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June 4,
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 |
June 4,
2007 |
GiftLaw Weekly eNewsletter -
June 4, 2007
- WASHINGTON
HOTLINE
- PLR THIS
WEEK
- CASE OF THE
WEEK
- ARTICLE OF THE
MONTH
|
WASHINGTON HOTLINE
Tax Quote of the Week
"I can't define
tax evasion, but I know it when I see it."
-- Fred T. Goldberg, Jr.
Sen.
Baucus Expects Better Charity Reporting
Each year public
charities are required to file IRS Form 990. This form describes the
operations and management of the charities and includes useful
financial information. The IRS Form 990 is required to be disclosed
to the public and may typically be found on
www.guidestar.org.
Sen. Max Baucus (D-MT) recently sent a
letter to Treasury Secretary Henry Paulson and indicated a need to
improve the Form 990. Sen. Baucus noted, "Charities and other
non-profit organizations do a great deal of good work to benefit
American communities, both to deal with crisis and to improve our
daily lives. It's important to insure, however, that these
organizations receiving tax-exempt status earn it on a daily basis
and keep their activities and policies in line with a special status
conferred on them by the tax code."
Sen. Baucus focused on
several areas, but especially emphasized the "dollars raised vs.
dollars for charity" relationship. He stated, "There is probably no
greater interest of the public than wanting to understand the answer
to this question when they make a donation: How much of their money
is actually going to a charitable activity?" In the view of Sen.
Baucus, Treasury should "make this information easily and clearly
available for the public."
Editor's Note: Treasury and
the IRS are in the process of reviewing the Form 990 that is
required to be filed each year by most public charities. The updated
Form 990 is likely to include additional required information. This
information will be beneficial for donors who want to understand
more completely the effectiveness of the organizations they
support.
Senate To IRS -- Track Charities Potentially
Supporting Terrorist Organizations.
On May 21, 2007, the
Treasury Inspector General for Tax Administration filed a report on
the efforts of the IRS to identify charities that may be supporting
terrorist organizations. As part of the war on terror, since 2002
the IRS has been comparing the names of organizations and key
officers with a terrorist watch list. The effort has been completed
through a manual comparison of the organizations and names of those
on the watch list.
Sen. Max Baucus (D-MT) and Sen. Charles
Grassley (R-IA) both sent letters to Treasury Secretary Paulson
expressing great concern about the report. Sen. Baucus noted that
the system is "at best, woefully inefficient." He stated that IRS
examiners look primarily for "Middle Eastern sounding names" when
deciding which charities' returns to review. He is concerned that
"the IRS is allowing individuals with terrorist connections to avoid
detection simply because their names do not fit in a narrow
predetermined profile."
Sen. Grassley also was upset. He
stated, "The report is disappointing. The IRS has to do better. The
agency isn't even checking a list available to all government
agencies. Once again, the IRS is a day late and a dollar short on
keeping up with the latest technology."
Both Sen. Baucus and
Sen. Grassley encouraged the IRS to upgrade its computer system to
use much more sophisticated methods of checking for terrorist
support.
Editor's Note: A number of domestic charitable
organizations have been charged with the support of terrorists. The
domestic organizations usually claim to be providing relief services
in foreign countries. However, Treasury claims that a portion of
funds allocated to relief services by some of these organizations
has been used for terrorist purposes.
Court Denies
Fractional Discount on 50% Interest in Artwork
In Robert
Grove Stone et al. v. United States; No. 3:06-cv-00259 (25 May
2007), the District Court in the Northern District of California did
not accept a 44% fractional discount for an estate that included a
50% interest in 19 paintings.
Lois M. Stone passed away
September 1, 1999. Her estate included an undivided 50% interest in
19 paintings. The estate valued the 19 paintings, divided the value
by two and then calculated a 44% fractional discount. The IRS
refused to recognize the fractional discount and assessed a
deficiency based on valuing the paintings at 50% of fair market
value.
