Wealth & Risk Management Blog

William Byrnes (Texas A&M) tax & compliance articles

Getting its “fair share” from the U.S., U.K. implements 2% tax on gross revenues of Google, Amazon, and Facebook

Posted by William Byrnes on July 11, 2019


From April 2020, the government will introduce a new 2% tax on the revenues of search engines, social media platforms and online marketplaces which derive value from UK users. Large multi-national enterprises with revenue derived from the provision of a social media platform, a search engine or an online marketplace (‘in scope activities’) to UK users.

The Digital Services Tax will apply to businesses that provide a social media platform, search engine or an online marketplace to UK users. These businesses will be liable to Digital Services Tax when the group’s worldwide revenues from these digital activities are more than £500m and more than £25m of these revenues are derived from UK users.

If the group’s revenues exceed these thresholds, its revenues derived from UK users will be taxed at a rate of 2%. There is an allowance of £25m, which means a group’s first £25m of revenues derived from UK users will not be subject to Digital Services Tax.

The provision of a social media platform, internet search engine or online marketplace by a group includes the carrying on of any associated online advertising business. An associated online advertising business is a business operated on an online platform that facilitates the placing of online advertising, and derives significant benefit from its connection with the social media platform, search engine or online marketplace. There is an exemption from the online marketplace definition for financial and payment services providers.

The revenues from the business activity will include any revenue earned by the group which is connected to the business activity, irrespective of how the business monetises the platform. If revenues are attributable to the business activity and another activity, the business will need to apportion the revenue to each activity on a just and reasonable basis.

Revenues are derived from UK users if the revenue arises by virtue of a UK user using the platform. However, advertising revenues are derived from UK users when the advertisement is intended to be viewed by a UK user.

A UK user is a user that is normally located in the UK.

Where one of the parties to a transaction on an online marketplace is a UK user, all the revenues from that transaction will be treated as derived from UK users. This will also be the case when the transaction involves land or buildings in the UK. However, the revenue charged will be reduced to 50% of the revenues from the transaction when the other user in respect of the transaction is normally located in a country that operates a similar tax to the Digital Services Tax.

Businesses will be able to elect to calculate the Digital Services Tax under an alternative calculation under the ‘safe harbour’. This is intended to ensure that the tax does not have a disproportionate effect on business sustainability in cases where a business has a low operating margin from providing in-scope activities to UK users

The total Digital Services Tax liability will be calculated at the group level but the tax will be charged on the individual entities in the group that realise the revenues that contribute to this total. The group consists of all entities which are included in the group consolidated accounts, provided these are prepared under an acceptable accounting standard. Revenues will consequently be counted towards the thresholds even if they are recognised in entities which do not have a UK taxable presence for corporation tax purposes.

A single entity in the group will be responsible for reporting the Digital Services Tax to HMRC. Groups can nominate an entity to fulfil these responsibilities. Otherwise, the ultimate parent of the group will be responsible.

The Digital Services Tax will be payable and reportable on an annual basis.

Draft legislation

Explanatory notes

Read:

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TaxFacts Intelligence Weekly of July 11

Posted by William Byrnes on July 11, 2019


2019’s Tax Facts Offers a Complete Web, App-Based, and Print Experience

Reducing complicated tax questions to understandable answers that can be immediately put into real-life practice, Tax Facts works when and where you need it….on your desktop, at home on your laptop, and on the go through your tablet or smartphone.  Questions? Contact customer service: TaxFactsHelp@alm.com800-543-0874

Prof. William H. Byrnes, Esq. and Robert Bloink, Esq. of

Texas A&M University Law Wealth Management programs

Jul 11, 2019

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IRS Snapshot Guidance Provides Insight into Post-2018 Plan Hardship Distribution Requirements

The Bipartisan Budget Act of 2018 made substantial changes to the rules governing hardship distributions from qualified plans beginning in 2019. These changes have left many employers wondering how to adequately comply with the new rules. The IRS has directed its agents to review the language in the plan document, as well as any written statement provided by the participant to ensure all documents are properly executed and signed. Further, agents are directed to examine any records that the employer used to verify that a true hardship did exist, as well as the amount of that hardship. These records can include bills, eviction notices, closing documents for purchase of a home, etc. The employee should also provide documentation to establish that no other readily available source of funds existed, which can be as simple as an employee attestation. For more information on post-2018 hardship distributions, visit Tax Facts Online. Read More

IRS Clarifies Treatment of Transportation Benefits Upon Termination of Employment

An IRS information letter has clarified that a taxpayer forfeits any unused transportation benefits upon termination of employment. Because employers have only been permitted to provide tax-preferred transportation benefits to current employees, those benefits must be lost once the individual is no longer an employee. This is the case even if the benefits were provided through pre-tax employee contributions, and even if the employee is fired (i.e., compensation reductions cannot be reimbursed if the employee had not fully used them). Importantly, employees can change their elections regarding transportation benefits monthly without the need for a change in status event. For more information on employer-provided transportation benefits, visit Tax Facts Online. Read More

Ninth Circuit Affirms Termination of Pension Benefits for Working Retiree

The Ninth Circuit recently confirmed that a pension plan was within its rights to terminate pension benefits to a participant who retired early, but then returned to work in the same industry. This was the case even though the plan itself had initially approved the taxpayer’s post-retirement work in the same industry in which he worked prior to retirement. Although Supreme Court precedent prohibits a pension from adding additional requirements to a participant’s benefit eligibility after that participant has retired, the court here found that the precedent did not apply because the plan in question had always required participants to withdraw from the industry in order to be eligible for benefits. The plan had begun enforcing the rule pursuant to a voluntary corrective action with the IRS that was entered in order to maintain the plan’s tax-qualified status. For more information on situations where a pension plan may reduce a participant’s benefits, visit Tax Facts Online. Read More

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Texas A&M Hiring Senior Associate Vice President positions

Posted by William Byrnes on July 10, 2019


The Division of Research at Texas A&M University is seeking applications for one or more positions at the Senior Associate Vice President (AVP) level.

The retirement of the Executive Associate Vice President for Research (EAVP) provides an opportunity to realign and expand the portfolios overseen by the EAVP and the two current Senior AVPs.  Senior AVPs report directly to the Vice President for Research and each has a portfolio of administrative, compliance, and research advancement responsibilities. Responsibilities to be covered by the appointment of new Senior AVP(s) include:

  • Oversight of the Comparative Medicine Program (CMP), as well as supervision of the Attending Veterinarian. The CMP is the centrally administered support service for research and teaching programs at Texas A&M and provides high quality animal care consistent with the standards established by the Guide for the Care and Use of Laboratory Animals and all pertinent local, state, and federal laws. The Attending Veterinarian is responsible for the health and well-being of all animals used for research, teaching, and testing at Texas A&M.
  • Leadership of The Texas A&M University System’s expanding emphasis on interdisciplinary life sciences, health, biomedical activities, and multidisciplinary research initiatives for the Division.
  • Oversight of the membership of compliance committees (IACUC, IRB, IBC).
  • Oversight of facilities-related issues for the Division; and developing campus-wide policies for research space.
  • Oversight of the development and recognition of University researchers at all levels.
  • Development of external partnerships.
  • Serving as the University’s Research Integrity Officer (RIO).

Ideal candidates will communicate effectively and work well with all segments of the University and its external constituencies. In addition, these positions require a demonstrated commitment to diversity, equity, and inclusion. Experience implementing and designing processes and projects is ideal. Familiarity with faculty-associated rules, guidelines, and administrative procedures is preferred.

Applications should include a cover letter with a clear statement of why the applicant believes they are qualified for the position, a description of key relevant experience, a vision statement for the position and its role in the Division of Research, a vita, and names and contact information of three references. For full consideration, applications should be received no later than July 22, 2019. These positions will remain open until filled. Applications should be submitted through email to Dr. Mark Barteau.

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Counter-Terrorism Financing’s International Best Practices and the Law – new book by Dr. Nathalie Rébé

Posted by William Byrnes on July 9, 2019


Counter-Terrorism Financing

International Best Practices and the Law

Series:

In Counter-Terrorism Financing: International Best Practices and the Law, Nathalie Rébé, offers a new comprehensive framework for CTF worldwide and reviews the strengths and weaknesses of current regulations and policies.

Both accessible, interesting and engaging in how it approaches chronic problems of Counter-Terrorism Financing, this book provides general understanding of this topic with a literature review and a gap-analysis based on CTF experts’ advices, as well as a very detailed analysis of current international regulatory tools.

Nathalie Rébé’s ‘all-in’one’ CTF manual is innovative in this field and provides answers for the international community to fight terrorism financing together more effectively, using a set of standards which promotes strong and diligent cooperation between countries concerning reporting, information exchange and gathering, as well as enforcement.

order here: https://brill.com/abstract/title/55779?rskey=Qa3MQv&result=1

For the Americas call (toll free) 1 (844) 232 3707 | or email us at: brillna@turpin-distribution.com
For outside the Americas call +44 (0) 1767 604-954 | or email us at: brill@turpin-distribution.com

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TaxFacts Intelligence Weekly of June 27

Posted by William Byrnes on June 28, 2019


2019’s Tax Facts Offers a Complete Web, App-Based, and Print Experience

Reducing complicated tax questions to understandable answers that can be immediately put into real-life practice, Tax Facts works when and where you need it….on your desktop, at home on your laptop, and on the go through your tablet or smartphone.  Questions? Contact customer service: TaxFactsHelp@alm.com800-543-0874

 

William H. Byrnes, J.D., LL.M. and Robert Bloink, J.D., LL.M.

Jun 27, 2019

IRS Clarifies Employer Withholding Obligations for Retirement Account Distributions to Non-U.S. Destinations

The IRS has released long-awaited proposed regulations clarifying the income tax withholding obligations when distributions from employer-sponsored plans (including pension, annuity, profit sharing, stock bonus or deferred compensation plans) are made to destinations outside the U.S. While U.S. payees can elect to forgo withholding, non-U.S. payees cannot. In general, the participant cannot elect to forgo withholding with respect to these distributions even if the participant provides a U.S. residential address, but directs funds to be delivered to a destination outside the U.S. If the participant provides a non-U.S. residential address, withholding obligations cannot be waived even if the participant directs that the funds be distributed to a U.S. financial institution. When the participant provides no residential address, withholding obligations cannot be waived. For more information on retirement plans and nonresident taxpayers, visit Tax Facts Online. Read More

Administration Releases Final Regs Expanding HRA Use

The regulations expanding the use of HRAs to purchase individual health insurance in the marketplace have now been finalized. The regulations largely follow the proposed regulations, but differ in that they place limits on the ability of an employer to vary HRA contributions by age. For more information on the new rule, visit Tax Facts Online. Read More

Buy-Sell Agreement Did Not Create Second Class of Stock for S Corp Qualification Purposes

The IRS recently ruled that, for purposes of the “one class of stock rule”, it would disregard a buy-sell agreement that provided if the S corporation shareholder-employee was terminated for cause, the company could repurchase his or her shares at the lesser of (1) fair market value or (2) the price paid for the shares (a forfeiture price, which could have been zero). To qualify as an S corporation, the entity must only have one class of stock, a determination that is primarily based on whether the shares confer equal rights as to distribution and liquidation proceeds. The Treasury regulations, however, provide that buy-sell and redemption type agreements will be disregarded for purposes of the one class of stock rule unless its principal purpose is to avoid the one-class rule and the agreement establishes a purchase price significantly above or below the fair market value of the stock when the parties entered the agreement. Bona fide buy-sell agreements providing for redemption or repurchase of S corporation shares in the event of death, divorce, disability or termination of employment are always disregarded, regardless of price. S corporations should review their buy-sell agreements to ensure that they satisfy guidance as to the one-class rule. For more information on the one class of stock rule, visit Tax Facts Online. Read More

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Analysis of Altera’s Double Take. Will Altera Be Reheard En Banc or Will Altera Seek The Supreme Court To Weigh In On Chevron and State Farm?

Posted by William Byrnes on June 8, 2019


Prof. William Byrnes (Texas A&M Law) is the author of the treatises Practical Guide to U.S. Transfer Pricing and Taxation of Intellectual Property & Technology

“an arm’s length result is not simply any result that maximizes one’s tax obligations”

In a double take two-to-one decision because of a withdrawn decision due to the death of a judge, a Ninth Circuit panel in Altera reversed a unanimous en banc decision of the Tax Court that the qualified cost sharing arrangements (QCSA) regulations[1] were invalid under the Administrative Procedure Act.[2]  The renown Professor Calvin Johnson (Texas) and I shared comments on this case.  Professor Johnson’s pragmatism is worth noting (see his latest Altera article here) in the context of Altera: “$100 million of stock options is a $100 million cost, as a matter of law.” Because it is a cost for public accounting, Calvin states it is incredulous hat Altera would enter into a arm’s length negotiation in which the counterparty invests $200 cash, and Altera invests $200 cash plus $100 million stock options, but then Altera agrees to ignore its additional $100 million cost and agrees to split equally.  Altera wants to deduct its $100 million of stock cost domestically but pass on the associated income to the foreign-controlled group member.  This is bad policy.

I agree with Professor Johnson that it is bad policy.  But I think that Treasury is taking shortcuts to generate the result that it wants instead of going through the steps necessary to effect a change in policy. Most of my academic colleagues support the majority’s opinion of the proposition that Congress bestowed such latitude to Treasury in IRC § 482.  I agree that the latitude is within the Code Section, but that Treasury to date has regulated a policy dependent on the arm’s length and comparables, as the dissent enunciates and the Ninth Circuit panel majority supported in Xilinx II.  Treasury may change its policy approach, but that requires a formal procedural process laid out by the APA, I argue in favor of the dissent’s approach.  Even with the new language added to IRC § 482 by the TCJA of 2017, Treasury, I propose, must still formally open a public process that it is changing tact from arm’s length and comparables to something else like apportionment of profits and loss by formulae.

The last word has not been heard in Altera.  I expect that Altera will request an en banc hearing.  However, Altera II may be the case that the two newest members, in particular, Justices Kavanaugh and Gorsuch, of the Supreme Court have been waiting for to weigh in on Chevron and State Farm.  Expect Altera III.

Altera I and Altera II (withdrawn)

The Ninth Circuit’s issuance, withdrawal, and re-issuance of a CSA decision is also a double take of Xilinx.[3] However unlike Altera, after the withdrawal of its initial Xilinx decision favoring the IRS position, the Ninth Circuit rejected the IRS’ position that the (pre-2003) QCSA Regulations required treating deductions for stock-based compensation as costs that must be shared by the foreign related party in cost-sharing arrangements. The former QCSA regulations, and current ones still, require that related entities share the cost of employee stock compensation in order for their cost-sharing arrangements to be classified as qualified cost-sharing arrangements. Treasury has consistently stated that the previous and current versions of the QCSA regulations are consistent with the arm’s length standard whereas the Tax Court has consistently disagreed with the IRS position.

At the Tax Court level for Altera, the Court held that the current QCSA regulations are a legislative rule because the regulations have the force of law, as opposed to an interpretive rule, and thus the State Farm standard applied.[4] The Tax Court concluded that Treasury did not undertake “reasoned decision making” required by State Farm in issuing the cost-sharing regulations because Treasury failed to support with any evidence in the administrative record its opinion that unrelated parties acting at arm’s length would share stock-based compensation (SBC) costs.[5] The Tax Court held that Treasury’s decision-making process relied on speculation rather than on hard data and expert opinions and that Treasury ignored public comments evidencing that unrelated party cost-sharing arrangements did not share stock compensation costs.

The Ninth Circuit’s first panel’s opinion, now withdrawn, held that Treasury did not exceed its authority delegated by Congress under IRC § 482.[6] That panel explained that IRC § 482 does not speak directly to whether Treasury may require parties to a QCSA to share employee stock compensation costs in order to receive the tax benefits associated with entering into a QCSA. The first panel held that the Treasury reasonably interpreted IRC § 482 as an authorization to require internal allocation methods in the QCSA context, provided that the costs and income allocated are proportionate to the economic activity of the related parties and concluded that the regulations are a reasonable method for achieving the results required by the statute. Thus, the first panel granted Chevron deference to the QCSA regulations.

The primary issue of Altera I and II, and the cases that precede it that have found in favor of the taxpayers is whether the arm’s length standard requires the comparability standard be met through a method seeking evidence of empirical data or known transactions?  Alternatively, is Treasury afforded deference to disregard a comparability method to instead seek an arm’s length result of tax parity that relies on an internal method of allocation to allocate the costs of the U.S. employee stock options between the U.S. and foreign related parties in proportion to the income enjoyed by each, determined post facto (after the fact) of the cost-sharing agreement?[7]

Altera II’s majority, relying on Frank,[8] states that the arm’s length standard need not be based solely on comparable transactions for reallocating costs and income, though recognizing that Frank is limited[9] to situations wherein it is difficult to hypothesize an arm’s length transaction.  The dissenting Judge provided a descriptive history that Treasury has repeatedly asserted that a comparability analysis is the only way to determine the arm’s length standard. Regarding Frank, the dissent stated, “The majority’s attempt to breathe life back into Frank is, simply, unpersuasive.” The Judge emphasized that the Ninth Circuit had declared Frank an outlier because (a) the parties in Frank had stipulated to applying a standard other than the arm’s length, (b) “there was no evidence that arms-length bargaining upon the specific commodities sold had produced a higher return,” and (c) that the complexity of the circumstances surrounding the services rendered by the subsidiary made it “difficult for the court to hypothesize an arm’s length transaction.”[10]

Pre Altera

The regulatory rules for cost-sharing arrangements (“CSAs”) at issue in Altera I and II, issued in temporary form January 5, 2009[11] and in subsequent final form effective December 16, 2011,[12] are different from the previously issued CSAs. The rules for earlier CSAs are subject to grandfather provisions.  For periods before January 5, 2009, the status of an arrangement as a CSA and the operative rules for complying arrangements, including rules for buy-in transactions, were determined under the qualified cost sharing arrangement regulations issued in 1995 and substantively amended in 1996 and 2003 (the “2003 QCSA Regulations”).[13]

The Ninth Circuit, in Xilinx,[14] rejected the position of the Service that the pre-2003 QCSA Regulations in effect in 1997–99 required treating deductions for stock-based compensation as costs that must be shared in cost-sharing arrangements.

The purpose of the regulations is parity between taxpayers in uncontrolled transactions and taxpayers in controlled transactions. The regulations are not to be construed to stultify that purpose. If the standard of arm’s length is trumped by 7(d)(1), the purpose of the statute is frustrated. If Xilinx cannot deduct all its stock option costs, Xilinx does not have tax parity with an independent taxpayer. Xilinx, Inc. v. Comm’r, 598 F.3d 1191, 1196, 2010 U.S. App. LEXIS 5795, *14 (9th Cir 2010)

The Xilinx concurring opinion summarizes the positions at odds between Xilinx and the IRS:

The parties provide dueling interpretations of the “arm’s length standard” as applied to the ESO costs that Xilinx and XI did not share. Xilinx contends that the undisputed fact that there are no comparable transactions in which unrelated parties share ESO costs is dispositive because, under the arm’s length standard, controlled parties need share only those costs uncontrolled parties share. By implication, Xilinx argues, costs that uncontrolled parties would not share need not be shared.

