APPLICABLE FEDERAL RATES - JUNE 2008

May 2008 Applicable Federal Rates Summary:

SHORT TERM AFR - Semi-annual Compounding - 2.07% (1.63%/May -- 1.84%/April -- 2.24%/March -- 3.09%/February )

MID TERM AFR - Semi-annual Compounding - 3.20% (2.72%/May -- 2.85% /April -- 2.95%/March -- 3.48%/February)

LONG TERM AFR - Semi-annual Compounding - 4.46% (4.17%/May -- 4.35%/April -- 4.23%/March -- 4.41%/February)

DIRECTION OF RATES: Up

RECENT GIFT TAX FLP CASE

Family limited partnership cases typically involve the valuation of partnership interests for estate tax purposes. The same valuation principles are generally involved for gift tax purposes when the subject of a gift is a limited partnership interest.

In Astleford, the Tax Court in a memorandum decision addressed limited partnership valuation issues, in the context of gift taxes. While the case has no groundbreaking precedents, it did address some valuation issues that often come up in the partnership context.

One issue that came up was whether a transferred general partnership interest (which was transferred by the taxpayer to a limited partnership controlled by the taxpayer), should be valued as a partnership interest or as a less valuable "assignee" interest which is valued at less than a full interest due to lack of management rights. The partnership agreement suggested that an assignee had less than full management rights, but nonetheless the Court applied a substance over form analysis to hold that the successor owner (a family limited partnership) held all or almost all of the ownership rights of the transferred general partnership interest and thus should not be valued as a mere assignee interest.

The Court noted that the taxpayer effectively retained the control rights over the transferred interest because the taxpayer was general partner of the transferee partnership. However, if the interest itself did not have control attached to it, under the willing buyer - willing seller valuation standard presumably a buyer would have paid less for the missing control element so this reasoning may be questionable.

Also questionable is that the Court also noted that the transfer documents for the partnership interest did not refer to the transferred interest only as an "assignee" interest. Since the transferee could only receive what the transferee received, and that is what is being valued, the fact that the assignee nature was not specified by the parties should not really impact value.

The Court also allowed a "tiered" discount. First, it allowed a discount for value for the general partnership interest that was transferred to the limited partnership. Then, it allowed a further discount for the value of the limited partnership interests transferred by the taxpayer. Such tiering of discounts is often sought after as a method of creating larger value reductions through a multiple partnership ownership structure than would be the case with only one partnership involved. However, the general partnership had been in existence for more than 20 years before the transfer to the limited partnership - there is a reasonable likelihood that the Tax Court if faced with a similar arrangement but with recently created multiple tier partnerships would not be so generous in allowing for tiered discounts.

Astleford, TC Memo 2008-128.

LATE FILING RELIEF FOR FIRPTA TAX AND WITHHOLDING ISSUES

Code Section 897 imposes U.S. income tax on foreign persons disposing of U.S. real property interests (including the disposition of interests in U.S. corporations owning significant real property interests - USRPHC's). Code Section 1445 imposes withholding obligations on buyers and transferees of such U.S. real property interests (USRPIs).

Sections 897, 1445, and the regulations thereunder provide for various exceptions to tax and withholding, provided that documentation is provided to the buyer/transferee, and where required, to the IRS, in a timely manner. If such documentation is not timely provided and filed, the parties can seek relief through a private letter ruling (with concomitant ruling fees and professional fees). The IRS has now provided a mechanism to obtain late filing relief on many of these issues without the submission of a private letter ruling request.

The late filings covered by these new rules are those provided in Treas.Regs. §§ 1.897-2(g)(1)(ii)(A), 1.897-2(h), 1.1445-2(c)(3)(i), 1.1445-2(d)(2), 1.1445-5(b)(2), and1.1445-5(b)(4). These provisions relate to the provision of:

a. documentation that stock being transferred is not stock in a USRPHC (relating to both tax under Section 897 and withholding under Section 1445); and

b. documentation advising that a nonrecognition provision of the Internal Revenue Code applies to the transfer of a USRPI.

Upon application, the IRS will advise the taxpayer whether relief is granted within 120 days. Relief will be granted if the taxpayer had "reasonable cause" for the nonfiling.

Rev. Proc. 2008-27, 2008-21 IRB, 05/13/2008

IRS UPDATES LIEN PRIORITY REGULATIONS

Like any lien on property, federal tax liens on property of a delinquent taxpayer raise questions of priority of payment against other lienholders. Under Code Section 6323, the holder of a security interest (including a mortgagee or pledgee) is protected against a general tax lien if, before the IRS files notice of lien, the security interest is in existence, even if it came into existence after the tax lien arose. The holder of a security interest is protected even if the holder had actual knowledge of the tax lien before acquiring the interest.

The IRS has not updated its lien priority regulations in many years. It recently issued proposed regulations, that will be effective if and when final. Highlights of the new regulations include:

--A Form 668, Notice of Federal Tax Lien, may be filed either in paper form or electronically;

--With regard to a Notice of Federal Tax Lien that includes a certificate of release, failure to timely refile the Notice in any jurisdiction where it was originally filed would extinguish the lien;

--A purchaser of property in a casual sale is protected against a filed tax lien if the sale price is less than $1,000 (adjusted for inflation - $1,320 in 2008);

--A holder of a mechanic lien is protected against a filed tax lien with respect to residential property in an amount up to $5,000 (adjusted for inflation - $6,600 in 2008);

--Household goods are exempt from levy to the extent they don't exceed $6,250 in value (indexed for inflation - $7,900 in 2008);

--The regulations indicate that there is generally a 10-year period (reflecting the period in Code Sec. 6502 ) for instituting a proceeding in court or serving a levy to collect a properly assessed tax.

Preamble to Proposed Regulations 4/16/08; Prop Reg § 301.6323(b)-1 , Prop Reg § 301.6323(c)-2 , Prop Reg § 301.6323(f)-1 , Prop Reg § 301.6323(g)-1

IRS ALLOWS SEPARATE ENTITY TREATMENT FOR SERIES LLC

A series limited liability company is an entity that allows for the creation of separate ventures ("Portfolios") as part of one LLC. Each Portfolio will typically have separate liabilities, assets, management, and members. Since there is only one entity filed with the applicable state, costs for forming new entities are avoided, administrative fees and costs are reduced, and one filing with the SEC possibly can be used for multiple Portfolios (as compared to forming a separate LLC for each venture). Delaware was the first to allow for SLLCs, and a few other states now provide for them.

SLLCs are not widely used. One reason for this is that the IRS has never provided any direct guidance on how the separate Portfolios would be treated for income tax purposes. This dearth has ended - the IRS has issued a private letter ruling dealing with the subject.

