The conference will be held on May 4 at the Sheraton Metairie from 8am-3:30pm. For additional information, visit www.financialplanningnola.org.

Eligible Shareholder

In a recent case, Taproot Administrative Services, Inc. v. Comm’r., 109 A.F.T.R.2d 2012-1446 (9th Cir. 2012), the Ninth Circuit Court of Appeals affirmed the Tax Court’s decision that a Roth IRA is not an eligible shareholder of an S corporation. Under IRC § 1361, generally individuals, estates, certain exempt organizations and certain trusts (QSSTs and ESBTs) are eligible S corporation shareholders.  The Taproot case was decided before Treas. Reg. §1.1361-1(h)(1)(vii) was promulgated.  Treas. Reg. §1.1361-1(h)(1)(vii) now provides that individual retirement accounts (including Roth IRAs) are not eligible S corporation shareholders subject to certain exceptions.

Second Class of Stock

In order to make an election to be treated as an S corporation pursuant to IRC §1361(b), an otherwise eligible entity must only have one (1) class of stock outstanding.  There are numerous regulations and cases debating whether certain instruments or obligations constitute a second class of stock.  In a recent case, Santa Clara Valley Housing Group, Inc. v. U.S., 109 A.F.T.R.2d 2012-554 (N.D. Cal. 2012), the court examined the second class of stock safe harbor provisions concerning warrants.  Treas. Reg. §1.1361-1(l)(4) contains the rules treating certain instruments, obligations or arrangements as a second class of stock.  Generally, a call option, warrant or similar instrument issued by a corporation is treated as a second class of stock if taking into account all of the facts and circumstances, the call option is substantially certain to be exercised and has a strike price substantially below the fair market value of the underlying stock on the date that the call option is issued. 

In finding that the warrants in question did not constitute a second class of stock, the court in Santa Clara focused on the safe harbor provisions contained in Treas. Reg. §1.1361-1(l)(4)(iii)(C).  The safe harbor provides that a call option is not treated as a second class of stock if, on the date the call option is issued, the strike price of the call option is at least ninety percent (90%) of the fair market value of the underlying stock on that date.  

S Corporations Liable for Employment Taxes

In a recent case, Donald G. Cave, a Professional Law Corp., v. Comm’r, 109 A.F.T.R.2d 2012-1504 (5th Cir. 2012), the Fifth Circuit affirmed the Tax Court’s decision that associate attorneys were employees of an S corporation law firm.  As a result the S corporation was liable for past due employment taxes, penalties and interest.

This is one in a long line of cases involving the determination of whether an individual is an employee or an independent contractor.  In this case, the court focused on the common law factors illustrating whether a worker is a common law employee.  The IRS and courts generally examine numerous factors, sometimes described as a twenty (20) factor test, in ultimately determining whether a worker is an employee or an independent contractor.

In this case, the Tax Court originally concluded, and the Fifth Circuit affirmed, that the associate attorneys were employees rather than independent contractors because of the high degree of control that the corporation exercised over the associate attorneys.  Employee-independent contractor cases are factually intensive and can wreak financial havoc on companies in the form of past due employment taxes, penalties and interest on employers.  

ESTATE/GIFT

Portability Election

IRC §2010(c) allows the estate of a decedent who is survived by a spouse to make a portability election, which allows the surviving spouse to use the decedent spouse’s unused exclusion amount for transfers during life and at death.  The portability election only applies to married individuals dying after 2010.  One of the requirements for the portability election is that the executor of the estate of the first spouse to die must file a Form 706, even if the decedent spouse’s estate was less than the applicable exclusion amount.  If the executor of the decedent spouse’s estate does not file a Form 706, then the unused exclusion amount of the decedent spouse will not transfer to the surviving spouse. 

Generally, an executor has nine (9) months to file a Form 706 from the date of death of a decedent.  The executor of an estate can request an automatic six (6) month extension of time to file by filing Form 4768.  IRS Notice 2012-21 grants a six (6) month extension of time to file Form 706 until fifteen (15) months after the decedent’s date of death for decedents dying after 12/31/10 and before 7/1/11 if the executor failed to timely file Form 4768.  In order to qualify for this extension, the executor must file a fully completed Form 4768 and the Form 706 within fifteen (15) months of the decedent’s date of death. 

A Not So Lucky Lottery Winner

In the Dickerson case, T.C. Memo 2012-60, the taxpayer established an S corporation shortly after winning the lottery.  The taxpayer and her family were the shareholders of the corporation.  The taxpayer then transferred the lottery ticket to the S corporation, which ultimately claimed the lottery prize.  The IRS determined that the taxpayer made a gift as a result of the transfer to the S corporation and issued a deficiency notice for $771,000 for gift tax owed. 

