Visiting the Committees
| Publication year | 2021 |
Commentary and Updates by the Committees
The Corporate and Pass-Through Entities Committee focuses on issues faced by corporate taxpayers and provides opportunities for practitioners and corporate tax counsel to maintain a level of expertise in the field of corporate tax law, expand their professional contacts, and serve the profession, the public and the legal system. Membership in the Committee offers practitioners information on developments with respect to corporate and business tax and a greater voice on developments in such legislation.
Generally, the Committee holds monthly meetings via teleconference and interested members of the Tax Section are welcome to participate. The Committee is sponsoring a four-part webinar CLE/CPE series on various partnership tax topics. In addition, members and other interested parties are welcome to submit articles for Quick Points on Corporate and/or Pass-through topics of general interest to the members of the Taxation Section. For more information regarding upcoming meetings and events should contact the Committee Co-Chairs Cameron Hess at (916) 920-5286 or chess@wkblaw.com, Asaf Kletter at akletter@gmail.com.
Downturn Tax Planning: Contributions of Debt
Many businesses (e.g., corporations, partnerships, and limited liability companies) have a capital structure that includes debt from owners (e.g., shareholders, partners and members). The current economic environment may cause those businesses to consider converting that debt to equity rather than change other terms of the debt. After all, the owners made the same initial investment to the business whether or not classified as debt. A conversion may have the effect of simply readjusting the initial classification without altering the rights vis-a-vis the owners.
A debt-to-equity conversion, though, may cause a business or its owners to recognize cancellation of indebtedness or "debt discharge" (COD) income for US or California income tax purposes. In turn, that would require them to seek some form of exclusion, deferral or offset or face paying tax liabilities when cash may be short.
Specifically, under Section 108(e)(6) of the Internal Revenue Code (the "Code"), a creditor who is a shareholder generally can contribute debts owed by a corporation to the capital of the corporation and not cause the corporation to recognize COD income if the corporation does not issue additional stock and the shareholder has a tax basis in the debt no less than the amount of the debt. Generally, an owner will have tax basis in the debt for a loan of cash, as distinct from amounts owed to the owner for rent, salaries, interest and other items for which the owner has not yet recognized income. Moreover, a special rule does not trigger COD income for debt contributed to an S corporation even if S corporation losses have reduced the tax basis of debt below the amount of the debt. California conforms to those provisions. In contrast, if the corporation issues its stock in exchange for the debt, then the corporation generally recognizes COD income to the extent the debt exceeds the fair market value of the stock issued.
The IRS could issue regulations under Code Section 108(e)(6), which could clarify when the IRS will deem an issuance of stock when the issuance of actual shares would be a "meaningless gesture" because the ownership percentage would remain the same. To date, the IRS has not issued those regulations, but has issued private rulings that apply Code Section 108(e)(6) if the corporation does not actually issue shares. On May 22, 2020, the IRS released a legal memorandum, 2020-005, which states that it will deem stock to be issued in "meaningless gesture" transactions if it affects the holding period of the shares. In an informal conversation with the contact attorney for the legal memorandum, the attorney confirmed that the legal memorandum is not intended to signal a change in policy regarding Code Section 108(e)(6).
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After changes made to Section 108 in 2004, no judicial or statutory exception, such as Code Section 108(e)(6), appears to apply to a partnership (or LLC taxed as such) debt to equity conversion treated as a contribution of capital.
- Layton L. Pace Hermosa Beach, CA
The Estate and Gift Tax Committee is comprised of attorneys throughout the State of California who devote a significant portion of their practice to understanding the evolving areas of estate and gift tax planning, drafting, compliance, and controversy work. One of the primary functions of the Committee is to provide valuable, informative, high quality continuing education programs on behalf of the Taxation Section. Throughout the year, the Estate and Gift Tax Committee also hosts quarterly conference calls to organize committee activities.
On May 6th, 2020, the Estate and Gift Tax Committee hosted a Webinar entitled "Tax & Planning Changes for Individuals Wrought by the Pandemic." The Webinar explored certain federal and state responses to the pandemic through tax, economic and legal initiatives, as well as certain wealth transfer planning opportunities that have resulted as a by-product to the crisis. The webinar, which was presented by Eric A. Baggett, was well attended by over 100 Taxation Section members.
Throughout the year, the Estate and Gift Tax Committee hosts other quarterly conference calls to organize committee activities. If you would like to join the conference calls of if you are interested in joining the leadership of the Estate and Gift Tax Committee please contact Eric A. Baggett at eric.baggett@bofa.com or (619) 515-5645.
The Income and Other Taxes Committee provides an outlet for its members to actively participate in the Taxation Section with respect to issues relating primarily to federal income taxation. The Committee's mission is to: (i) promote dialogue and maintain the expertise of its members through the annual provision of continuing education with respect to recent developments on various income (and other) tax issues; and (ii) provide a networking forum for members to expand their professional contacts.
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The 2020 Annual Income Tax Seminar was postponed, unfortunately, due to Covid-19. This event was scheduled to take place on Friday, June 26, 2020, at the CLA Headquarters in Sacramento. The Committee put on a Webinar on April 23, 2020, from 11:00 AM to 12:00 PM, in conjunction with CalCPA, providing an overview and in-depth discussion of the Final Regulations for Qualified Opportunity Funds.
Please contact the Committee Chair, Matthew Carlson, at mcarlson@boutinjones.com for information on joining the Income and Other Taxes Committee, participating in the 2021 Annual Income Tax Seminar, or participating in future Income and Other Taxes Committee submissions and projects. The Committee holds monthly meetings by teleconference on an ad hoc basis, so please reach out to the Committee Chair at mcarlson@boutinjones.com to confirm the date and time of the next Committee meeting if you are interested in participating.
The International Tax Committee is an integral part of California's international tax practice, providing a unifying forum in which to address the tax considerations of individuals, trusts, and business enterprises, whose members and activities cross international borders. The Committee works with the AICPA foreign trust task force and international tax technical resource panel to liaise with the IRS for various projects, including comments for regulations, modifying tax forms and developing new forms, and easing administrative burden while increasing compliance.
The International Tax Committee generally holds meetings at least quarterly via teleconference. We always welcome members to submit articles for Quick Points on international tax topics.
If you would like to participate in our quarterly conference calls, submit articles for a future Quick Points, or just want information on current committee activities, please contact the International Tax Committee Chair, Raul Villarreal-Garza, at raul.villarrealgarza@procopio.com or (619) 525-3874, or Vice Chair, Emily Graham, at egraham@emilygrahamesq.com or (561) 789-2220.
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