IRS Change Helps 'Innocent Spouse'

By LAURA SAUNDERS

The Internal Revenue Service announced a change in how it decides which taxpayers qualify for "innocent spouse" relief, a determination that frees the taxpayer from liability for a partner's tax debts.

Effective immediately, the agency has eliminated a rule that disqualifies taxpayers from innocent-spouse status if they fail to file for relief within two years—a provision that snagged people who otherwise qualified, including abused women.

"Today's change will help innocent spouses victimized in the past, present and future," said IRS Commissioner Doug Shulman.

The agency's shift was welcomed by others who pushed for it, including National Taxpayer Advocate Nina Olson and several dozen lawmakers led by Rep. Fortney "Pete" Stark (D., Calif.). Recently, the IRS has won federal appeals court cases involving the two-year deadline, so any change needed to come from within the agency or from Congress.

The change affects taxpayers applying for so-called equitable relief, a category open to taxpayers who don't meet strict requirements of other provisions in the innocent spouse law. An agency spokesman said the IRS receives about 50,000 requests under this provision a year, although the number of actual taxpayers is smaller because a taxpayer often requests relief for more than one year. Many are women under financial pressure, and some have been abused.

Until the change, the IRS denied applicants who missed its deadline of two years after the first collection notices sent by the agency. But some didn't know about the notices or the possible relief, and others feared a spouse's reaction.

Last summer, a federal appeals court upheld an IRS argument for the two-year deadline in the case of Cathy Marie Lantz, the former wife of an Indiana dentist. In 2000, her husband, Dr. Richard Chentnik, was arrested and convicted of Medicaid fraud, resulting in a $900,000 bill from the IRS. Ms. Lantz didn't file for innocent spouse relief because Dr. Chentnik told her he had taken care of it, and he died shortly afterwards. Through one of her pro-bono lawyers, Ms. Lantz declined to comment.

Agency officials said the change will apply to past as well as current cases. In its announcement, the IRS invited taxpayers who were denied relief solely because of the two-year limit it changed to reapply. Agency officials also said they wouldn't apply the two-year rule to pending litigation and might suspend collections in cases the IRS has won in court.

Experts say the elimination of the two-year deadline may be the first of more IRS revisions to the innocent spouse rules. "We believe more changes are coming," said Carlton Smith of Cardozo Law School in New York. An IRS official affirmed the possibility of more changes, but declined to say what they might be or when they might happen.

Write to Laura Saunders at laura.saunders@wsj.com

IRS Denies Non-Profit Status To Three Political Groups

By Dan Froomkin

Huffington Post 
First Posted: 7/19/11 09:46 AM ET Updated: 7/19/11 11:02 AM ET

WASHINGTON -- The IRS has denied non-profit status to three unnamed political organizations, setting off speculation about their identities -- and about whether other groups could be next.

The IRS rulings, first reported by the Election Law Blog, deny 501(c)(4) nonprofit status to three undisclosed organizations on the grounds that their activities are "conducted primarily for the benefit of a political party and a private group of individuals, rather than the community as a whole."

The move has the potential to slow the rise of overtly political organizations that claim non-profit status as "social welfare groups." Due to a controversial loophole in federal campaign finance rules, the names of donors to those organizations do not have to be disclosed publicly.

The three rulings (here, here and here) are redacted to remove identifying information, but the three groups were apparently involved in training members of a specific political party.

"[Y]our purpose in conducting this activity is to provide education solely to individuals affiliated with a certain political party who want to enter politics," reads one IRS letter. "Indeed, you measure your success in terms of the number of your graduates who have won elective office representing the [redacted] or are actively engaged as campaign managers and advocates for [redacted] campaigns."

The groups were formed separately -- on Aug. 7, 2006, Aug. 16, 2006, and Dec. 21, 2007 -- but otherwise appear very similar. Each required detailed applications, charged application fees and tuition and provided scholarships for their training programs. In the ruling, the IRS pointed out that one group's training date coincided with the unnamed political party's state convention.

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This kind of nonprofit designation is typically not much more than a formality, but IRS guidelines for 501(c)(4) status state that social welfare groups "must operate primarily to further the common good and general welfare of the people of the community" -- which "does not include direct or indirect participation or intervention in political campaigns on behalf of or in opposition to any candidate for public office."

