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Saturday, January 31, 2009


On January 9, 2009, Representative Earl Pomeroy introduced HR 436 ("Certain Estate Tax Relief Act of 2009"). The Bill would freeze the Federal estate tax exemption at $3,500,000 (the 2009 level), and retain the tax rate for estates exceeding that amount at 45 percent (50 percent for estates between $10 million and $23.5 million). The Bill, however, would also seek to eliminate popular estate planning techniques by disallowing most discounts associated with family limited partnerships containing "non-business assets" (such as marketable securities). A Democrat controlled White House and Congress, coupled with the current economic climate, have also caused predictions of additional estate tax reforms and there are at least four such bills currently pending in the House.

Valuation discounts (particularly of the minority and marketability type) may significantly reduce the values of transferred property. Under current law, if a taxpayer transfers interests in a non-publicly traded partnership, whether by gift or at death, the partnership interests would be valued at the "fair market value" of the property, generally defined as the price that a willing buyer would pay a willing seller for the partnership interests. Since family partnership interests are not publicly traded, and typically do not represent a controlling interest in the partnership, under current law, business appraisers typically assign substantial discounts when valuing properly structured partnership interests.

These valuation principles apply to any non-publicly traded entity and allow shifts in assets to younger beneficiaries in a tax effective manner. If HR 436 is enacted and becomes law, taxpayers would not be able to receive a discount on "non-business" assets held by their partnerships. Instead, those assets would be valued as though they had been owned directly and transferred to the recipients.

Finally, HR 436 would seek to deny "minority interest" discounts by providing that, in the case of the transfer of partnership interests other than an interest which is "actively traded", no discount shall be allowed by reason of the fact that the partner does not have control of the partnership if the transferor and his or her family have control of the partnership.

As proposed, HR 436 would apply to transfers occurring after the date of enactment. Nevertheless, there is the possibility that any tax law may be applied retroactively. Although it is uncertain whether this legislation will be enacted, it may reflect the attitude of the new administration of retaining and expanding the current estate tax laws.

Thanks to Jordan Klingsberg of our office for the above summary.

Thursday, January 29, 2009


The House of Representatives has passed the American Recovery and Reinvestment Tax Act of 2009. The Senate will take up the bill next week. Pending reconciliation of the two bills, we can’t tell what the final provisions will be. Nonetheless, based on common provisions in both bills, it is likely that the following tax provisions will soon be enacted into law:

-a new tax credit of up to $500 for working individuals and $1,000 for working families, calculated at a rate of 6.2% of earned income, and phased out at adjusted gross income (AGI) in excess of $75,000 ($150,000 for married couples filing jointly)

-an expanded earned income tax credit that would temporarily increase the EITC to 45% of the family's first $12,570 of earned income for families with three or more children

-first-year 50% bonus depreciation will be extended to 2009

-Enhanced Code Section 179 expensing will be extended to 2009

-NOL carrybacks for 2008 and 2009 may be carried back up to six years (instead of currently 2 year carryback for most NOLs, and the 90% limitation on use of NOLs for alternative minimum tax will be suspended

-The work opportunity tax credit will be expanded to include unemployed veterans and disconnected youth

-easier eligibility for the refundable child tax credit in 2009 and 2010

-a new educational tax credit for 2009 and 2010 of up to $2,500 of the cost of tuition and related expenses paid during the tax year. The credit would be based on 100% of the first $2,000 of tuition and related expenses (including books) paid during the tax year and 25% of the next $2,000 of tuition and related expenses paid during the tax year, subject to a phase-out for AGI in excess of $80,000 ($160,000 for married couples filing jointly)

- an enhanced 20% research & development credit for tax years beginning in 2009 and 2010 for research expenditures incurred in the fields of fuel cells, battery technology, renewable energy, energy conservation technology, efficient transmission and distribution of electricity, and carbon capture and sequestration

There are additional items that are included in either the Senate or House bills, but not in both, so we will report on those once it is determined if they make it into the final bill.

