Larry's Tax Law

In 2013, the Internal Revenue Service (“IRS”) announced that it would not issue Private Letter Rulings on “spin-off” transactions intended to qualify as tax-free under IRS § 355. As a result of the IRS no-ruling position, taxpayers have not been able to obtain certainty relative to the tax consequences of these types of transactions. Rather, the best they can do is obtain some comfort through an opinion of their tax advisors. The cost of tax opinions, however, can be significant.

CURRENT LAW

In accordance with ORS § 314.402, the Oregon Department of Revenue (“DOR”) shall impose a penalty on a taxpayer when it determines the taxpayer “substantially” understated taxable income for any taxable year. The penalty is 20% of the amount of tax resulting from the understated taxable income. ORS § 314.402(1). For this purpose, a “substantial” understatement of taxable income for any taxable year exists if it equals or exceeds $15,000. ORS § 314.402(2)(a). In the case of a corporation (excepting S corporations and personal holding companies), the threshold is increased to $25,000. ORS § 314.402(2)(b). As perplexing as it may be, these thresholds (established in 1987) are not indexed for inflation.

HOUSE BILL 2488 

House Bill 2488 changes the penalty terrain in Oregon. It was unanimously passed by the Oregon House of Representatives on March 2, 2015. The bill made its way to the Oregon Senate where it was unanimously passed on April 8, 2015. The Governor signed House Bill 2488 into law on April 16, 2015. Although it becomes law on the 91^st day following the end of the current legislative session, taxpayers and practitioners need to be aware, the new law applies to tax years beginning on or after January 1, 2015.

As I reported late last year (in my November 25, 2014 blog post), former House Ways & Means Committee Chairman David Camp proposed to repeal IRC § 1031, thereby eliminating a taxpayer’s ability to participate in tax deferred exchanges of property. The provision, a part of Camp’s 1,000+ page proposed “Tax Reform Act of 2014,” was viewed by some lawmakers as necessary to help fund the lowering of corporate income tax rates.

The Obama Administration responded to former Chairman Camp’s proposal, indicating its desire to retain IRC § 1031. The Administration, however, in its 2016 budget proposal, revealed its intent to limit the application of IRC § 1031 to $1 million of tax deferral per taxpayer in any tax year. The proposal was vague in that it was not clear whether the limitation was intended to apply to both real and personal property exchanges.

In 2009, the Service introduced its first Offshore Voluntary Disclosure Program (“OVDP”). As a result of this program, more than 50,000 taxpayers have come forward and disclosed offshore financial accounts. In a news release issued by the IRS on January 28, 2015 (IR-2015-09), it reported that the government has collected over $7 billion from this initiative. In addition, as we know from the Zwerner case (reported in my blog on June 16, 2014), the Service has conducted thousands of civil audits relating to offshore financial accounts, resulting in the collection of taxes and penalties in the “tens of millions of dollars.” Last, the IRS has not been shy about pursuing criminal charges against taxpayers who fail to disclose their offshore financial accounts. In fact, the IRS reports that it has collected “billions of dollars in criminal fines and restitutions” since the introduction of the OVDP.

As reported in my January 20, 2015 blog post, the IRS continues to take strong blows to its body in terms of budget setbacks.  President Obama, however, as part of his administration’s 2016 budget proposal issued on February 2, 2015, plans to end some of the pain being imposed on the Service.  His budget proposal, if enacted, would infuse over $12.9 billion into the Service’s coffers during fiscal year 2016.  This represents an increase of approximately $2 billion over the fiscal year 2015 IRS budget.

President Obama’s 2016 budget proposal includes provisions which, in the aggregate, increase income tax revenues by approximately $650 billion over 10 years.  At least three of the proposed tax increases will be of concern to a broad spectrum of taxpayers:

On February 2, 2015, President Obama published his 2016 budget proposal.  It proclaims that “[a] simpler, fairer, and more efficient tax system is critical to achieving many of the President’s fiscal and economic goals.”  While some tax practitioners may debate the claim that the tax provisions embedded in the President’s budget proposal make the tax system simpler, it is a certainty that a significant number of tax practitioners will question the fairness of these provisions.

Charitable Deductions

As in the past, the President’s budget proposes that “wealthy millionaires” pay no less than 30% of their income in federal income taxes.  To facilitate accomplishing that goal, President Obama suggests these taxpayers be prevented from making charitable contributions to reduce their tax liability.  He states:  “…this proposal will act as a backstop to prevent high-income households from using tax preferences to reduce their total tax bills to less than what many middle class families pay.”

As reported in my January 21, 2014 blog post, federal budget cuts continue to hit the IRS hard.  In the Consolidated Appropriations Act of 2014, our lawmakers cut the Service’s budget by more than $500 million.  The Continuing Appropriations Resolution, 2015, signed by President Obama on September 19, 2014, gave the Service about a $350 million budget setback.

While it is hard to debate the need for government budget cuts these days, deciding where to make the cuts is surely a difficult endeavor.  Nevertheless, perplexing as it may be, lawmakers find it necessary and appropriate to cut the funding of the IRS, a division of our government that collects revenue.  Making these budget decisions even more baffling, we currently have an annual tax gap in this country of over $450 billion.  Adequately funding the IRS so that it can enforce our tax laws, thereby reducing the annual tax gap, should be a given.  Apparently, it is not a given to our lawmakers.

Of interesting note, the annual tax gap has increased by approximately $150 billion since 2001.  Yet, the IRS has had its budget slashed by over $1 billion in the last five (5) years.

The Extender’s Bill impacts Subchapter S in at least two respects.  It amends IRC Section 1374(d)(7) and IRC Section 1367(a)(2).  Both of these amendments are temporary.  Unless extended, they only live until the end of this year.  Yes, they only apply to tax years beginning in 2014.

I.  IRC Section 1374(d)(7).

In the last five (5) years, we have seen at least three temporary amendments to the built in gains tax recognition period.

While it is highly unlikely Santa’s little helpers will deliver to taxpayers a tax reform package by the end of 2014 that is acceptable to the Senate, the House of Representatives and the President, House Ways and Means Committee Chairman, Dave Camp, made one last attempt to move the ball forward.  On December 11, 2014, shortly before Chairman Camp’s expected retirement, he formally introduced a bill in the House to adopt into law the Tax Reform Act of 2014 which he authored and circulated in proposed form to lawmakers back in February.  Affixed with the label “Fixing Our Broken Tax Code So That It Works For American Families and Job Creators,” the proposal is now formally before Congress.