SEPTEMBER 26, 2010 UPDATE

[Gutter Chaves Josepher Rubin Forman Fleisher Law Firm]

September 26, 2010
An Electronic Newsletter of Gutter Chaves Josepher Rubin Forman
Fleisher P.A.
Charles (Chuck) Rubin, Editor/Author (except as otherwise noted) ©
2010

******************************

CONTENTS OF THIS NEWSLETTER:

1. SUMMARY OF KEY PROVISIONS OF SMALL BUSINESS JOBS ACT OF 2010
2. SEPTEMBER 20 IS NOT A FREE PASS TO REFORMING DESIGNATED BENEFICIARY
TRUSTS
3. GRAEGIN LOANS – DO THE MATH!
4. BRAGGING RIGHTS
5. 2011 TAX HIKES LOOM
6. PRENEED GUARDIAN DECLARATION HOLDS UP [FLORIDA]
7. CAN A DISCLAIMER BE RESCINDED?
8. AN ELECTRONIC MINISTRY IS NOT A CHURCH
9. APPLICABLE FEDERAL RATES – OCTOBER 2010
10. ABOUT OUR FIRM

******************************

1. SUMMARY OF KEY PROVISIONS OF SMALL BUSINESS JOBS ACT OF 2010

Congress has now passed the Small Business Jobs Act of 2010. The Act
provides some welcome tax relief to business that hopefully will spur
growth and job creation. However, Congress was stingy, with most of
the tax benefits expiring after 2011. Many of you may recall, even
though it was many years ago, when if a tax benefit was a good idea,
it was enacted permanently because it was a good idea, and would not
expire after a few years. These days, tax legislation tends to make
increases in penalties and compliance obligations permanent, while tax
benefits and reductions are only temporary. If Congress was really
serious about these issues, it would make the changes on a permanent
basis (or at least as permanent as a law that could be changed at any
time in the future can be).

Below is a summary of the key new provisions.

I. Expensing

A. Increase of §179 annual expensing to $500,000 from $250,000
for 2010 and 2011

1. Increase threshold for beginning of phase-out to
$2,000,000

2. Will allow expensing of some types of depreciable real
property

3. Reducing back to $25,000 in 2012

B. Extension of 50% bonus first year depreciation for qualified
real property

C. First year depreciation cap for autos and trucks increased by
$8,000 for 2010

D. Deduction for start-up expenses increased to $10,000 from
$5,000 for 2010 and 2011

II. Credits

A. Eligible small business credits can be carried back 5 years
instead of one year, and extension of carryforward periods

III. Gain Exclusions

A. Gains from the disposition of qualified small business stock
can now be 100% excluded (up from 75%) and will not be an AMT tax
preference item for stock acquired before 2011

B. S Corporation built-in gains period reduced to 5 years for
2011

IV. Misc.

A. 2010 health insurance expenses are deductible in computing
self-employment tax

B. Substantiation requirements for cell phones and similar
equipment are elimianted by removing them from being "listed property"

C. Recipients of rental real estate income are deemed to be in a
trade or business for information reporting requirements (and thus
must report all expenditures of $600 or more)

D. Increased penalties for failure to file information returns

V. Retirement Plans

A. Roth options added to Section 457 plans

B. Retirement plan distributions may be rolled over to Roth IRA
accounts (other than periodic distributions, minimum required
distributions, and hardship distributions)

VI. International

A. Guaranty fees paid by a U.S. person are U.S. source income, as
well as fees paid by a foreign person if effectively connected with a
U.S. trade or business (overides Container Corp., 134 TC No. 5 (2010))

******************************

2. SEPTEMBER 20 IS NOT A FREE PASS TO REFORMING DESIGNATED BENEFICIARY
TRUSTS

In a recent Private Letter Ruling, the IRS addressed a trust
established by a decedent that was a beneficiary of the decedent's
IRA. It was clear from the trust instrument that the decedent desired
that the IRA payouts be based on the age of the designated beneficiary
so as to defer distributions and income taxes, pursuant to applicable
tax rules. However, the subject trust allowed for the appointment of a
charitable beneficiary, which power prevented there from being a
designated beneficiary that would allow for the "stretch" of the post-
death IRA payouts. To address this situation, a state court action was
filed and an order obtained that removed the problem power to appoint
a charitable beneficiary. The question before the IRS was whether this
state court reformation would be given retroactive effect so as to
allow for a designated beneficiary.

