Source: https://profwilliambyrnes.com/2011/03/
Timestamp: 2019-04-23 02:00:14+00:00

Document:
The Tax Court recently calculated the fair market value (“FMV”) of life insurance policies distributed by a terminated 419 welfare benefit plan. The FMV of the policies—which must be included in the taxpayers’ income—was determined by the court based on: (1) surrender charges, (2) conditions imposed on the taxpayers by the insurance company, and (3) “paid-up insurance coverage remaining on the policies as of the date of distribution.” Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).
For previous coverage of policy valuation in Advisor’s Journal, see Tax Courts Holds Employee Taxable for Value of Life Insurance Owned by Welfare-Benefit Plan (CC 11-14).
For in-depth analysis of welfare benefits plans, see Advisor’s Main Library: B—Welfare Benefit Funds.
Why is this Topic Important to Wealth Managers? This topic presents discussion on the individual and nonbusiness deductions offered under the Internal Revenue Code. Since April 15th is fast approaching, it is important to review common tax positions with regards to client planning.
In addition this blogticle presents a excerpted preview of new, updated material from Advanced Markets which will be available soon (see www.advisorfx.com). Over the coming 9 months, the entire AUS service is being revised and will be rolling out monthly. The updating will include many new areas and a sharper focus with practical explanations and client presentation aides for current areas. We look forward to helping you secure your next sale.
An expense of an individual may be business, nonbusiness, or personal, depending upon which of the individual’s spheres of activity gave rise to the expense. This Blogticle discusses personal and nonbusiness expenses generally.
Personal expenses are all expenses incurred by an individual that are not business or nonbusiness expenses. These would include, for example, food and clothing for the individual and his family, repairs on the family home, and premiums paid on the individual’s personal life insurance. Generally, no deduction is permitted for personal expenses. By specific statutory provision, however, deductions are allowed for some personal expenses, such as certain personal taxes, a limited amount of charitable contributions, medical expenses, certain interest on a principal residence, and alimony.
Most deductible personal expenses are “itemized deductions” and thus may be taken only if the taxpayer chooses to itemize his deductions instead of claiming the standard deduction.
A nonbusiness expense is generally an investment expense incurred in connection with the production of income, other than a trade, business or profession. Expenses of this type would include, for example, fees for tax or investment advice, and the cost of a safe deposit box used to store taxable securities. The deduction of nonbusiness expenses is governed by Code section 212. Specifically, Section 212 allows a deduction for expenses incurred in connection with: (1) the production or collection of income; (2) the management, conservation, or maintenance of property held for production of income; or (3) the determination, collection or refund of any tax.
Tomorrow’s blogticle will discuss important planning aspects of 2011.
Why is this Topic Important to Wealth Managers? This topic presents a discussion on information reporting regarding nonresident aliens and domestic interest income. Because some wealth managers work with international clients, or a family in which at least one family member like a spouse or child is foreign, it is helpful to discuss the new proposed reporting requirements as issued by the Department of the Treasury. Having a better understanding of the reported information that will end up in the hands of the IRS will hopefully help wealth managers focus on compliance, as well as wealth preservation and growth.
The Internal Revenue Service recently released new proposed regulations regarding reporting interest payments made to nonresident aliens. A nonresident alien is an individual who is neither a citizen of the United States nor a resident of the United States. We will discuss in a later blogticle this week about how to determine if someone is either a US taxpayer or instead is a non-resident alien (not a US taxpayer).
The newest proposed regulations published this month withdraw previous regulations and provide proposed regulations that extend the information reporting requirement to include bank deposit interest paid to nonresident alien individuals who are residents of any foreign country.
Why is this Topic Important to Wealth Managers? A wealth manager should be able to present Advanced Market Intelligence on the long-term economic impact of government spending and its ability to raise revenues with clients.
