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

Archive for August, 2013

the Emergence of the Company Limited by Guarantee in Company Law

Posted by William Byrnes on August 29, 2013

The full article may be downloaded at > William Byrnes’ academic SSRN page <

The origin of the company limited by guarantee is nearly impossible to pinpoint.  While some experts believe that this type of business form sprang into being overnight, it is more likely that the company limited by guarantee slowly developed over centuries of time.  The origins of the company limited by guarantee have a fuzzy existence, which is likely attributable to the notion that this business form is comprised of bits and pieces of other business forms that existed in early English history.

The most plausible origin of the company limited by guarantee stems from fire insurance, which came into existence after the Great London Fire of 1666.  An excerpt from an eyewitness’s diary describes the tragic fire: “I saw a fire as one entire arch of fire above a mile long: it made me weep to see it.  The churches, houses are all on fire and flaming at once, and a horrid noise the flames made and the cracking of the houses.”[1]  For this type of tragedy to occur at a time when England businesses and communities were beginning to flourish was a great devastation of utmost significance.  The Great London Fire may have been the catalyst that drove individuals to find better ways of insuring themselves in the future, should another similar tragedy occur in the future.  Individuals had to protect their future economic interests, and the emergence of a company that allowed individuals the ability to conduct business as needed while still providing them with the limited liability necessary to protect against future damages may have been the foundation of the company limited by guarantee.

In order to understand the modern day characteristics of the company limited by guarantee, the characteristics of its members, the relations of its members to the company and the relations to each other, it is necessary to first understand the historical origin of the United Kingdom (“UK”) business organization of the company.  This article will begin by studying the history of the company limited by guarantee by analyzing the following types of businesses: (1) partnerships; (2) trusts; (3) charitable trusts; (4) assurance companies; (5) joint stock companies; and (6) investment companies.

The second part of this article focuses on explaining and examining the company limited by guarantee, including the evolution of the English Company from the Chancery partnership and trust, to the joint stock company’s statutory recognition and devolvement from the partnership.  This section will also analyze the evolution and statutory recognition of the company limited by guarantee, and generally distinguish its characteristics from the company limited by shares.

The third part of this article includes an in-depth statutory comparison of the modern day (1) company limited by shares; and (2) company limited by guarantee.

Although it is likely that the main foundation of the company limited by guarantee stems from fire insurance, the origin of other historic business types must first be discussed in order to envision the larger picture – including all of the major business forms that existed in early English history – in order to pinpoint the exact origins of the modern day company limited by guarantee.

[1] Samuel Pepys, Diary 390 (George Bell & Sons 1893).

The full article may be downloaded at > William Byrnes’ academic SSRN page <

Posted in Insurance, Tax Exempt Orgs, Wealth Management | Tagged: , , , , , | 2 Comments »

A Review of the Development of an Internet Delivered LL.M Program in the United States

Posted by William Byrnes on August 27, 2013

This entire article may be downloaded at > William Byrnes’ SSRN academic page <

This article reviews the development of the first Internet delivered LL.M program (i.e. LL.M. of International Tax and Offshore Financial Centers, the ‘Program’) in the United States.

The paper comprises four sections: In Part 1 the economics reasons for, and logistics considerations of, the Internet delivered Program are addressed. Part 2 reviews the pedagogical approach to legal education employed in the United States, criticisms thereof, and finally examines an emerging pedagogical trend in the United Kingdom. Part 3 reviews the teaching tools employed in the Program International Tax and Offshore Financial Centers, and Part 4 reviews the practical aspects of developing the Program, obtaining ABA acquiescence, and reviews the Internet delivered law courses that came before it. Finally, the article concludes with some personal observations.

In Part 1 the economics reasons for, and logistics considerations of, the Internet delivered Program are addressed.

