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Sophisticated Capital Gains Tax Strategies: Risks and Rewards Givner & Kaye, A Professional Corporation [email protected] 1

Capital Gains Tax Planning

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Everyone knows about Section 1031 tax deferred exchanges. But what else is there that you can do? What is the role of the tax professional? How has our advice chnaged in light of the change in the tax rates? What is the difference between a situation where the taxpayer is under time pressure versus where the taxpayer has no pending transaction? Death is a capital gains tax loophole. What is wrong with installment sales? How do you fix an installment sale? What is the restriction on related party installment sales? Does a deferred sales trust "work"? What is the $5,000,000 per seller limit on the benefit of installment sales? How does the assignment of income doctrine impact this planning? Does a charitable lead annuity trust have a place in this planning?

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Page 1: Capital Gains Tax Planning

Sophisticated Capital Gains Tax Strategies:

Risks and Rewards

Givner & Kaye, A Professional [email protected] 1

Page 2: Capital Gains Tax Planning

Capital Gains Tax StrategiesTable Of Contents

1. Capital Gains Tax Rates2. Our Traditional Advice3. What Has Changed?4. Role Of The Tax Professional5. Role Of Professional Fees – Review Engagement6. Role Of Professional Fees – Implementation Engagement7. The Engagement – Before The Meeting8. The Engagement Meeting – Under No Time Pressure9. The Engagement Meeting – Those Under Pressure10. Describing Strategies11. Death Is A Capital Gains Tax Loophole12. What’s Wrong With Installment Sales?13. How To Fix An Installment Sale14. IRC Section 453(e) – Restriction On Related Party Installment Sales

The StatuteDiagramsEconomicsDisadvantagesExit Strategy

15. Unrelated Party Installment Sales – Friend16. Unrelated Party Installment Sales – Deferred Sales Trusts17. Section 1031 Exchanges In 201318. Nevada Non-Grantor Trust19. IRC Section 453A – The $5,000,000 Restriction20. Assignment Of Income Doctrine – Ferguson.21. Charitable Lead Annuity Trusts

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Capital Gains Tax StrategiesCapital Gains Tax Rates

The income tax began in 1913. The capital gains tax was introduced in1916 at 15%. It reached its maximum – 77% - in 1918 and its lowest – 12.5% - in1922.

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 almost40% in 1978. It dipped to 28% for 3 years and then stayed at 20% from 1982 to1986. It stayed in the 28% range for a decade. From 1998 to 2003 it remained inthe 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 itemizeddeductions 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.

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Capital Gains Tax StrategiesOur “Traditional” Advice

For the past 15 years we have suggested that clients “pay the capitalgains tax, avoid any complications that come from planning, and pocket what’sleft. It’s the best rate available under our system.”

When the capital gains tax was 15%, and especially for taxpayers instates like Nevada, that is advice that taxpayers readily accepted.

When IRC Section 7701(o), the economic substance doctrine, wasadded in 2010, that confirmed that we want to be very careful before engaging inany tax planning.

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Capital Gains Tax StrategiesWhat Has Changed?

In 2013, in California, the capital gains tax is 20% federal + 3.8% federal + 13.3%(income above $1,000,000) state = 37.1%! So, at that, it is arguably only 11% or so belowthe maximum individual rate (39.6% + a deductible 13.3% is about 48%). When taxpayersare shown that result, more of them now, than in the past, are interested in understanding ifthere 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 that themaximum individual rate on ordinary income.* However, human nature is that when thetransaction is large enough, some people will be curious just to be certain whether there isanything 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 toexplore alternatives.

*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%

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Capital Gains Tax StrategiesRole Of The Tax Professional

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

We view our role as educators. We want to be certain that the client isaware of the legal and ethical alternatives. We want the client to make aninformed decision. We are afraid of this situation: (i) 6 months after meeting withus, the taxpayer hears someone at the Country Club mention that he or she had abig gain at the end of last year but, based upon advice of that person’s CPAand/or tax lawyer, set up a “CLAT” that ended up dramatically reducing the taxthat the person would have otherwise paid; and (ii) the taxpayer did not hear fromus a thorough explanation of the advantages and disadvantages of a CLAT. Ifthat happens, the client will say or think, “Boy, Givner must not be that good. Henever even mentioned that to me.”

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Capital Gains Tax StrategiesRole Of Professional Fees – Review Engagement

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

If you do not charge, or if you charge less than your normal fee, you willhave an incentive to encourage the client to engage in planning that will generatea large fee. That is a very bad idea. You want to be absolutely comfortable, atthe 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 bestadvice.

