NOVEMBER 21, 2010 NEWSLETTER

[Gutter Chaves Josepher Rubin Forman Fleisher Law Firm]

November 21, 2010
An Electronic Newsletter of Gutter Chaves Josepher Rubin Forman
Fleisher P.A.
Charles (Chuck) Rubin, Editor/Author (except as otherwise noted) ©
2010

1. APPLICABLE FEDERAL RATES–DECEMBER 2010
2. TURBOTAX DEFENSE REJECTED
3. FATCA IS OVERKILL
4. YEAR-END GIFTING TRAPS
5. CAN SEPARATED SPOUSES HAVE TWO HOMESTEADS? [FLORIDA]
6. NO CHANGE IN 2011 ANNUAL EXCLUSION AMOUNT
7. 2011 INFLATION ADJUSTMENTS FOR INTERNATIONAL PROVISIONS
8. FIRM ANNOUNCEMENTS
9. ABOUT OUR FIRM

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1. APPLICABLE FEDERAL RATES–DECEMBER 2010

The applicable federal rates for December 2010 and the preceding five
months can be viewed at http://tinyurl.com/2dtebxo.

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2. TURBOTAX DEFENSE REJECTED

Mr. and Mrs. Au erroneously deducted gambling losses to offset other
income, in violation of Code §165(d). Code §165(d) only allows
gambling losses to be deducted to the extent of gambling winnings.

The IRS sought to impose the 20% accuracy-related penalty under Code
§6662 for the understatement of tax. The taxpayers objected, claiming
that they deducted the losses only because their tax preparation
software allowed them to do it – thus, they had reasonable cause which
is an exception to the 20% penalty.

The Tax Court rejected the reasonable cause claim. This is not the
first time it has done so. See, for example, Parker v. Comm., T.C.
Memo 2010-78 (June 21, 2010). That case involved the TurboTax tax
preparation software, and this defense is often referred to as the
“TurboTax Defense.”

In the Au’s case, the Court found that the taxpayers did not provide
evidence of a mistake in the software instructions, nor of a thorough
effort by the taxpayers to determine their correct tax liability. This
seemingly leaves the door open to the successful use of the TurboTax
Defense if a taxpayer can actually prove up a mistake in tax
preparation software or its instructions.

To be fair (to TurboTax), the opinion did not indicate whether the
software used was TurboTax or some other company’s software. I am sure
that TurboTax does not appreciate the colloquial use of the term
“TurboTax Defense” since it implies that their tax preparation
software makes mistakes. Perhaps they may take some comfort in the
credo that there is no such thing as bad publicity, or does that only
apply to celebrities?

Au v. Commissioner, T.C. Memo. 2010-247

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3. FATCA IS OVERKILL

There are a lot of people in Washington D.C. that believe there are
massive numbers of U.S. taxpayers who are avoiding U.S income taxes
through offshore accounts and entities. To attack this avoidance, as
part of the Hiring Incentives to Restore Employment Act of 2010 (HIRE
Act, P.L. 111-147, 3/18/2010) the Foreign Account Tax Compliance Act
(FATCA) installed a new withholding tax and reporting regime on
various payments to offshore entities. In October, the IRS issued
Notice 2010-60 to provide some guidance on how the new provisions will
apply (the new provisions commence operation in 2013).

The new provisions and the IRS’ planned implementation rules boarder
on the incomprehensible. They are the height of “bureacracyspeak.”
Rules exist, subject to exceptions, which are themselves subject to
additional exceptions. The rules contain definitions, which to
determine their application, require the application of other
definitions. Payors and offshore financial institutions have to run
through a gauntlet of determinations regarding the status of accounts,
payees, and various categories of taxpayers.

Those seeking to apply the rules will have to master the following new
terms and definitions:

-Financial Account. Code §1471(d)(2).
-Financial Institution (FI). Code §1471(d)(5).
-Foreign Financial Institution (FFI). Code §1471(d)(4).
-Non-Financial Foreign Entity (NFFE).
-Recalcitrant Account Holder. Code §1471(d)(6).
-Specified United States Person (Code §1473(3)).
-Substantial United States Owner. (Section 1473(2))
-United States Account. Code §1471(d)(1).
-United States Owned Foreign Entity. Code §1471(d)(3).
-Withholdable Payment (Code §1473(1)):
-Withholding Agent (Code §1473(4).

