Early Adoption of the Texas Business Organizations Code?

The Texas Business Organizations Code became effective January 1, 2006 for all entities formed after that date. It becomes effective January 1, 2010, for ALL Texas entities. 

If your entity was formed before January 1, 2006, you can “opt” into the new law before 2010 by filing a form with the Texas Secretary of State. Some reasons for your entity to opt in are:

  1. Favorable reinstatement provisions for suspended entities
  2. Cross-entity merger issues
  3. Amending governing documents and desire to use current terms
  4. Conversion or merger changes
  5. Identification of true entity type of foreign entity qualified as foreign LLC

Consult a knowledgeable corporate attorney on why or how your entity can comply with the new Texas statutes. 

Entities Need Maintenance, Too

Just as you may find yourself without a car by ignoring regular maintenance, you may find yourself without liability protection and expected business and tax advantages if you ignore your entity’s maintenance. If you have an ownership or management interest in an entity, it may be time to perform an Entity Maintenance Checkup. 

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Vanguard IRA Notice

For all of you with IRA's at Vanguard, please immediately see the article published by Forbes.com entitled "Disinherited by Vanguard" .  This article discusses the notice Vanguard has sent you regarding their new policy to combine IRA beneficiary desginations if you have more than one IRA at their company.  This new policy could have dramatic unintended consequences if you are not aware of your new beneficiary designation.  Although you will need to subscribe to this website (if you have not already done so), it is a free and immediate subscription.

Permanent Changes in the Estate Tax Introduced in the House *

We see these blurbs on a regular basis, and thought we would keep you updated on the legislative rumblings from the Hill.  Please keep watch here for any updates on this bill.

"Rep. Harry E. Mitchell, D-Ariz., introduced HR 3170 (July 25, 2007), which would permanently reform the estate tax and fix the capital gains tax rate at 15 percent. HR 3170 includes the following proposed changes, which are effective January 1, 2010, except as noted:

  • Increasing the unified credit to the equivalent of a $5 million exclusion is phased in as follows:
    • $3.75 million in 2010
    • $4 million in 2011
    • $4.25 million in 2012
    • $4.5 million in 2013
    • $4.75 million in 2014
    • $5 million after 2014
  • By reunifying the estate and gift tax exemptions, the increased unified credit applies to the estate, gift and GST tax.
  • The unified credit and GST exemption is indexed for inflation after 2015.
  • The estate and gift tax rates are reduced to the top capital gains tax rate (currently 15 percent; increasing to 20 percent January 1, 2010) on estates between $5 million and $25 million and twice that rate on estates above $25 million.
  • The $5 million definition of the top rate bracket is indexed for inflation after 2014.
  • The GST tax rate is reduced to the same as the top estate tax rate, as phased-in.
  • The executor of the estate of a deceased spouse is permitted to elect to give any unused applicable exclusion amount to the surviving spouse (usable for gift and estate tax purposes, but not for GST tax purposes).
  • The state death tax deduction is reduced in 2010.
  • The scheduled repeal of the estate and GST taxes is eliminated.
  • The present basis step-up rules are retained.

Note. This bill was referred to the House Committee on Ways and Means and has not yet been reviewed by the committee or the full House of Representatives."

* From Howard Zaritsky's Estate Planning Update,08/15/2007, Volume 07, No. 12, RIA.

Divorce and Income Tax Consequences

The income tax issues of alimony, child support, and property settlements are generally straightforward but worth reminding.


Alimony

Properly structured, alimony payments are considered gross income to the recipient, and are deductible to the payor. To qualify as alimony, all of the following must occur:
  • The payment must be made in cash.
  • The payment must be made pursuant to a divorce or written separation agreement.
  • If divorced or legally separated, the couple must live in separate households.
  • Payments made on behalf of the recipient spouse to a third party must be evidenced by a timely executed document.
  • The payor’s obligation to make the payment terminates at the recipient’s death.
  • The couple does not file a joint tax return.
  • The divorce or separation agreement does not provide that the payments are not considered alimony.
Normally, the paying ex-spouse does not have to withhold taxes on alimony payments. It is the responsibility of the recipient ex-spouse to make sure sufficient taxes have been withheld or estimated taxes have been paid. If the recipient spouse is a nonresident alien, a withholding tax may be imposed on alimony payments.

