View from the Hill - Wichita State University
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Transcript View from the Hill - Wichita State University
Wichita State University
Accounting & Auditing
Conference
Tax Update
May 20, 2010
Wichita, KS
What We’re Going to Cover
7216 Guidance
Disclosure of uncertain tax positions
Tax preparer registration
Tax provisions in health care bill
HIRE Act
Prospective legislation
Levin’s list
Section 7216
Brief History
Only criminal penalty applicable to preparers
Prohibits misuse of taxpayer information
Regs 1/1/09 required advance written permission for any
use other than tax preparation
New guidance in late December 2009 satisfied many of
our concerns
IRS Clarifications
Advance approval not required for:
Newsletters – even if:
Disclosure of statistical data of practice
Written and distributed by unrelated third party
Filtered by type of client
i.e. in practice development activity
Disclosures for
Quality, peer review or conflict reviews
Professional liability insurance matters
Acknowledged “normal course of accounting
services” exception
May make return information available to:
Taxpayers regarding changes in tax law and
regulations
Third parties such as stockholders, management,
suppliers or lenders
Providing K-1 to CPA preparing a partner’s return?
Next steps
Continue to work with Treasury
To provide further guidance on the “normal course” language
What We’re Going to Cover
7216 Guidance
Disclosure of uncertain tax positions
Tax preparer registration
Tax provisions in health care bill
HIRE Act
Prospective legislation
Levin’s list
Disclosure of Uncertain Tax
Positions - Background
US v. Arthur Young (1984) gave IRS access to tax
accrual workpapers
Historical IRS “policy of restraint”
1/26/2010 - IRS Commissioner Shulman introduced
Announcement 2010-9
Fin 48 calculation is stated impetus for IRS proposal
Proposal status - not yet effective
Would require most business tax returns to annually
disclose “uncertain tax positions”
7
Disclosure of Uncertain Tax
Positions - Concerns Being
Considered
May alter traditional notion of voluntary and cooperative
tax reporting system
May cause taxpayers to seek non-traditional preparers
Possible effects on financial statement reporting
Difficult to apply to “factual” situations
Allocation between land and building
Executive compensation
Difficult to apply to flow-thru entities
8
What We’re Going to Cover
7216 Guidance
Disclosure of uncertain tax positions
Tax preparer registration
Tax provisions in health care bill
HIRE Act
Prospective legislation
Levin’s list
Tax Preparer Registration Drivers
• Driven by significant errors with refundable
tax credits, i.e., EITC and home buyers credit
• IRS commenced a review to:
•
Enhance competency, and
•
Elevate the ethical conduct of preparers
10
Tax Preparer Registration –
Overview
January 4th – IRS released proposal
Commissioner announced his intent to implement:
1. PTIN
2. All preparers subject to Circular 230
3. CPE component
4. Testing
Phased in implementation – not applicable to 2010
filing season
Non-signing preparer issue
11
AICPA Positions
•
Support PTIN requirement
•
Support Circular 230 requirement for all preparers
•
AICPA succeeded in exempting CPAs from education
and testing requirements
•
Concerns
•
About the exam creating taxpayer confusion
•
If “non-signing” preparers subject to registration
12
Comparing CPA and IRS-registered
tax preparer requirements
CPA requirements
IRS requirements
College graduate
High school graduate
150 hours college
18 years old
education
Uniform CPA exam
120 hours CPE over
3-year period
IRS exam – level
unknown
15 hours annual tax
education
13
What We’re Going to Cover
7216 Guidance
Disclosure of uncertain tax positions
Tax preparer registration
Tax provisions in health care bill
HIRE Act
Prospective legislation
Levin’s list
Health Care Taxes
Description
Amount
Phase In
Effective
Date
Individuals
No insurance then pay greater of
Itemized deduct medical
Medicare tax earned income
Medicare tax on invest income
$95 or 1% income
2014
$325 or 2% income
2015
$695 or 2.5% income
2016
Excess over 10% AGI
2013
.9% on earned income
>$200 AGI single
2013
$250 AGI jt
2013
3.8%
Same as above
2013
2% income
< 133% poverty level
2013
3% income
133%-150%
2013
4%
150%-200%
2013
6.3%
200%-250%
2013
8.05%
250%-300%
2013
9.5%
300%-400%
2013
10%
n/a
2011
Premium assistance
Refundable cr if premium exceeds
Excise tax on tanning
Health Care
Individuals – Health Coverage
1. No insurance then pay greater of
$95 or 1% of income (2014)
$325 or 2% of income (2015)
$695 or 2.5% of income (2016)
