Friday, March 27, 2009

California State Tax Treatment of Ponzi Schemes

Today's release by the Franchise Tax Board:

Date: March 27, 2009

Subject: Franchise Tax Board News Release
tel 916.845.4800 | Public Affairs Office
cell 916.416.6931 | Brenda Voet
For Immediate Release


FTB Offers Tax Guidance for Ponzi Scheme Victims
Sacramento - The Franchise Tax Board (FTB) today offered guidance on theft-loss deductions for California taxpayers who had losses from investment schemes.

“Tax remedies are available for victims of Ponzi schemes,” said State Controller and FTB Chair John Chiang.

State and Federal law allow taxpayers to deduct some uncompensated losses on their tax returns. A recent IRS ruling, Revenue Ruling 2009-9, clarifies the treatment of losses from investment schemes, including the nature of such losses (theft losses), the amount of such losses to be allowed, and the year of deductibility. The IRS also plans to follow a new procedure, Revenue Procedure 2009-20, which provides an optional “safe-harbor” for determining the year in which the losses occurred and a simplified method of computing the amount of the loss. A “safe-harbor” allows taxpayers to avoid later IRS challenges.

California will follow this guidance, and FTB will accept the form provided in Appendix A to Revenue Procedure 2009-20for those taxpayers who choose to participate in the safe harbor provision for California purposes. However, a taxpayer that takes advantage of the safe harbor for federal purposes is not required to do so for California purposes.

State law differs from the Federal law in two key areas. In these areas, State law controls:

· Statute of limitations for filing a claim for refund.
· Deductibility of net operating loss (NOL) carryforwards or carrybacks. (NOL carryforwards are suspended for most taxpayers for 2008 and 2009. Carrybacks are allowable but only for NOLs attributable to 2011 or later.)

FTB will soon offer more detail on the differences in a FTB Taxpayer Notice. Interested taxpayers should check FTB’s website at for updates.

It looks like California will also be giving tax relief to those who are victims of fraudulent Ponzi Schemes. I will update everyone once the Franchise Tax Board offers more details on their treatment.

Thursday, March 26, 2009

Introduction to the Asset Protection Society

For those of you who are looking for additional information on asset protection, let me suggest the following resource. The website for the Asset Protection Society is: . Once a potential client takes the time to review the depth of material on the website, they generally come away with some information that they do not know before visitng the website. From asset protection statutes in the various states to ratings of local advisors who practice in this field, it is a great resource to both the individual and professional.

For Orange County, we are planning the second local Asset Protection Society meeting and details will soon be mentioned on this blog. If you are an individual who would like to hear more about these topics and discuss issues with advisors in a friendly setting, feel free to email me and I will give you information on the meeting.

Ponzi schemes and Federal Tax Treatment

A client called me the other day and mentioned that he and his CPA were having some arguments over the tax treatment of a bad investment. After discussing the issue with the client, it came out that the client had been involved with a Ponzi Scheme and had lost all of his investment in the program. This is not the BIG Ponzi Scheme that came up recently with Bernard Madoff, but the end result was the same.

This topic will not apply to 99.9% of the readers out there, so I will not spend a lot of time on it. Note though that the CPA wanted to be conservative and treat the investment as a long term capital loss (limited to $3,000 deduction per year) and the client wanted to deduct it according to the tax rules regarding theft.

After doing a bit of research, the IRS has come out with two rulings this year to help taxpayers who have been subject to this type of scheme. Revenue Ruling 2009-9 deals with the exact question as to whether these are theft losses or capital losses and goes on to deal with questions such as what year are the deductions available, how is the value of the loss determined, what limits prevent a person from taking the whole amount as a deduction, and other aspects. The IRS also published Revenue Procedure 2009-20, which provides safe harbor treatment for those who were subject to such schemes and report the losses in a certain way. If you were one of the people who were affected by one of them, then you should speak to your CPA and show him or her these two IRS Rulings to ensure that you are able to properly treat the theft that occurred to you.

Registration of foreign business entities in California

I often receive questions about forming limited liability companies, corporations, and limited partnerships in other states besides California. The reason being that California imposes a minimum $800 franchise fee and a gross receipts tax on limited liability companies. Furthermore, many jurisdictions such as Delaware, Nevada and others have preferential corporate codes that would apply to businesses formed in those states. With these facts, many people would say that they should form any and every business entity outside of the state, but California also has rules regarding when a foreign entity (a business entity formed in another state) has to register to do business in the state of California.

