MAY 15, 2011 UPDATE

[Gutter Chaves Josepher Rubin Forman Fleisher Law Firm]

May 15, 2011
An Electronic Newsletter of Gutter Chaves Josepher Rubin Forman
Fleisher P.A.
Charles (Chuck) Rubin, Editor/Author (except as otherwise noted) ©
2011

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

CONTENTS:

1. PUBLIC CHARITY STATUS DENIED

2. COMPENSATION VIA SHARE OF PROFITS DID NOT ESTABLISH A PARTNERSHIP

3. FLORIDA ACTS TO RESOLVE OLMSTEAD ISSUES [FLORIDA]

4. BUNDLED FIDUCIARY FEES REMAIN DEDUCTIBLE (FOR NOW)

5. "UNIFIED BUSINESS ENTERPRISE” THEORY

6. WHERE IS MY REFUND?

7. SECTION 332 LIQUIDATION OF INSOLVENT SUBSIDIARY VIA CONVERSION TO
DISREGARDED ENTITY

8. APPLICABLE FEDERAL RATES–MAY 2011

9. DING, DONG, THE WITCH IS DEAD

10. FIRM ANNOUNCEMENTS


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

1. PUBLIC CHARITY STATUS DENIED

Code §501(c)(3) organizations usually prefer to be classified as a
public charity and not a private foundation. Private foundations are
subject to excise taxes and limitations on donor charitable deductions
that public charities do not have to deal with, among other
disadvantages.

The usual route to public charity status is to meet certain numerical
tests that show the foundation has broad funding. Organizations with a
limited number of donors will not pass these tests. All is not lost
for such organizations. If they can show they are operating for the
benefit of one or more other specific public charities, they can
qualify as Code §509(a)(3) “supporting organizations” which are
treated as public charities.

One requirement (among others) under Code §509(a)(3) is the
“organization test” that requires that the organization “is organized
and, at all times thereafter, operated exclusively for the benefit of,
to perform the functions of, or to carry out the purposes of one or
more…specified organizations” that are public charities (other than by
reason of being supporting organizations). Thus the question arises
whether a given organization meets this specificity requirement. The
Regulations generally require the articles of incorporation to
designate each of the specified organizations. Treas.Regs.
§1.509(a)-4(d)(2)(i). Further refinements to the requirements are
based on the “type” of qualification sought. A Type II organization
need not specify by name each publicly supported organization it
intends to support if its articles of incorporation “require that it
be operated to support or benefit one or more beneficiary
organizations which are designated by class or purpose....”
Treas.Regs. § 1.509(a)-4(d)(2)(i)(b).

A recent case tested the limits of these identification and
specificity requirements. The organization at issue identified the
organizations it intended to support as organizations “which support,
promote and/or perform public health and/or Christian objectives,
including but not limited to Christian evangelism, edification and
stewardship.”

The IRS argued that this identification did not meet the Type II
specificity requirements. It interpreted the “designation by class or
purpose” allowance as still requiring that the identification be
specific enough so that the class of beneficiary organizations is
“readily identifiable.” The taxpayer challenged this gloss on the
regulation, but the appellate court determined that the IRS’
interpretation of its regulation was not plainly erroneous or
inconsistent and thus would be respected.

The organization’s description of the organizations it would support
was found to be too broad to meet this “readily identifiable”
standard. The appellate court noted that there were no geographic
limits imposed, nor a limit to a certain type of organization such as
a church or seminary.

Note that it is not the number of organizations that are specified
that is important – instead, it is whether someone can use the
description to actually identify the subject organizations. For
example, the IRS and the court noted with approval the description
used in Rev.Rul. 81-43. The organization in that ruling described the
organizations it will support as “charitable organizations located in
the Z area that are exempt under section 501(c)(3) of the Code and are
public charities described in section 509(a)(1) or 509(a)(2).” Thus,
this description passes muster because even though it may identify a
large number of organizations, it is a precise enough standard that
the organizations identified can be precisely determined.

Organizations that are not naming their supported public charities by
name should take a clue from this case and undertake to include
geographic limits and/or identification of the type of organization
that will be supported.

Polm Family Foundation v. U.S., 107 AFTR2d Para. 2011-804 (CA DC
5/6/2011)

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

2. COMPENSATION VIA SHARE OF PROFITS DID NOT ESTABLISH A PARTNERSHIP

Parties that jointly conduct a business or venture and share the
profits and losses will typically meet the definition of a
“partnership” for income tax purposes and be taxed accordingly. Such
partnership treatment can arise, even though the parties did not
intend to create a partnership and merely have some other type of
contractual arrangement between them.

