LEGISLATIVE UPDATE

Last month, the Internal Revenue Service issued TAM 200847015, addressing whether a decedent possessed at death a general power of appointment within the meaning of I.R.C. § 2041 over property held in a trust in which the decedent was both the beneficiary and trustee with discretionary powers of distribution. The Service concluded that the decedent's powers were not general within the meaning of § 2041.

The decedent's late husband's will had provided that the residue of his estate be held in trust with the decedent entitled, during her lifetime, to receive "so much of the net income as the Trustee in its sole discretion reasonably exercised, taking into account other income and resources she may have, deems necessary and appropriate to provide for the health, support and maintenance of my wife, [Decedent], in the manner to which she is accustomed at the time of my death." The trust further provided that if the trustee determined that the net income was insufficient to maintain and support the wife, the Trustee may, in "its sole discretion, use so much of the principal of said Trust as it deems necessary to make up such deficiency." Upon the wife's death, the net proceeds of the trust, if any, would be divided into two trusts: one for the husband's nephew and nieces or their issue, and the other for the wife's nephews or their issue. A spendthrift clause included for any trust created by the husband's will provided that anytime the trustee believed it appropriate in order to fulfill the intent of the clause "payment to any beneficiary named herein may be discontinued, and in lieu thereof, the Trustee may expend for the account of such beneficiary and for his or her support, comfort, happiness and welfare, such amounts as would otherwise be paid over directly to such beneficiary."

Based upon these facts, the issue in question was whether decedent possessed at death a general power of appointment within the meaning of I.R.C. § 2041 over property held in the trust since she was both discretionary beneficiary and trustee. The Service determined that the decedent's power as trustee "to distribute trust income to herself was limited to those amounts necessary to provide for Decedent's health, support and maintenance" and her power "to distribute trust corpus is limited to amounts necessary to 'maintain and support' the Decedent in her accustomed station in life. Since the powers granted… are restricted in such a manner as to satisfy the criteria of § 2041(b)(1)(A), neither power is a general power of appointment."

The Service also ruled that the trustee's broad distributive powers for the benefit of the beneficiary in the spendthrift clause in lieu of making payments to the beneficiary did not constitute a general power of appointment that she possessed at her death. The IRS said that "We believe this broad distributive power becomes exercisable, only if the beneficiary triggers the spendthrift provision, for example, by attempting to assign the trust interest or if a third party attempts to garnish or execute against the trust interest, or the beneficiary otherwise becomes financially distressed in some manner. There is no indication that, at the time of Decedent's death, she met any criteria that would trigger the spendthrift provision and the ability to exercise the power. Thus, at the time of her death, Decedent's exercise of the… power was conditioned on the occurrence of events or contingencies that were not in existence on the date of Decedent's death. In accordance with § 20.2041-3(b), a power, which by its terms is exercisable only upon the occurrence during the Decedent's lifetime of an event which did not in fact take place is not a power in existence at Decedent's death. Accordingly, Decedent did not possess at death a general power of appointment within the meaning of § 2041 over property held in Trust."

Source:
Westlaw: TAM 200847015, 2008 WL 4951010; Internal Revenue Service: TAM 200847015, released November 21, 2008

Last month, the U.S. District Court for the Southern District of Ohio, ruled that written and oral communications between an executor and the Internal Revenue Service regarding the proper calculation of the estate's estate tax liability on its 2001 returns constituted an informal claim prior to the expiration of the statute of limitations in I.R.C. § 6511. The court said that the estate was entitled to an inference in its favor after deciding that the IRS had improperly purged its file during the estate's administrative appeal, and further determined that the estate had perfected its claim in 2004 when it filed a formal claim for refund on Form 843, Claim for Refund and Request for Abatement. As a result, the estate was entitled to summary judgment, and the IRS was ordered to refund the estate overpaid federal estate taxes amounting to $429,542.00 plus interest. (Wilshire v. U.S., S.D. Ohio, No. 1:07-CV-00377, 2008 WL 4858256 11/10/08).

In September 2000, Louise Schaefer Wilshire passed away and Philip Blomer was appointed executor of the estate. The decedent's will provided that bequests to charities should not be charged with estate taxes, intending to increase the charitable deduction and thus reduce the estate's tax liability. When the original estate tax return was filed, the executor submitted a copy of decedent's will and included a note stating "Charitable calculation is interrelated with calculation of tax due. This will necessitate an amended return once accountant has finished it." In November 2001, the accountants filed the amended return. The executor believed that the amended return complied with the will's provision that charitable bequests not be charged with estate taxes; however, that was not the case.

The executor had several oral and written communications with the IRS over the next two years concerning the proper calculation of the estate tax liability and refund of any overpayments, including a letter the executor sent the IRS in May 2003 stating that the charities should not bear taxes and requesting that the IRS "give us the right refund or charge us the right tax." In 2004, the executor found that the tax returns had actually had the charitable bequests improperly bear taxes and, thus, filed Form 843 Claim for Refund and Request for Abatement in December of that year. Upon receipt of the formal claim, the IRS sent a letter to the estate in March 2005 indicating that the Service accepted "the merits and substance of your refund claim." The Service refunded $56,802, but refused to refund the balance of $429,542 on the grounds that the request for a refund was made after the expiration of the two-year statute of limitations under I.R.C. § 6511. As a result, the estate filed a motion for summary judgment in August 2008 seeking a refund of overpaid federal estate taxes amounting to $429,542 plus interest, and the government responded with a motion to dismiss on the grounds that the estate failed to file its claim within the applicable statute of limitations.

