eGiftLaw Newsletter
| July 5, 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. | July 5, 2010 |
GiftLaw eNewsletter - July 5, 2010
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WASHINGTON HOTLINE House Passes Budget Plan For 2011 By a vote of 215 to 210, the House of Representatives passed a one-year budget enforcement resolution. While it is rare in election years for the House to pass a full budget resolution, the urgency of the fiscal situation in the nation caused the House to pass the one-year plan. House Budget Chair John Spratt Jr. (D-SC) drafted the plan. He stated, "I am pleased to be introducing the budget enforcement resolution for fiscal year 2011. This resolution sets an overall limit of $1.12 trillion on discretionary spending in next year's appropriations bills. This limit is well below the comparable request made by the President and $3 billion below the resolution approved by the Senate Budget Committee." The comments by Rep. Spratt follow observations during the budget committee hearings by Congressional Budget Office Director Douglas Elmendorf. He indicated that it would not be possible in a fiscally responsible manner to extend the 2001 and 2003 tax cuts for middle-income Americans. In response to his comments, House Majority Leader Steny Hoyer (D-MD) suggested that the middle-class tax cuts enacted in 2001 and 2003 could be extended for one year. The Ranking Republican on the House Budget Committee is Rep. Paul Ryan (R-WI). He noted, "This Congress has failed to even produce a budget and it has refused to consider the tough choices to deal with our massive debt burdens – a debt burden growing exponentially larger with each kick of the can further down the road." In addition to the limit of $1.12 trillion for discretionary programs, the budget resolution reaffirms the "pay-go" rules that are designed to require any additional tax reductions to be offset with tax increases. The resolution also states that the national debt-to-gross domestic product ratio needs "to be stabilized once the economy recovers." Editor's Note: With the increase in expenditures and reduced taxes during the past two years, the government debt as a percentage of the economy has increased substantially. The passage of the one-year budget resolution is a small step toward stabilizing our national finances. Home Buyer Tax Credit Extended to September 30th With the sharp decline in home values and an increasing number of foreclosures, Congress created a temporary tax credit for first-time buyers of $8,000 and for other purchasers of new homes of $6,500. In order to qualify for the credit, it was necessary to have a signed contract for purchase by April 30, 2010. The initial deadline for closing contracts signed on or before that date was June 30. Because many home purchasers could not meet this deadline, the House and Senate have passed the Home Buyer Assistance and Improvement Act of 2010 (H.R. 5623). This bill extends the time for closing from June 30 to September 30. Chief Economist of the National Association of Realtors Lawrence Yun indicated that this extension of the deadline would be very important. He noted that about "180,000 homebuyers who signed a contract in good faith to receive the tax credit may not be able to finalize by the end of June due to delays in the mortgage process, particularly for short sales." These individuals with contracts by April 30 will now be able to close by September 30 and receive their tax credits. Editor's Note: When the tax credit lapsed for new purchases in May, housing sales declined significantly. Congress hopes that extending the deadline to close and benefit from the credit will help the housing recovery to continue. Supreme Court Unclear on Tax Patents In Bernard L. Bilski et al. v. David J. Kappos; No. 08-964 (27 Jun 2010), the Supreme Court rejected a patent application by inventors Bilski and Warsaw. The inventors had created a series of mathematical steps that showed how energy commodity purchasers could hedge against price changes. Because it was a "purely mathematical" method, the patent examiner, Board of Patent Appeals, Federal Circuit and Supreme Court all denied the application for a patent. The Federal Circuit followed a strict "machine-or-transformation test" and denied the patent and limited the potential for other business method patents. However, the Supreme Court in a 4-1-4 decision denied the application but suggested that some business method patents may be approved. Justice Kennedy wrote for the majority and indicated that business patent methods "raise special problems in terms of vagueness and suspect validity." However, the majority did not explicitly exclude the potential for business patents. Therefore, there still could be tax method patents. The four dissenting Justices concurred with the dissent by Justice John Paul Stevens. He stated that "Business methods are not patentable." Justice Scalia concurred in part with the majority and suggested that it maybe possible for there to be business method patents, but they would be very narrowly available. Editor's Note: Bilski did not clarify the current uncertainty about tax method patents. Barry Melancon, President of the American Institute of Certified Accountants, promptly issued a press release after the Bilski decision. He called upon Congress to take action. Mr. Melancon indicates, "No one should have to pay more tax than he or she lawfully owes because someone else purports to hold a patent on tax planning." He noted that there already are 107 tax strategy patents and 145 tax patent applications are pending. Given the 4-1-4 decision in Bilski, the question still remains open on the viability of tax method patents. Applicable Federal Rate of 2.8% for July – Rev. Rul. 2010-18; 2010-27 IRB 1 (17 June 2010) The IRS has announced the Applicable Federal Rate (AFR) for July of 2010. The AFR under Sec. 7520 for the month of July will be 2.8%. The rates for June of 3.2% or May of 3.4% 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 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 - 201022022 Issuing Units of Pooled Fund to Trusts Will Not Generate UBTI Organization is tax exempt under Sec. 501(c)(3) and classified as a