Category: Tax

2014 Year-End Illinois Estate Planning: It’s Time for a Careful Review

Much Shelist law firm logo

As 2014 comes to a close, now is the perfect time for careful planning to address the income, estate, gift and generation-skipping taxes that can directly affect you.  In addition to making sure your estate plan is up to date, making a few important decisions now can reduce your tax liability later.

Transfer Tax Exemption and GST Exemption

The exemption amount that individuals may transfer by gift and/or at death without being subject to federal transfer taxes increased in 2014 to $5,340,000; it will further increase to $5,430,000 in 2015.  The maximum federal estate tax rate remains 40%.  In contrast, Illinois imposes a state estate tax once a decedent’s estate exceeds $4,000,000 (which is not adjusted for inflation). The rates of Illinois estate tax range from 8% to 16% (with the Illinois estate tax paid allowable as a deduction for federal estate tax purposes). Both the federal and Illinois estate tax laws allow for a marital deduction for assets passing outright to a spouse or to qualifying trusts for the benefit of a surviving spouse.  Illinois allows this deduction to be claimed even if a marital deduction is not elected for federal purposes.

In order to impose a death tax at each successive generational level, a generation-skipping transfer (“GST”) tax – equal to the highest estate tax rate – is assessed on transfers to grandchildren or more remote descendants.  However, every taxpayer is also given a separate federal GST exemption equal to the federal transfer tax exemption (i.e., $5,340,000 in 2014 and $5,430,000 in 2015).

Estate planning documents should be reviewed to make certain that beneficial use of the federal and state transfer tax exemptions, federal and/or state marital deductions and federal GST exemption are being utilized.

Annual Exclusion Gifts

Making use of annual exclusion gifts remains one of the most powerful – and simplest – estate planning techniques. For 2014 (and 2015), individuals can make an unlimited number of gifts of up to $14,000 per recipient, per calendar year.  Over a period of time, these gifts can result in substantial transfer tax savings, by removing both the gift itself and any income and growth from the donor’s estate, without paying any gift tax or using any transfer tax exemption.  An individual cannot carry-over unused annual exclusions from one year to the next.  If such exclusions are not utilized by the end of the year, the balance of any annual exclusion gifts that could have been made for that year are lost.  These transfers may also save overall income taxes for a family, when income-producing property is transferred to family members in lower income tax brackets (who are not subject to the “kiddie tax”.)

Tuition and Medical Gifts

Individuals can make unlimited gifts on behalf of others by paying their tuition costs directly to the school or their medical expenses directly to the health care provider (including the payment of health insurance premiums).

Lifetime Utilization of New Transfer Tax Exemption

The ability to transfer $5,430,000 ($10,860,000 per married couple) – after annual exclusion and medical and tuition gifts, and without having to pay gift taxes – paves the way for many planning opportunities.  When combined with valuation discounts and leveraging strategies (e.g., family partnerships, sales to grantor trusts, grantor retained annuity trusts,  etc.), tremendous amounts of wealth may pass for the benefit of many generations free of federal and Illinois transfer taxes. Lifetime gifts utilizing the exemption amounts will almost always result in overall transfer tax savings (unless the assets which have been transferred decline in value). The main reason is the removal of the income and growth on the gifted assets from the taxable estate.

For individuals who fully used their transfer tax exemptions in prior years, consideration should be given to making gifts of the additional inflation adjusted amount (i.e., the $90,000 increase in the transfer tax exemption from 2013 to 2014, and an additional $90,000 increase in the exemption from 2014 to 2015).

Benefits of Acting Early. The main benefit of making gifts that utilize the transfer tax exemption is to remove from the taxable estate the income and appreciation on those assets from the date of the gift to the date of death. The sooner the gifts are made, the more likely that additional income and growth on such assets will escape taxation.

Gifts in Trust. Despite the tax savings, many individuals are uneasy about making outright gifts to their descendants. Such concerns are usually addressed by structuring the gifts in trust, which allows the donor to determine how the assets will be used and when the descendants will receive the funds. The use of gift trusts can also provide the beneficiaries with a level of creditor protection (including protection from a divorcing spouse) and additional transfer tax leverage. This is particularly effective when coupled with applying GST exemption to the trust (discussed above) and making the trust a “grantor trust” for income tax purposes (discussed below).

