rocky mountain relocation council fall conference denver, co september 18, 2012
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Rocky Mountain Relocation Council Fall Conference Denver, CO September 18, 2012. Relocation Risks and Opportunities Presented by Peter K. Scott Worldwide ERC Tax Counsel. Topics:. Washington Update BVO’s-Audit and other issues Severed Mineral Rights-why you should care - PowerPoint PPT PresentationTRANSCRIPT
Rocky Mountain Relocation CouncilFall Conference
Denver, COSeptember 18, 2012
Relocation Risks and OpportunitiesPresented by Peter K. ScottWorldwide ERC Tax Counsel
Topics:
Washington Update BVO’s-Audit and other issues Severed Mineral Rights-why you
should care Dangers from Corrupt Practices
Acts Tax Primer: One year rule
Washington Update
Current Political Landscape Key Issues Remaining for 112th
Congress Expiring Tax Provisions Sequestration under Budget Control Act
Washington Update
“American tax laws are constantly changing as our elected representatives seek new ways to ensure that whatever tax advice we receive is incorrect.” Dave Barry
Current Political Landscape Unlikely to see negotiations on big fiscal issues prior to
November elections What’s at stake in November
Presidency Senate (51 Democrats, 47 Republicans and 2 Independents that
caucus with Democrats) Republicans need a net pick up of 4 seats or 3 seats if Romney beats
Obama House (242 Republicans, 190 Democrats and 3 vacancies)
Democrats need a net pick up of 25 seats plus the 3 vacancies
Dire economic consequences of not acting should force compromise on some issues by both parties, but who gives up what depends on election results
Key Issues Remaining This Congress
Expiring Tax Provisions Bush Tax Cuts Alternative Minimum Tax Exemptions (AMT) Debt forgiveness on Principal Residence State Sales Tax Deduction Deduction for Mortgage Insurance Premiums Payroll Tax Cut
Sequestration under Budget Control Act $1.2 trillion cut over 10 years to federal spending
Key Issues Remaining This Congress
Bush Tax Cuts Federal income tax rates would revert back to:
Current If Cuts Expire10% tax 15% tax25% tax 28% tax31% tax 33% tax33% tax 36% tax35% tax 39.6% tax
Tax on long-term capital gains would increase from 0% to 20% for those in current 10% tax bracket and increase from15% to 20% for those in current 25%
Key Issues Remaining This Congress
Bush Tax Cuts (continued)
Tax on dividends would increase from 15% to max of 39.6%
Lower and middle-income married taxpayers filing joint return would lose easing of marriage penalty
Return of phase-out rule for itemized deductions and personal exemptions for higher income taxpayers
Expire on December 31, 2012
Key Issues Remaining This Congress
Alternative Minimum Tax (AMT) Taxpayer must pay the higher of standard tax or alternative
minimum tax Alternative minimum tax is intended to ensure that taxpayers
pay at least minimum tax, but not adjusted for inflation Original exemption amounts, if allowed to come into play
today, would result in some 30-40 million middle class taxpayers paying AMT. Big gross-up problem
AMT doesn’t allow personal exemptions, standard deductions, deductions for state income taxes or for interest on second homes or home equity lines
AMT higher exemption amounts expired on December 31, 2011
Key Issues Remaining This Congress
Debt Forgiveness Allowed to exclude up to $2 million in forgiven debt
on principal residence Expires December 31, 2012
State Sales Tax Deduction Taxpayer has option of deducting on federal income
tax form either states sales tax or state income tax Expired December 31, 2011
Mortgage Insurance Premium Deduction Expired December 31, 2011
Key Issues Remaining This Congress
Payroll Tax Cut Reduction in employee contribution to
Social Security from 6.2% to 4.2% Expires December 31, 2012 Very unlikely to be renewed; neither
party is pushing for this and it is not included in “extender” legislation discussed next
Key Issues Remaining This Congress
Some encouraging news on expiring provisions Bipartisan Senate Finance bill August
2 Increases AMT exemptions for 2012 Extends debt forgiveness through 2013 Extends state sales tax and mortgage
insurance deductions through 2012 Senate expected to act before election House is working on a similar bill
Key Issues Remaining This Congress
Sequestration under Budget Control Act “Super Committee” failed to reach agreement on
long-term deficit reduction plan $1.2 trillion automatic cut over 10 years to federal
spending if Congress does not act to control budget
Starting on January 1, 2013: 7.5% cut in affected defense programs 8.4% cut in discretionary programs 8.0% cut in affected mandatory programs 2.0% cut in Medicare provider payments
Key Issues Remaining This Congress
Combination of Sequestration and Expiring Tax Cuts creates a “fiscal cliff”
Non-partisan Congressional Budget Office predicts renewed recession if Congress does not resolve this fundamental problem
Neither party willing to address until after election
Depending on result, could see some compromise during “lame duck” session between election and end of year
Both parties want to extend tax cuts, but differ on whether high-income taxpayers should be included
Plans for spending reductions differ substantially Both interested in some type of “tax reform”
Tax Reform “A tax loophole is something that benefits
