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New Tax Laws. Real Opportunities for Tax Savings. Two New Acts. Working Families Tax Relief Act-signed by President Bush 10/4/2004 American Jobs Creation Act of 2004-signed by President Bush 10/22/2004. Working Families Tax Relief Act of 2004. Extensions of benefits for individuals

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new tax laws

New Tax Laws

Real Opportunities for Tax Savings

two new acts
Two New Acts
  • Working Families Tax Relief Act-signed by President Bush 10/4/2004
  • American Jobs Creation Act of 2004-signed by President Bush 10/22/2004
working families tax relief act of 2004
Working Families Tax Relief Act of 2004
  • Extensions of benefits for individuals
  • Extensions of benefits for corporations
  • Uniform definition of a child
  • Technical corrections
extensions of benefits for individuals
Extensions of Benefits for Individuals
  • Child tax credit
  • Marriage penalty relief
  • Increase AMT exemption
  • Use of personal credits against AMT
  • Extension of educator deduction
extension of benefits for businesses
Extension of Benefits for Businesses
  • Research credit extension
  • Expensing of environmental remediation costs
american jobs creation act of 2004
American Jobs Creation Act of 2004
  • General Business Considerations
  • Tax Shelter Changes
  • Individual Changes
  • Manufacturing and Production
  • International Tax Changes
general business considerations
General Business Considerations
  • S Corporation changes
  • Deferred Compensation
  • Cost Recovery Changes
  • Other Business Items
s corporation changes
S Corporation Changes
  • Number of allowable shareholders increases to 100 (up from 75)
  • Family members count as a single shareholder
  • Other changes:
    • ESBT changes
    • Transfers of suspended losses to spouse or former spouse
    • Inadvertent invalid QSub election relief
deferred compensation
Deferred Compensation
  • Why change?
  • New, rigorous standards for when compensation can be deferred from tax
  • What kind of plans are affected?
  • Key changes
    • Timing of deferral election
    • Distribution of amounts deferred
    • Added anti-abuse provisions
  • What is the affect of failing to comply?
action points
Action Points
  • Every deferred comp plan needs to be reviewed
  • Don’t rush
  • Evaluate current election for 2005 deferrals
  • Advise participants about access to funds
cost recovery changes
Cost Recovery Changes
  • $102,000 immediate write-off of §179 property is extended for two years
  • New limit of $25,000 for SUV’s purchased after October 22, 2004
  • Depreciable life for leasehold improvements and certain restaurant property reduced from 39 to 15 years
other business changes
Other Business Changes
  • Restrictions on business airplanes and entertainment facilities
  • Extended amortization for business start-up or organizational costs
  • Increased withholding on supplemental wage payments > $1 million
other business changes cont
Other Business Changes (cont.)
  • Charitable contributions of property appraisal requirements
  • Clarification of FICA on options and stock option plans
  • Capital gain on sale of stock acquired from exercise of stock options to comply with Federal conflict of interest requirements
tax shelter changes
Tax Shelter Changes
  • Why?
  • New penalties
  • No statute of limitations on undisclosed reportable transactions
  • Tightens up on enforcement of existing penalties
  • Tightens up on practitioners, as well as taxpayers
individual changes
Individual Changes
  • Changes in Charitable Contributions of Property
  • Deduction for Sales Tax
changes in charitable contributions of property
Changes in Charitable Contributions of Property
  • Standards established for the contribution of intellectual property
  • Restrictions imposed on contributions of vehicles
  • Increased reporting for contributions of property
deduction for sales tax
Deduction for Sales Tax
  • Taxpayer can elect to claim deduction for state income taxes or deduction for state sales taxes
  • Choose between documented expenses or table amounts
  • Of particular interest to taxpayers in states with no income taxes
  • Effective for 2004 and 2005 returns
action points1
Action Points
  • Accumulate records now for large purchases
  • Where subject to sales and income taxes, consider combining large taxable purchase into a single year
  • Special rule for vehicle purchases
  • Watch out for AMT
political outlook post election
Political Outlook – Post Election
  • White House Tax Plans
  • Senate Finance Tax Agenda
under current law
Under Current Law

