The answer to the question “What structure makes the most sense?” depends on the individual circumstances of each California business owner.

The IRS provides a handy fact sheet giving business men and women in Los Angeles County, Orange County, Ventura County and Santa Barbara County a quick look at the differences between the most common forms of business entities.

The most common forms of businesses are:

Sole Proprietorships

Partnerships

Corporations

Limited Liability Companies (LLC)

Of all the choices you make when starting a California-based business, one of the most important is the type of legal organization you select for your company. This decision can affect how much you pay in taxes, the amount of paperwork your business is required to do, the personal liability you face and your ability to borrow money. Business formation is controlled by the law of the state where your business is organized.

While state law controls the formation of your business, federal tax law controls how your business is taxed. Federal tax law recognizes an additional business form, the Subchapter S Corporation.

All businesses must file an annual return. The form you use depends on how your business is organized. Sole proprietorships and corporations file an income tax return. Partnerships and S Corporations file an information return. For an LLC with at least two members, except for some businesses that are automatically classified as a corporation, it can choose to be classified for tax purposes as either a corporation or a partnership. A business with a single member can choose to be classified as either a corporation or disregarded as an entity separate from its owner, that is, a “disregarded entity.” As a disregarded entity the LLC will not file a separate return instead all the income or loss is reported by the single member/owner on its annual return.

The type of business entity you choose will depend on:

Liability

Taxation

Recordkeeping

For more on the IRS fact sheet, click here.

To discuss this with a business attorney, call Mitchell A. Port at (310) 559-5259.

A conviction for willful failure to pay over employee payroll taxes is affirmed where “willfulness” does not require the government to prove that a defendant had the ability to meet his tax obligations.

In a decision made on August 22, 2008 by the federal court of appeals covering California (the U.S. 9th Circuit Court of Appeals), the court stated:

This case illustrates the enduring truth of Ben Franklin’s sage observation that “nothing is certain but death and taxes.” It is an appeal from a conviction for willful failure to pay over employee payroll taxes, in violation of 26 U.S.C. § 7202. The defendant-appellant, Jack Easterday, sought an “ability to pay instruction” in order to contend to the jury that his failure to pay over the taxes he owed was not “willful,” because he had spent the money on other business expenses and therefore could not pay it to the government when it was due. The district court refused to give the instruction, and Easterday subsequently was convicted and sentenced to thirty months in prison.

Payroll tax problems can have serious consequences. Consult with a qualified tax attorney about your tax problem. Call Mitchell A. Port at (310) 559-5259.

There is now tax relief for homeowners. In a news brief issued by the IRS for the benefit of those with troubled loans, the government now says that if your mortgage debt is partly or entirely forgiven during 2007, 2008 or 2009 you may be able to claim special tax relief by filling out Form 982 and attaching it to your federal income tax return for that year. Usually, forgiveness of debt results in taxable income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude from tax up to $2 million of debt forgiven on your primary residence. The limit is $1 million for a married person filing a separate return.

Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, may qualify for this relief. The debt must have been used to buy, build or substantially improve your principal residence and must have been secured by that residence. Debt used to refinance qualifying debt is also eligible for the exclusion, but only up to the amount of the old mortgage principal, just before the refinancing.

Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the new tax-relief provision. In some cases, however, other kinds of tax relief, based on insolvency, for example, may be available.

If you have other federal or California state tax problems, speak with a qualified tax attorney about finding a solution. Call Mitchell A. Port at 310.559.5259.

Your California estate planning documents (the living trust, will, durable power of attorney for property management and advance health care directive) are usually on paper and you want to be sure that they stay safe and can be easily found when your family needs to find them. So, where should you store them?

There are people who store them in very odd places like their freezers. It’s a better idea to keep your originals in a fire-resistant safe in your house and to notify friends and family where they are and how to get it open. Better yet, you can simply keep them in an accessible place where they can easily be found; if they are lost or destroyed before you need them, your estate planning attorney can provide you with another copy.

