eGiftLaw Newsletter
| June 8, 2009 Dear Professional Advisor,
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| University of Northern Colorado Foundation, Inc. | June 8, 2009 | |
GiftLaw eNewsletter - June 8, 2009
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WASHINGTON HOTLINE President Obama Outlines Health Care Reform Tax Quote of the Week "The most damaging thing you can do to any businessman in America is to keep him in doubt, and to keep him guessing, on what our tax policy is." -- Lyndon B. Johnson
President Obama Outlines Health Care Reform As Sen. Max Baucus (D-MT) and the Senate Finance Committee continue to labor to produce a major health care reform bill, President Obama sent a letter to both Sen. Baucus and Sen. Edward Kennedy (D-MA). In the letter, President Obama outlined his principal positions with respect to health care reform. He started by noting, "health care reform is not a luxury. It's a necessity we cannot defer. Soaring health care costs make our current course unsustainable." Because of the rapid increase in the costs of health care, President Obama advocates not postponing health care reform any longer. He also believes that a "public health insurance option" is an important part of providing all Americans with health care. To cover the costs of health care reform, President Obama offers three recommendations. First, he has proposed "$635 billion in a health reserve fund" to be funded with taxes on electricity and other energy. Second, he lists proposals to reduce Medicare spending by $309 billion in 10 years. Finally, he suggests that limiting itemized deduction benefits to the 28% bracket, even though taxpayers in 2011 may be in the 39.6% bracket, would "raise $326 billion over 10 years." This proposal would limit the charitable and mortgage deductions of higher-income taxpayers. Editor's Note: Senator Baucus has been meeting with other senators from the Senate Finance Committee and the Health, Education, Labor and Pension Committee. He plans to release the outline of his major health care reform bill the week of June 15, 2009. The financing options for major health care reform will prove quite controversial in the current economic climate. Chairman Bernanke Highlights the Need to Raise Taxes Federal Reserve Board Chair Ben Bernanke testified before a House Committee on June 3, 2009. He observed that the economy is stabilizing and will start to recover by the end of this year. With reduced consumer spending and the problems in the housing market, the recovery is anticipated to be slow. Economic growth will be "below its longer-run potential for a while." Chairman Bernanke noted that the 19 largest U.S. banks had been evaluated to determine that they held a safe level of capital reserves. The Treasury study recommended that 10 of the 19 banks acquire a total of $75 billion in added equity. The equity-building programs under way have already accounted for $48 billion of the needed $75 billion in new reserves. The balance is anticipated to be raised by November 9, 2009. The success of the banks in raising private capital indicates that investors are "gaining greater confidence in the banking system." However, Chairman Bernanke noted that it is now the time to start planning for a "restoration of fiscal balance." The national debt as a percentage of the economy will increase from 40% of the gross domestic product in 2008 to 70% of the economy by 2011. As a result, tax rates must be raised to a "level sufficient to achieve an appropriate balance" in the federal budget. Editor's Note: Chairman Bernanke has been supportive of the Administration's efforts to stabilize the banks and bring recovery to the economy. These stimulus efforts led to a deficit of $1.8 trillion this year and approximately $1 trillion next year. He now is suggesting that regaining fiscal balance and paying down the national debt will require substantially higher taxes in the future. Conservation Easement Battle of the Appraisers In Nick R. Hughes v. Commissioner; T.C. Memo. 2009-94; No. 6395-06 (6 May 2009), the Tax Court upheld a deficiency on an overvalued conservation easement. Nick R. Hughes purchased two parcels of property in the Gunnison County area of Colorado. On October 6, 1999, he purchased a parcel called the Bull Mountain property for $1,535,000 ($787 per acre). On September 18, 2000, he purchased an adjoining parcel named the Sylvester property for $671,350 ($1,449 per acre). On December 28, 2000, he granted a conservation easement to the Valley Land Conservancy, a Colorado nonprofit corporation. The conservation easement restricted construction of buildings, subdivision of the property and commercial or industrial use of the property. Mr. Hughes secured the services of appraiser Pamela M. Sant of Appraisal Associates of Colorado, Inc. She appraised the two parcels together at a combined value of $4,100,000 and determined that a 70% loss in value due to the charitable easement produced a charitable deduction of $3,100,000. The IRS permitted an easement deduction value of $1,992,375 and accessed a deficiency of $437,153. Defendant's trial expert Mark Weston noted that the $4.1 million value would be correct based on the assumption that the property could be rezoned and sold for residential purposes in 35-acre lots. The 70% decrease in value is then due to the assumption that Mr. Hughes had agreed not to develop the property for residential purposes. IRS expert Kerry Packard opined that the Bull Mountain property had increased in value from $1.53 million to approximately $1.7 million during the intervening 15 months between purchase and the gift. He also observed that because the Sylvester property had not been held for a year and deductions under Sec. 170(e)(1)(A) are limited to cost basis for short term capital gain assets, the Sylvester property value was deemed unchanged. Mr. Packard also claimed that