As an attorney and CPA, my practice concentrates on assisting clients where their legal and financial interests intersect, which occurs in a multitude of areas. One in particular is probate. Probate covers both disabled and deceased individuals. It is a very emotional time and can be very trying.
From the desk of Jeanne M. Kerkstra, Esq., CPA of Chuhak & Tecson, P.C.
Your work probably starts in the early morning hours and most likely does not end until the late evening. When are you expected to get to your personal issues? What if you don't?
On January 1, 2008, the new Illinois Employee Classification Act took effect. The Act is intended to address the practice of misclassifying employees as independent contractors.
A dollar-for-dollar discount for capital gains ("CG") tax liability was allowed by the Court of Appeals for the 11th Circuit in valuing a decedent's interest in a closely-held corporation, thereby reducing the gross estate by over $3,000,000. (Estate of Jelke v. Commissioner, 11th Cir., No. 05-15549 11/15/07) Added to this CG discount were discounts for lack of control and lack of marketability of the interest. The Court of Appeals agreed with the estate's assumption that all of the decedent's entity interest would be sold after his death, using the date of death as the valuation date.
Employment tax is by far one of the most heated topics currently. It has a dramatic impact on a company's bottom line whether a worker is an employee or an independent contractor. To complicate matters, a worker may be classified as an independent contractor by the IRS and an employee by the Illinois Department of Employment Security ("IDES"). In other words, a worker may be classified differently by federal and state taxing entities.
Believe it or not, a good deal of your financial destiny is in your own hands. You don't get a lot of satisfaction financially or otherwise from griping at your accountant around April 15 when you are signing your tax returns and sending that payment to the IRS. Now is the time for action.
- Have you set up retirement plans maximizing the benefits for you?
- Are you taking advantage of medical reimbursement plans, where available?
- Do you want to make gifts to your children thereby providing them with a valuable lesson while at the same time remaining in control?
- Do you have the proper structure in place to reduce your exposure to creditor attack?
There are a myriad of steps that you could take to improve and protect your bottom line. Don't resign yourself to just complaining about your tax situation on April 15, 2008.
Act now! Give me a call and let's talk strategy.
If you wish to discuss these issues in more detail, please contact Jeanne M. Kerkstra at jkerkstra@chuhak.com or 312-855-4337.
I have had the pleasure of speaking at several societies over the past few years. Most recently, my colleague, Lindsey Paige Markus, and I had the opportunity to present to the Chicago Society of Plastic Surgeons on estate planning and asset protection. The response from our presentation has been tremendous. Our role as attorneys is to advise, counsel, and most importantly to educate our clients on the many tools available to make smarter business and legal decisions. This week's Viewpoint was inspired from inquiries made by attendees at our presentation and we wanted to make this information available to everyone.
On August 31, 2007, a California federal judge issued a Temporary Restraining Order ("TRO") against the Social Security Administration ("SSA") preventing the SSA from sending out "no-match" letters for the Department of Homeland Security ("DHS"). The AFL-CIO, ACLU and the National Immigration Law Center were among the groups seeking the order. A hearing on the TRO is set for October 1, 2007. At issue is whether the DHS exceeded its authority by seeking to utilize indirectly SSA information on employers whose employees' social security information did not match with the federal government. Stay tuned for further developments.
Bottom Line: Don't wait to be told what to do. Stay in charge. Call me to act on your Company's employment law practices.
If you wish to discuss these issues in more detail, please contact Jeanne M. Kerkstra at jkerkstra@chuhak.com or 312-855-4337.
When an entrepreneur first starts a business, the focus is only on delivering a top-notch product in a timely fashion and keeping one's head above water financially. When you're lucky enough to have a financial success on your hands, you're burdened with the administrative headaches and costs. Growth is definitely a dual-edged sword: it's good for business but makes it more difficult to monitor both work to be done to pay the bills and worker issues. However, lack of monitoring or inadequate monitoring can lead to very costly legal matters for companies in all industries.
