JULY 11, 2010 UPDATE

[Gutter Chaves Josepher Rubin Forman Fleisher Law Firm]

July 11, 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. 30-DAY LETTERS VS. 90-DAY LETTERS IN ESTATE TAX AUDITS
2. CHARGING ORDERS AS EXCLUSIVE REMEDIES IN LLC’S – PART ONE
3. TAX AMNESTY WINDOW OPEN UNTIL SEPTEMBER 30 [FLORIDA]
4. MUTABILITY DOCTRINE
5. GIFT TAX GROSS-UP DOES NOT APPLY TO NONRESIDENTS
6. ABOUT OUR FIRM

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1. 30-DAY LETTERS VS. 90-DAY LETTERS IN ESTATE TAX AUDITS

In estate tax audit situations, the IRS only has a 3 year statute of
limitations to assess additional taxes. If the IRS takes too long to
initiate an audit, or the audit drags on too long, the taxpayer may
lose an opportunity to have unagreed audit issues reviewed by an
Appeals Office prior to the issuance of a 90-day letter.

When audit items are unagreed, the normal course of operation is for
the IRS to issue a 30-day letter of the IRS’ findings. The 30-day
letter asks the taxpayer to agree to the IRS’ findings. The taxpayer
can either agree, go over the examiner’s head and take the issue up
with the IRS Appeals Office, or do nothing (in which case the IRS will
then send a notice of deficiency). Thus, the 30-day letter is the
taxpayer’s ticket to the Appeals Office where the taxpayer may receive
a more favorable result than at the agent level, especially since
appeals officers can factor into settlements the likelihood of IRS
success if an issue is litigated.

If there is not enough time before the statute of limitations expires,
the IRS will skip the 30-day letter and instead issue a 90-day letter
(notice of deficiency). The 90 -day letter indicates a deficiency in
tax. The taxpayer that wants to fight on can either pay the tax and
sue for a refund in District Court, or file a petition for review in
the Tax Court without paying the tax. There is no effective
opportunity for Appeals Officer review prior to taking one of those
two steps (although the taxpayer can file in the Tax Court and then go
to Appeals).

Recent guidance to auditors provides that Appeals will need to at
least 180 days left on the statute of limitations before a case should
be referred to them. Adding the 30 days provided under a 30-day
letter, examiners are directed to skip the 30-day letter and issue a
90-day letter if there are less than 210 days remaining on the statute
of limitations on the day that the taxpayer communicates disagreement
with the proposed adjustments.

If there are more than 210 days, the examiner need not automatically
issue a 30-day letter. Instead, the examiner should examine all the
facts and circumstances to see if a 30-day letter is appropriate. The
factors to be reviewed include:

-how much time is needed for the examiner to issue the 30-day letter,
receive the taxpayer's response, and then consider that response;

-how likely is it that the taxpayer will request an extension of the
initial 30 day response period;

-a minimum of 30 days to process the case file to Appeals;

-a minimum of 10 days to account for time needed to process the case
filing from the date of closing to review and closing by the Group
Manager;

-the nature of the issues and the complexity of the facts involved;
and

-the applicable legal authorities.

Throughout the audit process, taxpayers and their representatives that
anticipate going to Appeals should endeavor to move the case along as
quickly as possible so as to not lose the opportunity to go to Appeals
under a 30-day letter.

SB/SE Division's Interim Guidance On Issuance of Statutory Notice of
Deficiency (June 24, 2010)

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2. CHARGING ORDERS AS EXCLUSIVE REMEDIES IN LLC’S – PART ONE

A recent Florida Supreme Court case addressing whether a charging
order is an exclusive remedy for a creditor of a member of an LLC as
to the LLC interest is creating a stir. This posting addresses the
case. A future posting will address the question of whether the
exclusive remedy of charging orders issue should be garnering so much
attention.

First, some background. Assume that Owner O is a member of an LLC, and
owes $1 million to judgment Creditor C. O has no assets other than his
LLC interest. The LLC owns substantial assets, so that O’s share of
the LLC exceeds $1 million in the underlying assets.