On the other hand, the Commissioner argues that the comparable transactions analysis is not always dispositive. The Commissioner reads the arm’s length standard as focused on what unrelated parties would do under the same circumstances, and contends that analyzing comparable transactions is unhelpful in situations where related and unrelated parties always occupy materially different circumstances. As applied to sharing ESO costs, the Commissioner argues (consistent with the tax court’s findings) that the reason unrelated parties do not, and would not, share ESO costs is that they are unwilling to expose themselves to an obligation that will vary with an unrelated company’s stock price.  Related companies are less prone to this concern precisely because they are related — i.e., because XI is wholly owned by Xilinx, it is already exposed to variations in Xilinx’s overall stock price, at least in some respects. In situations like these, the Commissioner reasons, the arm’s length result must be determined by some method other than analyzing what unrelated companies do in their joint development transactions. Xilinx, Inc. v. Comm’r, 598 F.3d 1191, 1197, 2010 U.S. App. LEXIS 5795, *16-17 (9th Cir 2010)

The concurring Judge concludes: “These regulations are hopelessly ambiguous and the ambiguity should be resolved in favor of what appears to have been the commonly held understanding of the meaning and purpose of the arm’s length standard prior to this litigation.”

The Treasury amended the QCSA in 2003 to explicitly provide that the intangible development costs that must be shared include the costs related to stock-based compensation. From January 5, 2009, the 2009/2011 QCSA Regulations apply (the “2009 QCSA Regulations”). For periods starting with January 5, 2009, a pre-January 5, 2009 arrangement that qualified as a CSA under the 2003 QCSA Regulations is subject in part to the 2003 QCSA Regulations and in part to the 2009 QCSA Regulations. Arrangements that qualified as CSAs under the 2003 QCSA Regulations, whether or not materially expanded in scope on or after January 5, 2009, are known as “grandfathered CSAs.” The IRS contends that grandfathered CSAs are subject, with significant exceptions, to the 2009 QCSA regulations provisions for cost sharing transactions (“CSTs”) and platform contribution transactions (PCTs).  The significant exceptions for the grandfathered CSAs include that, unless the CSA is later expanded by the related parties, the original pre-2009 CSA is not subject to the 2009 QCSA regulations ‘Divisional Interest’ and Periodic Adjustment rules.

However, the IRS attempted to adjust the application of the 2003 QCSA Regulations by issuing a Coordinated Issue Paper on Section 482 CSA Buy-In Adjustments on September 27, 2007 (the “2007 CSA-CIP”).[15] The CSA-CIP was de-coordinated effective June 26, 2012, after the rejection of its concepts in the 2009 Tax Court decision in the VERITAS case. [16] The CSA-CIP provided that the Income Method and the Acquisition Price Method, similar to the specified transfer pricing methods set forth in the 2009 QCSA Regulations, are to be considered ‘best methods’ under the 2003 QCSA Regulations even though they only could be applied as ‘unspecified methods’. The Tax Court in VERITAS, addressing assessments for the tax years 2000 and 2001, neither cited nor followed the IRS methods of its 2007 CSA-CIP. Note that VERITAS survives Altera II because the 2009 QCSA Regulations years were not yet promulgated for the years of concern.  From the IRS’ perspective, though it does not acquiesce in the decision, it cured VERITAS by including the Income Method and the Acquisition Price Method as specified methods for determining “buy-in” payments for the 2009 QCSA regulations buy-ins.  Thus, the IRS continues to aggressively litigate in favor of these methods, exemplified by the appeal from Altera[17] and Amazon[18] in 2017.

Post Altera

Although the IRS withdrew the CSA-CIP in 2012, it continues to pursue cases under the pre-2009 Treasury Regulations as is the CSA-CIP remained in place. Amazon filed a Tax Court petition in December of 2012 challenging a $2 billion transfer pricing adjustment related to a qualified cost sharing arrangement between Amazon.com Inc. and its European subsidiary pre-2009.  Amazon claimed that the IRS erred in relying on a discounted cash flow method which the tax court clearly rejected in VERITAS. In the 207-page Amazon opinion, the Tax Court ruled that the IRS’s adjustment with respect to a buy-in payment for the intragroup CSA was arbitrary, capricious, and unreasonable.

Moreover, the IRS has an ongoing CSA controversy against Microsoft for the 2004-06 tax years for which President George Bush’s former Treasury Secretary John Snow promised at a February 7, 2006 hearing to then Chairman of the Committee Senator Charles E. Grassley that the IRS would bring a substantial CSA adjustment.[19] Microsoft reported an effective tax rate for fiscal years 2016, 2017, and 2018 of 15 percent, eight percent, and 19 percent respectively.[20] Microsoft reported that this unresolved transfer pricing issue is the primary cause for it to increase its tax contingency from $11.8 billion to $13.5 billion to $15.4 billion.[21] The IRS has not issued a deficiency because the controversy remains in the IDR stage of the audit currently due to litigation over the issues of legal privilege and the issue of the IRS’ contract with a third party law firm to assist in the audit.[22]

The IRS announced in 2016 and 2018 a CSA adjustment against Facebook for the tax years 2010 and subsequent of at least $5 billion, and of 2011 – 2013 of approximately $680 million.[23] Facebook reported an effective tax rate of 13 percent for the second quarter of 2017 and 2018.[24] The controversy remains in the procedural phase on the docket of the Tax Court. The Microsoft and Facebook controversies appear to be further second take of Amazon and Altera.

Based on Treasury’s litigation stances and the 2015 temporary CSA regulations proposals, Treasury updated several International Practice Service Transaction Units’ audit guidelines relevant for CSAs, including (1) Pricing of Platform Contribution Transaction (PCT) in Cost Sharing Arrangements (CSA)—Initial Transaction, (2) Change in Participation in a Cost Sharing Arrangement (CSA)—Controlled Transfer of Interests and Capability Variation, (3) Pricing of Platform Contribution Transaction (PCT) in Cost Sharing Arrangements (CSA) Acquisition of Subsequent IP, (4) Comparison of the Arm’s Length Standard with Other Valuation Approaches—Inbound, and (5) IRC 367(d) Transactions in Conjunction with Cost Sharing Arrangements (CSA).

Altera’s Double Take Analysis Of Majority and Dissenting Opinions (Read the Altera II Decision here)

The Ninth Circuit Court majority evaluated the validity of Treasury’s regulations under both Chevron and State Farm, which the Court stated: “provide for related but distinct standards for reviewing rules promulgated by administrative agencies.”[25] The majority distinguished State Farm from Chevron in that State Farm “is used to evaluate whether a rule is procedurally defective as a result of flaws in the agency’s decision-making process,” whereas Chevron “is generally used to evaluate whether the conclusion reached as a result of that process—an agency’s interpretation of a statutory provision it administers—is reasonable.”  The majority first turned to the Chevron analysis that:[26]

“When Congress has ‘explicitly left a gap for an agency to fill, there is an express delegation of authority to the agency to elucidate a specific provision of the statute by regulation,’ and any ensuing regulation is binding in the courts unless procedurally defective, arbitrary or capricious in substance, or manifestly contrary to the statute.”

The Ninth Circuit Court panel’s majority resolved that IRC § 482 is ambiguous because it does not address share employee stock compensation costs.[27] The majority stated that it is not persuaded by Altera’s argument that stock-based compensation is not “transferred” between parties because only intangibles in existence can be transferred. Altera argues that QCSAs to “develop” intangibles does not constitute a “transfer” of intangibles. The majority instead concludes that the transfer of intangibles may include the transfer of future distribution rights to intangibles which stock-based compensation are albeit yet to be developed. The majority relies upon the expansive meaning of the statutory word “any” for IRC § 482 (“any” transfer . . . of intangible property).[28] But the dissent counters that “any” does not modify “intangible property.” Rather, “any” precedes and thus, applies only to “transfer.”[29]

The majority accepts Treasury’s new explanation that the taxpayer’s agreement to “divide beneficial ownership of any Developed Technology” constitutes a transfer of intangibles.[30]  The dissenting Judge points out that Treasury never made, much less supported, a finding that QCSAs constitute transfers of intangible property.[31] The dissent states that:[32]

“No rights are transferred when parties enter into an agreement to develop intangibles; this is because the rights to later-developed intangible property would spring ab initio to the parties who shared the development costs without any need to transfer the property. And, there is no guarantee when the cost-sharing arrangements are entered into that any intangible will, in fact, be developed.”

The majority next turned to the reasonableness of Treasury ignoring the comparables presented by the Taxpayer and during the regulatory comment period.  The majority quotes from an aspect of the legislative history:[33]  

 “There are extreme difficulties in determining whether the arm’s length transfers between unrelated parties are comparable. . . . [I]t is appropriate to require that the payment made on a transfer of intangibles to a related foreign corporation be commensurate with the income attributable to the intangible.”

The majority concludes that Congress granted Treasury the authority to develop methods that did not rely on the analysis of ‘problematic’ comparable transactions and that Treasury promulgated the QCSA based on this authority because Treasury stated, “The uncontrolled transactions cited by commentators do not share enough characteristics of QCSAs involving the development of high-profit intangibles…”.[34]

The dissenting Judge pointed out that Treasury merely cited to the general legislative history IRC § 482 1986 amendment but that Treasury “did not explain what portions of the legislative history it found pertinent or how any of that history factored into its thinking.”[35] The dissenting Judge holds out that the majority accepts the “ever-evolving post-hoc rationalizations” of Treasury and then “goes even further to justify what Treasury did here”.[36] Commentators of the 2009 QCSA regulations submitted comparable transactions demonstrating that unrelated companies do not share the cost of stock-based compensation. Treasury distinguished these uncontrolled transactions as not sharing enough characteristics of QCSAs involving the development of high-profit intangibles. The dissent agreed with the Tax Court which held that Treasury’s explanation for its regulation was insufficient under State Farm because Treasury “failed to provide a reasoned basis” for its “belief that unrelated parties entering into QCSAs would generally share stock-based compensation costs.”[37]

The dissenting Judge explained that the legislative history and plain reading of the second sentence of IRC § 482 did not offer Treasury the flexibility to depart from a comparability analysis required by the first sentence but for a limited context of “any transfer (or license) of intangible property”.  The Judge then pointed out that Treasury’s 1988 White Paper also stated: “intangible income must be allocated on the basis of comparable transactions if comparables exist.”[38]  Thus, the Tax Court’s found for Xilinx because the IRS had not provided evidence that unrelated parties transacting at arm’s length share expenses related to stock-based compensation.[39]  The Ninth Circuit majority upheld the finding in favor of Xilinx because the arm’s length standard required that stock-based compensation expenses would not be shared in the absence of evidence that unrelated parties would share these costs.[40]

The majority next concludes that Treasury complied with the procedural requirements of the Administrative Procedures Act (“APA”) so that the 2009 QCSA survives a State Farm analysis.[41] The State Farm analysis second step requires that the Treasury “must consider and respond to significant comments received during the period for public comment.”[42] The majority summarizes Altera’s four arguments that Treasury did not meet this requirement: (1) Treasury improperly rejected comments submitted in opposition to the proposed rule, (2) Treasury’s current litigation position is inconsistent with statements made during the rulemaking process, (3) Treasury did not adequately support its position that employee stock compensation is a cost, and (4) a more searching review is required under Fox,[43] because the agency altered its position.  Boiled down, Altera argues that Treasury stated its intent to coordinate the new regulations with the arm’s length standard and then dismissed submissions addressing arm’s length comparables.

The majority was not persuaded by Altera’s argument that an arm’s length analysis requires actual transactional analysis. Altera submitted that “unrelated parties do not share stock compensation costs because it is difficult to value stock-based compensation, and there can be a great deal of expense and risk involved.”[44] Treasury responded in the 2009 QCSA that “the uncontrolled transactions cited by commentators do not share enough characteristics of QCSAs involving the development of high-profit intangibles to establish that parties at arm’s length would not take stock options into account in the context of an arrangement similar to a QCSA.”[45] The majority sided with Treasury’s justification that the lack of similar transactions led it to “employ a methodology that did not depend on non-existent comparables to satisfy the commensurate with income test and achieve tax parity.”[46]  The majority also concluded that Treasury’s use of an internal method of reallocation is consistent with the arm’s length standard because the internal method attempts to bring parity to the tax treatment of controlled and uncontrolled taxpayers as does a comparison of comparable transactions when they exist.[47]

Finally, the majority distinguished the previous, contrary, 2010 holding of the majority in Xilinx that stock-based compensation is not required to be included for a CSA. This majority stated that administrative authority was not at issue in Xilinx and that the previous panel was not called upon to consider the “commensurate with income.  The Xilinx panel had to reconcile a conflict between two rules: the specific methods of the 1994 arm’s length rule and the pre-2003 QCSA Regulations.[48]

The dissenting panel member instead concluded that the two-member majority justified Treasury’s about-face by (a) providing “a reasoned basis for the agency’s action that the agency itself has not given”,[49] (b) encouraging “executive agencies’ penchant for changing their views about the law’s meaning almost as often as they change administrations”,[50] and (c) endorsing a practice of requiring interested parties to engage in a scavenger hunt to understand an agency’s rulemaking proposals.[51]  The dissenting Judge was troubled that Treasury stated “for the first time and with no explanation that it may, instead, employ the “commensurate with income” standard to reach the required arm’s length result.”[52]

Based on the Tax Court decision in Xilinx and in Altera that the taxpayer had presented sufficient evidence of comparable transactions, the dissent agreed with the Tax Court’s finding that Treasury was required at least to attempt to gather empirical evidence before declaring that no such evidence was available, in the face of such evidence being available.  In light of this evidence, Treasury concedes the comparables issue in its appellate brief and instead pivots its justification for the 2009 QCSA that Treasury is not required to undertake an analysis of what unrelated entities do under comparable circumstances. Treasury’s argument is that it was statutorily authorized to dispense with a comparability analysis in this narrow context and thus Treasury does not need to investigate whether the uncontrolled transactions were comparable.[53] The dissenting Judge would hold that the APA requires Treasury to state that it was taking this new position in a stark departure from its previous regulations.[54]

In my opinion, Treasury had to concede the comparables point.  The issues remain the same as explained by the Xilinx concurring Judge above.  Treasury’s argument, regarding CSAs, is that related parties should be treated differently because as a group the parties have more information and more control over the other party as regards the share options.  Given the group relationship, the U.S. and the foreign party will split the costs of the U.S. employees’ share options.  But the application of the arm’s length standard has been understood to treat the related parties and unrelated.  If unrelated, then the assumption of information is unfounded.  Moreover, why would the foreign party bear the costs of the share options of the U.S. employees without negotiating on behalf of its employees to also receive such options?  What is the quid pro quo for the foreign subsidiary?  Yet, I also consider that potentially such lopsidedness in favor of the U.S. party can be brought to bear by the economic dominance of the U.S. party. which can potentially occur in an outsourcing relationship.  However, Altera and amicus industry groups provided agreements evidencing the contrary and the IRS chose not to seek rebuttal evidence (or it could not locate any). 

The issues of comparables and comparability, at least in my perspective, are distinguishable.  The first step is to identify transaction comparables, which Altera clearly has, and the second is to then to adjust for the commonly accepted (market, economic) variances between the comparables.  By example, size of parties in relation to each other, size of market and competition within, term, etc the factors of the Treasury Regs and other arm’s length differences that would require adjustments.  I disagree with the underlying premise of the “three percent”. Stated another way, 97 percent of transactions are therefore incomparable.  That’s a lot of “unicorns”.  But business is not like our fingerprints and rarely generates unicorns.  More often, competitors develop distinguishing approaches that can be adjusted for.  Said another way, I disagree with the lack of comparables, and base my disagreement on the managerial sciences like supply and value chain.  The economy does produce unicorns and we call these unicorns first movers.  Sometimes we grant patent protection to maintain unicorn status for a period of time.  And sometimes first movers develop a new formation of the supply and full value chain that we call a business method.  But for the issue of a monopoly or concentrated oligopoly, such first movers eventually experience competitors and comparables begin to emerge.  Thus, the argument for a lack of comparable transactions within an industry or industry segment necessarily requires believing that unicorns are common.

Also, the “three percent” must be viewed in historical context.  Firstly, that report was written at a time when there was a lack of available information via the Internet and electronic (pay for) databases that captured such information, cleaned it, and tagged it.  Secondly, the domestic economy itself was less mature and robust, with much less competition and thus much less transactions to be compared. Thirdly, the world was not a globalized competitive economy as it is today.  The OECD and Treasury still state a lack of comparable transactions today with regard to “hard to value intangibles”.  My academic sense thinks that it is just hard, laborious work to find them.  (And arguably for simplicity maybe as a policy we should move away from the arm’s length). 

The dissenting Judge finds that in 1986 Congress could not have legislated against the backdrop of stock-based compensation and cost-sharing arrangement because these activities did not develop until the 1990s. Thus, the dissenting Judge concludes that while “Congress may choose to address this practice now, it cannot be deemed to have done so then.”[55] In his conclusion, the Judge states “… an arm’s length result is not simply any result that maximizes one’s tax obligations.”[56] In my opinion, the ball is in Treasury’s court, not Congress’.

Lexis’ Practical Guide to U.S. Transfer Pricing is 36 chapters, 3,000 pages, updated annually to help multinationals cope with the U.S. transfer pricing rules and procedures, taking into account the international norms established by the OECD and UN. It is also designed for use by tax administrators, both those belonging to the U.S. Internal Revenue Service and those belonging to the tax administrations of other countries, and tax professionals in and out of government, corporate executives, and their non-tax advisors, both American and foreign. Fifty co-authors contribute subject matter expertise on technical issues faced by tax and risk management counsel.  Free download of chapter 2 here

END NOTES

[1]Treas. Reg. § 1.482-7A(d)(2).

[2] Altera Corp. v Commr, __ F.3d. __ (9th Cir., June 7, 2019) (case no. 16-70496) [hereafter “Altera II”] reversing Altera Corp. v. Commr, 145 TC No 3 (July 27, 2015) [hereafter “Altera I”].

[3] Xilinx, Inc v Commr, 125 TC 37 (2005), affd, 598 F 3d 1191 (9th Cir 2010). It is noted that in 2009 the Ninth Circuit issued an opinion accepting the position of the Service, but withdrew that opinion on Jan. 13, 2010.

[4] See Am. Mining Cong. v. Mine Safety & Health Admin., 995 F.2d 1106, 1109 (D.C. Cir. 1993). Interpretive rules are excluded from the general notice requirement for proposed rulemaking by 5 U.S.C. sec. 553(b)(3)(A). See Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984) that the Tax Court held incorporates the State Farm standard.

[5] Motor Vehicle Mfrs. Ass’n of the U.S. v. State Farm Mut. Auto Ins. Co., 463 U.S. 29 (1983).

[6] The Ninth Circuit’s majority stated that the summary of the first panel’s withdrawn opinion constitutes no part of the opinion of the second panel.

[7] Altera II at 6, citing Comm’r v. First Sec. Bank of Utah, 405 U.S. 394, 400 (1972) (quoting 26 C.F.R. §1.482-1(b)(1) (1971)).

[8] Frank v. Int’l Canadian Corp., 308 F.2d 520, 528–29 (9th Cir. 1962).

[9] Oil Base, Inc. v. Comm’r, 362 F.2d 212, 214 n.5 (9th Cir. 1966).

[10] Altera II dissent at 54.

[11] 74 Fed Reg 340 (Jan 5, 2009) (the “Temporary Regulations”).

[12] 76 Fed Reg 80,082 (Dec 22, 2011) (the “Final Regulations”).

[13] Treas. Reg. § 1.482-7A. The “A” was added to the QSCA Regulations effective on January 5, 2009, when the Temporary Regulations were published.

[14] Xilinx, Inc v Commr, 125 TC 37 (2005), affd, 598 F 3d 1191 (9th Cir 2010).

[15] Coordinated Issue Paper on Section 482 CSA Buy-In Adjustments, LMSB-04-0907-62 [hereinafter CSA-CIP].

[16] VERITAS Software Corp v Commr, 133 TC 297 (2009), nonacq, 2010-49 IRB (Dec 6, 2010) (detailed explanation of the IRS’ reasoning available at http://www.irs.gov/pub/irs-aod/aod201005.pdf, assessed June 7, 2019).