Many individuals may not be comfortable giving away significant amounts of wealth. However, the gift trust technique is not limited to trusts for descendants, but may also include a spouse as a beneficiary (or as the sole primary beneficiary).  Making the spouse a beneficiary of a gift trust (generally referred to as a spousal lifetime access trust, or “SLAT”) provides indirect access to the trust assets, while allowing the income and growth to accumulate in the trust (if not otherwise needed), and pass free of estate and gift taxes.

One of the most powerful estate planning strategies is the utilization of a “grantor trust.”  Significant additional transfer tax benefits can be obtained by structuring a gift trust as a “grantor trust” for income tax purposes. The creator (or “grantor”) of a “grantor trust” is required to report and pay the tax on the income earned by the trust. This allows the grantor to pass additional funds to the trust beneficiaries free of gift and estate taxes and income taxes, as the grantor’s payment of the trust’s income taxes each year would be considered his or her legal obligation and would not be considered additional gifts.

Taxable Gifts

Although individuals generally dislike paying taxes, making taxable gifts and paying a gift tax may prove to be beneficial.  While the federal government imposes a 40% estate tax on taxable estates and a corresponding 40% gift tax on taxable gifts, Illinois does not impose a gift tax. Thus, taxable gifts result in an overall savings of state estate and gift tax.  Moreover, the differing manner in which the gift and estate taxes are computed and paid results in overall transfer tax savings.

The gift and estate tax, although “unified,” work quite differently. The estate tax is “tax inclusive:” the tax is determined based upon the assets owned at death, and paid from those assets (similar to the income tax, which “after tax” dollars must be used to pay the tax). However, the gift tax is “tax exclusive:” the gift tax is determined based on the assets gifted, and paid from other assets owned by the donor. As an example, if you previously used your transfer tax exemption and then make a $1,000,000 gift you would incur a $400,000 gift tax, $1,400,000 will be removed from your estate, and the donees will receive $1,000,000.  However, if you die without making the $1,000,000 gift, you would have the full $1,400,000 included in your estate, resulting in approximately $676,000 of federal and Illinois estate taxes, leaving only $724,000 rather than $1,000,000 for your descendants. In order to leave $1,000,000 for your descendants at death you would need approximately $1,934,000. The estate tax on such amount would be approximately $934,667, leaving $1,000,000 for your descendants. Stated another way, by gifting assets the IRS gets 40¢ for each $1.00 your beneficiaries receive, but by dying with the assets the IRS gets 93¢ for each $1.00 your beneficiaries receive. However, there are also potential downsides: paying a tax earlier than otherwise may be needed, the possibility that the estate tax may be repealed or the rates reduced, the loss of income/growth on assets used to pay the gift tax, the possibility that the transfer tax exemption may be increased which would have allowed the gifts to pass tax free, etc.

Making Use of Historically Low Interest Rates

Interest rates remain very low (with increases likely on the horizon). The current (and historically low) interest rates continue to create an environment ripe for estate planning and transferring wealth to descendants on a tax-advantaged basis.  Techniques such as grantor retained annuity trusts (“GRATs”), charitable lead trusts (“CLTs”), intra-family loans (bearing the minimal interest in order to avoid a gift of 0.39% for loans of 3 years or less, 1.90% for loans of 3 to 9 years, and 2.91% for loans of 9 years or more as of November 2014), and sales to “grantor trusts” are sensitive to interest rate changes – and are very beneficial in a low interest rate environment.

Illinois QTIP

Given the disparity between the $5,340,000 federal estate tax exemption and the $4,000,000 Illinois estate tax exemption, married couples domiciled in Illinois should make certain that their estate plans are structured to take advantage of the Illinois QTIP marital deduction.  Otherwise, an estate plan that is designed to fully utilize the federal $5,340,000 exemption can inadvertently cause a $382,857 Illinois estate tax upon the death of the first spouse.

