Weiss Berzowski Brady LLP's 31st Annual Tax and Business Seminar

31st Annual
Tax and Business
Seminar
September 18th, 2013
The Wisconsin Club,
Milwaukee, WI
Welcome to
Weiss
Berzowski
Brady’s

Circular 230 Disclosure
To ensure compliance with requirements imposed
by the IRS, any U.S. federal tax advice contained in
these materials is not intended or written to be used,
and cannot be used, for the purposes of
(i) avoiding penalties under the Internal Revenue
Code or (ii) promoting, marketing or recommending
to another party any transaction or matter
addressed herein.
Weiss Berzowski Brady
31st Annual Tax and Business Seminar
September 18, 2013

Representations,
Warranties and
Indemnities in the
Business Sale Context
David J. Roettgers
31st Annual Tax and
Business Seminar
September 18, 2013

Generally – Types of Transactions
• Sale of stock
• The buyer acquires the stock or
membership interest in the selling entity.
• All the liabilities of the transferring entities
pass through to the buyer of the
business. As a result the
representations, warranties and periods of
indemnification may be more carefully
scrutinized.
September 18, 2013

• Sale of Assets
• The entity sells all or substantially all of the
assets and the buyer assumes only certain
liabilities.
• This is the most prevalent type of transaction. In
this situation the buyer is able to limit liability and
protects itself against the liabilities of the seller.
As a result the representations, warranties and
indemnifications may be less carefully
scrutinized.
September 18, 2013

• Mergers
• All of assets and all of the liabilities of two or
more entities are combined into a single
entity.
• The liabilities of each merger participant will
carry over to the new entity. The
seller, however, does continue to be an
owner in the new entity.
September 18, 2013

Generally – What are Representations
and Warranties
• Representations Defined
• Representations are statements made by a seller
regarding the condition of the seller. These
statements cover all financial and nonfinancial
aspects of the business.
• Warranties Defined
• Warranties are seller’s promises to the buyer that
the representations are true and, if they are not,
buyer may be entitled to recover damages for the
breach.
September 18, 2013

Generally – Types of Representations
and Warranties
• Financial statements
• Employee related representations
• Customer relationships/contracts
• Compliance with laws
• Intellectual property
• Environmental
• Undisclosed liabilities
• Litigation
September 18, 2013

Generally – What is Indemnification
• Definition – general
• Indemnification is an agreement between the
parties whereby one party (typically the seller)
agrees to reimburse the other (typically the buyer)
for any losses they incur as a result of the breach
of the representations and warranties.
• Things to consider
• Survival
• Term
• Baskets
• Caps
• Escrows
September 18, 2013

Representations and Warranties
– Protecting Myself
• Qualifiers
• Material Adverse Effect
• Knowledge Qualifiers
September 18, 2013

Representations and Warranties –
Protecting Myself
• Material Adverse Effect (“MAE”) sample
language
• - “material adverse effect” means any result,
occurrence, fact, change, event or effect that has,
or could reasonably be expected to have, materially
adverse effect on the business, assets, liabilities,
capitalization, condition (financial or otherwise),
results of operations or prospects of seller.”
September 18, 2013

Protecting Myself
• Material Adverse Effect
• Issues related to MAE definition
• - “reasonably expected to have”
• - “prospects”
September 18, 2013

Protecting Myself
• MAE Carve outs
• - “…..except to the extent resulting from:”
• acts of war, sabotage or terrorism, military
action
• any changes in federal, state or local laws
including rules and regulations thereof.
• any changes in accounting rules or principals
including changes in GAAP or other accounting
standards
• changes in general economic conditions
whether local, domestic or foreign.
September 18, 2013

Protecting Myself
• MAE Carve outs (continued)
• - “….. Except to the extent resulting from:”
• announcement of the transactions
contemplated herein
• any other action required by this agreement
or
• any changes in the general financial market
(provided that any such event, change or
action does not effect the seller in a
substantially disproportionate manner).
September 18, 2013

Protecting Myself
• Knowledge Qualifiers
• Actual knowledge
• - “knowledge means the actual knowledge of the owner,
directors, officers, etc.??”
• Constructive knowledge
• - “any person knows or should have known”
Optional language:
• - “knowledge the seller would have had after
reasonable inquiry of a person reasonably expect to
have knowledge”
September 18, 2013

Examples – Undisclosed liabilities
“Seller has no liability except for the liabilities reflected or reserved against on the
latest balance sheet of the company except for those liabilities incurred in the
ordinary course of business since the date of such interim balance sheet.”
“Seller has no liability of the type or nature required to be disclosed in the balance
sheet prepared in accordance with GAAP except for liabilities reflected…..”
“Seller has no liability of the type or nature required to be disclosed in the balance
sheet prepared in accordance with GAAP or which could not reasonably be
expected to have, individually or in the aggregate, a materially adverse effect,
except for liabilities ….”
September 18, 2013

Examples – Compliance with laws:
“Business has been and is being conducted in compliance with
all applicable federal, state and local laws, rules and regulations.”
“To the sellers knowledge the business has been and is currently
being conducted in compliance with all applicable
federal, state, and local laws, rules and regulations.”
“To the sellers knowledge the business has been and is currently
being conducted in compliance with all applicable federal, state
and local laws, rules and regulations except to the extent such
violation could not reasonably expect it to have, individually or in
the aggregate, a materially adverse effect.”
September 18, 2013

Indemnification
Negotiation points
• “Sandbagging”
• Survival period
• Baskets
• CAPS
September 18, 2013

Indemnification
“Sandbagging”
• Sandbagging refers to a seller’s liability for
breach of a representation or warranty if the
buyer had knowledge of the breach prior to
closing.
• Anti-sandbagging refers to a provision that
limits a seller’s liability if the buyer knew of
the breach before closing.
September 18, 2013

Indemnification
Survival Time for a Claim
• Survival is the time period after closing
which a buyer may make a claim
• The survival time varies on a deal by deal
basis and on the type of representation and
warranty, i.e., “fundamental
representations”, tax representation or fraud
or intentional misrepresentations.
September 18, 2013

Indemnification
Baskets
• A basket is the threshold amount that must be
reached before a seller becomes liable to the
buyer for breach of the agreement.
September 18, 2013

Indemnification
Deductible:
• “Seller shall not be liable to indemnify the buyer for any
losses until the aggregate amount of the losses
exceeds $___ and only to the extent the losses exceed
$____.”
First Dollar:
• “Seller shall not be required to indemnify buyer for
losses unless the aggregate amount of the losses
exceed $___, in which event seller shall be responsible
for the amount of all losses, regardless of the
deductible.
September 18, 2013

Indemnification
Baskets
• Carve outs to baskets may also be negotiated
• Often times there is no basket in the event of certain
types of breaches such as
fraud, taxes, environmental, etc.
September 18, 2013

Indemnification
CAPS
• A cap is a maximum amount a buyer may
recover from a seller for claims of
indemnifications.
September 18, 2013

Indemnification
• Alternatives
• Unlimited
• Amount of the purchase price
• A percentage of the purchase price
• The escrowed amount, if any
• Fundamental representations, tax
representations, intentional breaches,
fraud may increase/have an increased
cap.
September 18, 2013

What’s Fair is Fair, But is
the Marketplace Fairness
Act
Mark W. Siler
31st Annual Tax and
Business Seminar
September 18, 2013

