The Section 355 Transaction: Waving Goodbye to Your Business Partner With Money in Your Pocket

A business is constantly changing and almost everyone wants to see their businesses evolve and grow.

However, when businesses have multiple owners, business relationships may sour due to both personal and professional conflicts. These conflicts can often lead to the dissolution and liquidation of a business if owners cannot find common ground, which often results in large amounts of realized income and capital gains tax. If you have almost or already reached such an impasse and you desire to continue operating the business, rather than dissolving your business, consider splitting your business via a Section 355 nonrecognition transaction (a Section 355 transaction can be used for both corporations and limited liability companies that have elected to be taxed as a corporation).

A Section 355 transaction in its most basic form generally involves a parent company and a subsidiary company. Though all requirements are the same within Section 355, there are three variations of the Section 355 fact pattern: 1) a spin-off, 2) a split-up and 3) a split-off.

1. A spin-off involves the distribution of subsidiary company stock from parent company to the shareholders of the parent, without the surrendering of any parent stock.
2. A split-up involves the distribution of two or more subsidiaries from the parent company to the shareholders of the parent company in complete liquidation of the parent company. The distribution of subsidiary stock can either be pro-rata to the parent company shareholders or each shareholder can acquire a separate subsidiary.
3. A split-off involves the distribution of subsidiary to some or all of the parent’s shareholders in exchange for some or all of their stock in parent.

Regardless of the type of split, there are a number of requirements that must be satisfied to ensure the transaction qualifies for nonrecognition treatment. Though a number of the requirements are relatively straightforward, the requirement most prone to challenge is the business purpose requirement. The reason for this is because even if the transaction satisfies all other requirements, if no legitimate business purpose exists, the transaction will lose its nonrecognition treatment and the shareholders and company will be subject to tax.

Though what constitutes a business purpose is not clearly defined within Section 355, or the corresponding regulations, a legitimate business purpose has previously been found in the following situations:

1. when there are two owners and they desire to split because the owners have interest in different business activities;
2. when a parent company surrendered all outstanding stock in its subsidiary due to serious disputes between owners; and
3. when a distribution was completed in order to increase the amount of commercial credit.

Nevertheless, it is important to note that simply because a business purpose has previously been found in the transactions, each transaction is independently reviewed and a business purpose that satisfied the requirement for one transaction may not satisfy the requirement for another.

Given the intricate requirements involved in properly structuring a Section 355 transaction to ensure nonrecognition treatment, it is important that you consult with competent legal counsel. If you have any questions about how a Section 355 transaction can help your business, the attorneys of Vandenack Weaver can assist you.

VW Contributor: Justin A. Sheldon
© 2020 Vandenack Weaver LLC
For more information, Contact Us

IRS Issues Final Regulations Providing Relief for Certain Tax-Exempt Organizations

On May 26, 2020, the Treasury Department and the IRS issued final rules (T.D. 9898) stating that certain tax-exempt groups will no longer be required to provide the names and addresses of major donors on annual returns filed with the IRS. These regulations specify that only organizations described in section 501(c)(3) and section 527 organizations are required to continue to provide names and addresses of contributors on their Forms 990 (Return of Organization Exempt From Income Tax), Forms 990- EZ (Short Form Return of Organization Exempt From Income Tax), and Forms 990-PF (Return of Private Foundation). Most of the information filled out on these annual returns in available for public inspection.

Charitable Organizations (501(c)(3))’s and Political Organizations (Section 527)

To be tax-exempt under section 501(c)(3) of the Internal Revenue Code, an organization must be organized and operated exclusively for exempt purposes and none of its earnings may inure to any private shareholder or individual. Organizations descried in 501(c)(3) are referred to as charitable organizations and such charitable organizations are barred from taking any action in an attempt to influence legislation as a substantial part of its activities, and this cannot participate in any campaign activity for or against political candidates.

This Treasury Decision revises §1.6033-2(a)(2)(ii)(F) to provide that organizations described in section 501(c)(3) generally are required to provide names and addresses of contributors of more than $5,000.  Similarly, §1.6033-2(a)(2)(iii)(D) is revised to remove the requirement to provide the names of contributors who contribute over $1,000 for a specific charitable purpose to the following organizations:

• Social and recreation clubs per 501(c)(7)
• Fraternity Beneficiary Societies and Associations per 501(c)(8), and
• Domestic Fraternal Societies and Associations per 501(c)(10).

