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Important Notice: This presentation has been prepared by Varnum LLP for informational purposes only and does not constitute legal advice. Copyright © 2013, Varnum LLP. All rights reserved.
IRS Enforcement Escalates and Morphs
Bank Secrecy Act Blindsides Cash Businesses
Offshore Enforcement Update
Eric M. Nemeth
IRS Enforcement Escalates and Morphs
Bank Secrecy Act (BSA) blindsides cash business;
Offshore accounts and FACTA Offensive;
Sane Taxpayer responses;
IRS Enforcement Has Gone Global
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IRS – CI Fiscal Year 2013 (3rd Quarter – Oct. 2012 – June 2013)
Investigations Initiated 4,119
Prosecution Recommendations 3,250
Information/Indictments 2,877
Convictions 2,336
Average Months to Serve 44
Source – CI Management Information System
Trends Point to Longer Sentences for White Collar Crimes “Madoff Effect;”
Are federal judges sending a message to white collar defendants?
More prosecutions and longer sentences highlight the need for early and realistic intervention and defense.
Clients need to be realistic about exposure and defense;
Preparers and representatives (non-lawyers) do not have privilege in criminal matters.
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Spousal and family exposure;
Confidentiality waiver concerns;
Conflict of interest;
Beware of finger-pointing and the “race” to the courthouse.
The traditional tax enforcements remain;
There is a new front in the war;
It is global.
The Bank Secrecy Act (BSA)
BSA requires U.S. financial institutions to assist U.S. government agencies to detect and prevent money laundering.
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Cash purchases of negotiable instruments (money orders, bank checks, etc.);
File reports of cash transactions exceeding $10,000 (daily aggregate amount);
Report suspicious activity and might signify money laundering, tax evasions or other criminal activity;
Wires from Offshore and going overseas.
The largest user of BSA data is…
IRS - CI
The BSA and the enforcement issues are a hazard regardless whether your client fully and properly reports and gross income, expenses and net income or even pays the full and correct tax;
This is a form over style situation.
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FinCEN is a Bureau within the Treasury Department that: Maintains a government-wide database of financial
transaction information;
Analysis and dissemination of information in supporting of law enforcements investigatory professionals at the federal, state, local and international levels;
Serves as the financial intelligence unit of the United States;
Carries out regulatory responsibilities.
Structuring – Nemeth’s Definition – handling cash deposits to avoid the over $10,000 “bank paperwork;”
Example: Day One: $9,900 deposit (cash)
Day Two: $9,900 deposit (cash)
Day Three: $9,900 deposit (cash)
Day One: 9:30 a.m. $6,000 deposit (cash)
Day Two: 2:30 p.m. $6,000 deposit (cash)
Day One:
Branch “1” $5,000 deposit (cash)
Branch “2” $6,000 deposit (cash)
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These examples are from real world scenarios. Usually this activity is repeated multiple times.
Practice tip: It is irrelevant what type of relationship your client has at the local financial institution or with the branch manager.
Sophisticated computer programs many levels above the branch level will spot unusual deposit activity and the financial institution will report the information – the financial institution gets it charter to operate from the government – end of debate.
FinCEN reports that it receives over 15 million BSA reports annually;
Electronic banking leaves permanent and easy footprints to follow.
Your client may (maybe not) get a warning either from the local financial institution about their deposit activity;
Your client may (maybe not) have their accounts unilaterally closed by the local financial institution;
Your client may learn about the “problem” when checks start bouncing and two (2) criminal special agents walk into the business as the government as seized the money.
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Federal Law (Title 31, § 5317) provides that the government may seize and forfeit property involved in violation of certain structuring laws (amongst others);
See ached article from an upcoming Michigan Business Lawyer Quarterly.
Practice Points to Save Your Client Grief
Explain to them that there is no “tax” on cash deposits over $10,000;
Explain to them that all of their banking activity is tracked;
If your client has a business with cash transactions, insist on reviewing bank statements for cash deposit activity; If there are no cash deposits…(warning);
If the cash deposits look suspicious (not your filter but the government’s or banks…(warning);
If the cash deposits do not track the business activity (warning).
It is a fact that more and more transactions are cashless with the rise of debit cards;
The best evidence is the consolidation of armored car businesses and standing in line at Starbucks or McDonalds and customers are “swiping” their cards for a $4.00 purchase. Grocery stores – forget about it.
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Your client better be able to show a legitimate source for cash of the magnitude that we are discussing and that the receipt of the cash tracks reasonably well to their deposit history.
The attached reports demonstrate the legal hurdles and challenges to just try and get the money back much less avoid prosecution. Civil forfeiture can be a slow and costly process.
To quote the brilliant tax philosopher Mr. Miyagi from Karate Kid I, II, III, and IV etc.:
“The best way to avoid a punch – no be there.”
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As tax professionals, the challenges grow every day as computerized tax enforcement, coupled with a loss of patience with financial crimes, provide an impetus for more enforcement.
Important Notice: This presentation has been prepared by Varnum LLP for informational purposes only and does not constitute legal advice. Copyright © 2013, Varnum LLP. All rights reserved.
Offshore Accounts – A RationalNuanced Perspective and Action Plan
Paul L. B. McKenney
We all have clients who . . .
Inherited assets from relatives’ abroad.
Were born abroad and have offshore bank, investment and other accounts.
Own income-producing real estate offshore.
The hard core “hide it in a Swiss bank” crew (there are more of them than you think and they didn’t tell you about it before).
Welcome to the brave new FATCA world…
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Undisclosed Offshore Accounts are the IRS’s
Number One Enforcement Target This has been the often-articulated statement of the last two
Presidents, a plethora of Congressmen and women, Commissioners, IRS Chief Counsel, and heads of Criminal Investigations.
The Treasury has put considerable resources behind this.
In the last few years, the Government has achieved previously unimaginable success. The hide it in Switzerland (or the Bahamas, etc.) days are over.
In September, the G20 voted to go to FATCA-type automatic electronic reporting among the 20 leading industrial nationals. Many other nations have been forced into bilateral
information exchange agreements with the United States.
Can government use Internal Revenue Code (Title 26 ) enforcement tools in FBAR (Title 31) investigations?
Yes, Hom v. United States, 112 AFTR 2d 2013-XXXX (N.D. Calif. 09/30/13).
Administrative summons and use of resultant information permissible even if Agents did not follow express Internal Revenue Manual requirement of obtaining a “related party determination” to use Title 26 information for FBAR investigation.
This is consistent with uniform harsh judicial treatment of offshore account holders.
Basic Reporting Obligations Include:
If aggregate accounts offshore exceed $10,000 in a year, there is a requirement to file an FBAR.
Those pesky “yes, no” questions at the bottom of Schedule B on Form 1040.
Form 8938, Statement of Specified Foreign Financial Assets, accompanies Forms 1040, 1041, 1120, 1120-S and 1040-NR.
This is in addition to FBARs.
Foreign assets must exceed threshold amount (i.e. $200k single
TP, $400k married filing joint)
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Basic Reporting Obligations Include (continued):
Form 3520 re: transactions with foreign trusts and receipt of foreign gifts. Example: U.S. beneficiary.
Form 3520-A for certain foreign trusts with U.S. owner.
Form 5471 regarding controlled foreign corporations.
Form 8621 re: PFIC shareholder.
Form 8891 re: Beneficiaries of Canadian registered retirement plans. Also see FAQ # 54.
Did your client report all of their income? If yes, potential FAQ 17 and 18 relief (i.e. no
penalties, file delinquent returns) under the current Offshore Voluntary Disclosure Program, or “OVDP.”
If no, it’s a far longer discussion and OVDP needs to be seriously investigated.
n.b. - “all” ≠ most or almost all. The IRS position for certain administrative relief is all.
QUESTION: Why would anyone ever go into the OVDP (i.e. amnesty, but at a price) when there is a penalty of 27.5% of the highest principal balance in the last eight years amended returns and 20% penalty, etc.?
ANSWER:
The alternatives are far, far worse.
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What Does Taxpayer Receive For Entering & Completing OVDP?
Criminal – No orange jumpsuit. The sentences have been severe, generally in the 60 to 100 month plus range.
Civil – 27.5% of highest balance in last eight years non-disclosure
penalty (versus 50% per year max outside OVDP). In certain di minimis situations the penalty is only 5% or 12.5%. See FAQs 52 and 53, respectively.
File amended returns for last eight years, and pay tax, interest and 20% accuracy related penalty.
Criminal
Failure to file an FBAR - Five year incarceration max/$500k fine, per year. 31 U.S.C. § 5322.
Plain old tax evasion is a five year per count felony. IRC § 7201(1).
Filing a false return is a three year felony and $250k max fine per year. IRC § 7203.
Failure to file is a mere one year per count and up to a $25k individual fine or $100 for corporation.
Civil Penalties are Draconian Failure to file annual FBAR penalty if “willful” is the greater of
$100k or 50% of the total balance of the foreign accounts per violation. 31 U.S.C. § 5321(a)(5).
More about “willfulness” later.
Failure to file Form 8938 penalty is up to $10,000 per year.
Failure to file Form 3520, Annual Return to Report Transactions with Foreign Trusts Receipt of Certain Foreign Gifts, penalty is up to 35% of gross amount reportable, with an exception for gifts where it is 5% a month for a gift with a 25% cap. IRC § 6048.
There are also substantial penalties for failing to file Form 3520-A, Form 5471, and myriad other reporting violations.
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To file an OVDP and later “opt out” is a question
of whether it was “willful”? (or 50% of principal vs. mere $10k cap)
The case law regarding what constitutes “willfulness” is simply horrible from a taxpayer perspective.
The question - Is it “willful” within the meaning of 31 U.S.C. § 5321(5)(C)?
The Williams case – United States v. J. Bryan Williams, 110 AFTR 2d 2012 – 5298 (4th Cir. 7/20/12).
