U.S. Flight Attendants living abroad owe tax when flying over the U.S. or international airspace

U.S. Flight Attendants living abroad owe tax when flying over the U.S. or international airspace The D.C. Circuit in Rogers v. C.I.R., 115 AFTR 2d 2015-1534 (D.C. Cir., 2015), has just affirmed the Tax Court's decision that a flight attendant providing services in or over the United States. and international waters could not use the foreign earned income exclusion under Code Sec. 911. Background: U.S. Citizens and U.S. Residents must pay tax on their worldwide income unless there is an exclusion that applies. Code Sec. 911 provides an exclusion for U.S. persons residing outside the U.S. and earning “earned income” to exclude same up to a limit. The limit is $80,000 plus inflation adjustment. The adjustment brings the maximum foreign earned income exclusion to $100,800. The taxpayer in Rogers did not earn more than that amount but the Internal Revenue Service determined that some of her earnings were attributable to time flown in and over the U.S. and some while flying over international waters. The portion of her earnings in the U.S. or over international waters was determined not to qualify as foreign earned income and both the Tax Court and the D,C. Circuit agreed with the Commissioner’s interpretation. The Circuit Court relied on the Regulation found at Treas. Reg. 1.911-3(a) which provides “earned income is from sources within a foreign country if it is attributable to services performed by an individual in a foreign country or countries.” Treas. Reg. 1.911-2(h) defines foreign country to include territorial waters of and airspace over the foreign country. But income earned over waters not subject to any foreign country's jurisdiction is not income earned in a foreign country. Thus, the Courts sided with the regulations. Flight attendants, pilots, ship crew members etc. must consider the Rogers ruling and keep logs of earnings in foreign countries versus the U.S. and international waters and report the income from those areas without claiming the foreign earned income exclusion on those earnings.

House Ways and Means Committee Votes to Repeal the Estate and GST Taxes

House Ways and Means Committee Votes to Repeal the Estate and GST Taxes By a vote of 22 to 10, the House Ways & Means Committee (“W&M”) on March 25, 2015, voted to pass H.R. 1105, the “Death Tax Repeal Act of 2015.” Currently the Estate Tax is imposed on estates valued at $5,430,000 (the basic exclusion amount) or higher for taxpayers dying in 2015. There is also a Generation Skipping Tax (“GST”) which is imposed on either outright transfers or transfers in trust to beneficiaries more than one generation below the transferor's generation. Both the estate and GST taxes are imposed at 40% (I.R.C. Sec. 2001(c)) of the amount in excess of the basic exclusion amount. The tax is based upon a unified system so that lifetime taxable gifts are added to transfers at death. The Republican dominated W&M has proposed estate tax repeal. The Death Tax Repeal Act of 2015 – if enacted - would repeal the estate and GST tax for estates of decedents dying, and generation-skipping transfers made, on or after the date of enactment. While the Estate and GST taxes would be eliminated, the proposed bill would retain the gift tax with its current tax rate of 35%. The lifetime gift tax exemption amount ($5,430,000 for 2015) under the proposed bill would remain the same as under present law and the gift tax annual exclusion ($14,000 for 2015) would continue to apply. The proposed bill does not change the basis rules for income tax purposes. Thus the basis of assets acquired by gift would retain its current basis while assets acquired from a decedent would obtain a stepped up basis - the fair market value of the asset on the date of death or on the alternate valuation date (the earlier of six months after the decedent's death or the date the property was sold or distributed by the estate). Should this bill make it through the House of Representatives and Senate, the likelihood that it will be signed by the President is remote. President Obama has indicated (through The President's Budget for Fiscal Year 2016 issued earlier this year) that not only does he want to retain the estate and GST taxes, but believes the current threshold for imposing the taxes ($5,430,000) is too high and wants to tax estates and skips starting at $3,500,000. Stay tuned as the path that this bill might take strongly affects estate planning. For those readers in states that impose an estate tax, this bill, if enacted, may have an effect on the state tax as well but states looking for estate tax revenue may choose to decouple their laws from the federal laws (if they have not done so already). As this author is in New Jersey, I can state that the New Jersey State Estate Tax has remained since 2001 at the same number: there is a tax on estates in excess of $675,000. Thus, estate planning at this time must be done very carefully by an estate planner familiar with the laws of the state and federal governments to weave through the morass of laws.

