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Overcoming Late IRC Section 1041 Transfer Presumption | IRS Lawyer & Attorney

In a previous article, I discussed that a late IRC Section 1041 transfer between former spouses is presumed to be unrelated to the cessation of the marriage. This means that such a transfer may not be considered tax-free for US tax purposes. In this article, I would like to explain what a late IRC Section 1041 transfer is and how to overcome the presumption that it is not related to the cessation of the marriage.

What is a Late IRC Section 1041 Transfer?

A transfer of property between ex-spouses is not taxable as long as it is “incident to divorce”. 26 U.S.C. §1041(a)(2). Temporary regulations state that such a transfer of property will be considered as incident to divorce as long as it occurs within one year of the date of the cessation of marriage or if this transfer is related to the cessation of marriage. Treas Reg §1.1041-1T(b), Q&A-6.

As I indicated in a previous article, a transfer of property is related to the cessation of marriage if it is done pursuant to a divorce or separation instrument and “occurs not more than 6 years after the date on which the marriage ceases”. Treas Reg §1.1041-1T(b), Q&A-7. If the transfer of property between ex-spouses occurs after six years of the cessation of marriage, then it is considered a late IRC Section 1041 transfer. Id.

Late IRC Section 1041 Transfer: Presumption that the Transfer if Not Related to Marriage

A late IRC Section 1041 transfer gives rise to a presumption that the transfer is not related to the cessation of marriage. Id. In other words, if an ex-spouse transfers a property to another ex-spouse more than six years after the cessation of their marriage, then the IRS will assume that the transfer is not related to the marriage.

Late IRC Section 1041 Transfer: Rebuttal of the Presumption

Luckily for US taxpayers, this presumption is not absolute and can be rebutted. “This presumption may be rebutted only by showing that the transfer was made to effect the division of property owned by the former spouses at the time of the cessation of the marriage.” Id.

The temporary Treasury regulations emphasize that the presumption can be rebutted by establishing two facts. First, the transfer was made late “because of factors which hampered an earlier transfer of the property, such as legal or business impediments to transfer or disputes concerning the value of the property owned at the time of the cessation of the marriage”. Id. Second, “the transfer is effected promptly after the impediment to transfer is removed.” Id.

Late IRC Section 1041 Transfer: PLRs Indicate Anticipation of Transfer in a Divorce Decree as the Crucial Factor

The IRS has issued a number of Private Letter Rulings (“PLRs”) on the issue of a late IRC Section 1041 transfer. Overall, the PLRs seem to follow an important trend in determining whether a taxpayer is successful in his rebuttal of the aforementioned presumption.

The key factor that appears in these PLRs seems to be whether a transfer of property (or an option to transfer a property) was part of the divorce decree. In other words, the most important question is whether this transfer of property was anticipated by the terms of the divorce decree. If it was and there is a good justification for the delay of the transfer of property, then the IRS is likely to rule that Section 1041 applies and the transfer would be deemed tax-free for federal income tax purposes.

Of course, it is highly important that a tax attorney review the situation to determine the likelihood that the IRS will agree on both points: anticipation of transfer in the divorce decree and the good reason for the delay of the transfer.

Contact Sherayzen Law Office for Professional Help Concerning Late IRC Section 1041 Transfers

If you are engaged in a divorce or you are an attorney representing a person who is engaged in a divorce, contact Sherayzen Law Office for experienced help with respect to taxation of transfers of property to an ex-spouse as well as other tax consequences of a divorce proceeding.

2014 First Quarter Underpayment and Overpayment Interest Rates

On December 9, 2013, the IRS announced that the underpayment and overpayment interest rates will remain the same for the calendar quarter beginning January 1, 2014. The rates will be:

  • three (3) percent for overpayments [two (2) percent in the case of a corporation];
  • three (3) percent for underpayments;
  • five (5) percent for large corporate underpayments; and
  • one-half (0.5) percent for the portion of a corporate overpayment exceeding $10,000.

Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis. For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points.

Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2 percentage points. The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.

The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.

Interest factors for daily compound interest for annual rates of 0.5 percent are published in Appendix A of Revenue Ruling 2011-32. Interest factors for daily compound interest for annual rates of 2 percent, 3 percent and 5 percent are published in Tables 7, 9, 11, and 15 of Rev. Proc. 95-17, 1995-1 C.B. 561, 563, 565, and 569.

Tax Lawyers Minneapolis: Preparing for Initial Consultation II (for Individuals)

In previous article, I discussed the first part of preparation for an initial consultation with Minneapolis tax lawyers; the first part was mainly concerned with what type of information you should bring to your Minneapolis tax attorney. In this essay, I shift the focus toward the second part of the preparation which is about what type of questions you need to ask your tax lawyer.

Usually, the questions that you want your tax attorney to answer should, at the very least, cover the following four areas:

1. Cost and Billing

One of most important areas that you need to cover is the cost of the case as well as the manner in which you will be billed. Unless this is a flat-fee case, you should not expect your attorney to give you a precise amount of money you will need to spend on your case. Usually, your tax lawyer will give you an estimate, which, in the end, may or may not correspond to the actual cost of the case. I usually provide a fairly conservative estimate and it is rare for my clients to pay above the estimate; usually, it occurs where a client fails to fully disclose the circumstances of the case or otherwise causes a significant delay in the proceedings of the case.

In terms of the manner of billing, you are likely to billed per hour in most tax litigation and voluntary disclosure matters. Regular tax returns, especially for returning clients whose circumstances have not changed in any significant way, are usually subject to a flat fee.

2. Time

The next area you should question your Minneapolis tax attorney about is how long the case will need to be conducted. The estimates here are likely to vary significantly. While it is fairly easy to predict when a tax return will be finished, it is much harder to estimate an amount of time a voluntary disclosure process may take (especially if more issues come up during the disclosure process).

3. Participation

Ask your Minneapolis tax lawyer about who will handle your case – i.e. whether the attorney will handle it personally or turn it over to his associates. When you are dealing with a large law firm, you run the risk that the attorney with whom you are having the initial consultation will not be the one handling your case, especially if you are a small business or an individual. Due to common division of labor in large law firms, it is very likely that the case will be turned over to inexperienced associates whose work will be only reviewed by the attorney who conducted the initial consultation.

If, however, you are hiring a small firm or a solo practitioner, you are very likely to avoid this problem and your case will be handled from the beginning through the end by your experienced tax lawyer who is probably an owner of the law firm and personally responsible for the case.

4. Percentage of Practice

Ask your Minneapolis tax lawyer about how much time per month, on the average, he devotes to his tax practice. At the very minimum, your tax attorney should devote about 25% of his practice to tax law. If, however, the attorney has specialized associates (for example, someone who is a lawyer and a CPA), then he can have a lower percentage devoted to tax law because he may work closely with his experienced and specialized associate.

Conclusion

While these four questions do not represent a complete list of questions you should ask your tax attorney, they are likely to provide that minimum background necessary for the review of a retainer agreement with your Minneapolis tax lawyer.

Sherayzen Law Office can help you with your tax issues, whether you want to check your tax return, negotiate with the IRS, or engage in complex tax planning.

Contact Sherayzen Law Office NOW to discuss your tax case with an experienced Minneapolis tax attorney!