New Tax Laws Real Opportunities for Tax Savings. Two New Acts Working Families Tax Relief Act-signed...

New Tax LawsNew Tax Laws

Real Opportunities for Tax Real Opportunities for Tax SavingsSavings

Two New ActsTwo New Acts

Working Families Tax Relief Act-signed Working Families Tax Relief Act-signed

by President Bush 10/4/2004 by President Bush 10/4/2004

American Jobs Creation Act of 2004-American Jobs Creation Act of 2004-

signed by President Bush 10/22/2004signed by President Bush 10/22/2004

Working Families Tax Working Families Tax Relief Act of 2004Relief Act of 2004

Extensions of benefits for individualsExtensions of benefits for individuals

Extensions of benefits for corporationsExtensions of benefits for corporations

Uniform definition of a childUniform definition of a child

Technical correctionsTechnical corrections

Extensions of Benefits Extensions of Benefits for Individualsfor Individuals

Child tax creditChild tax credit

Marriage penalty reliefMarriage penalty relief

Increase AMT exemptionIncrease AMT exemption

Use of personal credits against AMTUse of personal credits against AMT

Extension of educator deductionExtension of educator deduction

Extension of Benefits Extension of Benefits for Businessesfor Businesses

Research credit extensionResearch credit extension

Expensing of environmental Expensing of environmental

remediation costsremediation costs

American Jobs American Jobs Creation Act of 2004Creation Act of 2004

General Business ConsiderationsGeneral Business Considerations

Tax Shelter Changes Tax Shelter Changes

Individual ChangesIndividual Changes

Manufacturing and ProductionManufacturing and Production

International Tax ChangesInternational Tax Changes

General Business General Business ConsiderationsConsiderations

S Corporation changesS Corporation changes

Deferred CompensationDeferred Compensation

Cost Recovery ChangesCost Recovery Changes

Other Business ItemsOther Business Items

S Corporation ChangesS Corporation Changes

Number of allowable shareholders Number of allowable shareholders increases to 100 (up from 75)increases to 100 (up from 75)

Family members count as a single Family members count as a single shareholdershareholder

Other changes:Other changes:– ESBT changesESBT changes– Transfers of suspended losses to Transfers of suspended losses to

spouse or former spousespouse or former spouse– Inadvertent invalid QSub election Inadvertent invalid QSub election

reliefrelief

Deferred Deferred CompensationCompensation

Why change?Why change? New, rigorous standards for when New, rigorous standards for when

compensation can be deferred from taxcompensation can be deferred from tax What kind of plans are affected?What kind of plans are affected? Key changes Key changes

– Timing of deferral electionTiming of deferral election

– Distribution of amounts deferredDistribution of amounts deferred

– Added anti-abuse provisionsAdded anti-abuse provisions What is the affect of failing to comply?What is the affect of failing to comply?

Action PointsAction Points

Every deferred comp plan needs to be Every deferred comp plan needs to be

reviewedreviewed

Don’t rushDon’t rush

Evaluate current election for 2005 Evaluate current election for 2005

deferralsdeferrals

Advise participants about access to Advise participants about access to

fundsfunds

Cost Recovery Cost Recovery ChangesChanges

$102,000 immediate write-off of §179 $102,000 immediate write-off of §179 property is extended for two yearsproperty is extended for two years

New limit of $25,000 for SUV’s New limit of $25,000 for SUV’s purchased after October 22, 2004purchased after October 22, 2004

Depreciable life for leasehold Depreciable life for leasehold improvements and certain restaurant improvements and certain restaurant property reduced from 39 to 15 yearsproperty reduced from 39 to 15 years

Other Business Other Business ChangesChanges

Restrictions on business airplanes and Restrictions on business airplanes and entertainment facilitiesentertainment facilities

Extended amortization for business Extended amortization for business start-up or organizational costsstart-up or organizational costs

Increased withholding on supplemental Increased withholding on supplemental wage payments > $1 millionwage payments > $1 million

Other Business Other Business Changes (cont.)Changes (cont.)

Charitable contributions of property Charitable contributions of property appraisal requirementsappraisal requirements

Clarification of FICA on options and Clarification of FICA on options and stock option plans stock option plans

Capital gain on sale of stock acquired Capital gain on sale of stock acquired from exercise of stock options to from exercise of stock options to comply with Federal conflict of interest comply with Federal conflict of interest requirementsrequirements

Tax Shelter ChangesTax Shelter Changes

Why?Why?

