eGiftLaw Newsletter
| April 6, 2009 Dear Professional Advisor,
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| University of Northern Colorado Foundation, Inc. | April 6, 2009 | |
GiftLaw eNewsletter - April 6, 2009
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WASHINGTON HOTLINE House and Senate Approve $3.5 Trillion Budget Proposals Tax Quote of the Week "Don't tax you, don't tax me; Tax the fellow behind the tree." -- Russell B. Long
House and Senate Approve $3.5 Trillion Budget Proposals The House, by a vote of 233 to 196, and the Senate, by a vote of 55-43, approved their respective budget resolutions this week. The general priorities of both resolutions are consistent with the budget submitted by President Barack Obama. They would extend the income tax reductions for middle-income earners and index the alternative minimum tax exemption for inflation. The House bill will maintain the estate tax at current levels while the Senate budget supports a higher estate tax exemption. House Speaker Nancy Pelosi (D-CA) indicated that the budget "boosts investments in areas such as clean energy and education." House Minority Leader John Boehner (R-OH) was concerned that the budget would "double our debt in five years" and over a period of 10 years would "triple our debt." Sen. Kent Conrad (D-ND) is Chair of the Senate Budget Committee. On the floor of the Senate, he quoted Sen. Judd Gregg (R-NH) and noted that the Republican Senator had agreed that "it's necessary for the government to step in and be aggressive, and the government is the last sort of liquidity. And so you can argue that this number, although horribly large, is something we have to live with." Sen. Conrad has been an advocate for fiscal responsibility and indicated that the $1 trillion plus deficit for 2010 is essential to recovery. However, he also pointed out that "68% of the deficit" last year was financed through "foreign entities." Sen. Conrad continued, "When we are dependent on the Chinese to bankroll us, the Japanese to bankroll us, that gives them an extraordinary influence over us because if they decide to not show up at the bond auction one week, what would we have to do? We would either have to dramatically increase interest rates to attract capital or we would have to radically cut spending or dramatically raise taxes." Editor's Note: The House and Senate versions of the budget are each over $3.5 trillion. They will now proceed to a conference committee. While the budget resolution is not legally binding, it does set the direction for probable passage of the eventual spending bills for year 2010. Tax Freedom Day is April 13, 2009 Each year, the Tax Foundation reports on Tax Freedom Day. According to the Tax Foundation, Americans work from January 1 until Tax Freedom Day to pay for their tax obligations at the federal, state and local level. The Tax Foundation has calculated Tax Freedom Day for all years from 1900 through 2009. Tax Freedom Day has been during the month of April during the years 2001 through 2009. With the tax cuts enacted in 2001 and 2003, Tax Freedom Day moved to April 16 in 2003. However, in years 2003 through 2006, the economy recovered and tax revenues increased. By 2007, Tax Freedom Day had shifted to April 27. With the recession and the decline in both personal and corporate income taxes in 2008, Tax Freedom Day has moved back to April 13, 2009. If the tax increases scheduled for 2011 take place, it is probable that Tax Freedom Day will move forward again in the coming years. No Charitable Deduction for Gift of Oklahoma City Bombing Papers In Sherrel Jones et vir v. Commissioner; No. 08-9001 (27 Mar 2009), the 10th Circuit determined that attorney Leslie Steven Jones was not entitled to a charitable contribution deduction for gifts of the trial preparation materials for Oklahoma City bomber Timothy McVeigh. Following the destruction of the Federal Building in Oklahoma City by a bomb placed by defendant Timothy McVeigh, attorney Leslie Steven Jones was Mr. McVeigh's lead defense counsel. As part of the process of defending Mr. McVeigh, Jones acquired "voluminous discovery material" largely prepared by the Oklahoma State Bureau of Investigation, the Oklahoma County District Attorney's office and the Federal Bureau of Investigation. Following the conviction of Mr. McVeigh, Leslie Jones withdrew as lead counsel and donated the voluminous materials to the Center for American History at the University of Texas. Based on an independent appraisal, Mr. Jones deducted $294,877. He claimed the initial charitable deduction in the year 2000 and carried forward the balance of the deduction for subsequent years. The IRS denied the deduction and the Tax Court determined that the deduction was impermissible on two grounds. First, Jones did not own the materials prepared for the McVeigh trial. Second, under Sec. 1221(a)(3)(A) the assets were not a capital asset. Therefore, the deduction was limited to the cost basis of taxpayer Jones, which was zero. Mr. Jones claimed that the assets had been acquired as counsel and therefore were his property, that he had held them for over a year and a day, thus qualifying for long term capital gain status and that the prohibition in Sec. 1221(a)(3)(A) that proscribed deductions for "letters, memoranda, or similar property created by the taxpayer's own efforts" did not apply because the materials had been created by state and federal government entities. The 10th Circuit determined that the Sec. 1221(a)(3) capital gain exclusions "should be construed broadly." Because the materials were prepared by the government in the prosecution of Mr. McVeigh, the 10th Circuit determined that these were prepared specifically for Jones under the language of the statue. As a result, the deduction was limited to taxpayer's basis of zero. Editor's Note: Voluminous government documents are created every year for officials from Presidents to Governors to defense counsel. The intent of Congress in passing Sec. 1221(a)(3)(B) was to preclude charitable deductions or capital gain treatment upon sale of these materials. Because the materials are typically produced by the government without any personal cost to the individual who may end up with custody of the materials, Congress determined that there should be no charitable deductions or no capital gain benefits upon sale of these documents. Independent Sector Supports Estate Tax, But Senate Proposes $5 Million