Political organizations that are tax-exempt under section 527 of the code will also still have to report contributor names and addresses. A 527 group is created primarily to influence the selection, nomination, election, appointment, or defeat of candidates to federal, state, and local office. These final regulations also clarify that section 527 organizations with gross receipts greater than $25,000 generally are subject to the reporting requirements under section 6033(a)(1) as if they were exempt from taxes under section 501(a).

Social welfare organizations (501(c)(4)) and Business Leagues (501(c)(6))

Under the final regulations, social welfare organizations and business leagues are not required to provide donor names and addresses. The following organizations qualify as social welfare organizations under 501(c)(4):

• Civil leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare;
• Local associations of employees, where membership is limited to the employees of a designated person in a particular municipality, and the net earnings are used exclusively tor charitable, educational, or recreational purposes; and
• Certain organizations that engage in substantial lobbying activities (i.e. the National Rifle Association, the American Civil Liberties Union, and Citizens United).

Additionally, the Code provides for the exemption of business leagues, chambers of commerce, real estate boards, boards of trade and professional football leagues, under 501(c)(6), so long as they are not organized for profit and no part of the net earnings are used for the benefit of any private shareholder or individual. Organizations that qualify under 501(c)(6) are also allowed to engage in some political activity.

Commentators in favor of the IRS’s decision not to collect names and addresses of substantial donors to some tax-exempt organizations discussed the concern that supporters of certain organizations would face harassment if their status as contributors was publicly revealed. This would produce a “chilling effect,” discouraging potential contributors from giving to certain tax-exempt organizations and rise to a violation of a first amendment violation with regards to freedom of speech and freedom of association. On the other hand, critics asserted that the new rules will lead to an increase in the flow of money into U.S. elections through organizations described in section 501(c)(4) and (6). The IRS quashed this criticism and underscored section 6103 of the Code generally prohibits the IRS from disclosing any names and addresses of organizations’ substantial contributors to federal agencies for non-tax investigations, including campaign finance matters, except in narrowly prescribed circumstances.

As a final note, all tax-exempt organizations are required to maintain records regarding their substantial contributions, irrespective if they have to follow the annual reporting requirement. Still, states have the authority to impose their own reporting requirements as both the Treasury Department and the IRS expect each state to “determine the appropriateness of the burdens it may impose in light of its own tax administration needs.”

VW Contributor: Skylar Young
© 2020 Vandenack Weaver LLC
For more information, Contact Us

Nebraska Supreme Court Addresses Evidentiary Standards for Approving Average Weekly Wages in Workers’ Compensation Court

One of the issues evaluated by the Nebraska Supreme Court in the recent case of Bortolotti v. Universal Terrazzo and Tile Company, 304 Neb. 219, 933 N.W.2d 851 (Neb. 2019), was what evidence is necessary for a Plaintiff to prove applicable average weekly wages for an owner/operator of a business. In Bortolotti, the Plaintiff was the sole stockholder and president of Universal Terrazzo and Tile Company (Universal), a subchapter S corporation. The Plaintiff had been an installer of terrazzo tile and fabricator and installer of granite for over 30 years before becoming the sole stockholder and president in 2011. The injury at issue occurred in June 2013 and the Plaintiff’s operative petition for workers’ compensation benefits alleged weekly earnings of $3,625 at the time of the injury, but Universal and their compensation insurance provider denied the allegation. At trial the Plaintiff offered one page from his 2013 tax return noting that the employer was an S corporation, and his earnings for the year were $3,950. The compensation court did not believe the Plaintiff’s earnings were so low as president of the company. The evidence at trial also discussed the total gross income of the corporation, but offered no evidence regarding what business expense deductions were taken by the Plaintiff from business earnings. Thus, the compensation court was unable to verify if business expenses had been properly deducted from the company’s gross earnings or the Plaintiff’s testimony that his weekly draw from the corporation was $3,625. Ultimately, compensation court determined that the Plaintiff sustained a compensable injury, but had difficulty in determining the Plaintiff’s average weekly wage due to a lack of exhibits, and instead held the Plaintiff’s average weekly wage was $1,399.95, entitling him only to a statutory maximum compensation rate of $728 per week.

