Chris Moss CPA Tax Attorney
by Chris Moss CPA Tax Attorney
Welcome to TaxView with Chris Moss CPA Tax Attorney
Do you all want your kids and grandchildren to share in some way that legacy you or your wife, your grandmother or grandfather, or other family members are leaving you. But many of you as family members are not always in concurrence as to how each generation's estate plan shall be implemented for the good of the entire family and surely not all generations are in 100% agreement as what will work best for the entire family estate plan as we end the year of 2016. For those of you in this situation, may I suggest you think carefully before you set in motion an estate plan that might change a few years later. due to family disagreements or discord. Any major changes in the estate plan between generations could be construed by the IRS as various steps in the deadly estate tax trap known as the Step Transaction Doctrine. Unfortunately the IRS sees "steps" even when there are none, resulting in dramatic increase in taxes for all the family.. So whether you have created a private foundation for the arts, or whether you own a family farm or perhaps are now ready to pass your real estate portfolio on to the next generation, stay tuned to TaxView with Chris Moss CPA Tax Attorney to learn how to stay clear of IRS Step Transaction Traps so you can preserve and transfer these assets to your children and grandchildren safe from IRS adverse action in an IRS Step Transaction Estate Tax Audit
You will not find Step Transactions in the IRS code. The concept of Step Transactions is carved from hundreds of Federal tax court cases and is a spin-off from the Substance over Form Doctrine codified by Congress into IRS Code 7701(o) as part of the Health Care and Education Reconciliation Act of 2010. Step Transactions then remains a totally Court made law or Doctrine somewhat guided by Section 7701(o). The IRS generally argues that Step Transactions are a series of transactions or “steps” over many months or years, that when taken as a whole, convert what you all thought was the perfect estate plan to a sinister Step Transaction scheme to avoid estate taxation.
How does this happen? A series of family disagreements or even litigation between brothers or cousins could result in innocent steps not adequately documented. years earlier when these steps occurred. The IRS audits, patiently waiting until after you die I might add, and claims to your Executor that these series of steps were part of a sinister scheme planned years earlier by you (now deceased) to avoid estate tax. A super large tax bill is sent to your Executor which sometimes unfortunately forces your Executor to sell quickly at a great discount substantial assets to pay the tax.
However, there is good news: If the appropriate evidence had been contemporaneously preserved years earlier in the various income, gift tax and estate tax returns before filing you are absolutely safe from the Step Transaction Trap. That is why it is critical for the tax attorney for the grandparents work with the tax attorney of the children and grandchildren to make sure any future family disagreements would not be construed by the Government as disguised "steps".
Unfortunately, there are some taxpayers out there who fall into the step transaction trap through perhaps bad advice from tax advisors. Directly in response to these poorly structured estate plans, IRS audits have been dismantling even legitimate estate plans finding step transactions even if there were none, and have been winning big in US Tax Court. See US Tax Court Bianca Gross v IRS (2008), US Tax Court Holman v IRS (2008), US Tax Court Pierre v IRS (2010), CGF Industries v IRS (1999), US Tax Court CNT Investors LLC
v IRS (2015).
One case the IRS did lose was Klauer v IRS (2010). where the Klauer was smart enough to plan his steps with enough evidence to prove he had no illegal tax scheme, but a legitimate estate plan. The facts are relatively simple, Peter Klauer founded Klauer Manufacturing in Iowa in 1870 and branched out in New Mexico in 1919. More recently Klauer descendants were in discussions with the US Bureau of Land Management, the US Trust for Preservation of Land and various Indian tribes regarding purchase of the Taos Overlook or at least an option to purchase. Over three years from 2001 2002 and 2003 various agreements were executed all independent of the other. Taken separately each land sale was substantially below market value. Klauer’s S Corporation tax return for 2001 2002 and 2003 claimed millions of dollars as land donated on Form 8283 Noncash Charitable Contributions and various K1s were distributed to the stockholders with their proportionate share of the contribution. All the shareholders filed their Form 1040s for 2001 2002 and 2003 with very large charitable deductions. The IRS audited as a whipsaw and disallowed all charity deductions for all three years causing large amounts of taxes owed by the individual shareholders. The Government claimed all three years were one big series of step transactions voiding the below market sales and subsequent large charity deductions. Klauer appealed to US Tax Court in Klauer v IRS 2010 claiming each year stood by itself as separate transactions.
