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Author: Dickinson Wright

PLANNING FOR 2018

By: Henry Grix Even if Congress fails this autumn to overhaul the Internal Revenue Code and, conceivably, repeal the federal “death” or estate tax, 2018 can be expected to bring relief in the form of taxpayer-friendly inflation adjustments.  Under current law, important tax items are adjusted annually for cost of living, including the break points for income tax brackets, standard deductions, and certain estate, gift and generation skipping transfer tax exemption amounts.  Although the IRS has not made an official announcement of the 2018 adjustments, Thomson Reuters projects that the exemption from federal estate tax will increase in 2018 to $5.6 million from the current $5.49 million.  If this adjustment is made as expected next year, a single individual may shelter up to that  $5.6 million amount from federal gift, estate and generation-skipping transfer tax, and a married couple with proper planning may shelter double that amount, or $11.2 million.  The annual gift tax exclusion, which has been $14,000 for a number of years, is projected to increase to $15,000 in 2018.  Thus, a married couple can give up to $30,000 to any number of loved ones next year without using any of either spouse’s $5.6 million exclusion amount.  Please contact one of our tax and estate planning lawyers to learn more about planning for 2018 under current law.    For more information, please contact Henry M. Grix (Member)...

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What Happened to Economic Obsolescence in Assessment Valuations

By: Mark Lansing If you own property that is valued by the cost approach by assessors or appraisers, you likely found out that the only obsolescence being deducted was physical depreciation. Yet, it is fundamental that to reach market value by the cost approach, the assessor must also consider and deduct for both functional and economic obsolescence. Like Functional Obsolescence, to obtain economic obsolescence, you often must apply for it with the assessor/appraiser. Economic obsolescence arises from conditions that exist outside of the property. For example, a modern coal plant has a heat rate of 8500. At one point, the coal plant was considered more economical to produce electricity than a natural gas combined cycle gas turbine plant (even though, the combined cycle plant had a much lower and, thereby, more efficient, heat rate of 6500). However, when natural gas prices crashed, starting in the latter part of 2008, it became competitive with coal prices (and have remained at or near coal prices). The coal plant’s competitive advantage evaporated. The obsolescence at coal plants resulted from the market forces of fuel pricing, negatively impacting the coal plant’s gross margin (or dark spread). As the dark spread for a plant contracts, it becomes less profitable, and the coal plant’s value declines. To capture this reduced value in the marketplace by the cost approach, the assessor/appraiser must quantify the economic obsolescence...

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Estate Tax Portability – Not So Fast My Friend

By: Henry C.T. (Tip) Richmond, III Many of you have heard of the new Federal estate tax “portability” rule that allows a surviving spouse to effectively inherit any unused federal estate tax exemption of a predeceased spouse.  An individual can only use the unused estate tax exemption from his or her “last deceased spouse.”  Some married clients conclude that portability means they can simplify their estate plans by eliminating the “by-pass trust” fund now found in most married couple plans.  As Coach Lee Corso would say, “not so fast my friend”. Portability will be a beneficial “second best” choice for estates of decedents who did no estate tax planning.  But bypass trust planning (which is already part of most married couple plans) will continue to be the best alternative for most married couples with potentially taxable estates.  Here are some of the disadvantages of relying on portability in lieu of the by-pass trust: (i)         Portability works only if the executor of the first deceased spouse files an estate tax return electing to pass the unused exemption to the surviving spouse, and executors of relatively modest estates may see the cost of filing a complete estate tax return as too high of a price to pay to get only the potential benefit of portability; (ii)        Leaving property to one’s spouse in a bypass trust affords a number of non-tax benefits...

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What Happened to Functional Obsolescence in Assessment Valuations

By: Mark Lansing  If you own property that is assessed by the cost approach, you likely found out that the only obsolescence deducted was physical depreciation. Yet, it is fundamental that to reach market value by the cost approach, the assessor must also consider and deduct for quantifiable functional and economic obsolescence. Unfortunately, the taxpayer often must apply to the assessor to even be considered for either functional or economic obsolescence.   There are two types of functional obsolescence – superadequacies and excess operating costs. Super adequacies are measured by the difference between the cost of reproduction and the cost of a modern and economic replacement facility for the subject property. For excess operating costs, functional obsolescence is quantified by the present value of the identified excess operating costs that exist at the property resulting from, for example, either modern or efficient design of the facility. Some assessors believe that if they start with replacement cost of a modern facility, they have accounted for all functional obsolescence.  That is not correct.  Even starting with the cost of the model facility accounts only for super adequacies (and if the wrong replacement facility is chosen, it fails to fully capture the super adequacies). In addition to the super adequacies, the difference in operating costs between a modern facility and the subject property must also be accounted for.    Issues may arise when only...

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Inter-Company Pricing Practices of Taxpayers with Foreign Affiliates

By: William E. Elwood The Internal Revenue Service has increased its scrutiny of inter-company pricing practices of taxpayers with foreign affiliates and has provided agents conducting audits with standard language requesting information about such pricing, usually citing Treasury Regulation § 1.6662-2.   Clients need to understand that these transfer pricing requests are part of a recent audit emphasis by the IRS and are procedurally different from the information requests typically made by the IRS during an audit because, among other reasons, they are subject to a special 30-day response requirement to avoid possible IRS penalties.  Clients who receive such a request need to immediately (1) review their files and documents to see what written support they have for setting the terms of its cross border transactions between their foreign and US entities, and (2) contact and begin coordinating their response with their accountants and tax counsel.  Clients who are not yet under audit should take advantage of the time they have before the next audit cycle to discuss their inter-company pricing with their accountants and tax counsel and assure that transactions between related entities are done on an “arm’s length” basis, as required by Section 482 of the US Internal Revenue Code and pursuant to written pricing analyses (which must have be in effect and binding at the time of an applicable transactions).    For more information, please contact William...

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Tax Blog is published by Dickinson Wright PLLC to inform the public of important developments within the firm and practice areas. The content is informational only and does not constitute legal or professional advice. We encourage you to consult a Dickinson Wright attorney if you have specific questions or concerns relating to any of the topics covered in this blog.

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