Key Tax Planning Issues for 2009

10 February 2009 Publication
Author(s): Michael D. Annis Marina A. Choundas Stephen A. Crane Olin G. Shivers Randolph J. Wolfe

Legal News Alert: Taxation

Foley has prepared a summary of the tax issues that will likely be in the forefront in 2009.

Cancellation of Indebtedness Income (COD)
With the recent collapse in the housing market and the financial crisis in general, an increase in the number or loan workouts, both on personal residences and business assets, is likely. Generally, a taxpayer must recognize income on the discharge of indebtedness unless the taxpayer qualifies for one of several exceptions. These exceptions include circumstances involving a principal residence, insolvency, bankruptcy, or farm debt. It is imperative that the cancellation of indebtedness rules be reviewed before any loan workout or modification takes place to determine the tax consequences of the transaction.

While generally any COD issues on a taxpayer’s residence will be covered by the principal residence exception and later by the exclusion of gain on the sale of the residence under Code Sec. 121, the COD exception will only cover the taxpayer’s principal residence. Any second homes or investment properties will not fall under the exception, and any short sales, mortgage modifications/workouts, or foreclosures may subject the taxpayer to COD income. Further, many large and small businesses may face similar issues on investment property or even property on which the businesses operate.

Negotiating with the lender before any of these issues arise is instrumental to achieving a favorable outcome for the taxpayer. If taxpayers raise these issues with the lender after they arise, it may be too late to structure the transaction to either significantly reduce or eliminate the taxpayer’s COD income. Taxpayers facing potential COD issues should consult with and retain counsel to handle any lender negotiations.

Estate Planning
In 2009, the federal estate tax exemption increases from $2 million per taxpayer to $3.5 million per taxpayer. This significant increase could cause unintended economic consequences in estate planning documents. If an individual’s estate planning documents fully fund the family trust (or credit shelter trust) with the remainder to the marital trust, the exemption increase will shift $1.5 million from the decedent’s spouse to the children if the family trust is set up such that the spouse is not a beneficiary. Taxpayers should be made aware of this to ensure that their current documents are in line with their desires. The increased exemption, coupled with the likely decrease in value of assets, also may cause a much larger percentage of an estate to pass to the family trust and therefore away from the decedent’s spouse than was intended.

At the same time, the down economy creates various advantageous estate planning options. Interest rates are at or near historical lows, making it an excellent time to enter into transactions that take advantage of these rates. Further, the depressed stock and real estate markets make it an opportune time to transfer devalued assets to children and future generations. Intra-family loans, sales to “intentionally defective” grantor trusts (IDGTs), grantor retained annuity trusts (GRATs), qualified personal residence trusts (QPRTs), and charitable lead trusts (CLTs) are among the most effective tax planning strategies that can capitalize on these challenging economic times.

Deferred Compensation Plans
Companies often look for ways to reward senior executives and key employees without giving these individuals actual ownership in the company. This can be accomplished by granting these individuals stock appreciation rights (SARs) in the company, which allow the recipient to share in the company’s financial performance. A SAR plan provides motivation for the key employees and executives to increase the value of the company by allowing them to reap the rewards of any increases in value. SARs also are helpful tools for retaining key employees without having to pay large bonuses each year.

As more and more companies look for ways to decrease their expenses during the current economic downturn, SARs may be a helpful technique for a number of companies. SARs provide companies with the ability to reward their employees currently without a large cash outlay, while at the same time providing motivation for these employees to work hard to push the company through the downturn.

When setting up a SAR plan, it is critical to ensure that all elements of the plan comply with Code Sec. 409A and the related U.S. Department of the Treasury regulations. If structured improperly, the attempted deferral of income will fail, and employees may face tax without the corresponding receipt of funds from which to pay the tax.

In light of the current economic climate and increasingly complicated tax laws, it is more important than ever for taxpayers to have a team of professionals to handle both the financial and legal aspects of their tax and estate planning goals.

Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and colleagues.

If you have any questions about this alert or would like to discuss the topic further, please contact your Foley attorney or the following individuals:

Michael D. Annis
Tampa, Florida

Marina A. Choundas
Tampa, Florida

Stephen A. Crane
Tampa, Florida

Olin G. Shivers
Tampa, Florida

Albert P. Silva
Tampa, Florida

Debra K. Smietanski
Tampa, Florida

James R. Spoor
Tampa, Florida

Randolph J. Wolfe
Tampa, Florida







Internal Revenue Service regulations generally require that, for purposes of avoiding United States federal tax penalties, a taxpayer may only rely on formal written opinions meeting specific requirements described in those regulations. This newsletter does not meet those requirements. To the extent this newsletter contains written information relating to United States federal tax issues, the written information is not intended or written to be used, and a taxpayer cannot use it, for the purpose of avoiding United States federal tax penalties, and it was not written to support the promotion or marketing of any transaction or matter discussed in the newsletter.

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