A special presentation on IRAs owning LLCs and Trusts, the advantages, pitfalls and best practices. This has been a highly requested topic for a while. This package contains the class manual for the very successful meeting in 2010. It was well attend with accolades from all attendees, including a dozen or so attorneys and accountants. Also included are select audios of the meeting where Dyches and two highly respected authorities speak on this topic.

One is H. Quincy Long, an attorney who also runs two Entrust offices in Texas. Many of you may already be familiar with Entrust as a provider of true self-directed IRAs. Quincy is well versed in the promises of promoters in using the limited liability company owned partially or completely by the IRA. He will discuss the unsettled law in operating an entity that is owned by an IRA.

David G. Worley is a CPA in North Carolina. David is also active in real estate investment. David will be discussing tax reporting issues and the Family IRA-Owned LLC. This LLC is owned by the IRAs of multiple family members. David will cover the pro’s and con’s of this unique structure. To assure that the IRS rules and regulations are met, anyone thinking of doing this should to be acutely aware of the management challenges involved.

The class manual and recordings of this special session is a “must have” for anyone using entities owned by IRAs or thinking of using them. Get the facts and opinions of professionals who have studied this area in detail, not some telemarketer. They lay out these facts, in-depth in layman terms, what they have done themselves and seen others doing, right and wrong, and provide the most realistic view of setting up and using the IRA-owned LLC or Trust. They will give you their expert opinions on the “checkbook IRA” structure.

They have nothing to sell on this topic, so you will get an unbiased view from them. Sample agreements as well as clauses that should be in the LLC Operating Agreement, Trust Agreement and other documents are discussed. This information will prepare you to discuss these entities with your legal and tax counsel should you decide to form one of them.

Just a few of the topics that will be covered -

• Manager-Managed v. Member-Managed LLC
• The Manager as a fiduciary to the IRA account
• LLCs and Trusts owned by multiple IRAs
• The Family IRA-LLC
• LLCs with the IRA account holder as a Member personally along with their IRA
• Who can or should be Manager/Trustee? You? (lots of issues here)
• Management do’s and don’ts
• Self-Dealing situations that may surprise you
• Must-have Operating Agreement/Trust Agreement clauses
• Must-NOT-have Operating Agreement/Trust Agreement clauses
• Who should control the checkbook? Why?
• Alternative approaches
• Can additional contributions be made later?
• Member meetings/proxies/powers of attorney
• Handling Required Minimum Distributions

• Accounting / end-of-year reporting issues

• Case Studies from IRS & Department of Labor Rulings
• When an LLC/Trust becomes a disqualified person
• UBIT issues
• Reasonable compensation questions
• Plan Asset & Funding regulations
• and much, much more…

As you all know, I have taught many years on entity structures, however never before on the most controversial of issues . . . the IRA-owned LLC.

This entity is promoted as a perfect solution to common self-directed IRA issues, such as -

• Quick access to IRA funds
• Local ability to sign documents
• Protect IRA account from liabilities
• Keeping custodial fees low
• Invest in assets not allowed by your custodian
• Using multiple investor’s IRAs together
• Maintain a low profile of investment activity

Good points, but a significant level of knowledge must accompany the use of such entities.

Some questions that arise in using these entities are -

• Should LLC be Member-Managed or Manager-Managed?
• Who should (or can) be Manager?
• How can several IRAs form a single LLC?
• How are Member meetings handled?
• What about end-of-year reporting?
• Can additional contributions be made?
• Can you personally own part of the LLC?
• And many others . . .

And what about using an alternative structure such as a Trust? Many of these same issues apply to Trusts as well.

Why are we so concerned about dealing with these entities correctly?

Because the IRS penalties can be up to 160+%
if your IRA participates in a prohibited transaction!

And there is no statute of limitation since an IRA generally doesn’t file a tax return!

Quincy, David and I have no bones to pick, no vested interest in whether or not you utilize an LLC or Trust with your IRA. We only have an interest in providing you with the best information available on this topic! We tell you what we know and what we (as well as other experts) don’t know. So, you will get both the pros and the cons of these entities in a balanced, practical approach to the topic.

I am excited to be offering this package with known experts on these creative structures. Join us as we explore the possibilities in the use of the LLC and Trust owned by one or more IRAs.

Order Package Now for Only $597

P.S. As with all of my seminars and books, I personally GUARANTEE this package. Simply return the package in good. resalable condition within 30 days for a no hassle refund!