This issue often arises when an individual or an entity provides
services to another that is conducting a venture or business, and is
paid for its efforts in whole or in part with a percentage of the
profits of the venture. Since there is a sharing of “profits,” there
is a reasonable risk that the IRS may find the arrangement to be a
partnership, and not a non-partnership contractual arrangement.

The tax status of the relationship can have significant consequences
for the parties, including whether the service provider is taxed
immediately on a pass-through basis on the ventures profits, whether
the provider can deduct venture losses, whether Section 1446
withholding on foreign participants may apply, and whether the service
provider will be taxed on its receipts as ordinary income (nonpartner)
vs. capital gain income (partner) if the shared profits are in the
nature of capital gains.

It was whether such profits paid to a service provider were capital
gains or ordinary income that was the issue in recent tax case.
Interestingly, the court found that the service provider was NOT a
partner even though it was paid with a 20% profits interest in the
venture. While the court’s examination was very fact specific, the
factors looked at by the court and its view whether those facts
supported a partnership or nonpartnership relationship can be useful
when crafting contractual relationships when no partnership
relationship is (or is not) desired. These factors included:

-the contract specifically declared that the relationship was not a
partnership (this obviously was a factor against a partnership);

-the contract provider expended its own funds in performing its
functions (this was considered by the court as a capital contribution
and was a factor in favor of a partnership);

-the contract provider did not have authority to withdraw funds from
the business, it could not increase the business owner’s capital
commitment to assets, it could not enter into binding agreements in
the name of the business, and it could not dispose of an asset without
the owner's prior written approval. The court held that the service
provider’s responsibilities, while numerous, did not extend into the
key areas of acquiring and disposing of assets or drawing upon the
business’ bank accounts that would indicate a partnership
relationship (factor against partnership);

-the contract provider did not own title to any of the assets in the
business, and apart from depositing checks did not share control with
the business over the bank accounts that corresponded with the
companies in the business portfolio and could only make business
recommendations (factor against partnership); and

-the parties did not file partnership tax returns, and the contract
provider did not hold itself out as a partner to third parties (factor
against partnership).

Compensating employees or independent contractors with a profits share
often makes good business sense to owners, as compared to actually
making them part owners. Benefits to business owners include avoiding
creating statutory rights in the recipients (such as voting rights and
rights to examine books and records), and the ability to terminate the
relationship without an obligation to repurchase shares or ownership
interests, while gaining the incentive benefits of a profit
participation. Sometimes, these interests are established as a share
of gross profit instead of net profit, to avoid the partnership tax
risk -with a gross profit interest, there is no sharing of expenses
or losses, thus eliminating an important factor in the establishment
of a partnership relationship for tax purposes. Thus, in addition to
providing helpful factors to avoid partnership status, the case also
provides some comfort that compensation via a net profit share will
not, in and of itself, necessarily create a partnership relationship.

Rigas v U.S., 107 AFTR 2d ¶2011-788 (CD TX 5/2/7/2011)

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

3. FLORIDA ACTS TO RESOLVE OLMSTEAD ISSUES [FLORIDA], by Jordan
Klingsberg

The Olmstead case created a stir both inside and outside of Florida,
when it provided that at least in the situation of a single member
LLC, a creditor’s rights are not limited to a charging order but could
include a right to foreclose on the debtor’s LLC interest. The
potential application of the decision to multimember LLC’s became a
much-discussed issue.

On Friday April 29, 2010 the Florida Senate passed CS/HB 253, Limited
Liability Companies, to address some of the uncertainty surrounding
Florida LLCs created by the recent Florida Supreme Court case,
Olmstead v. Federal Trade Commission, 44 So.3d 76 (Fla. 2010). The
bill provides that, except in one situation, a charging order is the
"sole and exclusive remedy" to satisfy a judgment from a judgment
debtor's interest in an LLC. The exception concerns an LLC with one
member where distributions under a charging order will not satisfy the
judgment in a reasonable time. In such a situation, a court may order
the sale of the single member's interest in the LLC. CS/HB 253 passed
both the Florida House and Senate and has been sent to the Governor to
be signed into law.

