My latest presentation

Gave a presentation for NBI on “Drafting & Negotiating Risk Allocation Provisions in Tennessee” https://lnkd.in/dZn6vMm

Tennessee’s New Rules For Out of State Dealer’s Sales Tax Collection

On June 5, 2019, the Tennessee Department of Revenue released updated guidance regarding sales tax collection from out of state dealers.  This guidance is in response to the June 21, 2018, US Supreme Court decision in the South Dakota v. Wayfair case which overruled Quill Corp v. North Dakota (1992) and National Bellas Hess v. Department of Revenue of Ill. (1967), and thus erased long standing precedent in the area of sales and use tax collection.

Under those prior cases, a state could not compel a business to collect sales tax if that business had no physical presence in the state.  Instead, consumers paid a use tax that is equivalent to the sales tax.  However, as noted by the Supreme Court, “Consumer compliance rates are notoriously low” and South Dakota lost “between $48 and $58 million annually.”  Moreover, the physical presence rule has been seen to give out of state sellers an unfair advantage.

Tennessee, like South Dakota (the state at issue in the Supreme Court decision) has no income tax and must rely heavily on the sales tax, and therefore had a strong incentive to seek a change in the precedent.

The Supreme Court decided that the nexus requirements of the Commerce Clause were satisfied by South Dakota’s act since the act only applied to sellers that delivered substantial goods or services into South Dakota.  It found that South Dakota’s system “includes several features that appear designed to prevent discrimination against or undue burdens upon interstate commerce” since the South Dakota law has a safe harbor for those that conduct limited businesses, the law isn’t retroactively applied, the Streamlined Sales and Use Tax Agreement was utilized, and free software provided.

As expected, Tennessee has quickly enacted rules to take advantage of this change in the law.  Similarly, the Tennessee rule is not retroactive, and does have a sales threshold ($500,000.00 but does not include wholesale sales), and also utilizes streamlined.  Of note, however, the new rules require that the dealers know the proper local option sales tax rather than being able to use some uniform number, so out of state dealers will have to refer to the boundary database provided (or more likely use software).

The new rules are here:

• 19-04 – Post – Wayfair Collection by Out-of-State Dealers (June 2019)
• 19-05 – Local Sales Tax Reporting by Out-of-State Dealers (June 2019)
• Frequently Asked Questions

International Tax Law Changes and the Surprisingly International Tennessee

Tennessee has many international ties that often surprise practitioners. Some of the largest multinational companies in the world are headquartered here, and more than 147,000 Tennesseans are employed by foreign-based companies. In fact, Tennessee is the number one state for jobs created through foreign direct investment. Tennessee has frequently earned top marks for its business-friendly environment, and it is likely to be the beneficiary of increased investment by U.S. For more, go here for my latest article (I am a co-author):
http://www.tba.org/journal/new-tax-act-brings-major-changes-to-us-international-taxation-system

Kill Quill Succeeds: Supreme Court Overturns Sales Tax Precedent

On June 21, 2018, the US Supreme Court, in the South Dakota v. Wayfair case, overruled Quill Corp v. North Dakota (1992) and National Bellas Hess v. Department of Revenue of Ill. (1967), and thus erased long standing precedent in the area of sales and use tax collection.

Let’s first start with outlining the issues: Under the Quill and Bellas Hess cases, a state could not compel a business to collect sales tax if that business had no physical presence in the state.  Instead, consumers paid a use tax that is equivalent to the sales tax.  However, as noted by the Supreme Court, “Consumer compliance rates are notoriously low” and South Dakota lost “between $48 and $58 million annually.”  Moreover, the physical presence rule has been seen to give out of state sellers an unfair advantage.  As such, the Supreme Court found that the rule has become “further removed from economic reality and results in significant revenue losses to the States. These critiques underscore that the rule, both as first formulated and as applied today, is an incorrect interpretation of the Commerce Clause.”  E-commerce has made this issue particularly difficult in regards to the physical presence rule as it “ignores substantial virtual connections to the State.”  It should be noted that like Tennessee, South Dakota has no income tax and must rely heavily on the sales tax, and therefore had a strong incentive to seek a change in the precedent. In fact, according to the Supreme Court, “Forty-one States, two Territories, and the District of Columbia have asked the Court to reject Quill’s test.”