It was a pleasant surprise when the House Judiciary Committee on July 18, 2007 approved an amendment that would prohibit the patenting of tax planning methods. For the full text of the amendment see
On July 3, 2007, the U.S. Court of Appeals in the DC Circuit reversed its findings that Section 104(a)(2) was unconstitutional and ruled that non-physical personal damages awarded under that provision are indeed taxable. 1
It is always a breath of fresh air to read about legislators creating taxpayer goodwill as well as promoting a good cause. From August 4 through August 13, 2007, Florida will have a tax "holiday" on certain back-to-school items. This is the seventh such tax holiday for Florida.
Kids may not be thinking about school this time of year, but parents always have their kids' schooling on their minds. Check out the online sunshine.
If you wish to discuss these issues in more detail, please contact Jeanne M. Kerkstra at jkerkstra@chuhak.com or 312-855-4337.
Tax shelters have been around since the enactment of the Internal Revenue Code. It is a misconception to believe that all tax shelters are illegal. Even the IRS would have to acknowledge that there is a significant, if not overwhelming, number of tax shelters that are legitimate, creative and rightfully save the taxpayer money. However, those are not the ones that we read about.
It is interesting to note that earlier in May the IRS came out with a fact sheet (FS-2007-19) on reporting capital gains. Among the most eye catching was how the IRS claims that the incorrect reporting of basis concerning capital gains transactions is responsible for part of an estimated $345 billion per year in unpaid taxes. Is it coincidental that the Senate Finance Committee has now come out with bipartisan staff proposal under which brokers would be required to supply their customers with basis information for applicable securities? There are currently stiff penalties for failure to furnish customers with gross proceeds information as well as for failure to maintain records of such information. However, present law does not include penalties concerning basis.
One of my areas of concentration is tax controversy. It seems as though I am always fighting with the IRS, the IDOR or some other governmental agency about what really should be included or excluded from taxable income. To me, as it is with my clients, it is very important what ends up staying in my client's pocket and not going to the government.
The Vermont Supreme Court recently made a startling conclusion. It found that workers who work at home for a company, who set their own hours and supply their own equipment, are employees of said company and not independent contractors. (Fleece on Earth v. Vermont Department of Employment and Training, Vt., No. 2005-367, 5/4/07)
Certainly a lot of tax professionals are waiting with bated breath to hear what will be the decision in Murphy v. IRS.1 Prior to vacating its August 22, 2006 decision on December 22, 2006, it had been a controversial ruling in which the Court held that IRC §104(a)(2) 2 was unconstitutional as it applied to an award of damages for emotional distress or mental anguish and loss of reputation due to compensation for non-physical personal injury. A lot rests on how the Court will rule.
An interesting case that has recently been filed is Fallon v. Ernst & Young LLP.1 This is an interesting case in part because of who the players are. They include Robert Puette, a former President of Apple Computer and former director of Cisco; Thomas Fallon, a former Vice President of Cisco; Carl Redfield, a Senior Vice President of Cisco; Richard Timmins, a Cisco Vice President; and Alexandre Balkanski, a well-known venture capitalist. These five men collectively invested more than $51 million in a product marketed by Ernst & Young ("E&Y") and known as the contingent deferred swap ("CDS") tax strategy. According to the Complaint filed January 30, 2007, the Plaintiffs are alleging that E&Y did not establish economic substance for the transaction even though it should have well been aware of the two Notices noted above on economic substance.
"Economic Substance" has been bantered about quite a lot recently. There had been recent IRS victories on this topic, and there had also been talk about codification. This is an important topic which may shift more exposure to tax professionals. Consequently, let's take a closer look at "economic substance".
1. United States Court of Appeals for the District of Columbia Circuit has vacated its August 22, 2006 decision on December 22, 2006 in its controversial ruling in Murphy v. IRS (D.C. Cir., No. 05-5139) in which the Court held that IRC § 104(a)(2) . was unconstitutional as it applies to an award of damages for emotional distress or mental anguish and loss of reputation due to compensation for nonphysical personal injury. Most likely, they would like to revisit its conclusion and redact its startling finding of unconstitutionality.
Ring out the old, ring in the new. The more things change, the more things remain the same.
- The annual exclusion for gifts remains at $12,000. Note that for the calendar year 2007, the first $125,000 (up from $120,000) of gifts to a spouse who is not a citizen of the United States are excluded from taxable gifts.
