LITAGATION SUPPORT UPDATE 1/16/2015 The Importance of Disclosing Community Property, No Matter What It s Worth What did the court rule? In a divorce trial, the wife asked for sanctions against the husband, because he did not disclose a retiree medical benefit among other community property. The trial court declined to consider this sanction, because it was the husband s position that the asset had no value. The wife appealed this, among other issues, and the appellate court ruled that the trial court erred in not considering the sanction for nondisclosure. What s the main takeaway? Disclosure of community assets is important, even if they are considered to be of no value. Parties need to be in full compliance with Family Code 2104 (preliminary declaration of disclosure ) and Family Code 2105 (final declaration of disclosure), and are subject to sanctions if they fail to provide proper disclosure. If you have any questions about this or any other litigation support matter, call our Litigation Support and Forensic Accounting team Fred Rey, Stuart Nakanishi, or Richard Wilkolaski at 650.365.4646. Summary of the Case, Marriage of Moore (2014), 226 Cal.App.4th 92 Appellant Leslie Moore and respondent Terry Moore were married for over 27 years. They married on October 17, 1980. Ms. Moore was a homemaker and Mr. Moore was an officer with the Chico Police Department since 1984. On March 18, 2008, Ms. Moore filed a petition for dissolution. The court awarded temporary spousal support and entered judgment terminating the marriage in September 2009. Trial continued on the issues of support, division of Mr. Moore's retirement and employment benefits, property division, and attorney fees. One of the fringe benefits of Mr. Moore's employment was participation in a retiree medical reimbursement plan referred to as "the retiree medical expense and health insurance trust (medical trust)." The trial court reserved jurisdiction to award any interest in the medical trust, finding that its current value was unknown and speculative. It ordered the medical trust's value to be determined upon Mr. Moore's retirement. The trial court did not consider Ms. Moore's request for sanctions for Mr. Moore's failure to disclose the medical trust. It said that Mr. Moore was not obligated to disclose the medical trust if his position was that it had no value. Ms. Moore appealed, contending the court erred in reserving jurisdiction on the medical trust. She claimed it was a community asset that could be divided based on an actuarial valuation of its present value. Ms. Moore also claimed Mr. Moore should be sanctioned for not disclosing the
1/16/2015 The Importance of Disclosing Community Property, No Matter What It s Worth medical trust in his required disclosures. The Appellate Court found the medical trust was a community asset, but there was no abuse of discretion in reserving jurisdiction. The Appellate Court further found that the trial court must consider on remand Ms. Moore's request for sanctions for Mr. Moore's non disclosure of the medical trust in either of his preliminary or final declarations of disclosure. It stated that the trial court erred in finding that Mr. Moore was not obligated to disclose it if it was his position that the asset had no value. Rules Governing Full and Accurate Disclosure In order to provide full and accurate disclosure of all assets and liabilities in which one or both parties may have an interest, each party to a proceeding for dissolution of the marriage or legal separation of the parties shall serve on the other party a preliminary declaration of disclosure under Family Code 2104 and a final declaration of disclosure under Family Code 2105, unless service of the final declaration is waived. A party's preliminary declaration of disclosure must identify all assets and liabilities in which the declarant may have an interest, regardless of the characterization of the asset as community or separate property. (Family Code 2104(c)(1)) For purposes of this requirement, the term "[a]sset" includes, but is not limited to "any real or personal property of any nature, whether tangible or intangible, and whether currently existing or contingent." (Family Code 2101(a)) This is requirement is not dependent upon the declarant's opinion of value. In this case, the medical trust qualified as an asset that Mr. Moore was required to disclose. If a party fails to comply with the disclosure requirements, the trial court "shall...impose money sanctions against the noncomplying party. Sanctions shall be in an amount sufficient to deter repetition of the conduct or comparable conduct, and shall include reasonable attorney's fees, costs incurred, or both, unless the court finds that the noncomplying party acted with substantial justification or that other circumstances make the imposition of the sanction unjust." (Family Code 2107(c)) Click here to read the California Court of Appeal's full published opinion. About Seiler For more than 50 years, Seiler LLP