Generally speaking, state court reformation of dispositive instruments
will be respected by the IRS only if there is a specific tax statute
authorizing such reformation. There is no such specific statutory
authorization in regard to determining if there is a designated
beneficiary of an IRA trust. However, the beneficiaries of an IRA are
measured/determined on September 30 of the year following the death of
the decedent. This would imply that if a reformation is undertaken
prior to such September 30 date, such reformation should be given tax
effect. Indeed, this reasoning was followed in Private Letter Rulings
in the past that allowed qualification of a designated beneficiary
through state court reformation actions.

In this most recent ruling, the IRS has changed its analysis, and it
denied effective retroactive effect to the change to the trust. Thus,
the state court reformation was not effective to allow the subject
trust to have a designated beneficiary for IRA purposes.

It would appear that the IRS had legal wiggle room to provide a
favorable result for the trust, as evidenced by its prior rulings. It
will be interesting to see if the taxpayer under the subject ruling,
or some similarly situated taxpayer, litigates this issue in the hopes
that the court will adopt the IRS' earlier analysis of the issue.

PLR 201021038

******************************

3. GRAEGIN LOANS – DO THE MATH!

There is an often an estate tax advantage to an estate borrowing
funds, especially from related parties. If the estate is in a high
estate tax bracket, it can deduct the interest, and thus save estate
taxes. For example, if the estate is solidly in or above the 45% tax
bracket, then the estate tax savings are at least 45% of the interest
cost. The recipient will have to pay income taxes on the interest
income, but maximum income tax rates in this example would be higher
than the estate tax savings (except perhaps in some states with high
state income tax rates), so a net tax savings would result. If the
lender is a tax-exempt entity such as a family foundation, then the
income taxes are almost entirely eliminated, enhancing the overall tax
savings (even though the savings accrue for charitable purposes).

This is what the Estate of Henry Stick did – it borrowed funds from a
family foundation (well, in this case, the remainder beneficiary
actually did the borrowing). However, the estate failed to appreciate
the simple mathematics at work that address the estate tax deduction,
and thus lost its estate tax deduction for the interest paid when the
Tax Court reviewed the matter.

Treas. Regs. §20.2053-3(a) requires that estate tax deductions must be
actually and necessarily incurred, to be deducted. In the context of
interest expense for borrowings by the estate, the Tax Court looks to
see if the borrowing was needed by examining whether there are enough
liquid assets to pay the estate tax liability and other administrative
expenses. In the Stick Estate, the estate had approximately $1,953,617
in liquid assets. Putting together its administrative expenses and
federal and state estate taxes, these obligations totaled $1,723,799.
Thus, at least in the absence of other compelling circumstances, there
was no need for the estate to borrow funds. In a short and sweet
opinion, the Tax Court noted the excess of liquid assets over
obligations and denied the interest deduction for the loan taken.

Estate of Henry H. Stick, TC Memo 2010-192

******************************

4. BRAGGING RIGHTS

The inaugural edition of the U.S. News & World Report law firm
rankings came out this month. We are happy to note that our firm
received Tier 1 rankings in the Miami metropolitan area in the areas
of Tax Law and Estates and Trusts.

We also received a Tier 2 national ranking in Tax Law. In that regard,
almost all of the Tier 1 and Tier 2 rankings were given to law firms
ranging in size from 100+ to thousands of attorneys, and that at 9
lawyers we were the smallest firm to make it into those tiers – thus
validating our business model to deliver large firm quality services
in a small, boutique firm environment.

Thank you to all attorneys and clients who participated in the surveys
that allowed us to receive such favorable rankings.

******************************

5. 2011 TAX HIKES LOOM

If the expiration of the 2001 tax breaks are allowed to proceed as
planned, 2011 will see the highest tax hike in U.S. history.
Discussion is heating up regarding extending some or all of the
existing breaks, so perhaps not all of the changes will arrive in
2011. A table of many of looming changes is available at http://tinyurl.com/2bt4cep.

******************************

6. PRENEED GUARDIAN DECLARATION HOLDS UP [FLORIDA]

Florida, along with many other states, allows a competent individual
to prepare a written preneed guardian declaration that names a person
to serve as guardian for the declarant in the event of incapacity.
This is an important tool, allowing persons to name who shall be
responsible for their person and property in the event of incapacity,
and thus avoiding relatives, caretakers, or others who the declarant
does not want to serve from being named guardian. We all know people
that would not be good guardians, either because they lack the
requisite skills, are too self-centered, or that may act with bad
motives (for example, seeking to conserve assets which they may
inherit in the future instead of using such assets to support the
ward).

