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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 Working Families Tax.

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Presentation on theme: "New Tax Laws Real Opportunities for Tax Savings. Two New Acts Working Families Tax Relief Act-signed by President Bush 10/4/2004 Working Families Tax."— Presentation transcript:

1 New Tax Laws Real Opportunities for Tax Savings

2 Two New Acts Working Families Tax Relief Act-signed by President Bush 10/4/2004 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 American Jobs Creation Act of 2004-signed by President Bush 10/22/2004

3 Working Families Tax Relief Act of 2004 Extensions of benefits for individuals Extensions of benefits for individuals Extensions of benefits for corporations Extensions of benefits for corporations Uniform definition of a child Uniform definition of a child Technical corrections Technical corrections

4 Extensions of Benefits for Individuals Child tax credit Child tax credit Marriage penalty relief Marriage penalty relief Increase AMT exemption Increase AMT exemption Use of personal credits against AMT Use of personal credits against AMT Extension of educator deduction Extension of educator deduction

5 Extension of Benefits for Businesses Research credit extension Research credit extension Expensing of environmental remediation costs Expensing of environmental remediation costs

6 American Jobs Creation Act of 2004 General Business Considerations General Business Considerations Tax Shelter Changes Tax Shelter Changes Individual Changes Individual Changes Manufacturing and Production Manufacturing and Production International Tax Changes International Tax Changes

7 General Business Considerations S Corporation changes S Corporation changes Deferred Compensation Deferred Compensation Cost Recovery Changes Cost Recovery Changes Other Business Items Other Business Items

8 S Corporation Changes Number of allowable shareholders increases to 100 (up from 75) Number of allowable shareholders increases to 100 (up from 75) Family members count as a single shareholder Family members count as a single shareholder Other changes: Other changes: –ESBT changes –Transfers of suspended losses to spouse or former spouse –Inadvertent invalid QSub election relief

9 Deferred Compensation Why change? Why change? New, rigorous standards for when compensation can be deferred from tax New, rigorous standards for when compensation can be deferred from tax What kind of plans are affected? What kind of plans are affected? Key changes Key changes –Timing of deferral election –Distribution of amounts deferred –Added anti-abuse provisions What is the affect of failing to comply? What is the affect of failing to comply?

10 Action Points Every deferred comp plan needs to be reviewed Every deferred comp plan needs to be reviewed Don’t rush Don’t rush Evaluate current election for 2005 deferrals Evaluate current election for 2005 deferrals Advise participants about access to funds Advise participants about access to funds

11 Cost Recovery Changes $102,000 immediate write-off of §179 property is extended for two years $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 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 Depreciable life for leasehold improvements and certain restaurant property reduced from 39 to 15 years

12 Other Business Changes Restrictions on business airplanes and entertainment facilities Restrictions on business airplanes and entertainment facilities Extended amortization for business start-up or organizational costs Extended amortization for business start-up or organizational costs Increased withholding on supplemental wage payments > $1 million Increased withholding on supplemental wage payments > $1 million

13 Other Business Changes (cont.) Charitable contributions of property appraisal requirements Charitable contributions of property appraisal requirements Clarification of FICA on options and stock option plans 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 Capital gain on sale of stock acquired from exercise of stock options to comply with Federal conflict of interest requirements

14 Tax Shelter Changes Why? Why? New penalties New penalties No statute of limitations on undisclosed reportable transactions No statute of limitations on undisclosed reportable transactions Tightens up on enforcement of existing penalties Tightens up on enforcement of existing penalties Tightens up on practitioners, as well as taxpayers Tightens up on practitioners, as well as taxpayers

15 Individual Changes Changes in Charitable Contributions of Property Changes in Charitable Contributions of Property Deduction for Sales Tax Deduction for Sales Tax

16 Changes in Charitable Contributions of Property Standards established for the contribution of intellectual property Standards established for the contribution of intellectual property Restrictions imposed on contributions of vehicles Restrictions imposed on contributions of vehicles Increased reporting for contributions of property Increased reporting for contributions of property

17 Deduction for Sales Tax Taxpayer can elect to claim deduction for state income taxes or deduction for state sales taxes Taxpayer can elect to claim deduction for state income taxes or deduction for state sales taxes Choose between documented expenses or table amounts Choose between documented expenses or table amounts Of particular interest to taxpayers in states with no income taxes Of particular interest to taxpayers in states with no income taxes Effective for 2004 and 2005 returns Effective for 2004 and 2005 returns

