Important Differences Between Federal and Private Student Loans

Student loan borrowers commonly wonder whether they should refinance federal loans into private loans. There are many factors to consider in the case of federal loans, such as interest subsidies and possible forgiveness (but often with income tax consequences) paired with interest rates that are often lower in the case of private loans. Knowing the differences between federal and private student loans is imperative when making this decision.

Most notably, federal student loans are generally forgiven upon death whereas private lenders will pursue an estate for amounts owed by deceased borrowers.

Before refinancing your federal student loans into private ones, consider the cost of the extra life insurance you will need to purchase to cover the debt and, if you have already refinanced, be sure that your insurance coverage is adequate so that amounts intended for your family do not instead pay back creditors. When planning for federal student loan forgiveness, do not forget to account for any associated cancellation of debt income and purchase adequate insurance to cover the anticipated tax burden. The income tax on cancellation of debt income regarding federal student loans forgiven due to death was eliminated by the 2017 Tax Cuts and Jobs Act but this change is set to expire at the end of 2025 unless extended by Congress.

Similarly, consider any federal interest subsidies that may be available before refinancing. In some cases, the offset of the federal interest subsidy combined with the cost of the additional life insurance needed to cover the private loan debt makes refinancing a disadvantageous move.

In all cases, be sure to discuss the extent and type of your student loan debt and your repayment plan with your estate planning attorney. Planning for federal student loans is notoriously difficult because they are a moving target. The rules surrounding forgiveness, associated income tax consequences, repayment plans and interest subsidies can be changed at any time by any administration. Until a borrower’s loans are actually forgiven or paid off, the rules may be changed in the middle of the game which can make planning very dynamic. It is imperative to monitor the laws surrounding student loans and how they may affect repayment options, forgiveness options and associated income tax consequences.


© 2019 Varnum LLP

ARTICLE BY Rebecca K. Wrock of Varnum LLP.

Kentucky to Begin Taxing Video Streaming Services under Telecom Tax

Legislators in Frankfort added a new “video streaming service” tax to the omnibus tax bill (HB 354) as part of a closed-door conference committee process before the bill was hastily passed in the House and Senate. Notably, the new video streaming service tax was not previously raised or discussed as part of HB 354 (or any other Kentucky legislation) before it was included in the final conference committee report that passed the General Assembly in March.

Specifically, as passed by the General Assembly, HB 354 will add “video streaming services” to the definition of “multichannel video programming service” subject to the telecom excise tax.  This is the same tax imposition that the Department of Revenue argued applied to video streaming services in the Netflix litigation—an argument that was rejected by the courts in Kentucky and then subsequently settled on appeal. Under existing law, Kentucky taxes “digital property” under the sales and use tax. The term is broadly defined and applies to audio streaming services, but expressly carves out “digital audio-visual works” (i.e., downloaded movies, TV shows and video; defined consistently with the SSUTA) from the scope of the sales and use tax imposition. HB 354 would not modify the treatment of digital goods and services under the sales and use tax, and changes that would be implemented are limited to the telecom excise tax imposed on the retail purchase of a multichannel video programming service.

As amended by HB 354, the definition of “multichannel video programming service” for purposes of the telecom excise tax would be expanded to mean “live, scheduled, or on-demand programming provided by or generally considered comparable to or in competition with programming provided by a television broadcast station and shall include but not be limited to: (a) Cable service; (b) Satellite broadcast and wireless cable service; and (c) Internet protocol television provided through wireline facilities without regard to delivery technology; and (d) video streaming services.” The legislation defines “video streaming services” as “programming that streams live events, movies, syndicated and television programming, or other audio-visual content over the Internet for viewing on a television or other electronic device with or without regard to a particular viewing schedule.” Thus, the “video streaming services” language in HB 354 would clearly subject over-the-top video streaming service providers to the excise tax on the retail purchase of a multichannel video programming service. As passed by the General Assembly, the new video streaming services excise tax in HB 354 would “apply to transactions occurring on or after July 1, 2019.”

