eGiftLaw Newsletter
| May 31, 2010 Dear Professional Advisor, Greetings from University of Northern Colorado Foundation, Inc.. 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 Foundation, Inc. | May 31, 2010 |
GiftLaw eNewsletter - May 31, 2010
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WASHINGTON HOTLINE Tax Extenders Bill Delayed Until June Tax Extenders Bill Delayed Until June Senate Majority Leader Harry Reid (D-NV) has deferred a vote on the "tax extenders" bill until the Senate returns from its Memorial Day recess on June 7, 2010. He indicated this week that there is continuing debate about the tax provisions in the American Jobs and Closing Tax Loopholes Act of 2010 (H.R. 4213). House Ways and Means Committee Chair Sander Levin (D-MI) has been working with conservative House Democrats to reduce the cost of the bill. The estimated increase in the deficit as a result of the complete bill is now $84.2 billion. The hope of House Democrats is to reduce the cost to approximately $60 billion. The latest proposal is to increase the excise tax on oil another 2 cents per barrel to 34 cents. Other changes would also increase revenue and reduce the cost. The bill has grown substantially during the legislative process. It includes the tax extenders, but also has an extension of the 65% COBRA Health Insurance subsidy, an extension of unemployment benefits and a "doc fix." The "doc fix" is a restoration of a proposed 21% cut in physician reimbursements for Medicare. If the reimbursement rate were cut on June 1, 2010, many doctors would no longer accept Medicare patients. Therefore, the proposal in the bill is to eliminate this cut and maintain the current Medicare reimbursement schedule. Four Democratic Senators and one Republican (Scott Brown, R-MA) have sent a letter to Senate leaders objecting to the increased tax on hedge fund managers. The five Senators propose that an exception be created for venture capitalists. Under the bill, hedge fund managers who currently pay tax at capital gain rates on their earnings would be subject to taxation of 75% of their earnings at ordinary rates and 25% at capital gain rates in 2013 and later years. The five Senators indicated that this new tax could reduce entrepreneurial activity and have a negative impact on employment. In response to these efforts to save taxes for venture capitalists, Chairman Levin indicated that he expected "the compromise to stand." Because the House is now energetically attempting to reduce the cost of the bill, it is doubtful that any of the proposed tax increases will be reduced. The White House also published a press release and supported the bill. The White House was particularly pleased that the bill would extend healthcare benefits and unemployment insurance. Editor's Note: Because the act has changed from a fairly simple tax extenders bill into a comprehensive tax bill that covers energy, healthcare and employment, the Senate is likely to offer additional modifications. If the House and Senate can agree on the final provisions, then both can pass the bill by mid to late June. While there still are discussions underway in both the House and Senate, it now is quite likely that the bill will be passed and signed during June. The seven "tax extender" charitable provisions are included in all current versions of the bill. It is expected that the IRA Charitable Rollover and the other six charitable provisions will be enacted retroactive to January 1, 2010. Good Cause for Estate Tax Return Extension In Estate of Paul Proske v. United States; Memo. 2:09-cv-00670 (25 May 2010), a District Court held that the IRS abused its discretion in denying an estate request for an extension of time to file the Form 706 Estate Tax Return. Decedent Paul Proske married Donna Weller in early 2005. They signed a prenuptial agreement that included various provisions to provide for Ms. Weller in the event that Mr. Proske passed away. He died relatively soon thereafter on June 16, 2005. His heirs included his wife Ms. Weller and three daughters from a prior marriage. Because there was uncertainty as to the interpretation of the prenuptial agreement, the marital deduction under the estate tax return could range from $175,000 to $663,000. The Executor for the decedent did not file Form 706 by the March 16, 2006 deadline (nine months from Proske's demise). However, the estate did file IRS Form 4768, Application for Extension of Time to File a Return and/or Pay U.S. Estate Taxes on April 25, 2006. The estate also paid $1.8 million in estimated taxes at that time. Even though the IRS did not grant the requested late extension, the estate filed the final Form 706 within 15 months of the demise of Mr. Proske. The IRS assessed penalties and interest of $305,130 for the late filing. The estate paid the penalty plus interest and brought an action to recover that amount. Both the estate and the IRS made motions for summary judgment. The estate claimed that the IRS should have used its discretion to grant an extended period of time to file IRS Form 706. The estate noted that the tax calculation was very difficult because there was a missing document from the prenuptial agreement, the estate was highly illiquid and there was tension among the beneficiaries. The IRS responded that the estate had not filed the request for the automatic six month extension within the required nine month window. While IRS tax examiner Thomas Carney was unable to document the reason for denying the request for extension, the IRS maintained that it was appropriate to assess the penalty and interest for the