Current Basic Estate and Gift Tax Rules

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With the new year upon us, it’s a good time to review the federal estate and gift tax rules in order to utilize them to their maximum effect. Taxpayers should also be aware that certain beneficial gift and estate tax laws may expire at the end of this year and revert back to the pre-Economic Growth and Tax Relief Reconciliation Act of 2001 laws if Congress does not extend them, so taxpayers may also want to consider this when making decisions. This article will briefly explain some of the most basic current federal estate and gift tax rules, and highlight some of the laws that may sunset at the end of 2012.

Unified Federal Estate and Gift Tax Exemption

The unified federal estate and gift tax exemption for estates of individuals who die in 2012, or who make gifts this year is $5.12 million per spouse. For 2011, the unified federal estate and gift tax exemption was $5 million per spouse.

If Congress does not extend the unified gift and estate tax exemption, it will automatically be reduced to $1 million beginning 2013. Taxpayers who may be subject to gift and estate taxes at such levels should thus take heed.

Federal Estate and Gift Tax Rates

Currently, both the estate and gift tax rates are a flat 35%. If Congress does not extend these rates, the estate tax rates will begin at 41%, and reach a maximum of 60% in certain cases (55% top rate plus a 5% surcharge on estates over a statutory amount), and the gift tax will have a maximum 55% rate. The Generation-Skipping Transfer (GST) tax rate will also revert to a 55% rate (up from the current 35% rate).

Portable Exemptions

Under current tax law, surviving spouses of married individuals who die in 2011 or 2012 may use federal estate and gift tax exemptions that their spouses did not take during their lives. However, the ability of taxpayers to use portable exemptions will also sunset at the end of this year if Congress does not extend them. Thus, taxpayers who may be facing estate and/or gift taxes may want to keep this in mind when planning if such unfortunate events occur.

Contact Sherayzen Law Office For Help With Your Estate and Tax Planning

Obviously, this article only provides a very small amount of some of the basic gift and estate tax rules currently in place. It does not offer any type of legal advice and should not be relied upon in determining your particular tax position. Please contact our experienced tax office for legal help with your estate and tax planning.

Last Estimated Tax Payments for the Tax Year 2011 are Due on January 17, 2012

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Estimated tax payments for the fourth-quarter of 2011 are due on January 17, 2012. The estimated tax payments should be made using Form 1040-ES. Note, if the due date for an estimated tax payment falls on a Saturday, Sunday, or legal holiday, the payment will be considered on time if it is made on the next business day.

This is the last chance to make the payment of estimated taxes for the tax year 2011.

Baindurashvili v. Helpful Hands Transportation, Inc., No. A11-60, Unpub. (Minn. Ct. App. 11/21/2011) (A case recently won by Sherayzen Law Office)

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This is a copy of the Minnesota Court of Appeals unpublished opinion in the case recently won by Mr. Eugene Sherayzen, the owner of Sherayzen Law Office, on November 21, 2011.

 

This opinion will be unpublished and
may not be cited except as provided by
Minn. Stat. § 480A.08, subd. 3 (2010).

STATE OF MINNESOTA
IN COURT OF APPEALS
A11-60

Avtandil Baindurashvili,
Respondent,

Vyacheslav Kirkov,
Respondent,

vs.

Helpful Hands Transportation, Inc.,
Relator,

Department of Employment and Economic Development,
Respondent.

Filed November 21, 2011
Reversed and remanded
Kalitowski, Judge

Department of Employment and Economic Development
File Nos. 25886858-3, 26006922-4

Avtandil Baindurashvili, Crystal, Minnesota (pro se respondent)

Vyacheslav Kirkov, Burnsville, Minnesota (pro se respondent)

Eugene A. Sherayzen, Minneapolis, Minnesota (for relator)

Lee B. Nelson, Amy R. Lawler, Department of Employment and Economic Development, St. Paul, Minnesota (for respondent Department of Employment and Economic Development)

Considered and decided by Stoneburner, Presiding Judge; Kalitowski, Judge; and
Peterson, Judge.

U N P U B L I S H E D   O P I N I O N

KALITOWSKI, Judge

In this certiorari appeal, relator transportation company challenges the determination by an unemployment-law judge (ULJ) that respondents, drivers who transported patients for relator, were employees rather than independent contractors and accordingly were eligible for benefits under the unemployment-benefits laws.  Relator argues:  (1) the ULJ’s findings do not support a determination that respondents were employees; (2) the ULJ erred by failing to follow the structural framework set forth in Minn. R. 3315.0555 (2009); and (3) the ULJ’s decision was arbitrary and capricious.  Because the ULJ made findings that are inconsistent with a determination of employee status and failed to follow the analytic structure of Minn. R. 3315.0555, we reverse and remand.

