AUGUST 7, 2011 UPDATE

[Gutter Chaves Josepher Rubin Forman Fleisher Law Firm]

August 7, 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. ANOTHER ATTACK ON DEFINED VALUE CLAUSES FAILS

2. SECTION 197 AMORTIZATION APPLIED TO NONCOMPETE COVENANT IN SMALLER
STOCK ACQUISITION

3. FOUNDATION THAT CORRECTS SECTION 4942 DISTRIBUTION DEFICIENCY ON
ITS OWN ACCORD STILL IS SUBJECT TO PENALTY

4. INNOCENT SPOUSES GAIN MORE TIME TO SUBMIT CLAIMS FOR RELIEF

5. NEW FLORIDA DURABLE POWER OF ATTORNEY STATUTE [FLORIDA], by Mitch
Goldberg

6. APPLICABLE FEDERAL RATES–AUGUST 2011

7. FATCA IMPLEMENTATION SCHEDULE

8. FIRM ANNOUNCEMENTS

9. ABOUT OUR FIRM


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1. ANOTHER ATTACK ON DEFINED VALUE CLAUSES FAILS

In a prior newsletter, we discussed the use of charitable lid/defined
value clause planning, and how it had recently been upheld in by the
Tax Court in Hendrix. Such planning has now successfully weathered
another attack – this time in the 9th Circuit Court of Appeals in
Petter. This time, the IRS dropped its public policy objections and
focused on denial of the gift tax charitable deduction for additional
amounts passing to charity by reason of a revaluation of gifted or
sold property under regulations prohibiting a condition precedent to a
deductible charitable gift.

In Petter, the taxpayer transferred UBS stock to a family LLC. She
then gifted LLC units to two trusts and a charitable organization. The
gift was accomplished via a transfer of a fixed number of LLC units. A
formula was employed to allocate the transferred units between the two
trusts and the charitable organization. The amount allocable to the
trusts was intended to equal the value of the taxpayer's unused
unified tax exemption. More specifically, the allocation clause
allocated to each trust a portion of the LLC units equal to "one-half
the [maximum] dollar amount that can pass free of federal gift tax by
reason of Transferor's applicable exclusion amount allowed by Code
Section 2010(c). Transferor currently understands her unused
applicable exclusion amount to be $907,820, so that the amount of this
gift should be $453,910." To the extent the value of the transferred
LLC units exceeded this allocation to the trusts, such remaining LLC
units from the transfer were allocated to the charitable organization.
The transfer documents also provided that if the value of the units
was finally determined for federal gift tax purposes to be different
than as originally computed, the trusts and charitable organization
would reallocate those units amongst themselves in accordance with
that final determination. Subsequent to the gift, a sale of additional
LLC units to the two trusts was undertaken on an installment basis.
The sold units were allocated to the two trusts and another charitable
organization in a similar manner.

The LLC interests were eventually revalued higher than the value used
on the Form 709. This triggered additional units passing to the
charitable organizations.

Generally, gifts to charities are not subject to gift tax pursuant to
the gift tax charitable deduction under Code Section 2522(a). However,
no charitable deduction is allowed "[i]f, as of the date of the gift,
a transfer for charitable purposes is dependent upon the performance
of some act or of the happening of a precedent event in order that
[the transfer] might become effective" (emphasis added). Treas. Reg.
Section 25.2522(c)-3(b)(1). The IRS argued that the transfer of the
additional LLC units to the charities is subject to a condition
precedent within the meaning of that regulation. The condition
precedent is the IRS audit that ultimately determines that the
reported value of the LLC units is too low and triggers the additional
transfer.

The IRS further bolstered its argument by citing Code Section 2001(f)
(2). That provision provides that a value as finally determined for
gift tax purposes means the value shown on the taxpayer's return
unless the IRS audits and challenges the value. The IRS thus argued
that under the taxpayer's formula, the value, and thus the amount
passing to charity, was fixed by the value reported on the gift tax
return. Any IRS action to change that value was a subsequent action,
and thus a necessary precedent event, to increase what passes to the
charity - thus that increase would be a prohibited precedent event to
the transfer at the time of the gift.

