“A little hyperbole never hurts. People want to believe that something is the biggest and the greatest and the most spectacular…. I call it truthful hyperbole. It’s an innocent form of exaggeration – and a very effective form of promotion.” – Donald Trump, The Art of the Deal.
One of Trump’s campaign promises is a massive revamp of the tax code. It’s a huge (or is that yuge, as Trump might say?) undertaking that will be the biggest and the greatest and the most spectacular tax code overhaul ever. Maybe that’s a little truthful hyperbole.
The last time the Code was overhauled was in 1986; before that, it was revamped in 1954. The Code undergoes a fairly major overhaul every 30 or so years; we’re due.
Trump’s proposals are certainly some of the most ambitious proposals in recent memory. From a business perspective or a wealthy individual’s perspective, this may be best taxation scheme that the nation has seen since just before the introduction of income tax in 1913. For everyone else, it depends on a number of factors, one of the most significant being whether you believe in supply-side economics (you might know this better as “trickle down” economics or “Reaganomics”). However, I’m not here to discuss politics or debate the merits of different economic schools of thought. We’re here to look at what Trump has proposed. I should point out, this is all speculation and campaign promises should be taken with a block of salt.
Let’s start with the aspect that will affect the greatest number of taxpayers, the proposed tax rates and brackets. Trump would like to cut down the current seven brackets to just three. Right now, the brackets range from 10% for those with income less than $9,275 to 39.6% for with income over $415,050. There is also a 3.8% tax for those with adjusted gross incomes, or net investment income in excess of the statutory threshholds. I should also note that I’m just focusing on the single rates, not head of household or married filing jointly rates (however, a general rule of thumb with Trump’s proposal is the married amount is double the single amount, e.g., the single limit is $37,500, the married is $75,000).
Under Trump’s proposal there would only be three brackets, 12%, 25% and 33%. The 12% bracket would include those with income less than $37,499 and the 33% bracket includes those with income over $112,500; the 25% bracket captures everyone else.
The standard deduction would be increased to $15,000 for individuals, which was a reduction from Trump’s original proposal of a $25,000 standard deduction. Trump also proposes to cap individual itemized deductions at $100,000; a move that won’t affect most Americans (the average itemized deduction for 2011 was $25,230, according to IRS data).
An analysis by the Tax Policy Center found that the bottom 80% of households would see effective tax cuts between 0.6% and 1.7%. Whereas, the top 1% will see a tax reduction of 6.5% and the top 0.1% will see a reduction of 7.3%.
However, there are certain demographics who, because of the removal of head of household as well as the elimination of the $4,000 exemption for each individual in a household, would see their taxes increased. For example, a single parent who earns $75,000 and has two children could see a tax increase of over $2,400. In an attempt to offset the elimination of the $4,000 exemption, Trump proposed allowing parents to deduct child-care expenses for up to four children. The deduction would be capped at the average cost of care in the family’s geographic location. The child care deduction would not apply to individuals earning more than $250,000.
It’s also worth mentioning that Trump would like to repeal the estate tax. The estate tax currently exempts estates worth less than $5.45 million for individuals and $10.9 million for married couples. Currently, around 0.2% of the nation is subject to the estate tax. Further, though not mentioned by Trump, a repeal of the estate tax would almost axiomatically require the repeal of the gift tax due to the way the gift tax and the estate tax work together.
However, the real winners under the proposed tax plan are businesses. Trump would like to see a 15% tax rate on businesses. That would be a 20% cut from the current 35% corporate rate. As you may know, in general there are two ways to tax businesses, double taxation and pass-through. A traditional C corporation has what’s known as “double taxation” wherein the profits of the corporation are taxed at 35% and then any money taken out of the corporation, in the form of dividends, is taxed at a rate up to 20%. In pass-through entities, such as LLCs, partnerships, and S Corporations, profits are only taxed at the owner’s tax rate (i.e., a maximum of 43.4%). Trump’s proposal is to tax all business income at 15%, and that includes pass-through entities. Therefore, a member of an LLC, a partner in a partnership or a shareholder in an S corporation may only have to pay 15% in taxes. In other words, some business owners (including lawyers, accountants and doctors who are owners of their practices) will see their tax rates cut by up to almost two thirds.
Trump’s business tax rate proposal also raises an interesting point, not directly addressed by the proposed plan: Will partners and LLC members be subject to self-employment tax? As explained above, a partner or LLC member will pay taxes at their individual tax rate, however, they also pay the employee and employer share of employment taxes, about 15% (known as “self-employment tax”). Under the current Code, a partner or member could pay a total of 58.7% if he or she were in the highest tax bracket and paid the self-employment tax. If Trump’s plan converts partnership and LLC profit into “business income” that may lead to the elimination of the employment tax for partnership and LLC owners, which would effectively drop the tax rate by 75% for those partners and members in the highest tax brackets.
