Friday, November 30, 2007

IRS Changes Towards Charities

On November 10, 2007, Steven T. Miller, Internal Revenue Service Commissioner for Tax Exempt and Government Entities, spoke about "The IRS’s Role in an Evolving Charitable Sector" (PDF, 7 pages), in a presentation before the Philanthropy Roundtable.

These remarks, along with his testimony on "Oversight of Tax-Exempt Organizations" (PDF, 14 pages), on July 24, 2007, before the House Ways and Means Committee, address the renewed intentions & objectives of the IRS in its regulation of tax-exempt organizations.

That hearing had investigated the effectiveness of past IRS regulation of tax-exempt organizations, according to a posting by Gene Takagi, Esq., entitled "Congressional Hearing on Tax-Exempt Charitable Organizations - July 24", on his "Nonprofit Law Blog":

The Subcommittee questioned the witnesses about a June 2, 2007 GAO Report ["Thousands of Organizations Exempt from Federal Income Tax Owe Nearly $1 Billion in Payroll and Other Taxes"] stating that "nearly 55,000 exempt organizations had almost $1 billion in unpaid federal taxes as of September 30, 2006."

Miller responded that his office lacks sufficient resources to properly monitor all charities and requested Congress' support for the President's 2008 budget which provides for a 10.8 percent increase to TE/GE.

He also identified five areas of concern: (1) charitable contribution overvaluation, (2) charities established to benefit the donor, (3) a blurring of the line between tax-exempt and commercial sectors, (4) executive compensation and inurement, and (5) regulation and reporting of political activities.
Summaries & resource links regarding that hearing are available on the website of the Alliance for Charitable Reform here.

For more practical guidance about recent significant changes already in place, I highly recommend an article that appeared in the December 1, 2007, issue of the
American Bar Association Journal, also posted online, entitled "The IRS Gets Less Charitable", by Samuel L. Braunstein, Esq., & Carol F. Burger, Esq.

This article looks at tax-exempt regulation from the other side of the coin -- that of the charitable donors & charitable recipients. This article is an excellent summary of the effects of "new tax rules for charitable deductions [that] create hurdles to taxpayer philanthropy".

Generosity is a noble trait shared by many Americans. Traditionally, this generosity has been rewarded with favorable tax treatment by the Internal Revenue Code and Internal Revenue Service reg­ulations, primarily in the form of deductions pegged to qualifying charitable contributions of cash or property. * * *

But the federal tax laws are getting stingy in their treatment of charitable donations—one of the few remaining deductions available to a broad range of taxpayers—as part of a larger effort to clamp down on the tendency of taxpayers to “exaggerate” deductions. Business expenses claimed by self-employed taxpayers are also getting more attention from the IRS. * * *
The article reviews some sources for recently implemented restrictions in charitable giving:
  • New restrictions on deductions for charitable donations contained in the Pension Protection Act of 2006.
  • Renewed Treasury Depart­ment attention to the "donor-advised fund" vehicle for charitable giving.
  • New rules on contributions of used vehicles, boats and airplanes.
The article contrasts charitable gifts consisting of cash versus appreciated property (to avoid capital gains tax), and mentions limitations in certain situations applicable to gifts involving substantial capital gains.

The article addresses the "hot topic" of valuation & reporting of tangible personal property donated to charities, as affected by the charity's subsequent use of that property. It also notes other specialized areas for concern, including donated assets burdened by mortgage or partnership liabilities, donated securities of a corporation in liquidation or buyout, and partial interest (fractional or time-limited) gifts of property.

The article concludes by mentioning, in some detail, the new limitations placed upon the operations of charities, which began with the issuance of Executive Order 13224 on September 23, 2001, in response to threats from foreign terrorists.

Of course, the Internal Revenue Service offers its official, updated guides & summaries, along with source documentation, for many of the recent changes affecting charitable contributions.
See: "Pension Protection Act of 2006 Revises EO Tax Rules"; Publication 526 ("Charitable Contributions -- 2007"); and "Tax Information for Charities & Other Non-Profits".

Given the charge for more security & less abuse, there will be further restrictive changes to come for charitable organizations & their donors.

Wednesday, November 28, 2007

ABA's Estate Planning Primers Online

The American Bar Association, though its Section of Real Property, Trusts & Estates Law, offers to the public some good, free personal & estate planning primers, online.

First, check out ABA's "Guide to Wills & Estates", 2nd Edition (2004):

Estate planning is for everyone — it's a way of caring for your loved ones, seeing they are provided for, and making sure your hard-earned property is distributed according to your wishes.

Learn what you need to do to save money and assure that your plans are carried out exactly as you wish. * * *
This Guide is downloadable in its entirety; or it can be viewed online by chapters, all in PDF fromat, which include:
Ch. 1: Getting Started

Ch. 2: Transferring Property without a Will

Ch. 3: Making a Will

Ch. 4: Trusts

Ch. 5: Living Trusts

Ch. 6: Common Estate Planning Situations

Ch. 7: Special Considerations

Ch. 8: Death and Taxes

Ch. 9: Changing Your Mind: Changing, Adding to, or Revoking Your Will or Trust

Ch. 10: Choosing the Executor or Trustee

Ch. 11: Planning Now to Make Things Easier for Your Family

Ch. 12: When You Can't Make the Decision: Living Wills, Powers of Attorney, and Other Disability Issues
The Guide also can be purchased online at the ABA's Webstore for $17.00.

