Posted tagged ‘IRS’

The Corporate Minute Book – Have You Seen Yours Lately?

June 11, 2012

 by Jeff Waddell

Many, if not most, small business owners fail to keep their corporate records up-to-date.  The reasons this happens are entirely reasonable and predictable.  Small business owners make their own decisions.  They usually own the entire business so they do not need someone else to approve what they decide.  On top of those reasons, small business owners generally feel as though they lack the time to tend to what might seem to be useless record keeping.

Unfortunately for the small business owner the times they get the unpleasant reminder that the record keeping was not really useless are when there are problems.  For example, the IRS decides to audit, a family member passes away and it appears they still own stock in the company, a dispute arises about some decision that was made years ago and there is no written record of exactly what was decided.  The sting of all these problems can be lessened with taking the time to cross the “t’s” and dot the “i’s.”Business record keeping in important, not just for accounting records, but also the major business decisions and annual decisions about who are the officers and directors, what bank loans were approved, property acquired, sold or otherwise.  Maintenance of corporate records is also very beneficial for proper estate and corporate planning.  To know how to plan for the future, your attorney or other advisor will need to know the current landscape of the business and a properly maintained corporate minute book is the right place to start.

If there is an agreement among shareholders about the stock and what happens to it when someone dies, those records need to be maintained in a safe, central location.  Thus, the original purpose of the Corporate Minute Book.  If your business is a limited liability company or a partnership the same general concepts can be applied to create an LLC Book or Partnership Book.  That is just good business.

The maintenance of your corporate records is a relatively simple way to provide a history of your business that will one day be needed when the time comes to pass the company to the next generation, or to sell the company to a third party.  Thus, in its own way, keeping the corporate minute book up-to-date is an important part of preparing for business succession and estate planning.  Take those few extra minutes to do it right and save yourself and your heirs significant headaches in the future.

Wandry v. Commissioner: Defined Formula Transfers Provide Significant Planning Opportunity in 2012

May 1, 2012

 By Ashley Alderman

As we continue to emphasize, 2012 is the year to make transfers to family members.  The current gift tax exclusion amount is $5.12 million, which will be reduced to only $1 million as of January 1, 2013, unless Congress acts.  Therefore, most wealthy clients should use their $5.12  million exclusion amount to the greatest extent possible by the end of the year.

Many clients, however, may not have the liquidity to make transfers of $5.12 million in cash.   Instead, these clients may have family-held business interests or other business interests that could be transferred to younger generations.  The inherent problem with the transfer of business interests is the valuation of those interests.  If the IRS audits the gift tax return and adjusts the valuation of the business interests, the client may have created an unintended gift tax liability.  For example, suppose that the client transfers 500 membership units in the family LLC worth $5.12 million therefore fully utilizing the exclusion amount.  Following the IRS audit, however, the value of each membership unit is increased.  Now, the client has transferred 500 units worth $6 million and caused an unintended gift tax liability because the gift now exceeds the client’s available exclusion amount.

Fortunately, on March 26, 2012, the Tax Court issued an opinion in the case Wandry v. Commissioner, T.C. Memo 2012-88 that may provide significant assistance to taxpayers interested in these types of transfers.  In Wandry, the taxpayers made gifts of “a sufficient number of [membership units of the LLC] so that the fair market value of such Units for federal gift tax purposes” was a stated amount to their children and grandchildren.  In the assignment documents, the taxpayers acknowledged that the gift could be “subject to challenge by the Internal Revenue Service,” and that if a final determination was made by the IRS or a court of law that was different from the taxpayer’s appraisal, “the number of gifted Units shall be adjusted accordingly so that the value of the number of Units gifted to each person” equaled the stated amounts.   By making this defined value formula gift, the taxpayers intended to limit the value of the property transferred, thus eliminating the possibility of incurring unintended gift tax liability.   The Tax Court rejected several objections by the IRS to this type of formula gift and upheld the transfer.

Prior cases have upheld similar formula clauses when the excess value (if determined by audit or court) was transferred to a charity.  In those cases, no additional gift tax was incurred because the excess value received a charitable deduction.

