AVOIDING
CAPITAL GAINS -
WHAT’S
LEGAL & WHAT’S NOT! ™©2007
By:
I.R.S. Traps
& Trends™ - AVOIDING CAPITAL GAINS! – 2007 Update
Boy! Is this the marketing guru
hot-topic of the decade or what? Whether its advertisements, seminars, books or
articles, everyone is “selling” – “How To Avoid
Capital Gains”! But exactly what is legal and what is not? Can we really do all
of those crazy trusts, step-transactions, or exchanges to legally avoid taxes?
The answer if NO! The cold truth is the IRS does not allow a taxpayer to do
something indirectly (to avoid taxes) that can’t (legally) be done directly!
Recent
1. Private Annuity Trust is Dead! On
October 17, 2006 the I.R.S. issued Proposed Regulations 1.72-6(e) and
1.1001-1(j) (reversing Rev.Rul. 69-74) covering certain (private) annuity trust
transactions entered into after October
18, 2006, and other types entered into after April 18, 2007. The
Private Annuity (Trust) is effectively DEAD after
2. Business (Rental Real Estate) Trust Of Any Name! The IRS brochure “Too Good True to be
True” (IRS Notice 97-24 (www.irs.gov)),
clearly warns taxpayers about mis-using trusts of any kind to get
around obligations to pay capital gains or current taxes in general. Any trust, transaction or device that makes it appear that the taxpayer has given up control of
his or her property (or business), but in reality, through trustees or other
entities (or trust protectors) controlled by the taxpayer, he or she still runs
day-to-day activities or still controls the property or business, or it’s use
and enjoyment of the stream of income, will supply NO TAX RELIEF.
3. Offshore Integrated Trusts or
Transfers! Use of any
offshore trust, entity, credit card, insurance policy, individual, trust
protector or abusive foreign trust arrangement that enables taxable
funds or property (including loans) to flow through several trusts or entities
until the funds are ultimately distributed or made available to the original
owner is fully taxable. [Section 105 “Stop Tax Haven Abuse Act”]
4. CRT (Charitable Remainder Trust)
& (5) Charitable Gift Annuities (Trust)! Use of
the Charitable Remainder Trust and Charitable Gift Annuities are generally
acceptable methods of arranging estate succession which may defer taxation.
However, a trust set up for the purpose of avoiding capital gains or taxes may
fail as to form over substance. Also a charitable trust set up “on-paper” although
correctly will fail as a sham, lacking economic substance. You cannot
simply use a legally deferring tax device unless you comply with the substance and
the approved purpose of that device. You
must act as a real charity to obtain real charitable tax deferrals, otherwise
it will fail.
6. Installment Sales, (7) 1031 Exchange, and (8) 1031-TIC! Generally, installment sales with “economic substance” that comply with Internal Revenue Code (IRC) 453, reported on IRS Form 6252 are legal. Tax deferral is proper under IRC 1031. 1031 done correctly is the probably the safest way to build real estate wealth for the average owner. 1031-TIC is commonly used by landlords to sell their rental without current taxation, while using that untaxed wealth to buy a Tenant-In-Common (TIC) real estate rental replacement investment.
Economic Substance / Business Purpose! To
stop offshore tax haven abuse and domestic and related offshore tax
shelter abuses, on February 17, 2007 a bi-partisan bill called the “Stop
Tax Haven Abuse Act” codified the “form over substance” or economic
substance doctrine(s) amending IRC 7701 with Section 401 entitled:
Clarification of Economic Substance Doctrine. It holds in part that: tax benefits
are not allowed if the transaction (or series of transactions) does not have “economic
substance” or “lacks a business purpose”.
Call for our full article: IRS SHAKEDOWN – NEW TRAPS & TRENDS™
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O’CONNELL & RYDSTROM, LLP ATTORNEYS: LEGAL NOTICE: This
article is not legal, tax or financial advice, and you
may not rely on it for same. This is a brief non exhaustive newsworthy
article and may be deemed an advertisement from the State Bar. All Rights
Reserved ©2007 Richard I. Rydstrom IRS CIRCULAR 230 DISCLOSURE NOTICE: To ensure
compliance with IRS requirements, we inform you that any U.S. federal tax
advice contained in this communication is not intended or written to be used,
and cannot be used by any taxpayer, for the purposes of (i) avoiding penalties
under the Internal Revenue Code or (ii) promoting, marketing or recommending to
another party any transaction or matter addressed herein.