Senney Wins U.S. Tax Court Case

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I recently won a U.S. Tax Court case.  The facts in the case are not that unusual and the issues raised by the IRS in this case could likely be raised with respect to most sole shareholder-owned or closely-held "S" corporations.

In my recent case, the taxpayer operated his business as an "S" corporation.  Like a lot of taxpayers, the client took advances from the "S" corporation during the year.  At the end of the year, the client characterized these advances as either W-2 compensation, "S" corporation distributions or loans.   For 3 years in a row, 2006 to 2008, it made more sense for tax purposes to characterize the advances as loans.  In total, the "S" corporation loaned the shareholder about $400,000.

In the following year, the client and his business had some rough financial times and so the client declared personal bankruptcy.  In the bankruptcy, the amounts loaned to the client by  the "S" corporation were discharged, and the "S" corporation took a bad debt deduction.

On audit, the IRS disallowed the "S" corporation's bad debt deduction and assessed the client personally for taxes, penalty and interest in 2009 based on $400,000 of unreported income.  The IRS raised several arguments to justify their assessment of tax in 2009 including: (1) under IRC 108, cancellation of debt in bankruptcy creates income in 2009; (2) under IRC 1368, distributions in excess of basis are taxable as capital gains in 2009; and (3) under IRC 481, the IRS action to treat the advances as taxable distributions in 2009 amounts to a change in accounting method.

All of these arguments were raised by the IRS attorney in the Tax Court case.  The IRS attorney eventually recognized that cancellation of debt does not create income under IRC 108  if the debtor is insolvent.  The IRS attorney also eventually realized that IRC 1368 cannot not apply to the client in 2009 because the distributions were made to the client in 2006-2008.  Finally, the IRS attorney eventually agreed that changing the characterization of the advances from a loan to a distribution is not a change in accounting method.

The IRS attorney finally agreed with me that if the advances were taxable at all, they were taxable as distributions when paid to the client in 2006-2008.   The IRS attorney then closed the case because it was brought only with respect to year 2009.

The IRS attorney cautioned me that the IRS may try to assess tax in years 2006-2008 under the theory that there has been a substantial understatement of income.  Under the tax law, the normal statute of limitations is 3 years and years 2006-2008 are closed.  Hoever, the normal 3 year statute is extended to 6 years if the reported gross income has been understated by more than 25%.  There was no question that the amount in question was more than 25% of the gross reported income.  However, the IRS failed to realize that the amount in question was reported.  It simply was not reported as gross income on the client's tax return.

The amount in question was reported on the "S" corporation information return as a "loan to shareholder."  The case law is clear that such reporting gives the IRS the notice it needs to do further inquiry.  I forwarded this case law to the IRS attorney with the request it be forwarded to the IRS appeals agents.  Accordingly, I do not suspect the client will face assessments for 2006-2008.

If you have been assessed federal or state income taxes and need help with your appeal to the IRS or U.S. Tax Court, please give me a call or email at 937-223-1130 or Jsenney@pselaw.com.


AND ONE MORE THING.  I was listening to WYSO on the way into work this morning.  I heard a news report regarding proper preparation and cooking of chicken.  The story started with a tape of Julia Childs telling her audience that it was very important to thoroughly wash raw chicken in cold water before cooking.  Apparently Julia Childs was wrong.  The USDA has been trying to tell people for years that washing chicken is the wrong thing to do.  The point of washing chicken is to eliminate the salmonella and other germs that are on the chicken skin.  But washing raw chicken splashes the salmonella around in your sink, on your counter and any where else the water gets to.  It is much safer to cook the chicken to at least 165 degrees internal temperature and let the heat kill the salmonella and other germs.  Just thought you might be interested.  You can contact me at 937-223-1130 or Jsenney@pselaw.com.

Estate Planning for Married Couples (Same Sex or Not)

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The U.S. Supreme Court issued a decision in United States v. Windsor that radically changed the estate planning landscape for affluent same-sex married couples. The Court’s decision will have a significant effect on many federal laws and regulations affecting estate planning for spouses.

In Windsor, the Court was reviewing the applicability of the estate tax marital deduction to same-sex couples.  Taking advantage of the federal estate tax marital deduction, an individual can transfer property to his or her spouse during life or at death without having to pay any federal estate or gift tax.  Before the Windsor case, same-sex couples did not get this benefit because the federal Defense of Marriage Act (DOMA) defined “marriage” as a legal union between one man and one woman, and defined “spouse” as a person of the opposite sex who is a husband or a wife.  Consequently, same-sex married couples were forced to pay federal estate tax on their inheritance if it exceeded the tax-free exclusion amount.

Since, the same-sex couple in Windsor was not considered legally married under DOMA, the estate of the deceased had to pay more than $360,000 in federal estate tax.  The executor of the estate then filed suit in District Court requesting a refund, claiming that the definitions of “marriage” and “spouse,” in DOMA was unconstitutional. The District Court agreed.  So did the Court of Appeals.  And in a 5-4 majority decision, the US Supreme Court affirmed the lower courts’ opinions.  By striking down DOMA’s definition of marriage, the Court’s decision made numerous federal laws and regulations (some good, some bad) applicable to same-sex married couples.

The Federal estate planning benefits now available to same-sex couples include:

Portability.  Portability is the right of a surviving spouse to add the unused estate tax exclusion amount (currently at $5.25 million) of the deceased spouse to his or her own unused exclusion amount.  To take advantage of portability, the executor of the deceased spouse transfers the unused exclusion to the surviving spouse, who can then use it to make lifetime gifts or pass assets at death tax-free.  One requirement of portability is that an estate tax return must be filed when the first spouse dies (even if no tax is owed). If the executor does not timely file the return, the surviving spouse loses the right to portability.

Gift-splitting. Currently, any individual can give up to $14,000 each year to as many different people (without limit) as you like without incurring gift tax. Spouses may make a joint gift and combine the annual gift exclusion and jointly give up to $28,000 each year to as many people as they like tax-free. Any gift that is more (individually or in aggregate with all other gifts to the same person) than the annual exclusion amount counts against the lifetime gift tax exclusion amount.  Once an individual has exceeded the lifetime gift exclusion limit (currently $5.25 million), gift tax can apply.  But couples can also gift-split with their applicable exclusion amount, and together can transfer up to $10.5 million through lifetime gifts before gift tax applies.