Overview
• What is the Marketplace Fairness Act
• Why is this a hot topic
• Current Law and Conditions
• Quill v. North Dakota
• State Budgets
• The Bill
• Common Misconceptions
• Supporters and Detractors – Who and Why
• Chances of Passing and Steps for Preparation
September 18, 2013

What is the Marketplace Fairness
Act
• Simply, it is legislation which grants states the
authority to compel remote sellers (more on
this in a minute), no matter where they are
located, to collect sales tax at the time of a
sale transaction and remit it to the proper
state.
• It is NOT an “internet sales tax”
• It is not federal legislation which enacts a tax – it
allows states to enact a tax on remote sellers
• It does NOT only apply to internet sellers – it allows
states to enact laws which capture all remote sellers
including catalog sellers and brick and mortar stores
September 18, 2013

Current Law and Conditions
• Quill Corp. v. North Dakota 504 U.S. 298
(1992).
• The nexus standard for sales and use tax is set
forth in this case
• Due process nexus analysis turns on whether
an individual’s connections with a state are
substantial enough to justify the state’s exercise
of power over him. Therefore, notice and fair
warning are the touchstones of the due process
nexus analysis
September 18, 2013

(1992).
• The Supreme Court outlined the different nexus
requirements to satisfy the Commerce Clause
• According to the Supreme Court, the Commerce
Clause and its nexus requirement are not about
fairness for the individual taxpayer, but by
structural concerns about the effects of state
regulation of the national economy
• The substantial nexus requirement is a means for
limiting state burdens on interstate commerce
September 18, 2013

(1992).
• The Supreme Court ruled that the North Dakota
law was too onerous on interstate commerce
• There are 6,000 taxing jurisdictions in the U.S.
with the authority to impose the same
collection and filing obligation
• This would create a huge record keeping and
compliance burden on businesses
September 18, 2013

• States are looking for any new revenue
they can bring in.
• States are increasingly frustrated that they can’t
collect sales tax on products shipped into the
state
• Some have even gone so far as to pass
legislation requiring remote sellers to collect
sales taxes
September 18, 2013

The Bill
• Passed the Senate in May with bipartisan
support.
• Sponsorship by 30 Senators from both parties
• House version has 67 sponsors and again has
bipartisan support
• It has support from 26 Governors – 13
Republicans, 12 Democrats and 1 Independent
• The only surprise with this is that there are not
more supporters – the purpose of the bill is to give
states more power to collect money
September 18, 2013

The Bill
• Authorization to Require Collection of Sale
and Use Taxes.
• Two methods
• Streamlined Sales and Use Tax Agreement
• Alternative Method
September 18, 2013

The Bill
• Members states under the Streamlined Sales
and Use Tax Agreement are all authorized to
require remote sellers to collect and remit
sales and use tax with respect to remote sales
sourced to the Member state
• This means sales which are delivered into the state
• Exceptions
• Must meet simplification requirements set forth in the
law
• Small seller exception
September 18, 2013

The Bill
• Full Member States –
Arkansas, Georgia, Indiana, Iowa, Kansas, Ke
ntucky, Michigan, Minnesota, Nebraska, Neva
da, New Jersey, North Carolina, North
Dakota, Oklahoma, Rhode Island, South
Dakota, Utah, Vermont, Washington, West
Virginia, Wisconsin, Wyoming
• Associate Member States – Ohio, Tennessee
• 180 days’ notice of intent to exercise authority
under the act
September 18, 2013

The Bill
• Non-Member states may require sellers to
collect and remit sales and use taxes with
respect to remote sales sourced to that state
• Authority shall commence no earlier than the
first day of the calendar quarter that is at least
6 months after passing laws that meet certain
requirements
September 18, 2013

The Bill
• Those laws must:
• Specify the tax or taxes to which such authority and
simplification requirements apply
• Specify the products and services otherwise subject
to the tax or taxes identified by the state in question to
which the law does not apply
September 18, 2013

The Bill
• Simplification Requirements.
• The State must provide:
• A single entity within the state responsible for
all state and local sales and use tax
administration, return processing and audits
for remote sales sourced to the state
• A single audit of a remote seller for all state
and local taxing jurisdictions within the state
• A single sales and use tax return to be used
by remote sellers to be filed with the single
entity responsible for tax administration
September 18, 2013

The Bill
• The State may not require a remote seller to file
sales and use tax returns any more frequently
than returns are required for non-remote sellers
• The State must provide a uniform sales and use
tax base among the state and local taxing
jurisdiction
• Source remote sales to the location where the
item sold is received by the purchaser based on
the location indicated by the instructions for
delivery furnished by the purchaser
September 18, 2013

The Bill
• The State must provide:
• Information indicating the taxability of products
and services along with any product and service
exemptions from sales and use tax in the state
and a rates and boundaries database
• Free software for remote sellers that calculates
sales and use tax due, that files sales and use tax
returns and is updated to reflect rate changes
• Certification procedures for software providers
• Certification procedures for software providers
September 18, 2013

The Bill
• Small Seller Exception.
• A state can only require a remote seller to
collect sales and use taxes if the remote seller
has gross receipts from remote sales of over
$1,000,000 in a calendar year
• There are aggregation rules that may combine
remote sellers with certain ownership
relationships
September 18, 2013

The Bill
• Other Limitations.
• Does not subject remote sellers to
franchise, income, occupation or other types of
taxes
• No effect on nexus
• No effect on seller choice
• Licensing and regulatory requirements
• No new taxes
• No impact on intrastate sales
September 18, 2013

Common Misconceptions
• Important note: It is very difficult to find
unbiased coverage of this bill.
• This bill will implement a new sales tax.
• Not true - Each state must take steps to pass its
own tax legislation
September 18, 2013

• Example of Biased coverage: From the website
marketplacefairness.org
• Question: Won’t this raise my taxes? Is this a new
tax?
• Answer: No. Consumers are required under
existing state laws to pay sales and use taxes on
the goods they purchase, but online sellers simply
are not required to collect the tax in the same way
that local businesses do – which puts local
businesses at a disadvantage. Consumers can be
audited and charged with penalties for failing to
pay sales and use taxes, but too often states are
unable to enforce this requirement
September 18, 2013

• Who is behind marketplacefairness.org?
TaxCloud – a producer of sales tax compliance
software
September 18, 2013

• It only impacts internet sales.
• Not true - It impacts all remote sales. These can
be sales by brick and mortar stores
• It applies to your business if you have over
$1,000,000 in sales.
• This is not completely true although it is
repeated in many places, but it is $1,000,000 in
REMOTE sales
• Sales in any state where you have nexus will not
be counted
September 18, 2013

• You must comply with all 9,600 (note the
updated number) taxing jurisdiction.
• This is actually true, but the functioning of the
bill creates a sort of safe harbor for retailers
using compliance software
September 18, 2013

Supporters and Detractors – Who
and Why?
• The bill has wide support across several fronts.
• Many large retailers support the bill. These include
Amazon.com
• These include mostly large, brick and mortar stores who
already have nexus in most if not all states
• Most state and local entities support the bill
• A new revenue stream
• The local groups want the revenue and think it will help their property
tax base
• Local chambers of commerce support the bill
• Most are made up of small, local, brick and mortar stores
September 18, 2013

Supporters and Detractors – Who
and Why?
• The opposition is from just as diverse a group.
• American Association of Attorney CPA’s
• American Catalog Mailers Association
• eMainStreet Alliance
• ebay, Inc.
September 18, 2013

