September 11, 2011 Update

[Gutter Chaves Josepher Rubin Forman Fleisher Law Firm]

September 11, 2011
An Electronic Newsletter of Gutter Chaves Josepher Rubin Forman
Fleisher P.A.
Charles (Chuck) Rubin, Editor/Author (except as otherwise noted) ©
2011

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CONTENTS:

1. CHECK THE BOX ELECTIONS BY INSOLVENT CORPORATIONS

2. FLORIDA LEGISLATIVE UPDATE – PROBATE AND TRUST CHANGES [FLORIDA]

3. FLORIDA LEGISLATIVE UPDATE–CREDITOR PROTECTION FOR IRA’S [FLORIDA]

4. FLORIDA LEGISLATIVE UPDATE–LLC CHARGING LIENS [FLORIDA]

5. NO FIFTH AMENDMENT PRIVILEGE FOR OFFSHORE BANKING RECORDS

6. APPLICABLE FEDERAL RATES–SEPTEMBER 2011

7. JTWRS TRUMPS HOMESTEAD [FLORIDA]

8. MORE GUIDANCE ON ELECTING OUT OF ESTATE TAX FOR 2010 DECEDENTS

9. FIRM ANNOUNCEMENTS

10. ABOUT OUR FIRM

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1. CHECK THE BOX ELECTIONS BY INSOLVENT CORPORATIONS

When a corporation makes a check the box election, it is treated as
having liquidated and then being reestablished as a partnership. In
context of an insolvent corporation, this raises questions about
worthless stock treatment, bad debts, and other tax consequences. A
recent Chief Counsel Memorandum provides the IRS' opinion on these
issues.

WORTHLESS SECURITY DEDUCTION. In the deemed liquidation of a solvent
corporation, the shareholders realize gain or loss based on the deemed
distribution that occurs. However, an insolvent corporation has no net
assets to distribute. Therefore, the shareholders do not receive
anything and thus there is no sale or exchange to fix gain or loss.
See Rev. Rul. 2003 – 125. In this circumstance, however, the
shareholders will be entitled to a worthless security deduction in the
amount of their basis in their stock pursuant to Code Section 165(g).
Code Section 165(g) provides that if any security which is a capital
asset (such as a share of stock in a corporation) becomes worthless, a
loss from a seller or exchange of that security is deemed to occur.

Note that this result holds even if the shareholder is a corporation
owning 80% or more of the stock of the insolvent subsidiary. That is,
Code Section 332 (which applies to liquidations of corporate
subsidiaries into a parent corporation) will not apply to disallow the
loss. This result occurs because Code Section 332 will not generally
apply to the liquidation of an insolvent subsidiary when the parent
corporation receives no assets as shareholder.

TAXABLE SUBSTITUTION OF LIABILITIES. The substitution of a debt
instrument that differs materially in kind or in extent from an
existing debt instrument may constitute a sale or exchange of that
debt instrument under Code Section 1001. Changes in obligor of the
debt instrument can constitute such a taxable substitution.

Since an insolvent corporation will likely have liabilities to its
shareholders or third parties, the issue arises whether such a
substitution of debt occurs when the debt is deemed transferred and
reestablished in the partnership, since at a minimum, there is a new
obligor for federal tax purposes. Notwithstanding this new obligor,
the Memorandum concludes that there is no such taxable substitution
occurring under Code Section 1001.

BAD DEBT DEDUCTION. We noted above that the shareholders of the
insolvent corporation are eligible to receive a worthless stock
deduction upon the deemed liquidation of the corporation. This might
lead you to believe that a creditor of the corporation should likewise
receive a bad debt deduction under Code Section 166 since the
corporation disappears. Code Section 166 allows as a deduction any
debt which becomes worthless within a taxable year. However, you would
be wrong in that conclusion (at least according to the Memorandum).

The Memorandum determines that Code Section 166 does not apply because
the full amount of the liability is treated as surviving the
liquidation and being assumed by the partnership. Thus, the debt was
not rendered worthless by reason of the election.

BASIS IN PARTNERSHIP INTEREST AND PARTNERSHIP BASIS IN ASSETS. The
Memorandum then addresses various basis issues arising from the deemed
liquidation and deemed formation of the partnership. Interested
persons should consult the Memorandum – we will not run through them
here to avoid the risk of readers never wanting to read this blog
again.