[17] Altera I.

[18] Amazon.Com, Inc. v Commr, 148 TC No 8 (March 23, 2017).

[19] Unofficial Transcript of Finance Hearing on Fiscal 2007 Budget is Available, 2006 TNT 31-15 (Feb 15, 2006).

[20] Fiscal year end of June 30 for 2016 and 2017, last three months ending December 31, 2018.  Microsoft 10-K (2017) at 38; Microsoft 10-K (2018); Microsoft 10-K (2Q 2019) at Note 11-Income Taxes.

[21] Microsoft 10-K (2017) at 39; Microsoft 10-K (2Q 2019) at Note 11-Income Taxes.

[22] United States v Microsoft Corp, No 2:15-cv-00102 (WD Wash May 5, 2017).

[23] See U.S. v Facebook Inc ND Cal, No 3:16-cv-03777 (pet filed July 6, 2016).

[24] Facebook 10-Q (2Q 2017) at 20; Facebook 10-K (2018) at 35, 48.

[25] Catskill Mountains Chapter of Trout Unlimited, Inc. v. EPA, 846 F.3d 492, 521 (2d Cir. 2017).

[26] Chevron, 467 U.S. at 843–44.

[27] Altera II at 25.

[28] The Court cites United States v. Gonzales, 520 U.S. 1, 5 (1997) (“Read naturally, the word ‘any’ has an expansive meaning . . . .”) and Republic of Iraq v. Beaty, 556 U.S. 848, 856 (2009) (“Of course the word ‘any’ (in the phrase ‘any other provision of law’) has an ‘expansive meaning, giving us no warrant to limit the class of provisions of law [encompassed by the statutory provision].”

[29] Altera II dissent at 79.

[30] Altera II dissent at 67.

[31] Altera II dissent at 73.

[32] Altera II dissent at 73.

[33] See H.R. Rep. No. 99-426, at 425.

[34] Citing Compensatory Stock Options Under Section 482, 68 Fed. Reg. 51,171-02, 51,173 (Aug. 26, 2003).

[35] Altera II dissent at 63.

[36] Altera II dissent at 67.

[37] Altera II dissent at 65.

[38] Study of Intercompany Pricing under Section 482 of the Code (“White Paper”), I.R.S. Notice 88-123, 1988-1 C.B. 458, 474;

[39] Xilinx v. Commissioner (“Xilinx I”), 125 T.C. 37, 53 (2005).

[40] Altera II dissent at 58.

[41] Altera II at 33.

[42] 5 U.S.C. § 553(c); Perez v. Mortg. Bankers Ass’n, 135 S. Ct. 1199, 1203 (2015).

[43] FCC v. Fox Television Stations, Inc., 556 U.S. 502 (2009).

[44] Altera II at 36.

[45] Compensatory Stock Options under Section 482 (Preamble to Final Rule), 68 Fed. Reg. 51,171-02, 51,172–73 Aug. 26, 2003).

[46] Altera II at 39.

[47] Altera II at 41.

[48] Treas. Reg. § 1.482-1(b)(1) (1994).

[49] Motor Vehicle Mfrs. Ass’n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983) (citing SEC v. Chenery Corp. (“Chenery II”), 332 U.S. 194, 196 (1947))

[50] BNSF Ry. Co. v. Loos, 586 U.S. ___, No. 17-1042, slip op. at 9 (2019) (Gorsuch, J., dissenting)

[51] Altera II dissent at 51.

[52] in its preamble to § 1.482-7A(d)(2),

[53] Altera II dissent at 66 citing Appellant’s Br. 64.

[54] Altera II dissent at 68 citing FCC v. Fox Television Stations, Inc., 556 U.S. 502, 515 (2009) (“[T]he requirement that an agency provide reasoned explanation for its action would ordinarily demand that it display awareness that it is changing position.”).

[55] Altera II dissent at 80.

[56] Altera II dissent at 81.

 

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TaxFacts Intelligence Weekly June 6 – 12 by William Byrnes & Robert Bloink

Posted by William Byrnes on June 6, 2019


2019’s Tax Facts Offers a Complete Web, App-Based, and Print Experience

Reducing complicated tax questions to understandable answers that can be immediately put into real-life practice, Tax Facts works when and where you need it….on your desktop, at home on your laptop, and on the go through your tablet or smartphone.  Questions? Contact customer service: TaxFactsHelp@alm.com800-543-0874

 

IRS Releases 2020 HSA Inflation-Adjusted Amounts

The IRS has released Revenue Procedure 2019-25, which provides the 2020 inflation adjusted amounts for taxpayers who contribute to health savings accounts (HSAs). For 2020, the annual contribution limit for taxpayers with self-only coverage under an HDHP is $3,550 ($7,100 for family coverage). Relatedly, a high deductible health plan (HDHP) for 2020 is one with an annual deductible of not less than $1,400 for self-only coverage ($2,800 for family coverage), with annual out-of-pocket expenses for self-only coverage that do not exceed $6,900 ($13,800 for family coverage). For more information on the contribution limits that apply to HSAs, visit Tax Facts Online. Read More

PBGC Releases Final Regulations on Valuation and Notice Requirements for Insolvent Multiemployer Plans

Under the final regulations, insolvent plans that are receiving financial assistance or terminated via amendment, but expected to become insolvent, must only perform actuarial valuations once every five years if the plan provides nonforfeitable benefits of $50 million or less. Under prior law, valuations were required every three years and the nonforfeitable benefit threshold was $25 million. In the alternative, the plan may, within 180 days, submit their current SPD, most recent actuarial report and certain other information to allow the PBGC to complete the valuation. Additionally, plan sponsors of insolvent or terminated plans now must file information about their withdrawal liability payments and withdrawal of employers who have not yet been assessed withdrawal liability with the PBGC within 180 days of the earlier of the end of the plan year in which the plan terminates or becomes insolvent. This filing is due annually. For more information on multiemployer pension plans, visit Tax Facts Online. Read More

IRS Expands Determination Letter Program

The IRS has released guidance expanding the determination letter program for individually designed cash balance plans and certain plans that have merged. Revenue Procedure 2019-20 now allows both hybrid plans and merged plans to obtain a favorable determination letter. Hybrid plans can submit determination letter applications during the 12-month period beginning September 1, 2019 and ending August 31, 2020. During this period, the IRS will not penalize these plans for plan document failures related to the final hybrid plan regulations and will cap the penalty amounts for certain other good faith amendments. Merged plans that survive after two plans have merged into a single individually designed plan. To be eligible, the plan merger must occur no later than the end of the plan year after the corporate merger transaction took place and the application for the determination letter program must be submitted after the date of the plan merger, but no later than the end of the plan year after the plan merger. For more information on plan qualification requirements, visit Tax Facts Online. Read More

LL.M. or M.Jur. Curriculum in Wealth Management at Texas A&M Law

Our Wealth Management program gives you the knowledge and skills you need to advise wealthy clients and help manage their assets. Because wealth management involves professionals with various backgrounds, we’ve designed the program with both lawyers and non-lawyers in mind. This program is offered completely online, which gives professionals the flexibility they need to learn and to meet the increasing need of being versed in the legal aspects of financial transactions and in the legal aspects of financial investment and portfolio management. Contact us to learn more

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TaxFacts Intelligence Weekly for May 2 – May 8

Posted by William Byrnes on May 6, 2019


2019’s Tax Facts Offers a Complete Web, App-Based, and Print Experience

Reducing complicated tax questions to understandable answers that can be immediately put into real-life practice, Tax Facts works when and where you need it….on your desktop, at home on your laptop, and on the go through your tablet or smartphone.  Questions? Contact customer service: TaxFactsHelp@alm.com800-543-0874

Family Attribution Rules Do Not Impair Deductibility of S Corporation Employee Health Insurance

The IRS released a CCM providing that an S corporation employee who was considered a 2-percent shareholder via the family attribution rules was entitled to deduct the cost of health insurance premiums paid by the S corporation and included in the employee’s income. Here, the S corporation paid the premium costs and included those amounts in the individual’s income, who was, in turn, entitled to the deduction. For more information on the tax treatment of S corporation health insurance, visit Tax Facts Online. Read More

IRS Rules Loan Availability Does Not Jeopardize Employee Stock Purchase Plan Qualification

The IRS released a PLR providing that a plan participant’s eligibility to obtain a loan from the employer (or a third party) to purchase shares under an employee stock purchase plan does not jeopardize the plan’s qualification under IRC Section 423(b). In this case, loan availability was premised on the fact that the loan could not violate the Sarbanes-Oxley Act of 2002, meaning that some participants may have been rendered ineligible to take out a loan to purchase employee shares through the plan. This PLR indicates the IRS’ view that provisions allowing purchase of shares via loans do not prevent qualification even if some employees are ineligible. For more information on the ownership of employer stock in an employer-sponsored plan, visit Tax Facts Online. Read More

Received a 226J Letter? Here’s How to Respond

Employers have recently begun receiving 226J letters detailing employer mandate compliance issues from the IRS with respect to the 2016 tax year. Importantly, employers must remember that the employer mandate continues in effect despite the repeal of the individual mandate and despite pending challenges to the ACA itself. An employer may receive a 226J letter with respect to two types of failures: failure to offer minimum essential coverage to at least 95% of full-time employees or failure to: (1) offer coverage to the employee, (2) provide affordable coverage or (3) offer coverage that satisfied minimum value requirements, in all cases if the FTE received a tax credit. Letter 226J should contain a deadline for a response, usually 30 days after the letter was issued (employers may request a 30-day extension). It is important to get expert advice when drafting the response, but issues to consider include whether the IRS was using the correct data (i.e., was a corrected Form 1094 filed with the IRS in 2016?), whether the plan was a calendar year plan (transition relief may apply) and whether the employer did, in fact, offer minimum coverage during each month. For more information on the employer mandate, visit Tax Facts Online. Read More

LL.M. or M.Jur. Curriculum in Wealth Management at Texas A&M Law

Our Wealth Management program gives you the knowledge and skills you need to advise wealthy clients and help manage their assets. Because wealth management involves professionals with various backgrounds, we’ve designed the program with both lawyers and non-lawyers in mind. This program is offered completely online, which gives professionals the flexibility they need to learn and to meet the increasing need of being versed in the legal aspects of financial transactions and in the legal aspects of financial investment and portfolio management. Contact us to learn more

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TEXAS A&M REACHES MILESTONE: EXPANDS ITS NETWORK TO 500,000+ AT GRADUATION

Posted by William Byrnes on May 3, 2019


Commencement ceremonies will be held May 3 in Fort Worth for Texas A&M University School of Law for 17​4 graduates. The day will include a Law School Aggie Ring ceremony and a Military Cord ceremony prior to the hooding ceremony.

The school’s first Masters of Jurisprudence (M.Jur.) ​diplomas will be awarded along with Masters of Law (LL.M.) honors. Graduates walking across the stage are students who earned their ​graduate degrees in ​risk ​management or ​wealth management via Texas A&M Law’s innovative online program.

This May, Texas A&M University will surpass 500,000 former students and record more than 500,000 degrees granted since its opening in the fall of 1876, according to Texas A&M Today. Texas A&M University will award a record 10,767 degrees at 15 commencement ceremonies across multiple campuses.

“These milestones are reflective of our commitment to our land-grant mission to bring higher education to all who seek it, to develop leaders of character and to pursue excellence in teaching, research and service,” Texas A&M University President Michael K. Young said. “Congratulations to the Class of 2019 for being part of this historic moment, and thank you to each and every Aggie who came before for providing the foundation upon which we will continue to build.”

“This milestone is a testament to the unique and unparalleled education and experience provided by Texas A&M. As we also celebrate our 140th year of service and support to Texas A&M, I know the 11 Aggies who created our organization in 1879 would be proud to see the difference 500,000 former students have made on Texas A&M and our world,” The Association of Former Students President and CEO Porter S. Garner III said.

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TaxFacts Intelligence Weekly Client Questions Answered on April 29

Posted by William Byrnes on April 29, 2019


2019’s Tax Facts Offers a Complete Web, App-Based, and Print Experience

William Byrnes and Robert Bloink reduce complicated tax questions to understandable client answers that can be immediately put into real-life practice, Tax Facts works when and where you need it….on your desktop, at home on your laptop, and on the go through your tablet or smartphone.  Questions? Contact customer service: TaxFactsHelp@alm.com800-543-0874

 

IRS Releases FAQ on Section 199A Shedding Light on Impact of S Corporation Health Insurance Deductions

The IRS has released a set of FAQs based upon the regulations governing the new Section 199A deduction for pass-through entities, such as S corporations. One potentially overlooked issue in the S corporation context is the impact of health insurance premium payments on QBI. The FAQ provides that health insurance premiums paid by the S corporation for a greater-than-2-percent shareholder reduce QBI at the entity level (by reducing the ordinary income used to calculate QBI). Similarly, when a self-employed individual takes a deduction for health insurance attributable to the trade or business, this will be a deduction in determining QBI and can reduce QBI at the entity and individual levels. For more information on the treatment of health insurance premiums in the S corporation context, visit Tax Facts Online. Read More

Post-Reform Life Insurance Reporting Regs Provide Relief for Certain Contacts Acquired in Business Combinations

The proposed regulations governing the new life insurance reporting requirements created by the 2017 tax reform legislation (which do not become effective until finalized) would exclude from the new rules situations where one entity acquires a C corporation that owns life insurance contracts, so long as the life insurance contracts do not represent more than half of the corporation’s assets. Generally, the new rule created by tax reform would make cause certain life insurance contracts to lose their tax-preferred status if transferred in a reportable policy sale (and most business combinations would qualify as such). Under the proposed rules, however, the pre-tax reform exceptions to the transfer for value rule could apply when a C corporation is acquired. For more information on the future reporting requirements that will apply, visit Tax Facts Online. Read More

Missed the April 15 Tax Filing Deadline? Tips for Obtaining an Extension After the Fact

With the 2018 tax filing deadline behind us, many taxpayers who were unable to complete their returns may be wondering what steps to take to file those returns after the deadline has expired. Most taxpayers can easily request an extension through October 15 by using Form 4868 (available at irs.gov) to request the extension. The form will require that the client provide his or her estimated tax liability–remembering that the filing extension only extends the time for filing a return, so that the client’s 2018 tax payment was still due April 15. If the client was impacted by certain recent disasters, including the California wildfires, severe storms in Alabama, and storms and flooding in Nebraska or Iowa, have automatically been granted various extensions, so are not required to complete the paperwork necessary to obtain the extension. For more information on federal income tax filing requirements, visit Tax Facts Online. Read More

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TaxFacts Intelligence Weekly

Posted by William Byrnes on April 12, 2019


Tax Reform Impact on Performance Goal Certification Requirements in Executive Compensation Context

Prior to tax reform, companies were afforded special treatment for certain compensation in excess of the $1 million limit so long as the compensation was based on performance goals certified by the company’s compensation committee. Tax reform eliminated that exception so that companies cannot deduct this excess compensation even if it is performance based–therefore, there is no tangible benefit to having a compensation committee certify that those goals were met in many cases. Despite this, in order to qualify under tax reform’s grandfathering provisions, performance-based compensation must continue to satisfy all of the standards that existed prior to the reform, so many companies may wish to continue their certification practice if they otherwise qualify for grandfathering treatment. For more information on the post-reform rules governing the deduction for executive compensation and the grandfathering rules, visit Tax Facts Online. Read More

2019 Tax Season Preview: Now is the Time to Check Withholding

As we near the end of the 2018 tax season, many clients may have been disappointed by the amount of their refunds or even unexpectedly owed taxes because of the changes brought about by the 2017 tax reform legislation. Many of these surprises were caused by the new withholding tables developed by the IRS because the personal exemption was suspended from 2018-2025. Because of this, taxpayers should be advised to check their withholding now even though it may seem early in order to make any adjustments necessary to avoid unpleasant tax surprises next year. Taxpayers are entitled to have their employers withhold more or less depending upon their personal preferences, and the IRS website provides a calculator designed to help taxpayers anticipate how their withholding choices will impact their refund next year. For more information on the federal tax rules that apply this year post-reform, visit Tax Facts Online. Read More

IRS Provides Last-Minute Penalty Relief for Taxpayers Who Underpaid in 2018

The IRS released last minute penalty relief for certain taxpayers whose tax withholding or estimated tax payments were insufficient in 2018. Usually, a penalty will apply if the taxpayer did not pay at least 90 percent of his or her tax liability for the year. For the 2018 tax year only, the IRS lowered the threshold to 80 percent to account for the significant changes made to the tax code late in 2017. Under previous guidance released in January, the relief was to apply for taxpayers who paid at least 85 percent of their total tax liability. This relief applies both to taxpayers who paid through employer withholding and those who paid quarterly estimated payments (or any combination). If the taxpayer qualifies for this relief but has already filed a return, the taxpayer can request a refund using Form 843, which must be filed in paper format. For more information on the underpayment penalty, visit Tax Facts Online. Read More

Tax Facts Team
Molly Miller
Publisher
William H. Byrnes, J.D., LL.M
Tax Facts Author
Jason Gilbert, J.D.
Senior Editor
Robert Bloink, J.D., LL.M.
Tax Facts Author
Connie L. Jump
Senior Manager, Editorial Operations
Alexis Long, J.D.
Senior Contributor
Patti O’Leary
Senior Editorial Assistant
Danielle Birdsail
Digital Marketing Manager
Emily Brunner
Editorial Assistant

2019’s Tax Facts Offers a Complete Web, App-Based, and Print Experience

Reducing complicated tax questions to understandable answers that can be immediately put into real-life practice, Tax Facts works when and where you need it….on your desktop, at home on your laptop, and on the go through your tablet or smartphone.  Questions? Contact customer service: TaxFactsHelp@alm.com800-543-0874

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TaxFacts Intelligence Weekly

Posted by William Byrnes on April 10, 2019


IRS Explains Impact of SALT Cap on Taxpayers Receiving State and Local Tax Refunds

The IRS has provided guidance explaining the relevance of the “tax benefit rule” for taxpayers who receive a refund of state and local taxes in years when the post-reform limit on deducting state and local taxes (the “SALT cap”) is in effect. For more information on the impact of the SALT cap, visit Tax Facts Online. Read More

Federal Court Invalidates DOL Rules Expanding Association Health Plans

A Washington, D.C. federal court struck down the final regulations released by the DOL in effort to expand the availability of association health plans for various smaller employers and owner-employees, which would have given these groups access to less expensive plans that offered fewer benefits and did not satisfy ACA requirements. The fate of the actual expansion of association health plans remains unclear, however, as the DOL has indicated it will explore all available options and continue to work toward expanding access. For more information on the tax rules for self-employed business owners’ health coverage, visit Tax Facts Online. Read More

Employer Stock & 401(k) Plans: The Bad, the Ugly…and the Potentially Good?

