Susie and Nate have an estate of $5 Million. Everything is in joint name and Nate dies in January, 2012. Since Susie inherited everything, she figured no estate tax return was needed. She went to see Joe Probate, a local probate attorney, and he confirmed, “nuthin to probate”, he said. Susie went merrily on her way. In January, 2013, the estate tax exemption went down to $1 Million. Susie died in June of 2013. Her kids go to Joe Probate again, and he says, go see the accountant in town, that the estate is over $1 Million, so there is a potential estate tax. So, when they go to the Accountant, the accountant asks where was Nate’s Federal Estate Tax Return for 2012. The kids shake their heads, they ask Joe Probate, he says none was required. However, because Susie never filed an estate tax return for Nate, she did not capture his portability rights. She could have claimed, 1/2 of his property on a timely filed Federal Estate Tax return for Joe (15 months for portability return). Because she failed to do so, her estate will not get to use his estate tax exemption. Had she filed that return her kids would have had to pay an estate tax upon her death of $660,000. Instead, they will have to pay an estate tax of $2 Million. So it is very important for anyone dying in 2011 and 2012 to file those Federal Estate Tax returns within 15 months of the date of death.
Installment Agreements can the IRS breach them?
This is a very interesting question. Joe Dokes enters into an installment agreement. Out of the blue he gets a letter that he has defaulted on his installment agreement. Funny thing is, he’s made every payment and done what he’s supposed to do. That’s followed shortly thereafter by a Notice of Intent to Levy. So, he asks for a due process hearing. At that point the Settlement Officer asks for new financial information which he provides readily and the Agent Refuses to reinstate the Installment Agreement but is willing to entertain a larger installment. And the agent cannot explain how the agreement was defaulted. No one knows. Joe can’t agree with the new number and in fact likes the old number which is more than the levy is. He goes to Tax Court. The question is whether or not the Service can breach an installment agreement. The answer has not been answered by the Court, but it appears that the answer is yes. An Installment Agreement is a contract. The Government agrees not to pursue collection activity and the taxpayer agrees to voluntarily make payments. So far so good. But the Service here accidentally defaulted the Agreement and started collection activity in breach of that agreement. And the Settlement Officer in reviewing the Financial data did so using a de novo review instead of reviewing to see if, as the Installment Agreement puts it, there has been a significant change in circumstances. So, the IRS can be held in my view to breach an installment agreement and further they have to review using the standard of a significant change in circumstances.
Florida Spendthrift Trusts
A useful estate planning tool has long been the spendthrift trust with discretionary distributions. However, the Florida Supreme Court has ruled in Bacardi v. White 463 So. 2d 218 (Fl., 1985), that spendthrift trusts are not recognized for certain exception creditors, former spouses and children for support and maintenance and judgment creditors for services. Recently Florida amended the Trust Code to bring it more in line with the Uniform Probate Code, this created a dichotomy in the minds of many experts as to whether or not a spendthrift trust with discretionary power to distribute is now exempt from these super creditors. I have long thought that it is best that one err on the side of caution, thus if a Florida resident creates a spendthrift trust, for another Florida resident or makes the Trust subject to Florida law, the desired effect may not be achieved. It is better for the Grantor to choose an out of state trustee in a spendthrift friendly state like Virginia, Delaware, Alaska, etc. to administer the trust for the Florida beneficiary and adopt the law of one of those jurisdictions as the law of the Trust. In such a circumstance, you can achieve the savings you want including dynasty or generation skipping objectives without subjecting the Trust to potential drain by a lawyer or ex-spouse.
Oil prices have jumped through the roof. A solution which is technologically feasible and easy to quickly implement is a transition to natural gas. Honda makes a decent CNG car. The problem is that there’s no places to buy it. So, how does Government get people to front the risk capital to implement this strategy. You create tax incentives to implement the strategy. But wait, we have a budget crisis and this will reduce tax revenues. The answer is that it depends. CNG carries an excise tax so the incentives can be revenue neutral. Incentives can be packaged in short depreciation, tax credit plans which could create risk capital necessary to implement a national policy. With a system of credits, rapid depreciation, people will get their risk capital back rather quickly in the form of tax incentives. This allows them to invest with impunity to create the infrastructure needed to create a market. The problem of course is that no one wants to take the lead on such a policy.