Next, check out the advisories reposted by the ABA on its consumer webpage dedicated to "Wills & Estates".
This section contains basic information about estate planning and will writing. Click on the links below for more information on this subject area. [Note: Some are posted in PDF, others in HTML.]
Then, read the extensive "Estate Planning FAQs" (last updated 03/25/05) posted for public education by the ABA-RPT&E Section with this purpose in mind:
To provide answers to the most common questions about the estate planning process, probate and administration of estates, transfer taxes and tax planning for your assets, and disability planning.
These are some of the FAQ's topics:
I) Estate Planning Overview
II) An Introduction to Wills
III) Revocable Trusts
IV) Power-of-Attorney
V) Living Wills, Health Care Proxies, and Advance Health Care Directives
VI)The Probate Process
VII) Planning With Retirement Benefits
VIII) Guidelines for Individual Executors and Trustees
IX) The Lawyer's Role
X) Who We Are
XI) Tax Changes From 2001
Also, look for the ABA's explanation of Healthcare Directives found under the heading "Law for Older Americans".

For the most current information offered by the ABA on such topics, you can read the
latest edition of the RPTE eReport (October, 2007), which contains "Trust & Estate News".

Since October 31, 2006, these bi-monthly RPTE eReports (which are archived online) have noted both recent developments for trust & estate practitioners, and news for section members.

These are all good, generic treatments of these topics that can provide orientation & background.

However, since many such laws on these topics are state-specific -- and not at all uniform -- seek advice and conduct planning based on specific facts, considered under a particular state's laws, utilizing the services of an experienced practitioner.

Tuesday, November 27, 2007

Email from the "Elvis Place"

Would you like to send email after your end in this earthly existence? You could do so through an electronic timed-release commercial email notification service called "Deathswitch".

This service has existed since at least the year 2000, when it was mentioned in a posting entitled "Digital Tontine", by Matthew S. Hamrick on the Stacking Fault blog; so it is not new.

I noticed it early this year, when it was mentioned again in postings by marketers, not lawyers or geeks.
See: "Email from Beyond the Grave" (01/12/07), by John Whiteside on the The Opinionated Marketers blog; and "Deathswitch" (01/17/07), by Maureen Rogers on the Pink Slip blog.

These blog postings were prompted, in part, by an article entitled "
A brief history of death switches", written by that company's founder, Dr. David Eagleman, & published in the October 19, 2006 issue of the scientific journal Nature.

There is no afterlife, but a version of us lives on nonetheless.

At the beginning of the computer era, people died with passwords in their heads and no one could access their files. * * *
The marketers appeared intrigued by this innovative idea -- the one in the second paragraph, not the statement in the first paragraph.

For $19.95 annually, Deathswitch enables subscribers to "bridge mortality" by communicating important confidential information after death through email messages written by subscribers & addressed from the company to targeted survivors.

Possible uses could include: expression of "final wishes", disclosure of "unspeakable secrets", passage of "love notes", and even delivery of the "last word" in an argument. More recently, the emphasis of this service appears to be on password information that could allow post-mortem access to computer software or online data.

The "event" initiating such email notifications would be the non-responsiveness of a subscriber to periodic email messages sent by the company requiring reply confirmation. After no reply from the subscriber for a defined time, the pre-arranged email deliveries would be initiated by the company.

What a surprise for the recipients -- whether delivered properly, or erroneously!

This trip-wire mechanism, and the possibilities for premature delivery, remind me of the 1964 movie "Fail-Safe", starring Henry Fonda & Walter Matthau:
A technical malfunction in the Pentagon's strategic control system causes an erroneous order to be sent to a B-58 squadron on a routine training mission instructing the bombers to fly beyond their fail safe distance. At this point the flight crew are trained to cease communications and prepare to fulfill their objective by bombing Moscow. * * *
This is just one approach to the growing problem of disclosure of sensitive, important electronic information after death to permit proper administration of interests.

There are others, including some that minimize the potential of nuking Moscow in the process.

"It will have you sitting on the brink of eternity!"
-- Tagline of the movie "
Fail-Safe" (10/07/64)

Monday, November 26, 2007

Ebay Sellers as "Auctioneers" in PA

If a fiduciary in Pennsylvania decides to consign tangible personal property for liquidation through an online listing agent, like an eBay selling service, check for its auctioneer's license.

On November 17, 2007, an article entitled "
Ebay sellers pushed to get auctioneer licenses" reported strict enforcement of PA laws & regulations governing auctioneers that require online sellers of property owned by others either to serve apprenticeships with traditional auctioneers or to take college auctioneering courses, for certification.

The article
by Ford Turner, published by the Patriot-News (Harrisburg, PA), reported the position recently taken by the Pennsylvania State Board of Auctioneer Examiners:

The legal clout behind the examiners board is wielded by the Pennsylvania Department of State. Spokeswoman Leslie Amoros said it backs up 27 licensing boards, including those that deal with nurses, landscape architects and barbers.

The purpose, Amoros said, is to maintain the integrity of the professions. In the debate about online auctioneering, she said, the state is trying to protect consumers and apply the law, which has no language specific to online selling.

“Our position is that brokers who accept goods from sellers on consignment and then sell goods on eBay and retain a percentage ... must have an auctioneer license,” she said.

The enforcement does not affect people who sell personal belongings on eBay. It only applies to vendors who sell other people’s possessions. * * *

The applicable statute is the Auctioneer and Auction Licensing Act, 63 P.S. §§734.1 et seq.; and the relevant administrative rules are Regulations of the State Board of Auctioneer Examiners, 49 PA. CODE §§1.1 - 1.31. These govern auctioneer licensure procedures.

Another article, entitled "Online Sellers Need Pa. Auctioneer's Licenses", by Bradley Vasoli, published November 20, 2007, in The Bulletin (Philadelphia, PA), confirmed the penalties sought to be applied to unlicensed online sellers who are not owners of the property they list for sale.
Online merchants who sell secondhand items on eBay face a high legal hurdle set up for them by the State Board of Auctioneer Examiners.

Pennsylvania's Auctioneer Licensing Act requires anyone who makes a living taking bids on goods not their own to serve as an apprentice auctioneer for at least two years or to complete 20 credit hours in auctioning at a school approved by the Examiners Board.Under current Pennsylvania law, that goes for the eBay sellers as well.

