October 30, Dear Clients and Colleagues:

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1 Judson M. Stein, Esq. Partner Member of NJ Bar Direct: Dear Clients and Colleagues: The following is a summary of some of the most important tax developments that have occurred during the second quarter of 2015 that may affect you, your family, your investments, and your livelihood. Please call us for more information about any of these developments and what steps you should implement to take advantage of favorable developments and to minimize the impact of those that are unfavorable. New Tax Legislation. On July 31, 2015, President Obama signed into law the "Surface Transportation and Veterans Health Care Choice Improvement Act of 2015" (the Transportation Act) which extended the Highway Trust Fund and included a number of important tax changes. The most important tax changes in the Transportation Act are those that adjust tax-filing deadlines for partnerships and C corporations. Specifically, for tax years beginning after December 31, 2015: Partnerships and S corporations must file their returns by the 15 th day of the third month after the end of the tax year. Thus, entities using a calendar year will have to file by March 15 th of the following year. As such, the filing deadline for partnerships will be accelerated by one month, but the filing deadline for S corporations will stay the same. C corporations must file by the 15 th day of the fourth month after the end of the tax year. Thus, C corporations using a calendar year must file by April 15 th of the following year. As such, the filing deadline for C corporations will be deferred for one month. Under a special rule for C corporations with fiscal years ending on June 30, the change will not apply until tax years beginning after December 31, Due dates for extensions have been adjusted as well, effective generally for returns for tax years beginning after December 31, For example, the

2 new law creates the following exceptions to the 6-month extension that generally applies to corporations: 1) For any return for a tax year of a C corporation which ends on December 31 and begins before January 1, 2026, the automatic extension period is 5 months; 2) For any tax year of a C corporation which ends on June 30 and begins before January 1, 2026, the automatic extension period is 7 months; And, the maximum extension for the returns of partnerships filing Form 1065 will be a 6-month period (ending on September 15 th for calendar year taxpayers, not 5 months). Other tax changes included in the Transportation Act include the following: Veterans with VA or TRICARE health care coverage are not counted for purposes of the 50-full-time-employee threshold used to determine if an employer is subject to the Affordable Care Act employer shared responsibility penalty. This change is retroactively effective for months beginning after December 31, Effective for months beginning after December 31, 2015, otherwise eligible veterans are not disqualified from contributing to health savings accounts (HSAs) on a pre-tax basis merely because they receive medical care under any laws administered by the VA for a service-connected disability. Effective for returns required to be made and statements required to be furnished after December 31, 2016, lenders must report more information on mortgages, including the origination date, the amount of outstanding principal, and the property's address. The 6-year statute of limitations applies in cases where any overstatement of basis results in a substantial (25% or more) omission of income. Effective for property with respect to which an estate tax return is filed after July 31, 2015, large estates (i.e., those required to file a federal estate tax return) are required to provide the Internal Revenue Service with the value of property included in the gross estate to ensure consistent reporting for income 2

3 and estate tax purposes. Donee's Assumption of Estate Liability Reduced Value of Gift. The Tax Court has concluded that where a taxpayer gave her children property in exchange for their promise to pay any estate tax liability arising under Internal Revenue Code Section 2035(b) s gross-up rule which increases a decedent's gross estate by the amount of any gift tax paid by the decedent or the decedent's estate on any gift made by the decedent during the three-year period preceding the decedent's death the fair market value of that property for gift tax purposes was reduced by the value of the children's assumption of this potential estate tax liability. Jean Steinberg, Donor, (2015) 145 TC No. 7. Failure to Adequately Describe Gifts Allowed IRS to Assess Gift Tax at Any Time. In a Legal Advice Issued by Field Attorneys (LAFA), the Internal Revenue Service has concluded that a taxpayer failed to disclose gifts (a transfer of interests in two partnerships) to his daughter in a manner adequate to apprise Internal Revenue Service of the nature and amount of the gifts. He failed to sufficiently identify one of the partnerships and to adequately describe the method used to determine the fair market values of both partnership interests. As a result, the period of limitations for the gift tax was held open indefinitely under Internal Revenue Code Section 6501(c)(9). Legal Advice Issued by Field Attorneys F. Inflation-Adjusted 2016 Figures for Estate and Trust Tax Brackets and Other Transfer Tax Items. A number of tax figures are adjusted each year for inflation based on the average Consumer Price Index (CPI) for the 12-month period ending the previous August 31 st. The August 2015 CPI has been released by the Labor Department. (U.S. Department of Labor, Consumer Price Index (for all-urban consumers), 9/16/2015). Using the CPI for August 2015 (and the preceding 11 months), the Thomson Reuters Checkpoint editorial staff has calculated adjustments for 2016 to the estate and trust income tax rate schedule, and for transfer tax items, as follows: 3

