The IRS recently issued guidance that allows certain estates to make a late portability election if they did not make a timely election. (Rev. Proc. 2017-34). For the purposes of Federal estate (and gift) tax purposes, a portability election allows a decedent’s unused exclusion amount (Deceased Spousal Unused Exclusion (DSUE) amount) to be available for the surviving spouse’s subsequent transfers at death or during lifetime on gifts.
The portability election applies to the estates of decedent’s dying after December 31, 2010, if such decedent is survived by a spouse. Under §2010(c)(5)(A), a portability election is only effective if made on a timely filed estate tax return including extensions.
The IRS has previously provided a simplified method for obtaining an extension of time to make a portability election if the estate was not required to file an estate return (generally under the $5M gross estate filing threshold) and the decedent was survived by a spouse. However, this method was only available on or before December 31, 2014. Since then, the only way to file for a late portability election has been to submit a ruling request under Regs. Sec. 301.9100.3. Such ruling requests are very expensive and time consuming for taxpayers; and, the IRS has been overwhelmed with requests.
To provide further relief for taxpayers and to reduce the burden on the IRS, Rev. Proc. 2017-34 provides another simplified method to obtain an extension to make the portability election no later than January 2, 2018, or the second anniversary of the decedent’s death. A ruling request is no longer required and there is no user fee for submissions for relief under this procedure. Estates that are otherwise required to file an estate tax return (gross estates over the filing threshold) are not eligible for this relief.
A taxpayer seeking relief after January 2, 2018, or the second anniversary of the decedent’s death will have to request a letter ruling in accordance with the requirements of §301.9100-3 and Rev. Proc 2017-1 (or any successor).
To qualify for the simplified late election, the executor must file a complete and properly prepared Form 706, United States Estate Tax Return, on or before the later of January 2, 2018, or the second anniversary of the decedent’s date of death. Also, the executor must state at the top of the Form 706 that the return is “FILED PURSUANT TO REV. PROC. 2017-34 TO ELECT PORTABILITY UNDER §2010(c)(5)(A).”
For questions or assistance with your individual tax situation, please contact Emily Nathlich at ENathlich@aronsonllc.com, Michael Yuen at MYuen@aronsonllc.com; or, Richard Lee at RLee@aronsonllc.com.
Aronson has noticed that the current negotiation trend for large public companies and/or private equity strategic buyers, those who generally make-up the majority of the buyer pool for government contractors seeking exiting, is to not compensate the selling party for the incremental tax to be incurred upon transacting an asset sale form transaction versus straight stock sale.
The buyer party representatives controlling the negotiation will generally assert that the incremental tax burden to be incurred by the selling party for agreeing to an asset sale tax reporting treatment has already been considered in arriving at the selling price offering. Accordingly, it is vital for the selling party before commencing the negotiation phase to independently quantify the true incremental tax on an asset sale scenario, which could be more complicated than simply looking at the deferred taxes from the use of permissible tax accounting method.
For example, if your business that is taxed as a flow-through entity that is not subject to entity level taxation for federal and conforming states happens to be headquartered in Virginia, but a substantial amount of business is conducted within Washington, DC; you potentially on an asset sale tax election transaction have material incremental tax exposure from the gain that will be subject to double taxation of approximately 10%. Why? Because of the Washington, DC entity level imposed franchise tax of 9.975%, with no offsetting credit in your resident state of Virginia. Another example would be if one of the selling shareholders happens to be a bona fide resident of a state with no income taxes such as Florida, Texas, Washington State, etc., in such instance, there is clearly an incremental tax burden to be incurred by that particular selling shareholder on an asset sale involving a flow-through selling entity.
There is a sequence of tax planning techniques that could be incorporated into the final deal to mitigate and/or lessen the whipsaw effects from the described incremental tax scenarios. If you are interested in discussing how to effectively structure the sale of your business, please contact Jorge Rodriguez at 301.222.8220 or email me at email@example.com.
The IRS is stepping up enforcement and collection of unpaid employment taxes. The federal government derives approximately 70% of its revenues from employment taxes: FICA, Medicare, and income tax withholdings from wages. These withholdings are referred to as trust fund taxes, because the business is holding the funds in trust for the government until timely remitted. While the business is primarily responsible for collecting and remitting these taxes, the Internal Revenue Code (IRC) adds teeth via IRC 6672 and IRC 7202.
IRC 6672 imposes a penalty equal to 100% of the unpaid trust fund taxes against any person who is determined to be both willful and responsible. This effectively prevents anyone from standing behind a corporate, LLC, or any other type of shield for protection against assessment.
IRC 7202 adds that any person who fails to pay the trust fund taxes is guilty of a felony; and, if convicted, will be fined up to $10,000 or sent to jail for up to 5 years.
A responsible person is anyone who has the authority, whether that person exercises it or not, to pay the trust fund taxes, or direct others to pay them. Typically, officers and those with check signing authority are deemed to be responsible unless they can prove otherwise.
A willful person is a responsible person who knows, or should know; a tax liability exists but nonetheless does not act to pay over the taxes. A business owner is expected to exercise due care. Furthermore, claiming “I didn’t know” is not a valid defense in all but the most unusual of circumstances.
Because of the seriousness that the IRS ascribes to the nonpayment of trust fund taxes, all business owners and anyone working for a business in a discretionary capacity must be cognizant of these rules, take steps to routinely verify that there are no delinquent taxes, and swiftly act if a problem is discovered.
For further information about this matter, or to discuss your specific situation, please contact Aronson’s Larry Rubin, CPA, at 301.222.8212.