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

Archive for March, 2011

Tax Court Calculates FMV of Policies Distributed from Terminated 419 Plan

Posted by William Byrnes on March 31, 2011


The Tax Court recently calculated the fair market value (“FMV”) of life insurance policies distributed by a terminated 419 welfare benefit plan. The FMV of the policies—which must be included in the taxpayers’ income—was determined by the court based on: (1) surrender charges, (2) conditions imposed on the taxpayers by the insurance company, and (3) “paid-up insurance coverage remaining on the policies as of the date of distribution.”  Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of policy valuation in Advisor’s Journal, see Tax Courts Holds Employee Taxable for Value of Life Insurance Owned by Welfare-Benefit Plan (CC 11-14).

For in-depth analysis of welfare benefits plans, see Advisor’s Main Library: B—Welfare Benefit Funds.

 

Posted in Retirement Planning | Tagged: , , , , , , , | Leave a Comment »

Advanced Markets Preview: Personal and Nonbusiness Deductions

Posted by William Byrnes on March 30, 2011


Why is this Topic Important to Wealth Managers? This topic presents discussion on the individual and nonbusiness deductions offered under the Internal Revenue Code.  Since April 15th is fast approaching, it is important to review common tax positions with regards to client planning.

In addition this blogticle presents a excerpted preview of new, updated material from Advanced Markets which will be available soon (see www.advisorfx.com).   Over the coming 9 months, the entire AUS service is being revised and will be rolling out monthly.  The updating will include many new areas and a sharper focus with practical explanations and client presentation aides for current areas.  We look forward to helping you secure your next sale.

An expense of an individual may be business, nonbusiness, or personal, depending upon which of the individual’s spheres of activity gave rise to the expense.  This Blogticle discusses personal and nonbusiness expenses generally.

Personal Expenses

Personal expenses are all expenses incurred by an individual that are not business or nonbusiness expenses. These would include, for example, food and clothing for the individual and his family, repairs on the family home, and premiums paid on the individual’s personal life insurance. Generally, no deduction is permitted for personal expenses.[1] By specific statutory provision, however, deductions are allowed for some personal expenses, such as certain personal taxes, a limited amount of charitable contributions, medical expenses, certain interest on a principal residence, and alimony.

Most deductible personal expenses are “itemized deductions” and thus may be taken only if the taxpayer chooses to itemize his deductions instead of claiming the standard deduction.

Nonbusiness Expenses

A nonbusiness expense is generally an investment expense incurred in connection with the production of income, other than a trade, business or profession. Expenses of this type would include, for example, fees for tax or investment advice, and the cost of a safe deposit box used to store taxable securities. The deduction of nonbusiness expenses is governed by Code section 212. Specifically, Section 212 allows a deduction for expenses incurred in connection with: (1) the production or collection of income; (2) the management, conservation, or maintenance of property held for production of income; or (3) the determination, collection or refund of any tax.

The deductibility of nonbusiness expenses may be limited or deferred if they arise in connection with a “passive activity” or are interest expenses. Very generally, a “passive activity” is any activity which involves the conduct of a trade or business in which the taxpayer does not “materially participate.” [2] A passive activity also includes any rental activity, without regard to whether the taxpayer materially participates in the activity. Special rules apply to rental real estate activities. Aggregate losses from “passive activities” may generally be deducted in a year only to the extent they do not exceed aggregate income from passive activities in that year; credits from passive activities may be taken only against tax liability allocated to passive activities. Disallowed losses and credits may be carried over to offset passive income in later years. [3]

Once other limitations have been applied to the deductibility of nonbusiness expenses (e.g., the passive loss rule), they are generally deductible only to the extent that the aggregate of these and other “miscellaneous itemized deductions” exceeds 2% of adjusted gross income. “Miscellaneous itemized deductions” are deductions from adjusted gross income other than deductions for (1) interest, (2) taxes, (3) non-business casualty losses and gambling losses, (4) charitable contributions (including charitable remainder interests), (5) medical and dental expenses, (6) impairment-related work expenses for handicapped employees, (7) estate taxes on income in respect of a decedent, (8) certain short sale expenses, (9) certain adjustments under the Code’s claim of right provisions, (10) unrecovered investment in an annuity contract, (11) amortizable bond premium, and (12) certain expenses of cooperative housing corporations. [4]

A nonbusiness expense must also be “ordinary and necessary” to be deductible. [5] It must, therefore, be reasonable in amount and must bear a reasonable and proximate relation to (a) the production or collection of taxable income, or (b) the management, conservation, or maintenance of property held for the production of income. [6]

Tomorrow’s blogticle will discuss important planning aspects of 2011.

We invite your opinions and comments by posting them below, or by calling the Panel of Experts

 

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1099 B2B Reporting To Be Repealed

Posted by William Byrnes on March 29, 2011


Why is this Topic Important to Wealth Managers? This discussion is focused on a hot topic in Washington and around the country.  The new 1099 reporting requirements that are expected to come into effect next year may be amended or removed all together. Wealth managers would be well served to be knowledgeable on the subject that not only affects clients and their businesses, but it also directly affects many wealth managers themselves who pay for goods and services as a trade or business. Thus, here at Advanced Markets we bring wealth managers in particular the most relevant and up-to-date information on the web.

Repeal of the health reform law’s business-to-business 1099 reporting requirement is a step closer, with the U.S. Senate passing an amendment on February 2 that would repeal the provision.  Praising passage of the Senate amendment, Senator Stabenow said, “Today we provided a common-sense solution for business owners so they can focus on creating jobs, not filling out paperwork for the IRS…. If left unchecked, 40 million small businesses would see their IRS 1099 paperwork increase 2000 percent.”

President Obama even praised the repeal efforts in his state of the union address, receiving a resounding round of applause.  Acknowledging that his health care reform law has its share of flaws, and offering to work with the Congress to correct those flaws, he said that “We can start right now by correcting a flaw in the legislation that has placed an unnecessary bookkeeping burden on small businesses.”  Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

The House of Representatives passed H.R. 4, the Small Business Paperwork Mandate Elimination Act of 2011 by majority vote (314-112, with 76 Democrats joining a unanimous House GOP).[1] The legislation, if passed by the Senate and signed into law by President Obama, would repeal an expansion currently scheduled to take effect in 2012 of information that businesses must report to the Internal Revenue Service on Form 1099.

Specifically, the new legislation would amend the Internal Revenue Code to repeal the expanded 1099 information reporting requirements on payments made to corporations, rental property expense payments, and payments for property and other gross proceeds.  The legislation would thus strike portions of section 6041 of the Internal Revenue Code which were added by the Patient Protection and Affordable Care Act of 2010 (PPA).

The PPA expanded tax information reporting requirements to require businesses to issue a Form 1099 for any payments to corporations (rather than just to individuals) and for any payments for property (rather than just for services or investment income) that exceed $600 per year per payee.  H.R. 4 would strike language requiring “amounts in consideration for property” and “gross proceeds” to be subject to 1099 reporting requirements under section 6041 of IRS Code in order to eliminate the expanded reporting requirements.  The bill would also repeal expanded information reporting requirements on rental property expense payments that are currently in effect.

