Part 2: In the Midst of a Federal Government Shutdown, Tax-Exempt Bond Community Receives Long-Awaited Proposed Reissuance Regulations

Posted in GT Alert, Internal Revenue Code, IRS, Tax Planning, tax-exempt bonds

The Department of the Treasury and IRS provided two New Year’s Eve presents to the tax-exempt bond community. One was the finalization of the public notice regulations, and the second was the issuance of the proposed reissuance regulations, both of which have been long promised, and both of which were published in the Federal Register on Dec. 31, 2018. This GT Alert addresses the proposed reissuance regulations.

The Proposed Reissuance Regulations

The Treasury and IRS published proposed regulations (the Proposed Regulations) under §§150 and 1001 of the Internal Revenue Code of 1986, as amended (the Code), proposing rules for when bonds are deemed retired and reissued. These regulations generally follow existing guidance with some technical changes.

To read the full GT Alert, click here.

In the Midst of a Federal Government Shutdown, Tax-Exempt Bond Community Receives Long-Awaited Final Public Notice and Approval Regulations

Posted in GT Alert, Internal Revenue Code, IRS, Tax Planning, tax-exempt bonds

The Department of the Treasury and IRS provided two New Year’s Eve presents to the tax-exempt bond community. The first is the finalization of the public notice and approval regulations, commonly referred to as the TEFRA Regulations (the Final Regulations), and the second is the issuance of the proposed reissuance regulations. Both developments have been long promised, and both were published in the Federal Register on Dec. 31, 2018. This GT Alert updates the GT Alert published on Sept. 29, 2017, which described proposed public notice and approval regulations issued in 2017 (the 2017 Proposed Regulations), to identify changes that the Final Regulations made to those Proposed Regulations. A separate GT Alert will address the proposed reissuance regulations.

To read the full GT Alert, click here.

Applicable Federal Rates and Code Section 7520 Rate for January 2019 – Generally Trending Down

Posted in Applicable Federal Rates (AFRs), Estate Tax, Gifts, Internal Revenue Code, IRS, Legacy Planning, Tax Planning

The applicable federal rates (AFRs) under Internal Revenue Code (Code) Section 1274(d) and the Code Section 7520 rate (7520 rate) for a particular month are published by the Internal Revenue Service (IRS) in a Revenue Ruling that is released around the 18th day of the immediately preceding month. Advance knowledge of the rates for the following month provides a window of opportunity for the quick or delayed implementation of income, gift, and estate-tax planning techniques in response to upward or downward trends. The effective implementation and management of interest-sensitive estate planning techniques also involves numerous other factors in addition to the relevant AFR or 7520 rate, including a client’s particular personal and financial circumstances, and should be undertaken only with the advice of competent tax counsel and financial advisors.

The IRS has issued Revenue Ruling 2019-03, which provides the AFRs and 7520 rate for January 2019. Revenue Ruling 2019-03 will appear in Internal Revenue Bulletin 2019-02 dated January 7, 2019.

What is the Applicable AFR? The applicable AFR is the minimum acceptable or safe-harbor interest rate that must apply to loans between related parties (intra-family loans) to avoid adverse income or gift-tax consequences — based on the month in which the loan is made, how frequently interest is compounded, and the length or term of the loan.

AFRs Trending Up. Following an across-the-board increase for November and December 2018, short- and mid-term AFRs for January 2019 generally decreased, making intra-family loans and installment sales to grantor trusts generally more attractive.

January 2019 AFRs Summary. The AFRs for January 2019 are as follows:

AFR ANNUAL SEMI-ANNUAL QUARTERLY MONTHLY
Short-Term 2.72% 2.70% 2.69% 2.68%
Mid-Term 2.89% 2.87% 2.86% 2.85%
Long-Term 3.15% 3.13% 3.12% 3.11%

Historical AFRs. The AFRs for January 2018 through January 2019 are as follows, in reverse chronological order:

