APRIL 17, 2011 UPDATE

[Gutter Chaves Josepher Rubin Forman Fleisher Law Firm]

April 17, 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. SUSPECT EXPERT APPRAISAL RISKS TOTAL TAXPAYER LOSS

2. RECOVERING ATTORNEY FEES FROM THE IRS WHEN SOMEONE ELSE PAYS YOUR
FEES

3. FORM 8939 AND ELECTION OUT OF ESTATE TAX FOR 2010–CONTINUING
EXTENSION

4. SUMMARY TABLE OF TRANSFER TAX EXEMPTIONS, RATES, KEY CREDITS &
BASIS ADJUSTMENTS

5. NEW FBAR FORM AND INSTRUCTIONS RELEASED

6. INHERITED IRA’S–BANKRUPTCY PROTECTION

7. OBTAINING ESTATE TAX DEDUCTIONS VIA SETTLEMENT

8. APPLICABLE FEDERAL RATES–APRIL 2011

9. HOMESTEAD WAIVER IMPUTED TO WARRANTY DEED [FLORIDA]

10. 2009 FILING AND AUDIT STATISTICS HIGHLIGHTS

11. FIRM ANNOUNCEMENTS

12. ABOUT OUR FIRM

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1. SUSPECT EXPERT APPRAISAL RISKS A TOTAL TAXPAYER LOSS

Numerous tax consequences flow from the value of property. Principal
examples include charitable contribution deductions, estate taxes, and
gift taxes. Absent a contemporaneous sale of the subject property to
unrelated persons, an appraisal will usually be needed to compute the
relevant tax. If the IRS disputes the value and the matter ends up in
court, an expert will be needed to sustain the taxpayer’s valuation.
The government will often offer up its own competing appraisal,
although it may instead be content with only attacking the taxpayer’s
expert and report.

A recent Tax Court case demonstrates the hazards of relying on a
suspect expert or appraisal in tax litigation. In Boltar LLC et al v.
Comm., the issue was the valuation of a conservation easement for
charitable deduction purposes. During trial, the Tax Court noted a
host of problems with the valuation opinion of the taxpayer’s expert.
The government moved to exclude the expert’s report and testimony as
neither reliable nor relevant, under the authority of the Federal
Rules of Evidence and Daubert v. Merrell Dow Pharm., Inc., 509 U.S.
579 (1993). The expert’s report and opinion was so problematic that
the Court granted the motion.

A typical result in a case such as this will be a finding of value at
or close to the value presented by the government, since there will be
little or no admissible evidence to the contrary. Opportunities to
shift the burden of proof on value to the government may also be lost.
Thus, a taxpayer relying on a weak appraisal report or expert risks a
total loss on the valuation issue.

Results such as this demonstrate that relying on an aggressive value
during litigation enhances the risk of total loss. It also
demonstrates the importance of properly vetting the expert and his
appraisal to determine its credibility and correctness. Lastly, it
suggests that using more than one expert or report may be an
appropriate litigation strategy in the proper circumstances (although
having differing values under those reports may create other
litigation issues, and will also include litigation costs).

The taxpayer argued that the Daubert analysis should only apply in a
jury trial (Boltar involved a non-jury trial). The Tax Court did not
buy into that, holding that a Daubert-type exclusion can apply in a
bench trial.

Boltar, LLC et al v. Comm., 136 TC No. 14 (4/5/2011)

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2. RECOVERING ATTORNEY FEES FROM THE IRS WHEN SOMEONE ELSE PAYS YOUR
FEES

Under Code §7430 , a taxpayer who prevails against the IRS in court
(or at the administrative level) can recover his fees and costs.
Restrictions on recovery exist, however. The taxpayer must have
exhausted administrative remedies before going to court, the taxpayer
must not unreasonably protract the proceedings, and the taxpayer must
meet financial eligibility requirements. Further, no fees will be
allowed when the IRS proves its position in the proceeding was
substantially justified. Thus, taxpayers can only recover fees if the
IRS was acting unreasonably in seeking to impose taxes.

Oftentimes, a taxpayer’s employer or a related person or entity may
pay his attorneys fees. The procedural history of a recent case has
established that recovery of fees by the taxpayer are still available
in this circumstance, but only under two limited circumstances.

Under the first of these, the taxpayer must have an absolute
obligation to repay the fees to the person or entity that paid them
initially, regardless of whether he successfully recovers an award of
fees from the IRS. Under the second, the taxpayer must have a
contingent obligation to pay the fees if he recovers an award of fees
from the IRS.

