CLIENT NEWS

Renaissance Plaza, LLC
Renaissance Plaza, LLC, a Ben Arnold and David Bryant real estate joint venture, introduced its new 17-unit live-work townhome and 57-unit condominium project located at Lady St. and Pulaski St. in the Vista on Wednesday, May 17 with a ribbon cutting ceremony. The successful event was warmly greeted by about 200 people and was attended by many local dignitaries, including Mayor Bob Coble. Mr. Coble addressed the gathering and expressed his appreciation for the continued revitalization of downtown Columbia. New owner/tenants in the live/work units include professional medical practices, Allstate Insurance, and Polished Presence, a local image consulting firm. The one to three bedroom condominiums are scheduled to open in July, with local sales and marketing being provided by Metropolitan Development.

Jay Courie
Jay Courie of the McAngus Goudelock & Courie, LLC law firm has been named Vice-Chair of the DRI Law Practice Management Committee and appointed to the Advisory Committee of the Managing Partner Forum for Southeastern Law Firms.

• http://www.mgclawfirm.com/

NEWS FROM BP&S

TECHNICAL ISSUES

New Tax Rules

The recently enacted Tax Increase Prevention and Reconciliation Act contains investor tax breaks, alternative minimum tax (AMT) relief, and several other provisions with immediate and long-term impact on individuals. Below is a quick overview of the provisions in the new law that directly affect individual taxpayers.

AMT relief
Originally enacted to make sure that wealthy Americans did not escape paying taxes, the AMT, which is a parallel tax system which does not permit several of the deductions permissible under the regular tax system, such as state, local and property taxes, has started to affect more middle-income taxpayers. This is in part due to the fact that the AMT parameters are not indexed for inflation. In recent years, Congress has provided a measure of relief from the AMT by raising the AMT “exemption amounts”—allowances that reduce the amount of alternative minimum taxable income (AMTI), reducing or eliminating AMT liability. (However, these exemption amounts are phased out for taxpayers whose AMTI exceeds specified amounts.) For 2005, the AMT exemption amounts were $58,000 for married couples filing jointly and surviving spouses; $40,250 for single taxpayers; and $29,000 for married filing separately. However, for 2006, those amounts were scheduled to fall back to the amounts that applied in 2000: $45,000, $33,750, and $22,500, respectively. This would have brought millions of additional middle-income Americans under the AMT system, resulting in higher federal tax bills for many of them, along with higher compliance costs associated with filling out and filing the complicated AMT tax form.

To prevent the unintended result of having millions of middle-income taxpayers pay tax under the AMT rules, Congress has once again relied on a temporary fix to the problem, this time a one-year extension of the 2005 AMT exemption amounts, increased slightly. Under the new law, for tax years beginning in 2006, the AMT exemption amounts are increased to: (1) $62,550 in the case of married individuals filing a joint return and surviving spouses; (2) $42,500 in the case of unmarried individuals other than surviving spouses; and (3) $31,275 in the case of married individuals filing a separate return.

Another provision in the new law provides AMT relief for those who have personal tax credits. The tax liability limitation rules generally provide that certain nonrefundable personal credits (including dependent care, elderly and disabled, and Hope Scholarship and Lifetime Learning) are allowed only to the extent that a taxpayer has regular income tax liability in excess of the tentative minimum tax, which has the effect of disallowing these credits against AMT. Temporary provisions had been enacted which permitted these credits to offset the entire regular and AMT liability through the end of 2005. The new law extends this temporary provision to tax years beginning in 2006.

Investor tax breaks extended
In 2003, Congress passed a measure to lower the tax rate on most dividends to 15 percent from as high as 38.6 percent, and to lower the rate on most capital gains from 20 percent to 15 percent. That measure was due to expire at the end of 2008, but the new law extends the favorable tax rates through 2010.

Income limitations on Roth IRA conversions eliminated, beginning in 2010
A taxpayer who makes deductible contributions to a regular individual retirement account (IRA) gets a tax break now for the dollars he puts in and his earnings grow tax free, but he pays ordinary income tax on every dollar he takes out, and withdrawals are subject to significant restrictions. In a Roth IRA, the taxpayer gets no tax deduction for contributions, but his money grows tax free and there's no tax, and few restrictions, on qualifying withdrawals.