Trust Fund BabyWorking Couple

Wages-T $ -0- $ 65,000

Wages-S $ -0- $ 65,000

Dividends $ 65,000 $ -0-

Long-Term Gains $ 65,000 $ -0-

Itemized Deductions $ (30,000) $ (30,000)

Exemptions $ ( 6,000)$ (6,000)

Taxable Income $ 94,000$ 94,000

Federal Tax $ 8,300 $ 16,925

Payroll Taxes (ee & er) $ -0- $ 19,900

Total Taxes $ 8,300 $ 36,825

% of Total Income 6.3% 28.3%

white house plan
White House Plan
  • President hopes to have bipartisan advisory panel on tax reform by end of 2004
  • Tax proposals will be revenue neutral and promote economic growth and jobs
  • Looking to simplify existing system-current system is complicated
  • Make it more fair
  • Should the existing system be modified or replaced
  • Reduce administrative burdens on taxpayers
white house plan1
White House Plan
  • Retain the 15% rate for qualified dividends and long-term capital gains.
  • Make permanent the repeal of the Federal estate tax
  • Supports foreign tax reforms and tax breaks for manufacturers
  • Extend expiring middle-class tax breaks
white house plan cont
White House Plan (cont.)
  • Tax credit to help the uninsured buy health insurance
  • Credits for energy efficient homes
  • Expand incentives for college education
  • Preservation of mortgage and charitable deductions
senate finance tax agenda
Senate Finance Tax Agenda
  • Due to a GOP victory at the Polls, Senator Grassley expects to resume the chairmanship of the Senate Finance Committee
  • Extend “Tax Relief Legacy in 2005”
  • Make permanent previously enacted tax relief measures
    • Extend key tax breaks
    • College tuition deductibility
senate finance tax agenda cont
Senate Finance Tax Agenda (cont.)
  • Close loopholes
  • Adopt permanent interest rate for calculating pension liabilities
  • Enact Enron-inspired participant protections.
  • Make flexible spending accounts work efficiently
trivia question
Trivia Question

What is the estimated percentage of U.S. corporations that paid no federal taxes between 1996 and 2000?

  • 26%
  • 48%
  • 61%
  • 82%
highlights of the american jobs creation act of 2004

Highlights of the American Jobs Creation Act of 2004

Repeal of Exclusion for Extraterritorial Income

Phase-Out of the Extraterritorial Income Exclusion

Phase-In of the Deduction for Manufacturing/Production


Tax Reform & Simplification for U.S. Businesses

Incentive to Reinvest Foreign Earnings in U.S.

Foreign Tax Credit Reforms

Other Significant International Reforms

phase out of extraterritoral income exclusion eti

Phase-Out of Extraterritoral Income Exclusion (ETI)

Two year phase-out

‹ 2005 – 80%

‹ 2006 – 60%

‹ 2007 – no ETI benefit

Grandfather for transactions entered into it

‹ In the ordinary course of business

‹ Pursuant to a binding contract before 9/17/03

‹ Applies to leases, licenses and options

action points2

Action Points

Can export transactions be accelerated

into 2004?

Should associated expenses be deferred,

if possible?

Is the IC-DISC (Interest Charge Domestic

International Sales Corporation) an


manufacturing and production activities

Manufacturing and Production Activities

New deduction for domestic production

activity (IRC Section 199)

domestic production activity deduction

Domestic Production Activity Deduction

Lesser of a percentage of:

- Taxable income, or

- Qualified domestic production

activities income (QDPAI)

Not to exceed 50% of wages paid

what is qualified production activity income

What is Qualified Production Activity Income?

Income from certain domestic production



- Costs attributable to producing the


what is qualified production activity income cont

What is Qualified Production Activity Income? (cont.)

