This Article is designed to be of general interest. The specific techniques and information discussed may not apply to you. Before acting on any matter contained herein, you should consult with your personal legal adviser.

First, the important items:

The long-term Capital Gains period for sales after 1/1/98 is reduced to 12 months. The 1997 Act had created 3 holding periods:

1. short-term (less than 12 months);
2. mid-term (between 12 and 18 months); and
3. long-term (more than 18 months).

As previously reported (1997 Tax Act), the new law fixed an error in the 1997 Tax Act regarding the Exclusion for the sale of a Principal Residence. If the 2 year use and ownership tests are not met, and a sale occurs

1. before 8/5/99 or
2. due to special circumstances (health, job, etc.),

If Bob owned a home for only 1 year and was eligible for the "reduced exclusion," if his profit was $80,000, a strict reading of the 1997 Tax Act required taxation of $40,000 (50% of his gain). Now the 1997 law has been retroactively corrected to allow Bob to exclude 50% of his $250,000 exclusion amount and pay no tax on any gain up to that amount.

Various technical errors were fixed in the Roth IRA rules, as expected. Our Roth IRA article has not been affected.

IRS Restructuring
Attacking the IRS has become a favorite political bandwagon. The horror stories in the recent Congressional Hearings show how an out-of-control IRS can abuse taxpayers.

Our personal experience is that most of these horror stories are due to taxpayers' failure to respond to the IRS. If the IRS writes to a taxpayer:

• who moved without sending a change of address form to IRS; or
• who fails to respond; or
• whose response is not properly received by IRS,

Innocent Spouse status has been expanded. Formerly, an ex-wife who enjoyed a high standard of living and filed a joint return with her crooked husband had no chance of relief, since she enjoyed the benefits of his tax crimes.

Now Innocent Spouse qualification has been greatly expanded.

Joint Returns also impose joint and several liability. The crooked husband who embezzled money, failed to report it, filed a joint return, and fled the country with his mistress left behind a wife who signed the joint return. Formerly, the IRS could seek full payment from her.

Now, innocent divorced or separated taxpayers may be responsible only for their share of the tax liability in certain circumstances.

Both of these new rules apply to

• tax liabilities arising after the date of this brand new law, or
• to taxes still owed now.

Last year if each side presents equal evidence in Tax Court, the case is a tie and the Taxpayer lost because he did not meet the burden of proof. On the other hand, if the Taxpayer's case is just a smidgen better than the IRS's case, the Taxpayer won.

Now, under the new law if the case is a tie, the Taxpayer wins (if he cooperated at audit).

In real life, this means little as very few cases end up in a tie.

IRS seizures are now somewhat limited; either a Judge's or high-level IRS officer's approval will be needed.

Also, there has been some simplification made to the Family Business Exclusion for estate taxes.

Custodial Account Reminder
I am constantly amazed at the financial planning professionals who do not understand the following:

If the Donor (of a gift to a minor) is the Custodian under the Uniform Transfers to Minors Act, at the Donor's death the Custodial account is part of the Donor's taxable estate.

A simple example illustrates this.

Dad puts $10,000 a year into a Custodial account for Junior. Dad is Custodian. The account grows, and when Dad dies is worth $100,000. The entire $100,000 is part of Dad's taxable estate, because Dad was both the Donor and Custodian.

If Grandpa puts $10,000 a year into a Custodial account for Junior with Dad as Custodian, the account is not part of Grandpa's taxable estate, because Grandpa was not both the Donor and Custodian; it is also not part of Dad's taxable estate, because Dad was not both the Donor and Custodian.

Custodianship accounts terminate by California law at one of 3 points:

1. If the gift was made during the Donor's lifetime, it may last until the minor reaches age 21 IF that age is specified at the time the account is opened;
2. If the gift was made at the Donor's death, it may last until the minor reaches age 25 IF that age is specified at the time the account is opened;
3. Under either circumsrtance, if no age specification is made, the child gets the account at age 18!

A Minors Trust may be a better solution because it may last until any age.

Finally, either device should be evaluated against the general college aid requirement that a student must spend 35% of his assets for college.