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June 11,
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 11,
2007 |
GiftLaw Weekly eNewsletter -
June 11, 2007
- WASHINGTON
HOTLINE
- PLR THIS
WEEK
- CASE OF THE
WEEK
- ARTICLE OF THE
MONTH
|
WASHINGTON HOTLINE
Tax Quote of the Week
"Taxes cannot be
escaped by contracts however skillfully devised . . . by which the
fruits are attributed to a different tree from that on which they
grew."
-- Oliver Wendell Holmes
With
Election Campaigns Underway, New IRS Guidelines for
Charities
The Presidential debates have already
started. Candidates from both parties are now engaged in a quest
for the Presidency. Other candidates will soon be organizing
campaigns for the Senate, the House, Governorships and thousands of
other elected positions. Democracy in America is underway as
Americans prepare for the November 2008 election.
In response
to this election activity, the IRS has published guidelines for
charities. Since America is a nation with a First Amendment right to
free speech, many charities perform a valuable function by sharing
information with friends that apply to a particular charitable
purpose. Generally, this sharing of information is both acceptable
and beneficial for the nation.
However, the IRS has published
guidelines on charities and elections in Rev.
Rul. 2007-41; 2007-25 IRB 1. This IRS guide provides multiple
examples that explain the election rules for charities. Essentially,
charities are permitted to exercise their First Amendment rights,
but are not permitted to intervene and officially support a
candidate for a specific elected office.
Voter
Education. Many charitable organizations encourage their friends
to exercise the right to vote in an election. Voter education,
including preparation and distribution of voter guides, may be
conducted in a nonpartisan manner.
Endorsements.
Generally, officials from a charity have a right to speak out in a
private capacity and endorse a candidate for office. However, they
are not permitted to endorse candidates in their official capacity,
since that may suggest that the public charity is endorsing a
candidate. For example, a leader of a charitable organization may
allow his or her name to be used in an endorsement of a candidate,
but that must be private and may not be done in the official
publication of the charitable organization.
Speaking at
Events. Candidates may be invited to appear and speak at events
sponsored by charities. There are two circumstances in which that is
permitted. First, if all candidates are invited to a forum and have
equal opportunity to speak, then the discussion is permitted.
Second, a candidate who is qualified to speak on a particular topic
may address a group at a specific charity, provided that he or she
does not ask for votes, mention the election or fundraise at the
event. The charity may not host a candidate for the specific purpose
of endorsing or fundraising for one
candidate.
Introductions of Candidates. On many
occasions, candidates will attend charitable events. It is permitted
for the charity to welcome and mention the candidate by name.
However, the charity is not to refer to the election or the
candidacy of the visitor during the welcome. Also, the charity may
not ask for support or raise funds for the candidate.
Web
Site Links. With the increasing use of the Internet, nearly all
candidates have a web site. Charities are urged to exercise great
caution in linking to web sites of candidates. The charity is
responsible for the content and should not link to a web site in a
manner that suggests it is favoring or endorsing a particular
candidate.
Editor's Note: Your editor and this
organization take no specific position with respect to candidates
and the forthcoming election. Since many of our friends are involved
in charitable organizations, this description of the IRS rules on
charities and elections is offered as a public
service.
Qualified Conservation Deduction Guidelines
Published by IRS
In Notice
2007-50; 2007-25 IRB 1, the IRS released guidance on the
implementation of the "qualified conservation contribution" changes
created in the Pension Protection Act of 2006 (PPA 2006). The
guidelines outline the general rules for deductions and include
multiple question and answer cases to explain the application of
conservation deduction rules.
Generally, individuals are
permitted to deduct a percentage of the "contribution base" which is
the adjusted gross income, computed without net operating loss
carryback. In nearly all cases, the contribution base is adjusted
gross income (AGI) and that term will be used here.
The
charitable deduction limit under Sec. 170(b)(1)(A) for cash gifts to
public charities is 50% of AGI. For gifts of long-term capital gain
property, the Sec. 170(b)(1) limit is 30% of AGI.
However,
PPA 2006 created two new categories. For qualified conservation
easements, even though the property may be appreciated, the
charitable deduction limit is now 50%. Sec. 170(b)(1)(E)(ii). If
there is a conservation deduction carryforward, that is not limited
to the normal five years, but is now 15 years.
