A bipartisan bill introduced in the House of Representatives yesterday, if passed, will provide significant inventive for the purchase and use of natural gas and natural gas vehicles. “New Alternative Transportation to Give Americans Solutions” Act (HR 1380), dubbed “NAT GAS” for short, is intended to provide financial benefits for users of natural gas as a vehicle fuel.

This includes tax credits for the purchase of such vehicles, for retrofitting diesel or gasoline vehicles; for the purchase of natural gas; and for the building of fueling stations, including home refueling units.

Specifically, the bill would provide:

• A tax credit of up to 80% of the incremental cost of buying a natural gas vehicle, with the maximum value ranging from $7,500 for a light-duty passenger vehicle up to $64,000 for commercial vehicles over 26,000 lbs. GVWR. Conversion of a new or used vehicle to operate on natural gas would also be eligible for this vehicle purchase credit.
• A 50-cent per gallon fuel tax credit.
• An infrastructure tax credit of 50% of the cost of building a fueling station—up to a maximum of $100,000 per station. A credit of $2,000 would also be available to individuals installing home refueling units.

WASHINGTON – U.S. Senators Lindsey Graham (R-South Carolina), Rand Paul (R-Kentucky), and Mike Lee (R-Utah) today introduced new legislation addressing major funding issues facing Social Security in the coming years. The Senators noted their plan, Social Security Solvency and Sustainability Act, achieves sustainable solvency for the Social Security system without any tax increases.

What the plan accomplishes:

* Reduces debt held by the public by $6.2 trillion by 2085.

* Eliminates the current difference of $5.4 trillion between benefits promised and what Social Security can actually pay.

* Creates a solvent and sustainable Social Security system that will be able to provide the benefits it promises to future generations without raising taxes.

* Gradual Increase in the Social Security Retirement Age – The senators propose a gradual increase in the Social Security full retirement age to 70 by 2032.

* Indexing the Retirement Age to Longevity – When retirement age of 70 is achieved, the full retirement age will then be indexed to increases or decreases in life expectancy. Indexing will help maintain a constant ratio of years worked to years spent in retirement. (see attached chart detailing current law and Social Security Solvency and Sustainability Act retirement age)

* Gradual Increase in the Early Retirement Age – The senators propose a gradual increase in the Social Security early retirement age from 62 to 64 by 2028.

* Slower Benefit Accumulation for Higher Lifetime Earners – After 2018, all new retirees coming into the system will have benefits based on the first $43,000 of their average lifetime yearly earnings calculated based on wage growth. Above $43,000, benefits will be calculated based on price growth.

“Social Security is coming unraveled and it must be preserved,” said Senator Graham. “Our plan saves Social Security and will be significant down-payment on comprehensive entitlement reform. I’ve been involved in Social Security reform since my election to the Senate in 2002. I’m quite familiar with the scare tactics and know first-hand the demagoguery that is sure to come our way. But the American people know the problems facing Social Security are real and must be addressed. Every year we delay, the solutions get more difficult and the consequences of inaction become more dramatic. It’s time for action.”

“This plan fully fixes the shortfall in the Social Security program, ensuring that the promises we make today can and will be kept. It gradually implements changes everyone knows need to be made,” Senator Paul said. “If we wait a few years, the fixes will have to be more drastic and less thought-out and gradual. I urge anyone who wishes to join this discussion to do so by bringing forward their own plan that fully fixes our Social Security system for the next 75 years or more.”

“Our proposal addresses the coming Social Security deficit in a responsible way without raising taxes,” said Senator Lee. “These ideas should be part of the larger debate over entitlement reform that we will have in the coming months. For those who might oppose these solutions, I look forward to hearing their ideas to make Social Security solvent and sustainable as the discussion goes forward.”

See full text of bill here.

Summary: Failure to adhere to the technical requirements of Section 1031, including failure to use a Qualified Escrow Account, failure to properly document the transaction and to restrict the funds in accordance with Section 1031 caused the sale of property to be taxed, regardless of the intent of the taxpayers to treat the sale as a tax deferred sale subject to Section 1031.