AFR ANNUAL SEMI-ANNUAL QUARTERLY MONTHLY
Short-Term AFRs – For demand notes and notes with a term of three years or less.
January 2019 2.72% 2.70% 2.69% 2.68%
December 2018 2.76% 2.74% 2.73% 2.72%
November 2018 2.70% 2.68% 2.67% 2.67%
October 2018 2.55% 2.53% 2.52% 2.52%
September 2018 2.51% 2.49% 2.48% 2.48%
August 2018 2.42% 2.41% 2.40% 2.40%
July 2018 2.38% 2.37% 2.36% 2.36%
June 2018 2.34% 2.33% 2.32% 2.32%
May 2018 2.18% 2.17% 2.16% 2.16%
April 2018 2.12% 2.11% 2.10% 2.10%
March 2018 1.96% 1.95% 1.95% 1.94%
February 2018 1.81% 1.80% 1.80% 1.79%
January 2018 1.68% 1.67% 1.67% 1.66%
Mid-Term AFRs – For notes with a term in excess of three years but no greater than nine years.
January 2019 2.89% 2.87% 2.86% 2.85%
December 2018 3.07% 3.05% 3.04% 3.03%
November 2018 3.04% 3.02% 3.01% 3.00%
October 2018 2.83% 2.81% 2.80% 2.79%
September 2018 2.86% 2.84% 2.83% 2.82%
August 2018 2.80% 2.78% 2.77% 2.76%
July 2018 2.87% 2.85% 2.84% 2.83%
June 2018 2.86% 2.84% 2.83% 2.82%
May 2018 2.69% 2.67% 2.66% 2.66%
April 2018 2.72% 2.70% 2.69% 2.68%
March 2018 2.57% 2.55% 2.54% 2.54%
February 2018 2.31% 2.30% 2.29% 2.29%
January 2018 2.18% 2.17% 2.16% 2.16%
Long-Term AFRs – For notes with a term in excess of nine years.
January 2019 3.15% 3.13% 3.12% 3.11%
December 2018 3.31% 3.28% 3.27% 3.26%
November 2018 3.22% 3.19% 3.18% 3.17%
October 2018 2.99% 2.97% 2.96% 2.95%
September 2018 3.02% 3.00% 2.99% 2.98%
August 2018 2.95% 2.93% 2.92% 2.91%
July 2018 3.06% 3.04% 3.03% 3.02%
June 2018 3.05% 3.03% 3.02% 3.01%
May 2018 2.94% 2.92% 2.91% 2.90%
April 2018 3.04% 3.02% 3.01% 3.00%
March 2018 2.88% 2.86% 2.85% 2.84%
February 2018 2.66% 2.64% 2.63% 2.63%
January 2018 2.59% 2.57% 2.56% 2.56%

Note that the “blended annual rate” under Code Section 7872(e)(2)(A) may be used to determine the interest on a demand loan (i.e., a loan which can be called in at any time) with a fixed principal amount outstanding for an entire year.

What is the 7520 Rate? The 7520 rate for the month in which a lifetime gift or testamentary transfer occurs is used to determine the gift- or estate-tax value of an annuity, an interest for life or for a term of years, or a remainder or a reversionary interest. In the case of a charitable life estate or remainder, however, the 7520 rate for the month in which the lifetime gift or testamentary transfer occurs or a rate for either of the two preceding months may be used to determine its income-, gift-, or estate-tax value. The 7520 rate is equal to 120% of the applicable mid-term rate using semi-annual compounding, adjusting the resulting rate to produce an equivalent yield for annual compounding, and then rounding it to the nearest two-tenths of a percent.

7520 Rate for January 2019. The 7520 rate for January 2019 is 3.4%.

7520 Rate Trending Down. The 7520 rate increased to 3.6% for November 2018 and December 2018. It decreased to 3.4% in January 2019, making planning techniques like qualified personal residence trusts (QPRTs) and charitable remainder annuity trusts (CRATs) less attractive. Conversely, grantor retained annuity trusts (GRATs) and charitable lead annuity trusts (CLATs) have become generally more attractive as a result of this decrease.

Historical 7520 Rates. The 7520 rates for January 2018 through January 2019 are as follows, in reverse chronological order:

7520 RATE
January 2019 3.40%
December 2018 3.60%
November 2018 3.60%
October 2018 3.40%
September 2018 3.40%
August 2018 3.40%
July 2018 3.40%
June 2018 3.40%
May 2018 3.20%
April 2018 3.20%
March 2018 3.00%
February 2018 2.80%
January 2018 2.60%

Federal Individual Gift, Estate, and GST Exemptions Increase to $11.4 Million in 2019

Posted in Death Taxes, Estate, Estate Planning, Estate Tax, Gifts, Inheritance Rights, Tax Planning

IRS announces the 2019 inflation-adjusted figures for gift and estate tax exemption amounts.

The federal gift, estate, and GST exemption amount ( the exemption amount) is the total amount that an individual may transfer during life, or at death, without incurring gift, estate, or generation-skipping transfer tax. The exemption amount is adjusted annually for inflation, meaning, for individuals who had exhausted their available exemption amount in 2018, that the inflation adjustment of the 2018 exemption amount of $11,180,000 will become available on Jan. 1, 2019.

In 2019, the individual exemption amount will increase from $11,180,000 to $11,400,000 (an aggregate of $22,800,000 for a married couple) a $220,000 increase.