2. Premium assistance (2013)
Ranges between 2% - 9.5% of income
Available up to 400% of poverty level
Health Care
Individuals – Medical Expenses
1. Hurdle for itemized deduction (2013)
Increases from 7.5% to 10% AGI
Transition rule for seniors thru 2016
2. Change in definition of medical
expenses (2011)
Over-the-counter medications
Coverage for adult children
Health Care
Medicare Tax (2013)
3.8% on investments
0.9% on earned income
Affects high income taxpayers
>$200,000 of income (single)
> $250,000 of income (joint)
Health Care Taxes (cont’d)
Description
Amount
Phase In
Effective
Date
40% excise
$10,200 s ingle
2018
$27,500 family
2018
$11,800 single
2018
$30,950 family
2018
Insurance Companies
Cadillac plans tax on premiums over
If high risk profession or over 55
Same
Health Care
Cadillac Plans
$10,200 single; $27,500 family
Higher limits for high risk professions
and over 55
40% excise tax
Effective 2018
Health Care Taxes (cont’d)
Description
Amount
Phase In Effective
Date
Employers
If no medical plan
• Generally
•$2,000 x(# ees-30)
•2014
•n/a
•2014
< 25 employees <$50k avg wage
9% premiums paid
2011-2013
<10 employees <$25k avg wage
35% premiums paid
Same
40% under paid tax
Enactment
• If < 50 employees
Small business credits
Penalty
Codification Economic Substance Doc
Health Care
Employer Requirements
If no plan, penalty
$2,000 x (number of employees-30)
Not applicable if fewer than 50
employees
Effective 2013
Small business credits (2011-2013)
35% premiums (<10 employees)
9% premiums (<25 employees)
Codification of Economic
substance
Included in health care legislation
Applicable if no benefit other than tax savings
Penalty 40% tax savings (20% if disclosed)
Revenue increase $5.5 bil
What We’re Going to Cover
7216 Guidance
Disclosure of uncertain tax positions
Tax preparer registration
Tax provisions in health care bill
HIRE Act
Prospective legislation
Levin’s list
Hiring Incentives to Restore
Employment Act
If
New hire after 3/19/10 and before 1/1/11
Must be unemployed for >60 days
Then
1. Social Security Tax Exemption
6.2% of wages paid up to FICA limit of $106,800
(i.e., max. of $6,621)
Would still owe Medicare tax
2. Income Tax Credit
Up to $1,000
Must retain worker for 52 weeks
2010 benefit but taken on 2011 returns
HIRE Act
1. Extends 179 exp through 2010 - $35
mil
2. Expands Build America Bonds - $4.56
bil
Subsidizes 65% interest payment
to issuer
179 – $250,000 expensing
allowance
Phase out dollar for dollar starts at $800,000
Note –
Not subject to mid-year or mid-quarter convention
Not a preference item for AMT – 56(a)(1)(B)
Can be new or used property
Illinois conforms to federal law
If not extended beyond ‘10
‘11 – 25k write off – phase out begins at $200k
What We’re Going to Cover
7216 Guidance
Disclosure of uncertain tax positions
Tax preparer registration
Tax provisions in health care bill
HIRE Act
Prospective legislation
Levin’s list
S 2917 Small Business Jobs Act
Estate Tax
Extenders Bill
Levin’s List
Estate tax
Permit an election of 2009 or 2010 rules
AMT
2-year patch
Marginal rates
Extend 2001 cuts for middle-class (10,15, 25 and
28% rates)
Bring back the 39.6% rate
Extend unemployment benefits
What We’re Going to Cover
7216 Guidance
Disclosure of uncertain tax positions
Tax preparer registration
Tax provisions in health care bill
HIRE Act
Prospective legislation
Levin’s list
S 2917 Small Business Jobs Act
Estate Tax
Extenders Bill
Small Business Tax Relief
House and S 2917
100% exclusion from gain sale small business stock
Purchase directly from Corp between 3/15/10 and
12/1/12
When corp has less than $50 mil in assets
Hold for 5 years
Start-up expenses
Immediate deduction $20,000 (currently $5,000) but
reduce dollar for dollar to extent expenses exceed
$75,000
Extend “Build America Bonds” to 2013
IDB bonds issued in 2011 exempt from AMT
S 2917 Penalty Relief
6707A failure to report listed transaction
Strict liability penalty
$100k/individual - $200k for other taxpayers
IRS extended until June 1 its moratorium on
collecting penalty and/or filing liens
S 2917
reduce penalty to 75% tax benefit
Retroactive to1/1/07
S 2917 Small Business and
Infrastructure Jobs Act
Revenue offsets
1099’s for expenses related to rental property
Clamp down on federal contractors and vendors
Minimum term of 10 years for GRATs
Various international tax provisions
What We’re Going to Cover
7216 Guidance
Disclosure of uncertain tax positions
Tax preparer registration
Tax provisions in health care bill
HIRE Act
Prospective legislation
Levin’s list
S 2917 Small Business Jobs Act
Estate Tax
Extenders Bill
Estate Tax ??
