Gift Tax Statute of Limitations if Prior Gifts Omitted from Return

The IRS only has three years after a Form 709 is filed to assess gift taxes on a gift, so long as the gift is adequately disclosed on the return. If a gift is not disclosed, the statute of limitations does not begin to run on that gift.

The Form 709 requires disclosures of prior gifts, so that the tax on the current gifts can be properly calculated (since prior gifts can impact the rate of tax and available unified credit applicable to the current year computations).

So what happens if a gift is reported on the return, but the prior gifts are improperly reported, resulting in an underpayment of gift tax? Does the IRS have only 3 years to assess the underpayment, or does the failure to properly report the prior gifts extend the statute of limitations?

A recent Chief Counsel Advice concludes that the Code does not support an extended statute of limitations in this circumstance.

Chief Counsel Advice 201643020

IRS on the Hunt for Bitcoin Users

Bitcoin is the most popular of the virtual currencies. In Notice 2014-21, the IRS advised that such currencies are not money, but property, for tax purposes. Two implications of this are that persons who use Bitcoins to purchase things are treated as having sold the Bitcoin on the purchase date for the value of what they purchased – this will usually generate gain or loss to the buyer, and persons who receive Bitcoins are treated as receiving property worth the daily exchange value of Bitcoins on the date of receipt.

Likely suspecting that many taxpayers dealing in Bitcoins may inadvertently not be reporting their transactions as described above, or indeed are intentionally using Bitcoins to not report income, the IRS has issued a John Doe summons to Coinbase, the largest Bitcoin exchange firm in the U.S. seeking the records of all customers who bought virtual currenty from the company from 2013 to 2015. This is a warning that the IRS is enhancing its enforcement efforts in regard to Bitcoin transactions.

Of Course You Should Trust the IRS with Your Financial Information

The income tax provides justification for massive government intrusion into the financial privacy of its taxpayers. Its information gathering capacity and demands run wide and deep, and expand with almost every piece of enacted major tax legislation.

We would like to think that the government can be trusted with our financial data - but is that really justified? Data breaches are not limited to the private sector, the government is not too concerned about being sued like a private company if its servers are breached given sovereign immunity, and political motivations and abuse of access are also real risks.

Am I crying wolf here? You be the judge:

Recent Inspector General Report Excerpt: “TIGTA found the IRS did not ensure that encryption requirements are being enforced and ensure that nonsecure protocols are not being used in order to fully protect information during transmission. These protocols include File Transfer Protocol and Telnet, which are known insecure transfer protocols. The IRS also did not remediate high- risk vulnerabilities or install security patches on file transfer servers in a timely manner.  For example, TIGTA found 6 1 servers with high -risk vulnerabilities, 10 servers with outdated versions of Windows and UNIX operating systems still in operation, and 32 servers missing 18 unique security patches, of which four were deemed as critical. Lastly , the IRS did not ensure that corrective action plans for correcting security control weaknesses, including some of the weaknesses previously mentioned, met IRS standards.  This reduced the assurance that the weaknesses would be corrected timely”.

And another:

Recent Inspector General Report Excerpt: “taxpayers whose PII/tax return information was sent unencrypted in either internal or external e -mails during four weeks; this equates to 28,200,857 taxpayers for the full year”

Corporate Tax Reform on the Front Burner?

There is a clue out there that President-elect Trump may first want to tackle corporate tax reform, before moving on to individual tax reform (both of which involve rate reductions). This is because Stephen Moore, a Heritage Foundation fellow and co-author of President-elect Donald Trump's tax plan, is calling on Congress to pursue corporate tax reform as part of a bipartisan jobs bill that could finance a massive new infrastructure program while cutting tax rates for businesses, while suggesting separately that individual tax reform be addressed at a later time.

Of course this is only speculation, but given Mr. Moore’s involvement with the Donald’s tax plan, it may be indicative of the Donald’s thoughts as well.

Applicable Federal Rates - December 2016

New Regulations Issued Regarding CFCs and Investment in U.S. Property

Income earned abroad by U.S. controlled foreign corporations can often qualify for deferral of U.S. income tax. If the foreign corporation is a controlled foreign corporation (CFC), its U.S. shareholders may be taxable on such untaxed income if the corporation converts the property to U.S. property (Code §956).

The U.S. has now issued new and revised regulations relating to such investments in U.S. property. The regulations are technical, but here are some highlights:

a. Treas. Regs. §1.956-1T(b)(4) revises the anti-avoidance rule as to the definition of “funding” in regard to treating U.S. property held in a non-U.S. corporation controlled by the CFC if there is a principal purpose to avoid §956 (i.e., when U.S. property held in a controlled subsidiary foreign corporation will be attributed to the CFC under these rules).

b. Also under the anti-abuse rule, that rule was expanded in prior proposed regulations, and now in final regulations, to cover property that is held in controlled partnerships, too. The new rules also address how to compute these amounts, adopting a deemed liquidation rule but with special exceptions for property subject to special allocations.

c. The proposed regulations that applied §956 to property acquired by a CFC in certain related party factoring transactions were finalized.

