Nanotechnology is technology at the molecular level that was first proposed by Mr. K. Eric Drexler.[1] The technology would revolutionize and transcend human existence by extending life and possibly defying death with such inventions as nano-medical devices that can repair and mend human tissue inside the body. Furthermore, nanotechnology may provide the missing key in the field of human cryogenics, allowing a person suspended in time to return back to life with the assistance of nano-devices that would reverse the freezing process and restore cells back to life. Therefore, nanotechnology may provide people an opportunity to hibernate like bears, but at greater length, albeit in a frozen state, and come back to the world in a different generation. Death may not be a certainty anymore due to the technology. As a result, taxes may be the last certainty one can expect in life.
A question may arise whether a person is actually dead or alive if nanotechnology allows a person suspended in time with the application of cryogenics to be reawakened. Traditional view would indicate a person who shows no signs of life to be dead. Also, death implies a final and irreversible event. For example, the current view is that a person placed in a frozen state in human cryogenics is thought to be dead because the person is dead before their body is frozen. But, nano-medical advances may allow a person to be suspended in time before he or she is dead and revived at a later date. Hence, nanotechnology may blur the definition of death as a person once thought to be death can be reawaken. In the context of tax law, the act of death is very important in the Code[2] because certain tax events are triggered upon the death of the taxpayer. If a taxpayer is not dead, but acts dead, the tax laws may not know how to treat such an unusual state of flux. As a result, this paper will focus on the tax problems that may encounter to a taxpayer suspended in time and provide alternative solutions by extracting and modifying existing tax laws.
Where the person is suspended in time and revived at some point in the future, there is a question whether the person was in fact dead at some point. “An individual who has sustained either (1) irreversible cessation of circulatory and respiratory function, or (2) irreversible cessation of all functions of the entire brain, including the brain stem, is dead.”[3] Although, a person suspended in time under cryogenics has ceased their basic life functions, the cessation is arguably not irreversible since nano-devices would be able to revive the person. Therefore, a suspended person may still be treated as “alive” under the traditional definition. Arguably, a person is not dead if the person revives at a later date. For example, a person being resuscitated back to life is not considered once dead for legal purposes, but a fortunate survivor.
If a person suspended in time is not deemed dead, an interesting question arises relating to every American’s duty to file a timely individual tax return. If such a person fails to file a tax return, would such a person be subject to penalties for failure to file. This is an intriguing issue as it is very conceivable that the taxpayer will receive some type of income during his or her suspended period, such as deferred compensation or passive income (e.g., interest, dividends, and rental income).
In general, the Code requires every taxpayer subject to income tax to file an individual tax return on or before the fifteenth day of April following the close of the calendar year.[4] Thus, a person who is suspended in time would be required to file a return by every April 15.
Failure to file a timely tax return imposes late filing and late payment penalties.[5] However, the penalty for failure to timely file or pay tax may be waived if the taxpayer “can show that such failure is due to reasonable cause and not due to willful neglect.”[6] Thus, if the person in suspension fails to file a tax return, the person may nevertheless seek a waiver of the penalties if the failure was due to “reasonable cause” and did not result from “willful neglect.”
1. Reasonable Cause
Reasonable cause means when “the taxpayer exercised ordinary business care and prudence and was nevertheless unable to file the tax return within the prescribed time.”[7] The taxpayer has the burden of proof to show reasonable cause.[8] One example of reasonable cause provided by the Service[9] is where the failure to file arise from death or serious illness of the taxpayer.[10]
Death would not be a reasonable cause since the suspended person arguably is not deceased. Looking at the category of serious illness, the Courts focus on the taxpayer’s degree of incapacity to determine whether the illness was reasonable cause.[11] “The incapacity must be so severe that the taxpayer cannot function during the period, and so sudden that he could not reasonably have planned for it.”[12] Previously, the Courts found reasonable cause where a taxpayer was in serious paralysis[13] or was hospitalized.[14] In both instances, the taxpayers were incapacitated to the extent that they were not able to physically prepare their individual tax returns by the filing due date. Although, a suspended person may not be seriously ill, such a person is incapacitated to perform their American duty to timely file their tax returns.
