House Ways & Means Chairman Dave Camp (R. Mich.) released a long-anticipated draft of a comprehensive Tax Reform plan on Wednesday afternoon, February 26. The enormous document tackles the entire tax code, with a myriad of proposed changes to a wide range of provisions. The stated goal is to simplify the Code by eliminating or reformulating numerous deductions, exclusions, and other tax breaks while reducing tax rates for most taxpayers.
Unfortunately, the draft proposes changes that would negatively affect the Mobility industry.
The moving expense deduction would be eliminated entirely. Although the draft does not provide any analysis of the reason, it claims the repeal would raise some $8 billion over the ten years from 2014-2023.
The mortgage interest deduction would be retained, but further limited. The current $1 million limitation on mortgage debt would be reduced to $500,000, but phased in over a four year period beginning with debt incurred in 2015. Interest on debt incurred prior to the reductions would continue to be deductible. Home equity indebtedness incurred after 2014 would no longer be deductible at all. The proposal also retains the ability to deduct mortgage interest on up to two homes, and specifies that debt that is refinanced after the new rules go into effect will remain subject to the old ones. The reporting provisions for mortgage interest would also be stiffened.
The exclusion for capital gain on sale of a principal residence would also be retained, but significantly restricted. Currently, the taxpayer must own and use the home as the principal residence for two of the five years preceding its sale, and may use the exclusion once every two years. The proposal would require the taxpayer to own and use the home as the principal residence for five of the eight years preceding sale. The provision could only be used once every five years. In addition, the exclusion would be phased out for taxpayers whose income exceeded $500,000 ($250,000 single), and eliminated once income hit $1 million. The extension of the time period is intended to prevent “speculators and so-called ‘flippers’” from benefiting from the exclusion, but there is no apparent appreciation of the effect this would have on employees who are relocated and cannot meet the 5-year rule.
The deduction for state and local taxes would be limited to taxes incurred in carrying on a trade or business or producing income. Consequently, most deductions of such taxes would be eliminated for transferees.
Charitable deductions would also be restricted. Under the proposal, deductions would be permitted only to the extent they exceeded 2% of the individual’s Adjusted Gross Income, and the value of contributions of property would be limited to the property’s adjusted basis rather than fair market value.
The over-riding rationale for many of these limitations (of which the foregoing is merely a small sample) is that tax rates would be reduced to three brackets (10%, 25%, and 35%), with the vast majority of taxpayers falling into the 10% and 25% brackets. The Standard Deduction would then be greatly increased (from $12,200 to $22,000 for joint filers, and from $6,100 to $11,000 for singles), so that according to Mr. Camps estimates only about 5% of taxpayers would need to itemize deductions, most of whom would be high-income filers.
The proposal also contains literally hundreds of other provisions, most of them affecting business taxes. Many, many “loopholes” (at least in the view of Mr. Camp) would be eliminated, again in trade for lower tax rates.
Worldwide ERC® and the American Moving and Storage Association (AMSA) have been preparing for some years to defend the moving expense deduction, and will now move forward to do so.
However, it is worth noting that even Mr. Camp does not expect any action in Congress on his proposals this year. The draft is intended to provoke discussion and debate leading to eventual tax reform that may yet be years away.
Posted by Peter K. Scott
Two more Federal Courts of Appeal have ruled that Fannie Mae, Freddie Mac, and the Federal Housing Finance Agency, are not liable for state or local transfer taxes on foreclosed properties sold to buyers. Appeals courts in both the Fourth and Eighth Circuits have joined the Appeals Court for the Sixth Circuit in holding that when Congress specifically exempted Fannie and Freddie from “all taxation” in their charters, it logically included excise taxes such as real estate transfer taxes.
The Sixth Circuit decision, County of Oakland v. Federal Housing Finance Agency
, was filed May 20, 2013, and reversed the only lower court decision so far to have held the agencies liable for the taxes. That case was reported on in the Worldwide ERC® Tax & Legal Update for May/June, 2013.
Since then, two more circuit courts have weighed in.
In Montgomery County, Maryland v. Federal National Mortgage Association, Nos. 13-1691 and 13-1752 (January 27, 2014), the Fourth Circuit Federal Court of Appeals held that counties in Maryland and South Carolina may not collect transfer taxes from the housing entities because Congress specifically exempted them in their enabling legislation. It also held that Congress did not violate the Commerce Clause of the Constitution by exempting the agencies from local taxes, nor did it otherwise stray from Constitutionality. Click here for the decision.
Similarly, in Hennepin County v. Federal National Mortgage Association, No. 13-1821 (February 5, 2014), the Eighth Circuit Federal Court of Appeals also held the federal entities exempt from transfer taxes in Minnesota. Click here for the decision.
