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April 30, 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	April 30, 2007
GiftLaw Weekly eNewsletter - April 30, 2007 WASHINGTON HOTLINE Small Business Tax Package Faces Presidential Veto PLR THIS WEEK PLR - 200716026 Creation of a Trade Group Will Not Affect Charity's Tax Exempt Status CASE OF THE WEEK Public Good IRA Rollover - Part 2 of 3 ARTICLE OF THE MONTH Active Businesses Transferred to Unitrusts
WASHINGTON HOTLINE Tax Quote of the Week "The greatest scourge of mankind, the detestable race of tax informers, must be stopped. We must stifle it in its first efforts and tear out the pernicious tongue of envy. Let not the judges receive... information of the informer; let them be given up to punishment as soon as any of them appear." -- Constantine Small Business Tax Package Faces Presidential Veto The small business tax incentive package of approximately $4.8 billion has been included in the supplemental war funding legislation. The combined bill passed the Senate 51-46 and passed the House on a 218-208 vote. President Bush has promised to veto the legislation because it includes language mandating a schedule for withdrawal of combat troops from Iraq. If the bill is vetoed, it is highly likely that the small business tax incentives and a minimum wage increase will be eventually included in another bill that may be signed by the President later this year. The tax provisions include several benefits for businesses. These small business tax provisions include the following: Work Opportunity Tax Credit (WOTC) - extended for three and one half years with expanded coverage. Expensing under Sec. 179. - increased to $125,000. Expanded flexibility for Subchapter S Corporations. Changes in tip income credits and alternative minimum tax credits. As is common with 2007 tax legislation, the bill incorporates offsets designed to reduce the total cost. These offsets include: The age for the "Kiddie" tax increases from under 18 to under 19, or under age 24 for a student. The child's unearned income over $1,700 will be taxed at the current rate of the parent. Extending to 36 months the period of time for the IRS to issue a notice of deficiency and still levy interest and penalties. Expanded preparer penalties and increased IRS user fees, plus increased fees for taxpayers who write bad checks to the IRS. Sen. Baucus indicated that he hopes to pass these provisions this year in the war supplemental bill or as standalone legislation. He stated, "We all know the President plans to veto this bill. But it's particularly disappointing that the White House is already promising to oppose this package of small business tax relief as it moves forward as standalone legislation." Chairman Rangel of Ways and Means Committee to Hold Charitable Hearings Karen McAfee is tax counsel for the Ways and Means Committee. She recently indicated that Chairman Charles Rangel (D-NY) of the House Ways and Means Committee plans to hold two hearings on charitable tax issues. Hearing one will cover three issues arising out of charitable provisions of the Pension Protection Act of 2006. First, there is a requirement for Sec. 501(c)(3) organizations to disclose their unrelated business income tax return. It is possible that there may be limitations on this requirement concerning the duration of that disclosure. Second, Ms. McAfee notes that the PPA 2006 provisions on supporting organizations may be "overly broad." The hearings will discuss potential ways to protect charitable interests while softening or modifying some of the harsh supporting organization requirements. Third, Ms. McAfee recognizes that new rules on fractional interest of property gifts are "having a chilling effect" on art donations. The hearing will discuss methods to correct obvious flaws in the legislation with respect to the estate and gift consequences of fractional gifts of art interests. There will also be a second hearing that will discuss the impact of charitable tax laws on rural, urban and minority communities. Ms. McAfee indicated that Chairman Rangel is very interested in charitable organizations and the scheduling of these two hearings shows his commitment to philanthropy. Proposed Regulations Clarify Valuation of Sec. 2053 Claims Against Estates Estates are permitted to deduct claims under Sec. 2053(a)(3), since the claims will not benefit heirs and, therefore, should not be subject to estate taxes. These claims may be for funeral expenses, administration expenses, liability claims against the estate and unpaid mortgages. Valuing these claims has been contentious, difficult and subject to inconsistent standards by different federal circuit courts. Several circuit courts follow the principal of Ithaca Trust v. Commissioner, 279 U.S. 151 (1929), which held that a charitable remainder interest must be valued as of date of death. The "determine value based on known facts as of date of death" standard has proven "to be expensive" and may require opposite taxpayer positions with the IRS and the civil court. These could "actually increase the taxpayer's potential liability" for claims against the estate. A second approach by other circuits is articulated by the Eighth Circuit in Jacobs v. Commissioner, 34 F.2d 223 (8th Cir. 1929). In this case the court did not accept the concept of a date of death valuation, but determined that only claims actually paid could be deducted. To reduce inconsistency in the circuits, Treasury proposes new Sec. 2053(a)(3) regulations that would generally adopt the Jacobs approach. See REG-143316-03 (20 Apr 2007). Deductions would be permitted only for claims "actually paid" by the estate. The deductions would be limited to following categories and rules: Final court decisions would determine the amounts paid. Settlements reached through "bona fide negotiations between adverse