Thursday, August 17, 2017

Good Corporate Citizen or Simply Paying too Much Property Taxes

By: Mark D. Lansing

Notwithstanding that property taxes tend to be one of the more significant operating expenses for commercial property owners, applying the “good corporate citizen” rational, many fail to challenge their assessments. Does that really work or just a myth? It is a myth. Being a good corporate citizen does not mean that your property taxes should not be equitable. Yet, commercial and industrial property owners pay well in excess of their fair share. A review of states having equalization rates and other means to measure “inequality” in valuation, frequently, if not always, shows that commercial and industrial property owners (or large tenants, as lessees) are valued at a substantially higher uniform percent of value than residential property. Thus, the question becomes – why?  Why do commercial and industrial property owners subsidize residential and vacant land parcels? More often than not the rational is to be a “good corporate citizen.” Notably, being that good corporate citizen rarely translates into some other quantifiable benefit to the taxpayer (e.g., environmental certificate, building permit, zoning variance). To the contrary, and legally, the two are distinct and disparate.

Conversely, those taxpayers that seek equitable taxation on long-term basis often obtain that result, maintain good community relations, and put themselves into a greater or more competitive position, as their property taxes tend to be substantially lower and more reflective of market value. That is, by holding the assessor’s feet to the fire, the taxpayer experiences a greater likelihood of a long-term valuation that reflects market value. By doing so in a respectful and cooperative manner, community relations are maintained or even enhanced.


Mr. Lansing focuses his practice on property tax & condemnation matters with respect to energy, industrial and commercial properties. He achieves significant property tax savings and assessment reductions for his clients through litigation, negotiations (settlements), due diligence reviews and alternative agreements (e.g., PILOTs). Mark assists clients with their valuation of complex property, and through real property tax management. Mr. Lansing also works with energy, industrial and commercial companies in buying, building and operating facilities to effectively manage their property taxes, including due diligence review in the purchase or development phase, and representation before administrative agencies.

As an experienced trial lawyer, Mark has successfully represented clients in settlement negotiations, motions, trials and appeals at all levels of state and Federal Courts (including, Circuit Courts of Appeal). Mark is also well published in property tax and condemnation valuation matters.
Mark Lansing may be reached in our Washington, D.C. office at 202.466.5964.

Monday, August 14, 2017

IRS Tax Penalties

By: Leighton Koehler

In a famous saying by Benjamin Franklin, “… but in this world nothing can be said to be certain, except death and taxes.”  In the past 100 years, it would be very safe to add to the end of that quote, “and the Internal Revenue Service asserting penalties.”   

File a return late?  Penalties.  Pay taxes late?  Penalties.  Forget to list out all your income on a tax return? Penalties.  Forget to report a foreign bank account?  Penalties. 

The good news is that when the IRS imposes a penalty, there are a variety of procedures and arguments that can be used to remove or mitigate those penalties.  If you are an individual, or a business owner, and have a clean filing history, you may qualify for an administrative “first time penalty abatement”.  The IRS will not automatically apply this penalty relief – you have to ask. 
 
If you do not qualify for automatic first-time penalty abatement, there are still options available.   The IRS typically reviews penalty abatement cases by considering “reasonable cause”, and in certain circumstances also considers “good faith”. Treas. Reg. § 301.6651-1 provides that, to avoid the penalties for failure to file a return or pay taxes, a taxpayer must “make an affirmative showing of all facts alleged as a reasonable cause” for such failure.  If it is determined that the delinquency “was due to a reasonable cause and not to willful neglect, the addition to the tax will not be assessed.”  To avoid the penalties asserted for an accuracy related penalty under IRC 6662, Treas. Reg. § 1.6664-4 states, “No penalty may be imposed under section 6662 with respect to any portion of an underpayment upon a showing by the taxpayer that there was reasonable cause for, and the taxpayer acted in good faith with respect to, such portion.” 

Treas. Reg. § 301.6651-1 further provides that reasonable cause can be shown if the taxpayer exercised ordinary business care and prudence but was nevertheless unable to pay taxes or file tax returns on time, or would have suffered an undue hardship had the taxpayer completed their return on the due date.  Treas. Reg. § 1.6161-1 describes an “undue hardship” as “more than an inconvenience to the taxpayer,” stating that “[i]t must appear that substantial financial loss, for example, loss due to the sale or property at a sacrifice price, will result to the taxpayer for making payment on the due date of the amount with respect to which the extension is desired.”
 