]]> http://assets101.com/ira-owned-llc-trust/feed/ 240 http://assets101.com/hello-world/ http://assets101.com/hello-world/#comments Tue, 13 Apr 2010 20:15:44 +0000 admin http://assets101.com/wp/?p=1 Lonnie Scruggs and I have put our Mobile Home packages together to offer a great deal
to anyone who could not attend our combined class back in April. This combo package
will only be offerred for a limited time…

You get Lonnie’s package including

• Lonnie’s Deals on Wheels Home Study Course *** Newly Revised *** – Regularly $295 plus $10 Shipping
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  need to get started making awesome returns and constant cash flow, including:

  • How to quit your job and become financially secure with notes
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  • How to structure the note for the highest yields
  • The two most important words you can use in negotiating the sale
  • How to start in your spare time with little or no money
  • How to do a little work one time and get a check for years
  • How to eliminate tenants, management, maintenance and still get a check
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  • How to recover ALL your money in 12 to 15 months
  • How to do just one deal a month and make more than your full-time job pays
  • AND — How to buy mobile home notes for spectacular yields

• Lonnie’s How to Use the Hewlett-Packard 12c Financial Calculator CD Course with Workbook.
  Learn what the calculator keys mean and how to use them to solve simple math problems or
  complex calculations. This powerful, little pocket-sized calculator will open up an exciting,
  new world of opportunity for you.

• Lonnie’s Three Best Selling Books –
  • Deals on Wheels: How to Buy, Sell and Finance
    Used Mobile Homes for Big Profits, and Cash Flow
  • Making Money with Mobile Homes: How to Make
    Unbelievable Profits and High Yields in the
    Used Mobile Home Business
  • Taking the Mystery Out of Money:
    Stop Working for Money; Start Making Money
    Work for You!

• PLUS Dyches’ Mobile Home Money Machine Package – Regularly $347 plus $15 Shipping
  We made a lot of money using the concepts covered in this course. While everyone else is
  competing for good deals in site-built homes, you can be cherry picking mobile home deals.
  Every aspect of the business is detailed — for example, just a few of the areas covered are:
  where to find good deals, how to evaluate, negotiating, fix-up, finding buyers, working with
  communities, finding investors, doing paperwork properly, sales tax, income tax, and licenses.
  All the forms you need are included with explanations of their use. You won’t find this much
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Both Lonnie & Dyches’ packages are being made available to you
for just $597 including shipping!

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>>> Print this form (use “Print” above on the right ↑), complete & send by Fax or Mail <<<

- – - – - – - – - – - – - – - – - – - – PRE-REGISTRATION – - – - – - – - – - – - – - – - – - – -

This information is designed to provide accurate and authoritative information in regard to the subject matter covered. It is offered with the understanding that the presenters are not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert advice is required, the services of a competent professional should be sought.

American Bar Association and a Committee of Publishers and Associations.

Sign me up for:

Advanced LLC, Corporation & Trust Class with Dyches Boddiford

Saturday & Sunday, September 26 & 27, 2009

Hilton Garden Inn – Atlanta Airport 2301 Sullivan Road College Park, GA 30337 404-766-0303

“Boddiford Group” room rate $80 single or double (If you are unable to get this rate, contact the Sales Manager, Sherron at 678-686-8295)

Directions

Conference is 9:00 to 5:00 each day, registration begins 8:30 Saturday

Pre-registration ends 9/21/09

Amount
________ Pre-registered Attendees ……. $597
________ Multiple Registration ____ x $497

(Add $35 after pre-registration deadline, add $50 at door)

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Mail to: The Oaks Group, Inc., PO Box 505, Marietta, GA 30061
Fax to: (678) 935-4439 for Credit Card registration

SORRY, NO RECORDING WILL BE ALLOWED

By Robert M. Swaim, E.A.
2009

Think you can avoid paying damages in a lawsuit by holding property and other assets in the names of your relatives, friends or business entities that you own? Think again.

Under the law of fraudulent conveyance a transfer made by a debtor is fraud perpetrated against the creditor whether the claims of the creditor were made before or after the transfer if the debtor made the transfer in either of the following ways:

1. with actual intent to hinder, delay, or defraud any creditor, or

2. without receiving a reasonably equivalent value in exchange for the transfer of the asset and if either of the following applies:

(a) the debtor was engaged or was about to engage in a business or transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or

(b) the debtor intended to incur, or believed or reasonably should have believed that he would incur, debts beyond his ability to pay as they came due.

For example, we can all reasonably expect to owe income tax in the future. We are worried that one day the government could seize our property for back taxes so we set up trusts for our children or spouse or parents to hold our assets We may now believe that the property is safely beyond the reach of the IRS in future years should we ever fall behind in paying our taxes. WRONG! And you can substitute the name of any creditor in place of the IRS in the example here, same rules apply.

