BRUCE GIVNER (bruce@givnerkaye.com) OWEN D. KAYE (owen@givnerkaye.com) KATHLEEN GIVNER (kathy@givnerkaye.com) NEDA BARKHORDAR (neda@givnerkaye.com) LAW OFFICES SUITE 445 12100 WILSHIRE BOULEVARD LOS ANGELES, CALIFORNIA 90025 www.givnerkaye.com October 19, 2017 CAPITAL GAINS TAX PLANNING PART 1 - INTRODUCTION PHONE (310) 207-8008 (818) 785-7579 FAX (310) 207-8708 (818) 785-3027 1. Our Traditional Advice. 2. What Has Changed? Rates. Internal Revenue Code 7701(o). 3. Role Of The Professional. 3.1. Educate, Not Advocate. 3.2. Realistic Expectations. 4. Death Is A Capital Gains Tax Loophole. PART 2 INSTALLMENT SALES 5. Regular Installment Sale (With A Stranger). 6. Fixing An Installment Sales: IRC 453(e). 7. Installment Sale With An Unrelated Friendly Party. 8. The Use Of Partnerships. 9. Installment Sale With A Professional Third Party. 9.1. Deferred Sales Trust. 9.2. Monetized Installment Sale. PART 3 CHARITABLE 10. Charitable Remainder Uni-Trust. 11. Charitable LP.
Page 2 of 20 (o) 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) (B) the transaction changes in a meaningful way (apart from Federal income tax effects) the taxpayer s economic position, and the taxpayer has a substantial purpose (apart from Federal income tax effects) for entering into such transaction. (5) Definitions and special rules For purposes of this subsection (A) Economic substance doctrine The term economic substance doctrine means the common law doctrine under which tax benefits under subtitle A with respect to a transaction are not allowable if the transaction does not have economic substance or lacks a business purpose. (B) Exception for personal transactions of individuals In the case of an individual, paragraph (1) shall apply only to transactions entered into in connection with a trade or business or an activity engaged in for the production of income. (C) Determination of application of doctrine not affected The determination of whether the economic substance doctrine is relevant to a transaction shall be made in the same manner as if this subsection had never been enacted. (D) Transaction The term transaction includes a series of transactions. IRC 6662(i): (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 percent for 20 percent. (2) Nondisclosed noneconomic substance transactions
Page 3 of 20 For purposes of this subsection, the term nondisclosed noneconomic substance transaction means any portion of a transaction described in subsection (b)(6) with respect to which the relevant facts affecting the tax treatment are not adequately disclosed in the return nor in a statement attached to the return. (3) Special rule for amended returns In no event shall any amendment or supplement to a return of tax be taken into account for purposes of this subsection if the amendment or supplement is filed after the earlier of the date the taxpayer is first contacted by the Secretary regarding the examination of the return or such other date as is specified by the Secretary. California R&T Code 19774: A "noneconomic substance transaction" includes: (A) The disallowance of any loss, deduction or credit, or addition to income attributable to a determination that the disallowance or addition is attributable to a transaction or arrangement that lacks economic substance including a transaction or arrangement in which an entity is disregarded as lacking economic substance. 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. (B) Any disallowance of claimed tax benefits by reason of a transaction lacking economic substance, within the meaning of 7701(o) of the Internal Revenue Code. 5. The Basics Which You Must Explain To Your Clients And Referral Sources 5.1. The Beauty Of An Installment Sale. stock Client 30 year interest only installment note Cash Buyer 5.2. Problems With An Installment Sale. Trust and Money. 5.3. Problems With Capital Gain Tax Planning Generally. 5.3.1. General Common Law Doctrines, e.g., Step Transaction, Assignment Of Income. 5.3.2. Big Bad Codified Economic Substance Doctrine. IRC 7701(o):
Page 4 of 20 5.4. Role Of An Opinion Letter. 5.5. Two Big Client Controlled Facts. 5.5.1. Timing. Educating The Referral Sources. 5.5.2. What Is Being Sold? C stock vs. C corporation assets vs. S stock ( 338(h)(10) or not) vs. real estate vs. personal goodwill. 1 6. Fixing An Installment Sales: IRC 453(e) - Related Parties. 2 stock stock Client Complex Children s Trust Cash Buyer 30 year interest only note cash 1 Martin Ice Cream, 110 T.C. 189 (March 17, 1989); Howard v. U.S., 108 AFTR 2d 2011-5226 (dentist - against the taxpayer); H&M, Inc., TC Memo 2012-290 (sole shareholder s goodwill wasn t a corporate asset taken into account on sale of business); Bross Trucking, Inc. v. Comm r., T.C. Memo 2014-107 (follows Martin Ice Cream); Estate of Franklin Z. Adell, T.C. Memo 2014-155 (approved personal goodwill of son in estate tax case!). 2 453(f) Definitions and special rules. For purposes of this section (1) Related person. the term related person means (A) a person whose stock would be attributed under 318(a) (other than (4) thereof) to the person first disposing of the property, or (B) a person who bears a relationship described in 267(b) to the person first disposing of the property. 318: (a) General rule. (1) Members of family. (A) In general. An individual shall be considered as owning the stock owned, directly or indirectly, by or for (i) his spouse (other than a spouse who is legally separated from the individual under a decree of divorce or separate maintenance), and (ii) his children, grandchildren, and parents. (B) Effect of adoption. For purposes of subparagraph (A)(ii), a legally adopted child of an individual shall be treated as a child of such individual by blood. 267(b) refers us to subsection (c)(4) for the definition of members of a family. That paragraph read as follows: (4) The family of an individual shall include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants.
