JULY 27, 2010 UPDATE

[Gutter Chaves Josepher Rubin Forman Fleisher Law Firm]

July 27, 2010
An Electronic Newsletter of Gutter Chaves Josepher Rubin Forman
Fleisher P.A.
Charles (Chuck) Rubin, Editor/Author (except as otherwise noted) ©

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CONTENTS OF THIS NEWSLETTER:

1. PREPAID FORWARD CONTRACT TREATED AS A SALE
2. APPLICABLE FEDERAL RATES – AUGUST 2010
3. DOES A TAX FRAUD GUILTY PLEA AUTOMATICALLY RESULT IN AN FBAR
PENALTY?
4. PREPAYING INDEBTEDNESS AT A DISCOUNT DOES NOT ALWAYS GIVE RISE TO
CANCELLATION OF INDEBTEDNESS INCOME
5. IRS AUTOMATICALLY REVOKES TAX-EXEMPT STATUS OF THOUSANDS OF 501(C)
(3) AND OTHER NONPROFIT ORGANIZATIONS BUT PROVIDES ONE TIME RELIEF
PROGRAM FOR SMALL NONPROFITS
6. ABOUT OUR FIRM


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1. PREPAID FORWARD CONTRACT TREATED AS A SALE

Prepaid forward contracts were a popular item in the early 2000’s.
Such arrangements would allow the holder of substantially appreciated
public stock (such as a founder whose stock had run up substantially
in the bull market) to receive a payment of 75%-80% of the value of
his or her shares, have an upside if the stock appreciated in value
thereafter in the next few years, have no downside risk, and be able
to defer income taxes on the funds paid until the transaction closed a
few years later. A principal issue regarding such transactions was
whether the upfront payment constituted a taxable sale in the initial
year, or whether deferral existed until the transaction completely
closed in a later year. Something of a sweet deal, Revenue Ruling
2003-7 allowed for nonsale treatment for prepaid forwards, at least
under the facts of that ruling.

Taxpayers who participated in those transactions could typically
receive a better financial deal if as part of the transaction they
also lent the shares that were subject to the transaction so that the
investment entity involved could sell those shares short or otherwise
hedge their risks. This is what the Anshutz Company did in the prepaid
forward contracts it entered into in the early 2000’s.

The Tax Court has now determined that the Anshutz Company was not
entitled to defer its gain, but instead had income upon entering the
prepaid forward contract. The court noted that the prepaid forward, in
combination with the share lending transaction, resulted in almost all
incidents of ownership having been given up by the taxpayer, and thus
it was appropriate to trigger gain in the year the taxpayer received
the cash proceeds.

Since many of these transactions occurred awhile ago, of those older
ones only those that are either under audit, in litigation, or for
which the taxpayers have extended the applicable statute of
limitations, will be affected by the new decision. Presumably, those
whose transactions did not include the stock lending element will not
be as adversely impacted by the Tax Court’s analysis, but it remains
to be seen how the IRS will interpret the precedential value of the
case in those situations.

Anschutz Company v. Commissioner, 135 T.C. No. 5 (2010)

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2. APPLICABLE FEDERAL RATES – AUGUST 2010

The August 2010 rates can be viewed at http://tinyurl.com/2fyzbap.

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3. DOES A TAX FRAUD GUILTY PLEA AUTOMATICALLY RESULT IN AN FBAR
PENALTY?

A taxpayer through a company had Swiss bank account. He did not report
the income from the accounts on his federal income tax return. The
taxpayer also did not file the required FBAR disclosure form for the
accounts.

The taxpayer eventually plead guilty to tax fraud, conspiracy to
defraud the United States and criminal tax evasion in connection with
the Swiss bank accounts. The IRS sought to use his guilty plea as
requiring an automatic finding of willful failure to file the required
FBARs and sought to automatically impose FBAR penalties.

Not so fast, says the U.S. District Court for the Eastern District of
Virginia. In denying the government’s motion for summary judgment, the
court noted that there may still be valid defenses available to the
FBAR penalty even though the taxpayer admitted guilt on the above tax
charges. More particularly, the court noted the following issues still
remain and thus allowed the case to proceed to trial:

-The taxpayer contends that U.S. authorities were already on notice of
the accounts, and indeed, the assets in the accounts had already been
frozen. Thus, according to the taxpayer, he did not have the
requisite intent to “willfully” fail to disclose the accounts by
filing the Form TDF 90-22.1 because he believed their existence had
already been disclosed.

