Fresh Planning Opportunities for Qualified Personal Residence Trusts

Qualified personal residence trusts ("QPRT"s) have been an extremely useful estate planning tool for years.  But now in 2011 and 2012, it is a particularly good time for QPRTs.  Why?  Three reasons:
(1)  there is a new gift tax exemption available in the amount of $5M when it was previously only $1M.  This allows much more gifting to take place. 
(2)  there is a potential valuation discount available for an undivided interest in real estate as set forth in Ludwick, TCM 2010-104 which allowed a 17% discount for lack of marketability and lack of control.
(3)  the current depressed housing market has made QPRTs a very viable method because the lower the current value, the less the amount of gift tax exemption that needs to be used.

The new estate and gift exclusion amounts have just been released for 2012.

Unified estate and gift tax exclusion amount -   For gifts made and estates of decedents dying in 2012, the basic exclusion amount will be $5,120,000 (up from $5,000,000 for gifts made and estates of decedents dying in 2011).
Generation-skipping transfer (GST) tax exemption -  The exemption from GST tax will be $5,120,000 for transfers in 2012 (up from $5,000,000 for transfers in 2011).
Gift tax annual exclusion -  For gifts made in 2012, the gift tax annual exclusion will be $13,000 (same as for gifts made in 2011).

Obama Sets Forth His Deficit Reduction Plan Which Includes Estate and Gift Tax Changes

The Obama Administration has proposed a deficit reduction plan in which “[t]he Administration . . . supports the return of the estate tax exemption and rates to 2009 levels.”  This means that the estate tax applicable exclusion amount would go to $3.5 million (down from $5 million currently) and the gift tax exemption to $1 million, (down from $5 million currently) and the top marginal rates would be 45 percent (up from 35% currently).  Portability of a deceased spouse's unused estate tax applicable exclusion amount would remain under the President's proposal. 

New IRS Notice Eliminates Taxation of Personal Use of Employer Provided Cell Phones

 When an employer provides its employees with cell phones primarily for business reasons, there is no taxation to the employee on either the business or personal use and no recordkeeping of usage is required.  Similarly, reimbursements by employers of an employee-provided cell phone for business use is similarly not taxed.  This notice applies for all tax years beginning with 2010.  Notice 2011-72,2011-38 IRB; IR 2011-93.

The normal rule for an employer providing property to an employee that has both business and personal uses is that no deduction is allowed for the personal, living, or family expenses.

Generally an employee is taxed on the personal portion of any property provided to the employee.  AThe IRS has declared in effect that the employee's personal use of an employer-provided cell phone is a tax-free de minimis fringe benefit.

The notice does require that there must be substantial reasons relating to the employer's business, other than providing compensation to the employee, for providing the phone in order for the employee not to be taxed. Examples include contacting the employee at all times for work-related emergencies, or the employee's availability to speak with clients when he's away from the office or call clients in other time zones after his normal workday is over. However, the notice provides that cell phones provided to promote employee morale or goodwill, to attract prospective employees, or to provide additional compensation to employees is not provided primarily for noncompensatory business purposes.

The same rule of non-taxation of employer supplied cell-phones applies for employee reimbursements for their cell phones.  However, reimbursements of unusual or excessive expenses or to reimbursements made as a substitute for a portion of the employee's regular wages will remain taxable.

Tax Advantages of Purchasing Property (including Qualified Real Property) for Business Use This Year

Pursuant to Sections 168 and 179 of the Internal Revenue Code, depreciation deductions and expensing deductions will be more generous in 2011 than in 2012 and beyond.  To summarize, for businesses interested in purchasing new equipment or other business property, this is the year to do so.  Now is the time to buy machinery and equipment before the advantages are set to expire.  You can lock in accelerated deductions by buying qualifying assets this year but that property must also be placed in service before year-end.  Until the end of the year, in addition to tangible personal property, there is expensing allowed for qualified real property under Section 179(f)(1).  This section permits expensing of up to $250,000 this year. 
Qualified real property is:

(A) qualified leasehold improvement property described in Section 168(e)(6),

(B) qualified restaurant property described in Section 168(e)(7), and

(C) qualified retail improvement property described in Section 168(e)(8).