Next, let's discuss the underlying legal principal at stake, i.e. the Commerce Clause contained within the U.S. Constitution:  According to the Supreme Court in Wayfair, “Two primary principles mark the boundaries of a State’s authority to regulate interstate commerce; State regulations may not discriminate against interstate commerce; and States may not impose undue burdens on interstate commerce. These principles guide the courts in adjudicating challenges to state laws under the Commerce Clause." The Supreme Court did note that if the U.S. Congress actually passed legislation in this area it would be controlling, but it remains to be seen if any such legislation will be passed, at least in the near term.

Next, let’s look at the South Dakota Act itself.  First, it only applies to sellers that annually deliver more than $100,000 of goods or services into the State or engage in 200 or more separate transactions that deliver goods or services into the State. Secondly, it does not impose a retroactive sales tax.  Third, South Dakota adopted the Streamlined Sales and Use Tax Agreement.  The state provides free sales tax administration software to businesses.

The Supreme Court decided that the nexus requirements of the Commerce Clause were satisfied since the Act only applied to sellers that delivered substantial goods or services into the State.  It found that South Dakota’s system “includes several features that appear designed to prevent discrimination against or undue burdens upon interstate commerce” since the South Dakota law has a safe harbor for those that conduct limited businesses, the law isn’t retroactively applied, the Streamlined Sales and Use Tax Agreement was utilized, and free software provided.

As for the effect of this decision, it is likely that many states will work to quickly enact compliant legislation in order to expand their sales tax collection, and will likely model their statutes after South Dakota to avoid undue burden issues.  It will be interesting to see if the Supreme Court is correct that the elimination of the physical presence rule will encourage more physical “storefronts, distribution points, and employment centers,” since sales tax collection will not be able to be so easily avoided (by not having a physical presence) for larger sellers in states that adopt statutes in compliance with this decision.

Tax Reform and Sole Proprietorships, Partnerships and S Corporations

Much attention has been paid to the doubling of the standard deduction as well as the lowering of the corporate tax rates contained in the Tax Cuts and Jobs Act of 2017 (the “Act”).  The corporate federal rate will now be 21 percent and there is a maximum dividend rate of 23.8 percent (combined would be 39.8 percent (79 percent times 23.8 percent plus 21 percent)) and the top individual tax rate is 37 percent, which is the rate generally applied to the income of pass-through businesses (sole proprietorships, partnerships, and S corporations).  As such, in order to keep some of the advantages of a lower rate of pass-through businesses, complex changes  are contained within the Act.  Careful attention will need to be made to see whether particular pass-through businesses can benefit from the Act and thus reduce their taxes by several percentage points.  Contained herein is a brief overview which can serve as a high-level guide.  However, please note that some of the information contained herein may change based upon future IRS guidance, and the exact effects on certain transactions and entities, such as like-kind exchanges, tiered entities, and trusts and estates, are not currently known (although the Act directs the IRS to develop guidance for these areas).  As you will see, these changes are surprisingly complex even without any of the regulations, and careful attention will need to be paid to the various calculations contained therein.  Moreover, not all pass-through businesses will be able to benefit, but some may be able to see at least some modest reductions.

At the outset it should be noted that an actual entity formed under state law, e.g., a limited liability company or a limited partnership, is not required to take advantage of the Act’s provisions.  So sole proprietorship and common law partnerships would be able to take advantage of the additional deductions, provided that they otherwise meet all of the requirements contained under the Act.  Limited liability companies that have a single member can elect corporate taxation or can keep the default classification of being treated as disregarded, and thus as a sole proprietorship.  Multiple member limited liability companies can elect corporate taxation, or they can keep their default classification as a partnership.  Obviously, any limited liability company that elects corporate taxation but does not elect to be an S corporation will not be a pass-through entity and as such the provisions discussed herein would not apply.

Under the tax law for tax year 2017, individuals who receive pass-through entity income are taxed on that income at their individual rates.  Partners and S corporation shareholders are taxed on their share of the income regardless of whether or not the income is distributed to them and sole proprietorships are not treated as separate from their owner and are taxed accordingly.

