MARCH 13, 2011 UPDATE

[Gutter Chaves Josepher Rubin Forman Fleisher Law Firm]

March 13, 2011
An Electronic Newsletter of Gutter Chaves Josepher Rubin Forman
Fleisher P.A.
Charles (Chuck) Rubin, Editor/Author (except as otherwise noted) ©
2011

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CONTENTS:

1.IRS WILL NOT EXTEND SECTION 118 CAPITAL CONTRIBUTION CONCEPTS TO
NONCORPORATE ENTITIES

2. DYNASTY TRUSTS IN THE CROSS-HAIRS

3. FINCEN FINALIZES FBAR REPORTING REGULATIONS

4. COURT HAS NO MERCY FOR BOTCHED ESTATE TAX PAYMENT EXTENSION

5. INDIRECT LOAN DOESN’T AVOID IRA LIMITATIONS

6. APPLICABLE FEDERAL RATES–MARCH 2011

7. IRS RESOLVES (SOMEWHAT) THE FILING DEADLINE OF THE ELECTION OUT OF
FEDERAL ESTATE TAX FOR 2010 DECEDENTS

8. FIRM ANNOUNCEMENTS

9. ABOUT OUR FIRM

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1.IRS WILL NOT EXTEND SECTION 118 CAPITAL CONTRIBUTION CONCEPTS TO
NONCORPORATE ENTITIES

Gross income generally includes all income from whatever source
derived. At times, entities may receive amounts from nonowners that
enhance its capital. For example, local government or groups may make
contributions to encourage an entity to set up or expand business in a
locality. Are such transfers gross income to the entity?

Code §108 provides that in “the case of a corporation, gross income
does not include any contribution to the capital of the taxpayer.”
Thus, such capital contributions are not gross income to a
corporation.

Contributions to noncorporate entities, like partnerships or LLC’s,
are not expressly covered by Code §118. Outside of the statute, there
are common law cases that provide situations when a capital
contribution is not taxable. For example, in Edwards v. Cuba Railroad,
5 AFTR 5398 (S.Ct. 1925), third party contributions to capital of a
corporation were not considered income.

This would lead one to believe that in the appropriate circumstances,
similar contributions to capital by nonowners in noncorporate entities
should not be taxable. However, IRS Appeals, in an Appeals Technical
Guidance Program Settlement guidelines manual effective on March 2,
2011, has indicated that Code §118 exclusion concepts should not be
applied to noncorporate entities.

There are several justifications given for this position. First, it is
asserted that the common law rules were replaced by Code §118, and
thus the exclusion applies only so far as Code §118 goes. Second,
expanded definitions of gross income have effectively voided prior
case law precedent of exclusion, such as in Cuba Railroad. Third, the
IRS indicated that it is a taxpayer choice as to what form of entity
to operate under, and they should be bound by the particular tax
provisions that relate to the chosen entity.

Such positions are not law but are only the IRS’ opinion in regard to
analyzing its litigation strategy. Given the prior precedent, one can
expect some taxpayers to challenge these positions in court even the
the manual indicates that the chances of taxpayer success are “remote”
and the government’s hazards of litigation are de minimis.

Appeals Technical Guidance Program Settlement, March 2, 2011

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2. DYNASTY TRUSTS IN THE CROSS-HAIRS

A dynasty trust is a trust that provides for an existence that may
span many generations. Once upon a time, the rule against perpetuities
limited the term of a trust to 2 or 3 generations at most. Now, many
states have no limits on the term of a trust, or have very long limits
(such as Florida). For transfer tax planning purposes, if the trust is
exempt from generation skipping tax by reason of the allocation of the
grantor’s GST exemption, the trust assets can be held to benefit many
generations without being subject to estate or generation skipping
taxes as each generation dies off and new beneficiaries arise.

President Obama’s 2012 budget includes a provision that would limit
the GST exemption benefits to a maximum of 90 years. 90 years is still
a long time to be exempt from transfer taxes, but it still is a lot
shorter than “forever.”