The federal gift tax annual exclusion amount in 2019 will remain unchanged from its current amount of $15,000 per donee. Gifts to any recipient may be doubled if gifts are split with a spouse (which requires the filing of a federal gift tax return). Unlike the exemption amount, the gift tax annual exclusion amount is a “use it or lose it” tax benefit. You may make annual exclusion gifts to as many recipients in a year as you wish, but you may not carry the gift tax annual exclusion amount forward to future years.

The annual exclusion for gifts to a non-U.S. citizen spouse will increase to $155,000 in 2019.

For further detail, please see IRS Revenue Procedure 2018-57.

Internet Marketplaces: Effects of the New German Law regarding VAT and Online Trading

Posted in Germany, internet marketplace, VAT, VAT Tax

On 14 December 2018, a new German law on VAT with regard to trading goods on the Internet (link in German) was officially published and will become effective as of 1 January 2019. The law contains considerable additional VAT obligations for operators of Internet marketplaces and merchants selling goods online. In the future, operators will be liable for their merchants if they do not pay VAT properly.

To read the full GT Alert, click here.

Florida Sales Tax on Commercial Real Property Leases Reduced Beginning January 2019

Posted in Florida, GT Alert, Real Estate

As commercial real property owners in Florida are likely aware, the Sunshine State imposes its sales tax on rental payments for the lease of real property. The general 6 percent state-level tax was reduced to 5.8 percent for 2018. The legislature passed a law to further reduce the state-level rate to 5.7 percent for occupancy periods beginning on or after Jan. 1, 2019. There is no reduction in the local option surtax that many Florida counties impose. Property owners should be aware of this reduction for lease payments related to periods starting next year.

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Applicable Federal Rates and Code Section 7520 Rate for December 2018 – Trending Up

Posted in Applicable Federal Rates (AFRs), Internal Revenue Code, IRS, Legacy Planning, Uncategorized

The applicable federal rates (AFRs) under Internal Revenue Code (Code) Section 1274(d) and the Code Section 7520 rate (7520 rate) for a particular month are published by the Internal Revenue Service (IRS) in a Revenue Ruling that is released around the 18th day of the immediately preceding month. Advance knowledge of the rates for the following month provides a window of opportunity for the quick or delayed implementation of income, gift, and estate-tax planning techniques in response to upward or downward trends. The effective implementation and management of interest-sensitive estate-planning techniques also involves numerous other factors in addition to the relevant AFR or 7520 rate, including a client’s particular circumstances, and should be undertaken only with the advice of competent tax counsel and financial advisors.

The IRS has issued Revenue Ruling 2018-30, which provides the AFRs and 7520 rate for December 2018. Revenue Ruling 2018-30 appeared in Internal Revenue Bulletin 2018-49, dated Dec. 3, 2018.

What is the Applicable AFR? The applicable AFR is the minimum acceptable or safe-harbor interest rate that must apply to loans between related parties (intra-family loans) to avoid adverse income or gift-tax consequences – based on the month in which the loan is made, how frequently interest is compounded, and the length or term of the loan.

AFRs Trending Up. Following a slight decrease in the mid-term and long-term rates for October 2018, AFRs increased across the board for November and again for December 2018, making intra-family loans and installment sales to grantor trusts generally less attractive.

December AFRs Summary. The AFRs for December 2018 are as follows:

AFR ANNUAL SEMI-ANNUAL QUARTERLY MONTHLY
Short-Term 2.76% 2.74% 2.73% 2.72%
Mid-Term 3.07% 3.05% 3.04% 3.03%
Long-Term 3.31% 3.28% 3.27% 3.26%