While the alimony rules seem fairly straightforward, this is one area in which drafting documents without proper tax advice can have disturbing consequences. For example, in one Tax Court case, a taxpayer drafted his own settlement agreement. Because of improper language, the court ruled that $34,000 in “alimony” payments were instead a nondeductible property settlement. Not only did the husband lose a $34,000 deduction, the court also imposed an accuracy-related penalty.


Child Support

Payments designated as child support are not deductible by the payor or taxable to the recipient parent. A payment is deemed to be for child support if any one of the following occurs:
  • The divorce agreement designates it as child support.
  • The payment reduces at times tied to a child’s pivotal birthdays (e.g., age 18).
  • The payment reduces when an event occurs to the child (e.g., marriage).
  • The payment reduces at a time clearly associated with a child-related event.
An issue related to child support is deciding which parent receives the dependency exemption for the child. Assuming all of the dependency exemption requirements are met, the parents themselves can decide which parent is entitled to the exemption for a minor child. However, once the child reaches majority, the parent claiming the dependency exemption must supply over 50% of the child’s support.


Property Transfers

Most property transfers that are “incident to divorce” are not taxable to either spouse for income tax purposes. However, there are some situations in which income taxes may be imposed, including:
  • A stock redemption done as a result of a divorce.
  • A property settlement made with a nonresident alien.
  • A direct transfer of property to a divorcing spouse is not taxable even when the liabilities secured by the property exceed the transferor’s basis in the property. However, if the transfer of the same property is made to a trust for the benefit of the divorcing spouse, the difference between the secured liability and the basis in the property may be taxable to the transferor.
  • Accrued interest on Series E and EE U.S. Savings Bonds must be recognized by the transferor of the bonds.
  • Many divorcing spouses make settlement payments over a number of years. Any interest on an installment obligation will be taxable to the recipient spouse.

Divorce and Transfer Tax Consequences

Some unique gift, estate, and generation-skipping transfer tax issues surround divorce or separation. The following issues should be taken into account.

Gift taxes

Property settlements must be reviewed in light of the possible imposition of a gift tax. The Internal Revenue Code provides for an unlimited marital deduction for transfers between spouses. However, transfers after divorce do not fall into this exception.

The tax laws do provide some gift tax protection for property settlements entered into after a divorce is finalized. For example, transfers for settlement of property rights or child support are exempt from gift tax if:

  • The parties enter into a written agreement. The agreement does not need to be approved by the court.
  • The transfers are payments of cash or property in settlement of spousal martial rights and a “reasonable allowance” of support rights of a minor child of the marriage.
  • The agreement must be entered into within a period beginning two years before the divorce and one year after the divorce. The agreement, but not the transfer of assets, must occur during this three-year period.

Also, the Supreme Court has ruled that divorce-related transfers founded on a court decree are involuntary and, therefore, are not voluntary taxable transfers for gift tax purposes. However, if the divorce decree merely declares the marriage terminated but does not approve the property transfer, the IRS could still argue that the transfer is a gift.

If the parties fail to enter into a written agreement, but make the transfers prior to a final decree of divorce becoming effective, the gift tax marital deduction may eliminate any gift tax on the transfer.

If a divorce agreement requires that one spouse fund the college education of the couple’s children, care should be taken to make sure the payments are made in a manner that does not produce a taxable gift. For example, instead of reimbursing an ex-spouse for the cost of tuition, the payment should be made directly to the institution, for which the tax code allows an unlimited gift tax exclusion for tuition only. Other payments for the child’s education may be covered by the $12,000 annual exclusion. As part of a divorce decree, the couple might also consider pre-funding college costs for children (especially younger children) by using Section 529 Plans. The rules permit donors to pre-pay up to five years of annual exclusion gifts to fund a Section 529 Plan.  

 

Estate Taxes

Divorce agreements often do not pay sufficient attention to the estate tax implications. The Internal Revenue Code provides for an unlimited marital deduction for death transfers to a spouse, but it does not provide any marital deduction for transfers to an ex-spouse. A liability accruing pursuant to a divorce settlement agreement is not necessarily a deductible debt of a decedent’s estate. It is important to make sure the divorce documents create an enforceable debt against the estate to generate an estate tax deduction, rather than a taxable transfer.

If the decedent’s obligations are based on a court decree,the post-death obligations would be deductible. However, if the court did not require the property transfers (e.g., transfers to support a step-child),the post-death transfers may not be deductible for estate tax purposes, unless they were entered into for “adequate and full consideration.”