A payor of a payment that may be subject to withholding will have to
make determinations place the payee and/or the payment into one of the
following 9 categories:

- U.S. Entity Payee (no withholding).
- Participating FFI (no withholding).
- Code §1471(f) entity (no withholding).
- Deemed compliant FFI (no withholding & will not be a NFFE).
- Nonparticipating FFI (withholding).
- NFFE Payee.
- Excepted NFFE (no withholding).
- Code §1472(c)(2) low risk entity (no withholding).
- Other NFFE (withholding).

Undoubtably, there will be a number of offshore entities that
legitimately invest in the U.S. that will say to heck with this, and
cease to invest in the U.S. or in its securities markets, rather than
attempt to comply with this monster or be burdened by its withholding
taxes. Yet there has been hardly a mention in the financial press of
the potential deleterious effects of these new provisions – both as to
compliance costs and the loss of capital investment in the U.S. Ah,
for the good old days when Congress considered the impact of its
legislation on the U.S. economy.

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4. YEAR-END GIFTING TRAPS

The end of 2010 brings unique opportunities and problems relating to
gifting. There is a strong interest in making gifts in 2010 since the
maximum federal gift tax rate is 35%, and generation-skipping taxes do
not apply. Absent a change in the law, come January 1, 2011 the
maximum federal gift tax rate will increase to 55%, and generation-
skipping taxes (at 55%) are again in effect.

Therefore, in many circumstances it may make sense to make a gift in
2010 to take advantage of the lower rate. However, there are some
important considerations in undertaking such planning.

First, in many circumstances it is desirable to delay the gifts until
as close as possible to (but before) January 1, 2011. This is because
if the transferor dies in 2010 there will be no estate tax. Therefore,
death allows for a tax-free transfer (if the gift recipient would also
be the recipient at the transferor’s death), while a taxable gift
incurs up to a 35% gift tax. To avoid an unnecessary gift tax, the
gift should be delayed to as close as possible to the end of the year
to avoid the situation of the gift being made and then the transferor
dying in 2010. Also, deferring the gift will allow for consideration
of any changes that may occur in the law prior to January 1, 2011 that
may impact on the tax planning.

Second, if the gift involves a transfer to a trust, there are some
uncertainties regarding the application of the generation-skipping tax
in future years. More particularly, if the gift in 2010 is effectively
a "direct skip" because it is a transfer to a trust for which all of
the beneficiaries are skip beneficiaries (i.e., they are all two or
more generations removed from the transferor), future distributions
from that skip trust to skip beneficiaries may still incur generation-
skipping tax. In normal circumstances, such a direct skip funding
would change the generation levels for a generation-skipping trust.
That is, if grandfather made a gift to a generation-skipping trust, as
a direct skip, future distributions to grandchildren from the trust
(but not great grandchildren or more remote descendents) will not be
subject to generation-skipping tax. However, since generation-skipping
taxes do not apply in 2010, it is unknown if this generation exemption
will apply to post-2010 distributions to a grandchild from such a
trust that is funded in 2010.

Further, if the transferor to a trust involved a transferor with
unused generation-skipping tax exemption, there is a fair amount of
uncertainty how or if to apply that exemption to the trust for
purposes of computing the inclusion ratio and applicable generation-
skipping taxes for future distributions out of that trust.

Third, the common understanding is that the maximum gift tax rate in
2010 is 35%. This is correct, but there are two important
considerations to paying gift tax in 2010. Accelerating transfer taxes
to 2010 means you are paying taxes sooner than you might otherwise.
This deprives the transferor and his family unit from the ability to
invest and earn from such transfer taxes. It is a maxim of tax
planning that, all other things being equal, it is better to pay a tax
tomorrow than today from a financial standpoint. Also, if the
transferor dies within three years, estate taxes will be payable on
the gift tax amount paid to the IRS. Since the maximum estate tax rate
is 55% starting in 2011, the combined 35% gift tax rate and a 55%
estate tax rate on gift taxes paid can result in a combined maximum
rate of approximately 54%, which is barely better than the maximum 55%
rate which would apply 2011 and beyond on gifts.

Therefore, it is advisable to consider making gifts in 2010, but the
above considerations, among others, need to enter into the analysis.

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5. CAN SEPARATED SPOUSES HAVE TWO HOMESTEADS? [FLORIDA]

In a recent Florida case, a separated husband and wife each had their
own homesteads (although the wife’s was situated in New York). The
local property appraiser denied granting a homestead exemption to the
husband for his Florida residence.

