Thursday, November 8, 2012

Tax increases in 2013 Under The Affordable Care Act

Even if Congress were to somehow avoid the Fiscal Cliff the fact remains that under the Affordable Care Act (the Patient Protection and Affordable Care Act, and the Health Care and Education Reconciliation Act of 2010), a number of important tax increases will go into effect next year. These include higher HI taxes for high earners, a 3.8% surtax on unearned income of higher-income individuals, and caps on health FSA contributions. These changes will cause compliance issues for companies, and some of them also will face new deduction limitations and fees.

Here is a brief summary

Increased HI tax for high-earning workers and self-employed taxpayers.
For tax years beginning after Dec. 31, 2012, an additional 0.9% hospital insurance (HI) tax applies under Code Sec. 3101(b)(2) to wages received with respect to employment in excess of: $250,000 for joint returns; $125,000 for married taxpayers filing a separate return; and $200,000 in all other cases. Under Code Sec. 1401(b)(2), the additional 0.9% HI tax also applies to self-employment income for the tax year in excess of the above figures. (Code Sec. 6051(a)(14))

Surtax on unearned income of higher-income individuals. For tax years beginning after Dec. 31, 2012, an unearned income Medicare contribution tax is imposed on individuals, estates, and trusts. (Code Sec. 1411) For an individual, the tax is 3.8% of the lesser of either (1) net investment income or (2) the excess of modified adjusted gross income over the threshold amount ($250,000 for a joint return or surviving spouse, $125,000 for a married individual filing a separate return, and $200,000 for all others). For surtax purposes, gross income does not include excluded items, such as interest on tax-exempt bonds, veterans' benefits, and excluded gain from the sale of a principal residence. Hence the sale of one’s home could trigger the 3.8% tax.

Higher threshold for deducting medical expenses. For tax years beginning after Dec. 31, 2012, unreimbursed medical expenses will be deductible by taxpayers under age 65 only to the extent they exceed 10% of adjusted gross income (AGI) for the tax year. (Code Sec. 213(a)) If the taxpayer or his or her spouse has reached age 65 before the close of the tax year, a 7.5% floor applies through 2016 and a 10% floor applies for tax years ending after Dec. 31, 2016. (Code Sec. 213(f))

Dollar cap on contributions to health FSAs. For tax years beginning after Dec. 31, 2012, for a health flexible spending account (FSA) to be a qualified benefit under a cafeteria plan, the maximum amount available for reimbursement of incurred medical expenses of an employee (and dependents and other eligible beneficiaries) under the health FSA for a plan year (or other 12-month coverage period) can't exceed $2,500. (Code Sec. 125(i))

Deduction eliminated for retiree drug coverage. Sponsors of qualified retiree prescription drug plans are eligible for subsidy payments from the Secretary of Health and Human Services (HHS) for a portion of each qualified covered retiree's gross covered prescription drug costs (“qualified retiree prescription drug plan subsidy”). These qualified retiree prescription drug plan subsidies are excludable from the taxpayer's (plan sponsor's) gross income for regular income tax and alternative minimum tax (AMT) purposes. For tax years beginning before 2013, a taxpayer may claim a business deduction for covered retiree prescription drug expenses, even though it excludes qualified retiree prescription drug plan subsidies allocable to those expenses. But for tax years beginning after Dec. 31, 2012, under Code Sec. 139A, the amount otherwise allowable as a deduction for retiree prescription drug expenses will be reduced by the amount of the excludable subsidy payments received.

Fee on health plans. For each policy year ending after Sept. 30, 2012, each specified health insurance policy and each applicable self-insured health plan will have to pay a fee equal to the product of $2 ($1 for policy years ending during 2013) multiplied by the average number of lives covered under the policy. The issuer of the health insurance policy or the self-insured health plan sponsor is liable for and must pay the fee. (Code Sec. 4375, Code Sec. 4376, and Code Sec. 4377)

$500,000 compensation deduction limit for health insurance issuers. For tax years beginning after Dec. 31, 2012, for services performed during that year, a covered health insurance provider isn't allowed a compensation deduction for an “applicable individual” (officers, employees, directors, and other workers or service providers such as consultants) in excess of $500,000. A health insurance provider is covered if at least 25% of its gross premium income from health business derives from health insurance plans that meet certain minimum requirements. (Code Sec. 162(m)(6)(A))

The are no exceptions for performance-based compensation, commissions, or remuneration under existing binding contracts. Also, in the case of remuneration that relates to services that an applicable individual performs during a tax year but that is not deductible until a later year, such as nonqualified deferred compensation, the unused portion (if any) of the $500,000 limit for the year is carried forward until the year in which the compensation is otherwise deductible, and the remaining unused limit is then applied to the compensation.

Excise tax on medical device manufacturers. For sales after Dec. 31, 2012, a 2.3% excise tax applies under Code Sec. 4191 to sales of taxable medical devices intended for humans. The excise tax, paid by the manufacturer, producer, or importer of the device, won't apply to eyeglasses, contact lenses, hearing aids, and any other medical device determined by IRS to be of a type that is generally purchased by the general public at retail for individual use.

Thursday, November 1, 2012

Cash Payments of Over $10,000

What About Suspicious Transactions?

If you receive $10,000 or less in cash, you may voluntarily file Form 8300 if the transaction appears to be suspicious.

A transaction is suspicious if it appears that a person is trying to cause you not to file Form 8300 or is trying to cause you to file a false or incomplete Form 8300, or if there is a sign of possible illegal activity.

If you are suspicious, you are encouraged to call the local IRS Criminal Investigation Division as soon as possible. Or, you can call the FinCEN Financial Institution Hotline toll free at 1-866-556-3974.

