Good lawyering got the IRS to back off the assessment of additional tax on receipt of an advance. Client entered into a three year service contract with Company to sell a new product. Company provided an advance of $100X to Client when he signed the contract. Under the contract, if Client reached his sales goals at the end of the three years, he would be paid compensation of $500X. If Client failed to reach his sales goals, he was obligated to return the advance of $100X.
Client took the position on his tax return that the $100X advance was not income until earned at the end of the third year because the advance might have to be returned if the sales targets were not met. During the audit, the IRS asserted that the $100X was income at the time the money was received under a “claim of right” theory.
To read more about the claim of right theory and the outcome of this case, click here.
Annual exclusions generate large gift tax savings
Utilization of the annual exclusion is a simple and effective way to transfer property and minimize gift taxes. The first $14,000 gifted to any person during the calendar year is excluded from gift tax. A caveat for the annual exclusion is that it’s only available for a “present interest” in property. This means that the donee must receive an unrestricted right to the immediate use, possession of enjoyment of property. While a gift of $14,000 in cash clearly meets the definition of present interest, a gift to a donee in trust may not. Donors are able to utilize the annual exclusion even for gifts made to a trust by including a “Crummey provision” in the trust agreement. The Crummey provision allows the trust beneficiary the right to withdraw from the trust property contributed to the trust. Under Crummey v. Comr., this withdrawal right was enough to transform a gift to be a present interest.
The recent case of Mikel v. Comr., proves the effectiveness of the annual exclusion. There, the taxpayers created a trust for the benefit of children, lineal descendants and their respective spouses. The trust agreement included a Crummey provision. The taxpayer then transferred property to the trust and claimed an annual exclusion for each of 60 trust beneficiaries. While the IRS challenged the annual exclusions, the Tax Court reaffirmed that the Crummey provisions creates a present interest and that the annual exclusions claimed were proper.
I will be a panelist on the Expert and Family Business Panel Discussion for Smart Business’ Family Business Conference at the Gleacher Center on Thursday, July 9, 2015 from 7:30-11:30 a.m.
The event is free but there are limited seats available. If you plan to attend, click here for more information and registration.
David Shiner, a Principal with Chuhak & Tecson, is a business and tax attorney focusing his practice in estate planning, taxation and corporate law. He leads the firm's tax and employee benefits practice group.
A certified public accountant with a masters of law in taxation, David is uniquely qualified to counsel his clients on structuring transactions such as domestic and foreign asset protection trusts, to reduce the risk of exposure to potential creditors, as well as minimizing exposures to federal and state estate taxes. David also battles the IRS both in administrative proceedings and in U.S. Tax Court in gift, estate and income tax matters.
The author, David Shiner, invites you to contact him and welcomes your inquiries.
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