Win Olympic Gold – And Pay for It

Olympic Gold

Olympic gold metals are assessed for income tax, but the real cost could be the estate taxes.

Every time the Olympics come around, there’s dozens of articles and posts about how Olympic medals are subject to income tax. The IRS considers all prize winnings, such as gambling or game show prizes, to be income and thus taxable. Olympic medals get lumped into this group (as do the cash bonuses they come with). Luckily for the athletes, their medals are valued at the time they are earned, essentially the value of the materials. A gold medal from Rio is estimated to be worth $564, a silver medal is estimated at $305, and a bronze medal has little intrinsic value. Since Olympic medalists generally treat their sport as a profession the value of the medal and related bonuses are likely to be offset with a deduction for the significant expenses that most athletes incur.

What people may fail to consider is the effect the medals will have on the Olympian’s estate taxes. Property in an estate is valued at the date of death, not the original value. And though Olympic medals have little intrinsic value, their sentimental value makes them worth far more. In 2013, one of Jesse Owens’ medals from the 1936 Olympics in Berlin sold for $1.47 million, the highest price ever paid for a piece of Olympic memorabilia. A boxer from Ukraine, Wladimir Klitschko, sold his medal for $1 million. Even a medal from an athlete who isn’t as well known may be valued upwards of $30,000. These values are included in a deceased Olympian’s estate and are potentially taxable.

Michael Phelps broke a 2100 year old Olympic record by winning 13 individual gold medals over the course of four Olympics (not to mention his 28 medals total.) The medals are worth quite a lot on the open market, even if Phelps is only initially taxed on their intrinsic value. When he dies, his estate will likely need to hire a specialized appraiser to determine the value and even then, it will only be an educated guess. Of course, since Michael Phelps is superhuman, he may never die, which would make this whole process simpler.

Bitcoin – Is It Really Money?

Is bitcoin money?

Florida court dismisses money-laundering case, saying that bitcoin is not money.

Recently, a Florida judge dismissed a money laundering charge against a man who sold $2,000 worth of bitcoin to an undercover agent. The agent claimed he was using the bitcoin to purchase stolen credit card numbers. The judge held that the digital currency is not money. Therefore, it does not fall within Florida’s money laundering statute. The judge stated that trying to regulate bitcoin using a statutory scheme regulating money is “like fitting a square peg in a round hole.” This leaves the door wide open for the Florida legislature to regulate bitcoin and other virtual currency.

Bitcoin was released in 2009. Since that time, courts and legislatures have struggled to fit it into existing legal framework. There are few laws or regulations specifically governing bitcoin and its price fluctuates widely. One expert witness compared bitcoin to “poker chips that people are willing to buy from you” (this expert was paid in bitcoin to appear as a defense witness). The currency isn’t printed, like the euro or the U.S. dollar. The IRS considers bitcoin to be property, as opposed to currency, so any exchanges are deemed to be bartering exchanges. New York now requires “BitLicenses”. They are needed for any businesses that buy, sell, or process bitcoin in the state. New York institutes a multitude of consumer and fraud protections on the businesses. Most notably, the business will have to maintain records of their customers’ names and addresses. This eliminates the anonymity that made bitcoin so appealing in the first place.

It is not just the US that struggles to define bitcoin. In Australia, bitcoin is double taxed. That is because in the country it is considered to be a commodity, not a currency. There is a 10% tax when consumers purchase the currency. They are taxed again when consumers use the bitcoin to purchase goods. Bitcoin is exempt from value-added tax (VAT) in many European countries, indicating that they do not see it as a good but instead as a legitimate currency. In Switzerland, the city of Zug is allowing citizens to pay for public services using virtual currency.

While the trend certainly seems to be towards treating bitcoin as currency, there is still plenty of uncertainty as to what its future will look like. The Florida case may have set precedent for how the rest of the United States will treat virtual currency. It may also encourage legislators to create more laws regulating bitcoin. Only time will tell.

The Estate of Prince – Let’s Go Crazy!

Early reports tell us that the late musician Prince died without a will.

