Monday, April 24, 2017

DRAFTING IN THE DETAILS

By: Emily Dorisio


The Fifth Circuit Court of Appeals recently affirmed that the devil really is in the details in a case that illustrates the importance of ensuring that deal documents accurately reflect the parties’ agreed upon terms with respect to a transaction.   In Makric Enterprises, Inc. v. CIR, No. 16-60410 (5th Cir. 2017), Makric and its shareholders negotiated a sale of Alpha Circuits, Inc., a wholly owned subsidiary of Makric.  After execution of a letter of intent and preparation of initial document drafts, Makric and its shareholders renegotiated the structure of the sale with buyer.  The deal documents were revised, but failed to accurately reflect the renegotiated structure.  Makric and its shareholders did not report the sale as reflected in the deal documents on their respective tax returns – they reported the transaction based on the renegotiated structure.  The discrepancy resulted in an assessment of additional tax and penalties against Makric of more than $3.4 million.  Makric sought to have the Tax Court reform the transaction from the transaction set forth in the deal documents to the renegotiated structure on grounds of mutual mistake, but the Tax Court refused and the Fifth Circuit agreed with the Tax Court. 

This case illustrates the importance of structuring a deal for maximum tax efficiency and following that up by making sure that the structure is accurately reflected in the deal documents.  If you would like more details about this case or need assistance with a transaction, please contact Emily Dorisio in the Lexington, Kentucky office at (859) 899-8714. 

Thursday, April 20, 2017

STRUCTURING A PARKING REIMBURSEMENT PLAN AS A TAXABLE OR TAX-FREE FRINGE BENEFIT

By:  Cyndi Moore


In Information Letter 2017-0007, the IRS analyzed an employer’s parking reimbursement arrangement and concluded that it was not a tax-free fringe benefit.
The employer purchased parking spots from a parking vendor near the employer’s office and offered employees the opportunity to use the parking spots.  Those employees who elected to use the parking spots were required to pay the employer by having the monthly parking fee deducted from their paychecks, on an after-tax basis, in the month prior to using the parking spot.  The parking fee was less than the statutory limit for qualified parking of $255 per month.  Employees asked the IRS whether they could exclude the parking fee from their income as a “qualified parking benefit” under Section 132(f)(1)(C) of the Internal Revenue Code.

The IRS concluded that the arrangement was not a “qualified parking benefit” because the deductions were made from employee pay on an after-tax basis.  The employer could have made the arrangement a tax-free benefit in one of two ways:

(1)       The employer could have reimbursed the employees for the amounts paid by each employee for parking (up to the monthly limit of $255); or
(2)       The employer could have allowed the employees to pay the cost of parking on a pre-tax basis by offering the employees a choice between cash and a parking benefit through a “compensation reduction arrangement.”  In this type of arrangement, the employee would make his or her election in the month preceding the month in which the parking spot was used, and then payroll deductions for parking expenses would be made in that month.
The employer in this case was clearly trying to give employees a benefit by making parking spots available to them, but it could have been an even better benefit if the employer had structured the arrangement as a qualified parking benefit. 

If you have any questions, please contact Cyndi Moore of our Troy office at 248-433-7295.  Ms. Moore and Will Elwood are the co-authors of BNA Tax Management Portfolio No. 395, "Employee Fringe Benefits." 

Monday, April 17, 2017

Michigan’s 2017 Property Tax Assessment Appeal Deadlines Are Approaching

By:  Bob Rhoades


Wednesday, May 31, 2017, is the deadline for filing 2017 petitions with the Michigan Tax Tribunal for property tax appeals involving commercial real property, industrial real property, developmental real property, commercial personal property, industrial personal property, or utility personal property valuation appeals.  Board of Review protests are not required to appeal the assessed value of these types of property.

Monday, July 31, 2017, is the statutory deadline for filing petitions with the Tax Tribunal for property classified as agricultural real property, residential real property, timber-cutover real property, or agricultural personal property.  Board of Review protests are required to appeal the assessed value of these types of property.

The 2017 property tax assessment can be appealed whether or not the assessment was increased this year.  Assessment notices mailed in late January show both the “assessed value” (SEV) of property, which should not exceed 50% of fair market value, and taxable value (TV), which is often “capped” at the previous year’s TV plus inflation, unless there is a transfer of the property.     Property owners and managers should consider an appeal when the assessed value is higher than 50% of market value and the reduction would also reduce TV.  

