DECEMBER 12, 2010 UPDATE

[Gutter Chaves Josepher Rubin Forman Fleisher Law Firm]

December 12, 2010
An Electronic Newsletter of Gutter Chaves Josepher Rubin Forman
Fleisher P.A.
Charles (Chuck) Rubin, Editor/Author (except as otherwise noted) ©
2010

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

CONTENTS:

1. CONTINUED AGRICULTURAL VALUATIONS WHILE HOLDING PROPERTY FOR SALE
[FLORIDA]
2. IS THE IRS IMPROPERLY EXAMINING THE RELIGIOUS AND POLITICAL
DOCTRINE OF EXEMPT ORGANIZATION APPLICANTS?
3. INNOCENT SPOUSE RELIEF GRANTED EVEN THOUGH WIFE KNEW TAXES MIGHT
NOT BE PAID
4. NO LOSSES TO ESTATE BENEFICIARIES WHEN THEY COULD RECEIVE NOTHING
5. OVERPAYMENT AND UNDERPAYMENT RATES–JANUARY 2011
6. BUSH TAX CUTS EXPIRATION UPDATE
7. FIRM ANNOUNCEMENTS
8. ABOUT OUR FIRM

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

1. CONTINUED AGRICULTURAL VALUATIONS WHILE HOLDING PROPERTY FOR SALE
[FLORIDA]

Owners of investment real property in Florida often rent out their
property to farmers - not so much for the rent but to obtain an
agricultural classification for ad valorem tax purposes. The
agricultural classification will typically result in much lower taxes.

Florida law now expressly provides that the agricultural
classification can continue even if the real property is listed for
sale. The Florida legislature had previously passed this law, but it
was vetoed by Governor Charlie Crist. The legislature voted to
override the veto and thus is now law (effective July 1, 2010).

The classification applies based on the use of the property on January
1 of the tax year. Thus, owners who put their property up for sale
during a period that includes January 1 can now squeeze out at least
one more year of lower ad valorem taxes.

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

2. IS THE IRS IMPROPERLY EXAMINING THE RELIGIOUS AND POLITICAL
DOCTRINE OF EXEMPT ORGANIZATION APPLICANTS?

The Internal Revenue Code allows nonprofit educational organizations
to be exempt from income tax under Code §501(c)(3). In making a
determination whether an organization is “educational,” the IRS will
determine whether an organization actually is engaged in educational
activities. While this is an appropriate line of inquiry, inquiries
into the substance and political correctness of the items that the
organization intends to teach should not be relevant.

According to pleadings filed in a civil action, Z Street is a
nonprofit organization which educates the public about Zionism, and
about the State of Israel and its battle with terror. As a nonprofit
educational organization, Z STREET has applied for certification that
donations made to it are charitable, and therefore exempt from federal
income tax, under Code §501(c)(3).

Z Street is contending that the IRS is asking improper questions and
unduly delaying its exempt organization application. As part of its
court filing, Z Street has indicated that an IRS agent has informed it
that the IRS is “carefully scrutinizing organizations that are in any
way connected with Israel,” and that there are such “cases… being sent
to a special unit in the D.C. office to determine whether the
organization’s activities contradict the Administration’s public
policies.”

If true, such inquiries by the IRS should not be permitted (as not
relevant to the “educational” aspects of the organization). Further,
it raises that the specter that the IRS may be denying exempt
organization status because an organization’s activities are not in
accord with the Administration’s policies – an improper, if not
unconstitutional, politicization of what should be a policy-neutral
exempt organization review.

To support its claim, Z Street has indicated that another Jewish
organization applicant has been asked questions such as (1) [d]oes
your organization support the existence of the land of Israel, and (2)
describe your organization’s religious belief system towards the land
of Israel.

It is true that an institution's purpose must not be so at odds with
the common community conscience as to undermine any public benefit
that might otherwise be conferred. Bob Jones Univ. v. U.S., 461 U.S.
574 (1983). In Bob Jones Univ., Code §501(c)(3) status was denied to a
school that imposed racial discrimination. However, in that case, the
U.S. Supreme Court noted that “[w]e are bound to approach these
questions with full awareness that determinations of public benefit
and public policy are sensitive matters with serious implications for
the institutions affected; a declaration that a given institution is
not “charitable” should be made only where there can be no doubt that
the activity involved is contrary to a fundamental public policy.”
Merely disagreeing with the Administration on foreign or religious
policy should not give rise to a clash with fundamental public policy
justifying denial of Code §501(c)(3) status.

