Monday, October 31, 2011

Tax probe widened to 17 Swiss banks.

U.S. authorities have widened their investigation to 17 Swiss banks under scrutiny for possibly helping wealthy Americans dodge taxes, a Swiss newspaper reported, citing several financial sector sources.

Strict secrecy has helped Switzerland build up a $2 trillion offshore financial sector, and in recent years the country has faced an international campaign against tax evasion as cash-strapped governments seek to boost revenue.


Credit Suisse is the formal target of an investigation in the United States and Julius Baer is also being probed. UBS, Switzerland's biggest bank, has already paid a big fine and was forced to reveal the names of some 4000 clients to U.S. authorities.

The German-language Handelszeitung said in a preview of its Thursday edition that 17 banks were under scrutiny, up from the previous figure of 11.

The Handelszeitung gave no further details.

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FATCA Guidance to Focus on Helping Banks & Withholding Agents Comply

The next round of guidance under the Foreign Account Tax Compliance Act expected in coming months will focus on giving banks and withholding agents the information they need to begin reporting U.S.-owned accounts to U.S. tax authorities, a senior Treasury Department official recently said.

“We are on track to issue proposed rules by the end of the year,” said Michael Plowgian, an attorney-adviser in Treasury's Office of International Tax Counsel.

Speaking at the 2011 fall meeting of the American Bar Association Section of Taxation on Oct. 21, Plowgian said the proposed rules will focus on critical issues for immediate answers as the government begins phased implementation of FATCA.

One key area is to give foreign financial institutions (FFIs) the information they need to begin entering into withholding agreements with the United States, the Treasury official said. Another is providing guidance for withholding agents.

Plowgian said while FATCA is in part a response to a number of financial scandals involving overseas banks, “it is generally consistent with a trend toward increased transparency of tax information.”

Speaking to the tax section's Investment Management Committee, Plowgian acknowledged that the withholding provisions under the legislation get “a lot of attention.”

However, he said, the government's aim is to achieve the reporting by foreign banks, not to take a punitive stance.

“If this worked out perfectly, there would be no withholding under FATCA and that's ultimately our goal,” he told practitioners.

Wednesday, October 26, 2011

9th Circuit Finds Fifth Amendment Privilege Does Not Apply to Swiss Banking Records

Ninth Circuit Finds Fifth Amendment Privilege Does Not Apply to Swiss Banking Records - The Fifth Amendment privilege does not apply to records that fall under the Required Records Doctrine.

On August 19, 2011, the U.S. Court of Appeals for the Ninth Circuit upheld a lower court’s ruling compelling an individual, M.H., to comply with a grand jury subpoena duces tecum demanding that he produce records relating to foreign bank accounts. The decision turned on the issue of whether the subpoena violated the individual’s Fifth Amendment protection against self-incrimination or whether the Fifth Amendment did not apply under the Required Records Doctrine.
M.H. was the target of a grand jury investigation into whether he used Swiss bank accounts to evade federal taxes. In 2009, as part of a deferred-prosecution agreement, UBS had provided M.H.’s name, along with approximately 250 others, to the United States Department of Justice, identifying him as someone who might have evaded taxes.

The government’s subpoena sought information that M.H. was required to keep and maintain for inspection under the Bank Secrecy Act of 1970 ("BSA"), and report to the government annually through the Form TD F 90-22.1, "Report of Foreign Bank and Financial Accounts" or "FBAR," including records reflecting the name of the account holder, the account number, the name and address of each foreign bank maintaining the account, the type of account, and the maximum annual value for each account.
Finding thre elements of the Required Records Doctrine present, the Ninth Circuit affirmed the trial court’s order compelling M.H. to produce the subpoenaed information. The court’s decision suggests that anyone claiming Fifth Amendment protection for foreign bank records will have a tough battle, particularly in the Ninth Circuit.

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Tuesday, October 25, 2011

All Swiss Banks Are Now Ready to Reveal Clients

Swiss banks will probably settle a sweeping U.S. probe of offshore tax evasion by paying billions of dollars and handing over names of thousands of Americans who have secret accounts, according to two people familiar with the matter.

Monday, October 24, 2011

FATCA Guidance Expected By Year's End

IRS Deputy Associate Chief Counsel (International) Ronald Dabrowski said FATCA guidance is a key priority. The law requires foreign banks to disclose U.S. owned accounts to U.S. tax authorities or face, in some cases, a 30 percent withholding tax.