Tis the season. We're counting down the days to the end of the year. Employees are trying to make sure that they have all of their necessary expenses in to maximize on their reimbursement under their company's cafeteria plan. However, no one, be they an employer or an employee, likes unhappy surprises such as the one in Rev. Rul. 2006-56. The employer had set up a reimbursement arrangement so that by providing certain substantiation, employees were reimbursed for certain expenses. However, because they did not follow the letter of the law and a part of the reimbursement was unsubstantiated and in excess of the allowable amounts, negative tax consequences resulted. It was the employer's decision not to seek the additional substantiation over the allowable amount. However, it was the employee that suffered. The IRS did not merely include the excess that was unsubstantiated. It held that due to the fact that the company was in violation, the company had an abusive reimbursement plan which resulted in all of the amounts, not only the excess, being counted as taxable wages to the employees. A stinging result.
In Rev. Rul. 2006-56, the employer was in the business of long-haul transportation. It reimbursed its drivers for meal and incidental expenses (M&IE) paid or incurred while traveling away from home. Pursuant to Rev. Proc. 2005-67, an employer is able to elect an amount as the federal M&IE rate. The employer received substantiation for said amount from its drivers. However, it did not require substantiation for those amounts in excess of the federal rate. The taxpayer did not require the drivers to return the portion of the allowance paid for days they were away from home on business travel that exceeded the $52.00 per day that may be deemed substantiated. The taxpayer did not treat the excess allowance over $52.00 per day as wages for withholding for employment tax purposes and did not report the excess allowance as wages on the driver's Form W-2.
A reimbursement arrangement is considered made under an accountable plan if it meets three requirements: 1. The business connection requirement. 2. The substantiation requirement. 3. The returning amounts in excess of substantiated expenses requirement. A reimbursement arrangement must meet all three requirements. See Sec. 1.62-2(c)(1). Failure to meet any of the three requirements results in total inclusion in taxable income of the reimbursements. If the worker does not return the excess amounts, the company must take steps to ensure that the excess reimbursements are tracked and treated as wages subject to withholding and payment of employment taxes and reporting on the W-2's.
Consequently, it is best to review all reimbursement arrangements to make sure that they are in conformity. Otherwise, this can make for a very unhappy holiday season.
An amazing case came down on August 22, 2006: Murphy v. IRS, D.C. Cir., No. 05-5139. Over cries by the IRS that it had the authority to revoke in full Section 104(a)(2), the U.S. Court of Appeals for the D.C. Circuit held that IRC Section 104(a)(2) is unconstitutional as it applies to an award of damages for emotional distress or mental anguish and loss of reputation due to compensation for non-physical personal injury. This was a phenomenal ruling. It should have lawyers, including those in personal injury, employment and tax, and accountants rethinking what is taxable when analyzing awards under Section 104(a)(2).
Last week actress Ellen Barkin symbolically and financially closed a chapter in her life. Christie's, the auction house, sold 106 pieces of jewelry, including her wedding ring, which she received from her ex-husband Ron Perelman, billionaire Revlon magnate, during their 6-year marriage. The haul fetched a whopping $20 million plus. The jewelry almost equaled her marriage settlement. Although she seemed to do well, her ex did better. When they got married, Ron was worth about $3 billion. He was worth double that 6 years later. But Ellen didn't get half of the $3 billion increase because she signed a prenup. (Contrast this with Paul McCartney's divorce ending a 4-year marriage in which there was no prenup. The press is reporting that his ex may walk away with about a quarter of a billion dollars).
I remember the last few years listening to the pre-Oscars buzz, which was more interesting, and significantly less time-consuming, than the actual Oscars themselves. In particular, you'd hear about the rooms the would-be presenters would buzz into to collect their goodie bags. I remember how rumor had it that some little starlet collected two. An insider would provide the dish on what was the contents--usually a few exotic sounding items. If I recall correctly, someone valued the bag booty at $17,000. Last year the take included a Blackberry 8700C, a kimono and a cultured Tahitian pearl necklace. Presenters included George Clooney. George donated his goodie bag to the United Way, and it raised a reported $45,100. Most assuredly, that was in excess of its FMV.
