Welcome to TaxView with Chris Moss CPA Tax Attorney

Estate Planning is hard to talk about.  Do you really want to talk about death and taxes?  But Estate Planning is also about life-your legacy in this life-and the lives of your children and lives of your grandchildren after you are long gone. Not to mention the tax free estate tax reducing gifts you give to all your children while you are living and enjoying life.  Furthermore, with a custom estate plan, your children and grandchildren can be protected in this life, as you perhaps have been protected if your parents had wisely estate planned in their lifetime. A good estate plan will not only secure and protect your family from harm’s way, but also prevent you all from being taxed to death by excessive estate tax so high your kids might just have to sell the farm to pay your death taxes. So if you are interested in protecting your family-and your assets-for generations to come, stay with us here on TaxView with Chris Moss CPA Tax Attorney and find out how you all can create the perfect Estate Plan for your family.

Let’s start your Estate Plan with gifting.  You can actual gift assets to reduce your estate tax to each child and grandchildren up to $14K or $28K married each year tax free. But what if you gift over the $28K annual exclusion?  Current law in 2015 allows you a one-time exclusion a $5.43 Million dollar limit in your lifetime-$10.86 Million married.  But be warned: this lifetime exclusion is subject to Congressional reform just about at any time during any administration.  If you gift over the lifetime exclusion you are taxed at 40% on the overage as the Cavallaro family found out in Cavallaro v IRS US Tax Court (2014).

Cavallaro started out in 1979 and grew the company with his three sons into Camelot Systems and Knight Tools both operating out of the same building.  In 1994 Ernst &Young (E&Y) was retained to consider an estate plan for Cavallaro.  They suggested a merger of both Knight and Camelot.  Unbeknownst to E&Y, Cavallaro also retained attorneys Hale & Dore of Boston for estate planning.  Mr. Hamel of that firm claimed that much of Camelot was already owned by the three sons based on a one-time transfer made in 1987 to the sons in exchange for $1000 from all three sons.

When E&Y found out about Mr. Hamel’s plan, senior partners in E&Y immediately pointed out that the 1987 transfer was at odds with all the evidence and E&Y would not support this tax strategy. Unfortunately for Cavallaro, the attorneys eventually prevailed and the accountants acquiesced. Gift tax returns were filed after the merger showing no taxable gifts and no gift tax liability.

In 1998 the IRS audited the business returns for 1994 and 1995 eventually claiming that gifts from parents to children as a result of the merger were grossly undervalued in the gift tax returns Form 709 filed in those years of the merger.  The IRS issued third party summonses to E&Y.  The tax attorneys filed petitions to quash the summonses fighting all the way to the Court of Appeals for the First Circuit, but eventually lost on all counts. 

The Court denied Cavallaro’s motion to quash and ordered the summons enforced as per Cavallaro v United States 284 F.3d 236 (1st Cir 2002) affirmed 153 F. Supp. 2d 52 (D. Mass 2001).    As the Court noted there was no attorney client privilege with a CPAs.  Therefore all documents had to be handed over to the Government and the E&Y accountants had to testify in many cases against their client’s best interest in compliance with the Court Order.  Cavallaro appealed in Cavallaro v IRS US Tax Court (2014)  and claimed the gift was at arm’s length. After hearing all the witnesses and reviewing the documents, Judge Gustafson opined that the 1995 merger transaction was notably lacking in arm’s length character, and concluded that the gift was undervalued by Cavallaro.  The Court then ruled that Cavallaro made gifts totally $29.6M in 1995 when the two businesses merged handing Cavallaro a tax bill of $12,889.550.   IRS wins Cavallaro loses.

Another case Estate of Rosen v IRS (2006) brings us to the next key component of gifting: control.  Unless you lose control of the assets you gift, the assets unfortunately still remain in your taxable estate upon your passing.  The facts in the Rosen case are simple.  Her assets were mostly stocks, bonds, and cash.  Her son-in-law formed a family limited partnership in 1996 and the children signed a partnership agreement and a certificate of limited partnership was filed with the State of Florida.  Each of the children were given a .5% interest and the Lillie Investment Trust was formed to own a 99% interest. $2.5 million was transferred from Rosen to the Lillie Investment Trust as consideration for its 99% interest.

What is interesting is the partnership conducted no business and had no business purpose for its existence other than to save taxes.  When Rosen died the IRS audited sending the Estate over a $1 Million tax bill, claiming all the money in the partnership was includable in Rosen’s estate because Rosen controlled until her death the possession or enjoyment of, or the right to the income from the assets. The Estate of Rosen appealed to US Tax Court  in Estate of Rosen v IRS (2006) claiming that Section 2036(a)(1) does not apply because the assets were transferred in a bona fide sale for full and adequate consideration. Alternatively the Estate argued that Rosen did not in fact retain enjoyment or “control” of the assets while she was alive.

