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Thursday, June 26, 2008


The assessed value of real property is typically adjusted by the county tax appraisers upon a sale of real estate, based on the amount paid for the real estate. However, if the real estate is owned by an entity, such as a corporation, LLC, or partnership, and it is the ownership interests in the entity that are sold (and not the real estate itself), the property appraiser typically has no notice of the sale or the price involved, and thus no valuation adjustment based on the sale usually occurs. As sale of interests in entities becomes more popular as a method of avoiding documentary stamp taxes, the problem of lack of notice to the tax appraiser has become worse.

Under recent changes to Florida law that became effective this month, an entity owning real estate must now report the sale of interests in the entity to the property appraiser. For this purpose, the reporting is triggered by a transfer of control of the entity or more than 50% of the interests in the entity (with exceptions for transfers between legal and equitable title and transfers between husband and wife or due to dissolution of a marriage). The reporting is not limited to "sales" of interests in entities - any transfer of control is subject to reporting.

The penalties for not reporting can be significant. For failing to report, the owner will be penalized for taxes avoided by such failure for up to 10 years, 15% interest on that amount each year, and a further penalty of 50% of the taxes avoided. Such penalty will become a lien against the subject real property, or if no longer owned, other real property of the owner owned in Florida.

Until the Department of Revenue issues Rules under the new law, the method of reporting and the forms to be used are unknown. Further, the statute is unclear as to who exactly must do the reporting. It appears that it is the entity that owns the real property that must report and that bears the penalty if reporting does not occur. Other issues that will hopefully be resolved include how to determine control and changes in control when interests in an entity are owned by other entities, how the rules will apply when interests in an entity that own the entity that owns the real estate are disposed of (that is, how the rules will apply to multi-tiered ownership structures), whether transfers that do not reflect typical sale transactions (such as transfers of interests in corporate reorganizations) will need to be reported, how the consideration on the sale will be allocated to the underlying real estate if the entity owns other assets or has liabilities, and how reporting will occur if the consideration received for the ownership interests is not based on cash consideration.

While at first glance it appears that the reporting requirement is not that big a deal, it is likely to present substantial administrative headaches for taxpayers and property assessors alike. There is also likely to be a substantial amount of unintended noncompliance, since many taxpayers and nonreal estate attorneys will likely not be aware of the need for reporting simply because of transfers of interests in entities.

Fla.Stats. §193.1556.


The IRS has provided recent guidance as to the revisions to various filing and disclosure requirements that impact exempt organizations. Many of these requirements were changed as part of the Pension Protection Act of 2006, but not all exempt organizations are aware of the changes. Some of the highlights of the changes, and the IRS guidance as to how those changes are implemented are:

a. SMALL ORGANIZATION EXEMPTION FROM FILING FORM 990. Generally, organizations with less than $25,000 in gross receipts do not need to file an annual Form 990. However, under the 2006 Act, nonfilers must give electronic notice to the IRS of their nonfiling. This is done through the use of the Form 990-N e-postcard. This is due by the 15th day of the 5th month after the close of the tax year, although there are some limited exceptions that exempts some organizations from even having to file the e-postcard form. If an organization does not file for 3 years, the penalty is severe – revocation of tax-exempt status.

b. SUPPORTING ORGANIZATION MANDATORY FILINGS. Supporting organizations are now required to file an annual information return, regardless of the level of gross receipts. The filing includes information on organizations supported, the type of organization that the supporting organization is, and certifying lack of control by disqualified persons.

c. MANDATORY ELECTRONIC FILING. Organizations with assets over $10 million must now file their Form 990 electronically.

d. FORM 990-T. Organizations with $1,000 or more of unrelated business income must file a Form 990-T. This filing requirement may apply even if a Form 990 is not required (e.g., churches still need to file the Form 990-T if applicable, even though they do not have to file a Form 990). The public and inspection and disclosure requirements applicable to Forms 990 are now extended to Form 990-T, although schedules, attachments and supporting documents that don’t relate to the imposition of the unrelated business income tax don’t have to be made available to the public.


