eGiftLaw Newsletter
| January 10, 2011 Dear Professional Advisor, Greetings from University of Northern Colorado. I am pleased to share with you the latest news from Washington, tax law updates, PLRs, Case Studies and timely articles. We provide this weekly eNewsletter and web site to our professional advisor friends as a free service. Please feel free to call me at 970-351-1380 if I can run a proposal or be of assistance to you. |
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| University of Northern Colorado | January 10, 2011 |
GiftLaw eNewsletter - January 10, 2011
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WASHINGTON HOTLINE House Rules Focus on Budget On January 5th the House Republican Majority adopted new rules on House operations. The rules were adopted on a vote that generally followed party lines with 240 in favor and 191 opposed. Under the new House rules, there is a "cut as you go" budget requirement. This provision requires any new spending proposal to be offset by a comparable reduction in an existing program. House Majority Leader Eric Cantor (R-VA) supported the measure and stated, "By passing this rules package, we will take a significant step in the right direction." House Budget Committee Chair Paul Ryan (R-WI) echoed that statement and noted, "It's a good day because we're bringing some fiscal sanity back to this institution." One of the rules permits Rep. Ryan as Chair of the House Budget Committee to set spending ceilings. This will permit him to set some budget limits without a full House vote. Democratic leaders objected because while spending is addressed under the new rules, tax cuts do not require a comparable reduction or offset. Budget Committee Ranking Minority Member Chris Van Hollen (D-MD) stated that not including tax cuts resulted in "a fiscally reckless blueprint and the American people deserve better." Democratic Whip Steny H. Hoyer (D-MD) also opposed the rules and noted, "There are two ways to create debt: you can buy things and not pay for it, or you can simply cut revenues and make yourself unable to pay for things." Editor's Note: Your editor and this organization do not take a specific position on these rules. Because the debate over the budget will have impact on all Americans, this information is offered as a service to our readers. IRS Explains 2010 IRA Charitable Rollover In an FS 2011-1, published on January 4, 2011, the Service explained many of the 2010 tax changes. It focused especially on the rules for the 2010 IRA Charitable Rollover. As noted by the IRS, an IRA owner over age 70½ can transfer up to $100,000 per year to charity. The IRS letter outlined several requirements for a qualified charitable distribution (QCD). In addition, because the bill was passed on December 17, 2010, IRA owners may treat their QCDs "made during January 2011 as if they occurred in 2010." The QCD must be a direct transfer from the IRA custodian to a qualified charity. It may not be to a donor advised fund or supporting organization. However, the IRS notes that "all QCDs from an IRA to eligible charities are counted in determining whether the owner has met the IRA required minimum distribution." Editor's Note: The intent of the IRS is made clear that QCDs for 2010 may be made in January of 2011. If the QCD is made in January of 2011, it still qualifies for the 2010 required minimum distribution (RMD). However, virtually all IRA owners have previously taken their 2010 RMD. It still is possible to make two QCDs in 2011 -- one in January for year 2010 if you have not already made a QCD for 2010, and one during the next 11 months for the 2011 QCD. IRS Launches 2010 Tax Filing Season In IR-2011-1, the IRS announced the guidelines for the 2011 filing season. Normally, taxes are due on April 15. However, April 15 of 2011 is Emancipation Day, a holiday observed in the District of Columbia. As a result, taxpayers will have until midnight on April 18th to file their returns. If they request an extension and pay the appropriate tax, they will have until October 17, 2011 to file the 2010 tax return. Because the tax law was changed on December 17, 2010, the IRS will require time to reprogram and test its computers. Therefore, it is giving notice to several categories of taxpayers that they should wait to file returns until "mid to late February" so that the IRS may reprogram its computers. The three categories specifically noted by the IRS include the following. 1. Itemized Deductions on Schedule A. If you are itemizing your deductions including mortgage interest, charitable deductions, medical and dental expenses and state and local taxes, you should delay filing your return until late February. 2. Higher Education Tuition and Fees. Taxpayers who are filing Form 8917 to deduct tuition and fees paid to a post-secondary institution should delay filing. However, other taxpayers claiming the American Opportunity Tax Credit and the Lifetime Learning Credit need not delay. 3. Educator Expense Deduction. Educators for classes from kindergarten through grade 12 who plan to deduct out-of-pocket classroom expenses up to $250 should also delay filing. IRS Letter on Charitable Easement Deductions Rep. Michael Capuano (D-MA) requested clarification from the IRS on the deductibility of historic preservation easements. John P. Moriarty, Branch Chief, Income Tax and Accounting, replied to Congressman Capuano in INFO 2010-0231 and outlined the specifics under the current law for historic easement deductions. There are four principal requirements for the deduction of a gift of an historic façade easement. These are that the Secretary of the Interior has certified the building as being of historic significance, the easement preserves the entire exterior of the building, there is a prohibition on change in that exterior and there is appropriate substantiation. The substantiation includes an appraisal for a non-cash contribution in excess of $5,000 completed by a qualified appraiser. The appraisal attachments must include photos of the entire building and a complete description of all restrictions on development of the property. Because nearly all historic conservation easements are non-cash gifts with a deduction of more than $5,000, the appraisal will need to be conducted by a qualified individual and will need to follow appropriate methods. If there is a "substantial record of sales of comparable easements," that is the preferred method. However, for many gifts of historic easements, there is not a "substantial" record of sales. Therefore, it will be necessary to use a "before and after" valuation. The before valuation must consider the potential for development in the absence of the restriction and existing conservation or historic preservation laws that already restrict any potential development. The after valuation must outline all of the terms of the easement and explain the impact those restrictions have on property value. Because "each property is unique," a mechanical valuation or percentage method is not accepted. There is "no safe harbor percentage" that may be used. An appraiser must explain the before and after value using the specific IRS factors. Applicable Federal Rate of 2.4% for January -- Rev. Rul. 2011-2; 2011-2 IRB 1 (21 Dec 2010) The IRS has announced the Applicable Federal Rate (AFR) for January of 2011. The AFR under Section 7520 for the month of January will be 1.8%. The rates for December of 1.8% or November of 2.0% 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 2011, pooled income funds in existence less than three tax years must use a 2.8% deemed rate of return. Federal rates are available by clicking here.
