MARCH 2009 APPLICABLE FEDERAL RATES

FBAR GUIDANCE ON "DOING BUSINESS IN THE U.S."

U.S. persons with interests in or signature authority over foreign accounts are generally required to report those interests to the Treasury Department on Form TD F 90-22.1 (commonly referred to as the 'FBAR'). Internal Revenue Code definitions of "U.S. person" do not apply, and the definition includes persons in and doing business in the U.S., even if not a citizen or resident of the U.S. Failure to report can result in significant penalties.

One problem with this requirement is that the Instructions to the form provide no guidance as to what constitutes "doing business in the U.S." for this purpose. The applicable form language reads:

The IRS has now published a FAQ that provides guidance on when a person will be considered to be doing business in the U.S. Q&A 4 in this guidance provides:

1. The determination is a facts and circumstances test.


2. Regular and continuous business activities in the U.S. are needed.


3. Merely visiting the U.S., or sporadically conducting business in the U.S., will not be enough.


4. Artists, athletes, and entertainers who are not citizens or residents of the United States and who only occasionally come to the United States to participate in exhibits, sporting events, or performances, will not be considered to be conducting business in the U.S.
   

FAQs Regarding Report of Foreign Bank and Financial Accounts (FBAR)

EXTENDED NOL CARRYBACK PERIOD IN RECOVERY ACT DISAPPOINTS MANY

One of the few “business friendly” tax provisions in the recently enacted Recovery Act is a temporary extension of the net operating loss (NOL) carryback period to 5 years from the usual 2. The purported benefit is to get cash into the hands of businesses who are presently suffering losses, by allowing them to carryback current losses to those earlier years and obtain income tax refunds. The businesses can then use the cash flow to remain in business and stem the flow of layoffs.

The big problem with the new provision is that it only applies to entities with gross receipts of under $15 million. While $15 million is a lot of money, in the grand scheme of things this eliminates a great number of middle and large business enterprises from sharing in the benefits of the new provision. I know of several disappointed companies that had thought they were going to receive the benefit of the new provision, only to find out that they exceeded the threshold and thus were locked out from its benefits. At least one of those companies is now going to have to significantly cut back its work force – something it did not want to do and something the Recovery Act was supposed to help prevent.

Once upon a time, a tax break for one, was a tax break for all. In today’s world, it is difficult to find any favorable tax provision that is not phased out or made inapplicable to taxpayers once certain income, asset, or gross receipts levels are exceeded. One has to question the wisdom of such populist policies which deny benefits to the country’s significant employers, especially in regard to the Recovery Act whose avowed purpose is to maximize jobs.

BULLET POINT SUMMARY OF TAX PROVISIONS OF NEW STIMULUS ACT

The House and Senate versions of The American Recovery and Reinvestment Act of 2009 has cleared the conference committee. Assuming passage by both houses of Congress, the following tax provisions will be in the version that goes to President Obama for signature. The following are short bullet points only to apprise yourself of the key tax provisions – there are plenty of materials that are or will be on the web that will provide the details for those that are interested.

• Subsidy for COBRA Continuation Coverage of Unemployed Workers
• New Temporary Deduction for Sales and Excise Taxes on Car Purchases
• Partial Exclusion from Income of Unemployment Compensation
• First-time Homebuyer Credit Eased
• Computers Treated as Education Expenses under 529 Plans
• A New “American Opportunity” Tax Credit
• Refundable Child Credit Rules Eased
• Increase in Earned Income Tax Credit
• A New “Making Work Pay” Credit
• S Corp Built-In Gains Holding Period Shortened Temporarily to Seven Years
• Exclusion for Qualified Small Business Stock Increased to 75% of Gain
• Modified OID rules for Certain High-Yield Obligations
• Deferral of Debt Forgiveness Income On Repurchase of Debt
• Expansion of Groups under Work Opportunity Tax Credit
• Reduced Estimated Tax Burden in 2009 for Individuals With Small Businesses
• Small Businesses May Elect Longer NOL Carryback Period
• Act Boosts Code Sec. 179 expensing for 2009
• First-Year Depreciation Dollar Cap for New Passenger Autos Placed in Service in 2009 Raised by $8,000
• Additional 50% First-Year Depreciation OK'd for Most Types of New Depreciable Property Placed in Service in 2009
• Boosted AMT Exemption Amounts for 2009
• Personal Nonrefundable Credits May Offset AMT and Regular Tax for 2009
• Repeal of AMT Limits on Tax Exempt Bonds Issued in 2009 and 2010

SECTION 1031 EXCHANGES AND DOCUMENTARY STAMP TAXES [FLORIDA]

Florida imposes documentary stamp taxes on deeds that transfer real property. In Section 1031 like-kind exchanges, an exchanged document will often be deeded twice – first to an exchange accomodator titleholder (EAT), and then from the EAT to the ultimate purchaser. Does this mean documentary stamp taxes are imposed twice?