The United States faces daunting economic and budgetary challenges. The economy has struggled to recover from the recent recession, which was triggered by a large decline in house prices and a financial crisis—events unlike anything this country has seen since the Great Depression.
2012 IRS Budget Revealed !!
Why is this Topic Important to Wealth Managers? Increasing the IRS staffing budget in certain departments may be indicative of increasing scrutiny of client’s information and tax returns. Increasing government scrutiny may lead to increased compliance costs in time and fees. Consequently, a wealth manager may want to address with client the need for increasing diligence in preparation of their affairs. Thus, Advanced Market Intelligence presents a discussion on the Internal Revenue Services’ allocations for fiscal year 2012, and contrasts 2010 data and figures.
The fiscal year 2012 proposed budget allocates $14 billion to the Department of the Treasury; a 4 percent increase above the 2010 enacted level.  The increase over 2010 levels is attributed to costs associated with implementation of legislation and new investments in IRS tax compliance activities that are aimed to help reduce the deficit. Of the $14 billion appropriated to the Treasury operations, over $13.28 billion is encumbered for the Internal Revenue Service.
The main function of the Internal Revenue Service is to collect he revenue that funds the government and administer the nation’s tax laws.  The IRS collected $2.345 trillion in taxes (gross receipts before tax refunds) in 2010, or 93 percent of all federal government receipts.
The 2012 budget provides funding to implement enacted legislation; handle new information reporting requirements; increase compliance by addressing offshore tax evasion; expand enforcement efforts on noncompliance among corporate and high-wealth taxpayers; and enforce return preparer compliance.
The IRS estimates new enforcement personnel will generate more than $1.3 billion in additional annual enforcement revenue once the new hires reach full potential in fiscal year 2014.
Even the Department of the Treasury notes, the tax law is complex and that even sophisticated taxpayers can make honest mistakes on their tax returns. To this end, the IRS states that it remains committed to a balanced program of assisting taxpayers to both understand the tax law and remit the proper amount of tax.
If you’re selling Reg D private placements or non-traded REITs, the proverbial Huns are on the hill. These illiquid, private investments are the top two items on FINRA’s (“Financial Regulatory Authority Inc.”) list of enforcement priorities. FINRA is particularly interested in whether firms selling the investments are complying with “suitability, supervision and advertising rules,” and is also looking at cases of fraud and the unregistered sale of the securities.
Medical Capital Holdings Inc. and Provident Royalties, LLC.—both of which offerings brought in hundreds of millions of dollars through private placements sold by broker-dealers—were given as examples of private placements done wrong. Both were charged with fraud in 2009. At least 12 broker-dealers who sold Provident Royalties to their customers are now defunct as a result of the millions of dollars in arbitration claims and lawsuits related to the offering. Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).
For previous coverage of FINRA regulatory action in Advisor’s Journal, see Broker Bonus Arbitration Bottleneck Forces FINRA to Reconsider Arbitrator Qualification Standards (CC 11-08), SEC Approves FINRA Suitability and Know-Your-Customer Rules (CC 11-17), and New FINRA Rule Restricts Brokers’ Outside Business Activities (CC 10-110).
For in-depth analysis of the taxation of REITs, see Advisor’s Main Library: D—REITs and Limited Partnerships.
In a recent case, the IRS denied an estate a fractional interest discount on the family ranch, resulting in a seven digit tax bill and the likely liquidation of the family homestead. The father had numerous options for securing a valuation discount on, or excluding the value of, a significant tract of property from his gross estate, but hadn’t done any planning since 1965, resulting in total denial of a discount. When he died in 2004, the property was worth $6,390,000. Don’t let this be your client.
The dispute between the IRS and the father’s estate centered on whether the property’s value in the gross estate was: (1) the undiscounted value of a fee simple interest in the property or (2) the aggregated value of the children’s fractional interests in the property—valued separately with fractional interest discounts. Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).
