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Section 643(b) and Trusts

Recently, there seems to be some confusion regarding section 643(b) of the Internal Revenue Code of 1986, as amended (the “Code”), and its application to trusts. Indeed, that provision—particularly to those not well-versed in federal trust taxation—can confound many. This article seeks to dispel some of the complexity surrounding section 643(b).

The Taxation of Trusts Generally

The federal income taxation of trusts and beneficiaries puzzles even tax professionals. Does the trust pay tax? What about the beneficiaries? What is the difference between a grantor trust and a complex trust? The questions can become endless.

I don’t seek to answer all those here. But I will try to provide some background on certain trust concepts so that you are more familiar with them. First, let’s start off with general concepts associated with the taxation of trusts. In Subchapter J of the Code (which addresses the taxation of trusts), it states in the very first provision: “[t]he tax imposed by section 1(e) shall apply to the taxable income of . . . any kind of property held in trust[.]”[i] That same provision further clarifies that this income includes: (i) income accumulated in trust (even contingent income or income for the benefit of unascertainable persons); (ii) income that a trustee is required distribute to the beneficiaries; and (iii) income that the trustee has discretion to retain in trust.[ii] Accordingly, as a general rule, a trust pays income tax on its activities.

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Federal Income Tax Characterization of Transactions Involving Computer Programs

The sale of a computer program—it seems simple.  But, as illustrated by the Treasury Regulations’ computer program characterization rules, the issue of just what a sale of computer program is can become confusing fast.

The Computer Program Characterization Regulations

Treasury Regulation § 1.861-18 provides rules for characterizing primarily cross-border transactions involving computer programs.[1]  For these purposes, a “computer program” means “a set of statements or instructions to be used directly or indirectly in a computer in order to bring about a certain result.”[2]  The term also includes certain items incidental to the operation of a computer program.[3]

In characterizing a transaction involving a computer program, neither general principles of copyright law nor the parties’ characterization of the transaction are determinative.[4]  For instance, it doesn’t matter if the parties label a transaction a license or payments as royalties if factors present in the transaction warrant a different treatment.[5]  The means by which the computer program is transferred also is irrelevant.[6]

Ultimately, there are six possible results from the application of the computer program characterization rules: 1) the sale or exchange of copyright in a computer program, 2) the license of a copyright in a computer program (generating royalties income), 3) the sale or exchange of a copy of a computer program, 4) the lease of a copy of a computer program, 5) the provision of services for the development/modification of a computer program; or 6) the provision of know-how relating to computer programming techniques.[7]

To get to these results, the regulations first require that we distinguish between the transfer of the copyright in a computer program versus the transfer of a copy of a computer program.[8]

A transaction is the transfer of a copyright right if the purchaser acquires any one of the following rights:

  • the right to make copies of the computer program for purposes of public distribution;
  • the right to prepare derivative computer programs based on the copyrighted computer program;
  • the right to make a public performance of the computer program;
  • the right to publicly display the computer program.[9]

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Freeman Law Tax Update: What A Biden Presidency Means For Your Federal Income Taxes

(Reposted Blog From November 2020, They Are On Top Of It)

With the projected election of Joe Biden, Freeman Law has already begun to review what a Joe Biden presidency could mean to its clients.  And although many of determinations could potentially depend on results from President Trump’s election challenges and a final tally of the United States Senate, Freeman Law wants our clients to be aware of the potential tax changes that could occur in the next few years under Joe Biden.

Increase in Top Marginal Tax Rate for High-Earners.  Currently, the top federal tax rate is 37%.  Mr. Biden has proposed increasing the top federal tax rate to 39.6% for those making more than $400,000 per tax year.

Investment Income.  High-income taxpayers are currently taxed at approximately 23.8% on their net investment income, which includes capital gains and ordinary dividends.  Mr. Biden has proposed maintaining these rates except for those taxpayers who make over $1 million.  In these latter instances, Mr. Biden has proposed increasing the tax on net investment income to ordinary income tax rates of 39.6%.

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By any measure, the tax code is huge. According to Commerce Clearing House’s Standard Federal Tax Reporter it’s up to 74,608 pages in length.¹

And each Monday, the Internal Revenue Service publishes a 20- to 50- page bulletin about various aspects of the tax code.²

Fortunately, it’s not necessary to wade through these massive libraries to understand how income taxes work. Understanding a few key concepts may provide a solid foundation. Read More

WASHINGTON – Many U.S. corporations elect to use a fiscal year end and not a calendar year end for federal income tax reporting purposes.  Due to a provision in the recently enacted Tax Cuts and Jobs Act (TCJA), a corporation with a fiscal year that includes Jan. 1, 2018 will pay federal income tax using a blended tax rate and not the flat 21 percent tax rate under the TCJA that would generally apply to taxable years beginning after Dec. 31, 2017.

Corporations determine their federal income tax for fiscal years that include Jan. 1, 2018, by first calculating their tax for the entire taxable year using the tax rates in effect prior to TCJA and then calculating their tax using the new 21 percent rate, subsequently proportioning each tax amount based on the number of days in the taxable year when the different rates were in effect.  Read More

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