2015 CALT Tax Schools Day 2. Contact Information. Day 2 Topics 12/15/2015. Dave Repp. Paul Neiffer.

Transcription

1 2015 CALT Tax Schools Day 2 David Repp and Paul Neiffer Contact Information Dave Repp drepp@dickinsonlaw.com Paul Neiffer Paul.neiffer@claconnect.com Day 2 Topics Rates & Tables Ag Easement payments (Volume A, chapter 4, page A157) Ag Income Deferral (Volume A, chapter 4, page A175) Ag Sale of partnership interest (Volume A, chapter 4, page A185) Ag Meals and lodging (Volume A, chapter 4, page A188) Ag Qualified farm indebtedness (Volume A, chapter 4, page A194) Ag Liquidity Planning for Ag Estates (Volume A, chapter 4, page A198) Ag Post death sale of livestock/grain (Volume A, chapter 4, page A217) Depreciation (Volume B, chapter 1, page B1) Iowa Department of Revenue update Capitalization and repairs (Volume A, chapter 5, page A225) Planning for C corporation terminations (Volume B, chapter 6, page B259) Education tax issues (Volume A, chapter 1, page A1) Truck Drivers/Railroad Employment Taxes (Volume A, chapter 6, page A279) High income taxpayers/sand Extraction (Volume B, chapter 4, page B178) Sale of Accounting Practice (Volume B, chapter 5, page B227) Reporting Cash Payments (Volume B, chapter 5, page B249) 1

2 Easement Tax Issues p. A Overview Easement payments Reporting the transaction Eminent domain Estate tax implications Overview A Permanent Easements Treated as a sale of a portion of the land First applied to reduce basis Specific portion Reduce basis to zero Excess is 1221 or 1231 gain All of parcel is affected Treat as sale of whole parcel Allocation of basis Does not require based on acres Can be equitably allocated ($ not acres) See Example 1, Page A159 Overview Cont. A161 Argument for full basis reduction Example 3 Cases (bottom of page A161) Bledsoe v. US Conway v. US Inaga Land Company, Ltd v. Comm r 2

3 Damages A162 Severance damages Reduce whole basis, excess is gain Temporary Easement payments Treat as rental income Damage payments Damage to property, reduce basis Damage to crops, report on Schedule F Lease Payments A163 Lease payments Rental income with no basis offset May be subject to NIIT If not permanent, then it is a lease Not subject to SE tax Do not report on Schedule F, report on Sch. E Negative Easement Payments Negative easement payments are made to prevent something from happening IRS has ruled these as lease income FSA F Relied on Morehouse CRP case A

4 Reporting A165 Payor will issue: Form 1099 S, or Form 1099 MISC If a 1099 MISC, then burden is on taxpayer to argue basis reduction Eminent Domain A Threat of Eminent Domain may Result in deferral of gain under Sec Election must be made timely Disclose details Must reinvest within 3 years after year of $ Can get extensions Most Easement payments have some threat of Eminent Domain, thus taxpayers have options on timing of gain or reinvestment Reporting on Form 4797 A166 4

5 Estate Tax Implications A168 Some valuation enhancement could arise Estate of Mitchell v. Comm r Tax Court increased value of property by present value of lease payments plus residual land value Special Use Valuation Can trigger disposition is easement granted Estate of Gibbs v. US 161 F.3d 242 (3d Cir. 1998) p. A One Year Deferral Livestock Sales Principal business is farming Cash method Normally sale would not have occurred Only excess number eligible for deferral Raised or purchased animals Election statement Federally declared disaster area Requirements? A175 Must be Farmer Raising, shearing, feeding, caring for, training and management of livestock Must use cash method of farming Sale would not normally occur Only excess livestock is allowed for deferral 5

6 Types of Livestock A176 May be raised or purchases Can be Held for breeding Inventory Regulations have not been updated to reflect this. Calculations A176 Farmer Angus sells the following number of livestock for : head head head Average of 70 head In 2015, he sells 100 head due to extreme drought in the area at an average of $1,500 per head. He can defer 30 head at $1,500 or $45,000 Reporting A176 Must attach schedule to return reporting Election is under IRC 451(e) Details of reason why Number of livestock sold in each of the preceding three years Number that would have been sold in current year Calculation of excess cattle sold by class Excess cattle sold in previous years is not included in calculation 6

7 Deferral Involuntary Conversion 1.Disease 2.Drought, flood or weather related 3.Replacement period 4.Making election & replacement p. A Deferral Circumstances A177 Gain from excess livestock sold can be deferred for longer than 2 years under Sec if the damage is caused by: Disease (Sec. 1033(d) Drought, flood or other weather related conditions (tornados, blizzards, hurricanes, etc.) Replacement Property A Must be like kind Can be other farm personal property if unable to purchase livestock due to weather events (drought persists) Example 5 If soil is contaminated, then can reinvest into real estate used for farming Example 6 7

8 Should you defer? A178 If excess breeding stock is sold, then you may not want to defer Long term capital gains No SE tax on sale Can use Section 179 to fully deduct cost of replacements Reduce SE tax Replacement Period A178 2 years This is general rule including sales related to disease 4 years Special replacement period for breeding stock due to drought or other weather Greater than 4 years Can be extended if drought continues IRS publishes list of counties each year around October Reporting A178 Similar to one year deferral Must report replacement property purchased each year If not enough replacement, need to file amended tax return in year of sale (interest will apply) 8

