Bill to Simplify State Tax Withholding on Mobile Workers Passes House

Posted in Income Tax, Labor & Employment, State Tax

A bill that would simplify state income tax compliance for employers when they send employees on temporary assignment to another state passed the House on Sept. 21. Many state government interests oppose the bill, so its future in the Senate is uncertain.

Employers face a major state tax compliance headache when they send an employee on a short-term assignment to another state (the Taxing State). The Taxing State typically requires the employer to withhold state income taxes for the portion of the employee’s wages earned while performing services there, on a prorated basis. Most states do not provide a de minimus rule, so technically an employer is required to withhold for the amount paid to an employee even on a short-term business trip. This can create an enormous administrative burden for many companies.

The Mobile Workforce State Income Tax Simplification Act (H.R. 2315) would ease this burden by saying that the Taxing State may require an employer to withhold state income taxes only if the employee spends more than 30 days performing services for an employer in that state in any calendar year. This may seem like a rather short time frame, but currently many states demand withholding if an employee works only a handful of days there.

The bill has several rules to help calculate when an employee is considered to be employed in a state. For example, if the employee travels to several states in a day, it only counts as a day of service for the state where the employee performs most of his or her services. Time spent in transit is not counted as a part of a day in any state. The employer may rely on the employee’s determination of the amount of time spent in another state, unless the employer knows that the employee’s time estimates are not accurate, or the employer and employee are colluding to evade state income tax requirements.

These rules would not apply to professional athletes, entertainers, or certain public figures who are paid appearance fees, who will have to comply with state income tax requirements that would require tax payments even for a single work day in a Taxing State.

It is important to note that if this bill becomes law, it would protect companies only from withholding tax obligations on wages paid to employees – it would not protect a company from becoming subject to another state’s taxing jurisdiction for the company’s state income tax or sales tax obligations. Other pending bills in Congress address this issue.

The bill now goes on the Senate, where its prospects in a lame duck session are uncertain. Some senators have been critical of the bill, saying that it impinges on state sovereignty, and would reduce revenues for many states.

Taxpayers Entitled to Credits for Double-Taxed Income in Resident State

Posted in Income Tax

As we approach the final income tax filing deadline of 2016, this is a reminder that income can often be earned in one jurisdiction but subject to tax in another. States often adopt credit regimes so that residents can get a credit for income tax paid to another state, but sometimes they don’t. The Supreme Court this past May held that state tax systems that lead to double taxation of interstate commerce are unconstitutional, which is good news for individuals paying tax in multiple states.

Following a Supreme Court decision in May, states will be reviewing their taxing provisions to ensure they don’t unconstitutionally impede interstate commerce. The good news for taxpayers is that the Supreme Court reemphasized that state taxes cannot operate in a manner that leads to intentional double taxation of the same income.

At issue in Comptroller of the Treasury of Maryland v. Wynne was Maryland’s tax framework that allowed state residents to credit taxes paid to other jurisdictions against state tax, but not against an additional mandatory county tax also imposed and collected by the state. The Wynnes, who were Maryland residents, received income from passthrough entities that paid taxes in a large number of states. Although they were allowed to claim a credit for their portion of the out-of-state taxes paid against their Maryland state tax, the state did not allow the same credits against their out-of-state county tax liability. The Wynnes sued, and although a lower court dismissed their claim, Maryland’s highest state court agreed that the state tax structure violated the U.S. Constitution. The state appealed and the U.S. Supreme Court granted review of the case.

On May 18, 2015, a divided Supreme Court held that Maryland’s tax scheme regarding applicability of credits against out-of-state taxes paid violated the dormant Commerce Clause. A majority of the Court’s justices found that prior caselaw established that a state is not justified in utilizing a tax system that treats in-state income more favorably than income arising from outside the state. The resulting tax burden violates the constitutional prohibition against states discriminating against interstate commerce, the Court held.

It is quite common for taxpayers these days to receive income from passthrough entities (such as partnerships or S corporations) that do business nationally or in large geographic markets that encompass many states.  Consequently, it is likely that taxpayers may be paying taxes in states other than where they reside. Under the Court’s analysis of the federal constitution, a state cannot refuse to credit taxes paid out-of-state on income that the state is also taxing based on the taxpayer’s residency. Although the Supreme Court affirmed that a state has broad jurisdiction to tax the income of its residents, that taxing power cannot lead to certain income being unfairly taxed multiple times simply because of where the taxpayer lives.

