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Friday, February 29, 2008


The classification of an expense of a trade or business as a “passive loss” or “investment interest” is not usually desirable for individual taxpayers, since such losses can only be offset against certain specified types of income. If such classification is avoided, these limitations on use are likewise avoided.

For hedge funds and other partnerships involving active trading in securities, such partnership activities can be characterized as a trade or business. Nonetheless, and unlike most other trades or businesses, under IRS regulations losses from such activities cannot be characterized as “passive losses.” Treas.Regs. §1.469-1T(e)(6)(i).

Often such partnership borrow funds to use in their business. At first it may appear that interest payments on such borrowings, when passed through to individual limited partners, should be fully deducted as trade or business expenses of the partners since under the above regulation they have dodged characterization as “passive losses.” However, in a recent Revenue Ruling, the IRS has indicated that in their analysis, such interest expense will be characterized as “investment interest.” As such, it is deductible by individual partners that do not materially participate in the partnership business under Code Section 163(d)(1) only to the extent they have “net investment income.” Thus, while the passive loss limitations are avoidable, for this type of expense the investment interest limits will apply.

Such interest expense will need to be separately stated on the partnership’s K-1 schedule to partners, so that the partners can properly account for it on their own tax returns based on their individual circumstances.

Revenue Ruling 2008-12, IRB 2008-10

Wednesday, February 27, 2008


First, the bad news. Unlike in prior years, small tax-exempt organizations (organizations with less than $25,000 in gross receipts) now must file an annual Form 990.

The good news is that the filing can be made with a Form 990-N, which is one of the shortest tax returns around. Further, as an "e-postcard" it can be filed directly online.

The return is due by the 15th day of the 5th month after the close of the organization's tax year. For calendar year taxpayers, this means that the 2007 return is due by May 15, 2008.

Taxpayers can file the form by going to the e-postcard website [].

The IRS also allows you to review the e-postcard filings of any organization that files one. This information can be reviewed here [].

Monday, February 25, 2008


March 2008 Applicable Federal Rates Summary:

-Short Term AFR - Semi-annual Compounding - 2.24% (3.09%/February -- 3.16%/January -- 3.84%/December)

-Mid Term AFR - Semi-annual Compounding - 2.95% (3.48%/February -- 3.55%/January -- 4.09%/December)

-Long Term AFR - Semi-annual Compounding - 4.23% (4.41%/February -- 4.41%/January -- 4.67%/December)


Thursday, February 21, 2008


Section 1031 exchanges are a popular mechanism for owners of real property to exchange one property for another without recognizing gain on appreciation at the time of the exchange. To qualify, the property being disposed of (the "disposition property"), and the property that is acquired in the exchange (the "replacement property"), must both be used in a trade or business of the taxpayer or held for investment.

Personal use of a dwelling unit (house, condominium, etc.) likely disqualifies a dwelling from being characterized as being used in a trade or business or held for investment, and thus will disqualify a swap of that property from Section 1031 treatment. In a break to taxpayers, the IRS has now issued that guidance that provides that a small amount of personal use by the taxpayer will not jeopardize Section 1031 treatment, if the property is rented out by the taxpayer.

The requirements of the safe harbor are:

-in each of the two twelve month periods leading up to the swap (a) the taxpayer owns the disposition property, (b) the disposition property is rented out at fair value for no less than 14 days, and (c) the taxpayer personally used the disposition property for no more than the greater of 14 days or 10% of the days the dwelling was rented; and

-in each of the two twelve month periods after the swap (a) the taxpayer owns the replacement property, (b) the replacement property is rented out at fair value for no less than 14 days, and (c) the taxpayer personally uses the replacement property for no more than the greater of 14 days or 10% of the days the dwelling was rented.

Revenue Procedure 2008-16

Tuesday, February 19, 2008


Under IRS regulations, foreign corporations and nonresident aliens who do not file a U.S. income tax return within certain time limits forfeit the ability to take otherwise available deductions against their income that is taxable in the U.S. While the regulations do not require that the return be filed on time, generally if the return is not filed within 18 months of the due date the deductions are lost.

