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Tax Court Judge Says IRS Does Not Have to Follow Its Own Published Guidance

txHave you ever Googled a tax question and found the answer on the IRS website? If you relied on the information provided by the IRS, you would think that the IRS couldn’t later argue against its own published information, increase the amount you owe in tax, and then charge you an additional penalty for underpayment, right? Well, as it turns out, you’d have thought wrong. Apparently the IRS can and will do just that.

The tax world received a bit of a shock when (coincidentally) on April 15 a Tax Court judge issued an order stating that published guidance from the IRS “is not binding precedent” and “taxpayers rely on IRS guidance at their own peril.” Wait…what?

Forbes recently detailed the facts of the case and the surrounding circumstances (it also provided an update after the April 15 order). A taxpayer – a tax attorney, no less – attempted (perhaps with improper motive) to roll over several of his IRAs. Under section 408(d)(3) of the tax code, an IRA owner is allowed to withdrawal money from his IRA and avoid an early withdrawal penalty so long as the cash is re-deposited into a different IRA within 60 days—however, he may only do this once per year. Publication 590, issued by the IRS, takes the position that the once-a-year limit applies to each separate IRA. But in this case, the IRS successfully argued that the once-a-year limit applies collectively to all of a taxpayer’s IRAs.

But hold on. The ruling points out that neither side raised the issue of Publication 590 during the trial. Was this all a big misunderstanding? Nope. The judge writes that he was aware of Publication 590 prior to deciding the case, and had the taxpayer tried to argue it, it would not have served as “substantial authority” to support the taxpayer’s argument.

So there we have it. Attorneys for the IRS are willing to argue against the IRS’ own published guidance, and tax court judges are willing to uphold the arguments. If you think that undermines public confidence in the tax system, you are not alone—the American College of Tax Counsel filed an amicus curiae brief making that argument, but to no avail. That leaves one to conclude that perhaps adhering to the IRS’ own guidance is disappointingly not covered by the IRS mission of helping America’s taxpayers “understand and meet their tax responsibilities and enforce the law with integrity and fairness to all.”

Swedish Court Rules Text Messages Do Not Constitute a Last Will and Testament

hndtxtAnother day, another attempt at a DIY will. If you recall, I’ve written about wills typed into an iPhone (Australia) or written on a tablet with a stylus (Ohio) being upheld, but have cautioned against relying on such outlier cases until the laws catch up to technology. Case in point: a decision out of Sweden, where, before committing suicide, the deceased sent text messages to his friends and family purporting to leave his assets to them after his death. The Swedish appellate court ruled that the text messages did not constitute a valid will.

This case is undeniably a tragedy, but does raise questions about other hypothetical scenarios. Let’s imagine you have a friend named Ben. What if he texted you and other friends and family several days before being killed in a car accident? Would such text messages be upheld as a valid last will in Illinois? Not a chance.

Recall that in Illinois, signing a will is a formal ceremony that must be done in front of two witnesses. These witnesses help establish the validity of a will once the person who created it is deceased and obviously can no longer speak to the circumstances under which the will was signed. Without witnesses, there is less certainty as to the deceased’s intent. In Ben’s case, was he in his right mind when he sent the texts, or was he under the influence of any substances (legal or not)? Did someone gain unauthorized access to his cell phone and send the texts? Did autocorrect change “I give you my ABBA albums” to “I give you my IKEA armchairs”? An unwitnessed will simply leaves too many questions unanswered.

But what if Ben devised a scheme whereby he texted his wishes, then had two witnesses text the same friends to confirm the “will” was witnessed, thereby complying with the witness requirement and outsmarting the sometimes archaic law of wills? Who’s to know if it would stand up in court, but estate planning attorneys would likely appreciate such creativity due to the mountain of work it would create to sort out such a mess.

The easiest route is to simply follow all of the statutory requirements when signing your will. Be creative at your own risk. At best, it could be awkward when an estate planning attorney blogs about your unique situation. At worst, a court may refuse to recognize your purported last will and distribute your assets in a manner you did not intend.

Celebrity Estate Planning Lessons: Paul Walker

lwandtThis month Forbes published a great article on Five Estate Planning Lessons From the Paul Walker Estate. Paul Walker died in a car accident on November 30, 2013. His last will was prepared in 2001, the same year as the release of the first movie in the Fast and the Furious franchise. He left behind a 15-year old daughter and an estate worth an estimated $25 million. The Forbes article explains the lessons well, but I wanted to expand on a couple of them.

First, kudos to Paul Walker for having an estate plan. Forbes listed this as lesson #4, but I think this is one of the most important takeaways from this tragic incident. He was 40 years old and in good health when he unexpectedly died. If he had procrastinated, or believed that estate planning was something that should be done later in life, it would have been too late. Mr. Walker gets extra credit because he prepared an estate plan in 2001 when he was only 28 years old. A 2011 study found that only 8% of Americans under the age of 35 have a last will, and that over 50% of Americans of all ages do not have a last will.

Second, Paul Walker left his assets in trust. One advantage of leaving assets in trust is that the deceased can dictate the terms under which the beneficiaries receive such assets. Many people do this to ensure their children won’t irresponsibly manage their inheritance if a parent dies when the children are still young. For example, the trust may state that one’s children may receive reasonable amounts from the trust for their health, maintenance, support, and education, and then the children may withdraw amounts from the trust at certain ages (for example, 1/3 of the trust at age 25, 1/3 at age 30, and the balance at age 35). We don’t know the terms of Mr. Walker’s trust because it’s not public record, however, imagine the alternative: his will could have left the remainder of his estate outright to his daughter. The result would have been that his daughter would inherit what was left of the $25 million after taxes and expenses on her 18th birthday. Working with a qualified estate planning attorney is immensely helpful in situations such as this as the attorney will assist you in tailoring a plan according to your circumstances and wishes.

Bottom line: don’t procrastinate, because you never know what life has in store.