late filing. The court noted that the IRS had the right under Sec. 6081-1(c) to grant an extension upon the taxpayer showing "good and sufficient cause." Because examiner Carney did not record any reason for the denial and at trial could not recall any reason for refusing to extend the deadline, the IRS had not made a case for justification of the denial. The court noted that without any documentation or reasons for the denial on the part of the IRS, there was no possibility of judicial review. Because judicial review is explicitly authorized in the statute, the court refused to accept the IRS claim that it could issue a denial without any recorded justification. That issuance of the denial on the part of the IRS was determined to be an abuse of discretion by the Service. The court then examined the potential reasons for the late filing to determine whether or not the taxpayer had demonstrated "good cause." First, there were obvious tensions between Ms. Weller as surviving spouse and the three daughters from an earlier marriage. They were unable to agree on the assets that were to be included in the bequest to Ms. Weller. While the IRS suggested that the estate should file anyway, the court noted that a filing is "under penalty of perjury." If the facts are such that it is not possible to file without risking a charge of perjury, then the executor should be granted more time. Second, the missing document was "Schedule A" of the prenuptial agreement. The amount of property to be transferred was dependent upon the formula using either the probate estate or the augmented estate for the calculation. This could result in a very wide range of potential property values that would change the marital deduction. Because the estate tax calculation could vary greatly, there was a second reasonable ground for delay. Finally, the payment of $1.8 million was only possible in the illiquid estate after an insurance payment had been received. Because there were no liquid assets to make the required estate tax payment on March 16, 2006, the extension should have been granted. Therefore, the court determined that the IRS had abused its discretion and that there was good and sufficient cause for granting the extension. Gift Tax Not in Estate In ILM 201020009 (16 Apr 2010), the IRS published a legal memorandum that addressed the inclusion of a gift tax paid by a nonresident, non-U.S. citizen in taxable estate. Under Sec. 2035(b), the gross estate is increased by the amount of gift tax that is paid by a decedent within three years of his or her demise. The gift tax "gross up rule" is intended to discourage attempts to reduce estate tax through deathbed gifts. If a decedent is a nonresident and non-U.S. citizen, then under Sec. 2103, U.S. property owned by that person is subject to estate tax. In addition, Sec. 2104(b) states that transfers in trust or otherwise under Secs. 2035 though 2038 of property situated in the United States shall also be included in the estate. If a nonresident, non-citizen decedent made a transfer of U.S. property and paid gift tax, the question arose whether a death within three years would require that gift tax to be added back into the estate. While the gift tax clearly is included for a U.S. citizen, the nonresident, non-citizen is subject to Sec. 2104(b). This provision applies when there has been a gratuitous transfer of property. However, the gift tax is an excise tax under Reg. 25.2511-1. Because the gift tax is not a gratuitous transfer, it does not come within the purview of Sec. 2104(b). Therefore, if a nonresident, non-citizen makes a transfer of U.S. property and pays a gift tax, followed by his or her demise within three years, that gift tax is not included in the taxable estate. Applicable Federal Rate of 3.2% for June – Rev. Rul. 2010-15; 2010-23 IRB 1 (18 May 2010) The IRS has announced the Applicable Federal Rate (AFR) for June of 2010. The AFR under Sec. 7520 for the month of June will be 3.2%. The rates for May of 3.4% or April of 3.2% 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 - 201020021 IRS Denies Organization's Application for Exempt Status ORG was formed as a nonprofit non-membership corporation and applied for exemption under Sec. 501(c)(3). ORG later amended its status to a nonprofit membership corporation. ORG's Articles of Incorporation state that ORG was organized for literary and/or educational purposes. Due paying members are able to participate in educational activities throughout the year. However, the principle activity and substantial recipient of ORG's time and expenditures has been the annual Event A and Event B. Event B is part of ORG's Children's Program and takes place while parents are attending Event A. While Event A and B are open to non-members, the event is not advertised to the general public. A portion of the scheduled activities during Event A and B consisted of activities that further an educational purpose. The other activities of Event A and B include dinners, receptions, addresses from political candidates, religious services and recreational activities. ORG is related to Section 527 Organization. Section 527 is a Political Action Committee ("PAC") created to influence and facilitate campaign contributions to senatorial, gubernational and presidential candidates. Section 527 Organization and ORG share some officers and many of the individuals who established Section 527 Organization were instrumental in ORG's formation. ORG and Section 527 Organization operate out of the same office, have similar website addresses and use the same phone lines. Section 527 Organization is able to coordinate fundraising events for candidates around ORG's main activities at Event A and B. The Service could not conclude the primary purpose of Event A and Event B was to further an exempt purpose (education) because ORG's events only incidentally furthered an educational purpose. The majority of activities at Event A and B were social and entertaining in nature. The limitation on website access to due paying members only, lack of public advertising for Events A and B and the constraints on the dissemination of Event A information to others are inconsistent with activities that further an educational purpose within the meaning of Sec. 1.501.