Under pre-Act law, only taxpayers with $100,000 or less in modified adjusted gross income can convert a regular IRA into a Roth IRA. A taxpayer making the conversion generally must pay tax on money he takes out of his regular IRA, but once it's in his Roth IRA, he won't pay tax on that money or the money it earns. Generally speaking, Roth conversions appeal to taxpayers who either think their tax rate will go up in retirement, or believe that the value of their account will rise significantly, and thus are willing to make an upfront tax payment when they convert in order to reap large tax savings in later years.

Under the new law, beginning in 2010, taxpayers with more than $100,000 of modified adjusted gross income also will be able to convert a regular IRA into a Roth IRA. To make such conversions more attractive in 2010, the new law permits taxpayers who convert in 2010 to spread the income and resulting tax payments on the converted funds over two years—2011 and 2012.

Kiddie tax age limit raised from under 14 to under 18
At one time, wealthy parents could significantly lower their family's tax bill by transferring investment assets to minor children. This tax technique, called income shifting, worked by taking income out of the parents' higher tax bracket and placing it in the lower tax brackets of their children. To curtail the use of this tax technique, Congress enacted the “kiddie tax” rules, which said that children under 14 who had more than a small amount of unearned (investment) income had to pay tax at their parents' marginal tax rate (the rate of tax on the last dollar earned). The threshold amount at which the kiddie tax kicks in is two times the amount allowed as a standard deduction for a dependent who has only investment income. For 2006, that amount is $850, so the kiddie tax begins to apply when the child has more than $1,700 in unearned income.

Under the new law, the age limit below which a child's income from investments is taxed at the parents' rates is raised from 14 to 18. The new law specifies, however, that the kiddie tax does not apply to a child who is married and files a joint return for the tax year. It also adds an exception to the kiddie tax for distributions from certain qualified disability trusts. The new provisions apply to tax years beginning after Dec. 31, 2005.

Capital gain treatment for self-created musical works
Under pre-Act law, capital assets do not include copyrights, literary, musical, or artistic compositions, letters or memoranda, or similar property held by a taxpayer whose personal efforts created the property. As a result, when a taxpayer sells copyrights he owns in, for example, books, songs, or paintings that he created, gain from the sale is treated as ordinary income, not capital gain, which is generally taxed at a lower rate.

Under the new law, at the election of a taxpayer, the sale or exchange before Jan. 1, 2011 of musical compositions or copyrights in musical works created by the taxpayer's personal efforts is treated as the sale or exchange of a capital asset. The change applies for sales or exchanges in tax years beginning after May 17, 2006.

Changes to the foreign earned income exclusion and housing allowance for U.S. citizens working abroad
The new law makes three changes to the foreign earned income exclusion and housing allowance. First, the income exclusion is indexed for inflation starting in 2006 (rather than 2008 under pre-Act law). Second, the base housing amount used in calculating the foreign housing cost exclusion in a taxable year is 16 percent of the amount of the foreign earned income exclusion limitation (instead of the pre-Act law 16 percent of the U.S. government employee grade GS-14, step 1 amount). Reasonable foreign housing expenses in excess of the base housing amount remain excluded from gross income, but the amount of the exclusion is limited to 30 percent of the taxpayer's foreign earned income exclusion. Third, income excluded as either foreign earned income or as a housing allowance is included for purposes of determining the marginal tax rates applicable to non-excluded income.

Please keep in mind that we've described only the highlights of the new law. If you would like more details on any aspect of this legislation, please call us.

IRS Concedes On Long-Distance Telephone Excise Tax Issue

In a new Notice (Notice 2006-50, 2006-25 IRB, IR 2006-82), the IRS has conceded that the 3% federal excise tax doesn't apply to long-distance calls for which the charges are computed on an elapsed time basis regardless of the distance of the phone call. Thus, taxpayers are no longer required to pay federal excise tax for this service, and persons who collect the tax or taxpayers themselves can request a credit or refund under the terms of the Notice for amounts paid for service that was billed to the taxpayer after February 28, 2003, and before August 1, 2006.  

Treasury Secretary John Snow has said the refund of the telephone excise tax would cost the Treasury about $13 billion for fiscal 2007 and 2008.  