This rule can be harsh for taxpayers that mistakingly conclude that they did not need to file a return based on a lack of income that is taxed in the U.S., that thought that having no net income after deductions meant they did not need to file a return, or that just did not realize that they needed to file a U.S. return. Such taxpayers will end up owing more tax than would have been the case if they had filed within the time limits. Indeed, taxpayers who might otherwise have been in a net loss position after deductions will now owe income tax regardless of their losses.

In 2006, the Tax Court found no statutory authority for the corporate version of the regulations, and declared them invalid. Now, the Third Circuit Court of Appeals has reversed the Tax Court and found the regulations are valid interpretative regulations. This occurred notwithstanding other long-standing precedent (that preceded the regulations) that a timely filing is not a prerequisite for being able to take deductions.

If and until the issue is addressed in a different manner by a different Court of Appeals, delinquent taxpayers are at substantial risk now for loss of deductions, and need to consider whether to file protective returns if they are uncertain as to whether they need to file a U.S. return.

The regulations will also have the unfortunate effect of discouraging innocent foreign nonfilers, who learn of U.S. tax and filing requirements after the time limits of the regulations, from coming clean and filing returns for prior missed years. There are lots of those nonfilers out there - while the regulation writers assume that all foreign persons will or should know and keep up with U.S. requirements, there truly are many who do not pick up on the requirements until after the deadlines have passed.

By allowing the regulations to stand, the appeals court essentially has authorized the Treasury Department to add late filing penalties that are not otherwise provided for in the Internal Revenue Code, and allows the conversion of a tax on "income" to a tax on gross receipts.

Thursday, February 14, 2008


The shareholders of wholly owned corporations often end up paying for corporate expenses out of their own wallets or checkbooks, or with their own credit cards. Sometimes this is just a matter of convenience for an occasional expense - othertimes, when the corporation is short of cash this may be a regular occurrence.

The shareholders typically want such expense payments to be treated as loans or advances to the corporation, and not a capital contribution. Loan treatment allows for repayment of such advances without the payment being treated as a taxable dividend or distribution from the corporation. As discussed in a recent Tax Court case, taxpayers also desire loan treatment so that they can obtain business bad debt treatment if the loan cannot be repaid.

While often done simply by an entry on the books of the corporation that treats the expense payment as a loan advance, more evidence of loan treatment is desirable if a strong defense against an IRS challenge on that characterization is desired. In the mentioned Tax Court case, the lack of evidence of loan treatment and intent resulted in the Tax Court not recognizing the shareholder payment of expenses as loans, and the Tax Court thus disallowed business bad debt treatment for the shareholder when the advances were not repaid.

What type of evidence of a loan is desired to avoid a similar result? The Tax Court provided a roadmap of what it was looking for (and what was not present):

Mr. Bynum and SEI did not have a debtor-creditor relationship. Mr. Bynum certainly paid and substantiated a wide array of business expenses, but these payments were not loans to SEI. First, there was no valid and enforceable obligation to pay a fixed or determinable amount of money. Second, there was no oral or written agreement establishing a debtor-creditor relationship. Third, Mr. Bynum did not demand or receive any payments from SEI relating to the alleged loans. Finally, the expenditures were not structured as, or intended to be, loans. To keep his business afloat, Mr. Bynum routinely paid a myriad of typical business expenses. He was concerned about the survival of the business, not repayment for the expenses. In sum, Mr. Bynum's payments were contributions to capital, and not bona fide indebtedness.

The simple expedient of a promissory note with repayment terms, and/or the occasional repayment of the advances, would have gone a long way toward allowing Mr. Bynum the loan treatment he sought.

Douglas Bynum, Jr., et ux., TC Memo 2008-14

Monday, February 11, 2008


On January 29, 2008, Florida voters approved a constitutional amendment that allows owners of Florida homesteads to transfer all or a part of their Save Our Homes homestead exemption caps from an old homestead to a new homestead. The Florida Department of Revenue has provided information on procedures that must be followed if a taxpayer wants to transfer his or her exemption to a new homestead. Some taxpayers will need to act quickly to qualify.

