Friday, May 18, 2012

Facebook IPO Triggers Tax Questions

The $16 billion tax deduction Facebook will receive when it goes public by using stock options prompted Sen. Carl Levin (D-Mich.) to make another push for a law eliminating such deductions.
Reiterating the need for the Ending Excessive Corporate Deductions for Stock Options Act (S. 1375), Levin said Facebook's pre-public offering filings show that the company will no longer be paying taxes because of the stock options it is providing founders and executives.

Facebook plans to capitalize on its massive deductions to create a "net operating loss" -- a legal corporate bookkeeping maneuver under which companies may use past financial losses to offset future taxable income -- to reduce its taxes for years to come, Levin said in attacking what he described as a gigantic tax loophole. 

“Despite trumpeting … revenue increases to investors, Facebook is planning at the same time to tell Uncle Sam it has no taxable income, offsetting its revenues with stock option tax deductions,” Levin said in a statement.  “Facebook's $16 billion stock option tax deduction is so huge, it will enable Facebook to claim a $500 million refund of taxes paid over the prior two years and wipe out this year's tax bill.”

Check back for updates regarding Senator Levin's bill.

Wednesday, May 9, 2012

Take that IRS: U.S. Tax Court Blesses Wealth Transfer Technique

Last month, the U.S. Tax Court ruled in favor of wealthy, closely held business owners everywhere when it gave the OK for these owners to gift shares of their business with the least amount of tax possible.  Sounds like common sense, but the IRS always wants you to pay up.  Here’s the gist of Wandry v. Commissioner:

The Wandrys each gave units of their family-owned LLC, worth over $1 million, to their heirs in 2004.  To avoid paying tax, they specified the gifts should be equal to the dollar amount of their federal tax exemptions (at the time of the gift, the lifetime exemption was $1 million, and the annual exclusion was $11,000).  The hitch in these plans is always the valuation:  taxpayers must hire professional appraisers to give these units a proper value.  Usually, these valuations are rather low in order to give the taxpayers the maximum use of their exemptions.  However, the IRS has the power to challenge these valuations, and they often appraise these family-owned businesses at a much higher dollar amount.  For the Wandrys, the value rose about 20% when the IRS challenged the appraiser’s work. 

So if the IRS determines the value to be much higher, do you have to write the IRS a big fat check for tax on the amounts over the federal exclusions? Thanks to the Wandrys, the answer is no.  Because the Wandrys explicitly stated that the gift amounts were to be equal to the applicable federal exemptions, the Court found that those excess amounts were never actually gifted to their heirs.  Because there was no gift over the exemption amount, no tax was owed.  And the excess amount of the gift remains the property of the Wandrys.  Great result for smart tax planners, especially because the unified exemption for couples is now $10 million.  

 The trick is to make sure your documentation explicitly states that the gift amount is to be equal the applicable exemption.  If this language is missing, a court very well may rule that you intended for your gift to transfer, regardless of the ultimate valuation.

But you may need to act fast:  The IRS has time to appeal this Tax Court ruling to the Court of Appeals.  Because this ruling is so great for us taxpayers, it is likely the IRS will have the 10th Circuit take another look.  Look for updates on this blog.   

Thursday, May 3, 2012

Supreme Court Settles the Score: Circuit Ct Split Resolved

Following up on our series regarding the hot issue of an overstatement of bases and an extended statute of limitations, the U.S. Supreme Court disposed of nine cases April 30 addressing issues the court resolved in United States v. Home Concrete, denying certiorari to the rulings which reached the same conclusion as the high court or granting certiorari—and then vacating—those which did not.
In Home Concrete, the Supreme Court found its 1958 ruling in Colony Inc. v. Commissioner is still controlling, therefore an overstatement of basis resulting from a taxpayer's use of a Son-of-BOSS tax shelter does not trigger the extended six-year assessment period under Section 6501(e)(1)(A).  The decision resolved a circuit split on the issue.
Among the cases vacated by the Supreme Court were three of the most well-known appeals court cases addressing the issue: Salman Ranch Ltd. v. Commissioner, Intermountain Insurance Service of Vail LLC v. Commissioner, and Grapevine Imports Ltd. v. United States.