The Courts hold that “a taxpayer should not be penalized for circumstances beyond his control.”[15] However, a person suspended in time may have done so voluntarily, at their discretion and control. Such person arguably could have reasonably planned ahead of time to comply with the filing obligations by preparing the tax returns in advance. The Courts are allowed to determine reasonable cause based on all of the facts and circumstances.[16] In light of the new technology, the Courts may hold that a person who suspends his or her life due to no serious illness is not in a circumstance beyond his or her control since the act may be voluntary. Therefore, the Courts may not treat life suspensions to fall within the scope of incapacity to meet reasonable cause. If not, allowing all life suspensions to qualify as reasonable cause, irrespective of the basis for why the person’s life was suspended, would be subject to abuse. Potentially, such activity may become a tax-planning tool to avoid or postpone filing tax returns, although it seems like a drastic step to take.
2. Willful Neglect
Also, a taxpayer’s failure to file an individual tax return may not result from willful neglect for waiver of late filing and late payment penalties. Willful neglect is not defined in the Code, but willful has been described to mean a conscious, intentional failure or reckless indifference.[17] If a taxpayer suspended in time knew or reasonably should have known a filing deadline was due and did not take any actions, arguably the Courts could hold that the taxpayer consciously and intentionally neglected his or her filing obligations. A lack of good faith in becoming incapacitated would result in the taxpayer not lacking from willful neglect. Therefore, the Courts would be cautious in determining whether a person suspended in time can abate penalties if their income tax returns are not timely filed during the suspension period. Interestingly, would the Service require a suspended person to be revived solely for the purpose of answering questions of willful neglect or other tax issues?
1. Cumulative Tax Return
In order to lessen the administrative burden of a taxpayer suspended in time but nevertheless required to file annual tax returns, the Code may be revised to provide for a safe harbor provision allowing taxpayers to suspend their annual compliance requirements. Upon reawaking, the person could then be required to file a cumulative tax return within a certain period of time or report all of the unreported income with the next filing due date with no late filing or late payment penalties. The latter treatment would be somewhat similar to the mechanism under the dual consolidated loss rules.[18]
The dual consolidated rules allow a taxpayer to claim certain losses with the understanding that the all of the “tainted” losses may be recaptured in one year upon the happening of a triggering event, even though the losses may have been claimed in several previous years. This timing difference is important, as an amended return is generally required when the original tax return does not reflect the true taxable income. For example, if the tainted losses are disallowed, the taxpayer would have to refile the prior year tax returns to properly excluded those amount. However, the dual consolidate rules allows the taxpayer to avoid filing the amended tax returns by simply recognizing the cumulative tainted losses claimed in the prior years in the current year. Similarly, the person who is revived can simply report any unreported income during the suspension period in the year of revival.
Note, the person suspended in time would be subject to interest in any event. The Service would impose interest on the time value of money in which the Service could have earned if the taxes were paid timely. Similarly, under the dual consolidated rules, interest is also assessed, determined “as if the additional tax owed as a result of the recapture had accrued and been due and owing for taxable year in which the losses, expenses, or the deductions taken into account in computing the dual consolidated loss gave rise to a tax benefit for U.S. income tax purposes.”[19] Likewise, the interest on the unpaid taxes during the suspended years would be computed in a similar fashion.
Under the Code, the taxpayer that claims dual consolidated losses is required to file an annual certificate statement, signed under penalties of perjury, with its annual tax return to indicate that the taxpayer will and has complied with the rules.[20] Similarly, the Service could require a taxpayer to enter into agreement prior to becoming suspended in time, in which the taxpayer will agree to pay any unpaid taxes upon revival, signed under penalties of perjury. So, if the taxpayer fails to file to pay any back taxes upon revival, the Service would have a cause of action.
Unfortunately, the drawback under this alternative is that the Service may not receive any taxes in situations where the suspended taxpayer is never revived, although the taxpayer would not obtain any benefit either since he or she will be incapacitated.
