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Nick Kokkis

Mr. Kokis is a former Internal Revenue Service District Counsel attorney with nearly twenty-five years experience who has also worked in-house for Fortune 500 companies. Mr. Kokis has a unique blend of government, private and public sector experience that differentiates him from most other practitioners, allowing him to address issues and anticipate potential risks in both a theoretical and practical manner.

Nick Kokkis / December 15, 2015

The Unknowns of the Chan-Zuckerberg LLC

The Unknowns of the Chan-Zuckerberg LLC
By David van den Berg

The announcement by Facebook co-founder and CEO Mark Zuckerberg and his wife, Priscilla Chan, that they will give nearly all of their Facebook stock to a new limited liability company they formed to work on social causes has generated enormous media attention, some adulation, and also some controversy.
But despite the attention the move has received, numerous questions remain — including the project’s exposure to legislative change and associated risks, its impact on the exempt organizations sector, whether it will follow through on its stated plans to work on seemingly charitable causes, and some tax-related aspects of its formation and operations.

“I think he’s just announced something that is not even remotely fleshed out,” Jeffery L. Yablon of Pillsbury Winthrop Shaw Pittman LLP told Tax Analysts. “I don’t think anybody has terrific insight into this.”

What is known, for now, is that Zuckerberg and Chan have announced they will give 99 percent of their Facebook shares, currently valued at about $45 billion, to the LLC, called the Chan Zuckerberg Initiative. In a Facebook post to their newborn daughter, Maxima, they said the organization’s initial focus will include curing disease, personalized learning, and community building. And in a follow-up post, Zuckerberg and Chan said structuring the organization as an LLC instead of a foundation allows them to pursue their mission by funding nonprofit organizations, making private investments, and participating in policy debates.

“What’s most important to us is the flexibility to give to the organizations that will do the best work — regardless of how they’re structured,” they said.

According to a filing with the SEC, Zuckerberg will give not more than $1 billion of stock to the new LLC for each of the next three years, and he plans to keep his majority voting position in Facebook stock. As of the filing, Zuckerberg beneficially owns about 4 million shares of class A common stock and about 419 million shares of class B common stock.

Operational Unknowns

While it isn’t yet official that the Chan Zuckerberg Initiative LLC will be structured as a passthrough entity, Zuckerberg and Chan really don’t have any other choice, experts told Tax Analysts.
“The alternative would be nasty,” said Beth Shapiro Kaufman of Caplin & Drysdale Chtd. in Washington. William D. Fournier, also of Caplin & Drysdale, said that the new LLC could either be a passthrough or a taxable C corporation but that choosing C corporation status would subject the entity to higher taxes. It’s unlikely Zuckerberg and Chan would do that for a range of reasons, Fournier said.

Apart from the organization’s form, Gene Takagi of the NEO Law Group said, it’s premature to call the Chan Zuckerberg Initiative philanthropy at the moment. It’s also premature to judge it on anything other than possibly the intended marketing effect of the announcement. Takagi said that the message Zuckerberg and Chan wrote to their daughter was “very touching” and that he thinks they want to do good things with the money, but it’s an unenforceable pledge.

“Ultimately, they can turn it into just a pure investment vehicle if they wanted,”Takagi said. “It’s basically his money and her money, and it’s coming out of their pocket, and it’s not really changed any control for charitable purposes at this point.”

One concern critics have, Takagi said, is that Zuckerberg and Chan can use their LLC to engage in lobbying and electioneering almost without restrictions, compared with those placed on, say, a section 501(c)(3) charitable organization. Zuckerberg and Chan, in their follow-up post, mention participating in policy debates.

“The LLC can just contribute all they want to any candidates they want just within the limits that any business could,” Takagi said. “I don’t have any reason to doubt their intent, but it’s certainly within their power and control to do so, to change the purposes of the LLC at any time.”

Tax and Legislative Unknowns

There are multiple tax issues “floating around” the announcement of the Chan Zuckerberg Initiative, Kaufman said. One is whether Zuckerberg gets a charitable deduction for “giving away” the Facebook stock. When he puts it in an LLC he and his wife own, there is no deduction, but if the LLC later transfers stock to a charity, there could be a charitable contribution deduction for them, she said.

