Lexington Approves Local Minimum Wage Ordinance

Lexington2Per the Bluegrass Hospitality Association:

“As you have probably already heard, the local minimum wage ordinance was approved by Council (9 to 6) at last night’s meeting.

The ordinance will increase minimum wage in Fayette County to the following on the below dates:

July 1, 2016                  $8.20

July 1, 2017                  $9.15

July 1, 2018                  $10.10

There was over two hours of public comment prior to the almost 9:00 PM vote.  As expected, there were passionate pleas and points both in support and against.

Several Council Members spoke prior to the vote.  The consensus is that raising the minimum wage does not ultimately solve the underlying issues long-term.  As such, Council will continue to work on programs to address long-term solutions to better wages like education, housing, transportation, childcare, etc.”

For more information on the vote itself:

http://www.kentucky.com/news/local/counties/fayette-county/article45566235.html

For more information on how this vote will affect your business, contact the attorneys at McBrayer.

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IRS: Bad News for REIT Spin-off Conversions

In late September, the IRS sent up as large of a red flag as possible concerning Real Estate Investment Trust (“REIT”) spinoffs in IRS Notice 2015-59 and Rev. Proc. 2015-43. While these issuances did not change existing law, they did state a new no-rule policy with regard to tax-deferred PropCo/OpCo spin-offs under Section 355 of the Internal Revenue Code (In these types of transactions, a property-holding company (“PropCo”) which is a subsidiary of an operating company (“OpCo”), purchases real estate owned by OpCo, then leases it back to OpCo and claims status as an REIT). Under the latest word from the IRS, unless there are “unique and compelling” circumstances, IRS will not issue private letter rulings on these types of transactions if real property owned by either PropCo or OpCo is the basis for REIT election for either company. Coupled with statements from the agency that these spin-offs and conversions give the agency “significant concerns,” these proclamations create significant market uncertainty as to the validity of such transactions.

BUILDINGTo do such an REIT spin-off transaction, an existing company must qualify that the REIT has a 5-year history as an active trade or business. It became a matter of course that such a company would ask the IRS for a private letter ruling on this qualification. Now, however, the IRS feels that these types of transactions might pose problems under Section 355 when the transaction spins off an REIT from a C corporation.

For one thing, both PropCo and OpCo must both be engaged in an active trade or business, and a spin-off to merely hold property may fail this requirement. The IRS also expanded the exclusion on private letter rulings to include transactions where less than 5% of a corporation’s assets are relied upon to fulfill the active trade or business requirement, so the IRS takes this requirement especially seriously. The spin-off must also have a substantial non-tax business purpose – the transaction cannot be a mere tax avoidance measure. Finally, the transaction cannot serve mainly as a device for the distribution of earnings or profits for either company. To put it plainly, a company cannot spin off an REIT to a property-holding subsidiary merely for the tax benefit and expect the transaction to be tax-deferred, and the IRS is no longer going to give its seal of approval to such transactions up front.

The tax consequences of such a transaction failing to qualify under Section 355 can be significant, so this move on the part of the IRS injects a chill into the REIT marketplace. These releases suggest that the IRS will pay closer attention to such transactions in the future as well, so they should be structured with the utmost care and with significant emphasis placed on meeting the requirements of Section 355. For more information about REIT spin-offs and the tax treatment of such transactions after these IRS issuances, please contact the attorneys of McBrayer.

Preston WorleyPreston Clark Worley is an associate with McBrayer, McGinnis, Leslie & Kirkland, PLLC. Mr. Worley concentrates his practice in employment law, land development, telecommunications, real estate and affordable housing. He is located in the firm’s Lexington office and can be reached at pworley@mmlk.com or at (859) 231-8780.

This article is intended as a summary of  state and federal law and does not constitute legal advice.