July 2006 – Issue #5
Looking Forward to September
July 1st just past was the first (and only while here) anniversary of my arriving at Lompoc to self-surrender and thus commence serving my sentence. I have been in the custody of the Federal Bureau of Prisons (BOP) since July 1, 2005, and look forward to leaving here on September 6th. I then have a few weeks of “pre-release custody” in a Coeur d’Alene, Idaho halfway house, and may be home in Syringa, ID by late September. My official release date is October 20, 2006, to be followed by up to 3 years probation.
Once in probation (“supervised release”) I will be able to devote substantial time to my non-lawyer consulting, under the name “FioreWealthPreserveConsulting”. My Mission Statement and updated form of Resume are posted on this website. Prior to entering into any consulting relationship, I will provide the client with a form of engagement letter clearly setting forth the scope of my services, confirming my non-lawyer status and abilities to provide services, summarizing the wealth planning process and my role in it, and stating the costs of my services. Of course, the client’s legal counsel must be involved in this process and must be looked to for any legal advice. The “team effort” should benefit clients by insuring an understandable and defensible plan is implemented both in documentation and operation.
Some readers of this newsletter may already have seen the little article on my consulting plans in the June 5, 2006 issue of FORBES magazine. The article headline, “My Advice Is Not Legal”, was a thoughtful play on words since truly my efforts will be as a “non-lawyer consultant”. My license in California as a lawyer is in suspense, that is, inactive, as I resigned my active status due to the plea bargain filed in court in late September, 2004. However, I was not disbarred, and may seek renewal of active status 3 years from now, were it to make sense for me to do so. The concluding sentence of the FORBES article is as follows: “After his release, the 71-year-old Fiore writes online, he’ll establish a ‘non-lawyer consulting practice’ on estate planning in Syringa, Idaho, where already ‘my tax law library has been brought up-to-date.’” Of course, all this is possible thanks to the Internet, and the fact that legal and tax research, as well as client communications, all are available on the Internet. In little Syringa along the beautiful Clearwater River of Idaho, my Internet capability is made possible by special satellite-based Internet access – no telephone line at all is involved!
The Federal Estate Tax – Going, Going, Nearly Gone?
Under current law, enacted in 2001, the Federal gift tax now has a frozen $1 million exemption equivalent and the Federal estate tax exemption equivalent continues to go up per estate from now its $2 million level to $3.5 million in 2009 and no estate tax in the year 2010. But the catch is that the estate tax exemption drops way back to $1 million in the year 2011 with the maximum estate tax rate increasing back to 55% (this year it is 46%) and continues to drop slightly each year through (2009).
The Administration and many Republicans have been pushing hard for a complete estate tax repeal as a permanent measure. In fact, the House passed such a bill as H.R. 8, but on June 5th a Senate motion to proceed on this bill failed to get the necessary 60 votes. There have been continuing negotiations among the legislators to work out a compromise, which likely will be short of full estate tax repeal.
Currently, the bill receiving much attention, authored by House Ways & Means Committee Chair William Thomas, and approved by the House (269 – 156) in late June, is H.R. 5638, the Permanent Estate Tax Relief Act of 2006. The Senate failed to act on the bill prior to the July 4th recess, presumably due to ongoing negotiations among the Senators seeking to develop the necessary 60 votes for a motion to proceed to a vote.
Under H.R. 5638, which budget estimates indicate will cost nearly 80% of full estate tax repeal, most American families will not have to worry about estate taxes, or gift taxes either for that matter. Beginning January 1, 2010, this permanent fix would increase the gift and estate tax exemption equivalents to $5 million per donor or per estate (thus, $10 million for a married couple). The estate tax rate would be tied to the long-term capital gain rate (now 15%, but, unless extended, going to 20% in 2011). Further, estates (taxable estates after allowed deductions) of $25 million or more would be subject to double the estate tax rate – so 30% or 40% depending on what the 2011 capital gains rate is that year. A provision added to the bill in the House is the post-2010 indexing of the $5 million exemption level.
Estate planning once again will include review of many existing plans, even those already updated and changed due to the 2001 tax law. For example, a new proposed provision in H.R. 5638 would provide a sort of “portability” of the exemption equivalent, i.e. allowing married couples to take full advantage of the $5 million exemption, per estate via an election to carry over a deceased spouse’s unused portion thereof to add to the surviving spouse’s own $5 million election. This raises a number of issues, not the least of which being the potential for elimination of a marital deduction qualifying trust being set up in the estate of the first spouse to die.
And IRC Sec. 2058, the state death tax deduction, would be repealed – not an issue in California which, due to elimination of the State death tax credit on which California’s “pick-up” estate tax was based, there no longer is any revenue to the State here – absent an amendment to the California Constitution being approved by voters.
To convince certain Senators to vote for this bill, a “sweetener” was added in H.R. 5638, namely, a new 60% deduction for qualified timber gain (proposed Sec. 1203), which obviously would benefit States with a significant timber industry. The Joint Committee on Taxation summary of H.R. 5638 states, as to the timber provision: “This deduction alleviates the disparate tax treatment of timber gains under current law (which is based upon the legal form of ownership of the underlying timber assets).”
So now we once more await action by Congress and the President on a virtual repeal of the estate tax. Note that, not only will marital deduction trust planning be affected, but also, if H.R. 5638 becomes law, installment sale transfers among family members, where otherwise allowed, would spring up with eventual – beginning 2010 – gift forgiveness of debt incurred by younger generation family members. Loans similarly would be a renewed planning step, again with forgiveness of principal beginning in 2010, when the exemption equivalent is upped to $5 million per person (donor).