According to the Joint Committee on Taxation, repealing these expanded 1099 information reporting requirements for rental property expense payments as well as certain payments of more than $600 will reduce taxes by approximately $24.7 billion over ten years. [2]

Section 6041 of the Internal Revenue Code outlines reporting requirements and generally requires information returns to be made by every person (payor) engaged in a trade or business that makes payments aggregating $600 or more in any taxable year to another person (payee) in the course of the payor’s trade or business.  The information returns must be filed with the Internal Revenue Service and corresponding statements must be sent to each payee.

Beginning in 2012, certain payments not previously subject to 1099 reporting requirements, including those made to corporations and those made for property, will become subject to the reporting requirements under the PPA.  The PPA and subsequent legislation expanded information reporting requirements of businesses for payments of $600 or more to any vendor and on rental property expense payments.  Some argue, these new requirements would likely impose a huge tax compliance burden on small businesses, forcing them to devote resources to tax filing instead of to business expansion and job creation.

 

For previous coverage of the Health Care Reform Act’s enhanced 1099 reporting requirement in Advisor’s Journal, see Health Care Reform Causes an Avalanche of 1099s (CC 10-84).

Please check back with Advisorfyi and Advisorfx for more timely information on 1099 reporting.

 

Posted in Tax Policy | Tagged: , , , , , , , | 1 Comment »

SEC Unprepared to Implement the Fiduciary Standard for Broker-Dealers

Posted by William Byrnes on March 28, 2011


Broker-dealers will be subject to a fiduciary standard of care no earlier than the second half of 2012, predicts Richard Ketchum, Chairman and CEO of the Financial Industry Regulatory Authority (“FINRA”).  Mr. Ketchum’s remarks come a week after SEC chairman Mary Schapiro said that the SEC has “a lot of work to do” before putting “pen to paper” and writing the fiduciary standard rules.

Causes of the delay were hinted at by a pair of reports issued by the SEC last month, one of which concluded that broker-dealers and registered investment advisers (“RIA”) should be subject to the same fiduciary standard of care. The other report provided recommendations for improving the examination of investment advisors, concluding that a Self-Regulatory Organization (“SRO”) should be appointed to conduct examinations of investment advisors. An SRO is a private organization that is granted some regulatory authority over a particular industry. SROs are typically funded by member user fees.  Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of the fiduciary standard in Advisor’s Journal, see SEC Fiduciary Standard Study Answers Few Questions (CC 11-25)Study Finds that Universal Fiduciary Standard Will Hurt Investors (CC 10-97) and What You Don’t Know Yet Might Hurt You: A Broker’s Duties under the Financial Reform Act (CC 10 40)

Your questions and comments are always welcome. Please post them below or call the Panel of Experts.

 

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Economy and Budget: Long-Term Outlook

Posted by William Byrnes on March 27, 2011


Why is this Topic Important to Wealth Managers?   A wealth manager should be able to present Advanced Market Intelligence on the long-term economic impact of government spending and its ability to raise revenues with clients.

The United States faces daunting economic and budgetary challenges. The economy has struggled to recover from the recent recession, which was triggered by a large decline in house prices and a financial crisis—events unlike anything this country has seen since the Great Depression.

For the federal government, the sharply lower revenues and elevated spending deriving from the financial turmoil and severe drop in economic activity—combined with the costs of various policies implemented in response to those conditions and an imbalance between revenues and spending that predated the recession—have caused budget deficits to surge in the past two years. The deficits of $1.4 trillion in 2009 and $1.3 trillion in 2010 are, when measured as a share of gross domestic product (GDP), the largest since 1945—representing 10.0 percent and  8.9 percent of the nation’s output, respectively. [1]

Also, the recovery in employment has been slowed not only by the moderate growth in output in the past year and a half but also by structural changes in the labor market, such as a mismatch between the requirements of available jobs and the skills of job seekers, that have hindered the employment of workers who have lost their job. Payroll employment, which declined by 7.3 million during the recent recession, gained a mere 70,000 jobs (or 0.06 percent), on net, between June 2009 and December 2010. [2]

However, under current law, CBO projects, budget deficits will drop markedly over the next few years—to $1.1 trillion in 2012, $704 billion in 2013, and $533 billion in 2014. Relative to the size of the economy, those deficits represent 7.0 percent of GDP in 2012, 4.3 percent in 2013, and 3.1 percent in 2014. From 2015 through 2021, the deficits in the baseline projections range from 2.9 percent to 3.4 percent of GDP. [3]

Nevertheless, the deficits that will accumulate under current law will push federal debt held by the public to significantly higher levels. Just two years ago, debt held by the public was less than $6 trillion, or about 40 percent of GDP; at the end of fiscal year 2010, such debt was roughly $9 trillion, or 62 percent of GDP, and by the end of 2021, it is projected to climb to $18 trillion, or 77 percent of GDP. [4] Read the analysis at AdvisorFYI

 

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2012 IRS Budget Revealed !!

Posted by William Byrnes on March 26, 2011


Why is this Topic Important to Wealth Managers?  Increasing the IRS staffing budget in certain departments may be indicative of increasing scrutiny of client’s information and tax returns.  Increasing government scrutiny may lead to increased compliance costs in time and fees.  Consequently, a wealth manager may want to address with client the need for increasing diligence in preparation of their affairs.  Thus, Advanced Market Intelligence presents a discussion on the Internal Revenue Services’ allocations for fiscal year 2012, and contrasts 2010 data and figures.

The fiscal year 2012 proposed budget allocates $14 billion to the Department of the Treasury; a 4 percent increase above the 2010 enacted level. [1] The increase over 2010 levels is attributed to costs associated with implementation of legislation and new investments in IRS tax compliance activities that are aimed to help reduce the deficit.  Of the $14 billion appropriated to the Treasury operations, over $13.28 billion is encumbered for the Internal Revenue Service.[2]

The Internal Revenue Service has allocated its appropriations to the tune of $2.345 billion for “Taxpayer Services”; $5. 96 billion for “Enforcement” of which over $5 billion is apportioned to “Exam and Collections”; “Operations and Support” represent $4.62 billion; and “Business Systems Modernization” together with “Health Insurance Tax Credit Administration” represent approximately $351 million. [3]

The main function of the Internal Revenue Service is to collect he revenue that funds the government and administer the nation’s tax laws. [4] The IRS collected $2.345 trillion in taxes (gross receipts before tax refunds) in 2010, or 93 percent of all federal government receipts.

Total resources to support the IRS activities for fiscal year 2012 are estimated to be around $13.626 billion, including $13.283 billion from direct appropriations, an estimated $138 million from reimbursable programs, and an estimated $204 million user fees.  The direct federal budget appropriation is $1,137,784,000, 9.37 percent, more than the fiscal year 2010 enacted level of $12,146,123,000. [5]

The 2012 budget provides funding to implement enacted legislation; handle new information reporting requirements; increase compliance by addressing offshore tax evasion; expand enforcement efforts on noncompliance among corporate and high-wealth taxpayers; and enforce return preparer compliance.

The IRS estimates new enforcement personnel will generate more than $1.3 billion in additional annual enforcement revenue once the new hires reach full potential in fiscal year 2014.

Even the Department of the Treasury notes, the tax law is complex and that even sophisticated taxpayers can make honest mistakes on their tax returns.  To this end, the IRS states that it remains committed to a balanced program of assisting taxpayers to both understand the tax law and remit the proper amount of tax.

