You hear it all the time these days – “There is a relentless bid underneath this market just waiting to buy every single dip…” and you can’t really argue with the statement itself.
The dips have become shallower and the buyers have rushed in more quickly each time. Sell-offs took months to play out during 2011 – think of the April-October peak-to-trough 21% decline for the S&P. In 2012, these bouts of selling ran their course in just a few weeks, in 2013 a few days and, thus far in 2014, just a few hours.
It’s rather extraordinary. I’ve been thinking about the reasons why for a long time now and I believe I’ve got the answer – my unified theory of everything, so to speak. I’ll lay it out below…
Morgan Stanley Wealth Management is now the world’s largest retail brokerage and investment advisory firm, having bought Smith Barney from Citi in its entirety. When it reported 4th quarter earnings the other day, we learned that the firm’s wealth management unit took in a massive $51.9 billion in fee-based or fee-only asset flows for the full-year 2013. Further, we were told that 37% of Morgan Stanley Wealth Management’s total client assets are now in fee-based accounts, a record high.
Bank of America Merrill Lynch’s wealth division had similarly astounding results – Merrill Lynch Global Wealth Management saw “$48 billion in flows to long-term assets under management in 2013, up from flows of about $26 billion in 2012.” This is a huge amount of gathered assets for one year’s haul. But more importantly for our purposes here, the brokerage reported that “44% of its advisers had half or more of their client assets under a fee-based relationship.”
Lastly, Wells Fargo Advisors – which is an amalgam of AG Edwards, Wachovia, Prudential and Wells all in one – said that “at the end of 2013 it had $375 billion in managed-account assets, roughly 27% of the unit’s $1.4 trillion in total assets under management. That’s up from $304 billion in managed-account assets.
Are you seeing a pattern? Wells Fargo brokerage account AUM is now 27% fee-based, Morgan Stanley’s is 37% and 44% of Merrill’s Thundering Herd has more than half its assets oriented that way. The nation’s largest traditional advisory firms have accelerated their push toward fee-based management and away from transactional brokerage. This has a huge impact on how the money itself is managed and this in turn greatly affects the behavior of the stock market.
These wirehouses, along with JPMorgan and UBS, have slightly less than half of the wealth management pie in America. Registered Investment Advisories (RIAs) have almost another 25% (the fastest growing channel by far) and they are almost completely fee-based – with the exception of some hybrid brokers-and-advisors. That’s 75% of the wealth business in this country being largely driven toward fee-based strategies and accounts.
In 2005, fee-based accounts directly managed by financial advisors and brokers totaled $198 billion. As of year-end 2013, that figure had soared to over $1.29 trillion – more than a sextupling in under a decade. It is safe to say that, while some of these fee-based accounts are managed actively (brokers picking stocks, selling options and whatnot), the vast majority are not. Most of this money is being run more passively – in the absence of a transactional commission incentive for the advisor to trade, why else would he? Edge? LOL.
No, the vast majority of this snowballing asset base being reported by both wirehouse firms and RIAs is being put to work in a calm and methodical fashion: long-term mutual funds, tax-sensitive separately managed accounts (SMAs) and, of course, index ETFs. Vanguard, State Street and iShares are to this era of investing as Janus, Fidelity and online day-trading were to the 1990′s. In fact, Vanguard’s share of all fund assets – now approaching 20% or $2.3 trillion – is the vexillum behind which the entire do-less movement marches.
What this means for the very character of the stock market and the way it behaves is very important. It means that, almost no matter what happens, each week advisors of every stripe have money to put to work and they’re increasingly agnostic about the news of the day. They’ve all got the same actuarial tables in front of them and they’re well aware that their clients are living longer than ever – hence, a gently increased proportion of their managed accounts are being allocated toward equities. And so they invariably buy and then buy more.
Whereas yesterday’s brokers were principally concerned with keeping money in motion and generating activity each month, today’s brokers – who call themselves wealth managers by the way – are principally concerned with making client retirement accounts stretch out over decades. Stocks are increasingly the answer to this puzzle. Bonds, with their fixed rate of income, by definition cannot get the job done. This means a bias toward buying equities everyday and almost never selling. It means adding to stocks sheepishly on up days and voraciously on the (rarely occurring) down ones.
In short, it means a relentless bid as the torrent of assets comes flowing in every day, week and month of the year.
Not only is the
Tacked into a highway bill that has recently
passed the U.S. Senate has a provision that would allow the State Department to deny
passports to US taxpayers who owe delinquent tax debts to the
If you owe more than $50,000 to the
Who can be denied a passport for delinquent
The Bill, if signed into law, would have dire consequences
for those with big unpaid and unresolved tax bills. The law would apply to
those who (1) owe more than $50,000 to the
Does this mean if you owe money to the
No. First of all this bill is not law yet. Second, even if
it become law, the bill clearly states that if you are in a repayment plan, or installment
agreement with the
If your case is still pending with
Also there are exceptions for those attempting to return to the
But what about those in Currently Non-Collectible status?
There it is a little tricky. Currently Non-Collectible
status is when the
Known as Code 530 to
Probably not lose your passport for FBAR penalties?
FBAR penalties are penalties the
First, the bill is written rather vaguely. It says a ?tax.? Well, FBAR penalties aren?t really a tax and this is why it makes a difference. The basis for the imposition of taxes comes from Title 26 of the
Further supporting the argument that this would not apply to outstanding FBAR penalties is the fact that the administrative remedies available to past due tax obligations are not available to FBAR penalty assessments.
The reductions in spending must be allocated 50 percent to defense spending and 50 percent to nondefense functions. The Super Committee was composed of 12 members of both the U.S. House of Representative and the U.S. Senate. Bipartisan majorities in both the House and Senate voted for the threat of sequestration as a mechanism to force Congress to act on further deficit reduction.