Temporary fix for confusion
Permit an election to follow 2010 repeal or 2009
rates and exemption
Exemption $5 mil
Rate – 35%
New features
Portability between spouses
Conformity with gift, GST and special use
valuations
Exemption indexed to inflation
What We’re Going to Cover
7216 Guidance
Disclosure of uncertain tax positions
Tax preparer registration
Tax provisions in health care bill
HIRE Act
Prospective legislation
Levin’s list
S 2917 Small Business Jobs Act
Estate Tax
Extenders Bill
Senate Extenders Bill
Individuals
Energy efficient home credits
Standard deduction for real estate taxes
Itemized deduction for sales taxes
Qualified tuition deduction
Charitable contributions from retirement plans
Refundable low-income housing credits
Businesses
R&D credit
15 yr life for leasehold, restaurant and retail improvements
Charitable deduction for food inventory
Offsets
Repeal Black liquor credit - $21.7 bil
Increase reporting requirements for first time home buyer – negligible
Codify economic substance doctrine - $5.5 bil
Information reporting for rental property expense payments $2.5 bil
Codification of Economic
substance
Included in health care legislation
Applicable if no benefit other than tax savings
Penalty 40% tax savings (20% if disclosed)
Revenue increase $5.5 bil
Cases & Rulings
61 – Settlement Credit Card
Debt
Payne, Jr. 8th Cir. 2009-7793, affrmg TC
Facts
Taxpayer renegotiated lower credit card debt
Lower amount was not less than result if “normal”
interest rate had applied
Taxpayer argued reduction should be regarded as
purchase price adjustment
Decision
Court denied taxpayer both arguments
Reduction in debt was income
61(a)(12) – Income from
Forgiveness of Debt
Paul Neal Jensen; T.C. Memo. 2010-77
Facts
Husband was obligor on a bank debt
Wife agreed to assume the liability in divorce decree
Debt was cancelled by bank
Issue
Who recognizes the income from discharge of
indebtedness, H or W?
Decision
Husband because he was the obligor the bank
looked to for payment
67(a) – Miscellaneous
Itemized Deductions
James Purdy, TC Sum 2010-26
Facts
Purdy was an employee of Merrill Lynch
Merrill Lynch terminated him
Purdy claimed wrongful termination
Case went to arbitration
Purdy reported award as wages but legal expenses on Sch C
Issue
Were the legal expenses unreimbursed employee business
expenses subject to 67(a) 2% AGI limitation?
Decision
Although the expenses were incurred after
Purdy’s employment, they were a direct
result of his employment and therefore are
subject to the 2% AGI rule
72(t) – Early Distributions
from IRA
Welker, TC Summ., Op. 2009-193
Facts
Taxpayer rec’d various distributions ($69k, $44k, $81k,
etc.) from 2001-2005
Taxpayer was a cancer survivor. Left job from
telephone company in 2001 as a result of treatments.
Taxpayer rec’d wages 2001-2003 (book store), 2005
(“modest” income) and 2006 (new job as asst. nurse)
Issue
Was the distribution in 2005 exempt from the 10%
additional tax on early distributions under the
exceptions for disability or part of a series of
substantially equal periodic payments?