Governor Matt Bevin signed HB 354 into law on March 26, 2019. The General Assembly subsequently passed a “cleanup bill” (HB 458) that was enacted into law last month, but it did not make any changes to the part of HB 354 that expanded the scope of the tax on multichannel video programming services to include video streaming services.

Kentucky is a member of the Streamlined Sales and Use Tax Governing Board. Taxation of electronically transferred audio-visual works is something specifically dealt with in the Streamlined Sales and Use Tax Agreement (SSUTA). The SSUTA also prohibit the enactment of so-called “replacement taxes” that have the effect of avoiding the provisions of the SSUTA.  Kentucky’s inclusion of streamed movies in its tax on multichannel video programming services, a regime outside the sales and use tax, could run afoul of the SSUTA’s prohibition on replacement taxes, potentially putting the state out of compliance with the SSUTA and exposing it to the risk of sanctions by the Governing Board.

Practice Note:  From an administrability and compliance point of view, enacting a new tax on digital goods and services as part of excise or gross receipts taxes outside the generally applicable sales and use tax poses significant problems. Many businesses that are not telecom providers simply do not have the compliance infrastructure to allow them to collect and remit taxes other than sales and use taxes. In addition, by taxing certain digital goods and services under a tax other than what is applicable to similar content sold via a tangible medium (such as a physical movie rental or viewing a movie in theater), the federal Permanent Internet Tax Freedom Act enacted by Congress may be implicated and pose a litigation risk to the state. Both the compliance nightmare and litigation risk could be easily avoided by imposing the tax under the sales and use tax (as opposed to miscellaneous excise or gross receipts taxes). We will continue to monitor the digital tax climate in Kentucky, and encourage companies impacted by this new imposition to contact the authors to discuss this issue in more detail.

© 2019 McDermott Will & Emery
Read more SALT news on the National Law Review’s Tax page.

IRS Periods of Limitation on Refunds, Assessment of Tax, and Collection

Statutes of limitation prescribe a period of limitation for the bringing of certain types of action. There are three such statutes of limitation that come into play when dealing with the Internal Revenue Service. These limitations periods relate to tax refunds, IRS examination and assessment, and IRS collections.

How long do you have to file a claim for refund?

Under IRC 6511(a), a taxpayer has three years from the date of filing a tax return to claim a credit or refund, or two years from the date the tax was paid, whichever is later. If a taxpayer files his/her return or makes payment prior to the date prescribed for doing so, the return or payment is considered filed or paid on that last day for doing so. Further, for claims for refund not filed within the three year period, the amount of the refund is limited to the portion of the tax that was paid within the two years preceding the filing of the claim. IRC 6511(b). There are exceptions to these general rules, however, and you should consult with a tax attorney to see if those exceptions apply in your case.

The IRS estimates that it has $1.4 billion in refunds for taxpayers that did not file an income tax return (Form 1040) for the 2015 tax year. In order to be entitled to their refunds, most taxpayers must file their 2015 return no later than April 15, 2019. If the 2015 tax return is not filed by that date, the tax refund will become property of the U.S. Treasury.

How long does the IRS have to audit your return? 

Generally speaking, the IRS has three years from the due date of your tax return or three years from the date it was filed, whichever is later, to audit your return and make an assessment. However, there are exceptions that may apply to extend the audit period:

  1. If there is a substantial omission of gross income, then the IRS has six years to make an assessment. A substantial omission of gross income is one that amounts to more than 25 percent of the amount reported on the tax return.
  2. If the additional tax is related to undisclosed foreign financial assets and the omitted income is more than $5,000, the IRS has six years to make an assessment.
  3. The statute of limitation is open indefinitely if the taxpayer has filed a false or fraudulent tax return.

Keep in mind, the statute of limitation on assessment does not start to run until a tax return has been filed. If a tax return has not been filed, the statute for assessment remains open.

