Tax, Trusts & Estates Law Monitor : Estate Planning Lawyer & Attorney : Cole Schotz Meisel Forman & Leonard Law Firm : NJ, Mid-Atlantic Gift Tax & Trust Issues

The IRS announced a third voluntary disclosure program for offshore accounts recently.  The IRS has conducted two prior voluntary disclosure programs – one in 2009 and one in 2011.  According to the IRS, it had 33,000 disclosures from the 2009 and 2011 programs.  The Service has closed approximately 95% of the 2009 cases and collected approximately $3.4 billion in payments.  The IRS also stated that it has collected approximately $1 billion in up-front payments as a result of the 2011 program. 

The third voluntary disclosure program does not have a set termination date and includes a top penalty rate of 27.5%, slightly higher than the top penalty rate in the 2011 program.  IRS Commissioner Douglas Shulman said that the Service’s focus on offshore tax evasion continues to produce strong, substantial results. 

The IRS has also pursued a number of international banks to disclose the names and records of customers with undisclosed offshore accounts, and now also requires the filing of a Form 8938 for taxpayers to disclose specified foreign financial assets. 

The third voluntary disclosure program may be a benefit to taxpayers who have not disclosed offshore accounts previously and were otherwise facing uncertainty as to how the IRS would treat their disclosures.  If you have questions about the program please contact us.
 

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Sometimes a client owns life insurance and borrows against the policy in order to pay premiums.  After many years of this, it is not unusual for the loans against the policy to exceed the owner’s basis in the policy.  If the policy is then terminated (ie, the client surrenders the policy or just stops paying the premiums), the client often is surprised to learn that the termination triggers income tax on the difference between the amount of the outstanding loan and the basis in the policy.
 
The seminal case on this issue is Atwood v Comm’r (TC Memo 1999-61).  In Atwood, the Tax Court found that when the policy is disposed of (surrender, lapse or life settlement), the relief of the outstanding liability is tantamount to a cash distribution and is therefore taxable to the extent it exceeds basis. 

In a recent appellate level decision, the 10th Circuit affirmed a Tax Court decision on the same issue.  McGowen v Comm’r, 108 AFTR 2d 2011-6063 (10th Cir 2011), aff’g TC Memo 2009-285.  In this case, the taxpayer purchased a single premium life insurance policy in 1986.  By 2004, the loan on the policy exceeded its cash value.  The insurance company notified the taxpayer that she needed to make a minimum payment on the loan in order to keep the policy in force.  The taxpayer failed to make any payment, and the insurance company cancelled the policy and sent a 1099 reflecting over $500,000 of taxable income.  The taxpayer claimed that the income was cancellation of indebtedness (“COD”) income and excludible because she was insolvent at the time.  But the Tax Court disagreed, finding that the debt was not discharged but rather was repaid in effect by transferring an appreciated asset (the built-up cash value of the policy).  The 10th Circuit affirmed, finding that the taxpayer was not insolvent at the time the policy was terminated.

These cases usually involve inadvertent terminations of the life insurance policy, and this was the case in McGowen where the taxpayer likely ignored the insurance company’s notices about the consequences of a policy termination.  If a client is aware of this issue, there may be viable alternatives to prevent such an adverse result, such as keeping the policy in force until death but significantly reducing the death benefit so that the premiums are significantly reduced. 

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On October 20, 2011, the IRS released Revenue Procedure 2011-52, which announced inflation adjustments to the applicable exclusion amount beginning in 2012. For an estate of any decedent dying during calendar year 2012, the applicable exclusion is increased from $5 million to $5.12 million.  This change increases not only the applicable exclusion amount available at death, but also a taxpayer’s lifetime gift applicable exclusion amount and generation skipping transfer exclusion amount.

The $13,000 gift annual exclusion has not been increased.

Note that the present tax law provides that if there is no change in the law prior to December 31, 2012, the applicable exclusion will be reduced to $1 million, subject to inflationary adjustment.  Due to this potential decrease in the lifetime gift exclusion, now is the time to seriously consider gifting options before they are limited.