Recent sales of the property or comparable properties that suggest a lower value are often persuasive evidence of value.  Also, changes in the condition of the property adversely affecting value are sometimes unknown to the assessor or overlooked, and can warrant an adjustment.   

 

For further information, contact Bob Rhoades in the Detroit office at (313) 223-3046.

 

Monday, April 10, 2017

RECENT TAX COURT CASES SERVE AS REMINDER OF TAX RISKS OF SHAREHOLDER GUARANTEES OF LOANS TO S CORPORATIONS



Two recent Tax Court cases are reminders that shareholder guarantees of loans to an S corporation do not generally create basis that can be used by the shareholder to deduct losses.  Under Internal Revenue Code §§1366(d)(1)(A) and 1366(d)(1)(B), an S corporation shareholder can only deduct a prorata share of deductions and losses of an S corporation to the extent of the shareholder’s adjusted basis in stock in the S corporation and the adjusted basis in any debt payable by the S corporation to the shareholder.  Under regulations promulgated under that Code section, a guarantee of debt of the S corporation does not create basis unless the shareholder actually makes a payment on such indebtedness and then only to the extent of such payment.  Reg. §1.1366-2(a)(2)(ii).  Because of these rules, practitioners generally discourage the use of S corporations to own real estate or any business in which the shareholders anticipate the need to borrow money to finance operations (particularly in the startup phase of any business in which tax losses are anticipated).

 In Franklin, TC Memo 2016-2017, the Tax Court found that where the assets of a sole shareholder of an S corporation who had personally guaranteed debt of the corporation were seized and sold by a creditor of the corporation after the corporation had defaulted on the debt, the shareholder was entitled to include in basis that could support losses of the corporation the amount the creditor received from the sale of the seized assets.  However, no basis could be claimed for the remaining unsatisfied debt of the corporation after sale of the assets.  Philip J. Franklin, the taxpayer, had guaranteed indebtedness that was owed by FDI, his wholly owned S corporation, to a third party, ACRO.  After FDI’s default in repayment of this debt, which was originally in excess of $1.7 Million, ACRO seized and sold Mr. Franklin’s assets for $496,000, leaving a remaining balance of $500,000 on the guaranteed loan.  In concluding that $496,000 in cost basis was created by virtue of the sale but that the taxpayer had no basis in the remaining $500,000 of the loan, the Tax Court gave the taxpayer credit for the $496,000 since by virtue of the levy and sale, he had in essence paid that portion of the guaranteed debt.  However, the taxpayer had not made any payments on the remaining $500,000 of FDI’s debt to ACRO.  Thus, the taxpayer could deduct up to $496,000 in FDI losses in the year of seizure and sale of the assets.

In another case, Tinsley, TC Summary Opinion 2017-9, the Tax Court rejected the taxpayer’s argument that the rule of “no basis in guaranteed debt of S corp until paid” should not apply to debt of an S corporation owed to a bank that was renewed in the name of the S corporation after the corporation had dissolved and liquidated and was no longer in existence under corporate state law.  The taxpayer had argued that in Selfe, 57 AFTR 2d 86-464 (11th Cir. 1985), the Eleventh Circuit found that a guaranty of a loan to an S corporation “may be treated for tax purposes as an equity investment in the corporation where the lender looks to the shareholder as the primary obligor (emphasis added).”  The Tax Court in Tinsley found that the taxpayer had failed to establish that the bank looked primarily to the taxpayer and not to the S corporation borrower or that the taxpayer had made direct payments to satisfy the loan (as the Tax Court in Franklin had found took place as discussed above).  Even though after the liquidation of the corporation, the loan was renewed in the name of the (then defunct) corporation and payments were made to service the loan after its renewal, the taxpayer had not submitted sufficient proof that he had made the payments personally.  For that reason, the Tax Court found that the taxpayer did not have sufficient basis to deduct the reported business losses.

These two cases remind us that in structuring debt used to finance an S corporation, shareholders cannot use personally guaranteed entity level debt to support losses generated by the S corporation.  One alternative would be to finance the S corporation through a so-called “back to back” loan, i.e., a loan by a bank or other third party lender to the shareholder, who then reloans the monies to the S corporation.  Loans of this type will create cost basis that can be used by the business owner to support the deductibility of tax losses of the S corporation.

 

For more information, please contact Ralph Z. Levy Jr. in the Nashville, TN office at 615-620-1733.