has provided tax, advisory and accounting services to some of the world s most affluent individuals, families, closely held businesses and non-profit organizations. Our clients include prominent business, community and philanthropic leaders, as well as high-net-worth multi-generational families and successful entrepreneurs. Based in Silicon Valley and San Francisco, we deliver the sophisticated solutions, innovative thinking, global capabilities and highly personalized service our clients require to navigate the complexities of their financial worlds, not only for today but for many years to come. Our goal is to exceed our clients expectations in every way. Recognized by INSIDE Public Accounting as one of the "Best of the Best Firms" for 11 years and counting. 2015 Seiler LLP. This content is for general information purposes only, and should not be used as a substitute for consultation with professional legal, tax or accounting advisors. Page 2 of 2
TAX UPDATE 12/30/2014 s Retroactively Extended through 2014 The Tax Increase Prevention Act of 2014 has once again extended an assortment of 60+ tax breaks into 2014. This package of individual and business tax deductions, tax credits, and other tax-saving laws has been technically temporary, because the tax breaks have specific end dates. They have been repeatedly extended for one or two years at a time, and this year s Tax Increase Prevention Act of 2014 (the Act) continues that trend. It s important to keep in mind, however, that these extensions might not continue beyond 2014 and should be considered temporary. The Act (Pub. L. 113-295) also includes another bill: Achieving a Better Life Experience Act of 2014 (ABLE). ABLE establishes a new type of tax-advantaged account for disabled individuals, allowing them to save money for future needs while remaining eligible for government benefit programs. Who does this impact? All U. S. individuals and businesses Do I need to do anything? We encourage you to reach out to your tax accountant to go over the details of how this legislation will affect you or your business. Extended Breaks for Individuals Qualified Tuition Deduction This write-off, which can be as much as $4,000 or $2,000 for higherincome folks, expired at the end of 2013. The Act retroactively restores it for 2014.
s Retroactively Extended through 2014 Extended Breaks for Individuals Tax-free Treatment for Forgiven Principal Residence Mortgage Debt $500 Energy-efficient Home Improvement Credit Mortgage Insurance Premium Deduction Option to Deduct State and Local Sales Taxes IRA Qualified Charitable Contributions For federal income tax purposes, a forgiven debt generally counts as taxable Cancellation of Debt (COD) income. However, a temporary exception applied to COD income from cancelled mortgage debt that was used to acquire a principal residence. Under the temporary rule, up to $2 million of COD income from principal residence acquisition debt that was cancelled in 2007 2013 was treated as a tax-free item. The Act retroactively extends this break to cover eligible debt cancellations that occur in 2014. In past years, taxpayers could claim a tax credit of up to $500 for certain energy-saving improvements to a principal residence. The credit equals 10% of eligible costs for energy-efficient insulation, windows, doors, and roof, plus 100% of eligible costs for energyefficient heating and cooling equipment, subject to a $500 lifetime cap. This break expired at the end of 2013, but the Act retroactively restores it for 2014. Premiums for qualified mortgage insurance on debt to acquire, construct, or improve a first or second residence can potentially be treated as deductible qualified residence interest. The deduction is phased out for higher-income taxpayers. Before the Act, this break wasn t available for premiums paid after 2013. The Act retroactively restores the break for premiums paid in 2014. In past years, individuals who paid little or no state income taxes, had the option of claiming an itemized deduction for state and local general sales taxes. The option expired at the end of 2013, but the Act retroactively restores it for 2014. For 2006 2013, IRA owners who had reached age 70½ were allowed to make tax-free charitable contributions of up to $100,000 directly out of their IRAs. These contributions counted as IRA Required Minimum Distributions (RMDs). Thus, charitably inclined seniors with more IRA money than they needed could reduce their income tax by arranging for tax-free QCDs to take the place of taxable RMDs. This break expired at the end of 2013, but the Act retroactively restores it for 2014, so that it s available for qualifying distributions made before 2015. Page 2 of 7
