eGiftLaw Newsletter
| February 28, 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 | February 28, 2011 |
GiftLaw eNewsletter - February 28, 2011
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WASHINGTON HOTLINE IRS Announces Open House The IRS announced on February 23 that it is holding open houses in 100 IRS offices. The offices will be open from 9:00 am to 2:00 pm local time on Saturday, February 26 and Saturday, March 26. Commissioner of the IRS Doug Shulman stated, "We are opening our doors these Saturdays to help taxpayers who may not have a chance to seek assistance during the work week. If taxpayers need help preparing their tax returns or have account questions, we encourage them to visit one of our open houses." Last year, 35,000 taxpayers were assisted during similar open houses. The taxpayers had questions on tax preparation and qualification for various tax deductions or benefits. The IRS indicated that 95% of the questions were resolved. In addition to the open houses, IRS offices in 10 cities will also offer free seminars on the 2010 tax laws. The locations of the IRS offices and seminars are available on www.irs.gov. Individuals with incomes of $49,000 or less also qualify for additional assistance. The Volunteer Income Tax Assistance (VITA) program will assist in completing returns. Those persons over age 60 qualify for the Tax Counseling for the Elderly (TCE) program. They also can receive help in preparing their 2010 income tax returns. Tax Exempt Hospitals Granted Filing DelayIn Announcement 2011-20; 2011-10 IRB 1 (23 Feb 2011), the IRS granted a three-month automatic filing extension for most tax-exempt hospitals. Following the development of a new Form 990 Return for Charitable Organizations, the IRS published a comprehensive Schedule H for medical centers. With the passage of the Patient Protection and Affordable Care Act of 2010, both the IRS and many medical centers need additional time to properly prepare for filing of Form 990 with the Schedule H for medical centers. As a result, the IRS indicates that the earliest permitted filing date for tax-exempt medical centers filing Form 990 and Schedule H will be July 1, 2010. This is the earliest filing date whether the filing is in paper form or electronic format. For those medical centers with return due dates before August 15, 2011, there is an automatic three-month extension of time to file. This extension is available without filing Form 8868, Application for Extension of Time to File an Exempt Organization Return. However, there may be new organizations that have not filed Form 990 Schedule H for tax year 2009. In this case, they may choose to file Form 8868 to clarify their intention to extend the deadline. If a medical center requires an additional three months to file, then it should file Form 8868. For those medical centers that qualify for this automatic extension, there will be no penalty if they file within the additional three-month period. Accountants Support Tax Patent BanDavid Auclair, Managing Principal of the Washington National Tax Office for Grant Thornton LLP, sent a letter this week to Senate Judiciary Chair Patrick Leahy (D-VT) and Ranking Member Charles Grassley (R-IA). In his letter, Mr. Auclair expressed "strong support" for the ban on tax patents included in the patent reform legislation (S. 23) that recently passed the Senate Judiciary Committee. Mr. Auclair stated, "Patents on tax strategy methods threaten the integrity, fairness and administration of the tax system." He indicated that his firm hopes that the two senators will aggressively oppose any efforts to weaken the tax patent ban when S. 23 reaches the Senate floor. Tax patents are particularly objectionable because they preclude taxpayers from satisfying "their legal obligations using a patented interpretation of the tax code, allowing patent holders to privatize tax provisions that Congress intended for everyone." The patents undermine confidence and will mislead taxpayers who may think that a government patent is equivalent to approval by the IRS of a tax method. Editor's Note: The ban on tax patents is part of a much larger bill on patent law. The tax patent provision covers a "strategy for reducing, avoiding or deferring tax liability," but excludes a ban on patents for tax preparation software. Palimony Claim a Valid Estate DebtIn Estate of Bernard Shapiro et al v. United States; No. 08-17491 (21 Feb 2011), the Ninth Circuit Court of Appeals reversed a summary judgment by a District Court in Nevada. The District Court had determined that the estate was not entitled to a deduction for a palimony claim. Decedent Bernard Shapiro and Cora Jane Chenchark met in 1977 and lived together from that year until 1999. They never were married. In 1999, the decedent had a relationship with another woman and the two separated. Chenchark sued in Nevada court and claimed breach of contract and breach of fiduciary duty. She claimed that during the 22 year relationship, both parties had agreed to share equally in each other's assets. While the suit was pending, Bernard Shapiro passed away. The estate filed IRS Form 706 and paid $10,602,238 in estate and generation skipping tax. The Nevada Court ruled in favor of the estate on the palimony claim and Chenchark appealed. The estate then settled with Chenchark for approximately $1 million. In June of 2003, the estate filed an action seeking a refund of approximately $2 million based on the assertion that the palimony claim was deductible. Following further proceedings, the estate claimed a potential refund of $4.86 million. The District Court noted that there were no factual issues and therefore ruled based on the applicable law. In the view of the lower court, the love and homemaking management provided by Chenchark were not sufficient consideration under Nevada law to create a contract. Therefore, there was no deduction for the value of Chenchark's claim against the estate. In addition, the District Judge ruled that there was an estoppel argument that precluded the estate from claiming in the palimony case that there was no consideration and then making the opposite claim in the estate tax case. The Court of Appeals first reviewed the law on consideration. It noted that under both California and Nevada law, a promise to perform homemaking services is adequate to create consideration. Because Chenchark had managed the home and supervised the decedent's maid, gardener and pool man, the court determined that there was sufficient performance to provide adequate consideration. On the judicial estoppel issue, the court noted that the estate had opposed the contract claim on the palimony allegation. However, that