Beginning with the 2010 election cycle, after the Supreme Court's Citizens United decision cleared the way for unlimited corporate donations to political organizations, some operatives saw the potential for using 501(c)(4)s status as a way not only to accept unlimited money, but to do so secretly.

Campaign finance reformer advocates -- and members of Congress -- have asked the IRS to deny or revoke non-profit status for such groups.

This past fall, Senate Finance Committee Chairman Max Baucus (D-Mont.) and Sen.Dick Durbin (D-Ill.) sent letters to the IRS requesting investigations of some 501(c)(4) groups.

Experts consulted by The Huffington Post have said that a group denied its 501(c)(4) status would suddenly owe the government a lot of money, either in taxes on donations received or in the form of a hefty fine for violating disclosure rules.

The Karl Rove-affiliated group Crossroads Grassroots Political Strategies, for example, used its nonprofit status to raise $43 million from undisclosed donors in 2010, and that money made the group a hugely influential player in the midterm elections. Were its 501(c)(4) status revoked, Crossroads would be subject to those tax liabilities and potential fines for nondisclosure.

The recent letters from the IRS, which were sent out April 4 but only released to the public on Friday, instruct the three groups to file their federal income tax returns or a request for an extension within 30 days.

Dan Froomkin is senior Washington correspondent for the Huffington Post. You can send him an e-mail, bookmark his page; subscribe to his RSS feed, follow him on Twitter, friend him on Facebook, and/or become a fan and get e-mail alerts when he writes.

Get Ready for a 70% Marginal Tax Rate

Some argue the U.S. economy can bear higher pre-Reagan tax rates. But those rates applied to a much smaller fraction of taxpayers than what we're headed for without spending cuts.

By MICHAEL J. BOSKIN

President Obama has been using the debt-ceiling debate and bipartisan calls for deficit reduction to demand higher taxes. With unemployment stuck at 9.2% and a vigorous economic "recovery" appearing more and more elusive, his timing couldn't be worse.

Two problems arise when marginal tax rates are raised. First, as college students learn in Econ 101, higher marginal rates cause real economic harm. The combined marginal rate from all taxes is a vital metric, since it heavily influences incentives in the economy—workers and employers, savers and investors base decisions on after-tax returns. Thus tax rates need to be kept as low as possible, on the broadest possible base, consistent with financing necessary government spending.

Second, as tax rates rise, the tax base shrinks and ultimately, as Art Laffer has long argued, tax rates can become so prohibitive that raising them further reduces revenue—not to mention damaging the economy. That is where U.S. tax rates are headed if we do not control spending soon.

The current top federal rate of 35% is scheduled to rise to 39.6% in 2013 (plus one-to-two points from the phase-out of itemized deductions for singles making above $200,000 and couples earning above $250,000). The payroll tax is 12.4% for Social Security (capped at $106,000), and 2.9% for Medicare (no income cap). While the payroll tax is theoretically split between employers and employees, the employers' share is ultimately shifted to workers in the form of lower wages.

But there are also state income taxes that need to be kept in mind. They contribute to the burden. The top state personal rate in California, for example, is now about 10.5%. Thus the marginal tax rate paid on wages combining all these taxes is 44.1%. (This is a net figure because state income taxes paid are deducted from federal income.)

So, for a family in high-cost California taxed at the top federal rate, the expiration of the Bush tax cuts in 2013, the 0.9% increase in payroll taxes to fund ObamaCare, and the president's proposal to eventually uncap Social Security payroll taxes would lift its combined marginal tax rate to a stunning 58.4%.

But wait, things get worse. As Milton Friedman taught decades ago, the true burden on taxpayers today is government spending; government borrowing requires future interest payments out of future taxes. To cover the Congressional Budget Office projection of Mr. Obama's $841 billion deficit in 2016 requires a 31.7% increase in all income tax rates (and that's assuming the Social Security income cap is removed). This raises the top rate to 52.2% and brings the total combined marginal tax rate to 68.8%. Government, in short, would take over two-thirds of any incremental earnings.

Many Democrats demand no changes to Social Security and Medicare spending. But these programs are projected to run ever-growing deficits totaling tens of trillions of dollars in coming decades, primarily from rising real benefits per beneficiary. To cover these projected deficits would require continually higher income and payroll taxes for Social Security and Medicare on all taxpayers that would drive the combined marginal tax rate on labor income to more than 70% by 2035 and 80% by 2050. And that's before accounting for the Laffer effect, likely future interest costs, state deficits and the rising ratio of voters receiving government payments to those paying income taxes.

