September 1, 2010, is an important date if Congress intends to reinstate the estate and GST tax retroactive to January 1, 2010. The reason is that the first estate tax returns for 2010 are due on September 1st (for persons who died on January 1st of 2010).

Well, Congress started its summer recess without an estate tax bill and, when they return after Labor Day, their focus is likely to be on the mid-term elections. After the elections, we'll have a lame duck Congress who may very well decide to let the next Congress deal with a permanent estate tax bill. If Congress does nothing, then on January 1, 2011, the estate tax exemption automatically drops to $1 million, with a top tax rate of 55%.

Senate Finance Committee Chairman Max Baucus (D - Mont.) had pledged earlier in the year to try to restore the estate and GST tax retroactively. But on July 27, 2010, Senator Baucus said that it is increasingly unlikely that the estate tax will be reinstated retroactively to the start of 2010. "Practically speaking, the later we take up and pass the estate tax law or provision, the more difficult it is to make it retroactive", Baucus said.

In addition, the heirs of the following billionaires who died in 2010 will have something to say about a retroactive tax bill.

1. On March 28th, the 74th richest person in the world, Houston businessman, Dan Duncan, died at age 77. Mr. Duncan, who made his money by piping, processing, and storing oil, left an estate estimated to be worth $9 billion by Forbes magazine.



2. On February 5, 2010, Mary Janet Morse Cargill, of the Minnesota family that founded Cargill, Inc. died at age 85. Forbes magazine estimated her net worth at $1.6 billion.



3. On June 24, 2010, Walter H. Shorenstein, who was the largest landlord in San Francisco (roughly 10 million square feet), a top Democratic fundraiser, and an advisor to several Presidents, died at age 95. Forbes magazine estimated his net worth at $1.1 billion.



4. On July 13, 2010, George Steinbrenner, the owner of the New York Yankees, who had just turned 80, died with an estate estimated at $1.1 billion by Forbes magazine.

You would have to assume that all of these decedents had sophisticated estate plans that took advantage of the temporary lapse in the estate and GST tax in 2010. Thus, if Congress reinstates the estate and GST tax retroactive to January 1, 2010 (and there is some legal precedence that would allow Congress to do so), the heirs of these estates will certainly challenge the constitutionality of the retroactive law, given the billions of dollars at stake. Such challenges could be tied up in court for years. Thus, you can probably kiss a retroactive estate tax goodbye.

For more information regarding this topic, please e-mail your requests to Julius Giarmarco, or call Julius at (248) 457-7200.

In an effort to encourage the purchase of life insurance, some life insurance agents will pay to the policyholder an amount of money equal to a portion or all of the life policy's premium. Typically, this "rebate" is only made by the agent for the first year's premium. In many states, including Michigan, rebates are illegal. Michigan forbids the sharing of an agent's or broker's commission with anyone who is not a licensed insurance agent. Moreover, rebates can result in taxation to both the agent and the policyholder. In the case of Gerlie v. Rickard et ux. v. Commissioner; T.C. Memo 2010-159; No. 5842-06, the issue was whether or not the policyholders who received payments from their insurance agent in an amount equal to the premiums on three separate policies in one year should be taxed on such payments despite the existence of non-recourse notes. The Court held that the non-recourse notes did not create genuine indebtedness and, therefore, the "rebates" paid to the policyholders were deemed taxable income to them in the year the rebates were received.

In 2001, the life insurance agent involved in Gerlie paid money from his corporation to a husband and wife equal to the first year premium for three policies that he sold them that year. At the same time, the husband signed a non-recourse promissory note in favor of the agent's corporation. The note was payable one year from the date of execution at 3% interest.

As of the trial earlier this year, not one loan payment had been made from the husband or wife to the agent or his corporation. Moreover, neither the agent nor his corporation ever demanded repayment or took any other action due to the husband's default on the loan.

On the couple's joint Federal income tax return for 2001, they did not report as income any portion of the amounts received from the insurance agent in 2001. The IRS sent the couple a notice of deficiency determining that they were required to include as income the total amounts of the payments they received from the agent in 2001. The IRS and the couple were unable to reach a resolution and the dispute went to trial.

The couple didn't deny receiving the payments at trial. Their argument was that the existence of the promissory note precluded the treatment of the payments as taxable income. The Court rejected their argument. Where the couple receiving a premium-reimbursing rebate from the insurance agent gives the agent a non-recourse note, secured only by the policies in the amount of the rebate, such a note does not constitute genuine indebtedness, particularly where there is no evidence of an intention to repay the notes. The Court decided that the creation of the promissory notes was merely a tax sham and that there was never any good faith intention to repay or demand repayment of the rebates paid to the married couple. Consequently, the couple received taxable income in 2001.

The lessons to be learned from this case are that rebates are illegal; rebates will likely result in taxable income (and legal fees) to both the insurance agent and life insurance policyholders; and the existence of a mere promissory note without any repayment or enforcement does not create genuine indebtedness.

For more information regarding this topic, please e-mail your requests to Thomas P. Cavanaugh, or call Tom at (248) 457-7218.

In Swanton v. Commissioner, T.C. Memo 2010-140, taxpayers were found by the Tax Court to be responsible for their defunct business's failure to remit withheld employment tax to the Treasury Department. As the responsible parties, taxpayers were held personally liable for the trust fund recovery penalties. Consequently, the IRS seized approximately $290,000 from an IRA of one of the taxpayers in order to collect the penalty. The taxpayer did not challenge the IRS's right to levy his assets. Assets of IRAs in qualified plans are subject to levy for unpaid taxes. The question in this Tax Court case was whether or not the participant/IRA owner is required to include the value of the seized assets in his/her gross income in the year of the levy.

The Tax Court held that the seized portion of the IRA is to be treated as though they were distributed to the taxpayer. IRC Section 72 governs the taxation of IRA distributions. The taxpayer was unable to offer proof that any of the contributions that he made to the IRA were non-deductible. Consequently, the full value of the seized assets was includible in the income of the taxpayer in the year of the levy. The payment of Federal taxes by way of levy was determined by the Tax Court to be an involuntary assignment of income and, accordingly, should be included in the taxpayer's gross income based upon the doctrine of constructive receipt.

The only bright spot for the taxpayer, who is younger than 59 1/2, was that the Tax Court held that he was not subject to a 10% early withdrawal penalty. The Tax Court held that the withdrawal penalty does not apply to distributions resulting from an involuntary assignment to the IRS to satisfy unpaid taxes.

For more information regarding this topic, please e-mail your requests to Thomas P. Cavanaugh, or call Tom at (248) 457-7218.