Although some of the losing Counties have said they would seek Supreme Court review, at this point it is doubtful that the Supreme Court would accept Certiorari. Ordinarily, that Court does not accept cases unless the issue is of paramount importance, or there is a conflict among the Circuit Courts of Appeal. Here, no conflict has developed, and three Circuits have ruled decisively that no taxes are owed. Consequently, unless another Circuit disagrees, it likely that the issue, which could have cost the federal government billions of dollars, has been decided.
This is good news for the Mobility industry. Continuing doubt over whether taxes were owed on purchases from Fannie, Freddie, or FHFA could have slowed such transactions, or cast lingering doubt on the title for such properties if the states successfully asserted that taxes were unpaid.
Posted by Peter K. Scott
Some states have enacted laws to prevent lenders from holding borrowers liable for a deficiency in various circumstances involving foreclosures or short sales. Recent IRS advice to California confirms that those laws, in general, should be effective to qualify the loans as non-recourse, which in turn would mean that those borrowers would not have cancellation of indebtedness income. This could be important if the federal law exempting most short sales of principal residences from debt cancellation income, which expired at the end of 2013, is not extended.
The Full Story:
Today’s tax quote: “A bank is a place that will lend you money if you can prove that you don’t need it.” Anonymous.
However, banks invariably insist on repayment, even if a mortgage debtor cannot scrape up the money. In such cases, the lender and the borrower may agree on a short sale of the property, that is, a sale for less than the amount owed. Generally, the lender will then agree not to pursue the borrower for the unpaid mortgage amount. The tax consequences of that relief from indebtedness, however, will vary depending upon whether the loan was “recourse” or “non-recourse.” A debt is recourse if the debtor is personally liable and can be pursued for any losses. It is non-recourse if the lender’s only source of recovering the unpaid debt is to take and sell the property itself.
Relief from debt is taxable under section 61(a)(12) of the Internal Revenue Code. This is usually referred to as “cancellation of debt” or “discharge of indebtedness” income, and it is taxable whether debt relief is full or only partial, unless the debtor is in bankruptcy or insolvent.
However, if the debt is nonrecourse, there is no cancellation of debt income. Rather, the debt is taken into account as proceeds of the sale. Consequently, regardless of the value of the property the proceeds of sale consist of the entire debt plus any actual cash retained by the borrower. If that amount exceeds the borrower’s basis in the property, there is a taxable gain, but no cancellation of debt income.
Assume a short sale of a principal residence for $250,000, with $300,000 debt. If the debt is nonrecourse the proceeds of sale are deemed to be $300,000, rather than the $250,000 actually received. If basis was less than $300,000 there will a potentially taxable gain. But even if there is a gain, up to $250,000 ($500,000 for married joint filers) may be excludable from income under section 121 of the Code if the home was owned and used as the taxpayer’s principal residence for two or the five years preceding the disposition and the gain was not attributable to depreciation claimed since 1997.
If the loan is recourse, the tax law divides the disposition transaction into two parts; a sale, and a cancellation of indebtedness. The amount realized on the sale part of the transaction does not include the debt to the extent the debt exceeds the fair market value of the property. Rather, the excess of debt over fair market value is cancellation of debt income, reportable as ordinary income, and not capital gain.
To illustrate the computation involved, assume the same facts discussed earlier; a short sale of a home for $250,000 that is burdened with $300,000 of debt. If the debt is recourse, and $50,000 of excess debt is written off as part of the transaction, the borrower has $50,000 of debt cancellation income. That is, proceeds of the sale are $250,000, with cancellation of debt income in the amount of $50,000. There may also be taxable gain if the taxpayer’s basis is less than $250,000, with the same result discussed above.
Federal law since 2007 has provided an exclusion for debt cancellation income on a disposition of the taxpayer’s principal residence, up to $2 million of debt incurred to acquire the property, but that provision was only extended through 2013, and will not be available for debt cancelled in 2014 unless Congress acts to extend it again. Moreover, the provision does not cover debt such as home equity loans or cash-out refinancings.
As a result, the question of whether a debt is recourse or non-recourse is of considerable importance.
Most mortgages are recourse. That is, the lender can pursue the borrower for any unpaid deficit unless the lender explicitly agrees not to do so. However, some states have enacted “anti-deficiency” statutes which forbid the lender from pursuing the borrower under various circumstances even if the loan was recourse on its face. It has never been clear whether the IRS would treat such provisions as turning the loan into a non-recourse loan for purposes of federal taxation.
California has had anti-deficiency laws for some time, and expanded them during the mortgage crisis. In 2010, the California State Legislature added section 580e to the Code, and expanded it in July of 2011. Under that section, a lender is prohibited from pursuing a deficiency on any debt (first or second mortgage, home equity line, etc.) disposed of in a short sale approved by the lender.
