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In 2009, the IRS shocked the business community by advising taxpayers (by making a change to a form’s instructions) that anyone “doing business” in the U.S. could be subject to the Foreign Bank Account reporting (“FBAR”) rules, and, therefore be required to file Form TD F 90-22.1 to disclose bank account information for all bank accounts outside the U.S. with an aggregate value over US$10,000. The form requires the bank name, bank address, account number and highest value of the account during the tax year be given to the IRS with the person’s name and address.
Form TD F 90-22.1 Form Instructions: General Definitions: United States Person:
The term “United States person” means a citizen or resident of the United States, or a person in and doing business in the United States. See 31 C.F.R. 103.11(z) for a complete definition of “person.”
I shudder to think how the words: “a person in” and “doing business in the United States” will be ultimately defined. Is any physical presence or a business meeting in the U.S. over the line? We can assume the IRS will take an aggressive view. Please note that non-filing of Form TD F 90-22.1 causes horrendous penalty exposure. Recently, the IRS was settling non-filing cases for 20% of the undisclosed account value.
So, for example, if a French businessman who is a non-U.S. resident and non-U.S. citizen and non-U.S. taxpayer of any sort is “doing business” in the U.S., he could be required to file Form TD F 90-22.1 to disclose his business and personal bank accounts in France, Switzerland, or wherever (completely unrelated to his U.S. activities) to the U.S. Internal Revenue Service and U.S. Treasury Department. The ways in which he is “doing business” in the U.S. are completely, legally protected from U.S. taxation under provisions of our Tax Treaties. He has no income tax filings or tax to pay to the IRS. He gets taxed on all his income in his home country (France in this case) where he’s a resident. But the instructions requires him to file a FBAR form or face penalties.
I heard from many clients: “Well, if they are going to do that, I’m just stop doing business in the U.S.”
The IRS came to their senses:
Announcement 2010-16 temporarily suspends the requirement to file Form TD F 90-22.1, also known as the FBAR, as the IRS tries to clear up the definition of “United States person.”
“The IRS and the Treasury Department now believe it is appropriate to provide the following administrative relief: The requirement to file an FBAR due on June 30, 2010, is suspended for persons who are not U.S. citizens, U.S. residents, or domestic entities. Additionally, all persons may rely on the definition of “United States person” found in the July 2000 version of the FBAR instructions to determine if they have an FBAR filing obligation for the 2009 and earlier calendar years. The definition of “United States person” there is: (1) a citizen or resident of the United States, (2) a domestic partnership, (3) a domestic corporation, or (4) a domestic estate or trust.”
I’m so glad they feel it is “appropriate to provide the following administrative relief” for a bad rule that is an invasion of privacy and a barrier to international business!
See: http://www.webcpa.com/news/IRS-Suspends-FBAR-Filing-for-Non-Citizens-for-Now-53401-1.html
But this only applies to 2009 and earlier years…so, the threat is still alive for future years.
In an attempt to catch drug-dealers, money launders and terrorists (whom, might I add, don’t file these forms anyway!) the IRS is impeding legitimate business activities in the U.S. Who could blame a businessperson from reasoning: “If I have to fill-out a FBAR form and disclose my personal bank accounts, I’ll just stay out of the U.S.”
Update: 3/5/10
Excellent Wall Street Journal article on the recent change and on-going FBAR filing requirements.
http://online.wsj.com/article/SB10001424052748704541304575099852607819826.html?mod=WSJ_newsreel_personalFinance
If you have any questions or comments, please call GROCO at (510) 797 8661.
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From Ron Cohen:
As of 2/13/10, U.S. estate tax outcomes -- (and capital gains tax for the heirs) -- for taxpayers who pass away in 2010, are becoming more confusing each day Congress does not act to replace expired laws.
The following is a Wall Street Journal article on the complete mess Congress has made of the U.S. Estate tax and how we are seeing tax winners and losers based on the date of death.
Adam Smith wrote in the 1700s that a tax systems should be fair, simple and predictable. Congress has failed us on all three counts with the Estate tax…and the personal income tax…and the payroll tax…and the corporate income tax…and the excise tax…OK, I’ll stop now.
Good advice from the article:
“Experts are telling those affected to avoid irrevocable actions, like distributing or selling assets, while the situation remains unresolved.”
http://online.wsj.com/article/SB10001424052748703630404575053430667449198.html
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By alliantgroup, LP
On January 29th, the U.S. District Court for the Northern District of Texas (Dallas) issued its ruling in Trinity Industries, Inc. v. U.S. The legal holdings in the case provide yet another victory for taxpayers claiming the R&D tax credit. In its ruling, the court held that all of the taxpayer’s projects relating to the design and development of special order ships contained qualified research. In doing so, the court specifically rejected several key government arguments that the IRS frequently raises.
Business Components: The IRS tried to argue that the taxpayer’s made-to-order ships were ineligible for the R&D tax credit because they were not held for sale in the taxpayer’s ordinary trade or business. The Court held that the IRS’ argument was without merit, stating that “[t]he government cites no authority … and the Court sees nothing in the statute that would require such a narrow meaning.” To the contrary, the Court ruled that the development of these products – even if based on custom orders from clients – qualified as business components under IRC §41.
Integrating Existing Components: The IRS then tried to argue that the taxpayer’s research did not qualify because the taxpayer merely integrated existing components, such as hulls, propulsion systems, and engines. The court held that this interpretation “greatly oversimplifies” the taxpayer’s research because the systems in question “do not exist in a vacuum” but rather “interact with each other, sometimes in complex and nonintuitive ways.” The court therefore ruled that “determining the degree of QRE involved requires an examination of the overall scope of the effort required to specify the components and integrate them into the overall design of the ship.” This ruling helps to clarify that although some portions of a research project may have been previously developed or used by a taxpayer – that does not preclude the new project from being qualified.
Substantially All: The Court held that, under the substantially all rule, if 80% of a project constitutes a process of experimentation, then all costs associated with the project qualify. Specifically, the IRS criticized the taxpayer for claiming costs related to painting an experimental ship. The court ruled that when the product meets the substantially all requirement, “the risk of failure attaches to the entire project. The potential loss includes not just the experimental aspects, but also the paint.” This rule contradicts numerous positions taken by the IRS and opens the door for many costs – previously thought not to be allocable to research projects – to be included within the credit calculation.
According to Dean Zerbe, alliantgroup National Director and former Tax Counsel and Sr. Counsel on the Senate Finance Committee, “The court’s decision in Trinity Industries, Inc. v. U.S. is a ray of sunshine for manufacturers struggling in this difficult economy. Trinity is now the fifth case in a row that has provided good news for the manufacturing sector. This will make it easier for businesses to claim the R&D tax credit. With these court decisions, and Congress about to extend the R&D credit, now is the time for manufacturers and their financial advisors who have not previously elected to take advantage of this powerful credit, to reconsider the significant benefits of doing so. Overall, the District Court’s ruling is good news for taxpayers who have been wary of the IRS’ heavy handed administration of the R&D credit.”
