Baldwin Haspel Burke & Mayer LLC

BHBM Tax Law Alert 12/13/2011


FEDERAL TAX LAW UPDATES

2012 Cost of Living Adjustments Announced

The Internal Revenue Service has issued Rev. Proc. 2011-52 containing the cost of living adjustments for various provisions in the Internal Revenue Code for 2012. Due to inflation, many of the various income thresholds and limitations have been increased for 2012. A non-exhaustive list is provided below:

Provision/Taxpayer

2011 Amount

2012 Amount

Standard Deduction

Single Taxpayers

$5,800

$5,950

Married Filing Jointly

$11,600

$11,900

Head of Household

$8,500

$8,700

Married Filing Separate

$5,800

$5,950

Personal Exemption

All

$3,700

$3,800

Estate Tax Credit

All (Unified Credit)

$5,000,000

$5,120,000

Qualified Benefit Plans

Elective Deferrals for 401(k), 403(b), certain plans under 457 and federal government’s Thrift Savings Plan

$16,500

$17,000

Defined Contribution Plans (415(c)(1)(A))

$49,000

$50,000

Annual Benefit Limit (Defined Benefit Plan)

$195,000

$200,000

Entities Treated as Limited Partnerships for Purposes of Passive Activity Limitations under IRC § 469

The IRS has issued proposed rules (REG-109369-10) detailing new circumstances in which an interest in entity will be treated as an interest in a limited partnership under IRC § 469.  In particular, the new rules address the determination of whether a taxpayer materially participates in an activity as defined under IRC § 469(h)(2).  IRC § 469(h)(2) provides as follows:

Except as provided in regulations, no interest in a limited partnership as a limited partner shall be treated as an interest with respect to which a taxpayer materially participates.

Under the proposed rules, an interest in an entity will be treated as an interest in a limited partnership under IRC §469 if:  (1) the entity is classified as a partnership and; (2) the holder of the interest does not have rights to manage the entity at all times during the entity’s taxable year.  Under the proposed rules, the rights to manage an entity include the power to contractually bind it.

Prior to the proposed rules, the IRS relied on liability limitations in order to determine whether an interest is an interest in a limited partnership as a limited partner.  Under the proposed rules the IRS stated that they, “[A]dopt an approach that relies on the individual partner’s right to participate in the management of the entity.”

Voluntary Compliance Program for Misclassified Workers

The IRS has launched a new voluntary compliance program that allows employers to prospectively reclassify workers as employees that such employers have erroneously treated as independent contractors.

Generally, section 530 of the ’78 Revenue Act (as amended) provides retroactive and prospective relief from employment tax liability for employers who misclassified workers as independent contractors using the common law facts and circumstances standards.  Section 530 applies only if:

1) The taxpayer does not treat an individual as an employee for any period, and does not treat any other individual holding a substantially similar position as an employee for purposes of employment tax for any period (the substantive consistency requirement);

2) For post-’78 periods, “all federal returns (including information returns) required to be filed by the taxpayer” with respect to the individual for such period “are filed on a basis consistent with the taxpayer’s treatment” of the individual as a non-employee (the reporting consistency requirement); and

3) The taxpayer had a “reasonable basis” for not treating the worker as an employee (judicial precedent or IRS rulings, a past IRS audit, or a long-standing practice of a significant segment of the relevant industry) (the reasonable basis requirement).

Previously, the Section 530 relief only applied for taxpayers under audit.

Under the new initiative, the IRS has determined that it would be beneficial to create a program that allows for voluntary reclassification of workers as employees outside of the examination context and without the need to go through normal administrative correction procedures applicable to employment taxes.  The voluntary classification settlement program is available to taxpayers who are currently treating their workers as independent contractors or other non-employees and want to prospectively treat the workers as employees.  See IRB 2011-41.

Tax-Free IRA Distributions for Charitable Donations

As we approach the end of the 2011 taxable year, clients that are charitably inclined and own traditional or Roth IRAs may wish to make a donation from such IRAs directly to a charity.  Under the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, taxpayers that are 70.5 years of age or older may directly transfer as much as $100,000 per taxable year to qualified charitable organizations through December 31, 2011.  The taxpayer may exclude the amount of such a donation from gross income.  See IRC § 408(d)(8).  Furthermore, the donation will qualify as a distribution for purposes of satisfying the required distribution amount for such taxable year.  However, the payment must be made directly from the IRA to a qualified charitable organization and does not include payments made to supporting organizations as defined under IRC § 509(a)(3).

Preparer Tax Identification Number Reminder

This is a reminder for all tax practitioners to renew Preparer Tax Identification Numbers (PTINs) for 2012.  PTINs must be renewed on a yearly basis.  Additionally, the IRS has issued a revised Form 2848, Power of Attorney, which includes a section requesting PTINs for tax professionals.

STATE TAX LAW UPDATES

Foreign Limited Partners Not Subject to Franchise Tax

The Louisiana First Circuit Court of Appeals has ruled that limited partners in a limited partnership doing business in Louisianawere not subject to franchise tax because the companies did not own or use directly any part of their capital or property in the state in a corporate capacity.  See UTELCOM Inc. v. Bridges, 2011 WL 4017522, 2010-0654 (La.App. 1 Cir. 9/12/11).  The court so found that the language in La. Admin. Code §61:I.301(D), which provides that the indirect ownership of property through another entity or venture subjects a corporation to franchise tax, was an impermissible expansion of the statute by the Louisiana Department of Revenue.

The taxpayers in this case were subsidiaries of Sprint Corp. and limited partners in Sprint Communications LP, which was registered inLouisianaas a foreign limited partnership and conducted business in the state.  The Louisiana Department of Revenue assessed franchise tax on the taxpayer on the basis that Sprint chose to do business in the state through the limited partnership directed by the by the taxpayer and its wholly-owned subsidiaries.  The court determined that the Louisiana Department of Revenue did not show how Sprint directed the activities of the limited partnership or its limited partners but only suggested “that they were united in their purpose.”  The court ruled that without a “unity of purpose” the Louisiana Department of Revenue could not rely on its administrative inclusion of a unity of purpose in La. Admin. Code §61:I.301(D).

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. 


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