eGiftLaw Newsletter

• WASHINGTON HOTLINE
  • Tax Freedom Day is April 12
• PLR THIS WEEK
  • QTIP Election is Null and Void
• CASE OF THE WEEK
  • A Sign of Warning on Assignments – Part 3
• ARTICLE OF THE MONTH
  • Double Discount Lead Trust

Each year the Tax Foundation reviews the state and federal taxes paid by Americans. Based on the total taxes, it determines a "Tax Freedom day." For the year 2011, the Tax Foundation calculates the Tax Freedom day to be April 12.

This Tax Freedom day is three days later than 2010, but it is nearly two weeks earlier than Tax Freedom day in 2007. There are four factors that affect the 2011 date for Tax Freedom day.

1. The Great Recession – As America starts to recover from the recession, taxes paid are increasing more than incomes.

2. Tax Cuts Extended – In a compromise between President Obama and House and Senate leaders, the tax cuts enacted in 2001 and 2003 were extended.

3. Payroll Taxes – The "Make Work Pay" reduction was replaced with a 2% payroll tax cut for 2011.

4. Estate Tax – The estate tax was repealed in 2010 (unless elected by executors), but it is reinstated in 2011 with a $5 million applicable exclusion amount and a tax rate of 35%.

The Tax Foundation also publishes a federal budget Tax Freedom day. If the total federal expenditures as reflected by both taxes and the deficits are considered, then Tax Freedom day is May 23. This is the latest Freedom day in the past six decades and reflects the total cost of government.

President Promotes Natural Gas Vehicles

In a speech on March 30, President Obama called on Congress to pass the New Alternative Transportation to Give Americans Solutions (NAT GAS) Act. The NAT GAS Act has been introduced in both the House and Senate.

President Obama noted bipartisan support for the bill and stated, "You know, getting 150 members of Congress to agree on anything is a big deal. And they were even joined by T. Boone Pickens, a businessman who made his fortune on oil, but who is out there making the simple point that we can't simply drill our way out of our energy problems."

The NAT GAS bill involves a two-part solution. First, there are tax incentives to encourage individuals to acquire natural gas automobiles. Second, there are additional tax incentives to encourage the construction of natural gas fuel stations, storage units and transmission pipelines.

The President is responding to the development of extensive new natural gas fields. New technology to drill in shale formations for both oil and natural gas has enabled development of natural gas fields in both the central and eastern parts of the nation.

President Obama also encouraged the development of electric vehicles. The White House proposed an updated $7,500 tax credit on new electric vehicles. His hope is that increased use of natural gas to produce electricity can be accompanied with the development of a larger number of electric vehicles.

Blue Dogs State Deficit Reduction Goals

Twenty-five Democratic House Members voluntarily participate in a group referred to as the "Blue Dogs." The Blue Dogs are a moderate group of Democratic members who describe themselves as "mainstream" Americans.

Blue Dog Co-Chair Mike Ross (D-AR) stated, "We have to take a comprehensive approach to our nation's finances and no one party can do it alone. The Blue Dogs are inviting everyone to the table because until we start having a grown-up conversation, we will continue to mortgage our future on the backs of children."

Chair of the Blue Dog Taskforce on Fiscal Responsibility Kurt Schrader (D-OR) continued, "This framework is about putting everything on the table and bringing both parties together for a frank conversation about how we forge a fiscally responsible and sustainable path forward. The choices won't be easy but we have an obligation to our children and grandchildren to get it right."

The Blue Dogs outlined specific goals for their program. They suggested that fiscal reform could reduce the deficit by $4 trillion in a decade, stabilize the debt with public debt equal to 60% of the economy by 2024, reduce spending to 2008 levels by year 2013 and reduce the deficit to 2.3% by 2016.

In the view of the Blue Dogs, approximately 2/3 of the deficit reduction should be the result of spending cuts and 1/3 through tax reform.

Other voices joined in the deficit debate. A coalition of business and university leaders led by Norman R. Augustine, Retired Chairman and CEO of Lockheed Martin Corporation, emphasized that a deficit plan could not "focus entirely on decreasing discretionary expenditures; it must also include tax reform, spending prioritization and actions to strengthen economic growth."

Another coalition of economists and former lawmakers led by Former Assistant Secretary of the Treasury Roger Altman supported the work of six senators (three Republicans and three Democrats) who are developing a bipartisan plan to submit to the Senate. The coalition praised the senators for "working to craft a comprehensive deficit reduction package based on the recommendations of the Fiscal Commission."

Editor's Note: The debate continues this week in the House and Senate on a proposed compromise to fund the rest of this fiscal year. While this debate is foremost in the news, the longer-term bipartisan effort to address the budget deficit continues. As this debate progresses, the recommendation of the Blue Dogs that the solution include two-thirds spending cuts and one-third tax reform (otherwise known as tax increases) will certainly have substantial influence on the debate. The Fiscal Commission, the Senate "gang of six" and voices in both parties in the House now suggest that there is at least a bipartisan agreement that some action is necessary.

Charitable Deduction Denied for Facade Easement

In Randal A. Schrimsher et ux. v. Commissioner; T.C. Memo. 2011-71; No. 945-09 (27 Mar 2011), the Tax Court determined that a claimed deduction of $705,000 would be denied due to a lack of a contemporaneous written acknowledgement.

Randal A. Schrimsher owned an historic building in Huntsville, Alabama known as the "Times Building." On December 30, 2004 he transferred a façade easement to the Alabama Historical Commission. The agreement between the two parties stated that Mr. Schrimsher irrevocably granted the Commission a "preservation and conservation easement in perpetuity."