Speaking at the fall meeting of the American Bar Association Section of Taxation, Dabrowski said IRS is working on guidance on other tax provisions under the Hiring Incentives to Restore Employment (HIRE) Act (Pub. L. No. 111-147), which created FATCA.

The government is committed to getting proposed rules on the Foreign Account Tax Compliance Act (FATCA) out by the end of the year.

Regulations under new tax code Section 6038D, which imposes penalties if taxpayers do not report specified foreign financial assets on a form attached to their tax returns, should be out soon, Dabrowski said, noting that the recent draft version of the Form 8938 and instructions are “a good indication of where things are going.”

Thursday, October 20, 2011

The New Gift Tax Audits - IRS Identifies Non-Filers Using State Property Records

A new IRS gift tax compliance initiative responds to suspicions of widespread failure to file gift tax returns. According to Josephine Bonaffini, the Federal/State Coordinator for the IRS Estate and Gift Tax Program, between sixty percent and ninety percent of taxpayers fail to file a gift tax return despite having engaged in a transaction requiring a return.

Although gift tax audits are historically rare, the IRS has examined hundreds of taxpayers in the last two years whom the IRS suspects made large gifts, yet failed to file the appropriate returns. Borrowing from techniques long employed to identify noncompliant taxpayers in the income tax context, the IRS is using records obtained from third parties—namely, land records maintained in state and county offices—to root out intra-family land transfers for little or no consideration.
Land records maintained at local state offices are publicly available. However, the suspect transfers make up a small percentage of these voluminous and decentralized records. Thus, the IRS has asked state and county agencies that compile the relevant records to provide the IRS with those records. For instance, the California constitution contains cap on property tax increases following certain intra-family transfers, which inadvertently results in the California Board of Equalization (“BOE”) segregating the records of interest to the IRS—those on intra-family transfers—from the mass of irrelevant property records.

State or county agencies in fifteen states, including New York and Texas, have voluntarily agreed to provide records similar to those maintained by the California BOE. There is no reason to believe that the IRS has not made similar requests to agencies within many more, if not all, states, and more voluntary compliance from individual states may be forthcoming.

The recent flurry of gift tax compliance activity took many in the tax community by surprise. The compliance initiative received no appreciable public attention until the recent dispute in California federal court (discussed in more detail below), and the IRS has declined to comment on the initiative beyond the information provided in documents filed in that case. This mysterious quality gives the IRS’s recent activity the aura of a “stealth” program.

As with any federal tax law violation, the government may impose severe consequences for violating the gift tax provisions. But one curious aspect of the new gift tax compliance initiative is that the majority of examinations likely result in zero assessed tax or penalties.

According to Bonaffini, in the past two years, 323 taxpayers have been audited for failure to file gift tax returns relating to gifts of real property, 217 cases were still under examination, and another 250 cases were being researched to determine whether to conduct gift tax audits. At the time, the IRS had determined that ninety-seven taxpayers had violated gift tax reporting requirements by failing to file, and just twelve cases resulted in assessment of tax and penalties.

Although several states apparently complied voluntarily with the IRS’s requests for records, California did not. Rather, when the IRS requested the California BOE produce the neatly segregated records of intra-family transfers discussed above, the BOE refused, citing a state statute which forbids disclosure of personal information absent a court order.

On May 23, 2011, the court issued an order whereby it disagreed with the government and refused to issue the summons.

The IRS may heed the court’s suggestion and simply attempt to seek the relevant records directly from the counties. Alternatively, the government may resubmit its petition in federal court, in which case the tax community will await another court order. In any event, the court’s denial of the government’s petition may embolden additional states to refuse the IRS’s request for records.

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Wednesday, October 19, 2011

Achieving Tax Efficiency with cross-border services and royalties in Latin America

In the global economy the growth of royalties and services associated to intellectual property and information technology has become critical for international taxation. On one-side governments of importing countries regularly source payments as territorial, based on the jurisdiction or location of payor. On the other, exporting countries push to resolve the issue through tax treaties. Unfortunately for US companies, one of their natural expansion markets is a “no-tax-treaty battleground”: Latin America (only Mexico and Venezuela have treaties with the US. A treaty with Chile is expected to be ratified by both countries soon).