Dickinson Wright attorneys have assisted clients in the abatement or compromise of millions of dollars of taxes, penalties, and interest.  A specially prepared cover letter and supporting documentation with an IRS Form 843, prepared by an experienced tax professional, is the best chance at having an IRS penalty removed or reduced.  And if that does not succeed, then be sure to talk with your attorney about how to deal with IRS collections.  Even if the penalty remains, there are ways to arrange for the payment over time or in special circumstances to have the government write-off the amounts due through an offer-in-compromise. 
 

For more information, please contact Leighton Koehler in the Las Vegas, Nevada office at 702-550-4449.

Monday, August 7, 2017

Section 338(h)(10) Election – S Corporation Stock Sale Treated as Asset Sale

By: Brian Kim

Generally, a buyer in a stock sale does not obtain a step-up (or down) in the basis of the acquired corporation’s assets, unlike in an asset sale. However, if the acquired corporation in a stock sale is an S corporation, an election may be available under Internal Revenue Code § 338(h)(10), pursuant to which the stock sale will be treated as a deemed asset sale for federal tax purposes. For buyers of S corporations desiring the benefits of a stock sale for non-tax purposes and the benefits of an asset sale for tax purposes, a § 338(h)(10) election can be a valuable tool. 

In order to make a valid § 338(h)(10) election, among other requirements, a “qualified stock purchase” must occur. A qualified stock purchase generally means a purchase of 80% or more of voting power and value of the acquired corporation’s stock within a 12 month period. A “purchase” for this purpose does not include any transactions resulting in a carry-over basis in the stock purchased, such as a § 351 exchange or a gift transaction, or any purchase by a related corporation within the scope of § 318 attribution rules.  

In an acquisition involving equity rollover by the selling stockholders of the acquired corporation, if not correctly planned, the equity rollover can preclude a valid § 338(h)(10) election. A straight forward example of an ineligible transaction is an equity rollover of greater than 20% of the acquired corporation’s stock. A less obvious but equally fatal example is a transaction in which the rollover stockholders holding 20% or more of the acquired corporation’s stock roll over 20% or less of the stock. In such case, if not properly structured, the rollover may be characterized as a § 351 exchange and may fail to qualify as a “purchase”. Therefore, a buyer considering a stock sale with a § 338(h)(10) election should consult with its tax advisor to ensure that the deal will be properly structured to be eligible for a § 338(h)(10) election.

 
For more information, please contact Brian Kim in the Columbus, OH office at 614-591-5464.

Monday, July 31, 2017

A Will Must Be Signed, Right?

By: Jeff Ammons


Wrong.  In a recently published case, the Michigan Court of Appeals took what has previously been taken as fact – that a will needs to be signed for it to be admitted to probate – and turned it on its head.  In In re Estate of Attia, 317 Mich App 705 (2016), the Court held that under Michigan law a will does not have to be signed in order to be admitted to probate, so long as the proponent of the will establishes by clear and convincing evidence that the decedent intended the document to be her/his will.   

This holding will inevitably be misconstrued as turning what was meant to be a very small exception to the will signing requirement into a gaping hole.  So it will inevitably have practice implications for both estate planners and probate litigators alike.   

If you’d like to discuss In re Estate of Attia, or its potential implications, please feel free to contact Jeff Ammons in the Troy, Michigan office at 313-223-3122.

 

Thursday, July 27, 2017

U.S Tax Court Bounces Rev. Rul. 91-32: Sales of Partnership Interests by Foreign Partners May Not be Subject to U.S. Tax

By: Peter J. Kulick


The practice of tax law is an exercise of statutory interpretation.  A recent opinion of the U.S. Tax Court, Grecian Magnesite Mining, Indust. & Ship. Co. v. C.I.R., 149 T.C. No. 3 (July 13, 2017), is illustrative.  Grecian Magnesite is also a highly anticipated decision that resolves a lingering debate over the proper U.S. tax treatment of the sale of a U.S. domestic partnership interest by a foreign partner.[1]  Grecian Magnesite held that a foreign partner’s sale or exchange of an interest in a U.S. domestic partnership may (mostly) be excluded from U.S. income tax.  In arriving at its conclusion, the Tax Court rejected a controversial Revenue Ruling, Rev. Rul. 91-32, 1991-1 C.B. 107.