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Capital Gains Tax StrategiesRole Of Professional Fees – Implementation Engagement

If you are engaged to implement a structure, you must be careful tocharge a fee that is enough to compensate you to thoroughly analyze the facts;be certain that the alternative selected makes sense for the clients; be certain thatthe client is aware of other alternatives; thoroughly explain the structure to theclient (you cannot rely only on your transmittal letter); and thoroughly explain thedownside risks. Unfortunately, although we are not paid to give financial advice,you probably have to address the fact that the economics can spoil the structure.

Also, have the client on a plan for annual reviews to be certain the planworks in operation from year to year. Many structures are perfect when theyleave the lawyer’s office. But they crash and burn due to the client’smisunderstanding or inattention in later years. Even if you have a strongtransmittal letter and “operating guide,” the client will still be unhappy with you ifthings go wrong.

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Capital Gains Tax Strategies

The Engagement: Before The Meeting

We try to get the prospective client to complete (and send to us beforethe meeting) our normal “Confidential Information Checklist” that we use forpreparing family trusts, as that gathers a great deal of helpful information. (Forexisting clients we ask them to “freshen” the Checklist in our files.)

We also ask them to send us a copy of a recent personal tax return, theirexisting estate planning documents and a personal financial statement (whichneed not be formal – it can be handwritten). We review this information beforethe meeting and pose any questions about these materials at the start of themeeting.

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Capital Gains Tax Strategies

The Engagement: Meeting – Those Under No Time PressureSome few people come to us during the year under no time pressure:

they do not have a transaction pending; they have not already incurred a capitalgain; they are simply toying with the idea of selling something at someunspecified time in the future.

For those people we follow a more elaborate procedure. The firstmeeting would be to review goals and objectives, talk generally about taxplanning, assure the clients that we can help them meet their needs, and get anengagement to do a Design.

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Capital Gains Tax StrategiesThe Engagement: Meeting – Those Under Pressure

Most people come to us under some type of pressure: they do have atransaction pending; they have already incurred a capital gain; they want to sell.

There is usually just time for one meeting. The meeting will begin with aconfirmation of the information provided, and clarification of uncertainties. Weconfirm their goals, only one of which is to reduce taxes. They also areconcerned with maintaining dictatorial control of their money forever; maintainingtheir standard of living; asset protection; perhaps estate tax planning; perhapsphilanthropic planning; perhaps mentoring heirs. We then describe strategies notby names, which we will use in this seminar, but by what they accomplish.Important point: once you label something, the taxpayer will react to the label.So, instead, describe the results (discussion follows).

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Capital Gains Tax StrategiesDescribing Strategies

You do not say “Let me describe a charitable lead annuity trust.” You willnot 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 theimpression that he or she is giving assets away, and what good could thatpossibly be? One approach is to pose a series of questions: would you beinterested 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 interest if, at the end of 12 years, you getback $4,000,000? Client responds “yes. What is that?” You respond: “We call ita chocolate chip cookie. Would you like a chocolate chip cookie?” There isplenty of time after the taxpayer understands the benefits to put a technical labelon the structure.

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Capital Gains Tax Strategies

Death Is A Capital Gains Tax Loophole

Setting aside how low the rate is, does it make any sense to try to deferor eliminate the capital gains tax? Many people are happy with the asset. It isjust that they have received an offer for more money than they thought the assetwas worth. However, perhaps they should now realize it is worth more than theythought 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 thechildren, 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 stepup.

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Capital Gains Tax StrategiesWhat’s Wrong With Installment Sales?

As a matter of deferral, a sale for an installment note is a great way todefer the tax (but not depreciation recapture). And deferring the tax is a greatidea if you think that (i) a tax deferred is a tax saved; and/or (ii) you can make alot of money on the money that would have otherwise been paid in taxes. So itinvolves a lot of guesswork as to the future.

However, as an economic matter, an installment note with a stranger isan awful idea. Some transaction lawyers will tell you that the failure to receive allcash at the closing is a failure of the negotiations. It truly does not matter who thebuyer is, no matter how well secured the note is (you may not want to get theasset back) and no matter the fact that the deal is “as is.” If you do not get paidall of your money at the closing, you are asking for trouble. There is not a singlecompany in the country that is incapable of going bankrupt. Remember that inthe 1950s the expression was “What’s Good For GM Is Good For America.”