Just because Z Street has made these factual allegations in its court
filings does not mean they are true. However, if they are, it is hoped
that further judicial attention will be focused on the appropriateness
of the questions being asked and whether the IRS is improperly basing
exempt organization determinations on whether an organization’s
activities are in concert with Administration policies.

PLAINTIFF’S MEMORANDUM IN OPPOSITION TO THE GOVERNMENT’S MOTION TO
DISMISS THE COMPLAINT FOR FAILURE TO STATE A CLAIM, Z Street v.
Commissioner

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

3. INNOCENT SPOUSE RELIEF GRANTED EVEN THOUGH WIFE KNEW TAXES MIGHT
NOT BE PAID

Each spouse is jointly and severally liable for the tax, interest, and
penalties (other than civil fraud penalty) arising from a joint
return. However, the Internal Revenue Code provides various routes for
relief for an “innocent spouse.”

One of those routes is relief under Code §6015(f). A spouse can obtain
equitable relief from joint liability if “taking into account all the
facts and circumstances, it is inequitable to hold the individual
liable for any unpaid tax or any deficiency.” The procedures for
obtaining Code §6015(f) relief are provided for in Rev.Proc. 2003-61.

A recent Tax Court case illustrates the application of the rules in
that Revenue Procedure, and further demonstrate the Tax Court
favorably granting relief to a spouse under those procedures even
though the spouse knew at the time she signed and filed the tax return
that there was a good chance the taxes indicated as due on the return
would not be paid.

Under Rev.Proc. 2003-61, a prerequisite to equitable relief is that
seven threshold conditions described in Section 4.01 must be met. If
they are met, the the IRS will ordinarily grant relief to a requesting
spouse if three safe harbor conditions in Section 4.02 are met.

In the recent case, a former wife passed the seven threshold
conditions of Section 4.01. However, due to her having filed the
return with knowledge that the taxes would likely not be paid, she did
not meet the three safe harbor conditions of Section 4.02.

Nonetheless, all is not yet lost for a spouse that fails the three
safe harbor conditions. In that circumstances, the spouse has one more
chance – the IRS can still grant equitable relief after applying a
balancing test that weighs various factors in Section 4.03 of the
Revenue Procedure. Luckily for the spouse in this case, the Tax Court
found enough factors in the wife’s favor that it found the spouse
eligible for equitable innocent spouse relief.

I have put together a MindMap that summarizes the various routes to
innocent spouse relief, including the various conditions, safe
harbors, and factors applied under Rev.Proc. 2003-61, for anyone that
wants to dig down into the details of these provisions. Click HERE for
an Adobe Acrobat version, and HERE for a flash version. In this case,
the wife could not use the relief mechanisms of Code §6015(b) or (c)
because the tax due had been reported by the taxpayer on a return.

Gail P. Drayer v. Comm., TC Memo 2010-257

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

4. NO LOSSES TO ESTATE BENEFICIARIES WHEN THEY COULD RECEIVE NOTHING

Code §642(h)(1) permits the capital loss carryover of an estate to be
carried over to the beneficiaries succeeding to the estate property
upon termination of the estate. What happens if the beneficiaries do
not actually succeed to any property?

In a recent Chief Counsel Advice, the estate agreed with the IRS to
turn over all of its assets to settle income tax liabilities of the
decedent. The beneficiaries who would have received a distribution
from the estate were thus barred from receiving anything. Nonetheless,
they deducted capital losses of the estate. The Advice indicates that
the beneficiaries should not be allowed the deduction.

