Wow, “in olden days a glimpse of stocking turned into something shocking now heaven knows, anything goes”. I’m not sure even Cole Porter envisioned this.
The Supreme Court struck down DOMA. This is one of those decisions that in terms of tax law is earth shattering. Marriage pervades the Tax Code. There are joint tax returns, there are marital deductions, there are Retirement Equity Act provisions. In other words, lots of issues. So where do we go from here.
(1) Gay persons who are legally married under relevant state law have up to three years to amend prior Federal tax returns to go to joint return status or married filing separately.
(2) The Government will presumably have the right to audit all legally married gay people who filed under “single” status and re-calculate their returns as married filing separately (don’t see them doing this because that would trigger a joint return and refund). In this circumstance, they could go back three years.
(3) This will complicate the budget negotiations in Congress, so look for increased rates.
(4) For decedent’s dying in the last four years estate tax returns should be filed or amended if the decedent was legally married under state law.
After watching the great $50,000 taxpayer funded video of IRS employees line dancing, or the Star Trek training video, it reminded me that IRS is only one of many Federal agencies. Is there any doubt that training videos and teambuilding retreat expenses are spent over and over and over again, from one end of the Government to the other. Yet, rather than cut out these types of perks and costs, the Government instead chooses to sequester the pay of their employees. Let’s assume that inside the IRS there are probably $500,000 year spent on employee training retreats and videos. Now add the rest of the Treasury Department, Transportation, Agriculture, Defense, etc., you get some huge amounts of money going out the door. Yes, people need to be trained how to do their jobs. But what about meetings at local offices. Supervisors training their underlings. And of course skype conferences if you have to have someone from somewhere else. Government needs to cut costs as the private sector has had to do. It can do it by reducing everyone’s pay or laying people off, or looking for other cuts that can handle these cost reductions.
I have no doubt that these expenses were meant to be helpful to teaching employees. But, we have to really evaluate the necessity of going overboard with expenditures which border on wasteful. Perhaps if a few more Mr. Spocks were hauled before Congress, they might begin to understand that the day of being faceless bureaucrats is over, and in the day of cellphone videos, people are being caught on tape every day. I talked to a fellow today who uses his cellphone to take pictures of people who litter and sends those to police. Now add that his cellphone is hooked to the NSA and is it long before Big Brother is really watching. Fehrenheit 951 and 1984 are right around the corner.
I felt it a good time to weigh in on the brewing Exempt Organizations brew-ha-ha at the IRS. The delay in processing applications for political reasons strikes me as kind of petty. For the most part the EO branch employees that I’ve dealt with are conscientious, but thorough and ultimately fair. And certainly what could be an dicey charity might get extra scrutiny and well it should. However, the 501 (c)(4) organization which does not give donors the benefit of a deduction has been honored in the breach for years. Even some 501(c)(3) organization such as Greenpeace and Family Foundation tip toe along the precipice between proper and improper expenditures. When is it lobbying and when is it education? Is indoctrination, education? Those are the types of things that have pretty much been allowed to happen over the years. So, the genie is kind of out of the bottle on these things.
More concerning is the disclosures of sensitive information by the EO section of Anti-Same Sex Marriage Groups. Disclosures are a career killer at the IRS. This is because they subject the Service to huge potential liabilities. Under Section 7431 of the Code, the victim of an illegal disclosure may sue the Service for $1000 for each disclosure. So suppose you have a donor list of 100 names. That might be deemed to be 100 disclosures. Further, let’s say its put on a website and that website has 100,000 hits. The could possibly be 100,000 disclosures. In addition to these penalties, the victim gets their damages as determined by a jury So, for example let’s say your giving goes down by $1,000,000 as a result of these disclosures and you can quantify those damages, you get those. You also can get punitive damages if the disclosure was willful. That’s potentially 5-9 times the damages you suffered. You also get attorneys fees. This is an area where the Service needs to really clamp down on their employees. No one likes the IRS. No one likes the IRS disclosing material illegally or sloppily. This is an area where the IRS could get hammered by the right organization.
In our brave new world of Medicare taxes on unearned income, higher marginal rates for incomes over $250,000; State taxes in California topping off at 12%, what is a businessperson to do who owns a profitable business and who is putting profits back into the business? There are several options. (1) A Corporation while doubly taxed permits corporations to retain earnings at a low tax cost currently, however to take the profits out increase tax costs dramatically. (2) Another possibility is to reduce one’s ownership interest by some percentage so that a portion of the profits go to one’s children who’s earnings as less than $250,000. This could reduce taxes significantly if the entity is an LLC or S Corporation. With low gift tax penalties, one could gift a significant ownership percentage to one’s children now and allow the children to have a portion of the growth. One could also create trusts to hold the ownership interests for the children under for example 2503(c). This would give the children the fruit of the tree without giving them the tree and the parent would continue to run the company. (3) Purchasing key man life insurance to be owned by your children or by a trust for your spouse’s benefit. These are but a few of the options available to make income lower from your business. We’d be glad to talk to you about these and other options in the future.
I was talking to an old friend of mine who mentioned that businesses don’t plan for succession. And that is really something that needs to be reviewed. In the past the problem for succession planning was death taxes. For small businesses, estate taxes used to chew up the value. Now death tax exemptions are $10 Million per couple (Federal only), some states still have lower limits. So, what are the succession issues these days.
The first one is of course death or disability of the key person. Who takes over when the king can no longer be king? So, the question of the “who” is perhaps the most important question to be answered. I remember reading the story of one business where a father died suddenly, and his family entrusted the business to a manager who exacted a great salary who was brought in from the outside. The manager knew the business generally, but did not understand this business. As a result, he made some changes to the business model that doomed the business to bankruptcy. Another business, the owner provided for his successor and groomed that successor. The business thrived and grew over time until the successors decided it was the optimum time to sell the business and they reaped a huge reward. So, the lesson here is to try and home grow the successor. Either be it a family member or a trusted employee. The best manager grooms his or her successor. This permits the manager to retire, to die or to lose his or her mind in peace and permits his or her family to be provided for should one of these events occur. And you know what, there is a 100% change that one of those events will occur. Our next installment will talk about financial and tax strategies to prepare for the next step. Stay tuned.