Slide 44
72(t) – Early Distributions
from IRA
Decision
Qualify under disability exception? NO
“Disabled” only if unable to engage in any substantial
gainful activity
Taxpayer started a new career in 2006
Example in regs is “Cancer which is inoperable and
progressive”
Qualify under substantial equal periodic payments?
NO
Notice 89-25 requires calculation of payments under 1 of
3 methods: (1) RMD method; (2) fixed amortization
method; or (3) fixed annuitization method
Slide 45
152 – Dependency Exemption
Aaron Lee Hill, TC sum Op 2009-188
Facts
Hill took in sister’s 2 children
Provided housing, meals, etc.
Issue
Can Hill claim exemption for children that are not his own?
Decision
Yes under 152(c)(1) – also eligible for
Child tax credits
Earned income credit
But not head of household because no evidence of cost of
maintaining household
163 – Interest Deduction
Adams, TC Memo, 2010-72
Facts
Homeowner put house in land trust
Remained primarily liable for mortgage
Rented house - renters
Had option to buy
Paid rent equal to mortgage and taxes
Obligated to carry insurance and maintain house
But were not obligated on the mortgage
Issue
Can “renters” take home mortgage interest deduction for
portion of “rent” they pay equal to the mortgage interest?
Decision
Yes, the terms of the agreement made
“renters” the equitable owners of the
residence
165 – Theft Loss
INFO 2009-05 (Information Letter)
Facts
Stock loses value due to fraudulent or criminal acts
committed by corporate officers or directors
Issue
Does this qualify for ordinary loss treatment under
Rev Rul 2009-9 and Rev Proc 2009-20 (guidance
related to Ponzi schemes)?
Conclusion
No, distinguishable from Ponzi scheme because
criminal act not directly related to the acquisition of
the stock
165 - Casualty Loss
Justin Rohrs TC Sum 2009-190
Facts
Rohrs was DWI on winding road
Car damaged when it ran off road
Insurance did not cover DWI incidents
Issue
Was Rohrs eligible for casualty deduction?
Decision
Yes –
level of intoxication and manner he drove did not indicate he was
indifferent to hazard
Exact cause of accident not determined (DWI, speed, road
condition)
167 - Amortization
Recovery Group, TC Memo 2010-76
Facts
Company bought out 23% shareholder
Agreement included payment of $400,000 for
a covenant not to compete for one year
Issue
Was the $400,000 paid for the covenant
deductible over the 12 months it was
effective?
Decision
No, the 15-year write off is the norm for an
intangible resulting from the acquisition of a
business.
170 – Contribution Façade
Easement
Kaufman, 134 TC No. 9
Facts
Kaufman donated façade easement
Property subject to mortgage
Issue
Can Kaufman claim a deduction for the
decrease in value of the property due to the
façade easement?
Decision
Not eligible for the deduction
Terms of the mortgage provided that, if the
building were destroyed, the bank would
have first rights to all insurance proceeds until
the mortgage was satisfied
To claim the deduction, the donee must have
a guaranteed right to the value of the
easement
172(f)(4) – Specified
Liability Losses
CCA 201006028
Facts
Homebuilder required to repair damage resulting
certain construction defects
Builder treated expenses as incurred in settling a
product liability
As such, builder argued the loss generated was
eligible for a 10-year carryback
Issue
Should costs incurred to repair damage be treated as
product liability losses eligible for the 10-year
carryback?
Conclusion
No , “product liability” limited to damages
due to injury or emotional harm or damage or
loss of the use of property (generally a tort
liability)
The facts in this case were contractual
liabilities
CCA concludes “defect” means “safety
defect”
197 – Amortization of
Intangibles
Recovery Group Inc. T.C. Memo. 2010-76
Facts
Corp redeemed stock held by a minority shareholder
/ employee
$400,000 of payment was for a 1-year covenant not
to compete.
Issue
Can company deduct cost of the covenant not to
compete over its 12-month term?