Wandry, however, is the first case to address this formula transfer when a charity was not available as a back-stop.   Therefore, Wandry provides a significant planning opportunity for clients who have not fully utilized their $5.12 million exclusion amount.   Now, pursuant to Wandry,  using the example above, a client could make a gift of the number of units in the family LLC worth $5.12 million.  At the time of the gift, pursuant to an independent appraisal, the client may anticipate that this gift will equal 500 units, but if the IRS audits the return and a final determination results in the increase in the value of each unit, it might actually be that only 425 Units are transferred by the client, pursuant to the gift worth $5.12 million.   Rather than transferring a set number of membership units and adjusting the value later, Wandry allows the client to transfer a set value and adjust the number of units transferred later.

Because of the nuances in the Wandry case, a client should seek professional assistance before making these types of transfers to ensure that the transfer complies with the Tax Court’s opinion in Wandry.  If done correctly, however, the client will now be able to fully utilize his $5.12 million exclusion amount in 2012 without incurring any gift tax liability.

IRS Guidance Anticipated for Tax Effects of Trust Decanting

January 25, 2012

 By Rose Drupiewski

The IRS announced that it would place the issue of trust “decanting” on its priority list of items to focus on in 2011 and 2012 for purposes of providing taxpayer guidance.   Decanting occurs when a trustee, pursuant to authority provided in the trust agreement or under state law, transfers property from one trust to another.  Decanting powers have recently become popular with trust drafters as a way to provide additional flexibility to trustees when managing trust assets on behalf of beneficiaries.

The reason for the popularity of decanting powers is that such powers can provide flexibility to otherwise inflexible irrevocable trust agreements.  For example, if a trust agreement provides for an outright distribution of assets to a trust beneficiary at age 25 and the trustee has determined that the beneficiary lacks enough maturity at that age to handle a large distribution, the trustee could (if permitted under the trust agreement or state law) transfer the assets to another trust for the benefit of such beneficiary that will not terminate at age 25 but at a later date.

Although decanting can be extremely useful from the standpoint of flexibility, such flexibility may come with undesirable tax consequences.  The gift, estate, GST and income tax consequences of decanting are less than clear.  For example, there has been some concern that the presence of a decanting power may transform an otherwise irrevocable trust into a revocable trust for estate tax purposes, thus causing the assets in the trust to be included in the grantor’s gross estate.  This is obviously an undesirable consequence because many irrevocable trusts are created for the purpose of enabling a grantor to make gifts to family members in trust without causing estate tax inclusion.  There is also some concern as to whether, if the trustee is a beneficiary of the trust, the trustee’s decanting power might be deemed a general power of appointment for estate tax purposes, which might cause unwanted estate tax consequences for the trustee.  These are just a few examples of multiple unresolved gift, estate, GST and income tax issues relating to trust decanting powers.  Because of the lack of clarity regarding the tax effects of decanting and the hope for favorable guidance, the IRS’s announcement is welcome news for many tax planners and their clients.

In connection with the IRS priority plan, the IRS has recently requested comments from the general public regarding the tax implications of decanting powers.  Comments should be submitted to the IRS by April 25, 2012.

Executors Must Act Soon to Guarantee Spousal Portability of Gift and Estate Tax Exemptions for Estates of Decedents Dying in 2011

October 20, 2011

 By Rose Drupiewski

Beginning in 2011, there is portability of the gift and estate exemption amounts for spouses. The portability feature provides that if a spouse dies after 2010 without using all of his or her gift and estate tax exemption amount (currently $5 million), the unused gift and estate tax exemption amount may be carried over to the surviving spouse and used by the surviving spouse in addition to the surviving spouse’s available exemption amount. The unused exemption amount that can be carried over to the surviving spouse is limited to the basic exemption amount available at the time of the surviving spouse’s death. The purpose of the portability feature is to relieve spouses from the burden and expense of having to retitle assets or create trusts in order to obtain use of both spouses’ gift and estate tax exemptions.

In IRS Notice 2011-82, the Internal Revenue Service recently reminded taxpayers that in order to take advantage of the new portability feature, the executor of the deceased spouse must file Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. Filing the return is the only requirement to make the portability election, as the Service does not require that any affirmative statement be made, box checked, or other special action be taken on the return to obtain portability. The estate tax return must be timely filed for the predeceased spouse for the election to be valid. Because estate tax returns are due nine months after the date of death, the first estate tax returns being filed for portability purposes are due beginning in October, though estates may request an automatic filing extension of six months by filing Form 4768.

