On September 24, 2009, the IRS released Notice 2009-82, which, among other things, permits many IRA owners and qualified plan participants (or a spouse beneficiary of either) to roll over 2009 RMDs to another retirement account by the later of November 30, 2009, or 60 days from the date the funds were received.

While this is welcome relief for those who took 2009 RMDs even though 2009 RMDs were suspended, two warnings should be heeded. First, the relief does not apply to non-spouse beneficiaries. Non-spouse beneficiaries are never allowed to do a 60-day rollover; they can only do a trustee-to-trustee transfer. The Notice makes no change to that rule.

Second, since the IRS has no authority to do so, the Notice does not change the one-rollover-per-year rule that applies to 60-day IRA rollovers. Thus, if a 2009 RMD was taken in installments, no more than one installment will be eligible for the Notice's rollover relief.

What can be done with the ineligible installments? Two options are available. First, they can be rolled into a qualified plan by the deadline. The one-rollover- per-year rule does not apply when funds are rolled from IRAs to qualified plans.

Second, the ineligible installments can be rolled to a Roth IRA by the deadline. The one-rollover-per-year rule also does not apply to rollovers that are conversions to Roth IRAs. If the taxpayer is not otherwise eligible for a Roth IRA or simply does not want one, a subsequent recharacterization of the Roth conversion can return the funds to the original IRA, scot-free.

However, it should be noted that while most experts agree that the Notice's extension of the 60-day window would apply to these two exceptions to the one-rollover-per-year rule, the Notice itself does not specifically address them. Therefore, the client should be advised accordingly.

For more information regarding this topic, please e-mail your requests to Salvatore J. LaMendola, or call Sal at (248) 457-7204.

Two surgeons purchased $2 million of life insurance on each other's lives. Soon after the purchase of the policies, one of the doctors passed away. The deceased doctor's estate sued Dr. Marian Zilkha contesting the payment of the death proceeds to the other surgeon who was the policy owner and sole beneficiary. The personal representative argued that the surviving doctor lacked an insurable interest under applicable state law (New York) because she was not legally authorized to practice medicine in New York. The surviving doctor was a Brazilian surgeon who was not licensed to practice medicine in New York, the state of residence of the deceased doctor.

The two doctors were not related by marriage, were not involved in the same professional corporation, and neither was an employee of the other. However, in finding that an insurable interest did exist, the U.S. District Court for the Southern District of New York in First MetLife Investors Insurance Company v. Zilkha , 209 WL 2999607 (S.D.N.Y. September 21, 2009), held that sufficient factual evidence supported the existence of a business enterprise between the two doctors. The Court was influenced by the undertakings of an enterprise by the two doctors, which included the joint development of new surgical techniques, a carbon dioxide skin "rejuvenation machine" and a line of cosmetic products marketed under both doctors' names. Additionally, the two doctors jointly owned the intellectual property associated with this enterprise, including trademarks and the copyright to a book they co-authored. The Court found that the factual evidence presented amply established that the surviving doctor had a "substantial economic interest in the continued life" of her deceased business partner.

The point of this case is that the key question in determining whether or not an insurable interest exists is whether or not the insured is more valuable to the policy owner alive than dead. In this case, the Court found that the surviving doctor was able to demonstrate a strong reason why she wanted the insured to remain alive. Co-venturers can have as great an insurable interest in each other's lives as can shareholders or partners, as long as the insured provides valuable services or funding to the joint venture.

For more information regarding this topic, please e-mail your requests to Thomas P. Cavanaugh, or call Tom at (248) 457-7218.

In Pierre v Commissioner, 133 T.C. No. 2 (2009), the IRS argued that a single member LLC (where the taxpayer did not elect to have the LLC taxed as a corporation) should be disregarded for all tax purposes - both income and gift tax.

The facts in the case are simple. The taxpayer formed a single member LLC; transferred $4,250,000 in cash and marketable securities to the LLC; and then (12 days later) gifted and sold membership interests in the LLC to irrevocable trusts formed by her. An appraisal opined that a 30% discount was appropriate.

The IRS argued that because the LLC was treated as a disregarded entity under the "check-the-box" regulations, the taxpayer's transfers of interests in the LLC were interests in the underlying assets rather than LLC interests. Thus, no discount would be applicable.

The taxpayer argued that, for federal gift tax purposes, state law, not federal tax law, determined the nature of a taxpayer's interest in property and the legal rights inherent in that property interest. The taxpayer further argued that under New York state LLC law, a membership interest is personal property, and no member has any interest in specific property of the LLC.

The Tax Court (in a 10-6 opinion) held in favor of the taxpayer ruling that the check-the-box regulations govern how a single member LLC is taxed for income tax purposes, but not for gift tax purposes. The Tax Court held that state law, in fact, determined what was gifted and sold.