The proposal does not apply to existing trusts – that’s a good thing.
Further, with the House of Representatives in the control of the
Republicans, it is unlikely that this provision will make it into law
in the near future.

However, like a bad penny, once these type of proposals are out there,
they tend to show up again and again. This doesn’t mean it will ever
pass - just that it will be hanging out there like the Sword of
Damocles waiting for the winds of political fortune to shift so as to
improve its chances of passage.

Just another reason to giving strong consideration to making gifts
during 2011 and 2012 under the favorable gift-giving transfer tax
environment.

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3. FINCEN FINALIZES FBAR REPORTING REGULATIONS

FinCEN has issued final regulations addressing various FBAR reporting
issues. These rules are effective as of March 28, 2011 for reported
due by June 30, 2011 for 2010 years and thereafter.

The new regulations do not address all reporting issues, but they do
provide a fair amount of clarification. Per my initial reading of the
regulations and the issued comments and explanations, some key points
include:

--The use of IRC residency test for U.S. residents subject to
reporting has been adopted.

--Clarification has been provided that the U.S. status of entities for
reporting purposes is determined by where they are formed.

--Signature authority over an account that triggers reporting now
includes ability to control disposition of assets by non-written
communication, not just written communications.

--Officers or employees who file an FBAR because of authority over
accounts of their employers are not expected to personally maintain
records of the accounts.

--Omnibus accounts with U.S. financial institutions that hold assets
thrugh a global custodian are generally not reported, so long as the
u.s. person cannot directly access the foreign holdings maintained at
the foreign institution.

--Domestic trusts with foreign accounts must file FBARs - the test is
not the §7701(a)(3) definition of a domestic trust, but whether the
trust has ben created, organized or formed under the laws of the U.S.

--Domestic corporations do not include Section 897(i) electing
corporations, per the focus on jurisdiction of formation and not tax
elections to be treated as domestic entities.

--There is no mention of foreign persons doing business in the U.S. as
persons that must file, notwithstanding prior proposals on that score.

--"Bank accounts" include certificate of deposit and other time
deposits.

--Life insurance and annuities are "accounts" but only if they have a
cash value. Presumably these rules should not capture term policies,
but that is not 100% clear, unless it is established that unearned
premium is not cash value.

--Clarifies that determining whether a trust is a grantor trust for
purposes of reporting by a U.S. grantor occurs under Internal Revenue
Code rules.

--Fully discretionary trust beneficiaries do not have a "present
income interest" that will subject them to reporting. Nor do remainder
beneficiaries by reason of that status alone.

--The former trust protector provision that could have given rise to
reporting has been removed, but it may still have application under
the anti-abuse rule when appropriate.

--Anti-avoidance rules have been added. A United States person that
causes an entity, including but not limited to a corporation,
partnership, or trust, to be created for a purpose of evading this
section shall have a financial interest in any bank, securities, or
other financial account in a foreign country for which the entity is
the owner of record or holder of legal title.

--Relief for beneficiaries is granted when the trust already reports.

--If someone has more than 24 accounts to report, they need only
provide certain basic information.

--Consolidated reports allowed if domestic entity own more than 50% of
another reporting entity.

Of course, the 2009 HIRE Act will also require similar reporting Code
§6038D reporting of foreign financial assets. Why Congress could not
direct FinCEN and the IRS to come up with one filing and one set of
rules for foreign financial asset reporting borders on the ridiculous
– taxpayers now will have to struggle with two sets of complex and
overlapping reporting requirements.

Amendments to the Bank Secrecy Act Regulations – Reports of Foreign
Financial Accounts, Federal Register, Vol. 76, No. 37, p. 10234

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4. COURT HAS NO MERCY FOR BOTCHED ESTATE TAX PAYMENT EXTENSION

In a recent appellate case, the 9th Circuit Court of Appeals upheld
the trial court in applying failure to pay penalties for late estate
taxes, even though a request for extension of payment could be
inferred from an extension request filed by the taxpayer.