New penaltiesNew penalties

No statute of limitations on undisclosed No statute of limitations on undisclosed reportable transactionsreportable transactions

Tightens up on enforcement of existing Tightens up on enforcement of existing penaltiespenalties

Tightens up on practitioners, as well as Tightens up on practitioners, as well as taxpayerstaxpayers

Individual ChangesIndividual Changes

Changes in Charitable Contributions Changes in Charitable Contributions of Propertyof Property

Deduction for Sales TaxDeduction for Sales Tax

Changes in Charitable Changes in Charitable Contributions of Contributions of

PropertyProperty Standards established for the Standards established for the

contribution of intellectual propertycontribution of intellectual property

Restrictions imposed on contributions Restrictions imposed on contributions of vehiclesof vehicles

Increased reporting for contributions of Increased reporting for contributions of propertyproperty

Deduction for Sales Deduction for Sales TaxTax

Taxpayer can elect to claim deduction Taxpayer can elect to claim deduction for state income taxes for state income taxes oror deduction for deduction for state sales taxesstate sales taxes

Choose between documented Choose between documented expenses or table amountsexpenses or table amounts

Of particular interest to taxpayers in Of particular interest to taxpayers in states with no income taxesstates with no income taxes

Effective for 2004 and 2005 returnsEffective for 2004 and 2005 returns


Accumulate records now for large Accumulate records now for large purchasespurchases

Where subject to sales and income Where subject to sales and income taxes, consider combining large taxes, consider combining large taxable purchase into a single yeartaxable purchase into a single year

Special rule for vehicle purchasesSpecial rule for vehicle purchases Watch out for AMTWatch out for AMT

Political Outlook – Post Political Outlook – Post ElectionElection

White House Tax PlansWhite House Tax Plans

Senate Finance Tax AgendaSenate Finance Tax Agenda

Under Current LawUnder Current Law

Trust Fund BabyTrust Fund Baby Working Working CoupleCouple

Wages-TWages-T $ -0-$ -0- $ 65,000$ 65,000

Wages-SWages-S $ -0-$ -0- $ 65,000$ 65,000

DividendsDividends $ 65,000$ 65,000 $ -0-$ -0-

Long-Term GainsLong-Term Gains $ 65,000$ 65,000 $ -0-$ -0-

Itemized DeductionsItemized Deductions $ (30,000)$ (30,000) $ (30,000)$ (30,000)

ExemptionsExemptions $ ( 6,000)$ ( 6,000) $ (6,000)$ (6,000)

Taxable IncomeTaxable Income $ 94,000$ 94,000 $ 94,000$ 94,000

Federal TaxFederal Tax $ 8,300$ 8,300 $ 16,925$ 16,925

Payroll Taxes (ee & er)Payroll Taxes (ee & er) $ -0-$ -0- $ 19,900$ 19,900

Total TaxesTotal Taxes $ 8,300$ 8,300 $ 36,825$ 36,825

% of Total Income% of Total Income 6.3% 6.3% 28.3% 28.3%

White House PlanWhite House Plan

President hopes to have bipartisan advisory panel on tax President hopes to have bipartisan advisory panel on tax

reform by end of 2004reform by end of 2004

Tax proposals will be revenue neutral and promote Tax proposals will be revenue neutral and promote

economic growth and jobseconomic growth and jobs

Looking to simplify existing system-current system is Looking to simplify existing system-current system is

complicatedcomplicated

Make it more fairMake it more fair

Should the existing system be modified or replacedShould the existing system be modified or replaced

Reduce administrative burdens on taxpayersReduce administrative burdens on taxpayers

White House PlanWhite House Plan

Retain the 15% rate for qualified dividends Retain the 15% rate for qualified dividends

and long-term capital gains.and long-term capital gains.

Make permanent the repeal of the Federal Make permanent the repeal of the Federal

estate taxestate tax

Supports foreign tax reforms and tax breaks Supports foreign tax reforms and tax breaks

for manufacturersfor manufacturers

Extend expiring middle-class tax breaksExtend expiring middle-class tax breaks

White House Plan White House Plan (cont.)(cont.)

Tax credit to help the uninsured buy health Tax credit to help the uninsured buy health

insuranceinsurance

Credits for energy efficient homesCredits for energy efficient homes

Expand incentives for college educationExpand incentives for college education

Preservation of mortgage and charitable Preservation of mortgage and charitable

deductionsdeductions

Senate Finance Senate Finance Tax AgendaTax Agenda

Due to a GOP victory at the Polls, Due to a GOP victory at the Polls, Senator Grassley expects to resume Senator Grassley expects to resume the chairmanship of the Senate the chairmanship of the Senate Finance CommitteeFinance Committee

Extend “Tax Relief Legacy in 2005”Extend “Tax Relief Legacy in 2005” Make permanent previously enacted Make permanent previously enacted

tax relief measurestax relief measures– Extend key tax breaksExtend key tax breaks– College tuition deductibilityCollege tuition deductibility

Senate Finance Tax Senate Finance Tax Agenda (cont.)Agenda (cont.)

Close loopholesClose loopholes

Adopt permanent interest rate for Adopt permanent interest rate for

calculating pension liabilitiescalculating pension liabilities

Enact Enron-inspired participant Enact Enron-inspired participant

protections.protections.

