California Tax Attorney Blog

The California State Board of Equalization has promulgated a rule that grants to registered domestic partners certain property tax relief afforded to spouses. County assessors (including the assessors of Los Angeles County, Ventura County, Santa Barbara County and Orange County) unsuccessfully challenged the rule in the trial court and appealed, arguing that it was unconstitutional. The California State Court of Appeal disagreed (you may read the opinion here).

In 1978, California voters adopted Proposition 13, a constitutional amendment, which limits the amount of ad valorem tax assessed on real property unless there has been a “change in ownership.” After the California Legislature defined such a change of ownership to exclude, among other things, real property transfers between spouses, the voters adopted Proposition 58, placing the spousal transfer exclusion in the state Constitution. The California State Board of Equalization then promulgated a rule excluding from the definition of change of ownership a transfer of real property to a registered domestic partner via intestate succession upon the death of the person’s registered domestic partner. Thereafter, the California Legislature amended the statutory scheme to limit change of ownership by excluding any real property transfers between registered domestic partners from the reassessment of full cash value for property tax purposes.

Plaintiffs, who are California county assessors, filed an action for declaratory relief, asserting that neither the Legislature nor the California State Board Equalization had the authority to create the registered domestic partner exclusion from classification as a change in ownership.

As California State Court of Appeal explained, the trial court correctly held (1) the Legislature can create an exclusion from “change in ownership” for registered domestic partners, without violating the California Constitution, (2) when the Legislature amended provisions of the Family Code and Revenue and Taxation Code, it ratified the Board’s rule excluding certain real property transfers between registered domestic partners from the property tax reassessment provisions of Proposition 13, and (3) accordingly, the Board’s rule is not unconstitutional.

For estate planning and probate help involving domestic partnerships and other matters, please call Mitchell A. Port at 310.559.5259.

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Posted In: Tax Controversy , Estate Planning

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You filed your tax return and you're expecting a refund. You have just one question and you want the answer now - Where's My Refund?

$110 million belongs to you through your tax refund. The IRS is looking for over 115,000 taxpayers who are due refund checks after those checks were returned as undeliverable. The refund checks, averaging about $953, can be claimed as soon as you update your address with the IRS. Some taxpayers have more than one check waiting.

You can ensure the IRS has your correct address by filing Form 8822, Change of Address. If you do not have access to the internet and think you may be missing a refund should first check their records or contact your tax preparer, then call the IRS toll-free assistance line at 1-800-829-1040 to update your address.

The Where’s My Refund? tool on IRS.gov enables you to check the status of your refunds. You must submit your social security number, filing status and amount of refund shown on your 2006 income tax return. The tool will provide the status of your refund and in some cases provide instructions on how to resolve delivery problems.

You can access a telephone version of “Where’s My Refund?” by calling 1-800-829-1954.

Whether you split your refund among several accounts, opted for direct deposit to one account or asked IRS to mail you a check, you can track your refund through this secure Web site. You can get refund information even if you filed just to request the telephone excise tax refund.

To get to your personal refund information, be ready to enter your:

Exact refund amount shown on your return

Filing status (Single, Married Filing Joint Return, Married Filing Separate Return, Head of Household, or Qualifying Widow(er))

Social Security Number (or IRS Individual Taxpayer Identification Number)

If you don’t receive your refund within 28 days from the original IRS mailing date shown on Where’s My Refund?, you can start a refund trace online.

If Where’s My Refund? shows that the IRS was unable to deliver your refund, you can change your address online.

Need tax help or have a California or federal tax problem? Call Mitchell A. Port at 310.559.5259.

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Earlier this month, the Internal Revenue Service and more than two dozen state workforce agencies - including California's - announced they have entered into agreements to share the results of employment tax examinations.

California, Michigan, New Jersey, New York and North Carolina all are part of the team that developed the strategy, and they were instrumental in helping make sure the agreements meet the needs of the participating states as well as the needs of the IRS.

The agreements, part of the Questionable Employment Tax Practice (QETP) initiative, provide a centralized, uniform means for the IRS and state employment officials to exchange information and data. As a result, they can leverage resources and encourage businesses to comply with federal and state employment tax requirements.

These agreements present a united front for the IRS and its state partners to improve compliance with filing tax returns and paying employment taxes. Combining resources will help IRS and the states uncover employment tax avoidance schemes, reduce fraudulent filings and ensure proper worker classification.

The state agencies, the U.S. Department of Labor, the National Association of State Workforce Agencies, the Federation of Tax Administrators and the IRS worked together on various facets of the exchange agreements.

So far, 29 states have entered into individual information-sharing agreements with the IRS. The states that have signed partnership agreements with the IRS thus far are:

Arizona, Arkansas, California, Colorado, Connecticut, Hawaii, Idaho, Kentucky, Louisiana, Maine, Massachusetts, Michigan, Minnesota, Nebraska, New Hampshire, New Jersey, New York, North Dakota, Ohio, Oklahoma, Rhode Island, South Carolina, South Dakota, Texas, Utah, Vermont, Virginia, Washington and Wisconsin.

