|
February 12,
2007
Dear Professional Advisor,
Greetings from
Immanuel St. Joseph's Foundation. 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 complimentary service.
Please feel free to call me at 507-385-2932 if I can run a proposal
or be of assistance to you.
Cordially
yours,
Bob Weiss
Immanuel St. Joseph's Foundation
1125
Mulberry St.
Mankato, MN 56001 |
| |
| Immanuel St.
Joseph's Foundation |
February 12,
2007 |
GiftLaw Weekly eNewsletter -
February 12, 2007
- WASHINGTON
HOTLINE
- PLR THIS
WEEK
- CASE OF THE
WEEK
- ARTICLE OF THE
MONTH
|
WASHINGTON HOTLINE
Tax Quote of the Week
"A taxpayer need
not arrange its affairs so as to maximize taxes as long as the
transaction has a legitimate business purpose."
-- Cornelia G. Kennedy
Budget
Balancing, Tax Cuts and The Tax Gap
The White House
released the proposed 2008 budget on Feb. 6, 2007. Speaking in
Virginia that afternoon, President Bush credited the improved
deficit numbers to a strong economy bolstered by tax cuts.
He
remarked, "Do tax cuts work? They work. I understand the politics of
cutting taxes. Some like it, some don't. I just asked the American
people to look at the facts. Since we cut taxes a second time in
2003, we've added 7.4 million new jobs. Tax cuts equaled new jobs.
Our economy expanded by 13 percent since we cut taxes in 2003. In
other words, we dealt with the recession, we dealt with the attacks,
we laid the conditions for economic vitality, and the American
people took hold and made it work."
Sen. Kent Conrad (D-ND),
Chair of the Senate Budget Committee, held a different viewpoint. At
a Senate hearing, he referred to numerous charts and commented,
"This chart shows if you make the President's tax cuts permanent, at
the very time the trust funds go cash negative, the cost of the tax
cuts explode, and it takes us right over a cliff; that is, if we
extend these tax cuts without paying for them. . . . And that means
we have got to have savings out of the entitlements, I believe, as
part of a package. It means we are also going to have to find more
revenue. Let me be swift to say that I think the first place we
ought to look for revenue is not a tax increase. The first place we
ought to look is this burgeoning tax gap, $350 billion a
year."
In response to the concern expressed by Sen. Conrad
about the future collision of tax cuts with Social Security and
Medicare costs, Treasury Sec. Henry Paulson responded, "Finally, the
President's budget, by emphasizing fiscal discipline and economic
growth, lays the right foundation for dealing with entitlement
reform - a challenge we all have a responsibility to address.
Strengthening Social Security and Medicare is the most important
step we can take."
Senate Finance Chair Calls Budget
"Badly Off Balance"
At a Senate Finance Committee hearing
on the Budget, Sen. Max Baucus (D-MT) called the new budget "badly
off balance." He noted, "The budget is not on the level, because it
omits major costs. Beyond the current year, the budget includes
nothing to fix the Alternative Minimum Tax. Yet, we know that fixing
the AMT will cost $60 billion next year. And it will cost more than
that every year thereafter. "
Sen. Baucus expressed concern
that the budget "makes at best a shaky attempt to collect the taxes
that people owe but do not pay. According to the IRS, this tax gap
is $345 billion a year. I have pressed Secretary Paulson and IRS
Commissioner Everson to come up with detailed plans to reduce the
tax gap."
Ranking Republican Sen. Charles Grassley responded,
"What is clear today is that the bipartisan tax relief, with the
alternative minimum tax accounted for, has a track record of
maintaining the federal revenue base. That is good news that
Democrats and Republicans ought to celebrate."
In good news
for philanthropy, Sen. Grassley also supported charity and noted,
"Despite soaring federal deficits and hefty proposed increases in
funding for defense and the war in Iraq, the Bush administration's
$2.9 trillion budget proposal, presented on February 5, manages to
include tax breaks to encourage Americans to give more to
charity."
Bush Budget Would Make IRA Rollover
Permanent
The Treasury Blue Book explanation of the 2008
Budget includes favorable provisions for several charitable
incentives passed in August 2006. The IRA charitable rollover,
enhanced deductions for gifts of food, books and computers and
favorable conservation easement deductions were passed, but all were
limited to years 2006 and 2007. The 2008 budget also proposed making
permanent the enhanced deduction for Subchapter S corporation gifts
and reducing the 2% private foundation excise tax to 1%.
The
2008 budget proposes to make the IRA charitable rollover and other
deductions permanent. An IRA charitable rollover permits IRA owners
over age 70˝ to transfer up to $100,000 per year directly from an
IRA to a qualified public charity. Because the IRA transfer is not
included in taxable income and it qualifies for part or all of the
IRA owner's required minimum distribution, an IRA rollover may
substantially reduce federal income tax.