FACTS. An estate executor hired an accountant to prepare a federal
estate tax return. Due to the inability to obtain the release of
liquid funds in a timely manner to pay the tax, the accountant
submitted a Form 4768, Application for Extension of Time to File a
Return and/or Pay U.S. Estate (and Generation-Skipping Transfer
Taxes). This Form allows for an automatic extension of 6 months TO
FILE, and the taxpayer can further use it to request an extension of
time TO PAY of up to 12 months. The Form submitted to the IRS did not
complete Part III of the Form which is entitled 'Extension of Time to
Pay." It appears that the estate did not check any of the boxes in
Part III, and the field labeled "Enter extension date requested" was
left blank. However, the accountant did include a letter with the Form
indicating that an extension of time to pay was needed and providing
the reason, but again, no specific date for the extension to run to
was included. Interestingly, the request estimated the tax due at
$131,327 - when the return was ultimately filed the actual tax due was
$1,684,408. Due to late payment, a penalty of $58,954 was imposed,
along with interest of $69,801. The taxpayer raised several reasons
why the penalty should be abated - principally the doctrine of
substantial compliance, collateral estoppel, and reasonable cause. The
court found that none of these reasons justified removing the penalty.

ANALYSIS. The estate put forth several interesting reasons why the
penalty should be abated. Unfortunately, none of them carried the day.

A. DOCTRINE OF SUBSTANTIAL COMPLIANCE. The doctrine of substantial
compliance is an equitable doctrine designed to avoid hardship in
cases when a party has done all that can be reasonable expected to
meet statutory or regulatory requirements. The estate argued that it
had substantially complied with the regulations governing payment
extension requests by reason of its partially complete Form and
accompanying letter.

In regard to statutory prerequisites, the doctrine cannot be used to
defeat the policies of the underlying statutory provisions. Sawyer v.
Sonoma County, 719 F2d 1001, 1008 (9th Cir. 1983). According to the
appellate court, the regulation governing payment extensions is
designed to provide the IRS with the information necessary to
determine whether an extension of time to pay is warranted and, if so,
to determine a reasonable length for that extension. By failing to
include a period for the extension request, the court found that use
of the doctrine would defeat these policies and thus the doctrine
could not be applied.

B. ESTOPPEL. The estate also argued that the IRS had an obligation to
inform it that the payment extension was request was deficient and to
provide an opportunity to amend it, or mitigate the penalty
(presumably by prompt payment). By not doing so, the IRS was equitably
estopped from asserting the penalty.

However, to assert equitable estoppel successfully, the taxpayer would
need to show the government engaged in affirmative misconduct beyond
mere negligence (among other required elements). The Court noted that
the estate could not show any affirmative misconduct by the IRS, such
as a deliberate lie or a pattern of false promises. Indeed, the Court
noted there was no IRS conduct at all – simply inaction. Thus, that
argument was rejected.

C. REASONABLE CAUSE. Code §6651(a)(2) provides that a late payment
penalty will not apply if the failure to pay is “due to reasonable
cause and not due to willful neglect.” The estate argued that it acted
reasonably because it relied on an accountant to prepare and submit
the extension request.

The appellate court noted that it found no cases addressing whether a
taxpayer’s reliance on an accountant to obtain an extension of time to
pay taxed owed constitutes reasonable cause under Code §6651(a)(2).
However, the court noted that in United States v. Boyle, 469 US 241
(1985), the Supreme court denied a reasonable cause defense for
reliance on an attorney to timely file an estate tax return when the
return was filed late. The appellate court found “no reason to
distinguish between reasonable cause for a failure to timely file an
estate tax return and reasonable cause for a failure to timely pay an
estate tax” and thus disallowed the reasonable cause claim.