In addition to coordinating compliance activities, the agreements call for collaborative outreach and education activities designed to help businesses understand their employment and unemployment tax responsibilities.

The exchange agreements are the first result of the QETP initiative. The QETP team will use the results of the project to find new opportunities for collaboration and to work toward improved employment tax compliance.

Do you have federal or California state tax problems? Contact Mitchell A. Port for help at 310.559.5259.

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Posted In: Tax Controversy , Business Transactions

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On March 30, 2005, the Tax Court ruled that a decedent’s transfer of real property to a family limited partnership (“FLP”) and later FLP gifts were includable in the decedent’s estate under Internal Revenue Code Section 2036(a)(1) which recaptures in a decedent’s gross estate certain assets transferred while alive. The Estate appealed. On September 14, 2007, the Ninth Circuit upheld the Tax Court’s decision. Read the Ninth Circuit opinion here.

Virginia Bigelow, the decedent, transferred her 98.3% interest in a single family residence to a trust (“Trust”). (The decedent’s children held the other undivided interests.) The trustees of the Trust were Virginia and her son. The following year, the parties exchanged the property held by the Trust for another rental residence (“Property”) and bought out the children’s undivided interests. Two years later, the Trust and the decedent’s children formed the FLP. The Trust contributed the Property to the FLP and the children each contributed $100. The Trust was the sole general partner. Over the next three years, numerous gifts of FLP interests occurred. At decedent’s death, the decedent owned a 44% limited partner interest in the FLP and her Trust held the sole one percent general partner interest. The 44% limited interest was valued at a 37% discount from the underlying appraised value and the one percent general partner interest was valued at a 35% premium.

In addition, the loans on the Property were retained as liabilities by the decedent. However, the Property served as the ultimate collateral for the loans. Because the decedent was left with insufficient funds to pay off the loans, the Partnership distributed funds necessary to service one of the two loans. No other distributions were made. After Ms. Bigelow’s death, a reduction in her Partnership capital account was made to reflect the loan payment distribution.

The Estate appealed the Tax Court’s decision arguing there was no “implied agreement” for the decedent to use, enjoy or have the right to the income of the Property and that the transfers were completed under the “bona fide sale” exemption of Internal Revenue Code Section 2036.

The Ninth Circuit affirmed the Tax Court’s deficiency determination, finding that Ms. Bigelow and the Bigelow children had an implied agreement that Ms. Bigelow would retain income and economic enjoyment from the transferred asset, and that the inter vivos transfer was not a bona fide sale for adequate and full consideration under Internal Revenue Code Section 2036(a).

To discuss putting an effective family limited partnership in place, please call Mitchell A. Port at 310.559.5259.

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Posted In: Tax Controversy , Estate Planning , Business Transactions

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The California State Bar maintains a very interesting website which provides information about the following California estate planning topics:

DO I NEED ESTATE PLANNING?

1. What Is Estate Planning?
2. What Is Involved in Estate Planning?
3. Who Needs Estate Planning ?
4. What Is Included in my Estate?
5. What Is a Will?
6. What Is a Revocable Living Trust?
7. What Is Probate?
8. To Whom Should I Leave My Assets?
9. Whom Should I Name as My Executor or Trustee?
10. How Should I Provide for My Minor Children?
11. When Does Estate Planning Involve Tax Planning?
12. How Does the Way in Which I Hold Title Make a Difference?
13. What Are Other Methods of Leaving Property?
14. What If I Become Unable to Care for Myself ?
15. Who Should Help Me With My Estate Planning Documents?
16. How Do I Find a Qualified Lawyer?
17. Should I Beware of Someone Who Is a "Promoter" of Financial and Estate Planning Services?
18. What Are the Costs Involved In Estate Planning?

You may also want to look at my website: www.AskMyAttorney.net for more information.

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Are you an employee of your own California corporation? How much are you paying yourself as salary? How much are you paying yourself as a year-end bonus? Are you unwittingly creating a tax problem for yourself?

An employer, including a California employer, is not entitled to deduct certain compensation paid if that compensation was not reasonable in amount. The excess monies paid are a disguised dividend which causes a tax problem for the employer who will have to pay tax on the amount deducted deduction that will be disallowed by the IRS.

Internal Revenue Code Section 162(a)(1) permits a corporation to deduct “a reasonable allowance for salaries or other compensation for personal services actually rendered.” The test for deductibility in the case of compensation payments is whether they are reasonable and are in fact payments purely for services.

A deduction for compensation that is, in fact, reasonable is an amount “as would ordinarily be paid for like services by like enterprises under like circumstances.”