State authorities have recently ramped up enforcement of the requirements. This has put a significant onus on thousands of Pennsylvanians who derive most of their income buying goods and selling them on the auction site eBay or other Web sites.

Some residents in that line of work, like Barry Fallon who owned iSold It on eBay in Lower Paxton Township, and Mary Jo Pletz who ran a secondhand antique e-commerce operation in Walnutport, face charges by the Pennsylvania Department of State. * * *
An article entitled "eBay Opposes Regulation while Pennsylvania Sellers Face Fines", by Ina Steiner, posted November 20, 2007, by AuctionBytes (a trade publication for online merchants), confirmed the enforcement effort in PA and reviewed opposition to it:
eBay consignment sellers in Pennsylvania are facing $1,000 fines if they do not comply with the state's auctioneering licensing requirements. A Pennsylvania newspaper article reports that at least two bills are awaiting committee action in the Legislature designed to deal with eBay consignment sellers.

AuctionBytes wrote in April about the plight of a Pennsylvania seller who is being forced to get an auctioneer's license to operate his eBay drop-off store.
[See: "Pennsylvania Latest Battleground in eBay Consignment-Sales Regulation" (04/23/07).]

eBay said it opposes attempts to extend state auction licensing requirements to eBay sellers, or to eBay itself.

eBay spokesperson Catherine England said Monday that while eBay transactions are commonly referred to as auctions, there are several fundamental differences between traditional regulated auctions and the transactions that occur over the eBay platform. * * *

A chart of laws affecting eBay consignment sellers is available on the AuctionBytes website.

eBay states its opposition to state regulation of online sellers under auctioneer laws, and notes some recent state law changes, in its position statement "Auctioneering Regulations: eBay opposes attempts to extend state auction licensing requirements to either eBay sellers or eBay itself".

This enforcement policy adds to the business challenges faced recently by online sellers of others' property. See: "EBay drop-off stores rethink business model", by Steve Mellon, published together with "Auctioneers licenses an issue for eBay sellers", by Teresa F. Lindeman, on May 3, 2007, in the Pittsburgh Post-Gazette.

The Patriot-News article mentioned two pending bills that would change this situation in Pennsylvania, if adopted:

“The auction laws were written before the computer age, and there needs to be some change,” said Allen Shissler, a Tioga County farmer who left the auctioneer examiners board within the last 18 months. “But the board is very careful on how they want to evolve the law. ... You don’t want the politicians to be involved too much, or they will have a heyday.”

At least two bills awaiting committee action in the Legislature were designed to deal with eBay auctioneering. Their outcome will have broad implications.

While there are 2,100 licensed auctioneers in Pennsylvania, the lead sponsor of a state Senate bill, Sen. Rob Wonderling, R-Montgomery, said there are more than 15,000 state residents who make most of their money by trading and selling on the Internet

His bill would remove any requirement for licensing residents who use online trading platforms. Those who demand they have licenses, he said, do not understand the modern, electronic economy. * * *

Another bill in the state House of Representatives would require online sellers of other people’s items to register, pay a fee of about $100, and secure a bond that would cost about $50, according to state Rep. Michael Sturla, D-Lancaster, the lead sponsor. The bill would not require anyone to go to auctioneers’ school, he said.

Sellers should register with the state, he said, because the eBay system allows sellers to submit bids on their own items, driving up prices in a false manner.

“There is a consumer protection issue here,” Sturla said. * * *

Sturla's bill in the House is House Bill 1899, P.N. 2733; and Wonderling's bill in the Senate is Senate Bill 908, P.N. 1080.

One motivation for state regulation of online sellers is the potential for consumer fraud. See: "eBay fights States who enforce auctioneer license requirements", by Burleson Consulting, posted on eCommerce Tips in May, 2007 (written by a person who had been defrauded). There are many schemes utilizing eBay as a vehicle. See: "eBay Accounts Hijacked and Used to Scam Buyers", by Tim Stevens, posted on AOL News' Switched, on October 22, 2007, which discussed online fraud in Great Britain.

There is another very powerful reason justifying updated state regulation of online resellers: Fencing of stolen goods. See: "E-bay drop-off stores balking at regulation -- States want to prevent sale of stolen items", by Katie Hafner, posted by the International Herald Tribune on May 25, 2005.

This concern is real in Pennsylvania. The PA Attorney General had conducted an investigation for almost two years that resulted in criminal charges in August, 2006, where eBay was utilized to "fence" stolen goods. See: Press Release, "
Attorney General Corbett & Blair Co. DA Consiglio announce arrest of four in "Operation eBay large-scale shoplifting and Internet sales schemes" (08/01/06).

The article,
"Pennsylvania Busts eBay Scam Rings", posted by (08/05/06), quoted from that Press Release:
Agents from the Pennsylvania Attorney General's Bureau of Narcotics Investigation (BNI), along with Pennsylvania State Police and local law enforcement, have captured four principal figures in two large-scale conspiracies that sold thousands of dollars worth of merchandise stolen from stores throughout central Pennsylvania.

Attorney General Tom Corbett said the 22-month long investigation, known as "Operation eBay," focused on the use of online auctions and Altoona area pawn shops to resell sporting goods, appliances, electronics and other items which were stolen from the shelves of local retail stores. The ring also sold industrial equipment, including compressors, paint sprayers and other heavy-duty equipment stolen from businesses and construction sites throughout the region. * * *

Corbett explained that individuals who unwittingly purchased stolen items from Friedenberger via eBay auctions would often pay for the items using checks or Paypal - an online system operated by eBay. * * *

As technology enables consumer abuse or criminal conduct to take new forms, the law should change to regulate conduct effectively. Perhaps a broad-based, in-depth study should be conducted by the Legislature in this developing area.

In the meanwhile, owners of personal property, including fiduciaries, who utilize an online seller's services in Pennsylvania, should check for an auctioneer's certification issued under the current law.

