eGiftLaw Newsletter
| October 5, 2009 Dear Professional Advisor,
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| University of Northern Colorado Foundation, Inc. | October 5, 2009 | |
GiftLaw eNewsletter - October 5, 2009
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WASHINGTON HOTLINE Baucus Healthcare Bill Vote Nears Tax Quote of the Week "Tax complexity itself is a kind of tax." -- Max Baucus
Baucus Healthcare Bill Vote Nears In one of the longest Senate bill markups in history, Sen. Max Baucus (D-MT) finally completed work on over 500 proposed amendments to his health care bill. The America's Healthy Future Act (AHFA) language is now complete. Following a determination of cost for the bill by the Congressional Budget Office, it is anticipated that the Senate Finance Committee will pass the bill this week. Sen. Baucus was pleased with the result. He published a statement early Friday morning that stated, "We have a bill that will improve the lives of every American. And one that does so in a fiscally responsible way." There were several important votes during the extended review by Senate Finance Committee members. Sen. Jay Rockefeller (D-WV) proposed that the bill include a "public option." The public option is included in the other four proposed bills and has been a controversial proposal. Rockefeller's amendment for the public option was voted down, with Sen. Baucus and Sen. Kent Conrad (D-ND) opposing the public option. Sen. Conrad has been the primary advocate for a system of public co-ops rather than the public healthcare option managed by the federal government. The health care bill includes $6 billion in startup funding for the proposed co-ops. An amendment by Sen. Bill Nelson (D-FL) will benefit seniors. Because the Baucus bill increased the floor for deduction of medical expenses to 10% of adjusted gross income, seniors would have reduced medical deductions. Under the amendment by Sen. Nelson, the threshold for deducting medical expenses for seniors would remain 7.5% of adjusted gross income. The amended bill includes two types of benefits to help small businesses acquire health insurance for employees. First, there will be small business health care purchasing pools called "SHOP" exchanges. A SHOP will enable a business with fewer than 100 employees to purchase health insurance at favorable rates. In addition, small businesses with 25 or fewer employees may qualify for partial tax credits for up to 35% of the cost of employee health insurance. These small businesses will be required to cover at least 50% of employee health care costs. Editors Note: The Senate Finance Committee markup has been a marathon session. Yet the remaining process is still lengthy. Therefore, the challenges for passing a health care bill this year are significant. First, the Senate Finance bill must pass and be merged with another Senate bill developed by the late Sen. Edward Kennedy. If health care bills then pass both the House and the Senate, there will be a fairly contentious conference committee to resolve the substantial differences in the House and Senate plans. Only if all of those differences can be resolved by the end of the year, will there be a health care bill passed in 2009. Conservation Easement Vanishes Into Thin Air In J. Maurice Herman v. Commissioner; T.C. Memo. 2009-205; No. 14005-07 (14 Sep 2009), the Tax Court denied a deduction for a conservation easement. Mr. J. Maurice Herman owned a building on 5th Avenue in New York. It was designed by Henry Odis Chapman in 1923 and was eight stories high in front and 11 stories high in the rear. The building also included development rights of 22,000 square feet that could permit an addition from three to six stories. The building is in the "Upper East Side Historic District" and is a "certified historic structure." On December 15, 2003, Mr. Herman contributed a conservation easement for 10,000 unspecified feet of the 22,000 feet of potential development rights. The recipient was the National Architectural Trust, Inc. (NAT), a nonprofit Sec. 501(c)(3) organization that is willing to enforce the easement. Based on an appraisal of the "before and after" value of the airspace rights conducted by Jefferson Lee Appraisals, Inc., the value of the charitable deduction claimed by Mr. Herman was $21,850,000. Mr. Herman claimed that deduction on his 2003 Form 1040. The IRS denied the deduction, assessed a deficiency and imposed a Sec. 6662(h) penalty of approximately $5.5 million. A conservation easement is a real property interest given to a qualified organization exclusively for conservation purposes. Sec. 170(h)(1). In this case, the underlying property is a "certified historic structure" under Sec. 170(h)(4)(A)(iv). However, this conservation easement does not protect the historic structure. The underlying structure had been transferred to Mr. Herman's controlled entity Windsor LLC. Owning 10,000 feet of unspecified airspace rights does not preclude Windsor from making major modifications to the historic structure. Because the 10,000 feet of unspecified rights leave another 12,000 feet in the ownership of Mr. Herman, it would be possible to build a six-story addition on the front half of the building and the donated air rights would have no aesthetic impact. In addition, the easement does not protect the underlying land. See Sec. 170(h)(4)(A)(iv). Finally, an easement on property that is close to a certified structure is not considered to preserve that structure. Because the grant of 10,000 feet of unspecified air rights from the original 22,000 feet does not preserve the building or the land, the conservation easement vanishes into thin air. Applicable Federal Rate of 3.2% for October -- Rev. Rul. 2009-33; 2009-40 IRB 1 (18 Sept. 2009) The IRS has announced the Applicable Federal Rate (AFR) for October of 2009. The AFR under Sec. 7520 for the month of October will be 3.2%. The rates for September of 3.4% or August of 3.4% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2009, pooled income funds in existence less than three tax years must use a 4.8% deemed rate of return. Federal rates are available by clicking here.