Retirement Plans. If an individual has a qualified retirement plan or IRA account, ERISA gives the individual’s spouse the right to be the sole primary beneficiary of the account. In order for the individual to name anyone else as a beneficiary, the individual needs his or her spouse’s written consent.

Rollover Rights. For IRAs and qualified plans, the law gives special privileges to spouses who inherit retirement plan or IRA assets. Unlike other inheritors, who must begin making withdrawals by the end of the year following the account owner’s death, a surviving spouse who inherits an IRA or retirement plan account can roll the assets into his or her own IRA and postpone required minimum distributions until the year after the surviving spouse turns 70½.

If you have any questions about estate planning, retirement plans or how the Court’s decision in Windsor affects you and your spouse, please contact one of our tax or estate planning attorneys at 937-223-1130 or Jsenney@pselaw.com.


AND ONE MORE THING.    In addition to giving same-sex couples some of the advantages of married status, the Windsor Court’s decision makes available to same-sex couples some of the disadvantages that are inherent in married status including: (1) losing the ability to step up basis in property by selling it to the same-sex spouse; (2) being jointly and severally liable on a joint tax return, subject to possible innocent spouse relief; (3) losing the ability to recognize loss on sale of property to a same-sex spouse; and (4) applicability of the constructive ownership rules to stock owned by the same-sex spouse.   If you want help with any income tax issues involving spouse please contact Jeff Senney at 937-223-1130 or Jsenney@pselaw.com.

Are You or Should You Be a Florida Resident?

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Some of my clients who spend a lot of time in Florida have asked about what is required to become a Florida resident for tax purposes.  While there are many relevant factors that determine where someone resides for tax purposes, the most important factor is where you spend most of your time.  Generally, a person is considered as resident of whichever state he or she spends more than half the year.

But many people travel on business and pleasure and may not spend half the year in any one place. In these situations, the state of residency is determined by looking at where you spend the most time and by examining other factors. To support your Florida residency you and your spouse should do the following:

1.  Complete and file a Florida Residency Declaration.

2.  Apply for a Florida driver’s license.

3.  Register to vote in Florida.

4.  Become a member of a church in Florida.

5.  Join the Rotary club, Lions Club, Elks club or similar organization in Florida.

6.  Join a gym or YMCA or golf club in Florida.

7.  Get a library card from the local Florida library.

8.  Get a land line phone for your Florida house.

9.  Get a new cellphone with a Florida area code number.

10.  Register your cars in Florida and get Florida license plates.

11.  Change the billing address on all your credit cards to your Florida address.

12.  Establish personal bank account in Florida.

13.  If you are operating a Florida management company or other business that will provide services to a non-Florida operating company, set up a Florida bank account for the Florida management company.

14.  Set-up a website for the Florida management company and advertise it as providing sales and management consulting services.

15.  Do a Yellow Pages ad for the Florida management company and its business.

16.  Get some Florida management company business cards and stationary printed up.

17.  Develop a relationship with a Florida doctor and dentist.

18.  Use credit cards to pay for everything so you have a record of all the days you are in Florida.

19.  Consider having someone house sit your non-Florida house while you are in Florida (this is actually a good idea just for protection of the property, but it also makes it more credible that the non-Florida house is your vacation house and the Florida house is your principal residence).

20.  Consider putting the non-Florida house in a trust or family LLC to get it out of your name (this would negate the principal residence gain exclusion on sale of this house so need to think about this one).


Give me a call if you are interested in moving to Florida and becoming a Florida resident. We can help you with any questions you may have about the process. Jsenney@pselaw.com or 937-223-1130.


AND ONE MORE THING.  Sharon and I were co-hosts of the House of Bread Gala that was held Saturday August 10th at the Sinclair Ponitz Center. Dinner and drinks were excellent, visiting with old and new friends was great, and helping House of Bread collect over $30,000 was wonderful. Thank you to everyone that attended, donated  a silent auction prize, made a cash contribution or helped out in any other way.  Hope to see you all at next year's Gala.  For more information about the House of Bread, go to their website at  http://houseofbread.org/

Hire Workers Before 2014 to Qualify for WOTC

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 The Work Opportunity Tax Credit (WOTC) allows employers who hire members of certain targeted groups before January 1, 2014 to  get a credit against income tax of 40% of first-year wages up to a maximum amount. The maximum amount of first-year wages  is generally  $6,000 per employee, but the limit is only $3,000 for  qualified summer youth employees and various  amounts for qualified veterans.  The credit percentage is 25% for employees who have completed at least 120 hours, but less than  400 hours of  service for the employer.   Where the employee is a long-term family assistance (LTFA) recipient, the maximum WOTC is $9,000.

The targeted worker groups are: qualified IV-A recipients (qualified recipients of aid to families with dependent children or successor program); qualified veterans; qualified ex-felons; designated community residents;  vocational rehabilitation referrals; qualified summer youth employees; qualified supplemental nutrition assistance program (SNAP) recipients; qualified SSI recipients; and long-term  family assistance recipients, i.e., members of a family that receives or  received assistance under a IV-A program for a minimum period of time.  No WOTC is allowed for employees who are related to the employer or to certain owners of the employer.

The amount of first-year wages taken into account in computing the WOTC for qualified veterans is:

    (a) $6,000 for a veteran who is a member of a family receiving assistance under a food stamp program for at least three months (maximum credit of $2,400);
    (b) $12,000 for a veteran with a service-connected disability (maximum credit of $4,800);
    (c) $24,000 for a veteran with a service-connected disability who has aggregate periods of unemployment of six months or more (maximum credit of $9,600);
    (d) $6,000 for a veteran who has aggregate periods of unemployment which equal or exceed four weeks (maximum credit of $2,400); and
    (e) $14,000 for a veteran who has aggregate periods of unemployment of six months or more(maximum credit of $5,600).

Wages paid (1) for federally funded on-the-job training  and (2) to an individual who performs the same or substantially similar services as those of employees participating  in or affected  by a strike or lockout at the employer's plant don't qualify for the credit.

To be eligible for the WOTC, a new employee must be certified as a member of a targeted group by a State Employment Security Agency (SESA). In general, the employer can either get the certification by the day the prospective employee  begins work  or complete a pre-screening notice (use Form 8850) for the employee by the day he is offered employment, and submit it to the SESA as part of a request for certification within  28 days after the employee begins work.