In addition,
Sec. 170(b)(1)(E)(iv) creates a special rule for a qualified farmer
or rancher. For a person with more than 50% of gross income from
farming or ranching as defined in Sec. 2032A(e)(5), the deduction
limit is 100% of AGI. But in order to benefit from the 100% limit, a
new conservation easement on agricultural or livestock property must
include a restriction that a property remains "available for
agricultural or livestock production."
Contribution
Deduction Order. The conservation deductions are considered
after other charitable deductions. For a donor with AGI of $100 who
makes a gift of $60 of cash and creates a conservation easement
valued at $80, the charitable deduction is limited to $50 for the
year. There is a $10 cash carryforward that may be used for up to
five years, and an $80 conservation gift carryforward. The
conservation carryforward is a 50%-type gift with a carryforward for
up to 15 years.
If the donor is a farmer or rancher with over
50% of income from farming or ranching, then in the same situation
the donor first deducts the cash contribution to 50% of AGI and then
may deduct the conservation contribution up to 100% of AGI,
producing a total deduction of $100. The farmer carries forward a
$10 cash deduction for up to 5 years and the remaining $30 of the
conservation contribution may be carried forward up to 15
years.
Contributions by Partnerships or Sub Chapter S
Corporations. The determination as to whether a partner or
shareholder is a qualified farmer or rancher is made at the
individual level, not at the partnership level.
Bargain
Sale Conservation Easement. Income from the sale portion of the
land in a bargain sale is not used to determine whether the farmer
or rancher qualifies under the 50% farm income
requirement.
Sale of Timber. Timber planting and
cultivation is a permissible farming activity under Sec.
2032A(e)(5). It may be used to determine whether a tree farmer has
reached the required 50% income level.
Hunting and Fishing
Fees. Income from hunting and fishing fees are not farm
income.
Restricted to Agriculture or Ranching. The
typical agricultural or ranching restrictions could include a
prohibition against construction of buildings other than normal
farmstead and farm buildings, a restriction against removing
minerals in a way that would adversely affect agricultural or
livestock production and prohibitions on land use detrimental to
agricultural or livestock production.
CRT Estate
Inclusion Proposed Regs
The Service has published
proposed regulations that define the values included in an estate
for a charitable remainder unitrust, charitable remainder annuity
trust, grantor retained annuity trust or qualified personal
residence trust. In REG-119097-05;
72 F.R. 31487-31491 (7 Jun 2007), the Service defined the procedures
for calculating the estate inclusion value of various remainder
trusts.
If an individual creates a charitable trust and
receives income from that trust or retains right of use of the
property, the property is included in the estate. Reg. 20.2036-1(a).
In most cases, the entire value of the property is includable at
death.
However, Rev. Rul. 76-273, 1976-2 CB 268 noted that
for a charitable remainder unitrust with a payout of 6%, the
includable amount at death is "the portion necessary to yield the
amount of the annual unitrust payment in perpetuity." See Reg.
20.2031-7-(1). The interest rate used in the calculation is the Sec.
7520 rate applicable at the demise of the trust grantor. If the
unitrust percent is greater than the equivalent interest rate, 100%
of the unitrust corpus is included. Any successor income interests
are valued based on the calculated portion of this amount. If the
unitrust percentage is less than the equivalent rate (adjusted
rate/(1-adjusted rate)), there is a prorated reduction in the
unitrust corpus included in the estate.
In Rev. Rul. 82-105,
1982-1 CB. 133, a donor created a charitable remainder annuity
trust. The included amount was calculated as the annual adjusted
annuity, divided by the applicable interest rate (now the Sec. 7520
rate). This calculation equals the corpus necessary to produce that
adjusted annuity. Any excess corpus is not included.
It is
also possible that Sec. 2039(a) could lead to inclusion of an
annuity value in an estate. In order to create a uniform result, the
proposed regulations mandate use of the formulas in the above
Revenue Rulings under Sec. 2036 and preclude use of Sec. 2039 for
valuing annuity interests for remainder trusts.