Please call GROCO if you have any questions or comments regarding the above and the R&D tax credit at (510) 797 8661.
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Dear Clients & Friends:
In these troubled economic times, many financially distressed borrowers may have had some or all of their debt cancelled or forgiven by their lender last year. While such relief was no doubt welcome to people who received it, what they may not have realized is that debt forgiveness may have tax consequences. Specifically, debt forgiven in 2009 may have to be included as income on your 2009 return. However, not all canceled debts trigger taxable income. And, even if there is no exception or exclusion in a particular case, that may not be the last word. The tax bite may be reduced or eliminated if you can show that the amount reported by the lender is incorrect.
General rule. The tax laws specifically include income from the discharge of indebtedness in gross income. However, there are several exceptions to this rule. In addition, there are numerous exclusions from gross income for certain types of forgiven debts.
Exceptions. If the cancellation of debt by a private lender, such as a relative or friend, is intended as a gift, there is no income. Likewise, a debt cancelled by a private lender's Last Will and Testament triggers no income to the borrower.
There is also an exception for certain student loans. For example, doctors, nurses, and teachers agreeing to serve in rural or low income areas in exchange for cancellation of their student loans won't have income from the cancellation if they meet certain conditions.
Also keep in mind that there is no income from cancellation of deductible debt. For example, if a lender cancels home mortgage interest that could have been claimed as an itemized deduction on Schedule A of Form 1040, there is no tax problem to contend with.
Price adjustment. There is no income if an individual purchases property and the seller later reduces the price. The purchaser's basis (yardstick for measuring gain or loss on a later sale) in the property, however, is reduced by the amount of the purchase price adjustment.
Exclusions. In addition to the above exceptions, there are exclusions from the general rule for reporting canceled debt as income for:
- discharge of debt through bankruptcy,
- discharge of debt of an insolvent taxpayer,
- discharge of qualified farm debt,
- discharge of qualified real property business debt, and
- discharge of qualified principal residence debt.
These exclusions are quite complicated and a detailed discussion of them is beyond the scope of this letter. However, it is worth pointing out that the qualified principal residence debt exclusion applies where individuals restructure their acquisition debt on a principal residence, lose their principal residence in a foreclosure, or sell a principal residence in a short sale (where the sales proceeds are insufficient to pay off the mortgage and the lender cancels the balance). Also, the exclusions require certain tax attributes to be reduced and must be reported to the IRS on its Form 982.
Repurchased business debt. Income from certain repurchased business debt can be stretched out over several years. Although all of the deferred debt discharge income will eventually be recognized, you benefit from the deferral of tax to later years.
Form 1099-C, Cancellation of Debt. A taxpayer should receive a Form 1099-C from a federal government agency, financial institution, or credit union that forgives a debt of $600 or more. The amount of the canceled debt is shown in box 2. Any forgiven interest included in the amount of canceled debt in box 2 will also be shown in box 3. As noted above, if the interest would otherwise be deductible, it does not have to be included in income.
An individual who doesn't agree with the amount shown on Form 1099-C should contact the lender in writing and request it to issue a corrected Form 1099-C showing the proper amount of canceled debt. Even if the lender refuses to issue a corrected report, there still may be recourse if you have adequate documentation to show that the lender incorrectly reported the amount canceled.
If you had a debt forgiven last year, we can determine how it may affect your 2009 taxes, make sure you gain maximum advantage from any exception or exclusion that may apply, and guide you through various choices that may be available to you, depending on the specific circumstances of your situation. We also may be able to help you to resolve any discrepancy concerning the amount reported by the lender.
Please call GROCO at (510) 797 8661 is you have any questions or comments.
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Entities have one year from the date their final return is filed to formally dissolve with the Secretary of State.
The FTB no longer assesses the $800 minimum franchise tax, or the $800 annual tax, for the year after a corporation, LP, LLP, or LLC ceases business, provided the entity:
- Files a timely final tax return on or before the extended due date for the preceding taxable year;
- Does not do any business in California after the end of that year; and
- Formally dissolves with the Office of the California Secretary of State (SOS) before the end of the 12 month period beginning with the date the final return was filed.1
Most dissolutions can be accomplished using check-box forms provided by the SOS. For copies of those forms, go to: www.sos.ca.gov/business/be/forms.htm (You’re on your own with this. We don’t give legal advice!)
Dissolve before or after final return
There is no requirement that the entity wait until after the return is filed to dissolve with the SOS. The entity may dissolve and file the final tax return later.
Short year return due 10 months following dissolution
If an entity dissolves in the middle of its taxable year, the tax return will be for a short period. The time allowed to file the short year return begins the first day of the end of the month following the short year. For example, a calendar- year entity that dissolves the SOS prior to December 1 must file a final return on or before the 15th day of the 10th month following dissolution, or the FTB (and IRS) will assess late filing penalties.
Ralite still applies to corporations
A shareholder who “walks away” from a corporation without taking any assets is not personally liable for any taxes. For these shareholders, the Ralite case provides relief.2 (Check with your lawyer on this. We do not give legal advice.)
Under Ralite, the FTB must prove all of the following before holding a shareholder liable for a corporation’s tax:
- The corporation transferred property to the shareholder(s) for less than full and adequate consideration;
- At the time of the transfer and at the time the shareholder liability was asserted, the corporation was liable for the tax;
- The transfer was made after liability for the tax was accrued, whether or not the tax was actually assessed at the time of the transfer;
- The corporation was insolvent at the time of the transfer or the transfer left the corporation insolvent; and
- The FTB had exhausted all reasonable remedies against the corporation.
Ralite applies to the shareholder, not the corporation. You cannot use this decision until the FTB has made its assessments, given up trying to collect from the now-defunct corporation, and actively pursues the individual shareholder to pay the tax liability. Here is the chain of events:
- The shareholder gives up the business, doesn’t formally dissolve and stops filing tax returns.
- Because the taxpayer did not dissolve, the FTB sends the corporation a Demand to File notice.
- The taxpayer still does nothing, and the FTB sends a Notice of Proposed Assessment and begins billing the corporation. Assuming the corporation has no assets, there will be nothing for the FTB to collect.
- Eventually, the FTB may come to the shareholder (believe me, this is not fun for the shareholder!) and demands payment from the shareholder. At this time, you should invoke the Ralite decision, explaining that the taxpayer did not take assets without consideration. Enclose the following in the shareholder’s reply to the FTB:
- A copy of the final balance sheet which probably includes loans from shareholders to the corporation and capital stock as well as a negative earnings account;
- A list of assets with book value and fair market value. Indicate which shareholders took which assets; and
- A list of loans from each shareholder to the corporation, debts each shareholder paid, and the basis of each shareholder’s capital stock.
If it is clear that the shareholder did not receive more value out of the corporation than was owed, the FTB will generally stop pursuing the shareholder(s) and close the account.