In June of 2010, the Florida Supreme Court in Olmstead held that a
charging order is not the exclusive remedy available to a creditor
holding a judgment against the sole member of a Florida single member
LLC. The court ruled that the judgment debtor had to surrender all
right, title, and interest in the member's single member LLC interest
in order to satisfy the outstanding judgment. The dissent in Olmstead,
however, stated that the majority's holding was not limited to single
member LLCs and expressed a desire that the Florida legislature
clarify the law in this area.

Many practitioners believed that the Supreme Court's reasoning in
Olmstead would apply to all limited liability companies. This lead
many businesses to change their situs and organize in states other
than Florida where a charging order is the exclusive remedy available
to judgment creditors of multimember LLCs. This bill amends Fla. Stat.
§608.433 to clarify that the Olmstead decision does not extend to
multimember LLCs and provides procedures for applying the Olmstead
decision to single member Florida LLCs.

The bill specifically states that a judgment creditor has only the
rights of an assignee of the LLC interest to receive distributions to
which the judgment debtor would have otherwise been entitled from the
LLC. The only situation in which a court may order the sale of a
member's interest is where the judgment creditor of a member's
interest in a single member LLC establishes "that distributions under
a charging order will not satisfy the judgment within a reasonable
time." Upon such a showing, the court may order the sale of the single
member's interest pursuant to a foreclosure sale and the purchaser
becomes a member of the LLC and obtains the prior member's entire
interest in the LLC. The foreclosure remedy is not available to a
judgment creditor of a multimember LLC and cannot be ordered by a
court.

Section 9 of the Bill does provide that nothing in the statute shall
(i) limit the rights of a secured creditor, (ii) change the impact of
a fraudulent conveyance; or (iii) change the court's right to use
equitable principals such as ruling that an LLC was sham or using
equitable liens or constructive trusts. These provisions, however,
were likely already law in Florida.

The Bill does not contain any provisions for treating a multi-member
LLC as a single member LLC and disregarding nominal interests held by
minority members such as family members and grantor trusts.

This Act and the amendment to Fla. Stat. §608.433 will hopefully
clarify the judgment remedies available against Florida LLCs and
remove some of the ambiguity surrounding the treatment and operations
of LLCs in Florida.

Special thanks to Richard Josepher of our firm and other members of
the special committee of the Florida Bar Tax Section who worked
extremely hard and supported this legislation.

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

4. BUNDLED FIDUCIARY FEES REMAIN DEDUCTIBLE (FOR NOW)

In 2008, the U.S. Supreme Court held that costs paid to an investment
advisor by a nongrantor trust or estate generally are subject to the
Code §67(a) 2% floor for miscellaneous itemized deductions. Michael J.
Knight, Trustee of William L. Rudkin Testamentary Trust v.
Commissioner, 552 U.S. 181 (2008). What happens when the estate or
trust pays a bundled fiduciary fee – that is one that does not provide
a breakout on the total fee paid between investment advisory fees
subject to the 2% limit and other fees that are not subject to the 2%
floor? How is the taxpayer supposed to know how much is subject to the
2% floor?

After the Knight case, the IRS has issued Notices on an annual basis
that relieved taxpayers of having to determine the portion of a
bundled fiduciary fee that is subject to the 2% floor.

The IRS has now issued a Notice that indefinitely extends this relief,
until the date that final regulations on the subject are published.
Prior to that date, taxpayers may deduct the full fee without regard
to the 2% floor. The Notice warns that payments by the fiduciary to
third party for investment expenses are deemed to be readily
identifiable and must be treated separately from the otherwise bundled
fee.

Notice 2011-37, 2011-20 IRB (4/13/11)

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

5. "UNIFIED BUSINESS ENTERPRISE” THEORY

Under Code §183, individuals and S corporations desiring deductions
for their business activities must be engaged in the activity “for
profit.” Activities which consistently generate losses may be presumed
to be not for profit.

A recent case illustrates a seldom-discussed theory or concept, known
as the “unified business enterprise” theory. Under this theory, a
taxpayer conducting activities in isolation which generate losses and
thus may be considered not to be “for profit” under Code §183, may be
able to aggregate that activity with other activities conducted either
individually or through other commonly controlled entities to come up
with a profit motive for an aggregate, or “unified business”
enterprise that will avoid the limits of Code §183.