Sunday, January 25, 2009


Owners of a homestead in Florida are entitled to a reduction in their ad valorem taxes under the Florida Constitution homestead exemption. Fla.Stats. § 196.061 provides that “[t]he rental of an entire dwelling previously claimed to be a homestead for tax purposes shall constitute the abandonment of said dwelling as a homestead…” (emphasis added).

In a recent Florida case, the taxpayer owned a condominium unit and claimed homestead exemption for it. The unit was put into a rental pool for multiple days at the condominium development. As part of the rental arrangement, the owner retained exclusive possession of a locked closet in the unit to safeguard possessions at the unit.

The State of Florida asserted that the rental constituted an abandonment of the homestead status under Fla.Stats. § 196.061, and thus the unit became fully taxable. The taxpayer countered that by not renting out the closet, he had not rented out the “entire” unit, and thus the statute creating abandonment did not apply.

The court applied the statute, after some rewriting of its plain meaning, and held that the homestead was abandoned.  The court noted that applying the word “entire” in its usual manner would be “grounded in a decontextualized literalism which overemphasizes the word “entire” and ignores its context” and also produces an unreasonable result. In other words, the legislature surely could not have meant “entire” to mean 100%, but something less when the circumstances warrant.

Of course, the legislature could have used words like “substantially all” instead of “entire” if that is what it had intended – but it is good to know that the courts will always help the legislature out when they can’t believe that the legislature intended what it actually wrote.

There are two interesting side notes in this case. First, it appears that the taxpayer was not really concerned about the few hundred dollars per year in ad valorem tax savings that the homestead exemption yields, but the loss of the “Save our Homes” limits on increasing annual ad valorem values (and thus taxes) that applies to homesteads. Second, the taxpayer had asserted that the scope of homestead can only be derived from the Florida Constitution, and not an interpretative or implementing statute of the legislature – this argument was also rejected by the court.

GREG HADDOCK, Nassau County Property Appraiser, and JAMES ZINGALE, Executive Director of the State of Florida Department of Revenue, Appellants, v. THOMAS W. CARMODY, Trustee, and THOMAS J. CARMODY, Trustee for the Mary K. Carmody Qualified Personal Residence Trust created January 31, 1999, Appellees, 34 Fla.L.Weekly D207b, 1st District. Case No. 1D08-241. Opinion filed January 21, 2009.

Wednesday, January 21, 2009


The uniform capitalization rules require a manufacturer to capitalize various costs into its produced inventory. Licensing costs incurred in securing the contractual right to use a trademark or other similar right associated with property produced are indirect costs that must be capitalized (to the extent the costs are properly allocable to property produced) under Treas. Regs. Section 1.263A-1(e)(3)(ii). However, marketing, selling, advertising, and distribution costs are indirect costs that are specifically excluded from the Section 263A rules.

A recent Tax Court case landed at the intersection of these two rules, when a kitchen product manufacturer paid royalties under a trademark licensing agreement, and claimed that the payments for the use of the trademark on its products did not need to be capitalized.

On the one hand, clearly the right to put a trademark on produced goods enhances the marketing, selling, advertising and distribution of the product. This is what the taxpayer asserted. The IRS asserted that capitalization applies because the acquired trademark related to goods that the taxpayer was producing. The Tax Court sided with the IRS.

The taxpayer’s argument seemed strong – common sense indicates that the use of the trademark enhances sales and distribution of the produced product. What appears to have swayed the court to the IRS side was that the license agreements granted the taxpayer the right to manufacture the branded knives and tools – without the license it would not not have had the legal right to produce them. Thus, the license was an integral part of production and the license fees had to be capitalized.

However, nothing in the case indicates that the taxpayer acquired any trade secrets or manufacturing process licenses – instead, it appears that while the licensors did exercise quality control over the taxpayer, there was no license of intellectual property that was needed by the taxpayer to produce its products – the license appears to have been needed solely to affix the trademarks. Most licensors will exercise quality control over the licensees to protect their trademark, so this oversight does not seem to be enough to make the trademark part of the manufacturing process. If the taxpayer-manufacturer could have produced the products without the consent of the licensors by leaving off the trademarks (as appears to be the case), then it is difficult to see how the trademark is part of the production process and why the fees had to be capitalized.