For previous coverage of valuation discounts in Advisor’s Journal, see IRS Rebuffed by Federal Court of Appeals in Valuation Discount Case (CC 11-21) and Valuation Discounts: Only for a Bona Fide Business (CC 10-60).
For in-depth analysis of valuation discounts, see Advisor’s Main Library: A—Family Limited Partnerships and Estate & Gift Tax Valuation Discounting.
Copies of the 64-page report are available for only $12.95 plus shipping and handling here. Producers and their companies can also license use of their logos and contact information directly on the cover of the guide for a marketing and client-management tool.
Why is this Topic Important to Wealth Managers? Presents discussion on the national debt and national future financial outlook. A client wants to know what YOU think about Treasury Notes versus other types of government debt, even foreign government debt. An understanding of the annual federal national deficit, and its impact on the federal national debt, will provide you a helpful starting point to educate your client, without providing investment advice.
Debt held by the public primarily represents the amount the federal government has borrowed to finance cumulative cash deficits. To finance a cash deficit, the federal government borrows from the public. When a cash surplus occurs, the annual excess funds can then be used to reduce debt held by the public. In other words, annual cash deficits or surpluses generally approximate the annual net change in the amount of federal government borrowing from the public.
Intragovernmental debt holdings represent balances of Treasury securities held by federal government accounts, primarily federal trust funds, that typically have an obligation to invest their excess annual receipts (including interest earnings) over disbursements in federal securities.
The federal debt has been audited since fiscal year 1997. Over this period, total federal debt has increased by 151 percent. During the last 4 fiscal years, managing the federal debt has been a challenge, as evidenced by the growth of total federal debt by $5,058 billion, or 60 percent, from $8,493 billion as of September 30, 2006, to $13,551 billion as of September 30, 2010.
The increase to the federal debt became particularly acute with the onset of the recession in December 2007. Reduced federal revenues and federal government actions in response to both the financial market crisis and the economic downturn added significantly to the federal government’s borrowing needs. And, due to the persistent effects of the recession, experts believe federal financing needs remain high. As a result, the increases to total federal debt over the past three fiscal years represent the largest dollar increases over a three year period in history. The largest annual dollar increase occurred in fiscal year 2009 when total federal debt increased by $1,887 billion.
During fiscal year 2010, total federal debt increased by $1,653 billion. Of the fiscal year 2010 increase, about $1,471 billion was from the increase in debt held by the public and about $182 billion was from the increase in intragovernmental debt holdings.
Company is an accrual basis fiscal year taxpayer. Company pays severance benefits in its discretion on an ad hoc basis, and vacation benefits pursuant to its established policy.
Historically, Company has paid both severance and vacation pay from its general assets. Due to a decline in the Market over the past few years, Company has paid significant severance and expects to continue to pay additional severance over the next few years. Effective Jan 1, 2009 Company established Trust to pay this anticipated severance and vacation pay. Trust intends to submit an application for recognition of exempt status in 2010. On 1/1/2009 Company contributed over $1,000,000 to the Trust and deducted that amount on its tax return for 2009. Company indicates that beginning in 2010, Company will make payments for vacation and severance and will seek reimbursement from the Trust.
Company computed the amount deducted based on the limitation set forth in the Code.
The Internal Revenue Service announced earlier this week a special voluntary disclosure initiative (the second one of its kind in the past few years). The Internal Revenue Service states the program is designed to bring offshore money back into the U.S. tax system and assist individuals that may have undisclosed income from hidden offshore accounts to pay taxes owed. The new voluntary disclosure initiative will be available through Aug. 31, 2011.
The IRS decision to open a second special disclosure initiative follows continuing interest from taxpayers with foreign accounts. According to the IRS, the first special voluntary disclosure program finished with 15,000 voluntary disclosures on Oct. 15, 2009. Since that time, the Service notes, more than 3,000 taxpayers have come forward to the IRS with bank accounts from around the world.
