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Loeb & Loeb High Net Worth Family Tax Report

Loeb and Loeb has issued its latest High Net Worth Family Report, which covers the following items:

  • What You Need to Know About Corporate Inversions
  • Taxpayer Avoids Penalties by Relying on Professional Advice
  • IRS Streamlines Offshore Voluntary Disclosure Program
  • IRS Issues Additional Guidance as to When Construction Begins for Production Tax Credit
  • The End of the Year Is Rapidly Approaching
  • IRS Changes Rules Regarding IRA Rollovers
  • Tax Court Addresses Income, Estate and Gift Tax Issues Related to Personal Goodwill
  • Tax Court Attributes Significant Value to Personal Goodwill in Estate Tax Valuation Case
  • California Franchise Tax Board Expands Concept of Doing Business in California for Out-of-State Corporations
  • Recent Case Emphasizes Importance of Keeping Records of the Tax Basis of Assets
  • Court Holds That Land Sold Was Inventory That Gave Rise to Ordinary Income
  • Another Taxpayer Mistake Causes Loss of Charitable Contribution Deduction

Read the report at High Net Worth Family Tax Report, Vol. 9, No. 2 | Loeb & Loeb LLP – JDSupra.

Posted by Lewis J. Saret, Co-General Editor, Wealth Strategies Journal.

2015 Predicted Inflation Adjusted Tax Items

Pessin Katz reports on predicted 2015 inflation adjusted tax items.  It’s article begins as follows:

The following are some of the more salient tax items adjusted unofficially for inflation by Research Institute of America.  While unofficial they represent a very good estimate of predicted adjusted items for 2015.  This list is not all inclusive. IRS is required to release the “official” adjustments by December 15, 2014.

Estate and Gift and Long Term Care:

  • Unified estate and gift tax exclusion amount for estates of decedents dying in 2015 should rise to $5,430,000.
  • The exemption from Generation Skipping Transfer Tax should be $5,430,000 for transfers in 2015.
  • The gift tax annual exclusion should be $14,000, unchanged from 2014.

Read more at 2015 Predicted Inflation Adjusted Tax Items | Pessin Katz Law, P.A. – JDSupra.

Posted by Lewis J. Saret, Co-General Editor, Wealth Strategies Journal.

AICPA identifies problems with IRS’s electronic signature rules

The Journal of Accountancy notes that Jeffrey Porter, chair of the AICPA’s Tax Executive Committee, sent a letter to IRS Commissioner John Koskinen raising concerns about the IRS’s recently issued guidance on electronic signatures. The letter addresses the electronic signature standards that apply when a taxpayer does not appear in person before the tax return preparer to present a valid form of identification.

In March, the IRS updated Publication 1345, Handbook for Authorized IRS e-File Providers of Individual Income Tax Returns, to authorize taxpayers to sign, and practitioners to accept, e-file authorization forms containing electronic signatures. (For more on the new standards, see “E-File and Digital Signatures: Where Are We Now?” The Tax Adviser, June 2014, page 430.)

Read more at AICPA identifies problems with IRS’s electronic signature rules.

Posted by Lewis J. Saret, Co-General Editor, Wealth Strategies Journal.

Developments in Life Insurance in Florida

Carlton Fields/Jordan Burt reports on Florida Life Insurance Developments, noting that life insurers will find the following Florida decisions regarding the state’s unclaimed property law and false claims act important:

  • Total Asset Recovery Services, LLC v. Metlife, Inc. and Prudential Financial Inc., Case no. 2010-CA-3719 (Fla. 2d Jud. Cir., Aug. 20, 2013), aff’d per curiam sub nom., Case no. 1D13-4420 (Fla. App., 1 Dist., Sept. 19, 2014) (“TARS”)
  • Thrivent Financial for Lutherans v. State, Department of Financial Services, 2014 WL 3819476 (Fla. App., 1 Dist., Aug. 5, 2014) (“Thrivent”)

The article notes that TARS significantly limits the ability of qui tam plaintiffs to pursue reverse false claims under the Florida False Claims Act against insurers for allegedly failing to escheat life insurance benefits.

It also notes that, like TARS, Thrivent holds that, under Florida’s unclaimed property law, life insurance funds are automatically “due and payable” at the time of the insured’s death, and that the dormancy period for an insurer’s obligation to escheat does not begin to run until the insurer receives a proof of death, until the insurer otherwise knows the insured has died, or until the insured reached, or should have reached, the limiting age under the policy.

Read more at Developments in Life Insurance in Florida | Carlton Fields Jordan Burt – JDSupra.