Chances of Passing and Steps for
Preparation
• Timing is the difficult question here. The bill has
and will remain controversial because it is painted
as a new tax. However, as long as states need
new revenue streams it is likely they will push for
the passage of some type of sales tax law reform.
Most commentators believe that passage of some
sales tax nexus reform legislation will pass in the
near future.
September 18, 2013

Preparation
• With the political and economic situation we
currently have, there has never been more support
for a bill of this type.
• It is also important to note that many local groups
are worried about property tax base. They want a
level playing field for brick and mortar stores
because they don’t want empty storefronts.
September 18, 2013

Preparation
• Steps to help clients prepare for the law:
• Determine where your client is already in compliance with
sales tax requirements and where your client is making
sales without paying sales tax
• Review internal accounting systems to be sure your client
is tracking the information required, especially shipping
instructions which will determine sourcing
• Sample and test compliance software before it is actually
needed
• Be ready for angry customer calls, emails and reviews
September 18, 2013

The Net Investment
Income Tax
Steven M. Szymanski
31st Annual Tax and
Business Seminar
September 18, 2013

Overview
• Section 1411 of the Internal Revenue
Code was enacted as part of the Health
Care and Education Reconciliation Act of
2010.
• Section 1411 is effective for taxable
years beginning after December 31,
2012.
September 18, 2013

Overview
• Section 1411 imposes a 3.8% tax on the net investment
income of individuals, estates and trusts with income
above certain statutory threshold amounts.
• Section 1411 does not apply to a nonresident alien.
• On November 20, 2012, the IRS and Treasury issued
Proposed Regulations with respect to Section 1411.
• The Proposed Regulations may be relied upon by
taxpayers until they are finalized.
September 18, 2013

Section 1411 – The Net Investment
Income Tax
• Net Investment Income Tax for Individuals.
Section 1411 imposes a 3.8% tax on the
lesser of: (1) an individual taxpayer’s “net
investment income” for the tax year, or (2)
the excess, if any, of (a) the individual
taxpayer’s modified adjusted gross income
for the tax year over (b) the statutory
threshold amount.
September 18, 2013

Income Tax
• Statutory Threshold Amounts.
• For taxpayers filing a joint return, the statutory
threshold is $250,000.
• For a married taxpayer filing a separate
return, the statutory threshold is $125,000.
• For any other instance, the statutory threshold is
$200,000.
September 18, 2013

Income Tax
• Definition of Net Investment Income.
Section 1411 defines “net investment
income” as “investment income” less any
deductions properly allocable to the
income.
September 18, 2013

Income Tax
• Investment Income includes, without limitation, the
following items:
• Gross income from
interest, dividends, annuities, royalties, and rents
(other than those derived in the ordinary course of
an active trade or business);
• Net gains from dispositions related to passive
activities;
• Income from pass-through entities in which the
taxpayer does not materially participate (within the
meaning of Section 469); and
• Income from the investment of working capital.
September 18, 2013

Income Tax
• Exclusions from Investment Income.
• Income that is taxed under the Self-Employment Contribution
Act.
• Amounts paid by an employer to an employee that are
treated as wages.
• Any distribution from the following plans or arrangements:
• a qualified pension, stock bonus, or profit sharing plan
under Section 401(a)
• a qualified annuity plan under Section 403(a)
• a tax-sheltered annuity under Section 403(b)
• an individual retirement account under Section 408
• a Roth IRA under Section 408A
• a deferred compensation plan or a state and local
government or a tax-exempt organization under Section
457(b)
September 18, 2013

Income Tax
• Ordinary Course Exception For
Interest, Dividends, Etc..
Interest, dividends, annuities, royalties and
rents are not included in net investment
income if they are “derived in the ordinary
course of an active trade or business.”
• The ordinary course exception consists of
a two-pronged test: (1) the passive activity
test and (2) the trade or business test.
September 18, 2013

Income Tax
• The Passive Activity Test. In order for an item of
income to be excluded from net investment
income, the item must be derived in a trade or
business that is neither:
• a passive activity (within the meaning of
Section 469) nor
• a business which involves the trading of
financial instruments or commodities.
September 18, 2013

Income Tax
• The Passive Activity Test.
• In analyzing the passive activity test, the question
arises at what level is the passive determination
made, individual or entity.
• In the case of an individual who is engaged in a business
directly or through a disregarded entity, the passive
determination is made at the individual level.
September 18, 2013

Income Tax
• The Passive Activity Test.
• In the case of an individual, estate or trust that owns
an interest in a pass-through entity, the determination
of whether an item of income allocated to the
individual, estate or trust from the pass-through entity
is made in the following manner:
 The determination of whether the trade or business from which
the income is derived is a passive activity with respect to the
taxpayer is determined at the taxpayer level.
 The determination of whether the trade or business from which
the income is derived is a trade or business involved in the
trading of financial instruments or commodities is made at the
entity level.
September 18, 2013

Income Tax
• The Trade or Business Test.
• In order for an item of income to be excluded
from net investment income, the item must be
derived in a trade or business.
• The Proposed Regulations do not define a
“trade or business.” Rather, they reference
Section 162 regulations and case law for
precedent on whether a trade or business
exists.
September 18, 2013

Income Tax
• Section 469 Reference. Section 1411
incorporates by reference the passive
activity rules of Section 469.
September 18, 2013

Income Tax
• Passive activity
• A passive activity is any activity that involves the
conduct of a trade or business and which the
taxpayer does not materially participate.
• Material participation is defined as a taxpayer
being involved in the trade or business on a
regular, continuous and substantial basis.
September 18, 2013

Income Tax
• The Temporary Regulations for Section 469
provide seven safe harbors for material
participation.
September 18, 2013

Income Tax
• Rental activities are presumed to be per se
passive activities, unless an exception applies.
Because of this presumption, rents and net gain
from real estate presumptively constitute net
investment income. Consequently, it is
imperative to find an exception to the per se
presumption. The available exceptions include:
• Real estate professional status.
• Grouping rules.
• Rules that recharacterize passive income as nonpassive.
September 18, 2013

Income Tax
• Impact of Real Estate Professional Rule. If a
taxpayer qualifies as a real estate
professional, the per se treatment of a rental
activity as passive no longer applies. The
taxpayer is allowed to test for material
participation and may use the grouping rules to
lump various activities into a single activity in
order to satisfy material participation.
September 18, 2013

Income Tax
• Real Estate Professional Rule. A taxpayer may
qualify as a real estate professional for a tax year
if:
• more than one-half of the personal services performed in
trades or businesses by the taxpayer during such year
are performed in “real property trades or businesses” in
which the taxpayer materially participates
• the taxpayer performs more than 750 hours of services
during the tax year in real property trades or businesses
in which the taxpayer materially participates.
• “Real property trades or businesses” means any real
property development, redevelopment, construction,
reconstruction, conversion, rental, operation,
management, leasing, or brokerage trade or business.
September 18, 2013

Income Tax
• Grouping Rules.
• The Section 469 Regulations provide rules
which allow a taxpayer to group a taxpayer’s
trade or business activities and rental activities
for purposes of applying the passive activity loss
rules.
• The grouping rules allow one or more trade or
business activities to be treated as a single
activity if the activities constitute an “appropriate
economic unit” for the measurement of gain or
loss.
September 18, 2013