This new law established in the taxpayer’s case unfortunately did not
help the taxpayer. The Tax Court, on remand from the appellate court
to apply these rules, did not find either of the two limited
circumstances to apply. While the taxpayer did assert that he had a
contingent obligation to repay any fees he recovered by the IRS, there
was no written evidence of such an obligation – essentially, the Court
did not find sufficient evidence to find that there really was such an
agreement.

The taxpayer also argued that he was obligated to pay the attorneys if
the corporation that undertook to pay them could not. However, the
court indicated that this does not meet the first circumstance – the
test there is only whether the taxpayer had on obligation to repay the
entity paying his fees. “In other words, the relevant inquiry is
whether petitioner is indebted to Caspian for the amounts Caspian paid
to counsel on his behalf. Petitioner's argument focuses incorrectly on
his supposed obligation to pay the fees to counsel directly ‘if
Caspian failed to pay for such services’, rather than on an obligation
to repay Caspian.”

Taxpayers seeking to be able to recover fees from the IRS in these
circumstances would be well served to establish in a contemporaneous
writing an agreement to repay the paying entity or person, either in
all circumstances or in the event of recovery from the IRS (assuming
that to be the actual agreement of the parties).

Morrison, TC Memo 2011-76

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3. FORM 8939 AND ELECTION OUT OF ESTATE TAX FOR 2010–CONTINUING
EXTENSION

As April 18 approaches, there have been continuing concerns whether
the election out of estate tax for those estates that desire to do so
for 2010 decedents, and the filing of Form 8939 to report basis
adjustments for those decedents, will be required to be filed by that
date. This is because previously the Form 8939 reporting was to have
been completed and submitted by the due date of the decedent’s 2010
income tax return.

We have previously discussed earlier guidance on when those items will
be due here. On March 31, the IRS issued further unambiguous guidance
that such items will not be due on April 18.

The due dates (and applicable forms) will be released by the IRS in
the future.

IR-2011-33, March 31, 2011

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4. SUMMARY TABLE OF TRANSFER TAX EXEMPTIONS, RATES, KEY CREDITS &
BASIS ADJUSTMENTS

Trying to keep track of the various changes in the federal transfer
tax exemptions, credits, rates, and basis adjustments that have
occurred since 2001 and the enactment of EGTRA is becoming a difficult
task. We have created a summary table to assist with this. It can be
accessed at http://goo.gl/TyeyS.

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5. NEW FBAR FORM AND INSTRUCTIONS RELEASED

Previously, we discussed here the new FinCEN regulations that revise
the rules applicable to FBAR/Form TD F 90-22.1 filings. The Treasury
Department has now issued a March 2011 revision to the FBAR form and
instructions, which incorporate the new provisions of the regulations.

The new instructions generally track the revised regulations, with
some minor modifications. The form and instructions can be downloaded
http://www.irs.gov/pub/irs-pdf/f90221.pdf.

Charles (Chuck) Rubin has written a journal article that provides a
detailed analysis of the new rules in context of trusts and foreign
accounts, which will be published in the July 2011 issue of Estate
Planning. After it is published, we’ll be able to share its content
here.

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6. INHERITED IRA’S–BANKRUPTCY PROTECTION

Last March, we discussed the bankruptcy case In re Chilton. That case
held that unlike a traditional individual retirement account (IRA), an
inherited IRA is not an exempt asset in bankruptcy.

That case has now been reversed. When Chilton was first decided, it
was a case of first impression. Since then, there have been at least
five other cases that ruled in an opposite manner. In reversing the
bankruptcy court, the District Court held that (a) an inherited IRA
holds “retirement funds” within the meaning of 11 U.S.C. §522(d)(12),
and (b) such an IRA is tax exempt under Code §408(e). Thus, an
inherited IRA qualifies as an exempt asset under 11 U.S.C. §522(d)
(12).

Chilton v. Moser, 107 AFTR 2d 2011-XXXX, 2011 WL 938310 (2011, DC TX)

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7. OBTAINING ESTATE TAX DEDUCTIONS VIA SETTLEMENT

Oftentimes, parties in litigation will direct property to a spouse or
charity in settlement, and seek a marital or charitable deduction. At
times, such settlements are motivated by and structured around the
estate tax deduction. However, litigants or their counsel oftentimes
do not realize that the deductions cannot be created out of whole
cloth – there must be a bona fide dispute regarding the entitlement of
the spouse or charity to the payment. That is, there must be some
reasonable legal basis that entitled the spouse or charity to the
settlement payment. That is, if such a payment was not directed for
under the dispositive documents (including prior dispositive documents
involved in the dispute) or some other binding obligation, parties
should expect IRS resistance to deductions for such payments that are
“created” in the settlement process.

