Tag: Tax

The Fiscal Cliff Legislation: An Executive Summary of What You Need to Know

The National Law Review recently published an article, The Fiscal Cliff Legislation: An Executive Summary of What You Need to Know, written by Michael L. Pate and Elizabeth L. McGinley of Bracewell & Giuliani LLP:

Bracewell & Giuliani Logo

 

As everyone knows, the American Taxpayer Relief Act of 2012 (aka, the “Fiscal Cliff Deal”) was passed by the U.S. House of Representatives late in the evening on January 1, 2013. The legislation includes provisions related to tax relief, business tax extenders, energy tax extenders, and the federal budget, among other issues.

To help you navigate this legislation, we have prepared documents featuring concise information on these provisions:

  1. A Summary of the Provisions in the American Taxpayer Relief Act of 2012
  2. The Fiscal Cliff Deal: What’s Included, What Isn’t, and What’s Next
  3. Estimated Revenue Effects of the American Taxpayer Relief Act of 2012

© 2012 Bracewell & Giuliani LLP

2013 Expiring and Changing Employee Tax Provisions

The National Law Review recently published an article by Jacob Mattinson, Diane M. Morgenthaler, and Ruth Wimer, Esq., CPA of McDermott Will & Emery titled, 2013 Expiring and Changing Employee Tax Provisions:

McDermottLogo_2c_rgb

 

With the fiscal cliff approaching in 2013, several favorable tax provisions affecting individuals and businesses are set to expire.  These changes include an expiration of the lower federal income tax rates implemented under President Bush, a return of the “marriage penalty” and an expiration of an extensive list of previously extended temporary tax provisions.  Given this tax uncertainty, employers must prepare for possible changes to payroll taxes, flexible spending account contribution limits, adoption assistance benefits and educational assistance benefits.

Payroll Taxes

The 2 percent payroll tax cut enjoyed in 2011 and 2012, which reduced the employee’s share of Social Security payroll taxes, will expire as of January 1, 2013.  Specifically, this tax cut reduced the employee’s share of Social Security taxes from 6.2 percent to 4.2 percent on the first $110,100 of wages in 2012.  A similar reduction from 12.4 percent to 10.4 percent applied to the income of self-employed individuals. Although the increase is on employee contributions, the increase also affects an employer’s withholding obligations.  Furthermore, if an employer provides a gross-up of any type to an employee, such gross-up will be commensurately more expensive beginning in 2013.

At the same time that the temporary 2 percent decrease in employee payroll taxes expires, a new 0.9 percent Medicare payroll tax increase applies (from 1.45 percent to 2.35 percent) under the Patient Protection and Affordable Care Acton wages over $250,000 for married taxpayers filing jointly and $200,000 for single taxpayers.  Self-employed individuals will have a similar increase in self-employment tax liability.  Although this increased rate of tax is not an employer liability, employers must be prepared to withhold the additional 0.9 percent from wages for any employee with wages over $200,000.  Because this withholding is required on an employee’s wages over $200,000, which does not particularly correlate with an employee’s ultimate tax liability, many employees, particularly those who are married, may find that they are over- or under-withheld, depending upon the earnings of their spouse.  For example, if a husband and wife each earn $200,000, with joint wages totaling $400,000, this couple will be under-withheld because their respective employers will withhold nothing.  However, the additional 0.9 percent tax for them is owed on combined wages over $250,000, resulting in an under-withholding of $1,350 ($150,000 times 0.9 percent).

Qualified Adoption Assistance

The income tax exclusion for amounts paid by an employer under a qualified adoption assistance program is also set to expire on December 31, 2012.  A qualified adoption assistance program allows an employer to reimburse an employee on a tax-free basis for as much as $12,650 in 2012 for expenses related to the adoption or attempted adoption of a child.  Qualified adoption expenses include reasonable and necessary adoption fees, including court costs, attorney fees, traveling expenses (including amounts spent for meals and lodging while away from home) and other expenses directly related to the legal adoption of an eligible child.

Flexible Spending Account Contributions

Employee contributions to health care flexible spending accounts will be reduced to $2,500 per year for plan years beginning in 2013.  Prior to 2013, the tax code did not limit health care flexible spending account contributions.  This new limit must be documented in a flexible benefits plan by December 31, 2014, regardless of the fiscal year of the flexible benefits plan, and this change must be retroactive to the beginning of the 2013 plan year.

Educational Assistance

Certain reimbursements for employer-provided educational assistance will expire at the end of 2012.  Section 127 of the Internal Revenue Code allows an employer to reimburse an employee on a tax-free basis up to $5,250 for certain educational expenses provided through a non-discriminatory educational assistance program, including reimbursements for graduate school and programs that allow the employee to qualify for a new position.  Even if employer-provided educational assistance programs no longer have tax subsidies in 2013, employers can still provide some type of educational reimbursements in a more limited manner if the educational reimbursements qualify as a business expense and meet certain requirements, such as enhancing the employee’s performance but not qualifying the employee for a new position or career.

Next Steps

With the uncertainty of the approaching fiscal cliff, employers should consider advising employees of the ambiguity surrounding educational assistance and adoption assistance benefits for 2013 and the possibility of a 2 percent payroll tax increase.  However, even if tax extensions for education assistance, adoption assistance and the 2 percent payroll tax increase are adopted in a new tax bill, employers should note that it is highly unlikely that either the new limits on health care flexible spending accounts or the new 0.9 percent payroll tax increase for high-income employees will be altered or eliminated.