While all of that sounds great for business owners, there’s always a catch. Under Trump’s plan, businesses would lose most deductions, including interest on debt deductions. But, in a move that will please most businesses, Trump proposed that, instead of depreciating assets over the life of the asset, the entire expense of an asset could be deducted up-front.
Additionally, multinational companies will be celebrating a potential tax holiday in which a 10% deemed repatriation tax will be imposed on profits held overseas. That might not seem great on the surface, but that allows US companies to bring back those profits held overseas, valued around $2.5 trillion, with a 10% tax instead of the current 35%. Moreover, the 10% tax would be payable over 10 years. Trump claims that this would lead to mountains of money flowing back into the US, presumably to be spent by businesses to hire people and expand, instead of substantial shareholder dividends and bonuses to executives. But, as stated earlier, there’s always a catch. With this proposal, Trump would seek to tax foreign subsidiaries on their profits every year.
Trump’s proposal is that by lowering taxes for most Americans and further reducing taxes for the top 1% and drastically reducing the corporate tax rate, the entire nation will benefit. We can’t know, right now, whether his proposals will be enacted, and, if they are, what effect they will have on Americans and the economy, both domestic and global.
No matter your political beliefs, economic philosophies or personal feelings, Tom Hanks recently summed up a Trump presidency in the best light possible, “I hope the president-elect does such a great job that I vote for his re-election in four years.” That is a sentiment every American can support.
For far too long, vacant and abandoned foreclosed homes have been a serious problem for citizens and public officials in New York. According to a recent study, vacant foreclosed homes number over 3,000 in the state of New York, trailing only New Jersey. One need not venture inside a property to see that it is vacant and abandoned – usually its status is quite evident to passersby. The telltale signs are overgrown grass and weeds, broken or boarded windows, sagging gutters and other signs of disrepair. Abandoned homes are not only eyesores for citizens, but pose safety hazards and drag down values of nearby homes. To top it off, the local municipalities are often stuck with maintaining these homes – cutting the grass to prevent rodent infestation, repairing the gutters to prevent flooding and sometimes demolishing homes that have become a serious safety concern. Often these costs are significant and are ultimately passed on to the taxpayers.
As one might suspect, the current law requires the homeowner to maintain his or her property. When that owner defaults on his or her mortgage, often due to financial distress, the owner does not have the means to maintain the property, thus resulting in the property maintenance issues mentioned above. Sometimes the owner(s) eventually abandon the property during the foreclosure process. Under the current law, since a lender does not become the owner of the property until the foreclosure process is completed (which can sometimes take years in New York), the maintenance responsibility continues to fall on the owner who no longer lives at the property and has little incentive or ability to maintain it. Thus, the property continues to fall further into disrepair, often resulting in intervention by the local municipality at the ultimate cost of the local taxpayers.
New York recently enacted the “Abandoned Property Neighborhood Relief Act of 2016,” effective December 20, 2016, to address these issues. The provisions of the Act fall into three primary categories: 1) requiring lenders to inspect and maintain vacant property prior to completion of foreclosure, 2) the implementation of a statewide abandoned property registry and reporting system to monitor vacant properties, and 3) providing an expedited foreclosure process for vacant properties.
As mentioned above, currently, the responsibility to maintain a foreclosure falls to the lender only when after it comes into ownership of the property at the completion of the lengthy foreclosure process. Pursuant to the Act (with some limited exceptions), lenders will now have the duty to inspect and maintain abandoned and vacant properties prior to completion of the foreclosure proceedings. Specifically, within 90 days of delinquency, the lender must complete an exterior inspection of the home to determine whether it is vacant and must continue to inspect every 25 to 35 days.
If a home is determined to be vacant, the lender must secure and maintain the property, including: securing points of entry (i.e. doors, broken windows), winterizing the property, protecting against mold growth, and addressing code violations (such as overgrown grass and weeds). Should a lender fail to maintain the property, it will be subject to a $500.00 per day fine. Additionally, should a lender fail to maintain the property, a municipality may itself address maintenance and, per the Act, will have the right to commence an action directly against the lender to recover its costs. Pre-foreclosure recovery against the lender is generally not available today and will be a boon to municipalities that will now have a method by which to quickly and fully recoup their maintenance costs (as opposed to now, where a municipality’s costs are often billed to an owner who is nowhere to be found and ultimately levied on to a tax bill that the owner cannot pay).