There is an interesting discussion of “willful blindness” regarding Schedule B and myriad other issues. Read the opinion for the intense review of facts and circumstances.
Continued . . .
United States v. Sturman, 951 F.3d 1466, 1476-77 (6th Cir. 1991) held that willfulness may “be proven through inference from conduct meant to conceal and mislead sources of income or other financial information. . . ”). In plain English, no “depends what is is…”
United States v. McBride, 110 AFTR 2d 2012-5298 (D.UT Nov., 2012) intensely examined the Form 1040 and other facts and circumstances.
The case law is clear. A wealthy individual who says in essence, “My accountant has all the information and I just sign what he or she puts in front of me” is penalty-wise a dead duck.
Continued . . .
Starting with the first OVDP in 2009, a non-negotiable part of the program has been transparency with taxpayers giving up the identities and considerable other information about the professionals, onshore and offshore, who helped them hide the money. The IRS has now identified the facilitators and understands how they operate.
Sentences to date have been very harsh settling in the five to ten year range.
You don’t want to play ball with the U.S., then . . .
The oldest private bank in Switzerland, Wegelin & Co., was indicted in February, 2012 and promptly forced out of business.
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Current OVDP Program
No expiration date, IRS can pull plug at any time.
If eligible, and if taxpayer completes the program, then: No criminal prosecution (27.5% of the highest account
balance in the last eight years penalty). There are some de minimis lower penalty exceptions.
All delinquent returns, FBARs, Forms 3520, etc. filed and all income tax, plus a 20% penalty, and interest are paid.
See www.irs.gov/uac/2012-Offshore-Voluntary-Disclosure-Program for forms, FAQs, documents, etc.
The FAQs layout how the program operates and is essential reading for anyone involved in an OVDP.
What about “quiet disclosure?”
Quiet disclosure means file past due returns and do nothing about the past omissions and other problems hoping the IRS does not discover them.
In 2009 the Commissioner, Chief Counsel and Criminal Investigation loudly and repeatedly announced that quiet disclosure is dead. See FAQ #16 re similar pronouncement in current OVDP.
There is a six year criminal statute and no civil statute for fraud.
Circular 230 obligations require you and I to tell clients to rectify past shenanigans, and we “must advise the client of the consequences…” See § 10.21.
If taxpayer goes into OVDP (and the government doesn’t pull the plug first) then . . .
Step 1 – Taxpayer submits pre-clearance to learn if eligible. FAQ 23.
Step 2 – Criminal Investigation sends a fax and either checks the “Yes” box on eligibility or the “No” box. If Yes box checked, then taxpayer has 45 days from the date of that fax to submit their OVDP package. Taxpayers can also request and are virtually automatically granted up to an additional 90 days to submit the voluminous OVDP package. If “No” box checked, then life becomes far more interesting.
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Continued. . .
Step 3 – Submission of ODVP package.
Step 4 – Service gets back relatively quickly if the paperwork as submitted preliminarily looks O.K.
Step 5 – Sometime, probably 12 to 15 months later, a specially trained Agent stationed from somewhere else in our country is assigned a “certification” of the accuracy and completeness of the voluntary disclosure.” See FAQ 27.
Transparency by the taxpayer is a non-negotiable requirement.
What would I tell a friend or relative who confided in me today that they had unreported offshore accounts?
There is a 99% probability that my strident advice is to fax in an OVDP Pre-Clearance Request before the sun sets.
There is considerable uncertainty of when the Service pulls the plug on the current OVDP program.
The government has been good to its word beginning with the first OVDP that if there is another one, then the terms become harsher. There is also no guarantee of a future amnesty, or the current one continuing.
Continued . . .
Question: Out of well over 50 who have entered various voluntary disclosure programs since the first in 2009, how many have regretted it?
ANSWER: Absolutely none!
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Important Notice: This presentation has been prepared by Varnum LLP for informational purposes only and does not constitute legal advice. Copyright © 2013, Varnum LLP. All rights reserved.
Hot Gift and Estate Tax Issues –Turning Red Flags Green
Michael J. Mulcahy
Estate and Gift Tax Credit equal to $5,250,000;
Adjusted for inflation each year.
IRS Staffing
One Estate and Gift Tax Attorney in Michigan;
Michigan returns could be assigned anywhere;
Most Michigan returns go to Ohio for examination.
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IRS Audit Program
As many 706 returns as they can handle;
As many 709 returns that have potential for change;
Close look at closely held stock valuations.
Portability returns are not being examined;
When second spouse files, both returns will be examined.
Gift Tax Annual Exclusion
$3,000 1981 and Before
$10,000 1982 – 2001
$11,000 2002 – 2005
$12,000 2006 – 2008
$13,000 2009 – 2012
$14,000 2013
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Example of gift by husband and wife to son and daughter-in-law:
Two (2) Donors and Two (2) Donees
Four (4) exclusions per year
$56,000 x 10 years = $560,000
$560,000 x 0.40 = $224,000
Estate Tax Savings
Crummey Case
Gifts in trust with power to withdraw amount equal to annual exclusion;
No demand ever made;
Tax Court: Beneficiaries had an absolute right to and amount equal to the annual exclusion amount. 68-2 USTC ¶ 12,541.
Christofani Case
Same basic facts as Crummey;
Five (5) grandchildren added as contingent beneficiaries with withdrawal rights;
Grandchildren were not likely to receive anything. 97 TC 74 (Acq).
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Action on Decision: Treasury
Still resisting Crummey and Christofani “must be given notice.”
Turner Case
Life insurance trust;
Payment made by insured directly to insurance company;
No notice to beneficiaries;
Tax Court: annual exclusion available. TC Memo 2011-209.
Private Annuities
Self-canceling installment note;
Example: Senior Generation (80 years old) sells a $3MM parcel of
real estate to son and daughter-in-law;
Life expectancy 9 to 10 years
Payments are $300,000 per year plus interest.
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Advantage of Private Annuity
If 80 year old lives three (3) years, son and daughter-in-law get a $3MM parcel for $900,000 plus small amount of interest. Saves transfer tax on $2,100,000.
Disadvantages
If 80 year old lives to 95, beneficiary has paid $4,500,000 for a $3MM parcel;
Income tax issues must be addressed.
Self-Cancelling Installment Note
Same $3M parcel must increase face of note or interest rate to reflect self-canceling feature.
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Must Pass an Arm’s Length Test
Example: Interest only with balloon at end of term;
IRS Letter Ruling 2013-330033.
Seller must have a 50-50 chance of living a year;
Ideally, the seller should have a life expectancy of more than a year and less than the mortality tables;
Again, income tax issues.
Estate of Costanza
6th Circuit, Estate of McLendon, 135 F.3rd 1017 (1998)
5th Circuit
All decided cases depend on facts developed during exam.
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Important Notice: This presentation has been prepared by Varnum LLP for informational purposes only and does not constitute legal advice. Copyright © 2013, Varnum LLP. All rights reserved.
Review That Estate Plan: Important Steps to Take Now!
Thomas H. Bergh
Remember the Basics:
Annual Exclusion Gifts: $14,000
Postability vs. Credit Shelter (Bypass) Trust; Basis step-up vs. exclusion of future appreciation;
Asset protection aspects (entireties property)
Recalculate Cost/Benefit Analysis
Does family entity still make sense in 5.2M (x 2) unified credit environment?
Make sure trust formula clauses still make sense;
Is spousal share smaller than anticipated?
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Make Hay While the Sun Shines
Low interest rates: Intra Family Loans;
“Loopholes”: Treasury wish list targets short-term GRATs, discount entities, grantor trust treatment.
Important Notice: This presentation has been prepared by Varnum LLP for informational purposes only and does not constitute legal advice. Copyright © 2013, Varnum LLP. All rights reserved.
Learning to Live With (if Not Love) the 3.8% Net Investment Income Tax
Thomas H. Bergh
1. What is it? §1411 Tax (“1411 Tax”)
3.8% Rate: Income Tax (not deductible like SE Tax).
“Net Investment Income” (“NII”).
Threshold of Application Individual: $200,000 AGI.
Joint Return: $250,000 AGI.
Estates and Trusts: All Undistributed NII that is subject to highest marginal rate (over $11,950 for 2013).
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2. Components of NII
Specified Income: Gross income from interest, dividends, annuities, royalties, rents, and other passive income.
Covered Business Income: Gross Trade or Business Income: Derived from trading in financial instruments or
commodities.
Earned in a §469 Passive Activity.
Produced from investment of working capital.
2. Components of NII (Con’t)
Covered Gain: Net Gain from dispositions of property other than from business income other than Covered Business Income.
“Net”: Aggregate “II” can be reduced by deductions allowable to the investment income or gain. All other Code limitations are applicable, such as itemized
deduction limits of §§67 and 68.
Excluded items: Cash value life insurance; IRA/Retirement Plan distributions; municipal bond interest; wages and SE income.
3. Computation: Basics
Step 1 - Determine NII.
Step 2 - Determine AGI over applicable threshold.
Step 3 - Apply 3.8% rate to lesser of results from Steps 1 and 2.
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4. Computation: Nuances
Grantor Trusts are disregarded entities.
Other trusts: Only undistributed NII is considered. Normal Subchapter J rules apply in determining whether distributions carry out NII to the beneficiary.
Trust administration expenses: Unique expenses reduce both AGI and NII. Others are subject to 2% floor.
DNI calculation generally excludes capital gains, “trapping” them at trust level (and increasing trust NII) unless a position can be developed to treat capital gains as trust accounting income.
4. Computation: Nuances (Con’t)
What does the Trust document say!
Excluding capital gains from DNI is arguably unfair to beneficiaries not in top brackets.
Amount subject to 642(c) by being permanently set arise for charity reduces undistributed NII, but not AGI.
