JULY 15, 2011 UPDATE

[Gutter Chaves Josepher Rubin Forman Fleisher Law Firm]

July 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. ANOTHER DAY TRADER TAXED AS AN INVESTOR
2. KILLER B REGULATIONS FINALIZED
3. DISCRETIONARY TRUST INTEREST HAS A GIFT TAX VALUE, BUT WHAT IS IT?
4. NEW FOREIGN FINANCIAL ACCOUNTING REPORTING ONE STEP CLOSER
5. 5 MONTH EXTENSIONS FOR PASS-THROUGH ENTITIES MADE PERMANENT
6. DON'T HOLD ANNUITIES IN TRUSTS - WELL, MAYBE IT'S OKAY
7. FIRM ANNOUNCEMENTS
8. ABOUT OUR FIRM

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

1. ANOTHER DAY TRADER TAXED AS AN INVESTOR

Successful stock market day-traders like to be characterized as mere
investors for federal income tax purposes - this allows them to pay
taxes on their trading gains at preferential capital gains rates.
Unsuccessful stock market day traders want to avoid the "investor"
label, and instead they want to be characterized as engaged in the
trade or business of trading. This is because they don't want capital
loss treatment for their trading losses - capital losses can only be
used to offset capital gains (except as to $3,000 per year which can
be used to offset ordinary income).

Traders that are engaged in the trade or business of trading
securities may elect to have the Code Sec. 475(f) mark-to-market rules
apply. Under these rules gain or loss is recognized on their
securities held at the close of a tax year as if they were sold for
their fair market value on the last business day of the tax year.
Further, gain or loss is taken into account for the tax year as
ordinary income or loss. Being engaged in a trade or business also
avoids the expense limits on investors – investor trading expenses can
only be deducted to the extent they and any other miscellaneous
itemized expenses exceed 2% of adjusted gross income.

A recent Tax Court case involved a trader who engaged in substantial
trading activities. The trader lost over $2 million in 2000,
$400,000.oo in 2001, and $278,000.00 in 2002. With all those losses,
the trader sought trade or business treatment so as to obtain ordinary
loss treatment for the losses.

In 2000, the trader traded on 73 days with a total of 313 trades. In
2001, he traded on 18 days and had 72 trades, and in 2002 he traded on
21 days for 84 days.

A taxpayer's activities constitute a trade or business if (1) the
taxpayer's trading is substantial, and (2) the taxpayer seeks to catch
the swings in the daily market movements and to profit from these
short-term changes rather than to profit from the long-term holding.

In regard to the first test of “substantiality,” the courts will
examine the number of trades, the amount involved in the trades, the
number of days on which trading occurs, and whether trading is the
taxpayer’s sole or primary source of income. Since the taxpayer only
traded on 29%, 7% and 8% of the trading days in 2000-02, this was not
substantial enough for the court (even though they acknowledged that
the dollar volume of the trades was significant).

In regard to the second test, the courts will examine whether stocks
were held for more than 30 days, and how often stocks were both
purchased and sold on the same day. In the instant case, a majority of
the stocks purchased were held for over 30 day, and very few stocks
were sold on the same day they were purchased. Thus, the court ruled
against the taxpayer on this element, too. The taxpayer was denied
ordinary loss/trade or business treatment.

This case is factually similar to Holsinger v. Comm., which we
previously wrote about, and with a similar holding. Per these two
cases, taxpayers with stock trades that number in the hundreds should
not automatically assume they will achieve trade or business status.
Of course, those traders at that level who are successful will not
want trade or business status anyway so they can get preferential
capital gains rates (for their long-term gains).

Richard Kay, Jr., TC Memo 2011-159

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

2. KILLER B REGULATIONS FINALIZED

Triangular B reorganizations are often conducted whereby a subsidiary
corporation will acquire a target corporation in exchange for stock of
the subsidiary’s parent corporation. Throw a foreign corporation into
the mix and the opportunity exists for tax avoidance, especially as to
the acquisition of the subsidiary of stock of its parent for valuable
consideration to use in the acquisition. For example, a foreign
subsidiary may be able to repatriate earnings to a U.S. parent without
a taxable dividend, or if the parent corporation is foreign then funds
may be transferred to the parent without a U.S. withholding tax.

