SCOTUS Grants Cert on whether a State can Tax a Trust Based Solely on the Residence of a Beneficiary

The United States Supreme Court granted certiorari in the case of North Carolina Department of Revenue v. The Kimberley Rice Kaestner 1992 Family Trust, No. 18-457.  The question at issue is whether North Carolina may tax an out-of-state trust based solely on the North Carolina residency of a trust beneficiary, or whether such taxation is a violation of the federal due process clause.

Here, Kimberly Rice Kaestner, one of the trust beneficiaries, was a resident of North Carolina during the years at issue. The Trustee did not live in North Carolina, nor were the trust’s assets located in North Carolina.

The North Carolina Department of Revenue assessed $1.3 million in taxes for accumulated income of the trust during a three-year period even though no income was distributed to the North Carolina beneficiary during those years.

The North Carolina Supreme Court ruled that an in-state beneficiary does not give the state sufficient minimum contacts to tax an out-of-state trust under federal and state due process provisions.

Tax Notes. Supreme Court Agrees to Hear Trust Taxation Case. Jan. 14, 2018.


ACTEC Seeks Opportunity Zone Guidance for Trusts and Estates

On December 27, 2018, the American College of Trust and Estate Counsel (ACTEC) submitted comments to the IRS on proposed regulations on Qualified Opportunity Zones under Internal Revenue Code § 1400Z-2. This code section provides a tax incentive designed to promote investment in certain designated economically-distressed communities referred to as “Opportunity Zones.”  Investment in these Opportunity Zones provides for preferential tax treatment, including the deferral of gain, and, in certain circumstances, the elimination of gain, on the investment.

In its comments, ACTEC requested the following:

  1. Clarification concerning the income tax consequences resulting from the death of a taxpayer who has deferred gain through a timely reinvestment of gain in a Qualified Opportunity Fund (“QOF”), and to provide relief for successors-in-interest.
  2. Clarification concerning the income tax consequences resulting from the gift of an interest in a QOF where the donor has deferred gain through a timely reinvestment of gain in a QOF.
  3. Clarification concerning grantor trusts, including confirmation that a transaction with a grantor trust that is disregarded for income tax purposes pursuant to Rev. Rul. 85-13 should not be considered a sale or exchange of an interest in a QOF.
  4. Relief to extend the 180-day period for rollover of gain to a QOF be granted to partners, S corporation shareholders and beneficiaries of estates and trusts because they may not receive a Schedule K-1 indicating capital gains until more than 180 days after the end of the taxable year.

ACTEC Seeks Opportunity Zone Guidance for Trusts, Estates. Tax Notes Today, a product of Tax Analysts. Jan. 9, 2019

IRS Grants Extension to Make Portability Election

In PLR 201850015, the Decedent’s estate requested an extension of time pursuant to § 301.9100-3 of the Procedure and Administration Regulations to make a portability election to allow the Decedent’s surviving spouse to take into account the Decedent’s deceased spousal unused exclusion amount.

The Decedent’s estate represented that based on the value of the Decedent’s gross estate and taking into account any taxable gifts, the Decedent’s estate is not required under Internal Revenue Code § 6018(a) to file an estate tax return.

The due date of an estate tax return on which the portability election is made is nine months after the Decedent’s date of death, or the last day of the period covered by an extension if an extension of time for filing has been obtained.  An extension of time under § 301.9100-3 to make a portability election may be granted in the case of an estate that is not otherwise required to file an estate tax return.

Requests for relief under § 301.9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the Commissioner that the taxpayer acted reasonably and in good faith, and that granting relief will not prejudice the interests of the government.  Although this private letter ruling does not provide the reason for the Decedent’s estate’s failure to make the portability election, the ruling does provide that the requirements of § 301.9100-3 had been satisfied.  Therefore, the Commissioner granted the request for the extension to make the portability election.