D E C I S I O N

Respondents Avtandil Baindurashvili and Vyacheslav Kirkov worked as drivers for  relator Helpful Hands Transportation, Inc. (Helpful Hands) from 2003 and 2007, respectively, until June 2010.  Helpful Hands contracts with insurance companies to provide nonemergency medical transportation and hires drivers to transport patients. Prior to 2009, Helpful Hands classified drivers as employees.  In April 2009, Helpful Hands began to treat drivers as independent contractors.

Baindurashvili and Kirkov applied for unemployment benefits after their separations from Helpful Hands.  Respondent Department of Employment and Economic Development (DEED) conducted an audit and determined that the drivers were employees for purposes of unemployment-benefits law.  Helpful Hands appealed the determinations and the matters were consolidated for a telephone hearing before the ULJ. The ULJ determined that Baindurashvili and Kirkov were employees of Helpful Hands.

Employers must contribute to the unemployment trust fund based on wages paid to employees.  See Minn. Stat. § 268.035, subd. 25 (2010).  But payments to independent contractors do not constitute wages under Minnesota unemployment law.  Nicollet Hotel
Co. v. Christgau, 230 Minn. 67, 68, 40 N.W.2d 622, 622-23 (1950).

Whether an individual is an employee or an independent contractor is a mixed question of law and fact.  Nelson v. Levy, 796 N.W.2d 336, 339 (Minn. App. 2011).  This court reviews a ULJ’s factual findings in the light most favorable to the decision and will not disturb them if sustained by substantial evidence.   Skarhus v. Davanni’s Inc., 721 N.W.2d 340, 344 (Minn. App. 2006).   Questions of law are reviewed de novo.  Ywswf v. Teleplan Wireless Servs., Inc., 726 N.W.2d 525, 529 (Minn. App. 2007).

Five factors are used to determine whether a worker is an employee or an independent contractor:  “(1) The right to control the means and manner of performance; (2) the mode of payment; (3) the furnishing of material or tools; (4) the control of the premises where the work is done; and (5) the right of the employer to discharge.”  Guhlke v. Roberts Truck Lines, 268 Minn. 141, 143, 128 N.W.2d 324, 326 (1964) (codified at Minn. R. 3315.0555, subp. 1).  Of these five factors, the two most important are “the right or the lack of the right to control the means and manner of performance,” and the right or the lack of the right “to discharge the worker without incurring liability.”  Minn. R. 3315.0555, subp. 1.   Subpart 3 sets forth  criteria to be considered when evaluating whether the right to control the means and manner of performance exists.  Minn. R. 3315.0555, subp. 3.  Subpart 2  provides additional factors that may be considered if analysis of the five essential factors is inconclusive.  Minn. R. 3315.0555, subp. 2.

Helpful Hands argues that the ULJ’s findings of fact as to the issue of control are contradictory and  inconsistent with his  ultimate conclusion  that the drivers are employees.  We agree.  The ULJ found,

A  driver, usually the driver in the most convenient location who is available, is contacted the day the service is needed and asked if he is able and willing to accept the assignment. If the driver declines, another driver is contacted. . . . [Helpful Hands] does not dictate how a driver does his job or what  route is driven and it does not require drivers to work specific hours.

The ULJ concluded, “ultimately there is little if any control to be had over how the actual transport is conducted.”  These findings suggest that Helpful Hands did not retain the right to control the drivers’ means and manner of performance and tend to support
independent-contractor status.

The ULJ did make other findings of fact that weigh in favor of employee status. But if the ULJ determined that other factors in the  Minn. R. 3315.0555 analysis outweighed these findings on the issue of control, explanation was necessary.  Because the ULJ failed to set forth  such  analysis, we are unable to review  the decision to determine whether it is supported by substantial evidence.   See Minn. Stat. § 268.105, subd. 7(d) (2010) (providing that this court may reverse or modify the decision of a ULJ if a party has been prejudiced by findings, inferences, conclusions or decisions that are unsupported by substantial evidence in view of the entire record as submitted).

We do not suggest that all factual findings relating to the factors in Minn. R. 3315.0555 must support the final determination of worker status.  Indeed, the various factors may  tend to support either determination and may be inconsistent with one another.  See St. Croix Sensory, Inc. v. Dep’t of Emp’t & Econ. Dev., 785 N.W.2d 796, 800-04 (Minn. App. 2010) (finding that some factors indicated control and an employment relationship, while others indicated a lack of control and an independentcontractor relationship, and holding that on the totality of the circumstances the workers were independent contractors).   But there must be a logical link between the findings on the important factor of the right to control the means and manner of performance and the ultimate conclusion.