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Capital Gains Tax StrategiesHow To Fix An Installment Sale

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

How do you do that? Establish an irrevocable trust for the benefit ofyour children. You pick the trustee that you trust to do whatever you want thetrustee to do whenever you want them to do it without question. Same for thesuccessor trustees. You have the right to remove the trustee and name a newone (subject to IRC Section 672(c)). The trust can have a protector who canchange the allocation among the children and the manner of distribution to thechildren (and perhaps add you as a beneficiary). The trust can contribute all theassets to a single member LLC of which you can be the non-member manager.What’s not to like?

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Capital Gains Tax StrategiesIRC Section 453(e) – Restriction On Related Party Installment Sales

(e) Second dispositions by related persons.(1) In general.If—

(A) any person disposes of property to a related person(hereinafter in this subsection referred to as the “first disposition”), and

(B) before the person making the first disposition receivesall payments with respect to such disposition, the related person disposes of theproperty (hereinafter in this subsection referred to as the “second disposition”),

then, for purposes of this section, the amount realized with respect to suchsecond disposition shall be treated as received at the time of the seconddisposition by the person making the first disposition.

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Capital Gains Tax StrategiesIRC Section 453(e) – Restriction On Related Party Installment Sales

(2) 2-year cutoff for property other than marketable securities.

(A) In general. Except in the case of marketable securities,paragraph (1) shall apply only if the date of the second disposition is not morethan 2 years after the date of the first disposition.

(B) Substantial diminishing of risk of ownership. The running of the2-year period set forth in subparagraph (A) shall be suspended as to any propertyfor any period during which the related person's risk of loss as to the property issubstantially diminished by—

(i) the holding of a put as to the property (or similar property),(ii) another person’s holding of a right to acquire the property, or(iii) a short sale or any other transaction.

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Capital Gains Tax Strategies

IRC Section 453(e) – Restriction On Related Party Installment Sales

The statute restricts related party installment sales if the related partywho paid on an installment basis sells the asset in two years. However, thestatute is black and white: if the sale by the related party takes place in 2 yearsand a day, the transaction “works” and the related party can use the relatedparty’s purchase price as the basis for the sale to the outsider.

Unfortunately, these fact situations do not come up often. Most peopledo not plan that far in advance. However, when you can identify these situationsthey are terrific. This is why it is so important to have a network of CPAs who willrefer clients to you because they have annual meetings with their clients and caneasily ask “do you have plans to sell your business/investment real estatesometime in the next few years?”

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Capital Gains Tax StrategiesIRC Section 453(e) – Restriction On Related Party Installment Sales

In the first diagram that follows the parents sell the high value, low basisasset to a non-grantor children’s trust for an interest-only installment note.

In the second diagram that follows the children’s trust, after a wait of atleast two years, sells the asset for more than the face value of the note, to anoutside buyer for cash.

In the third diagram, the children’s trust continues to hold the cashproceeds of the sale and continues to make the interest only payments on thenote to the parents.

In the fourth diagram, after four years, the trustee of the children’s trustdrops the assets into a single member LLC and the parents can be the non-member managers.

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Capital Gains Tax Strategies

Givner & Kaye, A Professional [email protected] 20

Parents

Sell Asset

Installment note

IRC Section 453(e) – Restriction On Related Party Installment Sales

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Capital Gains Tax Strategies

Givner & Kaye, A Professional [email protected] 21

Parents

Sell Asset

Installment note

IRC Section 453(e) – Restriction On Related Party Installment Sales

Cash Buyer

Pay Cash

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Capital Gains Tax Strategies

Givner & Kaye, A Professional [email protected] 22

Parents

Installment note

IRC Section 453(e) – Restriction On Related Party Installment Sales

Cash

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Capital Gains Tax Strategies

Givner & Kaye, A Professional [email protected] 23

ParentsInstallment

note

IRC Section 453(e) – Restriction On Related Party Installment Sales

Single Member LLC(cash)

Non-member

managers

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Capital Gains Tax StrategiesIRC Section 453(e) – Restriction On Related Party Installment Sales

Do the economics make sense?

The property being sold must generate enough income so that the non-grantorchildren’s trust will have enough revenue to both pay the tax and the interest due to theparents.