Transfers satisfying the gift tax requirements listed above will be treated as an expense of the estate. Thus, if former spouses have a written agreement that satisfies the three-prong test, testamentary transfers to a former spouse pursuant to the agreement are treated as deductible claims against the estate.

 

Gift splitting

The law permits a spouse to elect to be treated as the donor of a gift, even when the other spouse is the sole transferor. In order for the “gift splitting” to apply, the donor must file a gift tax return, on which the spouse consents to the treatment of the gifts as made one-half by that spouse. The return must be filed by the donor spouse, even if a gift tax return was not otherwise required (e.g., when only annual exclusion gifts were made). Gift splitting for any year applies to all gifts and cannot be made on a gift-by-gift basis. If gift splitting is elected, the spouses have joint and several liability for any gift tax that may be due.

Because of this rule, consenting spouses should be very careful to assure that the value of the gifts are accurate.

If gift splitting was anticipated early in the year, divorce before year end will terminate the right to split gifts.


Using The Unified Credit

The unified credit should be viewed as an asset of a couple’s divorce estate when it comes to estate planning. For example, assume a wealthy wife agreed to or is required to make a significant property settlement for the benefit of a less wealthy second husband. She wants the funds to eventually revert to her children from a prior marriage. She could create a lifetime trust during the marriage for the benefit of the soon to be ex-spouse. Properly created, the trust would create no gift taxes. At the ex-husband’s death, his unified credit (which he might not otherwise have used in full) benefits her children by reducing the overall transfer taxes. A similar arrangement could be made through a generation-skipping trust and annual exclusion gifts using the couple’s combined generation-skipping and annual exclusion exemptions.

 

Divorce and Your Estate Plan

Dissolution of a marriage raises a number of complicated issues. There is more involved than obtaining a property settlement and divorce decree. The impact of a pending divorce on your estate plan should be considered as a part of the divorce process. The following issues relating to your estate plan should all be reviewed if you are separated from or divorcing your spouse.


Wills

You should discuss with your estate planner the possibility and benefit of executing a new will in contemplation of the divorce. Although Texas provides statutory rights to a surviving spouse, notwithstanding the terms of the decedent’s will, a new will can still provide for the maximum allowable benefits to go to your children or other heirs instead of to the other spouse. This may also be a time when it is particularly important to provide for a trust for your children’s inheritance.

Likewise, this is an important time to re-think the persons whom you have named as the executor of your estate and the trustee of any trusts you may have provided for in your will and change your will accordingly.  

Once divorced, Texas law provides that the divorce results in the ex-spouse being treated as a predeceased heir of the maker of the will. However, “updating” your will by means of relying on the inflexibility of statutory law is not generally the best solution. Therefore, if you did not execute a new will in contemplation of a divorce, then it is certainly advisable to do so once the divorce is final.

If a divorce or legal separation has occurred and results in financial obligations placed upon you, your will should reflect the terms of the agreement that must be carried out. Your new will should also be careful to provide that any bequests to an ex-spouse are in satisfaction of your legal obligations and are not meant to be in addition to those obligations. For example, assume the divorce decree provides that a payment of $100,000 be made to an ex-spouse in ten years. Your will says, “If my ex-spouse is alive in ten years, I convey to her $100,000.” As a result, the ex-spouse may receive a double benefit of both the bequest and divorce settlement rights.

 

Retirement Plans

You may also need to explore the possibility and benefit of executing new beneficiary designations for your retirement plans in contemplation of the divorce. Federal law generally provides that the retirement benefits of a qualified retirement plan must pass to the surviving spouse even if separated or if a divorce is pending, unless the spouse waives those rights. However, federal law does not require a spouse to be the designated beneficiary of an IRA.

Once divorced, Texas law provides that a designation made prior to divorce of the other spouse as a beneficiary under an individual retirement account, employee stock option plan, stock option, or other form of savings, bonus, profit-sharing, or other employer plan or financial plan of an employee or a participant in force at the time of divorce, the designating provision in the plan in favor of the former spouse is not effective, and the proceeds of the policy are payable to the named alternate beneficiary, unless:

  1. the decree designates the other former spouse as the beneficiary;
  2. the designating former spouse re-designates the other former spouse as the beneficiary after rendition of the decree; or
  3. the other former spouse is designated to receive the proceeds or benefits in trust for, on behalf of, or for the benefit of a child or dependent of either former spouse.