18 Action Points Accumulate records now for large purchases Accumulate records now for large purchases Where subject to sales and income taxes, consider combining large taxable purchase into a single year Where subject to sales and income taxes, consider combining large taxable purchase into a single year Special rule for vehicle purchases Special rule for vehicle purchases Watch out for AMT Watch out for AMT

19 Political Outlook – Post Election White House Tax Plans White House Tax Plans Senate Finance Tax Agenda Senate Finance Tax Agenda

20 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%

21 White House Plan President hopes to have bipartisan advisory panel on tax reform by end of 2004 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 Tax proposals will be revenue neutral and promote economic growth and jobs Looking to simplify existing system-current system is complicated Looking to simplify existing system-current system is complicated Make it more fair Make it more fair Should the existing system be modified or replaced Should the existing system be modified or replaced Reduce administrative burdens on taxpayers Reduce administrative burdens on taxpayers

22 White House Plan Retain the 15% rate for qualified dividends and long-term capital gains. Retain the 15% rate for qualified dividends and long-term capital gains. Make permanent the repeal of the Federal estate tax Make permanent the repeal of the Federal estate tax Supports foreign tax reforms and tax breaks for manufacturers Supports foreign tax reforms and tax breaks for manufacturers Extend expiring middle-class tax breaks Extend expiring middle-class tax breaks

23 White House Plan (cont.) Tax credit to help the uninsured buy health insurance Tax credit to help the uninsured buy health insurance Credits for energy efficient homes Credits for energy efficient homes Expand incentives for college education Expand incentives for college education Preservation of mortgage and charitable deductions Preservation of mortgage and charitable deductions

24 Senate Finance Tax Agenda Due to a GOP victory at the Polls, Senator Grassley expects to resume the chairmanship of the Senate Finance Committee 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” Extend “Tax Relief Legacy in 2005” Make permanent previously enacted tax relief measures Make permanent previously enacted tax relief measures –Extend key tax breaks –College tuition deductibility

25 Senate Finance Tax Agenda (cont.) Close loopholes Close loopholes Adopt permanent interest rate for calculating pension liabilities Adopt permanent interest rate for calculating pension liabilities Enact Enron-inspired participant protections. Enact Enron-inspired participant protections. Make flexible spending accounts work efficiently Make flexible spending accounts work efficiently

26 QUESTIONS

27 International Tax Provisions

28 Trivia Question What is the estimated percentage of U.S. corporations that paid no federal taxes between 1996 and 2000? What is the estimated percentage of U.S. corporations that paid no federal taxes between 1996 and 2000? 26% 48% 61% 82%

29 Highlights of the American Jobs Creation Act of 2004 Repeal of Exclusion for Extraterritorial Income Phase-Out of the Extraterritorial Income Exclusion Phase-Out of the Extraterritorial Income Exclusion Phase-In of the Deduction for Manufacturing/Production Phase-In of the Deduction for Manufacturing/Production Activities Activities Tax Reform & Simplification for U.S. Businesses Incentive to Reinvest Foreign Earnings in U.S. Incentive to Reinvest Foreign Earnings in U.S. Foreign Tax Credit Reforms Foreign Tax Credit Reforms Other Significant International Reforms Other Significant International Reforms

30 Repeal of the Extraterritorial Income Exclusion

31 Two year phase-out Two year phase-out ‹ 2005 – 80% ‹ 2005 – 80% ‹ 2006 – 60% ‹ 2006 – 60% ‹ 2007 – no ETI benefit ‹ 2007 – no ETI benefit Grandfather for transactions entered into it Grandfather for transactions entered into it ‹ In the ordinary course of business ‹ In the ordinary course of business ‹ Pursuant to a binding contract before 9/17/03 ‹ Pursuant to a binding contract before 9/17/03 ‹ Applies to leases, licenses and options ‹ Applies to leases, licenses and options Phase-Out of Extraterritoral Income Exclusion (ETI)

32 Can export transactions be accelerated Can export transactions be accelerated into 2004? into 2004? Should associated expenses be deferred, Should associated expenses be deferred, if possible? if possible? Is the IC-DISC (Interest Charge Domestic Is the IC-DISC (Interest Charge Domestic International Sales Corporation) an International Sales Corporation) an alternative? alternative? Action Points

