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June 2,
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 |
June 2,
2008 |
GiftLaw Weekly eNewsletter -
June 2, 2008
- WASHINGTON
HOTLINE
- PLR THIS
WEEK
- CASE OF THE
WEEK
- ARTICLE OF THE
MONTH
|
WASHINGTON HOTLINE
Tax Quote of the Week
"The power to tax
the exercise of a privilege is the power to control or suppress its
enjoyment."
-- William O. Douglas
Health
Care Reform Summit 2008
Health care reform has been
receiving significant news coverage. Massachusetts passed a health
care program in 2006 intended to offer coverage to all residents of
the state. California, Minnesota and Florida are all considering
proposals to expand health care coverage. The discussion of health
care options continues to be a major part of the presidential
campaigns.
The Senate Finance Committee under the leadership
of Chairman Max Baucus (D-MT) and Ranking Member Charles Grassley
(R-IA) has been holding hearings on health care reform. One of the
principal topics of these hearings has been the level of charity
care provided by nonprofit medical centers. Sen. Grassley has
suggested that health care reform should include specific standards
for measuring and reporting the charity care provided by medical
centers.
Both senators announced this week the Washington
Summit on Health Care to be held at the Library of Congress on June
16, 2008. Sen. Baucus noted, "Our broken health care system is
endangering families and sapping this country's ability to compete
economically, and Americans want something done about it. But
comprehensive health reform won't drop out of the clear blue sky --
we have to do some legwork first."
Sen. Grassley continued,
"Without a doubt, health care matters to every American. This summit
is a chance to study the opportunities that exist to improve access
and quality in America's health care system, and to consider what's
involved in making possible reforms."
The hearing will start
with comments on health care and the economy by Federal Reserve
Chairman Ben Bernanke. It will continue with remarks by Dr. J. Craig
Venter, a leader in the mapping of the human genome. He also
researches human genes and potential health care treatments. Other
witnesses will discuss rising health care costs, proposed or enacted
state reforms in Massachusetts, Minnesota, California and Florida
and health care insurance reform.
Editor's Note: Both
Sen. Baucus and Sen. Grassley understand that health care reform is
not likely before 2009. However, with the rising costs for Medicare,
Medicaid and other health care, both senators hope to pass health
care reforms next year.
eFiling Record as Americans
Turn to the Internet
Americans of all ages are steadily
moving toward greater use of the Internet. An increasing number of
Americans are banking online, paying bills online and now filing
income tax returns online.
IRS Commissioner Doug Shulman
reported that the IRS has processed 86 million electronic returns
this year. Sixty percent of returns are now electronically filed. He
noted, "The growth in the electronic services helped the IRS deliver
a strong filing season for the nation's taxpayers in 2008. The
increase in e-file, particularly in the final weeks of the filing
season, shows that taxpayers are continuing to recognize the
benefits of filing electronically."
The IRS Customer Account
Data Engine has been able to process over 30 million returns. The
electronic return refunds with this system are typically five days
faster than other refunds. In addition, 4.6 million taxpayers with
incomes of $54,000 or less used the Free File System on www.irs.gov.
The IRS website had a 44% increase in number of visits this year
compared with 2007.
Holman FLP Discounts Substantially
Reduced
In Thomas
H. Holman, Jr. et ux v. Commissioner; 130 TC No. 12; No.
7581-04 (27 May 2008), the Tax Court issued a detailed analysis of
arguments for and against family limited partnership (FLP) discounts
and the rationale for FLP valuations.
Thomas H. Holman, Jr.
and Kim D.L. Holman are the parents of four children. During the
Internet boom in the late 1990's, Mr. Holman was employed by Dell
Computer Corporation in Texas and acquired a substantial block of
Dell stock. The Holmans moved to Minnesota in 1997 and created the
Holman Family Limited Partnership (HFLP) on November 3, 1999. The
Holman's transferred 70,000 shares of Dell stock to the HFLP on that
date. Five days later on November 8, 1999, they transferred limited
partnership interests to trusts for their four daughters. Similar
FLP gifts to their daughters' trusts were made in 2000 and 2001.
With additional transfers of Dell stock, HFLP owned 111,100 shares
of stock by 2001.
The four goals of HFLP were long-term
growth, asset preservation, asset protection and education. The
Holmans filed IRS Form 709 Gift Tax Returns and claimed discounts
for lack of marketability and minority interests of approximately
49%.
The IRS contested the valuation discounts and made four
arguments. First, the IRS claimed that there was a gift not of FLP
interests but actually a gift of Dell shares to the daughters under
the theory of Senda v. Commissioner; T.C. Memo. 2004-160,
affd. 433 F.3d 1044 (8th Cir. 2006). Second, the IRS claimed
that there was no operating business and so the valuation should be
based on a trust and not an active business. Third, the restrictions
on transfers within the partnership agreement should be disregarded
under Sec. 2703(a). Fourth, the valuation discounts should be
reduced to 28%.
The Tax Court considered the IRS and taxpayer
positions and made three main findings. First, there was no "Senda"
indirect gift. The FLP was created, the stock was transferred to the
FLP and five days later the FLP units were gifted. There was no
simultaneous gift on creation and there was a change in valuation
during the intervening five days.
Second, the Sec. 2703(a)
restrictions are not to be considered for evaluation purposes. HFLP
is solely an entity to hold the Dell stock and therefore not a bona
fide business. It is also merely a device to facilitate asset
transfer to the family.