the other guy. If it benefits you, it is tax reform.” Russell B. Long
“I was working on a flat tax proposal, and I accidentally proved there’s no God.” Homer Simpson
“This idea that you start with a clean slate and end up with a beautiful, logical tax system just isn’t democracy.” John L. Knapp
Tax Reform
Possibly could happen next year Most popular notion is to reduce/eliminate tax
breaks that cost money, reduce/flatten rates somewhat
Tax breaks we care a lot about might be included Mortgage interest deduction State/local income tax deduction Foreign income exclusion Home sale capital gain exclusion Moving expense deduction
Could be an interesting year for Relocation
BVO’s-Audits/Other Issues
“The Opera reminds me of my tax audit. It was in a language I didn’t understand, and it ended in tragedy.” Jeff McNelly’s “Shoe”
BVO’s-Audits/Other Issues IRS agents still sometimes contend BVO with no
appraisal, guaranteed buyout, not within Rev. Rul. 2005-74
Good case they are wrong, but ERC continues to recommend addition of delayed AV process
Position of IRS lawyers who wrote Rev. Rul. 2005-74 unclear
Have expressed some skepticism that BVO works, but no definite position
No indication yet that issue has resurfaced as part of the IRS’s ongoing special employment tax audits, but caution advised
BVO’s-Audits/Other Issues Delayed AV Process-Example
Employee markets with BVO for 90 days If no offer, company does appraisals or BMA’s, determines
an appraised value Offers employee appraised value, or some realistic
percentage of it (e.g., 90%), but Employee must continue to market for 60 days before
accepting Must market at no more than realistic percentage of appraised
value (e.g., 102%) IRS invariably accepts this process as a qualifying AV
BVO’s-Audits/Other Issues
Generally, audits less frequent than in past, but still a number every year
Audits focus not only on basic BVO, but procedures used (also in AV)
Poor audit results are almost always the result of questionable risk reduction procedures used by company
BVO – Questionable Procedure In both AV and BVO, companies often have waited to
enter contract with transferee until inspections are complete, all contingencies are removed from outside contract
Transferee is usually involved in negotiating inspection results
Sometimes, company intentionally waits to sign contract with transferee until very shortly before outside closing, resulting in a “holding period” of no more than 1-3 days
BVO – Questionable Procedure IRS consistently maintains that this practice falls
within “situation 3” of Rev. Rul. 2005-74 and that the program fails. Company has simply not assumed any significant ownership risk for any significant period of time
Companies should NOT engage in practices that artificially create short holding periods. They should also NOT wait for inspections to be completed before contracting with employee. Better practice is to do own inspections up front, do not rely on buyer inspections to set price for purchase from employee
BVO’s-Audit Results
“We try to cooperate fully with the IRS, because, as citizens, we feel a strong patriotic duty not to go to jail.” Dave Barry
Tax Lawyer’s Golden Rule: If somebody has to go to jail, make sure it’s the client
BVO’s-Audit Results In audits, IRS invariably asks for complete list of
purchase and sale dates IRS invariably concludes that all purchases/sales
within a few days of each other fail Some success for taxpayer when it can be shown that
nothing other than transferee vacate date causes some to be close together
However, if procedures force short periods, IRS always sticks to disallowance
Settlements usually involve company conceding all transactions where purchase/sale within some agreed number of days of one another
Severed Mineral Rights
Country song about separation: “I’m so miserable without you, its
just like you were still here”
Severed Mineral Rights Many states permit severance of the surface estate (the
house and land) from the underlying mineral rights (like gas & oil), and each can be sold separately
As search for more energy escalates, and more methods are devised for extraction (e.g. “fracking” for natural gas in Eastern and Mid-Atlantic states like PA), exists almost nationwide
Is becoming a more common fact of life in relocation Recent NC case in which builder was reserving mineral
rights on sale of new homes Buyer, or purchaser from buyer, may not even be aware
property is without mineral rights Creates two serious problems for relocation properties
Severed Mineral Rights Owner/lessee of mineral rights has right
to access the surface to do what is necessary to extract mineral Could involve drilling, piping, or other
activities that significantly detract from usability of the home
May not use surface, but indirectly conduct activities beneath home
Possibility that this could occur is a problem in itself, may create buyer stigma
Severed Mineral Rights
Valuation of properties is difficult Value is diluted by lack of mineral
rights Value also may be compromised by
perception that use may be disrupted by extraction activities
Few appraisers qualified to determine amount of negative value adjustment
Severed Mineral Rights
Definition of Fair Market Value: “The value arrived at in negotiations
between a willing tax lawyer and a willing revenue agent, neither of whom has ever bought or sold anything of consequence in his life.”