The new initiative is being called the 2011 Offshore Voluntary Disclosure Initiative, which includes several changes from the 2009 Offshore Voluntary Disclosure Program. The overall penalty structure for 2011 is higher, meaning that people who did not come in through the 2009 voluntary disclosure program will not be rewarded for waiting. However, the 2011 initiative does have additional features.
For the 2011 initiative, there is a new penalty framework that requires individuals to pay a penalty of 25 percent of the amount in the foreign bank accounts in the year with the highest aggregate account balance covering the 2003 to 2010 time period. However, some taxpayers will be eligible for lower 5 or 12.5 percent penalties. Participants also must pay back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties.
Is a state law trust that is established as an investment trust to hold interests in an LLC, which has the power to vary its investments, classified as an investment trust?
LLC is organized under the laws of State as a limited liability company and is treated as a partnership for federal tax purposes. LLC will acquire, hold and manage a portfolio of investments. The governing document of LLC permits the managers of LLC to sell assets in the portfolio and acquire new assets.
LLC will issue two classes of interests: common interests and manager interests. Holders of common interests and holders of manager interests have different rights to the income, deductions, credits, losses, and distributions of LLC. Manager interests will be held by a select group of investors who are also responsible for managing LLC. The common interests of LLC will be held by Trust.
Trust is organized under the laws of State as a trust. The governing documents for Trust provide that Trust is only permitted to hold common interests in LLC. Trust will issue trust certificates and each certificate will entitle the holder to all the income, gain, profit, deductions, credits, losses, and distributions associated with one common interest in LLC. The governing documents for Trust indicate that Trust is a trust for federal tax purposes.
Moreover, an “investment” trust will not be classified as a trust if there is a power under the trust agreement to vary the investments of the certificate holders.  An investment trust with a single class of ownership interests, representing undivided beneficial interests in the assets of the trust, will be classified as a trust if there is no power to vary the investments of the certificate holders.
Going back to our example, to determine whether Trust is an investment trust for tax purposes, it is appropriate to consider the nature and purpose of Trust. Trust is holding the interests in LLC for the purpose of providing investors with the benefits of the managed investments of LLC. These investment activities would result in Trust failing to be classified as a trust if Trust were permitted to engage in those activities directly. Because the nature and purpose of Trust under this arrangement is to vary the investments of the certificate holders, Trust is likely a business entity for federal tax purposes and not an investment trust.
Restated, a state law trust that is established as an investment trust to hold interests in an LLC partnership, that has the power to vary its investments, is generally not classified as a trust for federal tax purposes.
Tomorrow’s blogticle will discuss relevant topics to wealth managers in 2011.
We invite your opinions and comments by posting them below, or by calling the Panel of Experts.
 Treasury Regulations § 301.7701-4(c); See also Comm’r v. North American Bond Trust, 122 F.2d 545 (2d Cir. 1941), cert. denied, 314 U.S. 701 (1942).
 Morrissey v. Comm’r, 296 U.S. 344 (1935).
 See Comm’r v. Chase Nat’l Bank, 122 F. 2d 540 (2d Cir. 1941).
Lead Professor Dr. Alfredo Garcia-Prats (University of Valencia, formerly IMF), Lecturers include Knut Olsen on EU Tax Risk Management – Head of Global Tax & Legal for a Nordic-based multinational corporation with responsibility for 80 countries of operation, overseeing over 100 subsidiaries.
How does the average gambler determine wagering gains and losses for tax purposes?
Upon cashing out, there are three possibilities, that she have $100 (the basis of her wagers), less than $100 (a wagering loss), or more than $100 (a wagering gain). She went to a casino to play the slot machines on ten separate occasions throughout the year. On each visit to the casino, she exchanged $100 of cash for $100 in slot machine tokens and used the tokens to gamble. On five occasions, the she lost her entire $100 in tokens before terminating play. On the other five occasions, the she redeemed her remaining tokens for the following amounts of cash: $20, $70, $150, $200 and $300.
