Wichita State University
Accounting & Auditing
Conference
Tax Update
May 20, 2010
Wichita, KS
What We’re Going to Cover
 7216 Guidance
 Disclosure of uncertain tax positions
 Tax preparer registration
 Tax provisions in health care bill
 HIRE Act
 Prospective legislation
 Levin’s list
Section 7216

Brief History




Only criminal penalty applicable to preparers
Prohibits misuse of taxpayer information
Regs 1/1/09 required advance written permission for any
use other than tax preparation
New guidance in late December 2009 satisfied many of
our concerns
IRS Clarifications

Advance approval not required for:

Newsletters – even if:



Disclosure of statistical data of practice


Written and distributed by unrelated third party
Filtered by type of client
i.e. in practice development activity
Disclosures for


Quality, peer review or conflict reviews
Professional liability insurance matters

Acknowledged “normal course of accounting
services” exception

May make return information available to:




Taxpayers regarding changes in tax law and
regulations
Third parties such as stockholders, management,
suppliers or lenders
Providing K-1 to CPA preparing a partner’s return?
Next steps

Continue to work with Treasury

To provide further guidance on the “normal course” language
What We’re Going to Cover
 7216 Guidance
 Disclosure of uncertain tax positions
 Tax preparer registration
 Tax provisions in health care bill
 HIRE Act
 Prospective legislation
 Levin’s list
Disclosure of Uncertain Tax
Positions - Background
 US v. Arthur Young (1984) gave IRS access to tax
accrual workpapers
 Historical IRS “policy of restraint”
 1/26/2010 - IRS Commissioner Shulman introduced
Announcement 2010-9
 Fin 48 calculation is stated impetus for IRS proposal
 Proposal status - not yet effective
 Would require most business tax returns to annually
disclose “uncertain tax positions”
7
Disclosure of Uncertain Tax
Positions - Concerns Being
Considered
 May alter traditional notion of voluntary and cooperative
tax reporting system
 May cause taxpayers to seek non-traditional preparers
 Possible effects on financial statement reporting
 Difficult to apply to “factual” situations
 Allocation between land and building
 Executive compensation
 Difficult to apply to flow-thru entities
8
What We’re Going to Cover
 7216 Guidance
 Disclosure of uncertain tax positions
 Tax preparer registration
 Tax provisions in health care bill
 HIRE Act
 Prospective legislation
 Levin’s list
Tax Preparer Registration Drivers
• Driven by significant errors with refundable
tax credits, i.e., EITC and home buyers credit
• IRS commenced a review to:
•
Enhance competency, and
•
Elevate the ethical conduct of preparers
10
Tax Preparer Registration –
Overview
 January 4th – IRS released proposal
 Commissioner announced his intent to implement:
1. PTIN
2. All preparers subject to Circular 230
3. CPE component
4. Testing
 Phased in implementation – not applicable to 2010
filing season
 Non-signing preparer issue
11
AICPA Positions
•
Support PTIN requirement
•
Support Circular 230 requirement for all preparers
•
AICPA succeeded in exempting CPAs from education
and testing requirements
•
Concerns
•
About the exam creating taxpayer confusion
•
If “non-signing” preparers subject to registration
12
Comparing CPA and IRS-registered
tax preparer requirements
CPA requirements
IRS requirements
 College graduate
 High school graduate
 150 hours college
 18 years old
education
 Uniform CPA exam
 120 hours CPE over
