Tag Archives: tax

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.

Does a Republican Sweep Augur Federal Tax Reform?

Amongst many things, the Republican sweep in yesterday’s election improves prospects for the most significant tax reforms since 1986.

While we instinctually focus on possible changes to our personal tax burdens, business income taxation may offer the most opportunities for structural reforms. Structural changes may or may not reduce the amount of tax revenue. They are, at least in theory, policy driven to encourage business behavior consistent with greater economic growth.

Changes on the table include taxing business income that is reinvested (rather than distributed to owners for their personal uses) at a lower rate, and changing the international tax regime to a territorial system that does not tax income earned in other countries when repatriated to the United States. The former may encourage business investment spending. The latter may reduce distortions in capital flows into the United States caused by the current tax regime. Both changes would bring the United States closer in line with the tax systems in other developed countries.

And, of course, our leaders will revisit Obamacare, including the new taxes it created.

President-Elect Donald Trump’s proposals do not exactly match those in Congress. Disagreement could impede reform. But with House Speaker Paul Ryan and President-Elect Trump both focusing on tax reform, we will see the most serious tax reform debate in many years.

Here are links to recent media discussion of possible tax reforms:

http://www.wsj.com/articles/donald-trump-win-gives-gop-fuel-to-slash-taxes-1478687402

http://www.forbes.com/sites/anthonynitti/2016/11/09/president-trump-what-does-it-mean-for-your-tax-bill/#53ec8be84b8b

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