  • Any sale, exchanges or other disposition,
  • or any lease, rental or license, of qualifying
  • production property that was
  • manufactured, produced, grown or
  • extracted by the taxpayer in whole or in
  • significant part with the U.S.;

Taxpayer’s gross receipts derived from:

what is qualified production activity income cont1

What is Qualified Production Activity Income? (cont.)

2. Any sale, exchange or other disposition, or

any lease, rental or license, of qualified

films produced by the taxpayer;

3. Any sale, exchange or other disposition of

electricity, natural gas, or potable water

produced by the taxpayer in the U.S.;

what is qualified production activity income cont2

What is Qualified Production Activity Income? (cont.)

4. Construction activities performed in the

U.S.; or

5. Engineering or architecturalservices

performed in the U.S. for construction

projects located in the U.S.

what is qualified production activity income cont3

What is Qualified Production Activity Income? (cont.)


1. Food and beverages prepared at a retail


2. Transmission or distribution of electricity,

natural gas or potable water

3. Property leased, licensed or rented by the

taxpayer for use by any related person

deduction offers complexity
Deduction Offers Complexity

Related Persons

  • Control group, affiliated service group or entities under common control
  • Similar to rules under the ETI regime
deduction offers complexity cont
Deduction Offers Complexity (cont.)

Affiliated Groups

  • Members of an affiliated group (i.e., 50% ownership) are treated as a single corporation
deduction offers complexity cont1
Deduction Offers Complexity (cont.)

Pass-Through Entities

  • Deduction is available
  • Limitation determined at the shareholder or partner level
  • A shareholder or partner allocated W-2 wages equal to lesser of:

1. Person’s allocable share of the wages,

2. 2x QPAI allocated to that person

deduction offers complexity cont2
Deduction Offers Complexity (cont.)

Deduction Limited to Wages Paid

  • Wages determined on a calendar year basis
  • Creates incentive to obtain services through employees rather than independent contractors.
deduction offers complexity cont3
Deduction Offers Complexity (cont.)


  • “In whole or in significant part” within the U.S.
  • Does not include receipts from leasing, licensing or renting property for use by a related person. But, does include receipts from selling property to a related party.
deduction offers complexity cont4
Deduction Offers Complexity (cont.)


  • Not limited by the 2% AGI on miscellaneous itemized deductions
  • Subject to Section 469, passive activity loss limitation
allowable deduction

Allowable Deduction

Lesser of % of T. Inc. or QDPAI

Not to exceed 50 % of wages paid

Calculated on a controlled group basis

Passed through to sole proprietors and

owners of partnerships and S corporations

Deduction allowed against AMT

action points3

Action Points

Do you conduct a Domestic

Manufacturing Activity?

Do your accounting systems provide

sufficient information to measure direct

and allocable indirect costs?

Can and should the business be

restructured to maximize this deduction?

incentives to reinvest foreign earnings in u s

Incentives to Reinvest Foreign Earnings in U.S.

General rule: a USC may elect to claim an

85% DRD on repatriated earnings received

from a CFC during the election period

- Base: dividends qualify for DRD to extent >

avg. actual and deemed dividends in 3 of last

5 years (highest and lowest years


incentives to reinvest foreign earnings in u s cont

Incentives to Reinvest Foreign Earnings in U.S. (cont.)

Ceiling - Dividends eligible for DRD may not


‹ $500 million;

‹ APB 23 amount in financials certified before

7/1/03; or

‹ If no APB 23 amount in financials but tax

liability on APB 23 amount disclosed-the

grossed up amount using a 35% tax rate

incentives to reinvest foreign earnings in u s1

Incentives to Reinvest Foreign Earnings in U.S.

