IRS Warns of New Phone Tax Scam

In IR-2016-40 the IRS warned about a new phone tax scam. The tax scammers will call victims and explain that they are just verifying their tax return information.

The caller frequently will claim that he or she is reviewing your tax return. You will need to confirm your Social Security Number, bank account number and routing numbers. IRS Commissioner John Koskinen stated, “These schemes continue to adapt and evolve in an attempt to catch people off guard just as they are preparing their tax returns. Do not be fooled. The IRS will not be calling you out of the blue asking you to verify your personal tax information or aggressively threatening you to make an immediate payment.”

Koskinen observed that the tax scams are growing in every part of the country. He continued, “It is a growing list of people who have encountered these. I have even gotten these calls myself.”

The Treasury and Inspector General for Tax Administration (TIGTA) monitors phone scam reports. It notes that since October 2013 there have been 896,000 reported phone scam calls. Over 5,000 victims have paid $26.5 million to scammers.

In 2016 the IRS also estimates that there is a 400% increase in “phishing” contacts by email.

The IRS cautions that there are several actions it will not take. It will not call you to demand an immediate payment, ask you to verify personal and financial information, demand that you pay tax immediately, require you to use a method such as a prepaid debit card to pay your taxes, ask for your credit or debit card numbers over the phone or threaten you with immediate arrest by your local police.

There are several steps that will help protect you from a phone scammer. First, do not give personal information over the phone. Second, if you suspect a phone scam, call TIGTA at 800-366-4484 and report it. Third, you can go to www.FTC.gov and use the “FTC Complaint Assistant” on their website to report the scam.

FLP Assets Taxed in Estate

In Estate of Sarah D. Holliday et al. v. Commissioner; T.C. Memo. 2016-51; No. 8143-13 (16 Mar 2016), the Tax Court held that assets in a limited partnership were taxable at full value in the estate.

Decedent Sarah D. Holliday created Oak Capital Partners, LP (Oak Capital) on November 30, 2006. OVL Capital Management, LLC (OVL Capital) was the general partner with a 0.1% interest and Holliday owned limited partnership shares with a 99.9% interest.

On December 6, 2006, Holliday sold the OVL Capital shares to her sons Joseph and Douglas for two payments of $2,959.84. She also transferred 10% of her limited partnership shares to Holliday Irrevocable Trust.

Oak Capital was funded with $5,919,683 of public securities. It was maintained thereafter in various liquid public securities. The decedent passed away on January 7, 2009 owning 88.9% of the limited partnership shares. The estate discounted the $4,064,759 asset value to $2,428,200.

The IRS audited the estate and assessed a deficiency of $785,019. At trial, the IRS maintained that Holliday had retained the enjoyment of the assets and there was inclusion in the estate under Sec. 2036(a)(1).

Section 5 of the partnership agreement indicated that if “the partnership has sufficient funds in excess of its current operating needs to make distributions to the partners, periodic distributions of Distributable Cash shall be made to the partners on a regular basis according to their respective partnership interest.” The IRS maintained that there was a right to receive distributions and the family had indicated that she would receive distributions if needed. Even though Holliday had retained substantial assets outside the limited partnership, the Tax Court determined that she had indeed a retained right under Section 2036(a)(1).

The estate also claimed that there was a “bona fide sale” and therefore the discount should be honored. The estate observed that she was concerned there would be risk of trial attorney extortion, that a caregiver could subject her to undue influence and that there was a family goal to preserve assets.

The Tax Court noted that there were public securities, she had ample other assets and there was no unusual liability risk. There was no demonstrated reason for a caregiver risk and the decedent had been on both sides of the transaction. There was no arms-length negotiation involved.

Therefore, there were no “legitimate and nontax reasons for the transfer of assets.” Because the trust also failed to follow appropriate and normal business procedures in its administration, the assets were included at fair market value under Sec. 2036(a)(1).

Executor Not Personally Liable for Estate Tax

In Scott Singer v. Commissioner; T.C. Memo. 2016-48; No. 23277-13 (14 Mar 2016), the Tax Court held that an executor was not personally liable for a $422,694 estate tax.

Decedent Melvin Sacks was a New York attorney. At his death he was married to Alvia Sacks, but also had relationships with Lucille Atwell and Joan Parker. He passed away on Aug. 24, 1990.

In 1996 the IRS filed a claim for $4,023,213 for unpaid income taxes. The income tax claim was settled by the estate for $1 million.

The estate made transfers to Alvia Sachs, Lucille Atwell, two grandchildren and decedent’s law partner Ira Sacks. IRS audits and negotiations ensued. Executor Singer sought contributions from several heirs. On April 15, 1999 the estate released $753,321 for payments of $255,107 to the estate of Alvia Sacks, $446,777 to the IRS and $171,587 to the New York Department of Taxation. On July 16, 2013, the IRS filed a claim of personal liability for executor Singer in the amount of $422,694.

Sec. 6901(a) creates executor personal liability if he or she has notice of an IRS claim, the estate is insolvent and there is a distribution of assets. Because Singer had notice of the claim and distributed assets, the issue was the insolvency of the Sacks estate.

Under New York law Singer could have sought contribution from heirs. Because the estate could have regained solvency by these contributions, it was not insolvent and the executor is not personally liable.

Applicable Federal Rate of 1.8% for April—Rev. Rul. 2016-9; 2016-14 IRB 1 (18 Mar 2016)

The IRS has announced the Applicable Federal Rate (AFR) for April of 2016. The AFR under Section 7520 for the month of April will be 1.8%. The rates for March of 1.8% or February of 2.2% 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 2016, pooled income funds in existence less than three tax years must use a 1.2% deemed rate of return. Federal rates are available by clicking here.