Don't forget to join us February 4 for The Scoop: Hot Issues from the Front Line. The Scoop is a live, FREE, 30-minute webinar session briefing you on current hot issues, recent court cases, and new IRS procedures. We offer the Scoop twice a month.
During the Carter Administration, as a part of the 1976 Tax Reform Act, “stepped-up” basis was eliminated for inherited assets. However, in 1980, the provision was repealed before it ever took effect because of the administrative problems associated with “tracking” basis. Now, President Obama is proposing to bring the idea back - eliminating stepped-up basis for inherited assets and retaining the estate tax. That would result in a tax on the appreciation in asset value during the period of the decedent’s ownership until the asset is sold.
But, that’s not all. President Obama is also proposing an increase in the tax rate on capital gains to 28 percent. That would mean a significant tax on everyone and would basically create an estate tax on small-sized estates. Apparently, the tax would be triggered only upon the death of the surviving spouse (for married couples) and would not subject to capital gain tax the first $200,000 for married persons ($100,000 for single persons). Transfers to charity would not be subject to capital gain tax and there would probably be some sort of exemption for small businesses. It is not known how the proposal would impact intentionally defective grantor trusts which remove the trust property from the grantor’s estate.
This is probably the last we’ll write on this proposal. It’s not a serious tax proposal (if it were, the President would have introduced it during his first two years in office) and will never get formulated into a bill that the Congress will vote on.
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The repair/capitalization regulations are still generating a lot of commentary. Unfortunately, much of the commentary is confusing to practitioners and even misleading due to its incompleteness. We posted several technical articles to TaxPlace in November and December, with the December article focusing on the (limited) situations in which a Form 3115 (change of accounting method) would have to be filed. We encourage you to refer to those articles for guidance. Here, we address some of the recent questions that have come in from practitioners worried about how to implement the regulations based on some of the articles they have been reading by tax commentators. As we pointed out in our TaxPlace article, it looks like numerous large tax firms and some commentators are pushing the idea that Forms 3115 will have to be filed for nearly all clients, and others have followed along out of fear. The bottom line, however, is that Forms 3115 will not be required for the vast majority of farm clients (and other small businesses).
Here are the major points to keep in mind with respect to the repair/capitalization regulations:
Most taxpayers (and virtually all ag taxpayers) have not adopted a method of accounting for the handling of repairs, supplies or small tools. They have never been required to do so. The same can be said for the vast majority of small corporations, partnerships, LLCs and other similar entities – they have not adopted a method of accounting for the treatment of repairs, supplies or small tools. They don’t have a repair/capitalization policy for their books. Thus, the implementation of the repair/capitalization regulations does not involve a change in accounting method for these taxpayers and no Form 3115 would have to be filed. They are simply adopting a method and Form 3115 is not required for that.
While it is true that a “qualified taxpayer” (a taxpayer with average gross receipts over the three preceding tax years of $10 million or less) can file a less-complete Form 3115, that does not mean that such a taxpayer has a Form 3115 filing requirement. As noted above, a Form 3115 only need be filed if a change of accounting method is involved. The adoption of a capitalization policy does not constitute a change in accounting method that would trigger a Form 3115 filing requirement. So, while the vast majority of farming and ranching operations will qualify as a “qualified taxpayer” that does not mean that they have a Form 3115 filing requirement. They still aren’t changing a method of accounting, merely adopting one.
Hopefully, this helps clear-up some of the confusion created by the misleading information out there concerning the repairs/capitalization regulations. Stay tuned.
On January 8, 2015, the Des Moines Board of Water Works Trustees (DMWW) voted unanimously to send a notice of intent to file a Clean Water Act citizen lawsuit against the county supervisors of Sac, Buena Vista, and Calhoun Counties in Iowa. The notice alleges that the supervisors, in their role as trustees for 10 Iowa drainage districts, are violating the Clean Water Act (CWA) by discharging pollutants into the Raccoon River through various point sources without proper permits. The notice alleges that if the drainage districts do not cease discharging pollutants without permits or act within 60 days to correct the violations, DMWW will file their federal lawsuit. The notice also threatens state law claims of nuisance, trespass, and negligence.
DMWW contends that it is without other recourse to avert high nitrate levels in its water, which flows from the Raccoon and Des Moines Rivers and supplies approximately 500,000 consumers. DMWW alleges spending thousands of dollars for a denitrification process required during certain days to ensure safe drinking water. DMWW states that it must pay more than $7,000 for each day the process is operated. Nonetheless, DMWW asserts that the lawsuit is not about the money, but about meeting a “public safety need.”
