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March 10,
2008
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 |
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| Immanuel St.
Joseph's Foundation |
March 10,
2008 |
GiftLaw Weekly eNewsletter -
March 10, 2008
- WASHINGTON
HOTLINE
- PLR THIS
WEEK
- CASE OF THE
WEEK
- ARTICLE OF THE
MONTH
|
WASHINGTON HOTLINE
Tax Quote of the Week
"Everyone who has
anything to do with the tax code agrees it's just an unbelievable
mess."
-- Paul H. O'Neill
Stimulus
Payments Available For Low-Income Persons
The IRS has
released an explanation of the rules for $300 to $600 payments to
low-income persons. In FS-2008-17 the Service outlined the four
types of qualifying income and described how to file a simple Form
1040A and receive a payment.
The $3,000 in qualifying income
may be a total of these four types:
- Earned income from wages, salaries, tips and
self-employment.
- Social Security retirement, disability and survivor's benefits
reported in Box 5 of Form SSA-1099. (But not Supplemental Security
Income (SSI)).
- Railroad Retirement Tier I benefits reported in Box 5 of Form
RRB-1099.
- Federal veterans' retirement, disability and survivor's
benefits.
To receive the stimulus check, fill out a
Form 1040 or Form 1040A. Write "Stimulus Check" at the top and enter
earned income on Line 7 and other qualifying income on line 14a of
Form 1040a or Line 20a of Form 1040. Include your Social Security
number and that of your spouse or children. Sign and mail the form.
Example 1: Joe Single
Joe is single with $3,600 of
income in 2007. He has a Social Security number and is not a
dependent of someone else. Joe files Form 1040A and receives a check
for $300.
Example 2: Sue and Jim Couple
Sue and Jim
both work and are not dependents of another person. Sue earns $2,700
and Jim earns $1,200 per year. If they file Form 1040A and report
total income of $3,900, they will qualify for a $600 stimulus
check.
While Form 1040A can be filed by lower income persons
anytime during 2008, it is better to file before April 15. Those who
file by that date will be the first to receive stimulus
checks.
Subchapter S Corporation Charitable Gifts of
Appreciated Property
The Pension Protection Act of 2006
(PPA 2006) increased the number of Subchapter S shareholders who
could receive flow-through deductions for corporate charitable gifts
of appreciated property. Under PPA 2006, the fair market value of
the gift flows through to Sub S shareholders, with a reduction in
outside basis in the Sub S stock equal to the inside basis of the
gifted property. Previously, the Sub S shareholder had to reduce
outside basis by the fair market value to take the deduction. See
Sec. 1367(a)(2).
While this favorable PPA 2006 rule on Sub S
appreciated gifts ended on Dec. 31, 2007, the Sub S appreciated
gifts basis rule has been included in the list of 31 tax extenders
that passed the House but not the Senate in November 2007.
Therefore, it is quite possible that it will be extended for 2008
when the tax extenders are passed.
In Rev. Rul. 2008-16;
2008-11 IRB 1 (29 Feb 2008), the Service published guidelines and
examples for 2006 and 2007 appreciated property gifts by Sub S
corporations.
Example 1: Mary Sub S Shareholder
Mary Jones is sole shareholder in the AAA Subchapter S
corporation. Mary has a basis in her stock of $5,000.
AAA
makes a 2007 gift of IBM shares owned by the Sub S to a local
charity. The IBM shares have a basis of $2,000 and a fair market
value of $5,000. The $5,000 charitable deduction flows through and
Mary reduces her Sub S stock basis by the $2,000 inside basis of
the gifted property. Mary's Sub S Stock basis is then $5,000 less
the $2,000 property basis, or $3,000.
Example 2:
Joe "Income and Loss" Shareholder
Joe Wilson is sole shareholder in the BBB Subchapter S
corporation. Joe has a basis in his stock of $50,000.
BBB
makes a 2007 gift of IBM shares owned by the Sub S to a local
charity. The IBM shares have a basis of $100,000 and a fair market
value of $190,000. BBB also has income of $30,000 and a long-term
capital loss of $25,000.
What is the deduction for Joe in
2007? First, the charitable deduction may not exceed the sum of
(i) Joe's pro rata share of the gift appreciation, and (ii) the
amount of the § 1366(d) loss limitation amount allocable to the
gift property's adjusted basis under Reg.
1.1366-2(a)(4).
Therefore, Joe's basis is increased by the
$30,000 income from $50,000 to $80,000. Next, the gift is
allocated by multiplying the $80,000 basis times the fraction
$100,000(gift property basis)/$125,000(basis plus $25,000 loss).