Other items of note that also are subject to inflationary adjustment in 2012 include the social security wage base, which increases from $106,800 in 2011 to $110,100 in 2012, and the maximum amount that can be deferred into a 401(k) from $16,500 to $17,00

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The New York Department of Taxation and Finance recently announced that it will follow the IRS and eliminate the two year time limit for innocent spouse equitable relief claims. 

For federal tax law purposes, a taxpayer can request innocent spouse relief by any of three methods:  (1) making a timely election within two years from the date the IRS has begun collection activities (and meeting other requirements), (2) electing to allocate a tax deficiency in proportion to each spouse’s contribution to the deficiency, or (3) by petitioning the IRS for “equitable relief” when relief is not available under the first two alternatives if it would be inequitable under the circumstances to hold the spouse liable. 

Pursuant to 2002 regulations, an innocent spouse equitable relief claim (the third method above) had to be made within two years of the date that the IRS began collection activities.  But in July, 2011, the IRS repealed this requirement.  Notice 2011-70. 

New York has similar innocent spouse rules.  New York Tax Law §654.  On September 27, 2011, New York announced that it will follow the IRS’ lead and also will eliminate the two year time limit on innocent spouse equitable relief claims.  TSB-M-11(11)I.  This change may apply to pending and past innocent spouse claims as well.

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On September 21, 2011 the IRS announced a new program to permit taxpayers to voluntarily reclassify workers as employees rather than independent contractors for employment tax purposes with minimal tax consequences for prior years.  The new program is called the Voluntary Classification Settlement Program (“VCSP”) and permits employers to make the change with minimal federal tax consequences.  To be eligible, an applicant must meet the following criteria:

• Consistently have treated the workers in the past as non-employees.
• Have filed all required Forms 1099 for the workers for the previous 3 years.
• Not currently be under audit or investigation by the IRS, the Department of Labor or any State agency concerning the classification of these workers.

In exchange for prospectively treating the workers as employees for future tax periods, the taxpayer will only have to pay an amount equal to 10% of the employment taxes that may have been due related to compensation paid to the workers for the most recent tax year.  This typically equals just over 1% of compensation. No interest or penalties will be due on the liability and the taxpayer will not be subject to an employment tax audit with respect to the worker classification issue for prior years.  Taxpayers participating in the VCSP must agree to extend the period of limitations on assessment of employment taxes for 3 years for the first, second and third calendar years beginning after the date on which the taxpayer has agreed to begin treating the workers as employees. 

Before participating in the program other issues need to be considered including, without limitation employee benefits, retirement plans, wage and hour and state tax considerations.

You should consult a qualified professional with respect to these issues.
 

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The IRS recently released the Applicable Federal Rate, or “AFR,” for October, 2011.  The AFR is a key interest rate used in connection with a number of the more sophisticated estate planning techniques, such as grantor retained annuity trusts (“GRATs”), sales to intentionally defective grantor trusts, and qualified personal residence interest trusts (“QPRITs”).

The mid-term AFR for October is 1.4%, which is historically low.  This means that GRATs, sales to grantor trusts, and intra-family loans are even more attractive in October because the amount that is required to be paid back to the donor under these techniques is relatively lower due to the extremely low interest rate. 

On the other hand, techniques in which the value of the gift is dependent upon the value of the income interest retained by the grantor, such as QPRITs or charitable remainder annuity trusts (“CRATs”), are not as attractive.  For these techniques, the low interest rate leads to a lower value for the retained interest and a higher value for the remainder interest, thereby resulting in a larger taxable gift when the technique is implemented.

With the increased lifetime gift exclusion ($5 million in 2011 and 2012) and the possibility that the use of GRATs may be restricted in the future, now may be the time to explore some of the estate planning approaches that have been enhanced by historically low interest rates.

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The IRS recently announced a second voluntary disclosure program to encourage US taxpayers to reveal their foreign assets, file tax returns for missing years and otherwise come into compliance with the tax laws.

The IRS had a similar voluntary disclosure program which ended in 2009 and resulted in approximately 15,000 taxpayers entering the program, well more than the IRS anticipated.

