ESTATE PLANNING GIFTING

Estate Planning: Gifting

by Chris Moss CPA

Welcome to TaxView with Chris Moss CPA Tax Attorney

Estate Planning is hard to talk about.  Do you really want to talk about death and taxes?  But Estate Planning is also about life-your legacy in this life-and the lives of your children and lives of your grandchildren after you are long gone. Not to mention the tax free estate tax reducing gifts you give to all your children while you are living and enjoying life.  Furthermore, with a custom estate plan, your children and grandchildren can be protected in this life, as you perhaps have been protected if your parents had wisely estate planned in their lifetime. A good Estate Plan will not only secure and protect your family from harm’s way, but also prevent you all from being taxed to death by excessive estate tax so high your kids might just have to sell the farm to pay your death taxes. So if you are interested in protecting your family-and your assets-for generations to come, stay with us here on TaxView with Chris Moss CPA Tax Attorney and find out how you all can create the perfect Estate Plan for your family.

Let’s start your Estate Plan with gifting.  You can actual gift assets to reduce your estate tax to each child and grandchildren up to $14K or $28K married each year tax free. But what if you gift over the $28K annual exclusion?  Current law in 2015 allows you a one-time exclusion a $5.43 Million dollar limit in your lifetime-$10.86 Million married.  But be warned: this lifetime exclusion is subject to Congressional reform just about at any time during any administration.  If you gift over the lifetime exclusion you are taxed at 40% on the overage as the Cavallaro family found out in Cavallaro v IRS US Tax Court (2014).

Cavallaro started out in 1979 and grew the company with his three sons into Camelot Systems and Knight Tools both operating out of the same building.  In 1994 Ernst &Young (E&Y) was retained to consider an Estate Plan for Cavallaro.  They suggested a merger of both Knight and Camelot.  Unbeknownst to E&Y, Cavallaro also retained attorneys Hale & Dore of Boston for Estate Planning.  Mr. Hamel of that firm claimed that much of Camelot was already owned by the three sons based on a one-time transfer made in 1987 to the sons in exchange for $1000 from all three sons.

When E&Y found out about Mr. Hamel’s plan, senior partners in E&Y immediately pointed out that the 1987 transfer was at odds with all the evidence and E&Y would not support this tax strategy. Unfortunately for Cavallaro, the attorneys eventually prevailed and the accountants acquiesced. Gift tax returns were filed after the merger showing no taxable gifts and no gift tax liability.

In 1998 the IRS audited the business returns for 1994 and 1995 eventually claiming that gifts from parents to children as a result of the merger were grossly undervalued in the gift tax returns Form 709 filed in those years of the merger.  The IRS issued third party summonses to E&Y.  The tax attorneys filed petitions to quash the summonses fighting all the way to the Court of Appeals for the First Circuit, but eventually lost on all counts.

The Court denied Cavallaro’s motion to quash and ordered the summons enforced as perCavallaro v United States 284 F.3d 236 (1st Cir 2002) affirmed 153 F. Supp. 2d 52 (D. Mass 2001).    As the Court noted there was no attorney client privilege with a CPAs.  Therefore all documents had to be handed over to the Government and the E&Y accountants had to testify in many cases against their client’s best interest in compliance with the Court Order.  Cavallaro appealed inCavallaro v IRS US Tax Court (2014)  and claimed the gift was at arm’s length. After hearing all the witnesses and reviewing the documents, Judge Gustafson opined that the 1995 merger transaction was notably lacking in arm’s length character, and concluded that the gift was undervalued by Cavallaro.  The Court then ruled that Cavallaro made gifts totally $29.6M in 1995 when the two businesses merged handing Cavallaro a tax bill of $12,889.550.   IRS wins Cavallaro loses.

Another case Estate of Rosen v IRS (2006) brings us to the next key component of gifting: control.  Unless you lose control of the assets you gift, the assets unfortunately still remain in your taxable estate upon your passing.  The facts in the Rosen case are simple.  Her assets were mostly stocks, bonds, and cash.  Her son-in-law formed a family limited partnership in 1996 and the children signed a partnership agreement and a certificate of limited partnership was filed with the State of Florida.  Each of the children were given a .5% interest and the Lillie Investment Trust was formed to own a 99% interest. $2.5 million was transferred from Rosen to the Lillie Investment Trust as consideration for its 99% interest.

