MARCH 28, 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. ROYALTIES DID NOT HAVE TO BE CAPITALIZED
2. SUMMARY OF TAX PROVISIONS OF HEALTH CARE ACTS
3. APPLICABLE FEDERAL RATES – APRIL 2010
4. ATTORNEY FORFEITS $1 MILLION FEE [Florida]
5. INHERITED IRA DOES NOT RECEIVE FEDERAL BANKRUPTCY PROTECTION
6. SPRINGING LIFE INSURANCE - MORE
7. FIRM ANNOUNCEMENTS
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1. ROYALTIES DID NOT HAVE TO BE CAPITALIZED
In an earlier newsletter in 2009, we discussed how a manufacturer of
kitchen items was required by the Tax Court to capitalize royalties
paid to put Pyrex and Oneida trademarks on their kitchen tools. The
Tax Court found that the trademarks were part of the production
process, and thus could not be immediately expensed.
The Second Circuit Court of Appeals has now reversed the Tax Court,
and allowed the taxpayer to immediately deduct the royalty payments.
The Court held that the royalty payments were not “properly allocable
to the property produced” so as to require capitalization under the
Code Section 263A uniform capitalization rules.
The Court focused on the royalty payments being calculated on items
SOLD and not PRODUCED, and thus were more in the character of expenses
for marketing instead of production. Presumably, if the royalty
payments were instead based on units produced, capitalization would
have been required.
Robinson Knife Manufacturing Co., Inc., 105 AFTR 2d ¶2010-634 (CA-2
3/19/2010)
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2. SUMMARY OF TAX PROVISIONS OF HEALTH CARE ACTS
We have prepared a summary of the tax provisions of the recent Health
Care Acts. This summary assumes that both the Senate bill which was
approved by the House on 3/22/2010, and the House reconciliation bill
which will need to go back to the Senate for approval, will both be
enacted and enter into law. If the House reconciliation bill is
subsequently modified or not enacted by the Senate, then the tax
provisions of the Senate bill that were approved by the House on
3/22/2010 shall enter into law – the provisions of that Senate bill
are not the same as those on the summary. Go to http://tinyurl.com/y92mlem
to review the summary, which can be viewed in outline or mindmap
format by clicking on the various page links.
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3. APPLICABLE FEDERAL RATES – APRIL 2010
The April 2010 applicable federal rates can be viewed at http://tinyurl.com/yeb377g.
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4. ATTORNEY FORFEITS $1 MILLION FEE [Florida]
William West, an attorney licensed to practice in North Carolina,
entered into a contingency fee agreement with a beneficiary of a trust
to handle a trust dispute in Florida. West handled the matter through
mediation, and received a favorable result for his client. When West
sought to collect a $1 million fee, his client balked, and claimed
West was not entitled to any fee because he earned the fee while
practicing law in Florida without a license.
At several points in the litigation, West advised his client that he
would need to affiliate with a Florida law firm since he was not
authorized to practice in Florida. He even made arrangements with a
Florida law firm and sent them a motion to appear pro hac vice.
However, he never finalized these arrangements and the Florida firm
was not engaged.
The trial court found that West’s contract with his client was void ab
initio because he was not authorized to practice law in Florida.
West then sought to be paid, either under the theory of unjust
enrichment (his client being unjustly enriched by not having to pay
his fee) or quantum meruit (his being paid for his service based on
their value, even though there was no existing valid fee agreement).
The trial court then awarded fees based on quantum meruit.
The appeals court reversed the trial court and held Mr. West was not
entitled to any fee, stating that to “award fees for illegal
activities is contrary to public policy.”
The case is interesting for the total rejection of compensation to the
attorney, and doubly so for the amount of fees at issue - $1 million
lost, yikes!
Morrison v. West, 4th DCA, Case No. 4D08-1693 (2/17/10)
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5. INHERITED IRA DOES NOT RECEIVE FEDERAL BANKRUPTCY PROTECTION
A Bankruptcy Court in Texas has ruled that unlike a traditional
individual retirement account (IRA), an inherited IRA is not an exempt
asset in bankruptcy under federal bankruptcy exemptions. The basis of
the ruling is two-fold.
