eGiftLaw Newsletter
| March 1, 2010 Dear Professional Advisor,
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| University of Northern Colorado Foundation, Inc. | March 1, 2010 | |
GiftLaw eNewsletter - March 1, 2010
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WASHINGTON HOTLINE Senate Passes HIRE Act Tax Quote of the Week "All taxes discourage something. Why not discourage bad things like pollution rather than good things like working or investment?" -- Lawrence Summers
Senate Passes HIRE Act On February 24, 2010, the Senate passed the Hiring Incentives to Restore Employment (HIRE) Act by a vote of 70-28. Thirteen Republicans joined Democrats in passing the $15.5 billion tax incentive bill that is intended to boost employment. Majority Leader Harry Reid (D-NV) rejected a proposal by Senate Finance Chair Max Baucus (D-MT) to combine the jobs portion of the bill with tax extenders and an extension of the 2009 estate tax law. Sen. Reid decided that a smaller bill with just the unemployment provisions would be easier to pass. He did indicate that the extenders bill will be taken up in the near future. The HIRE Act has four major sections. All of these are designed to increase employment. These are as follows: 1. The Act creates exemption from Social Security tax for the year 2010 for hiring people who have been unemployed for 60 days or longer. This reduction in the 6.2% tax normally paid by the employer could save as much as $6,621. There is also an additional $1,000 credit if the new employee continues with the business for 52 weeks. 2. Expensing rather than depreciation of equipment is again restored at the $250,000 level. For businesses with over $800,000 of equipment purchases per year, this option is phased out. 3. Build America Bonds are extended. The bonds enable the purchaser to receive a federal tax credit rather than interest. Build America Bonds for renewable energy, energy conservation, and qualified school construction also receive federal subsidy for 45% of interest payments. 4. Various provisions in the Highway Fund are extended. The extension will permit contracts that were created in fiscal year 2009 to be completed in subsequent years. Editor's Note: Sen. Reid stated, "Toward the end of this week, what we will do is move to the Finance Committee matters that they worked on before, and they worked very hard. I'm glad that we have made progress in that regard." He appears to be promising that he will take up the balance of the Baucus-Grassley bill on tax extenders and continuing the 2009 estate tax law during 2010. Sen. Baucus has stated that he plans to pass an extension of the 2009 estate tax law with an exemption of $3.5 million per person. If this is passed, it will be retroactive to January 1, 2010. Fiscal Commission Appointments President Obama and Sen. Reid announced additional appointments to the Fiscal Commission. Following the rejection of a statutory Fiscal Commission by the Senate, President Obama signed an Executive Order that created an 18 person "National Commission on Fiscal Responsibility and Reform." Under the Executive Order, six members of the Commission are appointed by the President and the other 12 are appointed by the Republican and Democratic Leaders of both the House and Senate. President Obama previously appointed Erskine Bowles, who was Chief of Staff for President Clinton and former Senator Alan Simpson (R-WY) to Co-Chair the Commission. His other four appointees are David Cote, CEO of Honeywell International, Inc., Ann Fudge, who formerly served as CEO of Young and Rubican, Andy Stern, President of Service Employees International Union and former Office of Management and Budget Director Alice Rivlin. Senate Majority Leader Harry Reid (D-NV) announced his three appointments. He selected Senate Finance Committee Max Baucus (D-MT), Senate Budget Committee Chair Kent Conrad (D-ND) and Assistant Majority Leader Richard Durbin (D-IL). Speaker Pelosi and the Republican Leaders of the House and Senate have yet to act on their appointments. If all of the appointments are made, the Fiscal Commission will start to review options to reduce the deficit. The probable solution will involve a combination of increased taxes and reduced spending. White House Reduces "Cadillac" Healthcare Tax On February 22, 2010, the White House published an updated healthcare reform proposal. It retains many of the provisions of the Senate Patient Protection and Affordable Care Act (H.R. 3590). In the Senate bill, there was a 40% excise tax on insurers that offer "Cadillac" healthcare plans. The excise tax is applicable for single