s Retroactively Extended through 2014 Extended Breaks for Individuals $250 Deduction for K-12 Educators Qualified Conservation Contribution Breaks 100% Gain Exclusion for Qualified Small Business Corporation (QSBC) Stock For the last few years, teachers and other eligible personnel at K-12 schools could deduct up to $250 of school-related expenses paid out of their own pockets whether they itemized or not. This break expired at the end of 2013. The Act retroactively restores it for 2014. Qualified conservation contributions are charitable donations of real property interests, including remainder interests and easements that restrict the use of real property. Liberalized deduction rules applied through 2013 that increased the maximum write-off for these contributions. The Act retroactively restores these liberalized rules for contributions made in 2014. The Act retroactively restores the temporary 100% gain exclusion (within limits) and the exception from alternative minimum tax preference treatment for sales of QSBC stock acquired in 2014. Note that you must hold QSBC shares for more than five years to be eligible for the 100% gain exclusion privilege. Extended Breaks for Individuals & Businesses: Extended Cost Recovery Provisions 50% Bonus Depreciation The Act extends 50% first-year bonus depreciation for an additional year to cover qualifying new (not used) assets that are placed in service in calendar-year 2014. However, the placed-inservice deadline is extended to December 31, 2015, for certain assets that have longer production periods. Under the extended deadline privilege, only the portion of a qualifying asset s basis that is allocable to costs incurred before 2015 is eligible for 50% bonus depreciation. For a new passenger auto or light truck that is subject to the luxury auto depreciation limitations, the 50% bonus depreciation provision increases the maximum first-year depreciation deduction by $8,000. Page 3 of 7
s Retroactively Extended through 2014 Extended Breaks for Individuals & Businesses: Extended Cost Recovery Provisions Generous Section 179 Rules 15-year Depreciation for Leasehold Improvements, Restaurant Property, and Retail Space Improvements For qualifying assets placed in service in the tax year beginning in 2014, the Act restores the maximum Section 179 deduction to $500,000 (same as for tax years beginning in 2013). Without this change, the maximum deduction would have been only $25,000 for 2014. The Act also restores the Section 179 deduction phase-out threshold to $2 million for tax years beginning in 2014 (same as for tax years beginning in 2013). Without this change, the phase-out threshold would have been only $200,000 for 2014.The temporary rule that allowed up to $250,000 of Section 179 deductions for qualifying real property placed in service in tax years beginning in 2013 was also retroactively restored for tax years beginning in 2014. The Act retroactively restores the 15-year straight-line depreciation privilege for qualified leasehold improvements, qualified restaurant property, and qualified retail space improvements for property placed in service in 2014. Extended Breaks for Businesses Research Credit Work Opportunity Credit Hiring Deadline Differential Pay Credit for Small Employers Credit for Building Energy-efficient Homes The Act retroactively restores the research credit to cover qualifying expenses paid or accrued before 2015. The Act retroactively extends the deadline for employing eligible individuals for purposes of claiming the Work Opportunity Tax Credit to cover qualifying hires that begin work in 2014. The Act retroactively restores the credit for eligible small employers that provide differential pay to employees while they serve in the military to cover payments made in 2014. The credit equals 20% of differential pay of up to $20,000 paid to each qualifying employee. The Act retroactively extends the $2,000 or $1,000 (depending on the projected level of fuel consumption) per-home contractor tax credit for building new energy-efficient homes in the U.S. to qualifying homes sold by December 31, 2014 for use as a residence. Page 4 of 7
s Retroactively Extended through 2014 Extended Breaks for Businesses Credits for Renewable Energy Production Facilities Enhanced Deduction for Food Donations Favorable Rule for S Corporation Donations of Appreciated Assets Parity for Employerprovided Parking and Transit Benefits The Act retroactively restores the renewable energy production credit for one year to cover facilities that begin construction before 2015. The Act retroactively restores, for 2014, the enhanced charitable contribution deduction for non-c corporation businesses that donate food (it must be apparently wholesome when donated). This provision is intended for non-c corporation businesses that have food inventories, such as restaurants. For non-c corporation taxpayers, deductions for donated food are normally limited to the taxpayer s basis in the food or FMV, whichever is lower. In contrast, the enhanced deduction equals the lesser of: (1) basis plus half the value in excess of basis, or (2) two times the basis. (The same enhanced deduction rule has been available to C corporations for years.) The Act retroactively restores for tax years beginning in 2014 the favorable