Under the ruling, the IRS has indicated that each Portfolio will be treated as a separate entity for tax purposes. While the IRS did not come out and specifically say that the Portfolios within each Series LLC are to be treated as separate entities, it implied this when they said that each can make its own entity characterization selection under the check the box rules and entity characterization rules.

Perhaps similar to the way that LLCs exploded in popularity once the federal income tax consequences of their use was ruled on by the IRS, this ruling may result in broader use of SLLCs. In this regard, it would be helpful if the IRS issued guidance in the form of a Revenue Ruling or Regulations, since taxpayers other than the recipient of a private letter ruling are technically not permitted to rely on private rulings issued to others.

PLR 200803004

AVOIDING PENALTIES ON LATE IRA ROLLOVERS

Individuals may transfer funds from one qualified retirement plan or IRA into another without triggering income tax if the transfer is completed within 60 days. If the rollover is not completed by the 60th day, bad things can result - principally, the potential income taxes on the transferred amount, with applicable penalties and interest, the potential loss of deductions and exemptions due to the phase-outs based on resulting increase in adjusted gross income, and a 10% penalty on early withdrawal for taxpayers under age 59 1/2.

Internal Revenue Code Sec. 408(d)(3)(I) grants the power to the IRS to waive the 60-day requirement if penalizing the taxpayer would be against equity or good conscience. The Code specifically lists casualty, disaster, or other events beyond the reasonable control of the individual subject to the requirement as good reasons.

The following summarizes the automatic waiver and the discretionary waiver provided by the IRS, and how these are applied in practice. This summary is based in large part on an article by Linda Nelsestuen And Wesley Austin in December 2007 issue of Practical Tax Strategies.

1. Automatic Waiver - If the taxpayer's situation meets all of the criteria in Rev Proc 2003-16, 2003-1 CB 359 , the 60-day rule is automatically waived. To qualify, among other criteria the following must apply:
   1. The financial institution receives the funds within the 60 day period;
   2. The funds are not deposited into an eligible retirement plan within the 60-day rollover period solely because of an error on the part of the financial institution; and
   3. The funds are properly deposited within one year from the beginning of the 60-day rollover period.
2. Facts and Circumstances Waiver - Rev Proc 2003-16 provides that the Service will issue a ruling waiving the 60-day rollover requirement for cases in which the failure to waive such requirement would be against equity or good conscience. This consists of casualty, disaster, or other events beyond the reasonable control of the taxpayer. Facts the IRS consider include:
   1. Whether the errors were caused by the financial institution;
   2. Whether the taxpayer was unable to complete the rollover due to death, disability, hospitalization, incarceration, or restrictions imposed by a foreign country or postal error;
   3. Whether the taxpayer used the amount that was distributed;
   4. How much time has passed since the date of distribution.
3. IRS Denial of Discretionary Facts and Circumstances Waivers in Practice.
   1. In practice, many waivers are denied because the taxpayer used the funds with the expectation of replacing them within the 60 days, or taxpayers originally had no intent to roll over the proceeds until they became aware of the tax consequences.
   2. Taxpayers using ignorance of the law as an excuse have not received favorable rulings.
   3. Relying on the advice of counsel has been an appropriate reason.
   4. Taxpayer intent is very important. If the original intent was something other than rolling the money over into another IRA, the Service will most likely rule against the taxpayer. However, if the taxpayer has a documented medical or mental condition that precluded him or her from transferring funds in a timely manner, the original intent does not appear to be an issue, and the IRS will most likely rule in favor of the taxpayer.
   5. The use of the funds as a short-term loan is not viewed favorably unless the taxpayer has a debilitating illness and was physically or mentally unable to complete the transaction within the required time.
   6. A lack of understanding of the law, reliance on the advice of non-financial advisors, and a belated realization as to the adverse tax consequences have not been found to be acceptable reasons to grant a waiver.

FOREIGN PARTNERS CAN REDUCE WITHHOLDING

Under Internal Revenue Code Section 1446, foreign partners of a partnership that is engaged in a U.S. trade or business are subject to withholding of taxes attributable to their allocable share of the effectively connected income of that partnership. This can be unfair to a partner who would not have to pay taxes on that income due to other deductions available to the partner.

In the spirit of fairness, the IRS has issued final regulations allowing the partner to certify available deductions to the partnership, so as to reduce the amount of tax that must be withheld. The IRS doesn't freely give out this benefit - it requires that the taxpayer have filed returns for the prior 3 years for the first time it files, and has specific certification requirements.

Some of the highlights of the final regulations include:

a. A protective return of the partner is not a "return" for purposes of the filing requirements for prior years;

b. Foreign estates and their beneficiaries, and trusts that are not grantor trusts, cannot use these rules;

c. There are special limitations that apply to tiered partnerships;

d. The rules do not apply to partners of a publicly-traded partnership;

e. A provided certificate can only have a prospective effect;

f. The certificate does not effect the estimated tax obligations of the foreign partner;

g. The certificate does not affect the obligations of the partner to file a U.S. income tax return; and

h. The partnership must attach copies of the certificates received to its Section 1446 filings with the IRS.

IRS TO USE REGULATIONS TO WRITE KOHLER DECISION UNDER SECTION 2032 OUT OF THE LAW

Under Code Section 2032, an estate can elect to value its assets for estate tax purposes on a date that is six months after the death of the decedent, instead of on the date of death. Thus, an estate can reduce its estate taxes if the overall value of those assets has declined in that six month period. In 2006, the Tax Court held that post-death changes in the character of stock owned by a decedent pursuant to a tax-free reorganization would be allowed to affect the alternative valuation date value of the stock for estate tax purposes. Herbert V. Kohler, Jr., et al., TC Memo 2006-152.

The IRS, in a direct attack on the Kohler decision, has announced that it will soon be issuing regulations that will limit Section 2032 value adjustments to those that occur to changes in market conditions. Thus, voluntary actions by interested persons that affect post-death value will not allow for the use of alternatve valuation. The regulations will define “market conditions” as events outside of the control of the decedent (or the decedent's executor or trustee) or other person whose property is being valued that affect the fair market value of the property being valued.

Preamble to Proposed Regulations 04/24/2008; Proposed Regulations Section 20.2032-1

IRS PROVIDES COMFORT ON METHOD OF CREATING GRANTOR TRUSTS

A grantor trust generally is a trust whose income is taxed, in whole or in part, to the grantor/settlor, and not the trust or other beneficiaries. Grantor trust status is often intentionally sought as a way to shift tax incidents to the grantor and thus in effect allow transfers to the trust to effectively occur through the tax payments of the grantor without incurring a gift tax, or to avoid income tax consequences for transactions between the grantor and the trust.

