Brown & Streza Blog
By David Keligian on 3/4/2019 11:59 AM
My last article dealt with the doctrine of “rescission”—the ability to go back in time to “re-do” a transaction for tax purposes. If you comply with the rescission requirements, you can fix anything as long as the fix occurs in the same tax year. But as pointed out in the article, once the tax year closes, you are stuck with the tax consequences for that year, even if you rescind the transaction in a later tax year.

This article addresses a little known provision of partnership tax law that blesses changing a partnership agreement after the close of a tax year, retroactively to the beginning of the prior tax year. You have until the original due date of the tax return for the partnership to amend the partnership agreement. This means that for the 2018 tax year, I can amend the partnership agreement for 2018 until March 15, 2019. Unfortunately, extending the partnership’s tax return doesn’t extend the deadline for amending the partnership agreement, but even so the rule is quite liberal.

Why is...
By David Keligian on 2/28/2019 1:53 PM
On occasion, I come across interesting ideas involving taxation. It will be fun to share some of these ideas, and I will be doing a few more articles about some quirky areas of the tax law. Those "quirks" can help you achieve some results that you would normally not think were possible.

The concept of "rescission" is one such topic. Many areas of taxation impose extremely specific requirements. For example, to benefit from a Section 1031 exchange, you need to identify a certain number of replacement properties, specifically and in writing, by the 45th day after you sell your old property. Identify too many replacement properties? You lose and have to pay the tax. Identify the properties on the 46th day? You lose and have to pay the tax. Don’t identify the properties correctly? You lose and have to pay the tax.

That’s why it’s surprising that the Internal Revenue Service ("IRS") has blessed the concept of "rescission". Think of rescission as a tax time machine that lets you go back in time and...
By David Keligian on 10/26/2017 2:49 PM
Regardless of your party affiliation, expecting Congress to enact rational tax reform is - - at least for individual income taxes - - like asking your dog to parallel park your car. You're foolish if you expect a good result. To paraphrase one observer's comment, you can't expect reform from those who deformed our income tax laws to begin with.

Let's talk about one of the first principles mentioned in the "Unified Framework for Fixing Our Broken Tax Code" (the "Framework"). The Framework is supposed to make the tax code simple, fair, and easy to understand. But fixes such as adding a "zero tax bracket", combining 7 tax brackets into 3, and eliminating most itemized deductions don't simply do anything for most taxpayers.

Most individual tax returns are filed with software that makes the number of brackets, or what itemized deductions are allowed, simple to address. The same point applies to repealing the alternative minimum tax ("AMT"). Again, most tax return software automatically generates AMT...
By David Keligian on 6/20/2017 12:35 PM
Although tax reform in general and estate tax repeal in particular have been sidetracked as a result of other issues facing the Trump administration, even if the estate tax is “repealed", it will not eliminate the possibility of taxes being due at death. That is because one of the long standing features of our estate tax law is the increase of a decedent's income tax basis in any assets that are included in their estate for estate tax purposes.

For example, under current law, if I own a piece of vacant land that cost me $1,000 and it has appreciated to $10,000,000 on my death, my estate would include an asset valued at $10,000,000 on which I would have to pay estate tax. However, for income tax purposes, my heirs could sell that property with a “stepped-up" income tax basis of $10,000,000, thus avoiding income taxes on the sale of the property at it’s date of death value.

For example, the estate tax previously was repealed for just one year in 2010. Anyone who died that year didn't pay estate...
By David Keligian on 7/12/2016 9:34 AM
In my previous articles on avoiding California residency, we saw that residency questions are ultimately decided by establishing the state with which someone has the "closest connection" during a tax year. It was noted that relying on presumptions and mechanical tests (including the 29 factor test listed in the Corbett case) will not necessarily win the day.

As pointed out in the prior articles, certainly someone who wishes to avoid California residency should align and document as many favorable objective (Corbett) factors as they possibly can. But if the stakes are high (such as leaving California in advance of a major stock sale), an understanding of the practicalities of a Franchise Tax Board ("FTB") challenge is important.

For example, I'm frequently asked "how long do I have to stay out of California after the sale?" The practical answer is "at least 4 years". That is because, assuming a California tax return is filed for the year of the sale, that return may not be selected for audit for...
By David Keligian on 3/24/2014 12:26 PM
My previous California residency articles have discussed how simply applying mechanical factors (such as where your driver’s license is, where you’re registered to vote, and using an out of state mailing address) can still result in you being found a California resident. One overlooked aspect of the California residency test is where one maintains their “domicile”.

Domicile is the place where an individual has his true, fixed, permanent home and principal establishment, and to which place they have, whenever they are absent, the intention of returning. An individual can only have one domicile at a time.

This means that you can be completely absent from California for a certain period of time (say a year), but the Franchise Tax Board can still claim that California was your “domicile” because you always intended to return here. The domicile test is essentially a test of your intent.

Of course, intent is very difficult to prove and can always change. When you consider how aggressive the...
By David Keligian on 12/10/2013 3:36 PM
There are many misconceptions about the rules governing whether someone is taxed as a California resident. This article provides more information as a follow up to my August 20, 2012 article.

BASIC TEST. A very common misconception is that someone can avoid being taxed as a California resident by relying on mechanical tests, such as staying out of California for certain periods of time. This is not necessarily true.

The ultimate test for determining whether or not you are a California resident is whether you have a “closer connection” to California than to any other state during a taxable year. This means it is possible that someone can be taxed as a California resident even if they spend very little time in California during a tax year.

