IRS proposes regulations on substantial risk of forfeiture

• Bryan Cave LLP
• Richard L. Arenburg and Christopher J. Rylands
• USA
• June 11 2012
• 
  

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The IRS has released proposed regulations under Section 83 of the Internal Revenue Code to refine the concept of what constitutes a substantial risk of forfeiture for the purpose of narrowing the scope of the concept.
The proposed regulations are in response to case law, tracing back as far as 1986, which the IRS claims has created confusion over the appropriate elements of what may constitute a substantial risk of forfeiture.
In the proposed regulations, the IRS clarifies that a substantial risk of forfeiture may be established only through (1) a service condition or (2) a condition related to the purpose of the transfer, such as a performance condition relating to the services provided by a service provider. In addition, the proposed regulations further clarify that in determining whether a substantial forfeiture exists based on a condition is related to the purpose of the transfer, both the likelihood that the forfeiture event will occur and the likelihood that the forfeiture will be enforced must be considered.
The IRS emphasizes in the proposed regulations that transfer restrictions do not create a substantial risk of forfeiture, such as lock-up agreements or restrictions related to insider trading. However, the IRS acknowledges that the statutory exception related to potential short-swing profits liability under Section 16(b) of the Securities Exchange Act does delay taxation under Section 83.
The IRS appears to be laying the groundwork for the anticipated issuance of new regulations under Section 457 of the Internal Revenue Code, which incorporates the same concept of a substantial risk of forfeiture. While we are not aware of any statements by IRS officials to that effect, it is one possible explanation why the IRS did not address an issue from 1986 until now.
The proposed regulations, if finalized, will apply to transfers of property occurring on and after January 1, 2013 

California court rejects higher tax on 'alcopops'

By Dan Walters
dwalters@sacbee.com

Published: Thursday, May. 3, 2012 - 12:00 am | Page 4A

Last Modified: Thursday, May. 3, 2012 - 8:25 am

The California Board of Equalization overstepped five years ago when it voted to tax flavored malt beverages, known popularly as "alcopops," as hard liquor instead of beer, a state appellate court has ruled.

The Sacramento-based 3rd District Court of Appeal, in a decision released Monday, described the bottled drinks, such as Mike's Hard Lemonade and Smirnoff Ice, as "hybrids" of beer and distilled spirits but based its decision on a state agency's classification of them as beer.

The difference in taxation is immense. California taxes beer at 20 cents a gallon but hard liquor at $3.30 per gallon.

If California taxpayers paid up, state's deficit would disappear

If California taxpayers paid up, state's deficit would disappear

By Kevin Yamamura
kyamamura@sacbee.com

 

Published: Saturday, Apr. 7, 2012 - 12:00 am | Page 1A 

Last Modified: Sunday, Apr. 8, 2012 - 12:46 pm

As Californians put the finishing touches on their income tax returns, tax collectors say the state's $9.2 billion deficit would drop to zero if all taxpayers submitted what they owe.

That means every resident claiming the market value of tattered jackets donated to charity. Every business reporting every dollar of income they receive even when paid in cash. Every service worker reporting every tip. And every resident paying use tax on Internet purchases.

But full compliance does not occur. 

In a new estimate, the Franchise Tax Board says that $10 billion in state income taxes go unpaid each year, often when workers receive payments under the table, businesses skirt reporting requirements or people take deductions for which they do not qualify. The state Board of Equalization says an additional $2.3 billion in sales and use taxes go unpaid.

"It's our way of investing in society for the various benefits we receive," said Jerome Horton, who helps oversee the state's two major tax agencies as chairman of the Board of Equalization and board member at the Franchise Tax Board. "When we find folks aren't, it places an unfair burden on everyone else playing by the rules."

Dennis J. Ventry, a tax law professor at the UC Davis School of Law, said that as much as tax agencies like to call the system voluntary because people file their own returns, he doesn't consider it so.

According to a 2005 Legislative Analyst's Office report, taxpayers report about 99 percent of their wage income as employers withhold taxes and document income on W-2 forms. But when people self-report their income streams, compliance dips below 70 percent.

"If you ask me what keeps people in compliance, it is the withholding regime and the reporting regime," Ventry said.

The state's $10 billion income tax gap and $2.3 billion sales and use tax gap total 13 percent of the state's 2010-11 general fund budget, the year for which they were estimated.

The Franchise Tax Board, which oversees income tax collection, does not have precise statistics on the state gap. The board points to a recent Internal Revenue Service study upon which the state's findings are based.

The federal study of the 2006 tax year found the IRS received 83.1 percent of taxes through voluntary compliance and 85.5 percent after accounting for people who paid late or after being audited.

