FEDERAL TAX LAW UPDATE FOR 2010

Tax Rates Ordinary Income35%39.6% Capital Gain15%20% Qualified Dividends15%39.6%

AMT Exemption Amount70,95045,000 (joint filers) AMT Rate:26-28%

Healthcare Legislation – How Will We Pay for It? H.R % surtax on AGI > $500,000 (1 MM for joint filers) Senate40% excise tax on insurers of “cadillac plans” additional 0.9% payroll tax on wages over 200k

Business Tax Breaks 50% bonus depreciation ended 12/31/09 Section 179 – Cap EX may be expensed up to $134k (down from $250k in 2009) 5-year carryback for 2008 and 2009 for business tax losses

Deferral of Business COD Applies only to debt forgiven during 2009 or 2010 Deferral until 2014 with 5 year spread Election required by borrower Insolvency exception still applies

Employer Owned Life Insurance Life insurance proceeds in excess of basis are taxable Exceptions  Insured is employee within 12 months of death  Insured is HC or director at time policy issued  Payable to insured’s family / beneficiary  Used to purchase equity of insured Notice and Consent  Must be writing  Prior to issuance of policy

COBRA Subsidy 65% subsidy for COBRA coverage for involuntary terminated employees between September 1, 2008 and February 28, 2010 Employer claims credit against payroll taxes

Home buyer $8,000 Tax Credit Extended to purchases of principal residence closing before May 1, 2010 Also applies to purchases that close prior to July 1, 2010 if purchase agreement is signed prior to May 1, 2010 Phases out starting with AGI of $125,000 for individual filers (AGI of 225,000 for joint)

IRA Distributions to Charity $100,000 exclusion expired 12/31/09 House has passed extension through 2010

Nonspouse Beneficiary Rollovers Starting 2010 plans required to permit nonspouse beneficiaries to elect transfer to IRA 60 day roll over rule does not apply

Required Minimum Distribution Required Beginning Date 2009 Waiver 2010 RMDs recommence

Family Limited Partnership Device to gift assets to next generation at substantial valuation discount Independent Business Purpose required Best if used to gift interests in family business

Foreign Financial Account Reporting Signature authority / beneficial interest in foreign financial accounts Aggregate value in excess of $10,000 FBAR due June 30 of succeeding year October 15, 2009 was due date under IRS Voluntary Disclosure Program

IRS Audit Rates 1% of individuals 3% of individuals with income of $200, % of individuals with income of $1 million Schedule C (sole proprietorship) attract IRS audits

Conventional and Roth IRAs TAX TREATMENT Conventional IRA – Deduction upon contribution and taxed as ordinary income when funds withdrawn Roth IRA – No deduction on contribution and no tax upon withdrawal INCOME RESTRICTIONS Conventional IRA – None, if not in an employer sponsored plan. If in employer sponsored plan, $65,000 (ind.), $109,000 (Married Filing Jointly) Roth IRA – $120,000 (ind.), $176,000 (Married Filing Jointly) CONTRIBUTION RESTRICTIONS - $5,000/yr. ($6,000/yr. if over 50) Conventional IRA – cannot contribute if over the age of 70 1/2 Roth IRA – can contribute until death MINIMUM REQUIRED DISTRIBUTIONS (MRD) Conventional IRA – starting April 1, in the year after turning 70 1/2 Roth IRA – no MRD

Conversions of Conventional IRA to Roth IRA No income restrictions (previously $100,000) Conversion triggers income tax Conversions in 2010 can have income recognized 50% in 2011 and 50% in 2012, or all in 2010 Highest marginal income tax rate is currently 35% Highest marginal income tax rate is scheduled to be 39.6% in 2011

Factors to Consider in Conversions Rising tax rates Lower income levels now Higher rates of return Longer time frame before withdrawals Need to withdraw during lifetime Exposure to State and Federal estate tax Purpose of conversion (personal or for children) Ability to pay tax outside of retirement assets Use of loss carryovers or charitable deduction carry forwards

Recharacterization Can be completed up until the date the tax return is due (including all extensions) if reported on the return Suggestion: Create multiple Roth IRAs broken up by asset classes to retain the “winners” and recharacterize the “losers.” Recharacterization will be eligible for conversion in year following the first conversion and not until 30 days after the recharacterization

Tax upon the Disposition of Life Insurance Revenue Ruling and Rev Rul Situation #1 – A is the insured, the beneficiary is member of A’s family, A had incidents of ownership (right to change beneficiary, take loan, surrender policy). Surrendered for $78,000 which included $10,000 of “cost of insurance” deductions taken by insurer through the date of surrender. Premiums of $64,000 had been paid. Income is $14,000 ($78,000 - $64,000). It is ordinary income.