The appellate court found that there was no condition precedent - the
Taxpayer's transfers became effective immediately upon the execution
of the transfer documents and delivery of the units. The only post-
transfer open question was the value of the units transferred, not the
transfers themselves. The court stated the "clauses merely enforce the
foundations' rights to receive a pre-defined number of units...Thus,
the IRS's determination...in no way grants the foundations rights to
receive additional units." Similarly, the court noted "that value was
a constant, which means that both before and after the IRS audit, the
foundations were entitled to receive the same number of units. Absent
the audit, the foundations may never have received all the units they
were entitled to, but that does not mean that part of the Taxpayer's
transfer was dependent upon an IRS audit." If the charities did not
agree with the reported value, they could have brought suit to
determine the proper value applying the gift tax definition and thus
did not need an IRS audit to get all they needed (although the court
notes this was unlikely to occur).

The appellate court overcame the IRS' argument that Code Section
2001(f)(2) set the value as finally determined for gift tax purposes
at the returned value, by noting that Code Section 2001(f)(2) applies
to set the value as finally determined for purposes of gift only for
purposes of applying Code Section 2001(f)(1) which relates to
determination of values only after the period for assessment of tax
has expired. Code Section 2001(f)(2) does not apply to set that value
for other Chapter 12 gift tax purposes.

The decision is important for several reasons. It applies a well-
reasoned and supported appellate court defeat to the IRS' condition
precedent argument. Also, it may signal IRS surrender on the public
policy arguments it has been asserting, per its withdrawal of those
arguments from the appeal issues. Lastly, another Circuit Court of
Appeal is voicing its approval of the formula clauses.

The appellate court invites the IRS to seek a change in the law if it
is troubled by these clauses. One hopes that Capital Hill would resist
such changes. While the clauses can be subject to abuse, for the
majority of taxpayers they provide a mechanism to allow them to make
full use of available transfer tax exemptions without being subject to
the risk of taxes arising from challenges to a good faith valuation.

Petter v. Commissioner (9th Cir. 2011)

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2. SECTION 197 AMORTIZATION APPLIED TO NONCOMPETE COVENANT IN SMALLER
STOCK ACQUISITION

Noncompetition covenants are common when interests in businesses are
sold. The buyer typically would like to amortize (deduct) the cost of
the covenant as quickly as possible, so as to get the tax savings from
the deduction sooner rather than later. Absent any special statutory
treatment, the cost of the covenant is usually written off over the
number of years that the covenant applies.

However, if Code Section 197 applies to the covenant, the buyer must
amortize it slowly, over a 15 year term. In a recent case, the First
Circuit Court of Appeals held that Section 197 applies to a one-year
covenant not to compete when it was issued in conjunction with a
redemption of a 23% corporate shareholder.

The case turned on whether Code Section 197(d)(1)(E) characterizes
such a covenant as a section 197 intangible. That section includes as
a section 197 intangible “any covenant not to compete (or other
arrangement to the extent such arrangement has substantially the same
effect as a covenant not to compete) entered into in connection with
an acquisition (directly or indirectly) of an interest in a trade or
business or substantial portion thereof.”

The taxpayer argued that the term "thereof" at the end of this
provision requires that the interest sold any trade or business must
be substantial, and that the 23% sold here is not substantial. Thus,
the covenant would not be a section 197 intangible.

The IRS argued that the term "thereof" does not not modify the term
"interest" but instead modifies the term "trade or business." Applying
the IRS' interpretation, there are thus two circumstances that will
treat the covenant as a section 197 intangible. The first is the
purchase of an INTEREST in a trade or business, such as stock, no
matter how small that interest is. The second is the purchase of
assets of the trade or business (that is, the purchase of the trade or
business itself), in which case the sale must be at least of a
substantial portion of the total assets to trigger section 197
treatment.

At first, the IRS interpretation appears strange, if not outright
ridiculous. However, if you look at it long enough, it does appear to
be more reasonable, and if you keep looking at the clause, you soon
have no idea what it really means.

The Tax Court accepted the IRS’ interpretation. It based this in part
on the policy of Code Section 197 to discourage over allocation of
purchase price to a covenant by a buyer. However, this is probably not
a fair basis on which to base the interpretation, since in a stock
sale there is a natural tension between the buyer and seller that
limits the ability of the buyer to over allocate purchase price to a
covenant not to compete. This is because the covenant not to compete
will be ordinary income to the seller, while the allocation of sale
proceeds to the asset being sold would generate only capital gain. The
buyer will thus be bargaining for a lower allocation of proceeds to
the covenant not to compete.