Therefore, Minnesota “intestacy” statutes (i.e. statutes govern estates of decedents dying without a will) are going to control the administration of Prince’s estate. In a legal petition filed on April 26, 2016, by Prince’s sister, Tyka Nelson, Ms. Nelson stated that she did not know of the existence of a will signed by Prince. Because of this, no person currently has the legal right to act on behalf of his estate (such as a personal representative, executor, or trustee). In the petition, Prince’s sister asked a Minnesota probate court to appoint Bremer Trust as the “special administrator” of Prince’s estate. Under the applicable statutes in Minnesota, a special administrator has the legal authority to act on behalf of an estate in much the same fashion as a personal representative or executor.

In the coming months, it is likely that more information will emerge about Prince’s estate and the assets compiled by this intriguing artist. The special administrator will likely face of number of challenging questions, including:

  • Who is entitled to inherit Prince’s estate? While Tyka Nelson is Prince’s only full sibling, her petition names five “half siblings” as well. Under Minnesota statutes, half siblings are entitled to the same share of an intestate. If other half siblings are discovered, they will also be considered equal heirs of Prince’s estate.
  • How will Prince’s estate and ongoing business interests be managed? Prince’s estate includes extensive holdings of the rights to the songs he wrote, many of which have never been published or released. As we have seen with celebrity estates of Elvis Presley and Michael Jackson, the artist’s ongoing music sales and other intellectual property continues to have considerable value. Reports indicate that 1 million of Prince’s songs and 231,000 of his albums were sold on the single day in which Prince passed away.
  • How will Prince’s estate be valued for estate tax purposes? While the executors of Michael Jackson’s estate reported an initial value of $7 million for Mr. Jackson’s estate, the Internal Revenue Service has valued Mr. Jackson’s estate and lifetime taxable gifts of approximately $1.178 billion (yes, that is billion with a “b”). The matter is currently in a disputed case before the United States Tax Court. For iconic celebrities such as Prince, the artist’s mere “name and likeness” will likely be a separate and independent asset of the estate having significant value. Like the intangible goodwill of an ongoing business, an artist’s name and likeness has the potential to produce significant income in the future.

“Electric word life. It means forever and that’s a mighty long time. But I’m here to tell you, there’s something else. The after world (and taxes).”

~Prince. Let’s Go Crazy (as respectfully modified by a humble lawyer).

SYK Business Counsel: Business Succession Planning Before You Open the Doors

Part of the new SYK Business Counsel Series.

On many occasions, I have had the opportunity to act as legal counsel and advisor to business owners that are at the point of “exit” from their business. This may be at a point where the business is being sold, where the owner is passing the reins of management to the next generation of family owners, or even in some instances where the business is wound down and liquidated. If the business owner has not planned carefully, problems due to taxes, unnecessary expenses, and exposure to unanticipated liabilities can make that departure a rough off-ramp.

The truth is, the best time to begin the process of succession planning is before the business opens its doors. While this may sound counter-intuitive, many important and far-reaching decisions are made in the opening weeks of a new business. Future articles in the SYK Business Counsel series will explore many of these issues in more depth, but here are just a few samples of some critical decision-point questions for owners of new businesses:

  • Do I have a business plan? A business plan will typically set forth a plan for business operations, analyze the business market, layout a management structure, assess the business capital required, and estimate the business’ prospective sales and profitability.
  • Should I get professional advice? While I admit my bias in an answering this question, I strongly believe having a team of professional advisors that is appropriate for the particular business is indispensable to success. Most new businesses face a conglomeration of “keystone” issues relating to taxes, employment laws, business contracts, accounting and finances, banking, insurance, intellectual property, data security, just to name a few. A “team” of professional advisors can help guide the business owner through this complicated thicket of challenges.
  • What legal structure should I use for my business? The business legal structure options include C Corporations, S Corporations, limited liability companies (LLCs), limited partnerships (LPs), limited liability partnerships (LLPs), and, on some occasions, a sole proprietorship. No one entity type is “best” for every business. Rather, the business owner should consider the options in light of many of the same keystone issues referenced above.
  • Where should I locate the business? Not only is a business’ location central to a business’ financial success, but the physical location of a business presents a number of important legal questions. For example, does the business have written lease that allows it to remain at the location for a prudent time period, possibly with options to renew and extend the lease term, if necessary? Do the municipal zoning rules at the location permit the particular operations of the business? These issues may even be critical if the business is initially operated as a home-based business.
  • Is my intellectual property protected? Often intellectual property is one of the most important assets of the business, but is frequently one of the least protected. While intellectual property can take many forms, common forms of intellectual property include trade secrets and other proprietary property (including customer lists and customer data), trademarks, industrial designs, and patented (or patentable) technologies. Proactive steps are often necessary to protect the value of intellectual property from competitors or departing employees.