Senator Boxer of California inquired of the IRS whether the effect of that law was to make such debts non-recourse for purposes of federal tax on cancellation of debt. In a letter late in 2013, the IRS responded that it was. That is, California debts subject to section 580e (and by implication, other portions of section 580 that ban deficiencies in other circumstances) will be treated as non-recourse for purposes of avoiding cancellation of debt income under the Internal Revenue Code.
Although the IRS was careful to hedge its advice by limiting it to California law, it is difficult to see why it would not apply to anti-deficiency laws in other states to the extent that they in fact bar deficiency proceedings on a particular debt.
Consequently, in both short sales and other proceedings in which a lender takes over the home (for example, a foreclosure or a deed in lieu of foreclosure) taxpayers should ascertain whether there is a state law that would prevent the lender from pursuing them individually. If so, the application of the now-expired federal exclusion will not be necessary to avoid ordinary cancellation of debt income, and cancellation income may also be avoided even if the debt included a second trust or home equity line if the state law, as in California, precluded a deficiency.
Posted by Peter K. Scott
States that follow or incorporate the federal tax system, but in which same-sex marriage is not recognized, have been required to provide guidance as to how same-sex couples who are now permitted to file joint federal tax returns should file for state purposes. All have now done so, and the great majority has opted to continue to require such couples to file as single. Those decisions will have consequences not only for the couples in question, but for the gross-up and benefits decisions of their employers. This Mobility LawBlog entry provides the details.
The Full Story:
Today’s tax quote: “Nothing makes a man and wife feel closer, these days, than a joint tax return.” Gil Stern
As the filing season for 2013 tax returns ramps up, Mr. Stern’s observation for the first time applies to married couples of the same sex. But state rules discussed below will, in most cases, confine the joy to federal returns.
After the Supreme Court’s decision in the Windsor case in 2013, holding that the federal Defense of Marriage Act (DOMA) is unconstitutional in denying federal benefits to same sex married couples, it was left to IRS and Treasury to resolve a number of issues concerning the application of federal tax law to such couples. In a related series of rulings and announcements on August 29, 2013, they did so. See IR-2013-72 ; Frequently Asked Questions for same sex married couples ; and Frequently Asked Questions for Registered Domestic Partners and Individuals in Civil Unions. For more on that guidance, see the Mobility LawBlog post from August 30, 2013
. In brief, that guidance says that same-sex married couples can file joint federal tax returns regardless of where they live if they are legally married in a state that recognizes same-sex marriage.
However, it was unclear what the states that do not recognize same-sex marriage but follow federal tax law in their own system would do. Currently, 17 states and the District of Columbia recognize same sex marriage, and no guidance as to state filing is necessary. There are 22 states, however, that follow the federal tax code in general, but ban same sex marriage. In those states, the state tax authority has had to decide how same sex couples who filed joint federal tax returns should proceed for state tax purposes.
This is more complicated than it might appear, since those couples have not calculated taxes for federal purposes based on each individual’s income. If the state requires them to file as single, there is no federal income tax return from which to import data. In general, such states have followed one of three approaches: (1) taxpayers allocate income to two single returns using a state-provided schedule (5 states); (2) taxpayers must complete “pro forma” federal tax returns as single and use that information for state filing purposes (12 states); (3) taxpayers apportion income between two single returns using a state provided ratio (Alabama).
All 22 states have by now decided how to proceed, and as discussed above, the majority has opined that even though same-sex couples may now file joint federal tax returns if they are legally married in any state that recognizes such marriages regardless of their state of residence, they must continue to file as single at the state level.
Based on the most recent available information, here is the line-up of the states:
1. States that do not recognize same-sex marriage in which such couples must file as single:
Alabama, Arizona, Georgia, Idaho, Indiana, Kansas, Kentucky, Louisiana, Michigan, Montana, Nebraska, North Carolina, North Dakota, Ohio, Oklahoma, South Carolina, Virginia, West Virginia, and Wisconsin.
Arkansas, Mississippi, and Pennsylvania ban same sex marriage, but do not base their calculations on the federal system, and as a result same sex couples there also would continue to file as single.
2. States in which same-sex couples may file joint returns:
Colorado, Missouri, and Oregon do not currently recognize same-sex marriage, but have announced that same-sex married couples who file jointly for federal purposes may do so for state purposes as well. Utah is embroiled in litigation over the constitutionality of the state’s same sex marriage ban, which has preliminarily been held unconstitutional, and has therefore announced that for 2013 same sex couples may file joint Utah returns.