It is probably not a good idea to store your estate plan in a safe deposit box at the bank. Unless your friends or family are co-owners of the box (and sometimes even if they are), it won’t be easy for them to open it if you’re not there. Having the key isn’t enough to get the bank to open it up for them — the bank wants you to prove that you have the legal authority to require them to open it up. Think about it: the document granting your friends or family the right to act on your behalf as an executor is INSIDE the box, and until the box is opened, they can’t prove that they have the authority to get the bank to open it… (and so on).

Another concern about using a safe deposit box is those small keys to safeguard. Lost keys are create an expensive problem. When you rent a box from the bank, they give you two keys. The only way the box can be opened is when one of your keys and one from the bank are used at the same time. If you lose both of your keys, you have to pay the bank to drill out and replace the lock on the box.

For other information about California estate planning, call an estate tax attorney – call Mitchell A. Port at 310.559.5259.

I am often asked about restraining orders that become effective when a divorce action is filed in California and how those orders impact estate planning by my clients who live in Los Angeles County, Santa Barbara County, Ventura County or Orange County. I am also asked about the ability of my clients to do estate planning when they terminate their marital status before the final disposition of property.

When a dissolution action is filed, pursuant to California Family Code section 2040(4)(b), parties are prevented from creating a nonprobate transfer or modifying a nonprobate transfer that could affect the disposition of the property being transferred without having first obtained the written consent of the other party or a court order. Nonprobate transfers include revocable trusts, joint tenancies and beneficiary designations such as payable on death accounts, IRAs, profit sharing pension plans and life insurance.

As a result, a trust can be created but cannot be funded. While this will allow my client to immediately fund the trust at the conclusion of the dissolution action, this does not solve the problem of dieing during the dissolution action without an estate plan in place.

Therefore, if my client has the luxury of time, creating or modifying a revocable trust should be done before a dissolution action is pending. If this is not possible, then revoking any and all family trusts should be considered and an interim Will should be created. This will insure a disposition of my client’s separate property and one-half of the community property to persons whom my client would want to receive the property should their death occur during the pending dissolution action.

Because people often choose to terminate their marriage before the final disposition of property, what about estate planning of such property once the parties divorced? The issue was that while restraining orders became effective upon the filing of the dissolution action, Probate Code section 5600 provides that spousal beneficiary designations are automatically revoked at the termination of marital status if an asset is a “non probate transfer asset,” as defined in Probate Code section 5000 unless there is either (1) clear and convincing evidence that the transferor intended to preserve the nonprobate transfer in favor of his or her former spouse, or (2) an order from the Court. Effective January 1, 2008, the California legislature resolved this question in California Family Code section 2337(c)(7A).

California Family Code section 2337 addresses the situation where a party seeks to terminate their marital status before the disposition of property and protections that may be put in place to protect the spouse that did not seek the early termination of their marital status. Section (c)(7A) now provides that the Court may specifically order a party, as a condition of their seeking to be divorced, to maintain the other party as a beneficiary of a nonprobate transfer of one-half, or upon good cause, all of a nonprobate transfer asset until a judgment is entered with regards to the property and the property is in fact distributed.

As a result of this new development, it is important that when my clients tell me they are divorced, I must inquire further. I need to know if they were divorced after January 1, 2008; and if so, if they have a final judgment on their property issues. If not, I need to see their Status Only Judgment of Dissolution to know if the Court imposed a California Family Code section 2337(c)(7A) condition on the termination of their marital status so I know how to proceed with their estate planning.

If you are contemplating a divorce and you are concerned about your spouse getting your estate upon your death because that is what your Will or living trust provides, then speak with me about resolving this issue. I am an estate planning attorney and can help.

For the purpose of determining inheritance when there is no Will or other instrument disposing of property (called “intestate succession”) by, through, or from a person, California Probate Code Section 6450 provides that a relationship of parent and child exists in the following circumstances:

(a) The relationship of parent and child exists between a person and the person's natural parents, regardless of the marital status of the natural parents.

(b) The relationship of parent and child exists between an adopted person and the person's adopting parent or parents.