In ordinary practice, a wagering “gain” means the amount won in excess of the amount bet (basis).  That is, the wagering gain is the total winnings less the amount of the wager. The term wagering “loss” means the amount of the wager (basis) lost.
Under the facts presented above, Mrs. X purchased and subsequently lost $100 worth of tokens on five separate occasions. As a result, the taxpayer sustained $500 of wagering losses. She also sustained losses on two other occasions, when she redeemed tokens in an amount less than the $100 (basis) of tokens originally purchased.
Therefore, on the day the taxpayer redeemed $20 worth of tokens, the taxpayer incurred an $80 wagering loss. On the day the taxpayer redeemed $70 worth of tokens, the taxpayer incurred a $30 wagering loss. On three occasions, the taxpayer redeemed tokens in an amount greater than the $100 of tokens originally purchased. The amount redeemed less the $100 basis of the wager constitutes a wagering gain.  On the day the taxpayer redeemed $150 worth of tokens, the taxpayer had a $50 wagering gain. On the day the taxpayer redeemed $200 worth of tokens, the taxpayer had a $100 wagering gain. And on the day the taxpayer redeemed $300 worth of tokens, the taxpayer had a $200 wagering gain.
 IRC Section 61; Rev. Rul. 54-339; Umstead v. Commissioner, T.C. Memo. 1982-573, 44 TCM 1294, 1295 (1982).
 IRC Section 165(d); Treasury Regulations Section 1.165-10.
 Skeeles v. United States, 118 Ct. Cl. 362 (1951), cert. denied, 341 U.S. 948 (1951).
 See United States v. Scholl, 166 F.3d 964 (9thCir. 1999).
 See Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955).
One of the U.S.’s oldest life settlement companies, publically traded Life Partners Holdings, Inc., is being investigated by the SEC for falsifying life span reports used to sell the company’s life settlement products. Falsified life spans can leave investors on the hook for additional premiums over the insureds’ remaining years when insureds outlive the firm’s life-span estimates.
The question for Life Partners Holdings shareholders and customers is whether the Life Partners investigation will go the way of Mutual Benefits Corp, a life settlement company that sold fractional interests in life insurance policies. Mutual Benefits was the subject of a similar SEC investigation concerning falsified life expectancies that ultimately led to the company’s collapse. Could Life Partners be next?
A Limited Liability Company (LLC) is a business structure allowed by state statute. LLCs are popular because, similar to a corporation, owners have limited personal liability for the debts and actions of the LLC. Other features of LLCs are more like a partnership, providing management flexibility and the benefit of pass-through taxation.
Although supervising the cost of insurance embedded in life insurance premiums has historically been the domain of state insurance commissioners, the U.S. District Court for the Central District of California has intervened in one recent case, ruling on January 19 that Conseco Life Insurance Co. cannot increase the premiums it charges 50,000 of its existing policyholders.
The premium increase was part of a plan by Conseco to reduce its long-term losses. Rather than post reserves, Conseco looked for a way to reduce its future liabilities by $173 million. They targeted two blocks of universal life policies that had lower than expected lapse rates, using a pricing formula that would explode the cost of insurance charged in the policies’ 21st year after issuance. Customers who’d held the affected policies longest would have seen their premiums increase in 2010 or 2011. Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).
For previous coverage of another carrier lawsuit in Advisor’s Journal, see Carriers Targeted by Suit Over Losses on Madoff Investments (CC 11-06).
For in-depth analysis of the income taxation of life insurance, see Advisor’s Main Library: A—Definition of “Life Insurance” For Income Tax Purposes.
Valuation discounts will always be a disputed issue between taxpayers and the IRS, but as illustrated by the recently published Ninth Circuit Court of Appeals case, a properly timed gift can still qualify for a discount. The parents contributed cash, securities, and real property to an LLC and then transferred LLC interests to a trust (“the children’s trust”) naming their children as beneficiaries.