See Section 179(f)(2)(C)

In order to qualify as Qualified real property, the property must be depreciable and acquired for use in the active conduct of a trade or business.  However, the following types of property are not eligible: property used for lodging, property used outside the U.S., property used by governmental units, foreign persons or entities and certain tax-exempt organizations; also exempt are air conditioning or heating units). Section 179(f)(1)(C).

The 10 year statute of limitation for collection after assessment may be extended by an offer in compromise

The United States District Court in Nevada case of U.S. v. Booher, 108 AFTR 2d 2011-5113 highlights the fact that the IRS may pursue collection against a taxpayer even though it began after the 10-year time period generally allowed by law.  The general rule under Section 6502 of the Internal Revenue Code requires the IRS to begin a civil action to collect federal tax within 10 years after assessment or such assessment is released.

However, Booher reminds us that under Section 6331(i)(5) the 10 year statute of limitations period is suspended during the time that an offer in compromise (OIC) is pending. In Booher the OICs filed extended the limitation period beyond the general 10 year period.  Booher reminds us to obtain transcripts of account for taxpayers to ascertain whether or not the 10 year period has expired before taking action.  Such transcripts will show the existence of OICs and the duration of their pendency.

Defined Value Gifts Approved by Ninth Circuit

The U.S. 9th Circuit Court of Appeals in Estate of Petter v. CIR, ___ F.3d ___, 2011 WL 3332532 (9th Cir. Aug. 4, 2011), just affirmed the United States Tax Court, holding that a taxpayer is not liable for transfer tax in a defined value gift scenario.  The taxpayer in Petter claimed a charitable deduction for the value of a charity's share of a gift of interests in an LLC, where the gift documents transferred to the donor's children a fixed dollar amount of the interests as finally valued for tax purposes, and gave the balance to charity. The court also held that the taxpayer was entitled to a charitable deduction for the value of the additional assets transferred to charity upon the donees' final determination of the value of the LLC interests.
This affirmance gives planners more assurance that this type of planning opportunity will pass muster with the courts.

Senate Bill Proposes to Eliminate Short Term GRATs

A Senate Bill - S.1286, 112th Cong., 1st Sess. (June 28, 2011) - was introduced by Senator Robert B. Casey (D-Pa.) which would set a minimum term for all grantor retained annuity trusts (GRATs) at 10 years. The bill would also prevent any decreasing annuity payment GRATs during the first 10 years, and would require that the remainder interest have a value greater than zero on the date the trust is created. The bill would make these changes retroactively to all transfers made after December 31, 2010. 

Previously, short term GRATs of two years in duration, decreasing term GRATs and so called zero out GRATs were used effectively to save estate taxes.

This bill highlights the fact that we should move diligently to perform estate planning now.

Tax Court Sets Value of a Publishing Company Lower Than Initially Reported on Estate Tax Return!

In Estate of Gallagher v. Comm'r, T.C. Memo. 2011-148 (June 28, 2011), the Tax Court set a value for an interest in a publishing company below the amount found on the Estate Tax Return.  The Tax Court applied the discounted cash flow method to determine the fair market value of the 15% interest held in a publishing company held by the Decedent. The estate tax return had initially valued the Decedent's portion of the publishing company at $34.9 million and on audit, the IRS determined the value to be $49.5 million.  The estate petitioned to the United States Tax Court and obtained an independent appraisal indicating its value to be only $26.6 million. The Tax Court (Judge James S. Halpern, J.T.C. held the value of the Decedent's interest to be $32.6 million (less than on the return), using the discounted cash flow method of valuation. The Court also applied discounts for lack of marketability and lack of control.
The upshot is that when the IRS challenges a valuation, sometimes, you end up better off than the value that was placed on the return.