shareholder basis rule for stock in S corporations that make charitable donations of appreciated assets. For such donations, each shareholder s tax basis in the S corporation s stock is only reduced by the shareholder s prorata percentage of the company s tax basis in the donated assets. Without the extended provision, a shareholder s basis reduction would equal the passed-through write-off for the donation (a larger amount). The extended provision is taxpayer-friendly because it leaves shareholders with higher tax basis in their S corporation shares. The Act extends for one year, through 2014, the parity provision that requires the tax exclusion for transit benefits to be the same as the exclusion for parking benefits. Thus, for 2014, employees can be given tax-free transit benefits of up to $250 a month the same as for taxfree parking benefits. Page 5 of 7
s Retroactively Extended through 2014 Extended Breaks for Businesses Break for S Corporation Built-in Gains Energy Efficient Commercial Buildings Deduction When a C corporation converts to S corporation status, the corporatelevel built-in gains tax generally applies when built-in gain assets (including receivables and inventories) are turned into cash or sold within the recognition period. The tax is only assessed on built-in gains (excess of FMV over basis) that exist on the conversion date. The recognition period is normally the 10-year period that begins on the conversion date. However, for S corporation tax years beginning in 2012 and 2013, the recognition period was five years. The Act retroactively restores the five-year recognition period for tax years beginning in 2014. In other words, for gains recognized in 2014, the built-in gains tax won t apply if the fifth year of the recognition period has gone by before the start of 2014. The Act retroactively restores the deduction for the cost of an energy efficient commercial building property placed in service during the tax year for one year, for property placed in service before 2015. The maximum deduction for any building for any tax year is the excess (if any) of the product of $1.80, and the square footage of the building, over the total amount of the Section 179 deductions claimed for the building for all earlier tax years. Achieving a Better Life Experience (ABLE) Accounts The Act also includes another bill, the Achieving a Better Life Experience Act (ABLE) of 2014. ABLE establishes a new type of tax-advantaged account for disabled individuals, allowing them to save money for future needs while remaining eligible for government benefit programs. Beginning in 2015, the Act allows states to establish tax-exempt Achieving a Better Life Experience (ABLE) accounts to assist persons with disabilities in building an account to pay for qualified disability expenses. An ABLE account can be set up for an individual (1) who is entitled to benefits under the Social Security disability insurance program or the Supplemental Security Income (SSI) program due to blindness or disability occurring before the individual reached age 26, or (2) for whom a disability certification has been filed with the IRS for the tax year. Annual contributions are limited to the amount of the annual gift tax exclusion for that tax year ($14,000 for 2015). Distributions are tax-free to the extent they don t exceed the beneficiary s qualified disability expenses for the year. Distributions that exceed qualified disability expenses are included in taxable income and are generally subject to a 10% penalty tax. However, distributions can be rolled over tax-free within 60 days to another ABLE account for the benefit of the beneficiary or an eligible family member. Similarly, an ABLE account s beneficiary can be changed, as long as the new beneficiary is an eligible family member. Page 6 of 7
s Retroactively Extended through 2014 Except for SSI, ABLE accounts are disregarded for federal means-tested programs. Also, some ABLE accounts are provided limited bankruptcy protection. About Seiler For more than 50 years, Seiler LLP has provided tax, advisory and accounting services to some of the world s most affluent individuals, families, closely held businesses and non-profit organizations. Our clients include prominent business, community and philanthropic leaders, as well as high-net-worth multi-generational families and successful entrepreneurs. Based in Silicon Valley and San Francisco, we deliver the sophisticated solutions, innovative thinking, global capabilities and highly personalized service our clients require to navigate the complexities of their financial worlds, not only for today but for many years to come. Our goal is to exceed our clients expectations in every way. Recognized by INSIDE Public Accounting as one of the "Best of the Best Firms" for 11 years and counting. 2014, Seiler LLP. This content is for general information purposes only, and should not be used as a substitute for consultation with professional legal, tax or accounting advisors. Page 7 of 7