Background. Some of the facts have been stipulated and are so found. The stipulation of facts and the attached exhibits are incorporated herein by this reference. Petitioners resided in California at the time the petition was filed.

Petitioners owned an undeveloped parcel of property in Lake Havasu City, Arizona (Arizona property). Petitioners held the Arizona property for investment. Petitioners desired to own investment property closer to their California residence. After receiving some limited advice concerning a tax-free exchange of properties, petitioners took steps to sell the Arizona property and purchase new property with the intention of executing a tax- free exchange. On March 4, 2005, petitioners sold the Arizona property for $76,000. The buyers of the property paid petitioners $10,000, and the remaining $66,000 was placed in an escrow account with Capital Title Agency, Inc. (Capital Title). At petitioners’ direction $61,743.25 was held in the escrow account. Capital Title initially released $4,256.75 to petitioners. Petitioners’ basis in the Arizona property was $8,500.

In furtherance of the purchase petitioners made payments 3 to Chicago Title Co. (Chicago Title) and placed in an escrow account as follows:

Date Amount
January 4, 2005 $ 10,000.00
March 14, 2005 $ 24,700.00
March 14, 2005 $ 4,256.75
March 14, 2005 $ 294.00
March 18, 2005 $ 61,550.00
Total $100,800.75

The Capital Title and Chicago Title escrow agreements did not reference a like-kind exchange under section 1031, nor did they expressly limit petitioners’ right to receive, pledge, borrow, or otherwise obtain the benefits of the funds.

Discussion
In general, the Commissioner’s determination set forth in a notice of deficiency is presumed correct, and the taxpayer bears the burden of showing that the determination is in error. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 [12 AFTR 1456] (1933). Pursuant to section 7491(a), the burden of proof as to factual matters shifts to the Commissioner under certain circumstances. Petitioners did not allege that section 7491(a) applies. See Section 7491(a)(2)(A) and (B). Therefore, petitioners bear the burden of proof. See Rule 142(a).

The general rule regarding recognition of gain or loss on the sale or exchange of property is that the entire amount of the gain or loss is recognized. Sec. 1001(c). An exception to the general rule is found in section 1031.

Section 1031 provides that no gain or loss is recognized when business or investment property is exchanged solely for other business or investment property of like kind. The regulations define “like kind” as a reference to the nature or character of the property and not the property’s grade or quality. Sec. 1.1031(a)-1(b), Income Tax Regs. In order to take advantage of the nonrecognition provisions of section 1031 through a deferred exchange, a taxpayer must satisfy a number of technical requirements. 1 Sec. 1031(a)(3); sec. 1.1031(k)-1, Income Tax Regs.

A deferred exchange is defined as “an exchange in which, pursuant to an agreement, the taxpayer transfers property held for *** investment *** and subsequently receives property to be held *** for investment”. Sec. 1.1031(k)-1(a), Income Tax Regs. To qualify as a deferred exchange the transaction must be an exchange of property, not a transfer of property for money. Id. The reinvestment of the proceeds from a cash sale of one property into a second property of like kind will not qualify as a section 1031 exchange. Greene v. Commissioner, T.C. Memo. 1991-403 [1991 TC Memo ¶91,403] (citing Carlton v. United States, 385 F.2d 238, 242 [20 AFTR 2d 5376] (5th Cir. 1967), Coastal Terminals, Inc. v. United States, 320 F.2d 333, 337 [12 AFTR 2d 5247] (4th Cir. 1963), and Estate of Bowers v. Commissioner, 94 T.C. 582, 589 (1990)); Lee v. Commissioner, T.C. Memo. 1986- 294 [¶86,294 PH Memo TC]; Gibson v. Commissioner, T.C. Memo. 1982-342 [¶82,342 PH Memo TC]; sec. 1.1031(k)- 1(a), Income Tax Regs.