The SEC filing says nothing about the initiative being a tax-exempt entity, and Zuckerberg and Chan said in their follow-up post that by choosing an LLC instead of a “traditional foundation” structure, there is no tax benefit for transferring their shares to it. Because the entity won’t be tax exempt, Kaufman said, any earnings on the stock it holds or any capital gains realized when it sells stock would be subject to tax. If the stock were sold in the hands of a charity, Zuckerberg would escape capital gains tax, she said.
There’s also the question of estate tax, Kaufman said. If shares are given to charity either while Zuckerberg is alive or upon his death, estate tax is avoided. If Zuckerberg and Chan die with the current LLC structure maintained, the LLC assets would be included in their estates, she said.

But if they have a will or trust that bequeaths the LLC ownership to charity, then it would qualify for a charitable deduction at death and escape estate tax,” she said, adding it’s unknown whether Zuckerberg, 31, is even thinking about estate taxes at this point in his life.

Zuckerberg can easily avoid estate taxes, said David Herzig, a tax law professor at Valparaiso University in Indiana. Were he planning Zuckerberg’s estate, Herzig said he would set up a Document generated for Nick Kokis Page 2 of 4 Doc 2015-27130 (4 page(s)) (C) Tax Analysts 2015. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content. private foundation within the trust instrument and have the stock pass to the foundation through a revocable trust that would become irrevocable at death. “And that’s a standard plan, and then it’s just a part of a foundation when he passes,” he said.

Sometimes, tax planning happens with an eye toward cementing the application of current law, said Susan Morse, a tax law professor at the University of Texas at Austin. But by launching their LLC in the way they did, Zuckerberg and Chan have not insulated themselves from the impact of future law changes on the estate tax or other fronts,
Morse said. For instance, if the U.S. implemented a consumption tax regime that treated charitable contributions as consumption, the Chan Zuckerberg Initiative would be exposed to that change, too.

“The point is that a contribution to an LLC is a tax nothing,” Morse said. “And therefore they don’t change what is already their exposure to a change in future law.”
Ofer Lion of Seyfarth Shaw LLP said it is possible Congress

“may well end up taking a look at some sort of cap on taxpayers’ ability to avoid capital gains through charitable contributions.”

The Chan Zuckerberg Initiative isn’t a tax avoidance scheme, though, Herzig said. There is a risk of future rule changes regarding the ability of charities to sell received stock by deferring contributions, he said.
Everything is subject to legislative risk, Herzig said, but he added that he isn’t sure what legislative risks the project faces. If there were a capital gains change, Zuckerberg and Chan would see it coming and could plan for it, and it’s hard to envision a modification to the estate tax that wouldn’t provide a charitable deduction at death, he said.
The biggest risk could “be outside the tax realm,” he said. “Maybe there would be an SEC rule or some other type of governing agency that would affect what they want to do.”

‘Silicon Valley Philanthropy’

Zuckerberg’s project is undeniably high-profile, but it follows what some other leaders in the tech industry have already done. A December 2 New York Times report said Laurene Powell Jobs, widow of Apple Inc. co-founder Steve Jobs, has an LLC called the Emerson Collective. The report also cited the Omidyar Network, set up by eBay co-founder Pierre Omidyar, which takes a hybrid approach. In a Facebook post praising the Chan Zuckerberg Initiative, the Omidyar Network billed itself as a philanthropic venture with both a foundation and an LLC, allowing it to invest in “the right change makers” regardless of structure.

“I’ve already heard the term ‘Silicon Valley philanthropy’ given to using for-profits as philanthropic vehicles,” Takagi said. “Not necessarily always as the intermediary vehicle if you will — just impact investing in general.”

The nonprofit sector, however, “should welcome gifts of this magnitude with open arms,” Lion said.

“Frankly, as a native of Pittsburgh, where the likes of the Carnegie Library, the Carnegie Museum, Carnegie Mellon University, and other monuments of the charitable acts of the staggeringly wealthy stand to this day, I’m all for this (not so new) model of philanthropy,” Tax Analysts does not claim copyright in any public domain or third party content. said. “I just hope it catches on.”
But for Takagi, such a trend may bring risk to the exempt organizations sector.

“I’ve been saying for several years now that charities need to be paying attention to taxable social enterprises as competition,” he said.

That competition isn’t necessarily a bad thing, but charities should be aware they are competing for resources, including talent, Takagi said. For-profits can also claim a greater share of money that might have otherwise been granted or donated to charities, he said. Foundations haven’t taken full advantage of their ability to make program-related investments in for-profit corporations because of complex rules regarding those investments and because of fear of penalties, he said.

But that may change as LLCs with ostensibly philanthropic focuses invest more on taxable social enterprises, Takagi said. Many foundations make just enough qualifying distributions to charities each year to meet the 5 percent minimum requirement, he said. And for foundations with specific plans for qualifying distributions, the more they spend making program-related investments in for-profits, the less they have to spend on grants to charities.

