Those Annoying Disclaimers on Emails

If you have ever received an email from an attorney or other professional person, you are well aware of the disclaimers that often appear at the end of such emails. Here is a link to a few samples.  I personally have resisted using them.  I never (well, hardly ever) give legal advice via email, and find most blanket disclaimers tedious.

In 2005 the U.S. Treasury Department adopted revisions to what is called Circular 230, a publication which governs ethical standards of conduct for tax attorneys, CPA’s and other professionals who interact with the Internal Revenue Service.  In 2005, the IRS wanted to curb reliance by taxpayers on informal or off-the-cuff opinions from tax attorneys. In the event of a successful challenge to a taxpayer position by the IRS, a taxpayer might cite reliance on the informal opinion to abate a negligence penalty. The IRS wanted to take this excuse away where the opinion provided was not carefully considered by the provider.

Instead, in order for a taxpayer to have “penalty protection,” the tax attorney had to provide a “covered opinion,” which was highly detailed and costly to the taxpayer. There were severe sanctions authorized for a tax attorney who ran afoul of the covered opinion requirement. Many tax attorneys complained that the new Circular 230 rules brought a tax practice to the point where the complexity for following Circular 230′s ethical rules exceeded the complexity of the Internal Revenue Code itself.

This led to a proliferation by tax attorneys in the use of Circular 230 disclaimers on emails, faxes, and other written communications with clients, such as -

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code.

The IRS recently decided that its 2005 revisions to Circular 230 were perhaps not such a great idea after all. In June 2014 it adopted these revisions to Circular 230, scaling back on the requirements regarding covered opinions. Reading between the lines, it appears the IRS also wants to discourage the indiscriminate use of disclaimers by tax attorneys that proliferated with its 2005 amendments to Circular 230. Apparently, the IRS does not appreciate being implicitly criticized on the millions of emails sent out by tax professionals each year.

I suspect it will be years before we see the Circular 230 disclaimer appear from most attorney emails. But one practitioner on the ACTEC listserv suggested (tongue-in-cheek) that he would replace his existing disclaimer with the following -

The IRS has made me remove the Circular 230 notice it formally made me put here.  Under  penalty of law you may not rely on, and no inference may be drawn from, the fact that I have deleted the Circular 230 notice the IRS used to make me put here but has now told me not to put here. Further explanation of this notice of non-notice is available at my usual hourly rate.

Bush Tax Cuts Live On

The Dustbin of History?  When President Obama was re-elected on November 6, 2012 I assumed the Bush Tax Cuts would soon land in the dustbin of history. The President and the Democratic Party blame the Bush Tax Cuts for  many of the things that have gone wrong in the American economy since 2008. All that was required to end the Bush Tax Cuts and reinstate the Clinton era tax increases was to hold fast until January 1, 2013 and it would happen automatically. But a funny thing happened as Americans prepared to skid off the fiscal cliff – most of the Bush Tax Cuts were made permanent.

Does anyone down there know how to cut a deal? If the Wall Street Journal can be believed, Kentucky Senator Mitch McConnell and Vice President Joe Biden were the authors of the legislation. McConnell reportedly called the Vice President on December 30, after talks with Democratic Leader Harry Reid had broken down. From that point forward, Biden and McConnell cobbled out the deal that ultimately became law. On New Year’s Day, the Senate approved the deal 89 to 8 and the House followed up with its own vote of 257 to 167 in favor. Two days later President Obama, from Hawaii, by “autopen” signed into law the bill that averted the automatic imposition of the Clinton era tax rate increases.

Here is a sample of what was enacted.

A permanent per-person estate tax exemption of $5.25 million, adjusted periodically for inflation. That means a married couple can pass more than $10.5 million to the next generation free of estate tax. Unless a future President and a future Congress can agree on a change, I could practice law for 20 more years, with a reasonably wealthy clientele, and never see another decedent’s estate pay estate tax.