Gain or loss may be recognized if the taxpayer actually or constructively receives money that does not meet the qualifications of section 1031(a) before the taxpayer actually receives like-kind property. Sec. 1.1031(k)-1(a), Income Tax Regs. “The taxpayer is in constructive receipt of money or property at the time the money or property is credited to the taxpayer’s account, set apart for the taxpayer, or otherwise made available so that the taxpayer may draw upon it at any time”. Sec. 1.1031(k)-1(f)(2), Income Tax Regs. If the taxpayer’s control of receipt of the money or property is subject to substantial limitations or restrictions, then there is no constructive receipt. Id. To avoid being in constructive receipt of money or property, a taxpayer may use a qualified escrow account. Section 1.1031(k)-1(g)(3), Income Tax Regs., defines a qualified escrow account as the following:

(ii) A qualified escrow account is an escrow account wherein—
(A) The escrow holder is not the taxpayer or a disqualified person * * *, and
(B) The escrow agreement expressly limits the taxpayer’s right to receive, pledge, borrow, or otherwise obtain the benefits of the cash or cash equivalent held in the escrow account *** . The taxpayer’s own limitation of use of the funds does not convert the escrow account into a qualified escrow account. Klein v. Commissioner, T.C. Memo. 1993-491 [1993 RIA TC Memo ¶93,491].

The Arizona property and the California property are like- kind properties. At issue is whether there was an exchange within the meaning of the statute and the regulations.
We have no doubt that petitioners intended the transaction to qualify under the provisions of section 1031. However, it is well established that a taxpayer’s intention to take advantage of tax laws does not determine the tax consequences of his transactions. Bezdjian v. Commissioner, 845 F.2d 217 [61 AFTR 2d 88-1105] (9th Cir. 1988), affg. T.C. Memo. 1987-140 [¶87,140 PH Memo TC]; Carlton v. United States, supra at 243 (citing Commissioner v. Duberstein, 363 U.S. 278, 286 [5 AFTR 2d 1626] (1960)). To support their argument, petitioners testified that the funds in the Capital Title escrow account were held solely for the purchase of the California property and that they received no proceeds from the sale of the Arizona property.

Respondent argues that petitioners’ transactions were a sale and reinvestment of the proceeds because the Capital Title escrow agreement did not expressly restrict petitioners’ access to and use of the funds held in the escrow account. Respondent asserts that petitioners were in constructive receipt of the proceeds from the sale of the Arizona property and that the gain on the sale must be recognized in 2005.

The underlying purpose of section 1031 is to permit a taxpayer to defer gain with respect to “an ongoing investment, rather than ridding himself of one investment to obtain another.” Teruya Bros., Ltd. v. Commissioner, 580 F.3d 1038, 1042 [104 AFTR 2d 2009-6274] (9th Cir. 2009) (citing Starker v. United States, 602 F.2d 1341, 1352 [44 AFTR 2d 79-5525] (9th Cir. 1979) (”The legislative history [of sec. 1031] reveals that the provision was designed to avoid the imposition of a tax on those who do not `cash in’ on their investments in trade or business property.”)), affg. 124 T.C. 45 (2005).

Neither escrow agreement expressly limited petitioners’ right to receive, pledge, borrow, or otherwise obtain the benefit of the funds nor made any mention of a like-kind exchange. Because of the lack of limitations, neither escrow account was a qualified escrow account. See Hillyer v. Commissioner, T.C. Memo. 1996-214; Lee v. Commissioner, supra. Although petitioners used the funds in the Capital Title escrow account to purchase the California property, the lack of express limitations in the escrow agreement results in petitioners’ being treated as having constructively received the proceeds.

We conclude that the disposition of the Arizona property was a sale and the funds deposited in the Capital Title escrow account represent the receipt of the proceeds. See sec. 1001(c). Consequently, this transaction does not qualify for section 1031 nonrecognition, and petitioners must recognize gain for 2005. See sec. 1001(c). The Court notes that the tax consequences are not what petitioners intended and the result may seem somewhat harsh. However, Congress enacted strict provisions under section 1031 with which taxpayers must comply. We also note that respondent has conceded the accuracy-related penalty.

