14 10-16 capital gains tax planning strategies - all of them

L A W O F F I C E S

GIVNER & KAYE A PROFESSIONAL CORPORATION

SUITE 445 12100 WILSHIRE BOULEVARD

LOS ANGELES, CALIFORNIA 90025 www.GivnerKaye.com

BRUCE GIVNER ([email protected]) OWEN D. KAYE ([email protected]) KATHLEEN GIVNER ([email protected]) NEDA BARKHORDAR ([email protected])

PHONE (310) 207-8008 (818) 785-7579

FAX (310) 207-8708 (818) 785-3027

October 16, 2014

CAPITAL GAINS TAX PLANNING STRATEGIES: ALL OF THEM

1. Forthcoming Seminars.

November 6 - Conservatorships & Elder Abuse – An Introduction

November 20 - IRS National Office Private Letter Rulings (and the California Equivalents). User Fees. Legal Fees. Topics, e.g., IRAs, Section 355 Split-Offs. Timing. Opinion Letters and the Accuracy-Related Penalty.

December 4 - Everything You Always Wanted To Know About Controlled For- eign Corporations and Subpart F Income But Were Afraid To Ask

December 18 - Everything You Always Wanted To Know About Public Charities and Private Foundations But Were Afraid To Ask

January 15, 2015 Everything You Always Wanted To Know About Going To Jail For Tax Problems But Were Afraid To Ask

PART 1 - INTRODUCTION 2. Rates.

2.1. Federal.

The income tax began in 1913. The capital gains tax was introduced in 1916 at 15%. It reached its maximum – 77% - in 1918 and its lowest – 12.5% - in 1922.

In the modern era, the maximum tax on long-term capital gains was 25% from 1954 to 1967. Starting in 1968 it climbed slowly reaching a peak of almost 40% in 1978. It dipped to 28% for 3 years and then stayed at 20% from 1982 to 1986. It stayed in the 28% range for a decade. From 1998 to 2003 it remained in the 21% range and then dropped to the 15% - 16% range from 2004 – 2009. Then it was 15% to the end of 2012.

Now it is 23.8% (24.988% given the 1.188% adjustment for itemized deductions per Bob Keebler). That is a large percentage increase (almost 60%) from what it was in 2012. However, from an historic perspective, it is not high.

2.2. State.

The Mental Health Services Tax Rate is 1% for taxable income in excess of $1,000,000.

LAW OFFICES


Capital Gains Tax Planning Strategies: All Of Them October 16, 2014 of 14

3. Our Traditional Advice.

When the capital gains tax was 15%, and especially for taxpayers in states like Nevada, we suggested that clients “pay the capital gains tax, avoid any complications that come from planning, and pocket what’s left. It’s the best rate available under our system.”

That advice was usually accepted.

When IRC Section 7701(o), the economic substance doctrine, was added in 2010, with a 40% penalty (reduced to 20% if the transaction was disclosed), that confirmed that we want to be very careful before engaging in any tax planning.

4. What Has Changed?

4.1. Rates.

In 2014, in California, the capital gains tax is 20% federal + 3.8% federal1 + 13.3% (income above $1,000,000) state = 37.1%! So, at that, it is arguably 11% to 15% or so below the maximum individual rate (39.6% + a deductible 13.3% is about 48%, but it is arguably as high as 52%). When taxpayers are shown that result, more of them now, than in the past, are interested in understanding if there are palatable alternatives to simply “paying the tax and pocketing the difference.”

In Nevada, the capital gains tax is now 23.8%. That is still 15.8% less than the maximum individual rate on ordinary income.2 However, when the transaction is large

1 This applies unless the property is one in which the taxpayer materially participates or it is the sale of “S” corporation stock or a partnership interest which is an active trade or business. §1411(0(c)(2) and (4). 2 Bob Keebler: 44.588% top rate on investment income – 24.988% on capital gains = 19.6%. 41.688% top rate on salary – 24.988% on capital gains = 16.7%.