PLEASE BE ADVISED THAT WHILE A TAXPAYER HAS A LEGAL RIGHT TO APPLY RALITE, WE ABSOLUTELY DO NOT RECOMMEND IT UNLESS YOU HAVE NO OTHER CHOICE. INSTEAD, FILE THE FINAL TAX RETURNS ON A TIMELY BASIS AND PAY ANY TAX DUE. FORMALLY DISSOLVE THE ENTITY WITH THE SOS. AVOID ALL THE FTB NOTICES, HASSLES AND ANGST. IN MY EXPERIENCE, IN MOST CASES, LITTLE OR NO TAX IS DUE, AND IT IS MUCH, MUCH EASIER TO SIMPLY FILE THE FINAL RETURN AND DISSOLVE RATHER THAN EXERCISE THESE ADMINSTRATIVE STEPS TO AVOID FILING AND PAYING A MINOR AMOUNT. KEEP IN MIND, FEES INCURRED WITH YOUR CPA OR LAWYER TO APPLY RALITE CAN EASILY EXCEED THE POTENTIAL TAX SAVINGS. MOST TAXPAYERS GET A GREAT FEELING OF CLOSURE TO FILE PROPERLY AND CLOSE THE ENTITY’S ACCOUNT WITH THE FTB.
Ralite and the LLC
The Ralite case applies to corporate shareholders. Although there are no cases on point, it would seem that the same criteria would apply to an LLC and its members, as an LLC has the same liability aspects as a corporation.
Ralite and the limited partnership
The Ralite decision does not apply to LPs. In the case of these partnerships, there is a general partner who is personally liable for the debts of the partnership. Unless the general partner is a corporation that itself would qualify for Ralite treatment, the general partner will be liable.
Five General Dissolution Tips
- The final return must be timely filed to avoid imposition of the $800 minimum/annual tax for the following year.
- The corporation/LLC must be in good standing to dissolve; i.e., all tax returns have been filed, taxes paid, and SOS registration must be current.
- If the entity dissolves with the SOS in the middle of the year, be sure to compute the due date of the return based on the short year.
- Check the State Controller’s Web site to search for unclaimed property prior to dissolution.
- If the corporation has unpaid taxes, unfiled returns, and no assets, evaluate using Ralite and walk away from the corporation rather than formally dissolve, which will require personal liability on the part of the shareholders. (Check with your lawyer on this! We don’t give legal advice.)
If you have any questions or comments, please call GROCO at (510)797-8661.
1R&TC §§17937, 17947, 17948.3, 23332
2Appeal of Howard Zubkoff and Michael Potash, Assumers and/or transferees of Ralite Lamp Corporation (April 30, 1990) 90-SBE-004
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- Remember to File by April 15
California imposes “Use” tax on the purchase of tangible personal (non-real estate) property purchased in another state and transported into California for “use”…hence the “Use” Tax name. While taxpayers play various games to avoid sales tax, the biggest problem comes from internet purchases, where the seller charges no California sales tax when it is obvious tangible personal property is being sold and shipped to a California purchaser.
For the complete story on the Use Tax see my blog at:
http://community.groco.com/cs/blogs/tax_expert/archive/2010/01/07/32504.aspx
The BOE (State Board of Equalization – the Sales/Use tax authority) is currently sending requests for use tax returns to 180,000 California businesses and will send account and login information during the tax season.
Although the BOE states that only about 1% of the businesses have requested the required immediate registration (as discussed below), those who have - and have filed use tax returns - are receiving threatening letters from the BOE demanding returns and payment.
The BOE's computers automatically respond to any appropriate and timely use tax registration with a demand for returns and payment, threatening of penalties as if the taxpayer has automatically done something wrong. How ironic, and normal for our dysfunctional California tax authorities!
If you have registered and have any problems now, we suggest you contact the BOE's Ms. Ana Paulos at (916) 323-4240 Or, you can e-mail: ana.paulos@boe.ca.gov I checked the phone number. Ms. Paulos actually answered the phone!
The Original Problem – The Registration Requirement
The original problem arose in September, 2009 with this BOE Notice:
http://www.boe.ca.gov/news/pdf/l232.pdf and many taxpayers responded by registering.
In early March 2010, the BOE will mail account number and express login information to all individuals and businesses that reported more than $100,000 in gross receipts (not net or taxable income) from a business or rental property on their 2007 federal return.
Under law, our friends at the Internal Revenue Service share this information with the BOE.
These taxpayers will have a use tax account and must electronically file their 2009 use tax return by April 15. The taxpayer must also file 2007 and 2008 returns, which may also be filed electronically.
A return is required even if there is no use tax due. If no use tax is due, file the return with zeros. Because the penalty for failure to file is based on 10% of the tax liability, there will be no penalty for failure to file if there is no tax liability. However, taxpayers who do not file will continue to receive notices from the BOE.
Beware: The BOE will estimate a use tax liability for anyone who fails to file a return!
If no return is filed, the BOE will make an estimate - based on available information - of the total purchases subject to use tax, "based on income." The BOE will then add a penalty equal to 10% of estimated tax. So, to do nothing and not file will just add to your problems.
The BOE will also automatically impose a late-payment penalty for the 2007 and 2008 tax returns. After you file any late 2007 and 2008 returns, you should immediately file with the BOE Form BOE-735, Request for Relief of Penalty…as if you had nothing better to do with your time, Aye? We have been told that the BOE will normally abate penalties for taxpayers who voluntarily come forth to file and pay the tax for the 2007 and 2008 years.
Here’s the link to Form BOE-735 for your enjoyment.
http://www.boe.ca.gov/pdf/boe735.pdf
Due Dates
The 2009 use tax return is due April 15, 2010, for the 2009 tax year. The April 15 due date applies to both calendar and fiscal year taxpayers. While not mandatory, the BOE will provide information on how to e-file to all registered taxpayers by mid-March 2010. The BOE is working with software providers to enable businesses to e-file use tax returns for multiple accounts at once (currently, you may e-file one taxpayer at a time).
No Contact Letters
Businesses that are required to register but did not receive an initial contact letter must register to pay use tax.
Taxpayers may register by calling the BOE at: (915) 323-7654
Taxpayers may also register by downloading Form BOE-404-A, Use Tax Registration, and mailing it to BOE. The form is available at: www.boe.ca.gov/pdf/boe404a.pdf
BOE Bills to Filers
For those 1,800 taxpayers who already responded to the BOE's initial contact letter, the BOE assigned account numbers and mailed use tax forms to file 2007 and 2008 returns.
Almost immediately thereafter, the BOE began sending letters demanding returns and threatening to assess tax, penalties, and interest for any year that no return was filed. Unfortunately, the BOE sent the threats prior to processing returns and cashing checks.
Paying the tax
You may pay use tax by check, credit card, or Electronic Funds Transfer.