Assume the applicable mid-term (more than 3, no more than 9 years) federal rateis 2% (it is currently 1.73%). Assume the asset is an apartment building worth $2.0, subjectto $1.0 of debt, in which the parents have a $1,0 basis and on which the free cash flow is$50,000 per year. The children’s trust will have to pay tax on the $50,000 less a deductionfor the $20,000 per year of interest due the parents. Before the transaction the parentswere taxed on $50,000. After the transaction the trust is taxable on $50,000 AND theparents are taxable on $20,000 of interest. So there may be some additional cost.

However, if the family can make money for the next several decades on $238,000to $371,000 that would have otherwise gone in taxes, that is a trade-off that many peoplewill be glad to make.

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Capital Gains Tax StrategiesIRC Section 453(e) – Restriction On Related Party Installment Sales

Are there disadvantages?

1. The parents no longer own the asset so it will not have theopportunity to step up in basis on the first parent’s death.

2. The note will be included in the parents’ estates.

3. If the note causes an estate tax, there must be another source for thepayment of the estate tax.

4. The note is an item of income in respect of a decedent.

5. This is just a deferral: the tax must be paid when the principal on thenote is paid.

6. If you pick an initial 9 year term to get a low interest rate, you mustrenegotiate in the future when the rates might be higher.

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Capital Gains Tax Strategies

IRC Section 453(e) – Restriction On Related Party Installment Sales

What generally happens with these transactions?

After two or three decades of deferral, the clients come back to us andsay “Thanks. We enjoyed having the benefit of the taxes we should have paidback in 1982 (or 1992). We have made a lot of money with that. However, wenow want to wind this transaction up. So let’s amortize the note and pay it downover the next 5 (or 10) years.”

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Capital Gains Tax StrategiesUnrelated Party Installment Sales - Friend

What if you don’t have two years?

Can you sell the property to a party who is not technically related? Forexample your sister-in-law and your cousins are not “related” as defined in IRCSection 318(a) and 267(b) (see Section 453(f)(1)). However, will such atransaction have “economic substance”? If not, under Section 6662(b)(6) if thetransaction is not disclosed the penalty is 40% (20% if disclosed).

How would you give the transaction economic substance? Presumablythe unrelated party would make a reasonable, e.g., 10% downpayment. So theseller must pay tax on that portion of the capital gain in year one. Does theunrelated party independently have the cash to make the downpayment? Is theseller happy to see the unrelated buyer make a big profit when the assets is soldto a true outsider in 2+ years?

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Capital Gains Tax StrategiesUnrelated Party Installment Sales - Friend

What if you don’t have two years?

Can you sell the property to a party who is not technically related? Forexample your sister-in-law and your cousins are not “related” as defined in IRCSection 318(a) and 267(b) (see Section 453(f)(1)). However, will such atransaction have “economic substance”? If not, under Section 6662(b)(6) if thetransaction is not disclosed the penalty is 40% (20% if disclosed).

How would you give the transaction economic substance? Presumablythe unrelated party would make a reasonable, e.g., 10% downpayment. So theseller must pay tax on that portion of the capital gain in year one. Does theunrelated party independently have the cash to make the downpayment? Is theseller happy to see the unrelated buyer make a big profit when the assets is soldto a true outsider in 2+ years?

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Capital Gains Tax StrategiesUnrelated Party Installment Sales – Deferred Sales Trust

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Capital Gains Tax StrategiesUnrelated Party Installment Sales – Deferred Sales Trust

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Capital Gains Tax StrategiesUnrelated Party Installment Sales – Deferred Sales Trust

Legal Issues:1. Must read all the contracts between taxpayer and the DST company. Does

the taxpayer understand the power that is being handed to the DST company?The answer is usually “no.” However, without that power, tax problems arise.

2. Are the DST company’s on-going fees appropriate, e.g., 1.25%?3. Are the sales proceeds safe?4. Does the taxpayer expect to have investment control over the proceeds? If

so, does that vitiate the independence of the DST company for tax purposes?5. Does the taxpayer expect to be able to borrow from the trust? Ditto.6. Does the taxpayer expect to be able to “call” the loan? If the taxpayer cannot

do so, what happens if the taxpayer unexpectedly runs into financialproblems?

7. Is the installment note protected from creditors? Not if the seller holds onto it.

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Capital Gains Tax StrategiesUnrelated Party Installment Sales – Deferred Sales Trust

Tax Issues:1. Is the DST company the seller’s agent? That probably depends upon the

terms of the contract between the taxpayer and the DST company. Thestronger the contract (in terms of making sure that the DST company is notthe taxpayer’s agent), the more uncomfortable the taxpayer is going to be interms of the security of the sales proceeds. So it is a push-pull problem.

