In this newsletter you will find information on updates and changes in the law on both the Federal and State level. If you have any questions, please feel free to contact Andrew Sullivan at (504) 569-2900.
At Risk Rules and Co-Guarantors
A Louisiana federal district court recently determined that a member of a limited liability company who co-guaranteed a loan for a company that he owns was only fifty percent (50%) at risk under IRC § 465. Moreno v. United States, No. 6:12CV2920, 2014 WL 2112864 (W.D. La. May 19, 2014). As background, IRC § 465 only allows a taxpayer deductions for a business activity to the extent that the taxpayer is economically or actually at risk for the investment in the activity. In Moreno, a company (Company A) that Mr. Moreno wholly-owned borrowed money from an unrelated lender to purchase an airplane. The loan was secured by Mr. Moreno and another company that Mr. Moreno owned. Company A leased the aircraft and deducted a large loss. The IRS argued that Mr. Moreno was not at risk for the loan since he was only a co-guarantor.
The district court held that since a co-guarantor could be subject to contribution or reimbursement under state law for up to fifty percent (50%) of the loan upon a default by Company A, the guarantor (Mr. Moreno) was only at risk for fifty percent (50%) of the loan amount. The court was not concerned with the liquidity or security of the co-guarantor at the time of the loan.
On July 1, 2014, the IRS issued new Form 1023-EZ, Streamlined Application for Recognition of Exemption under Section 501(c)(3) of the Internal Revenue Code, with the hope of providing a new streamlined process for smaller charitable organizations to apply for tax-exempt status. The new form aims to alleviate an IRS backlog of pending applications for tax-exempt status. The IRS has reduced the Form 1023-EZ to three (3) pages from the traditional twenty-six (26) page Form 1023. The Form 1023-EZ is more of a registration for tax-exempt status rather than a comprehensive description of all of the organization’s activities.
Based on IRS data, approximately seventy percent (70%) of charitable organization applicants will qualify to use the new Form 1023-EZ. The IRS also released Rev. Proc. 2014-40, which sets forth the procedures for using the new Form 1023-EZ. Applicants must have gross receipts of $50,000 or less during the past three (3) years (or projected gross receipts of $50,000 or less in any of the next three (3) years) and total assets less than $250,000. Rev. Proc. 2014-40 contains other criteria for using Form 1023-EZ.
The new Form 1023-EZ is completed electronically and must be submitted online at www.pay.gov. The form is subject to a $400 user fee due upon submission.
Circular 230 Revisions
The IRS issued final regulations that change various provisions of Circular 230, which provides rules on practice before the IRS. The most significant changes include elimination of the complex rules governing “covered opinions” and reconfiguration of written tax advice requirements into one standard.
31 U.S.C. § 330 authorizes the Treasury Department (“Treasury”) to regulate the practice of persons’ representatives before the Treasury. With this authority, the Treasury publishes regulations governing practice before the IRS in 31 C.F.R. §10, which is reprinted as Treasury Department Circular No. 230 (“Circular 230”). In 2012, the IRS proposed regulations that would amend Circular 230, which are discussed in more detail below.
Former Circular 230 rules required practitioners to make certain disclosures when providing covered opinions. As a result, many practitioners included Circular 230 disclosures at the end of every email or other writing to remove the correspondence from the covered opinion rules.
Departing from a rule-based approach, the final regulations adopt the method provided in the proposed regulations, which replaces the covered opinion rules (§ 10.35) with one standard for all written tax advice. The IRS expects that this change will minimize or may even eliminate the use of Circular 230 disclaimers in email and other writings.
Final regulation § 10.37 states affirmatively those principles to which all practitioners must adhere when providing written advice on a Federal tax matter. It requires, among other things, that a practitioner (1) base all written advice on reasonable factual and legal assumptions, (2) consider all relevant facts that he or she knows or reasonably should know, (3) use reasonable efforts to identify and establish facts relevant to the written advice, and (4) exercise reasonable reliance.
A practitioner must possess the necessary competence to practice before the IRS. Competent practice requires the appropriate level of knowledge, skill, thoroughness, and preparation necessary for the issue for which the practitioner is engaged. As seen in the final regulations, the competence standard asserts that competency may be gained in a myriad of ways, including but not limited to, consulting with experts and studying relevant law.
Under the revised Circular 230, any practitioner who has principal authority and responsibility for overseeing a firm’s practice must take reasonable steps to ensure that the firm has adequate procedures in effect for all members, associates, and employees to comply with Circular 230 provisions. Failure to comply with this mandate or to ensure that procedures are followed properly will result in disciplinary action.
Changes/Additions Made to Proposed Regulations
Other changes made by the final regulations to the proposed regulations include:
These final regulations became effective on June 12, 2014. For more information, see a full-copy of the revised Circular 230 here.