Upon review, the Court determined that an informal claim did exist. In rendering its decision, the court noted that "[a]lthough the accountants hired by the Estate improperly prepared the returns, the IRS had the Will in its possession, was instructed by the Estate of the proper interpretation of the Will and calculation of the taxes, received the Estate's request for a refund, and conducted an extensive audit. Under these facts and circumstances there is no doubt the IRS was on notice the Estate asserted a right with respect to an overpayment of tax. Taken together, Blomer's oral and written communications constitute a valid informal claim for a refund."

The Court also found it "troubling the fact that Defendant purged its file after the Estate gave it notice of the refund claim, and concludes a negative inference is warranted against the IRS for spoliation...The IRS should not benefit from the spoliation of its file during the administrative appeal, and it has provided no satisfactory explanation for its action." Lastly, the court concluded that "the IRS should be estopped from arguing at this point in the proceeding that the Will could somehow be interpreted so as not to require a refund… The government's position that the Will could be interpreted so as not to require a refund strikes the Court as disingenuous."

Source:
Westlaw: Wilshire v. U.S., S.D. Ohio, No. 1:07-CV-00377, 2008 WL 4858256, 11/10/08.

A recently issued fact sheet by the Internal Revenue Service reminds taxpayers of the requirement to report foreign gifts of money and other property received during the year.

In this latest addition to its International Tax Gap Series, the IRS defined a foreign gift as money or other property received by a U.S. person from a nonresident alien individual or foreign corporation, partnership, or estate that the U.S. person treats as a gift or bequest and excludes from gross income. Amounts for qualified tuition or medical expenses paid on behalf of the U.S. person are not included in this definition. The Service noted, however, that gifts from foreign trusts are subject to different rules than gifts from foreign persons, and that amounts received from foreign partnerships or foreign corporations may be re-characterized as items of income that must be included in gross income.

U.S. recipients of foreign gifts must file Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, if they treat the money or other property above certain thresholds as a foreign gift or bequest. Items that must be disclosed on Form 3520 include gifts or bequests valued at more $5,000 if the aggregate amount of gifts is more than $100,000 from a nonresident alien individual or foreign estate, including foreign persons related to that nonresident alien individual or foreign estate, and gifts valued at more than $13,561 (for 2008, with this amount adjusted annually for inflation) from foreign corporations or foreign partnerships, including foreign persons related to the foreign corporations or foreign partnerships. Keep in mind that recipients must aggregate gifts received from related parties when determining whether gifts exceed these thresholds. Transfers by a U.S. person to a foreign trust and from a foreign trust to a U.S. person are also reported on Form 3520.

The fact sheet also reminded taxpayers that gifts from an individual who ceased to be a U.S. citizen or green card holder on or after June 17, 2008 may be subject to special rules, which are included in the provisions of the Heroes Earnings Assistance and Relief Tax Act of 2008 (PL 110-245, June 17, 2008).

The filing deadline for Form 3520 is the same date as for the taxpayer's annual income tax return, including extensions. Failure to file the required return or filing an incomplete or inaccurate return may result in a penalty of 5% of the amount of the foreign gift for each month for which the failure to report continues, up to a maximum penalty of 25%.

Source:
Westlaw: IRS International Tax Gap Fact Sheet (Unnumbered): Gifts From Foreign Person, 08 No. 231 BNA Taxcore 087: Internal Revenue Service: Gifts from Foreign Person, International Tax Gap Series - December 2008.

In Revenue Procedure 2008-72, the Internal Revenue Service announced the new optional standard mileage rates to use beginning January 1, 2009 when computing the deduction for operating an automobile for business, charitable, medical or moving expense purposes.

These rates will be:

• 55 cents a mile when computing deductible business miles;
• 24 cents a mile when computing deductible medical or moving expenses; and
• 14 cents a mile when providing services to a charitable organization

The 2009 rates for business, medical and moving miles are lower than the rates that applied during the second half of 2008, when the rates were increased mid-year by a special adjustment from 50.5 cents to 58.5 cents for business miles and from 19 cents to 27 cents for medical and moving miles due to soaring gas prices. Rules for substantiating the deductible expenses of using an automobile for business, moving, medical, or charitable purposes and limitations on the use of the standard mileage rates are also provided in the procedure.

Source:
Westlaw: Rev. Proc. 2008-72, 2008 WL 4965290; Internal Revenue Service: IRS Announces 2009 Standard Mileage Rates, IR-2008-131, Nov. 24, 2008, News Releases - November 2008; Rev. Proc. 2008-72, published November 26, 2008.

Note: Under Section 42(b)(2), the applicable percentage for non-federally subsidized new buildings placed in service after July 30, 2008, and before December 31, 2013, shall not be less than 9%.

Appropriate percentage for the 70% present value low-income housing credit	7.84%
Appropriate percentage for the 30% present value low-income housing credit	3.36%

Source:
Westlaw: Federal Rates; Adjusted Federal Rates; Adjusted Federal Long-term Rate and the Long-term Exempt Rate, Rev. Rul. 2008-53, 2008 WL 4916061; Internal Revenue Service: Rev. Rul. 2008-53 Index of Applicable Federal Rates (AFR) Rulings, published November 19 2008.