Going forward, taxpayers should work closely with their tax advisers to ensure that all state tax reporting adequately makes use of all available credits from taxes paid in other states. To the extent that a state tax structure is viewed as unfairly punitive, close scrutiny should be applied to determine if the system violates the principles enunciated in Wynne.

Trusts Can Provide Benefits Even for the Most Financially Savvy

Posted in Estate Planning, Legacy Planning, Trusts

In planning for the next generation, many parents struggle with the decision of whether to transfer property to their children outright or in trust.  Some feel that transferring property outright is the best option when the beneficiary is competent (i.e., mature, intelligent, financially savvy, and capable of managing money and making investment decisions).  A beneficiary who is incompetent may be an individual who is still a minor, immature, reckless, a spendthrift, or incapable of handling asset management decisions.  In designing a family legacy plan, it is important to note that the beneficiary of a well drafted trust enjoys many advantages that are not available if assets are owned outright, such as asset protection and tax savings.  These advantages may be valuable to all beneficiaries, even those who are more than capable of managing an inheritance received outright and free of trust. 

When considering the use of long-term trusts for beneficiaries, keep in mind that a trust may be structured to avoid any unnecessary restrictions or controls on a beneficiary’s access to the trust and may provide the beneficiary with a fair amount of control over his or her trust without jeopardizing the benefits of the trust structure.  In contrast, a trust created for a beneficiary who is incompetent may severely limit or eliminate any of the beneficiary’s control over the trust assets.  In discussing with your legacy planning advisor the issue of control over trusts, consider that there are many types of control, including investment control, dispositive control (the ability to make distributions from the trust), and control over trustees (the ability to remove and replace a trustee).  The beneficiary may be given the opportunity to earn more control by reaching appropriate milestones (i.e., a certain age or a college degree) or granted partial control over certain aspects of the trust, such as the appointment of successor trustees or investment decisions.   

Before creating a family legacy plan, it is important to seek the advice of an attorney with experience in estate planning so that your plan can be properly structured and creatively deal with differences among your beneficiaries. If not properly drafted, your legacy plan could backfire and instead of leaving your family with resources to enable them to improve their lives, your legacy may be squandered, or be subject to unnecessary tax, or even create adverse tax consequences for your beneficiaries.

*Not admitted to the practice of law.

Selection of Fiduciaries

Posted in Legacy Planning, Trusts

One of the most important decisions you will make in developing a legacy plan is selecting the right individuals to serve out the roles in your core legacy planning documents.

The people appointed to these roles are often called fiduciaries or sometimes, stewards. A fiduciary is a person or institution who can act on your behalf. Personal representatives, trustees, guardians, and agents are all fiduciaries. 

When selecting who should serve what role, you should carefully consider each role’s responsibilities and what qualifications your prospective appointees bring to the table.

Regardless of who is selected as the initial fiduciary, a successor fiduciary can always be named in case the initial fiduciary is unable to serve.

Personal representative:

A personal representative is responsible for wrapping up your affairs and ensuring that the terms of your Will are carried out.

Some duties include:

  • Controlling the estate’s assets;
  • Paying outstanding bills;
  • Paying expenses incurred in administering the estate;
  • Filing paperwork with the Register of Wills (e.g., filing an inventory of estate assets and an accounting of distributions and expenses);
  • Paying any creditor claims; and
  • Preparing any necessary tax returns.

Your personal representative is named in your Last Will and Testament.  Generally, married individuals name their spouse as their initial personal representative. Both professionals and individuals may serve in this role, and typically individual personal representatives such as family and friends will choose to hire an attorney for assistance.


When your legacy plan involves a trust, a trustee will manage the assets held in trust.  A trustee is responsible and legally liable for the financial welfare of your named trust beneficiaries and can be a professional institution (e.g., a bank or law firm) or an individual.

Your choice of trustee and successor trustee are named in the trust agreement.

Some duties include:

  • Reviewing assets for quality and performance;
  • Making adjustments to the portfolio;
  • Filing annual trust tax returns;
  • Distributing income and principal to the beneficiaries; and
  • Arranging for the maintenance of a personal residence or other real estate owned by the trust.


A guardian is an individual appointed to take custody of your minor children under your Will.


An agent is appointed to manage your affairs upon your incapacity under a durable power of attorney.

Under an advance medical directive, an agent will make your health care decisions in the event that you are unable to do so.

