eGiftLaw Newsletter
| June 29, 2009 Dear Professional Advisor,
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| University of Northern Colorado Foundation, Inc. | June 29, 2009 | |
GiftLaw eNewsletter - June 29, 2009
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WASHINGTON HOTLINE "Cap and Trade" House Vote Tax Quote of the Week "A democracy cannot exist as a permanent form of government. It can only exist until a majority of voters discover that they can vote themselves largess out of the public treasury." -- Alexander Tyler
"Cap and Trade" House Vote At publication time the House was debating and voting on the "Cap and Trade" bill. Under the Cap and Trade bill, there will be an auction of emissions permits. Power-generating companies and industry must purchase permits for emissions of carbon and other pollutants into the atmosphere. The theory of Cap and Trade is that industries and electrical power plants will become efficient users of clean energy in order to avoid purchase of additional emissions permits. In addition, the House bill involves spending billions of dollars to facilitate development of clean-energy technology, including electric vehicles and carbon capture and sequestration. By 2020, electrical utilities would also be required to meet 20% of total energy demand through renewable sources. These could include solar, wind, biomass and other methods. President Barack Obama emphasized the ability of the Cap and Trade bill to create new jobs, noting that the bill "will spark a clean energy transformation of our economy." Democratic members from farm states expressed concern. Agriculture Committee Chairman Collin Peterson (D-MN) indicated that the Cap and Trade legislation will increase energy costs for farmers and ranchers throughout the Midwest. Rep. Joe Barton (R-TX) was even stronger in his opposition. He stated, "It is an economic disaster bill for the United States of America if it were to pass." In response to claims by opponents of cap and trade that the increased electrical costs could amount to $1,000 or more per family, the Congressional Budget Office (CBO) conducted a survey and projected costs. According to the CBO analysis, the cost per household in 2020 would be $175 per year. Healthcare Debate Continues The House and Senate continue to develop separate plans for comprehensive healthcare reform. Leaders in both the House and Senate are attempting to cover the 46 million Americans who currently do not have health insurance. The House Committee on Healthcare Reform published a discussion draft on June 19, 2009. It emphasized that through a health insurance exchange and a public health insurance option, it would be possible to cover these 46 million Americans. The draft also discussed the cost issue. It suggested that healthcare costs could be limited by modernizing Medicare payment procedures, through the increased competition with a public health insurance option, through improving accuracy of Medicare payments and reducing waste and fraud. Sen. Max Baucus (D-MT) continues to meet regularly with other senators and interested organizations to develop the Senate Finance Committee Healthcare Reform Act. He indicated that the current version of his bill now has been reduced in cost to $1 trillion over ten years. Sen. Baucus continues to emphasize that the bill will be "fully paid for" and he will not publish the actual draft "until we are sure we have it right." The current funding goals for the $1 trillion bill involve three principal concepts. First, there would be a cap or limit on the deductibility of employer-provided healthcare. This cap could raise an estimated $300 billion per year. Second, there are employer mandates that will require employers to include employees in the healthcare program or pay fines. The employer mandate revenue is also estimated at approximately $300 billion. Third, healthcare savings through reform of the Medicare and Medicaid system are estimated to save approximately $350 billion. Editor's Note: The challenges faced by Sen. Baucus and Sen. Charles Grassley (R-IA) in crafting a bipartisan bill show how difficult it is to pass this Healthcare Reform Act. When the actual tax increases necessary to pay for healthcare reform are examined, it becomes apparent that some currently-insured persons will now pay more for healthcare insurance in order to fund the programs for the uninsured. Deciding who will pay more and how much that will be is a delicate political question. Experienced Appraiser Supports Major Conservation Deduction In Kiva Dunes Conservation LLC et al. v. Commissioner; T.C. Memo. 2009-145; No. 13196-06 (22 Jun 2009), the Tax Court approved the deduction for a gift of a conservation easement. On June 6, 1992, Mr. E. A. Drummond purchased a parcel in Alabama from the Resolution Trust Corporation (RTC). The RTC was selling at auction various properties recovered from banks and savings and loans that had become insolvent during the 1990 real estate crash. The purchase price for the 228 acre parcel was $1,050,000. Mr. Drummond formed B&E Investments, LLC and elected to be taxed as a partnership. He conveyed the property to the partnership and commenced development of a resort community named Kiva Dunes. The resort community began selling lots in 1995. In 2002, he transferred 140.9 acres of property on which was placed a golf course to the Kiva Dunes LLC. On December 31, 2002, Kiva Dunes, LLC transferred a perpetual conservation easement on the golf course to the North American Land Trust (NALT). Appraiser Claude Clark was hired to determine the value of the perpetual conservation easement and he claimed a contribution deduction value of $30,588,235. Kiva Dunes also made a $35,000 cash contribution to NALT. The IRS denied the deduction and the Tax Court proceeding ensued. In the Tax Court, the IRS conceded that the perpetual easement did fulfill the requirements of a qualified conservation contribution and therefore would produce a charitable deduction under Sec. 170(a). The deduction would depend on a "before and after" determination of