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.
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House Moves Toward Potential Repeal of Estate Tax
The House Ways and Means Committee recently reported out of committee the “Death Tax Repeal Act of 2015” (the “Repeal Act“). While the fate of this Repeal Act is uncertain at best, the repeal of the federal estate tax has attracted strong support (as well as strong opposition) in the past.
If enacted, the Repeal Act would repeal the estate tax and the generation-skipping transfer tax for estates of decedents dying after the date of enactment thereof.
The proposed bill would, however, retain the gift tax with a top marginal gift tax rate of thirty-five percent (35%). The lifetime gift tax exclusion amount would remain the same as under current law ($5 million adjusted for inflation for the years after 2011), and the gift tax annual exclusion (currently $14,000 for 2015) would continue to apply. The proposed bill would provide that a transfer in trust would be treated as a taxable gift unless, at the time of the transfer, the transferee trust is a grantor trust with respect to the donor or the donor’s spouse for federal income tax purposes.
Proposed Regulations May Limit Allocation of M & A Costs
On March 5, 2015, the Internal Revenue Service released proposed regulations to revise the consolidated return regulations for reporting certain items of income and deduction that are reportable on the day a corporation joins or leaves a consolidated group. In particular, the proposed regulations significantly limit the application of the next-day rule for success-based fees and similar costs that arise in the context of mergers and acquisitions.
The proposed regulations deal with a corporation (hereinafter “A“) that becomes or ceases to be a member of a consolidated group during a consolidated return year. Under the consolidated return regulations, A is treated as becoming (or ceasing to be) a member of the group at the end of the day of A’s change in status (i.e., the “end-of-day” rule). Thus, A’s tax items that are reportable on the day that A joins the group generally are included in A’s short-period return for the tax year that ends as a result of A’s change in status.
The next-day rule is an exception to the end-of-day rule and applies if, on the day A joins the consolidated group, a transaction occurs that is properly allocable to the portion of the day after joining the group. The current regulations provide that an item is properly allocable and allowable on the next day if it is (1) reasonable and (2) consistently applied by all effected. If the next-day rule applies, A treats the transaction as occurring at the beginning of the day following the transaction (i.e., A’s tax items may are taken into account for the period after joining the group).
The proposed regulations address uncertainty regarding the application of the current next-day rule. In particular, the proposed regulations establish a new “proposed next-day rule” that would only apply to extraordinary items that result from transactions that (1) occur on the day of A’s change in status, but after the event resulting in A’s change in status, and (2) would be taken into account by A on that day.
Thus, the proposed next day rule is intended to prevent certain post-closing items from affecting A’s tax return for the period ending on the day of A’s change in status and would not apply to items arising simultaneous with the events causing A to join the group. Furthermore, the proposed regulations provide for no electivity with respect to income and deduction items that arise simultaneously with A’s change of status, with said tax items being allocated to A’s short-period return under the proposal.
Exclusionary Part of Tax Benefit Rule Held Not to Apply to Refundable State Tax Credits
The Tax Court recently held that refundable New York state income tax credits (the “NY Tax Credits“) were taxable income to the taxpayer and were not excludable from income under the exclusionary part of the tax benefit rule. The taxpayer, as a member of limited liability company, had invested in certain NY Tax Credits. Due to the NY Tax Credits and other New York state credits claimed on his return, the taxpayer paid no New York state taxes. Furthermore, due to the partially refundable status of the NY Tax Credits, the taxpayer ended up receiving large refunds for 2005-2007. The taxpayer claimed that the NY Tax Credits were not taxable income because New York state law referred to these refundable credits as overpayments of state income tax.
Under the tax benefit rule (IRC Section 111(a)), a taxpayer is allowed to exclude a refund from his income if, but only if, he never got the benefit of a corresponding deduction for an earlier year. In other words, the recovery of taxes deducted in an earlier tax year is includible in gross income unless the deduction did not reduce tax imposed (i.e., the “exclusionary part” of the tax benefit rule).
The taxpayer argued that the NY Tax Credits were just like excess state income tax withholding and pointed out that the NY Tax Credits were defined by state law to be “overpayments” of state income tax. Accordingly, the taxpayer argued that the Tax Court had no power to call them something other than overpayments. He contended that since he had not taken a deduction for New York state taxes in an earlier year, the exclusionary part of the tax benefit rule applied to cause the refunded New York taxes to not be taxable.
The Tax Court, stating precedent that a particular label given to a transaction under state law is not necessarily controlling for federal tax purposes, ruled that the exclusionary part of the tax benefit rule did not apply and that, therefore, the refundable NY Tax Credits were taxable income under Section 61(a). The Tax Court stated that New York could not simply change reality by attaching a label to something that was clearly not what they claimed it to be. The Court also found that it was not relevant whether the taxpayer elected to receive the refund of the credits or to carry the credits forward and that any amount the taxpayer could have received as a refund would be deemed taxable under the doctrine of constructive receipt.
Isolated and Occasional Sales
In Rev. Rul. No. 15-001, the Louisiana Department of Revenue addressed whether the use of a third-party intermediary to broker the sale of a vessel would disqualify a transaction from qualifying as an isolated or occasional sale under La. R.S. 47:301(10)(c)(ii)(bb).
Under Louisiana sales tax laws, sales at retail are typically subject to Louisiana sales tax law. Nevertheless, La. R.S. 47:301(10)(c)(ii)(bb) generally states that the term “sale at retail” excludes an isolated or occasional sale of tangible personal property by a person not engaged in the “business” of selling such property.
La. R.S. 47:301(1) provides that the term “‘business’ includes any activity engaged in by any person or caused to be engaged in by him with the object of gain, benefit or advantage, either direct or indirect. The term ‘business’ shall not be construed to include the occasional and isolated sales by a person who does not hold himself out as engaged in business.” Furthermore, La. R.S. 47:301(12) provides that a “sale” means any transfer of title and/or possession, in any manner or by any means, of tangible personal property for consideration.
After consideration the relevant statutes, the Department of Revenue determined that the use of a broker will not necessarily disqualify a transaction from qualifying as an isolated or occasional sale as long as the seller (i) does not hold himself out to be engaged in the business of selling vessels; (ii) does not have a history of frequent, regular and repeated sales of vessels; (iii) maintains title of titled vessel (or possession, if the vessel is not titled); and (iv) purchased the vessel for his own use. In addition, the buyer must submit documentation (e.g., cancelled check, bill of sale, etc.) showing a transfer of ownership.
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