Make flexible spending accounts work Make flexible spending accounts work

efficientlyefficiently

QUESTIONSQUESTIONS

International Tax International Tax ProvisionsProvisions

Trivia QuestionTrivia Question

What is the estimated percentage of What is the estimated percentage of U.S. corporations that paid no federal U.S. corporations that paid no federal taxes between 1996 and 2000?taxes between 1996 and 2000?

• 26%• 48%• 61%• 82%

Highlights of the Highlights of the American Jobs Creation American Jobs Creation

Act of 2004Act of 2004Repeal of Exclusion for Extraterritorial Repeal of Exclusion for Extraterritorial

IncomeIncome

Phase-Out of the Extraterritorial Income ExclusionPhase-Out of the Extraterritorial Income Exclusion

Phase-In of the Deduction for Phase-In of the Deduction for

Manufacturing/ProductionManufacturing/Production

ActivitiesActivities

Tax Reform & Simplification for U.S. Tax Reform & Simplification for U.S.

BusinessesBusinesses

Incentive to Reinvest Foreign Earnings in U.S.Incentive to Reinvest Foreign Earnings in U.S.

Foreign Tax Credit ReformsForeign Tax Credit Reforms

Other Significant International ReformsOther Significant International Reforms

Repeal of the Repeal of the

Extraterritorial Income Extraterritorial Income

ExclusionExclusion

Two year phase-outTwo year phase-out

‹ ‹ 2005 – 80%2005 – 80%

‹ ‹ 2006 – 60%2006 – 60%

‹ ‹ 2007 – no ETI benefit2007 – no ETI benefit

Grandfather for transactions entered into itGrandfather for transactions entered into it

‹ ‹ In the ordinary course of businessIn the ordinary course of business

‹ ‹ Pursuant to a binding contract before 9/17/03Pursuant to a binding contract before 9/17/03

‹ ‹ Applies to leases, licenses and optionsApplies to leases, licenses and options

Phase-Out of Phase-Out of Extraterritoral Income Extraterritoral Income

Exclusion (ETI)Exclusion (ETI)

Can export transactions be Can export transactions be accelerated accelerated

into 2004?into 2004? Should associated expenses be Should associated expenses be deferred, deferred,

if possible?if possible? Is the IC-DISC (Interest Charge Is the IC-DISC (Interest Charge Domestic Domestic

International Sales Corporation) an International Sales Corporation) an

alternative?alternative?


New deduction for domestic New deduction for domestic

production production

activity (IRC Section 199)activity (IRC Section 199)

Manufacturing and Manufacturing and Production ActivitiesProduction Activities

Lesser of a percentage of:Lesser of a percentage of:

- Taxable income, or- Taxable income, or

- Qualified domestic production - Qualified domestic production

activities income (QDPAI)activities income (QDPAI)

Not to exceed 50% of wages paidNot to exceed 50% of wages paid

Domestic Production Domestic Production Activity DeductionActivity Deduction

Phase-In of Phase-In of DeductionDeduction

Taxable Year Beginning Taxable Year Beginning In:In: PercentagePercentage

2005 – 20062005 – 2006 3%3%

2007 – 20092007 – 2009 6%6%

2010 and later2010 and later 9%9%

Income from certain domestic Income from certain domestic

production production

activitiesactivities

Less:Less:

- Costs attributable to producing - Costs attributable to producing

the the

incomeincome

What is Qualified What is Qualified Production Activity Production Activity

Income?Income?


Income? (cont.)Income? (cont.)

Taxpayer’s gross receipts derived Taxpayer’s gross receipts derived

from:from:1. Any sale, exchanges or other

disposition, or any lease, rental or license, of

qualifying production property that was manufactured, produced, grown or extracted by the taxpayer in whole or

in significant part with the U.S.;



2. Any sale, exchange or other

disposition, or

any lease, rental or license, of

qualified

films produced by the taxpayer;

3. Any sale, exchange or other

disposition of

electricity, natural gas, or potable

water

produced by the taxpayer in the U.S.;



4. Construction activities performed in

the

U.S.; or

5. Engineering or architectural services

performed in the U.S. for construction

projects located in the U.S.



Exclusions:Exclusions:

1. Food and beverages prepared at a 1. Food and beverages prepared at a

retail retail

establishmentestablishment

2. Transmission or distribution of 2. Transmission or distribution of

electricity, electricity,

natural gas or potable waternatural gas or potable water

3. Property leased, licensed or rented by 3. Property leased, licensed or rented by

the the

taxpayer for use by any related taxpayer for use by any related

personperson

Deduction Offers Deduction Offers ComplexityComplexity

Related PersonsRelated Persons

Control group, affiliated service Control group, affiliated service

group or entities under common group or entities under common

controlcontrol

Similar to rules under the ETI Similar to rules under the ETI

regime regime

Deduction Offers Deduction Offers Complexity (cont.)Complexity (cont.)