“Voluntary disclosure” is a long-term IRS policy that a taxpayer who may have committed a tax crime can disclose and correct past wrongs, and in doing so, avoid criminal prosecution. Correcting past wrongs generally includes filing or amending tax returns for prior years and paying all related taxes, interest and penalties.

The new voluntary disclosure program carries stiffer penalties than the first program, reflecting a policy choice that delinquent taxpayers should not be rewarded for waiting. To enter into the new program, a taxpayer must file complete and accurate original or amended returns, any related information returns, including Form TD F 90-22.1, also known as an “FBAR,” which reports the taxpayer’s foreign bank accounts, cooperate in the voluntary disclosure process, and pay all interest and penalties. Under the new program, taxpayers must pay accuracy related penalties, failure to file and failure to pay penalties (if applicable), and also pay an additional penalty generally equal to 25% of the highest aggregate balance in the foreign bank account during the period covered by the voluntary disclosure.

There is a reduced penalty structure for taxpayers whose offshore accounts or assets did not surpass $75,000 in any calendar year, and for certain other taxpayers who did not open the account or had minimal contact with it.

The program reflects the IRS’ increasingly aggressive approach to enforcing the tax laws in the international area. The IRS recently opened offices in several other counties, particularly in Asia, as part of these efforts. The agency continues to negotiate mutual assistance agreements with other countries’ tax authorities. Moreover, recent legislation (the Foreign Account Tax Compliance Act or “FATCA”) requires foreign banks to disclose information about account holders with US ties. In short, the US landscape for international taxpayers is changing dramatically. For those not in compliance, it is getting more and more difficult to hide.

The deadline for the program is August 31. If you desire further information about the voluntary disclosure program, please contact us.
 

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We have blogged frequently on domicile issues and have even written a guidebook on how to change your domicile from New York or New Jersey to Florida. In that regard, we wanted to make note of an article on February 23 in The New York Times (see http://www.nytimes.com/2011/02/24/nyregion/24taxes.html?_r=2) which addressed New York City domicile issues. The rules on whether you are taxed as a New York City resident are similar to the rules regarding whether you are a New York State resident. An individual will be taxed as a New York City resident if (i) he or she is domiciled in New York City, or (ii) he or she is not domiciled in New York City, but maintains a permanent place of abode in New York City and spends more than 183 days in New York City. How is New York finding New York City taxpayers? In addition to its fleet of auditors, the 2010 New York income tax return adds a new question asking New York taxpayers who maintain living quarters in New York City to provide the number of days spent in New York City. Taxpayers who are close to 183 days of residence should be certain to keep accurate and detailed records so that they are properly classified.

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New Jersey’s gross income tax system is unique because (1) it allows few deductions (that’s what they mean by “gross income”) and (2) income is separated into different categories or baskets (such as partnership income, interest income, etc.). Allowable deductions in one basket cannot offset income in another basket. This system can create mismatches with a taxpayer’s federal income tax liability and traps for the unwary.

Danny “Tiger” Schulmann is a successful karate practitioner, instructor and franchiser of karate schools, with over 40 schools in the New York metropolitan area, but he was recently KO’d by New Jersey’s Division of Taxation due to such a mismatch between his income and deductions.

Schulmann created an S corporation management company which provided management services to each karate school. Each karate school in turn was structured as a separate corporation co-owned between Schulmann and the instructor who would run the school. Each instructor also could receive up to 20% commissions when one of his or her students opened a new school.

Schulmann paid the 20% commission from a personal account rather than a business account. He testified that he did this to guarantee the instructors that there would be cash available for the payments, which totaled $863,000 - $1.025 million for the years in question. This was a mistake, however, for New Jersey gross income tax purposes.

The Division of Taxation denied the deductions, taking the position that the commission payments were personal expenses, not S corporation expenses (even though they were obligations of the business). In a January, 2011 opinion, the New Jersey Tax Court agreed, holding fast to the concept that expenses in one category cannot offset income in another category. Having chosen to make the commission payments personally rather than through the business, Schulmann could not avoid the structure when it resulted in unfavorable tax consequences.

