Friday, October 31, 2014

IRS Announces Annual Inflation Adjustments for 2015 Including Estate Exemption Increase to $5,430,000

For tax year 2015, the Internal Revenue Service announced today annual inflation adjustments for more than 40 tax provisions, including the tax rate schedules, and other tax changes. Revenue Procedure 2014-61 provides details about these annual adjustments.
The tax items for tax year 2015 of greatest interest to most taxpayers include the following dollar amounts --
  • The tax rate of 39.6 percent affects singles whose income exceeds $413,200 ($464,850 for married taxpayers filing a joint return), up from $406,750 and $457,600, respectively. The other marginal rates -- 10, 15, 25, 28, 33 and 35 percent -- and the related income tax thresholds are described in the revenue procedure.
  • The standard deduction rises to $6,300 for singles and married persons filing separate returns and $12,600 for married couples filing jointly, up from $6,200 and $12,400, respectively, for tax year 2014. The standard deduction for heads of household rises to $9,250, up from $9,100.
  • The limitation for itemized deductions to be claimed on tax year 2015 returns of individuals begins with incomes of $258,250 or more ($309,900 for married couples filing jointly).
  • The personal exemption for tax year 2015 rises to $4,000, up from the 2014 exemption of $3,950. However, the exemption is subject to a phase-out that begins with adjusted gross incomes of $258,250 ($309,900 for married couples filing jointly). It phases out completely at $380,750 ($432,400 for married couples filing jointly.)
  • The Alternative Minimum Tax exemption amount for tax year 2015 is $53,600 ($83,400, for married couples filing jointly). The 2014 exemption amount was $52,800 ($82,100 for married couples filing jointly).
  • The 2015 maximum Earned Income Credit amount is $6,242 for taxpayers filing jointly who have 3 or more qualifying children, up from a total of $6,143 for tax year 2014. The revenue procedure has a table providing maximum credit amounts for other categories, income thresholds and phaseouts.
  • Estates of decedents who die during 2015 have a basic exclusion amount of $5,430,000, up from a total of $5,340,000 for estates of decedents who died in 2014.
  • For 2015, the exclusion from tax on a gift to a spouse who is not a U.S. citizen is $147,000, up from $145,000 for 2014.
  • For 2015, the foreign earned income exclusion breaks the six-figure mark, rising to $100,800, up from $99,200 for 2014.
  • The annual exclusion for gifts remains at $14,000 for 2015.
  • The annual dollar limit on employee contributions to employer-sponsored healthcare flexible spending arrangements (FSA) rises to $2,550, up $50 dollars from the amount for 2014.
  • Under the small business health care tax credit, the maximum credit is phased out based on the employer's number of full-time equivalent employees in excess of 10 and the employer's average annual wages in excess of $25,800 for tax year 2015, up from $25,400 for 2014.

Ebola Virus Disease Outbreak Occurring in Guinea, Liberia, and Sierra Leone Designated as a Qualified Disaster under IRC 139

Notice 2014-65 issued October 29, 2014 has designated the Ebola Virus Disease (EVD) outbreak occurring in the West African countries of Guinea, Liberia, and Sierra Leone as a qualified disaster for purposes of § 139 of the Internal Revenue Code. As a result of the designation of the EVD outbreak as a qualified disaster for purposes of § 139, payments of qualified disaster relief to assist victims affected by the EVD outbreak in the three countries (Guinea, Liberia, and Sierra Leone) are excludable from the recipients' gross income.
As of October 22, 2014, more than 4,800 EVD-related deaths and more than 9,900 suspected and confirmed cases of EVD have been reported by Guinea, Liberia, and Sierra Leone. See In addition, the reported number of cases of EVD continues to increase rapidly in those countries. USAID West Africa -- Ebola Outbreak -- Fact Sheet No. 4 (FY15) (October 22, 2014). President Obama has stated that the EVD outbreak in West Africa is a public health emergency, a humanitarian crisis, and a national security priority, and has directed U.S. agencies and departments (including the Departments of State, Defense, and Health and Human Services, the Centers for Disease Control and Prevention, and the U.S. Agency for International Development) to assist West African governments in their responses. See The President has also called on other nations regarding the need for more robust commitments and rapid delivery of assistance by the international community.