Because you can't keep a tax attorney quiet, my question was always: Did the presenters include the FMV of the goodie bags in their taxable income for that year? Answer: It seems not.
Recently, the Academy of Motion Picture Arts and Sciences (a/k/a the Oscars) reached an agreement with the IRS to have the Academy pay taxes due on goodie bags handed out through last year. This upcoming year, the presenters will get a little something extra in their bags--the tax bill.
Previously posted on www.moneylawviews.com we discussed the 2006 credits against tax for the purchase of hybrid and fuel-efficient vehicles. What we now know is that environmentally-conscious employers might not have considered their "do-good" attitude to have a downside for their employees.
On June 30, 2006 the IRS issued Rev. Rul. 2006-38 determining the amount involved, for purposes of calculating the prohibited transaction excise tax under IRC § 4975, if an employer does not timely pay elective deferrals to a qualified plan.
The Law
Section 4975 (a) and (b) impose a 15% (first tier) and a 100% (second tier) excise tax respectively on a prohibited transaction.
Section 4975(f)(4) defines the term "amount involved," generally, as the greater of (1) the amount of money and the fair market value of the other property given or (2) the amount of money and the fair market value of the other property received in such transaction.
For purposes of the first tier excise tax, the fair market value is determined as of the date on which the prohibited transaction occurs, whereas, for purposes of the second tier excise tax, the fair market value is the highest fair market value during the "taxable period".
Section 4975(f)(2) defines the term "taxable period" as the period beginning with the date on which the prohibited transaction occurs and ending on the earliest of:
1. the date of the mailing of a statutory notice of deficiency,
2. the date on which the first tier excise tax is assessed, or
3. the date on which correction of the prohibited transaction is completed.
Section 141.4975-13 of the Temporary Pension Excise Tax Regulations provides that, under paragraphs (4) and (5) of § 4975(f), § 53.4941(e)-1 of the Foundation Excise Tax Regulations is controlling to the extent those regulations describe terms appearing both in § 4941(e) and § 4975(f). The term "amount involved" appears in both § 4941(e) and § 4975(f).
As if there weren't enough headaches already associated with buying and selling a business, there is now another. Please be aware that besides complying with the Illinois Bulk Sales Act, you must also comply with Cook County's Ordinance. The devilish twist with Cook County's Ordinance is that both the buyer and seller are on the hook if a timely notice is not filed with the County. In other words, an untimely filed notice could result in joint and several liability for both the buyer and the seller.
The Bottom Line
Nowhere has the warning "Caveat Emptor" - "Buyer Beware" - been more applicable than in Cook County.
First, there was a major overhaul in the bankruptcy laws making it more difficult in general for individuals to do away with burdensome debt. Now, effective July 16, 2006, there have been major changes to how an individual may submit an Offer in Compromise to the IRS. See IRS Notice 2006-68.
First, if you make either a lump sum payment or installments of five or fewer, then you must make a non-refundable payment of 20% of the amount of the Offer. Also, if you are making installments of six or more, then you are required to make installments while the Offer is being evaluated by the IRS. All installment payments are non-refundable. The IRS will waive payments with respect to Offers in Compromise submitted by (1) low income taxpayers, and (2) with respect to Offers submitted by other taxpayers based only on doubt as to liability. Hopefully, a revised Form 656 will be posted on the IRS website by the end of the month. In the meantime, you are to continue to use the 2004 revision of the Form 656.
The Bottom Line
You may have doubt as to collectibility of your federal taxes, but the IRS doesn't. The IRS has been pitching "a gentler, kinder IRS" when it should be more realistically pitching "show me the money."
In 2004, Congress enacted major tax legislation, a part of which was intended to stimulate the economy by encouraging manufacturing and construction in the U.S. Under new Section 199 of the tax code, individuals and businesses are entitled to a tax deduction in 2005 and 2006 of 3% of their qualified income from "domestic production activities." The deduction becomes 6% in 2007-2009, and 9% in 2010 and thereafter.
The IRS recently published guidance for implementing Roth features to your 401(k) plans. For those of you just tuning in, a Roth feature gives you the option to contribute after tax dollars with the prospect of not being taxed when you take the funds out. Up to now the Roth brand of retirement savings has only been available as an IRA, and then with income restrictions on availability.