The Act adds a new code section, 199A, that allows a deduction by individuals of up to 20 percent for certain domestic qualified business income from pass-through businesses.  Therefore, for those businesses that fully qualify, their rates would be reduced from 37 percent to 29.6 percent.  199A applies to tax years after December 31, 2017 and before January 1, 2026.  The deduction is available to individuals who itemize as well as individuals who claim the standard deduction, but is subject to phase in or elimination if taxable income exceeds certain thresholds or for certain service trades or businesses.  Performing services as an employee does not count as a qualified trade or business.  Exactly what types of business qualify as a trade or business will need to be better specified with regulations, particularly with rental properties.

The deduction amount is calculated as follows, and is the lesser of:

1. The combined qualified business income amount (income, gain, deduction, and loss effectively connected to a trade or business within the United States and included for determining taxable income are qualified), or
2. Twenty percent of the excess of the individuals taxable income over the sum of (i) that individual’s net capital gain under IRC 1(h) and (ii) that individual’s aggregate cooperative dividends.

PLUS
The lesser of:

1. Twenty percent of the individual’s aggregate qualified cooperative dividends, or
2. The individual’s taxable income minus that individuals net capital gain.

The deduction cannot be more than the individual’s taxable income, reduced by net capital gain, for the tax year.  For purposes herein taxable income is determined without regard to the 199A deduction.  Note that cooperative dividends cover a variety of different business cooperatives, such as cooperative telephone companies, and as such there are special rules under 199A for claiming these deductions.

The combined qualified business income amount for a tax year equals:

1. The sum of deductible amounts for each qualified trade or business of the individual, plus
2. Twenty percent of the individual’s aggregate qualified REIT dividends and qualified publically traded partnership income.

This deduction is limited to the greater of:

1. Fifty percent of W-2 wages (wages that qualified trade or business paid to its employees and include certain deferrals) paid by the business; or
2. The sum of 25 percent of the W-2 wages plus 2.5 percent of unadjusted basis of certain property that the business uses to produce the qualified business income.

However, this limitation does not apply if the individual’s taxable income for the tax year is equal or less than $157,000.00 or $315,000 for a joint return.  For single filers who make more than $157,500 and less than $207,500, there is a phase in of the limitation, and for joint filers who make more than $315,000 but less than $415,000 there is also a phase in.  The purpose of this limitation is to try to prevent abuse.  As an example, it prevents employees quitting their jobs, setting up S corporations that contract with their old employer, and then not pay themselves a salary, and thereby convert their salary into Qualified Business Income and obtain the lower rate.  In this case, since the S corporation would have no W2 wages and no applicable property, then the limitation would be zero, and as such no deduction allowed.  The 25 percent and 2.5 percent of unadjusted basis of certain property was added late into the bill to allow certain rental property owners to still claim a deduction if they could not otherwise qualify under the 50 percent limitation.  However, it is not completely clear which rental activities rise to the level of a trade or business.

Certain specified service trades or businesses cannot claim the 199A deduction, and those businesses are in the fields of accounting, actuarial science, athletics, brokerage services, consulting, financial services, health, law, performing arts; investing and investment management, trading, dealing in securities or dealing in partnership interests or commodities.  In addition, those businesses whose principal asset is the reputation or skill of one or more of its employees or owners also cannot claim the 199A deduction.  However, a modified qualified business deduction may be claimed even for a specified service trade or business if the taxable income for the tax year is less than $415,000 for taxpayers filing a joint return or $207,500 for all other taxpayers.

Code Section 199A regarding pass-through businesses contains new provisions that will have to be carefully analyzed, particularly all the various calculations for both deduction amounts as well as for the limitations, phase-ins and modifications.  One takeaway from this article is that the choice of business entity has now become more complex, and that pass-through entities might not always be the best answer if the business owner(s) cannot qualify for the lower pass-through rate.  In the coming months it can be expected that many new rules and regulations will be issued to better define the new concepts under 199A that will hopefully allow for more precise calculations and planning. 

Does the Republican’s Estate Tax Repeal Plan Affect Community Property Trusts?

In 2010, Tennessee became the second state to create an elective community property system through community property trusts. Community property is a system of ownership that provides for equal ownership between husband and wife. However, the property in this type of trust would be subject to the creditors of both spouses. Community property trusts therefore are different than tenancy by the entirety, whereby property held by husband and wife as tenants by the entirety are immune from the creditors of only one spouse (although they are not immune from creditors of both spouses jointly, or if the non-debtor spouse dies first).  