did not cause the estate to relinquish a right to deduct the potential value of that claim on IRS Form 706. Finally, Chenchark had filed notices of Lis Pendens against several of Shapiro's properties. These properties had lower values as a result of the cloud on title. However, the estate had failed to raise that issue in a timely manner and was not permitted to raise it on appeal. Therefore, the Court of Appeals reversed the District Court grant of summary judgment on the deduction for the palimony claim and remanded it to the District Court. Circuit Judge Tashima concurred in part and dissented in part. Judge Tashima noted that there is a difference between contract law for state property purposes and that which applies for federal tax purposes. Even though there may have been a valid contract under Nevada law supported by Chenchark's homemaking activities, that does not necessarily qualify the estate for the deduction. If under Sec. 2053 there is a person who is a "natural object of bounty," then a claim is permitted only if it is supported by "adequate and full consideration." Even though Chenchark supervised the maid, gardener and pool man, she never contributed to any funds to the partnership and therefore did not provide the full consideration required for federal tax purposes. Applicable Federal Rate of 3.0% for March – Rev. Rul. 2011-6; 2011-10 IRB 1 (17 Feb. 2011)The IRS has announced the Applicable Federal Rate (AFR) for March of 2011. The AFR under Section 7520 for the month of March will be 3.0%. The rates for February of 2.8% or January of 2.4% 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 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 - 201106019 Rental to Public Constitutes UBTI ORG is tax-exempt under Sec. 501(c)(3) and classified as an educational organization. Rooms are offered on an overnight basis in building H on ORG's campus. Although rooms are used for campus purposes, such as temporary housing for students until long-term housing becomes available and accommodations for official visitors to the campus, rooms are also available to the general public. Although signs are not posted on the facility itself, ORG advertises availability of rooms on ORG's website that highlights H's convenient location and amenities. Rooms are on a "first come-first serve" basis and the rates charged are comparable to other commercial hotels in the area. Students, however, are charged at the daily portion of the student housing fee and the official visitors' fees are billed to the applicable host department. Previously the Service held that the revenue generated from providing accommodations to students, potential students and their families, campus speakers and other official guests would not constitute unrelated business taxable income (UBTI) under Sec. 512(a)(1). The Service reconsidered PLR 200625035 and, using the authority under Sec. 13.04 of Rev. Proc. 2010-4, 2010-1 I/R.B 122, 150, revoked and modified the previous ruling in part. ORG was not able to establish that the operation of H is part of ORG's educational program or that providing hotel accommodations to anyone other than ORG students contributes importantly to the accomplishment of ORG's educational and charitable purposes. Based on ORG's failure to establish a substantial and causal relationship between the stays of guests and ORG's exempt purpose, the Service held that revenue generated from providing rooms to persons other than ORG's students constitutes UBTI under Sec. 512(a)(1). To view the full PLR Click Here.
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CASE OF THE WEEK Toxic Real Property – Part 1 of 3 Diane Plant is a real estate broker and a savvy investor. Over the past twenty years, Diane has made a fortune investing in undeveloped commercial property. She generally will seek out and buy land on the outer limits of potentially high growth areas. Once the growth expands to her property, Diane will lease the land to incoming businesses, such as grocery stores and gas stations. This strategy has been wonderfully rewarding and successful. However, Diane is now nearing retirement and wants to transition out of her career. Therefore, she has decided to start selling her land holdings. Diane realizes the sale of her investments will produce a very large capital gains tax. Therefore, she would be very interested in options which would reduce her upcoming tax liability. Recently, a local charity's gift planner approached Diane about making a large gift to support a capital campaign. The gift planner informed Diane that a large gift would produce a generous charitable deduction which could be used to offset her capital gains liability. Diane is excited about this idea. She could greatly reduce her taxes and substantially help her favorite charity. In fact, she has the perfect property in mind to give. It is a two-acre lot in the heart of the city that has been used as a gas station for the past 15 years. It is worth approximately $500,000. Although excited about the size of the gift, the gift planner is nevertheless worried about the potential liability (i.e., environmental problems) associated with accepting the property. How can Diane contribute the land to her favorite charity, yet provide liability protection for the charity? To view the solution to this Case of the Week Click Here.
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ARTICLE OF THE MONTH Rise of the Testamentary UT With the increase in the applicable exclusion amount to $5 million per person or $10 million per couple, over 99% of 2011 estates will not pay estate tax. Under previous rules with lower exemptions, some counsel who had clients with larger estates were reluctant to use a testamentary unitrust (UT). The position of the IRS is that the income of a testamentary UT is subject to income tax, but the estate still has to pay estate tax on the present value of that income interest. Because in 2011 there will be no estate tax for nearly all estates, there is a very logical reason to expect the "Rise of the Testamentary UT." The UT income value will not be subject to estate tax in most estates and the trust may be invested for favorable income tax purposes. Most testamentary lead trusts may be invested to pay out part of the income taxable at favorable long-term capital gain rates. This ability of a testamentary UT principal to grow tax free and to invest for reduced tax on payments makes it very attractive for children, nephews, nieces and other heirs. 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 | February 28, 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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