It would be a huge mistake to imagine that the cumulative, cascading burden of many tax rates on the same income will leave the middle class untouched. Take a teacher in California earning $60,000. A current federal rate of 25%, a 9.5% California rate, and 15.3% payroll tax yield a combined income tax rate of 45%. The income tax increases to cover the CBO's projected federal deficit in 2016 raises that to 52%. Covering future Social Security and Medicare deficits brings the combined marginal tax rate on that middle-income taxpayer to an astounding 71%. That teacher working a summer job would keep just 29% of her wages. At the margin, virtually everyone would be working primarily for the government, reduced to a minority partner in their own labor.

Nobody—rich, middle-income or poor—can afford to have the economy so burdened. Higher tax rates are the major reason why European per-capita income, according to the Organization for Economic Cooperation and Development, is about 30% lower than in the United States—a permanent difference many times the temporary decline in the recent recession and anemic recovery.

Some argue the U.S. economy can easily bear higher pre-Reagan tax rates. They point to the 1930s-1950s, when top marginal rates were between 79% and 94%, or the Carter-era 1970s, when the top rate was about 70%. But those rates applied to a much smaller fraction of taxpayers and kicked in at much higher income levels relative to today.

There were also greater opportunities for sheltering income from the income tax. The lower marginal tax rates in the 1980s led to the best quarter-century of economic performance in American history. Large increases in tax rates are a recipe for economic stagnation, socioeconomic ossification, and the loss of American global competitiveness and leadership.

There is only one solution to this growth-destroying, confiscatory tax-rate future: Control spending growth, especially of entitlements. Meaningful tax reform—not with higher rates as Mr. Obama proposes, but with lower rates on a broader base of economic activity and people—can be an especially effective complement to spending control. But without increased spending discipline, even the best tax reforms are doomed to be undone.

Mr. Boskin is a professor of economics at Stanford University and a senior fellow at the Hoover Institution. He chaired the Council of Economic Advisers under President George H.W. Bush.

A Reorganization Can Include A Rehabilitation

Allen Matkins

phone: (949) 553-1313
e-mail: kbishop@allenmatkins.com

Posted In California Securities Laws,Fairness Hearings

Until last year, Ambac Assurance, a Wisconsin domiciled insurer, was one of the largest monoline insurers in the world.  Originally it insured low-risk, public finance bonds.  However, in the 1990s it started to offer financial guarantee insurance on residential mortgage backed securities and collateralized debt obligations of asset-backed securities.  Not surprisingly, Ambac was a casualty of the 2008 financial crisis.  In response, Ambac stopped writing policies and began an informal run-off.

The separate account and its rehabilitation

In 2010, Ambac created a segregated account for the purpose of isolating certain of its liabilities.  The segregated account holds many of the policies against which there are significant existing claims or the likelihood of significant claims.  Under Wisconsin insurance law, the segregated account is treated as a separate insurer from Ambac for purposes of rehabilitation.  The Wisconsin Office of the Commissioner of Insurance (OCI) filed this petition for a rehabilitation for the segregated account.
The OCI defines a “rehabilitation” as:

An action in which an insurance regulator takes control of an insurance provider and all aspects of its business.  Rehabilitation can be triggered when an insurance provider enters a hazardous financial condition that adversely impacts its claims-paying ability and puts policyholders at risk.

On January 24, 2011, a Wisconsin Circuit Court approved Ambac’s plan of rehabilitation.  The plan provides for the orderly run-off and/or settlement of the liabilities allocated to the segregated account.   Under the plan, holders of valid policy claims will receive a combination of cash payments and unsecured notes.

What does this have to do with California?

Earlier this year, Ambac requested an interpretive opinion from the Commissioner of Corporations concerning whether the rehabilitation constitutes a “sale” as defined in Corporations Code Section 25017.  Last month, the Commissioner responded favorably with this opinion.  The Commissioner relied on the exclusion in Section 25017(f)(3) for any transaction incident to a reorganization approved by a state or federal court in which securities are issued in exchange for one or more outstanding securities, claims, or property interests, or partly in that exchange and partly for cash.  To reach this conclusion, the Commissioner had to find that a “reorganization” includes a rehabilitation.  The Commissioner, however, emphasized that the reorganization exclusion should be interpreted narrowly.