-The taxpayer contends he had no knowledge that Form TDF 90-22.1
existed, nor had his attorneys advised him as to its existence or
significance, and thus could not “willfully” have failed to file the
Form.

-Lastly, the taxpayer contends he had no “signatory or other authority
over” the accounts as required by 31 C.F.R. § 103.24 because the
accounts were frozen.

Whether the taxpayer will prevail remains to be seen, but at least he
will have his day in court as to these issues.

U.S. v. Williams, 106 AFTR 2d 2010-XXXX, (DC VA), 03/19/2010

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4. PREPAYING INDEBTEDNESS AT A DISCOUNT DOES NOT ALWAYS GIVE RISE TO
CANCELLATION OF INDEBTEDNESS INCOME

Oftentimes, a debtor is able to negotiate with a creditor to pay off a
debt at a discount. The debtor pockets the savings – however its not a
total win since the debtor may have to share some of the savings with
the IRS. This is because the reduction in the amount due will often be
characterized as cancellation of indebtedness income, which is subject
to income tax. This harks back to a case that tax people may remember
from their school days – U.S. v. Kirby Lumber Co. In that well-known
case from 1931, the U.S. Supreme Court held that a taxpayer who
purchased back its own bonds at a discount realized income to the
extent of the savings since the taxpayer had increased its net wealth
in the transaction.

However, not all obligations are treated the same in this area. A
recent private letter ruling reminds us that if the debtor’s
obligation is contingent only and not fixed, a negotiated prepayment
reduction will NOT generate cancellation of indebtedness income. In
issuing the favorable ruling, the IRS relied on another old case,
Corporacion de Ventas de Salitre y Yoda de Chile v. Comm., 29 AFTR
1074 (CA 2 1942). That case was very similar to Kirby Lumber in that
a taxpayer purchased back its own bonds at a discount. However, since
the bonds were payable only of future profits, the obligation was
contingent. The Second Circuit there held that no cancellation of
indebtedness income due to the contingent nature of the obligation.

PLR 201027035

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5. IRS AUTOMATICALLY REVOKES TAX-EXEMPT STATUS OF THOUSANDS OF 501(C)
(3) AND OTHER NONPROFIT ORGANIZATIONS BUT PROVIDES ONE TIME RELIEF
PROGRAM FOR SMALL NONPROFITS (by Jordan Klingsberg)

In 2006, Congress passed legislation requiring all tax-exempt
organizations (except churches) to file annual returns (Form 990s)
with the IRS starting in 2007. Another change was made requiring the
automatic revocation of the tax exempt status of any 501(c)
organization that failed to file the required version of Form 990 for
three consecutive years.

May 17, 2010 marked the due date of IRS Form 990s for the vast
majority of America's tax-exempt nonprofits, including 501(c)(3)
organizations and on May 18 thousands of non-profits saw their tax-
exempt status automatically revoked by the IRS. Recently, however, the
IRS announced a relief program for small non-profit organizations who
are at risk of losing their tax exempt status because they missed the
deadline for filing Forms 990-N or Form 990EZ with the IRS.

Form 990-N is an "electronic postcard" that must be filed by
organizations with gross revenue below $25,000 per year. For these
small organizations, the IRS has extended the filing deadline to
October 15, 2010. In order to restore their tax exempt status, these
organizations simply have to file the Form 990-N by providing eight
informational items and the organization will be back in compliance.

Larger organizations who are eligible to file Form 990-EZ
(organizations with gross receipts less than $500,000 and total assets
less than $1.25 million) may enter into a voluntary compliance
program. Under this program, a Form 990-EZ filer will not lose its tax
exempt status if it files its three delinquent returns and pays a
small fee ($100 - $500 depending on gross receipts) by October 15,
2010.

Organizations that have to file a Form 990 (organizations with gross
receipts greater than $500,000 and total assets greater than $1.25
million) as well as private foundations are not eligible for this
relief. The only remedy for such an organization that loses its tax
exempt status is to reapply via Form 1023, pay another user fee and
subject itself to another 501(c)(3) determination exam.

You can find more information as well as the IRS FAQ on the subject by
going to: http://tinyurl.com/25mv877.

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6. 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.

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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