Tax upon the Disposition of Life Insurance Rev Rul (cont.) Situation #2 – A is the insured, the beneficiary is member of A’s family, A had incidents of ownership. $78,000 cash surrender value, $64,000 in premiums paid and a $10,000 cost of insurance. The policy is sold to B (unrelated to A) for $80,000 Insurance with cash value consists of investment and insurance components. Cash value is value of the investment characteristic, and the cost of insurance is the value of the insurance portion. Basis for taxpayer is the premium paid ($64,000) minus the cost of insurance ($10,000). Result is a gain of $26,000 ($80,000-$54,000). Of that $26,000, $14,000 is ordinary income ($78,000-$64,000), the balance is capital gain.

Tax upon the Disposition of Life Insurance Rev Rul (cont.) Situation #3 – A is the insured, the beneficiary is member of A’s family, A had incidents of ownership. Policy was 15 year term no cash surrender value. Premiums were $45,000 ($500/monthly). Policy was sold to B (unrelated to A) for $20,000. Basis is the amount paid minus the cost of insurance. Cost of insurance is presumed to be the premium for term policies. In this case the sale occurred half way through the month, so the “basis” was $250. Income is amount paid minus unused premium so there is a $19,750 of income. There was no inside build-up of value, so no ordinary income. All of the income is capital gain.

Tax upon the Disposition of Life Insurance Rev. Rul Situation #1 - A is the insured of a 15 year level term policy ($500/mo. premium). B purchased the policy from A for $20,000 with 7+ years remaining on term. B has no risk of economic loss at A’s death, no insurable interest in A’s life and the policy was purchased by B as an investment. B pays $9,000 in premiums before A dies and B is paid the death benefit of $100,000. The sale from A to B is a transfer for a valuable consideration. The exclusion from income is limited to actual consideration paid ($20,000) and any amounts paid thereafter ($9,000). Therefore B’s exclusion is $29,000 out of $100,000 and he has $71,000 of income. The $71,000 is ordinary income, not capital gain.

Tax upon the Disposition of Life Insurance Rev. Rul (cont.) Situation #2 – A is the insured of a 15 year level term policy ($500/mo. premium). B purchased the policy from A for $20,000 with 7+ years remaining on term. B has no risk of economic loss at A’s death, no insurable interest in A’s life and the policy was purchased by B as an investment. B pays $9,000 in premiums. A does not die, instead, B sells to C (unrelated to A) for $30,000. B paid $20,000 for the policy and $9,000 in additional premiums, so his basis is $29,000. The income therefore is $1,000 ($30,000-$29,000). Because B has purchased the insurance as an investment, it is a capital investment and therefore the income is capital gain. Situation #3 – Same as #1 except B is foreign corporation. The results are the same as Scenario #1, there is $71,000 worth of ordinary income to the corporation.

New Estate Tax Law HR 436 – 1/9/2009, $3.5million unified credit, 45% tax rate, eliminate FLLP discounts HR 498 – 1/14/2009, 15% capital gains permanent, $5 million unified credit by 2015 plus inflation, portability HR 2023 – 4/22/09, $2 million unified credit, restore state tax credit, raise rates on large estate, portability Taxpayer Certainty and Relief Act of 2009 – 3/26/ $3.5 million unified credit plus inflation, 45% tax rate, make numerous EGTRRA tax cuts permanent, portability Lincoln-Kyl Amendment to the Senate budget bill – 4/1/09 - $5 million unified credit, 35% tax rate, portability Pay-As-You-Go Bill – 6/17/09, $3.5 million unified credit, 45% tax rate HR 4363, HR 533, HR 205, HR 99 all call for repeal of estate tax effective 1/1/ Budget

Disclaimer IRS CIRCULAR 230 DISCLAIMER: To the extent that this written communication may address certain tax issues, this written communication is not intended or written to be used, and cannot be used by any persons to avoid any potential tax penalties that may be asserted by the Internal Revenue Service. In addition, this communication may not be used by anyone in promoting, marketing or recommending the transaction or matter addressed herein.