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Table of Contents

• 2001 will be the year of estimated tax reviews.
• Dan Kennedy gives another outstanding "Boot Camp".
• Jerry Wilson tells how to get repeat customers.
• Economic Growth and Tax Relief Reconciliation Act.
• IRA distributions for new California residents.
• IRS vs Tax Court about innocent spouse relief for estate.
• Single member LLC used to avoid transfer tax in exchange.
• Ninth Circuit rejects Tax Court valuation rulings.
• If you have employee stock options...
• PS Marché Aux Fleurs
• Visit our new articles.
• Subscribe/Unsubscribe from Michael Gray, CPA's Tax and Business Insight.

2001 will be the year of estimated tax reviews.

As the stock market fizzles, many of our clients that reported significant income for 2000 are having a much quieter 2001. Since income will be down this year, many clients are not paying their estimated tax based on their 2000 income tax liability.

In this situation, it's especially important to notify your tax advisor when you have a transaction that will result in additional tax, so he or she can either set up or adjust your estimated tax payments and minimize or eliminate potential penalties.

Since employers will be reducing federal tax withholding because of the federal tax cut legislation, employees may need to direct their employers to increase their withholding to avoid penalties from underpayment of estimated tax.

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Dan Kennedy gives another outstanding "Boot Camp". Will give a repeat performance in October.

Dawn Gray and I made another pilgrimage to Phoenix for Dan Kennedy's "swan song" Ultimate Marketing & Entrepreneurship Boot Camp. Dan and some of his star students gave an outstanding three-day intensive program of marketing and business strategies.

In case you don't know, Dan has an outstanding reputation in marketing, including creating many of the infomercials that you see on television.

One of the highlights included a student relating how his business was dropping off. It turned out he had stopped mailing to his existing customers, so they simply forgot about him. He resumed mailing to them every two weeks and has restored his business volume. (How often do you write to your customers?)

If you came to the boot camp, you might have been impressed how far I got in playing the "marketing trivia" version of Who Wants To Be A Millionaire?

If you are an entrepreneurial businessperson, I highly recommend attending the repeat performance of the Boot Camp during October, 2001. For details, visit Dan's web site at http://www.dankennedy.com.

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Jerry Wilson tells how to get customers to want to come back.

Jerry Wilson is the author of Word of Mouth Marketing. Ellen Nicoletti, clients Irene Miano and Terry Huang and I attended Jerry's "I'll Be Back" seminar. According to Jerry, "the proof of the pudding is not in the eating, but whether they come back for seconds!" The seminar revolved around managing the "3 R's" of a business - repeat business, relationships and referrals. Jerry emphasized the importance of hiring employees that enjoy working with people and who are likely to be successful in pleasing customers.

If you haven't read Word of Mouth Marketing yet, consider adding it to your reading list. I will be writing a book review on it eventually.

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Congress passes The Economic Growth and Tax Relief Reconciliation Act of 2001.

President Bush has indicated he will sign this compromise tax cut legislation.

Most of the changes will take effect after 2001, and many of the changes won't be effective for many years. By that time, President Bush will be out of office and the changes may be eliminated. Remember this legislation is supposed to be a refund of expected future surpluses. Those surpluses may never materialize and we may be dealing with deficits.

Rate changes. For 2001, the most notable change is the reduction of income tax rates and an "advance" tax refund. Effective July 1, 2001, the rates for each bracket will be reduced by 1%. This means the rate will be reduced 1/2% for the year. A new 10% rate bracket is being created. Congress has directed that an advance refund check be issued to taxpayers who filed income tax returns for 2000 based on the difference between the 15% rate and the new 10% rate. The refunds will be $300 for single persons, $500 for heads of households, and $600 for married couples filing joint returns. The advance refund or credit will be recomputed on the 2001 income tax return, but excess refunds will not have to be repaid to the IRS.

Most of the refund checks will be issued by October 1, 2001 and no refund checks will be issued after December 31, 2001.

The maximum rates for long-term capital gains are unchanged.

Effective 2006, the maximum individual income tax rate will be 35%.

Education changes. I think the most exciting changes in the Act relate to education benefits.

Effective after 2001, the annual limit for contributions to education IRAs is being increased from $500 to $2000. Distributions to pay "qualified education expenses" of the beneficiary are tax free. The education becomes more similar to a tax deductible Roth IRA than a regular IRA. Also, qualified education expenses have been expanded to include elementary and secondary school expenses, including the purchase of a computer for internet access. The phase out range for married persons filing a joint return will be increased from $150,000 to $160,000 to $190,000 to $220,000. You will soon get a tax deduction for part of your child's education expenses.

Effective after 2001, private insitutions will be able to set up tax-deferred education savings "Section 529" plans, as states now can.