In fiscal year 2010, revenue from all enforcement sources at the IRS reached $57.6 billion, 18 percent more than in 2009.  The significant increase was attributable in part to:  Read the analysis at AdvisorFYI

 

Posted in Tax Policy | Tagged: , , , , , , , | 1 Comment »

Firms Selling Private Placements Face Increased Scrutiny

Posted by William Byrnes on March 25, 2011


Firms Selling Private Placements Face Increased Scrutiny

If you’re selling Reg D private placements or non-traded REITs, the proverbial Huns are on the hill. These illiquid, private investments are the top two items on FINRA’s (“Financial Regulatory Authority Inc.”) list of enforcement priorities.  FINRA is particularly interested in whether firms selling the investments are complying with “suitability, supervision and advertising rules,” and is also looking at cases of fraud and the unregistered sale of the securities.

Medical Capital Holdings Inc. and Provident Royalties, LLC.—both of which offerings brought in hundreds of millions of dollars through private placements sold by broker-dealers—were given as examples of private placements done wrong. Both were charged with fraud in 2009. At least 12 broker-dealers who sold Provident Royalties to their customers are now defunct as a result of the millions of dollars in arbitration claims and lawsuits related to the offering.  Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of FINRA regulatory action in Advisor’s Journal, see Broker Bonus Arbitration Bottleneck Forces FINRA to Reconsider Arbitrator Qualification Standards (CC 11-08)SEC Approves FINRA Suitability and Know-Your-Customer Rules (CC 11-17), and New FINRA Rule Restricts Brokers’ Outside Business Activities (CC 10-110).

For in-depth analysis of the taxation of REITs, see Advisor’s Main Library: D—REITs and Limited Partnerships.

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The Perils of Not Re-Visiting a Client’s Plan—a $3MM Tax Bill

Posted by William Byrnes on March 24, 2011


In a recent case, the IRS denied an estate a fractional interest discount on the family ranch, resulting in a seven digit tax bill and the likely liquidation of the family homestead.  The father had numerous options for securing a valuation discount on, or excluding the value of, a significant tract of property from his gross estate, but hadn’t done any planning since 1965, resulting in total denial of a discount.  When he died in 2004, the property was worth $6,390,000.  Don’t let this be your client.

The dispute between the IRS and the father’s estate centered on whether the property’s value in the gross estate was: (1) the undiscounted value of a fee simple interest in the property or (2) the aggregated value of the children’s fractional interests in the property—valued separately with fractional interest discounts.  Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of valuation discounts in Advisor’s Journal, see IRS Rebuffed by Federal Court of Appeals in Valuation Discount Case (CC 11-21) and Valuation Discounts: Only for a Bona Fide Business (CC 10-60).

For in-depth analysis of valuation discounts, see Advisor’s Main Library: A—Family Limited Partnerships and Estate & Gift Tax Valuation Discounting.

 

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2012 Budget Talk: Capital Gains, Dividends, and 1099 Information Reporting

Posted by William Byrnes on March 23, 2011


Why is this Topic Important to Wealth Managers?  A producer should be able to present a perspective of the potential impact of current budget proposals upon investments that will be realized in the future.  Thus, Advanced Market Intelligence discusses certain features to the proposed federal budget that impact fiscal year 2012.

The President’s new budget proposal included many revenue raising measures.  However, below are two areas affecting the tax code that will actually increase the deficit, and also have a strong likelihood to have an impact on clients’ decisions made today.

Currently, the maximum rate of tax on the qualified dividends and net long-term capital gains of an individual is 15 percent. [1] In addition, any qualified dividends and capital gains that would otherwise be taxed at a 10- or 15-percent ordinary income tax rate are taxed at a zero percent rate.

The zero- and 15-percent rates for qualified dividends and capital gains are scheduled to expire for taxable years beginning after December 31, 2012. [2] In 2013, the maximum income tax rate on capital gains would increase to 20 percent (18 percent for assets purchased after December 31, 2000 and held longer than five years), while all dividends would be taxed at ordinary tax rates of up to 39.6 percent.

Taxing qualified dividends at the same low rate as capital gains for all taxpayers is said to reduce the tax bias against equity investment and promote a more efficient allocation of capital.  Eliminating the special 18-percent rate on gains from assets held for more than five years is thought to further simplify the tax code.  Read the analysis at AdvisorFYI

 

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National Underwriter Offers Tax Advisors Expert Analysis

Posted by William Byrnes on March 22, 2011


Tax and insurance advisors looking for answers on how the new Tax Relief Act of 2010 will impact their clients are finding them in The National Underwriter Company’s just-published Selected Provisions and Analysis of the Tax Relief Act of 2010.  The proprietary analysis is the only practitioners’ guide in Q&A format that answers the most critical questions asked by clients on insurance, estate and gift tax law changes.

Copies of the 64-page report are available for only $12.95 plus shipping and handling here.  Producers and their companies can also license use of their logos and contact information directly on the cover of the guide for a marketing and client-management tool.

National Underwriter’s wealth management experts and report authors, Professor William H. Byrnes, Esq., LL.M, CWM and Robert Bloink, Esq., LL.M., noted, “While most media attention has focused on the Act’s retention of existing tax rates on the highest-earning Americans, tax, insurance and investment advisors are finding that the most important changes, from their perspective, are likely to be found in insurance, estate and gift tax provisions that will drive client decisions on investment strategy and wealth management priorities in 2011 and beyond.”

Rick Kravitz, Vice President & Managing Director of Summit Business Media’s Reference Division, said, “This proprietary analysis – compiled by leading experts in the field – demonstrates National Underwriter’s commitment to bringing timely and critical updates to advisors and financial planners so that they can successfully build their practices and better serve their clients.”

Prof. Byrnes, a former Coopers & Lybrand associate director in international tax and now Dean of the wealth management graduate program at Thomas Jefferson School of Law, noted that the 64-page analysis has answers to more than 100 important questions in these areas:

  • Income Tax
  • Estate and Gift Tax
  • Generation Skipping Transfer Tax
  • Deduction for State and Local Sales Taxes
  • Alternative Minimum Tax
  • Tax Credits
  • Payroll Tax Holiday
  • Wage Credit for Employees Who Are Active Duty Members of the Military
  • Charitable Distributions from Retirement Accounts
  • Bonus Depreciation and Section 179 Expensing
  • Basis Reporting Requirements for Brokers and Mutual Funds
  • Regulated Investment Company Modernization Act of 2010
  • Health Care Act
  • Form 1099 Reporting Requirement for Businesses
  • American Jobs and Closing Tax Loopholes Act of 2010
  • Requirements for Tax Return Preparers

“This is the only guide available on the market today that gives financial planners and producers issue-specific, time-critical information in Q&A format that addresses their most important technical questions with content that can also be used directly in client presentations,” Prof. Byrnes added.  “The unique combination of The National Underwriter Company’s editorial staff and the resources and professional experience of the wealth management faculty at Thomas Jefferson School of Law provides assurance that these are answers that can be counted on.”

About The National Underwriter Company

For over 110 years, The National Underwriter Company has been the first in line with the targeted tax, insurance, and financial planning information you need to make critical business decisions.  With respected resources available in print, on CD, and online, National Underwriter remains at the forefront of the evolving insurance industry, delivering the thorough and easy-to-use resources you rely on for success.  National Underwriter is a Summit Business Media company.