Section 3(a)(10) No-Action Letter

Ambac also submitted this no-action request to the Securities and Exchange Commission with respect to the ability to rely upon the Section 3(a)(10) exemption under the Securities Act of 1933.  The staff issued this favorable response.

The Lawyer Surplus, State by State

By: CATHERINE RAMPELL11:35 a.m. | Updated to include more detail on and caveats for estimates for Wisconsin and Washington, D.C.

We’ve written before about the tough job market for recent law-school graduates. The climate is hard partly because of the weak economy, but also partly because the nation’s law schools are churning out many more lawyers than the economy needs even in the long run.

Now a few researchers have tried to quantify exactly how big that surplus is.

The numbers were crunched by Economic Modeling Specialists Inc. (also known as EMSI), a consulting company that focuses on employment data and economic analysis. The company’s calculations were based on the number of people who passed the bar exam in each state in 2009, versus an estimate of annual job openings for lawyers in those states. They also looked at data from the Department of Education on law school graduates each year to get another measure of the quantity of new lawyers. Estimates for the number of openings [are] based on data from the Bureau of Labor Statistics and the Census Bureau.

According to this model, every state but Wisconsin and Nebraska (plus Washington, D.C.) is producing many more lawyers than it needs. (See table after the jump for full data, and additional caveats.)

In fact, across the country, there were twice as many people who passed the bar in 2009 (53,508) as there were openings (26,239). A separate estimate for the number of lawyers produced in 2009 — the number of new law-school graduates, according to the National Center for Education Statistics — also showed a surplus, although it was not quite as large (44,159 new law grads compared with 26,239 openings).

In raw numbers, New York has the greatest legal surplus by far.

In 2009, 9,787 people passed the bar exam in the Empire State. The analysts estimated, though, that New York would need only 2,100 new lawyers each year through 2015. That means that if New York keeps minting new lawyers apace, it will continue having an annual surplus of 7,687 lawyers.

California and New Jersey have the next largest gluts of new lawyers, according to EMSI.

As noted above, not every state is overproducing lawyers. Nebraska appears to have a small deficit of lawyers. Wisconsin is also listed as having a deficit according to the number of people who passed the bar exam, but the bar-passers figure may not be a good metric (as noted by many readers in response to an earlier version of this post). Graduates of University of Wisconsin Law School and Marquette University Law School, in Milwaukee, do not have to take the bar exam in order to practice law, so there may be many new lawyers not counted in this figure. Note that the Education Department’s figures for the number of people who completed law school in Wisconsin is far higher, and would indicate that Wisconsin too has a surplus of new attorneys.

The place list with the biggest shortage is the District of Columbia, which is projected to have 618 new jobs opening annually for lawyers for the next few years, but had only 273 bar-passers in 2009. But as several readers observed in the comments, the District of Columbia waives in lawyers who are barred in other states, meaning that these figures probably underestimate the number of newly-minted lawyers in the nation’s capital. (If you know how to calculate a better estimate for this figure, please e-mail us.)

The District of Columbia has the highest median wage for lawyers in the country: $70.96 an hour.