Part 2 reviews the pedagogical approach to legal education employed in the United States, criticisms thereof, and finally examines an emerging pedagogical trend in the United Kingdom. In particular, this part concludes that the grounding of a LL.M (Masters) level legal education program exclusively using the Socratic method (case study) roots of traditional Juris Doctorate (graduate) legal education may neither meet the goals, nor produce the skills sought by this Program. By example, some legal education writers have negatively critiqued the primary use of the Socratic method in even graduate legal education’s pedagogy. The scope of the negative critiques are presented from the perspective of economic efficiency over educational quality, as well as the perspective of professional development, and also from the perspective of a feministic approach.  These critiques are followed by a review of suggested alternatives. This part ends with an examination of the emerging United Kingdom literature supporting a pedagogy based upon ‘student-centered learning’.

Part 3 reviews the teaching tools employed in the International Tax Program. Part 4 reviews the practical aspects of developing the Program, obtaining ABA acquiescence, and it reviews the Internet delivered law courses that came before it. Finally, the article concludes with some personal observations.

Keywords: LL.M Program, Legal Education in the US, Legal Education in the UK, Internet Delivered Law Courses, C&IT in Legal Education, CAL, CBL, Socratic Teaching Method, Alternatives to Socratic Teaching.

This entire article may be downloaded at > William Byrnes’ SSRN academic page <

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Posted by William Byrnes on August 27, 2013

For the period from the opening of the FATCA registration website through December 31, 2013, a financial institution (FI) will be able to access its online account to modify or add registration information.

FIs can use the remainder of 2013 to become familiar with the FATCA registration website, to input preliminary information, and to refine that information.  On or after January 1, 2014, each FI will be expected to finalize its registration information by logging into its online account on the FATCA registration website, making any necessary additional changes, and submitting the information as final.

As registrations are finalized and approved in 2014, registering FIs will receive a notice of registration acceptance and will be issued a global intermediary identification number (GIIN).

The IRS will electronically post the first IRS Foreign Financial Institution (FFI) List by June 2, 2014, and will update the list on a monthly basis thereafter.  To ensure inclusion in the June 2014 IRS FFI List, an FI will need to finalize its registration by April 25, 2014.

Below find a link to IRS instructions, user guide and video materials to assist you and your financial institution with FATCA registration:

FATCA Registration Overview (PDF)
FATCA Registration Online User Guide (PDF)
Tips for Logging into the FATCA Registration System
Instructions for Form 8957 (PDF)
Global Intermediary Identification Number (GIIN) Composition (PDF)

“How-to” videos to assist financial institutions with FATCA registration:

Creating a FATCA account for online registration
Logging into a FATCA Account
Recovering a FATCA ID or resetting a FATCA Access Code
Registration System Common Features and Navigation


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Second Edition of Lexis’ International Withholding Tax Treaty Guide released

Posted by William Byrnes on August 26, 2013

Associate Dean William Byrnes is also pleased to announce the publication of International Withholding Tax Treaty Guide, Second Edition by LexisNexis.

The second edition of International Withholding Tax Treaty Guide, authored by Professor William H. Byrnes and Dr. Robert J. Munro, includes new binders with new chapter structures of completely rewritten tax information and analysis. The second edition of Foreign Tax & Trade Briefs includes a new structure for all 110 country chapters to reflect the evolution of national tax systems since 1948. The International Withholding Tax Treaty Guide has been expanded to include many new countries to match the robust list of Foreign Tax & Trade Briefs, and its footnote numbering has been amended for brevity and modern coherence.

Moreover, International Withholding Tax Treaty Guide subscribers will receive new chapters of analysis and planning based on the OECD Model DTA articles and major trading country jurisprudence that are most relevant to corporate tax counsel, addressing topics such as capital gains, dividends, interest, rents, leasing income, royalties, and permanent establishment, as well as developing topics such as new standards of information exchange. Corporate counsel may combine these publications with the LexisNexis Matthew Bender publication Tax Havens of the World to form a complete international tax planning and risk management library.

Associate Dean William Byrnes said “The Second Edition completes my re-write process of this book to re-structure the citation architecture for a modern approach to tax treaty analysis,”  Over the next two years I will author an in-depth, comparative analysis of tax treaty articles, to provide practitioners and arbitrators a go-to treatise for global corporate planning.”