Why would a couple give up tenancy by the entirety protection?  Generally, for tax purposes, i.e., a double step in basis.  Without a community property trust, when one spouse dies there is only a half step-up in basis typically with property owned jointly.  With a community property trust it is possible to receive a full step up on the death of one’s 'spouse for property owned jointly.  Here’s an example: assume Mary Smith and John Smith bought a rental house for $100. At Mary Smith’s death, the property has appreciated in value to $200. If the property is sold at that point for $200 there would be a 50% step up in basis, so there would be tax on $50 of gain ($100. basis plus $50 step up).  If the property had instead been in a community property trust, there would be a full step up at Mary Smith’s death and there would be no tax if the property sold for $200. There would be another full step up at the time of John Smith's death.

A Tennessee community property trust is set up if one or both spouses transfer property to a trust that:

1. expressly declares that the trust is a Tennessee community property trust;
2. has at least one trustee who is a qualified trustee and whose powers include, or are limited to, maintaining records for the trust and preparing or arranging for the preparation of any income tax returns that must be filed by the trust (both spouses or either spouse may be a trustee);
3. is signed by both spouses; and
4. contains the following language in capital letters at the very beginning of the trust document: THE CONSEQUENCES OF THIS TRUST MAY BE VERY EXTENSIVE, INCLUDING, BUT NOT LIMITED TO, YOUR RIGHTS WITH YOUR SPOUSE BOTH DURING THE COURSE OF YOUR MARRIAGE AND AT THE TIME OF A DIVORCE. ACCORDINGLY, THIS AGREEMENT SHOULD ONLY BE SIGNED AFTER CAREFUL CONSIDERATION.  IF YOU HAVE ANY QUESTIONS ABOUT THIS AGREEMENT, YOU SHOULD SEEK COMPETENT ADVICE. 

Tenn. Code Ann. § 35-17-103. 

The issue with the current Republican tax proposal is not in regards to the technical set up of the trust in accordance with the above, and not even in regards to the ability to have elective community property treatment.  Instead, the issue is that it is unclear if the proposal is passed whether or not there would still be a step up in basis at the death of the first spouse.  The reason is that this double step up requires the property to be subject to the estate tax (or fall under the credit amount).  Without an estate tax, it is unknown whether this double step up would be available.  Therefor, more information will need to be forthcoming as the bill or bills progress, but this is definitely a situation that should be monitored by those who have or are contemplating a community property trust.  Fortunately, if the double step up is no longer available, community property trusts are revocable, and as such the property could be deeded out and into a trust that has treatment similar to tenancy by the entirety.

See the article at: Stites & Harbison Learning Center

An expanded version of my article on Trump's death tax proposal, as published on Law360:

Estate And Gift Taxes Under Donald Trump: A Preview

Many aspects of President-elect Donald Trump’s tax plans are still unclear. But proper estate planning will still be important. Michael Goode of Stites & Harbison PLLC considers what lies ahead with regard to estate and gift taxation, including a prohibition on some transfers to closely held family charities, incentives to keep taxable estates within the family, and whether or not the gift tax will be repealed. 

http://www.stites.com/learning-center/articles/estate-and-gift-taxes-under-donald-trump-a-preview

My latest article, on Trump's Death Tax proposal and how it affects estate planning:



As this time, it is difficult to determine what the specific provisions of President-Elect Donald J. Trump’s tax proposals will be; however, it is important to highlight the types of planning that are not likely to be affected, and therefore could, and should, continue.

www.linkedin.com/hp/update/6207339058297921536

An Overview of Important International Taxation Considerations

My article "An Overview of Important International Taxation Considerations" appears on page 20 

The Goods (July 2016):

https://issuu.com/kam2014/docs/july2016goods/20

The latest digital issue of the Kentucky Association of Manufacturers' publication "The Goods"

Don’t Forget to Report Certain Foreign Accounts to Treasury by the June 30 Deadline

Don’t Forget to Report Certain Foreign Accounts to Treasury by the June 30 Deadline



In general, the filing requirement applies to anyone who had an interest in, or signature or other authority over foreign financial accounts whose aggregate value exceeded $10,000 at any time during 2015. Because of this threshold, the IRS encourages taxpayers with foreign assets, even relatively small ones, to check if this filing requirement applies to them.

