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May 7,
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 |
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| Immanuel St.
Joseph's Foundation |
May 7,
2007 |
GiftLaw Weekly eNewsletter -
May 7, 2007
- WASHINGTON
HOTLINE
- PLR THIS
WEEK
- CASE OF THE
WEEK
- ARTICLE OF THE
MONTH
|
WASHINGTON HOTLINE
Tax Quote of the Week
"One
information-reporting requirement added in 1986 required people to
include on their tax returns Social Security numbers of all
dependents over age two. This caused seven million dependents to
disappear from the tax rolls."
-- Michael J. Graetz
Four
Emerging Trends in Philanthropy
Steven P. Miller, IRS
Commissioner for Tax-Exempt and Government Entities, spoke to a
conference in Washington on April 26, 2007. In his remarks to the
conference, he outlined four major trends in philanthropy and
described the IRS response to those trends.
I. Internet
Fundraising. The entire nation is now regularly using the
Internet. With the expansion of the Internet as a communications
method used by donors, billions of dollars are now given each year
online. Commissioner Miller noted that "web-based fundraising could
create international organizations that operate without the same
level of IRS supervision as traditional charities."
II.
Concentration of Wealth in America. Surveys indicate that up to
$40 trillion will pass from the senior generation to the baby boomer
generation over the next several decades. A substantial part of this
wealth, especially in larger estates, will be transferred by bequest
to charity. This wealth transfer will facilitate the development and
marketing of new giving techniques.
This large transfer of
wealth to family and charity also raises challenges. To continue to
enlist support from donors, charities will need to be able to
demonstrate "their efficiency and effectiveness."
III.
Large multinational non-profit organizations. There are now
large charitable organizations with branches in many different
nations. Many of these multinationals are now "nation-sized
nonprofits that are global in scope and scale."
A favorable
aspect of this trend is that the large multinational nonprofits can
carry out social programs and research programs that previously
could only be accomplished by national governments.
IV.
Blurred line between Tax-Exempt and Commercial Sectors. As large
non-profits become more diverse in the services they offer, there
will continue to be more competition between the non-profit and the
for-profit sectors.
In response to these global trends in
philanthropy, Commissioner Miller suggests that the IRS shift its
focus to three areas. First, the filing of the annual Form 990
returns by charities should be done through electronic methods. The
electronic filing helps the IRS and also makes it easier for
organizations to publish their Form 990s on the
Internet.
Second, there must be standards for good
governance. As the nonprofit sector grows larger and acquires
greater endowment and reserves, it is most important to make certain
that all of the funds are used properly and that donors' gifts are
managed for the best charitable result.
Third, Commissioner
Miller advocates a "sunshine" policy. One of the best protections
for both charities and their donors is a policy by the board of
directors to disclose information about the organization, including
a discussion of its activities, efficiency and
effectiveness.
Commissioner Miller concluded, "Sunshine and
good governance will drive good behavior."
Real Estate
Firm Not a Qualified Charity
In CRSO
v. Commissioner; 128 T.C. No. 12; No. 11804-05X (30 Apr 2007),
the Tax Court denied exempt status to a commercial real estate
investment company.
CRSO was incorporated on December 26,
2000 in Washington. It was funded by Hudson and Cynthia Staffield,
who transferred commercial real estate subject to substantial debt.
The commercial real estate had been acquired for $2,297,000 and the
debt was approximately $1.4 million when transferred to
CRSO.
The commercial real estate was leased to various
commercial tenants on long-term leases. CRSO received the income and
transferred all net proceeds to Chi Rho Corp. Chi Rho is a Sec.
501(c)(3) qualified exempt charitable organization.
CRSO
applied for exempt status. On November 8, 2002, Treasury denied
exempt status on the grounds that CRSO is a feeder organization and
therefore not qualified.
Treasury noted that there are two
basic requirements to qualify as an exempt entity. First, the entity
must be "operated exclusively" for a Sec. 501(c)(3) purpose. Second,
it cannot be a trade or business operated for profit, which it would
be if the rental income is produced through debt
financing.
Rental income is generally excluded from UBI. Sec.
502 (b)(1). However, it is not excluded if the rent is from
"debt-financed property" under Sec. 514. The Sec. 512(b)(3)
exclusion of rent from UBI is not applicable if the rent is
debt-financed and therefore constitutes UBI.
Since
approximately 50% of the real estate income was debt-financed, the
court determined that the rental property was a "trade or business"
under Sec. 502(a). Because the rent was debt-financed income, the
Sec. 502(b)(1) exception for rent did not apply. As a result, CRSO
did not qualify for charitable exempt status.
Deathbed
FLP Assets Included in Estate
In Estate
of Hilde E. Erickson et al. v. Commissioner; T.C. Memo.
2007-107; Nos. 17982-05, 18003-05, the Tax Court determined that a
deathbed FLP for an Alzheimer's patient would not be recognized for
the purpose of qualifying for a minority or marketability estate
discount.
Hilde Erickson survived her husband Arthur
Erickson. He was a dentist from Reedsburg, Wisconsin, who passed
away in May 1984 and transferred his estate into a credit shelter
trust with the balance to Mrs. Erickson.
Mrs. Erickson gave
her daughter Karen Lange a durable power of attorney in 1987 and an
updated power in 1994. Mrs. Erickson was diagnosed with Alzheimer's
in 1999 and moved into a supervised living facility in
2000.