In recent years, many employers have begun shying away from offering employer stock to employees as 401(k) investments. Fiduciary liability concerns and lack of diversification, especially amid dramatic decreases in value in some cases, have made the strategy risky for some companies. However, this does not mean that any client who currently holds employer stock in a 401(k) should immediately liquidate all employer stock. Clients should first be advised that the potential to take advantage of a net unrealized appreciation (NUA) strategy could provide a more valuable way to sell off employer stock. For more information on the NUA strategy, visit Tax Facts Online. Read More

Tax Facts Team
Molly Miller
Publisher
William H. Byrnes, J.D., LL.M
Tax Facts Author
Jason Gilbert, J.D.
Senior Editor
Robert Bloink, J.D., LL.M.
Tax Facts Author
Connie L. Jump
Senior Manager, Editorial Operations
Alexis Long, J.D.
Senior Contributor
Patti O’Leary
Senior Editorial Assistant
Danielle Birdsail
Digital Marketing Manager
Emily Brunner
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2019’s Tax Facts Offers a Complete Web, App-Based, and Print Experience

Reducing complicated tax questions to understandable answers that can be immediately put into real-life practice, Tax Facts works when and where you need it….on your desktop, at home on your laptop, and on the go through your tablet or smartphone.  Questions? Contact customer service: TaxFactsHelp@alm.com800-543-0874

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TaxFacts Intelligence Weekly

Posted by William Byrnes on March 29, 2019


EDITOR’S NOTE FOR ONLINE SUBSCRIBERS
You will notice a new orange banner appearing at the top of your screen called “Latest Developments”. In this section we are offering new features, and we will introduce other features later in the year….

· Tax Facts Intelligence Weekly – current as well as archive weekly newsletters you receive by email as another way to access our latest developments.

· Thumbs Up/Thumbs Down – a debate each week between Robert Bloink and myself (William Byrnes) whereby we take opposing viewpoints on tax policy and argue our opinions. Find out if you agree or disagree and, eventually, you will be able to vote on whose side you are on for that week.

· Featured Articles – a weekly article with archives written by Robert Bloink and myself, thought leaders in finding customer needs for new products and how to make new practice tools work with your clients, perhaps in ways you may not have thought about.

· Recent Updates – as you may know, our digital version of Tax Facts is updated weekly and not annually like our print version of Tax Facts. You can now see any significant changes made to a Tax Facts question that week as it will appear in the “Latest Developments” section, so you are aware of changes. These changes can even be delivered to your smartphone should you choose.

We are looking for another big year providing lots of value-added commentary and analysis. I am always interested in your feedback so feel free to email me at williambyrnes@gmail.com.

Sixth Circuit Confirms Insurance Agents Remain Independent Contractors

The Sixth Circuit Court of Appeals recently confirmed that life insurance agents were properly classified as independent contractors, rather than employees. The case involved eligibility for benefits under ERISA, and a district court, using the traditional Darden factors for determining classification status, had ruled in 2017 that the agents were employees who were eligible for ERISA benefits. For more information on insurance agents and employment classification issues, visit Tax Facts Online. Read More

Renewed Importance of Checking “Compensation” Definition in Retirement Plans Post-Tax Reform

The definition of “compensation” is important for many reasons in the retirement planning arena, but has gained new importance in light of suspended deductions and exclusions post-tax reform. Retirement plans generally must use the IRC’s definition of compensation for nondiscrimination testing purposes, which includes, for example, nondeductible moving expenses (but excludes deductible moving expenses). Post-reform, however, all moving expenses are nondeductible. Despite this, the moving expense deduction was only suspended, not eliminated. This is one example of how tax reform has created a level of uncertainty regarding the appropriate definition of compensation while all tax reform provisions remain (at least temporarily) in effect. For more information on the definition of compensation for qualified plan purposes, visit Tax Facts Online. Read More

Grandfathered Health Plan Status: Still Important for Employers

In the years that have passed since the ACA became effective, many employers may have forgotten the importance of maintaining the grandfathered status of their health insurance plans. Grandfathered health plans remain exempt from many of the ACA market reform provisions and help employers avoid some of the more difficult compliance issues presented by the ACA. To maintain grandfathered status, employers should be sure to maintain proper documentation of the plan coverage extending from March 23, 2010 to the present. If and when the plan enters a new policy or contract, it should provide the health insurance company with documents governing the plan terms to make sure the change will not cause loss of grandfathered status. Adding new employees or new contributing employers will not impact the grandfathered status of the plan, so long as the principal purpose of any restructuring of the business was not to cover additional people under a grandfathered plan. Amendments to the plan that eliminate certain benefits can cause loss of grandfathered status, as can increases in certain cost-sharing requirements and copayments. For more information on grandfathered health plans, visit Tax Facts Online. Read More

2019’s Tax Facts Offers a Complete Web, App-Based, and Print Experience

Reducing complicated tax questions to understandable answers that can be immediately put into real-life practice, Tax Facts works when and where you need it….on your desktop, at home on your laptop, and on the go through your tablet or smartphone.  Questions? Contact customer service: TaxFactsHelp@alm.com800-543-0874

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TaxFacts Intelligence Weekly

Posted by William Byrnes on March 27, 2019


EDITOR’S NOTE FOR ONLINE SUBSCRIBERS
You will notice a new orange banner appearing at the top of your TaxFacts & App screen called “Latest Developments”. In this section we are offering new features, and we will introduce other features later in the year….

· Tax Facts Intelligence Weekly – current as well as archive weekly newsletters you receive by email as another way to access our latest developments.

· Thumbs Up/Thumbs Down – a debate each week between Robert Bloink and myself (William Byrnes) whereby we take opposing viewpoints on tax policy and argue our opinions. Find out if you agree or disagree and, eventually, you will be able to vote on whose side you are on for that week.

· Featured Articles – a weekly article with archives written by Robert Bloink and myself, thought leaders in finding customer needs for new products and how to make new practice tools work with your clients, perhaps in ways you may not have thought about.

· Recent Updates – as you may know, our digital version of Tax Facts is updated weekly and not annually like our print version of Tax Facts. You can now see any significant changes made to a Tax Facts question that week as it will appear in the “Latest Developments” section, so you are aware of changes. These changes can even be delivered to your smartphone should you choose.

We are looking for another big year providing value-added commentary and analysis. I am always interested in your feedback and “practitioner note” submissions so feel free to email me at williambyrnes@gmail.com.

IRS Releases New Safe Harbor for Depreciating Passenger Autos Under Tax Reform 

Post-reform, taxpayers are generally entitled to an additional depreciation deduction for qualified property, including passenger automobiles, if that property was placed in service after September 27, 2017 (and before 2027). If the passenger auto qualifies for 100% depreciation deduction in year one, the tax legislation increased the first-year limitation by $8,000. Assuming the depreciable basis is less than the first year limitation, the additional amount is deductible in the first tax year after the end of the recovery period. Under the safe harbor, however, the taxpayer can take the depreciation deductible for the excess amounts during the recovery period up to the limits applicable to passenger autos during this time frame. The IRS will publish a depreciation table in Appendix A of Publication 946, which taxpayers must use to apply the safe harbor. The safe harbor only applies to passenger autos placed into service before 2023, and does not apply if (1) the taxpayer elected out of 100% first year depreciation or (2) elected to expense the automobile under Section 179. For more information on the rules that apply in determining the depreciation deduction for passenger automobiles, visit Tax Facts Online. Read More

PBGC Proposes Regulations to Simplify Calculating Withdrawal Liability Under the Multi-Employer Pension Reform Act

PBGC recently released a set of proposed regulations to amend the rules on calculating withdrawal liability and annual withdrawal liability payments when an employer withdraws from a multi-employer pension plan. Under the regulations, in calculating withdrawal liability, plan sponsors must disregard benefit suspensions for the ten plan years following the plan year in which the suspension of benefits became effective, and include the suspended benefits when determining the plans unvested benefit liability (UVBs) during that period. The proposed regulations would also require plan sponsors to disregard surcharges when determining how to allocate UVBs to a withdrawing employer, as well as certain increases in contribution rates. The regulations provide detailed guidance on how each element necessary to calculate a withdrawing employer’s liability could be calculated. For more information on benefit reductions under the MPRA, visit Tax Facts Online. Read More

Court Clarifies When Disabled Employees May be Entitled to Disability Benefits

A district court recently clarified that an employee’s request for reasonable accommodations for a disability does not necessarily mean that the employee will also qualify for benefits under a short-term disability plan. In this case, the employee provided evidence from his doctor that stated he was unable to drive in traffic, but the employer’s plan required that he be unable to perform essential duties of his job in order to qualify for disability benefits. The employer denied the claim for benefits because the employee’s job did not involve driving, although he was entitled to work from home so that he could avoid driving into an office (the “reasonable accommodation” in this case). The court agreed with the employer that the employee’s ability to perform his job was not impaired, so he was not entitled to disability benefits. The key takeaway from this case is that, even if an employee has a disability that requires reasonable accommodation, that employee is not necessarily entitled to receive employer-sponsored disability benefits. For more information on employer-sponsored disability benefits, visit Tax Facts Online. Read More

2019’s Tax Facts Offers a Complete Web, App-Based, and Print Experience

Reducing complicated tax questions to understandable answers that can be immediately put into real-life practice, Tax Facts works when and where you need it….on your desktop, at home on your laptop, and on the go through your tablet or smartphone.  Questions? Contact customer service: TaxFactsHelp@alm.com800-543-0874

 

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Request for Applications: Associate Dean of Faculties, Texas A&M University

Posted by William Byrnes on March 26, 2019


Dear Faculty,

The Office of the Dean of Faculties seeks applications for the position of Associate Dean of Faculties.  This is an internal search with an expected completion by the end of the Spring semester.

The Associate Dean of Faculties reports to the Dean of Faculties and Associate Provost and plays a major role in the proactive planning for the Office of the Dean of Faculties, representing faculty needs and issues. The Associate Dean of Faculties works with multiple university constituencies to facilitate an environment in which each faculty member can achieve his or her maximum potential. The Associate Dean of Faculties oversees and/or collaborates in administrative aspects of key faculty-related processes such as recruiting, hiring, evaluation, tenure and promotion, and grievances. This position is part-time (50-70% time) and it is limited to senior tenured faculty members. The Associate Dean of Faculties is expected to maintain a faculty appointment, with associated responsibilities in teaching and/or research.

The ideal candidate will have the ability to communicate effectively and evaluate all requests objectively. The individual must also be able to work well with all segments of the University and external constituencies and have demonstrated a commitment to diversity, equity and inclusion. The applicant must possess the ability to verbalize the office goals to both large and small groups. Experience implementing and designing processes and projects is ideal.  Familiarity with faculty associated rules, guidelines, and administrative procedures is helpful. Further, acumen and expertise with database management and data presentation are important.

The position description can be found at dof.tamu.edu/Associate-DOF.

Applications should include a cover letter with a clear statement of why the applicant believes he or she is qualified for the position, a description of key relevant experience, and a vision statement for the position and its role in the Office of the Dean of Faculties; a vitae; and names of three references. For full consideration, applications should be received no later than COB Wednesday April 3, 2019. The position will remain open until filled. Applications should be submitted through email todof@tamu.edu.

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TaxFacts Intelligence Weekly

Posted by William Byrnes on March 25, 2019


EDITOR’S NOTE FOR ONLINE SUBSCRIBERS
You will notice a new orange banner appearing at the top of your screen called “Latest Developments”. In this section we are offering new features, and we will introduce other features later in the year….· Tax Facts Intelligence Weekly – current as well as archive weekly newsletters you receive in email today as another way to access our latest developments.

· Thumbs Up/Thumbs Down – a debate each week between Robert Bloink and myself (William Byrnes) whereby we take opposing viewpoints on tax policy and argue our opinions. Find out if you agree or disagree and, eventually, you will be able to vote on whose side you are on for that week.

· Featured Articles – a weekly article with archives written by Robert Bloink and myself, thought leaders in finding customer needs for new products and how to make new practice tools work with your clients, perhaps in ways you may not have thought about.

· Recent Updates – as you may know, our digital version of Tax Facts is updated weekly and not annually like our print version of Tax Facts. You can now see any significant changes made to a Tax Facts question that week as it will appear in the “Latest Developments” section, so you are aware of changes. These changes can even be delivered to your smartphone should you choose.

We are looking for another big year providing lots of value-added commentary and analysis. I am always interested in your feedback so feel free to email me at williambyrnes@gmail.com.

IMPORTANT TAX DEVELOPMENTS

IRS Provides Additional Rules for Employers’ Ability to Recover Mistaken HSA Contributions
The IRS clarified when an employer can recover health savings account (HSA) contributions made in error. Generally, erroneous HSA contributions must be corrected by reducing future contributions. The IRS Office of the Chief Counsel released an information letter stating an employer can recover mistaken contributions if the employer has clear documentary evidence that demonstrates an administrative or process error that caused the mistaken contribution. Examples of correctable mistakes provided by the IRS include situations where the participants’ names were confused, mathematical errors and duplicate payroll transmittals. For more information on excess HSA contributions, visit Tax Facts Online and Read More.

8th Circuit Denies Bankruptcy Exemption for Retirement Accounts Transferred Incident to Divorce 
The 8th Circuit denied the bankruptcy exemption for retirement plan assets that the debtor acquired incident to divorce. Qualified plan assets and up to about $1.3 million in IRA assets are usually protected from creditors in bankruptcy. In this case, the debtor received a portion of his former spouse’s 401(k) and her entire IRA in their divorce settlement, via a domestic relations order. The courts relied upon the Supreme Court’s prior ruling that inherited IRAs are not exempt in bankruptcy in concluding that assets acquired through a divorce are not primarily retirement assets of the debtor. Instead, the assets represented a property settlement, so were not entitled to any type of special treatment in bankruptcy. For more information on the treatment of qualified plans in divorce, visit Tax Facts Online and Read More.
LITIGATION WATCH

Wellness Programs Post-EEOC: What Remains Important 
EEOC regulations that were recently vacated and removed focused incentives an employer could offer without rendering the program impermissibly involuntary. Although the incentive based regulations were removed, the remaining regulations provide some clarity on this “voluntariness” issue. The program may not require employees to participate, and the employer is not permitted to deny health coverage or limit group health plan or other benefits if the employee chooses not to participate in the program. The employer cannot take an action that would be considered retaliation or take any adverse employment actions for non-participation. For more information on the rules that currently govern employer-sponsored wellness programs, visit Tax Facts Online and Read More.

 

2019’s Tax Facts Offers a Complete Web, App-Based, and Print Experience

Reducing complicated tax questions to understandable answers that can be immediately put into real-life practice, Tax Facts works when and where you need it….on your desktop, at home on your laptop, and on the go through your tablet or smartphone.  Questions? Contact customer service: TaxFactsHelp@alm.com800-543-0874

 

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TaxFacts Intelligence Weekly March 21, 2019

Posted by William Byrnes on March 21, 2019


William H. Byrnes, J.D., LL.M. and Robert Bloink, J.D., LL.M.

IRS Ruling Provides New Impetus for Lump-Sum Pension Buyouts for Retirees

The IRS has released a ruling that impacts whether pension plan sponsors are permitted to provide lump-sum distributions to plan participants who are already receiving plan benefits via regular annuity payments. The issue was whether, under the IRS required minimum distribution (RMD) rules, a lump-sum payment would constitute an impermissible increase in the payment amounts these participants were receiving. In 2015, the IRS reversed its previous stance allowing these lump-sum payments to participants in pay status and stated its intent to amend the RMD rules to prohibit these payment options. Now, the IRS has once again changed course and announced that, for the time being anyway, it is no longer planning to amend the RMD rules to prohibit lump-sum payments to pension plan participants already receiving annuity payments under the plan. For more information on lump sum pension buyout offers, visit Tax Facts Online. Read More

Tax Court Case Could Eliminate Valuable Split-Dollar Insurance Estate Planning Strategy

The Tax Court is set to hear a case that has had planners who help very wealthy clients use split-dollar strategies to minimize transfer taxes waiting for results since 2014. This issue in this case involves the value of several life insurance policies. Here, a parent purchased life insurance on her sons’ lives–the policies were technically purchased through revocable “dynasty” trusts–for $29.9 million (premium costs). When she died, her reimbursement rights under these “split-dollar” arrangements were valued at only $7.5 million, because the policies would not pay out until the sons died at some future date (essentially, the strategy is valuable because the difference between the two values is a tax-free gift). The IRS has argued that a fair market valuation approach must be used in split-dollar cases, which would assign the much higher premium cost to the value of the policies using the logic typically applied to buy-sell arrangements in family businesses. Initially, the Tax Court indicated that the economic benefit theory of split-dollar could be applied, a result that would favor the estate. Since then, the court has noted that the estate may have to prove it can satisfy an exception under IRC Section 2703 to avoid full taxation of the $29.9 million in premiums paid. A similar case, Cahill v. Comm., was settled out of court in 2018. For more information on split-dollar plans, visit Tax Facts Online. Read More

Sixth Circuit Allows Employer to Terminate Retiree Health Benefits Despite Collective Bargaining Agreements

The Sixth Circuit recently overturned a district court ruling, finding instead that an employer was permitted to terminate certain retiree health benefits despite the presence of collective bargaining agreements (CBAs). The plaintiffs in this case failed to show that the CBAs’ general durational clauses did not apply to healthcare benefits covered under the agreements. In the Sixth Circuit, a CBA’s general durational clause applies to every provision, unless the contract clearly states that it does not. Despite language pertaining to health benefits in the CBAs, that language did not specifically state the duration of the health benefits, so that the general durational clauses applied and the employer was permitted to modify or terminate coverage when the relevant CBAs expired. For more information on retiree-only health benefits provided in the employment context, visit Tax Facts Online. Read More

 

2019’s Tax Facts Offers a Complete Web, App-Based, and Print Experience

Reducing complicated tax questions to understandable answers that can be immediately put into real-life practice, Tax Facts works when and where you need it….on your desktop, at home on your laptop, and on the go through your tablet or smartphone.  Questions? Contact customer service: TaxFactsHelp@alm.com800-543-0874

 

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15 Recent Tax Debates Between Robert Bloink and William Byrnes

Posted by William Byrnes on March 18, 2019


the weekly tax debate transcribed from Tax Facts authors Professors Robert Bloink and William Byrnes, both of Texas A&M University Law School’s Wealth Management graduate program for professionals.

— More Bloink & Byrnes Go Thumb to Thumb:

  1. IRS Relief for Tax Underpayment: Bloink & Byrnes Go Thumb to Thumb
  2. IRS’ New 199A Real Estate Safe Harbor
  3. Postcard Premiere of IRS Form 1040
  4. Repeal SALT Cap, Raise Corporate Tax
  5. Tax Deferral on Stock Options and RSUs
  6. Should Annuity Products Get a Fiduciary Safe Harbor?
  7. Should Tax Hikes Need Supermajority Vote?
  8. Does DOL’s HRA Proposal Go Far Enough?
  9. Should 2017 Tax Changes Be Permanent?
  10. Is the Proposed Child Tax Credit Even Needed?
  11. Is Inflation Indexing of Capital Gains Good?
  12. Are New USA Plans a Boon to Savers?
  13. Was It Right to Kill the DOL Fiduciary Rule?
  14. Is DOL Rule on Health Plans Bad?
  15. Trump’s RMD Rule Change

 

2019’s Tax Facts Offers a Complete Web, App-Based, and Print Experience

Reducing complicated tax questions to understandable answers that can be immediately put into real-life practice, Tax Facts works when and where you need it….on your desktop, at home on your laptop, and on the go through your tablet or smartphone.  Questions? Contact customer service: TaxFactsHelp@alm.com800-543-0874

 

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TaxFacts Intelligence (Week of March 14, 2019)

Posted by William Byrnes on March 14, 2019


William H. Byrnes, J.D., LL.M. and Robert Bloink, J.D., LL.M.