William Byrnes continued “In 1974, Matthew Bender added a third binder to Foreign Tax & Trade Briefs, the International Withholding Tax Treaty Guide, to specifically address the important role of tax treaties in tax risk management that had developed in the sixties. By 1975, nearly one thousand tax treaties had been signed between countries based on the OECD’s Model with an additional 200 treaties in force based on the League of Nations Models. Moreover, many (former) territories had become independent, developing countries with the ability to establish their own tax treaties. There are now more than 3,200 tax treaties, of which 2,900 are signed and in effect with the remaining 300 yet to become effective by official legislative approval.”

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2 New Tax Facts Books Released

Posted by William Byrnes on August 23, 2013

National Underwriters published 2014 editions of Tax Facts books authored by William Byrnes and Robert Bloink of the graduate tax program.

2014 Tax Facts on Investments

2014 Tax Facts on Insurance & Employee Benefits

“We have included a new section on cross border employment and estate tax issues, captive insurance and alternative risk transfer, reverse mortgages, DOMA, as well as the previously expanding sections on ETFs and on precious metals & collectibles,” William Byrnes said.  “Moreover, we hope to soon announce the newest title of Tax Facts addressing entrepreneurs and their small business tax issues.” 

“Tax Facts Books and the Tax Facts Online portal have built strong following of many thousand of financial planning professionals.  I think financial planning professionals relate to National Underwriter’s approach of contextualizing client problems in a Question – Answer format.”

Both publications are now available as e-books, as an alternative or in combination with print.

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The Development of the Law of Charity and Charitable Practices

Posted by William Byrnes on August 22, 2013

The entire article may be downloaded at > William Byrnes’ SSRN academic page <

This article describes the ancient legal practices, codified in Biblical law and later rabbinical commentary, to protect the needy. The ancient Hebrews were the first civilization to establish a charitable framework for the caretaking of the populace. The Hebrews developed a complex and comprehensive system of charity to protect the needy and vulnerable. These anti-poverty measures – including regulation of agriculture, loans, working conditions, and customs for sharing at feasts – were a significant development in the jurisprudence of charity.

The first half begins with a brief history of ancient civilization, providing context for the development of charity by exploring the living conditions of the poor. The second half concludes with a searching analysis of the rabbinic jurisprudence that established the jurisprudence of charity. This ancient jurisprudence is the root of the American modern philanthropic idea of charitable giving exemplified by modern equivalent provisions in the United States Tax Code. However, the author normatively concludes that American law has in recent times deviated from these practices to the detriment of modern charitable jurisprudence. A return to the wisdom of ancient jurisprudence will improve the effectiveness of modern charity and philanthropy.

The entire article may be downloaded at > William Byrnes’ SSRN academic page <

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FATCA Registration Portal Finally Opens

Posted by William Byrnes on August 21, 2013

Update for subscribers of LexisNexis® Guide to FATCA Compliance[1]

FATCA requires that FFIs, through a responsible officer (a.k.a. “FATCA compliance officer”), make regular certifications to the IRS via the FATCA Portal, as well as annually disclose taxpayer and account information for U.S. persons, unless an intergovernmental agreement allows for indirect reporting to the IRS via a foreign government.   On Monday, August 19 the IRS opened its new online FATCA registration system for financial institutions that need to register for compliance with the Foreign Account Tax Compliance Act.[2]  This critical FATCA milestone was supposed to open July 15; however only on July 12 the IRS issued a postponement, as well as a push back of all corresponding impacted milestones and deadlines.

The full text of this article is available on the LexisNexis FATCA http://www.lexisnexis.com/legalnewsroom/tax-law/b/fatcacentral/archive/2013/08/21/the-race-to-register-with-the-irs-online-fatca-system-has-begun.aspx

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U.S. History of Non-Profit Tax Exemption and Deduction for Donations

Posted by William Byrnes on August 20, 2013

“. . . [w]hen the Finance Committee began public hearings on the Tax Reform Act of 1969 I referred to the bill as ‘368 pages of bewildering complexity.’  It is now 585 pages  . . . . Much of this complexity stems from the many sophisticated ways wealthy individuals – using the best advice that money can buy – have found ways to shift their income from high tax brackets to low ones, and in many instances to make themselves completely tax free.  It takes complicated amendments to end complicated devices.” Senator Russell Long, Chairman, Finance Committee

