Monthly Archives: August 2016

Applicable Federal Rates for September 2016

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 September 2016:

Short Term AFR (Loans with Terms <= 3 Years)                                          0.61%

Mid Term AFR (Loans with Terms > 3 Years and <= 9 Years)                    1.22%

Long Term AFR (Loans with Terms >9 Years)                                              1.90%

7520 Rate (Used in many estate planning vehicles)                                     1.4%

Here is a link to the complete list of rates: https://tax.thomsonreuters.com/wp-content/pdf/checkpoint/ria-wgl/2016/September2016-AFR.pdf

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

Want to Diversify an Appreciated Asset Position Without Paying Capital Gains Tax? Take a Federal Government Job With a Conflict of Interest.

If you want to convert a substantially appreciated asset into a diversified asset portfolio without paying capital gains tax, choose your favorite Presidential candidate with extra care.   He or she could save you a lot of tax by giving you a job.

If that candidate becomes President, appoints you to an Executive Branch position, and determines owning the appreciated asset creates a conflict of interest in your new Executive Branch job, Internal Revenue Code Section 1043 allows you to sell the appreciated asset and buy a diversified investment portfolio or Treasury Securities without paying the capital gains tax. Judicial appointees enjoy a similar opportunity.

Sound crazy? In 2006, media speculated that former Goldman Sachs CEO Hank Paulson would use Section 1043 to avoid millions of dollars of capital gains tax from selling appreciated Goldman Sachs stock when President George W. Bush appointed him Treasury Secretary. One might expect the tax benefit far exceeded the value of Mr. Paulson’s salary and other compensation.

But Section 1043  isn’t a complete “win” for the appointee. The gain is only deferred, not permanently eliminated, so the appointee must recognize the gain and pay the capital gains tax if and when he or she sells the newly purchased investments.  Also, diversification isn’t always voluntary.  As a condition to confirming his or her appointment, a Congressional committee can require an appointee to sell an asset the appointee wants to keep.  Another noteworthy consideration: these jobs aren’t necessarily easy.  One can wonder if, given a crystal ball, Mr. Paulson would rather have paid the capital gains tax, than serve as Treasury Secretary in the early days of the the Great Recession and, as a Republican, drop to a knee before the Democratic Congressional leadership to beg support for rescue legislation in the midst of financial crisis.

Nevertheless, don’t hesitate to raise an eyebrow if our future President appoints someone with a lot of gain (to defer) to an Executive Branch position. And if you find a job attractive in part for its tax perks, take heart that you aren’t necessarily the first person to submit your resume under such circumstances.

Here is a link to Internal Revenue Code Section 1043: https://www.law.cornell.edu/uscode/text/26/1043

Here is a link to a 2006 Forbes article discussing Mr. Paulson’s tax situation and some quirks to Section 1043 in more detail:  http://www.forbes.com/2006/06/01/paulson-tax-loophole-cx_jh_0602paultax.html

Here is a link to 2008 coverage of Mr. Paulson’s kneel: http://www.nytimes.com/2008/09/26/business/26bailout.html

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

Tax Court Approves Non-Safe-Harbor “Reverse” 1031 Exchange Even Though Titleholder Had No Ownership Benefits or Burdens

A 1031 Exchange is a popular capital gains deferral strategy for business and investment property. Taxpayers use the strategy to defer capital gains tax on property “sold” by acquiring “like kind” replacement property, usually in coordination with an intermediary or accommodation party.

After deliberating for a decade, the U.S. Tax Court has held that an accommodation party with no benefits or burdens of ownership can hold title to real property outside the established IRS “reverse” 1031 Exchange safe harbor without disqualifying the taxpayer’s 1031 Exchange.  The case arose from transactions spanning from 1999 to early 2001, before the IRS issued its safe harbor ruling for such transactions.  The accommodation party held the potential 1031 Exchange replacement property for over one year (longer than the 180-day period allowed by the IRS safe harbor) before transferring it to the taxpayer, following the taxpayer’s sale of its intended relinquished property.  During this period, the taxpayer funded all costs (including acquisition and construction costs) associated with the property, and entered into arrangements that constructively prevented the titleholder from realizing the benefits of owning the property.

The “owner” of property for federal income tax purposes usually is the party with the “benefits and burdens” of ownership, not legal title.  Application of that standard would have disqualified the 1031 Exchange by treating the taxpayer as owning the replacement property before acquiring the relinquished property. But the Tax Court found that different rules apply in the 1031 Exchange context, such that the arrangement was acceptable to treat the temporary accommodation titleholder as the income tax owner until the taxpayer completed its 1031 Exchange.

The Tax Court’s reasoning relied heavily on a decision of the U.S. Court of Appeals for the Ninth Circuit, the appellate court with jurisdiction over California and other western states.  While the Tax Court also relied on other precedent, there remains a risk cases in other geographic areas could have different outcomes.  The case is nevertheless significant, bolstering the substantial flexibility taxpayers enjoy in structuring 1031 Exchanges.

Here is a link to the Tax Court opinion in Estate of Bartell v. Commissioner: http://www.ustaxcourt.gov/USTCInOP/OpinionViewer.aspx?ID=10868.

IRS Targets Valuation Discounts on Family Controlled Entities

The Treasury has followed through on its promise to issue proposed regulations that are intended to significantly reduce the lack of control and lack of marketability discounts applied by appraisers when valuing family-controlled entities.  The proposed regulations follow closely with guidance provided in the Treasury Department’s “Greenbook” as discussed in our prior post (click here to view prior post). The good news is that the proposed regulations have provided everyone with a window of opportunity to complete their planning before the regulations become final. We will provide a more detailed analysis of the proposed regulations soon.

Thomas J. McLaughlin
tmclaughlin@williamsparker.com
941-536-2042