The Act also calls for the implementation for a statewide electronic abandoned and vacant homes registry to be operated by the New York State Department of Financial Services (“DFS”). Within 21 business days of when a lender/servicer learns or “show have learned” that a property is vacant, the lender must cause the property to be entered into the statewide vacant property registry by providing the following information to DFS: 1) the name and contact information or the lender who will be required to maintain the property, 2) whether a foreclosure action has been filed and if so, when and 3) the last known contact information of the homeowner.
Though the Act provides that the information in the registry will be kept “confidential” (presumably to protect defaulting homeowners), it also provides that the information will be provided by the DFS to local municipal officials upon request so long as it is used strictly to address vacant and abandoned property in a manner consistent with the Act. Furthermore, the Act calls for the establishment of a hotline where neighbors and residents can report to the DFS regarding apparent vacant properties. If executed properly, the registry and the hotline could be a very valuable resource that could be leveraged by both NY State and local municipal officials to ensure lenders are timely and fully addressing maintenance responsibilities on vacant foreclosures.
In the legal and banking community that deals with foreclosures, New York is known for its notoriously slow and cumbersome foreclosure process – a process to which many attribute at least some blame for the vacant and abandoned properties crises. The Act seeks to address this problem by implementing an expedited foreclosure process for vacant and abandoned property. In sum, lenders may make use of an expedited legal process known as an “order to show cause” in order to quickly bring a foreclosure process to conclusion so long as the lender demonstrates that the property is indeed vacant. In order to do so, it must conduct 3 consecutive inspections of the subject property, at least 25 to 35 days apart, and show 1) no evidence of persons residing there, and 2) that the property was not being maintained in a manner consistent with requirements of the NY Property Maintenance Code. Evidence of lack of occupancy may include: overgrown or dead vegetation, accumulation of mail, past due utility notices, accumulation of trash, absence of window coverings, broken windows, failure to secure entry points, and that the property is structurally unsound or otherwise hazardous.
In addition, New York is pursuing measures to prevent abandoned property in the first place, including the establishment of the “Community Restoration Fund” program whereby New York will be able to purchase defaulted mortgages and offer favorable mortgage modifications in order to keep owners in their homes.
Prior to the Act, municipalities sought to address vacant properties by adopting a patchwork of local legislation. Generally, the local legislation centers on requiring lenders to register with the local municipality and post a bond that can be accessed by the municipality to deal with maintenance on foreclosed properties. Municipalities should be aware that the Act provides that local legislation cannot be inconsistent with the Act. New York State’s intent appears to be that the Act will accomplish the purpose of the aforementioned local legislation by having DFS maintain a statewide registry (rather than local registries), by legally requiring lenders to maintain prior to foreclosure (and thus dispensing with the need for municipalities to step in) and by providing municipalities a direct path to recovery against lenders should they fail in their duties.
As effective date of Act approaches (Dec. 20, 2016), public officials should prepare to make use of the new tools they will have at their disposal. From the ability to interface with DFS to identify vacant homes to the right to recover maintenance costs directly from the lender, the Act promises long overdue tools that appear likely to significantly and positively impact the abandoned and vacant homes crises in New York.
As most know by now, earlier this year the U.S. Department of Labor (DOL) published its final rule updating the regulations governing whether executive, administrative, and professional employees are entitled to overtime under the Fair Labor Standards Act (FLSA). Under the current regulations, an employee who is classified under one of these exemptions is exempt from overtime if the employee receives a salary of at least $455 per week ($23,660 annually) ($675 per week / $35,100 annually here in New York State) and otherwise meets additional criteria specific to each exemption. The DOL’s new rule more than doubles the current FLSA minimum salary threshold to $913 per week ($47,476 annually). This figure is based on the standard salary level at the 40th percentile of weekly earnings for full-time salaried workers in the lowest wage earning Census Region, currently the South region. The revised regulations also increase the highly compensated employee exemption annual salary threshold from $100,000 annually to $134,004. Additionally, the revised regulations include an indexing mechanism to automatically update the salary threshold every three years, beginning January 1, 2020. The DOL estimates that the revised rule will cast a broad net making an additional 4.2 million workers eligible for overtime under the FLSA.
As most also know by now, the final rule is scheduled to go into effect in just over one month on December 1, 2016. Or will it?