The specter of harmful across-the-board cuts to defense and
nondefense programs was intended to drive both sides to compromise and was
never intended to be implemented. However, the Super Committee failed to reach
an agreement and, effective,
The Office of Management and Budgets recently released the
OMB Report Pursuant to the Sequestration Transparency Act of 2012. The report
provides estimates of the sequestration's impact on more than 1,200 budget
accounts. With respect to the Treasury Department, the report lists the
following services and functions of the
1. Taxpayer Services
3. Business Systems Modernization
He also noted that, in addition to providing fewer services at lower quality, sequestration would require reductions in a number of important Treasury programs that would adversely affect economic growth. The Treasury would need to reduce payments that support certain state and municipal bond programs through lower levels of refundable tax credits and direct payments to issuers likely increasing the borrowing costs to improve infrastructure, schools, affordable housing, and other needs for these communities.
Bruce was only a few weeks from retirement after 30 years as
a mail carrier in sunny
He never lived to fulfill his retirement plan of moving back
to a quiet life in the
Instead, he was gunned down on his daily mail route in December 2010 by members of an identity theft ring who stole his master key as part of a scheme to claim fraudulent tax refunds.
Using stolen names and Social Security numbers, criminals are filing phony electronic tax forms to claim refunds, exploiting a slow-moving federal bureaucracy to collect the money before victims, or the Internal Revenue Service, discover the fraud.
Parton was a victim of what officials say has ballooned into a massive, and dangerous, illegal industry that could cost the nation $21 billion over the next five years, according to the U.S. Treasury Department.
While that is a relatively small sum compared to the $1.1 trillion collected from individual tax payers in the last fiscal year, the crime has been growing by leaps and bounds in the last three years.
"We are on the top of a national trend that is causing
a hemorrhage of tax dollars," said
"For whatever reason, we always tend to lead the nation when it comes to fraud," he said, noting that his office has been battling massive Medicare fraud in recent years that has since spread to other parts of the country.
Nationwide, the number of cases of tax identity theft detected by authorities sky-rocketed to more than 1.2 million cases in 2012 from only 48,000 in 2008, according to the Treasury Department.
The real number of phony tax filings is likely much higher as the fraud is hard to track, according to a November General Accountability Office report.
The tax ID theft problem is particularly troubling as, unlike Medicare fraud, it is associated with violent crime and armed gangs.
When agents raided a Howard Johnson in
The suspects had lists of personal information containing more than 1,000 names and confidential personal information, multiple re-loadable debit cards, and records of numerous financial transactions. The investigation revealed that the suspects had been camped out in the hotel room for more than a week filing claims.
Tax identity fraudsters are apparently drawn by the ease of the crime, officials say.
"The scheme is very basic, it works virtually the same in almost every case," said Ferrer. "All they need is your name and the tax ID number."
Armed with that information a refund claim can be filed electronically, making up other details on the form, including addresses, employer data, income and deductions.
Criminals obtain the vital numbers using various tactics, often by bribing office workers with access to personnel files inside companies, as well as large public institutions such as hospitals and schools, according to prosecutors.
Last summer a hacker stole 3.8 million unencrypted tax
records from the South Carolina Department of Revenue in what is believed to be
the largest security breach of a
In December, a former U.S. Marine from
In Parton's case the criminals were after his master key that gives postal workers access to mail drop-off boxes and apartment mailboxes. He was shot twice in the chest by a gunman as part of a plot to steal identities in people's mail for tax refund fraud.
The gunman, Pikerson Mentor, 31, was sentenced last month to life plus 42 years.
More than 600 people turned up for Parton's funeral, including postal workers and people who got to know him on his route. "He had been doing that mail route for 10 years and he always had a smile for everyone," said his daughter, Nina Parton.
The criminals stay under the radar using identities of the elderly or the very young, who are unlikely to be filing for earned income, as well as the deceased. They typically claim small refunds, around $3,000, but use multiple identities, with payments often made to pre-paid debit cards.
The number of
The tax collection agency prevented $20 billion in attempted tax refund fraud in fiscal year 2012, up from $14 billion a year earlier, he said.
"It's one of the biggest challenges that faces the
Despite the increase in investigations, the agency still had a backlog of 300,000 cases of people waiting for legitimate refunds after they were victims of fraud. It takes an average of six months to resolve a case, Miller said.
Electronic filing, which now accounts for 80 percent of returns and was introduced to speed up delivery of refunds, has made the system more vulnerable to fraud.
"We will not be prosecuting our way out of this. That's not going to be the answer. We're going to have to make it more and more difficult for criminals to profit from this behavior," said Miller. "If they're not successful they will move onto something else."
Dividends will not be taxed as ordinary income. While that is a huge relief for top earners, their dividends and long-term capital gains will still be taxed more in 2013. Here are the newly adjusted tax rates on both of these forms of investment income.
10% & 15% brackets 0%
25%, 28%, 33% & 35% brackets 15%
39.6% bracket 20%
Estate taxes top out at 40% with a $5.25 million individual exemption.
The less-publicized news: the individual exemption is still portable.
Congress gave families a great estate planning break in the fiscal cliff deal. The portable individual estate tax exemption is no longer a temporary thing; it has been made permanent. This means that an unused portion of a $5.25 million individual exemption may be transferred to the surviving spouse at the death of the first deceased spouse.
You may have read earlier that the individual exemption would be set at $5 million this year. The estate tax exemption is subject to indexing for inflation, and in the fiscal cliff bill, Congress chose to keep and continue the indexing off of the $5 million base from 2011. Thus, we have the $5.25 million exemption amount.
Also, the estate and gift tax remain unified; if you choose, you can use up the whole $5.25 million individual exemption on gifts made during your lifetime.
Upper-income Americans face two healthcare surtaxes in 2013.
Should your modified adjusted gross income (MAGI) exceed certain thresholds in 2013, you will contend with a new Medicare surtax and an increase in any Medicare payroll tax you pay (which is actually a form of withholding).