Ready to create your own Tennessee LLC? At the end of our seminar you will have a completely formed company.

Check out "Form Your Own Company - A Guided LLC Formation Seminar" REGISTER AT EVENTBRITE

Don't want to spend your valuable startup capital on your own attorney?  Thought about using a legal website to form your company?  Don't zoom through your company formation just to save a buck!  

Are you ready to form your own company?  

Get it done in two hours during this unique hands-on seminar where two attorneys will walk you through the online process of organizing your own Tennessee Limited Liability Company.

Here's what to expect

At the end of the seminar, you'll have:

1. A formed company
2. Filed Articles of Organization
3. A basic, Member Managed Operating Agreement
4. An Employer Identification Number with the IRS
5. Instructions for Recording the Articles of Organization with the Recorder of Deeds
6. A completed workbook with all of the relevant information about your company
7. New entrepreneur friends who have just formed their own companies with you

Before the seminar, you'll need:

1. To do some research to determine whether a limited liability company is the right legal form for your business
2. To complete some short homework about your business that you'll use to form your company
3. To select a few options for your business name

At the seminar, you'll need:

1. A wifi enabled laptop
2. Your completed homework questionaire
3. A debit card or credit card to pay the $300 Secretary of State filing fee 
4. A few choices for business names
5. Enthusiasm?

During class, you'll use your laptop to:

1. Organize your company on the Tennessee Secretary of State's website
2. Register your Employer Identification Number on the IRS website

What the seminar is not:

1. You won't receive legal advice or be represented by an attorney; we're just there to walk you through the organization process
2. You won't receive tax or legal advice about the type of entity to form; you should do some research to make sure that you want to form an LLC as opposed to a corporation, nonprofit corporation, partnership or other type of entity

We hope you'll join us! 

BECAUSE WE'RE ATTORNEY'S, WE HAVE TO TELL YOU THIS IS AN ADVERTISEMENT

WHEN

Thursday, July 14, 2016 from 3:00 PM to 5:30 PM (CDT) 

WHERE

Stites & Harbison, PLLC - 401 Commerce Street, Suite 800, Nashville, TENNESSEE 37219 

Tennessee Series LLC Basics: Liability Separation with a Single Entity

What is a “Series LLC”?  It's a limited liability company that has elected to allow the creation of separate series.  According to the statute:

• Notwithstanding anything to the contrary set forth in this chapter, or under other applicable law, the debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing, with respect to a particular series established . . . shall be enforceable against the assets of such series only, and not against the assets of the LLC generally, or any other series of the LLC . . .

T.C.A. § 48-249-309.  This broad provision allows for the segregation of liabilities into each series, without having to form separate LLCs. As stated above, the segregation is allowed notwithstanding other provisions of the Revised Limited Liability Company act, and it's even allowed regardless of other applicable law.

The main attraction of a Series LLC is this: separation of liability using only one entity and paying only one annual fee.  This easily creates and dissolves “series” without having to create new companies.

Although there are requirements as to how to establish a series, none of those requirements include having to file again with the Secretary of State. Thus, the ultimate benefit to utilizing a Series LLC is that it allows a business entity to form separate ‘‘series’’ between which an internal liability shield can be established.  It also minimizes legal, regulatory, accounting, transfer and recordation fees that might otherwise result when forming a new LLC or transferring assets between or among two or more LLCs.  Accordingly, the benefit of the use of a Series LLC in the context of real estate transactions is that it will allow an owner to segregate liabilities among its various properties.

Until 2013 there was some uncertainty as to Tennessee franchise and excise taxes, but this was resolved with guidance issued in 2013, which essentially treats each series separately for franchise and excise tax purposes. Significantly, this will allow each series to apply for the Family Owned Non-Corporate Entity exception if applicable residential real estate is held by a series and thereby avoid the franchise and excise tax.  This makes this structure ideal for someone holding a number of residential real estate properties.  The specific requirements of this exception are outside the scope of this update, but should be explored for family owned residential rental property.