Mar 14, 2019

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IRS: Employers Must Exercise Caution in Providing “Free Lunch” for Employees 

The IRS has released a technical advice memorandum (TAM) that sheds light on the potential tax implications when employers provide employees with free meals in the office. Post-tax reform, meals provided “for the convenience of the employer” may receive favorable tax treatment. In the TAM, the IRS denied exclusion of the meals’ value from employee compensation. Here, the employer provided free meals to all employees in snack areas, at their desks and in the cafeteria, justifying provision of these meals by citing need for a secure business environment for confidential discussions, employee protection, improvement of employee health and a shortened meal period policy. The IRS rejected these rationales, stating that the employer was required to show that the policies existed in practice, not just in form, and that they were enforced upon specific employees. In this case, the employer had no policies relating to employee discussion of confidential information and provided no factual support for its other claims. General goals of improving employee health were found to be insufficient. The IRS also considered the availability of meal delivery services a factor in denying the exclusion, but indicated that if the employees were provided meals because they had to remain on the premises to respond to emergencies, that would be a factor indicating that the exclusion should be granted. For more information on “de minimis” type fringe benefits, visit Tax Facts Online. Read More

Common Scenarios in Client Retirement Planning: Account Consolidation and the Rules of the Road

Most clients will change jobs a few times in their lives, which often means they wind up with multiple 401(k) and other types of retirement plans. Consolidating can produce many benefits–namely, making it easier to manage retirement assets and easing RMD calculations, but there are rules to consolidating and clients also need to be aware of benefits that may be unique to any one type of plan. Clients should evaluate their goals with respect to eventual withdrawals, as the rules for penalty-free withdrawals–for example, via using an IRA to establish a series of substantially equal periodic payments to provide penalty-free withdrawals prior to age 591/2. For more information on the rollover rules and how they may impact clients considering retirement account consolidation, visit Tax Facts Online. Read More

April 1 is Fast Approaching: Important Deadline for Clients With First-Time RMD Obligations

While April 15 is a well-known and understood deadline, most clients don’t associate April 1 with any important tax-related deadlines—but April 1 is, in fact, one of the most important deadlines for clients who turned 701/2 years old in the previous year. For those clients who maintain traditional retirement accounts, such as 401(k)s and IRAs, April 1 is the date by which they must take their first required minimum distribution (RMD) from the account if they turned 701/2 in the previous year. For example, a client who turned 701/2 in 2018 must take their first RMD by April 1, 2019. This April 1 deadline is a special rule that applies only to first-time RMDs–a client’s 2019 RMD will be due by December 31, 2019. This means that clients who choose to wait until the April 1 deadline will be required to take two RMDs in 2019. For each subsequent year, the generally applicable December 31 deadline is the relevant date for RMDs. For more information on lifetime RMD requirements, visit Tax Facts Online. Read More

 

2019’s Tax Facts Offers a Complete Web, App-Based, and Print Experience

Reducing complicated tax questions to understandable answers that can be immediately put into real-life practice, Tax Facts works when and where you need it….on your desktop, at home on your laptop, and on the go through your tablet or smartphone.  Questions? Contact customer service: TaxFactsHelp@alm.com800-543-0874

 

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TaxFacts Intelligence Weekly (Feb 7, 2019)

Posted by William Byrnes on February 8, 2019


William H. Byrnes, J.D., LL.M. and Robert Bloink, J.D., LL.M.

TAX REFORM DEVELOPMENTS

IRS Provides New 199A Safe Harbor for Rental Real Estate Activities
Since the introduction of Section 199A, business owners engaged in real estate activities have been confused by the new 20 percent deduction for qualified business income of certain pass-through entities. IRS proposed Revenue Procedure 2019-07 provide a safe harbor so that rental real estate businesses will qualify as “trades or businesses” if it: (1) maintains separate books and records for each rental enterprise, (2) involves the performance of at least 250 hours of rental real estate activities, and (3) maintains contemporaneous records regarding the rental real estate services. The safe harbor is effective for tax years ending after December 31, 2017. For more information, visit Tax Facts Online and Read More.

Final 199A Guidance on Tracking W-2 Wages Provides Guidance for Short Tax Years
The IRS has recently finalized the methods that a business owner can use to track W-2 wages for calculating the Section 199A deduction. The new guidance clarifies that, in the case of short taxable years, the business owner is required to use the “tracking wages method” with certain modifications. The total amount of wages subject to income tax withholding and reported on Form W-2 can only include amounts that are actually or constructively paid to the employee during the short tax year and reported on a Form W-2 for the calendar year with or within that short tax year. For more information on the methods available for calculating W-2 wages for Section 199A purposes, visit Tax Facts Online and Read More.

LITIGATION WATCH

Court Requires Employer to Pay Dependent Life Insurance Benefits After Failure to Provide SPD
A court recently ruled that an employer was required to pay life insurance benefits to an employee under a life insurance policy insuring her former spouse, which was offered by the employer as a dependent life insurance benefit. When the employee’s former husband died within three months’ of their divorce, her claim for benefits under the policy was denied because she was not an “eligible dependent” because of the divorce. The employee made several claims, including one that the she was not provided a summary plan description (SPD) with respect to the policy. The court agreed with the plaintiff’s claim that failure to provide the SPD was a breach of fiduciary duty under ERISA. For more information on employer-sponsored life insurance, visit Tax Facts Online and Read More.

2019’s Tax Facts Offers a Complete Web, App-Based, and Print Experience

Reducing complicated tax questions to understandable answers that can be immediately put into real-life practice, Tax Facts works when and where you need it….on your desktop, at home on your laptop, and on the go through your tablet or smartphone.  Questions? Contact customer service: TaxFactsHelp@alm.com800-543-0874

 

Tax Facts Team

  • William H. Byrnes, J.D., LL.M, Tax Facts Author
  • Robert Bloink, J.D., LL.M., Tax Facts Author
  • Alexis Long, J.D., Senior Contributor
  • Richard Cline, J.D. Senior Director, Practical Insights
  • Jason Gilbert, J.D., Senior Editor
  • Patti O’Leary, Senior Editorial Assistant
  • Connie L. Jump, Senior Manager, Editorial Operations
  • Molly Miller, Publisher
  • Danielle Birdsail, Digital Marketing Manager
  • Emily Brunner, Editorial Assistant

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Guidance on receiving the 20% deduction from qualified business income; many rental real estate owners may claim deduction

Posted by William Byrnes on January 25, 2019


The Treasury Department and the Internal Revenue Service issued final regulations and three related pieces of guidance, implementing the new qualified business income (QBI) deduction (section 199A deduction).

The new QBI deduction, created by the 2017 Tax Cuts and Jobs Act (TCJA) allows many owners of sole proprietorships, partnerships, S corporations, trusts, or estates to deduct up to 20 percent of their qualified business income.  Eligible taxpayers can also deduct up to 20 percent of their qualified real estate investment trust (REIT) dividends and publicly traded partnership income.

The QBI deduction is available in tax years beginning after Dec. 31, 2017, meaning eligible taxpayers will be able to claim it for the first time on their 2018 Form 1040.

The guidance, released today includes:

  • A set of regulations, finalizing proposed regulations issued last summer, A new set of proposed regulations providing guidance on several aspects of the QBI deduction, including qualified REIT dividends received by regulated investment companies
  • revenue procedure providing guidance on determining W-2 wages for QBI deduction purposes,
  • notice on a proposed revenue procedure providing a safe harbor for certain real estate enterprises that may be treated as a trade or business for purposes of the QBI deduction

The proposed revenue procedure, included in Notice 2019-07, allows individuals and entities who own rental real estate directly or through a disregarded entity to treat a rental real estate enterprise as a trade or business for purposes of the QBI deduction if certain requirements are met.  Taxpayers can rely on this safe harbor until a final revenue procedure is issued.

The QBI deduction is generally available to eligible taxpayers with 2018 taxable income at or below $315,000 for joint returns and $157,500 for other filers. Those with incomes above these levels, are still eligible for the deduction but are subject to limitations, such as the type of trade or business, the amount of W-2 wages paid in the trade or business and the unadjusted basis immediately after acquisition of qualified property. These limitations are fully described in the final regulations.

The QBI deduction is not available for wage income or for business income earned by a C corporation.

For details on this deduction, including answers to frequently-asked questions, as well as information on other TCJA provisions, visit IRS.gov/taxreform

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TaxFacts Intelligence Weekly

Posted by William Byrnes on December 3, 2018


TAX DEVELOPMENTS

SEC Announces New Disclosure Requirements for Variable Annuities and Life Insurance 
The SEC recently proposed a rule change designed to improve disclosures with respect to variable annuities and variable life insurance contracts. The new disclosure obligations would help investors understand the features, fees and risks to these types of products in an effort to allow investors to make more informed investment decisions. Under the proposal, annuity and life insurance carriers would be entitled to provide information to investors in a summary prospectus form that would provide a more concise summary of the terms of the contract. For more information on variable annuities, visit Tax Facts Online and Read More.

Digging Into the Details of Hardship Distributions for Primary Residence Purchases
Qualified plans can to allow participants to take hardship distributions to help with the purchase of a primary residence. The distribution must be directly taken to purchase the residence–items such as renovations made prior to move-in do not qualify. Despite this, the distribution can cover more than just the purchase price of the residence itself. Closing costs would also qualify, as would the cost of a piece of land upon which the primary residence would be built. If a participant buys out a former spouse’s interest in a jointly-owned home pursuant to divorce, the distribution would also qualify. For more information on the hardship distribution rules, visit Tax Facts Online and Read More.
Avoiding Gift Tax Traps This Holiday Season
Most taxpayers believe that they are not required to file a gift tax tax return if they do not owe gift taxes–as many will not because of the current $11.18 million gift tax exemption will shield most donors from gift tax liability. Despite this, each gift made during a donor’s lifetime serves to reduce that $11.18 million amount, which applies both to lifetime gifts and transfers made at death. Taxpayers must file Form 709 to report taxable gifts in excess of the annual exclusion amount to avoid potential IRS penalties for failure to file a return. The form is required not because gift taxes are owed, but to provide the IRS with a mechanism for tracking any given taxpayer’s use of the exemption amount during life. For more information on the gift tax filing requirements, visit Tax Facts Online and Read More.

Posted in Retirement Planning, Taxation | Tagged: , | 1 Comment »

IRS provides tax inflation adjustments for tax year 2019

Posted by William Byrnes on November 23, 2018


The Internal Revenue Service was very late (only on November 15) in announcing the tax year 2019 annual inflation adjustments for more than 60 tax provisions, including the tax rate schedules and other tax changes. Revenue Procedure 2018-57 provides details about these annual adjustments. The tax year 2019 adjustments generally are used on tax returns filed in 2020.

The tax items for tax year 2019 of greatest interest to most taxpayers include the following dollar amounts:

  • The standard deduction for married filing jointly rises to $24,400 for tax year 2019, up $400 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $12,200 for 2019, up $200, and for heads of households, the standard deduction will be $18,350 for tax year 2019, up $350.
  • The personal exemption for tax year 2019 remains at 0, as it was for 2018, this elimination of the personal exemption was a provision in the Tax Cuts and Jobs Act.
  • For tax year 2019, the top rate is 37 percent for individual single taxpayers with incomes greater than $510,300 ($612,350 for married couples filing jointly). The other rates are:

o 35 percent, for incomes over $204,100 ($408,200 for married couples filing jointly);

o 32 percent for incomes over $160,725 ($321,450 for married couples filing jointly);

o 24 percent for incomes over $84,200 ($168,400 for married couples filing jointly);

o 22 percent for incomes over $39,475 ($78,950 for married couples filing jointly);

o 12 percent for incomes over $9,700 ($19,400 for married couples filing jointly).

o The lowest rate is 10 percent for incomes of single individuals with incomes of $9,700 or less ($19,400 for married couples filing jointly).

  • For 2019, as in 2018, there is no limitation on itemized deductions, as that limitation was eliminated by the Tax Cuts and Jobs Act.
  • The Alternative Minimum Tax exemption amount for tax year 2019 is $71,700 and begins to phase out at $510,300 ($111,700, for married couples filing jointly for whom the exemption begins to phase out at $1,020,600). The 2018 exemption amount was $70,300 and began to phase out at $500,000 ($109,400 for married couples filing jointly and began to phase out at $1 million).
  • The tax year 2019 maximum Earned Income Credit amount is $6,557 for taxpayers filing jointly who have three or more qualifying children, up from a total of $6,431 for tax year 2018. The revenue procedure has a table providing maximum credit amounts for other categories, income thresholds and phase-outs.
  • For tax year 2019, the monthly limitation for the qualified transportation fringe benefit is $265, as is the monthly limitation for qualified parking, up from $260 for tax year 2018.
  • For calendar year 2019, the dollar amount used to determine the penalty for not maintaining minimum essential health coverage is 0, per the Tax Cuts and Jobs act; for 2018 the amount was $695.
  • For the taxable years beginning in 2019, the dollar limitation for employee salary reductions for contributions to health flexible spending arrangements is $2,700, up $50 from the limit for 2018.
  • For tax year 2019, participants who have self-only coverage in a Medical Savings Account, the plan must have an annual deductible that is not less than $2,350, an increase of $50 from tax year 2018; but not more than $3,500, an increase of $50 from tax year 2018. For self-only coverage, the maximum out-of-pocket expense amount is $4,650, up $100 from 2018. For tax year 2019, participants with family coverage, the floor for the annual deductible is $4,650, up from $4,550 in 2018; however, the deductible cannot be more than $7,000, up $150 from the limit for tax year 2018. For family coverage, the out-of-pocket expense limit is $8,550 for tax year 2019, an increase of $150 from tax year 2018.
  • For tax year 2019, the adjusted gross income amount used by joint filers to determine the reduction in the Lifetime Learning Credit is $116,000, up from $114,000 for tax year 2018.
  • For tax year 2019, the foreign earned income exclusion is $105,900 up from $103,900 for tax year 2018.
  • Estates of decedents who die during 2019 have a basic exclusion amount of $11,400,000, up from a total of $11,180,000 for estates of decedents who died in 2018.
  • The annual exclusion for gifts is $15,000 for calendar year 2019, as it was for calendar year 2018.
  • The maximum credit allowed for adoptions is the amount of qualified adoption expenses up to $14,080, up from $13,810 for 2018.

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Tax Facts was first published in 1951 in a slim, 137-page volume covering the income, estate and gift tax aspects of life insurance and annuity ownership, titled Tax Facts on Life Insurance. Since that first year, the breadth and depth of Tax Facts coverage has grown to include employee benefits, business continuation, individual and qualified retirement plans, as well as decades of hard-to-find rulings and clarifications of longstanding regulations.  In 1983, Tax Facts grew to two volumes, with the second covering investments of all types: stocks, bonds, mutual funds, real estate, and the tax requirements related to each. What began as a 234-page book grew rapidly as tax reform in the 1980s multiplied the rules covering the treatment of investments.

In 2010 Tax Facts expanded to its current 4 volume and online format.  In its 67-year history, Tax Facts has become the financial advisor industry’s standard for clear, up-to-date thorough tax information. Now in an all-inclusive online format, every answer, ruling and table is easier than ever to find.

Tax Facts is the place I go to find the answers to those tough life insurance questions that no one else has – and to check those they do. It’s THE SOURCE for authoritative income, estate, and gift tax information on life insurance and annuity contracts.”

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TaxFacts Intelligence Weekly Nov 16th

Posted by William Byrnes on November 16, 2018


IRS Releases Guidance on Impact of Personal Exemption Suspension on Premium Tax Credit
The 2017 tax reform legislation suspended the personal exemption for tax years beginning after 2017 and before 2026. Relatedly, taxpayers are entitled to claim the Affordable Care Act premium tax credit with respect to an individual if the taxpayer has claimed an exemption with respect to that taxpayer (i.e., the personal or dependency exemption). A taxpayer is entitled to claim the premium tax credit with respect to another individual if the taxpayer would otherwise be entitled to claim a dependency exemption with respect to that individual, and includes the individual’s name and TIN on his or her Form 1040. For more information, visit Tax Facts Online and Read More.
OTHER IMPORTANT DEVELOPMENTS

Grandfathering Potential May Still Exist Under Section 162(m) Post-Regulations
The IRS regulations governing the new limitations on the Section 162(m) executive compensation deduction limits may have curtailed grandfathering opportunities that some had expected under the new tax law, but possibilities still remain. The test for determining whether grandfather treatment is permitted involves whether the company was legally obligated to pay the compensation under state law (meaning contract law) as of November 2, 2017. For more information on the new rules governing the deductibility of executive compensation, visit Tax Facts Online and Read More.

LITIGATION WATCH

Tax Court Rules Business-Provided Life Insurance Taxable to Insured Individual Under Split Dollar Rules
The Tax Court recently ruled that the “economic benefit” of business-sponsored life insurance provided to a key employee through a multiple-employer welfare benefit fund was taxable income to the employee. The Tax Court agreed with the IRS that this structure required current income inclusion under the split dollar life insurance principles, so that the economic benefit received by the employee was required to be included in his gross income for the year in question despite the fact that no actual cash benefits were received during that year. For more information on the rules governing split dollar life insurance, visit Tax Facts Online and Read More.

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TaxFacts Intelligence Weekly (Nov 2)

Posted by William Byrnes on November 2, 2018


TAX REFORM DEVELOPMENTS by William Byrnes & Robert Bloink

IRS Guidance Provides Market Discount Not Included Under Section 451
The IRS has released guidance on the treatment of market discount under the new accounting rules created by the 2017 tax reform legislation. For accrual basis taxpayers, income must be included in gross income when all events have occurred to fix the right to the income and the amount can be determined with reasonable accuracy. Post-reform, this “all events test” is satisfied when the taxpayer takes the item into account as revenue on an applicable financial statement. For more information on the rules governing accrual-based accounting post-reform, visit Tax Facts Online and Read More.

OTHER TAX REFORM DEVELOPMENTS

IRS Releases New Model Notice Implementing Tax Reform Rollover Changes for Safe Harbor Retirement Plans
The IRS has released a new safe harbor model tax notice under IRC Section 402(f), which is important for plans that use these notices for eligible rollover distributions (however, alternative notice formats should also be updated). The model notice incorporates the new rollover deadline for qualified plan loan offsets–the deadline has been extended from 60 days to the taxpayer’s tax filing deadline. The new self-certification procedures for waiver of the 60-day rollover deadline are also reflected in the notice (these were introduced in 2016) For more information on the rules governing qualified plan rollovers, including tax reform’s changes, visit Tax Facts Online and Read More.

Tax Court Finds Capital Gain Income Counted in Determining Premium Tax Credit Eligibility Although the Affordable Care Act (ACA) rules may seem to have taken a back burner following the repeal of the individual mandate, most ACA provisions remain in force and clients continue to claim the premium tax credit. A recent Tax Court summary opinion highlights the importance of continuing to understand the ACA rules. In the case, a taxpayer’s gross income from most sources was very low, allowing the taxpayer and her son to qualify for premium tax credit assistance. However, to make ends meet, they sold several of their personal belongings in the same year, generating capital gain income. Because the capital gain income exceeded 400% of the poverty line, they were required to repay all advance premium tax credit payments. For more information on the premium tax credit, visit Tax Facts on Individuals and Small Business Online and Read More.
LITIGATION WATCH

Court Rules Stock in Former Parent No Longer Qualified as “Employer Securities” for ERISA Purposes
A district court in Texas recently ruled that stock in a former parent ceased to qualify as an “employer security” following a spinoff, so that the ERISA exemption from the duty to diversify investments and the duty of prudence no longer applied. The plan at issue was a defined contribution plan that also contained an employee stock ownership plan (ESOP), which was formed after a spinoff. The plan held both newly issued employer stock, as well as stock in the former parent company that was transferred from an old plan. The court rejected the defendants’ argument that the ERISA exemption applied, finding that stock does not retain its character as employer securities indefinitely. For more information on the tax treatment of employer securities in retirement plans, visit Tax Facts Online and Read More.

