APRIL 11, 2010 UPDATE
Gutter Chaves Josepher Rubin Forman Fleisher Law Firm
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. FAMILY PARTNERSHIP HOLDING ONLY DELL STOCK SUBJECTED TO LIMITS ON
VALUATION DISCOUNTS
2. NO CHANGE IN PFIC REPORTING, YET
3. BUNDLED INVESTMENT FEES GAIN ANOTHER REPRIEVE
4. TAX PROVISIONS IN HIRE ACT IMPOSE NEW COMPLIANCE BURDENS ON
INTERNATIONAL COMMERCE AND INVESTING
5. NO SPOUSAL BENEFITS IN IRA OF DECEDENT WHEN OTHERS WERE THE
DESIGNATED BENEFICIARIES
6. ABOUT OUR FIRM
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1. FAMILY PARTNERSHIP HOLDING ONLY DELL STOCK SUBJECTED TO LIMITS ON
VALUATION DISCOUNTS
A recent case family limited partnership case involved a partnership
whose principal asset was publicly traded shares of stock of Dell. The
highly liquid nature of those assets was used by the IRS and the
reviewing courts to limit the amount of applicable discounts that were
sought based on transfer restrictions in the partnership agreement and
for lack of marketability.
In regard to transfer restrictions that were in the partnership
agreement, the IRS claimed that these restrictions could not be used
to reduce the value of gifted limited partnership interests pursuant
to Section 2703(a)(2). Section 2703(a)(2) provides that “any
restriction on the right to sell or use [the subject] property” are
disregarded, unless the safe harbor requirements of Section 2703(b)
are met. One of these safe harbor requirements is Section 2703(b)(1)
which requires that the restriction “is a bona fide business
arrangement.” The IRS argued that since the partnership owned only
liquid shares of Dell, there was no “business” and thus no “bona fide
business arrangement” under 2703(b). The Tax Court and the 8th Circuit
Court of Appeals agreed. While the appeals court noted that at times
shares of stock in a partnership can be a “business” for this purpose,
such as where the stock is closely held and the arrangement is to
maintain close control, this arrangement did not allow for a finding
of a business. The courts found that the primary purposes of the
arrangements were to protect the recipients of the gifts from
dissipating the assets and to teach the children how to handle their
money and did not relate to a business arrangement.
The second principal issue in the case related to the liquid nature of
the Dell stock and the lack of marketability discount for the limited
partnership interests. The IRS’ appraiser made an interesting argument
that the fact that all the partners could agree to terminate the
partnership, and that the partnership asset was a highly liquid asset,
combined to put a limit on the lack of marketability discount since at
some level of discounting the parties could find a mutual basis upon
which it made sense to instead liquidate the partnership. This seems a
little odd under the willing buyer – willing seller standard since who
is to say when and why the other partners would consent to such a
liquidation (that is, why it would ever be in their interests to
consent to the liquidation), but both the Tax Court and the appellate
court bought into the argument and thus limited the lack of
marketability discount based on this theory.
HOLMAN v. COMM., 105 AFTR 2d 2010-XXXX, (CA8), 04/07/2010
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2. NO CHANGE IN PFIC REPORTING, YET
New Code Section 1298(f) (recently enacted under the HIRE Act)
requires shareholders of a passive foreign investment company (PFIC)
to report such information as the IRS requires on an annual basis.
Questions have been raised as to what and when taxpayers should now be
reporting.
Even though this new provision is now in effect, the IRS is advising
taxpayers that Form 8621, Return by a Shareholder of a Passive Foreign
Investment Company or a Qualified Electing Fund, need only be filed
under the old rules. New guidance will eventually be forthcoming that
implements the new annual reporting requirements.
Notice 2010-34
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3. BUNDLED INVESTMENT FEES GAIN ANOTHER REPRIEVE
In the 2008 Supreme Court case of Knight v. Comm., investment advisory
fees paid by a trust were held to be subject to the “greater than 2%
of adjusted gross income” deduction limits of Code Section 67(a).
Oftentimes, banks, brokers, and trust companies impose only one
“bundled” fee for all services performed. Proposed regulations
indicated that taxpayers would need to unbundle the fee somehow to
allocate the fees among investment fees that are subject to the 2%
limit and those that items that are deductible without regard to the
2% limit.
