Recipient of IRA Subject to Transferee Liability for Taxes

By Laurie A. Hunter, Esq.

In U.S. v. Mangiardi, (DC FL 07/19/2013) 112 AFTR 2d 2013-5108, the district court refused to dismiss a transferee liability action brought by the IRS against a decedent’s daughter who received funds from his IRA after his death. The gross estate consisted primarily of $4.5 million in a revocable trust and $4 million in an IRA. Tax due was $2.4 million after audit (actually reduced by $200,000!), but the estate requested and received extensions of time to pay, arguing that the securities had greatly depressed values due to the recession. In fact, the decedent’s daughters engaged in active trading of the securities and paid themselves hundreds of thousands of dollars in fees. The IRS levied for the unpaid taxes; the probate estate is insolvent. The IRA was distributed to decedent’s nine children as named beneficiaries. The Court noted that if the estate tax is not paid after notice and demand, a lien (which lasts for 10 years) arises automatically against all property in the estate. In addition, a "transferee of property" in the estate has personal liability to the extent of the value of the property received. The Court agreed with the IRS that the transferee liability suit can be brought within the 10-year time period of the lien against the transferor, and was not limited to the three-year plus one statute of limitations in Code section 6901 that concerns transferee liability. Point to remember: recipients of assets on death are liable for taxes if unpaid by the estate.

U.S. Supreme Court Finds Federal DOMA Unconstitutional

By Laurie A. Hunter, Esq.

On June 26, 2013, the U.S. Supreme Court, in a 5-4 decision, determined that the federal DOMA (Defense of Marriage Act) that prohibited recognition of a valid same-sex marriage under state law was unconstitutional. U.S. v. Windsor. In this case, the surviving spouse of a valid same-sex marriage filed a U.S. Estate Tax Return, claiming the marital deduction for assets passing to her. The marital deduction was denied by the IRS, and tax assessed. This decision makes clear that for a valid marriage under state law, the federal government cannot deny benefits to a spouse.

What this decision does not do: It did not address the validity of a state’s "DOMA" laws, which Colorado has passed, in which a state refuses to recognize the validity of a same-sex marriage that is valid under another state’s law. This may be the next case that reaches a court. It also does not address civil unions, that are specifically not marriage. In Colorado’s new Civil Union statute, a valid same-sex marriage in another state automatically converts to a civil union in Colorado. Therefore, it may be that couples married in a state where same-sex marriage is valid, would still not be entitled to spousal benefits in Colorado, but they could be entitled to federal spousal benefits. The effect is unclear at this point.

IRS Confirms Deductibility of Donations to Certain Charity Owned LLCs

In a long awaited pronouncement, the IRS in Notice 2012-52 confirmed what tax-exempt practitioners had expected for many years: that a donation to a single member LLC that is wholly owned by a U.S. charity, where the LLC is acting as a charitable branch or division of the U.S. charity and conducting charitable activities, are tax-deductible as if the donation were made to the U.S. charity directly. Many charities use single member LLCs to isolate its activities that may expose the parent/single member owner to increased liability. For example, real estate owned by a charity is often held in a single member LLC. However, single member LLCs are also sometimes used to expand the scope of charitable services offered or to establish charitable operations in locations outside the charity’s original service area. In these situations, the LLC is really an extension of the parent/single member charity and operates much like a branch or division of the charity. Donors often develop loyalty to and wish to donate directly to the local LLC rather than to the parent charity. For many years the IRS avoided issuing guidance on whether donations to such LLCs were deductible and as a result, conservative practitioners advised donors and charities alike that, to be assured of a deduction, donations had to be made directly to the charity that was exempt under Section 501(c)(3) rather than through any single member LLC, even where the LLC was wholly owned and operated by the charity. With the issuance of this Notice, however, donations can be made directly to the LLC, as a gift to a branch or division of the charity, provided the LLC satisfies the other requirements of deductibility for charities (i.e., it is organized and operated in the U.S., it is organized and operated exclusively for charitable purposes, there is no private inurement of the earnings and it satisfies the lobbying and political campaign restrictions for 501(c)(3) organizations). The Notice states that the U.S. charity is the donee for substantiation and disclosure purposes, and the IRS encourages the charity to disclose in the acknowledgment or another statement that the LLC is wholly owned by the U.S. charity and treated by the charity as a disregarded entity (that is, the charity reports all of the LLC’s activities on its information return and does not treat it as a separate taxpayer). The Notice is effective for contributions made on or after July 31, 2012, but can also be relied on by taxpayers for prior taxable years where the statute of limitations has not yet expired (that is for prior year gifts).

Favorable PLR on Grantor Trusts

Although a Private Letter Ruling only applies to the taxpayer involved, and cannot be used as precedent, the IRS analysis can be instructive. In PLR 201235006 (August 31, 2012), the IRS stated that a sale of a life insurance policy at its gift tax value from one grantor trust to another grantor trust would not be a "transfer for value" for income tax purposes. While life insurance proceeds are usually exempt from income tax to the beneficiary, if the policy had been sold or was subject to any other "transfer for value," the proceeds are subject to income tax. The IRS also concluded in the PLR that the insured’s power to reacquire the assets of the grantor trust in exchange for assets of equivalent value (a common power included in a trust to make it a grantor trust) would not be considered an incident of ownership over the policy for estate tax purposes. If the insured dies owning any incidents of ownership in a policy on the insured’s life, the proceeds are included in the insured’s estate. This ruling clarified that such a power in an "Irrevocable Life Insurance Trust" would not cause the proceeds to be included in the insured’s estate.