NO CHANGE IN 2011 ANNUAL EXCLUSION AMOUNT

While we are on the subject of 2011 inflation adjustments, due to a lack of significant inflation in 2010 the annual exclusion amount for gifts for federal gift taxes will remain at $13,000. This is the amount that a donor can gift to any given recipient in a calendar year that is not treated as a taxable gift.

The current official rate of inflation is in the neighborhood of 2-3%. If that doesn’t square with your perception of inflation and rising prices, don’t judge yourself too harshly. Go ahead and visit the charts at www.shadowstats.com/alternate_data/inflation-charts. This website compiles its own inflation statistics, inlarge  part by ignoring changes made by the government in the CPI rules that now act to depress the “official” rate of inflation. According to Shadowstats, inflation is currently at around 8%.

2011 INFLATION ADJUSTMENTS FOR INTERNATIONAL PROVISIONS

The IRS has announced the following 2011 inflation adjustment amounts that relate to international issues:

1. EXPATRIATION. An individual with “average annual net income tax” of more than $147,000 for the five taxable years ending before the date of the loss of United States citizenship under  §877(a)(2)(A) is a covered expatriate for purposes of   §877A(g)(1). Also, for taxable years beginning in 2011, the amount that would be includible in the gross income of a covered expatriate by reason of §877A(a)(1) is reduced (but not below zero) by $636,000.

2. FOREIGN EARNED INCOME EXCLUSION. The foreign earned income exclusion amount under §911(b)(2)(D)(i) is $92,900.

3. ANNUAL EXCLUSION GIFTS TO NONCITIZEN SPOUSES. The first $136,000 of gifts to a spouse who is not a citizen of the United States (other than gifts of future interests in property) are not included in the total amount of taxable gifts under §§2503 and  2523(i)(2) made during that year.

4. NOTICE OF LARGE GIFTS RECEIVED FROM FOREIGN PERSONS. Recipients of gifts from certain foreign persons may be required to report these gifts under §6039F if the aggregate value of gifts received in a taxable year exceeds $14,375.

5. TAX ON ARROW SHAFTS. The tax imposed under §4161(b)(2)(A) on the first sale by the manufacturer, producer, or importer of any shaft of a type used in the manufacture of certain arrows is $0.45 per shaft. 

Okay, the last one has nothing to do with international taxes – it is in here just to see if you are paying attention. Did you know there was a special tax on “arrow shafts?” No, I didn’t think so. but then again, neither did I until about five minutes ago.

Rev.Proc. 2010-40

THIRD PARTY CAPITAL CONTRIBUTIONS

A basic tenet of federal income tax is that all accessions to wealth are income to the recipient, absent a statutory exclusion. What happens if a for-profit corporation receives funds by the government – is that income? It would seem silly – the government giving money away with one hand, and then taking some of it back in tax with the other. However, it happens all the time. For example, Social Security payments can be taxable to recipients.

This issue came up in regard to grants to broadband communications companies under the American Recovery and Reinvestment Act of 2009, and reminds us of an advantageous characterization of such payments if the recipient is a corporation. Revenue Procedure 2010-34 recently provided a safe harbor interpretation for the communications companies, using Code Section 118.

Code Section 118 permits corporations to receive contributions to capital in a nontaxable manner. Most capital contributions come from shareholders of a corporation, and the Code Section 118 clearly avoids income to the corporation on its receipt. Further, Code Section 118 will also apply to contributions received from non-shareholders. However, in that situation, the corporation must reduce its tax basis in assets acquired within 12 months of the contribution (or other property of the taxpayer if such assets are not purchased in that period), pursuant to the rules of Code Section 362(c)(2)(B).  Thus, the reduction in basis does impose a tax cost to the recipient corporation by way of reduced depreciation or increased gains/reduced losses in regard to corporate property.

The Revenue Procedure confirmed the application of these provisions to most of the grants, but did not apply them to reimbursement for pre-application expenses and certain specified grants. The Procedure is silent as to why some of the grants do not qualify.

Code Section 118 only applies to corporations. The Revenue Procedure confirms this when it excludes noncorporate taxpayers from the coverage of the Procedure.

An interesting question is what happens if the recipient corporation does not acquire enough property within 12 months of a grant, and has insufficient basis in its other property, to apply a full basis reduction equal to the capital contribution.

Revenue Procedure 2010-34