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The Issue

I recently encountered an interesting situation in which someone suggested that a grantor trust be decanted into a non-grantor trust before the end of the taxable year. The reason? To avoid the special interest charge that would otherwise be imposed with respect to the deferred tax liability attributable to the trust’s share of an installment obligation.[i]

The trust’s principal asset was a membership interest in an LLC that was treated as a partnership for purposes of the federal income tax. Among the assets held by the partnership was an installment obligation that had been received by the partnership earlier in the taxable year in exchange for the partnership’s sale of unimproved real property.

In order to appreciate the issue presented, it may be helpful to first take a short walk through the installment sale rules. Continue Reading Planning for the Interest Charge on Installment Sales: Decanting a Grantor Trust?

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Where is the Economy Heading?

According to the data released Friday by the Department of Labor, the U.S. economy added approximately 528,000 jobs in July, reducing the unemployment rate to 3.5 percent.[i] Although this figure was certainly better than what was expected by many economists, it seems to belie other signs of economic weakness.

Many states, for example, have reported recently that they are experiencing significant declines in estimated tax payments or that they expect declines in revenue from the withholding of personal income taxes.[ii] These developments are being attributed to the performance of the stock market[iii] and to the fact that wages have not kept in step with inflation.[iv] Continue Reading New York to Taxpayer: “Forget What the Feds Said, You’re a ‘Responsible Person’”

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Summer Break?

After the last couple of weeks, I’m looking forward to Congress’s summer vacation. I’m pretty sure our elected representatives feel the same way, though it is unclear at this point when they will be heading to their respective homes – or wherever else it is they go[i] – to relax, recreate, and rejuvenate.

According to the Congressional Calendar, the Senate is scheduled to begin its break on August 6 and to return on September 6, while the House was supposed to have stopped work on July 30 and will be back in session on September 13.[ii] Continue Reading The Schumer-Manchin Proposal To “Eliminate” the Profits Interest

Tax Alchemy?

How many of you remember Section 138509 of the Ways and Means Committee’s markup last September of what would have been the Build Back Better Act? (A moment of silence, please.)  Allow me to jog your memory. Its heading read as follows: “TEMPORARY RULE TO ALLOW CERTAIN S CORPORATIONS TO REORGANIZE AS PARTNERSHIPS WITHOUT TAX.”[i]

“Oh, that Section 138509. Of course.”

Yep. Under the proposal, any corporation that was an S corporation on May 13, 1996[ii] could have been reorganized as a partnership without triggering a tax liability,[iii] provided the corporation transferred substantially all of its assets and liabilities to a domestic partnership during the two-year period beginning on December 31, 2021. Continue Reading S Corps with Real Property: Separating Shareholders & Partnership Envy

“Summertime and the Living” Isn’t Easy[i]

Summer in the New York Metro Area can be challenging. Some would say it sucks.[ii] It gets really hot. When it rains, it pours – no spritz here. The humidity is oppressive.[iii] Ironically, a forecast of sunny days and clear skies that may draw other “subspecies”[iv] of humans out of their dwellings causes many New Yorkers, instead, to remain indoors, whether it be at home, in air-conditioned shops, or at other artificially cooled venues. Continue Reading Leaving New York? Can You Prove It?

Deal Costs, Generally

Every purchase and sale of a business, whether from the perspective of the seller or the buyer, is about economics, and few items will impact the economics of the transaction more certainly or immediately than taxes. The transaction involves the transfer and receipt of value, with each party striving to maximize its economic return. The more taxes that a selling party pays as a result of the deal structure, the lower is that party’s economic return. The more slowly that a purchasing party recovers its investment, the more expensive the deal becomes.[i] Continue Reading The Transaction That Failed – Tax Treatment of Termination Fees

Escape from New York[i]

According to data released by the IRS earlier this year, the pandemic triggered a “wealth migration” that saw high-tax states like New York lose high-income earners to low-tax jurisdictions such as Florida.[ii]

This weekend, the Wall Street Journal reported that New York’s tax base shrank by $19.5 billion as a result of workers fleeing during a time when lockdown measures allowed employees to work remotely. Other high-tax jurisdictions experienced a similar exodus of workers.

Unfortunately for New York, the migration out of the State began before the pandemic, which does not bode well because, as the Office of the Comptroller recently stated, “the personal income tax is the single largest revenue source for New York, accounting for two of every three tax dollars.” Continue Reading Statutory Residence in New York: Time to Rethink the “Permanent Place of Abode” Test?

Economic Downturn?

The Federal Reserve’s Open Market Committee announced last week that it would raise the Fed’s baseline interest rate by 0.75 percentage points, the largest such increase since 1994.

The Fed’s move came in the wake of the Labor Department’s earlier announcement that the consumer price index (a measure of inflation) rose by 1 percent last month, and by 8.6 percent for the past 12 months, the highest rate of inflation since 1981. Following the release of the inflation figures, all the major domestic stock indices plummeted.

As a result of the foregoing, combined with the geopolitical uncertainty arising from the war in Ukraine, the continued supply chain issues (exacerbated by China’s ongoing difficulty with Covid), and other related factors, many economists and business owners are anticipating a recession.[i] Continue Reading Will An Economic Downturn Lead to An Increase in Tax-Related Whistleblowing?

The Housing Market[i]

During the first quarter of 2022, the housing market accounted for 16.7 percent of gross domestic product (“GDP”).[ii] This figure represents a return to historic norms following the substantial reduction in housing’s share of GDP after the Great Recession.

The reasons cited for the increase include the imbalance in supply and demand for housing, which itself resulted from the reduction in inventory following the 2007-2009 recession and the housing bubble burst[iii] and the recent wave of millennials who, encouraged by what has been until now a low interest rate environment created by the Federal Reserve in response to the pandemic,[iv] have been looking to purchase their first homes.[v]
Continue Reading Either An Investor or a Dealer Be – That is the Question

A More Cautious Approach

Compared to the torrid pace of M&A transactions last year,[i] the current year seems rather pedestrian. That is not to say businesses are not being sold; they are. The purchase and sale of a business is one of the natural alternative paths in the evolution of the business.[ii]

However, the environment in which buyers and sellers are now considering their options and the manner in which they are approaching one another seem to have changed; one might say they are generally being more cautious, notwithstanding that the economy apparently remains strong by many measures. Continue Reading The Earnout: Contingent Purchase Price or Compensation?