Pending Legal Malpractice Claim Against A Decedent is Disallowed as a Deduction under the Federal Estate Tax If Claim Amount is Uncertain

The United States Tax Court has held that a decedent's federal taxable estate for Federal Estate Tax ("FET") purposes may not include, as a deduction, a $30 million potential legal malpractice litigation claim pending against it as of the date of death.  Rather, the amount actually paid during the administration of the Estate is deductible for the FET.  The test is whether the amount due is "reasonably certain" as of the date of death.  See (Former) Treas. Reg. 20.2053-1(b)(3) and (Current) Treas. Reg. 20.2053-1(d)(4).  In Estate of Saunders, 136 T.C. No. 18 (2011), the conflicting expert reports on the value of the claim as of the date of death, led the Tax Court to conclude that the value of the claim was too uncertain to be deducted based on estimates as of the date of death.  Therefore, the court concluded that the deduction was required to be based on the ultimate outcome.
Facts.  The taxpayer was an attorney who had a significant claim pending against him which alleged that he was a secret IRS informer against the interest of his client.  The complaint requested over $90 million in compensatory damages plus additional punitive damages. After death, a jury returned a verdict in favor of the taxpayer and on appeal, the Estate paid only $250,000.  Prior to the jury verdict, the estate tax return was filed and a $30 million deduction was claimed for the malpractice claim.  The IRS allowed a $1 deduction for the malpractice claim and assessed a $14.4 million deficiency.
Analysis: Code Section 2053(a) permits certain deductions in calculating the taxable estate, including litigation claims against the estate.  However, to be deductible, the amount of the claim must be ascertainable with reasonable certainty. The Tax Court stated that it did not consider the subsequent settlement in its discussion of the question of whether the value of the claim was ascertainable with reasonable certainty as of the date of death.  Instead, the Tax Court ruled based upon the various reports of the value of the claim.  The Tax Court concluded that the claim was not deductible as of the date of death, and only the amount actually paid during the administration of the estate could be deducted in accordance with Prior Reg § 20.2053-1(b)(3).  Current Treas. Reg. 20.2053-1(d)(4) would apply to new cases and the current regulation also requires: "A deduction under this paragraph (d)(4) will be allowed to the extent the Commissioner is reasonably satisfied that the amount to be paid is ascertainable with reasonable certainty and will be paid. In making this determination, the Commissioner will take into account events occurring after the date of a decedent's death."
Conclusion:  It is important to understand the rules concerning claim deductibility when assessing the effect of potential lawsuits pending against a Decedent in preparing the estate tax return and when addressing the concerns that the IRS will pose on audit of such claims. 

 

Tax Court holds that the IRS May Reject a Taxpayer's Offer in Compromise Where He Dissipates Assets Through Day Trading Losses

The Tax Court just held in Tucker,TC Memo 2011-67 (Tax Court Memo 2011) , that a taxpayer's day-trading losses while owing taxes constituted the dissipation of assets.  Thus, the lost assets were included in his reasonable collection potential ("RCP") analysis.

The procedure of the case went as follows: Tucker owed taxes, the amounts were not in dispute, but he claimed an inability to pay. In connection with the offer, Tucker submitted a Form 656, "Offer in Compromise" (OIC).  The OIC was evaluated and IRS notified Tucker that it had determined he could pay the liability in full. Tucker requested a collection due process (CDP) hearing after a lien was filed.
The Appeals Office upheld the filing of the lien, and Tucker appealed to the Tax Court. Tucker sought review in the Tax Court, claiming Appeals abused its discretion in rejecting Tucker's OIC. The Tax court held that the Service properly included the dissipated assets in its calculation of the taxpayer's RCP.  The tax court determined that Tucker's losses from engaging in "the highly speculative and volatile activity of day trading" were not unforeseeable. He had had the cash in hand that would have paid in full the taxes, interest, and penalties that were owing, but chose rather to devote that money to a risky investment.  The tax court therefore opined that Tucker's situation was therefore of his own making.