No effort to hinder or delay creditors is more severely condemned by the law than an attempt by a debtor to place his property where he can still enjoy it and at the same time require his creditors to remain unsatisfied. Direct evidence of a party’s fraudulent intent is not required in court because it is impossible to look into a debtor’s mind for the purpose of ascertaining his intent, the court must consider the circumstances surrounding the fraudulent transfer to determine intent from what the debtor does or fails to do.

The court will look for badges of fraud which are circumstances so frequently attending fraudulent transfers that an inference of fraud arises from them. The following acts are considered strong evidence that you have committed fraud in transferring or attempting to hide assets to prevent losing them to pay a debt you owe:

1. whether the transfer was to an insider (i.e. relative, friend, etc.);

2. Whether the debtor retained possession or control of the property transferred after the transfer. Meaning that you really own it in all but legal title.

3. Whether the transfer was concealed or done “secretly” or whether it was disclosed and done openly in the “sunshine”;

4. Whether before the transfer was made or the obligation was incurred, the debtor had been sued or threatened with a suit. Whether you knew, or should have known, that you were going to incur a debt.

5. Whether substantially all of the debtor’s assets have been transferred to related parties to hide the true ownership.

6. Whether the debtor absconded;

7. Whether the debtor attempted to hide assets or remove them to a place where they could not be found.

8. Whether the dollar value the debtor received from the related party that he transferred the assets to approximated FMV. In such a case your relative simply becomes your nominee or “straw man” (i.e. “selling” the assets to your child for a very low price or selling at a fair price but taking a note in lieu of cash payment knowing the note will never be paid or “gifting the assets – which by the way triggers the federal gift tax);

9. Whether the transfer of assets caused the debtor to become insolvent shortly after the transfer of assets was made.

10. Whether the transfer occurred shortly before or shortly after a substantial debt was incurred;

Although badges of fraud are not conclusive and are more or less strong or weak according to their nature and the number occurring in the same case, a concurrence of several badges will always make out a strong case against the debtor.

If the creditor is able to prove a sufficient number of badges, the burden of proof then falls on the debtor to prove that the transfer was not fraudulent.

The doctrine of “economic substance over legal form” applies here. No matter that you have all the legal documents prepared with the i’s dotted and the t’s crossed, this will not protect your assets if your actions and intent fail the badges of fraud test. The court will look to the reality, not the legal fiction, of what really is going on with those properties. If you continue to use, control, benefit from, and enjoy the properties then you are in fact still the legal owner, no matter whose name is on the deed.

If you hold these properties in business entities, i.e. corporations for LLC’s, then you must strictly observe the formality of the “corporate veil” and never pierce it if you expect to benefit from the limited liability statutes of state law. Otherwise, your company will be deemed to be your “alter ego” or “nominee” and this means that the entity is not the real owner but rather it is you. You will lose it all in court.

If you undertake to protect your assets be sure that your attorney is well versed in the statute of frauds and fraudulent conveyances.

Robert Swaim holds a Masters in Accounting and is an Enrolled Agent in Charleston, SC. He works with real estate investors for tax returns, audit defense and other IRS problems. He can be contacted at 843-722-5264 or Robert@CarolinaTax.net.

By Robert M. Swaim, E.A.
2009

Life is getting tougher for some people who own more than one home.

Part of the 2008 housing-stimulus package could reduce — though not eliminate — the appeal of a tax-saving strategy used by taxpayers who own multiple homes. While the new law won’t affect the vast majority of the nation’s homeowners, it will likely affect some people planning to sell their primary residence, claim the full home-sale exclusion to pay little or no capital-gains taxes — and then move to a second or third home they’ve owned for some time, convert it into their primary residence for the next two years, sell it and once again pay little or no capital-gains tax.

Under new law, most homeowners can sell their primary residence and exclude as much as $250,000 of the gain if they’re single, or $500,000 if they’re married and filing jointly with their spouse. To qualify for the full exclusion, owners typically must have owned the home and used it as their primary residence for at least two of the five years prior to the sale.

Under the new law, which takes effect starting in 2009, many owners might not be eligible to claim the full exclusion on a vacation or rental home they convert to a primary residence. Congressional staffers estimate the new restrictions will raise about $1.4 billion in revenue for the U.S. Treasury Department over the coming decade. The move was designed to plug what Congress sees as a major loophole in a law.

Tax experts predict the new law probably will prompt some wealthy people who own several homes to rethink the home-hopper strategy. “I know one individual with four homes who had planned to convert each of his three vacation and resort properties to a principal residence” and sell each at varying intervals to take advantage of the full home-sale exclusion, thus paying little or no capital gains tax. That client will pay more tax under the new rules.

