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Is This the End of Valuation Discounts for Intra-Family Transfers of Ownership Interests?

By David DuWaldt | Sep 20, 2016

valuation discountsOn August 2, 2016, the U.S. Treasury Department released proposed regulations that pertain to IRC Section 2704. The intent of the proposed regulations is to eliminate the use of valuation discounts with respect to the transfer of ownership interests between family members. Consistent with the rulemaking process of proposed regulations, the submission of written comments must be received by November 2, 2016 and a public hearing is scheduled for December 1, 2016.

To gain a better understanding of how these proposed regulations came into existence, it is beneficial to look back at some legislative history. Chapter 14 of the Internal Revenue Code (i.e., Sections 2701 through 2704) became law in 1990. Chapter 14 is entitled “Special Valuation Rules” which specifically pertains to the federal estate, gift and generation-skipping transfer tax. The adoption of Sections 2701 through 2704 of the Internal Revenue Code was an attempt by Congress to eliminate the use of valuation discounts for tax planning and compliance purposes. Although there was a lot of attention placed on the use of family limited partnerships, the scope of Chapter 14, and the recently released proposed regulations, includes all family businesses such as corporations, general partnerships, limited liability companies, and other arrangements that are considered business entities. Read more »


U.S. Corporation Income Tax – Studies and Proposals

By David DuWaldt | Nov 10, 2015

Tax CalculatorIn my blog post of October 27, 2014, The Art of Corporate Inversions, I alluded to the fact that, relative to other countries, the United States has the highest income tax rate imposed on C corporations. And since the late 1990s, several multinational corporations have changed their domicile to another foreign territory or country. Federal lawmakers have passed stricter rules in an attempt to prevent corporate inversion transactions and income shifting strategies.

With the concerns about the shifting of income from the United States to lower tax rate countries and the effect upon the U.S. economy, several studies were conducted. An interesting recent article at the Tax Foundation website touches on some of the studies and suggests that a lower tax rate structure for corporations, which are subject to U.S. income tax, could reduce income shifting by multinational corporations and increase the tax base. In some ways, this concept is similar to the famous “Laffer Curve” that was introduced by Dr. Arthur Laffer in the late 1970s and supported the macroeconomic theory of supply-side economics.

Last February, as part of the 2016 budget proposal, President Obama recommended a reduction in the corporation income tax rate from 35% down to 28%, with a special rate of 25% for manufacturers. The proposal provided for unspecified cuts in tax preferences and a one-time tax on unrepatriated foreign earnings of U.S. based multinational corporations. At this moment, we are patiently waiting for Congress to pass a budget for the 2016 fiscal year.

Last July, Representatives Charles Boustany (Republican – Louisiana) and Richard Neal (Democrat – Massachusetts) released a discussion draft of their Innovation Promotion Act of 2015, which is an “innovation box” bill to provide for a 10.15% effective tax rate on income derived from certain intellectual property. This tax based incentive is not new to some of the countries that belong to the Organisation for Economic Co-operation and Development (OECD) and have their own “innovation box” low tax rate incentives. Unfortunately, with any specific tax incentive, legislation of this type adds to the complexity of the tax code and the cost of tax administration.

We do have some corporation tax reform proposals by some of the presidential candidates that rank high in the recent polls. Democratic candidate, Hillary Clinton, has not proposed a specific corporation tax rate but has commented that she likes the pre-Bush tax rates of the 1990s. Democratic candidate, Bernie Sanders, did not specify a proposed corporation income tax rate but did comment that it should be higher than the current rate. Republican candidate, Donald Trump, proposes a reduction in the corporation income tax rate from 35% to 15%. Dr. Ben Carson proposes a corporation income tax rate of between 15% and 20%. Marco Rubio proposes a reduction in the corporation tax rate to 25%. Jeb Bush proposes a reduction in the corporation income tax rate to 20%.

It is challenging to guess what the corporation income tax rate will be in a few years from now but it will be interesting to observe what happens when Congress addresses the issue.

Posted by David DuWaldt.

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The Art of Corporate Inversions

By David DuWaldt | Oct 27, 2014

Tax PendulumHave you ever heard of a “Double Irish?” To some readers, this term may sound more like a stiff drink. Perhaps the tax lawyers and accountants that serve multinational corporations are becoming more like bartenders by preparing the kind of “drinks” their customers really desire.