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TaxFacts Intelligence Weekly (Oct 31)

Posted by William Byrnes on October 31, 2018


Tax Reform Developments by William Byrnes & Robert Bloink

IRS Official Explains Link Between Business Expense and Fringe Benefit Rules for Tax-Exempt Entities Post-Reform
The 2017 tax reform legislation disallowed deductions for certain transportation-related benefits, including parking expenses, transit passes, commuter vehicles, as well as other types of employee fringe benefits. The law also modified the rules governing unrelated business income, so that tax-exempt entities that provide these benefits may now be subject to the unrelated business income tax (UBIT) on the benefits’ value. An IRS official recently explained that because of the close ties between Section 512 (UBIT) and Section 274 (fringe benefit rules), tax-exempt entities that are considering o fringe benefits to employees should look to the Section 274 expensing rules. For more information on tax reform’s impact on tax-exempt entities, visit Tax Facts Online and Read More.

Section 199A QBI Deduction Introduces Potential Compensation Planning Issues
The Section 199A deduction for the qualified business income of certain pass-through entities presents potential compensation planning issues for both small and large businesses. For example, partnerships and S corporations may wish to reevaluate guaranteed payments to partners and wages to S corporation shareholders. Larger companies may benefit from converting subsidiaries to pass-through entities and using interests in these entities to compensate certain executives where the deductibility of compensation would otherwise be limited by the post-reform restrictions contained in IRC Section 162(m). For more information on the Section 199A QBI deduction, visit Tax Facts Online and Read More.
OTHER IMPORTANT TAX DEVELOPMENTS

IRS Extends Key Tax Filing Deadlines for Victims of Hurricane Michael in Florida and Georgia
The government has declared areas impacted by Hurricane Michael to be major disaster zones, and in recognizing this, the IRS has extended several key filing deadlines for individuals who reside or have businesses in the affected areas. The filing deadline has been extended for individuals who had extended their 2017 filing deadline to October 15, and the January 15, 2019 estimated tax filing deadline has been extended to February 28, 2019. Impacted entities required to file a Form 5500 also have until February 28, 2019 to file if the form was originally due on or after October 7, 2018 and before February 28. For more information on casualty loss deductions in major disaster zones, visit Tax Facts Online and Read More.

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TaxFacts Intelligence Weekly

Posted by William Byrnes on September 21, 2018


TAX REFORM DEVELOPMENTS

IRS Provides Guidance Updating Accounting Method Changes for Terminated S Corporations
The 2017 tax reform legislation added a new IRC section that now requires eligible terminated S corporations to take any Section 481(a) adjustment attributable to revocation of the S election into account ratably over a six-year period. Under newly released Revenue Procedure 2018-44, an eligible terminated S corporation is required to take a Section 481(a) adjustment ratably over six years beginning with the year of change if the corporation (1) is required to change from the cash method to accrual method and (2) makes the accounting method change for the C corporation’s first tax year. For more information on the rules governing S corporations that convert to C corporation status post-reform, visit Tax Facts Online and Read More.
OTHER IMPORTANT DEVELOPMENTS

IRS Guidance on Interaction between New Association Health Plan Rules and ACA Employer Mandate
The IRS recently released new guidance on the rules governing association health plans (AHPs), which permit expanded access to these types of plans, and the Affordable Care Act (ACA) employer mandate. The guidance provides that determination of whether an employer is an applicable large employer subject to the shared responsibility provisions is not impacted by whether the employer offers coverage through an AHP. Participation in an AHP does not turn an employer into an applicable large employer if the employer has less than 50 employees. For more information on the employer mandate, visit Tax Facts Online and Read More.

OCC Explains Employee Tax Consequences of Employer’s Belated Payment of FICA Tax on Fringe Benefits
The IRS Office of Chief Counsel (OCC) released a memo explaining the tax consequences of a situation where the employer failed to include $10,000 of fringe benefits. The employer paid the FICA taxes associated with the benefits in 2018, although the benefits were provided in 2016. The guidance provides that the payment in 2018 did not create additional compensation for the employee in 2016. If the employer collects the amount of the employee portion of the FICA tax from the employee in 2018, the employer’s payment is not additional compensation. However, if the employer does not seek repayment, the payment of the employee’s portion is additional compensation. For more information on FICA tax issues in the employment benefit context, visit Tax Facts Online and Read More.
LITIGATION WATCH

Employer Amendments to VEBA Did Not Result in Adverse Tax Consequences
The IRS recently ruled that an employer could amend its voluntary employees’ beneficiary association (VEBA) to provide health benefits for active employees in addition to retired employees without violating the tax benefit rule or incurring excise taxes. In this case, the VEBA provided health benefits for collectively bargained retired employees. When the VEBA became overfunded, the employer proposed transferring the excess assets into a subaccount for collectively bargained active employees. The IRS found that this proposed amendment would not violate the tax benefit rule because, the new purpose of providing health benefits to active employees under a collective bargaining agreement was not inconsistent with the employer’s earlier deduction. For more information on VEBAs, visit Tax Facts Online and Read More.
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Make Sure You’ve Made a Completed Gift

Posted by bonddad on August 28, 2018


In 2009, F. Hale Stewart, JD. LL.M. graduated magna cum laude from Thomas Jefferson School of Law’s LLM Program.  He is the author of three books: U.S. Captive Insurance LawCaptive Insurance in Plain English and The Lifetime Income Security Solution.  He also provides commentary to the Tax Analysts News Service, as well as economic analysis to TLRAnalytics and the Bonddad Blog.  He is also an investment adviser with Thompson Creek Wealth Advisors and contributor to the Income Seeker section of Thestreet.com.

The determination of gift tax liability rests on whether the donor has “so parted with dominion and control of the property as to leave him, “no power to change its disposition, whether for his own benefit or for the benefit of another, the gift is complete.” (Treas. Reg. §20.2511.2(b)).  The mosts obvious example occurs when the donor simply gives money to an individual or organization.  For example, the donor writes a check (or, as is more common now, makes a debit card transfer) to a charity.  Once the money leaves his account, the gift is complete.

Things can get a bit dicier when it comes to using trusts.  A revokable trust results in an incomplete gift because the trustor can simply terminate the trust, reverting the trust property back to his control.  But an irrevocable trust doesn’t necessarily result in a completed gift.  Consider the following facts:

  1. Can the trustor change the trustee?  If so, it’s possible the trustor could nominate a more aggreeable trustee that the trustor can bend to his will.  This could result in a determination that the donation to the trust was an incomplete gift.
  2. Does the trustor retain a power of appointment over the property?  If so, the gift is incomplete, at least to the degree of the power.

As with all things, the devil is in the details.

 

 

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Global Tax Guides

Posted by bonddad on August 13, 2018


Sorry for the lack of posting over the last few months.  William and I (along with several others) have been updating Matthew Bender’s Texas Estate Planning, which William has either uploaded or will upload soon.  

Here are a few key links to the global tax guides issued by some of the major accouting firms.  I’ve always found these guides to provide an excellent overview of various countries’ tax regimes.

E&Y Global Tax Guide

PWCs Global Tax Summaries

PKF Global Tax Guides

 

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TaxFacts Intelligence Weekly

Posted by William Byrnes on July 24, 2018


Tax Reform May Require Additional Disclosures for Withholding Purposes
The IRS released a draft Form W-4 designed to reflect the new changes to the tax code imposed by the 2017 tax reform legislation, including the elimination of the personal exemption. The new form is more complex and detailed than previously existing forms, because employers can no longer use the personal exemption to calculate withholding. The form itself is not yet finalized, and it is possible that changes following a very brief comment period. For more information on the suspended personal exemption, visit Tax Facts Online and Read More.
Small Business Valuation Discounts Less “Valuable” Post-Reform
With the enlargement of the estate tax exemption for 2018-2025, many planners are now seeking to reverse strategies that would have permitted clients to claim valuation discounts in their estate plans. Valuation discounts are primarily important in reducing the value of a client’s taxable estate–usually in the small business context. However, if the client is unlikely to be subject to the estate tax at all, use of a valuation discount can cause the client to forgo a portion of the basis adjustment to which his or her heirs would otherwise be entitled. Clients who do not expect to be subject to the estate tax may wish to revisit their estate planning. For more information on minority discounts in the small business context, visit Tax Facts Online and Read More.
OTHER TAX DEVELOPMENTS

Need to Know Information for Kids With Summer Jobs
Many teenagers and college students are likely to be working this summer, and it is important that both the parent and kids should know with respect to potential tax liabilities. First, kids should pay attention to their withholding to ensure that they aren’t under or over paying–any over-withholding will be returned in the form of a refund, and most minors should claim 0 or 1 allowances on their Form W-4. Kids also should be aware that some states will require even very low income workers to file state income tax returns, so even if the kid expects to be exempt at the federal level, a state filing may be required. Finally, if the kid has started his or her own summer business–such as a lawn mowing business–business-related expenses may be tax deductible, so should be carefully documented for tax time. For more information on the kiddie tax, visit Tax Facts Online and Read More.

Last Call for IRS Offshore Voluntary Disclosure Program is Looming
The September 28, 2018 closing date for the IRS’ offshore voluntary disclosure program (OVDP) is looming. Many advisors agree that the September 28 deadline is the last date for potential participants to submit an “initial submission” that requests admission, and note that a pre-clearance request is likely insufficient. The initial submission requires more detailed information, such as the history of any foreign accounts, assets and past reporting, as well as the source of any foreign funds and an estimate of foreign account value. For more information on foreign account reporting requirements, visit Tax Facts Online and Read More.
LITIGATION WATCH

Metlife Lawsuit Highlights Missing Plan Participant Issue
Metlife has recently been sued because of its failure to pay retirement benefits to pension plan participants that it claims it can no longer locate, highlighting the importance of the “missing participant” issue in the financial community. Metlife’s liability stems from a pension risk transfer transaction, where the pension plan itself purchased a group annuity contract from Metlife in order to reduce its pension liabilities. It then became Metlife’s responsibility to make payments to plan participants. For more information on pension plan rules, visit Tax Facts Online and Read More.

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5 Fundamentals Of LLCs (Guest Attorney Article by Haik Chilingaryan, Esq.)

Posted by William Byrnes on June 29, 2018


Haik Chilingaryan, Esq.

Please contact Mr. Chilingaryan to discuss the five fundamentals of an LLC at E-Mail: haik@chilingaryan.law or Tel: 818.442.7777

A Limited Liability Company (“LLC”) is a hybrid business entity which contains elements of a partnership and a corporation. LLCs consist of members and managers. An LLC may provide tremendous benefits for its members, which include asset protection, intergenerational transfers, tax saving strategies, wealth preservation, flexible management structures, and clarity on the roles of all essential parties involved in the company as set out in the Operating Agreement.

The following five concepts are fundamental for establishing an LLC: Asset Protection, Intergenerational Transfers, Tax Saving Strategies, Management, and Funding.

Asset Protection

Generally, the more assets a person owns in one’s name, the more likely it is that he or she will be a target mark for creditors. This is why it’s good practice to own as little as possible in your own name. In order to accomplish this goal, it’s important to evaluate the types of asset protections tools that are available to you. An LLC is one such tool that is effective for asset protection purposes.

For creditors of the LLC itself, a member’s personal liability will generally be limited to the amount of the member’s investment in the LLC unless the member personally guarantees the transaction in question.

For creditors of the member of the LLC, a creditor is generally precluded from acquiring an interest in the debtor-member’s interest in the LLC if the judgment was entered after the LLC was formed. However, most states allow for a judgment creditor to levy on assets after distributions have been made to the debtor-member by the LLC.

As a general rule, a creditor has no right to become a member, compel a distribution, or demand company assets. If such rights were given to a creditor, then the other members of the company would suffer from an action or inaction of a particular member. This would inevitably lead to an unjust result for the remainder of the group. Therefore, the creditor must wait until distributions are made to the member before any potential recovery can be pursued.

Another limitation on a creditor’s pursuit on a claim against the debtor-member is that an Operating Agreement has the power to prevent non-members from acquiring an interest in the company. This is especially important in the case of failed marriages and judgment creditors because courts may at times issue overreaching rulings in order to accomplish an equitable outcome in the event of divorces or other circumstances. An LLC can also provide the means for family members or ex-family members who are in dispute to not be compelled to communicate at the time their interest is being transferred from their donors to them.

There is another layer of asset protection that deals particularly with the recipients of the LLC interest. It’s standard practice for owner-members to make gifts to their heirs throughout their lives. Several problems are immediately surfaced when gifts of substantial value such as property or a significant amount of cash are transferred to their heirs. Without a proper plan in place, the recipients are likely to subject these assets to waste or relinquish them to creditors or former spouses. However, the transfer of an interest in the LLC can protect these assets from loss or waste by the recipient-members.

Keep in mind that the asset protection planning must be done well in advance of any anticipation to a claim. That’s because fraudulent transfers are broadly construed. Intent is generally presumed if a transfer is found to have been made before or after the claim arose with the intent to defraud, hinder, or delay a known creditor. If the transfer is deemed fraudulent by the court, the court may set aside the transfer, which may also lead to criminal consequences.

An LLC is the preferred homeplace for many types of properties, including real estate. Real estate held for the purpose of investment is a ubiquitous phenomenon. Yet in practice, it is widespread to see title to its ownership being held in an individual’s name. In fact, if an investor owns multiple income-producing properties, it’s recommended (subject to some exceptions) to form and operate a separate LLC for each piece of property. In the case of a primary residence, transferring title to a living trust is the preferred method primarily due to tax advantages and the homestead exemption.

One of the reasons for forming a separate LLC for an income-producing real estate is that an injury on its premises can be costly even if the insurance policy satisfies a portion of the claim. Thus, if an entity only owns one piece of real estate, the claims will only be limited to that piece of property. If, however, the entity owns other assets, all such assets are at the risk of being exposed to the creditor.

Let’s also not forget one crucial point in the context of asset protection. By merely establishing an LLC, it will not be enough to be sheltered from personal liability. Formalities must be followed to embolden the shield of limited liability (just like for corporations or other types of entities that are subject to limited liability). If formalities are not adequately followed or there is a personal guarantee against the particular risk in question, the member’s personal assets will likely be exposed to the creditor.

It’s also equally important to make sure that the business is never conducted in the individual member’s capacity, but only in business capacity. For example, as “Manager” or “Member.” In the context of distributions, the accounting must continuously be updated as the distributions are being made to the members. The lack of formalities will give more weight to the argument that the LLC had no business purpose and should be disregarded as a separate legal entity.

Despite all the asset protection tools, a creditor has a few recourses (some of which go beyond the scope of this article). The one recourse that is generally available to a creditor is commonly referred to as a “charging order.” A charging order permits a creditor to seize only those assets that have been actually distributed, but not the assets that the debtor-member may potentially be entitled to receive under his or her ownership interest in the LLC.

Charging orders are better known as “phantom income” for a reason. The IRS requires for the members of the LLC to pay income tax even if they do not receive any distributions. In the case of charging orders, the creditor would be required to pay income tax on the debtor-member’s interest in the LLC even if the creditor does not receive any actual distributions. This is perhaps the most deterring factor on a creditor’s pursuit in recovering from an LLC because a creditor generally ends up in a worse position than before his pursuit of the charging order. Additionally, a creditor’s tax bracket may also increase as a result of the charging order.

Intergenerational Transfers

An LLC can be structured in such a way to protect the assets of a family for generations. These are otherwise known as Family Limited Liability Companies (“FLLC”). Even though such entities are structured and operated just like typical LLCs, most, if not all of the assets, are owned by the family in FLLCs.

In general, LLCs have some of the same benefits as living trusts when it comes to intergenerational transfers. An LLC can provide for a smoother transfer of wealth upon the death of an owner by avoiding probate. It can further prevent assets from going through probate in the event of a member’s disability and even in guardianship or conservatorship proceedings.

Another similarity with a living trust is that the nature and character of the underlying assets of the company are private. In other words, details as to what assets the LLC owns will generally be outside the scope of the public domain. As opposed to probate, where the circumstances surrounding the transfers of the decedent’s assets are a matter of public record, transfers of LLC assets are generally accomplished under private circumstances.

The effective planning techniques involve not only how the assets will be transferred when the owner of those assets dies, but to also employ techniques that will allow the transfer of assets during the donor’s life. In the context of FLLCs, there is a planning method available through gifting which allows for senior family members to periodically gift a portion of their assets to their younger family members.

There are some assets, however, that by their nature make it difficult to gift in fractions. Transferring portions of real estate, farm, or other assets are difficult to calculate especially when their value can fluctuate on a daily basis. There are some factors that may make the particular asset periodically more or less valuable: external market conditions and the overall condition of the asset. However, the gifting of an interest in an LLC avoids the trouble of transferring a fraction of a particular asset.

Regardless of the type of asset being transferred, there are incentives in place for transferring wealth during a donor’s life. These incentives can range from reducing the donor’s taxable estate to providing for the living expenses of the donor’s children. As such, the implementation of an annual gifting method may play a significant role in the periodic transfer of wealth from the older family members to the younger ones.

In 2018, the annual exclusion amount is $15,000 for individual taxpayers. Under the taxation rule of gift-splitting, a married couple can transfer $30,000 to any individual without being required to pay a Gift Tax or having to file a Gift Tax Return. To illustrate the significance of annual gifting, suppose that a married couple has four children. The couple can potentially remove $120,000 per annum from their estate without the Gift Tax consequences.

An LLC can also provide an excellent tool for gifting an interest during the donor’s life without commingling the gifted portion of the assets with the recipient’s other assets that have been accumulated during his or her marriage. After the membership interest is directly transferred to the recipient or in a separate property trust that has been specifically established for the recipient, the “paper trail” can show that a particular asset (whether in the form of cash or other property interest) is in fact the separate property of the recipient-member.

In the context of LLC ownership transfers, it is the member’s interest – not the actual asset – being transferred. Thus, the interest is adjusted in value due to lack of marketability. That’s because the assets that are subject to the LLC generally have limitations. Such limitations may include the right of first refusal, the inability to demand a distribution, order a dissolution, or participate in the management of the LLC.

The fundamental reason for the lack of marketability is that the membership interest is not a liquid asset and generally cannot be freely assigned. In other words, if the buyer cannot indeed purchase the piece of a parcel, but instead he or she can only purchase a potential ownership interest in the parcel (e.g., by owning X% in the LLC) with some of the previously mentioned limitations, the value of the membership interest will be discounted in accordance with the limitations.

The discounting aspect for lack of marketability is especially useful in the context of gifting. For instance, if a member’s interest is discounted by 1/3 due to lack of marketability, a gift of $10,000 in the form of an LLC interest is equivalent to a gift of $15,000 in the underlying assets of the LLC ($15,000 x 2/3 =$10,000).

Upon the death of the owner-member, value adjustments may also apply to the remaining portion of the deceased member’s interest in the LLC based on lack of marketability. A general formula for calculating the taxable value of the estate of the deceased-member’s interest is the following:

% of ownership x FMV (1 – discount) = Estate Tax Value

Tax Saving Strategies

An LLC can be taxed as a disregarded entity, partnership, cooperative, or corporation. By default, a multi-member LLC is taxed as a partnership. By default, a single-member LLC is taxed as a sole proprietorship. Under such a classification, the member is considered self-employed and is consequently responsible for self-employment taxes (Social Security and Medicare).

For income tax purposes, sole proprietorships, partnerships, and S-corporations are classified as pass-through entities. This means that the income and expense will pass through to the owner’s personal tax returns. Under a pass-through scenario, the LLC itself will file a Form 1065 tax return, but it will not pay the income taxes on the LLC’s profits.

One strategy for lowering a member’s taxable income is to not have them actively participate in the management of the LLC. Members who do not participate in the management of the company will generally be exempt from paying the self-employment tax. Therefore, their overall income tax may be reduced since they will not pay the self-employment tax on the LLC portion of their income.