33 New deduction for domestic production New deduction for domestic production activity (IRC Section 199) activity (IRC Section 199) Manufacturing and Production Activities

34 Lesser of a percentage of: Lesser of a percentage of: - Taxable income, or - Qualified domestic production activities income (QDPAI) activities income (QDPAI) Not to exceed 50% of wages paid Not to exceed 50% of wages paid Domestic Production Activity Deduction

35 Phase-In of Deduction Taxable Year Beginning In: Percentage 2005 – % 2007 – % 2010 and later 9%

36 Income from certain domestic production Income from certain domestic production activities activities Less: Less: - Costs attributable to producing the income income What is Qualified Production Activity Income?

37 What is Qualified Production Activity Income? (cont.) Taxpayer’s gross receipts derived from: Taxpayer’s gross receipts derived from: 1. 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.;

38 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.;

39 What is Qualified Production Activity Income? (cont.) 4. Construction activities performed in the U.S.; or 5. Engineering or architectural services performed in the U.S. for construction projects located in the U.S.

40 What is Qualified Production Activity Income? (cont.) Exclusions: Exclusions: 1. Food and beverages prepared at a retail 1. Food and beverages prepared at a retail establishment establishment 2. Transmission or distribution of electricity, natural gas or potable water natural gas or potable water 3. Property leased, licensed or rented by the taxpayer for use by any related person taxpayer for use by any related person

41 Deduction Offers Complexity Related Persons Control group, affiliated service group or entities under common control Control group, affiliated service group or entities under common control Similar to rules under the ETI regime Similar to rules under the ETI regime

42 Deduction Offers Complexity (cont.) Affiliated Groups Members of an affiliated group (i.e., 50% ownership) are treated as a single corporation Members of an affiliated group (i.e., 50% ownership) are treated as a single corporation

43 Deduction Offers Complexity (cont.) Pass-Through Entities Deduction is available Deduction is available Limitation determined at the shareholder or partner level Limitation determined at the shareholder or partner level A shareholder or partner allocated W-2 wages equal to lesser of: 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

44 Deduction Offers Complexity (cont.) Deduction Limited to Wages Paid Wages determined on a calendar year basis Wages determined on a calendar year basis Creates incentive to obtain services through employees rather than independent contractors. Creates incentive to obtain services through employees rather than independent contractors.

45 Deduction Offers Complexity (cont.) DPGR’s “In whole or in significant part” within the U.S. “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. 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.

46 Deduction Offers Complexity (cont.) Individuals Not limited by the 2% AGI on miscellaneous itemized deductions Not limited by the 2% AGI on miscellaneous itemized deductions Subject to Section 469, passive activity loss limitation Subject to Section 469, passive activity loss limitation

47 Lesser of % of T. Inc. or QDPAI Lesser of % of T. Inc. or QDPAI Not to exceed 50 % of wages paid Not to exceed 50 % of wages paid Calculated on a controlled group basis Calculated on a controlled group basis Passed through to sole proprietors and Passed through to sole proprietors and owners of partnerships and S corporations owners of partnerships and S corporations Deduction allowed against AMT Deduction allowed against AMT Allowable Deduction

48 Action Points Do you conduct a Domestic Do you conduct a Domestic Manufacturing Activity? Manufacturing Activity? Do your accounting systems provide Do your accounting systems provide sufficient information to measure direct sufficient information to measure direct and allocable indirect costs? and allocable indirect costs? Can and should the business be Can and should the business be restructured to maximize this deduction? restructured to maximize this deduction?

49 Tax Reform & Simplification for U.S. Businesses

50 Incentives to Reinvest Foreign Earnings in U.S. General rule: a USC may elect to claim an General rule: a USC may elect to claim an 85% DRD on repatriated earnings received 85% DRD on repatriated earnings received from a CFC during the election period from a CFC during the election period - Base: dividends qualify for DRD to extent > - Base: dividends qualify for DRD to extent > avg. actual and deemed dividends in 3 of last avg. actual and deemed dividends in 3 of last 5 years (highest and lowest years 5 years (highest and lowest years disregarded) disregarded)