Download this entire article at > William Byrnes’ full-lenth articles on SSRN <

From the turn of the twentieth century, Congress and the states have uniformly granted tax exemption to charitable foundations, and shortly thereafter tax deductions for charitable donations.  But an examination of state and federal debates and corresponding government reports, from the War of Independence to the 1969 private foundation reforms, clearly shows that politically, America has been a house divided on the issue of the charitable foundation tax exemption.  By example, in 1863, the Treasury Department issued a ruling that exempted charitable institutions from the federal income tax but the following year, Congress rejected charitable tax exemption legislation.  However thirty years later, precisely as feared by its 1864 critics, the 1894 charitable tax exemption’s enactment carried on its coat tails a host of non-charitable associations, such as mutual savings banks, mutual insurance associations, and building and loan associations.

Yet, the political debate regarding tax exemption for the non-charitable associations did not nearly rise to the level expended upon that for philanthropic, private foundations established by industrialists for charitable purposes in the early part of the century.  But the twentieth century debate upon the foundation’s charitable exemption little changed from that posited between the 1850s and 1870s by Presidents James Madison and Ulysses Grant, political commentator James Parton and Dr. Charles Eliot, President of Harvard.  The private foundation tax exemption evoked a populist fury, leading to numerous, contentious, investigatory foundation reports from that of 1916 Commission of Industrial Relations, 1954 Reece Committee, 1960 Patman reports, and eventually the testimony and committee reports for the 1969 tax reform.  These reports uniformly alleged widespread abuse of, and by, private foundations, including tax avoidance, and economic and public policy control of the nation.  The private foundation sector sought refuge in the 1952 Cox Committee, 1965 Treasury Report, and 1970 Petersen Commission, which uncovered insignificant abuse, concluded strong public benefit, though recommending modest regulation.

During the charitable exemption debates from 1915 to 1969, Congress initiated and intermittently increased the charitable income tax deduction while scaling back the extent of exemption for both private and public foundations to the nineteenth century norms.  At first, the private foundation’s lack of differentiation from general public charities protected their insubstantially regulated exemption.  But in 1943, contemplating eliminating the charitable exemption, Congress rather drove a wedge between private and public charities.  This wedge allowed the private foundation’s critics to enact a variety of discriminatory rules, such as limiting its charitable deduction from that of public charities, and eventually snowballed to become a significant portion of the 1969 tax reform’s 585 pages.

This article studies this American political debate on the charitable tax exemption from 1864 to 1969, in particular, the debate regarding philanthropic, private foundations.  The article’s premise is that the debate’s core has little evolved since that between the 1850s and 1870s. To create perspective, a short brief of the modern economic significance of the foundation sector follows.  Thereafter, the article begins with a review of the pre- and post-colonial attitudes toward charitable institutions leading up to the 1800s debates, illustrating the incongruity of American policy regarding whether and to what extent to grant charities tax exemption.  The 1800s state debates are referenced and correlated to parts of the 1900s federal debate to show the similarity if not sameness of the arguments against and justifications for exemption.  The twentieth century legislative examination primarily focuses upon the regulatory evolution for foundations.  Finally, the article concludes with a brief discussion of the 1969 tax reform’s changes to the foundation rules and the significant twentieth century legislation regulating both public and private foundations.

Download this entire article at > William Byrnes’ full-lenth articles on SSRN <

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video interview with William Byrnes

Posted by William Byrnes on August 16, 2013

When William Byrnes returned to the United States in 1998 to establish the International Finance and Taxation program leveraging online communication technologies, both international tax programs and distance learning programs were in their infancy. Through engaging a renown and talented faculty of industry professionals, and the support of an immensely engaged student body from professional and financial service firms, the international tax program blossomed over the past 15 years to become a cutting edge industry leader that it is today.