How long can the IRS collect a tax liability?

Generally speaking, the statute of limitation for the IRS to collect on a tax debt, plus penalties and interest, is 10 years from the date of assessment. Note that this is 10 years from the date of the assessment, not 10 years from the due date of the return. In addition, this 10-year period can be suspended under certain circumstances, including:

  • if the taxpayer has filed for bankruptcy protection, plus an additional six months
  • if the taxpayer resides outside of the US for at least six months
  • if the taxpayer files a request for a collection due process hearing
  • if the taxpayer files a claim for innocent spouse relief
  • if the taxpayer files for an offer-in compromise (OIC)
  • while there is a pending installment agreement request

Finally, the IRS can take action to collect beyond the 10-year limitation period by filing suit to reduce the assessments to judgment.

© 2019 Varnum LLP
This post was written by Angelique M. Neal of Varnum LLP.

Did You Send Notice to the Partners?

The implementation of the centralized partnership audit regime (CPAR) has finally arrived. Enacted by the Bipartisan Budget Act of 2015, CPAR wasn’t effective until tax years beginning after December 31, 2017. Many taxpayers and tax practitioners placed it behind the Tax Cuts and Jobs Act on their list of priorities. Now 2019 brings the first filing season under CPAR as 2018 tax returns are filed.

Most partnerships and LLCs that qualify will choose to elect out of CPAR’s application. The election out is available if (1) each partner is an individual, a C corporation, a foreign entity that would be treated as a C corporation were it domestic, an S corporation, or an estate of a deceased partner, and (2) the partnership is required to furnish 100 or fewer Form K-1s for the year. To elect out, a partnership must make an affirmative election each year on its timely filed tax return and file a Schedule B-2 that sets forth the name and taxpayer identification number of every partner and every shareholder of an S corporation that is a partner. The schedule also requires that the type of partner (e.g., individual, C corporation, etc.) be identified.

Electing out of CPAR is straightforward for qualifying partnerships. The partnership tax return Form 1065 specifically asks whether the partnership is electing out and instructs taxpayers to complete a Schedule B-2. However, there is one more requirement. Did you notify all the partners of the election? The Internal Revenue Code requires that a partnership notify each of its partners that it has elected out of CPAR, and the final regulations require that the notice be delivered to the partners within 30 days of the election being made.

There is no prescribed form or manner for the notice, nor is requirement of the notice addressed on Form 1065 or Schedule B-2. The preliminary comments to the proposed regulations say it may be in writing, electronic or other form chosen by the partnership. The IRS has said that it intends to “carefully review” a partnership’s decision to elect out of CPAR to determine whether the election is valid. Partnerships and tax return preparers using tax-preparation software should make sure the partner notification is on the Form K-1s, and if it is not, notice should be sent by whatever manner within 30 days of the tax return’s filing.

 

© 2019 Jones Walker LLP
This post was written by Robert E. Box, Jr. of Jones Walker LLP.

Be Thankful I Don’t Take It All – France Moves to Tax the Value of Data

Were the Beatles still recording today, they might have to add this verse to Taxman. As what will surely be the opening salvo in government efforts to find ways to recapture the value of the personal data upon which so much of our digital economy now seems to depend and return it to consumers, France is now set to become the first European country to implement what is effectively a “data tax”.

About 30 companies, mostly from the US, may soon have to pay a 3% tax on their revenues. The tax will mostly affect companies that use customer data to sell online advertising. Justifying the new tax, French Finance Minister Bruno Le Maire clearly drew the battle lines:

This is about justice . . . . These digital giants use our personal data, make huge profits out of these data . . . then transfer the money somewhere else without paying their fair share of taxes.

The bill would apply to digital companies with worldwide revenues over 750 million euros ($848 million), including French revenue over 25 million euros. Not surprisingly, Google, Amazon and Facebook are squarely in the crosshairs of the new tax.