Other states in which joint filing is permitted include California, Connecticut, Delaware, DC, Hawaii, Illinois, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New Jersey, New Mexico, New York, Rhode Island, and Vermont.
For Worldwide ERC® members, the decisions at the state level may affect not only gross-up calculations for these employees, but also the taxability for state purposes of benefits made available to spouses of employees married to a person of the same sex. (Note that the IRS recently published guidance on the treatment for federal tax purposes of benefits under so-called “cafeteria plans” under section 125, including flexible spending arrangements, and health savings accounts under section 223. That guidance can be found at http://www.irs.gov/irb/2014-2_IRB/ar13.html
.) Consequently, human resources functions for relocation, benefits, and payroll will need to take them into account.
Posted by Peter K. Scott
Today’s tax quote: “If the Lord had meant us to pay income taxes, He’d have made us smart enough to prepare the return.” Kirk Kirkpatrick
In the interest of assisting more transferees to prepare “smart” returns, here are Worldwide ERC®’s annual tax season filing tips for transferees.
Here are several items deductible as moving expenses that are sometimes overlooked:
- Tips to the moving van driver or helpers.
- Mileage for driving second or third cars to the new location (in addition to the first car). The deduction for 2013 is 24 cents per mile. (The deduction will decrease to 23.5 cents per mile for 2014).
- Lodging expenses in the departure location for one night after the household goods are packed, and one night in the new location on the day of arrival.
- Moving household goods from a location other than your main home, up to what it would have cost to move them from the main home
- Storage of household goods for up to 30 days, including the cost of moving the goods into and out of storage. Note that the costs for moving the goods into and out of storage remain deductible even if the goods are in storage more than 30 days.
- Expenses not reimbursed by your employer, such as extra crating, shipment of unusual items, tips to van line staff, etc.
And remember: You don’t have to itemize to deduct moving expenses.
Other filing season tips:
- If the seller of your new house agreed to pay part of your mortgage points instead of reducing the sales price, IRS says you can deduct those points, even though the seller paid them.
- If you ever refinanced your mortgage, don’t forget to deduct the entire remaining balance of points paid on the refinancing in the year you sell your home.
- If your new job is for a different employer, and you earned more than $113,700 in 2013, you may have had too much deducted as contributions to Social Security. You can take a credit for the excess over $7,049.40 on line 69 of your Form 1040 tax return. However, you may still owe the additional 0.9% Medicare tax that went into effect in 2013 if combined wages from both employers exceeded $200,000, or if your wages combined with those of your spouse exceeded $250,000. In such a case, you will need to file Form 8959 to report the additional tax, which applies to amounts in excess of the thresholds above, and include it on line 60 of the Form 1040.
- If you moved to one of the states with state and local sales taxes but no general income tax (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, or Wyoming) you may benefit from an itemized deduction for state sales taxes. The deduction was reauthorized by Congress for 2012 and 2013 at the end of 2012.
- If you paid a premium for mortgage insurance, you may be entitled to an itemized deduction as mortgage interest for the portion of the premium allocable to 2013. No deduction is available, however, if your adjusted gross income is more than $110,000.
- If you claimed a homebuyer credit on your purchase of a home in 2008 through 2010, and you sold your home or stopped using it as your principal residence when you were transferred in 2013, you may have to repay on the 2013 return the entire credit taken. See IRS Form 5405 and its Instructions for details. Repayment is always required for credits taken in 2008. However, for credits claimed in 2009 and 2010, repayment is only required if the home ceased to be your principal residence within 36 months of its purchase. If you sold the home and did not have a gain, none of the credit must be repaid. In calculating gain, remember to subtract from the sale proceeds all purchase closing costs, and any improvements you made to the home during the time you owned it.
- If the sale of your former principal residence was a “short sale,” and you were relieved of some of the mortgage debt by your lender, you may receive a Form 1099-C reporting that debt relief to the IRS. However, a provision of the tax code excusing tax on such relief for acquisition mortgage debt up to $2 million was extended through 2013 in late 2012, and no tax should be due.
The 2013 return will be due on Tuesday, April 15, 2014.
Posted by Peter K. Scott
On December 6, 2013, the IRS released its annual optional standard mileage rates that may be used in computing automobile deductions during 2014. See IR-2013-95, http://www.irs.gov/2014-Standard-Mileage-Rates-for-Business,-Medical-and-Moving-Announced
, and Notice 2013-80. The new rates, applicable for auto use after December 31, 2013, are 56 cents per mile for business use, 23.5 cents per mile for medical or moving use, and 14 cents per mile for charitable use. The business rate is down a half cent from the 56.5 cents per mile rate that has been in effect since January 1, 2013, while the rate for medical and moving is also down a half cent from 24 cents. The charitable rate of 14 cents per mile does not vary from year-to-year because it is fixed by statute.