Using the power of attorney, Karen, her sister Sigrid
Knuti and their spouses created a family limited partnership in May
2001. Mrs. Erickson's health was rapidly deteriorating and the
majority of her assets were transferred to the Erickson FLP on
September 28, 2001. Mrs. Erickson passed away on September 30,
2001.
The IRS claimed that the FLP discounts were not
appropriate and assessed a deficiency of $734,599 in gift tax and
$718,320 in estate tax.
The Tax Court considered the question
of inclusion of the transferred assets under Sec. 2036 (a)(1). It
noted that this provision is applicable if there is a decedent who
"impliedly retained their right to possession and enjoyment" of the
transferred assets.
The Tax Court determined that the assets
would be fully includable under Sec. 2036(a)(1) for three reasons.
First, there was a delay in transferring the assets until a day or
two before the death of Mrs. Erickson. The partnership agreement
required immediate funding and there was a failure to comply with
that partnership requirement.
Second, the FLP distributed
approximately $200,000 to the estate for payment of estate tax. The
FLP transfers did not reserve sufficient assets outside the FLP to
cover obligations for Mrs. Erickson. Third, the FLP had "little
practical effect during Mrs. Erickson's life" and therefore was
simply a tax planning strategy that failed to meet the business
purpose test.
As the court noted, "The act and circumstances
surrounding the transaction also failed to show any non-tax purpose
for the partnership." Therefore, under Sec. 2036(a)(1) the full
value of assets were incuded in the estate.
Editor's
Note: This is another "bad facts" FLP case. If an FLP is created
during life, sufficient assets for other personal obligations are
retained outside the FLP, the partnership formalities are followed
and it is funded well before the demise of the decedent, the
discounts are very likely to qualify. The Erickson FLP failed on
virtually all of these grounds and lost all potential estate tax
discounts.
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.
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PLR THIS
WEEK
PLR - 200717019 Interest and Rent Collected by a
Supporting Organization is Not UBTI
B is a supporting organization under Sec. 509(a)(3).
B owns land on a hospital campus. B leases its parcel of land to G.
G is a limited partnership owned by B. G borrowed money to build a
medical office building on, and to make improvements to, B's parcel.
G leases substantially all of the office building to several
affiliates and subsidiaries of B. The remainder of the building is
leased for private medical practices. The lease payments earned by G
are used to pay the rental and interest payments owed to B. B
requested rulings from the Service that neither the interest
received by B from G (for the loan made to G) or the rental income
paid by G to B (for the use of the parcel of land the office
building was built) be classified as unrelated business taxable
income (UBTI) under Secs. 511-514 of the Code.
The Service
ruled that while rental and interest income is normally excluded
from UBTI under Secs. 512(b)(1) and (3), payments from a controlled
entity to a non-profit organization are included to the extent that
the payments reduce the "net unrelated income" of the controlled
entity under Sec. 512(b)(13)(A). If G were a tax-exempt entity, the
rental income earned would be excluded from UBTI as passive income
under Sec. 512(b)(3). However, G incurred acquisition indebtedness
in the construction and maintenance of the office building.
Acquisition indebtedness is considered UBTI unless "substantially
all" (85% or more) of the use of the indebted property is
substantially used to further a controlling organization's exempt
purpose, the property is not considered debt-financed. Because
substantially all of the office building is used by tax-exempt
affiliates of B for the purpose of furthering B's exempt purpose,
the property is not classified as debt financed and the rent and
interest paid to B by G is not subject to UBTI.
To view
the full PLR Click
Here.
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CASE OF THE
WEEK
Public Good IRA Rollover - Part 3 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 a $1.5 million Connecticut home 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 a supporting organization with his
advisor, Ted Wright. After reviewing the plan, Dr. Emerson wanted to
fund a $1 million named endowment at his death.
Dr. Emerson
asked if he can immediately create a $1 million charitable gift
annuity from his IRA, which would fund his gift 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.
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ARTICLE OF THE
MONTH
Gifts of C Corporations Part I -- Double
Taxation
The C Corporation
is an entity that is a separate taxpayer. It is frequently created
to shield the shareholders from liability. Under Sec. 351(a), it is
permissible to transfer assets to corporations without payment of
tax. The corporation files Form 1120 and pays tax at corporate
rates, which may be as high as 35%. After payment of tax, the
corporation may distribute dividends to shareholders. The dividends
are subject to a second tax at the shareholder level. With a federal
income tax rate on corporations up to 35%, the federal and state
combined tax rate may approach approximately 40%. If a corporation
holding the land with $200,000 sells the land, there could be a tax
of up to 40% on the $150,000 of gain. In addition, if the
corporation then distributes the cash proceeds after-tax to the
shareholder, there will be a dividend tax paid by the shareholder.
Alternatively, the shareholder who liquidates or sells the entire
assets of the C Corporation and terminates the existence of the
corporation could pay capital gains tax at both levels. In either
case, there have been two taxes. One tax is paid at the corporate
level and one tax is paid at the shareholder level. The cumulative
double tax rate can approach 65% or more of the value of the
asset.
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 1999-2007
Crescendo Interactive, Inc.
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| Immanuel St.
Joseph's Foundation |
May 7,
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
| |