Decision
No - cost of a covenant not to compete is a section
197 intangible and must be amortized over 15 years
213 Medical Expense
PLR 200941003
Deduction denied for cost of baby formula
because the formula is “properly viewed as
food that the infant would normally
consume”
401 – Required Minimum
Distributions
Client turned 70 ½ 2009
RMD suspended for 2009
But must make RMD by 12/31/10
Client turned 70 ½ this year
Has until 4/1/11 to take initial RMD
But consider making initial RMD this year
Tax rates may be higher next year
Avoids bunching 2 RMDs into 2011
401(k)
Schwab v Dibickero, 9th Cir
Facts
Decedent rolled 401(k) over to IRA
Willed IRA to children of previous marriage
Issue
Surviving spouse arguing that, to the extent the
IRA consists of the401(k) rollover, it automatically
goes to her
408 - IRAs
Chilton, D.C. Texas
Facts
Chilton inherited mother’s IRA
Chilton later filed for bankruptcy
Bankruptcy law provides $1 mil exemption
from creditors for IRAs
Issue
Does Chilton get to exclude the inherited IRA
from the assets in bankruptcy?
Decision
Wife’s position correct only if funds still held in
401(k)
Once funds rolled over to IRA, surviving wife has
no priority over will
446 – Method of Accounting
ILM 200949040
Facts
Accrual method company
Bonus for employees fixed at year end
But paid early in subsequent year
Recipient must be employee at payment date
Issue
Can company accrue deduction for bonuses at year end?
Conclusion
No because payment is contingent on event in subsequent
year – continued employment
451 – Taxable Year of Inclusion
Gift Cards
FAA 20100901F
Facts
Gift card income
Deferred until redeemed if sold by company providing
the goods or services
But currently taxable if sold by subsidiary
Corp sells gift cards through LLC that is
disregarded
Conclusion
If LLC disregarded, treated as if sold by
company providing goods or services
461 – Year of Deduction
CCA 200949040
Facts
Accrual method company
Bonuses
based on Year 1 income
Paid within 2 ½ months of Year 2 if still an employee
employees had no ownership in company
Question
Are bonuses deductible in Year 1?
Conclusion
No – conditioned upon an event that was not satisfied at
end of Year 1 - i.e. continued employment for 2 ½ months
Year 2
469 Passive Loss Rules
PLR 201005016
Interest S corp earns on working capital is not
treated as business income for purposes of the
passive loss rules regardless of its intended use
469 – Passive Losses
Newell, TC Memo 2010-23
Facts
Newell was managing member of LLC that owned
and operated a country club in California
Club operated at a loss
Issue
Was the pass a passive loss that Newell has to defer
until he has passive income or disposes of his
interest?
Decision
No, Newell was materially active and was not a
limited partner in a limited partnership
469 Passive activity Losses
Rev Proc 2010-13
Requires taxpayers to report their groupings
of passive activities
Removes the Notice 2008-64 requirement for
disclosure whenever there is a disposition of
an activity within a grouping
Applicable to tax years beginning after
1/25/10
469 – Passive Losses
Trask, TC Memo, 2010-78
Facts
Trask owned several rental properties
Most generated losses
Trask spent more than 750 hr/yr and more
than 50% of his working hrs on the properties
Issue
Did Trask qualify as a real estate professional
to enable him to claim the losses currently?
Decision
No, he didn’t spend more than 750 hrs and
50% of his time on any one property
Note
Could have avoided this problem by electing
to aggregate all his properties
Disadvantage of aggregation is that he
would not be able to report a loss on the
disposition of any one property until he had
disposed of them all.
469 - Passive Losses
Thompson Ct. of Claims 2009
Facts
Taxpayer had 99.9% interest in LLC taxed as
partnership
Taxpayer was general manager of LLC’s operations
LLC had loss
IRC 469(h)(2) states limited partners deemed not to be
materially active
Issue
Can taxpayer report the loss as an ”active” loss
Slide 71
Passive Losses
Decision
Yes,
Taxpayer’s activities similar to those of a general
partner
Limited liability is not determining factor
469(h)(2) meant to apply only to limited partners
because, unlike LLC owners, limited partners cannot
participate in the business and retain limited liability
Note – IRS issued AOD acquiescence in result only
Slide 72
469 - Passive Activity
Losses
Agosto, TC Summ., Op. 2009-191
Facts
Taxpayer’s incurred $60,000 of PALs on rental
property
Taxpayer actively participated in rental property (and
eventually agreed losses were limited to $25,000)
Taxpayer claimed add’l $44,000 casualty loss on same
rental activity (due to fire damage)
Issue
Since the casualty loss was from rental activity, should
it be subject to the $25,000 limitation?