Just recently, National Law Journal wrote “Perhaps no one in legal academia has more experience with online master’s degrees than William Byrnes, Associate Dean for Graduate and Distance Education Programs at Thomas Jefferson School of Law.” (May 20, 2013)

His article that reviews the development of the first Internet delivered LL.M program in the United States may be downloaded at > William Byrnes’ SSRN academic page <

The article comprises four sections: In Part 1 the economics reasons for, and logistics considerations of, the Internet delivered Program are addressed. Part 2 reviews the pedagogical approach to legal education employed in the United States, criticisms thereof, and finally examines an emerging pedagogical trend in the United Kingdom. Part 3 reviews the teaching tools employed in the LL.M. Program, and Part 4 reviews the practical aspects of developing the LL.M. Program, obtaining ABA acquiescence, and reviews the Internet delivered law courses that came before it. Finally, the article concludes with some personal observations.

Posted in Courses, Education Theory, Uncategorized | Tagged: , , , , , , , , , , , , , , | Leave a Comment »

Reforming Annuities’ Image Problem: New Focus on Risk

Posted by William Byrnes on August 16, 2013

Today’s media coverage of the variable annuity market has focused on company buybacks and modifications to existing clients’ product guarantees—a prospect that has many clients feeling more wary than ever about annuity purchases.

Despite this, insurance companies have used the negative experiences of recent months as motivation to effect positive change in their annuity product offerings by offering clients real flexibility and risk management options.

read William Byrnes and Robert Bloink’s full analysis regarding annuities at > ThinkAdvisor <

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Planning Concept: Traditional Private Annuity in Trust Variation

Posted by William Byrnes on August 14, 2013

Provides an overview of private annuities in relation to financial planning.  Examines a new concept wealth managers are employing for their clients with regards to private annuities and trusts. 

The traditional private annuity is a transaction used by some wealth managers for clients whose circumstances permit. Generally a private annuity transaction occurs where the grantor transfers assets to a third party who pays the grantor an annuity, usually for the life of the grantor.[1]

When a trust is involved with a traditional private annuity, the common transaction may look like this:  “The owner of highly appreciated commercial real estate transfers the property to an irrevocable trust in exchange for the trust’s promise to pay an annuity for life. The present value of the annuity equals the fair market value (‘FMV‘) of the property. The trust then sells the property to a third party for a sale price equal to its FMV.” [2]  For additional discussion on private annuity contracts see National Underwriter Advanced Markets’ Private Annuity [3]

The idea behind wealth managers suggesting similar transactions “is that the original transferor can spread his large capital gain over life expectancy by using the irrevocable trust as an intermediary rather than selling directly to the third party (who is presumably unwilling to do a private annuity).” [4]

There are considerations wealth managers must take into account when discussing private annuities with their clients. These may include valuation methods, arms-length transaction consideration, and incidents of ownership. For a detailed discussion of the tax implications of private annuities, please see Tax Facts Q 41. How are payments received under a private annuity Taxed? [5]

It is often the case that a trustee, although not necessarily, will use “the sale proceeds to insure its annuity obligation by purchasing a commercial immediate annuity.” [6]

Planning Concept:  Some wealth managers have recently begun to structure private annuities for their clients slightly differently than the traditional method discussed above.  Here the idea is a private annuity contract issued from the trust to the grantor who pays valuable consideration for the annuity which carries with it a condition precedent or “contingency”.  The condition on the annuity could be the death of the grantor’s spouse.  The trustee may “reinsure” the risk with the purchase of life insurance from payment of the annuity in the event the condition takes place.[7]  Similar considerations with regards to private annuities should also be considered with private annuities that carry a condition.

In the event the grantor’s spouse does not die in the near future, the premiums paid for the private annuity could generally be considered income to the trust, which may be owned by a second generation.  If the spouse does die in the near future, payment of the annuity would create general gain taxation with a tax-free redemption up to basis. [8]

[1] Manning on Estate Planning. PLIREF-ESTPLN s 5:9, 5-30.  “§ 5:9 The Private Annuity”.

[2] New York Estate Planning. 33 ESTPLN 13.  “Maximizing The Planning Opportunities Of Private Annuities”. 2006.

[3] AUS Main Libraries, Section 2. The Federal Estate Tax, D—Annuities In The Gross Estate.

[4] Id.

[5] Tax Facts Q 41. How are payments received under a private annuity taxed

[6] Id.