© 2012 McDermott Will & Emery

IRS Extends Transition Relief for Puerto Rico Qualified Plans to Participate in U.S. Group Trusts and Deadline to Transfer Assets

Posted in the National Law Review an article by attorney Nancy S. Gerrie and Jeffrey M. Holdvogt of McDermott Will & Emery regarding  U.S. employers with qualified employee retirement plans that cover Puerto Rico:

On December 21, 2011, the U.S. Internal Revenue Service (IRS) issued Notice 2012-6, which provides welcome relief for U.S. employers with qualified employee retirement plans that cover Puerto Rico employees.  Notice 2012-6 provides that the IRS will extend the deadline for employers sponsoring plans that are tax-qualified only in Puerto Rico (ERISA Section 1022(i)(1) Plans) to continue to pool assets with U.S.-qualified plans in group and master trusts described in Revenue Ruling 81-100 (81-100 group trusts) until further notice, provided the plan was participating in the trust as of January 10, 2011, or holds assets that had been held by a qualified plan immediately prior to the transfer of those assets to an ERISA Section 1022(i)(1) Plan pursuant to a spin-off from a U.S.-qualified plan under Revenue Ruling 2008-40.

Notice 2012-6 also extends the deadline for sponsors of retirement plans qualified in both the United States and Puerto Rico (dual-qualified plans) to spin off and transfer assets attributable to Puerto Rico employees to ERISA Section 1022(i)(1) Plans, with the resulting plan assets considered Puerto Rico-source income and not subject to U.S. tax.

There are now two separate deadlines:

    • First, in recognition of the fact that Puerto Rico adopted a new tax code in 2011 with significant changes to the requirements for qualified retirement plans, the IRS has extended the general deadline to December 31, 2012, for dual-qualified plans to make transfers to Puerto Rico-only plans, in order to give plan sponsors time to consider the effect of the changes made by the new tax code.
    • Second, in recognition of the fact that the IRS has not yet issued definitive guidance on the ability of an ERISA Section 1022(i)(1) Plan to participate in 81-100 group trusts, the IRS has extended the deadline for dual-qualified plans that participate in an 81-100 group trust to some future deadline, presumably after the IRS reaches a conclusion on the ability of a dual-qualified plan to participate in an 81-100 group trust, as described in Revenue Ruling 2011-1.

For more information on the issues related to participation of ERISA Section 1022(i)(1) Plans in 80-100 group trusts, see “IRS Permits Puerto Rico-Qualified Plans to Participate in U.S. Group and Master Trusts for Transition Period, Extends Deadline for Puerto Rico Spin-Offs.”

For more information on the issues plan sponsors should consider with respect to a dual-qualified plan spin-off and transfer of assets attributable to Puerto Rico employees to ERISA section 1022(i)(1) plans, see “IRS Sets Deadline for Transfers from Dual-Qualified to Puerto Rico-Only Qualified Plans.”

© 2011 McDermott Will & Emery

Congress Reconsiders Independent Contractor Classification

Posted in the National Law Review an article by Robert B. Meyer and David L. Woodard of  Poyner Spruill LLP regarding Employee MisClassification Prevention Act (EMPA):

 

 

It appears that Congress has again turned its attention to the issue of employee/independent contractor classification.  On October 13, 2011, Rep. Lynn Woolsey (D-CA) reintroduced legislation titled the “Employee Misclassification Prevention Act” (EMPA).  This bill, if enacted, would amend the Fair Labor Standards Act to impose new obligations on employers which utilize independent contractors, and also penalties for employers which misclassify employees as contractors.  Similar legislation was also introduced in the Senate last April, further suggesting that this issue of contractor classification is gaining traction in Congress.  The EMPA, as it is presently drafted, proposes the following:

  • Require employers to keep records of wages and hours worked by independent contractors.  The failure to do so would result in a presumption that the worker is an employee.
  • Require employers to provide written notice to every worker of his/her classification as either an employee or contractor.  The notice must also direct the worker to a Department of Labor website for information regarding worker rights under the EMPA, and encourage workers to contact the DOL if they have questions about classification.
  • Prohibit employers from discriminating or retaliating against workers who exercise their rights under the EMPA.
  • Amend the FLSA to make misclassification a prohibited act, and impose double liquidated damages for violations of the minimum wage and overtime pay provisions of the FLSA resulting from the misclassification.
  • Impose civil penalties upon employers for violating the EMPA (up to $1,100 for first violation, and up to $5,000 for repeat or willful violations).
  • Authorize the DOL to conduct targeted audits of employers in “certain industries with frequent incidence of misclassifying employees as non-employees….”
  • Permit the DOL to share information with the Internal Revenue Service regarding employers found to have misclassified workers.
  • Amend the Social Security Act to establish “administrative penalties for misclassifying employees, or paying unreported wages to employees without proper recordkeeping, for unemployment compensation purposes.”
  • Require state unemployment benefits agencies to conduct worker classification audits of employers.

The potential impact of this proposed legislation is far-reaching.  It is apparent that the EMPA would create a new federal offense for both intentional and unintentional contractor misclassifications.  In addition, the law would create a federal source of new employee rights, and would empower the DOL to seek expanded monetary damages on behalf of workers.  Therefore, employers should not only remain watchful of this legislation as it works its way through Congress, but also cautious about their use and classification of independent contractors.