Severed Mineral Rights What to do? Suggestion:
Properties with severed mineral rights are not eligible for home sale program, unless
Employee has a home that was purchased with mineral rights already severed
Home is in an area where this status is common, and severed properties are readily marketable
Home can be reasonably valued and appraised by qualified professionals
Employee should not be allowed to use the relocation to sell the home to employer, and the mineral rights to someone else
Corrupt Practices
“Corruption is nature’s way of restoring our faith in Democracy.” Peter Ustinov
Law of Probability: The probability of being watched is
directly proportional to the stupidity of your act
Corrupt Practices
Anyone providing services overseas, either directly or indirectly, must pay attention to growing government enforcement of the U.S. Foreign Corrupt Practices Act
UK law is even tougher
Corrupt Practices FCPA prohibits U.S. based company from
paying any form of bribe to any foreign official
Allows small “facilitation payments” For minor, non-discretionary actions Example: “Tea Money” requested at docks to
get goods off boat quicker Facilitation payments must be separately
itemized on company financials
Corrupt Practices
Company is responsible not only for its own bribes, but those made by suppliers or others working for company Must supervise, prevent illegal
payments Even if supplier is a foreign company
Corrupt Practices
Company must also have in place an FCPA compliance program Law requires Customer companies increasingly
demand relocation suppliers show they are compliant
Corrupt Practices FCPA compliance program includes:
Clear, written corporate anti-corruption policy System of effective oversight Communication of policy to employees and
subcontractors Due diligence procedures for vetting and
oversight of third parties Appropriate disciplinary procedure Periodic audits and risk assessments System for reporting suspected violations
Corrupt Practices Penalties:
Criminal, civil, and government contracts Corp: $2 million per violation Individual: $100K and up to 5 years Debarment or suspension from federal
contracts Big companies recently nabbed:
Walmart ($24 million) Siemens Oracle Pfizer
Corrupt Practices-UK Act
Stronger than U.S. FCPA No facilitation payments Broad definition of commercial bribery,
including travel and entertainment that is considered lavish or extreme
Must be considered by any company doing business in UK, either directly or through suppliers
Corrupt Practices-What to Do?
Administrators of relocation programs should make sure suppliers everywhere are aware of requirements
Consider putting in place reporting programs for suppliers to follow
Have a compliance program in place
Tax Primer: One-year rule Moving expense regs say move has to
“proximate in time” with beginning of work at new location One year is presumed to be proximate But if taxpayer can show that “circumstances
existed which prevented” the move within one year, moving expenses still deductible
Example: children finishing school (IRS has allowed 30 months)
Tax Primer: One-year rule What else might “prevent” the move?
Spouse employment Parent or dependent care
How about inability to sell the old home? No authority, but good case
If transferee has made good faith and unsuccessful efforts to sell, or
Cannot afford to sell because “underwater” on debt Won’t work if transferee just wants to wait for
market to improve
Tax Primer: One-year rule Important principle:
One-year rule has NOTHING TO DO with the tax treatment of home sale programs
Employee goes to new job in 2009, doesn’t want to sell old home yet
Employer puts home through qualifying Amended Value program in 2012
Home sale costs are not taxable to employee However, costs of moving HHG in 2012 will be
taxable unless transferee can show that “circumstances existed which prevented” a move within one year
The End (whew!)
Old saying: “Knowledge is knowing the tomato is a fruit. Wisdom is not putting it in a fruit salad.” However,
Murphy’s First Minor Law: Anything you try to make absolutely
clear will confuse everybody Therefore:
QUESTIONS!!! (And Answers) Rules:
Has to be one I can answer (but not necessarily on the subjects we covered)
Questioner cannot be on permanent “banned” list (you know who you are)
No “stump the tax nerd” No questions such as “how much do you
weigh” Contact information:
[email protected] 910-579-5332