Another way to reduce the overall income taxes during the members’ life is by spreading them among members who happen to fall in lower tax brackets than the owners. This is especially useful in the context of FLLCs since younger family members may not necessarily earn as high of an income as their elder counterparts.

Another benefit of an LLC is that a transfer of an asset by an individual to the LLC is normally not a taxable event unless otherwise excepted. Similarly, transfers upon the dissolution of the LLC are also not taxable since they are deemed a return of capital. Of course, gain may be recognized if the asset is sold by the individual after the asset has been transferred from the LLC.

The general tax consequence on transfers (to and from) an LLC is especially significant when considering that virtually any transfer from one entity to another can either be accomplished by sale or gift. If it’s a sale, then the transferor must generally pay capital gain taxes if the asset has appreciated in value since its purchase. If it’s a gift, there may be gift tax consequences. In this case, we have the owner being a separate entity, transferring to the LLC (also a separate entity). Nonetheless, these transfers generally do not qualify as taxable events for IRS purposes.

In the context of FLLCs, calculating the basis of assets or membership interests can be problematic, especially if such assets are sold generations after their purchase. This will inevitably affect the basis adjustments of those assets. The basis of an asset is what the original owner paid for its purchase. Several factors may affect the adjustment of the basis by either increasing the original basis (e.g., capital improvements) or by decreasing the original basis (e.g., depreciation deductions).

The similar concepts on basis adjustments apply to a member’s interest in the LLC because these interests also have their own basis. If there are many assets with different basis inside the LLC, it can become a logistical nightmare for accountants and administrators to calculate each member’s separate basis in the LLC. Thus, mixing different assets in the same LLC can be problematic especially in the context of multi-generational entities (e.g., FLLCs). Instead of being limited to one LLC, it is recommended to consider additional or subordinate LLCs especially for preventing such problems down the road.

The last point with regard to tax consequences of LLCs pertains to state law. When forming an LLC, it’s essential to consider all of the laws that the state provides on the formation and governance of LLCs. Some states have favorable laws with regard to LLCs versus other business types of entities; other states tend to be less favorable.

Management of an LLC

LLCs consist of members and managers. If we can make an analogy with corporations, members would be equivalent to the shareholders of a corporation; whereas managers can be a hybrid between Board of Directors and senior officers of a corporation (depending on the scope of authority provided by the members and the Operating Agreement).

There are two types of structures in which LLCs operate. There are member-managed and manager-managed LLCs. In member-managed LLCs, the members of the company manage the company by voting in accordance with each member’s interest. In manager-managed LLCs, members appoint one or more managers to conduct business activities that fall within the scope authorized by the company’s members.

There is no requirement for a manager to be a member of the LLC. Even in a member-managed LLC, the members may appoint a manager to be responsible for the daily business operations, but nevertheless be prevented from exercising any decision-making management authority.

A managing entity is recommended for a variety of reasons. First, as opposed to an individual, a managing entity does not have the same limitations as a human being might have, including disability and death. Since managers generally answer to members, the level of control over investment decisions can be set by the members in accordance with the manager’s fiduciary duty to the LLC. The level of control may vary from how much income to distribute or reinvest to being limited to only managing simple day-to-day operations.

An LLC formed in California must have an Operating Agreement. The Operating Agreement sets forth the scope of authority of members and managers. It can also provide restrictions on the transferability of membership interests and determine the form of compensation of its managers. A membership interest can be in the form of percentage or membership units. Membership units are analogous to owning shares in a corporation.

There are generally four ways members can receive compensation from the LLC. First, the General Members can receive management fees for managing the company. Such compensation can even be in the form of “preferred equity interest,” whereby a certain percentage of income is paid to the individual or entity holding that interest.

The second way is for the LLC to make distributions to the members. In such a scenario, the limited members will generally be entitled to a pro rata share from the distributions. The third way is for the LLC to make loans to the members. This strategy should be implemented with extreme caution. The fourth way provides an option to the limited members to potentially purchase a more significant share in the LLC from the owners, thereby resulting in more direct income for the owners.

Funding the LLC

Funding is the process of transferring assets to the LLC. Funding is an essential step in order for the LLC to be legally enforceable. An LLC must have a business purpose. If the LLC does not have any assets or is not otherwise funded, it follows that it does not have a business purpose.

The similar concept of funding applies to revocable living trusts. If a revocable living trust does not have any assets, it can be the most potent trust instrument ever written, but it will generally have no legal effect. Therefore, an LLC must also be properly funded, for among other things, to potentially grant limited liability to its members.

The means for funding the LLC may vary from asset to asset. For example, different standards apply when real estate is transferred onto the LLC as opposed to a publicly traded security company. As a baseline rule, the transfer of an asset to the LLC must happen in the same manner in which title to the particular type of property is held. In case of real estate, such transfers may only be effectuated by deeds, regardless of whether the transfer is from person to person, or from (or to) an LLC.

Notwithstanding the type of asset being transferred, the value of the asset must be determined at the time of transfer. Determining the valuation of real estate and business interests in firmly held companies or LLCs is not an exact science. Consequently, such assets may be required to be appraised by a qualified appraiser (someone with an excellent reputation in the field of appraisals and a successful track record for audits). To justify any valuation discounts in the event of litigation or potential challenges by taxing authorities, qualified appraisals should also value the interest in the LLC at the time the member’s interest is either sold or gifted or when one of the members dies.

The transfer of stocks, bonds, and other securities to an LLC is accomplished by a stockbroker, the issuing company, or a third party agent. If a stockbroker is used to facilitate the transfer, it’s recommended for the stocks to be held in a “nominee securities” account. In other words, the brokerage account will be in the name of the LLC, however, the actual stocks will be held in the brokerage company’s name.

One final point concerning funding to keep in mind when it comes to stocks and investment assets are the “anti-diversification rules.” Generally, the transfer of an asset to the LLC is not a taxable event unless the transfer triggers an immediate tax consequence within the meaning of diversification of securities.

Several standards are used to determine issues related to diversification. First, “The 80% Rule” states that if 80% or more of the assets of the LLC are marketable securities, the LLC can be classified as an “investment company.” As a result, the anti-diversification rules may apply and tax may be due on the transfer. Therefore, if 20% or more of the assets are made up of real estate, the anti-diversification rules will not be triggered and no tax would be due on the transfer provided that real estate assets remain at 20% or more in the LLC after the transfer.

Second, “The Non-Identical Assets Rule” applies in a scenario where one person contributes one type of stock and another person contributes another type of stock, the anti-diversification rule may be triggered. However, if the same two people were to contribute two of the same stock or if one person contributes all of the assets (even if they are not identical), the anti-diversification rules will generally not be triggered.

Third, “The 25% Test and 50% Test” states that no diversification can occur when the transferor transfers a diversified portfolio of securities to the LLC which contains no more than 25% of the value of all securities from one issuer and no more than 50% of the value of all securities from five or fewer issuers. In this instance, the portfolio itself is considered diversified since it does not contain any one issuer which represents more than 25% of the value of the total securities nor five or fewer issuers which represent more than 50% of the securities in the same portfolio. Similar to mutual funds, diversification rules generally do not apply to a portfolio that is being contributed to the LLC that is already diversified.

The crux of the matter regarding the anti-diversification rules is that if an LLC owns securities and the LLC itself is in fact performing the functions of an investment company within the context of securities, then any asset being transferred (including cash) to the LLC may be subject to tax. The application of these rules can be pernicious and planning around them must be done with extreme caution to minimize the likelihood of a tax being due on a transfer.

Final Thoughts

The rigorous legal standards surrounding LLCs increase the likelihood for the LLC to lose its asset protection status against creditors or to be successfully challenged by taxing authorities. The LLC provides tremendous benefits to its members: asset protection, intergenerational transfers, tax saving strategies, flexible management structures, and wealth preservation. In order to enjoy all the benefits that an LLC has to offer, it’s important to be in constant contact with qualified advisors, including attorneys, CPAs, tax specialists, and financial advisors to make sure that all applicable legal matters are properly addressed in advance.

Remember that an LLC is a business, it must have a business purpose, and it must be operated as a business. Problems are bound to occur when the owners of LLCs deviate from these standards and become overconfident in the notion that their LLC is an enforceable legal entity that is unequivocally protected against creditors and taxing authorities by virtue of its existence.

Important Note: Chilingaryan Law or its affiliates are not rendering legal, financial, or tax advice by providing the content above. No attorney-client relationship is formed based on the information provided above. The above content is designated only for educational use. Accordingly, Chilingaryan Law assumes no liability whatsoever in reliance on its use. Additionally, certain changes in law may affect on the legality of the information provided above and certain circumstances of the reader may vary the applicability of the above content to his or her situation.

About Chilingaryan Law

Our law firm focuses its practice on serving professionals and business owners who, among other things, seek counsel on matters relating to Estate Planning and Business Planning with an emphasis on tax efficiency.  We work with of counsel attorneys, financial advisors, tax specialists, and accountants to provide the most optimal services for our clients. We recognize that some clients wish to minimize their tax consequences, others are more concerned about posterity, yet many others are concerned about their financial security and lifestyle needs once they retire.

Our main office is in Glendale, California. We also have offices in Downtown Los Angeles, West Los Angeles, and Sherman Oaks. Tel: 818.442.7777

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New SEC Rules on Fiduciary Standard

Posted by fhalestewart on April 19, 2018


From the SEC:

SEC Proposes to Enhance Protections and Preserve Choice for Retail Investors in Their Relationships With Investment Professionals

FOR IMMEDIATE RELEASE
2018-68

Washington D.C., April 18, 2018 —

The Securities and Exchange Commission today voted to propose a package of rulemakings and interpretations designed to enhance the quality and transparency of investors’ relationships with investment advisers and broker-dealers while preserving access to a variety of types of advice relationships and investment products.

Under proposed Regulation Best Interest, a broker-dealer would be required to act in the best interest of a retail customer when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer.  Regulation Best Interest is designed to make it clear that a broker-dealer may not put its financial interests ahead of the interests of a retail customer in making recommendations.

In addition to the proposed enhancements to the standard of conduct for broker-dealers in Regulation Best Interest, the Commission proposed an interpretation to reaffirm and, in some cases, clarify the Commission’s views of the fiduciary duty that investment advisers owe to their clients.  By highlighting principles relevant to the fiduciary duty, investment advisers and their clients would have greater clarity about advisers’ legal obligations.

Next, the Commission proposed to help address investor confusion about the nature of their relationships with investment professionals through a new short-form disclosure document — a customer or client relationship summary.  Form CRS would provide retail investors with simple, easy-to-understand information about the nature of their relationship with their investment professional, and would supplement other more detailed disclosures.  For advisers, additional information can be found in Form ADV.  For broker-dealers, disclosures of the material facts relating to the scope and terms of the relationship would be required under Regulation Best Interest.

Finally, the Commission proposed to restrict certain broker-dealers and their financial professionals from using the terms “adviser” or “advisor” as part of their name or title with retail investors.  Investment advisers and broker-dealers would also need to disclose their registration status with the Commission in certain retail investor communications.

Taken as a whole, the proposed rules and interpretations would enhance investor protection by applying consistent principles to investment advisers and broker-dealers: provide clear disclosures, exercise due care, and address conflicts of interest.  The specific obligations of investment advisers and broker-dealers would be, however, tailored to the differences in the types of advice relationships that they offer.

SEC Chairman Jay Clayton stated, “The tireless work of the SEC staff has proven to me that we can increase investor protection and the quality of investment services by enhancing investor understanding and strengthening required standards of conduct.  Importantly, I believe we can achieve these objectives while simultaneously preserving investors’ access to a range of products and services at a reasonable cost.  The package of rules and guidance that the Commission proposed today is a significant step to achieving these objectives on behalf of our Main Street investors.”

The public comment period will remain open for 90 days following publication of the documents in the Federal Register.

*   *   *

FACT SHEET

SEC Open Meeting
Apr. 18, 2018

The Commission proposed two rules and an interpretation to address retail investor confusion about the relationships that they have with investment professionals and the harm that may result from that confusion.  Evidence indicates that retail investors do not fully understand the differences between investment advisers and broker-dealers, which could lead them to choose the wrong kind of investment professional for their particular needs, or to receive advice that is not in their best interest.  The Commission will therefore consider strengthening the standard of conduct that broker-dealers owe to their customers, reaffirming and, in some cases, clarifying the standard of conduct that investment advisers owe to their clients, and providing additional transparency and clarity for investors through enhanced disclosure designed to help them understand who they are dealing with, and why that matters.  The rulemaking package seeks to enhance investor protections while preserving retail customer access to transaction-based brokerage accounts and a broad range of investment products.
Proposal’s Highlights
Regulation Best Interest 

A broker-dealer making a recommendation to a retail customer would have a duty to act in the best interest of the retail customer at the time the recommendation is made, without putting the financial or other interest of the broker-dealer ahead of the retail customer.

A broker-dealer would discharge this duty by complying with each of three specific obligations:

  • Disclosure obligation: disclose to the retail customer the key facts about the relationship, including material conflicts of interest.
  • Care obligation: exercise reasonable diligence, care, skill, and prudence, to (i) understand the product; (ii) have a reasonable basis to believe that the product is in the retail customer’s best interest; and (iii) have a reasonable basis to believe that a series of transactions is in the retail customer’s best interest.
  • Conflict of interest obligation: establish, maintain and enforce policies and procedures reasonably designed to identify and then at a minimum to disclose and mitigate, or eliminate, material conflicts of interest arising from financial incentives; other material conflicts of interest must be at least disclosed.

Investment Adviser Interpretation

An investment adviser owes a fiduciary duty to its clients — a duty that the Supreme Court found exists within the Advisers Act.  The proposed interpretation reaffirms, and in some cases clarifies, certain aspects of the fiduciary duty that an investment adviser owes to its clients.

Form CRS – Relationship Summary

Investment advisers and broker-dealers, and their respective associated persons, would be required to provide retail investors a relationship summary.  This standardized, short-form (4 page maximum) disclosure would highlight key differences in the principal types of services offered, the legal standards of conduct that apply to each, the fees a customer might pay, and certain conflicts of interest that may exist.

Investment advisers and broker-dealers, and the financial professionals who work for them, would be required to be direct and clear about their registration status in communications with investors and prospective investors.  Certain broker-dealers, and their associated persons, would be restricted from using, as part of their name or title, the terms “adviser” and “advisor” — which are so similar to “investment adviser” that their use may mislead retail customers into believing their firm or professional is a registered investment adviser.

Background

The Commission has been considering issues relating to changes in the market for investment advice, retail investor understanding of their advice relationships, and broker-dealer conflicts of interest, since the mid-1990s.  The staff studied these matters further pursuant to the Dodd-Frank Act’s mandate in Section 913.  Most recently, in June 2017, Chairman Jay Clayton sought public input on a variety of issues associated with standards of conduct for investment professionals.  Today’s proposed rules and interpretations are the outcome of the Commission and the staff’s extensive experience in and consideration of these issues

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What Exactly Is A Fiduciary Standard?

Posted by fhalestewart on March 27, 2018


Last week, I noted that a court overturned the DOL’s new “fiduciary” rule.  Since its enactment, the new rule has been a point of contoversy within the investment community.

However, what exactly is a fiduciary standard?  Let’s begin by looking at the definition of fiduciary, which, according to the Merriam-Webster online legal dictionary, is

“one often in a position of authority who obligates himself or herself to act on behalf of another (as in managing money or property) and assumes a duty to act in good faith and with care, candor, and loyalty in fulfilling the obligation : one (as an agent) having a fiduciary duty to another.”

The definition contains a number of key concepts:

  1. “one … in a position of authority.”   The person on whom the law places the duty is “superior” to the other person, usually because the fidicuary has a specific skill-set that the other does not.  The fiduciary is an expert.
  2. The fiduciary “act[s] on behalf of another.”  The fiducairy must not consider himself ot his personal situation when making decisions, but instead the situation of the person for whom he is exercising his skills.
  3. The fiduciary “assumes a duty” or a “moral obligation.”  There’s an ethical component to the duty; it’s almost like a higher calling.
  4. The fiduciary must act
    1. In good faith: The Restatement of Contracts defines good faith as, “honesty in the fact of the conduct.”  Most other areas of law use similar terminology and concepts.
    2. “and with care, candor, and loyalty.”  To a certain extent, these restate the need to act for another instead of oneself irrespective of the fiduciary’s situation.
  5. The definition for obligation contains a number of phrases that imply a moral component …
    1. “binding oneself … by a moral tie.”
    2. “A duty … to follow a code.”
    3. “A course of action … imposed by conscience.”
      1. (The American Heritage Dictionary, (c) 1985).

Because the fiduciary has more knowledge or skill in a particular area, he can also take advantage of his client.  The law therefore casts the relationship between the fiduciary and his client in moral terms.

In 2009, F. Hale Stewart, JD. LL.M. graduated magna cum laude from Thomas Jefferson School of Law’s LLM Program.  He is the author of three books: U.S. Captive Insurance LawCaptive Insurance in Plain English and The Lifetime Income Security Solution.  He also provides commentary to the Tax Analysts News Service, as well as economic analysis to TLRAnalytics and the Bonddad Blog.  He is also an investment adviser with Thompson Creek Wealth Advisors. 

 

 

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IRS Releases 2018 “Dirty Dozen” Tax Scam List

Posted by fhalestewart on March 22, 2018


This link will take you to a page that has a link to each of the IRS’ targeted transactions for 2018.

Here is a screen grab of the main IRS page:

IRS

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Court Overturns DOL Fiduciary Rule

Posted by fhalestewart on March 20, 2018


From the NY Times:

FR1

FR2

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The Arguments Against Asset Protection Trusts

Posted by fhalestewart on March 11, 2018


My colleague Jay Adkisson has written a summation of a new domestic asset protection trust case at Forbes.  Another colleague, Steve Oshins, has weighed in as well.   Mr. Adkisson argues this case is the final nail in the asset protection trust industry; Mr. Oshins argues for a less sweeping interpretation.

I counsel against these structures for a number of reasons, which are listed below in no order of importance.

1.) We have yet to see a grantor of a foreign or domestic asset protection trust (APT) win a case.  Planners who still like APTs correctly argue that these cases have a potent negative combination: blatant fraudulent transfers and unsavory characters — an admittedly very bad combination of facts.  Regardless, there are now a number of decisions where the APT failed when challenged.  Why?  That leads to point number two:

2.) APTs are bad public policy.  At the heart of any case involving an APT is a creditor enforcing a judgment.  A court upholding an APT will be opening the door to the idea that a debtor can “have his cake and eat it too;” he can be adjudicated to owe somebody money, have the financial capability to satisfy the debt, yet not do so — and, in fact, have a court say they don’t have to.  That’s a detrimental holding in a capitalist economy that depends on credit financing to fuel economic growth.  So far, courts don’t want to play.

3.) Point number 2 is derived from the Uniform Trust Code’s commentary to §505 which “… follows sound doctrine in providing that a settlor who is also a beneficiary may not use the trust as a shield against the settlor’s creditors.  The drafters of the UTC concluded that traditional doctrine reflects sound public policy.”  Several courts that have ruled against APTs have referenced this section ot the UTC.

4.) Are courts turning against asset protection planning?  It depends on where you do it, but in California they are:

As indicated by Defendant’s testimony that prior to filing his bankruptcy petition, he met with an asset protection firm, and one of his goals in doing so, was to potentially protect his assets from potential creditors . . . and while he changed his mind about using the asset protection firm, the evidence of his consideration, meeting and paying the asset protection firm supports a finding that Defendant intended to hinder or delay his nonpreferred creditors. 

One could argue that this decision should be taken with a  grain of salt because it’s from California — a valid point.  But, you can see the argument being effective regardless of the jurisdiction.  Imagine this line of questioning in a deposition or at trial:

Lawyer: And on this date, you saw John Smith, correct?