Background. Despite a veritable tidal wave of courts opinions that have overwhelmingly found against IRS—including the Second, Third, Sixth, Eleventh, and D.C. Circuits and the Court of Federal Claims—and seemingly clear statutory language to the contrary, IRS had staunchly maintained up until now that the 3% excise tax on long-distance telephone communications applied where the toll charge varied with either distance or elapsed time of the call, rather than when it only varied with both distance and elapsed time.

IRS concedes. IRS says it will follow the Circuit Court decisions that held that telephone communication for which a toll charge varied only with elapsed time, and not distance, wasn't taxable, and will no longer litigate this issue. Taxpayers are no longer required to pay the excise tax on this tax and other nontaxable services, and collectors or taxpayers can request a credit or refund of amounts paid for service that was billed to taxpayers after February 28, 2003, and before August 1, 2006.

Nontaxable service includes not only long distance service, but “bundled service,” as well. Bundled service is local and long distance service provided under a plan that does not separately state the charge for the local telephone service, including, for example, Voice over Internet Protocol service, prepaid telephone cards, and plans that provide both local and long distance service for either a flat monthly fee or a charge that varies with the elapsed transmission time for which the service is used.  

How to get a refund. Under the terms of Notice 2006-50, taxpayers can only request a credit or refund of the excise tax that was billed during the “relevant period” on their 2006 income tax returns (i.e., the income tax return for calendar year 2006 or the first tax year including December 31, 2006). IRS will revise the relevant forms (e.g., Form 1040 or 1120) and instructions to provide additional guidance. Taxpayers who aren't required to file a return must do so to get a credit or refund.

Taxpayers will have to certify that they: (1) haven't already received a credit or refund from their collector, and (2) won't ask their collector for a credit or refund and have withdrawn any such previously submitted request. The taxpayers, other than individuals using the safe harbor amount, must retain records that substantiate the request, i.e., bills showing the tax charged for nontaxable services for each month and receipts, canceled checks, or other evidence that the tax was actually paid.

Income tax consequences. Any part of the credit or refund attributable to tax payments that were deducted as an ordinary and necessary business expense (including in the determination of unrelated business taxable income, or UBTI) must be included in income for the tax year in which the refund is received or accrued to the extent that the tax payments reduced the amount of income tax (or UBTI tax) imposed.

Pass-through rules. Any credit or refund included in a partnership's or S corporation's income (and any interest on it) must be reported on its return for the tax year in which received or accrued and must be allocated to the partners or shareholders on Schedule K-1 for that tax year. Any credit or refund amount included in a corporation's income (and any interest on it) must be reported on its return for the tax year in which received or accrued. Except for grantor trusts, any credit or refund amount included in an estate's or trust's income (and any interest on it) must be reported on its Form 1041 for the tax year in which received or accrued.

Interest on the credit or refund included in income. If a taxpayer requests a credit or refund of the actual amount of tax paid, any interest on this amount must be included as income on his return for the tax year in which it is received or accrued.

Safe harbor refund method for individuals. Individuals, but not other taxpayers, may request a refund or credit using either the actual amount of tax paid for nontaxable services or a safe harbor amount. Those who use the safe harbor amount are not required to submit or keep any documentation to support their refund request. To use the safe harbor amount, individuals must have paid all taxes billed by their service provider after February 28, 2003, and before August 1, 2006; have not received a credit or refund of these taxes from the service provider, and either have not requested a credit or refund from the service provider or have withdrawn any such request. However, the amount of this safe harbor is still under consideration and will only be announced in later guidance. 

Service that is billed after July 31, 2006. IRS will deny a taxpayer's request for a refund of service that was billed after July 31, 2006. Instead, a taxpayer should seek repayment of the tax from the collectors of the excise tax. Collectors may also repay the tax on service that was billed before August 1, 2006, but are not required to do so. They may also request a refund or make an adjustment to their separate accounts, as appropriate.

Taxpayers who collect the excise tax. An excise tax collector may make a credit or refund request for the excise tax only if it establishes that it has repaid the amount of the tax to the person from whom the tax was collected, or obtains the written consent of such person to the allowance of the credit or refund. Collectors must follow the procedures in Notice 2006-50, Sec. 5. IRS also advises collectors to not to pay over to it excise tax for service that is billed after July 31, 2006, and to certify to this fact on Form 720 for the third quarter of 2006. Collectors are also told not to report any customer's refusal to pay the tax for service that is billed after May 25, 2006.