Judge Laro observes that the US Tax Court has recently stated, a transfer of assets to a family limited partnership or family limited liability company may be considered a bona fide sale if the record establishes that: (1) The family limited partnership was formed for a legitimate and significant nontax reason and (2) each transferor received a partnership interest proportionate to the fair market value of the property transferred citing the Estate of Bongard v. Commissioner, Estate of Strangi v. Commissioner, Estate of Thompson v. Commissioner, US Tax Court on remand, and Thompson v. Commissioner on Appeal 382 F.3d 367 (3d Cir. 2004)

The Court concluded that the overwhelming reason for forming the partnership was to avoid Federal estate and gift taxes and that neither Rosen nor her children had any legitimate and significant nontax reason for that formation.  In addition Rosen herself used the partnership to pay for her personal expenses all the way up to her death and therefore never truly “gifted” the assets out of her estate.  IRS wins, Rosen Loses.

So how do you safely start gifting so that your assets are permanently out of your taxable estate in a protected Estate Plan?  First create an Estate Plan that has a legitimate business purpose in mind.  Second, make sure you have sufficient assets to live without the Family LLC having to support you.  Third make sure you have transferred control of these assets to your children with properly filed gift tax returns.  Finally, with the help of your tax attorney make sure all transactions are contemporaneously documented with appraisals inserted into the gift and personal tax returns before you file.  When the IRS comes to examine your Estate Plan your children will be happy you did.

Thank you for joining us on TaxView with Chris Moss CPA Tax Attorney

See you next time on TaxView

Kindest regards

Chris Moss CPA Tax Attorney

Welcome to TaxView with Chris Moss CPA Tax Attorney

There are now four states that have legalized recreational and medicinal use of Marijuana, Colorado and Washington, Oregon and Alaska. The cities of Portland and South Portland in Maine fully legalized marijuana for both medical and recreational use. The District of Columbia has fully legalized recreational and medical marijuana, but recreational commercial sale is currently blocked by Congress.  Nineteen (19) other states have legalized Marijuana for medicinal use only.  If you are one of many thousands of Americans who will be servicing the Marijuana industry either through growing and farming, distribution, wholesale supply to hospitals and pharmacies, or retail sales to the public, the IRS has a special surprise for you when you file your income tax return. Don’t like surprises form the IRS?  Better stay tuned to TaxView with Chris Moss CPA Tax Attorney to find out the latest on the IRS vs Marijuana Court battles, where we are headed, and how best to structure your Marijuana business.

We have previously written about IRS Section 280E in IRS or State Law for Medical Marijuana, which disallows tax deductions for any amount paid in a business dealing in “trafficking of controlled substances” prohibited by Federal law.  As of publication of this Article, the only expense that is currently deductible against Marijuana sales is the Cost of Goods of the Marijuana.  See California Helping to Alleviate Medical Problems v IRS US Tax Court (2007) (CHAMP) and Martin Olive v IRS US Tax Court (2012).  If you are asking why a Marijuana business legally set up under State law is still considered by the IRS as a business dealing in trafficking of a controlled substance you are asking a very good question indeed.

The answer may be soon playing out in Federal Court. In CHAMP Judge Laro of the US Tax Court said “Section 280E and its legislative history express a congressional intent to disallow deductions attributable to a trade or business of trafficking in controlled substances.   However another non-tax case has been winding its way through the Federal Courts in US v Schweder, Pickard, et al Federal District Court for the Eastern District of California (2011) questions whether or not 30 years after the enactment of Section 280E Marijuana should still be classified in 2015 as a controlled substance.

The facts of the case or very simple.  On October 20, 2011, sixteen individuals were indicted for conspiracy to manufacture at least 1,000 marijuana plants, in violation of 21 U.S.C. §§ 846, 841(a)(1)  Mr. Pickard moved to dismiss the indictment in 2013, arguing that the classification of marijuana as a Schedule I substance under the CSA, 21 U.S.C. § 801, et seq., violates his Fifth Amendment equal protection rights and that the government’s allegedly disparate enforcement of the federal marijuana laws violates the doctrine of equal sovereignty of the states under the Tenth Amendment.  To prove his case Picard filed a motion for an evidentiary hearing which the Court eventually granted.

After the evidentiary hearing was held Judge Mueller on April 17, 2015 denied Picard’s Motion to Dismiss in a 38 page Order concluding that while “At some point in time, in some Court, the record may support granting such a Motion, having carefully considered the facts and the law as relevant to this case, the Court concludes that on the record in this case, this is not the Court and this is not the time.”  Judge Mueller concludes “In sum, the evidence of record shows there are serious, principled differences between and among prominent, well-informed, equivalently credible experts. There are some positive anecdotal reports from persons who have found relief from marijuana used for medical purposes; those reports do not overcome the expert disputes. Consistent with the conclusions other courts have reached, this court finds “[t]he continuing questions about marijuana and its effects make the classification as a controlled substance rational.”

