Proposition 30 and that $6 Billion in Education Cuts

One of the most prevalent arguments in favor of Proposition 30 is that without it, education spending will be subject to $6 billion in "trigger cuts" that will result in higher college tuition and shorter school years. 

But is this $6 billion really a "cut" in the way you and I would think about it? 

Consider the following example:

Say you're expecting a $100-per-week raise at work.  But then you don't get it, and you tell your friends that you have to cut back by $100 a week. 

Normally, you really wouldn't think of that $100 week not coming in as a cut, since it was never part of your salary in the first place.  However, with respect to these "trigger cuts", the key is that this $6 billion figure stems from the fact that Gov. Brown and the legislature started the budget year by assuming that Proposition 30 would pass.

So Did The Wall Street CEOs Actually Call For Tax Hikes to Fix the Deficit?

On Thursday, the Wall Street Journal published a letter from over 100 major CEOs apparently calling for tax hikes in an effort to reduce the deficit.

Almost immediately, the letter was cited as proof that any position which did not accept the idea of tax increases as a prime vehicle to decrease the debt was indefensible. 

The Wall Street Journal editorial board, has taken a different interpretation in its editorial:  CEOs to the Tax Rescue? Liberals Confuse a Pro-Growth Plea With a Tax-Rate Hike:

Two words: game, change. On Thursday a 100-strong group of major business leaders did a Warren Buffett and endorsed a big tax hike, even if it means they'll have to pay more themselves. The support of this CEO lobby could break the Republican dead-enders who oppose all taxes and finally clear the way for a glorious bargain of tax increases and spending cuts to reduce the deficit. 

If you've seen this news story, don't worry. It's all a fantasy, albeit one that appeals to certain political types, who are reading their own priorities into the latest CEO petition on debt and taxes. The reality is that the chief executives who this week signed on to a "core set of principles" on budget reform are more than anything else scorching President Obama's lack of leadership. ...

The CEOs favor a framework that would "stabilize the debt as a share of the economy, and put it on a downward path." ... The CEOs also want to "reform Medicare and Medicaid" and do more to control national health spending. ... Only then—as a condition of structural entitlement reform, including Social Security—do the CEOs back "comprehensive and pro-growth tax reform, which broadens the base, lowers the rates, raises revenues and reduces the deficit." Note that reference to tax reform and lower rates, not the standard Beltway trade of certain tax increases for the promise of spending cuts that never happen.

The folks who are treating this as an extraordinary political breakthrough have apparently come down with a case of Romnesia, to borrow the President's coinage: Mitt Romney has been running on exactly such a tax reform for nearly a year, using exactly those principles....

What the CEOs we know really want is faster economic growth, the policies to promote it, and a Washington political class that can pass those policies. The politicos claiming that this rather anodyne CEO debt proclamation will make it easier for Mr. Obama to "raise taxes" are the same ones who merely want him to raise taxes.

 Hat Tip (Tax Prof.)

IRS Releases Inflation Adjustments--gift tax exemption increased

The IRS just released various inflation-adjustments for 2013 (Rev. Proc. 2012-41, 2012-45), including:

Gift Tax Exemption: $14,000 (up $1,000 from 2012)

Contribution Limit for 401(k)/403(b)/457 Plans: $17,500 (up $500 from 2012)

Catch-Up Contribution Limit (Age 50+) for 401(k)/403(b)/457 Plans: $5,500 (same as 2012)

Income Limit for Full IRA Deduction: $59,000 single/$95,000 joint (up $1,000/$3,000 from 2012)

Income Limit for Full Roth IRA Contribution: $112,000 single/$178,000 joint (up $2,000/$5,000 from 2012)

Defined Benefit Plan Annual Benefit Limit: $205,000 (up $5,000 from 2012)

Year-End Gift Planning: How Valuation Clauses Can Get Around a Late Appraisal

With the abnormally high gift/estate tax exemption amounts of $5.12 million set to sunset at the end of this year, many attorneys, CPAs and tax-advisors are rushing to help their clients take steps to make significant gifts.  For those who wish to take advantage of this unique opportunity, the clock is winding down.  For the gifts to be effective this year, the transfer must be completed by December 31.