The rates are based on an annual study of fixed and variable costs of operating an automobile conducted for the IRS by an independent contractor. The rates for business and moving differ because the rate for business use includes fixed costs such as depreciation, which are not allowed as medical or moving deductions. Both rates include variable expenses such as fuel. Taxpayers are also allowed to deduct items such as parking and tolls in addition to the standard mileage rate.
Use of the standard deduction rates is optional; taxpayers are always free to determine their own actual costs of operating a vehicle. However, such costs must be substantiated through detailed records, while the use of the standard rates avoids any need to substantiate the underlying costs incurred, although taxpayers must still maintain records of the miles driven and the purpose of each trip.
Notice 2013-80 also provides amounts by which taxpayers using the standard business mileage rate must reduce the basis in their automobile for depreciation that is included in the standard mileage rate. Those amounts are 23 cents per mile for 2010, 22 cents per mile for 2011, 23 cents per mile for 2012 and 2013, and 22 cents per mile for 2014.
Some companies use mileage rates higher than the standard rates to reimburse business travelers or transferees. In such cases, the excess amounts are treated as taxable wages, and are subject to withholding and payroll taxes. Amounts up to the standard mileage rates are excluded from the income of the employee. An employee cannot deduct moving expenses using the business travel rate. See Adamson v. Commissioner, 32 T.C.M. 484 (1973).
Generally, the rates the IRS announces in November or December remain in effect during the entire following year, regardless of changes in underlying costs. However, in 2011 the IRS changed the rates in mid year due to a dramatic rise in fuel costs, the third time in six years in which it had done so. Currently, however, gasoline costs have been relatively steady and the current mileage rates are likely to remain in effect for all of 2014.
Posted by Peter K. Scott
IRS and Treasury have published final regulations requiring reporting of mortgage insurance premiums on Form 1098 by the recipient, but excuse such reporting for 2012 because no reporting requirement was in place. See http://www.ofr.gov/OFRUpload/OFRData/2013-28381_PI.pdf
. Although payers of such premiums must allocate prepaid premiums to the years they cover for purposes of the deduction, and may deduct the amount allocable to 2012, the recipient is not required to allocate them, or to file a report for 2012. If the premium received during 2013 exceeds $600, the recipient reports the entire premium on Form 1098.
The Full Story:
Today’s tax quote: “The tax law is six times longer than War and Peace and not nearly as easy to read.” Michael J. Graetz
The saga of the deduction for mortgage insurance premiums and the reporting of them is a fine illustration of Professor Graetz’s point.
Congress first enacted legislation in 2006 allowing a deduction for some mortgage insurance premiums by treating them as additional mortgage interest. The original legislation was for one year only (2007), but has been periodically extended, most recently through 2013 by the American Taxpayer Relief Act of 2012.
Mortgage insurance premiums are commonly prepaid for the entire length of the mortgage, but the law allows a deduction only for the amount allocable to the current year. It also gives the Treasury Department authority to write regulations requiring recipients of such premiums to report them both to the payer and to the government.
In its initial attempts to provide rules, Treasury simplified the allocation required by allowing individuals to allocate the premium ratably over the shorter of 84 months, or the length of the mortgage. It also told recipients to report the amount actually allocable to the year of receipt, but eliminated any penalties if the recipient reported the entire amount received, or utilized the 84 month rule applicable to the payer.
Eventually, temporary and proposed regulations were issued adopting the allocation rules above for individuals, but requiring the recipient only to report the full amount received if it exceeded $600. That is, the recipient is not required to allocate the premium received. The proposed regulations relating to the payer’s deduction were finalized in 2012. However, the regulations for recipients were not finalized at that time because the law allowing the deduction had expired at the end of 2011, and Treasury concluded it had no statutory authority to require reporting.
Now that the deduction has been extended to both 2012 and 2013, Treasury has finalized the regulations requiring reporting of premiums received when the premiums exceed $600. The final regulations retain the rule that no allocation is required by the reporting person; it only reports the full amount of the premium received in that year.
However, in an unusual twist, Treasury says that because there was no statute applicable in 2012 under which it could require reporting, no reports are required for that year, and there are no penalties for failing to report. But even though payers of premiums did not receive a Form 1098 for 2012, they still are allowed a deduction for amounts allocable to that year. If they did not take the deduction on their 2012 return, they may claim it by filing a claim for refund.
The deduction for mortgage insurance premiums is limited. It phases out at adjusted gross income of $110,000, and therefore is of use to a limited universe of taxpayers. However, the regulations create considerable likelihood of misunderstanding and inflated deductions by instructing recipients of prepaid premiums to report the full amount of Form 1098 even though the payer can only deduct the portion allocable to the current year. This is a break for the recipients, who otherwise would have been required to calculate an allocation and then continue to report it each year, but as noted may result in payers over-deducting.