2. Is the transaction a sham? For this we must look not only to the terms of thecontract, but to the reality of the custody and control of the funds.

3. Does the transaction have economic substance? Should it be disclosed(Form 8275)?

4. Does this seem too much like the PATs (private annuity trusts) that wereheavily marketed 10 years ago, causing the IRS to change the regulations onOctober 18, 2006? We now know, if we did not know previously, that the IRSreads the internet and knows how to use Google.

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Capital Gains Tax StrategiesUnrelated Party Installment Sales – “C453 Transaction”

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Capital Gains Tax StrategiesSection 1031 Exchanges In 2013

Section 1031 (in one form or another) has been in the Internal Revenue Code since 1921.With a 60% higher capital gains tax rate, it is more attractive than before. Since it can eliminate the 3.8%surtax on passive investment income, it is more attractive than before.

Why does it seem that fewer Section 1031 exchanges are being consummated in 2013 thanpreviously? There may be several reasons.

First, people have been shaken by the real estate debacle that followed the Lehman Brotherscrash. Those that are selling may not wish to remain invested in real property. Also (a more traditionalobjection to an exchange), many of those that are invested in real property do not wish to trade a propertythey already know for one that they do not know.

Second, many people experienced bad results with Section 1031 exchanges in the past twodecades. Due to the 45 and 180 day requirements, despite the availability of deferred exchanges, manypeople have been rushed into acquiring replacement properties with which they were later unhappy.

Third, many people feel that the market has already been overpriced. So even though theyget attractive offers for their own properties, they see nothing attractive to buy.

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Capital Gains Tax StrategiesNNGs

A Nevada Non-Grantor Trust (sometimes called a Nevada incomplete gift non-grantor trust –NING) are touted for asset protection planning and for saving state income tax.

Every state is, of course, different when it comes to the taxation of trusts. California taxestrusts based on the residence of the (i) trustees and (ii) beneficiaries. Rev. & Tax. Code Section 17742.However, in determining who is a “beneficiary,” California ignores a beneficiary whose interest is“contingent.” “A resident beneficiary whose interest in a trust is subject to the sole and absolutediscretion of the trustee holds a contingent interest in the trust.” FTB TAX 2006-0002.

How is this used? Mom and Dad, California residents, have stock in a publicly tradedcompany with a fair market value of $1,000,000 with a basis of zero. They transfer the stock to a NNGwith a Nevada trustee. There are three beneficiaries: the American Cancer Society; and Son andDaughter. The Trustee has complete discretion as to distributions of principal and income. Mom andDad have the right to remove the trustee and name a new one subject to the limits of IRC Section 672(c).In years 1 – 5 the Trustee distributes $5,000 to the American Cancer Society and nothing to Son andDaughter. In year 6 the stock is sold and the trust owes no California tax. No California tax is owed untildistributions are, in fact, paid to California beneficiaries. If, at the time of distribution, Son and Daughterare living in Florida, Texas, Nevada, etc., there will be no state tax.

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Capital Gains Tax StrategiesIRC Section 453A – The $5,000,000 Restriction

(a) General rule.

(a) In the case of an installment obligation to which this section applies—

(1) interest shall be paid on the deferred tax liability with respect to such obligation in themanner provided under subsection (c)…

(b) Installment obligations to which section applies.

…(2) Special rule for interest payments.

For purposes of subsection (a)(1), this section shall apply to an obligation described in paragraph (1)arising during a taxable year only if—

(A) such obligation is outstanding as of the close of such taxable year, and

(B) the face amount of all such obligations held by the taxpayer which aroseduring, and are outstanding as of the close of, such taxable year exceeds $5,000,000.

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Capital Gains Tax Strategies

IRC Section 453A – The $5,000,000 Restriction

Does it make sense to exceed the $5,000,000 per person ($10,000,000per couple) installment note when doing this type of transaction? Currently theinterest rate on underpayments is 3%, so if H&W do a $20,000,000 note inCalifornia they will owe ($20,000,000 - $10,000,000 = $10,000,000 is the excessX 37.1% tax = $3,710,000 X 3% interest rate = ) $111,300 per year in interest.

Do clients do this (exceed the Section 453A limit)? Some do becausethey feel that they can make more on the money that would otherwise be paid intax than two times the interest (since it is non-deductible). Certainly manyengage in transactions for double the Section 453A limit because they rationalizethat at $10,000,000 per person the effective interest rate is only 1.5% on the tax.