What is interesting is the partnership conducted no business and had no business purpose for its existence other than to save taxes.  When Rosen died the IRS audited sending the Estate over a $1 Million tax bill, claiming all the money in the partnership was includable in Rosen’s estate because Rosen controlled until her death the possession or enjoyment of, or the right to the income from the assets. The Estate of Rosen appealed to US Tax Court  inEstate of Rosen v IRS (2006)claiming that Section 2036(a)(1) does not apply because the assets were transferred in a bona fide sale for full and adequate consideration. Alternatively the Estate argued that Rosen did not in fact retain enjoyment or “control” of the assets while she was alive.

Judge Laro observes that the US Tax Court has recently stated, a transfer of assets to a family limited partnership orfamily limited liability company may be considered a bona fide sale if the record establishes that: (1) The family limited partnership was formed for a legitimate and significant nontax reason and (2) each transferor received a partnership interest proportionate to the fair market value of the property transferred citing the Estate of Bongard v. Commissioner,Estate of Strangi v. Commissioner, Estate of Thompson v. Commissioner, US Tax Court on remand, and Thompson v. Commissioner on Appeal 382 F.3d 367 (3d Cir. 2004)

The Court concluded that the overwhelming reason for forming the partnership was to avoid Federal estate and gift taxes and that neither Rosen nor her children had any legitimate and significant nontax reason for that formation.  In addition Rosen herself used the partnership to pay for her personal expenses all the way up to her death and therefore never truly“gifted” the assets out of her estate.  IRS wins, Rosen Loses.

So how do you safely start gifting so that your assets are permanently out of your taxable estate in a protected Estate Plan?  First create an Estate Plan that has a legitimate business purpose in mind.  Second, make sure you have sufficient assets to live without the Family LLC having to support you.  Third make sure you have transferred control of these assets to your children with properly filed gift tax returns.  Finally, with the help of your tax attorney make sure all transactions are contemporaneously documented with appraisals inserted into the gift and personal tax returns before you file.  When the IRS comes to examine your Estate Plan your children will be happy you did.

Thank you for joining us on TaxView with Chris Moss CPA Tax Attorney

See you next time on TaxView

Kindest regards

Chris Moss CPA Tax Attorney

IRS GIG WORKER AUDIT

The IRS Gig Worker Audit

by Chris Moss CPA

Welcome to TaxView with Chris Moss CPA Tax Attorney

All business owners at one time or another have had to make a choice between classifying a new worker as an employee or an independent contractor.  For most part in the 20^th century these choices were easy to make.  But in the 21^st century a unique worker has begun to emerge that is somewhere between an employee and an independent contractor, the “Gig Worker” or what some may call the Gigs.  While Judge Edward Chen O’Conner v Uber 3:13-cv-03826 ruled against the existence of Gigs, the California Uber case is far from over.  Whatever the ultimate outcome in Uber, in my view Gigs are here to stay.  What or who are the Gigs and how will they be evaluated during an IRS audit of your business?   Stay with us here on TaxView with Chris Moss CPA Tax Attorney to see where Gig law is trending in the 21^st century and what you need to do now to protect yourself from an IRS Gig Worker Audit.

So what is Gig and who are the Gigs?  It all started with Uber.  Not only are there now Gig Uber Drivers but Uber Medicine Gigs called “healers”.  In the last few years we are being invaded and inundated by Gigs.  Unfortunately US tax law has not caught up with the rapid rise of Gigs, who in my view are simply independent contractors being directed by cell phone apps by you all out there to fulfill an immediate need, either providing a service, product or both.

Just so you know, Gig was coined in the early 20^th century as slang for a paying musical engagement.  The Urban dictionary now defines Gig as a job that could now apply to contract work in the IT and computer field or any temporary or incidental employment.  However, the Gig has traveled or “Ubered” way beyond even Urban Dictionary’s definition.