About Summit Business Media

Summit Business Media is the leading B2B media and information company serving the insurance, investment advisory, professional services and mining investment markets through a variety of channels, including print, online and live events.  Summit provides breaking news and analysis, in-depth practice management strategies, business-building techniques and actionable data to the markets it serves. Through its Media and Reference Divisions, Summit publishes 16 magazines, 20 websites and 150 reference titles. Summit’s Event Division hosts a dozen conferences across the spectrum of markets the company services.  Summit’s Data Division is the leading data provider of financial, marketing and benefits information on corporations, insurance companies and life, benefits and property-casualty agents.

Summit employs nearly 400 employees in ten offices across the United States.  For more information, please visitsummitbusinessmedia.com.

 

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2012 Federal Budget Proposed – High Debt Continues

Posted by William Byrnes on March 22, 2011


Why is this Topic Important to Wealth Managers? Clients will often ask for your “take” on the annual federal budget.   It is important to show the client a command of the the facts and figures before addressing the political perspective of spending and revenue.  Any producer can “mime” someone else’s perspective.  Distinguish yourself with a command of the underlying numbers.  Thus, this week Advanced Market Intelligence presents the facts and figures of the proposed federal budget for fiscal year 2012.

The new 2012 Federal Budget was released by the President.  Below is a summary of the inflows and outflows concerning next year’s proposed budget (in billions of dollars).

Outlays:

Appropriated (“discretionary”) programs:   Security $ 884/Non-security 456; Subtotal—appropriated programs: 1,340

Mandatory programs: Social Security $ 761, Medicare 485, Medicaid 269, Troubled Asset Relief Program (TARP) 13, Other mandatory programs 612; Subtotal, mandatory programs 2,140, Net interest 242, Disaster costs 8

Total outlays 3,819

Receipts:

Individual income taxes $ 1,141, Corporation income taxes 329

Social insurance and retirement receipts: Social Security payroll taxes 659,Medicare payroll taxes 201, Unemployment insurance 57, Other retirement 8, Excise taxes 103, Estate and gift taxes 14, Customs duties 30, Deposits of earnings, Federal Reserve System 66, Other miscellaneous receipts 20

Total receipts 2,627

2012 Deficit $ 1,101

Here are some noted observations of the current budget:   Read the analysis at AdvisorFYI

 

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Advisors Hit with Another Round of SEC Reporting Rules

Posted by William Byrnes on March 21, 2011


Do small- to medium-sized advisors represent a threat to the systemic integrity of the worldwide financial system? Probably not, but you’d think so based on the flood of advisor regulations flowing out of Washington.

The Dodd-Frank compliance maze expanded again last week as the SEC commissioners voted unanimously to release proposed reporting requirements that will complicate the compliance landscape for many advisors. Although affected advisors are not among the largest advisors overseen by the SEC, they are nevertheless categorized by the Commission as large enough to represent a systemic threat warranting increased SEC attention.

And while the SEC has assured affected advisors that their proprietary trading strategies won’t become part of the public record, recent events like the Wikileaks private banking releases should spook advisors.  Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of recent SEC rulemaking activity in Advisor’s Journal, see SEC’s Plain English Requirement Equals Expensive Client Disclosures(CC 10-44) and SEC Approves FINRA Suitability and Know-Your-Customer Rules (CC 11-17).

 

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Highlights of the GAO Financial Audit: Bureau of the Public Debt’s Fiscal Year 2010

Posted by William Byrnes on March 20, 2011


Why is this Topic Important to Wealth Managers? Presents discussion on the national debt and national future financial outlook. A client wants to know what YOU think about Treasury Notes versus other types of government debt, even foreign government debt.  An understanding of the annual federal national deficit, and its impact on the federal national debt, will provide you a helpful starting point to educate your client, without providing investment advice.

We thought an introduction to the current economic condition would therefore be appropriate.  As of September 30, 2010, the federal debt managed by Bureau of the Public Debt totaled about $13,551 billion primarily for borrowings to fund the federal government’s operations.  A Government Accountability Office (GAO) Study recently showed the Federal Debt balances consisted of approximately (1) $9,023 billion as of September 30, 2010, of debt held by the public and (2) $4,528 billion as of September 30, 2010 of intragovernmental debt holdings. [1]

Debt held by the public primarily represents the amount the federal government has borrowed to finance cumulative cash deficits.  To finance a cash deficit, the federal government borrows from the public.  When a cash surplus occurs, the annual excess funds can then be used to reduce debt held by the public.  In other words, annual cash deficits or surpluses generally approximate the annual net change in the amount of federal government borrowing from the public.

Intragovernmental debt holdings represent balances of Treasury securities held by federal government accounts, primarily federal trust funds, that typically have an obligation to invest their excess annual receipts (including interest earnings) over disbursements in federal securities.

The federal debt has been audited since fiscal year 1997. Over this period, total federal debt has increased by 151 percent.  During the last 4 fiscal years, managing the federal debt has been a challenge, as evidenced by the growth of total federal debt by $5,058 billion, or 60 percent, from $8,493 billion as of September 30, 2006, to $13,551 billion as of September 30, 2010.

The increase to the federal debt became particularly acute with the onset of the recession in December 2007. Reduced federal revenues and federal government actions in response to both the financial market crisis and the economic downturn added significantly to the federal government’s borrowing needs.  And, due to the persistent effects of the recession, experts believe federal financing needs remain high.  As a result, the increases to total federal debt over the past three fiscal years represent the largest dollar increases over a three year period in history.  The largest annual dollar increase occurred in fiscal year 2009 when total federal debt increased by $1,887 billion.

During fiscal year 2010, total federal debt increased by $1,653 billion.  Of the fiscal year 2010 increase, about $1,471 billion was from the increase in debt held by the public and about $182 billion was from the increase in intragovernmental debt holdings.

During fiscal years 2008, 2009, and 2010, legislation was enacted to raise the statutory debt limit on five different occasions.  During this period, the statutory debt limit went from $9,815 billion to its current level of $14,294 billion, an increase of about 46 percent.  Read the analysis at AdvisorFYI

 

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Advisor/Trustee Ends Up Responsible for a Trust’s Tax Bill?

Posted by William Byrnes on March 19, 2011


You’d better think twice before agreeing to act as trustee for your clients’ trusts, since doing so can cost you far more than the goodwill and fees it generates.

We all know that, depending on the circumstances, a trust, its grantor, or its beneficiaries can be held responsible for tax liability stemming from trust income.

What about its trustee?

Although trustees are not usually personally responsible for a trust’s taxes, a trustee can be stuck with the tax bill if the trustee breaches his or her fiduciary duty to the beneficiaries. A U.S. District Court recently considered a trustee’s liability for GST taxes when the trust’s beneficiaries claimed that the trustee failed to keep them informed of their potential liability for taxes stemming from trust distributions.

The trustees’ mistake in this case could cost them over $1 million.  Read the full analysis by linking to AdvisorFX!

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Deductibility of Welfare Benefit Plan Contributions (Section 419)

Posted by William Byrnes on March 18, 2011


Company is an accrual basis fiscal year taxpayer.  Company pays severance benefits in its discretion on an ad hoc basis, and vacation benefits pursuant to its established policy.