Here’s info on the BOEs Electronic Funds Transfer program.
http://www.boe.ca.gov/elecsrv/eft.htm
To participate in the Sales and Use Tax EFT Program, complete Form BOE-555-EFT, http://www.boe.ca.gov/pdf/boe555st.pdf Authorization Agreement for Electronic Funds Transfer. After your completed form has been received, the BOE will confirm your EFT start date.
Mail or fax the completed form to:
Attn: EFT Group
State Board of Equalization
P.O. Box 942879
Sacramento, CA 94279-0035
Fax: (916) 322-8457
We hope you find this information helpful, and can survive this additional burden placed on honest taxpayers who, by no fault of their own, unfortunately do business in the State of California.
We can be reached for questions or comments at GROCO at (510) 797 8661.
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IRS Announcement 2010-9
http://www.irs.gov/pub/irs-drop/a-10-09.pdf
Comment from Ron Cohen: Unfortunately, with the absurd complexity of U.S. tax laws, tax audits are an adversarial, confrontational, and litigious process. Rather than change the laws to make tax more rational, the IRS wants taxpayers to put “all their cards on the table” since, in most cases, the IRS has neither the education, time, technology nor resources to do a proper audit of large businesses. But, don’t mind me. I’m just a voice in the wilderness.
Of course, your state tax authority will have access to and will utilize the same list!
To additional observations:
1) The Ivory Tower people at the IRS in Washington, D.C., don’t realize (or don’t care) that businesses can set-up in other countries where these rules don’t apply.
This rule provides just another reason to avoid U.S. operations that might create or add to U.S. tax filing requirements.
If a top level decision is made to minimize operations (including research and development) in the U.S., of course, those jobs are lost to another country.
2) A big “Two Thumbs Down” to the Financial Accounting Standards Board (FASB). When they issued FIN 48 with the lofty goal of recording every possible, uncertain, obscure tax liability (most of which will never arise in the real world), the community of tax advisors warned the IRS would ask for the FIN 48 workpapers as a road map to possible tax return audit issues. That is, the IRS will wisely leverage off the work of the financial auditors to have an unfair advantage in a tax audit.
It puts the taxpayer in the position of being “crucified for their honor” in completing the FASB FIN 48 requirements.
The FASB replied “Oh, No. That won’t happen. This is just for GAAP accounting purposes. The IRS has no right to those estimates.”
Well, the FASB was right. The IRS declines to ask for the workpapers. The IRS has now gone EVEN FURTHER!
Comments from IRS Commissioner Doug Shulman on 1/26/10:
“We do not believe we will be adding substantial new work or burden on taxpayers. These taxpayers are already required to establish tax reserves for uncertain tax positions in determining their financial statement income under US or foreign accounting standards, such as FIN 48. So the work is already being done. We are asking for more transparency.”
So, why not just fill out another form in your tax return, and tell us exactly the issues you’ve already had to identify under FIN 48. Thank you, FASB! Well done.
3) In a comment that can only be viewed as the height of hypocrisy, the IRS Commission goes on to say:
“We believe we have crafted a proposal that gives us the information we need to do our job without trying to get in the heads of taxpayers as to the strengths or weaknesses of their positions.”
If any of you have ever dealt with the IRS, here’s how things normally work:
1) “We have identified an issue and the taxpayer’s position is 100% wrong.”
2) You spend 6 months to a year educating the IRS on the law and the facts involved. Often, their tactic is to just out-last the taxpayer until they concede, regardless of the merits of the issue and the Rule of Law.
3) If they don’t back down, you file an appeal and spend a long time waiting to plead your case to an Appeals Officer, who is usually pretty reasonable. If they are not reasonable, you’re off to a 2 year adventure filing a Tax Court Petition.
So, Dear IRS and FASB: You have to understand, our shock at this new rule is that we expect the IRS will review the form and start the process by asserting, in every case, the taxpayer is 100% wrong.
Well, I guess that’s more work for tax advisors, but it’s not good for capitalism or job creation.
Corporations and some partnerships that are covered by shareholder-transparency rules and have assets over $10 million will be required to file a list of uncertain tax positions along with their tax return, Mr. Shulman said.
Wall Street Journal Article:
http://online.wsj.com/article_email/SB10001424052748703906204575027320135790934-lMyQjAxMTAwMDIwNzEyNDcyWj.html
From USA Today:
“Calling the announcement "a shock and awe" move, Jeremiah Coder, a contributing editor for Tax Analysts, a non-profit that studies tax issues, said some large firms would mount a "pushback" to the IRS' justification for the disclosure.”
"This puts the audit relationship" with the IRS "in a more confrontational mode," said Matt Miller of Financial Executives International, a 15,000-member group of senior tax officials, CFOs, treasurers and controllers. "It involves the disclosure of exposure items to possible adversaries."
Here’s the IRS Announcement:
http://www.irs.gov/pub/irs-drop/a-10-09.pdf
“The schedule will require a concise description of each uncertain tax position in
sufficient detail so that the Service can determine the nature of the issue. The
sufficiency of a description will depend on the taxpayer’s particular facts and the nature of the underlying transaction. As currently contemplated, this concise description will include the rationale for the position and a concise general statement of the reasons for determining that the position is an uncertain tax position. To be sufficient, the description must contain:
1. The Code sections potentially implicated by the position;
2. A description of the taxable year or years to which the position relates;
3. A statement that the position involves an item of income, gain, loss, deduction, or credit against tax;
4. A statement that the position involves a permanent inclusion or exclusion of any
item, the timing of that item, or both;
5. A statement whether the position involves a determination of the value of any
property or right; and
6. A statement whether the position involves a computation of basis.”
IRS Commissioner Comments:
http://www.irs.gov/newsroom/article/0,,id=218705,00.html
We have been taking a hard look at transparency regarding business tax issues. Accounting for income taxes and tax risk has changed over the past several years. Accounting for uncertain tax positions is much more articulated now than in the past. And auditing firms are conducting much more extensive reviews of materials used to make decisions on tax reserves reflected in a taxpayer’s financial statement.
Several months ago, I announced that the IRS was studying these changes and was exploring ways to improve transparency regarding material tax issues so that we can achieve the three objectives of certainty, consistency, and efficiency for us and taxpayers.
The IRS is taking a major step towards transparency that I want to announce today related to changes we are proposing to reporting requirements regarding business taxpayers’ uncertain tax positions
The Announcement we are issuing today does two things. First, it describes proposed reporting requirement at the “time-of-filing.” Second, it highlights specific areas where we are requesting public comment and thus serves to further our continuing dialogue with practitioners, business taxpayers, and others regarding how to improve tax administration and compliance regarding many of our nation’s business taxpayers.
Before I get into the meat of the proposal, let me set some context.
Today we spen up to 25 percent of our time in a large corporate audit searching for issues rather than having a straightforward discussion with the taxpayer about the issues. It would add efficiency to the process if we had access to more complete information earlier in the process regarding the nature and materiality of a taxpayer's uncertain tax positions. The goals of our proposal are simple: to cut down the time it takes to find issues and complete an audit… ensure that both the IRS and taxpayer spend time discussing the law as it applies to their facts, rather than looking for information…and to help us prioritize selection of issues and taxpayers for examination.