The Supreme Court affirmed the Court of Appeals’ determination that there was not sufficient evidence to support the high average weekly wage and that the only competent evidence in the record supported the Court of Appeals’ determination of an average weekly wage of $49, the minimum weekly income benefit provided by statute based on the 2013 earnings of $3,950. The Supreme Court held that net profits or net income of an S corporation do not necessarily qualify as “wages” under the Nebraska Workers’ Compensation Act, as the statute requires focus on the “money rate at which the service rendered is recompensed,” not payments received solely because of a recipient’s status as a shareholder.

As the Supreme Court notes, the burden was on the Plaintiff, the president and sole shareholder of the S corporation to provide evidence differentiating his wages as a corporate employee from his profits as a corporate shareholder. The co-mingling of ownership and employment burdens the party seeking workers compensation to provide sufficient evidence of what their total income is. Bortolotti demonstrates that simply indicating the total revenue of a company will not be sufficient evidence for computing an average weekly wage.

VW Contributor: Ryan Coufal
© 2019 Vandenack Weaver LLC
For more information, Contact Us

Nebraska Sales and Use Tax on Short-Term Rentals: New Guidance by the Nebraska Department of Revenue

By Ryan Coufal

Earlier this year Nebraska LB 284 passed into law requiring remote sellers—those without a physical presence—whose retail sales exceeded $100,000 in the previous year or current calendar year or if the seller made 200 or more separate Nebraska retail sales transactions in that same time frame, to obtain a sales tax permit from the Nebraska Department of Revenue (DOR) and begin collecting and remitting Nebraska and local sales tax.  Included with the online retail sales were sales made Multivendor Marketplace Platforms (MMP), or online marketplace facilitators.  Remote sellers selling through MMP’s must file sales tax returns reporting all of their Nebraska sales, but are relieved of the duty to collect and remit the sales tax on sales facilitated by the MMP if the MMP reports and remits the tax to the DOR.

Recently, the Nebraska DOR provided guidance on sales and use tax collection for remote sellers and MMPs which transact sales regarding Short-Term Lodging and Rentals in General Information Letter (GIL) 1-19-1.  The GIL clarifies that beginning on April 1, 2019, MMPs which facilitate short-term rentals must obtain sales and lodging tax licenses and begin collecting and remitting these taxes on the sales they facilitate, much like MMPs facilitating retail sales.  Additionally, the MMP is to complete the MMP Lodging Tax Worksheet-Breakdown by County with the Nebraska and County Lodging Tax Return (Form 64) to report the lodging tax by each county for sales facilitated in Nebraska.  Hotel or tourist home owners who provide short-term lodging and rentals are relieved of the duty to collect and remit the sales and lodging taxes on sales facilitated by an MMP if the MMP reports and remits the taxes themselves to the DOR, however, any sales and lodging not facilitated by an MMP must still be reported by the short-term rental provider themselves.

Per the Nebraska Revenue Act, a retailer or seller of lodging is defined as any person who, directly or indirectly, rents or leases property for a profit or gain when the transaction is subject to the sales tax, including sales facilitated by an MMP.[1]  The GIL indicates that travel agents who do not publish room availability and rates on behalf of hotels or tourist homes are generally not considered MMPs. This helps clarify a travel agent from a more well-known MMPs, such as Airbnb.

[1] Neb. Rev. Stat. §§77-2701.07, 77-2701.13, 77-2701.16, 77-2701.32 and 77-2701.36; see also Neb. Rev. Stat. §§77-2701.25, 77-2701.31, and Nebraska Sales and Use Tax Regulations 1-004.02C.

© 2019 Vandenack Weaver LLC
For more information, Contact Us

 

New Nebraska Law’s Impact on Filing Requirements for Corporations and Partnerships

LB 512 signed into law on May 30^th, 2019, requires all S Corporations, limited liability companies, and partnerships with Nebraska source income to file a Nebraska return for all tax years beginning on or after January 1^st, 2019.

Previously, S Corps, LLCs, and partnerships had to file a Nebraska income tax return if they had nonresident owners and were apportioning income.

The Nebraska Department of Revenue (DOR) encourages all S corporations, limited liability companies, and partnerships to e-file their pass-through entity returns. A Nebraska state ID is required when e-filing a pass though entity return.