Section 139(a) provides that gross income shall not include any amount received by an individual as a qualified disaster relief payment.

Section 139(b) provides that a qualified disaster relief payment includes any amount paid to or for the benefit of an individual --

(1) to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses (not otherwise compensated for by insurance or otherwise) incurred as a result of a qualified disaster, or

(2) to reimburse or pay reasonable and necessary expenses (not otherwise compensated for by insurance or otherwise) incurred for the repair or rehabilitation of a personal residence or repair or replacement of its contents to the extent that the need for such repair, rehabilitation, or replacement is attributable to a qualified disaster.

Under § 139(c)(3) the term "qualified disaster" includes a disaster resulting from an event that is determined by the Secretary to be of a catastrophic nature.


The Commissioner of Internal Revenue, pursuant to a general delegation by the Secretary, has determined that the EVD outbreak occurring in the West African countries of Guinea, Liberia, and Sierra Leone is an event of a catastrophic nature under § 139(c)(3). Therefore, the EVD outbreak occurring in those countries is designated as a qualified disaster under § 139.


Employer-sponsored private foundations may choose to provide disaster relief to employee victims of the EVD outbreak in Guinea, Liberia, and Sierra Leone. Like all organizations described in § 501(c)(3), private foundations should exercise due diligence when providing disaster relief as set forth in Publication 3833, Disaster Relief: Providing Assistance Through Charitable Organizations.


Wednesday, October 29, 2014

Wright Medical Announces Inversion; Pfizer Won't Rule It Out

Wright Medical Group Inc., the maker of orthopedic implants and instrumentation, announced on October 27 that it has agreed to merge with fellow orthopedic manufacturer Tornier N.V. and reincorporate into the Netherlands, where Tornier has been headquartered for eight years. Wright will maintain its U.S. headquarters in Memphis, Tennessee. Both companies' boards of directors unanimously approved a deal to create a $3.3 billion combined entity.

"As a merger of two similar-sized companies with different domiciles, we had to choose a domicile that was best long term for the combined company," Wright CEO Robert Palmisano said on an October 27 conference call. "We expect the global structure of this planned combination will spur greater growth and employment opportunities here in the U.S. and other international locations."

According to a joint release from the companies, following the all-stock transaction, Wright shareholders will own 52 percent of the combined Wright Medical Group N.V. and Tornier shareholders will own about 48 percent. Each outstanding share of Wright stock will be exchanged for 1.0309 shares of Tornier. The exchange places a 28 percent premium on Tornier's closing share price as of October 24. The transaction is expected to be taxable to Wright's shareholders.

Also according to its 10-K, as of December 31, 2013, Wright had an immaterial amount of cash and cash equivalents held in foreign jurisdictions. The company did not have intentions of repatriating those indefinitely reinvested funds, which the company admitted would have negative tax consequences, the filing stated.

The Wright-Tornier transaction is expected to close in the first half of 2015, the release says.

The impact of Notice 2014-52, 2014-42 IRB 712, on corporate inversions is still being measured.
Despite the recent guidance, Pfizer Inc. has not ruled out inverting, Pfizer CEO Ian Read said on an October 28 conference call, although Read admitted concern over Treasury leaving open the possibility of taking further action against inversions. The uncertainty over future action further disadvantages U.S. companies already hindered by a high tax rate when compared with foreign competitors, Read said.

Read said. "We still believe on a case-by-case basis there is still meaningful value to be had from inversions and probably the most significant is the liberation of a substantial proportion of your future cash flows outside of the U.S. tax system into a territorial system."


Tuesday, October 28, 2014

California Asks Its Citizens to Report Crimes- Including Tax Evasion

California and various federal government agencies have combined to create a task force, through a a website called the Tax Recovery And Criminal Enforcement Tax Force  ( TRACE) that targets the underground economy of California and allows Californians to report a crime either by telephone, online or by mail.

The task force has as partners the Department of Alcohol Beverage Control, the Board of Equalization, the Department of Justice, the Employment Development Department, the FBI, the Franchise Tax Board, and Homeland Security.