When, Where, and What To File

The amount you receive and when you receive it determine when you must file. Generally, you must file Form 8300 within 15 days after receiving a payment. If the Form 8300 due date (the 15th or last day you can timely file the form) falls on a Saturday, Sunday, or legal holiday, it is delayed until the next day that is not a Saturday, Sunday, or legal holiday.

More than one payment. In some transactions, the buyer may arrange to pay you in cash installment payments. If the first payment is more than $10,000, you must file Form 8300 within 15 days. If the first payment is not more than $10,000, you must add the first payment and any later payments made within 1 year of the first payment. When the total cash payments are more than $10,000, you must file Form 8300 within 15 days.

After you file Form 8300, you must start a new count of cash payments received from that buyer. If you receive more than $10,000 in additional cash payments from that buyer within a 12-month period, you must file another Form 8300. You must file the form within 15 days of the payment that causes the additional payments to total more than $10,000.

If you are already required to file Form 8300 and you receive additional payments within the 15 days before you must file, you can report all the payments on one form.

Example. On January 10, you receive a cash payment of $11,000. You receive additional cash payments on the same transaction of $4,000 on February 15, $5,000 on March 20, and $6,000 on May 12. By January 25, you must file a Form 8300 for the $11,000 payment. By May 27, you must file an additional Form 8300 for the additional payments that total $15,000.

Amending a Report? If you are amending a report, check box 1a at the top of Form 8300. Complete the form in its entirety (Parts I-IV) and include the amended information. Do not attach a copy of the original report.

Where to file. Mail the form to the address given in the Form 8300 instructions.

Required statement to buyer. You must give a written or electronic statement to each person named on any Form 8300 you must file. You can give the statement electronically only if the recipient agrees to receive it in that format. The statement must show the name and address of your business, the name and phone number of a contact person, and the total amount of reportable cash you received from the person during the year. It must state that you are also reporting this information to the IRS.

You must send this statement to the buyer by January 31 of the year after the year in which you received the cash that caused you to file the form.

RECORDS: You must keep a copy of every Form 8300 you file for 5 years.


Example 1. Pat Brown is the sales manager for Small Town Cars. On January 6, 2009, Jane Smith buys a new car from Pat and pays $18,000 in cash. Pat asks for identification from Jane to get the necessary information to complete Form 8300. A filled-in form is shown in this publication.

Pat must mail the form to the address shown in the form's instructions by January 21, 2009. He must also send a statement to Jane by January 31, 2010.

Example 2. Using the same facts given in Example 1, suppose Jane had arranged to make cash payments of $6,000 each on January 6, February 6, and March 6. Pat would have to file a Form 8300 by February 26 (17 days after receiving total cash payments within 1 year over $10,000 because February 21, 2009, is a Saturday). Pat would not have to report the remaining $6,000 cash payment because it is not more than $10,000. However, he could report it if he felt it was a suspicious transaction.


There are civil penalties for failure to:

• File a correct Form 8300 by the date it is due, and

• Provide the required statement to those named in the Form 8300.

If you intentionally disregard the requirement to file a correct Form 8300 by the date it is due, the penalty is the greater of:

1. $25,000, or

2. The amount of cash you received and were required to report (up to $100,000).

There are criminal penalties for:

• Willful failure to file Form 8300,

• Willfully filing a false or fraudulent Form 8300,

• Stopping or trying to stop Form 8300 from being filed, and

• Setting up, helping to set up, or trying to set up a transaction in a way that would

make it seem unnecessary to file Form 8300.

If you willfully fail to file Form 8300, you can be fined up to $250,000 for individuals ($500,000 for corporations) or sentenced to up to 5 years in prison, or both.

The penalties for failure to file may also apply to any person (including a payer) who attempts to interfere with or prevent the seller (or business) from filing a correct Form 8300. This includes any attempt to structure the transaction in a way that would make it seem unnecessary to file Form 8300. Structuring means breaking up a large cash transaction into small cash transactions.

Thursday, October 25, 2012

Reporting Cash Payments of Over $10,000 Received in a Trade or Business -PART I


The IRS has published new guidance on reportable cash transactions (Pub. 1544).

If, in a 12-month period, you receive more than $10,000 in cash from one buyer as a result of a transaction in your trade or business, you must report it to the Internal Revenue Service (IRS) and the Financial Crimes Enforcement Network (FinCEN) on Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business.

Financial institutions must file FinCEN Form 104 (formerly Form 4789), Currency Transaction Report, and casinos must file FinCEN Form 103 (formerly Form 8362), Currency Transaction Report by Casinos.

Why Report These Payments?

Drug dealers and smugglers often use large cash payments to "launder" money from illegal activities. Laundering means converting "dirty" or illegally-gained money to "clean" money.

The government can often trace this laundered money through payments reported. Laws passed by Congress require you to report these payments. Your compliance with these laws provides valuable information that can stop those who evade taxes and those who profit from the drug trade and other criminal activities.

Who Must File Form 8300?

Generally, any person in a trade or business who receives more than $10,000 in cash in a single transaction or in related transactions must file Form 8300.

For example, you may have to file Form 8300 if you are a dealer in jewelry, furniture, boats, aircraft, or automobiles; a pawnbroker; an attorney; a real estate broker; an insurance company; or a travel agency.

However, you do not have to file Form 8300 if the transaction is not related to your trade or business. For example, if you are a pawnbroker and sell your personal automobile for more than $10,000 in cash, you would not submit a Form 8300 for that transaction.