Sunday, June 22, 2008


Qualified personal residence trusts ("QPRTs") are most often used in wholly domestic U.S. estate planning. A QPRT is a trust established to hold a personal residence of the grantor. The grantor retains the rent-free use of the residence for a fixed number of years. At the end of the term, the ownership of the residence passes to other named beneficiaries of the trust.

QPRTs provide a valuable transfer tax benefit. If the grantor survives the term of the trust, the amount of the taxable transfer is limited to the present value of the remainder interest of the trust, established at the time of the trust creation and funding. This means that the portion of the value of the property equal to the number of years of free use by the grantor is transferred free of gift and estate taxes to the other trust beneficiaries. Further, any appreciation in value of the residence during the term is also transferred to the other trust beneficiaries free of U.S. federal transfer taxes.

A recent article (Using a U.S. Qualified Personal Residence Trust in Cross-Border Planning, J.F. Meigs and R.R. Gager, 35 Estate Planning, No. 7, 22 (July 2008)) reminds us that the QPRT can also be used in an international context. For example, U.S. citizens or domiciliaries can fund a QPRT with a residence that is located outside the U.S. - there is no restriction to using domestic real property. The same transfer tax benefits will generally apply for both U.S. and non-U.S. residences. However, since not all foreign jurisdictions recognize the concept of a trust or allow trusts or non-locals to own interests in their real property, this planning may not be available for property in all jurisdictions, at least without additional planning to work around these limitations.

On the other side of the coin, foreign persons for U.S. transfer tax purposes (non-U.S. citizens who are not domiciled in the U.S.) may want to consider the use of QPRT when acquiring a U.S. residence, since such persons are subject to U.S. estate tax at death on their directly owned U.S. real property interests.  However, such persons are at a disadvantage as compared to U.S. persons. When a QPRT is established, a current taxable gift occurs, equal to the discounted present value of the remainder interest (that is, the value of the property, reduced actuarially to account for the fact that the beneficiaries will not receive the property for the term of the trust). For U.S. grantors, this gift is typically absorbed or covered by their $1 million unified credit, so that no current gift tax needs to be paid. Since nonresidents do not have such a unified credit, upon establishment of the QPRT it is likely that a current gift tax will be paid. The nonresident grantor, if he or she survives the term of the QPRT, will still obtain the same overall transfer tax benefits as a U.S. grantor, subject to this advance payment of transfer taxes (which a U.S. grantor would effectively not pay until a later gift, death or may never pay, depending on how the use of his or her unified credit from the lifetime gift at establishment of the QPRT ultimately effects other gift or estate tax obligations from subsequent transfers).

Saturday, June 21, 2008


July 2008 Applicable Federal Rates Summary:

SHORT TERM AFR - Semi-annual Compounding - 2.41% (2.07%/June -- 1.63%/May -- 1.84%/April -- 2.24%/March)

MID TERM AFR - Semi-annual Compounding - 3.42% (3.20%/June -- 2.72%/May -- 2.85% /April -- 2.95%/March)

LONG TERM AFR - Semi-annual Compounding - 4.55% (4.46%/June -- 4.17%/May -- 4.35%/April -- 4.23%/March)


Tuesday, June 17, 2008


Internal Revenue Code Section 1031 allows taxpayers to swap a business or investment property for a new business or investment property without recognizing gain on the exchange. However, these “like-kind” exchange rules do not apply to exchanges of partnership interests (Code Section 1031(a)(2)(D)).

In a recent private letter ruling, the IRS did allow partnership interests received by a taxpayer in exchange for real property to qualify for like-kind exchange treatment. However, this was not a major departure from existing law.

In the private letter ruling, the taxpayer received 100% of the partnership interests in the partnership. In that situation, the IRS was comfortable in looking through the received partnership and treating the taxpayer as having received the underlying assets of the partnership. Since the underlying partnership-owned property was of like-kind to that exchanged away by the taxpayer, like-kind exchange treatment was allowed. The IRS noted that by acquiring 100% of the partnership interests, the partnership was deemed to have liquidated and distributed its assets to its partners, and thus the acquisition was essentially an acquisition of partnership assets.

