Legal Doc Template in Microsoft Word

As anyone who drafts legal documents knows, it can be difficult to manage all of the section numbers, references to section numbers, table of contents, headings, and formatting. This post will describe tips for managing some of these variables in a commonly-used legal document format. The objective is a manageable legal document that looks like this:
ARTICLE I. INTRODUCTION
          Section 1.01 Detailed Introduction. This section number corresponds with the Article number (i.e., Section 1.01 is the first section of Article I, Section 2.3 appears in Article II, etc). Additionally, this section begins with a summary phrase describing what the section is about, and that phrase is formatted differently than the rest of the paragraph (in this case, it is underlined).

                  (a) If Article I becomes Article II due to another article being added in front, it is critical that all of the sections numbers automatically update, for example, sections 1.01 through 1.06 become 2.01 through 2.06, and so on throughout the document.

                  (b) It is also important that the "Detailed Instructions" introductory phrase be a "Heading" in Microsoft Word, but that the language that follows be excluded. The reason for this is so that a detailed Table of Contents can be automatically generated.

                  (c) If a section is referenced within a sentence of the document, such as "see Section 1.01," it is critical that this reference update automatically when Section 1.01 changes to Section 2.01, and so on.

Here are instructions on how to accomplish these time-saving objectives using easy-to-manage formatting tools:

The first key to consistent formatting is to avoid all direct formatting in Word documents and instead use styles. There are dozens of websites that discuss how to do this (here is a link to one example), and so this won't be dealt with in detail here. However, as a starting point, it is helpful when Word identifies text that is formatted directly; to enable this, go to Word Options, Advanced, and make sure "Keep track of formatting" and "Mark formatting inconsistencies" are both selected.

The next key is to utilize Headings that are integrated with Multilevel List numbering. To being, open a new Word document, type the word "Introduction," select all, and, from the Paragraph section of the Home tab, choose to format everything as the Multilevel List option highlighted in the screenshot to the right:

This causes "Article I." to be automatically added before the word "Introduction" in the document you just created. By right-clicking on "Article I," selecting "Numbering," and "Change List Level," you can change the outline level of the text. See if you can reproduce the sample document above by copying and pasting the text and formatting as Headings/Styles and adjusting the list levels of each Article/Section/Paragraph. All formatting should be done by right-clicking on the applicable style in the "Style" section of the Home tab, selecting Modify, and formatting in this way; alternatively, you can temporarily apply direct formatting to the text, right-click the applicable style, and select "Update Heading to match selection."

The next task is to cause the text that follows "Section 1.01. Detailed Introduction" above to be formatted as a non-heading. To do this, hit "Enter" after "Detailed Introduction" so that the text that follows is in a separate paragraph, then click anywhere in the "Detailed Introduction" paragraph and press Alt+Ctrl+Enter to insert a style separator and bring the subsequent text up. For more details, see this link.

Next, we want to provide for automatic updates to references to a Section. To accomplish this, don't type the reference to Section 1.01 directly; instead, select the Insert tab and click Cross Reference. In the box that pops up, select "Numbered item" for "Reference type", select "Paragraph number (no context)" for "Insert reference to", and pick the applicable numbered item from the list in the box below, as illustrated here.

Finally, all that is left to do is generate a Table of Contents from the References tab. After editing the contract terms and immediately prior to printing, update the Table of Contents and section references throughout the document by selecting all and pressing F9.

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Tax Protester Arguments Work, Until They Don't

Certain individuals and groups insist that portions of the Internal Revenue Code do not apply to them. The reasoning in support of this position is generally based upon words and phrases in statutes and cases taken out of context. Many of these arguments have been deemed "frivolous" by the IRS, the making of which subjects the "tax protester" to additional penalties.

Because the U.S. tax system depends, in large part, on voluntary compliance, tax protesters can point to various circumstances as "proof" that the techniques "work," at least temporarily. The IRS may accept tax returns with obviously understated income or overstated expenses and may pay out refunds as well. This "works," as Peter J. Reilly, writing for Forbes, pointed out, "if you are just about maximizing your current lifestyle rather than accumulating net worth and entirely amoral when it comes to meeting tax obligations."

Collection due process affords taxpayers a chance to appeal to the Tax Court, a process I outlined in a previous post. All tax protester arguments fail at Tax Court, the result being a judgment against the taxpayer for taxes due and probably penalties. While most Tax Court judges don't bother writing an opinion in tax protester cases, Judge Ronald L. Buch, a new Tax Court judge, took the opportunity to write a very detailed opinion in a recent one. The discussion section of the opinion beings with this, which should cause would-be tax protesters to reconsider their course of action:

This case has occupied an inordinate amount of the Court’s time. The Court could have disposed of the entire matter summarily by reference to Crain v. Commissioner or any number of 6 other cases that stand for the proposition that we need not address frivolous arguments (citing Crain v. Commissioner, 737 F.2d 1417, 1417 (5th Cir. 1984) ("We perceive no need to refute these arguments with somber reasoning and copious citation of precedent; to do so might suggest that these arguments have some colorable merit.")

The case, Waltner v. Commissioner, TC Memo 2014-35, is a good read for anyone who thinks they may have found a book or website promoting a loophole in the Internal Revenue Code. Judge Buch had a clear intent to "inform the public of the court’s analysis" of frivolous positions of tax protesters. Hopefully, some will listen.

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The Bypass Trust: To "B" or Not to "B"?

For many years, estate planners recommended planning that involved an "A/B trust" structure whereby assets of the first spouse to die equaling the estate tax exemption in value would end up in a trust to preserve that spouse's estate tax exemption. This prevented the surviving spouse from being "left with the couple's assets, but only their own individual exemption." Depending on a number of factors, this strategy could potentially save millions of dollars in estate taxes.

The costs of this trust, which is known by many names including a "B Trust," "Credit Shelter Trust," "Family Trust," or "Bypass Trust," are not insignificant. The surviving spouse's access to the assets of the B Trust are necessarily restricted, tax returns must be filed each year the trust is in existence and has income, legal responsibilities are imposed on the surviving spouse or a non-spouse trustee for trust management, and there is no step-up in basis for the B Trust assets at the surviving spouse's death.

Until recently, these costs could easily be justified by the potential estate tax savings. After the American Taxpayer Relief Act, however, the law allows the deceased spouse's unused exclusion amount to be transferred to the surviving spouse without the need for a B Trust. The unused exclusion must be calculated, and an election to transfer the unused exclusion made, on a timely filed estate tax return of the first spouse to pass away.

Rev. Proc. 2014-18, effective January 27, 2014, allows for an extension of time to make this "portability" election for decedents who passed away in 2011, 2012, or 2013 and who were survived by a spouse. Such elections, made in conjunction with the filing of an estate tax return, must be filed by December 31, 2014.

There are still benefits of a B Trust, namely, asset protection for the assets held by the trust, asset appreciation value that is excluded from estate tax, and greater certainty that the bequests contemplated by the first spouse to die will be carried out. However, the estate tax benefits to the B Trust have been reduced.

While it a good idea for everyone to review their estate plan every few years anyway, it is particularly appropriate for those with A/B trust provisions included in a revocable trust package to review whether that is still appropriate. For surviving spouses stuck managing a B trust that is no longer justified, it is appropriate to have the trust reviewed to see if it can be modified to better achieve that spouse's objectives.

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Activities of Charitable Organizations

Individuals wanting to form their own charitable organization are not alone; the number of public charities has increased substantially in the past few years. I.R.C. section 501 describes certain organizations that are exempt from tax. Section 501(c)(3) and Treas. Reg. 1.501(c)(3)-1(d)(2) generally describe the following exempt purposes for which a charity can be organized:

Religious Organizations. Includes organizations operated exclusively for religious purpose and organizations that advance religion. Some, but not all religious organizations qualify as a "church," which are treated somewhat preferentially compared to other religious organizations.