What transactions are subject to reporting? A "transaction" occurs when:

• Goods, services, or property are sold;

• Property is rented;

• Cash is exchanged for other cash;

• A contribution is made to a trust or escrow account;

• A loan is made or repaid; or

• Cash is converted to a negotiable instrument, such as a check or a bond.

Who is subject to the law? A "person" includes an individual, a company, a corporation, a partnership, an association, a trust, or an estate.

Exempt organizations, including employee plans, are also "persons." However, exempt organizations do not have to file Form 8300 for a more-than-$10,000 charitable cash contribution they receive since it is not received in the course of a trade or business.

What about Foreign transactions? You do not have to file Form 8300 if the entire transaction (including the receipt of cash) takes place outside of:

• The United States,

• The District of Columbia,

• Puerto Rico, or

• A possession or territory of the United States.

However, you must file Form 8300 if any part of the transaction (including the receipt of cash) occurs in Puerto Rico or a possession or territory of the United States and you are subject to the Internal Revenue Code.

What about cash deposited for bail received by court clerks. Any clerk of a federal or state court who receives more than $10,000 in cash as bail for an individual charged with any of the following criminal offenses must file Form 8300:

1. Any federal offense involving a controlled substance,

2. Racketeering,

3. Money laundering, and

4. Any state offense substantially similar to (1), (2), or (3) above.

What Payments Must Be Reported?

You must file Form 8300 to report cash paid to you if it is:

1. Over $10,000,

2. Received as:

a. One lump sum of over $10,000,

b. Installment payments that cause the total cash received within 1 year of the initial payment to total more than $10,000, or

c. Other previously unreportable payments that cause the total cash received within a 12-month period to total more than $10,000,

3. Received in the course of your trade or business,

4. Received from the same buyer (or agent), and

5. Received in a single transaction or in related transactions (defined later).

A simple question: What Is Cash?

Cash is:

1. The coins and currency of the United States (and any other country), and

2. A cashier's check, bank draft, traveler's check, or money order you receive, if it has a face amount of $10,000 or less and you receive it in:

a. A designated reporting transaction (defined later), or

b. Any transaction in which you know the payer is trying to avoid the reporting of the transaction on Form 8300.

Cash may also include a cashier's check even if it is called a "treasurer's check" or "bank check."

Note: Cash does not include a check drawn on an individual's personal account.

A cashier's check, bank draft, traveler's check, or money order with a face amount of more than $10,000 that you purchase is not treated as cash. These items are not defined as cash and you do not have to file Form 8300 when you receive them because, if they were bought with currency, the bank or other financial institution that issued them must file a report on FinCEN Form 104.

Example 1. You are a coin dealer. Bob Green buys gold coins from you for $13,200. He pays for them with $6,200 in U.S. currency and a cashier's check having a face amount of $7,000. The cashier's check is treated as cash. You have received more than $10,000 cash and must file Form 8300 for this transaction.

Example 2. You are a retail jeweler. Mary North buys an item of jewelry from you for $12,000. She pays for it with a personal check payable to you in the amount of $9,600 and traveler's checks totaling $2,400. Because the personal check is not treated as cash, you have not received more than $10,000 cash in the transaction. You do not have to file Form 8300.

Example 3. You are a boat dealer. Emily Jones buys a boat from you for $16,500. She pays for it with a cashier's check payable to you in the amount of $16,500. The cashier's check is not treated as cash because its face amount is more than $10,000. You do not have to file Form 8300 for this transaction.

Designated Reporting Transaction

A designated reporting transaction is the retail sale of any of the following:

1. A consumer durable, such as an automobile or boat. A consumer durable is property, other than land or buildings, that:

a. Is suitable for personal use,

b. Can reasonably be expected to last at least 1 year under ordinary use,

c. Has a sales price of more than $10,000, and

d. Can be seen or touched (tangible property).

For example, a $20,000 car is a consumer durable, but a $20,000 dump truck or factory machine is not. The car is a consumer durable even if you sell it to a buyer who will use it in a business.

2. A collectible (for example, a work of art, rug, antique, metal, gem, stamp, or coin).

3. Travel or entertainment, if the total sales price of all items sold for the same trip or entertainment event in one transaction (or related transactions) is more than $10,000.

To figure the total sales price of all items sold for a trip or entertainment event, you include the sales price of items such as airfare, hotel rooms, and admission tickets.

Example. You are a travel agent. Ed Johnson asks you to charter a passenger airplane to take a group to a sports event in another city. He also asks you to book hotel rooms and admission tickets for the group. In payment, he gives you two money orders, each for $6,000. You have received more than $10,000 cash in this designated reporting transaction. You must file Form 8300.

Retail sale. The term "retail sale" means any sale made in the course of a trade or business that consists mainly of making sales to ultimate consumers.

Thus, if your business consists mainly of making sales to ultimate consumers, all sales you make in the course of that business are retail sales. This includes any sales of items that will be resold.

Broker or intermediary. A designated reporting transaction includes the retail sale of items (1), (2), or (3) of the preceding list, even if the funds are received by a broker or other intermediary, rather than directly by the seller.

Exceptions to Definition of Cash

A cashier's check, bank draft, traveler's check, or money order you received in a designated reporting transaction is not treated as cash if one of the following exceptions applies.

Exception for certain bank loans. A cashier's check, bank draft, traveler's check, or money order is not treated as cash if it is the proceeds from a bank loan. As proof that it is from a bank loan, you may rely on a copy of the loan document, a written statement or lien instruction from the bank, or similar proof.