In the late 1990s, real-estate agents, developers and others discovered special benefits for home-hoppers: These owners could pay little or no capital-gains taxes by carefully timing which home they used as their primary residence and when they sold it. For example: consider a married couple with several homes who had lived in their main home for two years or more. They typically could sell their primary residence, exclude as much as $500,000 of the gain from tax — and then move into a vacation home, make it their new primary residence, live in it two years or more, sell it and once again take advantage of the full $500,000 exclusion.

Under the new law, you can’t exclude the gain from the sale of the home allocated to periods of “nonqualified use.” That typically refers to any period (after the end of 2008) when the property isn’t used by you, your spouse or former spouse as a principal residence. Note that the new law is effective only for sales beginning in 2009.

Example: Suppose a married couple buys a home on Jan. 1, 2009 for $600,000. They plan to hold it as an investment. On Jan. 1, 2012 — three years later — they begin using it as their principal residence. They live there two years and sell it on Jan. 1, 2014 for $1.1 million, for a profit of $500,000.

Under the old law, they would have been able to exclude the entire $500,000 gain from their taxable income. But under the new law, they could exclude only two-fifths of the gain, or $200,000, since the other three-fifths would be considered attributable to the three years the home wasn’t their principal residence.

Robert Swaim holds a Masters in Accounting and is an Enrolled Agent in Charleston, SC. He works with real estate investors for tax returns, audit defense and other IRS problems. He can be contacted at 843-722-5264 or Robert@CarolinaTax.net.

By Robert M. Swaim, E.A.
May 28, 2009

An employer must generally withhold federal income taxes, withhold and pay social security and Medicare taxes, and pay unemployment tax on wages paid to an employee. An employer does not generally have to withhold or pay any taxes on payments to independent contractors.

Common-Law Rules

To determine whether an individual is an employee or an independent contractor under the common law, the relationship of the worker and the business must be examined. In any employee-independent contractor determination, all information that provides evidence of the degree of control and the degree of independence must be considered.

Facts that provide evidence of the degree of control and independence fall into three categories: behavioral control, financial control, and the type of relationship of the parties. These facts are discussed below.

Behavioral control. Facts that show whether the business has a right to direct and control how the worker does the task for which the worker is hired include the type and degree of:

Instructions that the business gives to the worker. An employee is generally subject to the business’ instructions about when, where, and how to work. All of the following are examples of types of instructions about how to do work.

a.. When and where to do the work.

b.. What tools or equipment to use.

c.. What workers to hire or to assist with the work.

d.. Where to purchase supplies and services.

e.. What work must be performed by a specified individual.

f.. What order or sequence to follow.

The amount of instruction needed varies among different jobs. Even if no instructions are given, sufficient behavioral control may exist if the employer has the right to control how the work results are achieved. A business may lack the knowledge to instruct some highly specialized professionals; in other cases, the task may require little or no instruction. The key consideration is whether the business has retained the right to control the details of a worker’s performance or instead has given up that right.

Training that the business gives to the worker. An employee may be trained to perform services in a particular manner. Independent contractors ordinarily use their own methods.

Financial control. Facts that show whether the business has a right to control the business aspects of the worker’s job include:

The extent to which the worker has unreimbursed business expenses. Independent contractors are more likely to have unreimbursed expenses than are employees. Fixed ongoing costs that are incurred regardless of whether work is currently being performed are especially important. However, employees may also incur unreimbursed expenses in connection with the services that they perform for their business.

The extent of the worker’s investment. An independent contractor often has a significant investment in the facilities he or she uses in performing services for someone else. However, a significant investment is not necessary for independent contractor status.

The extent to which the worker makes his or her services available to the relevant market. An independent contractor is generally free to seek out business opportunities. Independent contractors often advertise, maintain a visible business location, and are available to work in the relevant market.

How the business pays the worker. An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time. This usually indicates that a worker is an employee, even when the wage or salary is supplemented by a commission. An independent contractor is usually paid by a flat fee for the job. However, it is common in some professions, such as law, to pay independent contractors hourly.

The extent to which the worker can realize a profit or loss. An independent contractor can make a profit or loss.

Type of relationship. Facts that show the parties’ type of relationship include:

Written contracts describing the relationship the parties intended to create.

Whether or not the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay.

The permanency of the relationship. If you engage a worker with the expectation that the relationship will continue indefinitely, rather than for a specific project or period, this is generally considered evidence that your intent was to create an employer-employee relationship.

The extent to which services performed by the worker are a key aspect of the regular business of the company. If a worker provides services that are a key aspect of your regular business activity, it is more likely that you will have the right to direct and control his or her activities. For example, if a law firm hires an attorney, it is likely that it will present the attorney’s work as its own and would have the right to control or direct that work. This would indicate an employer-employee relationship.

