By David R. Bohm
Part of a series on issues related to Manufacturers, Distributors and International Trade
Co-authored by David R. Bohm and David A. Zobel
A major change involving subpoenas to non-parties has hit the business world in the state of Missouri.
A new amendment to the Missouri Supreme Court Rules now requires non-party record custodians to physically appear at deposition to produce subpoenaed items, unless all parties to the litigation have agreed that the subpoenaed party may produce the items without appearing.
The amendment changes the prevailing practice where parties send out subpoenas to third parties with a letter explaining that they will be excused from appearing at deposition if they produce the requested items along with what is known as a business records affidavit.
Rule 57.09, as amended, now requires parties to first obtain consent from all other parties to the litigation before a subpoenaed witness may produce documents without attending the deposition. This agreement must be communicated to the witness in writing. Absent this agreement, a witness must appear to produce subpoenaed items at deposition.
What does this mean to you? If you receive a subpoena, you may only produce the documents to the party serving the subpoena without appearing at deposition if that party represents to you in writing (e.g., in a letter) that all other parties have consented to production of the documents without need for you to appear at the deposition. Such a letter should protect you from allegations that you improperly produced records by mail, instead of bringing the documents to the deposition. You do not need to see the actual agreement. If you have any questions as to whether you can simply mail the documents, instead of appearing at deposition, you should either call your attorney for advice or simply wait and bring the documents at the time and place designated in the subpoena.
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03/28/12 12:30 PM
Banking and Finance, Bankruptcy, Business Law, Employment Law, Healthcare, Intellectual Property, Litigation, Manufacturing and Distribution, Real Estate, Tax, Workers' Compensation | Comments Off |
Is This by Consent? Changes to Missouri Supreme Court Rule Affect Use of Non-party Subpoenas
By Patrick J. Murphy
Many individuals establish LLCs and then operate a business as if it was an extension of themselves, commingling funds and not following proper formalities. A recent Tax Court decision provides a sobering realization for individuals who fail to properly title their assets and follow the required formalities. In this case, the court found that a taxpayer’s purchase of an RV did not increase the amount he had at-risk in the LLC because he could not show the LLC owned or used the RV. As a result, deductions he had taken based upon that amount at-risk were disallowed by the IRS.
In Estate of Roberts v. CIR, the taxpayer had established an LLC to lease equipment to his S corporation. He lent money to the LLC, which issued him a promissory note in that amount. With the proceeds of the loan, the LLC purchased an RV. However, there were several issues with the RV’s ownership and use. Even though the RV was titled in the name of CTI Leasing, it was not titled in the name “CTI Leasing, LLC,” the company’s legal name. The EIN on the car title belonged to his S corporation. The RV was not on the LLC’s depreciation schedule. The taxpayer used the RV for his own purposes. Lastly, there was no record that the LLC ever used the RV, because there was no written lease between the LLC and the S corporation concerning the RV.
As a result, the IRS concluded, and the Tax Court confirmed, there was no evidence that the LLC owned the RV or used it. Because the taxpayer could not show that the LLC owned or used the RV, the taxpayer was unable to claim tax deductions based upon the LLC’s capital at-risk in connection with the RV.
There are a few items to take away from this case:
- You should always properly title your corporate assets and use the corporate title LLC, Corp., or Inc., as the case may be.
- If you have multiple business entities, you must keep assets of each entity separate from other assets. If you lease an asset among entities, you must have a proper lease in writing executed by both entities.
- It would be much cheaper for the taxpayer to seek the guidance of an accountant or attorney when completing these transactions than suing the IRS in Tax Court for the disallowed tax deductions.
These days, with Legal Zoom and other ready-to-order LLCs, people are buying assets and operating businesses without knowing the consequences of their actions. Before you enter into large transactions, it is important to understand the formalities that must be followed in order to receive the intended tax consequences.
Posted by Attorney Patrick J. Murphy, CPA. As both an attorney and a CPA, Murphy’s practice includes sophisticated estate planning approaches as well as corporate transactions and advice in mergers and acquisitions, buy/sell agreements, corporate structuring, and real estate transactions for small to medium-sized businesses.
03/22/12 9:55 AM
Business Law, Emerging Business, Tax | Comments Off |
Importance of Maintaining Formalities with Your LLC: It Will Affect Your Deductions
By Marcia Swihart Orgill
Part of a series on issues related to Manufacturers, Distributors and International Trade
There is an increasingly wide divide between Democrats and Republicans on a multitude of issues. However, both parties agree that exports are a key to economic growth.