California Probate Code Section 6452 says that if a child is born out of wedlock, neither a natural parent nor a relative of that parent inherits from or through the child on the basis of the parent and child relationship between that parent and the child unless both of the following requirements are satisfied:

(a) The parent or a relative of the parent acknowledged the child.

(b) The parent or a relative of the parent contributed to the support or the care of the child.

For answers to this and other probate questions, please call Mitchell A. Port at (310) 559-5259.

The IRS issued a revenue procedure which lists the various factors necessary to satisfy to obtain equitable relief as an innocent spouse.

If you have a tax problem, and believe that you maybe qualify for innocent spouse relief contact the Mitchell A. Port at (310) 559-5259.

California tax lawyers and many of their clients are familiar with the advantages of accelerating charitable bequests into charitable remainder trusts: income for life for beneficiaries of the client’s choosing, capital gains tax savings, generous income tax charitable deductions and eventual support for important charitable causes. CRTs typically involve six-figure funding amounts, however, and come burdened with a variety of complexities and reporting requirements.

On the other hand, it is possible for clients age 60 and older to blend support for their charitable cause with a simple plan that will provide significant payments for life from gifts as small as $3,000 as well as large income tax deductions, potential capital gains tax savings and payments that are partly tax free. The technique that makes these benefits possible is a charitable gift annuity.

A gift annuity is a contract between a donor and a not-for-profit organization in which the donor exchanges cash or securities for an annuity for one or two recipients.

Immediate payment gift annuities have greatest appeal to older clients who are charitably motivated and wish to add a fixed income component to their portfolios. Both payout rates and deductions are high for this age group (the average gift annuity donor is age 77).

Gift annuities seem to have appeal for women. Women continue to live longer than men by roughly 5 years and so may have a greater interest in “an income that a person cannot outlive.”

Gift annuities also can be arranged to make payments for the lifetimes of two people, such as a husband and wife, brothers and sisters, parents and children or close friends.

Investors can use gift annuities to get investment profits and receive annual payments form the charitable organization that range from 5.5% to 10.5% depending on the age or ages of the persons receiving the payments. In general, 30 to 50% of a donor’s capital gain escapes capital gains tax completely. The remaining gain will be reported in small annual installments as part of the donor’s annuity payments and taxed at only 15% or possibly less.

Retirees who are unhappy with low CD returns can increase their spendable income with gift annuities and also enjoy payments that are partly tax-free. Capital gains savings are advantageous to investors who wish to move from equities into a fixed income arrangement.

Deferred payment gift annuities provide higher payout rates and larger charitable deductions, however, tax-free payments are smaller as a percentage of the annuity payment.

For other tax planning opportunities, call your tax lawyer. Call Mitchell A. Port at (310) 559-5259 for a tax consultation.

The American Institute for Cancer Research has developed programs to assist California's tax lawyers and financial planners in providing their clients with accurate and current information related to charitable gifts. The Institute appreciates the role that California tax attorneys and financial planning professionals play in the consideration of charitable gifts by AICR supporters.

In the AICR's Estate Planners Corner: Services for Attorneys, Financial Professionals and Investment Advisors, it provides free publications and updates on a variety of tax and gift planning issues related to charitable gifts. Some of the publications include tax topics such as:

Minimizing Gift and Estate Taxes Through Charitable Trusts

Planning and Drafting Gifts and Trusts of Closely Held Stock

Selecting Assets for Charitable Gifts - Outright and in Trust

Supplementing Retirement Savings With Charitable Gifts

Charitable Remainder Trust Agreements Approved by the IRS

Minimizing Income Taxes and Transfer Taxes with Charitable Gift Annuities

Planning and Drafting Charitable Gifts and Trusts with Real Property

Planning and Drafting a Testamentary Charitable Remainder Trust

Planning and Drafting Charitable Lead Trusts

Administration and Investment Strategies for a Charitable Remainder Trust

For more detailed information on these estate planning topics, you are invited to call Mitchell A. Port, a tax attorney in Los Angeles, California, at (310) 559-5259.