First, to be exempt, the funds in the IRA must be “retirement funds.”
While the funds would be retirement funds as to the original IRA
participant, they are not for someone who inherits the account.
Second, the Bankruptcy Code requires that the funds be exempt from
taxation under Internal Revenue Code Section 408. Since inherited IRAs
are created and treated under Code Section 402(c)(11), the Code
Section 408 requirement was found not to be met.
It is likely that inherited qualified plan assets would be similarly
treated as inherited IRA’s.
States are allowed to allow debtors to use state law exemptions in
bankruptcy instead of federal exemptions. However, some states have
similar issues as to inherited IRAs. For example, as you may recall
from an earlier newsletter, a recent Florida case held that Florida’s
state law IRA exemption also does not apply to inherited IRAs.
Robertson v. Deeb and RBC Wealth Management, 2nd DCA, Case No.
2D08-6428 (August 14, 2009).
In re Chilton, (Bktcy Ct TX 3/5/2010) 105 AFTR 2d ¶ 2010-575
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6. SPRINGING LIFE INSURANCE - MORE
In our last newsletter, we discussed the Matthies case, which tagged a
taxpayer with a substantial deficiency in a “pension rescue”/springing
life insurance situation involving the use of valuation mechanisms and
life insurance to attempt to remove assets from a qualified retirement
plan through the purchase and sale of a life insurance contract whose
value was depressed through the existence of substantial surrender
charges. The transaction that took place in Matthies preceded the
“safe harbor” life insurance valuation rules that were issued by the
IRS in Rev.Proc. 2005-25 and a 2005 revision to the Regulations.
The Revenue Procedure did allow for safe-harbor reductions in value
due to surrender charges, but caps the aggregate reduction at 30% of
the value. Further, the Procedure did not bless pension rescue-type
transactions, per several restrictions included in the Procedure,
including:
a. Allowing a reduction for surrender charges, "but only if those
charges are actually charged on or before the valuation date and those
charges are not expected to be refunded, rebated, or otherwise
reversed at a later date;"
b. Not allowing a reduction for charges, "if a mortality charge or
other amount charged under a contract can be expected to be directly
or indirectly returned to the contract holder (whether through the
contract, a supplemental agreement, or under a verbal understanding
and regardless of whether there is a guarantee);"
c. Allowing for a challenge in other potentially abusive situations,
including situations where the contract is sold if not in force "for
some time" (whatever that means). In particular, the Procedure reads:
"In addition, a surrender charge cannot be taken into account in
determining an average surrender factor if it may be waived or
otherwise avoided or was created for purposes of the transfer or
distribution. Furthermore, at no time are these rules to be
interpreted in a manner that allows the use of these formulas to
understate the fair market value of the life insurance contracts and
associated distributions or transfers. For example, if the insurance
contract has not been in force for some time, the value of the
contract is best established through the sale of the particular
insurance contract by the insurance company (i.e., as the premiums
paid for that contract)."
The IRS also issued new Regulations in 2005 that provide valuation
methodologies that the IRS can attempt to use to challenge springing
value arrangements.
The foregoing limitations and the Matthies case, taken together,
appear to provide plenty of maneuvering room for the IRS to
successfully challenge pension rescue transaction, at least those of
the plain vanilla variety.
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7. FIRM ANNOUNCEMENTS
Charles Rubin has published an article in the March 2010 edition of
the Journal of Taxation entitled “Regulations Shift Burden of
Uncertain and Contested 2053 Claims and Expenses to Taxpayers.” The
article analyzes new Treasury Regulations that provide new and
extensive rules for addressing when deductions can be taken for
federal estate tax purposes for uncertain and contested claims and
expenses. A copy of the Article can be accessed from the “Resources”
section of our firm’s website at www.floridatax.com.
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, which includes
instructions for downloading an iPhone app as another method of
receiving updates.
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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