Rocky Mountain Relocation Council Fall Conference Denver CO

Rocky Mountain Relocation Council Fall Conference Denver, CO September 18, 2012 Relocation Risks and Opportunities Presented by Peter K. Scott Worldwide ERC Tax Counsel

Topics: n n n Washington Update BVO’s-Audit and other issues Severed Mineral Rights-why you should care Dangers from Corrupt Practices Acts Tax Primer: One year rule

Washington Update n n Current Political Landscape Key Issues Remaining for 112 th Congress n n Expiring Tax Provisions Sequestration under Budget Control Act

Washington Update n “American tax laws are constantly changing as our elected representatives seek new ways to ensure that whatever tax advice we receive is incorrect. ” Dave Barry

Current Political Landscape n n Unlikely to see negotiations on big fiscal issues prior to November elections What’s at stake in November n n Presidency Senate (51 Democrats, 47 Republicans and 2 Independents that caucus with Democrats) n n House (242 Republicans, 190 Democrats and 3 vacancies) n n Republicans need a net pick up of 4 seats or 3 seats if Romney beats Obama Democrats need a net pick up of 25 seats plus the 3 vacancies Dire economic consequences of not acting should force compromise on some issues by both parties, but who gives up what depends on election results

Key Issues Remaining This Congress n Expiring Tax Provisions n n n n Bush Tax Cuts Alternative Minimum Tax Exemptions (AMT) Debt forgiveness on Principal Residence State Sales Tax Deduction for Mortgage Insurance Premiums Payroll Tax Cut Sequestration under Budget Control Act n $1. 2 trillion cut over 10 years to federal spending

Key Issues Remaining This Congress n Bush Tax Cuts n Federal income tax rates would revert back to: Current 10% tax 25% tax 31% tax 33% tax 35% tax n If Cuts Expire 15% tax 28% tax 33% tax 36% tax 39. 6% tax Tax on long-term capital gains would increase from 0% to 20% for those in current 10% tax bracket and increase from 15% to 20% for those in current 25%

Key Issues Remaining This Congress n Bush Tax Cuts (continued) n n Tax on dividends would increase from 15% to max of 39. 6% Lower and middle-income married taxpayers filing joint return would lose easing of marriage penalty Return of phase-out rule for itemized deductions and personal exemptions for higher income taxpayers Expire on December 31, 2012

Key Issues Remaining This Congress n Alternative Minimum Tax (AMT) n n n Taxpayer must pay the higher of standard tax or alternative minimum tax Alternative minimum tax is intended to ensure that taxpayers pay at least minimum tax, but not adjusted for inflation Original exemption amounts, if allowed to come into play today, would result in some 30 -40 million middle class taxpayers paying AMT. Big gross-up problem AMT doesn’t allow personal exemptions, standard deductions, deductions for state income taxes or for interest on second homes or home equity lines AMT higher exemption amounts expired on December 31, 2011

Key Issues Remaining This Congress n n n Debt Forgiveness n Allowed to exclude up to $2 million in forgiven debt on principal residence n Expires December 31, 2012 State Sales Tax Deduction n Taxpayer has option of deducting on federal income tax form either states sales tax or state income tax n Expired December 31, 2011 Mortgage Insurance Premium Deduction n Expired December 31, 2011

Key Issues Remaining This Congress n Payroll Tax Cut n n n Reduction in employee contribution to Social Security from 6. 2% to 4. 2% Expires December 31, 2012 Very unlikely to be renewed; neither party is pushing for this and it is not included in “extender” legislation discussed next

Key Issues Remaining This Congress n Some encouraging news on expiring provisions n Bipartisan Senate Finance bill August 2 n n n Increases AMT exemptions for 2012 Extends debt forgiveness through 2013 Extends state sales tax and mortgage insurance deductions through 2012 Senate expected to act before election House is working on a similar bill

Key Issues Remaining This Congress n Sequestration under Budget Control Act n n n “Super Committee” failed to reach agreement on long-term deficit reduction plan $1. 2 trillion automatic cut over 10 years to federal spending if Congress does not act to control budget Starting on January 1, 2013: n n 7. 5% cut in affected defense programs 8. 4% cut in discretionary programs 8. 0% cut in affected mandatory programs 2. 0% cut in Medicare provider payments

