Washington Hotline – February – Week 4 – 2011

IRS Announces Open House
The IRS announced on February 23 that it is holding open houses in 100 IRS offices. The offices will be open from 9:00 am to 2:00 pm local time on Saturday, February 26 and Saturday, March 26.

Commissioner of the IRS Doug Shulman stated, “We are opening our doors these Saturdays to help taxpayers who may not have a chance to seek assistance during the work week. If taxpayers need help preparing their tax returns or have account questions, we encourage them to visit one of our open houses.”

Last year, 35,000 taxpayers were assisted during similar open houses. The taxpayers had questions on tax preparation and qualification for various tax deductions or benefits. The IRS indicated that 95% of the questions were resolved.

In addition to the open houses, IRS offices in 10 cities will also offer free seminars on the 2010 tax laws. The locations of the IRS offices and seminars are available on www.irs.gov.

Individuals with incomes of $49,000 or less also qualify for additional assistance. The Volunteer Income Tax Assistance (VITA) program will assist in completing returns. Those persons over age 60 qualify for the Tax Counseling for the Elderly (TCE) program. They also can receive help in preparing their 2010 income tax returns.

Tax Exempt Hospitals Granted Filing Delay

In Announcement 2011-20; 2011-10 IRB 1 (23 Feb 2011), the IRS granted a three-month automatic filing extension for most tax-exempt hospitals.

Following the development of a new Form 990 Return for Charitable Organizations, the IRS published a comprehensive Schedule H for medical centers. With the passage of the Patient Protection and Affordable Care Act of 2010, both the IRS and many medical centers need additional time to properly prepare for filing of Form 990 with the Schedule H for medical centers.

As a result, the IRS indicates that the earliest permitted filing date for tax-exempt medical centers filing Form 990 and Schedule H will be July 1, 2010. This is the earliest filing date whether the filing is in paper form or electronic format.

For those medical centers with return due dates before August 15, 2011, there is an automatic three-month extension of time to file. This extension is available without filing Form 8868, Application for Extension of Time to File an Exempt Organization Return.

However, there may be new organizations that have not filed Form 990 Schedule H for tax year 2009. In this case, they may choose to file Form 8868 to clarify their intention to extend the deadline. If a medical center requires an additional three months to file, then it should file Form 8868.

For those medical centers that qualify for this automatic extension, there will be no penalty if they file within the additional three-month period.

Accountants Support Tax Patent Ban

David Auclair, Managing Principal of the Washington National Tax Office for Grant Thornton LLP, sent a letter this week to Senate Judiciary Chair Patrick Leahy (D-VT) and Ranking Member Charles Grassley (R-IA). In his letter, Mr. Auclair expressed “strong support” for the ban on tax patents included in the patent reform legislation (S. 23) that recently passed the Senate Judiciary Committee.

Mr. Auclair stated, “Patents on tax strategy methods threaten the integrity, fairness and administration of the tax system.” He indicated that his firm hopes that the two senators will aggressively oppose any efforts to weaken the tax patent ban when S. 23 reaches the Senate floor.

Tax patents are particularly objectionable because they preclude taxpayers from satisfying “their legal obligations using a patented interpretation of the tax code, allowing patent holders to privatize tax provisions that Congress intended for everyone.” The patents undermine confidence and will mislead taxpayers who may think that a government patent is equivalent to approval by the IRS of a tax method.

Editor’s Note: The ban on tax patents is part of a much larger bill on patent law. The tax patent provision covers a “strategy for reducing, avoiding or deferring tax liability,” but excludes a ban on patents for tax preparation software.

Palimony Claim a Valid Estate Debt

In Estate of Bernard Shapiro et al v. United States; No. 08-17491 (21 Feb 2011), the Ninth Circuit Court of Appeals reversed a summary judgment by a District Court in Nevada. The District Court had determined that the estate was not entitled to a deduction for a palimony claim.

Decedent Bernard Shapiro and Cora Jane Chenchark met in 1977 and lived together from that year until 1999. They never were married. In 1999, the decedent had a relationship with another woman and the two separated. Chenchark sued in Nevada court and claimed breach of contract and breach of fiduciary duty. She claimed that during the 22 year relationship, both parties had agreed to share equally in each other’s assets.

While the suit was pending, Bernard Shapiro passed away. The estate filed IRS Form 706 and paid $10,602,238 in estate and generation skipping tax. The Nevada Court ruled in favor of the estate on the palimony claim and Chenchark appealed. The estate then settled with Chenchark for approximately $1 million.

In June of 2003, the estate filed an action seeking a refund of approximately $2 million based on the assertion that the palimony claim was deductible. Following further proceedings, the estate claimed a potential refund of $4.86 million.

The District Court noted that there were no factual issues and therefore ruled based on the applicable law. In the view of the lower court, the love and homemaking management provided by Chenchark were not sufficient consideration under Nevada law to create a contract. Therefore, there was no deduction for the value of Chenchark’s claim against the estate. In addition, the District Judge ruled that there was an estoppel argument that precluded the estate from claiming in the palimony case that there was no consideration and then making the opposite claim in the estate tax case.

The Court of Appeals first reviewed the law on consideration. It noted that under both California and Nevada law, a promise to perform homemaking services is adequate to create consideration. Because Chenchark had managed the home and supervised the decedent’s maid, gardener and pool man, the court determined that there was sufficient performance to provide adequate consideration.

On the judicial estoppel issue, the court noted that the estate had opposed the contract claim on the palimony allegation. However, that did not cause the estate to relinquish a right to deduct the potential value of that claim on IRS Form 706.

Finally, Chenchark had filed notices of Lis Pendens against several of Shapiro’s properties. These properties had lower values as a result of the cloud on title. However, the estate had failed to raise that issue in a timely manner and was not permitted to raise it on appeal. Therefore, the Court of Appeals reversed the District Court grant of summary judgment on the deduction for the palimony claim and remanded it to the District Court.

Circuit Judge Tashima concurred in part and dissented in part. Judge Tashima noted that there is a difference between contract law for state property purposes and that which applies for federal tax purposes. Even though there may have been a valid contract under Nevada law supported by Chenchark’s homemaking activities, that does not necessarily qualify the estate for the deduction. If under Sec. 2053 there is a person who is a “natural object of bounty,” then a claim is permitted only if it is supported by “adequate and full consideration.”

Even though Chenchark supervised the maid, gardener and pool man, she never contributed to any funds to the partnership and therefore did not provide the full consideration required for federal tax purposes.

Applicable Federal Rate of 3.0% for March – Rev. Rul. 2011-6; 2011-10 IRB 1 (17 Feb. 2011)

The IRS has announced the Applicable Federal Rate (AFR) for March of 2011. The AFR under Section 7520 for the month of March will be 3.0%. The rates for February of 2.8% or January of 2.4% 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 2011, pooled income funds in existence less than three tax years must use a 2.8% deemed rate of return. Federal rates are available by clicking here.

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