Effective after 2001 for state plans and after 2003 for private institution plans, distributions from these plans to pay qualified higher education expenses for a beneficiary will be tax free. These accounts will be similar to the current Roth IRA with a high contribution limit, and no phaseout based on adjusted gross income. Wow!

A last-minute surprise coming out the Senate agreement is the gift tax will not be repealed. However, the maximum gift tax rate will be reduced from 55% to the maximum individual income tax rate, effective for gifts made after December 31, 2010. The rate will phase down from 2002 through 2010. Effective for years after 2001, the lifetime gift tax exemption amount will be $1,000,000.

Estate tax repeal. The most publicized and controversial provision of the legislation is the repeal of the estate tax and generation-skipping tax.

The maximum estate and generation skipping tax rate will also phase down and the exemption amount will increase from 2002 to 2009, until the taxes are repealed in 2010. The exemption amount for 2002 will be $1 million.

In addition, taxpayers with larger estates will have to deal with determining the decedent's tax basis for inherited property. This will create headaches for years into the future. The carryover basis rules will become effective beginning in 2010.

Beginning in 2010, transfers by a U.S. person's estate to a nonresident who is not a U.S. citizen will be treated as a sale or exchange of the property for an amount equal to the fair market value of the transferred property.

The income tax exclusion of up to $250,000 of gain on the sale of a principal residence will be extended to estates and heirs. The exclusion may be claimed provided the decedent used the property as a principal residence for two or more years during the five- year period before the sale. Use of the property as a principal residence by an heir can also be counted in determining if the property qualifies for the exclusion.

The qualified family-owned business deduction will be repealed effective for estates of decedents dying after December 31, 2003.

Alternative minimum tax. Effective for taxable years beginning after December 31, 2000 and expiring for taxable years beginning after December 31, 2004, the AMT exemption for married couples filing a joint return and certain surviving spouses with a dependent is increased by $4,000. The AMT exemption for unmarried individuals and married individuals filing a separate return is increased by $2,000. (These exemptions are phased out for taxpayers with high alternative minimum taxable income.)

The Act includes other cosmetic changes to the alternative minimum tax.

The Act does not include any relief relating to incentive stock options.

Since the maximum regular tax rate is being reduced (eventually from 39.6% to 35%) while the maximum alternative minimum tax rate is unchanged (28%), more taxpayers will be subject to the alternative minimum tax!

California tax implications. California's budget surplus has been wiped out by the energy crisis. It's unlikely California will conform to many of the federal tax cut provisions.

To be continued... I'll discuss more tax law changes in future issues of the Tax and Business Insight.

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Clarification/correction about IRA distributions for new California residents.

In the January issue of the Tax and Business Insight, I discussed the taxability of IRA distributions when a California non-resident moves to California.

There was an error in the second paragraph. It should read, "If the IRA was funded from a rollover from a qualified pension plan, the taxpayer will have a zero basis in the account. All of the distributions will be taxable for California.

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IRS and Tax Court disagree about innocent spouse relief for estate.

The IRS issued field service advice indicating that, unless the innocent spouse has already applied for relief, the estate of the innocent spouse may not apply for the relief. (FSA 200117005.) The Tax Court recently ruled the estate is eligible to apply for relief, even if the innocent spouse didn't apply for it before death. (Hale Exemption Trust v. Commissioner, TC Memo 2001-89.) Time will tell if the IRS will change its position to conform to the Tax Court.

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Single member LLC used to avoid transfer tax in exchange.

For income tax reporting, a single-member LLC is generally disregarded. A taxpayer set up a tax-deferred exchange where a single-member LLC holding real estate was acquired as replacement property. As a result, the taxpayer avoided a state transfer tax for the acquisition. The IRS ruled the transaction qualified for tax-deferred exchange treatment. (PLR 200118023.)

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Ninth Circuit rejects Tax Court valuation rulings.

The Ninth Circuit Court of Appeals has rejected two Tax Court rulings for estate business valuations. The cases are Estate of Simplot v. Commissioner and Estate of Mitchell v. Commissioner. The Ninth Circuit found the Tax Court had disregarded the valuation evidence presented by the taxpayers' experts and the conclusions of the Tax Court were speculative or unsupported by the record. The Tax Court was criticized for speculating about particular purchasers and their possible motivations instead of determining a market valuation.

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If you have employee stock options, have you subscribed to the ESOAA Option Alert?

To subscribe, go to http://www.stockoptionadvisors.com. You can review past issues at http://www.stockoptionadvisors.com/optionalert/.

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P.S. Marché Aux Fleurs

My daughter and her husband, Holly and Dan Baker, have opened a Southern French Restaurant at 23 Ross Common, Ross, California, about 15 minutes north of the Golden Gate Bridge. The name of the restaurant is Marché Aux Fleurs. For the best meal of your life, call 415-925-9200 for a reservation and give them a try soon!

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IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this communication was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.