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Massachusetts DOR Issues Guidelines on 2010 Sales Tax Holiday

Monday, August 9th, 2010 by Moore McLaughlin

The Massachusetts Department of Revenue provided guidelines on the 2010 sales tax holiday for August 14 and 15, 2010, during which most purchases made by individuals for personal use will not be subject to Massachusetts sales or use taxes. During these two days, nonbusiness retail sales of tangible personal property costing $2,500 or less are exempt from sales and use taxes subject to certain exclusions. All motor vehicles, motorboats, meals, telecommunications services, gas, steam, tobacco products, and any single item costing over $2,500 do not qualify for the sales tax holiday exemption and remain subject to tax. ( Massachusetts Technical Information Release 10-10, 08/05/2010 .)

Qualifying purchases. The sales tax exemption applies to sales of tangible personal property for personal use only. Purchases exempt from sales tax are also exempt from use tax. Therefore, eligible items of tangible personal property purchased on the Massachusetts sales tax holiday from out-of-state retailers for use in Massachusetts are exempt from Massachusetts use tax. Alcoholic beverages sold for off-premises consumption by liquor or package stores qualify for the 2010 sales tax holiday.

Nonexempt sales. The sales tax holiday does not apply to sales of motorboats, meals, telecommunications services, gas, steam, electricity, tobacco products, any single item costing in excess of $2,500, and all sales of motor vehicles. Layaway sales do not qualify for the exemption even if the last required payment or payments necessary to complete the transaction are made on August 14 or 15, 2010. Sales of the excluded items remain taxable.

Specific rules. The Department provided specific rules to be applied by retailers in administering the Massachusetts sales tax holiday exemption.

Threshold: Generally, sales or use tax is due on the entire sales price of a single item worth more than $2,500. The sales price is not reduced by the threshold amount. However, since there is no sales tax on any article of clothing worth less than $175, only the increment of the sales price of the article of clothing over $175 is subject to tax.

Multiple items on one invoice: Separate invoices do not have to be prepared when a customer purchases multiple items during the sales tax holiday. As long as each item is priced $2,500 or less, there is no upper limit on the tax-free amount each customer may purchase.

Bundled transactions: When several items are offered for sale at a single price, the entire package is exempt if the sales price of the package is $2,500 or less. Items that are priced separately and are to be sold separately qualify for the sales tax holiday exemption if the price of each item is $2,500 or less.

Coupons and discounts: If a store coupon or discount reduces the sales price of an article, the discounted sales price determines whether the sales price is within the sales tax holiday threshold. If the purchaser bought both an eligible property and a taxable property and the coupon or discount applies to the total amount paid by the purchaser, the seller allocates the discount on a pro rata basis to each article sold.

Exchanges: In case of an even exchange, no tax is due even if the exchange is made after the sales tax holiday.

Special orders: Special order items are eligible for the sales tax holiday exemption provided they are ordered and paid in full on the sales tax holiday weekend and the cost of each item is $2,500 or less even if the items are delivered at a later date. A prior special order purchase with a deposit made before August 14, 2010 will not qualify for the sales tax holiday exemption even if the customer pays the entire remaining balance due on August 14 or 15, 2010.

Rain checks: Eligible property bought with the use of a rain check during the sales tax holiday weekend qualifies for the exemption regardless of when the rain check was issued. Issuance of a rain check during the sales tax holiday weekend will not qualify otherwise eligible property for the sales tax holiday exemption if the property is actually purchased after the sales tax holiday.

Rentals: Generally, rentals for 30 days or less of eligible tangible personal property are eligible for the sales tax holiday even if the rental period covers days before or after the holiday provided payment in full is made during the sales tax holiday weekend.

Rebates: A rebate is generally treated as a cash discount and is excluded from the sales price. So, the discounted sales price determines whether the sales price is within the sales tax holiday threshold, and tax must be charged on the full purchase price if it is over $2,500. If the customer receives a rebate after the sale by mailing a coupon to the manufacturer, the full purchase price of the property determines whether the sales price is within the sales tax holiday price threshold and tax must be charged on the full purchase price if it is over $2,500. If the customer receives a cash discount from the vendor upon the purchase of tangible property and a manufacturer’s rebate after the sale, only the cash discount given by the vendor is excluded from the sales price for purposes of the sales tax holiday exemption.

Internet sales: An eligible property ordered over the Internet is exempt if it is ordered and paid for on August 14 or 15, 2010, Eastern Daylight Time, even if the property is delivered after the sales tax holiday period.

Splitting items normally sold together: Articles normally sold as a single unit cannot be priced separately and sold as individual items in order to qualify for the sales tax holiday exemption.