Judge Mueller further opines that after careful consideration, the court joins the chorus of other courts considering the same question, and concludes as have they that – assuming the record created here is reflective of the best information currently available regarding Marijuana - the issues raised by Pickard are policy issues for Congress to revisit if it chooses, citing United States v. Canori, 737 F.3d 181, 183 (2d Cir. 2013) which upheld the constitutionality of Congress’s classification of marijuana as a Schedule I drug.”. Picard then moved for Reconsideration on May 6, 2015 and Judge Mueller Denied the Motion last week on June 1, 2015. Will Picard appeal to the US Court of Appeals for the 9th Circuit?  Good question.  

What does all this mean for anyone planning to run a legal Marijuana business and file a Federal and State income tax return?  First, make sure you retain the services of a good tax attorney who will not only file your tax return but represent you before an almost certain audit of your business by the IRS,  Be prepared to appeal within the Service and eventually to US Tax Court.  Second, be prepared to structure your business to legally maximize your tax deductions through non-Marijuana businesses and to contemporaneously defend this structure to the IRS with sufficient documentation included into the tax return prior to filing.  Finally, be prepared to pay a lot of income tax as an owner of a legal Marijuana business, at least until Congress removes Marijuana as a controlled substance from Federal law.

Thank you for joining us on TaxView, with Chris Moss CPA Tax Attorney,

Kindest regards

Chris Moss CPA Tax Attorney

Welcome to TaxView with Chris Moss CPA

Remember the cash for clunkers program Congress created in 2009 for your old beat up car. You brought in your clunker car to the dealer and got cash to buy a new car to stimulate the economy? It seems that the 100 year old income tax has become an obsolete “clunker tax” and is not working. The income tax needs to be replaced with a new tax better suited for the 21srt century, a National Sales Tax. Stay tuned to TaxView with Chris Moss CPA to find out why.

Historically income tax has always been somewhat of a voluntary tax. History shows most Americans when given the choice, choose not to pay. That is why in 1943 with the introduction of the W2 form in just two years revenue collection increased from $7 billion to $43 billion with 60 million Americans added to the tax rolls almost overnight.   

Congress realized the power of the W2 with revenue collections as a percent of Gross Domestic Product surging from less than 6% to almost 20%.  Unfortunately Americans would fight back against the W2 form.  Slowly an underground economy thwarted forced W2 withholding now estimated to total almost $2 Trillion a year in unreported income.  Congress fought back as well. 

Over the last 30 years there has been an attempt by the Government to “capture” all that underground income by creating the 1099 network of reporting hoping for another W2-like increase in collections as percentage of GDP.  The ultimate 1099 program was enacted in 2010 when Congress tried to capture all income from everyone, but Congress soon realized this was impossible to enforce let alone comply with.  That law was repealed a year later in 2011.  

The fact is that it is impossible in the 21st century to capture all income from 1099s unless the IRS audits everyone. The solution?  An involuntary national sales tax, taxed at the source of each purchase at the same time state sales tax is collected.  Easy, simple and very effective.  But just in case you’re not convinced yet that a voluntary income tax does not work in the 21st century, there’s more:  Identify theft, a 21st century crime is further eroding income tax collections.

The Government is losing at least $6 billion a year to identity theft as organized crime has moved its operations from drug dealing to identity theft.  John Koskinen, the Commissioner of the IRS has recently commented that he has heard from police that “street crime is down because everybody is now filing false IRS returns”.   Add identity theft to the underground economy and the IRS is unable to collect enough money each year to allow America to pay its bills. Further add additional tax revenue being lost to off shore illegal tax shelters and you have the triple crown of tax evasion:  Underground economy, identify theft, and offshore tax shelters.   No wonder our National Debt is dramatically approaching the unthinkable $20 Trillion level.

A National Sales Tax might just wipe out the Underground economy as well as drive organized crime out of the United States Treasury.  As an added benefit, all off shore money would soon return home and many if not all tax shelters would disappear back to the 20th century where they belong.  If Congress were bold enough to embark on a 21st century solution to increase revenue collection, perhaps annual deficits would be wiped out as well.  Could the dramatic rise in collections as a percent of GDP from 1943 be recreated in 2015 with a National Sales Tax?

I don’t know about you all, but I don’t want to see our Government cut services to Americans, including our military, just because Congress does not have the courage to see that the income tax has become a “clunker tax”.  If you all believe that the income tax is now an obsolete clunker, let your elected representatives know how you feel.  Perhaps House Ways and Means and Senate Finance can best serve America by creating a new tax better suited for the 21s century rather than trying to reform a 100 year old clunker.

Thank you for joining us on TaxView with Chris Moss CPA.

Kindest regards

Chris Moss CPA