 The website encourages the reporting of various crimes including income tax fraud and describes how to report tax fraud either by fax, telephone, online, or by mail.

 The website states that already it has resulted in the arrest of several people including a 40-year-old man who was accused of copying DVDs and selling them at flea markets and a 66-year-old man accused of underreporting sales of tobacco products. Additionally it reports the arrest of a pair of sisters accused of running a brothel.
Accompanying the website is a form that could be completed in paper form or online describing the suspect information, the complaint, the offense and the dates, and the various categories of crime which includes sales and use tax, income tax, tobacco tax etc. The crime report can be done anonymously.

IRS Announces Pension Plan Increases for 2015

The IRS has announced (IR-2014-99) the cost of living adjustments that affect dollar limitations for pension plans and other retirement-related items for the 2015 tax year.

The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan is increased from $17,500 to $18,000.

The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan is increased from $5,500 to $6,000.

The limit on annual contributions to an Individual Retirement Arrangement (IRA) remains unchanged at $5,500. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.

The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGI) between $61,000 and $71,000, up from $60,000 and $70,000 in 2014. For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $98,000 to $118,000, up from $96,000 to $116,000. For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple's income is between $183,000 and $193,000, up from $181,000 and $191,000. For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

The AGI phase-out range for taxpayers making contributions to a Roth IRA is $183,000 to $193,000 for married couples filing jointly, up from $181,000 to $191,000 in 2014. For singles and heads of household, the income phase-out range is $116,000 to $131,000, up from $114,000 to $129,000. For a married individual filing a separate return, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

The AGI limit for the saver's credit (also known as the retirement savings contribution credit) for low- and moderate-income workers is $61,000 for married couples filing jointly, up from $60,000 in 2014; $45,750 for heads of household, up from $45,000; and $30,500 for married individuals filing separately and for singles, up from $30,000.


In addition :

The limitation for defined contribution plans under Section 415(c)(1)(A) is increased in 2015 from $52,000 to $53,000.

The annual compensation limit under Sections 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) is increased from $260,000 to $265,000.

The dollar limitation under Section 416(i)(1)(A)(i) concerning the definition of key employee in a top-heavy plan remains unchanged at $170,000.

The limitation under Section 408(p)(2)(E) regarding SIMPLE retirement accounts is increased from $12,000 to $12,500.

The limitation on deferrals under Section 457(e)(15) concerning deferred compensation plans of state and local governments and tax-exempt organizations is increased from $17,500 to $18,000.

The deductible amount under Section 219(b)(5)(A) for an individual making qualified retirement contributions remains unchanged at $5,500.

There are many more changes described in the IRS Announcement which you should study should it apply to you or your clients.