In the event of incapacity, what weight must the guardianship court
give to the preneed declaration? Fla. Stats. §744.3045 indicates that
the declaration is a rebuttable presumption that the preneed guardian
is entitled to serve. However, the court may disregard the declaration
if the preneed guardian is found to be unqualified to serve by the
court. Thus, if the named guardian is unfit, or unsuitable, or if a
conflict of interest exists between the guardian and the ward, the
court need not point the named person.

In a case arising in Miami-Dade County Circuit Court, the guardianship
court declined to follow a declarant’s naming of three persons to
serve as preneed guardian, and named one person only to serve as
guardian. The court did this based on representations that the
declaration required unanimous actions by the three appointed
guardians, and that this was not workable because the guardians
disagreed as to certain care-giving issues.

In an opinion that gives due recognition and respect to the
declaration, the Third DCA reversed the guardianship court and
required the appointment of all 3 named guardians. The appellate court
noted that the intent of the ward is the polestar that should guide
probate judges in the appointment of guardians, and that this was not
respected in this case.

There were a number of procedural problems with the guardianship
court’s order. First, the court never examined the declaration itself,
and the representation to the court that it required unanimous action
by the guardians was erroneous. Further, there was no finding by the
court that any of the named guardians was unqualified, unwilling, or
unable to serve as guardian.

Therefore, we don’t know if the court would have upheld the lower
court if in fact unanimous action was required. To avoid this issue
entirely, practitioners should give thought to avoiding a requirement
for unanimous action when multiple guardians are named (even the
appointment of 2 guardians has the risk of deadlock). Alternatively,
they could give final decision-making power to one of the named
guardians in the event of deadlock on any given issue.

It is always reassuring when the courts give due regard to statutory
presumptions, although it did take an appellate court reversal to
reach that result in this case (but again, in the guardianship court’s
defense, that was due in large part to a misrepresentation by one of
the attorneys before the court.

Acuna & Magill v. Dresner, 2010 wl 3025111 (3rd DCA 2010)

******************************

7. CAN A DISCLAIMER BE RESCINDED?

Craig and his sister were the two remaindermen that succeeded to his
parents’ property at the termination of 10 year QPRTs that the
parents set up. Craig wanted to transfer his remainder interest in the
property to his sister when the QPRTs terminated. His attorney told
him he could disclaim his QPRT interests, and that his interests would
pass to his sister without gift tax. Thus, he entered into disclaimers
to accomplish this.

Oops! After doing the disclaimers, he learned that the nine month
period for doing a qualified disclaimer for gift tax purposes ran from
the time of establishment of the QPRTs (well, actually from the time
when Craig became an adult after the QPRTs were established), and not
from the 10 year termination date of the QPRTs. Therefore, his
disclaimers were done too late. As nonqualified disclaimers, they
transferred his interests to his sister under state law, but resulted
in a taxable gift by him to his sister since they were not qualified
disclaimers under Code Section 2518. The IRS sought to impose gift
taxes.

That would seem to be the end of the story. However, resourceful Craig
learned that under applicable Massachusetts law, a written instrument
may be reformed or rescinded in equity on the grounds of mistake when
there is “full, clear, and decisive proof” of the mistake. Craig thus
brought an action to rescind the disclaimers.

While the action commenced in state court, it was eventually removed
to federal court. Applying Massachusetts law, the court allowed the
rescission.

Could it be that simple? Could a state law rescission of a transaction
eliminate the federal transfer tax consequences that arose on the
original transfer prior to its rescission? The IRS claimed that while
the rescission may be binding for state law purposes, it could not
undue the original gift tax consequences of the disclaimer transfer.

Clearly, the government has a valid concern that rescissions that
eliminate taxable gifts can be problematic, since there often will not
be an adverse party at the court proceeding that would inhibit
collusive agreed rescissions between the parties that are entered into
to avoid gift taxes. Indeed, there are a number of court decisions
that will disregard a rescission for these purposes, at least when the
government is not a party to the rescission proceedings.

Nonetheless, Craig was able to persuade the federal District Court
that under his facts, the taxable gift was eliminated. The key facts
that appear to have persuaded the Court were (a) the rescission action
was heard by a federal court, not a state court, and (b) the IRS was a
party to the action, thus eliminating the risk of collusion by the
private parties.