When you have a California living trust, generally the trust is revocable while you are alive. That means no one has the right to ask to see it and it's contents remain private. However, when either you or your spouse dies, a part or all of your California living trust becomes irrevocable. Once your trust becomes irrevocable, it's contents are no longer private and any beneficiary can request a copy of it. California Probate Code Section 16061.5(a) provides that:

"When a revocable trust or any portion of a revocable trust becomes irrevocable because of the death of one or more of the settlors of the trust, or because, by the express terms of the trust, the trust becomes irrevocable within one year of the death of a settlor because of a contingency related to the death of one or more of the settlors of the trust, the trustee shall provide a true and complete copy of the terms of the irrevocable trust, or irrevocable portion of the trust, to any beneficiary of the trust who requests it and to any heir of a deceased settlor who requests it."

A California probate attorney may be helpful in this and other estate matters. For a consultation, call Mitchell A. Port at (310) 559-5259.

Last week, California's governor approved a bill providing that on and after January 1, 2010, any instrument, whenever executed, that became irrevocable on or after January 1, 2001 the law regarding no contest clauses will change.

Existing law, in relation to wills, trusts, and other instruments, defines and regulates no contest clauses, which are provisions in otherwise valid instruments that, if enforced, penalize beneficiaries if the beneficiaries file a contest with the court. Existing law provides that a no contest clause in a will or a trust is generally enforceable and defines a "contest" and "direct contest" in this regard. Existing law provides that certain actions do not constitute a contest unless expressly identified in the no contest clause as a violation. Existing law exempts certain contests from the enforcement of the no contest clause under specified circumstances, including if there is reasonable cause to believe that instrument has been revoked. Existing law permits a beneficiary to apply to a court for a determination of whether a particular motion, petition, or other act by the beneficiary would be a contest within the terms of a no contest clause.

This bill, beginning January 1, 2010, would revise, recast, and clarify these provisions. The bill would limit the application of a no contest clause to specific contests. The bill would redefine "direct contest," and would provide that a no contest clause may be enforced against a direct contest only when it is brought without probable cause, which the bill would define for these purposes. The bill would delete the provisions regarding the authority of a beneficiary to apply to a court for a determination regarding a no contest clause, as described above.

In May and June alone, taxpayers reported almost 700 separate phishing incidents to the IRS.

The most common scams involve tax refunds and, this year, economic stimulus payments. The Internal Revenue Service cautions taxpayers to be on the lookout for a new wave of scams using the IRS name in identity theft e-mails, or phishing, that have circulated during the last two months.

The IRS has an interesting news article where the full details are available.

Here is a part of the article:

How Scams Work

"To lure their victims, phishing scams use the name of a known institution, such as the IRS, to either offer a reward for taking a simple action, such as providing information, or threaten or imply an unpleasant consequence, such as losing a refund, for failing to take the requested action.

"The goal of the scams is to trick people into revealing personal and financial information, such as Social Security, bank account or credit card numbers, which the scammers can use to commit identity theft.

"Typically, identity thieves use a victim’s personal and financial data to empty the victim’s financial accounts, run up charges on the victim’s existing credit cards, apply for new loans, credit cards, services or benefits in the victim’s name, file fraudulent tax returns or even commit crimes. Most of these fraudulent activities can be committed electronically from a remote location, including overseas. Committing these activities in cyberspace allows scammers to act quickly and cover their tracks before the victim becomes aware of the theft.

"People whose identities have been stolen can spend months or years — and their hard-earned money — cleaning up the mess thieves have made of their reputations and credit records. In the meantime, victims may lose job opportunities or may be refused loans, education, housing or cars."

Topics in the article also include:

Refund e-Mail Scam

Tax Court Scam

Economic Stimulus Payments Scam

Company Report Scam

Substitute Form 1040 Fax Scam

What to Do

Do you have other tax problems with the IRS or California tax authorities? If so, speak with Mitchell A. Port, a tax attorney in Los Angeles, about your concerns.

The Internal Revenue Service has a general questions and answers section you can read in detail here. Each year the IRS updates the answers to reflect the latest changes in tax regulations. These questions and answers came from taxpayers like you.