Retroactive Ban on Corporate Inversions May Kill Pending Deals
Taking a firm position on corporate inversions on July 24 while speaking at the Los Angeles Trade-Technical College, President Obama called for “economic patriotism” and urged a ban on corporate inversions used to shield tax exposure.
A corporate inversion occurs when a domestic corporation reincorporates in another country through an acquisition or merger with a foreign company. Domestic companies often choose this strategy to prevent double taxation if they conduct substantial amounts of foreign business or generate a significant amount of revenue abroad. Generally, the U.S. Internal Revenue Code prohibits this practice through anti-inversion rules; however, companies have found a loophole. Under current U.S. tax laws, a company that results from the merger of a domestic and foreign corporation is considered “foreign” if more than twenty percent (20%) of its stock is owned by the shareholders of the foreign constituent corporation.
Approximately forty-one (41) U.S. companies have exploited this loophole and changed their addresses to low-tax jurisdictions. Additionally, at least eight (8) more inversions are pending.
At the moment, President Obama has endorsed the Stop Corporate Inversions Act of 2014, a bill proposed by Rep. Sander Levin (D-Mich.). Under this bill, which would retroactively take effect as of May 2014, a foreign corporation would be treated as a U.S. company if (1) the shareholders of the U.S. corporation own fifty percent (50%) or more of the merged company following acquisition, or (2) if the foreign corporation is managed and controlled primarily within the U.S. and has substantial domestic business activities.
If Congress fails to pass anti-inversion legislation within the year, legislation may still be passed next year and could apply retroactively to deals that close after January 1, 2015. Because of this, inversion transactions involve some risk of which companies are wary. To reduce this risk, some buyers have negotiated a “walkaway” right in the event that tax laws constrict. For example, in a recent inversion transaction, Medtronic, Inc. added an out clause to its purchase agreement whereby it could terminate its deal if U.S. tax laws changed in such a way that the combined company would be considered a U.S. company for U.S. tax purposes.
IRS Advises Against “Dumping” Workers on Health Insurance Exchange
Many employers attempted to shift costs for employee health insurance away from themselves by reimbursing employees for the premiums that employees paid for health insurance. This “dumping” strategy required only that the employer provide its employees with tax-free cash contributions to help pay premiums. However, the Internal Revenue Service (“IRS”) released a set of question and answers that reject this idea.
When an employer reimburses employees for health insurance premiums, the arrangement is classified as an “employer payment plan.” However, per IRS Notice 2013-54, employer payment plans generally do not include any employer-sponsored arrangements under which a worker may choose either cash or an after-tax amount as assistance for health coverage. As provided in Notice 2013-54, these group health plans must adhere to “market reform” provisions, which include the “annual dollar limit prohibition” and the “preventive services requirements.” In particular, the “annual dollar limit prohibition” requires that a group health plan may not establish any annual limit on the dollar amount of benefits received by any individual, and the “preventive services requirements” mandates that non-grandfathered group health plans provide certain preventive services without imposing any cost-sharing mechanisms (i.e., co-payments) for the services.
The document released by the IRS asserts that employer payment plans fail to satisfy the market reform requirements and cannot be integrated with individual policies to fulfill the market reforms. As a result, these arrangements fail to meet ACA requirements, which may subject employers to a $100 per day (or $36,500 per year) excise tax for each employee who purchases health insurance from the individual marketplace.
Choice of Accounting Methods
Section 446(d) allows accounting methods to be chosen at the trade or business level; therefore, when computing taxable income, taxpayers engaged in more than one trade or business may use a different method of accounting for each trade or business. Nevertheless, different methods of accounting may only be used where the taxpayer has two or more trades or businesses that are truly separate and distinct, and if the accounting method adopted for each separate and distinct trade or business clearly reflects the income of that trade or business. Treas. Reg. § 1.446-1(d)(1).
In a recent CCA, the IRS determined that a corporation and its wholly owned disregarded entity subsidiary were separate and distinct trades or businesses for purposes of Section 446(d) where the entities primarily engaged in different activities, had separate books and records, were in different geographical locations, and shared only high-level executive employees. The IRS found that the disregarded entity status of the subsidiary was not determinative as to whether it was a separate and distinct trade or business for purposes of choosing its accounting method.
2014 Louisiana Annual Sales Tax Holiday
On Friday, August 1 and Saturday, August 2, most retail purchases will be exempt from the four percent (4%) Louisiana state sales tax. The exemption applies to the first $2,500 of each eligible item of tangible personal property that a customer purchases if:
The exemption does not apply to the following purchases:
Please note that this exemption applies only to Louisiana state sales tax. Local sales taxes will still apply unless the local taxing authority offers its own exemption. For more information, visit the Louisiana Department of Revenue’s website here.
If you would like to receive BHBM Email Tax Alerts to stay informed on the latest changes in tax law, subscribe here.