Is Warren Buffett a hypocrite?
Are Warren Buffett has chided rich America for not paying taxes. Two companies that he controls not only sued the government claiming that taxes passed by Congress didn’t apply to them, but further seem to be hit with a counterclaim over other unpaid taxes totaling over $300 Million.
The operative Sections of the IRS Code are Sections 4261 and 4262. There is an excise tax on “taxable transportation” assessed in Section 4261. In Section 4262, “taxable transportation” is defined as follows:
“(a) Taxable transportation; in general
For purposes of this part, except as provided in subsection (b), the term “taxable transportation” means –
(1) transportation by air which begins in the United States or in the 225-mile zone and ends in the United States or in the 225-mile zone; and
(2) in the case of transportation by air other than transportation described in paragraph (1), that portion of such transportation which is directly or indirectly from one port or station in the United States to another port or station in the United States, but only if such portion is not a part of uninterrupted international air transportation (within the meaning of subsection (c)(3)).
(b) Exclusion of certain travel
For purposes of this part, the term “taxable transportation” does not include that portion of any transportation by air which meets all 4 of the following requirements:
(1) such portion is outside the United States;
(2) neither such portion nor any segment thereof is directly or indirectly –
(A) between (i) a point where the route of the transportation leaves or enters the continental United States, or (ii) a port or station in the 225-mile zone, and
(B) a port or station in the 225-mile zone;
(3) such portion –
(A) begins at either (i) the point where the route of the transportation leaves the United States, or (ii) a port or station in the 225-mile zone, and
(B) ends at either (i) the point where the route of the transportation enters the United States, or (ii) a port or station in the 225-mile zone; and
(4) a direct line from the point (or the port or station) specified in paragraph (3)(A), to the point (or the port or station) specified in paragraph (3)(B), passes through or over a point which is not within 225 miles of the United States.”
A key rule of tax law interpretation is that unless there is a specific exclusion, an item that is within the definition of a taxable transaction is taxable.
Net-Jet charges for tickets for rides on private jets. The question is what is Net-Jet getting out of the deal. Is it acting as kind of a facilitator (like a travel agent), thus in reality the transporter of the passenger owes the tax. However, the language of the statute is clear that the person who uses the transportation pays the tax. Thus, when Net-Jet collects for the ticket, it was supposed to collect the tax from the ticket purchaser.
Section 4263 reads: “(c) Payment of tax
Where any tax imposed by section 4261 is not paid at the time payment for transportation is made, then, under regulations prescribed by the Secretary, to the extent that such tax is not collected under any other provision of this subchapter, such tax shall be paid by the carrier providing the initial segment of such transportation which begins or ends in the United States.”
Thus, the carrier is supposed to pay the tax.
The word “carrier is defined in 49 USC 41762 as follows:
” In this subchapter, the following definitions apply:
(1) Air carrier. – The term “air carrier” means any air carrier holding a certificate of public convenience and necessity issued by the Secretary of Transportation under section 41102. ”
So the question of fact does Net-Jet hold a certificate of convenience and necessity from the Secretary of Transportation. If it does, then it probably should have collected the tax, if not, then the “carrier” the person who was paid the fare should collect and pay over the tax.
NetJets would counter that it is selling not tickets on a plane but in fact fractional ownership interests in a fleet of planes and that the “ticket” is really just a cost of ownership (like a timeshare). The question is whether NetJets is deemed a carrier by the FAA and the DOT, if it is then passengers would owe the tax. Some NetJets entities have certificates of convenience, others I could not find. But the long and short of it is this. If NetJets does not owe the tax, then this is a huge tax loophole of the type that Buffett has publicly decried. So, perhaps a sign of his magnanimity it would be great if he were to say, that NetJets is willing to work with Congress to ensure there is no loophole here.