© 2011 Poyner Spruill LLP. All rights reserved.

Ford Motor Credit Company v. Chesterfield County: Reading Constitutional Fairness And Supply Side Economics Into The Virginia Tax Code

Recently posted in the National Law Review, Winner of the Winter 2011 Student Legal Writing Contest, Adam Blander of Brooklyn Law School wrote an article regarding the recent decision of Ford Motor Credit Company v. Chesterfield County:

In the recent decision of Ford Motor Credit Company v. Chesterfield County,[1] the Virginia Supreme Court held that the gross receipts of a taxpayer’s local business branch reflected activity generated outside of the branch itself, and was therefore not taxable to Chesterfield County as a licensing privilege. This Note argues that despite the rather case-specific and constrictive holding of the decision (which was decided on state-statutory grounds), the facts of the case actually confronted the Court with a much broader, yet more delicate constitutional and public policy determination — what constitutes “fair” tax apportionment of large multi-state businesses?

I. Background: Constitutional Boundaries of State Tax Apportionments

Tax apportionment is the attempt by a governing body to levy taxes based on a corporation’s earned income in that jurisdiction.[2] Almost by definition, “[a]ny state tax apportionment formula will be inaccurate – either overstating or understating the portion of a corporation’s income that should be subject to tax.”[3] Consequently, any formula, at some level, is unfair. In Complete Auto Transit, Inc. v. Brady, the Supreme Court held that the U.S. Constitution required all state taxes affecting multi-state businesses to be, among other things, “fairly apportioned.”[4] In Container Corp. of America v. Franchise Tax Board, the Court explained that a “fairly apportioned” tax must be both “internally” and “externally consistent.”[5] Container directed courts to test for “internal inconsistency” through engaging in a hypothetical exercise: if more than 100 percent of the business’s income would be taxed if every jurisdiction applied the challenged apportionment formula, then formula was internally inconsistent.[6]Internal inconsistency is a facial challenge – the taxpayer need only prove that he faces a “theoretical risk of multiple taxation.”[7] The more elusive element of externalinconsistency, on the other hand, requires the challenged formula to “actually reflect a reasonable sense of how income is generated.”[8]  As such, the taxpayer must show by “clear and cogent evidence that the income attributed to the State is in fact out of all appropriate proportions to the business transacted in that State” or that it “has led to a grossly distorted result.”[9] In Goldberg v. Sweet, the Court clarified that that “[t]he external consistency test asks whether the State has taxed only that portion of the revenues from the interstate activity which reasonably reflects the in-state component of the activity being taxed.”[10]

The practical effect of these Supreme Court decisions is that state courts have been entrusted with the daunting task of determining what constitutes “fair apportionment.” State courts have analyzed challenges to tax schemes utilizing these Supreme Court directives, but have also taken cues from their state’s common law tradition, the state’s own statutory code, and, when possible, the legislative intent of the state’s taxing body. Patrolling for constitutional defects presents an interpretative and political challenge to any court adjudicating tax disputes- how should it reconcile a taxpayer’s right to be free from unfairly apportioned taxes (even if the “unfairness” is entirely theoretical), while at the same time, faithfully interpret the tax systems passed by the legislative body, whose purpose is to collect vital revenue from all taxpayers in its jurisdiction?  This dilemma becomes all the more problematic when the taxpayer is a complex interstate business, which may organize its corporate make-up or accounting scheme in an attempt to avoid payingthese taxes. The Virginia Supreme Court faced such a dilemma in Ford Motor Credit Company.

II. Ford Motor Credit Company v. Chesterfield County: The Facts

In February 2007, Ford Motor Credit Company (FMCC), filed in Virginia circuit court an “Application for Correction of Erroneous Assessment of Business, Profession and Occupation License [“BPOL”] Tax,”[11] claiming it had mistakenly overpaid Chesterfield County, Virginia for the tax years of 2001, 2002, 2003, and 2004. FMCC asserted that its BPOL payments to Chesterfield County, which was based on “the entire gross receipts of loans related to its Richmond branch,”[12] did not actually “reflect the limited contribution of the Richmond Branch to [its] nationwide business.”[13] As such, FMCC sought a refund of $1,515,935.05.[14]

FMCC, a subsidiary of Ford Motor Company, is a “financial services provider, primarily to the automobile purchase or loan lessee environment,” headquartered in Dearborn, Michigan, with hundreds of sales branches throughout the Country, the Richmond branch being one of them.[15] The FMCC headquarters provided the Richmond branch with the capital needed to provide loans, and dictated to the branch “the policies and criteria governing loan approval, contract terms, and other management issues.”[16]

Roughly 75 percent of the branch’s revenue came from “retail and lease contracts,” in which the branch would provide financing to customers wishing to purchase or lease a vehicle from a Ford Motor Company dealership. While the Richmond branch provided the administrative duties necessary to effectuate a loan, such as reviewing the loan application, collecting paperwork and forwarding account information, [17] it generally “did not process funds, receive payments, engage in collection or other customer service activities, or handle delinquent debts.”[18] Upon approval of the loan, the paperwork was forwarded to a service center, in charge of taking title to the vehicle,[19] and the “branch had no further involvement in the loans.”[20] FMCC would then record these loans as receivables in its internal “management, analysis and performance system” (“MAPS”).[21] FMCC would also “book” as revenue any payments due to FMCC. In the event of default on a loan, FMCC would record revenue once the “principle was satisfied on the note.”[22] FMCC paid BPOL taxes based on the gross receipts that MAPS attributed to the Richmond Branch.