Affiliated GroupsAffiliated Groups

Members of an affiliated group (i.e., Members of an affiliated group (i.e.,

50% ownership) are treated as a 50% ownership) are treated as a

single corporationsingle corporation


Pass-Through EntitiesPass-Through Entities Deduction is availableDeduction is available Limitation determined at the shareholder Limitation determined at the shareholder

or partner levelor partner level A shareholder or partner allocated W-2 A shareholder or partner allocated W-2

wages equal to lesser of:wages equal to lesser of:

1. Person’s allocable share of the wages,1. Person’s allocable share of the wages,

2. 2x QPAI allocated to that person2. 2x QPAI allocated to that person


Deduction Limited to Wages PaidDeduction Limited to Wages Paid

Wages determined on a calendar Wages determined on a calendar

year basisyear basis

Creates incentive to obtain services Creates incentive to obtain services

through employees rather than through employees rather than

independent contractors.independent contractors.


DPGR’sDPGR’s

““In whole or in significant part” within the In whole or in significant part” within the

U.S.U.S.

Does not include receipts from leasing, Does not include receipts from leasing,

licensing or renting property for use by a licensing or renting property for use by a

related person. But, does include receipts related person. But, does include receipts

from selling property to a related party.from selling property to a related party.


IndividualsIndividuals

Not limited by the 2% AGI on Not limited by the 2% AGI on

miscellaneous itemized deductionsmiscellaneous itemized deductions

Subject to Section 469, passive Subject to Section 469, passive

activity loss limitationactivity loss limitation

Lesser of % of T. Inc. or QDPAILesser of % of T. Inc. or QDPAI

Not to exceed 50 % of wages paidNot to exceed 50 % of wages paid

Calculated on a controlled group basisCalculated on a controlled group basis

Passed through to sole proprietors and Passed through to sole proprietors and

owners of partnerships and S corporationsowners of partnerships and S corporations

Deduction allowed against AMTDeduction allowed against AMT

Allowable DeductionAllowable Deduction

Action PointsAction Points Do you conduct a DomesticDo you conduct a Domestic

Manufacturing Activity?Manufacturing Activity? Do your accounting systems provide Do your accounting systems provide

sufficient information to measure sufficient information to measure direct direct

and allocable indirect costs?and allocable indirect costs? Can and should the business be Can and should the business be

restructured to maximize this restructured to maximize this deduction?deduction?

Tax Reform & Tax Reform & Simplification for Simplification for U.S. BusinessesU.S. Businesses

Incentives to Reinvest Incentives to Reinvest Foreign Earnings in U.S.Foreign Earnings in U.S.

General ruleGeneral rule: a USC may elect to claim an : a USC may elect to claim an

85% DRD on repatriated earnings 85% DRD on repatriated earnings

receivedreceived

from a CFC during the election periodfrom a CFC during the election period

- Base: dividends qualify for DRD to - Base: dividends qualify for DRD to

extent > extent >

avg. actual and deemed dividends in 3 avg. actual and deemed dividends in 3

of lastof last

5 years (highest and lowest years 5 years (highest and lowest years

disregarded)disregarded)

Incentives to Reinvest Incentives to Reinvest Foreign Earnings in U.S. Foreign Earnings in U.S.

(cont.)(cont.)

CeilingCeiling - Dividends eligible for DRD may - Dividends eligible for DRD may not not

exceed:exceed:

‹ ‹ $500 million;$500 million;

‹ ‹ APB 23 amount in financials certified APB 23 amount in financials certified before before

7/1/03; or7/1/03; or

‹ ‹ If no APB 23 amount in financials but taxIf no APB 23 amount in financials but tax

liability on APB 23 amount disclosed-the liability on APB 23 amount disclosed-the

grossed up amount using a 35% tax rategrossed up amount using a 35% tax rate

Incentives to Reinvest Incentives to Reinvest Foreign Earnings in U.S.Foreign Earnings in U.S.

Ceiling ReducedCeiling Reduced: By increase in related : By increase in related

partyparty

indebtedness on part of CFC between indebtedness on part of CFC between

10/3/0410/3/04

and close of taxable year DRD claimedand close of taxable year DRD claimed

‹ ‹ All CFC’s of corporate “US Shareholder” All CFC’s of corporate “US Shareholder”

treated as one CFCtreated as one CFC


(cont.)(cont.) Reinvestment PlanReinvestment Plan: Dividends must be invested: Dividends must be invested

in the U.S. pursuant to a plan approved by DC’sin the U.S. pursuant to a plan approved by DC’s

president or CEO and BOD to qualify for DRDpresident or CEO and BOD to qualify for DRD

‹ ‹ Permissible investments (without limitation)Permissible investments (without limitation)

include:include:

- Worker hiring and training;- Worker hiring and training;

- Infrastructure;- Infrastructure;

- Research & development;- Research & development;

- Capital investments; and- Capital investments; and

- Financial stabilization for job retention and - Financial stabilization for job retention and

creation purposescreation purposes

‹ ‹ Executive compensation is not a permissible investmentExecutive compensation is not a permissible investment

OffsetsOffsets::

‹ ‹ Dividends not covered by DRD (15%) Dividends not covered by DRD (15%)

cannot be shielded from tax by –cannot be shielded from tax by –

- Expenses- Expenses

- NOL’s- NOL’s

‹ ‹ And the tax thereon cannot be offset And the tax thereon cannot be offset byby

credits credits other thanother than FTC and AMT FTC and AMT

creditscredits


(cont.)(cont.)

