Remembering Bob Mendenhall

By Wells Hall

Bob Mendenhall is a man with a grey beard and dark eyes. He is pictured smiling and wearing a white shirt, a black jacket and a red tie with a white pattern.

Bob Mendenhall

Bob Mendenhall, former Chair of the North Carolina Bar Association Tax Section, passed away on July 14, 2022, at the Charlotte Rehab Center, one day before his 68th birthday. His obituary is available here.

When I spoke to Bob shortly before his death, he told me about his surgery to remove a blood clot after a head injury resulting from a fall in late May. He knew that his recovery would take some time, but he looked forward to resuming his law practice at Holland & Knight in Charlotte. He shared with me his daughter Lauren’s summer plans prior to her junior year at Elon. He was so proud of her. Read more

What is an Investment Partnership?

John Hodnette is a man with brown hair and blue eyes. He is pictured wearing a dark blue jacket, white shirt, and pale blue and pink plaid tie. He is smiling and standing against a grey background.By John G. Hodnette

As discussed in my January 12, 2022, blog post, Section 731(c) generally treats marketable securities as money in determining gain or loss on a distribution to a partner. Section 731(c)(3)(A)(iii) provides an exception in the case of marketable securities held by an investment partnership that are distributed to an eligible partner. But what is an investment partnership, and what is an eligible partner?

An investment partnership is defined by Section 731(c)(3)(C)(i) to mean “any partnership which has never been engaged in a trade or business and substantially all of the assets (by value) of which have always consisted of (i) money, (ii) stock in a corporation, (iii) notes, bonds, debentures, or other evidences of indebtedness, (iv) interest rate, currency, or equity notional principal contracts, (v) foreign currencies, (vi) interest in or derivative financial instruments (including options, forward or future contracts, short positions, and similar financial instruments) in any asset described in any other subclause of this clause or in any commodity traded on or subject to the rules of a board of trade or commodity exchange, (vii) other assets specified in regulations prescribed by the Secretary, or (viii) any combination of the foregoing.”
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Quid Pro Quo: Charity Disclosure Requirements

John Hodnette is a man with brown hair and blue eyes. He is pictured wearing a dark blue jacket, white shirt, and pale blue and pink plaid tie. He is smiling and standing against a grey background.By John G. Hodnette

Section 6115 imposes a disclosure requirement on charitable organizations that receive quid pro quo contributions in excess of $75. A quid pro quo contribution is a payment made partly as a contribution to the charity and partly in consideration for goods and services provided to the payor by the charitable organization. The disclosure by the charity to the payor must include (i) a statement informing the donor the amount of the contribution deductible for federal income tax purposes is limited to the excess of the amount of any money and the value of any other property contributed by the donor over the value of the goods or services provided by the donee organization, and (ii) a good-faith estimate of the value of the goods or services provided by the donee organization.

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Recent National Articles about North Carolina Tax Matters

 

By Herman Spence III

There have been several recent national articles about North Carolina tax matters.

1. The May 11, 2022 issue of Taxes – The Tax Magazine has an article entitled “100 Years of State and Local Taxation in North Carolina.” The article is by Roby B. Sawyers, who is a professor in the College of Management at North Carolina State University. In addition to providing interesting history, the article contains statistics, such as over the past thirty years, the percentage of state general fund tax revenues by source has (a) increased from about 48.5% to about 52% for individual income taxes, (b) increased from about 25% to 32.7% for sales and use taxes, and (c) decreased from about 8% to 2.7% for corporate income taxes.

2. On May 23, 2022, Tax Notes posted an interview with Charles Collins. Mr. Collins worked for the North Carolina Department of Revenue for more than thirty years before retiring from the Department at age 55. He has continued to be active in tax matters, including with ADP’s payroll operations.

3. On May 23, 2022, Tax Notes posted an article by Roxanne Bland about transactional nexus. It discusses Quad Graphics, Inc. v. NC Dept. of Rev., No. 407A21-1 (NC, filed Nov. 22, 2021). The article criticizes the formalistic distinctions between sales and use taxes that would prohibit the state from collecting a sales tax but permit it to collect a use tax.

Herman Spence III is an attorney with Robinson, Bradshaw & Hinson, P. A. in Charlotte.

Golden Parachute Payments – Shareholder Approval Exception

John Hodnette is a man with brown hair and blue eyes. He is pictured wearing a dark blue jacket, white shirt, and pale blue and pink tie. He is smiling and standing against a grey background.By John G. Hodnette

Sections 280G and 4999 impose a 20% excise tax in addition to regular income taxes on individuals who receive an excess parachute payment upon a change of control or sale of a substantial portion of the assets of a corporation. Section 280G also prohibits the corporation from deducting the payment. However, there are notable exceptions to these general rules, including the shareholder voting exception in Section 280G(b)(5)(B).

Only officers, certain shareholders, and the highest paid group of individuals of a corporation are subject to the golden parachute rules. Parachute payments are limited by definition to payments equal to or exceeding three times the individual’s base salary. However, even if the Section 280G rules would generally apply, there may be an opportunity for the corporation to apply the shareholder approval exception. The exception applies only to corporations whose stock is not readily tradable on an established securities market, as defined in Treas. Reg. § 1.897-1(m). A corporation is treated as having regularly traded stock if either (i) it is a member of an affiliated group of corporations and stock of any member of such group is readily tradable on an established securities market, or (ii) its parent corporation has any ownership that is readily tradable on an established securities market and the stock of the corporation constitutes a substantial portion of the fair market value of the assets of the parent corporation.