If you have any questions about the WOTC, please contact one of our tax or business attorneys at 937-223-1130 or Jsenney@pselaw.com.
AND ONE MORE THING.  The work opportunity tax credit (WOTC) is a valuable tax break for businesses that hire workers from certain targeted groups. However, under current law, qualifying employee hires must begin work for the employer before January 1, 2014.  Although the United States Congress may extend the WOTC, it's not a certainty.   So if you are planning to add workers, and you are thinking of hiring WOTC-eligible employees, you should make the hire before January 1, 2014 so you can ensure you get the tax credit.  It makes sense not to wait until the last minute, because the process of getting eligible workers certified can be somewhat involved.  Contact me at 937-223-1130 or Jsenney@pselaw.com if you would like to discuss this further.

Buying or Selling Assets or Stock of a Corporation

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Potential buyers of a corporate business generally want to buy the assets of the corporation and not the stock.  Sellers generally want to sell the stock and not the assets.

When a seller sells stock of a corporation, the seller pays tax at capital gain rates on the gain recognized on the sale of the stock.  On the other hand, if the seller caused his or her corporation to sell its assets, then the corporation generally would have to pay tax at ordinary income tax rates on the depreciation recapture amount and tax at capital gains rates on the balance of the recognized gain.  And this corporate level tax is in addition to any tax the sellers pay upon distribution of the sales proceeds by the corporation to themselves.  So sellers generally prefer doing a stock sale because they pay less tax when the deal is structured as a stock sale.

On the other hand, a buyer wants to do a deal as an asset sale because the buyer avoids becoming liable for seller’s known and unknown liabilities, and because buyer will get an automatic basis step-up in the corporation’s assets.  As a result, the buyer will  get larger depreciation deductions and will pay less tax in the future.  For these reason, buyers generally insist on doing the deal as an asset sale.

Assuming taxes and existing liabilities are not a major concern, there are some situations where both buyer and seller would prefer to do a deal as a stock sale.  Doing a stock sale can eliminate the need to transfer or obtain new licenses, permits and certifications.  Doing a stock sale is somewhat less cumbersome since only title to the stock gets transferred and not all of the individual assets.

When buyer and seller negotiate the structure of the deal as an asset sale or a stock sale, they need to factor in the tax consequences when setting the agreed purchase price.  A higher purchase price will generally be paid by the buyer in an asset sale.  A lower purchase price will generally be paid by a buyer in a stock sale.

 But if a deal must be structured as a stock sale, is it possible for a buyer to do the stock sale and still get the tax effect of doing an asset deal?    It is.    IRC section 338(h)(10) permits a buyer and seller to jointly make an election to treat the stock sale as an asset sale for tax purposes.  If this election is made, only corporate-level gain on the deemed asset sale is recognized.  No shareholder-level gain is recognized on the actual stock sale.  Second, the deemed asset sale is treated as occurring while the target corporation is still a member of the selling group.  As a result, it is often possible for the seller to shelter the gain on the deemed sale of assets with operating losses or other tax benefits within the selling group.  As a result, an IRC section 338(h)(10) election may be agreeable to both parties when negotiating the structure of a deal if the value of the future tax benefits to the buyer (stepped up basis) exceeds the current tax cost to the seller.  To the extent the buyer gains significant basis step-up as a result of the election, buyer might increase the stock purchase price somewhat to account for the increased taxes paid by the seller.

If you have questions about making a 338(h)(10) election, call one of our business and tax attorneys at 937-223-1130 or jsenney@pselaw.com.



AND ONE MORE THING.  Don’t forget that making a 338(h)(10) election for an “S” corporation could cause the built-in-gains tax to apply.  BIG tax applies when an “S” corporation that was formerly a “C” corporation sells appreciated assets at any time during the recognition period.  If you have any questions about BIG tax please call one our tax and business attorneys at 937-223-1130 or Jsenney@pselaw.com.
- See more at: http://www.pselaw.com/2013/08/06/buying-or-selling-assets-or-stock-of-a-corporation/#sthash.4fo4apnf.dpuf

Work Opportunity Tax Credit Extended

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The VOW to Hire Heroes Act of 2011 had previously made changes to the Work Opportunity Tax Credit (WOTC), including adding new categories to the qualified veterans targeted group and expanding the WOTC to make a reduced credit available to tax-exempt organizations hiring qualified veterans. The VOW Act had also extended the WOTC for qualified veterans hired before January 1, 2013.  The American Taxpayer Relief Act of 2012 (ATRA) then extended the Work Opportunity Tax Credit (WOTC) for hiring certain workers including qualified veterans through December 31, 2013.

Pre-screening and Certification Requirements

All employers must obtain certification that an individual is a member of a targeted group, before the employer may claim the WOTC. The process for certifying the veterans for this credit is the same for all employers. To obtain certification, employers must file Form 8850.

Normally, an eligible employer must file Form 8850 with their respective state workforce agency within 28 days after the eligible worker begins work. However, the IRS has provided special transition rules for the recent law changes.

Under the special transition rules, an employer who hires a member of a targeted group, other than a qualified veteran, after December 31, 2011, and on or before March 31, 2013, will be considered to have timely filed Form 8850 if it submits the completed form to the respective state workforce agency by April 29, 2013.  An employer who hires a veteran after December 31, 2012, and on or before March 31, 2013, will be considered to have timely filed Form 8850 if it submits the completed form to the respective state workforce agency by April 29, 2013. The 28-day rule will only be applicable after that date.

Claiming the Credit - Taxable Employers

For taxable employers, the WOTC may be claimed for hiring targeted group members, including qualified veterans, who begin work before January 1, 2014.  After the required certification is secured, taxable employers claim the tax credit as a general business credit against their income tax.

Claiming the Credit - Tax-exempt Employers

Qualified tax-exempt organizations may claim the credit for qualified veterans who begin work on or after November 22, 2011, and before January 1, 2014. Tax-exempt employers may not claim the WOTC for other targeted group members.  After the required certification is secured, tax-exempt employers claim the credit against the employer social security tax by separately filing Form 5884-C.  The Form 5884-C is filed after filing the related employment tax return for the employment tax period for which the credit is claimed. It is recommended that qualified tax-exempt employers not reduce their required deposits in anticipation of any credit as the forms are processed separately.

