eGiftLaw Newsletter
December 22, 2008
Dear Professional Advisor,
Greetings from University of Northern Colorado
Foundation. 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 Foundation
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December
22, 2008
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GiftLaw
Weekly eNewsletter - December 22, 2008
- WASHINGTON HOTLINE
- PLR THIS WEEK
- CASE OF THE WEEK
- ARTICLE OF THE MONTH
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WASHINGTON
HOTLINE
Tax Quote of the Week
"When a tax is not visible, it can be easily
retained or raised with little, if any, awareness among taxpayers about how
the tax affects them."
--
Tax Division of the American Institute of Certified Public Accountants
Sen. Reid and Sen. Snowe Seek Stimulus Tax Relief
The lights are burning late in Washington as
Congressional staffs are already working on the 2009 stimulus bill.
President-elect Barack Obama has asked that Congress pass the bill so that
he can sign it quickly after his inauguration on January 20, 2009.
Senate Finance Chair Max Baucus (D-MT) has informally
indicated to other committee members that there may be a markup of the tax
section of a stimulus bill on January 8, 2009. This would be very soon
after Congress returns to Washington.
The main stimulus bill (perhaps $700 to $800 billion
over two years) will include benefits for unemployment, food stamps and
infrastructure. The tax portion of the bill is likely to include extension
of the ability to expense up to $250,000 of equipment under Sec. 179 and
bonus depreciation for new equipment. Both measures are designed to
encourage companies to buy new equipment and stimulate the economy.
Sen. Harry Reid (D-NV) sent a letter this week to
incoming Director of the Office of Management and Budget, Peter Orszag,
outlining his preferences. In the tax area he stated, "This could
include reductions in rates, and extension of the child credit or marriage
penalty relief, or other tax benefits targeted for working families."
Sen. Olympia Snowe (R-ME) sent a letter to Majority
Leader Reid to state her requests. In the tax area she suggests that
"Congress should extend the current expensing amount of $250,000
through 2009." She also proposes that small businesses should be able
to carry back operating losses for up to five years and that there should
be a "New Markets Tax Credit" to assist low income and rural
communities.
Editor's Note: With $700 to $800 billion in
federal funds forthcoming, a major stampede of governors, business owners,
lobbyists and others is on the path to Washington. Because of the desire to
pass the stimulus bill quickly, there will be many surprises in both the
expenditure and tax sections of the bill to be signed by President-elect
Obama in early 2009.
Generous Giver Merits Non-cash Deduction
In Donald
W. Nicholas et ux. v. Commissioner; T.C. Summ. p. 2008-155; No.
18199-07S (15 Dec 2008), the Tax Court permitted a deduction for a non-cash
charitable contribution.
Mr. and Mrs. Donald Nicholas are residents of Arizona
and very philanthropic. During 2005, their adjusted gross income (AGI) was
$89,092. They contributed $32,875 in cash, $4,906 in non-cash gifts and
also deducted a carry forward from 2004 of $6,012. During 2004, the
generous couple had given in excess of 50% of their AGI and carried forward
the excess contribution.
The Nicholas' accountant improperly deducted the
$4,906 as a cash-type gift. When the couple was audited by the IRS, the
discrepancy was noted and they promptly filed Form 8283. Mrs. Nicholas kept
complete records of the gifts and, in most cases, had a receipt or letter
from the charitable recipient. She often frequented garage sales and flea
markets and was a good judge of value. The gift items included books, CDs,
used furniture and lamps.
The IRS denied the deduction and claimed there was
not sufficient proof. At trial, the tax court judge determined that the
deduction would be permitted. Judge Gerber noted that Mrs. Nicholas had
"forthright testimony," she and her husband had an
"extremely generous" history of charitable giving, and through
both documentation and oral testimony she was a very credible witness. The
$712 IRS deficiency was dismissed.
Editor's Note: This case is a useful example
of the expected documentation for non-cash gifts. For items cumulatively
valued at less than $5,000, an appraisal is not required. The donor should
keep accurate records of the date of the gift, the charitable recipient,
the general description of the item and the method used for valuation. Mrs.
Nicholas clearly passed that standard and qualified for the noncash gift
charitable deduction.
Sklar II -- No Religious Tuition Charitable
Deduction
In Michael
Sklar et ux. v. Commissioner; No. 06-72961 (12 Dec 2008), the Ninth
Circuit affirmed a Tax Court decision and denied a deduction for tuition
payments to a religious school.
Michael and Marla Sklar are Orthodox Jews with five
children. In 1995 they sent the children to two Orthodox Jewish day schools
and paid a total of $27,283 in tuition and fees. The religious schools
devote part of their school day to education and part to prayers and
religious studies. The Sklars attempted to deduct 55% of the tuition
payment as a charitable gift under Sec. 170.
In an earlier case the Ninth Circuit also determined
that the Sklars would not qualify for charitable deductions for a portion
of their 1993 and 1994 tuition payments. See Sklar
v. Commissioner, 282 F.3d 610 (9th Cir. 2002).
The Sklars claimed that they should qualify for a
deduction of $15,000 (55% of the total tuition) on the dual payment theory
of United States v. American Bar Endowment, 477 U.S. 105 (1986). They also
claimed that Sec. 170(f)(8) should permit the deduction. Finally, they
argued that the Closing Agreement between the IRS Commissioner and the
Church of Scientology in 1993 that permitted partial deductions should
require the Court to extend this same benefit to them.
The Court determined that the Sklars were not in a
similar position to the Church of Scientology with respect to any deductions
permitted for "auditing." The Sklar children were voluntarily
attending a religious school and tuition payments were mandatory for the
education received. In Hernandez v.
