Pennsylvania Fiduciary Litigation : Pennsylvania Trusts and Estates Lawyer & Expert Witness : Patti Spencer Law Firm : Fiduciary Litigation, Planning : Lancaster, Harrisburg, Philadelphia, Pennsylvania

The New York Court of Appeals has broken new ground.  It has held that an attorney may be held liable for damages resulting from negligent representation in estate tax planning that causes enhanced estate tax liability.  The court held that a personal representative of an estate may maintain a legal malpractice claim for such pecuniary losses to the estate.  The case is Estate of Saul Schneider, Appellant, v Victor M. Finmann, et al., Respondents, New York Court of Appeals Opinion No. 104 (June 17, 2010), 2010 NY Slip Op 5281.

The case involved a $1 million life insurance policy that was included in the decedent's estate for estate tax purposes.

Before this case, NY courts have applied a strict privity rule, that lawyers owe no duty of care to non-clients, and only a client may sue a lawyer for legal malpractice.   As the New York Appeals Court Jude pointed out, the application of the privity rule "leaves the estate with no recourse against an attorney who planned the estate negligently."  The opinion stated: "We now hold that privity, or a relationship sufficiently approaching privity, exists between the personal representative of an estate and the estate planning attorney."

Further:  "The personal representative of an estate should not be prevented from raising a negligent estate planning claim against the attorney who caused harm to the estate," Judge Jones wrote. "The attorney estate planner surely knows that minimizing the tax burden of the estate is one of the central tasks entrusted to the professional."

The court made it clear, however, that strict privity should remain a bar against malpractice suits launched by estate beneficiaries or other third parties absent fraud claims or other special circumstances.

 I recommend that you read Steve Leimberg's insightful comments on the case in his newsletter at LISI Estate Planning Newsletter # 1660 (June 19, 2010) at http://www.leimbergservices.com Copyright 2010 Leimberg Information Services, Inc. (LISI).

• Email This
• Print
• Comments
• Trackbacks

Aron Heller writes for the AP:

"JERUSALEM – It seems almost Kafkaesque: Ten safety deposit boxes of never-published writings by Franz Kafka, their exact contents unknown, are trapped in courts and bureaucracy, much like one of the nightmarish visions created by the author himself.

The papers, retrieved from bank vaults where they have sat untouched and unread for decades, could shed new light on one of literature's darkest figures.

In the past week, the pages have been pulled from safety deposit boxes in Tel Aviv and Zurich, Switzerland, on the order of an Israeli court over the objections of two elderly women who claim to have inherited them from their mother."  Click here to read the rest of Heller's article.

From Wikipedia:

"Kafkaesque" is an eponym used to describe concepts, situations, and ideas which are reminiscent of the literary work of the Austro-Hungarian writer Franz Kafka, particularly his novels The Trial and The Castle, and the novella The Metamorphosis.

The term, which is quite fluid in definition, has also been described as "marked by a senseless, disorienting, often menacing complexity: Kafkaesque bureaucracies"^[1] and "marked by surreal distortion and often a sense of impending danger: Kafkaesque fantasies of the impassive interrogation, the false trial, the confiscated passport ... haunt his innocence" — The New Yorker.^[2]

Hat tip to Wills, Trusts and Estates Prof Blog - read his summary here.

• Email This
• Print
• Comments
• Trackbacks

Juan Altunez writes in his Florida Probate and Trust Litigation Blog about this recient Florida Supreme Court case:  Olmstead v. F.T.C., --- So.3d ----, 2010 WL 2518106 (Fla. Jun 24, 2010). Read his execllent summary and anlaysis of the case here.

An excerpt from the post:

"For those of you interested in understanding the charging-order policy issue I think is lurking in the background of the Florida Supreme Court's ruling, STARTrightLLC.com is an excellent starting point. Below is an excerpt from that website explaining why charging-order protection makes sense in a multi-member LLC scenario, and why it doesn't make sense for single-member LLCs.

The charging order protects the company and the member’s investment if one of the members is sued in his or her personal life. . . . The original charging order philosophy protected guys A, B from having to accept D as an unwanted partner if C, the person they originally went into business with gets sued. They don’t want to have to deal with D. To prevent this unwanted member . . . the charging order is all D can get out of C’s membership . . . The charging order limits D. He must wait for A and B to decide to distribute money. No distributions = no money.