Robert Swaim holds a Masters in Accounting and is an Enrolled Agent in Charleston, SC. He works with real estate investors for tax returns, audit defense and other IRS problems. He can be contacted at 843-722-5264 or Robert@CarolinaTax.net.

By Robert M. Swaim, E.A.
May 28, 2009

“C” Corporations

Advantages of an LLC Relative to a “C” Corporation

Tax Consequences to Owners. The primary advantage of the LLC over the “C” Corporation is in the tax consequences to owners. As a pass-through entity, the LLC’s income and losses flow through and are taxed to or deducted by the members, normally retaining the character they had in the LLC. Thus, there is a single level of tax, and losses are fully deductible by members (but are subject to passive activity rules and the deduction may not be in excess of their bases in their membership interests). The income of a C corporation is taxable, both by the federal government and your state, at the corporate tax rate. Thus the corporation and its shareholders may be subject to “double taxation”, when dividends are paid to shareholders because the corporation pays tax on its income and the shareholders pay tax on dividends received from the corporation, and the corporation is not allowed to deduct dividends as an expense.

Structure of the Owners Participation. The owners of the LLC have greater latitude and flexibility in providing for the return of an owner’s investment. There is also more liberty in structuring the owners participation in the enterprise.

Disadvantages of an LLC Relative to “C” Corporation.

Retention of Earnings. A venture that intends to retain substantial earnings may find the corporate structure beneficial. It is likely that the marginal corporate tax rate on the retained earnings (only 15% up to 50K) will be lower than the marginal rates applicable to individuals. One needs to carefully study the venture’s projections and calculate the estimated after-tax financial performance of the venture before making a decision.

Fringe Benefits. An LLC taxed as a partnership cannot provide many of the fringe benefits that a “C” Corporation can. Members are not “employees” for purposes of the fringe benefit rules. See, e.g., IRC 5105(9) relating to accident and health care plans and IRC #79 relating to group term life insurance. If the LLC provides members with fringe benefits, the cost must be included in the member’s gross income. In some states, “C”s can maintain more favorable asset-protected retirement plans.

“S” CORPORATION

Advantages of LLC Relative to “S” Corporation

Restrictions on Ownership. An “S” Corporation offers the advantage of limited liability for owners, and some of the advantages of being taxed as a partnership. It does not pay tax on its earnings, and its profits and losses are passed through and taxed directly to its shareholders. However, there are a number of restrictions on the ownership of and the operation of an “S” corporation that do not apply to an LLC. The “S” corporation can have only one class of stock. Its stockholders can be only natural persons, and those persons must be U.S. citizens or resident aliens. An “S” corporation may have no more than 100 shareholders.

Special Allocations. Further, an “S” Corporation may not specially allocate tax attributes to its shareholders. Those attributes pass through pro rata. This fact restricts the type of debt the corporation may issue, hampers efforts to gradually shift control of family-owned businesses, and in general makes passive investments difficult to structure.

Deductibility of Losses. An “S” corporation differs in the ability to obtain tax basis from its share of the entity’s liability, which determines the extent of losses that may be deducted by the owners, and their ability to receive operating distributions tax free. An “S” corporation shareholder does not share in the entity liabilities and its basis is limited to the cash invested. Both an LLC member and a limited partner increase their basis by the allocable share of entity liabilities. Moreover, distributions of appreciated property trigger a gain to the “S” corporation that passes through to the shareholders. Also, there is a second entity level tax on built-in gain, if the “S” corporation was formerly a “C”.

Disadvantages of LLC Relative to “S” Corporation

The LLC offers the limited liability of the “S” corporation and pass-through taxation with none of the “S” corporation restrictions on ownership and operations. Therefore, we really cannot see a great deal of general disadvantage. However, there may be some disadvantages in a special case.

Taxation of LLCs

One-owner LLCs are treated the same as sole proprietorships. Profits are reported on Schedule C as part of your individual 1040 tax return. Self-employment taxes on LLC net income must be paid just as you would with any self-employment business.

Multiple owner LLCs are treated as a partnership by the IRS. The tax return that the LLC completes and files is IRS Form 1065, Partnership Information Return. On this form, LLC profits are reported and allocated to each of the owners according to the LLC’s operating agreement. Each owner is given a Schedule K-1, which shows each owner’s share of LLC income or loss. The owner then reports and pays taxes on this income on the owner’s annual 1040 income tax return.

Note that as with a sole proprietorship, all profits of the LLC are taxed to the owners, even if they are not actually distributed by the LLC. This situation could happen when the LLC needs to use its profits to meet ongoing expenses.