TC 9792 (11/2/1)

What Kind of Tax Changes Can We Expect From Trump's Presidency?

The tears have not yet dried for some, and the celebrating is not yet over for others, but let's turn our attention to taxes. With a Republican Congress and a Republican president, some measure of tax relief is a given. What can we expect?

A good place to start is Trump's platform. Here are the key elements:

1. Cut in half the number of individual income tax brackets and bring rates down to 12%, 25% and 33%.

2. Elimination of the 3.8% Obamacare tax.

3. Lower the business tax rate for corporations and small businesses alike to 15%, but with elimination of many deductions.

4. Tax carried interest gains as ordinary income.

5. Retain 20% capital gains rate for noncorporations.

6. Increase the standard deduction for joint filers to $30,000 from $12,600, while eliminating personal exemptions.

7. $200,000 cap for itemized deductions for joint filers.

8. Repeal of the estate tax (what about the gift tax?). No basis step-up at death, except on first $10 million of assets.

9. Elimination of corporate alternative minimum tax.

10. 10% one-time tax on repatriation of corporate profits held offshore.

11. U.S. manufacturers may elect to expense capital investment and lose the deductibility of corporate interest expense.

How much of this will make it into law, and with what changes? What happens with the new Section 2704 regulations? Will the IRS try to push them through before the inauguration? Will it matter, since Trump is proposing eliminating the estate tax? Will the life insurance lobby influence Congress so as to retain the estate tax at some level?

As the expression goes, "may you live in interesting times." Well, that has been true for the last few months, and in the tax world will be true for at least the next few months. By the way, that expression is often attributed as an anonymous Chinese curse - however, others claim it is in fact an American expression (see the discussion here).

$100 Million FBAR Penalty - Ouch

Taxpayers who fail to file Reports of Foreign Bank and Financial Accounts (FBARs) disclosing their non-U.S. accounts can suffer a 50% penalty on the balance of the unreported accounts. In one of the largest penalties I have seen, a New York professor of business administration has been subjected to a $100 million civil FBAR penalty for failing to report a $200 million account.

Clients often enquire whether the IRS would really impose a 50% penalty - this case provides an unequivocal yes. They also ask what bad facts will bring about such a penalty. Here, the nonreporting was clearly intentional and egregious. For more facts, feel free to read the press release of the Department of Justice here.

Emeritus Professor Pleads Guilty to Conspiring to Defraud the United States and to Submitting False Expatriation Statement (DOJ Release, November 4, 2016)

Exceptions to Limited Liability for LLC Members [Florida]

Fla.Stats. §605.0304(1) provides for the limited liability of LLC members - it provides: "A debt, obligation, or other liability of a limited liability company is solely the debt, obligation, or other liability of the company. A member or manager is not personally liable, directly or indirectly, by way of contribution or otherwise, for a debt, obligation, or other liability of the company solely by reason of being or acting as a member or manager."

Nonetheless, there are other routes to liability for members, arising in their capacity as members. A recent article in the Florida Bar Journal provides details on many of these. These routes include;

• A  member's written obligation to make future contributions. Sometimes, these are not obvious to unsophisticated members - for example, a provision in an operating agreement requiring members to be responsible for deficit capital account balances.
• Provisions in an agreement for an LLC to be formed prior to organization.
• The 2 year clawback for improper distributions, which can be imposed on the transferee, and members and managers consenting to the distribution (Fla.Stats. §§605.0405 and .0406). Thus, this liability can be imposed on members and managers who did not receive the distribution.
• Responsible person liability for U.S. taxes (Code §6672), and for Florida sales or use taxes.
• Tortious conduct individually committed by a member or manager.
• Violation of officer or director fiduciary duties to the creditors of a company that operates in the "vicinity of insolvency" (See In Re Trafford Distribution Center, Inc., 431 D.R. 263 (Bankr. S.D. Fla. 2010); In re Sol, LLC, 2010 Bankr. LEXIS 2047 (S.D. Fla 2012))
• Theories expanding fiduciary duties to persons affiliated with owning entities, based on expansive case law, such as In re USACafes, L.P. Litigation, 600 A.2d  43 (Del. Ch. 1991) (expanded fiduciary duties of directors of general partner of limited partnership towards a limited partnership) and Beaubien v. Cambridge Consol., 652 So.2d 936, (Fla. 5th DCA 1995) (individual managers of corporate trustee owed fiduciary duties individually to the beneficiaries of the trust), and similar expansion of control person liability as applied in context of tortious conduct (Quail Cruises Ship Mgmt., 2011 U.S. Dist. LEXIS 122830 (S.D. Fla. Oct. 24, 2011).
• Potential for expanded duty of loyalty under Fla.Stats. §605.04091(2) which has a nonexclusive list of bad acts.

Judicial Exceptions to Limited Liability Protection Provided by Florida LLCs, by Thomas O. Wells and Diane Noller Wells, The Florida Bar Journal, November 2016