the reduction in value due to the conservation easement was from 0% to 10%. The Court determined that there were four potential issues. First, there was no factual basis for the claim that the property could have been subdivided and the 39 lots readily sold. Second, the access to the property was still limited to agricultural and not residential purposes. Third, there was no proof that the Bull Mountain property had been sold in a distress sale and therefore the price was substantially depressed. Finally, the Court determined that the 70% reduction in value for the easement was too high, but the 10% Treasury claimed value for the conservation easement was too low. However, due to the Sec. 170(e) loss of deduction for appreciation that is not long-term gain, the issue was moot. The IRS deficiency was sustained. Applicable Federal Rate of 2.8% for June -- Rev. Rul. 2009-16; 2009-22 IRB 1 (18 May 2009) The IRS has announced the Applicable Federal Rate (AFR) for June of 2009. The AFR under Sec. 7520 for the month of June will be 2.8%. The rates for May of 2.4% or April of 2.6% 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 - 200922013 Partial Annuity Trust Distribution to Charity In 1969, Decedent established Trust to pay a fixed annuity of $A from the net income of Trust to five nieces and nephews ("Annuitants") and, upon the death of any of these, to their issue. The remaining net income plus any amounts to a deceased Annuitant not survived by issue was to be distributed among six charitable organizations ("Charitable Remaindermen"). Upon the death of all Annuitants and their issue, Trust was to be distributed to Charitable Remaindermen. Because Trust had grown to nearly five times its original value, while only a small portion of Trust would be needed to meet the Annuitants' payments over the next forty or so years, Charitable Remaindermen proposed modification of Trust. The proposed modification provided for partial termination and early distribution to Charitable Remaindermen of the Trust corpus exceeding the amount needed to meet Annuitants' payments. Charitable Remaindermen sought a ruling that this modification would not destroy Trust's tax-exempt status or trigger the realization of gain or loss to any party. The Service ruled that the partial termination and early distribution will not destroy Trust's tax-exempt status or result in the realization of capital gain or taxable income to any party. Sec. 2601 imposes a tax on every generation-skipping transfer. According to Sec. 1433 of the Tax Reform Act of 1986 and Reg. 26.2601-1(b)(4)(i) regarding generation-skipping transfer tax (GSTT), GSTT does not apply to a trust that was irrevocable by September 25, 1985 (unless additions to trust were made after this date) and modification will not destroy existing tax-exempt status. Reg. 26.2601-1(b)(4)(i)(D)(1) states that GSTT will not be imposed so long as the modification does not shift a beneficial interest to a lower-generation beneficiary and does not extend the time for vesting the beneficial interests of the original trust. GSTT does not apply to Trust because it was irrevocable on September 25, 1985 and the proposed modification will not shift or extend the time for vesting any beneficial interests. Annuitants will receive the same amounts for the same period of time. Reg. 1.1001-1(a) states that gain or loss realized from the conversion of property to cash or the exchange of property for property differing materially in kind or extent is treated as income or loss sustained. In Cottage Savings Ass'n v. Comm'r, 499 U.S. 554 (1991), the U.S. Supreme Court held that the exchange of "substantially identical" property does not trigger realization of gain or loss. The Service interpreted this to mean that the interests of the Annuitants and six charities in Trust will not differ materially from the proposed partial termination of Trust and the early distribution to Charitable Remaindermen because the legal entitlements and payments to beneficiaries will remain the same. Although the modification will distribute a large portion of Trust corpus to Charitable Remaindermen early, all other Trust provisions will remain the same with no material difference in the kind or extent of legal entitlements and thus no gain or loss will be realized as a result of the modification. To view the full PLR Click Here.
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CASE OF THE WEEK Exit Strategies for Real Estate Investors, Part 9 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, the building was appraised for $2 million! This was no surprise to Karl. He knew the building was another great buy. Once the building was completed, Karl leased the building to a Fortune 500 company. The lease contract was for 10 years and it included an "option to buy" provision. The lease income represented a 12% return on investment for Karl, so naturally he was very happy with his investment. However, after seven years, the property value grew to $3 million and Karl decided it was time to sell the property. The Fortune 500 company has not elected to exercise its option to buy during the seven year time period. Karl learned about the benefits of a FLIP CRUT, and he decided that looked like the perfect solution. (See Part 1 for the benefits of a FLIP CRUT.) Karl's attorney was very familiar with CRTs and was positive about the proposed solution. However, Karl's attorney was concerned with one issue in particular - prearranged sale. If Karl transfers leased property subject to an "option to buy" to a FLIP CRUT, will this constitute a prearranged sale? When the property is eventually sold, will Karl avoid the capital gains on the property or must he recognize the capital gains personally? 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 8, 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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