Exemption In a press release on March 31, 2009, Independent Sector, a national organization representing nonprofits, stated its unequivocal support for continuing the $3.5 million estate exemption. The statement indicated that Independent Sector "strongly supports retaining the federal estate tax at 2009 levels." The House and Senate Budget Committees both passed budget resolutions that propose retaining that exemption level. Independent Sector notes that "further weakening of the estate tax from 2009 levels would diminish an essential source of revenue to the charitable community." Independent Sector directly opposed the Senate floor amendment by Sen. Kyl (R-AZ) and Sen. Lincoln (D-AR) that would increase the exemption from $3.5 million to $5 million and reduce the estate tax rate from 45% to 35%. The Independent Sector statement urged senators "to oppose an alternative proposal by Senators Lincoln and Kyl that would raise the individual exemption and lower the estate tax rate." Finally, the Independent Sector statement summarizes by suggesting that the 2009 estate tax exemption and tax rate would "ensure adequate federal revenues" and "encourage charitable contributions." On the Senate floor, the Lincoln-Kyl proposal to set the exemption at $5 million with an estate tax rate of 35% passed by 51-48. However, Senate Majority Leader Dick Durban (D-IL) then proposed a further amendment that the expanded estate exemption would apply only if middle-income earners received a comparable tax reduction. His amendment passed 56-43. The estate tax and other budget provisions will now be discussed by a House-Senate Conference Committee. Applicable Federal Rate of 2.6% for April -- Rev. Rul. 2009-10; 2009-14 IRB 1 (18 Mar. 2009) The IRS has announced the Applicable Federal Rate (AFR) for April of 2009. The AFR under Sec. 7520 for the month of April will be 2.6%. The rates for March of 2.4% or February of 2.0% 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 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 - 200913065 Shares of Endowment -- No UBTI M, a tax-exempt educational organization, maintains a diversified endowment. M also serves, at no cost, as the trustee of a number of charitable remainder trusts. N is one such trust. M proposed to issue units of its endowment fund to N. The units would pay N an amount based on the value of the units as determined by M on a monthly basis. N could choose either to reinvest part of the payout, or redeem additional units, depending on its cash requirements. All of the income paid to N would be classified as ordinary income. Should N redeem any of the M units, the gain (or loss) would be classified as either short-term or long-term capital gain (or loss) depending on the holding period. N would not have any ownership interests in the assets of M's endowment nor would it have any right to manage, supervise or control any of M's business activities with regard to the endowment. N requested a ruling that the issuance of units, the payment of income based on the units and the holding or redeeming of units would not give rise to unrelated business taxable income (UBTI). Sec. 512(a)(1) defines "unrelated business taxable income" as gross income derived by an organization which is regularly carried on and is unrelated to the organization's business. Sec. 512(b) modifies the definition to exclude income derived from dividends, royalties, rent, from real property and gain on the sale of property. The Service noted that under the terms of the agreement, N would have no right to the underlying assets of M's endowment, no right to control or otherwise manage the affairs of M and N would not be liable for any cost or expense related to the endowment. In light of this, the Service determined that the issuance of units would not result in the issuance of "unrelated business taxable income." Editor's Note: The Service noted that M was not charging a trustee's fee for its services to N or other CRTs. If M were to charge a fee, the income it derived from such services would give rise to unrelated business taxable income. Thus, M would be required to pay a tax on the income earned from such activity. See Rev. Rul 69-528, 1969-2 C.B. 127. To view the full PLR Click Here.
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CASE OF THE WEEK Dying to Deduct, Part 3 Abigail Azah is a wonderful and spirited 80-year-old woman. To this day, she still works in her garden, handles all of her finances and plays golf each weekend. In addition to her busy schedule, she also makes time to help at a local homeless shelter. She believes that whenever you can lend assistance to your fellow neighbor it is your responsibility to do so. Because of this belief, she gives her time, love and money to the shelter. Abigail's normal practice is to give $5,000 each year to the homeless shelter. However, she wants to make a more significant gift to the shelter this year. So, in January of this year, she decided to establish a $100,000 charitable gift annuity for her and her sister. The payments would go to Abigail for life, then to her sister, Mandy, for life. She liked the high fixed payments, large tax deduction and simplicity of the arrangement. Because Abigail funded the CGA with cash, a large portion of each payment was tax-free. This tax-free component is essentially a return of principal or investment, and it would last for the life expectancy of both Abigail and Mandy. But of course, what she loved most was the eventual gift to the shelter. Sadly, Abigail suffered a heart attack in March and died soon after. To make matters worse, Mandy died the following year in a tragic automobile accident. It was a terrible loss to the family, friends and community. Now several months have passed and Mandy's CPA is winding up Mandy's financial affairs. Mandy's CPA recalls that if a person who funds a gift annuity dies prematurely he or she may claim an additional tax deduction for any unrecovered investment (See "Dying to Deduct, Part 1"). However, in this case, Mandy is not the donor but just an annuitant. Thus, the CPA wonders if he can claim a tax deduction for the unrecovered investment on Mandy's final income tax return? Since Abigail and Mandy died prematurely, who gets the "unrecovered investment" tax deduction? 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 6, 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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