According to European Commission figures, the FANG companies and their ilk pay on average 14 percentage points less tax than other European companies. France took unilateral action after a similar proposal at the EU level failed to get unanimous support from member states, although Le Maire said he would now push for an international deal by the end of the year.

Lest you think this is just a European phenomenon, you need only look west to California, where Governor Newsom has commissioned the study of “data dividends” to help address the digital divide. In fact, the much-discussed California Consumer Privacy Act already contains provisions encouraging digital companies to compensate consumers for the use of their personal data. See our recent alert on data dividends and the CCPA here.

There will be lots more action in the “value for data” space in coming days. While academics debate whether data is more like labor or more like capital, we expect state and federal regulators to look to the value of data as a means to address the challenges of artificial intelligence and income inequality.

 

Copyright © 2019 Womble Bond Dickinson (US) LLP All Rights Reserved.
Read more international news on the NLR’s Global Type of Law Page.

IRS Notice Offers Good News for State Colleges and Universities (at Least for Now)

In January 2019, the Internal Revenue Service (IRS) issued Notice 2019-09, which provides interim guidance for Section 4960 of the Internal Revenue Code of 1986. As a reminder, Section 4960 imposes an excise tax of 21 percent on compensation paid to a covered employee in excess of $1 million and on any excess parachute payments paid to a covered employee. A “covered employee” is one of the organization’s top-five highest-paid individuals for years beginning after December 31, 2016. An organization must determine its covered employees each year, and once an individual becomes a covered employee, that individual will remain a covered employee for all future years.

Of particular interest to state colleges and universities is the answer to Q–5 of the notice. It provides that the Section 4960 excise tax does not apply to a governmental entity (including a state college or university) that is not tax-exempt under Section 501(a) and does not exclude income under Section 115(l). What does this mean? Basically, if an institution does not rely on either of those statutory exemptions from taxation, the institution will not be subject to the excise tax provisions of Section 4960. This exclusion from Section 4960 means the institution could compensate its athletic coaches (or other covered employees) in excess of the $1 million threshold and not be subject to the 21 percent excise tax.

As we discussed previously, some institutions rely on political subdivision status for tax purposes. Importantly, the notice also provides that any institution relying on its political subdivision status to avoid taxation, as opposed to relying on either of the above-mentioned exemptions, will be subject to the Section 4960 excise tax if the institution is “related” to any entity that does rely on either of the exemptions.

Although the IRS’s guidance is helpful in determining Section 4960’s application to state colleges and universities, it appears not to reflect “Congressional intent.” On January 2, 2019, the Committee on Ways and Means of the U.S. House of Representatives released a draft technical corrections bill that seeks to correct “technical and clerical” issues in the Tax Cuts and Jobs Act of 2017. The corrections bill seeks to clarify Section 4960’s application by stating that any college or university that is an agency or instrumentality of any government or any political subdivision, or that is owned or operated by a government or political subdivision, is subject to Section 4960. Given the current state of affairs in Washington, D.C., we are not confident that the corrections bill’s expanded application to state colleges and universities will ever come to fruition.

 

© 2019, Ogletree, Deakins, Nash, Smoak & Stewart, P.C., All Rights Reserved.

Impact of Government Shutdown on IRS Collections

The government shutdown has impacted many government offices, including the Internal Revenue Service. After the longest government shutdown in history, IRS employees returned to work on January 28, 2019, in most offices across the country. Unfortunately, due to extreme weather conditions in parts of the US, including Michigan, local offices were closed most days during this first week of the IRS reopening. If a taxpayer has outstanding balances with the IRS, the lingering question is what impact did the shutdown have on IRS collections.

While it will take some time for the IRS to resume normal operations, on January 29, 2019 the IRS issued a number of FAQs to assist taxpayers and tax professionals with collection issues that were affected by the shutdown.