Helpful Hands next argues that the ULJ failed to follow the analytic framework set forth in Minn. R. 3315.0555.  We agree.  The ULJ determined that analysis of two of the essential factors—the right to control the means and manner of performance and the right to discharge without incurring liability—was inconclusive but did not make a finding as to whether analysis of all five essential factors was inconclusive before addressing the additional factors.  See Minn. R. 3315.0555, subp. 1 (providing that if the five essential factors of subpart 1 are inconclusive, the additional factors of subpart 2 should be considered).  The ULJ also considered certain subpart 3 criteria as stand-alone factors and thus did not properly weigh them in his analysis of control of the means and manner of performance.  See id. at subp. 3 (setting forth “criteria for determining if the employer has control over the method of performing or executing services”).

Finally, Helpful Hands contends that the ULJ’s decision is arbitrary and capricious because the ULJ relied on a factor—the importance of the worker to the company—that is not included in Minn. R. 3315.0555.  We disagree.  An agency ruling is arbitrary and capricious if the agency relied on factors not intended by the legislature.   Citizens Advocating Responsible Dev. v. Kandiyohi Cnty. Bd. of Comm’rs, 713 N.W.2d 817, 832 (Minn. 2006).  The ULJ’s discussion of the importance of the drivers to Helpful Hands’s business informed the ULJ’s analysis of whether the workers’ activity was performed in the course of the employer’s business.  Minn. R. 3315.0555, subp. 2H includes whether services are performed in the course of the employer’s business as an additional factor in the worker-status analysis, and provides,  “services  which  are a part or process of the employer’s trade or business are generally performed by individuals in employment. . . . Process refers to those services which directly carry out the fundamental purposes for which the organization, trade, or business exists . . . .”  The ULJ’s consideration of the importance of the drivers to the company did not depart from the rule and was  not arbitrary and capricious.

In conclusion, we reverse and remand for findings of fact and conclusions of law consistent with this opinion in such proceedings as the ULJ deems appropriate.

Reversed and remanded.

Eugene Sherayzen, Esq. Wins a Minnesota Court of Appeals Case

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On November 21, 2011, the Minnesota Court of Appeals ruled in favor of Helpful Hands Transportation, Inc. (HHT) – the client of Sherayzen Law Office – and reversed the unemployment law judge’s (ULJ) determination that HHT’s workers should be classified as employees. Judge Kalitowski wrote the opinion.  Two respondents were listed as “pro se”, but the opinion of the ULJ was defended by Minnesota Attorney General’s Office on behalf of the Department of Employment and Economic Security (DEED). Mr. Eugene Sherayzen represented our client throughout the case.

At the center of the issue was whether the ULJ erred in its determination that HHT’s workers were employees.  Mr. Sherayzen’s chief arguments were: (1) the ULJ’s factual findings are inconsistent with his legal conclusion, and (2) the ULJ failed to follow the analytical framework of Minnesota Rule 3315.0555.   The Court of Appeals agreed with both arguments and reversed the decision.

A copy of the court opinion will be posted on our website later.

Contact Sherayzen Law Office For Appellate Litigation

If you have a case that you wish to appeal to the Minnesota Office of Administrative Appeals, Minnesota Court of Appeals or Minnesota Supreme Court, contact Sherayzen Law Office.  Our experienced appellate tax firm will assist you in filing the case, constructing efficacious legal arguments, drafting compelling legal briefs,  and zealously representing your interests in applicable courts.

Form 8938 Penalties

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As discussed in an earlier article, Form 8938 is used by specified individuals to report the ownership of specified foreign financial assets if the total value of those assets exceeds an applicable threshold amount.

Similarly to most international tax forms issued by the IRS, Form 8938 has its own system of penalties. What makes Form 8938 penalties stand out are the scope of coverage, the severity of penalties, and the effect on the IRS statute of limitations.

A. Scope of Form 8938

Form 8938 is much more intrusive than the now-famous FBARs. While the threshold amount for filing the FBAR is much lower (only $10,000), the type of information requested by Form 8938 is much broader. The FBARs only require disclosure of foreign bank and financial accounts.

Form 8938, however, requires the disclosure not only of the interest held in foreign bank and financial accounts (which may also be somewhat different from the FBAR definition), but also of the interest held in foreign entities and “other foreign financial assets” – the definition of which includes an array of varies types of swaps, contracts, and stocks.

Moreover, Form 8938 directly ties assets disclosed on Forms 3520, 3520-A, 5471, 8621, 8865 and 8891 to the assets that need to be reported on Form 8938 (pursuant to the “duplication” rule, the taxpayers do not need to report on Form 8938 the assets already reported the five aforementioned forms). Therefore, Form 8938 makes it much easier for the IRS to to uncover potential issues with the other six forms (all of which have their own applicable penalty standards).