The bulk of the $450 billion federal tax gap came from underreporting, a broad category that ranges from hiding income to abusing deductions to not paying self-employment tax. The rest of the gap: people who didn't file at all or paid less than they owed.

Estimates of the tax gap come largely from studying audit data on compliance and applying statistical techniques to determine how much businesses and individuals fail to pay their full share.

Horton believes the gap is significantly larger, because the estimates do not consider income from illegal activities such as selling drugs or counterfeit goods.

To Ventry's point, the analyst's report suggests that the less "visible" a payment is, the less people comply.

"This is clearly the case in cash transactions, as well as in other areas where there is a lack of adequate independent reporting requirements," the report notes. "For example, when businesses do not accurately report payments to subcontractors, tax agencies have no way in which to verify the income."

The state tax board routinely reports on cases in which Californians are caught cheating on their taxes. In 2008, a couple who ran two El Dorado County painting companies failed to report more than $547,000 in taxable income. The couple faced jail time, community service and probation in addition to having to pay back taxes and penalties.

A Brentwood couple who owned seven sandwich shops and a newspaper distribution business last year pleaded no contest to tax evasion. They did not file tax returns for four years and hid more than $800,000 in income, partly by opening a bank account with false Social Security numbers.

The tax board has the advantage of piggybacking on IRS efforts to find income tax cheats. But the state is also trying to conduct more of its own data-sifting to detect where California taxpayers are not reporting income.

One instance is a pilot program started in 2008 that flags people who register vehicles worth at least $25,000 with the Department of Motor Vehicles but fail to pay income taxes. The DMV forwards car registration data to the board, which then cross-checks the list against its own records.

Some of those flagged never filed tax returns, while others owe back taxes. Since 2008, the state has collected nearly $37.9 million through the enforcement program.

"It's an indicator that someone is in the state and may have the means through some other sources to pay their tax debt," said FTB spokeswoman Denise Azimi.

Horton is pushing Senate Bill 1185 with Sen. Curren Price, D-Los Angeles, to create a "Centralized Intelligence Partnership" that would coordinate data across state agencies to flag tax evaders and people selling illegal goods and services. It would incorporate data from agencies ranging from the DMV to the Department of Consumer Affairs.

To increase tax compliance and reduce deficits, lawmakers have offered proposals in the past that would have required businesses to withhold taxes on payments to independent contractors. None passed.

In 2009, former Gov. Arnold Schwarzenegger vetoed a budget plan that would have raised an estimated $300 million annually. Business groups said it would have been too burdensome.

"Businesses would have had to spend time, labor and a lot of money to implement withholding systems and comply with some very complex tax laws," said David Kline of the California Taxpayers Association. "Other companies operating out of the state would not have faced the same costs, so it would have been one more example of making it difficult to do business for a California company."

For years, Democrats have tried to force Amazon and other online retailers to collect sales tax from California shoppers. A Board of Equalization report last year showed that only 0.42 percent of taxpayers paid use tax on their personal income tax forms, though others may have paid elsewhere.

In a deal last year with Amazon, lawmakers agreed to delay a new law requiring online sales tax collection until September 2012. Amazon is expected to collect sales tax on California purchases at that time, and the company is believed to be working on a 1,500-employee distribution center in western Stanislaus County.

"Last chance" estate planning may end soon

• Jeffer Mangels Butler & Mitchell LLP
• Scott A. Harshman
• USA
• February 13 2012
• 

This article was first published in the Orange County Business Journal, February 13, 2012   
Much has been written about the perfect storm of estate planning: the coincidence of low values, low interest rates, valuation discounts and the $5 million ($10 million for a married couple) gift and estate tax exemption. Unfortunately, the $5 million gift and estate tax exemption ends (reverting to $1 million) after December 31, 2012. Values of certain assets are increasing. However, most importantly, valuation discounts may be severely restricted at any time by IRS regulations. Thus, the best opportunities may close well before December 31, 2012. Don't wait for this "last chance" at once-in-a-generation estate planning.

Over the last three years of economic crisis and unfunded legislative spending, extraordinary deficits have been created and will continue for years to come. Congress and the Administration continue to examine all available means for raising new tax revenue, including additional gift and estate tax revenue. The Administration's revenue raising proposals for the last three budgets, include: (1) disregarding valuation discounts applicable to certain restrictions on transfer of interests in family-controlled entities; and (2) limiting grantor retained annuity trusts to a minimum 10-year term. In addition, the IRS has for several years maintained that it has the authority to restrict or eliminate valuation discounts by regulation. Several political and legal factors suggest that such regulations could be issued at any time, effective on the date of publication, without an opportunity for notice and comment. President Obama has promulgated the "We Can't Wait" doctrine to justify extensive regulatory actions and bypass Congress. If there is political concern regarding the potential outcome of the 2012 elections, there is strong incentive to implement more "can't wait" regulations, including eliminating family valuation discounts.