FTCFTC: Foreign taxes attributable to : Foreign taxes attributable to

Dividends shielded from tax by DRD Dividends shielded from tax by DRD

are lost; are lost; butbut DC may specifically DC may specifically

identify these Dividends – making the identify these Dividends – making the

limitation meaningless in many limitation meaningless in many

situationssituations


(cont.)(cont.)

Disallowance of DeductionsDisallowance of Deductions: Expenses allocated and : Expenses allocated and

apportioned to the DRD amount are not deductibleapportioned to the DRD amount are not deductible

‹ ‹ But floor colloquies indicate the rule But floor colloquies indicate the rule

applies solely to expenses applies solely to expenses directlydirectly related related

to the DRD amountto the DRD amount

Effective DateEffective Date: DRD available only for –: DRD available only for –

‹ ‹ First taxable year beginning after 10/21/04; orFirst taxable year beginning after 10/21/04; or

‹ ‹ At DC’s election, the last taxable year beginningAt DC’s election, the last taxable year beginning

before the date of enactmentbefore the date of enactment


(cont.)(cont.)

Foreign Tax Credit Foreign Tax Credit ReformsReforms

Carryforward period extended to 10 years Carryforward period extended to 10 years

(effective: taxable year ending after (effective: taxable year ending after

10/22/04)10/22/04)

Carryback period reduced to 1 year Carryback period reduced to 1 year

(effective: (effective:

taxable years arising in taxable years taxable years arising in taxable years

beginning beginning

after 10/22/04)after 10/22/04)

FTC baskets: reduced from 9 to 2 (effective: FTC baskets: reduced from 9 to 2 (effective:

years after 12/31/06)years after 12/31/06)

Foreign Tax Credit Foreign Tax Credit Reforms (cont.)Reforms (cont.)

Recapture of OFL extended to dispositions of Recapture of OFL extended to dispositions of stock stock

of a CFC where taxpayer owned > 50% of of a CFC where taxpayer owned > 50% of CFC’s CFC’s

stockstock Repeal of 90% limitation on usage of AMT Repeal of 90% limitation on usage of AMT foreign foreign

tax credit (effective: tax years beginning tax credit (effective: tax years beginning after after

12/31/04)12/31/04) Alternative method, elect by 12/31/08, to Alternative method, elect by 12/31/08, to allocateallocate

interest expense on a worldwide affiliated interest expense on a worldwide affiliated groupgroup

basisbasis

Other Significant Other Significant International ReformsInternational Reforms

Elimination of anti-deferral regimes of Foreign Elimination of anti-deferral regimes of Foreign

PersonalPersonal

holding company and foreign investment holding company and foreign investment

companycompany

(effective: tax years beginning after 12/31/04)(effective: tax years beginning after 12/31/04)

Repeal withholding tax on dividends from certain Repeal withholding tax on dividends from certain

foreign foreign

corporations with ECI > 25% or gross incomecorporations with ECI > 25% or gross income

(effective: payments after 12/31/04)(effective: payments after 12/31/04)

Two new exceptions to definition of U.S. property Two new exceptions to definition of U.S. property

underunder

Sec. 956 re: securities.Sec. 956 re: securities.

Other Significant Other Significant International Reforms International Reforms

(cont.)(cont.)

Definition of FPHCI concerning commodity Definition of FPHCI concerning commodity

transactionstransactions

and sale of partnership interestsand sale of partnership interests

Foreign tax credit treatment of royalty payments Foreign tax credit treatment of royalty payments

andand

payments for the sale of IPpayments for the sale of IP

Changes in rules governing former citizens or Changes in rules governing former citizens or

residents residents

who relinquish citizenship or terminate residency who relinquish citizenship or terminate residency

statusstatus

Real EstateReal Estate

Environmental Environmental Remediation CostsRemediation Costs

Code Section 198 extended through Code Section 198 extended through

20052005

Is extended for expenditures paid or Is extended for expenditures paid or

incurred after 12/31/2003?incurred after 12/31/2003?