If you are interested in taking advantage of the WOTC, you should talk to your tax professional.  If you have any questions about how to take advantage of the WOTC as amended by the VOW Act or ATRA, please contact me at 937-223-1130 or Jsenney@pselaw.com.

AND ONE MORE THING.   The mandate for large employers to provide health insurance to their full time employees, or face penalties, has been deferred to 2015.  Employees however are still required to obtain and carrying health insurance, or face penalties, starting in 2014.  The delay in implementing the employer mandate will likely cause more people to enroll in the subsidized insurance exchanges.  Each year, going forward as fewer and fewer employers offer health coverage and/or restructure their work force (part time versus full time workers), more and more individuals will likely move to the exchanges.

Small businesses with fewer than 50 employees are not subject to the mandate.  So some employers are looking at restructuring their work force as a way around the new law.  For this purpose, the law defines full time employees as those that work on average 30 or more hours per week.  To avoid the mandate, some businesses have been hiring fewer full time workers, hiring more part-time workers, and/or cutting employees' hours to less than 30 per week.  If you would like to know more about the employer mandate, contact one of our employment law attorneys at 937-223-1130 or Jsenney@pselaw.com.

Facebook Firings Revisited

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The National Labor Relations Board often takes a pro-labor stance when deciding cases brought before it.  In a number of cases where the Employer terminated an employee for posting disparaging comments about the Employer or the workplace on Facebook or another internet site, the NLRB ordered the Employer to reinstate the employee.  The NLRB found in these cases that the posted messages were protected "concerted activity" and that the employee's termination was an unfair labor practice.  However, in a recent case Tasker Healthcare Group dba Skin-Smart Dermatology, the NLRB Associate Counsel sent an Advice Memorandum to the Regional Director supporting the termination of an employee by a medical practice where the employee had vented about her workplace in a private group message sent via Facebook.

In Tasker, the employee and 9 others participated in a group message in which only invited individuals could participate.  The message initially focused on a planned social event.  But the employee later in the string of messages told the others about an exchange between the employee and her supervisor.  In this string of messages the employee told the others that she had told the supervisor to "back the freak off", that the Employer was "full of sh___", that the employee would not "bite my tongue any longer",  and that the supervisor should "FIRE ME . . . and make my day".   Eventually one of the other individuals posted that the workplace was "annoying as hell" and that "there was always some dumb sh__ going on."

On the next day, one of the individuals who had participated in the message string showed it to the Employer.  The Employer then fired the employee in question.  The Employer told the employee it was obvious from the message string that the employee was not interested in continued employment with the medical practice, and that the Employer was concerned about having the employee work directly with patients given the employee's feelings about the medical practice.

The employee filed a claim against the Employer with the NLRB alleging an unfair labor practice.  The NLRB Regional Director asked for advice from the Associate Counsel. The Associate Counsel acknowledged that the NLRB generally protects individuals who engage in concerted activity.  However, the Associate Counsel found that the employee had only been expressing an individual gripe and had not been engaging in a discussion of shared employment concerns.  The Associate Counsel found further that the employee's Facebook comments were nothing more than personal contempt for the Employer and in no way could be characterized as a discussion of the terms and conditions of group employment.  As a result, the Associate Counsel determined that the employee's termination was not unlawful.

If you have any questions or need assistance in any matter involving employee hiring, discipline or firing, please give one of our employment attorneys a call at 937-223-1130 or Jsenney@pselaw.com.

AND ONE MORE THING.  The EEOC settled its first lawsuit alleging discrimination under the Genetic Information Non-Discrimination Act (GINA).  The lawsuit was brought by the EEOC on behalf of a temporary worker.  When the worker's temporary assignment came to an end, the worker applied for permanent employment.  The employer made the worker an offer and then sent the worker to its contract medical examiner for a pre-employment drug test and physical.  The worker was required to complete a questionaire which inquired about the existence of heart disease, hyper-tension, cancer, diabetes, arthritis and other physical and mental disorders in her family medical history.  Following the employee's examination, the employer rescinded its employment offer.  GINA prohibits employers from discriminating based on genetic information and restricts employers from requesting, requiring or purchasing such information.  In this case, the EEOC determined that the employer violated federal law when it requested the worker's family medical information through a contract medical examiner.  If you have any questions about GINA or other employment law matters, please contact one of our employment attorneys at 937-223-1130 or jsenney@pselaw.com

Taxpayer Guide to Identity Theft

We are migrating this blog to Facebook and our website. Please visit www.facebook.com/senneysays and "Like" our page. ~Or~ Send your email address to: jsenney@pselaw.com to receive the latest blog by email. Identity theft occurs when someone uses your personal information such as your name, Social Security number (SSN) or other identifying information without your permission.  Often an identity thief uses a legitimate taxpayer’s identity to file a fraudulent tax return and claim a refund.  This generally occurs early in the filing season before the legitimate taxpayer has filed his or her return.  As a result, you and the IRS may be unaware that this has happened until you file your return and discover that two returns have been filed using the same SSN. You should be alert to possible identity theft if you receive an IRS notice that states that:   More than one tax return for you was filed,   You have a balance due, refund offset or have had collection actions taken against you for a year you did not file a tax return, or   IRS records indicate you received wages from an employer unknown to you. If you receive a notice from IRS concerning possible identity theft, you should respond immediately.  If you think someone may have used your SSN fraudulently, notify IRS immediately by responding to the name and number printed on the notice.  You will also need to fill out the IRS Identity Theft Affidavit on Form 14039.  If you are a victim of identity theft and have previously been contacted by the IRS, but have not achieved a satisfactory resolution, you should contact the IRS Identity Protection Specialized Unit at 1-800-908-4490.  Even if your tax records have not currently been affected by identity theft, you should contact the IRS Identity Protection Specialized Unit if you think you might be at risk because your purse or wallet was lost or stolen, or you noticed unusual or questionable credit card activity. You can minimize your chances of being a victim of identity theft by doing the following:   Don’t carry your Social Security card or any document(s) with your SSN on it.   Don’t give a business your SSN just because they ask.  Give it only when required.   Protect your financial information.   Check your credit report every 12 months.   Secure personal information in your home.   Protect your personal computers by using firewalls, anti-spam/virus software, update security    patches, and change passwords for Internet accounts.   Don’t give personal information over the phone, through the mail or on the Internet unless you    have initiated the contact or you are sure you know who you are dealing with.

The IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels.  If you receive a suspicious email, you should report it to the IRS at phishing@irs.gov.  If you receive a suspicious contact by phone, fax or mail, you should call the IRS at 1-800-366-4484.   For more information on identity theft and how to prevent it, click on the following links: IRS.gov/identitytheft and IRS.gov/phishing

If you would like to discuss possible identity theft or how to prevent it, please contact your tax or business attorney at 937-223-1130 or Jsenney@pselaw.com

AND ONE MORE THING.   Identity theft and internet schemes do not only affect tax matters.  Internet crime schemes of all types continue to occur with regularity.  The Federal Trade Commission has issued advice on how to prevent identity theft and internet scams and what to do if it happens.  For more information check out the FTC’s Identity Theft page or use the FTC’s Complaint Assistant Internet Crime Complaint Center.  Please contact us with any questions you may have concerning this at 937-223-1130 or Jsenney@pselaw.com.

SEC Issues Some Rules on Crowd-Funding

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One of the biggest barriers to raising capital from unrelated investors is the ban on general solicitation.  Under this ban, a start-up company is not permitted to make a mass mailing, radio or TV broadcast or email solicitation to reach potential investors.  This ban has made it difficult if not impossible for some start-ups to find the investment dollars necessary to launch their business venture.

In an attempt to jump-start the US economy, Congress passed the JOBS Act in early 2012.  One part of the JOBS Act was a provision mandating the SEC to ease the rules governing how start-ups and small businesses can raise capital from investors.  While the SEC has not rushed to adopt new rules authorizing full-blown crowd-funding, the SEC is moving in that direction and has recently proposed certain exceptions to the ban on general solicitation.

In about 60 days, startups will legally be allowed to advertise, market, and publicly disclose the fact that they are fundraising to accredited investors.  But the use of crowd-funding to solicit and obtain funding from non-accredited investors is not yet permitted.  There is no time table for that phase.  Permitting the use of crowd-funding to solicit funds from non-accredited investors is viewed as more controversial since unsophisticated investors with limited net worth and income could lose their retirement savings by investing in questionable investments.  As the SEC moves forward and develops rules on crowd-funding, we will keep you updated.

If you have any questions about crowd-funding or private placement security offerings please contact me at Jsenney@pselaw.com or 937-223-1130.

AND ONE MORE THING.  We are starting to get inquiries from clients about the effect of same-sex marriages on estate planning, income taxation, asset protection, etc.  If you would like to know more about these matters contact one of our tax or estate planning attorneys at 937-223-1130 or Jsenney@pselaw.com.

If an LLC is Set-up With a Corporate Structure, What Laws Apply?

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Many LLCs are set up with a corporate governance structure.  These LLCs are formed by filing Articles of Organization with the Secretary of State's Office.  These LLCs generally have an operating agreement.  But these LLCs also generally have By-Laws and a Board of Directors and Officers.  So when a question arises concerning governance of the LLC, do you look to ORC chapter 1705 which governs LLCs or do you look to ORC chapter 1701 which governs corporations?  The answer is it depends on whether you added language to the Operating Agreement to say that ORC chapter 1701 applies in certain situations.

An LLC is generally governed under ORC chapter 1705.  This means that if the LLC's operating agreement is silent on a particular issue, then the default provisions of ORC chapter 1705 apply.  But if the LLC's Operating Agreement provides for a different method or procedure for governing the LLC, the method or procedure set forth in the Operating Agreement controls.  As a result, it is possible to have parts of ORC chapter 1701 apply to the LLC by so providing in the LLC operating agreement.

Why would you want ORC chapter 1701 apply?  Well there are some concepts in ORC chapter 1701 that do not exist in ORC chapter 1705.  For example, under ORC section 1701.55, shareholders may cumulate their voting power when voting for directors.  In this way a minority shareholder is able to vote in a director acceptable to the minority shareholder.  Without cumulative voting the majority shareholder is always be able to vote in all the directors.

There is no similar cumulative voting procedure under ORC chapter 1705.   So under ORC chapter 1705,  the majority members can appoint all of the members of the Board of Directors.  To avoid this result, the members could provide in the operating agreement that the cumulative voting procedures of ORC section 1701.55 shall apply to th election of members of the Board of Directors of the LLC.

There are numerous differences in the laws that govern LLCs and corporations.  You need to be sure you understand what laws apply to you.  Contact me at 937-223-1130 or Jsenney@pselaw.com.

AND ONE MORE THING.   The House of Bread was founded with the belief that no one deserves to go hungry.   My wife and I are co-chairs of this year's House of Bread Gala. We invite you to join us for this wonderful event to raise funds and awareness for this organization.  The Gala is being held at the Sinclair Ponitz Center at 6pm on Saturday August 10th.  Hundreds of families count on the House of Bread.  We appreciate all your support.  Register online today!

New Ohio Budget Signed Into Law

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Governor Kasich signed the 2-year $62 billion state budget legislation last Sunday.   The legislation is intended to spur economic growth by reducing personal income taxes.  Under the new budget legislation, personal income taxes are expected to fall $2.6 billion.  The cuts in personal income tax are to be offset by an increase in the state sales tax rate from 5.50 percent to 5.75 percent.  The budget also includes a 50 percent tax break for small-business owners on their first $250,000 of income.  The budget went into effect on Monday.

While taxpayers are generally pleased by the reduction in personal income taxes, some business owners are not so happy with the changes in the state sales tax system.  In addition to increasing the sales tax rate, the new budget legislation also taxes some services that were not previously subject to tax including such varied activities as horse boarding and training; pet grooming; intrastate courier services; marine towing services; packing and crating services; refuse collection; insurance, investment counseling, loan brokerage, property sales agents fees, property management fees, title abstract work, and other financial services; accounting, tax preparation, architecture, engineering, interior design and legal services; hair styling, dating services, funeral services and other personal services; advertising, marketing, public relations and other similar services; computer online sales, software and modifications; admissions to cultural events, sports events and similar entertainment; and certain other labor, fabrication and repair services.  The list of new taxable services is extensive and the scope of some covered services may not be entirely clear.

If you have any questions about the new sales tax provisions or any other part of the new budget legislation please contact one of our tax and business attorneys at 937-223-1130 or Jsenney@pselaw.com.