Update: 05/05/08:

On May 4, 2008, Auction Bytes
posted an article entitled "Upcoming Licensing Hearing Could Impact Many eBay Sellers", by Ina Steiner, who provided a comprehensive update of the situation involving Barry Fallon.
Small-business owner Barry Fallon was scheduled to appear before the Pennsylvania State Board of Auctioneer Examiners on May 12, 2008, to face charges of conducting an auction on eBay and operating an auction house without a license. Fallon sold his consignment drop-off store in 2007 after regulators required him to get an auctioneer's license to operate the store, which operated as an iSold It franchise.

"It would be wonderful if a lot of Pennsylvania eBay Trading Assistants and Power Sellers could attend this hearing in support of all of us," Fallon said. "A show of strength might help sway their decision. If I am convicted everyone else in the state will be next. Any promotion of such mass show of support would greatly be appreciated."

Fallon said he would be defending himself since a lawyer would cost over $10,000. He faces fines of at least $2,000. * * *

The article contains many links and up-to-date information. It concludes with a link to an interview, available online: "You can hear an interview with Barry Fallon conducted last week on the Ecommerce Industry Soundbytes podcast."

Wednesday, November 21, 2007

Caregiving Noted in Survey at Thanksgiving

A Press Release issued on November 20, 2007, entitled "New Survey Finds That Half of Caregivers Spend 10 Percent of Their Income Caring for an Older Loved One", quantifies how caregivers spent their own assets, time, and opportunities for the benefit of the loved ones they serve.

The study provides the "First, In-Depth Look at What Caregivers Spend and What They Sacrifice."

Caring for a loved one 50 years or older-as many as 17 million Americans-spend more than 10 percent of their annual income on caregiving expenses and often sacrifice their own financial and personal well-being to do so, according to a new Evercare/National Alliance for Caregiving (NAC) study.

The Evercare/NAC Study finds that caregivers who have annual median income of $43,026 spend an average $5,531 a year on caregiving. At lower income levels, the annual average costs remained about $5,500, making their financial burden even heavier. * * *
The Press Release noted the study's more detailed findings about caregivers' expenditures of money for the benefit of seniors (50 years or older) in their care:
  • One in three respondents (34 percent) has used their own savings to cover the cost of caregiving
  • One-quarter (23 percent) have cut back on their own health care spending
  • 38 percent are saving less or not at all for their children's future
  • Many cut back on basics: clothing, utilities or transportation (27 percent) and groceries (25 percent)
  • 23 percent cut back on personal medical or dental expenses
It further reported about the most common caregiving expenses that respondents incurred:
  • Household goods, food and meals (42 percent)
  • Travel and transportation costs (40 percent)
  • Medical co-pays and pharmaceuticals (31 percent)
  • Medical equipment and supplies (22 percent)
  • Clothing (21 percent).
Perhaps more important was the commitment of time:
More than half of the Study respondents (53 percent) did not work while 37 percent of the respondents said they had quit their job or reduced their work hours.

The respondents also reported they were spending on average 35.4 hours a week caring for their loved one with 19 percent providing care for more than three years and 32 percent caregiving for more than five years.
To enable such major expenditures of funds and time in caregiving, respondents were making significant sacrifices:
  • Cutting back on leisure activities (49 percent) and vacations (47 percent)
  • Saving less or not at all for their children's future (38 percent)
  • Using their savings (34 percent)
  • Cutting back on basics such as clothing, utilities or transportation (27 percent) and groceries (25 percent)
  • Cutting back on personal medical or dental expenses (23 percent)
The Press Release briefly acknowledged other tolls paid by the caregivers: "[S]tatistics from a 2005 brief provided by The Commonwealth Fund show that caregivers are twice as likely as the general population to develop multiple chronic illnesses." See: "A Look at Working-Age Caregivers’ Roles, Health Concerns, and Need for Support" (August, 2005, PDF, 12 pages); and its website topic "Care of the Elderly".

So, at Thanksgiving, give thanks for caregivers. Honor those who give daily, practically, unselfishly, from their "time, treasure, and talents", for others.

Tuesday, November 20, 2007

Medicare Part D Enrollment Opens with Outreach & Education

On November 15, 2007, the Centers for Medicare & Medicaid Services issued a Press Release entitled "2008 Open Enrollment for Medicare Part D Prescription Drug Coverage and Medicare Advantage Plans Begins Today", noting that this enrollment period will end on December 31, 2007.

The U.S. Department of Health and Human Services (HHS) announced that, beginning today, Medicare beneficiaries will be able to begin making enrollment changes in their health and prescription drug coverage for 2008, if necessary.

The Medicare annual Open Enrollment Period for prescription drug plan runs from Nov. 15 through Dec. 31, 2007. * * *

“Now is the time for beneficiaries to prepare and compare their health and prescription drug coverage options and choose the plan that best meets their needs,” HHS Secretary Mike Leavitt said. * * *

HHS’ Centers for Medicare and Medicaid Services (CMS) encourages all beneficiaries to act soon to compare their current plan with other plan options. If they are satisfied with their current plan, they do not need to do anything in order to maintain coverage. CMS wants eligible beneficiaries who do not have prescription drug coverage to know that, if they wait, they may pay a penalty on their premium. * * *

The Press Release recommended various resources available on the Medicare website, including the updated, 2008 Medicare handbook, "Medicare & You". This publication, previously mailed in print to beneficiaries in October, provides tips on selecting a plan and an overview of plan options.

The Press Release promoted the enhanced online Medicare Prescription Drug Plan Finder options provided on the Medicare website by use of search tools and data updated for 2008:
The Press Release also mentioned renewed fourth quarter public outreach & educational efforts by CMS in promoting this Medicare Part D enrollment period.
The 2007 Medicare bus tour, Working Together for Better Health, is touring 180 cities across the country from Oct. 2 through Dec. 31, joining community efforts and hundreds of partners nationwide to assist Medicare beneficiaries with their health and prescription drug plan options.