Historically, Company has paid both severance and vacation pay from its general assets.  Due to a decline in the Market over the past few years, Company has paid significant severance and expects to continue to pay additional severance over the next few years.  Effective Jan 1, 2009 Company established Trust to pay this anticipated severance and vacation pay.  Trust intends to submit an application for recognition of exempt status in 2010.  On 1/1/2009 Company contributed over $1,000,000 to the Trust and deducted that amount on its tax return for 2009.  Company indicates that beginning in 2010, Company will make payments for vacation and severance and will seek reimbursement from the Trust.

Company computed the amount deducted based on the limitation set forth in the Code.

Company has not provided any information documenting any severance claims incurred in 2009 that it expects to pay in 2010.  Company indicates that because the Trust was established “to pay severance that they anticipate they will have to pay over the next few years …”, and because the amount deducted is within the limit set forth in the Code that the deduction is proper.  Read the analysis at AdvisorFYI

 

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Advanced Trusts and Company Law

Posted by William Byrnes on March 18, 2011


Dates:  Video-conference course starting March 28 ending 10 weeks later in late May

Medium – Wimba live lectured webcam video-conference and LexisNexis blackboard course-ware

Enrollment Contact: Associate Dean William H. Byrnes – wbyrnes@tjsl.edu

or call +1 (619) 961-4211

includes access to full online international tax library of databases such as IBFD, CCH, Checkpoint, RoyaltyStat, EdgarStat, LexisNexis, Westlaw, amongst many others.

Lead Professor: Dr. Daan Ribbens (see professors link)

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Bank Secrecy Act

Posted by William Byrnes on March 17, 2011


Dates:  Video-conference course starting March 28 ending 10 weeks later in late May

Medium – Wimba live lectured webcam video-conference and LexisNexis blackboard course-ware

Enrollment Contact: Associate Dean William H. Byrnes – wbyrnes@tjsl.edu

or call +1 (619) 961-4211

includes access to full online international tax library of databases such as IBFD, CCH, Checkpoint, RoyaltyStat, EdgarStat, LexisNexis, Westlaw, amongst many others.

Lead Professor: Dr. Robert J. Munro with guest instructor Joel DiCiccio (see professors link)

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Merrill Lynch Busted by SEC for Tailgating Client Trades

Posted by William Byrnes on March 16, 2011


Merrill Lynch has agreed to pay a $10 million penalty to the Securities and Exchange Commission (SEC) to settle charges that Merrill used information about customer trades to trade on its own behalf—in violation of its customers’ confidences.

According to the SEC, Merrill Lynch operated a proprietary trading desk—its “Equity Strategy Desk” (ESD)—from 2003 to 2005. The desk traded solely on the firm’s account and did not have any responsibility for customer orders.

The SEC says that, although Merrill represented to customers that their trading information would be kept on a need-to-know basis, the ESD had access to and used institutional customers’ information when executing trades on Merrill’s behalf.

The activity that resulted in the SEC investigation is known as “tailgating”—related to the illegal act of “front running.” Front running is the practice of executing proprietary trades using information about pending customer trades to the broker’s advantage. Tailgating is similar to front running, except that the broker executes its own trade after executing the related customer trades.

Read the full analysis at AdvisorFX – sign up for a no obligation free subscription to all the services including AUS, ASRS, the Journal, Presentation Aids, Soft Skills. amongst others.

 

Posted in Compliance, Wealth Management | Tagged: , , , , , , , | 1 Comment »

Financial Instruments

Posted by William Byrnes on March 16, 2011


Dates:  Video-conference course starting March 28 ending 10 weeks later in late May

Medium – Wimba live lectured webcam video-conference and LexisNexis blackboard course-ware

Enrollment Contact: Associate Dean William H. Byrnes – wbyrnes@tjsl.edu

or call +1 (619) 961-4211

includes access to full online international tax library of databases such as IBFD, CCH, Checkpoint, RoyaltyStat, EdgarStat, LexisNexis, Westlaw, amongst many others.

Lead Professor: Stephen Polak with guest instructor Joel DiCiccio (see professors link)

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AIG Marked as Central Player in the Financial Crisis Blame Game

Posted by William Byrnes on March 15, 2011


According the FCIC report, in the late 90s, AIG leveraged its superior credit rating—its “most valuable asset”—to branch out beyond standard insurance products and become a major over-the-counter derivatives dealer. Through its subsidiary AIG Financial Products, AIG eventually amassed a derivatives portfolio with $2.7 trillion in notional value.

A significant portion of AIG’s derivatives business was devoted to credit default swaps (CDS’s) that “insured” debt held by financial firms and institutional investors. A CDS is a contract under which the party writing the CDS agrees to reimburse the party purchasing protection if there is a default on the underlying debt. In exchange, the party purchasing protection makes a series of payments to the issuer of the CDS—essentially premium payments.

AIG’s credit protection business grew rapidly, swelling from $20 billion in 2002 to $211 billion in 2005 and $533 billion in 2007.

Although insurance policies and CDS’s are similar, crucial differences between the two played a critical role in the crisis. An insurance company is obligated to set aside reserves to balance against potential losses; but a credit default swap, not being an insurance policy, is not subject to a reserve requirement. As a result, AIG was not required to put up collateral when it issued hundreds of billions in CDS’s. What the company did do, however, was promise to post collateral if its credit rating was downgraded.

Read the entire analysis by linking to AdvisorFX !  Sing up for the no obligation free trial – with full access to Advanced Underwriting Service, the Presentation Aids, Soft Skill Tools, Calculators, and Daily Journal.

 

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Financial Crimes and Institutional Security

Posted by William Byrnes on March 15, 2011


Dates:  Video-conference course starting March 28 ending 10 weeks later in late May

Medium – Wimba live lectured webcam video-conference and LexisNexis blackboard course-ware

Enrollment Contact: Associate Dean William H. Byrnes – wbyrnes@tjsl.edu

or call +1 (619) 961-4211

includes access to full online international tax library of databases such as IBFD, CCH, Checkpoint, RoyaltyStat, EdgarStat, LexisNexis, Westlaw, amongst many others.

Approved for Certified Fraud Examiner (CFE) – Lead Professor: Stephen Polak (see professors link)

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Investment Trusts (or Not) Via Limited Liability Companies

Posted by William Byrnes on March 14, 2011


Is a state law trust that is established as an investment trust to hold interests in an LLC, which has the power to vary its investments, classified as an investment trust?

Example:

LLC is organized under the laws of State as a limited liability company and is treated as a partnership for federal tax purposes.  LLC will acquire, hold and manage a portfolio of investments.  The governing document of LLC permits the managers of LLC to sell assets in the portfolio and acquire new assets.

LLC will issue two classes of interests:  common interests and manager interests.  Holders of common interests and holders of manager interests have different rights to the income, deductions, credits, losses, and distributions of LLC.  Manager interests will be held by a select group of investors who are also responsible for managing LLC.  The common interests of LLC will be held by Trust.

Trust is organized under the laws of State as a trust.  The governing documents for Trust provide that Trust is only permitted to hold common interests in LLC.  Trust will issue trust certificates and each certificate will entitle the holder to all the income, gain, profit, deductions, credits, losses, and distributions associated with one common interest in LLC.  The governing documents for Trust indicate that Trust is a trust for federal tax purposes.