FMCC argued that MAPS, in fact, was not an “an activity based system,” but merely a “contract revenue-based system.”[23] In other words, MAPS tracked revenue via the branch in which the loan was originally processed, but was unable to verify which office was actually responsiblefor the specific revenue-generating activities.[24] An FMCC accounting expert testified that it would be “very difficult” to design a system which actually “attribute[d] revenue based on where services are performed.”[25]Accordingly, the BPOL tax assessment, which was based on the gross receipts of “all loans originating in the Richmond Branch” failed to consider the role of other offices in the administering of these loans, including, in particular, the Dearborn headquarters. Because reliance on the gross receipts did not actually reflect revenue collected based on the Richmond branch’s activities, FMCC argued that the BPOL tax, as administered, violated the “fair apportionment prong” for local taxation set forth in Brady.[26] The expert proposed that a BPOL tax based on payroll apportionment would more accurately reflect “all the activities [of the Richmond branch] thatgeneratedrevenues” which, incidentally, would entitle FMCC to a sizable refund.[27]

Unmoved, the circuit court dismissed FMCC’s application with prejudice, finding that the “MAPS figures accurately reflect the gross receipts generated as [a] result of the distinct efforts of the Richmond Branch” and consequently, was not “‘out of all appropriate proportion’ to the business transacted in the locality,” thus satisfyingBrady’s fair apportionment requirement.[28]

III. Ford Motor Credit Company: The Decision

On appeal, the Supreme Court of Virginia reversed the circuit court’s decision, and found for FMCC. Writing for the majority, Chief Justice Cynthia D. Kinser declined to directly address the constitutional challenges under Brady, and instead held that the assessment contravened the Virginia Taxation Code. Nonethless, this Note contends that the decision was not an exercise in “constitutional avoidance”: while the Court did not state so explicitly, it read into the state Tax Code its own value-laden interpretation of what constitutes “fair apportionment,” regardless of whether such an interpretation was a faithful interpretation of the actual legislation.  In so doing, the Court hinted that any alternate interpretation of the Code faced the risk of being challenged on constitutional grounds as well.

The Virginia Tax Code allows the “governing body of any county” to collect “liscence taxes” (BPOL taxes) upon any person, firm, or corporation “engaged” in any business or trade “within the county.”[29] The question, therefore, was whether “gross receipts [] falls within a locality’s statutory power to tax.”[30] Citing a prior Virginia case, City of Winchester v. American Woodmark (Woodmark I), the Court noted that additional tax burdens “are not to be extended by implication beyond the clear import of the language used. Whenever there is just doubt, that doubt should absolve the taxpayer.”[31] The Code provides that local BPOL taxes may only tax “those gross receipts attributed to the exercise of a privilege subject to licensure at a definite place of business within this jurisdiction.”[32] With regards to service businesses in particular, gross receipts should be “attributed to the definite place of business at which the service is performed…directed, or controlled.”[33] Nonetheless, if the licensee  “has more than one definite place of business and it is impractical or impossible to determine to which definite place of business gross receipts should be attributed under the general rule,” then gross receipts are to be “apportioned based on payroll.”[34]

The Court, relying upon its prior holding in City of Winschester v. American Woodmark Corp. (Woodmark II), which itself relied upon the language of the Supreme Court decision, Goldberg v. Sweet, concluded that the gross receipts werenotattributable solely to FMCC services rendered in the County.[35]Woodmark II held that a BPOL tax may be levied “only to the portion of the revenues from the interstate activity which reasonably reflects the in-state component of the activity being taxed.”[36] In Woodmark II, American Woodmark, a furniture manufacturer with 24 facilities in different states, alleged that city’s imposition of BPOL taxes on 100% of its revenue constituted “unfair apportionment” because only its corporate headquarters were located in Winchester. Woodmark argued that an assessment of the gross receipts was not “attributable to [its] business activities within the city.”[37] The Court determined it a matter of “common sense” that the value by the headquarters alone could “not possibly produce 100% of the revenues.”[38] It thus held that American Woodmark had presented “clear and cogent evidence” that the “assessments attributed to operations conducted in Winchester [were] out of all appropriate proportions to…the business transacted in Winchester.”[39]

The FMCCcourt noted that “[a]lthough a statutory challenge was not presented inWoodmark II” the case nonetheless stood for the proposition that a locality, under the Code, may only tax the gross receipts “attributed to the exercise of a privilege subject to licensure at a definite place of business.”[40] Regarding the facts of this case, the court observed that service centers outside the County had refinanced loans (initially contracted into at the Richmond branch), assisted customers with administration changes, titled vehicle, and tracked the progress of loan payments. The court also recognized that FMCC headquarters directly provided the Richmond branch with capital. In light of these realities, the court held that FMCC had demonstrated “by clear and cogent evidence” that the gross receipts attributed to the Richmond Brach, were in fact, the product of “financial services provided in other jurisdictions.”[41] “In other words, the operation of the Richmond Branch did not produce 100 percent of the gross receipts that the County taxed.”[42] Therefore, a tax assessment based on these gross receipts was invalid. Finally, because MAPS only tracked revenues by contract, the Court determined it would be “impossible, or, at least, impractical” for FMCC to track the actual services performed over the lives of the approximately 20,000 loans which originated in the Richmond Branch. As such, the court concluded that the “BPOL tax assessment must be calculated using payroll apportionment.”[43]