COMMENTS/LESSONS

A. Based on this opinion, arguments of reliance on counsel or an
accountant to abate a late penalty will be as difficult to prevail
upon as a penalty for late filing. Of course, a negligent attorney or
the accountant may have liability to the taxpayer for the penalty –
but that obviously is not as favorable as to both the taxpayer and the
advisors escaping without liability.

B. If you are submitting a Form 4768, fill in all the requisite
fields! If an extension for time to pay is included, at a minimum make
absolutely sure that a time period is filled in.

C. One can wonder whether both the IRS and the courts came down on so
hard on the taxpayer here due to the actual tax due turning out to be
over 12 times the size of the estimate of the tax included on the
extension form. We will never know, but it is eye-raising and thus may
have had some impact on the courts and the IRS. Since interest on an
allowed late payment will be based on the actual tax due and not the
estimate used on an extension request, there usually is no upside to
being stingy with the estimate of tax that will eventually be due
other than the possibility that the IRS will be more likely to grant
an extension when the estimated tax amount is small.

Baccei v. U.S., 107 AFTR2d 2011-xxxx (CA9)

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5. INDIRECT LOAN DOESN’T AVOID IRA LIMITATIONS

Generally, an IRA beneficiary cannot enter into a loan transaction
with the IRA. Per Code §4975(c)(1)(B), the lending of money between a
plan and a disqualified person is a prohibited transaction. For this
purpose, a “plan” includes an IRA. Code §4975(e)(1).

What if the IRA purchases a preexisting note and mortgage from a bank,
on property owned by the beneficiary and other disqualified persons
(the beneficiary’s spouse and a trust)? Is this a prohibited loan
transaction?

According to the Department of Labor it is. The DOL has recently
advised that the use of IRA funds to acquire such note and mortgage is
as much a lending transaction as a direct loan to the beneficiary.
Clearly, when the dust settles, the beneficiary will owe the IRA on
the note (instead of the bank). Nothing that surprising here – just a
confirmation that the IRA and its beneficiary cannot do indirectly
what they cannot do directly. Indeed, the statute itself specifically
targets both direct and indirect credit transactions as problematic.

As if this wasn’t enough to dissuade the beneficiary from proceeding,
the DOL further opined that the transaction would also be a prohibited
transaction under Code §4975(c)(1)(D), which prohibits to a
disqualified person the use or benefit of the assets of the plan.

ERISA Opinion Letter No. 2011-04A, 2011

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6. APPLICABLE FEDERAL RATES–MARCH 2011

Please go to http://tinyurl.com/6ht4aqg for a summary chart on the
march 2011 applicable federal rates.

COMMENT: Is the time for low-rate planning running out?

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7. IRS RESOLVES (SOMEWHAT) THE FILING DEADLINE OF THE ELECTION OUT OF
FEDERAL ESTATE TAX FOR 2010 DECEDENTS

Prior to the enactment of the Tax Relief, Unemployment Insurance
Reauthorization, and Job Creation Act of 2010 ("TRA 2010"), the
estates of persons dying in 2010 were exempted from federal estate
tax, and were subject to a restrictive basis step-up regime. TRA 2010
reversed this and reimposed federal estate taxes for such decedents,
but Section 301(c) of the Act allows estates of such persons to elect
out of federal estate tax with the application of the original
restrictive basis step-up regime.

The deadline for making such an election has been subject to some head
scratching by practitioners. Section 301(c) of the Act is fairly clear
that persons making this election are not required to file a federal
estate tax return or pay federal estate tax until 9 months after the
enactment date of the Act (effectively, until September 17, 2011, but
since that is a Saturday, then September 19, 2011). What is unclear is
when the election out of estate tax needs to be filed.

Under the law in effect prior to TRA 2010, an estate of a 2010
decedent had until the due date of the decedent's income tax return
(usually, April 17, 2011), to make basis allocations required or
permitted under the restrictive basis step-up regime. The IRS had gone
so far as to prepare and release a draft Form 8939 for such purposes
prior to TRA 2010. Thus, there has been concern that this April 17,
2011 deadline may apply to the new election out of estate tax, or
perhaps even a deadline relating to the normal 9 month from death
deadline for filing a Form 706.