[7] 33 ESTPLN 13

[8] PLIREF-ESTPLN s 5:9, 5-30; 26 U.S.C.A. § 1001.

Posted in Insurance, Taxation, Wealth Management | Tagged: , , , , , , , | Leave a Comment »

Incidents of Ownership and Burden on the Estate

Posted by William Byrnes on August 12, 2013

Why is this Topic Important to Wealth Managers?   Discusses estate tax considerations in regards to life insurance policies.  Also, includes a detailed dialogue of the incidents of ownership concept. 

What do most wealth managers try to avoid when planning with life insurance and trusts?

That the Gross Estate for Estate Tax calculations would include the death benefit from the policy in the estate.[1]

What are some common ways to avoid this dilemma when using a trust and life insurance in regards to estate planning?[2]

The insured should never own the policy; “it should be owned from inception” by the trust or third party.

  • A trustee takes “all the actions to purchase the policy on the life of the insured”.
  • The trustee should be “authorized but not required to purchase insurance on the life of anyone whose life the trust’s beneficiaries have an insurable interest.”
  • The trust explicitly prohibits the insured from obtaining any interest whatsoever that the trust may purchase on the insured’s life.
  • The trust does not require, but rather permits the premium payments.
  • Trust is well funded, beyond that of one year of premium payments.
  • The trustee acts in the best interest of the beneficiaries.

A revisionary interest will give rise to incidence of ownership [3], which could include the insured’s right to; [4]

  • Cancel, assign or surrender the policy.
  • Obtain a loan on the cash value of the policy or pledge the policy as collateral for a loan.
  • Change the beneficiary, change contingent beneficiaries, change beneficiaries share of the proceeds.

When discussing incidents of ownership, naturally the 3 year rule should be further expounded.[5] “The 3-year ‘bring-back’ rule” is applicable, “with respect to dispositions of retained interests in property which otherwise would have been includable in the gross estate”.[6]  As discussed in AUS Main Libraries Section 8, C—Lifetime Gifts Of Insurance And Annuities-“Gifts Within Three Years Of Death, essentially, the rule as it applies to life insurance means that any policy transferred out of the estate of the insured within 3 years of his/her death, the policy proceeds are brought back into the gross estate for estate tax calculations.

It is generally accepted that “the trust should be established first, with a transfer of cash from the grantor to be used to pay the initial premium” or a few years of premiums.  “The trustee would then submit the formal application, with the trust as the original applicant and owner.”  Generally, the insured will “participate only to the extent of executing required health questionnaires and submitting to any required physical examination.”  Again the key is that the, “grantor/insured not have possessed at any time anything that might be deemed an incident of ownership with respect to the policy.” [7]

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Employees and Independent Contactors

Posted by William Byrnes on August 9, 2013

Why is this Topic Important to Financial Professionals? Many small business owners are faced with issues surrounding Form 1099 and how the rules apply to their businesses.  

What are some distinctions of the employees versus independent contractors?

An independent contractor, in general, has a majority of control over the details of his job function and only the end result is dictated by the company or individual who hires.  This is what is commonly known as “the degree of behavioral control.”  Another category used by the IRS and the courts to determine the status of an individual as either an employee or independent contractor is “financial control”.  Financial control involves examining the financial relationship between the parties such as reimbursement, and/or if any materials or space has been provided to accomplish the job.  Other relationship factors such as having a contract or agreement between the parties, as well as the terms of any contract, must also be examined in determining the employment status of the individual.

One of the issues that is often overlooked in the area of an employee relationship instead of an independent contractor relationship is that employees have X number of hours to dedicate to employment each week, whether that number is 40, 50, or anything else that an employment agreement might state.  Independent contracts are often not required to expend a set number of hours to accomplish a task, but instead enough hours to accomplish the task.

Another relevant issue to be considered in determining which of the two employment relations exist is that of termination.  An “At-Will” employee can normally be terminated and generally has no cause for a breach of contract and cannot sue for damages.  An independent contractor cannot usually be terminated without a breach of contract.