The initiative features educational materials that are easy to understand and geared towards specific minority groups. Outreach messages will target African American, Hispanic, Asian American Pacific Islander and Tribal communities. Information and applications are also available in English, Spanish, Chinese, Korean and Vietnamese.* * *

Educational information will be provided through print materials, radio and Internet banner ads. In addition, CMS partners including the SHIPs, Area Agencies on Aging and local community providers will be reaching out to beneficiaries and helping with enrollment. * * *
As part of that outreach & education, the Pennsylvania Department of Aging updated its website on November 19, 2007, with a News Release entitled "Local Meetings Will Help Pennsylvanians to Choose Among Medicare Drug Plans":

Secretary of Aging Nora Dowd Eisenhower today urged older adults and other Medicare beneficiaries to attend local enrollment meetings designed to help them choose a federal Medicare Part D prescription drug plan. Meetings will be held across the state. * * *

Secretary Eisenhower stressed the importance of considering the “three C’s” when choosing among the Part D plans:
  • Coverage: Check to see if your medications are covered on the plan’s formulary;
  • Cost: Compare your current prescription costs to the costs of other Medicare drug plans (premiums, deductibles, co-payments);
  • Convenience: See if your current pharmacy works with the plan and whether they offer a mail order option. Some plans may require Step Therapy, which means that they may require you to first try a certain drug to treat a medical condition before they will cover a different drug for that same condition. * * *
The News Release noted that the educational meetings, as organized by PA DoA and its 52 local Area Agencies on Aging, will be "led by volunteers from the department’s APPRISE program, which offers free, unbiased health insurance counseling to Medicare beneficiaries."

These are the topics & objectives of the sessions:
  • Complete a Medicare Part D plan comparison based on individual prescriptions & needs
  • Explain the various costs involved with the Medicare Drug Plans in a local area
  • Offer tips on how to save money during the coverage gap
  • Assist with on-line enrollments
The Medicare meeting schedule, by county in Pennsylvania, is available online through a link on the home page of the PA DoA's website, or you can access it directly here.

Medicare beneficiaries may also contact APPRISE, toll-free, at 1-800-783-7067, for information.

“This is an important time for beneficiaries to review their current coverage
and make a decision

that will give them peace of mind for the rest of the year."
-- CMS Acting Administrator Kerry Weems.

Monday, November 19, 2007

IRS Gets Comments on "Rudkin" Regs Proposed

On November 14, 2007, at 10 a.m., a hearing was held by the Internal Revenue Service at its offices in Washington, D.C., to receive comments about the Notice of Proposed Rulemaking on Section 67 Limitations on Estates or Trusts (Internal Revenue Bulletin No. 2007-36), issued September 4, 2007.

That Notice was summarized as follows:

This Notice contains proposed regulations that provide guidance on which costs incurred by estates or non-grantor trusts are subject to the 2-percent floor for miscellaneous itemized deductions under section 67(a). The regulations will affect estates and non-grantor trusts. This document also provides notice of a public hearing on these proposed regulations.

The Notice acknowledged inconsistent federal court decisions from various circuits interpreting IRC Section 67(a).
The issue in each case has been whether the trust’s costs (specifically, investment advisory fees) “would not have been incurred if the property were not held in such trust or estate.”

In O’Neill v. Commissioner, 994 F.2d 302 (6th Cir. 1993), the Court of Appeals for the Sixth Circuit held that investment advisory fees paid for professional investment services were fully deductible under section 67(e)(1) where the trustees lacked experience in managing large sums of money. The court found that, under state law, the trustee was required to engage an investment advisor to meet its fiduciary obligations and to incur fees that the trust would not have incurred if the property were not held in trust. The court held that estate or trust expenditures that are necessary to meet specific fiduciary obligations under state law are not subject to the 2-percent floor.

In contrast, in Mellon Bank, N.A. v. United States, 265 F.3d 1275 (Fed. Cir. 2001), Scott v. United States, 328 F.3d 132 (4th Cir. 2003), and Rudkin v. Commissioner, 467 F.3d 149 (2d Cir. 2006), the courts held that investment advisory fees are subject to the 2-percent floor.

These courts read the language of section 67(e)(1) differently than the Sixth Circuit. Specifically, the courts in Scott and Mellon Bank concluded that a trust expense is subject to the 2-percent floor if it is an expense “commonly” or “customarily” incurred by individuals; and the court in Rudkin looked to whether such an expense was “peculiar to trusts” and “could not” be incurred by an individual. * * *

The result of this lack of consistency in the case law is that the deductions of similarly situated taxpayers may or may not be subject to the 2-percent floor, depending upon the jurisdiction in which the executor or the trustee is located. * * *
The IRS determined to issue proposed regulations to resolve the situation.

That was quite unusual -- and somewhat controversial -- because the Supreme Court of the United States already had granted a review of these conflicting federal circuit court decisions. For background about the dispute involving William L. Rudkin Testamentary Trust v. Commissioner (PDF, 19 pages), 467 F.3d 149, 98 AFTR2d 2006-7368 (2d Cir. 10/18/06), see PA EE&F Law Blog postings: "Rudkin" Regulations Proposed During Appeal (08/02/07); and Bankers Associations File Amicus Brief in Rudkin Case (09/24/07). Furthermore, the proposed regulations would create rules going beyond even supportive court decisions.

In anticipation of the October 24th deadline for submission of written comments about the proposed regulations, the American Bar Association sent a letter, dated October 23, 2007
(PDF, 1 page), relating to the "Proposed Regulations Relating to Limitation on Estates or Trusts Deductions (REG-128224-06)".

The comments, derived from its Tax Section and its Real Property, Trusts & Estate Law Section, were brief:
The interpretation of section 67(e) will be before the United States Supreme Court in the current term (Rudkin v. Commissioner, 467 F.3d 149 (2nd Cir. 2006), cert. granted sub nom. Knight v. Commissioner (S. Ct. Doc. No. 06-1286)).