Charitable Remainder Trust. Trust itself is exempt, but distribution to non-charitable lead beneficiary may carry out NII depending on character: NII treated as distributed first.
5. Material Participation by Trust
If the Fiduciary, in its capacity as such, so participates in the business directly, or through an entity owned by the Trust.
Requires Fiduciary’s regular, continuous and substantial involvement.
“Fiduciary” must be vested with discretionary power to act in order to be considered for these purposes.
Corporate trustee: Look-through to “actual decision-makers,” so a bank-trusteed trust will typically be considered passive unless another fiduciary (special trustee) makes business decision.
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6. Trusts Holding S Corp Stock
Grantor Trust: Disregarded – look to “Grantor”.
QSST: Single beneficiary Trust: Logically, the beneficiary’s material participation should be determinative.
ESBT: Special treatment under 1411 Regs: First: Treat S and non-S portions as separate “trusts”.
Second: Compute NII separately, and then combine to
determine undistributed NII.
Third: Calculate combined AGI.
Fourth: Pay 1411 tax on lesser of total undistributed NII; or excess ESBT AGI over highest bracket threshold ($11,950 for 2013).
7. Planning
Trusts should factor in exposure to the 1411 tax in determining amount of appropriate distributions to beneficiaries.
Example: Discretionary Trust has $120,000 of NII. Beneficiary has $40,000 of salary income. If distribution made, 1411 tax will be ø.
If accumulated, 1411 tax will be $4,105.
Consider §645 election of non-calendar taxable year to postpone exposure.
Manage investments to reduce NII.
Important Notice: This presentation has been prepared by Varnum LLP for informational purposes only and does not constitute legal advice. Copyright © 2013, Varnum LLP. All rights reserved.
Rescission: No Harm, No Foul
Katie K. Wilbur
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Ever Want To Do Something Over?
Motivations For Rescission Can Be:
Non-tax reasons such as:
Mistake of fact or law,
Results were opposite of expectations,
Unanticipated events, and/or
Tax motivated triggers include:
Faulty tax planning,
Subsequent legislation, Regulations, Rulings, cases, etc.
In Golf, It is Called a Mulligan
In tax, it goes by rescission.
Neither the Code nor Regulations address specifics of when a transaction or
series of transactions may be unwound.
January 2012:
the IRS announced that it was suspending any rulings on the tax
consequences of unwinding via rescission pending the issuance of further
guidance
June 2013:
the IRS Associate Chief Counsel, William Alexander, announced that the IRS
was abandoning the guidance project and that the no-ruling policy would stay
in place
Consequently, rescission in 2013 is still guided by a 1980 Revenue Ruling:
33 years later, Rev. Rul. 80-58 is still the “Rosetta Stone” of rescission.
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The Basics of Revenue Ruling 80-58
The following must occur in and be effective for the same tax year:
The transaction the taxpayer seeks to void through rescission
The rescission agreement
All transactions and payments implementing the rescission and return to status quo
The rescission must be irrevocable.
The parties to the rescission must be the original parties to
the transaction.
The parties must be restored to their original position.
The Tax Mother Lode – Rev. Rul. 80-58
All of the requirements on the prior slide are mandated under this Revenue Ruling. The operative word is “all”, which does not mean some or
most.
Successful rescission: Releases contracting parties from further obligations to each other,
Restores parties’ positions back to the status quo that existed before
the rescinded transaction occurred
IRS continues to issue PLRs allowing expansive and complicated rescission transactions.
Service’s Flexibility in Granting Relief
Can taxpayers unwind or rescind transfers of
ownership interests that effectively change tax
status of entities themselves, such as from C
corporation to S corporation or to partnership tax
status?
The answer is many cases is “yes” as long as the
prerequisites of Rev. Rul. 80-58 are followed.
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Simple Example – Family Installment Sale
Earlier this year the husband and wife sold stock, which they expected would substantially appreciate, for $100X appraised fair market value to their children and trusts for their grandchildren. This transaction was undertaken for as part of their estate plan. Unfortunately, instead of appreciating, the stock has substantially declined in value to $30X. Consequently, the stock does not produce adequate income for the children/trust for grandchildren to pay the husband and wife and does not further the intended estate planning goals.
Think “Dewey Defeats Truman” of estate planning.
A Simple Example (continued)
Take a tax mulligan? Yes, just undo the transaction to take advantage of the rescission doctrine.
1. Execute a timely rescission agreement during the year in which the transaction occurred under which the parties rescind, revoke and void the prior installment sale transaction.
2. Ensure that all security documents and promissory notes are effectively voided ab initio so that the parties are released from further obligations under the various documents.
3. Return payments and instruments of transfer so that there is a return to status quo ante.
A More Complicated Example: PLR 200952036 A limited partnership with different lines of business assumed
that potential investors would prefer investing in a corporation rather than a partnership. Consequently, the partnership was incorporated. The corporation did not attract investors, and the owners wanted to rescind the incorporation transactions.
The Service ruled that the conversion of the partnership into a corporation could be rescinded via conversion of the corporation into an LLC taxed as a partnership, provided that the rescission occurred in the same tax year as the incorporation, the parties were restored to a status quo ante,
and all Rev. Rul. 80-58 criteria were satisfied.
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Results of the rescinded transaction?
The incorporation never, ever happened for Federal income
tax purposes.
Because there was no incorporation, there were no taxable
transactions stemming from the incorporation.
The partnership was treated as a partnership at all times in
that tax year.
A More Complicated Example (continued)
See also:
“New IRS Rulings Approve Rescission Transactions that
Change an Entity’s Tax Status, Banoff, Journal of Taxation,
July, 2006,
PLR 200613027, and
“Recession of Incorporation Approved Despite Use of LLC
Rather Than Limited Partnership,” Journal of Taxation,
March, 2010.
What If Rescission Occurred In Year Two?
Rescission won’t work:
The initial transaction is treated as a completed transaction
for tax purposes.
The rescission transaction in year two has independent tax
consequences
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Rescission’s Role in Maintaining S Corporation Status
Rescission is the proverbial back-up parachute for S
Corporation status.
For example, what if an S corporation issues a second class
of stock and is no longer eligible for S corporation status?
PLR 200533002 allows for rescission relief.
Unanswered Questions Regarding Rescission
There are still some lingering questions regarding how to use
rescission.
For example:
Does it matter that the only motivation for unwinding a
transaction is tax avoidance?
Where parties to a potential rescission have different tax
years, whose tax year controls?
Timing is Everything.
Rescission of 2013 transaction must be executed and implemented for a calendar year taxpayer on December 31st.
Practical advice – Start now because the time for rescission is running out!
Start working on not only the Rescission Agreement, but also, all necessary transactions to effect status quo ante
These status quo transactions must occur this tax year to rescind an earlier 2013 transaction or series of transactions.
Talk to your clients now about doing this, and seek competent experienced assistance to effectively rescind appropriate transactions.
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Conclusion
Step 1
Consider transactions clients have entered into this year
that might be appropriate candidates for rescission.
Step 2
Begin informal discussion ASAP with clients about
rescission, and what it would entail.
Step 3
If the decision is to rescind, then start ASAP as it must be
consummated before the end of 2013.
Important Notice: This presentation has been prepared by Varnum LLP for informational purposes only and does not constitute legal advice. Copyright © 2013, Varnum LLP. All rights reserved.
Fixing Faulty "S" Elections And Rev. Proc. 2013-30
Evan H. Kaploe
Supersedes the relief provisions included in Rev. Procs. 2003-43, 2004-49 and 2007-62 for taxpayers to make a late "S" corporation election, QSST elections, QSub elections
This Rev. Proc. provides the exclusive relief for late elections, QSST elections and QSub elections and late corporate elections which the taxpayer intended to take effect on the same date that taxpayer intended that an "S" corporation for the entity should take effect.
Effective September 2013
96
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Scope
This revenue procedure expands and consolidates relief provisions included in prior revenue procedures that provide a simplified method for taxpayers to request late elections for the previously mentioned entities
Provides procedures in lieu of the letter ruling process ordinarily used to obtain relief for a late “S” election
User fees do not apply to corrective actions under this revenue procedure
An entity that does not meet the requirements or is denied relief under this revenue procedure may seek relief by requesting a letter ruling (as described in Rev. Proc. 2013-1)
97
General Requirements for Relief
The requesting entity intended to be classified as an “S” corporation, intended the trust to be an ESBT, intended the trust to be a QSST, or intended to treat a subsidiary corporation as a QSUB as of the Effective Date
Effective Date: the date on which the “S” corporation elections. ESBT election, QSST election, QSub election, or corporation classification election is intended to be effective.
The requesting entity requests relief under this revenue procedure within 3 years and 75 days after the effective date
The failure to qualify as a “S” corporation, ESBT, or QSub as of the effective date was solely because the Election Under Subchapter S was not timely filed by the due date of the Election Under Subchapter S; and
98
General Requirements for Relief (Cont.)
In the case of a request for relief for a late “S” corporation or QSub election, the requesting entity has reasonable cause for its failure to make the timely election under Subchapter S and has acted diligently to correct the mistake upon its discovery
In the case of a request for relief for an inadvertently invalid “S” corporation or an inadvertent termination of an “S” corporation election due to the failure to make the timely ESBT or QSST election
The failure to file the timely Election Under Subchapter S was inadvertent and the “S” corporation and the person or entity seeking relief acted diligently to correct the mistake upon discovery
Election Form: Form 2553 for "S Corporation" elections (including 301.7701-3)
Separate statements made by electing ESBT under 1.361-1(m)
Form 2553 and separate statements made by electing QSST under 1.361-1(J)
Form 8869 for QSub elections
99
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General Procedural Requirements for Relief
The requesting entity may request relief for a late Election Under Subchapter S by properly completing the Election Form(s) and attaching any supporting documents.
Reasonable cause for failure to timely file the Election, and
Its diligent actions to correct the mistake upon discovery.