Income Tax
• Whether a grouping of activities constitute an
“appropriate economic unit” depends on the
relevant facts and circumstances.
• Factors.
• Similarities and differences in types of trades
and businesses.
• The extent of common control.
• The extent of common ownership.
• Geographic location.
• Interdependencies between and among the
activities.
September 18, 2013

Income Tax
• Passive Income Recharacterization Rules
• Self-rental rule.
• Nondepreciable property rule.
• Substantially appreciated property rule.
September 18, 2013

Income Tax
• Net Gains from Dispositions Related to
Passive Activities.
• Generally, an interest in a partnership or S
corporation is not considered property held in a
trade or business.
• Therefore, gain or loss from a sale of a
partnership or S corporation interest will be
subject to the net investment income tax.
September 18, 2013

Income Tax
• Net Gains from Dispositions Related to
Passive Activities.
• Gain from the disposition of a partnership or S
corporation interest will only be taken into
account for net investment income tax purposes
to the extent of the net gain which would be
taken into account by the taxpayer if all of the
assets of the partnership/S corporation were
sold at fair market value immediately prior to
such disposition.
September 18, 2013

Income Tax
• The Proposed Regulations set forth a four-step
process for this deemed sale:
• The partnership or S corporation is deemed to
sell all of its properties at fair market value for
cash immediately prior to the disposition of the
partnership or S corporation interest.
• The partnership or S corporation determines
the gain or loss on each property deemed to
have been sold by comparing each property’s
fair market value and adjusted basis.
September 18, 2013

Income Tax
• The gains and losses computed for each property
are allocated to the transferor taxpayer, complying
with the allocation provisions of Sections
704(b), 704(c), and 743(b) and the regulations
thereunder.
• Gains and losses attributable to non-passive trade
or businesses and that are not in the trade or
business of trading financial instruments or
commodities are netted together to compute a net
gain or loss. Net gains (negative adjustments) are
subtracted from the total gain or loss on
disposition of the partnership or S corporation
interest, and net losses (positive adjustments) are
added to the total gain or loss on disposition of the
partnership or S corporation interest.
September 18, 2013

Income Tax
• Income from the Investment of Working
Capital.
• Gross income and net gain attributable to the
investment of working capital is not derived in
the ordinary course of a trade or business.
• As a result, the gross income and net gain
derived from working capital is subject to the net
investment income tax.
September 18, 2013

Elections to Consider
• Regrouping of Activities Election.
• The Proposed Regulations provide taxpayers with a “fresh
start” with respect to activity groupings for taxpayers
subject to Section 1411.
• Taxpayers subject to Section 1411 can regroup previous
regroupings.
• The regrouping must be made for the first tax year
beginning after December 31, 2013, in which the taxpayer
is subject to the net investment income tax (determined
without regard to the effect of the regrouping).
• Taxpayers may also regroup their activities for a tax year
that begins during 2013 if they would be subject to the net
investment income tax without regard to the effect of the
regrouping.
September 18, 2013

• Regrouping of Activities Election.
• A taxpayer choosing not to regroup its activities
under the Proposed Regulations will not be
precluded from regrouping its activities once the
Proposed Regulations are finalized.
• Taxpayers must disclose details regarding any
regrouping in a written statement attached to
their original income tax return in the year of the
regrouping.
September 18, 2013

• Installment Sale Election
• Installment sales of partnership or S corporation interests
are subject to the net investment income tax.
• The Proposed Regulations provide for an adjustment to
gain or loss from a disposition of a partnership or S
corporation interest for purposes of determining the net
investment income tax
• The adjustment is calculated in the year of the disposition.
Consequently, the adjustment is not available for pre-
Section 1411 installment sales. This results in the full
amount of the gain on the installment sale proceeds
received in tax years beginning after December 31, 2012
being taxable as net investment income.
September 18, 2013

• Installment Sale Election
• Taxpayers may make an election to installment
sales gains that are attributable to pre-effective
date dispositions in order to adjust gains on
installment sales and limit application of the net
investment income tax.
September 18, 2013

Estate Tax Portability –
Finally a Permanent
Estate Planning Tool
Nancy M. Bonniwell
31st Annual Tax and
Business Seminar
September 18, 2013

What is Estate Tax Portability?
• Surviving spouse’s ability to use a
predeceased spouse’s unused gift and
estate tax exemption.
• Purpose of portability: simplify estate
planning for married couples.
September 18, 2013

Computing the DSUE Amount
• DSUE amount is equal to the lesser
of:
• Basic exclusion amount in the year of
the spouse’s death
or
• Last deceased spouse’s remaining
exclusion
September 18, 2013

The Portability Election is Not
Automatic
• Portability election is made by the
executor on a timely filed estate tax
return.
• File within 9 months of the date of death, plus
extensions.
• Return is filed by the executor of the estate or any
person in possession of the deceased spouse’s
property.
• Once made, the election is irrevocable.
September 18, 2013

The Portability Election is Not
Automatic
• An estate tax return is required even if
the estate’s value is below the filing
threshold.
• Opting out of portability: check the box or
do not file a return.
• No statute of limitations for the DSUE
amount.
September 18, 2013

Properly Prepared Estate Tax
Return
• “Estimate” the fair market value of the
assets to the nearest $250,000 for
assets that qualify for the marital
deduction or charitable deduction.
• Appraisals not required.
• Good faith and due diligence are
required.
September 18, 2013

Properly Prepared Estate Tax
Return
• The exception to the above relief does
not apply if:
• Partial QTIP election.
• A partial interest in property to each of the
surviving spouse and a third party.
• Formula bequests.
• Alternate valuation or valuation of farm or
other real property.
• Due diligence is not exercised.
September 18, 2013

Who Is the Last Spouse to Die?
The following examples illustrate how estate tax portability works:
Example 1
• Husband 1 dies. He has $2 million of unused
estate tax exemption. He made taxable
transfers of $3 million.
• Husband 1’s estate tax return permits Wife to
use Husband 1’s deceased spousal unused
exclusion amount.
• As of Husband 1’s death, Wife has made no
taxable gifts.
• Wife’s applicable exclusion amount is $7 million
(her $5 million basic exclusion amount plus $2
million DSUE.)
September 18, 2013

Example 2
• Same facts as in Example 1
• Wife subsequently marries Husband 2.
• Husband 2 predeceases Wife. He made $4
million in taxable transfers and has no
taxable estate.
• Husband 2’s estate tax return permits Wife
to use Husband 2’s DSUE amount: $1
million
• Wife’s applicable exclusion amount is $6
million (her $5 million basic exclusion
amount plus $1 million DSUE.)
September 18, 2013

Example 3
• Same facts as in Examples 1 and 2, except…
• Wife predeceases Husband 2.
• Wife’s applicable exclusion amount is $7 million (her
$5 million exclusion plus $2 million DSUE amount from
Husband 1).
• Wife has a taxable estate of $3 million. Wife’s estate
tax return permits Husband 2 to use Wife’s amount: $4
million (Wife’s $7 million DSUE exclusion amount less
her $3 million taxable estate).
• Husband 2’s applicable exclusion amount is $9 million
(his $5 million exclusion plus $4 million from Wife).
(Examples 1, 2 and 3 from Joint Committee on Taxation’s General Explanation
of Tax Legislation Enacted in the 111th Congress)
September 18, 2013

Considerations in Making the
DSUE Election
Advantages
• Simplicity.
• Basis Adjustment.
• Large Retirement Accounts.
• State Estate Tax.
• Additional Planning for the Wealthy.
September 18, 2013

