Wealth Law Blog : Oregon Asset Protection Lawyers & Attorneys : Samuels Yoelin Kantor Seymour & Spinrad Law Firm : OR Estate Planning, Fiduciary Litigation

TRUIRJCA, or the “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010” (previously discussed in Wealth Law Blog) was passed by the 2010 “lame duck” Congress on December 17, 2010, and for the most part extended what many refer to as the “Bush Tax Cuts” until December 31, 2012. If Congress takes no action prior to that time, many key provisions of the tax law will revert to the law as it existed prior to the 2001 tax act.

Recently, the battle lines for the tax debate for the next 20 months have begun to take shape. Many of these issues are highly contentious, hotly political, and will not be resolved in the short term.

In the 2012 budget resolution dubbed The Path to Prosperity, House Budget Committee Chair Paul Ryan set forth a detailed budget proposal which also included certain parameters for tax reforms. The Ryan proposal includes:
 

• The lowering of both the top corporate and individual tax rates from 35% to 25%.
• “Eliminating or limiting as necessary existing tax deductions, exclusions, and other special provisions.”
• While not all of the details of such “eliminations” and “limitations” have not been released, many believe the proposals could include a limitation on the home mortgage interest deduction to a maximum of $500,000 worth of mortgage and only on a principal residence, not a second home (under current law, the amount of mortgage held by a married couple eligible for interest deduction is $1 million, and that can apply to a second home).

On the other hand, President Obama and Senate Democrats are proposing the following:

• Allow the Bush tax cuts to expire for individuals earning over $200,000 and couples earning over $250,000, pushing the top tax bracket for such individuals up to 39.6%.
• Limiting itemized deductions (termed “tax expenditures” by President Obama) for the wealthiest 2% of taxpayers.
• Reform of the corporate tax code, although neither the President nor Treasury Secretary Geithner has released specific details of these reforms.

The looming budget deficit crisis will, by itself, make any tax compromise very difficult. Add in a full dose of election year politics, and the likelihood of true tax reform becomes even more speculative. Could we be looking at “TRUIRJCA II” in the 2012 post-election “lame duck” session? Stay tuned!

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On February 8, 2011, the IRS announced a second voluntary disclosure program for taxpayers who have not disclosed their foreign bank account holdings. The first disclosure program occurred in 2009. When the program closed on October 15, 2009, there were 15,000 disclosures. The new initiative – called the “2011 Offshore Voluntary Disclosure Initiative” will be similar to the 2009 program, but there will be some changes.

• The disclosure period is two years longer. It covers 2003 through 2010
• The penalty is higher. It is 25% of the highest aggregate balance during 2003 through 2010. The penalty rate during the 2009 program was 20%.
• Taxpayers who participate in the program must file all original or amended tax returns and pay the taxes, interest and accuracy related penalties for these eight years by August 31, 2011. 
• In addition the foreign bank account disclosures – form TD F 90-22.1 need to be filed as well.
• In limited situations taxpayers may qualify for a lower 12.5% or 5% penalty rate.

In a recent news release, Doug Shulman, the IRS Commissioner, said “Tax secrecy continues to erode. We are not letting up on international tax issues and more is in the works. For those hiding cash or assets offshore, the time to come in is now. The risk of being caught will only increase.”
This is a tougher program than the 2009 voluntary disclosure program, but it still presents a way to reduce penalties and reduce the chance of criminal prosecution.
 

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The Importance of Using a Lawyer Before You Encounter a Problem

Legal disputes can be very expensive, very risky, and very time consuming. In my experience, most disputes could have been avoided if the client had sought the assistance of a lawyer before they entered into the agreement or transaction that was the basis for the dispute. Unfortunately, many people don’t see an attorney until after a dispute has arisen. At that point, it is often too late to undo the damage and the client spends substantially more time and money addressing the dispute than they would have if they had sought the assistance of a lawyer before they signed the contract or started the project.