Organizations Providing Relief for the Poor Underprivileged. These are the "classic" type of charitable organizations; they are permitted to provide a wide range of assistance for low-income persons, including transportation, housing assistance, counseling, legal aid, and day care services.

Social Welfare Organizations. Includes organizations that build or maintain public buildings, monuments, or works; lessen the burdens of government; lessen neighborhood tensions; eliminate prejudice and discrimination; defend human and civil rights secured by law; or combat community deterioration and juvenile delinquency.

Health Organizations. Includes hospitals and health-care providers that promote the health of the community and which provide below-cost medical services to lower income individuals.

Scientific Organizations. Includes organizations that perform research that is beneficial to the public and that is normally made available to the public as well.

Public Safety Testing Organizations. Includes organizations that test consumer products, construction standards, and equipment for safety.

Educational and Literary Organizations. Includes organizations that train individuals so as to develop their capabilities or the instruction of the public on subjects beneficial to the community. Many other types of charitable organizations also have educational purposes.

Amateur Sports Competition Organizations. Includes organizations that operate exclusively to foster national or international amateur sports competition, as long as they do not provide athletic facilities or equipment.

Organizations for the Prevention of Cruelty to Children or Animals. Includes organizations protecting children from unfavorable work conditions and animal welfare organizations.

Source: Webster, 451 T.M., Tax-Exempt Organizations: Operational Requirements.

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Medicaid Eligibility for a Married Individual

Medicare is a federal entitlement program available to seniors regardless of need and works like health insurance. In contrast, Medicaid is a health benefit program for low-income individuals. "Medicaid planning," normally refers to qualifying for long-term care benefits under Medicaid. Long-term care costs thousands of dollars per month and coverage is not available under Medicare and most health insurance plans. This post will focus on Medicaid qualification in Utah for a married individual.

In order to be eligible for Medicaid, an applicant cannot have more than $2,000 in assets. However, some assets do not count toward this limit; moreover, some "countable" assets can be converted to "non-countable" assets. First, an in-state residence is not a countable asset unless the applicant does not intend to return home and no spouse or dependent lives there. The cash value of a life insurance policy up to $1,500 is exempt, as is up to $1,500 that is specifically designated as a funeral fund. Irrevocable prepaid funeral plans, cemetery plots, and household items are also exempt. It is generally permissible to purchase these items or pay down a mortgage or other debts in order to reduce countable assets and qualify for Medicaid. However, the applicant cannot have more than $525,000 of equity in a residence.

In addition, spouses of applicants who live at home can keep some assets. A Medicaid worker will value all of a couple's countable assets and divide by two. The spouse can keep half, with a minimum of around $23,000 and a maximum of around $114,000 (which changes each year). The applicant is still limited to $2,000 of assets, meaning that if the couple has more than $25,000 in total non-exempt assets, the excess attributable to the applicant spouse must be spent down before they will qualify for Medicaid. In addition, the non-applicant spouse can keep some of the income of the applicant spouse once the applicant spouse is in a nursing home.

Certain transfers of assets do not affect Medicaid eligibility, such as transfers to a spouse or certain transfers to disabled individuals. However, nearly all other transfers made within five years prior to applying for Medicaid are of no benefit for eligibility purposes because applicants must report all such transfers made for less than fair market value. Making transfers of non-exempt assets within this timeframe will be detrimental due to the Medicaid sanction rules.

It is critical that an individual consults with a Medicaid expert before applying in order to avoid making transfers that will result in sanctions or spending assets they would have been allowed to keep. Proper planning will allow a spouse remaining at home to be more financially secure.

The state will seek to recover funds paid by Medicaid from the estate of a recipient after the death of the recipient and the surviving spouse, so long as there is no minor or disabled child. Even though an asset may have been exempt for Medicaid qualification purposes, it will not be exempt from estate recovery. For more information, including the sources for this post, see the pamphlets provided by the Utah Department of Health entitled “Estate Recovery Information Bulletin”, DWS 05-994, "Nursing Home Information, May we be of service to you?” DWS 05- 969, and “Assessment of Assets” DWS 05-992.

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Captive Insurance Companies

Insurance does two things: First, it shifts a risk from an insured to the insurance company. Second, it distributes the risk taken on by the insurance company among a pool of like risks with a predictable number of risks that will materialize. In other words, from the insured’s perspective, insurance shifts risks; and from the insurer’s perspective, insurance distributes risk.

This is the view of insurance from a tax perspective and helps explain why historically, the IRS challenged "captive" insurance companies, or insurance companies owned by the insured. The IRS argued that true risk shifting and distribution could never occur within the same "economic family" and that as such, deductible premiums by the insured were really non-deductible contributions to a reserve fund.

Beginning with the case of Humana v. Commissioner, 88 T.C. 197 (1987), which was discussed at length in the recent case of Rent-A-Center, Inc. v. Commissioner, 142 T.C. No. 1 (2014), the IRS started consistently losing this argument. Eventually, in Rev. Rul. 77-316, the IRS announced that it would no longer rely on its economic family argument. Currently, there are a few safe harbors that taxpayers can rely upon to obtain the expected tax treatment of their captive insurance companies and payments made thereto. However, as Rent-A-Center makes clear, the IRS can still litigate based on facts and circumstances of individual scenarios.

Rev. Rul. 2002–89 and Rev. Rul. 2002-90 stand for the following two safe harbors: If a captive insurance company either (1) receives at least 50% of its income from a non-parent or (2) provides insurance for at least twelve subsidiaries, with no subsidiary accounting for less than 5% or more than 15% of the total risk underwritten, the IRS will normally concede that adequate risk shifting and distribution has occurred and not challenge the captive arrangement. 11 Mertens Law of Fed. Income Tax'n § 44:24.

Firms who market and help clients establish captive insurance companies can help clients pool with third parties in order to meet these requirements. The viability of this strategy assumes that the captive is operated as a bona fide insurance company in every respect.

While captive insurance companies provide clear asset protection benefits, the tax benefits are substantial as well. If the captive qualifies and elects to be taxed as a "small company" under section 831(b) of the Internal Revenue Code, it will be taxed only on taxable investment income, not underwriting income. A captive insurance company can receive up to $1.2 million in annual premiums and still qualify under section 831(b). Effectively, this means that by establishing a captive insurance company, a taxpayer can reduce taxable income by deducting premiums of $1.2 million, while recognizing no taxable income to the captive. Assuming a good claims history, the premiums accumulate tax-deferred and are available to be withdrawn later as dividends or long term capital gains.

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The IRS Audit and Appeals Process

After taxpayers file their tax returns, the IRS computer system analyzes the returns to verify that income, deduction, gain, and loss amounts reported to the IRS by third parties are properly reported on the taxpayers' returns. The system also gives each return a numeric score based on certain factors that the IRS has identified as indicative of error. Returns that have a high probability of error are screened by IRS personnel and in this manner, selected for audit. The first step in an audit is a letter from the IRS to the taxpayer providing notification that the return has been selected.

Examinations can be conducted through the mail or face-to-face. A taxpayer can represent themselves, but it is wise to have a good CPA or tax attorney assist. Hiring a reputable professional to assist with tax return filing and significant transactions in the first place can often prevent the kinds of problems that trigger IRS scrutiny of a tax return in the first place.

At the end of the audit, the IRS will provide the taxpayer a written explanation of any proposed changes to the tax return. If the audit results in a lower assessed tax (which is possible), the taxpayer will get a refund. If not, and the IRS takes the position that additional tax is owed, the taxpayer has a choice: Pay the additional tax, or contest the proposed changes.

If the audit meeting takes place at an IRS office, the taxpayer can immediately request a meeting with the examiner's supervisor. If the meeting takes place elsewhere or no agreement with the supervisor can be reached, the examiner will forward the case for processing. The IRS will prepare an examination report detailing the proposed adjustments as well as a "30 day letter."

