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To the Recurring Intangibles Tax, Adieu!

E. John Wagner, II

For many years, Florida imposed an annually recurring tax on intangible personal property (such as stocks, limited liability company membership interests, bonds, and promissory notes) owned, managed, or controlled in the state.  Although the tax featured higher rates in the past, it was most recently imposed at the rate of $500 for each $1 million of such property owned on January 1 of each year.  Governor <st2:sn w:st="'on'">Bush signed legislation repealing the tax in August.   

Should you immediately restructure your legal affairs?  Unless you are bored, probably not.  Unlike many reforms, this tax repeal is pretty straightforward.  In fact, you probably will fare just fine in the post-recurring intangibles tax world if you follow these four steps:

1.         Understand the Effective Date.    The repeal is effective January 1, 2007.  You must still pay tax on the taxable assets you owned on January 1, 2006.  In fact, if you have not  filed your return and have not obtained an extension, your return is already past due.

2.         The Next Time You Form a Business Entity, Ask Your Lawyer Whether Repeal Makes a Difference in Your Business Entity Selection.   The recurring intangibles tax did not treat all closely-held entities alike.  Statutory exemptions applied to interests in general partnerships, limited liability partnerships, limited partnerships, and limited liability limited partnerships.  (I call this tongue-twisting group of entities the “partnership variants.”)  In contrast, the tax base included limited liability company membership interests and closely-held corporation stock.  This encouraged the use of partnership variants for entities likely to accumulate a significant net worth, particularly land holding companies.  While tax efficient, the use of partnership variants was often frustrating for lawyers and business owners because these entities generally lack the operational simplicity and flexibility of corporations and limited liability companies.  

Given the other advantages of limited liability companies and corporations, will partnership variants fade into obscurity as forms of doing business in Florida?  Lawyers probably will form general partnerships and limited liability partnerships less frequently.  In contrast, limited partnerships and limited liability limited partnerships, which enjoy a special statutory safe harbor against Federal self-employment tax for limited partners, may remain a popular choice for active businesses that seek income taxation as a partnership rather than as a corporation.  

Lest a friendly newsletter article devolve into a mind-numbing choice-of-business entity exposition, we will leave this point without saying more.  The bottom line is that you should no longer assume a partnership variant remains the best entity choice for you just because you used it in the past.

3.         Do Not Forget the Nonrecurring Intangibles Tax.  The legislation repealing the recurring intangibles tax did not affect its cousin, the nonrecurring intangibles tax.  The nonrecurring intangibles tax is imposed upon obligations secured by mortgages. The nonrecurring tax is not a property tax, but instead is a transactional tax paid only once, when the obligation is created.  It is less popularly known, but you can find it on the closing statement for just about any loan secured by Florida real property.  The nonrecurring intangibles tax remains in effect. 

4.         Take Your Lawyer to Dinner.  Anyone who found the recurring intangibles tax more than an annoyance could legally avoid it by temporarily transferring his or her taxable assets to an irrevocable trust each year.  This was no secret loophole or tax shelter.  The Florida Department of Revenue had promulgated a safe harbor regulation to sanction such trusts.  These trusts were so common that they had their own catchy, popularly-used acronyms.  They were called “FLIT” (for Florida intangibles tax) and “FLITE” (for Florida intangibles tax exempt) trusts.  

The recurring intangibles tax repeal obviates these trusts.  This is even more good news for clients, but Florida lawyers will have to find something else to occupy at least some of their time.  If you used such a trust in the past, consider taking your lawyer to dinner to minimize the risk that he or she will start wandering aimlessly with nothing to do.  You might enjoy an invigorating discussion about intangibles tax trusts of  the past.  More likely, you will hope your lawyer finds more interesting things to discuss.  

Of course, you should not feel too sorry for your lawyer. The tax bar is an industrious group.  We will be sure to use our newfound spare time to discover even more “exciting” ways to save your money. 

For more information regarding this article, please contact John Wagner at (941) 536-2037 or jwagner@williamsparker.com.
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