Slide 73
469 - Passive Activity
Losses
Decision
Casualty loss limited under §469? NO.
Section 469 does not apply to all casualty and
theft losses (Reg. §1.469-2(d)(2)(xi))
Losses are NOT passive if:
Caused from fire, storm, shipwreck, or other
casualty, or from theft;
Losses that are similar in cause and severity do not
occur regularly; and
Taxpayer sustains loss after 1989
Slide 74
469- election to Aggregate
Rental Activities
Donald William Trask v. Commissioner; T.C. Memo. 2010-78
Facts
Since 1994 taxpayer aggregated his rental income and expenses
on Sch E as if the rental real estate activities were a single
activity.
But did not attach to any return a statement electing to treat his
rental real estate activities as a single activity.
Issue
Was reporting rental activity on an aggregate basis a “deemed”
election to aggregate
Decision
The fact that petitioner consistently aggregated the rental
income and expenses from the rental properties on his Schedules
E is not a deemed election under the requirements of section
469(c)(7)(A).
469 – Interest in LLC not
Automatically Passive
AOD IRB 2010-14, 4/5/10
Facts
Thompson owned 99% of charter airplane business held as
LLC
IRS disallowed losses because he did not materially
participate under limited partner rules of 1.469-5T(e)(3)(i)
Thompson argued that owner of LLC not same as limited
partner Material participation should be determined under 7 tests of -
5T(a)
Decision Thompson, Fed Cl 2009
Claims Court found for taxpayer
IRS has acquiesced in “result only”
1012 - New Basis Reporting
Requirements
Energy Improvement and Extension Act of
2008
Notice 2009-17
Proposed regulations issued 12/16/09
Effective for stocks acquired on or after 1/1/2011
Effective date for RIC and DRP stocks is 1/1/2012
Other securities have until 1/1/2013
AICPA Comments
Slide 77
1031 – Like-Kind Exchanges
Rev Proc 2010-14
Facts
Like kind exchange using Qualified Intermediary
Qualified intermediary goes bankrupt before replacement
property is acquired
Code requires replacement to take place within 180 days from
when the relinquished property is surrendered
Issue
If the bankruptcy exceeds 180 days, does the owner of the
relinquished property have to recognize gain?
Conclusion
No – owner of relinquished property recognizes the gain from the
sale of the property only as actual cash is received after QI comes
out of bankruptcy
1031 – Like Kind Exchange
Facts
taxpayer exchanging old off-road truck ($750,000
fmv $150,000 basis) for a dealer's new one ($760,000
taxpayer transferred old truck to qualified
intermediary, which then sold the truck to an
individual related to the taxpayer for $750,000.
The intermediary then purchased from the dealer's
inventory the new truck that the taxpayer had
selected, paying $760,000.
Issue
Does this qualify as a tax free exchange under IRC
1031?
Conclusion
1031(f) does not permit deferral of gain when
transaction is with a related party
This result cannot be avoided restrictions by
structuring transaction through a n unrelated
party
Also ineligible for exception under 1031(f)(2)
because a purpose was tax avoidance.
See also Rev. Rul. 2002-83
2031 - Estate Tax
Congress did not extend the $3.5mil exclusion
and 45% marginal rate
Accordingly, estate tax repealed for 2010
Generally carryover basis except stepped up
basis for:
First $1.3 mil of unrealized capital gain plus
Additional $3 mil if the assets go to surviving
spouse
2033 - Family Limited
Partnerships
Est of Shurtz, TC Memo 2010-21
Facts
FLP formed to hold timber land
Non tax benefits
Protected land from general creditors
Provided centralized management
Decision
FLP approved where taxpayer demonstrated
important purpose other than tax savings
2501 - Gift Tax
Petter, TCM 2009-280
Facts
Petter gifted units of LLC to children and charity
Formula clause would reduce units to children
and increase units to charity if value later
determined to be greater
Issue
Was the formula clause effective to adjust the
number of units deemed transferred or was it an
invalid “savings clause”
Decision
Clause effective – made clear that gift was of
certain value not certain number of shares or
a certain % of interest in the LLC
2503(b) – Annual gift tax
exclusion
Price v. Comm’r, T.C. Memo. 2010-2
Facts
Taxpayers formed LP to own privately held company and
commercial real estate. Company was sold w/in months.