Net Investment Income (Medicare) Tax

Higher-income-earners should also plan for the 3.8% surtax on certain unearned income and the additional 0.9% Medicare tax that applies to individuals earning in excess of $200,000 ($250,000 for married couples filing jointly and $125,000 for married couples filing separately.) While the 0.9% additional tax on wages is only imposed on individuals, the 3.8% tax on net investment income is imposed on individuals, estates and trusts. Individuals are only subject to this new 3.8% Medicare tax if their “modified adjusted gross income” exceeds $250,000 for joint filers ($125,000 for a married individual filing a separate return) and $200,000 for single individuals.  In 2014, trusts and estates are subject to this tax at a $12,150 threshold ($12,300 in 2015). The approach to minimizing or eliminating the 3.8% surtax depends on each taxpayer’s individual situation. Some taxpayers should consider ways to minimize (e.g., through deferral) additional net investment income for the balance of the year, while others should review whether they can reduce modified adjusted gross income other than unearned income. In contrast, others may want to accelerate net investment income and/or modified adjusted gross income that would be received next year so that it is included this year (e.g., to take advantage of deductions this year). Year-end planning (such as timing the receipt of net investment income, the receipt of modified adjusted gross income and the payment of deductible expenses) can save significant taxes.

Retirement Plans and Beneficiary Designations

Contribution limitations for pension plan and other retirement accounts for 2015 were recently released by the IRS.  The following adjustments were triggered by an increase in the cost-of-living index:

  • Elective deferral contribution limits for employees who participate in a 401(k), 403(b) and 457(b) plans increased from $17,500 in 2014 to $18,000 in 2015.
  • The catch-up contribution limit for employees (aged 50 or older) who participate in a 401(k), 403(b) and governmental 457(b) plans increased from $5,500 in 2014 to $6,000 in 2015.

The end of the year is a good time to review the beneficiary designations on your pension plan and other retirement accounts (as well as life insurance policies).  Failing to name beneficiaries or keep designations current to reflect changing circumstances can create substantial difficulties and expense (both emotionally and financially) – and may lead to unintended estate, gift and income tax consequences.  You should make certain to designate beneficiaries when participating in a new retirement plan and update beneficiary designations when circumstances dictate (e.g., death of a spouse).  Finally, it is prudent to maintain a current list of accounts with beneficiary designations – which specifies the type of asset, account numbers, account custodians/administrators and beneficiaries designated for each account (primary and contingent).

ARTICLE BY

Gregg M. Simon
OF
Much Shelist, P.C.

Attend the 2nd Annual Bank and Capital Markets Tax Institute West – December 2-3 in San Francisco

The National Law Review is please to give you information on the 2nd Annual Bank and Capital Markets Tax Institute WestBank and Captial Markets Tax Institute Dec 2-3 San Francisco, CA - Register Now!

Register today!

WHEN

December 2-3, 2-14

WHERE

San Francisco, CA

Due to the success of last year’s first ever west coast Bank and Capital Markets Tax Institute (BTI), we are proud to announce that BTI West will be coming back for a second year! For 48 years the annual BTI East in Orlando has provided bank and tax professionals from financial institutions and accounting firms in-depth analysis and practical solutions to the most pressing issues facing the industry, and from now on professionals on the west coast can expect the same benefits on a regular basis

The tax landscape is continually changing; you need to know how these changes affect your organization and identify the most efficient and effective plan of action. At BTI West you will have access to the same exceptional content, networking opportunities and educational value that have made the annual BTI East the benchmark event for this industry.

In an industry that thrives on both coasts, we will continue to offer exceptional educational and networking opportunities to ALL of the hard-working banking and tax professionals across the country. Join us at the 2nd Annual Bank and Capital Markets Tax Institute WEST, where essential updates will be provided on key industry topics such as General Banking, Community Banking, GAAP, Tax and Regulatory Reporting, and much more.

2015 COLAs (Cost of Living Adjustments) for Employee Benefit Plans

Varnum LLP

The Internal Revenue Service has announced the 2015 cost of living adjustments to various limits on employee benefit plans. The adjusted amounts generally apply for plan years beginning in 2015. Some of the adjusted amounts, however, apply to calendar year 2015:

1. he limit on an employee’s contributions made during the 2015 calendar year to a 401(k) or a 403(b) tax-sheltered annuity increases to $18,000. Participants who are age 50 or older by the end of 2015 may make an additional $6,000 catch-up contribution, which also increases from the 2014 limit.

2. The limit on an employee’s contributions made during the 2015 calendar year to a 457 plan sponsored by a governmental unit or a tax-exempt organization also increases to $18,000. Participants who are age 50 or older by the end of the 2015 plan year may make an additional $6,000 catch-up contribution, which also increases from the 2014 limit.

3. The limit on an employee’s compensation that may be considered for retirement plan purposes increases to $265,000 for plan years beginning in 2015.

4. The limit on annual benefits payable under defined benefit plans remains the same at $210,000 for plan years beginning in 2015.