The applicable Election Form must state at the top of the document
“FILED PURSUANT TO REV. PROC. 2013-30.”
File the Election Form with the IRS Service Center by either:
ATTACHING THE Election Form to the “S” corporation’s current year
Form 1120S (so long as filed within the 3 year, 75 day limit; does not
include extensions for filing);
100
General Procedural Requirements for Relief
(Cont.)
Form 1120S must state at the top “INCLUDES LATE ELECTION(S) FILED
PURSUANT TO REV. PROC 2013-30.”
Attaching the Election Form to one of the “S” corporation’s late filed
prior year Forms 1120S (same time limit applies); or
Filing Election Form independent of Form 1120S (time limit applies)
All supporting statements must be filed under penalty of perjury.
Multiple late Elections
If one or more Requesting Entities are seeking relief under this revenue procedure with respect to a single “S” corporation, all of the Election Forms can be filed at the same time using one of the methods described
101
Relief for Late "S" Corporation Elections
Form 2553 – a Requesting Entity seeking relief for a late “S” corporation election must file a completed Form 2553, signed by: An officer of the corporation authorized to sign, and
All persons who were shareholders at any time during the period that began on the first day of the taxable year for which the election is to be effective and ends on the day the completed Election Form is filed
Supplemental Materials The completed Election Form must include statements from all shareholders
during the period between the date the “S” corporation election was to have become effective and the date the completed Election Form is filed that they have reported their income on all affected returns consistent with the “S” corporation election for the year the election should have been filed and for all subsequent years
102
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Relief for Late "S" Corporation Elections
(Cont.) Additional Materials for a late corporate classification election
intended to be effective on the same date that the “S” corporation election was intended to be effective
In addition to the previous Supplemental Materials, it must include the
following representations:
The Requesting Entity is an eligible entity as defined in Treas. Reg. §
301.7701-3(a);
The Requesting Entity intended to be classified as corporation as of the
Effective Date of the “S” corporation status;
The requesting Entity fails to qualify as a corporation solely because Form
8832 was not timely filed or not deemed to have been filed
The Requesting Entity fails to qualify as an “S” corporation on the Effective
Date of the “S” corporation status solely because the “S” corporation election
was not timely filed pursuant to § 1362(b); and
103
Relief for Late "S" Corporation Elections (Cont.)
The Requesting Entity timely filed all required federal tax returns and information returns consistent with its requested classification as an “S” corporation for all of the years the entity intended to be an “S” corporation and no inconsistent tax or information returns have been filed by or with respect to the entity during any of the taxable years, or
The Requesting Entity has not filed a federal tax or information return for the first year in which the election was intended to be effective because the die date has not passed for that year's federal tax or information return.
Relief Where all returns Filed as an “S” corporation – the requirement for relief (under 4.02(2)) is not applicable in the case of corporations if the following conditions are met: The corporation is not seeking late corporation classification election
relief concurrently with a late “S” corporation election under this revenue procedure;
104
Relief for Late "S" Corporation Elections
(Cont.)
The corporation fails to qualify as an “S” corporation solely because the Form 2553 was not timely filed;
The corporation and all of its subsidiaries reported their income consistent with “S” corporation status for the year the “S” corporation should have been made, and for every subsequent taxable year (if any);
At least 6 months have elapsed since the date on which the corporation filed its tax return for the first year the corporation intended to be an “S” corporation; and
Neither the corporation nor any of its shareholders was notified by the IRS of any problem regarding the “S” corporation status within 6 months of the date on which the Form 1120S for the first year was timely filed; and
The completed Election Form includes the statements described
105
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Relief for Late ESBT and QSST Elections
The trustee of an ESBT or the current income beneficiary of a QSST must sign and file the appropriate Election Form, which includes the following statements: A statement from the trustee of the ESBT or current income
beneficiary of the QSST that includes the information required by Treas. Reg. § 1.1361-1(m)(2)(ii) for ESBT or §1.1361-1(j)(6)(ii) for QSST and that the income distribution requirements have been and will continue to be met;
106
Relief for Late ESBT and QSST Elections (Cont.)
In the case of an ESBT, a statement from the trustee that al
potential current beneficiaries meet the shareholder
requirements of § 1361(b)(1) and that the trust satisfies the
requirements of an ESBT under § 1361(e)(1) other than the
requirement to make the election;
Statements from all shareholders during the period between the
date the “S” corporation election was to have become effective
or was terminated and the date the completed Election Form is
filed that they have reported their income on all affected returns
consistent with the C corporation election for the year the
election should have been made and for all subsequent years
107
Relief for Late QSub Elections
Must file a completed Form 8869
Supplemental Materials The completed Election Form must include a statement signed by an
officer of the “S” corporation, which includes the supporting statements made under penalty of perjury;
The subsidiary corporation satisfies the QSub requirements of §1361(b)(3)(B); and
All assets, liabilities, items of income, deduction and credit of the QSub have been treated as assets, liabilities, and items of income, deduction and credit of the “S” corporation on all affected returns consistent with the QSub election for the year the election was intended to be effective and for all subsequent years
108
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109
110
111
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6527828_1.ppt
Important Notice: This presentation has been prepared by Varnum LLP for informational purposes only and does not constitute legal advice. Copyright © 2013, Varnum LLP. All rights reserved.
BREAK
Important Notice: This presentation has been prepared by Varnum LLP for informational purposes only and does not constitute legal advice. Copyright © 2013, Varnum LLP. All rights reserved.
State and Local Tax Update
Thomas J. Kenny
10/16/2013
39
1. INCOME TAX: COMBINED APPORTIONMENT
Malpass
Wheeler
Winget
2. USE TAX AND ADMINISTRATIVE CASES
Andrie
Musashi Auto Parts
NACG
Asahi
SMK
Fradco
3. CRIMINAL ENFORCEMENT
115
Income Tax: Combined Apportionment
116
Malpass v. Dep’t. of Treasury,
295 Mich. App. 263 (2012)
Malpass owns East Jordan Iron Works ("EJIW") which operates a
foundry in Michigan. In 1999, Malpass incorporated Anderson
Foundry Inc. ("Anderson").
Anderson's sole business activity is the operation of a foundry in
Ardmore, Oklahoma. The Malpass family owns 100% of the
Anderson stock.
Both EJIW and Anderson are S corporations.
Malpass filed Michigan individual income tax for 2001-2003 and
treated the business income as if from separate non-unitary
businesses. Income from EJIW was allocated to Michigan and
losses incurred by Anderson were attributed to Oklahoma and
added back to Malpass' adjusted gross income for Michigan tax
purposes.
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Malpass later filed amended income tax returns and treated EJIW and Anderson as unitary businesses and applied the Michigan apportionment factor to both businesses.
The combined apportionment methodology resulted in a $1M refund claim.
The Department asserted: (a) the ITA does not allow the unitary principle; and (b) the ITA does not permit a taxpayer to use a combined filing method based on the unitary business principle.
118
The Court of Claims held, in the absence of some underlying unitary business, multi-state apportionment is precluded.
The Court of Claims focused on the word "all" in MCL 206.115 and ruled that "all business income" must be added together and then apportioned by the apportionment factor.
The Court of Claims further ruled that if business income is earned from entities that do not operate in a unitary fashion, then the income must be apportioned at the entity level with each entity analyzed separately.
119
The Court of Appeals ruled a more consistent approach would be to apportion all business income at the entity level.
The taxpayers receive business income from 2 separate businesses. Therefore, they must apportion that income at the entity level.
Allowing the taxpayer to combine all their business income from separate entities and then apportion it using apportionment factors, or alternatively, requiring other similarly-situated taxpayers to do so would raise due process concerns and cause the ITA to be applied inconsistently.
120
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UBP / ENTITY LEVEL APPORTIONMENT / NO COMBINATION
121
Malpass
AndersonEast
Jordan
In re Estate of Thomas Wheeler,
Court of Appeals Docket No.: 302251 (July 31, 2012)
Wheeler was a shareholder in Electro-Wire Products, an S-corporation.
Electro-Wire acquired all the assets of a German business. Two general partnerships were formed:
1.TKG, the operating company held the assets; and
2.EWG, a holding company held a 99.5% partnership interest in TKG.
Electro-Wire held a 99% partnership interest in EWG and .5% partnership interest in TKG.
Wheeler reported their income by treating Electro-Wire and TKG as a unitary business and combining their apportionment factors.
122
The Department took the position: (1) the unitary business principle (UBP) did not apply to individuals under the Income Tax Act; and (2) Wheeler was required to apply the Electro-Wire apportionment factor to Electro-Wire income alone.
RULING:
Michigan law (Malpass case) does not allow separate entities to be treated as a unitary business in the absence of common ownership at the entity level.
Ownership by the same individual taxpayer is insufficient to trigger this relationship requirement.
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Wheeler’s factual pattern/structure is analogous to the Preston case:
TKG is 99% owned by EWG
EWG is 99.5% owned by Electro-Wire
Electro-Wire and TKG business relationship amounts to a
parent/subsidiary relationship
The income flowed to Wheeler solely from one source –Electro-Wire – not from 2 separate sources, as in the Malpass case. Therefore, combined apportionment is permitted.
