eGiftLaw Newsletter
| January 31, 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 31, 2011 |
GiftLaw eNewsletter - January 31, 2011
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WASHINGTON HOTLINE Tax Reform on 2011 Agenda In the State of the Union Address, President Obama mentioned an interest in tax reform. He suggested that simplifying the income tax code would be "the best thing we could do on taxes for all Americans." He continued that it will "be a tough job, but members of both parties have expressed interest in doing this and I am prepared to join them." The Senate Finance Committee had already made preparations for hearings on tax reform in 2011. Senate Finance Chair Max Baucus (D-MT) noted, "Tax reform is about more than just the tax codes – it's about one of the most direct relationships Americans have with their government. We need to work together to reform and simplify our tax system in a way that creates more American jobs, makes our country more competitive and bolsters our economy." Sen. Baucus has previously conducted hearings on the last comprehensive tax reform, the Tax Reform Act of 1986. He plans to continue the hearings this year to prepare for major tax reform. The House, Ways and Means Committee is charged under the Constitution with preparing major tax legislation. New Committee Chair Dave Camp (R-MI) is also planning a series of hearings on major tax reform. Following the State of the Union Address, Camp commented, "While the President focused on the need for corporate tax reform to make our employers more competitive, 75% of America's job creators are small businesses. Moving our economy forward and creating a climate for job growth requires a tax code that empowers all job creators." Rep. Camp also noted that tax reform will need to deal with the "complexity and cost burdens" of the current system. Editor's Note: While there are clear differences of opinion between the White House, the Senate and the House of Representatives, the year after a major election is the best time for major tax reform. All of the key political leaders now have expressed an interest in a tax bill in 2011. It is generally agreed that tax reform should reduce credits and deductions while maintaining or lowering tax rates. However, when actual decisions are made on reducing specific tax deductions, the politics of the process become complicated and difficult. It remains to be seen whether there is sufficient political will to actually complete major tax reform in 2011. Residence Included in Taxable EstateIn Estate of Adelina Cheng Van et al. v. Commissioner; T.C. Memo. 2011-22; No. 5456-04 (26 Jan 2011) the Tax Court determined that the decedent's principal residence was includable in her estate, even though she had previously deeded the property to family members. Adelina Cheng Van ("Van"), moved to the United States from China in 1962. She and her family of four children settled in San Mateo. In 1973, she moved into a home on Capistrano Way in San Mateo owned by Marcel Periat. She agreed to purchase the home in 1988 with $170,000 cash down payment and an $80,000 note. Her daughter Norma and her husband James Hu provided Van with funds for the home. Immediately after taking title, Van deeded the home in joint tenancy to herself and her two grandchildren, Virginia and Arlene. In 1994, the grandchildren deeded their interest back to Van. The home was transferred by Van into a revocable living trust in 1997. Finally, in 1999 she deeded the home to Norma and her granddaughters Virginia, Arlene and Christina. Van passed away on May 1, 2000. Her son Michael Van served as executor and did not report the house as an estate asset. The IRS issued a deficiency and noted that because Van lived in the Capistrano house until her death, there was inclusion in the estate under the "possession and enjoyment" principle of Sec. 2036(a). The estate noted that the funds for the home were provided by James and Norma Hu. Therefore, the house had actually been owned by the Hus. The court noted that under Sec. 2036(a), an individual who had legal title to an asset and enjoyed the beneficial interest for a lifetime is required to include the value of the property in his or her estate. While the estate claimed that Van was merely an agent for the Hus, the court ruled that she did take legal title under California law. In addition, she lived in the home from 1973 until her death in 2000. Therefore, she held a beneficial interest in the home for life. The Hus next claimed that there should be a resulting trust. Van received the funds from the Hus and acted as their agent. However, in the case of a parent-child relationship the assumption is gift rather than agency. Therefore, there is no resulting trust. Because Van lived in the house and did not pay any rent, she clearly had beneficial enjoyment. Even though she did transfer legal title to daughter Norma and her three granddaughters prior to death, she still retained the possession and enjoyment of her home. Therefore, she held a beneficial interest that required inclusion under Sec. 2036(a). Regulation Advisor Not ExemptIn Asmark Institute v. Commissioner; T.C. Memo. 2011-20; No. 30238-07X (23 Jan 2011), the Tax Court denied tax-exempt status to an organization on the grounds that it was primarily commercial. Asmark, Inc. was operated as a forprofit company from 1990 until 2005. The company and its owners were assisting and educating farm retailers who needed to comply with government regulations. They provided risk management assessments and recommended strategies for the retailers who often sold ammonia nitrite and anhydrous ammonia to farmers for use as fertilizer. Because the products can be used to construct a bomb and are quite toxic, there is a requirement for farm retailers to comply with both Environmental Protection Agency and the Department of Homeland Security regulations. On March 22, 2005, Asmark determined that it would be preferable to restructure as a nonprofit. Asmark Institute was incorporated as a nonstock, nonprofit corporation. The Articles of Incorporation stated that it would be "operated exclusively for charitable purposes." Asmark Institute continued to provide various services to enable farm retailers to comply with OSHA, EPA, DOT, DHS and other regulatory provisions. There were five categories of members. In 2005, there were 976 charter members, 102 regular members, nine association members, zero government members and zero educational members. The court noted that the key question for any determination of exemption is whether or not the primary purpose of the entity is for charitable purposes, or if "its primary purpose is the non-exempt one of operating a commercial business producing net profits." Asmark Institute claimed that it was a charitable entity because it was assisting farm retailers in complying with federal and state regulations, conducting risk management analyses and enabling farm retailers to comply with the government requirements for handling the nurse tanks that were filled with anhydrous ammonia. The IRS claimed that Asmark Institute was not exclusively charitable in purpose. It listed six grounds for that decision. 1. Competition – It competed with other commercial firms. 2. Clients – The farm retailers were not charitable. 3. Continuation – It was essentially a continuation of the previous forprofit business. 4. No Non-Profit Clients – All of the clients receiving services were forprofit entities. 5. Trade Associations Relationships – The primary benefit of the relationship with the trade associations was for Asmark marketing purposes. 6. Free Public Education – Because a fee was charged for materials, there was no free public education. As a result of the actual operations of Asmark Institute, the court determined that it was not "exclusively operated" for charitable purposes. The exemption was denied. Applicable Federal Rate of 2.8% for February – Rev. Rul. 2011-4; 2011-6 IRB 1 (18 Jan. 2011)The IRS has announced the Applicable Federal Rate (AFR) for February of 2011. The AFR under Section 7520 for the month of February will be 2.8%. The rates for January of 2.4% or December of 1.8% 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 - 201103062 IRS Converts Veterans Organization's Exempt Status to Social Club ORG serves as the home association for a qualified veterans organization. ORG held exempt status as a veterans organization under Sec. 501(c)(19). Following examination of ORG's Form 990, it was determined that ORG's activities were those of a social and recreational club. The Service modified ORG's status from that of a veterans organization described under Sec. 501(c)(19) to that of a social club described under Sec. 501(c)(7). ORG agreed to the modification by signing Form 6018-A. As a result of the modification, contributions to ORG are no longer deductable. ORG is permitted to receive up to 35% of its gross receipts from sources outside of its membership. Of the 35%, only 15% of the gross receipts may be from the use of club facilities or services by the general public. Any income above these limits may result in ORG losing its tax-exempt status. To view the full PLR Click Here.
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CASE OF THE WEEK The Cowboy Oilman – Part 4 of 4 "Gift of Closely Held C Corporation Stock" 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 Home for Wayward Boys which 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., Cadillac, 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 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 31, 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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