The Single Member Hitch: When a the member of a single member LLC is sued, there is no other member to protect from D. Two bankruptcy courts have used this flaw in the LLC protection to allow creditors of a business owner to completely take over his LLC and liquidate it for cash. The first case was in Colorado and the nation held its breath to see what would happen next. The next case was in Idaho and actually used the Colorado case to base its decision on. This means the trend is starting to move in the direction of denying charging order protection to single member LLCs."

• Email This
• Print
• Comments
• Trackbacks

Remember when Treasury Secretary Timothy Geithner ran into trouble because he hadn’t paid his self-employment tax? There was quite a political stir because it meant a tax-evader would be in charge of the IRS.

Geithner had worked at the International Monetary Fund from 2001 to 2004. During those four years, he paid no social security or Medicare taxes. American citizens who are IMF employees don't have FICA and Medicare tax withheld from the paychecks because it is an international agency. They are considered to be self-employed and are supposed to treat the income as "self-employment" earnings, paying both employer and employee payroll taxes on the income.

The IRS audited Geithner in 2006 and discovered the problem for his 2003 and 2004 returns. Geithner paid just under $17,000 at the time, and the IRS waived any possible penalties. A three-year statute of limitations precluded the IRS from auditing the 2001 and 2002 tax returns. Geithner didn’t volunteer to look over 2001 and 2002 returns even though they contained the same mistake as the 2003 and 2004 returns. The additional amounts for 2001 and 2002 ($25,000) were discovered by the Obama vetting team and Geithner promptly paid up.

Mr. Geithner testified before Congress that he self-prepared his returns using Turbo Tax and that the error was a careless mistake. He paid his over-due social security taxes without penalty, and went on to become the Secretary of the Treasury. Did you ever wonder if it would work for the rest of us?

On June 21, 2010, the U.S. Tax Court handed down a decision in the case of another IMF employee, David Cameron Parker. Mr. Parker also failed to pay self-employment tax, used Turbo Tax to self-prepare his tax returns, and due to that fact argued that he had reasonable cause and acted with good faith with regard to the underpayment. Mr. Parker initiated contact with the IRS and voluntarily came forward with the problem, requesting a waiver of penalties. (He wasn’t caught in an audit.)

From May 25, 2005 through 2006, Mr. Parker earned gross annual compensation of approximately $175,000 while working for the IMF. On his 2005 return, Mr. Parker reported a tax liability of $20,212, which was about $12,000 less than what he actually owed. He asserted that he believed Turbo Tax included the self-employment tax in the tax he owed. He claimed that he called TurboTax and specifically asked "an expert" if self-employment taxes were included. He claimed the "expert" said they were included.

The Court did not believe such a conversation took place, since there were no self-employment taxes shown on the return. As for acting in "good faith" by initiating contact with the IRS regarding the underpayment, good faith must be shown before and during the act of filing. No later acts are included in the "good faith" definition. The IRS refused to waive penalties and the Tax Court backed up the IRS. Here is an excerpt from the opinion, Parker v. Commissioner, T.C. Summ. Op. 2010-78 (June 21, 2010):

"We shall address briefly petitioner's contention that the IRS granted "favorable treatment" in a case involving U.S. Secretary of the Treasury Timothy Geithner, which petitioner described as "incredibly similar" to the instant case. According to petitioner, "there should not be different, or favorable rules for the well-connected". The record in this case does not establish any facts relating to the case to which petitioner refers involving U.S. Secretary of the Treasury Timothy Geithner. In any event, those facts would be irrelevant to our resolution of the issue presented here. Regardless of the facts and circumstances relating to the case to which petitioner refers involving U.S. Secretary of the Treasury Timothy Geithner, petitioner is required to establish on the basis of the facts and circumstances that are established by the record in his own case that there was reasonable cause for, and that he acted in good faith with respect to, the underpayment for each of his taxable years 2005 and 2006 that is attributable to his failure to report self-employment tax."

Similarly situated taxpayers should be treated similarly. The Tax Court was not necessarily wrong in the Parker case. There are other cases holding that reliance on tax preparation software is not enough to escape penalties. The problem is that Geithner should have had to pay the penalty as well.

• Email This
• Print
• Comments
• Trackbacks