2018 Historical AFRs. The AFRs for January through December 2018 are as follows, in reverse chronological order:

AFR ANNUAL SEMI-ANNUAL QUARTERLY MONTHLY
Short-Term AFRs – For demand notes and notes with a term of three years or less.
December 2018 2.76% 2.74% 2.73% 2.72%
November 2018 2.70% 2.68% 2.67% 2.67%
October 2018 2.55% 2.53% 2.52% 2.52%
September 2018 2.51% 2.49% 2.48% 2.48%
August 2018 2.42% 2.41% 2.40% 2.40%
July 2018 2.38% 2.37% 2.36% 2.36%
June 2018 2.34% 2.33% 2.32% 2.32%
May 2018 2.18% 2.17% 2.16% 2.16%
April 2018 2.12% 2.11% 2.10% 2.10%
March 2018 1.96% 1.95% 1.95% 1.94%
February 2018 1.81% 1.80% 1.80% 1.79%
January 2018 1.68% 1.67% 1.67% 1.66%
Mid-Term AFRs – For notes with a term in excess of three years but no greater than nine years.
December 2018 3.07% 3.05% 3.04% 3.03%
November 2018 3.04% 3.02% 3.01% 3.00%
October 2018 2.83% 2.81% 2.80% 2.79%
September 2018 2.86% 2.84% 2.83% 2.82%
August 2018 2.80% 2.78% 2.77% 2.76%
July 2018 2.87% 2.85% 2.84% 2.83%
June 2018 2.86% 2.84% 2.83% 2.82%
May 2018 2.69% 2.67% 2.66% 2.66%
April 2018 2.72% 2.70% 2.69% 2.68%
March 2018 2.57% 2.55% 2.54% 2.54%
February 2018 2.31% 2.30% 2.29% 2.29%
January 2018 2.18% 2.17% 2.16% 2.16%
Long-Term AFRs – For notes with a term in excess of nine years.
December 2018 3.31% 3.28% 3.27% 3.26%
November 2018 3.22% 3.19% 3.18% 3.17%
October 2018 2.99% 2.97% 2.96% 2.95%
September 2018 3.02% 3.00% 2.99% 2.98%
August 2018 2.95% 2.93% 2.92% 2.91%
July 2018 3.06% 3.04% 3.03% 3.02%
June 2018 3.05% 3.03% 3.02% 3.01%
May 2018 2.94% 2.92% 2.91% 2.90%
April 2018 3.04% 3.02% 3.01% 3.00%
March 2018 2.88% 2.86% 2.85% 2.84%
February 2018 2.66% 2.64% 2.63% 2.63%
January 2018 2.59% 2.57% 2.56% 2.56%

Note that the “blended annual rate” under Code Section 7872(e)(2)(A) may be used to determine the interest on a demand loan (i.e., a loan which can be called in at any time) with a fixed principal amount outstanding for an entire year.

What is the 7520 Rate? The 7520 rate for the month in which a lifetime gift or testamentary transfer occurs is used to determine the gift- or estate-tax value of an annuity, an interest for life or for a term of years, or a remainder or a reversionary interest. In the case of a charitable life estate or remainder, however, the 7520 rate for the month in which the lifetime gift or testamentary transfer occurs or a rate for either of the two preceding months may be used to determine its income-, gift-, or estate-tax value. The 7520 rate is equal to 120% of the applicable mid-term rate using semi-annual compounding, adjusting the resulting rate to produce an equivalent yield for annual compounding, and then rounding it to the nearest two-tenths of a percent.

7520 Rate for December 2018. The 7520 rate for December 2018 is 3.6%.

7520 Rate Trending Up. The 7520 rate increased steadily during the beginning of 2018, remained at 3.40% for June 2018 to October 2018, and increased to 3.6% for November 2018 and December 2018, making planning techniques like qualified personal residence trusts (QPRTs) and charitable remainder annuity trusts (CRATs) increasingly attractive. Conversely, grantor retained annuity trusts (GRATs) and charitable lead annuity trusts (CLATs) have become generally less attractive as a result of this upward trend.

2018 7520 Rates. The 7520 rates for January through December 2018 are as follows, in reverse chronological order:

7520 RATE
December 2018 3.60%
November 2018 3.60%
October 2018 3.40%
September 2018 3.40%
August 2018 3.40%
July 2018 3.40%
June 2018 3.40%
May 2018 3.20%
April 2018 3.20%
March 2018 3.00%
February 2018 2.80%
January 2018 2.60%

Proposed Regulations on the Interest Deduction Limitation Under Section 163(j) of the Internal Revenue Code

Posted in GT Alert, IRS, Tax Cuts and Jobs Act

On Nov. 26, 2018, the IRS issued proposed regulations under the Internal Revenue Code (IRC) § 163(j) enacted by the Tax Cuts and Jobs Act of 2017 (the Proposed Regulations). Generally, IRC § 163(j) limits certain taxpayers’ business interest expense deduction to the sum of (i) the taxpayer’s current year business interest income, (ii) 30 percent of the taxpayer’s adjusted taxable income (ATI) from a trade or business, and (iii) certain floor plan financing interest expense.  Any disallowed business interest expense (i.e., excess business interest expense) can be carried forward indefinitely and treated as business interest expense in future years. Taxpayers with average annual gross receipts of 25 million or less, tested for the three taxable years immediately preceding the current taxable year, are not subject to the above limitations.  In addition, certain activities (referred to as “excepted trades or businesses”) are excluded from the definition of a trade or business for purposes of IRC § 163(j).  Such activities include (i) the trade or business of providing services as an employee; (ii) certain electing real property businesses; (iii) certain farming businesses; and (iv) certain regulated utility businesses.1

The Proposed Regulations are 439 pages long and are divided into eleven sections.  Below is a high-level summary of key provisions of the proposed regulations.

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1 IRC § 163(j)(7).

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