Returns: Under the law, sales tax may only be refunded if returns are made within 90 days of the sale. During the 90-day period after August 14 or 15, 2010, a retailer may not credit a retail customer who returns an item that could have qualified for the sales tax holiday exemption, unless the customer provides a receipt or invoice showing the tax was paid or the seller’s records show that tax was paid.

Erroneously collected taxes: Customers who were erroneously charged sales tax for an exempt purchase may obtain a tax refund from the vendor. The vendor that has remitted erroneously collected tax to the Department may file an abatement application within three years with satisfactory evidence that the vendor credited or refunded the tax to the purchaser.

Responsibilities of retailers. All Massachusetts businesses normally making taxable sales of tangible personal property on August 14 and 15, 2010 and out-of-state retailers registered to collect Massachusetts sales and use taxes must participate in the sales tax holiday. Any sales or use tax erroneously collected by a retailer during the sales tax holiday must be remitted to the Department. Retailers must keep normal business records showing the date of sale, items purchased and selling price. Purchasers paying for tangible personal property with business credit cards or checks must be charged tax on the items purchased. Normal business records showing the date of sale, items purchased, and selling price must be kept by the retailer/vendor. However, a separate certification of nonbusiness use from the purchaser will not be required for the 2010 Sales Tax Holiday regardless of the amount of the otherwise qualifying purchase.

Penalties. Retailers that back-date sales occurring after August 15, 2010 or that forward-date sales that occurred before August 14, 2010 in order to make them appear to qualify for the sales tax holiday may be subject to the tax evasion penalties of Mass. Gen. L. § 73 , including a felony conviction, a fine of not more than $100,000 or $500,000 in the case of a corporation, or by imprisonment for not more than five years, or both, and may also be required to pay the costs of prosecution.

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Posted in Current Events, IRS and state tax collections, Tax Current Events and News, Tax planning

President Obama admits his new healthcare program is a tax

Saturday, July 17th, 2010 by Moore McLaughlin

President Obama and the Democrat leaders flat out denied that their mandate for Americans to buy health insurance was actually a new tax.  In recently filed court briefs, President Obama has finally admitted that his new plan is actually a tax on the American people.  Very interesting reading.  Click here for a NY Times article. 

Stay tuned for word about more and even larger tax increases.  The tax attorneys at McLaughlin & Quinn, LLC will be working even harder to help you preserve your hard-earned dollars.  Call founding partner, F. Moore McLaughlin, IV, CPA, Esq. for more information at 401-421-5115 ext. 212 or reach him by e-mail at MMcLaughlin@McLaughlinQuinn.com.

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Posted in Asset Protection Planning, Current Events, Estate Planning, IRS and state tax collections, Tax Current Events and News, Tax planning

RI Senator Sheldon Whitehouse Introduces Estate Tax Reform Bill

Thursday, July 15th, 2010 by Moore McLaughlin

S. 3533, 111th Cong., 2d Sess. (June 23, 2010), the “Responsible Estate Tax Act of 2010,” introduced by Senators Bernard Sanders (I-Vermont), Tom Harkin (D-Iowa) and Sheldon Whitehouse (D-R.I.), would:

  • Retroactively reimpose the estate tax and GST tax;
  • Adopt an applicable exclusion amount and GST exemption of $3.5 million per person;
  • Adopt a progressive rate structure, under which a 45% rate would apply on the taxable estate up to $10 million, 50% on the taxable estate above $10 million and below $50 million, and 55% on taxable estates above $50 million, and a 10% surtax on estates above $500 million;
  • Enact two loophole closures included in President Obama’s Fiscal Year 2011 budget, requiring consistent valuation for transfer and income tax purposes, and requiring a 10-year minimum term for GRATs;
  • Eliminate the use of valuation discounts for entities that do not operate an active trade or business;
  • Allow reduction in the gross estate under Code Sec. 2032A , special use valuation for family farms and certain closely held business real estate, by up to $3 million; and
  • Expand the rules for conservation easements through increasing the maximum exclusion amount to $2 million and increasing the base percentage to 60%.
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Deduction denied to property developer where access to land was challenged in court

Thursday, July 1st, 2010 by Moore McLaughlin

The Tax Court has held in D.L. White Construction, Inc., TC Memo. 2010-141 that a corporation engaged in the business of residential real estate construction could not claim the cost of acquiring unimproved real estate as the cost of goods sold or alternatively deduct that amount as a Code Sec. 165(a) business loss where its easement to access the property through adjacent land was challenged in the courts.Real Estate Development

