TICK, TOCK, WILL CONGRESS SPEED UP THE GIFT TAX CLOCK?

As part of the 2010 budget showdown, the unified credit equivalent for federal gift taxes was bumped up to $5 million for 2011 and 2012. In 2013, the amount will be reduced down to $1 million with the expiration of the Bush tax cuts, unless Congress and the President act to modify that amount. What this means is that high net worth taxpayers only have until the end of 2012 to take advantage of the $5 million exemption.

Or do they? About a month ago, rumors started that the Congressional budget “Super Committee” that is tasked with producing budget cuts to Congress by November 23 was considering a reduction in the exemption to $1 million. What was once a trickle is now becoming a torrent of newsletters and warnings regarding the possible reduction with an effective date of November 23.

So far, I have not seen anything from official sources on this. Personally, I find it hard to swallow that the Republicans on the Super Committee would accept this, but of course, anything is possible in Washington D.C. Even if a change is contemplated, there is no certainty that the effective date would be on November 23 – it could be before or after that.

AT THE INTERSECTION OF MEDICINE AND TAX LAW

Medicine and tax law are two distinct fields. However, when tax law allows a deduction for expenditures relating to disease, tax lawyers and courts have to apply medical concepts.

Code §213 allows a deduction for medical expenses if paid for the diagnosis, cure, mitigation, treatment or prevention of disease. Cosmetic surgery doesn’t come under his unless related to a congenital abnormality, personal injury, or a disfiguring disease.

Do expenses for hormone therapy and sex reassignment surgery relate to a disease, so that they are deductible?

In O'Donnabhain, 134 TC 34 (2010), the Tax Court allowed the deduction for some of these items. It was able to do this by locating a disease – here, “sever gender identity disorder.” What likely tipped the scale was that such an order is listed in the Diagnostic and Statistical Manual of Mental Disorders. That is published by the American Psychiatric Association. In other words, it had enough scientific recognition to be a “disease.”

The Tax Court allowed deductions for expenses of hormone therapy and sex reassignment surgery. However, expenses relating to breast augmentation surgery were found to be cosmetic only and therefore nondeductible. For some reason, below the belt surgery was deemed noncosmetic and above the belt surgery was cosmetic. We won’t dwell on the legitimacy of that distinction, nor the applicable mental images – the opinion does have something of an involved discussion of this issue.

The IRS initially opposed the Tax Court’s determination. However, it has now acquiesced and says it will follow the decision.

AOD 2011-03, 11/2/11

DISREGARDED ENTITIES AND EMPLOYMENT TAXES–FURTHER REFINEMENTS

A recent post noted that disregarded entities are not treated as disregarded for employment tax purposes, but are instead treated as corporations. This special treatment came into effect in 2009, and the treatment as a corporation was specifically provided for recently.

Some wage payments are exempt from FICA and FUTA taxes.  For example, services performed by a child under the age of 18 in the employ of his father or mother is not considered employment for FICA purposes. Code §3121(b)(3)(A). Services performed by an individual under the age of 21 who is employed by his father or mother, or performed by an individual employed by his spouse or son or daughter (subject to certain conditions) for domestic service in a private home of the employer is not considered employment for FICA purposes. Code §3121(b)(3)(B). Services performed by an individual in the employ of his son, daughter, or spouse, and service performed by a child under the age of 21 in the employ of his father or mother, are not considered employment for FUTA purposes. Code §3306(c)(5).

If the employer is a disregarded entity owned by an employer described in one of the preceding exemptions, the treatment of the employer as a corporation and not a disregarded entity for employment tax purposes acts to convert exempt wages to taxable wages for FICA and FUTA taxes. In recognition of this problem, the IRS has issued temporary Treasury Regulations that will allow the exemptions to continue to apply in this circumstance. Essentially, they provide a partial exception to the nondisregarded entity treatment applied to otherwise disregarded entities for employment tax purposes – yes, quite a mouthful.

The new regulations also confirm that information reporting and backup withholding is applied to the owners of disregarded entities, and more specifically, that the disregarded entities themselves are relieved of such obligations.

Treas. Regs. §§31.3121(b)(3)-1T(e) , 31.3127-1T(d) , 31.3306(c)(5)-1T(e) , and 301.7701-2T(e)(5)