persons with plans over $8,500 and families with plans that cost more than $23,000 per year. The updated White House proposal changes those limits to $10,200 for single persons and $27,500 for family plans. In addition, the White House proposal would not make the tax applicable until 2018. Another section of the White House proposal would raise taxes starting in 2013. Individuals with incomes over $200,000 (single) or $250,000 (married) would be subject to a 2.35% tax on earned income and a 2.9% tax on investment income. This provision would be an increase from the normal 1.45% Medicare tax for higher income individuals. The 2.9% tax on all investment income is also a change from current law. The balance of the revenue to pay for the White House healthcare proposal is raised through a 2.9% tax on manufacturers of medical devices. After releasing the updated plan, the White House conducted a seven hour Healthcare Summit. The Healthcare Summit was an opportunity for the White House, Democratic leaders and Republican leaders from the House and Senate to discuss healthcare reform in a televised format. The Senate Republican Conference Chair Lamar Alexander (R-TN) presented his party's recommendations for healthcare reform. He urged the President to reject the potential option of using reconciliation to pass healthcare reform. Under the Senate budget reconciliation rules, a bill may be passed with 51 votes rather than the 60 votes required for the normal order of business for major legislation in the Senate. Sen. Alexander quoted Sen. Robert C. Byrd (D-WV). He noted that Sen. Byrd is "the constitutional historian of the Senate" and that he has stated it would be "an outrage to run the healthcare bill through the Senate like a freight train with this process." Editor's Note: Your editor and this organization take no position with respect to these observations and comments. This information is offered as a service to our readers because of the importance of the healthcare debate. Proposed 2.9% Tax on Charitable Trust and Annuity Payouts Following the release by the White House of the updated healthcare proposal, the Joint Committee on Taxation (JCT) published an analysis of the revenue impact of this provision. According to JCT, the 2.9% tax would apply to passive income. This includes interest, dividends, royalties, annuity payouts and rents. The limits apply for individuals with incomes over $200,000 and joint filers with incomes over $250,000. This new tax on passive income could potentially have impact on both charitable remainder trusts and charitable gift annuities. A charitable remainder unitrust or charitable remainder annuity trust makes distribution under the Sec. 664 four-tier accounting structure. The distributions are first ordinary income, then capital gains, then other or tax-free income and finally principal. Because most trusts have ordinary income, dividends and rent payments, these amounts would be distributed first. For upper-income persons who receive payments of ordinary income from a unitrust or an annuity trust, there would be an additional 2.9% tax under the White House plan. It appears that long-term capital gain that is passed through will not be subject to that tax. Similarly, for higher-income persons who receive payouts from a gift annuity, the ordinary income portion of those payments will also be subject to the 2.9% tax. For senior individuals, 60% to 80% of the payout is return of principal and would not be subject to tax. However, the balance is ordinary income and therefore could require payment of the 2.9% tax. A representative of the American Council of Life Insurers named Frank Keating wrote a letter to Secretary of the Treasury Timothy Geithner and expressed concern about the proposed 2.9% tax on annuity payments. Mr. Keating noted that "Americans face unprecedented difficulties" in the current economic environment. He suggests that the 2.9% tax creates "a disincentive for annuity products" that makes it more difficult for Americans to enjoy a secure retirement. He urged Treasury to oppose the 2.9% tax "on an important retirement security tool." Applicable Federal Rate of 3.2% for March -- Rev. Rul. 2010-8; 2010-10 IRB 1 (19 Feb. 2010) The IRS has announced the Applicable Federal Rate (AFR) for March of 2010. The AFR under Sec. 7520 for the month of March will be 3.2%. The rates for February of 3.4% or January of 3.0% 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 2010, pooled income funds in existence less than three tax years must use a 4.6% deemed rate of return. Federal rates are available by clicking here.