NOTE: The Court also held the plain language of the ITA: (a) requires unitary, international
businesses to apportion their income and; (b) unitary, international businesses are
required to include international apportionment factors in the calculation of property,
payroll and sales factors.124
125
UBP / COMBINED PERMITTED
Wheeler
ElectroWire
99.5%
EWG99.5%
TKG
Malpass v. TreasuryMalpass v. Treasury, MI Supreme Court Docket No. 144430 (June 24, 2013)
Supreme Court Ruling The ITA does not prohibit individual taxpayers from
combining the profits and losses from unitary flow-through businesses and then apportioning that income based on combined apportionment
A foreign entity may also be included if it is unitary with the individual taxpayer's in-state business
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Analysis The Department argued that combined reporting is
prohibited because it is not expressly authorized for individuals
The Court held the Department's argument was flawed because the ITA does not expressly authorize either method of reporting
A provision in the ITA authorizing combined reporting is unnecessary for individuals because they are already required to aggregate all their income on a single return
127
The Department also argued that it has always been their policy to require separate-entity reporting
The Court noted that in the absence of the promulgation of a rule requiring separate entity reporting, an internal policy is non-binding and inconsistent with Section 115 of the ITA
128
Larry J. Winget and Alicia J. Winget v. Dep't. of Treasury,Mich. App. Docket No. 302190 (Oct. 16, 2012)
Mr. Winget was the sole shareholder of 3 multi-state business enterprises and the sole shareholder of 12 other businesses which operated solely in the State of Michigan. All the businesses were Sub S-corps.
In preparing the Michigan Income Tax returns, the accounting firm applied a three-factor apportionment formula at the shareholder level rather than at the entity level.
Winget had significant out-of-state loses, therefore, using a combined apportionment formula at the shareholder level minimized the amount of loss to be added back to taxable income.
Treasury disallowed combined apportionment at the shareholder level.
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Wingets' Theory: The Winget entities did not raise the unitary business theory.
Taxable income for Michigan Income Tax purposes is the same as taxable income under the IRC. (See MCR 206.2(3).)
For Federal tax purposes, a S-shareholder combines business income to determine taxable income.
Sections 112-115 of the Income Tax Act neither requires nor prohibits the combination of the factors for apportionment at the shareholder level.
UDITPA requires apportionment of business income. Some states focus on business income at the entity level while other states focus on business income at the shareholder level.
Tax Tribunal Decision: The Tax Tribunal rejected Wingets' theory holding combination at the shareholder level was not authorized by the ITA.
130
Court of Appeals Decision In following Malpass, the Court held:
Michigan law does not allow separate entities to be treated as a unitary business in the absence of common ownership at the entity level and being owned by the same individual is insufficient
Michigan Supreme Court:
On September 30, 2013, the Court issued an order reversing the Court of Appeals Decision and remanded the Winget case back to the Court of Appeals for further consideration
131
Use Tax and Administrative Cases
132
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Audit Methodology:Imposition of Use
Tax in a Sales Transaction
133
Andrie Inc. v. Department of Treasury,Court of Appeals Docket No.: 301615 (Apr. 26, 2012)
Andrie is engaged in the "marine transportation" and "marine construction" business. The marine transportation activities involve the shipping of asphalt to various customers in the Great Lakes area. Andrie shipped asphalt to various ports in Indiana, Wisconsin, Michigan, Illinois, Ohio, New York and Ontario.
During the tax years 1999 through 2006, Andrie made various purchases from retailers which were used in its business activities.
134
The Department conducted a use tax audit of Andrie and determined Andrie had purchased tangible property from Michigan retailers. Andrie, however, had no records to prove that sales tax was paid on the purchases.
The Department concluded that Andrie failed to pay use tax on certain transactions in the State of Michigan where it could provide no supporting documentation to show that sales tax had been paid.
The Court of Claims determined that, since the tangible
personal property was sold within the State, the transaction was only subject to sales tax.
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LAW:
The sales tax is imposed on the retailer for the privilege of engaging in the business of making retail sales. However, a retailer is not obligated to include the sales tax in the property's selling price, although the retailer has this option.
While the sales tax is ordinarily passed on to the purchaser at retail, the retailer is obligated to pay the tax due and bears the direct legal incidence of the sales tax. Additionally, the use tax exempts from taxation property on which sales tax is paid.
136
The Court of Appeals held there is no dispute that the transactions in question involve Michigan retailers and the transfer of title to the personal property occurred within the State of Michigan.
Because the retailer has the ultimate responsibility to pay sales tax, it is erroneous to place a duty on a purchaser to prove that the sales tax was paid to the State. Therefore, the transactions are not subject to use tax.
137
Musashi Auto Parts v. Dep't. of Treasury,Court of Claims Docket No.: 10-13-MT (2011)
Musashi rented uniforms from Gallagher Uniforms.
Gallagher issued an invoice to Musashi for the rental fee which did not include a line item charge for use tax.
The Department of Treasury, upon audit of Musashi, determined use tax should have been remitted by Gallagher for the reason Gallagher elected to pay use tax on rental receipts.
The Department, rather than auditing or making an attempt to collect use tax from Gallagher, included in Musashi's use tax base the rental charge for the employee uniforms.
138
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The Court of Claims Decision: When a lessor elects to pay tax on a lease transaction, the lessor is both the "consumer" and "seller" of the property and, therefore, is solely liable for use tax.
139
NACG Leasing v. Dep't. of Treasury,Court of Appeals Docket No. 306773
NACG purchased a DC-8 aircraft and simultaneously leased it to Murray Aviation
Treasury issued a use tax assessment of $414,000 on the purchase of the aircraft by NACG
The Tribunal affirmed the assessment and ruled NACG used the aircraft as the term is defined in the Use Tax Act
The Court of Appeals held that under the terms of the lease, plaintiff transferred control of the airplane and, therefore, could not have used the airplane
The lease, executed contemporaneously with purchase, transferred total control: repairs, maintenance, insurance, taxes, including use tax
140
Michigan Supreme Court: NACG Leasing – The Supreme Court granted Treasury's
Application for Leave to Appeal
Musashi – The Supreme Court held Treasury's Application for Leave to Appeal in abeyance pending its decision in NACG Leasing
141
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Asahi Kasei v. Dep't. of Treasury,MTT Docket No.: 309240 (2013)
The Company carried forward an investment tax credit (ITC) from 2002 and applied the ITC to its 2003 SBT liability.
The 2002 tax year had closed for tax refunds based on the four-year limitation period. MCLA 207.27a.
Treasury disallowed the ITC while claiming the ITC was, in substance, a tax refund.
The Appellate Court held the SBT characterizes excess ITC as a "carryforward" and specifically provides that excess ITC shall not be refunded.
The plain language of the SBT states an excess ITC is not refundable, therefore, the four-year limitations does not apply.
142
SMK LLC v. Dep't. of Treasury,Court of Appeals Docket No.: 306639 (Oct., 2012)
Fradco Inc. v. Dep't of Treasury,Court of Appeals Docket No.: 306617 (Oct., 2012)
The taxpayer, during the course of a sales tax audit, provided Treasury with a written request that all notices be sent to their representative.
Treasury issued a Final Assessment, which was sent only to the taxpayer. Later, a notice was sent to the representative (10 months later).
The taxpayer's representative, upon receipt of the notice, filed an appeal.
Treasury argued the Tax Tribunal did not have jurisdiction because 35 day appeal period expired.
The Court held MCL 205.8 imposes a mandatory duty on Treasury to send copies of notices to a taxpayer's representative. The appeal period does not commence until the representative receives notice.
NOTE: Michigan Supreme Court granted leave to appeal.
143
Criminal Enforcement
144
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Highly Regulated Industry
TOBACCO PRODUCTS TAX ACT
Strict Enforcement
Expansion of Michigan's Tax Enforcement Team
Increase in Administrative Inspections
145
146
ADMINISTRATIVE
INSPECTION
ContrabandTobaccoHearing
LicenseRevocation
Hearing
CriminalCharges
TaxAssessments
Enforcement Focus: Other Tobacco Products ("OTP")
Tax Rate: Cigars, Non-Cigarette Smoking Tobacco, and Smokeless Tobacco – 32% of Wholesale Price. MCL 205.427
147
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Types of Tobacco Licenses
Wholesaler – Purchases tobacco from manufacturer tax free.
75% of tobacco products sold to others for re-sale.
Maintains business location.
Secondary Wholesaler – Purchases tobacco from wholesaler or unclassified
acquirer.
All purchases are tax paid.
Maintains an established business location.
Sales are to retailers.
148
Unclassified Acquirer
A person who imports or acquires tobacco product from a source other than a Wholesaler or Secondary Wholesaler.
A person who purchases OTP directly from a manufacturer or a source outside the state.
149
Records
Licensee Requirements –
Complete and accurate record of tobacco product purchased
A licensee shall have all purchase orders, invoices shall be at the location where the tobacco is stored or offered for sale. MCL 205.426(1).
A retailer shall have accurate records substantiating purchases at the business location for a period of four (4) months from the date of purchase
150
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Administrative Inspection
All Licensees and Retailers –
All records shall be preserved for four (4) years and offered for inspection upon demand by the Department or its authorized agent. MCL 205.426(5).
151
Contraband Seizure
Tobacco products possessed or in control of a person in violation of the Act and any related books and records are contraband and may be seized/confiscated. MCL 205.429.(1).
If a tobacco product is found in possession of a licensee without: (a) proper markings on the shipping case; or (b) without invoices or other records – the presumption shall be that the tobacco is held in violation of the Act. MCL 205.426(b).
152
Contraband Hearing
A person claiming an interest in the property shall file a demand for hearing within ten (10) business days after receipt of the inventory state. MCL 205.429(3).
A hearing shall be conducted within fifteen (15) business days and a decision shall be issued within ten (10) business days after the hearing. MCL 205.429(3).
A person may appeal the Department's decision to the circuit court of the county in which the seizure occurred. The appeal must be filed within twenty (20) days.
153
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License Hearing – Special Taxes Division
The Department (Special Taxes) may revoke or refuse to renew a license for: (a) failure to comply with the Act; or (b) for any other good cause. MCL 205.425(1).
The Department shall conduct a hearing prior to a revocation and provide fourteen (14) days' notice. MCL 205.425(3).
154
Informal Licensing Appeal Hearing
A licensee, whose license has been suspended or revoked by the Special Tax Division, may be appeal the decision to the Department within twenty (20) days of the decision pursuant to MCL 205.21. MCL 205.425(4).
