Most people are aware that Roth IRAs enable after-tax contributions to grow income tax-deferred. Moreover, provided that certain conditions are met, distributions of not only contributions—but also investment growth—of a Roth IRA can be taken income-free provided that you’ve owned the IRA for at least 5 years. The five-year period begins on Jan. 1 of the year you made your first contribution to your Roth. Once that 5-year period tolls, earnings can only be withdrawn income tax-free if taken after age 59½ unless you qualify for certain exceptions. To be clear, however, if you’ve had your Roth for less than five years, there are also exceptions that can exonerate you from the 10% penalty on withdrawn earnings — but not all income taxes (see below for more detail).
“Of course, it must be too good to be true!” “My accountant said it is illegal and will increase my audit risk and I may go to jail!” “If it existed everyone would know about it!” I have heard every variation of reasons not to fully realize the benefits available in the Internal Revenue Code. However, my 37 years of taxation experience allows me to understand that no one, not myself, not your CPA, and not even your tax attorney knows everything.
A contribution of land for the public good, or at least an easement over a portion of some of your land to the community would potentially allow you a deduction for a qualified conservation easement.
In Summa Holdings, Inc. v. Comm’r, T.C. Memo 2015-119, the 6th Circuit Appellate court has partially put a leash on the IRS Commissioner to argue that a transaction, if done solely for income tax purposes may be set aside, on substance-over-form arguments, if the transaction clearly follows the Tax Code! It does not sweep away this overly broad tool of the IRS to claim that a transaction should be recharacterized because a business chose the lowest tax method to structure the transaction, but allows such structure, if it is a path that Congress intended.
Use of a Single-Member LLC
A single-member LLC’s provides considerable flexibility for its owner. Individuals forming a new business may choose to forego the liability of operating the business as a sole proprietorship, or the forming a corporation to own the business, by creating a single-member LLC which would own and operate the business and assets. The single-member LLC provides advantages over partnerships with a single equity source because a single-member LLC eliminates the need to have two or more owners and this may result in fewer costs by avoiding the need for creation of more than one legal entity to act as “partners.” Additionally, single-member LLC’s may be used to own multiple divisions of a business or multiple real properties with ownership is vested in a single-entity.
Illinois Limited Liability Companies (“LLC”) are governed by 805 ILCS 180/1-1. The Limited Liability Company Act (“LLCA”).
An LLC is a separate legal entity and requires certain procedural steps be followed. First, the LLC organizer(s) must file articles of organization (the LLC counterpart to a corporation’s Articles of Incorporation) with the appropriate state agency (generally, the Secretary of State). The articles of organization must contain: the name and address of the principal place of business of the LLC; its period of duration; the business purpose (ordinarily, language to the effect of for the transaction of any or all lawful business for which limited liability companies may be organized under the Limited Liability Company Act); the registered agent’s name, the registered agent’s address; the name(s) and address(es) of the initial LLC’s manager(s) or members; and a statement indicating that the LLC is managed by managers; the names and addresses of each organizer; and any other provision the members/managers elect to include.
Family Limited Partnerships, hereinafter “FLP’ are a special type of limited partnership, that can be used in conjunction with an estate plan, an asset protection plan, as well as a financial plan.
What is this wondrous vehicle and how does it work? The purpose of this article will be to address these concerns.
IRS NOT ALWAYS CORRECT
In Center vs. Commissioner, 1995 TCM 311, the Tax Court ruled that an IRS Notice of Deficiency is not entitled to a presumption of correctness, if the IRS does not produce any evidence in support of its determination. In Center, the taxpayer did not provide any proof of his income during the year at issue. He had not filed a tax return. The IRS took the earnings from a prior year and used the consumer price index to compute the alleged income for a subsequent year. The taxpayer denied he had made that much money. The taxpayer petitioned the Tax Court saying that the amount of income was wrong.
Offshore Asset Protection Trusts are becoming the rage of the nineties. The setting up of an Asset Protection Trusts involves the initial structure of a trust in an offshore jurisdiction. Properly drafted this gives one protection against creditors and eliminates the creditors abilities to attach assets.
For those of you who are a bit skeptical on the usage of offshore trusts and entities, please be aware that recently reported in the Business & Economics Section of the European, a European-based weekly newspaper, that London-based, Price Waterhouse and Ernst & Young have been consulting with the Island of Jersey to promote new laws allowing limited liability partnerships to become part of the Jersey legal systems. This would limit the partners from those UK firms that have set up limited partnerships on the Island of Jersey to only be liable for the amount of their interest in the firm. Current United Kingdom law indicates partners that they are personally liable for any claims against the partnership.