Mr. Schrimsher and his wife filed their 2004 joint federal income tax return and claimed a deduction of $705,000 based on the appraisal summary from IRS Form 8283. However, the Form 8283 was not signed or dated by the taxpayers, an appraiser or a representative of the charity. In addition, there was no Sec. 170(f)(8) contemporaneous written acknowledgement that indicated no goods or services were exchanged for the easement gift.

The Schrimsher's deducted $193,180 for 2004 and substantial amounts in subsequent years. Following an audit by the IRS, the deduction was denied on the grounds that there was a failure to include the contemporaneous written acknowledgement and a failure to comply with the qualified appraisal requirements.

The Schrimshers maintained that the Sec. 170(f)(8) requirement for a contemporaneous written acknowledgement was satisfied by the agreement signed by taxpayers and representatives of the Alabama Historical Commission. However, the court noted that the agreement included the typical information used for transfer of real property, but did not explicitly state that "no goods or services" were transferred for the gift. Since the agreement did not include these words or a description of any "other good and valuable consideration," the taxpayer failed to meet the substantiation burden and there was no charitable deduction.

Editor's Note: This is a very harsh result and it is notice of the importance of providing appropriate substantiation for major charitable gifts. The Tax Court chose the easier route of denying the deduction for failure to meet the Sec. 170 (f)(8) contemporaneous written acknowledgement, but could also have denied the deduction for failure to comply with the qualified appraisal requirements.

Applicable Federal Rate of 3.0% for April – Rev. Rul. 2011-10; 2011-14 IRB 1 (17 Mar 2011)

The IRS has announced the Applicable Federal Rate (AFR) for April of 2011. The AFR under Sec. 7520 for the month of April will be 3.0%. The rates for March of 3.0% or February of 2.8% 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 2011, pooled income funds in existence less than three tax years must use a 2.8% deemed rate of return. Federal rates are available by clicking here.

Decedent created a living trust. Upon his death, the trust was divided into a marital trust and a family trust. The marital trust was funded with as much of the taxable estate as necessary to eliminate the estate tax from decedent's estate. The remaining portion of the estate was used to fund the family trust. The executor (decedent's spouse) of the estate filed Form 706, United States Estate Tax Return. On Schedule M, the executor listed the assets of the family trust. By doing so, the executor made a Qualified Terminable Interest Property (QTIP) election. The executor subsequently discovered that the election was not necessary to reduce the estate tax liability to zero. Therefore, the executor requested a ruling under Rev. Proc. 2001-38 that the QTIP election may be set aside as null and void.

Section 2001(a) imposes a tax on the transfer of the taxable estate of a decedent. Under Sec. 2056(a), the value of a taxable estate is reduced by the value of all assets passing to a surviving spouse. Sec. 2056(a)(1) provides that the marital deduction is not available for transfers of a "terminable interest" to a spouse. An interest is terminable if it will pass to the surviving spouse and terminate on the lapse of time or on the occurrence of an event and if, on termination, the property will pass to someone other than the surviving spouse. However, Sec. 2056(b)(7) provides an exception to the terminable interest rule when the surviving spouse has a qualifying life income interest in the transferred asset, known as a QTIP.

The Service ruled that under Rev. Proc. 2001-38, a QTIP election, while normally irrevocable, will be set aside as null and void where the election is not necessary to reduce the estate tax liability to zero. Therefore, the unnecessary election made by the executor was set aside by the IRS.


To view the full PLR Click Here.

Ken Richards, 70, is a very charitable American. He consistently makes gifts each year to various causes he supports. In fact, ten years ago, Ken created a one-life Charitable Remainder Unitrust (CRUT). The unitrust was drafted to have a 5% payout and named a local orchestra as the charitable remainderman. Ken funded his unitrust with $1 million of appreciated stock.

Ken's other favorite charity is a local museum. Currently, the local museum is raising funds for a proposed expansion. Ken is financially independent now and no longer relies heavily on the CRUT income stream. In an effort to help with the current fundraising project, Ken is willing to give the local museum 100% of his remaining one-life CRUT income stream. As a result, the local museum would receive income each year and, at Ken's death, the remaining CRUT assets would pass to the local orchestra.

However, Ken discovered this proposed plan was not permissible, because a CRUT may not have only charitable income and remainder beneficiaries. (See Case Study: A Sign of Warning on Assignments, Part 1.) Thinking creatively, Ken proposed an assignment of less than 100% of his one-life CRUT income stream to the local museum. For example, Ken could irrevocably assign 75% of the CRUT income stream to the local museum. As a result, each year Ken would receive 25% and the local museum would receive 75% of the CRUT payouts.

May Ken assign a percentage of his one-life CRUT income stream to the local museum? What are the consequences of such an assignment?


To view the solution to this Case of the Week Click Here.

Lead trusts provide wonderful leveraged gifts. The gift and estate tax deduction, of course, is equal to the present value of the income to charity. When the Applicable Federal Rate approaches 4% or lower, lead trusts paying 6% to 8% provide a very significant gift or estate tax deduction. Depending on the trust term, the deduction can range from 60% to 100% of the lead annuity trust value.

But can a donor double his or her benefit? Is it possible through creative planning to receive a double discount? If the plan is structured correctly, it may be possible to obtain a double discount and move assets through to children in a few short years with zero gift or estate taxation.


To view the full Article of the Month Click Here.

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