IRS Issues Notice on State and Local Tax Deductions

On May 23, 2018 the U.S. Department of Treasury and the Internal Revenue Service issued Notice 2018-54, which announced new  proposed regulations addressing state and local tax payment deductions for federal income tax purposes.

The 2017 Tax Cuts and Jobs Act places limits on an individual’s deduction to $10,000 ($5,000 in the case of a married individual filing a separate return) for the aggregate amount of state and local taxes paid during the calendar year.  Any state and local tax payments above those limitations   are no longer deductible.  This new limitation is effective January 1st, 2018 and applies to taxable years after December 31, 2017 and before January 1, 2026.  This limitation will  have implications for many Nebraska residents according to data research  by The Pew Charitable Trusts. Based on IRS data from 2015, 28 percent of Nebraskans claimed a state and local tax deduction amount higher,  than $10,000.[1]

Several state legislatures, in response to this limitation, are considering adopting legislative proposals that would allow taxpayers to make transfers to funds controlled by state or local governments, in exchange for credits against the state or local taxes already required.  New York, Connecticut, and New Jersey, states known for having higher state taxes, have already enacted measures that allow taxpayers to fund municipal governments by making charitable donations that are both fully federal income tax deductible and satisfy state and local tax liabilities.   In these states, a taxpayer would be able to apply any amount of state and local taxes over $10,000 toward a municipal government fund and report the transfer as a charitable donation.   The  treatment of these state and local tax payments as charitable contributions effectively reduces  the taxpayer’s  federal income tax liability.

Notice 2018-54 informs taxpayers that the upcoming proposed regulations will assist them in understanding the relationship between federal charitable contribution deductions and the state and local tax payment deduction.  The notice also warns taxpayers to be mindful and cautious in making such transfers or donations, and to remember that federal laws control the proper characterization of payments for federal income tax purposes.  Finally, the Notice states the proposed regulations intend to clarify the requirements of the Internal Revenue Code, and that “substance-over-form” principles govern the federal income tax treatment of such transfers.  In colloquial terms the Treasury and IRS are stating that “if it looks, smells and operates like a state tax deduction those payments will most likely be characterized as state tax deductions with the applicable deduction limits.

[1] Phillip Oliff & Brakeyshia Samms, Cap on the State and Local Tax Deduction Likely to Affect States Beyond New York and California, The Pew Charitable Trusts (Apr. 10, 2018) http://www.pewtrusts.org/en/research-and-analysis/analysis/2018/04/10/cap-on-the-state-and-local-tax-deduction-likely-to-affect-states-beyond-new-york-and-california.

© 2018 Vandenack Weaver LLC

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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

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The Defend Trade Secrets Act

Last summer, Congress enacted the Defend Trade Secrets Act (“DTSA”), which created a federal civil cause of action for misappropriation of trade secrets. Recently, various courts have started to interpret the DTSA, and determined that it does not preempt existing state law, but gives trade secret owners the option to enforce their claims and receive more consistent outcomes than they would in state court. Prior to the DTSA’s enactment, manufacturers and sellers had to bring trade secret misappropriation claims in state court, unless the parties could establish diversity jurisdiction or an independent federal cause of action.  Because state interpretations of the Uniform Trade Secrets Act vary in every state, consistent relief was not always possible.  For example, the definition of “trade secret” and the types of remedies differ across states. However, the DTSA applies nationwide and provides a uniform statute for trade secret owners to rely on in federal court.

The DTSA has important features that will impact trade secret owners.  Notably, it defines “misappropriation” and “trade secret”, which aids in consistent enforcement across state lines.  Additionally, it creates a civil seizure mechanism, which allows courts to order the seizure of property to prevent the propagation or dissemination of the trade secret, even before a formal finding of misappropriation is established and without notice to the alleged wrongdoer.  Last, a whistleblower provision provides immunity to employees from criminal or civil liability under federal or state laws for disclosing a trade secret to an attorney or government official for purposes of reporting or investigating a suspected violation of the law or filing a lawsuit made under seal.

Most controversial is the civil seizure provision, and courts are reluctant to permit seizures unless the plaintiff establishes necessity. Also controversial, federal courts are turning to state courts for guidance in interpreting the DTSA, thus, defeating its underlying purpose of providing uniformity. However, these issues are likely to be resolved over time. Since its enactment, it is estimated that less than seventy cases have been brought under the DTSA, but the law provides an important option for those pursuing trade secret claims.

© 2017 Vandenack Weaver LLC
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IRS Denies Tax-Favored Status to Certain “Self-Funding” Health Plans

By James Pieper

The Internal Revenue Service (“IRS”) has issued a memorandum (“Memorandum”) indicating that it will deny tax-favored status to payments received under certain health plans marketed by their promoters as “self-funding.”