Commissioner, 490 U.S. 680 (1989), the Court indicated that tuition
payments to parochial schools would not be deductible and stated,
"Such payments . . . . have long been held not to be charitable
contributions under Sec. 170."
With respect to the "dual payment" claim,
the Ninth Circuit noted that there are two specific requirements. First,
the payment must exceed the fair market value of the eduction. Second,
there must be an intent to make a gift. Because the tuition payments at the
Orthodox Jewish schools were higher than some private schools but lower
than others, there was no proof of a specific excess payment. Finally,
because the students would be expelled if the tuition payments were not
made, there was no gift. Therefore, payments for religious school tuition
do not qualify for any charitable deduction.
Applicable Federal Rate of 2.4% for January --
Rev. Rul. 2009-1; 2009-2 IRB 1 (18 Dec. 2008)
The IRS has announced the Applicable Federal Rate
(AFR) for January of 2009. The AFR under Sec. 7520 for the month of January
will be 2.4%. The rates for December of 3.4% or November of 3.6% 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 - 200850004
Creative IRA Transfer to Charities
Decedent passed away owning an IRA of which
Individual was the sole beneficiary. Decedent's will directed that several
gifts be made to three charitable organizations, but did not specify the
assets to be used to satisfy the bequests. Individual timely filed a
qualified disclaimer of the IRA, leaving Decedent's estate as the sole
beneficiary of the IRA. The Court approved Executor's petition to amend
Decedent's will to designate the IRA as the source of the charitable
bequests. Executor requested a ruling that the amount of the IRA
transferred to the charities in satisfaction of Decedent's bequests would
not be included in the gross taxable income of the estate under Sec. 691.
Sec. 691(a)(1) provides that items of income in
respect of a decedent (IRD) not properly included in income prior to death
will be included in the taxable income of the decedent's estate, the party
receiving the right to the asset from the estate, or the party inheriting
the IRD asset by direction of the estate. According to Sec. 691(a)(2) and
the accompanying regulations, if the right to the IRD asset is transferred
by the estate, the gross income from that portion of the IRD asset shall be
reported by the estate.
However, the term "transfer" within the
meaning of this section does not include transmission at death to a party
pursuant to a right to receive the asset by reason of death of the
decedent. Reg. 1.691(a)-4(b)(2) provides that if a right to an IRD asset is
transferred to a specific legatee, only the legatee must include the IRD
asset in income. The Service determined that transfer of the IRA in
satisfaction of the bequest will not be a transfer within the meaning of
Sec. 691(a)(2). Therefore, only the charities will include the amounts
transferred to them in gross income. Because the IRA is not unrelated
business taxable income and the charity is exempt, there is no payment of
income tax on the IRA.
To view the full PLR Click
Here.
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CASE
OF THE WEEK
Living on the Edge,
Part 2
Rhea Jones, 75, lives in a beautiful coastal town in
northern California. Rhea's home occupies three magnificent acres of bluff
property that overlooks the crashing waves of the Pacific. Since her home
sits just steps away from the dramatic cliffs, Rhea frequently jokes to her
friends about her "living on the edge" lifestyle.
John, Rhea's husband of 50 years, built the custom
home 10 years ago. It was truly the realization of a lifelong dream of John
and Rhea. Unfortunately, John passed away unexpectedly five years ago. Now
Rhea lives alone in the large home. Nevertheless, Rhea is looking forward
to spending her remaining days in this lovely home. Not surprisingly, she
frequently plays host to her children, grandchildren and friends.
Rhea is an active philanthropist. In fact, she spends
three days a week volunteering with local charities. While very wealthy and
philanthropic, Rhea makes only modest yearly gifts. However, she intends to
make a substantial bequest upon her death. Specifically, Rhea plans on
distributing her entire estate to her children and grandchildren, except for
her cliff-side home. Rhea's will provides that the home passes to John and
Rhea's favorite charity upon her death. The home is worth $3 million.
However, at a recent estate planning presentation,
Rhea discovered the benefits of a gift of a remainder interest in a
personal residence. In particular, she liked the potential significant tax
savings and the home's avoidance of the probate process. Also, because the
gift is irrevocable, the local charity would recognize and honor Rhea for
her generous gift at the annual fund raising gala. Of course, Rhea would
retain the right to live in her home for the rest of her life, which is an
absolute requirement to any potential gift arrangement.
Rhea is very excited about this gift arrangement, but
she has many questions. Before she commits to the gift plan, she wants to
address several issues. In particular, Rhea learns that now is an excellent
time for gifts of remainder interests in a home. Why is this so?
To view the solution to this Case of the Week Click
Here.
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ARTICLE
OF THE MONTH
CRTs and CGAs in a
Down Market
Charities that serve as trustees of CRTs and issue
charitable gift annuities are in the midst of a bear market. The S&P 500
Index is down over 40% and passed the 776.76 low of the 2002 bear market.
The Federal Reserve suggests that the recession will
be longer than the typical two quarters and will stretch to three and
possibly four quarters. Banks are still struggling to recover from their
losses due to collateralized debt obligations (CDOs) and other
mortgage-related securities.
The net result is a drop in virtually all trust
portfolios and gift annuity reserve funds. The only fortunate news for
charities is that during times of adversity, donors remain faithful and
giving generally holds up fairly well, especially considering the down
market and the national recession.
But what actions should charities serving as CRT
trustees and gift annuity reserve custodians take? Should there be specific
strategies to manage charitable remainder unitrusts, charitable remainder
annuity trusts and charitable gift annuities in a down market?
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 1999-2008 Crescendo Interactive, Inc.
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University of Northern Colorado Foundation
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December
22, 2008
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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
Director of Planned Giving
E-mail: George.pickell@unco.edu
Phone: 970-351-1380
University of Northern Colorado Foundation
http://www.uncalumni.org/Foundation
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