C can obtain a “charging order” against O. This requires that if and
when the LLC makes distributions to its members, the amount due to O
has to be paid to C instead to the extent of its $1 million judgment.
C does not become a member of the LLC and obtains no voting or other
rights as to the LLC. O remains the member. Once C is fully paid, O
can then begin again to receive member distributions from the LLC.
Thus, a charging order does not provide a lot of leverage to C – it
cannot force a distribution so it has to wait around until the members
decide to vote a distribution. This could involve a very long wait for
C.

In most states, in the absence of a specific statutory provision that
a charging order is an exclusive remedy for a creditor, a creditor
could alternatively judicially foreclose on a debtor’s interest. This
would require the sale of O’s member interest either to third parties
or to C. If this happens, then C loses his member interest
permanently.

If C can only obtain a charging order as his sole remedy, this is
generally perceived to be favorable to debtors like O.

The purpose of the charging order remedy is to protect the other
members of the LLC. This avoids innocent co-members from having their
entity hijacked or interfered with by a third party creditor of a
debtor member that succeed to the ownership interest of a debtor
member. Instead, the creditor has to stand by on the outside of the
entity awaiting distributions and cannot interfere with LLC
operations.

So what happens if the LLC is only owned by one person? Since there
are no other members of the LLC to protect, the question arises
whether a creditor should be limited to charging order remedies only.
This was the question raised in the recent Florida case.

The Florida Supreme Court held that even though Florida law provides
for a charging order as a remedy as to LLC interests, a charging order
is not the exclusive remedy for a creditor. When one considers that
the purpose of the charging order remedy is to protect other members,
it is not surprising that a creditor was not limited to a charging
order as its sole remedy in the single member LLC situation.

However, the way that the Court went about this is questionable.
Instead of simply addressing the situation of a single member LLC, the
Court ruled with a broad stroke, seemingly interpreting that the
Florida Statutes do not support a reading that charging orders are an
exclusive remedy for LLC interests. The problem is that the case may
stand for the proposition that charging orders are not an exclusive
remedy, even in the case of multiple member LLC’s.

In the end, this may not be that big a deal, at least in Florida.
There is a strong likelihood that a legislative fix will be enacted to
clarify that charging orders are an exclusive remedy, at least for
multiple member LLC’s (as many commentators thought was already
presently the case).

As noted, in a future posting, we will address the question whether
having charging orders being an exclusive remedy is really that big a
deal.

Shaun Olmstead, et. al., vs. The Federal Trade Commission, Supreme
Court of Florida. Case No. SC08-1009 (June 24, 2010).

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3. TAX AMNESTY WINDOW OPEN UNTIL SEPTEMBER 30 [FLORIDA]

Did you buy some artwork out of state that you brought back to Florida
and did not pay Florida use taxes on? Did you forget that your ‘c’
corporation has to pay Florida corporate income taxes? Did you sell
items upon which you should have collected Florida sales tax?

If a taxpayer answers yes to any of these, or has any other failures
to pay Florida taxes, a tax amnesty program opened on July 1 and will
run through September 30, 2010. Those coming forward will have no
penalties imposed and need not worry about criminal prosecution. They
may also get a break on up to half of the interest owed on delinquent
taxes if there is no ongoing audit or investigation by Florida.

The last time Florida had an amnesty program such as this was in 2003.

The program will not apply, however, to Florida unemployment taxes and
Miami-Dade County Lake Belt Fees. Further, those who are under
criminal investigation, whose liability is already covered by a
settlement or payment agreement, or are involved in certain other
programs are ineligible.

To participate in the program, a Tax Amnesty Agreement has to be
submitted by the September 30 deadline. This can be done online.
Proper returns must also be filed for the applicable taxes. It may be
possible to make an installment arrangement for payment of the late
taxes.

Interestingly, taxpayers currently under audit can participate in the
program.

More information on the program is available at http://dor.myflorida.com/dor/amnesty/.