If a taxpayer had a 2007 exemption on their home, and acquired a new homestead by January 1, 2008 to which they want to transfer their old cap, they will need to apply for the transfer with their local tax appraiser by March 1, 2008.  It appears that merely obtaining a homestead exemption on the new residence is not enough - a transfer of the Save our Homes benefit must also be applied for.

In future years, these applications will have to be submitted by March 1 of the year following that calendar year in which the new homestead is acquired. To qualify for a transfer, a taxpayer will have to have had a homestead exemption for the old residence in either of the two preceding years.


Saturday, February 09, 2008


Congress is continuing its 80 year tradition of spending to spur the economy through its passage on February 7 of the Economic Stimulus Act of 2008 ("ESA"), which President Bush is expected to sign. Here are some of the major highlights:

  • A tax credit to taxpayers. High income taxpayers should not wait around the mailbox for their check - the credit starts to phase out for taxpayers with AGI over $75,000 ($150,000 on a joint return) and is completely phased out at levels not much higher than that.  Nonresidents, tax dependents (e.g., students who are declared as a dependent on their parents' returns) and estates and trusts are also ineligible. The basic credit will range from $300 to $600 (double that for married couples), based on a formula that takes into account the amount of qualifying income of the taxpayer and his or her income tax liability. Taxpayers with dependent children under age 17 that otherwise qualify will receive an additional $300.
  • The Code Section 179 deduction for new property is increased to  $250,000 per year. This deduction applies to property acquired for use in an active trade or business that is tangible property or computer software which would generally be depreciated over multiple years instead of being expensed in one year. This is an increase from $128,000. The deduction starts phasing out as more than $800,000 of Section 179 property is put in service. Thus, by increasing deductions, businesses will pay less in tax.
  • 30% bonus depreciation (that is, extra depreciation allowed in the first year of service) is replaced with 50% bonus depreciation.
  • The maximum depreciation deduction for qualified passenger automobiles is increased by $8,000.

Happy spending!

Wednesday, February 06, 2008


Section 1031(a)(1) provides that no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment. Exchanged properties must of of the same kind or class to qualify.

Generally, real property must be exchanged for other real property, to be of the same kind or class.  In a recent private letter ruling, the issue was raised whether real property could be exchanged for development rights in real property (which development rights were to be applied to property already owned by the taxpayer). The IRS found that the development rights were the equivalent of real property and thus a Section 1031 exchange was allowed.

In determining that the development rights were real property, the IRS noted:

  • the fact that the development rights would be applied to other property owned by the taxpayer was not a problem;
  • it was enough that development rights were treated as real property for some purposes under state and local law, even though they were not treated as real property for all such purposes;
  • the fact that the rights are "as-of-right" and not discretionary meant they existed permanently, which was an important factor in finding them to be real property;
  • it was also helpful that the transfer of development rights was subject to local transfer taxes like a deed transfer; and
  • it was also helpful the development rights were perpetual and not temporary.

PLR 200805012.

Monday, February 04, 2008


A common estate planning document is a durable power of attorney. This POA typically grants broad authority to the designee to act on behalf of the principal. A durable POA will survive the incapacity of the principal, providing an alternative to guardianship in the event a principal becomes unable to act for himself or herself.

Revocable trusts are another common estate planning document. Typically, such documents can be amended freely by the settlor. However, they often have limits on the ability of third parties, such as a guardian, to modify the trust on their behalf.

In a recent Florida case, a settlor's revocable trust prohibited any conservator, guardian, or “any other person” from exercising the rights of amendment during the lifetime of the grantor. A holder of a durable POA asserted that the POA allowed him to modify the settlor's trust.

The court made short-shrift of the POA holder's argument, and held that the prohibition language include a POA holder.

A more interesting case would have arisen if the POA explicitly granted the power to amend to the POA holder - then there would have been a direct conflict between the POA and the trust. However, in the instant case, while the POA holder did assert that some language under the POA authorized amendment, the POA language really didn't have any clear language to that effect.

ROSE GURFINKEL, etc., et al., Appellants, vs. JOSI, a/k/a JOSEPH MARMOR, etc., et al., Appellees. 3rd District. Case No. 3D06-1616. L.T. Case No. 05-3664. Opinion filed December 12, 2007.