Let me explain the Announcement and what it means to business taxpayers. Reporting uncertain tax positions would be required at the time a return is filed by certain business taxpayers: those who have both a financial statement prepared under FIN 48 or other similar accounting standards reflecting uncertain tax positions and assets over $10 million. Under the Announcement, these taxpayers would be required to annually disclose uncertain tax positions in the form of a concise description of those positions and the maximum amount of US income tax exposure if the taxpayer’s position is not sustained. By concise, we mean a few sentences that inform us of the nature of the issue, and not pages of factual description or legal analysis.
Let me say a few things about this proposal. We have taken what I believe is a reasonable approach. We could have asked for more…a lot more… but chose not to. We believe we have crafted a proposal that gives us the information we need to do our job without trying to get in the heads of taxpayers as to the strengths or weaknesses of their positions.
We will be looking only for a brief description of the issue and the maximum amount of US income tax exposure. The proposal does not require the taxpayer to disclose the taxpayer's risk assessment or tax reserve amounts. We are asking for a list of issues that the taxpayer has already prepared for financial reporting purposes, in order to improve the efficiency and effectiveness of tax examinations. We are also looking for the maximum exposure, so we can allocate our exam resources appropriately. We need to have a sense of materiality and whether we should spend exam resources on an issue.
We do not believe we will be adding substantial new work or burden on taxpayers. These taxpayers are already required to establish tax reserves for uncertain tax positions in determining their financial statement income under US or foreign accounting standards, such as FIN 48. So the work is already being done. We are asking for more transparency.
Just to be clear again, this proposal would not require that taxpayers disclose how strong or weak they regard their tax positions or report to us the amounts they reserved on the books regarding those positions.
And as part of this proposal, the IRS would otherwise retain its longstanding policy of restraint as it applies to tax accrual workpapers.
I think this is a sound proposal that will significantly advance the ball in the transparency area. We understand this proposal will generate a good deal of discussion and debate, and we welcome that. We look forward to public comments and the upcoming dialogue regarding this important announcement.
Our mission with respect to our large business audit program, indeed our entire audit program, is to collect the proper amount of tax and to use our compliance tools to foster on-going compliance by all taxpayers, including our largest taxpayers. Our responsibility is the same as the responsibility of our taxpayers – apply the law as it currently exists, not how we would like it to be, and do so with neither a thumb on the scale in favor of the government, nor in favor of the taxpayer.
Our ultimate goal with respect to our large case audit program is to bring taxpayers into compliance and keep them there with strategies that are less time and resource intensive than our traditional audit process. Our work on corporate governance is part of this strategy as is the transparency proposal I outlined today. In fact, we have moved down this path with the Compliance Assurance Program or “CAP.” This program allows taxpayers that are transparent with us with respect to their tax issues to get certainty with respect to their tax obligations at the time their return is filed. Indeed, with regard to several of our CAP taxpayers that have been in the program for a number of years, we will be moving them to what we refer to as a monitoring program, where we address and resolve issues with a taxpayer as they arise. We are looking to expand and make permanent the CAP program in the near future.
While we understand that there will always be a need for our traditional audit process, we will continue to try to work smarter. We will use new techniques, and count on enhanced transparency, to help us maximize the use of our resources and spend our time on the issues and taxpayers who pose the greatest compliance risk. In the future, the IRS will depend more and more on information and new alternatives to the traditional audit process to ensure compliance with the tax laws.
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Comment:
I don’t think even the worst bureaucrats of the U.S.S.R. could have devised a more convoluted, complex, time-wasting, form-producing way to send a few dollars of tax credit to the hard-working population.
Payroll systems need reprogramming, Tax return software must consider all the moving parts and provide appropriate tax filing solutions. People must check their withholding levels and re-think Form W-4 with their payroll departments. Grandmas may have too little withheld on their pensions.
(Oh, and remember, the Form W-4 instructions often result in an incorrect number of withholding exemptions claimed. Do a complete projected tax return to get it right.)
Perhaps the Congress and the IRS should consider that if they have to write a list of “Ten Things You Should Know about the Making Work Pay Tax Credit”, the law must be flawed and unworkable… as that is 9 “things” too many.
But we are all powerless. Did the credit even result in any economic stimulus? If I get a few dollars per paycheck, I would suggest I am much, much less likely to go to Walmart and buy something compared to getting a lump sum check in the mail.
Best of luck!
From Below:
“7. In 2010, you may notice that your paychecks are slightly lower than in 2009. The slight decrease may be because of the Making Work Pay Credit. Most of the credit for wage earners is distributed through reduced withholding. The credit – which was spread out over nine months last year – is being spread over 12 months this year. A little less credit in each paycheck means slightly higher withholding. But don’t worry, in the end it all adds up.
8. Certain taxpayers should review their tax withholding to ensure enough tax is being withheld in 2010. Those who should pay particular attention to their withholding include: married couples with two incomes, individuals with multiple jobs, dependents, pensioners, Social Security recipients who also work, and workers without valid Social Security numbers.
Having too little tax withheld could result in potentially smaller refunds or – in limited instances – small balance due rather than an expected refund.”
Issue Number: IRS Tax Tip 2010-15
Ten Things You Should Know about the Making Work Pay Tax Credit
Many working taxpayers are eligible for the Making Work Pay Tax Credit, a provision created by the American Recovery and Reinvestment Act in early 2009.
Here are 10 things the IRS wants you to know about this tax credit to ensure you receive the entire amount for which you are eligible.
1. In 2009 and 2010, the Making Work Pay provision provides a refundable tax credit of up to $400 for individuals and up to $800 for married taxpayers filing joint returns.
2. For taxpayers who receive a paycheck and are subject to withholding, the credit will typically be handled by their employers through automated withholding changes.
3. Taxpayers receiving less than the full amount of the allowable credit through reduced withholding will be entitled to claim any remaining credit when they file their tax return.
4. The amount of the credit actually received during 2009 in the form of reduced withholding will be reported on your 2009 tax return. Taxpayers who do not have taxes withheld by an employer during the year can claim the credit on their 2009 tax return filed in 2010.
5. Taxpayers who file Form 1040 or 1040A will use Schedule M, Making Work Pay and Government Retiree Credits to figure the Making Work Pay Tax Credit. Completing Schedule M will help taxpayers determine whether they have already received the full credit in their paycheck or are due more money as a result of the credit.
6. Taxpayers who file Form 1040-EZ will use the worksheet for Line 8 on the back of the 1040-EZ to figure their Making Work Pay Tax Credit.
7. In 2010, you may notice that your paychecks are slightly lower than in 2009. The slight decrease may be because of the Making Work Pay Credit. Most of the credit for wage earners is distributed through reduced withholding. The credit – which was spread out over nine months last year – is being spread over 12 months this year. A little less credit in each paycheck means slightly higher withholding. But don’t worry, in the end it all adds up.
