JUNE 13, 2010 UPDATE

[Gutter Chaves Josepher Rubin Forman Fleisher Law Firm]

June 13, 2010
An Electronic Newsletter of Gutter Chaves Josepher Rubin Forman
Fleisher P.A.
Charles (Chuck) Rubin, Editor/Author (except as otherwise noted) ©

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CONTENTS OF THIS NEWSLETTER:

1. HOMESTEAD CAN STILL BE SUBJECT TO FRAUDULENT CONVEYANCE WHEN IRS
INVOLVED [Florida]
2. DESIGNATED BENEFICIARY COULD NOT BE CREATED THROUGH A POST-DEATH
TRUST REFORMATION
3. SALE RESTRICTIONS AND FORFEITURE RISK DID NOT INHIBIT CONSTRUCTIVE
RECEIPT
4. APPLICABLE FEDERAL RATES – JUNE 2010
5. TAX COURT COMBINES GIFT AND SALE TRANSACTION
6. A METHODOLOGY FOR DISCOUNTING JOINT OWNERSHIP INTERESTS
7. TAX COMPETITIVENESS SURVEY
8. ABOUT OUR FIRM

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1. HOMESTEAD CAN STILL BE SUBJECT TO FRAUDULENT CONVEYANCE WHEN IRS
INVOLVED [Florida]

A transferee of an insolvent debtor that receives property from the
debtor may be required to disgorge the received property or its
equivalent value to the debtor’s creditors, if the transfer to the
transferee was a “fraudulent conveyance.” However, a fraudulent
conveyance only applies to a transfer of property of a debtor.
Property of a debtor for this purpose does not include property that
is “generally exempt under nonbankruptcy law.”

In a recent case, an insolvent debtor transferred his homestead
property to his transferee. The creditor sought to recover the
homestead property from the transferee as a fraudulent conveyance. Per
the above rules, the transferee defended the creditor’s claim per the
homestead property being exempt from creditor claims under Florida law
– thus, it was not “property” of the debtor for this purpose so that
the fraudulent conveyance laws did not apply.

A strong argument, but the twist in this case was that the creditor
was the Internal Revenue Service. The IRS is a supercreditor in that,
as a matter of federal supremacy, it is not bound by state law
homestead protections. Since the IRS could have levied on the
transferred homestead prior to its transfer and regardless of its
homestead status, the Tax Court held in a case of first impression
that the transferred homestead was not “generally exempt under
nonbankruptcy law” (at least as to the IRS) and thus was an asset of
the transferor that could be reached by the IRS under Florida’s
fraudulent transfer laws.

Scott E. Rubenstein, et al. v. Commissioner, 134 T.C. No. 13 (2010)

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2. DESIGNATED BENEFICIARY COULD NOT BE CREATED THROUGH A POST-DEATH
TRUST REFORMATION

Individual retirement account (IRA) assets can be made payable to a
trust at the death of the account owner. If the trust has a
“designated beneficiary” under the Code and Regulations, the payout
from the IRA can typically be spread (and tax deferral maximized) over
the lifetime of the designated beneficiary.

In a recent private letter ruling, a beneficiary trust of an IRA did
not have a designated beneficiary. The trustee undertook a reformation
action in state court to modify the trust so that after the
reformation the trust then had a designated beneficiary.

In the ruling, the IRS rejected the attempt to create a designated
beneficiary. The IRS indicated that a retroactive modification to the
date of death of the account owner would not be respected for federal
tax purposes. While the IRS will respect state court orders in many
circumstances, it will respect it in regard to a reformation only if
reformation is specifically authorized by the Code. For example, Code
§2055(e)(3) specifically allows parties to reform a charitable split
interest trust to make the charitable interest eligible for the
charitable deduction. Since there is no applicable Code provision
authorizing a reformation so as to qualify a trust as having a
designated beneficiary, the reformation would not be given effect.

Private Letter Ruling 201021038

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3. SALE RESTRICTIONS AND FORFEITURE RISK DID NOT INHIBIT CONSTRUCTIVE
RECEIPT

In a recent District Court case, a taxpayer sold a partnership
interest in exchange for shares of stock. The stock had significant
restrictions, including limits on the ability to sell the received
stock for up to 5 years, and the taxpayer would have to forfeit shares
if they went into competition with the buyer of the partnership
interests, if they quit working for the buyer, or were fired for cause
or poor performance.

The taxpayer claimed that he did not have to recognize gain on the
value of the received shares, since he could not realize anything from
the shares upon receipt and they could be forfeited in the future.

In analyzing the situation, the court noted that “constructive
receipt” occurs under Section 451 Regulations if as to a taxpayer an
amount is “credited to his account, set apart for him, or otherwise
made available so that he may draw upon it at any time, or so that he
could have drawn upon it during the taxable year if notice of
intention to withdraw had been given.” Income is not constructively
received “if the taxpayer's control of its receipt is subject to
substantial limitations or restrictions.”

The court found that a number of facts combined to indicate there was
sufficient “control” in the taxpayer to find constructive receipt.
These facts included that the seller would eventually benefit from any
appreciation that occurred in the shares while they were subject to
restrictions, the seller would receive the dividends from the shares
during the restriction period, and the seller could direct how the
shares were voted. The court also took into consideration that the
transaction was specifically structured to result in full taxation in
the year of sale and not a later year, because the taxpayers
anticipated future appreciation (in this case, the taxpayer changed
his mind and sought to “defer” the tax because the stock actually
ended up going down in value, so that the taxpayer picked up income in
the year of sale that would never have arisen if the stock was taxable
only when the restrictions lapsed).