Treas. Regs. § 1.642(h)-4 does provide an example of a beneficiary
receiving a loss even though there were insufficient assets to
actually distribute anything to the beneficiary. This is based on the
premise that such a beneficiary would have gotten something but-for
the loss, and thus suffered it and should receive the capital loss
deduction. Nonetheless, the Advice indicated that there was no way the
beneficiaries could receive anything pursuant to the settlement
agreement, and thus they could not use this example. The Advice does
not provide any details on the economics of the settlement – it would
seem that if the losses were large enough that if they did not occur
and the IRS liability could have been satisfied with something left
over for the beneficiaries, then the beneficiaries suffered the loss
at least in part and thus should get at least some of the losses. Such
an analysis would seem to be required by the definition of
beneficiaries in regard to a testate estate under Treas. Regs. §
1.642(h)-3(a) which definition includes persons who bear the burden of
any loss for which a carryover relates. Thus, it would seem that an
analysis should have been undertaken to determine if any amounts would
have been left to the beneficiaries if the IRS was paid its liability
in full, assuming that no losses had occurred. However, the Advice
does not undertake this analysis and simply hangs its hat on the fact
that the agreement existed so the beneficiaries could receive nothing
and thus no losses would be allowed to them – end of story.

Treas. Regs. § 1.642(h)-3(b) provides a definition of a “beneficiary”
for an intestate estate. That includes heirs and kin of the decedent
under an insolvent intestate estate that receive nothing but would
have received something if the estate was not insolvent. This concept,
if applicable to a testate estate also, should allow a deduction here,
at least in part, if the losses were large enough to have cost the
beneficiaries part of what they otherwise would have received even
after the IRS was paid in full. The Advice noted that the estate at
issue above was a testate estate, so the intestate estate rule did not
directly apply and would not be applied. More reasonably, the Advice
should have used the intestate rule to inform it regarding the need to
track the actual economics in the testate situation, but as noted,
such an economic analysis was not undertaken.

Perhaps we may see more on this issue if the taxpayers decide to
litigate the issue.

CCA 201047021

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

5. OVERPAYMENT AND UNDERPAYMENT RATES–JANUARY 2011

For a chart of the IRS overpayment and underpayment of tax interest
rates, visit http://tinyurl.com/2elxlmb.

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

6. BUSH TAX CUTS EXPIRATION UPDATE

The last minute efforts of Congress and the President to deal with the
expiration of the Bush tax cuts on December 31 have been interesting,
to say the least. It has also contributed to making year-end tax
planning the most complicated and speculative it has been in recent
memory, if ever.

The current proposal, backed by President Obama and most Republican
Congressmen and Senators, is embodied in the Tax Relief, Unemployment
Insurance Reauthorization and Job Creation Act of 2010. The Senate and
House will be voting on the Act this week. What is keeping things
interesting is that the House Democratic caucus met on Thursday and
voted to reject the plan. What this means is that for the Act to clear
Congress is that it will probably need the votes of many of the lame
duck “blue dog” Democrats who were defeated in the recent election. An
interesting artifact of the recent election is that while the general
shift in Congress was towards the right on economic issues, many
Democrats who were conservative on economic issues were swept out of
office as part of the big wave, leaving the remaining Democrats
further to the left on economic issues than where they were as a whole
prior to the election.

For those not following things, the following is a list of the key tax
provisions of the Act:

-Existing income tax rates will remain in place for another two years.

-Personal exemption phase-out repeal is delayed for two years.

-The temporary repeal of the itemized deduction limits are extended
for two years.

-Capital gains and qualified dividend rates remain the same for two
years.

-Individual alternative minimum tax exemptions are increased for two
years.

-The unified credit for estate and gift taxes is increased to $5
million per person and $10 million per married couple, and will be
indexed for inflation beginning in 2012. The generation skipping tax
exemption will also be at $5 million. The exemption is portable
between spouses. A 35% maximum rate is imposed for two years for
estate, gift and generation skipping taxes. The new tax regime is
retroactive to January 1, 2010, but allows an election to choose no
estate tax and modified carryover basis for estates arising in 2010.

-FICA tax reduction for employees in 2011 from 6.2 percent to 4.2
percent.

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

7. FIRM ANNOUNCEMENTS

Charles (Chuck) Rubin and Robert Chaves gave a presentation at a local
meeting of the Florida Institute of CPA’s. The presentation covered
International Tax Updates, including an overview and review of the
international tax provisions in the HIRE Act.

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

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 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.

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

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