Planning Potpourri


Oy Veigh:

The lawyer who represented Timothy McVeigh in the Oklahoma City bombing case donated materials from his case file to charity and tried claiming a tax deduction. The Tax Court denied the deduction. Jones v. Comm'r, 129 TC No. 16 (Nov. 1, 2007).


Passive Losses in Your Estate:

The passive loss rules limit the tax losses you can deduct from an activity in which you don't materially participate. IRC Sec. 469. Losses you cannot deduct are held in abeyance (suspended) until they can be deducted in the future. What happens if you die before that future date comes to deduct those suspended losses?  The answer is some good news and some bad news, and of course more tax complexity.  Good News: Death is treated as a complete disposition of the passive activity freeing all the losses for deduction on your final personal tax return Form 1040. IRC Sec. 469(g) (2). Bad News: These formerly suspended passive losses have to be reduced by the step-up in income tax basis of the passive activity asset. IRC Sec. 1014. So if you hold a partnership interest that is worth $250,000, but your basis is only $100,000, you'd get a step up of $150,000 (to the fair value at death). Your suspended losses from that partnership interest would be deductible on your final return after reducing them by $150,000. Complexity: The basis rules are complicated. Your executor will have to contend with alternate valuation date values, and after 2009 the $1.3 and $3 million step ups when basis increases are otherwise eliminated. Whew.


Double IDITs:

Remember the gum commercial with twins extolling you to double your fun? Well if you sell assets to a grantor trust for a note (affectionately an "IDIT" or "IDIGIT") if at a later date you want to engage in another sale transaction, don't use the same IDIT. Set up a new trust for the new transaction.  If the first transaction washes out (e.g. the real estate assets underling the sale declined dramatically in value) why taint the second transaction with that risk? If the first transaction was a homerun and the next is a disaster, the value of the first will be used to cover the second. Set up a new trust and protect your planning gains.

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