IV. Possible Consequences

FMCC received a significant windfall from the ruling, which, as the dissent observed, was now entitled to recover approximately 93% of its past payments.[44] Still, the Court’s uncritical acceptance of FMCC’s contention that it would be “very difficult” to design an alternative accounting system may spawn unanticipated mischief in the near future. Without judicial incentives (punitive or otherwise), a complex interstate business, well aware of the financial stakes, will simply fail to create an accounting system which records revenue generated by each definite places of business. At that stage, the business will self-servingly insist to the taxing authority that redesigning the system would be “very difficult,” entitling itself to the more attractive BPOL based on payroll. In effect, a company may fleece itself from paying higher taxes simply through its own negligence, willful blindness, or lack of innovative impetus.

Perhaps more significantly, the court’s reliance on Woodmark II,  which was decided on non-statutory based grounds,  in interpreting the BPOL statutory provisions seems to be an effort by the court to inject constitutional principles of “fair apportionment” into the Tax Code itself. The FMCC court could have determined the extent of Chesterfield County’s authority to tax through utilizing the traditional maxims of statutory interpretation, in which the provisions dealing with the BPOL tax were analyzed within the context to the Code as a whole. Instead, the FMCC court relied onWoodmark II’s broad “reasonableness” standard of external inconsistency, set forth by the Supreme Court in Goldberg v. Sweet. Apparently, the court signaled that it would interpret the Code itselfto mandate that all assessments reasonably reflect the in-state component of the taxed activity in accordance with Goldberg. The Virginia Supreme Court, moreover, has set a considerably higher external inconsistency standard than Goldberg’s – Both Woodmark II and FMCC held that an assessment which taxed anythingmore than revenue attributed to that definite place of business constituted clear and cogent evidence that the assessments were out of all appropriate proportion. Proportionality was measured, not through any mathematical ratio or formula, but rather through an appeal to “common sense” (Woodmark II), or through realization that the revenue could not be quantified (FMCC). Both decisions’ reference to an opaque “100% of revenue” hypothetical exercise indicates that the Court has attempted to articulate a “reasonableness” standard which (rather coarsely) incorporates both internal and external consistency models.

V. Trending Towards a More Business-Friendly Virginia

To appreciate how far-reaching the FMCC decision is, it is crucial to highlight the actual holding in WoodmarkI, approvingly cited in FMCC. Woodmark Iheld that office equipment located at a manufacturer’s headquarters was sufficiently “used in manufacturing” under the Virginia Tax Code, thus exempting it from local property taxes.[45] The Virginia legislature thereafter amended the Code to codifyWoodmark’s broad interpretation of “manufacturing.”[46] The practical consequence of these actions was that anybusiness involved in manufacturing, however tangentially, could now claim exemptions for its personal property.[47] FollowingWoodmark I, the Virginia courts further broadened these exceptions to include, among other things, vending machines and advertising scoreboards used by a manufacturer, and even raises questions of whether the exemption may extend to property leased to a manufacturer which is owned by a non-manufacturer.[48] One scholar opined that Woodmark I’s interpretation of the Virginia Codeare  “convoluted” and “not easily categorized by [ ] theoretical rationales.”[49] She concluded that “on a more practical level, Virginia…seems willing to enlarge the tax breaks offered to manufacturing businesses.”[50]

FMCC’s reference to Woodmark I, regardless of its actual relevance to the facts of the case, evinces how broad Woodmark I’s holding has become. Instead of being constrained only to the manufacturing realm, Woodmark Iapparently has evolved into a judicial mandate to create additional tax breaks for interstate companies, even those engaged in distinctly non-manufacturing enterprises, such as financing loans. Seen in this light, Ford Motor Credit Company, inspired by Woodmark I (and to a degree, Woodmark II) is the latest incident of a growing trend in Virginia to resolve discrepancies in the tax code in favor of big business. The creation of these corporate “tax-loopholes,” either through judicial fiat or legislative codification, is likely an attempt to lure large businesses, particularly manufacturers, into locating or expanding their operations inside Virginia. As the Circuit Court in Woodmark I put it, “the term manufacturing is to be construed liberally because ‘the public policy of Virginia is to encourage manufacturing in the Commonwealth.’”[51]

Virginia, in essence, has endorsed a localized version of “supply side economics,” predicting that the lowering of taxes on the production of both goods (e.g., furniture, as in Woodmark I) and services (e.g., financing, as in FMCC)[52] will, in turn, spur economic growth in Virginia, particularly in the form of job creation. As a result, Virginia localities, faced with a subtle yet significant decrease in millions of dollars of property tax and BPOL tax revenue, may be compelled to shift this burden directly onto consumers, whom, incidentally, are less capable lobbyists than large corporations.[53] If the courts succeed in incentivizing large employers to make Virginia their home, it may come at the cost of overtaxing less lucky Virginians.

[1] Ford Motor Credit Company v. Chesterfield County, 2011 WL 744985 (Va. 2011).

[[2] David Shipley, The Limits of Fair Apportionment: How Fair is Fair Enough?, 93 St. & Loc. Tax Law 34, 34 (2007).