Obama administration states tax holiday for corporations that repatriate income from tax haven countries is poor policy

The federal government loses corporate income tax revenue from the shifting of income into low-tax countries, often referred to as tax havens. The revenue losses from this tax planning are hard to estimate, but it has been suggested that the annual cost of offshore tax abuses may be around $100 billion per year.  Pursuant to Section 862 of the Internal Revenue Code ("the Code"), corporations formed in the U.S. are taxable on certain income from outside the U.S.  Foreign corporations with U.S. owners however, can often earn and accumulate certain income without federal tax.  For controlled foreign corporations (CFCs),defined in Section 957 of the Code, the non-U.S.-source income may be shielded from U.S. tax until it is actually brought back to the U.S. (i.e., repatriated and distributed to the U.S. owners).  Remarkably, the American Jobs Creation Act of 2004 ("AJCA") provided a one year tax special treatment for CFCs to repatriate their income by providing an 85% dividends-received deduction.  It has been estimated that approximately $312 billion was repatriated under this provision.
Recently, in a blog post on March 23 titled “Just the Facts: The Costs of a Repatriation Tax Holiday,” the Treasury Assistant Secretary for Tax Policy, Michael Mundaca, stated that there was no evidence that the AJCA repatriation tax holiday increased U.S. investment or jobs, and that it in fact cost taxpayers billions of dollars. He wrote that “just five firms got over one-quarter of the tax benefits of the repatriation holiday, and just 15 firms got more than 50 percent of the benefits,” and cited to a Congressional Research Service report that found most of the largest beneficiaries actually cut jobs following the tax holiday and used the repatriated funds to repurchase stock and pay dividends.

 

The U.S. Tax Court has shielded a former business owner from transferee liability for his former company's unpaid taxes after the owner sold its business

In Douglas R. Griffin, T.C. Memo 2011-61 (Tax Ct. Memo 2011), the Tax Court held that a business owner who sold a substantial portion of the assets of his business was not responsible as a transferee for the prior taxes of the business.  Mr. Griffin had deposited a portion of the sale proceeds into his individually held account in exchange for a promissory note to the company.  He then sold his stock in a separate and unrelated transaction.  In the subsequent transaction, some of his promissory note to the business was canceled in exchange for a redemption of a portion of the shares of his stock. The Tax Court found that the facts and circumstances of the case revealed that the transactions were entered into separately and that they were not entered into fraudulently.

Transferee liability is codified in Section 6901 of the Internal Revenue Code and provides that the liability of a transferee of a taxpayer's property may be “assessed, paid, and collected in the same manner and subject to the same provisions and limitations as in the case of the taxes with respect to which the liabilities were incurred.”  What this means is that the Internal Revenue Service may assess and collect from the transferee of property the transferor's existing liability in accordance with the fraudulent transfer law of the state where the transaction occurred.  In Griffin, the transfer occurred in Florida which applies the Florida Uniform  Fraudulent Transfer Act (UFTA).

The Tax Court declined to apply the substance over form doctrine, finding that each transaction was separately arranged and had independent legal significance.

Griffin reminds us that proper planning may avoid transferee liability

Will you be audited? Will your offer in compromise be accepted? The IRS has published its 2010 data book which provides clues

The data book gives valuable insight into how many tax returns the IRS audits and what categories of returns the IRS focuses on.  Will you be audited?  1,581,394 out of  142,823,105 (about 1.1%) income tax returns were audited. This is an increase from about 1% rate for 2009. About 30% of the audits contained an earned income tax credit (EITC) claim, a decrease from about 36% from 2009.

Of the audits, 78% were correspondence audits (no revenue agent or compliance officer involved) up from 77%.

Of the returns not claiming the EITC the following rates are listed in 2010 compared with 2009:

a) business returns other than farm returns with total gross receipts of $100,000 to $200,000, 4.7% up from 4.2%
b) business returns other than farm returns showing total gross receipts of $200,000 or more, 3.3%up from 3.2%.
c) farm (Schedule F) income, 0.4% up from 0.3%.
d) returns showing total positive income of $200,000 to $1 million, 2.5% of returns with no business activity, and 2.9% of returns with business activity were audited compared with 2.3% and 3.1% respectively.
e) returns with total positive income of $1 million or more was 8.4% up from 6.4%.

Offers-in-compromise: In 2010, 57,000 offers-in-compromise were received by the IRS (up from 52,000 in 2009), and 14,000 were accepted (up from 11,000).