As part of tax planning, the grantor may also seek to avoid having the trust being subject to estate tax at the death of the grantor. Therefore, tax planning is undertaken to give the grantor a power over the trust that will create a grantor trust, but which is not so broad as to result in estate tax at the grantor's later death.

One power often used to accomplish this dual purpose is to give the grantor the nonfiduciary power to replace trust property at any time with property of equivalent value. So long as the grantor is not also the trustee and the grantor's power is a nonfiduciary power, the Internal Revenue Code and Regulations are fairly clear that this will create a grantor trust. What has previously been understood by way of case law precedent is that such a power by itself will not create estate tax inclusion via Code Sections 2036 or 2038.

The IRS has now issued a Revenue Ruling that confirms this treatment under Sections 2036 and 2038, at least if the requirements of the Ruling are complied with. Those requirements are:

a. the trustee has a fiduciary obligation (under local law or the trust instrument) to ensure the grantor's compliance with the terms of this power by satisfying itself that the properties acquired and substituted by the grantor are in fact of equivalent value, AND

b. the substitution power cannot be exercised in a manner that can shift benefits among the trust beneficiaries.

What exactly is meant by b. is not entirely clear, but the Ruling does provide two safe harbors that satisfy b. This requirement will be satisfied if:

1. the trustee has both the power (under local law or the trust instrument) to reinvest the trust corpus and a duty of impartiality with respect to the trust beneficiaries; OR

2. the nature of the trust's investments or the level of income produced by any or all of the trust's investments does not impact the respective interests of the beneficiaries, such as when the trust is administered as a unitrust (under local law or the trust instrument) or when distributions from the trust are limited to discretionary distributions of principal and income.

Thus, while it may be possible to avoid Section 2036 and 2038 inclusion even without strictly following the above rules, the Ruling is a useful safe harbor to avoid the estate tax inclusion entirely.

Revenue Ruling 2008-22

APPLICABLE FEDERAL RATES - MAY 2008

May 2008 Applicable Federal Rates Summary:

SHORT TERM AFR - Semi-annual Compounding - 1.63% (1.84%/April -- 2.24%/March -- 3.09%/February -- 3.16%/January)

MID TERM AFR - Semi-annual Compounding - 2.72% (2.85% /April -- 2.95%/March -- 3.48%/February -- 3.55%/January)

LONG TERM AFR - Semi-annual Compounding - 4.17% (4.35%/April -- 4.23%/March -- 4.41%/February -- 4.41%/January)

DIRECTION OF RATES: Down

RELIEF FOR RETURN PREPARERS PENALTIES MAY BE COMING

In recent months, the IRS has set up a conflict of interest between tax return preparers and their taxpayer clients. They have done this by requiring that for a return preparer to avoid a penalty on an erroneous tax position without specifically highlighting/disclosing the tax position, the preparer generally has to have a more likely than not belief that the reported position was correct. However, a taxpayer would be penalized for the same error only if there was no substantial authority for the position - this requires less belief in the correctness of the position than the more likely than not standard. This puts preparers in the uncomfortable position that if they have a taxpayer who wants to report a position based on substantial authority (and thus the taxpayer is not at risk for penalties if wrong), but there is not enough authority that the preparer has a more likely than not belief in the correct position, they are at risk of a penalty when their client is not. The effect is that the preparer either refuses to adopt the position, or must attempt to persuade the taxpayer to disclose the issue even though the taxpayer is justified in reporting the position.

Many members of Congress disapprove of these higher standards being imposed on preparers. A recent tax bill, H.R. 5719, the “Taxpayer Assistance and Simplification Act of 2008,” seeks to reduce the preparer standard to match the substantial authority standard for taxpayers in most situations. This bill is presently being debated in Congress. Whether it will be enacted into law is uncertain, since there are other provisions of the bill that President Bush does not favor, and he has threatened to veto the bill (these provisions relate to the termination of the IRS' authority to hire private debt collectors).

If relief comes, it will be too late for the April 15 deadline for 2007 individual income tax returns, but, depending on effective date provisions, may still come in time to exist in regard to the preparation of returns that are on extension and to perhaps avoid penalties on returns that have already been filed.

ASSISTANCE FOR THOSE WHO CAN'T PAY THEIR TAXES IN FULL BY APRIL 15

As previously discussed, taxpayers should endeavor to file their income tax returns by April 15, even if they cannot fully pay their taxes on time, so as to avoid the late filing penalty. The late payments will still be subject to interest (presently at 6% per year) and the late payment penalty of 1/2 of 1% per month.

Taxpayers who need additional time to pay may qualify for a payment agreement with the IRS. The IRS has made this easy through an online process through their website at www.irs.gov. If eligible, a taxpayer can get a short-term extension with up to 120 days to pay, or a monthly payment plan.

The short term extension is still subject to late payment penalties and interest, but no fee is charged for it. A monthly payment plan will cut the late payment penalties in half, but a fee of $43 to $105 is charged.

A payment agreement can also be requested by filing Form 9465 with the filed income tax return.

Note that a few taxpayers may make late payments without interest or penalties without asking for permission. These include members of the military serving in combat-zone localities and taxpayers in certain designated disaster area (but note that specific extended deadlines for payment still apply).

ENCUMBRANCES CAN DRAMATICALLY ALTER ESTATE PLAN RESULTS

When a testator specifically leaves real estate or other property under his estate planning documents, and that property is encumbered by debt, it is important that the estate planner determine the testator's desires as to the debt and make proper provision for it. This is because the treatment of that debt at death can dramatically impact both the recipient of the property and the residuary beneficiaries of the estate. For example, if the recipient of the property is to receive it free and clear of the debt, then the estate will have to pay off the debt with other estate assets. This payment will usually directly decrease the assets left for the residuary beneficiaries. Alternatively, if the debt is not paid off, the net value passing to the beneficiary receiving the property can be substantially diminished.

This effect of these issues was illustrated in a recent Florida appellate case. In the case, a decedent left 3 family farms to one of his sons. At the time of death, the farms were encumbered by over $240,000 in debt. The decedent's remaining property was to be divided among 5 beneficiaries (one of which was the son who received the farms). The Last Will had no specific provision as to whether the debt should be paid off by the estate, although it did provide that all of the decedent's legal debts should be paid.

During the course of administration, the estate paid off the debt, so that the son received the farms free of debt. One of the residuary beneficiaries sued, claiming that the payment was not authorized.

Fortunately for the residuary beneficiaries, Florida law has a provision on point which provides “[t]he specific devisee of any encumbered property shall be entitled to have the encumbrance on devised property paid at the expense of the residue of the estate only when the will shows that intent” and that “[a] general direction in the will to pay debts does not show that intent.” FS Section 733.803. Based on this statute, the payment of the debt by the estate was held to be improper.