3-year period
 IRS exam – level
unknown
 15 hours annual tax
education
13
What We’re Going to Cover
 7216 Guidance
 Disclosure of uncertain tax positions
 Tax preparer registration
 Tax provisions in health care bill
 HIRE Act
 Prospective legislation
 Levin’s list
Health Care Taxes
Description
Amount
Phase In
Effective
Date
Individuals
No insurance then pay greater of
Itemized deduct medical
Medicare tax earned income
Medicare tax on invest income
$95 or 1% income
2014
$325 or 2% income
2015
$695 or 2.5% income
2016
Excess over 10% AGI
2013
.9% on earned income
>$200 AGI single
2013
$250 AGI jt
2013
3.8%
Same as above
2013
2% income
< 133% poverty level
2013
3% income
133%-150%
2013
4%
150%-200%
2013
6.3%
200%-250%
2013
8.05%
250%-300%
2013
9.5%
300%-400%
2013
10%
n/a
2011
Premium assistance
Refundable cr if premium exceeds
Excise tax on tanning
Health Care
Individuals – Health Coverage
1. No insurance then pay greater of
 $95 or 1% of income (2014)
 $325 or 2% of income (2015)
 $695 or 2.5% of income (2016)
2. Premium assistance (2013)
 Ranges between 2% - 9.5% of income
 Available up to 400% of poverty level
Health Care
Individuals – Medical Expenses
1. Hurdle for itemized deduction (2013)
 Increases from 7.5% to 10% AGI
 Transition rule for seniors thru 2016
2. Change in definition of medical
expenses (2011)
 Over-the-counter medications
 Coverage for adult children
Health Care
Medicare Tax (2013)
 3.8% on investments
 0.9% on earned income
 Affects high income taxpayers
 >$200,000 of income (single)
 > $250,000 of income (joint)
Health Care Taxes (cont’d)
Description
Amount
Phase In
Effective
Date
40% excise
$10,200 s ingle
2018
$27,500 family
2018
$11,800 single
2018
$30,950 family
2018
Insurance Companies
Cadillac plans tax on premiums over
If high risk profession or over 55
Same
Health Care
Cadillac Plans
 $10,200 single; $27,500 family
 Higher limits for high risk professions
and over 55
 40% excise tax
 Effective 2018
Health Care Taxes (cont’d)
Description
Amount
Phase In Effective
Date
Employers
If no medical plan
• Generally
•$2,000 x(# ees-30)
•2014
•n/a
•2014
< 25 employees <$50k avg wage
9% premiums paid
2011-2013
<10 employees <$25k avg wage
35% premiums paid
Same
40% under paid tax
Enactment
• If < 50 employees
Small business credits
Penalty
Codification Economic Substance Doc
Health Care
Employer Requirements
 If no plan, penalty
 $2,000 x (number of employees-30)
 Not applicable if fewer than 50
employees
 Effective 2013
 Small business credits (2011-2013)
 35% premiums (<10 employees)
 9% premiums (<25 employees)
Codification of Economic
substance
Included in health care legislation
Applicable if no benefit other than tax savings
Penalty 40% tax savings (20% if disclosed)
Revenue increase $5.5 bil
What We’re Going to Cover
 7216 Guidance
 Disclosure of uncertain tax positions
 Tax preparer registration
 Tax provisions in health care bill
 HIRE Act
 Prospective legislation
 Levin’s list
Hiring Incentives to Restore
Employment Act
If
 New hire after 3/19/10 and before 1/1/11
 Must be unemployed for >60 days
Then
1. Social Security Tax Exemption
 6.2% of wages paid up to FICA limit of $106,800
(i.e., max. of $6,621)
 Would still owe Medicare tax
2. Income Tax Credit
 Up to $1,000
 Must retain worker for 52 weeks
 2010 benefit but taken on 2011 returns
HIRE Act
1. Extends 179 exp through 2010 - $35
mil
2. Expands Build America Bonds - $4.56
bil
 Subsidizes 65% interest payment
to issuer
179 – $250,000 expensing
allowance