Tax advisors, as senseis to their clients, should guide them with care through the challenging tests of New Jersey’s income tax system.

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With many taxpayers receiving their W-2s in the past 2 weeks, 2011 income tax returns are now squarely on the radar screen. With that in mind, we wanted to note the following:

• For those early filers, due to the late enactment of the 2010 tax law (December 17), the IRS has not been able to process all of the law changes into its computers. As a result, the IRS announced it will begin to process tax returns with itemized deductions no earlier than February 14.
• Taxpayers have additional time to file their returns this year. Tax returns are due April 18th due to an April 16th holiday in the District of Columbia (Emancipation Day, observed on April 15th). Because the IRS follows the District of Columbia holiday calendar, the due date is Monday, April 18th. This includes the due date for gift tax returns.
• As a result of The Emergency Economic Stabilization Act of 2008, new cost basis reporting rules are in effect as of January 1, 2011. The new law requires brokerage firms and mutual fund companies to report a taxpayer’s adjusted cost basis for specified securities to the IRS on Form 1099-B and whether the holding periods for the securities are short term or long term. The rules are phased in over a three-year period. Stocks acquired after January 1, 2011 will be required to be tracked, mutual funds acquired after January 1, 2012 will be required to be tracked, and bonds and options acquired after January 1, 2013 will be required to be tracked.

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One of the benefits of an S corporation ownership structure is a payroll tax advantage. An S corporation owner will pay payroll tax on his or her salary, but not on the entire amount of corporate profit. For example, if a corporation’s profit would be $500,000 without factoring in the owner’s salary, and the owner takes $200,000 as compensation and shows $300,000 in profit, only the salary amount is subject to payroll tax. This is one of the benefits S corporations have over LLCs, where all company profit is considered self-employment income and subject to payroll tax. (A legislative proposal to change this treatment recently failed to pass.)

This advantage may encourage S corporation owners to take less in salary and more in profit so as to save payroll taxes, but a recent case [David E. Watson, P.C. v US, 107 AFTR 2d ¶2011-305 (S D IA, December 23, 2010)] shows that salary still must be reasonable.

David Watson, a CPA in Des Moines, Iowa, set up an S corporation which was a principal in a four member accounting firm. In 2002 and 2003, the accounting firm made profit distributions to Watson’s S corporation of approximately $204,000 and $175,000 respectively. In those years, Watson reported a mere $24,000 of salary and the rest as S corporation profit, saving over $20,000 in payroll taxes.

The IRS disagreed with this reporting position, arguing that recent accounting graduates with no experience had average salaries at the time of approximately $40,000 per year, and that Watson’s reasonable salary was approximately $91,000. The District Court for the Southern District of Iowa agreed, ordering Watson to pay back taxes, interest and penalties.

This case may be viewed as an IRS victory, and it demonstrates that S corporation owners must take a reasonable salary. Nonetheless, the case also demonstrates the benefit of the S corporation structure. Had Watson organized as an LLC, all of the profits distributed would have been subject to payroll tax.
 

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From 1986 until very recently, a C corporation that converted to an S corporation faced potential double taxation on built-in gain assets (“BIG assets”) for a 10 year period following its S election. The full benefit of electing S corporation status and pass-through taxation was only available after the 10 year period.

In 2009, legislation was enacted reducing the built-in gain period to seven years for BIG assets sold in 2009 and 2010. In the recently-enacted Small Business Jobs Act of 2010, this period was reduced to five years for BIG assets sold in 2011.

This generally means that if a corporation’s S election was on January 1, 2006 or earlier, there will be no corporate level tax on BIG assets sold in 2011.

Unless it is extended, this provision only is valid for this year and the law will revert to the 10 year built-in gains period at the end of 2011. Owners of S corporations with significant built-in gains should consider the tax benefits of selling BIG assets during this time frame.
 

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This year – 2010 – has been the year of the Roth IRA, with new rules in place permitting taxpayers in any income tax category to convert their traditional IRAs to Roth IRAs. There has been a plethora of discussion and commentary on this issue (see our article on this subject at http://www.coleschotz.com/assets/attachments/241.pdf), and generally taxpayers have the decision of weighing whether it is worth it to pay an immediate tax as a result of the conversion in order to come out ahead in the long run as a result of the tax-free growth of the newly created Roth IRA.