Achieving Tax Efficiency with cross-border services and royalties in Latin America presents an important tax planning challenge in outbound taxation for US companies; as the corresponding inbound activity in Latin American countries is subject to high rates of income tax withholdings, and eventually, reverse VAT issues. In countries like Brazil, on top the income withholding tax issues, the scenario becomes even more complicated when the CIDE tax becomes applicable. The CIDE tax is a 10% surcharge withheld on certain services or royalties considered to be importation of technology. As such, the CIDE tax will not be creditable against US income taxes under the Internal Revenue Code, as it is not an income tax nor in lieu of income taxes.

The subject has become increasingly important, particularly in absence of tax treaties. In the US, under the Internal Revenue Code, the tax credit system might be insufficient to resolve the issue from a cash flow perspective; and, secondly, it might present some tax optimization issues as well. Thirdly, another problem could arise when the royalty or service activity is parallel to certain support services, programming or commercialization activities in the importing country. Generally the use of independent contractors could be problematic and eventually not escape potential tax liability issues, including those emerging from the notion of “engagement in a local trade or business”, in absence of a protective permanent establishment provision per a tax treaty.

Three options to consider, from a tax planning perspective are:

1. Playing as a local with a Tax Hybrid. Reducing withholding taxation on the overseas service payments by creating a Sociedad de Responsabilidad Limitada (hereinafter referred as “SRL”), which is the equivalent of an LLC (or other eligible entity under the check-the-box regulations). This option is optimal when treaty networking becomes complex, expensive or unviable, as well when the growth is focused or concentrates in a particular country.

The SRL (or eligible entity) will become a tax hybrid, thus a disregarded entity in the US but a legal independent entity in the Latin American country. Accordingly the entity is a blocker and a conduit at the same time. As such, the parent company is protected from tax exposure or any other liability issues locally (particularly relevant when there is related marketing or support activity in the importing country), but from a tax perspective all taxes paid flow-through as direct tax credits, and all expenses as deductions, including as the latter all indirect taxes paid.

The key in this planning technique is that income tax withholdings on local payments for services or royalties are very low (or none), compared to the high rates applicable to cross border payments for the same. Additionally, the withholding tax is applicable over the gross amount paid, whereas the entity is taxed on a net basis. Most jurisdictions in Latin America do not tax dividends when declared after previously taxed profits or earnings, but this is an important issue to look country by country as a pre-condition, because it is necessary to ensure that surpluses flow back without tax implications. Thus, with proper planning, the efficiency and savings are significant.

In countries like Brazil, where strategizing becomes highly relevant not only from an income tax perspective but from a CIDE tax and indirect taxation perspective as well, there are additional options to bring efficiency. Brazilian tax law allows that any legal entity provided that its income is below the BzR$ 2.4 million threshold, to elect taxation under the simplified “presumed profits method”. One alternative to consider is to create one SRL for each contract or revenue stream from royalties or services, to meet the income threshold necessary to meet the presumed profits method election. Accordingly, in a service scenario, the presumed profits are considered to be 32% of gross revenue. With nominal tax rates in the 35%, the effective rate of taxation upon this election becomes 11,2 (compared to a 25% flat withholding rate applicable, including the 10% CIDE tax, when the payments are made directly to a foreign provider or licensor). Finally, any net profits accumulated at the local entity in Brazil can be repatriated as dividends at 0% income tax withholdings. Another advantage of the presumed profits method is that it will significantly simplify local compliance and reporting packages.

2. Treaty Networking. Avoiding withholding taxation on Service Payments adopting a Tax Treaty Country. Another approach if significant expansion is expected in several Latin American countries is to create an IP holding incorporated or filed on a jurisdiction with a good tax treaty network.

The critical factor is to overcome the limitation of benefit provisions provided under the treaties, as well as giving substance to the IP toolbox or holding. Jurisdictions of choice for Latin America are Spain and the Netherlands.

3. Transactional Structuring. Another alternative to avoid withholding taxation on royalties and technical assistance is by creating and selling a legal entity. This approach is relevant in a transactional planning scenario. An entity is formed in an offshore low tax and non-blacklisted jurisdiction (preferably with a tax treaty) and capitalized with a contribution in pre-paid royalties and services. Thereafter, the local client, affiliate or partner purchases the stock in the capitalized offshore entity.

A jurisdiction to consider in this planning technique is Barbados, as it is not blacklisted by the OECD and has tax treaties with a number of countries, including the United States.

Monday, October 17, 2011

Foreign Investors in U.S. Partnerships Miss Schedule P

Foreign investors often miss Schedule P.

It applies to the ownership of any U.S. partnership including a limited liability company. Many foreign investors use a foreign corporation with the hope of avoiding US estate taxes. 