Example. You are a car dealer. Mandy White buys a new car from you for $11,500. She pays you with $2,000 of U.S. currency and a cashier's check for $9,500 payable to you and her. You can tell that the cashier's check is the proceeds of a bank loan because it includes instructions to you to have a lien put on the car as security for the loan. For this reason, the cashier's check is not treated as cash. You do not have to file Form 8300 for the transaction.

Exception for certain installment sales. A cashier's check, bank draft, traveler's check, or money order is not treated as cash if it is received in payment on a promissory note or an installment sales contract (including a lease that is considered a sale for federal tax purposes). However, this exception applies only if:

1. You use similar notes or contracts in other sales to ultimate consumers in the ordinary course of your trade or business, and

2. The total payments for the sale that you receive on or before the 60th day after the sale are 50% or less of the purchase price.

Exception for certain down payment plans. A cashier's check, bank draft, traveler's check, or money order is not treated as cash if you received it in payment for a consumer durable or collectible, and all three of the following statements are true.

1. You receive it under a payment plan requiring:

a. One or more down payments, and

b. Payment of the rest of the purchase price by the date of sale.

2. You receive it more than 60 days before the date of sale.

3. You use payment plans with the same or substantially similar terms when selling to ultimate consumers in the ordinary course of your trade or business.

Exception for travel and entertainment. A cashier's check, bank draft, traveler's check, or money order received for travel or entertainment is not treated as cash if all three of the following statements are true.

1. You receive it under a payment plan requiring:

a. One or more down payments, and

b. Payment of the rest of the purchase price by the earliest date that any travel or entertainment item (such as airfare) is furnished for the trip or entertainment event.

2. You receive it more than 60 days before the date on which the final payment is due.

3. You use payment plans with the same or substantially similar terms when selling to ultimate consumers in the ordinary course of your trade or business.

Taxpayer Identification Number (TIN)

You must furnish the correct TIN of the person or persons from whom you receive the cash. If the transaction is conducted on the behalf of another person or persons, you must furnish the TIN of that person or persons. If you do not know a person's TIN, you have to ask for it. You may be subject to penalties for an incorrect or missing TIN.

There are three types of TINs.

1. The TIN for an individual, including a sole proprietor, is the individual's social security number (SSN).

2. The TIN for a nonresident alien individual who needs a TIN but is not eligible to get an SSN is an IRS individual taxpayer identification number (ITIN). An ITIN has nine digits, similar to an SSN.

3. The TIN for other persons, including corporations, partnerships, and estates, is the employer identification number (EIN).

Exception. You are not required to provide the TIN of a person who is a nonresident alien individual or a foreign organization if that person or foreign organization:

1. Does not have income effectively connected with the conduct of a U.S. trade or business;

2. Does not have an office or place of business, or a fiscal or paying agent in the United States;

3. Does not file a federal tax return;

4. Does not furnish a withholding certificate described in § 1.1441-1(e)(2) or (3) or 1.1441-5(c)(2)(iv) or (3)(iii) to the extent required under 1.1441-1(e)(4)(vii);

5. Does not have to furnish a TIN on any return, statement, or other document as required by the income tax regulations under section 897 or 1445; or

6. In the case of a nonresident alien individual, the individual has not chosen to file a joint federal income tax return with a spouse who is a U.S. citizen or resident.

What Is a Related Transaction?

Any transactions between a buyer (or an agent of the buyer) and a seller that occur within a 24-hour period are related transactions. If you receive over $10,000 in cash during two or more transactions with one buyer in a 24-hour period, you must treat the transactions as one transaction and report the payments on Form 8300.

For example, if you sell two products for $6,000 each to the same customer in 1 day and the customer pays you in cash, these are related transactions. Because they total $12,000 (more than $10,000), you must file Form 8300.

More than 24 hours between transactions. Transactions are related even if they are more than 24 hours apart if you know, or have reason to know, that each is one of a series of connected transactions.

For example, you are a travel agent. A client pays you $8,000 in cash for a trip. Two days later, the same client pays you $3,000 more in cash to include another person on the trip. These are related transactions, and you must file Form 8300 to report them.

(PART II- Suspecious Transaction and Penalties)

Thursday, April 19, 2012

The MyTaxBurden Tax Policy Calculator

If you can stay up with the many tax cut/tax increase proposals being made almost daily by our President and various legislators you need a tool to see how well (badly) you will fare under these proposals. The Tax Foundation has launched a newly revised and updated online tool for taxpayers, to help them estimate what their tax burden would be under several possible legislative proposals being considered by Congress and the President. The MyTaxBurden Tax Policy Calculator allows users to input household data and get a personalized estimate of what they would have to pay to the federal government under an array of different scenarios.

Try it out!