Last year, President Obama announced his goal to double U.S. exports by 2015, and Republican leaders indicated their desire to work with the President to expand trade to key allies. To encourage exports, the President issued a National Export Initiative that focuses on helping small to mid-sized U.S. businesses export their products and services.
The extension of the qualified dividend rates through 2012 also provides U.S. exporters with the opportunity to save taxes by establishing an Interest-Charge Domestic International Sales Corporation (IC-DISC).
Yet many export companies that could benefit from the tax savings of an IC-DISC fail to do so. According to some estimates, only about 6,000 businesses–a small portion of those that qualify—take advantage of the tax savings of an IC-DISC.
Capitalizing on these tax savings could give Missouri export companies a leg up on their competition. A key to increasing profitability is working smarter not just harder. Less taxes means more money that can be injected into the business to fuel growth and increase profitability.
Candidates for an IC-DISC
Privately held C-Corporations and pass through entities, such as S-Corporations, partnerships and LLCs, that could benefit from the tax savings of an IC-DISC include:
- Manufacturers and distributors of U.S. manufactured products with more than 50% U.S. content and a destination outside of the U.S.,
- Architectural and engineering firms with projects outside of the U.S.,
- Software developers of computer software that is licensed for reproduction outside of the U.S.,
- Agricultural and mineral producers that export products outside the United States, and
- Lessors of new or used U.S. made products to third parties for use outside of the U.S.
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09/22/11 2:10 PM
Business Law, International, Manufacturing and Distribution, Tax | Comments Off |
The IC-DISC: An Underutilized Tax Savings Provision
By Misty A. Watson
The IRS has published guidelines for domestic partners in community property states and same-sex spouses in California.
Each year, many LGBT couples must complete two separate and completely different tax returns. For states recognizing same-sex marriage or allowing the registration of domestic partners, the couple may be able to file jointly for their state tax return. Then, due to the provisions of the federal Defense of Marriage Act, the couple must individually complete separate federal tax returns.
The IRS guidelines help with couples in which an individual may be eligible for head of household status and clarify that each member of the couple must file a separate tax return.
For more information, click here: “Questions and Answers for Registered Domestic Partners in Community Property States and Same-Sex Spouses in California.”
Posted by Attorney Misty A. Watson. Watson’s practice focus is estate-related: planning, administration, and probate. She creates trusts, wills, financial, and health care powers of attorney, guardianships, and conservatorships.
09/22/11 12:53 PM
Estate Planning, Family Law, Tax | Comments Off |
IRS Publishes Guidelines for Domestic Partners and Same-Sex Spouses
By Christopher D. Vanderbeek
Good news for Missouri: A survey conducted recently by the United States Chamber of Commerce has determined Missouri to be the seventh most business-friendly state in the country, according to its ranking in the survey’s “taxes and regulation” category.
The category took into account five criteria affecting businesses and economic functioning: overall state and local tax burden, corporate tax burden, impact of “government-imposed and related costs” on small businesses and entrepreneurs, anticipated state budget gap in fiscal year 2012, and cost of living. Missouri was ranked in the top twenty in all five criteria. It ranked eighth in terms of cost of living.
The study specifically recognized Missouri for “comprehensive reforms” in its workers’ compensation system in recent years. This language undoubtedly refers, at least in part, to the sweeping amendments enacted in 2005. Prior to 2005, the system generally favored injured employees. However, the 2005 amendments dramatically shifted the landscape in favor of employers. A microcosm of the shift can be found in Missouri’s statutory directive regarding judicial interpretation of workers’ compensation statutes: prior to 2005, judges were directed to generally interpret the statutes liberally and in favor of employees, but the 2005 amendments called for “strict interpretation” of all statutes and struck the language regarding favoring employees.
The survey further noted the recent passage of legislation in Missouri to eliminate the state franchise tax. It is suggested that the measure will save Missouri businesses $80 million over the six-year period during which the tax is phased out.
Finally, the survey credited Missouri’s tax credit programs and state tax structure with providing corporations with “one of the most favorable situations in the nation.” For example, the state only considers income earned within the state taxable. Furthermore, manufacturer inventories (such as raw materials), as well as goods held by retailers, distributors and wholesalers, are exempt from property taxes.
What this means for Missouri businesses is, essentially, that Missouri is a great place to start, run, or relocate a business. The state tax structure allows businesses to keep a higher percentage of earned income than they would be able to keep in most other states. In addition, the employer-friendly workers’ compensation system keeps workers’ compensation insurance carriers’ liability exposures down relative to other states, which in turn bolsters relative the earning capacities of Missouri businesses even further.
The full U.S. Chamber survey report is available here.