Defendant: Yes.

Lawyer: Doesn’t Mr. Smith hold himself out as an “asset protection lawyer?”

Defendant: Yes

Lawyer: why did you feel the need to consult with him?

There’s no answer to this question that can’t be spun in a negative light.

5.) Creditors have a number of well-defined and clearly articulated methods of obtaining a judgment.  Even Texas — my home and debtor’s haven — has a statutory path for creditors to obtain a judgment and satisfy it.  What usually keeps creditors from pursuing a claim is time (litigation is an inherently long and drawn-out process), money (they will probably have to pay at least a portion of their ongoing legal bills), and effort (litigation takes an inordinate amount of time away from running a business).  If a debt is small, it’s far easier to write it off as a business loss (see §165) and be done with it.  But an aggressive creditor will eventually get his money.

6.) Every time I hear someone extol the virtues of a spendthrift trust, I’m reminded of the following line from the movie, A Princess Bride: “That word doesn’t mean what you think it means.”  A spendthrift provision prevents the voluntary or involuntary alienation of the beneficiary’s interest (§502 of the Uniform Trust Code).  So, let’s assume that beneficiary John Smith owes $10,000 to Mr. X.  Mr. Smith cannot transfer his interest to Mr. X to satisfy the debt (For more, please see Nichols, Assignee v. Eaton Et Al, 91 U.S. 716, 23 L.Ed. 254 (1875) ).

But a spendthrift provision only applies to the trust; once the money is distributed, it can be attached any number of ways.  If it’s transferred to a pass-through entity such as a family limited partnership, a creditor can use a charging order to obtain his funds.  If the money is transferred to a bank account, the creditor can simply levy the bank account.  For a discussion of the procedures in my home state of Texas, please read “Post-Judgment Remedies: Garnishment, Execution, Turnover Proceedings, Receiverships Under the DTPA, and “Other Stuff” by Donna Brown.  Ultimately, this gets back to point number 5: an aggressive creditor is going to get his money eventually.

7.) Why would you choose to be shielded behind an APT’s spendthrift provision — which is a new legal concept (in legal years) — when you can use a pass-through entity like an LLC whose liability shield is very well-developed?  Brief history: the corporate limited liability shield came about sometime in the mid-1800s.  I believe New York was the first state to adopt the concept.  It caught on like wildfire and has now been praised as a key concept of a capitalist society (For an in-depth discussion, please see Stephen Presser’s book, Piercing the Corporate Veil).

Corporate limited liability is now a very well-developed legal concept developed over hundreds of cases.  This is great news for planners because we have exacting detail about what works and what doesn’t.  Why not use this area of law — that also has a number of favorable decisions — instead of APT law which so far has issued a large number of anti-APT decisions?

Again, these are presented in no order of importance.  But with yet another asset protection trust failing when challenged, I believe these points have a great deal of merit.

 

In 2009, F. Hale Stewart, JD. LL.M. graduated magna cum laude from Thomas Jefferson School of Law’s LLM Program.  He is the author of three books: U.S. Captive Insurance LawCaptive Insurance in Plain English and The Lifetime Income Security Solution.  He also provides commentary to the Tax Analysts News Service, as well as economic analysis to TLRAnalytics and the Bonddad Blog.  He is also an investment adviser with Thompson Creek Wealth Advisors. 

 

 

 

 

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Foreign Asset Protection Trusts; Let the Buyer Beware

Posted by fhalestewart on March 6, 2018


This is an article that I wrote for the TaxAnalysts Service a few months ago.157tn1817-Stewart

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Deferred Compensation, Part VII: Taxation of Benefits

Posted by fhalestewart on February 26, 2018


I often refer to reading the tax code as “hop, skip and jump” reading because one paragraph or section of the code will require the reader to reference several other sections in order to comprehend the meaning behind the first code section.    §402, which explains the taxability of deferred compensation, is a prime example of this approach.   Section (a) states:

Except as otherwise provided in this section, any amount actually distributed to any distributee by any employees’ trust described in section 401(a) which is exempt from tax under section 501(a) shall be taxable to the distributee, in the taxable year of the distributee in which distributed, under section 72 (relating to annuities)

Section 401(a) provides the relevant rules for a trust to obtain tax-exempt status.  By way of quick review, these include certain vesting timelines, minimum participation standards, and non-alienability requirements.  Section 501(a) is the tax code section that grants tax-exempt status to certain organizations as well as trusts specifically mentioned in §401(a).  And §72 contains the rules for annuities, which provides rules allowing the recipient to not be taxed on his return of principal.

In 2009, F. Hale Stewart, JD. LL.M. graduated magna cum laude from Thomas Jefferson School of Law’s LLM Program.  He is the author of three books: U.S. Captive Insurance LawCaptive Insurance in Plain English and The Lifetime Income Security Solution.  He also provides commentary to the Tax Analysts News Service, as well as economic analysis to TLRAnalytics and the Bonddad Blog.  He is also an investment adviser with Thompson Creek Wealth Advisors. 

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Deferred Compensation, Pt. VII: Vesting

Posted by fhalestewart on February 19, 2018


The online Merriam-Webster dictionary defines “vesting” as “the conveying to an employee of inalienable rights to money contributed by an employer to a pension fund or retirement plan especially in the event of termination of employment prior to the normal retirement age”

The purpose of the vesting rules is to make sure that the money the employee contributes to the plan is his, and can never be taken away.  Here, there are actually two rules — one for contributions made by the employee.  These rights are “non-forfeitable” — they cannot be taken away.

The second rules apply to the employer’s contributions.  The statute contains two approved vesting schedules.  The first is the “3-year rule.”  If an employee has at least three years of service, he has a non-forfeitable right to 100% of the employer’s contributions.   The second is a schedule based on the years of service:

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Due to its somewhat stricter nature, most this schedule is more attractive from the employer’s perspective.

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Deferred Compensation, Part VII: Profit-Sharing

Posted by fhalestewart on February 13, 2018


Adding a profit-sharing component to your 401(k) plan can increase your contributions while also motivating employees.  All of the previously-discussed rules apply: you can’t have a top-heavy plan, you can’t discriminate in favor of certain employees, etc…

Here’s a general description of what’s involved from the code:

A profit-sharing plan is a plan established and maintained by an employer to provide for the participation in his profits by his employees or their beneficiaries. The plan must provide a definite predetermined formula for allocating the contributions made to the plan among the participants and for distributing the funds accumulated under the plan after a fixed number of years, the attainment of a stated age, or upon the prior occurrence of some event such as layoff, illness, disability, retirement, death, or severance of employment. A formula for allocating the contributions among the participants is definite if, for example, it provides for an allocation in proportion to the basic compensation of each participant.

The best part is the company is not required to make contributions every year; they can also determine the total amount of their contribution in the first quarter of the year, after sitting down with their accountant and getting a good idea for the previous year’s performance.

The total contribution is limited to the lesser of 25% of compensation or $55,000 (for 2018; $54,000 for 2017, subject to cost-of-living adjustments for later years).

In 2009, F. Hale Stewart, JD. LL.M. graduated magna cum laude from Thomas Jefferson School of Law’s LLM Program.  He is the author of three books: U.S. Captive Insurance LawCaptive Insurance in Plain English and The Lifetime Income Security Solution.  He also provides commentary to the Tax Analysts News Service, as well as economic analysis to TLRAnalytics and the Bonddad Blog.  He is also an investment adviser with Thompson Creek Wealth Advisors. 

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Deferred Compensation, Part VI: Minimum Participation Standards

Posted by fhalestewart on February 6, 2018


In general, a plan cannot specifically require that employees work for the company at least 1 year or attain the minimum age of 21.  For large employers with several divisions, this can happen accidentally.  Here are two examples from the accompanying Treasury Regulations:

Example 1. Corporation A is divided into two divisions. In order to work in division 2 an employee must first have been employed in division 1 for 5 years. A plan provision which required division 2 employment for participation will be treated as a service requirement because such a provision has the effect of requiring 5 years of service.

Example 2. Plan B requires as a condition of participation that each employee have had a driver’s license for 15 years or more. This provision will be treated as an age requirement because such a provision has the effect of requiring an employee to attain a specified age.

Second, the plan cannot exclude an employee who attains a specific age.

Finally, there are minimum participation standards, which must comply with one of the following three rules.

1.) The plan must benefit at least 70% of the “non-highly compensated” employees

2.) The plan benefits—

(i) a percentage of employees who are not highly compensated employees which is at        least 70 percent of

(ii) the percentage of highly compensated employees benefiting under the plan.

3.) The company sets up its own classification system approved by the Secretary that benefits at least 70% of the non-highly compensated individuals.

In 2009, F. Hale Stewart, JD. LL.M. graduated magna cum laude from Thomas Jefferson School of Law’s LLM Program.  He is the author of three books: U.S. Captive Insurance LawCaptive Insurance in Plain English and The Lifetime Income Security Solution.  He also provides commentary to the Tax Analysts News Service, as well as economic analysis to TLRAnalytics and the Bonddad Blog.  He is also an investment adviser with Thompson Creek Wealth Advisors. 

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Deferred Compensation, Part V: Exemption Planning

Posted by fhalestewart on January 30, 2018


When a person declares bankruptcy, all of their property becomes part of the estate — the total assets that are used to pay existing creditors.  Here is the exact definition contained in the bankruptcy code:

(a) The commencement of a case under section 301, 302, or 303 of this title creates an estate. Such estate is comprised of all the following property, wherever located and by whomever held:

      (1) Except as provided in subsections (b) and (c)(2) of this section, all legal or equitable interests of the debtor in property as of the commencement of the case.
     (2) All interests of the debtor and the debtor’s spouse in community property as of the commencement of the case that is—

        (A) under the sole, equal, or joint management and control of the debtor; or
        (B) liable for an allowable claim against the debtor, or for both an allowable claim against the debtor and an allowable claim against the debtor’s spouse, to the extent that such interest is so liable.

This is very similar to the definition the gross estate in the estate tax code or gross income in §61 — it’s an exceedingly broad definition, designed to include every piece of property owned by the debtor.

The code, however, does allow several specific exemptions.  Under the federal statute, the debtor may choose federal or state law exemptions.  Under federal statute, retirement plans are excluded

§522(b)(1) Notwithstanding section 541 of this title, an individual debtor may exempt from property of the estate the property listed in either paragraph (2) or, in the alternative, paragraph (3) of this subsection.

…..

     (C) retirement funds to the extent that those funds are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986.

 Most states allow this exemption as well.

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Deferred Compensation, Part IV: Non-Discrimination

Posted by fhalestewart on January 24, 2018


According to §401(a)(4), a deferred compensation plan cannot discriminate in favor of highly compensated employees (HCEs), which is a person who either owned 5% of the business at any time during the year or made more than $80,000 (inflation-adjusted) during the preceding year.

The regulations provide two safe-harbor tests for defined contribution plans (which comprise the vast bulk of 401ks).  The first is a “unified allocation formula,” which requires all plan contributions to be allocated in one of three ways:

  • the same percentage of plan year compensation,
  • the same dollar amount, or
  • the same dollar amount for each uniform unit of service (not to exceed one week) performed by the employee during the plan year.

While the rules do allow a C-Suite executive to benefit from the plan based on their status within the company, it doesn’t allow them to benefit more than their status would allow.

The second method uses a “uniform points method” which are determined by summing “the employee’s points for age, service, and units of plan year compensation for the plan year.”

The main point that advisers should take from these rules is that the regulations contain very rigid, mechanical rules that prevent the top of the employee ranks from rigging the retirement plan to their benefit at the expense of the rank-and-file.

 

In 2009, F. Hale Stewart, JD. LL.M. graduated magna cum laude from Thomas Jefferson School of Law’s LLM Program.  He is the author of three books: U.S. Captive Insurance LawCaptive Insurance in Plain English and The Lifetime Income Security Solution.  He also provides commentary to the Tax Analysts News Service, as well as economic analysis to TLRAnalytics and the Bonddad Blog.  He is also an investment adviser with Thompson Creek Wealth Advisors. 

 

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Understanding the New Tax Law

Posted by fhalestewart on January 22, 2018


For those of you who are interested in the new tax law, please see this paper from Sam Donaldson, titled, Understanding the New Tax Law.

 

SSRN-id3096078

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Deferred Compensation, Pt. III: Non-Diversion of Trust Assets

Posted by fhalestewart on January 15, 2018


In order for a deferred compensation trust to the “qualified,” it must comply with all of §401s specific requirements.  Complete compliance creates tax-deferred status.  §501 states (emphasis mine), “An organization described in subsection (c) or (d) or section 401(a) shall be exempt from taxation under this subtitle unless such exemption is denied under section 502 or 503.”

One of 401’s most important requirements is that funds can only be used for the benefit of the employees.  §401(a)(2) states in relevant part,

“(2) if under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees and their beneficiaries under the trust, for any part of the corpus or income to be (within the taxable year or thereafter) used for, or diverted to, purposes other than for the exclusive benefit of his employees or their beneficiaries…”

To borrow language from contract law, this section contains a condition precedent, which is, “…  an event which must take place before a party to a contract must perform or do their part.”  The following hypothetical illustrates: Company A owes a significant amount of money and also has a large, well-funded retirement plan.  401(a)(2) prevents the company from raiding the retirement fund until every possible obligation of the trust is paid.

The Treasury Regulations add additional color:

(2) As used in section 401(a)(2), the phrase “if under the trust instrument it is impossible” means that the trust instrument must definitely and affirmatively make it impossible for the nonexempt diversion or use to occur, whether by operation or natural termination of the trust, by power of revocation or amendment, by the happening of a contingency, by collateral arrangement, or by any other means. Although it is not essential that the employer relinquish all power to modify or terminate the rights of certain employees covered by the trust, it must be impossible for the trust funds to be used or diverted for purposes other than for the exclusive benefit of his employees or their beneficiaries.

The phrasing is unambiguous, providing no legal “wiggle-room.”

In my introductory post on the topic, I specifically noted this code section uses trust language, placing a fiduciary duty and obligation on the sponsoring company.  This section furthers that observation.

In 2009, F. Hale Stewart, JD. LL.M. graduated magna cum laude from Thomas Jefferson School of Law’s LLM Program.  He is the author of three books: U.S. Captive Insurance LawCaptive Insurance in Plain English and The Lifetime Income Security Solution.  He also provides commentary to the Tax Analysts News Service, as well as economic analysis to TLRAnalytics and the Bonddad Blog.  He is also an investment adviser with Thompson Creek Wealth Advisors. 

 

 

 

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Deferred Compensation, Pt. 2: ERISA

Posted by fhalestewart on January 10, 2018


29 U.S.C. Chapter 18 contains ERISA — the Employee Retirement Income Security Act, which was passed in 1974.  Its purpose is to protect employee benefit plans from employer malfeasance, such as using employee plans to fund corporate operations or pay corporate debts.

Like the deferred compensation section of the tax code, ERISA itself its own legal specialty.   A complete discussion would be the subject of an entire course in law school.  For our purposes, the following points are salient:

1.) The statute gives federal courts jurisdiction over a large number of causes of action related to ERISA: (“Except for actions under subsection (a)(1)(B) of this section, the district courts of the United States shall have exclusive jurisdiction of civil actions under this subchapter brought by the Secretary or by a participant, beneficiary, fiduciary, or any person referred to in section 1021(f)(1) of this title. State courts of competent jurisdiction and district courts of the United States shall have concurrent jurisdiction of actions under paragraphs (1)(B) and (7) of subsection (a) of this section.).  This greatly increases the weight of potential litigation.

2.) The statute creates a complex compliance burden.  Here is a list of the sections contained in 29 U.S.C. Part I: Reporting and Disclosure:

ERISA Reporting

This is yet another reason why an entire industry exists to service deferred compensation plans.

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The First Revenue Bulletin of the Year Covers Several Important Issues

Posted by fhalestewart on January 7, 2018


IRB1

 

You can download it at this link:

irb18-02

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Deferred Compensation, Part 1: Introductory Concepts

Posted by fhalestewart on January 2, 2018


Certain sections of the tax code (such as §1031 like-kind exchanges and §482 transfer pricing) have become their own mini-specialty.  §401-§420 (deferred compensation) is another such area of the code.  In the following posts, I’ll go over the “high points” of these code provisions, starting with today’s general introduction to the topic.

The opening sentence of §401 contains a large amount of important information:

A trust created or organized in the United States and forming part of a stock bonus, pension, or profit-sharing plan of an employer for the exclusive benefit of his employees or their beneficiaries shall constitute a qualified trust under this section— 

Here are that sentence’s key provisions:

  • “A trust:” trust law has over 500 years of common law history, dating back to Britain. There is an entire restatement on trusts which has been adopted by all U.S. states.  The legal tome Scott on Trusts is the leading academic treatise on the topic.  For an attorney, the word trust immediately leads to the phrase “fiduciary obligation,” which is best explained by these two phrases: “Alleged good faith on the part of the fiduciary forgetful of his duty is not enough…he must not have “honesty alone, but the punctilio of an honor the most sensitive.”[1] This is a very long and well-developed common law doctrine that has no wiggle room for legal shenanigans.  This is the duty placed on the company forming the plan regarding plan assets.  It’s also a primary reason why most companies outsource this task to third parties.
  • “organized in the United States – self-explanatory, but it should be noted
  • “forming part of a stock bonus, pension or profit-sharing plan:” Like “trust,” these words are also terms of legal art, each connoting specific concepts under the law.
  • “for the exclusive benefit of his employees:” “exclusive” is the key word, which, according to the online Merriam-Webster dictionary, means, “excluding other from participation.” Management can only use trust assets for employees.  Put another way, management can’t use the funds for company purposes like funding ongoing operations or acquisitions.
  • “qualified trust” is a trust that complies with section 401(a) (Treas. Reg. 1-401(0)) which has 33 different sub-sections. Some are very broad while others are very situation specific.  Regardless, it’s a very technical section of the code, which further explains why compliance is usually outsourced to third parties.

In 2009, F. Hale Stewart, JD. LL.M. graduated magna cum laude from Thomas Jefferson School of Law’s LLM Program.  He is the author of three books: U.S. Captive Insurance LawCaptive Insurance in Plain English and The Lifetime Income Security Solution.  He also provides commentary to the Tax Analysts News Service, as well as economic analysis to TLRAnalytics and the Bonddad Blog.  He is also an investment adviser with Thompson Creek Wealth Advisors. 

 

 

 

 

 

[1] In Re Rothko, 43 N.Y. 2d 305 (I have reversed the order of the quotes for the sake of clarity).

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(Delayed) Merry Christmas and Happy New Year

Posted by fhalestewart on December 29, 2017


On behalf of Professor Byrnes and myself, we’d like to wish you a Merry Christmas and Happy New Year.  We’ll return next week.

 

 

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Deferred Compensation and Rabbi Trusts

Posted by fhalestewart on December 18, 2017


This will be the last post in our NQDC series.

Revenue Procedure 92-64 contains model language for a “Rabbit Trust,” which is a trust a company can establish to set-aside funds for a NQDC plan.  Companies routinely use these structures to allay employee concerns about actually receiving NQDC payments.

You can read the entire Procedure at this link on the Legal Bit Stream website.

In 2009, F. Hale Stewart, JD. LL.M. graduated magna cum laude from Thomas Jefferson School of Law’s LLM Program.  He is the author of three books: U.S. Captive Insurance LawCaptive Insurance in Plain English and The Lifetime Income Security Solution.  He also provides commentary to the Tax Analysts News Service, as well as economic analysis to TLRAnalytics and the Bonddad Blog.  He is also an investment adviser with Thompson Creek Wealth Advisors. 

 

 

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