You may choose to appoint different agents under the durable power of attorney and the advance medical directive depending on who you trust to make your financial decisions and your health care decisions.

Treasury Department Issues Proposed Regulations That Will Dramatically Reduce Valuation Discounts

Posted in Estate, Tax Planning, Trusts

On Aug. 2, 2016, the Treasury Department issued proposed regulations under Section 2704 of the Internal Revenue Code that, if finalized in their present form, would substantially alter the valuation of transfers of interests in family-controlled entities (including corporations, partnerships, and LLCs) for estate, gift and generation-skipping transfer tax purposes. To read the full GT Alert, click here.

Does Fraudulent Conduct by Someone Else Extend the Statute of Limitations Permitting the IRS to Pursue the Taxpayer?

Posted in Income Tax, IRS, Tax Planning

A fraudulent tax return is bad news for a taxpayer. Normally, the IRS has a limited period of time (3 years) to audit a taxpayer’s return.  The existence (or allegation) of fraud, however, gives the IRS an unlimited amount of time to make an assessment of tax liability.  But more importantly, taxpayers may be surprised to learn that the IRS considers fraud by someone other than the taxpayer to also trigger the open-ended statute of limitations. So if a return preparer or someone else affecting the reporting of your taxes engages in fraud, the taxpayer could be the one left on the hook to make the IRS whole (including the possibility of a 75% fraud penalty to boot). The Tax Court has given the IRS latitude in using this tool against taxpayers in these situations, but an appellate court recently limited the IRS’s reach on the issue.

Sometimes tax return preparers act fraudulently on their own initiative without the taxpayer’s knowledge and without the taxpayer’s own fraudulent intent to evade tax. It seems appropriate and just in these circumstances for the IRS and Justice Department to pursue the unscrupulous return preparer.  And the government frequently does so.  But, in seeking to recover any tax loss, the IRS may decide that the unwitting taxpayer who submitted the fraudulent return is liable to make the government whole.  The IRS approach is founded in the idea that the taxpayer signing and submitting the return is obligated to review it and is deemed to know its contents.  If the return is fraudulent, the unwitting taxpayer should have found the errors and had them corrected.  The argument that the taxpayer relied on the accountant and just signed the return without reviewing it generally does not stand up.

The framework for the IRS’s actions stems from an exception to the general three-year statute of limitations. Under IRC Section 6501(c)(1) and (2), fraudulent conduct can suspend the running of the limitations period indefinitely.  The key statutory phrase is “intent to evade tax.”  But the statute does not clearly state whose fraudulent intent triggers the open-ended assessment period by the IRS.  It should be noted, however, that the IRS will bear the burden of proving that the return was fraudulent by clear and convincing evidence.  It cannot merely make the assertion without something to back it up.

In the past decade, the Tax Court has considered this issue and decided several cases favorable to the IRS. For example, in Allen v. Commissioner, 128 T.C. 37 (2007), a tax return preparer put false itemized deductions on a taxpayer’s return without the taxpayer having indicated to the preparer that he was entitled to those deductions. The return preparer was eventually convicted of preparing false and fraudulent tax returns under IRC Section 7206(2). The IRS then sent deficiency notices to the taxpayer after the general three-year assessment period had passed, claiming that IRC Section 6501(c)(1) applied because fraud was present, even if it wasn’t the taxpayer’s own conduct that caused it.

The Tax Court upheld the IRS’s deficiency notice based on the preparer’s fraudulent conduct even though the taxpayer was not to blame for the fraud. In its analysis of the issue, the Tax Court concluded that the statute’s fraud exception contained no “express requirement that the fraud be the taxpayer’s” in order to extend the statute of limitations. The court stated that “the statute keys the assessment extension to the fraudulent nature of the return, not to the identity of the perpetrator of the fraud,” [emphasis added] and so chose to strictly construe the limitations periods in the government’s favor. An additional reason for letting the IRS go after the taxpayer is Congress’s intent to ensure that the IRS is not at a disadvantage in recovering unpaid taxes resulting from fraudulent tax returns, the court said. The court seemed concerned that an outcome against the government could allow a taxpayer to “hide behind an agent’s fraudulent preparation.”