9 Ag Income Deferral 1. CONTRACT! 2.Straightforward 10 Criteria 3.Coupled with LOC/ Escrow (court cases) 4.Third party sales 5.Installment reporting 6.Death of the seller p. A Deferred Payment Contracts Deferred payment contracts allow income to be reported under installment sale taxation Reported in year of cash receipts Can elect to report in year of sale Normally be considered dealer, however Sec. 453(l)(2)(A) specifically excludes farm products A179 Contract terms A180 The terms of the contract should contain/follow the 10 items listed on page A180 Many contracts do not follow these conditions Risk of taxation in year of sale 9

10 Letters of Credit A Seller is unsecured credit Letter of credits or escrow accounts are allowed However, care must be used to make sure IRS does not challenge due to constructive receipt Court Cases Watson v. Comm r Griffith v. Comm r Reed v. Comm r Busby v. Comm r Scherbart v. Comm r Third Party Sales A182 Using third party such as a broker or cooperative may result in taxation US v. Pfister Sale of cattle through commission company. Sold by company and check mailed to farmer before year end, received after year end. Taxable to farmer due to agency. Packers and Stockyards Act (PSA) make deferral more problematic. IRS argues agency in all cases Third Party Sales (Cont) A Warren v. US Cotton Gin acted as agent, taxpayer had to report income in year of sale Rev. Rul Deferral not allowed since farmer could reclaim livestock sold Rev. Rul Deferral allowed on cotton sales through co op 10

11 Installment Reporting A Cash method farmers can report income in the year of receipt Automatic unless farmer elects out Election out is all or none Election is made by simply reporting the income Make sure contracts are not too big Made by due date including extensions Make sure not to double report income Death of Seller A184 If seller dies before collecting cash, then Income is treated as income in respect of a decedent (IRD) No step up in basis in the contract Character of the payment remains the same Sale of Farm Partnership Interest Hot Assets Unrealized receivables Inventory 1221(a)(1) Other Unharvested crops p. A

12 Sale of Farm Partnership Interest Sale of farm partnership interest usually creates capital gain, unless following property is sold Unrealized receivables Inventory A185 Unrealized Receivables A Right to payment for following: Goods delivered or to be delivered under contract Depreciable Farm Property under Sec or 1250 Recapture of soil and water conservation expenditures Services rendered or to be rendered Deferred payment contracts Present value of lease contracts Contracts for production of farm commodities Long term management contracts Inventory A Sec. 1221(a)(1) assets Stock in trade of business Property primarily held for sale to customers Farmers would include Harvested crops Feeder livestock Poultry Tools and repair parts Supplies Seed Feed Fertilizer and chemicals 12

13 Inventory Cont. A187 Other partnership property that would case the income to be reported as ordinary income Single purpose Ag structures, grain bins, or farm buildings held for more than one year Personal property held less than a year Cows and horses held less than two years Other livestock held for less than one year All poultry is considered inventory Land held less than one year Unharvested crops are usually not considered inventory One Way to Prevent Issue One way to prevent the issue is to form an S corporation, contribute the assets and then have the seller sell stock Buyers do not get a step up in basis on the individual assets (no Section 754 election) May work well for parents retiring and transferring assets to children Meals & Lodging 1. Convenience of the employer and 2. On the employer s premises p. A Employee exclusion of taxable compensation Discounted meals Employer provided lodging Condition of employment and for the convenience of the employer Cash payments don t qualify 13

14 Exclusion of Employer Provided Meals Meals must be provided on business premise Place of employment Can t be a place near the business Must be for convenience of employer If not, subject to income and payroll taxes Must not be intended as compensation Must be reasonable connection between providing meals and lodging and business purpose A188 How Not to Do It A189 Example 8 Convenience of the shareholder, not the employer Reference to groceries Should have written lease Cash meal allowance are included in compensation A Treatment of Meals as Fringe Benefit If more than half of the meals provided on business premises are for the convenience of the employer, than all are Treated as tax free fringe benefit to employee and 100% deductible by employer 14

15 Employer Provided Housing A190 In order for this to be tax free fringe benefit The employer must furnish the lodging to the employee The employee must be required to accept the lodging as a condition of employment and for the convenience of the employer Must be provided in like kind (no cash allowance) Case History A Dole Disallowed since lodging was located about 1 mile from business premise Comm r v. Anderson House was located about 2 blocks from hotel. IRS allowed, but court disallowed since it was not on business premises McDonald Reimbursement for lodging costs must be included in employee compensation Case History continued A192 Benninghoff Local government ownership of house was not sufficient to meet on the business premise for police officer Boykin Rental value of quarters provided on a VA hospital was excluded Lindeman General manager lived in hotel that was leased by employer. Court ruled this was OK. 15

16 Case History continued A Peterson Value of home to poultry breeding corporation president was included in employee s income. Was not required to live there and not as condition. Wilhelm Remote ranch operation met the condition Dilts Closely held farm corporation met the criteria Case History continued A193 J. Grant Farms, Inc. Swine raising and grain drying business met conditions Johnson Farm operation met the conditions Waterfall Farms, Inc. Not allowed since it could not be proved substantial business operations occurred at the location. Creative Use of Lodging?! Shareholder owns land leases to C corporation on a 20 year lease Corporation builds residence, takes 50% bonus depreciation, depreciates remainder over 20 years At end of 20 years, residence reverts back to shareholder Shareholder has zero basis in home, lives in it for at least two years and sells it tax free (up to $250/$500,000 gain) under Section

17 Summary A193 Must have employee employer relationship Only C corporations work for owners S corporations treated like partnerships Good to have employment agreement Especially for owners Can be leased, no ownership requirement Vol. A, p. 194 Qualified Farm Indebtedness Qualified Farm Indebtedness p. A 194 General Policy Considerations Income occurs when a taxpayer becomes economically enriched because of cancellation of debt The income is called discharge of indebtedness income Codified at IRC Section 61(a)(12) 17