Blog Archives

2017 Individual Tax Update

1/31/2017

With the new year in full swing and plenty of changes coming with it, few things are certain, aside from updates and annual adjustments to the Internal Revenue Code. For your convenience, we have laid out some of the more important updates below:

1. Tax Brackets Adjusted for Inflation

Below you will find the tax brackets for 2017. But with Trump’s election and a Republican controlled House and Senate, we could be seeing drastic reductions in tax rates very soon.

2017 Brackets

Tax Rate Single   Married, Filing Jointly

10% $0 $0

15%   $9,326 $18,651

25%   $37,951 $75,901

28%   $91,901 $153,101

33%   $190,651   $233,351

35%   $416,701   $416,701

39.6% $418,401+ $470,701+

2. Standard Deduction Increase

Individuals will be receiving a small gift in the form of an increase to the standard deduction amount for taxable-year 2017. Accordingly, married couples filing jointly will be entitled to a $12,700 deduction; head of household and individual filers will receive standard deduction increases to $9,350 and $6,350, respectively.

3. Traditional and Roth IRA Phaseout Increase

Traditional IRAs provide you the opportunity to defer taxes while contributing toward your retirement. You can deduct amounts contributed toward your IRA from your current year’s taxable income. However, this benefit phases out at certain income levels. The phase-out lower and upper limits for this deduction, respectively, will increase in 2017 by $1,000 to: $62,000 and $72,000 for single taxpayers, and $99,000 and $119,000 for married couples filing jointly.

Roth IRAs, on the other hand, provide no up-front tax savings but do in fact grow tax-free and provide tax-free income in over the course of your retirement. If you were not eligible for Roth IRA contributions in 2016, it is possible that you may be eligible to contribute in 2017. Same as with the Traditional IRA, Roth IRA phase-outs increased by $1,000 for single filers to a range of $118,000 to $133,000, and $2,000 for married couples filing jointly to a range of $186,000 to $196,000.

4. Estate Tax Exemption Increase

Those of you who will be inheriting more than $5.45 million are in for a small windfall. On January 1, 2017, the estate tax exemption increased $40,000 to $5.49 million. This means that the estates of individuals who pass away will not be subject to any estate tax on up to $5.49 million of the estate. There may be even better news on the horizon, as well, as Donald Trump has indicated he would like to abolish the estate tax entirely. This would mean that wealth, even in excess of $5.49 million, would pass from a decedent to a beneficiary tax free.

5. Medical Expense Deduction Decrease for Seniors

Amid all these increases, seniors will be seeing a decrease to their allowable medical expense deduction. Pre-January 1, 2017, taxpayers 65 and older were able to deduct medical expenses from their taxable income if such expenses surpassed 7.5% of the taxpayer’s adjusted gross income, while the threshold for taxpayers under 65 years of age was, and still is, 10%. However, beginning this year all individuals will be subject to this 10% threshold.

6. Alternative Minimum Tax Exemption Increase

The Alternative Minimum Tax (the “AMT”) is a nasty trap that only pops up for some taxpayers but still finds a way to complicate the lives of many more. Thankfully, however, the IRS provides an exemption so that if your AMT liability is not over a certain amount you are not subject to the AMT. The exemption amount for tax year 2017 is $54,300 for individuals and $84,500 for married couples filing jointly, which amounts to an increase of $400 and $700, respectively, from the 2016 exemption amounts.

0 Comments

IRS Releases Temporary Regs in Order to Override Nonrecognition Rules Related to Contributions of §721(c) Property to Partnerships with Foreign Partners

1/23/2017

0 Comments

On January 19, 2017, the IRS finally released temporary regulations (“TD 9814 Regs”), first brought to the public’s attention in Notice 2015-54 (Aug. 6, 2015), which override the §721(a) nonrecognition of gain rules for contributions of §721(c) appreciated property to a partnership, in exchange for an interest in such partnership, if the partnership has certain “related” foreign partners (partnerships may have cause to breathe easy, however, as the TD 9814 Regs define "related" as the U.S. transferor and foreign partner(s), together, having an 80% or more interest in the partnership's capital, profits, deductions, or losses, as opposed to the 50% threshold originally proposed in Notice 2015-54).

Taxpayers have frequently sought to contribute §721(c) appreciated property to partnerships with foreign partners in order to effectively allocate the built-up gain from, or income stemming from, such appreciated property to the foreign partners who are not subject to U.S. income tax. The Service, arguably, does in fact already have tools to combat such practices: (i) §704(c) of the Code is used to prevent the shifting of “tax items” among partners; and (ii) §482 of the Code gives the Service broad authority to make allocations that properly reflect the economics of a controlled transaction. Taxpayers, however, by utilizing a §704(c) method other than the remedial method and/or valuation techniques that are likely inconsistent with the arm's-length standard, have purported to shift appreciated gain and income from appreciated property in a manner that is in fact consistent with Code §§ 704(b), 704(c), and 482.