Background on cost of goods. In a manufacturing, merchandising, or mining business, gross income means total sales less the cost of goods sold, plus any income from investments and from incidental or outside operations or sources. (Reg. § 1.61-3(a)) The amount that a taxpayer claims as cost of goods sold is not subject to the limitations on deductions found in Code Sec. 162 (ordinary and necessary trade or business expense) and Code Sec. 274 (substantiation requirements). Rather, it is treated as a subtraction from gross sales to arrive at a qualifying business’ gross income. (Metra Chem Corp. (1987), 88 TC 654) As a general rule, where the production, purchase, or sale of merchandise of any kind (inventory) is an income-producing factor, inventory on hand at the beginning and end of the year is taken into account in computing the taxable income for the year. If a taxpayer must use an inventory, a taxpayer ordinarily is required to use the accrual method. (Reg. § 1.446-1 , Reg. § 1.471-1) Real property is not generally merchandise for purposes of inventory accounting. (W.C. & A.N. Miller Dev. Co. (1983), 81 TC 619)

Background on business loss deduction. Under Code Sec. 165(a), a taxpayer may deduct a loss sustained during the tax year and not compensated for by insurance or otherwise. To be allowable under Code Sec. 165(a) , the loss must be evidenced by a closed and completed transaction, fixed by identifiable events, and actually sustained during the tax year. If a taxpayer has a claim for reimbursement on which there’s a reasonable prospect of recovery, that “reimbursable” loss can’t be deducted until it’s reasonably certain the reimbursement will or will not be made. This may be ascertained by, among other things, settlement, adjudication or abandonment of the claim. (Code Sec. 165(a), Reg. § 1.165-1(d))

Facts. D.L. White Construction, Inc. (White Construction), is a C corporation that uses the cash method of accounting and a fiscal year ending on September 30. It’s in the business of residential real estate construction. During its 2002 tax year, it bought four parcels of adjoining land in northern Idaho (the Blossom Mountain property), totaling approximately 80 acres, for $290,000 ($90,000 of which was financed through a promissory note). It planned to build four homes on the Blossom Mountain property and sell the homes at a profit. However, to reach the Blossom Mountain property, White Construction used an access road that crossed an adjoining property owned by Mr. and Mrs. Akers. On January 10, 2002, the Akerses filed suit against White Construction in the Idaho district court for negligence and trespass and to quiet title.

White Construction filed its Form 1120, U.S. Corporation Income Tax Return, for the 2002 tax year. It included the $220,000 it spent on the Blossom Mountain property in its cost of goods sold. Although the Akerses’ lawsuit was still ongoing when it filed its Form 1120, White Construction claimed the $220,000 amount because it didn’t have legal access to the Blossom Mountain property and contended that the property was worthless.

The Blossom Mountain litigation was protracted. On January 3, 2003, the Idaho district court found that White Construction did not have a complete easement over the Akerses’ property, had trespassed, was negligent, and had engaged in malicious conduct. On April 1, 2004, the district court reheard the case, again finding against White Construction. This decision was appealed, and the Idaho Supreme Court remanded the case to the district court. On October 6, 2006, the district court again found against White Construction. This decision was appealed, and the case was once again remanded to the district court. On January 22, 2009, the Idaho Supreme Court withdrew its latest decision to remand, and, affirming the district court in part and vacating its judgment in part, once more remanded the case for further proceedings.

After the Idaho district court issued its April 1, 2004 decision, White Construction’s title company’s insurer issued White Construction a $200,000 check.

On audit of the 2002 tax year, IRS reduced White Construction’s cost of goods by $220,000. White Construction sought relief in court, where it acknowledged that its deduction for cost of goods sold might have been incorrect, but argued that it nevertheless should be able to deduct the $220,000 amount as a Code Sec. 165 business loss.

Decision on cost of goods argument. The Tax Court concluded that even if the Blossom Mountain property were properly classified as inventory, White Construction would not be entitled to include the cost of the property in its cost of goods sold.

After first noting the oddness of the fact that White Construction apparently used an inventory in its business even though it claimed to be a cash basis taxpayer, the Court assumed for the sake of argument that merchandise was an income-producing factor in its business and that it was required to use an inventory. That being the case, the Court concluded that White Construction failed to prove that the Blossom Mountain property was merchandise properly includable in calculating its cost of goods sold. White Construction also failed to prove that the Blossom Mountain property, even if properly classified as merchandise includable in inventory, should not have been included in closing inventory for purposes of calculating its cost of goods sold. White Construction continued to own the property on September 30, 2002, and failed to show that it was worthless as of that date.