DSUE Election
Disadvantages (on outright
distribution)
• Wasted GST Exemption.
• No Creditor Protection.
• No Spendthrift Protection.
• DSUE amount transferred to the
surviving spouse is not indexed for
inflation.
September 18, 2013

DSUE Election
Disadvantages
• Death of Second Spouse.
• Estate Tax Return Must Be Filed.
• Estate Tax Burden is Controlled by
Surviving Spouse.
September 18, 2013

Question
&
Answer
31st Annual Tax and
Business Seminar
September 18, 2013

Fifteen Minute
Break from
Programming
Please feel free to
stretch, grab a beverage.
31st Annual Tax and
Business Seminar
September 18, 2013

Recent Wisconsin
Supreme Court Business
Decisions
Jacqueline L. Messler
31st Annual Tax and
Business Seminar
September 18, 2013

Beidel v. Sideline Software
Facts:
• Dispute over whether Sideline Software owed
Beidel under the terms of the stock repurchase
agreement after Beidel was fired, and if so, how
much money
• Fantasy football software
• Beidel was the minority shareholder in Sideline.
Originally Hall and Beidel were the only 2
shareholders. Then Austin joined. Austin and
Beidel did not get along.
September 18, 2013

Facts:
• Sideline wanted to fire Beidel, but wanted to
wait until stock price agreement expired.
Instead of firing, reduced duties.
• Stock repurchase agreement-- shareholders
agreed on the price of shares in effect for 1
year. If no agreement at end of 1 year, would
stay in effect for 2 years. After two years, if no
agreement, sold shares would be valued at
FMV.
September 18, 2013

Facts:
• Agreement gave shareholders put option if
terminated
• Beidel attempted to exercise put option, but
Sideline claimed Beidel had not been
terminated
• Beidel sought specific performance of the put
option, argued actual termination and
constructive termination
September 18, 2013

Issue:
• Whether Beidel is entitled to specific
performance of the repurchase of his shares at
the stipulated price after Sideline refused to
honor Beidel's attempted exercise of his put?
September 18, 2013

Supreme Court Holding:
• Specific performance was an available remedy;
the stock repurchase agreement said specific
performance was available
• Good Faith and Fair Dealing.
• On remand, the circuit court will consider whether
Sideline's actions violated the duty of good faith and fair
dealing that is implied in every contract
• Court decides in equity. Range of factors, consider
whether specific performance is unduly burdensome.
September 18, 2013

Broader Points:
• Buy-sell arrangements are important in most
closely held situations
• Such arrangements are important for both
majority and minority owners
• Buy-sell arrangements must be tailored to the
specific situation; too often, “off the shelf”
agreement text is used
September 18, 2013

Broader Points:
• Each potential triggering event (e.g., death,
termination of employment, disability, and
separation or death of a marital property owner) and
potential situations in which it may arise for the
particular situation must be considered
• Valuation methods must be carefully considered;
formula, annual agreement, financial statement
based and appraisal methods may all be
considered; and, combinations of those methods
can be considered
September 18, 2013

Broader Points:
• In potential owner-deadlock
situations, “Solomon’s Choice” provisions
should be considered
• If sale of the business is possible, drag along
and come along rights should be considered
• Minority and majority owner interests may differ
substantially; evaluating representation issues
is important
September 18, 2013

Park Bank v. Roger Westburg
Facts:
• Westburgs start manufacturing business,
Zaddo, making advertising displays. Loan from
Park Bank to Zaddo. Westburgs executed
personal guarantees.
• Westburgs guaranteed payment of Zaddo's
obligations. Westburgs also granted a security
interest in their deposit accounts or other
amounts Park Bank owed to the Westburgs.
September 18, 2013

Facts:
• 1 year later, Park Bank alleges Zaddo is in
default. Alleged misconduct by Park Bank, also
froze securities account.
• Zaddo goes into receivership, land foreclosed.
Park Bank brings an action to collect on the
guarantees.
• The Westburgs bring affirmative defenses and
counterclaims alleging that Park Bank forced
Zaddo into default and Park Bank wrongly froze
the Westburgs' securities account.
September 18, 2013

Issue:
• Whether the Westburgs' status of guarantors
gives them standing to raise affirmative
defenses and counterclaims that Zaddo was
injured?
September 18, 2013

• Rule
• Direct vs. Derivative. In a derivative action, a
shareholder “assumes the mantle of the corporation
itself to right wrongs committed by those temporarily in
control” of the corporation. Derivative claims belong to
the corporation, not the complaining individual.
• Rose v. Schantz- corporate (derivative) vs. individual
(direct). Where the injury to the corporation is the primary
injury and any injury to a shareholder is secondary, the
shareholder may not bring a direct action, and is instead
limited to commencing a derivative action. Even though
value of shareholders' stock may suffer.
September 18, 2013

• Rule
• Same action may cause direct and derivative injuries.
• Any difference because claimants are guarantors?
No. Guarantors are treated no differently from creditors
in determining whether the guarantor may bring a
derivative action. Apply general rule--guarantors may
not maintain a derivative action.
September 18, 2013

• Application
• Zaddo was primarily injured by allegedly being forced
into receivership and any alleged resulting injury to
the Westburgs occurred as a result of Zaddo's alleged
injury.
• But freezing securities account is direct injury.
However, the Westburgs did not plead any damages
associated with that action.
September 18, 2013

Broader Points:
• Case illustrates the significance of decisions to personally
guarantee bank obligations, mortgage properties to
secure bank obligations, or provide other security, such
as interests in bank accounts, for those obligations; those
decisions must be carefully evaluated, particularly if the
guarantor does not control all business decisions
• General default provisions are often not negotiable with a
lender, but must be understood by guarantors; loan
covenants, on the other hand, are typically the subject of
negotiation and must also be understood by guarantors
September 18, 2013

Broader Points:
• Case illustrates that a guarantor may not enjoy all rights
the debtor enjoys; typical guaranty document text often
emphasizes this by use of “unconditionally” text in the
document
• Bank guaranties are typically written as guaranties of
payment, not merely of collection; thus, guarantors should
recognize that a lender need not exhaust remedies
against the obligor or collateral before seeking payment
from the guarantor
September 18, 2013

Broader Points:
• Guaranties are typically unlimited, limited, or of
a specific transaction; guarantors should
understand the difference and negotiate for
proper document language based on the
circumstances
September 18, 2013

United Concrete v. Red-D-Mix
Construction
Facts:
• United installed concrete for homeowners.
United was supplied its concrete by Red-D-Mix.
Two parties had a prior business relationship,
but stopped because of bleed water problem,
causing concrete to crack.
• Began relationship again, United sought
specific guarantees from Red-D-Mix that it had
fixed bleed water problem.
September 18, 2013

Construction
Facts:
• United put in driveways, homeowners
complained. United approached all
homeowners, got an assignment of claims from
them, brought action against Red-D-Mix. In
own name and for homeowners.
September 18, 2013

Construction
Issue 1:
• Whether a claim for misrepresentation under
Wis. Stat. § 100.18 is a question of fact or law?
• Follow standard summary judgment procedure.
• It can be a question of a law if no genuine issue of
material fact. Can be a question for factfinder if
questions of fact.
September 18, 2013