 

Life Insurance

You should discuss with your estate planner the possibility and benefit of executing new beneficiary designations for your life insurance in contemplation of the divorce. Although Texas law provides that a designation of an ex-spouse as beneficiary becomes void upon divorce, if your spouse is the named beneficiary and you are merely separated or if a divorce is pending at the time of your death, the beneficiary-spouse will receive the life insurance benefits.

Similar to retirement plans, Texas law provides that a designation made prior to divorce of the insured’s spouse as a beneficiary of a life insurance policy is not effective, and the proceeds of the policy are payable to the named alternate beneficiary, unless the decree designates the insured’s former spouse as the beneficiary; the insured re-designates the former spouse as the beneficiary after rendition of the decree; or the former spouse is designated to receive the proceeds in trust for, on behalf of, or for the benefit of a child or a dependent of either former spouse.

 If a divorce has occurred and results in your obligation to name a certain person as the beneficiary of a life insurance policy, you should execute a new beneficiary designation form to reflect the terms of the agreement to be carried out.

 

Other Beneficiary Designations

Don’t forget to review your annuities, bank accounts, brokerage accounts, and any other assets that may have a beneficiary designation. However, in certain circumstances Texas law requires notice be given to the other spouse or may require both spouses to sign the beneficiary change form.

 

Powers of Attorney

Many couples have executed powers of attorney naming each other to provide for the handling of medical and property issues in the event of incapacity. In many cases, estranged spouses do not focus on revising these important documents during or after divorce. In Texas, divorce terminates the powers granted to a former spouse under a durable power of attorney, but it does not do so until the divorce is granted. Having a soon-to-be ex-spouse in charge of medical and property decisions is usually not advisable. Therefore, you should consider changing your powers of attorney on the first hint of divorce. Alternatively, your documents can provide that if divorce or legal separation proceedings are initiated, the spouse’s right to serve as power holder immediately terminates and the next named successor is automatically appointed.

 

Your Parents’ Estate Plan

If you are separated from or divorcing your spouse, your parents may need to review their own estate plans as well. For example, your parents’ wills may provide gifts or other benefits for your spouse or may name your spouse as an executor or trustee. Your parents’ powers of attorney may also name your spouse as an agent to make medical and property decisions.  Though Texas laws may automatically “revise” your documents to read as though your ex-spouse predeceased you, they do not revise your parents’ documents.

A key element to planning for the potential divorce of a child or heir is flexible drafting. Every plan needs to address the possibility that a child or an heir will face a future divorce. The use of spendthrift trusts for the intended beneficiaries is oftentimes a good solution. Basically a spendthrift trust is any trust that restricts the ability of any trust beneficiary to assign or otherwise transfer his or her interest in the trust. It also restricts the right of a beneficiary’s creditors (which may include an ex-spouse) to demand payment of income or principal to satisfy the beneficiary’s obligations.

How To Stay In Your Grandparent's Will

I have revised many estate plans and wills in my 30 years of law practice. There are many reasons that one changes a will. Taxes. Financial success. Financial reversal. Marriage. Divorce. But no event seems to occur more often than a change to delete a beneficiary or reduce his or her gift because of conduct, or lack thereof, which causes one to lose his or her place in a grandparent’s heart.

I have often given programs on estate planning. Sometimes I think the best advice might be to beneficiaries rather than to the estate planning client. So, I offer a few basic hints.

Seek Their Wisdom. Your grandparents are the ones who brought your parents into this world, and if that had not happened, you would not be the subject of this article. No matter who your grandparents are or what they are like, they will have life experiences and wisdom from which you will profit. Their lives are an important part of your character foundation.

Remember Important Days/Events. Call, write, and visit your grandparents on the important days of their lives. They have been doing the same for you. Nothing shows one more how much you care than your sincere remembrance of them.

Try. Demonstrate to your grandparents, and most importantly, to yourself that you can make and earn the substances of life on your own. Rely on the foundations they have provided by their teachings and examples (not their money), and their love and support, to create your own significant existence. Your efforts will be what make you strong, not granddad’s cash.

You Are Not Entitled. There is not a right in this state to inherit. No cut of the pie was reserved for you at your birth. Your grandparents can add you or delete you from their wills with the stroke of a pen. Do not live your life with foolish hopes of entitlement to wealth you did not create.

