The House of Representatives passed a similar bill earlier this year. Speaker Nancy Pelosi (D-CA) indicated that she plans to submit the Senate bill for a vote by the House. If the House passes the bill, it will be sent to President Obama for his signature.
Senate Finance Committee Chairman Max Baucus (D-MT) was very please that the bill passed. He stated, “When we help small businesses, we help to get Americans back to work. This bill creates the right conditions right now to help small businesses create jobs by spurring investments and entrepreneurs helped with tax cuts and improved access to capital.”
There are several provisions in the bill that are designed to assist small businesses in hiring new employees. These include the following sections.
- $30 billion loan fund – The funds will be transferred to small and mid-size banks. These banks will be encouraged to make loans to small businesses. Compared with mid-2008, loans to businesses are down approximately 18%. It is hoped that this fund will increase lending to small businesses who then will hire new employees.
- Small Business Administration loans – There will be reduced fees on SBA loans. In addition, the loan down payments for some types of loans may be reduced from 25% to 10%.
- Various tax reductions – For new corporations, if investors hold the stock for five years, it may be sold with no capital gains tax. Assets purchased this year may be expensed up to $250,000 for real estate or $500,000 for equipment. There is also a one year extension on bonused appreciation.
A point of controversy was a Republican amendment that failed by a vote of 46-52. The amendment would have repealed the healthcare act requirement that businesses report all payments of $600 or more on Form 1099. Small businesses have objected strenuously to this requirement on the grounds that it will be very burdensome and expensive to implement.
Ranking Member on the Senate Finance Committee, Charles Grassley (R-IA), was generally supportive of the bill even though he voted against it. Sen. Grassley complimented his “friend, Chairman Baucus, for diligently pressing the tax proposals in this bill.” However, he did express concern about the $30 billion bailout. Sen. Grassley was concerned that the bailout fund might be mismanaged as he believes the Troubled Assets Recovery Plan (TARP) funds were mismanaged. He quoted Professor Elizabeth Warren, head of the TARP Congressional Oversight Panel, who noted that the fund “runs the risk of creating moral hazard by encouraging banks to make loans to borrowers who are not credit-worthy.” Sen. Grassley is concerned that the new loan fund may create incentives for banks to make bad loans to overextended small businesses.
Estate Requests to Value Tax Bill Denied
In Marshall Naify Revocable Trust et. V. United States; No. 3:09-cv-01-604 (8 Sep 2010) the District Court refused to permit a deduction based on an estimated cost of California State capital gains tax.
The decedent, Marshall Naify, created a revocable trust on February 3, 1997. On December 18, 1998, he also created the Mimosa Delaware Investment Corporation with initial offices in Delaware and subsequent offices in Reno, NV. Mimosa was intended to be a C Corporation under California law and was created in the hopes that it would avoid payment of California Income Tax.
Mr. Naify owned a large block of convertible notes in Telecommunications, Inc. (TCI). He transferred the stock to Mimosa and converted the notes into stock in 1999. There was a gain of approximately $835 million on the conversion; however, he claimed that the California tax was only $629 million because the corporation was claimed to be a Delaware Corporation with offices in Reno, Nevada.
Mr. Naify passed away on October 12, 2000. The estate filed the final IRS Form 1040 and reported federal income of $835 million and state income of $629 million. The state of California audited the return and contested the lower valuation for the California tax.
On July 18, 2001, the estate filed IRS Form 706 estate tax return. The state valued the potential tax payable to California at $62 million. In February of 2004, after extended negotiation, the estate and the state of California settled the tax debt for $26 million. On March 29 of 2004, the IRS allowed the $26 million deduction and assessed the tax. The estate sought a refund of $11 million based on the claimed deduction of $62 million and the IRS refused the claim. The estate then paid approximately $12 million in additional tax and sued for a refund.
The court reviewed the factual background and then applied the applicable law. Under Sec. 2053, claims and expenses are deductible. Reg. 20.2053-1(b) (3) indicates that “estimated amounts” may be deducted if the claim is “ascertainable with reasonable certainly and will be paid.”
It was obvious that the creation of the Mimosa Corporation was an attempt to avoid the California tax. By claiming a $62 million deduction for the value of the potential California tax, the estate was essentially claiming that the detailed plan to avoid tax was going to fail and, therefore, and the amount payable was ascertainable.