Note that the Commissioner may grant an extension of time to make an election whose due date is prescribed by regulation, not statute.  Therefore, if it is later determined, based on the value of the gross estate and taking into account any taxable gifts, that the Decedent’s estate was required to file an estate tax return, then because that deadline is statutory, the Commissioner would be without authority to grant the extension to make the portability election, and the grant of the extension in this ruling would be null and void.

PLR 201850015. Release Date: 12/14/2018.


Consider Retirement Assets When Bankruptcy Looms

On October 21st, I posted a blog on the following case: In re: Brian A. Lerbakken v. Sieloff and Associates, P.A., No. 18-6018, United States Bankruptcy Appellate Panel For the Eighth Circuit. Oct. 16, 2018 (“Lerbakken”).   In Lierbakken, the Court held that the Debtor could not claim bankruptcy exemptions in a Wells Fargo 401K and an IRA account that Debtor received from his ex-wife as part of a property settlement.

Lerbakken relied on the 2014 Clark v. Rameker Supreme Court case that held that inherited IRAs were not exempt from creditors in bankruptcy.  Like the debtor in Clark, the debtor in Lerbakken (1) could not contribute additional funds to the qualified plan account, and (2) would not be subject to a 10% penalty on early withdrawal.  Therefore, the debtor’s account could not be exempt as a “retirement account.”  A “retirement account,” as the Court in Clark defined it, must incentivize contributions over time in order to save toward retirement.  The plans in Clark and Lerbakken did not meet that definition.

But, is there a workaround?  Sandra G. Glazier, an equity shareholder at Lipson Neilson, P.C. in its Bloomfield Hills, Michigan office, suggests that there is.

“Perhaps,” she said, “the outcome would have been different had the debtor in Lerbakken made a tax-free distribution to a rollover IRA in the debtor’s own name prior to bankruptcy. Once qualified plans are rolled over to an IRA, such IRAs are then subject to early withdrawal penalties and that account holder may make additional contributions.”

LISI Asset Protection Planning Newsletter #378, (January 2, 2019) at Copyright 2019 Leimberg Information Services, Inc. (LISI).

Company Doing Business in Tennessee but Incorporated in Florida has Right to Apportion

Under Tenn. Code Ann. §§ 67-4-2010 and 67-4-2110, a taxpayer is entitled to apportionment for franchise and excise tax purposes if the taxpayer has taxable business activities both inside and outside the state of Tennessee.  A taxpayer is considered taxable in another state if it is conducting business activities in that state and such activities would constitute doing business in Tennessee and subject the taxpayer to franchise and excise tax in Tennessee if such activities were performed in Tennessee.

Here, (Popular Categories) was incorporated in the state of Florida.  Popular Categories then joined with another company to form Popular Enterprises, LLC.  In 2008, the Tennessee Department of Revenue determined that the proceeds from the sale of Popular Enterprises, LLC that were payable to Popular Categories were subject to Tennessee franchise and excise tax, and that Popular Categories was not entitled to apportionment because it was not doing business outside of the state of Tennessee.

The legal question at issue was whether Popular Categories had a substantial nexus with some other state such that it would be at risk of taxation in that other state’s jurisdiction

The Court of Appeals held that Popular Categories’ legal domicile in Florida afforded it a substantial nexus to Florida such that Popular Categories would be subject to Florida’s taxing jurisdiction, notwithstanding the fact that Florida did not tax Popular Categories on the proceeds at issue.  Therefore, Popular Categories had the right to apportion its net worth and net earnings for purposes of the Tennessee franchise and excise taxes. Inc. v. Gerregano, No. M2017-01382-COA-R3-CV (Tenn. Ct. App. Dec. 20, 2018)

Muse, Andrea, Tennessee Court: Out-of-State Incorporation Enough to Apportion, Tax Notes, Dec. 26, 2018.