The Memorandum indicates that payments made under such plans will be considered “income” on the part of the employee (and thus not excluded from “gross income” for purposes of the income tax), and will be considered “wages” for purposes of the Federal Insurance Contributions Act (FICA) and Federal Unemployment Tax Act (FUTA) taxes paid by the employer.

The Memorandum cites plans being offered by promoters as “fixed indemnity health plans” with associated “wellness plans.”  The benefit promoted is that the plans are “self-funding” because the purported tax benefits will offset the expense, and employees can gain apparently tax-favored payments as a result of the plan while reducing the FICA purportedly owed by the employer.

The key to the plans is that the employee receives a monthly payment, not as income, but as a “health benefit” in return for a simple but voluntary act such as calling a toll-free number to obtain health advice or participating in biometric screening.  So long as the employee undertakes one act per month, then the benefit is paid.  Promoters of such plans contend that the employee receives comparable take-home pay and the employer receives tax benefits, all on a self-funded basis.

The IRS, however, concludes in the Memorandum that the plans do not constitute “insurance” because the “health benefit” is almost certain to be paid, and, on an actuarial basis, the amount of “benefits” is almost certain to exceed the amount paid as “premium.”

Accordingly, the IRS concluded that payments related to the so-called “self-funding” plans will be considered “income” and “wages” – and, therefore, the apparent “self-funding” mechanism obtained via tax-favored treatment is illusory.

Any employers considering any sort of “self-funding” plan should consider the Memorandum as strong evidence that such a plan is not likely to produce the tax benefits promised.

© 2017 Vandenack Weaver LLC
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Federal Judge Orders IRS to Refund Tax Preparers for PTIN Fees

In 2014, tax return preparers brought a federal class action lawsuit challenging the legality of fees charged by the IRS for PTINs (Preparer Tax Identification Number). Regulations promulgated in 2010 and 2011 imposed requirements on tax return preparers including obtaining a specific PTIN and paying a fee associated with obtaining such PTIN. Currently, the application and renewal fee for a PTIN is $50.00.

The preparers in the class action argued that the fees are unlawful since tax preparers receive no special benefits from the PTIN and secondly the fee is unreasonable in comparison to the costs the IRS incurs to issue the PTIN.

On June 1, 2017, Judge Royce C. Lamberth of the United States District Court for the District of Columbia held that the IRS may continue to require PTINs but granted summary judgment in favor of the tax preparers stating, in part, that the IRS may not charge fees for issuing PTINs. Following a review of applicable case law, the Court found that PTINs are not a “service or thing of value” provided by the IRS. The IRS will be enjoined from charging fees in the future and is required to refund fees charged for the PTINs to all members of the class.

The order granting summary judgment is not yet a final judgment. Such final judgment will indicate the amount owed to each member of the class and may be subject to appeal by the IRS.

For more information, including court documents and the opinion rendered by Judge Lamberth see http://ptinclassaction.com/

© 2017 Vandenack Weaver LLC
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Tax Related Identity Theft Awareness

The holiday season is underway and while this is a time for family events and holiday parties, this is also the time that many identity theft scams occur. The Internal Revenue Service (IRS) started the process of alerting taxpayers about potential tax-related identity theft and to provide advice on how to prevent threats to your identity.

For prevention, the initial steps include ensuring use of security software on devices, use of secure wireless networks, and never providing sensitive data when replying to emails, texts, or pop-up ads. For individuals that are hit with tax-related identity theft, it may not become apparent until attempting to file taxes or receiving a notice from the IRS and finding out that a tax return has been filed on your behalf. When this occurs, file a complaint with the Federal Trade Commission (FTC) at https://www.identitytheft.gov/, file a report with the credit agencies, and contact the IRS. Importantly, regardless of the situation, ensure that your taxes are filed and paid, even if it requires filing in paper form.

Taking steps now to add layers of security for your social security number and other sensitive data can help prevent tax-identity theft in the future. If you have questions, please contact the attorneys at Vandenack Weaver LLC.

© 2016 Vandenack Weaver LLC
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Does an Out-of-State Retailer Have to Collect Sales Tax?

A Tax FAQ with Mary E. Vandenack.

As a generality, an out-of-state retailer is subject to collecting tax in another state if they have nexus with the state in which they are making a sale. The definition of nexus varies state to state so it’s really important that a business look at what nexus means in a particular state.

In addition, different states tax different types of things so you have to really understand the nature of the business to determine whether you’re going to be subject to sales tax in another state.

© 2014 Parsonage Vandenack Williams LLC

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