4 Tax rate schedules. The tax rate schedules for 2016 will be as follows: FOR ESTATES AND TRUSTS: If taxable income is: The tax is: Not over $2, % of taxable income Over $2, but not $ plus 25% of the over $5, excess over $2, Over $5, but not $1, plus 28% of the over $9, excess over $5, Over $9, but not $2, plus 33% of the over $12, excess over $9, Over $12, $3, plus 39.6% of the excess over $12, Unified estate and gift tax exclusion amount. For gifts made and estates of decedents dying in 2016, the exclusion amount will be $5,450, (up from $5,430, for gifts made and estates of decedents dying in 2015). Generation-skipping transfer (GST) tax exemption. The exemption from GST tax will be $5,450, for transfers in 2016 (up from $5,430, for transfers in 2015). Gift tax annual exclusion. For gifts made in 2016, the gift tax annual exclusion will be $14, (same as for gifts made in 2015). Special use valuation reduction limit. For estates of decedents dying in 2016, the limit on the decrease in value that can result from the use of special valuation will be $1,110, (up from $1,100, for 2015). Determining 2 percent portion for interest on deferred estate tax. In determining the part of the estate tax that is deferred on a farm or closely-held business that is subject to interest at a rate of 2 percent a year, for decedents dying in 2016, the tentative tax will be computed on $1,480, (up from 4

5 $1,470, for 2015), plus the applicable exclusion amount. Increased annual exclusion for gifts to noncitizen spouses. For gifts made in 2016, the annual exclusion for gifts to noncitizen spouses will be $148, (up from $147, for 2015). Reporting foreign gifts. If the value of the aggregate foreign gifts received by a US person (other than an exempt Internal Revenue Code Section 501(c) organization) exceeds a threshold amount, the US person must report each foreign gift to Internal Revenue Service. (Internal Revenue Code Section 6039F(a)) Different reporting thresholds apply for gifts received from (a) nonresident alien individuals or foreign estates, and (b) foreign partnerships or foreign corporations. For gifts from a nonresident alien individual or foreign estate, reporting is required only if the aggregate amount of gifts from that person exceeds $100, during the tax year. For gifts from foreign corporations and foreign partnerships, the reporting threshold amount will be $15, in 2016 (up from $15, for 2015). Kiddie tax. The exemption from the kiddie tax for 2016 will be $2, (same as for 2015). A parent will be able to elect to include a child's income on the parent's return for 2016 if the child's income is more than $1, and less than $10, (same as for 2015). AMT exemption for child subject to kiddie tax. The AMT exemption for 2016 for a child subject to the kiddie tax will be the lesser of (1) $7, (same as for 2015), plus the child's earned income, or (2) $53, (up from $53, for 2015). Home Mortgage Interest Deduction Doubled for Unmarried Co-Owners. The Ninth Circuit Court of Appeals, reversing a Tax Court decision, concluded that the tax law's limits on the amount of debt eligible for the home mortgage interest deduction ($1 million of mortgage "acquisition" debt and $100, of home equity debt) are applied on a per-individual basis, and not a per-residence basis as the Internal Revenue Service 5

