Monthly Archives: March 2014

Tax Court Reduces Obamacare 3.8% Medicare Surtax Bill for Irrevocable Trusts with Rental Real Estate Investments

If your family has an irrevocable trust holding closely-held rental real estate investments, a recent Tax Court case may help the trust reduce its Obamacare 3.8% Medicare Surtax bill. It may also help trusts use rental real estate losses to offset other income by avoiding the “Passive Activity Loss” limitations.

The Internal Revenue Service had argued that trusts could not use the same 3.8% Medicare Surtax and Passive Activity Loss planning techniques as individuals respect to rental properties, because trusts could not perform “personal services” in a real estate business to become a “real estate professional” as is necessary for the planning. The Tax Court disagreed, holding a trustee’s time devoted to such activities could satisfy the relevant tests. Here is a link to the opinion:

We have previously written about 3.8% Medicare Surtax avoidance techniques for individuals who own closely-held businesses. Here is a link: 2013 Federal Income Tax Return “Regrouping” Election Can Permanently Reduce Exposure to the New 3.8 percent Medicare Surtax. These techniques, which require active planning, are now available for irrevocable trusts as well.

Here is a link to a more detailed explanation of 3.8% Medicare Surtax planning for real estate investors: Medicare Surtax Planning for Real Estate Investors and Developers

E. John Wagner, II

Applicable Federal Rates for April 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 April 2014:

Short Term AFR
(Loans with Terms <= 3 Years) 0.28%

Mid Term AFR
(Loans with Terms > 3 Years and <= 9 Years) 1.81%

Long Term AFR
(Loans with Terms >9 Years) 3.32%

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

Here is a link to the complete list of rates:

E. John Wagner, II

May 1, 2014 Florida Business Entity Filing Deadline to Avoid Nonwaivable Penalty – 2014 Florida Annual Uniform Business Reports

The Florida Department of State deadline for filing a 2014 Florida Annual Uniform Business Report for Florida business entities and non-Florida entities registered in Florida is May 1, 2014. A non-negotiable late fee of $400 will be added to the Department of State fee for entities that file their Florida Annual Report after May 1, 2014. Failure to file a Florida Annual Report for 2014 will result in the administrative dissolution or revocation of an entity in September 2014.

Annual Reports must be electronically filed at the Florida Department of State’s website:

Even if you have a professional registered agent, it is your responsibility to file the annual report. If you need assistance, please contact us.

E. John Wagner, II

Final Regulations Issued on Compensatory Property Transfers

Treasury recently finalized Regulations under Code Section 83, which governs the taxation of the transfer of property (such as shares of stock, partnership interests, options, or warrants) to persons in exchange for services. Under these rules, the taxable event to the recipient generally occurs upon the earlier of the property being transferrable or when the property is not subject to a substantial risk of forfeiture. The final regulations modify Section 1.83-3(c) to clarify that a substantial risk of forfeiture may be established “only” through a service condition or a condition related to the purpose of the transfer. In determining whether a substantial risk of forfeiture exists, both the likelihood that the forfeiture will occur and the likelihood that the forfeiture will be enforced must be considered. Also, a transfer restriction that provides for the forfeiture or disgorgement of all or a portion of the property in the event of a violation of the restriction generally does not create a substantial risk of forfeiture. Finally, the final regulations incorporate the holding of Revenue Ruling 2005-48 by providing that the only provision of the securities law that would delay taxation under Code section 83 would be if a sale of the property could subject the seller to liability under Section 16(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) (which generally prevents corporate insiders from purchasing and selling corporate securities within 6 months). The final regulations add examples illustrating that a substantial risk of forfeiture is not created solely as a result of potential liability under Rule 10b-5 of the Exchange Act (relating to fraud or insider trading) or as a result of a lock-up agreement.

If you have questions regarding the final regulations or the tax treatment of granting equity interests in corporations or tax partnerships or options to acquire equity interests in exchange for services, please contact:

Michael J. Wilson