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Thursday, August 29, 2013


Since the U.S. Supreme Court ruled in Windsor, 133 S. Ct. 2675 (2013) that same sex married couples would be recognized for federal purposes, a question has existed as to what happens if a same sex couple married in a state that allows such marriages, but moves to or lives in a state that does not. The IRS has now issued a Revenue Ruling that provides that the key fact for federal tax purposes is where the couple married. If they marry in a state that recognizes same sex marriages, the IRS will treat them as married for federal tax purposes – even if they move to or reside in a state that does not.

This rule will greatly simplify tax administration, as well as simplify the lives of same sex married couples. There is now only one question to determine marital status – was the marriage in a state that recognizes same sex marriage.

The ruling also clarifies that for federal tax purposes the term “marriage” does not include registered domestic partnerships, civil unions, or other similar formal relationships recognized under state law that are not denominated as a marriage under that state’s law.

Rev.Rul. 2013-17

Saturday, August 24, 2013


For much of the 1980's and 1990's, federal transfer tax rates, exemptions, and credits were static and easy to remember. Then the roller coaster changes started. I don't know about you, but the number of changes has exceeded my capacity to remember them all. I've kept a cheat sheet under the glass of my desk for a few years. I have now expanded and updated it, and thought it would be worthwhile to put it out there for others. You can download a copy of the table from here

For other helpful tables and charts, take a look at the links in the column on the right.

Tuesday, August 20, 2013


At times, persons acquire property in their own names, but the true owner is a third party. Generally, for the IRS to respect the true owner as the owner for tax purposes (and not tax the titleholder), there must be a written nominee or agency agreement (among other requirements). In a case that may be useful to taxpayers who want to prove up a nominee/agent relationship for tax purposes but did not enter into a written agreement, the Tax Court respected an agency relationship without such an agreement.

In the case, a son and daughter-in-law purchased three parcels of realty on behalf of the father’s real estate development business. The deeds were in the name of the son and daughter-in-law.  This was done because the business had exhausted its own lines of credit.  As cash flow from sales of the parcels were received, the funds were turned over to the father. The son was also an employee of the business.

The IRS sought to tax the son and daughter-in-law on the gains from the sale of the parcels. The son and daughter-in-law argued that the income really belonged to their father, per their agency relationship.

Notwithstanding the absence of a written agency agreement (at least one was not mentioned in the opinion), the court respected the agency relationship and determined that the son and daughter-in-law were not the owners of the parcels for income tax purposes.

Chad B. Hessing, et ux., TC Memo 2013-179

Saturday, August 17, 2013


A recent private letter ruling illustrates how a non-U.S. procurement corporation can generate Subpart F income, but also illustrates an exception to the creation of that income.

10% or more shareholders of a controlled foreign corporation (CFC) have to pick up their pro rata share of the Subpart F income of the CFC when it is earned, regardless of whether the CFC distributes the income to its shareholders. One type of income that is characterized as Subpart F income is “foreign base company sales income” (FBCSI). FBCSI includes income from the purchase of personal property from any person on behalf of a related person, provided that the property both is manufactured, produced, grown or extracted outside of the CFC's country of organization and is sold for use, consumption or disposition outside of such country. Code §954(d)(1).

In the ruling request, a disregarded entity owned by a CFC entered into a buying agency agreement under which the disregarded entity performed various procurement-related activities. The disregarded entity was responsible for ensuring that the products purchased by related entities met standards of design, image, quality, vendor compliance, and brand. The disregarded entity received payments from affiliates as compensation for the procurement activities. As a disregarded entity, its activities (and income) were attributed to the CFC that owned it.

The IRS first ruled that the income earned by the procurement CFC would normally constitute FBCSI and thus Subpart F income. Interestingly, FBCSI arose even though the disregarded entity did not take title to the purchased goods, even though the language of the Code clearly supports a reading that acquisition of title is required.

The IRS further ruled that there was no FBCSI in this circumstance since the CFC had made a substantial contribution through its employee to the manufacture, production or construction of the property that was sold. Treas. Regs. §1.954-3(a)(4)(iv). It would have been instructive to see what type of contribution the procurement CFC did to meet this exception since I’d be interested to see what activities a procurement agent would be doing to meet this exception. Unfortunately, that information was not included in the ruling request.

PLR 201332007

Monday, August 12, 2013


A recent Claims Court case addressed whether a radio station's assets include goodwill.

The case involved a country music station in Los Angeles. The station was exchanged by its owner for several other stations. The parties agreed to an allocation of the $185 million purchase price to the tangible assets of the radio station ($3.4 million), some intangible assets ($4.9 million), and then with the bulk of the price being allocated to the FCC license ($176.7 million). No value was allocated to goodwill. These allocations were based on an appraisal.

The IRS asserted the station had $73.3 million of goodwill, by attributing a lower value to the FCC license and allocating the residual portion of the purchase price to goodwill. The appraiser for the taxpayer had indicated that broadcast stations do not possess any goodwill - the IRS contested that assertion.