8. Certain taxpayers should review their tax withholding to ensure enough tax is being withheld in 2010. Those who should pay particular attention to their withholding include: married couples with two incomes, individuals with multiple jobs, dependents, pensioners, Social Security recipients who also work, and workers without valid Social Security numbers.
Having too little tax withheld could result in potentially smaller refunds or – in limited instances – small balance due rather than an expected refund.
9. To ensure your current withholding is appropriate for your individual situation, you can review Publication 919, How Do I Adjust My Tax Withholding? You can also perform a quick check of your withholding using the interactive IRS Withholding Calculator on IRS.gov.
10. If you find you need to adjust your withholding, submit a revised Form W-4, Employee's Withholding Allowance Certificate to your employer.
Visit IRS.gov for more information about the making Work Pay Tax Credit, Schedule M, Form W-4 or Publication 919. You can also call 800-TAX-FORM (800-829-3676) to order forms and publications.
Links:
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Be careful to consider these rules for payments from a California taxpayer to a person earning income that is California “Source.”
The penalties mount quickly on this type of reporting.
“Starting January 1, 2010, individuals and other payers that are required to withhold and remit backup withholding to the Internal Revenue Service (IRS) must also withhold and remit to the Franchise Tax Board (FTB). Generally, payers must withhold and remit 7% of reportable income to California when performing federal backup withholding. California backup withholding is required if a payer pays income to a nonresident or to a resident at certain minimum levels as required by the IRS, except for: (1) payments of interest and dividends (reported on IRS Forms 1099 INT, 1099 DIV, 1099 OID, and 1099 PATR); and (2) any release of loan funds made by a financial institution in the normal course of business. Payers backup withholding when a payee submits an IRS Form W-9 that does not provide a taxpayer identification number (TIN), provides an invalid TIN, or fails to certify exemption from backup withholding. Tax-exempt organizations and certain other payees listed on IRS Form W-9 are exempt from backup withholding. Taxpayer inquiries can be directed to the FTB's automated line at (888) 792-4900 ((916) 845-4900 if outside the United States) or inquiries can be faxed to (916) 845-9512."
(California FTB Public Service Bulletin California FTB Public Service Bulletin 10-02, 01/14/2010 .)
If you have any questions or comments, please call GROCO at (510) 797 8661.
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- A new tax credit of $3,000 for each additional full-time employee hired is available to small businesses with 20 or less employees beginning January 1, 2009.
- The credit is not subject to the 50% limitation for business credits.
- The total amount of credit available to be claimed by all taxpayers is capped at $400 million.
- The credit must be claimed on a timely filed original return received by the Franchise Tax Board on or before a cut-off date specified by the Franchise Tax Board.
- Taxpayers claiming the credit on an original return received by the Franchise Tax Board after the cut-off date is met will be notified that the credit has been denied.
- Taxpayers that have been denied the credit as a result of the $400 million cap being reached will not be assessed an underpayment of estimated tax or underpayment of tax penalty to the extent the underpayment was created or increased by the disallowance of this credit.
To Qualify
An employer will qualify for the credit if:
- Each qualified full-time hourly employee is paid wages for not less than an average of 35 hours per week.
- Each qualified full-time employee that is a salaried employee was paid compensation during the year for full-time employment within the meaning of Section 515 of the Labor Code.
- On the last day of the preceding taxable year, they employed a total of 20 or fewer employees.
- There is a net increase in qualified full-time employees compared to the number of full-time employees employed in the preceding taxable year. For taxpayers who first commence doing business in California during the taxable year, the number of qualified full-time employees employed in the preceding year would be generally be zero, unless certain special rules apply.
Exceptions
An employer may not claim the credit for those employees who are any of the following:
- Certified as a qualified employee in an enterprise zone or targeted tax area.
- Certified as a qualified disadvantaged individual in a manufacturing enhancement area.
- Certified as a qualified disadvantaged individual or qualified displaced employee in a local agency military base recovery area.
- An employee whose wages are included in calculating any other credit allowed.
Claiming the Credit
Claim the credit on a 2009 Personal Income Tax or Business Entity Tax Return using the credit form for the New Jobs Credit.
Here’s the form to claim the credit:
http://www.ftb.ca.gov/forms/2009/09_3527.pdf
Check this FTB website page for status on the availability of the credit (related to the $400 million cap).
http://www.ftb.ca.gov/businesses/New_Jobs_Credit.shtml
Please call GROCO if you have any questions or comments at (510) 797 8661.
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Dear Clients & Friends:
The following is a summary of the most important tax developments that have occurred in the past three months that may affect you, your family, your investments, and your livelihood. Please call us for more information about any of these developments and what steps you should implement to take advantage of favorable developments and to minimize the impact of those that are unfavorable.
New opportunity to convert to Roth IRA. This year is a pivotal one for retirement planning, as it is the first year in which taxpayers may convert funds in regular IRAs (as well as qualified plan funds) to Roth IRAs regardless of their income level. Such a conversion may be desirable because distributions from Roth IRAs may be tax-free if several conditions are met, and a Roth IRA owner does not have to commence lifetime required minimum distributions (RMDs) from Roth IRAs after he or she reaches age 70 1/2. However, even if Roth distributions are tax-free, a 10% penalty may apply. Plus, the conversion itself will be fully taxed, assuming the rollover is being made with pre-tax dollars (money that was deductible when contributed to an IRA, or money that wasn't taxed to an employee when contributed to the qualified employer sponsored retirement plan) and the earnings on those pre-tax dollars. For example, an individual in the 28% federal tax bracket who rolls over $100,000 from a regular IRA funded entirely with deductible dollars to a Roth IRA will owe $28,000 of tax. So the individual would be paying tax now for the future privilege of tax-free withdrawals, and freedom from the RMD rules.
New option to choose longer carryback period for net operating loss (NOL). A new law enacted last November makes it easier for most businesses to get immediate tax savings from NOLs. It does so by allowing certain NOLs to be carried back to earlier, more profitable years. In these tough economic times, that's good news for businesses who have suffered losses recently after better years when high taxes were paid. Specifically, the new law generally permits any business to increase the carryback period for an applicable NOL to 3, 4, or 5 years from 2 years (however, businesses getting certain federal bailout funds are not eligible). An applicable NOL is a business's NOL for any tax year ending after Dec. 31, 2007, and beginning before Jan. 1, 2010. Generally, an election may be made for only one tax year. The amount of the NOL that can be carried back to the 5th tax year before the loss year can't be more than 50% of a business's taxable income for that 5th preceding tax year determined without taking into account any NOL for the loss year or for any tax year after the loss year.