Posted by Lewis J. Saret, Co-General Editor, Wealth Strategies Journal.

Regulatory Changes Could Restrict Pool of Private Investors

Paul Sullivan, in his weekly NY Times column, Wealth Matters, writes about possible changes to accredited investor rules.  His article begins as follows:

DAVID VERRILL considers himself a savvy, educated investor. Since the year 2000 he has been part of a group that has invested $25 million in 35 start-up companies around New England. He has an M.B.A. from M.I.T.’s Sloan School of Management in Cambridge, Mass., where he is executive director of the school’s Center for eBusiness.

But the Securities and Exchange Commission will consider new guidelines, as early as October, that could disqualify him from making those private investments. Even though he knows the start-up scene well in the Boston area where he lives and carefully researches companies before making one or two investments a year, he might no longer be considered an accredited investor entitled to make what are generally seen as riskier private investments.

The prospect of change has created a furor in the investment world, where some fear that the changes will shrink the pool of private investors and unfairly limit the investment opportunities for millions of people.

via Regulatory Changes Could Restrict Pool of Private Investors – NYTimes.com.

Posted by Lewis J. Saret, Co-General Editor, Wealth Strategies Journal.

Texas Judge Refuses to Grant Same Sex Divorce

Courthouse News Service reports that a Texas Judge has refused to void a lesbian couple’s marriage or grant them a divorce, citing the state’s constitutional gay marriage ban.  The article begins as follows:

     Brooke Powell, of Fort Worth, and Cori Jo Long, of North Richland Hills, married in June 2010 in New Hampshire. The women separated in June 2013 and Powell filed to void their marriage in April in Tarrant County District Court.

“The marriage is void because the petitioner and respondent are of the same sex,” the complaint stated.

District Judge William Harris refused both requests Friday, the Fort Worth Star-Telegram reported. He said the court lacked jurisdiction to make either ruling because same-sex marriages are not recognized in Texas due to the ban enacted by voters in 2005

Read more at Courthouse News Service.

See also article on Wills Trusts Estates Prof Blog.

Posted by Lewis J. Saret, Co-General Editor, Wealth Strategies Journal.

Being Mindful Can Help Guide Financial Decisions

Carl Richards, in his Sketch Guy column in the NY Times discusses the benefits of Mindfulness in making financial decisions.

Mr. Richards notes that people try to form good new habits only to continuously fall back on old habits. He notes the following:

…take a look at the market for productivity tools. There are more apps than ever before, but we still struggle to accomplish tasks.

So if solutions tend not to come from tools, what’s really happening in our heads? Why is there a gap between all this great intention and our behavior? I suspect it’s because, in part, of how fast we now respond to stimulus. In our modern world, we’ve been trained to respond to things immediately.

Just think about how hard it is to avoid checking your email when you hear the familiar ding. Some of us even suffer from phantom phone vibration. We’re so attuned to these signals that we will respond to them even when they haven’t really happened. So is it truly a surprise that we allow ourselves no time to think or reflect before we react?

So what if instead of just acting (or reacting) we stopped, took a deep breath, and checked how we’re feeling at that moment?

The word that researchers like Dr. Jon Kabat-Zinn have used to describe this idea is “mindfulness.” In an interview with The Harvard Business Review, another researcher named Ellen Langer, who has spent nearly four decades studying the topic, describes mindfulness as “the process of actively noticing new things.” She goes on to suggest that “when you’re mindful, rules, routines, and goals guide you; they don’t govern you.”

Read more at Being Mindful Can Help Guide a Decision – NYTimes.com.

Posted by Lewis J. Saret, Co-General Editor, Wealth Strategies Journal.

Pricing issues for small CPA firm sales

Joel Sinkin and Terrence Putney are writing a three part series of articles on sales of CPA practices in The Journal of Accountancy.  Their first article begins as follows:

For CPAs looking to sell their accounting practice, it can be a big plus to be in a small firm. That’s because small firms generally can command higher multiples than big firms, and external sales usually produce higher prices for accounting practices than internal ownership transfers.

Those are two of the trends that will be explored in a three-part series on valuation issues in accounting firms. This article focuses on small CPA firms. The next two articles will address valuation issues for large CPA firms and internal transfers of ownership.

Read more at Pricing issues for small firm sales.

Posted by Lewis J. Saret, Co-General Editor, Wealth Strategies Journal.

