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May 18,
2009
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 18,
2009 |
GiftLaw Weekly eNewsletter -
May 18, 2009
- WASHINGTON
HOTLINE
- PLR THIS
WEEK
- CASE OF THE
WEEK
- ARTICLE OF THE
MONTH
|
WASHINGTON HOTLINE
Tax Quote of the Week
"Is there a
method to resolve the current problem of the tax system? Perhaps as
a first step, Congress can pass its own ethical rules that will
require each representative and Senator to prepare and file his or
her own tax return without any professional help or guidance and,
under penalty of being dismissed from Congress, certify his or her
compliance to the respective ethics committee."
-- Denis A. Kleinfeld
Social
Security and Medicare 2009 Reports
Each year the Social
Security and Medicare Board of Trustees is required to report the
condition of both programs. The key Trustees for the Social Security
and Medicare Boards include Treasury Secretary Tim Geithner,
Secretary of Labor Hilda Solis, Secretary of Health and Human
Services Kathleen Sebelius and Commissioner of Social Security
Michael Astrue.
The Social Security report starts by noting,
"The financial condition of the Social Security and Medicare
programs remains challenging." The current practices "are not
sustainable" over the long term.
With the weak economy in
2009, the normal Social Security surpluses will "fall sharply."
Social Security is currently in surplus but is now expected to start
cash-flow deficits in 2016. The Social Security reserve fund is
invested in Treasury bonds. It is projected to be exhausted by 2037.
In 2008, the projected exhaustion year was 2041, but with the
recession the Social Security fund will now exhaust four years
earlier.
The financial status of Medicare is "much worse."
The Medicare Hospital Insurance (HI) Fund will exhaust in the year
2017.
The Medicare Supplementary Medical Insurance (SMI) Fund
is presently receiving general revenue financing. There is also a
"Medicare funding warning" that will be sent this year to Congress
because general revenue support will exceed 45% of the total
Medicare cost.
Secretary Geithner noted that, "The longer we
wait to address the long-term solvency of Medicare and Social
Security, the sooner those challenges will be upon us and the harder
the options will be." He urged Congress to work in a "bipartisan
way" to safeguard Social Security and Medicare.
Editor's
Note: The future solution to the economic problems of Social
Security and Medicare involves potential reductions in benefits or
increases in taxes. In the past, Congress has been reluctant to
reduce benefits. If Congress chooses the tax increase solution, the
Trustees report that Social Security could be restored to solvency
by increasing the employee and employer contribution by 1% each. For
Medicare to regain solvency through tax increases, the contribution
by the employee and employer would each need to increase by nearly
2%.
How to Pay For Healthcare Reform?
On
May 13, 2009, the Senate Finance Committee conducted the third and
final public hearing on its forthcoming major legislation to reform
healthcare. Sen. Max Baucus (D-MT) indicated that the proposed bill
will be submitted by the end of June. He has been conducting
hearings for nearly two years to develop a comprehensive healthcare
reform plan.
During this hearing, Sen. Baucus indicated that
it is essential to evaluate "options to pay for expanding access to
healthcare." He continued, "Now its time to think about money." He
pointed out that the current federal expenditure for Medicare and
Medicaid is over $700 billion per year. With a $300 billion cost for
the federal healthcare tax deduction, the net federal government
cost for healthcare for now is $1 trillion per year.
One of
the hearing witnesses was Leonard Burman, Director of the
nonpartisan Tax Policy Center. Mr. Burman noted that "46 million
Americans were uninsured." He reviewed several options for funding
healthcare reform and suggested that "the best option to pay for
universal healthcare is a valued added tax (VAT)."
Mr. Burman
indicated that a VAT on all goods and services in the nation could
raise sufficient revenue. He suggested that this national sales tax
would be the "only plausible" way to pay for the envisioned
healthcare reform. In his view, a VAT of "less than 10%" would be
adequate to cover the cost of healthcare.