The 30 day letter will inform the taxpayer of their right to an appeal from within the IRS to an independently-operated IRS Appeals office. A written request must be filed with the IRS office indicated in the letter in order to have the matter brought before the IRS appeals officer. Many matters can be settled with an IRS appeals officer, although the taxpayer can take the matter to court without IRS appeals.

If the taxpayer does not respond to the 30-day letter or an agreement cannot be reached, the IRS will send a Notice of Deficiency, or 90 day letter. The Notice of Deficiency gives the taxpayer 90 days to file a petition with the U.S. Tax Court. If no petition is filed, the IRS assesses the proposed tax and bills the taxpayer for the deficiency. Alternatively, the taxpayer can pay the disputed tax in full and file a claim for refund with the IRS. If the refund is denied, the taxpayer can file suit for refund in a Federal District Court or the Court of Federal Claims.

Throughout this process, there are a number of resources and options available, such as Taxpayer Advocate Service, Offers in Compromise, installment agreements, Alternative Dispute Resolution, etc. After the taxpayer's protest options have been exhausted, and if they are unable to pay, the collections process will commence. That will be the topic of a future post.

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Self-Employment Taxes for LLC Members

In a previous post, I discussed how members of an LLC taxed as a partnership can avoid being liable for self-employment tax on the net income from the business. With the limited exception of Prop. Reg. 1.1402(a)-2, the subject of that post, clear guidance on this issue has been lacking for decades. This month, the IRS created a stir by taking on the issue anew with Chief Counsel Advice memorandum 201436049. Tony Nitti, writing at Forbes, has a great article that describes the backdrop for this new pronouncement in this way:

"IRC Section 1402, like many provisions of the Code, starts off by setting the general rule– i.e., all trade or business income, including a partner’s distributive share of partnership income, is included in self-employment income–before listing a host of exceptions to that general rule. Specific to this discussion, IRC Section 1402(a)(13) provides that the distributive share of partnership income of a limited partner – other than guaranteed payments – is NOT included in self-employment income."

In general, taxpayers who earn active income owe self employment tax on that income, while taxpayers who invest and earn passive income, such as limited partners in a limited partnership, do not pay self employment tax on those earnings. IRC 1402 was passed before LLCs came into existence, and LLCs have confused the issue because all LLC members are legally akin to limited partners.

Most tax practitioners agree that, similar to how S-Corps are treated, only part of the distributive share received by members from properly-structured LLCs ought to be subject to self-employment tax, not all of it. However, with CCA 201436049, the IRS took the position that individuals who were members of an LLC that served as a general partner of an investment limited partnership and received a management fee were subject to self employment tax on the entirety of their distributive share.

CCA 201436049 makes reference to Prop. Reg. 1.1402(a)-2 in a footnote, summarizing the three tests for limited partner treatment: "[A]n individual is treated as a limited partner unless the individual: (1) has personal liability for the debts of or claims against the partnership by reason of being a partner; (2) has authority to contract on behalf of the partnership; or (3) participates in the partnership's trade or business for more than 500 hours. [There are] exceptions for certain holders of classes of interest that are identical to those held by limited partners."

With respect to the exceptions: "If the LLC has two classes of members... [and if] at least 20% of the members of the Investor Class do meet all three tests and the managing member is a member of this class," the managing member is treated as a limited partner and his or her distributive share is not subject to self employment tax. John M. Cunningham, "Using LLCs to Protect Family Assets," WealthCounsel CLE, September 14, 2011. The key is to have a properly-drafted operating agreement that clearly creates these distinct classes of membership.

CCA 201436049 stands for the idea that the distributive shares of LLC members who provide services are not wholly exempt from self employment tax simply due to the LLC structure. The proposed regulation, even though not finalized, can probably still be relied upon as a safe harbor. Beyond that, be aware that the IRS appears prepared to argue that more or all of a partnership LLC's distributive shares ought to be subject to self-employment tax.

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Prepaid Expenses

With some exceptions, taxpayers using the cash method of accounting must recognize income when funds are received and may take deductions only when expenses are actually paid. Accrual method taxpayers generally must recognize income when all events have occurred that fix the right to receive the income and the amount of the income can be determined with reasonable accuracy; expenses may be deducted when all the events have occurred that establish the fact of the liability, the amount of the liability can be determined with reasonable accuracy, and economic performance has occurred with respect to the liability.

At year end, and assuming a taxpayer will be in the same or lower tax bracket in the following year, deferring income until the next year and accelerating expenses to the current year will defer taxes and save money. However, this can only be done within the restrictions discussed above. With respect to accelerating expenses, a further complication is that any expense attributable to an asset with a life that extends beyond the current tax year generally must be capitalized, as opposed to being fully deducted in the current tax year.

One opportunity for accelerating expenses is discussed in Treas. Reg. 1.263(a)-4(f): "[A] taxpayer is not required to capitalize under this section amounts paid to create (or to facilitate the creation of) any right or benefit for the taxpayer that does not extend beyond the earlier of (i) 12 months after the first date on which the taxpayer realizes the right or benefit; or (ii) the end of the taxable year following the taxable year in which the payment is made." The regulation gives examples that specifically allow the following for an accrual method taxpayer:

On December 1, a corporation pays $10,000 for rent or insurance on a one-year lease or policy that begins December 15 of that same year. Because benefit attributable to the payment neither extends more than a year beyond the first date the benefit is realized nor beyond the end of the taxable year following the taxable year in which the payment is made, the payment need not be capitalized and may be deducted in full in the current year. In this way, taxpayers with certain prepaid expenses can defer taxes and save money.

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The Research and Development Tax Credit

The research and development tax credit is an extremely valuable benefit to companies engaged in R&D. However, the credit is not just available to those who "wear lab coats and use test tubes [because] the definition of research and development for tax credit purposes is fairly broad."

The R&D credit is generally allowed for wages, supplies, and certain contract research expenses paid or incurred for qualified research. Qualified research means research, the expenses for which qualify as deductible business expenses, and which is undertaken for discovering technological information and developing a new or improved business component or process, and which involves a process of experimentation.

The credit is calculated from a base amount designed to encourage "increasing" research activities. The net benefit can be around 6.5 percent of qualified research expenditures, which reduces a company's taxes dollar-for-dollar, not including potential state tax benefits. For businesses that are in losses and don't pay taxes, unused credits can be carried forward for 20 years.

The credit became even more widely available due to a recent regulation that expands the class of companies that can benefit. Previously, the Alternative Simplified Credit (ALS) could only be taken on original returns, not amended returns from past years. Now, the ALS can be taken on past year amended returns, making it much easier to offset the cost of an R&D tax credit study.

The R&D credit technically expired Dec. 31, 2013, requiring Congress to enact legislation extending the credit. Fortunately, this is what typically happens. "Congress has extended the R&D credit 15 times since its inception in 1981. In 11 of those instances, the extension retroactively restored the credit."

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Vehicles and Revocable Trusts

In order to avoid probate upon death, it is necessary to transfer certain assets from your personal name into a revocable trust. I discussed non-probate assets in an earlier post; most other assets, particularly real estate, should be transferred into a revocable trust.

Whether personal vehicles should be transferred into a revocable trust is sometimes debated, but generally is not worth the expense and hassle. First, vehicles are purchased and sold on a relatively frequent basis, making the transfer of a vehicle that is later sold by the transferor unnecessary. Second, in the event of an accident, a vehicle title that lists a trust as an owner instead of an individual can give a potential litigant the impression that the owner of the vehicle is wealthy and may in fact encourage a lawsuit.

Third, even if a person passes away without having transferred a vehicle into a trust, the vehicle can still likely be transferred outside of the probate process. This is because most states, particularly those that have adopted the Uniform Probate Code, have a statutory provision for a "small estate affidavit." This enables some assets such as vehicles to be transferred from the estate of the decedent outside of probate. The applicable provision states:

"Thirty days after the death of a decedent, any person... having possession of tangible personal property... belonging to the decedent shall... deliver the tangible personal property... to a person claiming to be the successor of the decedent upon being presented an affidavit...."