The IRS scored a significant victory in Coltec Industries, Inc. v. United States, Fed.Cir. No. 05-5111, 7/12/06. It's a very compelling story. We have a publicly traded company, Coltec, having sold a subsidiary and looking at paying approximately $241 million in capital gains. Understandably, they sought relief through offsetting capital losses. However, it would appear that the series of transactions that then occurred that same year was merely a shell game.
Did you know that there is a tax benefit for sending your children to day camp? Many people are not aware, and not everyone qualifies, but there is something called the "dependent care tax credit," and the cost of day camp is a qualified expense. Under Section 21 of the tax code, taxpayers get a credit for certain household and dependent care services necessary for the taxpayer to engage in work/employment. The tax regulations for this tax credit were very recently amended to reflect changes in the law in the last couple of years.
A decedent's Individual Retirement Account ("IRA") is includable in his gross estate solely because he failed to make an irrevocable election as to the form of this retirement benefit. Sherill v. U.S., No. 2:04-CV-509 (N.D. IN 1/27/06).
On May 17, 2006, President Bush signed into law the Tax Increase Prevention and Reconciliation Act of 2005 (the "Act"). The Act prevents tax increases, but also in some instances may increases tax. Highlights of the Act include: (1) an extension of AMT relief; (2) an increase in the age limit to which the kiddie tax applies; (3) a two-year extension of reduced capital gains and dividend rates; and (4) a two-year extension of enhanced Code Section 179 expensing.
Recently, four administrative rulings came down in which Fed Exs independent contractors were deemed to be employees. On the one hand, it would appear that there should not be grave concern by employers over these findings due to the fact that they are administrative rulings and only determinative as to the individual plaintiffs. However, there is also a class action lawsuit pending in Indiana concerning this issue. Furthermore, Fed Ex is appealing the California Employment Development Departments ruling that Fed Ex owes $7.88 million in back payroll taxes for independent contractors who should have properly been classified as employees. Consequently, in the grand scheme of things, these four recent administrative rulings can have a tremendous impact on Fed Exs bottom line.
As any employer will tell you, there is a tremendous cost associated with having employees. According to the IRS, and what is also usually followed by the states, the general rule is that you are an independent contractor if the payor has the right to control or direct only the result of the work done by you and not the means and methods of accomplishing the result. In the four recent administrative rulings, it was found that Fed Ex had the right to control the work done as well as directing the means and methods of accomplishing it.
The Bottom Line
Do you think you have employees or independent contractors working for you? This is something that can change over time and, as noted above, dramatically impact your bottom line. To see how the IRS classifies workers, go to their website.
If you wish to discuss these issues in more detail, please contact Jeanne M. Kerkstra at jkerkstra@chuhak.com or 312-855-4337.
The annual gift tax exclusion has long been a favorite tool of tax and estate planners to assist their clients. Under present law, each donor can gift $11,000 per donee per year free of gift tax liability. Gifting offers various financial benefits to the client - reduced estate tax liability, reduced income tax liability, and increased asset protection. Gifting can also enable the client to achieve other family or business succession objectives.
By law, the annual gift tax exclusion is indexed for inflation. On October 28, in Revenue Procedure 2005-70, the Internal Revenue Service announced that beginning in taxable year 2006, the annual gift tax exclusion will be increased from $11,000 to $12,000. Thus, while for the remainder of taxable year 2005, the annual gift tax exclusion is at $11,000, beginning in taxable year 2006, the annual gift tax exclusion will be increased to $12,000. For a husband and wife, with 3 children, the effect of this increase in the annual gift exclusion would be to enable this family to derive $6,000 of additional financial and other benefits from gifting based on the annual gift tax exclusion in taxable year 2006.
The Bottom Line:
Persons already engaged in annual gifting programs will welcome the opportunity to accelerate their gifting with this increase in the annual gift tax exclusion.
Persons who are concerned with estate tax liability issues, income tax liability issues, or asset protection issues, or who wish to transfer assets or property to achieve other family or business succession objectives, should consult with their tax and financial advisors to take advantage of the increased benefits from this increase in the annual gift tax exclusion.
