February 13, 2011 An Electronic Newsletter of Gutter Chaves Josepher Rubin Forman Fleisher P.A. Charles (Chuck) Rubin, Editor/Author (except as otherwise noted) © 2011 ************************************** CONTENTS: 1. NEW OFFSHORE VOLUNTARY DISCLOSURE INITIATIVE 2. HOW NOT TO OBTAIN A FRACTIONAL OWNERSHIP VALUATION REDUCTION 3. REPEAL OF 1099 REPORTING MAY COME TO FRUITION 4. BLACKWATER IS NOT PART OF THE ARMY 5. APPEALS COURT BREATHES NEW LIFE INTO OVERSTATED BASIS ISSUE 6. TAX INCENTIVES IN THE SMALL BUSINESS JOBS ACT OF 2010 7. IRS SAYS IT IS READY NOW FOR 2010 RETURNS 9. ABOUT OUR FIRM ************************************** 1. NEW OFFSHORE VOLUNTARY DISCLOSURE INITIATIVE About 15,000 taxpayers came forward in 2009 in an amnesty initiative that allowed taxpayers to come clean on offshore holdings and unreported offshore income. The IRS has now introduced a similar initiative that will run through August 31, 2011. The principal benefits to taxpayers for using the program are avoiding criminal penalties, and limits on overall penalties that might otherwise apply (such as near-confiscatory FBAR penalties). Some key points: --A 25% penalty will be imposed on the highest balance during the unreported period in foreign bank accounts/entities or the value of unreported assets. This is compared to the 20% penalty under the prior initiative. Under limited circumstances, the 25% penalty may be reduced to 12.5% or 5%. The 25% penalty is in addition the 20% accuracy-related penalties under Code §6662(a) for any tax underpayments that occurred, Code §6651(a)(1) failure to file penalties, and Code §6651(a)(2) failure to pay penalties. --Tax years covered are 2003-2010. --Taxpayers will need to provide previously filed returns, and provide missing or required complete and amended returns, for 2003-2010. --If a civil exam is already under way, the program is not available. --Simplified PFIC reporting mechanisms are provided for. Presumably, most taxpayers interested in this type of relief would have participated in the 2009 program. However, within several days of the new program, we have already seen new clients interested in participating in the new program in our office. 2011 Offshore Voluntary Disclosure Initiative, Frequently Asked Questions and Answers ************************************** 2. HOW NOT TO OBTAIN A FRACTIONAL OWNERSHIP VALUATION REDUCTION If more than one person owns a fractional interest in property, the sum of the value of each part may be less than the whole for transfer tax purposes. For example, if Bill and Mary own a parcel of land worth $1,000,000 as 50/50 tenants in common, at Bill’s death his interest is likely to be valued at less than $500,000 to reflect Bill’s lack of control and costs of partition. In a recent Tax Court case, a decedent during his lifetime transferred 1/5 interests in his ranch to each of his five children. HOWEVER, he retained the “full use, control, income and possession” of the ranch during his lifetime. At his death, his estate sought discounts in value for lack of marketability and control based on the children’s fractional ownership. Not so fast, opined the Tax Court. The entire value of the ranch was included in the decedent’s estate under Section 2036, due to the decedent’s retained lifetime interest in the ranch. The Court noted that in valuing property with a retained lifetime interest, the change in ownership is deemed to occur at the decedent’s death. Thus, for this purpose, the children did not own an interest prior to death, and their interests could not give rise to a fractional interest valuation reduction to the decedent. The result is as one would expect – to have ruled otherwise would have created a gaping whole in the estate tax regime that would allow for discounting of testamentary transfers simply by the creation of lifetime transfers with retained life estates. Of course, if one of the children subsequently passed away while owning the ranch as co-owners with his siblings, then a fractional interest valuation adjustment would be more appropriate. ESTATE OF AXEL O. ADLER, TC Memo 2011-28 (January 31, 2011) ************************************** 3. REPEAL OF 1099 REPORTING MAY COME TO FRUITION The health care reform act including a provision that will require business owners to report to the IRS on Form 1099 all payments in excess of $600 each year. That provision was heavily criticized by business interests for the expensive and time-consuming reporting burden it would impose. Many gold bugs were/are convinced that this was an intentional effort by the government to be able to track their bullion purchases (as a necessary first step towards confiscation in the event of fiscal emergency). Despite strong support for repeal, the repeal was held hostage to political interests, including possible stratagems to resisting repeal as creating an open door to the repeal of other provisions of the health care act. On February 2, the Senate voted against the bill that passed the House of Representatives to repeal the health care act. However, it did approve, by a vote of 81-17, an amendment to the FAA Air