However, an appeals court recently held for a taxpayer in dismissing the government’s argument that third-party fraud is relevant in applying the unlimited statute of limitations. In BASR Partnership v. United States, No. 2014-5037 (Fed. Cir., 7/29/15) the taxpayer relied on a law firm’s tax opinion in deciding how to report large capital gains arising from the sale of a business. When the lawyer was later convicted for fraud, he acknowledged that he acted with intent to evade the tax that the taxpayer would have otherwise owed on the transaction.  This allowed the government to claim the fraud exception in assessing tax against the partnership a decade after the returns had been filed.

The Federal Circuit, in an opinion issued in July 2015, held that IRC Section 6501(c) requires that the taxpayer be the one who has the intent to evade tax in order for the limitations period to stay open indefinitely.  This means that in situations where the taxpayer has clean hands (i.e., no fraudulent intent), fraud by a third-party that causes a taxpayer’s return to be false will generally not allow the IRS to go after the taxpayer for the unpaid taxes if the three-year assessment period has passed.  The circuit court maintained that the Tax Court had conducted only a limited analysis of IRC Section 6501’s text in Allen that was not necessarily congruent with Supreme Court precedents, and that even if the reasoning in Allen was persuasive, the particular facts of BASR further distinguished the case from Allen.

With different outcomes among federal courts, taxpayers facing this issue should be aware of the jurisdictional benefits and disadvantages of pursuing litigation in Tax Court versus the U.S. Court of Federal Claims.

Greenberg Traurig’s Diana Zeydel Featured In Forbes

Posted in Estate, Estate Planning, Trusts

zeydeldGreenberg Traurig attorney, Diana Zeydel, was recently quoted in Forbes where she discusses the new proposed regulations regarding the valuation of family limited partnerships. These new proposed regulations would likely make it more difficult for business owners and others to manage their estate tax exposure. To read the full article, click here.

Spousal Lifetime Access Trusts (SLATs)

Posted in Estate Planning, Insurance

Higher gift and generation-skipping transfer (GST) tax exemptions mean greater opportunities for individuals to make gifts to family members during life, when the donors can share in the joy these gifts bring to their families.  Individuals with a more modest net worth, however, will want to balance any desire to make lifetime gifts with their need to retain adequate funds to support their current and future lifestyle.  For married couples, a spousal lifetime access trust (a so-called SLAT) may provide the solution.

Overview.  For married individuals who want to make lifetime gifts to their descendants but have concerns about permanently giving away a large part of their estate and their ability to maintain their current lifestyle, a SLAT may be the solution.  With a SLAT, one spouse (donor-spouse) makes a gift to an irrevocable trust using the donor-spouse’s gift tax exemption.  The SLAT names the non-donor spouse (beneficiary-spouse) as a current beneficiary, which allows the trustee to make distribution of trust funds to the beneficiary-spouse during his or her life.

Potential Benefits.

The use of a SLAT offers a number of advantages, including:

  • The donor-spouse uses his or her exemption but may not feel a “permanent loss” as the beneficiary-spouse still has access to the funds, if needed, during life.
  • The beneficiary-spouse and/or descendant(s) can serve as trustee, subject to certain limitations (see below under “Planning Considerations”).
  • Descendants can be named as current and/or remainder beneficiaries, so the SLAT can continue as part of a legacy plan for future generations.
  • If the donor-spouse allocates GST tax exemption to the SLAT gifts, the trust can benefit multiple generations of descendants without incurring additional estate or GST taxes.
  • As an irrevocable trust, the SLAT can protect assets from the beneficiaries’ creditors.

SLATs & Life Insurance.  SLATs are often combined with life insurance planning, with the SLAT using the donor’s gift to buy life insurance on the donor-spouse.  If appropriate, the trustee can choose to take policy loans or withdrawals to supplement or support distributions to the beneficiary-spouse, potentially income tax-free (depending on the type of policy and the amount of loan/withdrawal).  Further, on the donor-spouse’s death, the death benefit should pass to the SLAT beneficiaries free of income and estate taxes.

  • Example: John creates a SLAT benefiting his wife, Jane, during her life, with the remainder passing to his descendants.  John funds the trust with $3 million, using his gift and GST tax exemptions.  The SLAT buys a cash value life insurance policy on John with a $5 million death benefit.  The death benefit is protected from estate tax, at a potential maximum savings of up to $2 million, assuming a 40 percent estate tax rate.

Planning Considerations.

To achieve the potential benefits offered by a SLAT, the following questions should be carefully considered.

