January 2013 – Significant Developments
Over the past month, there have been several significant developments of importance to farmer, ranchers, agribusinesses and the professionals that represent them. In early January we posted our annual article on the Top Ten agricultural and tax developments from 2012. If you haven’t done so already, take a look at the cases and rulings highlighted in that publication. There were some big developments in 2012.
Also, in early January, the Congress finally enacted a new tax law designed to deal with many of the provisions that had expired before 2012 in addition to those expiring at the end of 2012. We highlighted the major developments in our article of January 7. In addition, our webinar (co-sponsored by the Iowa Bar Association) had nearly 800 people in the combined live audience and those watching via the web. The big developments for many agricultural clients include the retention of the $5 million exemption equivalent of the unified credit for estate and gift tax purposes (indexed for inflation) along with portability of the first deceased spouse’s unused exclusion amount. While the top rate increased to 40 percent, that change is easy to deal with. Also, the depreciation provisions in the new law were largely unexpected. The retroactive increase in the I.R.C. §179 amount to $500,000 for 2012 and extension for 2013 is big. Also, the ability to make or revoke an I.R.C. §179 election on an amended return for an open tax year was extended through tax years beginning before 2014. That provides a huge planning tool. If a client wants to dispose of an asset on which a large amount of expense method depreciation has been claimed, to avoid a significant amount of tax on the disposition the election can be revoked and made on a different asset that the client is not disposing. The IRS in 2008, gave the clearance for making in addition to revoking such elections without the need for Treasury Regulations (see Rev. Proc. 2008-54, 2008-38 I.R.B. 722). In 2009, the Chief Counsel’s Office of IRS reiterated that I.R.C. §79 elections can be made or revoked on an amended return for an open tax year in Information Letter 2009-0059 (Feb. 17, 2009). Clearly, the IRS couldn’t care less about arguments that taxpayers can’t make I.R.C. §179 elections on an amended return. Remember, under the Code of Federal Regulations (26 C.F.R. §301.7805-1) it is the Commissioner of the IRS with the approval of the Secretary that “prescribe[s] all needful rules and regulations for the enforcement of the Code…”. The IRS is a bureau within the Department of the Treasury, so when IRS says that Regulations aren’t needed to allow I.R.C. §179 elections on an amended return, that is done with the approval of the Secretary of the Treasury so that is all the authority you need. Simply ignore any non-IRS statements asserting that such elections can’t be made. Is it a malpractice issue for a practitioner that doesn’t follow the IRS guidance staked out in the Rev. Proc. and the Information Letter and fails to make such an election when it would have been in the client’s best interest to do so? Let’s not find out.
On January 15, a federal court in California decided another demutualization stock basis case. This time the case was on cross motions for summary judgment so there really wasn’t a decision on the merits of the tax issue involved. But, the court refused to allow the taxpayer to use the Open Transaction Doctrine that a different federal court allowed a few years ago. The court said that the taxpayer in the California case failed to provide sufficient evidence to establish that they had anything other than a zero tax basis in the stock.
On January 18, a federal judge wiped out the IRS preparer regulations. Then, on February 1, the same judge modified the injunction to clarity that the IRS could issue PTINs, but couldn’t require preparers to pay for the PTIN numbers or require mandatory continuing education for the previously unregulated preparers.
Also on January 18, the IRS announced that the March 1 filing deadline for farmers that don’t pay estimated tax and was being moved to April 15. However, the penalty abatement (waiver of estimated tax penalty) doesn’t apply if the return is filed on or before March 1. In that event, the tax has to be paid with the return – such farmers can’t file on or before March 1 and pay the tax by April 15 without being subject to penalties. So, just cool it and file those farm returns after March 1.
On another tax note, the Iowa legislature has sent its first bill of the session to the Governor. The bill, SF 106, is a “coupling” bill designed to conform Iowa tax law to the federal provisions in many respects. The bill conforms Iowa law to all of the recent changes in the federal tax code except for bonus depreciation. Iowa continues to not couple on bonus depreciation. The Governor is expected to sign the bill.
There were also some very significant ag-related court decisions from the Iowa appellate-level courts in January and on February 1. Make sure to read our summaries of those cases. A couple of them are very important to farm families.
Also, keep an eye on your clients’ businesses. The economy continues to struggle. During the last quarter of 2012, the economy not only did not grow, it contracted. Also, the January unemployment rate (as reported by the Bureau of Labor Statistics) was higher than in December and December was higher than in November. In addition, some have cited the reported improvement in the housing market as signs that the economy is improving. But, not so fast on that one. There has been a reported “low inventory” of homes for sale and reports that housing starts were up dramatically in December of 2012 compared to a year earlier. But, there is a “shadow inventory” of homes of somewhere between 20 and 30 million according to some of the most reliable housing market experts. These are homes that are in default or delinquency, in a delayed foreclosure, underwater on the mortgage and can’t be sold, as well as those where the owner is simply waiting for the market to get better before selling. The market can’t recover until that inventory is cleared. It’s just basic economics. As for housing starts, the non-seasonally adjusted number of starts for December of 2012 was the lowest non-adjusted number since March of 2012 according to the Census Bureau - Housing Starts. As for lumber futures being up, there is quite a history of the housing market running well ahead of the actual fundamentals. So, don’t be deceived. Watch your clients’ business closely for any tax and financial planning moves that need to be made. At our summer seminar in Santa Fe and at the tax schools this coming fall we will be addressing financial distress issues. The problem won’t go away by then, especially with the tax hike on wage earners kicking in this year along with the new Medicare surtaxes. Expect the economy to continue to struggle. The stock market will continue to do well as long at the Federal Reserve keeps pumping it up with cash.
The Center for Agricultural Law and Taxation 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. The Center'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.