LAW OFFICES


Capital Gains Tax Planning Strategies: All Of Them October 16, 2014 of 14 enough, some people will be curious just to be certain whether there is anything they are overlooking before they write the check to Uncle Sam. So, if it is a $1,000,000 capital gain, the taxpayer may simply write the check. But if it is $10,000,000, the magnitude of the check motivates some people to buy a few hours from a tax lawyer to explore alternatives.

4.2. Internal Revenue Code §7701(o).3

Clarification of economic substance doctrine (1) Application of doctrine In the case of any transaction to which the economic substance doctrine is relevant, such transaction shall be treated as having economic substance only if— (A) the transaction changes in a meaningful way (apart from Federal income tax effects) the taxpayer’s economic position, and (B) the taxpayer has a substantial purpose (apart from Federal income tax effects) for entering into such transaction.

Internal Revenue Code §6662(i) Increase in penalty in case of nondisclosed noneconomic substance transactions.

(1) In general In the case of any portion of an underpayment which is attributable to one or more nondisclosed noneconomic substance transactions, subsection (a) shall be applied with respect to such portion by substituting “40%” for “20%t”.

5. Role Of The Professional.

5.1. Educate, Not Advocate.

We do not try to encourage our existing clients, or the taxpayers referred to us by other professionals for this type of advice, to engage in transactions that minimize or eliminate the capital gains tax.

We view our role as educators. We want the client to be aware of the legal and ethical alternatives. We want the client to make an informed decision. We are afraid of this situation: (i) 6 months after meeting with us, the taxpayer hears someone at the Country Club mention that he had a big gain at the end of last year but, based upon advice of that person’s CPA and/or tax lawyer, set up a “CLAT” that ended up dramatically reducing the tax that the person would have otherwise paid; and (ii) the taxpayer did not hear from us a thorough explanation of the advantages and disadvantages of a CLAT. If that happens, the client will

3 The California corollary is Rev. & Tax. Code §19774: “A transaction shall be treated as lacking economic substance if the taxpayer does not have a valid nontax California business purpose for entering into the transaction.”

LAW OFFICES


Capital Gains Tax Planning Strategies: All Of Them October 16, 2014 of 14 say or think, “Boy, Givner must not be that good. He never even mentioned that to me.”

5.2. Realistic Expectations.

Foreign employee leasing schemes of the 1980s.

The Fortrend/MidCoast Transaction: Midcoast buys 100% of the stock of a “C” corporation. Midcoast pays a significant premium above the amount the seller would have received from an asset sale and later liquidation. Midcoast has losses it used to allow it to liquidate the corporation. Notice 2001-51. PwC approved these transactions routinely.

The October 18, 2006, death of private annuities as a capital gain technique.

Doc Hauk and the National Heritage Foundation. Charitable reverse split dollar life insurance.

Don Guess and the xelan Foundation which allowed a donor-directed fund for doctors to make tax-deductible donations and direct those donations to pay for the college tuition of the doctors’ children. He also had a 419A plan and a captive that were found to be fraudulent.

Ken Hartstein and Bryan Cave’s million dollar fully insured §412(i) plans.

6. Goals.

No client’s most important goal is to save taxes. Each client’s most important goal is always the same: to maintain dictatorial control of their assets from now until the day they die. Their second goal is to make sure they have enough assets to maintain their standard of living. After those two assets might come others like:

save on capital gains tax; save on ordinary income tax; save on estate tax; protect themselves from future creditors; protect the heirs from their own blunders; support philanthropic causes in which they believe; provide for the education of their grandchildren; provide for aged parents; help their children buy a home; keep their closely held business intact; keep their real estate empire intact; and protect their key employees.

You must get the clients to prioritize their goals and objectives.

LAW OFFICES


Capital Gains Tax Planning Strategies: All Of Them October 16, 2014 of 14 “You cannot sell a solution to an undiagnosed problem.”4 Find out what keeps the client awake at night.

7. Review Engagement.5

Once you understand that you are an educator, you understand why you cannot meet with taxpayers about this type of planning for free, or even at complimentary or dramatically reduced fees. That applies even to an initial meeting. You must charge fairly for your time.