Because of the uncertainty regarding future changes to estate and gift taxes and applicable exemption amounts, executors of decedents dying in 2011 will most likely want to file an estate tax return to allow portability even if there is otherwise no obligation to file an estate tax return. The portability feature may provide a substantial benefit to the surviving spouse’s estate in the event the estate tax exemption amount drops to $1 million, as it is currently scheduled to do in 2013.

IRS Issues Guidance on 2010 Estate Tax Return Filing Requirements and Deadlines

September 14, 2011

 By Ashley Alderman

On September 8, 2011, the IRS released the updated Form 706, “United States Estate (and Generation-Skipping Transfer) Tax Return” for decedents dying in 2010.  A link to the Form 706 and the accompanying instructions appears below.  The Form incorporates the changes made to the Estate and Generation-Skipping Transfer Taxes in the 2010 Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act.  According to the Instructions for the Form 706, estates of decedents who died in 2010 with a gross estate (including adjusted taxable gifts and specific exemptions) in excess of $5,000,000 must file a Form 706, unless the Executor of the Estate makes an election to apply the modified carryover basis treatment.

The deadline for filing the Form 706 is September 19, 2011, but the Executor may apply for an automatic six-month extension by filing Form 4768, “Application for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes.”  A link to this form is also included below.  The automatic extension extends the deadline for filing the Form 706 and paying the tax to March 19, 2012.

If the Executor elects to apply the modified carryover basis treatment, then Form 706 does not have to be filed, but the Executor must file a Form 8939, “Allocation of Increase in Basis for Property Acquired from a Decedent” instead.  This Form 8939 has not been finalized by the IRS.  The Form 8939 was originally due on November 15, 2011, but pursuant to Notice 2011-76 issued on September 13, 2011, the deadline is now January 17, 2012.  In accordance with earlier guidance in Rev. Proc. 2011-41 and Notice 2011-66, in Notice 2011-76, the IRS stated that it would not allow extensions for time to file this Form 8939, to make a carryover basis election or to amend or revoke such election except under certain specific exceptions.  We will update the Blawg when that final form becomes available on the IRS website.

Because a Form 8939 will not have another extension period, it is important that Practitioners and Executors quickly determine whether it is beneficial for the estate to elect the modified carryover basis treatment (and file such election by January 17, 2012) or file an extension to file the Form 706 by September 19, 2011 and then proceed with the filing of a Form 706 prior to the final deadline of March 19, 2012.  This determination may be more complex in situations where the estate is over the $5,000,000 exemption amount, but due to very low basis assets in the estate it may be beneficial for the Estate to pay some estate tax in order to receive a stepped-up basis rather than elect into the carryover basis treatment and eliminate any estate tax due.

 Resources: Forms

Form 706: United States Estate (and Generation-Skipping Transfer) Tax Return

Instructions for Form 706

Form 4768: Application for Extension of Time To File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes

Instructions for Form 4768

When Bad Things Happen to Good Charities: Dealing with Automatic Revocation of Exemption

August 3, 2011

 By Rose Drupiewski

For many years, small charities with gross income falling under certain levels were not required to file annual returns with the IRS. However, beginning in 2007, all charities are now required to provide certain information to the IRS on an annual basis. Small charities that were previously exempt from filing annual information returns with the IRS must now file Form 990-N, also called the e-postcard, which is simply a short electronic notice to the IRS providing the organization’s name, address, and other identifying information. Congress made another change in the law providing the muscle to enforce these new reporting requirements: beginning in 2007, the IRS is required to revoke the exempt status of any charity that has failed to satisfy its information reporting requirements for three consecutive years.

The first wave of revocations recently hit the charitable shore, as this summer the IRS sent hundreds of thousands of notices to charities informing them that their exemptions were automatically revoked for failure to file returns. Most of the charities receiving revocation notices have been small charities that were unaware of the new reporting requirements, leaving many of them wondering how to deal with this unexpected burden.

Fortunately for small charities, the IRS has provided guidance as to how charities can reinstate their federal tax exemptions. For small charities, the IRS allows a simpler reinstatement process and a reduced application fee of $100. It is possible to obtain a retroactive reinstatement of exemption, thus ensuring seamless exemption coverage. Small charities that wish to apply for reinstatement of their tax exemptions can obtain information about the application process from the IRS website, with specific procedural requirements set forth in IRS Notice 2011-43.