5. The limit on allocations to individual accounts in defined contribution plans increases to the smaller of $53,000 or 100% of compensation for plan years beginning in 2015.

6. The taxable wage base for Social Security increases to $118,500. This figure may affect the “integration level” for plans that are integrated with Social Security.

7. Employees will be classified as highly compensated employees for the plan year beginning in 2015 if their compensation in the 2014 plan year exceeded $115,000.

8. Health savings accounts (HSAs) are a means of paying health care expenses under a high deductible health care plan. To be a high deductible health care plan, the deductible must be at least a minimum amount for the year and out-of pocket expenses cannot exceed a maximum amount for the year. Contributions to an HSA may be made by the employer or the employee, but the total annual contribution amount from both sources cannot exceed the smaller of the plan’s deductible for the year or the maximum contribution amount for the year. For 2015, the adjusted amounts for HSAs are:

  • Maximum contribution: Family: $6,650 Self: $3,350
  • Minimum deductible: Family: $2,600 Self: $1,300
  • Maximum out of pocket: Family: $12,900 Self: $6,450

9. Participants who attain age 55 by the end of the 2015 plan year may make an additional $1,000 “catch-up” contribution to their HSAs.

The maximum amounts that Social Security recipients may earn during 2015 without loss of Social Security benefits are as follows:

  • Recipients ages 62 through full retirement age: $1,310/mo. ($15,720/yr.)
  • Year recipient reaches full retirement age: $3,490/mo. up to the month the recipient reaches full retirement age. ($41,880/yr.)
  • There is a special rule that applies to earnings for one year, usually the first year of retirement, in which you can get a full social security check for any whole month you are retired, regardless of your yearly earnings.
  • “Full retirement age” for Social Security is:

Year of Birth

Full Retirement Age

Prior to 1938

Age 65

1938

Age 65 & 2 months

1939

Age 65 & 4 months

1940

Age 65 & 6 months

1941

Age 65 & 8 months

1942

Age 65 & 10 months

1943 – 1954

Age 66

1955

Age 66 & 2 months

1956

Age 66 & 4 months

1957

Age 66 & 6 months

1958

Age 66 & 8 months

1959

Age 66 & 10 months

1960 and later

Age 67
© 2014 Varnum LLP

‘Jersey Shore’ Star Pleads Not Guilty to Tax Fraud

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C’mon, admit it: you’ve watched at least a few minutes of MTV’s “Jersey Shore.” Okay, fine, not all of us have let our curiosity get the best of us, but for those who have, one of the main characters of the series is currently making headlines for a tax fraud case.Mike Sorrentino, whose nickname on the show was “The Situation,” is currently facing charges that he and his brother failed to pay $8.9 million of taxes between 2010 and 2012.

According to the IRS, the brothers filed false income tax returns, failing to report personal and business income and claiming false business deductions. Those earnings were largely from public appearances for which potentially thousands of dollars were paid. Authorities also accused Sorrentino of altering accounting records or having them altered after a grand jury issued a subpoena.

Sorrentino denies the allegations and has pleaded not guilty to the charges. His attorney made a public statement last month that Sorrentino “denies that he criminally violated the tax laws.” In effect this means that he is claiming the violations were due to negligence rather than fraud.

The difference between tax negligence and tax fraud is pretty significant, not only in terms of the mental state of the taxpayer at the time the filing was made but also in terms of the penalties attached. Penalties for fraud, of course, are much more significant.

While the IRS usually has a pretty good idea of when an individual has committed fraud or negligence, this is not always the case. Those who have been wrongfully accused of tax fraud need to work with an experienced attorney to ensure their rights are protected.

ARTICLE BY

McBrayer, McGinnis, Leslie & Kirkland, PLLC

Real Estate “Change in Ownership” Can Trigger Documentary Transfer Tax

Sheppard Mullin Law Firm

926 North Ardmore Avenue, LLC v. County of Los Angeles, (9/22/14, B248536)

The California Court of Appeals has recently held that, as a general rule, the Documentary Transfer Tax (“DTT”) applies whenever there is a “change in ownership” of real property under the California Revenue & Taxation Code. In the case, 926 North Ardmore Avenue, LLC v. County of Los Angeles, the court held that the phrase “realty sold” under the DTT Act includes a “change in ownership” (subject to the limited exceptions expressly included in the DTT Act).  San Francisco and Santa Clara Counties have already enacted amendments to their DTT ordinances to provide for this result, and there are several other counties (most notably Los Angeles and San Diego) that have taken this position without any change to their ordinances.

