Private Wealth Developments and Observations

Bitcoin and the Like: Further Tax Developments to Monitor

Posted in Digital Assets, Virtual Currency

bigstock-Bit-Coin--BTC-54872525Virtual currency developments continue to emerge, including state tax guidance, a court decision on deductibility of losses, and the Uniform Fiduciary Access to Digital Assets Act (the “Act”).

State Tax Guidance

The New Jersey Division of Taxation released Technical Advice Memorandum 2015-1 (the “NJ TAM”). The NJ TAM explains New Jersey’s treatment of virtual currency; that is, New Jersey treats virtual currency as property in conformance with Internal Revenue Service (IRS) Notice 2014-21 (detailed in a previous post). New Jersey takes its guidance two steps further than the federal guidance: (1) sales and use tax, and (2) corporation business tax and gross income tax.

First, a customer who uses convertible virtual currency to pay for property will be viewed as engaging in a barter transaction. In a barter transaction, if what is received in exchange is subject to sales tax, then sales or use tax is due from each party based on the value of the property or services given in a trade. The state statute provides that a sale includes a barter transaction. New Jersey imposes sales tax on the receipts from retail sales of tangible personal property, specified digital products, and enumerated services. The NJ TAM explains how, in a barter transaction, one party must forfeit something of value in order to receive something of value. If a customer purchases a good with convertible virtual currency, sales tax is due on the amount allowed in exchange for the virtual currency, or (put another way) the purchase price of the goods received. The NJ TAM imposes a record-keeping obligation on sellers who accept convertible virtual currency as a form of payment for goods. Among other things, sellers must record the regular selling price of the same or similar product when sold in United States dollars, and the amount of sales tax collected.

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Bitcoin and the Like: Tax Considerations

Posted in Tax, Virtual Currency

bigstock-Bit-Coin--BTC-54872525Virtual currency is a new, untested, and unregulated asset. The Internal Revenue Service (IRS) defines “virtual currency” as a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value. “Convertible virtual currency” is virtual currency that has an equivalent value in real currency, or acts as a substitute for real currency. For simplicity, this post will use the terms virtual currency and convertible virtual currency interchangeably. Virtual currency is held for investment, used to pay for goods and services, and traded through online exchanges. Bitcoins and Ripples are the most well-known types of virtual currency. Bitcoins and Ripples contain their own version of virtual currency and systems, including payment systems. A Bitcoin or Ripple is sent between two accounts, converted into other currency, or used to pay for goods and services. Both Ripples and Bitcoins are finite in number, with only a certain number existing. Virtual currency is volatile, with unpredictable swings in value.

A particular virtual currency’s long-term viability is questionable because virtual currency is far from “mainstream.” Few merchants accept virtual currency for payment. Virtual currency is unregulated and decentralized, meaning there is no bank or governmental oversight. Taxpayers, however, might have to report virtual currency held in foreign exchanges to the IRS. Although the accounts currently are not subject to Report of Foreign Bank and Financial Accounts (FBAR) requirements, commentators opine that, in the future, virtual currency accounts could be subject to FBAR and the foreign exchanges could be subject to reporting under the Foreign Account Tax Compliance Act. Virtual currency is subject to higher scrutiny by law enforcement agencies due to perceived abuses. In law enforcement’s view, because virtual currency transactions are largely anonymous, opportunities exist for money laundering and tax evasion. Continue Reading

Obama Proposes “Middle Class” Tax Increases at Death

Posted in Tax

The prospects of significant tax legislation this year are low. Nevertheless, when the President proposes “tax reform” it makes headlines. The Obama administration’s latest tax proposals for fiscal year 2016 would increase dramatically both the rates of transfer/income taxation at death and the number of people subject to those higher taxes in the event of a family member’s death.

Since 2011, the lifetime federal estate tax, gift tax, and generation-skipping transfer (“GST”) tax exemption equivalents applicable to each individual have been set at $5,000,000, adjusted each year for inflation ($5,430,000 per person in 2015). For the few individuals who make taxable gifts or who have taxable estates in excess of $5,430,000, the federal estate, gift, and GST tax rates have been set at 40%.