Homebuyer credit extended and liberalized. A new law enacted last November extended and generally liberalized the tax credit for first-time homebuyers, making it a much more flexible tax-saving tool. Before the new law, the credit was to have expired for homes purchased after Nov. 30, 2009. The new law extended the credit to apply to a principal residence bought before May 1, 2010; it also applies to a principal residence bought before July 1, 2010 by a person who enters into a written binding contract before May 1, 2010, to close on the purchase of the principal residence before July 1, 2010. Also, effective for purchases after Nov. 6, 2009, the new law allows existing homeowners who meet certain conditions to qualify for a reduced credit of up to $6,500. For purchases after Nov. 6, 2009, the phaseout rules have been eased. These are the rules that cause the credit to be reduced or eliminated as modified adjusted gross income exceeds certain levels. Much higher income levels are now allowed before there is any reduction of the credit. On the negative side, a credit cannot be claimed for a home whose purchase price exceeds $800,000. In addition, the new law included some crackdowns designed to prevent abuse of the credit.
New lease on life for COBRA subsidy. In December of last year, the 65% COBRA premium subsidy that was enacted in February of 2009 got a new lease on life. Under the original provision, employees who were involuntarily terminated after Aug. 31, 2008 and before Jan. 1, 2010, and who elected COBRA health continuation coverage, became entitled to receive a 65% subsidy on their COBRA premiums. For periods of COBRA coverage beginning after Feb. 16, 2009, the involuntarily terminated employee was treated as having paid the required COBRA premium if the individual paid 35% of the premium amount. The employer (or, in some cases, multiemployer health plan or insurer) could recover the other 65% by taking the subsidy amount as a credit on its quarterly employment tax return. The December 2009 legislation added another six months to the maximum period that the COBRA subsidy can run (i.e., to a total of 15 months). In addition, it extended the up-to-15 month COBRA premium subsidy to workers (and their eligible family members) who lose their jobs during the first two months of 2010.
Standard mileage rates down for 2010. The optional mileage allowance for owned or leased autos (including vans, pickups or panel trucks) is 50¢ per mile for business travel after 2009. That's 5¢ less than the 55¢ allowance for business mileage during 2009. Further, the rate for using a car to get medical care or in connection with a move that qualifies for the moving expense deduction is 16.5¢ per mile, down 7.5¢ from the 24¢ per mile allowance for 2009.
ARC loan program has no tax consequences for small business borrowers. The IRS has concluded that qualifying small business borrowers who receive an interest-free loan under the America's Recovery Capital Loan Program (ARC Loan Program) don't have income on account of the loan and can't claim interest deductions for the loan. The ARC Loan program helps small businesses that are experiencing financial hardship. Under it, viable small businesses experiencing immediate financial hardship can receive an interest-free loan of up to $35,000 from a lender approved by the Small Business Administration (SBA) for the purpose of making payments on qualifying small business loans. The loan proceeds are used to make up to six months of principal and interest payments on qualifying small business loans (e.g., credit card obligations for the borrower's business, capital leases for major equipment and vehicles, and notes payable to suppliers or vendors) and repayment of the loan principal is deferred for at least 12 months after the last disbursement of the proceeds. Repayment of an ARC loan may extend up to five years, but the borrower must pay the principal over the repayment period. The SBA pays monthly interest to the lender, and provides a 100% guaranty of payment to the lender. The borrower has no obligation to pay any interest on the loan. The ARC Loan Program runs through Sept. 30, 2010, or until appropriated funds run out, whichever comes first.
Indirect investors can benefit from Ponzi scheme safe harbor. A letter sent by the IRS to some members of the House of Representatives explains how indirect investors can benefit from a previously issued optional safe harbor which direct investors who suffered losses in Ponzi schemes can use to determine the proper time and amount of the loss. The letter indicates that the primary reason for the safe harbor's restriction to direct investors is because they are the party from which the perpetrator of the fraudulent arrangement stole money or property, and thus the proper party to compute and claim a theft-loss deduction. The letter stresses, however, that this restriction does not prevent indirect investors from benefitting from the safe harbor treatment or from deducting their share of a theft loss sustained by a passthrough entity. It notes that partnerships and LLCs taxed as partnerships that qualify as direct investors may use the safe harbor treatment and pass the loss through to the indirect investor (partner).
Proposed regulations on forthcoming stock reporting rules. The IRS has issued proposed regs explaining the complex basis and character reporting requirements that will apply for most stock acquired after 2010, for shares in a regulated investment company (RIC, i.e., a mutual fund) or stock acquired in connection with a dividend reinvestment plan (DRP) after 2011, and other specified securities acquired after 2012. When these rules are implemented, the IRS will be in a much better position to monitor whether taxpayers are properly reporting investment gains and losses.
How small employers opt in or out of filing Form 944 for 2010. The IRS has explained how small employers eligible to file Form 944 (Employer's Annual Federal Tax Return), should request to file that form instead of Forms 941 (Employer's Quarterly Federal Tax Return), for tax years beginning on or after Jan. 1, 2010. In addition, the IRS explained how employers who previously were notified to file Form 944, may request to file Forms 941 instead for tax years beginning on or after Jan. 1, 2010. Employers whose estimated annual employment tax liability is $1,000 or less are eligible to file Form 944 rather than Form 941 (but not if they must file Form 943, Employer's Annual Federal Tax Return For Agricultural Employees, or Schedule H (Household Employment Taxes, Form 1040)). Beginning in tax year 2010, employers will be able to opt out of filing Form 944 for any reason if they follow certain procedures
Please call us at GROCO if you have any questions or comments at (510) 797 8661.
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The following is an excellent summary of the sad state of the U.S. tax system at this moment in time on 1/8/10. We completely agree with the author about “Congressional dereliction of duty.”
My sources tell me that Congress will not resolve the tax law issues until they finalize the Health Care bill. Seems they can’t do two things at the same time.
So, all we can do is stay-tuned!
Comment: We have more modern technology and smart people than at any time in history. And yet, the Congress can’t decide on a stable tax system.
http://online.wsj.com/article/SB10001424052748704130904574644143283896148.html?mod=WSJ_Opinion_LEFTTopOpinion
Happy New Year. Your tax bill just went way up.
When the clock hit midnight on Jan. 1, some 70 new taxes on the middle class and small businesses went into effect, thanks to Congress's failure to prevent the expiration of popular and economically vital tax breaks on time. So some 25 million middle class Americans are now slated to get hit with the alternative minimum tax (AMT) this year. Remember: This is the tax that was originally supposed to only hit the richest 100 Americans.
This year, the alternative minimum tax will gather $63 billion from American families with an income of as little as $75,000, according to the Senate Finance Committee. The AMT may now hit tax filers who are school teachers, construction workers and bus drivers. Call them the new rich.
The middle class will get soaked other ways, too. The new homebuyer tax credit goes away. That will hit working families with a $10.8 billion tab. The tax deduction for state and local taxes also disappears (Ron: He means sales tax deduction, not state income tax deduction), so shoppers of all incomes will cough up $1.85 billion more.
Got a kid in college? The federal tax deduction for college tuition and fees has disappeared. That's another $1.5 billion tax hike on the nonrich.