First, the Treasury Regulations provide that a “business entity” is an entity recognized for federal tax purposes that is not properly classified as a trust under or otherwise subject to special treatment under the Code. [1]

In addition, an arrangement will be treated as a trust if it can be shown that the purpose of the arrangement is to vest in trustees responsibility for the protection and conservation of property for beneficiaries who cannot share in the discharge of this responsibility and, therefore, are not associates in a joint enterprise for the conduct of business for profit. [2]

There are arrangements that are known as trusts because legal title to property is conveyed to trustees for the benefit of beneficiaries, but which are not classified as trusts for purposes of the Code because they are not simply arrangements to protect or conserve the property for the beneficiaries.   These trusts, which are often known as business or commercial trusts, generally are created by the beneficiaries simply as a device to carry on a profit making business which normally would have been carried on through business organizations that are classified as corporations or partnerships (business entities) under the Code. [3]

Moreover, an “investment” trust will not be classified as a trust if there is a power under the trust agreement to vary the investments of the certificate holders. [4] An investment trust with a single class of ownership interests, representing undivided beneficial interests in the assets of the trust, will be classified as a trust if there is no power to vary the investments of the certificate holders.

The essential nature of an arrangement, whatever its form, as shown by the objects attained and the manner of their attainment, is what controls the classification of the arrangement as a trust.[5] In determining the character of an arrangement, the managerial powers of all parties to an arrangement will be combined in order to arrive at the full amount of permitted managerial activity and its object. [6]

Going back to our example, to determine whether Trust is an investment trust for tax purposes, it is appropriate to consider the nature and purpose of Trust.  Trust is holding the interests in LLC for the purpose of providing investors with the benefits of the managed investments of LLC.  These investment activities would result in Trust failing to be classified as a trust if Trust were permitted to engage in those activities directly.  Because the nature and purpose of Trust under this arrangement is to vary the investments of the certificate holders, Trust is likely a business entity for federal tax purposes and not an investment trust.

Restated, a state law trust that is established as an investment trust to hold interests in an LLC partnership, that has the power to vary its investments, is generally not classified as a trust for federal tax purposes.

Tomorrow’s blogticle will discuss relevant topics to wealth managers in 2011.

We invite your opinions and comments by posting them below, or by calling the Panel of Experts.


[1] Treasury Regulations § 301.7701-2(a).

 

[2] Treasury Regulations § 301.7701-4(a).

[3] Treasury Regulations § 301.7701-4(b).

[4] Treasury Regulations §  301.7701-4(c); See also Comm’r v. North American Bond Trust, 122 F.2d 545 (2d Cir. 1941), cert. denied, 314 U.S. 701 (1942).

[5] Morrissey v. Comm’r, 296 U.S. 344 (1935).

[6] See Comm’r v. Chase Nat’l Bank, 122 F. 2d 540 (2d Cir. 1941).

 

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National Underwriter Offers Tax Advisors Expert Analysis

Posted by William Byrnes on March 14, 2011


Tax and insurance advisors looking for answers on how the new Tax Relief Act of 2010 will impact their clients are finding them in The National Underwriter Company’s just-published Selected Provisions and Analysis of the Tax Relief Act of 2010.  The proprietary analysis is the only practitioners’ guide in Q&A format that answers the most critical questions asked by clients on insurance, estate and gift tax law changes.

Copies of the 64-page book are available for only $12.95 plus shipping and handling here.  Producers and their companies can also license use of their logos and contact information directly on the cover of the guide for a marketing and client-management tool.

National Underwriter’s wealth management experts and report authors, Professor William H. Byrnes, Esq., LL.M, CWM and Robert Bloink, Esq., LL.M., noted, “While most media attention has focused on the Act’s retention of existing tax rates on the highest-earning Americans, tax, insurance and investment advisors are finding that the most important changes, from their perspective, are likely to be found in insurance, estate and gift tax provisions that will drive client decisions on investment strategy and wealth management priorities in 2011 and beyond.”

Rick Kravitz, Vice President & Managing Director of Summit Business Media’s Reference Division, said, “This proprietary analysis – compiled by leading experts in the field – demonstrates National Underwriter’s commitment to bringing timely and critical updates to advisors and financial planners so that they can successfully build their practices and better serve their clients.”

Prof. Byrnes, a former Coopers & Lybrand associate director in international tax and now Dean of the wealth management graduate program at Thomas Jefferson School of Law, noted that the 64-page analysis has answers to more than 100 important questions in these areas:

  • Income Tax
  • Estate and Gift Tax
  • Generation Skipping Transfer Tax
  • Deduction for State and Local Sales Taxes
  • Alternative Minimum Tax
  • Tax Credits
  • Payroll Tax Holiday
  • Wage Credit for Employees Who Are Active Duty Members of the Military
  • Charitable Distributions from Retirement Accounts
  • Bonus Depreciation and Section 179 Expensing
  • Basis Reporting Requirements for Brokers and Mutual Funds
  • Regulated Investment Company Modernization Act of 2010
  • Health Care Act
  • Form 1099 Reporting Requirement for Businesses
  • American Jobs and Closing Tax Loopholes Act of 2010
  • Requirements for Tax Return Preparers

“This is the only guide available on the market today that gives financial planners and producers issue-specific, time-critical information in Q&A format that addresses their most important technical questions with content that can also be used directly in client presentations,” Prof. Byrnes added.  “The unique combination of The National Underwriter Company’s editorial staff and the resources and professional experience of the wealth management faculty at Thomas Jefferson School of Law provides assurance that these are answers that can be counted on.”

About The National Underwriter Company

For over 110 years, The National Underwriter Company has been the first in line with the targeted tax, insurance, and financial planning information you need to make critical business decisions.  With respected resources available in print, on CD, and online, National Underwriter remains at the forefront of the evolving insurance industry, delivering the thorough and easy-to-use resources you rely on for success.  National Underwriter is a Summit Business Media company.

About Summit Business Media

Summit Business Media is the leading B2B media and information company serving the insurance, investment advisory, professional services and mining investment markets through a variety of channels, including print, online and live events.  Summit provides breaking news and analysis, in-depth practice management strategies, business-building techniques and actionable data to the markets it serves. Through its Media and Reference Divisions, Summit publishes 16 magazines, 20 websites and 150 reference titles. Summit’s Event Division hosts a dozen conferences across the spectrum of markets the company services.  Summit’s Data Division is the leading data provider of financial, marketing and benefits information on corporations, insurance companies and life, benefits and property-casualty agents.

Summit employs nearly 400 employees in ten offices across the United States.  For more information, please visitsummitbusinessmedia.com.

Posted in Taxation | Tagged: , , , , , , , | Leave a Comment »

European Union Taxation and Investment

Posted by William Byrnes on March 14, 2011


Dates:  Video-conference course starting March 28 ending 10 weeks later in late May

Medium – Wimba live lectured webcam video-conference and LexisNexis blackboard course-ware

Enrollment Contact: Associate Dean William H. Byrnes – wbyrnes@tjsl.edu

or call +1 (619) 961-4211

includes access to full online international tax library of databases such as IBFD, CCH, Checkpoint, RoyaltyStat, EdgarStat, LexisNexis, Westlaw, amongst many others.

Lead Professor Dr. Alfredo Garcia-Prats (University of Valencia, formerly IMF), Lecturers include Knut Olsen on EU Tax Risk Management – Head of Global Tax & Legal for a Nordic-based multinational corporation with responsibility for 80 countries of operation, overseeing over 100 subsidiaries.

