Monthly Archives: June 2014

Applicable Federal Rates for July 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 July 2014:

Short Term AFR (Loans with Terms <= 3 Years)                                          0.31%

Mid Term AFR (Loans with Terms > 3 Years and <= 9 Years)                     1.82%

Long Term AFR (Loans with Terms >9 Years)                                              3.06%

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

Here is a link to the complete list of rates:  RR-2014-20 — APPLICABLE FEDERAL RATES 

E. John Wagner, II

New Law Limits Liability For Florida Skilled Nursing Facility Investors

On June 13th, 2014 Senate Bill 670 was signed by Governor Rick Scott. The new law will change and amend several aspects of the existing law pertaining to skilled nursing facilities. The changes are of particular importance to passive investors and those indirectly involved with skilled nursing homes. From now on:

Passive investors are not liable for damages under this law; Only the licensee, licensee’s management or consulting companies, and direct caregivers are subject to suit without an extra hearing; and Punitive damages are harder to obtain and require an extra hearing.

This law should make Florida a safer place for passive investors and companies that are indirectly involved with skilled nursing home facilities. The law in its entirety can be found here:

John L. Moore

A Rebirth of Common Sense? After Ten Years, We Bid Adieu to Circular 230 Tax Disclaimers

If you received an email or letter from an attorney or CPA in the last decade, you probably have seen a Circular 230 disclaimer. Since 2004, the Internal Revenue Service has required that almost all written communications from tax practitioners concerning federal tax matters include this disclaimer notifying the reader that advice contained in the written communications cannot be used to avoid certain tax penalties.

Effective June 12, 2014, new regulations eliminate the Circular 230 disclaimer requirement. Why?

The requirement was a reaction to aggressive tax shelters marketed in the late 1990s and early 2000s. It was perceived that tax advisors told taxpayers the worst-case scenario was that, after an audit, the Internal Revenue Service would impose tax and interest on the shelter transactions, but that professional tax opinions would protect them from penalties. A perception existed that the opinions in question did not accurately describe the transactions or in some cases were obviously faulty to a tax professional.

The problem was that a non-tax expert has a hard time discerning a good opinion from a bad opinion. The Internal Revenue Service hoped that requiring the disclaimer for all but the most thorough and detailed written advice would protect taxpayers from unscrupulous tax practitioners selling bad advice, because the “bad” opinions would have the “no penalty protection” disclaimer.

While well intentioned, it is doubtful the disclaimer ever served its purpose. Few taxpayers could or would pay for formal tax opinions on most issues, and there weren’t enough tax practitioners to give most advice in a manner sufficiently detailed to avoid the disclaimer. So few communications satisfied the stringent requirements to avoid the disclaimer that almost all communications included it. Instead of serving as a red flag to wary taxpayers, it became routine boilerpate that taxpayers ignored.

The Internal Revenue Service has not abandoned its quest to encourage practitioners to behave responsibly. The new rules still require tax practitioners to exercise diligence in giving advice. With the disclaimer’s elimination, however, we can thank the Internal Revenue Service for saving us all time, ink, paper, and data storage capacity in the future. After ten years, common sense prevailed.

Here is a link to the new regulations:

E. John Wagner, II

Sales Tax Applies to Payments by Tenants for Leasehold Improvements Unless Certain Conditions are Satisfied

A recent ruling by the Florida Department of Revenue indicates when sales tax will be imposed on leasehold improvements required to be made by a tenant pursuant to a commercial lease. In Technical Assistance Advisement 13A-023, the Department concluded that such leasehold improvements would be considered rent subject to sales tax unless all of the following five conditions are satisfied:

The leasehold improvements are made to put the premises in a condition suitable for the operation of the tenant’s business;

There is no requirement for the tenant to spend a specific or minimum amount of money on the improvements;

There is no credit given against rental payments for the leasehold improvements furnished by the tenant;

The leasehold improvements are not explicitly classified as rent, additional rent, rent-in-kind, or in lieu of rent; and
There is no evidence that the tenant and landlord attempted to reclassify rental payments to avoid tax.

Below is a link to an article that describes the ruling in more detail and addresses related topics.

Sales Tax Applies to Payments by Tenants for Leasehold Improvements Unle… (1)

Michael J. Wilson

A Proposal to Better Protect Capital Gains for Real Estate Investors Before Development

We have discussed a structuring technique real estate investors use to protect the lower-federal-income-tax-rate-long-term-capital-gain treatment of real estate gains, before property is converted to an active development purpose that creates higher-tax-rate income. The structuring requires property transfers and the use of multiple business entities, which decreases transparency for the government and is difficult for taxpayers to implement.

A “check-the-box” tax election that allows taxpayers to achieve the same tax result would better serve the interests of all involved. I am co-author of a new Florida Tax Review article proposing such an election. Here is a link:

The following provides a broader overview of the structuring technique allowed under current law: Check the Box Bramblett – ABA Tax SEB Committee Presentation

E. John Wagner, II