AND ONE MORE THING.   Employers from time to time face situations where they must investigate an employee suspected of misconduct.  Such investigations frequently involve reviewing employee emails.   But the employer’s legitimate  need to know can run into the employee’s privacy rights.  Can employers be liable if they access an employee’s email account?  Does an employer need to have an email privacy policy in effect?    What happens if the email policy is not enforced consistently?  Does it make any difference if an employee’s email account is provided by the employer?  What if the employee accesses his or her personal gmail account using employer provided computers or Internet connections?   Employers need to know what they can and can’t do in searching employee email accounts.  Please contact one of the business attorneys at PS&E at 937-223-1130 or Jsenney@pselaw.com.

Running the Family-Owned Business

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Family-owned businesses offer certain advantages not always available in larger publicly-held businesses. These advantages generally include close contact with upper management, less bureaucracy, built-in trust among officers, board members and shareholders, and the opportunity for hands-on training, mentoring and early exposure of the younger generation to the business.

Family-owned businesses also present certain unique challenges. In particular, family-owned businesses often have problems with succession. These succession problems can often be tied to inadequate training of the younger generation, family rivalries and jealousies, inadequate communication between family members and lack of planning. These succession problems can also occur when the senior generation does not allow the younger generation the opportunity to grow (and make mistakes), develop, and at some point assume a leadership role in the business.

Most successful family-owned businesses have clearly defined roles and responsibilities for family-members. Most successful family-owned businesses also do a thorough job training and preparing the younger generation to assume leadership positions. This can include job shadowing where the younger generation hears, sees, and absorbs the actions of a mentor in the actual business environment. Many family-owned businesses span multiple generations.

These family-owned businesses can be quite complicated to run smoothly as multiple generations interact in running the business. These family-owned businesses can be even more complicated to run when in-laws are involved. Planning is critical for any business. But careful planning is even more crucial to the family-owned business because many families have all or most of their assets tied up in the business. Personal estate and family planning therefore gets intertwined and inter-woven with succession and business planning.

Owners of family-owned businesses need to carefully plan to move assets where they are needed for family reasons, while minimizing transfer taxes and preserving necessary resources within the business. Business, estate and succession planning can be overseen by the company’s Board of Directors, an advisory panel, or other professional advisors. It is important for owners of a family-owned business to ask and answer the hard questions. Who should be in charge 5, 10, or 20 years from now? Does my son or daughter have what it takes to run this business successfully? Are there employees in the business who could help lead the business profitably? Do we have the time to train and develop the next generation? Are there vendors or customers who would be interested in buying part or all of the business?

If you would like to meet with one of our business and tax attorneys to discuss succession planning or any other aspect of your family-owned business, please contact me at 937-223-1130 or Jsenney@pselaw.com.


AND ONE MORE THING. The Ohio legislature released a proposed resolution of the tax differences in House Bill 59. Under this proposed resolution, most Ohioans would pay less income tax, while paying more property and sales taxes. More on this as it develops. Call or email me at 937-223-1130 or Jsenney@pselaw.com with any questions about state or federal tax issues.

Passive or Active? It Makes a Difference

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Under IRC section 469(c)(1), the losses from a passive activity can generally be deducted only against passive income.  So the characterization of an activity as active or passive controls whether a taxpayer can deduct the losses of such activity against other active income.  An activity is not characterized as an active trade or business with respect to the taxpayer unless the taxpayer materially participates in the activity. A taxpayer is treated as materially participating in an activity by meeting at least one of the seven tests in Treas. Reg. section 1.469-5T.  As an example, a taxpayer is considered to materially participate if: (1) the taxpayer participates in the activity for more than 500 hours during the year (first test); or (2) on the basis of all of the facts and circumstances, the taxpayer's participation was regular, continuous, and substantial during the year (seventh test).  In determining whether any of the tests are satisfied, the participation of the taxpayer's spouse is considered.

A taxpayer can demonstrate his or her participation in an activity by any reasonable means.  Contemporaneous daily time logs, calendars, appointment books, reports, or similar documents aren't required. Reasonable means includes identification of services performed over a period of time and the approximate number of hours spent performing the services during the period, based on appointment books, calendars, or narrative summaries.

If you have any questions about how to properly characterize an activity as active or passive, or how to best structure your business and investment activities, contact one of our tax and business attorneys at 937-223-1130 or Jsenney@pselaw.com.

AND ONE MORE THING.  An S corporation shareholder may deduct his or her pro-rata share of any loss sustained by the corporation.  However, the shareholder's deduction of such loss is limited to the sum of the shareholder’s basis in his or her stock and the amount of any debt owed to him or her by the corporation.  For this purpose, a shareholder's guarantee of a loan made by a third person to the S corporation is not treated as a debt from the S corporation to the shareholder.   In a recent tax court case, the Court looked at whether the guarantee of a corporate note to a bank would give a shareholder basis in his or her stock or debt at the time the corporation defaulted and the Bank looked to the shareholder-guarantor for payment.  The Court found that the mere fact that the corporation defaulted and thereby rendered the shareholder-guarantor liable was not sufficient.  The Court found that, the shareholder-guarantor had not changed his position to that of the primary obligor prior to the default.  If you have questions about deductibility of losses contact 937-223-1130 or Jsenney@pselaw.com.

Treating a Stock Purchase Like an Asset Purchase

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Potential buyers of a corporate business generally want to buy the assets of the corporation and not the stock.  Sellers generally want to sell the stock and not the assets.

When a seller sells stock of a corporation, the seller pays tax at capital gain rates on the gain recognized on the sale of the stock.  On the other hand, if the seller had caused his or her corporation to sell its assets, then the corporation generally would have had to pay tax at ordinary income tax rates on the depreciation recapture amount and tax at capital gains rates on the balance of the recognized gain.  And this is in addition to any tax the sellers pay upon distribution of the sales proceeds by the corporation to themselves.  So sellers generally prefer doing a stock sale because they pay less tax when the deal is structured as a stock sale.

On the other hand, a buyer wants to do a deal as an asset sale because the buyer avoids becoming liable for seller’s known and unknown liabilities, and because buyer will get an automatic step-up basis in the corporation’s assets.  As a result, the buyer will  get larger depreciation deductions and will pay less tax in the future.  For these reason, buyers generally insist on doing the deal as an asset sale.