Friday, April 13, 2012

Tax Foundation Releases 'Tax Facts' from 2010 Filing Season

We all get wrapped up in statistics; especially when it come to taxes. Here is some from the Tax Foundation.
 The deadline for filing federal tax returns this year is April 17th, and with that date fast approaching, the Tax Foundation has compiled a few statistics.
This edition of Tax Facts was compiled by Tax Foundation economist Will McBride. The following are based on the most recent Internal Revenue Service data for tax year 2010 and the IRS National Taxpayer Advocate's 2011 Report to Congress.
143 million tax returns were filed with the IRS in 2010, some of which represent households and married couples.
Americans paid federal incomes taxes of $945 billion.
Only 85 million actually paid taxes out of the 143 million filers. In other words, 58 million, or 41%, were non-payers. 96% of these non-payers made less than $50,000.
The IRS paid out $105 billion in refundable credits to filers who paid no income tax.
The effective tax rate for those making less than $50,000 was 3.5%, and their share of taxes paid was 6.7%.
The effective tax rate for those making more than $50,000 was 14.1%, and their share of taxes paid was 93.3%.
The effective tax rate for those making more than $250,000 was 23.4%, and their share of taxes paid was 45.7%.
33% of tax filers itemized.
25% of tax filers took the mortgage interest deduction, which reduced taxable income by $381 billion.
27% of tax filers took the charitable donations deduction, which reduced taxable income by $158 billion.
26 million filers took the refundable earned income tax credit, and they received $56 billion from the IRS despite having paid no income taxes.
21 million filers took the refundable child credit, and they received $27 billion from the IRS despite having paid no income taxes.
4 million paid the Alternative Minimum Tax.
The IRS estimates that it takes more than 7 billion hours to comply with the tax code each year.
The tax code is now 3.8 million words long.
Over the last ten years there have been about 4,428 changes to the tax code, or more than one a day, including about 579 changes in 2010 alone.
The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937.

Thursday, April 12, 2012

Important Recent Developments

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.

Payroll tax cut extended for all of 2012.

On Feb. 22, 2012, President Obama signed the “Middle Class Tax Relief and Job Creation Act of 2012” into law. It extended the 2-percentage-point payroll tax cut through the end of 2012 (earlier legislation had extended it for only the first two months of 2012). Thus, the 2-percentage point payroll tax reduction and the 2-percentage point reduction in the OASDI tax under the SECA tax for the self-employed applies through Dec. 31, 2012. As a result, for 2012, employees pay only 4.2% Social Security tax on wages up to $110,100 (wage base for 2012) and self-employed individuals pay only 10.4% Social Security self-employment taxes on self-employment income up to $110,100. The maximum savings for 2012 is $2,202 (2% of $110,100) per taxpayer. If both spouses earn at least as much as the wage base, the maximum savings is $4,404. 

Some estates get more time to make estate tax portability election.
The IRS issued guidance giving certain estates of married individuals who died during the first six months of 2011 an extension of the deadline to make the portability election to pass the decedent's unused estate and gift tax exclusion amount to the surviving spouse. The election is made on the Form 706 (estate tax return). Even if the estate isn't required to file a Form 706 (e.g., because the value of the gross estate is less than the exclusion amount), the Form 706 must be filed in ordered to make the election.
The extension is available to qualifying estates of decedents who are U.S. citizens or residents. A qualifying estate is an estate in which:
... The decedent is survived by a spouse;
... The decedent's date of death is after Dec. 31, 2010, and before July 1, 2011; and
... The fair market value of the decedent's gross estate does not exceed $5,000,000.
The IRS will grant the executor of a qualifying estate a six-month extension of time until 15 months after the decedent's date of death to file Form 706 if the executor files an appropriately designated Form 4768 with the IRS no later than 15 months from the decedent's date of death.

Retirement security initiative.
The U.S. Departments of the Treasury and Labor announced a sweeping initiative which is designed to broaden the availability of retirement plan options in order to provide greater certainty in retirement and minimize the risk of retirees outliving or underutilizing their retirement savings. It includes the following:
  • Partial annuity options. Proposed regulations would change the rules to make it simpler for defined benefit pension plans to offer combinations of lifetime income and a single-sum cash payment. They would allow retirees to receive a steady stream of income for the duration of their lifetimes while keeping a portion of their savings invested in assets with the flexibility to respond to liquidity needs.
  • “Longevity” annuities. Proposed regulations would make it easier for retirees to use a limited portion of their savings to purchase guaranteed income for life starting at an advanced age, such as average life expectancy. These annuities would provide an efficient way for 65- or 70-year-olds to address the risk of outliving their assets by purchasing a predictable income stream starting at age 80 or 85.
  • Spousal protection rules and deferred annuities. A new IRS ruling has clarified that employers can offer their employees the option to use Code Sec. 401(k) savings to purchase deferred annuities and still satisfy spousal protection rules with minimal administrative burdens.
  • Purchase of annuities from defined benefit plan. A new IRS ruling has clarified how the rules apply when employees are given the option to use a single-sum Code Sec. 401(k) payout to obtain a low-cost annuity from their employer's defined benefit pension plan.
  • Code Sec. 401(k) fee disclosure. Final Labor Department regulations require service providers to furnish information that will enable pension plan fiduciaries to determine both the reasonableness of compensation paid to the service providers and any conflicts of interest that may impact a service provider's performance under a service contract or arrangement.
Relief for struggling taxpayers.
 The IRS is making available to certain wage earners and self-employed individuals a six-month grace period on failure-to-pay penalties. The request for an extension of time to pay will result in relief from the failure to pay penalty for tax year 2011 only if the tax, interest and any other penalties are fully paid by Oct. 15, 2012. Subject to income and balance due limits, the penalty relief applies for these two categories of taxpayers:
... Wage earners who have been unemployed at least 30 consecutive days during 2011 or in 2012 up to the April 17 deadline for filing a federal tax return this year.
... Self-employed individuals who experienced a 25% or greater reduction in business income in 2011 due to the economy.
A taxpayer's income must not exceed $100,000 if he or she files as single or head of household ($200,000 for joint filers). The penalty relief is not available to taxpayers whose calendar year 2011 balance due exceeds $50,000.
Form 1127-A, Application for Extension of Time for Payment of Income Tax for 2011 Due to Undue Hardship, must be completed to seek the relief.
In addition, the IRS has raised the threshold for using an installment agreement without having to supply IRS with a financial statement from $25,000 to $50,000. 