Whether this is what the testator intended is unknown. Therefore, to make sure that the testator's intent is properly implemented, planners need to specifically inquire of the testator what is desired, and if needed, make specific provision in the Last Will if the default result under Florida law will not accomplish this intent. Even when it is intended that the debt not be paid from the residuary as per the default scheme under the statute, a specific statement to that effect may still be helpful so that the decedent's heirs are comfortable that the statutory scheme was specifically desired by the testator.

In re: Estate of James Ollis Woodward a/k/a James O. Woodward. BRIAN WOODWARD, Appellant, v. ELLEN C. SMITH, as personal representative of the estate of James Ollis Woodward, Appellee. 2nd District. Case No. 2D07-713. Opinion filed April 9, 2008.

PENALTY REFRESHER

As surely as April 15 comes every year, there will be taxpayers who do not file their income tax returns on time or who do not pay their income taxes on time. Here's a quick refresher on penalties relating to income tax filings, courtesy of the IRS:

FILING LATE: If you do not file your return by the due date (including extensions), you may have to pay a failure-to-file penalty. The penalty is usually 5 percent for each month or part of a month that a return is late, but not more than 25 percent. The penalty is based on the tax not paid by the due date (without regard to extensions). If you file your return more than 60 days after the due date, the minimum penalty is $100 or, if less, 100 percent of the tax on your return. For any month both the penalty for filing late and the penalty for paying late apply, the penalty for filing late is reduced by the penalty for paying late for that month, unless the minimum penalty for filing late is charged.

PAYING TAX LATE: You will have to pay a failure-to-pay penalty of ½ of 1 percent (0.5 percent) of your unpaid taxes for each month, or part of a month, after the due date that the tax is not paid. This penalty does not apply during the automatic six-month extension of time to file period if you paid at least 90 percent of your actual tax liability on or before the original due date of your return and pay the balance when you file the return.

The failure-to-pay penalty rate increases to a full 1 percent per month for any tax that remains unpaid the day after a demand for immediate payment is issued, or 10 days after notice of intent to levy certain assets is issued.

For taxpayers who filed on time, the failure-to-pay penalty rate is reduced to ¼ of 1 percent (0.25 percent) per month during any month in which the taxpayer has a valid installment agreement in force.

BOUNCED CHECKS: If you write a check to pay your taxes and the check bounces, the IRS may impose a penalty. The penalty is either 2 percent of the amount of the check - unless the check is under $1,250, in which case the penalty is the amount of the check or $25, whichever is less.

Do not fall into the trap of not filing your tax return on time just because you can't pay the tax on time.

Note that the above are only penalties - interest on late payments of tax will likely also apply.

FS-2008-19, March 2008

CREDIT CARD HOLDER COULD NOT ESCAPE DISCHARGE OF INDEBTNESS INCOME ON WRITE-OFF OF DEBT

As the economy moves closer to (or deeper into, depending on who you believe) recession, the number of credit card holders who will obtain reductions in their credit card debt from the issuer is likely to increase. Those debtors will eventually learn that the discharge of debt is taxable to them.

Section 108 of the Internal Revenue Code provides that such income will not arise in certain specified situations, including a discharge in a Title 11 bankruptcy, when the debtor is insolvent, when the debt is qualified farm indebtedness, when the debt is qualified real property business indebtedness, or when the debt is qualified principal residence indebtedness.

A recent Tax Court case highlights the creative arguments raised by taxpayers to come within Section 108 when the taxpayer doesn't fit within any of the above exceptions. In shooting down 2 taxpayer theories, it is evident that taxpayers should not expect any leniency from the IRS or the Tax Court on these issues.

The taxpayer first tried to use Code Section 108(e)(5). That provisions avoids debt discharge income where the buyer of property negotiates with the seller/creditor for a discharge of all or part of the purchase money indebtedness. The resulting discharge of indebtedness is characterized not as taxable income but in effect as a retroactive reduction of the purchase price. However, in this case the credit card company was found not be a seller of property, so the provision was held not to apply.

The taxpayer then tried to claim that the case of Earnshaw v. Comm., T.C. Memo 2002-191 stands for the proposition that the discharge of interest on debt is not income to the debtor. The Tax Court disagreed, finding that the case only applied to reductions in debt due to a bona fide dispute about the amount of the debt involved. While not discussed in the case, if the interest payment would have been deductible to the debtor, then Code Section 108(e)(2) would then have avoided debt discharge income to that extent. This provision avoids debt discharge income on debt that would be deductible if actually paid by the debtor. Presumably, the taxpayer in the Tax Court case could not use that provision because the expenses were personal, nondeductible expenses so that interest relating to their purchase would not be deductible.

Ancil N. Payne, Jr., et ux. v. Commissioner, TC Memo 2008-66

ESTATE TAX LIEN NOT DIVESTED BY SALE

When an individual dies, his or her assets are subject to a 10 year estate tax lien in favor of the IRS for any unpaid estate taxes. Many would think that the lien would be divested as to any third party purchaser of estate assets for fair value, since the purchaser would not have any involvement in the computation or payment of estate taxes. However, they would be wrong, as several title companies found out in a recent tax case.

In that case, a decedent died owning 3 houses. The 3 houses were deeded out to the appropriate heir and her spouse, and then they sold the houses to 3 purchasers. Ultimately, the IRS challenged the value of another estate asset, and assessed additional estate tax. Since it was unable to collect the unpaid tax from the estate, it came after the 3 purchases pursuant to its 10 year estate tax lien. Note that the purchasers didn't even buy the properties from the estate, but from a successor in interest to the estate (the heir and her husband).

Ultimately, the purchasers were held liable for the unpaid estate taxes (actually, the title insurers ended up paying the taxes pursuant to title insurance policies purchased by the purchasers). The case demonstrates that real property purchasers ignore the 10 year estate tax lien at their own peril, and that the IRS will come after unrelated third party purchasers when it cannot collect estate taxes from the estate. As an aside, the third party purchasers were not able to challenge the additional tax assessment that they ended up paying, because they were not the taxpayer.

Of course, knowledgeable purchasers are not without protection against estate tax liens. When a title search shows that property was owned by a decedent within the past 10 years, a purchaser can insist on the seller obtaining a release of lien from the IRS. The purchaser can also wait for a closing letter to be issued that demonstrates that estate tax has been satisfied. Further, if the executor had applied for and obtained a discharge of personal liability from Code Section 2204, the lien would have been released as to any purchasers.