* A 3.8% Medicare surtax will be levied on the lesser of either a) net investment income or b) the amount of MAGI exceeding $200,000 for single filers, $250,000 for couples filing jointly, and $125,000 for spouses filing separately.
* While all wage earners routinely pay a 1.45% Medicare payroll tax on earned income, the Medicare payroll tax rises 0.9% for employees after their MAGI exceed the $200,000 individual threshold this year. Your employer will deduct 1.45% in Medicare payroll taxes from your paycheck up until that threshold, and 0.9% more from your paycheck once your wages surpass it.
If you are married and file jointly, this could get complicated. While your individual MAGI may be $200,000 or less (and therefore below the individual threshold), your joint MAGI might top the applicable $250,000 threshold and that could make the 0.9% surtax kick in.
In regard to these thresholds, remember that the definition
of MAGI encompasses many different forms of income: your salary, your adjusted
gross income (
The Alternative Minimum Tax has at last been indexed to
inflation due to the American Taxpayer Relief Act of 2012. The fix is
retroactive to the beginning of last year, which will spare about 34 million
taxpayers from the sting of the
Single filers $51,900
Married filing separately $40,400
Married filing jointly/qualifying widower $80,800
Phase-outs of itemized deductions & personal exemptions are back.
The Pease limitation and the personal exemption phase-out (
For single filers, the threshold for both the
Reinstalling the Pease limitation effectively adds about 1%
to the top tax rate. Under the Pease provision, taxpayers with
The personal exemption phase-out (
Bonus depreciation is still around for 2013.
The Section 179 deduction amount has also increased.
In 2012, businesses could deduct as much as 50% of the cost of their investments in so-called ?qualified property? placed into service. ?Qualified property? does not include real estate, but it does encompass many forms of new business equipment. (Only new property is eligible for bonus depreciation.) In 2013, businesses can again write off such investments at this accelerated rate thanks to the fiscal cliff bill passed at the start of the year. This may or may not apply in 2014.
The bill also raised the maximum Section 179 deduction amount to $500,000 for both the 2012 and 2013 tax years, with the dollar-for-dollar phase-out kicking in above $2 million
The following is an explanation about FATCA, and when this
regime constitutes a tax treaty override, and that I don't think that Intergovernmental
Agreements are a valid fix as a matter of law. Here is my reasoning. I will use
the US-Canada tax treaty as an example, but the override applies to all
This is a lengthy post so let me preface with the executive summary, after which I will provide more detail:
FATCA places a new condition on receiving those rates.
This restricts the benefits of the treaty, which is treated as a treaty override by the terms of the treaty itself.
The treaty provides that the remedy for such an override is a change to the terms of the treaty.
The IGAs do not change the terms of the treaty but purport to interpret it to allow a different new condition (which condition is itself an override of the domestic FATCA statute) to take effect immediately.
And now for the detail.
Every tax treaty also includes information exchange provisions under which each country agrees to "exchange such information as may be relevant for carrying out the provisions of this Convention or of the domestic laws of the Contracting States concerning taxes to which this Convention applies insofar as the taxation thereunder is not contrary to this Convention." In the Canada-US treaty that is Article 27.
Although this is not critical to the override argument, it is worth noting that the various provisions of the treaty are not conditional on each other; that is, Canadian residents are entitled to the specified tax rate even if, for example, the countries get into a tangle over their information exchange efforts.
FATCA's effect is to impose a new condition on the treaty-based withholding tax rate. That is, under FATCA, the only way for resident Canadian institutions to continue to get the treaty rate (of 0, 10, or 15%, depending on the type of income in question) is to fulfill FATCA information gathering and reporting requirements. If they do not fulfill these requirements, they will not be eligible for the treaty rate, but rather they will be subject to a 30% withholding rate on all "withholdable payments"--an expansive concept of US-source income items which you can read in the statute.
FATCA is thus a new condition on the treaty rate, a condition that is not by any stretch included or even contemplated in the treaty. Indeed, how could FATCA be contemplated by any treaty that came into force prior to 2010, as FATCA did not exist as law before then. This is not to say that no conditions can be placed on the access of Canadian residents to treaty rates. There are many existing conditions for treaty benefits--see particularly the limitation on benefits clause (Art 29A), which are quite expansive and form a major part of any treaty negotiation with the
Therefore FATCA overrides the existing treaty by unilaterally denying the treaty rate to Canadian residents who would otherwise qualify therefor under the existing, duly negotiated, treaty provisions currently in force.
Now let us look at Art 29(7), which tells us how the countries are supposed to deal with potential tax treaty overrides that arise when one country enacts a domestic law that conflicts with the treaty in effect:
"Where domestic legislation enacted by a
Thus the remedy to a law that would restrict or remove a
material benefit--namely, a specified tax rate on a payment of US-source income
to a Canadian investor--is a change to the convention.
A change to an existing convention is undertaken in a protocol. A protocol is in legal terms nothing less than a new treaty that overrides specific provisions of the existing treaty to reflect the parties' later agreement. That is, to change a treaty, each government must agree to the change via a new treaty, which each government must ratify under its internal treaty-making processes.
This therefore suggests that the proposed intergovernmental agreements (IGAs) are not a valid means to get FATCA to work as a matter of law. This is because the
I will note, however, that the IGAs further dirty the interpretive waters since what they do is in fact override the terms of the FATCA statute, by switching the reporting relationship from Canadian resident institutions to a government-to-government relationship. Some have argued that they do not override but merely use Treasury's mandate to define exemptions to FATCA. Perhaps, but Treasury was not given any mandate by Congress to encase those exemptions in international agreements. Moreover, it seems a real stretch to assert that the IGAs simply interpret existing information exchange provisions, especially when it is clear that many or most countries will have to enact domestic legislation to fulfill the new reporting requirements. The valid way forward for Treasury would have been to create straightforward conditional exemptions: exempt countries from FATCA provided those countries enacted laws according to Treasury specifications. That would still be an extra-territorial reach, perhaps, but there are precedents for the mechanism (such as what was done to shut down bearer bonds). But, importantly, this established way forward would not solve the tax treaty override problem. Therein may lie a main reason for going the IGA route, even though it is not a clearly valid resolution.