These are just a few of the many issues for owners of new businesses to consider. If you have particular issues that you would like covered in future additions of the SYK Business Counsel series, feel free to email me.

IRS Telephone Scam – Don’t Fall for It!

Recently, I spoke with two clients who were almost victims of a pervasive telephone scam involving a person posing as an Internal Revenue Service agent.  In each instance, the caller demanded immediate same-day payment of thousands of dollars in order to prevent drastic enforcement measures as a result of alleged tax debts.  In one instance, the perpetrator actually threatened criminal arrest if the money was not paid the same day.  Luckily, in both instances the wannabe IRS agents failed in their attempted swindle as reasonable questions from both of my clients yielded answers that were both hostile and suspicious.

In a recent public notice, the IRS issued a consumer alert giving taxpayers additional tips to avoid these telephone scams.  The typical scam described in the alert is similar to that experienced by my clients.  In these situations, the scammer may know your name and address, and possibly other personal details such as the last four digits of the victim’s social security number.  Their caller ID may contain a false descriptor that references the IRS in some way.  In almost all instances, very serious enforcement actions – such as bank account levies or criminal arrest – will be threatened.  To avoid such consequences, the scammer seeks payment through some fast payment system, such as a temporary debit card or wire transfer.

In the recent alert, the IRS reminded taxpayers of the following five things the IRS will never do:

1. Call you about taxes you owe without first mailing you an official notice.

2. Demand that you pay taxes without giving you the opportunity to question or appeal the amount they say you owe.

3. Require you to use a specific payment method for your taxes, such as a prepaid debit card.

4. Ask for credit or debit card numbers over the phone.

5. Threaten to bring in local police or other law-enforcement groups to have you arrested for not paying.

If in doubt about an alleged communication from the IRS, you can always call the IRS at 1.800.829.1040 to ask more questions.  If you do receive a scam call, you can also file a complaint using the FTC Complaint Assistant.  Just follow that line, choose “Other” and then “Imposter Scams.” If the complaint involves someone impersonating the IRS, include the words “IRS Telephone Scam” in the notes.

Oregon Secretary of State Issues “Scam Alert”

Last week, Oregon Secretary of State Kate Brown issued a “Scam Alert” relating to deceptive mailings received by a number of Oregon businesses. The deceptive mailings are entitled “Compliance Filing Center – Annual Minutes Compliance Notice,” and include an invoice for the recipient business to pay $150.00.

In addition, several clients of our firm have received a number of very similar notices from “Corporate Records Service” in Salem, Oregon. These notices, entitled “2013 – Annual Minutes Form,” seek $125.00 for the supposed preparation of annual corporate minutes.

Despite the official looking appearance of these notices, these notices are not from the Oregon Secretary of State nor are they authorized by the Secretary of State’s office to send these notices on the State’s behalf. Neither the “Compliance Filing Center” nor the “Corporate Records Service” is listed on the Oregon Secretary of State’s website as having been authorized to do business in Oregon. The addresses of both companies appear to be private mail boxes and not legitimate business addresses. It is by no means certain that these companies will actually provide the services that they claim to offer, or whether these services are adequate to comply with Oregon corporate statues.

The Oregon Secretary of State’s website includes a page setting forth excerpts from Oregon corporate statutes relating to the requirement for corporations to hold an annual meeting of shareholders and other statutory corporate records requirements. Please feel free to contact us is you have any questions regarding these requirements.