Goodwill is "the value of a trade or business attributable to the expectancy of continued customer patronage," which expectancy may be due "to the name or reputation of a trade or business or any other factor." Code §197; Treas. Regs. §1.107-2(b)(1). The taxpayer argued that since a station would lose customers if it fundamentally changed is format or on-air personalities, there was no inherent value attributable to future customer patronage. The court found that just because continued customer patronage could disappear if critical business elements are changed by a buyer does not mean there was no expectation of continued customer patronage at the time of sale. Such an interpretation could be used to assert "no goodwill" by many other types of business since most businesses could suffer a lost of continued customer patronage if significant changes are made to the business. Thus, the court rejected the premise that broadcast stations cannot have goodwill.

The taxpayer also argued that an underperforming business lacks goodwill. This was also rejected. The court noted that a tendency of old customers to resort to the old business may exist even when a firm is unprofitable. To accept the taxpayer's position would be to accept that goodwill could come and go as quickly as profits or losses arise.

While the court found there could be goodwill, in this case, it found as a factual matter, based on the value of the other assets of the seller and the use of residual method for determining goodwill, there was in fact no material goodwill that was sold in this instance. Further, the court found that when the residual method of determining goodwill is used, and the parties based on their allocations leave nothing for goodwill, then goodwill is presumed to be zero even if there is goodwill as a factual matter (citing Republic Steel Corp., 28 AFTR 175 (Ct. Cl. 1941).

Deseret Management Corp.
, 112 AFTR 2d Para 2013-5151 (Ct. Fed. Cl. 7/31/2013)

Friday, August 09, 2013


It is fairly commonplace for owners of closely held corporations to loan funds to their corporation without full loan documentation. Oftentimes, there is nothing establishing the debt other than an entry on the corporation books, without any mandatory repayment date. A recent Tax Court case instructs that the absence of more comprehensive loan documentation in terms can result in the disregard of loan status. If the loan status is not respected, repayments may constitute taxable distributions or compensation payments.

In the case, the sole stockholder of an S  corporation transferred funds to the corporation. Such advances were characterized as loans on the tax return of the corporation. The taxpayer later treated payments to the shareholder as a repayment of the loan. The IRS challenged and was successful before the Tax Court in converting those payments from a nontaxable loan repayment to taxable compensation income to the stockholder.

The bottom line here is that the IRS was not convinced that the advances were loans instead of capital contributions. Factors that influenced the court included a lack of written agreements or promissory notes, a lack of interest, no security, and no fixed repayment schedule. Repayment was seen as dependent on the success of the business (since payments were made out of positive cash flow) and not as an unconditional obligation.

To avoid these issues, loans to closely held shareholders should bear as many of the following indicia of loan as possible:

a. A written obligation;

b. Interest;

c. Fixed repayment schedule and maturity date:

d. Security for repayment;

e. A reasonable debt/equity ratio;

f. Minimal or no subordination to other creditors of the corporation; and

g. Actual repayments independent of profits.

Clearly, not all of these are necessary. However, the case does suggest that at least items a.-c. should be included at a minimum.

Another important fact here is that the stockholder was a key employee of the company, but received no wages or other compensation. If that had occurred, that would have been another helpful fact for the taxpayer.

Glass Blocks Unlimited, TC Memo 2013-180

Sunday, August 04, 2013


The IRS office of Chief Counsel addressed a SCIN transaction, and concluded that the value of the note was includible in the gross estate of a decedent. While not binding on taxpayers, the Chief Counsel Advice is indicative of areas that the IRS will scrutinize in SCIN transactions.

A self-cancelling installment note (SCIN) is a promissory note issued to a seller, typically in exchange for the sale of property or a loan of funds. What makes the SCIN unique is that if the holder dies while any amounts are unpaid under the note, the remaining balance is cancelled and does not have to be repaid. Estates of decedents holding a SCIN at death will usually argue that the SCIN balance at death is not subject to estate tax, and that there was no gift on the establishment of the SCIN.

In the SCIN at issue, the term of the notes were based on the taxpayer’s life expectancy under the Section 7520 tables. The notes required interest payments only, with a balloon principal payment at the end of the term. To compensate the notes for the risk of loss by reason of death, some of the notes provided for a principal amount double of that which a normal note would carry, and others included an above-market interest rate.

Factors and Considerations of the IRS as to Whether the Decedent Received a SCIN of Equal Value to What Was Sold – i.e., Avoiding a Gift on Creation, or Whether Transferred Property Should be Included in the Issuer’s Gross Estate Under Section 2038:

     a. Family SCINS are presumed to be gifts, citing Estate of Costanza v. Comm'r, 320 F. 3d 595 (6 th Cir. 2003).

     b. The presumption may be rebutted by an affirmative showing that there existed at the time of the transaction a real expectation of repayment and intent to enforce the collection of the indebtedness.

          1. Helpful facts are that the note provides for regular principal and interest payments, and that the issuer needed the payments for living expenses.

          2. Unfavorable facts are balloon principal payments and lack of need of payments for living expenses.

          3. If the payor does not have sufficient assets to pay the obligations in full, that can be used to show there is no expectation of full payment. Thus, where the payor is a trust or entity that does not have sufficient seed money or cash flow to pay the enhanced principal and interest amounts in full, this will be a bad fact.

     c.  Code Section 7520 tables are not useful in valuing the SCIN or setting the note repayment term. Instead, the notes should be valued based on the willing-buyer willing-seller standard of Treas. Regs. §25-2512-8.

          1. Illness or other items impacting life expectancy must be factored in, including in regard to the term of the SCIN.

CCA 201330033