Office of Chief Counsel Memorandum AM2011-003, August 26, 2011

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2. FLORIDA LEGISLATIVE UPDATE – PROBATE AND TRUST CHANGES [FLORIDA],
by Sean Lebowitz

On April 14, 2011 and April 29, 2011, the Florida legislature
enacted several significant changes to the probate and trust code
(hereinafter referred to as “legislation”). The bill was signed by the
Governor on June 21, 2011. Some of the key sections of the legislation
became effective on July 1, 2011 and others will become effective on
October 1, 2011. In essence, the legislation creates or substantially
modifies the following subject matters: I) Intestate succession; II)
Reformation of a will; III) Challenges to revocation of a will and
trust; IV) Attorney-client privilege relating to fiduciaries; and V)
Timing for requesting attorney’s fees in a trust matter. The author
urges probate and trust litigators to review the entire legislation
because it contains nuances not fully addressed in this article.

I. Intestate Succession

When a decedent dies without a will, the assets are distributed
according to the laws of intestacy. Currently, the intestate share of
a surviving spouse where all of the decedent’s descendants are also
descendants of the surviving spouse is the first $60,000.00 and half
of the remaining estate. Effective October 1, 2011, the legislation
amends Florida Statute § 732.102(2) so that the intestate share of a
surviving spouse of a decedent where all of the decedent’s descendants
are also descendants of the surviving spouse (or if there are no
descendants) is the entire estate. The legislation also creates
Florida Statute § 732.102(4) to provide that if the surviving spouse
has descendants that are also the decedent’s descendants and has
descendants not related to the decedent, the surviving spouse’s
intestate share is half of the estate.

II. Reformation of a Will

Reformation of a testamentary document is an effective, yet often
times overlooked, probate litigator’s technique to reform a document
to conform to the settlor’s intent. Since 1998, Florida case law
permitted reformation of a trust instrument to correct a mistake. See
In re Estate of Robinson, 720 So. 2d 540 (Fla. 4th DCA 1998). In 2007,
the Florida legislature codified and expanded common law to permit
reformation to correct a trust to cure a mistake as well as
reformation of a trust to achieve a settlor’s tax objectives. See Fla.
Stats. §§ 736.0415 and 736.0416.

Effective July 1, 2011, the legislation created Florida Statutes
§§ 732.615 and 732.616. These statutes mirror the above-referenced
trust code statutes to permit reformation of a will to correct a
mistake and to modify a will to achieve a testator’s tax objectives.
The mistake statute, Florida Statute § 732.615, allows an interested
person to seek reformation of the terms of a will to conform to the
testator’s intent, and provides a burden of proof of clear and
convincing evidence. The statute even permits reformation that is
completely inconsistent with the apparent terms of the will.

The tax modification statute, Florida Statute § 732.616, permits
an interested person to seek reformation of the terms of a will to
achieve a testator’s tax objectives in a manner that is not contrary
to the testator’s “probable intent.” These statutes are significant
because reformation of an unambiguous will was previously never
permitted by case law or statute. In addition, the legislation creates
Florida Statute § 732.1061 which requires that in actions under
reformation of a will to correct a mistake and modification of a will
to achieve tax objectives, the court must award attorney’s fees and
costs to the prevailing party. Nonetheless, the statute also gives the
court discretion in awarding and allocating fees using the concept of
equity.

III. Challenges to Revocation of a Will and Trust

Florida law provides that a will or trust is void if procured by
fraud, duress, mistake or undue influence. A testator or settlor may
revoke a will or trust by writing or act. Until the legislation, there
was no mechanism to challenge a revocation of a will or trust by
physical act based upon fraud, duress, mistake or undue influence. The
legislation amends Florida Statutes §§ 732.5165 and 736.0406 to
provide that revocation of a will or trust is void if procured by
undue influence, fraud, duress or mistake. A challenge to the
revocation of a testamentary document cannot take place until the
instrument becomes irrevocable or at the settlor’s demise.

IV. Attorney-client Privilege relating to Fiduciaries

Florida law provides that communication between an attorney and
the client is confidential if it is not intended to be disclosed to
third parties. The legislation clarifies and expands existing law so
that communication between a fiduciary client and the attorney is
confidential and privileged. See Fla. Stat. § 90.5021. The legislation
also amends Florida Statutes §§ 733.212(2)(b) and 736.0813 which
create new reporting requirements for personal representatives and
trustees. The reporting requirement compels personal representatives
and trustees to provide notice to the beneficiaries that an attorney-
client privilege exists between the fiduciary and the attorney
employed by the fiduciary. See Fla. Stats. §§ 733.212(2)(b) and
736.0813.

V. Timing for Requesting Attorney’s Fees in a Trust Matter

The Florida Trust Code provides that trust proceedings are
governed by the Florida Rules of Civil Procedure. In civil litigation,
Florida Rule of Civil Procedure 1.525 is commonly used which requires
a party to serve a motion seeking fees or costs within 30 days after
the filing of a judgment. By amending Florida Statute § 736.0201(1),
the legislation clarifies and confirms that Florida Rule of Civil
Procedure 1.525 applies to all judicial proceedings concerning trusts.