CONSTITUTIONAL PROVISIONS. Article VII, Section 6(a) of the Florida
Constitution provides that a homestead exemption extends to “[e]very
person who has the legal or equitable title to real estate and
maintains thereon the permanent residence of the owner, or another
legally or naturally dependent upon the owner.” However, section 6(b)
directs that “[n]ot more than one exemption shall be allowed any
individual or family unit or with respect to any residential
unit” (emphasis added). There is no constitutional or statutory
definition of the term “family unit” nor is there case law
interpreting the term in context of the tax exemption.

REGULATORY RULE. However, this a regulatory provision on the issue.
Florida Administrative Code Rule 12D-7.007(7), provides as follows:
“If it is determined by the property appraiser that separate permanent
residences and separate “family units” have been established by the
husband and wife, and they are otherwise qualified, each may be
granted homestead exemption from ad valorem taxation under Article
VII, Section 6, 1968 State Constitution. The fact that both residences
may be owned by both husband and wife as tenants by the entireties
will not defeat the grant of homestead ad valorem tax exemption to the
permanent residence of each.”

There is also case law that recognizes separate homestead exemptions
for creditor protection purposes under similar facts.

The property appraiser argued that the application of the FAC rule
would make his job in reviewing homestead exemptions virtually
administratively unworkable, because no property appraiser has the
staff or resources to verify whether a married couple is, in fact,
maintaining two separate permanent residences and family units.

The court was not impressed. It held that in circumstances when a
husband and wife have established two separate permanent residences in
good faith and have no financial connection with and do not provide
benefits, income, or support to each other, each may be granted a
homestead exemption if they otherwise qualify.

Wells v. Haldeos, 2D09-4250, 2010 WL 4137581 (Fla. Dist. Ct. App. Oct.
22, 2010)

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6. NO CHANGE IN 2011 ANNUAL EXCLUSION AMOUNT

While we are on the subject of 2011 inflation adjustments, due to a
lack of significant inflation in 2010 the annual exclusion amount for
gifts for federal gift taxes will remain at $13,000. This is the
amount that a donor can gift to any given recipient in a calendar year
that is not treated as a taxable gift.

The current official rate of inflation is in the neighborhood of 2-3%.
If that doesn’t square with your perception of inflation and rising
prices, don’t judge yourself too harshly. Go ahead and visit the
charts at www.shadowstats.com/alternate_data/inflation-charts. This
website compiles its own inflation statistics, inlarge part by
ignoring changes made by the government in the CPI rules that now act
to depress the “official” rate of inflation. According to Shadowstats,
inflation is currently at around 8%.

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7. 2011 INFLATION ADJUSTMENTS FOR INTERNATIONAL PROVISIONS

The IRS has announced the following 2011 inflation adjustment amounts
that relate to international issues:

1. EXPATRIATION. An individual with “average annual net income tax” of
more than $147,000 for the five taxable years ending before the date
of the loss of United States citizenship under §877(a)(2)(A) is a
covered expatriate for purposes of §877A(g)(1). Also, for taxable
years beginning in 2011, the amount that would be includible in the
gross income of a covered expatriate by reason of §877A(a)(1) is
reduced (but not below zero) by $636,000.

2. FOREIGN EARNED INCOME EXCLUSION. The foreign earned income
exclusion amount under §911(b)(2)(D)(i) is $92,900.

3. ANNUAL EXCLUSION GIFTS TO NONCITIZEN SPOUSES. The first $136,000 of
gifts to a spouse who is not a citizen of the United States (other
than gifts of future interests in property) are not included in the
total amount of taxable gifts under §§2503 and 2523(i)(2) made during
that year.

4. NOTICE OF LARGE GIFTS RECEIVED FROM FOREIGN PERSONS. Recipients of
gifts from certain foreign persons may be required to report these
gifts under §6039F if the aggregate value of gifts received in a
taxable year exceeds $14,375.

5. TAX ON ARROW SHAFTS. The tax imposed under §4161(b)(2)(A) on the
first sale by the manufacturer, producer, or importer of any shaft of
a type used in the manufacture of certain arrows is $0.45 per shaft.

Okay, the last one has nothing to do with international taxes – it is
in here just to see if you are paying attention. Did you know there
was a special tax on “arrow shafts?” No, I didn’t think so. but then
again, neither did I until about five minutes ago.

Rev.Proc. 2010-40

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8. FIRM ANNOUNCEMENTS

Charles (Chuck) Rubin gave a presentation at the FICPA 2010 Florida
Institute on Federal Taxation Conference in Orlando, Florida on
various topics relating to U.S. taxation of foreign trusts, entitled
“Foreign Trust, Dancing Through the Minefield.”

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9. 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 U.S. News &
World Report law firm
rankings, 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