6 has long maintained. Thus, for the unmarried co-owners in the case, their collective limit for the home mortgage interest deduction doubled from a maximum of $1.1 million to a maximum of $2.2 million acquisition and home equity debt. Simplified Per-Diem Increase for Post-September 30, 2015 Travel. An employer may pay a per-diem amount to an employee on business-travel status instead of reimbursing actual substantiated expenses for away-from-home lodging, meal, and incidental expenses (M&IE). If the rate paid does not exceed Internal Revenue Serviceapproved maximums and the employee provides simplified substantiation, the reimbursement is not subject to income- or payroll-tax withholding and is not reported on the employee's Form W-2. In general, the Internal Revenue Service-approved per-diem maximum is the GSA per-diem rate paid by the federal government to its workers on travel status. This rate varies from locality to locality. Instead of using actual per-diems, employers may use a simplified "high-low" per-diem, under which there is one uniform per-diem rate for all "high-cost" areas within the continental US (CONUS) and another per-diem rate for all other areas within CONUS. The Internal Revenue Service released the "high-low" simplified per-diem rates for post-september 30, 2015, travel. The highcost area per-diem increases $16.00 to $275.00, and the low-cost area per-diem increases $13.00 to $ New Accounting Safe Haven. The Internal Revenue Service has provided a new safe harbor that allows accrual method recipients of services to treat economic performance as occurring ratably for contracts where services are provided on a regular basis. Thus, under the safe harbor, a taxpayer can ratably expense the cost of regular and routine services as the services are provided under the contract. The Internal Revenue Service also provided procedures for obtaining the Internal Revenue Service's automatic consent to change to this accounting method which is effective for tax years ending on or after July 30, Absent an exception or safe harbor such as this, a liability is generally incurred and taken into account by a taxpayer under an accrual accounting method only in the tax year in which: (1) all the events have occurred that establish the 6

7 fact of the liability; (2) the amount of the liability can be determined with reasonable accuracy (these first two items are collectively referred to as the all events test); and (3) economic performance has occurred. Lump Sum Payments from Defined Benefit Plans. The Internal Revenue Service announced that it will change the required minimum distribution (RMD) regulations to provide that qualified defined benefit plans generally are not allowed to replace, with a lump sum payment or other accelerated form of distribution, any joint and survivor, single life, or other annuity that is currently being paid. The required distribution rules for pension plan annuities were crafted to provide an administrable way to ensure that a distribution of the employee's benefit will not be unduly tax-deferred. In addition, under the regulations, a defined benefit pension plan cannot permit those currently receiving pension benefits to commute annuity payments to a lump sum or otherwise accelerate those payments, except in a narrow set of circumstances specified in the regulations, such as in the case of retirement, death, or plan termination. If a participant has the ability to accelerate distributions at any time, then the actuarial cost associated with that acceleration right would result in smaller initial benefits, which contravenes the purpose of the required distribution rules. The Internal Revenue Service intends that these amendments to the regulations, with some exceptions, will apply as of July 9, Bonus Depreciation. The Internal Revenue Service provided guidance on the retroactive extension of the 50 percent additional first-year bonus depreciation deduction and the corporate election to not claim the 50 percent additional deduction for property placed in service in 2014 and instead increase the alternative minimum tax (AMT) limitation, in light of changes made by the Tax Increase Prevention Act of 2014 (TIPA, P.L , 12/19/2014). The additional first-year depreciation deduction is allowed for both regular tax and AMT purposes, but is not allowed for purposes of computing earnings and profits. The basis of the property and the depreciation allowances in the year of purchase and later years are appropriately adjusted to reflect the additional firstyear depreciation deduction. Most of the guidance is centered on "late" elections to claim 7

8 or not claim bonus depreciation under TIPA, and on "late" elections by corporations to not claim bonus depreciation in favor of AMT credits. Residential Energy Efficient Property Credit. The Internal Revenue Service has privately ruled that an individual can claim a residential energy efficient property credit under Internal Revenue Code Section 25D for the cost of solar panels (and a partial ownership interest in related equipment) installed in an offsite community-shared solar project. An individual can claim a 30 percent credit for qualified solar electric property expenditures made by him during the year. A qualified solar electric property expenditure is an expenditure for property which uses solar energy to generate electricity for use in a dwelling unit located in the US and used as a residence by the taxpayer. This ruling is significant, because it is the first one allowing the energy efficient property credit for owners of solar panels in a shared, offsite array. Proposed Regulations Would Establish Test for When a Partnership Allocation is a Disguised Payment. The Internal Revenue Service has issued proposed regulations that would provide guidance to partnerships and partners regarding when an arrangement will be treated as a disguised payment for services under Internal Revenue Code Section 707(a)(2)(A). Notably, the proposed regulations would establish a test, based on the legislative history for Internal Revenue Code Section 707(a)(2)(A), under which payments made pursuant to an arrangement that lacks significant entrepreneurial risk are treated as disguised payments for services. Very truly yours, GENOVA BURNS LLC JUDSON M. STEIN, ESQ. JOHN A. GREY, ESQ. For more information, please contact: Judson M. Stein at jstein@genovaburns.com or John A. Grey at jgrey@genovaburns.com. 8