A pass-through entity without an assigned Nebraska identification number will need to apply for a number before e-filing a 2019 Nebraska tax return. If your business does not have a Nebraska Tax ID Number, follow the link below to the Nebraska Department of Revenue to register your business.

http://www.revenue.nebraska.gov/electron/online_f20.html

© 2019 Vandenack Weaver LLC

For more information, Contact Us

U.S. Supreme Court Expands Rights of States to Collect Tax on Internet Transactions

by James S. Pieper

Since the dawn of the Internet, online sellers have benefited from a line of United States Supreme Court precedent that prevented states from requiring out-of-state businesses to collect and remit sales tax on sales in states where the seller has no “physical presence.”

On June 21, 2018, the Court discarded its longstanding “physical presence” test, thus opening the door for state governments to impose a broader range of duties on remote sellers, including the duty to collect and remit sales tax.

In South Dakota v. Wayfair, Inc., South Dakota sought to defend its statute that imposed a duty on all retailers with more than $100,000 of sales or 200 transactions within the state to collect sales tax on transactions and remit the tax to the state.  For retailers with no physical presence in the state, the statute was clearly in violation of the historic interpretation of the Commerce Clause of the United States Constitution, which limits the ability of states to regulate “interstate commerce” unless there is a “substantial nexus” between the state’s interests and the commercial activity.

Prior court decisions concluded that a state could have no “substantial nexus” with a seller that had no “physical presence” in said state.  As a result, online sellers with no “brick-and-mortar” presence or employees working in a state were free from the obligation to collect tax on their sales.

In South Dakota v. Wayfair, the Court rejected its prior interpretations of the Commerce Clause and held that a “substantial nexus” could be created by online sales alone despite the lack of “physical presence.”  The decision was decided with a bare 5-4 majority.

As a practical matter, the majority of online sales already entail the collection of sales tax due to either requirements that were valid under prior law or voluntary compliance by larger online retailers (including amazon.com).  Some retailers with no physical stores, however, will lose the advantage of being able to undertake transactions without collecting tax (including the respondents in the case, wayfair.com, overstock.com and newegg.com).

It will be up to each state to set the parameters of which remote sellers might be exempt from collecting tax due to a lack of significant sales, and the Court did not set a constitutional standard for what level of sales would constitute a sufficient “substantial nexus” to allow a state to impose duties (only that South Dakota’s standards were more than sufficient).

Perhaps more importantly, by jettisoning the “physical presence” standard as inappropriate in an era of “substantial virtual connections,” the Court has raised the prospect of greater opportunity for individual states to tax and regulate the actions of businesses whose only connection to said state is via online presence.

All businesses that connect with customers in other states via online connections will need to have heightened awareness that state tax and regulatory requirements in those other states may now apply to those interactions due to the Court’s new reading of the scope of a state’s authority under the Commerce Clause.

© 2018 Vandenack Weaver LLC
For more information, Contact Us

 

FIRPTA: United States Resident, Foreign Person or “Disregarded Entity”?

Upon arriving at a piece of real property, a prospective buyer or real estate agent is usually on the look-out for hidden liabilities. One hidden tax liability could involve the Foreign Investment Real Property Tax Act (“FIRPTA”). An unfamiliar concept to many, tax liability arising under FIRPTA could put the purchaser on the hook for the seller’s real estate capital gains.

The FIRPTA tax, which taxes a foreign person’s disposition of real property, was designed to address widespread concern that foreign investors were purchasing United States real property and selling it at a profit, but not paying any tax. Generally, under FIRPTA, a transferee, who is often the purchaser, must withhold 15% of the total amount realized when purchasing United States real property from “foreign persons.” The IRC defines “foreign person” to include a nonresident alien individual, a foreign corporation, a foreign trust, a foreign partnership, a foreign estate, and any other person that is not a U.S. person as defined by the IRC.

If the seller is an individual, IRC Section 7701 provides various technical definitions for when a “nonresident alien individual” becomes a “residential alien individual,” making FIRPTA inapplicable. If the seller is a single-member limited liability company (“SMLLC”) organized in the United States, which is owned by a “foreign person,” the residency status of the SMLLC is “disregarded.” The seller is deemed to be the SMLLC owner, potentially subjecting the sale to FIRPTA. Under the IRC Treasury Regulations, there are various seller entities that are considered “disregarded entities.”

