The Ex Posts

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Edward ExPost was dying, his family revoked his advance medical directive in late 2009. On January 1, 2010, he died at 12:42 a.m. He left his entire $1 Billion estate to his two loving children. Due to fights on Capitol Hill over a health care bill and President Obama’s Hawaiian vacation plans, no law was passed until February 1, 2010 extending the estate tax which expired on December 31, 2009. In their haste to go celebrate President’s Day, Congress forgot about reauthorizing a step-up in basis for people inheriting from decedent’s estates.

On October 1, 2010, Edward’s Executrix, Eugenia Ex Post, filed his Federal Estate tax return. She paid the tax that would have been due under the new law. She took Dad’s company public to pay for the taxes. She sold some stock in Dad’s Company. The it was worth $490,000,000 more than what he paid for it. She then immediately filed an amended return seeking a refund of $500,000,000 on the estate tax and citing the fact that at the moment of his death there was an exclusion equal to 100% of the tax.. The Service received the amended return and after auditing it, denied the refund claim. She then filed suit in the U.S. Court of Federal Claims claiming that the law was ex post facto and thus violated the U.S. Constitution.

On April 15, 2011, Eugenia filed a Fiduciary Income Tax return showing a capital gain of $498,000,000 and estate tax deduction of $299,000,000. She paid income taxes to IRS of $45,000. She again filed for a refund and the refund claim was denied at which point she filed another lawsuit in the U.S. Claims Court, claiming that in effect she should have been allowed to step-up her basis.

Apologies

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I must confess that last week flew completely out of control as far as writing was concerned. Also it was one of waiting to see if what might come out of Congress. So far no tax bills are forthcoming with the Senate totally tied up in knots over passing a health care bill. This means of course that time is running out on a bunch of extenders that need to be passed by the Senate and the ever present 2010 one year repeal of the Estate Tax which I worked over last year. If your billionaire uncle is about to die, you might hold off pulling the plug for a couple of weeks at this stage. I do recall some late bills passing Congress, but with only 10 days left in the year, I would put the odds a 50/50 whether any tax bills are signed into law before the end of the year. I heard that once President Obama signs a health care law in whatever form, he’s heading for a vacation in Hawaii. So, now we get to the knotty question of ex post facto laws. What happens if a person dies on January 1, 2010 worth over $3.5 Million Dollars and then there is a retroactive passage of a bill setting that limit at $3.5 Million. Is that legal? We’ll talk about that in the coming days.

Sale and Exchange

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She called her accountant. He told her that she did not qualify for the deferral of gain on the house. The law said that she had to hold it for five years after an exchange to qualify for the deferral of gain and that she had only had it for three years. She would rent it again, but she couldn’t bear to have another incident like the first. Enrique was adamant that he wanted her to join him in Venice. Crestfallen she removed the antiques and put them in storage and put in some generic furniture and rented out the house. After two more years and much damage and headaches and several flights back and forth from New York to Venice and a six month stay in the small house documented by her passport, she sold the bungalo and lived happily ever after with Enrique eating Italian food, drinking wine and going down the romantic canals of beautiful Venice.

Eleanor in Love

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She got a concierge rental agency who could really make top dollar for her. She spent some money to get the house outfitted with lovely antiques and satin sheets. Everything was perfect.

She got a request to rent the house in mid-March, the following year. There was a high stakes poker tournament right up the road in Atlantic City. All the hotels were booked. The event was televised. The house was being rented by Guisseppe Marvel, a legendary poker player. As luck would have it Guisseppe bet on 2 jacks and the flop revealed two more jacks. His opponent thought he had the tournament won with a full house and Guisseppe went all in. His opponent had fewer chips at the time and also went all in. The place erupted in celebration. At 4 a.m., he staggered back into the small cottage with about 100 of his closest friends. He called the concierge to bring more liquor and a chef for breakfast and they were procured. A two day party ensued. After the party was over and Guisseppe moved out, the concierge went to the bungalow. It looked like a hurricane had hit Ocean City, New Jersey. Windows were broken, antiques were damaged, the total bill was $200,000. Eleanor felt as though she had been violated. Guisseppe and the insurance company got it fixed back to close to its original state, but Eleanor decided never to put it out for rent again. She liked the cottage and figured that if two weeks were nice 2 months would be even nicer. Since it was debt free at that point, she went ahead and converted it to her personal use and moved into it as her personal residence. She sold her house pocketed the money tax free, as she only had about $250,000 of gain on the place. She thought she was in heaven. She dated handsome younger men and there was always something to do. After two years, she met a swarthy young man from Italy named Enrique. He wanted to marry her and move to Venice. She readily agreed. She decided to sell her house.

Like Kind Exchange -Personal Use

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Eleanor Breezy decided that rather than have an investment rental property in town, she’d get one at the beach so she could use it 14 days out of the year and have fun at the beach. After all she was at 32 still young, still beautiful and divorced without children. She got the rental property and her house in the divorce. She consulted her accountant about the tax impact of selling it. He told her that she was going to get hit pretty hard with taxes because her ex had depreciated down to nothing prior to giving it to her in the divorce. He suggested that there was something called a like kind exchange and that she should consult an attorney for the specifics. She went to see a real estate attorney, Geoffrey Dunder. Mr. Dunder agreed that a like kind exchange would work for her and that he could act as intermediary and paper the transaction. He went through the usual discussion of the identification rule of 45 days and the settlement rule of 180 days. She put her property on the market and started looking for her dream beach house. She immediately got a contract for the rental property from a nice couple with two kids and a dog. She was very happy that the house would have a good owner. The contract called for settlement in 30 days, she bumped it up to 60 days to give her time to find the replacement property. Geoffrey made sure that the appropriate language was in the contract to permit the like kind exchange.

She found a darling cottage in Ocean City, New Jersey. It was perfect. She could rent it out, and use it 14 days in May and in September and still get prime rental dollars. It had a new kitchen with all the energy efficient and high end appliances. She put a contract down and the price was workable with the other sale and the settlement date tracked so that it would occur shortly after the other contract settled. She smartly kept the sale of other property contingency in the contract in case something blew up. The old property settled and one week later she settled on the new property. The paperwork was flawless and she did not recognize any taxes on the transaction.