Nonetheless, with this case the IRS' interpretation of Code Section
197(d)(1)(E) must be given due consideration in regard to any sales of
interests in business entities that are accompanied by a covenant not
to compete, no matter how small the percentage interest that is being
sold.

Recovery Group, Inc., 108 AFTR 2d ¶ 2011-5114 (CA 1 7/26/2011)

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3. FOUNDATION THAT CORRECTS SECTION 4942 DISTRIBUTION DEFICIENCY ON
ITS OWN ACCORD STILL IS SUBJECT TO PENALTY

Section 4942 requires a private foundation to make minimum
distributions to charitable recipients each year (generally, no less
than 5% of its assets). If not made in a timely manner, a first tier
penalty tax of 30% is imposed.

A private foundation filed its Forms 990-PF for several years, but
neglected to make the required minimum distributions. When this was
discovered by a new accountant, the foundation eventually made the
missing distributions and filed a Form 4720 (Return of Certain Excise
Taxes Under Chapters 41 and 42 of the Internal Revenue Code)
requesting abatement of the penalty tax.

Under Code Section. 4962(a) , the IRS can abate the penalty if the
private foundation establishes to the IRS's satisfaction that the
violation (1) was due to reasonable cause; (2) wasn't due to willful
neglect, and (3) has been corrected within the appropriate correction
period. The foundation alleged reasonable cause due its accountant
advising it that it qualified as a private operating foundation that
did not have the minimum distribution requirement.

Since the foundation submitted returns that provided it was not a
private operating foundation, the IRS did not accept that reasonable
cause existed for missing the required distributions. The IRS also
felt that changes by the foundations Board to increase returns and
reduce expenditures evidenced knowledge that the foundation should
have known that distribution shortfalls were occurring.

While not discussed in the ruling, apparently the foundation did not
earn enough brownie points by reason of its voluntary disclosure of
the issue so as persuade the IRS to abate the penalty.

PLR 201129050

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4. INNOCENT SPOUSES GAIN MORE TIME TO SUBMIT CLAIMS FOR RELIEF

There are various routes available to innocent spouses relief from
income tax liabilities. One of those routes is Code Section 6015(f)
which allows a claim for equitable relief if certain requirements are
met.

Regulations under that section limited this relief to spouses who
apply for relief within two years after the date of the IRS' first
collection activity. Various courts have disagreed whether that
limited time period is authorized by law.

The IRS has now issued a Notice that it will do away with the two-year
limitation. Instead, individuals may request equitable relief without
regard to when the first collection activity was undertaken. However,
requests must still be filed within the Code Section 6502 period of
limitations on collection (generally, 10 years), or for any credit or
refund of tax within the Code Section 6511 period of limitation (three
years of filing or two years after payment of tax).

The notice also goes on to provide guidance as to pending request for
relief, previously denied requests, and requests that are in court.

Notice 2011 – 70

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5. NEW FLORIDA DURABLE POWER OF ATTORNEY STATUTE [FLORIDA], by Mitch
Goldberg

Introduction. On May 4, 2011, the Florida legislature passed Senate
Bill 670 which substantially revises the Florida power of attorney
("POA") statute, § 709. The new law is effective for POAs executed on
or after October 1, 2011 albeit, for matters other than execution
formalities (such as statutory interpretation and fiduciary duties),
the new law applies to all POAs, regardless of when it was executed.
§ 709.2402. While this article discusses relevant changes to the
statute in brief, the author urges practitioners who deal with the
subject matter discussed herein to read the new statue in its entirety
to better understand the scope of the substantive changes.

Creation and Termination. The formalities to execute a POA have not
changed from prior Florida law, to wit: (1) signed by the principal;
(2) with two subscribing witnesses; and (3) before a notary public. §
709.2105. Also consistent with prior law, a POA is not durable unless
the instrument explicitly designates it as such. § 709.2104. However,
a significant change is the elimination of springing POAs (unless
executed prior to October 1, 2011 and contingent on the principal's
incapacity), provided, however, that military deployment-contingent
POAs are still valid. § 709.2108. To revoke a POA, the principal must
do so by expressly stating the revocation in a subsequently executed
POA or other writing signed by the principal; mere execution of a
subsequent POA, without indicating revocation of prior instruments, is
insufficient to revoke prior executed POAs. § 709.2110.