Don’t Count Your Chickens Before They Hatch. I promise that if your grandparent finds out that you have started a new house, ordered a new car, and set up a Caribbean cruise betting on the inheritance to come, you have just taken one of the top 3 steps to be written out of your grandparent’s will. Nothing seems to upset a grandparent more than your expecting what is to come, and worse, making your financial plans based on his or her dying.

Save (Buy Used Cars). The number one cause for deletion of a beneficiary from a will is that he or she is a total and hopeless spendthrift. I often hear one say, “Why she has never saved a dime, nor will she ever!” If you are a spendthrift, admit it, change your ways or get someone to help you do so. All of those around you, including you, will be better for it.

Live Responsibly. All of my comments above boil down to the hope of all grandparents, and that is their grandchildren will have a life rewarded by his or her own responsibility. Wealth, no matter how much, is a serious responsibility. We must all use our resources wisely, so that the management of wealth will support and nurture ourselves, our families and our fellow human beings.

Please understand that the comments above are my observations. They are not recipes for inheriting from grandma. Followed, however, your reward will be great.

Qualified Plan Rollover Rules Liberalized for Non-Spouse Beneficiaries *

In August 2006, Congress passed the Pension Protection Act of 2006 (the “Act”), a massive tax bill that contains liberalized retirement account payout and rollover rules. Following is a summary of one of the key tax changes in this important new legislation—non-spousal rollovers for beneficiaries who inherit a qualified plan (such as a 401(k)), governmental Section 457 plan, or tax-sheltered annuity.  

Pre-Act law had harsh income tax consequences for non-spouse beneficiaries who inherited any of the above plans.  Non-spouse beneficiaries were generally forced to collect the entire balance within 5 years following the owner's death, and some employer plans required that the payout be made within 1 year or as a lump sum. Either way, the result was a huge income tax burden on the recipient because the inherited amounts that could not be rolled into an IRA were taxable income in the year they were distributed.  The payout was added to the beneficiary's other income, often pushing them into a higher tax bracket. In contrast, payouts to the decedent's spouse from a 401(k) could be—and still can be—rolled over into the surviving spouse's IRA or stretched over the spouse's lifetime, thus stretching out the income tax burden.

Beginning in 2007, the Act allows non-spouse designated beneficiaries to make rollovers of inherited amounts in any of the above plans to either (i) an IRA or (ii) an individual retirement annuity, established for the purpose of receiving the distribution on behalf of the employee's designated beneficiary. This allows beneficiaries to spread the distributions and the taxable income over several years, and, better yet, the inheritance, less required distributions, continues to appreciate income tax-deferred. The transferee plan is treated as an inherited IRA under which benefits must be distributed in accordance with the RMD rules that apply to inherited IRAs of non-spouse beneficiaries.

Cautions: (1) In order for the non-spouse transfer to take place, the plan must allow it.  Check with your Plan Administrator to make sure the plan allows a direct transfer to an inherited IRA for a non-spouse beneficiary.  (2) The law stipulates that the funds must be moved in a trustee-to-trustee transfer.  This means that the beneficiary cannot receive a check and then deposit the check into an inherited IRA.  Rather, the plan must make the check payable to the trustee or custodian of the inherited IRA, making it a qualifying transfer. (3) The rules described above apply to distributions from qualified plans, but also apply to distributions from some other plans. If you are in the process of inheriting an employee’s retirement plan, seek professional tax advice as to the new options that may be available.

 * Taken in part from RIA's "Complete Analysis of the Pension Protection Act of 2006"

Charitable Giving From IRA's *

Please Note:  This article is only relevant for charitable giving from your IRA through the end of 2007.

In August 2006, Congress passed the Pension Protection Act of 2006 (the “Act”), a massive tax bill that contains liberalized retirement account payout and rollover rules.  Following is a summary of one of the key tax changes in this important new legislation—charitable giving.

The Act contains provisions to provide additional tax incentives for Americans to give more resources to the charitable community.  One incentive allows taxpayers to exclude from gross income (“GI”) certain distributions of up to $100,000 from a traditional or Roth IRA if made to a tax-exempt organization to which deductible contributions can be made.

Under pre-Act law, if an amount withdrawn from a traditional or Roth IRA was donated to a charitable organization, the rules relating to the tax treatment of withdrawals from IRAs applied to the amount withdrawn, and the charitable contribution was subject to the normally applicable limitations on deducting charitable contributions.