The 9 Factor Test of Reasonableness

The reasonableness inquiry is governed by the nine - factor test based on a case called Owensby & Kritikos, Inc. v. Cmm'r., 819 F.2d 1315, 1323-24 (5th Cir. 1987).

These nine factors are:

1. The employee's qualifications;

2. The nature, extent and scope of the employee's work;

3. The size and complexities of the business;

4. A comparison of salaries paid with gross income and net income;

5. The prevailing general economic conditions;

6. Comparison of salaries with distributions to stockholders;

7. The prevailing rates of compensation for comparable positions in comparable concerns;

8. The salary policy of the taxpayer as to all employees; and

9. Compensation paid in prior years.

Courts will examine and weigh the totality of the facts and circumstances in determining reasonable compensation so that no one factor will be determinative of reasonableness.

The IRS's determination of reasonableness is presumptively correct which shifts the burden to the taxpayer to establish that he is entitled to a deduction larger than that allowed by the Service.

If you have been challenged by the IRS about your compensation deduction and would like to consult with a tax attorney, call Mitchell A. Port at (310) 559.5259.

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Under Internal Revenue Code section 6166, an estate that meets all of the requirements of the statute may elect to pay the estate tax attributable to the decedent’s interest in a closely held business in up to 10 equal, annual installments. The first of those annual payments must be made by the 5th anniversary of the due date of the estate tax liability that is not deferred under section 6166.

An estate qualifies for a section 6166 election if the value of the decedent’s interest in the closely held business exceeds 35 percent of the adjusted gross estate, the decedent was a United States citizen or resident at the time of his or her death, and the estate made the election by attaching a full and complete notice of election with a timely filed federal estate tax return.

If the estate qualifies for the election, the estate pays a reduced rate of interest on the portion of estate tax deferred under section 6166; that interest is payable annually during the entire deferral period, and in most instances, interest only is paid during the first four years of the deferral period. The deferred tax is payable in no more than ten equal annual installments, beginning on a date that is not more than five years after the due date of the Federal estate tax return, which is generally nine months from the date of death.

Continue reading "Estate Tax Installment Payments" »

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California business owners can now request an Employer Identification Number (EIN) - a tax I.D. - through a web-based system that immediately processes requests and generates identification numbers in real time, the Internal Revenue Service recently announced.

Here's how it works. California business owners such as those in Los Angeles County, Orange County, Santa Barbara County and Ventura County, access the internet EIN system through IRS.gov and enter the required information. If the information passes the automatic validity checks, the IRS issues a permanent EIN. If the information does not pass the validity checks, the application is rejected. You then have an opportunity to correct the information and resubmit the application.

The internet EIN application is interactive and asks questions tailored to the type of entity you are establishing.

The system provides "help" screens throughout the application process. This means you will no longer have to print the EIN instructions and separately search for answers while requesting an EIN.

When the EIN application process is complete, you have the option to view, print and save your confirmation notice; you no longer have to wait for the IRS to mail it. Third parties authorized by you can also be provided with the EIN, but the third party cannot view, print or save the confirmation notice. Instead, the confirmation notice is mailed to you.

An EIN assigned through internet submission is immediately recognized by IRS systems. You can begin using the EIN immediately for most business purposes.

For tax help regarding other business activity - creating Subchapter S or C corporations, drafting contracts, liquidating a company - you may call Mitchell A. Port at 310.559.5259.

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Posted In: Tax Controversy , Business Transactions

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In California, you can make a will in one of three ways:

A will prepared by a California lawyer. A qualified estate planning lawyer can make sure that your will conforms with California law. The California attorney can also offer suggestions and help you understand the many ways that property can be transferred to or for the benefit of your beneficiaries. I, as a California lawyer, can also help you develop a complete estate plan and offer alternative plans which may save taxes. This kind of planning can be extremely helpful and economical in the long run for you and your beneficiaries. No matter what kind of will you use, the will should be solely your will and not a joint will with your spouse or any other person.

Also, keep in mind that your will is not a living will. The term living will is used in many states to describe a legal document stating that you do not want life-sustaining treatment if you become terminally ill or permanently unconscious.

A statutory will. California law provides for a “fill-in-the-blanks” will form. The will form is designed for people with relatively small estates. If there is anything you do not understand or if you are making any provisions which are complicated or unusual, you should ask a qualified lawyer to advise you.

A handwritten or holographic will. This will must be completely in your own handwriting. You must date and sign the will. Your handwriting has to be legible, and the will must clearly state what you are leaving and to whom. A handwritten will does not have to be notarized or witnessed. However, any typed material in a handwritten will may invalidate the will. A typed will must be signed by two witnesses. It is a good idea to consult with a qualified lawyer to make sure your will conforms with California law and does not have any unintended consequences.

Continue reading "The Case Against A Holographic Will" »

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