rroyselaw.com Blog

Switzerland Approves UBS Agreement

Administrator — Wed, 07 Jul 2010 04:07:44 +0000

I have always been impressed with the Swiss government’s longstanding capacity for discretion – much like the governmental equivalent of a friend that can keep a secret. Unfortunately, as we have been discovering, there are some very good reasons that Swiss account holders have demanded confidentiality, and Switzerland has finally had to cough up its secrets to the US government.

The IRS has had a two pronged approach to bringing foreign income back into the US tax net. First, as we blogged back in September of 2009, the IRS’s foreign bank account voluntary disclosure program offered partial amnesty for taxpayers with unreported income from undisclosed foreign bank accounts. Close to 14,000 taxpayers participated in that program and, in the last few weeks, IRS agents have initiated contact with participating taxpayers to settle these matters in an accelerated fashion. It was a good program that resulted in getting a large number of foreign accounts into the system. We advised taxpayers to take full advantage of the program, knowing that there would be more to come for persons with offshore accounts, and that it would not be pretty.

On a parallel track, the United States vigorously pursued Swiss banking giant, UBS, for its involvement in facilitating unreported offshore accounts, culminating in an August 19, 2009 agreement obligating UBS to disclose 4,450 names of U.S. accountholders to the IRS. On June 3, 2010, after a long, drawn-out process, and much debate within the Swiss government concerning Switzerland’s bank secrecy laws, the upper house of Switzerland’s parliament approved the agreement. UBS has since been notifying the affected U.S. accountholders, and the names of 4,450 UBS accountholders could be in the possession of the IRS by the end of August, 2010. This will likely be a serious problem for anyone who opted not to participate in the 2009 voluntary disclosure program, as the IRS has an entire arsenal of penalties, both civil and criminal, at its disposal.

Some advisors, including us, have counseled their clients to voluntarily disclose to the IRS outside of the 2009 voluntary disclosure program. Voluntary disclosures are generally thought to protect the disclosing taxpayer from criminal prosecution, and depending on the facts, may also warrant more lenient penalties from the IRS. Of course, the fact of disclosure is itself a giant red flag, so the decision cannot be made lightly. This is one area of tax practice where the quality of the tax advice will be heavily dependent on the judgment and experience of the advisor. Stay tuned for the inevitable fallout from the actions of the ill advised.

Are Severance Payments Subject to FICA?

Administrator — Tue, 22 Jun 2010 19:18:40 +0000

According to the recent decision in United States v. Quality Stores,

Inc., No. 1:09-cv-44 (W.D. Mich. Feb. 23, 2010) (”Quality Stores”),

severance payments resulting from an involuntary termination are not

subject to taxation under the Federal Insurance Contributions Act

(”FICA”) because such payments do not constitute “wages.” Prior to

Quality Stores, it was generally accepted that severance payments are

taxed like any other bonuses.

While it is generally accepted that severance payments are a form of

“wages” subject to FICA, it is unclear whether the “social benefit” type

analysis found in Quality Foods will catch on in other jurisdictions.

In the future, a well advised employer will continue to withhold and pay

FICA taxes on severance payments, and a well advised employee may use

Quality Stores to seek to avoid FICA withholding on severance.

Separation agreements are often negotiated, and the issue of tax

withholding is often subject to contentious disagreement between

employer and former employee. An employee will often argue that he or

she is being paid for something that is non-taxable or not subject to

withholding, while an employer will want to take the most conservative

approach, since they have the withholding obligation.This is a question

of law – not a business term – so the lawyers can argue ad nauseum about

it.The Quality Stores opinion gives us one more thing to disagree

about.

HIRE Act Signed into Law

Administrator — Tue, 23 Mar 2010 04:05:58 +0000

On March 18, 2010 the President signed the Hiring Incentives to Restore Employment Act of 2010 (“HIRE”) into law. HIRE provides $13 billion worth of tax incentives to businesses in the form of –

(1) Temporary payroll tax relief for employers who hire individuals that have been unemployed at least 60 days;
(2) An income tax credit equal to 6.2% of paid wages (up to $1,000) for each new employee retained for at least 52 weeks;
(3) Higher limits for small business deductions under Section 179 (increased to a maximum deduction of $250,000); and
(4) Credits to issuers of qualified tax credit bonds used to construct schools and energy-related projects (benefits mostly state and local governments and their ability to fund infrastructure projects).

In addition to the tax incentives, HIRE included new rules relating to foreign bank account compliance. The new rules include a 30% withholding tax penalty on foreign financial institutions that withhold U.S. account holder information from the IRS, a requirement that U.S. taxpayers disclose foreign accounts on their U.S. tax returns, an extension of the statute of limitations to six years for failing to report offshore income or transactions, and other special provisions relating to foreign trusts, substitute dividend payments and worldwide interest. Finally, HIRE increased estimated income tax payments for corporations with asset values of at least $1 billion for the third quarters of 2014, 2015 and 2019.