parties" would be recognized. Protective claims for refunds may be filed where necessary by estates. Deductions would not be allowed if there is reimbursement through insurance or other means. With multiple defendants, estates could deduct only their portion of liability. Family members' claims would be strictly scrutinized to insure legitimacy. Unenforceable claims would not be deductible. Recurring payments would be deducted as made or the estate may purchase a commercial annuity to cover the obligation. A public hearing is scheduled for August 6, 2007 at the IRS auditorium to discuss these proposed rules. Persons who wish to speak for 10 minutes at the hearing must submit written or electronic comments by July 23, 2007. Submissions should be sent to: CC:PA:LPD:PR (REG-143316-03), Room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 20044. Applicable Federal Rate of 5.6% for May. Rev. Rul. 2007-29; 2007-19 IRB 1 (16 Apr. 2007) The IRS has announced the Applicable Federal Rate (AFR) for May of 2007. The AFR under Section 7520 for the month of May will be 5.6%. The rates for April of 5.6% or March 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 - 200716026 Creation of a Trade Group Will Not Affect Charity's Tax Exempt Status C is tax-exempt under Sec. 501(c)(3). C's primary functions are diagnosing and treating disease, providing medical education, hosting medical symposiums and the publication of various medical journals. C believes that its mission would best be served by creating D, a tax-exempt trade association under Sec. 501(c)(6). Subsequent to the receipt of a favorable ruling, C would change its name to F and D would revise its articles of incorporation to change its name to C. The change in names would be done to best reflect the nature of each organization's mission. D (the new C) shall serve as the sole corporate member of F (the old C). The new C will also have the right to appoint and remove members of F's board of trustees. The former members of the old C will become members of F. There would be substantial overlap of the boards. F will appoint a committee to review all the transactions and proposals between F and the new C to ensure compliance with F's exempt purpose. The old C requested a ruling that the creation of D and the transfer of some of C's duties to D and the proposed corporate structure will not jeopardize C's exempt status. The Service ruled that F will still function as a tax-exempt 501(c)(3) organization with no more than an insubstantial part of it in furtherance of a non-exempt purpose. Editor's Note: A 501(c)(3) may create a trade association under 501(c)(6) to act as the parent of the 501(c)(3) as long as the original charitable organization does not give up control of its charitable purposes. This situation should not be confused with a non-profit/for profit joint venture. The rules for such partnerships are quite complex. To view the full PLR Click Here.
CASE OF THE WEEK Public Good IRA Rollover - Part 2 of 3 Ralph Emerson, 68, is a recently retired doctor. Like many doctors, Dr. Emerson has accumulated a very large IRA. After 35 years of contributions and tax-free growth, Dr. Emerson's IRA balance has reached $5 million. In addition to his IRA, he owns his $1.5 million Connecticut home outright and has additional property worth approximately $500,000. Dr. Emerson withdraws about $150,000 a year, or 3% of his IRA plan balance, for living expenses. Dr. Emerson has long supported charitable causes and wants to establish a substantial endowment in his name. He discussed the creation of an endowment with his advisor, Ted Wright. After reviewing the plan, Dr. Emerson stated he would like to fund an endowment with his favorite charity during life with $1 million. Upon his death, he would also like to add an additional $1 million to his gift. Dr. Emerson asked if he can immediately fund a $1 million CRUT from his IRA, which would distribute to his named endowment at his death. What are the tax consequences for implementing this plan? Would the result be different under the Public Good IRA Rollover proposed legislation? How so? To view the solution to this Case of the Week Click Here.
ARTICLE OF THE MONTH Active Businesses Transferred to Unitrusts A common challenge for owners of ongoing businesses who would like to use a charitable trust is that the business may not be held in a charitable trust. Charitable trusts are exempt from tax under Sec. 501(a) and Sec. 508(e). They also are subject to the private foundation rules on self-dealing, excess business holdings and taxable expenditures. Sec. 4947(a)(2). Charities and charitable trusts are normally tax exempt. However, if they are regularly conducting a trade or business that is not substantially related to the exercise of their exempt purpose, they are subject to unrelated business income tax. Sec. 513(a). Since a charitable trust will never be able to claim that an active trade or business is related to its exempt purpose, the transfer of an operating business to a charitable remainder trust results in unrelated business income. See Newhall v. Commissioner. However, there are exceptions to the unrelated business rules. Among the various exceptions are the receipt of rent from real property and the payment of royalties and lease returns. These exceptions require the payouts to be fixed. If the payments are dependent upon earnings and profits, then the trust is in effect a partner and again subject to UBI. Sec. 512(c). If an active trade or business is involved, transfer of these assets to a CRT could subject the unitrust to a 100% excise tax on the UBI. Sec. 664(c)(2)(A). While the tax may not be large if the assets are sold quickly, many grantors prefer to avoid the tax on UBI. 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	April 30, 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