07/18/11 7:36 AM
Business Law, Emerging Business, Tax | Comments Off |
Missouri Ranks High for Businesses in U.S. Chamber Survey
By Patrick J. Murphy
With the passing of the health care bill, there are a number of new tax code provisions and many people are concerned about how these new provisions will affect them. One of these new tax code provisions is the 3.8% Medicare tax that applies to “net investment income,” which is such items as interest, dividends, annuities, royalties, rents, and net gain on the sale of property (like your primary residence). One of the misconceptions about the new 3.8% Medicare tax is that it will affect a number of people when they sell their primary residence for a gain. Fortunately, this new tax will only affect a small percentage of people who are high income taxpayers.
One reason the new tax will not impact many taxpayers is the current exemption for gain on the sale of your primary residence. For single individuals, they are able to exclude the first $250,000 in gain from the sale of their primary residence. For married couples, the first $500,000 in gain from the sale of their primary residence is excluded. As a result, depending upon the taxpayer, the first $250,000 or $500,000 may be excluded from gross income and would not be subject to the 3.8% tax. The only individuals who should be concerned about the 3.8% Medicare tax is individuals who sell a second home or a have a very large gain on the sale of their primary residence.
Another reason that the new 3.8% Medicare tax will not affect many people is that it only applies to high income individuals. The tax will only be incurred when a single individual has adjusted gross income over $200,000 or when a married couple filing jointly has adjusted gross income over $250,000. Only a small percentage of taxpayers earn incomes over these threshold amounts, even for taxpayers who sell their primary residence for a gain over the $250,000/$500,000 exemption.
Therefore, due to the $250,000/$500,000 income exemption and the tax’s income thresholds, the only individuals who will be affected by this tax are high income taxpayers. If you believe you may be subject to the 3.8% Medicare tax due to a sale of your primary residence or otherwise, it is important that you speak with your tax attorney or accountant to develop a tax planning strategy to minimize the impact of this new tax. The goal behind the tax planning will be to minimize your adjusted gross income through such strategies as recognizing losses at the time you sell your primary residence or purchasing municipal bonds which pay tax-exempt interest. Through proper planning, you can minimize the impact of this new tax.
02/15/11 5:00 AM
Real Estate, Tax | Comments Off |
Will There be a 3.8% Sales Tax When You Sell Your Home?
By Misty A. Watson
For trustees and personal representatives of 2010 estates, new legislation passed on December 17, 2010, provides two options for tax treatment of assets from an estate created in 2010.
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 made sweeping changes to estate taxes for 2011 and 2012 and retroactively made several changes for estates in 2010.
The new estate tax law allows an estate created in 2010 to elect out of the estate tax for 2010 which results in the application of the modified carryover basis rules.
Option One – Modified Carryover Basis
Elect out of the estate tax and complete IRS Form 8939 to allocate which assets in the estate will have their basis increased to the value of the assets as of the decedent’s date of death. This allocation is limited to $1,300,000 for non-spouse beneficiaries and $3,000,000 for a spouse beneficiary.
The executor of the estate is given the authority to complete the Form 8939 and make such allocations of the basis. There are also additional increases for capital loss carryovers and other losses. The proposed allocation must be provided to the beneficiaries prior to the election.
The basis step-up still does not apply to property which is considered “income in respect of a decedent” which includes traditional IRAs and 401(k)s.
Option Two – Five Million Dollar Estate Tax Exemption
Elect to subject the estate assets to estate tax and obtain a basis increase for all assets of the estate. The estate tax exemption amount was increased to $5 million for 2010 at a rate of 35% tax for assets over the $5 million.
For 2010 estates under $5 million, electing into the estate tax makes perfect sense.
If the decedent’s total value of assets on his or her date of death was under $5 million, electing into the estate tax allows the basis of the assets to be increased to a maximum of $5 million (depending on the date of death value) without paying estate tax. Even 2010 estates which have assets over $5 million need to evaluate whether electing to pay the estate tax would result in less tax than electing to allocate the limited basis amounts.
Similar to the modified carryover basis rules, IRAS, 401(k)s, and other qualified retirement plan assets are not eligible for a basis increase.
Whether to elect in or out of the estate tax exemption is unique to each situation.
Trustees and personal representatives of 2010 estates are advised to seek professional advice on which election is best. A fiduciary for a 2010 estate making the modified carryover basis election should carefully weigh each election against the duties the fiduciary owes to each beneficiary of the trust or estate.
Notice of the election and which assets are being chosen for the carryover basis step-up should be provided to each beneficiary prior to the election being made. All elections should be completed in a timely manner to comply with the Act’s requirement of filing such elections with the IRS within nine months from the date of enactment.