Monday, October 27, 2014

The New Jersey Legislature have approved the Economic Opportunity Act of 2014

As David Engle from RIA reports-Both Houses of the New Jersey Legislature have approved the Economic Opportunity Act of 2014 (A3213). The legislation conforms to all of the changes requested by Governor Chris Christie in his conditional veto message and is expected to be signed by the governor. The legislation makes adjustments to numerous tax incentives for development in New Jersey.
Grow NJ tax credit changes. The legislation would make several revisions to the GROW NJ tax credit program. Here are some of the major changes:
Garden State Growth Zones: Atlantic City would be designated as the fifth Garden State Growth Zone. This designation would render qualifying projects in Atlantic City eligible for maximum Economic Redevelopment and Growth (ERG) grants.
Mega project status: The legislation would bestow “mega project” status, which qualifies projects for larger tax credit amounts than they would otherwise receive, to eligible capital investments of at least $20 million in a business facility located in an area designated in need of redevelopment in Atlantic, Burlington, Camden, Cape May, Cumberland, Gloucester, Ocean or Salem counties that will create or retain more than 150 full-time positions.
Minimum capital investment requirements: The legislation would reduce the minimum capital investment requirement for the rehabilitation and improvement of warehousing, logistics, and research and development premises for the continued use of the premises from $40 to $20 per square foot of gross leasable area, and for the new construction of such premises from $120 to $60 per square foot of gross leasable area.
Bonus for investing in vacant property: The legislation would create a new annual $1,000 bonus award per full-time job created or retained for investments in business facilities that include over 100,000 square feet of office or laboratory space that has been vacant for over a year. The base award for such projects ranges from $500 to $5,000 per full-time job created or retained per year, depending on project characteristics. Projects would also qualify for additional bonus awards.
Incubator facilities: The legislation would ease the eligibility criteria for incubator facilities located near a research institution, teaching hospital, college or university in a GROW NJ incentive area by lowering the minimum required square footage of office, laboratory, and industrial space from 100,000 square feet to 50,000 square feet, and the percentage of the gross leasable area that must be for technology startup company use from 75% to 50%.
Creditable capital investments: The legislation would include development expenses in Garden State Growth Zone municipalities as creditable capital investments. The legislation would no longer treat as a creditable capital investment, the acquisition costs of real property located in any GROW NJ incentive area, with the exception of the five Garden State Growth Zones, that was purchased within 24 months prior to the submission of a GROW NJ application.
Calculation of annual tax credit: The legislation would change the calculation of the annual tax credit amount per retained job from 50% of the base amount plus any applicable bonuses to the lesser of 50% of the base amount plus any applicable bonuses or 10% of the capital investment divided by the number of retained and new full-time jobs (except that certain limited projects will continue to earn job retention tax credits equal to 100% of the base amount plus any applicable bonuses). The legislation would allow for the upward revision of tax credit amounts for City of Camden and Atlantic City-based businesses that exceed the full-time employment targets stipulated in their incentive agreements. Such businesses would also newly count as retained full-time jobs employees previously employed elsewhere in New Jersey and transferred to the Camden or Atlantic City location.
Consolidated applications for credit: The legislation would allow non-profit organizations in Garden State Growth Zone municipalities and qualified incubator facilities in any GROW NJ incentive area to file consolidated tax credit applications for projects comprised of several individual businesses that would not, on their own, qualify for tax credits. The legislation would also allow the developer of a project that would bring a large full-service supermarket to the City of Camden or Atlantic City to apply for tax credits on behalf of the supermarket and file a consolidated tax credit application on behalf of several individual businesses that would not, on their own, meet tax credit eligibility criteria.
Exemption for City of Camden and Atlantic City projects: The bill would exempt City of Camden and Atlantic City-based projects for which applicants seek annual tax credits exceeding $4 million from the general requirement that projects for which applicants seek annual tax credits exceeding $4 million earn the lesser of the statutory annual maximum amounts for such projects or the amounts the Economic Development Agency (EDA) deem necessary for project completion. City of Camden and City of Atlantic City-based projects for which applicants seek annual tax credits exceeding $4 million would receive statutory annual maximum amounts.
Sale of tax credits: The bill would impose a new $25,000 minimum amount on tax credits that recipients would be able to sell to other taxpayers.
Tax credit program for redevelopers donating public infrastructure. The legislation would establish a new 5-year tax incentive program for redevelopers that donate to a governmental entity public infrastructure with a minimum $5 million fair market value or open space without improvements with a minimum $1 million fair market value. Redevelopers would be able to apply for a corporation business tax credit equal to the cost of providing the public infrastructure, but not more than $5 million. To qualify for the credit the public infrastructure would have to be: (1) donated or built and donated after January 1, 2013; (2) part of a new capital investment of more than $10 million in a building or complex of buildings, which must be completed within two years following tax credit approval; and (3) part of a redevelopment project that has not received a GROW NJ tax credit or an ERG tax credit or grant. Incentive awards would be available statewide and would not be contingent upon the incentives being vital to the execution of a redevelopment project or its public infrastructure components. Moreover, redevelopment projects and their attendant public infrastructure components would not be required to generate indirect fiscal benefits to the state in excess of the cost of the tax incentive. The EDA would be able to award no more than $25 million in total tax credit awards over the program's 5-year lifespan.
New limits on sale of tax credits. The legislation would reduce from $100,000 to $25,000 the general minimum Urban Transit Hub tax credit amount that recipients would be able to sell to other taxpayers and would eliminate the existing authority for recipients to make one transfer of less than $100,000 per year.
ERG program changes. The legislation would defer from July 1, 2015 to July 1, 2016 the application deadline under the ERG tax credit program for residential redevelopment projects and from July 28, 2015 to July 28, 2018 the date by which eligible residential redevelopment projects would be required to have obtained temporary certificates of occupancy.