Assuming taxes and existing liabilities are not a major concern, there are some situations where both buyer and seller would prefer to do a deal as a stock sale.  Doing a stock sale can eliminate the need to transfer or obtain new licenses, permits and certifications.  Doing a stock sale is somewhat less cumbersome since only title to the stock gets transferred and not all of the individual assets.

When buyer and seller negotiate the structure of the deal as an asset sale or a stock sale, they need to factor in the tax consequences when setting the agreed purchase price.  A higher purchase price will generally be paid by the buyer in an asset sale.  A lower purchase price will generally be paid by a buyer in a stock sale.

But if a deal must be structured as a stock sale, is it possible for a buyer to do the stock sale and still get the tax effect of doing an asset deal?  It is.  IRC section 338(h)(10) permits a buyer and seller to jointly make an election to treat the stock sale as an asset sale for tax purposes.  If this election is made, only corporate-level gain on the deemed asset sale is recognized.  No shareholder-level gain is recognized on the actual stock sale.  Second, the deemed asset sale is treated as occurring while the target corporation is still a member of the selling group.  As a result, it is often possible for the seller to shelter the gain on the deemed sale of assets with operating losses or other tax benefits within the selling group.  As a result, an IRC section 338(h)(10) election may be agreeable to both parties when negotiating the structure of a deal if the value of the future tax benefits to the buyer (stepped up basis) exceeds the current tax cost to the seller.  To the extent the buyer gains significant basis step-up as a result of the election, buyer might increase the stock purchase price somewhat to account for the increased taxes paid by the seller.

If you have questions about making a 338(h)(10) election, call one of our business and tax attorneys at 937-223-1130 or jsenney@pselaw.com.


AND ONE MORE THING.  Don’t forget that making a 338(h)(10) election for an “S” corporation could cause the built-in-gains tax to apply.  BIG tax applies when an “S” corporation that was formerly a “C” corporation sells appreciated assets at any time during the recognition period.  If you have any questions about BIG tax please call one our tax and business attorneys at 937-223-1130 or Jsenney@pselaw.com.

Why Do I Need to Comply with the Required Corporate Formalities?

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Met a former business owner and his spouse at a networking event recently. The husband used to own a corporation. Funds were tight and he missed some payroll tax deposits. Then he missed a few sales tax deposits. Next thing you know the IRS and State of Ohio filed liens and levies to collect the unpaid tax.

The corporation went out of business and liquidated. The delinquent federal and Ohio taxes were not paid. The IRS and Ohio went after both the owner and his spouse for payment of the "trust fund" portion of the taxes arguing that each was a responsible person. Generally a responsible person is an officer, director, shareholder of a corporation who has the power and authority to make payment decisions. The owner now says that his spouse is not a responsible person since at the time the tax liabilities arose only he was a shareholder, director and officer of the corporation.

I suggested he could easily prove to the tax authorities that his spouse was not a responsible person by showing them copies of the corporation's stock certificates, stock ledgers, corporate resolutions and other documents that listed only the owner as a shareholder, director and officer at the relevant times. He was a bit embarrassed to admit he never kept a corporate record book or did annual minutes, and he really had no documents to show the tax authorities to disprove their assumption that both the owner and his spouse were responsible persons.

To add insult to injury, the failure to maintain the corporate record book gave the tax authorities support for their argument that they should be permitted to "pierce the corporate veil" and go after both the owner and his spouse for all the corporate taxes (not just the trust fund portion) as partners.

At times it can seem a bit troublesome to prepare annual minutes for a small corporation. But the annual cost to maintain a corporate record book is low when you compare it against the problems that can arise from failure to comply with the required corporate formalities.

AND ONE MORE THING.  Shahrzad Allen of Pickrel, Schaeffer & Ebeling and others will be presenters at the Immigration Reform Leadership forum sponsored by the Dayton Hispanic Chamber on June 19^th from 7:30 to 9 am.  The event will be held at the Hilton Garden Inn in Beavercreek.  The cost is $20 for non-members and $15 for non-profit organizations.  Continental breakfast will be served.  For more information, visit DHC’s website at  www.daytonhispanicchamber.com.  Or contact Jeff Senney jsenney@pselaw.com or Jan Burden jburden@pselaw.com.

Social Security Benefits

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For many people, social security remains a significant part of their overall financial plan.  To be eligible for benefits, a person must have worked and paid into the Social Security Administration (SSA) system for at least 10 years (40 quarters) and have earned more than $4,640 per year (in today's dollars).   The amount you are eligible to receive can be determined from your SSA statement which is available online at www.ssa.gov.

To access your Social Security information online, you will need set up a SSA online account.  To verify your identity, the SSA website will ask you some personal questions.  The SSA system is  linked to the Experian credit reporting system.  Questions it might ask you include where do you work, what is your address, when was your current home built, and/or when did you last open an AMEX credit card.  If you answer any of the questions wrong it bars you out of the SSA system for 24 hours.

If you were born in 1960 or after, full retirement age is currently 67 ("FRA").  Some people may retire before they reach their FRA.  Others may want to wait until after they reach their FRA.  The earliest possible Social Security retirement age is 62.  Retiring at 62 causes a reduction to the benefit that would otherwise be paid if the person retired at FRA.   For each year up to age 70 that a person waits after FRA to retire, the social security benefit increases 8%.

There is no limit on the amount of money a person can earn after they reach their FRA.  If a person wants to collect Social Security before they reach their FRA, then the social security benefit is reduced if the person earns more than a threshold amount.  The threshold amount for 2013 is $15,150.

Planning for your retirement can be complicated.  Social Security is just one component.  You need to consider all of your assets, liabilities, income and expenses from all sources.  You also need to consider life style choices and family commitments.  Please contact me or one of our estate planning attorneys at 937-223-1130 or Jsenney@pselaw.com.

AND ONE MORE THING.  In previous blogs we talked about the importance of properly classifying workers as employees or independent contractors.  If you misclassify a worker as an employee, you perhaps will pay more in the way of payroll taxes and workers compensation premiums than would otherwise be required.  On the other hand, if you misclassify a worker as an independent contractor, you face the risk of being subject to significant payroll taxes, income tax withholding, penalties and interest.  A recent news release shows that US workers are filing a record number of federal lawsuits against employers alleging violations of wage and hour laws including misclassification of their status as independent contractors.  If you would like to discuss worker classification further, please contact me or Matt Stokely at 937-223-1130 or Jsenney@pselaw.com.