Residence interest limits for unmarried co-owners.
The Tax Court has held that limitations on deductions for qualified residence interest ($1 million of acquisition indebtedness and $100,000 of home equity indebtedness) are applied on a per-residence basis, and not per-individual basis. Thus, unmarried co-owners were collectively limited to a deduction for interest paid on a maximum of $1.1 million, rather than $2.2 million, of acquisition and home equity indebtedness.
Luxury auto depreciation limits for 2012. Under special “luxury automobile” rules, a taxpayer's otherwise available depreciation deduction for business autos, light trucks, and minivans is subject to additional limits, which operate to extend depreciation beyond its regular period. The IRS has released the inflation-adjusted depreciation limits for business autos, light trucks and vans (including minivans) placed in service in 2012—e.g., the first-year depreciation limit is $3,160 for autos and $3,260 for light trucks or vans first placed in service in 2012. However, for vehicles that qualify for bonus depreciation, the otherwise applicable first-year limit is increased by $8,000 to $11,160 for autos and $11,360 for light trucks or vans first placed in service in 2012.

S corporation underpaid employment taxes.

A federal appeals court, affirming a district court, held that an S corporation shareholder-employee's salary was unreasonably low. As a result, it allowed the IRS to reclassify as salary a substantial amount of dividend payments made to the officer during the years at issue. This resulted in the corporation owing employment taxes on the reclassified dividend payments. 

FinCEN gives taxpayers more time to e-file FBARs.
The Treasury's Financial Crimes Enforcement Network (FinCEN) has announced that electronic filing (e-filing) of TD F 90-22.1, Report of Foreign Bank and Foreign Accounts (FBAR), won't be required until June 30, 2013. Each U.S. person who has a financial interest in or signature or other authority over any foreign financial accounts, including bank, securities, or other types of financial accounts, in a foreign country, if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year, must report that relationship each calendar year by filing TD F 90-22.1, Report of Foreign Bank and Foreign Accounts (FBAR) with the Department of the Treasury on or before June 30, of the succeeding year. Although FinCEN reports generally must be e-filed from July 1, 2012, FinCEN has announced a general exemption from mandatory electronic filing of FBARs until July 1, 2013. The temporary e-filing exemption does not relieve any person of the obligation to file an FBAR and does not affect the required date by which any given FBAR must be received by Treasury.

Friday, February 10, 2012


Is a shareholder always protected from corporate liabilities by the “corporate shell”?

A corporation and an LLC is a legal person or entity that exists separately from its shareholders. It may, therefore, contract or otherwise incur obligations apart from a shareholder. As a result, one desired aspect of a corporation is that shareholders (or in the case of an LLC, the members) are not individually liable for the debts or obligations of the entity. For purposes of our discussion, references herein to corporations will apply similarly to LLCs.

In some circumstances, however, courts will ignore the corporate identity and hold the individual shareholders liable for the debts and obligations of that corporation by applying a legal theory that is commonly referred to as the “alter ego doctrine.” Under this theory, if a party whose interest has been injured due to the acts of a corporation can prove that the corporation entity is the “alter ego” of one or more individuals, the court may hold the individuals themselves personally responsible for the injurious conduct.

Typically, an alter ego allegation is made against a corporation and its shareholders when the corporation’s assets or insurance are inadequate to respond to a claim or to pay a debt. A creditor who would otherwise go unpaid by the corporation will seek to hold its shareholders personally liable for the claim based on the theory that:

  • The shareholder has not treated the corporation as an entity separate and apart from themselves so why should the Court,
  •  When maintaining the corporate veil would be inequitable.
Piercing the corporate veil has been granted in 40% of the cases where the issue was raised. Piercing initiated by the federal government is effective in almost 60% of the cases it has raised and more than 80% of the time when raised in a regulatory context or in environmental litigation and in fraud cases.

The equitable remedy of piercing the corporate veil is applied in New Jersey in situations where the principal, i.e. owner, uses the corporation (or his LLC) as his “alter ego” and thus abuses the corporate form in order to advance his own personal interests. See Walensky v. Jonathan Royce International, Inc., 264 N.J. Super. 276 (App. Div. 1993). The two primary factors that weight in favor of an “alter ego” finding are the use of the business as a personal business conduit and a lack of a separate corporate identity. Judge Stripp distinctly summarized the criteria for piercing the corporate veil under New Jersey common laws as follows:

  • A shareholder disregarded the corporate entity and made it into a mere instrumentality for their own affairs.
  • There was such a unity of interest and ownership that the owners and the corporation have no separate existence; and
  • Upholding the corporate veil would protect fraud or promote other injustice.

Piercing The Corporate Veil In Bankruptcy

In Bankruptcy proceedings, the court uses a concept called “substantive consolidation” to in effect pierce the veil. This doctrine permits the bankruptcy court to pool all of the debtor’s assets as well as the assets of affiliated entities owned by the debtor, in order to satisfy claims against the debtor. Substantive consolidation will be allowed when:

  • The creditor dealt with the entities as a whole, and not as separate entities, and
  • The affairs of the debtor are so intertwined that the consolidation would benefit all of the creditors.
A fruitful discussion of piercing the corporate veil in a bankruptcy case in New Jersey can be found in Buildings by Jamie, Inc., United States Bankruptcy Court, District of New Jersey, Case No. 96-39381. In Buildings by Jamie, Inc., the creditors of the bankrupt debtor sought to recover monies loaned to the debtor. The debtor was a close corporation which constructed homes for sale to third parties. During a certain period of time preceding the bankruptcy, loans were made to the debtor for use exclusively in the construction of these homes. The debtor did not repay the loans. The creditors allege that the debtor transferred the net proceeds of sale of several homes to Jamie, Inc. (not the debtor) for no consideration, which in turn transferred $100,000 to the individual owners again for no consideration. The creditors further allege that the debtors transferred accounts receivables to a related corporation for no consideration. The creditors further argued that the individual debtors used the loan money from a guaranty for their personal benefit including construction of their personal residence and the purchase of real property and renovation of business property which was not owned by the debtor. Finally, the creditors alleged that in a series of transactions the debtor transferred all of its cash and several thousand dollars worth of assets to a related corporation for no consideration. During the period in question, the debtor ceased operations but the related corporations continued operations virtually indistinguishable from the debtor’s business. These corporations were operated from the same location, by the same employees, shared the same offices and had the same shareholder.