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SEC Fiduciary Standard Study Answers Few Questions

Posted by William Byrnes on March 13, 2011


The SEC has finally released its anxiously awaited study of whether a fiduciary standard of care should be applied to broker-dealers; but, like the study on adviser examinations, the report leaves as many questions as it answers. The fiduciary standard study recommends that brokers be held to the same standard as register investment advisers (RIAs).  Although the study doesn’t provide details on how the switch to the fiduciary standard will be implemented, there are hints as to what brokers can expect.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of the fiduciary standard in Advisor’s Journal, see Study Finds that Universal Fiduciary Standard Will Hurt Investors (CC 10-97) and What You Don’t Know Yet Might Hurt You: A Broker’s Duties under the Financial Reform Act (CC 10 40).  Comments are welcome below.

 

Posted in Uncategorized | Tagged: , , , , , , , | 1 Comment »

Taxing Gaming Wins and Losses

Posted by William Byrnes on March 12, 2011


How does the average gambler determine wagering gains and losses for tax purposes?

Mrs. X is a casual gambler.   She uses the cash receipts and disbursements method of accounting and files her returns on a calendar year basis.  Mrs. X’s gaming practice is to commit only $100 to slot machine play on any visit to a casino.  She wagers until she loses the original $100 committed to gambling or until she stops gambling and “cashes out.”

Upon cashing out, there are three possibilities, that she have $100 (the basis of her wagers), less than $100 (a wagering loss), or more than $100 (a wagering gain).   She went to a casino to play the slot machines on ten separate occasions throughout the year.  On each visit to the casino, she exchanged $100 of cash for $100 in slot machine tokens and used the tokens to gamble.  On five occasions, the she lost her entire $100 in tokens before terminating play.  On the other five occasions, the she redeemed her remaining tokens for the following amounts of cash:  $20, $70, $150, $200 and $300.

Under the Internal Revenue Code, gross income means all income from whatever source derived, which has been determined to include wagering gains. [1]

The Code further allows a deduction for any loss sustained during the taxable year and not compensated for by insurance or otherwise. [2] In the case of losses from wagering transactions, losses are allowed only to the extent of gains from such transactions. [3]

In ordinary practice, a wagering “gain” means the amount won in excess of the amount bet (basis). [4] That is, the wagering gain is the total winnings less the amount of the wager.  The term wagering “loss” means the amount of the wager (basis) lost.

Generally, gamblers may not carry over excess wagering losses to offset wagering gains in another taxable year or offset non-wagering income. [5] Nor may casual gamblers net their gains and losses from play throughout the year and report only the net amount for the year. [6]

It is accepted that fluctuating wins and losses left in play are not accessions to wealth until the taxpayer redeems her tokens and can definitively calculate the amount above or below basis (the wager) realized. [7]

Under the facts presented above, Mrs. X purchased and subsequently lost $100 worth of tokens on five separate occasions.  As a result, the taxpayer sustained $500 of wagering losses.  She also sustained losses on two other occasions, when she redeemed tokens in an amount less than the $100 (basis) of tokens originally purchased.

Therefore, on the day the taxpayer redeemed $20 worth of tokens, the taxpayer incurred an $80 wagering loss.  On the day the taxpayer redeemed $70 worth of tokens, the taxpayer incurred a $30 wagering loss.  On three occasions, the taxpayer redeemed tokens in an amount greater than the $100 of tokens originally purchased.  The amount redeemed less the $100 basis of the wager constitutes a wagering gain. [8] On the day the taxpayer redeemed $150 worth of tokens, the taxpayer had a $50 wagering gain.  On the day the taxpayer redeemed $200 worth of tokens, the taxpayer had a $100 wagering gain.  And on the day the taxpayer redeemed $300 worth of tokens, the taxpayer had a $200 wagering gain.

For the year, the taxpayer had total wagering gains of $350 ($50 + $100 + $200) and total wagering losses of $610, ($500 from losing the entire basis of $100 on five occasions + $80 and $30 from two other occasions).  Mrs. X’s wagering losses exceeded her wagering gains for the taxable year by $260 ($610 – $350).  She must report the $350 of wagering gains as gross income under IRC § 61. However, under IRC §165(d), she may deduct only $350 of the $610 wagering losses.  In this case, the taxpayer may deduct only $350 of her $610 of wagering losses as an itemized deduction.   Generally, a casual gambler who takes the standard deduction rather than electing to itemize may not deduct any wagering losses. [9]


[1] IRC Section 61; Rev. Rul. 54-339; Umstead v. Commissioner, T.C. Memo. 1982-573, 44 TCM 1294, 1295 (1982).

 

[2] IRC Section 165(a).

[3] IRC Section 165(d); Treasury Regulations Section 1.165-10.

[4] See Rev. Rul. 83-103.

[5] Skeeles v.  United States, 118 Ct. Cl. 362 (1951), cert. denied, 341 U.S. 948 (1951).

[6] See United States v. Scholl, 166 F.3d 964 (9thCir. 1999).

[7] See Commissioner v. Glenshaw Glass  Co., 348 U.S. 426 (1955).

[8] See Rev. Rul. 83-130.

[9] See Rev. Rul. 54-339.

We invite your opinions and comments by posting them below, or by calling the Panel of Experts.

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SEC Waffles in Study on Improving RIA Oversight

Posted by William Byrnes on March 11, 2011


The SEC has finally released its Dodd-Frank mandated study on enhancing registered investment adviser (RIA) examinations, but the study is more a tale of SEC budgetary distress than a concrete plan to improve examinations. Although the study hints at the regulatory framework that is likely to emerge for RIAs in the coming months, it doesn’t conclude with a definitive solution to the problem. Although the study does not conclude with a specific plan for improving adviser examinations, the scope of the RIA examination problem and the funding problems revealed make it clear that change is coming for RIAs—change likely to be paid for by increased user fees.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

 

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Life Settlement Provider Accused of Falsifying Life Span Reports

Posted by William Byrnes on March 10, 2011


One of the U.S.’s oldest life settlement companies, publically traded Life Partners Holdings, Inc., is being investigated by the SEC for falsifying life span reports used to sell the company’s life settlement products.  Falsified life spans can leave investors on the hook for additional premiums over the insureds’ remaining years when insureds outlive the firm’s life-span estimates.

The question for Life Partners Holdings shareholders and customers is whether the Life Partners investigation will go the way of Mutual Benefits Corp, a life settlement company that sold fractional interests in life insurance policies. Mutual Benefits was the subject of a similar SEC investigation concerning falsified life expectancies that ultimately led to the company’s collapse.  Could Life Partners be next?

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

 

Posted in Insurance | Tagged: , , , , , , , | Leave a Comment »

Taxpayer Advocate Speaks Out on Tax Reform

Posted by William Byrnes on March 9, 2011


Last month the National Taxpayer Advocate Nina E. Olson released her annual report to Congress, identifying the need for tax reform as the number one priority in tax administration.  The report also examines challenges the IRS is facing in implementing the new health care law.  Below is a highlight of some points made in the report: [1]

Tax Reform

“There has been near universal agreement for years that the tax code is broken and needs to be fixed,” Olson said in releasing the report.  “Yet no broad-based attempt to reform the tax code has been made.  This report documents the burdens the tax code imposes on taxpayers and explores why many taxpayers may nevertheless feel wedded to key aspects of the current system, undermining efforts at reform.”