The allocated basis for the gift portion is then $64,000. The
charitable deduction for 2007 is thus $90,000 appreciation plus
$64,000 allocated basis, or a total of $154,000. The 2007 capital
loss is $16,000, leaving Joe with basis of zero in his BBB Sub S
stock.
The remaining $36,000 charitable deduction and
$9,000 capital loss are carried forward under Sec. 1366(d)(2) to
the next year.
Discounts Denied For Valuing
Term of Years Annuity
In Tincy
Anthony v. United States; No. 07-30089 (4 Mar 2008), the
decedent James Bankston was seriously injured in a vehicle accident
in 1990. He settled the claim in 1991 and received three annuities
payable for a minimum of fifteen years. The annuities were not
assignable, and approximately ten years of payments remained at his
death in 1996.
Under Sec. 7520 tables, the three annuities
had a value of $2,371,409. After payment of an estate tax of
$610,683, the estate filed for a refund, claiming that the inability
to assign the annuities entitled the estate to a discounted value
due to a restriction as defined in Reg. 20.7520-3(b)(1)(ii). The
district court determined that "the result produced by the annuity
tables was not unreasonable or unrealistic" and ruled in favor of
the IRS. The estate appealed.
The 5th Circuit cited Cook
v. Comm'r, 349 F.3d 850, 854 (5th Cir. 2003), and noted that in
"enacting § 7520(a)(1) and requiring valuation by the tables,
Congress displayed a preference for convenience and certainty over
accuracy in the individual case." Even though the tables may
"inevitably lead to departures from true value, whatever that might
be, the error costs are perceived as small in the aggregate." Using
the tables provides a "measure of certainty and administrative
convenience" appropriate for valuing of annuity
interests.
The estate claimed that assignability is an
essential part of valuation and, therefore, a discount is
appropriate. However, the court decided that an annuity is
distinguishable and it is "unreasonable to apply a nonmarketability
discount" for an annuity.
The court did agree that discounts
may be appropriate in narrow circumstances. Under Reg. 20.7520-3(b),
discounts apply if there are actual lower rates of return, if death
is imminent due to a terminal illness, or the income stream will
exhaust the assets or otherwise terminate before the end of the
term.
Editor's Note: The 5th Circuit directly rejected
the decision of the 2nd Circuit in Estate of Paul C. Gribauskas,
et al. v. Commissioner; No. 01-4189 (26-Aug 2003). In Gribauskas
the Second Circuit overruled the Tax Court and held that an annuity
would not be valued using the Sec. 7520 tables, but that an
appraiser-determined discount was appropriate.
Instead the
5th Circuit agreed with the Tax Court that use of Sec. 7520 tables
is important for tax certainty. Because all income, gift and estate
charitable deductions for lead trusts, remainder unitrusts,
remainder annuity trusts, life estates reserved, charitable gift
annuities and pooled income funds are based on the Sec. 7520 tables,
it is essential for planned giving that these tables be accepted by
the courts.
Proposed Regulations on 100% UBI Tax for
Charitable Remainder Trusts
In REG-127391-07, the IRS
published proposed regulations for charitable remainder unitrusts
and annuity trusts with unrelated business taxable income (UBTI).
Under the Tax Relief and Health Care Act of 2006, charitable
remainder trusts with UBTI remain exempt from Federal income tax,
but have a 100% excise tax on UBTI. Sec. 664(c)(2)(A) requires
calculation of the excise tax under Sec. 512.
Two examples in
the proposed regulations explain the operation of the 100% excise
tax. The UBI, less direct expenses, is reduced by the $1,000
deduction under section 512(b)(12). The remaining UBI amount is
subject to the 100% tax. Even though this UBI is income, it is
allocated to the principal tier for accounting purposes under Sec.
664.
Editor's Note: While a 100% tax is a high rate
and the requirement to allocate the UBI to tier four principal is
not favorable, the net result of this provision is beneficial for
many donors. Previously, a charitable unitrust or annuity trust with
any UBI would lose its tax exempt status. Under the 100% UBI rule,
it pays tax but still is exempt. This option enables nearly all
business assets to be sold with reasonable safety "almost tax-free"
through a CRT. With a buyer "waiting in the wings" and no binding
agreement for sale, the assets are transferred to the CRT and fairly
quickly sold to new buyer. The amount of the UBI will be nominal,
and the benefit of the capital gain bypass is preserved. On balance,
this UBI provision will facilitate many new unitrusts funded with
business assets.
Applicable Federal Rate of 3.6% for
March -- Rev. Rul. 2008-11; 2008-11 IRB 1 (21 Feb.