ARTICLE BY

D. Matthew Richardson
OF
Sheppard, Mullin, Richter & Hampton LLP

Full D.C. Circuit to Rehear ACA Premium Tax Credit Case

Mcdermott Will Emery Law Firm

The full U.S. Court of Appeals for the D.C. Circuit has vacated the 2-1 panel decision issued July 22, 2014, in Halbig v. Burwell, which struck down the Internal Revenue Service (IRS) Rule providing for Affordable Care Act (ACA) premium tax credits to be available to lower income exchange customers, regardless of their state of residence.  The government’s brief is due October 3, 2014, and the plaintiffs’ opposing brief is due a month later on November 3, 2014, to precede oral arguments on December 17, 2014.  It is likely that the full D.C. Circuit would not render its opinion before mid- to late Spring 2015.  This has the effect of preserving the status quo with respect to the availability of premium tax credits, at least until the full D.C. Circuit renders its decision.

Meanwhile, the plaintiffs have sought review by the Supreme Court of the United States in King v. Burwell, Halbig’s sister case in which the U.S. Court of Appeals for the Fourth Circuit upheld that same IRS Rule.  The Clerk of the Supreme Court has granted the government an extension until October 3, 2014, to respond to the petition for certiorari.  The plaintiffs have urged the highest court render its decision as quickly as possible to resolve the circuit split.  If the Supreme Court accepts King for review before mid-January, it could issue a ruling in the current term, which is scheduled to end in late June 2015.

Among the highest profile legal challenges to the ACA, Halbig and King seek to invalidate a May 2012 IRS Rule providing that health insurance premium tax credits will be available to all taxpayers nationwide, regardless of whether they obtain coverage through a state-based exchange or a federally facilitated exchanges (FFE).  The plaintiffs (represented by the same lawyers in both cases) argued that the plain language of the ACA limits the availability of premium tax credits to only those taxpayers who reside in the 14 states (plus the District of Columbia) that set up their own exchanges, and thus nullifies the IRS Rule’s application to the 36 states operating exchanges through the FFE.  Plaintiffs’ argument is based on language providing that premium tax credits are only available for plans “enrolled in through an Exchange established by the State under section 1311 of the [ACA].”  ACA § 1401(a), enacting 26 U.S.C. § 36B(c)(2)(A)(i) (emphasis added).  The government counters that other provisions of the ACA make clear that the subsidies are to be made available in the FFE states as well.  

There are also two similar cases awaiting decisions by federal trial courts on motions for summary judgment.  First, in Pruitt v. Burwell, pending in federal district court in Muskogee, Oklahoma, the state complains that the availability of the premium tax credit in FFE states forces the state to choose between the costs of providing coverage to its employees or paying the IRS a significant financial penalty.  Second, in Indiana v. IRS, pending in federal district court in Indianapolis, the state and 39 of its public school districts argue that the IRS Rule directly injures the state and school districts in their capacities as employers by subjecting them to increased compliance costs and administrative burdens.  On August 12, 2014, the plaintiffs survived the government’s motion to dismiss based upon lack of standing inIndiana v. IRS, although the court dismissed one aspect of the case because of the delay in enforcing the employer mandate.  Oral arguments on the merits are set for October 9, 2014.

ARTICLE BY

Lauren D’Agostino
J. Peter Rich
 
OF 
McDermott Will & Emery

The Real Tax Benefits of Inverting to Canada

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On August 26, Burger King announced that it entered into an agreement to acquire Tim Hortons, Inc., the Canadian coffee-and-doughnut chain, in a transaction that will be structured as an “inversion” (i.e., Burger King will become a subsidiary of a Canadian parent corporation).  The deal is expected to close in 2014 or 2015. The agreement values Tim Hortons at approximately $11 billion, which represents a 30 percent premium over Tim Hortons’ August 22 closing stock price.