ESOPs: The Tax Law Provides a Buyer for Your Business

Ross Cohen of Baker Donelson writes about using ESOPs as a method of selling your business. His article begins as follows:

As baby boomer business owners begin to retire, many will want to monetize the value they have created in their businesses. An employee stock ownership plan (ESOP) is one alternative. The ESOP alternative, authorized by the Internal Revenue Code of 1986, allows a business owner to form a retirement plan for the employees of the corporation, or add an ESOP feature to an existing retirement plan such as a 401(k) plan. The ESOP can be the buyer of some or all of the owner’s stock in the corporation, normally in one of two principal ways. If a third-party lender to the ESOP can be found, the owner may receive all cash at the time of sale. If the owner finances the sale, the owner will receive a promissory note from the ESOP, and perhaps some cash, in payment of the purchase price. In any case, both ESOP structures provide these benefits, subject to several limitations in the tax law. The basic process is as follows:

Read more at ESOPs: The Tax Law Provides a Buyer for Your Business | Baker Donelson – JDSupra.

Posted by Lewis J. Saret, Co-General Editor, Wealth Strategies Journal.

Asset protection of retirement funds after Clark

The Journal of Accountancy explores asset protection of retirement accounts after Clark v. Rameker.  The article begins as follows:

In June, the Supreme Court in Clark v. Rameker, No. 13-299 (U.S. 6/12/14), said that just because funds are held in an account called an individual retirement account (IRA), it doesn’t necessarily mean that they are retirement funds. And if they are not retirement funds, they are not excluded from a bankruptcy estate under Section 522(b)(3)(C) of the Bankruptcy Code (11 U.S.C. §522(b)(3)(C)).

That section of the Bankruptcy Code provides that a debtor may exempt from the bankruptcy estate retirement funds “to the extent that those funds are in a fund or account that is exempt from taxation” under Sec. 401, 403, 408 (traditional IRAs), 408A (Roth IRAs), 414, 457, or 501(a).

This article examines the implications of the Supreme Court’s Clark decision, as well as treatment of IRAs outside bankruptcy under state laws. It suggests how taxpayers and their advisers may nonetheless achieve a degree of asset protection from creditors for inherited IRAs. Specifically, with either of two types of “see-through” trusts, an IRA owner may designate an individual as the trust’s beneficiary to receive IRA distributions. A “conduit trust” protects the balance of the inherited IRA from creditors of the trust beneficiary. Alternatively, a discretionary or “accumulation” trust also provides asset protection while also allowing the trustee discretion in making minimum required distributions.

Read more at  Asset protection of retirement funds after Clark.

Posted by Lewis J. Saret, Co-General Editor, Wealth Strategies Journal.

Five myths about billionaires

Darrell M. West, vice president of the Brookings Institution’s governance studies department and author of “Billionaires: Reflections on the Upper Crust” writes about five myths about billoinaires in the Washington Post, which is now owned by billionaire, Jeff Bezos.  Mr. West’s article begins as follows:

Billionaires can be fascinating — and not just because of the fortunes they amass. They buy islands and media organizations, experiment with space travel, and have larger-than-life personalities. They also become proxies in national political debates about economic growth, inequality, taxes and fairness. Misconceptions abound about their beliefs, businesses and influence. Let’s explore five of the most common myths.

via Five myths about billionaires – The Washington Post.

Posted by Lewis J. Saret, Co-General Editor, Wealth Strategies Journal.

Love Them or Loathe Them, Reverse Mortgages Have a Place

Ron Lieber, in his NY Times column, Your Money, writes about Reverse Mortgages.  Among other things, Mr. Lieber notes that this summer, BNY Mellon got back into the business as a servicer and securitizer of the loans. In addition several respectable researchers have endorsed certain uses of reverse mortgages, and a series of legal and regulatory changes intended to lower the number of defaults have also taken effect or are about to.

Mr. Lieber also notes that many of the people entering or examining the reverse mortgage business now describe their interest in it as a sort of conversion. Even half a decade ago, Michael Gordon, BNY Mellon’s head of retirement and strategic solutions, would never have suggested that the company come near the product. Companies considering a potential customer generally did not check to make sure that the borrower would be able to afford property taxes and home insurance payments. They also did not disqualify many borrowers for whom the loan was simply not suitable.

Mr. Gordon is quick to note that the product is not right for everyone. But he also thinks that many retirees with investment portfolios that are half in stocks and half in bonds are unaware of their true asset allocation. After all, their home equity is an asset too. Many people have an awful lot of it, and those who bought retirement homes in 2005 know all too well how much of it can disappear.

To read more, see Love Them or Loathe Them, Reverse Mortgages Have a Place – NYTimes.com.

Posted by Lewis J. Saret, Co-General Editor, Wealth Strategies Journal.