Phase out dollar for dollar starts at $800,000
Note –
 Not subject to mid-year or mid-quarter convention
 Not a preference item for AMT – 56(a)(1)(B)
 Can be new or used property
 Illinois conforms to federal law
 If not extended beyond ‘10
 ‘11 – 25k write off – phase out begins at $200k
What We’re Going to Cover






7216 Guidance
Disclosure of uncertain tax positions
Tax preparer registration
Tax provisions in health care bill
HIRE Act
Prospective legislation




Levin’s list
S 2917 Small Business Jobs Act
Estate Tax
Extenders Bill
Levin’s List
 Estate tax
 Permit an election of 2009 or 2010 rules
 AMT
 2-year patch
 Marginal rates
 Extend 2001 cuts for middle-class (10,15, 25 and
28% rates)
 Bring back the 39.6% rate
 Extend unemployment benefits
What We’re Going to Cover






7216 Guidance
Disclosure of uncertain tax positions
Tax preparer registration
Tax provisions in health care bill
HIRE Act
Prospective legislation




Levin’s list
S 2917 Small Business Jobs Act
Estate Tax
Extenders Bill
Small Business Tax Relief
House and S 2917
 100% exclusion from gain sale small business stock
 Purchase directly from Corp between 3/15/10 and
12/1/12
 When corp has less than $50 mil in assets
 Hold for 5 years
 Start-up expenses
 Immediate deduction $20,000 (currently $5,000) but
reduce dollar for dollar to extent expenses exceed
$75,000
 Extend “Build America Bonds” to 2013
 IDB bonds issued in 2011 exempt from AMT
S 2917 Penalty Relief
6707A failure to report listed transaction
 Strict liability penalty
 $100k/individual - $200k for other taxpayers
 IRS extended until June 1 its moratorium on
collecting penalty and/or filing liens
 S 2917
 reduce penalty to 75% tax benefit
 Retroactive to1/1/07
S 2917 Small Business and
Infrastructure Jobs Act
 Revenue offsets
 1099’s for expenses related to rental property
 Clamp down on federal contractors and vendors
 Minimum term of 10 years for GRATs
 Various international tax provisions
What We’re Going to Cover






7216 Guidance
Disclosure of uncertain tax positions
Tax preparer registration
Tax provisions in health care bill
HIRE Act
Prospective legislation




Levin’s list
S 2917 Small Business Jobs Act
Estate Tax
Extenders Bill
Estate Tax ??
 Temporary fix for confusion
 Permit an election to follow 2010 repeal or 2009
rates and exemption
 Exemption $5 mil
 Rate – 35%
 New features
 Portability between spouses
 Conformity with gift, GST and special use
valuations
 Exemption indexed to inflation
What We’re Going to Cover






7216 Guidance
Disclosure of uncertain tax positions
Tax preparer registration
Tax provisions in health care bill
HIRE Act
Prospective legislation




Levin’s list
S 2917 Small Business Jobs Act
Estate Tax
Extenders Bill
Senate Extenders Bill
Individuals
 Energy efficient home credits
 Standard deduction for real estate taxes
 Itemized deduction for sales taxes
 Qualified tuition deduction
 Charitable contributions from retirement plans
 Refundable low-income housing credits
Businesses
 R&D credit
 15 yr life for leasehold, restaurant and retail improvements
 Charitable deduction for food inventory
Offsets
 Repeal Black liquor credit - $21.7 bil
 Increase reporting requirements for first time home buyer – negligible
 Codify economic substance doctrine - $5.5 bil
 Information reporting for rental property expense payments $2.5 bil
Codification of Economic
substance
Included in health care legislation
Applicable if no benefit other than tax savings
Penalty 40% tax savings (20% if disclosed)
Revenue increase $5.5 bil
Cases & Rulings
61 – Settlement Credit Card
Debt
 Payne, Jr. 8th Cir. 2009-7793, affrmg TC
 Facts
 Taxpayer renegotiated lower credit card debt
 Lower amount was not less than result if “normal”
interest rate had applied
 Taxpayer argued reduction should be regarded as
purchase price adjustment
 Decision
 Court denied taxpayer both arguments
 Reduction in debt was income
61(a)(12) – Income from
Forgiveness of Debt
Paul Neal Jensen; T.C. Memo. 2010-77
Facts
 Husband was obligor on a bank debt
 Wife agreed to assume the liability in divorce decree
 Debt was cancelled by bank
Issue
 Who recognizes the income from discharge of
indebtedness, H or W?
Decision
 Husband because he was the obligor the bank
looked to for payment
67(a) – Miscellaneous
Itemized Deductions
James Purdy, TC Sum 2010-26
Facts
 Purdy was an employee of Merrill Lynch
 Merrill Lynch terminated him
 Purdy claimed wrongful termination
 Case went to arbitration
 Purdy reported award as wages but legal expenses on Sch C
Issue
 Were the legal expenses unreimbursed employee business
expenses subject to 67(a) 2% AGI limitation?
Decision
 Although the expenses were incurred after
Purdy’s employment, they were a direct
result of his employment and therefore are
subject to the 2% AGI rule
72(t) – Early Distributions
from IRA
Welker, TC Summ., Op. 2009-193
Facts
 Taxpayer rec’d various distributions ($69k, $44k, $81k,
etc.) from 2001-2005
 Taxpayer was a cancer survivor. Left job from
telephone company in 2001 as a result of treatments.
 Taxpayer rec’d wages 2001-2003 (book store), 2005
(“modest” income) and 2006 (new job as asst. nurse)
Issue
 Was the distribution in 2005 exempt from the 10%
additional tax on early distributions under the
exceptions for disability or part of a series of
substantially equal periodic payments?
Slide 44
72(t) – Early Distributions
from IRA
Decision
 Qualify under disability exception? NO
 “Disabled” only if unable to engage in any substantial
gainful activity
 Taxpayer started a new career in 2006
 Example in regs is “Cancer which is inoperable and
progressive”
 Qualify under substantial equal periodic payments?
NO
 Notice 89-25 requires calculation of payments under 1 of
3 methods: (1) RMD method; (2) fixed amortization
method; or (3) fixed annuitization method
Slide 45
152 – Dependency Exemption
Aaron Lee Hill, TC sum Op 2009-188
Facts
 Hill took in sister’s 2 children
 Provided housing, meals, etc.
Issue
 Can Hill claim exemption for children that are not his own?
Decision
 Yes under 152(c)(1) – also eligible for
 Child tax credits
 Earned income credit
 But not head of household because no evidence of cost of
maintaining household
163 – Interest Deduction
Adams, TC Memo, 2010-72
Facts
 Homeowner put house in land trust
 Remained primarily liable for mortgage
 Rented house - renters