Unfortunately, many planners are now realizing that scheduling appraisals this late in the year means that they will likely not have the appraisal figures back until next year.  Thus, a donor is left to wonder, if I want to make a gift of say, exactly $5.12 million to my children, how do I know how many shares of stock or LLC units to transfer this year if I won't know the value until next year.

Fortunately, due to the availability of defined value clauses and some recent Tax Court cases, the donor (and his/her advisers) can make large gifts with confidence.

In short, a donor need not specificy the exact number of LLC units given, all that needs to be specified is that value to be transferred, expressed in a mathematical formula.

A good example of such a formula clause is found in the recent Wandry decision, and reads as follows:

I hereby assign and transfer as gifts, effective as of January 1, 2004, a

sufficient number of my Units as a Member of Norseman Capital,

LLC, a Colorado limited liability company, so that the fair market

value of such Units for federal gift tax purposes shall be as follows:

                   Name                             Gift Amount

                   Kenneth D. Wandry        $261,000

                   Cynthia A. Wandry           261,000

                   Jason K. Wandry              261,000

                   Jared S. Wandry               261,000

                   Grandchild A                     11,000

                   Grandchild B                     11,000

                   Grandchild C                     11,000

                   Grandchild D                     11,000

                   Grandchild E                     11,000

                                                          1,099,000

Although the number of Units gifted is fixed on the date of the gift, that

number is based on the fair market value of the gifted Units, which

cannot be known on the date of the gift but must be determined after

such date based on all relevant information as of that date.

Furthermore, the value determined is subject to challenge by the

Internal Revenue Service (“IRS”). I intend to have a good-faith

determination of such value made by an independent third-party

professional experienced in such matters and appropriately qualified to

make such a determination. Nevertheless, if, after the number of gifted

Units is determined based on such valuation, the IRS challenges such

valuation and a final determination of a different value is made by the

IRS or a court of law, the number of gifted Units shall be adjusted

accordingly so that the value of the number of Units gifted to each

person equals the amount set forth above, in the same manner as a

federal estate tax formula marital deduction amount would be adjusted

for a valuation redetermination by the IRS and/or a court of law.

In short, while it would be preferrable to get the value before making the gift, a formula clause like the above gives the donor, and other professionals some breathing room.

Of course, one big caveat is to ensure that when the gift tax return is filed that the language on the return matches the language on the gift.  If the return just lists the exact number of shares, units, or percentage interest transferred the donor exposes himself to a potential challenge from the IRS alleging that a formula clause was not utilized. 

State "Names and Shames" Top 500 Tax Delinquents

The FTB recently released its list of the state's top individual and corporate tax delinquents. 

In the past, the FTB only released the top 250 names annually but this year the list was expanded to 500 and is to be updated and published bi-annually.  In addition, the state is publishing the names and titles of corporate officers of the listed corporations, publishing professional license information as well as prohibiting state agencies from entering into contracts with anyone on the list.

Of course, every year there is at least one celebrity who has the dubious distinction of being named on the list.  This year's honor goes to none other than Pamela Anderson of "Baywatch" fame who reportedly owes $524,241 in state income taxes.

Debate Fact-Check: Special Tax Break For Shipping Jobs Overseas? Not Really

The accusations and statistics about taxes bandied about by both candidates last light during the first Presidential debate were somewhat astounding.

One particular exchange caught my attention:

Obama: ....But I also want to close those loopholes that are giving incentives for companies that are shipping jobs overseas. I want to provide tax breaks for companies that are investing here in the United States....Right now, you can actually take a deduction for moving a plant overseas. I think most Americans would say that doesn't make sense. And all that raises revenue.

Romney's Response was incredulous:

Romney: ...Look, I've been in business for 25 years. I have no idea what you're talking about. I maybe need to get a new accountant. . . . But the idea that you get a break for shipping jobs overseas is simply not the case."
As I listened to the exchange I assumed that the President was stating that there was a separate stand-alone provision in the code that had special deductibility rules pertaining to companies that move facilities overseas--which I had never heard of before. Of course, with the Internal Revenue Code consisting of more than 5,000 pages and over 70,000 pages of interpretive regulations, I assumed that the President was right.

In reality, there is no "special" or stand-alone provision that, in the president's words, gives "incentives" to companies to move plants overseas. Any cost of doing business is deductible and so a company can claim a deduction whether it's moving operations to New York or New Delhi.