What are the downsides?  Series LLC may not be a great choice if the LLC is going to have business in states (or countries) that do not explicitly recognize Series LLCs, since there would be too much uncertainty of law.  Another downside is that the Tennessee law, unlike Delaware’s Series LLC act, does not specifically state that each series can in and of itself hold real estate, so some title insurance companies will not insure property held that way.  A possible workaround is to hold the property in the name of the LLC but on behalf of a series, since the Tennessee Series LLC law allows the “LLC documents” to establish separate series with “specified property or obligations of the LLC”.  If certainty of law is of particular concern, one might consider using Delaware’s law, or simply using separate LLCs.  However, for many deals the Tennessee Series LLC will be better than simply holding everything in one LLC, when separate LLCs are not practical or economical.  

What are the requirements for the Series LLC? In addition to the notice requirement in the articles of organization filed with the Secretary of State and the requirements that the LLC documents establish a series, the LLC member also must make sure that:

1. “Separate and distinct records are maintained for any such series”, and
2. “the assets associated with any such series are reflected and held in such separate and distinct records, directly or indirectly, including through a nominee or otherwise”, and
3.  the assets are accounted for in “separate and distinct records separately from the other assets of the LLC and the assets of any other series of the LLC”.  

Therefore, a Series LLC is only appropriate for a person willing to keep the proper records. 

Co-authored with J. David Wicker

Reporting Foreign Income: Eight Tax Tips from the IRS

Reporting Foreign Income: Eight Tax Tips from the IRS

https://content.govdelivery.com/accounts/USIRS/bulletins/13f2f30?reqfrom=share

Succession Planning for an International Business Upcoming Event

Our next meeting for Chattanooga Succession Planning Professionals will be at 8am to 8:50am on May 19, 2016 at Olsen Law Firm.  This event will be at Olsen Law Firm's brand new office in the James Building, 735 Broad St #708, Chattanooga, TN 37402. 

Terry Olsen will be speaking on "Succession Planning for an International Business".  In this presentation Terry will discuss the steps he has taken to help a new generation open a branch of a family business in the US as part of their plans for succession, modernization, and expansion in to the United States.  Included in this presentation will be actual case studies and warnings regarding traps for the unwary, particularly with increased and unpredictable regulation.  Special focus will be on how immigration issues control financial, tax, banking, and business law issues, and the penalties for failures to comply.

Please RSVP to mgoode5407@me.com and let me know if you will attend.

If anyone who like to host/present for a meeting, please let me know.

https://www.facebook.com/events/1145790955454414/

What to Do with an Estate with Foreign Assets (Even that “Little” Bank Account in Europe)

This article regards estates of decedents who owned foreign assets and the tax and reporting requirements.  Many people are quite shocked to learn about the reporting requirements for foreign bank accounts, in particular.  After all, tax is typically being paid in the foreign jurisdiction, or perhaps the foreign bank accounts generate little to no income that is taxable anyway.  There are, however, two categories to be concerned with, first, of course is taxation.  Second is reporting in and of itself.  How does this all relate to estates?  Well, if the estate has foreign assets and the proper reports are not made, then the personal representative of the estate could be liable.

One of the main reporting obligations is actually not an IRS form at all, it’s a treasury department Form FinCen 114, commonly called an FBAR (Foreign Bank Account Report). It’s part of the financial crime enforcement network, and if the foreign bank accounts in the aggregate exceed $10,000 at any point during the year (even very briefly) then this report must be electronically filed.  The penalties for failure to file can be quite draconian, including willful penalties of 50% or more of what is not reported.  Again, note that this filing has nothing to do with the amount of tax owed, if any.  If a person has signature authority of foreign financial accounts then there can also be a reporting requirement, even if there is no financial interest in the account.  As such, one should be careful about the accounts that a person has signature authority over.  Similarly, one should be careful about having a power of attorney over one’s parents who have a foreign account, as there could be a reporting requirement.

As for tax reporting, several years ago an act of Congress commonly called FATCA added Form 8938, Statement of Specified Foreign Financial Assets.  It is very important that this form is filed, since the statute of limitations never runs if it is not – meaning that there could be a potential tax problem forever.  The IRS recently released regulations requiring this form to be filed by certain domestic entities as well.