Annuity
Trust Example. Donor creates a $100,000 annuity trust payable to
donor for life and then to donor's child for life. The trust is
funded with $100,000 and pays a $12,000 annuity. When donor dies,
the Sec. 7520 rate is 6% and the trust assets are $300,000.
Since the annuity is an annual payment at the end of the
year, the calculation of required corpus is $12,000/.06 = $200,000.
Therefore, $200,000 of the $300,000 trust corpus is includable.
However, based on the age of child, the annuity amount and the Sec.
7520 rate, the present value of the annuity to the child is
$169,975.20. Therefore, the estate includes $200,000 in the estate
with a Sec. 2055(e) charitable deduction of $30,024.80. The net
estate taxable amount is $169,975.20.
Unitrust
Example. Donor creates a 6% unitrust payable quarterly and
valued each year on December 15th. The donor passes away with the
trust value of $300,000 and a life interest from the trust payable
to a child age 55.
The adjusted rate for the quarterly
payments is 5.786%. The equivalent rate is therefore 6.141%
(5.86%/(1-0.05786)). Because the equivalent payout rate exceeds the
6% rate under Sec. 7520 as of date of death, the $300,000 of trust
assets are fully included. Based on the remainder factor of .28253
for the age of the child, the estate charitable deduction is that
number times $300,000 or $84,759. The taxable amount is
$215,241.
Qualified Personal Residence Trust (QPRT).
If a donor creates a QPRT for the use of a home for the lesser of 10
years or until prior death and the donor dies prior to the
expiration of the term of years, the home is included at fair market
value on date of death.
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 - 200719012 Transfer of Private Foundation Assets
will not Terminate PF Status
PF is classified as a private foundation under Sec.
4642(j)(3). PF operated three museums, a radio station, a grant
making organization for disaster relief, a performing arts center
and many other activities. PF's board of directors believed it would
be in the best interest of the museums to create PC, a public
charity, to manage the affairs and operations of the museums. On
date x, PF created PC and transferred the museum and museum related
assets to it. PF will cover any costs incurred by PC which exceed
revenue generated by PC until PC is fiscally sound. In addition,
some of PF's employees will initially work with PC to ensure
productivity and maintenance of the museums until PC acquires
competent personnel. PF requested rulings that the transfer to PC
will not result in the termination of PF's private foundation status
and that the financial support given to PC will be considered in
line with PFs exempt purpose. The Service noted that PF has neither
committed willful and repeated acts that would give rise to an
involuntary termination under Sec. 507(a)(2) nor has PF given notice
to the Secretary of an intention to terminate voluntarily under Sec.
507(a)(1) of the Code. Therefore, the transfer of assets will not
result in the termination of PF's status. The Service also stated
that because PC will provide reports to PF on all fiscal matters,
the PF will comply with the expenditure responsibilities as mandated
by Sec. 4945(h). Because the expenditures will be used for a purpose
connected with PF's exempt purpose, the expenditures will be
classified as "qualifying distributions" under Sec.
53.4942(b)-1(b).
Editor's Note: PF is classified as a
Private Operating Foundation under Sec. 4942(j). In order to be
classified as an operating foundation, the organization must
demonstrate that it complies with three tests enumerated in Treas.
Reg. 53.4942(b)-2(a). These tests are commonly known as the "assets
test," the "endowment test" and the "support test." The assets test
requires the organization to devote at least 50% of the
organization's assets directly for its exempt purpose or to
functionally related businesses. The endowment test is satisfied if
the foundation's qualifying distributions for its exempt purpose
meet or exceed two-thirds of its minimum investment return. The
support test is satisfied if substantially all of its support is
received from the general public and from five or more exempt
organizations that are not disqualified persons under Sec.
4946(a)(1)(H).
To view the full PLR Click
Here.
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CASE OF THE
WEEK
Planning Gifts of Life Insurance, Part 5 of 6 -
Current, Deferred, Contingent &
Split-Interest
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 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 to their favorite charity upon their deaths.
However, they also would like additional income for their lifetimes
because "you never know."
Can the Mimms transfer their
insurance policy to a charitable remainder unitrust? What are the
benefits and 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 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 11,
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
| |