Ceiling Reduced: By increase in related party

indebtedness on part of CFC between 10/3/04

and close of taxable year DRD claimed

‹ All CFC’s of corporate “US Shareholder”

treated as one CFC

incentives to reinvest foreign earnings in u s cont1

Incentives to Reinvest Foreign Earnings in U.S. (cont.)

Reinvestment Plan: Dividends must be invested

in the U.S. pursuant to a plan approved by DC’s

president or CEO and BOD to qualify for DRD

‹ Permissible investments (without limitation)


- Worker hiring and training;

- Infrastructure;

- Research & development;

- Capital investments; and

- Financial stabilization for job retention and

creation purposes

‹ Executive compensation is not a permissible investment

incentives to reinvest foreign earnings in u s cont2
Incentives to Reinvest Foreign Earnings in U.S. (cont.)
  • Offsets:

‹ Dividends not covered by DRD (15%)

cannot be shielded from tax by –

- Expenses

- NOL’s

‹ And the tax thereon cannot be offset by

credits other than FTC and AMT


incentives to reinvest foreign earnings in u s cont3
Incentives to Reinvest Foreign Earnings in U.S. (cont.)
  • FTC: Foreign taxes attributable to Dividends shielded from tax by DRD are lost; but DC may specifically identify these Dividends – making the limitation meaningless in many situations
incentives to reinvest foreign earnings in u s cont4
Incentives to Reinvest Foreign Earnings in U.S. (cont.)
  • Disallowance of Deductions: Expenses allocated and apportioned to the DRD amount are not deductible

‹ But floor colloquies indicate the rule

applies solely to expenses directly related

to the DRD amount

  • Effective Date: DRD available only for –

‹ First taxable year beginning after 10/21/04; or

‹ At DC’s election, the last taxable year beginning

before the date of enactment

foreign tax credit reforms

Foreign Tax Credit Reforms

Carryforward period extended to 10 years

(effective: taxable year ending after 10/22/04)

Carryback period reduced to 1 year (effective:

taxable years arising in taxable years beginning

after 10/22/04)

FTC baskets: reduced from 9 to 2 (effective:

years after 12/31/06)

foreign tax credit reforms cont

Foreign Tax Credit Reforms (cont.)

Recapture of OFL extended to dispositions of stock

of a CFC where taxpayer owned > 50% of CFC’s


Repeal of 90% limitation on usage of AMT foreign

tax credit (effective: tax years beginning after


Alternative method, elect by 12/31/08, to allocate

interest expense on a worldwide affiliated group


other significant international reforms

Other Significant International Reforms

Elimination of anti-deferral regimes of Foreign Personal

holding company and foreign investment company

(effective: tax years beginning after 12/31/04)

Repeal withholding tax on dividends from certain foreign

corporations with ECI > 25% or gross income

(effective: payments after 12/31/04)

Two new exceptions to definition of U.S. property under

Sec. 956 re: securities.

other significant international reforms cont

Other Significant International Reforms (cont.)

