Review/Summary of International Provisions of the new Tax Act

Our firm has prepared a summary and review of these new provisions. You can download it from here.

A happy, healthy, and prosperous New Year to all our readers!

THE INTERNAL REVENUE CODE JUMPS THE SHARK WITH THE TAX CUTS AND JOBS ACT OF 2017

Meaning of “jump the shark” - “It's reached its peak, it'll never be the same again, and from now on it's all downhill.” [Source] Or if you prefer another popular culture reference, the Code has entered the Twilight Zone.

Case in point, new Code Section 199A which provides a 20% deduction for qualified business income earned through pass-thru entities. This one new Code Section:

a. is over 22 pages long (using the pages from the bill report and print;

b. employs approximately 20 defined terms;

c. includes 26 cross-references within Section 199A;

d. includes 25 cross-references to other Code provisions;

e. includes numerous “lesser than” or “greater than” computations, some of which are nested within each other;

f. includes computations that require subtraction, addition, and multiplication;

g. includes exemption amounts, and then includes complex formulas to phase-out out those amounts at higher levels; and

h. imports an international tax concept (effectively connected income) into a provision applicable to all domestic pass-through entities.

Forgive me if some of these counts are off a bit - I was getting nauseous going through the provision so could only go through it once in counting.

I’m sure our Congressmen and women understand the gist of the deduction, but I sincerely doubt that most of them have read the language of this provision. I further doubt whether ANY of them can fully comprehend the operation of the statute from the text of the statute alone.

There are plenty of complex provisions in the Internal Revenue Code, but this one statute is really up there. Yes, I can figure it out, but I have been practicing tax law for over 35 years, and it took me quite a while to parse out and comprehend this statute. This is serious business when a law is written as to be incomprehensible to 99%+ of the population. Some aspects of this are:

1. The Rule of Law is degraded, if not obliterated. How can one be subject to the Rule of Law when the law itself is incomprehensible to most everyone?

2. How can a taxpayer be penalized for violating this law when it is incomprehensible? Is there de facto reasonable cause relief for violation?

3. Similarly, how is a typical federal District Court judge going to understand this statute in a tax dispute with the IRS?

4. How much wasted time, effort, and cost will be expended at the taxpayer and professional advisor/accountant level in regard to complying with and planning in regard to this provision?

I pity the poor programmers at Turbotax and other tax preparation software companies that will have to convert this into computer code.

If you think I am exaggerating, you can download the statutory language here and read it for yourself.

Was there really no way to provide this deduction in a much simpler, shorter, and straight-forward manner? While there are some provisions of the new law that aim to simplify the Code, at least for smaller taxpayers and businesses, provisions like this swamp that simplification effort and continue the beastly size and complexity of the Internal Revenue Code.

Some Combined Personal/Firm News

I’m happy to announce that my daughter, Jenna, has recently become a member of our law firm, Gutter Chaves Josepher Rubin Forman Fleisher Miller P.A. Jenna focuses her practice on probate, trust and guardianship litigation and administration, as well as estate and tax planning. She is a graduate of Northwestern University (like me), and of Harvard Law School (not like me). I’ve had the pleasure of her working 2 doors down for me these past years, and I look forward to her now being my partner (I use that term loosely - our firm is a corporation and not a partnership).

By the way, for those of you that don't know, Jenna hosts her own blog, Rubin on Probate Litigation.

2017 Charitable Gifts

If the pending tax bills are reconciled by Congress and enacted into law, there is likely to be a substantial reduction in the number of  individuals that will itemize their deductions. For many taxpayers, this may mean they will no longer be deducting charitable contributions after 2017. Taxpayers may want to consider making or increasing charitable contributions in 2017 if it looks like they will not be deducting charitable contributions in the future. This is not a one-size-fits-all recommendation and must be tailored to individual circumstances, and of course will be impacted by if there is passage of a tax bill and what the final text contains – but it is nonetheless something worthy of consideration.

Florida Homestead Protections Against Forced Sale Under Threat of Dilution

Once every 20 years, Florida convenes a Constitution Revision Commission (CRC) to review and make recommended changes to the Florida Constitution. Proposed changes are then put to Florida voters for approval or disapproval. A CRC is presently convened and at work in making such a review.