Given the number of factors cited by the court, it is difficult to
tell which ones were more critical than the others in the finding of
constructive receipt. Further, if the transaction had not been
carefully structured with one tax result in mind, but with the
taxpayer then adopting the opposite characterization when the stock
value went down instead of up, perhaps a more sympathetic hearing by
the District Court may have resulted.

U.S. v. Fort, 105 AFTR 2d 2010-XXXX, (DC GA), 05/20/2010

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4. APPLICABLE FEDERAL RATES – JUNE 2010


A table of the June 2010 applicable federal rates can be viewed at
http://tinyurl.com/247wsk7.

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5. TAX COURT COMBINES GIFT AND SALE TRANSACTION

In a recent Tax Court decision, the Court applied the step transaction
doctrine to collapse a separate gift and sale of LLC interests to gift
trusts into a gift transaction. Perhaps the precedential value of the
case can be limited due to some bad facts present in the case, but the
broad use of the step transaction doctrine simply by reason of a
taxpayer bifurcating transfers into a gift and sale element so as to
be able to use available gift and generation skipping tax exemptions
is quite troubling.

The decision is also somewhat troubling since it involves many
elements that are present in current sales transactions that are
undertaken in transfer tax planning. However, the particular holding
of the case does not act to convert the entire sale transaction into a
taxable gift but appears to only have created a gift to the extent of
discounts taken on the sold property.

For a more detailed review of the case and its facts, go to
http://tinyurl.com/2b74mce for a summary in map format which can be
viewed using most versions of Adobe Acrobat or Adobe Reader (click on
the ‘+’s in the map to expand it).

Suzanne J. Pierre, TC Memo 2010-106

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6. A METHODOLOGY FOR DISCOUNTING JOINT OWNERSHIP INTERESTS

Federal transfer taxes are based on the value of the property
transferred. When the property transferred is a joint interest in
property, some reduction from the pro rata share of the full value of
the property is appropriate since a willing buyer would not pay 100%
of the pro rata share of the value due to restrictions on enjoyment of
the property or freely liquidating the property.

All qualities of appraisals to quantify this discount are obtained by
appraisers, ranging from detailed to valuations akin to estimates. In
a recent case gift tax case, the Tax Court rejected the data and
appraisals offered by both the IRS and the taxpayer. Instead, the Tax
Court applied its own methodology. This well-thought-out methodology
should be useful to appraisers and taxpayers alike.

The property interest involved was a 50% tenancy-in-common interest of
residential real property situated in Hawaii. The following summarizes
the methodology used.

FIRST, determine a value as if partition is not necessary to sell the
property.

A. Determine the pro rata share of the appraised value of the full
parcel, projected 1 year into the future (the estimated time to
complete the sale in the case).

B. Reduce that value by an appropriate discount for the time period
needed to sell.

C. Reduce by the pro rata share of selling costs (e.g., broker
fees).

D. Reduce by estimated operating costs for the time period needed to
sell.

SECOND, determine a value as if partition is necessary to sell the
property.

A. Determine the pro rata share of the appraised value of the full
parcel, projected 2 years into the future (the estimated time to
complete both the partition and the sale).

B. Reduce that value by an appropriate discount for the time period
needed to partition and sell.

C. Reduce by pro rata share of selling costs (e.g., broker fees) and
partition costs.

D. Reduce by estimated operating costs for the time period needed to
partition and sell.

Then, find a value in-between FIRST and SECOND, based on an expert
opinion on the likely need of a partition (in the case, that was
estimated at 10% likelihood of need for partition).

Andrew K. Ludwick, et ux., TC Memo 2010-104

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7. TAX COMPETITIVENESS SURVEY

A theme we have often mentioned is that capital flows to where it is
best treated. Obviously, the level of tax imposed on businesses is a
key element of how capital is treated in any given jurisdiction.

A 2010 KPMG guide analyzes the current tax competitiveness of 10 major
countries, and 41 major cities in those countries. Among those
countries, Mexico provides the best overall tax environment, with
Canada following closely in second place. Japan and France find
themselves in the highest tax positions at number 9 and 10
respectively. The table published in the report can be viewed at:
http://tinyurl.com/28r2mmh (the first table).

Note that the tax competitiveness analysis also includes a currency
factor so that the results are not entirely based purely on tax
issues.

A listing of the top 10 major cities in the subject jurisdictions can
be viewed at http://tinyurl.com/28r2mmh (the second table).
Interestingly, Vancouver has a better tax environment than two Mexican
cities, even though Mexico as a country has an overall better tax
environment than Canada.

The entire KPMG report can be viewed at http://tinyurl.com/25hdn84.

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8. ABOUT OUR FIRM

Our firm seeks to protect and enhance the individual, family and
business wealth of our clients in the following principal practice
areas: Planning to Minimize Taxes (U.S. & International) • Probate &
Trust Litigation • Estate Planning, Charitable, Marital & Succession
Planning • Business Structuring & Transactions • Trusts & Estates
Administration • Tax Controversies • Creditor Protection.

Please visit our website at http://www.floridatax.com for information
about the firm, our attorneys, articles from recent monthly
newsletters, interesting articles and tax guides, and federal and
Florida tax rates and information. The firm and its attorneys have
been recognized in numerous peer rating guides, such as Best Lawyers,
Martindale-Hubbell, Chambers, Who's Who in American Law, Florida
Trend's Legal Elite, Superlawyers, and South Florida Legal Guide Top
Lawyers.

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DAILY TAX AND BUSINESS UPDATES AVAILABLE. View prior articles, updates
that we didn't have room for in this newsletter, or read the above
postings when they are first published, by visiting http://www.rubinontax.blogspot.com.

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The Usual Disclaimer: This newsletter summarizes for informational
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.

Boca Corporate Center
2101 Corporate Blvd., Suite 107
Boca Raton, Florida 33431
561.998.7847
www.floridatax.com