A permanent per-person gift tax exemption of $5.25 million, adjusted periodically for inflation. The estate tax exemption and gift tax exemption are now “unified.” You can use your entire $5.25 million exemption either during your life or at your death.

Portability is now permanent.  First introduced in 2011, it is a technique available to married couples to reduce estate taxes. It allows the surviving spouse to add the unused estate tax exemption of a deceased spouse to the surviving spouse’s exemption. This is accomplished by filing a federal estate tax return on IRS Form 706 for the estate of the deceased spouse and making the election provided on that return. This means the end of the use of by-pass trust planning for most married couples of modest weath. 

Marginal income tax rates for those above the $450,000 (married) or $400,000 (single) threshold will shoot up to the Clinton era 39.6% rate. For everyone else, the Bush rates apply.

Capital gains and dividends will be taxed at 20 percent for those with income above the $450,000/$400,000 threshold. The Bush tax rates will remain at 15 percent for everyone else.

Permanent?  I’m reminded of Inigo Montoya. “You keep using that word. I do not think it means what you think it means.”  While the new legislation brings a measure of certainty to estate planning that has not existed for several years, it is permanent only in the sense it will not automatically expire. There is nothing to prevent a future Congress and a future President from changes in the federal tax laws. In fact, few things are more certain.

2010: Strange Tax Year To Get Stranger

“The repeal of the estate tax this year — which the economist Paul Krugman has called the “Throw Momma from the Train” law in his New York Times column — has generated much black humor about unfortunate accidents befalling wealthy parents as Dec. 31 approaches.”

Check this link to see why. I fear the last week in December will be full of surprises.

Those Expiring Bush Tax Cuts

What are “the Bush tax cuts” ?

In 2001, the Congress passed and the President signed into law a wide range of tax provisions affecting individual income tax rates, tax rates on shareholder dividends, capital gains tax rates, and the per-person exemption from the federal estate tax. These tax provisions have come to be known as “the Bush tax cuts.”

What did the Bush tax cuts do to federal income tax rates?

In 2001, the maximum federal income tax rate was 39.6 percent. Under the Bush tax cuts, the maximum rate was reduced to 35 percent.

What did the Bush tax cuts do to the tax on shareholder dividends?

In 2001, the dividends were taxed as part of a person’s income and could have been taxed at a rate as high as 39.6 percent. Under the Bush tax cuts, the maximum rate on shareholder dividends was reduced to 15 percent.

What did the Bush tax cuts do to the federal capital gains tax?

In 2001, the maximum federal income tax rate on the sale of capital assets, such as stock market investments, was 20 percent. Under the Bush tax cuts, the maximum rate was reduced to 15 percent.

What did the Bush tax cuts do to the federal estate tax?

In 2001, each person had a $1.0 million exemption from the federal estate tax, which could be used during life or at death. A married couple who planned properly could pass $2.0 million to the next generation free of estate tax. Once the tax applied to a decedent’s estate, it began at a rate of about 37 percent and went as high as 55 percent for very large estates. Under the Bush tax cuts, the per-person exemption rose from $1.0 million to $1.5 million (2004), then to 2.0 million (2006), then to 3.5 million (2009). In 2010, the estate tax has been completely eliminated for persons dying in this calendar year.

Why do the Bush tax cuts automatically expire on January 1, 2011 ?

It has to do with the rules of the Senate, particularly the Byrd Rule. Budget legislation cannot be fillibustered during the “reconciliation” process, but if a tax cut is proposed during the reconciliation process, it needs at least 60 votes to be a permanent tax cut. Otherwise, it must sunset after 10 years. The Bush tax cuts passed with less than 60 votes during the reconciliation process in 2001. Thus, on January 1, 2011, the tax laws as they existed on 2001 will automatically become, once again, the law of the land.

Will there really be only a $1.0 million per-person estate tax exemption in 2011 and in future years?

Unless Congress passes and the President signs a new law, the $1.0 million exemption will return on January 1, 2011. I think it is very unlikely this President and this Congress (or the next Congress) will be able to agree on any changes.