LIMITS ON CONTRACTUAL RELEASES [FLORIDA]

Contracts often contain release or exculpatory language that seek to protect a party from liability for future activities. Such clauses are disfavored in the law because they relieve one party of the obligation to use due care and shift the risk of injury to the party who is probably least equipped to take the necessary precautions to avoid injury and bear the risk of loss. Nevertheless, because of the countervailing policy that favors the enforcement of contracts as a general proposition, unambiguous exculpatory provisions are enforceable.

While  such clauses will be enforceable, there are limits. A recent Florida case points out two of those limitations. In the case, a builder of a residence included a very broad clause that released the builder from any liability for faulty construction whether based on negligence, gross negligence, strict liability or intentional conduct. The 5th District Court of Appeals noted at least two problems with the release language.

First, it noted that the release clause is unenforceable to the extent it seeks to release the builder for an intentional tort. Second, it noted that a party may not contract away its responsibility to comply with a building code when the person with whom the contract is made is one of those whom the code is designed to protect. Consequently, to the extent that the builder's release language sought to protect it against liability from such sources, it was unenforceable.

SUE A. LOEWE AND WARREN LOEWE, Appellant, v. SEAGATE HOMES, INC., Appellee. 5th District. Case No. 5D07-1683. Opinion filed July 11, 2008.

INVESTMENT INTEREST EXPENSE IN TRADING PARTNERSHIPS

Earlier this year, in Revenue Ruling 2008-12, the IRS ruled that the interest expense of a partnership engaged in trading activities for the account of its owners is characterized as investment interest expense of limited partners for those who do not materially participate in the business. While most expenses of partners in limited partnerships that conduct business activities are treated as "passive" if the partner does not materially participate, Regs. Section 1.469-1T(e)(6) provides that an activity of trading personal property for the account of owners of interests in the activity is NOT a passive activity (without regard to whether such activity is a trade or business activity), and thus passive loss treatment is not appropriate.

In Revenue Ruling 2008-38, the IRS has followed up on the earlier ruling and has indicated that the investment interest expense is business expense under Code Section 62(a)(1), and is not an itemized deduction. An accompanying Notice indicated that the expense is reported on Schedule E.  The IRS guidance is useful for taxpayers. By characterizing the interest expense relating to the trading activities of the partnership as not being an itemized deduction under Section 63(d), it is effectively deductible for individual taxpayers even if they do not itemize their deductions. However, since investment interest deductions are not subject to the phase-out of itemized deductions under Code Sections 67 and 68 (unlike many other itemized deductions), the characterization of the deductions as itemized deductions will often not be a big deal to many taxpayers who otherwise itemize.

The IRS also indicated that any investment interest expense of the trading partnership that relates not to its trading activities but to its investment property is an itemized deduction. If a partnership has both types of interest expense, the taxpayer must allocate the individual's net investment income between the two categories of investment interest expense using a reasonable method of allocation. The Ruling provides an example of a reasonable method - allocate to each category based on the relative amounts of interest expense directly attributable to the two types of activities. Since this may unduly skew the bulk of the interest expense to investment activities (and thus making the deduction an itemized deduction to that extent) when the bulk of the indebtedness relates to investment activity and not trading activity, another reasonable method of allocation may be desired. While the Ruling provides no further guidance on what is reasonable, perhaps allocations based on relative amounts of gross income derived by the two types of activities, or the relative amounts of gross assets involved in each of the activities, may also pass muster as reasonable methods of allocation, and should be considered by taxpayers if they provide more favorable results.

TAX PREPARER PENALTIES - PROPOSED REGULATIONS

The IRS has issued Proposed Regulations under §6694, to assist tax return preparers in avoiding penalties under that provision. So long as tax return preparer has a "reasonable basis" for a return position, the penalty can be avoided through proper disclosure if the position later turns out to be wrong. The Proposed Regulations provide significant detail as to what will constitute proper disclosure. Notably, "boilerplate" language to clients to meet the disclosure requirements will not be acceptable.

A quick summary of the Proposed Regulations as to preparers who sign the return, based on how an erroneous reporting issue is characterized, is as follows:

a. There was no "reasonable basis" for the filing position. In this situation, the penalty will almost always apply.

b. There was a "reasonable basis," but not "substantial authority" for the filing position. To avoid a penalty, the preparer must meet disclosure requirements. This will either mean full disclosure to the IRS in accordance with its disclosure rules, or in the case of an income tax return, the preparer delivers the prepared return with proper disclosures to the taxpayer.

c. There was "substantial authority," but no reasonable belief by the preparer that the position was more likely than not reported correctly. Again to avoid a penalty, the preparer must meet disclosure requirements. In this situation for an income tax return, the preparer can meet the disclosure requirements by advising the taxpayer of the applicable penalties and penalty standards.

d. The preparer had a reasonable belief that the reported position was more likely than not reported correctly. In this case, no penalty will apply (with or without disclosure).

Different rules apply for preparers who do not sign the return. Further, the above general rules are subject to various particular refinements in the Proposed Regulations. A more detailed outline of the new provisions can be read here (or click on the .docstock icon below).

Summary of Proposed Regulation Regarding Tax Return Preparer Penalties - Get more Legal Forms