No, not according the Florida Department of Revenue. While the Florida Administrative Code has no provisions directly on point, the Department has indicated that no documentary stamp taxes are due when an exchangor transfers his real property to the EAT, as this is as a transfer between agent and principal which is exempt under FAC Rule 12B-4.014(5).

TAA 08(B)4-007

BORROWING FROM A QUALIFIED PLAN

In times of economic contraction, retirement plan participants often look to their plan as a source of loans to help them through cash flow difficulties. This is especially so for the many taxpayers that have a large part of their savings tied up in retirement plans. If done properly, such loans can be made without adverse tax consequences, so long as they are repaid in a timely manner. Such loans will not be treated as a taxable distribution from the plan.

These loans may provide interest rates better than those available from banks and other lenders. Importantly, the interest paid by the participant goes back into the participant’s plan account, instead of being lost forever to a third party lender as would be the case in for a bank loan.

Loans are permitted for profit sharing and 401(k) plans, but not from SEP or Simple IRAs. The plan must specifically allow for such loans.

There are a number of provisions that restrict deductibility of interest, both within the pension rules and under general Code provisions restricting deductions of personal interest.

The basic requirements for a qualified loan include the following:

a. LOAN AMOUNT. The loan amount can't exceed the lesser of (1) $50,000, or (2) 1/2 of the present value of the employee's nonforfeitable accrued benefit under the plan. But a loan up to $10,000 is allowed, even if it's more than half the employee's accrued benefit.

b. LOAN TERM. Generally, the plan loan must be repaid within five years in substantially level payments, made not less frequently than quarterly, over the term of the loan. Special rules apply as to the repayment term for loans to buy a qualified dwelling unit.

c. REPAYMENT. If the participant does not repay the loan in time, it will be treated as a taxable distribution.

d. DOCUMENTS.  The loan must be documented in writing, as required by applicable regulations and plan documents.

Of course, the foregoing is only a general summary. Plan administrators can provide more detailed guidance on implementing loans as to any particular plan.

NOL CARRYBACK WAIVER CAN BE VOIDED IN BANKRUPTCY

A taxpayer with a net operating loss (NOL) can usually carryback that NOL for 2 years, and apply it in those prior years. Typically, the carryback will result in a refund of income tax. If the taxpayer makes an irrevocable election, it can forego the carryback and thus use the NOL in future years only.

Daniel Taylor had an NOL from his business. Instead of carrying it back and receiving a refund, he waived the carryback so he could use it against future expected income. After such waiver, he declared bankruptcy. The bankruptcy trustee sought to avoid the carryback waiver - if he could do so it would generate a refund in a prior year which would belong to the bankruptcy estate.

The bankruptcy trustee had to overcome a number of hurdles to "avoid" the waiver as a pre-petition transfer of property made within 2 years of a bankruptcy filing. Generally, such transfers are avoidable if the trustee can show that (i) there was a transfer of an interest of the debtor in property, (ii) the transfer occurred within two years preceding the petition date, (iii) the debtor received less than reasonably equivalent value in exchange for the transfer, and (iv) the debtor was either insolvent on the date of the transfer or became insolvent as a result of the transfer.

Thus, assuming that items (ii) and (iv) were met, the trustee first had to show that the NOL carryback waiver was "an interest...in property." Holding that the practical effect of the waiver was a relinquishment of a present tax refund amount in favor a speculative future refund, the court found that "tax refund" that was available was an interest in property.

Next, the trustee had to show there was a "transfer" of that property to someone (here, the United States). The court found that a transfer did occur, by reason of the U.S. not having to pay a refund to Mr. Taylor. A bit of a stretch, but let's keep going.

Lastly, the trustee had to show that it could override an election that is "irrevocable" under the Internal Revenue Code. Here, the court noted that the trustee was not seeking to "revoke" the carryback waiver, but to "avoid" it. Noting that bankruptcy trustee avoidance powers are frequently used to undo transactions that are irrevocable as to the debtor, the court indicated that it was not constrained by the irrevocable nature of the waiver.

Consequently, the trustee was able to surmount all of these barriers, was able to avoid the prior waiver of the NOL carryback, and thus was able to capture the NOL carryback refund.

U.S. v. KAPILA, 103 AFTR 2d 2009-XXXX (D.C. Southern District of Florida), 08/18/2008