Definition of FPHCI concerning commodity transactions

and sale of partnership interests

Foreign tax credit treatment of royalty payments and

payments for the sale of IP

Changes in rules governing former citizens or residents

who relinquish citizenship or terminate residency status

environmental remediation costs
Environmental Remediation Costs
  • Code Section 198 extended through 2005
  • Is extended for expenditures paid or incurred after 12/31/2003?
  • Allows an expensing of qualified remediation expenditures at a qualified contamination site (“brownfields”)
depreciation of leasehold improvements
Depreciation of Leasehold Improvements
  • Current law provides for straight-line 39 years for LHI that are non-residential real property
  • “Qualified LHI” placed in service before 1/1/2005 are eligible for 50% bonus depreciation
ajca changes
AJCA Changes
  • Provides for a 15 year straight-line recovery period
  • Applies to property placed in service after 10/22/2004 and before 1/1/2006
  • If a lessor makes a qualified LHI subsequent owner’s who purchase are not allowed the 15 year provisions
qualified leasehold property
Qualified Leasehold Property
  • Improvements to the interior of a commercial building if:
    • Improvement is made pursuant to a lease
    • Portion of the building is to be occupied by the lessee or sub-lessee
    • Improvement is placed in service more than 3 years after the date the building was first placed in service
what s not qualified
What’s Not Qualified
  • Enlargement of the building
  • Elevator or escalator
  • Structural component benefiting a common area
  • Internal Framework of the building
partnership changes
Partnership Changes
  • Cancellation of indebtedness on partnership debt to equity conversion
  • Treatment of built-in losses and partnership basis adjustments
debt to equity conversion
Debt to Equity Conversion
  • Partnership exchanges a capital or profits interest to creditor in satisfaction of debt
  • Partnership recognizes cancellation of indebtedness income in the amount that would be realized if the debt were satisfied with money equal to the FMV of the partnership interest
  • No income to extent FMV of partnership interest=amount of the debt
allocation of income
Allocation of Income
  • Income is allocated to partners who held an interest immediately prior to satisfaction of the debt
  • Effective for cancellations occurring on or after 10/22/2004
  • Will cause adverse tax consequences in real estate debt workouts or restructures
built in losses basis adjustments
Built-in Losses & Basis Adjustments
  • AJCA Changes
    • Built-in loss property now only taken into account by contributing partners
    • If contributing partner’s interest is sold or liquidated the partnership’s basis is based upon FMV on date contributed and built-in loss is eliminated
    • Effective for contributions after 10/22/2004
built in losses basis adjustments cont
Built-in Losses & Basis Adjustments (cont.)
  • AJCA provides for mandatory basis adjustments upon sale or liquidation of an interest with substantial built-in losses
  • Elective under current law per Section 754
  • Substantial loss=in excess of $250,000
built in losses basis adjustments cont1
Built-in Losses & Basis Adjustments (cont.)
  • Applies to liquidations/transfers after 10/22/2004
  • Basis reductions under 734(b)(2) (liquidations) cannot be allocated to basis of corporate stock of a partner
  • Allocated to other assets but not below zero
  • Any excess=gain to the partnership
individual changes1
Individual Changes
  • Property received in a (§1031) like-kind exchange
  • Converted to use as a principal residence
  • 5 year rule-must hold 5 years after 1031 exchange
  • Will not qualify for gain exclusion on personal residences
  • Effective for sales or exchanges of residences after 10/22/2004
real estate investment trusts
Real Estate Investment Trusts
  • Expansion of straight debt safe harbor
  • Relief from Asset Test Violations
  • Modifications of REIT prohibited transaction safe harbor for Timber REIT’S
  • Modification of FIRPTA treatment for foreign investors
  • Other technical modifications
exchange of undivided fractional interests ufi s
Exchange of Undivided Fractional Interests (UFI’s)
  • What is the game?
  • Partnership owns property & want to dispose of
  • Some partners want gain some want deferral
  • Partnership interests do not qualify as §1031 (Like-kind) property


