Dean Mead and The Economic Development Council of St. Lucie County cordially invites you to “Coffee Talk”, an informal roundtable discussion on the current economic climate, economic development issues and/or challenges in the county and cities.

Wednesday, June 6, 2012

8:00 a.m. -  9:30 a.m.

Continental Breakfast and Program

LOCATION:
Scripps Treasure Coast Newspapers  
St. Lucie West Operations  
760 NW Enterprise Drive
Port St. Lucie, FL  34986

Kindly RSVP:
Space is limited, please make your reservation via cmarlow@youredc.com by end of day June 1st. 

“2012 Legislative Update: The Bills Impacting Florida’s Real Estate and Business Communities”

Key legislation for Florida’s business and real estate community was enacted in several areas even though the 2012 Florida legislative session was generally marked by the passage of only a few bills. Please join us for an overview of the new laws and the changes imposed as a result of these key bills. Learn how they will impact you and your clients’ businesses. 

Some of the highlights addressed by the legislature include:

• Tangible Personal Property Tax Exemption Amendment
• Water Quality Nutrient Criteria
• Casualty Insurance Reform
• Unemployment Compensation Tax Relief
• Two Growth Management – DRI Bills
• Statewide Environmental Resource Permitting Rules
• Construction Liens
• Tax on Transfer of Business Assets
• Implied Warranty 

The program will feature three attorneys from Dean Mead:

R. Mason Blake practices in the Real Estate department. He has more than 30 years experience in commercial real estate, business, environmental and land use law. Mr. Blake represents clients in a variety of complex real estate transactions with a special emphasis in the development of large, mixed-use communities.

Dennis G. Corrick practices in the Real Estate department and he is a member of the Agribusiness Industry Team.  Mr. Corrick has experience in every element of real estate purchase, ownership, governance and sale. In addition, he assists clients in land use and zoning matters, permitting and licensing, and in agreements governing the use of property such as covenants and restrictions, commercial and agricultural leases, easements and licenses.   

Christine L. Weingart practices in the Tax department. She provides tax and business counsel to business owners, including corporations, LLCs and partnerships on all types of business matters. Her experience involves the formation, termination and reorganizations of businesses.

GAINESVILLE, Fla. – The Gainesville Community Foundation in partnership with the North Central Florida Estate Planning Council is pleased to announce the recipients of the second annual Legacy Awards. Award recipients will be honored at the Legacy Awards Luncheon on Thursday, May 3, 2012 from 11:30 until 1:00 at the University of Florida Hilton and Conference Center.

Created in 2010, the Legacy Awards recognize the crucial interaction between donor, professional advisor, and charity necessary in creating an effective and meaningful charitable gift. A key part of this event focuses on the role that professional advisors, such as attorneys, financial and investment professionals, accountants and others play in helping their clients plan and execute charitable gifts.

“The Legacy Awards highlight the cooperation and collaboration between donors and charities that result in inspirational gifts to our community.” said Perry McGriff, chairman of the Gainesville Community Foundation Board of Directors.

The three honorees for the 2012 Legacy Award are:

Donor Recognition Award: Mrs. Nancy Perry and the late Chuck Perry

The Donor Recognition Award is awarded to an individual, couple or family who has made a significant impact through their planned gift to a charity.   This Legacy Award for Donors recognizes and honors an individual or family for their commitment to a deferred or planned gift made in support of one or more non-profit organizations or charitable causes.  Special consideration is given to donors who have provided leadership and or encouragement to others, and to donors who have structured unique and innovative planned gifts that enrich the lives of people in our community.  This award may be made to honor either living or deceased donors.

Non-Profit Organization Recognition Award: Girl Scouts of Gateway Council

The Non-Profit Recognition Award recognizes a leading non-profit who has demonstrated a commitment to encouraging gift planning, including bequests and other planned gifts, through exceptional program and marketing efforts.

Professional Advisor: Mr. Jack Bovay

The Professional Advisor Award recognizes service, expertise, and outstanding work by a Professional Advisor in helping his or her client complete a satisfying and transformative charitable gift.  This category applies to Trust/Estate Attorneys, Financial/Investment Advisors, CPAs, Bankers/Trust Officers and other trained or certified practicing professionals.

Formed in 1976, the North Central Florida Estate Planning Council is a multi-disciplinary professional organization which exists to facilitate communication and cooperation among its members as to the proper roles and relationships of the various estate planning professions.

Council membership, currently at 60, consists exclusively of the following professions: Attorneys, Bank Trust Officers, Certified Financial Planners, Certified Public Accountants, Chartered Financial Consultants, and Chartered Life Underwriters.