Frequently Asked Questions

1. IRS Procedures

1.1. General Procedural Questions

1.2. Address Changes

1.3. Amended Returns & Form 1040X

1.4. Code, Revenue Procedures, Regulations, Letter Rulings

1.5. Collection Procedural Questions

1.6. Copies & Transcripts

1.7. Extensions

1.8. Forms & Publications

1.9. Injured Spouse

1.10. Name Changes & Social Security Number Matching Issues

1.11. Notices & Letters

1.12. Refund Inquiries

1.13. Reporting Fraud

1.14. Signing the Return

1.15. W–2 - Additional, Incorrect, Lost, Non-receipt, Omitted

1.16. W–4 - Allowances, Excess FICA, Students, Withholding

2. Filing Requirements/Status/Dependents/Exemptions

2.1. Filing Requirements

2.2. Filing Status

2.3. Dependents & Exemptions

3. Itemized Deductions/Standard Deductions

3.1. Autos, Computers, Electronic Devices (Listed Property)

3.2. Education & Work-Related Expenses

3.3. Gifts & Charitable Contributions

3.4. Interest, Investment, Money Transactions (Alimony, Bad Debts, Applicable Federal Interest Rate, Gambling, Legal Fees, Loans, etc.)

3.5. 5. Medical, Nursing Home, Special Care Expenses

3.6. 6. Real Estate (Taxes, Mortgage Interest, Points, Other Property Expenses)

3.7. 7. Other Deduction Questions

4. Interest/Dividends/Other Types of Income

4.1. 1099–DIV Dividend Income

4.2. 1099–INT Interest Income

4.3. 1099–MISC, Independent Contractors, and Self-employed

4.4. 1099 Information Returns (All Other)

4.5. Alimony, Child Support, Court Awards, Damages

4.6. Employee Reimbursements, Form W–2, Wage Inquiries

4.7. Gifts & Inheritances

4.8. Grants, Scholarships, Student Loans, Work Study

4.9. Life Insurance & Disability Insurance Proceeds

4.10. Ministers' Compensation & Housing Allowance

4.11. Savings Bonds

4.12. Tips

5. Pensions/Annuities/Retirement Plans (i.e., 401(k), etc.)

5.1. General/Taxability Issues including Distributions, Early Withdrawals, 10% Additional Tax, Defaulted Loans

5.2. Rollovers

5.3. Types of Plans

5.4. Plan Operations

5.5. Plan Design

5.6. Correcting Plan Errors

6. Social Security Income

6.1. Back Payments

6.2. Regular & Disability Benefits

6.3. Survivors' Benefits

7. Child Care Credit/Other Credits

7.1. Child and Dependent Care Credit & Flexible Benefit Plans

7.2. Child Tax Credit

7.3. Credit for the Elderly or the Disabled

7.4. Hope & Life Time Learning Educational Credits

7.5. Other Credits

8. Earned Income Tax Credit

8.1. Qualifying Child Rules

8.2. Taxable & Nontaxable Income

8.3. Other EITC Issues

9. Estimated Tax

9.1. Businesses

9.2. Farmers & Fishermen

9.3. Individuals

9.4. Large Gains, Lump-sum Distributions, etc.

9.5. Penalty Questions

10. Capital Gains, Losses/Sale of Home

10.1. Property (Basis, Sale of Home, etc.)

10.2. Stocks (Options, Splits, Traders)

10.3. Mutual Funds (Costs, Distributions, etc.)

10.4. Losses (Homes, Stocks, Other Property)

11. Sale or Trade of Business, Depreciation, Rentals

11.1. Depreciation & Recapture

11.2. Rental Expenses versus Passive Activity Losses (PALs)

11.3. Personal Use of Business Property (Condo, Timeshare, etc.)

11.4. Sales, Trades, Exchanges

12. Small Business/Self-Employed/Other Business

12.1. Entities: Sole Proprietor, Partnership, Limited Liability Company/Partnership (LLC/LLP), Corporation, Subchapter S Corporation