Decision on business deduction argument. The Court found that White Construction failed to prove any of the elements for a deduction under Code Sec. 165. Its claimed loss for the Blossom Mountain property was not evidenced by a closed and completed transaction, fixed by identifiable events. As of the close of White Construction’s 2002 tax year, the Idaho district court had not issued its first opinion in the lawsuit-a lawsuit that the Court noted was still unresolved. Further, White Construction failed to show that the claimed loss was actually sustained during its 2002 tax year or in any other year. While contending that the Blossom Mountain property was worthless because there was not any access to the property, White Construction continued to own the property. There was no credible evidence that White Construction could not acquire access to the property in some other way or that the property had become worthless as of September 30, 2002. In addition, even if it did establish that it sustained a $220,000 loss with respect to the Blossom Mountain property during the tax year 2002, it still could not deduct the loss because it had a reasonable prospect of recovery as of the end of the year since it had a claim under its title insurance policy. Indeed, White Construction actually received reimbursement of $200,000 for its loss.

For more information about this case or tax planning for real estate developers, contact Moore McLaughlin, Esq. at MMcLaughlin@McLaughlinQuinn.com or by phone at 401-421-5115 ext. 212.

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Posted in Current Events, Tax Current Events and News, Tax planning

Online Legal Documents Company Sued Over Flawed Estate Plan

Sunday, June 27th, 2010 by Moore McLaughlin

LegalZoom, one of the most prominent sellers of do-it-yourself wills and other estate planning documents, is the target of a class action lawsuit in California charging that the company engages in deceptive business practices and is practicing law without a license.

The lawsuit was filed in Los Angeles Superior Court on May 27, 2010, by Katherine Webster, who is the niece of the late Anthony J. Ferrantino and the executor of Mr. Ferrantino’s estate.

Knowing that he had only a few months to live, Mr. Ferrantino asked Ms. Webster in July 2007 to help him use LegalZoom to execute a will and living trust. Based on LegalZoom’s advertising, Ms. Webster says she believed that the documents they created would be legally binding and that if they encountered any problems, the company’s customer service department would resolve them.

But after the living trust documents were created and signed, Ms. Webster could not transfer any of her uncle’s assets into the trust because the financial institutions that held his money refused to accept the LegalZoom documents as valid. Ms. Webster tried to get help from LegalZoom, with no success. The trust was still not funded when Mr. Ferrantino died in November 2007.

Ms. Webster was forced to hire an estate planning attorney, who petitioned the court to allow the post-death funding of the trust. The attorney then had to convince the banks to transfer the funds — a more difficult task following Mr. Ferrantino’s death. The attorney also discovered that the will LegalZoom created for Mr. Ferrantino had not been properly witnessed. All this cost Mr. Ferrantino’s estate thousands of dollars.

legalzoomThe lawsuit claims that Ms. Webster and others like her relied on misleading statements by LegalZoom, including that LegalZoom carefully reviews customer documents, that it guarantees its customers 100 percent satisfaction with its services, that its documents are the same quality as those prepared by an attorney, and that the documents are effective and dependable.

“Nowhere in the [company's] manual do defendants explain that using LegalZoom is not the same as using an attorney and that its documents are only ‘customized’ to the extent that the LegalZoom computer program inputs your name and identifying information, but not tailored to your specific circumstances,” the lawsuit states, adding that “the customer service representatives are not lawyers and cannot by law provide legal advice.”

Ms. Webster is suing not only on her behalf but on behalf of anyone in California who paid LegalZoom for a living trust, will, living will, advance health care directive or power of attorney. The lawsuit estimates this class embraces more than 3,000 individuals.

“LegalZoom’s business is based on nurturing the false sense of security that people do not need to hire a traditional attorney,” says San Francisco attorney Robert Arns, one of the attorneys who filed the lawsuit. “The complaint points out that LegalZoom advertises that you don’t need a real attorney because its work is legally binding and reliable. That’s misleading. Improperly prepared estate planning documents are a ticking time bomb that can result in improper tax consequences and other items that could cost the estate and heirs huge sums.”

“LegalZoom preys on people when they’re at their most vulnerable, when they are of advanced age or poor health and need a will or a living trust,” adds San Francisco elder abuse attorney Kathryn Stebner, Ms. Webster’s lead counsel.

One of the defendants named in the suit is LegalZoom co-founder Robert Shapiro, who appears on the LegalZoom Web page and TV ads and who is best-known for being one of O.J. Simpsons attorneys.

This is not the first suit against LegalZoom. In December 2009, a Missouri man who paid LegalZoom to prepare his will sued the company for engaging in the unauthorized practice of law (Janson v. LegalZoom). The lawsuit is also seeking class action status. LegalZoom is trying to have the case removed from Missouri state court to the United States District Court for the Western District of Missouri.

Estate Planning attorney, Jill E. Sugarman, has encountered documents adopted from an on-line document preparation service.  “In many instances, the documents themselves are not flawed, but the client has either used the wrong form and has left out important provisions,” says Jill.