51 Incentives to Reinvest Foreign Earnings in U.S. (cont.) Ceiling - Dividends eligible for DRD may not Ceiling - Dividends eligible for DRD may not exceed: exceed: ‹ $500 million; ‹ $500 million; ‹ APB 23 amount in financials certified before ‹ APB 23 amount in financials certified before 7/1/03; or 7/1/03; or ‹ If no APB 23 amount in financials but tax ‹ If no APB 23 amount in financials but tax liability on APB 23 amount disclosed-the liability on APB 23 amount disclosed-the grossed up amount using a 35% tax rate grossed up amount using a 35% tax rate

52 Incentives to Reinvest Foreign Earnings in U.S. Ceiling Reduced: By increase in related party Ceiling Reduced: By increase in related party indebtedness on part of CFC between 10/3/04 indebtedness on part of CFC between 10/3/04 and close of taxable year DRD claimed and close of taxable year DRD claimed ‹ All CFC’s of corporate “US Shareholder” ‹ All CFC’s of corporate “US Shareholder” treated as one CFC treated as one CFC

53 Incentives to Reinvest Foreign Earnings in U.S. (cont.) Reinvestment Plan: Dividends must be invested Reinvestment Plan: Dividends must be invested in the U.S. pursuant to a plan approved by DC’s in the U.S. pursuant to a plan approved by DC’s president or CEO and BOD to qualify for DRD president or CEO and BOD to qualify for DRD ‹ Permissible investments (without limitation) ‹ Permissible investments (without limitation) include: include: - Worker hiring and training; - Worker hiring and training; - Infrastructure; - Infrastructure; - Research & development; - Research & development; - Capital investments; and - Capital investments; and - Financial stabilization for job retention and - Financial stabilization for job retention and creation purposes creation purposes ‹ Executive compensation is not a permissible investment ‹ Executive compensation is not a permissible investment

54 Offsets: Offsets: ‹ Dividends not covered by DRD (15%) ‹ Dividends not covered by DRD (15%) cannot be shielded from tax by – cannot be shielded from tax by – - Expenses - Expenses - NOL’s - NOL’s ‹ And the tax thereon cannot be offset by ‹ And the tax thereon cannot be offset by credits other than FTC and AMT credits other than FTC and AMT credits credits Incentives to Reinvest Foreign Earnings in U.S. (cont.)

55 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 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. (cont.)

56 Disallowance of Deductions: Expenses allocated and apportioned to the DRD amount are not deductible Disallowance of Deductions: Expenses allocated and apportioned to the DRD amount are not deductible ‹ But floor colloquies indicate the rule ‹ But floor colloquies indicate the rule applies solely to expenses directly related applies solely to expenses directly related to the DRD amount to the DRD amount Effective Date: DRD available only for – Effective Date: DRD available only for – ‹ First taxable year beginning after 10/21/04; or ‹ First taxable year beginning after 10/21/04; or ‹ At DC’s election, the last taxable year beginning ‹ At DC’s election, the last taxable year beginning before the date of enactment before the date of enactment Incentives to Reinvest Foreign Earnings in U.S. (cont.)

57 Foreign Tax Credit Reforms Carryforward period extended to 10 years Carryforward period extended to 10 years (effective: taxable year ending after 10/22/04) (effective: taxable year ending after 10/22/04) Carryback period reduced to 1 year (effective: Carryback period reduced to 1 year (effective: taxable years arising in taxable years beginning taxable years arising in taxable years beginning after 10/22/04) after 10/22/04) FTC baskets: reduced from 9 to 2 (effective: FTC baskets: reduced from 9 to 2 (effective: years after 12/31/06) years after 12/31/06)

58 Foreign Tax Credit Reforms (cont.) Recapture of OFL extended to dispositions of stock Recapture of OFL extended to dispositions of stock of a CFC where taxpayer owned > 50% of CFC’s of a CFC where taxpayer owned > 50% of CFC’s stock stock Repeal of 90% limitation on usage of AMT foreign Repeal of 90% limitation on usage of AMT foreign tax credit (effective: tax years beginning after tax credit (effective: tax years beginning after 12/31/04) 12/31/04) Alternative method, elect by 12/31/08, to allocate Alternative method, elect by 12/31/08, to allocate interest expense on a worldwide affiliated group interest expense on a worldwide affiliated group basis basis

59 Other Significant International Reforms Elimination of anti-deferral regimes of Foreign Personal Elimination of anti-deferral regimes of Foreign Personal holding company and foreign investment company holding company and foreign investment company (effective: tax years beginning after 12/31/04) (effective: tax years beginning after 12/31/04) Repeal withholding tax on dividends from certain foreign Repeal withholding tax on dividends from certain foreign corporations with ECI > 25% or gross income corporations with ECI > 25% or gross income (effective: payments after 12/31/04) (effective: payments after 12/31/04) Two new exceptions to definition of U.S. property under Two new exceptions to definition of U.S. property under Sec. 956 re: securities. Sec. 956 re: securities.