If a foreign entity is doing business in the state of California, then the entity is required to register with the California secretary of state. If that occurs, then the foreign entity will be subject to the California fees outlined above. Many people after hearing this explanation will expect that there is a straightforward answer as to what level of intrastate business creates this requirement, but the corporations code states that "Transact intrastate business" means to enter into repeated and successive transactions of business in this state, other than in
interstate or foreign commerce. Section 17001 of the California Corporations Code also states that simply being a member of an entity or a shareholder is not enough to subject the entity to the California taxes. Based on this, many people who believe that being a resident of the state of California is enough of a requirement to register their out of state businesses are incorrect. However, if you take the next step and try to determine what level requires you to register, then that requires a detailed facts and circumstances analysis that your corporate attorney and accountant will have to make in order to make that decision for you.

If you have a business formed in another state and you have had questions about registering the entity to do business in California, feel free to contact me to discuss. Many times a discussion with the individual's CPA will answer many of their questions, but it often requires ongoing discussions in order to save you from an unpleasant surprise from the state of California.

Tuesday, March 17, 2009

2nd Orange County Asset Protection Society Meeting

The date for the second Orange County Asset Protection Society Meeting has been set. It will be on Tuesday, May 12, at 7:00 PM. The website for the Asset Protection Society is here: . The members are both advisors and individuals who have a desire to learn about and implement various asset protection structures for protection. If you would be interested in attending or have questions about the meeting or the society, contact me to discuss.

Friday, March 6, 2009

First Asset Protection Society meeting in Orange County

For any potential client or advisor who would be interested, we are having the first local meeting of the Asset Protection Society ( in Orange County, California, on Tuesday, March 10, 2009, at 7:00 PM. The location will be at the Law Office of Ferruzzo and Ferruzzo, LLP, which is located at 3737 Birch, Suite 400, Newport Beach, CA 92660. The initial meeting will be to discuss options for having ongoing meetings in Orange County and many of the members of the asset protection society who are in this area have decided to attend. If you are not a member of the asset protection society but would be interested in meeting some of the advisors who are members of the society, please email me for more details and I will give you more information for the March 10 meeting.

H.R. 436

A few advisors that I work with have asked me to give my opinion on one of the proposed bills in the House of Representatives (HR 436) and specifically on the proposed changes to transfer tax valuation rules contained in the bill.

You can find the proposed text of the bill here:

While the bill does propose changes to the estate tax exemption amount, the proposed changes to the valuation rules are on the minds of many advisors. If you look at the Bill, it states,

"In the case of the transfer of any interest in an entity other than an interest which is actively traded (within the meaning of section 1092)

(A) the value of any nonbusiness assets held by the entity shall be determined as if the transferor had transferred such assets directly to the transferee (and no valuation discount shall be allowed with respect to such nonbusiness assets), and

(B) the nonbusiness assets shall not be taken into account in determining the value of the interest in the entity."

The first item to consider is what is a transfer "in an entity" and second, the issue of eliminating valuation discounts. The first issue is explained simply by pointing to many different kinds of estate planning techniques that advisors have used in the past and are currently using today. These vehicles for transfer planning are generally called family limited partnerships, family limited liability companies, or some other type of business entity owned primarily by one member of a family who begins gifting or selling those interests to younger individuals in the same family.

The second issue is the lack of valuation discounts for these types of transfers. In the past, the value of the business interest that was transferred could be reduced under several theories. These theories are usually discounts for lack of marketability (as closely held business interests generally do not have a market in which they are bought and sold) and lack of control (as the interest that is transferred by gift or sale is usually a minority interest).

The good news is that this bill has not yet been passed in the House of Representatives, but it continues to gather support from Representatives across the country. The bad news is that if this bill passes, then many estate plans or planning techniques that have used a family entity (Limited Liability Company or Limited Partnership) may lose their effectiveness for transferring future interests. If this bill passes, it is unlikely that it would have any kind of retroactive effects upon transfers, but any future transfers would be subject to the bill itself.

Based on this, I am recommending to my current clients that have family entities to consider completing their gifts or transfers before this bill is passed into law, or if they are not comfortable or able to conclude these transfers at the present time, to understand that future estate planning will be needed to eliminate any additional estate taxes based on the elimination of these discounts. If you or any of your family members or friends have been using a family limited partnership or family limited liability company to transfer wealth, it is as important now as it ever has been to make sure all of the administrative requirements are fulfilled (proper valuations of the interests, gift tax returns filed on an annual basis, interest payments made on installment sale promissory notes to trusts for the benefit of family members, etc.) and to continue to speak to your advisors about this Bill to find out if it passes in the future.

If you have one of these kinds of entities and you are uncertain as to whether or not you have been handling the administrative aspects of the entity correctly, or if you have questions about this proposed bill or any other estate planning question, do not hesitate to contact me.