So-called ‘Killer B’ transactions were first addressed in Notices
2006-85 and 2007-48, and then further addressed in 2008 Temporary
Regulations under Code Section 367(b). In May of this year, final
Regulations were issued.

The final Regulations, when applicable, generally result in deemed
distributions that are subject to tax under other Code sections, such
as Section 301. They may also result in deemed contributions from the
parent to its subsidiary. The deemed distributions may be
characterized as ‘notional’ only, so as to avoid the potential
application of Code Section 311(b) gains and losses.

Jeffrey Rubinger has published a recent article in the June 2011
Journal of Taxation that provides the history of the ‘Killer B’
transactions and an analysis of the new Regulations (“Final ‘Killer B’
Regulations Further Expand Likelihood of Gain Recognition by
Taxpayers”). He points out that the deemed distributions can occur
even if the target corporation is unrelated to the acquiring parent/
sub group. He also notes that in circumstances when Code Section
367(b) does not apply due to a lack of earnings and profits, Code
Section 367(a) may still be triggered.

Treasury Decision 9526, 5/19/11

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

3. DISCRETIONARY TRUST INTEREST HAS A GIFT TAX VALUE, BUT WHAT IS IT?

In a recent Private Letter Ruling, a current trust beneficiary was
entitled to income only in the discretion of the trustee, and was
entitled to principal in the discretion of the trustee as needed for
the beneficiary’s health, support or maintenance. The trust
beneficiaries and trustee are seeking State court approval for an
early distribution of a portion of principal to the remaindermen,
since it appears they would not otherwise be entitled to any
distributions until the death of the current trust beneficiary.

The current trust beneficiary has advised the IRS that her income and
resources are sufficient to maintain her current standard of living
for her lifetime and any forseeable emergencies, that she has received
no trust distributions, and based on her financial condition she will
not qualify for distributions from the trust. The trustee has
represented that distributions would be made to the current trust
beneficiary only in case of emergency.

Thus, the IRS was advised that the chances of a distribution being
made to the current trust beneficiary during her lifetime are between
slim and none. Based on that, the current beneficiary sought a ruling
that her cooperation in allowing the early distribution of a portion
of the principal to the remaindermen would not be a taxable gift.

The IRS ruled that a gift would occur with such a distribution. The
gift arises by reason of the current beneficiary giving up the ability
to receive income or principal from the principal amount that will be
distributed, and that such transfer is a gratuitous and taxable
transfer to the remaindermen. Regardless of the lack of likelihood of
a distribution ever being made to the current beneficiary, the
possibility remains.

This is a fair and appropriate legal analysis. The practical issue is
how to value the gift? This is a fact question and not something the
IRS wouldl rule on, although the ruling does concede that the value
may be nominal. When dealing with gifts involving discretionary
interests, and even ascertainable standards, this is a common
valuation question, but one that begs a practical solution.

Private Letter Ruling 201122007

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

4. NEW FOREIGN FINANCIAL ACCOUNTING REPORTING ONE STEP CLOSER

For tax years beginning after March 18, 2010, the Hiring Incentives to
Restore Employment Act of 2010 (HIRE Act) provides that individuals
with an interest in a “specified foreign financial asset” during the
tax year must attach a disclosure statement to their income tax return
for any year in which the aggregate value of all such assets is
greater than $50,000. This reporting is in addition to similar
reporting required on the annual FBAR form.

The IRS has now released a revised draft Form 8938, “Statement of
Specified Foreign Financial Assets,” for public comment and review.
This is the form that will be used for the HIRE Act reporting.
Interestingly, the draft requires the taxpayer to list out the various
income items from reported foreign financial assets and indicate where
they are reported on the taxpayer’s income tax return.