Rosen – Recent Tax Court Decision: More of the Same, Plus!
The Estate of Lillie Rosen, T.C. Memo. 2006-115 (June 1, 2006), is an opinion on an FLP authored by Tax Court Judge David Laro. The decision is not surprising in that the “testamentary substitute” arguments against the FLP and gifts of interests therein to family members were clearly understandable given the facts. The decedent was 88 and incompetent upon the 1996 formation of the FLP under the guidance of decedent’s attorney son-in-law who had implemented gift planning way back in 1979. From a seminar on FLPs and hoped for valuation discounts, the “ultimate” gift plan and estate tax avoidance program was developed for the decedent’s remaining marketable securities and cash, constituting substantially all decedent’s assets.
While the decedent lived until mid-2000, it was clear from the operation of the FLP that only decedent would benefit from the FLP while she was alive, through mostly “loans” that Judge Laro took great pains to explain were not really loans at all. Thus, IRC Sec. 2036(a)(1) was easily applied to bring the gifts back into the decedent’s estate and to ignore the FLP for valuation purposes. The court’s opinion sets out in the often seen Judge Laro detail the specific points of contention and determines each one in favor of the Respondent IRS.
A good question, particularly in view of the possible virtual repeal of the Federal estate and gift tax regime, is the usefulness of FLP/LLC planning in the future and what criteria should be applied to realize desired wealth preservation goals. I believe that such planning still is viable, but serious issues are involved in the estate level justifying such plans, the costs thereof and the need for constant monitoring of plan operation. These issues, and the guidance from recent court decisions, will be covered in my next newsletter.
Justice and the Federal Prison Business
A recent point-counterpoint set of editorials in USA TODAY considered an extensive report, “Confronting Confinement”, by The Commission On Safety And Abuse In America’s Prisons. Chaired by the Hon. John J. Gibbons (private attorney and former Federal Circuit Court of Appeals Court Judge) and Nicholas de B. Katzenbach (private attorney and former Deputy Attorney General and Attorney General of the U.S.), the report recently released looks carefully at America’s prisons (State, Federal, local) with a well-supported analysis and critical eye, finding problems requiring resolution in (1) conditions of confinement, (2) labor and leadership, (3) oversight and accountability, (4) knowledge and data. The keynote statement is the following (see www.prisoncommission.org for the report and downloading thereof):
“What happens inside jails and prisons does not stay inside jails and prisons. It comes home with prisoners after they are released and with corrections officers at the end of each day’s shift. We must create safe and productive conditions of confinement not only because it is the right thing to do, but because it influences the safety, health and prosperity of us all.”
There is an emerging debate regarding the effectiveness of the U.S. prison systems, especially given the documented high rate of recidivism – about 67% according to a Wall Street Journal report on the Commission’s June, 2006 Report.
Then quite recently in the news, we read the Department of Justice employee “shoot-out” (see N.Y. Times, June 23, 2006) reporting on the gun battle between Department of Justice Investigators and a Bureau of Prisons correctional officer when the former attempted to arrest several BOP correctional officers for exchanging contraband for sex with female prisoners in a Florida BOP institution. Obviously this situation was an unusual case, but likely not the only example of abuse by employees in prisons.
Our country has the largest prison population in the world, with the numbers of those incarcerated having doubled and tripled in the past several decades. Was Mark Twain right when he stated: “You can see the dregs of life in the changing of the guard”? Perhaps not, but those on the “outside” need to take a look at incarceration of American citizens as “big business” that maybe is not really beneficial to our nation.
In my December, 2005 Newsletter #2, I spoke of an inmate friend of mine, Michael Santos, who has served nearly 20 years of a net 26 year sentence and is now at the Lompoc Federal Prison Camp. Michael’s chosen profession is as a writer and commentator, as can be learned from reviewing his website: www.michaelsantos.net. His newest book, being published and released next month by St. Martin’s Press, New York, is titled: “Inside: Life Behind Bars in America.” Very favorable reviews already have been received from Amazon.com, Publisher’s Weekly Review, and the London Times. America’s prisoners make up, according to the London Times reviewer, a quarter of the world’s prisoners – a startling fact.
I do not consider myself, having been incarcerated only in a minimum security “camp” for a relatively short time, anywhere near an “expert” on the prison system. However, being here has allowed me to read a lot, and to speak with many inmates. I will leave it to readers of this newsletter to read Michael’s book if they want to learn at least one person’s point of view from personal experience.
There is yet another aspect of this issue of criminal punishment; and that is the prosecution of crimes, the number of possibilities for which persons may be indicted, and the changed criteria or elements of crimes. These have apparently changed in a way that truly may threaten our assumed freedoms and liberties. For that point, I refer readers to a book published in the year 2000, “The Tyranny Of Good Intentions – How Prosecutors and Bureaucrats Are Trampling the Constitution in the Name of Justice”. Paul Craig Roberts and Lawrence M. Stratton are the co-authors (Prima Publishing).
The dramatic rise in the number and scope of laws that describe and create criminal activities that can be prosecuted without proof of criminal intent or mens rea is outlined in the book. Add to that the unlimited resources of governments and their prosecutors and the primacy of the “plea bargain” forced on defendants by the immensity of criminal charges, and one might conclude that the criminal justice system is out of control. This is not my call, but I sincerely believe people on the “outside” need to learn from the above-referenced and other sources.
Conclusion
I hope the reader has enjoyed and perhaps been stimulated by this newsletter. Others will be published in the coming months, and especially I am looking forward to the freedom of communication with family, friends, clients and professional advisors after my release this Fall. As always comments and suggestions are welcome – either via letter or email to owen@owenfiore.com.