publicly supported organization under Secs. 509(a)(1) and 170(b)(1)(A)(iv). Organization solicits and receives donations on behalf of University. Restricted gifts to University are tracked by Organization and placed in separate Accounts. Organization pools Accounts for investment purposes in Pooled Fund. Pooled Fund is invested in a diverse manner and a "unit" concept is used to administer Accounts. Accounts are each given a certain number of units of the Pooled Fund. Unit payout rates are determined by the Pooled Fund's investment performance and distributions are determined by an annual spending policy approved by the Board. Administrative fees are paid directly from each Account on a monthly basis based on the market value of each Account. Organization is also trustee for a number of charitable remainder trusts ("Trusts") that were established to benefit Organization and University. Organization seeks to issue contract rights for units in the Pooled Fund to each of the Trusts, allowing Trusts to invest in the Pooled Fund and receive an investment return. Trusts would have no control or ownership interest in the underlying assets of Pooled Fund. Further, Trusts would not be liable for any cost, expense or payment incurred by the Pooled Fund. However, unlike Accounts in Pooled Fund, administration fees would not be assessed against Trust assets. Organization requests that the issuance, making or receipt of payments and holding or redemption of the units of the Trusts will not result in unrelated business taxation income. "Unrelated business taxable income" is defined in Sec. 512(a)(1) as the income derived by an organization for any unrelated trade or business regularly carried on. Sec. 512(b) defines "unrelated trade or business" as any trade or business the conduct of which is not substantially related to the performance of an organization's exempt purpose. An organization that provides investment services on a regular basis for a fee to other exempt or nonexempt organizations would be engaged in an unrelated trade or business under Sec. 513(a). However, Organization is not charging a fee for services and is not receiving income from the services proved to the Trusts. Further, because Organization is engaging in the investment activities for co-beneficiaries of the Trusts at the same time Organization engages in investment activities for Organization's own benefit, Organization's activities can easily be distinguished from a commercial venture. For these reasons, Organization will not receive unrelated business taxable income under Sec. 512(a)(1). To view the full PLR Click Here.
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CASE OF THE WEEK Son's Intentions Paved with Gold, Part 1 Several years ago, Mother and Father built a very unique home on 45 acres of beautiful rolling hills and woods. Father passed away three years ago and Mother now solely owns the 45-acre parcel and home. She enjoys the peaceful country view out her front window. However, the university adjacent to the property is very interested in acquiring the property for future growth. Not surprisingly, Mother is concerned. She does not want a new dormitory filled with college students in her front yard. In fact, she enjoys the peace and protection of her lovely home in the wooded countryside. However, at age 80, she recognizes that some planning will have to be accomplished. After a thorough understanding of Mother's needs and desires, a wonderful four-part solution was suggested which incorporated an outright sale, a unitrust, a gift annuity and a gift of a remainder interest in a home. (See Case Study "Peace in the Countryside" for a full explanation.) In addition, another component of the plan involves the potential sale of the home to Son after Mother's death. Specifically, Son enters into an option agreement with the university. It is a contingent agreement that permits Son to purchase the home from the university. Son intends to move the home into the city where he and his family can continue living in the "family home." Mother worries whether this option agreement and purchase from the university is permissible. She remembers the prohibition on acts of self-dealing which prevented her from leasing property from her unitrust. (See Case Study "Dealing with the Five & Dime" for a full explanation.) Naturally, she wonders if this arrangement between Son and the university would likewise cause self-dealing problems. May Son and the university enter into an option agreement? May Son later purchase the home from the university? Must the sales price equal the fair market value of the home? To view the solution to this Case of the Week Click Here.
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ARTICLE OF THE MONTH IRA Charitable Rollover – Donor Profiles Note: At publication date the House and Senate are still not in agreement on the provisions of the tax extenders bill. It is very likely to be passed and enacted by the end of 2010, but has not yet been signed by the President. In The American Jobs and Closing Tax Loopholes Act of 2010 (H.R. 4213), which is still in negotiations in the Senate, Congress permits a 2010 rollover directly from an IRA to a qualified public charity. This act enables an IRA owner age 70½ or older to make a direct transfer to charity. The transfer may be up to $100,000 in one year. See Sec. 408(d)(8)(A). The IRA rollover first created by the Pension Protection Act (PPA) of 2006 is (after enactment of H.R. 4213) extended to the end of 2010. Donor Profiles There are five donor profiles for IRA rollover gifts. First are the convenience donor who finds it a very simple and easy method for an end of year gift. The second is the generous donor, who wants to give past the 50% of AGI limit. The third is a major donor. This person may be a board member or trustee who is looking for a favorable opportunity to make a major gift. Fourth, the Social Security recipient may reduce taxes with an IRA rollover gift. Finally, a standard deduction donor will benefit from a direct IRA to charity gift. 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. | July 5, 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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