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May 28,
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 28,
2007 |
GiftLaw Weekly eNewsletter -
May 28, 2007
- WASHINGTON
HOTLINE
- PLR THIS
WEEK
- CASE OF THE
WEEK
- ARTICLE OF THE
MONTH
|
WASHINGTON HOTLINE
Tax Quote of the Week
"Trying to
control tax shelters is like stepping on Jell-O. It just squeezes
out between your toes and the mess is worse than when you
began."
-- Anonymous Congressional Staff
Member
Business Incentives with Offsets Attached
to Iraq Bill
Both the House and Senate on May 24, 2007
approved a comprehensive Iraq funding bill (H.R. 2206) that included
tax incentives and offsets. There are several tax incentives,
primarily for small businesses. The incentives are:
- Work opportunity tax credit - extended for three and a half
years.
- Expensing limits for small business - Sec. 179 year 2007 limit
increased to $125,000.
- Subchapter S corporations - More flexible rules to allow
greater use of Sub S status.
- Tip credit - minimum wage level frozen for calculating amount.
In order to offset the costs of the small business tax
incentives, there are several provisions that will increase taxes.
Many of the increases will apply to individual taxpayers. The
increases will include:
- Kiddie Tax - Age increase from 18 to 19 with further increase
to age 24 for students. Tax applies for unearned income over
$1700. New age limits apply in 2008.
- Notices of Deficiency - IRS now has 36 months to issue before
interest is suspended on underpayments.
- Preparer Penalties - Expanded and increased.
- IRS User Fees - Expanded.
- Penalty for Refunds with "No Reasonable Basis" - New penalty
created.
Editor's Note: Sen. Charles Grassley
(R-IA) and other senators were very unhappy that the tax provisions
were attached in conference to the bill. He noted, "The bottom line
is the Republicans now know that the conference process and the
committee process will not be respected." Sen. Grassley wanted the
tax provisions to be reviewed in a tax conference committee. In
addition, it is now obvious that tax incentives in future bills are
going to be fully offset by tax increases. With the efforts to close
the "tax gap" by incorporating offset incentives, it will be
progressively more difficult in the future to find offsets for
proposed laws such as the expanded IRA charitable
rollover.
Kiddie Tax Applies to College Annuities and
Education Unitrusts
H.R. 2206 increased Kiddie Tax rates
to age 19 (24 for students), and will have major adverse impact on
education unitrusts and annuity trusts.
While the increased
Kiddie Tax ages do not apply until 2008, the major benefit of
college annuities and education remainder trusts have declined
significantly. There will still be a charitable deduction for a
parent or grandparent who funds one of these plans, but the lower
student income tax rate no longer exists in 2008 and later years for
most recipients.
Previously, a college student age 18 or
older could receive ordinary income and capital gain payouts from a
charitable remainder trust or the ordinary income from a college
annuity and pay tax at his or her rate. The student was taxed
initially at the 10% bracket and the excess amounts were taxed at
the 15% bracket.
However, for 2008 and future years, students
under age 24 will be taxed at their parents' rate. Under Sec. 8241
of H.R. 2206, Sec. 1(g)(2)(a)(ii)(II) states that the kiddie tax
will apply unless the student has earned income equal to one half of
his or her support. This is a standard that will be very difficult
to meet.
As a result, the ordinary income portion of a
college annuity will be subject to tax at the parent's rate plus a
10% excise tax for early distribution of a term of years payout to
an individual under the age of 59˝. With this high income tax rate,
the college annuity is no longer attractive.
It may still be
possible to use an education unitrust or annuity trust if a parent
decides that the 15% tax rate for dividends and capital gain payouts
are acceptable for the student. In order to qualify all income for
the favorable 15% tax rate, the trustee of an education unitrust or
annuity trust would need to accept somewhat greater investment
risk.
If a unitrust is funded with appreciated stock, it may
be sold and trust corpus could be invested approximately 80% in a
diversified portfolio of value stocks and 20% in municipal bonds.
Stock dividends, recognized long term capital gains and income from
the bonds could then be distributed to students. Under the Sec. 664
four-tier structure, the dividends and the long term capital gain
distributions would be taxable at 15% for the balance of this
decade.
Trustees of existing education unitrusts or education
annuity trusts may choose a similar investment strategy. With the
80% value stocks and 20% municipal bond portfolio, all income
distributed from the unitrust may be taxable at a 15%
rate.
Sen. Baucus Suggests Eliminating Appreciated
Property Charitable Deductions.
On April 13, 2007, Sen.
Max Baucus (D-MT) sent a letter to Treasury Secretary Henry Paulson,
Jr. Sen. Baucus was very concerned about a charitable strategy that
uses potentially inflated appraisals. With the intentional
concealment of the gift by the charity, Treasury may not discover an
overvaluation of the charitable deduction.
The basic strategy
involves acquisition of real property subject to a lease as long as
60 years. The remainder interest is transferred into LLC 1, which is
owned by LLC 2. The investors in the real property typically own LLC
2.
LLC 1 is then transferred to a public charity. The
remainder interest is appraised and typically produces a substantial
charitable deduction that flows through the investors in LLC
2.
