Go to Top

Duly Noted

A Deferred Annuity Makes Taxable Estate Assets Disappear. Virginia Kite, a member of a prominent Oklahoma banking family, transferred substantial wealth in trust for her husband, a petroleum geologist who predeceased her. That wealth returned to her via several trusts after his death. At age 75, Kite then sold her trust interests to her children in exchange for a large deferred annuity that would not begin making payments for 10 years. But several years after the sale, Kite died without collecting any of the annuity. In a significant victory for her estate, the Tax Court ruled that the sale of Kite’s interest in the trust was valid under Internal Revenue Service regulations, leaving the former trust assets outside of Kite’s taxable estate. Kite also received a valuable income tax benefit through a stepped-up cost basis in the stock she placed in trust for her husband. But the IRS won a small victory when the court found Kite liable for gift tax in connection with the termination of her trust interests. Estate of Kite v. Commissioner, T.C. Memo 2013-43.

Tax Deduction Denied For Unrecorded Loan. Christopher DeFrancis and Jennifer Gross purchased a Massachusetts home in 2001. In 2003, they refinanced the house with a 4.5 percent mortgage loan from Gross’s mother. However, the loan was never formally recorded in local land records, so it lacked the legal priority that mortgages ordinarily receive ahead of the borrower’s other debts. The Internal Revenue Service denied the couple’s mortgage interest deduction for 2009 and also imposed an accuracy-related penalty. The Tax Court upheld the tax assessment because of the failure to record the mortgage, but it overruled the penalty. The homeowners actually paid the interest to the lender and made a good-faith effort to comply with the tax law, the court found, adding that the technicalities of property law are beyond the expertise expected of ordinary taxpayers. Christopher DeFrancis et. ux. v. Commissioner, T.C. Summ. Op. 2013-88.

Another Late Start For Tax Filing Season. For the second year in a row, early-bird tax filers who hope to use their refunds to pay off holiday shopping bills are apt to be disappointed. The Internal Revenue Service announced that it will not accept electronically filed individual tax returns, or process paper returns, until Jan. 31. That is weeks behind schedule and a day later than last year, when Congress and the president did not get around to finalizing a new tax law until New Year’s Day. There was no major law change this time, but the IRS said the 16-day partial government shutdown in October put it behind schedule. The agency still encourages taxpayers to file early and to use electronic filing, which it said will generate refunds “much faster” than any paper returns. IR-2013-100.

If you enjoyed this article, be sure to check out Palisades Hudson’s books, The High Achiever’s Guide To Wealth and Looking Ahead: Life, Family, Wealth and Business After 55. Both are available in paperback and as e-books.