A word of caution: even if a specified foreign financial asset is reported on any of the six forms listed above, the taxpayer must still include the value of the asset in determining whether the aggregate value of the taxpayer’s specified foreign financial assets is more then the reporting threshold that applies to the taxpayer.

Finally, the IRS can use Form 8938 to analyze if the taxpayer was supposed to file the FBAR and failed to do so (or failed to do so correctly).

Thus, it becomes obvious that Form 8938, which popularly known as a “Son of FBAR”, far excels its father-FBAR in enhancing the IRS capacity to gather additional taxpayer data, use this data for deeper analysis of the taxpayer non-compliance, and imposing civil and criminal penalties on non-compliant taxpayers.

B. Form 8938 Penalties

Form 8938 has a severe penalty system.

1. Failure-to-File Penalty

If the taxpayer is required to file Form 8938, but fails to file a complete and correct Form 8938 by the due date (including extensions), he may be subject to a penalty of $10,000.

If the IRS discovers non-compliance and mails the corresponding notice to the taxpayer, but the taxpayer still does not file Form 8938 within 90 days after the mailing of the notice, additional penalties of $10,000 may be imposed for each 30-day period (or part of a period) of non-compliance after the expiration of the 90-day period. This additional penalty is currently capped at $50,000.

What about the situations where the taxpayer believes that the assets in question are below the threshold amount but the IRS asks the information about the assets in any case? In this case, if the taxpayer fails to respond to the IRS inquiry, the IRS has the power to presume that the taxpayer owns specified foreign financial assets with a value of more than the reporting threshold (even if it is not so in reality). Hence, the IRS can impose failure to file penalties if Form 8938 is not filed.

Common to other forms, From 8938 instructions provide for the reasonable cause exception. However, to avoid the penalties, the taxpayer must affirmatively show the facts that support a reasonable cause claim. The IRS does not consider the potential imposition of civil and criminal penalties by a foreign jurisdiction as a reasonable cause.

Keep in mind that the married taxpayers who file a joint income tax return have a joint and several liability for all IRS penalties.

2. Accuracy-Related Penalty

While Form 8938 is a purely reporting requirement, it contains a provision related to enhancing the accuracy-related penalties. If the taxpayer underpays his tax as a result of a transaction involving an undisclosed specified foreign financial asset, the IRS may impose a penalty of 40% of the underpayment.

For example, if the taxpayer does not report a foreign pension on Form 8938 and he receives a taxable distribution from the pension plan that he did not report on his income tax return, the taxpayer will be subject to the 40% penalty on the underpayment.

The same would be true with respect to any specified foreign financial asset, including ownership of shares in a foreign corporation or an interest in a foreign partnership.

3. Civil Fraud Penalty

If the taxpayer commits civil fraud which results in non-payment of penalties and involves Form 8938, the taxpayer will be subject to the civil fraud penalty of 75% of the underpayment due to fraud.

4. Criminal Penalties

In addition to civil penalties, the IRS may initiate a criminal prosecution of (and impose criminal penalties on) the taxpayers who fail to file Form 8938, fail to report an asset on Form 8938 or have an underpayment of tax.

C. Form 8938 Effect on the Statute of Limitations

Similar to other FATCA provisions (with respect to Forms 5471, 8621, 8865, et cetera), the IRS greatly extended the statute of limitations for the purposes of Form 8938. Unlike the other forms, however, Form 8938 contains a singular provision without a precedent.

The IRS sets forth this general rule in its instructions: the failure to file Form 8938 or the failure to report a required specified foreign financial asset keeps the statute of limitations open for all or a portion of the taxpayer’s income tax return. Once the correct Form 8938 is filed, the statute of limitations is subject to the common three-year rule (i.e. the IRS has three years to audit the taxpayer’s tax return and assess additional tax and penalties), subject to the aforementioned singular provision.

This provision states that, if the taxpayer does not include in his gross income an amount relating to one or more specified foreign financial assets and this amount is more than $5,000, then the statute of limitations is extend to six years after the taxpayer files a complete tax return that contains Form 8938.

Furthermore, for the purpose of the six-year extended statute of limitations provision, “specified foreign financial assets” include any such asset regardless of: (i) the reporting threshold that applies to the taxpayer, or (ii) whether this asset is excepted from reporting because it was reported on certain other forms (such as Form 5471, 8621, 8865, et cetera).

These provisions constitute an incredible increase in the IRS power to extend the statute of limitations and assess additional tax and penalties on the taxpayers.

Contact Sherayzen Law Office For Legal Help With Form 8938

Given the severe penalties that accompany Form 8938, it is very important that you properly comply with the Form’s requirements. Therefore, if you need to file Form 8938, contact Sherayzen Law Office for legal help. Our experienced international tax compliance firm will guide you through the complex web of the U.S. international tax reporting requirements and assist you in bringing your tax affairs in full compliance with the U.S. tax system.