Applicable Federal Rates for April 2017

The Internal Revenue Code prescribes minimum imputed interest rates and time-value-of-money factors applicable to certain loan transactions and estate planning techniques. These rates are tied formulaically to market interest rates. The Internal Revenue Service updates these rates monthly.

These are commonly applicable rates in effect for April 2017:

Short Term AFR (Loans with Terms <= 3 Years)                                          1.11%

Mid Term AFR (Loans with Terms > 3 Years and <= 9 Years)                    2.12%

Long Term AFR (Loans with Terms >9 Years)                                              2.82%

7520 Rate (Used in many estate planning vehicles)                                     2.6%

Here is a link to the complete list of rates: https://www.irs.gov/pub/irs-drop/rr-17-08.pdf

E. John Wagner, II
jwagner@williamsparker.com
941-536-2037

Can Your Website Expose You to Copyright Infringement Liability? Make Sure Your DMCA Protection Is Up-To-Date

Does your website allow users to post content in any way (whether it be through a message board or even a simple comment or review), or do you link to other websites from yours?  If so, you may be subject to liability for copyright infringement if the posted or linked content is infringing.  Luckily, the Digital Millennium Copyright Act (the “DMCA”) creates safe harbors which could provide protection from such liability.

To qualify for the safe harbors, a website operator must satisfy a number of requirements, which may include the following:

  1. Adopting, reasonably implementing, and informing subscribers and account holders of a policy for terminating repeat infringers’ use of the operator’s system or network under appropriate circumstances; and
  2. Designating an agent to receive notices of alleged infringement.  As of the end of last year, the U.S. Copyright Office (the “Office”) implemented a new electronic system for the designation of agents.  The Office will no longer accept paper designations.

If you already comply with the DMCA safe harbors and previously filed a paper designation, you will need to submit a new, electronic designation by the end of the year to maintain your compliance with the DMCA safe harbor.  Once filed electronically, the designation must be renewed every three years.

If you operate a website that links to other websites or allows users to post content but have not complied with the DMCA safe harbors, you may want to consider designating an agent with the Office and implementing the other required policies to gain the benefit of the DMCA safe harbors against copyright infringement claims.

Elizabeth M. Stamoulis
estamoulis@williamsparker.com
(941) 552-5546

How to Sell Raw Land or Air Rights to a Real Estate Developer and Receive Back Finished Condominiums Tax-Free

When a land owner sells to a condominium developer, both the land owner and the developer have motivations favoring the developer “paying“ the land owner with finished condominium units instead of cash. Such a transaction reduces the developer’s up-front cash investment while sometimes enabling the developer to use all the land as collateral for senior financing. While more risky than a cash sale, the seller may receive condominium units more valuable than the cash price the seller could realize.

What gets in the way of these transactions?  Often, the seller balks because the seller lacks the cash to pay capital gains tax on the value of the condominium units received back. To alleviate that problem, transactions are sometimes structured as partnership “mixing bowl” co-investments and redemptions, or as combination ground lease-Internal Revenue Code Section 1031 exchange transactions. These structures may defer capital gains tax; however, they also are subject to restrictions and frequently sufficiently convoluted so as to interfere with the developer’s business structure or senior financing.

In some circumstances an alternative sale structure offers a better solution. Under the alternative, the seller takes the positon that the receipt of finished condominiums is exempt from capital gains tax under Internal Revenue Code Section 1038. These same rules exempt a seller from tax when the seller forecloses on a delinquent purchaser on traditional seller financing (in tax parlance, an installment note). Unlike the mixing bowl or combination ground lease-Internal Revenue Code Section 1031 exchange structures, the Section 1038 structure more closely resembles traditional seller financing, making it potentially more palatable to senior development lenders and more simple for all the parties to understand and implement.

To learn more—including understanding scenarios involving air rights rather than raw land—follow this link to materials summarizing all these potential structures originally presented in an American Bar Association Section of Taxation webinar.

Please note that we post these materials with permission from and subject to the copyright of a co-presenting firm, Meltzer, Lippe, Goldstein & Breitstone, LLP.