A decision shall be issued within forty-five (45) days of the request for hearing. MCL 205.425(4).
Further appeals to either the Tax Tribunal or the Court of Claims. MCL 205.22.
A business license is a property right.
155
Criminal Sanctions
A person who possesses, contrary to this Act, tobacco products other than cigarettes with a wholesale value of $250.00 or more, is guilty of a five-year felony.
If the wholesale value of the tobacco products is less than $250.00, then person is guilty of a misdemeanor.
156
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Statutory Interpretation by Department of
Treasury
The Michigan legislature, upon the enactment of 2011 PA 270,
prohibits the use of "instructions or interpretive statements" by an
agency to have the force or effect of law. MCL 24.232.
In Malpass v Dep't of Treasury, the Supreme Court noted that the
Department argued it had always required separate-entity
reporting and never approved combined reporting.
Although the Department had rule-making authority, in this case,
the Department had not promulgated a rule requiring separate-
entity reporting for individuals.
The Department asked the Supreme Court to adopt its preferred
methodology. The Court declined to engage in rule-making
because "to supply omissions transcends the judicial function."
157
Important Notice: This presentation has been prepared by Varnum LLP for informational purposes only and does not constitute legal advice. Copyright © 2013, Varnum LLP. All rights reserved.
Michigan Tax Update
John C. Ray, CPA
Revenue Administrative Bulletins
RAB – 2013-1
CIT
Unitary Business Group
Control Test
Relationship Test
159
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RAB 2013-9
Treasury Guidance on Nexus
Actively Solicits
Physical presence more than 1 day
Actively solicits sales in Michigan and has more than $350,000 in Michigan sales
Ownership interest in a Michigan flow-through entity
160
Internal Policy Directive 2013-1
SBT Personal Investment Activities
Follows amendment to the Revenue Act exempting personal investment activity from SBT
161
Internal Policy Directive 2013-2
Informal Hearing
Rebuttal to Hearing Referee Determination will be reviewed by Deputy Treasurer for Tax Administration prior to issuance
162
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Letter Ruling 2013-1
Cigarette Making – RYO
Deemed to be a manufacturer
163
Letter Ruling 2013-2 – Motor Fuel
CNG and Liquefied Natural Gas
Not Part of tax base – MF Tax
164
Letter Ruling 2013-4 – Motor Fuel
Butane and Propane
Not gasoline – not subject to road tax
Could be subject to tax if blended with gasoline
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Letter Ruling 2013 – MBT
Small Business Alternative Credit
Irrevocable Trust not subject to disqualifiers for distributive share of business income
Can be disqualified by gross receipts over $20M/business income over $1.3M
166
Michigan Income Tax
Same sex couples filing Joint Federal returns notallowed to file Joint Michigan return
167
Sales/Use Tax
Exemption – Rolling Stock – Interstate Carriers
Parts and other property affixed or to be affixed to and directly used in the operation of either a qualified truck or trailer to be drawn behind a qualified truck. Exempt from sales/use tax.
168
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Contractors/Manufacturer-Contractor
Two changes to contractors sending property another state for installations
Section 3a – "In this State"
Section 4o(7)(b) – Now qualify for IP exemption TPP
169
The Following Rules Have Been Rescinded
R 205.5 – Tangible Personal Property
R 205.9 – Sales for purposes of resale
R 205.23 – Records
170
The Following Rules Have Been Revised
R 205.1 – Sales tax licenses
R 205.8 – Consumer; use; conversion ←
R 205.15 – Trade-in deduction
R 205.16 – Returned goods
R 205.20 – General application
R 205.22 – Discounts
R 205.26 – Use tax registration
R 205.28 – Use tax included in gross proceeds
R 205.136 – Food for human consumption
171
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Important Notice: This presentation has been prepared by Varnum LLP for informational purposes only and does not constitute legal advice. Copyright © 2013, Varnum LLP. All rights reserved.
Nexus and the Power of States to Tax
Evan H. Kaploe
Mich. Const. Art. IX § 1
The legislature shall impose taxes sufficient with other resources to pay the expenses of government.
Income Tax
Sales/Use Tax
Property Tax
173
Constitution's Restrictions on State's Ability to Tax
Commerce Clause and Due Process Clause Fundamental requirements:
Commerce Clause Art. I, §8, cl. 3 – "Substantial Nexus"
Congress has the ability to address
Due Process Clause – "Minimum Contacts"
Nexus threshold ultimately subject to court's review
174
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Early Jurisdictional Cases
175
International Shoe Co., 326 U.S. 310 (1945)
Could the State of Washington require a Delaware corporation with its principal office in St. Louis, MO to remit an unemployment compensation tax
Supreme Court of Washington found the "regular and systematic solicitation of orders in the state by appellant's salesman" was sufficient to subject the corporation to be subject to the state's court
U.S. Supreme Court affirmed
176
World-Wide Volkswagen Corp., 444 U.S. 286
(1980) New York residents purchased an Audi in NY; had
an accident in OK
Supreme Court dismissed the distributor and the dealership
Foreseeability
Complete absence of marketing, sales, service, or any other contracts with OK
177
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Burger King Corp., 471 U.S. 462 (1985)
40 years after Int'l. Shoe, U.S. Supreme Court reviews the Florida long-arm statute that extends jurisdiction to the state based upon any person breaching a contract in the state
The district court upheld jurisdiction; the 11th Circuit reversed, finding the long-arm statute unconstitutional –"offending . . . fundamental fairness"
U.S. Supreme Court reversed the Circuit Court based on Rudzewicz, knowing that he was contracting with a corporation based in Miami, FL
His relationship cannot be viewed as random, fortuitous or
attenuated
178
Asahi Metal Industry Co., Ltd., 480 U.S. 102 (1987) Asahi manufactured tire valves in Japan, which were
sold to a Taiwanese manufacturer of tubes – there was a products liability suit in California from a sudden loss of air in a tube used in a motorcycle
Only question remaining is whether Asahi was subject to CA long-arm statute to indemnify the manufacturer of tubes (injured party settled out-of-court)
CA court asserted jurisdiction due to stream of commerce theory
U.S. Supreme court reversed
179
Quill Corp., 504 U.S. 298 (1992)
First case to distinguish between commerce clause and due process clause
Physical presence and separation of Commerce/Due Process Clauses
Remote sellers need physical presence before a state can require such seller to collect and remit its sales/use tax
180
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Commerce Clause Test
181
Complete Auto Transit, Inc. v. Brady,
430 U.S. 274 (1977)
Tax must apply to activity with substantial nexus to taxing state
Tax must be fairly related to the benefits provided by the state
Must not discriminate against interstate commerce
Tax must be fairly apportioned
182
Congressional Action
183
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PL 86-272, 15 U.S.C. §§ 381-84
Grants immunity from tax obligations for income taxes
Only applies to a "net income tax"
1. The solicitation of orders by such person, or his representative, in such state for sales of tangible personal property, which orders are sent outside the state for approval or rejection, and if approved, are filled by shipment or delivery from a point outside the state
2. The solicitation of orders by such person, or his representative, in such state in the name of or for the benefit of a prospective customer of such person, if orders by such customer to such person to enable such customer to fill orders resulting from such solicitation are orders described in paragraph 1
Wisconsin Dep't. of Revenue v. William Wrigley, Jr., Co., 505 U.S. 215 (1992)
Does not apply to sales and use taxes
184
Recent Due Process Cases
185
United Haulers Association, 550 U.S. 330 (2007)
Goodyear Dunlop Tires Operations v. Brown(2011)
J. McIntyre Machinery, Ltd. v. Nicastro (2011)
186
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Types of Nexus
187
Physical Nexus
Actual, physical presence within the state Quill Corp., 504 U.S. 2098 (1992)
188
Standard Pressed Steel v. Dep't. of Revenue,
419 U.S. 560 (1975)
The Court found nexus to impose a gross receipts tax on the in-state presence of only one employee operating out of his home office
Employee was not soliciting sales but worked with the company's principal customer to determine its product and sales needs and handled complaints
The Court held that while not soliciting sales, "made possible the realization and continuing valuable relations with the customer"
189
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Tyler Pipe Industries v. Washington Dep't. of
Revenue, 483 U.S. 232 (1987)
The activity of one independent contractor residing in the taxing state were sufficient to create a taxable presence in the state on behalf of the company to impose Washington's Business and Occupations Tax
Critical test by the Court
Tyler's sales representatives perform any local activities necessary for maintenance of Tyler Pipe's market and protection of its interest
190
AFFILIATE NEXUS
The notion that the in-state presence of a parent or sister corporation, standing alone, can create nexus for a separate out-of-state mail order vendor
This theory closely resembles piercing the corporate veil
191
The Country Shop, Inc. v. Limbach, No. 90-K-90 (Ohio B.T.A. 1993)
G.P. Group Inc. v. Director of Revenue, Nos. 91-002180RV, 92-00318RV, 92-00324RV (Mo. Admins. Hearing Commission 1993)
Consolidated Fuel Corp. v. Director of Revenue, No. 92-00230RV (Mo. Admin. Hearing Commission 1993)
Cherrydale Farms, Inc. v. Director of Revenue, No. 93-000983RV (Mo. Admin. Hearing Commission (1994)
192
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ECONOMIC NEXUS
193
Enacted/Approved Since 1997
California: Effective 1/1/11
Colorado: Effective 1/1/10
Connecticut: Effective 1/1/10
Michigan: Effective 1/1/08
New Hampshire: Effective 1/1/08
New York: Credit Card Nexus 1/1/08
New York City: Credit Card Nexus 1/1/11
Oregon: Effective 5/5/08
Washington: Effective 6/1/10
Wisconsin: Effective 1/1/09
194
Arguments for an Economic Presence Standard
for Net Income Tax
Reluctant affirmation of Bellas Hess and Quill
Acknowledgment that the Court may not decide the question the same way today were it to arise for the first time
No reliance or interests outside the direct marketing industry. No Store Decisions
Court Statement that has not applied a physical present standard to other taxes
195
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Geoffrey, Inc. v. South Carolina Tax Commission, 437 S.E.2d 13 (S.C. 1993)
Klucko v. California Superior Court, 436 U.S. 84, 96 (1978)
See also World Wide Volkswagen, Burger King andAsahi Metal
196
Click Through Nexus
197
Amazon.com, LLC v. New York Dep't. of Taxation and Finance;
Overstock.com v. New York Dep't. of Taxation and Finance
Amazon.com and Overstock.com waived right to challenge "as applied" commerce clause and due process claims
New York's top court only addressed whether the "click through" provision was facially unconstitutional under the commerce/due process clauses
With one dissent noting the affiliates were only passively advertising, the New York Court of Appeals upheld the law as being facially constitutional
Due Process: Purposeful directed activities
Commerce Clause: Mere truth slightest presence with website links
Cert filed with U.S. Supreme Court
198
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199
Cloud Nexus / Remote Sellers
200
Claims, 11/27/12), appeal filed, Thomson Reuters v. Dep't. of Treasury,
No. 313825 (12/14/12)
Is "Checkpoint" a taxable use in Michigan while servers are in Minnesota?
