November 2016 Archives

Be Wary of Tax Laws Concerning IRAs

This past June, the IRS issued a Private Letter Ruling (201623001) which impacts surviving spouses in community property states. The decedent and the surviving spouse were married in 2004 and lived in a community property state. They had a son, whom the decedent named as the sole beneficiary of his three IRAs. Upon the decedent's death, the surviving spouse filed a claim against his estate, seeking her one-half interest in the community property they owned together. The claim was settled and the settlement was approved by the court, which ordered that the IRA custodian assign a certain amount of the son's inherited IRAs to the surviving spouse as a spousal rollover IRA. Seeking to avoid paying a tax on the amounts paid to her from the IRAs, the surviving spouse requested four rulings: 1) that the settlement amount of the inherited IRAs be classified as the taxpayer's community property interest; 2) that the taxpayer be treated as a payee of the inherited IRAs; 3) that the IRA custodian distribute the settlement amount to the taxpayer in the form of a surviving spouse rollover; and 4) that the distribution to the taxpayer of the settlement amount from the inherited IRA not be considered a taxable event. Applying IRA Section 408, the IRA rejected the taxpayer's requests. The IRS first stated that under Section 408(d)(3)(C) rollovers are not permitted from non-spousal inherited IRAs, and Section 408 must be applied without regard to any community property laws. Thus, rejecting the surviving spouse's first request, the IRS stated that classifying the amount of the inherited IRA as the taxpayer's community property is a matter of state property law, not federal tax law.

Deadline Looms to Apply for Rhode Island's New Cannabis Cultivators License

Effective January 1, 2017, neither medical marijuana patients, nor their licensed caregivers, nor cooperative cannabis cultivations will be allowed to sell excess medical cannabis to dispensaries, known as Compassion Centers. Only licensed cultivators, a newly created category of legal cannabis growers, will be permitted to cultivate and sell medical marijuana to dispensaries. Both those presently participating in Rhode Island's medical cannabis industry, and those seeking to enter the marketplace, will have to meet the regulatory requirements of Rhode Island's Department of Business Regulation (DBR) to obtain licensed cultivator status. The DBR recently released Emergency Regulation 1- Licensed Cultivators, along with a lengthy and laborious Application for Medical Marijuana Cultivator License. The regulations lay the groundwork for a complex regulatory scheme for would-be wholesale cannabis growers involving, among other things, mandatory participation in the State's to-be-established seed-to-sale tracking system, limitations on pesticides and various grow mediums, as well as rigorous product packaging and security requirements for cultivation facilities. With these onerous standards, however, comes substantial opportunity for cannabis entrepreneurs. For one, cultivators will be permitted to operate as for-profit enterprises, by definition making them more lucrative than state-sanctioned dispensaries, which will continue to operate under nonprofit models. Additionally, whereas cooperative growers historically participating in the Rhode Island marketplace were capped at 48 flowering plants in any one grow cycle, the new regulations allow licensed cultivators to grow upwards of 500 flowering plants and 500 seedlings at any given time. And this limitation only applies until the State implements its seed-to-sale tacking system, after which time cultivators will, at least theoretically, be unrestrained in the quantity of plants that they may grow.

Proposed 2704 Regulations May Have Substantial Impact on Estate Planning

Proposed 2704 Regulations, as they are now drafted, would make vast and substantial changes to the valuation of interests in many family-controlled entities, such as a Family Limited Partnership (FLP) or Limited Liability Company (LLC), for purposes of estate, gift, and generation-skipping transfer taxes. Currently, due to the restrictions placed on a limited partner of a FLP or non-managing member of an LLC, interests that are gifted are valued less than the fair market value of the gifted share, as the donor owns a non-controlling interest and his or her interest is not readily marketable. Thus, discounts for lack of control and lack of marketability apply, reducing the value for estate tax purposes. Additionally, a potential buyer will pay less for an interest that is subject to restrictive agreements, such as restrictions on transferability or formulas setting a withdrawal or repurchase price. Such restrictions are frequently used in buy-sell or stock restriction agreements between business owners. Similarly, a willing buyer will pay less for an interest that is subject to certain rights held by other interest owners, such as puts, calls, and liquidation rights. The Regulations will change the discount-ability of non-controlling interests. Specifically, they disregard certain restrictions on liquidation in determining the fair market value of a transferred interest. This means that transferring an interest in a FLP or LLC may be found to have been a transfer of higher value, rather than a transfer of discounted value. The higher the value of the gift transferred, the higher the gift tax. Additionally, the Regulations treat the lapse of voting or liquidation rights as an additional transfer, thus, another taxable event. As noted, the Regulations are in proposed form and certain aspects may become final as soon as December 1, 2016. If you are interested in forming a family limited partnership or limited liability company for the significant non-tax business advantages these types of entities provide, you should consider doing so before these Regulations become effective to also obtain the tax benefits noted above.

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