There is a possible third tax treatment that an LLC could elect if it did not want pass-through taxation. The LLC may elect to be taxed as a corporation by completing IRS Form 8832 and checking the corporate income tax treatment box. After making this election, the LLC is taxed as a C corporation by the federal government. Because the corporate income tax rates for the first $75,000 of corporate taxable income are lower than the individual income tax rates that apply to the taxable income of non-corporate taxpayers, it is possible a net income tax savings can result from this tax election.

The state income tax treatment of LLC profits typically mirrors the IRS tax treatment as discussed above. Some states have different rules and for specific information on your state rules visit your state’s web site.

POTENTIAL MAJOR DISADVANTAGES
OF LIMITED LIABILITY COMPANIES

In addition to any disadvantages of LLCs compared to other entities, one should keep in mind the following general drawbacks to the use of LLCs: The legal ramifications of forming and operating an LLC, e.g., tax classification is more uncertain because of the lack of guidance from established case law and regulations. This may be more theoretical than real. Other states may not recognize all of the rights and privileges afforded to an LLC in your home state. If the LLC has one or more members who are non-residents of the LLC state, it must file a list of members and consents with its annual state tax return. As to any non-resident member who fails to consent to Your state tax jurisdiction, the LLC must pay the tax attributable to the non-consenting member’s distributive share of LLC income. The members of an LLC may have implied authority to act on behalf of the LLC and bind the LLC, e.g. signing of deed of trust (mortgage).

SUMMARY

As a general rule, the LLC will probably serve well in those circumstances where the limited partnership and “S” corporation were formerly used. The LLC may even be used in those circumstances where the “C” corporation was used. However, the “C” corporation does have its advantages, particularly with respect to the availability of nontaxable fringe benefits and asset protected retirement plans. Therefore, we recommend you continue to use the “C” corporation in those circumstances where a “C” corporation was formerly used. Use an LLC in those situations were a limited partnership (including an FLP, unless a specific estate and gift tax result is desired) or “S” corporation was formerly used.

Robert Swaim holds a Masters in Accounting and is an Enrolled Agent in Charleston, SC. He works with real estate investors for tax returns, audit defense and other IRS problems. He can be contacted at 843-722-5264 or Robert@CarolinaTax.net.

by Robert Swaim, Accountant and Enrolled Agent
2009

During a March 18 IRS phone forum on cancellation of indebtedness income, Anne Freeman, IRS chief of review, gave an overview of Code Sec. 108′s cancellation of indebtedness income resulting from foreclosures and short sales where the lender has to “eat” a portion of the unpaid mortgage, with a focus on applicable exceptions to the general rule that mortgage forgiveness by the lender results in taxable income to the borrower.

The IRS is currently working on an update to Publication 4681, which explains the federal tax treatment of canceled debts, foreclosures, repossessions and abandonments, said Freeman. You can print a copy of this booklet from the IRS web site, www.irs.gov.

Cancellation of Debt Under Code Sec. 108

Code Sec. 108 generally excludes from gross income discharges of indebtedness (also known as “COD” income) IF:

(1) the discharge occurs in a title 11 bankruptcy case,

(2) the discharge occurs when the taxpayer is insolvent,

(3) the indebtedness is “qualified farm indebtedness,” or

(4) the indebtedness is “qualified real property business indebtedness.”

In addition, as a temporary relief provision during the current housing crisis, discharged qualified principal residence indebtedness (QPRI) is excluded for discharges on or after January 1, 2007, and before January 1, 2013. Exclusions from income are allowed under Code Sec. 108 in an order of priority.

Definition of “Qualified Real Property Business Indebtedness”:

Taxpayers, other than C corporations, are permitted to exclude income attributable to cancellation of qualified real property business indebtedness. This exclusion does not apply to qualified farm debt, which is covered by a separate exclusion discussed above. In order to be considered “qualified” the real property business indebtedness must have been incurred or assumed before January 1, 1993, in connection with realty used in a trade or business that secures the debt. For indebtedness incurred on or after that date to qualify for the exclusion, it must be either qualified acquisition indebtedness, which is indebtedness incurred or assumed to “acquire, construct, reconstruct, or substantially improve… .” the property securing the debt, or indebtedness obtained to refinance, but not add to, pre-1993 qualified real property business indebtedness.

Additionally, taxpayers must make an election to exclude forgiveness of indebtedness income attributable to qualified real property business indebtedness. The election is made by checking the box on line 1d of Form 982 and filing it along with the taxpayer’s federal tax return. Taxpayers who file a timely return who are eligible to make the election but fail to do so may still make the election by filing an amended return within six months of the original due date, excluding extensions, with the notation “Filed pursuant to Section 301.9100-2″ written on the amended return. Once a proper election is made, it may not be revoked unless permission to do so is obtained from the IRS.