The court evaluated the facts of the case and found that the taxpayer had no family contract which required the taxpayer to transfer the ticket.  The court also found that there were no predetermined sharing percentages or voting rights, and there was no pooling of money of the family members for the purchase of lottery tickets.  The court concluded that the transfer to the S corporation was a gift because the taxpayer transferred property to a corporation for less than adequate consideration.

GENERAL

Fractional Aircraft Ownership Programs Fuel Surtax

The IRS recently issued IRS Notice 2012-27 which provides guidance on the tax imposed by IRC §4043 on fuel used in a fractional program aircraft.  IRC §4043 imposes a $0.141 per-gallon tax for fuel used in a fractional program aircraft after March 31, 2012: (1) for the transportation of a qualified fractional owner with respect to the fractional ownership aircraft program of which such aircraft is a part; or, (2) with respect to the use of such aircraft on account of such qualified fractional owner, including use in a deadhead service. 

Generally, a fractional ownership aircraft program is a system of aircraft ownership and exchange that involves a single program manager that manages a fleet of aircrafts on behalf of fractional owners.  The program entitles the fractional owner to fly on any of the aircrafts in the fleet regardless of whether the owner has an ownership interest in the aircraft in which the owner flies. 

The IRS Notice provides some of the specific definitions and citations essential to fractional aircraft ownership programs.  The IRS Notice provides that fractional ownership program managers must report the tax imposed by IRC §4043 on Form 720, and taxpayers liable for the tax must make deposits semimonthly.

Employer Identification Numbers

The Treasury Department has recently issued proposed regulations which would require taxpayers that receive employer identification numbers to provide updated information to the IRS in a manner and frequency required by certain forms, instructions or other appropriate guidance.  To date, the Treasury Department and the IRS have not issued the proposed methods of updating the required information.  As of now, the Treasury Department has requested comments from practitioners on the best methods for obtaining this information.

Audits

Several IRS officials have recently announced that the IRS is currently reorganizing its audit operations.  The IRS is attempting to streamline audits for the nation’s largest companies through the use of new forms like the Schedule UTP and the establishment of new resolution programs.  While the IRS will likely have some type of presence at the nation’s largest taxpayers, the goal of the IRS is to devote more resources to audits for mid-sized taxpayers, including S corporations, partnerships and smaller C corporations.  The IRS is also increasing the size of its international auditors due to the increasing volume and complexity of international transactions. 

LOUISIANA

The Louisiana Department of Economic Development has recently amended the research and development tax credit program rules due to changes in the statutes governing the research and development tax credit (La. R. S. 47:6015).  Specifically, the Louisiana Department of Economic Development has amended certain provisions of the Louisiana Administrative Code contained in Sections 2901-2911 regarding the research and development tax credit programs.  The amendments include, without limitation, certain changes to definitions contained in La. Admin. Code 13:I:2903, the exclusion of certain expenditures from research and development programs, and the extension of the research and development tax credit program through December 31, 2019. 

If you would like to receive BHBM Email Tax Alerts to stay informed on the latest changes in tax law on the Federal and State level, please email Katie Kelly at kkelly@bhbmlaw.com. 

Payroll Tax Cuts on the Horizon

On Friday, February 17, 2012, Congress reached an agreement to extend the highly-debated payroll tax cuts through the end of 2012. Congress originally enacted payroll tax cuts as part of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, and later extended these payroll tax cuts through February, 2012 in The Temporary Payroll Tax Cut Continuation Act of 2011, which was signed by President Obama on December 23, 2011.

The payroll tax cuts were included in the Middle Class Tax Relief and Job Creations Act of 2012, which was signed by President Obama last night. Because of this extension, the employee portion of the social security tax withholding remains at 4.2% for 2012 (a reduction from 6.2%). 

IRS Form 2848

Effective March 1, 2012, tax practitioners may no longer file one (1) Form 2848, Power of Attorney, for a married couple who filed a joint return. The most recent instructions to the Form 2848 require that a tax practitioner must have a separate Form 2848 for a husband and wife that filed a joint return, even if the same tax practitioner represents both individuals.

Additionally, the Form 2848 now requires a tax practitioner to include his or her preparer tax identification number (PTIN). 