As now in effect, far less than 1% of decedents’ estates are subject to federal estate tax. Thus, under current law, the vast majority of Americans would be able to transfer to their children or other loved ones whatever wealth they may have left at their death, free of any federal estate tax. Continue Reading

Repeated IRS Warnings Haven’t Stopped Telephone Scams

Posted in Uncategorized

In October 2013, the IRS issued taxpayers a warning about a pervasive telephone scam designed to solicit payments and release of personal information from individuals. The IRS issued a second warning concerning the scam near the end of the 2014 filing season, but the calls have continued into the 2015 filing season with no end in sight.

Scammers have largely targeted elderly persons and recent immigrants. Victims receive calls from people impersonating IRS employees, often complete with false badge numbers and fictitious common names. Some callers are able to mimic the IRS toll-free number on the victims’ caller identification systems and send corroborating e-mails from phony IRS e-mail accounts. The callers generally have very limited information about their victims, though some are able to recite the last four digits of their victims’ Social Security numbers. Callers claim that the call recipients owe the IRS fees or back taxes. Many then try to arrange payments with prepaid debit cards or wire transfers while also soliciting further identifying information from their victims. Callers often threaten arrest, and those targeting recent immigrants may threaten deportation.  Continue Reading

U.S. Supreme Court Agrees to Hear Cases Regarding the Constitutionality of Same-Sex Marriage Bans

Posted in Estate Planning

The U.S. Supreme Court has agreed to hear four cases from Ohio, Michigan, Kentucky, and Tennessee, respectively, regarding the constitutionality of same-sex marriage bans by the states. While the Court’s decision to hear the cases was anticipated (as previously discussed here), the decision is nonetheless exciting. Arguments are expected to be presented in April of this year, and the U.S. Supreme Court may very well issue a ruling resolving the state-by-state conflict over same-sex marriage by June. Such a resolution to the state-by-state conflict over same-sex marriage would be a welcome development and would bring a great deal more clarity to trust and estate planning for same-sex partners.

For more information, please contact Chad Makuch at (216) 861-7535 or cmakuch@bakerlaw.com.

Still Waiting For Guidance on Material Participation

Posted in Tax

In March 2014, I commented on the US Tax Court decision in the Frank Aragona Trust case. In that case, the tax court disagreed with the Internal Revenue Service’s arguments that a trust was incapable of providing “personal services” to meet the material participation test under IRC § 469 (c)(7).

In November 2013, when the Service issued the final net investment tax rules, it promised to address the material participation dilemma. To date, no guidance other the Service’s arguments in several court cases have been issued.

Most practitioners take the position that a fiduciary’s participation in the activities in question in any capacity should count for purposes of the material participation determination. The American Institute of CPAs (AICPA) has recommended that when there are multiple fiduciaries, material participation by any one fiduciary should be sufficient for purposes of satisfying the material participation test under IRC § 469 (c)(7). The American Bar Association (ABA), in a recent letter to the Service, urged the Service to allow fiduciaries of a trust or estate to use the same tests that individuals use to establish material participation in a trade or business. The ABA’s letter proposed two alternative tests to determine whether an individual materially participated: an objective hours test and a subjective facts and circumstances test. The hours test would be satisfied on the basis of hours invested by an individual with fiduciary duties to the beneficiaries of the trust or estate, if that individual has the decision-making authority and power to act on behalf of the trust or estate in the trade, business or rental activity. The facts and circumstances test would be satisfied by aggregating the participation of all fiduciaries of the trust or estate, their employees, and agents in the trade, business or rental activity. The Service’s position has been that the activities of a fiduciary’s agents and employees are not considered for purposes of material participation; however, the holdings in the Frank Aragona Trust and Mattie Carter Trust cases, along with continued urging from practitioners, might influence any guidance from the Service on these issues.

The waiting continues.

Protecting A Family’s Most Valuable Asset – Privacy

Posted in Privacy

Private-Weatlth-01-06-2015Each day, family offices receive, relay, and manage a family’s private information.  Depending on the family and the role of the family office, the information managed can be voluminous and include financial information, tax identification numbers, account numbers, health and health insurance information, estate planning documents and even home security system information.   Oftentimes, the family office transmits information to family members via various forms of communication.  Younger generations may respond only to text messaging, another generation may prefer e-mail, and older generations may prefer snail mail.  None is immune to a security breach.