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PLR THIS WEEK PLR - 201052018 Scholarships Not Taxable Expenditures Charity is a non-profit private foundation under Secs. 501(c)(3) and 509(a). Charity requested an advanced letter ruling approving Y, a proposed scholarship program. Y would provide scholarships to students based on credit point average and financial need. The scholarships would be used for tuition at local Catholic elementary and high schools. Applicants would fill out a financial need application and submit information on his/her academic history. Awardees will be selected by the scholarship advisory committee after they have been recommended by the school's principal. Scholarships will not be made to any disqualified persons. The advisory committee will not discriminate on the basis of race, color, creed or sex in the selection process. Sec. 4945(a) and (b) impose certain excise taxes on "taxable expenditures" of a private foundation. Grants are classified as taxable expenditures unless they meet the requirements of Sec. 4945(g). A grant will not be classified as a taxable expenditure if it is demonstrated that the grant is a scholarship for study, is awarded to the general public and is for the purpose of achieving a specific objective. To secure an advanced ruling, the private foundation must show that scholarships will be awarded on an objective and nondiscriminatory basis, the scholarships are reasonable calculated to achieve the intended objective and the private foundation will keep records of awards and awardees' performance. The Service determined that Charity's scholarship plan would meet the requirements of Sec. 4945(g) and are not taxable expenditures under Sec. 4945(a) and (b). To view the full PLR Click Here.
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CASE OF THE WEEK The Cowboy Oilman - Part 1 of 4 "IRA to Charity" Jack Cobb, 77, is a self-made man. Deserted by his parents at a young age, Jack grew up in a boys' home and on the streets. At the age of 17, he moved to Texas to chase oil and women. With his street smarts and gritty determination, Jack made millions in the oil business as an arrogant and risk-taking maverick. His fortune with women, however, was not nearly as successful. In fact, Jack was married - and divorced - four times. To this day, Jack still claims it was "all their fault" and remains bitter toward his ex-wives. Yet, he continues to date and currently has several "girlfriends." Also, Jack has six children, but unfortunately he does not have any ongoing relationship with them. He contends that his children are all spoiled and ungrateful, because he gave them too much growing up. More likely, Jack's poor relationships stem from the lack of any family structure growing up and the minimal amount of support given to him as a child. Jack does have one love though - his love for the boys' home that raised him. It is the one and only good memory from his childhood. It was his only family as a child. As a result, he has publicly supported the boys' home throughout his entire life and privately supported many of the people who touched his life while there. Although his hours are nominal, Jack continues to draw a salary of $300,000 as CEO and President of his company. Jack's estate of $11 million consists of a $5 million closely-held "C" corporation, a $2.5 million ranch, a $3 million IRA and $500,000 in personal property (i.e., cars, art collection, antique gun collection, jewelry, etc). Jack intends to leave his entire estate to the boys' home at his death. However, he would like to also make a major contribution now so he can see the effects of his gift. Jack wants to know which assets he should give now and which assets he should give at death. Jack also wants to know how to structure his gifts in order to make the best tax-wise decisions. To view the solution to this Case of the Week Click Here.
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ARTICLE OF THE MONTH Bypass the 2011 Estate Tax On December 17, 2010, the President signed into law The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. The estate tax section of the bill carries the title "Temporary Estate Tax Relief" and includes Sections 301, 302, 303 and 304. Most gift, estate and GST tax provisions will apply during 2011 and 2012. Sec. 301 reinstates the estate tax and repeals carryover basis. Sec. 302 addresses the gift, estate and GSTT exclusion amounts. Sec. 303 creates marital deduction "portability." Because there is an estate tax with an exemption of $5 million, it will continue to be important for individuals with large estates to create "bypass trusts." The bypass trust is a trust created in the estate of the first spouse to die. It typically will benefit the surviving spouse and the trust principal may then be transferred to children without further estate taxation. There are two general types of bypass trusts. The conventional bypass trust pays income to the surviving spouse. When he or she passes away, the trust is distributed to children. For individuals who have large IRAs, 401(k)s or other qualified and taxable pension plans, another option is a "bypass charitable remainder trust." 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.
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| University of Northern Colorado | January 10, 2011 |
| 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 If you do not wish to receive future emails, please click here to unsubscribe. Thank you. |
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