Construction
Issue 2:
• Whether claim that bleed water problem can be
fixed is puffery?
• Puffery- the exaggerations reasonably to be expected
of a seller as to the degree of quality of his product, the
truth or falsity of which cannot be precisely determined.
• Examples. American TV- Products were the finest.
Teitsworth- Product was masterpiece, premium quality.
• This was first Supreme Court case where statement
under a Wis. Stat. § 100.18 claim was not puffery.
September 18, 2013

Construction
Issue 3:
• Whether United may litigate the homeowner’s
claims against Red-D-Mix through
assignments?
• Linden answers the question definitively. United tried to
distinguish because subcontractor/general/homeowner
vs. supplier/installer/ customer. In Linden, the Supreme
Court held that the economic loss doctrine prevents a
homeowner from suing a subcontractor in tort for purely
economic loss.
September 18, 2013

Construction
Issue 3:
• Brief Overview – Economic loss doctrine
• A judicially created doctrine that bars purchasers of
goods from recovering solely economic losses (damage
to the product itself) from manufacturers under tort
theory. Instead, the buyer who purchases defective
goods looks to the contract for remedies.
• Applies to commercial transactions. Sunnyslope
Grading. Applies to consumer transactions, example
purchase of car. State Farm v. Ford.
September 18, 2013

Construction
Issue 3:
• Main Exceptions/Limitations
• Does not apply to service contracts. Cease. If contract is
for goods and services, look at predominant purpose of
contract. Linden.
• "Other property." Damages other than to product itself are
not covered by the doctrine, such as personal injury or
damage to other property. Linden.
• "Fraud in the inducement." Tort remedies allowed when
buyer is induced into the contract by fraud. Kaloti.
• Dangerous products. Tort remedies may be allowed when
product is inherently dangerous, such as asbestos-based
materials. Northridge.
September 18, 2013

Construction
Issue 3:
• The claims United asserted against Red–D–Mix through
the assignments squarely fit within the class of lawsuits
governed by Linden.
• United had a contract with Red–D–Mix, and contracts
with the homeowners. No contract existed
between Red–D–Mix and the homeowners. Here, the
damages were to the installed concrete itself, and there
were no physical injuries or personal harm. In
short, the three parties stood in the same position as
those discussed in Linden.
September 18, 2013

Construction
Broader Points:
• Sellers open themselves up to Wis. Stat. § 100.18
misrepresentation claim if court can determine that a
seller's statement about a product is false
• Trend of expansion of economic loss doctrine
• Important for purchasers of products to negotiate
contractual remedies or insure against defective
products; economic loss doctrine may prohibit tort
remedies
September 18, 2013

Wisconsin Manufacturing
& Agriculture Credit
Wisconsin Department of Revenue
Nate Weber
September 18, 2013
127

History
• Created by 2011 Act 32 (2011-13 Budget)
• Originally known as Qualified Production
Activities credit
• 2011 Act 232 made technical changes
• 2013 Act 20 made further technical changes
• Credit begins January 1, 2013
128

Brief Summary
• Credit applies against taxes on income from
manufacturing and agriculture activity in Wisconsin
• Phased in over four years:
Tax year 2013 = 1.875%
Tax year 2014 = 3.750%
Tax year 2015 = 5.526%
Tax year 2016 and beyond = 7.500%
• Offsets top tax rates of 7.90% (corporate income tax)
and 7.65% (individual income tax)
129

Who May Compute Credit
• Individual
• Corporation
• Estate or Trust
• Partnership*
• Limited Liability Company*
• Tax-option (S) Corporations*
*These entities cannot claim the credit but the eligibility
for and the computation of the credit are based on the
entity's business operations. The beneficiaries, partners,
shareholders, & members can claim the credit.
130

Who Cannot Claim Credit
• Insurance Companies
• Partnerships*
• Limited Liability Companies treated as
partnerships*
• Tax-option (S) Corporations*
*These entities cannot claim the credit but the eligibility
for and the computation of the credit are based on the
entities business operations. The
beneficiaries, partners, members, & shareholders can
claim the credit. 131

Requirements to Claim Credit
• Property must be assessed as manufacturing
or agricultural
• Must produce qualified production activities
income from that property
• Property must be located in Wisconsin
132

Manufacturing Assessments
• Performed by DOR's Manufacturing Bureau
• Application to verify assessment:
https://ww2.revenue.wi.gov/RETRWebRolls/application
• Regional office contacts:
http://www.revenue.wi.gov/forms/manuf/pa-750R.pdf
• General questions: mfgtelco@revenue.wi.gov
133

Agricultural Assessments
• Performed by local assessors
• Local assessor contact list:
http://www.revenue.wi.gov/training/assess/assrlist.pdf
• Both manufacturing and agricultural property
assessments must be reviewed each year
134

Nonqualifying Activities
• Income from film production
• Income from producing, transmitting, or distributing
electricity, natural gas, or potable water
• Income from constructing real property (except that
income from producing materials which become real
property can qualify)
• Income from engineering or architectural services
performed with respect to constructing real property
• Income from the sale of food and beverages prepared
by the claimant at a retail establishment
• Income from the lease, rental, license, sale, exchange,
or other disposition of land 135

Miscellaneous Provisions
• Use Schedule MA to claim credit
• Nonrefundable – 15 year carryforward
• Credit computed is income in the year after
the year the credit is claimed
• Credit is not shareable with other combined
group members
136

Computation of Credit
Production gross receipts1
Less: Cost of goods sold2
Direct costs3
Indirect Costs4 multiplied by production gross receipts factor5
= Qualified production activities income6
Multiplied by manufacturing property factor7 or agriculture property factor8
= Eligible qualified production activities income9
Multiplied by credit rate in effect for the taxable year10
Total credit
137

Definitions
1 Production gross receipts are the
receipts from the
lease, rental, license, sale, exchange, or
other disposition of qualified production
property1a.
138

Definitions
1a Qualified production property means:
• Tangible personal property manufactured in
whole or part on property assessed as
manufacturing under s. 70.995
• Tangible personal property produced,
grown, or extracted in whole or part on
property assessed as agricultural under
s. 70.32(2)(a)4
139

Definitions
2 Cost of goods sold are the production
costs associated with the production gross
receipts.
140

Definitions
3 Direct costs are the costs associated with the
production gross receipts and include all the
claimant's ordinary and necessary expenses paid or
incurred during the taxable year to carry on a trade
or business that are deductible under section 162 of
the Internal Revenue Code and identified as direct
costs in the claimant's managerial or cost accounting
records.
141

Definitions
4 Indirect costs are the costs associated with the
production gross receipts and include all the
claimant's ordinary and necessary expenses paid or
incurred during the taxable year to carry on a trade
or business that are deductible under section 162 of
the Internal Revenue Code, other than cost of goods
sold and direct costs, and identified as indirect costs
in the claimant's managerial or cost accounting
records.
142

Definitions
5 The production gross receipts factor is a fraction
consisting of the production gross receipts
(numerator) divided by the gross income from all
sources except those specifically excluded under
the Internal Revenue Code or excluded under
Wisconsin law (denominator). Items included in the
denominator include: gross sales, gross
dividends, gross interest income, gross rents, gross
royalties, the gross sales price from the disposition
of capital and business assets, gross income from
pass- through entities, and all other gross receipts
that are included in income before apportionment.143

Definitions
6 Qualified production activities income does not include any
of the following:
• Income from film production
• Income from producing, transmitting, or distributing
electricity, natural gas, or potable water
• Income from constructing real property
• Income from engineering or architectural services
performed with respect to constructing real property
• Income from the sale of food and beverages prepared by
the claimant at a retail establishment
• Income from the lease, rental, license, sale, exchange, or
other disposition of land
144