As 2011 nears and the prospect of the Bush era tax cuts ending becomes more of a possibility, the case for making a Roth IRA conversion becomes clearer for some taxpayers. If a taxpayer converts in 2010 (i.e., prior to the tax cuts expiring), the taxpayer will pay tax on the conversion at the lower 2010 income tax rates. This assumes the taxpayer will not elect to pay the conversion tax in 2011 and 2012, as is permitted with a 2010 Roth conversion. If the taxpayer does not convert, and is over 70 ½, the required minimum distributions after the tax cuts expire (if they do expire) will be taxed at higher rates. Remember, Roth IRAs during lifetime do not require minimum distributions, so not only will the Roth conversion be taxed at lower rates (assuming the tax cuts expire), but also no minimum distributions will be required post-conversion during the taxpayer’s life.

In addition, taxpayers should consider the effect of the 3.8% surtax imposed on net investment income that was enacted as part of President Obama’s new health care law. While IRA distributions are exempt from the 3.8% surtax, distributions from IRA accounts and future Roth conversions can push income over the threshold amounts, causing other investment income to be subject to the surtax. If the Roth conversion occurs prior to 2013, a taxpayer will have one fewer item of income that could push him or her into the 3.8% surtax.

These are just two more factors to consider when making the Roth conversion decision. And certainly keep an eye on the elections tonight – the outcome could certainly play a role in whether the Bush tax cuts will be extended and if the new health care law will be repealed.

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The maximum 15% income tax rate on qualified dividends now in effect is scheduled to expire at the end of 2010. If Congress does not act, then beginning in 2011 dividends will be taxed at ordinary income rates (ie, at a maximum rate of 39.6%, assuming that rate returns as the top rate). For this reason, clients with available cash in a C corporation should consider corporate distributions to shareholders before year-end to take advantage of the lower income tax rates.

There is of course a possibility that the preferential income tax rate on dividends could be continued. If so, a taxpayer who makes a 2010 corporate distribution could trigger a tax unnecessarily. Some taxpayers may adopt a wait and see approach, at least until shortly before year-end, to reduce this risk. At the present time, Congressional leaders have said they do not expect a tax bill to be introduced or voted on prior to the November elections.

If you have questions about this potential tax saving opportunity, please contact us.
 

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We read with interest this week the story regarding Derek Jeter listing his New York condo for sale, not because of the startling price ($20 million), but for the potential domicile considerations and where Jeter is considered to be a resident for income tax purposes. We have fielded many inquiries on this topic over the past few years, and thought this story was a good reminder to people that where you are domiciled, or alternatively, where you are considered to be a statutory resident, can have a major financial impact.

Using New York as an example (the same analysis is applicable to other states, including New Jersey), if an individual is domiciled in New York, he or she generally is a New York resident for income tax purposes. Even if not domiciled in New York, an individual may be a statutory New York resident for income tax purposes if the individual (i) maintains a permanent place of abode in New York and (ii) spends in the aggregate more than 183 days of the taxable year in New York.

The determination of whether an individual is domiciled in New York or a resident is important for income tax purposes. While nonresident taxpayers are subject to New York income tax only on New York source income, resident taxpayers are taxed on all income, irrespective of whether the income is generated in New York.

In Jeter’s case, while he owns his apartment, the taxing authorities have two avenues to argue that he is a New York resident – first that he is domiciled in New York, or second that even if he is not domiciled in New York, because he maintains a permanent home in New York and assuming he was in New York for more than 183 days, he is a statutory resident for New York income tax purposes and should be taxed as such.

Now that he is selling his New York apartment, New York may not have the ability to argue that Jeter is a statutory resident since he may no longer be maintaining a permanent home. If New York were to pursue Jeter again (he was previously in a domicile dispute with New York for the 2001-2003 tax years that was settled out of court), they may only have the domicile argument to raise, and not the statutory resident argument.

