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On Friday, July 31, 2015, President Obama signed into law the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (the “Act”), which extended funding to the Highway Trust Fund (“HTF”) for an additional three months.
This Act contains several important tax provisions, including modified due dates for several common tax returns, overruling of the Supreme Court’s Home Concrete decision, required additional information on mortgage information statements, and required consistent basis reporting between estates and beneficiaries.
Tax Return Due Date Modifications

The Act sets new due dates for partnership and C corporation returns, as well as FinCEN Form 114, Report of Foreign Bank and Financial Accounts (“FBAR”), and several other IRS information returns.

Partnership Returns

The new due date is March 15 (for calendar-year partnerships) and the 15th day of the third month following the close of the fiscal year (for fiscal-year partnerships). Currently, these returns are due on April 15 for calendar-year partnerships. The Act directs the IRS to allow a maximum extension of six months for Forms 1065, U.S. Return of Partnership Income.

C Corporations

The new due date is the 15th day of the fourth month following the close of the corporation’s year. Currently, these returns are due on the 15th day of the third month following the close of the corporation’s year.

Corporations will be allowed a six-month extension, except that calendar-year corporations would get a five-month extension until 2026 and corporations with a June 30 year end would get a seven-month extension until 2026.

The new due dates will apply to returns for tax years beginning after December 31, 2015. However, for C corporations with fiscal years ending on June 30, the new due dates will not apply until tax years beginning after December 31, 2025.

Other Forms Affected

The new Act directs the IRS to modify its regulations to allow the following maximum extensions:

5 and 1/2 months on Form 1041, U.S. Income Tax Return for Estates and Trusts;
3 and 1/2 months on Form 5500, Annual Return/Report of Employee Benefit Plan;
6 months on Form 990, Return of Organization Exempt From Income Tax, Form 4720, Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code, Form 5227, Split-Interest Trust Information Return, Form 6069, Return of Excise Tax on Excess Contributions to Black Lung Benefit Trust Under Section 4953 and Computation of Section 192 Deduction, Form 8870, Information Return for Transfers Associated With Certain Personal Benefit Contracts, and Form 3520-A, Annual Information Return of a Foreign Trust With a U.S. Owner.
The due date for Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, will be April 15 for calendar-year filers, with a maximum six-month extension.

FinCEN 114 (former FBAR)

The due date for FinCEN Form 114 is changed from June 30 to April 15, and for the first time taxpayers will be allowed a six-month extension to October 15.

Additional Information on Mortgage Interest Related Returns

The Act amends Sec. 6050H to require new information on the mortgage information statements that are required to be sent to individuals who pay more than $600 in mortgage interest in a year. These statements will now be required to report the outstanding principal on the mortgage at the beginning of the calendar year, the address of the property securing the mortgage, and the mortgage origination date. This change applies to returns and statements due after December 31, 2016.

Changes Related to Basis Reporting Between Estate and Beneficiaries

The Act amends Sec. 1014 to mandate that anyone inheriting property from a decedent cannot treat the property as having a higher basis than the basis reported by the estate for estate tax purposes. It also creates a new Sec. 6035, which requires executors of estates that are required to file an estate tax return to furnish information returns to the IRS and payee statements to any person acquiring an interest in property from the estate. These statements will identify the value of each interest in property acquired from the estate as reported on the estate tax return. The new basis reporting provisions apply to property with respect to which an estate tax return is filed after the date of enactment.

The Home Concrete Case is Overruled

In Home Concrete & Supply, LLC, 132 S. Ct. 1836 (2012), the Supreme Court held that the extended six-year statute of limitation under Sec. 6501(e)(1)(A), which applies when a taxpayer “omits from gross income an amount properly includible” in excess of 25% of gross income, does not apply when a taxpayer overstates its basis in property it has sold.

In response to this decision, the Act amends Sec. 6501(e)(1)(B) to add this language: “An understatement of gross income by reason of an overstatement of unrecovered cost or other basis is an omission from gross income.” The change applies to returns filed after the date of enactment as well as previously filed returns that are still open under Sec. 6501 (determined without regard to the amendments made by the Act).