  • How will the SLAT be funded? The donor-spouse should consider funding the SLAT using only his or her own assets (not joint assets).  If the beneficiary-spouse is deemed to make a gift to the SLAT, it could result in inclusion of the trust assets in his or her estate.
  • The SLAT must be irrevocable.
  • Will the SLAT acquire life insurance on the donor spouse? If so, it may affect who should have control over or rights to the SLAT-owned policies (e.g., ability to name or change beneficiaries, to make policy withdrawals, etc.).
  • Who will serve as trustee? The beneficiary-spouse or another beneficiary may serve as a trustee of the SLAT, provided that the beneficiary’s power to make distributions to him or herself is limited by something called an “ascertainable standard” (e.g., distributions can only be made for health, education, maintenance, and support). The donor-spouse should not serve as a trustee of the SLAT.
  • How will you provide for planning flexibility? To provide planning flexibility, the beneficiary-spouse can be given a limited power of appointment, effective at his or her death, which allows him or her to change how the SLAT assets will be distributed among the couple’s descendants after the beneficiary-spouse’s death.
  • Who will have access to the SLAT funds? Divorce or the premature death of the beneficiary-spouse will cut off the donor-spouse’s access to the SLAT funds.

Portability of the Estate and Gift Tax Exclusion – How Does it Work?

Posted in Estate Planning, Tax Planning

Portability refers to the ability of a surviving spouse, to make use of a deceased spouse’s unused estate tax exclusion amount (DSUE amount).  Portability was intended to simplify estate planning for married couples by eliminating the need for a bypass trust.  However, in order to preserve the DSUE amount the surviving spouse must comply with a complex set of rules, including filing a federal estate tax return for the decedent even though one would not otherwise be required.  Portability is not a substitute for traditional estate planning, particularly for high net worth individuals. However, it may prevent an otherwise unused DSUE amount from being completely lost.

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Bill to Bar Air Excise Tax on Aircraft Management Fees Clears House Ways and Means Committee

Posted in IRS, Sales Tax, Tax Planning

A bill that would exempt aircraft management fees from the federal air transportation excise tax is advancing in the House — good news for aircraft owners who use a leasing company structure to save on state sales tax when purchasing aircraft.

The bill (H.R. 3608) clarifies that fees paid to an aircraft services company to provide pilots, flight services and to manage maintenance for a company that is leasing an aircraft are not subject to the 7.5 percent federal excise tax on air transportation. This bill arises out of a case where the IRS said that NetJets was subject to the excise tax for the fees it received for such flight management services. NetJets won this case in federal court, because the court found that the IRS did not give adequate notice that the tax was applicable to such aircraft management services fees. So without Congressional approval or further action, the IRS could decide to give proper notice to aircraft services companies, which would then be legally require them to collect the federal excise tax on their fees.

If this bill becomes law, it would be good news for a common  sales tax planning technique involving aircraft purchases that is accepted in many states. This technique involves setting up a separate aircraft leasing company (ALC) that is owned 100 percent by the person or company (end-user) acquiring the aircraft. The ALC then leases the aircraft to the end-user on a dry-lease basis.  The advantage of an ALC structure is that in many states, the ALC can purchase the aircraft exempt from sales and use tax, because it is purchasing the aircraft solely for the purpose of leasing it to the end-user and others. Sales tax would be due on the monthly dry-lease payments, so this technique trades off the big upfront sales tax payment on the purchase of the aircraft for the much smaller sales tax due on the monthly lease payments, resulting in a sales tax deferral.

However, in order to use the ALC structuring technique properly, the end-user must ensure that it enters into a dry lease in respect of the aircraft – meaning that such end-user (as lessee) will be responsible for, among other things, the operation and maintenance of the aircraft, If the lease does not qualify as a dry lease, then the entire lease payment could be subject to the 7.5 percent federal transportation excise tax under existing law if the IRS provides notice of application of the tax. End-users routinely enter into management agreements regarding operation and maintenance support in connection with their entry into dry leases. If H.R 3608 becomes law, this would assure that the fees paid to an aircraft services company will not become subject to the federal excise tax, resulting in complete excise tax savings on both the dry lease payments and the management services fees.

The House Ways and Means Committee cleared this bill on July 13. A companion bill has been introduced in the Senate. Those involved in the aviation industry should be interested in the progress of this legislation.

To see the text of H.R. 3608, click here.

To the see the Joint Committee on Taxation’s explanation of this bill, click here.