Tax Distinctions

Taxation of the two dissimilar positions is significantly different.  Independent contractors essentially work for themselves, and the business that pays them is, in effect, a client.  Generally, and independent contractor will file a tax return as a sole proprietor or closely held corporation, such as a Subchapter S Corporation.  An employee is subject to federal income tax withholding and the employer is subject to payroll taxes, included in the general W-2 process.

Independent contractors, like other businesses, recognize revenue and expenses. The independent contractor usually receives a Form 1099 from the source that pays him.  The Code and Regulations state that when a trade or business pays an individual for certain “services” over $600 that a Form 1099 is required to be filed with the Secretary of the Treasury.[1] And just as other businesses realize “legislative graces of Congress,” such as Section 162 deductions, the sole proprietor too may have expenses that generally qualify as trade or business expenses.

For a detailed analysis regarding independent contractors, see Tax Facts Q 814. How are business expenses reported for income tax purposes?

[1] Internal Revenue Code Section (IRC) 6041, Treasury Regulations (TR) 1.6041-1(a)(1)(i), TR 1.6041-1(a)(2).  

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Accounting for Corporations and Limited Liability Companies and How it Relates to Insurance

Posted by William Byrnes on August 7, 2013

Why is this Topic Important to Financial Professionals? Accounting is like a road map of the company’s financial operations.  It is essential to understand the accounting basics and how they relate to small businesses and insurance. 

Accrual or Cash Accounting Methods

Now that the business has been incorporated and is operating, what is required to keep the business accounted for?  The first determination a company must make is determining if the business will account using an accrual or cash system.  An accrual accounting method recognizes revenues and expenses in the period in which they occur whereas a cash accounting method recognizes transactions as they occur.

For example, an accrual taxpayer that performs services will account for income earned when the service is actually provided and not when the actual cash or payment is received.  A cash method of accounting is concerned only when cash is paid out and when paid in.  Expenses follow the same logic.  For example, if a service company that uses the accrual method incurs 500 dollars of phone expenses in December 2010 and the payment is not due until January 2011, the company will still account for the phone expense on its books in 2010 for December’s usage.

Accounting System

Once the business has determined its accounting method, it is ready to keep track of the transactions.  Every accounting system should provide a basic financial statement, income statement, cash flow statement, balance sheet, and statement of owner equity.  Each statement provides a view through a different window into the financial operation of the business.

The income statement is easy to understand.  The top item is revenues and beneath that line expense are deducted to determine the net income.

The cash flow statement is essentially a variation of the income statement.  However the cash flow statement will show the ability of the business to operate on a periodic basis given the ins and outs of cash payments.

The balance sheet will tell the financial planner what the business is comprised of.  Most accountants refer to the balance sheet as a snapshot of the business at any particular moment of time.  From it we can see what assets the business holds and how much money it owes others.

Lastly, the statement of owner’s equity shows how the business is owned and financed.

Financial Statements and Insurance

Properly kept financial statement can help ensure easier access to capital as well as give a truer understanding of the business’ financial position.  The financial statements are commonly used in the risk management processes including when insurance is purchased on a key man.  Small businesses are especially sensitive to this risk and keeping accurate books can help insurance agents and underwriters determine among other factors the insurance needs of the operation.

Key man insurance and buy-sell agreements are generally based on some total dollar amount that represents the value of the business.  This figure is usually based on some number that is related to the financial statements and accounting of the business.  Whether it’s the total assets, a factor of revenue or income, or some other determination, the need for a basic knowledge of financial accounting for small business is essential.

For a detailed analysis on business valuation and how it relates to buy sell agreements see AUS Main Libraries, Section 11 F—Insurance Needs Revealed In Financial Statements.

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Limited Liability Companies: A New Best Friend

Posted by William Byrnes on August 5, 2013

Why is this Topic Important to Financial Professionals?  Look in most local business journals that report on the formation of new business entities and you will see 95% of new businesses are formed as an “L.L.C.”  This company structure is the primary one for entrepreneurs, professionals, and small businesses.  However, after twenty years of significant usage, many questions about this form of entity are still novel.  The financial professional should be able to explain to a client the basics of the Limited Liability Company.