The legislation also creates Florida Statute § 736.0201(6) which
states that Florida Rule of Civil Procedure 1.525 applies to all
judicial proceedings concerning trusts, but provides the following two
exceptions: “A trustee’s payment of compensation or reimbursement of
costs to persons employed by the trustee from assets of the trust
[and] [a] determination by the court directing from what part of the
trust fees or costs shall be paid, unless the determination is made
under s. 736.1004 in an action for breach of fiduciary duty or
challenging the exercise of, or failure to exercise, a trustee’s
powers.”

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3. FLORIDA LEGISLATIVE UPDATE–CREDITOR PROTECTION FOR IRA’S [FLORIDA]

In likely response to earlier cases in various states questioning the
creditor protection aspects of an inherited IRA, Fla.Stats. §222.21(2)
(c) has been modified to expressly include such IRAs in Florida’s
statutory protection scheme.

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4. FLORIDA LEGISLATIVE UPDATE–LLC CHARGING LIENS [FLORIDA]

Florida has modified Fla.Stats. §608.433 to both clarify and change
the rights of creditors vis-à-vis LLC owner interests owned by
debtors.

First, the statute has been modified to make clear that the charging
lien is the sole and exclusive remedy of a creditor against a debtor’s
LLC interest, if the LLC has more than one member. A creditor is
expressly prohibited from seeking a foreclosure sale of the member’s
LLC interest.

Second, if the debtor is the sole member of the LLC, a creditor’s
remedies are not restricted to a charging lien. Thus, for example, the
creditor can foreclose on the member’s LLC interest, and the purchaser
at the foreclosure sale can obtain full voting and other powers over
the interest (that is, the sold interest will not be limited to an
“assignee” interest). However, before remedies other than a charging
lien are allowed, the creditor must establish to the satisfaction of a
court that distributions under a charging order will not satisfy the
judgment within a reasonable time. The new statute should provide
statutory certainty to the issues raised in the 2010 Olmstead
decision.

Thus, the use of single-member LLC’s should not be relied upon as an
asset protection mechanism. For planning, the addition of bona fide
additional members may allow for a limitation of remedies to a
charging lien if not subject to challenge on a sham, fraudulent
conveyance, or other equitable theory.

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5. NO FIFTH AMENDMENT PRIVILEGE FOR OFFSHORE BANKING RECORDS

Under the Fifth Amendment to the U.S. Constitution, a taxpayer may
refuse to answer specific questions or produce specific records if it
would violate his or her privilege against self-incrimination. In a
recent appellate case, the taxpayer was under a grand jury
investigation as to whether he used undisclosed Swiss bank accounts to
evade taxes. The taxpayer claimed that the Fifth Amendment protected
him from having to provide his records relating to his foreign bank
accounts. More specifically, a subpoena was issued for the taxpayer to
produce “[a]ny and all records required to be maintained pursuant to
31 C.F.R. § 103.32 [subsequently relocated to 31 C.F.R. § 1010.420]
relating to foreign financial accounts that you had/have a financial
interest in, or signature authority over, including records reflecting
the name in which each such account is maintained, the number or other
designation of such account, the name and address of the foreign bank
or other person with whom such account is maintained, the type of such
account, and the maximum value of each such account during each
specified year.”

The information identified in the subpoena mirrors the banking
information that 31 C.F.R. § 1010.420 2 requires taxpayers using
offshore bank accounts to keep and maintain for government inspection.
The information the subpoena seeks is also identical to information
that anyone subject to § 1010.420 already reports to the IRS annually
through Form TD F 90-22.1, known as a “Report of Foreign Bank and
Financial Accounts,” or “FBAR.”

The taxpayer argued that the information he provided could be used to
prosecute him criminally if it conflicts with other information he
provided to the IRS. He also argued that if he had to deny he had such
information, he could be guilty of a felony of not meeting legal
requirements to maintain such records.

Notwithstanding the risk of criminal prosecution relating to
responding to the record requests, the Ninth Circuit Court of Appeals
held that the Fifth Amendment privilege did not apply under the
“Required Records Doctrine.” This exception to the privilege applies
under Grosso v. U.S., 21 AFTR 2d 554 (S Ct 1968) if:

a. The purpose of the government’s inquiry is regulatory and not
criminal prosecution. Here, the government’s purpose under the Bank
Secrecy Act was essentially regulatory. It was important to the Court
that the activity being regulated (participation in offshore banking)
is not inherently unlawful, and thus information reporting in regard
to it is not essentially related to criminal prosecution.

b. And, the information requested is contained in documents of a
kind the regulated party customarily keeps. In this situation, bank
customers would generally keep basic account information both to
comply with required reporting of offshore bank information and to be
able to access their accounts.

c. And, the records have public aspects which render them at least
analogous to public documents. The records here had public aspects
because individuals had to retain them for five years and provide them
to the government upon request. Further, such records were required to
be kept to aid in the enforcement of a valid regulatory scheme.