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4. MUTABILITY DOCTRINE

When tax issues turn on international conflict of laws analysis,
attempting to determine tax consequences can become a hair-pulling
exercise. A recent Tax Court case provides a good illustration.

On its face, the tax issue was fairly simple. A married resident and
domiciliary of Belgium died while owning a significant amount of
shares in a U.S. corporation. Under U.S. tax law, those shares are
subject to U.S. estate tax. The issue for the court was whether the
decedent owned 100% of the shares for estate tax purposes, or whether
he owned only 50% with the other 50% of the shares being deemed owned
by his surviving spouse under community property principles.

The husband and wife were married in Uganda, which at the time of
their marriage was governed by United Kingdom law. The UK is a
“separate property” regime - not a community property regime. The
couple later moved to Belgium, where they resided for many years and
had their domicile. Belgium is a community property regime. They never
changed their nationality, however, out of the UK. It was while they
were domiciled in Belgium that the decedent acquired the U.S. shares.

To determine whether the surviving spouse had a community property
interest, the Tax Court had to work through and ultimately apply the
following conflict of law and marital property issues:

a. Which country’s conflict of laws provisions should be applied? In
this situation, the general rule that the law of the country of
domicile applies to determine ownership of intangible property was
applied - so Belgium law applied. Interestingly, Belgium conflict of
laws rules then kicked the question of ownership back to England since
both the husband and wife were U.K. nationals.

b. Which country’s spousal ownership rules should be applied? Applying
the doctrine of immutability, the Tax Court determined that the law of
the couple at the time of their marriage applied. This was the U.K.’s
separate property regime. Thus, since the stock was titled solely in
the name of the decedent, all of the stock was included in the
decedent’s U.S. gross estate and subjected to U.S. estate tax.

The case is interesting for two particular reasons.

The first relates to the discussion under a. above. Applying the “use
the law of the country of domicile for intangibles” rule to determine
ownership of intangible personal property, many would think that
Belgium law should decide the ownership of the marital property. As
noted above, however, since the individuals were UK nationals, Belgium
conflicts of law rules apparently applies UK law even though the
individuals were Belgium domiciliaries.

The second relates to the doctrines of mutability vs. immutability. It
isn’t often that one sees these doctrines discussed in tax cases, so
the case provides a good review (and learning opportunity for those
not familiar with the concepts). The doctrines apply to determine what
happens when a married couple get married under one marital property
regime, but later acquire property while domiciled under another
regime. The doctrine of mutability provides that the law of the
country of domicile at the time of acquisition of the property governs
questions of separate vs. community property. This doctrine is more
often applied in the U.S. The doctrine of immutability provides that
the law of the country of marriage applies (absent affirmative steps
by the spouses to change the applicable law) to any later property
acquisition. This concept is more often applied in European
jurisdictions. In the case, it was a finding by the Tax Court that a
U.K. court would apply the doctrine of immutability that ultimately
resulted in 100% gross estate inclusion.

Estate of Charania, et al. v. Shulman, 105 AFTR 2d ¶2010-988 (1st Cir.
2010)

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5. GIFT TAX GROSS-UP DOES NOT APPLY TO NONRESIDENTS

Under Code Section 2035(b), if a U.S. person makes a gift and pays
gift tax within 3 years of his or her death, the amount of the gift
tax is included in his or her gross estate for federal estate tax
computation purposes. In an interesting ruling, the IRS has indicated
that such inclusion will not apply if the decedent is a nonresident
alien of the U.S. for transfer tax purposes.

Code Section 2104(b) generally applies Code Sections 2035 through 2038
to the estates of nonresidents. However, Code Section 2104(b) by its
language only applies to “property of which the decedent has made a
transfer.” The IRS is interpreting this language to require a
“gratuitous transfer,” and further believes that the payment of gift
tax is not such a gratuitous transfer. Thus, Code Section 2035(b) will
not apply.

Nonresidents have various transfer tax planning opportunities that are
not available to U.S. citizens and residents. Add this to the list!

CCA 201020009

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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