value. Appraiser Clark determined that the highest and best use of the golf course property would be as a subdivision. The property would have permitted the creation of 370 lots. Based on comparables in the county, he determined that the value of each lot would be $170,000 and lot sales would occur at a rate of 37 per year, for a total sale period of ten years. IRS Appraiser Philip Paulk claimed that the land would only support 300 lots, that the value per lot would be $85,000 and the sales would occur over 15 years. His estimated "before" value was approximately 1/3 of that of Mr. Clark. The Court determined that the analysis by Claude Clark was correct with respect to the number of lots, was persuasive with his value per lot and accurate in projecting the sale duration. Therefore, the Court accepted the "before" value of $31,938,985 as claimed by Mr. Clark. The remaining issue was the "after" value. Mr. Clark used five comparable properties within the same county to determine the value. The Court accepted his determination with an adjustment for both the improvements and previously-claimed depreciation. Based upon the before and after value establishment by Mr. Clark, the charitable deduction was approved for $28,656,004. Editor's Note: Mr. Clark was the most experienced appraiser in the county surrounding Kiva Dunes. He was very credible and the Tax Court accepted his interpretation of all the key valuation issues. This case highlights the importance of securing the services of a capable and respected appraiser. Applicable Federal Rate of 3.4% for July -- Rev. Rul. 2009-20; 2009-26 IRB 1 (19 June 2009) The IRS has announced the Applicable Federal Rate (AFR) for July of 2009. The AFR under Sec. 7520 for the month of July will be 3.4%. The rates for June of 2.8% or May 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 - 200923005 Contributions to State Authority are Deductible Authority was created by an act of the state legislature for the purpose of implementing solid waste disposal and recycling. Authority also provides public educational programs on waste reduction and recycling. Authority fulfills its educational mission through Facilities. Facilities provide outreach programs through day camps, scout troops and other youth-oriented organizations. Funding for Facilities has traditionally come out of Authority's operating budget. With tight finances and pressure from state and local governments to reduce costs, Authority is unable to provide further funding. In order to continue the educational activities, members of the community have expressed interest in making contributions to Facilities, but are reluctant until Authority can assure them that the contributions will be deductible. Authority's enabling documents prevent it from creating a Sec. 501(c) (3) subsidiary. Authority, therefore, proposes to create a segregated account in which contributions will be held and used solely for continuance of the educational programming. Authority seeks a Letter Ruling that contributions to the segregated account would qualify as deductible charitable gifts under Sec. 170(c)(1). Under Sec. 170(a)(1), a deduction is permitted for charitable contributions. Sec. 170(c)(1) defines "charitable contribution" as a contribution or gift to or for the use of any political subdivision but only if the contribution or gift is made exclusively for public rather than private purposes. Treas. Reg. Sec. 1.103-1(b) defines a "political subdivision" as any division of a state or local government unit that is a municipal corporation that has been delegated the right to exercise part of the sovereign power of the unit. The Service determined that Authority is a political subdivision and that contributions made to its segregated account for the public benefit of educational programs put on by Facilities will entitle the donors to a tax deduction under Sec. 170(a)(1). To view the full PLR Click Here.
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CASE OF THE WEEK Exit Strategies for Real Estate Investors, Part 12 Karl 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, Karl did still have some important questions. Karl wanted to know what IRS forms needed to be filed in order to substantiate his charitable income tax deduction. He knew the IRS would not just "take his word for it." To view the solution to this Case of the Week Click Here.
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ARTICLE OF THE MONTH Unitrust to Gift Annuity Rollover With major changes in the stock and bond markets the past year, some unitrust donors may prefer the simplicity and stability of a gift annuity. The fixed payouts and knowledge that the full assets of the issuing charity (which often are millions or tens of millions of dollars) stand behind the gift annuity permit the donors to sleep soundly at night. A good solution is to consider taking the income value of a unitrust or annuity trust and exchanging that amount for a gift annuity. But what are the rules or guidelines for a unitrust to gift annuity conversion? In PLR 200152018, a unitrust donor was interested in rolling over the income interest of the unitrust into a gift annuity. The donor had created a standard 5% unitrust that made payments quarterly for his lifetime. Apparently, a single charity was a remainder recipient and held a vested interest. The charity desired to use the remainder value as a current gift. While in the past some charities have borrowed against a vested remainder interest for a current project, the donor and charity proposed a better solution. The donor desired to receive income and was not willing to gift the entire income interest to the charity at present. However, if the income interest from the 5% unitrust could be converted to a gift annuity, the donor could receive a reasonable income stream for life and the charity could use the remainder value immediately for a current project. 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. | June 29, 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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