	2010-15 Est. Annual Openings	2009 Bar Exam Passers	2009 Completers (IPEDS)	Surplus/Shortage	Median Wages
New York	2,100	9,787	4,771	7,687	$56.57
California	3,307	6,258	5,042	2,951	$50.61
New Jersey	844	3,037	787	2,193	$43.84
Illinois	1,394	3,073	2,166	1,679	$51.54
Massachusetts	715	2,165	2,520	1,450	$43.89
Pennsylvania	869	1,943	1,697	1,074	$46.05
Texas	2,155	3,052	2,402	897	$41.55
Florida	2,027	2,782	2,781	755	$36.39
Maryland	560	1,277	548	717	$41.46
Missouri	362	943	908	581	$39.96
Connecticut	316	880	510	564	$43.69
North Carolina	503	1,032	279	529	$37.79
Minnesota	378	888	948	510	$43.69
Ohio	686	1,194	1,513	508	$34.69
Georgia	779	1,217	894	438	$46.11
Colorado	547	967	509	420	$40.83
Virginia	956	1,375	1,435	419	$49.34
Louisiana	357	731	810	374	$33.35
Tennessee	389	735	446	346	$37.34
Washington	619	935	678	316	$37.37
Oregon	291	594	519	303	$34.51
Indiana	339	602	825	263	$32.48
South Carolina	262	506	410	244	$33.03
Kentucky	261	478	389	217	$34.39
Nevada	219	392	143	173	$40.32
Arizona	440	607	378	167	$37.51
New Mexico	134	298	114	164	$29.78
Michigan	862	1,024	1,993	162	$35.22
Kansas	190	351	296	161	$31.16
Alabama	295	455	406	160	$37.98
Iowa	155	290	556	135	$32.16
Rhode Island	102	209	184	107	$39.65
Hawaii	76	179	88	103	$33.70
Mississippi	173	268	335	95	$28.86
Utah	308	401	283	93	$37.04
W. Virginia	100	191	152	91	$32.51
Montana	81	163	83	82	$24.96
Maine	75	153	91	78	$29.70
Arkansas	152	227	243	75	$30.83
Wyoming	40	113	80	73	$29.86
New Hampshire	92	154	146	62	$30.84
Oklahoma	326	387	489	61	$29.56
South Dakota	38	83	73	45	$29.19
North Dakota	33	63	80	30	$28.78
Idaho	128	157	97	29	$30.77
Alaska	41	66	0	25	$37.80
Delaware	116	141	235	25	$60.67
Vermont	51	55	191	4	$30.48
Nebraska	112	109	279	-3	$32.47
Wisconsin	262	248	691	-14	$36.43
D.C.	618	273	2,109	-345	$70.96
Nation	26,239	53,508	44,159	27,269	$44.22

Why Investment Properties (Rentals) Should Be Placed In LLCs

Prepared By: Melissa C. Marsh, Los Angeles Real Estate Attorney

The California LLC is probably the least understood entity, but it’s the best entity to hold ownership to real estate investment property (rental property) because of the asset protection it provides and the beneficial tax treatment it offers over the corporation.

A California Limited Liability Company Provides Asset Protection.
As most landlords know, there is an inherent risk of liability with property ownership. Some of the risks are foreseeable and can be effectively insured against. Others cannot. Should an accident occur, you might lose not only the property itself, but all of your other personal assets as well. Although insurance can limit your potential exposure, why be exposed at all? The California limited liability company (LLC) offers its member-owners the same limited liability protection offered by the corporation. [California Corp. Code §17101(a)]. Even with adequate insurance coverage, if some negligent act results in severe injury to a tenant, worker, or guest, the resultant award may far exceed the insurance coverage. If the property is held in your personal name, the claimant will be able to attach your personal assets (including other properties, your home, bank accounts, vehicles, stock) to satisfy the judgment. By contrast, if the property is held in a California limited liability company, the LLC may be liable, and its assets subject to attachment by the judgment creditor, but the individual member's personal assets will remain protected.

In addition, a California LLC protects against claims by creditors of the members of the LLC. With a proper LLC Operating Agreement, the creditors of an individual member of the LLC cannot attach the assets owned by the LLC, nor can they step into the shoes of the member. At most, a judgment creditor will be able to place a lien on the distributions from the LLC to the member (if any).

Like a California corporation, a California LLC generally affords its owners with personal liability protection from lawsuits. But the assets within the LLC are not protected from such lawsuits, and creditors of the LLC typically can attach the LLC's assets. Accordingly, despite the additional tax burdens, you should consider placing each of your investment properties into their own separate California LLC.

A California Limited Liability Company Offers Many Tax Advantages.
A California Real Estate LLC can provide significant tax advantages, especially when compared to both a C-corporation and an S-corporation. Like a sole proprietorship or partnership, a California LLC enjoys pass-through taxation. This means that owners (known as "members") report their share of the income or losses on their individual tax returns. Because of the pass-through partnership tax treatment offered to the LLC, the LLC gets the best of both worlds: (1) the benefit of protection from personal liability; and (3) the tax benefit of being treated like a partnership, or sole proprietorship, as the case will be.

A Single-Owner LLC offers an additional unique benefit. Unless the owner of the LLC specifically elects to do otherwise, the IRS will automatically classify a single-owner LLC as a sole proprietor. The owner of the LLC reports the LLC's profits or losses on Schedule C of their personal tax return (usually Form 1040).
In California, spouses who own LLC interests as community property, file joint returns, and are the only members of the LLC, can choose whether the LLC will be treated as a partnership, or as a disregarded entity for income tax purposes (Rev. Proc. 2002-69). If the spouses opt to treat the LLC as a disregarded LLC, it makes it simple to complete a Section 1031 exchanges, as there is no risk that the real estate interests will be reclassified as partnership interests.