Things to Keep in Mind

IRS revenue officers were furloughed during the shutdown. Meaning that they were put on a leave of absence that prohibited them from performing their duties. If you were working with a revenue officer to resolve your balance due account, the officer will be reviewing inventory and should be reaching out to taxpayers within the next week or so. If an appointment was missed, it should be rescheduled. If a payment or information was due during the shutdown, you should have that payment and/or information ready and available when contacted so that you can move your case toward resolution.

Government shutdown stamp over Form 1040 documentThe government shutdown did not affect federal tax law as it relates to the filing of returns and the making of payments to the IRS. Thus, penalties for failure to file, failure to pay, federal tax deposit penalties and estimated tax payment penalties may still apply. Further, since compliance is critical for all collection alternatives, including installment agreements, offers-in-compromise, and currently not collectible status, your collection alternative can be subject to default procedures.

The government shutdown did not affect statutory deadlines for filing timely appeals from enforced collection actions, including the time frame within which to request a Collection Due Process Hearing from the issuance of a Final Notice of Intent to Levy or from a Notice of Federal Tax Lien Filing. Thus, you may find yourself in jeopardy of levy action on income and financial assets.

 

© 2019 Varnum LLP
This post was written by Angelique M. Neal of Varnum LLP.
Read more news on the IRS and other Tax issues on the NLR Tax Type of Law Page.

ABLE Accounts: What They Are and What They Mean for Your Family

Individuals with disabilities and their families have many options to set aside funds without jeopardizing eligibility for means-tested government benefits. However, until recently most of the available options require the person with a disability to lose control over his or her own money.  With the 2014 enactment of the Stephen J. Beck Achieving a Better Life Experience (ABLE) Act, people with disabilities can once again control some of their own money and retain a sense of autonomy. While ABLE accounts will not replace other forms of planning that are available to and recommended for people with disabilities, there are definite advantages to adding the ABLE account into an overall plan.

The Basics

ABLE accounts are tax-deferred savings accounts that are closely modeled on 529 education savings plans. While ABLE is a federal program, much like 529 education plans, each state is responsible for crafting and administering its own program. Some states only allow residents to enroll, while others welcome out-of-state residents. It’s important to consider not only whether an ABLE account is appropriate, but also which state’s program best suits your situation.

To be eligible for an ABLE account, a person must be diagnosed, before age 26, with a disability that would entitle him or her “to benefits based on blindness or disability under Title II or XVI of the Social Security Act.” Once eligibility is determined, the individual or a third party (e.g., the disabled individual’s parents, siblings, or friends) can establish and fund an ABLE account.

Contributions and Account Limits

In any given year, the aggregate cash contribution from all donors (including the beneficiary him/herself) cannot exceed the annual gift tax exclusion amount ($15,000 for 2018). ABLE accounts accept cash only. Stocks, bonds, investments, and real estate cannot be contributed.

In addition to the annual contribution limits, as of January 1, 2018, the Tax Cuts and Jobs Act of 2017 authorizes an employed ABLE account beneficiary to contribute an amount up to the lesser of (i) his or her compensation or (ii) the poverty line for a one-person household ($12,140 for 2018). In order to be eligible for this additional contribution the individual cannot also contribute to an employer-sponsored defined contribution plan, such as a 401(k). Since the earned income contribution can be made in addition to the aggregate cash contribution, the total possible contribution for 2018 is $27,140.

Starting this year, a new funding option is available that allows individuals to “roll over” assets from a 529 plan into an ABLE account. While this is certainly a boon for families who initially set aside funds in a 529 account for a beneficiary who cannot use it, the funds rolled over cannot exceed the standard annual ABLE account contribution limit, so depending on the value of the 529 account the rollover could take several years to complete.

One of the biggest differences between the various state programs is the maximum amount that may be held in the account. For New York plans, the limit is $100,000. In other states, the limits are significantly higher and are tied to the limits those states have imposed for 529 education plans. For example, Illinois plans have a limit of $400,000. So for people who plan to accumulate larger sums in an ABLE account, it is wise to shop around to different states.