The Gainesville Community Foundation, a 501(c)(3) tax exempt organization, is a permanent charitable endowment, developed and sustained by individuals from all over our community.

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PDF for Gainesville Community Foundation Press Release 2012 (O0704815)

In April 2001, Albert and Joanne Wandry and their children started Norseman Capital, LLC, a Colorado limited liability company (“Norseman”).  Albert was designated to serve as the initial manager of Norseman.  On January 1, 2004 Albert and Joanne gifted interests in Norseman to their children and grandchildren.  The amount of each gift was defined in the assignment as follows:

I hereby assign and transfer as gifts effective as of January 1, 2004 a sufficient number of my units as a Member of Norseman Capital, LLC, a Colorado limited liability company, so that the fair market value of such for federal gift tax purposes shall be as follows:

1. Kenneth Wandry      $ 261,000

2. Cynthia Wandry       $ 261,000

3. Jason Wandry          $ 261,000

4. Jared Wandry           $ 261,000

5. Grandchild A            $ 11,000

6. Grandchild B            $ 11,000

7. Grandchild C            $ 11,000

8. Grandchild D            $ 11,000

9. Grandchild E            $ 11,000

Although the Donors did not have a completed appraisal at the time of the gift, the Assignment document also contained the following:

I intend to have a good faith determination of such value made by an independent third party professional experienced in such matters and appropriately qualified to make such a determination.  Nevertheless if, after the number of gifted units is determined based on such valuation, the IRS challenges such valuation and a final determination of a different value is made by the IRS or a court of law, the number of gifted united shall be adjusted accordingly so that the value of the number of units gifted to each person equals the amount set forth above.

An appraisal was issued on July 26, 2005 concluding that a 1% Norseman membership interest was worth $109,000.  Gift tax returns were filed for Albert and Joanne for 2004 reporting net transfers from each donor of $261,000 to their children and $11,000 to their grandchildren.  In addition, the gift tax return schedules described the gifts to the children as a 2.39% Norseman membership interest ($261,000 / $109,000), and the gifts to the grandchildren as a .101% Norseman membership interest ($11,000 / $109,000).  These membership interests where derived by dividing the total dollar value gifted to each descendant by the appraised value of a 1% interest.

The IRS audited Albert and Joanne’s gift tax returns in 2006 alleging that the each donor actually made gifts of a 2.39% interest to each child and a .101% interest to each grandchild (rather than gifts of $261,000 and $11,000, respectively).  The IRS sought to increase the value of the 2.39%  Norseman membership interests from $261,000 (as reported on each donor’s gift tax return) to $366,000, and the .101% Norseman membership interests from $11,000 (as reported on each donor’s gift tax return) to $15,400.  Albert, Joanne and the IRS eventually agreed to increase the value of the 2.39% and .101% Norseman membership interests to $315,800 and $13,346, respectively.

The key issue in this case was whether Albert and Joanne actually made gifts of a 2.39% and .101% Norseman membership interest to their descendants, or whether they made a gift of a fixed dollar amount of Norseman membership interests.  If Albert and Joanne gifted a fixed percentage of Norseman membership interests, then an increase in the value of the 2.39% and .101% membership interests would result in gift tax.  However, if it was determined that Albert and Joanne made a gift of a fixed dollar amount, then no gift tax would result because the value of the gift would remain unchanged.  In essence, the formula under the assignment would operate to adjust the percentage membership interest transferred by Albert and Joanne at an amount less than 2.39% and .101% so that each donee only received those membership interests equal in value to the stated gift.

The IRS asserted the following arguments:

1.         The descriptions contained in the gift tax returns of a specific percentage membership interest was a binding admission by Albert and Joanne that they transferred fixed percentage membership interests;

2.         The capital accounts of Norseman, which were adjusted after the gifts to show the children and grandchildren as the owners of a 2.39% interest and .101% membership interest, controlled the nature of the gifts by Albert and Joanne;

3.         The specific language of the gift documents transferred a fixed percentage of membership interests to the donees; and

4.         The adjustment clause contained in the assignments is void for Federal tax purposes as contrary to public policy.

The Tax Court rejected all of the IRS arguments, holding:

1.         The fact that the descriptions in the gift tax return included a specific percentage membership interest was not controlling because such percentage membership interest was merely based on the net dollar value reported by each donor and the appraisal.  Albert and Joanne reported their gifts of a net dollar value consistent with the gift documents.