Now, the 2011 Schedule P (Form 1120-F) is required by a foreign corporation’s ownership of a U.S. partnership. Schedule P also reports the distributive shares of partnership effectively connected income and the foreign corporation’s effectively connected outside tax basis in interest. 

Part I is used to identify all partnership interests the foreign corporation directly owns that give rise to distributive share of income or loss that effectively connected with a trade or within the United States of the corporation. 

Part II is used to the foreign corporation’s distributive share of ECI and allocable expenses with the total income and expenses reported to it on Schedule K-1 1065), Partner’s Share of Income, Deductions, Credits, etc. 

Part III is used follows: The corporation’s outside its directly-held partnership that include ECI in the corporation’s distributive share is apportioned between ECI and non-ECI Regulations section 1.884-1(d)(3) determine the average value treated as asset for interest expense allocation purposes under Regulations.

Friday, October 14, 2011

U.S. Wins Three Tax Cases Involving Big Banks, KPMG

United States prosecutors said Tuesday they had won three major cases against American clients of questionable tax shelters, including ones used by a Dallas billionaire and Wells Fargo Co. and others designed by Citibank and accounting firm KPMG LLP.

The separate cases, the verdicts of which were rendered in October, represent a significant victory for the Justice Department, which was sued by each of the three clients when the Internal Revenue Service denied their claimed deductions that totaled hundreds of millions of dollars.

The rulings also underscore how the two agencies, in the midst of a crackdown on offshore tax evasion by wealthy Americans at Swiss banks, are continuing to pursue corporate tax shelters used by large American companies.

In the first case, the 5th Circuit appeals court in New Orleans upheld a lower court ruling that D. Andrew Beal, a Dallas billionaire banker, improperly used a sham shelter to deduct $200 million in federal income taxes stemming from more than $1 billion on sham losses.

A Justice Department statement said the shelter involved Beal acquiring "a portfolio of non-performing Chinese debt for less than $20 million, disposing of the portfolio and generating more than $1 billion in artificial paper losses approximately equivalent to the debt's face value."

Beal is the founder of Beal Bank, a small bank headquartered in Dallas and is No.39 on the Forbes 400 list of wealthiest Americans with a $7 billion personal fortune.

In the second case, a federal judge in Iowa ruled that Principal Life Insurance Co., part of Principal Financial Group in Iowa, a large investment company, could not claim $21 million in foreign tax credits stemming from a $300 million transaction with Bred Banque Populaire and Natexis Banque Populaire, two French banks, from 2000 through 2005.

The judge found that the transaction lacked both economic substance and a business purpose -- two key features of questionable tax shelters -- and was a loan rather than an investment. The transaction, the judge ruled, was designed solely to generate foreign tax credits and thus violated anti-abuse regulations at the Treasury Department.

The complex transaction involved a Delaware company called Pritired 1 LLC, in which Principal Financial and Citicorp North America, a division of Citigroup, were the sole investors. Pritired, the tax matters partner in the lawsuit, sued the US government -- meaning, in this case, the IRS -- in 2008 after the agency disallowed its refund claims.

Court papers said that Bruno Rovani and John Buckens, both employees of a London-based division of Citi's Structured Products Group, Citi Capital Structuring Group, designed and carried out the transactions underpinning the shelter.

Principal Financial Group, a member of the Fortune 500 largest American companies, manages nearly $336 billion in assets, mainly retirement plans and investment funds. It manages 10 of the 25 largest pension plans in the world, according to its website.

In his decision, Judge John Jarvey wrote that "the facts of this case are exceedingly complex. American companies sent $300 million to French banks who combined the $300 million with $900 million of their own. The money was used to earn income from low-risk financial instruments. French income taxes were paid on the income from this approximately $1.2 billion investment."

The judge also said "the American companies received some cash from the income on the securities, but, more importantly, were given the ability to claim foreign tax credits on the taxes paid on the entire $1.2 billion pool. Through this transaction, the French banks were able to borrow $300 million at below market rates. The American companies received a very high return on an almost risk-free investment."

In the third decision, a federal judge in Minnesota disallowed a claim by a Wells Fargo subsidiary for more than $82 million in tax refunds.

The claim stemmed from a sham transaction in 1999, improperly valued at nearly $424 million, that involved capital losses stemming from Wells Fargo's transfer of "underwater" commercial leases to a subsidiary in conjunction with a related sale of stock to Lehman Brothers, the defunct investment bank. Wells Fargo had tried to claim the tax refunds on its 1996 corporate tax return.