The Double Irish is a tax avoidance arrangement involving two Irish registered companies. The structure is quite effective for companies with valuable intellectual property rights and it has been commonly used by large technology and pharmaceutical companies. The structure involves the payment of royalties and fees between controlled entities for the use of intellectual property rights. One of the Irish companies is offshore and located in a tax haven such as Bermuda or the Cayman Islands and holds non-U.S. intellectual property rights. The other company is based in Ireland. The entity based in Ireland pays royalties and fees to the entity in the tax haven thereby reducing taxable income. The left over profits for the entity based in Ireland are taxed at the rate of 12.5%. Now compare the foregoing structure to a plain vanilla C corporation based in the United States, with taxable income above $18,333,333, thereby paying income tax at the rate of 35%, plus any applicable state and local taxes. Read more »


The Standards of Value

By David DuWaldt | Oct 28, 2013

Money GraphIn his blog post of September 30, 2009, Lee Crawley did a great job of clarifying the business valuation process and he made reference to the fine business valuation article written by Gary Parker. Lee touched on the standard of value by raising an important initial question in a business valuation engagement: What is its purpose?

It may seem odd to some readers that you can value the same stock of a company and arrive at very different results just by a change in the standard of value. The standards of value include fair market value, fair value, investment value, liquidation value, marital value, intrinsic value, etc. For this blog post, I will address the three common standards of value – fair market value, fair value and investment value. Read more »


Something About a “Fiscal Cliff”

By David DuWaldt | Nov 19, 2012

Walking off a cliffNow that the election is over, the President and members of Congress are, once again, having discussions about the fiscal cliff which the United States will soon face unless new legislation is passed. The term, “fiscal cliff,” was first introduced by Federal Reserve Chairman, Ben Bernanke, to describe changes that are scheduled to take place after 2012. 

Beginning in January of 2013, certain provisions of the Budget Control Act of 2011 will take effect and bring about a substantial reduction in government spending. At the same time, the Bush-era tax cuts are scheduled to expire. So what does this mean for the economy? Many economists believe that increases in tax and reductions in government spending will have a negative effect upon an economy that is still trying to recover. Read more »


Coming Attraction for 2013 – The New Medicare Taxes

By David DuWaldt | Oct 29, 2012

Money BlocksAs part of the health care legislation that passed back in 2010, certain provisions were included which impose additional Medicare taxes on certain types of income. Beginning in 2013, salaries, wages and self-employment income above $200,000 will be subject to an additional .9% Medicare tax. In the case of married individuals filing jointly, the wage or self-employment income level is $250,000, and for married individuals filing separately, the wage or self-employment income level is $125,000. Also beginning in 2013, certain unearned income of individuals will be subject to a new 3.8% Medicare contribution tax when modified adjusted gross income (“MAGI”) exceeds $200,000. In the case of married individuals filing jointly, the MAGI level is $250,000, and for married individuals filing separately, the MAGI level is $125,000. 

The new Medicare contribution tax on unearned income also applies to trusts and estates with adjusted gross income (“AGI”) above the dollar amount in which the highest tax bracket applies for that tax year. For 2013, the AGI threshold is $11,950 so income above this level could be subject to the Medicare contribution tax. Bear in mind that income distributed to beneficiaries is usually a deduction to the trust or estate for purposes of deriving AGI. However, capital gains are generally treated as part of principal rather than income depending on how it is defined in the trust instrument and applicable state law. In such a case, the capital gains could be subject to the Medicare contribution tax for a trust or an estate (unless it is the final return for an estate since gains are passed through to the beneficiaries on a final return).  Read more »


Excise Tax on Medical Devices

By David DuWaldt | Jun 14, 2011

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Who Really Pays?

Pursuant to the federal health care legislation of March 2010, a new section 4191 was added to the Internal Revenue Code.  This new code section provides for an excise tax of 2.3% on sales of medical devices other than eyeglasses, contact lenses, hearing aids, and other medical devices purchased, at retail, by the general public for individual use.  In other words, Class I medical devices sold to the public are generally excluded from the excise tax.  The application of this new excise tax takes effect for sales by the manufacturer, producer, or importer of medical devices after December 31, 2012.