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PLR THIS WEEK PLR - 200939001 Extension of Trust Election for Charitable Deduction Granted Grantor of Trust died on Date 1. Trust provides for bequests to Charity upon Grantor's death. In Year 1, Trust claimed an income tax deduction for amounts set aside from Trust's gross income for Charity. These amounts were actually distributed to Charity in Year 2, but Trust failed to file a Sec. 642(c)(1) election to claim the deduction for taxable Year 1. Trust requested an extension of time to make the Sec. 642(c)(1) election. The Service ruled that under Reg. 301.9100-3 of the Procedure and Administration Regulations, the Commissioner may grant an extension for Trust to make the Sec. 642(c)(1) election. Sec. 642(c) provides that an estate or trust may claim a deduction (from gross income) for any amount paid for a Sec. 170(c) charitable purpose during the taxable year. The charitable contribution must be made pursuant to the governing instrument. If the contribution is paid after the close of that taxable year but on or before the last day of the succeeding taxable year, an election to treat the contribution as paid during the initial taxable year is permitted. This election must be made not later than the federal income tax return due date for the succeeding taxable year (including extensions) under Reg. 1.642(c)-1(b)(2). Reg. 301.9100-1(c) permits the Commissioner to grant a reasonable time extension to make a regulatory election and the Commissioner may do so if (1) the taxpayer acted reasonably and in good faith and (2) granting relief will not prejudice government interest. See Reg. 301.9100-3. The Commissioner granted Trust 60 days to file Sec. 642(c) elections and stipulated the amended returns must be filed within the same period. To view the full PLR Click Here.
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CASE OF THE WEEK Lucky Lucy Lindstrom's Long Shot Unitrust Lucky Lucy Lindstrom finished college and headed west. She started as a financial analyst with a large company in Seattle. After just four years, she became a Registered Investment Advisor and began advising clients. Lucky Lucy also managed her own investments. Lucky Lucy was so successful in the markets that she now manages only her mega-dollar personal portfolio. Somewhat late in life, Lucy discovered the wonderful world of philanthropy. She volunteered at her favorite charity and has learned that giving someone in need a helping hand is even more gratifying than making another million in the futures market. After reading in the charity's weekly eNewsletter about a charitable remainder trust, Lucy called Clara Johnson, the gift planner for favorite charity. Lucy recently invested $1,000,000 in stock in a Canadian oil "wildcatter" with the name Northern Long Shot, Inc. This company has been drilling new exploratory wells in the far north. Recently, the stock rose from the $1 per share that she paid to over $3 per share. Lucy thinks that the stock could move much higher next year, but she would like to receive a deduction this year. She suggested to Clara that she might fund a unitrust, serve as self-trustee and hold the stock for another two years. Would this plan work? May Lucy serve as trustee? Is it permissible to hold the highly speculative stock in the unitrust? To view the solution to this Case of the Week Click Here.
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ARTICLE OF THE MONTH Difficult Donor I – Water Rights & Zoning As the economy slowly recovers, real estate will begin to become attractive again. However, there may be cases in which donors desire income today, but the best value for their real estate will not be realized for several years. This person is a "Difficult Donor" because he or she wants the charity to invest to facilitate the gift. Harry and Helen Green are age 85 and 83. Harry is a lifelong real estate investor. Four decades earlier, Harry had the wisdom to buy a property next to a two lane road. The property was quite inexpensive and at the time four miles from the nearest town. During those four decades, the road was expanded and became a four lane highway. The town steadily increased in population. Commercial development slowly moved toward the land. Four decades later, Harry and Helen's property is now a good candidate for a shopping center or other commercial development. The 20-acre parcel is large enough for a commercial building and surrounding parking. At age 85 and age 83, Harry and Helen would like to start receiving cash today from the property. There is no development on the property, and they have paid fairly modest taxes for the 40 years. However, they are tired of the negative cash flow and would like to receive income. But there is a major obstacle. As a real estate entrepreneur, Harry understands markets and was quite successful in picking a property that would eventually have significant value. However, the property cannot be developed until it is rezoned for commercial use and several water rights issues are resolved in a way that permits a large commercial building to be constructed. Because property issues and rezoning takes time in this community, it may be three to five years before the property could be sold and developed. How can Harry and Helen receive cash today without great risk to the charity? To view the full Article of the Month Click Here.
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| Note:Case studies, articles, commentary and other materials in the GiftLaw system are included solely as educational information. Articles and editorial comments are offered as an educational service to friends of this organization, and may not always reflect our official position on any issue. Since case studies or articles may not always reflect the current AFR or tax law, it may be necessary to run any illustration with a current version of Crescendo to obtain updated information. If professional services are required, all persons shall consult with their qualified professional advisors. Tax Quotes are courtesy of Jeffery L. Yablon, Washington, D.C.
© Copyright 1999-2009 Crescendo Interactive, Inc. |
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| University of Northern Colorado Foundation, Inc. | October 5, 2009 | |
| Thank you for your interest in gift planning. To access any of this updated GiftLaw information, please select our web page by clicking here. Cordially yours, George O. Pickell University of Northern Colorado Foundation, Inc. If you do not wish to receive future emails, please click here to unsubscribe. Thank you. |
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