The contents of the affidavit vary slightly among states but generally require that the value of the estate (excluding assets in a trust or that pass by operation of law) be below a certain threshold and that no probate has been opened. Some state agencies, such as the Utah Department of Motor Vehicles, even have a form that complies with the statutory requirements and can be completed without much more difficulty than signing over a car title. Before transferring a vehicle into a revocable trust, check your state's statutes and see if your vehicles can be transferred in this manner.

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Registered Agent Services

Every state in the U.S. offers business owners some form of limitation on liability if they operate through a business entity such as a corporation or LLC. One of the requirements for all business entities is to maintain a "registered agent." A registered agent is a person or other entity within the state where the entity is formed that maintains a physical address within that state. The purpose of a registered agent is to receive service of process on behalf of the business entity. If a registered agent is not identified, a business entity cannot be formed in any state; if an entity ceases to maintain a registered agent, the business will immediately cease to be in good standing with that state.

While almost anyone can be a registered agent, many companies offer this service for a fee.  In my experience, the following complaint about commercial registered agents constantly resurfaces: "I want to cancel my registered agent services, but I keep getting billed or told I have to pay a huge fee to cancel!" Hopefully, this post explains why this situation arises and what to do about it.

This problem is most often faced by someone who has purchased a new business entity, usually an LLC in a different state from where they live, and decides that they don't need the entity any more. Maybe they intended to start a business and it didn't work out, or maybe an advisor recommended setting up an entity or many entities that proved to be overly costly to maintain.

From the registered agent's perspective, as long as the business entity lists it as agent, it is bound to maintain the registered address and be prepared to forward any service of process it receives to the business owner. The only way the registered agent can be relieved of its obligation to provide these services is if (1) the agent resigns, (2) the business owner switches agents, or (3) the entity is dissolved, either voluntarily or involuntarily. With the exception of involuntary, or "administrative," dissolution, each option requires a document to be submitted to the state in which the business entity is formed. This requires time and a fee that is paid to the state, and the registered agent is unlikely to want to take these steps unless compensated by the business owner.

As a specific example, if you own a business entity and LegalZoom.com is your registered agent, the terms of service state, "If you no longer wish to use the Registered Agent Services in any jurisdiction, you must assign another registered agent in that jurisdiction, and must pay all fees related to changing your agent.... If, however, you no longer wish to use the Registered Agent Services because you are discontinuing your business operations (voluntarily or otherwise), you must properly dissolve, cancel, withdraw, or otherwise properly terminate your entity.... If you fail to [do this and submit proof,] you will continue to incur charges for Registered Agent Services until such proof is provided."

To complicate matters further, nearly every business owner must pay an annual fee to the state for every entity they own in order to keep the entity in good standing with the state. If the annual fee to the state is not paid, the entity will go on inactive or default status until all annual fees (including late penalties) are paid. In most states, if an entity is in default, no filings may be made with respect to that entity. After an extended period, at least three years in most states, the entity will be administratively dissolved.

LegalZoom.com maintains a registered office in Nevada, and all other states, so that it can serve as a registered agent. (As an interesting side note, on October 1, 2013, a new Nevada law went into effect requiring any registered agent with 10 or more represented entities to register with the Secretary of State, which LegalZoom.com has not yet done. This means that all of its represented entities are on administrative hold and will be unable to file annual reports until LegalZoom fixes the problem. If your entity is charged late fees in Nevada because you couldn't file your annual report, LegalZoom should be responsible for those late fees).

Continuing the Nevada example, entities in that state must pay $325 to the state each year (not including registered agent fees, which normally range from $100-$200). If a business fails to file the necessary reports, a $175 late fee per year is imposed. What this means is that if someone set up a Nevada entity, never did anything with it, forgot to file annual report for two years and wants to stop being billed $100-$200 each year for registered agent services, they must first bring the entity back into good standing (which would cost at least $1,000 in state fees alone), then pay the $100 fee to the state to dissolve the entity, and only then will the registered agent be released from its obligations and be able to close the account (perhaps only after receiving payment for the past years of registered agent services). That can add up quickly for a business that never did anything but briefly exist.

If you have a business entity but haven't done anything with it, didn't keep it in good standing, and want to close it down, my best advice is this: Ask your registered agent to resign as your agent. There will be a fee for this, but it will be significantly less because a registered agent can usually resign from entities that are not in good standing. In other words, if you were to dissolve the entity yourself, most states would require you to first pay all past due annual fees and late fees and then pay to formally dissolve; if your registered agent simply resigns its position, most states do not require the entity to be in good standing. This is by far the easiest and cheapest option, and most registered agent companies don't offer to do this up front, so you have to ask and try and negotiate.

If this doesn't work, and you happen to have a personal relationship with your registered agent, you may be able to simply let them know you are abandoning the entity and letting it administratively dissolve and they may cancel your account and stop billing you. Usually, this is not an option, however. Your only other viable option is to pay the state to bring your entity back into good standing if it isn't, and file Articles of Dissolution. Provide proof to your registered agent and then ask if they will give you a break on any past-due agent fees.

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Basics of Foreign Income Taxation

From a U.S. perspective, personal income taxation is based on (1) citizenship, (2) residency, and (3) income source. U.S. citizens are taxed on U.S. source and foreign source income, regardless of residence. Non-citizen residents (those who possess a green card or who were present in the U.S. 31 days during the current year and 183 days over the last three years) are taxed the same as U.S. citizens. Non-citizen, non-residents are usually taxed only on U.S. source income.

Different applications of these basic principles apply to the U.S. territories. For example, U.S. citizens residing in Puerto Rico are taxed similar to non-citizen, non-residents even though Puerto Rico is a U.S. territory: only U.S. source income is taxed by the U.S. In contrast, U.S. citizens residing in American Samoa are taxed on worldwide income but can exclude American Samoa source income; each territory is different.

Those who are taxed on worldwide income by the U.S. and who also have foreign source income and pay taxes to foreign countries may be able to (1) exclude foreign source income from reported U.S. gross income, (2) deduct foreign taxes paid from U.S. gross income, or (3) receive a credit against U.S. taxes for foreign taxes paid. These rules are intended to prevent the same income from being fully taxed by two different countries.

For those not taxed on worldwide income, properly determining the source of income for tax purposes is critical. In general, the U.S. considers personal service income to be sourced from where the services are performed. Interest income is sourced to the payer of the interest. Dividend income is U.S. source if paid by a U.S. corporation and foreign source if paid by a foreign corporation (but different rules apply where a foreign corporation is generating income "effectively connected" to the U.S.) With some exceptions, rents and royalties are sourced to the location of the property generating the income. Income from the sale of personal property is sourced to the seller's location, with special rules for inventory and intangibles. Gains from the sale of real estate is sourced to the location of the real property.

This is a broad overview of general principles that apply to U.S. worldwide income taxation. Other issues that could arise include tax withholding on U.S. source income of foreign persons, tax treaties between the U.S. and foreign countries, and foreign account reporting requirements, to name a few. It is never a bad idea to engage local counsel when dealing with foreign income and tax reporting.

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Foreign Account Reporting Requirements

The U.S. reporting requirements for individuals with foreign assets are complex. This post will focus on the reporting requirements for a citizen and resident of the U.S. with a foreign financial account. The starting point for these requirements will be Schedule B, Interest and Dividends, for Form 1040, U.S. Individual Income Tax Return.

Part III of Schedule B, Question 7, asks whether the taxpayer had, in the past year, "a financial interest in or signature authority over a financial account... located in a foreign country." The question also asks whether the taxpayer is required to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR) to report that interest or authority. The FBAR is a different form, independent of Schedule B or Form 1040 in general, but with nearly identical definitions and requirements. In fact the instructions to Schedule B direct the taxpayer to refer to the FBAR for additional information. If the answer to Question 7 is "yes," the taxpayer should plan on filing an FBAR as well.