60 Other Significant International Reforms (cont.) Definition of FPHCI concerning commodity transactions Definition of FPHCI concerning commodity transactions and sale of partnership interests and sale of partnership interests Foreign tax credit treatment of royalty payments and Foreign tax credit treatment of royalty payments and payments for the sale of IP payments for the sale of IP Changes in rules governing former citizens or residents Changes in rules governing former citizens or residents who relinquish citizenship or terminate residency status who relinquish citizenship or terminate residency status

61 Real Estate

62 Environmental Remediation Costs Code Section 198 extended through 2005 Code Section 198 extended through 2005 Is extended for expenditures paid or incurred after 12/31/2003? Is extended for expenditures paid or incurred after 12/31/2003? Allows an expensing of qualified remediation expenditures at a qualified contamination site (“brownfields”) Allows an expensing of qualified remediation expenditures at a qualified contamination site (“brownfields”)

63 Depreciation of Leasehold Improvements Current law provides for straight-line 39 years for LHI that are non-residential real property 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 “Qualified LHI” placed in service before 1/1/2005 are eligible for 50% bonus depreciation

64 AJCA Changes Provides for a 15 year straight-line recovery period Provides for a 15 year straight-line recovery period Applies to property placed in service after 10/22/2004 and before 1/1/2006 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 If a lessor makes a qualified LHI subsequent owner’s who purchase are not allowed the 15 year provisions

65 Qualified Leasehold Property Improvements to the interior of a commercial building if: 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

66 What’s Not Qualified Enlargement of the building Enlargement of the building Elevator or escalator Elevator or escalator Structural component benefiting a common area Structural component benefiting a common area Internal Framework of the building Internal Framework of the building

67 Partnership Changes Cancellation of indebtedness on partnership debt to equity conversion Cancellation of indebtedness on partnership debt to equity conversion Treatment of built-in losses and partnership basis adjustments Treatment of built-in losses and partnership basis adjustments

68 Debt to Equity Conversion Partnership exchanges a capital or profits interest to creditor in satisfaction of debt 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 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 No income to extent FMV of partnership interest=amount of the debt

69 Allocation of Income Income is allocated to partners who held an interest immediately prior to satisfaction of the debt 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 Effective for cancellations occurring on or after 10/22/2004 Will cause adverse tax consequences in real estate debt workouts or restructures Will cause adverse tax consequences in real estate debt workouts or restructures

70 Built-in Losses & Basis Adjustments AJCA Changes 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

71 Built-in Losses & Basis Adjustments (cont.) AJCA provides for mandatory basis adjustments upon sale or liquidation of an interest with substantial built-in losses 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 Elective under current law per Section 754 Substantial loss=in excess of $250,000 Substantial loss=in excess of $250,000

72 Built-in Losses & Basis Adjustments (cont.) Applies to liquidations/transfers after 10/22/2004 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 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 Allocated to other assets but not below zero Any excess=gain to the partnership Any excess=gain to the partnership

73 Individual Changes Property received in a (§1031) like-kind exchange Property received in a (§1031) like-kind exchange Converted to use as a principal residence Converted to use as a principal residence 5 year rule-must hold 5 years after 1031 exchange 5 year rule-must hold 5 years after 1031 exchange Will not qualify for gain exclusion on personal residences Will not qualify for gain exclusion on personal residences Effective for sales or exchanges of residences after 10/22/2004 Effective for sales or exchanges of residences after 10/22/2004

74 Real Estate Investment Trusts Expansion of straight debt safe harbor Expansion of straight debt safe harbor Relief from Asset Test Violations Relief from Asset Test Violations Modifications of REIT prohibited transaction safe harbor for Timber REIT’S Modifications of REIT prohibited transaction safe harbor for Timber REIT’S Modification of FIRPTA treatment for foreign investors Modification of FIRPTA treatment for foreign investors Other technical modifications Other technical modifications

75 Exchange of Undivided Fractional Interests (UFI’s) What is the game? What is the game? Partnership owns property & want to dispose of Partnership owns property & want to dispose of Some partners want gain some want deferral Some partners want gain some want deferral Partnership interests do not qualify as §1031 (Like-kind) property Partnership interests do not qualify as §1031 (Like-kind) property WHAT DO YOU DO? WHAT DO YOU DO?