A certificate of non-foreign status provides the purchaser the requisite information to determine the seller’s residency status and whether funds need to be withheld to satisfy FIRPTA. In the above SMLLC scenario, a United States “disregarded entity” cannot provide a certificate of non-foreign status. The certificate of non-foreign status is required to state that the entity is not a disregarded entity, evidenced by a United States employer identification number. An individual transferor may also provide a certificate of non-foreign status, whereby the individual certifies he or she is not a nonresidential alien, and provides their Unites States taxpayer identification number, which is often their Social Security number.

Mischaracterizing a seller’s legal status under the IRC may create liability for the purchaser or their designated agent(s). A simple request by the purchaser or their agent of a notarized certificate of non-foreign status when purchasing real property will allow the purchasing party the ability to discover the FIRPTA implication, and its tax implications.

 

 

© 2018 Vandenack Weaver LLC

For more information, Contact Us

End of the Year Tax Planning Considerations: New Issues Arise from Tax Legislation

            With the passage of new tax legislation by Congress, the usual gamut of year-end tax considerations has been made more complicated this year.  The timing of this legislation leaves US taxpayers with little time to determine what actions need to be taken this year to give them favorable consideration in 2017 and beyond.  Vandenack Weaver LLC has assembled the most important changes here for your consideration.  We encourage you to discuss these issues with your tax professionals.

• 2018 Real Estate Taxes – The new tax legislation limits the deductibility of state income tax, real estate taxes, or sales tax to $10,000. With this new limit, some clients may find it advantageous to pay all but $10,000 of their 2018 real estate taxes in 2017.  If you are paying taxes into an escrow account, you are eligible to take the deduction in the year when the bank pays the property taxes, not when you pay the bank.  As such, consult with your bank to determine if you may take advantage of this.  Note, for those clients who are subject to the Alternative Minimum Tax (AMT) in 2017, paying early is inapplicable as these taxes are not deductible when computing AMT in 2017.

 

• Gifts – Gift and generation skipping transfer tax exemptions will double under the new tax legislation. For those making large gifts, consider waiting until the new year in order to avoid 2017 tax consequences.  However, remember to make your annual gifts before the end of the year.  These limits will increase from $14,000 to $15,000 in 2018, but if you do not make a transfer in a calendar year, you will not get the exemption for that calendar year.

 

• Payment Timing for Estimated State Income Taxes – Traditionally, state and local income taxes have been deductible provided that such tax payments were based on a reasonable estimate of the taxpayer’s actual liability (and that the state has authorized the tax payment). This was available even if you received a refund after the end of the year for which payments were made.  The new tax legislation curtails this practice.  For example, an amount paid in 2017 for taxes that are imposed in 2018 or later will be treated as though it was paid at the end of 2018.  This is particularly important for individuals who are under audit or who have outstanding liabilities for 2017 and earlier.  In 2018, deductions for payments of taxes attributable to prior years will be severely reduced.  Consider settling these issues prior to 2018.

• Moving Expenses – Under the new tax legislation expenses for a work-related move will be eliminated (except for those in the military). While it is highly unlikely anyone who hasn’t planned to or already moved will be able to take advantage of this, it is important to take this change into consideration for your future plans.

• Impact to Charitable Gifts – Although the new tax legislation did not make many changes to deductions for charitable gifts, other changes in the legislation will impact how far charitable gifts go in reducing your taxes. Because the tax brackets are shifting downward, many taxpayers will find themselves requiring fewer deductions in 2018. Thus, making a charitable deduction in 2017 could have a greater impact on your taxes than in 2018.  There are many factors that can impact the deductibility of your charitable contributions, so it is highly advised that you speak to a tax consultant before making any decisions.  It should also be noted that because of the overall decrease in itemized deductions and the increase of the standard deduction, some taxpayers will find it more advantageous to take the standard deduction in the new year.  If you are taking the standard deduction, then you will not be able to deduct your charitable contributions.  One change that was made to the deductibility of charitable gifts is in the ability to deduct 80 percent of an amount donated to a university in order to acquire the right to purchase tickets to the university’s sporting events.  That deduction will no longer be available after December 31. If you expect to make any such donations, you should consider doing so before the end of the year to take advantage of this expiring deduction.