If you have any questions, please contact your WithumSmith+Brown professional, a member of WS+B’s National Tax Services Group or email us at taxbriefs@withum.com.

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There are two basic types of business combinations – taxable and nontaxable.

Taxable Business Combinations (Asset Purchase):

In a taxable business combination, new tax bases for acquired assets and assumed liabilities are generally determined on the basis of the fair market value. The acquirer “steps up” the acquiree’s historical tax bases in the assets acquired and liabilities assumed to fair market value.  Under the U.S. federal income tax law (IRC Section 338), certain stock purchases can be treated as taxable business combinations if an election to treat the stock purchase as a taxable asset purchase is filed.

Both the seller and purchaser of a group of assets that makes up a trade or business generally must use Form 8594 to report the transaction and both must attach the form to their respective income tax returns.  The taxpayers are not required to file Form 8594 when a group of assets that makes up a trade or business is exchanged for like-kind property in a transaction to which section 1031 applies and when a partnership interest is transferred. For stock purchases treated as asset purchases under Sections 338(g) or 338(h)(10), the purchaser and seller must first file Form 8023, to make the 338 election.  Form 8883 is then filed by both the purchaser and the target to supply information relevant to the election.

There is no legal requirement that the target and acquiring company take consistent positions on their respective tax returns, and therefore each could in principle take a different position favorable to itself.  However, if they do so, the IRS is likely to discover this fact and protect itself by challenging the positions taken by both parties.  To avoid this result, acquisition agreements almost always provide that the parties will attempt to agree on an allocation of price among the assets within a relatively short time after the closing of the transaction. 

Non-Taxable Business Combinations (Stock Purchase):

In a nontaxable business combination, the acquirer assumes the historical tax basis of the acquired assets and assumed liabilities. In this case, the acquirer retains the “historic” or “carryover” tax bases in the acquiree’s assets and liabilities. Generally, stock acquisitions are treated as nontaxable business combinations (unless a Section 338 election is made). Nontaxable business combinations generally result in significantly more temporary differences than do taxable business combinations because of the carryover of the tax bases of the assets acquired and liabilities assumed. To substantiate the relevant tax bases of the acquired assets and assumed liabilities, the acquirer should review the acquired entity’s tax filings and related books and records. This information should be evaluated within the acquisition’s measurement period.

The non-taxable corporate reorganization Internal Revenue Code provisions are concerned with the form, rather than the substance, of the transaction.  Therefore, it is important to document that the correct procedures have been followed.  Regulation Section 1.368-3 sets forth which records are to be kept and which information needs to be filed with tax returns for the year that such a transaction is completed.  Each corporate party to a non-taxable reorganization must file a statement with its tax return for the year in which the reorganization occurred that contains the names and EINs of all parties, the date of the reorganization, the FMV of the assets and stock transferred, and the information concerning any related private letter rulings.  All parties must also maintain permanent records to substantiate the transaction.  While there are no statutory penalties for failure to comply with the reporting requirements, the IRS has argued that failure to comply with the requirements could indicate that a transaction was a sale and not a non-taxable reorganization.

Authored by Robert Cutolo

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One of the major advantages of owning real estate in a partnership is the ability to leverage the real estate and distribute the proceeds of the borrowing to the partners on a tax free basis. 

FOR EXAMPLE: 

Individuals A & B equally own a Limited Liability Company that is treated as a partnership for tax purposes.  The LLC owns real estate with a tax basis of $1 million and a fair market value of $5 million.  The LLC borrows $3 million from a bank on a non-recourse basis, that is, the bank can only look to the property for repayment.  Neither partner is personally obligated to repay the bank.  Immediately after the borrowing, the LLC distributes the $3 million equally to the two partners.