Canadian Flag

Under the terms of the deal, Tim Hortons shareholders will receive a combination of cash and common shares in the new company. Each common share of Burger King will be converted into 0.99 of a share of the new parent company and 0.01 of a unit of a newly formed, Ontario-based limited partnership controlled by the new parent company. Holders of shares of Burger King common stock, however, will be given the right to elect to receive only partnership units in lieu of common shares of the new parent company, subject to a limit on the maximum number of partnership units issued.  Burger King shareholders who make this election will be able to defer paying tax on the built-in gain in their Burger King shares until the partnership units are sold. 3G Capital, Burger King’s principal shareholder, has elected to receive only partnership units. 3G will own approximately 51 percent of the new Burger King-Tim Hortons company, with current public shareholders of Burger King and Tim Hortons receiving 27 percent and 22 percent, respectively.

Inversions have gotten plenty of negative publicity during the past few years.  Most of the reported deals involve U.S. companies that have acquired smaller foreign companies in low tax jurisdictions such as Ireland, Switzerland, and the U.K.  As with any inversion transaction, the U.S. company will continue to be subject to U.S. federal income tax on its worldwide income.  The U.S. company will benefit, however, from the ability to: (i) reorganize its controlled foreign subsidiaries under a new foreign parent corporation (thereby removing those subsidiaries from the U.S. “controlled foreign corporation” regime and also allowing for the future repatriation of non-U.S. source profits to the foreign parent corporation and avoid U.S. corporate income tax); and (ii) “base erode” the U.S. company with intercompany debt and/or license arrangements with the new foreign parent or its non-U.S. subsidiaries.

It has been reported that Burger King’s effective tax rate was 27.5 percent in 2013 and Tim Hortons was 26.8 percent (15 percent federal rate plus 11.8 percent provincial rate), so “base eroding” Burger King with deductible interest and/or royalty payments to Canada will not provide a significant tax benefit to Burger King.  Where the use of a Canadian parent corporation, however, will benefit Burger King (and other U.S. companies that have inverted into Canada) from a tax perspective is the ability to take advantage of Canada’s (i) “exempt surplus” regime, which allows for the repatriation of dividends from foreign subsidiaries into Canada on a tax-free basis; and (ii) income tax treaties that contain tax sparing provisions, granting foreign tax credits at rates higher than the actual foreign taxes paid.  The United States does not provide either of these tax benefits under its corporate income tax system or treaty network. 

Canadian Exempt Surplus Regime

In general, under Canadian law, dividends received by a Canadian corporation out of the “exempt surplus” of a foreign subsidiary are not subject to corporate income tax in Canada.  Exempt surplus includes earnings of a foreign subsidiary that is resident in, and carrying on an active business in, a country with which Canada has concluded an income tax treaty or, more recently, a tax information exchange agreement (TIEA).  A TIEA is an agreement between two jurisdictions pursuant to which the jurisdictions may request and share certain information that is relevant to the determination, assessment and collection of taxes, the recovery and enforcement of tax claims, and the investigation or prosecution of tax matters.  The extension of the exempt surplus regime to jurisdictions that have signed TIEAs (but not income tax treaties) with Canada is significant because Canada has signed such agreements with low-tax jurisdictions, such as the Cayman Islands, Bermuda, and the Bahamas. Historically, the use of a Barbados IBC, which has a maximum corporate income tax rate of 2.5 percent, was the preferred jurisdiction for a Canadian parent company operating in a low-tax jurisdiction because of the long standing Canada-Barbados income tax treaty.

On the other hand, dividends received by a Canadian corporation out of the “taxable surplus” of a foreign subsidiary will be taxable in Canada (subject to a grossed-up deduction for foreign taxes) at regular corporate income tax rates. Taxable surplus includes most types of passive income, such as royalties, interest, etc., and active business income of a foreign subsidiary that is resident in, or carrying on business in, a country with which Canada has neither an income tax treaty nor a TIEA.  Special rules may deem certain passive income (such as interest or royalties) to be included in exempt surplus if received by a foreign subsidiary resident in a tax treaty or TIEA jurisdiction, if those amounts are deductible in computing the exempt earnings of another foreign subsidiary.  For example, interest and royalties paid from an active business of a U.K. subsidiary of a Canadian parent corporation to a Cayman Islands subsidiary of such Canadian parent will be eligible to be repatriated to Canada from the Cayman Islands under the exempt surplus regime on a tax-free basis.

It is interesting to note, however, that Burger King will not be able to repatriate most of its foreign-source income to Canada on a tax-free basis under the exempt surplus rules.  The majority of Burger King’s foreign-source income consists of royalties and franchise fees, which will be considered passive income for Canadian income tax purposes.  (Burger King, which operates in about 14,000 locations in nearly 100 countries, has become a franchiser that collects royalty fees from its franchisees, not an operator of restaurants).