EXAMPLE: In 1989, Wayne Smith purchased rental property, which he used in his business, for $15 million. He financed the acquisition with a $12 million nonrecourse mortgage. The current fair market value of the property has dropped to $8 million, a figure well below both its original cost and the amount of the outstanding nonrecourse debt. The holder of the nonrecourse debt has agreed to release the mortgage in exchange for a cash payment of $7 million. The adjusted basis of the property is $9.5 million, with $2 million allocable to the basis of the land and the remaining $7.5 million allocable to the depreciable building.

The existing $12 million nonrecourse debt would be satisfied with only $7 million in cash, leading to a $5 million discount that would ordinarily be a taxable discharge of indebtedness income. The qualified real property business indebtedness requirements are met. If Smith makes a Code Sec. 108(c) election, current recognition of part of this income could be avoided. The amount of discharge of indebtedness income that Smith can elect to exclude is limited to $4 million (the outstanding principal amount of debt determined immediately before the discharge ($12 million) minus the fair market value of the real property securing the debt ($8 million)) ( Code Sec. 108(c)(2)(A)). The second, overall limit on the amount of the exclusion is the total amount of the adjusted bases of all the taxpayer’s depreciable real property held immediately before the discharge. Here, Smith owns the one item of depreciable real property, and its $7.5 million adjusted basis exceeds the $4 million of discharge of indebtedness income. Discharge of indebtedness income will be recognized in the amount of $1 million.

The basis of Smith’s depreciable real property is reduced by the amount of excluded discharge of indebtedness income –resulting in a basis of $3.5 million ($7.5 million – $4 million). The basis is reduced at the beginning of the tax year following the year in which the discharge occurred.

Taxpayers are allowed the qualified real property business indebtedness exclusion only to the extent that the outstanding principal amount of real property business debt, reduced by the amount of any reduction in that debt that qualifies for the insolvency exclusion, exceeds the fair market value of the property securing the debt. If there is additional business debt secured by the real property, the fair market value of the property must first be reduced by the amount of that additional indebtedness in making the calculation. Additionally, there is an overall limitation which prohibits taxpayers from excluding qualified real property business indebtedness in excess of the adjusted bases of the qualified depreciable realty held immediately before the cancellation, (exclusive of any such property acquired in contemplation of the debt cancellation).

Generally, taxpayers must reduce certain tax attributes to the extent that income from the discharge of indebtedness is excluded from gross income under Code Sec. 108. Tax attributes reduced under this provision include the adjusted basis of properties, net operating losses, passive activity losses and credit carryovers. In many cases Code Sec. 108 operates to defer, rather than eliminate, income from discharge of indebtedness, Freeman explained.

Bankruptcy and Insolvency Exceptions

Freeman discussed three major exclusions from gross income for: (1) bankruptcy, (2) insolvency (your net worth is negative), and (3) a qualified principal residence. She clarified that the bankruptcy exclusion for Title 11 bankruptcies “takes precedence over any other exclusion under Code Sec. 108.” Freeman further noted that “because no dollar limit is associated with it [the bankruptcy exclusion], you wouldn’t need another exclusion to apply.”

Insolvency is the second exclusion in order of priority. However, unlike under the bankruptcy exclusion, dollar limits apply, Freeman clarified. The “concept is much easier than the calculation,” according to Freeman. She revealed that the IRS is in the process of creating an insolvency worksheet to “help with the calculation.” Very simply: If the debt forgiven is $75,000 and your net worth is NEGATIVE $37,000, then $38,000 [$75,000 - $37,000] of the debt forgiveness is taxable and $37,000 [$75,000 - $38,000] is not taxable.

The extent to which the taxpayer is insolvent for purposes of the exclusion is calculated by subtracting the fair market value (FMV) of total assets immediately before the discharge from the total amount of liabilities immediately before the discharge. Freeman noted that “accrued liabilities, like accrued real estate taxes and assets generally beyond the reach of creditors” must also be included in the calculation.

Robert Swaim holds a Masters in Accounting and is an Enrolled Agent in Charleston, SC. He works with real estate investors for tax returns, audit defense and other IRS problems. He can be contacted at 843-722-5264 or Robert@CarolinaTax.net

Dyches Boddiford & George Yeiter
present a Special

Annual

Advanced Strategies

Conference

Come see why prior attendees keep coming back to this conference. Each year we pick new topics and enhance prior topics that provide practical solutions to investor situations. This year promises to be better than ever. We have even invited special guest experts to cover some advanced concepts.

Each year we begin the conference with a Washington update of changes in the tax law. New tax law has created several great new opportunities that will be especially beneficial this year (bet you haven’t heard about several of these!). The new Energy Credits will be discussed in particular. In addition, George will show you how to use the Manufacturers Credit for rehabbing and flipper property. Some of these opportunities have a narrow window before they are gone forever, so learn about them now!