[3] Id.

[4] 430 U.S. 274 (1977).

[5] 463 U.S. 159, 169.

[6] Id.

[7] Shipley, at 34.

[8] Container,463 U.S. at 169 (emphasis added).

[9] Id.at 170.

[10]  488 U.S. 252, 262  (emphasis added).

[11] Ford Motor Credit Company, at *3.

[12] Id.

[13] Id.

[14] Id.

[15] Id.

[16] Id.

[17] Id. at *4.

[18] Id.

[19] Id.

[20] Id.

[21] Id.

[22] Id.

[23] Id.

[24] Id. at *5

[25] Id.

[26] Id. at *6

[27] Id. at *5 (emphasis added).

[28]  Id. at *6.

[29] Idat *7.

[30] Id.

[31] Id. The Court also ruled that a “tax assessment made by the proper authorities isprima facie correct and valid, and the burden is no the taxpayer to show that such assessment is erroneous.” Id.

[32] Id. (emphasis added).

[33] Id. at*8.

[34] Id.

[35] Id. at *9.

[36] Id (emphasis added).

[37] Id.

[38] Id. 

[39] Id.

[40] Id. (emphasis added).

[41] Id. at *10.

[42] Id. at *11.

[43] Id.

[44] Id. at *13.

[45]  American Woodmark Corp. v. City of Winchester, 464 S.E.2d 148 (Va. 1995).See generally, Stacey Wilson, Good Intentions, But Unintended Consequences: Expanding Virginia’s Manufacturing Tax Exemption Under City of Winchester v. American WoodmarkCorp, 41 WM & MARY L. REVIEW 67 (2000)

[46] Virginia Code § 58.1-1101(A)(2), cited in Wilson at 69.

[47] Wilsonat 73.

[48] Id.

[49] Id.

[50] Id.

[51] 34 Va. Cir. 421, 434 (1994) (citing County of Chesterfield v. BBC Brown Boveri, Inc., 380 S.E.2d 890, 893 (Va. 1989)), cited by Wilson at 84.

[52] Ford Motor Company, at *8. (“Neither party contests that FMCC was a service business for purposes of Code § 58.1–3703.1(A)(3)(a)(4).”)

[53] Wilson, at 73.

Adam Blander © Copyright 2011

Is the $5 Million Gift Tax Exempt Amount About to End?

Recently posted in the National Law Review an article by Elyse G. Kirschner and Carlyn S. McCaffrey  of McDermott Will & Emery regarding the The Tax Relief Act of 2010 made significant changes to the gift, estate and generation-skipping, however, not permanent:

 

 

 

The Tax Relief Act of 2010 made significant changes to the gift, estate and generation-skipping transfer tax regimes by increasing the amount each individual can give without incurring tax from $1 million to $5 million.  The increase was not permanent however, and rumor has it that it may be in jeopardy.  To avoid any risk, those who have decided to use their full exemptions should do so no later than December 31, 2011, and, if feasible, November 22.

The Rumors

The Tax Relief Act of 2010 made significant beneficial changes to the gift, estate and generation-skipping transfer tax regimes.  Most important, it increased the amount each individual can give without incurring gift tax and generation-skipping transfer tax to $5 million from $1 million.  For married individuals, the combined exemptions can be as high as $10 million.  The 2010 increase was not a permanent one.  Congress scheduled the exemption to return to $1 million after the end of 2012.

Rumors circulating recently within the financial and estate-planning communities have suggested the $5 million exemptions may be in immediate jeopardy.  Democratic staff on the U.S. House Committee on Ways and Means recently proposed decreasing the $5 million gift, generation-skipping transfer tax and estate tax exemptions to $3.5 million, effective January 1, 2012.  There also are rumors the Joint Select Committee on Deficit Reduction (the Super Committee) may recommend a drop down in the gift tax exemption to $1 million, effective at year end, or possibly as early as November 23, 2011, when its recommendations are scheduled to be released, though there is no confirmation this rumor is true.

What Should You Do?

Although it seems unlikely that Congress will focus on changes to the transfer tax system before year end, congressional action in the transfer tax area has been notoriously difficult to predict.  Congress’ decision in December 2010 to reinstate the estate tax retroactively, to permit the estates of 2010 decedents to opt out of paying estate tax and to reduce the generation-skipping transfer tax rate to zero, was a noteworthy example of congressional action that took the entire estate-planning community by surprise.  A congressional decision to reverse the 2010 transfer tax reductions would be more surprising because it would immediately strip from taxpayers a benefit that was clearly agreed to last December.  However, Congress is unpredictable.

In view of the uncertain availability of the $5 million exemption, those who have decided to use their full exemptions may want to do so quickly, rather than run the risk of losing them.  To avoid any risk, your deadline should be no later than December 31, 2011, and, if feasible, November 22.  The choices to be made include identifying the property to be transferred, selecting the individual recipients and determining the manner in which the recipients should receive their gifts.

Selection of Assets to Give

Assets to be transferred to the trust should be those that are likely to appreciate over time.  The transfer of appreciating assets will help leverage the initial gift.  Investments that are temporarily depressed as a result of recent market conditions, for example, could prove to be successful gifts. Remainder interests in residences in today’s depressed housing markets may also be attractive gifts.  Marketable securities, interests in hedge funds or other investment partnerships and real estate are all good possibilities.  High-basis assets typically are a good choice, but assets that are valued today at less than their basis are not usually the best choice.