Late last night, Congress reached a settlement in the ?fiscal cliff? negotiations. As a result, the Mortgage Forgiveness Debt Relief Act has been extended for another year. The measure will continue to exempt from taxation mortgage debt that is forgiven when homeowners and their mortgage lenders negotiate a short sale, loan modification (including any principal reduction) or foreclosure.
Also under the agreement, so called ?Pease Limitations? that reduce the value of itemized deductions are permanently repealed for most taxpayers but will be reinstituted for high income filers. These limitations will only apply to individuals earning more than $250,000 and joint filers earning above $300,000. The thresholds have been increased and are indexed for inflation so will rise over time. Under the formula, filers gradually lose the value of their total itemized deductions up to a total of a 20% reduction.
The reinstitution of these limits has far less impact on the mortgage interest deduction than a hard dollar deduction cap, percentage deduction cap, or reduction of the amount of mortgage interest deduction that can be claimed.
Capital gains rates on the sale of principal residences will remain unchanged and continues to exclude the first $250,000 for single taxpayers and $500,000 for married couples.
A taxpayer may be allowed to exclude from taxable income a
portion of the gain realized on the sale of qualified small business stock.
There are two sections of the Internal Revenue Code that provide such an
opportunity. Section 1202 permits a taxpayer to exclude a specified percentage
of such gain, while §1045 permits a taxpayer to avoid, or at least defer, recognition
of potentially all such gain if the taxpayer reinvests in qualified small
business stock within sixty days. Section 1202 permits a taxpayer, other than a corporation,
to exclude in general 50% of the gain realized on the sale of such stock if the
taxpayer holds the stock for more than five years prior to sale. The amount of
gain which may be excluded in this manner is limited, on a "per
issuer" basis, to the greater of $10 million or ten times the taxpayer's
basis in the stock. A portion of the gain excluded under §1202 must be added
back, however, as a preference for alternative minimum tax purposes. Qualified small business stock means any stock in a domestic
corporation that is originally issued after A "qualified small business" is a domestic C corporation,
the gross assets of which at all times on or after Gain from the disposition of qualified small business stock
by a partnership, S corporation, regulated investment company or common trust
fund that is taken into account by a partner, shareholder or participant therein
is eligible for §1202 exclusion if all of the requirements of a qualified small
business and qualified small business stock are met and if the taxpayer held
its interest in the entity on the date the stock was acquired and at all times
thereafter until the stock's disposition. To avoid the circumvention of the
holding period requirements, the amount of gain so excluded cannot exceed the
amount determined by reference to the taxpayer's pro-rata interest in the
entity upon the acquisition of the stock. In addition to meeting all the requirements to qualify for
the general 50% exclusion, if the stock sold is acquired after Section 1045 permits a taxpayer, other than a corporation,
selling "qualified small business stock," after Deferral of gain under §1045 is available only to the extent
that the amount realized upon sale does not exceed: (1) the cost of any new
qualified small business stock purchased during the 60-day period beginning on
the date of such sale; reduced by (2) any portion of such cost already used to
shelter gain under §1045. The application of these rules in any specific instance is
complex and requires careful planning. Please contact me at your convenience so
that we may discuss how these rules apply to your situation. Section 1244 of the Internal Revenue Code, the small
business stock provision, was enacted to allow shareholders of domestic small
business corporations to deduct as ordinary losses, losses sustained when they
dispose of their small business stock. In order to receive this beneficial
treatment, the Code prescribes specific requirements for: (1) the corporation
issuing the small business stock; (2) the stock itself; and (3) the
shareholders of the corporation. (1) The corporation issuing the stock must qualify as a
domestic small business corporation, which generally means that it must be
created under the laws of the United States and that its aggregate capital must
not exceed $1,000,000 at the time the §1244 stock is issued to its
shareholders. The first taxable year in which the capital of the corporation
exceeds $1,000,000 is called the transitional year, and the corporation must
designate which shares issued that year qualify for §1244. For example, if a
newly formed corporation received $2,000,000 for its initial issue of stock, it
could designate up to $1,000,000 of its stock as qualified §1244 stock. The corporation must also satisfy a gross receipts test.
This test requires that the corporation, during the period of its five most
recent years ending before the date the loss on its stock was sustained, derive
more than 50% of its gross receipts from sources other than passive investment
income. The gross receipts test thereby confines the tax relief provided by the
small business stock provision to the stock of corporations actively engaged in
a trade or business. The gross receipts test does not apply where, for the
entire period for which gross receipts are measured, the gross income of the
corporation is less than the business deductions allowed to the corporation by
the Code. The Code also imposes recordkeeping requirements on the
corporation relative to its §1244 stock. Among these is requirement that the
corporation designate designation, for its transitional year, those of its
outstanding shares that qualify for small business stock treatment. (2) Common stock, and preferred stock issued after (3) Section 1244 is available only for losses sustained by
shareholders who are individuals. Losses sustained on stock held by a
corporation, trust or estate do not qualify for §1244 treatment. Subject to
very limited exceptions, the benefits of §1244 are only available to
individuals who acquire the stock by issuance from a domestic small business
corporation, and are not available to a subsequent transferee of the stock. In
some cases, a partnership can qualify as a shareholder of §1244 stock.