Foreign mutual funds held in an estate of a United States citizen or resident are particularly problematic. A United States citizen or resident should never own foreign mutual funds due to the extensive reporting under Form 8621, PFIC shareholder filings and the often very unfavorable tax treatment and the difficulties in obtaining information from often very reluctant foreign financial institutions (FATCA and PFICs are two of the main reasons it’s often hard for United States citizens and residents to open accounts overseas). Although there may be some elections available to alleviate some of the tax burden, foreign financial companies often refuse to supply the needed information.

Of course, some will wonder how the IRS would ever know about these accounts.  Well, FATCA requires foreign financial institutions to identify and report US holders of non-US financial accounts.  The US already has agreements with most countries for this reporting.

The major forms to be concerned with are set forth in the list below.  This is not an exhaustive list and not every form is needed in every circumstance.  The form number is listed with its title in parenthesis:

• FinCen 114 (Foreign Bank Account Report),
• Form 926 (Transfers to Foreign Corporations),
• Form 1042 (Payments to Foreign Taxpayers),
• Form 3520, 3520A (Foreign Trusts),
• Form 5471 (US Owned Foreign Companies),
• Form 5472 (Foreign Owned US Companies),
• Form 8233 (Independent Personal Services by Nonresident),
• Form 8621 (Passive Foreign Investment Corporations),
• Form 8833 (Treaty Based Disclosure Form),
• Form 8840 (Closer Connections Form),
• Form 8858 (Foreign Disregarded Entities),
• Form 8865 (Foreign Partnerships),
• Form 8938 (Specified Foreign Financial Assets),
• Form W-8BEN (Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding).

Now, back to the subject of personal representative liability.  Pursuant to Title 31 U.S.C.§3713(b) any personal representative who pays “any part of a debt of the . . . estate before paying a claim of the Government is liable to the extent of the payment for unpaid claims of the Government.” Therefore, the personal representative may be liable for taxes, interest and penalties if the distribution leaves the estate unable to pay the government and the personal representative had notice of the government’s claim.  In terms of notice “the executor must have knowledge of the debt owed by the estate to the United States or notice of facts that would lead a reasonably prudent person to inquire as to the existence of the debt owed before making the challenged distribution or payment.” United States v. Coppola, 85 F.3d 1015, 1020 (2d Cir.1996). Therefore, there is a duty of inquiry regarding the existence of these obligations, and as such important that the proper reporting is done and taxes paid.

The good news, however, is that much of the reporting, aside from the PFIC reporting of course, is actually not very difficult.  Moreover, there are generally tax credits that can be used due to foreign tax paid, meaning that the US tax liability is often quite small.  If there are past years that have not been reported, the government currently offers several different programs to settle the tax and reporting obligations for reduced penalties (provided that a person comes forward prior to receiving IRS notice).  Considering the severity of the penalties, proper reporting is obviously very advisable.

Estate Planning With Partnerships: Important New Considerations

Two recent acts of Congress (including the rather interestingly named Protection of Americans from Tax Hikes Act) created new audit rules for partnerships.  Normally one would not think that a change to “audit rules” would impact estate planning.  However, many estates have LLCs taxed as partnerships, or even limited partnerships or limited liability partnerships, which are used as family limited partnerships in order to obtain valuation discounts through lack of control and lack of marketability (provided that all of the proper procedures and documentation is followed).  Moreover, many estates have revocable trusts that own limited liability companies, which is a common way to avoid the often lengthy process of probate for business assets.  Again, these techniques are quite common.

So what are the new audit rules, and how do they impact estate planning?  Briefly, starting in 2018 the new audit rules allow for a partnership level determination of deficiencies if the partnership is audited as the default regime.  The problem with this determination is that if there are different partners currently than the year under audit, then the current partners could end up being liable for the past deficiency.  There also can be issues with allocation, since the IRS won’t undo erroneous allocation and will simply assess the net increase against the partnership.  Another problem is that this deficiency will be assessed at the highest tax rates.  The tax matters partner is no longer, and instead there is a partnership representative who does not even need to be a partner.  It will be important to select a partnership representative since the IRS gets to choose the representative if one is not selected.  Due to the possible negative consequences of the new laws, many partnerships will want to opt out (which will keep determinations at the partner level).  The issue is whether trustees that own partnership interests on behalf of trusts will be able to opt out.

