Monthly Archives: August 2012

This change signals a new direction in the government's focus on tax compliance, Deloitte said. Taxpayers now are confronted with a variety of new reporting responsibilities, including those required under the Foreign Account Tax Compliance Act, Deloitte said.

“The information reporting compliance environment has changed,” the report stressed, noting that in the past, IRS enforcement efforts focused less on information reporting compliance than on income tax compliance.

Accordingly, many companies did not devote extensive resources to compliance in the information reporting area, Deloitte said.

But this has changed. “The IRS and Treasury Department are now firmly focused on the payment and reporting of income paid by companies to U.S. recipients on a worldwide basis,” the report said.

Until IRS clarifies a Feb. 24 memorandum in which it determined that a gift was complete, even though the grantor had retained a power of appointment exercisable at his or her death, donors are in danger of making gifts that IRS says are taxable, the officials said.

In chief counsel advice memorandum (CCA201208026), IRS said donors made completed gifts of term interests in a trust upon their transfer of property to the trust, and their retained testamentary limited powers of appointment relate only to the trust remainder.

Under the trust agreement, the Settlors retained testamentary limited powers of appointment, presumably with the intent that these retained powers would render contributions to the trust incomplete under Treas. Reg. § 25.2511-2(b), and thus not subject to immediate gift taxation. The Settlors then commenced funding the trust each year with interests in a family entity (the nature of which is not specified in the Memorandum) in amounts equal to the couple's annual gift tax exemption amounts with respect to the trust beneficiaries.

The Memorandum, however, concludes that, under established case law, a testamentary power of appointment relates only to the remainder of the trust and not to the interest held for the benefit of the current beneficiaries. As a result, each gift to the trust has to be thought of as consisting of two parts, a current interest (which is complete for gift tax purposes) and a remainder interest (which is incomplete for gift tax purposes).

In this case, the value of the gift of the current interest is equal to the entire fair market value of the transferred property, for two reasons: (1) since the Trustee of the trust has the power to terminate the trust at any time by distributing all of the principal to one or more of the current beneficiaries, the present value of any remainder interest is negligible and (2) because the incomplete gifts of the remainder interests are not "qualified interests" under the special valuation rules of § 2702, the value of the retained interest is treated as zero.

As a result of this analysis, practitioners wishing to ensure that a gift is incomplete should not rely on a retained testamentary power and should make certain that the grantor is also given an applicable lifetime power, such as a lifetime limited power of appointment or a power to veto trust distributions.

The Memorandum concludes that the beneficiaries have no means of enforcing their withdrawal rights under state law, since the Other Forum is not bound by state law and no beneficiary would be willing to petition the state court for relief at the risk of terminating his or her beneficial interest in the trust. Because these withdrawal rights are therefore deemed unenforceable, the Settlors were not allowed to use their annual gift tax exemption amounts to shield any portion of their
contributions to the trust.

• Four (4) months in federal prison for willfully failing to file a Report of Foreign Bank and Financial Accounts (FBAR), in violation of Title 31, United States Code, Sections 5314 and 5322(a). 
• Quintero was also sentenced to three (3) years of supervised release with 250 hours of community service, and a $20,000 criminal fine. and
• Quintero also paid a $2 million civil penalty for the FBAR violation.

1. Whether the promise to repay was evidenced by a note or other instrument;
2. Whether interest was charged;
3. Whether a fixed schedule for repayment was established;
4. Whether collateral was given to secure payment;
5. Whether repayments were made;
6. Whether the borrower had a reasonable prospect of repaying the loan and whether the lender had sufficient funds to advance the loan; and
7. Whether the parties conducted themselves as if the transaction was a loan.

The Tax Court concluded that $400,000 distribution from UEBF didn't constitute a bona fide loan. (Todd, TC Memo 2011-123) In reaching this conclusion, the Court analyzed the seven factors used to determine if a bona fide loan exists. It found that five factors indicated that the parties didn't intend to establish a debtor-creditor relationship at the time the funds were advanced (Factors 1, 2, 3, 5, and 7), while one factor did (Factor 6), and one indicated a possible intent to do so (Factor 4).

1. Presence of a note. Despite the requirements in their agreement, the debt wasn't contemporaneously memorialized when the money was distributed. Further, the terms of the trust agreement and note weren't followed: UEBF failed to charge a market rate of interest, and Todd failed to make quarterly payments;
2. Interest rate. Todd was charged 1% interest rate by UEBF on the promissory note, lower than the market rate. In comparison, Southland charged a rate of 4.76% on a similar loan;
3. Repayment schedule. UEBF didn't provide Todd with an amortization schedule reflecting quarterly payments until three months after the first payment was due under the note's terms, and the note wasn't executed until almost four months after the first payment was due;
4. Collateral. At the time of the purported loan, Todd didn't own the policy (UEBF did), had no access to the cash value of the policy, and had no rights to the proceeds from the policy. However, the Tax Court found that the dual repayment mechanism could serve as security between the parties for the promissory note. The dual repayment mechanism allowed UEBF to deduct the $400,000 distribution from the death benefit obligation;
5. Repayments. As of the date of trial, Todd hadn't made any payments toward the purported loan. The Court rejected Todd's argument that the dual repayment mechanism served as a valid method of repayment (although it had accepted that it could serve as security). Because the purported benefits under the DBO plan were contingent on multiple future events (e.g., Corporation might cease participation in the UEBF plan, the covered employee might be terminated or retire, or the master contract group and the union might not renew their agreement), Todd couldn't reasonably rely on the death benefit as an alternative payment;
6. Prospect of repaying. Todd earned a substantial living as a neurosurgeon, so there was a reasonable prospect of his repaying the purported loan; and
7. Parties' conduct. Neither UEBF nor Todd conducted themselves in a manner indicating that the distribution was a loan. Neither strictly abided by the note's terms. There was no inquiry into the hardship justifying the loan. The interest rate was below market. No quarterly payments were made. UEBF never attempted collection when quarterly payments weren't made.