FIRST AMERICAN TITLE INSURANCE COMPANY v. U.S., 101 AFTR 2d 2008-XXXX, (CA9), 03/27/2008

APPRAISAL RIGHTS DEEMED NOT SOLE REMEDY WHERE PRIOR BAD ACTS OF CORPORATE PRINCIPALS [FLORIDA]

Under Florida corporate law, minority shareholders of corporations are protected from majority shareholders who engage in undesirable merger, sale, or other major corporate transactions by demanding that their minority shares be purchased for fair value ("appraisal rights"). So as to limit litigation and force use of appraisal rights as a dispute resolution mechanism, such rights are made the exclusive remedy for a disgruntled shareholder, unless proper corporate formalities are not followed or the corporate transaction was "procured as a result of fraud or material misrepresentation." Fla.Stats. Section 607.1302(4)(b).

In a recent Florida case, the majority shareholder transferred corporate assets and liabilities to a new entity to which the minority shareholders were not included as shareholders. There was no fraud or material misrepresentation in regard to the transaction itself. Nonetheless, the minority shareholders sued for relief outside of the appraisal statute, claiming that a prior course of bad actions by the majority shareholder (relating to use of corporate funds to pay personal expenses) was enough "fraud" to allow for a remedy other than appraisal rights.

At first review, this would not seem to be the type of fraud that the appraisal rights statute was addressing, since there was no fraud in the transfer transaction itself. However, drawing upon Delaware corporate decisions under a similar statute, the Florida 1st District Court of Appeals has indicated that the statutory term "fraud or material misrepresentation" includes "unfair dealing." It further found that the majority shareholder's prior actions and overall course of conduct, if proved to be true, could constitute "unfair dealing" and thus allowed the minority shareholders to bring a cause of action outside of appraisal rights.

This expansive reading of the statute does allow for a court to do equity in egregious cases. However, it is unclear in the case how appraisal rights would not provide an adequate remedy (if the court could include in the valuation of the corporation an obligation of the majority shareholder to repay any misappropriated funds). It further effectively voids the public policy of using appraisal rights as an exclusive remedy since the standard of "unfair dealing" opens the door to many likely challenges to the required use of the appraisal rights as the exclusive remedy.

PAUL R. WILLIAMS AND JAMES F. WILLIAMS, JR. ON BEHALF OF BROWN & STANFORD COMPANY, INC., A FLORIDA CORPORATION D/B/A J.C. STANFORD & COMPANY, INC., Appellants, v. JOHN C. STANFORD, JR., AN INDIVIDUAL; VICTORIA B. STANFORD, AN INDIVIDUAL; BROWN & STANFORD COMPANY, INC., A FLORIDA CORPORATION D/B/A J.C. STANFORD & COMPANY, INC.; J. C. STANFORD & SON, INC., A FLORIDA CORPORATION; AND HENDERSON KEASLER LAW FIRM, P.A., A FLORIDA PROFESSIONAL CORPORATION, Appellees. 1st District. Case Nos. 1D06-3701 & 1D06-4808. Opinion filed March 25, 2008.

APPLICABLE FEDERAL RATES - APRIL 2008

April 2008 Applicable Federal Rates Summary:

-Short Term AFR - Semi-annual Compounding - 1.84% (2.24%/March -- 3.09%/February -- 3.16%/January)

-Mid Term AFR - Semi-annual Compounding - 2.85% (2.95%/March -- 3.48%/February -- 3.55%/January)

-Long Term AFR - Semi-annual Compounding - 4.35% (4.23%/March -- 4.41%/February -- 4.41%/January)


DIRECTION OF RATES: Mixed

IRS CONTINUES TO ASSERT THAT COMPENSATORY STOCK OPTIONS ARE A SHARED EXPENSE UNDER SECTION 482

The qualified cost sharing regulations under Section 482 are an arrow in the IRS' quiver in its attempts to limit the ability of U.S. companies to develop an intangible, deduct the costs in the U.S., but then have a significant portion of the income earned in a non-U.S. entity that does not incur immediate U.S. tax. The regulations require that when a U.S. company and a foreign affiliate jointly develop an intangible, they must share costs in the same proportion that they expect to receive benefits from the intangible.

In sharing costs, the IRS regulations provide that compensatory stock options and other stock-based compensation should be included as a cost that must be borne proportionately between the companies engaged in a qualified cost sharing arrangement. The potential problem with this is that the Tax Court, in Xilinx v. Commissioner, 125 T.C. 37 (2005), albeit under a prior version of the Regulations, held that requiring such stock-based compensation to be a shared cost was improper, since arms-length arrangements between unrelated parties for the joint development of an intangible might not share such a cost.

The IRS has appealed the case to the 9th Circuit Court of Appeals. In a Coordinated Issue Paper, entitled "Cost Sharing Stock Based Compensation," LMSB-04-0208-005, UIL 482.11-13, the IRS has indicated it will continue to apply the Regulations as written. Further, it announced that even if it loses its appeal in Xilinx, it will continue to apply the Regulations except in the 9th Circuit. Further, since the 2003 cost sharing Regulations were issued after the tax years at issue in Xilinx, it appears that the IRS may still apply them in the 9th Circuit for tax years after the issuance of the 2003 Regulations regardless of the final outcome of Xilinx.

LATE CONVERSION TO LIFETIME PAYOUT FROM INHERITED IRA ALLOWED

When an IRA owner dies before the required beginning date of required IRA distributions, a nonspouse beneficiary of the IRA can either take the IRA out over the beneficiary's remaining life expectancy, or take the entire IRA out within 5 years of the IRA owner's death (by December 31st of the 5th year after such death). Since IRA distributions are generally taxable to the recipient, taking the IRA out over the beneficiary's life expectancy typically results in two benefits. First, the payouts will be spread over many years, continuing the tax deferral aspects of the IRA and deferring taxes to the recipient. Second, it avoids bunching of the payouts which could result in even higher income taxes by pushing the recipient into a higher income tax bracket.

To avoid the 5 year payout rule and use the life expectancy rule, life expectancy distributions to the beneficiary must begin on or before the end of the calendar year immediately following the calendar year in which the employee died. Therefore, beneficiaries need to act in a timely manner to secure this tax benefit.

In a recent private letter ruling, the IRS did allow a beneficiary to use the life expectancy rule, even though the first distribution was not made within the above time limit. In the ruling, the beneficiary made up the missed annual distributions in later years, but prior to the expiration of the 5 year period.

The IRS' generosity was not unlimited, however. The beneficiary had to pay the usual penalty on late IRA distributions for the late payments - 50% of the required distribution. The taxpayer may also have incurred higher taxes than would have been the case if the payments had been made timely, since the bunching of makeup payments and the required payment in one tax year may have pushed the taxpayer into a higher bracket for the years of the makeup payments. The taxpayer is also out the fees for applying for the ruling, including professional fees which were likely incurred.