The Court agreed with Klauer because it was clear that each year was separately negotiated with distinct separate agreements. Specifically, Judge Chiechi points out that the supposed first step created no binding commitment to take the second step siting Security Industrial Insurance v US 702 F.2d 1234 (5th Circuit 1983). The Court then focuses on whether the Klauer family intended to save taxes by structuring the three years from 2001-2003 a certain way citing King v US 418 F.2d 511 (Fed Cir 1969). Judge Chiechi argues that Klauer’s subjective intent was especially relevant in allowing the Court to see if Klauer directed a series of transactions to an intended purpose solely to save taxes. The Court found facts created in the record as evidence that Klauer’s primary intent from 2001-2003 was not to create a tax savings scheme but to work the Bureau of Land Management, the Land Trust, and various Indian tribes to allow for the preservation of the Taos Overlook, This had been the intent of the Klauer family for many years. While there were huge tax savings for the shareholders the way the sales were structured that result was secondary to the primary purpose of land preservation. Klauer wins IRS loses.
So where do we all go from here? First, now that you know Step Transactions are thinly disguised tax schemes, your goal is to protect your estate plan with plenty of written evidence and facts proving to an IRS agent years later, after you have died, that your primary goal is, was and has always been legacy preservation and protection with tax savings merely as a secondary goal. Second, discuss with your tax attorney your options in operating a Family Limited Liability Company (FLLC) owned by SLAT, Crummey, or DAPT trusts to maximize asset protection and keep the family assets safe protected and secure for generations to come, Finally, as 2016 comes to a close ask your tax attorney to bullet proof your family estate plan factually documented with contemporaneous created facts inserted into tax returns prior to being filed with the IRS, with no one step leading to a predetermined second step. While the estate path may change direction due to family disputes, disagreements, or even litigation, if you have the facts on your side, you can relax knowing that your estate plan if protected against Step Transaction traps that lie ahead. even years after you are long gone.
Thank you joining us on TaxView with Chris Moss CPA Tax Attorney
Stay tuned for our 2016 year end TaxView.
Kindest regards
Chris Moss CPA Tax Attorney
Welcome to TaxView with Chris Moss CPA Tax Attorney
Do you all want your kids and grandchildren to share in some way that legacy you or your wife, your grandmother or grandfather, or other family members are leaving you. But many of you as family members are not always in concurrence as to how each generation's estate plan shall be implemented for the good of the entire family and surely not all generations are in 100% agreement as what will work best for the entire family estate plan as we end the year of 2016. For those of you in this situation, may I suggest you think carefully before you set in motion an estate plan that might change a few years later. due to family disagreements or discord. Any major changes in the estate plan between generations could be construed by the IRS as various steps in the deadly estate tax trap known as the Step Transaction Doctrine. Unfortunately the IRS sees "steps" even when there are none, resulting in dramatic increase in taxes for all the family.. So whether you have created a private foundation for the arts, or whether you own a family farm or perhaps are now ready to pass your real estate portfolio on to the next generation, stay tuned to TaxView with Chris Moss CPA Tax Attorney to learn how to stay clear of IRS Step Transaction Traps so you can preserve and transfer these assets to your children and grandchildren safe from IRS adverse action in an IRS Step Transaction Estate Tax Audit
You will not find Step Transactions in the IRS code. The concept of Step Transactions is carved from hundreds of Federal tax court cases and is a spin-off from the Substance over Form Doctrine codified by Congress into IRS Code 7701(o) as part of the Health Care and Education Reconciliation Act of 2010. Step Transactions then remains a totally Court made law or Doctrine somewhat guided by Section 7701(o). The IRS generally argues that Step Transactions are a series of transactions or “steps” over many months or years, that when taken as a whole, convert what you all thought was the perfect estate plan to a sinister Step Transaction scheme to avoid estate taxation.
How does this happen? A series of family disagreements or even litigation between brothers or cousins could result in innocent steps not adequately documented. years earlier when these steps occurred. The IRS audits, patiently waiting until after you die I might add, and claims to your Executor that these series of steps were part of a sinister scheme planned years earlier by you (now deceased) to avoid estate tax. A super large tax bill is sent to your Executor which sometimes unfortunately forces your Executor to sell quickly at a great discount substantial assets to pay the tax.