If you are truly concerned about your estate planning needs and want to ensure that the documents you use are legally binding and appropriate for your particular needs, contact Jill E. Sugarman, Esq. at JSugarman@McLaughlinQuinn.com or by phone at 401-421-5115.

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Posted in Asset Protection Planning, Current Events, Elderlaw/Law For Life, Estate Planning

What Is the Generation-Skipping Transfer Tax?

Monday, June 14th, 2010 by Moore McLaughlin

The estate tax gets all the press, but if you are leaving property to a grandchild, there is an additional tax you should know about. According to Jill E. Sugarman, Esq., elderlaw and estate planning attorney at McLaughlin & Quinn, LLC, the generation-skipping transfer (GST) tax is a tax on property that is passed from a grandparent to a grandchild (or great-grandchild) in a will or trust. The tax is also assessed on property passed to unrelated individuals more than 37.5 years younger. Like the estate tax, it is currently repealed, but is scheduled to return in 2011.

Generation Skipping TaxThe GST tax was designed to close a loophole in the estate tax. Normally, grandparents would leave their estates to their children, incurring estate taxes. Then the children would pass on the estates to the grandchildren, incurring estate taxes again. Wealthy individuals realized they could leave their estates to their grandchildren directly and avoid one set of estate taxes. Congress established the GST tax to prevent this by taxing transfers to related individuals more than one generation away and to unrelated individuals more than 37.5 years younger.

A GST tax is imposed even when property is left in trust for a grandchild. For example, suppose a grandparent sets up a trust that leaves income to her children for life and then the remainder to her grandchildren. The part of the trust left to the grandchildren will be subject to a GST tax.

The GST tax has tracked the estate tax rate and exemption amounts. In 2009, the federal government exempted $3.5 million from the tax and the tax rate was 45 percent. The GST tax expired in 2010 along with the estate tax, but it is scheduled to return in 2011. Unless Congress acts in the meantime, the 2011 GST tax exemption amount will be $1 million and the tax rate will be 55 percent.

For more information on estate taxes, contact Founding Partner F. Moore McLaughlin, IV, CPA, Esq. at 401-421-5115 ext 212 or by e-mail at MMcLaughlin@McLaughlinQuinn.com or Jill E. Sugarman, Esq. at 401-421-5115 ext 217 or by e-mail at JSugarman@McLaughlinQuinn.com.

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Posted in Elderlaw/Law For Life, Estate Planning, Tax planning

Rhode Island Governor Approves Significant Personal Income Tax Reform Measure

Friday, June 11th, 2010 by Moore McLaughlin

Rhode Island FlagOn June 9, 2010, Governor Donald Carcieri signed legislation bringing significant reform to the personal income tax system beginning with the 2011 calendar year. The legislation reduces the highest marginal income tax bracket from 9.9% to 5.99%, and reduces the number of income tax brackets from five to three. The legislation eliminates the option to itemize deductions, increases the amounts of the standard deduction, reduces the amount of the personal exemption, and limits the types of credits that may be taken. Finally, the alternative flat tax is eliminated. (L. 2010, H8196A/S2921A, effective 01/01/2011.)

Tax rates. The tax rates have been revised, providing three taxable income brackets for married individuals filing jointly, qualifying widows, head of households, unmarried individuals, married individuals filing separately and bankruptcy estates, effective for tax years beginning after December 31, 2010: $0-$55,000, 3.75%; $55,000-$125,000, 4.75%; and over $125,000, 5.99%. Previously, there were five brackets with rates ranging from 3.75% to 9.9%, and the income brackets differed depending on the filing status. In addition, the revised tax rates provide three taxable income brackets for an estate or trust: $0-$2,230, 3.75%; $2,230-$7,022, 4.75%; and over $7,022, 5.99%. Previously, the rates for an estate or trust were based on five taxable income brackets: $0-2,150, 3.75%; $2,150-$5,000, 7%; $5,000-7,650, 7.75%; $7,650-10,450, 9%; and over $10,450, 9.9%.

Deductions. The legislation eliminates the option to itemize deductions and increases the amounts of the standard deduction based on the filing status as follows: single, $7,500; married filing jointly, $15,000; married filing separately, $7,500; and head of household, $11,250. Previously, the amounts of the standard deductions based on the filing status were as follows: single, $5,700; married filing jointly, $9,550; married filing separately, $4,750; and head of household, $8,400. In addition, the standard deduction is phased out for taxpayers whose adjusted gross income exceed $175,000 such that the standard deduction is reduced by 20 percentage points for each $5,000 by which the taxpayer’s adjusted gross income for the taxable year exceeds $175,000.

