Tax Law Insights

Congress enacted the Opportunity Zone (“OZ”) investment incentives in late 2017 as part of the Tax Cuts and Jobs Act.  Since then many investors, fund managers, and community development professionals have devoted significant time and resources to locating and underwriting investment opportunities.  The legislation left many unanswered questions – largely limiting investments to obvious qualifying businesses.  The first set of proposed regulations, released October 29, 2018, provided further guidance but not enough to answer many remaining questions.

The 50% Gross ...

After months of eager anticipation, today the Department of the Treasury released regulations defining and refining certain requirements set forth in the "Opportunity Zone" law.

While the Opportunity Zone statute provided a framework for tax-deferred investments, most projects have been on hold pending the regulatory framework. The regulations released today answer many questions, while others remain unaddressed. According to today's release, more guidance will be forthcoming by the end of the year.

Some highlights of the proposed regulations include:

Substantial ...

Qualified Opportunity Zones were included as part of the Tax Cuts and Jobs Act which became law in December 2017. The zones were originally introduced as the Investing in Opportunity Act sponsored by South Carolina Senator Tim Scott and are meant to encourage investment in economically distressed communities.

Opportunity Zones have generated a lot of interest and even more questions. This alert attempts to answer the most frequently asked questions we are hearing from clients.

1. What is the opportunity?

The opportunity is for investors with long-term capital gains to defer paying ...

UPDATE: In Notice 2018-18, published March 1, 2018, the IRS announced its intention to issue regulations clarifying that S corporations will be subject to the extended carried interest holding period.

Prior to the passage of the Tax Cuts and Jobs Act (the "Act"), one of the more controversial and hotly-debated tax benefits was the so-called "carried interest," which allowed certain fund managers and venture capital firms to pay income taxes on what would typically be considered ordinary income at favored long-term capital gains rates. Both Presidential candidates took aim at the ...

In June of 2016, the Internal Revenue Service (IRS) changed its procedure for granting discharges of estate tax liens and implemented centralized handling of applications for discharge. Historically, Specialty Examination Estate & Gift and Specialty Collection Advisory (Advisory) shared the responsibility for processing applications for discharge of the estate tax lien, depending on the circumstances. In June 2016, the responsibility for working all applications for discharge of the estate tax lien was transferred to Advisory and centralized in the Estate Tax Lien Group ...

In Notice 2017-10, the IRS has determined that certain conservation easements are now "listed transactions" for purposes of federal tax reporting. "Syndicated" conservation easements are conservation easements donated by a pass-through entity (such as an LLC or partnership) interests in which have been sold, or syndicated, by a promoter to outside investors. Because the charitable deductions generated by conservation easements themselves cannot be sold, promoters circumvent this by selling interests in the underlying donor LLC or partnership entity and then passing the ...

Partnerships and LLCs are common choices of entity for family-owned businesses, due to their flexibility and the many uses to which they can be put - including pooling of family assets, succession planning, asset protection, and confidentiality of ownership.

The transfer of partnership and LLC interests among family members is subject to gift and estate tax based on the fair market value of the interests. Valuation discounts are typically applied to reduce the value (and thus the tax cost) of the transferred interests because of various restrictions imposed on the interests that ...

The "hobby loss" rules of Internal Revenue Code Section 183 are commonly overlooked limitations that restrict the amount of loss a taxpayer may claim from an "activity not engaged in for profit" - i.e., a hobby. The definition of these activities is framed in the negative; a hobby is any activity other than those for which losses are allowed under Section 162 (ordinary and necessary business expenses) and Section 212 (investment expenses).

Generally, Sections 162 and 212 business and investment expenses can not only offset the income generated by those activities, but net losses over ...

Internal Revenue Code Sec. 1411, passed by Congress in 2012, introduced a new tax on passive income that went into effect on Jan. 1, 2013, the tax on "net investment income" (NII).

The new tax was created to help pay for health care reforms that were enacted in 2010. The rate is 3.8% of the lower of net investment income or the amount of modified adjusted gross income (MAGI) over specific thresholds. Modified adjusted gross income is adjusted gross income increased by the foreign earned income exclusion (but also adjusted for certain deductions related to the foreign earned income). For ...

Individuals and businesses seeking to sell trade or investment property may have taxable capital gains or other income from the sale. Section 1031 of the Internal Revenue Code provides an opportunity to instead exchange this property for other property of a "like kind", and to defer, postpone, or even exclude altogether (at death) this tax.

Like all tax rules, Section 1031 contains important definitions and terms, which must be considered in understanding how this tax mechanism works.

3 Property Rule - An Exchangor may identify as Replacement Property like-kind property of any ...

Writing for an 8-0 majority, with Justice Kagan abstaining, Justice Anthony Kennedy handed down the Supreme Court's ruling in the closely-watched United States v. Quality Stores, Inc., et al. case March 25, holding that severance payments to involuntarily terminated employees are taxable wages under the Federal Insurance Contributions Act (FICA), and thus subject to Social Security and Medicare withholding. The Court took issue with a Sixth Circuit opinion which had found such payments not subject to withholding, stating that "[t]o reach its holding, the [Sixth Circuit] Court ...

In a recent private letter ruling, PLR 201405005, the IRS validated a succession plan implemented by a Subchapter S corporation to transition share ownership from retiring co-owners to certain key employees. An S corporation is a small business corporation which has made an election to be taxed under Subchapter S of the Internal Revenue Code and which, among other things, may not have more than one class of stock.

Specifically, the IRS concluded that profit on a redemption of the owners' shares by the company for notes will:

1. be taxed to them as capital gain reportable on the ...

The Court of Appeals for the First Circuit, in Kaufman v. Shulman, Docket No. 11-2017P-01A (1st Cir., July 19, 2012), reversed a Tax Court decision siding with the IRS which had disallowed a couple's conservation easement deduction.  The Tax Court had disallowed the deduction because a provision in a subordination agreement with the couple's lender violated the Treasury Regulations' "extinguishment provision".  The Court of Appeals reversed the Tax Court, finding that the Tax Court and IRS interpretation of this regulation was unreasonably restrictive and inconsistent with ...

The Eighth Circuit Court of Appeals, in the recent case of Watson, P.C. v. US, 109 AFTR 2d 2012-1059, 668 F. 3d 1008 affirming the district court below, held that an S-corporation shareholder's 2002 and 2003 reported salaries were unreasonably low, and reclassified dividends paid by the corporation to the shareholder as additional salary, thus subjecting that income to additional employment taxation under the Federal Insurance Contribution Act (FICA).

Generally, earnings from self-employment and employee wages are subject to withholding for Social Security and Medicare ...

On August 15, 2011, the South Carolina Supreme Court ruled in Clarendon County v. TYKAT, Inc. (Op. 270252011, WL 3568536) that Section 12-37-950 of the Code of Laws of South Carolina, 1976, as amended (the "Code"), subjected a leasehold interest in real estate to property taxation where the property was otherwise exempt from such taxation in the hands of the owner. The court's ruling in TYKAT affirmed the ruling of the South Carolina Administrative Law Court (the "ALC") below finding that TYKAT, Inc. ("TYKAT") was liable to Clarendon County for property taxes on the value of TYKAT's ...