Therefore, we respectfully request that the Treasury and the Service consider deferring 1) the
submission date for the comments on the Proposed Regulations, 2) the hearing date for the comments on the Proposed Regulations, and 3) any action on the Proposed Regulations all until after the Court has issued its decision in the Knight case.

This will afford the public the opportunity to take into account the effect, if any, of the
Court's conclusions when submitting comments on the Proposed Regulations.
The American Bankers Association also submitted comments consistent with its general position on trust taxation issues:
In particular, the IRS calls for the unbundling of fees and a list of what fees are deductible and what fees are not. This requirement goes beyond the scope of the statute.

This issue was raised in the Rudkin case for which the Supreme Court recently granted certiorari and on which the ABA has filed an amicus brief.
However, the letter, dated October 24, 2007, sent by the American Bankers Association (PDF, 6 pages), provided far more detail in its substantive objections to the proposed regulations. That letter then concluded, similarly:
At a minimum, the IRS should not move forward with this proposal until the Supreme Court has had an opportunity to rule on the merits of the case before it.

In addition, we would strongly urge the IRS to abandon this proposal,
as it ignores the significant fiduciary duties of trustees and leads to far greater burdens than benefits.
On November 16, 2007, Susan D. Snyder, Esq., of Northern Trust Corporation, posted on the listserv of the American College of Trust & Estate Counsel (ACTEC) the following summary, which was circulated by the American Bankers Association post-hearing:
The panel consisted of three attorneys in the IRS's Passthroughs and Special Industries section (Danielle Grimm; Brad Poston; and Jennifer Keeney) and one person from Treasury, Catherine Hughes, Attorney Advisor in the Office of Tax Policy.

Seven people testified: Robert Balter, attorney; Joseph Mooney, representing the American Bankers Association; Richard Weber, representing the AICPA; Grace Allison, Northern Trust; Diana Zeydel, attorney; Barbara Sloan, attorney; and Randall Harris, attorney.

Generally, the speakers made these arguments: (1) extend the comment period until 90 days after the Supreme Court has issued a decision; (2) plain meaning of Sec. 67(e) allows a full deduction of the entire trust fee, including investment management fees; (3) the unbundling requirement will be very costly and burdensome to trustees; (4) trustees are held to fiduciary principles, individuals are not; (5) in drafting the proposed regulation, the IRS is engaging in linguistic manipulation of the statute.
Susan also posted the testimony presented by her co-worker, tax attorney Grace Allison, Esq., on behalf of Northern Trust Corporation, at that hearing.

Since I cannot find these comments on either the Northern Trust Corporation website or the American Bankers Association website, I requested to repost them. Susan graciously consented; and I do so, with thanks to her, Grace, & their employer.
Ladies and Gentlemen:

Thank you for the opportunity to make this presentation today.

I represent Northern Trust Corporation (“Northern Trust”), which has been in the business of administering trusts since its founding in 1889. Today, Northern is one of the largest trust companies in the world, with a network of 85 offices in 18 U.S. states, administering more than 15,000 irrevocable trusts nationwide.

In my position as Vice President in the Personal Financial Services Division of Northern Trust, I have worked closely with trust administrators, investment managers and ancillary personnel on a wide range of trust matters. I am a tax attorney, admitted to the Illinois bar and to practice before the Tax Court.

As a member of the Illinois Bankers Association, Northern Trust endorses the amicus brief filed on August 23, 2007, by The American Bankers Association in Knight v. Commissioner, U.S., No. 06-1286, as well as the comments submitted by The American Bankers Association in connection with this hearing.

It is our view that the proposed regulations should be replaced with regulations adopting the rationale articulated by the Sixth Circuit in O’Neil v. Commissioner, 994 F.2d 302 (6th Cir. 1993).

Additionally, we submit that the plain language of section 67(e) fails to provide any basis whatsoever for the requirement that trustees “unbundle” their fees and that the proposed regulations, to the extent they so require, are invalid as an abuse of administrative authority.

The Plain Meaning of Section 67(e)

Section 67 generally provides that an itemized deduction is allowed only to the extent that it exceeds 2% of a taxpayer’s adjusted gross income. Subsection (e) of that section, however, permits a full deduction (without application of the 2% floor) for “costs which are paid or incurred in connection with the administration of the estate or trust and which would not have been incurred if the property were not held in such estate or trust . . ..”

This plain language, and the legislative history behind it, permit a full and undiminished deduction for all trust fees (including fees for custody and investment advice) to the extent that such costs are paid in connection with the administration of the trust and would not have been incurred if the property were not held in the trust. Indeed trustee fees can only be incurred in connection with property held in a trust. Regardless of whether we incur costs to achieve good business practice and reputation or to comply with strict requirements of local fiduciary law, there is no question that we incur them in order to administer our trusts.

We are not talking here about abusive pass-throughs of inappropriate expenses—such as stadium tickets or airfare to China. The fees that are the proper subject of this hearing relate to integral trust functions. There is no authority for excluding legitimate trustee fees from the coverage of section 67(e).

Disparate Treatment of Mutual Fund Fees.

It is also important to note that the proposed regulations, if made final, have the potential to disrupt the financial markets (and create another tax loophole) by providing a new incentive for all trusts to invest in mutual funds. This undoubtedly unintended consequence is caused by the asymmetry between the treatment of investment costs incurred by mutual funds and the treatment, under the proposed regulations, of trust investment fees.

The former are, pursuant to section 67(c)(2)(B), allowed as a direct offset to the fund’s investment income; the latter, by regulation, would now be allowed only to the extent they exceed a 2% floor. To put it plainly, Treasury lacks the authority to require trustees to “unbundle” their fees, just as it would lack the authority to require mutual funds to pass their unbundled fees through to trust investors.