Charles (Chuck) Rubin: Mission Creep Costs a Section 501(c)(3) Organization Its Exemption

By Charles (Chuck) Rubin

SUMMARY: A change in function of a Section 501(c)(3) organization results in the IRS revoking its exemption.

To receive Section 501(c)(3) status, exempt organizations apply for exemption from the IRS. The exemption application provides details on what the organization intends to do, and the IRS confirms that it is an appropriate activity for a Section 501(c)(3) organization.

Many times, as organizations evolve they move into other areas and functions. Such organizations must monitor their functions and determine that the new functions are exempt functions under Code Section 501(c)(3).

In a recent Taxpayer Assistance Memorandum, an exempt organization and public charity was formed to operate a private school. Over time, its function drifted to the purchase or lease of school buildings that it then renovated, leased, and subleased to nonexempt charter schools. The IRS determined that such landlord functions were not an exempt purpose under Code Section 501(c)(3), and it revoked the exempt status of the organization.

The TAM is interesting for a number of reasons, including:

1. It is a warning to exempt organizations that the IRS will not tolerate mission creep away from the original exempt purposes of the organization. Organizations undergoing a change in purpose and function should advise the IRS of these changes prospectively and confirm that such changes do not jeopardize exempt status.

2. Leasing real estate is generally a nonexempt trade or business carried on for profit.

3. At times, a business can be regarded as exempt if it is an integral part of the exempt activity of a related exempt entity. Counsel for Bibliographic and Information Technology, T.C. Memo. 1992-364. In the TAM, the lessees, while they were schools, were not exempt entities.

4. Further, an organization may conduct a business in a charitable manner to promote the exempt purpose of an unrelated exempt organization. For example, the provision of leased space at rents well below market the levels can be exempt. Rev.Rul. 69-572. This was not helpful in the TAM because again, the lessees were not exempt organizations. Further, while the exempt organization did reduce the rents below market values, the reduction was not low enough since the exempt organization recovered its costs and also accumulated a surplus.

5. That an organization conducts some exempt activities along with its non-exempt activities may not act to save the exemption. Here, the organization conducted an educational summer program. The TAM concluded that this constituted only a minor portion of its time and resources, and thus the activity could not be considered a substantial purpose or basis for exemption. The TAM cited the U.S. Supreme Court in Better Bus. Bureau of Washington, D.C. v. U.S., 326 U.S. 279,283 (1945) which provided “that the presence of a single non-educational [exempt] purpose, if substantial in nature, will destroy the exemption [under § 501(c)(3)] regardless of the number or importance of truly educational [or other exempt] purposes.”

TAM 201438034

Link to Original Article

TIGTA Recommends Improvements to Selection of Problematic Paid Preparers For Further Enforcement Actions

The Treasury Inspector General for Tax Administration released its report, Return Preparer Coordinators Could Improve the Selection of Problematic Paid Preparers for Further Enforcement Actions.  The report notes that the Internal Revenue Service (IRS) could improve its selection of problematic paid preparers for further enforcement actions, according to a report publicly released today by the Treasury Inspector General for Tax Administration (TIGTA.)

Since the majority of individual taxpayers pay someone to prepare their tax returns – nearly 60 percent of all individual taxpayers in 2013 – paid preparers’ impact on tax compliance can be significant. While most paid preparers can be trusted, a troublesome few have intentionally manipulated tax return information to generate excessive refunds for taxpayers, modified tax returns after the taxpayers signed them to steal the refunds, or used taxpayer identities to create fictitious returns to generate fraudulent refunds.

The Return Preparer Office coordinates the IRS’s strategy to provide oversight of noncompliant paid preparers with demonstrated patterns of preparing inaccurate tax returns. Return Preparer Coordinators in the Area Offices are the key control to ensure that the Examination function implements its part of the IRS’s Return Preparer Strategy.

The objective of TIGTA’s review was to determine if opportunities exist to enhance the compliance efforts of Return Preparer Coordinators.

TIGTA found that the IRS’s Return Preparer Coordinators effectively managed most of the paid preparer activities under their control and provided good audit leads for further enforcement actions. However, more actions could be taken to ensure that the Return Preparer Coordinators timely review referrals with allegations of inappropriate paid preparer behavior and that the referrals and complaints are shared among the various functions responsible for reviewing them.

TIGTA reviewed 2,134 paid preparer referrals received by three Area Offices during Fiscal Years 2010 through 2012, finding that the Return Preparer Coordinators had not evaluated 722 referrals (34 percent) to determine if a preparer case was warranted. This resulted primarily from limited resources and ineffective controls. In addition, due to a lack of guidance, many of the complaints processed by the Return Preparer Office are not shared with the Return Preparer Coordinators.

