Monthly Archives: October 2014

Our Guide to Florida Residency (And its Tax Benefits)

Posted below is a link to our updated guide to Florida residency. The guide is a starting point for persons considering becoming Florida residents, whether for tax planning, asset protection, or other reasons. (I hear the weather isn’t bad.)

If Florida residency is motivated by tax planning or other legal factors, it is important to not only convince Florida to accept you as a resident, but also to convince your former home state to recognize your status as a Florida resident. The level of difficulty varies widely amongst the states. We recommend coordination between tax advisors in both Florida and your former state of residence.

We hope you find the guide useful. Here is the link:

E. John Wagner, II

Applicable Federal Rates for November 2014

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 November 2014:

Short Term AFR (Loans with Terms <= 3 Years)                                          0.39%

Mid Term AFR (Loans with Terms > 3 Years and <= 9 Years)                     1.90%

Long Term AFR (Loans with Terms >9 Years)                                              2.91%

7520 Rate (Used in many estate planning vehicles)                                     2.2%

Here is a link to the complete list of rates:

E. John Wagner, II

Florida LLC Act Personal Liability (Surprise!)

We have previously written about Florida’s new Limited Liability Company (LLC) Act. Section 605.0205 of the Act creates new personal liability exposure for LLC members and managers. What is the exposure? How do you manage it?

Section 605.0205 applies when an LLC filing with the Florida Department of State is incorrect and a person suffers a loss as a result of the inaccurate statement. This is most likely to occur when an annual report filing results in the Sunbiz website inaccurately showing a person as having authority to act on behalf of the LLC, and then that person improperly causes the LLC to contract with a third party or otherwise improperly acts on the LLC’s behalf.

Section 605.0205 imposes personal liability on a person signing a filing knowing it is inaccurate. That is not surprising.

But Section 605.0205 also imposes personal liability on certain LLC members or managers who had notice of the inaccurate filing and failed to remedy it despite having an opportunity to do so. The problem is that notice and opportunity to cure are factual issues evaluated in hindsight. Circumstances could exist to suggest that a passive investor had notice even though the investor had no actual knowledge of the inaccurate filing. For example, some companies send copies of filings to all their members, which might create a presumption of notice, even though in the real world few if any passive investors would actually inspect such documents to verify their accuracy.

What should you do to manage this risk?

First, if you manage an LLC, pay more attention than you have in the past to your Florida Department of State filings. Verify that annual reports are accurate, and create periodic calendar ticklers to verify that no inaccurate or fraudulent filings have occurred between annual reports.

Second, if you are a passive investor who does not have management responsibilities, inquire whether the LLC can be “manager-managed” under the Act. If the LLC is “member-managed” under the Act, inquire whether the LLC operating agreement contains a clause making only the active members with management duties liable for improper filings. Under an exception in Section 605.0205, either circumstance may protect you.

Third, rather than managing or owning an LLC individually or through another entity with separate assets, use single-purpose LLCs you own and control as managers and members in operating or investment-holding LLCs. This may provide additional protection if the other safeguards fail.

This is, of course, yet another risk business owners and investors would prefer not to spend precious time managing. The Legislature has nevertheless decided that time commitment is now part of the price for limited liability. Don’t shoot the messenger!

Here is a link to Section 605.0205 of the Act:

Here is a link to our prior, more comprehensive post regarding the LLC Act:

E. John Wagner, II

Sale of Personal Goodwill Tax Strategy Reaffirmed by Tax Court

Owners of C corporations, and S Corporations that previously were C corporations and have built-in gains, can face a significant tax hit upon the sale of their business – two levels of federal income tax and Florida corporate income tax. Where the owner of the business has bona fide personal goodwill that is distinct from the corporate goodwill, such as strong personal relationships with customers, a common tax strategy can be used to mitigate some of the tax hit by bifurcating the sale transaction into a corporate sale of assets and a sale of personal goodwill by the owner to the same buyer as part of the same transaction. The sale of the personal goodwill will be outside of corporate solution and taxable at the preferential long-term capital gain rate. This strategy was first upheld by the Tax Court in 1998 in the Martin Ice Cream case. The Tax Court recently reaffirmed this strategy in Bross Trucking, Inc. v. Commissioner, T.C. Memo 2014-107. However, implementing this tax strategy in a manner that will be respected by the Internal Revenue Service or upheld by a court requires advance planning (ideally before a Letter of Intent is signed and certainly before the sale is closed) and careful implementation.

A link to the Bross Trucking case is below:

Michael J. Wilson