Therefore, the effect of the ruling was not to open the door to like-kind exchanges of partnership interests, but simply to acknowledge the pass-through/disregarded entity treatment that arises when 100% of the partnership interests are being transferred. Nonetheless, the ruling is helpful since the IRS is acknowledging such pass-through treatment for Section 1031 purposes.

As with all private letter rulings, the ruling is only binding on the IRS as to the taxpayer that submitted the ruling. Nonetheless, such rulings are typically (but not always) indicative of the IRS’ approach to the subject matters of the ruling.

PLR 200807005

Friday, June 13, 2008


One of the key decisions to be made when preparing a trust is who should serve as trustee. The first part of that decision is whether the trustee should be an individual or a corporation (that is, a bank or trust company).

There are distinct advantages and disadvantages to using both individuals and entities. A summary of the principal pros and cons is available here, with a permanent link to that summary in the bar to the right, or click on "docstoc" below on the image of the summary.

Choosing Whether to Use a Corporate or Individual Trustee - Get more Legal Forms

Tuesday, June 10, 2008


Private foundations are generally required to distribute 5% of their assets each year for charitable purposes. Beyond that, there is little in the law that requires tax-exempt charitable organizations to distribute or spend their assets for their stated charitable purposes. As a consequence, many charitable institutions have built-up large endowment funds as contributions and investment returns have exceeded charitable spending.

Due to concerns regarding such growth in retained assets, the IRS has indicated that it will be studying whether it is appropriate to apply the "commensurate doctrine" to exempt organizations. The "commensurate doctrine" generally provides that charitable organizations should provide services that are commensurate with their resources, and that measuring expenditures with this doctrine is a method of ensuring that these organizations are fulfilling their charitable mission.

Related to this review will be a study of 400-500 colleges and universities, who will be sent a questionnaire. Some of the areas of questions will relate to endowment funds and executive compensation.

Sunday, June 08, 2008


The question often comes up of how long taxpayers should retain their tax and business records. There is no hard and fast answer to this question.

Some records are worth holding on to forever, since it can be hard to determine whether an issue from those documents may be relevant in a later tax years. For the rest, a useful guide is the six year federal income tax statute of limitations period that applies for tax returns that omit 25% or more items of income. Since this statute can apply by inadvertently leaving off income items from a return, relying on the standard three year statute of limitations, while acceptable, is clearly not a conservative retention policy.

A recommended retention policy is attached here, and is also being added to the Links portion of this site in the right-hand column. The policy assumes that all returns are timely filed, principally because the statute of limitations for income tax returns remains open for unfiled returns. Note that legal and business considerations other than federal income taxes may result in retention periods longer than those described on the retention policy. Further, income statute of limitations can apply beyond six years - for example, there is no statute of limitations on fraud. Therefore, the recommended periods represents a balance between reasonably likely need for records and the most conservative retention policy of retaining everything forever.

As a practical matter, with the use of modern electronic recordkeeping and storage, there is little extra cost to attempting to retain records for an extended period of time, other than perhaps being able to read (and convert if necessary) from old storage media and file types.

Friday, June 06, 2008


The IRS has announced the interest rates for tax overpayments and underpayments for the calendar quarter beginning July 1, 2008.

For noncorporate taxpayers, the rate for both underpayments and overpayments will be 5%.

For corporations, the overpayment rate will be 4%. Corporations will receive 2.5% for overpayments exceeding $10,000. The underpayment rate for corporations will be 5%, but will be 7% for large corporate underpayments.

Rev. Rul. 2008-27

Monday, June 02, 2008


Florida imposes documentary stamp taxes on transfers of real property. The amount of the stamp taxes is based on the consideration paid for the real property.

So as to allow computation of the taxes, taxpayers previously used Form DR-219 to report the amount of consideration paid for the real property. In a curious move, Fla.Stats. §201.022 has been repealed, effective June 1, 2008. This is the provision that required the filing of the Form DR-219, so apparently that Form is no longer needed. This provision does NOT repeal the documentary stamp tax itself.

How the local county recorder's offices will be able to compute the documentary stamp tax due is anyone's guess. Presumably, each county will likely require their own form or method of reporting.

For a listing of current and historical documentary stamp taxes, see the Tax Tables & Info area at