Before adjourning for election season late last month, the United States House of Representatives passed a bill, H.R. 6094 (the bill is referred to as the “Regulatory Relief for Small Businesses, Schools and Nonprofits Act”), that would delay the effective date of the DOL’s new overtime rule by 6 months, from December 1, 2016 to June 1, 2017. However, the Senate adjourned the same night after passing a stopgap spending bill to avert a government shutdown, meaning the Senate will not vote on the overtime bill until after the November elections at the earliest. Thus, without further congressional action, the overtime rule will still take effect December 1st. And with Congress adjourned until November 14th so that lawmakers can campaign for reelection, there will be little time for the Senate to act before the rule becomes effective. Even if the bill survives the Senate, a Presidential veto is almost certain to follow. In fact, President Obama released a statement strongly opposing any delay in the rule’s effective date, and threatening to veto any such law. Additionally, Congress likely would not have enough votes to override any such veto.
In a similar last ditch effort to stall and challenge the rule change, twenty-one states recently banded together and filed a lawsuit in the United States District Court for the Eastern District of Texas. The group challenging the rule is led by Texas and Nevada, and includes the following states: Alabama, Arizona, Arkansas, Georgia, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Michigan, Mississippi, Nebraska, New Mexico, Ohio, Oklahoma, South Carolina, Utah, and Wisconsin. The lawsuit names as Defendants the DOL and its Wage and Hour Division, Secretary of Labor Thomas Perez, and Wage and Hour Administrator David Weil, and Assistant Administrator for Policy Mary Ziegler. In a separate suit just hours later, the U.S. Chamber of Commerce led an expansive alliance of national and Texas business groups and filed a similar suit to challenge the rule, arguing that the new rule drastically alters the DOL’s minimum salary requirements by imposing new overtime payment requirements on businesses of all sizes and millions of individuals who have historically been considered exempt.
Both suits maintain that the DOL exceeded its statutory authority under the FLSA in promulgating the new rule, and that the new rule is arbitrary and capricious. They ask the court to issue an injunction preventing its implementation, application and enforcement. The states also raise constitutional objections, arguing that the new federal rule violates the Tenth Amendment (which reserves to the states powers not expressly granted to the federal government) by mandating how they must pay employees and allocate their budgets. The states allege that by implementing this new rule, the federal executive branch will “wreck State budgets” and “commandeer, coerce, and subvert the States” by mandating the wages state employees are paid, what hours these employees will work, what compensation will be provided to employees working overtime, and the overall structure of payment at the State level. In addition, the states challenge the mechanism for automatic increases in the salary threshold every three years, asserting that it fails to acknowledge Congress’s intention that the “activities” in which employees engage be the distinguishing factor between exempt and non-exempt employees, not salary levels. The states further allege that Congress did not give the DOL indexing authority, and the DOL failed to follow the Administrative Procedure Act’s (APA) notice and-comment rulemaking process before seeking to impose indexing.
Like the states, the business groups argue that the DOL exceeded its statutory authority and violated the APA in issuing the final overtime rule. They argue that the rule’s excessively high salary threshold for determining who qualifies for a “white collar exemption” would disqualify large numbers of employees who perform exempt job duties from exempt status. The Business groups also take sharp aim at the automatic update or “escalator” provision that will increase the minimum salary threshold over time. Like the states, they argue the indexing mechanism was issued without a rulemaking or input from stakeholders in violation of the APA.
Just last week, the two lawsuits were consolidated and they will now be heard together. Moreover, the Federal Court granted an expedited timetable for the states’ Emergency Motion for Preliminary Injunction and the business groups’ own Motion for Expedited Summary Judgment, which are presently set for a hearing on November 16, 2016, just two weeks ahead of the rule’s December 1st effective date. It is certainly conceivable that these combined cases could offer employers some relief from the new regulations before the effective date, but they should not hold their breath. While employers might sensibly delay announcing any changes while these lawsuits play out, they should still be preparing for the change in the law as scheduled.
Scott Mooney is a partner with the law firm Boylan Code LLP concentrating his practice in the areas of labor & employment and litigation.
In 1976 Harvard Law Professor A. James Casner, an acknowledged expert in estates, told the members of the House Ways and Means Committee: “In fact, we haven’t got an estate tax, what we have, you pay an estate tax if you want to; if you don’t want to, you don’t have to.”
About three years later an enterprising law professor named George Cooper wrote what was probably the seminal article on estate planning in the Columbia Law Review summarizing (in 87 pages) the findings of an exhaustive study which he had conducted. He went into great detail on Casner’s view, interviewing literally hundreds of lawyers and other practitioners in the estate planning area to see what they were actually doing, and he concluded that Casner was largely correct. He observed that there were so many estate avoidance techniques available, that the well-to-do who were willing to engage in some sophisticated (in some cases not-so-sophisticated) planning, the Federal estate tax was almost a “voluntary” tax. Among the techniques that he summarized were various estate “freezing” techniques, including preferred stock recapitalizations, installment sales, family partnerships, and intra-family diversions of service and capital. He also observed that life insurance and similar annuities and survivorship benefit plans created opportunities for the creation of tax-exempt wealth.