• Miscellaneous Itemized Deductions – If you do visit a tax consultant to discuss these issues, be sure to consider paying for those services in 2017! The new tax legislation eliminates the deductibility of tax preparation fees as well as other miscellaneous itemized deductions.  Some of these include appraisal fees for charitable gifts of property, investment advisory advice, and safety deposit box fees.  Clients should look at paying any of those expenses that are coming up in 2018 now to get the deduction before it is gone.

• Unreimbursed Employee Expenses – Expenses that are attributable to an employee’s work and that have not been reimbursed are deductible in 2017. However, the new tax legislation will be eliminating this deduction.  As with miscellaneous itemized deductions, clients should look to move any of these expenses that they were planning to incur in 2018 to the current year.  Such expenses may include tools, uniforms, work-related education, even unpaid mileage and gas if the trip was work related.  Business owners are still able to deduct business expenses on Schedule C under the new legislation.

• Mortgages – Current tax law allows for a deduction of the interest paid on up to $100,000 (for married couples) of home equity debt on a personal residence. This interest will no longer be deductible with the new tax legislation. Interest on mortgages for the acquisition of a principal residence will remain deductible, but the debt cap of $1,000,000 (for married couples) will be lowered to $750,000.  However, those who have purchased a home before December 15, 2017, will still be able to use the higher cap.  These changes may impact your decision in purchasing a home as it effectively increases the cost of the loan.  In addition, this is also one of the main reasons why many clients may consider taking the standard deduction in the future as the deduction for mortgage interest can make up a significant portion of your itemized deductions.

• 8% Surtax – While the new tax legislation does not change the present 3.8% surtax on net investment income, some other changes may cause your taxable net investment income to rise in 2018. First, as noted earlier, the deduction for investment-related expenses will no longer be available.  In addition, state income taxes that could previously be deducted (to the extent they were connected to net investment income) are now capped at the $10,000 limit.  Clients should consider making any of these payments they can in 2017 in order to take advantage of these deductions.

• Roth IRAs – The new tax legislation changes an existing rule regarding Roth IRAs. Presently, if you convert a traditional IRA to a Roth IRA, you may undo the conversion by recharacterizing it within specified time frames.  The new legislation removes the ability to recharacterize a Roth IRA.  In addition, there is legislative ambiguity as to what Roth IRAs may be impacted by this.  If you have converted an IRA in 2017 and are considering recharacterizing the subsequent Roth IRA, it is advisable you complete the recharacterization in 2017 to avoid any ambiguity in the law.

• Capital Gains – Taxes on capital gains do not change significantly with the new tax legislation. However, there are some hidden issues to consider.  Because income tax rates and tax brackets are changing significantly, accelerating or deferring your capital gains may create a positive impact (or avoid a negative one).  Specifically, one of the major issues to consider is whether your taxable income will increase because of these changes that could bump your capital gains tax rate to a higher amount (from 15% to 20% for taxable income over $479,000).  One caveat to this issue is that it is highly dependent on other factors such as where you live.  Given the short amount of time left in the year it may not be possible to take advantage of these changes.

• Pass-Through Business Limits – With the reduction of the corporate tax in the new tax bill, a corresponding change is made to the taxation of pass-through businesses (which do not pay the corporate tax) in order to keep them competitive. Those participating in a pass-through business will be able to deduct 20% of their allocable share of business income.  There are some limits to this, primarily if you earn more than $157,500 if single or $315,000 if married.  In addition, if you are in certain professional jobs such as accountants, doctors, or lawyers, the deduction will not apply unless you make under certain specified limits.  Still, small businesses may want to consider reorganizing in order to take advantage of these new tax savings.

• Recently Purchased Business Equipment – One of the new provisions allows for the full and immediate expensing of qualifying capital investments (as opposed to gradual deductions). In addition, the provision will be applicable in the 2017 tax year for purchases made after September 27, 2017.  Businesses should speak to their tax professionals to consider if this applies to them or if they should purchase new equipment before the new year to include it on their 2017 return.

 

• Limits of the Bill – One final point to note is that many of these changes will terminate in 2025 or earlier, at which time the tax code will revert to the old rules.  Therefore, consultation with a tax professional is encouraged to ensure that you will be receiving the best tax treatment now and in the future

 

© 2017 Vandenack Weaver LLC

For more information, Contact Us

Court Ruling Sheds Light on Estate’s Ability to Access Digital Information

By Monte Schatz

The Supreme Judicial Court of Massachusetts issued a ruling on October 16, 2017 that empowers administrators of estates to access digital content of deceased persons.