If you do not charge, or if you charge less than your normal fee, you will have an incentive to encourage the client to engage in planning that will generate a large fee. That is a very bad idea. You want to be absolutely comfortable, at the end of your time with the taxpayer, recommending – if that is your feeling – that the taxpayer simply pay the tax and pocket the difference (do no planning). Indeed, for the majority of the taxpayers you meet that will probably be the best advice.

8. Design Engagement.

Few clients are going to be able to make up their minds on one approach in an initial meeting. That is why, after the initial meeting – the Review Engagement – you need to have a separate Design Engagement. This is where the professional team maps out the one, two or three alternatives that seemed most attractive to the client. The result should be charts, diagrams and calculations to be presented at the next client meeting.. It should also provide budgets and timelines for the Implementation Engagement. This engagement is arguably more valuable, and should be more costly, than the implementation.

9. Maintenance.6

Once the structures are completed, be certain the client has engaged you to follow up on the structure at the end of the first year’s reporting so you can review the tax returns and the corporate records. It is also appropriate to meet with the client each later year to make sure that the “T’s” are crossed and the “I’s” are dotted as a structure perfectly designed may fall apart if not maintained properly.

10. Describing Strategies.

Do not say “Let me describe a charitable lead annuity trust.” You will not get to the third syllable of the first word and the client will already say “no.” Just the first two syllables – “char – it” – is enough to give the client the impression that he or she is giving assets away, and what good could that possibly be?

4 Simon Singer. [email protected]. 5 The Review, Design, Implement Engagement format is courtesy of Joseph Strazzeri, Esq. www.StrazzeriMancini.com. 6 The idea for a routine maintenance program is from Vincent Bonazzoli, Esq. www.vbestateplanning.com.

LAW OFFICES


Capital Gains Tax Planning Strategies: All Of Them October 16, 2014 of 14 One approach7 is to pose a series of questions: would you be interested in a result where you can deduct $1,000,000? Client responds “yes.” Would you be interested if you could control the investment of the $1,000,000? Client responds “yes.” Would you be interested if, at the end of 12 years, you get back $4,000,000? Client responds “yes. What is that?” You respond: “We call it a chocolate chip cookie. Would you like a chocolate chip cookie?” There is plenty of time after the taxpayer understands the benefits to put a technical label on the structure. 11. Death Is A Capital Gains Tax Loophole.

Setting aside how low the rate is, does it make any sense to try to defer or eliminate the capital gains tax? Many people are happy with the asset. It is just that they have received an offer for more money than they thought the asset was worth. However, perhaps they should now realize it is worth more than they thought and they should continue to hold on to it. If the income is good, why sell? If it does not require painful upkeep, why sell? If it is a good asset for the children, definitely do not sell as death is a great capital gains tax loophole.

Bear in mind, it only takes the death of one spouse to get the basis step up.

Also, recognize that basis planning is the new estate planning: having parents buy high value, low basis assets from grantor trusts set up for their children.

PART 2 – INSTALLMENT SALES 12. Regular Installment Sale (With A Stranger).

As a matter of deferral, a sale for an installment note is a great way to defer the tax (but not depreciation recapture). And deferring the tax is a great idea if you think that (i) a tax deferred is a tax saved; and/or (ii) you can make a lot of money on the money that would have otherwise been paid in taxes. So it involves a lot of guesswork as to the future. However, as an economic matter, an installment note with a stranger is an awful idea. Some transaction lawyers will tell you that the failure to receive all cash at the closing is a failure of the negotiations. It truly does not matter who the buyer is, no matter how well

7 Simon Singer. [email protected].

Joe Stranger asset

note

LAW OFFICES


Capital Gains Tax Planning Strategies: All Of Them October 16, 2014 of 14 secured the note is (you may not want to get the asset back) and no matter the fact that the deal is “as is.” If you do not get paid all of your money at the closing, you are asking for trouble. There is not a single company in the country that is incapable of going bankrupt. Remember that in the 1950s the expression was “What’s Good For GM Is Good For America.” 13. Fixing An Installment Sales: IRC §453(e).