76 Exchange of Undivided Fractional Interests (Con’t) Plan ahead Plan ahead Distribute Property out to partners as UFIs (Tenants-in-Common) Distribute Property out to partners as UFIs (Tenants-in-Common) Hold property for a period of time Hold property for a period of time Enter into sales contract with purchaser to sell all UFIs 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 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 IRS would not rule on these transactions In Rev Proc IRS would not rule on these transactions

77 Revenue Procedure  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

78 Revenue Procedure (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

79 Practical Considerations of Ruling Should hold at least two months before sell UFI’s 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 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 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 If this is the case take your 15% tax & run

80 Revenue Ruling Will a Delaware Statutory Trust (DST) help solve problem for banks and legal issues of owning 35 UFI’s 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 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 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 Land exchanged for interest in grantor trust=considered an exchange

81 Revenue Ruling (cont.) Additional powers will cause problems and deem treatment as one entity: 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

82 Bramblett Transactions Partnership or S-Corporation owns property with large inherent capital gain Partnership or S-Corporation owns property with large inherent capital gain Taxpayer wants to develop property and sell “lots” Taxpayer wants to develop property and sell “lots” which would convert all inherent gain into ordinary income which would convert all inherent gain into ordinary income WHAT DO YOU DO? WHAT DO YOU DO?

83 Bramblett Transactions (cont.) Consider selling to a related entity – (needs to be a corporation 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 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

84 Bramblett Transactions (cont.) KEYS: Appraisal 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 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 Development Entity has own financing and capital

85 Bramblett Transactions (cont.) Separate business cards and helpfully new employee or two Separate business cards and helpfully new employee or two Helpful if a different ownership % in ownership of Development entity. Helpful if a different ownership % in ownership of Development entity.

86 THE ENERGY INDUSTRY

87 Oil & Gas Update Update of Recent Law Changes Update of Recent Law Changes Update of Oil & Gas Industry in Denver Update of Oil & Gas Industry in Denver Is Energy Really That Expensive Today? Is Energy Really That Expensive Today? What is Driving Energy Prices? What is Driving Energy Prices?

88 Tax Law Update Credit for Production from Marginal Oil & Gas Production Credit for Production from Marginal Oil & Gas Production Suspension of 100% Net Income Limitation on Percentage Depletion for Oil & Gas from Marginal Production Suspension of 100% Net Income Limitation on Percentage Depletion for Oil & Gas from Marginal Production

89 Tax Law Update (cont.) Phase-Down of the Electric Vehicle Credit is Partially Repealed 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 Credit for Electricity Produced from Wind Energy, Closed-Loop Biomass and Poultry Waste Facilities is extended until 2006

90 What’s Going on in Denver Seen the Sale/Merger of Several Large Independent E&P Companies Seen the Sale/Merger of Several Large Independent E&P Companies Several of the Management Teams from these Companies are Forming new Companies Several of the Management Teams from these Companies are Forming new Companies

91 What’s Going on in Denver (cont.) These Companies will be Private, Niche Oil & Gas Companies These Companies will be Private, Niche Oil & Gas Companies Opportunity to Revitalize Denver as an Energy Growth Hub Opportunity to Revitalize Denver as an Energy Growth Hub

92 Is U.S. Energy Still Cheap? Price per Barrel of Household Items: Regular Unleaded Gas………….. $77.28 Regular Unleaded Gas………….. $77.28 Coca Cola……………… ….$ Coca Cola……………… ….$ Bottled Water……………….....…$ Bottled Water……………….....…$ Milk……………………………….. $ Milk……………………………….. $ Budweiser……………………...…$ Budweiser……………………...…$ Jack Daniel’s……… $4, Jack Daniel’s……… $4, Chanel #5 Parfum …….…$1,344, Chanel #5 Parfum …….…$1,344,000.00

93 What is Driving Energy Prices? China – Chinese Economy is White Hot China – Chinese Economy is White Hot Instability Throughout the Oil Producing World, Not Just the Middle East Instability Throughout the Oil Producing World, Not Just the Middle East Supply and Demand Reality Check Supply and Demand Reality Check


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