Find out what types of assets make the best planned gifts. Learn about gifts of cash, securities and property.
Bob and Mary Are Giving Smarter and Achieving Their Dreams...Find Out How You Can Too!
Bob and Mary first met at Two-Bit Flicks, a 25-cent movie night held on Fridays in Brighton Lecture Hall. When the spring formal hosted by the women's dorm came around, Mary asked Bob to go with her. It was their first "official" date.
The rest, as the saying goes, is history. Or in Bob and Mary's case, it is natural history. That's because Emporia State also introduced them to a lifelong passion for the natural sciences.
Bob and Mary feel Emporia State was the catalyst for the life they've built together. Mary became a science educator for 6th, 7th, 8th and 9th grade students. Bob founded and served as director of the Great Plains Nature Center and became a renowned nature photographer.
Now they want others to have the same opportunity they did. They want to help students come to ESU and discover a passion they can follow for the rest of their lives.
Bob and Mary found a simple and easy way to achieve this dream. When they set up their trust, they named Emporia State as a beneficiary.
What's your dream?
Learn how easy it is to make your dream a reality by naming Emporia State University in your will or trust. Contact Angela Fullen, Director of Planned Giving at the Emporia State University Foundation. She can answer your questions or help you get started. If you have already named Emporia State in your will or trust, let us know. We will make sure your gift does everything you want it to do.
"I would encourage anyone, if they are thinking about doing something like this, to contact the Foundation. For us, it has been a great experience." - Mary Butel
Getting Started is Easy
Not sure how to take the first step? We've got just the thing you need. Download your free Will and Estate Planning Guide. This guide is an easy way to get started on, or update, your estate plan. It will help you explore your options at your own pace. It's free, easy and yours to keep.
Download your copy today or contact Angela Fullen to request a printed copy.
IRS Warns About ERC Scams
The IRS has been monitoring a "barrage of aggressive broadcast advertising" that seriously misrepresents and exaggerates the qualifications for the Employee Retention Credit. Due to the proliferation of ERC scams, the IRS is increasing its effort both in audits and criminal investigations.
IRS Commissioner Danny Werfel stated, "The aggressive marketing of the Employee Retention Credit continues preying on innocent businesses and others. Aggressive promoters present wildly misleading claims about this credit. They can pocket handsome fees while leaving those claiming the credit at risk of having the claims denied or facing scenarios where they need to repay the credit."
The IRS emphasized that the Employee Retention Credit is a legitimate taxpayer benefit. It was created to help businesses with employment challenges during the COVID-19 pandemic.
However, the ERC has been abused. Werfel continued, "This continual barrage of marketing by advertisers means many invalid claims are coming into the IRS, which also means it takes our hard-working employees longer to get to the legitimate Employee Retention Credits. The IRS understands the importance of these credits, and we appreciate the patience of businesses and tax professionals as we continue to work hard to get valid claims processed as quickly as possible while also protecting against fraud."
The IRS emphasizes the improper ERC credits may result in an obligation to pay back the IRS, potentially including penalties and interest. There are several signs to indicate that taxpayers should be wary of ERC promoters.
1. Unsolicited Calls — Promoters will send out millions of calls and advertisements claiming that the ERC is an "easy application process."
2. ERC Eligibility Within Minutes — The promoter claims he or she can determine eligibility in a few minutes.
3. Upfront Fees — Promoters require you to pay a large upfront fee before they are willing to submit your claim to the IRS.
4. Percentage of the Refund — If the promoter desires a percentage of the ERC amount, this is a red flag. You should not hire individuals who provide tax advice based on a percentage of a refund or credit received.
5. Aggressive Claims — Many promoters claim your business will qualify before a review of your tax situation. The truth is that the ERC is a complex credit that applies only to a limited group of businesses.
6. Nothing to Lose — The IRS considers the claim that there is nothing to lose as a "wildly aggressive suggestion" and discourages fraudulent claims for the ERC.
Taxpayers and businesses should be cautious because the promoters follow proven methods but omit requirements for eligibility. They engage in aggressive marketing, send out fake letters claiming to be from non-existent groups such as the "Department of Employee Retention Credit" and will leave out key details. One point to know is that the ERC cannot be claimed on wages that were reported as payroll costs for amounts forgiven under the Paycheck Protection Program.