What if you could do an installment sale with someone whom you absolutely trust? You are confident that no matter what happens this party is going to pay you the cash at any time that you want to receive the cash.

How do you do that? Establish a non-grantor irrevocable trust for the benefit of your children.8 You pick the trustee that you trust to do whatever you want the trustee to do whenever you want him or her to do it without question. Same for the successor trustees. You have the right to remove the trustee and name a new one (subject to IRC §672(c)). The trust can have a protector who can change the allocation among the children and the manner of distribution to the children (and perhaps add you as a beneficiary). The trust can contribute all the assets to a single member LLC of which you can be the non-member manager. What’s not to like?9

It requires waiting for 2 years and one day before the children’s trust sells to the outsider.10 It can’t be done for publicly traded securities. You can’t limit the asset’s ability to go up or down during the two year period (“substantial diminishing of risk of ownership”), e.g., through a short sale. Unfortunately, it requires waiting. Need not worry about §453A11 if personal use or farm property.

8 Consider the IRS audits in Karmazin, Woelbing and Davidson. Have the children’s trust represented by separate counsel. Use an interest rate that is FMV rather than AFR. Have the children guaranty the trust’s obligation. Use a downpayment of more than 10% if possible. 9 You have to run the calculations. If the sale doesn’t close the tax cost of the downpayment, principal received on the note each year, children’s trust tax on dividends, etc., can start eating up the savings if the sale doesn’t occur for many years. 10 What if a year after the sale the parent wants to undo the transaction? §1038 protects the transaction if the asset sold is real estate. §453B(f) probably is overridden. 11 The $5,000,000 per person restriction and the interest charge on amounts over that.

Joe Non-

Grantor Children’s

Trust

asset

cash

Stranger

asset

note

LAW OFFICES


Capital Gains Tax Planning Strategies: All Of Them October 16, 2014 of 14 14. Installment Sale With An Unrelated Friendly Party.

What if you don’t have two years? Can you sell the property to a party who is not technically related? For example your sister-in-law and your cousins are not “related” as defined in IRC §318(a) and 267(b) (see §453(f)(1)). However, will such a transaction have “economic substance”? If not, under §6662(b)(6), if the transaction is not disclosed, the penalty is 40% (20% if disclosed).

How would you give the transaction economic substance? Presumably the unrelated party would make a reasonable, e.g., 10% downpayment. So the seller must pay tax on that portion of the capital gain in year one. Does the unrelated party independently have the cash to make the downpayment? Is the seller happy to see the unrelated buyer make a big profit when the assets is sold to a true outsider?

15. Installment Sale With A Professional Third Party.

Opportunity: sell life insurance. Use a portion of the increased cash flow to buy a policy owned by an ILIT to pay off the loan owed back to the lender on the parent’s death.

Concerns: the economic substance doctrine. The deal between the seller and S. Crow Collateral Corp. is an “intermediate sale” contract; it is not finalized until the deal between SCCC is finalized with the ultimate cash buyer. The deed goes directly from the seller to the buyer, bypassing S. Crow Collateral Corp. SCCC gets a 5% discount on the price at the end

LAW OFFICES


Capital Gains Tax Planning Strategies: All Of Them October 16, 2014 of 14 of the 30 year term if it has fully fulfilled its contract. Amount due on the loan is the exact amount due on the installment contract.

PART 3 – MOVING 16. Moving To Puerto Rico.12

Most of the income tax benefits of expatriation without giving up your citizenship.

The Export Services Act of 2012 (Act 20) offers a 4% corporate tax rate13 for PR businesses providing services for exportation (must employ at least 3 people), 100% tax-exempt dividends from E&P derived from the export services income of eligible businesses, and a 60% exemption on municipal taxes. There is a 20 year decree guaranteeing these rates. There are no federal taxes on PR source income.

The Individual Investors Tax Act of 2012 (Act 22) is to promote the relocation of individual invests by providing a total exemption from PR income taxes on all passive income realized or accrued after they become residents. The goal is to attract new local investments in real estate, services and capital injections to the PR banking sector. The act expires on December 31, 2035. It includes a 100& tax exemption on dividends and interest and short and long-term capital gains.

