Time for an Entity Review?

Much has happened in the tax arena lately, particularly relating to entities and structuring businesses and investments. Good practice dictates that one periodically review business and investment structures. Due to recent changes in the tax law, now may be the time for a review even if it has not been that long since your last review. Continue Reading...

Proposed Regulations May Spark Year-End Transfers

Treasury has recently issued Proposed Regulations under Section 2704. Section 2704 affects the valuation of interests in corporations and partnerships. Most notably, the proposed changes would disregard restrictions on liquidation that are not mandated by federal or state law and disregard the ability of most nonfamily member owners to block the removal of covered restrictions. Combining these two rules may result in gifts of interests in family held entities to be valued in a fashion similar to the "fair value" standard rather than the "fair market value" standard previously applicable.

The Proposed Regulations rules are proposed to apply transfers occurring after the date the regulations are published as final regulations. Comments will be considered at a public hearing currently for December 1, 2016. So, the Proposed Regulations should not take effect until after that date - probably no earlier than 2017.

One should make a careful determination whether they should make transfers of interests in closely-held entities before the end of 2016 to avoid the application of the proposed rules to the valuation of the gift. Even those transfer could be caught by the proposed rules if the transferring person dies within three years of the transfer and after the date that the proposed regulations become final.

See, Proposed Section 2704 Regulations Would Impose Major Restrictions on Valuation Discount Planning for a more detailed discussion of the proposal.

New Non-discrimination Rules for Health Insurance Plans

Fully insured health plans have not been subject to any the nondiscrimination requirements. Those plans could discriminate on eligibility, contributions, and benefits, without triggering adverse tax consequences to either the plan or the plan participants.

The Patient Protection and Affordable Care Act (Affordable Care Act or Obamacare) has changed that. Fully insured group health plans that are not grandfathered under the Affordable Care Act or that do not meet the exception for small employer plans will have to comply with the nondiscrimination rules of Code Section 105(h)(2). Accordingly, plans that are now subject to the nondiscrimination rules cannot discriminate regarding either eligibility to participate in the plan or the benefits provided under the plan. Plans that discriminate in favor of highly compensated individuals will face severe penalties.

Implementation of the new rules has been delayed. The IRS, Department of Labor (DOL), and Department of Health and Human Services (HHS) will not require compliance with these rules until additional guidance is issued. And, at this point, we have no indication of when that guidance will be issued. So, compliance with the rules is delayed indefinitely. But, any fully insured group health plan offered by your business will eventually have to be examined to determine whether it must and, if so, whether it will pass the nondiscrimination rules.

A fully insured plan that is found to be discriminatory faces severe penalties. It may be subject to a civil action to compel it to provide nondiscriminatory benefits. Additionally, the plan or plan sponsor could be subject to an excise tax of $100-per-day for each individual who was discriminated against (i.e., for all participants who do not meet the definition of a highly compensated individual).

Sales of Livestock Due to Drought

The drought in the Texas Panhandle and surrounding areas has staggered the livestock industry. Many livestock farmers have been forced to liquidate their herds entirely, or at an abnormal rate. The Code provides some tax relief available for farmers who have sold livestock due to the drought. The two principal provisions are Section 1033 and Section 451.

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Tax Avoidance Just Isn't What It Used To Be

I have previously written on how the government's attitude towards tax planning seems to have changed over the years. Contrary to what I was taught in law school, the IRS now essentially takes the position that if a transaction included tax planning, the tax benefits of that planning should not be sustained.

But even worse, it seems that some within the profession and academics are starting to side with the government. If you don't believe me, read Tax Avoidance Just Isn't What it Used To Be.

I hope this attitude does not continue to spread.

Fiscal Cliff Avoided

I saw an editorial cartoon the other day. It was of Wiley Coyote going off the cliff. He seemed to be doing this regularly in the Roadrunner and Coyote cartoons. In this case, he was able to scramble, out of thin air, back to the edge of the precipice.

Early Jan. 1, 2013, the Senate, by a vote of 89-8, passed H.R.8, the “American Taxpayer Relief Act” (the Act). Late on that same day—hours after the government had technically gone over the “fiscal cliff”—the House of Representatives, by a vote of 257 to 167, also passed the bill. The Act, which the President is expected to quickly sign into law, prevents many of the tax hikes that were scheduled to go into effect this year and retains many favorable tax breaks that were scheduled to expire. However, it increases income taxes for some high-income individuals and slightly increase transfer tax rates.

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"Now that's a fine mess you've gotten us into!"

Suppose you were an idiot. And suppose you were a member of Congress. But I repeat myself.
- Mark Twain, a Biography

The so-called “fiscal cliff” is looming, and I don’t see how we can avoid going over the edge. The election is now over, but nothing has really changed. Before the election we had Obama as President, a Democratic majority in the Senate, and a Republican majority in the House. Today, we still have the same thing.

The day after the election, Democratic and Republican leaders claimed to be willing to work towards a bi-partisan solution, but it sounds more like posturing than substance, and I don’t think there is enough time left before January 1, 2013 to avoid the tax calamity that will automatically happen on that date.

Though both sides agreed not to draw lines in the sand, congressional leaders did just that, staking out unchanged bargaining positions. Harry Reid, Senate Democratic leader, said he wanted to avoid the tax increases except for the wealthy and he would like to see substantial measures enacted during the lame-duck session of Congress that starts next week. Speaker John Boehner, Republican leader of the House, said that while he was open to tax reform, and saw considerable common ground on that, he continued to find tax increases unacceptable. Boehner repeated his previous objections to moving forward during the lame-duck session, except with temporary, stop-gap legislation to avoid the cliff. Vice President Joe Biden, saying the administration would like to move "right now," claimed "a clear, clear sort of mandate" on the tax issue, citing in particular doing "something on corporate taxes sooner than later".

It is thus apparent on the day after the election that the clarity it was supposed to have brought has yet to arrive.

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Real Estate Transferred to FLP Escapes Inclusion in Estate

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.

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Tax Court Rejects Cost Segregation Study of Apartment Complex

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.

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Ranch Owner Didn't Materially Participate in Ranch Activities

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.