Larry's Tax Law

People are often surprised by the long reach of Internal Revenue Service (“Service” or “IRS”) liens.¹  Plains Capital Corporation (“Plains”) recently learned this lesson.  Plains lost a fight with the Service in a case before the United States District Court for the Eastern District of Texas.  It appealed to Fifth Circuit Court of Appeals.  Losing again, Plains proceeded with an appeal to the United States Supreme Court.  Unfortunately, on June 24, 2013, the highest court in the nation refused to hear Plain’s appeal.²  The saga is over for Plains, but the case should be a loud warning to others.

In 2002 and 2003, the Service assessed taxpayer Gregory Rand (“Rand”) for tax liabilities arising from 2000 and 2002.  It eventually filed notices of federal tax liens totaling over $3 million (“Tax Liens”).

In 2005, Rand obtained a $200,000 line of credit from Plains.  Plains was aware of the Tax Liens.  To secure its credit extension, however, it took possession of the title to Rand’s 2005 Ferrari.  Plains thought taking possession of the vehicle title would put it in front of the IRS.  Wrong!

In 2007, Rand agreed with the IRS that he would deliver the Ferrari to Boardwalk Motor Sports, Ltd (“Boardwalk”).  Boardwalk agreed to sell the vehicle on consignment.

The Service and Plains could not agree upon the priority of their respective liens.  So, the IRS served a notice of levy on Boardwalk and instructed Boardwalk to deliver the sale proceeds to it.  Later, an IRS agent instructed Boardwalk not to release the sale proceeds until the IRS and Plains reached agreement on lien priorities.  If it was unsure whether an agreement was reached, Boardwalk was instructed to go to the local court and file an interpleader action.

Introduction

Section 336(e)1 expressly delegates authority to Treasury to issue regulations, allowing taxpayers to elect to treat the sale, exchange or distribution of corporate stock as a deemed sale of the corporation’s underlying assets.  On May 15, 2013, Treasury finalized regulations under Section 336(e).

What is the 336(e) Election?

A Section 336(e) election allows certain taxpayers to treat the sale, exchange or distribution of corporate stock as an asset sale.  The benefit of an asset sale is obvious—the basis of the target corporation’s assets is stepped up to fair market value.

If an election is made, “old target” is treated as selling all of its assets to “new target.”  New target is treated as purchasing those assets, resulting in a step-up in basis of the assets.  Old target recognizes the gain or loss from the deemed asset sale immediately before the close of the stock transaction.

Section 336(e) is intended to provide taxpayers relief from multiple levels of tax on the same economic gain—economic gain attributable to the appreciation of assets held in corporate solution.  Such multiple levels of tax can result from the taxable transfer of appreciated corporate stock where the assets in corporate solution do not receive a corresponding step-up in basis.

As many employers have painfully learned, misclassifying employees as independent contractors can be an expensive mistake. Worker misclassification may become even more costly in 2014, when a new potential trap for the unwary will exist. If a non-complying employer gets caught in this new trap, it could be faced with significant monetary penalties.

Beginning in 2014, as a result of the Patient Protection and Affordable Care Act, employers who misclassify employees as independent contractors may be subject to an additional penalty regime. Section 4980H(a) of the Internal Revenue Code (the “Code”) imposes a penalty on “large employers” who fail to offer full-time employees health insurance with a minimum level of coverage. Because employers generally do not provide health care coverage to independent contractors, reclassification of an independent contractor to a full-time employee could trigger this penalty.

According to a Bureau of Labor Statistics study conducted almost 8 years ago, approximately 10.3 million workers in the United States, or 7.4% of the workforce, are classified as independent contractors. Today that number, despite recessionary times, is likely dramatically larger.

The federal government, based upon recent case studies including federal and state income tax and unemployment tax audits, recently concluded many workers classified as independent contractors are actually employees. Consequently, worker classification is currently a hot topic for the Internal Revenue Service, the state departments of revenue, and other federal, state and local agencies.

Government focus on worker classification is not a new phenomenon. Due to current economic and political pressures, however, it has risen to the forefront of governmental attention. During the last few years, federal, state and local agencies have dramatically increased audit activity, targeting worker misclassification.