Tax-Free Transfers to Charity Renewed For IRA Owners 70½ or Older; Rollovers in January 2013 Can Still Count For 2012

Certain owners of individual retirement arrangements (IRAs) have a limited time to make tax-free transfers to eligible charities and have them count for tax-year 2012, the Internal Revenue Service said today.

IRA owners age 70½ or older have until Thursday, Jan. 31 to make a direct transfer, or alternatively, if they received IRA distributions during December 2012, to contribute, in cash, part or all of the amounts received to an eligible charity.

The American Taxpayer Relief Act of 2012, enacted Jan. 2, extended for 2012 and 2013 the provision authorizing qualified charitable distributions (QCDs)—otherwise taxable distributions from an IRA owned by someone, 70½ or older, paid directly to an eligible charitable organization. Each year, the IRA owner can exclude from gross income up to $100,000 of these QCDs. First available in 2006, this provision had expired at the end of 2011.

The QCD option is available regardless of whether an eligible IRA owner itemizes deductions on Schedule A of IRS Form 1040. Transferred amounts are not taxable and no deduction is available for the transfer. QCDs are counted in determining whether the IRA owner has met his or her IRA required minimum distributions for the year.
For tax-year 2012 only, IRA owners can choose to report QCDs made in January 2013 as if they occurred in 2012. In addition, IRA owners who received IRA distributions during December 2012 can contribute, in cash, part or all of the amounts distributed to eligible charities during January 2013 and have them count as 2012 QCDs.

Dance Partners On The Fiscal Cliff

“I want everyone to know that I’m willing to get this done, but I need a dance partner.”

-Senate Minority Leader Mitch McConnell in a Senate Floor Speech, December 30, 2012

In a flurry of activity around the New Year’s holiday, Congress in part averted the much touted “Fiscal Cliff” – the series of expiring tax cuts and sharp governmental spending reductions that would have taken effect on January 1, 2013. In the early hours of January 1, 2013, the Senate passed the American Taxpayer Relief Act of 2012 (ATRA) by a vote of 89 to 8. Thereafter, after a flurry of party caucuses on New Years Day, the House of Representatives passed ATRA by a vote of 257 to 167. President Obama is expected to sign the Act.

Here is a quick summary of ATRA’s major tax provisions:

Tax Rates. Beginning in 2013, for married taxpayers with incomes greater than $450,000 and single taxpayers with incomes greater than $400,000, the tax rate on the portions of their incomes greater than those threshold amounts will be 39.6%. For taxpayers with incomes lower than the threshold amounts, the tax rates in effect for 2012 and prior years will be made permanent. Hence, the top income tax rates return to those that were in effect during the Clinton presidency, albeit at much higher income levels than if the “Fiscal Cliff” had become a reality.

Tax on Capital Gains & Dividends. ATRA includes a permanent extension of current capital gains and dividend rates for individuals and married couples earning less than the $400,000/$450,000 thresholds mentioned above. For taxpayers with incomes greater than those thresholds, the tax return on capital gains and dividends will return to a 20% rate. This does not include the new 3.8% Medicare surtax taking effect in 2013, which in general will impact single taxpayers with incomes over $200,000 and married couples with joint incomes over $250,000. Hence, the top federal tax rate on capital gains and dividends earned by some taxpayers will be 23.8%.
Estate & Gift Taxes. The current $5 million exemption levels for estate, gift, and generation skipping transfer (GST) taxes will be made permanent. As indexed for inflation, the exemption levels are expected to be $5.25 million for 2013. In a compromise between Republicans (who wanted to keep the current 35% tax rate on estate and gift taxes) and Democrats (who wanted the rates to rise to 45%), the parties “split the difference” and increased the top estate, gift, and GST tax rates to 40%.

Alternative Minimum Tax (AMT). The AMT was passed in 1982 to ensure that wealthy Americans didn’t use tax loopholes to avoid paying a certain amount of income taxes. Because the original income levels under the AMT provision were not indexed for inflation, the AMT needed to be continually “patched” as the years have gone by to prevent the AMT from impacting middle-class taxpayers. ATRA includes a provision which will permanently “patch” the AMT.