If you wish to discuss these issues in more detail, please contact Gary J. Stern at GSTERN@CHUHAK.COM or 312-855-4604.
Although reduced for 2006, a credit against federal tax of up to $1,000 may be taken by each individual and corporate taxpayer who is the initial owner of a motor vehicle powered primarily by electrical current. Prior to January 1, 2006, the maximum credit had been as high as $4,000.
This credit is not available to taxpayers who depreciate the cost of their electric vehicle under Internal Revenue Code Section 179.
In January of 2006, Illinois governor Rod Blagojevich proposed a sales tax credit for Illinois residents who purchase any one of nine types of fuel-efficient vehicles. The credit amount would be $500 for each vehicle, and would be applied at the dealership.
The eligible vehicles for the Illinois credit are hybrids Ford Escape, Honda Civic and Toyota Prius; diesel-powered Volkswagen Beetle, Golf and Jetta; Chevrolets Impala and Monte Carlo; and Hondas Insight. These cars average between 25 and 35 miles per gallon in city driving.
The Illinois credit would be in addition to any similar credit against federal tax.
The Bottom Line
With increasing gasoline prices, electric vehicles and fuel-efficient vehicles should be considered by all new car purchasers. The tax credits described above make purchasing these vehicles even more attractive financially.
If you wish to discuss these issues in more detail, please contact Jill McNamara at jmcnamara@chuhak.com or 312-855-6408.
You have signed off on your Will, revocable trust, Powers of Attorney, and perhaps an irrevocable trust. You feel a sense of accomplishment now that your estate plan is done. Years later, your loved ones receive the fruits of your labor as the beneficiaries of your planning. Unfortunately, you left them with a burden in the form of $8,000 in unnecessary costs to probate your estate.
Estate planning which involves trust documents is not complete until the trusts are funded. If this step is overlooked, the trust you signed is a meaningless stack of paper. The number one reason for executing a living trust (a/k/a a revocable trust) is to avoid the probate process, and you will not have met this goal if you do not have your assets transferred into the name of your living trust.
The average cost to probate an estate begins at $1,500, according to statistics published by the American Association of Retired Persons. If your Will is contested, this cost increases significantly. In Illinois, assets in excess of $100,000 which do not automatically pass per beneficiary designation require probate. Just the filing fees to probate an estate in Cook County are conservatively $500. Why even leave this amount for your heirs to pay, when properly completing your estate planning would avoid this cost? Working with your brokers and attorneys to transfer your assets into your living trust is time well spent, and leaves the money your living trust beneficiaries will not have to spend on probate in their grateful hands.
The Bottom Line
Funding your living trust is a crucial step in your estate planning. The trust documents supporting your estate plan which have been drafted and executed should not be considered complete until such trusts have been funded.
If you wish to discuss these issues in more detail, please contact Jill McNamara at jmcnamara@chuhak.com or 312-855-6408.
DISCLAIMER: All information provided on and through this site is for general purposes only and may not be construed or relied upon as legal advice. The publication of this BLOG and/or reading its contents does not create an attorney-client relationship and does not have the confidentiality protection of the attorney-client privilege. The author has used reasonable efforts in collecting, preparing, and providing information but does not warrant or guarantee the content, accuracy, completeness, or currency of the information contained in this BLOG. Any link to or reference made in this BLOG to any other website or BLOG, or any individual, product or service of any kind does not constitute or imply an endorsement or recommendation by the author. Any opinions, statements, services, offers, or other information expressed or made available by third parties are exclusively those of the respective third party and not the author. The Internal Revenue Service (IRS) now requires specific formalities before written tax advice can be used to avoid penalties. This communication does not meet such requirements. You cannot contend that IRS penalties do not apply by reason of this communication. In addition, any opinions, statements, services, offers, or other information expressed or made available in this BLOG are not the opinion of Chuhak & Tecson, P.C. and may not be relied upon as legal advice.
About the firm:
Chuhak & Tecson is a full service law firm with offices in Chicago. Chuhak's clients range from individuals to multinational companies. C&T's attorneys are dedicated to understanding, preserving and defending our clients' business and personal visions.