A recent case compares and contrasts the allowable and not allowable
situations. In Estate of Palumbo (3/9/11, DC PA), a charitable trust
was a remainder beneficiary under various versions of a prior Will.
However, in the decedent’s last Will, the trust was inadvertently left
out. In settlement of a dispute as to the rights of the charitable
trust against the residuary beneficiary named in the last Will, the
trust received over $11 million. The estate sought a charitable
deduction for the $11+ million. The IRS disallowed it.

The District Court noted that there was a bona fide dispute. Further,
even though the charitable trust was not mentioned in the last Will,
it could not be said that it had no legal right to the residuary
estate. Perhaps it didn’t, but there was a bona fide dispute based on
the prior Will and the admission of the drafting attorney of a
scrivener’s error. Thus, the settlement payment to the charity was
deemed to qualify for a charitable deduction as a Code §2055
deduction.

This result was contrasted by the court with the disallowance of a
charitable deduction in the case of Bach v. McGinnes, 333 F.2d 979 (3d
Cir.1964). In that case, a decedent’s surviving spouse did not like a
dispositive plan of her decedent spouse that would only allow property
to pass to charity only if certain named relatives predeceased her. To
achieve a better result for the charity, after her spouse’s death the
surviving spouse threatened her use of her spousal elective share
against the estate – if exercised, it would reduce the economic
interests of some of the beneficiaries. Due to that threat, the
beneficiaries and the charity reached an agreement that resulted in a
current remainder distribution to the charity. A charitable deduction
was sought for the transfer to the charity. The IRS objected, and no
deduction was allowed either by the District Court or the Court of
Appeals.

What distinguishes Palumbo from Bach? In Bach, there was no legal
argument raised that if successful would have resulted in a charitable
gift to the charity. Thus, there was no bona fide legal dispute over
the charity’s legal entitlement. Instead, the various parties arranged
for the transfer to the charity because it otherwise best suited their
economic interests, albeit some of them acting under the threat of a
spousal elective share.

Estate of Antonio J. Palumbo, 107 AFTR 2d 2011-XXXX, (DC PA),
03/09/2011

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8. APPLICABLE FEDERAL RATES–APRIL 2011

For a summary and diagram, please visit http://goo.gl/7wGZB.

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9. HOMESTEAD WAIVER IMPUTED TO WARRANTY DEED [FLORIDA]

The Florida Constitution prohibits a decedent from devising his or her
homestead to third parties if the decedent is surviving by a spouse at
death. When there are no surviving lineal descendants of the decedent,
the surviving spouse will receive 100% of the homestead if an invalid
devise is attempted.

Virginia Habeeb died in November 2008, survived by her husband
Mitchell and no lineal descendants. Virginia owned homestead property.
Her last will gave a life estate interest to Mitchell, with the
remainder interest to her sister. Mitchell died about a year later,
and his estate challenged the devise as invalid under the
Constitution, and asserted that the entire homestead passed to
Mitchell at Virginia’s death.

In 1979, Virginia and Mitchell had owned the subject condominium as
tenants by the entireties. In that year, Mitchell and Virginia signed
a Ramco form warranty deed granting to Virginia a fee simple interest
in the condominium. Based on this, Virginia’s estate claimed that
Mitchell had waived his homestead rights in the condominium, and thus
no homestead restrictions on the devise applied at Virginia’s death.
Both the trial court and the appellate court agreed with Virginia’s
estate.

Virginia’s estate had several obstacles to overcome to assert a valid
waiver, per the requirements of Fla.Stats. Section 732.702. That
statute, in 1979, allowed for a waiver BY A WRITTEN CONTRACT,
AGREEMENT, OR WAIVER. The statute further required that each spouse
make a FAIR DISCLOSURE TO THE OTHER OF HIS OR HER ESTATE if the waiver
is signed after marriage.