Fifty years later, just a few weeks ago, the Internal Revenue Service announced that it was moving to close off one of those tax avoidance maneuvers which, to this day, remains wide open and available despite the spotlight shown on it so many years ago. The ability to create substantial valuation discounts by means of gifts to family members has remained a significant estate planning activity. That window of opportunity remains open for those who are seriously interested in favoring their families over the Federal fisc, provided that they are willing to move efficiently and aggressively over the next three to four months.
Back in 1990, Congress enacted several Internal Revenue Code provisions that started to chip away at the available discounts. One of these provisions was contained in §2704, the substance of which was to eliminate in the appraisal process the discounting or diminishing effect of the “lapse” of certain rights and restrictions held by a stakeholder in a family controlled entity. The Treasury was authorized to enact regulations implementing these provisions, but has just gotten around to it, and will be holding public hearings from interested parties on December 1, 2016. Technically, the Treasury then has the authority to issue final regulations, and those become effective 30 days after the date of the announcement. As a practical matter, it’s highly unlikely that all of this can occur any earlier than sometime in the first quarter of 2017, thus creating the “window of opportunity” referred to above.
What are the new regulations all about? Although the proposed regulations run 13 pages of fine print in the Federal Register, attempting to address many different situations, they can be fairly summarized as follows:
- They attempt to reduce the “lack of control” discounts that are taken on gifts by minority interest holders of closely-held businesses. That is, a minority interest, which essentially cannot control the direction of the business or force the liquidation of the entity and distribution of its assets, is always worth less than a majority or controlling interest.
- They create a bright line test for “deathbed transfers” that result in a lapse of a dying shareholder’s rights and restrictions. Under the new regulations, any transfer resulting in a lapse of rights and restrictions that takes place within the three years prior to the transferor’s death will be treated as if it took place at his death. This means, in effect, that the discounted amount would be pulled back in the transferor’s gross estate. The “three year rule” replaces the subjective test currently used by courts to determine whether this kind of transfer is done during the normal course of business or solely to reduce estate tax liability.
- The regulations also go after state legislation by disallowing discounts that stem from non-mandatory restrictions imposed by state law. Many states enacted laws that placed restrictions on transfer and control for the sole purpose of attracting family-owned businesses to the state. These restrictions make it easier for families to take advantage of this federal estate tax loophole. Under the new regulations, a state law that imposes a restriction by default, but allows family-member shareholders to contract around the restriction, may not create applicable as a discount.
There are many legal traps for the unwary in this area of estate planning. If the regulations are finalized according to the quickest possible schedule, they will take effect in January 2017. Since these regulations are very broad and far-reaching, many experts believe they may need to be reviewed, and that they will be challenged by the courts after they are finalized. We will also have a new President-elect by that time, which may affect whether and how quickly the regulations are finalized. Since Donald Trump has expressed his distaste for estate and gift taxes, closing the discount loophole probably will not be popular with him. Hillary Clinton, on the other hand, will likely want the regulations to become enforceable.
If you would like to take advantage of the current discounts as you transfer property and business interests to your family, during life or through your estate, you may want to take action before the end of this year. However, there are many factors that weigh into these kinds of decisions, so consult a knowledgeable professional to ensure that a transfer will make sense for you and your family.
Make sure to stay healthy if you decide to make a transfer soon. The three-year rule will apply to all estates that file an estate tax return after the regulations are finalized. To maintain the discount, the transferor must survive for three years following the transfer to ensure the value of the “lapse” is not included in the gross estate. The Treasury Department has given new meaning to the phrase “Live long and prosper.”
You’ve decided that you want to form a company. Great! Maybe you want to form a simple C corporation, but you’ve heard something about “double taxation,” and you certainly don’t want to pay taxes twice. You’ve also heard people, in passing, mention S corporations, but you probably didn’t want to dig around in subchapter S of the Internal Revenue Code (“IRC”) to find out the benefits of an S corporation. I’m sure you’ve also heard of a Limited Liability Company (“LLC”), and some of the benefits of the LLC structure. So, which do you chose, and more importantly, why?
Fans of the popular television series “Colombo” that starred Peter Falk may remember his familiar line in each episode, “Just one more thing…”