We have considered the parties’ arguments and, to the extent not discussed herein, we conclude the arguments are irrelevant, moot, or without merit. To reflect the foregoing… [the] Decision will be entered for respondent as to the deficiency in income tax and for petitioners as to the accuracy-related penalty.

[Footnotes omitted.]

Federal data indicate how urgently we need reform: The unfunded liabilities of Social Security, Medicare and Medicaid already exceed $106 trillion. That’s well over $300,000 for every man, woman and child in America (and exceeds the combined value of every U.S. bank account, stock certificate, building and piece of personal or public property).

The Congressional Budget Office has warned that the interest on our federal debt is “poised to skyrocket.” Even Federal Reserve Chairman Ben Bernanke is sounding alarms. Yet the White House insists that substantial spending cuts would hurt the economy and increase unemployment.

Plenty of compelling examples indicate just the opposite. When Canada recently reduced its federal spending to 11.3% of GDP from 17.5% eight years earlier, the economy rebounded and unemployment dropped. By comparison, our federal spending is 25% of GDP.

Government spending on business only aggravates the problem. Too many businesses have successfully lobbied for special favors and treatment by seeking mandates for their products, subsidies (in the form of cash payments from the government), and regulations or tariffs to keep more efficient competitors at bay.

Crony capitalism is much easier than competing in an open market. But it erodes our overall standard of living and stifles entrepreneurs by rewarding the politically favored rather than those who provide what consumers want.

The purpose of business is to efficiently convert resources into products and services that make people’s lives better. Businesses that fail to do so should be allowed to go bankrupt rather than be bailed out.

But what about jobs that are lost when businesses go under? It’s important to remember that not all jobs are the same. In business, real jobs profitably produce goods and services that people value more highly than their alternatives. Subsidizing inefficient jobs is costly, wastes resources, and weakens our economy.

Because every other company in a given industry is accepting market-distorting programs, Koch companies have had little option but to do so as well, simply to remain competitive and help sustain our 50,000 U.S.-based jobs. However, even when such policies benefit us, we only support the policies that enhance true economic freedom.

For example, because of government mandates, our refining business is essentially obligated to be in the ethanol business. We believe that ethanol—and every other product in the marketplace—should be required to compete on its own merits, without mandates, subsidies or protective tariffs. Such policies only increase the prices of those products, taxes and the cost of many other goods and services.

Our elected officials would do well to remember that the most prosperous countries are those that allow consumers—not governments—to direct the use of resources. Allowing the government to pick winners and losers hurts almost everyone, especially our poorest citizens.

Recent studies show that the poorest 10% of the population living in countries with the greatest economic freedom have 10 times the per capita income of the poorest citizens in countries with the least economic freedom. In other words, society as a whole benefits from greater economic freedom.

Even though it affects our business, as a matter of principle our company has been outspoken in defense of economic freedom. This country would be much better off if every company would do the same. Instead, we see far too many businesses that paint their tails white and run with the antelope.

I am confident that businesses like ours will hire more people and invest in more equipment when our country’s financial future looks more promising. Laying the groundwork for smaller, smarter government, especially at the federal level, is going to be tough. But it is essential for getting us back on the path to long-term prosperity.

Thank you, Mr. Koch! And keep hiring.

The Federal Motor Carrier Safety Administration proposed a regulation Monday that would require interstate truck and bus companies to install electronic onboard recorders in vehicles to monitor drivers’ hours of service.

The rule would apply to all companies that are currently required to use logbooks to record compliance under federal hours-of-service regulations, DOT said in a statement Monday.

“This proposal would make our roads safer by ensuring that carriers traveling across state lines are using EOBRs to track the hours their drivers spend behind the wheel,” Transportation Secretary Ray LaHood said in the statement.

Under the proposal, carriers that violate the regulation would be fined up to $11,000 per offense. Violations would also have a negative effect on a carrier’s safety ratings and federal operating authority.

FMCSA estimates the mandate will affect 500,000 carriers.

The rule would also relieve carriers of the requirement to retain documentation such as toll receipts to verify HOS compliance. A court had told FMCSA to issue a rule defining the supporting document requirement by Jan. 31, and DOT that the EOBR rule fulfills that order.