Perhaps a re-reading of War and Peace might indeed have been easier.
Posted by Peter K. Scott
The tax code contains a number of temporary provisions that expire unless extended by Congress. Provisions of interest to Worldwide ERC members that are set to expire at the end of 2013 include the exclusion for mortgage debt cancellation on primary residences, the deduction for private mortgage insurance, and the deduction for state and local sales taxes. All were extended by legislation at the end of 2012 that made lower tax rates permanent. Although there is no current movement in Congress to achieve further extensions, past experience suggests that these provisions will eventually be extended, in some cases retroactively after they have expired.
The Full Story:
Today’s tax quote: “If Patrick Henry thought taxation without representation was bad, he should see how bad it is with representation.” The Old Farmer’s Almanac
One of the recurring problems with “taxation with representation” is that Congress frequently enacts beneficial provisions on a temporary basis. This practice is justified on the basis that it requires Congress to periodically re-examine those provisions to determine their effectiveness. However, the practice also creates ongoing uncertainty for taxpayers, and allows Congress to disguise the true long-term cost of benefits by limiting the period of time in which they will be effective even though many are routinely extended year after year with little or no re-examination. For example, the research credit, first enacted in 1981, has been temporarily extended some 15 times.
In the past, extension of some 40 expiring provisions was usually accomplished by taking them all together in a so-called “tax extenders” bill. However, that did not happen in 2012. Rather, many of the expiring provisions were included in the “American Taxpayer Relief Act of 2012,” enacted at the end of 2012 to make lower tax rates permanent, raise taxes somewhat on higher-income taxpayers, and fix the Alternative Minimum Tax.
Among the provisions extended through 2013 in 2012 were the exclusion for mortgage debt cancellation on primary residences; the deduction for private mortgage insurance, and the deduction for state and local sales taxes. All of these are of interest to the mobility industry and to Worldwide ERC members. What will become of them after 2013?
Currently, there is no movement in Congress to produce the usual “tax extenders” bill. Rather, the Chairmen of both the House Ways & Means Committee and Senate Finance Committee have said that they would prefer to address expiring provisions as a part of comprehensive tax reform. However, neither Committee seems likely to produce a tax reform package that it can vote on this year, in part because of fundamental differences between Republicans and Democrats as to whether tax reform should raise revenue, and if it does, how that revenue should be used (to reduce tax rates, or reduce deficits). Further, the budget conference mandated by the recent agreement to reopen the government and raise the debt ceiling, which must reach a conclusion in December, will impede any movement on tax legislation until it can address revenue issues.
The President’s budget proposals for fiscal year 2014, unlike previous budget proposals, suggest that many of temporary provisions be made permanent, and others dropped entirely. Those suggested for permanent extension include the exclusion for cancelled mortgage debt and the deduction for state and local sales taxes. The deduction for private mortgage insurance is not addressed.
Given this state of affairs, it is likely that the provisions mentioned will in fact expire at the end of 2013. Fortunately, that is not the end of the story.
Many of the expiring provisions have expired in the past, only to be restored retroactively like Lazarus rising from the dead. In fact, this happened in 2012. Two of the three provisions noted above had expired at the end of 2011, but were reinstated for both 2012 and 2013 at the end of 2012. Moreover, all three of these provisions have been extended multiple times in the past.
Worldwide ERC® members therefore can expect a period (perhaps a lengthy one) of uncertainty concerning the provisions mentioned, but can also have some modest confidence that Congress will address them eventually. Worldwide ERC will follow this issue, and advise members as more information becomes available.
Posted by Peter K. Scott
“Welcome to the Spanish Hills Country Club for the greatest golf litigation in the history of golf ball cases!”
Okay – so maybe this is the only golf ball case we know of but it's still worth reading about.
One might think that golf balls landing in your yard when you live on a golf course is not so shocking, right? And if you only saw the final decision in the case of Moore and Masters vs. Burton and SIRVA (2nd Civil, No. B234555; 2nd Civil No. B239447, Filed July 29, 2013, Court of Appeal Second District. Division 6, California; Superior Court No. 56-2008 0321433-CU-OR-VTA, Ventura County), you would think you were right. You would have read that SIRVA filed a motion for summary judgment; it was granted, and upheld on appeal. The end.