A U.S. person must file an FBAR by June 30 of the following year if the aggregate value of the foreign financial accounts in which the person has a financial interest or or over which the person has signature authority exceeds $10,000 at any time during the reporting year. A U.S. person who is the owner of record or holder of legal title, or is able to control the owner of record or holder of legal title, of a foreign financial account meets the definition of having a "financial interest." Signature authority is defined as the authority (alone or in conjunction with another) to control the disposition of assets held in the account by communicating to the institution that maintains the account.

Depending on how the foreign asset came to be owned by the taxpayer, Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts may be required. This form is referenced in Question 8, Part III of Schedule B to Form 1040, which asks whether the taxpayer received a distribution from, was the grantor of, or was the transferor to, a foreign trust. U.S. persons who, among other things, received either (1) a gift or bequest of more than $100,000 from a nonresident alien individual or a foreign estate or (2) a gift of more than $15,102 from a foreign entity, must file Form 3520.

Another potentially required form is Form 8938, Statement of Specified Foreign Financial Assets, which accompanies the personal income tax return. The requirements for this form are similar to the requirements for an FBAR; in fact, the IRS has published a Comparison of Form 8938 and FBAR Requirements. In short, Form 8938 is required when a U.S. person has a foreign financial asset, including a foreign financial account, worth more than an applicable threshold, which thresholds are summarized on page 2 of the instructions.

While this discussion has focused on the reporting requirements applicable to foreign financial accounts, the following instructions for Form 8938 are instructive in providing an idea of what is required when dealing with other kinds of assets:

"You do not have to report any asset on Form 8938 if you report it on one or more of the following forms that you timely file with the IRS for the same tax year.

• Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts.
• Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations.
• Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund.
• Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships.
• Form 8891, U.S. Information Return for Beneficiaries of Certain Canadian Registered Retirement Plans."

Source: Carolyn Reers, U.S. Tax Compliance for U.S. Persons With Interests in Foreign Accounts, Trusts, Corporations and Partnerships, ST008 ALI-ABA, September 2011.

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Unrelated Business Income Tax

Certain organizations are exempt from paying income tax under the Internal Revenue Code. These include charitable, religious, and scientific organizations; certain pension, profit sharing, and stock bonus plans; IRAs; colleges and universities; and medical savings and college savings accounts. To the extent that these organizations generate "exempt function income," such as "income from dues, fees, charges, or similar items paid by members for the purposes for which exempt status was granted," such income is not subject to federal income tax.

For exempt organizations, income that meets certain characteristics is not exempt function income and is instead unrelated business taxable income on which tax must be paid. Activities that (1) constitute a trade or business, (2) are regularly carried on, and (3) are not substantially related to furthering the exempt purpose of the organization generate unrelated business taxable income.

A "trade or business" is defined as "any activity carried on for the production of income from selling goods or performing services." To be "regularly carried on," the activities would "show a frequency and continuity, and [be] pursued in a manner similar to, comparable commercial activities of nonexempt organizations." Finally, for an activity to be "not substantially related" to the exempt purpose, the activity would lack a "[substantial] causal relationship to achieving exempt purposes (other than through the production of income)."

The specific rules regarding UBIT are numerous, with certain types of income being subject to UBIT depending on the type of exempt organization that generates the income or the intended purpose of the income. Deductions directly connected with producing the unrelated income are generally deductible in a similar manner as regular business deductions, although certain types of deductions are disallowed. Conceptually, the purpose behind the UBIT rules is to prevent normal for-profit businesses from experiencing unfair competition from an exempt organization engaging in the exact same activity without having to pay the tax that the for-profit business pays.

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Avoid Owning Real Estate in a Corp

Tony Nitti, writing for Forbes, wrote a great article earlier this year that clearly explains Why You Should Never Hold Real Estate In A Corporation. Following is a summary of the primary reasons, contrasted with owning real estate in a partnership:

Capital Contributions: If an individual transfers real property to a corporation in exchange for stock, they must own 80% of the vote and value of the corporation immediately after the transfer; otherwise, a gain must be recognized and tax paid on the difference between the individual's basis in the property and the fair market value. In contrast, "appreciated property can be contributed to a partnership in exchange for a partnership interest [as small as a 1%] without triggering any gain."

Contributions of Property Subject to a Mortgage: Even if a contribution of real property to a corporation is otherwise exempt from gain, if the property is subject to a mortgage, "and the corporation assumes that liability as part of the transfer, the transfer triggers gain to the extent the liability exceeds the tax basis of the property." In contrast, it is "much less likely that a partner contributing leveraged property to a partnership will recognize gain" due to the inside and outside basis rules of partnership taxation.

Sale or Distribution: While it is possible to contribute real property to a corporation without being required to pay tax, the same is not true for getting the property out. If appreciated property is distributed from a corporation, "the corporation recognizes gain as if it had sold the property for its fair market value." The same treatment applies if the property is actually sold by the corporation. Furthermore, withdrawing the sales proceeds from a C-Corporation can result in double taxation to the shareholder. In the case of a distribution from an S-Corp, "the distribution will not be taxed a second time at the shareholder level..., [however the shareholder] cannot take the property out of the corporation without incurring a tax bill." In contrast, "when a partnership distributes property to a partner in a current distribution, generally no gain or loss is recognized by either the partnership or the partner;" only basis adjustments are required.

In addition to the problems listed above, owning real estate within a taxable entity other than a partnership can result in loss limitations, lost step-up in basis of the underlying assets upon the death of a shareholder, and lost step-up in basis for the purchaser of an interest in a corporation owning appreciated assets. It is almost always better to own real estate in a partnership or disregarded entity.

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Home Office Deduction Safe Harbor

In addition to being a rumored audit risk, the deduction for a home office has been relatively complex, both the deduction calculation itself as well as its effect on other parts of Form 1040. For example, under the regular home office deduction method, actual expenses such as rent, real estate taxes, internet, gas and electric, phone, insurance, and other costs attributable to the square footage of the home office space must be calculated and detailed records maintained. Furthermore, home-related itemized deductions must be apportioned between Schedule A and Schedule C. Finally, while depreciation can be deducted for the portion of the home used for business, that depreciation must be recaptured upon the sale of the home.

In Revenue Procedure 2013-13, the IRS has provided an easier option. Using the "simplified" or "safe harbor" home office deduction method, a business owner can take a standard $5 deduction for each square foot of the home used exclusively for business, up to 300 square feet. There is no need to apportion house expenses to the office space, and all home-related itemized deductions may be claimed in full on Schedule A.

There is no home depreciation deduction or later recapture of depreciation for the years the simplified option is used. While deduction amounts in excess of gross income may not be carried forward as in the regular method, preparing Form 8829 is not required when electing the simplified method; calculated expenses are simply entered on Line 30 of Schedule C.

The criteria for who can take the regular or simplified home office deduction is the same: The room or section of the home used for business must be exclusively used on a regular basis (1) as a place of business used by patients, clients, or customers; (2) in connection with the trade or business if it is a separate structure unattached to the home; or (3) as the principal place of business. A home office will qualify as a principal place of business if it is used exclusively and regularly for administrative or management activities of the trade or business and no other fixed location for conducting substantial administrative or management activities of the business exists.

The IRS is strict about the exclusivity requirement. If the home office doubles as a guest bedroom, for example, the taxpayer does not qualify to take the deduction. However, the home office can be a section of a room if clearly partitioned from the rest of the room and personal activities are excluded from the business section.

While the extra complexity of the regular home office deduction method may be worth it for large home offices with high expenses, the simplified method is a good option for many other business owners who work out of their house.

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Income Shifting to Children

A fundamental tax-mitigation technique is shifting income from taxpayers in high tax brackets to taxpayers in lower brackets. One of the ways this can be accomplished for business owners is by paying their children a salary for working for the business. Not only does this shift taxable income from the parent's higher-bracket to the children's lower-bracket while keeping everything within the family, this technique can also save payroll taxes compared to hiring non-family employees.

