OCTOBER 24, 2010 NEWSLETTER

[Gutter Chaves Josepher Rubin Forman Fleisher Law Firm]

October 24, 2010
An Electronic Newsletter of Gutter Chaves Josepher Rubin Forman
Fleisher P.A.
Charles (Chuck) Rubin, Editor/Author (except as otherwise noted) ©
2010

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CONTENTS OF THIS NEWSLETTER:

1. THIRD PARTY CAPITAL CONTRIBUTIONS
2. IRS RULES FAVORABLY ON RESIDENCE INTEREST DEDUCTIONS
3. FRAUDULENT HOMESTEAD CONVEYANCE AND INCOME TAXES
4. NO ONE EVER SAID THE CODE IS A TWO WAY STREET
5. TREATMENT OF PROPERTY THAT IS BOTH RENTED AND SOLD
6. APPLICABLE FEDERAL RATES – OCTOBER 2010
7. ABOUT OUR FIRM

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1. THIRD PARTY CAPITAL CONTRIBUTIONS

A basic tenet of federal income tax is that all accessions to wealth
are income to the recipient, absent a statutory exclusion. What
happens if a for-profit corporation receives funds by the government –
is that income? It would seem silly – the government giving money away
with one hand, and then taking some of it back in tax with the other.
However, it happens all the time. For example, Social Security
payments can be taxable to recipients.

This issue came up in regard to grants to broadband communications
companies under the American Recovery and Reinvestment Act of 2009,
and reminds us of an advantageous characterization of such payments if
the recipient is a corporation. Revenue Procedure 2010-34 recently
provided a safe harbor interpretation for the communications
companies, using Code Section 118.

Code Section 118 permits corporations to receive contributions to
capital in a nontaxable manner. Most capital contributions come from
shareholders of a corporation, and the Code Section 118 clearly avoids
income to the corporation on its receipt. Further, Code Section 118
will also apply to contributions received from non-shareholders.
However, in that situation, the corporation must reduce its tax basis
in assets acquired within 12 months of the contribution (or other
property of the taxpayer if such assets are not purchased in that
period), pursuant to the rules of Code Section 362(c)(2)(B). Thus,
the reduction in basis does impose a tax cost to the recipient
corporation by way of reduced depreciation or increased gains/reduced
losses in regard to corporate property.

The Revenue Procedure confirmed the application of these provisions to
most of the grants, but did not apply them to reimbursement for pre-
application expenses and certain specified grants. The Procedure is
silent as to why some of the grants do not qualify.

Code Section 118 only applies to corporations. The Revenue Procedure
confirms this when it excludes noncorporate taxpayers from the
coverage of the Procedure.

An interesting question is what happens if the recipient corporation
does not acquire enough property within 12 months of a grant, and has
insufficient basis in its other property, to apply a full basis
reduction equal to the capital contribution.

Revenue Procedure 2010-34

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2. IRS RULES FAVORABLY ON RESIDENCE INTEREST DEDUCTIONS

Generally, interest paid by a taxpayer on personal items is not
deductible. However, the Code allows an interest deduction for
"acquisition indebtedness" for a qualified residence of a taxpayer for
up to $1 million of indebtedness. A taxpayer may also deduct interest
on up to $100,000 of "home equity indebtedness."

If a taxpayer incurs a mortgage debt on a qualified residence of over
$1 million when he buys the residence, clearly he can deduct interest
on the first million dollars of debt. Can he use the "home equity
indebtedness" provisions to obtain an interest deduction on the first
$100,000 over the first million dollars of debt? Until now, the answer
was no, at least according to 2 Tax Court Memo decisions and a 2009
Chief Council Advice.

Happily for taxpayers (or at least for those that can afford to take
on mortgages in excess of $1 million), the IRS has reversed its
position and will now allow the use of the "home equity indebtedness"
provisions for interest on the first $100,000 of acquisition
indebtedness in excess of $1 million already allowed. The IRS based
its decision on the fact that there is no provision in the Code that
restricts "home equity indebtedness" to indebtedness not incurred in
acquiring, constructing, or substantially improving the residence.

It is not often that the IRS reverses both itself and the Tax Court in
a manner favorable to taxpayers. This is something of an early holiday
gift for sure.

For any taxpayers that are eligible for additional interest deductions
under these rules for prior open tax years, they should consider
filing an amended tax return to obtain the benefit of this ruling.