The nation's employers are none too happy either with Congress's failure to extend these tax cuts before the New Year. The research tax credit, which businesses depend on for new innovation and R&D, has been suspended. This will raise R&D costs by more than $7 billion in 2010.
The 50% write-off for small businesses for capital purchases—such as expanding their facilities, purchasing new equipment or machinery, or building a new plant—has vanished. Without those tax incentives, small businesses are likely to put any plans to expand their operations on hold. That means less jobs and fewer pay raises. A study by the National Center for Policy Analysis found that about 90% of the benefits from capital investment goes to workers in the form of higher wages due to increased productivity.
But the biggest debacle is the estate tax. On Jan. 1 it fell to zero for the year, and then in 2011 it goes back up to 55%. Estate tax attorneys are full of stories of wealthy heirs with living wills that ask their dependents to take account of the estate tax when determining when to pull the plug on the life support system. Don't be surprised if death rates of wealthy Americans rises substantially this year.
Sen. Max Baucus has vowed to raise the estate tax back to between 35% and 55% this year, and to make that change retroactive to Jan. 1. But this will be of questionable constitutionality. Can Congress impose a new estate tax, say in April, on someone who was already dead and buried in February? Let's hope not.
Sometime within the next few months Congress promises that it will enact a new tax law to reinstate many of the tax breaks that have expired. It's highly doubtful that in an election year this Congress is going to hit 25 million Americans with a surprise AMT bill. But where is House Speaker Nancy Pelosi going to find the $63 billion in revenues to "pay for" that tax cut is anyone's guess.
What no one in Congress seems to understand is that there is a very real economic cost to constantly tinkering with the tax laws. Uncertainty is the enemy of investment. Do businesses want to make major investment decisions based on congressional promises of a future tax break? Likely not. So right now millions of businesses and tens of millions of individual tax filers are stranded in a tax purgatory.
All of this only makes the case stronger for a simple flat-rate income tax with a low rate below 20%, no deductions and no double taxation (i.e. the termination of the death tax forever). The tax rules should be simple, nonintrusive, pro-growth, and set in stone.
Congress's failure to settle the tax laws for 2010 is an unforgivable dereliction of duty. The federal government isn't so understanding when American citizens are late paying their taxes: The IRS imposes strict civil fines and even criminal penalties. We should hold Congress to the same standards.
Mr. Moore is senior economics writer for The Wall Street Journal.
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Wall Street Journal, 12/23/09, Page C3
http://online.wsj.com/article/SB10001424052748704157304574612532368682034.html?ru=yahoo&mod=yahoo_hs
Summary of the article & comments:
1) Sell Stock Now Before the Law Changes?
A shareholder sold shares in his company and opted to receive CASH instead of taking stock of the same value of the acquiring company (that would have been a tax-free transaction) specifically because he feels tax rates are going up in the U.S. and California. So rather than defer (perhaps for decades) the gain and related tax payments to the IRS and California Franchise Tax Board on the sale of the stock, he decided to pay tax at today’s rates, fearing higher rates in the future.
I comment:
Using the “time-value of money” approach, it almost never, never makes sense to pay tax today that could be deferred into the future (most certainly if the tax-deferral can be decades into the future…even if the tax rates do go up). I’ve seen taxpayers make this mistake before. It is very difficult to predict the outcome of future tax legislation. This taxpayer is very pessimist about future tax rates…but with a $12 trillion federal debt and California another $20 billion out of balance (as of this date), who can blame him?
2) Inventive Stock Options (ISOs)
Consider exercising ISOs before 12/31/09 so that you’ll meet the 12 month holding period to get long-term capital gain treatment by this time in 2010. You have to “exercise” (and pay the “grant price”) to get the 12 month long-term capital gain holding period clock to start ticking in your favor. The article mentions the exercising of ISOs can have horrendous Alternative Minimum Tax consequences, and you should consult a CPA or other tax advisor before exercising ISO shares.
3) Non- Qualified Stock Options (“NQSO”)
Exercise NQSOs with a big gain (current price of the stock in excess of your exercise price) now before tax rates increase.
However, by doing so, be fully aware you are giving up the potential for future appreciation in the stock. So if you save a few percentage points in tax by exercising now, but give up to right to ride the stock to higher prices, the lost investment gain may far, far exceed the potential tax savings. So choose wisely!
4) Restricted Stock
Consider an Internal Revenue Code Sec. 83(b) election. This can also apply to ISOs.
Normally, restricted stock is taxable to the taxpayer as it vests and can be sold.
If you are fearful of higher tax rates, make a Sec. 83(b) election and pay tax on the value of the stock now, even before it vests, at ordinary income tax rates. Further appreciation will be taxed as a capital gain, if you hold the stock for 12 months after the Sec. 83(b) election.
Review all this with a tax advisor BEFORE filing the Sec. 83(b) election. Look at all the requirements. The election must be mailed to the IRS
AND be attached to your tax return. Check your current year tax payments (estimated tax payments, withholding, etc.) to make sure you avoid underpayment penalties as a result of the Sec. 83(b) election.
If the employee/taxpayer forfeits the stock (is fired, quits, etc., before the vesting date and never takes ownership rights to the shares), he can’t recover the tax paid at ordinary income tax rates as a result of making the Sec. 83(b) election…although a capital loss should be available.
5) Wash-Sale Traps:
Often, this time of year, taxpayers want to recognize stock losses to offset the taxation of stock gains triggered earlier in the year. As the article mentions, the wash-sale rules can negate the loss sale you intended. The wash-sale rule NEVER negates a gain (people often get confused with this rule).
The “wash sale” rule prohibits taking tax losses while buying the same stock within 30 days before or after the sale of a stock at a loss.
The rationale for the rule is that within the 30 day period, the taxpayer is in the same ownership/economic position in the stock as when they started, so the loss in disallowed.
“A grant of options or restricted stock, or an option exercise ALL COUNT AS BUYING STOCK, so loss sales should be kept far apart from these transactions.”
You can’t assume your stock broker can or will figure this out for you and put you on notice on Form 1099-B. They may not have the information from you stock exercises, etc. The taxpayer is responsible to disallow any losses that are wash-sales when reporting transactions on Form 1040, Schedule D.
Good luck to everyone in 2010.
If you have any questions of comments, please call me or ask for a partner at GROCO at (510) 797 8661.
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This is an excellent article in the L.A. Times, December 24, 2009, Page B1.
Their has been confusion in the minds of tax and non-tax people about their tax obligation for California Use Tax on internet purchases, when the internet seller does not charge sales tax on purchases of tangible personal property.
There really is no confusion under the law. All California taxpayers should pay this tax with their Form 540 filed with the Franchise Tax Board each year... and people who want or need to be 100% accurate in all their tax obligations should seriously make a good-faith effort to pay-in a reasonable estimate of Use Tax due on untaxed internet sales.
See:
http://www.latimes.com/business/la-fi-hiltzik24-2009dec24,0,487418.column
If you have any questions or comments, contact me or any of our partners at (510) 797-8661.
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