The CRC process is fairly advanced regarding a change to Article X, Section 4. Proposal 17 would add the following language relating to the exemption of homestead property from creditor claims:

(d) Notwithstanding subsection (a), a homestead is not exempt from creditor claims if an owner:

(1) Obtained the homestead using the proceeds from a fraudulent or dishonest act; or

(2) Caused the creditor’s damages or losses by an intentional criminal or fraudulent act.

The legislature may enact implementing legislation consistent with the purposes of subsection (d), and such legislation may include, but is not limited to, limitations periods and protections for an innocent spouse or dependents.

There are a number of problems with this (especially the broad scope of losing the exemption for funds from a mere “dishonest act,” whatever that means)  but on December 4, an amendment was approved in committee to change the proposal to read:

Notwithstanding subsection (a), a homestead is not exempt from the claim of a creditor if the creditor:

  (1) Establishes in an action against the owner of the homestead that the creditor’s funds were fraudulently used by the owner to acquire or improve the homestead; or

  (2) Obtains a judgment against the owner of the homestead  for damages caused by an intentional tort or intentional criminal or fraudulent act by the owner of the homestead, so long as the homestead was not the primary residence for the owner’s spouse or minor child when the tort or act occurred or at the time of the judgment in the action.

Subsection (1) appears to me to be a fraudulent conveyance exception to creditor protection. That is, if funds are transferred into a homestead (whether such funds were fairly and legally owned, or obtained in a fraudulent or other improper manner) in defeat of a creditor’s claims, then the protection would not apply. This is not presently allowed under the Havoco decision of the Florida Supreme Court, and thus would void that holding. The policy of protecting the homestead of a debtor and his or her family members so as to avoid them being kicked to the curb and/or becoming public charges of the state would be diluted, in favor of creditors. Beyond this change in policy, the use of the term “fraudulently” also raises an interpretative question. While fraudulent conveyance law employs the term “fraud” in its title, it does not require common law fraud to occur before it applies. By using the term “fraudulently,” is this provision requiring common law fraud, thus imposing a higher standard than prevailing fraudulent conveyance law, or merely intending to co-opt the less rigorous requirements of fraudulent conveyance law?

Subsection (2) provides a new exception to protection if the creditor was injured by an intentional tort, or intentional criminal or fraudulent act - essentially a “bad acts” exception. This is a substantial loss of protection from what is under current law. It does provide an exception if the owner’s spouse or minor child is living on the homestead at the time of the bad act or judgment, which is a good thing but has the unfortunate consequences of providing a windfall to bad actors and their families if they have a cohabitating spouse or minor child..

Credit to Michael Singer for pointing out this provision at the recent Florida Bar RPPTL Section meeting.

You can monitor the activities of the CRC here.

IRS On The Hunt for Bitcoin Gains

While bitcoin seems like money, for federal income tax purposes, it is not. Like any asset, when it is sold or used to purchase goods or services, gain results if the value of the bitcoin is greater than the taxpayer’s basis in it (generally, what the taxpayer paid to acquire it).

The IRS suspects that either intentionally or unintentionally, many taxpayers are not reporting their bitcoin gains. To help find such taxpayers, it issued a John Doe summons against Coinbase, a leading bitcoin firm, for extensive information on its users. Coinbase objected, but a federal court has now ordered it to comply. The IRS did not get access to all the information that Coinbase has on its customers, such as account opening records, copies of passports or driver's licenses, all wallet addresses, and all public keys for all accounts/wallets/vaults. Nonetheless, Coinbase has been ordered to turn over the following information for each customer, (1) the taxpayer ID number, (2) name, (3) date of birth, (4) address, (5) account activity including transaction logs or other records identifying the date, amount, and type of transaction (purchase/sale/exchange), the post transaction balance, and the names of counterparties to the transaction.

Tax return preparers should be asking their clients about bitcoin transactions, and taxpayers should know that the IRS is actively seeking information on persons that buy or sell bitcoin.

U.S. v. Coinbase, Inc., Case No. 17-cv-01431-JSC (U.S.D.C. Northern District of California)