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Law Offices of Givner & Kaye Newsletter | April Issue
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When a taxpayer enters into a transaction in which the tax consequences are not 100% certain, there is a concern about the imposition of a tax penalty. The most common penalty is due to Internal Revenue Code Section 6662, the so-called accuracy-related penalty. It is 20% of the understatement. So if the taxpayer reports $100,000 of tax, but the IRS later determines that the tax should have been $150,000, the understatement is $50,000 and the penalty is $10,000. That does not sound like much. But if the taxpayer is in a 50% bracket the taxpayer must earn $20,000 to pay $10,000, which makes the penalty more like a 40% penalty.
The tax laws effectively recognize 5 levels of authority which, starting at the bottom are: frivolous; colorable; reasonable basis; substantial authority; and more likely than not. If the taxpayer's position is frivolous or merely colorable, the penalty will be imposed. "Reasonable basis" is viewed by some as a position that has a 20% to 1/3rd chance of prevailing on the merits. If the taxpayer's position has a "reasonable basis," then the penalty should not be imposed if the taxpayer includes with the tax return an IRS Form 8275, which is a "Disclosure Statement." Many people are afraid that including such a disclosure with a tax return is an invitation to an audit. However, there is no evidence that such a relationship exists.
If the taxpayer's position has a 40% or greater chance of prevailing on the merits, that is viewed as "substantial authority". That means that the taxpayer should not be subject to a penalty even without disclosure. Of course "Nirvana" is if the taxpayer's position is "more likely than not" to prevail on the merits.
If the taxpayer and the CPA are uncertain, they can request a written opinion from a tax lawyer. Usually when asked we need to spend several hours to determine if we can even give the opinion. However, if a "reasonable basis" or "substantial authority" level of comfort is available, we are happy to issue those opinions.
Best regards,
Bruce Givner
Owen Kaye
Kathleen Givner
Neda Barkhordar
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Featured Article: IRC Section 1031 - Tax Deferred Exchanges
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Internal Revenue Code Section 1031 Exchanges - so-called "tax free" exchanges which are really "tax deferred" exchanges - are a hot topic in our law firm. Tax issues are constantly arising with brokers, developers and investors.
A common issue is the so-called "drop and swap". Assume Abe, Bob and Chuck are each 1/3rd owners of ABC, LLC. ABC, LLC owns an apartment building worth $12,000,000 with a basis of $3,000,000. If the entity sells the building, the state and federal tax will be $12,000,000 - $3,000,000 = $9,000,000 X (20% federal plus 13.3% state) = roughly $3,000,000. Of course that tax analysis is simplified.
Assume that Abe and Bob want to enter into an exchange, but Chuck wants to sell and pocket the proceeds. One possibility is for them to dissolve the LLC and then for Abe and Bob to enter into a 1031 exchange and for Chuck to get cash. However, that would be the dreaded "drop and swap": drop the property out of the entity into the hands of the former members. In that situation the IRS used to take the position that Abe and Bob did not hold the property for trade or business or investment purposes. However, the IRS got black eyes in cases such as Bolker, 760 F. 2d 1039 (9th Cir. 1985) and Magneson, 753 F. 2nd 1490 (9th Cir. 1985). As a result, the IRS gave up the fight (at least in California and other states that are part of the 9th Circuit). But the California Franchise Tax Board has not given up the fight. Therefore, taxpayers in such situations must try to structure their transactions to avoid the problem or resolve to be satisfied with the federal tax savings and pay the state tax.
One way to avoid the problem is for Chuck to take his interest in the property as a tenant in common. This allows Abe and Bob to continue the LLC and for the LLC to enter into the exchange.
If you have concerns about your 1031 exchange, give us a call.
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| Attorney Spotlight: Owen Kaye & Upcoming Engagements |
Owen Kaye, Esq. recently argued in front of the United States Bankruptcy Appellate Panel for the Ninth Circuit Court of Appeals. He tried to explain to the Appeals Court Justices that a qualified personal residence trust (QPRT) is an irrevocable trust. That is contrary to the bankruptcy court's holding in the case. Owen was hired as an expert since he is the co-author of, among perhaps 60 other published works, Chapter 17 of the two volume California Continuing Education of the Bar treatise on Irrevocable Trusts, which is about QPRTs.
On May 21 the firm's Thursday Insight Series - from 2:30 to 4, both in the office and televised over the internet - will be on "Everything You Always Wanted to Know About The IRS Offshore Voluntary Disclosure Program and Foreign Bank Accounts" with Neda Barkhordar, Esq. of our firm.
On May 26 Bruce will be doing a nationally televised webinar for the Clear Law Institute on Retirement Plans For Nontaxable Estates.
On May 29 we will be holding a Tequila Tasting Event. Attendance will be limited to the first 20 people who (i) RSVP to Desiree; (ii) promise not to drink anything before they arrive; and (iii) promise not to leave until they are sober.
On September 26 Bruce will be speaking to the Santa Barbara Paralegal Association on "How Parents Keep Control Both During Their Lifetimes And After They Are Dead."
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Bruce Givner & Owen Kaye |
Upcoming Thursday Insights Series Seminar:
Everything You Always Wanted To Know About The Offshore Voluntary Disclosure Program And Foreign Bank Account Reports But Were Afraid To Ask with Neda Barkhordar, Esq.
May 21
2:30pm-4pm
Join us in the office or online via webinar, where you can watch the folks in the room listen to and question Neda.
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The most common question asked by California taxpayers on AVVO and other legal ListServs is whether they have personal liability for unpaid minimum franchise taxes. The answer is that the person who created the entity - whether it is an LLC, a corporation or a limited partnership - normally does NOT have personal liability for the unpaid $800 per year minimum franchise tax. There is one exception: if the owner of the entity took money out of the entity while that entity owed the tax. However, in most cases taxpayers set up these entities and don't use them; they never put money into a bank account for the entity; or the entity did some small amount of business, lost money and the owner never received a penny. As long as that is the case, the Franchise Tax Board cannot get the unpaid minimum franchise tax from the owner. See In the Matter of the Appeal of Zubkoff and Potash, Transferees of Ralite Lamp Corporation, 90-SBE-004.
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 For almost four decades, our experienced Los Angeles estate planning, asset protection and expert tax attorneys have met each client's unique planning needs by collaborating with our longtime partners - attorneys, accountants, business managers, financial planners, stockbrokers and insurance professionals. Contact Givner & Kaye today! |
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