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The Tax Section Returns to Kiawah Island for Memorial Day!

After a 3-year hiatus, the Tax Section returns to beautiful Kiawah Island, SC for its annual meeting and CLE program, May 27-29, 2022. The 3-day program includes sessions on state and federal tax, tax policy, and planning, with added ethics and technology sessions. Speakers include well-known professionals from private practice, government, and education sectors. The program has been approved for 9 hours of CLE credit, including 1 hour each of ethics, substance abuse/mental health, and technology. There will also be plenty of time for attendees to enjoy golf, tennis, beaches, dinning, and other amenities that make Kiawah Island Resort special. Registration and program materials are at https://cle.ncbar.org/courses/41046 .

New Proposed Rules for Group Tax Exemptions

By John G. Hodnette

Section 501(a) provides an exemption from income taxation for certain organizations. For decades, the IRS has provided a procedure allowing multiple organizations to receive tax exemption under the same umbrella central organization. Such group exemption process was instituted to relieve the IRS from the burden of individually processing a large number of applications for organizations that are affiliated and operate for the same purpose.

The central organization receives a group exemption letter (“GEL”) granting tax-exempt status not only to itself but also to all of its subordinate organizations. The subordinate organizations are not required to provide individual documentation supporting their exemption. Instead, the central organization attests that the subordinates qualify and provides the information required by the IRS. Common examples of group exemptions are churches, fraternal societies, and other central-hub-style organizations.

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Federal Income Tax Update: Part II

By Keith A. Wood

I. IRS Continues to Crack Down on S Corporation Disguised Wages.

In Ward & Ward Company v. Commissioner, T.C. Memo. 2021-32, the Tax Court held payments from an S corporation law firm to its owner/shareholder were wages subject to self-employment tax rather than a Subchapter S distributions of profit.

II. Court Rules Taxpayers Adequately Notified the IRS of Address Change: Direct Communication of Address Change to IRS Agent Was Sufficient Notice to IRS.

In Gregory v. Commissioner, No. 19-2229 (3d Cir. 2020), the Third Circuit held a couple’s filing of two IRS tax forms that used their new address along with direct communication of the address change to an IRS agent was sufficient notification to the IRS of the change of address. The Tax Court previously held the IRS sent a valid 90-day notice of deficiency to the couple’s last known address, and the couple had not provided the IRS with clear and concise notification of the address change.

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Federal Income Tax Update

By Keith A. Wood

  1. Tax Court Again Rules Emotional Distress is Not Physical Illness.

    In Tressler v. Commissioner, T.C. Summ. Op. 2021-33, the Tax Court held emotional distress damages are not excluded from income unless those emotional damages are attributable to a direct physical injury. Ms. Tressler brought a lawsuit against her former employer for failing to prevent a physical assault by another employee. Ms. Tressler alleged the assault caused her emotional distress, which caused even more physical injuries. The court held the emotional distress damages were not excludable from income under Section 104(a)(2) because the settlement agreement failed to state the payments Ms. Tressler received were related to physical injuries rather than her claims for emotional distress.

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Marketable Securities as Money Under Partnership Tax Rules

By John G. Hodnette

Section 731(c) generally treats marketable securities as money in determining gain or loss on a distribution to a partner. Section 731(a)(1) provides no gain is recognized on a distribution to a partner except to the extent any money distributed exceeds the adjusted basis of the partner in the partnership interest.

The term “marketable security” means financial instruments and foreign currencies that are, as of the date of the distribution, actively traded within the meaning of Section 1092(d)(1). For example, if a partnership distributes publicly traded stock with a value of $100 to a partner with an adjusted basis in her partnership interest of $50, the partner generally recognizes a gain of $50. However, there are a number of exceptions.

The first exception, in Section 731(c)(3)(A)(i), provides a marketable security is not treated as money if the partner receiving the security contributed the security to the partnership.

The second exception, in Section 731(c)(3)(A)(ii), provides a marketable security is not treated as money to the extent provided in regulations if the property was not a marketable security when acquired by the partnership. Reg. § 1.731-2(d)(iii) clarifies that is satisfied if (a) the entity that issued the security had no outstanding marketable securities when the security was acquired by the partnership; (b) the security was held by the partnership for at least six months before the security became marketable; and (c) the partnership distributed the security within five years of the security becoming marketable.

The third exception, in Section 731(c)(3)(A)(iii), provides a marketable security is not treated as money if the partnership is an investment partnership, and the partner is an eligible partner. A future blog post will describe what qualifies as an investment partnership and an eligible partner.

Finally, Section 731(c)(3)(B) provides for a reduction in the amount treated as money on a distribution of marketable securities equal to the difference between the partner’s distributive share of partnership net gain before the distribution and the partner’s distributive share of partnership net gain after the distribution. That is best demonstrated by Example 2 in Reg. § 1.731-2(j).

When gain is recognized as a result of Section 731(c), the basis of the marketable securities to which gain is recognized equals their basis as determined under Section 732 increased by the amount of such gain.  IRC § 731(c)(4)(A).

John G. Hodnette, JD, LLM is an attorney with Culp, Elliott, & Carpenter in Charlotte.