Definitions
• 7 The manufacturing property factor is the average value of the
claimant's real and personal property assessed under s. 70.995, Wis.
Stats., that is owned or rented and used in Wisconsin by the claimant to
manufacture qualified production property (numerator), divided by the
average value of all the claimant's real and personal property owned or
rented during the taxable year and used by the claimant to manufacture
qualified production property (denominator).
• Qualified production property is tangible personal property manufactured
in whole or in part by the claimant on property that is assessed as
manufacturing property under s. 70.995, Wis. Stats.
• The property owned by the claimant is valued at its original cost and
property rented by the claimant is valued at an amount equal to the
annual rent paid by the claimant, less any annual rental received by the
claimant for sub-rentals, multiplied by 8.
• The average value of the property is determined by averaging the values at
the beginning and ending of the taxable year.
145

Definitions
• 8 The agriculture property factor is the average value of the claimant's real
property and improvements assessed under s. 70.32(2)(a)4., Wis. Stats., that is
owned or rented and used in Wisconsin by the claimant during the taxable
year to produce, grow, or extract qualified production property (numerator)
divided by the average value of all the claimant's real property and
improvements owned or rented during the taxable year and used by the
claimant to produce, grow, or extract qualified production property.
• Qualified production property is tangible personal property
produced, grown, or extracted in whole or in part by the claimant on or from
property assessed as agricultural property under s. 70.32(2)(a)4., Wis. Stats.
• The property owned by the claimant is valued at its original cost and property
rented by the claimant is valued at an amount equal to the annual rental paid
by the claimant, less any annual rental received by the claimant from sub-
rentals, multiplied by 8.
• The average value of the property is determined by averaging the values at the
beginning and ending of the taxable year.
146

Definitions
9 The amount of eligible qualified production activities
income that a corporation may claim in computing the
credit is the lesser of the following:
– The eligible qualified production activities income
determined using the computation above
– Income apportioned to this state under s.
71.25 (5), (6), and (6m)
– Income determined to be taxable under s.
71.255 (2)
Note: For individual taxpayers the credit may only offset the tax imposed
by the business operations used to compute the credit 147

Definitions
10 The manufacturing and agriculture credit rate
is as follows:
• 1.875% for 2013 taxable year
• 7.500% for 2016 taxable year and beyond
148

Company ABC - Example
$500,000 (Production gross receipts)1
$200,000 (Direct costs)3
$125,000 X 100% (Indirect Costs4 X production gross receipts factor)5
= $175,000 (Qualified production activities income)6
x 70% (manufacturing property factor7 or agriculture property factor)8
= $122,500 (Eligible qualified production activities income)9
x 7.5% (Multiplied by credit rate in effect for the taxable year 2016)10
= $ 9,188 (Total credit)
• ABC Company manufactures products partially on property assessed as
manufacturing that is located in Wisconsin.
149

ABC Example – 2016 Tax Return
$175,000 Taxable income (only mfg. income)
X 7.9% Corporate tax rate
$ 13,825 Gross tax
9,188 Manufacturing & Agriculture Credit
$ 4,637 Net tax
150

Company XYZ - Example
$500,000 (Production gross receipts)1
$200,000 (Direct costs)3
$125,000 X 100% (Indirect Costs4 X production gross receipts factor)5
= $175,000 (Qualified production activities income)6
x 100% (manufacturing property factor7 or agriculture property factor)8
= $175,000 (Eligible qualified production activities income)9
x 7.5% (Multiplied by credit rate in effect for the taxable year 2016)10
= $13,125 (Total credit)
• XYZ Company manufactures products entirely on property assessed as
manufacturing that is located in Wisconsin.
151

XYZ Example – 2016 Tax Return
$175,000 Taxable income (only mfg. income)
$ 13,825 Gross tax
13,125 Manufacturing & Agriculture Credit
$ 700 Net tax
152

XYZ Example – 2016 Tax Return
$200,000 Taxable income (includes other income)
$ 15,800 Gross tax
13,571 Manufacturing & Agriculture Credit*
$ 2,229 Net tax
*Production gross receipts factor in slide 25 is 95.24%
($500,000/$525,000)
153

Resources
• Fact Sheet #1107
(http://www.revenue.wi.gov/taxpro/fact/manufandagr.pdf)
• Common Questions
(http://www.revenue.wi.gov/faqs/ise/manufagr.html)
• Wisconsin Tax Bulletin #172, 175, 179, & 180
(http://www.revenue.wi.gov/ise/wtb/index.html)
• For More Information or Questions Contact:
(608) 266-2772 or email questions to: corp@revenue.wi.gov
154

The Tax Man Cometh:
What are the IRS, Dept. of
Revenue and Local
Authorities up to in
Audits, Appeals and
Collections
Robert B. Teuber
31st Annual Tax and
Business Seminar
September 18, 2013

Internal Revenue Service
• The Post Scandal IRS
• Image Problem
• Tax Exempt Organizations
• Training Videos
• Conference Spending
September 18, 2013

• Audit Selection – Fairness Review
• Reviewing the criteria used to choose which small
businesses, business entities and individuals will be
selected for audit.
• Announced review came on the heels of the Tea-Party
controversy. In response, the acting Commissioner
stated that “It is rare or virtually non-existent that the
political activity of an entity would be relevant in terms
of any increased scrutiny that we would provide.”
• In 2011, of 1.65 million returns filed, small business
audits consisted of .2 percent of all audits and 1.3
percent of all small business returns filed.
• 62 percent of S Corp audits in 2011 were closed
without a change in revenue.
September 18, 2013

• IRS Still Using Prohibited Terms
• In the wake of the scandals, the IRS took steps to
avoid using certain terms on the BOLO list.
However, as recently as the end of August, the
Treasury Inspector General found that the IRS
was still using prohibited terms to permanently
label taxpayers as “Tax Protesters” or
“Constitutionally Challenged.”
• Performance Evaluations
• The IRS is not supposed to use tax enforcement
records for employee performance evaluations.
However, the Treasury Inspector General
identified a number of instances in which
“corrective action” was necessary.
September 18, 2013

Current Activity at the IRS
• Same Sex Marriage
• The IRS will now recognize legal same-sex marriages for all
federal tax purposes regardless of the state of domicile.
• Ruling does not apply to domestic partnerships or civil unions.
• Filing Issues
• Complications arise for taxpayers at the state level where
domiciled in states that do not recognize same-sex
marriages.
• Must file “married filing jointly” or “married filing separately.”
• Amended returns are permitted provided any refund claims
are made within the applicable statute of limitations.
• Wisconsin filing requirements likely requires 5 prepared tax
returns.
September 18, 2013

FATCA/FBARS – The current state of foreign
accounts
• News releases
• The IRS continues to release a considerable
amount of information concerning taxpayers
that have been prosecuted for unreported
income held through foreign accounts.
• Almost daily more information is released
concerning FATCA agreements with new
nations or foreign banks.
September 18, 2013

FATCA/FBARS – The current state of foreign
accounts
• Voluntary, quiet and noisy disclosures of previously unreported
foreign accounts – each approach should be carefully
considered based on the facts and circumstances facing the
client. As the penalties can be significant, the practitioner must
be sure to fully advise the client of the potential consequences.
• Summonses
• The number of summonses issued by the IRS, in audit and
collections, appears to be on the rise.
• Summonses are not self-enforcing.
• Foreign Bank Accounts and the Required Records Doctrine –
where it comes to foreign bank accounts, the government is
having tremendous success in overcoming 5th Amendment
objections concerning the production of records.
September 18, 2013