As long as the non-recourse liability is allocated equally to the two partners, the withdrawal of $1.5 million by each partner is a tax free transaction.  This follows Section 752 of the Internal Revenue Code which states that any increase in a partner’s share of the liabilities of a partnership shall be considered a contribution of money by such partner to the partnership.  In effect, the partner’s outside tax basis is deemed to increase by his share of the increase in the partnership’s liabilities.  This increase can provide sufficient tax basis to allow a withdrawal of funds to be considered a tax-free return of basis. Additionally, such an increase in outside tax basis can permit the use of valuable deductions, the benefit of which may have been deferred absent the increase in liabilities and tax basis.     

While an increase in a partner’s share of partnership liabilities increases the partner’s outside basis, a decrease in the partner’s share of partnership liabilities decreases the partner’s outside basis.  Thus, it is important for partner A and B that their share of the partnership’s liabilities does not significantly decrease.  A significant decrease may have the same effect as withdrawing money in excess of tax basis, i.e. resulting in a current taxable gain. 

Thus, a partnership that is contemplating taking in new partners or contributing its property to a larger partnership (for example, a real estate venture fund) must examine how the reallocation of its liabilities will affect the tax liability of its current partners.

A partner who is facing a taxable event due to the reallocation of liabilities may find it beneficial to guarantee a portion of the partnership’s non-recourse liabilities.  A guarantee will convert a portion of the non-recourse liability to a recourse liability.  Partnership recourse liabilities are allocated to that partner who may be ultimately liable for the debt. Thus, by guaranteeing the debt, the partner may be able to maintain a sufficient allocation of partnership liabilities to avoid gain.     

While a guarantee of debt is good for tax purposes, most partners are not willing to take on a possible liability that they did not have previously.  A guarantee may not be a good economic choice.

BOTTOM DOLLAR GUARANTEE

A method of guaranteeing the debt while mitigating the economic risk of satisfying the guarantee is a so-called “bottom dollar guarantee.”  This is a guarantee where the partner agrees to repay partnership debt only if the bank collects less than the guaranteed amount from the partnership. In the example above, if partner A signs a bottom dollar guarantee for $1 million, partner A will only have to satisfy this guarantee if the bank cannot collect at least $1 million of the $3 million debt from the partnership.  Once the bank collects $1 million from the partnership, partner A is relieved of all further liability on the debt.  This is contrary to a normal guarantee, where the guarantor is liable for any and all amounts of the debt left unsatisfied by the partnership up to the stated guarantee amount.

The Internal Revenue Service has been struggling with the issue of whether a bottom dollar guarantee is a real guarantee and should be respected as such for tax purposes.  Recently released proposed regulations under Section 752 make it clear that the IRS will not recognize bottom dollar guarantees as valid guarantees of partnership debt. Under the proposed regulations, a partner only bears the economic risk of loss if the partner is liable for amounts that the partnership does not satisfy. 

The new proposed regulations will not be effective until published in final form.  However, for those partners who have bottom dollar guarantees in place at the time the regulations are finalized, a seven year transition rule is provided. In conclusion, the proposed regulations, if finalized in their current form, will provide that a partner is not able to both mitigate his or her economic risk and increase his or her outside tax basis when he or she guarantees partnership debt.  Accordingly, maintaining a partner’s share of partnership debt will require that the partner take on a real economic burden.  

By Robert E. Demmett, CPA, MS, Partner | rdemmett@withum.com

If you have any questions about this real estate update, please contact your WithumSmith+Brown professional or a member of WS+B’s Real Estate Services Group. 

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While the National Collegiate Athletic Association (NCAA) landscape remains entwined with issues regarding compensation of student-athletes, another element of the debate reached a “foothold”…

U.S. District Court Judge Claudia Wilken (Oakland, CA) recently issued an injunction invalidating NCAA rules that prohibit student-athletes from being compensated for use of their names, images, and likenesses in television broadcasts and video games.

The decision is a win for certain student-athletes in the sense that it would allow football players in the top 10 conferences, and all Division I men’s basketball players, a limited share of the revenue generated by schools from the use of their likenesses. 