Generally, all transfers of §1244 stock by the shareholder, whether in a
taxable or nontaxable transaction, whether by death, gift, sale or exchange,
terminate §1244 status. Once all of the requirements of §1244 stock are met,
ordinary loss treatment for losses on a sale or exchange of §1244 stock is
permitted if the loss would otherwise be treated as a capital loss. The amount
of ordinary loss that an individual taxpayer may realize by reason of the small
business stock provision is subject to certain limitations. Any amount of §1244
loss in excess of this limitation is treated as a capital loss. For losses
incurred in taxable years beginning after 1978, the maximum amount that a
taxpayer may claim as an ordinary loss for all losses sustained on §1244 stock
in a taxable year is $50,000, generally, or $100,000 if a joint return is filed.
A taxpayer may be allowed to exclude from taxable income a portion of the gain realized on the sale of qualified small business stock. There are two sections of the Internal Revenue Code that provide such an opportunity. Section 1202 permits a taxpayer to exclude a specified percentage of such gain, while §1045 permits a taxpayer to avoid, or at least defer, recognition of potentially all such gain if the taxpayer reinvests in qualified small business stock within sixty days.
Section 1202 permits a taxpayer, other than a corporation, to exclude in general 50% of the gain realized on the sale of such stock if the taxpayer holds the stock for more than five years prior to sale. The amount of gain which may be excluded in this manner is limited, on a "per issuer" basis, to the greater of $10 million or ten times the taxpayer's basis in the stock. A portion of the gain excluded under §1202 must be added back, however, as a preference for alternative minimum tax purposes.
Qualified small business stock means any stock in a domestic
corporation that is originally issued after
A "qualified small business" is a domestic C corporation,
the gross assets of which at all times on or after
Gain from the disposition of qualified small business stock by a partnership, S corporation, regulated investment company or common trust fund that is taken into account by a partner, shareholder or participant therein is eligible for §1202 exclusion if all of the requirements of a qualified small business and qualified small business stock are met and if the taxpayer held its interest in the entity on the date the stock was acquired and at all times thereafter until the stock's disposition. To avoid the circumvention of the holding period requirements, the amount of gain so excluded cannot exceed the amount determined by reference to the taxpayer's pro-rata interest in the entity upon the acquisition of the stock.
In addition to meeting all the requirements to qualify for
the general 50% exclusion, if the stock sold is acquired after
Section 1045 permits a taxpayer, other than a corporation,
selling "qualified small business stock," after
Deferral of gain under §1045 is available only to the extent that the amount realized upon sale does not exceed: (1) the cost of any new qualified small business stock purchased during the 60-day period beginning on the date of such sale; reduced by (2) any portion of such cost already used to shelter gain under §1045.
The application of these rules in any specific instance is complex and requires careful planning. Please contact me at your convenience so that we may discuss how these rules apply to your situation.
Section 1244 of the Internal Revenue Code, the small business stock provision, was enacted to allow shareholders of domestic small business corporations to deduct as ordinary losses, losses sustained when they dispose of their small business stock. In order to receive this beneficial treatment, the Code prescribes specific requirements for: (1) the corporation issuing the small business stock; (2) the stock itself; and (3) the shareholders of the corporation.
(1) The corporation issuing the stock must qualify as a domestic small business corporation, which generally means that it must be created under the laws of the United States and that its aggregate capital must not exceed $1,000,000 at the time the §1244 stock is issued to its shareholders. The first taxable year in which the capital of the corporation exceeds $1,000,000 is called the transitional year, and the corporation must designate which shares issued that year qualify for §1244. For example, if a newly formed corporation received $2,000,000 for its initial issue of stock, it could designate up to $1,000,000 of its stock as qualified §1244 stock.
The corporation must also satisfy a gross receipts test. This test requires that the corporation, during the period of its five most recent years ending before the date the loss on its stock was sustained, derive more than 50% of its gross receipts from sources other than passive investment income. The gross receipts test thereby confines the tax relief provided by the small business stock provision to the stock of corporations actively engaged in a trade or business. The gross receipts test does not apply where, for the entire period for which gross receipts are measured, the gross income of the corporation is less than the business deductions allowed to the corporation by the Code.
The Code also imposes recordkeeping requirements on the corporation relative to its §1244 stock. Among these is requirement that the corporation designate designation, for its transitional year, those of its outstanding shares that qualify for small business stock treatment.
(2) Common stock, and preferred stock issued after
(3) Section 1244 is available only for losses sustained by shareholders who are individuals. Losses sustained on stock held by a corporation, trust or estate do not qualify for §1244 treatment. Subject to very limited exceptions, the benefits of §1244 are only available to individuals who acquire the stock by issuance from a domestic small business corporation, and are not available to a subsequent transferee of the stock. In some cases, a partnership can qualify as a shareholder of §1244 stock. Generally, all transfers of §1244 stock by the shareholder, whether in a taxable or nontaxable transaction, whether by death, gift, sale or exchange, terminate §1244 status.
Once all of the requirements of §1244 stock are met, ordinary loss treatment for losses on a sale or exchange of §1244 stock is permitted if the loss would otherwise be treated as a capital loss. The amount of ordinary loss that an individual taxpayer may realize by reason of the small business stock provision is subject to certain limitations. Any amount of §1244 loss in excess of this limitation is treated as a capital loss. For losses incurred in taxable years beginning after 1978, the maximum amount that a taxpayer may claim as an ordinary loss for all losses sustained on §1244 stock in a taxable year is $50,000, generally, or $100,000 if a joint return is filed.
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When it comes to enforcing loans secured by
Posted by Anton A. Ewing, JD
An important issue in the real estate industry is the extent to which real estate agents can properly be classified as independent contractors. Brokers cannot limit their liability to third parties for the agent?s actions by seeking to classify their agents as independent contractors. But brokers can agree with their agents that the agents are independent contractors and not employees for other purposes.