Although ABLE accounts are generally disregarded as a resource when determining eligibility for means-tested benefits, there is an exception. The first $100,000 of assets held in the ABLE account will not count as a resource when determining Supplemental Security Income (SSI) eligibility. However, once the account balance exceeds $100,000, the individual’s SSI will be suspended until the balance is again below that amount. There is no impact on Medicaid eligibility regardless of how much money is in the account.

Growth and Distributions

Income generated on assets held in an ABLE account are not taxed. Disbursements made for qualified expenses of the disabled individual are also not taxed. If a distribution is made that does not constitute a qualified expense, the beneficiary will be responsible for both ordinary income tax and a 10 percent penalty.

Qualified expenses of the disabled individual that can be paid for from the ABLE account without incurring taxes or penalties include, but are not limited to, education, legal fees, financial management and administrative services, health and wellness, housing, transportation, personal support services, and funeral and burial expenses.

As of January 1, 2018, the designated beneficiary is permitted to claim the saver’s credit for contributions made to his or her ABLE account. The saver’s credit is a nonrefundable tax credit for eligible tax payers who make contributions to retirement savings accounts.  The maximum annual contribution eligible for credit is $2,000 per individual, and the amount of the credit depends on the taxpayer’s adjusted annual income.

Benefits Eligibility Tip: An important benefit of the ABLE account is that, unlike when payments are made from a Special Needs Trust, payments for the beneficiary’s housing and food are not viewed as in-kind maintenance support for the purposes of SSI, and the beneficiary will not suffer the usual reduction for payments made by someone other than the SSI recipient for those purposes.

Words of Caution

Although ABLE accounts can be a valuable tool, there are several pitfalls to consider before opening an ABLE account. As with any decision that may affect government benefits, it is always best practice to discuss the situation and your options with your attorney, as there are many issues to consider before adding an ABLE account to a beneficiary’s plan.

For example, an important thing to consider is whether the beneficiary is capable of managing the ABLE account. Since the beneficiary is allowed to manage the funds in the account, families should carefully consider the risks (e.g., making non-qualified distributions or risking abuse and undue influence by an outside person) of the funds being immediately available. While this risk can be mitigated in several different ways beyond the scope of this article, it is certainly a point worthy of consideration.

Additionally, ABLE accounts are similar to first party Special Needs Trusts in that, to the extent the beneficiary receives medical assistance funded by Medicaid after the account is established, any funds remaining in the ABLE account at his or her death will be used to pay back the state for benefits that are paid for the beneficiary. This is the case regardless of whether the funds originally come from the beneficiary or a third party.

Notwithstanding the limitations, ABLE accounts can still be a valuable addition to a carefully crafted special needs plan.

 

© 2018 Schiff Hardin LLP

IRS Issues Proposed Regulations for Qualified Opportunity Zone Funds

Treasury issued long-awaited Proposed Regulations and a Revenue Ruling today (October 19, 2018) regarding key issues involved with investing in and forming Qualified Opportunity Zone Funds (“OZ Fund”) and the OZ Fund’s investments in Opportunity Zone Businesses (“OZ Business”).  Although the Proposed Regulations do not answer all of our key questions, Treasury did provide generally taxpayer friendly guidance to the issues discussed below.  These Regulations are only proposed, and are therefore subject to further revisions based on comments received by Treasury.  However, Treasury has provided that taxpayers can rely on many of these proposed rules, provided that the taxpayer applies the rule in its entirety and in a consistent manner.

