Proposed Tax Would Actually Hit Family Businesses Hard
Proposed “Carried Interest” Tax Purports to Soak Wall Street But Hits Family Businesses
For the time being, the Senate has again abandoned efforts to impose a “carried interest tax” on venture capitalists, investors, and managers of family businesses. The tax would have increased the 15% capital gains tax rate on certain investors’ profits to the top income tax rate, which is scheduled to hit 39.6% on January 1st (H.R. 4213). The share of investors’ profits is called “carried interest.” It might appear at first glance that it’s perfectly fine for investment managers to be taxed at higher rates on their “carried interest.” But venture capitalists and investors don’t reside exclusively on Wall Street. The law was written so broadly that it could have hit approximately 6.5 million people invested in real estate partnerships that own anything from a single dwelling to sizable commercial properties.
The proposed legislation attempts to sway middle America by couching the carried interest tax as imposing a higher rate on “investment management services” and “investment managers” who work for Wall Street houses. 
In reality, the proposed legislation could have imposed a higher tax rate on any partnerships invested in particular assets. The higher rates would apply to investment gains and also to gains from the sale of the partnership, and therefore, a sale of the family business would not qualify as a capital gains transaction. Family operations are commonly formed as partnerships and managed by a family member. Under the proposed legislation, the managing family member could be subject to the “carried interest tax.” For a family partnership to gain liability protection and also not be subject to the higher taxes, an outsider – not a family member — would have to manage the partnership. The House version of the legislation exempted family farms and ranches held in partnerships. Other family partnerships would have had to wait for the Treasury Department to exempt them through regulations.
Although the proposed legislation is dead for now, it is likely to reemerge as efforts to plug the federal deficit mount. The increased carried interest tax may be reintroduced in some other form. If so, watch carefully to see how the “carried interest” tax will hit families that are well beyond the alleged targets of the legislation, and communicate any concerns to your representatives in Congress.
Dan A. Penning
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Launching a boat in Michigan waters during the month of April is not very common. Boat insurance policies, however, generally begin to provide coverage on April 15. If you’ve not given much thought to your boat insurance policy, this spring might be a good time to review your policy and determine if you need more protection as you navigate the Great Lakes or Michigan’s inland lakes.
The valuation clause in the policy is what determines the calculation the insurance company uses to arrive at the amount to pay in the event of a loss. Actual cash value policies take into account depreciation, where other policies are written on the basis of “agreed value.” If the boat is a total loss, the policy holder of an “agreed value” policy receives the amount as provided in the policy, rather than the actual cash value. This coverage is not available from every insurance company.
Consider liability and bodily injury coverage that provides you with liability insurance coverage when there is damage to something owned by someone else or injury to someone else. Medical payments coverage pays for bills that may arise from an accident on a boat. Additional coverages may be available: uninsured boater’s insurance, roadside assistance (when towing your boat), trailer insurance, and coverage if you travel to Canada.
As weather in Michigan becomes warmer signaling the approach of summer, waterfront property owners begin thinking about boats, docks, jet skis, etc. Every summer, unfortunate accidents occur that are related to water and recreational activities: swimmers make a wrong judgment regarding the depth of the water and dive into shallow water resulting in severe neck injuries, boaters and those driving personal watercraft can be blinded by the sun and fail to see someone skiing or tubing behind a boat resulting in a catastrophic accident, a “slip and fall” during a game of volleyball played on the beach or in shallow water can cause unexpected and long-lasting injuries.
The RUA, Michigan Compiled Law 324.73301(1) states: “[A] cause of action shall not arise for injuries to a person who is on the land of another without paying the owner . . . for the purpose of fishing, hunting, trapping, camping, hiking, sightseeing, motorcycling, snowmobiling, or any other outdoor recreational use . . . unless the injuries were caused by gross negligence [i.e., intentional misconduct] or willful and wanton misconduct of the owner.” In 2004, the Michigan Supreme Court reversed itself and determined that the RUA will, in fact, operate pursuant to its plain language. Therefore, unless a property owner acts with the intent to harm another, the RUA can protect a property owner from liability for injuries sustained by a third party who is performing recreational activities on the land irrespective of whether the land is undeveloped, developed, vacant, occupied, urban, suburban, rural, subdivided or unsubdivided.
The Michigan General Property Tax Act (the Act) requires real property in Michigan be assessed yearly and taxed at one-half (1/2) of its true cash value (true cash value is the same as market value). However, with the passage of the Headlee Amendment to the Michigan Constitution in 1994, limitations were placed on how much assessments and taxes could go up each year. Since 1994-1995, annual property tax increases have been “capped” at levels specified in the Act and remain capped until a “transfer of ownership” occurs. Once a transfer of ownership occurs, the property is reassessed at one-half (1/2) of the “true cash value” as of that date and the taxes, in most cases, go up substantially. The property tax is capped at the new, higher amount until the next transfer of ownership takes place (Michigan property tax bills show a “Taxable Value” and a “State Equalized Value.” The Taxable Value is the capped value upon which the property tax is assessed. The State Equalized Value approximates one-half (1/2) of the true cash value/market value of the property. Once the property tax is uncapped, the State Equalized Value and the Taxable Value become the same for the year in which the uncapping occurred and the cap goes back into effect at that amount).
In 2006, the assessor for the City of Charlevoix determined that the death of James in 2005 constituted a conveyance to Nathan and uncapped the property taxes, resulting in a new taxable value that was almost double the previous taxable value. Nathan appealed the assessor’s determination to the local board of review which upheld the decision of the assessor. Nathan appealed that decision to the Michigan Tax Tribunal which upheld the decision of the board of review. Nathan appealed that decision to the Michigan Court of Appeals.