Page 5 of 20
Page 6 of 20
Page 7 of 20
Page 8 of 20
Page 9 of 20 7. Selling To A Friendly, But Technically Unrelated Stranger. 8. The Use Of Partnerships. 8.1. FLPs (or LLCs): estate tax planning and creditor protection planning. 8.2. 754 as part of that process. 8.3. 2/9/06 IRS Bogus Optional Basis Coordinated Issues Paper: Excerpts from Part 1 Attached. 9. Selling To A Professional Stranger. 9.1. Deferred Sales Trust. 3 Telos Capital s installment structure. 4 9.2. Monetized Installment Sale. 9.2.1. 3 Transactions. Transaction 1: Client sells to Stan for $10,000,000 30 year interest only, unsecured installment note at 5.61% interest. Transaction 2: Stan sells to buyer for $10,000,000 cash. 3 They have a CPA or attorney with whom they have a relationship set up a trust for your client. The trust issues a 10 year interest-only installment note. The sales proceeds are invested with a money-manager of your client s choice. There is a 0.35% trustee fee and a 1% money management fee of which your client s money manager gets 70%. 4 The Buyer acquires the business or property owned by the Seller for a note. Telos Capital unconditionally guarantees the note payments to the Seller of interest and principal. That seems comparable to the former structured installment deals in which an installment buyer bought an annuity offered by an offshore subsidiary of Prudential. The IRS declined to endorse it and Prudential withdrew.
Page 10 of 20 Transaction 3: Client borrows $9,350,000 from unrelated lender for 30 years, interest only at 6% ($561,000,000) secured only by the note from Stan. 5 9.2.2. External Evidence. Chief Counsel Memorandum 20123401F (8/24/2012). 6 Office Max transaction (description attached). 9.2.3. Advantage. Tax on $1,000,000 is 20% federal + 13.3% state = 33.3% = $333,000. Net from Monetized Installment Sale: $935,000 what would have been left had Client sold ($667,000) = $268,000. The question is what will the $268,000 be worth in 30 years? It is from that source that the client will have to pay the $333,000 in tax. The following chart indicates the answer based on various interest rate assumptions. Interest Earned On The Funds Fund Left After Paying The Tax Deferral Advantage As % Of Tax 2% $ 485,445 $ 152,445 45.78% 3% $ 650,506 $ 317,506 95.35% 4% $ 869,231 $ 536,231 161.03% 5% $1,158,281 $ 825,281 247.83% 6% $1,539,256 $1,206,256 362.24% 7% $2,040,084 $1,707,084 512.64% 8% $2,696,792 $2,363,792 709.85% 9% $3,555,738 $3,222,738 967.79% 10% $4,676,440 $4,343,440 1,304.34% 5 One business lawyer passed on the transaction due to what he viewed as a bad boy clause. 6 Reprinted from http://scrowcollateral.com/m453-irs-ruling.pdf.
Page 11 of 20
Page 12 of 20
Page 13 of 20
Page 14 of 20
Page 15 of 20
Page 16 of 20
Page 17 of 20
Page 18 of 20
Page 19 of 20
Page 20 of 20