Many traditional planning techniques employ valuation discounts to enhance the transfer of wealth to heirs with little or no gift or estate tax consequences. For example, a Grantor Retained Annuity Trust ("GRAT") allows a person to transfer assets to a trust in exchange for payment from the trust of a yearly amount that includes an interest factor set by the IRS, which is 1.4% for February 2012. Valuation discounts effectively lower the required annual payment, thus increasing the amount that passes to the beneficiaries when the GRAT ends. This has been a favorite wealth transfer technique of the rich and famous, including the Gates, Buffet and Walton families, and numerous Google millionaires.

Elimination of family valuation discounts would impact many other conventional planning techniques. One is a sale to an intentionally defective grantor trust ("sale to a DGT"). A sale to a DGT has several advantages over a GRAT. Another technique that would be impacted is a transfer to a charitable lead annuity trust ("CLAT"). The CLAT is a Trust to which the grantor transfers assets and the Trust pays a yearly amount to a charity for a period of years, after which any remaining trust assets pass to the grantor's children or other beneficiaries. The annuity payment is a fixed percentage of the initial value of the assets transferred to the CLAT, including valuation discounts. The value of the gift to the remainder beneficiaries is measured by the initial discounted value of assets, value of the annuity payments, and term. There are many nuances applicable in considering these and other planning techniques that should be reviewed with a qualified estate planning professional.

Finally, the grand revenue raiser - rates and exemptions. No one would have predicted that 2010 would be the year with no estate tax or that the gift and estate tax exemptions would increase to $5 million with a maximum estate and gift tax rate of 35% in 2011 and 2012. Now, the specter of huge 2013 estate and gift tax increases looms. This window of opportunity, combined with the possible loss of valuation discounts, should create some urgency for those desiring to transfer wealth to children and grandchildren. Advisors and clients should act now.

Former Lynwood District Chief Business Officer Arrested on Misappropriation of Public Funds, State Income Tax Charges

Former Lynwood District Chief Business Officer Arrested on Misappropriation of Public Funds, State Income Tax Charges

FTB 02.17.2012

Sacramento –A Santa Ana man was arrested on numerous counts of misappropriation of public funds, embezzlement, enhancements for excessive taking, state income tax fraud and state income tax evasion, the Franchise Tax Board (FTB) announced.

William D. Agopian, 60, was employed by the Lynwood Unified School District as its Chief Business Officer. According to FTB investigators, Agopian allegedly failed to report the more than $600,000 he defrauded from the school district in 2006 – 2010. Agopian allegedly used funds deposited into a school bank account opened for a District sponsored student exchange trip for his own benefit. The scheme was discovered when the school district hired an individual to review its books.

As a result, he owes the state more than $60,000 in personal income tax. Penalties, interest, and the cost of the investigation will be added to this amount and sought as restitution.

Agopian was booked into the Los Angeles County Main Jail on Wednesday. His bail is set at $700,000 and his arraignment is scheduled for February 17 in Department 30 of the Folz Criminal Justice Center.   

This is a joint investigation between the Los Angeles County District Attorney’s Office and FTB.

FTB’s criminal investigation program identifies and investigates cases of tax evasion and tax fraud to encourage compliance with California income tax laws and maintain the public trust.

The charges and allegations contained in the criminal complaint are merely allegations, and the defendant is presumed innocent unless and until proven guilty.