Court of claims granted summary judgment
Treasury argues Java Code and Java Script create nexus in state
Treasury also argues that "On Point," a CD-ROM was taxable, so why not Checkpoint?
Prewritten computer software is tangible personal property. MCL 205.92b(o)
Pending in Court of Appeals
201
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Hall v. Laronde, 2d Civil No. B107423 (CA Court of Appeals, 2nd
Appellate District, 8/7/97)
Hall, a Californian, reached out to Laronde, a New York business, with the idea of selling a software program
Parties continued to communicate by email and telephone to consummate arrangement
Court said "speed and ease of such communication had increased the number of transactions that are consummated without either party leaving the office"
The Court of Appeals held that Due Process minimum contacts nexus can be met solely through use of electronic transactions
Failed to address general jurisdiction of California courts
202
Cloud Computing
203
What is Cloud Computing
A model for enabling convenient, on demand network access to a shared pool of configurable computing resources, e.g., networks, servers, storage, applications and services that can be rapidly provisioned and released with minimal management effort or service provider interaction
Cloud Computing is not: Cloud Computing is: Any specific technology, such as VM ware ▪ An IT delivery approach that binds
or sales force together technology infrastructure, Virtualization applications, and internet connectivity as Outsourcing a defined, managed service that can be Grid computing sourced in a flexible way
Web listing ▪ Cloud computing models typically
leverage scalable and dynamic resourcesthrough one or more service and
Characteristics of Cloud Computing include: deployment models
▪ The goal of cloud computing is to provideeasy access to, and elasticity of,IT services
204
On-Demand
Self Service
BroadNetworkAccess
Resource Pooling
RapidElasticity
MeteredService
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Cloud Computing Models
Cloud services can be delivered using different service models, ranging infrastructure hosting to an entire application or service being provided as a service
The three most common service models used in cloud computing environments are SaaS, PaaS and IaaS
Software as Service (SaaS)
The capability provided to the consumer is to use the provider's applications (and services) running on a cloud infrastructure Reduce or eliminate application development effort
High adoption rate – any device, anywhere, any time
Lower up-front costs
E.g., SalesForce.com
205
Platform as a Service (PaaS) The capability provided to the consumer is to deploy onto the cloud
infrastructure consumer-created or acquired applications created using programming languages and tools supported by the provider Simplified software management (upgrades, patches, licensing, etc.) Simplified application deployment E.g., Google App Engine
Infrastructure as a Service (IaaS) The capability provided to the consumer is to provision processing,
storage, networks and other fundamental computing resources where the consumer is able to deploy and run arbitrary software, which can include operating systems and applications Cost reduction/pay as usage Scalability/dynamic resources allocation Reduced administrative overhead E.g., Rackspace
206
Characterization – License to Use TPP
Tangible Personal Property means personal property than can be seen, weighed, measured, felt, or touched or that is in any other manner perceptible to the senses and includes electricity, water, gas, steam and prewritten computer software. MCL 205.92(k)
Licensing Tangible Personal Property:
"'use' in the context of the Use Tax Act is not limited to physical actions
performed directly on the property. It includes any exercise of a right
that one has to that property by virtue of having an ownership interest
in it. Something need not necessarily be physically present in Michigan
for it to be 'used' in Michigan."
Fisher Co. v. Dep't. of Treasury, Nos. 280476, 280498 (Mich. App. Jan.
29, 2009)
207
6522814_1.ppt
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Important Notice: This presentation has been prepared by Varnum LLP for informational purposes only and does not constitute legal advice. Copyright © 2013, Varnum LLP. All rights reserved.
Affordable Care Act
What You and Your Clients Need to Know Now
Nancy L. Farnam
Affordable Care Act Overview
2014 – Most individuals will have health coverage
Individuals, employers, insurers and government
participate
Affordable Care Act Overview
Individuals - most everyone will be required to have
health insurance coverage or will pay a penalty
Health Insurance Marketplace (State Exchanges)
Employer sponsored
Medicaid/Medicare
Individual market
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Affordable Care Act Overview
Employers -
“Small” employers” are not required to provide coverage
But, may get tax credit if they do
In 2015, “large” employers won’t be required to provide coverage, but will pay a penalty if:
Don’t provide coverage
Provide coverage that doesn’t meet certain requirements
Affordable
Provide minimum value
Employer sponsored health coverage must meet certain requirements
Employers have new reporting and disclosure obligations
Affordable Care Act Overview
Insurance companies - subject to reforms intended to make
coverage more available and affordable
Coverage available to all employers and individuals that
apply
Can’t discriminate based on health status
Disclosure and review of rate increases
Restrictions on ability to vary rates
Must include “essential health benefits” and cost-sharing
will be limited
Affordable Care Act Overview
Government
Marketplace (State Exchanges) – one stop shopping for
individuals and small businesses to purchase coverage
Financial assistance available to certain individuals
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Employers - October 1 Notice of Exchange
Individuals may purchase coverage through the
Marketplace
Open enrollment starts October 1, 2013
Employers subject to the FLSA must notify all
employees about the Marketplace
Employers - Notice of Marketplace
Notice required on or before October 1, 2013 for all current
employees
After October 1, 2013, within 14 days of hire
DOL confirmed that there is no penalty for failure to provide
the notice
No relief from the requirement to provide the notice
Employers - Notice of Marketplace
Model notices available from Department of Labor
http://www.dol.gov/ebsa/
2 notices available
Employers that offer coverage
Employers that do not offer coverage
Also available in Spanish
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Individuals – Health Coverage Requirement
January 1, 2014
Most individuals must:
have health care coverage
have an exemption from coverage or
make a payment when they file their 2014 tax return in
2015
Individuals – Health Coverage Requirement Exemptions
Exemptions:
religious conscience objectors
individuals who are not U.S. citizens or nationals and who
are either nonresident aliens or not lawfully present in the
U.S.