12.2. Form 1099–MISC & Independent Contractors

12.3. Form W–2, FICA, Medicare, Tips, Employee Benefits

12.4. Form W–4 & Wage Withholding

12.5. Form SS–4 & Employer Identification Number (EIN)

12.6. Forms 941, 940, Employment Taxes

12.7. Income & Expenses

12.8. Schedule C & Schedule SE

12.9. Starting or Ending a Business

13. Aliens and U.S. Citizens Living Abroad

13.1. Canadian & U.S. Tax Issues

13.2. Exchange Rate

13.3. Foreign Income & Foreign Income Exclusion

13.4. Nonresident Alien - General

13.5. Nonresident Alien - Tax Withholding

13.6. Nonresident Alien - Students

13.7. U.S. Citizens Overseas

13.8. Other

14. Electronic Filing (e-file)

14.1. Age/Name/SSN Rejects, Errors, Correction Procedures

14.2. Amended Returns

14.3. Due Dates & Extension Dates for e-file

14.4. Forms W–2 & Other Attachments

15. Magnetic Media Filers

16. Other (Alternative Minimum Tax, Estates, Trusts, Tax Shelters, State Tax Inquiries)

17. Individual Retirement Arrangements (IRAs)

17.1. Distributions, Early Withdrawals, 10% Additional Tax

17.2. Rollovers

17.3. Roth IRA

17.4. Traditional IRA

Are you in tax trouble with any of these federal compliance procedures? Talk to a professional: talk with tax attorney Mitchell A. Port at 310.559.5259.

As a California business person, have you asked yourself any of the questions below concerning employees and their tax for which you may be responsible in part? The IRS has the answers to these question on its website at IRS.gov.

Here are the questions:

As an employee, what happens if the IRS determines that I do not have adequate withholding?

If an employer no longer has to submit Forms W-4 claiming complete exemption from withholding or claiming more than 10 allowances, how does the IRS determine adequate withholding?

If the IRS determines that an employee does not have enough federal income tax withheld, what will an employer be asked to do?

As an employer who has received a modification letter (letter 2808C) from the WHC program, do I wait for another 60 days to change the marital status and/or number of allowances per the modification letter?

I have been directed to lock in an employee’s withholding. What happens if I do not lock in the employee’s withholding as directed?

As an employer, after I lock in withholding on an employee based on a lock-in letter from the IRS, what do I do if I receive a revised Form W-4 from the employee?

Our employees can submit or change their Forms W-4 on line. How can I prevent them from changing their Forms W-4 after they have been locked-in by the IRS?

What should I do if an employee submits a valid Form W-4 that appears to be claiming an incorrect withholding amount?

What do I do if an employee hands me a substitute Form W-4 developed by the employee?

I heard my employer no longer has to routinely submit Forms W-4 to the IRS. How will this affect me as an employee?

What if I don’t want to submit a Form W-4 to my employer?

What do I do if an employee hands me an official IRS Form W-4 that is clearly altered?

In the past, as an employer, I was required to submit all Forms W-4 that claimed complete exemption from withholding (when $200 or more in weekly wages were regularly expected) or claimed more than 10 allowances. What Forms W-4 do I now have to submit to the IRS?

Tax problems? Would you like tax help? Tax compliance a problem? Want to settle with the IRS? Call Los Angeles tax attorney Mitchell A. Port at 310.559.5259.

Hot news: Schwarzenegger signed a bill recently issued from the California legislature to protect pet trusts. Other blog posts on this topic include: "Estate Planning For Pets" from June 20, 2008, "California Estate Planning And Your Pets" from April 16, 2008, "No Kidding – A California Trust For Your Pet" from December 17, 2007

Under such trusts, a trustee pays a caretaker to ensure that the pets are housed, fed and otherwise maintained. Pet owners have to account for their pets during estate planning or the animal may not be cared for.

California Senate Bill 685 removes the discretion of trustees in fulfilling the trust. It also allows courts to appoint a caregiver if the trustee does not wish to arrange for the pet care.

You may see the full Los Angeles Times article on this subject.

If you want to speak with an estate planning attorney in California about a pet trust, call Mitchell A. Port at (310) 559-5259.