Another Offshore Voluntary Disclosure Program

The IRS has recently reopened its offshore voluntary disclosure program with a few changes. On January 9, 2012, the IRS announced that it had collected more than $4.4 billion under the two previous disclosure programs. The offshore voluntary disclosure programs were originally adopted to allow people to disclose offshore assets and to get current with filing obligations, while paying lesser penalties to the IRS. There are severe penalties for failing to disclose offshore assets to the appropriate governmental entity, including a penalty of up to 75% of the amount in the offshore account.

The current program is similar to the program that opened in February 2011 and continued through September 9, 2011. Presently, there is no set deadline to apply for the current disclosure program; however, the IRS announced that it may change this program at any time, including the amount and severity of the applicable penalties.

Current participation in the offshore disclosure program includes a penalty of 27.5% of the highest aggregate balance in the foreign bank account/entities or value of the foreign assets during the eight (8) full tax years before the disclosure (an increase from 25% of this same amount in previous programs). Additionally, participants in the disclosure program must file all original and amended tax returns for the immediate eight (8) years and make all payments for back-taxes, including interest and penalties (including accuracy-related penalties if applicable) for such years.

For certain taxpayers whose offshore accounts or assets did not exceed $75,000, the penalties may be reduced from 27.5% to 12.5% (or 5% in some cases). 

Another New Form for Foreign Assets

Taxpayers who own specified foreign financial assets must file Form 8938, Statement of Specified Foreign Financial Assets, for the 2011 tax year.

U.S. citizens, resident aliens of the United States for any part of the year, or individuals electing to be classified as a resident alien of the United States for purposes of filing a joint return, who own specified foreign financial assets meeting a certain threshold must file Form 8938, Statement of Specified Foreign Financial Assets, for the 2011 tax year and beyond, unless an exception is met.

These covered individuals must file Form 8938 if the following thresholds are met:

-for unmarried taxpayers living in the United States (and for married taxpayers filing a separate return living in the United States), if the total value of the specified foreign financial assets exceeds $50,000 on the last day of the year or $75,000 at any time during the year; and

-for married taxpayers filing a joint return and living in the United States, if the total value of the specified foreign financial assets exceeds $100,000 on the last day of the year or $150,000 at any time during the year.

There are several thresholds for other categories of taxpayers and several examples contained in the instructions to the Form 8938.

For purposes of Form 8938, specified foreign financial assets include:

-any financial account maintained by a foreign financial institution; and

-to the extent held for investment and not held in an account maintained by a U.S. or foreign financial institution, any stock or securities issued by someone that is not a U.S. person, any interest in a foreign entity, and any financial instrument or contract that has an issuer or counterparty that is other than a U.S. person.

If the taxpayer reports the specified foreign financial assets on a timely filed Form 5471 or Form 8865, then the taxpayer must reference these other forms on Form 8938 without completing the entire Form 8938. There are numerous other exceptions that apply to the Form 8938 depending upon the circumstances.

The IRS also intends to issue regulations and further guidance requiring domestic entities to file Form 8938. However, currently, domestic entities are not included in the filing requirements for the 2011 tax year.

This form is in addition to the Report of Foreign Bank and Financial Accounts (FBAR).

Depreciation in 2012

Reminder, that bonus depreciation for qualified property acquired and placed in service after December 31, 2011 and before January 1, 2013 has been reduced from a one hundred percent (100%) deduction to a fifty percent (50%) deduction. However, there are certain exceptions for aircrafts and long-production period property.

Additionally, the IRC §179 expense election has been reduced from $500,000 in 2011 to $139,000 in 2012. Further, the amount allowed for the IRC §179 election is phased out dollar for dollar once a taxpayer places $560,000 of assets into service in 2012.

Streamlined Installment Agreement

The IRS has a streamlined installment agreement program for taxpayers based on the size of the tax debt. In previous years, taxpayers who had outstanding tax liabilities of less than $25,000 could enter into an installment agreement with the IRS without the need for disclosing financial information as long as the debt would be paid off in five (5) years. The IRS recently broadened the streamlined installment agreement process.

The streamlined installment agreement process now applies to taxpayers with outstanding tax liabilities of less than $50,000 who will pay off such liability in six (6) years or less.

If you would like to receive BHBM Email Tax Alerts to stay informed on the latest changes in tax law on the Federal and State level, please email Katie Kelly at kkelly@bhbmlaw.com. 

This exam and certification is offered by the National Federation of Paralegal Associations, Inc. (NFPA^_®) to test the competency level of experienced paralegals. It is designed for professional paralegals, with a minimum of two years experience, who want to pioneer the expansion of paralegal roles for the future of the profession.