Court papers show that Wells Fargo bought the shelter from the accounting firm KPMG LLP for $3 million in 1998, part of what court papers said KPMG characterized a "quick hit" tax strategy on the eve of Old Wells Fargo's merger that year with Norwest. Wells Fargo sued the US in 2007 when the IRS denied its refund claims.

Joel Resnick, a former KPMG partner, offered testimony in the case about KPMG having sold Wells Fargo a "tax product" called an "economic liability transaction," according to court papers.

"KPMG employees developing the economic liability transaction product knew that a company needed a non-tax business purpose to justify the transaction," wrote Judge John Tunheim, of Minneapolis, in his decision.

KPMG narrowly averted an indictment in 2005 over its sale of questionable tax shelters to wealthy Americans. It paid a $456 million fine and was put on probation through a deferred-prosecution agreement that has now expired.

Final Form 8939 and Instructions Now Available

The IRS just released the final Form 8939 and Instructions.

Form 8939 is required to be filed by an Executor of a 2010 decedent’s estate to make the election to opt out of the federal estate tax system and apply the modified carry-over basis rules under Internal Revenue Code (“IRC”) Section 1022.

The deadline for filing Form 8939 is January 17, 2012. No further extension of time to file or to make the IRC Section 1022 election will be allowed.

Thursday, October 13, 2011

European Union Savings Directive (EUSD) – Amendment Is Coming Soon

Banks in EU must report beneficial owner information or implement 35% withholding tax on any interest payment to zero tax offshore entity effectively managed in the EUSD territory.

There is a list of jurisdictions outside the scope of the EUSD and includes Barbados, Panama, Belize, Bermuda and Hong Kong and St.Lucia among others.
Also the list includes places that will have to pass legislation to enact the EUSD amendments including, Cayman, BVI, IOM, Jersey, Monaco, Switzerland
A typical example includes a scenario where a BVI company with a Swiss bank account and Swiss directors pays interest to an EU resident. That transaction will attract either withholding tax at 35% or the automatic reporting of the beneficial owner information. Any interest payment to an untaxed entity or legal arrangement managed within the savings tax territory in another country, even if beneficiary is a non-EU resident.

Life insurance and payments of benefits under certain life insurance policies is also addressed in the amended EUSD.

Even non-EUSD jurisdiction IBCs or zero tax vehicles are roped into the directive if the IBC is effectively managed in the EU for example the trustees or even company nominees are based in the EU. Jurisdictions like Panama, Belize, Barbados, Hong Kong and Singapore all suffer the same fate. Where zero tax entities incorporated in these jurisdictions are effectively managed in the EU and payments are being made to apply the savings directive.

If the banking jurisdiction has banking secrecy but the IBC or offshore trust or foundation is effectively managed in the EU the EUSD applies.

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Julius Baer Financial Advisers in Switzerland Accused of Scheme to Conceal $600 Million

A pair of Swiss bank financial advisers have been charged with conspiring with U.S. clients to hide more than $600 million from the Internal Revenue Service in offshore accounts, prosecutors announced Oct. 11 (United States v. Casadei, S.D.N.Y., No. 11 Crim. 866, indictment unsealed 10/11/11).

In an indictment unsealed in U.S. District Court for the Southern District of New York, client advisers Daniela Casadei and Fabio Frazzetto were accused of helping clients evade U.S. taxes by advising them to open undeclared accounts under code names or fictional names. They worked for an institution identified by prosecutors as “Swiss Bank No. 1,” which sources said is Julius Baer Group Ltd.

Casadei and Frazzetto also allegedly advised clients not to worry about U.S. law enforcement authorities because the bank no longer had offices on U.S. soil, the indictment charged. In one case, it said, Frazzetto specifically discouraged a client from making a voluntary disclosure to IRS, telling him not to “panic.” Daniela Casadei and Fabio Frazzetto conspired with more than 180 U.S. clients and others at the bank to hide at least $600 million in assets from the Internal Revenue Service, according to the indictment in federal court in New York and the person, who wasn’t authorized to speak about the matter. The indictment refers to the bank as Swiss Bank No. 1.

“The bank is one of a number of Swiss financial institutions supporting the ongoing tax negotiations between the U.S. and Switzerland and is cooperating with the U.S. government investigation,” Baer said in an e-mailed statement today.