Canada’s Tax Sparing Provisions

Another tax benefit offered by a Canadian parent corporation is the ability to utilize the “tax sparing” provisions contained in many Canadian income tax treaties. Canada currently has income tax treaties that contain tax sparing provisions with more than 30 countries, including Argentina, Brazil, China, Israel, Singapore, and Spain. In general, the purpose of a tax spari
ng provision is to preserve certain tax incentives granted by a developing jurisdiction by requiring the other jurisdiction to give a foreign tax credit for the taxes that would have been paid to the developing country had the tax incentive not been granted.  For example, under Article 22 of the Canada-Brazil income tax treaty, dividends paid by a Brazilian company to a Canadian parent corporation are deemed to have been subject to a 25 percent withholding tax in Brazil and therefore, eligible for a 25 percent foreign tax credit in Canada, even though the treaty limits the withholding tax to 15 percent (and in actuality, Brazil does not even impose withholding taxes on dividends under its local law).  A similar benefit is available for interest and royalties paid from Brazil to Canada (e.g., a deemed withholding tax, and therefore foreign tax credit, of 20 percent, even though the treaty caps the withholding tax at 15 percent).  As noted above, the United States does not currently have any income tax treaties that contain tax sparing provisions.

Conclusion

With Burger King’s effective corporate tax rate of 27.5 percent in the United States in 2013 and Tim Hortons 26.8 percent in Canada, the tax benefits of Burger King inverting to Canada are not readily apparent.  Notwithstanding the lack of a significant disparity in these tax rates, Canada does offer the ability to exclude from its corporate income tax dividends received from the earnings of a foreign subsidiary that is resident in, and carrying on an active business in, a jurisdiction that has concluded an income tax treaty or TIEA with Canada.  This key benefit, along with the Canadian income tax treaties that contain tax sparing provisions, provides one more example of why U.S. multinationals are operating at a competitive disadvantage when compared to other OECD countries around the world. 

ARTICLE BY

Jeffrey L. Rubinger
 
OF 
Bilzin Sumberg Baena Price & Axelrod LLP

In Estate Planning, Where There's a Will There's a Way

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An August 15, 2014 article, by Robert Wood, in Forbes.com, told how many large companies, such as GM and Merck, pay zero taxes. It told how Apple avoided $9 billion in US taxes in 2012, according to a US Senate Report issued in 2013.

In the estate world, billionaires such as George Steinbrenner, the Yankees owner who died in 2010, avoided an estimated $500 million in US estate tax. But that was because he died in 2010, the one year when there was no estate tax. In 2014, US citizens can protect $5 million from estate tax, and that amount is indexed for inflation, so the current figure is $5,340,000. Thus, $10,680,000 protects most American married couples from paying federal estate tax upon the second of their deaths. Married couples fortunate enough to have more than $10,680,000, will pay federal tax at 40%.

Even wealthy families with assets exceeding $10,680,000 (or a single person exceeding $5,340,000) can take advantage of gifting strategies and charitable planning to avoid or reduce estate tax. These strategies include techniques known as “GRATS,” “IDGT’s,” “CRT’s” and “CLT’s,” which mean nothing except to the tax professionals who implement them, and the wealthy who benefit from them. Although Congress has threatened to curtail or eliminate many of these strategies, they currently remain legal options for US citizens upon their deaths to leave more to their families and less to the IRS.

Whether it is multi-national public companies with billions of income, or wealthy US families with millions of assets, when it comes to avoiding taxes, be it income or estate, where there’s a will there’s a way.

ARTICLE BY

John P. Dedon
OF
Odin, Feldman & Pittleman, P.C.

“Do You Want Liability With That?” The NLRB McDonald’s Decision that could undermine the Franchise Business Model (Part II)

 

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Yesterday’s post discussed the decision of NLRB’s General Counsel to hold McDonald’s Corp. jointly responsible with its franchise owners for workers’ labor complaints. The decision, if allowed to stand, could shake up the decades-old fast-food franchise system, but it does not stop there. The joint employer doctrine can be applied not only to fast food franchises and franchise arrangements in other industries, but also to other employment arrangements, such as subcontracting or outsourcing.

This decision could also impact the pricing of goods and services, as franchisors would likely need to up costs to offset the new potential liability. Everything from taxes to Affordable Care Act requirements could be affected if the decision stands.