Final Regs Issued on $1 million pay limit

Final Regs Issued on $1 million pay limit The Internal Revenue Service has issued final regulations on I.R.C. §162(m) in Treas. Reg. §1.162-27. These regulations make clear what was permitted under temporary regulations (with certain modifications) and now yields more certainty in the area of planning executive pay by public companies. Background. I.R.C. §162 allows a deduction for trade or business expenses. I.R.C. §162(m) limits the deduction that a public corporation may take for payment of compensation to the principal officer and three highest paid employees to $1 million. However, pay that is performance based is exempt if certain criteria are met. I.R.C. §162(m)(4)(C) and Treas. Reg. §1.162-27(e)(2)) We now have permanent regulations further defining the terms and issues. A discussion of the rules is beyond the scope of a blog. Suffice it to say that anyone seeking to be paid more than $1 million ought to have competent legal advice and any company seeking to pay more than $1,000,000 ought to have competent legal advice.

Even Minority Shareholders Can Be Hit With Transferee Liability for Unpaid Taxes When the Corporation Does Not Pay the Taxes

Even Minority Shareholders Can Be Hit With Transferee Liability for Unpaid Taxes When the Corporation Does Not Pay the Taxes The Tax Court in Kardash v. Comm., T.C. Memo 2015-51 (2015) has just held that minority shareholders who are also high-level employees were liable for unpaid taxes as transferees, with respect to some of the monies the taxpayers received from the corporation. I.R.C. Sec. 6901(a) authorizes the IRS to pursue a transferee of property to assess and collect tax owed by the transferor. State law determines the liability, while Sec. 6901 authorizes the enforcement of that liability. In Kardash, taxpayer and another minority owner held less than 10%, and the company’s president, and its board chairman, owned the balance. Kardash was an engineer and was involved in the company's financial affairs. The company paid no income tax despite though it owed more than $120 million, and its majority shareholders siphoned substantially all of the cash out of the company. Kardash received his usual salary, which was not at issue but also "advances" and “dividends,” which were at issue. Pursuant to Sec. 6901, the IRS asserted approximately $5 million that Kardash received from the company in “advances.” In ruling for the Government, the Tax Court, citing several other decisions looked to Florida law to determine whether IRS has an obligation to pursue all reasonable collection efforts against a transferor before proceeding against a transferee. It determined that Florida law does not require a creditor to pursue all reasonable collection efforts against the transferor so the taxpayers could still be held liable. The Kardash Court also noted that the IRS could pursue Kardash without first exhausting collection efforts against the majority shareholders. Under Florida state law and the law of many states, transfers that are not in exchange for reasonable value while a debtor corporation was insolvent at the time of the transfer or became insolvent as a result of the transfer results in transferee liability. Kardash argued that the advances were actually payments of compensation and thus were reasonably equivalent value, i.e., the value of their work. The IRS urged that the advances were loans that the taxpayers never paid back, and, therefore the corporation did not receive reasonable equivalent value. The Court ruled the advances were payments of compensation but that the dividends were not compensation and thus the corporation did not receive equivalent value for the dividends. Therefore, the taxpayers were liable as transferees under Code Sec. 6901(a). Moral of the story is that anyone receiving funds from an entity that does not pay its taxes can be subject to transferee liability and the recipient of the funds should be sure to document the goods or services provided to the company for which payment is received or risk transferee liability.