17. Moving To Nevada.

17.1. James v. FTB.

On February 26, 2013, former New York Knick Jerome James lost his case against the FTB. He claimed to be Washington state resident for 2003 when he was a Seattle SuperSonic. However, he only rented temporary housing in Seattle during the NBA season and return to California for the off-season, and did not change this habit until March 24, 2004, when he signed a long-term lease in Washington. He had a home, a vehicle and a driver’s license in California due to his tenure as a member of the Sacramento Kings.

To change domicile, a taxpayer must move to a new residence and intend to remain there permanently or indefinitely. For a professional athlete you must look at where he goes during the offseason. He maintained his California driver’s license, kept his home in California; his children were in California; and he did not change attorneys, financial advisors or other professional services.

17.2. FTB v. Hyatt.

September 18, 2014: The Nevada Supreme Court held that the California FTB is immune from punitive damages of $250 million under Nevada law for intentional torts and

12 82 degrees F all-year and 300 miles of beaches. However, the humidity is in the high 70s. 13 Compares favorably to Ireland and Singapore.

LAW OFFICES


Capital Gains Tax Planning Strategies: All Of Them October 16, 2014 of 14 bad faith conduct during an audit of microprocessor inventor Gilbert Hyatt's state tax returns. The court also reversed a 2008 jury verdict finding as to invasion of privacy, breach of confidential relationship and abuse of process. However, the court held that Nevada's exception to immunity for intentional torts and bad-faith survived the adoption of the federal discretionary-function immunity test, because such conduct isn't based on public policy. The court affirmed the jury findings of fraud and intentional infliction of emotional distress. So the $139,000,000 judgment in compensatory damages and attorneys’ fees for the agency’s conduct during the audit survived.

17.3. FTB Publication 1031.

We know that meeting the 13 objective criteria on page 4 of FTB Publication 1031 are essentially a minimum, but are not sufficient.

18. Expatriation.

Mark-to-market exit tax. Special retirement plans rules. Visa appointments in 2015.

19. NNGs, DNGs and WNGs.

Franchise Tax Board TAM 2006-002 (2/17/06): if a non-California trustee could make distributions in the trustee’s discretion to a California beneficiary, the undistributed income of the trust should not be subject to California tax. The FTB reasoned that a California beneficiary has a non-contingent interest only as of the time, and to the extent of the amount of income, that the trustee actually decides to distribute or is required to distribute to that beneficiary. Thus, when distributions are not being made or required to be made, there is no resident beneficiary in this situation, and the trust is not a resident trust.

Should the client seek an IRS PLR? Should the client ask the attorney for a favorable opinion letter?

PART 4 – CHARITABLE 20. Charitable Remainder Uni-Trust.

2 lives - 5%14 distribution: One life - 5% distribution:

75 and 70 47% deduction 75 60% deduction 70 52% deduction 65 and 60 30% deduction 65 45% deduction 60 38% deduction 55 and 50 19.5% deduction 55 32% deduction 50 26% deduction

14 Minimum distribution permitted by law, which – naturally – generates the largest deduction at each age.

LAW OFFICES


Capital Gains Tax Planning Strategies: All Of Them October 16, 2014 of 14 More attractive to some when it pours into a private foundation controlled by the heirs.

21. Charitable LLC.

Make money through arbitrage of what you make on the money above what you pay the LLC for borrowing plus, of course, the upfront charitable deduction. November 24, 2013, Forbes article by Jay Adkisson, Esq. indicating it is substantially similar15 to the KPMG LLC-2 tax shelter listed in Notice 2004-30. So do nothing for the first 3 years (until the statute of limitations runs on the deduction).

File an IRS Form 8275?

No interest retained by taxpayer.

Create a large deduction to turn your IRA into a Roth?