For more information go to

Monday, October 10, 2011

IRS Program for Employers who have Misclassified Independant Contractors

Employers have a strong withholding and employment tax incentives to classify their workers as independent contractors instead of employees. Such a course avoids income tax withholdings and FICA, FUTA, and Medicare taxes and withholdings, shifting responsibility of such items to the worker. 

As such, employers may have aggressively or inappropriately classified employees as independent contractors. An IRS settlement program known as the “Voluntary Classification Settlement Program,” or VCSP, provides a semi-painless way for employers to correct their classifications and come into the fold of compliant taxpayers. A recent set of FAQs provides details on the new program. Below is a summary of the key provisions.


Businesses, tax-exempt organizations, and government entities.


To be able to apply, the employer must:

     (1) have consistently treated the subject workers as nonemployees,

     (2) have filed all required Forms 1099 for the workers for the previous three years, and

     (3) not be under audit by IRS, or currently under audit concerning the classification of the workers by the Department of Labor or a state government agency.


The employer will have to pay a relatively small sum to enter the program, but will then receive absolution for its mischaracterizations for past years. More particularly, the employer  will: 

     (1) owe 10% of the employment tax liability that may have been due on compensation paid to the workers for the most recent tax year, applying the special reduced rates of Code Section 3509, and without interest or penalties being imposed on that liability, 

     (2) be safe from an employment tax audit for the worker classification of the subject workers for prior years, and 

      (3) have to agree to extend the period of limitations on assessment of employment taxes for three years for the first, second and third calendar years beginning after the date on which the taxpayer has agreed under the VCSP closing agreement to begin treating the workers as employees. 

Of course, the employer will begin classifying the subject workers as employees and paying appropriate employment and withholding taxes. 

Given the relatively small amount that is due, the program provides an excellent opportunity for taxpayers to put themselves into compliance.

In an example provided in the FAQ, an employer who paid $1,500,000 to workers in the subject tax year owed only $16,020 for the required 10% payment. 

JK Harris to file for bankruptcy

The JK Harris company once advertised that it could resolve people's tax debts for "pennies on the dollar," but now it could be the company's creditors and disgruntled former clients who will get less than they are owed.

JK Harris & Co. plans to seek bankruptcy protection in Charleston to head off an attempt by the Texas attorney general's office to force the company into receivership, said company founder John K. Harris.

The company, a national tax-debt-resolution service based in Goose Creek, has been dogged by cash-flow problems and the cost of large settlements related to claims that it misled consumers.

The bankruptcy filing is aimed at selling the business quickly while writing off debt. The company would continue operations in the meantime.

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Thursday, October 6, 2011

Florida Probate & Trust Changes

On April 14, 2011 and April 29, 2011, the Florida legislature enacted several significant changes to the probate and trust code (hereinafter referred to as “legislation”). The bill was signed by the Governor on June 21, 2011. Some of the key sections of the legislation became effective on July 1, 2011 and others will become effective on October 1, 2011. In essence, the legislation creates or substantially modifies the following subject matters:
I) Intestate succession
II) Reformation of a will
III) Challenges to revocation of a will and trust
IV) Attorney-client privilege relating to fiduciaries and
V) Timing for requesting attorney’s fees in a trust matter.

We urges readers and probate and trust litigators to review the entire legislation because it contains nuances not fully addressed herein.

I. Intestate Succession

When a decedent dies without a will, the assets are distributed according to the laws of intestacy. Currently, the intestate share of a surviving spouse where all of the decedent’s descendants are also descendants of the surviving spouse is the first $60,000.00 and half of the remaining estate.

Effective October 1, 2011, the legislation amends Florida Statute § 732.102(2) so that the intestate share of a surviving spouse of a decedent where all of the decedent’s descendants are also descendants of the surviving spouse (or if there are no descendants) is the entire estate.
The legislation also creates Florida Statute § 732.102(4) to provide that if the surviving spouse has descendants that are also the decedent’s descendants and has descendants not related to the decedent, the surviving spouse’s intestate share is half of the estate.

II. Reformation of a Will
Reformation of a testamentary document is an effective, yet often times overlooked, probate litigator’s technique to reform a document to conform to the settlor’s intent. Since 1998, Florida case law permitted reformation of a trust instrument to correct a mistake. See In re Estate of Robinson, 720 So. 2d 540 (Fla. 4th DCA 1998). In 2007, the Florida legislature codified and expanded common law to permit reformation to correct a trust to cure a mistake as well as reformation of a trust to achieve a settlor’s tax objectives. See Fla.Stats. §§ 736.0415 and 736.0416.