According to the IRS, "[p]ayments for the services of a child under age 18 who works for his or her parent in a trade or business are not subject to social security and Medicare taxes if the trade or business is a sole proprietorship or a partnership in which each partner is a parent of the child." Furthermore, children claimed as dependents on a parent's return and who make less than $6,200 for 2014 do not owe any income tax and are not required to file a tax return, although filing would be necessary in order to receive a refund of income tax withheld.

A parent can also match the child's wages up to $5,500 with a Roth IRA contribution in the child's name. This will reduce the parents' future tax on investment income by the amount of the return on the contribution, which would grow tax-free.

In addition to passing income in the form of "active" wages to children, "passive" income can also be passed to children. In order to take advantage of this opportunity, the "kiddie tax" must be avoided. If the tax applies, the income is taxed at the parent's highest rate instead of the child's, completely negating the strategy. However, parents can still transfer income-generating assets to children, and if the income for the tax year is under $2,000 in 2014, the child's lower rate applies. As children reach the age of majority and continue earning substantially less than their parents, the opportunities to shift passive income increases.

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Gay Marriage Cases Yield Estate Tax Planning Opportunities

Some of the court decisions on the issue of gay marriage are creating estate tax loopholes that could allow wealthy individuals to pass their estate to their heirs tax free. Every state restricts close relatives from marrying. However, the language of some states' statutes technically only prohibits opposite-sex relatives from marrying, but with a definition of "marriage" that only includes male-female unions.

Consider the statute in Massachusetts, which contains the traditional definition of marriage and provides that "No man shall marry his mother, grandmother, daughter, granddaughter, sister, stepmother, grandfather’s wife, grandson’s wife, wife’s mother, wife’s grandmother, wife’s daughter, wife’s granddaughter, brother’s daughter, sister’s daughter, father’s sister or mother’s sister." There are corresponding provisions for women.

In Goodridge v. Department of Public Health, the court acknowledged this language and said in a footnote that "the statutory provisions concerning consanguinity or polygamous marriages shall be construed in a gender neutral manner." However, the statute has not been updated despite ample opportunity for the legislature to do so. Given this, it is at least arguable that, as Phillip Greenspun pointed out, a "grandfather [could] marry his grandson, give his spouse/grandson a tax-free spousal gift of $25 million, and then get a no-fault divorce after a couple of years."

In contrast, the Connecticut legislature did amend the gender-based consanguinity provisions in its marriage statutes. Shortly after the case of Kerrigan v. Commissioner of Public Health was handed down, the legislature passed Public Act No. 09-13. This act replaced the language "No man may marry his mother, grandmother, daughter, granddaughter, sister, aunt, niece, stepmother or stepdaughter, and no woman may marry her father, grandfather, son, grandson, brother, uncle, nephew, stepfather or stepson" with the following: "No person may marry such person's parent, grandparent, child, grandchild, sibling, parent's sibling, sibling's child, stepparent or stepchild."

It is unclear what rationale Connecticut or any state would have in removing the right of same-sex relatives to marry. As has been astutely pointed out, "[T]he biological rationale for the consanguinity rules makes no sense in the context of two women or two men, as there simply can be no progeny produced between them, and hence there is no possibility of in-breeding."

The state of Iowa chose to remain silent on this question; its statute declares as void any marriage between "a man and his father's sister, mother's sister, daughter, sister, son's daughter, daughter's daughter, brother's daughter, or sister's daughter" (and vice versa) in Iowa Code Ann. § 595.19. The court in Varnum v. Brien did not mention 595.19 or consanguinity and the legislature has not updated the statute since. As such, Iowa has seen fit to allow close same-sex relatives to marry; accordingly, an unmarried woman can marry her daughter and pass wealth to her tax free.

With the 10th Circuit currently considering whether to overturn traditional marriage laws in multiple states, it will be interesting to see how or if it approaches the varied consanguinity provisions within its jurisdiction. Oklahoma is poised to become another state with an estate-tax loophole.

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Debt Repayment Strategy

For those who are having trouble managing multiple debts, a debt repayment strategy can save money and also be psychologically rewarding. The first step in any debt repayment strategy is to list all of your debts with the balance outstanding, interest rate, and minimum monthly payment for each. For example:

Description	Balance	Interest Rate	Minimum Payment
Car Loan	$11,000.00	3.5%	$200.00
Visa Credit Card	$1,900.00	12.99%	$43.00
Discover Card	$3,500.00	14.99%	$83.00
Student Loan	$9,500.00	8.99%	$153.00

The next step is to establish a budget and commit to make the minimum required payment on all of your debts every month; the free budgeting tool at Mint.com that I've been discussing in recent posts could help. In addition to committing to pay the minimum monthly payment on all of your debts, you also must commit to pay a little bit extra towards one of the loans. The extra amount will all be applied to the principal balance, as opposed to interest, and a lower principal balance results in less interest being charged over the life of the loan. While Mint can be used for tracking your debts and payments, other free online tools dedicated to debt reduction such as ReadyforZero.com are available.

Which creditor should be paid the extra amount? All else being equal, this would obviously be the one that is charging the highest interest rate. However, many financial planners recommend making the additional payment towards the loan with the lowest balance. The reason for this is that you will see results sooner as the small balance goes down to zero. By seeing results faster, you will be more likely to stick to the debt repayment plan, which is better than starting with the higher rate/higher balance loan but ultimately abandoning the plan.

Perhaps a good compromise would be to sort all of your debts from highest interest rate to lowest, then move the loan with the lowest outstanding balance to the top of the list and pay off your debts in that order. The order of debts in the example above under this method would be the Visa Credit Card, Discover Card, Student Loan, and Car Loan.

Whatever method you choose, the next phase of the debt repayment plan after the first debt is paid off is important. The entire amount that was going toward the payment of the paid-off debt becomes an extra payment towards principal in addition to the minimum payment on the next debt on your list. For instance, in the example above if you were paying the minimum Visa Credit Card payment of $43 plus an additional $10 each month, after that debt is paid off, the $53 that has been freed up becomes an extra payment to Discover Card in addition to the minimum you are already paying.

This cycle is repeated until all your debts are paid off. As the number of outstanding loans diminishes, the extra amount being paid has grown substantially, similar to a snowball rolling downhill. This "Snowball Method" of debt-payment can help you achieve your goal of debt freedom.

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Budgets and Goals on Mint.com Part II

In my previous post, I discussed using Mint.com to track outgoing and incoming cash, categorizing line items on the Transactions menu, and integrating these items with Budgets. The topic of this post is Mint's Goals.

To set up a goal, click the Goals tab, select one of the predefined goals or a custom goal, and answer the questions as prompted, such as source of funding, target date for reaching that goal, desired monthly contribution, etc. Each goal should be linked to an account so that Mint can track the balance and report on your progress. The Goals function is a particularly good fit for the situation I addressed in my previous post, paying off a credit card balance you are carrying.

The difficulty some have experienced with Goals on a Budget is that while Mint can reduce your projected monthly net income by the goal contribution amount, the goal amount is not linked to any Budget payment. This means that there is no indication on the Budgets tab whether a payment was actually made towards a goal in a month and no goal contributions appear on any report of expenses, net income, etc. If you create a budget item for the goal amount, the contribution toward the goal will essentially be double counted on the Budget.

The workaround for this is to add the goal amount as a budget item and exclude the goal amount from the Budget calculation. This is done by clicking on the Budgets tab, scrolling down to the goal, clicking Edit Details, and opting to exclude part or all of the goal amount from the budget calculation. This is also the appropriate way to treat a goal where the funding for that Goal comes from an account that is not linked to Mint. For example, if you set a retirement goal, employer contributions to a retirement plan would never appear as income, so that monthly goal contribution should be excluded from your budget calculation.