A traditional C-corporation is subject to double tax, both at the corporate level and at the personal level. When a C-corporation transfers or sells appreciated real property, the profit (gain) subjects the corporation to a capital gains tax at the corporate rate. Once the capital gains tax had been deducted, the remaining profits if distributed to the corporation's shareholders in the form of dividends, would again be taxed at the capital gains tax rate for individuals (10% to 15%). This is commonly referred to as "double taxation."
Although the S-corporation is similar to a California LLC as far as eliminating the "double taxation" issue, it has other negative tax treatments problems when real estate is involved. If the shareholders of an S- Corporation want to transfer a property held or owned by an S- corporation to another entity, or sell the property in exchange for another property to be held by the S-corporation, the sale or transfer would immediately trigger the 15% capital gains tax on the fair market value of the property minus its original cost. In addition, any losses that may have been realized by the sale are limited to the shareholder’s basis in the S- corporation. And worse, the S- Corporation cannot take advantage of the 1031 Exchange tax treatment. For example, if an S-corporation desires to transfer a property to say a partnership or a LLC so it can be developed, the shareholders of the S-corporation will have to pay income tax on the profit from the alleged sale. By contrast, the transfer or trade of property held by an LLC would be free of such income tax and can result in a tax-free transaction if done properly.

While every California LLC and California corporation must pay the $800 annual franchise tax, most California real estate holding LLCs that hold a single investment property can avoid the gross receipts tax, which does not apply unless the limited liability company's gross receipts equal or exceed $250,000.
The one major negative to the California LLC, which is why a personal home residence should never be placed in a California LLC, is the loss of the federal capital gain exclusion of $250,000 ($500,000 if you are married) on the sale of a personal residence. Pursuant to the 1997 Taxpayer Relief Act, homeowners can lock in a profit of up to $250,000 ($500,000 if married) and owe nothing to the IRS as long as the taxpayer lived in the home as a personal residence for at least 2 of the past 5 years.

Estate Planning Benefits offered by the California Limited Liability Company.
A California LLC also offer unique estate planning benefits for parents wishing to pass ownership of their property to their child(ren). One benefit is the ease of transfer of ownership. The ownership of real estate held by an LLC is represented proportionately by the member's shares in the LLC. Rather than filing a new deed, members can transfer ownership of the property to their children by simply increasing their membership percentage in the LLC.

Best of all, current tax laws allow a tax-free gift of up to $12,000 per year and because the interest transferred from a parent to the child(ren) would be unmarketable minority interests, the IRS will permit up to a 40% valuation discount on the fair market value of the real estate being transferred. In essence, the parents can continue to have control over the property as long as they are the managers of the LLC, and their child(ren) remain merely members of the LLC with a minority interest in the LLC (and in turn the real estate it holds).

For example, let's assume a parent owns a California real estate holding LLC. And let's further assume that the parent has decided to transfer some, or all, of his interest in that real estate holding LLC (and in turn the property) to his two children on a tax-favored basis. Using the annual gift tax exclusion ($12,000 per recipient in 2008), the parent can make annual gifts of interests in the California real estate holding LLC to each of his two children with no transfer tax cost. So the question now becomes, how much of an interest can the parent transfer? Assume the property held by the California LLC is worth $1 million dollars. Applying a valuation discount of 40%, the parent can make a tax-free transfer of $12,000 worth of the property to each child -- which actually represents $20,000 each, or two percent (2%). While you may not be able to transfer the whole of your interest via tax-free gifts, you can significant reduce the size of your estate.

Consider Forming a California Corporation to Manage Your Properties.
If you plan to own, or do own, a very large building with multiple tenants, or multiple rental properties, you should consider setting up a corporation to manage your properties. This will keep your paperwork to a minimum and hopefully substantially reduce the possibility of co-mingling your funds between multiple real estate holding LLCs. For all of the properties you have placed in an LLC, a single corporation can keep the books, pay the bills, arrange for repairs and maintenance, sign leases, etc.

Conclusion.
With the benefits of asset protection, tax savings and estate planning aids, the California real estate holding LLC has become the preferred entity for holding individual investment properties. The LLC offers the prized limited liability protection afforded to the corporation, but without the negative tax implications. Before embarking on the formation of a real estate holding LLC, however, you would be wise to speak with an attorney in your local area to discuss the laws in your state, and your particular needs and circumstances.