What does this all mean? On a technical level, if Jeter were to spend more than 183 days in New York after he sells his apartment, it would not automatically classify him as a New York resident since the “183 day test” requires the maintenance of a permanent home. The number of days spent in New York is one of the primary factors when determining domicile so it is still not recommended that he spend more than 183 days in New York. Earlier this summer, the Yankees public address announcer, Bob Sheppard, passed away, and it was widely reported that no Yankee (including Yankee captain Jeter) attended his funeral in New York, which was over All-Star weekend in California. In Jeter’s case, one is left to wonder whether his not attending was simply due to the fact that his attendance would require extra days spent in New York which could get him closer to 183 days spent in New York and thus being classified as a statutory resident.

We have written a guidebook on domicile and how to change your residence from New York or New Jersey to Florida. If you would like a copy, please email Melissa Shuman (Director of Marketing) at MShuman@coleschotz.com.

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The IRS and New Jersey Division of Taxation have extended this year’s tax return filing deadline for residents of 12 New Jersey counties due to the flood emergency in the state.  Residents of these counties now have until May 11, 2010 to file their returns.

See the IRS Press Release on this topic by clicking here.

See the NJ Division of Taxation announcement by clicking here.

The extension applies to residents of Atlantic, Bergen, Cape May, Essex, Gloucester, Mercer, Middlesex, Monmouth, Morris, Passaic, Somerset, and Union counties.

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It is fairly common for foreigners to invest in US real estate. Before doing so, however, they should consider the income, gift and estate tax implications of such investments and possible tax structuring (entities, trusts, etc.) to minimize exposure.

A foreigner may purchase US situs real estate directly and own the property or properties in his or her individual name, though this creates income tax reporting and withholding issues. In addition, if the foreign owner then dies, his or her US situs real estate is subject to US estate tax, often an unpleasant surprise for the surviving family members. This tax result is exacerbated because, generally speaking, foreigners do not get the benefit of a unified credit.

Example: Charles, a Japanese citizen, buys a New York City rental apartment valued at $2 million. He dies 10 years later when the property is worth $4 million. Absent other circumstances, Charles’ US situs property is subject to US estate tax. Assuming a 45% tax rate and no exemption, federal estate tax of $1.8 million will be due nine months from Charles’ date of death. New York estate tax would be additional. (Note that the federal estate tax is currently repealed, so these figures in this example apply only if/when the federal estate tax is re-enacted).

There are a number of steps that foreigners and their families should consider if faced with the situation of a foreign decedent owning US property, including:

Treaty relief.  If the US has an estate tax treaty with the decedent’s home country, the decedent may be entitled to a greater unified credit. A common treaty provision gives a nonresident alien decedent a unified credit equal to a fraction of the unified credit available to US persons. The fraction is equal to the percentage of the decedent’s US situs property over the decedent’s worldwide property. The greater unified credit permitted under a treaty can mitigate the estate tax exposure.

Post mortem QDOT.  A surviving spouse (often an nonresident alien too) can create a qualified domestic trust (“QDOT”) and transfer to it inherited US situs real estate. With a proper structure and a QDOT election in place, property passing to a nonresident alien spouse will qualify for the estate tax marital deduction. The effect of this is to defer the estate tax until the death of the surviving spouse, though it does not avoid the estate tax altogether.

Pre-death planning. There are any number of steps that could be taken prior to death to avoid US estate tax. Some common considerations include (1) annual exclusion gifts of interests in the property which will qualify for the gift tax annual exclusion, (2) transferring the real estate to a foreign corporation, since the shares of a foreign corporation generally are not subject to US estate tax in a nonresident alien’s estate, or (3) transferring the real estate to another entity, the ownership of which will not be subject to US estate tax. Before taking any of these steps, the property owner should look into the income tax considerations (including FIRPTA), gift tax considerations, and reporting requirements that can be quite onerous. These approaches also should be considered for a surviving spouse’s portion of jointly owned property.

Conclusion. When a foreigner dies owning US situs real estate, the executor or surviving family members can consider a number of steps to reduce the US estate tax exposure.
 

