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Saturday April 18, 2015

Washington News

Washington Hotline

Still Time to Extend Until October 15

As the April 15 tax-filing deadline approaches, the IRS published IR-2015-68 to remind taxpayers that it is easy to extend the filing deadline to October 15.

There is a Free File link on www.irs.gov. With this link you may request an electronic Form 4868. If you file this form, the IRS permits you to file your tax return on or before October 15, 2015.

Another option is to obtain a hard copy Form 4868 from the IRS website. You may also request an extension by mailing in the printed form. In both cases, taxpayers are required to pay the proper amount of tax. The extension applies only to filing the return and not to the payment of tax.

If you owe taxes, there are several convenient ways to pay.

1. Direct Pay – On irs.gov/directpay, you may make transfers directly from your checking or savings account. There is no fee or pre-registration required.

2. Electronic Federal Tax Payment System – This is a free system that requires pre-registration. You can obtain information on EFTPS.gov or call 800-316-6541.

3. Electronic Fund Withdrawals – Your bank or other financial institution may offer an electronic payment option. You may use this to pay your taxes.

4. Credit or Debit Card – It is permissible to pay your taxes with an authorized credit or debit card. The IRS does not charge a fee for that payment, but your credit or debit card issuer may assess their normal fee.

There are limited exceptions for specific categories with respect to filing. Civilians and military personnel who live abroad must pay tax by April 15, but may delay filing their return until June 15.

However, military members in combat zones such as Afghanistan or other areas may delay both filing and payment of taxes until 180 days after they return from their combat assignment.

If you need more time to pay, it is possible to use the Online Payment Agreement on irs.gov. If you owe the IRS $50,000 or less, you may schedule a monthly payment. The payment agreement can have a maximum duration of 72 months.

Taxpayers who are in economic difficulty may also qualify for the Offer in Compromise Program. An IRS agent may review your financial circumstance and set up a scheduled payment plan that covers less than your total taxes owed. The irs.gov site includes an Offer in Compromise Pre-Qualifier Program. This may be helpful to you if you think you could qualify for a reduced tax payment plan.

Insurance Beneficiary Must Reimburse Executor


In Thomas H. Smoot III v. Dianne Smoot; No. 2:13-cv-00040 (30 Mar 2015), the former wife of the decedent was directed to repay the executor for an estate tax payment to the IRS.

Decedent Thomas H. Smoot II and Dianne Smoot were married. Prior to his demise on February 16, 2009, they were divorced.

His son Thomas H. Smoot III was appointed as executor. The estate of the insurance broker decedent included multiple insurance policies.

Under the eventual estate transfers, former wife Dianne received approximately $5.4 million. Decedent's executor-son received $2,248,041 and decedent’s former business partner Greg Howard received $100,625.

Initially, the estate claimed that it was insolvent. Following negotiations with the IRS, Thomas Smoot III entered into an estate tax agreement and paid $1,268,365 of estate tax and $145,425 of interest. The total estate payment was $1,413,780.

Thomas Smoot III brought the present action against Dianne Smoot to obtain reimbursement for the appropriate share of the estate taxes on her $5.4 million inheritance. The will of the decedent stated that taxes “shall be charged against and be paid by the recipient of such property or from the property to be received.”

Since Dianne received approximately 69.8% of the estate, Thomas Smoot III claimed that she should make reimbursement to the estate of an appropriate amount of taxes and interest.

Dianne offered several defenses. First, there was previous litigation over ownership of the insurance policies and a settlement agreement that resolved “all remaining claims.” Second, the executor did not demonstrate at trial that the decedent had incidents of ownership over the policies received by Dianne. In addition, she claimed that many of the insurance documents had not been property authenticated.

The court reviewed specifics of the documents with respect to multiple policies. It determined that there was sufficient notice to Dianne regarding the existence of the policies. In addition, the decedent had reviewed the policies two months prior to death and changed a beneficiary on one policy. There was no evidence that decedent did not have the right to change beneficiaries on the date of death. With the exception of one policy with value of $1 million that was not includable in the estate, the evidence indicated that the balance of the policies were subject to estate tax. Therefore, Dianne should make reimbursement to the estate for her share of the estate tax.

With respect to various other assets transferred to Dianne, the divorce decree under Georgia law stated that the assumption for estate tax purposes is that Dianne would be treated as though she had predeceased Thomas Smoot II. Under this state law provision, there was no right of reimbursement with respect to those assets.

Finally, with respect to the amount of payment from Dianne to the estate, the interest attributable to that amount was also subject to the reimbursement provisions.

Clothing and Household Goods Charitable Deductions Denied


In Kenneth James Kunkel et ux. v. Commissioner; T.C. Memo. 2015-71; No. 21982-13 (8 Apr 2015), the Tax Court disallowed deductions of $37,315 for charitable gifts of clothing, books and other personalty. The deductions were denied for failure to obtain receipts and failure to maintain the required records. The Sec. 6662(a) penalty also applied because there was no effort to maintain the required records.

Taxpayers filed their 2011 return and claimed $42,455 in charitable deductions. The IRS permitted $4,840 of the claimed $5,148 of cash gifts. Taxpayers claimed they had given books, clothes and other items to their church with a value of $13,115. There was no receipt for those gifts. In addition, taxpayers reported charitable deductions for gifts of clothing and other items to Goodwill Industries, the Military Order of the Purple Heart Service Foundation and Vietnam Veterans of America. There were no receipts or acknowledgements for those gifts. Taxpayers claimed that they made all of the gift contributions in amounts under $250 and therefore should not be required to obtain receipts.

The court noted that all contributions of $250 or more require a contemporaneous written acknowledgement under Sec. 170(f)(8). If substantially similar items are contributed, the applicable amount applies if the total value exceeds $250.

In addition, gifts over $500 in value require specific records. Reg. 1.170A-13(b) indicates that the records should include the date of acquisition, a reasonable description of the property, the cost or other basis of the property, the fair market value at the time of the gift and the method used to determine fair market value. Clothing gifts must be “in good used condition or better.” Sec. 170(f)(16)(A).

Because taxpayers did not have receipts and did not maintain any of the required records, the deductions for the gifts of clothing and other personalty were denied. In addition, with no dates for the gifted items, the Tax Court expressed doubt that there actually were nearly 100 separate deliveries of items over the year with each delivery carefully designed to be under $250 in value. Since there was no effort to maintain the required records, taxpayers did not have a good faith, reasonable cause defense under Sec. 6664(c)(1) and the Sec. 6662(a) penalty applied.

Applicable Federal Rate of 2.0% for April -- Rev. Rul. 2015-7 (18 March 2015)


The IRS has announced the Applicable Federal Rate (AFR) for April of 2015. The AFR under Section 7520 for the month of April will be 2.0%. The rates for March of 1.8% or February of 2.0% 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 2015, 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 April 10, 2015
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