On June 10, 2020, in Nelson v. Commissioner, T.C. Memo 2020-81, the Tax Court ruled in favor of the IRS and against a taxpayer who attempted to use a defined value provision to value a transfer of assets.

The taxpayer’s primary business was in heavy equipment relating to the oil and gas industry.  The taxpayer created a new holding company for the business equity, and transferred interests in the holding company to a trust in a gift and sale transaction.  The taxpayer used a defined value provision in valuing the gift and sale, but the defined value provision referred to an amount determined by an appraiser within 90 days or 180 days of the transfer.

The Tax Court, distinguishing the instant case from Wandry v. Commissioner, T.C. Memo 2012-88, 2012 WL 998483, determined that the value of the gift and sale would be determined by a condition subsequent (ie, the valuation by a qualified appraiser).  If the taxpayer had instead included the language “as finally determined for gift tax purposes” to define the amount transferred, and removed the specific dollar amount, the outcome likely would have been different.

The Tax Court has traditionally struck down defined value provisions that are based on a condition subsequent (ie, undue a portion of the gift based on a subsequent revaluation (see Commissioner v. Procter, 142 F.2d 824 (4th Cir. 1944)), but permitted such clauses that resulted in an adjustment to the percentage of interest that is transferred based on a later revaluation (see Wandry).  While the result in the Nelson case was a blow to the taxpayer, the court indirectly ratified the defined value provision that had been approved in Wandry.  In addition, the court permitted multiple, layered discounts for gift tax purposes which totaled approximately sixty (60%) percent.

The case is a lesson in using defined value provisions that have been approved in prior cases.

As an estate and trust attorney who has been practicing for over 20 years, I never lose sight of the difficulty we all face when losing a loved one.  Often when I meet a client, sometimes for the very first time, the initial words out of my mouth are  “I am so very truly sorry for your loss.”   I often enter someone’s life while they are grappling with everything from grief, to making funeral arrangements, accessing accounts, paying bills, to answering the overarching question of “what do I do now.” The process is overwhelming and daunting, especially during such a vulnerable and confusing time in someone’s life.  As an older sister, a yoga teacher and as a human being, I have this innate desire to help and to guide those who need it most. So being in the position that I am in, I wanted to share my thoughts on where to start.

After losing a loved one, your focus is and should be on your family and on grieving the loss —not administering an estate.  It is natural  for one to feel overcome with emotions, responsibilities and never-ending to do lists. There will be what seems like an endless barrage of questions – from “where do I even begin” to “how can I ensure that my loved one’s final wishes are respected?”  What seems like a million issues will come up and with no guidance, these issues can very quickly become incredibly overwhelming.

What I have seen over the years is that people generally fall into one of two modes: (1) the “what do I need to do and how quickly can I get it done mode” or (2) the “sweep it under a rug and deal with it later mode.”  While neither of these approaches are ideal, they are very natural responses. Because we will all have to go through the unfortunate and tragic loss of a loved one, I wanted to share a list of 10 things to consider during this difficult time (this is not an all-inclusive list):

  1. First and foremost, take care of yourself and your family.
  2. Do not make any hasty decisions or major changes immediately.
  3. Know that if you held a power of attorney while your loved one was alive; this document is no longer valid after death. The only person permitted to act on behalf of an estate following a death is the personal representative or executor appointed by the court.
  4. Determine if a Will exists.  When it is appropriate, the family should search for an original Will.  Keep in mind that a Will may not be acted upon until the court admits the Will to probate.  Do not assume that just because your loved one may not have had a lot of assets when they died that they do not need to probate the Will or have someone appointed if there is no Will.
  5. Address whether you need to contact the Social Security Office and inquire about lump sum benefits or monthly benefits.
  6. Familiarize yourself with what assets your loved one owned, how were they titled, how to locate and value them.
  7. You will want to know about your loved one’s debts, particularly in what amounts and to whom they are owed.
  8. Be prepared to deal with banks, credit card companies, and any automatic payment plans.
  9. Make sure all appropriate creditors are paid first prior to making distribution to any beneficiaries. It is normal to need advice on how this is handled.  Many families have questions, especially if there are insufficient assets in the estate to satisfy all the debts or tax obligations.
  10. Ensure you are aware of any upcoming estate/inheritance or income tax filing deadlines.

As you are trying to grieve the loss of your loved one, there are so many issues that need to be addressed, questions that will pop up and things that you may not even be able to imagine which go beyond the scope of this short article.  In addition to needing help and comfort from your friends and family, know that in all likelihood, you will need help to address the maze of financial and legal issues that are sure to arise and know that it is alright.  Seeking help sooner rather than later can often alleviate the stress and burden that you will experience.

Everyone’s circumstances are different and knowing where to start is just the beginning.  My hope is that this article guides you in the right direction.

 


The information in this presentation is general in nature and is purely for informational purposes and does not constitute legal advice, nor does it create an attorney-client relationship. You should accept legal advice only from a licensed legal professional with whom you have an attorney-client relationship.

The IRS recently issued Notice 2020-39, which offers relief to both qualified opportunity zone funds (“QOFs”) and persons seeking to invest in QOFs who are affected by the global COVID-19 pandemic.