Bartender beats IRS in Tax Court

Tax Court rules for Bartender on his Tip reporting method over IRS's reconstruction method The United States Tax Court held that the actual tip income from a bartender's own records was a better reflection of his income than the Internal Revenue Service’s version based upon reconstructing his tip income. By way of background, I.R.C. Sec. 6001 and Treas. Reg. Sec. 31.6053-4 require those who earn tips to keep accurate and contemporaneous records of their income. The IRS has the authority to recompute tip income as it determines if the tip earner fails to produce adequate records. In Sabolic v. Comm., TC Memo 2015-32 (T.C.M. 2015), a bartender had a set routine of how he recorded his tips at the end of each shift but IRS claimed that the bartender had underreported his tip income and because his tip logs were recorded in whole numbers; he did not keep track of how much he paid to the bar backs; and the logs did not include all days. IRS reconstructed the bartender's tip income by determining a “charge tip rate” for each tax year. But, the Court sided with the bartender fully reported his tip income. In the Court’s analysis, it did state that the IRS does have great latitude in adopting a suitable method for reconstructing tip income and its method of recomputing income carries with it a presumption of correctness and therefore, the burden of proof was on the bartender. But the Court sided with the taxpayer on all three challenges: round numbers, payments to bar backs and missing days. In sum, the Court concluded that the bartenders actual records were more accurate than the IRS’s reconstructed method and therefore ruled for the bartender. Many bartenders receive tips that are higher than the Internal Revenue Service method and therefore this case is not helpful. But for those who are not earning tips as high as the IRS method, any tip earner should keep accurate records and fight the IRS if necessary.

Another Estate Tax Repeal Bill Is Proposed

Another Estate Tax Repeal Bill Is Proposed

Many Republicans have been urging a repeal of the Federal Estate Tax for years.  During the time that we have a democratic president, the chances of such a bill becoming law are remote.  In fact, President Obama has set forth his proposal to actually increase the tax by lowering the threshold for an estate to be taxable.  The latest bill was sponsored by Rep. Kevin Brady (R-Tx).  He introduced H.R. 1105, 114th Cong., 1st Sess. (March 6, 2015), which would repeal the federal estate and GST taxes. The bill already has 32 co-sponsors, and has been referred to the House Committee on Ways and Means.

The upshot of this is that it is unlikely that any changes will occur during this administration but if a Republican takes the white house and the Republicans continue to control both Houses, the possibility of absolute repeal may very well become a reality.

Obama’s Budget Proposal Includes Estates, Gifts, and Trusts Taxation Changes

Obama’s Budget Proposal Includes Estates, Gifts, and Trusts Taxation Changes

The Treasury Department has just issued “General Explanations of the Administration's Fiscal Year 2016 Revenue Proposals,”  http://www.treasury.gov/resource-center/tax-policy/Pages/general_explanation.aspx.  In it, the President’s Administration includes a budget proposal that contains proposals to change estate, gift, and trust taxation.  Some of these proposals include:  1. imposing a capital gains tax on the transfer of appreciated assets by gift or upon death;  2. reverting the estate, gift, and GST rates and exemptions beginning in 2016 to the levels and rates that existed in 2009 (i.e., $3.5 million estate tax applicable exclusion amount and GST exemption, and $1 million gift tax exemption with a top estate and gift tax rate and sole GST tax rate of 45 percent);   3. requiring that grantor retained annuity trusts (“GRATs”) have a minimum length of 10 years and at the end of the term there be a minimum remainder value of 25 percent of the value of the transferred assets (or $500,000, if greater);  4. Making sales to grantor trusts moot by  treating such trusts as an incomplete transfer for gift and estate tax purposes;  5. limiting the protection from the GST tax afforded by allocation of GST exemption to 90 years;  6.  causing the lien from  estate tax deferrals for taxes attributable to interests in a closely-held business interest to continue throughout the deferral period;   7.  limiting the annual exclusion for gifts to most trusts, gifts of interests in passthrough entities, gifts of interests subject to a sales prohibition, and other transfers of property that cannot be liquidated immediately by the donee to $50,000 per year;  8. eliminating stretch IRAs by requiring non-spouse beneficiaries of a decedent's IRA or retirement plan to take inherited distributions over no more than five years;  9. Capping IRA and qualified plan contributions by prohibiting future contributions by a taxpayer with an IRA or qualified plan to $210,000 per year (indexed).

While it is always relevant to read the administration’s proposals,  with a Republican dominated House and Senate, the likelihood of any of this passing as actual legislation seems low.