Effective July 1, 2011, the legislation created Florida Statutes §§ 732.615 and 732.616. These statutes mirror the above-referenced trust code statutes to permit reformation of a will to correct a mistake and to modify a will to achieve a testator’s tax objectives.

The mistake statute, Florida Statute § 732.615, allows an interested person to seek reformation of the terms of a will to conform to the testator’s intent, and provides a burden of proof of clear and convincing evidence. The statute even permits reformation that is completely inconsistent with the apparent terms of the will. 

The tax modification statute, Florida Statute § 732.616, permits an interested person to seek reformation of the terms of a will to achieve a testator’s tax objectives in a manner that is not contrary to the testator’s “probable intent.”
These statutes are significant because reformation of an unambiguous will was previously never permitted by case law or statute. In addition, the legislation creates Florida Statute § 732.1061 which requires that in actions under reformation of a will to correct a mistake and modification of a will to achieve tax objectives, the court must award attorney’s fees and costs to the prevailing party. The statute also gives the court discretion in awarding and allocating fees using the concept of equity. 

III. Challenges to Revocation of a Will and Trust 

Florida law provides that a will or trust is void if procured by fraud, duress, mistake or undue influence. A testator or settlor may revoke a will or trust by writing or act.

Until the legislation, there was no mechanism to challenge a revocation of a will or trust by physical act based upon fraud, duress, mistake or undue influence. The legislation amends Florida Statutes §§ 732.5165 and 736.0406 to provide that revocation of a will or trust is void if procured by undue influence, fraud, duress or mistake. A challenge to the revocation of a testamentary document cannot take place until the instrument becomes irrevocable or at the settlor’s demise. 

IV. Attorney-client Privilege relating to Fiduciaries

Florida law provides that communication between an attorney and the client is confidential if it is not intended to be disclosed to third parties. The legislation clarifies and expands existing law so that communication between a fiduciary client and the attorney is confidential and privileged. See Fla. Stat. § 90.5021.

The legislation also amends Florida Statutes §§ 733.212(2)(b) and 736.0813 which create new reporting requirements for personal representatives and trustees. The reporting requirement compels personal representatives and trustees to provide notice to the beneficiaries that an attorney- client privilege exists between the fiduciary and the attorney employed by the fiduciary. See Fla. Stats. §§ 733.212(2)(b) and 736.0813.

V. Timing for Requesting Attorney’s Fees in a Trust Matter

The Florida Trust Code provides that trust proceedings are governed by the Florida Rules of Civil Procedure. In civil litigation, Florida Rule of Civil Procedure 1.525 is commonly used which requires a party to serve a motion seeking fees or costs within 30 days after the filing of a judgment. By amending Florida Statute § 736.0201(1), the legislation clarifies and confirms that Florida Rule of Civil Procedure 1.525 applies to all judicial proceedings concerning trusts. 

The legislation also creates Florida Statute § 736.0201(6) which states that Florida Rule of Civil Procedure 1.525 applies to all judicial proceedings concerning trusts, but provides the following two exceptions:

a. A trustee’s payment of compensation or reimbursement of costs to persons employed by the trustee from assets of the trust and
b.  Determination by the court directing from what part of the trust fees or costs shall be paid, unless the determination is made under s. 736.1004 in an action for breach of fiduciary duty or challenging the exercise of, or failure to exercise, a trustee’s powers.

Foreign Banks in 140 Countries Draw IRS Scrutiny

The U.S. Treasuryannounced the current results of the Tax Amnesty that was offered for 2011 with the extended deadline of September 9, 2011.

A total of more than 30,000 individuals have come forward under the amnesty programs for 2009 and 2011. The amount of additional revenue collected just on the 2009 amnesty program exceeded $2,200,000,000. Of the 2009 applications for amnesty, about 80% of the cases have been “closed”. It is unclear what Washington means by the word “closed” but may include applicants that were later found as not qualifying for the amnesty program.

For the 2011 amnesty program, the IRS has disclosed that more than 12,000 individuals applied for the tax amnesty and $500,000,000 has already been collected from the 12,000 applicants without penalties. It is doubtful that the $500 million represents any substantial percentage of the 12,000 applicants, since the period of time to work a particular complicated taxpayer case can take more than a year.

With penalties at a much higher level for 2011 amnesty as compared to 2009 amnesty, it is possible that the gross revenue netted from the 2011 amnesty will be more than $3,000,000,000.