  • Treatment of Land. Land is excluded from the requirement that the original use of opportunity zone property commence with the OZ Fund or that the OZ Fund substantially improve the property, alleviating fears that land could only be a “bad” asset. Very favorably, if the OZ Fund purchases an existing building and the underlying land, the OZ Fund is only required to substantially improve (“double the basis”) the building.  The cost of the land is disregarded for this purpose.
  • Treatment of Capital Gains of Partnerships and other Pass-Thru Entities. Partners have 180 days from the end of the partnership’s taxable year to invest in an OZ Fund. Accordingly, capital gains recognized by a partnership early in 2018 (or even very late 2017) may still be eligible for investment in OZ Funds, even if 180 days have passed. A partnership has the option of either investing capital gains in an OZ Fund itself or allocating the gain to its partners, thereby permitting the partners the opportunity to invest their distribute share of the gain in an OZ Fund. If desired, the partner has the option to select the 180-day period starting from the date of the partnership’s sale of the property.
  • Treatment of Working Capital. The Proposed Regulations provide a working capital safe harbor for investments in OZ businesses that acquire, construct, or rehabilitate tangible business property. An OZ business can hold the working capital for a period of up to 31 months if there is a written plan that identifies the working capital as held for the acquisition, construction, or substantial improvement of tangible property in an opportunity zone and such written plan identifies a schedule of expenditures. This alleviates the concern that cash invested by an OZ Fund in an OZ business would be a “bad asset” for the OZ business.  Working capital can be held in cash, cash equivalents, or debt instruments with a term of 18 months or less.
  • Only 70% of an OZ Business’ Tangible Assets Need to be OZ Property. An OZ Fund that invests directly in assets must have 90 percent of its assets be qualifying OZ Property. Qualifying property includes an investment into an OZ Business. An OZ Business only needs to have “Substantially all” of its tangible assets consist of qualifying OZ Property. The Proposed Regulations define, for this purpose only, “substantially all” as 70 percent of the OZ Business’ tangible assets. This is critical in allowing investors in non-real estate businesses to take advantage of the opportunity zone benefits. The Proposed Regulations provide alternative methods for determining compliance with the “substantially all” test, based either on the values in an applicable financial statement of the OZ business, or, if the business does not have an applicable financial statement, applying the methodology used by its Fund investors (who hold at least 5 percent of the OZ business) for determining their compliance with the 90 percent asset test.
  • The OZ Fund Can Borrow Money. The Proposed Regulations provide that deemed contributions of money derived from a partner’s share of partnership debt do not create a separate, non-qualifying investment in the OZ Fund. There had been concern that the proportion of the investment relating to money borrowed by the Fund would result in a non-qualifying investment. The Proposed Regulations do indicate that Treasury is considering an anti-abuse rule for investments that may be considered abusive. In addition, the Proposed Regulations imply that partners in OZ Funds do get outside basis for amounts borrowed by the OZ Fund, thereby potentially permitting the investors to take advantage of OZ Fund losses.
  • “Gains” are Limited to Gains Treated as Capital Gain. Treasury has specifically limited the OZ Fund benefits to gain that “is treated as a capital gain” for Federal income tax purposes.  Although this provision could have been clarified better, we think that “treated as a capital gain” is intended to include Section 1231 gains (special rules apply gains from hedging/straddles).
  • Special Allocations are Permitted. Investors must receive an equity interest in an OZ Fund.  For OZ Funds organized as partnerships, the Proposed Regulations specifically permit special allocations. Depending on whether additional limits are placed on special allocations, this may permit a certain amount of “carried interest” to be paired with an equity investment for OZ Fund service providers.
  • Early Disposition of OZ Fund interest. If an OZ Fund investor sells all of its interest in an OZ Fund before the end of deferral in 2026, the OZ Fund investor can maintain the original gain deferral by reinvesting the proceeds into a new OZ Fund within 180 days.  This allows an investor to get out of a bad deal without losing the deferral benefits. Note that the Proposed Regulations specifically deferred until future Regulations issues involved when the OZ fund itself sells OZ Fund property. These issues include what a “reasonable period of time” is for the OZ Fund to reinvest in qualifying assets and what the potential income tax consequences to the Fund and its investors of such a sale of OZ Fund property by the OZ Fund.
  • Valuation of Assets for Purposes of the 90% Test. For purposes of determining whether a Fund holds 90 percent of its assets in qualified opportunity zone property, the Proposed Regulations require the Fund to use asset values reported on an applicable financial statement of the Fund. Applicable financial statements are prepared in accordance with U.S. GAAP and either: (1) filed with a federal agency besides the IRS (which includes the SEC); or (2) are audited and used to make decisions by the taxpayer.  If a Fund does not have an applicable financial statement, the Fund must use its cost in acquiring the assets for the calculation. Treasury is seeking comments as to whether adjusted basis or another valuation method is a better measurement than cost.
  • 90% Asset Test Testing Dates. The Proposed Regulations provide for the possibility that an OZ Fund formed late in the taxable year could have to fully comply with the asset tests by the end of that year.  The law requires that an Oz Fund invest 90 percent of its assets in qualified opportunity zone business property, measured as the average of two Testing Dates. The first testing date is the last day of the 6th month following formation, and the second Testing Date is the last day of the taxable year.  For example, if a calendar-year fund selects April as its first month as an OZ Fund, then its first testing dates are the end of September and the end of December.  However, if a Fund is formed in the last half of the taxable year, then it will have only one testing date, which may be soon after formation. This creates the possibility that an OZ Fund formed in December only has until the end of December to fully comply. We are hoping that the final Regulations will provide more time for the OZ Fund to initially comply.
  • Limited Liability Companies (LLCs) Can Be OZ Funds. So long as the LLC is taxed as a partnership or a corporation, an LLC can be an OZ Fund.