Reporting Uncertain Tax Positions

Administrator — Mon, 22 Feb 2010 22:37:57 +0000

The Internal Revenue Service (the “Service”) is considering requiring businesses to report “uncertain tax positions” if they are “a business taxpayer with total assets in excess of $10 million…. [or] a taxpayer who prepares financial statements, or is included in the financial statements of a related entity, so long as that taxpayer or related entity determines its United States federal income tax reserves under FIN 48, or other accounting standards relating to uncertain tax positions involving United States federal income tax.”

For this unlucky group, the new schedule will require extensive information, including a concise description of each uncertain tax reserved in its financial statements and the maximum amount of potential federal tax liability attributable to each uncertain tax position (determined without regard to the taxpayer’s risk analysis regarding its likelihood of prevailing on the merits).

If you aren’t scared by now, you should be. Although not yet detailed, the Service expects to have penalties and sanctions for those taxpayers that fail to make adequate disclosure of uncertain tax positions.

Is it reasonable to require taxpayers to notify the Service whenever they may have done something wrong, disclosing the value of the wrongdoing? If the value is high enough, it seems that all those positions that were possibly wrong, will, all of a sudden, become definitely wrong.

Taxation of Carried Interest – The Debate Continues as Legislation Looms

Administrator — Thu, 07 Jan 2010 05:05:07 +0000

I first wrote about proposed changes in the taxation of carried interests (the manager’s share of income from a venture or private equity fund) in June of 2008 (see http://archive.constantcontact.com/fs056/1101631528224/archive/1102150842963.html). Last December, the House finally approved a bill to tax carried interests at ordinary income rates rather than capital gains rates (and subject such profits to self-employment tax). While H.R. 4213 contains language to ensure that an investment fund manager’s pro rata allocations of capital gain attributable to invested capital will remain subject to the preferential capital gains rates, many individuals (mostly fund managers) believe it is neither fair nor economically advisable to tax any portion of the allocations to investment fund managers at ordinary income rates. If the legislation passes, the higher rates would take effect for taxable years ending after December 31, 2009, and the bill contains no exemption for existing carried interest arrangements.

So, should carried interest be taxed at ordinary rates? The argument for capital gains treatment relies on the fact that the income is earned at the fund level as capital gains, and thus when being split amongst its owners it should retain its fund-level classification as capital gains. General rules of partnership taxation dictate this result, and it may be unfair and discriminatory to treat an investment fund different from any other type of partnership arrangement. The argument for ordinary income treatment relies on the fact that compensation income is taxed at ordinary rates, and the investment fund manager’s receipt of profit allocations is really just a disguised payment of compensation income. Because the investment manager is not receiving its allocation of profits in proportion to its invested capital, it should not be entitled to treat its allocation of fund income as capital gain.

Tax professionals come out on both sides of this dispute. There are good arguments for both positions, and the matter will ultimately come down to a matter of policy, or persuasive lobbying.

COBRA Premium Subsidy Eligibility Period Extended

Administrator — Thu, 07 Jan 2010 05:01:09 +0000

As discussed in a recent post regarding the government’s COBRA program, the American Recovery and Reinvestment Act of 2009 made certain individuals terminated in the period beginning Sept. 1, 2008 and ending December 31, 2009 eligible to receive a government financed subsidy equal to 65% of the COBRA continuation premium. Such program was initiated in response to the recession and a growing population of individuals without health-care coverage. For participating individuals the subsidy can continue for a maximum period of 15 months. With the eligibility window set to expire last week, Assistant Secretary of Labor Phyllis C. Borzi announced that the government had decided to extend the eligibility window for two additional months, thus allowing assistance-eligible-individuals terminated after December 31, 2009 and before February 28, 2010, to participate in the subsidy program.

Finally, Some Good Tax News

Administrator — Mon, 16 Nov 2009 06:03:12 +0000

The Obama administration has just made my year-end busier. On November 7th, the President signed into law the Worker, Homeowner, and Business Act of 2009 (the “WHB 2009 Act”) which, among other things, extends the period that businesses can carry back a net operating loss (NOL) arising in either 2008 or 2009. This is a significant benefit to companies holding loss properties that can sell by year end. Losses triggered in 2009 might be available to offset income earned as far back as 2003.

Under the existing rules, a business could carry back its current year’s NOL for two years (and certain “small businesses” had been previously awarded an extended NOL carry-back period under P.L. 111-5). Thus a business with an NOL in 2008 could carry that loss back to 2006 to offset taxes paid in 2006, if any. Thereafter, any unused 2008 NOL could carry to 2007, and eventually forward to years after 2008, for a maximum of 20 years. To the extent an NOL offsets income on which taxes were previously paid, the government will make a cash refund to the business (in the amount of the overpaid taxes).