In addition, the requirement to “unbundle” fees imposes an impractical burden on all trust companies, large and small, and would set a standard impossible to meet with any degree of precision. Put in an historical context, the proposed regulations rival the ill-fated carryover basis rules in the degree of administrative complexity they would entail if made final as proposed.

When providing trust services (whether as sole trustee or co-fiduciary), trustees must pay keen attention to the needs of beneficiaries. This means that services must be individualized—and the exact service mix will depend on a variety of factors, including the complexity of the family situation, the number of beneficiaries, the terms of the trust, and the type of assets under administration. For example, a trust administrator may spend many, many hours on a trust established for a disabled child or a distraught widow. In the same vein, a trust with 40 beneficiaries has different needs from a trust that benefits a single individual.

Some of our accounts are simple trusts, requiring that all income be paid annually, with no discretion to distribute principal. In other trusts, however, distributions of both income and principal are left to the discretion of the trustee, with complex distribution standards requiring hours of fact-finding and analysis.

In several of our large trust relationships, the predominant asset is closely-held stock of a family business; with this type of asset, discussions of family values are often as important—and far more difficult—than straight-forward investment briefings.

As a consequence, the percentage of time devoted to trust administration fluctuates widely from trust to trust and from year to year—and would be most difficult to quantify.

In pertinent part, the preamble to the proposed regulations states that: “whether costs are subject to the 2-percent floor . . . depends on the type of services provided, rather than on taxpayer characterizations or labels for such services.”

Read literally, this would require Northern to detail its services on a minute-by-minute account-by-account basis. This is an impossibility in a corporate trustee environment, where some services are rendered to hundreds of trusts at the same time—and other services are required for more than one purpose.

Is the cost of tax lot accounting, for example, most properly allocated to trust accounting (not subject to the 2% floor), to tax return preparation (not subject to the 2% floor) or to investment management (subject to the 2% floor)?

Proposed Safe Harbors.

The preamble to the proposed Regulations notes that the IRS and the Treasury Department “invite comments on whether any safe harbors or other guidance, concerning allocation methods or otherwise, would be helpful.”

In the unfortunate event that IRS and Treasury cannot be persuaded to withdraw the proposed regulations, we reluctantly suggest consideration of the two safe harbors described below.

For a few of its largest and most complex trust relationships, Northern Trust enters into highly individualized arm’s length written contracts detailing annual fees for specific services such as custody, investment management and trust administration. It would be helpful if the proposed regulations clarified that, in such situations, the terms of the actual written contract should form the basis for any fee allocation.

In addition, for the thousands of our accounts where there is no such individualized agreement, the addition of a bright-line safe harbor would provide necessary practicality in applying these proposed regulations. Given the diversity of our trusts, and the corresponding diversity of services needed to protect them, we have found it impossible to arrive at a single allocation percentage. Rather, our experience leads us to conclude that an allocation range would be most appropriate, with between 53 and 62.5 percent of total trustee fees allocated to trust administration services not subject to the 2 percent floor. This proposed safe harbor is based on our actual experience as a corporate trustee and, to the best of our ability, on the definitions of “unique” and “not unique” services found in the proposed Regulations at section 1.67-4(b).

We recognize that, in some trust situations, the safe harbors described above will not accurately reflect actual trust services rendered, and will, for that reason, not achieve a fair result for our clients. We would hope, however, that in the bulk of our situations, the safe harbors we suggest would further administrative efficiency—and would help ensure that all clients of all trustees are treated equally.


In conclusion, we strongly urge Treasury and the IRS to withdraw the proposed Regulations, which are neither contemplated nor sanctioned by section 67, as ill-advised, impractical and expensive—both to the taxpayer and to the IRS.
Update: 12/05/07:

A weekly update email message sent by the American College of Trust & Estate Counsel (ACTEC) to its members provided a further useful resource on this issue: a link to the transcript of the oral argument held on November 27, 2007, before the U.S. Supreme Court, in the matter of Knight v. Commissioner (Rudkin).

The transcript is available here (PDF, 66 pages).

Update: 01/17/08:

On January 16, 2008, the United States Supreme Court issued its decision in
Knight, Trustee of William L. Rudkin Testamentary Trust v. Commissioner of Internal Revenue Service. (No. 06–1286; PDF, 16 pages). In short, the IRS won. But the drama may not be over, either.

PA EE&F Law Blog posting "
IRS Wins Rudkin Case in U.S. Supreme Court" (01/17/08).

Friday, November 16, 2007

PA Orphans' Court Statistics Available Online

On November 5, 2007, the Administrative Office of Pennsylvania Courts (AOPC) posted "Updates to the 2006 caseloads statistics" for all PA courts, including the Orphans' Court Division. These caseload statistics are compiled annually & updated periodically by AOPC's Department of Policy & Research using data derived from court dockets & court administrators' reports.

The 2006 Caseload Statistics of the United Judicial System of Pennsylvania (updated 11/05/07, PDF, 124 pages) can be reviewed online in its document presentation form. Also, it can be searched selectively.

Using AOPC's "
Interactive Statistics" database query tool, you can "design reports that meet your specific needs" for statistics regarding:

  • Protection from Abuse cases
  • Criminal Division case
  • Civil Division case
  • Orphans' Court Division cases
  • Family Division cases
Regarding the Orphans' Court Division caseload, you can review filings & dispositions in the categories of:
  • Accounts
  • Adoptions
  • Relinquishments & Terminations (of parental rights)
  • Appointment of Guardians
For customized data reports under these categories, you can designate additional screening factors of:
  • County (by judicial district or by class of county)
  • Year (1994-2005)
  • Case status (filed, pending at year beginning, available for disposition, contested before a judge, contested before a non-judicial officer, uncontested, pending at year end, or "other").
You can also calculate totals, averages, or percentage changes in your customized search results.

Using the database query tool, I was able to determine quickly by searches that, in 2005, 74 accounts were filed in Dauphin County, 119 in Philadelphia County, and 774 in Allegheny County.