As a general matter, the most significant factor under California law for determining whether a worker is an employee rather than an independent contractor is the right of the company to control the manner and means by which the work is performed to accomplish the desired result: if the person to whom the worker renders services retains the right to exercise such control, even if it is not exercised, then the relationship is one between an employer and an employee. (See S. G. Borello & Sons, Inc. v. Department of Indus. Relations, 48 Cal.3d 341, 350 (1989); see also Cal. Code Regs., tit. 22, § 4304-1 (2007).) Additional factors considered in making this determination include: (1) the right to terminate the worker at will; (2) engagement in a distinct occupation or business; (3) the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision; (4) the skill required in a particular occupation; (5) who provides the ?instrumentalities,? tools, and place of work (by statute, this factor will not be considered for unemployment insurance purposes); (6) the length of time for which the services are to be performed; (7) method of payment by time or by job; (8) whether the work is part of the general business of the principal; (9) whether the parties believe they are creating an employer-employee relationship; and (10) the realization of profit or loss by the worker. (See Information Sheet DE 231 Rev. 7 (12-06) (INTERNET); see also Section 220 of both the Restatement of Agency and the Restatement Second of Agency; Empire Star Mines Co. v. California Employment Commission, 28 Cal.2d 33, 43 (1946),overruled on other grounds by People v. Sims, 32 Cal.3d 468, 480 n.8 (1982); Tieberg v. Unemployment Ins. App. Bd., 2 Cal.3d 943, 949 (1970); S. G. Borello & Sons, Inc. v. Department of Indus. Relations, 48 Cal.3d 341, 350-351 (1989).)
For purposes of social welfare legislation, such as workers? compensation coverage, courts focus on whether the worker is truly established as a business entity that can realistically provide the benefits required by law. Federal law uses various tests to determine independent contractor status, which generally mirror the tests under California law. For example, the Internal Revenue Service (IRS) uses a 20-factor test to determine employment for federal tax withholding purposes. (See Rev. Rul. 87-41, 1987-1 C.B. 296; Revenue Service Manual, 4600 Employment Tax Procedures, Exhibit 46401.)
Traditionally, both California courts and the IRS had a difficult time applying these factors to determine whether real estate salespersons qualified as employees or independent contractors. (See Grubb & Ellis Co. v. Spengler, 143 Cal.App.3d 890, 398 (1983); Resnik v. Anderson & Miles, 109 Cal.App.3d 569, 572-573 (1980); Gipson v. Davis Realty Co., 215 Cal.App.2d 190, 206-207 (1963).) Courts and administrative agencies were concerned that if they held a real estate salesperson to be an independent contractor, the broker for which the salesperson worked could try to insulate himself from liability to the public for fraud or ethical violations by a real estate salesperson acting under the direction of the broker. The IRS was concerned with the assignment of tax liability.
By statute, both California and the federal government adopted legislation applicable specifically to the real estate industry. Under these special laws, real estate salespersons can, under appropriate circumstances, be recognized as independent contractors for tax and certain other purposes. Because these statutes are limited in scope, a real estate salesperson can qualify as an independent contractor for certain purposes while simultaneously qualifying as an employee for other purposes.
The California legislature adopted a statute, effective 1991, which allows real estate salespersons to contract with a broker on either an employee or independent contractor basis. California Business and Professions Code section 10032 provides that, for statutory purposes other than eligibility for workers? compensation benefits (and for purposes other than liability to third parties such as customers), a worker will be considered an independent contractor if he or she:
(1) Is licensed as an agent under the Business and Professions Code;
(2) Obtains substantially all of his or her payments for services directly related to sales or output rather than the number of hours worked; and
(3) Performs work under a written contract that provides that the individual will not be treated as an employee with respect to those services for state tax purposes.
The statute further provides that it shall not be interpreted or applied to affect the obligation of a broker to maintain workers compensation insurance, or to be responsible for the illegal acts of a salesperson licensed under the broker. Real estate salespersons cannot be classified as independent contractors for purposes of liability to third parties, such as members of the public.
The federal statute (26 U.S.C.A. § 3508(b)) allows real estate agents to be treated as independent contractors whose earnings are not subject to payroll tax withholding so long as they meet the following three tests:
(1) The worker is licensed as a real estate agent;
(2) Substantially all of the payments for the services performed as a real estate agent are directly related to sales or other output (including the performance of services) rather than to the number of hours worked; and
(3) The services are performed under a written contract that provides that the worker will not be treated as an employee with respect to his or her services for federal tax purposes. So long as these requirements are met, the real estate salesperson will not be subject to federal tax withholding regardless of whether he or she qualifies as an employee under the common law. (See Self-Employment Tax; Liability of Direct Seller, 1985-1 C.B. 292, Rev. Rul. 85-63, 1985 WL 286757 (1985).) However, the fact that the real estate salesperson is not an employee for tax withholding purposes will not preclude a finding that he or she is an employee for other purposes ? such as the application of federal wage and hour law. (See, e.g., Esquivel v. Hillcoat Properties, Inc., 484 F.Supp.2d 582, 584 (W.D.Tex. 2007); see also Luther v. Z. Wilson, Inc., 528 F.Supp. 1166, 1172-1173 (S.D.Ohio 1981) and 29 C.F.R. §§ 779.316 and 779.317 (2007) (providing that the real estate industry is not subject to a ?retail concept? for purposes of qualifying for the federal inside sales exemption.))
In summary, licensed real estate salespersons with written contracts can qualify as independent contractors for tax purposes under federal and California law and certain other statutory purposes under California law, while potentially qualifying as employees for purposes of workers? compensation coverage, broker liability to third parties such as customers, and certain other federal employment laws. Accordingly, brokers and salespersons must exercise care in structuring their working relationships, and are advised to consult with qualified counsel regarding risk management based on the different treatment of the real estate salespersons for different purposes.