However, the Tax Court expressly reserved judgment for later opinion rulings on whether the step transaction doctrine applies to collapse the separate transfers to the trusts and the appropriate valuation discount, if any. But, at least the Tax Court will be valuing LLC interests instead of underlying cash and marketable securities.

For more information regarding this topic, please e-mail your requests to Julius H. Giarmarco, or call Julius at (248) 457-7200.

In many instances, property can be contributed to an entity by its owners in exchange for ownership interests, without gain or loss being recognized on the contribution. For partnerships and LLCs, the general rule under Sec. 721(a) states that "no gain or loss shall be recognized to a partnership or to any of its partners in the case of a contribution of property to the partnership in exchange for an interest in the partnership". This section, however, contains a lesser-known exception to the rule. This rule may create unintended consequences for taxpayers who do not properly consider them when transferring appreciated property to an entity as an investment company.

In Ltr. Rul. 200931042, the IRS concluded that contributions of cash and/or a diversified portfolio of stocks in exchange for a partnership interest did not trigger the gain recognition rules applicable to investment companies.

Facts. An LLC was formed for the purpose of lowering investment costs and creating greater investment opportunity for the members. The LLC executed an amended agreement under which the LLC admitted five new members, each of whom made capital contributions to the LLC in exchange for membership interests. Further, certain original members made additional capital contributions in exchange for additional membership interests.

With respect to the anticipated capital contributions, the LLC represented to the IRS that (1) both new and original members contributed solely cash and/or a diversified portfolio of stock and securities to the LLC, (2) the LLC had no plan or intention for any members to transfer assets other than cash and/or a diversified portfolio of stocks and securities to the LLC, and (3) any other transferor who previously contributed or will in the future contribute assets to the LLC has contributed or will contribute solely cash and/or a diversified portfolio of stocks and securities to the LLC. The LLC further represented that the portfolio of stocks and securities to be contributed would be "diversified" within the meaning of Section 368(a)(2) (F)(ii).

The LLC sought a ruling concerning the federal income tax consequences of the contribution of property to the LLC.

IRS analysis. The Service began by observing that Section 721(a) generally provides that neither a partner nor a partnership recognizes gain or loss as a result of a contribution of property in exchange for a partnership interest. Nevertheless, Section 721(b) clarifies that this general nonrecognition rule does not apply to transfers of property to a partnership that would be treated as an investment company, within the meaning of Section 351, if the partnership were incorporated. Under Reg. 1.351-1(c)(1), a transfer to an investment company occurs when two elements are met:

1. The transfer results, directly or indirectly, in diversification of the transferors' interests.



2. The transferee is a regulated investment company, real estate investment trust, or a corporation; more than 80% of the value of whose assets (excluding cash and nonconvertible debt obligations) are held for investment and are readily marketable stocks or securities or interests in RICs or REITs.

The IRS further explained that a transfer results in diversification of the transferors' interests if two or more persons transfer non-identical assets to a corporation in the exchange. Under Reg. 1.351-1(c) (5), a transfer also results in diversification of the transferors' interests where the transfer is part of a plan to achieve diversification without recognition of gain, such as a plan that contemplates a subsequent transfer, however delayed, of the corporate assets (or of the stock or securities received in the earlier exchange) to an investment company.

The Service also noted, however, that a transfer of stocks and securities is not treated as resulting in a diversification of the transferors' interests if each transferor transfers a diversified portfolio of stocks and securities. A portfolio of stocks and securities is considered diversified if it satisfies the 25% and 50% tests of Section 368(a)(2)(F)(ii); that is, no more than 25% of the portfolio's total asset value can be invested in the stock and securities of one issuer. Further, no more than 50% of the portfolio's total asset value may be invested in the stock and securities of five or fewer issuers. (See Reg. 1.351-1(c)(6)(i).)

The LLC members in Ltr. Rul. 200931042 proposed to contribute stock and security portfolios that satisfied the 25% and 50% tests of Section 368(a)(2)(F)(ii). The IRS ruled that such transactions would not be treated as transfers to an investment company within the meaning of Section 351. The Service further determined that neither the members nor the LLC would recognize gain or loss as a result of the transactions. The IRS declined to opine as to whether the proposed transaction was part of a plan to achieve diversification under Reg. 1.351-1(c)(5).

Implications. A taxpayer who wishes to diversify investment holdings ordinarily pays the price of immediate gain recognition. By following the guidance in Ltr. Rul. 200931042, however, a taxpayer could diversify investment holdings and defer gain recognition without running afoul of the investment company rules.

These rules are especially important to keep in mind for those of your clients interested in transferring marketable security accounts to LLCs to achieve additional asset protection. Care must be taken to avoid the investment company rules so that the transfer will be income tax free.

For more information regarding this topic, please e-mail your requests to Randall A. Denha, or call Randy at (248) 457-7205.