The IRS rejected the valuation discount, claiming that the parents did not make a gift of the LLC interests to the trusts as they claimed, but instead made an indirect gift of the assets owned by the LLC. The IRS also argued that, even if the LLC were funded prior to the gifting of the LLC interests to the children, the transaction’s two steps—transfer of assets to the LLC and the gift of the LLC interest to the children’s trust—were really a single transaction, an indirect gift of the assets, under the step transaction doctrine. Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).
Why is Washington Calling for Corporate Tax Reform?
Although America has one of the highest maximum corporate tax rates throughout industrialized nations, many large corporations pay only a fraction of the maximum rate. In a study by a New York University Professor, the data shows that a great number of public companies are paying around half, or even less, than the maximum corporate rate.
The Congressional Research Service last week released a publication describing the employer healthcare mandate and penalties for large employers under the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010. Although penalties under the Health Care Act will not be applicable until 2014, the Act brings about a sea of change in the employer’ role in employee health insurance that requires significant present preparation.
Contrary to popular miscomprehensions about the Act, it does not mandate that employers provide their employees with health insurance; however, the Act does incentivize large employers to do so by penalizing them if their employees are not covered to a minimum level by employer-provided health insurance. Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).
Late last year the IRS published proposed regulations regarding the classification for Federal tax purposes a domestic series limited liability company (LLC), a domestic cell company, or a foreign series or cell that conducts an insurance business.
A number of States, such as Delaware, have enacted statutes providing for the creation of entities that may establish series, including limited liability companies (series LLCs). In general, most series LLC statutes provide that a limited liability company may establish separate series.
Although the series LLC generally are not treated as separate entities for State law purposes, the treatment of rights and obligations is similar to separate entities, creating in essence “associated members”. Members’ association with one or more particular series is comparable to direct ownership by the members in such series, in that their rights, duties, and powers with respect to the series are direct and specifically identified. If the conditions enumerated in the relevant statute are satisfied, the debts, liabilities, and obligations of one series generally are enforceable only against the assets of that series and not against assets of other series or of the series LLC.
SEP is a written plan that allows a business to make contributions toward executive’s retirement and employees’ retirement without getting involved in a more complex qualified plan.
Under a SEP, the business makes the contributions to a traditional individual retirement arrangement (called a SEP-IRA) set up by or for each eligible employee. A SEP-IRA is owned and controlled by the employee, and the business makes contributions to the financial institution where the SEP-IRA is maintained.
SEP-IRAs are set up for, at a minimum, each eligible employee. An eligible employee means an individual who meets all the following requirements: the individual has reached age 21, has worked for the business in at least 3 of the last 5 years, and has received at least $550 in compensation from the business in 2010.
Wikileaks is set to release confidential Swiss banking documents, and although the scope of information included in the documents isn’t yet clear, the release could pave the way for a new IRS surge against tax evaders. Similar disclosures by bank insiders were at the heart of the Justice Department’s UBS investigation. This most recent leak came from a former senior private banker and chief operating officer of Julius Baer’s Caribbean operation. He’s currently on trial in Switzerland for allegedly leaking client documents in 2005.
… the statute of limitations for criminal tax offenses is generally three years, but there are a number of exceptions that extend the statute to six years, including “willfully attempting to evade or defeat any tax.” Leaked documents from prior to 2002 would reveal activities that would generally fall outside the six-year statute of limitations; however, the six year statute only begins to run on the day the last affirmative act is committed by the defendant, so criminal prosecution of accountholders revealed by the leak may still be viable. Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).
For previous coverage of the IRS’s offshore enforcement efforts in Advisor’s Journal, see Offshore’s Limited Shelf Life (CC 10-47), IRS Proposed FATCA Guidance Expands Offshore Compliance Initiatives (CC 10-52), and IRS Planning New Voluntary Disclosure Program for Offshore Assets (CC 10-118).

References: § 301
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v.