Collection Matters
• Installment Agreements
• Liabilities of under $50,000 – automatic debit
installment agreements paid over 72 months
can avoid the filing of tax liens and expedite
the resolution of outstanding liabilities.
• Lien withdrawals – lien withdrawals (in lieu of
releases) are available following the
resolution of a tax liability.
September 18, 2013

Collection Matters
• Offers in Compromise
• Modifications to financial analysis – the IRS has changed how its
standard expense categories are applied. The changes now
allow for consideration of federally subsidized student loans, the
payment of state tax obligations and the increases in the amount
of asset value exemptions.
• Changes to payment period – The maximum period over which a
compromise can now be paid is now limited to two years.
• No compromise will be allowed if the IRS determines an
Installment Agreement could pay the liability in full.
• Incentivizing bad behavior?
• Increase in filing fees?
• Collection Due Process Hearings – The IRS has issued
guidance concerning the timeliness of CDP requests
mailed to incorrect addresses.
September 18, 2013

Wisconsin Department Of
Revenue
Audits
• Sales Tax Audits – The WDOR continues to aggressively pursue
Sales and Use Tax liabilities.
• Trust Fund Taxes
• Many cases coming out of the Wisconsin Tax Appeals
Commission appear to be related to personal liability imposed on
the failure to pay Sales/Use Taxes.
• Statute of Limitations – In the case Rashaed v. WDOR – the
taxpayer argued that a four year statute of limitations should
apply to the imposition of personal liability under Wis. Stats. Sec
77.60(9).
• The taxpayer lost at both the TAC and Circuit Court levels on the factual
issues and the argument that Wis. Stats. sec. 77.60(9) was
unconstitutional
• The case is currently on appeal to the Wisconsin Court of Appeals.
September 18, 2013

Revenue
Audits
• Powers of Attorney – Mass Confusion at the WDOR
• The Department of Revenue is rejecting Powers of Attorney that
do not include phone numbers and firm names.
• In some instances, agents are attempting to bypass
representatives.
• Many agents have different interpretations on the requirements
with which to comply.
• There appears to be strict, but unclear, guidance concerning
Powers of Attorney.
September 18, 2013

Revenue
Collections
• Interest Rate Changes
• 2013 Wisconsin Act 20 (the budget bill) reduced interest
rates on tax overpayments from 9 percent to 3 percent for
refunds paid on or after July 2, 2013.
• Regardless of whether the refund was for periods arising
or requested prior to this date, the new interest rate
applies.
• The interest rates charged to taxpayers (12 percent rate
on assessed taxes and 18 percent rate if delinquent)
remain unchanged.
• Out of State Taxpayers
September 18, 2013

Real Property Tax Assessments
• What are municipalities doing with
property values?
• Are assessors making changes at Open
Book?
• Are Boards of Review making changes?
September 18, 2013

Drafting Flexible
Estate Plans
After The American
Taxpayer Relief Act
Randy S. Nelson
31st Annual Tax and
Business Seminar
September 18, 2013

The New Normal
• EGT exemption $5,250,000
• GST exemption $5,250,000
• Portability of EGT exemption
• Unlimited marital deduction
• Longer life expectancies
September 18, 2013

Life Expectancies at Age 65
• Male – age 83
• Female – age 85
• 1 of 4 live past 90
• 1 of 10 live past 95
September 18, 2013

Estate Planning
Under the New Normal
• Flexibility in tax planning
• Non-tax benefits of trusts
• Asset protection
• Controlling the disposition of
assets on survivor’s death
September 18, 2013

Flexible Estate Plans
• All to spouse with
contingent bypass trust
• All to QTIP trust
• Optimum marital deduction
with QTIPed bypass trust
September 18, 2013

Contingent Bypass Trust Plan
• All to spouse
• Spouse may disclaim to
bypass trust
• Deadline – 9 months after
death
September 18, 2013

Advantages
• Simplicity – bypass trust is
only used if needed
• Many options in structuring
dispositive provisions of
bypass trust
• Spouse makes the
post-death decision
September 18, 2013

Disadvantages
• No extension on 9 month
deadline
• Spouse makes the
post-death decision
• No income tax basis
adjustment to bypass trust
September 18, 2013

Disadvantages (cont’d)
• Technical requirement –
spouse may not have already
accepted the economic benefits
of disclaimed assets
• Spouse may not change the
disposition of bypass trust assets
on survivor’s death
September 18, 2013

QTIP Trust Plan
• All to QTIP trust
• May make full, partial, or no
QTIP election
• Deadline – 9 months after
death but can extend for 6
more months
September 18, 2013

Advantages
• Simplicity – all going to one
trust
• Extension permits 15 month
deadline
• Spouse may be given power to
change the disposition of QTIP
trust assets on survivor’s death
September 18, 2013

Advantages (cont’d)
• Executor makes the
post-death decision
• May preserve deceased spouse’s
GST exemption with reverse QTIP
election
• To extent of QTIP election, income
tax basis of QTIP trust assets is
adjusted again on survivor’s death
September 18, 2013

Disadvantages
• Have QTIP trust even if not
needed
• Spouse is the only permitted
lifetime beneficiary of QTIP trust
• All QTIP trust income must be
paid to spouse even if not needed
September 18, 2013

OMD with QTIPed Bypass
Trust Plan
• Decedent’s assets up to the
exempt amount go to a QTIP
trust
• Balance goes to spouse
• May make full, partial, or no
QTIP election
September 18, 2013

OMD with QTIPed Bypass
Trust Plan (cont’d)
• Variation on QTIP trust plan
with a limit on QTIP trust
• Similar advantages and
disadvantages
September 18, 2013

Protection of Assets
• Trusts can protect assets for
benefit of spouse and/or
children
• Applies to bypass trust and
QTIP trust
September 18, 2013

Objective is Protection from:
• Divorce
• Creditors
• Undue influence of new
spouse, child, caregiver, etc.
September 18, 2013

Protection of Assets (cont’d)
• At a minimum provides vehicle
for tracing inherited assets
• Selection of trustee or co-
trustee may have a big impact
• May limit survivor’s power to
change the disposition of trust
September 18, 2013

Specialized Trusts
for Specialized
Assets
Philip J. Miller
31st Annual Tax and
Business Seminar
September 18, 2013

One Easy Step to
Getting a Contract
Enforced
Sandy Swartzberg
31st Annual Tax and
Business Seminar
September 18, 2013
Sandy invites you to
visit his blog:
Conversations-With-Sam.com

Did I Say That?
When An Email
May Become A
Binding Contract
Neal S. Krokosky
31st Annual Tax and
Business Seminar
September 18, 2013

Why is it Always
Important to Get a
Survey When
Purchasing Property
Ann K. Chandler
31st Annual Tax and
Business Seminar
September 18, 2013

usiness
Considerations in
light of the Repeal of
the Wisconsin Bulk
Sales Law
James S. Swiderski
31st Annual Tax and
Business Seminar
September 18, 2013

Thank you for attending our
31st Annual
Tax and Business Seminar
Please join us in the
adjoining bar area
for cocktails,
hors d’œuvres and
conversation.
September 18, 2013

Weiss Berzowski Brady LLP's 31st Annual Tax and Business Seminar

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