After lengthy debate, the House and Senate passed a two month extension of the payroll tax cut on a unanimous voice vote.  The President signed the bill on Friday, December 23.

Under the bill, the employee payroll tax will be reduced from 6.2% to 4.2% for the months of January and February of 2012.  The federal unemployment benefits were in danger of lapsing for 1.8 million long-term unemployed Americans.  These will also be continued for two months.

Each year since 2003, Congress has passed the "Doc Fix."  Medicare reimbursements would decline by 27% if Congress did not change the physician reimbursement rules.  However, the American Medical Association points out that even with reimbursements at the current rate, most physicians are receiving payments from Medicare that are 20% below the amounts received for other patients.

President Obama lobbied in favor of the payroll tax reduction.  He stated, "At a time when so many Americans are working harder and harder just to keep up, the extra $1,000 or so that the average family would get from this tax cut makes a real difference when you're trying to buy groceries or pay the bills, make a mortgage or make a repair."

The Ranking Republican on the Senate Finance Committee is Orrin Hatch (R-UT).  He also supported the bill and stated, "Though I remain concerned with the continued extension of a temporary payroll tax holiday and its long-term implications for Social Security, I'm supporting this legislation because it allows the construction of the Keystone XL Pipeline to move forward and prevents physicians from getting hit with a 27.4% pay cut that could hinder access to quality care for American seniors."

Editor's Note: After the holiday break, Congress will return in January and commence negotiations on a full year extension.  Because this is an election year, the extension is likely to be passed.  However, the debate will continue over the methods to pay for the cost of the payroll tax cut.

Baucus Promotes Tax Extenders

The payroll tax reduction bill signed by President Obama failed to include two important tax provisions.  Each year for the past two decades, Congress has passed approximately 40 different "tax extenders" and has also adjusted the alternative minimum tax (AMT) exemption for inflation.  Neither of these provisions were included in the payroll tax bill.

Senate Finance Committee Chairman Max Baucus (D-MT) has supported the tax extenders bill each year. He published a press release and indicated that he will fight "to find a bipartisan path forward for these tax extenders, including the research and development (R&D) tax credit, teachers' expense deduction and job-creating clean energy tax incentives. It is critical to extend these tax provisions early in the year to maximize their effect and provide certainty for the 2012 tax year."

The tax extenders include six charitable provisions.  The most popular of these is the IRA charitable rollover.  Since 2006, IRA owners have been permitted to transfer up to $100,000 directly from the IRA to qualified charities.  In prior years (such as 2010) the extension was passed later in the year and it was difficult for many IRA owners to assist their charities through an IRA rollover.  Chairman Baucus is asking members of Congress to act early in the year so that donors may plan their 2012 IRA rollovers well before the end of the year.

Editor's Note: Because 2012 is an election year, there is a reasonably good prospect for passage of the tax extenders.  The IRA charitable rollover now has been effective for the past six years. While there are great differences in Congress, there could be passage of the IRA charitable rollover and other tax extenders for 2012. Hopefully, Congress will follow the advice of Chairman Baucus and take action before the very end of the year.  Even though the tax extenders bills have been retroactive to January 1, it is difficult for many IRA owners to plan if Congress passes the bill very late in the year.

Refund Denied Due to Executor Delay

In W.E Davis v. United States: No. 2:11-cv-00034 (14 Dec 2011), a U.S. District Court denied a request by an estate to toll the statute of limitations and allow a late refund request.

Decedent Anthony Walker Smith passed away in 2002 and executor W.E. Davis filed IRS Form 706 on February 3, 2003.  The estate reported an estate tax liability of $491,521 and on April 17, 2003 made a payment of $406,791.83.   The estate reported fee simple ownership of a farm in Tate County, Mississippi.

However, on November 3, 2003, the Chancery Court of that county ruled that decedent Smith held a remainder interest rather than a fee interest in the Mississippi farmland.  This ruling was affirmed by the Mississippi Court of Appeals on January 20, 2005 and the Mississippi Supreme Court denied certiorari on March 2, 2006.

Executor Davis then filed a claim for refund on November 4, 2008.  The IRS denied the refund claim because it was untimely.

The government moved to have the court dismiss the case for lack of subject matter jurisdiction. The government noted that it had not waived sovereign immunity and that the general sovereign immunity waiver provisions apply only if actions are taken within the required time period.  Sec. 6511(a) states that claims for refund "shall be filed by the taxpayer within three years from the time the return was filed or two years from the time the tax was paid, whichever of such periods expires the later."

Because the filing of the refund claim was over five years after the IRS Form 706 was filed, the IRS claimed that the matter was "untimely."

Executor Davis indicated that the court should have jurisdiction to apply the principle of equitable tolling.  Because the title to the property was not clearly settled until the denial of certiorari on March 2, 2006, the estate indicated that it was unable to comply with the three year requirement and due process requires a tolling of the statute.

The court indicated that it was sympathetic to the position of the estate.  The remainder interest value clearly is smaller than the fee interest amount and the estate had overpaid the estate tax.

However, the court noted that the estate had notice of the change in title in 2003 and even the Court of Appeals decision was within the required three year period to file for refund.  Because the estate did not make a protective filing at that time, the opportunity to file later lapsed.  The court noted that there was no obligation to apply equitable tolling to the claim for relief from the untimely filing date.  Therefore, the case for the refund was dismissed.

Applicable Federal Rate of 1.4% for January – Rev. Rul. 2012-2; 2012-3 IRB 1 (19 Dec. 2011)

The IRS has announced the Applicable Federal Rate (AFR) for January of 2012.  The AFR under Sec. 7520 for the month of January will be 1.4%.  The rates for December of 1.6% or November of 1.4% also may be used.  The highest AFR is beneficial for charitable deductions of remainder interests.  The lowest AFR is best for lead trusts and life estate reserved agreements.  With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable.  During 2012, pooled income funds in existence less than three tax years must use a 1.8% deemed rate of return. Federal rates are available by clicking here.