The Fifth Amendment privilege against self-incrimination does not apply to records that fall under the Required Records Doctrine, and a taxpayer who is the subject of a grand jury investigation into his use of offshore bank accounts cannot invoke the privilege to resist compliance with a subpoena seeking records kept pursuant to the Bank Secrecy Act, the U.S. Court of Appeals for the Seventh Circuit ruled Aug. 27 (In re Special February 2011-1 Grand Jury Subpoena Dated September 12, 2011, 7th Cir., No. 11-3799, 8/27/12).
The records were sought as part of a grand jury's investigation of a taxpayer, known only as T.W., regarding his possible use of secret offshore bank accounts to avoid
The U.S. District Court for the Northern District of Illinois quashed the subpoena, agreeing with T.W. that the act of producing the records was testimonial and could result in T.W. incriminating himself.
The U.S. Court of Appeals for the Seventh Circuit joined the Ninth Circuit in holding that the required records exception to the Fifth Amendment privilege against self-incrimination applies to records of foreign bank accounts.
"Having determined that T.W.'s act of production privilege is not an obstacle to the Required Records Doctrine, we must decide whether the records sought under the subpoena fall within the Required Records Doctrine. In order for the Required Records Doctrine to apply, three requirements must be met: (1) the purposes of the United States inquiry must be essentially regulatory; (2) information is to be obtained by requiring the preservation of records of a kind which the regulated party has customarily kept; and (3) the records themselves must have assumed public aspects which render them at least analogous to public document. Grosso, 390
"Recently, in a case nearly identical to this one, the Ninth Circuit held that records required under the Bank Secrecy Act fell within the Required Record Doctrine. In re M.H., 648 F.3d 1067 (9th Cir.2011) cert. denied, No. 11?1026, 2012 WL 553924 (
Because the Required Records Doctrine is applicable, and the records sought in the subpoena fall within the doctrine, T.W. must comply with the subpoena.
This holding means that people who have foreign bank accounts can be forced to produce records that may prove that they have committed tax crimes, including failure to file FBARs, filing false tax returns, tax evasion, and conspiracy to defraud the U.S.
The Southern District of California, in the M. H. case, has gone a step further by holding that even if the account holder does not have the records, he or she must go to the bank and request the records for the government. These decisions, while valid precedents, are limited to the Seventh and Ninth Circuits.
Buying and selling a business can be structured to be tax free through properly established mergers and reorganizations under the Internal Revenue Code.
However, a tax free transaction from a federal standpoint may not be tax free for State purposes. California imposes a sales tax that should also be taken into consideration for any sale of an entire business.
California imposes a sales tax where six requirements are met:
A "sale" is defined as "any transfer of title or possession, exchange, or barter, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property for a consideration. "At retail" is defined as " a sale for any purpose other than resale in the regular course of business in the form of tangible personal property."
A "retailer" includes every seller who makes any retail sale of tangible personal property and every person engaged in the business of making sales for storage, use, or other consumption. The sales tax is also imposed where more than two "retail sales" are made within a 12-month period.
A seller includes "every person engaged in the business of selling tangible personal property of a kind the gross receipts from the retail sale of which are required to be included in the measure of the sales tax . . . whether or not the . . . property is ever sold at retail." In other words, a retailer does not need to be in the actual business of making retail sales but merely in the business of selling property that would be a retail sale if sold at retail.
Sales and use tax law exempts most service industries from the definition of "seller:" accounting, law, laundry, cleaners, and transportation firms. Also, sales of food products are statutorily exempted from the definition of "retail sales."
Also, three major exemptions exist to the imposition of sales tax where a business is sold - (1) occasional sales, (2) mergers, and (3) stock transactions.
An "occasional sale" is defined as "(1) a sale of property not held or used by a seller in the course of activities for which he or she is required to hold a seller?s permit . . . if the activities were conducted in this state, provided that the sale is not one of a series of sales sufficient in number, scope, and character to constitute an activity for which he or she is required to hold a seller?s permit if the activity were conducted in this state; and (2) any transfer of all or substantially all the property held or used by a person in the course of such activities when after such transfer the real or ultimate ownership of such property is substantially similar to that which existed before such transfer."
It appears that qualifying "occasional sales", where a seller?s permit is held is very limited. The sale must be completely unrelated to the seller?s usual course of business activities as well as not be subject to tax as a separate transaction. For example, a restaurant owner who sells his home furnishings and appliances would not be subject to sales tax.
A second exclusion from the sales tax provisions for the sale of a business is a statutory merger. A statutory merger constitutes the transfer of property of one corporation to another in conformance with Sections 1100 - 1305 of the California Corporations Code.
A final method of qualifying for an exemption from sales tax regarding the sale of a business is to structure the sale as a sale of stock instead of as a sale of assets. Stock of a corporation is not tangible personal property and its sale would not be subject to sales tax.
In summary, the "occasional sale" exemption from the imposition of sales tax has very narrow application to the sale of a business. Where a stock purchase of a corporation is not desirable, the statutory merger provides the broadest vehicle for selling an entire business without adverse sales tax consequences.
Under the Ralite Lamp Corporation case, the FTB must prove all of the following before holding a shareholder liable for a corporation?s tax:
Ralite applies to the shareholder, not the corporation. You cannot use this decision until the FTB has made its assessments, given up trying to collect from the now-defunct corporation, and actively pursues the individual shareholder to pay the tax liability. Here is the chain of events:
If it is clear that the shareholder did not receive more value out of the corporation than was owed, the FTB will generally stop pursuing the shareholder(s) and close the account.
Ralite and the LLC
The Ralite case applies to corporate shareholders. Although there are no cases on point, it would seem that the same criteria would apply to an LLC and its members, as an LLC has the same liability aspects as a corporation.
Ralite and the limited partnership
The Ralite decision does not apply to LPs. In the case of these partnerships, there is a general partner who is personally liable for the debts of the partnership. Unless the general partner is a corporation that itself would qualify for Ralite treatment, the general partner will be liable.
