SEPTEMBER 5, 2010 NEWSLETTER

[Gutter Chaves Josepher Rubin Forman Fleisher Law Firm]

September 5, 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. CHECK-THE-BOX RELIEF FOR FOREIGN ENTITIES
2. PSYCHOLOGICAL FACTORS IN T&E LITIGATION SETTLEMENT
3. OVERPAYMENT AND UNDERPAYMENT RATES – 4TH QUARTER 2010
4. ESTATE SETTLEMENT RECIPIENTS LOSE A CHUNK TO THE IRS
5. APPLICABLE FEDERAL RATES – SEPTEMBER 2010
6. ABOUT OUR FIRM

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1. CHECK-THE-BOX RELIEF FOR FOREIGN ENTITIES

Foreign entities that provide limited liability to their owners,
shareholders, or members will generally be classified by the U.S. as
corporations/associations for U.S. income tax purposes. However, if
such entities make a check-the-box election with the IRS, they can be
classified as a disregarded entity (if there is one owner) or a
partnership (if there is more than one owner) - although some types of
entities are not eligible at all for such elections.

Since the election is due within 60 days of formation of the entity,
as a practical matter it may be difficult to know at the time of
filing how many owners there will be. Therefore, some entities may be
filing check-the-box elections as partnerships when they end up having
only one owner, and some entities may be filing as disregarded
entities when they actually have more than one owner.

The IRS is now allowing such entities to correct their elections,
without being stuck with an erroneous/invalid election. There are some
conditions attached, but they are not too onerous:

1. Original or amended returns must be filed by the owners and the
entity consistent with the revised/corrected treatment;

2. All required amended returns must be filed by the expiration of
period of statute of limitations on assessments for the applicable tax
years; and

3. A corrected Form 8832 is filed with the IRS and attached to the
appropriate returns.

While we don’t know how often this problem actually arises, any relief
for taxpayer errors is always welcome.

Rev.Proc. 2010-32

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2. PSYCHOLOGICAL FACTORS IN T&E LITIGATION SETTLEMENT

When dealing with clients on evaluating and settling estate and trust
litigation, attorneys need to be cognizant of some psychological
factors that may inhibit their clients from rationally acting or
evaluating the case in their own self-interest. A recent article in
the Estate Planning Journal discusses some of these factors. With
knowledge of these factors, the attorney can better understand what
may be motivating his or her client, and also work to reduce the
influence of factors that are distorting client perceptions and
evaluations.

1. ENDOWMENT EFFECT. A client under the influence of the endowment
effect will exaggerate the value of his or her position simply by
reason of ownership of items involved, or by holding such a position
for a period of time. That is, things take on more value if they are
actually owned or the longer they are held or owned, than would
otherwise be the case.

2. PASSIONS. Obviously, client emotions and passions influence
judgment. In estate and trust litigation, these passions will include
grief, guilt, sibling rivalry and other jealousy, hostility towards
second (or subsequent spouses), etc.

3. UNDERVALUE OF COSTS. Litigants tend to overly discount the likely
future cost of litigation.

4. SELF-SERVING BIAS. Litigants will tend to view situations in a way
that make themselves look correct and as acting from good motives,
while viewing opponents as wrong or acting with bad intent.

Pointing out these factors to clients may help them in being more
objective and to help diffuse the impact of such distortions. The
author also notes that in regard to self-serving bias, bringing this
to the attention of a litigant may not be enough. In that case, the
author believes that asking the client to list the weaknesses in his
or her own case will help reduce the impact of this bias.

Helsinger, Howard M., Advising the Trust or Estate Litigant: When to
Raise or Fold, Estate Planning Journal (WG&L, July 2010)

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3. OVERPAYMENT AND UNDERPAYMENT RATES – 4TH QUARTER 2010

For a table of rates, see http://tinyurl.com/2d9vmav.


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4. ESTATE SETTLEMENT RECIPIENTS LOSE A CHUNK TO THE IRS

Two brothers brought suit against their step-siblings and the estate
of their step-mother for a share of ownership of real properties that
were devised to them by their step-mother, but which were transferred
out of the step-mother's death in the months before her death. A
settlement agreement was reached that provided for cash payments to
the brothers. The attorney for the brothers received a contingency
fee, and that was that. Well, until the IRS came a-knocking.

The estate had deducted the brothers' settlement payments as claims
against the estate for federal estate tax purposes. On audit, this
claim was denied, and thus additional estate taxes, penalties, and
interest were imposed. By this time, the estate had already
distributed all of its assets. The IRS came after the brothers for the
amounts due, under Code Section 6901 transferee liability.

The brothers raised a number of well thought-out reasons why
transferee liability did not apply. Unfortunately, the Tax Court
rejected them all. These issues are instructive, and thus are
summarized below:

a. The brothers asserted that they did not receive "property of a
decedent," which is a requirement for transferee liability. They based
this argument on their having sued their step-siblings, and that the
settlement funds were thus paid by the step-siblings and not the
decedent's estate. The court rejected this because the actual funds
were paid to them from the estate and because the estate was a co-
defendant. But the court went on to address what would be the case if
the payments had in fact been paid by the step-siblings directly. The
court noted that if the step-siblings received property from the
estate, and then paid the brothers from their own funds, transferee
liability would still apply since a "transferee of a transferee" is
still liable.

b. The brothers argued that they were not "transferees" because they
received their settlement proceeds not as beneficiaries but in
exchange for a waiver of their right to sue to enforce the terms of
the will. However, the court characterized the settlement proceeds as
a substitute for the real property devised to them, which was thus
received as transferees.

c. The brothers argued that the portion of the settlement that was
paid to their attorney for his contingency fee was not property
received by them for transferee liability purposes. The court rejected
this, acknowledging that such fees were authorized and attributable to
the brothers, and thus deemed received by them before the attorney was
paid.

Note that Code Section 6901 does not independently create transferee
liability. Instead, a transferee must first have liability for the
estate taxes under applicable State law or state equity principles. In
this case, as in most such settlement circumstances, this is not much
of a hurdle to the IRS since under the law of most (if not all)
States, a beneficiary will be liable for estate obligations to the
extent of distributions received by the beneficiary.

While not addressed in the opinion, the brothers perhaps may be able
to sue and collect from the other estate beneficiaries who received
estate assets to the extent that a portion of the estate tax liability
is apportioned to them under the applicable State law and their shares
were not previously charged with their apportioned liability. Also,
perhaps the fiduciaries of the estate may have some liability to the
brothers for the penalties that were incurred attributable to estate
issues.

The lesson from this case is that every plaintiff in estate litigation
needs to determine what the federal estate tax exposure is of the
plaintiff upon success or settlement. More particularly, counsel for
such plaintiffs need to think about whether tax, penalties and
interest will be apportioned to their clients. If yes, should this be
varied by agreement? If yes, how can their clients monitor estate tax
compliance and audit activity to protect their interests? If yes,
should other parties be burdened with the penalties or interest? If
yes, how can their clients be sure the other parties will pay their
respective shares in case the IRS comes after only their clients for
any deficiency?

We can't tell from the opinion whether the brothers knew of the risk
of estate taxes being imposed on them by reason of the settlement, but
I suspect the answer is no. This is doubly so as to the penalty
portions of the liability.

Carl M. Upchurch, et al. v. Commissioner, TC Memo 2010-169,

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5. APPLICABLE FEDERAL RATES – SEPTEMBER 2010

For a table of rates, see http://tinyurl.com/2d73hhr.

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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