 

The S Corporation Inversion – How to Convert an S Corporation into a Tax Partnership Tax-Free

Tax inversions have been in the news for several years now, but almost always in the context of a public US company reincorporating in a foreign country to achieve lower tax rates on non-US source income. However, there is another type of inversion, the S corporation inversion, that does not involve any foreign countries but can be an elegant solution to a problem faced my many small and medium-sized businesses operated as S corporations.

Many businesses start as S corporations for good tax reasons, but later in their lifecycle want to convert to a tax partnership (such as an LLC taxed as a partnership) for a variety of business and tax reasons. For example, perhaps a private equity fund or foreign investor (which are both impermissible S corporation shareholders) want to invest in the business and become owners. Another example is where an S corporation wants to grant an equity interest to a key employee in exchange for their past and future services. Oftentimes, the best approach in this case is to grant the employee a “profits interest” in the business, but S corporations cannot grant such interests, while tax partnerships can. Simply converting or merging the S corporation into an LLC taxed as a partnership is not satisfactory, because that transaction would trigger the taxable liquidation of the S corporation.

One method to convert to a tax partnership tax-free, without undergoing an inversion, is the “LLC drop-down,” which entails the S corporation forming a wholly-owned LLC, that is initially a disregarded entity for tax purposes, and transferring all of the S corporation’s assets and business to the new LLC. Once this is accomplished, the new investors can invest in the business by investing into the new LLC, which will become a tax partnership. However, this restructuring is deceptively simple, because migrating the S corporation’s business to the new LLC can create many issues, including (1) migrating employees, payroll, and benefit plans to the new LLC; (2) opening new operating and payroll bank accounts for the new LLC; (3) consulting with insurance agents to obtain coverage for the new LLC; (4) assigning customer, lease, vendor, and other key agreements to the new LLC, which oftentimes requires the counterparty’s consent; (5) transferring or obtaining new licenses and permits for the new LLC to operate the business; and (6) obtaining lender consent.

These headaches can oftentimes be avoided by utilizing an S corporation inversion. The S corporation inversion is accomplished by having the shareholders of the S corporation (“Old S”) transfer their stock to a newly formed S corporation (“New S”) in exchange for all the stock of New S. Old S immediately makes an election to be a qualified subchapter S subsidiary, and so Old S will be disregarded for tax purposes. New S then forms a wholly-owned LLC, which is initially disregarded for tax purposes, and then merges Old S into the new LLC, with new LLC as the survivor of the merger. The merger is without tax consequences, because it’s a merger of two entities, Old S and LLC, that are disregarded for tax purposes. Furthermore, by operation of the Florida merger statute, all of the assets, liabilities, contracts, and legal relationships of Old S transfer to LLC and in most circumstances no third party consents are required. Now the old business is in a new LLC that can take on new investors in a tax partnership format and without many of the headaches of migrating a business to a new legal entity. For guidance on this structure, see Treasury Regulation Section 1.1361-5(b)(c), Example 2.

Michael J. Wilson
mwilson@williamsparker.com
941-536-2043

Applicable Federal Rates for March 2017

The Internal Revenue Code prescribes minimum imputed interest rates and time-value-of-money factors applicable to certain loan transactions and estate planning techniques. These rates are tied formulaically to market interest rates. The Internal Revenue Service updates these rates monthly.

These are commonly applicable rates in effect for March 2017:

Short Term AFR (Loans with Terms <= 3 Years)                                          1.01%

Mid Term AFR (Loans with Terms > 3 Years and <= 9 Years)                    2.05%

Long Term AFR (Loans with Terms >9 Years)                                              2.78%

7520 Rate (Used in many estate planning vehicles)                                     2.4%

Here is a link to the complete list of rates: https://www.irs.gov/pub/irs-drop/rr-17-07.pdf

E. John Wagner, II
jwagner@williamsparker.com
941-536-2037

Williams Parker Represents Taxpayers in Settling $16,000,000 Payroll Tax Audit

Williams Parker shareholder Mike Wilson recently led a Williams Parker team in the representation of several affiliated taxpayers that were under a combined audit by the Internal Revenue Service (the “Service”) in connection with the taxpayers’ treatment of several thousand workers as partners, instead of as employees or independent contractors, for payroll tax purposes over multiple years. By characterizing their workers as partners, the taxpayers’ took the position that the workers’ compensation was not reportable on Form W-2 or subject to withholding or payroll tax obligations. Instead, the compensation was a guaranteed payment, reportable on the workers’ Schedule K-1, and subject to self-employment tax to be paid by the workers. Not surprisingly, the Service took a very aggressive position regarding the classification of the workers as partners, arguing they were properly characterized as employees. With an exposure for the taxpayers of approximately $16,000,000 of tax, interest, and penalties, Williams Parker was able to settle the four-year dispute with the Service for approximately 12 percent of such amount.