Nonconforming credit or refund requests. Requests for a credit or refund that don't follow the rules in Notice 2006-50 (whether filed before or after its publication) (1) won't be processed to the extent they relate to the tax paid on nontaxable service that was billed after February 28, 2003, but (2) will be processed normally to the extent they relate to the tax paid on nontaxable service that was billed before March 1, 2003.

Real Estate Developments

South Carolina Provides Incentives for Rehabilitating Abandoned Retail Facility Sites

South Carolina has enacted legislation that provides credits against property and income tax for expenses incurred in rehabilitating abandoned retail facility sites located in the state.

Rehabilitation of eligible site. Taxpayers may claim a credit against either real property taxes levied by local taxing entities or state income taxes for “rehabilitation expenses,” which are expenses incurred in the rehabilitation of an “eligible site.” Rehabilitation expenses do not include the cost of acquiring the eligible site or the cost of personal property maintained at the eligible site. An “eligible site” is a shopping center, mall, or free standing site whose primary use was as a retail sales facility with at least one tenant or occupant located in a 40,000 square foot or larger building or structure. To qualify as an “eligible site,” the shopping center, mall, or free standing site must be abandoned, meaning that at least 80% of the eligible site's facilities have been continuously closed to business or otherwise non-operational for at least one year. During the abandonment, the eligible site may serve as a wholesale facility for no more than one year.

Income tax credit. Taxpayers may choose to take a credit against state income taxes equal to 10% of the rehabilitation expenses. The credit must be taken in equal installments over an eight-year period beginning with the year in which the property is placed in service. Any unused portion of a credit installment may be carried forward up to five years. This credit is in addition to and does not offset the state historic credit, if the eligible site also qualifies for the state historic credit.

Credits earned by an S corporation owing corporate level income tax must be used first at the entity level; any remaining credit passes through to the shareholders. Credits earned by partnerships and LLCs are passed through to the partners.

Property tax credit. Alternatively, taxpayers may choose to take a credit against real property taxes levied by local taxing entities equal to 25% of the rehabilitation expenses made to the eligible site multiplied by the “local taxing entity ratio” of each local taxing entity that has consented to the credit. The “local taxing entity ratio” is computed by dividing the millage rate of each local taxing entity by the total millage rate for the eligible site.

In order for a taxpayer to receive the property tax credit, the municipality, or if the eligible site is located in an unincorporated area, the county must first determine the eligibility of the eligible site and the eligibility of the proposed project seeking the credit. The governing body or municipality where the site is located may, by resolution, reduce the 40,000 square foot requirement for eligible sites by up to 15,000 square feet for purposes of the real property tax credit. The local governing body must also approve any proposed project beginning after July 1, 2006, by majority vote. The determination and approval of the eligible site and proposed project must be by ordinance and public hearing, and the ordinance shall provide for the credit to be taken against up to 75% of the real property taxes due on the site each year, for up to eight years. Before determining the eligibility of a proposed eligible site, the municipality or county must make a finding that the credit will not violate any covenant, representation, or warranty in any of its tax increment financing transactions.

The governing body of the county or municipality must give notice of its intention to grant a tax credit for an eligible site and the amount of the proposed credit to all affected local taxing entities at least 45 days before the public hearing. If the local taxing entity does not file an objection with the county or municipality to the credit on or before the date of the public hearing, it is considered to have consented to the tax credit, provided that the actual credit granted does not exceed the amount stated in the notice. The tax credit vests in the taxpayer in the tax year when the eligible site is placed in service and may be carried forward for up to eight years.

Election and transfer of credit. Taxpayers must elect which credit they want to claim by providing written notification to the Department of Revenue prior to the date the eligible site is placed in service. If the taxpayer does not obtain the approvals required for the property tax credit or fails to affirmatively make an election before the date the eligible site is placed in service, the taxpayer is considered to have elected to receive the income tax credit.

The owner of an eligible site may transfer, devise, or distribute any unused credit to the tenant of the eligible site, provided that the Department receives written notification and approves of the transfer, devise, or distribution.

If you have questions about this issue please contact Ken Bauknight or Jay Swearingen.

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