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President Obama signed the “Worker, Homeownership and Business Assistance Act of 2009” on November 6, 2009. Among other things, the new law expands the net operating loss carryback rules so that virtually all taxpayers can elect to carryback 2008 and 2009 NOLs for up to five years.

A net operating loss (“NOL”) generally means the amount by which a taxpayer’s business deductions exceed its gross income. In general, an NOL may be carried back two years and carried over 20 years to offset taxable income in those years.

Under present law (which was passed in 2009 as part of the federal stimulus measures), “electing small businesses” – generally businesses (including individuals who run a trade or business) with less than $15 million in annual sales – can elect to carry back a 2008 net operating loss for three, four or five years instead of the usual two years.

The new law expands this rule by permitting virtually all businesses (other than those that have received federal bailout money or been acquired by the federal government) to elect to carry back 2008 and 2009 NOLs for three, four or five years. Under the new law, however, there is a 50 percent income limit on any NOL offsets applied to the fifth year.

The law also affects the NOL deduction for AMT purposes. Under present law a taxpayer’s NOL deduction cannot reduce the taxpayer’s AMT income by more than 90%. This restriction is suspended under the new law for 2008 and 2009 NOLs and related carrybacks.

The decision as to whether to make the carryback election can be complicated and generally involves analyzing (1) the size of the NOL, (2) the taxpayer’s income, character of the income (ordinary or capital gain), and effective tax rate in each of the past five years, (3) the taxpayer’s expected future income and (4) the effect of any carryback for AMT purposes. A taxpayer can also elect under Code §172(b)(3) to waive the carryback to prior years and therefore carry the entire NOL forward to future years.
 

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When a US citizen relinquishes citizenship or a long-term US resident (green card holder) leaves the US, new rules in effect since June, 2008 can apply to treat the expatriate as if he or she sold all of his or her assets (worldwide) as of the date of expatriation, triggering an immediate income tax on all appreciated assets. This rule is intended to prevent expatriates from moving their assets offshore without paying tax, and can have significant adverse tax consequences.

Last week, the IRS issued Notice 2009-85, which provides 58 pages of detailed guidance regarding the operation of these rules.

A qualifying expatriate, generally speaking, is a US citizen who relinquishes citizenship or a long term resident who terminates US residency, and who meets either (1) the average annual net income tax test (more than $124,000 average annual income tax in each of the last five years), (2) the net worth test (greater than $2 million) or (3) the “failure to certify” test (failure to certify compliance with the US tax laws).

The rule triggering immediate income tax on expatriation is mitigated by an exemption for the first $600,000 of gain (adjusted for inflation). A taxpayer also may be able to defer the payment of tax if a number of conditions are met. Lastly, the deemed sale rules do not apply to deferred compensation items, specified tax deferred accounts and interests in trusts where the expatriate is a beneficiary.

Please contact us if you would like to discuss how these complicated rules may apply to you.
 

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Late in 2008, the Worker, Retiree and Employer Recovery Act of 2008 was enacted, which provided for a one-year suspension of the required minimum distribution rules in 2009 due to the economic meltdown. This means that IRA and 401(k) participants and beneficiaries are not required to take minimum distributions in 2009. Unfortunately, the enactment of the law in late 2008 resulted in many participants unknowingly taking their minimum distributions in 2009.

On September 24, 2009, the IRS issued Notice 2009-82 to provide relief for taxpayers who already took minimum distributions in 2009 but now want to take advantage of this one-year suspension rule. Basically, taxpayers now have until November 30, 2009 to rollover their mistaken 2009 minimum distributions without any adverse tax consequences.
 

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Under the American Recovery and Reinvestment Act of 2009, certain taxpayers can make an election to carry back a 2008 net operating loss for three, four or five years (instead of the usual two years). The deadlines to make this election are fast approaching.

For individuals, the deadline for this election is October 15, 2009. For calendar-year corporations, the deadline for this election is September 15, 2009.

Taxpayers with large losses in 2008 should consult with their tax advisors and consider whether this election will produce a larger refund. If so, they should be sure not to miss the deadline.
 

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