Transportation Modernization and Safety Improvement Act that repeals the new Form 1099 reporting. The provision now has to go back to the House of Representatives. Hopefully, the House will pass a similar repeal and President Obama will not veto it, so that this burdensome requirement meets its end before its 2012 effective date. As a political aside, it is interesting to note how the Form 1099 provision was enacted as part of health care legislation, and its repeal is part of air transportation legislation – two subjects that have next to nothing to do with tax reporting. In many states, the legislature is prohibited from legislating on more than one subject at a time. This provides the social benefit of avoiding the enactment of undesirable legislation in a vote because it is paired with or buried in legislation that enjoys broader support in the legislature or to evade a governor’s veto – a common legislative tactic. ************************************** 4. BLACKWATER IS NOT PART OF THE ARMY A recent Tax Court case is interesting, not because of the tax principles involved but because of its unusual subject matter. In the case, the taxpayer worked for Blackwater Security Consulting (Blackwater), performing dangerous security work in Iraq that related to military operations. Blackwater is an organization that has garnered attention as something akin to a private army. The taxpayer sought to exclude from income his pay under Code Section 112. That provision excludes from gross income compensation received for active service as a member below the grade of commissioned officer in the Armed Forces of the United States while serving in a combat zone. The Tax Court held that Code Section 112 did not apply since Blackwater is not part of the Armed Forces of the U.S. Prior case law had likewise held the inapplicability of Code Section 112 for a pilot employed by a private airline flying civilian aircraft under contract in support of the U.S. military in the Vietnam War, and for a merchant marine employee of a private company working on a U.S. naval ship in a combat zone. Given the existing precedent, one would expect penalties to be applied against the taxpayer, and indeed the IRS did assess them. However, the Tax Court struck them down (other than an estimated tax underpayment penalty) since the taxpayer had reasonably relied on an IRS internal memorandum that erroneously described civilian personnel as being able to use the Code Section 112 exclusion. Nathanial J. Holmes, TC Memo 2011-26 ************************************** 5. APPEALS COURT BREATHES NEW LIFE INTO OVERSTATED BASIS ISSUE On several occasions, we have written about cases where courts have held that the six-year extended statute of limitations for a 25% omission of gross income from an income tax return will not apply when the unreported income arises from the taxpayer overstating his basis in a sold asset. It now appears that the IRS' dogged persistence in fighting these cases has paid off, at least in one court. In a decision of the Seventh Circuit Court of Appeals, the court has reversed the Tax Court in its decision and held that an overstatement of basis is an omission of gross income for this purpose. This decision is contrary to holdings in the Nine Circuit and in the Court of Appeals for the Federal Circuit. Thus, the stage is set for a possible US Supreme Court resolution of this issue. Beard v Comm., (CA 7, 1/26/2011) ************************************** 6. TAX INCENTIVES IN THE SMALL BUSINESS JOBS ACT OF 2010 A little lost in the attention garnered by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 are for the tax incentives for small businesses enacted under the Small Business Jobs Act of 2010. These provisions are meant to encourage growth and expansion for small businesses. The following summary is largely based on the article by Linda Nelsestuen and Michael Chiasson in the December 2010 version of Practical Tax Strategies/Taxation for Accountants entitled "Exploiting the Tax Incentives Included in the Small Business Jobs Act of 2010." 1 Capital Gains Tax Relief 1.1 Those who purchased qualified small business stock between 9/27/10 and 1/1/11 and hold it for at least five years, will pay absolutely no tax on the capital gain when the stock is sold. 1.2 This is an expansion of the 50% excluding available under Code Section 1202(a). 1.3 Qualified small businesses generally are domestic C Corporations whose aggregate assets are under $50 million and which use at least 80% of their assets in one or more active trade or businesses. 2 Section 179 Expensing 2.1 Increased to $500,000 in 2010 and 2011. 2.1.1 Under the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 for tax years beginning in 2012 a small business taxpayer will be allowed to write off up to $125,000 (indexed for inflation). 2.2 The limitations on the value of assets placed into service have increased from $800,000 to $2 million. For assets placed into service beyond the $2 million limit, the deduction is lost dollar for dollar. 