Thus, taxpayers under investigation in regard to offshore bank
accounts will not be able to rely on the Fifth Amendment to deny
access to their banking records.

In re: M.H., 108 AFTR 2d Para. 2011-5203

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6. APPLICABLE FEDERAL RATES–SEPTEMBER 2011

For a table and graphs of the September 2011 applicable federal rates,
go to http://goo.gl/3A1hE.

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7. JTWRS TRUMPS HOMESTEAD [FLORIDA]

Article X, section 4(c), of the Florida Constitution provides that
“[t]he homestead shall not be subject to devise if the owner is
survived by spouse or minor child.” What happens if a Florida
resident acquires property while he has a minor child and lives in it
as his primary residence – but instead of acquiring property in his
own name he acquires it as joint tenant with rights of survivorship
with a third party, and then dies?

Option One – the property is not the decedent’s homestead, and it
passes entirely at his death to the other joint tenant.

Option Two – the property is the decedent’s homestead, and his
interest in the property does not pass to the joint tenant as an
invalid devise under the foregoing Constitution provision.

These were the facts in Marger v. De Rosa, wherein the administrator
ad litem for the estate of Mr. Marger asserted Option Two – that is,
the homestead nature of the property trumped the JTWRS status of
ownership.

Both the trial court and the Second District Court of Appeals found
for Option One. The appellate court noted:

“This language [in the Constitution] does not restrict the type of
interests in real property a person may acquire or how a person may
title his or her property. Instead, it restricts a person's attempt to
devise property he or she owns when homestead status has attached to
that property.”

Since the property was not homestead property at the time of the joint
purchase, the homestead restriction was determined not to apply.

Marger v. De Rosa, 57 So.3d 866 (2nd DCA 2011)

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8. MORE GUIDANCE ON ELECTING OUT OF ESTATE TAX FOR 2010 DECEDENTS

The IRS has issued detailed guidance regarding estates of 2010
decedents that elect out of federal estate tax. The guidance has lots
of details, and should be reviewed by any persons involved with the
estates of decedents that died in 2010.

While not intended as a comprehensive analysis of the new guidance,
some highlights and interesting points follow:

1. Form 8939 will be used to opt-out of estate tax (the Section 1022
election), and to allocate available basis step-up among eligible
assets.

2. Form 8939 is due no later than November 15, 2011. Since the form is
not out yet, estates should start gathering information now. The are
only limited circumstances for an extension or a later amendment.

3. A conditional Form 8939 (one that is effective only if assets
exceed the remaining unified credit amount of the decedent) is not
allowed.

4. If the Section 1022 election is made, the decedent’s GST exemption
is allocated by attaching Schedule R to the Form 8939. For decedents
that made a 2010 inter vivos gift, the Form 8939 is not used to elect
out of the automatic allocation of GST exemption. If the gift was made
before December 17, 2010, the time for filing a Form 709 with the
election out is extended to September 19, 2011. If the gift was on or
after December 17, the regular 2010 Form 709 filing dates apply.

5. Note that the Form 8939 must report ALL of the decedent’s assets,
not just those for which a basis step-up allocation applies (except
for cash and IRD items, and noncitizens who are nonresidents only
report U.S. assets). The form must also report property that was
required to be included on another donor’s Form 709 if gifted to the
decedent within 3 years of his or her death.

6. The executor must provide a statement to each recipient of property
acquired from the decedent within 30 days of the filing of the Form
8939.

7. If the decedent creates separate interests in an item of property
(such as a life estate and remainder), the basis interest must be
allocated to all such separate interests if an allocation to any
portion is desired.

If the opt-out election is not filed, the estate must file a Form 706,
unless the assets of the decedent total less than the decedent’s
available unified credit amount. Those estates that do not file a Form
706 because the value of its assets do not require one and for which
an opt-out election does not make sense should NOT file a Form 8939
since this could act to reduce the available amount available to step-
up the basis in the decedent’s assets.

Notice 2011-66 and Revenue Procedure 2011-41

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9. FIRM ANNOUNCEMENTS

Charles (Chuck) Rubin recently gave a presentation on the topic of
Business Succession Planning to the Atlantic Chapter of the FICPA.
Please email him at cru...@floridatax.com if you would like a copy of
his presentation materials.

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.

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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 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.

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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