Medical Device

An earlier version of the health care bill that was introduced by the Senate had a starting date in 2010 and it would have cost the medical device industry approximately $40 billion in excise tax over ten years.  Several large medical device manufacturers and industry groups were able to influence members of Congress so that the final version of the law begins with medical device sales in 2013.  Starting in 2013, the final version of this excise tax provision is expected to cost the medical device industry approximately $20 billion over ten years. Read more »


Bush Tax Cuts Extended

By David DuWaldt | Feb 15, 2011

On December 17, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (“Tax Relief Act”).  Pursuant to the Tax Relief Act, certain tax cuts that were enacted during the Bush Administration have been extended until December 31, 2012.

The Tax Relief Act extended through 2012 the individual income tax rate schedule, which provides for a maximum tax rate on ordinary income of 35%.  Without passage of the Tax Relief Act, the individual income tax rate schedule that was introduced during the Clinton Administration, with a maximum tax rate of 39.6%, would have taken effect in 2011.  The income tax rate schedule for estates and nongrantor trusts, with a maximum tax rate of 35% on ordinary income, was also extended through 2012 by the Tax Relief Act.

Under the Tax Relief Act, the lower tax rate on long-term capital gains and qualifying dividends has been extended until December 31, 2012.  Except for certain items such as unrecaptured Section 1250 gain on real property (25%) and collectibles (28%), the maximum tax rate on long-term capital gains and qualifying dividends is 15%.  Without the Tax Relief Act, for 2011, the maximum tax rate on long-term capital gains would have increased to 20% and dividends would be taxed as ordinary income. Read more »


Tax Legislation Update

By David DuWaldt | Nov 12, 2010

As you may have heard, the Small Business Jobs Act of 2010 (SBJA) was signed into law on September 27, 2010. Included in this recent tax legislation are some provisions that may prove beneficial to certain buyers and sellers of businesses.

The SBJA moved up the gain exclusion from the sale of small business stock to 100%. By comparison, prior to 2009, the exclusion was 50% of the gain. In the early part of 2009, tax legislation was passed which increased the exclusion from gain to 75% for qualifying small business stock acquired during the period from February 17, 2009 to December 31, 2010. Eligibility for the 100% exclusion includes the following requirements:

  1. The stock must be held at least five years
  2. The aggregate gross assets of the issuing corporation must not exceed $50 million
  3. The stock is acquired in an original issuance from the corporation
  4. At least 80% of the value of the assets must be used in a qualifying trade or business
  5. The stock must be acquired by December 31, 2010

With respect to stockholders that are individuals, the exclusion from gain is capped at 10 times the stockholder’s basis in the stock or $10 million, whichever is greater. Under the SBJA, the excluded amount will not be treated as an alternative minimum tax (AMT) preference item.

For S corporations, one of the provisions included under the SBJA is the reduction of the built-in gains period to five years. Read more »


The CRT Strategy – Charitable Remainder Trusts

By David DuWaldt | Jan 29, 2010

Suppose you own a valuable asset that does not earn any income or it earns very little income.  Let us assume that this property has substantially appreciated in value such that, if you sold it today, you would realize a substantial gain and resulting tax on the gain.  So how can you turn this valuable property into an income producing source without erosion to principal due to taxation?

Answer:  By conveying the property to a Charitable Remainder Trust (CRT).

Here’s how it works:  After the trustor/donor transfers property to the CRT, the property is sold by the trustee.  There is no tax on the sale since the CRT is exempt from income tax under Section 664(c)(1) of the Internal Revenue Code.  The proceeds from the sale are invested into income producing property.  The trustee distributes income to the trustor during his or her lifetime.  Upon death of the trustor, the remaining property (corpus) is transferred to a designated charity.

Besides the benefit of avoiding tax from a taxable sale, in the year of transfer to the CRT, the trustor receives a charitable contribution deduction for the computed value of the charitable remainder interest.  The charitable remainder interest computation is based upon the value of the property transferred to the trust, the type of trust, the payout rate, frequency of payments each year, the mortality table, the applicable federal interest rate, and the age of the trustor.

There are two types of charitable remainder trusts Read more »