The best protection is to work with a trusted tax professional. Your local CPA can determine qualification requirements and can file the appropriate tax forms with the IRS. The ERC is available for companies that suffered from a full or partial suspension of operations due to COVID-19 lockdowns during 2020 or the first three quarters of 2021. There is a requirement for a substantial decline in gross receipts. Any recovery startup businesses must have commenced operations during the 3rd or 4th quarter of 2021.
Editor's Note: The IRS advice to trust your local CPA is excellent. A local CPA will be familiar with your business and can determine whether you are qualified to file for the ERC. While Congress allocated billions in government funding in an effort to try to address record levels of unemployment, it is important to be certain you are properly qualified before filing for the ERC.
Adequate Gift Disclosure Starts Statute of Limitations
In Ronald Schlapfer v. Commissioner; No. 419-20; T.C. Memo. 2023-65, the Tax Court determined that the taxpayer had filed a sufficient IRS Form 709 Gift Tax Return with the 2013 Offshore Voluntary Disclosure Program (OVDP). The Tax Court determined that the 2006 gift tax return and related documents, filed in 2013, constituted adequate disclosure and the statute of limitations was tolled in 2017. Therefore, the 2019 IRS deficiency was denied because it was outside of the statute of limitations.
Taxpayer Ronald Schlapfer was born in Switzerland and began a career in banking. In 1979, he moved to the United States with his first wife and worked at a major bank. He held a non-immigrant visa with a declaration he did not intend to permanently reside in the United States. His immediate family remained in Switzerland. He and his first wife had two daughters. Schlapfer and his second wife had a son together and his second wife had a child from a previous marriage. In 1998, Schlapfer started a currency trading company and in 2002 formed EMG. EMG was a Panamanian corporation holding marketable securities with 100 shares of common stock. Schlapfer became a US citizen in 2008.
In 2006, Schlapfer obtained a life insurance policy from Swisspartners Insurance Company SPC Ltd. He and his second wife were the primary beneficiaries. His three children and stepchild were secondary beneficiaries. The initial policy was funded with $50,000 cash and all 100 shares of EMG. The shares were transferred to an AIG Account as custodian of the policy on November 8, 2006. In 2007, Schlapfer asked that the policy be transferred to his mother, aunt and uncle as joint policyholders with irrevocable beneficiary designations to the four children.
In 2012, Schlapfer entered the OVDP and filed multiple income tax returns and an IRS Form 709, Gift Tax Return for 2006. He included additional disclosure forms with the OVDP paperwork. His IRS Form 709 stated that a protective filing was submitted as of July 6, 2006, showing a gift of a controlled foreign stock company with value of approximately $6 million.
The IRS interviewed Schlapfer in 2016 and he agreed to extend the tax assessment date to November 30, 2017. The IRS claimed that the gift was made in 2007 rather than 2006. Schlapfer did not agree and withdrew from the OVDP. On October 17, 2019, the IRS issued a deficiency for approximately $8.8 million in gift tax and various additions.
The IRS generally has three years after a gift tax return is filed to assess gift tax. Sec. 6501(a) and (c). There is an exception if the gift has not been adequately disclosed. However, adequate disclosure will start the ordinary three-year period for assessment. Reg. 301.6501(c)-1(f)(1). The "disclosure starts the statute of limitations" and applies even if the transfer is ultimately determined to be an incomplete gift.
The determination of adequate disclosure is a question of fact. The taxpayer claimed that he filed a gift tax return, the protective filing attachment, Schedule F of Form 5471 with the tax return and an Offshore Entity Statement. The IRS claimed he had failed to adequately disclose the gift.
Disclosure can be through exact or substantial compliance. Reg. 301.6501(c)-1(f)(2) states the disclosure must correctly describe the gift or consideration received for the gift, the identities of the donor and recipients and their relationship, if a gift is in trust, the tax by the number and description of the trust, a detailed description of the valuation method and a statement describing any position taken contrary to Treasury Regulations.
The Tax Court determined the taxpayer did correctly describe the gift of the EMG stock. He identified the number of shares and whether they were common or preferred. However, if the gift were the insurance policy, he did not strictly satisfy the requirement because his disclosure did not describe the specifics of the policy. However, a disclosure is adequate if it is "sufficiently detailed to alert the Commissioner to the nature of the transaction so that the decision to select return for audit is reasonably informed."
The taxpayer did provide sufficient information on the insurance policy to comply with this requirement. While he did not fully describe the identity of the parties, there was sufficient information to show the basic information on the family. He also did not strictly comply with the valuation method, but again, he did provide sufficient information for the IRS to determine the value of the EMG stock. Therefore, Schlapfer substantially complied with the method of valuation requirement.