The plaintiff sought to compel the debtor to repay the loan obligations and the transfers among debtor and non-debtor defendants. In doing so, they allege that the individual shareholders were liable for the debtor’s debts based upon an “alter ego theory.” The plaintiffs relied on lack of corporate formalities among the debtor and the non-debtor defendants as well as the free transferability of assets and share ownership, use of the same employees, same location and same line of business.

The plaintiffs sought to pierce the corporate veil based upon the complete disregard of corporate formalities, free transfer of assets among the corporations and the shareholders and the interchangeable use of corporations.

In reviewing New Jersey alter ego law, Judge Stripps sitting in the Bankruptcy Court reaffirmed the principal that it is well settled in New Jersey that the doctrine of piercing the corporate veil is employed when fraud or injustice has been perpetrated. The court stated that the principal (owner) could be held liable under theories of piercing the corporate veil and successor liability because the principal “was using the corporation as his “alter ego” and thus was abusing the corporate form in order to advance his own personal interest.” Factors which weighed heavily included the principals treatment of the corporation as a personal business conduit and that the corporation was a mere instrument through which the shareholder conducted their own affairs and furthermore the principal failed to maintain an identity separate and apart from the corporation. The court also noted that in New Jersey courts generally pierce the corporate veil where such unity of ownership exists where the corporation operates as an instrument of the shareholders’ personal business such that the failure to disregard the corporate entity would promote fraud. Finally, a court concluded that the bankruptcy trustee had the power to reach beyond the debtor corporation into the pockets of the corporation’s shareholders.


Shareholders are not liable for corporate debts or lawsuit liability if the corporation is properly established and maintained. To help insure that creditors cannot pierce the corporate veil and seek judgments against the shareholders, corporate formalities must be observed, the corporation must be treated as an entity separate and apart from its shareholders. Make sure the corporation has done the following:

  • Documentation and Formalities. Create By-Laws, issue stock, maintain an up to date corporate minute book (do not wait for the night before an audit to create them), have separate books of account, file annual reports, have regular board meetings with all directors.
  • Avoid co-mingling. Do not co-mingle corporate assets with those of shareholders, all corporate assets should be titled in the corporate name. Corporations should have its own separate bank account. If you borrow from, or lend to the corporation, record an appropriate Resolution, sign a promissory note, charge fair market rate interest, make regular payments.
  • Capitalization. Appropriately capitalize the corporation and purchase appropriate liability insurance.
  • Employment Agreements. Enter into one between you and your corporation.
  • Multiple Corporation. Avoid identical stock ownership of several corporations. Avoid having similar officers and directors. Use different business addresses, telephone numbers and employees.
In addition, the fact that a business is being operation as the corporation should be made evident. The words “Inc.” or “Incorporated” should be present on letterheads, business cards and corporate signs. Those who operate the entity should sign all contracts and documents in a corporate capacity indicating their corporate position.

In these uncertain times, the valuable advice you give your clients can pay dividends. An important part of estate planning and wealth preservation is the protection of assets. Keeping corporate liabilities separate from shareholders is an important part of the asset protection plan.


Sunday, January 29, 2012

Is a Sale Price of a Residence Evidence of Its True Value for Purposes of Real Property Tax Assessments?

The residence sale price standing alone is insufficient to provide reliable evidence of market value in the absence of other corroborative evidence.

The New Jersey Tax Court has affirmed a municipality’s determination of true value of a residential property after finding that the purchaser’s sale price standing alone was insufficient to provide a reliable evidence of market value.

In these difficult economic times for homeowners and municipalities, the payment and receipt of real property taxes are important. Real property taxes are assessed and paid based on a property’s full and fair value which is defined as the price of the property would sell for at a fair and bona fide sale by private contract on October 1. However, taxable value is a fixed percentage of true value. Hence, how true value is determined is critical in a challenge of the assessed value of a residence.

Recently, in Gibbons v. City of East Orange; No. 019151-2010, a residence located in East Orange was assessed at $262,100 but was purchase for $125,000. Within a month after the assessment, the owner challenged the assessment however the Board of Taxation entered a judgment affirming the assessment. The owner appealed to the Tax Court maintaining that the assessment should be the purchase price of the residence, namely, $125,000 not the assessed value.

The Tax Court noted that it is well-established that "[o]riginal assessments and judgments of county boards of taxation are entitled to a presumption of validity." The scope of this presumption has been stated as follows:

● The presumption attaches to the quantum of the tax assessment.

● Based on this presumption the appealing taxpayer has the burden of proving that the assessment is erroneous.

● The presumption in favor of the taxing authority can be rebutted only by cogent evidence, a proposition that has long been settled.

● The strength of the presumption is exemplified by the nature of the evidence that is required to overcome it. That evidence must be definite, positive and certain in quality and quantity to overcome the presumption.