PART 5 – MISCELLANEOUS 22. Personal Goodwill: Martin Ice Cream and Bross.16

“The remaining attributes assigned to Bross Trucking’s goodwill all stem from Mr. Bross’s personal relationships. Bross Trucking’s establish revenue stream, its developed customer base, and the transparency of the continuing operations were all spawned from Br. Bross’s work in the road construction industry. … Mr. Bross did not transfer any goodwill to Bross Trucking through an employment contract or a noncompete agreement. … Mr. Bross did not have an employment contract with Bross Trucking and was under no obligation to continue working for Bross Trucking. … [H]e was free to leave the company and take his personal assets with him. … [A] business can distribute only corporate assets and cannot distribute assets personally owned by shareholders. See Martin Ice Cream Co. v. Commissioner, 110 T.C. 209. Bross Trucking did not own and could not transfer Mr. Bross’s goodwill….”

23. §1031.

Drop and Swap. Pre-1031 holding period requirement?

24. One-Day ESOP Technique.

Sale of “C” corporation is imminent. The corporation adopts an ESOP. The shareholder sells at least 30% of the stock to the ESOP for a note. (The price must be so as to allow the ESOP a profit when it enters into the sale to the outside buyer.) The deal closes for cash to the outside buyer. The ESOP owes a 10% tax since it sold the stock within 3

15 “Substantially similar” is magic language when it comes to listed transactions. If a transaction is “substantially similar to a transaction described in a listed transaction notice then it, too, is a listed transaction about which a report must be made to the IRS and for which promoters must keep lists. 16 T.C. Memo 2014-107.

LAW OFFICES


Capital Gains Tax Planning Strategies: All Of Them October 16, 2014 of 14 years of acquiring it (however, that is a cheap cost than the 33.1% the shareholder would have incurred).17 The ESOP pays off the note to the former shareholder. The former shareholder uses the cash to buy replacement property, e.g., 30 year GE bonds and dies with the bonds which step-up in basis to the date of death FMV.

The IRS might argue for the step-transaction doctrine or that it was not an ESOP. Presumably you can build enough economic substance into the transaction with careful thought.

25. Tax Qualified Employee Retirement Plans. Taxpayers can use the funds accumulated in their profit sharing plans (which include 401(k)s) and pension plans (which include defined benefit pension plans and money purchase plans and target benefit pension plans) to buy investment real property, even with debt, without incurring UBTI. We have clients with $20,000,000 of investment property in their retirement plans.

On the one hand, the clients do not personally benefit from depreciation and capital gain treatment (as getting money out of the plans is ordinary income). On the other hand the acquisitions are made with pre-tax dollars and the dispositions are not taxable. Also, with proper planning the taxable income can be postponed so that it is received by the children and the assets can be excluded from the taxable estate of the parents.

26. Partnership Transactions. The other 2% is a corporate GP §754 election after the purchase

17 The 10% tax applies to the entire value whereas the 33.1% only applies to the gain. However, in a closely held corporation it is likely that the shareholder has a very low, if not zero, basis in the stock.

Family Limited Partnership

Children’s Trust

Parents

Highly appreciated asset

3% LP

95% LP

90% LP interest

Cash and note

LAW OFFICES


Capital Gains Tax Planning Strategies: All Of Them October 16, 2014 of 14 February 9, 2006 IRS “BOB” Announcement.