FTC Announces Revised Thresholds for HSR

For Your Information: 01/24/2012

FTC Announces Revised Thresholds for Clayton Act Antitrust Reviews

The Federal Trade Commission announced it has revised the thresholds that determine whether companies are required to notify federal antitrust authorities about a transaction under the Hart-Scott-Rodino Antitrust Improvements Act. These filing thresholds are required to be adjusted annually to keep pace with inflation, unlike the pre-merger filing fees, which have not changed in more than a decade.
The HSR Act requires companies to notify authorities if – among other things – the value of a transaction exceeds the filing thresholds. The FTC is required to revise those thresholds annually, based on the change in gross national product. For 2012, the threshold for reporting proposed mergers and acquisitions subject to enforcement under Section 7 of the Clayton Act increased from $66.0 million to $68.2 million.
The FTC also announced revisions to the thresholds that trigger a prohibition preventing companies from having interlocking memberships on their corporate boards of directors under Section 8 of the Clayton Act. The Act requires that the Commission revise those thresholds annually, based on the change in the level of gross national product. The new thresholds for the Act's prohibition on interlocking directorates are $27,784,000 for Section 8(a)(1) and $2,778,400 for Section 8(a)(2)(A).
In the case of each type of threshold, the vote to approve Federal Register notices announcing the revisions was 4-0. The revised thresholds under Section 7A will apply to all transactions that close on or after the effective date of the notice, which is 30 days after its publication in the Federal Register. The thresholds for Section 8 will become effective upon publication in the Federal Register. (FTC File No. P859910; the staff contact for Section 7 is Michael Verne, Bureau of Competition, 202-326-3100; the staff contact for Section 8 is James F. Mongoven, Bureau of Competition, 202-326-2879.)
The FTC's Bureau of Competition works with the Bureau of Economics to investigate alleged anticompetitive business practices and, when appropriate, recommends that the Commission take law enforcement action. To inform the Bureau about particular business practices, call 202-326-3300, send an e-mail to antitrust@ftc.gov, or write to the Office of Policy and Coordination, Bureau of Competition, Federal Trade Commission, 601 New Jersey Ave., Room 7117, Washington, DC 20580. To learn more about the Bureau of Competition, read Competition Counts. Like the FTC on Facebook and follow us on Twitter.

IRS Offshore Programs Produce $4.4 Billion To Date for Nation’s Taxpayers; Offshore Voluntary Disclosure Program Reopens

IR-2012-5, Jan. 9, 2012 WASHINGTON — The Internal Revenue Service today reopened the offshore voluntary disclosure program to help people hiding offshore accounts get current with their taxes and announced the collection of more than $4.4 billion so far from the two previous international programs. The IRS reopened the Offshore Voluntary Disclosure Program (OVDP) following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. The third offshore program comes as the IRS continues working on a wide range of international tax issues and follows ongoing efforts with the Justice Department to pursue criminal prosecution of international tax evasion.  This program will be open for an indefinite period until otherwise announced. “Our focus on offshore tax evasion continues to produce strong, substantial results for the nation’s taxpayers,” said IRS Commissioner Doug Shulman. “We have billions of dollars in hand from our previous efforts, and we have more people wanting to come in and get right with the government. This new program makes good sense for taxpayers still hiding assets overseas and for the nation’s tax system.” The program is similar to the 2011 program in many ways, but with a few key differences. Unlike last year, there is no set deadline for people to apply.  However, the terms of the program could change at any time going forward.  For example, the IRS may increase penalties in the program for all or some taxpayers or defined classes of taxpayers – or decide to end the program entirely at any point. “As we’ve said all along, people need to come in and get right with us before we find you,” Shulman said. “We are following more leads and the risk for people who do not come in continues to increase.” The third offshore effort comes as Shulman also announced today the IRS has collected $3.4 billion so far from people who participated in the 2009 offshore program, reflecting closures of about 95 percent of the cases from the 2009 program. On top of that, the IRS has collected an additional $1 billion from up front payments required under the 2011 program.  That number will grow as the IRS processes the 2011 cases. In all, the IRS has seen 33,000 voluntary disclosures from the 2009 and 2011 offshore initiatives. Since the 2011 program closed last September, hundreds of taxpayers have come forward to make voluntary disclosures.  Those who have come in since the 2011 program closed last year will be able to be treated under the provisions of the new OVDP program. The overall penalty structure for the new program is the same for 2011, except for taxpayers in the highest penalty category. For the new program, the penalty framework requires individuals to pay a penalty of 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to the disclosure. That is up from 25 percent in the 2011 program. Some taxpayers will be eligible for 5 or 12.5 percent penalties; these remain the same in the new program as in 2011. Participants must file all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties. Participants face a 27.5 percent penalty, but taxpayers in limited situations can qualify for a 5 percent penalty. Smaller offshore accounts will face a 12.5 percent penalty. People whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the new OVDP will qualify for this lower rate. As under the prior programs, taxpayers who feel that the penalty is disproportionate may opt instead to be examined. The IRS recognizes that its success in offshore enforcement and in the disclosure programs has raised awareness related to tax filing obligations.  This includes awareness by dual citizens and others who may be delinquent in filing, but owe no U.S. tax.  The IRS is currently developing procedures by which these taxpayers may come into compliance with U.S. tax law. The IRS is also committed to educating all taxpayers so that they understand their U.S. tax responsibilities. More details will be available within the next month on IRS.gov. In addition, the IRS will be updating key Frequently Asked Questions and providing additional specifics on the offshore program.