These regulations have not been finalized yet. In Notice 2008-32, the
IRS provided interim guidance that for tax years before 2008,
taxpayers would not be required to unbundle the fee to determine a
portion of the fee that is subject to the 2% floor. It extended this
guidance to tax years beginning before January 1, 2009 in Notice
2008-116.
The IRS has now extended the same guidance to tax years beginning
before January 1, 2010, thus allowing full deductibility for bundled
fees without regard to the 2% floor. This guidance applies to
nongrantor trusts and estates.
Notice 2010-32
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4. TAX PROVISIONS IN HIRE ACT IMPOSE NEW COMPLIANCE BURDENS ON
INTERNATIONAL COMMERCE AND INVESTING
The recently passed Hiring Incentives to Restore Employment Act of
2010 (the "HIRE" Act) imposes new obstacles to the flow of capital
into and out of the U.S. We have prepared a general overview of the
new provisions, which can be viewed at http://tinyurl.com/yarams5here.
In addition to increasing the compliance burden of investors and
businesses (including the imposition of foreign account disclosure
requirements that essentially duplicate disclosures already required
under FBAR reporting), the new provisions include several traps for
the unwary. For example, U.S. persons that purchase stock of a U.S.
corporation from a foreign entity are required to obtain certification
regarding “substantial” U.S. ownership (or nonownership) of the
foreign entity. If the U.S. person does not obtain the required
certification, the U.S. buyer is obligated to withhold 30% of the
purchase price from the foreign seller (at least that is how we
initially read the new statute). If the U.S. buyer is not aware of
these rules, the IRS can come after it for the 30% withholding even if
the buyer has already fully paid the foreign seller. Tax and business
counsel need to familiarize themselves with these rules to avoid the
inadvertent application of these rules to their clients.
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5. NO SPOUSAL BENEFITS IN IRA OF DECEDENT WHEN OTHERS WERE THE
DESIGNATED BENEFICIARIES
Surviving spouses of a decedents who are participants in a qualified
ERISA retirement plan have significant statutory protections. These
protections include mandatory survivor benefits for the surviving
spouse that cannot be changed without the consent of the spouse. Thus,
a plan participant cannot provide for the passage of assets at death
to third parties without consent of his or her spouse.
Different from ERISA retirement plans are individual retirement
accounts (IRA). The statutory spousal protections applicable to ERISA
plans do not apply. In a recent case, the issue was raised whether the
ERISA spousal protections applied to an IRA anyway, because the IRA at
issue was funded by a rollover of funds out of an ERISA plan.
In the case, a decedent had previously had his ERISA retirement plan
assets rolled over into an IRA. The decedent subsequently remarried.
The beneficiaries of the IRA were the children of the decedent. The
participant died, and the fight was on – the children claimed they
were entitled to the IRA by reason of the beneficiary designation. The
surviving spouse claimed she should get the proceeds by reason of her
surviving spouse status, and that the funds came from an ERISA plan
where spousal protections applied.
The appellate court’s holding was that the surviving spouse benefits
of ERISA did not apply, so that the IRA belonged to the children. The
analysis was detailed and technical, but the bottom line was that the
surviving spouse protections of ERISA do not apply to IRAs, even if
the funds in the IRA came from an ERISA plan.
One “benefit” of the ruling is that it provides certainty as to IRA
beneficiary designations – a contrary ruling would effectively require
IRA custodians to conduct historical research to determine if the IRA
was previously funded from an ERISA plan when spouses are not the
beneficiaries. Information on this history may not be readily
available to the custodian, if it all. If Congress finds the lack of
protection in this situation objectionable, then it can change the law
to provide extended protection to spouses in this circumstance.
Charles Schwab & Co., Inc. v. Debickero, 105 AFTR 2d 2010-692 (9th
Cir. 2010)
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6. ABOUT OUR FIRM
Our firm seeks to protect & enhance the individual, family & 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 & Drafting) • 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.
DAILY TAX AND BUSINESS UPDATES AVAILABLE. View updates that we didn't
have room for in this newsletter or prior articles, or easily stay up-
to-date with twice a week postings on breaking tax and business
developments. Visit 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