Allows an expensing of qualified Allows an expensing of qualified

remediation expenditures at a qualified remediation expenditures at a qualified

contamination site (“brownfields”)contamination site (“brownfields”)

Depreciation of Depreciation of Leasehold Leasehold

ImprovementsImprovements Current law provides for straight-line Current law provides for straight-line

39 years for LHI that are non-39 years for LHI that are non-

residential residential realreal property property

““Qualified LHI” placed in service Qualified LHI” placed in service

before 1/1/2005 are eligible for 50% before 1/1/2005 are eligible for 50%

bonus depreciationbonus depreciation

AJCA ChangesAJCA Changes

Provides for a 15 year straight-line Provides for a 15 year straight-line

recovery periodrecovery period

Applies to property placed in service Applies to property placed in service

after 10/22/2004 and before 1/1/2006after 10/22/2004 and before 1/1/2006

If a lessor makes a qualified LHI If a lessor makes a qualified LHI

subsequent owner’s who purchase are subsequent owner’s who purchase are

not allowed the 15 year provisionsnot allowed the 15 year provisions

Qualified Leasehold Qualified Leasehold PropertyProperty

Improvements to the interior of a Improvements to the interior of a

commercial building if:commercial building if:– Improvement is made Improvement is made pursuant to a pursuant to a

leaselease

– Portion of the building is to be occupied Portion of the building is to be occupied

by the lessee or sub-lesseeby the lessee or sub-lessee

– Improvement is placed in service more Improvement is placed in service more

than 3 years after the date the building than 3 years after the date the building

was first placed in servicewas first placed in service

What’s Not QualifiedWhat’s Not Qualified

Enlargement of the buildingEnlargement of the building

Elevator or escalatorElevator or escalator

Structural component benefiting a Structural component benefiting a

common areacommon area

Internal Framework of the buildingInternal Framework of the building

Partnership ChangesPartnership Changes

Cancellation of indebtedness on Cancellation of indebtedness on

partnership debt to equity partnership debt to equity

conversionconversion

Treatment of built-in losses and Treatment of built-in losses and

partnership basis adjustmentspartnership basis adjustments

Debt to Equity Debt to Equity ConversionConversion

Partnership exchanges a capital or profits Partnership exchanges a capital or profits interest to creditor in satisfaction of debtinterest to creditor in satisfaction of debt

Partnership recognizes cancellation of Partnership recognizes cancellation of indebtedness income in the amount that indebtedness income in the amount that would be realized if the debt were would be realized if the debt were satisfied with money equal to the FMV of satisfied with money equal to the FMV of the partnership interestthe partnership interest

No income to extent FMV of partnership No income to extent FMV of partnership interest=amount of the debtinterest=amount of the debt

Allocation of IncomeAllocation of Income

Income is allocated to partners who Income is allocated to partners who

held an interest immediately prior to held an interest immediately prior to

satisfaction of the debtsatisfaction of the debt

Effective for cancellations occurring on Effective for cancellations occurring on

or after 10/22/2004or after 10/22/2004

Will cause adverse tax consequences Will cause adverse tax consequences

in real estate debt workouts or in real estate debt workouts or

restructuresrestructures

Built-in Losses & Basis Built-in Losses & Basis AdjustmentsAdjustments

AJCA ChangesAJCA Changes– Built-in loss property now only taken Built-in loss property now only taken

into account by contributing partnersinto account by contributing partners

– If contributing partner’s interest is sold If contributing partner’s interest is sold

or liquidated the partnership’s basis is or liquidated the partnership’s basis is

based upon FMV on date contributed based upon FMV on date contributed

and built-in loss is eliminatedand built-in loss is eliminated

– Effective for contributions after Effective for contributions after

10/22/200410/22/2004

Built-in Losses & Basis Built-in Losses & Basis Adjustments (cont.)Adjustments (cont.)

AJCA provides for mandatory basis AJCA provides for mandatory basis

adjustments upon sale or liquidation of an adjustments upon sale or liquidation of an

interest with substantial built-in lossesinterest with substantial built-in losses

Elective under current law per Section 754Elective under current law per Section 754

Substantial loss=in excess of $250,000Substantial loss=in excess of $250,000

Built-in Losses & Basis Built-in Losses & Basis Adjustments (cont.)Adjustments (cont.)

Applies to liquidations/transfers after Applies to liquidations/transfers after

10/22/200410/22/2004

Basis reductions under 734(b)(2) Basis reductions under 734(b)(2)

(liquidations) cannot be allocated to basis (liquidations) cannot be allocated to basis

of corporate stock of a partnerof corporate stock of a partner

Allocated to other assets but not below Allocated to other assets but not below

zerozero

Any excess=gain to the partnershipAny excess=gain to the partnership

Individual ChangesIndividual Changes Property received in a (§1031) like-kind Property received in a (§1031) like-kind

exchangeexchange

Converted to use as a principal residenceConverted to use as a principal residence