Grecian Magnesite
involved the redemption of a foreign partner’s interest in a Delaware limited liability company, Premier Chemicals, LLC (“Premier”).  Grecian Magnesite Mining (“GMM”), the foreign partner, was domiciled in Greece and engaged in foreign mining activities.  Its sole U.S. activity consisted of owning a membership interest in Premier.  Premier was engaged in the business of mining magnesite at mines located throughout the U.S.  In 2008, Premier agreed to redeem GMM’s membership interest in a transaction that ultimately produced $6.2 million in gain.  Taking the position that the gain was not U.S. sourced or ECI of a U.S. trade or business, GMM did neither reported the gain nor paid U.S. tax on the gain.


A foreign business can be subject to U.S. taxation if it either has U.S. sourced income that is “fixed or determinable annual or periodic” income (so-called “FDAP income”), or the foreign business is engaged in a U.S. trade or business during a taxable year and has ECI of the U.S. trade or business.[2]

Rev. Rul. 91-32 and its Controversy

Rev. Rul. 91-32 was controversial since the date it was released some 26-years ago.  The controversy stemmed from the Internal Revenue Service’s position to treat a domestic partnership as an aggregate, rather than an entity.  By applying an aggregate approach, the Service treated a foreign partner’s sale or disposition of an interest in the partnership as if the foreign partner sold a portion of each asset owned by the partnership.  As a result, when turning to the income-sourcing rules of the Internal Revenue Code of 1986, as amended (the “Code”), the Service concluded that any gain was U.S. sourced and subject to U.S. tax.

For the astute partnership tax attorneys, the Service’s argument in Rev. Rul. 91-32 harkened back the historic policy debate of whether an entity or aggregate approach should be used in determining the U.S. tax of partnership activities.  Under an entity approach, the partnership is treated as an entity on to itself.  In contrast, the aggregate approach views each partner as a co-owner of the partnership assets.  With the enactment of Subchapter K of the Code,[3] Congress opted to mostly apply an entity approach to partnership taxation.  Exceptions exist to the entity approach.  The exceptions force the application of an aggregate approach to certain items of partnership taxation.  The treatment of unrealized receivables and inventory items under Section 751 of the Code is one example where the aggregate approach predominates.

To understand why applying the aggregate approach to a foreign partner was controversial, it is helpful to understand how Subchapter K treats the sale or exchange of a partnership interest.  Code Section 741 offers a general rule that a sale or exchange of a partnership interest “shall be considered as gain or loss from the sale or exchange of a capital asset.”[4] 

Payments received upon a redemption and liquidation of a partnership are treated as the same a sale or exchange; however, the legal analysis requires weaving through three separate Code sections.  First, Code Section 736(b) addresses the treatment of payments received by a partner upon liquidation of the interest.  That section provides that liquidating payments are considered a distribution by the partnership.  Second, the flush language of Section 731(a) provides that any gain or loss recognized upon a distribution shall be treated “as gain or loss from the sale or exchange of the partnership interest of the distributee partner.”   Third, since Section 731(a) directs that a distribution is to be treated as a sale or exchange of a partnership interest, Code Section 741 is operable.  As noted above, Section 741 directs that a sale or exchange of a partnership interest is treated as a sale of a capital asset.

Turning back to Rev. Rul. 91-32, the Service’s decision to apply an aggregate approach meant that the source and effectively connected income (“ECI”) character of the gain on the foreign partner’s deemed sale of the partnership’s assets was U.S. source income of a U.S. trade or business with a fixed place of business in the U.S.  According to the Service, since the gain was U.S. sourced income of a U.S. trade or business, the gain recognized by the foreign partner was subject to U.S. tax.[5]

The Grecian Magnesite Decision

Rev. Rul. 91-32 had long been the bane to many tax attorneys.  Not only did most tax lawyers disagree with the Service’s strained interpretation of the tax law, there were several practical concerns.  Most foreign partners exiting a U.S. trade or business were unlikely to willingly comply with Rev. Rul. 91-32.  From the foreign partner’s perspective, it was questionable whether the Service had jurisdiction to enforce payment of the purported tax.  From the U.S. partnership perspective, it could face back-up withholding obligations and concerns with respect to its own consequences if it failed to comply with a back-up withholding obligation.[6]

From a partnership tax perspective, Grecian Magnesite confirms that the entity approach applies to the sale or redemption of a partnership interest -- even if the selling partner is a non-U.S. partner.  From a statutory interpretation perspective, the court’s conclusion is not surprising.  As outlined above, the plain language of the Code would seem to dictate the exact outcome reached by the Tax Court.