Agents, Co-Agents and Successor Agents. The new statute imposes
certain mandatory fiduciary duties on agents that cannot be eliminated
by contract as well as default duties that can be waived by written
agreement. § 709.2114. If more than one agent is designated to act
on behalf of the principal, unless the instrument provides otherwise,
a co-agent may act independently of the other co-agent(s), departing
from the prior requirement that two co-agents must act in concert, or
if more than two, by a majority. Notwithstanding the fact an
instrument requires co-agents to act together, a co-agent may delegate
to another co-agent authority to conduct banking transactions. In
addition, if a co-agent has actual knowledge of a fiduciary breach by
another co-agent or predecessor agent, such co-agent has an
affirmative duty to take reasonably appropriate action to safeguard
the principal's best interests. Failure to take such action renders
the agent liable to the principal for the principal's reasonably
foreseeable damages that could have been avoided had the agent taken
such action. § 709.2111.

Agent's Authority to Act. The new law imposes additional drafting and
execution requirements when enumerating an agent's authority to act on
behalf of the principal. Generally, an agent may only exercise
authority specifically granted to the agent in the instrument and the
new law explicitly states that global provisions, such as those
attempting to grant the agent authority to do all acts the principal
can do, are ineffective. § 709.2201. Even more specifically, the
following powers require they be specifically granted in the
instrument and the principal sign or initial next to each specific
grant of authority:

-Create an intervivos trust;

-With respect to a trust created by or on behalf of the principal,
amend, modify, revoke, or terminate the trust, but only if the trust
instrument explicitly provides for amendment, modification,
revocation, or termination by the settlor's agent;

-Make a gift (as further discussed below);

-Create or change rights of survivorship;

-Create or change a beneficiary designation;

-Waive the principal's right to be a beneficiary of a joint and
survivor annuity, including a survivor benefit under a retirement
plan; or

-Disclaim property and powers of appointment. § 709.2202.

Agents are specifically precluding from the following acts:

-Perform duties under contract that requires the exercise of
personal services of the principal;

-Vote in any public election on behalf of the principal;

-Execute or revoke any will or codicil for the principal; or

-Exercise powers or authority granted to the principal as trustee
or as court-appointed fiduciary. § 709.2201.

In addition, to the above limits, if an agent is not an ancestor,
spouse, or descendant of the principal, such agent cannot exercise any
authority to grant an interest in the principal's property to the
agent or to an individual to whom the agent owes a legal obligation of
support, unless the instrument states otherwise. Also an agent's
authority to make gifts, described above, is limited in amount to the
annual gift tax exclusion provided for in 26 U.S.C. § 2503(b), per
donee, regardless of whether the annual exclusion applies, unless the
instrument provides otherwise. § 709.2202.

Non-Exclusive. The new law is not the exclusive method of
interpretation and enforcement. The new law is supplemented by the
common law of agency and principles of equity. § 709.2301. The
remedies provided in the new law are not exclusive and do not abrogate
any other right or remedy under any other law. § 709.2303.


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6. APPLICABLE FEDERAL RATES–AUGUST 2011

A summary table and chart can be viewed at http://goo.gl/MpjY9.


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7. FATCA IMPLEMENTATION SCHEDULE

The implementation of FATCA is approaching. FATCA imposed a
substantial withholding tax, due diligence, and reporting regime on
non-U.S. entities to enlist their assistance in rooting out U.S.
taxpayers who are using offshore entities and accounts to hide their
assets and income. Unfortunately, the rules are lengthy, difficult to
comprehend, expensive to implement, and will likely have the
unfortunate result of keeping much needed capital from being invested
in the U.S. at a time when that capital is needed for job creation.

The IRS has issued Notice 2011-53 which provides guidance and
information on the phase-in of implementation. Covered in the Notice
are the dates that participating foreign financial institutions must
register with the U.S., the phase-in of such institutions’ due
diligence requirements, the phase-in of reporting of foreign accounts,
and the implementation in two stages of the new withholding rules.

For those that have an interest in these rules, and other masochists,
we have prepared a map outline of the principal Notice provisions,
available at http://goo.gl/4OwbZ. You will need a recent version of
Adobe Reader or Adobe Acrobat to be able to view the file.

Notice 2011-53

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8. 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.

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9. 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