Had option to buy
Paid rent equal to mortgage and taxes
Obligated to carry insurance and maintain house
But were not obligated on the mortgage
Issue
 Can “renters” take home mortgage interest deduction for
portion of “rent” they pay equal to the mortgage interest?
Decision
 Yes, the terms of the agreement made
“renters” the equitable owners of the
residence
165 – Theft Loss
INFO 2009-05 (Information Letter)
Facts
 Stock loses value due to fraudulent or criminal acts
committed by corporate officers or directors
Issue
 Does this qualify for ordinary loss treatment under
Rev Rul 2009-9 and Rev Proc 2009-20 (guidance
related to Ponzi schemes)?
Conclusion
 No, distinguishable from Ponzi scheme because
criminal act not directly related to the acquisition of
the stock
165 - Casualty Loss
Justin Rohrs TC Sum 2009-190
Facts
 Rohrs was DWI on winding road
 Car damaged when it ran off road
 Insurance did not cover DWI incidents
Issue
 Was Rohrs eligible for casualty deduction?
Decision
Yes –
 level of intoxication and manner he drove did not indicate he was
indifferent to hazard
 Exact cause of accident not determined (DWI, speed, road
condition)
167 - Amortization
Recovery Group, TC Memo 2010-76
Facts
 Company bought out 23% shareholder
 Agreement included payment of $400,000 for
a covenant not to compete for one year
Issue
 Was the $400,000 paid for the covenant
deductible over the 12 months it was
effective?
Decision
 No, the 15-year write off is the norm for an
intangible resulting from the acquisition of a
business.
170 – Contribution Façade
Easement
Kaufman, 134 TC No. 9
Facts
 Kaufman donated façade easement
 Property subject to mortgage
Issue
 Can Kaufman claim a deduction for the
decrease in value of the property due to the
façade easement?
Decision
 Not eligible for the deduction
 Terms of the mortgage provided that, if the
building were destroyed, the bank would
have first rights to all insurance proceeds until
the mortgage was satisfied
 To claim the deduction, the donee must have
a guaranteed right to the value of the
easement
172(f)(4) – Specified
Liability Losses
CCA 201006028
Facts
 Homebuilder required to repair damage resulting
certain construction defects
 Builder treated expenses as incurred in settling a
product liability
 As such, builder argued the loss generated was
eligible for a 10-year carryback
Issue
 Should costs incurred to repair damage be treated as
product liability losses eligible for the 10-year
carryback?
Conclusion
 No , “product liability” limited to damages
due to injury or emotional harm or damage or
loss of the use of property (generally a tort
liability)
 The facts in this case were contractual
liabilities
 CCA concludes “defect” means “safety
defect”
197 – Amortization of
Intangibles
Recovery Group Inc. T.C. Memo. 2010-76
Facts
 Corp redeemed stock held by a minority shareholder
/ employee
 $400,000 of payment was for a 1-year covenant not
to compete.
Issue
 Can company deduct cost of the covenant not to
compete over its 12-month term?
Decision
 No - cost of a covenant not to compete is a section
197 intangible and must be amortized over 15 years
213 Medical Expense
 PLR 200941003
 Deduction denied for cost of baby formula
because the formula is “properly viewed as
food that the infant would normally
consume”
401 – Required Minimum
Distributions
Client turned 70 ½ 2009
 RMD suspended for 2009
 But must make RMD by 12/31/10
Client turned 70 ½ this year
 Has until 4/1/11 to take initial RMD
 But consider making initial RMD this year
 Tax rates may be higher next year
 Avoids bunching 2 RMDs into 2011
401(k)
Schwab v Dibickero, 9th Cir
 Facts
 Decedent rolled 401(k) over to IRA
 Willed IRA to children of previous marriage
 Issue
 Surviving spouse arguing that, to the extent the
IRA consists of the401(k) rollover, it automatically
goes to her
408 - IRAs
Chilton, D.C. Texas
Facts
 Chilton inherited mother’s IRA
 Chilton later filed for bankruptcy
 Bankruptcy law provides $1 mil exemption
from creditors for IRAs
Issue
 Does Chilton get to exclude the inherited IRA
from the assets in bankruptcy?
 Decision
 Wife’s position correct only if funds still held in
401(k)
