Monthly Archives: May 2016

Applicable Federal Rates for June 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 June 2016:

Short Term AFR (Loans with Terms <= 3 Years)                                          0.64%

Mid Term AFR (Loans with Terms > 3 Years and <= 9 Years)                    1.41%

Long Term AFR (Loans with Terms >9 Years)                                              2.24%

7520 Rate (Used in many estate planning vehicles)                                     1.8%

Here is a link to the complete list of rates:

E. John Wagner, II

How Can You Succeed in Your Business Succession Plan?

As the baby-boomer generation ages, an increasing number of family businesses will be experiencing transitions in ownership and/or management.  Not all of these transitions will be successful; popular studies indicate that only 30% of family businesses survive beyond the first generation.  In some cases, a transition may be undermined by a disconnect between the owner’s estate plan and the business’ succession plan.  A transition can be both successful and profitable, however, with patience, persistence, and proper planning.

John Wagner and Doug Elmore recently discussed techniques that can help align a business succession plan with an estate plan at a joint meeting of the Gulf Coast Chapter of the of Florida Institute of CPAs and the Suncoast Chapter of the Financial Planners Association.  Here is a link to their presentation materials:
Striking a Balance: Aligning the Business Succession Plan With the Estate Plan

E. John Wagner, II

Douglas J. Elmore


IRS Continues Push to Prohibit Tax-Exempt Bond Financing for Developer-Controlled CDDs and Similar Political Subdivisions

Real estate developers routinely use tax-exempt bond financing for infrastructure improvements for new communities. That may change soon. IRS perceives abuse in the process, and has proposed regulations making such bonds taxable if the developer controls the issuing governmental body.

Using enabling statutes under state law, a developer can initiate creation of a governmental body with the power to issue bonds secured by the developer’s land.  Although other types exist, Community Development Districts (often called “CDDs”) are the most common governmental body formed this way in Florida.

Such governmental bodies have historically qualified to issue municipal bonds exempt from federal income tax.  Because investors demand a lower absolute interest rate from tax exempt bonds than taxable bonds, these structures allow developers to enjoy a lower financing cost than would otherwise be the case.

The governing officials for such bodies usually are elected through a voting process weighted based on land ownership. In the early phases of development, the developer owns most or all of the land, and therefore controls the governmental body. When the neighborhood is closer to completion–and end-users have purchased lots and other developed property–the developer loses control, and the new property owners oversee the governmental body.

The problem with the IRS proposed regulations is that the developer always controls the governmental body when making the initial infrastructure improvements–such as roads and utility infrastructure–for a community. At that time, there is no community in which end users can buy lots, homes, or other property.  By prohibiting developer control, the proposed regulations could eliminate–or severely restrict–this form of financing.

The IRS is considering  taxpayer comments suggesting an exemption from the new rules for early-stage developments under developer control. This may provide a middle ground that limits abuse, but permits legitimate infrastructure improvements by governmental bodies that are reasonably expected to eventually be controlled by a widely disbursed group of end-user owners. As usual, the devil is in the details. For example, it may be difficult to fit larger, multi-phase communities within such rules. Unfortunately, with these proposed regulations, the IRS has put the burden on taxpayers, rather than itself, to design a workable framework. Comments are due to IRS by May 23.

Here is a link to the proposed regulations:

 E. John Wagner, II

DOL Issues Final Rule Revising Overtime Regulations

On May 18, 2016, the Department of Labor raised the minimum salary level that certain employees must be paid to qualify as exempt from the overtime pay requirements of the Fair Labor Standards Act. Under current regulations, executives (supervisors), administrative employees and professionals, must both perform “exempt” duties as defined by the DOL and be paid a guaranteed salary of at least $455 a week ($23,660 annually). This new regulation significantly increases the salary threshold to $933 a week ($47,476 annually), however, it does not alter the primary duty test. The federal government predicts that the new rule will result in companies having to pay an additional 4.2 million employees overtime, boosting wages for workers by $12 billion over the next ten years.