However, there are aspects of the injunction that provide factors somewhat beneficial to the NCAA.  Based on witness testimony and current NCAA rules, Judge Wilken determined that the NCAA and schools are allowed to cap the amount of money paid to college athletes while they are in enrolled in school; an eligible athlete must be paid at least $5,000 per year they are academically eligible, but schools do not have to necessarily pay more than that.  Furthermore, the compensation will likely be deferred as schools are permitted to pay the funds to a trust, which would then be held until after an athlete’s eligibility ends or he graduates, whichever occurs sooner. 

Former UCLA basketball player Ed O’Bannon had filed the class-action lawsuit on behalf of himself and other former college athletes against the NCAA, alleging that the NCAA’s prohibition on allowing student-athletes from receiving any compensation other than scholarships and the cost of attendance at schools violated federal antitrust laws.

The NCAA traditionally required student-athletes to sign a form before participating in athletics, which gave the NCAA permission to use player images and likenesses to “promote NCAA championships or other NCAA events, activities or programs.”  Because of this document, student-athletes had been unable to negotiate deals for the use of their likenesses, which the plaintiffs alleged was an unreasonable restraint on trade conspiring to fix the price for the use of athletes’ image and likeness at zero.

The injunction stops short of allowing athletes to receive money for endorsements, nor does it prevent the NCAA from creating rules that prohibit athletes from selling their name, image, and likeness rights individually.  But Judge Wilkin’s ruling is certainly a battle won by the Ed O’Bannon plaintiffs in this continuing “war” with the NCAA over amateurism and legal rights of student-athletes.

An issue with the decision is that was confined “revenue sports” (football players in the top 10 conferences, and all Division I men’s basketball players).  Thus, for the time being it remains up to the NCAA and the individual conferences and schools to determine how, or if at all, “non-revenue athletes” will be compensated for use of their likeness.  “Non-revenue athletes” encompasses the remaining Division I, Division II, and Division III athletes, as well as female student-athletes.  Application of Title IX, which requires equal opportunities and resources for all male and female athletes, is seemingly called into question if only certain athletes are able to be paid for to use of their likeness.

The ruling will not affect any recruit enrolled in college before July 1, 2016.  The NCAA has announced that it will appeal the ruling.

Authored by CJ Stroh

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We have all heard the term milestone payment in the life science field. Generally, milestone payments are made under a collaboration agreement upon the completion of a successful stage of research. These payments are generally deductible for financial accounting purposes. However, these payments are generally capitalized and amortized in the eyes of the Internal Revenue Service.

The Internal Revenue Code generally allows a deduction for all ordinary and necessary expenses paid or incurred during a taxable year on carrying on a trade or business. However, expenditures that create or develop an asset with a useful life beyond the taxable year must be capitalized rather than expensed in the year paid.

The Internal Revenue Service believes that milestone payments relate to the acquisition or creation of intangibles and thus should be capitalized and amortized. They are generally amortizable over the life of the agreement, the remaining life of the patent or 15 years.

Authored by Stephen Talkowsky

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This past week, Treasury Secretary Jacob Lew sent a letter to key members of Congress calling for the nation to embrace a “new sense of economic patriotism” and stop supporting corporations that are moving their tax home out of the U.S. to reduce their corporate income tax burdens by taking advantage of an existing loophole in the tax code.

The loophole, known as “corporate inversion,” is a transaction where a U.S. based multinational group acquires a foreign corporation located in a country whose tax rates are lower than in the U.S. These reorganizations have the effect of changing the U.S. corporation’s domicile to a foreign country but typically results in little change to the U.S. operations of the entity. Although operations in the U.S. would continue to be subject to U.S. tax, the foreign operations conducted by the newly formed group would be subject to the lower foreign country tax rates. In addition, the foreign income is not taxed to the U.S. shareholders until dividends are paid. Moreover, the U.S. corporation may engage in earnings stripping transactions where deductible payments to the parent company reduce U.S. taxable income.

These transactions are particularly attractive to pharmaceutical and medical device companies who seem to have more choices of appropriately sized targets overseas and enjoy many benefits of a global presence. Popular destinations seem to be Britain, Ireland and Bermuda for their lower tax rates and other attractive R&D incentives. Transactions involving pharma and medical device companies have spiked in recent years, most notably the recent merger of Medtronic and Covidien, the attempted acquisition by Pfizer of AstraZeneca, and the AbbVie takeover of Shire, the largest inversion deal to date.