incarcerated individuals
individuals who cannot afford coverage
Required contribution exceeds 8% of household income
Individuals – Health Coverage Requirement Exemptions
individuals who have a gap in coverage for less than a
continuous three-month period
individuals whose household income does not exceed the
threshold for filing a federal income tax return
members of a health care-sharing ministry
members of certain Indian tribes
individuals who are extended a hardship exemption as
determined by the Secretary of Health and Human
Services
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Individuals – Health Coverage Requirement
No penalty if have “minimum essential coverage”
government-sponsored program (e.g., Medicare, Medicaid,
the CHIP program, TRICARE, veterans benefits)
employer-sponsored coverage
health plan offered in the individual market
other health benefits coverage (e.g., State health benefits
risk pool) as HHS recognizes
Individuals – Health Coverage Requirement
If don’t have minimum essential coverage, or exempted from
coverage requirement individual will pay a penalty
The penalty is the lesser of:
The monthly national average bronze premium OR
Individuals – Health Coverage Requirement
The greater of:
Flat dollar amount
Assessed for each individual, spouse or dependent that is without coverage
Equal to lesser of
$95 for 2014; $325 for 2015; and $695 in 2016 and thereafter (half the amount for
individuals under age 18) or
300% of the applicable dollar amount
Excess income amount
Excess of income over filing threshold multiplied by the income percentage
1% for 2014, 2% for 2015, and 2.5% thereafter
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Individuals – Health Coverage Requirement
Example: In 2016, family of 5 (children ages 21, 15 and 10), no essential health
coverage, income of $250,000, filing threshold $24,000, annual national average
bronze plan premium for family of 5 is $15,000
Flat dollar amount, lesser of dollar amount for each individual or 300% of dollar
amount
$695 x 3 adults + $695/2 x 2 children = $2,780
$695 x 300% = $2,085
Excess income, income over filing threshold multiplied by applicable percentage
$250,000 - $24,000 x 2.5% = $5,650
Monthly penalty amount is $470.83 ($5,650/12)
Monthly average bronze premium is higher, so will not apply
Individuals – Health Coverage Requirement
The individual penalty is reported annually on the
individual's federal income tax return
If married and file a joint return, spouses are jointly liable
for the penalties that apply to either or both of them
An individual is responsible for the payment attributable to
a dependent’s lack of coverage
Individuals – Health Insurance Coverage Requirement
May purchase coverage through Marketplace
Open enrollment began October 1
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Marketplace
Marketplace
Individuals may purchase coverage
Small businesses may purchase coverage
Will determine eligibility for government financial assistance
https://www.healthcare.gov/
Michigan has partnered with the federal government
Premium Assistance and Cost Sharing Reductions
If individual and family does not qualify for Medicare or
Medicaid and is not offered health insurance through an
employer, a refundable tax credit or cost-sharing reductions
is available to help pay for coverage purchased through the
Marketplace
Marketplace determines eligibility for premium tax credit and
cost-sharing reductions
Premium Tax Credit
To assist individuals and families who do not qualify for
Medicare or Medicaid and are not offered health insurance
through an employer, a refundable tax credit is available
beginning in 2014 to help pay for coverage purchased
through the Marketplace
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Premium Tax Credit
Generally, eligible for the credit if:
buy health insurance through the Marketplace;
are ineligible for coverage through an employer or government plan;
are within certain income limits
generally, taxpayers with household income between 100% and 400% of the federal poverty line
file a joint return, if married; and
cannot be claimed as a dependent by another person
If individual is eligible for the credit, may choose to:
Get It Now: have some or all of the estimated credit paid in advance directly to insurance
company to lower monthly premiums during 2014
Must reconcile when file tax returns
Wait to get the credit when individual files 2014 tax return in 2015
Premium Tax Credit
During enrollment through the Marketplace, using
information provided about projected income and family
composition for 2014, the Marketplace will estimate the
amount of the Premium Tax Credit
Individual must report income and family size changes to the
Marketplace throughout the year
For any tax year, if individual receives advance credit
payments in any amount or plans to claim the premium tax
credit, must file a federal income tax return for that year
Cost Sharing Reductions
Some individuals and families will qualify for a cost-sharing
reduction subsidy to help with deductibles and co-payments
The cost-sharing reduction lowers the amount an individual pays
for out-of pocket costs like deductibles, coinsurance and
copayments
Plans in the Marketplace are separated into 4 different categories:
Bronze, Silver, Gold, and Platinum; these categories are based on
how much the plan pays for medical costs
Out of pocket savings apply only to Silver plans
If an individual qualifies, the individual will get the out-of-pocket
savings benefits of a Gold or Platinum plan for a Silver plan price
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PCORI Fees
ACA created a new nonprofit corporation, the Patient-Centered
Outcomes Research Institute, to support clinical effectiveness research
Funded in part by fees paid by certain health insurers and sponsors of
self-insured health plans
Insured plans – insurance company pays fee
Self-insured plans – plan sponsor pays fee
Fee is $1 multiplied by the number of covered lives (IRS rules for
determining)
Apply to policy and plan years ending after October 1, 2012 and before
October 1, 2019
Due July 31
Reported on IRS Form 720
Small Employers
50 or less employees
Controlled group rules apply
Not required to offer health coverage
Small Employer SHOP
If 50 or less full-time employees, may be able to purchase coverage
through Small Business Health Options Program (SHOP)
https://www.healthcare.gov/small-businesses/
Features:
Employer controls the coverage offered and how much it pays toward employee
premiums
Employer may qualify for a tax credit
Employer may deduct premium costs not covered by the tax credit
Enrollment starts November 1, 2013 for coverage starting in January 2014
Must offer coverage to all of full time employees (30 or more hours per week)
In many states, at least 70% of full-time employees must enroll
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Small Employer Premium Tax Credit
Beginning in 2014, available only to employers purchasing
coverage through SHOP
Less than 25 full time employees making an average of
$50,000 a year or less
Employer must pay at least 50% of premium costs for full
time employees
Starting in 2014, tax credit is worth up to 50% of employer’s
contribution
Large Employers
Beginning in 2014, large employers will be subject to a penalty tax for: Failing to offer all full-time employees (and their
dependents) the opportunity to enroll in minimum essential coverage or
Offering minimum essential coverage that is unaffordable or that does not provide minimum value
In both cases, at least one full-time employee must enroll in a Marketplace and be certified to the employer as having received a premium tax credit or cost-sharing reduction
Large Employers
A large employer is an employer that employed an
average of at least 50 full-time employees (and full
time equivalent employees) on business days
during the preceding calendar year
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Large Employers
Full-time equivalencies apply
All employees who were not full-time employees for any
month in the preceding calendar year are included by:
Calculating the aggregate number of hours of service
(but not more than 120 hours of service for any
employee) for all employees who were not employed
on average at least 30 hours of service per week for
that month, and
Dividing the total hours of service by 120
Large Employers
Coverage is affordable if the employee’s required contribution for the employer’s lowest cost, self-only coverage does not exceed 9.5% of the employee’s household income
Three optional safe harbors:
Form W-2 (Box 1)
Determined at end of calendar year
May use prospectively to set contribution level
Applied by adjusting W-2 wages to reflect period when employee offered coverage and comparing wages to employee share of premium during that period
Large Employers
Rate of pay
Cost does not exceed 9.5% of amount equal to 130 hours
multiplied by hourly rate or monthly salary for salaried
employees at beginning of plan year
Example: Employee earns $7.25 per hour for entire year.
$7.25 x 130 = $942.50. Employee contribution may not
exceed $89.50 per month ($942.50 x 9.5% = $89.50)
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Large Employers
Federal poverty line
Coverage considered affordable if employee’s cost for
self-only coverage does not exceed 9.5% of the federal
poverty level for a single individual
Example: Assume federal poverty level is $11,170.
Employee contribution is amount equal to 9.5% x $11,170
($1,060.15 per year / 12), or $88.43 per month
Large Employers
Failure to offer coverage
Treated as offering coverage if offer coverage to all but 5%
of full-time employees
Penalty is based on all (excluding the first 30) employees
employed in given month
Penalty equals:
Number of full-time employees (reduced by 30) multiplied
by 1/12 of $2,000 (indexed)
Large Employers
Offer coverage that is not affordable or doesn’t offer
minimum value
Penalty equals:
1/12 of $3,000 (indexed)
Multiplied by the number of full-time employees who are
certified to the employer as having received a premium tax
credit or cost-sharing reduction
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All Employers
Effective for calendar year 2015, if provide self-insured
health coverage, must file an annual return reporting certain
information for each employee covered
This rule is optional for 2014
All Employers
Beginning Jan. 1, 2013, must withhold and report an
additional 0.9 percent on employee wages or compensation
that exceed $200,000
May be required to report the value of health insurance
coverage provided to each employee on Form W-2
Temporary Reinsurance Program
Each state that operates a Marketplace is required to
establish a temporary reinsurance program for non-
grandfathered plans in the individual market, to which health
insurers and group health plans are required to contribute
This program will be in operation from 2014 through 2016
Fee is paid by insurer for insured plans and by plan sponsor
for self-insured plans
Fee is estimated at $63 per enrollee in 2014
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Employers – Employer Sponsored Health Plan Requirements
If provide health insurance to employees:
Plan must meet certain requirements
90 day waiting period
Coverage requirements
Dependent coverage
Miscellaneous Tax Issues
Itemized medical expenses
May deduct unreimbursed medical and dental expenses that exceed 10
percent of adjusted gross income on 2013 tax return
The 7.5 percent threshold will remain for those 65 and older for tax
years 2013 through 2016
Net investment tax
3.8% of certain net investment income of individuals, estates and trusts that have income above statutory threshold amounts
Miscellaneous Tax Issues
Net investment tax, con’t
Effective January 1, 2013 (tax return filed in 2014) reported on Form 1040 for individuals, Form 1041 for estates and trusts
Additional Medicare tax
0.9% for compensation received after December 31, 2012 for compensation that exceeds following threshold:
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Important Notice: This presentation has been prepared by Varnum LLP for informational purposes only and does not constitute legal advice. Copyright © 2013, Varnum LLP. All rights reserved.
Same-Sex Couples – Tax and Estate Planning Issues
Thomas H. Bergh
Basics
“Defense of Marriage Act”: Federal statute that deemed same sex couples as unmarried for federal law purposes regardless of state law validity of their marriage;
Windsor – Denial of estate tax marital deduction to same sex spouse based on valid Canadian marriage was unconstitutional: Court punted on scope of its holding.
Rev. Rul. 2013-17
For federal tax purposes, status of marriage for federal tax purposes is to be determined of the “state of ceremony”, rather than the state of residence of the individuals;
Example: Jane and Jill, Michigan residents, travel to Vermont and are married in accordance with Vermont law. Under Rev. Rul. 2013-17, their marriage will be recognized for federal tax purposes.
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Rev. Rul. 2013-17 (cont.)
A civil union, or other commitment sanctioned by a state that is not recognized by the state of ceremony as a “marriage”, is not a marriage for federal law purposes;
Example: Jim and Joe, Michigan residents, travel to Chicago for a civil commitment ceremony. Under Rev. Rul. 2013-17, their civil commitment is irrelevant for federal tax purposes.
Bottom Line: Practical Impact
Effective as of 9/16/13, prospectively: in addition, taxpayers may rely on the rulings interpretation for all open years for returns, amended returns, and claims for refund: consistency required;
Amended returns not required: up to the taxpayers.
Retirement Plan Issues
Code required spousal rights must be provided to validly married same-sex couples; Normal form of benefit: joint and survivor annuity, spousal
death benefits, rollover rights;
Will Plan amendments be required?
QDROs, mandated Notices; minimum distribution calculations.
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Health and Welfare Plan Issues
No federally mandated spousal coverage;
Michigan Insurance Law (applicable to insured plans) does not recognize same-sex marriage: stay tuned!
Self-insured plans: look to plan document. If spouses generally covered, excluding same-sex spouse may be problematic.
Tax Treatment of Health Coverage
Provision of coverage for same sex spouse (or dependent of that spouse) now excludible from income - § 105(c);
Refund claims available for open years;
Cafeteria plan marriage “window” now applicable to same sex spouse;
COBRA notices – “Qualified Beneficiary”.
Important Notice: This presentation has been prepared by Varnum LLP for informational purposes only and does not constitute legal advice. Copyright © 2013, Varnum LLP. All rights reserved.
Q&A