“I think we’re slowly going to see more money go into for-profit social enterprises, and that will be at the expense of charities receiving some of that money,” he said.

Rules governing private foundations contain safeguards to ensure assets are used for charity and with regular distributions, Kaufman said. The LLC structure doesn’t have those protections and is unregulated, she said. On the other hand, LLCs don’t have the tax benefits.

Fournier said it isn’t clear whether that’s a threat to exempt organizations. “I think there are still plenty of advantages that come with being able to actually have tax-exempt status,” he said.

“Not everyone is going to want to necessarily participate in activities that you couldn’t comfortably do inside of a private foundation. Certainly I don’t think it eliminates or is an immediate threat to the existence of private foundations.”

Yablon said the charitable world is changing but the sector shouldn’t panic — its model isn’t being blown up. The Zuckerberg model of philanthropy “might be a wonderful model, but it’s not going to be a model for most people,” he said. Organizations like his are only “for people who are really, really, seriously rich,” he said.

Nick Kokkis / December 10, 2015

IRS Pilot Attempts to Address Nettlesome ID Theft Issue

by LUCA GATTONI-CELLI

SUMMARY BY TAX ANALYSTS

A pilot program contacting thousands of filers who might not have otherwise known that someone else used their Social Security number to gain employment will help the IRS better balance statutory mandates and filer interests,according to IRS Commissioner John Koskinen.

A pilot program contacting thousands of filers who might not have otherwise known that someone else used their Social Security number to gain employment will help the IRS better balance statutory mandates and filer interests, according to IRS Commissioner John Koskinen.

However, Senate Finance Committee member Daniel Coats, R-Ind., believes the pilot undermines IRS claims that section 6103 privacy rules and other factors limit its capacity to broadly combat employment related identity theft, his office said. Coats has recently questioned the IRS’s general practice of not notifying the legitimate holder of an SSN if the SSN is falsely listed on the Form W-2 of another person who is technically filing tax returns using an individual taxpayer identification number (ITIN).

Typically, a U.S. wage earner’s SSN appears on the filed tax returns as well as information returns such as the Form W-2, and the IRS uses the SSN to cross-reference the two.

However, the IRS assigns an ITIN to filers who are ineligible for an SSN, to record on their tax return instead. ITIN taxpayers can include undocumented workers residing in the United States, who are still required to pay income taxes. If any worker provides an employer someone else’s SSN to get a job, the employer may list that SSN on the worker’s Form W-2, but the IRS still relies on the ITIN listed on the W-2 to cross-reference with the filer’s tax return.

Specific cases vary, as described in a 2010 Treasury Inspector General for Tax Administration report on collection issues related to ITIN filers, but the result is that the IRS may see someone else’s SSN on an ITIN filer’s W-2, which IRS critics say is often evidence of identity theft.

The IRS’s broad argument has been that such cases do not directly affect tax administration — filing, reporting, or collection. The IRS also defends its current posture on the grounds that verifying employment related identity theft cases would be beyond its resources and statutory mandate.

Responding to the 2010 TIGTA report, the IRS said that the Social Security Administration (SSA) already had a program to notify SSN holders of W-2 inconsistencies and that a similar effort by the IRS would be redundant.

But because of budgetary constraints, the SSA stopped sending those notification letters to employers in 2011, and to employees and self-employed individuals in 2013, the SSA said in a written statement to Tax Analysts, which also explained how to report the theft of one’s own identity.

“People need to be careful with their SSN and their [Social Security] card,” the SSA added.

The uncertainty raised by the IRS’s trial attempt to address employment identity theft illustrates the issue’s complexity, particularly as it relates to tax administration.

The SSA later clarified that it does not alert potential identity theft victims, telling Tax Analysts:

“There is not a program by which SSA notifies individuals whose SSNs appear to be compromised.”

“Senator Coats believes that neither the IRS nor SSA are adequately addressing this situation,” his office said.

‘Borrowing’ Versus Theft

The Internal Revenue Manual uses the neutral term “SSN borrowing” to refer to these W-2 mismatches. Speaking to Tax Analysts after a November 18 public meeting of the IRS Advisory Council in Washington, Koskinen said that the IRS’s overriding statutory mandate is to administer the tax code as written by Congress.