A. WRITTEN CONTRACT, AGREEMENT OR WAIVER ISSUE. Virginia’s estate
argued that the warranty deed constituted the waiver of homestead
rights. Clearly, the deed contained no waiver language, and did not
mention the term “homestead.” Fla.Stats. section 732.702(1) does
indicate that a waiver of “all rights” or equivalent language, as to
property or an estate will constitute a waiver of homestead, so there
is no requirement of an express reference to homestead rights to have
a valid waiver.

In reviewing the issues, the appellate court noted that the Ramco form
provides that the grantor “grants, bargains, sells, aliens, remises,
releases, conveys, and confirms” to the grantee “all that certain
land” as well as “all the tenements, hereditaments and appurtenances
thereto” to the grantee. The court indicated that the term
“heriditaments” includes “anything capable of being inherited.” Based
on this language, the court found a valid “waiver” by Mitchell of his
homestead rights.

This appears to be quite a stretch. There is no express waiver
language whatsoever. Further, the deed language can be read as a
waiver of any retained rights of Mitchell that arose by reason of HIS
ownership interest in the property – not those under separate
homestead provisions applicable to his wife’s subsequent ownership.
Additionally, there was no mention of any discussions, knowledge, or
other direct evidence of intent by Mitchell, that indicated he knew of
his homestead rights or that he knew he was waiving them (other than
an implied intent based on Mitchell’s actions after Virginia’s death
and prior to Mitchell passing away).

B. FAIR DISCLOSURE ISSUE. Most knowledgeable practitioners
implementing a post-marital waiver of homestead rights would have the
spouses prepare a written disclosure of assets, or at least a written
acknowledgment of knowledge of each other’s assets, to meet the fair
disclosure requirement. There is no evidence that Mitchell or Virginia
made such disclosures to each other in 1979 when the transfer was made
to Virginia.

The appellate court was undisturbed by this lack of evidence or
disclosure. Instead, it relied on (a) the parties having been married
around 30 years at the time of the 1979 transfer, (b) the deed having
been prepared by an attorney and signed before two witnesses and a
notary public, (c) the parties preparing later estate planning
documents based on the real estate transfer and without regard to
homestead restrictions, and (d) Mitchell not having made objections
during the period he survived Virginia.

Again, the courts appear to have really stretched to find a waiver,
when there clearly was no express evidence of one.

COMMENTS. The holdings of the case can be distilled to (a) a warranty
deed between spouses can constitute a waiver of homestead right, and
(b) disclosure of assets can be inferred from the length of marriage.
The courts’ clearly reached to find compliance with the statutory
requirements of waiver, especially since when there is doubt whether a
constitutional right has been waived, there is a presumption against
the waiver (as acknowledged by the appellate court in its opinion!).
While perhaps the reaching did not result in an egregious result in
this case, it provides fodder and precedent for assertions of waiver
of homestead without clear disclosure of assets or clear waiver
language in future cases.

While the courts were applying the waiver statute as it existed in
1979, the portions of Fla.Stats. Section 732.702 addressed in the case
are essentially unchanged, so that the analysis has continued
application to such waivers being made today.

As an aside, a useful summary table of the Florida restrictions on
transfers of homestead property is available here.

RICHARD J. ABEEB, AS PERSONAL REPRESENTATIVE OF THE ESTATE OF MITCHELL
HABEEB v. CATHERINE RISK LINDER, AS PERSONAL REPRESENTATIVE OF
VIRGINIA HABEEB, 3rd DCA (February 9, 2011)

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10. 2009 FILING AND AUDIT STATISTICS HIGHLIGHTS

The IRS has issued information from the 2009 income tax filing season.
As a voluntary compliance system, taxpayers often are interested to
know their chances of audit. Below are some interesting facts and
statistics.

Individual returns filed - 142,823,105

Audits of individual returns - 1,581,394

Individual audits that were only correspondence audits - 78.3%

Audit rates for individual returns with $200,000 to $1 million in
income - 2.5%-2.9%

Audit rates for individual returns with more than $1 million in income
- 8.4%

Audit rates for corporations (excluding S corporations) - 1.4% (with
percentages increasing significantly with increased total assets –
e.g., 45% for corporations with $5-$20 billion in assets

Audit rates for partnerships and S corporations - .4%

Offers in compromise - 57,000 filed and 14,000 accepted

Criminal investigations - 2010: 4,706 investigations – 3,034 referrals
for prosecution – 2,184 convictions

Incarceration rate for convicted taxpayers - 81.2%

Source: 2010 Data Book (Pub 55B)

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11. 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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12. 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