Limitations on Itemized Deductions & Personal Exemptions. ATRA restores to the Tax Code previously-repealed limitations on itemized deductions and personal exemptions. These limitations will effectively reduce the amount of itemized deductions and personal exemptions that can be utilized for single taxpayers with incomes greater than $250,000 and married taxpayers with incomes in excess of $300,000.

Expiration of Payroll Tax “Holiday”. The provisions of ATRA do not include an extension of the prior law’s provisions which reduced the employee portion of social security payroll taxes from 6.2% to 4.2%. Hence, the 6.2% will apply to all wages paid in 2013 and years thereafter.

WealthLawBlog.com will continue to follow these developments and other important tax and legal issues.

Who Really “Owns” Your iTunes and Amazon Content?

Like many Americans, I have a digital smart phone, tablet computer, and other digital media devices. Along with owning these devices, I have “purchased” (at least I thought I did) digital content such as music, movies, and digital “ebooks.” Americans purchase around $6 billion (and rising) of such content each year. However, when we die, who “owns” all of this digital content? The “legal” answer may be a surprise.

Typically, when one purchases digital content from providers like Apple or Amazon, a license agreement relating to that content is involved, and this agreement controls your legal rights to that content. Most people don’t really take the time to read and understand these license agreements. Rather, they click the “ACCEPT” button so they can move forward and access the digital content.

A typical digital licensing agreement provides that the content is “personal” and “nontransferable.” This means that these digital providers are licensing (similar to “renting”) this content only to you, and you or your estate do not have the right to transfer this content to a third person (such as your children or other heirs) when you die. Taken literally, when a person dies, the license to the digital content comes to an end.

There is no easy answer to this dilemma. The law relating to rights to digital content still needs to catch up to the world of digital ownership. In Oregon, my law partners, Victoria Blachly and Jeff Cheyne, and I have recently worked on an Oregon State Bar task force to draft proposed legislation which we anticipate will be introduced in the 2013 session of the Oregon Legislature. If passed, this legislation will allow the personal representative of a decedent’s estate to send a notice to a company holding digital content of a decedent, and within a specified time after receipt of that notice, the company must provide the personal representative with access to digital accounts maintain by such company and/or copies of any digital assets stored by the company.

While the potential Oregon legislation is not currently law, it represents an effort by our task force to begin to address an area where the law has not kept pace with technology, particular with respect to the digital content that has become so commonplace in American society. Watch for more updates in Wealth Law Blog as the legislation (hopefully) makes its way through the Oregon legislature.

What happens when a trustee has too much discretion?

The executors for the estate of Whitney Houston filed a petition last week to amend some of the distribution language in Whitney’s Last Will. The wording in question outlines the trust to be created for her daughter Bobbi Kristina Brown’s benefit. The executors are working to amend the Last Will to provide the Trustee with less discretion over payments to Bobbi Kristina. The petition states that Bobbi Kristina "is a highly visible target for those who would exert undue influence over her inheritance and/or seek to benefit from respondent’s resources and celebrity."

Whitney’s Last Will gave the Trustee of Bobbi Kristina’s trust liberal discretion to make payments of principal and income out of the trust for Bobbi Kristina’s benefit. Whitney’s Last Will also outlined the following series of principal payments to Bobbi Kristina: 1/10th of the principal when she turned 21, 1/6 when she turned 25, the remaining balance when she turned 30. Language of this sort is found in many estate planning documents.

In Oregon, and in most states, attorneys have a handful of ways to try to alter distributions in order to protect vulnerable beneficiaries. The text of properly executed legal documents is difficult to argue against, however, no matter how compelling or heart wrenching the story is about the beneficiary’s circumstances. The facts of each specific case determine the strategy when amending these sorts of provisions.

Whitney Houston’s estate is dealing with arguing family members, issues over control, and servicing the sizeable debt Whitney left behind. These issues come up fairly often when administering estates. My colleague Glen Goland and I will be discussing some of the practical lessons we can learn from the estates of Presidents, Princesses and Rock Stars at a 90 minute seminar in our office next week. Our meeting will take place from 7:30 to 9 AM on Thursday October 11. To register for this seminar, please contact us at events@samuelslaw.com or 503-226-2966. Space is limited, so be sure to contact us soon.
 

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