In one transaction, Sen. Baucus noted that "the promoter
originally purchased a remainder interest in property for less than
$200,000" and transferred it to LLC 1. This LLC was then contributed
to a university and the deduction claimed was "as much as seven
times the purchase price." The university held the asset from the
gift date in 2003 until a date in 2005 when it was no longer
required to file IRS Form 8282. (Ed. - the Form 8282 nonfiling time
is now three years.) In 2005 the university sold the property back
to the promoter for "less than the original purchase price of the
remainder interest."
Because of the "significantly inflated
valuations," Sen. Baucus noted that "the donee's tax-exempt status
could be at risk." In addition, he suggested that a simple way to
stop this perceived abuse is for Congress to allow "taxpayers to
claim no more than their basis in contributed property." With the
exception of publicly traded securities, the deduction for other
types of gifts of appreciated property would be reduced to
basis.
IRS Deputy Commissioner for Services and Enforcement
Kevin M. Brown responded by letter to Sen. Baucus. He noted that the
IRS became aware of the transaction in August of 2006. They have
"identified 48 entities participating" in the transactions. The
reported charitable deductions were "approximately $271 million."
The charitable organizations were largely in New York and the IRS is
now auditing "all taxpayers who might have claimed charitable
deductions using this type of transaction."
As a result of
this audit process, Treasury will evaluate legislative options such
as "the Joint Committee on Taxation proposal for a general
deduction-not-to-exceed-basis-rule."
Editor's Note:
Counsel for the Joint Committee on Taxation indicated at a Senate
Finance hearing in early 2007 that a simple way to solve the
"hard-to-value" problem for gifts of real estate is to allow
deductions only for cost basis. At that hearing, several senators
observed that this drastic rule would greatly reduce charitable
gifts of real estate, art and other types of appreciated property.
However, when there are obvious abuses of gift valuation rules, the
advocates for cost-basis-only deductions have new ammunition to
bolster their argument. Sen. Baucus is clearly emphasizing that the
IRS must become more aggressive in pursuing charitable
overvaluations. Counsel for donors and charities should recognize
that appreciated property gifts are still a very appropriate and
attractive gift method, but any strategy that involves potential
overvaluations could lead to audits and major
penalties.
Applicable Federal Rate of 5.6% for June.
Rev. Rul. 2007-36; 2007-23 IRB 1 (18 May 2007)
The IRS
has announced the Applicable Federal Rate (AFR) for June of 2007.
The AFR under Sec. 7520 for the month of June will be 5.6%. The
rates for May of 5.6% or April of 5.6% 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 - 200720021 Redemption of Stock from CRT by
Disqualified For-Profit is Not
Self-Dealing
A is a for
profit corporation with common stock owned by B, C and X. B is a
charitable remainder unitrust formed by X and Y under the meaning of
Sec. 664(d)(2). C is an employee stock ownership plan. X is a
trustee of B and the sole unitrust income beneficiary. A offers to
redeem for cash, the common stock held by all shareholders. The
offer establishes a maximum amount of stock to be redeemed and a
formula for calculating the redemption amount. B intends to tender
as many shares as possible for cash redemption, X will not tender
her shares and it is unknown whether C will tender any of its
shares. The parties request a ruling as to whether A's redemption of
stock will be treated as an act of self-dealing under Sec. 4941.
Sec. 4941(d)(1)(A) of the Code provides that the term "self-dealing"
means any direct or indirect sale or exchange of property between a
private foundation and a disqualified person. The IRS held that
there is no self dealing violation. A will offer to redeem the
shares of stock held by all three stockholders at a price
representing the fair market value as determined by an independent
third party appraiser, who is not a disqualified person to B.
Because the redemption of the stock is subject to the same terms for
all shareholders and B will receive no less than fair market value
for its shares of stock, the stock redemption will not be an act of
self-dealing within the meaning of Sec. 4941(d)(1) of the Code
pursuant to the exception to self-dealing set forth in Sec.
4941(d)(2)(F) of the Code and Reg. 53.4941(d)-3(d)(1).
To
view the full PLR Click
Here.
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CASE OF THE
WEEK
Planning Gifts of Life Insurance, Part 3 of 6 -
Current, Deferred, Contingent &
Split-Interest
Current
& Deferred Gift with Partial Control by the Charity: Many years
ago when Dr. Mimms was just a budding young surgeon and father, he
decided to purchase a life insurance policy on his life "just in
case." At that time, he had two children and a very large mortgage.
Therefore, he sought some financial protection should anything
happen to himself, since he was the only income earner and his wife
stayed at home to raise their children. Consequently, he purchased a
$1,000,000 life insurance policy with annual premiums of
$10,000.
Now the Mimms' financial picture is quite different.
They have an estate of $4 million, which consists of a $1.25 million
home, $2.5 million IRA, and $250,000 of various assets. Both of
their daughters' schooling expenses have been set aside in education
savings accounts. Finally, through the use of credit shelter trusts,
bequests, and testamentary charitable remainder trusts, their estate
plan was arranged so that no estate tax would be payable at either
death. The Mimms are very philanthropic and want to make a
substantial gift upon their death to their favorite
charity.
Since the Mimms no longer need the life insurance
policy for estate tax or "just in case" reasons, can they transfer
their existing life insurance policy to charity? Assuming the Mimms
pay the remaining premiums on the policy, can they make the payments
directly to the insurance company (as opposed to contributing the
premiums to the charity each year)? What are the tax consequences of
making such a gift?
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 28,
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
| |