Because the taxpayer substantially complied with the requirements to disclose the identity of the parties and the method for valuation, the statute of limitations tolled on November 30, 2017. The 2019 assessment of $8.8 million in tax and additions by the IRS was denied.
Editor's Note: This case is an excellent analysis of the various elements for substantial compliance for gift disclosure. It is helpful for tax professionals who are filing IRS Form 709 or who are engaged in a dispute with the IRS for a previously filed IRS Form 709 Gift Tax Return.
Artificial Intelligence and Tax Research
With the release of ChatGPT and Google Bard, two of America's largest technology corporations are steadily improving their artificial intelligence (AI) capabilities. One question for tax professionals is how to make use of these new AI capabilities and whether they ought to use them. While there are both copyright and privacy concerns with the large language models that are the basis for AI, the legal and accounting professions are grappling with questions on how to make use of this new research tool.
Attorney Libin Zhang is a partner in a New York law firm and recently published an analysis of tax research questions that were submitted to ChatGPT, Bing Chat and Google Bard. The research questions are similar to those given to associate attorneys or other tax researchers in law firms and academia.
The first question related to the use of IRC Section 1031 to apply to a like-kind exchange of a Picasso painting. The second asked whether or not a person who passes away with debt in excess of basis would have to report gain in his or her final income tax return. The third question related to the appropriate federal policy for stock buybacks.
1. May I engage in a Section 1031 like-kind exchange with a painting?
The correct answer for the question is that the Tax Cuts and Jobs Act amended Section 1031 and limited the application to real property in 2018 and later years. Because the AI large language models can include information from the past decade, they may not be reporting the law based on the latest changes.
Zhang's queries resulted in interesting results. Google Bard's response to this question was yes, that like-kind exchanges of paintings are permitted, with some restrictions. ChatGPT initially said yes, but when questioned a second time, said no because the painting could not be exchanged for another painting because paintings are unique. No was the proper answer, but it was for the wrong reason.
2. Does a decedent who has debt in excess of tax basis recognize gain?
The second question has been long debated within the tax community. Zhang noted that some estate attorneys claim that there is never a taxable gain in the estate of a decedent, while others interpret regulations under Section 1001 and Tax Court cases to claim that this gain should be recognized.
Google Bard did not provide an answer to the question. It noted that it was a large language model and was unable to answer the question.
ChatGPT stated that there would be recognition of gain. It agreed with some estate attorneys and the proposals in the current White House budgets there should be recognition of gain. However, this is a possible result, but is not clear law at the present time.
3. Should the federal government tax stock buybacks?
Both AI models provided reasonably cogent answers to Zhang. Google Bard provided a 200-word essay and noted this policy could reduce the inflation of stock prices, encourage corporate investment, reduce tax avoidance and reduce inequality.
ChatGPT also created a 200-word essay. It stated this policy would encourage corporate investment, promote income equality, reduce financial instability and generate government revenue.
The analysis of the three questions and the AI answers shows both the strength and the weaknesses of the large language models. AI does not actually think; it simply analyzes based on the total cumulative data within the large language model. It does not always generate the correct answer even with the cumulative data at its proverbial fingertips. This information is likely to lead to errors, particularly with recent changes to tax provisions. The majority of the information in the large language model will be prior to the date of the law change and the model is likely to give incorrect information.
If the question is truly subject to a split determination by professionals, such as the recognition of gain when debt exceeds basis at death, some AI models are stumped. It may simply refuse to answer the question. Alternatively, it may review and process information on both sides of the issue and decide on one side or the other. In both cases, it may not be helpful to the professional who is tasked with evaluating the probable risks of each course of action because it does not produce the information relating to both sides.
Zhang concluded that the models have "some room for improvement before they are useful to tax professionals."
Editor's Note: AI will supplement tax professional research. ChatGPT Versions 5, 6 and 7 are expected to improve. By ChatGPT Version 6 or 7, it may be able to conduct most tax research. However, there still will be a requirement for professional analysis when close issues are examined.
Applicable Federal Rate of 4.2% for June — Rev. Rul. 2023-10; 2023-23 IRB 1 (15 May 2023)
The IRS has announced the Applicable Federal Rate (AFR) for June of 2023. The AFR under Sec. 7520 for the month of June is 4.2%. The rates for May of 4.4% or April of 5.0% 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 2023, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return.