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Saturday, March 21, 2020

Procrastinators Rejoice - Income Tax Deadlines Extended to July 15, 2020

Recently, income tax return payment deadlines were extended under Notice 2020-17, subject to dollar limitations. This notice has now been superseded by Notice 2020-18. This Notice now extends both income tax payments due, as well as return filings due, on April 15 to July 15. The dollar limitations provided in Notice 2020-17 no longer apply.

Keep in mind this is for income tax relief only, and extends to individuals, trusts, estates, partnerships, associations, companies, and corporations with an April 15, 2020 return filing due date or payment due date.

Now you can keep your tax dollars invested for an additional two months and rack up those stock market gains - if the market will only stop falling, that is.

the extension only applies to federal taxes - states and other localities may be offering their own relief separately.

Stay safe!

Notice 2020-18

Tuesday, March 17, 2020

Coronavirus Update: 90 Day Extension to Pay Federal Taxes

In a press briefing, Treasury Secretary Steven Mnuchin announced that the April 15 due date for payment of federal income taxes has been pushed back 90 days. Individuals can defer up to $1 million of tax liability, and corporations can defer $10 million, without being subject to interest nor penalties for late filing.

Some observations:

  • This is an extension to pay, not to file. So taxpayers still need to file on time.
  • However, individuals can get an automatic extension to file for six months if they file an extension request, so the lack of an extension by Treasury for filing should not be troublesome.
  • It remains to be seen whether state and local governments will follow suit.

Presumably, written guidance will be forthcoming that may bring more details.

Saturday, March 14, 2020

Will the Income Tax Return Filing Deadline be Extended Due to the Coronavirus?

It seems likely. It would be unprecedented (to my knowledge) for there to be a national extension, but of course such extensions are regularly granted to regions afflicted by disasters from time to time.

President Trump indicated last week that he was instructing Treasury to allow for deferral of tax payment deadlines, but what I have read on that only mentioned payments and not filing due dates. There are also a number of members of Congress calling for an extension. And President Trump has now declared a national emergency. So things do seem to be lining up for a gift to procrastinators everywhere.

Saturday, March 07, 2020

Tax Court Rejects IRS Valuation Theory Aimed at Reducing Nonvoting Interest Discounts

In a recent Tax Court Memorandum decision, the taxpayer undertook two inter vivos gifting transactions - one to a GRAT, and one to an irrevocable trust. The latter was a part sale/part gift transaction. The transferred items were LLCs holding securities, limited partnership interests, and promissory notes. The taxpayer’s transferred interests were 99.8% nonvoting class B member interests, with 0.2% of the member interests being voting class A interests retained by a management entity owned and controlled by the taxpayer’s daughter.

Traditional appraisal methodologies were applied to yield lack of control discounts in the 13-14% range, and lack of marketability discounts at 25%.

Rather than engage in a direct attack on these discounts, the IRS’ primary approach was to say that the nonvoting members in selling their interests would seek to buy the voting member interests so as to be able to sell their nonvoting interests along with control and receive a much higher purchase price. The IRS calculated the additional premium that the nonvoting members would need to pay to the class A 0.2% voting member to buy the voting interests. The net value of the nonvoting member interests that were gifted were determined to be 99.8% of the undiscounted net asset value of the subject LLC, less the premium required to purchase the 0.2% voting member interest. Compared to the values computed under the taxpayer’s traditional appraisals, the IRS’ discount for the nonvoting member was close to de minimis.

In reviewing the IRS’ methodology, the Tax Court noted that as a factual matter, the taxpayer’s daughter had no intention of selling the class A voting units controlled by her. She also testified that if she did, the premium would be much higher than the IRS estimate.

The Tax Court was concerned about assuming a subsequent event into the valuation process on the date of the gift (i.e., the sale of the class A voting units to the class B members). It noted:

“We are looking at the value of the class B units on the date of the gifts and not the value of the class B units on the basis of subsequent events. . .”

It did note that events affecting value that depend upon events within the realm of possibility can be applied, but only if they are “reasonably probable.” It found such reasonable probability absent:

“The facts do not show that it is reasonably probable that a willing seller or a willing buyer of the class B units would also buy the class A units and that the class A units would be available to purchase. To determine the fair market values of the class B units we look at the willing buyer and willing seller of the class B units, and not the willing buyer and willing seller of the class A units.”

The court ruled in favor of the taxpayer and allowed the taxpayer’s claimed discounts.

Some thoughts/observations:

1. Perhaps if the IRS had focused its challenge on the size of the taxpayer’s discounts in lieu of the above alternate and untested valuation theory, it might have gotten something for its efforts.

2. The IRS’ theory, if validated, would deal a blow to gifting structures that are often employed. Since it is only a memorandum decision, its precedential value is limited, but at least it is a good precedent for taxpayers. Perhaps we may hear more about this if there is an appeal.

3. There is no mention of Powell and its successful approach to reduction of discounts where the taxpayers do not control the vote. That is a good thing for taxpayers, but since it was not mentioned it doesn’t mean it was a rejection of Powell.

4. One often doesn’t see IRS challenges to GRAT valuations, since an adjustment in value doesn’t result in an immediate gift because of the adjustment provisions built into GRATs. Perhaps the IRS challenged the value only because it was already litigating the irrevocable gift made by the taxpayer. Or was the IRS intentionally playing the long game - requiring more assets to be paid back to the taxpayer from the GRAT, thus building up the taxpayer’s estate for a later estate tax at death?

Grieve, TC Memo 2020-28