Editor's
Note: Healthcare is currently 1/6 of the entire U.S. economy.
Any comprehensive reform of healthcare will have impact on every
American. In the updated budget submitted by President Obama and the
White House on May 11, 2009, the Administration again proposed
funding healthcare reform by creating limits on major donor gifts.
The White House proposed that charitable donors in higher brackets
(potentially 39.6% by 2011) should have deductions limited to the
28% bracket. The proposal has not yet been accepted by the
Senate.
Baucus Pushes IRS to Close the "Tax
Gap"
At a hearing on the potential confirmation of Deputy
Treasury Secretary Nominee Neil Wolin, Senator Max Baucus focused on
the opportunity for the IRS to increase tax revenue. Senator Baucus
indicated that it will be essential to "close the tax gap" which he
estimated at "$345 billion every year." Given the urgent budget
demands, the IRS must take action to "collect all the revenues" that
taxpayers owe to the Government. In addition, Sen. Baucus expects
the IRS to pursue offshore tax evaders and collect all possible
revenue from that source.
Sen. Grassley (R-IA) is the ranking
Republican member of the Senate Finance Committee. In his view the
nation is "approaching a crisis." When the tax cuts enacted in 2001
and 2003 expire in 2010, there is the potential for a very large
increase in income taxes, capital gain taxes and taxes on
dividends.
Sen. Grassley also observed that the
Administration is now committed to raising taxes on those with
incomes over $250,000 per year. In his view, these tax increases
could be a "serious blow to small business."
He concluded
with a warning that the IRS and the tax policy of Congress show a
"ravenous hunger for [tax] revenue" rather than a desire to promote
economic growth.
Applicable Federal Rate of 2.4% for
May -- Rev. Rul. 2009-12; 2009-19 IRB 1 (17 Apr.
2009)
The IRS has announced the Applicable Federal Rate
(AFR) for May of 2009. The AFR under Section 7520 for the month of
May will be 2.4%. The rates for April of 2.6% or March of 2.4% 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 2009, 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 - 200919060 Poetry Awards Not Taxable
Expenditures
X is an
organization exempt from taxes under Sec. 501(c)(3) and classified
as a private foundation under Sec. 509(a). X was formed to "educate
the public in the appreciation of works of literature... and to
promote literary arts." Its mission is achieved by discovering poets
and displaying their work before the general public. X intends to
operate several grant and fellowship programs aimed to encourage and
publish the work of aspiring and struggling poets. The awards are to
be dispersed by a selection committee made up of several X
executives and outside experts in the field. The committee reviews
each candidate's merit, skill and potential for success. Members of
the committee and their families are ineligible for awards. X will
review each awardee's work and use of funds annually to ensure that
the funds have been used to further his/her education in a related
field of study. X will maintain records relating to individual
grants, fellowships and awards. X asked for a ruling that the
payment of awards not be classified as taxable expenditures to the
foundation.
Sec. 4945(a) and (b) impose an excise tax on all
"taxable expenditures" made by a private foundation. Sec. 4945(d)(3)
defines a taxable expenditure as any amount paid or incurred by a
private foundation as a grant to an individual for travel, study or
similar purposes... unless such grant satisfies the requirements of
Subsection (g). Sec. 4945(g) exempts from excise tax grants and
awards that are awarded on an objective and non-discriminatory basis
pursuant to a procedure that demonstrates: (1) that the grant
constitutes a scholarship used for educational organization
expenses, (2) the grant constitutes a prize awarded to candidates
selected from the general public, and (3) the purpose of the grant
is to achieve a specific objective or enhance a literary, artistic
or similar skill. Sec. 53.4945-4(c)(1) requires a private foundation
seeking approval of a grants and awards program to demonstrate that
the grant process in objective and non-discriminatory, the selection
procedure is reasonably calculated to result in proper performance
and that the foundation will keep adequate records to determine if
the grantees used the funds as intended.