But as with any case, the facts are not as simple as the headline – "If you live on a golf course you may get golf balls in your yard" (and for a purse of $1.3M – or in this case the transferee’s claim for attorney fees – you might consider taking up golf or, better yet, being a litigation attorney!) And just like reading the Monday morning paper to see that Tiger Woods won yet again instead of watching the tournament, if you didn’t follow the whole case, you would have missed the excitement of an up-and-down golf match. Full of long drives, slices, hooks, errant shots, lots of shouts of "fore" and then the one long dramatic put to end it all! So, here you go!
This golf match began in 2002 when the Burtons (the Transferee sellers) purchased a home on the 7th fairway of the Spanish Hills Country Club in Camarillo, California. At the time of the purchase the Burtons signed a “Special Disclosure” setting forth special risks associated with golf balls landing on their property. Time goes by and the golfing continues.
By 2004, the Burtons were concerned enough about excessive golf balls landing on the property that Mr. Burton went to a city planning commission meeting to voice his concerns and asked for changes to the 7th fairway on the golf course. Some changes were made and more time and golfing goes by. By the time Mr. Burton was relocated in 2006 and the Burtons had to sell the house, there were 3 to 4 golf balls a day landing on the property. They had cracked roof tiles, damage to walls, lights and windows.
The Burtons sold their house through Mr. Burton’s employer’s relocation program using a two-step home sale transaction.
Under the relocation program, SIRVA Relocation was the intermediary party between the Burtons and the buyers. Eventually the buyers became aware of the golf ball problem, to the point where they testified that they were afraid to go swimming in their pool. On June 20, 2008 the buyers sued SIRVA and the Burtons for rescission of the sale and damages. The golf match was getting personal!
Although the trial court found that the Burtons did not choose to sell the house because of this excessive golf ball problem(1,200-1,500 balls a year), the court did find that the Burtons minimalist disclosure of "some golf balls" in the yard was woefully insufficient and that the Burtons intentionally did not disclose to anyone the excessive nature of the golf ball problem. One of the key findings of the trial court judge was that the Burtons knowingly did not provide the “Special Disclosure” they signed in 2002. The judge found that the Burtons intentionally withheld information to mislead both SIRVA and the buyers.
By finding that the Burtons intentionally misrepresented the golf ball problem, one would think that this is seemingly a hole-in-one for the buyers. But after a 30 day trial which began on April 6, 2010 (not counting the rain delays – or "court room dark days") and the initial tentative decision in favor of the buyers; followed by a “sudden-death” hearing on the buyers objections to that decision, the court surprised everyone – reversing its initial ruling and giving the closest to
the pin award to the Burtons with a final decision – filed on May 9, 2011, over year later, in favor of the Burtons!
The trial court found that because one of the buyers – Mrs. Masters – was a real estate agent, she had a higher duty of
"utmost care, diligence and skill" than a non-professional buyer. In her role as agent for the buyers, the court found that Mrs. Masters should have inquired more about the golf ball problem. If she had, she would have realized that Mr. Moore (her husband/the other buyer) had a big concern about the number and impact of errant golf balls on the house. The court found that Masters "negligently failed to ascertain desirability factors for Mr. Moore and negligently failed to investigate the cause of the disclosed damage to the residence". As such, because of her status as a real estate broker, Masters as a buyer could not avail herself of the Burton's "fraudulent concealment".
The appellate court upheld the trial court finding that as a real estate agent, Masters had a heightened duty to make a
reasonable, competent and diligent visual inspection and disclose all facts materially affecting value or desirability. The
court recognized there were "enough red flags" that could lead to a realization of a problem that Masters as a real estate agent should have investigated further. The buyers could therefore not support the element of justifiable reliance
necessary to a fraud claim. The impact of the Burton’s intentionally misleading statements were lost due to Master’s
negligence in her duties as a real estate broker.
But all this was just a battle for second place. The real Tiger Woods here was SIRVA and the relocation industry as a
whole. SIRVA won its summary judgment motion at trial, which was sustained on appeal. However, despite winning the summary judgment motion, SIRVA would still have to play the whole match. Because SIRVA was the "intermediary seller" the court required SIRVA to remain in the case as a nominal defendant with respect to the buyer’s claim for rescission. That allowed SIRVA to play along with the Burtons and the buyers as they fought out the factual disclosure and reliance issues.
The summary judgment decision and the appeal upholding it were relatively straightforward and reaffirmed basic principles of California law. Relying on the seminal case of Shapiro v Sutherland, 64 California App 4th 1534, the appellate court concluded that SIRVA satisfied its disclosure obligations as a third-party relocation company. The court acknowledged that California has both a common law and statutory duty to disclose. But the appellate court rejected the buyer’s claim that SIRVA breached its contractual duty to disclose under California statute 1102.4 because the duty of a seller to disclose is limited to information in the seller's personal knowledge.