Under the WHB 2009 Act, almost all businesses (not just “small businesses”) can carry back their NOLs for a period of five years. Thus , a company with a 2008 loss may carry that loss back and offset taxes paid in 2003 and each year thereafter (until the NOL is used up). Now the fine print: (1) the five year carry-back is only available for NOLs earned in a business’s tax year ending in either 2008 or 2009; (2) generally, the election to carry back losses is only available for a single period (i.e. it cannot be made to carry back 2008 losses for five years and 2009 losses for five years, it is one or the other), however, “small businesses” that already carried back a 2008 loss five years can still elect to carry back 2009 losses for five years; (3) the amount of the NOL carried back to the 5th tax year before the year in which the NOL arose, is limited to 50% of such year’s taxable income (disregarding all NOLs properly taken in that period); and (4) any election to carry back NOLs for the extended period, as described herein, is irrevocable.

Because its provisions apply to NOLs arising in tax years ending in 2009, the WHB 2009 Act provides certain businesses with an extremely valuable planning opportunity. 2009 is not over yet, and a business that is in a position to benefit from an extended NOL carry back period (i.e. those businesses with taxable income available to offset in 2004, 2005 or 2006) should seriously consider undergoing transactions that will increase their 2009 NOL. If a business is carrying a large loss asset on its books, 2009 might be the year to sell that asset and recognize a loss. When that NOL offsets income on which taxes were previously paid, the government will make a cash refund to the business (in the amount of the overpaid taxes). In this economy, such opportunities for immediate cash are rare, and after 2010 hits, this planning opportunity will be gone.

The Entertainment Industry and § 409A: That’s Hollywood!

Administrator — Fri, 16 Oct 2009 05:26:56 +0000

By now, everyone has heard of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), which has turned traditional deferred compensation on its head by including deferrals in gross income unless they meet strict requirements. While Hollywood may have been the furthest thing from Congress’s collective mind when Code Section 409A was enacted, its provisions are broad enough to reach common entertainment industry agreements. The basic problem is that many service providers in the entertainment industry will not qualify under Section 409A’s exclusion for “independent contractors.”

In the entertainment industry, agreements often require the talent to provide services in one year in exchange for compensation in a later year based on box office receipts. Absent compliance with the strict requirements of Section 409A, the talent might be required to include income in the year he acted rather than the year he was paid (assuming the payment is not subject to a “substantial risk of forfeiture”). To go one step further, suppose the motion picture is widely successful, leaving the audiences clamoring for a sequel. The actor might then renegotiate his agreement with the production company for a bonus against the contingent payments to be paid under the original agreement. In essence, the movie star has renegotiated his rights to future earnings and accelerated his receipt of amounts previously earned and deferred. Section 409A punishes this type of renegotiation.

Section 409A generally does not apply to an independent contractors that meet certain requirements. However, because motion picture projects may require the exclusive attention of the talent for more than one year, the independent contractor exception may not be available.

Section 409A would more fairly apply in the context of entertainment industry agreements if contingent participation compensation were excluded from the definition of “deferred compensation.” However, under its current provisions, Section 409A is a real “gotcha” for Hollywood.

Offshore Bank Account Reporting Developments

Administrator — Mon, 21 Sep 2009 09:02:56 +0000

In an act of charity, or good business (depending how you look at it), the IRS announced an extension, through October 15, 2009, of the deadline to participate in the foreign bank account voluntary disclosure program. The program, unveiled March 26, 2009, provides penalty relief for individuals that have failed to adequately report income tied to undisclosed foreign bank accounts. The program was undoubtedly extended due to the surprisingly large response by errant taxpayers.

Taxpayers participating in the voluntary disclosure program must fully comply with IRS investigation and turn-over significant amounts of information concerning their offshore accounts. In exchange, the IRS will assess taxes and accuracy penalties (20%) for the past 6 years (2003 through 2008), and in lieu of all other penalties (described below), the IRS will agree to assess a penalty equal to 20% of the value in each undisclosed foreign bank account, such value being determined in the year with the highest aggregate account value. Certain facts may warrant an even further reduced penalty structure.

If a taxpayer chooses not to participate in the voluntary disclosure program and the IRS discovers that taxpayer has undisclosed foreign bank accounts with unreported income, such taxpayer will likely face taxation of that income, plus penalties for underreporting (ranging from 20% to 75% of the underreported amount), plus interest. In addition, for failure to file Reports of Foreign Bank and Financial Accounts (Form TD F 90-22.1) disclosing such offshore accounts to the US government, the taxpayer may face an additional penalty of up to $100,000 or 50% of the value of the account at the time of the violation (whichever is greater). The IRS may also recommend certain cases to the Department of Justice for criminal prosecution, where violators could face up to 10 years in prison and a fine of $500,000.

Individuals with undisclosed foreign bank accounts only have until October 15, 2009 to take advantage of the IRS’s voluntary disclosure program. Given the government’s heightened attention to the taxation and reporting of foreign bank accounts, the wide exposure to penalties that taxpayer’s face, and the gradual collapse of bank secrecy laws, this is perhaps a unique opportunity for taxpayers in need of relief.