California describes the test as being whether someone is in California “for other than a temporary or transitory purpose”. Someone who visits California for an extended vacation of 3 months and who does not engage in any business activity in California...
By Casey Hale on 12/21/2012 9:38 AM

 

Here's a short video on the history of the charitable deduction. Interestingly, just like today, it was on the Congressional chopping block back in 1917 when the country was faced with a huge budget crisis precipitated by World War I. It survived that crisis. But will it survive our current budget crisis almost 100 years later?

By Casey Hale on 12/20/2012 4:03 PM


A recent article published by The Chronicle of Philanthropy suggests that the nonprofit sector's efforts to convince the White House to preserve the charitable deduction may have paid off. The article indicates that the budget proposal the Obama administration gave to the Republicans earlier this week appears to preserve more generous write-offs for charitable deductions versus other deductions, such as mortgage interest, state taxes. etc. While White House officials have not yet confirmed the details, some Washington insiders are reporting that Obama's proposal preserves the charitable deduction's current rates. Of course, with all of the back and forth proposals, only time will tell where charitable deduction will end up. But still it is encouraging...
By Casey Hale on 12/14/2012 6:27 AM

For more in-depth information on the ongoing battle over the the charitable deduction and how it is affecting current gifts, the Nonprofit Law Prof Blog posted an entry yesterday that is definitely worth reading.

Also, here is a panel on Fox News discussing the fiscal cliff and the charitable deduction:

 

And on the other end of the media spectrum, here is MSNBC on the topic as well:

 

By Casey Hale on 12/13/2012 10:51 AM


The Washington Post published a story today covering the Obama Administration's struggle to convince the nonprofit sector to accept the administration's proposed curtailment of the charitable deduction. Needless to say, the White House is feeling significant push back from the nonprofit sector. Here's some of the key excerpts:

The White House and the nation’s most prominent charities are embroiled in a tense, behind-the-scenes debate over President Obama’s push to scale back the nearly century-old tax deduction on donations that the charities say is crucial for their financial health.

“It’s all castor oil,” said Diana Aviv, president of Independent Sector, an umbrella group representing many...
By David Keligian on 11/9/2012 10:19 AM
The uncertainty about the recent presidential and California elections has vanished and one thing is absolutely clear—taxes are going to be much higher. Unlike the situation two days ago, there is now a very strong possibility that one of the most powerful wealth transfer vehicles will soon be legislated out of existence.

Intentionally defective grantor trusts (or “IDITs”) are among the most powerful estate and gift tax saving strategies in existence. IDITs have been used successfully over the past 20 years. They let you get assets out of your estate, provide asset protection for your children, grandchildren, and great-grandchildren, and allow continuous wealth transfers (by the grantor’s payment of income taxes on the trust’s assets) without further gift taxes. They can be used to pass wealth which will greatly exceed the $1 million gift and estate exemption which will automatically take effect on January 1, 2013.

The problem is that President Obama’s Fiscal Year 2013 revenue proposals included...
By David Keligian on 8/20/2012 11:25 AM
We get frequent questions about how to avoid California’s high income tax rates by claiming residency in another state. Since California is very aggressive in residency matters, it is important to understand the basic rules determining California residency.

BASIC RULES. There are two basic rules you need to keep in mind if you wish to avoid California tax. The first rule is that a California resident pays California tax on their worldwide income.

For example, if you are a California resident and own part of a Nevada LLC, you will pay California tax on your distributive share of the Nevada LLC’s income, even if that LLC earned all of its income completely outside the state of California.

The second rule is that California will tax California-source income, regardless of where you live. Thus, if you live in Florida but own California real estate, you will still have to pay California tax on the California real estate income.

WHO IS A RESIDENT? California has a very expansive definition...
By David Keligian on 2/27/2012 5:24 PM
One of the most powerful techniques for the transfer of wealth to children and grandchildren is the intentionally defective grantor trust, or “IDIT”. The IDIT offers the following benefits:

• An opportunity to transfer significant wealth by getting assets out of your estate at the cost of little or no gift tax.

• Asset protection for the IDIT beneficiaries.

• Exemption from the generation skipping transfer tax for the IDIT, meaning the transferred wealth can be passed down to grandchildren and great-grandchildren without exposure to additional estate or gift taxes.

• The ability for the grantor to pay all income taxes on the IDITs taxable income. This amounts to an additional wealth transfer to the IDIT beneficiaries each and every year, without any gift taxes.

Unfortunately, President Obama’s fiscal year 2013 revenue proposals (read: “big tax increases”) propose doing away with the IDIT. In the proposal’s words: “The lack of coordination between the income and transfer tax rules applicable to a grantor trust creates opportunities to structure transactions between the deemed owner and the trust that can result in the transfer of significant wealth by the deemed owner without transfer tax consequences”.

...
By David Keligian on 2/17/2012 1:15 PM
Businesses that use independent contractors have always been in the crosshairs of federal and state taxing agencies. Taxing agencies are unusually aggressive, because they feel it is easier to collect taxes from the companies who use independent contractors rather than the independent contractors themselves.

Independent contractor audits are again becoming a hot priority for the IRS. The legal rules really haven’t changed, it’s just that the IRS is becoming increasingly aggressive in targeting companies that use independent contractors to raise revenue. The state of California is even worse, because the state rules for independent contractor treatment are even less favorable than the federal rules.

The federal rules incorporate a “safe harbor” that most taxpayers don’t know about. The “safe harbor” is contained in the provisions of the Revenue Act of 1978. There are definite strategies involved in positioning businesses to take advantage of the safe harbor. The safe harbor allows a taxpayer to...