What is an LLC?

Limited Liability Companies (commonly called “LLCs”) are state statute sanctioned legal business entities.  The business entity is similar to a limited liability partnership except that it has members and not partners (no need for general partners).  Moreover, some states allow for only one member, known as a single-member LLC, an option not available in partnership entities that require at least two partners.  The members can be persons but may be other business entities, such that an LLC can be a member of another LLC.

The LLC can be established and managed so as to offer the benefits of a corporation such as limited liability and continuation after a member’s death, but without the impact of corporate taxation.

What is the benefit of an LLC?

The LLC properly managed provides for the protection of personal financially liability in connection with the business liability.  Proper management generally includes following the annual requirements of corporation law, such as holding an annual directors and members meeting, and recording corporate minute (this will be discussed in future blogticles).

Additionally, the LLC avoids double taxation because of it can elect to be a “pass-through” entity for federal and state tax purposes – like a partnership or a sole-proprietorship is treated.

Also, most LLCs do not have a restriction on the number of members as S-Corps have (albeit rarely will the number of members or shareholders be an issue for a financial professional’s client).  To learn more details and nuances of each business structure see the AUS Main Section 10. Basics Of Business Insurance, A—Forms Of Business Organization.  More detail on LLCs specifically is provided in AUS Main Section 14.1, I—The Limited Liability Company (LLC).


What are some limitations of the LLC?

Aside from the fact that LLCs have essentially developed as a hybrid of older forms of business organizations, and are relatively new in the history of corporation law.  The LLC is not a corporation in the traditional sense of the word.

Sometimes businesses start as an LLC but expand to a point of eventually considering receiving outside equity with the goal of a public offering such as listing on a stock exchange.  The LLC is not suitable for “going public”.  Thus at the stage of soliciting equity investment for a business a client may have outgrown the LLC and should convert into a C-Corporation (a topic that will be addressed in a future blogticle).

The Federal Government allows the business owner(s) of the LLC to choose how the LLC will be characterized for tax purposes.  The LLC may be taxed as a Corporation (both Subchapter C and S), partnership or sole-proprietorship. This process is generally referred to as “Check the Box”.[1] The IRS Check the Box Form is Number 8832[2] and the business owners literally check one of the included boxes on that form and then file the corresponding tax returns.

What are some other uses of LLCs?

LLCs are used in many transactions by high-net worth client.  Sometimes clients use an LLC in place of a trust in the irrevocable life insurance trust (commonly called an “ILIT”) structure.  By example, in a situation where a client wants less restriction on the direction of the assets of the vehicle, the LLC is a more popular choice than the ILIT.  As a result, the LLC has become a common tool for the financial planner.  A detailed discussion of one of these transactions is examined in the AUS Main Section 14.1, I-The Limited Liability Company (LLC). “LLC as an Alternative to a Life Insurance Trust”.

For a detailed analysis of the tax and non-tax Advantages of a Close Corporation see AdvisorFX Main Library Section 14. Close Corporations I—The Limited Liability Company (LLC) http://www.advisorfx.com/articles/f14_1_2_2080.aspx?action=13

Tomorrow’s blogticle will address Accounting for Corporations and Limited Liability Companies and How it Relates to Insurance.

[1] Treasury Regulations Section §301.7701-3.


[2] Internal Revenue Service Form 8832, http://www.irs.gov/pub/irs-pdf/f8832.pdf.

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Practical Guide to U.S. Transfer Pricing coordinating author speaks …

Posted by William Byrnes on August 1, 2013

practical_guide_bookWilliam Byrnes has been appointed a primary author for his sixth Lexis title.  

Read Professor Byrnes’ comments at http://www.tjsl.edu/news-media/2013/9861


For the 2013 OECD policy initiative regarding multinational’s transfer pricing, see “Addressing Base Erosion and Profit Shifting” available at http://www.keepeek.com/Digital-Asset-Management/oecd/taxation/addressing-base-erosion-and-profit-shifting_9789264192744-en


and the more recently published “Action Plan on Base Erosion and Profit Shifting”: http://www.oecd.org/ctp/BEPSActionPlan.pdf

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