Investors in QOFs who want to defer capital gains and receive other QOF tax benefits are required to invest in a QOF within 180 days of the date of the sale that generated the gain or a later date applicable to partners, S Corporation shareholders or certain other special situations.  The Notice provides that if a taxpayer’s 180th day to invest in a QOF would have fallen on or after April 1, 2020 and before December 31, 2020, the taxpayer has until December 31, 2020 to invest that gain into a QOF.  Investors still need to make a valid deferral election and file Forms 8949 and 8997 with their tax return to obtain deferral.

QOFs are subject to other time sensitive deadlines.  QOFs who purchase real property are required to substantially improve the property within 30 months.  The Notice provides that the period between April 1, 2020 and December 31, 2020 is suspended for purposes of the 30-month period during which property must be substantially improved.

QOFs are required to hold 90% or more of their assets in eligible QOZ property on certain testing dates each year.  The Notice provides that, due to the pandemic, a QOF’s failure to hold less than the 90% of its assets in QOZ property on any testing dates from April 1, 2020 through Dec. 31, 2020 is due to reasonable cause.  As a result, such failure will not cause loss of QOF status or imposition of penalties.

For QOZ business projects that meet the requirements of the 31-month working capital safe harbor, the Notice states that due to the COVID-19 pandemic, these projects may have up to an additional 24 months in which to spend their working capital.  QOFs must still meet the other requirements for this exception such as having a written schedule of when they expect to invest their working capital.

The Notice offers welcome relief to both investors and funds seeking to comply with the QOF requirements.  Nonetheless, QOFs still need to monitor and comply with these rules especially since prior to the pandemic, QOF investments were coming under greater scrutiny by both the IRS and Congress who wanted to ensure the intended benefits for local communities were being delivered.

 


As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice.  For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.

The global coronavirus pandemic is of course a challenging time.  Many businesses have been hard hit and may not recover.  Unemployment has skyrocketed.  On the other hand, there are many businesses that have been only mildly affected to date.

The conventional wisdom is that the economic pain will continue for some time.  Accordingly, it is an important time to review the terms of your business agreements, such as operating agreements or stockholders’ agreements (and frequently employment agreements).

We expect to see an increase in “business divorces.”  If you or your business partners are separating, the first step in evaluating the consequences is to review the governing agreements between the owners.  Some questions you may ask include:

  1. What happens if you or another owner “quit” or voluntarily terminate employment? This may trigger equity buyout rights by the company or other owners.  It also may trigger severance pay obligations.
  2. Do you have obligations if there is a capital call? In other words, could you be required to contribute money to the business if needed?  Who makes this determination?
  3. What potential liabilities might you be responsible for, including any personal guarantees on bank loans or lines of credit? How easy or difficult will it be to be removed from these types of obligations?
  4. If there is an equity buyout, how will the business be valued? Is an appraisal required, or does the agreement use a formula such as a multiple of sales or profits?  What are the payment terms for any buyout?  Often, this involves the buyer giving the seller a promissory note and paying it over a term of years (eg, three or five years).  What is the interest rate on such a note?  What security is there for the seller if the business is struggling?
  5. What do the agreements say if you or another owner are disabled? This may include salary continuation, or a forced equity buyout.  What happens if an owner dies (for example, is there a mandatory or optional buyout?  On what terms?  Are there “permitted transferees” such that the remaining owners could be partners with the deceased owner’s family?
  6. Can you exit the business and be paid for the value of your equity? Most business agreements do not permit an owner to simply exit, or “put” his or her equity to the company and get paid fair value in return.  You may not have an easy exit, in which case you may be at a disadvantage if you attempt to negotiate a buyout.
  7. What other types of incentive compensation – such as stock options, profits interests – may be affected in the event of a business divorce?
  8. In addition, if you do not have a current business agreement for your business, this may be a time to put one in place, so that you and the other owners have a plan and an agreement. Without an agreement, many of the issues mentioned above can lead to disputes and potential litigation.  It is prudent to work out agreements on these issues when parties are competent and getting along.

Business divorces raise important questions that should be reviewed with your attorney.

 


As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice.  For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.

In order to remove any ambiguity occasioned by prior New Jersey Supreme Court Orders, extending the April 1 and May 1 annual tax appeal filing deadlines for regular and revaluation or reassessment district appeals to “30 days after the Governor lifts the State of Emergency” occasioned by the COVID-19 pandemic, respectively, Govenor Murphy has signed into law legislation fixing July 1, 2020 as the appeal deadline for this tax year.  Although this July 1 deadline does not apply to certain limited municipalities located mainly in Monmouth and Gloucester counties, this new deadline will apply for the vast majority of property owners throughout the state.

The passing of this law was intended to provide both property owners and municipalities with the necessary certainty of schedule that will allow all parties, the fair opportunity to decide, on an informed basis, whether to take action. The relevant valuation date for the 2020 tax year is October 1 of 2019 and consideration of property values at that time as compared with the values indicated by their respective 2020 assessments should be reviewed without delay with appropriate real estate valuation experts and counsel experienced in this area of practice.

 


As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice.  For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.