Since this relief was granted in a private letter ruling, it is not automatically available to everyone in the same situation. Instead, similarly situated taxpayers will have to apply for a ruling to get the relief. Per the language of the ruling, if the IRA documentation provides that a 5 year payout is the default payout method, then a ruling may not be available in those circumstances.

PLR 200811028

THEFT LOSS VS. WORTHLESS SECURITY LOSS

A taxpayer will often prefer a theft loss deduction to a deduction for a worthless investment security. One advantage of theft loss treatment is that the loss is not a capital loss, unlike the worthless security loss. The timing of the loss may also be more advantageous for a theft loss, since the loss for a worthless security cannot be used until the security is entirely worthless (or the security is otherwise sold).

The subprime mess has given rise to an IRS pronouncement that deals with a potential overlap area between these two types of losses. The taxpayers here were lenders, who lent money to an established company that wrote sub-prime mortgage loans. While the company was at one time a legitimate business, as its subprime losses mounted it provided false and fraudulent information to its investors to encourage them to continue to lend money to the company. Eventually, several insiders of the company were convicted of or plead guilty to securities laws violations based on their misrepresentations to their investors.

The investors did not get repaid on their investments. The issue was whether their losses had to be treated as worthless securities losses, or whether they could qualify for theft loss treatment.

In Chief Counsel Advise 200811016, the IRS held, surprisingly enough, that the losses qualified as theft losses. The Advisement noted that to qualify as a theft loss, a taxpayer needs only to prove that his loss resulted from a taking of property that is illegal under the law of the state where it occurred and that the taking was done with criminal intent. It also noted that in Rev.Rul. 71-381, a corporation provided fraudulent financial statements to obtain a loan, and the president of the corporation was convicted of violating state securities laws in issuing those statements. That ruling allowed the lender to take a theft loss deduction for the amounts that were lent and not repaid.

Thus, a theft accomplished through a purported borrowing or offer to sell a security does not get converted to a worthless security loss, but can qualify as a theft loss.

INTEREST RATES FOR TAX OVERPAYMENTS AND UNDERPAYMENTS (APRIL 2008 QUARTER)

The IRS has announced the interest rates for tax overpayments and underpayments for the calendar quarter beginning April 1, 2008.

For noncorporate taxpayers, the rate for both underpayments and overpayments will be 6%.

For corporations, the overpayment rate will be 5%. Corporations will receive 3.5% for overpayments exceeding $10,000. The underpayment rate for corporations will be 6%, but will be 8% for large corporate underpayments.

Rev. Rul. 2008-10

TEST YOUR FLORIDA HOMESTEAD LAW KNOWLEDGE [FLORIDA]

An interesting homestead case gives us the opportunity to test our knowledge of Florida law. Here are the facts. Husband owns the homestead. He executes a valid deed that transfers the homestead to create a life estate interest in himself and his wife as tenants by the entireties, and a remainder interest after their deaths to one of his children. The wife does not join in the deed. The husband then dies, without a Last Will.

Remember that Article X of Florida's Constitution provides in part that "[t]he owner of homestead real estate, joined by the spouse if married, may alienate the homestead by mortgage, sale or gift and, if married, may by deed transfer the title to an estate by the entirety with the spouse. " Further Fla.Stats. Section 689.11 provides in pertinent part that "[a] conveyance of real estate, including homestead, made by one spouse to the other shall convey the legal title to the grantee spouse in all cases in which it would be effectual if the parties were not married, and the grantee need not execute the conveyance. An estate by the entirety may be created by the action of the spouse holding title: (a) Conveying to the other by a deed in which the purpose to create the estate is stated; or (b) Conveying to both spouses."

So what legal interests are created under Florida law? See if you can arrive at the proper answer.

In Clemons and Gilpin, Jr. v. Thorton, 1st District Court of Appeal (Case No. 1D07-1664) held that:

a. A valid life estate, to be held as tenants by the entireties was created between the husband and wife. A grantee spouse is not required to join in to a conveyance to herself by the other spouse.

b. The conveyance of the remainder was invalid, since the grantee spouse would have needed to join in that conveyance.

c. The fact that the conveyance of the remainder was void did not impact the validity of the life estate conveyance.

d. Since the conveyance of the remainder interest was void, the husband continued as the owner of the remainder interest at his death.

e. At the husband's death, since he died intestate (without a Last Will), the remainder interest (effective at the death of the wife) passed to his then surviving lineal descendants per stirpes.

So, how did you do?

By the way, remember you can consult a summary table of Florida's homestead restrictions on transfers.

EARNINGS AND PROFITS NEEDED FOR CRIMINAL TAX EVASION RELATING TO DIVIDEND DISTRIBUTION

A shareholder of a corporation wrote checks from the corporation to his wife and girlfriend. He did not report any income from such transfers. The government asserted that this was tax evasion and obtained a criminal conviction. The shareholder appealed, claiming that he should have been able to present evidence that the corporation had no earnings and profits and that the distributions were thus not taxable up to the shareholder's basis in his shares, applying the general rules of Sections 301 and 316 (relating to corporate nonliquidating distributions). Under those rules, the recipient of a distribution from a corporation that has no current or accumulated earnings and profits will not be taxed as having received a taxable dividend.

The government had been able to exclude such evidence based on the precedent of United States v. Miller, 545 F2d 1204 (9th Cir. 1976). There, the court held that in a criminal tax evasion case, a diversion of funds may be deemed a return of capital only if there is some evidence that the distribution was intended by the corporation or shareholder as a return of capital. Since the defendant in the current case could not show such evidence, it ended up that the defendant was convicted of tax evasion when there was no evidence presented that any tax was actually due.

Clearly, a conviction of criminal tax evasion when no tax is due is an absurd result. However, the 9th Circuit Court of Appeals affirmed the conviction. Thankfully for the defendant, the U.S. Supreme Court disagreed, and reversed the conviction so as to allow in evidence of earnings and profits to determine if the distribution was in fact taxable as a dividend. The Court noted that Miller inserted an intent test into dividend treatment that is nowhere present in the statute or law - Sections 301 and 316 are mechanical rules based on the presence or absence of earnings and profits. Likewise, it had big problems with a tax fraud conviction when there may have been no taxes evaded.

Boulware v. U.S., 552 U.S. ___ (2008)

IRS REJECTS KOHLER DECISION

In 2006, the Tax Court held that post-death changes in the character of stock owned by a decedent pursuant to a tax-free reorganization would be allowed to affect the alternative valuation date value of the stock for estate tax purposes. Herbert V. Kohler, Jr., et al., TC Memo 2006-152. Under Code Section 2032, an estate can elect to value its assets for estate tax purposes on a date that is six months after the death of the decedent, instead of on the date of death. Thus, an estate can reduce its estate taxes if the overall value of those assets has declined in that six month period.