Key Issues Remaining This Congress n n Combination of Sequestration and Expiring Tax Cuts creates a “fiscal cliff” Non-partisan Congressional Budget Office predicts renewed recession if Congress does not resolve this fundamental problem Neither party willing to address until after election Depending on result, could see some compromise during “lame duck” session between election and end of year n n n Both parties want to extend tax cuts, but differ on whether high-income taxpayers should be included Plans for spending reductions differ substantially Both interested in some type of “tax reform”

Tax Reform n n n “A tax loophole is something that benefits the other guy. If it benefits you, it is tax reform. ” Russell B. Long “I was working on a flat tax proposal, and I accidentally proved there’s no God. ” Homer Simpson “This idea that you start with a clean slate and end up with a beautiful, logical tax system just isn’t democracy. ” John L. Knapp

Tax Reform n n n Possibly could happen next year Most popular notion is to reduce/eliminate tax breaks that cost money, reduce/flatten rates somewhat Tax breaks we care a lot about might be included n n n Mortgage interest deduction State/local income tax deduction Foreign income exclusion Home sale capital gain exclusion Moving expense deduction Could be an interesting year for Relocation

BVO’s-Audits/Other Issues n “The Opera reminds me of my tax audit. It was in a language I didn’t understand, and it ended in tragedy. ” Jeff Mc. Nelly’s “Shoe”

BVO’s-Audits/Other Issues n n n IRS agents still sometimes contend BVO with no appraisal, guaranteed buyout, not within Rev. Rul. 2005 -74 Good case they are wrong, but ERC continues to recommend addition of delayed AV process Position of IRS lawyers who wrote Rev. Rul. 2005 -74 unclear n n Have expressed some skepticism that BVO works, but no definite position No indication yet that issue has resurfaced as part of the IRS’s ongoing special employment tax audits, but caution advised

BVO’s-Audits/Other Issues n Delayed AV Process-Example n n n Employee markets with BVO for 90 days If no offer, company does appraisals or BMA’s, determines an appraised value Offers employee appraised value, or some realistic percentage of it (e. g. , 90%), but n n n Employee must continue to market for 60 days before accepting Must market at no more than realistic percentage of appraised value (e. g. , 102%) IRS invariably accepts this process as a qualifying AV

BVO’s-Audits/Other Issues n n n Generally, audits less frequent than in past, but still a number every year Audits focus not only on basic BVO, but procedures used (also in AV) Poor audit results are almost always the result of questionable risk reduction procedures used by company

BVO – Questionable Procedure n n n In both AV and BVO, companies often have waited to enter contract with transferee until inspections are complete, all contingencies are removed from outside contract Transferee is usually involved in negotiating inspection results Sometimes, company intentionally waits to sign contract with transferee until very shortly before outside closing, resulting in a “holding period” of no more than 1 -3 days

BVO – Questionable Procedure n n IRS consistently maintains that this practice falls within “situation 3” of Rev. Rul. 2005 -74 and that the program fails. Company has simply not assumed any significant ownership risk for any significant period of time Companies should NOT engage in practices that artificially create short holding periods. They should also NOT wait for inspections to be completed before contracting with employee. Better practice is to do own inspections up front, do not rely on buyer inspections to set price for purchase from employee

BVO’s-Audit Results n n “We try to cooperate fully with the IRS, because, as citizens, we feel a strong patriotic duty not to go to jail. ” Dave Barry Tax Lawyer’s Golden Rule: If somebody has to go to jail, make sure it’s the client

BVO’s-Audit Results n n In audits, IRS invariably asks for complete list of purchase and sale dates IRS invariably concludes that all purchases/sales within a few days of each other fail n n n Some success for taxpayer when it can be shown that nothing other than transferee vacate date causes some to be close together However, if procedures force short periods, IRS always sticks to disallowance Settlements usually involve company conceding all transactions where purchase/sale within some agreed number of days of one another

Severed Mineral Rights n n Country song about separation: “I’m so miserable without you, its just like you were still here”

Severed Mineral Rights n n n Many states permit severance of the surface estate (the house and land) from the underlying mineral rights (like gas & oil), and each can be sold separately As search for more energy escalates, and more methods are devised for extraction (e. g. “fracking” for natural gas in Eastern and Mid-Atlantic states like PA), exists almost nationwide Is becoming a more common fact of life in relocation n Recent NC case in which builder was reserving mineral rights on sale of new homes Buyer, or purchaser from buyer, may not even be aware property is without mineral rights Creates two serious problems for relocation properties