Federal statutes 18 U.S.C. §§ 2701 through 2712 titled The Stored Communications Act created privacy rights to protect the contents of certain electronic communications and files from disclosure by certain online service providers. If the Act applies, the online user account service provider is prohibited from disclosing the contents/files to the estate or trust representatives and family members unless there is an exception under the Act. The result of this legislation was that many digital communications and accounts of a deceased person were inaccessible

The Stored Communications Act provides for certain exceptions in § 2703 (b). One of the exception states that, “[A] provider may divulge the contents of a communication… with the lawful consent of the originator or an addressee or intended recipient of such communication.” The language of this exception did not clarify if the recipient could include a fiduciary of a trust or estate.

In Ajemian v. Yahoo, 478 Mass. 169 (2017) the administrator and siblings of a deceased brother’s estate sought to gain access to information from the son’s Yahoo email account. In that capacity, they sought access to the contents of the e-mail account. While providing certain descriptive information, Yahoo declined to provide access to the account, claiming that it was prohibited from doing so by certain requirements of the Stored Communications Act (SCA), 18 U.S.C. §§ 2701 et seq. The Supreme Judicial Court of Massachusetts stated in its decision that, “Nothing in this definition would suggest that lawful consent precludes consent by a personal representative on a decedent’s behalf. Indeed, personal representatives provide consent lawfully on a decedent’s behalf in a variety of circumstances under both Federal and common law.” The court relied on Massachusetts’ provisions in the Revised Uniform Fiduciary Access to Digital Act that has been adopted in 36 states including Nebraska and Iowa. This legislation provides a clear state law procedure for fiduciaries to follow to request access to or disclosure of online account contents and other digital assets.

Though the Massachusetts state court ruling isn’t binding on other states, this case will provide valuable precedent and guidance in interpreting and applying a standard that allows estate administrators to gain access to digital information of a deceased that previously was prohibited under strict interpretation of federal law by certain digital service providers.

© 2017 Vandenack Weaver LLC
For more information, Contact Us

IRS Notice Provides Penalty Relief to Certain Partnership Return Filing Taxpayers

by Monte L. Schatz

The IRS has issued Notice 2017-47 that provides penalty relief to partnerships that filed certain untimely returns or untimely requests for extension of time who filed those returns for the first taxable year that began after December 31, 2015.

Section 2006 of the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (the Surface Transportation Act), Public Law 114–41, 129 Stat. 443 (2015), amended section 6072 of the Internal Revenue Code (the Code) and changed the date by which a partnership must file its annual return. The due date for filing the annual return of a partnership changed from the fifteenth day of the fourth month following the close of the taxable year (April 15 for calendar-year -2- taxpayers) to the fifteenth day of the third month following the close of the taxable year (March 15 for calendar-year taxpayers). The new due date applies to the returns of partnerships for taxable years beginning after December 31, 2015.

Many partnerships failed to timely file their various partnership returns (1065, 1065-B, 8804, 8805 or 7004 Extension requests for any of the other various partnership returns).  The assumption of these taxpayers was that the normal deadlines for their 2016 Partnership returns applied (namely April 18, 2017 for the actual returns and September 15, 2017 for those that filed the Form 7004 extension for any of these returns).    Normally in these circumstances the taxpayer is subject to late filing penalties; however, the new filing deadlines shortening the return filing period by one month resulted in many taxpayers filing late returns and the IRS has provided relief for those late filed returns.

The IRS in Notice 2017-47 has announced relief will be granted automatically for penalties for failure to timely file Forms 1065, 1065-B, 8804, 8805, and any other returns, such as Form 5471, for which the due date is tied to the due date of Form 1065 or Form 1065-B. Partnerships that qualify for relief and have already been assessed penalties can expect to receive a letter within the next several months notifying them that the penalties have been abated.  For reconsideration of a penalty covered by this notice that has not been abated by February 28, 2018, contact the number listed in the letter that notified you of the penalty or call (800) 829-1040 and state that you are entitled to relief under Notice 2017-47.

SOURCE: IRS Guidewire Issue Number N-2017-47

© 2017 Vandenack Weaver LLC
For more information, Contact Us