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Friday October 21, 2016

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October 17 Income Tax Return Deadline

In IR-2016-130 the Service published reminders for 13 million taxpayers who filed for a six month extension. Most tax returns on extension are due on October 17, 2016.

There are several exceptions. Military personnel serving in Afghanistan, Iraq or other combat areas may wait for 180 days after departing the combat zone to file and pay taxes due. In addition, there are certain disaster relief areas in Florida, Louisiana and West Virginia that have extensions. Check if an extension applies to you as a resident of one of those states.

The IRS has included a number of filing tips for taxpayers on extension.

1. Tax Credits – Check to see if you are a lower income person who qualifies for the earned income tax credit (EITC). Other low-income persons may qualify for the savers credit if they fund an IRA, 401K and file Form 8880. Those who are funding students in higher education programs may qualify for the American Opportunity Tax Credit, which is claimed on Form 8863.

2. Health Care – If you have used the Health Insurance Marketplace, you may be eligible for the premium tax credit. You must file and reconcile any advance credit payments. If you do not have health insurance and are not otherwise exempt, you may be subject to the Shared Responsibility Payment.

3. eFile – Of the tax returns filed so far in 2016, over 87% or 128 million of the 147 million returns were eFiled. eFiling is quick and secure. If your income is $62,000 or less, you could qualify for the IRS Free File Program.

4. Payments – The IRS Direct Pay Plan is a very quick and secure way to pay your tax bills or make online estimated tax payments. You may also make payments with a debit or credit card, or enroll to use the Electronic Federal Tax Payment System.

5. Need Tax Relief – Some taxpayers are struggling to pay their taxes. They may call the IRS and if the tax bill is $50,000 or less, they could use the Online Payment Agreement. This permits monthly payments for a period of up to 72 months. Some taxpayers with financial problems may qualify for a reduced tax payment. You can use the Offer in Compromise Pre-Qualifier on to see if you are permitted to pay a reduced amount.

6. Before Filing Checks – You should check you return prior to filing and always retain one copy for your records. If your withholding for 2015 resulted in a large refund or substantial tax bill, you may wish to adjust your withholding for the balance of 2016. If you are employed and have a substantial tax amount due, you can ask your employer to increase your withholding for the balance of the year. Refunds can be tracked using the "Where's My Refund" section on

No Deduction for Trust Charitable Gifts

In Harvey C. Hubbell Trust et al. v. Commissioner; T.C. Summ. Op. 2016-67; No. 2889-12S (13 Oct 2016), the Tax Court denied a charitable income tax deduction for trust distributions to qualified charities.

Decedent Harvey C. Hubbell passed away on October 1, 1957. His will directed the estate residue to a trust with fixed payments to five beneficiaries.

His three trustees had significant discretion with respect to income and principal not required for the fixed payments. This excess amount "shall be used and distributed, in such proportion as the trustees deem best, for such purpose or purposes, to be selected by them at the time of each distribution, as will make such uses and distributions exempt from Ohio inheritance and federal estate taxes and for no other purpose."

The trustees made the required payments to beneficiaries and used their discretionary authority to make substantial gifts to qualified charities. They claimed Sec. 642(c) charitable deductions on their trust IRS Form 1041. For tax year 2009, the claimed charitable deduction was $64,279.

The IRS audited the trust and denied the charitable deduction, claiming that the deduction was not "pursuant" to a specific mandate or designation in the trust. The trustees claimed that the long history of charitable giving was consistent with the intent of the donor. This history resolved the "latent ambiguity" about their right to make charitable gifts.

The Tax Court observed that under Sec. 642(c), a qualified charitable gift must comply with three requirements. The governing instrument must be identified, the gifts must be "pursuant to" directions in the instrument and they must be made to a qualified charitable organization or for a qualified charitable purpose.

The court noted that "pursuant to" is not necessarily a mandate in the document, but the instrument must at least authorize gifts to charity. The Hubbell will did not include a specific authorization for charitable gifts. The statement that the use of income and principal is intended to be "exempt from Ohio inheritance tax and federal estate tax" was not sufficient. Hubbell could easily have authorized charitable gifts and failed to do so. The court will not rewrite a will to add this language. Therefore, the trust income tax charitable tax deduction was properly denied.

Estate Taxes Prior To Executor Fees

In United States v. F. Gordon Spoor et al.; No. 15-12877 (11th Cir. 2016), the Eleventh Circuit reversed a District Court decision and held that the federal estate tax lien under Sec. 6324A had priority over the claims by the executor for administrative expenses.

Decedent Louise P. Gallagher passed away on July 5, 2004. Her previously-funded Revocable Trust ("Trust") held 39,700 units of Paxton Media Group, LLC (Paxton). The estate valued the Paxton units at $34,936,000. The estate reported a total fair market value of $36,624,546 and executor fees of $1,086,265.

The estate elected under Sec. 6166 to make ten payments of the estate tax on the Paxton units. In August 2010 the estate agreed to a Sec. 6324A special estate tax lien. By 2012 media values had declined dramatically and the remaining value of the Paxton units was less than the estate taxes due. $600,000 of the executor fee had been paid, but there was a balance on the executor fee of $486,265. A U.S. district court determined that the executor fee had priority over the estate tax special lien.

The Eleventh Circuit noted that tax liens under Sec. 6322 generally are effective when recorded. However, the special estate tax lien under Sec. 6324A is effective as of the date of the death and attaches to the estate.

The estate claimed a "first in time" common law right to priority. However, Congress created the Sec. 6324A lien and did not create an exception for estate administration expenses. The intention of Congress was to differentiate this from a Sec. 6324 estate lien that does permit an exemption for estate administration costs. Because the executor chooses the assets that will be subject to the Sec. 6324A lien, he or she may set aside other assets to pay administrative expenses.

Therefore, the Sec. 6324A special estate lien has priority over executor fees and other administrative expenses. In addition, the executor fee is not a lien against the estate. Therefore the "first in time" rule does not apply. The estate and income tax obligations must be fulfilled prior to payment of the executor's fees.

Applicable Federal Rate of 1.6% for October -- Rev. Rul. 2016-25; 2016-41 IRB 1 (18 Sep 2016)

The IRS has announced the Applicable Federal Rate (AFR) for October of 2016. The AFR under Section 7520 for the month of October will be 1.6%. The rates for September of 1.4% or August of 1.4% 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.

Published October 14, 2016
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