Personal exemption. For purposes of computing the personal exemption, the legislation reduces the exemption amount from $3,650 to $3,500. In addition, the personal exemption is phased out for taxpayers whose adjusted gross incomes exceed $175,000 such that the personal exemption is reduced by 20 percentage points for each $5,000 by which the taxpayer’s adjusted gross income for the taxable year exceeds $175,000.

Credits. The legislation limits the types of credits that may be taken against personal income tax to the following: earned income credit; property relief credit; lead paint credit; credit for income taxes of other states; historic structures tax credit; motion picture productions tax credit; child and dependent care credit; tax credits for scholarships to scholarship organizations; and credit for tax withheld. For purposes of the property tax relief credit against personal income tax, the calculation of “income” does not include any deductions for rental losses, business losses, capital losses, exclusion for foreign income, and any losses received from pass-through entities.

Alternative flat tax. The alternative flat tax option is eliminated for tax years 2011 and thereafter.

For more information about these changes, contact Moore McLaughlin, Esq. at 401-421-5115 ext 212 or by e-mail at MMcLaughlin@McLaughlinQuinn.com.

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Posted in Current Events, Tax Current Events and News, Tax planning

Final regulations clarify and strengthen partnership Code Sec. 704(c) anti-abuse rule

Wednesday, June 9th, 2010 by Moore McLaughlin

The IRS has issued final regulations providing that the Code §704(c) anti-abuse rule takes into account the tax liabilities of both the partners in a partnership and certain direct and indirect owners of the partners. The regulations, which apply to tax years beginning after June 9, 2010, also provide that a Code §704(c) allocation method cannot be used to achieve tax results inconsistent with the intent of subchapter K of the Code.Internal Revenue Service

Background. Code §704(c) requires partnerships to allocate income, gain, loss, and deductions for property contributed by a partner so as to take into account variations between the property’s adjusted tax basis and its fair market value at the time of contribution. The allocations must be made using a reasonable method that’s consistent with Code §704 ‘s purpose. Reg. §1.704-3 provides three allocation methods: the traditional method, the traditional method with curative allocations, and the remedial method.

Under the anti-abuse rule of Reg. §1.704-3(a)(10) (as in effect before amendment by T.D. 9485, 06/08/2010), an allocation method (or combination of methods) is not reasonable if the contribution of property (or event that results in reverse Code Sec. 704(c) allocations) and the corresponding allocation of tax items for the property are made with a view to shifting the tax consequences of built-in gain or loss among the partners in a manner that substantially reduces the present value (PV) of the partners’ aggregate tax liability.

Under the anti-abuse rule of Reg. §1.701-2(b), if a partnership is formed or availed of in connection with a transaction a principal purpose of which is to reduce substantially the PV of the partners’ federal tax liability in a manner inconsistent with the intent of subchapter K, IRS may recast the transaction as appropriate to achieve tax results that are consistent with the intent of subchapter K. Thus, IRS may disregard: (a) purported partnerships, in whole or part, so that partnership assets are treated as owned by the partner; (b) one or more contributions; or (c) one or more purported partners.

In 2003, the Staff of the Joint Committee on Taxation issued “The Report of Investigation of Enron Corporation and Related Entities Regarding Federal Tax and Compensation Issues, and Policy Recommendations,” (JCS-3-03, February 2003) (Enron Report). Although the Enron Report noted that the anti-abuse rule of Reg. §1.704-3(a)(10) (as in effect before amendment by T.D. 9485, 06/08/2010 ), was an effective tool, it recommended strengthening the reg for partnership allocations for property contributed to a partnership, especially for partners that are members of the same consolidated group, to ensure that the allocation rules are not used to obtain unwarranted tax benefits.

The final regs address the recommendation in the Enron Report by clarifying certain aspects of the anti-abuse rule.

Final regulations. The regulations amend the anti-abuse rule of Reg. § 1.704-3(a)(10) to provide that the tax effect of an allocation method (or combination of methods) on both direct and indirect partners is considered. (Reg. § 1.704-3(a)(10)(i)) An indirect partner is any direct or indirect owner of a partnership, S corporation, or controlled foreign corporation (CFC, as defined in Code §957(a) or Code §953(c)), or direct or indirect beneficiary of a trust or estate, that is a partner in the partnership, and any consolidated group of which the partner in the partnership is a member (under Reg. §1.1502-1(h)). However, a CFC owner is treated as an indirect partner only for allocation of items that: (1) enter into the computation of a U.S. shareholder’s inclusion under Code §951(a) for the CFC; (2) enter into any person’s income attributable to a U.S. shareholder’s inclusion under Code §951(a) for the CFC; or (3) would enter into these computation if the items were allocated to the CFC. (Reg. §1.704-3(a)(10)(ii))

