1999 Federal Tax Briefs

Proposed Regulations would treat an LLC member as a limited partner unless the member (a) had personal liability for debts of the LLC; (b) had the ability to contract on behalf of the LLC; or (c) participated more than 500 hours. Since Congress has not acted, it is unclear whether self-employment tax should be reported on the entire distributive share of LLC income, or only on that portion which is not a “capital” interest. Since reliance on Treasury Regs would negate the negligence penalty, an aggressive stance may be justified.

TRA 1997 increased the applicable exclusion amount from $600,000 to $1 million, effective January 1, 2006. As of February 1, 2000, the amount of one’s taxable estate that can pass free of NY estate taxes will equal the federal amount, which at that time will be $675,000. Thereafter, if the taxable estate exceeds the applicable exclusion amount (i.e., federal estate tax is owed), the NY estate tax will be equal to the maximum state tax credit shown on the Form 706.

Title need not be held jointly between spouses where a joint tax return is filed to claim the $500,000 exclusion for home sales provided both spouses resided in the home for at least 2 years and neither claimed an exemption during the previous 2-year period. The new exclusion may also be claimed by a taxpayer who has previously taken the old $125,000 exclusion. Furthermore, PLR 199912026 provides that the trustee of an inter vivos grantor trust into which the residence has been deeded may utilize the exclusion provided the trust beneficiary has occupied the home for the required 2-year period.

The 1998 Tax Act provides that the value of a gift for gift tax purposes has been “finally determined” either when the amount is (i) reported on a gift tax return, (ii) determined by the IRS, or (iii) determined by a court. An item is shown on a return if the item is disclosed on the return or if an attached statement apprises the IRS of the nature of the item. Since the IRS has indicated that it will scrutinize gift tax returns for which discounts are claimed, it appears advisable to report all gifts including annual exclusion gifts, on a gift tax return, if value could be an issue.

Effective in 1999, home offices maintained for administration or management purposes will be considered a “principal place of business” and will qualify for the home office deduction. . . The above-the-line deduction for health insurance premiums for self-employed taxpayers rises to 60% in 1999.

A recent GAO report  reveals that 59% of audited returns were selected using the “discriminant function system” (DIF), which is a calculation based on a classified formula designed to choose the returns with the highest probability of a tax change if audited. Non-DIF audits resulted primarily from IRS special projects, books and records audits, and audits of tax preparers whom the IRS views as questionable.

Under new IRC §7525, the attorney-client confidentiality privilege also applies to communications involving tax advice between a taxpayer and any federally-authorized tax practitioner. However, the new privilege does not extend to communications related to return preparation or to criminal tax proceedings.

IRC §7520 values a term interest according to published actuarial tables. §2702(a)(2)(a) excepts certain retained interests in trust and values them zero. §2702(a)(2)(B), which governs personal residence trusts, excepts certain “qualified” retained interests from the first exception, and permits them to be valued under §7520. One “qualified” interest is a personal residence trust (QPRT), in which a family member is granted a remainder interest. Properly structured, the remainder interest in a QPRT is valued according to §7520, which results in a greatly reduced taxable gift. However, since §2702 does not apply to “incomplete” transfers, the grantor must outlive the trust term to qualify. To curtail perceived abuses, the Regs now prohibit the grantor from repurchasing the residence during or after the trust term. This prevents the depletion of the donor’s estate due to the repurchase money, and also prevents heirs’ from taking a stepped-up basis in the residence. QPRTS have recently drawn the attention of Mr. Clinton, who has proposed repealing the §2702 exception.  See From Washington.

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