Tag Archives: IRS

IRS Sees the Light and Withdraws §2704 Proposed Regulations

The Treasury Department’s issuance of proposed regulations under Code Section 2704 were met with significant criticism and confusion. The §2704 proposed regulations were intended to provide the IRS with an additional sword to reduce and in some cases eliminate valuation discounts on family-controlled business entities.

After thousands of comments were received and a public hearing was held where numerous taxpayer advocacy groups, business advisors, and valuation experts provided their concerns, the IRS finally blinked. On October 20, 2017, the IRS published a withdrawal notice of proposed rulemaking, which removes the potential for these proposed regulations to be finalized. The elimination of the proposed regulations is fantastic news for all family-controlled business owners that would be subject to estate and gift taxes. More information regarding the withdrawal is available at federalregister.gov.

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

Applicable Federal Rates for October 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 October 2017:

Short Term AFR (Loans with Terms <= 3 Years)                                          1.27%

Mid Term AFR (Loans with Terms > 3 Years and <= 9 Years)                    1.85%

Long Term AFR (Loans with Terms >9 Years)                                              2.5%

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

Here is a link to the complete list of rates: https://www.irs.gov/pub/irs-drop/rr-17-20.pdf.

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

IRS Declines to Follow Tax Court Decision Liberalizing Reverse 1031 Exchanges

Last year on the blog, we reported a Tax Court decision approving “reverse” 1031 Exchanges in which a taxpayer acquires replacement property more than 180 days before disposing of relinquished property.

The IRS recently announced it will not follow the Tax Court decision, and may seek future challenges in other courts to overturn it. This limits the Tax Court decision’s impact until the courts establish more precedent.

The IRS announcement should not, however, deter all taxpayers needing more than 180 days to dispose of relinquished property from attempting 1031 Exchanges. In any reverse 1031 Exchange transaction, a person unrelated to the taxpayer must hold the replacement property or relinquished property until the ultimate buyer acquires the relinquished property. The Tax Court decision and IRS announcement only affect transactions in which an agent or straw man holds the replacement or relinquished property for the taxpayer in the interim period, without bearing risks normally associated with property ownership. Sometimes a taxpayer can find an unrelated person willing to bear some of the benefits and burdens of ownership for the property, differentiating the arrangement from an agent or straw-man structure. This opens the door to a taxpayer taking the position a longer holding period may exist, even if financing or other arrangements remain in place between the interim titleholder and the taxpayer.

The IRS announcement can be read at irs.gov.

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

Hurricane Irma Tax Deadline Relief

The Internal Revenue Service has announced that tax relief will be available to individuals who live in, and businesses whose principal place of business is located in, 37 different Florida counties affected by Hurricane Irma, including Sarasota and Manatee counties. Taxpayers who live outside the disaster area may also qualify for relief if they have records necessary to meet a deadline located in the disaster area.

The tax relief offered includes additional time to file certain tax returns, additional time to make certain tax payments, and additional time to perform other time-sensitive actions. If an enumerated tax return, tax payment, or other action for which relief has been granted was previously due on or after September 4, 2017 and before January 31, 2018, taxpayers will now have until January 31, 2018 to perform that action without incurring penalties. This relief would apply to businesses with filing extensions until September 15 and individuals with filing extensions until October 16 for their 2016 income tax returns.

Affected taxpayers may also be entitled to claim disaster-related casualty losses and deduct personal property losses not covered by insurance or other reimbursements on either their current year or prior year tax returns. Taxpayers should include the Disaster Designation “Florida, Hurricane Irma” at the top of the relevant 2016 tax form(s).

The Internal Revenue Service will also waive certain fees for tax return copy requests and may consider appropriate relief in the event a tax collection or tax audit matter has been impacted by Hurricane Irma.

A full list of the counties whose residents and businesses may be entitled to tax relief can be accessed here: https://www.irs.gov/newsroom/tax-relief-for-victims-of-hurricane-irma-in-florida.

Nicholas A. Gard
ngard@williamsparker.com
(941) 552-2563

Applicable Federal Rates for September 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 September 2017:

Short Term AFR (Loans with Terms <= 3 Years)                                          1.29%

Mid Term AFR (Loans with Terms > 3 Years and <= 9 Years)                    1.94%

Long Term AFR (Loans with Terms >9 Years)                                              2.6%

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-17-17.pdf.

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

Applicable Federal Rates for August 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 August 2017:

Short Term AFR (Loans with Terms <= 3 Years)                                          1.29%

Mid Term AFR (Loans with Terms > 3 Years and <= 9 Years)                    1.95%

Long Term AFR (Loans with Terms >9 Years)                                              2.58%

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-17-15.pdf.

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

Tax Court Rejects IRS’ Attempt to Narrow Reasonable Cause Exception

Earlier this month, the Tax Court rejected an argument by the IRS that in order to establish good faith reliance on a tax advisor, for purposes of avoiding penalties, the taxpayer, a foreign corporation, needed to have (1) conducted an independent investigation into the tax advisor’s background and experience instead of merely relying upon the recommendation of the tax adviser by the taxpayer’s US legal counsel, and (2) hired a tax expert that specialized in international tax law or an attorney with an LL.M. degree.  The Tax Court found that the IRS attempted to impose greater conditions on the taxpayer than what is required under existing law. The Tax Court ruled that the taxpayer reasonably relied upon the recommendation of its legal counsel in hiring the tax advisor. Furthermore, the standard is not whether the tax advisor was an expert in international tax law or an attorney with an LL.M. degree, but instead whether the tax advisor was “a competent professional who had sufficient expertise to justify reliance.”

The opinion in the case, Grecian Magnesite, Industrial & Shipping Co., S.A. v. Commissioner, 149 T.C. 3 (2017), can be found here.

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

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.

 

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.

2704 Regulations Explained: Proposed Rules Are Set to Further Expand Value Differences between Family-Controlled Entities and Other Companies

The IRS is focused on reducing valuation discounts associated with transfers of interests in family-controlled businesses, but this focus will result in family members being deemed to receive a different value than non-family members.  This also means that an appraiser will be required to establish two different values based on ignoring certain restrictions for family members, while taking those same restrictions into consideration for non-family members.

Consider, for example, a trust that provides that 50 percent of a decedent’s family-controlled business interest will go to charity and the remaining 50 percent will go to family members.  The IRS will be expecting that the interest being conveyed to the family members to result in a higher value when compared to the same percentage interest being conveyed to charity.  This ultimately means that the interest conveyed to family will result in higher estate taxes and the interest conveyed to charity will result in a smaller charitable deduction for estate tax purposes.  The end result is the IRS receives more estate tax from the estate even though the same restrictions apply to all members (both the family members and charity).

This post is part of a series of blog posts addressing the proposed 2704 regulations and the parties that should be reviewing their plans as a result.

View previous posts:

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