AUGUST 15, 2010 NEWSLETTER

[Gutter Chaves Josepher Rubin Forman Fleisher Law Firm]

August 15, 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. NEW TAX ACT PROVISIONS
2. UPDATED TABLE ON FLORIDA HOMESTEAD RESTRICTIONS ON TRANSFER
3. COVENANT NOT TO COMPETE DEFEATS PERSONAL GOODWILL CLAIM
4. KEY MAY 2010 FLORIDA PROBATE LAW CHANGES [FLORIDA]
5. THE PROS AND CONS OF MAKING GIFTS IN 2010
6. FIRM ANNOUNCEMENTS
7. ABOUT OUR FIRM

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1. NEW TAX ACT PROVISIONS

On August 10, the Education Jobs and Medicaid Assistance Act was
signed into law. The new law contains several new provisions relating
to the foreign tax credit.

First, new Code §909 is added to the Internal Revenue Code. Without
getting bogged down in the details, the new provision delays the
foreign tax credit or deduction for a taxpayer until the foreign
income that gives rise to the foreign tax is taken into account by the
taxpayer – if this never happens, then the credit or deduction is lost
for good. The delay is triggered by a “splitting” transaction which is
when the related income is taken into account by related entities or
persons to the taxpayer who seeks the credit or deduction. Congress
was concerned that some taxpayers were engaging in tax structuring so
that foreign income was incurred by related persons or entities that
are not currently subject to U.S. tax while still allowing the income
to generate U.S. foreign tax credits that can be used to offset U.S.
tax on other foreign income. The deferment of the credit or deduction
will also apply for deemed paid credits under Code §§902 and 960.

Another new provision is Code §901(m), which acts to disallow a
portion of the foreign tax credit or deduction for actual or deemed
asset acquisitions that arise in certain circumstances (referred to as
“covered asset acquisitions”). The genesis of this provision is a
concern that U.S. taxpayers were obtaining basis step-ups in foreign
assets in transactions that did not result in a basis step-up for
foreign purposes. Thus, such assets could generate more income or gain
or less depreciation in foreign jurisdictions than is arising in the
U.S., giving rise to more foreign tax and less U.S. tax. The new
provision, again in a complex manner, targets this extra foreign
income tax and denies foreign tax credits and deductions for it.
Covered asset acquisitions include (a) Section 338 qualified stock
purchases that are treated as asset acquisitions, (b) other
transactions which are treated as asset acquisitions fore U.S. tax
purposes but are treated as stock acquisitions or are disregarded for
purposes of the foreign income taxes of the relevant foreign
jurisdiction (e.g., the purchase of shares of a corporation that is
disregarded for U.S. tax purposes), and (c) acquisitions of
partnership interests for which a Code §754 election is in place.
Again, the common denominator in these acquisitions is a basis step-up
in assets for U.S. purposes, but not foreign tax purposes.

Lastly, new language under Code §904(d)(6) seeks to restrict the
availability of foreign tax credits and deductions for taxpayers that
have income which would be treated as U.S. source but which is instead
characterized as foreign source under a treaty. The concern is that
this increase in foreign source income under a treaty, which is often
of a type that is lightly taxed by the foreign jurisdiction, creates
more foreign source income than is appropriate (which foreign source
income allows for greater taxpayer credits and deductions). The new
provision effectively creates separate baskets for each such item of
income, thus allowing only the foreign taxes imposed on each such item
to be creditable or deducted. Thus, each item of income must be
separately tracked and analyzed.

COMMENTS: The foreign tax credit is already a complex area, that is
little understood beyond those that often deal with it. The foregoing
provisions address legitimate concerns of the government. However, the
remedies further complicate the area, and will result in additional
taxpayer compliance costs and frustration. Taxpayers would like to
understand the laws applicable to them, and would also not like to
have to pay substantial fees to advisors and accountants to have them
explained and applied. The complexity of these new provisions
indicates the total disregard for these taxpayer concerns by Congress.

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2. UPDATED TABLE ON FLORIDA HOMESTEAD RESTRICTIONS ON TRANSFER

Several years ago we posted my summary table on Florida’s homestead
restrictions on transfer. As those who have dealt with these
restrictions know, they can be difficult to both remember and
correctly apply.