Robinson Knife Manufacturing Company, Inc., et al., TC Memo 2009-9

Thursday, January 15, 2009


Modifying, transferring beneficial interests in, or making distributions from a QTIP trust, in context of the settlement of trust litigation or otherwise, involves numerous complex tax issues, including Section 2519 gift taxes, other possible gifts, estate taxes and income taxes. To assist others in dealing with these issues, I recently wrote an article on the subject, which was published this month in Estate Planning, a Warren Gorham Lamont publication.

For those interested, a copy of the article is available at

Saturday, January 10, 2009


Beginning with Kuro, Inc. v. State, 713 So.2d 1021 (Fla.App. 2 Dist. May 15, 1998), and as finally confirmed by the Florida Supreme Court in Crescent Miami Center LLC in 2005, transfers of Florida real property from owners to wholly-owned entities are not subject to Florida documentary stamp taxes, at least when the property is unencumbered. Based on these decisions, the Florida Department of Revenue has acknowledged in various technical assistance advisements that transfers of unencumbered real estate between entities that are commonly owned are also nontaxable.

There are limits to these precedents. In a recent case, the 2nd District Court of Appeals held that a transfer of encumbered real estate was taxable, notwithstanding that it was a transfer from one entity to another, both of which were ultimately owned and controlled by the same individual.

So where does this leave the issue of such a transfer if the property is unencumbered?

In the case, documentary stamps were paid only on the mortgage balance, and refund was sought by the taxpayer. There was no mention of additional documentary stamps being due on the excess of the value of the property over the mortgage – but neither was there any discussion on that issue at all. Therefore, the case may be limited to situations when there is a mortgage, and that stamps are imposed only to the extent of the mortgage.

On the other hand, the court did discuss how this case is factually different from Crescent Miami Center LLC, apart from there being debt on the property. This leaves the door open to an argument that the concepts of Crescent Miami Center LLC (relating to a lack of consideration for transfers between owners and their wholly owned entities) may not apply in regard to transfers between commonly controlled entities.

DEPARTMENT OF REVENUE, Appellant, v. PINELLAS VP, LLC, Appellee. 2nd District. Case No. 2D07-6037. DEPARTMENT OF REVENUE, Appellant, v. TPA INVESTMENTS, LLC, f/k/a Condo LLC, Appellee. Case No. 2D07-6039. (Consolidated), 34 Fla. L. Weekly D101b, Opinion filed January 7, 2009.

Thursday, January 08, 2009


In a surprising announcement, President-elect Obama has indicated that his upcoming stimulus package will include tax breaks for business. While lacking in details, the following breaks are expected to be included:
  • an extension of the net operating loss carryback period to five years for 2008/2009 losses;
  • a two-year extension of bonus first year depreciation;
  • enhanced expensing for business property; and
  • tax incentives for businesses that hire new workers.
Such relief will be welcomed, especially in light of the current business environment.

Saturday, January 03, 2009


Land (but not buildings and improvements on the land) is not subject to the allowance for depreciation. However, there is one method of obtaining depreciating deductions for land. A recent private letter ruling summarizes the method and the limitations on its use.

The method involves a purchase of a term of years interest in land. The IRS acknowledges that this converts the land to an intangible asset with limited use, thus qualifying it for depreciation deductions over the term of years (assuming that the land is used in a trade or business of the acquiring taxpayer or held for the production of income). Buildings purchased in this manner are not depreciated over the term of years, however – as regular depreciable assets they are depreciated under normal (MACRS) depreciation rules and terms.

With depreciation deductions allowed for land in this manner, the planner will think to acquire land in joint fashion to create deductions – that is, have a business entity that will be using the land acquire a term of years interest, and have the remainder interest purchased by a related person or entity. Thus, 100% of the land is acquired between the related entities, but the business entity will get depreciation deductions.

However, Congress has already closed the door on that technique, by providing that no depreciation deductions will be allowed to the term of years owner when the remainder interest is owned by a related person (within the related party rules of Sections 267(a) and (e)). If the acquiring taxpayers are able to plan around the related party rules of Sections 267(a) and (e), then this split purchase technique should be available.

Private Letter Ruling 200852013, 12/26/2008