2.         State law controls in determining the nature of the donees legal interest in property, not the capital accounts of an LLC.  The Court noted that capital account entries are always tentative until a final adjudication or the expiration of the statute of limitations.

3.         The clause contained in the assignments was a valid formula clause which operated to correct the allocation of Norseman membership units among Albert, Joanne and the donees after the appraisal was determined to have understated Norseman’s value.  This was not an attempt to reverse a completed gift of a fixed percentage membership interest.

4.         There is no well-established public policy against formula clauses.  The use of a formula clause such as this, which merely defines the rights transferred and does not undo a prior transfer, does not create a “severe and immediate” public policy concern.

Wandry represents a landmark case in the defined value clause arena.  Although taxpayers have had success with similar clauses in recent years (McCord, Hendrix, Christiansen, Petter), this is the first case which did not involve the use of a charity to receive any amount in excess of what a donor intended to gift.  For example, in Petter, McCord and Hendrix, the donor gifted a specific number of units, which were allocated between the non-charitable donee and charity pursuant to a formula.  If the IRS increased the value of the gifted units on audit, then the number of units allocated to the non-charitable donee decreased while the number of units allocated to the charity increased.  Essentially, the charity was in place to receive any amount in excess of what the taxpayer intended to be subject to gift tax.  The Wandry case, however, validates what some practitioners have been asserting since McCord - that a charity is not required to avoid unanticipated gift tax.  This is significant because some taxpayers simply do not want to involve a charity.

Since the case of Proctor v. Commissioner in 1944, the IRS has attacked the use of clauses designed to avoid gift tax.  The IRS has historically been successful in these challenges.  In recent years, however, courts appear to be more accepting of formula gifting clauses.  What has developed is a fine-line distinction between “savings clauses”, which are void, and “defined value clauses”, which are gaining acceptance.  To the untrained eye, the clauses appear to almost be identical; however, the consequences of using the wrong clause are drastic.

A savings clause is void because it operates to undo a prior completed transfer because of an event (such as a court decision) occurring after the completion of a gift.  A basic example of a savings clause is “I give a 10% interest in ABC, LLC to my son, but if the value of this 10% interest is finally determined to be greater than $100, then the interest transferred shall be adjusted.”  A defined value clause is valid because operates to irrevocably transfer a fixed value.  A basic example of a defined value clause would be “I give to my son $100 worth of my interest in ABC, LLC.”  The difference lies in what the donor is giving away.  With a defined value clause, son is entitled from the outset to nothing more than $100 worth of ABC, LLC.  With a savings clause, the son is entitled to 10% from the outset, unless a subsequent event occurs which changes what son is entitled to.

With the end of 2012 fast-approaching, and gift tax exemptions scheduled to plummet from $5,120,000 to $1 million beginning in 2013, defined value formula clauses may become even more popular for 2012 gifts.  If properly drafted, a donor could potentially utilize the full $5,120,000 exemption in 2012 while minimizing exposure to gift tax.  Here are a few points to consider if you intend to make or draft a defined value formula gift:

1.         Obtain an appraisal in advance or contemporaneously with the gift.  Although Albert and Joanne did not obtain an appraisal until after the gift documents were executed, this factor was certainly not favorable to the taxpayer.

2.         Use grantor trusts as donees.  A significant drawback of the defined value clause is deciding how to allocate ownership and tax items during the period in which the IRS is still able to audit the transaction.  If too much property is allocated to the donee, then it may be necessary to amend several years of income tax returns.  However, if the donee is a grantor trust, then all tax items will be included on the grantor’s return during the years of uncertainty.  No amended returns should be necessary.

3.         Prepare gift tax returns consistent with the formula gift.  As shown in Wandry, the IRS will likely use any inconsistencies against the donor on audit.  Do not overlook the importance of filing an accurate and complete gift tax return!

4.         Formula gifts work well if a single asset is gifted, but not so well if multiple assets are transferred.  If you or your client intend to gift multiple assets, consider transferring the assets to an entity first, and then making a formula gift of the entity interest.

It is no secret that the IRS absolutely despises defined value formula clauses and it is unlikely that they will give up their fight because of Wandry.  Therefore, practitioners and donors should remain cautious in utilizing these type of clauses.  The IRS can still appeal Wandry, which would lie in the Tenth Circuit.  There is marginally favorable precedent already in the Tenth Circuit (See King v. Commissioner).  However, the Tax Court stated in Wandry that it did not view King as controlling because it was not “squarely on point.”  This may or may not deter the IRS from appealing Wandry to the Tenth Circuit. The IRS may instead choose to find a similar case in another jurisdiction (outside of the Fifth (McCord, Hendrix), Ninth (Petter) or Tenth Circuits) and try for a more favorable outcome.  Alternatively, the IRS may forgo the court system altogether and issue regulations to limit the use of defined value clauses, as invited by the Ninth Circuit during oral arguments in Petter.