Editor's
Note: Permanent extension of the IRA charitable rollover is
particularly important. With passage of the IRA rollover in August,
many donors and advisors did not have sufficient time or notice to
make IRA gifts. The IRA rollover gifts will probably follow the
pattern of annual giving programs, and there will be significant
growth between 2007 and 2015 for IRA gifts.
At a seminar this
week conducted by your editor, over half of the charities had
received IRA gifts during 2006. Many donors have substantial IRAs
and prefer to help a favorite charity with an IRA gift. For these
donors, the IRA charitable rollover enabled much larger gifts.
Several gift planners reported that some donors had made cash gifts
of $100 in 2005, but made 2006 IRA rollover gifts of $2,000 or
$3,000. One community foundation reported receipt of three IRA
rollover gifts, and all three were for $100,000. Two $100,000 IRA
gifts were from donors who had made no prior gifts to the community
foundation. Overall, the IRA rollover gifts were about ten times the
average of prior gift.
Treasury to Charities - Avoid
Tax Shelters or Pay Penalty Tax!
In Notice
2007-18; 2007-9 IRB 1, Treasury explained to nonprofits the
potential penalties for becoming involved in tax shelter
transactions.
The Tax Increase Prevention and Reconciliation
Act of 2005 (TIPRA), Pub. L. No. 109-222, 120 Stat. 345, enacted on
May 17, 2006, created new Sec. 4965 and amended Secs. 6033(a)(2),
6011(g), and 6652(c)(3) of the Sec. 4965(a) requires nonprofits to
pay an excise tax if it is involved in a "prohibited tax shelter
transaction." The nonprofit may be required to pay an excise tax
based on the greater of (1) the nonprofit's net income "for the
taxable year" attributable to the transaction or (2) 75 percent of
the proceeds from the transaction.
Treasury provides several
examples of nonprofits who are and are not subject to the excise tax
on prohibited transactions. Generally, transactions before Aug. 16,
2006 and those that are not facilitated by the nonprofit's exempt
status are exempt. However, payments received as a "party to a tax
shelter" transaction after that date will subject the nonprofit to
the excise tax.
Editor's Note: This excise tax was
passed after the Senate Finance Committee was informed that many tax
shelter promoters were paying charities modest fees to participate
in tax shelters. Tax shelter promoters were then using the
credibility of the charity to facilitate sale of tax shelter
interests. With the excise tax and reporting requirements,
nonprofits are wise to be very cautious about participating in or
receiving gifted interests in tax shelters in the
future.
IRS Request For Comments on Donor Advised
Funds and Supporting Organizations
In Notice
2007-21; 2007-9 IRB 1, Treasury requested comments on the
Treasury study of donor advised funds and supporting
organizations.
Under PPA 2006, Treasury is required to
undertake a study on the organization and operation of donor advised
funds (DAFs) and supporting organizations (SOs). The study must then
consider and report on the following:
- Charitable Deductions - are DAF and SO deductions appropriate
for the gifted assets and potential benefits to the donors?
- DAF Mandatory Payouts - should there be a specific payout
amount similar to a private foundation or a charitable remainder
trust for a DAF?
- DAF and SO Advice - is the practice of permitting donor advice
"consistent with the treatment of such transfers as completed
gifts" qualified for tax deductions?
- Similar Funds - do these donor issues apply in other
charitable circumstances?
Comments should refer to Notice
2007-21 and be submitted by April 9, 2007, to Internal Revenue
Service, P.O. Box 7604, Ben Franklin Station, Washington, D.C.
20044, Attn: CC:PA:LPD:PR, Room 5203. Alternatively, comments may be
submitted electronically via e-mail to
Notice.Comments@irscounsel.treas.gov.
Applicable
Federal Rate of 5.6% for February. Rev. Rul. 2007-9; 2007-6 IRB 1
(18 Jan. 2007)
The IRS has announced the Applicable
Federal Rate (AFR) for February of 2007. The AFR under Sec. 7520 for
the month of February will be 5.6%. The rates for January of 5.6% or
December of 5.8% 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 2007, 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.
|
PLR THIS
WEEK
PLR - 200704036 Trusts Holding Units of Charity's
Endowments Will Not Result In UBTI
C is a tax-exempt 501(c)(3) organization classified
as an educational organization under Sec. 509(a)(1) of the Code. C
served as the trustee of a number of charitable remainder trusts
(CRTs). C received concerns from trust donors and beneficiaries that
the CRTs were not generating as much of a return on investments as
C's endowment fund. C requested a ruling that would allow the CRTs
to share in the returns generated by the endowment without
encountering unrelated business taxable income (UBTI). The endowment
contains some debt financed income and other unrelated business
income. C proposes to assign each CRT a number of units in C's
endowment. The contract right would entitle the Trusts to receive
periodic payments based on the number of units owned by the CRT. The
value of each unit would be based on the value of the underlying
endowment investments. C determines a payout rate on the endowment
each year based in part on the endowment's investment performance.