The actual reporting is not yet required. In Notice 2011-55the IRS
suspended the reporting requirements until it releases a final Form
8938. Once the final form is released, taxpayers will still need to
report for the period required by the new law, but not until they file
their next income return that is due. The Notice also advises that the
Code Section 6501(c)(8) limitations period for tax assessments for
periods for which reporting is required will not expire before three
years after the date on which the IRS receives Form 8938.

Draft Form 8938 (http://www.irs.gov/pub/irs-dft/f8938--dft.pdf)


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

5. 5 MONTH EXTENSIONS FOR PASS-THROUGH ENTITIES MADE PERMANENT

In 2008, proposed and temporary Treasury Regulations reduced the six-
month automatic extension of time to file income tax returns for most
partnerships, estates, and certain trusts to five months. The IRS has
now finalized the Regulations, retaining the shortened five month
period. Such extension period will include extensions for the filing
of Forms 1065, 8804 and 1041.

The purpose of the shortened period is to allow persons reporting
income from such pass-through entities, which persons may be on a six
month extension, a month to prepare their own returns. That is, the
pass-through entity will have to get them the reporting information a
month before their own extended return is due.

The final Regulations also provide rules as to some specific filing
situations, such as:

--Even though individual bankruptcy estates file a Form 1041, they
still will use the six month period (unless it is a pass-through
entity that is in bankruptcy).

--Electing large partnerships also use the six month period.

T.D. 9531, 06/23/2011 ; Reg. §1.6081-2 , Reg. §1.6081-6 , Reg.
§54.6081-1

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

6. DON'T HOLD ANNUITIES IN TRUSTS - WELL, MAYBE IT'S OKAY

Section 72 of the Internal Revenue Code generally provides favorable
deferral of income tax for qualified annuities. However, Code Section
72(u) disallows such favorable treatment when the annuity is owned by
someone other than a natural person, such as a trust. An exception to
the exception allows a trust to hold the annuity as an agent for a
natural person.

A recent private letter ruling has employed the "agent for a natural
person” exception to allow use of the trusts. The subject ruling
allowed the trust to purchase annuities with the remaindermen as the
annuitants. Another individual was the current beneficiary of the
trust. To the extent that distributions were made from the annuity
prior to the death of the current beneficiary, those proceeds would be
payable to the trust. After the death of the current beneficiary, the
annuity policies will be distributed to the remaindermen (each
receiving his or her annuity for which he or she is the annuitant).

The IRS examined the history of the Code Section 72(u) limit on non-
individual ownership. It found that provision was largely intended to
restrict an employer's use of annuity contracts to fund significant
amounts of deferred compensation for employees. In the context of the
subject trust, no such employment aspects were involved. Since all of
the beneficiaries of the trust were natural persons, the IRS ruled
that the Code Section 72(u) limits did not apply.

The IRS also ruled favorably in regard to Code Section 72(e)(4)(C).
That provision holds that an assignment of an annuity contract without
full and adequate consideration will be taxable as a sale of the
contract based on the cash surrender value of the contract at that
time. The IRS ruled that the later distribution of the annuity
contracts to the individual remaindermen would not be subject to this
deemed sale provision. Again, the IRS ruled favorably based on its
reading of the legislative history. According to the ruling, the
purpose of the restriction on gratuitous transfers of annuity
contracts related to inhibiting taxpayers from continuing tax deferral
beyond a life of an individual taxpayer. Since such deferrals were not
involved in the subject transfers, the IRS ruled that Code Section
72(e)(4)(C) will not apply.

Clearly, these rulings are very favorable for the requesting
taxpayers, and are not directly supported by language of the Internal
Revenue Code. However, it is doubtful if anyone is going to be upset
by this. Note that this is not the first time that the IRS has
provided ruling similar to this.

Private Letter Ruling 201124008

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

7. 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.

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

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