5 year rule-must hold 5 years after 1031 5 year rule-must hold 5 years after 1031

exchange exchange

Will not qualify for gain exclusion on personal Will not qualify for gain exclusion on personal

residences residences

Effective for sales or exchanges of residences Effective for sales or exchanges of residences

after 10/22/2004after 10/22/2004

Real Estate Investment Real Estate Investment TrustsTrusts

Expansion of straight debt safe harborExpansion of straight debt safe harbor

Relief from Asset Test ViolationsRelief from Asset Test Violations

Modifications of REIT prohibited Modifications of REIT prohibited

transaction safe harbor for Timber REIT’Stransaction safe harbor for Timber REIT’S

Modification of FIRPTA treatment for Modification of FIRPTA treatment for

foreign investorsforeign investors

Other technical modificationsOther technical modifications

Exchange of Undivided Exchange of Undivided Fractional Interests Fractional Interests

(UFI’s)(UFI’s) What is the game?What is the game?

Partnership owns property & want to dispose Partnership owns property & want to dispose

of of

Some partners want gain some want deferralSome partners want gain some want deferral

Partnership interests do not qualify as §1031 Partnership interests do not qualify as §1031

(Like-kind) property(Like-kind) property

WHAT DO YOU DO? WHAT DO YOU DO?WHAT DO YOU DO? WHAT DO YOU DO?

Exchange of Undivided Exchange of Undivided Fractional Interests Fractional Interests (Con’t)(Con’t) Plan aheadPlan ahead Distribute Property out to partners as UFIs Distribute Property out to partners as UFIs

(Tenants-in-Common) (Tenants-in-Common) Hold property for a period of timeHold property for a period of time Enter into sales contract with purchaser to sell Enter into sales contract with purchaser to sell

all UFIsall UFIs Each owner than can take cash and pay tax or Each owner than can take cash and pay tax or

have cash from buyer go to a qualified have cash from buyer go to a qualified intermediary and effectuate a §1031 exchangeintermediary and effectuate a §1031 exchange

In Rev Proc 2000-46 IRS would not rule on In Rev Proc 2000-46 IRS would not rule on these transactionsthese transactions

Revenue Procedure 2002-Revenue Procedure 2002-2222

Rev. Proc allows 15 conditions where Rev. Proc allows 15 conditions where

the IRS will consider UFI’s in Real the IRS will consider UFI’s in Real

Property not to be a partnership Property not to be a partnership

interestinterest

Co-ownership in real property under Co-ownership in real property under

local law (legal costs)local law (legal costs)

Not more than 35 co-ownersNot more than 35 co-owners

Revenue Procedure 2002-Revenue Procedure 2002-22 (cont.)22 (cont.)

Separate loans for each co-owner (Banks hate Separate loans for each co-owner (Banks hate

this)this)

Co-owners have right to manage property or Co-owners have right to manage property or

hire a property manager if approved annuallyhire a property manager if approved annually

Each owner has right to sell or transfer co-Each owner has right to sell or transfer co-

interestinterest

These conditions are not all inclusiveThese conditions are not all inclusive

Practical Practical Considerations of Considerations of Ruling 2002-22Ruling 2002-22

Should hold at least two months before Should hold at least two months before sell UFI’ssell UFI’s

Watch Court Holding if negotiations have Watch Court Holding if negotiations have proceeded to such a point before proceeded to such a point before distribution – i.e. advanced planningdistribution – i.e. advanced planning

Generally these UFI’s are used more for Generally these UFI’s are used more for the reinvestment of §1031 proceeds-But the reinvestment of §1031 proceeds-But be careful you will end up owning be careful you will end up owning property with an inflated purchase priceproperty with an inflated purchase price

If this is the case take your 15% tax & runIf this is the case take your 15% tax & run

Revenue Ruling 2004-Revenue Ruling 2004-8686

Will a Delaware Statutory Trust (DST) Will a Delaware Statutory Trust (DST) help solve problem for banks and legal help solve problem for banks and legal issues of owning 35 UFI’sissues of owning 35 UFI’s

DST in Ruling treated as a grantor trust, DST in Ruling treated as a grantor trust, but the trustee had only limited powersbut the trustee had only limited powers

If trustee had additional powers = If trustee had additional powers = business entity and not a grantor trust & business entity and not a grantor trust & UFI concept doesn’t workUFI concept doesn’t work

Land exchanged for interest in grantor Land exchanged for interest in grantor trust=considered an exchangetrust=considered an exchange

Revenue Ruling 2004-Revenue Ruling 2004-86 (cont.)86 (cont.)