2. Power of Attorney
Alternatively, the Service could allow a taxpayer, prior to being suspended in time, to allow a representative to be responsible for filing the suspended person’s tax returns by completing a power of attorney form. Under this approach, the taxpayer’s exposure for future examinations is limited because the statute of limitations for assessment by the Service for each suspended year would start to run upon the filing of the tax return.[21] If a tax return were not filed for a particular year, the statute of limitations for such year would never lapse.[22]
3. Gross Withholding Tax System
The Service could institute an alternative tax system during the suspended period in which the taxpayer would be subject to a tax at a fixed percent measured on the gross income earned during suspended period rather than computing tax on the current net income method. For example, the Code provides a similar system where the tax is applied on a gross basis for certain U.S. source income earned by nonresident alien individuals not connected with a U.S. trade or business.[23] The tax is withheld at source and as a result, the nonresident alien is generally not required to file a tax return. The payor of income is deemed to be a withholding agent and is required to withhold and deposit the tax to the Service.[24] This system shifts the burden from the taxpayer to the withholding agent. Thus, the party submitting income payments to the suspended taxpayer could be treated as the withholding agent and be required to withhold and deposit the tax in a similar fashion set forth for payments made to nonresident aliens.
Where a person suspended in life is never revived, should such a person be treated as deceased.
The traditional definition of death seems to look whether the cessation of the functions is irreversible. With the advent of nanotechnology, it would appear nobody would meet this test. Therefore, an alternative test for death may be required. For example, the definition may look to the intent of the person to be the controlling factor, rather than the physical state of their body. However, to determine a person’s intent at times may also be as allusive as the definition of death. In addition, the person may already be suspended in time and thus, would not be able to answer any questions.
For simplicity, a person suspended in life should have a presumption that the person would be revived sometime in the future or else why would the person be suspended in time in the first place. Thus, a bright-line rule could be imposed to indicate that a person suspended in time is technically alive unless other facts and circumstances can be shown that the person intended otherwise. The taxpayer or his or her estate would have the burden of proof.
Assuming a suspended person can qualify to be dead, such notion impacts the Code where the reference of death is used for valuation and for triggering certain tax events. For example, the basis of a property acquired from a decedent is generally measured at its fair market value at the date of death.[25] Thus, a property may obtain a “stepped up” basis in which the appreciation of the property escapes from income taxation. Death also invokes the estate tax[26] and may result in triggering the filing of an estate tax return within nine months after the decedent’s death.[27]
If the date of death can be manipulated or predetermined, a decedent’s death may be decided when the value of the property (e.g., equity securities) have substantially appreciated in value. As a result, the recipient of the property could reduce gain recognized on the subsequent sale since its basis in the property would be the fair market value at the date of the decedent’s death (i.e., the higher appreciated value).[28]
For estate tax purposes, the value of the gross estate of the decedent reduced by allowable deductions is subject to the estate tax.[29] Thus, the value of the gross estate can also be subject to manipulation by planning the date of death of the decedent. Similarly, the manipulation of the date of death can impact the decedent’s final income tax return by including more or less income and deductions in the final tax year, and subsequently affecting the liability of the decedent’s estate.[30] Arguably, such planning is not a legitimate tax-planning tool intended by the Service.
In order to alleviate the confusion of when death actually occurs and avoid future disagreements between the taxpayer’s estate and the Service, the Code could provide an elective provision which allows the taxpayer’s estate or representative to make an election to choose the official date of death in situations where the taxpayer, who is suspended in life, would not be revived. Such an approach may be similar to the “check-the-box” regulations that provides certain taxpayers an election to choose its entity classification for tax purposes without the fear that the Service would challenge its classification.[31]
Alternatively, where a person has been suspended in time for a certain period of time and is uncertain whether the person would be revived, the Code could provide a safer harbor provision which allows the taxpayer to elect himself or herself to be deemed dead for tax purposes. Thus, prior to being suspended in time, the taxpayer may enter into an agreement with the Service to provide that after a certain length of time (e.g., five years from date of life suspension), the taxpayer would be treated as dead for tax purposes only.
Although, both alternatives may create different dates of death for other legal purposes, it is not uncommon for tax and other legal rules to be inconsistent. For example, a limited liability company is treated as a separate legal entity from its members for corporate law purposes. However, the limited liability company may be disregarded as an entity separate from its owner where there is one owner or can be treated as a partnership if there are two or more members for tax purposes.[32] Therefore, inconsistent positions for determining date of death would not be unique.