After concluding the redemption of the partnership interest was a sale of a capital asset, the Service’s path to taxing GMM’s gain was to convince the Tax Court that the gain was ECI of a U.S. trade or business of Premier.[7]  What was the trade or business of Premier?  Was GMM’s gain on the sale of its membership effectively connected with Premier’s trade or business?  Whether the gain was ECI ultimately turned on the proper income sourcing of the gain.

The Code default rule sources a gain arising from the sale of personal property to outside the U.S. if the gain is recognized by a non-U.S. resident.  Alternatively, gain can be sourced to a U.S. office if the U.S. office is a material factor in the production of income and the U.S. office regularly carries on activities of the type from which such gain is derived.  While engaging in a technical application of the Code’s income sourcing rules, the important take-away is that the Tax Court concluded GMM’s gain from the sale of an interest in a U.S. partnership was foreign-sourced.  Thus, the gain was not subject to U.S. tax, unless another specific tax law exception applied. 

An exception did applying to a portion of GMM’s gain -- which GMM conceded during trial -- that cause a portion of the gain to be subject to U.S. tax.  The exception dealt with the Foreign Investment in Real Property Tax of 1980 (so-called “FIRPTA”) rules, which cause the direct or indirect sale of U.S. real property interests to be subject to U.S. taxation.

Planning Opportunities

Grecian Magnesite settles the debate with regard to the proper U.S. tax treatment of a foreign partner’s sale of an interest in a U.S. partnership.  In many instances, any gain may properly be characterized as foreign-sourced income. 

Grecian Magnesite also demonstrates traps for the unwary remain.  The entity approach to partnership taxation can be called-off in some instances.  The consequence is that all or a portion portion of a gain derived from the sale of a partnership interest would be subject to U.S. taxation.  For example, the FIRPTA rules cause a direct or indirect sale of a U.S. real property interest to be subject to U.S. income tax.  For those structuring a foreign partner’s sale of its interest in a U.S. partnership, Grecian Magnesite provides certainty with respect to whether the gain can be taxed in the U.S. and also warns the tax planner that individual assets of a partnership still need to be examined to assess whether, and the extent of, U.S. tax exposure.




[1]               A “partnership” as used in this article refers to entities classified as a partnership for federal tax purposes, including multi-member limited liability companies.  The terms “partnership” and “LLC” are used interchangeably.


[2]               It is noteworthy to stress that the second mechanism for a foreign business to have U.S. tax exposure is tested on an annual tax year basis and is not a permanent taint.


[3]               The mostly entity approach was originally adopted by Congress with the enactment of the 1954 version of the Internal Revenue Code.  The entity approach continued with subsequent enactment of the 1986 Code.


[4]               Code Section 741 continues by acknowledging a caveat to the capital asset treatment of a sale of a partnership: “except as otherwise provided in section 751 (relating to unrealized receivables and inventory items.”  The Tax Court in Grecian Magnesite did point to this caveat in rejecting the Commissioner’s argument that the aggregate approach should apply to a foreign partner’s sale of a partnership interest by pointing out that Congress could have called off the entity approach by specifically directing an aggregate approach to apply such as was done by cross-referencing Code Section 751. 


[5]               The courts and the Service both agreed that a different result is reached if the entity is a C corporation.  In the context of the sale of stock of a C corporation by a foreign partner, the Service had conceded that gain would not be U.S. sourced and, thus, not subject to U.S. taxation. 


[6]               There was likely not a basis under the U.S. tax law to impose a withholding tax on proceeds paid to a foreign partner that sold its interest in a U.S. partnership.
 


[7]               The Code attributes the trade or business of a partnership to the foreign partners.  Thus, a foreign partner is treated as if it directly conducts the trade or business of the partnership.

_____________________________

Peter Kulick (Member, Lansing) is a tax attorney with wide ranging experience representing clients in transactional matters. Peter's tax practice focuses in the areas of tax-exempt bonds issuances, tax-advantage financings, partnership taxation, mergers and acquisitions, and cross-border tax planning. In addition, Peter has significant experience representing clients in administrative and regulatory matters, real estate development, gaming law, and general business transactional matters.  Peter may be contacted in our Lansing office at 517-487-4729.