If you would like to retain the services of Melissa C. Marsh to form and organize a California LLC, please call 818-849-5206.

IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained on this web site is not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed on a taxpayer under the U.S. Internal Revenue Service.

 
© 2005 Melissa C. Marsh. All Rights Reserved.

Federal jobless tax for employers expiring quietly

By STEPHEN OHLEMACHER, Associated Press

Nearly every private employer in the U.S. will get a tax cut on Friday.

It won't affect workers' paychecks. But the expiration of a 35-year-old "temporary" unemployment tax — about $14 a year per worker — will mean real money for some big companies at a time when President Barack Obama is pushing Congress to raise taxes on businesses by closing some loopholes.

Amid a fierce debate over whether higher taxes should be part of a deal to reduce annual deficits — in exchange for letting the government go further into debt — the small cut in federal unemployment taxes has received little attention on Capitol Hill. Most employers probably don't even know they are getting it, especially those who are being hit with bigger increases in state jobless taxes.

But business groups say every little bit helps, whether you're a small employer struggling to make a payroll or a huge company like Wal-Mart, with more than 1.4 million U.S. workers. That's nearly $20 million a year in savings for Wal-Mart.

Some worry that reducing federal unemployment taxes while the jobless rate hovers above 9 percent will add to the system's financial problems. But the tax cut will save businesses nationwide more than $14 billion over the next decade, according to congressional estimates.

"The death of any tax on jobs, no matter how big or small, is a historic moment and one to be celebrated," said Rep. Dave Camp, R-Mich., chairman of the tax-writing House Ways and Means Committee. "The fact that it has taken 35 years for this 'temporary' tax to expire clearly illustrates the dangers of higher taxes — once in place, they are unlikely to ever go away."

The expiring levy was a 0.2 percent surtax on the first $7,000 of a worker's wages. Getting rid of it effectively lowers the federal unemployment tax from 0.8 percent to 0.6 percent for most employers. That's a decrease from $56 a worker to $42 a worker each year — a 25 percent cut.

The tax is paid by nearly all private employers, who also must pay state unemployment taxes. Some services performed by employees of religious or charitable organizations are not subject to federal unemployment taxes. Other workers who are paid by commission also are exempt.

The surtax was first imposed in 1976 to help pay for federal unemployment benefits distributed in the 1970s. The tax was supposed to be temporary, but like a lot of short-term measures in Washington, it endured and was extended at least eight times, under both Republican and Democratic presidents.

President George W. Bush proposed extending it in his 2009 budget, and Obama proposed making it permanent in the 2012 budget he released in February. Both presidents said the additional tax was necessary to help sustain federal unemployment trust funds. But Obama's proposal has been largely ignored by Congress.

"Payroll taxes are always a big problem for small businesses because they are not based on the profitability of the business, like most taxes are," said Bill Rys, tax counsel for the National Federation of Independent Business. "Especially right now, when we have small businesses still really struggling to work their way out of this recession, every little bit has an impact on their bottom line."

The federal unemployment trust funds were drained by the recession in 2008, and federal jobless benefits are currently paid from general fund revenues, adding to the budget deficit.

George Wentworth, senior staff attorney at the National Employment Law Project, said letting the tax expire now is going to make it harder to replenish federal unemployment trust funds.

"For 35 years, that additional 0.2 percent has been critical to stabilizing the system, and certainly there's probably never been a time when the system had a greater need for that," Wentworth said.

The tax cut comes as Obama and GOP leaders are trying to negotiate a deficit reduction package. As part of the package, Obama wants about $400 billion in tax increases paired with more than $1 trillion in spending cuts. Republicans are balking at the tax increases.

At the same time, Obama wants to extend a temporary Social Security payroll tax cut that Congress passed for 2011. The Social Security tax cut, totaling $112 billion a year, goes to workers, while the unemployment tax cut goes to employers.

Employers pay federal unemployment taxes on top of state jobless taxes, which are generally much higher and have been increasing as states cope with high unemployment. State jobless taxes are based in part on rating systems for employers that take into account their recent history of laying off workers. More layoffs mean higher taxes.

In general, state taxes cover unemployment benefits and federal taxes pay to administer the program and provide loans to states when they run out of unemployment funds. Federal taxes also help pay for the federal extension of benefits when unemployment is high.

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