Larry's Tax Law

Please join me later this month in New York City for NYU’s Tax Conferences in July. I will be speaking at the program’s Advanced Subchapter S Conference on July 25-26, 2019.

I will be presenting my new White Paper entitled “The Road Between Subchapter C and Subchapter S – It May Be a Well-Traveled Two-Way Thoroughfare, but It Isn’t Free of Potholes and Obstacles.” We will explore the complexities that may impede travel on this two-way road, including the built-in-gains tax, LIFO recapture, excessive passive income, unreasonable compensation, personal holding company status, excessive accumulated earnings, and re-election hindrances and restrictions.

I want to share some exciting news with you.

Our firm, over the years, has explored mergers with other law firms, both medium and large.  We never completed a merger, however, due in most part to cultural differences.  Our firm is not and probably never will be “big law.”  Instead, as you know, we partner/collaborate with our clients in a manner to bring about the best results for clients, give back to our community in a big and meaningful way, and create an environment for our attorneys and staff that is as nonhierarchical as possible.  “Big law” is generally not consistent with that approach to practicing law and, as a consequence, we have stayed the course alone for over 50 years.

Things are changing!  For the past eight months, I have been on a GSB committee exploring a merger with another Pacific Northwest law firm.  This time, we found a great firm to partner with, a law firm with consistent values and culture, and great attorneys and staff.  The firm is Foster Pepper, PLLC.

We are taking a break from our multi-post coverage of Opportunity Zones to address a recent, significant piece of Oregon tax legislation. 

On May 16, 2019, Governor Kate Brown signed into law legislation imposing a new “corporate activity tax” (“CAT”) on certain Oregon businesses.  The new law expressly provides that the tax revenue generated from the legislation will be used to fund public school education. 

Although the new tax is called a “corporate” activity tax, it is imposed on individuals, corporations, and numerous other business entities.  The CAT applies for tax years beginning on or after January 1, 2020. 

To help defray the expected increased costs of goods and services purchased from taxpayers subject to the CAT that will assuredly be passed along to consumers, the Oregon Legislative Assembly modestly reduced personal income tax rates at the lower income brackets.

On April 17, 2019, Treasury issued its second installment of proposed regulations relating to Qualified Opportunity Zones (“QOZs”). The regulations are 169 pages in length, and (as suspected) are fairly complex. Nevertheless, Treasury addresses a significant number of important QOZ issues.

We will dive into the proposed regulations in some detail in subsequent blog posts. In this post, however, we provide a high-level overview of some of the more significant provisions in the proposed regulations.

There has been a lot of “buzz” in the media about Qualified Opportunity Zones (“QOZs”). Some of the media accounts have been accurate and helpful to taxpayers. Other accounts, however, have been less than fully accurate, and in some cases have served to misinform or mislead taxpayers. Let’s face it, the new law is quite complex. Guidance to date from Treasury is insufficient to answer many of the real life questions facing taxpayers considering embarking upon a QOZ investment.

In this installment of our series on QOZs, we will try to address some of the questions that are plaguing taxpayers relative to investing in or forming Qualified Opportunity Funds (“QOFs”). Please keep in mind before you attempt to read this blog post that we readily admit that we do not have all of the answers. We do, however, recognize the many questions being posed by taxpayers.

As with any investment, due diligence is required. Investing in an Opportunity Zone Fund (“OZF”) is not any different.

Historically, we have seen taxpayers go to great lengths to attain tax deferral. In some instances, the efforts have resulted in significant losses. With proper due diligence, many of these losses could have been prevented.

A TALE OF IRC § 1031 EXCHANGES GONE WRONG

Tax deferral efforts under IRC § 1031 have often resulted in significant losses for unwary taxpayers.   The best examples of these losses resulted from the mass Qualified Intermediary failures we saw over the last two decades.

BACKGROUND

Sections 1400Z-1 and 1400Z-2 were added to the Internal Revenue Code of 1986, as amended (the “Code”) by the Tax Cuts and Jobs Act. These new provisions to the Code introduce a multitude of new terms, complexities and traps for the unwary.

The first new term we need to add to our already robust tax vocabulary is the phrase “Qualified Opportunity Zones” (“QOZs”). The Code generally defines QOZs as real property located in low-income communities within the US and possessions of the US. Additionally, to qualify as a QOZ, the property must be nominated by the states or possessions where the property is located and be approved by the Secretary of Treasury.

It is hard to believe it, but 2018 is close to an end. We have had a truly interesting year in the world of tax law, the primary impetus of which was the passage of the Tax Cuts and Jobs Act (“TCJA”) late last year.  

During the past twelve months, we have explored several aspects of the TCJA as well as other interesting developments in tax law, including:

In Exelon, the Seventh Circuit held that exchanges by Exelon Corporation (“Taxpayer”) of nuclear power plants for long-term leasehold interests in power plants located in other states were not exchanges qualifying for like-kind exchange treatment under Code Section 1031. According to the court, the Taxpayer did not acquire the benefits and burdens of ownership but rather received an interest more in the nature of a loan, which was not like-kind with the relinquished real property.

The IRS issued notices of deficiency for tax years 1999 and 2001. The tax deficiency for 1999 was in excess of $431 million. On top of that, the Service imposed a 20% accuracy related penalty under Code Section 6662(a) that exceeded $86 million. For 2001, the deficiency was a bit over $5.5 million. Again, for good measure, the Service tacked on a 20% accuracy related penalty of about $1.1 million.

The U.S. Tax Court affirmed both the deficiency assessment and the imposition of accuracy related penalties. Exelon Corp. v. Comm’r, 147 TC 230 (2016). On October 3, 2018, the U.S. Court of Appeals for the Seventh Circuit affirmed the Tax Court. Exelon Corp. v. Comm’r, 122 AFTR 2d ¶2018-5299 (2018).

The saga of Exelon Corporation is a long and complex read, but the morals to the story definitely warrant tax advisors dedicating the time to understand the case.