Additional powers will cause problems and deem Additional powers will cause problems and deem

treatment as one entity:treatment as one entity:– Dispose of contributed property and acquire new Dispose of contributed property and acquire new

propertyproperty

– Renegotiate lease with tenantRenegotiate lease with tenant

– Enter into new leases with tenantEnter into new leases with tenant

– Renegotiate obligation used to purchase propertyRenegotiate obligation used to purchase property

– Refinance obligation or borrow to purchase propertyRefinance obligation or borrow to purchase property

– Invest cashInvest cash

– Make structural modifications to propertyMake structural modifications to property

Bramblett Bramblett TransactionsTransactions

Partnership or S-Corporation owns Partnership or S-Corporation owns

property with large inherent capital gainproperty with large inherent capital gain Taxpayer wants to develop property and Taxpayer wants to develop property and

sell “lots”sell “lots” which would convert all inherent gain which would convert all inherent gain

into ordinary incomeinto ordinary income

WHAT DO YOU DO? WHAT DO YOU DO?WHAT DO YOU DO? WHAT DO YOU DO?

Bramblett Bramblett Transactions (cont.)Transactions (cont.)

Consider selling to a related entity – Consider selling to a related entity –

(needs to be a corporation(needs to be a corporation

Sell on the installment method – Old Sell on the installment method – Old

owner entity recognizes capital gain, owner entity recognizes capital gain,

therefore inherent gain is taxed at 15% therefore inherent gain is taxed at 15%

- only gain related to development is - only gain related to development is

tax as a developer tax as a developer


KEYS:KEYS:

AppraisalAppraisal

Note with fixed payment terms, reasonable Note with fixed payment terms, reasonable

rate of interest & proper form. Down rate of interest & proper form. Down

payment should be a substantial amount and payment should be a substantial amount and

payments cannot be tied to sales in payments cannot be tied to sales in

Development entityDevelopment entity

Development Entity has own financing and Development Entity has own financing and

capitalcapital


Separate business cards and Separate business cards and

helpfully new employee or twohelpfully new employee or two

Helpful if a different ownership % in Helpful if a different ownership % in

ownership of Development entity. ownership of Development entity.

THE ENERGY THE ENERGY INDUSTRYINDUSTRY

Oil & Gas UpdateOil & Gas Update

Update of Recent Law ChangesUpdate of Recent Law Changes

Update of Oil & Gas Industry in DenverUpdate of Oil & Gas Industry in Denver

Is Energy Really That Expensive Today?Is Energy Really That Expensive Today?

What is Driving Energy Prices?What is Driving Energy Prices?

Tax Law UpdateTax Law Update

Credit for Production from Marginal Credit for Production from Marginal

Oil & Gas ProductionOil & Gas Production

Suspension of 100% Net Income Suspension of 100% Net Income

Limitation on Percentage Depletion Limitation on Percentage Depletion

for Oil & Gas from Marginal for Oil & Gas from Marginal

ProductionProduction

Tax Law Update (cont.)Tax Law Update (cont.)

Phase-Down of the Electric Vehicle Phase-Down of the Electric Vehicle

Credit is Partially RepealedCredit is Partially Repealed

Credit for Electricity Produced from Credit for Electricity Produced from

Wind Energy, Closed-Loop Biomass Wind Energy, Closed-Loop Biomass

and Poultry Waste Facilities is and Poultry Waste Facilities is

extended until 2006extended until 2006

What’s Going on in DenverWhat’s Going on in Denver

Seen the Sale/Merger of Several Seen the Sale/Merger of Several

Large Independent E&P CompaniesLarge Independent E&P Companies

Several of the Management Teams Several of the Management Teams

from these Companies are Forming from these Companies are Forming

new Companiesnew Companies

What’s Going on in DenverWhat’s Going on in Denver(cont.)(cont.)

These Companies will be Private, These Companies will be Private,

Niche Oil & Gas CompaniesNiche Oil & Gas Companies

Opportunity to Revitalize Denver as Opportunity to Revitalize Denver as

an Energy Growth Huban Energy Growth Hub

Is U.S. Energy Still Cheap?Is U.S. Energy Still Cheap?

Price per Barrel of Household ItemsPrice per Barrel of Household Items:: Regular Unleaded Gas………….. $77.28Regular Unleaded Gas………….. $77.28 Coca Cola……………….........….$102.59Coca Cola……………….........….$102.59 Bottled Water……………….....…$126.18Bottled Water……………….....…$126.18 Milk……………………………….. $183.96Milk……………………………….. $183.96 Budweiser……………………...…$372.59Budweiser……………………...…$372.59 Jack Daniel’s……….................$4,460.17Jack Daniel’s……….................$4,460.17 Chanel #5 Parfum …….…$1,344,000.00Chanel #5 Parfum …….…$1,344,000.00

What is Driving Energy What is Driving Energy Prices?Prices?

China – Chinese Economy is White HotChina – Chinese Economy is White Hot

Instability Throughout the Oil Producing Instability Throughout the Oil Producing

World, Not Just the Middle EastWorld, Not Just the Middle East

Supply and Demand Reality CheckSupply and Demand Reality Check

New Tax Laws Real Opportunities for Tax Savings. Two New Acts Working Families Tax Relief Act-signed...

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