In summary, in order to set Goals, categorize transactions, and establish Budgets in Mint and have your reports provide accurate information, the key is to focus on each account type and the unique interaction each account has, if any, with other accounts being tracked by Mint.

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Budgets and Goals on Mint.com

My wife and I have used Mint.com for personal finance management for over three years now. While it is not perfect, it is low-maintenance, fairly intuitive, and completely free. After signing up, Mint accesses the transactions from your financial accounts and helps you categorize income and expenses, establish budgets, set goals, and generally stay on top of your personal finances.

Many Mint users have expressed frustration at understanding the relationship between Mint's Budgets, fund transfers reporting, and Goals; this is one of the areas of Mint that is not always intuitive. Hopefully, the following explanation helps.

The first thing to understand is how income, expense, and transfers are handled in Mint. When you deposit your paycheck or pay for movie tickets with a debit card, you have income and expense respectively; Mint's treatment of cash coming in from or going out to an outside source is straightforward.

If you pay for a movie with a credit card, and pay off the credit card at the end of the month, Mint records three transactions: the charge to the credit card, the debit to the checking account when the payment is made, and the credit to the credit card account when the payment is received. The net result is the movie expense; the two payment transactions, if properly classified as a Transfer, net to zero. Everyday income, expense, and credit card transactions are grouped in the Cash and Credit section of the Transactions menu and appear on Mint's Budgets.

All payments or transfers from one account to another, where both accounts are Cash and Credit accounts, should be categorized as a Transfer and net to zero. If you have a loan such as a mortgage, activity on the mortgage account will appear on the Loans section of the Transactions menu, as opposed to Cash and Credit. Payments from your checking account to your mortgage account should be categorized as an expense, as opposed to a Transfer, and will appear as a cash outlay in Budgets.

In contrast to Mint's treatment of a traditional loan, suppose a large emergency expense occurs in one month, such as a medical bill, and you charge it to a credit card and plan on carrying a balance. In this situation, the "loan" will appear as a large expense in one month and the payments will be categorized as a Transfer in subsequent months. In other words, there will be no budgeted cash outlay in Budgets in subsequent months; each time a payment is made on the credit card, there will still be a debit to the checking account when the payment is made and a credit to the credit card account when the payment is received.

If you classify the debit to the checking account as an expense so that it shows up on Budgets as a cash outlay, the credit to the credit card account will still be listed as a Transfer and ignored on the Budgets, and your budget over time will ultimately count the large expense twice. The initial credit card charge will be an expense in month one, and each subsequent credit card payment will also be an expense. You are faced with either double counting your expense over time or not being able to effectively budget for the cash outlay each month a payment is made. The solution to this problem may be Goals, which I will discuss in my next post.

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Educational Assistance Programs

Companies who hire students or potential students can offer educational benefits that would be more beneficial to both employer and employee than a standard wage offer would be. This can be accomplished through the fringe benefit known as an Educational Assistance Program.

An Educational Assistance Program allows an employer to provide an employee assistance in paying for tuition, fees, books, and supplies for education. Benefits provided under this program will not be subject to income or employment taxes, and the first $5,250 will be excluded from the employee's income each year.

The requirements are as follows: (1) The program must benefit employees who qualify under rules set up by the employer but that do not favor 5%-or-more owners or employees earning more than $115,000; (2) the program may not provide more than 5% of its benefits during the year for shareholders or owners; (3) the program may not allow employees to choose to receive cash or other benefits that must be included in gross income instead of the educational assistance, (4) the employer must give reasonable notice of the program to eligible employees, and (5) the program must be in writing.

To illustrate how such a program can be better for both an employer and an employee who is indifferent about receiving wages or educational assistance as compensation, assume that an employer is contemplating offering an employee an annual raise of $5,000. Were this raise to come in the form of a salary increase, the employer would need to first deduct 6.2% for social security, 1.45% for medicare, and some amount for income tax withholding, say 5%, for a total of $632.50, leaving the employee with $4,367.50. The employer must pay out, in addition to the $5,000, an additional $382.50 for the employer portion of social security and medicare, for a total of $5,382.50.

In contrast, if the annual raise is in the form of educational assistance, neither the employee nor the employer is subject to any of the above taxes. If the employer offers a raise of $5,250.00, the total payout will be $5,250.00, a savings of $132.50. The employee will have $5,250.00 of his or her educational expenses paid for, a net benefit of $882.50 compared to receiving a salary and paying for tuition with after-tax dollars.

Certainly, an educational assistance program isn't appropriate in all cases, but it can provide savings and incentives to both the employer and employee for whom the situation is right.

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Valuation Discounts

One of the primary objectives of estate planning is to arrange for the transfer of wealth to the next generation at the lowest possible cost. For large estates, the most significant cost is the gift and estate tax. These two tax regimes are essentially a single tax imposed on total lifetime gifts plus the value of property transferred at death. As mentioned in a previous post, gifting during lifetime can be part of an estate planning strategy.

For a gifting example, assume a gift tax rate of 40% and a donor who has previously utilized his or her entire tax exemption and who desires to make a gift of $1,000,000 of a $4,000,000 investment in a publicly-traded company.

After making the gift of the $1,000,000 asset, the donor will pay a $400,000 gift tax. Obviously, a key factor in the calculation of the gift tax is the valuation of the stock that is the subject of the gift. In this case, the valuation is straight-forward because the stock is easy to sell and has a ready market.

However, consider the gift of a small, privately-owned family business. In this case, the value of the asset will reflect the fact that there is not a ready market for the business; it is more difficult to sell. In addition, the value of a minority interest in a private business will reflect a lower value if the owner does not have managerial control.

For planning purposes, both the "lack of control" and "lack of marketability" discounts can be effectuated in not only the small, privately-owned family business context, but also for nearly any other asset. For example, suppose that the owner of the $4,000,000 stock investment first transfers the stock into a limited partnership. Subsequently, if the owner transfers a 25% limited partnership interest to a donee, the value of the gift for gift tax purposes will be less than $1,000,000.

This is because there is not a ready market for a privately-owned partnership interest. Furthermore, instead of owning $1,000,000 worth of publicly traded stock outright, the donee merely owns a 25% limited interest in a private partnership. Since the donee lacks managerial control over that interest, it does not matter that the underlying asset is publicly-traded stock; the lack of control discount would apply in addition to the lack of marketability discount.

If the total valuation discount in this case works out to be 30%, this results in a gift valuation of $700,000 instead of $1,000,000. This results in an accompanying gift tax of $280,000 instead of $400,000, an immediate cash savings of $120,000 simply by utilizing the limited partnership.

Source: Valuation, Jonathan C. Lurie and Edwin G. Schuck, Jr., The American Law Institute - American Bar Association Continuing Legal Education, 2008

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Basic Visual Basic for Excel Part IV

This is the fourth and last post in my introduction to learning and utilizing Visual Basic in Excel. As you may have guessed or experienced, writing Visual Basic code from scratch is extremely difficult. Realistically, there are simply too may classes, properties, commands, and syntax rules to learn before a beginner can automate a task by coding from a blank slate. Fortunately, there is an easier way.

If you need to automate a repetitive task in Excel, consider recording a macro, whereby the code for the actions you take is written automatically. The Record Macro button is located in the Macros menu, which is within Excel's View menu. The "Use Relative References" button at the bottom toggles between relative and absolute references on your spreadsheet. If the task you are trying to automate will always occur at the same location on the spreadsheet, make sure Use Relative References is off. However, if the task you are trying to automate will happen at different locations on the spreadsheet, highlight Use Relative References.

One task I find myself repeating a lot, when working with a filtered table in Excel and after having implemented multiple filters, is needing to unfilter the whole table. To do this, I usually just click the Filter button from the Data menu to turn off filtering, select the whole sheet, and click the Filter button again. To demonstrate how to automate this repetitive task, I will record a macro. In order to follow along, you will need a filtered table in Excel (if you need a quick data set, feel free to copy the entity table I used in this previous post).

