Rocky Mountain Relocation CouncilFall Conference

Denver, COSeptember 18, 2012

Relocation Risks and OpportunitiesPresented by Peter K. ScottWorldwide ERC Tax Counsel

Topics:

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

Current Political Landscape Key Issues Remaining for 112th

Congress Expiring Tax Provisions Sequestration under Budget Control Act

Washington Update

“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 Unlikely to see negotiations on big fiscal issues prior to

November elections What’s at stake in November

Presidency Senate (51 Democrats, 47 Republicans and 2 Independents that

caucus with Democrats) Republicans need a net pick up of 4 seats or 3 seats if Romney beats

Obama House (242 Republicans, 190 Democrats and 3 vacancies)

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

Expiring Tax Provisions Bush Tax Cuts Alternative Minimum Tax Exemptions (AMT) Debt forgiveness on Principal Residence State Sales Tax Deduction Deduction for Mortgage Insurance Premiums Payroll Tax Cut

Sequestration under Budget Control Act $1.2 trillion cut over 10 years to federal spending

Key Issues Remaining This Congress

Bush Tax Cuts Federal income tax rates would revert back to:

Current If Cuts Expire10% tax 15% tax25% tax 28% tax31% tax 33% tax33% tax 36% tax35% 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 from15% to 20% for those in current 25%

Key Issues Remaining This Congress

Bush Tax Cuts (continued)

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

Alternative Minimum Tax (AMT) 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

Debt Forgiveness Allowed to exclude up to $2 million in forgiven debt

on principal residence Expires December 31, 2012

State Sales Tax Deduction Taxpayer has option of deducting on federal income

tax form either states sales tax or state income tax Expired December 31, 2011

Mortgage Insurance Premium Deduction Expired December 31, 2011

Key Issues Remaining This Congress

Payroll Tax Cut 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

Some encouraging news on expiring provisions Bipartisan Senate Finance bill August

2 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

Sequestration under Budget Control Act “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: 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

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

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 “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

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 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

“The Opera reminds me of my tax audit. It was in a language I didn’t understand, and it ended in tragedy.” Jeff McNelly’s “Shoe”

BVO’s-Audits/Other Issues 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

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 Delayed AV Process-Example

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 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

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 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 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

“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 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 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

Country song about separation: “I’m so miserable without you, its

just like you were still here”

Severed Mineral Rights 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 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 Owner/lessee of mineral rights has right

to access the surface to do what is necessary to extract mineral 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

Valuation of properties is difficult 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

Definition of Fair Market Value: “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 What to do? Suggestion:

Properties with severed mineral rights are not eligible for home sale program, unless

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

“Corruption is nature’s way of restoring our faith in Democracy.” Peter Ustinov

Law of Probability: The probability of being watched is

directly proportional to the stupidity of your act

Corrupt Practices

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 FCPA prohibits U.S. based company from

paying any form of bribe to any foreign official

Allows small “facilitation payments” 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

Company is responsible not only for its own bribes, but those made by suppliers or others working for company Must supervise, prevent illegal

payments Even if supplier is a foreign company

Corrupt Practices

Company must also have in place an FCPA compliance program Law requires Customer companies increasingly

demand relocation suppliers show they are compliant

Corrupt Practices FCPA compliance program includes:

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 Penalties:

Criminal, civil, and government contracts Corp: $2 million per violation Individual: $100K and up to 5 years Debarment or suspension from federal

contracts Big companies recently nabbed:

Walmart ($24 million) Siemens Oracle Pfizer

Corrupt Practices-UK Act

Stronger than U.S. FCPA 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?

Administrators of relocation programs should make sure suppliers everywhere are aware of requirements

Consider putting in place reporting programs for suppliers to follow

Have a compliance program in place

Tax Primer: One-year rule Moving expense regs say move has to

“proximate in time” with beginning of work at new location 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 What else might “prevent” the move?

Spouse employment Parent or dependent care

How about inability to sell the old home? No authority, but good case

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 Important principle:

One-year rule has NOTHING TO DO with the tax treatment of home sale programs

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!)

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: Anything you try to make absolutely

clear will confuse everybody Therefore:

QUESTIONS!!! (And Answers) Rules:

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:

pkslawoffice@gmail.com 910-579-5332