So, President Biden’s Tax plan has to gifts for farmers and small business owners. Reduction of the Estate tax exemption from $11.5 Million to $3.5 Million ($7 Million per couple). And capital gain recognition upon the death of an ancestor. So, let’s take Bernie Sanders. He dies owning real estate totalling about $3 Million and his basis is about $800,000. This translates into a $2.2 Million gain. This gets taxed at 45% = $990,000. So, let’s take Grandma who dies with $4 Million in a farm with a basis of $100,000. Capital gain of $3.9 Million x 45% tax = $1,755,000 to be paid over 15 years by the family or they have to sell the farm to some conglomerate probably. Same numbers if Grandma owned a gas station. Jobs will be lost, wealth will be lost, investment will be lost. If you want to raise taxes, raise it the simplest way possible, raise rates on income for everyone. Then everyone sees that their taxes are going up and that the Government is spending money.
Trump Organization Indictments
In the grand scheme of things $3.5 Million of benefits spread over 13 years for a billion dollar operation is not a huge issue and in probably 99.9% of the cases leads to a civil, not criminal case. However there are some of the charges that are on pretty solid ground while others are tenuous. The charges involving the rent free apartment are the strongest. He and his wife lived in the apartment and clearly the checks for the rents were paid by the Trump Organizations without calling it compensation and his salary was reduced by the rent payments. This leads to the inevitable conclusion that he was receiving a rent free apartment as part of his compensation. The private school tuition payments for his children are on the tenuous side. Those were actually paid by Donald Trump or by his trust. That would tend to make them a gift from Mr. Trump and if they are less than $28,000 per year per child, they don’t even trigger a gift tax calculation. So, that part of the indictment might fail (although apparently there is a plea deal in the works so he will cooperate with an investigation into former President Trump).
So, the lesson from this is that if you are a hard target of those who wish to discredit you, you probably should make sure that all transactions are fully defensible and not bleed into the tax fraud realm. Tax avoidance is acceptable and if there is a business purpose and economic reality to a transaction, it is not fraud. In this case, the rent free apartment is of a possible tenuous business purpose (perhaps he was on 24 hour/day call and needed to be close to the office), but normally that still doesn’t cure the economic reality that he was getting a place to stay courtesy of his employer and his salary was being reduced accordingly. Those two facts push it into the compensation zone and it was taxable and shows intentionality.
Section 7430 Substantially Justified Case
In the case of Adkins v. US (which we argued) the Court of Federal Claims defined substantially justified in the context of the findings of the Court of Appeals for the Federal Circuit.
“The court begins by examining the “objective indicia” of the strength of defendant’s position. Pierce, 487 U.S. at 568; Nat’l Org. for Marriage, 807 F.3d at 597. Those indicia include the trial and remand decisions that this court issued in defendant’s favor, the existence of supporting precedent from other circuit courts of appeals (namely Jeppsen), the lack of contrary precedent from other appellate courts, and the Federal Circuit’s resounding rejection of defendant’s position in its most recent decision in this case. It is this final factor that tips the balance in plaintiffs’ favor.”
“Additionally, the Federal Circuit concluded, upon its review of the record, that this court’s fact findings regarding whether plaintiffs had a reasonable prospect of recovering their losses in 2004 were “clearly erroneous.” Id. at 1366.”
“The Federal Circuit considered the avenues of recovery discussed by this court—and which had been raised by defendant—and concluded that there was “overwhelming evidence” that plaintiffs lacked a reasonable prospect of recovering their losses in 2004. Adkins, 960 F.3d at 1366-68.”
“In this case, the Federal Circuit based its denunciation of the United States’ position
(adopted by this court) on its conclusion that the United States (and this court) plainly misinterpreted the relevant Treasury regulation. Misinterpretation of a regulation has been found by other courts to render the United States’ position unreasonable. See, e.g., Huckaby v. U.S. Dep’t of the Treasury, 804 F.2d 297, 299 (5th Cir. 1986) “
“This issue was the main subject of a summary judgment decision, a trial, two trial decisions, and two appeals. It therefore stands to reason that whether defendant’s position on this issue was substantially justified deserves the greatest weight in determining whether the United States’ overall position was substantially justified. Adopting this reasoning, the court concludes that because defendant’s position regarding the proper year for plaintiffs to claim a theft loss was not substantially justified, defendant’s overall position was not substantially justified. Consequently, plaintiffs are prevailing parties entitled to an award of attorney’s fees under I.R.C. § 7430. “
As one can see the Court went to great pains to show that where the Court of Appeals rules that the findings of the Trial Court were clearly erroneous and that the Court at the urging of the Government misinterpreted the Government’s own regulation, 7430 attorneys fees are allowable.
New Virginia Filing Requirement for Certain Corporations July 1, 2021
The Virginia legislature is doing a study on unitary taxes for brother/sister or parent subsidiary corporations. https://www.tax.virginia.gov/news/corporate-unitary
This study requires corporations to file a special return by July 1, 2021 based upon their 2019 tax returns.
Corporations must be “unitary businesses”.
“”Unitary business” means a single economic enterprise made up either of separate parts of a single business entity or of a commonly controlled group of business entities that are sufficiently interdependent, integrated, and interrelated through their activities so as to provide a synergy and mutual benefit that produces a sharing or exchange of value among them and a significant flow of value to the separate parts. A “unitary business” includes that part of the business that meets the definition in this section and is conducted by a taxpayer through the taxpayer’s interest in a partnership, whether the interest in that partnership is held directly or indirectly through a series of partnerships or other pass-through entities. A “unitary business” shall not include persons subject to, or that would be subject to if doing business in the Commonwealth, the insurance premiums license tax under Chapter 25 (§ 58.1-2500 et seq.), Code of Virginia, or the bank franchise tax under Chapter 12 (§ 58.1-1200 et seq.)”
So, talk to your tax advisor if this applies to you.
Changing Step Up in Basis is a big deal
In its thirst to get more tax revenue to fund more give-aways, the Biden Administration has proposed a provision to get rid of the step-up in basis provision when a person dies. The current rule is that when a person dies the tax basis of that person’s assets are the fair market value on the date of death. This rule has been around for over 50 years. In the 1976 Tax Act, Congress repealed the rule and put a new rule into effect, it was so hard to carry out that it got deferred and ultimately repealed.
There are three main problems with the concept. (1) Much of the appreciation in property is due to inflation not real gain in wealth. So, if one adopts carry-over basis, then one should index that basis to inflation which creates even more complexity. (2) How does a survivor know the basis of grandpa’s assets after grandpa dies? Where did grandpa keep that information? Suppose he invested in a dividend reinvestment plan and didn’t keep records. For real estate that is probably easier to track, but if Grandpa made improvements, how do you track that? It becomes an accounting nightmare. (3) Lastly when combined with an estate tax (even if you get the tax added to the basis), it becomes confiscatory.
These are the reasons why the Administration provision is a difficult proposal.