The threatened action is truly unprecedented. Drainage districts are unique creatures of Iowa law, which grants county supervisors the authority to create drainage districts for the purpose of straightening, widening, deepening, or changing any natural watercourse whenever the same will be of “public utility or conducive to the public health, convenience or welfare.” The law specifically states that “the drainage of surface waters from agricultural lands and all other lands or the protection of such lands from overflow shall be presumed to be a public benefit and conducive to the public health, convenience and welfare.” In other words, drainage districts exist to retain the productivity of farmland by ensuring that surface waters (which generally comprise rainwater) are not allowed to flood the land and take it out of production. Continue reading here.
On January 20, 2015, Dakota Access, LLC, a subsidiary of Dallas-based Energy Transfer Partners, filed a petition with the Iowa Board of Utilities seeking a permit to build a crude oil pipeline across the State of Iowa. The private Houston-based company is moving forward with plans to build a pipeline to transport crude oil from the Bakken Shale Oil field to a refinery hub in Illinois. Dakota Access is proposing a 1134-mile pipeline stretching from northwestern North Dakota to the Patoka Oil Terminal Hub in south-central Illinois. The plan includes 346 miles of pipeline—30 inches in diameter—across 18 Iowa counties.
To build the Iowa portion, Dakota Access must obtain a permit from the Iowa Utilities Board. Although the Board has no jurisdiction to regulate the safety of hazardous liquid pipelines (the U.S. Department of Transportation Pipeline and Hazardous Material Safety Administration has safety jurisdiction), the Board has sole discretion to determine whether to allow Dakota Access to build the crude oil pipeline across Iowa. The decision will ultimately turn on whether the Board believes the pipeline will “promote the public convenience and necessity.”
Continue reading here.
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Every partnership (defined as a joint venture or any other unincorporated organization) that conducts a business is required to file a return for each tax year that reports the items of gross income and allowable deductions. If a partnership return is not timely filed (including extensions) or is timely filed but is inadequate, a monthly penalty is triggered that equals $195 times the number of partners during any part of the tax year for each month (or fraction thereof) for which the failure continues, capped at 12 months. Such an entity is also subject to rules enacted under the Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982. These rules established unified procedures for the IRS examination of partnerships, rather than a separate examination of each partner.
An exception from the penalty for failing to file a partnership return and the TEFRA audit procedures could apply for many small partnerships (basically defined as a domestic partnership with 10 or fewer partners that are natural persons). However, it is important to understand the scope of the "small partnership exception" and what is still required of such entities. In many instances, such entities may find that simply filing a partnership return in any event is a more practical approach. That's because the partnership (and the partners), even if the small partnership exception applies, have to fully report their shares of income, deductions and credits on their own timely filed returns. In addition, the partnership allocation percentages must be the same for all partnership tax attributes. Also, the tax preparer will have to split income and expense into two or more separate Schedule Fs and allocate depreciation and other tax items amongst the partners. That's why, In most instances, it will be much easier to simply report all of this information on a partnership tax return than to do the same calculations and then attempt to allocate individual items of income and expense to each partner.
Typically, the small partnership exception is limited in usefulness to those situations where the partners are unaware of the partnership return filing requirement or are unaware that they have a partnership for tax purposes, and the IRS asserts the penalty for failing to file a partnership return. In those situations, the partnership can use the exception to show reasonable cause for the failure to file a partnership return. But, even if the exception is deemed to apply, the IRS can require that the individual partners prove that they have properly reported all tax items on their individual returns.
In addition, if the small partnership exception applies, it does not mean that the small partnership is not a partnership for tax purposes. It only means that the small partnership is not subject to the penalty for failure to file a partnership return and the TEFRA audit procedures. The small partnership exception is not a way to escape partnership tax complexity, and it is not a blanket exemption from the other requirements that apply to all partnerships. For more information on this subject, subscribers can read this article on TaxPlace.
Following is a sample of recent legal cases summarized on our website. See the complete collection here.
CALT does not provide legal advice. Any information provided on this website is not intended to be a substitute for legal services from a competent professional. CALT's work is supported by fee-based seminars and generous private gifts. Any opinions, findings, conclusions or recommendations expressed in the material contained on this website do not necessarily reflect the views of Iowa State University.