LP agreement
Provided for discretionary distributions
Prohibited transfers to 3rd parties
Taxpayers transferred LP interests to children over 6 yrs.
Issue
Did the transfers of the LP interests qualify for the annual
exclusion from gift tax liability under §2503(b)?
Slide 85
2503(b) – Annual gift tax
exclusion
Decision
NO, the transfers were not present interest gifts
Applied the methodology set forth in Hackl
Donees must have immediate use, possession, or
enjoyment of either the transferred property or the
income therefrom.
Taxpayers must show that
the LP would generate income at or near the time of gifts;
some portion of that income would flow steadily to the
donees; and (PROBLEM: No distributions in 97 or 01)
the portion of income flowing can be readily ascertained.
(PROBLEM: Timing and amount of discretionary
distributions are pure speculation)
Slide 86
2503(b) – Annual gift tax
exclusion
Price v. Comm’r, T.C. Memo. 2010-2
Facts
Taxpayers formed LP to own privately held company and
commercial real estate. Company was sold w/in months.
LP agreement
Provided for discretionary distributions
Prohibited transfers to 3rd parties
Taxpayers transferred LP interests to children over 6 yrs.
Issue
Did the transfers of the LP interests qualify for the annual
exclusion from gift tax liability under §2503(b)?
Slide 87
2503(b) – Annual gift tax
exclusion
Decision
NO, the transfers were not present interest gifts
Applied the methodology set forth in Hackl
Donees must have immediate use, possession, or
enjoyment of either the transferred property or the
income therefrom.
Taxpayers must show that
the LP would generate income at or near the time of gifts;
some portion of that income would flow steadily to the
donees; and (PROBLEM: No distributions in 97 or 01)
the portion of income flowing can be readily ascertained.
(PROBLEM: Timing and amount of discretionary
distributions are pure speculation)
Slide 88
2703 – Certain Restrictions
Disregarded
Holman, 8th Cir, 4/7/10, affmg TC
Facts
Holman passed Dell stock into an limited
partnership
Gifted partnership shares to children
Subject to certain restrictions on ability of
children to transfer their interest in the pship
Issue
Did the restrictions on transferability affect the
value of the gifts for tax purposes?
Decision
Restrictions not effective in reducing value
Most of assets were readily marketable securities
No business purpose for the restrictions
General partners had broad management
discretion
3111 – Social Security Tax
Quality Stores, DC Western District of Michigan
2/23/10 , affmg Bankruptcy Court
Facts
Quality Stores laid off 75 workers
Each was given supplemental unemployment
compensation benefits
Quality argued “decoupling rule” of 3121(a)
treats FICA and wages separately
IRS argued CSX, Fed Cir, 3/6/08 and Rev Rul 9072 concluded that severance pay was subject to
FICA
Decision
Severance pay not subject to social security tax
Not payment for services – rather “wage
replacement social benefit” as defined in 3402(o)(2)
Note
IRS likely to appeal so employers should continue to
withhold but file protective claim for refund if:
Layoff was involuntary – employees cannot be
given a choice to forgo the pay and continue work
Has to involve more than one worker
4974(d) – Penalty for
Failure to Take RMD
PLR 201008049
Facts
Beneficiary of decedent’s IRAs failed to take required minimum
distributions beginning the year after decedent’s death, 1999
Beneficiary’s legal right to the IRAs was in dispute until 2008
while beneficiary was serving prison sentence for the murder of
the decedent
Issue
Did the legal dispute over the rights to the IRAs effectively delay
the required date for the RMDs?
Decision
Yes, failure to receive the distributions was beyond the control of
the beneficiary even though it was the act of the beneficiary
that caused the uncertainty.
New Basis Reporting
Requirements
Energy Improvement and Extension Act of
2008
Notice 2009-17
Proposed regulations issued 12/16/09
Effective for stocks acquired on or after 1/1/2011
Effective date for RIC and DRP stocks is 1/1/2012
Other securities have until 1/1/2013
AICPA Comments
Slide 94
Heads Up
1. No phase-out of personal exemptions or
itemized deductions in 2010 but these will
return to pre-2006 levels in 2011 unless
Congress takes action
Have a Great Conference!