IRS Waived 60-Day Rollover Requirement Due to Acute Medical Condition

In PLR 201849018, the Decedent received a cash distribution from his IRA.  The Decedent failed to accomplish a rollover within the 60-day period prescribed by Internal Revenue Code § 408(d)(3)(A) because of an acute medical condition that caused severe cognitive impairment.

Prior to the Decedent’s death, the Decedent’s son, now the Executor of the Decedent’s estate, was appointed as the Decedent’s guardian.  As the Decedent’s guardian, the Decedent’s son noticed that the Decedent failed to file an income tax return during the year in which he withdrew the money from the IRA.  The Decedent’s son promptly filed a federal income tax return reporting the distribution.  This distribution was used for no other purpose.

As Executor of the Decedent’s estate, the Decedent’s son requested a ruling that the IRS waive the 60-day rollover requirement as to the Decedent’s withdrawal from the Decedent’s IRA.

Rev Proc 2003-16 provides that the IRS will issue a ruling waiving the 60-day rollover requirement in cases where the failure to waive such requirement would be “against equity or good conscience.”  Further, the IRS will consider the following facts: (1) errors committed by a financial institution; (2) inability to complete a rollover due to death, disability, or incarceration, (3) use of the amount distributed, and (3) the time elapsed since the distribution occurred.

Because the failure to make the rollover within the requisite time period was caused by the Decedent’s “acute medical condition that caused severe cognitive impairment, “ the IRS waived the 60-day rollover requirement.

The IRS did note, however, that the scope of the Executor’s authority is a matter of state law, and that this ruling assumes that the Executor’s actions to complete the rollover on the Decedent’s behalf are in accordance with the laws of the state in which the probate is being administered and are taken pursuant to the Executor’s authority.

Clerk’s Failure to Send Notice to Personal Representative Pursuant to Tenn. Code Ann. § 30-2-313(a) Did Not Render Estate’s Exception Untimely

Ms. Bernice Y. Hill (the “Decedent”) died on February 3, 2016.  The Decedent’s Last Will and Testament was admitted to probate on July 18, 2016.  Publication to creditors occurred on August 10, 2016 and August 17, 2016.  A creditor filed a claim in the amount of $181,486.52 against the Estate on July 24, 2016.  The probate clerk did not send a Notice of the claim to the Personal Representative of the Decedent’s Estate.  The clerk is required to mail the Personal Representative a copy of the claim pursuant to Tenn. Code Ann. § 30-2-313(a).  Pursuant to Tenn. Code Ann. § 30-2-314(a)(1), the Estate is required to file an exception to a claim no later than thirty (30) days after the deadline for filing the claim expires.  The Estate did not file an exception to the claim until March 9, 2017.

The Court of Appeals held that because the clerk failed to send out the notice, the estate’s exception was not untimely.

In re Estate of Bernice Hill, No. W2017-02131-COA-R3-CV, Tenn. Ct. App. Dec. 14, 2018.

Donald J. Trump Foundation to Dissolve and Distribute Remaining Funds to Charity

The Donald J. Trump Foundation and the New York attorney general Barbara Underwood have agreed that the foundation will dissolve under judicial supervision and distribute its remaining assets to charities approved by the attorney general’s office.  The proposed agreement was filed yesterday in the New York State Supreme Court for New York County and requires the signature of Justice Saliann Scarpulla to be effective.

This agreement is the result of litigation in which the state has alleged that President Trump used the foundation for personal gain, violating tax laws.

Jones, Paige. Trump Foundation to Dissolve Under Proposed Agreement. Tax Notes. Dec. 19, 2018.

Anti-Clawback Regulations Say No Clawback for Gifts Made Between 2018 and 2025

The proposed anti-clawback regulations provide that Treasury will not issue rules clawing back the gift tax exemption on gifts made between 2018 and 2025 if a taxpayer dies after the doubled exemption sunsets.  What the proposed regulations do not address, however, is whether the anti-clawback rule applies only to the unadjusted exemption amount.