After filtering one of the columns in your table, click View, from the Macros menu click Record Macro, select a shortcut key (such as Ctrl+Shift+A), and press OK. Everything you do until you click Stop Recording from the same Macros menu will be automatically coded into a new module. While recording, first unfilter the entire sheet by clicking View, Filter; second, select the entire sheet by clicking in the blue box to the top left of A1; and third, click Filter again. Press the Stop Recording button, and within your Visual Basic editor (click Alt+F11 to get there) you should have the following code in Module1:

Sub Macro1()
'
' Macro1 Macro
'
' Keyboard Shortcut: Ctrl+Shift+A
'
    Selection.AutoFilter
    Cells.Select
    Selection.AutoFilter

End Sub

From the spreadsheet, you are now able to unfilter the entire table easily by clicking Ctrl+Shift+A each time. This has been an example of recording a macro, and this concludes my four-part primer on how to automate tasks in Excel with Visual Basic. I anticipate posting subroutines that I use from time to time, but feel free to comment or contact me with your coding challenges or successes; I may address them in a future post as well.

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Basic Visual Basic for Excel Part III

This is the third post in a series explaining how I use Visual Basic in Microsoft Excel to increase productivity. In my previous post, I discussed the If Then statement as well as different ways to reference cells on a sheet; in this post, I will discuss the Do Loop.

The Do Loop allows you to repeat the same block of code until a condition is satisfied. To demonstrate, I will be using the client entity table from this earlier post; this Do Loop will concatenate a list of all a client's entities into a single field.

After recreating the client entity table in your own spreadsheet, select blank cell G2.  The code below will list all the entities in the active cell, starting with the entity name in the same row as the active cell, and ending with the last entity name before the client's name changes.

Before moving further, however, it will be important to declare a variable that can be used to keep track of which of the client's entities will appear next on the list. A good practice when declaring any variable is to use Option Explicit (for an explanation why, see this article). Declaring a variable is accomplished by typing "Dim" followed by the name for the variable you select, followed by the data type, which can be an "Integer" in this case (other data types are capable of storing different sizes or kinds of data). After declaring the existence of the variable "r," we assign it a value of 0 for reasons described below. After doing all of this, I have the following as the starting point for my code:

Option Explicit
Sub concatenateEntities()

    Dim r As Integer
    r = 0

End Sub

With "r" set to zero, we will follow with our Do Loop. The basic Do Loop to accomplish the procedure described above is as follows:

    Do Until ActiveCell.Offset(0, -6) <> ActiveCell.Offset(r, -6)

        ActiveCell.Value = ActiveCell.Value & "; " & ActiveCell.Offset(r, -5)
        r = r + 1

    Loop

By running the macro with cell G2 selected on a spreadsheet containing my entity table, the active cell should now read as follows: ";  ABC Corporation;  Doe Family Partnership;  Doe Rental Property, LLC;  Doe Equipment, LLC". Here is how this was accomplished:

The "Do Until" line tells the computer to repeat the code that follows until it says "Loop," repeating until the client name changes. It starts by comparing the value in column A in the same row as the active cell with the value in column A in each subsequent row, one at a time. The "r = r + 1" line keeps increasing the count of the row after the prior line sets the active cell equal to whatever it's current value, followed by a semicolon, followed by the value of the cell in column B that contains the next entity name on the list.

Notice that we probably don't want to have the first semicolon that appears in the active cell, which occurs due to the fact that the first time the code sets the active cell equal to itself before adding the semicolon, the active cell has nothing in it. See if you can use an If Then statement to fix that problem; I will post my solution in the comments that follow. For a tutorial on recording a macro, please stay tuned for my next installment of Basic Visual Basic for Excel.

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Basic Visual Basic for Excel Part II

In a previous post, I demonstrated how to create and execute a very simple macro in Microsoft Excel. In this post, I will demonstrate a number of fairly simple enhancements to that macro. The code we will start with is as follows:

Sub lastRun()

    ActiveCell.Value = "Subroutine last run at " & Time()

End Sub

Before beginning, we should assign a shortcut to the macro to make it easier to run. This is accomplished by clicking Alt+F8 from within Excel, selecting the lastRun macro, clicking "Options," and assigning a shortcut key such as Ctrl+Shift+A. Now you can run the macro from Excel simply by clicking Ctrl+Shift+A.

The first enhancement to lastRun is to have the macro enter the time it was last run not in the active cell, but in a cell relative to the active cell on the spreadsheet:

    ActiveCell.Offset(2, 4).Value = "Sub last run at " & Time()

The numbers following "Offset" are the number of respective rows and columns from the active cell into which the time will be entered. Positive numbers offset rows down and columns to the right, while negative numbers offset rows up and columns to the left.

We can also refer to cells without reference to whatever cell is currently selected; in the "Cells" reference below, the row number of the spreadsheet appears first and the column number follows. Of course, the cell we are changing can be set equal to any value we describe as well. Type a message into cell A1 on your spreadsheet; then try the following code:

    Cells(2, 1).Value = "Cell A1 said " & Cells(1, 1).Value & " when the sub ran at " & Time()

Another useful function in Visual Basic is an If Then statement, which works similar to the IF function in Excel. Here is an example of how the lastRun function can run an exception if cell A1 is blank by using an If Then statement:

    If Cells(1,1) <> "" Then

        Cells(2, 1).Value = "Cell A1 said " & Cells(1, 1).Value & " when the sub ran at " & Time()

    Else

        MsgBox "Cell A1 is blank!", vbOKOnly, "For your information..."
        Cells(2, 1).Value = "Cell A1 was blank at " & Time()
        'This is a sample comment in VB

    End If

Note that it is good practice to insert comments throughout your code, as above, so it is easy to remember what the section is supposed to accomplish; the first character of a comment line is an apostrophe, followed by your notes. Another tip is to use blank lines and tabs often to separate and group different sections of your code. In my next post, we will examine the Do Loop, a powerful tool in Visual Basic for people who use Excel frequently.

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Basic Visual Basic for Excel

This will be the first post in a series of posts explaining how to use Visual Basic with Microsoft Excel to accomplish a number of useful tasks. While I am by no means a programmer, I hope I can demonstrate some practical ways to use Visual Basic to help you increase your productivity on a PC.

The first step after opening Excel is to open the Visual Basic Editor. This is accomplished by clicking on the Developer tab within Excel and clicking the Visual Basic button. Alternatively, you can press Alt+F11 to open the editor.

The next step is to insert a new module. In the column on the left, the Visual Basic Editor displays the various Excel spreadsheets that are open. Make sure that the spreadsheet you want the code associated with is selected, and click the Insert menu and select Module. This will bring up a blank screen into which you will type your code.

The next step is to create a subroutine within the module window. This is accomplished by typing "Sub" followed by the name of subroutine followed by "()". The name can be almost anything you want, but it can't have spaces and should describe what the code does so that you can select the subroutine you want from a potentially long list. For a very simple example, I will create a subroutine named lastRun; it will display the time that the subroutine was last executed. Type the following to set up the lastRun macro (the "End Sub" usually appears automatically):

    Sub lastRun()

    End Sub

Between these two lines will be the rest of the code, which in the lastRun example, will be the following:

    ActiveCell.Value = "Subroutine last run at " & Time()

The lastRun subroutine will change the value of the active cell, or the cell that is highlighted on the spreadsheet, to the text in parentheses followed by the time that the subroutine was run. In order to run the subroutine, save your spreadsheet as an .xlsm file (always, always save before testing new code!) and then click the green triangle "Play" button at the top of the Visual Basic Editor. Alternatively, from within the spreadsheet, click View, Macros, make sure lastRun is highlighted, and click the Run button. Note that the text and time appear in whatever cell on the spreadsheet is highlighted when the macro is run.

This has been an introduction to utilizing Visual Basic with a very simple subroutine; in my next post, I will show how to increase the functionality of this simple bit of code.

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