The IRS countered that the $62 million potential tax bill paid to California was ascertainable with reasonable certainty. The amount payable to the Franchise Tax Board could have been anywhere from $0 to $61 million. Subsequently, the estate claimed that the appropriate valuation and deduction should be $47 million.
However, the claim was quite uncertain. No one could be certain that the Mimosa tax strategy would work.
In addition, the reasonably ascertainable bill must also have a certainly that it “will be paid.” Given the protracted litigation with the California Franchise Tax Board, there was no certainty as to the amount that would be paid.
The fact that the claim was both disputed and disputable by the estate and that there was negotiation over a period for 7 years indicates that there was not an ascertainable amount. As a result, post-death events are a permissible factor in determining the appropriate amount of tax.
Therefore, the claim by the state of California was not certain. After the settlement for $26 million, it was appropriate for the IRS to allow deduction for the actual amount. The resulting tax bill, as stated by the IRS, was affirmed.
Estate Refund of Late Filing Penalties Denied
In Estate of Robert M. Cederloff v. United States; No. 8:08-cv-02863 (9 Sep 2010), the District Court denied an estate petition to wave penalties for late filing of IRS Form 706.
The decedent, Robert M. Cederloff, passed away on August 15, 1999. Attorney Garland Lowe was appointed as personal representative. Mr. Lowe had previously been employed as an IRS attorney.
On May 15, 2000, Lowe filed Form 4768 and obtained an automatic six-month extension for filing the tax return. The extension gave Mr. Lowe until November 15, 2000 to file. On January 30, 2001, he requested an additional extension which the IRS denied. The IRS required him to “file IRS Form 706 immediately.” Mr. Lowe waited until October 31, 2001 to file Form 706.
With that filing, Mr. Lowe indicated four reasons why the late-filing penalties should be abated.
First, Mr. Lowe observed that the decedent had purchased a home in Las Vegas and placed both his name and his brother’s name on the home. After the death of Mr. Cederloff, the brother claimed the entire home and there was litigation to resolve the issue.
Second, the decedent resided in Maryland and maintained records in both Maryland and Las Vegas. However, he passed away in his daughter’s home in Lake Oswego, OR and also had records there.
Third, the decedent was separated from his wife but not divorced. She predeceased him and her estate needed to be probated to determine the total assets.
Fourth, at the due date with extension, it appeared that there were other unknown assets in the estate. In fact, the other assets were discovered and subsequently reported in the estate.
For all of these reasons, Mr. Lowe claimed that he could not file the return and requested that the penalties be abated. The IRS refused to abate the penalties and noted that an IRS Form 706 must be filed within the required deadlines.
Before the District Court, the estate observed that the four reasons given constitute the reasonable cause for the failure as defined under Sec. 6651(a). In addition, the personal representative noted that the IRS had waived the penalties on late filing of the final income tax return and claimed that a refusal to similarly waive the penalties on the estate tax return was arbitrary and capricious behavior by the IRS.
The court noted that the Internal Revenue Code creates strict deadlines for Form 706. The form is due nine months after the date of death, but there is an automatic six month permitted extension if Form 4768 is filed. However, no further extensions are permitted unless the executor is abroad. Reg. 20.6081-1(b).
While Sec. 6651(a)(1), (a)(2) permits waiver of late filing if there is no “willful neglect” and there is “reasonable cause,” the actions cannot be within the control of the personal representative. Only if there are events such as the death of an immediate family member or a mistake of a competent tax advisor is there an event that is “beyond the executor’s control” that permits delay.
The intent of the statutes is to require filing of the return “as complete as possible” prior to the applicable deadline. The fact that Mr. Lowe paid the estimated tax payments suggested that he had sufficient data to file. The court noted that the taxpayer may file based on the available information.
While the form does require a statement by the personal representative that it has been filed under penalty of perjury and “to the best of his or her knowledge and belief,” Mr. Lowe could have and should have filed the return. It is not permitted to amend the return, but Mr. Lowe could have later provided supplementary information that would have assisted in the final tax calculations. Therefore, because Mr. Lowe had the ability to file, even though some information was incomplete, the penalties were correctly levied and are applicable.
Applicable Federal Rate of 2.0% for October
The IRS has announced the Applicable Federal Rate (AFR) for October of 2010. The AFR under Sec. 7520 for the month of October will be 2.0%. The rates for September of 2.4% or August of 2.6% 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 2010, pooled income funds in existence less than three tax years must use a 4.6% deemed rate of return.