2008)
The IRS has issued the following CORRECTION NOTICE
regarding the applicable federal rate for the month of March, 2008:
"Rev. Rul 2008-11, which set forth the applicable federal rates and
various other rates for March, 2008, contained a mistake in Table 5,
the Rate under Section 7520 for March 2008. The correct percentage
for the March 2008 Rate under Section 7520, in Table 5, is 3.6% not
4.0% Rev. Rul. 2008-11; 2008-11 IRB 1."
The IRS has announced
the Applicable Federal Rate (AFR) for March of 2008. The AFR under
Section 7520 for the month of March will be 3.6%. The rates for
February of 4.2% or January of 4.4% 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 2008, 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 - 200605001 Trust Reformation Qualifies as a CRAT
for a Charitable Deduction
Decedent (D) created revocable trust (Trust). Trust
provided for, upon D's death, income to be paid to Son's Trust for
the duration of Son's life and upon Son's death, for distribution of
the remaining trust property to both charitable and non-charitable
beneficiaries. The proceeds of three specific properties held in
Trust would be paid in varying fractional shares to both charitable
and private individual beneficiaries while the balance of all other
Trust assets would be distributed to the private individual
beneficiaries.
Upon D's death, D's executor and trustee of
Trust proposed a reformation of Trust because as written, the
charitable remainder interests of Trust did not qualify for the
estate tax charitable deduction under Sec. 2055(a). The reformation
provided for the severance of Trust into Charitable Trust and
Non-Charitable Trust. Non-Charitable Trust would hold a percentage
of Trust's interests in the three properties and 100% of all other
assets. Charitable Trust would hold the remaining percentage of the
three properties (corresponding with the fractional remainder
interests to be distributed to charities under the original
agreement), pay income of 5% of the initial fair market value
primarily to Son and then be distributed to charities upon Son's
death.
The Service found the charitable remainder interest in
the Trust was a reformable interest and that the Charitable Trust
was a qualified reformation. The interest was reformable under
2055(e)(3)(C) because the value of the charitable interest was
ascertainable on D's date of death and thus severable from the
non-charitable interest. The reformation into Charitable Trust
qualified under 2055(e)(3)(B) because the difference between the
actuarial value of the qualified interest and the actuarial value of
the reformable interest did not exceed 5% of the actuarial value of
the reformable interest. Additionally, the Service found that the
reformed Charitable Trust met the requirements of a charitable
remainder annuity trust under Sec. 664(d)(1) and consequently, D's
estate would be entitled to a Sec. 2055(a) federal estate tax
charitable deduction for the present value of the remainder interest
of the Charitable Trust.
To view the full PLR Click
Here.
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CASE OF THE
WEEK
A Sign of Warning on Assignments, Part
2
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 make a 5% payout with 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. Accordingly, the
local museum would receive income each year and, at Ken's death, the
remaining CRUT assets would pass to the local
orchestra.
Unfortunately, Ken discovered this assignment was
not permissible because the CRUT rules prohibited a CRUT which
consisted solely of charitable beneficiaries. As a result, Ken
elected to make a direct contribution to the local
museum.
However, Ken still possessed the CRUT income stream,
yet he had little use for it. Thus, as another alternative, Ken
suggested an assignment of the CRUT income stream to his favorite
nephew, Bobby. Implementing Ken's idea, Bobby would receive income
each year and, at Ken's death, the remaining CRUT assets would pass
to the local orchestra.
May Ken assign his one-life CRUT
income stream to Bobby? What are the tax consequences of such an
assignment?
To view the solution to this Case of the Week
Click
Here.
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ARTICLE OF THE
MONTH
Gift Policies and
Guidelines
Editor's
Note: The following article is a comprehensive set of gift
policies. All boards of directors should review at least annually
and update gift policies. This article will serve as a form for that
review and updating
process.
________________________________________________
Gift
Policies and Guidelines
_____________________,
2008
Planned gifts are a substantial part of the
philanthropic support received by ____________________ (the
Foundation) to support ___________________________________. These
gifts usually involve tax and other forms of financial and estate
planning activities. Often a significant portion of the assets a
donor owns are used to create and fund the gifts.
Because of
(i) the size of most planned gifts; (ii) the responsibilities the
Foundation often incurs for asset management and (iii) the
liabilities incurred for beneficiary payments, the Board of
Directors establishes these policies and guidelines to assure that
our planned gifts are a productive and positive aspect of our
fundraising efforts.
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 1999-2008
Crescendo Interactive, Inc.
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| Immanuel St.
Joseph's Foundation |
March 10,
2008 |
| |
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
| |
