South Carolina DOR Gives Guidance on $300 Sales Tax Cap

South Carolina Department of Revenue issued Rev. Ruling 14-2 stating the utility trailers that are capable of being pulled by an automobile, minivan or pick-up truck are not subject to the $300 sales tax cap, but instead, are subject to the 6% sales tax rate, plus any local additions.  Utility trailers are trailers that are not recreational vehicles, fire safety education trailers or horse trailers.

http://www.sctax.org/NR/rdonlyres/AF3D4D34-9902-460A-9AA4-89B4E4E9ED19/0/RR142.pdf

S Corporation Conversion from C Corporation Tax Benefit Made Permanent

On June 12th, the House agreed to make permanent an expired tax provision that allows an S corporation after it converts from a C corporation to recognize the built in gains over a five (5) year period from the conversion date.  Without this provision, S corporations had to wait 10 years before it could sell its business assets in order to avoid the built in gain tax.

Supreme Court Rules that Inherited IRAs Not Exempt from Bankruptcy Creditors

In the case of Clark v. Rameker, Trustee, Justice Sotomayer penned an unanimous opinion finding that inherited IRAs are not afforded protection under the Bankruptcy Code against creditors. The Court found that inherited IRAs are not "retirement funds" within the meaning of  Section 522(b)(3)(C) of the Bankruptcy Code.  There were three primary factors that lead the Court to this conclusion that inherited IRAs are not "retirement funds" within its ordinary meaning. (1) the holder of an inherited IRA may never invest additional money into the fund; (2) the holder must make withdrawals from the IRA no matter how close to retirement; and (3) the holder can withdraw the whole amount at any time.

In light of this decision, a person may wish to carefully weigh the benefit of holding assets in an inherited IRA from a tax benefit perspective and an asset protection point of view.  This determination will be heavily driven by a person's risk profile.

IRS Issues Taxpayer Bill of Rights

Yesterday, the Internal Revenue Service released the Taxpayer Bill of Rights setting forth 10 rights of taxpayers that are contain in various parts of the Internal Revenue Code.

• The right to be informed.

• The right to quality service.

• The right to pay no more than the correct amount of tax.

• The right to challenge the IRS's position and be heard.

• The right to appeal an IRS decision in an independent forum.

• The right to finality.

• The right to privacy.

• The right to confidentiality.

• The right to retain representation.

• The right to a fair and just tax system.

Waiver of Privilege:Sharing Information with Deal Team in Tax Planning

In Schaeffler v. U.S., the taxpayer filed a motion to quash the U.S.'s request to discover information that was shared between lawyers, financiers and accountants under the attorney work product doctrine.

In short, the taxpayer owned a limited partnership that was funded by a consortium of banks to purchase a target company.  Shortly, after the target company was acquired, the share price dropped significantly, and the taxpayer, the banks and the partnership were required to restructure.  As part of the restructuring, the parties entered into an Attorney Client Privilege Agreement ("ACPA") and retained EY and Dentons US, LLP to assist with the restructuring.  The U.S. sought via summons all documents shared under the ACPA.

First, the Court ruled that, although the banks had an large interest in the partnership's tax treatment, there was no common interest, so the common interest rule did not apply.  In order for the common interest rule to apply, there must be: (1) a common legal, rather than commercial, interest, and (2) the disclosures were made in the course of that common legal goal.  The Court held that the banks' interest was primarily commercial in that they were interested in how much they would have to finance to pay the tax burden.  As such, their interest was commercial, not legal, and there was no attorney-client privilege.

The Court also rejected the work product argument as applied to EY in that the restructuring plan formed by EY was not in anticipation of litigation.  The Court used the standard of whether EY would have created the document containing the opinion in a similar form even if litigation or an audit had not been anticipated.  The Court found that EY would have had a legal duty to create similar memorandum under a similar form.  The Court reasoned that Circular 230 and Treas. Reg. 1.6694-2(b) require tax practitioners in providing tax advice to base their opinions on all legal issues and risks regardless of anticipated litigation or audit. As such, EY was legally bound to provide a similar analysis even if an audit was not anticipated.

In this Office's opinion, the Court's opinion makes any tax advice from a non-lawyer to a client non-privileged because the tax practitioner must consider legal arguments and risks in formulating an opinion under Circular 230 and the regulations.  Clients would be well advised to use law firms in place of accountancy firms in analyzing the risks of business transactions.

See Schaeffler v. U.S., 1:13-cv-4864 (SDNY May 28, 2014)