The final regs also provide that the principles of Code §704(c), together with the allocation methods in Reg. §1.704-3(b) (the traditional method, the traditional method with curative allocations, and the remedial method) only apply to contributions of property to the partnership. Further, in determining if a purported contribution of property to a partnership should be recast to avoid results that are inconsistent with subchapter K, one factor that might be relevant is the use of the remedial method in which allocations of remedial items of income, gain, loss or deduction are made to one partner and allocations of offsetting remedial items are made to a related partner. (Reg. §1.704-3(a)(1))

For more information on these Final Regulations or other partnership tax matters, contact Moore McLaughlin, Esq. at 401-421-5115 ext 212 or by e-mail at MMcLaughlin@McLaughlinQuinn.com.

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Posted in Tax Current Events and News, Tax planning

Massachusetts Court Dismisses Constitutional Challenge to Capital Gains Abatement Act

Monday, June 7th, 2010 by Moore McLaughlin

Massachusetts Supreme Judical CourtThe Massachusetts Supreme Judicial Court held that the Superior Court properly dismissed a taxpayer’s action for declaratory relief because the taxpayer failed to exhaust administrative remedies. The taxpayer challenged the constitutionality of the legislature’s action not to pay interest on refunds of the unconstitutional capital gains taxes. The remedies provided by the act were not seriously inadequate. Unless the administrative remedy is seriously inadequate it should not be displaced by an action for a declaration. (DeMoranville v. Commissioner of Revenue, Mass. Supreme Judicial Ct., Dkt. No. SJC-10460, 06/03/2010.)

Background. In Peterson v. Commissioner of Revenue (Mass. Sup. Jud. Ct., 2004) 806 NE2d 784 (Peterson I), the Massachusetts Supreme Judicial Court held that §32 of L. 2002, c. 186 (2002 act), which set a higher capital gains tax rate effective May 1, 2002, violated the uniformity requirement of Art. 44 of the Amendments to the Massachusetts Constitution because it applied different tax rates to capital gains obtained within the same tax year. In response to Peterson I, the Massachusetts Legislature enacted L. 2004, c. 149 (2004 act) establishing the effective date of the new capital gains tax rate to January 1, 2002 and directing that the Commissioner not adjust the tax liability for capital gains realized between January 1, 2002 and April 30, 2003 for any taxpayer who already paid capital gains taxes at the prior rates. In Peterson v. Commissioner of Revenue (Mass. Sup. Jud. Ct., 2005) 825 NE2d 1029 (Peterson II), the Massachusetts Supreme Judicial Court struck out §413 of the 2004 act as unconstitutional but severable from the section setting January 1 2002 as the effective date of the higher capital gains rate. The legislature again responded by enacting L. 2005, c. 163 (abatement act), which changed the effective date of the new tax rate from January 1, 2002 to January 1, 2003 and addressed the remedy for those taxpayers who had paid long-term capital gains taxes at the higher rate in 2002. It provided that any taxpayers who overpaid capital gains taxes may apply for an abatement pursuant to the administrative procedures generally set for tax abatements and the Commissioner is to abate such overpayments in four equal installments without interest. This provided the exclusive basis for relief stemming from overpayment of the capital gains taxes in 2002.

Action for declaratory relief. In 2002, the taxpayer sold his business and paid capital gains taxes that he would not have been required to pay prior to the 2002 act, which provided that long-term capital gains realized on or after May 1, 2002 were taxed as ordinary income at 5.3%, a rate higher than gains realized before that date. Following the enactment of the abatement act, the taxpayer applied for abatement and received four installments of the refund without interest. On March 18, 2008, the taxpayer filed an action for declaratory relief asserting that the legislature’s determination that no interest was to be paid on the refund of the unconstitutional capital gains taxes is unconstitutional and that he has not been fully compensated for his payment of the wrongful taxes. The taxpayer alleges that his action for declaratory relief is proper because pursuit of administrative remedies would have been futile since neither the Commissioner nor the Board has the authority to declare a statute unconstitutional. His action for declaratory relief was dismissed and he appealed.

Failure to exhaust administrative remedies. The Massachusetts Supreme Judicial Court held that the Superior Court properly dismissed the taxpayer’s declaratory action for failure to exhaust administrative remedies which are deemed exclusive by the abatement act. Even if the Board could not have declared the abatement act facially unconstitutional, it could have declared the statute unconstitutional or illegal as applied to the taxpayer, and could have awarded him interest. Accordingly, the administrative remedies provided by the abatement act were not seriously inadequate. Unless the administrative remedy is seriously inadequate it should not be displaced by an action for a declaration. The Massachusetts Supreme Judicial Court further held that the judge did not abuse her discretion, noting that she concluded that the issues were not sufficiently recurrent or of sufficient public importance to merit declaratory relief in the light of the adequate administrative remedies proscribed and made exclusive by the legislature.