Penalties: In 2009, IRS assessed 27 million civil penalties against individual taxpayers, up from 26 million civil penalties assessed in2008. Of the 2010 assessments,the amount of penalties by percentages were 57% for fail to pay, 27% for estimated tax underpayment, and 13% for delinquency.

Estate Tax Portability planning for married couples

For the years 2011 and 2012, the 2010 Tax Relief Act (full title is the “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010") (“TRA 2010") allows a deceased spouse's unused $5,000,000 lifetime exemption to be shifted to the surviving spouse.

Section 2010(c)(2) of the I.R.C. now provides that for estates of decedents dying in 2011 and 2012, the applicable exclusion amount is the sum of (1) the “basic exclusion amount” and (2) in the case of a surviving spouse, the “deceased spousal unused exclusion amount.”

Per Sec. 2010 (c)(3) and (4), the deceased spouse’s exclusion is defined as $5,000,000 of the last deceased spouse dying after 2010 and is inflation adjusted after 2011.  This amount is added to the $5,000,000 exclusion available to the surviving spouse.  An irrevocable election must be made on the estate tax return of the first spouse to die to obtain this exclusion.

Because the exclusion may only be taken for the “last deceased spouse” a decision to remarry may have drastic tax consequences.

Theoretically, this portability is designed to obviate the need for proper estate planning using traditional trusts to take advantage of the exclusion for each spouse to minimize overall estate taxes.  However, portability sunsets in 2013 and beyond and therefore cannot be relied upon. Married taxpayers with sizeable estates still need to maximize the amount of the exclusion used in the estate of the first to die and provide an exclusion in the estate of the second to die by making the value of property owned by each spouse roughly equal and having wills with credit shelter trusts built in to the wills.

And for those taxpayers who feel that portability will not in fact sunset (the President’s budget proposal calls for extending portability, there are still strong reasons for each spouse to plan to use as much of the applicable exclusion as possible. This is because using credit shelter planning not only exempts the amount in the trust from estate tax, but any increase in that value after the death of the first spouse to die will likewise not be included in the estate of the survivor. Portability option does not shield the growth on the $5,000,000 from estate tax.

Another advantage of the traditional credit shelter trust is asset protection planning from creditors or spendthrift spouses or the surviving spouses new beau or spouse.

Filing a return claiming portability keeps the statute of limitations open so if the first spouse’s estate contains a business or other difficult to value assets, the open limitation period rule may militate against making the election.

Final consideration is that the generation skipping tax (“GST”) exemption is not portable.

A bipartisan bill was introduced to the Senate to repeal the much maligned expanded Form 1099 reporting requirement.

On January 25, Max Baucus, Senate Finance Committee Chairman (D-MT) and Harry Reid, Senate Majority Leader (D-NV) introduced a bill that if enacted would repeal the recent Form 1099 reporting requirements for businesses that would have otherwise become effective commencing in 2012. The bill would repeal the expanded requirements for businesses to report payments made for goods and certain services above the existing requirements. The Act being repealed has been widely maligned by businesses who fear the new paperwork requirements would be too cumbersome and too costly to complete the extra 1099 forms.
If this bill does not become law, Sec. 9006 of the recently enacted Patient Protection and Affordable Care Act would require payments of amounts in consideration for property and goods would be added to the list of payments required to be reported. It would also provide that starting in 2012, payments to taxable corporations which had previously been exempt from the Form 1099 reporting requirement, would become subject to the Form 1099 requirement.
This Bill comes as a major relief to businesses and conversely as a blow to accountants and payment processors who would have enjoyed new business coming from the extra reporting requirements.

 

Senate almost unanimously passes bill that repeals the new Form 1099 requirements that were scheduled to take effect next year.

By a vote of 87-8, the Senate, on February 17, the Senate approved S.223, the FAA Air Modernization and Safety Improvement Act.  The FAA Bill includes a repeal of the expanded Form 1099 information reporting requirements for payments of $600 or more to corporations. The FAA Bill will now go to the House for vote.  If enacted, the FAA BILL would nullify the 1099 provisions of Sec. 9006 of the Patient Protection and Affordable Care Act which would have been applicable starting in 2012.  The PPACA had expanded the 1099 requirement to include payments for property and gross proceeds to the list of payments subject to 1099 reporting and would have included the need to issue 1099s to (taxable) corporations.  The FAA Bill will strike Sec. 9006 of the PPACA as if it had never been enacted. 
This will be a big relief to companies who would otherwise have had major reporting requirements to contend with.  This vote is seen as business friendly and therefore received wide bipartisan support.