The estate relied on an appraisal by Sotheby's, while
government witnesses Michael Findlay and Karen Carolan were members
of the IRS Art Advisory Panel and recognized art valuation experts.
After determining the total value of the 19 paintings, the court
rejected the estate claim that there should be a fractional interest
discount for a 50% interest. The estate claimed a 44% discount based
on an analogy of the art to fractional interests in real estate.
However, the court noted that "the art market differs from the real
estate or business market." Because art may be sold as a partial
interest with no discount, in comparison with fractional real estate
interests, "there is no evidence that similar sales have also
occurred in the art market." Therefore the court rejected a discount
on the art based on an analogy to "undivided real estate interest
transactions."
The final issue was the cost to partition. If
a partial interest in art is owned and there is a forced partition,
there could be various costs. The estate claimed that the partition
cost discount should be 51%. The IRS expert noted that a 2% discount
for cost of partition and sale would be appropriate. The court
required the parties to negotiate a cost-to-partition discount
between 2% and 51% and to report the result back to the
court.
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 - 200720020 Scholarships Not Taxable
Expenditures
G, a private
foundation under Sec. 509(a) of the Code, proposed to create a
scholarship program to benefit deserving children of the employees
of B. G's proposed scholarship plan would make grants available to
children of B employees who worked at B for at least one year and
maintained a 3.0 grade point average or higher. The scholarships
would be available for students attending a college, university or a
technical training school. G hired C to administer the scholarship
program. C would appoint a selection committee of which no members
would be officers, directors or employees of B. Relatives of any
member of C would be ineligible for a scholarship. G requested a
ruling allowing the creation of the scholarship program without the
inclusion of tax under Sec. 4945. Under Sec. 4945, a tax is imposed
on all taxable expenditures of a private foundation. Sec. 4945(d)(3)
defines "taxable expenditures" as any amount paid or incurred by a
private foundation as a grant... for study. The Service noted an
exception exists in Sec. 4945(g) for a grant awarded on an objective
and nondiscriminatory basis pursuant to a procedure approved in
advance by the Secretary. Because G will implement procedures to
ensure objectivity and prevent discrimination, the Service ruled
that G's scholarship program qualifies for the exception created by
Sec. 4945(g). Furthermore, G's scholarship program meets all the
requirements set forth in Rev. Proc. 76-47, 1976-2 C.B.
670.
Editor's Note: Rev. Proc. 76-47 outlines seven
conditions a private foundation must meet in order to obtain advance
approval for a scholarship program. These seven conditions are; (1)
No inducement to recruit employees, (2) There must be an independent
selection committee, (3) There must be identifiable eligibility
requirements, (4) Selection of recipients must be on an objective
basis, (5) A grant may not be terminated because the recipient or
the recipient's parent terminates employment with the employer
subsequent to the awarding of the grant regardless of the reason for
such termination of employment, (6) The courses of study for which
grants are available must not be limited, and (7) The program must
meet all of the other requirements of section 117 of the
Code.
To view the full PLR Click
Here.
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CASE OF THE
WEEK
Planning Gifts of Life Insurance, Part 4 of 6 -
Current, Deferred, Contingent &
Split-Interest
Deferred
Gift with Full Control by the Donor: 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 seem to need the life
insurance policy for estate tax or "just in case" reasons, can they
designate their favorite charity as the beneficiary of the $1
million life insurance policy? What are the tax consequences of
making such a designation? How can the charity count the
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 II -- Stock Sale with
Unitrust
A C Corporation
may be subject to a double tax. There is potential tax at corporate
tax rates on the gain inside the corporation and potential tax at
the shareholder capital gain rate on the sale of stock by the
shareholder. However, if the C Corporation is the type of business
that may be sold as a corporation, generally to a larger C
Corporation, then a very attractive option exists. In this
circumstance, the taxpayer may transfer part or all of the C
corporate stock into a charitable remainder unitrust. If the stock
is transferred to a unitrust and then sold by the unitrust to the
new purchaser, there will then be a complete bypass of capital
gain.
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 |
June 4,
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
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