For more information on this or other recent Massachusetts cases, contact tax attorney Moore McLaughlin at 401-421-5115 ext 212 or by e-mail at MMcLaughlin@McLaughlinQuinn.com.

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Disaster victims in Massachusetts, Rhode Island qualify for tax relief

Friday, April 2nd, 2010 by Moore McLaughlin
Rhode Island Flood

Rhode Island Flooding

The IRS has announced on its website that victims of the recent severe storms and flooding in counties in Massachusetts and Rhode Island are designated as federal disaster areas qualifying for individual assistance have more time to make tax payments and file returns. Certain other time-sensitive acts also are postponed. The following is a summary of the relief that is available.

Who gets relief.  Only taxpayers considered to be affected taxpayers are eligible for the postponement of time to file returns, pay taxes and perform other time-sensitive acts. Affected taxpayers are those listed in Treas. Reg. § 301.7508A-1(d)(1) and thus include:

  • any individual whose principal residence, and any business entity whose principal place of business, is located in the counties designated as disaster areas;
  • any individual who is a relief worker assisting in a covered disaster area, regardless of whether he is affiliated with recognized government or philanthropic organizations;
  • any individual whose principal residence, and any business entity whose principal place of business, is not located in a covered disaster area, but whose records necessary to meet a filing or payment deadline are maintained in a covered disaster area;
  • any estate or trust that has tax records necessary to meet a filing or payment deadline in a covered disaster area; and
  • any spouse of an affected taxpayer, solely with regard to a joint return of the husband and wife.

What may be postponed. Under Internal Revenue Code §7508A, the IRS gives affected taxpayers until the extended date (specified by county, below) to file most tax returns (including individual, estate, trust, partnership, C corporation, and S corporation income tax returns; estate, gift, and generation-skipping transfer tax returns; and employment and certain excise tax returns), or to make tax payments, including estimated tax payments, that have either an original or extended due date falling on or after the onset date of the disaster (specified by county, below), and on or before the extended date.

The IRS also gives affected taxpayers until the extended date to perform other time-sensitive actions described in Treas. Reg. §301.7508A-1(c)(1) and Rev. Proc. 2007-56, 2007-34 IRB 388, that are due to be performed on or after the onset date of the disaster, and on or before the extended date.  This relief also includes the filing of Form 5500 series returns, in the way described in Rev. Proc. 2007-56, Sec. 8.  Additionally, the relief described in Rev. Proc. 2007-56, Sec. 17, relating to like-kind exchanges of property, also applies to certain taxpayers who are not otherwise affected taxpayers and may include acts required to be performed before or after the period above.

The postponement of time to file and pay does not apply to information returns in the W-2, 1098, 1099 or 5498 series, or to Forms 1042-S or 8027.  Penalties for failure to timely file information returns can be waived under existing procedures for reasonable cause. Likewise, the postponement does not apply to employment and excise tax deposits.  The IRS, however, will abate penalties for failure to make timely employment and excise deposits, due on or after the onset date of the disaster, and on or before the deposit delayed date (specified by county, below), provided the taxpayer made these deposits by the deposit delayed date.

Affected areas and dates for storms, floods and other disasters as published on the IRS’s website:

Massachusetts:  The following are federal disaster areas qualifying for individual assistance on account of severe storms and flooding beginning on March 12, 2010: Bristol, Essex, Middlesex, Norfolk, Plymouth, Suffolk and Worcester counties.  For these Massachusetts counties, the onset date of the disaster was March 12, 2010, the extended date is May 11, 2010, and the deposit delayed date was March 29, 2010. [Note:  In response to the IRS' tax deadline extension, the Massachusetts Department of Revenue has announced that the new filing deadline for state tax returns will be midnight May 11, 2010 for residents of the counties that were federally-declared disaster areas. (Release, Massachusetts Department of Revenue, 03/31/2010 ; Massachusetts Severe Storm and Flooding Victims Have Until May 11 to File Their Tax Returns, 03/31/2010).]

Rhode Island: The following are federal disaster areas qualifying for individual assistance on account of severe storms and flooding beginning on March 12, 2010: Kent, Newport, Providence and Washington counties. For these Rhode Island counties, the onset date of the disaster was Mar. 12, 2010, the extended date is May 11, 2010, and the deposit delayed date was Mar. 29, 2010.

For more information, please contact your CPA or our office.

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