Each endowment fund is entitled to a payout in an amount equal to
the payout rate times the number of units it holds. C sets the value
of the endowment units on a monthly basis, and the units may be
redeemed for value. Each CRT would acquire interests in the
endowment but would have no right to the endowment's underlying
assets. The payments made to CRT beneficiaries would be classified
as all ordinary income.
The Service ruled that under Sec. 512
of the Code, UBTI is defined as gross income derived by any
organization from any regularly carried on unrelated trade or
business. Under Sec. 511, any UBTI incurred by a 501(c)(3) is
taxable. UBTI inside of a CRT is taxable at 100% of the income
generated. In order for such an organization's income to be subject
to the unrelated business income tax, three requirements must be
met: (1) the income must be from a trade or business; (2) the trade
or business must be regularly carried on; and (3) the conduct of the
trade or business must not be substantially related to the
organization's exempt purpose or function. The Service noted that C
is not charging a fee for its services and not receiving income from
the services it provides to the CRTs. Thus, C will not receive
unrelated business taxable income under Sec. 512(a)(1). Furthermore,
because the CRTs would not be entitled to the underlying assets of
C's endowment and the income earned would be classified as ordinary
income, no UBTI would be accrued inside of the CRTs.
To
view the full PLR Click
Here.
|
CASE OF THE
WEEK
The Cowboy Oilman - Part 2 of 4 "$2.5 Million Ranch to
Charity"
Jack Cobb, 77, is
a self-made man. Deserted by his parents at a young age, Jack grew
up in a boys' home and on the streets. At the age of 17, he moved to
Texas to chase oil and women. With his street smarts and gritty
determination, Jack made millions in the oil business as an arrogant
and risk-taking maverick. His fortune with women, however, was not
nearly as successful. In fact, Jack was married - and divorced -
four times. To this day, Jack still claims it was "all their fault"
and remains bitter toward his ex-wives. Yet, he continues to date
and currently has several "girlfriends." Also, Jack has six
children, but unfortunately he does not have any ongoing
relationship with them. He contends that his children are all
spoiled and ungrateful, because he gave them too much growing up.
More likely, Jack's poor relationships stem from the lack of any
family structure growing up and the minimal amount of support given
to him as a child.
Jack does have one love though - his love
for the boys' home that raised him. It is the one and only good
memory from his childhood. It was his only family as a child. As a
result, he has publicly supported the boys' home throughout his
entire life and privately supported many of the people who touched
his life while there.
Although his hours are nominal, Jack
continues to draw a salary of $300,000 as CEO and President of his
company. Jack's estate of $10 million consists of a $5 million
closely-held "C" corporation, a $2.5 million ranch, a $2 million IRA
and $500,000 in personal property (i.e., Cadillac, art
collection, antique gun collection, jewelry, etc.). Jack intends to
leave his entire estate to the boys' home at his death. However, he
would like to also make a major contribution now, so that he can see
the effects of his gift.
Jack wants to know which assets he
should give now and which assets he should give at death. Jack wants
to know how to structure his gifts in order to make the best
tax-wise decisions.
To view the solution to this Case of
the Week Click
Here.
|
ARTICLE OF THE
MONTH
Supporting Organizations After PPA
2006
If a donor wants to
make a significant gift, wants to remain involved with the use or
investment of the gifted funds and wants the tax advantages of
donating to a public charity rather than a private foundation, a
supporting organization (SO) is an excellent option. As its name
suggests, an SO supports another public charity. Sec. 509(a)(3)(A).
An SO must distribute money to, perform the functions of or carry
out the purposes of one or more public charities. The public charity
that an SO supports is commonly referred to as a "supported
organization" and must be designated by name, purpose or class
(except that a Type III SO, as discussed below, must designate by
name the organization(s) it supports). In addition to the
requirements discussed below, an SO must satisfy the organizational
and operational tests applicable to all charities.
Supporting
organizations (SOs) are public charities that provide assistance or
support to a Sec. 501(c)(3) charity. A "Type I" supporting
organization is controlled by the parent charity, usually through
election of a majority of the board of directors by the parent. A
"Type II" SO is a brother-sister organization with a majority of the
board serving both the publicly supported and the supporting
organizations. A "Type III" SO is operated "in connection with" the
parent charity. It must meet a "responsiveness" test and "integral
part" test.
To view the full Article of the Month Click
Here.
|
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 1999-2007
Crescendo Interactive, Inc.
|
| Immanuel St.
Joseph's Foundation |
February 12,
2007 |
| |
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,
Bob Weiss
Immanuel St. Joseph's Foundation
| |