I cannot predict the outcome of the decision of the Supreme Court.  What I can predict, however, is that the rate of growth of health care expenditures in the U.S. is unsustainable.  Over 17% of GDP is spent on healthcare and economists predict an annual increase in spending of 10%.

The areas of healthcare which promote this unsustainable growth in health care spending are:  1) unwarranted use; 2) fraud and abuse; 3) administrative inefficiencies; 4) provider inefficiency and errors; 5) lack of care coordination; and, 6) preventable conditions.  The Affordable Care Act was intended to address these issues systematically. 

The “individual mandate” was meant to be a shared responsibility requirement to increase the number of individuals participating in the insurance market to make purchasing insurance more affordable for all. While Americans are not now required to buy health insurance, those who do are paying for the healthcare of those that do not. It is estimated that the average American family and their employer pay $1,000 a year extra in health insurance costs to cover care for the uninsured. Many Americans caught up in the media debate and shielded from the true cost of their health care have overlooked the need for health reform. 

I can predict, therefore, that persistent medical cost inflation will drive employers to require an increase in employee cost sharing to reduce their health care spend.  While the Affordable Care Act is not perfect (what law is?), health reform is necessary to arrest the amount we spend each year on health care services.  I look forward to the Supreme Court’s decision so we can find ways for providing less costly means of achieving quality outcomes in patient care.

Please join us on Wednesday, May 23, 2012 for the Estate Planning seminar series in Orlando.

2011 and 2012 have presented a unique environment for estate planning, with record high transfer tax exemptions and near record low values and rates. However, beginning in 2013, exemptions are scheduled to plummet while tax rates are scheduled to increase. This presentation will highlight planning opportunities for you and your clients for the remainder of 2012 – before its too late!

When: May 23, 2012

Time: 11:30 a.m. -  Lunch and Registration

12:00 noon – Program

Location:  Orange County Bar Association, 880 N. Orange Avenue, Orlando, FL  32801

Please RSVP to: estateplanning@deanmead.com

The Southern Federal Tax Institute, Inc. is a non-profit corporation organized for the exclusive purpose of developing and presenting annually a professional institute covering current federal tax problems and issues at the post-graduate level.  The program is designed for the practitioner who must frequently anticipate and handle federal tax matters. Emphasis is placed on subjects which are new and current, including in-depth coverage of recent developments and problems which often prove difficult in planning clients’ affairs and transactions.

Now in its 47th year, the institute is widely regarded as the organization that hosts the preeminent conference for tax professionals throughout the Southeast.  Looney has been a featured speaker at the conference for the past four years. Last fall, he offered a presentation entitled, “Advising the Professional Service Firm”.  His topic covered the range of income tax issues that commonly arise in the context of professional service firms, that were historically organized as professional C Corporations, but more frequently take the form of a S Corporation LLC.  His presentation focused on issues that should be considered in the operation and conversion of these entities.

Looney represents clients in a variety of business and tax matters including entity formation (S and C corporations, partnerships, and LLCs), acquisitions, dispositions, redemptions, liquidations, reorganizations, tax-free exchanges of real estate and tax controversies.  His clients include closely held businesses, with an emphasis on medical and other professional practices.  He is a former Chair of the S Corporations Committee of the American Bar Association’s Tax Section and currently chairs Dean Mead’s tax department.

At present, there are 19 members of the SFTI Board of Trustees who are all acknowledged leaders in the tax field. Egerton, one of the founding partners of Dean Mead and the immediate past Chair of the American Bar Association Tax Section, served on the Board of Trustees for more than 20 years. Said Egerton, “This is a well-deserved honor for our esteemed colleague, Steve, whose leadership, integrity and dedication to his clients and the practice of law continues to elevate the profile of the legal profession and our firm both regionally and nationally”.

About Dean Mead:

Dean Mead provides full-service legal representation to businesses and individuals throughout Florida.  The firm has nearly 50 attorneys practicing in multiple practice areas including: tax, estate and succession planning, corporate, agribusiness, healthcare, real estate, general commercial litigation, employee benefits, bankruptcy and creditors’ rights.  The firm’s offices are located in Orlando, Fort Pierce, Gainesville and Viera. For more information, please visit http://www.deanmead.com.

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