A bipartisan bill was introduced to the Senate to repeal the much maligned expanded Form 1099 reporting requirement.

On January 25, Max Baucus, Senate Finance Committee Chairman (D-MT) and Harry Reid, Senate Majority Leader (D-NV) introduced a bill that if enacted would repeal the recent Form 1099 reporting requirements for businesses that would have otherwise become effective commencing in 2012. The bill would repeal the expanded requirements for businesses to report payments made for goods and certain services above the existing requirements. The Act being repealed has been widely maligned by businesses who fear the new paperwork requirements would be too cumbersome and too costly to complete the extra 1099 forms.
If this bill does not become law, Sec. 9006 of the recently enacted Patient Protection and Affordable Care Act would require payments of amounts in consideration for property and goods would be added to the list of payments required to be reported. It would also provide that starting in 2012, payments to taxable corporations which had previously been exempt from the Form 1099 reporting requirement, would become subject to the Form 1099 requirement.
This Bill comes as a major relief to businesses and conversely as a blow to accountants and payment processors who would have enjoyed new business coming from the extra reporting requirements.

Tax Planning under the New Act

President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the "Act") into law on December 17, 2010. The Act provides several tax and estate planning opportunities. Keep in mind that the Act sunsets on January 1, 2013, so its opportunities will only last for two years and some for only one year. Therafter, the provisions of prior law reappear unless Congress makes more changes. Clients should therefore take advantage of these opportunities while they last.
One important change made by the Act is the unification of the gift, estate, and generation-skipping transfer (GST) tax lifetime exemption - all at $5 million per individual or $10 million for a married couple. Another important change is the reduction of the top estate, gift, and GST tax rates to 35%.
Since these rates are much lower than the previous rates which could exceed 55%, for the next two years, clients should consider lifetime transfers during these next two years, 2011 and 2012. For persons who had used up their $1,000,000 exemption through gifts prior to 2011, such person can give another $4,000,000 in assets without paying any gift tax (a gift tax return must be filed for the gift). Better yet, the gift can be to grandchildren or to a dynasty trust for the benefit of children and their descendants, not only are estate and gift taxes avoided, but generation skipping taxes are avoided too as long as the total lifetime gifts do not exceed $5,000,000 per donor.
Assuming there are no changes to the tax laws before 2013, the exempt amount for estate and gift tax purposes will revert to $1,000,000 per donor and the GST exemption will revert to $1,300,000 per donor. The maximum marginal rate will revert to 55%. This is therefore a tremendous opportunity for gift planning now.
A totally new concept to the estate laws that was introduced for the next two years by the Act is called "portability." Portability permits the use of an unused exempt amount in a predeceasing spouse's estate in the surviving spouse's estate. To achieve portability, an estate tax return must be filed by the estate of the first spouse to die and such estate must elect the portability option. With portability, couples can pass a total of $10,000,000 to the next generation free from federal estate tax regardless of the size of each respective estate. Portability does not apply for purposes of the GST tax.
For estates of decedents dying in 2010, the Act provides beneficial options. Such estates may elect to either subject the estate to the estate tax, with a $5,000,000 exemption amount and a maximum tax rate above that amount of 35%. If such election is made, the Estate also receives a step-up in basis of the decedent's assets from the decedent’s basis to their fair market value on the date of death. Otherwise, the Estate may elect not to pay estate tax at all but receive only the limited basis step-up of up to $1,300,000 of the appreciation inherent in the estate, and an additional $3,000,000 of stepped up basis for assets passing to the surviving spouse. The decision regarding which election to make is based upon a number of factors including the size of the estate, the amount of estate tax that would be due, the amount of appreciation in the assets and the time frame that the assets would be anticipated to be sold.
The use of discounting through family limited partnerships and family limited liability companies are still not disallowed by the Act though there had been a great deal of speculation that these devices would be legislated out of estate planners’ tool kits. Also Irrevocable Life Insurance Trusts ("ILITs") for multiple generations can be accomplished by leveraging the $5,000,000 exemption for even more spectacular savings. The premiums can be paid with GST exempt dollars so that when the policy matures and pays out, they are received estate, gift, income, and GST tax free. Grantor retained annuity trusts (GRATs) with less than a ten-year term and "zeroed-out GRATs" (those with no gift component) were also not legislated out.
New Jersey like many states, has decoupled their estate tax from the federal estate tax. New Jersey allows only $675,000 of an estate to pass estate tax free for its estate tax. That leaves a $4,325,000 spread between the amount allowed by the federal exemption and the amount allowed by New Jersey. If not properly planned, the estate may be subjected to a state estate tax on the death of the first spouse, even if the couple desired to defer all taxes until the death of the second spouse.
Congress had various bills pending (but never enacted) that would have eliminated discounts, and short term GRATs but the Act does not do so. The fact that those restrictions were not enacted is yet another reason to act now to revise one’s estate plan.
The time for planning is now.

