AVOIDING CAPITAL GAINS -

WHAT’S LEGAL & WHAT’S NOT! ™©2007

By: Richard Ivar Rydstrom, Esq. LL.M. Taxation | RydstromLaw@Yahoo.Com

 

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 U.S. Congressional hearings in late 2006 and most recently in February 2007 have set a dangerous trend in tax traps (and asset protection law) that you should know about.  Notably, the hearings were termed: “Tax Haven Abuses, The Enablers, The Tools and Secrecy Hearing; and the most recent was entitled: “Stop Tax Haven Abuse Act”.  Let’s review the common public list of devices generally used for avoiding or deferring taxes.  

 

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 April 18, 2007 in terms of avoiding or deferring taxes!

 

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 (by Richard Ivar Rydstrom, Esq. LL.M.: rydstromlaw@yahoo.com ).

By: Richard Ivar Rydstrom, Esq.

Attorney, Professor, J.D. Law, LL.M. Taxation / Litigation

949-798-6206 |

RYDSTROMLAW@YAHOO.COM

www.OConnellAndRydstrom.com

Published or quoted collectively hundreds of times (in Forbes, Los Angeles Times, Chicago Tribune, Dallas Morning News, Apartment Associations and CPA journals, etc., and in the 110th Congress of the United States of America.

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.