(c)(3)-1(d)(3)(i) of the regulations. Because Event A and B together account for a large percentage of ORG's time and expenditures, they comprise a substantial, rather than incidental, part of ORG's activities. Thus, ORG operations consist primarily for a non-exempt purpose. Additionally, the Service held ORG engaged in prohibited political campaign intervention. Because ORG made the use of ORG's office and telephone lines available to Section 527 Organization without charge and Section 527 Organization, a PAC, intervenes in political campaigns, ORG's assets are being used to intervene in political campaigns. ORG's inclusion of fundraisers, presentation of political candidates and speaker biographies with links to campaign pages on ORG's website all demonstrate a participation in the political campaigns on behalf of candidates for public office. Even if ORG otherwise qualified for exemption under Sec. 501(c)(3), ORG's activities furthered a substantial private interest under Sec. 1.501(c)(3)-1(d)(1)(ii) by providing more than an incidental private benefit to Section 527 Organization. All of these activities are expressly prohibited activities of an exempt organization. Therefore, the Service determined that ORG does not qualify for exemption as an organization described in Sec. 501(c)(3) of the Code. To view the full PLR Click Here.
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CASE OF THE WEEK Southern Brat Unitrust and Sale Bailout Peter and Sue Olson were raised in the great North Country. But after college, they were married and Peter accepted a position with one of the nation's largest discount stores. He rose through the ranks and finally was promoted to be manager of the New Orleans branch of the store. Peter and Sue lived in a suburban area of New Orleans and he was quite successful at managing the store. Each weekend, Peter also enjoyed his hobby of grilling brats on his barbeque. Peter, of course, recognized that brat (short for bratwurst sausage) was a well known delicacy in the North, but was new to his Southern friends. So Peter frequently invited friends and neighbors over for a brat and sweet iced tea gathering. Peter and Sue were thinking about branching out, so they started a small business, the "Southern Brat Deli." To their great surprise and mutual joy, their Southern customers were delighted with brats and sweet tea. The Southern Brat Deli flourished and Peter soon opened another store. And then another and another, until there were ten Southern Brat Deli's stretching across Louisiana and Mississippi. On the advice of his CPA, Peter had incorporated Southern Brat Deli, Inc. as a C Corporation. He was able to operate efficiently and the Southern Brat Deli, Inc. grew and flourished under his leadership. Peter and Sue are now 70 and a large restaurant company has offered to purchase Southern Brat Deli, Inc. Fortunately, Peter and Sue knew that they should not sign the purchase offer before speaking with their attorney. After meeting with their attorney, Bill, and discussing their retirement goals, they thought that placing 2/3 of the stock in a unitrust and selling 1/3 for cash would be a good choice. The 2/3 in the unitrust would bypass gain, while the tax on the 1/3 sold for cash would be offset by the charitable deduction on the unitrust. Would this plan work? But what if the sale falls through? Can Peter and Sue continue to run Southern Brat Deli, Inc ? Is there a time limit? To view the solution to this Case of the Week Click Here.
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ARTICLE OF THE MONTH Unprearranged Prearranged Sale "How can I be sure the real estate sale will be done properly?" Donors have been asking this question for many years. If a property is transferred into a charitable remainder unitrust, the income to the donor is dependent on the value received from the property. Donors are frequently very appreciative of the charitable work of their favorite organization, but may have doubts about the real estate expertise of that same organization. The "Prearranged Sale," simply put, exists under state contract law when there is a binding agreement to sell the property. In effect, there is a identified purchaser, an identified price and a legally-enforceable agreement to sell the property. Is there any latitude for creativity? How close to the sale is too close? It may be possible to have a sale with reasonable safety in a very short period of time, so long as the rules are followed quite carefully. The key is that there is no "binding obligation" when the trust is funded. See Rev. Rul. 78-197, 1978-1 C.B. 83. The three possible options include buyer waiting in the wings, a contingent oral agreement and a contingent escrow agreement. 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 Foundation, Inc. | May 31, 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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