exchange of undivided fractional interests con t
Exchange of Undivided Fractional Interests (Con’t)
  • Plan ahead
  • Distribute Property out to partners as UFIs (Tenants-in-Common)
  • Hold property for a period of time
  • Enter into sales contract with purchaser to sell all UFIs
  • Each owner than can take cash and pay tax or have cash from buyer go to a qualified intermediary and effectuate a §1031 exchange
  • In Rev Proc 2000-46 IRS would not rule on these transactions
revenue procedure 2002 22
Revenue Procedure 2002-22
  • Rev. Proc allows 15 conditions where the IRS will consider UFI’s in Real Property not to be a partnership interest
  • Co-ownership in real property under local law (legal costs)
  • Not more than 35 co-owners
revenue procedure 2002 22 cont
Revenue Procedure 2002-22 (cont.)
  • Separate loans for each co-owner (Banks hate this)
  • Co-owners have right to manage property or hire a property manager if approved annually
  • Each owner has right to sell or transfer co-interest
  • These conditions are not all inclusive
practical considerations of ruling 2002 22
Practical Considerations of Ruling 2002-22
  • Should hold at least two months before sell UFI’s
  • Watch Court Holding if negotiations have proceeded to such a point before distribution – i.e. advanced planning
  • Generally these UFI’s are used more for the reinvestment of §1031 proceeds-But be careful you will end up owning property with an inflated purchase price
  • If this is the case take your 15% tax & run
revenue ruling 2004 86
Revenue Ruling 2004-86
  • Will a Delaware Statutory Trust (DST) help solve problem for banks and legal issues of owning 35 UFI’s
  • DST in Ruling treated as a grantor trust, but the trustee had only limited powers
  • If trustee had additional powers = business entity and not a grantor trust & UFI concept doesn’t work
  • Land exchanged for interest in grantor trust=considered an exchange
revenue ruling 2004 86 cont
Revenue Ruling 2004-86 (cont.)
  • Additional powers will cause problems and deem treatment as one entity:
    • Dispose of contributed property and acquire new property
    • Renegotiate lease with tenant
    • Enter into new leases with tenant
    • Renegotiate obligation used to purchase property
    • Refinance obligation or borrow to purchase property
    • Invest cash
    • Make structural modifications to property
bramblett transactions
Bramblett Transactions
  • Partnership or S-Corporation owns property with large inherent capital gain
  • Taxpayer wants to develop property and sell “lots”
  • which would convert all inherent gain into ordinary income


bramblett transactions cont
Bramblett Transactions (cont.)
  • Consider selling to a related entity – (needs to be a corporation
  • Sell on the installment method – Old owner entity recognizes capital gain, therefore inherent gain is taxed at 15% - only gain related to development is tax as a developer
bramblett transactions cont1
Bramblett Transactions (cont.)


  • Appraisal
  • Note with fixed payment terms, reasonable rate of interest & proper form. Down payment should be a substantial amount and payments cannot be tied to sales in Development entity
  • Development Entity has own financing and capital
bramblett transactions cont2
Bramblett Transactions (cont.)
  • Separate business cards and helpfully new employee or two
  • Helpful if a different ownership % in ownership of Development entity.
oil gas update
Oil & Gas Update
  • Update of Recent Law Changes
  • Update of Oil & Gas Industry in Denver
  • Is Energy Really That Expensive Today?
  • What is Driving Energy Prices?
tax law update
Tax Law Update
  • Credit for Production from Marginal Oil & Gas Production
  • Suspension of 100% Net Income Limitation on Percentage Depletion for Oil & Gas from Marginal Production
tax law update cont
Tax Law Update (cont.)
  • Phase-Down of the Electric Vehicle Credit is Partially Repealed
  • Credit for Electricity Produced from Wind Energy, Closed-Loop Biomass and Poultry Waste Facilities is extended until 2006
what s going on in denver
What’s Going on in Denver
  • Seen the Sale/Merger of Several Large Independent E&P Companies
  • Several of the Management Teams from these Companies are Forming new Companies
what s going on in denver cont
What’s Going on in Denver(cont.)
  • These Companies will be Private, Niche Oil & Gas Companies
  • Opportunity to Revitalize Denver as an Energy Growth Hub
is u s energy still cheap
Is U.S. Energy Still Cheap?

Price per Barrel of Household Items:

  • Regular Unleaded Gas………….. $77.28
  • Coca Cola……………….........….$102.59
  • Bottled Water……………….....…$126.18
  • Milk……………………………….. $183.96
  • Budweiser……………………...…$372.59
  • Jack Daniel’s……….................$4,460.17
  • Chanel #5 Parfum …….…$1,344,000.00
what is driving energy prices
What is Driving Energy Prices?
  • China – Chinese Economy is White Hot
  • Instability Throughout the Oil Producing World, Not Just the Middle East
  • Supply and Demand Reality Check