The purpose of this coordinated issue paper is to discuss the grounds for disallowing an increase in basis that is improperly claimed due to §§754 and 743(b). Examiners should challenge these transactions on the basis of several alternative legal theories…. … There are various statutory and judicial bases that may be used to challenge the taxpayer's position, but these arguments must be tailored to the specific facts of the case. Because many of the legal arguments are document sensitive, extensive factual development is necessary for each transaction to establish and evaluate the appropriate legal positions. … 3. Or, the increased basis of the partnership property may be disregarded for Federal tax purposes under judicial doctrines, including the economic substance doctrine and the step transaction doctrine. … Briefly, redemption bogus optional basis ("BOB") transactions purportedly increase the basis of an appreciated asset so that when the asset is sold, the built-in gain is inappropriately deferred. In general, individuals or controlled entities transfer low basis, high value property, such as land, interests in a partnership, or stock, to a newly formed partnership (LTP) in which related parties own the remaining interests. LTP makes a §754 election as to partnership property. This election generally allows a partnership to adjust the basis of its assets (the "inside basis") as to certain partners' interests in the partnership's assets to match those partners' bases in the partnership (the "outside basis") where a triggering event has occurred under §743(b). To create a §743(b) adjustment, there must be a sale or exchange of a partnership interest. In general, in the redemption BOB transaction, LTP redeems all or part of one partner's interest in the partnership in exchange for promissory notes which are assumed by the other partners. … After the redemption, the remaining partners' interests in LTP are transferred to another newly formed partnership (UTP), triggering a basis adjustment under §§754 and 743(b). UTP may then buy the redeemed partner's remaining interests in LTP, if any, in exchange for promissory notes. LTP can continue to hold the appreciated asset with the stepped-up basis. However, once LTP makes a distribution of partnership property or sells the assets subject to the step-up in basis, a tax benefit, in the form of gain reduction, is triggered due to the stepped-up basis. The 2 steps can, and often do, take place in 1 different taxable years; the election and later step-up may occur in one year and the tax benefit triggering event may occur in a later year. For the sale year, LTP will indicate that there has been a sale of an asset, but due to the basis adjustment, LTP reports minimal or no gain; with a distribution, the remaining partners do not report gain on a later sale of the appreciated property, also due to the stepped up basis. Development of the cases has uncovered very few facts that are materially different from those described above. … Usually, the steps take place in anticipation of a sale of the property contributed to LTP (the Acquisitions partnership). Also, the promissory notes issued by the entities often remain unpaid.

27. Private Placement Life Insurance.

Segregated investment account. Crown Global Insurance. Management expense 0.4% per annum + $2,900. Acceptance fee is 2% of initial premium and 1% of additional premiums. Investment restrictions based upon law of country under which the policy is created. Can qualify as life insurance for U.S. tax purposes.

LAW OFFICES


Capital Gains Tax Planning Strategies: All Of Them October 16, 2014 of 14 28. VPFCs.

A VPFC, if broken into its aggregate pieces, is buying a put, selling a call, and borrowing money. It is nothing more than a Wall Street invention that puts all those three things together as a financial product.

Variable prepaid forward contracts are often used by investors to lock in their profits and defer their taxes. In return for giving the stock to the brokerage company, the investor usually gets between 75% and 90% of the current value. So the investor receives cash now, but doesn't actually have to account for the income until the official transfer is complete. Some think this should not be allowed because technically a transfer has occurred, and should therefore be recognized for tax and regulatory reasons.

However, on December 27, 2011, in Anschutz v. Commissioner, the Tenth Circuit affirmed a Tax Court decision taxing the disposition of appreciated stock through a VPFC. The underlying issue was whether the complex financial arrangement created a taxable constructive sale. The transaction involved a series of contracts including (1) a “forward contract” to sell the appreciated stock to the buyer in the future and (2) a loan from the buyer to the seller, secured by a pledge of the underlying stock. The court analyzed a series of eight factors in its determination that there was a current taxable sale, noting in particular that the ostensible buyer “has paid between 75% and 85% of the purchase price up front and is economically entitled to 100% of the initial value of the stock with no obligation to make additional payments. In contrast, the taxpayer has effectively cashed out its equity in the property in exchange for the upfront cash payment and a contingent contract right to acquire a certain number of shares based on the stock price on the settlement date.” The court also concluded that the transaction was distinguishable from the VPFC described in Rev. Rul. 2003-7, where there was not a constructive sale. The court found that the Anschutz transaction went further than the ruling by adding a master share purchase agreement and share-lending agreements, resulting in the “buyer” obtaining possession and most of the incidents of ownership of the underlying appreciated stock.

29. Turning Ordinary Income Into Capital Gain.

Non-Grantor Children’s Trust buys a portion of the contingency lawsuit.18

PART 6 – CONCLUSION

30. Alternatives. 31. Timing. 32. Accomplish Other Goals At The Same Time.

18 http://www.woodllp.com/Publications/Articles/pdf/Investors.pdf.

14 10-16 capital gains tax planning strategies - all of them

Documents