01/18/11 6:00 AM
Estate Planning, Tax, Trusts | Comments Off |
Important Tax Options for Estates of Those Who Passed Away in 2010
By Patrick J. Murphy
Buried within just 23 lines of Section 9006 of the Healthcare reform bill, The Patient Protection and Affordable Care Act, H.R. 3590, 111th Congress, signed into law by President Obama on March 23, 2010 is a dramatic change to the 1099 reporting requirements.
Prior law IRS reporting laws required, generally, that if a business made payments in excess of $600 to a person or a business over the course of a year, the business was required to file a Form 1099 to report those payments. One copy would be sent to the IRS, another copy was sent to the person/unincorporated business to whom you paid in excess of $600. Payments made to a corporation and payments made in exchange for merchandise were generally not required to be reported.
Now, beginning January 1, 2012, every business, both large and small, will be required to issue additional tax documents to any vendor of services or property to which the business has paid more than $600 to in a tax year. As before, the business will need to send the tax form to both the IRS and to the person who received payments. The Form 1099 will need to be issued for basic business expenses such as airlines, hotels, rental cars, and restaurants, according to the Small Business Legislative Council. Also, for a business who sells or distributes goods, all of their suppliers of inventory are also considered vendors under this law. This new 1099 trail would expose payments to small operators that might now be going unreported, and which the federal government expects to cause a dramatic revenue increase to offset the cost of the health bill.
In addition to issuing the Form 1099s to all its vendors, a business will also have to obtain Taxpayer Identification Numbers (TINs) from all qualifying vendors. If the business is unable to do so, the business will be required to withhold a portion of the vendor’s payment and send it instead to the IRS. If a business fails to accurately file their 1099s, significant penalties can apply. Hopefully technical corrections will be made to this legislation to lessen the record keeping and reporting burden placed on small businesses by these requirements.
07/27/10 3:00 PM
Business Law, Tax | Comments Off |
A New Headache for Business Owners – The IRS Form 1099
By Brian S. Weinstock
Recently, the Department of Labor advised that they are in the process of developing information to provide direction for Rollovers as Business Start-ups known by the IRS as ROBS transactions.
The IRS issued a memorandum on October 1, 2008 warning about potential pitfalls for ROBS transactions particularly related to prohibited transactions. Moreover, the Department of Labor and the IRS have indicated that a large percentage of ROBS transactions do not comply with federal rules and regulations with regard to tax-deferred retirement plans such as qualified 401k plans and IRAs.
According to Louis Campagna, Chief of the Fiduciary Interpretations Division for the Department of Labor’s Employee Benefits Security Administration, the direction being produced by his department shall address the Department of Labor’s apprehension with regard to ROBS transactions initiated with rollovers from employer sponsored qualified plans and individual retirement accounts, such as 401k plans and IRAs, in order to allow a professional to assess whether the ROBS transaction could be a prohibited transaction.
The Department of Labor is concerned with the employer’s intent when the ROBS transaction is initiated.
Specifically, the Department of Labor needs to determine whether the ROBS transaction was initiated to implement a lawful way for employees to save money for retirement or is the ROBS transaction being used to shelter income for taxpayers who want to start a business or capitalize an existing business. The latter would allow for the taxpayer to withdraw funds from the C-corporation with the 401k plan for reasons unrelated to the business. If so, the taxpayer could withdraw funds, which where designated as tax-deferred, before they are allowed to be withdrawn tax free.
The IRS has their own concerns with ROBS transactions such as the valuation of the transaction and their compliance with other rules for qualified retirement plans which invest in employer stock, therefore the IRS may publish their own memorandum with respect to the issues they have concerning ROBS transactions.
Besides the complex rules and regulations governing prohibited transactions, another major concern for the IRS is the ability to “unwind” ROBS transactions which have violated IRS rules and regulations for qualified retirement plans. If a 401k plan participates in a prohibited transaction, the entire 401k plan loses its tax deferred status. Therefore, the entire 401k becomes taxable. Another major issue is deterioration of the initial ROBS valuation. Many small to medium size business holders remove cash from the entity for reasons unrelated to the business. This type of action can cause a decrease in the initial value of the ROBS transaction and violate prohibited transaction rules and regulations.
Time is of the essence with respect to hiring a professional to review your ROBS transaction in order to determine if there have been any violations of federal rules and regulations, such as prohibited transactions. The IRS has a self-correction program for 401ks which taxpayers can take advantage of before an IRS examination.
06/9/10 7:30 AM
Business Law, Emerging Business, Tax | Comment (1) |
ROBS transactions: the Department of Labor and IRS Regulation