Tax

The White House Framework for Tax Legislation

White HouseBy David Wheeler Newman

On September 27, the White House released a document called the “Unified Framework for Fixing Our Broken Tax Code,” containing an outline prepared by the administration plus the senior Republican members of the tax-writing committees of Congress. The Framework is far less detailed than previous proposals for structural tax reform, but is instead described as a “template” which the authors intend for Congress to use to prepare actual legislation. This template calls for new tax rates for individuals and businesses and would create a territorial international tax system.  Some key headlines:

Estate Tax.  The Framework calls for a repeal of the estate tax.  In announcing the tax plan, the President said that repeal would overwhelmingly help farmers and small business owners.  However, most farm families are not actually affected by the estate tax, which only applies to estates valued at over $5.49 million.  The nonpartisan Tax Policy Center projects that estate tax of $19.95 billion will arise from Americans dying in 2017, of which about $30 million, or 00.15%, will be paid by the estates of farmers and small business owners.

The Framework would also repeal the generation skipping transfer tax. The proposal is silent on the gift tax. (more…)

New Partnership Audit Regime and Partnership M&A Transactions

business man financial inspector and secretary making report, calculating or checking balance. Internal Revenue Service inspector checking document. Audit concept.By Charles Kolstad and Robin C. Gilden

Background:

Congress has changed the way partnership[1] audits will be conducted in the future. Beginning with tax years starting on or after January 1, 2018, audits will still be done at the partnership level; however unlike current practice where adjustments and additional tax payments are made at the partner level, under the new rules the adjustments and additional tax payments will in many cases now be done at the partnership level with the payments made in the year the tax audit is finalized. The changes were made to make it easier for the IRS to audit partnerships.

The new rules raise a number of unanswered questions in the M&A arena all of which require a significant rethinking of the way partnership M&A transactions are structured and documented. There are likely to be significant differences in the responses to the Open Issues set out below between a transaction involving a LLC, which would survive as a separate legal entity after the acquisition, and a limited partnership which would terminate and not exist as a separate legal entity after the acquisition as it would only have one member. (more…)

California State Board of Equalization Gutted

By Jeffrey D. Davine

The Taxpayer Transparency and Fairness Act of 2017

Established by the California Constitution in 1879, the California State Board of Equalization (the “BOE”) has been the agency charged with administering most of the taxes imposed by California.  In addition, the BOE was the tribunal whose function was to decide taxpayer appeals of decisions by the California Franchise Tax Board (the “FTB”) concerning income tax matters.  All of this is about to change with the passage of AB 102.  AB 102, which is named the “Taxpayer Transparency and Fairness Act of 2017” (the “Act”), was signed into law by Governor Brown on June 27th.  The Act effectively cuts the legs out from underneath the BOE.

Background

In March of this year, the California Department of Finance issued a derisive report asserting that the BOE misallocated tax revenues, used BOE employees to assist elected BOE members with political activities, and attempted to improperly affect BOE audits.  In response, and at the urging of the Governor, the Act was passed by the California Legislature. (more…)

Proposed IRS Regulations Could End Most Valuation Discounts for Family Entities

By Allan Cutrow, Jeffrey Eisen and S. Eva Wolf

On August 2, 2016, the Treasury Department issued proposed regulations under Section 2704 of the Internal Revenue Code. The proposed regulations, if adopted in their current form, essentially will eliminate all minority discounts or lack of control discounts and lack of marketability discounts for transfers between family members of interests in family-controlled businesses.

The proposed regulations accomplish this result in complex ways. But here are some points to consider as you decide whether to act quickly.

  1. The regulations are “proposed.” This means that they are not currently in effect. The Internal Revenue Service has scheduled a public hearing on the regulations in Washington, DC on December 1, 2016. They take effect when the IRS announces that they are “final.” Thus, these regulations could take effect shortly after the hearing, sometime in 2017, years from now, or never (in theory). The IRS may change the regulations in meaningful ways before adopting them as final. (more…)

4 Things Beneficiaries Who Receive IRS Form 8971’s Schedule A Must Know

By Jacey L. Hayes

When someone inherits assets, he or she is supposed to have a tax basis in the inherited asset for income tax purposes equal to the “fair market value” of the inherited asset at the date of death. The IRS is concerned that it is losing billions of dollars due to improper basis reporting for inherited assets: that is, the executor reports the assets on the estate tax return at one value, and then when those same assets are later sold, exchanged, or transferred by the beneficiary, the beneficiary reports the basis at a higher value. To tackle this concern, all estates which file an estate tax return after July 31, 2015, also must now file, within 30 days after filing the estate tax return, new IRS Form 8971, and provide a Schedule A to each beneficiary. A beneficiary’s Schedule A must also be given to the beneficiary within the same time frame. (Note that for all estate tax returns filed between August 1, 2015 and May 31, 2016, the due date of Form 8971 was postponed to June 30, 2016, leading to a flood of recent filings.) (more…)

IRS Confirms – No More Phone Calls (At Least Not Initially)

By Jeffrey D. Davine

It has been somewhat of an epidemic. Lots of taxpayers have received calls from persons who claim to be from the IRS and who assert that the recipient of the call has an outstanding federal tax liability. The caller then threatens some kind of draconian penalty (e.g., the police will be immediately dispatched to arrest the recipient of the call) unless immediate payment is made by wire transfer, debit card, or some other mechanism whereby the caller can extort some quick money.  (more…)

Valuation Rule for Early Termination of Net-Income Charitable Remainder Unitrusts

By David Wheeler Newman

Under Internal Revenue Code § 664, a qualified charitable remainder unitrust each year during its term distributes to a non-charitable beneficiary a fixed percentage (5% or greater) of the value of trust assets, determined annually (the unitrust amount).  Assets remaining in the CRUT at the end of its term are distributed to charity.  Section 664(d) provides that a qualified CRUT may limit distributions to the non-charitable beneficiary to the lesser of the unitrust amount or trust income under fiduciary accounting principles (a net-income CRUT, or NICRUT), and may pay the non-charitable beneficiary any trust income in excess of the unitrust amount to the extent that aggregate distributions in prior years were less than the aggregate unitrust amounts as a result of the net-income limitation (a net-income with make-up CRUT, or NIMCRUT). (more…)

IRS Releases Draft Form 8971, Information Regarding Beneficiaries Acquiring Property from a Decedent

By S. Eva Wolf

On December 18, 2015, the IRS released draft Form 8971, Information Regarding Beneficiaries Acquiring Property from a Decedent. Once Form 8971 is finalized, executors who are required to file estate tax returns will complete it and provide it to the IRS and beneficiaries in compliance with the new basis reporting laws passed earlier this year.

For more information on the new basis reporting laws, see previous blog posts IRS Extends Due Date for New Basis Reporting Rules and New Law Steps Up Reporting Requirements for Executors.

Where Do You Think You’re Going?

By Jeffrey D. Davine

Maybe nowhere if you owe the IRS more than $50,000.

Congress recently passed H.R.22. It was signed by the President on December 4th and it became Public Law No: 114-94. The law is known as the “Fixing America’s Surface Transportation Act” (“FAST”).

For taxpayers who owe the IRS more than $50,000, the FAST Act might be more appropriately classified as the STOP Act because it may prevent them from leaving the country. (more…)

The Numbers Are In… er, Projected

By S. Eva Wolf

The Numbers Are In… er, Projected: Increases to the Estate, Gift, and Generation-Skipping Transfer Tax Exclusions.

While the official numbers will not be released until later this year, the following projections are unlikely to change since they are based on the average Consumer Price Index for the 12 month period ending August 31, 2015. (more…)