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Capital Gains Tax StrategiesWhat Is The “Assignment Of Income Doctrine”?

U.S. Supreme Court Justice Oliver Wendell Holmes in Lucas v. Earl, 281 U.S. 111(1930): “The case presents the question whether the respondent, Earl, could be taxed forthe whole of the salary and attorney’s fees earned by him…or should be taxed for only ahalf of them in view of a contract with his wife…. There is no doubt that the statute couldtax salaries to those who earned them and provide that the tax could not be escaped byanticipatory arrangements and contracts however skillfully devised to prevent the salarywhen paid from vesting even for a second in the man who earned it. That seems to us theimport of the statute before us and we think that no distinction can be taken according to themotives leading to the arrangement by which the fruits are attributed to a different tree fromthat on which they grew.”

Under the anticipatory assignment of income doctrine, once a right to receiveincome has “ripened” (into fruit) for tax purposes, the taxpayer who earned or otherwisecreated that right, will be taxed on any gain realized from it, despite the fact the taxpayerhas transferred the right before actually receiving the income.

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Capital Gains Tax Strategies

Assignment Of Income Doctrine: The Scary Ferguson case, 174 F3d 997 (1999)

Shareholders who donated stock to charities were taxable under theanticipatory assignment of income doctrine on gain realized on the later sale ofthat stock by the charities pursuant to a tender offer pending at the time of thegifts. The stock was converted from an interest in a viable corporation to a fixedright to receive cash before the date of the gifts. Although the mergeragreement was not formally approved before the gifts were made, the rightto merger proceeds matured on the date when more than 50% of the outstandingshares of stock had been tendered; that was all that was needed for the mergeragreement to be approved. The taxpayers relinquished control of the stock andcompleted their charitable gifts when they later executed final letters ofauthorization for the transfer.

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Capital Gains Tax Strategies

Assignment Of Income Doctrine: The Scary Ferguson case, 174 F3d 997 (1999)

“In the present case, the Tax Court determined that the realities andsubstance of the ongoing tender offer and the pending merger agreementindicated the AHC stock already had ripened from an interest in a viablecorporation into a fixed right to receive cash, by 8/31/88 - the first date bywhich over 50% of the AHC shares had been tendered. To wit, the Tax Courtdetermined that by 8-31-88, it was practically certain that the tender offerand merger would be completed successfully and that all AHC stock, evenuntendered stock, either already had been converted into cash (via thetender offer) or imminently would be (via the merger).”

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Capital Gains Tax StrategiesAssignment Of Income Doctrine:

The Scary Ferguson case, 174 F3d 997 (1999)

“…the Fergusons note that the logic of the Tax Court’s decisionimplies that their AHC stock already might have ripened by some date evenearlier than 8-31-88. In essence, they note that there is no clear linedemarcating the first date upon which a taxpayer’s appreciated stock hasripened into a fixed right to receive cash pursuant to a pending merger.However, from the taxpayers' perspective, walking the line between taxevasion and tax avoidance seems to be a patently dangerous business.Any tax lawyer worth his fees would not have recommended that a donormake a gift of appreciated stock this close to an ongoing tender offer and apending merger, especially when they were negotiated and planned by thedonor. … Therefore, we will not go out of our way to make this dangerousbusiness any easier for taxpayers who knowingly assume its risks. ”

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Capital Gains Tax Strategies

Assignment Of Income Doctrine: Practical

Ferguson is an extreme case. Rauenhorst, 119 T.C. 157 (2002) returnedto Rev. Rul. 78-197 which provides that, in the case of a charitable contribution ofstock, the IRS will treat sales proceeds as income to the donor only if at the timeof the gift the donee is legally bound or can be compelled to sell the shares.

Therefore, there are 3 ways in which your client may have gone "too far,"is legally obligated to sell, and must thus recognize the gain on the sale: (1)signed a binding Letter of Intent ("LOI"); (2) has a written Agreement; and/or (3)has entered into a binding oral contract.

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Capital Gains Tax StrategiesCharitable Lead Annuity Trust

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Capital Gains Tax StrategiesCharitable Lead Annuity Trust

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Capital Gains Tax StrategiesCharitable Lead Annuity Trust

Givner & Kaye, A Professional [email protected] 45

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Capital Gains Tax StrategiesCharitable Lead Annuity Trust

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