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PLR THIS WEEK PLR - 200952069 Exempt Status Revoked A was a tax-exempt organization under Sec. 501(c)(3), formed to "protect and enhance the physical environment and flora and fauna" of Town by "engaging in the consideration and study of planning, zoning and land use" in the Town region. During the year under audit, A's primary activity consisted of being a party with other petitioners in an Article 78 proceeding against the Planning Board of Town. Other activities of A included operation and maintenance of a website which promoted involvement in local legislation. Minutes from one of A's executive meetings indicate website and print materials were to be reviewed by X, who warned "topics should not be political or so 'lobby' for legislature" to the extent that A would lose tax-exempt status. The minutes from the executive meeting coupled other internal documents led the Service to believe printed material regarding A's activities might be a reaction to exclude any activities that would keep A from continuing to qualify under Sec. 501(c)(3) or be an inaccurate reflection of A's activities. The Service questioned whether A qualified for exemption. Sec. 501(c)(3) requires tax exempt organizations to be "organized and operated exclusively for [charitable] purposes... no part of the net earnings of which is carrying on propaganda, or otherwise attempting to influence legislation." The Service held that A's mission of preserving the traditions, architecture and appearance of Town for the sole benefit of residents of Town was not charitable, as it would be if it were for the general public good. Further, Organizations whose activities substantially attempt to influence legislation, whether by any local council or similar governing body or by the public in a referendum, are considered an "action" organization under Sec. 501(c)(3). Because 89% of A's total expenses for the year were spent on litigation against the Planning Board of Town and A advised readers to contact local legislative representatives in support of A's programs, the Service determined A was an "action" organization. A's primary activity of influencing local environmental legislation does not qualify for exemption under Sec. 501(c)(3). Therefore, the Service issued a final adverse determination letter as to A's exempt status because A's activities were not exclusively charitable. To view the full PLR Click Here.
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CASE OF THE WEEK George's "Green" Sale and Unitrust II George Green was a man of humble beginnings. He was born in Bulgaria and lived with his parents on their farm. But George was a diligent student and determined to become a successful business owner. After high school, he was able to get permission to come to America to go to college. George applied to several colleges and was accepted as a work-study student at a state college. He lived in the dorm, and worked nights in the cafeteria. On weekends, he moonlighted as a waiter at a five-star restaurant. George was both resourceful and determined to succeed. He enrolled in chemical engineering classes and studied every spare moment. His industry was quickly recognized by the faculty. After graduation with honors, he became a graduate assistant and also earned a master's degree in engineering. Due to his early years on the farm, George always loved nature. He interviewed and became a product development engineer with a company that built emissions control equipment for automobiles. Soon, George met Helen Wilson and they married. George was too energetic to stay in one place. After saving $5,000, he convinced Helen that it was time for him to go out on his own. George started a company and initially did environmental consulting. As soon as he could gather and borrow the funds, he also started to produce components for emissions control equipment. After a terrific struggle, the business took off and George began to manufacture probes for company smokestacks. When asked if that was a good business, George responded, "It is a great business. Companies buy my probes to measure their smokestack emissions, and then the government changes the rules! They all then have to buy upgraded probes!" George incorporated the probe manufacturer as Green Probe. Ever the entrepreneur, he later had a chance to buy a company that built converters for automobiles. He bought the assets of that company and transferred them into Green Converters. Finally, George started a third company to build "smokestack scrubbers" that would clean the emissions from the smoke of power plants. Since there later was a huge increase in the cost of energy, power companies began to build more coal-burning plants, and his "smokestack scrubbers" from Green Scrubber were in great demand. Four years ago, George funded a unitrust with the GC stock and then GC sold all assets to General Auto. George is now 79 and has now been approached by Major Power Company, who would like to buy Green Probe (GP). So George called CPA Arnie Arnst again and asked, "What should I do now? I still feel like I am paying a lot of tax. Can I sell tax-free again?" To view the solution to this Case of the Week Click Here.
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ARTICLE OF THE MONTH Gift Annuity Returns and the Age 111 Donor – Reinsurance Part III Ms. Ella Kelly was a fortunate and very healthy annuitant. When she was age 92, she purchased a gift annuity paying 14% from a private university in Florida (14% was the rate at that time for annuitants over age 90). Ms. Kelly was so encouraged by her 14% gift annuity payouts that she lived to be 111! Another donor purchased a $100,000 gift annuity for cash from a west coast charity. She also received a high percentage rate of return and was paid one quarterly payment before passing away. Some gift annuitants live a very long time – some pass away fairly quickly. It is quite difficult to know what the probable life expectancy will be of an individual. The concept of gift annuities and insurance is that the two extremes will balance in the middle. 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 1999-2010 Crescendo Interactive, Inc. |
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| University of Northern Colorado Foundation, Inc. | March 1, 2010 | |
| 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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