Such experiences cause me to think of the old Fram Oil Filter ads – the ones that said, “You can pay me now or pay me later.” Fram’s message was that you ought to pay a small amount of money to regularly change your oil filters rather than a whole bunch of money later to fix the problems caused by not maintaining your oil filters. The Fram Oil Filter ads imply, as I advocate in this article, that it makes better sense to pay a little for some prevention early on rather than paying a whole bunch more later when a problem develops. I believe the same can be said for the use of lawyers.

Before signing a contract, entering into a transaction, or starting a new venture, you should weigh the risks of the actions you are about to take. You should also perform a cost-benefit analysis to help determine whether you need to use a lawyer to assist with addressing the risks in the contemplated venture or transaction. The more risks you take on, the more important it is to use a lawyer to assist with the transaction or business venture. This may even be more important in the current economy when profits are not as easy to come by as they were a few years ago.

While it may only take a few hours for a lawyer to review a contract, form a business entity, or provide you with advice about a transaction, the amount of hours necessary to prosecute or defend a business dispute can be staggering. Many disputes that I have seen could have been avoided if the client had an attorney provide them with a few hours of advice before they got involved with the project. In addition to providing specific legal advice regarding the contemplated transaction or business venture, the right lawyer can also provide valuable general advice based upon their years of experience and experience with similar matters.

In addition to providing legal advice about a contemplated venture or transaction, I also have some general advice I’ve found to be valuable to clients regarding contemplated transactions or business ventures:

-Listen to your gut and the gut of your business partners and spouses. I have seen a number of disputes where one or more of the parties affiliated with our client felt early on that something was not right about the transaction or the parties with whom they were dealing. In hindsight, clients have informed me many times that they wished that they had listened to their gut or the gut of their business partners and spouses;

-Be very careful when the other party to your venture or transaction asks that you do things differently than you have done in the past. This is a red flag. Watch out. If you have never previously dealt with the other party, you may want to require that the venture or transaction be handled in a manner similar to how you have handled it in the past.

-Be very careful if the other party to the contemplated venture or transaction tries to require that you utilize a contract or documentation that differs from what you typically use for similar transactions or makes you feel uncomfortable. If there is a dispute regarding the transaction, the written contract and related written documentation will be the primary documents upon which the judge or arbitrator will render their decision. Also, make sure that any changes to the agreement or transaction are documented in writing.

If used in a preventative manner and timely manner, you can get good value from a lawyer. If, however, you wait until after a dispute has arisen to see a lawyer, it will likely be much more costly and time consuming. I suggest that you take the advice of the Fram Oil Filter guy and pay a lawyer a little for some legal advice before entering into the transaction or business venture. Otherwise, you will likely have to pay the lawyer a whole lot more later after a dispute arises.
 

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And Now You Know the Rest of the Story . . .

On November 24, 2010, we posted the blog article, “How Safe Is Your Stretch IRA?”, where we addressed several court cases in which the issue before the court was whether creditors could reach assets held by debtors in stretch IRAs. Well, your stretch IRA just got safer.

As you will recall, a stretch IRA is an individual retirement account that you inherit and then use the stretch-out provisions under the law to take payments over your lifetime (and thus defer the taxes on the distributions over your lifetime).

As we reported on November 24, 2010, several cases, including In re Chilton, had held that an inherited IRA was not entitled to the protections allowed to traditional IRAs under the Bankruptcy Code.

A district court in the Fifth Circuit has now reversed the bankruptcy court’s decision. See here. The district court noted that since the bankruptcy court’s decision, five other courts have all concluded that inherited IRAs do meet the requirements for a Bankruptcy Code exemption.

Agreeing with the reasoning of these other cases, the district court concluded that the funds in a debtor’s inherited IRA do not have to be the “retirement funds” of the debtor to satisfy the bankruptcy exemption requirements. The district court also concluded that inherited IRAs are among the IRAs that are exempt from taxation under § 408(e)(1) of the Internal Revenue Code, which provides that any individual retirement account is exempt from taxation. Because an inherited IRA meets these requirements, any differences between a traditional IRA and an inherited IRA are irrelevant for purposes of the bankruptcy exemption.
 

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