The case instructs us that if a taxable transfer was the result of a
transfer only undertaken by a mistaken belief that the transfer was
free of gift tax, and if state law allows for rescission due to
mistake, it may be possible to unwind the taxable transfer. However,
to accomplish this, it will likely be necessary to find a procedural
route that brings the IRS in as a party.

Breakiron v. Gudonis, 106 AFTR 2d 2010-XXXX (DC MA), 08/10/2010

******************************

8. AN ELECTRONIC MINISTRY IS NOT A CHURCH

Code Section 501(c)(3) organizations are generally exempt from federal
income taxes, and contributors may qualify for charitable deductions
for their contributions. Such organizations by default are typically
treated as "private foundations," but if qualified, they can achieve
non-private foundation status. Non-private foundation status is
preferable, because it avoids the potential application of various
excise taxes to the organization, and may allow for greater income tax
charitable contribution deductions for donors.

Beyond this private/non-private dichotomy, "churches" have further
advantages. First, a church escapes from private foundation status
without having to demonstrate public financial support, unlike most
other private charities. Further, churches are exempt from annual
information filings and exempt application procedures, and there are
restrictions on audits of churches.

Many religious organizations can qualify as Code Section 501(c)(3)
organizations due to their religious activities. However, not all
religious organizations are "churches" for purposes of the above rules
- only a smaller subset of such organizations will qualify as
churches.

The Internal Revenue Manual provides 14 criteria that will be examined
to determine if an organization is a church for these purposes. These
criteria are (1) a distinct legal existence, (2) a recognized creed
and form of worship, (3) a definite and distinct ecclesiastical
government, (4) a formal code of doctrine and discipline, (5) a
distinct religious history, (6) a membership not associated with any
other church or denomination, (7) an organization of ordained
ministers ministering to their congregations, (8) ordained ministers
selected after completing prescribed courses of study, (9) a
literature of its own, (10) established places of worship, (11)
regular congregations, (12) regular religious services, (13) Sunday
schools for religious instruction of the young, and (14) schools for
the preparation of ministers. The courts do not strictly apply this
14 criteria test, although they will often heavily consider these
factors. Instead, the courts often apply an "associational test."
Focusing on the association of congregants and believers, this test
examines whether there is a body of believers or communicants that
assembles regularly for communal worship.

In a recent case before the Court of Appeals for the Federal Circuit,
a religious organization challenged the IRS' rejection of its status
as a church, which rejection had been upheld by the Court of Federal
Claims. Among other arguments, the organization argued that its
"electronic ministry" qualified it as a church. The organization
asserted that its members regularly assembled to worship as a virtual
congregation by listening to sermons broadcast over the radio and the
Internet at set times.

The Appeals Court noted the overlap between the 14 criteria test and
the "associational test," and that to qualify as a church the
religious organization must create the opportunity for members to
develop a fellowship by worshiping together. Applying this test, the
court noted that listeners simultaneously receiving the organization's
message over the radio or the Internet did not mean that those members
associated with each other and worshiped communally. Further, a "call-
in" show that enabled individuals to call and interact with the
organization's clergy over the telephone, with such calls being
simultaneously broadcast, did not provide individual congregants with
the opportunity to interact an associate with each other and worship.

Thus, the Appeals Court refused to qualify the organization as a
church.

This should not mean that religious organizations that provide
electronic broadcast of their services cannot meet the definition of a
"church" for these purposes. However, it does suggest that such
organizations must conduct a material part of their activities through
in person, communal worshiping activities to qualify under the 14
criteria test or the "associational test."

Foundation of Human Understanding v. U.S., 106 AFTR 2d ¶2010-5204 (CA
Fed Cir 08/16/2010)
******************************

9. APPLICABLE FEDERAL RATES – OCTOBER 2010

For a table of rates, see http://tinyurl.com/23rlkqu.

******************************

10. 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.

******************************

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.

-----------------------------------------------
-----------------------------------------------
-----------------------------------------------

Having problems receiving this newsletter? Make sure that the E-mail
address "cru...@floridatax.com" is marked as a friend or otherwise set
to clear your spam filters! Subscribe and unsubscribe instructions
should be located at the end of this message - if not, send subscribe
and unsubscribe instructions to cru...@floridatax.com. To be properly
processed, unsubscribe instructions need to come from the applicable
email address or send instructions to cru...@floridatax.com with the
specific address being unsubscribed.

Feel free to forward this newsletter on to anyone who you think may be
interested.

-----------------------------------------------

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