What Is Business Succession, Anyway?

Recently, shareholder John Wagner sat down with the Sarasota Herald-Tribune to discuss business succession planning. In the following brief video, John addresses why and when business owners should consider succession planning and provides tips for getting started.

Related Resources:

UHF Antennas Become Even More Obsolete, But Broadcasters Get a Tax Break

Remember adjusting an oddly shaped TV antenna to improve reception on channels higher than 13?  If you do, the memory is likely distant.

Congress noticed a few years ago and mandated that the Federal Communications Commission (the “FCC”) repurpose Ultra High Frequency (a.k.a. “UHF”) broadcast spectrum that carried some of those channels, to create more room for mobile broadband.  The FCC gave licensees holding rights to the repurposed spectrum the option of selling their existing licenses or accepting inferior rights.

One licensee wanted to sell and reinvest in other rights of their choosing without paying capital gains tax on the sale. The licensee asked the Internal Revenue Service to rule that Internal Revenue Code Section 1033, the same provision that allows tax-free reinvestment when the government takes real estate by condemnation, applies to allow tax-free reinvestment of the UHF license rights.  The IRS agreed, even though the taxpayer technically was not forced to sell. The IRS ruled that the option to accept other rights did not prevent Section 1033 tax deferral because the inferiority of the substitute rights the FCC offered justified ignoring that alternative. The IRS found the transaction amounted to a forced sale and therefore qualified for tax deferral.

If the government gives you a “false” choice between selling your property or accepting an inferior alternative, this ruling explains how to defer tax on the sale if you reinvest the proceeds. But we do not recommend trying this strategy with your old UHF TV antenna. You probably won’t recognize gain to defer anyway.

Here is a link to the IRS ruling: https://www.irs.gov/pub/irs-wd/201702034.pdf

E. John Wagner, II
jwagner@williamsparker.com
941-536-2037

Applicable Federal Rates for February 2017

The Internal Revenue Code prescribes minimum imputed interest rates and time-value-of-money factors applicable to certain loan transactions and estate planning techniques. These rates are tied formulaically to market interest rates. The Internal Revenue Service updates these rates monthly.

These are commonly applicable rates in effect for February 2017:

Short Term AFR (Loans with Terms <= 3 Years)                                          1.04%

Mid Term AFR (Loans with Terms > 3 Years and <= 9 Years)                    2.10%

Long Term AFR (Loans with Terms >9 Years)                                              2.81%

7520 Rate (Used in many estate planning vehicles)                                     2.6%

Here is a link to the complete list of rates: https://www.irs.gov/pub/irs-drop/rr-17-04.pdf

E. John Wagner, II
jwagner@williamsparker.com
941-536-2037

SEMINAR: Succession Planning II – “How Did Your Plan Really Work?”

ACG logo

Williams Parker is pleased to serve as the Annual Sponsor of the Association for Corporate Growth’s Sarasota programming. On February 2, ACG is hosting “Succession Planning II – How Did Your Plan Really Work?” at the Sarasota Yacht Club.

The panel, moderated by Williams Parker attorney Robert W. Benjamin, features Taylor T. Collins and James B. Tollerton of PBI, as well as founder and CEO of Miles Partnership, Roger Miles.

In October, ACG presented a panel on how and when to successfully exit your business. At the upcoming seminar, the panel of business owners who have successfully implemented a succession plan will discuss the following:

  • What went right?
  • Were there any unexpected events or consequences and how did you deal with them?
  • What advice would you give a business owner planning for ownership succession?
  • What were the challenges of the transition from the perspective of the successor to the business?

Thursday, February 2, 2017
5:30 to 8:00 p.m.
(Cocktails/appetizers 5:30 – 6:30; Panel to begin at 6:30)
Sarasota Yacht Club
1100 John Ringling Blvd. Sarasota, FL  34236

Please contact us if you are interested in attending.