eGiftLaw Newsletter
| April 27, 2009 Dear Professional Advisor,
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| University of Northern Colorado Foundation, Inc. | April 27, 2009 | |
GiftLaw eNewsletter - April 27, 2009
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WASHINGTON HOTLINE Energy Bonus - Outrageous Loophole or Appropriate Bonanza? Tax Quote of the Week "More Americans pay taxes than vote." -- J. Robert Kerrey
Energy Bonus - Outrageous Loophole or Appropriate Bonanza? The Improvement and Extension Act of 2008 expanded a number of credits. One section under the act expanded the 50 cent per gallon credit for the use of renewable fuels. The biofuels credit was intended to encourage use of biomass and other renewable energy products. The estimated cost of the expansion of the biofuels credit was $61 million. However, the paper industry discovered that the credit is available as long as there is 0.1% petroleum products in the renewable fuels. For decades, the paper industry has been converting pulp wood to paper and producing a byproduct called "black liquor." The byproduct is cellulose and lignin fragments from the trees that are not used for paper. During the 1930's, a boiler was created to burn the "black liquor." With steady improvements in the technology, new plants are now using 99% of the black liquor for energy production. Because the paper mill has more black liquor than is needed for production purposes, a portion of the black liquor is also sold to nearby communities for power production. Creative managers in the paper industry discovered that by mixing one part diesel to 1,000 parts of black liquor, they qualified for a 50% per gallon credit that is refundable. In essence, by including 1/5 of one cent worth of diesel with each gallon of black liquor the federal government would pay the company 50 cents per gallon. Understandably, the black liquor credit is a highly profitable business and the paper industry is making maximum use of this new "free government money." The International Paper Co. is the world's largest paper producer and received a check from the IRS of $71 million in one month alone. It could potentially receive nearly $1 billion per year under the program. Total paper industry payouts are estimated to be between $3 billion and $6 billion per year under the credit. At a hearing on April 23, 2009, Chair of the Senate Finance Committee Max Baucus (D-MT) acknowledged that, "Sometimes, government gets it wrong." He continued, "It's an unintended adverse consequence and it's very expensive. It's a loophole and I think it should be closed." However, because the paper industry is suffering in the current economic downturn, Sen. Olympia Snowe, (R-ME), Sen. Blanche Lincoln (D-AR) and Sen. Debbie Stabenow (D-MI) all objected to closing the loophole. The Senators pointed to the difficult economy for the paper industry and asked that the renewable energy credit continue to include black liquor. Editor's Note: This rather extreme example of the federal government transferring billions of dollars to huge corporations is a stark example of the law of unintended consequences. When the credit was created, no one contemplated that by mixing a small amount of diesel fuel in each gallon of black liquor, the paper industry would receive a multi-billion dollar bonanza. It's also educational to see the response of Senators who promptly leaped to the defense of the paper industry in their states and seek to continue the credit for black liquor. Once any government benefit is granted, there is always a constituency for continuing that cash transfer. IRS Highlights Energy Credits The American Recovery and Reinvestment Act of 2009 increased residential and business credits for various energy efficiency improvements. In Notice 2009-41; 2009-19 IRB 1 (22 Apr 2009), the IRS explained in more detail the potential benefits. IRS Commissioner Doug Shulman stated, "These new, expanded credits encourage homeowners to make improvements that will make their homes more energy efficient. People can improve their homes and save money over the long run." There are two primary categories for homeowner improvements. The first includes basic functional improvements with a credit for 30% of the cost and a credit limit of $1,500. It is valid from January 1, 2009 through December 31, 2010. The second group is more comprehensive improvements that use specific renewable energy techniques and that credit applies from January 1, 2009 until December 31, 2017. The first group with a 30% credit up to $1,500 includes: -- Energy-efficient insulation -- Upgraded doors and windows that meet energy standards -- Efficient air conditioning systems -- Energy-efficient gas furnaces The renewable energy items with a 30% credit and no cap are: -- Solar electric generation through solar panels -- Solar water heating panels and equipment -- Small wind energy generation through windmills -- Geothermal heat pumps To claim the credit, the improvement must meet the government energy efficiency standards. However, the taxpayer may rely on a certification by the manufacturer of the product that it meets the required energy efficiency standards. Estate Tax Maneuvering As the House Senate Budget Conference grows near, members of both bodies are now staking out positions with the intent of influencing the outcome of the estate tax negotiation. The House and Senate both passed nonbinding resolutions that will extend the 2009 law with a $3.5 million exemption and 45% estate tax rate. However, by a vote of 51-48, there is a Senate budget resolution amendment that proposes an exemption level of $5 million with a top tax rate of 35%. Rep. Jim McDermott (D-WA) recently introduced H.R. 2023, The Sensible Estate Tax Act. His bill would exclude $2 million ($4 million for a couple) from estate tax. It also permits a surviving spouse to use the exemptions from both estates. He recommends unifying estate and gift taxes and proposes increasing the estate tax to 50% for estates over $5 million and 55% for estates over $10 million. The House "Blue Dog Democrats" have been negotiating over ways to move the budget toward a more fiscally responsible result. Under current House and Senate rules, the "pay-go" rules would apply unless there is a waiver. The Blue Dogs are discussing a strategy to create a "pay-go" waiver for the extension of the $3.5 million exemption and 45% tax rate, but not for any larger exemption. If the Blue Dog strategy is successful, then there would be a requirement for 60 votes in the Senate for an exemption