In a case involving an asserted estate tax deficiency of over $2.5 million, the Tax Court has held that real estate transferred to a family limited partnership (FLP) did not have to be included in the transferor's gross estate under Code Sec. 2036 because the transfer was a bona fide sale for an adequate and full consideration in money or money's worth. Estate of Joanne Harrison Stone, TC Memo 2012-48.
Continue Reading...A new Tax Court case deals with a taxpayer's claims that numerous assets in a rental apartment complex were depreciable as short-lived personal property rather than as residential rental property written off over 27.5 years. Amerisouth, TC Memo 2012-67. The Court disallowed most of the deductions, which were based on an overaggressive cost segregation study.
Continue Reading...The Tax Court in Iverson, TC Memo 2012-19, has disallowed losses incurred in a cattle ranch owned by Mr. Iverson. The taxpayer was the founder and an executive with a company based in Minnesota and appeared to use the ranch to entertain clients of his Minnesota company. So, the decision is not surprising in that regard. The decision could nonetheless spell trouble for other ranch owners. The court seemed to focus on the fact that the taxpayer did not live at the ranch, did not keep detailed records on participation in ranch activities, and had a full-time paid ranch manager who ran the day to day activities of the ranch. Many owners of ranches in Texas do not live and work full-time at their ranch and have paid employees who handle the day to day activities. Where the taxpayers do not keep extensive files, to-do lists, home and mobile phone records, business plans, project descriptions and instructions to employees documenting and establishing their active involvement in the regular, continuous, and substantial management and day-to-day activities of ranch, they may have difficultly persuading the fact finder that they have the necessary involvement in the ranch activities to avoid passive activity classification. This would particularly be true of taxpayers who do not live at the ranch or actually “work” the ranch when they are at the ranch.
There are many important tax changes taking effect in 2012, as well as some that took effect late last year and thus are “new.” They are the result of tax legislation enacted in prior years, or are triggered by effective dates in regs, rulings and other guidance, or will occur by default in 2012 absent Congressional action. The following is a list derived from Checkpoint of the key non-inflation-indexed tax changes, categorized by those affecting businesses and individuals. In addition, a list of provisions that expired at the end of last year is provided.
Continue Reading...Interest rates have dropped significantly in recent months and may remain low given the state of the economy. Sagging rates can have a significant impact on many tax and estate planning strategies. Lower interest rates affect the income, estate, and gift tax values of many types of transfers. In many cases, the drop in rates produces more favorable results for persons engaging in certain types of transactions. In other cases, however, the lower rates result in higher tax costs. This post examines how low interest rates affect key tax and estate planning transactions and strategies.
Continue Reading...The Texas Legislature made several changes to the Texas Business Organizations Code (BOC) that become effective September 1, 2011. Several of these changes deal with limited liability partnerships. I have, until now, not advised my clients to make use of the limited liability partnership provisions in the BOC because of their administrative difficulties and questionable liability protections. Those impediments have been removed. So, I am now advising my limited partnership and general partnership clients to take advantage of the limited liability partnership provisions unless the annual filing fees prove to outweigh the liability protections offered to LLPs and LLLPs.
Continue Reading...I recently finished resolving a dispute between a client and the IRS regarding the amount of compensation for the founder and owner of a corporation. While the amount of compensation during one of the years at issues was probably unjustifiably high if viewed by itself, the person's compensation over the years (and including the year in dispute) was readily justifiable when viewed over the entire period that the person worked for the business. We ended up resolving the dispute and the resolution was within $50,000 in compensation from my initial evaluation of the case. But it was an expensive "victory" for the client.
The strongest point for the IRS, and the reason it took as much time and expense to resolve, was the client’s lack of documentation of a consistently applied compensation plan. The client had annual minutes (which many clients do not), but those minutes did not address how the owner’s compensation was determined. The client also did not have a written employment agreement, nor did they have any written (or “understood”) basis for calculating the client’s incentive compensation each year. This lack of a consciously determined pattern to the compensation ended up costing the client several thousand dollars in attorneys fees, and a like amount in additional taxes.
The moral of the story: properly pay and report compensation to employee/owners as such; have a written employment agreement or at least some sort of documentation in your minutes of the oral arrangements for compensation; make sure you have a documented or easily proved method for determining incentive compensation that is reasonable in amount.
In a July 15th directive from IRS's Large Business & International (LB&I) Division, the IRS issued guidance to managers and examiners on when to seek the approval of the Director of Field Operations (DFO) for asserting the economic substance doctrine. The directive lays out a multi-step analysis for examiners to complete before submitting their requests to the DFO.
Continue Reading...One major difference between Form 990 and the tax forms filed by individuals and businesses has to do with privacy and confidentiality. On Form 990, almost nothing (except the list of donors' names) is private or confidential. The financial data of exempt organizations is out there for the world to see—and now that many Web sites carry copies of Forms 990, "the world" is probably not an exaggeration.
Continue Reading...I don't know about any of you, but I didn't see any specifics mentioned in the news reports yesterday about the tax proposals that are part of the newest compromise proposal to fix the debt ceiling. But I am happy to report that RIA included them this morning in their daily update. Here they are:
The bipartisan plan calls for the Senate Finance Committee within six months to report a comprehensive tax reform package using the listed items to deliver “real deficit savings by broadening the tax base, lowering tax rates, and generating economic growth.”
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