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Wednesday, August 31, 2005

Hurricane Katrina Emergency Tax Relief

The IRS has announced special relief for taxpayers in the Presidential Disaster Areas struck by Hurricane Katrina. These taxpayers generally will have until Oct. 31, 2005, to file tax returns and submit tax payments. IRS will abate interest and any late filing or late payment penalties that would otherwise apply. This relief includes the Sept. 15 due date for estimated taxes and for calendar-year corporate returns with automatic extensions.

Tuesday, August 30, 2005

Summary of Energy Tax Incentives Act of 2005

This recently passed law provides tax incentives to make energy saving improvements to homes and offices. Interestingly, the incentives generally come in form of tax credits (which are more valuable than tax deductions) and do not phase out for higher-income taxpayers.

Some of the key credits include:

-For purchase of hybrid, fuel cell, advanced lean-burn and other alternative power vehicles

-For purchase of qualifying residential solar water heating, photovoltaic equipment, and fuel cell property

-For energy efficient improvements to existing homes

-Credit for contractors that construct new energy efficient homes

There is also a deduction for energy efficient commercial buildings that are placed in service.

Monday, August 29, 2005

Springing Value Life Insurance Planning Attacked by IRS

The IRS has issued final regulations that seek to shut down "abusive" transactions involving life insurance policies designed to have a low cash surrender value when transferred from an Code Sec. 412(i) retirement plan or an employer to an employee. The general tax planning that the IRS was attacking generally involved:

a. Funds are transferred by an employer to purchase a life insurance policy on an employee in a retirement plan, with a deduction for the full amount of the contribution.

b. The retirement plan purchases a life insurance policy. The policy is structured to temporarily have a low cash surrender value - much lower than the premiums paid. The policy is distributed to the employee, and the employee is taxed on the low cash surrender value. The cash surrender value of the policy then increases under the terms of the policy.

The net effect - the employer gets a full deduction, but when the insurance policy is distributed to the employee, the income picked up by the employee is less than the deduction allowed the employer.

The new regulations aim to prevent this result by having the employee include income at the full fair market value of the life insurance contract transferred to him from the Code Sec. 412(i) retirement plan or the employer. Preamble to TD 08/26/2005 ; Reg. § 1.79-1 , Prop Reg § 1.83-3 ; Reg. § 1.402(a)-1 , Reg. § 1.402(a)-1(a)(2) .

Sunday, August 28, 2005

Gifts to Clubs

Courtesy of Private Letter Ruling 200533001, here are some things about gifts to social clubs that you may not know about:

-- A transfer by a member to a social club can constitute a taxable gift subject to give tax.

-- While a transfer of property by a donor to a corporation generally represents a gift by the donor to the other individual shareholders of the corporation, Treasury Regulations 25.2511-1(h)(1) provide that there may be an exception to this rule, such as a transfer made by an individual to a charitable, public, political or similar organization which may constitute a gift to the organization as a single entity. This exception was found to apply in the Ruling.

-- If the amount of the gift is under the $11,000 annual exclusion amount, such gifts can often qualify for that exclusion and thus not be subject to gift tax. Where the cash gift was to be used to upgrade club facilities, the IRS ruled that the gift qualified as a "present interest" thus allowing it to qualify as an annual exclusion gift under Internal Revenue Code Section 2503(b). Not all gift transfers to entities qualify for the annual exclusion. For example, Rev. Rul. 71-443, 1971-2 C.B. 337, concludes that a gift to a corporation in that ruling was a gift of a future interest in property to the shareholders of the corporation that was not eligible for the annual exclusion.

Friday, August 26, 2005

Estate Tax Reform - Is it Finally About to Happen?

President Bush has been pushing for the repeal of federal estate taxes since he entered office, and it was a central part of his campaign for reelection. As 2010, and its one year of no estate tax, creeps up on us, the question of when Congress will finally act to repeal or reform estate taxes weighs heavy on our minds. Will the next session of Congress be the one to finally resolve the issue?

Many in the mainstream media think so. For example, FoxNews recently published its take on these matters.

Whether estate taxes are repealed, or whether rates are reduced and exemptions creased, one issue that has not received a lot of attention [yet] is the scheduled repeal of date-of-death basis step-ups in assets in favor of a carry-over basis regime.

Thursday, August 25, 2005

Not All Mortgage Interest Is Deductible

Generally, interest on indebtedness secured by a qualified residence is deductible, if it meets the definitions (and is within the dollar limitations of) "acquisition indebtedness" or "home equity indebtedness." What is often overlooked is that even if the interest deduction passes muster under the qualified residence rules, other provisions of the Internal Revenue Code may still deny deductibility.

For example, the following three uses of the borrowed funds will result in disallowance of the interest deduction:
  • Borrowed funds used to purchase or carry a single premium life insurance, endowment, or annuity contract;
  • Borrowed funds used to purchase or carry obligations that produce tax-exempt interest (e.g., municipal bonds); and
  • Borrowed funds used to pay interest on a life insurance policy loan where the policy is owned by the taxpayer.
Temp. Reg. §1.163-10T(b).

