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.