Section 6103 prohibits the IRS from disclosing the name of an identity thief or his employer even to the thief’s victim, according to an IRS Web page about employment-related identity theft. The page said the IRS may send a “letter 4491 C” to a potential victim, letting him know his SSN was used by someone else to gain employment, but its standard for doing so was not stated. The IRS did not respond to inquiries about the letter 4491 C program.

How many “SSN borrowing” ITIN filers are undocumented workers is unclear. Koskinen said that many borrowers are simply relatives, not identity thieves, but he also noted that the IRS must by law collect taxes from all U.S. workers, regardless of immigration status.

“In the vast majority of these cases, the undocumented resident is paying their legitimate taxes, meeting their tax obligation, and it’s not affecting anyone else,” Koskinen told Tax Analysts.

However, two employment identity theft victims who faced erroneous IRS exams for understatement of income — based on Forms W-2 that falsely listed their SSNs — were quoted in a recent investigation by television news station WTHR in Indianapolis. WTHR later raised the larger issue with Coats.

The WTHR story quoted redacted portions of the IRM, stating that even if a taxpayer case has been marked as “Employment-related Identity Theft” in the database used to manage cases, the legitimate SSN holder should not be notified because the case does not meet the standard of “Taxpayer-Initiated Allegations of Identity Theft.”

That portion of the manual essentially bars the IRS employee from alerting a potential employment-related identity theft victim unless the filer in question becomes suspicious and alerts the IRS.

The two filers interviewed by WTHR said the IRS took months to clear their names and withheld information about the theft of their SSNs.

Koskinen said that when employment identity theft disrupts tax filings,

“clearly we need to work efficiently with the taxpayers and make sure that they don’t have any more difficulty than we can afford.”

But he added:

“Our primary responsibility is… to collect those taxes.”

The Search for Solutions

“We’re not in the immigration enforcement business; that’s not our role,”

Koskinen said November 19 after a press conference in Washington launching a tax identity theft public awareness campaign.

“We’re tax administrators.”

Another role Koskinen attributed to the IRS was protecting filers from identity theft. In a written statement to Tax Analysts, the IRS noted its efforts to combat what it calls stolen identity refund fraud.

The IRS also said it was reviewing the results of the pilot program looking at the use of SSNs by “other individuals” to gain employment. Koskinen said the pilot is still underway, and that although he could not share details until its results are in, the taxpayers of interest “come in all shapes and sizes, including those with ITINs.”

Koskinen framed the pilot as an attempt to balance the statutory mandate to collect tax obligations against the IRS commitment to protect filers.

“We think we’ll learn something from this, but I think it involves several thousand contacts with taxpayers,” he said.

“And so we’ll be delighted to let you know how it goes.”

TIGTA plans to release a report titled “Assistance to Taxpayers Affected by Employment-Related Identity Theft” in February 2016, Inspector General J. Russell George said August 26 at a Senate Budget Committee hearing on identity theft.

The IRS initiated the Employment Related Identity Theft Notification Project in July 2014, mailing about 25,000 letters to potential employment identity theft victims whose SSNs appeared on someone else’s Form W-2 accompanying a tax year 2013 return, George said. The letters told the filers that their SSN was used by someone else to gain employment and advised them how to protect themselves, but they also stated that the IRS could not disclose the identity of the person who used their SSN, he added.

A TIGTA spokesperson told Tax Analysts that TIGTA continues to be concerned about limitations in the IRS’s ability to prevent identity theft.

The office of National Taxpayer Advocate Nina Olson restated her belief that the IRS should notify filers whose SSNs have been compromised because they can be misused for nontax purposes as well. The IRS has yet to implement that recommendation, her office added.

Coats also appears likely to continue pushing the issue.

“We are working on a more comprehensive solution
to this problem,” his office said.

In the interim, Coats believes the IRS should notify employment identity theft victims, offer them an identity protection personal identification number, and notify the SSA of the theft to ensure victims’ earnings are correctly reflected and their benefits are not affected, his office added.

Getty Images

Nick Kokkis / December 8, 2015

You’re Running Out of Time for Your 2015 Tax Planning

Getty Images
Getty Images

This article is commentary by an independent contributor By Jason Notte taken from TheStreet.com
Person filing tax returns before deadline

A few months ago, we suggested getting your tax strategy together before it was time to panic.

Well, it’s time to panic.

We’re less than a month to the end of 2015 and any plans you have to lessen your tax hit by the end of the year should probably be implemented now. Rebecca Pavese, a certified public accountant, financial planner and portfolio manager with Palisades Hudson Financial Group’s office in Atlanta says that, at the very least, you should be calculating your income, tax payments and deductions to date, and estimating your totals for 2015.