The IRS says in a statement the latest data from the 2009 offshore program is just about 80% of the cases that it has closed for that year, involving bank accounts in 140 countries.

That has led to U.S. prosecutions, and a widening dragnet that includes a dozen banks, and now has shifted to Israel. U.S. Justice Department authorities are examining three of Israel's biggest banks over allegations they helped U.S. customers evade taxes, reports indicate. The banks reportedly under examination are Bank Hapoalim, Bank Leumi le-Israel BM and Mizrahi-Tefahot, the sources said.

The IRS adds in the statement that “people hiding assets offshore have received jail sentences running for months or years, and they have been ordered to pay hundreds of thousands and even millions of dollars.”

If you are one of the growing number of individuals that may be a part of this international dragnet and have not availed yourself of the amnesty programs, it is always wise to contact a competent tax attorney to discuss the totality of your situation and how best to protect yourself.

To read more go to

Tuesday, October 4, 2011

Newly Released Form 8938 - Statement of Specified Foreign Financial Assets

The IRS just released a new DRAFT of Form 8938 and a first DRAFT set of Instructions.

This Statement of Specified Foreign Financial Assets needs to be attached to and filed with the taxpayer's tax return (eg Form 1040) in addition to filing the FBAR (TDF 90.22.1) for all tax years starting after March 18, 2010.  Therefore calendar year taxpayer's are technically required to attach this form to their Form 1040, starting with their 2011 filing.

Foreign Financial Asset and PFIC Shareholder Reporting Requirements Are Temporarily Suspended by Notice 2011-55, 2011-29 I.R.B. (7/18/11). According to the notice, once previous hitForm 8938next hit and revised Form 8621 have been released, taxpayers for whom the reporting requirements have been suspended must attach Form 8621 or previous hitForm 8938next hit, as the case may be, for the suspended taxable year with their next income tax or information return.

For many each of the 7 million US persons overseas and hundreds of thousands back home in the States this new reporting immediately represents a significant increase in annual US tax data collection and reporting and will be highly complex to understand.
Here are some highlights from a first reading of the instructions:
  1. For unmarried taxpayers living in the United States, the new form must be completed if one had either more than $50,000 in foreign financial accounts on the last day of the tax year (usually December 31st) or if one had more than $100,000 at any time during the tax year. If married filing jointly, the amounts double (to $100,000/$200,000).
  2. Unmarried taxpayers living outside of the United States who are either bona fide residents of a foreign country or physically present abroad, must file this form if they had more than $200,000 on the last day of the tax year or more than $400,000 at any time during the tax year. If married filing jointly, the numbers increase to $400,000/$600,000.
  3. As for the types of accounts and assets that are reportable:
    1. Any financial account maintained by a foreign financial institution; 
    2. Other foreign financial assets, held for investment but not maintained by a financial institution, including stocks not issued by a US person, interests in foreign entities, and various financial instruments issued by non-US persons. The words "for investment" appear to eliminate interests in active businesses even if not reportable on any other return, but the wording is slightly unclear as drafted.
    3. A foreign financial institution is a non-US financial institution that is a bank (or similar entity), hold financial assets for others, and is engaged in investing, holding partnership interests, or other financial roles.
    4. Foreign mutual funds, foreign hedge funds, and foreign private equity funds are covered.
    5.  Foreign pension plans are not specifically mentioned, but may well be foreign grantor or non-grantor trusts so may be covered or reportable elsewhere.
    6.  Foreign real property is not mentioned specifically.
The instructions are 11 pages long.
While for the sophisticated investor it is still possible to structure foreign assets in ways that minimise US reporting; this new filing obligation may create increasing confusion for the Average American living outside of the US as well as costing more in annual accounting fees.

The draft instructions for Form 8938 are available on the IRS website at The draft Form 8938 is available at

IRS Chief Counsel Reissues Tax Levy Guidance

The IRS Small Business/Self-Employed Division Sept. 29 reissued interim guidance for issuing a notice of intent to levy/notice of a right to a hearing in a collection field function to a taxpayer.

In SBSE-05-0911-081, dated Sept. 26, the memorandum said after issuing Letter 1058 to a taxpayer, 15 extra days must elapse after the 30-day period before levying a taxpayer.
This is to allow for the possibility that the taxpayer mailed a request for a hearing on the 30th day of the period, the memorandum said.

The earlier guidance, SBSE-05-0910-051, was issued Sept. 27, 2010.