YEAR END TAX LAW CHANGES

A number of interesting year-end tax law changes were recently enacted. We will review a few of them in the coming postings. Let's start with two - AMT relief and mortgage discharge relief.

A. Alternative minimum tax exemptions have been increased for 2007, instead of being decreased as required under prior law. The exemption is increased to $66,250 (up from $62,550 in 2006) for married couples filing a joint return and surviving spouses, to $44,350 (up from $42,500 in 2006) for an individual who isn't married or a surviving spouse, and to $33,125 (up from $31,275 in 2006) for married individuals filing separate returns.

B. In recognition of the real estate debt problems many taxpayers are facing, a relief provision has been added for discharge of indebtedness of income relating to principal residences. Normally, if a lender relieves a borrower from having to pay off debt, the borrower incurs taxable income. Thus, for example, assume a taxpayer owns a house with a $300,000 mortgage. Due to increases under an adjustable mortgage, the taxpayer can no longer pay the mortgage. Due to decline in values, the house is only worth $250,000. The lender forecloses on the residence and acquires ownership to the residence, and does not pursue the borrower for the $50,000 loss it suffers due to the difference between the $300,000 loan amount and the $250,000 value of the house. Under normal circumstances, the taxpayer would incur $50,000 of ordinary income, unless the taxpayer was otherwise insolvent or other limited exceptions to discharge income applied under the Internal Revenue Code.

Under the new rules, if the discharge occurs before 2010, the indebtedness was incurred to acquire, construct, or substantially improve the individual's principal residence, and is secured by the residence, no discharge of indebtedness income will arise. The new rules are limited to $2 million of such "acquisition indebtedness." The exclusion rule will not apply to second homes, vacation homes, business property, or investment property, since these properties aren't the taxpayer's principal residence. It also will not apply to discharges of second mortgages or home equity loans, unless the loan proceeds were used to acquire, construct, or substantially improve the taxpayer's principal residence.

Note that a foreclosure is not required - a restructuring of a debt that involves a reduction in debt will also be covered, if the above requirements are met.

APPLICABLE FEDERAL RATES - JANUARY 2007

January 2008 Applicable Federal Rates Summary:

-Short Term AFR - Semi-annual Compounding - 3.16% (3.84%/December -- 4.07%/November -- 4.15%/October)

-Mid Term AFR - Semi-annual Compounding - 3.55% (4.09%/December -- (4.34%/November -- 4.3%/October)

-Long Term AFR - Semi-annual Compounding - 4.41% (4.67%/December -- (4.83%/November -- 4.82%/October)

DIRECTION OF RATES: Down

WASH SALE RULE LOOPHOLE CLOSED

Common year-end tax planning advice is to consider selling publicly traded securities that have lost value, so as to obtain a loss deduction to offset otherwise incurred gains. However, as a practical matter, a taxpayer may like a particular stock and want to keep it in his portfolio. Therefore, thoughts are given to selling the stock to incur the loss, and then quickly buying it back to put it in the portfolio.

Code Section 1091, also known as the "wash sale rule," limits the ability to do this. If a share of stock or securities are sold at a loss, and substantially identical stock or securities are acquired within 30 days (before or after) the sale, the loss is disallowed. Some taxpayers have sought to get around the loss sale rule by repurchasing the stock or securities in an IRA or Roth IRA account, on the theory that the repurchaser is not the taxpayer, but a different legal entity and taxpayer.

In Revenue Ruling 2008-5, the IRS has advised that it considers the IRA or Roth IRA as effectively the same person as the taxpayer, and will apply Section 1091 to these types of purchases and resales. It based its ruling on a 1930's case that held that a trust controlled by a taxpayer was considered a mere agent for the taxpayer, allowing the application of the predecessor to Section 1091 to a sale by the taxpayer and a repurchase by such a trust.

Interestingly, the Ruling also disallows the use of Section 1091(d), which preserves the built-in loss in the property repurchased that is subject to Section 1091 through an upward adjustment in basis equal to the disallowed loss. No explanation is given, but presumably this is done in light of the tax-exempt nature of the IRA or Roth IRA.

Rev.Rul. 2008-5, 2008-3 IRB