“Since the majority of individual taxpayers now rely on others to prepare their income tax returns, preparer accuracy, integrity, and reliability have never been more important,” said J. Russell George, Treasury Inspector General for Tax Administration. “The IRS must do everything it can to enforce the law and protect the taxpayer against inaccurate or fraudulent return preparation.”

TIGTA recommended that the IRS develop inventory controls and timeliness standards for the referral process to help ensure that problematic paid preparers are identified and considered for further enforcement actions. In addition, TIGTA recommended that the Small Business/Self-Employed Division work with the Return Preparer Office to develop a methodology for sharing information on paid preparer referrals and complaints to improve the identification of the most egregious paid preparers for further enforcement actions.

In their response to the report, IRS officials agreed with both recommendations and plan to take appropriate corrective actions.

Read the report at  TIGTA Recommends Improvements to Selection of Problematic Paid Preparers For Further Enforcement Actions.

Posted by Lewis J. Saret, Co-General Editor, Wealth Strategies Journal.

Charles (Chuck) Rubin: No Informal Abandonment of Residency Allowed

By Charles (Chuck) Rubin

SUMMARY: The Tax Court rules against informal abandonment of resident status.

Individuals who are admitted to the US as lawful permanent residents (“green card” holders) are treated as U.S. residents for income tax purposes. Code section 7701(b)(1)(A)(i). As such they are subject to U.S. income taxes on their worldwide income. Resident status is deemed to continue unless it is rescinded or administratively or judicially determined to have been abandoned. Treas.Regs. section 301.7701(b)-1(b)(1).

In a recent Tax Court case, a green card holder argued that he ceased to be a U.S. resident for income tax purposes by informally abandoning his U.S. resident status by selling his Hawaii residence, moving away, and only visiting the U.S. infrequently thereafter. In support of such informal abandonment, the taxpayer cited United States v. Yakou, 428 F.3d 241 (D.C. Cir. 2005). In that case, a defendant who held a green card was able to successfully argue he was not a U.S. person under the Arms Export Control Act via having left the U.S.

The Tax Court found that Yakou did not apply. Principally, this was because the Arms Export Control Act and related law was silent on how lawful permanent resident status terminated for those purposes. Under Treasury Regulations, however, there is explicit guidance on how permanent resident status is terminated for tax purposes. Treas.Regs. section 301.7701(b)-1(b)(3) provides:

Administrative or judicial determination of abandonment of resident status. An administrative or judicial determination of abandonment of resident status may be initiated by the alien individual, the Immigration and Naturalization Service (INS), or a consular officer. If the alien initiates this determination, resident status is considered to be abandoned when the individual’s application for abandonment (INS Form I-407) or a letter stating the alien’s intent to abandon his or her resident status, with the Alien Registration Receipt Card (INS Form I-151 or Form I-551) enclosed, is filed with the INS or a consular officer. If INS replaces any of the form numbers referred to in this paragraph or §301.7701(b)-2(f), refer to the comparable INS replacement form number. For purposes of this paragraph, an alien individual shall be considered to have filed a letter stating the intent to abandon resident status with the INS or a consular office if such letter is sent by certified mail, return receipt requested (or a foreign country’s equivalent thereof). A copy of the letter, along with proof that the letter was mailed and received, should be retained by the alien individual. If the INS or a consular officer initiates this determination, resident status will be considered to be abandoned upon the issuance of a final administrative order of abandonment. If an individual is granted an appeal to a federal court of competent jurisdiction, a final judicial order is required.

Since the taxpayer did not follow the above procedures, he will still be considered to be a U.S. resident regardless of any informal abandonment. The court noted that lawful permanent resident status for Federal income tax purposes turns on Federal income tax law and is only indirectly determined by immigration law. The court also was influenced by the House Ways and Means Committee report accompanying the enactment of section 7701(b)(1)(A)(i) and (6) which provided that “an alien who comes to the United States so infrequently that, on scrutiny, he or she is no longer legally entitled to permanent resident status, but who has not officially lost or abandoned that status, will be a resident for tax purposes.” H.R. Rept. No. 98-432 (Part 2), supra at 226, 1984 U.S.C.C.A.N. at 1166.

Thus, green card holders who desire to terminate their U.S. resident status for income tax purposes via abandonment should follow the procedures set out in the regulations and not rely on other mechanisms or arguments.

Gerd Topsnik v. Commissioner, 143 T.C. No. 12,  09/23/2014

Link to Original Article

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