greater than $3.5 million. Editor's Note: Sen. Kent Conrad is Chairman of the Senate Budget Committee. He indicates that there are still "many issues" to be resolved in the negotiation. Those in the estate planning community will want to follow the continued negotiations. It now appears that budget realities are making the road to an exemption larger than $3.5 million quite difficult. However, there now seems to be support for allowing a surviving spouse to use both exemptions and for unifying the gift and estate tax. Applicable Federal Rate of 2.4% for May -- Rev. Rul. 2009-12; 2009-19 IRB 1 (17 Apr. 2009) The IRS has announced the Applicable Federal Rate (AFR) for May of 2009. The AFR under Section 7520 for the month of May will be 2.4%. The rates for April of 2.6% or March 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 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 - 200916033 Scholarships Will Not Affect Exempt Status Foundation is a tax exempt charity under Secs. 501(c)(3), 509(a)(1) and 170(b)(1)(A)(vi). Its mission is to promote sports among the disabled, inner-city youth, the disadvantaged and women. Foundation also maintains a scholarship program for college students who meet certain eligibility requirements and are enrolled in one of 19 selected U.S. universities. The selection committee for awarding the scholarships is composed of seven individuals: five from Foundation's board and two independent individuals. Foundation maintains records and case histories as required by Rev. Rul. 56-304, 1956-2 C.B. 306. Foundation proposes to add three new scholarship programs to assist financially needy students who plan to study sports management. Foundation requested a ruling that the continued operation of existing scholarship program and the introduction of the three new programs will not adversely affect their tax-exempt status. Rev. Rul. 56-304, 1956-2 C.B. 306 provides that privately established charitable organizations that otherwise meet the requirements for tax exemption under Sec. 501(c)(3) may make funds available to individuals provided that such funds are dispersed for a bona fide charitable purpose in furtherance of the organization's stated purpose. Organizations making such distributions should maintain adequate records containing the names and addresses of the grantees, the amounts granted, the purpose and the manner in which the funds were dispersed. The Service noted that Foundation's existing and proposed scholarship programs are charitable and based on the need and scholastic ability of the grantees as described in Rev. Rul. 66-103, 1966-1 CB 134 and Rev. Rul. 69-257, 1969-1 CB 151. The Service also noted that Foundation does and will continue to abide by the recordkeeping requirements of Rev. Rul. 56-304, 1956-2 C.B. 306. Because of the diligence Foundation has taken and its assurance to maintain objectivity in the awards process and record keeping, the scholarship programs will not negatively affect Foundation's tax-exempt status. To view the full PLR Click Here.
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CASE OF THE WEEK Exit Strategies for Real Estate Investors, Part 3 arl Hendricks was a man with the golden touch. Throughout his life, it seemed every investment idea that he touched turned to gold. By far, Karl was most successful with real estate investments. It was definitely his passion. Amazingly, Karl continued to buy and sell real estate at the age of 85. For instance, about three months ago, Karl discovered a great investment property. It was a "fixer-upper" commercial building in a great area. While other nearby buildings sold for over $2 million, the seller needed to sell quickly and was asking just $1 million. The condition of the building turned many buyers away. It was being sold "as-is." But Karl was not deterred. He could see great potential with the building and knew it would not take much to get it to market condition. Therefore, Karl swooped in, bought the building for $1 million and instantly hired contractors to refurbish the place. After three months of hard work refurbishing the building, the place looked like new! In the end, Karl invested $250,000 in the building bringing his total investment in the property to $1.25 million. One month after the completion of the work, Karl was contacted informally by a company that expressed an interest in the building - a $2 million interest! This was no surprise to Karl. He knew the building was another great buy. After Karl learned about the benefits of a FLIP CRUT, he eagerly wanted to move forward. (See Parts 1 and 2 for a full discussion of this decision.) It looked like the perfect solution. However, there was still one issue unresolved: Who would serve as trustee of the FLIP CRUT? Should Karl or the charity serve as trustee? What risks should be considered before making the final decision? To view the solution to this Case of the Week Click Here.
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ARTICLE OF THE MONTH Grantor Lead Trusts - Down Market Bonanza Even with the soft economy, many professionals and business owners will have substantial incomes in 2009 and 2010. Because the markets are now down over 40% from the peak, they also may hold stocks with market value below their cost basis. The "high income and loss stocks" combination opens the door to the excellent income tax savings of the pre-1969 grantor lead trust. Prior to 1969, it was possible to create a charitable lead trust and receive a deduction for both income and gift taxes. Because the total tax savings produced a gift that under 1969 tax rates actually saved more in taxes than the transfer to charity, this was a tax bonanza that Congress inevitably was forced to change. One of the 1969 changes was the passage of Sec. 170(f)(2). If a donor receives an income tax deduction for the present value of a lead trust income stream to charity, then the donor must report and pay tax on the income distributed to charity for the term of the lead trust. In effect, the donor receives a deduction in year one, but has taxable income during the term of the lead trust. With the tax payments in future years, part of the initial savings is "given back" to the IRS during the term of the lead 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.
© Copyright 1999-2009 Crescendo Interactive, Inc. |
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| University of Northern Colorado Foundation, Inc. | April 27, 2009 | |
| 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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