 Once funds rolled over to IRA, surviving wife has
no priority over will
446 – Method of Accounting
ILM 200949040
Facts
 Accrual method company
 Bonus for employees fixed at year end
 But paid early in subsequent year
 Recipient must be employee at payment date
Issue
 Can company accrue deduction for bonuses at year end?
Conclusion
 No because payment is contingent on event in subsequent
year – continued employment
451 – Taxable Year of Inclusion
Gift Cards
FAA 20100901F
Facts
 Gift card income
 Deferred until redeemed if sold by company providing
the goods or services
 But currently taxable if sold by subsidiary
 Corp sells gift cards through LLC that is
disregarded
Conclusion
If LLC disregarded, treated as if sold by
company providing goods or services
461 – Year of Deduction
 CCA 200949040
 Facts
 Accrual method company
 Bonuses
 based on Year 1 income
 Paid within 2 ½ months of Year 2 if still an employee
 employees had no ownership in company
 Question
 Are bonuses deductible in Year 1?
 Conclusion
 No – conditioned upon an event that was not satisfied at
end of Year 1 - i.e. continued employment for 2 ½ months
Year 2
469 Passive Loss Rules
 PLR 201005016
 Interest S corp earns on working capital is not
treated as business income for purposes of the
passive loss rules regardless of its intended use
469 – Passive Losses
Newell, TC Memo 2010-23
Facts
 Newell was managing member of LLC that owned
and operated a country club in California
 Club operated at a loss
Issue
 Was the pass a passive loss that Newell has to defer
until he has passive income or disposes of his
interest?
Decision
 No, Newell was materially active and was not a
limited partner in a limited partnership
469 Passive activity Losses
 Rev Proc 2010-13
 Requires taxpayers to report their groupings
of passive activities
 Removes the Notice 2008-64 requirement for
disclosure whenever there is a disposition of
an activity within a grouping
 Applicable to tax years beginning after
1/25/10
469 – Passive Losses
Trask, TC Memo, 2010-78
Facts
 Trask owned several rental properties
 Most generated losses
 Trask spent more than 750 hr/yr and more
than 50% of his working hrs on the properties
Issue
 Did Trask qualify as a real estate professional
to enable him to claim the losses currently?
Decision
 No, he didn’t spend more than 750 hrs and
50% of his time on any one property
Note
 Could have avoided this problem by electing
to aggregate all his properties
 Disadvantage of aggregation is that he
would not be able to report a loss on the
disposition of any one property until he had
disposed of them all.
469 - Passive Losses
Thompson Ct. of Claims 2009
Facts
 Taxpayer had 99.9% interest in LLC taxed as
partnership
 Taxpayer was general manager of LLC’s operations
 LLC had loss
 IRC 469(h)(2) states limited partners deemed not to be
materially active
Issue
 Can taxpayer report the loss as an ”active” loss
Slide 71
Passive Losses
Decision
 Yes,
 Taxpayer’s activities similar to those of a general
partner
 Limited liability is not determining factor
 469(h)(2) meant to apply only to limited partners
because, unlike LLC owners, limited partners cannot
participate in the business and retain limited liability
 Note – IRS issued AOD acquiescence in result only
Slide 72
469 - Passive Activity
Losses
Agosto, TC Summ., Op. 2009-191
Facts
 Taxpayer’s incurred $60,000 of PALs on rental
property
 Taxpayer actively participated in rental property (and
eventually agreed losses were limited to $25,000)
 Taxpayer claimed add’l $44,000 casualty loss on same
rental activity (due to fire damage)
Issue
 Since the casualty loss was from rental activity, should
it be subject to the $25,000 limitation?
Slide 73
469 - Passive Activity
Losses
Decision
 Casualty loss limited under §469? NO.
 Section 469 does not apply to all casualty and
theft losses (Reg. §1.469-2(d)(2)(xi))
 Losses are NOT passive if:
 Caused from fire, storm, shipwreck, or other
casualty, or from theft;
 Losses that are similar in cause and severity do not
occur regularly; and
 Taxpayer sustains loss after 1989
Slide 74
469- election to Aggregate
Rental Activities
Donald William Trask v. Commissioner; T.C. Memo. 2010-78