We have now updated the table for the new election available to a
surviving spouse on a bad devise to obtain a 50% tenancy in common
interest in lieu of a life estate.

The table is available at http://tinyurl.com/23gsyx8.

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3. COVENANT NOT TO COMPETE DEFEATS PERSONAL GOODWILL CLAIM

Dr. Howard was the sole shareholder, officer, and director of his
personal service corporation. Back in 1980, he entered into an
employment agreement and a covenant not to compete with the
corporation.

In 2002, the corporation sold the practice. In the sale, $549,900 of
the purchase price was paid to Dr. Howard as a sale of his personal
goodwill in the practice (instead of such amount being paid to the
corporation for its goodwill). Dr. Howard reported the sale of the
goodwill on his individual return, as capital gain.

The IRS challenged the sale, claiming the goodwill belonged to the
corporation.

The court acknowledged that the “essence of goodwill is the expectancy
of continued patronage, for whatever reason…the probability that old
customers will resort to the old place without contractual
compulsion.” As such, the court also recognized that a professional
that works for a personal service corporation can have personal
goodwill. Unfortunately, in this circumstance, the goodwill that was
sold was held to be corporate goodwill, and not goodwill belonging to
Dr. Howard.

What did in Dr. Howard was the employment agreement and the covenant
not to compete that he had with the corporation. Relying on prior case
law, the court determined that the personal relationships with the
patients became the property of the corporation by reason of those
agreements. Absent such agreements, the court would likely have ruled
differently.

The sad part of the case is that Dr. Howard really did not need an
employment agreement nor a covenant not to compete, since he was the
sole shareholder. Those items generally protect the corporation vis-a-
vis its employees, but as a practical matter Dr. Howard was protecting
himself (as shareholder) from himself (as employee).

A curious part of the case is that the IRS and the court converted the
payment to Dr. Howard to a taxable dividend to him. One would think
that the proper tax accounting would have been income to the
corporation, followed by either a dividend (or liquidating
distribution if applicable) to Dr. Howard.

Howard v. U.S., 106 AFTR2d 2010-xxxx (7/30/2010)

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4. KEY MAY 2010 FLORIDA PROBATE LAW CHANGES [FLORIDA]

The following summarizes the interesting recent changes made to
Florida’s Probate Code.

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1. Fla.Stats. § 655.935 - Safe Deposit Boxes

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1.1 Lessor may have obligation to gather information and copies
regarding items removed from the decedent's safe deposit box.

1.2 COMMENT: Helpful to avoid cases of "disappearing dispositive
documents."

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2. Fla.Stats. § 731.110 - Caveats

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2.1 Provides noncreditors may file caveats prior to death, subject to
2 year expiration period.

2.2 COMMENT: A procedural break to noncreditors.

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3. Fla.Stats. § 731.201 - Notice

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3.1 Clarification of formal and informal notice definitions by
reference to particular Probate Rules.

3.2 COMMENT: Clarification is always a good thing.

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4. Fla.Stats. § 732.401 - Surviving Spouse Interest in Homestead

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4.1 In lieu of receiving a life estate in homestead that is improperly
or not devised, the surviving spouse may elect to receive a 50%
tenants in common interest (with the other 50% vesting in the
decedent's descendants).

4.2 6 month election period.

4.3 Election filed in real property records.

4.4 Disclaimer of surviving spouse's interest in homestead will not
act to divest statutory remaindermen of their interest.

4.5 Fla.Stats. § 732.4015 directs that disclaimed spousal interest
passes in accordance with Chapter 739 (Fla.Stats. § 732.4015).

4.6 COMMENT: Useful method to reducing conflicts between surviving
spouse and decedent's descendants, especially if descendants are not
lineals of the surviving spouse.

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5. Fla.Stats. § 732.4017 - Lifetime Homestead Transfers

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5.1 Irrevocable inter vivos transfers will be respected as such and
will not be treated as testamentary transfers subject to restrictions
on devises.

5.2 Such transfers include transfers in trust, and transfers when
transferor retains rights in the property or transfers are subject to
contingencies.

5.3 COMMENT: Useful in avoiding arguments that irrevocable inter vivos
transfers will not be subject to testamentary homestead restrictions.