However, under the Act, for distributions in tax years beginning in 2006 and through the end of 2007, the Act provides an exclusion from GI, up to $100,000, for otherwise taxable IRA distributions from a traditional or Roth IRA that are qualified charitable distributions.  Additionally, the amount of the qualified charitable distribution counts towards the taxpayer’s required minimum distribution (“RMD”) for the year. To constitute as a qualified charitable distribution, the distribution must be made: (1) directly by the IRA trustee to a qualified public charitable organization; and (2) on or after the date the IRA owner attains age 70 and 1/2. 

A qualified charitable distribution is excludible from GI only to the extent that the distribution would otherwise be includible in GI, is counted toward the taxpayer’s RMD requirement for the year, and is not taken into account in determining the individual's charitable contribution deduction for the year. In other words, the qualified charitable distribution is a free gift to charity with no negative income tax consequences to the donor.

The new provision clearly saves taxes for those taxpayers who do not itemize, but can also save taxes for taxpayers who itemize to the extent charitable limitations would have reduced the amount deducted.  Even if limitations would not cause a reduction in the amount of the charitable deduction, the new provision can still save taxes by lowering adjusted gross income (“AGI”) and thereby making it less likely to lose certain tax breaks pegged to AGI, such as medical expense deductions.  Finally, using IRA distributions, rather than other funds, to make charitable contributions can help to reduce the amount of social security benefits included in gross income.

Cautions:  (1) The exclusion does not apply to distributions from all types of IRAs (it does not apply to distributions from SEPs). (2) The exclusion applies only to contributions to qualified public charities. (3) A qualified charitable distribution must be made directly by the IRA trustee to a charitable organization.  Thus, a distribution made to an individual, and then rolled over to a charitable organization, would not be excludible from GI.  (4) If the IRA owner has an IRA with nondeductible contributions, a special rule applies in determining the portion of a distribution that is includible in GI and thus is eligible for qualified charitable distribution treatment. (5) Not all plans will allow this charitable distribution. So before planning any charitable gifts from your IRA, ask your Plan Administrator and your financial advisor to determine whether your plan will allow a gift to a charity and whether your distribution will qualify as a qualified charitable distribution.

* Taken in part from RIA's "Complete Analysis of the Pension Protection Act of 2006"

Overview of Partnerships as a Family Planning Tool

The attached link contains a brief overview of some of the classic reasons for forming a family owned partnership. Partnerships as a Family Planning Tool.

Transfer of Relinquished Property to Related Person Gets Favorable Like-Kind Treatment

The Service recently ruled (PLR 200728008) that Section 1031(f) will not trigger gain recognition in an otherwise qualifying like-kind exchange when the taxpayer transfers relinquished property (through a qualified intermediary (QI)) to a related person and acquires replacement property (through a QI) from an unrelated person, even if the related person disposes of the relinquished property within two years of its acquisition of such property.

This is the third time the Service has issued a letter ruling that addressed whether Section 1031(f)(4) applies when a taxpayer transfers relinquished property (through a QI) to a related person and the related person disposes of the relinquished property within two years. (See PLR. 200709036 and PLR 200712013). These three letter rulings may encouragte taxpayers looking to structure transactions with similar facts.

Taxpayers should remain cautious, however, in considering whether a related party's participation in a like-kind exchange will implicate Section 1031(f). The related party's purpose for acquiring the property may  determine whether the transaction qualifies for tax deferal. That is, if the related party acquired the property to subdivide it or construct improvements before selling (to preserve nondealer status for the exchanging taxpayer), or to list the property for sale immediately (seeking to extend the 180-day parking period permitted under Rev. Proc. 2000-37), the Service might not reach a similar conclusion.

Taxpayers should also be aware that this PLR should not be confused with the fact situation of earlier unfavorable rulings where the taxpayer acquired replacement property (through a QI) from a related person. Specifically, in Rev. Rul. 2002-83, 2002-2 CB 927, the Service concluded that a taxpayer transferring relinquished property (through a QI) to an unrelated person in exchange for replacement property (through a QI) owned by a related person must recognize gain if the related person receives cash or non-like-kind property. The Tax Court reached a similar conclusion in Teruya Brothers Ltd., 124 TC 45 (2005).

Deducting Business Travel that Involves some Pleasure

Some reminders about getting a travel bargain by attaching a vacation to an out-of-town business trip: If set up right, you may get free vacation airfare or mileage, and perhaps other savings.