In Shapiro, there was a noise problem not disclosed by Prudential Relocation or the relocating employee. That Court held that since Prudential did not know of the noise problem and never took possession of the property from the Transferee, the buyer’s only claim could be against the homeowner transferring employee. As long as Prudential's belief was "honest and reasonable" then any misrepresentation by Prudential was innocent and there is no liability.
The buyers in SIRVA’s case tried to distinguish Shapiro because Prudential never took title whereas SIRVA did. The Court rejected this "acquired title" argument because the argument puts form over substance. SIRVA never took possession and honestly and reasonably believed the “some golf balls” disclosure provided by the Burtons.
A second, salient point from the case is that nondisclosure of property information that does not shed new or different light on the facts will not result in a claim. Not everything needs to be disclosed. Laura Means was the real estate broker for the Burtons and SIRVA on this property. As part of her duties, Means prepared a Market Analysis report that indicated "large quantities of golf balls on side of house may be an issue.” WOW – you may be thinking – that looks like a ball in a deep sand trap - the kind you see in the British Open. But SIRVA's lawyer took out his 60° wedge and hit a beauty to the green. The court found that SIRVA had no duty to disclose the Market Analysis because it was "the realtor’s personal opinion of property value". It did not, the court wrote, require a special disclosure because it did not say anything more about where the golf balls were landing than the Burtons themselves had disclosed in multiple disclosures, such as the California state disclosure form and the SIRVA disclosure form (never mind that they were not truthful, because SIRVA had no knowledge of that.)
The fact that SIRVA did not execute a disclosure form separate from the Burtons even though the statute requires every seller to complete one was also not meritorious. The court found the buyer’s claim to be form over substance in light of SIRVA’s clear statements in the contract documents that it was never in actual possession; SIRVA disclaimed any knowledge beyond the Burton's disclosure in the contract addendum with the buyers; and, the fact that the buyers knew that SIRVA is a third-party relocation company involved only as an intermediary seller. So, as the appellate court penned in its last line about SIRVA’s involvement –"SIRVA did nothing wrong" – one could almost hear Bill Murray yelling "it's in the hole!"
The golf tournament ended when no party filed a petition for review with the California Supreme Court. But if you are ever in Camarillo, California and you need some golf balls, just listen for the guy in the swimming pool yelling “fore!”
Posted by Jeff Margolis
General Counsel, Relocation
SIRVA Worldwide, Inc.
The Social Security Administration announced October 30, 2013, a 1.5% benefit increase for 2014, and an increase from $113,700 to $117,000 in the maximum amount subject to Social Security taxes. On October 31, 2013, IRS announced 2014 inflation-adjusted amounts for the large number of provisions that are regularly adjusted, including the standard deduction and dependency exemptions. The standard deduction will increase by $200 for married couples, and personal exemptions will be worth $3,950, up $50.
The Full Story:
Today’s tax quote: “I want to find out who this FICA guy is and how come he’s taking so much of my money.” Nick Kypreos.
The Federal Insurance Contributions Act (FICA) tax (otherwise known as the Social Security tax) is 12.4%, split equally between employer and employee, but unlike the 2.9% Medicare tax is collected on wages only up to a limit, called the “Social Security Contribution and Benefit Base,” or the Social Security wage base. Social Security benefits are adjusted each year for inflation. That adjustment also leads to an increase in the taxable wage base.
In an October 30 news release, the Social Security Administration announced a benefit increase of only 1.5% for 2014, lower than last year’s increase of 1.7%. At the same time, the SSA also announced that the maximum amount of wages subject to FICA taxes will increase from 113,700 to $117,000. For the SSA Press Release go to http://www.ssa.gov/pressoffice/pr/2014cola-pr.html
About 10 million workers will pay more taxes as a result of the wage limit increase, and employers will also owe additional taxes for the employer share of FICA for such workers. The 2.8% Medicare tax (1.45% each for worker and employer) is not subject to any wage limit.
The most commonly utilized inflation-adjusted items are the standard deduction, and the personal exemption. For 2014, personal and dependent exemptions will be worth $3,950, up $50 from 2013. The standard deduction will rise to $12,400 for married couples, up $200, and to $6,200 for singles, up $100. In addition, the tax brackets will be adjusted. For example, the 15% bracket will now end at $73,800. And for the first time, the new high-income brackets imposed by the 2012 “American Taxpayer Relief Act” will be adjusted. In 2014, the 39.6% tax rate will apply to income exceeding $406,700 for singles and $457,600 for married couples, up from $400,000 and $450,000.
The foreign earned income exclusion, which is utilized by many Worldwide ERC® member expats, will rise to $99,200, up from $97,600 in 2013.
All of these developments will affect gross-up calculations and other payroll calculations for Worldwide ERC® members.
Posted by Peter K. Scott