Monday, July 24, 2017

Health Saving Accounts: An Underutilized Opportunity in a Time of Uncertain Healthcare Changes

By: Peter Domas

Regardless of whether there will be revisions to, repeal of, or no changes at all to the Affordable Care Act, patients will most likely continue to have a larger financial responsibility for their medical care.  This is true whether the insurance is provided through an employer, purchased individually, or offered through Medicare, all of which will likely continue to pass to their beneficiaries higher deductibles and co-pays that must be paid by the individuals when receiving care.  

A health savings account (HSA) offers individuals participating in high-deductible health insurance plans (currently a deductible of $1,300 for an individual, and a deductible of $2,600 for a family) the opportunity to save pretax dollars and use these funds tax-free to pay for qualified medical expenses.  While Medicare beneficiaries cannot contribute to an HSA, funds saved prior to enrolling in Medicare can be used for Medicare expenses in retirement. Unused funds rolling over from year to year and can be invested similar to a 401(k).  

While Health Savings Accounts have been around since 2004, and are gaining in popularity, they are still significantly underutilized by eligible individuals. In 2016, only 20 million individuals (less than 10% of the population) were enrolled in an HSA, only a 3.4% increase from the prior year. In addition, at the end of 2015 the average HSA balance was only $1,844, with individuals under 25 averaging only $759 and individuals over 65 averaging $3,623 in savings. This low amount of savings is staggering given estimates of healthcare expenses in retirement, which can exceed $250,000.  

The low utilization also demonstrates a significant missed opportunity for not only planning for future healthcare expenses but also tax savings which could significantly increase resources available in retirement. HSAs provide an unusual triple tax advantage of allowing a tax deduction upon contribution, deferred taxes on growth of the investment in the plan, and a tax free withdrawal for qualifying healthcare expenses.  Most tax deferred savings programs provide for only two of these three benefits.  For example a 401(k) or an IRA allow for a tax deduction on contributions and deferred taxes on growth, but distributions from the plan are taxed. Roth IRAs require after tax contributions, but allow for growth and distributions tax free.   

As an additional benefit, HSA’s allow for distributions to cover non-medical expenses after age 65 without a penalty.  The funds distributed will receive a similar tax treatment to a 401(k) or IRA, i.e. taxed on distributions. As a result, an HSA can function as a back-up retirement saving plan, and can be useful to increasing tax deferred contributions when an individual’s contributions to a 401(k) or IRA have met tax deductible limits. In fact, because of the triple tax benefits and possible taxable withdraw on non-medical expenses in retirement, a good case can be made that contributions to an HSA should be maxed out prior to contributions to other retirement plans.  

Not all individuals qualify to participate in an HSA.  Individuals should consult their employee benefits representative and their tax professional to determine whether they could qualify for an HSA and any tax benefits from contribution to an HSA.
 

For more information, please contact Peter Domas in the Troy, Michigan office at 248-433-7595.

Monday, July 17, 2017

IRS Scrutiny of Plan Loans Increases, But IRS Provides Helpful Guidance

By: Eric W. Gregory

The Internal Revenue Service has increased its level of scrutiny on the limitations imposed on participant loans from defined contribution retirement plans. Internal Revenue Code Section 72(p) generally limits a participant’s plan loans to a total of $50,000 or half of the participant’s vested balance, whichever is smaller. Additionally, this limit is reduced by the participant’s highest outstanding balance of loans during the calendar year prior to the day any new loan is made. This limit is intended to prevent participants from constantly maintaining a $50,000 loan balance. 

In a recent memorandum to IRS Employee Plans Examination employees, the IRS provided two acceptable methods of making this determination, using the following example: 

A participant borrowed $30,000 in February, which was fully repaid in April, and $20,000 in May, which was fully repaid in July, before applying for a third loan in December. The plan may determine that no further loan would be available, because $30,000 plus $20,000 equals $50,000. Alternatively, the plan may identify “the highest outstanding balance” as $30,000, and permit the third loan of $20,000. This assumes that to meet other Section 72(p) requirements, the participant has a vested accrued benefit of more than $100,000, and the loan is repayable in 5 years and requires substantially level amortization. 

The memo indicates that examiners are to determine whether the defined contribution plan has calculated the “highest outstanding loan balance” in one of the two ways as provided in the example if the defined contribution plan has made two or more loans to the same participant during a calendar year.
 

For more information on plan loans, please contact EricGregory at egregory@dickinsonwright.com or 248-433-7669, or any other member of the Employee Benefits group.