=================================================== This Report contains coverage of the Wednesday general session by Richard Robinson on 15% tax on Dividends and Capital Gains and the Friday morning session by Prof. Thomas Callanis on Domestic Partners and Inheritance ========================================================== Reporter: Herbert L. Braverman Esq. Mr. Robinson brought to our attention again the new playing field for income taxation. Lower rates should prompt us to think about realizing gains sooner rather than later because of the lower rates we are experiencing. He points out that the maximum rate for qualifying dividends is reduced to 15% for individuals, estates and trusts. The rates for lower bracket individuals is reduced to 5%. For taxpayers in the 10% to 15% bracket, the rate is ZERO in 2008. This is a tax environment we have not had in recent memory. For certain long term capital gains, property that had been taxed at 20% is now taxed at 15% for individuals , estates and trusts. Again, for lower bracket individuals, the tax rate is 5% and will be ZERO in 2008. These lower capital gains rates are scheduled to expire after 2008--Mr. Robinson is urging us to take advantage of these rates sooner rather than later. He notes certain exceptions, for example a 25% rate on certain recaptures and a 28% on certain collectibles. "Qualified dividend income" means dividends received during the tax year from a domestic corporation or qualified foreign corporations received by a non-corporate taxpayer. Certain dividends are not "qualified dividends", such as those from a tax exempt corporation, certain dividends from a mutual savings bank, dividends paid by a RIC or a REIT, etc. But , Mr. Robinson focuses our attention on situations where qualified dividends make sense today. Robinson discusses various situations where qualified dividends make sense for C corps and for S corps; similarly, he points out situations where redemptions are treated as qualified dividends for C corps and S corps, respectively, wither the attendant low tax consequences. His illustrations are numbers-driven with schematics that I cannot reproduce for you. My best advice is that you obtain a copy of his outline and follow the money! He shows us that flexibility and creativity can mean substantial windfalls to our clients. Though circumstances may dictate the use of dividend planning versus redemption planning (or both), both are important to keep in mind. For example, if stock basis is high, dividend treatment results in more income, but basis is not lost. Where there is significant capital loss carryforward, redemption treatment may be preferred. If stock has been held only a short time, dividend treatment produces a better result, provided the qualifying dividend holding period has been satisfied. Dividend treatment strips out earnings and profits on a dollar-for-dollar basis and may set the stage for an S election or future capital gains distributions from a C corporation. Robinson then turned to the topic of maximizing the benefits of capital gains realized sooner rather than later. If the 15% tax rate goes away, accelerating income in a 15% year could result in tax savings of 264% (15% vs. 39.6%). In other words deferral does not always produce the best tax result; the future tax burden from an increased tax rate may be substantially more than paying a current relatively low tax. He goes through detailed analyses to demonstrate the advantages
of the current tax environment in a variety of other situations,
including corporate liquidations, partnership distributions and
liquidations, Stock sales to related parties followed by liquidations
and sales between related parties, locking in appreciation at capital
gains rates. =================================================== Reporter: Herbert L. Braverman Esq. Professor Gallanis highlighted the apparent changes in the American family structure over several decades. He reviewed the demographics with us to show that there are many same-sex unmarried partners in this country and even more different-sex unmarried partners heading families in this country. He noted that inheritance laws in this country are focused on marriage,
whether formal, common law in some jurisdictions and under the putative
spouse doctrine who held a good faith belief that they were married. Hawaii, Vermont and California appear to be moving in this direction,
as does Maine with its recent legislation on the subject. Hawaii
has reciprocal beneficiaries register the relationship and gain
rights previously provided to married persons. Of course, this law
is aimed only at persons who are prohibited from marrying under
state law (same-sex partners and others, say a grandfather and his
granddaughter). On the other hand, the country has not reacted uniformly to this
trend. Where should we be on this set of issues? Professor Gallanis feels we should apply inheritance rights on the basis of domestic partnerships to effect the intend of decedents, to protect families or households and to avoid economic disruption to households. This will require a new understanding of domestic patterns. It will come only in time, slowly as our society changes, although it is not clear that we will see such a change. Finally, the Professor attaches a model statute for your consideration. There is certainly a lot to think about in this arena.
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