If non-marketable assets are given, an appraisal of those assets is needed to properly value and report the gift, but the appraisal can be completed after the gift is made.  In most instances, a formal appraisal of non-marketable assets will take into account certain valuation discounts (for example, lack of marketability and minority interest discounts).  The effect of these valuation discounts will be to further leverage the gift tax credit.

Selecting Recipients

The logical recipients of gifts will be those family members who will receive the estate.  Because tax-free gifts can be made to a spouse and charity, gifts to them do not need to be accelerated to take advantage of the gift tax exemption.  In some cases, clients may plan to use their increased exemptions to forgive debts previously made to friends and family members with financial needs, or to meet the living expenses of adult children.

Making Gifts in Trust

Outright gifts are a simple way to use the gift and generation-skipping transfer tax exemptions, but gifts in trust offer many more advantages.  For example, transferring assets to a trust for the benefit of children can protect those assets from the claims of their creditors or spouses.  In addition, with a trust the trustees of the trust can control the timing and manner of distributions to children.

Furthermore, if portions of the remaining $5 million generation-skipping transfer tax exemption are allocated to the trust, future distributions to grandchildren and more remote issue can be made free of the generation-skipping transfer tax.  Finally, if the trust that is established is a so-called “grantor trust” for income tax purposes, you, and not the trust, will pay the income tax on the income generated inside the trust.  When the gift-giver pays the income tax on the income of the trust, the size of the estate is reduced without having to make additional taxable gifts to the trust.

An Existing Trust or a New Trust?

Once the decision is made to make a gift in trust, the next question is whether to make the gift to an existing trust or to a new one.  Whether an existing trust or a new trust is selected is a function of a number of considerations, such as whether the trusts that are already created have the appropriate beneficiaries, whether a spouse also plans to make a gift in trust and whether certain provisions should be in the trust to address uncertainties at this time.

© 2011 McDermott Will & Emery

2011 Wisconsin Act 49: Wisconsin Tax Law Amended to Conform with Federal Adult Child Coverage Requirements

Posted in the National Law Review an article by Alyssa D. Dowse and Timothy C. McDonald of von Briesen & Roper, S.C.  regarding Wisconsin’s state income tax law for health coverage provided to an employee’s adult child to the exclusion provided for that coverage under federal income tax law.

As expected, Governor Scott Walker has signed legislation to conform the exclusion under Wisconsin state income tax law for health coverage provided to an employee’s adult child to the exclusion provided for that coverage under federal income tax law. If an employer’s health plan extends coverage to an employee’s adult child, then, through the end of the tax year in which the child attains age 26, the employee will not be subject to either federal or Wisconsin state income tax on the value of that coverage. This is the case regardless of whether the child otherwise qualifies as the employee’s tax dependent. This change in Wisconsin law is effective for tax years beginning on or after January 1, 2011.

If employer health plan coverage is provided to an employee’s adult child after the tax year in which the child attains age 26, then, as under current law, the employee will be subject to federal and Wisconsin state income tax on the value of that coverage unless the child qualifies as the employee’s tax dependent for health plan purposes.

Governor Walker signed 2011 Wisconsin Act 49 (the “Act”), which amends Wisconsin tax law to conform the state income tax exclusion for coverage provided to an employee’s adult child to the federal income tax exclusion, on November 4, 2011.

©2011 von Briesen & Roper, s.c

Wisconsin Eliminates Income Tax Disparity on Health Coverage for Adult Children

Posted on November 9, 2011 in the National Law Review an article by attorneys Kelli A. Toronyi, Charles P. Stevens and Kirk A. Pelikan of Michael Best & Friedrich LLP regarding Wis. Act 49.:

On November 4, 2011, Governor Walker signed into law 2011 Senate Bill 203 now known as 2011 Wis. Act 49. The bill, which received large bipartisan support among Wisconsin legislators, exempts from Wisconsin income tax the value of health coverage provided to certain adult children.

Background

Prior to 2010, most employers’ health plans provided coverage for children of employees up to age 19, or up to age 23 if the child was a full time student. Effective January 1, 2010, Wisconsin imposed a new rule requiring insurance carriers and certain self-funded governmental plans to provide eligibility for coverage for children through age 26 (up to the day before the child’s 27th birthday).

On March 23, 2010, the federal Patient Protection and Affordable Care Act (“PPACA”) was enacted. It required employer health plans to cover older children through age 25 (up to the day before the child’s 26th birthday), effective for calendar year health plans on and after January 1, 2011. Under the then current federal Internal Revenue Code, however, this coverage would be considered taxable income to some parents.

Then a week later on March 30, 2010, Congress amended the federal Internal Revenue Code to exclude from taxable income health coverage that a taxpayer receives for a child up to the end of the calendar year in which the child reaches age 26. Thus, the imputed income problem was solved for federal tax purposes.

In June of 2011, Wisconsin modified its insurance eligibility rules to adopt the federal eligibility rules under PPACA, effective January 1, 2012 (or upon expiration, extension, modification or renewal of an applicable collective bargaining agreement, if later). Thus, under both Wisconsin and federal law health coverage must be made available for children up through age 25. However, Wisconsin did not modify its tax rules, which continued to observe the previous version of the federal Internal Revenue Code, so the coverage of an employee’s child subject to Wisconsin income tax in some circumstances. To the extent such coverage has been taxable for Wisconsin income tax purposes, employers have been required to report this coverage as income on the employee’s W-2 form and to withhold the appropriate amount from wages.