Severed Mineral Rights n Owner/lessee of mineral rights has right to access the surface to do what is necessary to extract mineral n n n Could involve drilling, piping, or other activities that significantly detract from usability of the home May not use surface, but indirectly conduct activities beneath home Possibility that this could occur is a problem in itself, may create buyer stigma

Severed Mineral Rights n Valuation of properties is difficult n n n Value is diluted by lack of mineral rights Value also may be compromised by perception that use may be disrupted by extraction activities Few appraisers qualified to determine amount of negative value adjustment

Severed Mineral Rights n Definition of Fair Market Value: n “The value arrived at in negotiations between a willing tax lawyer and a willing revenue agent, neither of whom has ever bought or sold anything of consequence in his life. ”

Severed Mineral Rights n What to do? Suggestion: n Properties with severed mineral rights are not eligible for home sale program, unless n n Employee has a home that was purchased with mineral rights already severed Home is in an area where this status is common, and severed properties are readily marketable Home can be reasonably valued and appraised by qualified professionals Employee should not be allowed to use the relocation to sell the home to employer, and the mineral rights to someone else

Corrupt Practices n n “Corruption is nature’s way of restoring our faith in Democracy. ” Peter Ustinov Law of Probability: n The probability of being watched is directly proportional to the stupidity of your act

Corrupt Practices n n Anyone providing services overseas, either directly or indirectly, must pay attention to growing government enforcement of the U. S. Foreign Corrupt Practices Act UK law is even tougher

Corrupt Practices n n FCPA prohibits U. S. based company from paying any form of bribe to any foreign official Allows small “facilitation payments” n n n For minor, non-discretionary actions Example: “Tea Money” requested at docks to get goods off boat quicker Facilitation payments must be separately itemized on company financials

Corrupt Practices n Company is responsible not only for its own bribes, but those made by suppliers or others working for company n n Must supervise, prevent illegal payments Even if supplier is a foreign company

Corrupt Practices n Company must also have in place an FCPA compliance program n n Law requires Customer companies increasingly demand relocation suppliers show they are compliant

Corrupt Practices n FCPA compliance program includes: n n n n Clear, written corporate anti-corruption policy System of effective oversight Communication of policy to employees and subcontractors Due diligence procedures for vetting and oversight of third parties Appropriate disciplinary procedure Periodic audits and risk assessments System for reporting suspected violations

Corrupt Practices n Penalties: n n n Criminal, civil, and government contracts Corp: $2 million per violation Individual: $100 K and up to 5 years Debarment or suspension from federal contracts Big companies recently nabbed: n n Walmart ($24 million) Siemens Oracle Pfizer

Corrupt Practices-UK Act n Stronger than U. S. FCPA n n n No facilitation payments Broad definition of commercial bribery, including travel and entertainment that is considered lavish or extreme Must be considered by any company doing business in UK, either directly or through suppliers

Corrupt Practices-What to Do? n n n Administrators of relocation programs should make sure suppliers everywhere aware of requirements Consider putting in place reporting programs for suppliers to follow Have a compliance program in place

Tax Primer: One-year rule n Moving expense regs say move has to “proximate in time” with beginning of work at new location n One year is presumed to be proximate But if taxpayer can show that “circumstances existed which prevented” the move within one year, moving expenses still deductible Example: children finishing school (IRS has allowed 30 months)

Tax Primer: One-year rule n What else might “prevent” the move? n n n Spouse employment Parent or dependent care How about inability to sell the old home? n No authority, but good case n n n If transferee has made good faith and unsuccessful efforts to sell, or Cannot afford to sell because “underwater” on debt Won’t work if transferee just wants to wait for market to improve

Tax Primer: One-year rule n Important principle: n One-year rule has NOTHING TO DO with the tax treatment of home sale programs n n Employee goes to new job in 2009, doesn’t want to sell old home yet Employer puts home through qualifying Amended Value program in 2012 Home sale costs are not taxable to employee However, costs of moving HHG in 2012 will be taxable unless transferee can show that “circumstances existed which prevented” a move within one year

The End (whew!) n n n Old saying: “Knowledge is knowing the tomato is a fruit. Wisdom is not putting it in a fruit salad. ” However, Murphy’s First Minor Law: n Anything you try to make absolutely clear will confuse everybody Therefore:

QUESTIONS!!! (And Answers) n Rules: n n n Has to be one I can answer (but not necessarily on the subjects we covered) Questioner cannot be on permanent “banned” list (you know who you are) No “stump the tax nerd” No questions such as “how much do you weigh” Contact information: n n pkslawoffice@gmail. com 910 -579 -5332