However, there is good news: If the appropriate evidence had been contemporaneously preserved years earlier in the various income, gift tax and estate tax returns before filing you are absolutely safe from the Step Transaction Trap. That is why it is critical for the tax attorney for the grandparents work with the tax attorney of the children and grandchildren to make sure any future family disagreements would not be construed by the Government as disguised "steps".
Unfortunately, there are some taxpayers out there who fall into the step transaction trap through perhaps bad advice from tax advisors. Directly in response to these poorly structured estate plans, IRS audits have been dismantling even legitimate estate plans finding step transactions even if there were none, and have been winning big in US Tax Court. See US Tax Court Bianca Gross v IRS (2008), US Tax Court Holman v IRS (2008), US Tax Court Pierre v IRS (2010), CGF Industries v IRS (1999), US Tax Court CNT Investors LLC
v IRS (2015).
One case the IRS did lose was Klauer v IRS (2010). where the Klauer was smart enough to plan his steps with enough evidence to prove he had no illegal tax scheme, but a legitimate estate plan. The facts are relatively simple, Peter Klauer founded Klauer Manufacturing in Iowa in 1870 and branched out in New Mexico in 1919. More recently Klauer descendants were in discussions with the US Bureau of Land Management, the US Trust for Preservation of Land and various Indian tribes regarding purchase of the Taos Overlook or at least an option to purchase. Over three years from 2001 2002 and 2003 various agreements were executed all independent of the other. Taken separately each land sale was substantially below market value. Klauer’s S Corporation tax return for 2001 2002 and 2003 claimed millions of dollars as land donated on Form 8283 Noncash Charitable Contributions and various K1s were distributed to the stockholders with their proportionate share of the contribution. All the shareholders filed their Form 1040s for 2001 2002 and 2003 with very large charitable deductions. The IRS audited as a whipsaw and disallowed all charity deductions for all three years causing large amounts of taxes owed by the individual shareholders. The Government claimed all three years were one big series of step transactions voiding the below market sales and subsequent large charity deductions. Klauer appealed to US Tax Court in Klauer v IRS 2010 claiming each year stood by itself as separate transactions.
The Court agreed with Klauer because it was clear that each year was separately negotiated with distinct separate agreements. Specifically, Judge Chiechi points out that the supposed first step created no binding commitment to take the second step siting Security Industrial Insurance v US 702 F.2d 1234 (5th Circuit 1983). The Court then focuses on whether the Klauer family intended to save taxes by structuring the three years from 2001-2003 a certain way citing King v US 418 F.2d 511 (Fed Cir 1969). Judge Chiechi argues that Klauer’s subjective intent was especially relevant in allowing the Court to see if Klauer directed a series of transactions to an intended purpose solely to save taxes. The Court found facts created in the record as evidence that Klauer’s primary intent from 2001-2003 was not to create a tax savings scheme but to work the Bureau of Land Management, the Land Trust, and various Indian tribes to allow for the preservation of the Taos Overlook, This had been the intent of the Klauer family for many years. While there were huge tax savings for the shareholders the way the sales were structured that result was secondary to the primary purpose of land preservation. Klauer wins IRS loses.
So where do we all go from here? First, now that you know Step Transactions are thinly disguised tax schemes, your goal is to protect your estate plan with plenty of written evidence and facts proving to an IRS agent years later, after you have died, that your primary goal is, was and has always been legacy preservation and protection with tax savings merely as a secondary goal. Second, discuss with your tax attorney your options in operating a Family Limited Liability Company (FLLC) owned by SLAT, Crummey, or DAPT trusts to maximize asset protection and keep the family assets safe protected and secure for generations to come, Finally, as 2016 comes to a close ask your tax attorney to bullet proof your family estate plan factually documented with contemporaneous created facts inserted into tax returns prior to being filed with the IRS, with no one step leading to a predetermined second step. While the estate path may change direction due to family disputes, disagreements, or even litigation, if you have the facts on your side, you can relax knowing that your estate plan if protected against Step Transaction traps that lie ahead. even years after you are long gone.
Thank you joining us on TaxView with Chris Moss CPA Tax Attorney
Stay tuned for our 2016 year end TaxView.
Kindest regards
Chris Moss CPA Tax Attorney
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