If you are a franchisor and are currently in what could be determined to be a joint employer relationship, consider taking steps to further separate and distinguish your role from that of your franchisee. While franchisors should always take reasonable measures to ensure that franchisees are in compliance with applicable federal and state employment laws, they should take care to not wield such force over them to give the appearance of a joint-employer relationship.

We will be following the NLRB decision and keep you updated as the issue progresses.

ARTICLE BY

Luke A. Wingfield
 
OF 
McBrayer, McGinnis, Leslie and Kirkland, PLLC

Energy and Environmental Law Update: Week of 8/25/2014

Mintz Levin Law Firm

Now that summer is drawing to a close, let’s check in on one important bill that lost momentum just as the summer was beginning. Remember the Senate Finance Committee’s tax extenders package (S. 2260), which the committee marked up on a bipartisan basis in mid-May? The one that was poised to pass the Senate but that surprisingly failed to reach cloture after Senate leadership blocked Republican amendments on the bill? At the time, congressional staff and lobbyists—and even Majority Leader Harry Reid (D-NV) —suggested that the extenders package would come up again in the lame duck session after the November election. The House was not expected to vote on an extenders package before then anyway, so the Senate delay would not really impact the timing of final passage of this two-year extension of more than 50 tax provisions.

Well, that was then. Today, almost two months before the mid-term elections, the future of the clean energy provisions in an extenders package—particularly the production tax credit (PTC) and investment tax credit in lieu of the PTC—depends a great deal on which party wins control of the Senate. Republicans are more confident that they can win the necessary six seats to take back the top chamber; and if they do, they will have more leverage in the lame duck about what the contents of an extenders package would be. The $84 billion EXPIRE Act of 2014 not only extends the PTC by two years but also extends key clean energy depreciation benefits and tax credits, including a $1-per-gallon credit for biodiesel and a 50-cent-per-gallon credit for alternative fuels. Senate Democrats strongly support the clean energy provisions. Certain Republicans, such as Chuck Grassley (R-IA), remain staunch supporters of the PTC and biodiesel credits, but many other Republicans are eager to eliminate or scale back the PTC and other clean energy provisions. If Senator Orrin Hatch (R-UT) learns he will be chairman of the Finance Committee next year in a Republican chamber, he has less of an incentive to work with current Chairman Ron Wyden (D-OR) and Democrats during the lame duck session. He can simply hold out and put forward his own extenders bill next year with popular provisions like the research and experimentation (R&D) credit and without clean energy incentives.

The extension of a handful of relatively popular and less controversial business and individual extenders such as the R&D credit and bonus depreciation are more assured. House Republicans, as part of a “tax-reform-lite” effort, have passed several bills making select provisions such as these permanent. For clean energy advocates, they have to cling to the more popular parts of the overall package and make sure their provisions are not trimmed away when Congress eventually takes it up. The business community, which wants many of the non-energy provisions in the EXPIRE Act extended, also must be much more vocal if the bill is to rise to the front of the agenda.

If Democrats do manage to hold onto control of the upper chamber, they very likely will be dealing with a reduced majority, and that too will give Republicans more leverage. With all the competing priorities in a very short legislative period, it will be difficult for the package to be enacted before the end of the year. Another retroactive extension in early 2015 could be possible. Congress has let the PTC lapse several times since 1992 before renewing it again. While it’s hard to avoid feeling a feeling of déjà vu when faced with another “will-they-or-won’t-they” end-of-year extension, this time also seems different. Many legislators thought the previous PTC extension would be the last one, so the stakes are high. Anti-PTC campaigns financed by conservative groups and utilities ratchets up the pressure on lawmakers. One possible way to blunt some Republican opposition would be to modify the PTC and either reduce the amount of the credit or include a deadline by which projects must complete construction—or both.

Several scenarios exist where even a change of control in the Senate would not preclude the passage of a tax extenders package. A short-term extension would give lawmakers some breathing room to debate tax reform. Some Republicans from wind-friendly states might prefer the clean energy provisions to pass under a Democratic watch rather than under Republican leadership in the new Congress. In this optimistic scenario, the lame duck session could mirror the productive session of 1980.

Ironically, election results in any one of three bio-energy and wind states–Colorado, South Dakota, and Iowa—could help decide the balance in the Senate and the fate of clean energy tax credits.

ARTICLE BY

Bryan M. Stockton
 
OF 
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.