A concern for allowing a person to elect to be dead is in a situation where a person actually comes back to life after electing a date of death. Could a person die twice in a lifetime for tax purposes? At first glance, it may appear that the tax system will be in mockery. However, the Code does provide answers to some dilemma caused by such double deaths. For example, under the federal estate taxation, an estate tax credit may be entitled on prior transfers for the amount of estate tax paid.[33]
In general, the Code can simply correct this unusual circumstance by excluding items that was taxed at death from double taxation. For example, the definition of gross estates in the computation of the estate tax can exclude any property that was included to determine the gross estate previously by the same taxpayer. However, there is a more basic question to ponder. Would a revived taxpayer be concerned about double taxation if all of taxpayer’s assets and belongings were transferred to the taxpayer’s beneficiaries at the first death, thereby waking up with nothing in his or her possession.
The current income tax laws that address death are
based on the traditional view that a death is generally an
identifiable and irreversible event. If the date of death were easily
determinable, most of the tax laws addressing death issues would be
viable. However, nanotechnology creates a new time period in a
taxpayer’s life (i.e., suspension in time) and blurs the
definition of death. Traditionally, laws have not been proactive with
new issues that result from technological changes and the tax law is
no exception. For instance, computer software has been around for
some time and there is still confusion for the consistent tax
treatment of software, especially in the area of sales and use tax.
In California, a prewritten software transmitted electronically
through the internet from the seller’s place of business to the
purchaser’s computer is not subject to California sales and use
tax.[34]
However, Texas imposes a sales and use tax on prewritten computer
software in any medium.[35]
There are regulations relating to the international taxation of
computer software,[36]
but there are no similar regulations for domestic taxation of
software. As a result, shrewd lawyers and accountants may
abuse a sacred event as death to take full advantage of the tax laws
that may become out-dated when nanotechnology comes into existence.
However, the policymakers have tax rules from other sections of the
Code that can be applied to the current death laws to resolve the
pending new death issues. [2]
Internal Revenue Code of 1986, as amended [3]
Unif. Determination of Death Act, 12 U.L.A. 270 (Supp.
1985) [4]
IRC §6072(a) – Where the tax return is made on the basis
of a fiscal year, the due date of the return is the fifteenth day of
the fourth month following the close of the fiscal year. [5]
IRC §6651 [6]
Id. [7]
Treasury Regulations §301.6651-1(c)(1) [8]
Bebb v. Commissioner, 36 TC 170, 173 (1961) [9]
Internal Revenue Service [10]
Internal Revenue Service Manual Handbook, Chapter 3, Section 3.2.1,
7.6.1, Examination of Delinquent Returns (April 12, 1999) [11]
BNA Tax Management Portfolio 634 - Civil Tax Penalties,
A-68. [12]
Id. [13]
US v. Issac, 91 USTC (1991) [14]
Freeman v. CIR, TC Memo 1980-380 (1980) [15]
US v. Boyle, 469 US 243 (1985) [16]
Estate of Duttenhofer v. Commissioner, 49 T.C. 200 (1967) [17]
US v. Boyle, 469 U.S. 245 (1985) [18]
Treas. Reg. §1.1503-2 [19]
Treas. Reg. §1.1503-2(g)(2)(vii)(A)(2) [20]
Treas. Reg. §1.1503-2(g)(2)(vi)(B) [21]
IRC §6501(a) [22]
IRC §6501(c)(3) [23]
IRC §871 [24]
IRC §1441 [25]
IRC §1014 – Alternatively, the basis of property acquired
from a decedent may be based on the value at later valuation
date. [26]
IRC §2001 [27]
IRC §6075 [28]
IRC §1014(a)(1) [29]
IRC §2001(b) [30]
Jerry A. Kasner, Post Mortem Tax Planning, 3rd Edition,
Volume 1, Para. 2.01[2][a] [31]
Treas. Reg. §301.7701-3 [32]
Id. [33]
IRC §2013 – The credit is subject to certain time
limitations. [34]
California Sales & Use Tax Regulation 1502(f)(1)(D) [35]
Texas Administrative Code 34 TAC 3.308 [36]
Treas. Reg. §1.861-18 Back to Class
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