2.3 The expensing now temporarily applies to “qualified real property” for the 2010 and 2011 tax years, which is defined as qualified, domestic (1) leasehold improvement property, (2) restaurant property, and (3) retail improvement property. Excluded, however, are units for air conditioning and heating. 3 Section 168(k) Depreciation Bonus 3.1 This 50% depreciation bonus has been extended to include 2010. 3.2 Note that the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 also subsequently provided for a 100% bonus for qualified tangible personal property placed in service after September 8, 2010 and through December 31, 2011 (through December 31, 2012 for certain longer-lived and transportation property). 4 Carryback of Credits 4.1 The general business credit carryback period is temporarily increased to five years from one year. Other limitations and restrictions relating to the carrybacks are reduced or eliminated. 5 Health Insurance Deduction for Self-Employment Taxes 5.1 For 2010, self-employed taxpayers may deduct health insurance costs to offset employment taxes. 5.2 Note this is different from the deduction available against federal income to reduce income taxes. 6 Increase in Deductible Start-Up Expenditures 6.1 The initial deduction is increased from $5,000 to $10,000, and with the phase-out threshold increased from $50,000 to $60,000. 7 Removal of Cell Phones from Listed Property 7.1 Cell phones and other personal communication devices are no longer treated as listed property. Listed property is subject to strict substantiation requirements, and thus these items are no longer subject to these requirements. 7.2 This is a permanent change. 7.3 Note that personal use is still not deductible, and there still has to be some type of documentation as to the portion of the cell phone used for business purposes. 8 Reduction in Penalties for Failure to Disclose Information with Respect to "Reportable Transactions" 8.1 Section 6707A penalties will now be based in large part on the tax savings resulting from the unreported Reportable Transaction instead of being a flat amount penalty. ************************************** 7. IRS SAYS IT IS READY NOW FOR 2010 RETURNS On December 30, 2010, the IRS advised certain taxpayers to wait until mid or late February, 2011 to file their income tax returns for 2010. This was because the IRS needed time to reprogram its computers to reflect the 2010 Tax Leave Act's changes. Taxpayers that were affected by the delay are those claiming: --Itemized deductions on Schedule A; --above-the-line deductions for higher education tuition and fees; and --about-the-line deductions for kindergarten through grade 12 educators with out-of-pocket classroom expenses of up to $250. In a January 20, 2011 news release, the IRS has announced that such returns can be submitted for processing on or after February 14, 2011. Taxpayers using commercial software can check with their providers, since many of those companies will accept returns prior to that date and hold them for submission to the IRS on February 14. News Release 2011 – 7 ****************************** 8. FIRM ANNOUNCEMENTS Peter Forman, with the assistance of Sean Lebowitz, presented on the topic of “Nuts and Bolts of Contested Guardianship” at the 28th Annual Estate & Probate Seminar in January 2011. A copy of their presentation materials is posted on our website under the “Resources” tab of our website at www.floridatax.com. Our attorneys are available for speaking engagements at Bar, accountant, and other professional organization meetings and seminars (schedules permitting). Feel free to contact us with any requests. ****************************** 9. ABOUT OUR FIRM Our firm seeks to protect and enhance the individual, family and business wealth of our clients in the following principal practice areas: Planning to Minimize Taxes (U.S. & International) • Probate & Trust Litigation • Estate Planning, Charitable, Marital & Succession Planning • Business Structuring & Transactions • Trusts & Estates Administration • Tax Controversies • Creditor Protection. Please visit our website at http://www.floridatax.com for information about the firm, our attorneys, articles from recent monthly newsletters, interesting articles and tax guides, and federal and Florida tax rates and information. The firm and its attorneys have been recognized in numerous peer rating guides, such as U.S. News & World Report law firm rankings, Best Lawyers, Martindale-Hubbell, Chambers, Who's Who in American Law, Florida Trend's Legal Elite, Superlawyers, and South Florida Legal Guide Top Lawyers. ****************************** DAILY TAX AND BUSINESS UPDATES AVAILABLE. View prior articles, updates that we didn't have room for in this newsletter, or read the above postings when they are first published, by visiting http://www.rubinontax.blogspot.com. ----------------------------------------------- ----------------------------------------------- ----------------------------------------------- Having problems receiving this newsletter? Make sure that the E-mail address "crubin@floridatax.com" is marked as a friend or otherwise set to clear your spam filters! 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