The Proposed Regulations are generally favorable to investors, and so we expect that Opportunity Zone investments will really take off. Based on the 70 percent “substantially all” rule for OZ Businesses, we expect that Opportunity Zone investments will not be limited to real estate investors. In addition, we think Opportunity Zone investments are more likely to be structured with OZ Funds owning OZ businesses rather than the OZ Fund owning assets directly, because of the working capital safe harbor, the substantially all test, and the testing dates for OZ Funds.

© Polsinelli PC, Polsinelli LLP in California

This post was written by Korb Maxwell Jeffrey A. Goldman and S. Patrick O’Bryan of Polsinelli PC.

Illinois Adopts A New Remote Seller Nexus Law

We should have a Wayfair decision by then, but IL adopted a South Dakota remote seller nexus rule effective October 1, 2018.

For purposes of the Use Tax Act, the definition of “retailer maintaining a place of business in this state” is amended, and for purposes of the Service Use Tax Act, the definition of “serviceman maintaining a place of business in this state” is amended. Beginning October 1, 2018, such a retailer will include a retailer making sales of tangible personal property and a serviceman making sales of service to purchasers in Illinois from outside of Illinois if the cumulative gross receipts from sales of tangible personal property and sales of service to purchasers in Illinois are $100,000 or more, or the retailer or serviceman enters into 200 or more separate transactions for the sale of tangible personal property or sales of service to purchasers in Illinois. The retailer or serviceman will determine on a quarterly basis, ending on the last day of March, June, September, and December, whether he or she meets this criteria for the preceding 12-month period. If the criteria are met, the individual is considered a retailer or serviceman maintaining a place of business in this state and is required to collect and remit use tax or the service use tax, respectively, and file returns for one year. At the end of the 1-year period, the retailer or serviceman will determine whether he or she met the criteria during the preceding 12-month period, and, if so, the individual is considered a retailer or serviceman maintaining a place of business in this state and is required to collect and remit use tax or the service use tax, respectively, and file returns for the subsequent year. If at the end of a 1-year period a retailer or serviceman that was required to collect and remit use tax or service use tax, respectively, determines that he or she did not meet the criteria during the preceding 12-month period, the retailer or serviceman subsequently will determine on a quarterly basis, ending on the last day of March, June, September, or December, whether he or she meets the criteria for the preceding 12-month period.

 

© Horwood Marcus & Berk Chartered 2018. All Rights Reserved.