Trips undertaken primarily for business A taxpayer who mixes a bit of pleasure with business while away from home may still deduct all of the round-trip transportation costs as long as the trip was undertaken primarily for business reasons. The cost of lodging plus 50% of meals while on business status is deductible. If you tack on a day or few for a little personal pleasure time, you still get a deduction for the entire transportation cost as well as lodging and 50% of meals for the portion of the trip that is business. [You can’t deduct anything for the lodging and meals for the extra pleasure days.] Because you still get to deduct 100% of the transportation cost, you do get some subsidy for the cost of your min-vacation.

Saturday night stayovers Even if an employee's out-of-town business duties end on Friday, his or her employer may ask the employee to stay over a Saturday night to take advantage of a low-priced fare if the airfare savings exceeds the costs of the weekend’s meals and lodging. The employee doesn't have to pay tax on the reimbursement for his Saturday meal and lodging expenses. And, the IRS, under a “common sense test,” has ruled that payments to the employee for the Saturday stay were deductible if a “hardheaded business person would have incurred such expenses under like circumstances.”

Weekends Similarly, a business trip may straddle a weekend. For example, you may have to attend business meetings on Thursday, Friday, and Monday. If you are too far away to travel home and then come back (or the trip back and forth would cost more than staying put), staying the weekend relaxing at the out-of-town location is part of the business trip.

Weekend travel home A business traveler on an extended out-of-town assignment may decide to fly home for a weekend to be with the family. The cost of the weekend trip home is deductible up to the amount the traveler would have spent on meals and lodging at the out-of-town location. For this rule to apply the traveler must check out of the out-of-town hotel before leaving for the weekend trip home, and then re-register. If, instead, the traveler retains the hotel room, the deduction for the weekend trip home (i.e., the air fare) is limited to what the traveler would have spent on meals during the weekend at the out-of-town location.

When spouse comes The expenses of a spouse or other companion accompanying a traveler aren't themselves deductible unless (1) the spouse or other companion is an employee of the taxpayer and travels for a bona fide business purpose, and (2) the expenses would otherwise be deductible by the spouse or other companion. However, the business traveler may still deduct the cost that would have been incurred in single travel. So, for example, if the cost of lodging is the same whether the room has one occupant or two, the entire cost of the room may be deducted, even if it is shared with a companion who is not a business traveler.

Florida District Court contradicts Tax Court and Federal Court of Claims on 6-year Statute of Limitations

In what is probably another case of "bad facts make bad law," a Florda District Court allowed the IRS to proceed to the merits in a "Son of BOSS" case, despite the IRS' making it's assessment against the taxpayer more than 3 years after the taxpayer filed a return.  Brandon Ridge Partners v. U.S., (CA Fl 7/30/2007) 100 AFTR 2d ¶2007-5107.

The case contradicts two recent decisions, one in the Federal Claims Court (Grapevine Imports Ltd. v. U.S., (Ct. Fed. Cl., 7/17/2007) 100 AFTR 2d ¶2007-5065) and the other in the Tax Court (Bakersfield Energy Partners, LP, (6/14/2007) 128 TC No. 17. Both of these recent cases relied on the Supreme Court's decision in Colony Inc v. Com., (1958, S Ct) 1 AFTR 2d 1894 , 357 US 28. In Colony the Supreme Court held that the 6-year statute does not apply unless there has been an omission of an item of gross income, not simply the overstatement of basis or cost of the item sold. Under that reasoning, if you report the gross amount of the sales proceeds from each sale, there can be no omission of gross income, which is necessary for the 6-year statute to apply.

The District Court's reasoning in Brandon RIdge seems quite strained, probably because it takes a maze-like path to find a distinction from the prior decisions that is no more than the size of a pin hole if the distinction exists at all. Not only does it hold, contrary to the Supreme Court, Tax Court, and Court of Claims, that the reporting of an improper amount of gain amounts to an omission of gross income, but it also holds that reporting of the gross amount of the sales proceeds is not sufficient to adquately apprise the IRS that an omission of gross income has occurred. (Adquate disclosure of the omission is also sufficient to prevent the 6-year statute from applying.)

The moral of the story: If you have a situation, like Son of BOSS, where the IRS claims the 6 year statute of limitations applies because of overstating basis or cost of an item sold, you are better off fighting the statute of limitation issue in the Tax Court than the District Court (particularly if that DIstrict Court happens to be in Florida).