This is a useful tool to gauge current Orphans' Court activity regarding the reported data.

Thursday, November 15, 2007

Bills Proposed for Grandparents' Child Custody

On November 6, 2007, the Pittsburgh Tribune-Review published an article entitled "Grandparents may win rights in state", by Katen Roebuck, which noted "[g]randparents could get preferential treatment to rear grandchildren under a proposed state law."

The "grandparents rights bill" would require courts to consider giving grandparents legal custody when parents or guardians will not be granted the children.

Although it passed the House by a 181-11 vote last week, supporters and opponents disagree on how much preferential treatment grandparents would gain under the bill.
The PA House Bill under discussion is HB 1548, now in Printer's No. 2726. According to the legislative history of HB 1548, after passage by the House on October 29, 2007, it was introduced in the Senate on November 13, 2007, and then referred to the Senate Judiciary Committee.

Pennsylvania, among the states, had been labeled "the worst by far" by advocates for grandparental rights regarding grandchildren. See: "Courts giving grandparents a big say on visitation, custody issues", by Barbara White Stack, published June 22, 2003, in the Pittsburgh Post-Gazette.

Grandparents' rights were expanded in Pennsylvania with the enactment of the "Grandparents Visitation Act", 23 Pa.C.S. § 5311. It provides:

If a parent of an unmarried child is deceased, the parents or grandparents of the deceased parent may be granted reasonable partial custody or visitation rights, or both, to the unmarried child by the court upon a finding that partial custody or visitation rights, or both, would be in the best interest of the child and would not interfere with the parent-child relationship. The court shall consider the amount of personal contact between the parents or grandparents of the deceased parent and the child prior to the application.
For an overview of the Act, see: "Grandparent Rights", posted by the Erie County Bar Association.

In 2006, the Act was upheld as to constitutionality by the Pennsylvania Supreme Court in Hiller v. Fausey, 904 A.2d 875 (Aug. 22, 2006; PDF, 24 pages), in the situation of "partial custody or visitation to grandparents upon the death of their child who is also the grandchild’s parent." A "concurring" opinion was filed by Chief Justice Cappy; and a "dissenting opinion" was filed by Justice Newman.

For a commentary on this decision, see: "Pennsylvania’s Grandparents’ Visitation Act is Constitutional, and Granting Maternal Grandmother Partial Physical Custody of Her Grandson After Her Daughter Dies Does Not Violate Father’s Constitutional Rights", posted by the Juvenile Law Center.

This expansion of grandparents' rights follows a national trend. See: "Recent legal rulings favor grandparents", by Joan Biskupic, published September 12, 2006, by USA Today.

But grandparents rights remain undefined in other situations, such as the setting of "juvenile dependency" proceedings. This was the setting of a much publicized case before Philadelphia's Family Court, where custody in caretaking grandparents of a five-year old child was denied. See: EE&F Law Blog posting, "Grandparents Lose in Child Dependency Case" (10/17/07).

That trial court's ruling is authorized by principles repeated in a PA Superior Court decision issued May 4, 2007, captioned In the Interest of B.S., Appeal of D.D. A three-judge panel of that Court held that a paternal grandmother of a child "did not have standing to participate in the child’s dependency proceedings."

The Superior Court cited the Juvenile Act, 42 Pa.C.S.A. §§ 6301-65, and cases decided under it, including In re L.J., 691 A.2d 520 (Pa. Super. 1999), and In re L.C. II, 900 A.2d 378 (Pa. Super. 2006), to support its holding. It reiterated:

This statutory section [§ 6336.1 "Notice and Hearing."] is silent regarding either the right to be heard or statutory standing for grandparents or relatives who at some time in the past served as primary caregiver for the child.
Particularly after that Superior Court decision and the Philadelphia trial court ruling,
powerful seniors' organizations, such as AARP, allied with other child welfare advocates, now seek expansion and clarification of grandparents' rights in child custody & juvenile dependency matters.

The recent article mentions the tension that is perceived to exist, however.

"I think it does clearly show a very strong lobbying effort to give grandparents a serious advantage," said Harry Gruener, assistant clinical professor at the University of Pittsburgh School of Law.

"They've always had that favored status, and they have it in every state."

Proponents say grandparents' interests generally are disregarded in custody cases. Critics, including Gov. Ed Rendell, say the bill puts grandparents' interests above children's.

The bill would give grandparents legal standing in custody cases, which no relative automatically has in Pennsylvania, according to Gruener and Randall Wenger, chief counsel of the nonprofit Pennsylvania Family Institute, a Harrisburg public policy group that suggested the law. * * *

Although state laws require the Department of Public Welfare to consider grandparents and other relatives while making custody recommendations, no relatives have legal rights to argue their cases in court, Gruener and Wenger said.

"This law is going to force (judges) to consider the grandparents," said Rep. William Kortz, D-Dravosburg, who co-sponsored the bill. The law would be good for children's psychological health by keeping intact at least some of their families, Kortz said. * * *

The article also reports that the Senate Judiciary Committee is expected to consider soon a somewhat similar bill, Senate Bill 515, which was introduced on March 19, 2007.

If the bill is approved by the Legislature in its existing form, there appears still to be some question as to its effect, reports the article, and this may prevent its signature by the Governor:

The proposed law is unclear about whether it gives grandparents first crack at custody over other relatives, Mackereth said.

Rendell's office and the Welfare Department said it does; Kortz and the Pennsylvania Family Institute said it does not.
Another article, entitled "Grandparent Rights, Capital Punishment Bills Proceed in Pa. Legislature", posted by the Associated Press on October 30, 2007, quoted Rep. Randy Vulakovich (R-Allegheny), a co-sponsor:

"We have recognized as a society that it's not always in the best interests of the children to be raised by their birth parents, such as in abuse and neglect."

"Sometimes the best candidates for caring for dependent children are overlooked — their own grandparents."