The Service
determines that X has in place all of the requirements to exempt the
program from the excise tax under Sec. 4945(a) and (b) and has
sufficiently demonstrated the internal procedures put in place to
meet the requirements under Sec. 53.4945-4(c)(1). Therefore, the
grants and fellowship program was determined not to be classified as
a taxable expenditure.
To view the full PLR Click
Here.
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CASE OF THE
WEEK
Exit Strategies for Real Estate Investors, Part
6
Karl Hendricks was a man
with the golden touch. Throughout his life, it seemed every
investment idea that he touched turned to gold. By far, Karl was
most successful with real estate investments. It was definitely his
passion.
Amazingly, Karl continued to buy and sell real
estate at the age of 85. For instance, about three months ago, Karl
discovered a great investment property. It was a "fixer-upper"
commercial building in a great area. While other nearby buildings
sold for over $2 million, the seller needed to sell quickly and was
asking just $1 million.
The condition of the building turned
many buyers away. It was being sold "as-is." But Karl was not
deterred. He could see great potential with the building and knew it
would not take much to get it to market condition. Therefore, Karl
swooped in, bought the building for $1 million and instantly hired
contractors to refurbish the place.
After three months of
hard work refurbishing the building, the place looked like new! In
the end, Karl invested $250,000 in the building bringing his total
investment in the property to $1.25 million. One month after the
completion of the work, Karl was contacted informally by a company
that expressed an interest in the building - a $2 million interest!
This was no surprise to Karl. He knew the building was another great
buy.
There was one downside to the idea of selling, however.
Karl held the property only 4 months which meant the gain from the
sale would be short-term capital gain. In other words, the
applicable tax rate would be 35%, not 15%. Karl cringed at the
thought of paying a 1/3 of his gain to the government. At the same
time, Karl knew the hot real estate market would not last forever
and could change directions in the next year. So, although Karl
wanted the 15% tax rate, Karl did not want to risk holding the
property another 8 months.
Karl wanted a zero tax sale exit
strategy. In other words, he wanted to sell and pay no tax. Can Karl
sell the building, bypass the tax on the sale of the property and
receive cash?
To view the solution to this Case of the
Week Click
Here.
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ARTICLE OF THE
MONTH
Life Estate Plus Wind Farm
Will Jeffers Lives Off the West
Wind
Will Jeffers has resided in his modest home on 80
acres for many years. His land is located just downwind from two
mountain ranges that funnel prevailing winds toward his home.
Recently, Will was approached by a company with an offer to lease
his land and install a windmill farm. Will leased 70 acres and
retained his home on 10 acres. The lease will provide him with
future income of $200,000 per year! Will remarked, "My dad always
said you can't live on the west wind, but I am going to prove you
can. My windmill lease income is terrific. But my taxman now claims
I will have to pay an enormous income tax. What is an 80
year-old-rancher to do?"
Will now has an income tax problem.
In order to create a charitable deduction to offset his increased
taxable income, Will Jeffers contemplates transferring the remainder
in his home on ten acres to charity. With his lease income, savings
and IRA, he has substantial liquidity and will not need the value of
the home for living expenses.
Will decides to deed the
remainder interest in the home to his favorite charity. Based upon
his age and a 2.4% AFR, he receives a charitable deduction of
$236,611. This deduction is an appreciated-type deduction usable to
30% of adjusted gross income. With $200,000 of income, he can deduct
about $60,000 per year. Over a period of four years, this charitable
deduction will save over $78,000 in income taxes. The deduction is
based on assumed values for the residence of $100,000 and for the
land of $200,000. Will enjoys watching the windmills produce
electricity and earn income for him. He loves living well off the
"west wind" and saving taxes at the same time!
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 1999-2009
Crescendo Interactive, Inc.
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| Immanuel St.
Joseph's Foundation |
May 18,
2009 |
| |
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
| |