An in-depth analysis of the different areas of real estate investment, including rentals, quick-turn, building, developing, mobile homes, notes, etc., will be evaluated. This will include a risk assessment, typical returns, oversight level required and time required. This is to assist experienced investors in evaluating their business and portfolio while seeking other avenues for profit. It will also be helpful to those looking to wind down their investment business and enter areas that may require less oversight and time while still providing a decent return.

Then we will discuss laundry list of asset protection techniques that are low cost and low hassle that anyone can do. These will be in addition to the entities we are always talking about. Everyone whether you have entities or not, will be interested in this session. These will be practical, everyday techniques that everyone can use.
John Mangham, a CPA and with Starker Exchange Services, returns with some interesting advanced 1031 strategies. How do you do a dealer transaction with a 1031 exchange and meet the letter of the tax code? Would you like to be your own developer with a 1031? Well, John Mangham will be showing us a real life example of how this is done. Anyone owning real estate needs to hear this!

These are just a few examples of the information we will cover!

When we have little, we are not targets. But once we begin to build assets, there will always be someone, at some time, who believes he has a right to assets for which we have worked long and hard. Even the taxman wants more when we earn more. You will gain insights on methods others can use to separate you from your hard earned dollars and assets, then how to legally protect yourself.

DON’T BE A TARGET!

This Conference is NOT for those just beginning their real estate investment, but those with some experience in real estate investments. The information provided during this weekend would cost you several thousand dollars elsewhere. How do we know? Because Dyches and George are regularly paid thousands to teach this information to others!

Note: The Conference manual is only available to attendees of this event and will not be for sell afterwards.

We will cover practical, everyday techniques you can use to help bulletproof your assets as well as advanced strategies for use when you are ready. You will gain insights on methods others can use to separate you from your hard earned dollars and assets, then how to legally protect yourself.

To summarize just a few of the topics we plan to cover in detail include -

• Washington Update of changes and opportunities in the tax law

• The new Energy Credits for all investors and homeowners

• The new Manufacturing Credits for rehabbers and flippers

• In-depth analysis of the different areas of real estate investment

• Laundry list of simple, inexpensive asset protection techniques

• Case study showing how a dealer transaction can be done with a 1031 exchange

• and much more!

Techniques covered in this conference are the same as those covered in the $2,500 to $7,000 seminars attended by real estate professionals, doctors and lawyers. Once each year, these concepts are available to you at a more reasonable investment when Dyches and George present this Conference.

Mark your calendar for these dates and watch for more details of the subjects to be covered in this year’s conference. You won’t be disappointed.

Many of the attendees to this conference are already well off and are looking to protect what they have, make arrangements to pass it on, and simplifying their lives as well. Ask most of them if they should have started earlier in structuring their lives and you will get a resounding, “Yes!” So, don’t think that just because you are still building your assets, you should wait to get this information. The best time to act was yesterday, the next best time is TODAY!

And to give you more incentive to attend, the persons receiving this brochure are being offered a $200 discount off the already reasonable conference price of $797. My speakers say I’m crazy because they speak at conferences that cost in the thousands. But I believe that many of you getting this brochure need this information and I don’t want to give you any excuse not to come.

I am a full-time investor. Speaking is a sideline activity that I enjoy. It gives me a chance to pick the brains of other experts, compare strategies and learn new ones. Many come to this event because they get two full days of information for less than they would pay for a few hours of an expert’s time. This is also the time they get to hear different points of view and ask one on one questions of the speakers outside the class.

If you are serious about becoming wealthy or maintaining your wealth, you need the information presented here.

Sincerely,

Dyches Boddiford

P.S. Most of you will fax your registration, but if you call, be sure to state that you are a preferred customer to get your $200 discount.

Some Comments of Prior Attendees:

“One technique I learned at the Conference would have saved me over $150,000 in taxes on a deal I did six months ago. I can’t afford to miss another one.”

“George & Dyches are ‘Walking Encyclopedias’ concerning corporations, estate planning, asset protection and present the strategies in a way that is easy to understand and implement.”

“The information is so practical, I am going to put it to work as soon as I get home. I never knew there were so many simple ways to protect myself and minimize my taxes.”

George M. Yeiter – is a practicing CPA with offices in Houston, Texas. His professional experience includes a stint with a “Big Five” accounting firm and 6 years in corporate management. He is the author of A Primer to Real Estate Income Tax Law. Many of his clients are real estate investors and brokers and he is Past President of the Realty Investment Club of Houston. He regularly consults with clients on strategies to reach their financial goals by entity choices, maximizing benefits and assisting them in setting up corporate pension plans, charitable remainder trusts, etc.