Amendment to Wisconsin Tax Code Eliminates Obligation to Impute Income for Adult Child Health Coverage

With the enactment of 2011 Wis. Act 49, the Wisconsin Tax Code and the federal Internal Revenue Code are again consistent. Wisconsin employees are no longer subject to taxation for this coverage and Wisconsin employers are no longer required to impute as income the value of such coverage for tax withholding and W-2 reporting purposes. The new law is effective retroactive to January 1, 2011. This may result in some over withholding for some employees to date, but with a reduction in taxable income, this provides for a somewhat lower Wisconsin tax liability when tax returns are filed next year.

A copy of 2011 Wis. Act 49 can be found here.

© MICHAEL BEST & FRIEDRICH LLP

ABA Conference: Criminal Tax Fraud and Tax Controversy

The National Law Review wanted to bring your attention to the upcoming 28th Annual National Institute on Criminal Tax Fraude and the Fisrt National Institute on Tax Controversy on December 1-2, 2011 in Las Vegas:

  • Program Description

The  National Institute on Criminal Tax Fraud is the annual gathering of the criminal tax defense bar.  This year, it will be combined with the National Institute on Tax Controversy, bringing together high-level Government representatives, judges, corporate counsel, and private practitioners engaged in all aspects of tax controversy, tax litigation, and criminal tax defense.

The two Institutes will meet each morning of the conference in joint plenary sessions, addressing issues concerning international tax enforcement and ethics.  Participants will then chose break- out sessions that will focus on current civil tax controversy or criminal tax defense topics.

As in past years, these Institutes will offer the most knowledgeable panelists from the government, the judiciary, and the private bar.  Attendees will include attorneys and accountants just beginning to practice in tax controversy and tax fraud defense, as well as highly experienced practitioners.  The break-out sessions will encourage an open discussion of hot topics.  The program will provides valuable updates on new developments and strategies, along with the opportunity to meet colleagues, renew acquaintances and exchange ideas.

The IRS has focused on international enforcement, from its reorganization of its Large Business and International Division to its focus on global high wealth taxpayers and offshore activities, and both Institutes will focus on these issues, in a combined plenary session and in break-out sessions.  The break-out sessions will also include roundtable discussions with senior representatives from the IRS, and the Treasury and Justice Departments, and panels will focus on topics ranging from the nuts-and-bolts of representing clients in examination, at Appeals, at trial and in criminal investigations, to the hottest areas of civil and criminal enforcement.  It promises to be a program that no tax litigator should miss.

  • CLE Information

ABA programs ordinarily receive Continuing Legal Education (CLE) credit in AK, AL, AR, AZ, CA, CO, DE, FL, GA, GU, HI, IA, ID, IL, IN, KS, KY, LA, ME, MN, MS, MO, MT, NH, NM, NV, NY, NC, ND, OH, OK, OR, PA, RI, SC, TN, TX, UT, VT, VA, VI, WA, WI, WV, and WY. These states sometimes do not approve a program for credit before the program occurs. This course is expected to qualify for TBD CLE credit hours (including TBD ethics hours) in 60-minute-hour states, and TBD credit hours (including TBD ethics hours) in 50-minute-hour states. This transitional program is approved for both newly admitted and experienced attorneys in NY. Click here for more details on CLE credit for this program.

IRS Announces Retirement Plan Limitations for 2012 Tax Year – Most Limits Increased

Recently posted in the National Law Review an article written by Alyssa D. Dowse of von Briesen & Roper, S.C. regarding the cost of living adjustments for the 2012 tax year:

The Internal Revenue Service (“IRS”) has announced the cost of living adjustments for the 2012 tax year, which affect various dollar limitations for retirement plans. The IRS increased many of these limitations for the first time since 2009. Some limitations remain unchanged. The following chart highlights many of the noteworthy limitations for the 2012 tax year.

Plan Limit

2011

2012
Social Security Taxable Wage Base $106,800 $110,100
Annual Compensation (Code Section 401(a)(17)) $245,000 $250,000
Elective Deferral (Contribution) Limit for Employees who Participate in 401(k), 403(b) and most 457(b) Plans (Code Sections 402(g), 457(e)(15)) $16,500 $17,000
Age 50 Catch-Up Contribution Limit (Code Section 414(v)(2)(B)(i)) $5,500 $5,500
Highly Compensated Employee Threshold (Code Section 414(q)(1)(B)) $110,000 $115,000
Defined Contribution Plan Limitation on Annual Additions (Code Section 415(c)(1)(A)) $49,000 $50,000
Defined Benefit Plan Limitation on Annual Benefit (Code Section 415(b)(1)(A)) $195,000 $200,000
ESOP Distribution Period Rules—Payouts in Excess of Five Years (Code Section 409(o)(1)(C)) $985,000

$195,000

 $1,015,000

$200,000
Key Employee Compensation Threshold for Officers (Code Section (416(i)(1)(A)(i)) $160,000 $165,000

Plan sponsors should review employee communications and update such communications as appropriate based on the 2012 cost of living adjustments. Other cost of living adjustments can be found on the IRS  website: http://www.irs.gov/retirement/article/0,,id=96461,00.html.

©2011 von Briesen & Roper, s.c