IRS prevails in a tax collection case

On October 3, 2018, the Sixth Circuit released its opinion in United States v Estate of Albert Chicorel, in which it held that the United States, seeking to enforce a claim for unpaid taxes, may perfect its claim after timely submitting a notice of claim to the personal representative of the Estate by filing a collection proceeding in Federal Court, even though the Federal court proceeding was filed more than ten years after the assessment of the tax.

The tax was first assessed by the IRS in September 2005. Chicorel did not pay before he died in the fall of 2006. An estate was opened and the four-month notice to creditors was published in May 2007. The IRS was not notified, despite the fact that it was a known creditor. The United States filed a proof of claim in the probate court in January 2009. It later filed its collection action in March 2016.

26 USC 6502-a requires that any tax assessment may be collected "by levy or by a proceeding in court" if the proceeding is begun within ten years of assessment. The issue presented, given the fact that the lawsuit was filed more than ten years after the assessment, was whether the filing of the notice of claim was a "proceeding in court."

The court found that it was. The filing of a notice of claim requires action by the personal representative, and has significant legal consequences for the creditor and for the estate.

What the court did not tell us is what the personal representative did with the notice - it must be disallowed if the PR does not believe it is properly payable - or why the United States took another seven years to file the lawsuit against the estate. Under the Sixth Circuit's analysis, once the notice of claim was submitted to the personal representative within the ten-year period, the United States could wait as long as it wished to file the collection action.

United States v Estate of Albert Chicorel (PDF)

The effects of this year's tax cut

Newsweek has published an article entitled "Trump's tax cuts benefit rich Americans, not middle-class families, voters say by two-to-one margin in new poll."

If that that is what most people believe, it is because they have accepted claims made by politicians, because the assertion is simply untrue. Doing a direct financial analysis of the effects of the Tax Cuts and Jobs Act of 2017 tells another story entirely.

We have done the calculations for two hypothetical taxpayers, a single person with one child earning $70,000 per year and another single person with one child making $135,000 per year. The result of our calculation, comparing the 2017 tax year to the 2018 tax year, the first year the cuts go into effect, shows:

The 70K worker will have a 22.3% lower tax bill for 2018
The 135K worker will have a 15% lower tax bill for 2018

We show our work. We have posted the calculation at https://is.gd/OAFWiW

So you can believe the fictions disseminated by politicians, or you can believe the result of an actual calculation and comparison.

You can argue about whether the country can "afford" a cut in personal income taxes. You can argue about whether the taxes paid by those taxpayers who earn more than you do should be higher than they are. But you cannot deny that most middle-income Americans will have a lower tax bill next spring as a result of the TCJA.

Unexpected information from SSA

When you apply for Social Security benefits, the Social Security Administration will review the reports that it has received from former employers. If it finds information about a pension plan that you participated in during a period of employment, SSA will notify you of that plan and the fact that you might be entitled to benefits. One client of ours learned that she was entitled to $235 per month that she did not know about, in addition to her Social Security benefit.

In re Mardigian Estate

The Michigan Supreme Court has been considering this case for a long time. On June 21, 2018, it came down with its long-awaited decision. Except it was. . . a non-decision. The Court split by a 3-3 vote, resulting in an affirmance. The reason that all seven members did not rule is that Justice Wilder, one of the newer members of the Court, was on the Court of Appeals panel which ruled on the case earlier.

Mark Papazian drafted a will for a friend, Robert Mardigian. The will was remarkable because it left "the bulk of" his estate to Papazian and his children.

Rule 1.8-c of the Michigan Rules of Professional Responsibility prohibits an attorney from preparing a will or other instrument for his client if it gives him or his close family a "substantial" gift. But the Michigan Rules of Professional Responsibility provide a basis for attorney discipline, not for interpretation or application of the instrument.

The issue at all levels was whether (1) the will was automatically invalidated based on the violation of the rule and (2) whether the attorney-client relationship and the friendship between the two gave rise to a presumption of undue influence, requiring Papazian to produce evidence that there was no such undue influence. (Of interest, the presumption does not apply substantively, shifting the burden of proof at the time of the hearing. It applies only to the burden of production of evidence.)