In order to best define a Gig and understand the tax law of Gigs or lack thereof, let’s take a look at the 20^th century worker.  These folks, our parents and grandparents all had a 9-5 job as their primary source of income.  Taxes were withheld and work was reviewed by the “boss” at a company office.  Independents back in those days were according to the current IRS web site the tradesmen and professionals who earned income from many customers, clients, and patients, such as Doctors, Lawyers, and other self-employed contractors.

In my view Gigs are legally somewhere in the middle between Employees and Independent Contractors.  Gigs come to life when you all click on an Uber app and ask that a Gig driver to drive you from Point A to Point B.  The Gig driver is star rated by the public and develops a “branding” based on those ratings.  Over a few months, each Gig develops a unique brand or “good will” based on their star ratings from folks around the world who have used their services. The legal status of Gig drivers, could be compared to the legal status of Gig Nurses, Gig Landscapers, Gig Fitness Trainers, Gig Pilots, and Gig Dog sitters to name a few.  The fact that Uber supplies the App to us to find us the Gig driver, or HEAL supplies the App to find us the Nurse healer, is not the point.  The point is Uber, HEAL, and all the other service Apps simply put the buyer and seller of the service together electronically, kind of like EBay does. The world wide customer base of the individual Gig “controls” how successful the Gig will be, just like EBay sellers are controlled by their star world wide ratings.

Would anyone claim sellers on EBay are employees of EBay?   The similar question was presented to Judge Chen inO’Conner v Uber 3:13-cv-03826, where the the the Court is grappling with whether Gig drivers found via the Uber app are employees.  Unfortunately, because Congress and the Courts have been caught off guard by the rise of the Gigs, the Government during an IRS Gig Worker Audit may be unable to find that middle ground in existing tax law to allow you the business owner to have a no change audit.  So listen up on TaxView with Chris Moss CPA Tax Attorney as you learn how whether or not you win comes down to one simple word: “control”.

The key issues in existing law is “control” over the worker, as in Jones v IRS US Tax Court 2014.   Facts are simple enough.  Jones an attorney hired Tarri’s Business Service (TBS) as an independent contractor owned by his wife Mrs. Jones.  They filed separate tax returns. The IRS audited and claimed TBS was really a disguised employee of Jones and should be classified as an employee.  Judge Goeke easily finds Jones for because Jones did not control the details of TBS work schedule, thereby making TBS an independent contractor.  In other words, Jones did not “control” TBS.  Jones wins, IRS loses.

The facts are just as simple in Central Motorplex v IRS US Tax Court (2014). Central Motorplex (CM) engaged in buying, repairing and selling used autos. Mr. Smith was contracted to pick up and deliver license plates and title certificate as an independent contactor.  The IRS audited and claimed Smith was an employee.  Judge Lauber easily found for the Government because CM assigned Smith tasks, supervised his performance and set his compensation.  In other words, CM was in “control” of Smith. IRS wins, CM Loses.

So what does this all mean for all of us out there who might be paying for Gig services?  While Judge Edward Chen opines in his Order of March 11, 2015 “…it is conceivable that the legislature would enact rules particular to the new so-called “sharing economy..,” the IRS, Congress and the Courts, have yet to recognize the legal significance of the 21^stcentury Gig worker.  So first, for now, our best practice perhaps is to have your tax attorney create standard “Gig Contracts” showing you have absolutely no control over the Gigs.  The easiest way to do this is to allow your Gig to receive public ratings so the public  controls the Gig not your business.  Second, include the Gig Contract in a PDF file attached to your business tax return so that if you are audited years later you will have a document in the tax return supporting your Gig strategy. Finally have your tax attorney standing by with the contemporaneously created documentation, so that when the IRS Gig Worker Audit comes your way you can be confident you will win and save taxes.

Thanks for joining us on TaxView with Chris Moss CPA Tax Attorney

See you next time on TaxView

Kindest regards

Chris Moss CPA Tax Attorney