Additionally, as noted in comments included in a recent Law360 article, the DOL’s rule, while potentially extending overtime protections to 4.2 million more employees, may also have adverse effects for certain employees. In an effort to offset costs businesses may incur as a result of the new rule, both in terms of the expense associated with ensuring compliance, as well as having to pay overtime to formerly exempt employees or sufficiently increasing an employee’s salary so as to maintain the exemption, certain employers may reduce rates of pay, cut back scheduled hours to reduce risk of overtime, or offer less generous benefits to non-exempt employees.

A link to the new rule can be found here:

Related guidance issued by the DOL can be found here:

Lindsey L. Dunn
(941) 552-2556

Proposed Regulations Expand Reporting Obligations for Foreign-Owned Disregarded Entities

In the wake of the Panama Papers leak, Treasury promulgated proposed regulations that require a US disregarded entity that is wholly-owned by a foreign owner to comply with the reporting, record maintenance, and associated compliance requirements that currently apply to US corporations that are owned 25% or more by a foreign owner under Code section 6038A, including the obligation to file Form 5472. The regulations also expand the types of transactions that must be reported. For example, contributions and distributions between the disregarded entity and its foreign owner would be subject to reporting even though these transactions would otherwise be ignored for tax purposes because of the involvement of the disregarded entity.

A link to the proposed regulations is here:

Michael J. Wilson

Who Will Pay for IRS’s 600+ New Enforcement Personnel?

The IRS recently announced it will hire between 600 and 700 new enforcement personnel.

According to the daily news service Government Executive, in an internal IRS memorandum discussing the hires, Commissioner of Internal Revenue John Koskinen noted: “This is a good development for our tax system. When you look at the IRS overall, every dollar invested in us returns at least $4 to the Treasury. Each enforcement position typically returns almost $10 to the U.S. Treasury for every dollar spent — and in many instances, much more.”

The Commissioner indicated the IRS needs the hires to replace employees lost to attrition and retirement.  He did not, however, specify exactly who will enjoy the civic opportunity to fund IRS’s almost 1,000% expected return on its investment.

Here is the complete article describing the hires in Government Executive:

E. John Wagner, II

New Regulations End Dual Partner/Employee Planning Technique

Temporary and proposed regulations issued May 3, 2016, reaffirm Treasury’s position that an individual cannot be both an employee and a partner of the same tax partnership, and end the ability of tax planners to use a disregarded entity in conjunction with a tax partnership to change an individual’s self-employment tax treatment. Previously, tax planners would use the rule that disregarded entities are treated as corporations for employment tax purposes to setup a structure whereby a tax partnership owned a disregarded entity with the partners treated as employees of the disregarded entity and not the tax partnership.  The primarily motivation for such structures was to permit the partners to be employees and enable Form W-2 withholding instead of having the partners pay self-employment tax and make estimated tax payments.  The new regulations provide that the rule that a disregarded entity is treated as a corporation for employment tax purposes does not apply to the self-employment tax treatment of individuals who are partners in a partnership that owns a disregarded entity.  A link to the new regulations is here:

Michael J. Wilson

Independent Contractor or Employee? That is the Question!

A person can provide services to a company as an employee or an independent contractor depending upon the nature of the relationship between the service provider and the company. Misclassification of employees as independent contractors remains a primary focus of many government agencies, including the IRS, U.S. Department of Labor, Florida Department of Economic Opportunity Reemployment Assistance Programs, and Florida’s Division of Workers’ Compensation.  Investigations by these agencies can be extremely costly, time-consuming, and even lead to personal liability and criminal penalties!

The presentation in the following link explains the detailed federal and Florida tests that are used by these four agencies to properly classify service providers.  It also provides practical examples in which the tests can be applied.  Additionally, the presentation includes guidance to help mitigate the potential for employer liability regarding other wage and hour complexities and pitfalls.

Independent Contractor or Employee? That is the Question!

Gail E. Farb
(941) 552-2557