Wednesday, October 15, 2014

Ireland to Stop New "Double Irish" Tax Arrangement in 2015

Irish Finance Minister Michael Noonan announced October 14 that Ireland will eliminate the ability of new companies to use the "double Irish" tax arrangement, effective January 1, 2015, by changing residency rules to require all companies registered in Ireland to be Irish tax residents as well.
Noonan provided the details of a roadmap setting forth the government's international tax strategy in a financial statement for the 2015 budget that calls for attracting and retaining foreign direct investment while staying in alignment with measures being developed on a global scale to reduce base erosion and profit shifting.
The "double Irish" tax arrangement allows companies to shift profits to low- or no-tax jurisdictions by taking advantage of mismatches in corporate residency rules.
Ireland plans to change its residency rules so that new companies registered in Ireland on or after January 1, 2015, will be required to also be Irish tax residents. Existing companies would have until the end of 2020 to come into compliance with the new law.
However, Noonan emphasized that no change will be made to the country's 12.5 percent corporate tax, a rate that he said "never has been and never will be up for discussion."
Multinationals that use the double Irish arrangement recognize that they will need to make changes to ensure that profits are allocated to jurisdictions where substantive operations are located.
From a U.S. multinational's perspective, Ireland is already an attractive location for investment because of a shared language and similar laws on corporate governance and employment.

Thursday, October 2, 2014

Distribution of IRA by Estate in Satisfaction of a Charitable Pecuniary Bequest Accelerates IRD

With the significant increase in non-probate assets such as 401k’s and IRA’s owned by individuals the importance of proper planning for these assets become more and more important.  Indeed Natalie Choate has published books, articles and presented lectures and seminars and is considered by many as America's leading authority on these topics.

An example of how difficult such planning is and the consequences of not planning properly is demonstrated In PLR 201438014.  In this private letter ruling the decedent created a testamentary trust.  At the time of his death he owned an individual retirement account (IRA) and designated the trust under his will as a beneficiary. The trust provided for distribution of the decedents estate including the payment of the pecuniary bequests of two different amounts to two different charities. At the time of the decedents death the estate assets consisted of funds in his IRA. The charitable bequest to the two charities however exceeded the amount of the trust non-IRA assets.

The estate moved before the local court for a reformation of the trust. The purpose of the reformation was to ensure that the trust distribution of IRA assets to the two charities would be treated as a direct bequest to the charities rather than as income in respect of a decedent (IRD)  under IRC section 691. Alternatively the trustee attempted to qualify the trust for a charitable deduction. The IRS held that the distribution of the IRA by the estate and satisfaction of the charitable pecuniary bequest accelerated the IRD as income in respect of a decedent.

The IRS pointed to Keanan v. Commissioner, 114 F.2d 217 (2nd Cir. 1940) which held that if a trust or estate satisfies its pecuniary legacy with property, the payment is treated as a sale or exchange of the property. The service also pointed out that in the Supreme Court case of the Estate of Bosh, 387 U.S. 456 (1967) the court concluded that a decision of a state trial court should not control the application of a federal statute.

In Revenue Ruling 59–15 1959-1 C.B. 164, citing Emanuelson v. United States, 159 F. Supp 34  (Conn. 1958), it was held that a settlement agreement from a will contest qualifies as a governing instrument for purposes of section 642 (C) assuming the court decision was in settlement of a conflict. The IRS determined however that neither of these authorities held that a modification to a governing instruments will be construed to be the governing instrument in situations where the modification did not stem from a conflict. Hence because the trust used IRA assets to satisfy its pecuniary legacies the distributions must be treated these payments as sales or exchanges. These payments are transfers of the right to receive the income in respect of a decedent and the trust must include the in its gross income the value of the portion of the IRA which is IRD to the extent the IRA was used to satisfy the pecuniary legacy.