FMCSA will take public comments on the proposal for 60 days once it publishes the rule in the Federal Register. As of Monday, it had not yet published the rule.

(Published February 1, 2010)

“Using 1031 exchanges to recession proof your business” by Julie Robison

Real estate investors and their advisors have long been familiar with the cash flow benefits of 1031 exchanges. The most common are deferred exchanges- this is when the owners sell a piece of property first before buying more property within the 180 day limit.

There are a number of other types of 1031 exchanges that can also be used in a down market. For example, real estate investors with capital are currently able to purchase valuable properties at a significant discount. 1031 exchanges can then be used later to sell a property asset and use those proceeds to reduce the loan to the lender or to reimburse the investor for funds invested in the property purchased. This preserves the investors’ overall equity in their investments.

There are two options: a Reverse Exchange or a Parking Exchange. Both are the buy first, sell second method. A Reverse Exchange is when the sale is completed within 180 days. A Parking Exchange, on the other hand, allows the exchange to continue until the sale happens, even if it takes several years. While standard exchanges have a strict 180-day limit and a non-arm’s length legal structure, a Parking Exchange is the opposite: strict legal structure and a relaxed timeline.

There are good reasons for wanting a relaxed time line: in this economy, banks are hardly lending, and with prices of most properties substantially lowered, it is easier to buy than sell these days. The question of selling property, however, is not to ask if it is possible to sell but if it is probable. It is possible to sell anything; if it is probable to sell within the 180 day period is the more fitting question. If it is not, then a Parking Exchange will be the best course of action.

Parking Exchanges provide a remarkable opportunity to invest in a down economy. This is especially advantageous for unique pieces of property, where no suitable purchaser is available at the present moment.

A sample roster of our clients using Parking Exchanges includes a car dealership, a nursing home, commercial industrial building, apartment complexes and an orchard. By having the ability to “park” the property, the Qualified Intermediary (an independent 3rd party is required by law) safeguards the property and ensures the exchange’s successful completion. Every Parking Exchange is custom designed, since each exchange involves different type of properties with different purposes in mind, while following the same guidelines put forth by the IRS.

Example: Client A buys land and builds a new facility. It takes more than 6 months to build. Once the building is completed, client A moves from the old facility to the new facility. Once moved in, client A sells the old facility, and all the gains from the sale are deferred to the new facility’s purchase.

In real life, this exchange took a year and two months. If this had not been a Parking Exchange, it would not have been possible. However, because client A had more time, they were able to sell their old building without reducing their desired price.

Please do not reprint without permission.

WASHINGTON — The Internal Revenue Service plans a Feb. 14 start date for processing tax returns delayed by last month’s tax law changes. The IRS reminded taxpayers affected by the delay they can begin preparing their tax returns immediately because many software providers are ready now to accept these returns.

Beginning Feb. 14, the IRS will start processing both paper and e-filed returns claiming itemized deductions on Schedule A, the higher education tuition and fees deduction on Form 8917 and the educator expenses deduction. Based on filings last year, about nine million tax returns claimed any of these deductions on returns received by the IRS before Feb. 14.

People using e-file for these delayed forms can get a head start because many major software providers have announced they will accept these impacted returns immediately. The software providers will hold onto the returns and then electronically submit them after the IRS systems open on Feb. 14 for the delayed forms.

Taxpayers using commercial software can check with their providers for specific instructions. Those who use a paid tax preparer should check with their preparer, who also may be holding returns until the updates are complete. 

Most other returns, including those claiming the Earned Income Tax Credit (EITC), education tax credits, child tax credit and other popular tax breaks, can be filed as normal, immediately.

The IRS needed the extra time to update its systems to accommodate the tax law changes without disrupting other operations tied to the filing season. The delay followed the Dec. 17 enactment of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, which extended a number of expiring provisions including the state and local sales tax deduction, higher education tuition and fees deduction and educator expenses deduction.

Most people will be unaffected by this and can file now.