Here’s a summary of how the proposed inversion of Pfizer might have worked:
A newly created UK holding company would acquire the shares of both Pfizer and AstraZeneca. In the resulting structure, Pfizer and AstraZeneca would be subsidiaries of the UK parent and the former Pfizer shareholders would own 73% of the UK company and AstraZeneca former shareholders would own 27%. Pfizer hoped to shift profits to the UK, where the tax rate is around 21% as compared to 35% in the US.

For similar types of inversion transactions like the one proposed in the Pfizer deal, the U.S. government has attempted to curb the use of these inversion transactions:

• Where shareholders of the U.S. corporation subsequently acquire over 50% of the new foreign parent corporation, section 367(a) causes a gain on the transfer of U.S. stock to the parent corp.
• Where shareholders of the U.S. corporation subsequently acquire 60% or more, but less than 80% of the new foreign parent corporation, section 7874 prevents the U.S. corporation from using tax attributes, such as NOLs, to offset section the 367(a) inversion gain.
• Where shareholders of the U.S. corporation subsequently acquire 80% or more of the new foreign parent corporation, section 7874 treats the new foreign parent company as a U.S. corporation for tax purposes, effectively removing any real U.S. tax savings from the transaction.

• In triangular reorganizations, section 367(b) and Notice 2014-32 causes a potential taxable dividend as a result of a “deemed” distribution between parent and subsidiary on the acquisition of the target foreign corporation in exchange for parent stock.

Under Pfizer’s proposed new structure, the corporation would not have been considered a U.S. corporation for tax purposes under section 7874 because less than 80% of the foreign parent company would be held by the former U.S. shareholders. The U.S. corporation might have had to pay tax under the other anti-abuse regulations of section 7874 and section 367, however it planned to save over $1 billion in tax due to the tax rate differential alone, according to some reports. In other inversion transactions, some corporations were able to avoid the imposition of section 367(a) inversion gain by manipulating certain aspects of section 367(b)(“Killer B reorganization” rules), in order to make the transaction nearly tax free. Much tax planning goes into achieving these various tax savings from moving overseas and the transactions can get very complicated.

The letter from Secretary Lew calls for a lowering of the U.S. corporate income tax rate, among the highest in the world. At the very least, he asks Congress to pass laws to prevent or deter companies from using these inversion strategies, including retroactive laws to prevent tax savings on restructuring deals already agreed to, such as the recent Shire takeover. Despite bipartisan disagreement on how to address the tax loophole, tax reform in this area is likely to occur in some form. However, many tax practitioners and financial experts believe that these transactions will continue to be used at an increased pace until real reform occurs to lower U.S. corporate tax rates. In the meantime, patriotism aside, corporate management will maintain its allegiance to its shareholders and continue to strive to improve the corporate bottom line in the ever increasing global economy.

Author: Susan San Filippo

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So, you are development stage life science company located in New Jersey and, like the rest of us, in need of cash.  Your accountant tries to sell you a federal research and development tax credit study.  Your response is, “Why?  I don’t have any revenue and thus pay no taxes – get lost!”  While that may be the appropriate response from a federal perspective, that may not be the correct answer from the state of New Jersey’s perspective.

In 1999, New Jersey commenced a program that allows certain development stage companies (emerging technology or biotech companies) to actually sell their unused net operating losses (“NOLS”) and research and development tax credits for cash –  generally to the tune of 90 cents on the dollar.  So, if you have unused New Jersey R&D credits of $100,000, you may be able to sell those credits for $90,000!  The buyer is generally another New Jersey company in need of credits and NOLS.

As with any other program, when dealing with the Federal or State government you need to jump through some hoops and fill out some paperwork.  But, all in all, the process is not that painful.

So, if you are sitting on some unused credits and NOLS or you believe you may have some that you have not yet captured, it is probably worthwhile to taking a look to see if you are sitting on some cash.

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