The cases tend to arise where property, such as an airplane or land,
is owned and leased to a related business venture, with losses arising
in the owning entity. In the current case, the taxpayer was a
principal in the Hard Rock Café chain. The taxpayer owned several
aircraft in one or more entities, which aircraft were used by the
taxpayer and/or other entities. The IRS asserted that deductions
relating to the aircraft should be disallowed because the owning
entities were not operated for profit. The taxpayer countered with the
unified business enterprise theory.

The Court of Claims sustained the application of the unified business
enterprise theory to the taxpayer’s situation, and ruled against the
IRS (although IRS issues of substantiation of expenses were allowed to
go forward). The IRS raised the cases of Deputy v. du Pont, 308 U.S.
488 (1940) and Moline Properties, Inc. v. Comm., 319 U.S. 436 (1943)
to show that corporations and their shareholders should be treated as
separate and distinct for tax purposes. However, the court noted that
in those older cases, S corporations were not involved, and did not
involve overlapping businesses that essentially treated the S
corporations as alter-egos for the taxpayer owner.

Thus, the unified business enterprise theory is alive and well, at
least for pass-through entity situations such as S corporation and
partnerships. Situations involving C corporations should expect
greater resistance, if not outright rejection, of the theory by the
IRS and courts.

Morton v. U.S., 107 AFTGR 2d 2011-xxxx (Ct Fed Cl), April 27, 2011

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

6. WHERE IS MY REFUND?


If you have an iPhone or an iPad, there is a new way to check on when
to expect your income tax refund. By using the IRS2Go app, you can get
this information on an i-device. The app is available at the Apple app
store.

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

7. SECTION 332 LIQUIDATION OF INSOLVENT SUBSIDIARY VIA CONVERSION TO
DISREGARDED ENTITY

A corporation converted its wholly owned subsidiary to a disregarded
entity via a check-the-box election. At the time, the subsidiary was
insolvent. The parent corporation sought a worthless stock loss under
Code §165(g)(1).

At issue is Code §332 which will not allow a parent corporation
shareholder to recognize gain or loss on liquidating distributions of
an 80%-or-more owned subsidiary. The corporation sought a private
letter ruling to the effect that Code §332 did not apply.

A necessary requirement for Code §332 to apply is that the parent must
receive at least partial payment for the stock it owns. Since a check-
the-box election to be treated as a disregarded entity treats the
electing corporation as liquidating, at least in normal circumstances
it would appear that this constructive liquidation would result in the
requisite partial payment for the stock and Code §332 would apply to
disallow the loss.

However, in this case the subsidiary was insolvent. The taxpayer
sought to apply Rev.Rul. 2003-125 in context of this constructive
liquidation. In that Ruling, the IRS concluded that when the fair
market value of the subsidiary's assets, including intangible assets
such as goodwill and going concern value, is less than the sum of the
subsidiary's liabilities, including bona fide liabilities owed to the
parent, no part of the transfer is attributable to the parent's stock
ownership and the above payment -for-stock requirement isn't
satisfied. Accordingly, the Code Sec. 332 nonrecognition rules didn’t
apply.

On a constructive liquidation of an insolvent subsidiary, the same
effect should occur, even though no physical movement of assets
occurs. Thus, in theory, Rev.Rul. 2003-125 should apply.

Theory does not always apply when dealing with the IRS. However, in
this situation, it did, and the IRS acknowledged that Rev.Rul.
3002-125 could apply to a constructive liquidation under a check-the-
box election. Thus, the parent corporation obtained the worthless
stock deduction.

As an aside, note that the parent corporation was able to receive an
ordinary loss instead of a capital loss, by reason of the application
of the affiliation exception under Code §165(g)(3).

PLR 201115001

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

8. APPLICABLE FEDERAL RATES–MAY 2011

See http://goo.gl/gof9s for tables and graphs.

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

9. DING, DONG, THE WITCH IS DEAD

President Obama on Thursday signed into law a bill repealing the
health care reform law's 1099 tax reporting requirement. Demands for
repeal surfaced soon after the health care law was enacted, as the
costly and time-consuming new reporting requirement was understood.
Given the politics of Washington D.C., it took quite a while to kill
off the reporting, even though the repeal was widely supported by
Democrats and Republicans. The reporting requirement would have
required business and real estate owners to file a 1099 form with the
IRS for every vendor to whom they paid more than $600 in a year.

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

10. 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.

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

12. 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