The new audit rules allow opting out if there are less than 100 K-1s, and the “each of the partners of such partnership is an individual, a C corporation, any foreign entity that would be treated as a C corporation were it domestic, an S corporation[note that there are some additional rules for S Corps], or an estate of a deceased partner.”  Unfortunately the new code section does not mention trusts or trustees at all, so it is currently unclear as to whether partnership that have trusts as owners will be able to opt out.  I recently attended a tax conference, and the IRS representative on a panel there informally stated that there would likely be regulations regarding grantor trusts and the ability to opt out (the new audit rules do allow the IRS to prescribe similar rules for other partners not listed in the new code section).

What to do now?  For partnerships, family limited partnerships, limited partnerships, limited liability partnerships (and limited liability limited partnerships), as well as LLCs taxed as partnerships, that are currently being formed, it would be prudent to include some of the language from the new code in partnership and operating agreements in order to insure later that the entity is in compliance, in case the partners do not return to amend the agreements.  For existing partnerships, it makes more sense to wait to amend as more regulations are promulgated by the IRS.  Extra caution should be taken regarding trusts (particularly non-grantor trusts) as owners, since it is unclear how or if partnerships with trustee owners will be able to opt out.

Do We Really Have to Change Every Operating Agreement? The New Partnership Audit Rules

The Bipartisan Budget Act of 2015 and the Protection of Americans for Tax Hikes Act of 2015 created new audit rules, which will in 2018 (unless for some generally ill-advised reason you want to opt in early) replace the current TEFRA regime.  The new default rule is that if a partnership (or an LLC, LP, etc. taxed as a partnership) is audited, there will be a partnership level determination, assessment and collection.  The problem with this default regime is what happens if you currently have different partners than who you had during the year being audited?  Also problematic is if certain allocations are challenged, the IRS will still assess the tax difference against the partnership (rather than simply undoing the allocations), which can create distortions. Notice comes solely to the partnership, and a partner individually cannot appeal.  The partnership only has 90 days from the date of final adjustment to appeal.  According to the new law, “imputed underpayments” will be determined “by netting all adjustments of items of income, gain, loss, or deduction and multiplying such net amount by the highest rate of tax in effect for the reviewed year.” (emphasis added).

What to do about the new audit regime?  Opt out! If you can….

If you elect out then the IRS has to pursue each separate partner.  However, you must have less than 100 K-1s (and if you have an S Corp member each shareholder is counted separately for purposes of this limit).  You also must have individuals, corporations, or estates of deceased partners as members.  A partnership that has a partnership (or an LLC taxed as a partnership) as a member (i.e. an upper tier partnership) cannot opt out.  It is unclear as to how trustees will be treated, although informally it has been suggested at a recent ABA tax conference that the IRS might deal with this issue through regulations.

We will also have to say goodbye to the tax matters partner.  There is now a Partnership Representative.  Unlike the tax matters partner, this person can be a non-partner and nonresident (but must have substantial US presence).  Interestingly enough, this flexibility might not actually be a good thing.  If a Partnership Representative has not been appointed, then the IRS can appoint one.  It is an open question as to whether the IRS would use this flexibility to appoint a non-partner who is favorable to the IRS.

So, in light of all of this, should current operating agreements be amended?  At this point, in many cases it might be better to wait for a bit more guidance.  However, for current deals, it would seem quite prudent to incorporate very flexible language that can take into account these new rules, especially since these rules can alter the economics of a deal, particularly between current and former partners.  Moreover, extra thought should be given as to which types of partners may join the partnership.

Minor Children and IRA/401Ks Beneficiary Designations: Dangers and Concerns

As a parent, one of the most difficult issues that I have had to deal with is what would happen to our young child should anything happen to my wife and I.  No one likes to contemplate their own mortality or the idea of not being there to watch their children grow up.  Unfortunately, mortality is inescapable, and proper planning is essential. Often people think that once they have their Will done everything will be settled. This is rarely the case.

See my post at: http://www.stitesonestates.com/?p=3338

Foreign Account Owners Beware!

My latest post on the upcoming FBAR deadline:

http://www.stites.com/learning-center/legal-updates/foreign-account-owners-beware

Advantages of Tennessee Trusts: Investment Services Act Trusts

Please see my new post at the Stites on Estates blog:

http://www.stitesonestates.com/2015/05/the-advantages-of-tennessee-trusts-investment-services-act-trusts/