The TD 9814 Regs, consequently, propose to override nonrecognition treatment on contributions of appreciated property to partnerships (i) with related foreign partners; and (ii) with substantial related-party ownership, unless, however, “certain requirements are satisfied” (e.g., the Gain Deferral Method is used, the de minimis $1mm exception, as it relates to the sum of all property with built-in gain that is contributed to the partnership during the year, applies, or another proposed exception is met). With the announcement of these rules, the IRS clearly intends for the Code to treat contributions of appreciated property to a partnership in a manner similar to how the Code treats contributions of appreciated property to a foreign corporation (e.g., Code §367).

And, as always, before the adoption of these temporary regulations the IRS will accept and consider timely submissions of comments and concerns that are related to the TD 9814 Regs.

0 Comments

INCREASING EXECUTIVE FOCUS ON TAX COMPLIANCE AS GOVERNMENTS TAKE AIM AT PERCEIVED ABUSE

1/17/2017

0 Comments

Over the past few years we have witnessed increased scrutiny by worldwide tax authorities of corporate tax planning, corporate tax structures, and tax practices that arguably amount to tax evasion (e.g., Apple in Ireland; Amazon in Luxembourg; Starbucks in the Netherlands; and so on ). Countries are beginning to enact new and uncompromising legislation in order to combat what they perceive to be corporate tax abuse and corporate planning strategies that have a singular tax-related goal.

The United Kingdom, for example, has legislation (taking effect in 2018) that will make it a criminal offense for a company to fail to prevent the facilitation of tax evasion by its staff, regardless if such evasion relates to domestic or foreign taxes. Such legislation will make it a strict liability criminal offense (e.g., there will be no “intent” requirement needed for a conviction) for a company to fail to prevent the facilitation of tax evasion by a company’s employee(s) or a person associated with the company. Such increased scrutiny, and increasingly tangible steps to deter aggressive tax planning by businesses, coupled with shifting political landscapes and politicians’ increasingly publicized concerns about base erosion and profit shifting, are causing corporate executives and board of directors (“Senior Executives”) to spend more time focusing on tax compliance, according to a new report by Allen & Overy LLP (the “Report”).

This Report, released in January of 2017, surveyed 396 senior-level executives from a variety of companies located across Western Europe, the United States, and Australia. Senior-level executives and board members have traditionally limited the vast majority of their tax-related focus and discussions, if discussed at all and not left to others, to the minimization of the company’s effective tax rates. According to the Report, however, Senior Executives are now increasingly discussing, and spending more time on, effective ways to ensure that their companies are both complying with domestic and international tax reporting requirements and preemptively bringing potential tax issues to the attention of applicable authorities.

While it undoubtedly makes fiscal sense for a company to comply with tax laws and avoid even the potential of a major dispute with a country’s tax laws and tax authority, it can also be highly advantageous and profitable for a company to engage in novel or tried-and-true tax planning strategies in order to dramatically lower their effective rate. With increasingly complex, and ever-changing, tax codes and regulations enacted throughout the world, governments and tax authorities would be wise to provide taxpayers and their advisers with comprehensible and dependable guidance in order to increase the likelihood of transparency and not deter companies from expanding operations across the globe.

0 Comments

Denial of Business Expense Deduction for Executive’s Acquired Shares Affirmed by Fourth Circuit

1/11/2017

0 Comments

For most of us, the days following the New Year were filled with introspection, one or two remaining holiday/New Year’s parties, and plenty of hunkering down as a cold front swept through the country. The start of 2017 for QinetiQ U.S. Holdings, Inc. & Subsidiaries (“QinetiQ” or “Acquiring Co.”), a technology-based solutions and products company that offers support services to defense, security, and related markets, was, unfortunately, not so mundane. QinetiQ was recently forced to deal with a January 6, 2017, Fourth Circuit decision affirming the Service’s denial of QinetiQ’s Internal Revenue Code (the “Code”) § 83(h) deduction, for stock issued to its officers (the “DTRI Stock”), as well as the $117,777,501 in additional taxable income that must be recognized (a natural consequence of the Fourth Circuit’s decision).