In Kohler, during the six month period restrictions on transfer were placed on the stock of the company, including shares owned by the decedent's estate. Such restrictions reduced the value of the shares, and thus use of the alternate date value saved estate taxes for the estate.

Taxpayers need to be wary upon relying on Kohler for precedent. The IRS has issued an Action on Decision announcing that it does not acquiesce to the Kohler case. This means that the IRS does not accept the legal conclusions of that case, and on similar facts will argue that no valuation adjustment for post-death voluntary changes in the character of corporate stock is allowable.

The rationale of the IRS is that the purpose of Section 2032 is to provide relief for estates when the MARKET causes a substantial dimunition in value of an estate asset - that is, if unfavorable market conditions (as distinguished from voluntary acts changing the character of the property) result in a lessening of its fair market value. In this case, the value change did not relate to changes in market conditions, but came from the affirmative and voluntary act of the corporation and its shareholders changing the character of its outstanding stock.

While the position of the IRS sounds reasonable, one has to wonder that if such an exception to the use of Section 2032 is allowed to stand how many cases will be litigated over the question whether a change in value is due to changes in market conditions vs. a voluntary act?

Action on Decision 2008-001, 3/4/2008

IRS STRICTLY CONSTRUES EXCESS COMPENSATION LIMITS

Code Section 162(m)(1) denies an income tax deduction to publicly traded corporations to the extent compensation paid to certain key employees ("covered employees") exceeds $1 million. However, compensation that is contingent on performance goals being met will not be counted as compensation subject to this limitation. To use this exception, the goals have to be set by a committee of the board of directors which is comprised only of outside directors, and the payment arrangement must be approved by the shareholders.

To qualify, the payments can be made ONLY upon fulfillment of the goals. However, the plan may allow for payment without fulfillment of the goals upon the death, disability, or change of ownership or control of the company. Such a payment will be subject to the $1 million limit because the goals were not met - however, the presence of provisions in the plan allowing such payments will not act to disqualify payments made when the goals are otherwise met.

What happens if under the compensation plan an employee can be paid the performance compensation without reaching the goals, not just for death, disability or change in ownership, but also or instead upon termination by the company without cause or for good reason? The IRS has ruled that any payment under the plan will be subject to the $1 million limit (even if the employee is not terminated and actually satisfies the performance goals). Similarly, if the plan allows for payment due to a voluntary resignation from employment without regard to whether the performance goals are reached, all payments under the plan will also be subject to the $1 million limit regardless of whether the goals are reached.

This is a change from prior private letter rulings issued by the IRS. The IRS indicates that exceptions for termination without cause or voluntary resignation defeat the policy of the performance based pay exceptions to the $1 million limit by allowing payment without the requisite performance - indeed, in circumstances where there is a very good chance the goals will not be or have not been met. Therefore, to discourage such exceptions, it will disqualify all payments under such plans from the performance pay exception, even when the performance goals are met.

Rev.Rul. 2008-13

DEDUCTIBILITY FOR HEDGE FUND INTEREST IS LIMITED

The classification of an expense of a trade or business as a “passive loss” or “investment interest” is not usually desirable for individual taxpayers, since such losses can only be offset against certain specified types of income. If such classification is avoided, these limitations on use are likewise avoided.

For hedge funds and other partnerships involving active trading in securities, such partnership activities can be characterized as a trade or business. Nonetheless, and unlike most other trades or businesses, under IRS regulations losses from such activities cannot be characterized as “passive losses.” Treas.Regs. §1.469-1T(e)(6)(i).

Often such partnership borrow funds to use in their business. At first it may appear that interest payments on such borrowings, when passed through to individual limited partners, should be fully deducted as trade or business expenses of the partners since under the above regulation they have dodged characterization as “passive losses.” However, in a recent Revenue Ruling, the IRS has indicated that in their analysis, such interest expense will be characterized as “investment interest.” As such, it is deductible by individual partners that do not materially participate in the partnership business under Code Section 163(d)(1) only to the extent they have “net investment income.” Thus, while the passive loss limitations are avoidable, for this type of expense the investment interest limits will apply.

Such interest expense will need to be separately stated on the partnership’s K-1 schedule to partners, so that the partners can properly account for it on their own tax returns based on their individual circumstances.

Revenue Ruling 2008-12, IRB 2008-10

THE BAD NEWS/GOOD NEWS FOR SMALL EXEMPT ORGANIZATIONS

First, the bad news. Unlike in prior years, small tax-exempt organizations (organizations with less than $25,000 in gross receipts) now must file an annual Form 990.

The good news is that the filing can be made with a Form 990-N, which is one of the shortest tax returns around. Further, as an "e-postcard" it can be filed directly online.

The return is due by the 15th day of the 5th month after the close of the organization's tax year. For calendar year taxpayers, this means that the 2007 return is due by May 15, 2008.

Taxpayers can file the form by going to the e-postcard website [http://epostcard.form990.org/].

The IRS also allows you to review the e-postcard filings of any organization that files one. This information can be reviewed here [http://www.irs.gov/app/ePostcard/].

APPLICABLE FEDERAL RATES - MARCH 2008

March 2008 Applicable Federal Rates Summary:

-Short Term AFR - Semi-annual Compounding - 2.24% (3.09%/February -- 3.16%/January -- 3.84%/December)

-Mid Term AFR - Semi-annual Compounding - 2.95% (3.48%/February -- 3.55%/January -- 4.09%/December)

-Long Term AFR - Semi-annual Compounding - 4.23% (4.41%/February -- 4.41%/January -- 4.67%/December)

DIRECTION OF RATES: Down

SOME PERSONAL USE OF DWELLINGS WILL NOT JEOPARDIZE SECTION 1031 EXCHANGE

Section 1031 exchanges are a popular mechanism for owners of real property to exchange one property for another without recognizing gain on appreciation at the time of the exchange. To qualify, the property being disposed of (the "disposition property"), and the property that is acquired in the exchange (the "replacement property"), must both be used in a trade or business of the taxpayer or held for investment.

Personal use of a dwelling unit (house, condominium, etc.) likely disqualifies a dwelling from being characterized as being used in a trade or business or held for investment, and thus will disqualify a swap of that property from Section 1031 treatment. In a break to taxpayers, the IRS has now issued that guidance that provides that a small amount of personal use by the taxpayer will not jeopardize Section 1031 treatment, if the property is rented out by the taxpayer.

The requirements of the safe harbor are:

-in each of the two twelve month periods leading up to the swap (a) the taxpayer owns the disposition property, (b) the disposition property is rented out at fair value for no less than 14 days, and (c) the taxpayer personally used the disposition property for no more than the greater of 14 days or 10% of the days the dwelling was rented; and

-in each of the two twelve month periods after the swap (a) the taxpayer owns the replacement property, (b) the replacement property is rented out at fair value for no less than 14 days, and (c) the taxpayer personally uses the replacement property for no more than the greater of 14 days or 10% of the days the dwelling was rented.