Analysis of IRS data shows that taxpayers and businesses spend 6.1 billion hours a year complying with tax-filing requirements.  “If tax compliance were an industry, it would be one of the largest in the United States,” the report says.  “To consume 6.1 billion hours, the ‘tax industry’ requires the equivalent of more than three million full-time workers.”

Read the analysis at AdvisorFYI

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LLC Taxation

Posted by William Byrnes on March 8, 2011


A Limited Liability Company (LLC) is a business structure allowed by state statute.  LLCs are popular because, similar to a corporation, owners have limited personal liability for the debts and actions of the LLC.  Other features of LLCs are more like a partnership, providing management flexibility and the benefit of pass-through taxation.

Owners of an LLC are called members.  Since most states do not restrict ownership, members may include individuals, corporations, other LLCs and foreign entities.  There is no maximum number of members.  Most states also permit “single member” LLCs, those having only one owner.

A few types of businesses generally cannot be LLCs, such as banks and insurance companies. Check your state’s requirements and the federal tax regulations for further information.  There are special rules for foreign LLCs.

Read the analysis at AdvisorFYI

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Transfer Pricing course begins March 28

Posted by William Byrnes on March 7, 2011


Dates:  Video-conference course starting March 28 ending 10 weeks later in late May

Medium – Wimba live lectured webcam video-conference and LexisNexis blackboard course-ware

Enrollment Contact: Associate Dean William H. Byrnes – wbyrnes@tjsl.edu

or call +1 (619) 961-4211

includes access to full online international tax library of databases such as IBFD, CCH, Checkpoint, RoyaltyStat, EdgarStat, LexisNexis, Westlaw, amongst many others.

Posted in Courses | Tagged: , , , , , | Leave a Comment »

Court Nixes Carrier’s 300% Premium Increase

Posted by William Byrnes on March 7, 2011


Although supervising the cost of insurance embedded in life insurance premiums has historically been the domain of state insurance commissioners, the U.S. District Court for the Central District of California has intervened in one recent case, ruling on January 19 that Conseco Life Insurance Co. cannot increase the premiums it charges 50,000 of its existing policyholders.

The premium increase was part of a plan by Conseco to reduce its long-term losses. Rather than post reserves, Conseco looked for a way to reduce its future liabilities by $173 million. They targeted two blocks of universal life policies that had lower than expected lapse rates, using a pricing formula that would explode the cost of insurance charged in the policies’ 21st year after issuance. Customers who’d held the affected policies longest would have seen their premiums increase in 2010 or 2011.  Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of another carrier lawsuit in Advisor’s Journal, see Carriers Targeted by Suit Over Losses on Madoff Investments (CC 11-06).

For in-depth analysis of the income taxation of life insurance, see Advisor’s Main Library: A—Definition of “Life Insurance” For Income Tax Purposes.

Posted in Insurance | Tagged: , , , , , , , | Leave a Comment »

IRS Rebuffed by Federal Court of Appeals in Valuation Discount Case

Posted by William Byrnes on March 6, 2011


Valuation discounts will always be a disputed issue between taxpayers and the IRS, but as illustrated by the recently published Ninth Circuit Court of Appeals case, a properly timed gift can still qualify for a discount.  The parents contributed cash, securities, and real property to an LLC and then transferred LLC interests to a trust (“the children’s trust”) naming their children as beneficiaries.

The IRS rejected the valuation discount, claiming that the parents did not make a gift of the LLC interests to the trusts as they claimed, but instead made an indirect gift of the assets owned by the LLC.  The IRS also argued that, even if the LLC were funded prior to the gifting of the LLC interests to the children, the transaction’s two steps—transfer of assets to the LLC and the gift of the LLC interest to the children’s trust—were really a single transaction, an indirect gift of the assets, under the step transaction doctrine.   Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

Posted in Estate Tax | Tagged: , , , , , , , | Leave a Comment »

Why is Washington Calling for Corporate Tax Reform?

Posted by William Byrnes on March 5, 2011


President Obama recently targeted corporate tax rates in his State of the Union address.  “It makes no sense, and it has to change”. “Get rid of the loopholes. Level the playing field. And use the savings to lower the corporate tax rate for the first time in 25 years — without adding to our deficit. It can be done.”

Here’s why some politicians in Washington are calling for reform:

Although America has one of the highest maximum corporate tax rates throughout industrialized nations, many large corporations pay only a fraction of the maximum rate.  In a study by a New York University Professor, the data shows that a great number of public companies are paying around half, or even less, than the maximum corporate rate.

Read the analysis at AdvisorFYI

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Study Exposes Impact of Health Care Act’s Employer Penalties

Posted by William Byrnes on March 4, 2011


The Congressional Research Service last week released a publication describing the employer healthcare mandate and penalties for large employers under the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010.  Although penalties under the Health Care Act will not be applicable until 2014, the Act brings about a sea of change in the employer’ role in employee health insurance that requires significant present preparation.

Contrary to popular miscomprehensions about the Act, it does not mandate that employers provide their employees with health insurance; however, the Act does incentivize large employers to do so by penalizing them if their employees are not covered to a minimum level by employer-provided health insurance.  Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

 

Posted in Uncategorized | Tagged: , , , , , , , | Leave a Comment »

LLC Series and Cell Companies

Posted by William Byrnes on March 3, 2011


Late last year the IRS published proposed regulations regarding the classification for Federal tax purposes a domestic series limited liability company (LLC), a domestic cell company, or a foreign series or cell that conducts an insurance business.

A number of States, such as Delaware, have enacted statutes providing for the creation of entities that may establish series, including limited liability companies (series LLCs).  In general, most series LLC statutes provide that a limited liability company may establish separate series.

Although the series LLC generally are not treated as separate entities for State law purposes, the treatment of rights and obligations is similar to separate entities, creating in essence “associated members”.  Members’ association with one or more particular series is comparable to direct ownership by the members in such series, in that their rights, duties, and powers with respect to the series are direct and specifically identified.   If the conditions enumerated in the relevant statute are satisfied, the debts, liabilities, and obligations of one series generally are enforceable only against the assets of that series and not against assets of other series or of the series LLC.

Read the analysis at AdvisorFYI

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Wikileaks To Release Details of Secret Swiss Accounts

Posted by William Byrnes on March 1, 2011


Wikileaks is set to release confidential Swiss banking documents, and although the scope of information included in the documents isn’t yet clear, the release could pave the way for a new IRS surge against tax evaders.  Similar disclosures by bank insiders were at the heart of the Justice Department’s UBS investigation.   This most recent leak came from a former senior private banker and chief operating officer of Julius Baer’s Caribbean operation.   He’s currently on trial in Switzerland for allegedly leaking client documents in 2005.

… the statute of limitations for criminal tax offenses is generally three years, but there are a number of exceptions that extend the statute to six years, including “willfully attempting to evade or defeat any tax.” Leaked documents from prior to 2002 would reveal activities that would generally fall outside the six-year statute of limitations; however, the six year statute only begins to run on the day the last affirmative act is committed by the defendant, so criminal prosecution of accountholders revealed by the leak may still be viable.  Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of the IRS’s offshore enforcement efforts in Advisor’s Journal, see Offshore’s Limited Shelf Life (CC 10-47)IRS Proposed FATCA Guidance Expands Offshore Compliance Initiatives (CC 10-52), and IRS Planning New Voluntary Disclosure Program for Offshore Assets (CC 10-118).

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