Third, taxpayer appraiser Ingham
argued for minority and lack of marketability discounts, with a
total discount of approximately 49%. IRS Appraiser Burns generally
agreed with the minority interest discounts, but recommended
reducing the claimed 35% marketability discount to 12.5%, since the
Dell stock was readily tradable. The tax court accepted the 12.5%
discount. The resulting discount from net asset value for the total
gifts was approximately 24%.
Applicable Federal Rate
of 3.8% for June -- Rev. Rul. 2008-28; 2008-22 IRB 1 (19 May
2008)
The IRS has announced the Applicable Federal Rate
(AFR) for June of 2008. The AFR under Sec. 7520 for the month of
June will be 3.8%. The rates for May of 3.2% or April of 3.4% 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 - 200821036 Land Purchased by Church Meets
Neighborhood Land Rule
Church acquired land through debt-financing with the
intent to develop the land for a related use. Church paid off the
debt by Date 1. Though Church obtained approved building plans for
the property and held fundraisers for the proposed development,
fundraising fell short. Groundbreaking was delayed until Date 2. Due
to the delay, church requested a ruling that it is reasonably
certain that the land will be used for an exempt purpose within 15
years of acquisition and that the property is exempt from the
debt-financed provisions of Sec. 512(b)(4) under the neighborhood
land rule.
Debt-financed property is treated as unrelated
business income under Sec. 511. However, Sec. 514(b)(3)(A) provides
an exception to the rule where the land acquired is in the
neighborhood of the charity. This exemption allows the charity a 10
year window (15 years for churches) to avoid the debt-financed rules
if, at the time of the property acquisition, the charity intends to
use the property for its exempt purpose. The exemption continues to
apply after five years of inactivity only if the organization
demonstrates to the Secretary that it is reasonably certain that the
land will be used for an exempt purpose before the expiration of the
15 year period. The demonstration of reasonable certainty must occur
not less than 90 days before the end of the fifth year after the
acquisition of the property.
In the instant case, Church
submitted its proof of reasonable certainty in a timely fashion. The
proof submitted convinced the Service that the land would be
developed and used in furtherance of Church's exempt purpose within
the 15-year window. Therefore, the Service ruled that the
neighborhood land rule applied and the property would not be subject
to the debt-financed provisions of Sec. 512(b)(4) and
514.
Editor's Note: Church must still use the land in
furtherance of its exempt purpose within 15 years of its
acquisition. Should Church fail to use the land within this window,
the debt-financed rules will apply and thus, the debt will be taxed
as income under the unrelated business tax rule of Secs.
511-514.
To view the full PLR Click
Here.
|
CASE OF THE
WEEK
Marketing Ideas During Soft Markets and Dropping
Interest Rates, Part 4 - The Great Home Give
Away
Harold Henry, 77, is
a very generous American. He is the stereotypical major donor that
charities love to find. Coming from a wealthy and philanthropic
background, Harold has given approximately $15 million to national
and local charities over his lifetime. In addition, he currently
sits on the boards of several charities and loves his role as a
volunteer and donor.
With a $20 million estate, Harold's
estate plan is very comprehensive and reviewed annually. Not
surprisingly, Harold is always contemplating new gifts and tax-wise
planning. In fact, during the past two years, Harold has been
tinkering with the idea of giving the remainder interest in his $2
million Seattle home to one of his favorite charities. Harold loved
the idea and the income and estate tax benefits associated with the
gift. However, due to his busy schedule, he just has not found the
time to complete the gift.
Fortunately, Harold's attorney,
Stan Sutton, was aware of his gift intentions. Accordingly, Stan
noticed the dropping applicable federal rates (AFR) this year and
advised Harold that now may be the time to make the
gift.
What advantage is there for making a gift of a
remainder interest in a home during dropping interest rates? What
window of opportunity exists for completing this gift? How much can
Harold save by completing this gift now?
To view the
solution to this Case of the Week Click
Here.
|
ARTICLE OF THE
MONTH
Avoiding the Boats, Cars and Vacations
Disaster
What is the basic
purpose of inheritance? Most parents will respond that the purpose
of an inheritance is to help the child "become a better person."
Let's listen into a discussion between an advisor and John and Mary
Parent as they discuss an inheritance plan for their three
children.
Advisor: John and Mary, how do you feel
about the way your children are progressing in
life?
John: Well, all three children are doing fine.
They have all finished their education and are working. We know that
they will be making a good contribution to society in some
manner.
Mary: Yes, they are all working. We've tried
to teach them good principles and that they should be honest and
caring persons.
Advisor: Do both of you think that it
is good for them to have jobs and to eventually buy a house and
acquire some savings?
John: Yes, they should have jobs
and they should be responsible citizens.
Advisor: But
with an inheritance you have the opportunity to give them additional
security.
Mary: Yes, we think that is important. We
recognize that we have been fortunate over the years to have
acquired substantial resources, and we do want to help
them.
Advisor: Have you thought about the difference
between giving principal or giving income? I find that many people
in your situation have been careful and built up their estate. They
have substantial resources. And frequently they leave a substantial
inheritance outright to the children. Have you seen examples of
parents who have done that?
John: We certainly have.
An uncle of mine passed away and left the estate to two children.
One of them did fine. But the other spent his entire inheritance in
18 months.
When he was asked what happened to the inheritance
he replied, "Well, I spent most of it on boats, cars and
vacations -- and I wasted the rest!"
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 1999-2008
Crescendo Interactive, Inc.
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| Immanuel St.
Joseph's Foundation |
June 2,
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
| |