Facts
 Since 1994 taxpayer aggregated his rental income and expenses
on Sch E as if the rental real estate activities were a single
activity.
 But did not attach to any return a statement electing to treat his
rental real estate activities as a single activity.
Issue
 Was reporting rental activity on an aggregate basis a “deemed”
election to aggregate
Decision
 The fact that petitioner consistently aggregated the rental
income and expenses from the rental properties on his Schedules
E is not a deemed election under the requirements of section
469(c)(7)(A).
469 – Interest in LLC not
Automatically Passive
AOD IRB 2010-14, 4/5/10
Facts
 Thompson owned 99% of charter airplane business held as
LLC
 IRS disallowed losses because he did not materially
participate under limited partner rules of 1.469-5T(e)(3)(i)
 Thompson argued that owner of LLC not same as limited
partner  Material participation should be determined under 7 tests of -
5T(a)
Decision Thompson, Fed Cl 2009
 Claims Court found for taxpayer
 IRS has acquiesced in “result only”
1012 - New Basis Reporting
Requirements
 Energy Improvement and Extension Act of
2008
 Notice 2009-17
 Proposed regulations issued 12/16/09
 Effective for stocks acquired on or after 1/1/2011
 Effective date for RIC and DRP stocks is 1/1/2012
 Other securities have until 1/1/2013
 AICPA Comments
Slide 77
1031 – Like-Kind Exchanges
Rev Proc 2010-14
Facts
 Like kind exchange using Qualified Intermediary
 Qualified intermediary goes bankrupt before replacement
property is acquired
 Code requires replacement to take place within 180 days from
when the relinquished property is surrendered
Issue
 If the bankruptcy exceeds 180 days, does the owner of the
relinquished property have to recognize gain?
Conclusion
 No – owner of relinquished property recognizes the gain from the
sale of the property only as actual cash is received after QI comes
out of bankruptcy
1031 – Like Kind Exchange
Facts
 taxpayer exchanging old off-road truck ($750,000
fmv $150,000 basis) for a dealer's new one ($760,000
 taxpayer transferred old truck to qualified
intermediary, which then sold the truck to an
individual related to the taxpayer for $750,000.
 The intermediary then purchased from the dealer's
inventory the new truck that the taxpayer had
selected, paying $760,000.
Issue
 Does this qualify as a tax free exchange under IRC
1031?
Conclusion
 1031(f) does not permit deferral of gain when
transaction is with a related party
 This result cannot be avoided restrictions by
structuring transaction through a n unrelated
party
 Also ineligible for exception under 1031(f)(2)
because a purpose was tax avoidance.
See also Rev. Rul. 2002-83
2031 - Estate Tax
 Congress did not extend the $3.5mil exclusion
and 45% marginal rate
 Accordingly, estate tax repealed for 2010
 Generally carryover basis except stepped up
basis for:
 First $1.3 mil of unrealized capital gain plus
 Additional $3 mil if the assets go to surviving
spouse
2033 - Family Limited
Partnerships
 Est of Shurtz, TC Memo 2010-21
 Facts
 FLP formed to hold timber land
 Non tax benefits
 Protected land from general creditors
 Provided centralized management
 Decision
 FLP approved where taxpayer demonstrated
important purpose other than tax savings
2501 - Gift Tax
Petter, TCM 2009-280
Facts
 Petter gifted units of LLC to children and charity
 Formula clause would reduce units to children
and increase units to charity if value later
determined to be greater
Issue
 Was the formula clause effective to adjust the
number of units deemed transferred or was it an
invalid “savings clause”
Decision
 Clause effective – made clear that gift was of
certain value not certain number of shares or
a certain % of interest in the LLC
2503(b) – Annual gift tax
exclusion
Price v. Comm’r, T.C. Memo. 2010-2
Facts
 Taxpayers formed LP to own privately held company and
commercial real estate. Company was sold w/in months.
 LP agreement
 Provided for discretionary distributions
 Prohibited transfers to 3rd parties
 Taxpayers transferred LP interests to children over 6 yrs.
Issue
 Did the transfers of the LP interests qualify for the annual