The California Franchise Tax Board (FTB) is collecting delinquent tax debts through the Financial Institution Record Match (FIRM) program. FIRM uses automated data exchanges to locate bank accounts held by Californians who have tax debts. The FIRM program will match records on a quarterly basis in order to collect tax debts from both individuals and businesses. No financial institution doing business within the state of California is exempt from participating in the program. However, in rare cases temporary exemption or suspension of participation may apply. Banks that chose not to comply are subject to large fines each year. Accounts that are eligible for tax levies include checking and savings accounts, as well as mutual funds. FIRM is similar to the Financial Institution Data Match (FIDM) program, which is used to collect delinquent child support debt.
The FIRM program allows the FTB to use data obtained from banks to find assets and garnish bank accounts up to 100 percent of the amount owed. As of April, the FTB began to serve tax levies on the bank accounts of individuals who have delinquent balances, including penalties, interest, taxes and fees that have been identified through FIRM. With the help of the FIRM program, the FTB expects to issue 475,000 tax levies this fiscal year, a 75 percent increase from last year.
In order to avoid tax levies you should contact Anton A. Ewing, JD to consider possible alternatives including installment agreements, offer in compromise and bankruptcies.
Data between FTB and FIRM can be exchanged in two ways. In the first method, information regarding open accounts is given directly to the FTB for the Board to match accounts with delinquent taxpayers. This method is only available to institutions that are unable to match the information against their own records. Institutions that do not qualify for the first method must match taxpayer information against their own records. Banks can choose to hire a third-party transmitter to aid in matching the data. Because the accuracy of the data is of the utmost importance, banks must verify matches from third-party services before submitting them to the FTB.
A 10-day holding period follows the issue of the tax levy to the bank. During this time, the taxpayer or a tax attorney on the taxpayer's behalf may negotiate the amount due or, if financial hardship is creating tax problems, discuss payment options. If the FTB levied an account in error, they will delay the garnishment while they verify the mistake and then issue a garnishment release notice. If the bank has already issued the payment, the Board will return the payment.
Anton A. Ewing, JD
There are a number of steps you might take by year-end to cut your 2011 tax bill, such as deferring income, accelerating deductions and capital gains planning.
If you are planning on selling an investment this year on which you have a gain, it may be best to wait until the following tax year to defer payment of the taxes for another year (subject to estimated tax requirements).
If you are expecting a bonus at year-end, you may be able to defer receipt of these funds until January. This allows you to defer tax payments (other than the portion normally withheld) until the following year. However, keep in mind that you usually defer taxes on a bonus that is contractually due in 2011.
If your company grants stock options, it may be wise to wait until next year to exercise the option or sell stock acquired by exercise of an option. Exercise of the option is often but not always a taxable event; sale of the stock is almost always a taxable event.
The IRS has announced the maximum contribution limits for your 401(k) and other retirement plans for 2012. In general, many of the pension plan limitations will change for 2012 because the increase in the cost-of-living index met the statutory thresholds that trigger their adjustment. However, other limitations will remain unchanged. Highlights include:
Individuals Limits for 401(k): Annual compensation limit $250,000 in 2012 (up from $245,000 in 2011); maximum annual contribution $17,000 in 2012 (up from $16,500 in 2011) with a $5,500 contributions for age 50 and older.
Savings Incentive Match Plan for Employees (SIMPLE): Contribution limit $11,500 with a $2,500 catch up clause for age 50 and older. Remains unchanged from 2011.
Individual Retirement Plans (IRAs): Maximum contribution $5,000 with a $1,000 catch up contribution for those age 50 and older. The contribution can be split between a Roth IRA and a traditional IRA, but must not exceed $6,000. Remains unchanged from 2011.
For those that have a 12/31 tax year end, like partnerships, S-corporations, individual 1040, and LLC's taxed as partnerships or S-corporations, it is important to plan for year end before it passes by.
Under the cash basis rule of accounting, transactions must clear the business bank account on or before 12/31 in order to be included in this year's tax return. Pension contributions can be calculated, along with the required W-2 compensation amounts required to justify the pension contribution, by contacting the actuary. It is important to have your profit and loss statements up to date for 2011 before you can obtain a good estimate for year end planning.
The passage of CA Senate Bill 392 (Statutes of 2010, Chapter 698) authorizes the Contractor State Licensing Board to issue contractor licenses to Limited Liability Companies (LLCs). The law says that CSLB shall begin processing LLC applications no later than January 1, 2012.
Anton Ewing enjoys an excellent reputation for ably guiding his clients through the ever-changing world of tax law. Since he started his San Diego-based company in 2004, Anton Ewing has developed particular expertise in the area of charitable remainder trusts. These complex tax-exempt trusts are a means of reducing assets subject to estate tax while maintaining consistent income. Ewing is also highly skilled in structuring defined benefit pension plans. His firm?s slate of services includes basic tax planning as well as complex auditing and financial planning.
Before he started his company, Anton Ewing held a succession of tax, auditing, and pension management positions. While living in the Phoenix area in 2000, he founded an accounting and financial planning firm with the primary aim of helping clients maximize their asset protection.
A Certified Financial Planner, Anton Ewing has attained several financial advising licenses, including Series 7 Registered Representative, Series 24 General Securities Principal, and Series 66 Registered Investment Advisor. In addition, he is a member of the American Institute of Certified Public Accountants and has worked as a C.P.A. in several states.
Ewing began his career as a nuclear physicist and operated two nuclear reactors for the U.S. Navy. A decorated veteran of the Persian Gulf War, he was honorably discharged in 1992.
Anton Ewing graduated from The University of Arizona in Tucson with a Bachelor of Science with honors in Accounting. He holds a Juris Doctor from The University of Arizona James E. Rogers College of Law, and he has finished all of the core coursework for a Master of Taxation at Arizona State University.