No Theft Loss for Securities “Pump-and-Dump”

Pump-and-dump occurs when corporate officers or other shareholders fraudulently promote shares of a company and engage in fraudulent sales to increase the value of shares. This is injurious to other shareholders who suffer losses when the value of the stock ultimately collapses.

Such shareholders will be able to deduct their losses, but to the extent they are long-term capital losses they can only use them to offset long-term capital gains and another $3,000 in income each year. To avoid these limitations, such shareholders would prefer to be able to deduct their losses as theft losses under Code Section 165(c)(3). That section allows a theft loss if a theft occurs is determined under applicable state law

In a recent case, a victim of a pump-and-dump scheme was denied theft loss treatment. Both court decisions and IRS pronouncements establish that for a theft loss to occur in most states, there must be a direct flow of property or funds from the victim to the wrongdoer, or that the wrongdoer at least specifically targeted the victim. For example, the IRS has long taken the position that stock acquired on the open market that loses value due to corporate misconduct is not eligible for the theft-loss deduction.

Since the victim here purchased his shares on the open market and not from the perpetrators of the fraud, these limitations prevented a theft for state law purposes. This is the case even though it is possible that some of the shares of the perpetrators may have been purchased by the victim, because the sale flowed through the open market mechanism.

The state here was Ohio, and Ohio does characterize embezzlement, wrongful conversion, forgery, counterfeiting, deceit, and fraud as “theft offenses.” However, the term “theft offense” does not itself define a substantive crime in Ohio — it is merely a list of other crimes that are grouped together in the Ohio Revised Code. As such, it does not constitute a “theft” for federal theft loss deduction purposes.

Greenberger, Et Al. v. U.S., 115 AFTR 2d 2015-XXXX, (DC OH), 06/19/2015

Applicable Federal Rates - July 2015

You Now Have to Ask for an Estate Tax Closing Letter

The IRS issues closing letters to estates for federal estate tax purposes, acknowledging that it has accepted the estate tax return as filed, or as adjusted pursuant to audit. This used to be an automatic process.

The IRS has now announced on its website that a closing letter will be issued only if the taxpayer requests it. To make matters worse, the IRS asks that the request not be submitted until 4 months after the return is filed – thus ruling out making the request as part of the return filing.

This makes you wonder whether the IRS no longer has the resources to do a preliminary review of every filed Form 706, as in the past. If that is the reason for this new policy, then perhaps it may be advantageous to NOT request a closing letter since that may generate a review of a filed return that might not otherwise have occurred. However, in those localities where a probate court will require a closing agreement to close an estate administration, this may not be practical or possible.

Frequently Asked Questions on Estate Taxes

Outbound IP Transfer in an F Reorganization

In one corner, we have Code §368(a)(1)(F) which generally allows for a corporation to move from one jurisdiction to another without triggering gain or other immediate adverse income tax consequences. The purpose is to allow corporations to move around as they feel necessary without being impeded by gain considerations.

In the other corner, we have Code §367(d) which treats a transfer of intellectual property (IP) as a taxable disposition of the IP when it is transferred to a foreign corporation under Code Sections 351 or 361. The purpose is to realize upon the appreciation in such IP at the time it may be leaving the U.S. tax jurisdiction.

So if IP is transferred to a foreign corporation when a U.S. corporation converts to a foreign corporation as an F reorganization, which policy prevails – a taxable disposition, or not?

In a recent Legal Advice by Associate Area Counsel, the IRS concluded that Code §367(d) applies and there is a taxable disposition. Such a reorganization is treated as an indirect disposition. Further, the deemed disposition is treated as a lump-sum payment disposition and not one that is taxed as a stream of royalty payments over multiple tax years.

The Legal Advice is consistent with Chief Counsel Advice issues in 2013 in CCA 201321018.

Legal Advice Issued by Field Attorneys 20152104F

No Split Gift Election Where Spouse Was a Potential Beneficiary

A husband created a Family Trust for the benefit of his wife and their descendants. Under the trust, an independent trustee may pay to or use for the benefit of the wife, or any one or more of husband’s descendants and their spouses so much or all of the income and principal of the trust as the trustee determines in its discretion for their support, health and education. He also set up and funded two grantor retained income trusts (GRATs). At the end of the GRAT terms, the remaining trust assets will be paid into the Family Trust. Husband and wife filed gift tax returns, electing under Code section 2513(a) to split the gifts to the trusts, so that one-half of each gift would be deemed to be made by each spouse for federal gift tax purposes.

Under Section 2513, a gift-splitting election can only be made for gifts to a person OTHER THAN a spouse. Since the husband’s spouse was a beneficiary of the Family Trust, the election played out as follows:

a. If the property is transferred in part to a spouse and in part to third parties, the consent applies as to the part passing to third parties if such interest is ascertainable at the time of the gift and severable from the interest transferred to the spouse. Reg. Sec. 25.2513-1(b)(4).

b. In Rev.Rul. 56-439, a gift to a trust where the trustee has discretion to allocate amounts among the spouse and other descendants of the donor gives rise to a gift to the spouse that is not susceptible of determination and is not severable.

c. Thus, no part of the gifts by the husband here were eligible for gift splitting.

This reporting occurred for several years. However, since the statute of limitations has expired for the earlier years, the gift splitting undertaken in those return years, including allocations of GST exemption, will remain in effect, even though not permitted under the Code.

PLR 201523003

Florida Legislative Updates 2015 (Wills, Trusts & Estates Area)

For a diagrammed overview of the major legislative changes enacted during the last completed legislative session in the area of wills, trusts, and estates, click here. You may need to zoom in a bit on the PDF to read it easily.

Critiques, Strategies, and Analysis of Current State of Offshore Compliance Initiatives and Programs

My partner, Richard (Rick) Josepher has prepared an excellent and detailed review that analyzes and critiques the current state of affairs in regard to the offshore enforcement environment. It provides a unique in-depth review of the failings and problems of the current system, suggestions to the government to address these issues, and specific strategic analysis for tax practitioners operating in this area. You can read his analysis on a PDF here or on his blog here.

New Firm Website

Our firm’s new website is now online! Visit us at www.floridatax.com. If you catch any typos or problems, let me know at crubin@floridatax.com.