“You need this baseline information before making any moves,” she says.

Once you’ve done that, the easiest way to save is by reducing your taxable income. Bankrate’s (RATE) Kay Bell notes that boosting your retirement savings can be particularly helpful. If you haven’t made your maximum $18,000 contribution 401(k) ($24,000 for people age 50 or older) or $5,500 contribution for an IRA ($6,500 for people age 50-plus), now is the time.

“If your employer permits you to make extra contributions to your 401(k), put in as much as you can afford.
“If your employer permits you to make extra contributions to your 401(k), put in as much as you can afford,” says Bill Ringham, vice president and senior wealth strategist at RBC Wealth Management. “You typically contribute pretax dollars, so the more you invest, the lower your taxable income. Your earnings also grow on a tax-deferred basis.”

Ringham also notes that 529 plan contributions are tax deductible in several states, so contributing to your kid’s college fund will allow your earnings grow tax-free, provided they are used for qualified higher education expenses. Just make sure it’s going toward college, however, as distributions not used for qualified expenses may be subject to income tax and a 10 percent penalty. Meanwhile, it’s also time to take inventory of your other investments in 2015 … and root for the losers.”Tax-loss selling can minimize or eliminate capital gains on one asset by realizing a loss to offset it,” Pavese says. “There’s dollar-to-dollar offset. If for instance you’ve had $5,000 of capital gains, you can offset them completely with $5,000 of capital losses.”

The best part is that you can carry those tax losses forward indefinitely. If you don’t need those losses to offset capital gains right away, you can use the excess loss to offset gains in a future year. That’s particularly helpful since net capital losses (capital losses minus capital gains) can only be deducted up to a maximum of $3,000 in a given tax year. Any losses beyond $3,000 must be carried over, which also makes it worth your while to consider putting off selling some of your “winners” until next year.”

“Capital gains can increase your adjusted gross income — and, consequently, your tax bill,” Ringham says. “So if you are considering selling an asset that has increased in value, such as a stock, you may want to wait until January so the gain will be realized next year.”

If you’re in a really desperate situation, there’s also a chance you can just give some of those investments away. Highly appreciated stocks or mutual funds you’ve owned for more than one year can go directly to a charity, so if you’ve purchased shares for $1,000 and they are now worth $10,000, giving those share to a qualified charity would give someone in the 28 percent tax bracket a $2,800 tax deduction, based on the current market value of the donated shares.

“You benefit three ways,” Pavese says. “First, you’re doing good. Second, you won’t pay the capital gains tax you’d owe if you sold the security instead. And third, you’ll get a deduction if you itemize.”

Once all of that is complete, you’ll want to consider doing some housekeeping.

View all Courses Bankrate’s Bell suggests homeowners submit January mortgage payment and property taxes by Dec. 31 so they can deduct the interest for 2015. Also, if you haven’t taken advantage of your flexible spending account for health care, now is a great time to schedule doctor’s appointments or buy eligible supplies ranging from glasses to knee braces to cold medicine. Pavese, meanwhile, suggests filing a new W-4 form with your employer and adjusting your December tax withholding just to keep from running afoul of penalties and interest. However, just about anything you can do to lower your adjusted gross income is helpful.

“Lowering your income has many potential benefits,” she says. “If you can lower your taxable income to below $74,900 for a married couple filing jointly or $37,450 for a single filer, you will pay zero percent federal tax on sales of assets you’ve held longer than one year and zero percent on dividends. Even if you can’t get your taxable income quite so low, you may be able to lower it enough to step down to the next lowest capital gains tax rate.”

Lowering income can also lower deduction hurdles that are calculated as a percentage of that income. For example, unreimbursed medical expenses can only be deducted if they exceed 10 percent of adjusted gross income, and investment expenses must exceed 2 percent. However, if you can’t adjust to a desirable level for 2015, now is the time to start banking deductions for 2016. Pavese suggests that, instead of paying your estimated quarterly state income tax by Dec. 31 and deducting it on your 2015 return, you can pay it Jan. 1-15 and get a 2016 deduction. Also, if an additional deduction would trigger alternative minimum tax, pay your fourth-quarter state income tax and real estate tax installment in January.

“If your bracket will go up next year, consider deferring certain deductions, such as state taxes and real estate taxes, so you can claim them on your 2016 return,” Pavese says. “The higher your bracket, the more the same deduction can save you.”

This article is commentary by an independent contributor By Jason Notte taken from TheStreet.com
Person filing tax returns before deadline

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