Revenue Ruling 2010-25

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3. FRAUDULENT HOMESTEAD CONVEYANCE AND INCOME TAXES

Florida’s Uniform Fraudulent Transfer Act will allow a creditor to
reach an asset transferred from a debtor to a third party if the
transfer is found to constitute a fraudulent transfer. However,
Fla.Stats. §726.102(2)(b) will exempt transfers of assets that are
generally exempt from creditors under nonbankruptcy law from the
fraudulent conveyance rules.

In Scott E. Rubenstein et al. v. Comm., an insolvent father
transferred his exempt homestead to his son. The IRS sought to set
aside the homestead transfer as a fraudulent conveyance so as to
assist in collecting the father’s income tax liabilities. The son
argued that under the above Florida statute, the homestead was an
exempt asset and thus the fraudulent conveyance rules could not apply
to it.

That may be true for other creditors, but not the U.S. The IRS is not
bound by the exempt status under Florida law as to homestead property
in collection matters, and thus as to the U.S. the homestead was NOT
generally exempt from creditors under nonbankruptcy law. As such, it
was likewise not exempt from the application of the Fraudulent
Transfer Act.

Scott E. Rubenstein et al. v. Comm., 134 TC No. 13 (6/7/10)

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4. NO ONE EVER SAID THE CODE IS A TWO WAY STREET

On May 6, the stock market fell victim to the “flash crash.” In a
short period of time, the market took a major dive, and then quickly
recovered. Experts are still looking for what triggered the unusual
movement.

Many taxpayers who had standing stop-loss orders on their securities
had their securities sold for a gain or loss due to the large
percentage swing that occurred.

Under the wash sale rules, those taxpayers who repurchased the same
securities within 30 days cannot deduct any losses from such sales –
instead, the losses will be figured into their basis on the subsequent
sale of the securities.

Essentially arguing that since losses from the flash crash are
deferred, some taxpayers sought a special dispensation from the IRS
Commissioner that in regard to securities that were sold for a gain,
the taxpayers would be allowed to repurchase their sold securities and
avoid having to recognize their gains.

Not surprisingly, the Commissioner declined, per their being no
authority in the Internal Revenue Code for such a deferral. Beyond the
lack of specific authority, additionally there is no constitutional or
statutory requirement that gains and losses be treated in the same
manner under law. Indeed, the Code is rife with provisions that limit
the use of losses (e.g, the $3,000 capital loss limitation, passive
loss limitations, etc.) that have no corollary deferral of gain. The
Code is not the place to go looking for fair and balanced provisions
that impact the taxpayers and the government in equal measure.

Information Letter 2010-0188

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5. TREATMENT OF PROPERTY THAT IS BOTH RENTED AND SOLD

A taxpayer in the business of selling property holds it in inventory.
A taxpayer that rents property does not. In many circumstances, rental
treatment is superior to inventory treatment – such property can be
depreciated (and thus generate depreciation deductions), and it can be
swapped in tax-free exchanges under Code Section 1031 for other like-
kind property.

What if the taxpayer BOTH sells and rents property? In a recent Chief
Counsel Advice, the taxpayer acquired property. Pending sale of the
property, it rented it out. In selling property, it would typically
swap the property for other property so as to minimize gain
recognition on the swaps. The question was whether the taxpayer could
depreciate the property and use Code Section 1031, or must the
taxpayer hold the property as inventory instead.

There is no fixed rule in these circumstances. Instead, the taxpayer
should examine its PRIMARY PURPOSE for holding the asset to determine
whether it is inventoriable. In the situation that was analyzed, the
IRS concluded the property belonged in inventory. Some of the factors
noted by the IRS that tipped the scales towards inventory were (1) 91%
of the taxpayer’s income came from sales with only 9% from rental
operations, and (2) much of the new equipment was sold before it could
be rented out. Of course, in this situation it was probably in the
IRS’ interest to conclude the property was inventory, so as to deny
the depreciation deductions and the gain deferral under Code Section
1031. Nonetheless, per the above facts it was probably a reasonable
conclusion as to the taxpayer’s PRIMARY purpose.

Chief Counsel Advice 201025049

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6. APPLICABLE FEDERAL RATES – OCTOBER 2010

For a table of rates, see http://tinyurl.com/2f8m2sc.

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7. 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