Section 83(a) of the Code generally treats [stock] transferred "in connection with the performance of services" as "gross income of the person who performed such services." The person who receives such stock, in exchange for their services, generally recognizes the receipt of the stock as income in the year the stock is transferred. Employer is then entitled to a deduction, in the amount that is recognized as income by the recipient, in the same year that recipient employee captures the receipt of stock as income. This general rule, however, is greatly modified when the stock received by employee, in connection with employee’s services to employer, is subject to a substantial risk of forfeiture. In such an instance, employee is allowed to delay the recognition of income until the year in which the substantial risks of forfeiture lapse. Employer’s deduction under § 83(h), accordingly, must also be delayed until the substantial risks of forfeiture lapse. This delay allows employer’s ordinary and necessary business expense deduction, under §§ 83(h) and 162, to occur in a year (potentially much) later than the year in which the stock was “transferred” and for an amount (potentially much) greater than the FMV at the time of the initial “transfer.”

In 2008, QinetiQ entered into negotiations to acquire Dominion Technology Resources, Inc. (“DTRI”) vis-a-vi a stock acquisition (“M&A Plan”). As part of the M&A Plan, QinetiQ agreed to purchase all outstanding DTRI stock for $123,000,000 (the outstanding DTRI Stock was primarily owned by two DTRI executives). Initially, pursuant to the M&A Plan, the two major DTRI shareholders executed consent agreements waiving DTRI's rights with regards to DTRI Stock transfer restrictions (“Consent Agreements”). Such restrictions were put in place as part of the initial 2002 transfer of stock to the two executives. The M&A Plan was eventually finalized and QinetiQ proceeded to deduct from its 2008 taxable income, pursuant to Code §§ 83(h) and 162, the fair market value of the DTRI Stock that was initially “transferred” to the two DTRI executives in 2002.

QinetiQ’s rationale to make an ordinary and necessary business expense deduction for the DTRI Stock, in taxable year 2008, was based on its belief that there was a substantial risk of forfeiture attached to the executives’ DTRI Stock, from 2002 through 2008, but that such risk of forfeiture, after execution of the Consent Agreements, had lapsed.

The Service, however, concluded that the DTRI Stock was never subject to an actual substantial risk of forfeiture. The Service determined that the DTRI Stock should have been previously included in the executives’ 2002 taxable income and, thus, tax year 2002 was when DTRI would have been allowed a deduction pursuant to § 83(h). The Fourth Circuit proceeded to examine the facts and circumstances surrounding the 2002 DTRI Stock transfer and ultimately upheld the denial of the deduction. The Fourth Circuit found that the record showed: (i) that under the DTRI Stock transfer agreements, DTRI would have been required to pay the executives the fair market value of the stock if the stock was forfeited for almost any reason (such is not indicative of an actual substantial risk of forfeiture); and (ii) the sole event dictating actual forfeiture of DTRI Stock, for less than fair market value, would unlikely have been enforced by DTRI since the executives’ had majority control of DTRI and had a strong working relationship with one another.

We all remember the good old days of the fast-track IPOs (which would allow founders to continue to grow their companies and build their legacy within such company). An IPO, naturally, is much more attractive than exit through merger and acquisition. However, sometimes we must face reality. Startups will likely, eight-out-of-ten times, remain unprofitable private ventures, be acquired through an acquirer, or pivot and merge into a new business that is a far more profitable venture. For these reasons, in order to have the most attractive opportunity possible when contemplating and planning an exit through merger and acquisition, entrepreneurs have to start paying more attention to § 83 of the Code and the necessary requirements that must be followed in order to take full advantage of Code § 83.

0 Comments

Our Perspectives

2017 Individual Tax Update

IRS Releases Temporary Regs in Order to Override Nonrecognition Rules Related to Contributions of §721(c) Property to Partnerships with Foreign Partners

INCREASING EXECUTIVE FOCUS ON TAX COMPLIANCE AS GOVERNMENTS TAKE AIM AT PERCEIVED ABUSE

Denial of Business Expense Deduction for Executive’s Acquired Shares Affirmed by Fourth Circuit

Categories

Authors

Archives

Our Perspectives

﻿2017 Individual Tax Update

IRS Releases Temporary Regs in Order to Override Nonrecognition Rules Related to Contributions of §721(c) Property to Partnerships with Foreign Partners

﻿INCREASING EXECUTIVE FOCUS ON TAX COMPLIANCE AS GOVERNMENTS TAKE AIM AT PERCEIVED ABUSE

Denial of Business Expense Deduction for Executive’s Acquired Shares Affirmed by Fourth Circuit

Categories

Authors

Archives

2017 Individual Tax Update

INCREASING EXECUTIVE FOCUS ON TAX COMPLIANCE AS GOVERNMENTS TAKE AIM AT PERCEIVED ABUSE