Three members of the court (Markman, Zahra, and Clement) would find that the will was not invalidated, and that the presumption would apply. The other three (McCormack, Viviano, and Bernstein) would create and apply a new "per se" rule automatically invalidating the will.

The position of the Markman group was based on an earlier case, In re Powers Estate, 375 Mich 150 (1965), which had likewise allowed the application of a will in which the attorney's wife was a major beneficiary. The Powers rationale was encapsulated in the following: "the focus of the will contest is to determine the decedent’s intention and not to judge and discipline the attorney’s conduct."

This 3-3 split is very unfortunate. It permits the Court to escape making a definitive decision on this important point, to the detriment of the public's perception of the legal profession. This case will not have any precedential effect, but the 1965 decision in Powers will continue to apply as the controlling rule on this issue.

NPR's "Swan Song"

You can create a playlist for the music to be played at your funeral.

Using retirement funds pre-retirement

It is common wisdom among estate planners and commenters on financial matters that people between the age of 60 and 70 should not touch their retirement accounts until they are required to do so, and that those who have reached the point at which they must take required distributions (around age 71) should take only the required minimum distributions (RMDs). While this is good thinking for many people, it will not work for everyone. 

The common recommendation no doubt arises from the assumption that most clients have a sizable retirement account and a sizable investment account comprised of non-retirement assets. The recommendation is based on the fact that non-retirement funds consist of money on which tax has already been paid, and thus using that money will not result in the recognition of income and the imposition of additional tax based on that income. 

But a client who has a very large retirement account and whose other assets are modest may benefit from a bit more liberal thinking about the use of the retirement funds. 

Let us do a bit of calculating for a moment. Let’s begin by assuming a client who 60 and who has exactly $100,000 in retirement funds. We know that 

• His RMDs will begin in about 10 years. 
• His accounts are likely to grow to about $138,000 in that time, assuming no additional contributions are made. 
• His RMD for the first year, often his age 71 year, will be $5,223. 

A $5,000 annual distribution is of course not much. 

These calculations do “scale” perfectly, though. If we change one assumption, considering a retirement account with a current value of $1 million, it will change the following parameters. 

• His accounts are likely to grow to about $1,380,000 in that time, assuming no additional contributions are made. 
• His RMD for the first year, his age 71 year, will be $52,230. 

Now we are talking about a significant required minimum distribution. 

Let’s say that our client decides that he wishes to use the money to enhance his quality of life during the next ten years. Each year, he wants to use $7,500 of his accounts (probably netting about $6,000 after taxes) to do some traveling with his wife. What is the result? 

When he reaches age 71, he finds that 

• His total retirement account is $1.3 million, or about $80,000 less than it would have been if he had not touched the money. 
• His initial RMD is $49,000, or about $3,200 less than it would have otherwise been. Each successive RMD is also moderately smaller than it otherwise would have been. 

The differences, in all honesty, are not that great. And there is a real-life factor that seems to elude many who comment in this field. In general, our client is likely to be much better able to travel and get around in his 60s than he will in his 70s. The ability to use his money to travel and in general to enhance the lives of both spouses is likely to be greater in their 60s. In general, the money will be more useful to them in those years than it will be when they are 75, 80 or 85 years old. 

Update 12-7-18 - A user at Quora posted this in response to a question: 

I took my pension at 60 and get less than I would have if I had waited until I was 65. However, I got to enjoy retirement between 60 and 65 when my health was good and I could do pretty much anything I wanted to.
Retirement is much less enjoyable when your health is failing. Your eyesight goes so you can’t read or drive any more. Your joints start to ache so sports are less enjoyable. Out of country health insurance costs a lot more so travel is more expensive.
I personally recommend retiring as soon as you can and do as much as you can while you have your health. Living in retirement is a lot less expensive than most people think. I’m very glad I retired when I did.