Like many in this Country, the Supreme Court opinion today has many scratching their heads. The Court ruled that the “individual mandate” is a tax in the form of a penalty. The Court seemed to dance around the Constitutional Prohibition against Direct Taxes by saying this wasn’t a direct tax. I liken a “direct tax” to the definition of pornography, basically the Court views it as you’ll know it when you see it. So, the mandate stands and will be collected by the IRS when people who don’t have insurance file their individual income taxes. But the Court then threw everything into the mixer by saying that the “Anti-Injunction Act” does not apply to this “tax”. The “Anti-Injunction Act” essentially says that the collection of tax cannot be restrained . However in this case, if a person doesn’t buy insurance and doesn’t pay the tax, he could in theory get an injunction against its collection until the efficacy of the assessment is determined by the Court. Thus, I can forsee lots of business for Tax lawyers seeking injunctions against the IRS to prevent collection of this tax claiming all sorts of defenses (including perhaps insolvency, lack of intent (since penalties generally require “wilfulness”), incorrect amount on the assessment, or lack of Section 6320, 6330 due process before collections actions including disagreements as to collection alternatives. Thanks to the Supreme Court for giving the Tax bar a shot in the arm.
Portability of Estate Tax Exemption
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.