Congratulations Nicole. We are proud of you.    

Wednesday, March 14, 2012
Southern Yacht Club – West End Park
105 Roadway Drive, New Orleans, LA 70124

8:00 – 8:30 a.m. Registration & Continental Breakfast
8:30 – 11:30 CE Seminars
New Orleans SFSP and/or NAIFA GNO members: $20
Guest Fee: $30.00

RSVP by Thursday, March 8 to Dianne Smith
Email: sfspnola@bellsouth.net
Call (504) 737-0089    or    FAX (504) 737-0091

Please mail payments to:
N.O. SFSP or NAIFA GNO, 1016 Colonial Club Drive, Harahan, LA 70123

Go-Coil provides coiled tubing services to exploration and production companies operating in the United States onshore and offshore oil and gas markets. View the full press release here. 

The HELP program was founded in early 2004 by Judge Jay Zainey, of the United States District Court for the Eastern District of Louisiana, to provide attorneys in New Orleans with the opportunity to assist homeless individuals with legal matters on a single consultation, advice only and/or limited representation basis. The program has since expanded throughout 15 states.

For more information on the program, visit www.homelesslegalprotection.com.

Philanthropy is a tax, albeit a voluntary tax. It is the way we in America support education, social services, the needy and religion. Without this, our government would have to assume the responsibility of funding these services. This could only be accomplished through taxes. Most people believe that providing services through governmental bureaucracy is very inefficient and expensive. If this is true, then all of our taxes are lower than they would otherwise be if Americans did not generously support these needed causes. Therefore, such contributions are really a tax (a substitute
for taxes) and a debt that all of us owe. By giving we reduce the country’s overall taxes, but we can also benefit personally as a result of our tax code structure. These benefits are of a financial nature but also a personal nature since donating funds to charity, and I may add time and services, can be a very rewarding experience. 

This article is based upon the tax laws now in effect and on the assumption that the tax code structure will not change even though rates, exemptions and deductions may be modified. Examples of tax savings resulting from charitable donations and bequests are listed below. These calculations are based on a 33 percent federal income tax rate, a 6 percent state income tax rate and a 35 percent estate tax rate with no state inheritance tax.

A $100,000 cash donation could reduce the donor’s income taxes by $39,000 (33 percent plus 6 percent), resulting in an after tax cost of $61,000. 

If the donor dies shortly after this donation, then his estate would have been reduced by $100,000, resulting in an estate tax saving of $35,000, further reducing the after-tax cost of this donation to $26,000 ($61,000 minus $35,000). In this example, our federal and state governments will have subsidized about 75 percent of this donation. 

If the donor does not want to part with this prior to his death, he could bequeath $100,000 to a surviving spouse, or if his estate is not subject to estate taxes, then to his children with a request that they donate $100,000. This would reduce the cost of this donation to the family unit to $61,000 since there would be a $39,000 income tax saving. If a donor wants to donate to a particular charity in his will rather than parting with the amount during his lifetime, it may make more financial sense to bequeath the amount of the proposed donation to a surviving spouse or children with a request that the recipient donate the funds to the charity. This donation method provides an income tax benefit to the family unit and does not deprive the donor of the use of these funds during his lifetime. An estate tax benefit is not applicable since this taxpayer would have had no estate taxes to pay.

All lawyers have a debt to the Louisiana Bar, particularly since our professional fees have not been subjected to sales taxes. We also don’t have to buy an occupational license. Therefore, we are obliged to support the Louisiana Bar. One of the best ways to support the Bar is through contributions to the Louisiana Bar Foundation (LBF), whose funds are used for Bar-related causes. The LBF will work with a donor to dedicate a contribution for a particular use. 

There are many vehicles available to transfer assets to charitable institutions which, for tax purposes, are known as 501(c) (3) entities. The first question is what type of property should be donated; the second, how should the donation be made.

Donations can be made in cash or with capital gain or other property. A likely subject of a gift is publicly held securities that have been held by the taxpayer for more than a year. If securities held for more than a year are donated rather than cashed, then the donor would avoid the capital gain taxes due if securities were sold. 

Donations also can be made of a remainder interest in property with the donor retaining an income equivalent, i.e., an amount equaling a percent of the value of the property, or can be made of the income if the donor wants to retain the principal. These various donation alternatives include Charitable Remainder Unitrust, Charitable Remainder Annuity Trust and Charitable Lead Trust. Gifts made to a 501(c)(3) entity should be coordinated with personal estate planning objectives such as the taxpayer retaining the income interest or remainder interests or transferring those interests to others.