The language of Section 301(c) of the Act provides that the election
out of estate tax "shall be made at such time and in such manner as
the Secretary of the Treasury or the Secretary's delegate shall
provide." No such pronouncements have yet been made (subject to the
website information discussed below). Some practitioners have
interpreted Section 301(d)(A) of the Act, by its reference to Code
Section 6018, as imposing the September 19, 2011 (9 months from date
of enactment) deadline for the election out of estate tax. This is
because under Section 6018 as applicable to persons electing out of
estate tax (that is, applying Section 6018 as it applied to 2010
decedents before the changes of the TRA 2010), Section 6018 provided
for the reporting and allocation of basis under the restrictive basis
step-up regime. Since Section 6018 thus applies to the Form 8939
reporting, and since the election out of estate tax is assumed to be
made through the filing of a Form 8939, the theory is that the
election out of estate tax is thus not due until September 19, 2011.
This may be a fair interpretation, but it is not without doubt. For
example, pre-TRA 2010 Section 6018 specifically only related to
reporting regarding 2010 decedents - it did not address any specific
election out of estate tax (since of course, no such election existed
prior to TRA 2010). Thus, the reference to it in Act Section 301(d)(1)
(A) may not be sufficient to trigger the September 19, 2011 date of
election out of estate tax (as opposed to the deadline for information
reporting regarding basis and adjustments to basis that will arise out
of such an election out of estate tax).

The IRS has now published additional information on its website that
somewhat resolves these issues. This information is published at
http://www.irs.gov/pub/irs-pdf/f8939.pdf and was posted on February
16, 2011. Some things are fairly clear from the website information,
and some things are not.

As far as what is clear:

a. The Form 8939 for allocating basis increases is not yet finalized,
nor are the instructions for the Form or Publication 4895, Tax
Treatment of Property Acquired From a Decedent Dying in 2010 which
will presumably also address some of these issues.

b. The due date of the Form 8939 will be at least 90 days after the
Form 8939 is finalized.

c. Instructions for how to elect to have the modified carryover basis
rules apply will be included with the final Form 8939 and Publication
4895.

Some reasonable extrapolations from those items are:

a. The election out of estate tax will probably be made on or by
reason of filing the Form 8939. However, it is possible that some
other election method or form could be required, since the website
information provides only that instructions for the Section 301(c)
election will be included on the Form, not that the election itself
would be on the Form. That is, the Form may still be limited to
reporting of information and basis, with the election itself being
made in some other manner.

b. The April 17, 2011 filing deadline for election out of estate tax
should be a dead issue. Since the due date of the Form 8939 is at
least 90 days after the Form 8939 is finalized, and we are closer than
90 days to April 17, the April 17 deadline should not apply. One could
argue that if the election out of estate tax is to be done separately
from the Form 8939 reporting then the election out and the Form 8939
may have different filing deadlines and thus this 90 day minimum may
not apply to the election itself but only to the Form 8939 filing -
but this appears unlikely.

c. For the same reason, the earliest deadline for electing out of
estate tax should be 90 days from the date the Form 8939 is finalized.

One thing that the website information does not resolve is whether the
election out of estate tax deadline is being interpreted by the IRS as
not arising under TRA 2010 in any event before September 19, 2011.
Thus, for example, the language of the website information does not
appear to preclude an IRS interpretation that if it finalizes the Form
8939 on April 1, 2011 that the filing deadline could be set on or
around July 1, 2011 (i.e., 90 days after finalization). Some further
guidance or refinement of the website information in this regard would
be helpful to all - otherwise, practitioners will need to watch for
the final Form 8939 to determine if a filing deadline prior to
September 19 may still be imposed.

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8. FIRM ANNOUNCEMENTS

Our attorneys are available for speaking engagements at Bar,
accountant, and other professional organization meetings and seminars
(schedules permitting). Feel free to contact us with any requests.

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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