S corp built-in-gain period temporarily shortened

For C corporations holding appreciated property, there is a double tax on its sale.  First the corporation pays tax on the sale of its appreciated property equal to the difference between the sale price and the property’s basis, multiplied by the corporate tax rate.  Then, when the corporation distributes the proceeds to its shareholders as a dividend, the individuals pay a second level of tax on dividends received.  To avoid this second level of tax, the C corporation could (if eligible) file an election under Subchapter S and wait ten years and sell the property and only one level of tax on the gain would be paid.

In order to attempt to spur the economy, Congress has temporarily shortened the ten year built-in-gain holding period.  Beginning in 2011, the “Small Business Jobs Act of 2010,” the tax title of H.R. 5297, the Small Business Lending Funding Act ( P.L. 111-240 ) provided that for S corporation tax years beginning in 2011, no tax is imposed on the net unrecognized built-in gain of an S corporation if the fifth year in the recognition period preceded the 2011 tax year.  Code Sec. 1374(d)(7)(B)(ii).  Thus, if a corporation converts now to an S corporation, the built in gain property cannot be sold for 10 years, but if a conversion was done in 2005 or earlier, the built-in-gains tax on S corporations will not apply to the sale and thus the second level of tax can be avoided.  For companies who filed S elections in 2005 and earlier, they are now free to sell their appreciated property and only be subject to a single level of tax.

The Hiring Incentives to Restore Employment Act adds credit for hiring new workers

In an effort to jump start the economy and employment, Congress is providing a credit of up to $1,000 for so called  “retained workers” in 2011 pursuant to Section 102 of the HIRE Act, P.L. 111-147, for any tax year ending after Mar. 18, 2010.  A “retained worker” is defined as any qualified individual (as defined for purposes of the employer payroll tax holiday that was in effect for hiring unemployed workers, who makes a proper certification on Form W-11 and began employment with a qualified employer after Feb. 3, 2010, and before Jan. 1, 2011 and
    (1) who was employed by the taxpayer on any date during the tax year,
    (2) who was employed by the taxpayer for a period of not less than 52 consecutive weeks, and
    (3) whose wages (as defined for income tax withholding in Code Sec. 3401(a) ) for that employment during the last 26 weeks of the period (described in item (2) above) equaled at least 80% of the wages for the first 26 weeks of that period. (HIRE Act §102(b))
Make sure to file the Form W-11 to claim this credit for each such worker hired.


Shorter S corp built-in gain period. For tax years beginning after Dec. 31, 2010, the “Small Business Jobs Act of 2010,” the tax title of H.R. 5297, the Small Business Lending Funding Act ( P.L. 111-240 ) provided that for S corporation tax years beginning in 2011, no tax is imposed on the net unrecognized built-in gain of an S corporation if the fifth year in the recognition period preceded the 2011 tax year. ( Code Sec. 1374(d)(7)(B)(ii) )