A recent New York Times article states “The number of new digital threats has increased 10,000-fold over the last 12 years.  Last year, over 552 million people had their identities stolen and nearly 25,000 Americans had sensitive health information compromised – on a daily basis.” Approximately 47 states now have data breach statutes.  Generally, these statutes define the information covered and the obligations of the “information holder” upon discovery of a breach.

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U.S. Supreme Court Now Likely to Rule on Constitutionality of Same-Sex Marriage Bans

Posted in U.S. Supreme Court

Justice_453626233To date, the U.S. Supreme Court has declined to rule on the constitutionality of state laws banning same-sex marriage. Even in the U.S. Supreme Court’s landmark decision in U.S. v. Windsor (discussed here), the U.S. Supreme Court left to the states the authority to define and regulate marriage. In addition, as recently as October 6, 2014, the U.S. Supreme Court issued orders declining to review appeals regarding same-sex marriage in five states (Indiana, Oklahoma, Utah, Virginia, and Wisconsin). Consequently, same-sex married couples and state-sanctioned partners have been left to navigate a complex legal environment in which their marriage or partnership is recognized in some states (albeit an ever-growing number of states) and not others. Such irregular treatment among the states gives rise to complex estate and income tax planning and, at times, is so detrimental that it limits the states in which it is financially advisable for such couples to live.

Justice Ruth Bader Ginsburg publicly commented that the U.S. Supreme Court has not ruled to this point on the constitutionality of same-sex marriage, in part because the courts of appeals have not split on the issue. That is, until now.

Earlier this month, the U.S. Court of Appeals for the Sixth Circuit became the first federal appeals court to uphold same-sex marriage bans. Specifically, the Sixth Circuit’s decision upholds same-sex marriage bans in Ohio, Michigan, Kentucky, and Tennessee, and thereby marks a stark split from the decisions of federal appeals courts in the Fourth, Seventh, Ninth, and Tenth circuits, each of which has struck down similar bans on same-sex marriage.

Given this split in the courts of appeal (and assuming the Sixth Circuit decision is appealed directly to the U.S. Supreme Court), the Supreme Court will likely review the Sixth Circuit decision and rule on the constitutionality of same-sex marriage bans by the states once and for all.

For more information regarding the Sixth Circuit’s decision, please contact Chad Makuch at (216) 861-7535 or cmakuch@bakerlaw.com.

Tax Court Rules Corporate Merger of Family-Owned Businesses Results in Substantial Taxable Gift

Posted in Tax

In September, the Tax Court issued its opinion in Cavallaro v. Commissioner, T.C. Memo 2014-189, holding that a merger of two family-owned businesses resulted in a $29.6 million gift from Mr. and Mrs. Cavallaro to their three sons.


Mr. Cavallaro started a tool manufacturing company called Knight Tool Co. (“Knight”). Knight was co-owned by Mr. and Mrs. Cavallaro. As his sons became adults, all three were  involved in the business. In the 1980s, Knight developed what turned out to be a valuable technology for applying liquids during the manufacturing process. In the late 1980s, the sons formed Camelot Systems, Inc. (“Camelot”), which would exclusively sell Knight’s products. The Cavallaro sons each owned one-third of Camelot.

In the mid-90s, due to the rise in value of the technology, Mr. and Mrs. Cavallaro sought estate planning advice. The Cavallaros sought advice from their CPA and an estate planning attorney. Both advisors separately recommended merging Knight and Camelot. After the merger, the Cavallaros would own the surviving company, with each shareholder’s ownership proportionate to his or her relative ownership and the value of the shares owned in Knight and Camelot, respectively.

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IRS Attempts to Simplify the Application Process for Certain 501(c)(3) Organizations, but is “EZ” Better?

Posted in Tax

On July 1, 2014, the Internal Revenue Service (“IRS”) released Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code (“Code”).

Form 1023-EZ is an abbreviated version of the twelve page Form 1023 (which can be supplemented by as many as seven schedules) and is intended to streamline the application for recognition of exemption under Code §501(c)(3) for certain organizations.  Such organizations are those with gross receipts of $50,000 or less and assets of $250,000 or less and are otherwise eligible to file the Form by being a public charity described in Code §§170(b)(1)(A)(vi) or 509(a)(2), a private foundation, or an organization seeking reinstatement of exempt status pursuant to section 4 or 7 of Revenue Procedure 2014-11 following automatic revocation of such status for failure to file required annual returns or notices for three consecutive years. Continue Reading