The Tax Court found the assessment to be correct because "in tax matters it is to be presumed that governmental authority has been exercised correctly and in accordance with law." Pantasote Co. v. City of Passaic, 100 N.J. 408, 413 (1985). The presumption remains "in place even if the municipality utilized a flawed valuation methodology, so long as the quantum of the assessment is not so far removed from the true value of the property or the method of assessment itself is so patently defective as to justify removal of the presumption of validity." Transcontinental Gas Pipe Line Corp. v. Township of Bernards, 111 N.J. 507, 517 (1988).

To overcome the presumption, the property owner must provide "sufficient competent evidence to the contrary." Little Egg Harbor Twp. v. Bonsangue, 316 N.J. Super. 271, 285-86 (App. Div. 1998). The evidence "must be 'sufficient to determine the value of the property under appeal, thereby establishing the existence of a debatable question as to the correctness of the assessment.'" West Colonial Enters, LLC v. City of East Orange, 20 N.J. Tax 576, 579 (Tax 2003).

After the presumption is overcome with sufficient evidence, the court must "appraise the testimony, make a determination of true value and fix the assessment." Rodwood Gardens, Inc. v. City of Summit, 188 N.J. Super. 34, 38-39 (App. Div. 1982). The court must decide “based on a fair preponderance of the evidence." Ford Motor Co. v. Township of Edison, 127 N.J. 290, 312 (1992). The burden of proof remains on the taxpayer throughout the entire case to demonstrate that the judgment under review was incorrect.

The comparable sales approach is generally accepted as an appropriate method of estimating value for a residence. In this approach, the market value for the subject property is derived by comparing similar properties that have recently sold with the property being appraised, identifying appropriate units of comparison, and making adjustments to the sale prices of the comparable properties based on relevant, market-derived elements of comparison.

In Gibbons, the Plaintiff did not offer any comparable sales or any other evidence to establish that the assessment on the residence was incorrect, or that its market value should be $125,000 (the residence’s purchase price) as of the date of assessment. The Plaintiff contended that because the residence’s sale was between a willing seller and herself, a willing buyer, the residence’s sale was a reliable indicator of its market value.

The Tax Court noted that the "sales price of a property may be the best indicator of its true value in some circumstances." Passarella v. Township of Wall, 22 N.J. Tax 600, 603 (App. Div. 2004). However, while a property's sale price may be evidence of market value, it still requires that the sale meets the other requirements of market value. As stated in Romulus, 7 N.J. Tax at 316-18, the sale price of the subject "is a guiding indicium of fair value and ordinarily is merely evidential although it might under peculiar circumstances become controlling, subject to the limitation that the determination properly involve[s] the weighing and appraising of all component factors and adventitious circumstances." The weight, if any, to be afforded the sale must depend upon all of the facts and circumstances surrounding it.

The municipality argued that the sale of the residence, while not a sham, was nonetheless unusable to determine its market value because it lacked “market exposure,” and it was not an arms' length transaction because the seller was ill and eager to dispose of the vacant property as quickly as possible. The owner countered that there were no special circumstances or conditions for the sale as she was given no financing or other concessions by the seller. She argued that the residence had been sufficiently exposed to the market because it was listed and sold through real estate brokers and had other offers besides hers.

The Court noted that an arms' length transaction is one between a knowledgeable buyer, under no compelling obligation to buy, and a willing knowledgeable seller, under no compelling obligation to sell. Coastal Eagle Point Oil Co. v. West Deptford Tp. 13 N.J. Tax 242, 301 (Tax 1993).

In Gibbons, the Court said the evidence as to the surrounding circumstances of the sale of the residence tended to establish that the sale price was not a reliable indicator of the residence’s market value. It noted that the residence was vacant and in need of repairs/maintenance. The MLS also noted the need for fixing up of the residence. It was also not disputed that the owner was ill and in a nursing home. There were no negotiations with the seller or his daughter. Rather, plaintiff's first offer was immediately accepted. These facts, the Court noted, corroborate the statement in the MLS that the owner was "anxious" to sell. The evidence thus indicated that the seller desired to make a quick sale, which tends to prove that the residence was sold by one who was under a compelling obligation to sell.

Finally, that plaintiff was a willing and knowledgeable buyer did not overcome the evidence that the seller's daughter desired to make a quick sale of her father's vacant house. The Court emphasized each party must not be under any urgency or compulsion to finalize the transaction.

Therefore, the residence’s sale price, standing alone, was insufficient to provide a reliable evidence of market value in the absence of any other corroborative evidence of comparable sales or of market conditions. The court found that the plaintiff has not met her burden to prove by a fair preponderance of the evidence that the judgment of the Board of Taxation was incorrect.

The result reached by the Tax Court while not surprising underscores the difficulty a property owner has in challenging a real property tax assessment especially where the purchase price is less than the assessed value. One would think that sale price would carry more weight but in the final analysis it is only evidence of value and not determinative.

Monday, January 9, 2012

Yet Another Wealth Tax!

In today's Wall Street Journal in an article entitled "The Conservative Case for a Wealth Tax"
the author, a Stanford Professor, argues for the introduction of yet another tax system to “hit old wealth along with new wealth.” His proposal, an annual “modest” tax of 3% of wealth over $3,000,000 is just the “key to flattening the income tax to make it more revenue efficient.”

The author conveniently fails to mention that we already have a “wealth tax;” its call the Estate Tax!

Putting aside the social and political issues, implementation is nearly impossible. We estate planners have enough trouble obtaining valuation for gifts by donor’s; imaging having to valued everything you own each year until the day you die and to then have your estate and heirs continue this problematic and expensive exercise.

Do we really need yet another tax system?