exclusion from gift tax liability under §2503(b)?
Slide 85
2503(b) – Annual gift tax
exclusion
Decision
 NO, the transfers were not present interest gifts
 Applied the methodology set forth in Hackl
 Donees must have immediate use, possession, or
enjoyment of either the transferred property or the
income therefrom.
 Taxpayers must show that
 the LP would generate income at or near the time of gifts;
 some portion of that income would flow steadily to the
donees; and (PROBLEM: No distributions in 97 or 01)
 the portion of income flowing can be readily ascertained.
(PROBLEM: Timing and amount of discretionary
distributions are pure speculation)
Slide 86
2503(b) – Annual gift tax
exclusion
Price v. Comm’r, T.C. Memo. 2010-2
Facts
 Taxpayers formed LP to own privately held company and
commercial real estate. Company was sold w/in months.
 LP agreement
 Provided for discretionary distributions
 Prohibited transfers to 3rd parties
 Taxpayers transferred LP interests to children over 6 yrs.
Issue
 Did the transfers of the LP interests qualify for the annual
exclusion from gift tax liability under §2503(b)?
Slide 87
2503(b) – Annual gift tax
exclusion
Decision
 NO, the transfers were not present interest gifts
 Applied the methodology set forth in Hackl
 Donees must have immediate use, possession, or
enjoyment of either the transferred property or the
income therefrom.
 Taxpayers must show that
 the LP would generate income at or near the time of gifts;
 some portion of that income would flow steadily to the
donees; and (PROBLEM: No distributions in 97 or 01)
 the portion of income flowing can be readily ascertained.
(PROBLEM: Timing and amount of discretionary
distributions are pure speculation)
Slide 88
2703 – Certain Restrictions
Disregarded
Holman, 8th Cir, 4/7/10, affmg TC
Facts
 Holman passed Dell stock into an limited
partnership
 Gifted partnership shares to children
 Subject to certain restrictions on ability of
children to transfer their interest in the pship
Issue
 Did the restrictions on transferability affect the
value of the gifts for tax purposes?
Decision
 Restrictions not effective in reducing value
 Most of assets were readily marketable securities
 No business purpose for the restrictions
 General partners had broad management
discretion
3111 – Social Security Tax
Quality Stores, DC Western District of Michigan
2/23/10 , affmg Bankruptcy Court
Facts
 Quality Stores laid off 75 workers
 Each was given supplemental unemployment
compensation benefits
 Quality argued “decoupling rule” of 3121(a)
treats FICA and wages separately
 IRS argued CSX, Fed Cir, 3/6/08 and Rev Rul 9072 concluded that severance pay was subject to
FICA
Decision
 Severance pay not subject to social security tax
 Not payment for services – rather “wage
replacement social benefit” as defined in 3402(o)(2)
Note
 IRS likely to appeal so employers should continue to
withhold but file protective claim for refund if:
 Layoff was involuntary – employees cannot be
given a choice to forgo the pay and continue work
 Has to involve more than one worker
4974(d) – Penalty for
Failure to Take RMD
PLR 201008049
Facts
 Beneficiary of decedent’s IRAs failed to take required minimum
distributions beginning the year after decedent’s death, 1999
 Beneficiary’s legal right to the IRAs was in dispute until 2008
while beneficiary was serving prison sentence for the murder of
the decedent
Issue
 Did the legal dispute over the rights to the IRAs effectively delay
the required date for the RMDs?
Decision
 Yes, failure to receive the distributions was beyond the control of
the beneficiary even though it was the act of the beneficiary
that caused the uncertainty.
New Basis Reporting
Requirements
 Energy Improvement and Extension Act of
2008
 Notice 2009-17
 Proposed regulations issued 12/16/09
 Effective for stocks acquired on or after 1/1/2011
 Effective date for RIC and DRP stocks is 1/1/2012
 Other securities have until 1/1/2013
 AICPA Comments
Slide 94
Heads Up
1. No phase-out of personal exemptions or
itemized deductions in 2010 but these will
return to pre-2006 levels in 2011 unless
Congress takes action
Have a Great Conference!