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6. Fla.Stats. § 732.805 - Marriage Obtained by Fraud, Duress, or Undue
Influence

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6.1 Surviving spouse will not have listed marital rights, including
rights under the Probate Code.

6.2 COMMENT: Having seen too many instances of fraudulent marriages of
elder persons, this is a good thing. The litigators will like this,
too.

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7. Fla.Stats. § 733.1051 - Revisions of Wills for 2010 Decedents

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7.1 Provides a procedure for court review and revision of Wills with
dispositive provisions that are affected by repeal of estate tax in
2010.

7.2 COMMENT: Some of us prefer other approaches that treated the
decedent as having died on 12/31/09. This one requires litigation, and
may require having draftsman declare their own errors to obtain
relief.

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5. THE PROS AND CONS OF MAKING GIFTS IN 2010

With a year without estate tax, and reversion to 2001 rules in 2011,
2010 surely goes down as one of the most challenging years in transfer
tax planning. One of the big issues in 2010 is whether taxpayers
should be making taxable gifts. As with most planning issues, there is
no cut and dried answer - the circumstances of the taxpayer need to be
considered. Below are some of the key pros and cons of making taxable
gifts in 2010.

PROS

-With lower stock market and real estate values, the transfer value
(and thus transfer costs) are likely lower than in the past.

-The maximum gift tax rate is only 35% in 2010, returning to 2001
rates in 2011. If the transferor survives three years from the date of
the gift, any gift tax paid escapes transfer tax, thus reducing the
maximum effective rate to below 26%.

-If the Bush tax cuts are allowed to expire, income tax rates will
increase. Therefore, gifting strategies that allow income to accrue in
lower rate taxpayers will be more valuable than in the past.

-With a low interest rate environment, many gifting strategies produce
lower gifts than in high interest rate years.

-Direct gifts to lower generations, as opposed to gifts to generation
skipping trusts, may be more favored in 2010 than in other years due
to uncertain availability of generation skipping tax exclusion ratio
benefits for transfers to trusts.

CONS

-If the transferor dies in 2010, no gift tax would apply. Therefore,
unnecessary transfer taxes are incurred. However, this risk can be
minimized by waiting to complete gifts until very close to the end of
the year. This also allows for more flexibility should Congress change
the transfer tax laws prior to the end of 2010.

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6. FIRM ANNOUNCEMENTS

We are happy and proud to announce that the Florida Bar Tax Section
has established a public service award named after our partner, Marvin
Gutter. The text of the announcement by the Bar follows:

“In recognition of Attorney Marvin Gutter’s many years of
extraordinary public service, in government, in the legal profession
and in charitable organizations, the Tax Section of The Florida Bar is
pleased to announce the establishment of the Marvin C. Gutter
Outstanding Public Service Award. Mr. Gutter has served on the Board
of the Ann Storck Center since 1981. The Center is a nationally
accredited, non-profit human service organization serving the needs of
individuals with severe and multiple developmental disabilities,
including Epilepsy, Cerebral Palsy, Autism and Mental Retardation.
Throughout his 30 year legal career, Mr. Gutter has been recognized
for his humanitarian and professional efforts, including receipt of
the Pro Bono Award of the 17th Judicial Circuit, the J.C. Penny Award
for Outstanding Volunteerism, the Citizen Advocate of the Year Award
presented by FLORIDA ARF, and the Gerald T. Hart Award presented by
the Tax Section of The Florida Bar to the Outstanding Tax Attorney of
the Year in the State of Florida. Mr. Gutter is a partner in the law
firm of Gutter, Chaves, Josepher, Rubin, Forman, Fleisher, P.A. in
Boca Raton, Florida, and is actively involved in the South Florida
legal community. He practices in the areas of federal tax dispute
resolution, business combinations, estate planning and probate
matters. He obtained his law degree from Hofstra Law School (magna cum
laude). Mr. Gutter is a past chair of the Tax Sections of the Florida
Bar and the Broward County Bar Association, and a founding member of
the South Florida Tax Litigation Association. Prior to entering
private practice, Mr. Gutter served as a trial attorney with the
Office of Chief Counsel, Internal Revenue Service.”

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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 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