 

Friday, April 7, 2017

April 18, 2017 is the Deadline to Make Contributions to a Health Savings Account for 2016


By: Deb Grace

If you were eligible in 2016 to make contributions to a Health Savings Account (H.S.A.) and you have not already made the maximum contribution for the year, you have until April 18, 2017 to make your contribution.  Unlike other IRS deadlines, requesting an extension to file your federal income tax return does not extend the deadline for making your 2016 H.S.A. contribution. 

An individual is eligible to make contributions to an H.S.A. if he or she is covered by an eligible high deductible health plan and is not covered by any other medical insurance, including Medicare.  The maximum contribution for 2016 is $3,350 for an individual with single coverage for the full year, and $6,750 for family coverage for the full year.  An eligible individual who is age 55 or older in 2016 may make an additional contribution of $1,000.  If you have family coverage and both you and your spouse are age 55 or over, you each can make a $1,000 catch-up contribution, but each individual must make the catch-up contribution to his or her own H.S.A.  

Eligible contributions to an H.S.A. are tax deductible when made, and tax-free when used to pay for medical expenses.  You are not required to use your H.S.A to pay for current medical expenses, but instead may invest the funds to pay for future medical expenses.  An H.S.A.’s investment gains are not taxed currently, and are never taxed if they are used to pay for qualified medical expenses.

Since everyone’s situation is different, you will want to discuss these rules with your tax advisor.  If you are considering maximizing your 2016 H.S.A. contribution, you will want to act quickly, since your H.S.A. provider may require some advance processing time to ensure that your 2016 contribution is credited to your account by the April 18, 2017 deadline. 

 

For more information, please contact Deb Grace in the Troy, MI office at 248-433-7217. 

Monday, April 3, 2017

LLC Membership Interest Purchase Treated As Asset Purchase



A buyer of a business often will prefer to purchase assets rather than equity interests in order to, among other things, obtain a step-up in the tax basis of the assets of the business equal to its purchase price.  The buyer will then be able to realize the tax benefit of recovering its cost through depreciation and amortization of the assets.  Conversely, the seller typically prefers to structure the transaction as a sale of equity interests for both tax and non-tax reasons.

There are several tax rules which operate to treat acquisitions of equity interests as asset purchases (giving the buyer the tax benefit associated with an asset purchase).  One such rule is set forth in IRS Rev. Rul. 99-6.

IRS Rev. Rul. 99-6 provides that if a buyer acquires 100% of the membership interests in a multi-member LLC (classified as a partnership for federal income tax purposes), the the buyer will be treated, for federal income tax purposes, as if it purchased all of the assets of the LLC and will receive a cost basis in the assets equal to its purchase price.  The purchase price will be allocated among all of the underlying assets of the LLC.  The sellers will be treated as selling the membership interests (not the assets) for federal income tax purposes.  Such a structure can be a win-win for both the buyer and seller.


If you have any questions or would like to discuss other ways in which an acquisition of equity interests may be treated as an asset purchase, please contact Troy Terakedis in our Columbus, Ohio office at 614-744-2589.

Monday, March 27, 2017

IRS Will Not Require Response to Qualifying Health Coverage Line on 2016 Form 1040 Filings



 
Individuals completing their 2016 IRS Form 1040s will recognize the question asking if they, their spouses and dependents had qualifying health care coverage in 2016 (Form 1040 line 61, Form 1040A line 38, Form 1040EZ line 11).  This question relates to the Affordable Care Act’s (“ACA”) requirement that individuals have health care coverage or pay a tax penalty (with some exceptions) known as the Shared Responsibility Payment (SRP).  In 2014 and 2015, the IRS did not reject tax returns that failed to respond to this coverage question.  In contrast, for 2016, the IRS had planned to reject returns that did not respond to this question.

On January 20, 2017, President Trump issued an executive order allowing government agencies to waive any part of the ACA that would impose a tax penalty or regulatory burden on individuals or families.  In response, the IRS stated that, as in past years, it will not reject a 2016 tax return if the qualifying health care coverage question was not answered. 

Despite this, the individual health coverage mandate is still the law and individuals without qualifying health care coverage who cannot claim an exemption would still owe the SRP. However, without the Form 1040 information, the IRS has no direct way to know whether a taxpayer had coverage or paid the SRP for 2016.  The IRS stated that it would follow up with taxpayers if it has questions about their returns.  Any taxpayer considering not fully complying with qualifying health coverage requirements should consult with their tax advisers.

For more information, please contact Jordan Schreier in our Ann Arbor, Michigan office at 734 -623-1945