Tax on Unearned Income

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Effective in 2013, some individuals will be subject to a new 3.8% medicare contribution tax on unearned income.  The new tax applied to single taxpayers with modified adjusted gross income over $200,000 and to married taxpayers filing jointly with MAGI over $250,000.  The unearned income to which the tax applies includes interest, dividends, annuities, royalties, rents, passive income and other net investment income.

Investors might want to consider tax-free bonds since the interest on these bonds is not subject to the new tax.  Investors might also want to consider insurance products since the inside build-up of life insurance cash value is not subject to the new tax.   Investors should also maximize investments inside qualified retirement plans and IRAs since income/gain inside these vehicles is not subject to the new tax.

Income received by an individual from a business is subject to the new tax if the business is a passive activity for the individual.  But don't forget, if the new tax applies because the business constitutes a passive activity, the individual would not be subject to self-employment tax on the same income since self-employment tax only applies to earned income.   Furthermore, if an "S" corporation owner actively participates in the business, he or she can avoid both the new tax and self-employment tax on the dividend distributions he or she receives from the "S" corporation.

This can be a bit complicated.  Call or email me to discuss at Jsenney@pselaw.com or 937-223-1130.

Estate Planning for "Digital Assets" or Who Reads My Emails When I Die?

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Have you thought about what happens to all the emails, pictures, contacts, messages, phone numbers, email addresses, on-line accounts and other information on your personal and work cellphones and computers after you die?  Do you want anyone to have access to these “digital assets” after you die?  If so who should have access to what?  You  need to consider these digital assets as well as your other assets when doing your estate and succession planning.

What are Digital Assets?  Digital assets include any online account that you own or any file that you store on your computer or in the cloud.  Digital assets can include your on-line banking account, your e-mail accounts, your picture and video storage sites, your social networking sites, your domain names, your games and leisure sites, your business, professional, marketing and networking sites, your frequent flier mile and other award program accounts, and all your storage and backups.   Digital assets also include all the electronic information and data on your personal and business cellphones, laptops, I-pads, computers, hardware and software.

Passwords.  Many of your digital assets are protected by usernames, passwords, and security questions.  If these digital assets are to be easily accessible to your chosen beneficiaries, you need to make sure such access information is recorded and transferred to such beneficiaries.
Need to Plan.  It is important for many reasons to carefully plan for the eventual transfer of your digital assets.   These reasons include: (1) the uncertainty of existing digital asset privacy and other laws, (2) prevention of on-line identity theft, (3) making sure the right parties receive your digital assets, and (4) making sure others do not gain access to your digital assets.

No Body of Law.  Digital assets are a new phenomena.  There is no well-developed body of law that describes the rights and obligations of executors, agents, guardians, and beneficiaries with regard to digital assets.  Very few jurisdictions have dealt with this issue.  Facebook, Twitter, Linked-In and other on-line services have their own policies for how to deal with a user’s death or incapacity, but not all such services have developed policies, and the policies that are in place may not be consistent with your personal wishes.

Prevent On-Line Theft.  Proper planning for your digital assets can prevent on-line identity thefts.  When you die or are otherwise unable to monitor the activity on your on-line accounts, thieves have an opportunity to hack your accounts, open new credit cards in your name, obtain identification cards and make purchases and take other actions in your name.

Executor Needs Access.   Giving your trusted executor access to on-line to digital and other assets would greatly improve the efficiency of the administration of your estate.   Making sure the executor knows which bills you paid on-line or by automatic checking account deduction would help ensure these bills do not go unpaid and would make it easier for the executor to pay such bills.

Transfer of Digital Assets.  Some digital assets may not have any monetary value, but many may have personal or emotional value.  You may have established on-line photo albums and accounts that preserve photos and letters. If your family and friends do not know you have these assets or how to access these assets, these photos and letters may be lost forever.  And if no effort is may to protect these digital assets, the personal and emotional value attributable to these assets may be diminished or destroyed by addition or deletion of material by spammers and hackers.

Transfer to the Right People.  You may not want all your family and friends to have access to all your digital assets.  Emails and messages are often quick off-the-cuff posts or responses.  Some of your emails or messages may contain rude, crude or hurtful jokes, stories or rants that you did not really mean or that were meant only for the recipient.  If you are not careful about who gains access to your digital assets, the wrong people may gain access.

How to Plan for Digital Assets.   The first step in planning for digital assets is to do an inventory of these assets, including usernames, passwords, and answers to “secret” questions.   The next step is to determine for each digital asset whether such asset is subject to deceased/incapacitated user provisions and whether there are ways to change or opt out of such default provisions.

Using Wills or Trusts to transfer Digital Assets.  Wills can be used to transfer digital assets, but Wills are probably not the right place to handle disposition of digital assets or to list digital asset access information because such information changes from time to time and because Wills are eventually made public.  In addition, a Will transfers ownership and control of the digital assets to named-beneficiaries immediately when the Will is probated (rather than maintaining ownership and control in the hands of a trustee).    A Trust is probably a more appropriate location to include the transfer of digital asset provisions because a Trust can be changed more easily and because it does not become part of the public record.   The use of a Trust also gives you the ability to have your digital assets maintained and controlled after your death for so long as appropriate by a trustee you name.

Storing Access Information.  While Wills and Trusts can be used to transfer digital assets, they are not the best place to store the access information.  It is advisable to prepare a separate document with all of the access information related to your digital assets.  This separate document would be a list of all of your digital assets including your on-line accounts, passwords, security questions, and answers.  This separate document could also designate who gets access to which asset, and which assets get deleted.  This separate document can be in writing, but it also could be stored electronically on  a computer data file, USB flash drive, or in a cloud.

During your lifetime you are creating a wealth of electronic information about yourself, your family and  your friends.  Some of this you may want to pass on.  Some of this you for sure do not.  If you would like to speak with me or one of our estate planning attorneys about how to handle your digital assets please give us a call at 937-223-1130 or Jsenney@pselaw.com.


AND ONE MORE  THING.  PS&E is sponsoring a FREE   seminar at Dayton Country Club on Wednesday May 22 from 7am to 9 am on “Essential   Legal Documents, Planning Considerations and Legal Updates for Every   Business.”   It is not too late to register.  But you need to hurry since space is limited.  You can register by clicking on the following link Register   Now! or by contacting Jan Burden at 937-223-1130 or Jburden@pselaw.com.