NOVEMBER 23, 2008 UPDATE

[Gutter Chaves Josepher Rubin Forman Fleisher Law Firm]

November 23, 2008
An Electronic Newsletter of Gutter Chaves Josepher Rubin Forman
Fleisher P.A.
Charles (Chuck) Rubin, Editor/Author ©

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IRS ASSERTS NONOWNER CONTRIBUTIONS TO PARTNERSHIPS ARE TAXABLE

Both corporations and partnerships at times receive "capital
contributions" from persons other than shareholders or partners/
members. For example, such business entities often receive grants and
subsidies from federal, State, and local governments.

Code Section 118 of the Code provides that such capital contributions
to corporations do not give rise to income to the corporation. Other
Code provisions reduce the basis of contributed property (or other
corporate property when the contribution is cash) to offset such
nontaxation and/or to prevent the corporation from depreciating such
contributed property. These rules only apply to capital contributions
- not amounts paid in exchange for goods or services.

If the entity receiving the contribution is a partnership (or LLC or
other entity taxable as a partnership), Section 118 does not apply
since it only addresses corporations. Nonetheless, partnerships
receiving property from nonpartners have asserted that Section 118
concepts, or a nonstatutory common law capital contribution concept,
apply to avoid income to partnerships in the same manner as Section
118.

The IRS is having none of that theory. In a Coordinated Issue Paper,
it has stated that there is no corollary to Section 118 for
noncorporate entities taxable as partnership, such that capital
contributions to those entities by nonowners will be considered as
taxable to the entity (and thus to its owners, per the pass-through
nature of partnership) .

Coordinated Issue Paper All Industries, Exclusion Of Income: Non-
Corporate Entities And Contributions to Capital (LMSB4-1008-051), Nov.
18, 2008

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APPLICABLE FEDERAL RATES SUMMARY - DECEMBER 2008

To review the most recent applicable federal rates, go to http://tinyurl.com/5tjam6.

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SEPARATION DOES NOT EQUAL DIVORCE

A husband and wife enter into a prenuptial agreement. The agreement
provides that it continues to apply even through "separation and
reconciliation." Instead of separating and reconciling, the couple
divorces and remarries. The issue arises whether the agreement
continues to apply to the new marriage.

This was the issue in a recent Florida case, where after remarriage
the husband died, and the wife sought to exercise property rights she
had given up under the prenuptial agreement. Do you think the
agreement continued to apply - that is, does "separation and
reconciliation" mean the same thing as "divorce and remarriage?"

It would appear that the answer is no way - divorce is the legal
dissolution of marriage - separation is just that, the parties ceasing
to live together but without divorce. The trial court didn't agree
with this reading (or the surviving wife), and held that "separation
and reconciliation" = "divorce and remarriage," and thus the agreement
continued to apply to the new marriage. It held this, even though as a
general rule a prenuptial agreement does not survive the termination
of a marriage.

The appellate court did read it the surviving spouse’s way, however.
It reversed the trial court, holding that the wife was free of the
prenuptial agreement after the divorce, and that the "separation and
reconciliation language" did not carry it over to the remarriage.

Clients often wonder why lawyers often take 10 words to say something
in an agreement that could have been said in 5. This case is one
reason - no matter how obvious a word may seem, sometimes you have to
add a lot more language to make sure every knows what you meant if the
parties want to fight about it. Its also a little bit scary, since
this is not the first time that plain language is distorted by a trial
judge beyond what was ever intended or its common, everyday meaning.
Luckily, the appellate court was able to correct the error in this
case, but there are instances where it is not economically viable to
appeal or where the appellate court is not of a mind to disturb the
ruling of the trial court.

SVETLANA A. OZEROVA HERPICH v. THE ESTATE OF HOWARD M. HERPICH, 33
Fla. L. Weekly D2653a, (5th DCA), Case No. 5D07-3920. Opinion filed
November 14, 2008.

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IRS TARGETS SALE OF CHARITABLE TRUST INTEREST TRANSACTION

Taxpayers often use charitable remainder trusts to avoid current tax
on appreciated property. This is usually accomplished by the
contribution of appreciated property to a charitable remainder trust,
and then the trust sells the asset. Since the trust is tax-exempt, no
current income tax is due on the sale. However, under the tiered
income rules, as distributions are made to the grantor, those gains
will be taxable to the grantor. Therefore, such planning is usually a
deferral mechanism, not a tax elimination mechanism.

Some taxpayers have gone further. After the trust sells the property,
the grantor and the charitable remainder beneficiary sell their trust
interests to a third party. The grantor claims a stepped-up basis in
his or her retained interest in the trust, and thus that there is no
gain on the sale. The grantor also claims to avoid the uniform basis
rules (which would apply a $0 basis to the grantor's interest) by
reason of the combined sale with the remainderman. Thus, the grantor
effectively gets a large chunk of change equal to the retained value
of his or her trust interest, without incurring any income tax - and
the gain on the sale of the contributed property is never taxed.

In a recent Notice, the IRS has indicated that it does not believe
that the grantor gets the step-up in basis from the sale of the
property by the charitable remainder trust. However, it has gone
further than just making its views public - it has declared such
transactions to be a "transaction of interest." As a transaction of
interest, persons entering into these transactions on or after
November 2, 2006, must disclose the transaction to the IRS. Further,
advisors who make a tax statement on or after November 2, 2006, with
respect to transactions entered into on or after November 2, 2006,
have disclosure and list maintenance obligations. Failure to comply
with such requirements can result in significant penalties.

Notice 2008-99, October 31, 2008


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DAILY TAX AND BUSINESS UPDATES AVAILABLE. View updates that we didn't
have room for in this newsletter or prior articles, or easily stay up-
to-date with twice a week postings on breaking tax and business
developments. Visit http://www.rubinontax.blogspot.com.

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purposes only information of interest to the clients and friends of
Gutter Chaves Josepher Rubin Forman Fleisher P.A. The information is
condensed from, and a general summary of, legislation, court
decisions, administrative rulings and other information, and should
not be construed as legal advice or opinion, and is not a substitute
for the advice of counsel.

Gutter Chaves Josepher Rubin Forman Fleisher P.A.

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