Keep your friends close, and your relatives far away. The tax law often assumes that any financial transaction between relatives is untrustworthy. Many transactions that work just fine with a stranger become tax disasters when family is involved. A New York man got a hard education in this yesterday in Tax Court.
The man was selling property at a $1.5 million gain, and he wanted to use the Section 1031 “like-kind exchange” rules to defer the gain by using the proceeds to acquire new property. The tax regulations let you do so under the right facts as long as you follow rules on escrowing funds or using a “qualified intermediary,” and you meet deadlines for identifying and closing on the new “replacement property.”
For example (a very simplified example), if you sell an investment property and the proceeds are held by a “qualified intermediary,” and you identify the property within 30 days and close on it within 180 days, using the funds held by the intermediary in the purchase, the gain on the original property is transferred to the new property, to be only recognized if and when that property is sold. But the IRS insists you go by the book.
These deals only work if you use a “qualified” intermediary. The taxpayer in this case used his son. Game over, said the Tax Court:
Petitioner acknowledges that there was no direct exchange of like-kind property; property A was sold and property B was purchased with proceeds from the sale of property A. Petitioner also acknowledges that the intermediary used in the transaction was his son. However, petitioner asserts that he meets the requirements of the regulation’s safe harbor because (1) his son is an attorney; (2) the funds from property A were held in an attorney trust account; and (3) the real estate documents refer to the transaction as a section 1031 exchange. We do not accept petitioner’s argument. The regulation is explicit: A lineal descendant is a disqualified person, and the regulation makes no exception based on his/her profession. Consequently, petitioner’s disposition of property A and subsequent acquisition of property B is not a deferred exchange within the purview of section 1031, and he must recognize income on the gain from the sale of property A.
There are a number of reputable firms that specialize in serving as intermediaries and escrow agents in like-kind exchanges. They can make a potentially complicated deal go much more smoothly. And they are probably not your son. Yes, they charge for their services, but when a $1,512,000 taxable gain is at stake, as it was here, it can be a real bargain.
In other legal news, the Supreme Court declined to hear Wells-Fargo’s appeal of a 2013 decision striking down a lease tax shelter designed to generate a $423 million capital loss.
The Iowa Department of Revenue has warned at least one investor who owns shares in Energae LP of Clear Lake, Iowa, that tax credits for the company’s green energy production couldn’t be verified for 2012, and the credits must be paid back.
In a letter dated May 20, 2014, David Keenan, a revenue examiner for the compliance division of the Iowa Department of Revenue, told an unidentified taxpayer from Iowa to pay back $1,131.73. Victoria Daniels, public information officer for the agency, declined to comment on what might have disqualified the credits, or whether the denial affects only 2012. She also declined to comment on whether the department’s decision was focused on just one audited person or whether it will be extended to others who used the credits.
The Department has clawed back credits in cases where ethanol producers have failed or otherwise not met the requirements for the credits.
The article shows that the state subsidies encourage careless investing. An attorney in a lawsuit on the matter is quoted:
“They offered a dollar-for-dollar tax credit, so people thought, ‘How can you lose?’ They may find out. I hope things come to a head soon because it seems to me there’s a lot of confusion and misinformation in the investing public. I think there needs to be some clarity.”
While this is only one side of the story, it’s easy to see where an investor might overlook due diligence when a “dollar-for-dollar tax credit” makes the deal seem like a free play.
The Onion is a satirical publication, but it’s hard to tell sometimes: States Now Offering Millions In Tax Breaks To Any Person Who Says ‘High-Tech Jobs’
ST. PAUL, MN—In an effort to spur their local economies, many state governments are now offering tens of millions of dollars in tax breaks to any person who simply says the words “high-tech jobs,” according to a survey by the Pew Research Center published Monday. “We must do what it takes to draw potential innovators to the great state of Minnesota, which means granting lucrative tax credits and loan guarantees to any individual—whoever they may be—who utters the phrase ‘high-tech jobs’ in any context whatsoever,” said Minnesota governor Mark Dayton, whose office has reportedly joined numerous other states in doling out tax exclusions, low-interest municipal loans, full income tax exemption for 10 years or more, and other valuable incentives to thousands of people who have spoken such phrases as “biotech,” “innovation center,” “high-skilled workers,” and “tomorrow’s economy.”
If the story were written about Iowa, the magic words would include “renewables,” “wind-energy,” and “fertilizer.”
TaxProf, The IRS Scandal, Day 397. The stories today mostly cover a huge illegal transfer of confidential 501(c)(4) taxpayer data to the FBI. The House committee investigating the Tea Party scandal revealed communications between Lois Lerner and FBI representatives arranging the illegal transfer. This is a big deal, making it clear that the activities involving Ms. Lerner weren’t accidental, and were far more sinister than the “phony scandal” crowd would have you believe.
Russ Fox, Perhaps This Is Why Lois Lerner Is Taking the Fifth. “Based on what I just read, if anyone is expecting the IRS’s budget to increase this year, well, that has as much chance as it snowing here in Las Vegas tomorrow. (The high is expected to reach just 105 F.)”
Leslie Book, Exploding Packages and IRS Disclosure of Confidential Tax Return Information (Procedurally Taxing)
Robert D. Flach brings your fresh Tuesday Buzz!
Jack Townsend, Court Holds Online Poker Accounts are FBAR Reportable:
The two issues were: (1) whether the accounts with the three entities were “bank, securities or other financial account[s]” that must be reported on an FBAR; and (2) whether each of the three accounts was in a foreign country The Court answered both questions yes.
A potentially expensive result for a lot of folks, if it holds up.
Gerald Prante, Deductions for Executive Pay Is Not a Subsidy. (Tax Policy Blog) “Essentially, IPS and ATF are starting from a baseline that assumes all executive pay should be capped at $1 million and any deviation from this is a subsidy.”
Jeremy Scott, Whistleblower Highlights Undue Influence at the IRS (Tax Analysts Blog) “He claimed that granting credits for the use of black liquor was opposed by most of chief counsel, but that a few senior managers changed the policy, allowing paper manufacturers to take advantage of a true tax loophole.”
But we are supposed to trust them to regulate preparers without fear or favor.
Tax Justice Blog, State News Quick Hits: Keeping Score? Real Tax Reform 0. Tax Cuts 2
Martin A. Sullivan, How Not to Tax the Rich (Tax Analysts Blog). “The liberal case for corporate taxation has been severely weakened by capital mobility.”
Renu Zaretsky, Repatriation, Havens, and Tax Reform Abroad. The TaxVox daily headline roundup talks about extenders, tax havens and the costs of repatriation tax holidays.
Now thanks to Tanina Rostain and Milton C. Regan, Jr. you can read all about it in “Confidence Games – Lawyers, Accountants, and the Tax Shelter Industry”. It is a sad story with no heroes and only one villain, who is colorful enough to be engaging – Paul Dauugerdas, who is still awaiting sentencing on his second conviction (He got a do-over on his trial due to juror misconduct). The book is a must read for all tax professionals and others may enjoy it too.
Sounds like a buy to me.
Tags: corporate welfare, economic development, Gerald Prante, Jack Townsend, Jeremy Scott, Judge Jacobs, Kay Bell, Leslie Book, like-kind exchange, Martin Sullivan, Peter Reilly, Renu Zaretsky, Robert D Flach, Russ Fox, Section 1031, Tax Justice Blog, The Onion