Revenue Procedure 2008-16

LOSS OF DEDUCTIONS RULE REVIVED

Under IRS regulations, foreign corporations and nonresident aliens who do not file a U.S. income tax return within certain time limits forfeit the ability to take otherwise available deductions against their income that is taxable in the U.S. While the regulations do not require that the return be filed on time, generally if the return is not filed within 18 months of the due date the deductions are lost.

This rule can be harsh for taxpayers that mistakingly conclude that they did not need to file a return based on a lack of income that is taxed in the U.S., that thought that having no net income after deductions meant they did not need to file a return, or that just did not realize that they needed to file a U.S. return. Such taxpayers will end up owing more tax than would have been the case if they had filed within the time limits. Indeed, taxpayers who might otherwise have been in a net loss position after deductions will now owe income tax regardless of their losses.

In 2006, the Tax Court found no statutory authority for the corporate version of the regulations, and declared them invalid. Now, the Third Circuit Court of Appeals has reversed the Tax Court and found the regulations are valid interpretative regulations. This occurred notwithstanding other long-standing precedent (that preceded the regulations) that a timely filing is not a prerequisite for being able to take deductions.

If and until the issue is addressed in a different manner by a different Court of Appeals, delinquent taxpayers are at substantial risk now for loss of deductions, and need to consider whether to file protective returns if they are uncertain as to whether they need to file a U.S. return.

The regulations will also have the unfortunate effect of discouraging innocent foreign nonfilers, who learn of U.S. tax and filing requirements after the time limits of the regulations, from coming clean and filing returns for prior missed years. There are lots of those nonfilers out there - while the regulation writers assume that all foreign persons will or should know and keep up with U.S. requirements, there truly are many who do not pick up on the requirements until after the deadlines have passed.

By allowing the regulations to stand, the appeals court essentially has authorized the Treasury Department to add late filing penalties that are not otherwise provided for in the Internal Revenue Code, and allows the conversion of a tax on "income" to a tax on gross receipts.

HOW NOT TO DOCUMENT SHAREHOLDER LOANS

The shareholders of wholly owned corporations often end up paying for corporate expenses out of their own wallets or checkbooks, or with their own credit cards. Sometimes this is just a matter of convenience for an occasional expense - othertimes, when the corporation is short of cash this may be a regular occurrence.

The shareholders typically want such expense payments to be treated as loans or advances to the corporation, and not a capital contribution. Loan treatment allows for repayment of such advances without the payment being treated as a taxable dividend or distribution from the corporation. As discussed in a recent Tax Court case, taxpayers also desire loan treatment so that they can obtain business bad debt treatment if the loan cannot be repaid.

While often done simply by an entry on the books of the corporation that treats the expense payment as a loan advance, more evidence of loan treatment is desirable if a strong defense against an IRS challenge on that characterization is desired. In the mentioned Tax Court case, the lack of evidence of loan treatment and intent resulted in the Tax Court not recognizing the shareholder payment of expenses as loans, and the Tax Court thus disallowed business bad debt treatment for the shareholder when the advances were not repaid.

What type of evidence of a loan is desired to avoid a similar result? The Tax Court provided a roadmap of what it was looking for (and what was not present):

Mr. Bynum and SEI did not have a debtor-creditor relationship. Mr. Bynum certainly paid and substantiated a wide array of business expenses, but these payments were not loans to SEI. First, there was no valid and enforceable obligation to pay a fixed or determinable amount of money. Second, there was no oral or written agreement establishing a debtor-creditor relationship. Third, Mr. Bynum did not demand or receive any payments from SEI relating to the alleged loans. Finally, the expenditures were not structured as, or intended to be, loans. To keep his business afloat, Mr. Bynum routinely paid a myriad of typical business expenses. He was concerned about the survival of the business, not repayment for the expenses. In sum, Mr. Bynum's payments were contributions to capital, and not bona fide indebtedness.

The simple expedient of a promissory note with repayment terms, and/or the occasional repayment of the advances, would have gone a long way toward allowing Mr. Bynum the loan treatment he sought.

Douglas Bynum, Jr., et ux., TC Memo 2008-14

"SAVE OUR HOMES" PORTABILITY DEADLINES [FLORIDA]

On January 29, 2008, Florida voters approved a constitutional amendment that allows owners of Florida homesteads to transfer all or a part of their Save Our Homes homestead exemption caps from an old homestead to a new homestead. The Florida Department of Revenue has provided information on procedures that must be followed if a taxpayer wants to transfer his or her exemption to a new homestead. Some taxpayers will need to act quickly to qualify.

If a taxpayer had a 2007 exemption on their home, and acquired a new homestead by January 1, 2008 to which they want to transfer their old cap, they will need to apply for the transfer with their local tax appraiser by March 1, 2008.  It appears that merely obtaining a homestead exemption on the new residence is not enough - a transfer of the Save our Homes benefit must also be applied for.

In future years, these applications will have to be submitted by March 1 of the year following that calendar year in which the new homestead is acquired. To qualify for a transfer, a taxpayer will have to have had a homestead exemption for the old residence in either of the two preceding years.

Cite: http://dor.myflorida.com/dor/property/

HIGHLIGHTS OF THE ECONOMIC STIMULUS ACT OF 2008

Congress is continuing its 80 year tradition of spending to spur the economy through its passage on February 7 of the Economic Stimulus Act of 2008 ("ESA"), which President Bush is expected to sign. Here are some of the major highlights:

• A tax credit to taxpayers. High income taxpayers should not wait around the mailbox for their check - the credit starts to phase out for taxpayers with AGI over $75,000 ($150,000 on a joint return) and is completely phased out at levels not much higher than that.  Nonresidents, tax dependents (e.g., students who are declared as a dependent on their parents' returns) and estates and trusts are also ineligible. The basic credit will range from $300 to $600 (double that for married couples), based on a formula that takes into account the amount of qualifying income of the taxpayer and his or her income tax liability. Taxpayers with dependent children under age 17 that otherwise qualify will receive an additional $300.
• The Code Section 179 deduction for new property is increased to  $250,000 per year. This deduction applies to property acquired for use in an active trade or business that is tangible property or computer software which would generally be depreciated over multiple years instead of being expensed in one year. This is an increase from $128,000. The deduction starts phasing out as more than $800,000 of Section 179 property is put in service. Thus, by increasing deductions, businesses will pay less in tax.
• 30% bonus depreciation (that is, extra depreciation allowed in the first year of service) is replaced with 50% bonus depreciation.
• The maximum depreciat