Wednesday, August 24, 2005

New CRUT Forms

In Revenue Procedures 2005-52 through 2005-59 the Internal Revenue Service has issued sample charitable remainder unitrust forms replacing the sample forms issued in 1990. The new forms are a significant improvement over the prior forms and the explanatory material and annotations provided by the Internal Revenue Service are very useful.

Tuesday, August 23, 2005

Doc Stamps & Mergers/Consolidations (Florida)

Effective January 1, 2006, documentary stamp taxes, as imposed under ss. 201.02(1) and 201.08(1)(a), F.S., are not due on deeds or other instruments that purport to convey interests in Florida real property and instruments purporting to assume notes and other written obligations to pay money that are executed or delivered as a result of the certain mergers or conversions.

In a recently issued tax information publication, the Florida Department of Revenue summarized that such taxes will not apply to the following mergers and conversions:

  • A domestic corporation converting into another business entity pursuant to s. 607.1112, F.S.
  • Another business entity converting into a domestic corporation pursuant to s. 607.1115, F.S.
  • A domestic limited liability company converting into another business entity pursuant to s. 608.4401, F.S.
  • An organization other than a limited partnership converting into a limited partnership and a limited partnership converting into an organization other than a limited partnership pursuant to s. 620.2102, F.S.
  • A limited partnership merging with one or more constituent organizations pursuant to s. 620.2106, F.S.
  • An organization other than a partnership converting into a partnership and a partnership converting into another organization pursuant to s. 620.8912, F.S.
  • A partnership merging with one or more other constituent organizations pursuant to s. 620.8916, F.S.
  • In each merger or conversion referred to above, title to all real property is conveyed to the surviving or converted entity by operation of law, and all debts and liabilities of the merging or converting entity become the debts and liabilities of the surviving or converted entity by operation of law.

Monday, August 22, 2005

Civil [Tax] Disobedience

Civil [tax] disobedience, is alive and well in the USA. Anti-war protestor Cindy Sheehan, whose soldier son Casey was killed in Iraq, is refusing to pay her taxes as part of her escalating battle with President Bush over the war in Iraq.


Sunday, August 21, 2005

Don't Forget the GRIT!

Previously, the Grantor Retained Income Trust ("GRIT") was a popular device among estate planners to shift appreciation to the next generation at a reduced transfer tax cost. The special valuation rules of Chapter 14 of the Internal Revenue Code (§2701-2704) were enacted in 1990 by lawmakers seeking to curtail the use of GRITs as well as other similar transfer devices.

In a recent article, Mark Smith reminds us that the GRIT is still viable as an effective estate planning technique for gifts to extended family members (such as a niece or nephew), same-sex partners (whether or not married), and unrelated donees. Remembering the GRIT: Smart Planning for a Diverse Clientele, Estate Planning Journal, Sep 2005.

Extended Statute of Limitations for Responsible Officer Liability

The Internal Revenue Service takes the collection of employment taxes very seriously. For example, under the Internal Revenue Code "responsible officers" of employers may have personal liability to the IRS for employment taxes that are withheld from employees, but not paid over by their employers to the IRS.

In a determination that is not favorable to responsible persons, the IRS has concluded that a responsible person liable for the trust fund recovery penalty is subject to the same assessment period that applies to the employer's return. Thus, where the employer has committed fraud, willfully attempted to evade tax, or failed to file an employment tax return, an unlimited assessment period applies. Chief Counsel Advice 200532046.

Thursday, August 18, 2005

Subchapter S Audits Coming!

The Internal Revenue Service is planning to conduct special audits of about 5,000 closely held businesses as part of a wide-ranging research program to help combat tax evasion and improve compliance. These audits, scheduled to begin later this year, will focus on returns filed by S cororations, IRS officials recently announced. With a typical S corporation, the income, losses and deductions flow through directly to shareholders, instead of being taxed at the corporate level.

These corporations "continue to be the single most popular corporate entity choice," the IRS said, and their total assets are huge. The total number of returns filed by S corporations for the 2002 tax year was nearly 3.2 million, according to an article by Kelly Luttrell, an IRS economist, in the latest issue of the IRS Statistics of Income Bulletin. That was up from about three million in 2001 and about 725,000 in 1985. Total assets rose 7.1% in 2002, to more than $2 trillion.


Wednesday, August 17, 2005

Passing On the Family Vacation Home

Few families successfully transfer ownership of a cabin or vacation property by accident. But, some families do accomplish this Herculean feat with a great deal of advanced multi-generational planning, often with mechanisms to adjust the plan as circumstances and needs change. In a recent article, Wendy S. Goffe describes various considerations and techniques that should be considered.

In regard to methods of transfer, these include outright gifts, transfers to qualified personal residence trusts, use of other trusts, family LLC’s, and sales to family members. Once the property has been transferred to the next generation, the family will need to put into place a mechanism to manage the property, resolve conflicts, and facilitate maintenance of the property. The article provides a useful list of issues that should be addressed in an agreement dealing with these issues.

Planning Strategies for Keeping the Vacation Home in the Family, Estate Planning Journal, Sep 2005, Estate Planning Journal (WG&L).

Above the Line Deduction for Educators

With the beginning of the school year approaching, teachers and educators should remember to keep receipts for out-of-pocket purchases of books and classroom supplies that could lower their 2005 tax liability. A deduction for those items is an above-the-line deduction, although it is due to expire after 2005.