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June 22,
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 |
June 22,
2009 |
GiftLaw Weekly eNewsletter -
June 22, 2009
- WASHINGTON
HOTLINE
- PLR THIS
WEEK
- CASE OF THE
WEEK
- ARTICLE OF THE
MONTH
|
WASHINGTON HOTLINE
Tax Quote of the Week
"This idea that
you start with a clean slate and end up with a beautiful, logical
tax system just isn't democracy."
-- John L. Knapp
Healthcare
Holdup Over Tax Increases
Senate Finance Committee Chair
Max Baucus (D-MT) had expected to release his major healthcare
reform package on June 17, 2009. However, the package has been
delayed for further discussions over the taxes necessary to pay for
the package.
The Congressional Budget Office initially
estimated that the Baucus healthcare bill would cost $1.6 trillion
over the next ten years. The costs are primarily related to
expenditures to create a program that covers the estimated 46
million Americans without existing healthcare
insurance.
However, Sen. Baucus now believes that he can
craft a bill with a cost of $1 trillion over ten years. His updated
bill cost will be fully offset by a $1 trillion combination of
increased taxes and Medicare savings.
Sen. Baucus and House
Ways and Means Committee Chair Charles Rangel (D-NY) continue to
analyze five separate methods for offsetting the costs. These
include the following:
1. A cap on the employee deductions
for healthcare insurance, potentially at the level of the Federal
Employee Health Benefit Plan cost.
2. Increasing requirements for
hospitals to retain nonprofit status.
3. Increasing the 7.5%
adjusted gross income floor for charitable deductions.
4. A value
added tax (VAT) of 1% to 3%.
5. A payroll tax of 3% for
healthcare costs.
The Democratic and Republican leaders of
the Senate Budget Committee jointly issued a statement favoring a
limit on the healthcare tax exclusion for employer-sponsored health
insurance. Sen. Kent Conrad (D-ND) and Sen. Judd Gregg (R-NH)
jointly noted that, "The federal government has to encourage
long-term healthcare savings: by changing Medicare payment rules to
transform the practice of healthcare and by changing the tax
exclusion for employer-sponsored health insurance."
The House
Republican Healthcare Solutions Group also published its plan this
week. House Republicans proposed creating a system of offering
health insurance to all persons through tax credits and lower costs.
The Republican plan did not include an explanation of total costs or
funding options.
Editor's Note: With an annual
expenditure of $2.4 trillion, healthcare is approximately 1/6 of the
U.S. economy. The current healthcare reform plans will have major
impact on all Americans. The Senate Finance Committee is attempting
to develop a bipartisan plan for this essential part of the American
economy. With average healthcare expenditure per person nearing
$8,000 per year and U.S. per capita spending nearly double the
annual amount of other industrialized nations, both Republicans and
Democrats agree that this is an important legislative
priority.
Cap-and-Trade Tax Issues
The
Senate Finance Committee held a hearing on June 16, 2009 to examine
the tax aspects of the "Cap-and-Trade" proposals.
Senate
Finance Chair Max Baucus gave a short summary of the Obama
Administration proposal. The basic goal is to reduce greenhouse gas
emissions and, therefore, reduce the impact of global warming on the
world. The Obama Administration target is to have 14% reduction in
greenhouse emissions by the year 2020.
Reducing greenhouse
emissions will occur through caps or limits on the emissions. A
series of credits will be sold or given to power companies, industry
and other large organizations that emit greenhouse
gases.
Sen. Baucus noted that, "If the permits are sold, the
power companies and industry would pay an estimated $693 billion."
However, if the permits are given away, then the tax question
involved is whether the companies should report ordinary income for
the value of the permits given to them.
At the hearing,
panelist Gary Hufbauer from the Peterson Institute for International
Economics suggested that any gift of emission credits to industry
should be taxable. Given the $2 trillion deficit this year and the
mounting government debt, he suggested it would be "mind-boggling"
to give billions of dollars of credits to industry.
How much
will the cap-and-trade cost Americans? The Tax Foundation has
published a "Cap-and-Trade Burden Calculator." The estimated "hidden
tax" on each household would be $1,218, or about 2% of typical
household income. Households will eventually pay for the tax through
higher electricity and other energy bills.
Sen. Charles
Grassley (R-IA) commented about the proposal in the House climate
change bill to give away 85% of the allowances. He notes that Office
of Management and Budget Director Peter Orszag previously indicated
that giving the credits away would be "the largest corporate welfare
program that has ever been enacted in the history of the United
States."
Sen. Grassley suggests that the current version of
cap-and-trade is "all pain but no gain." He notes that individuals
will pay higher taxes, but China, India, Russia and other large
nations will continue to emit increasing amounts of greenhouse
gases. If this happens, the program may not have the desired impact
on global warming.
Pay-Go Bill Introduced in
House
In response to a request by President Barack Obama,
House Majority Leader Steny Hoyer introduced PAYGO legislation. Rep.
Hoyer indicated that the pay-go bill would show a "commitment to
financial responsibility" and this would have a favorable impact on
the budget deficits.
Senate Budget Committee Chair Kent
Conrad (D-ND) has expressed concern about the pay-go bill introduced
in the House. The bill exempts the current estate tax exemption and
rate, excludes alternative minimum tax and the 2001-2003 tax breaks
and has various other exemptions. With all of the exclusions and
exemptions, Sen. Conrad questions the effectiveness of the
bill.
Editor's Note: Under the proposed pay-go bill,
the estate tax would be continued with an exemption of $3.5 million
per person and a top rate of 45%. If pay-go passes, it will be
difficult for Senate advocates of a $5 million exemption and a lower
tax rate to prevail. Passage of pay-go may make virtually certain
the extension of the $3.5 million exemption and 45% estate tax
rate.
Lot Sales Produce Capital Gain
In Bruce
A. Rice et ux. v. Commissioner; T.C. Memo. 2009-142; No.
10669-07 (16 Jun 2009), the Tax Court was faced with the question of
whether the taxpayer was an investor or a dealer. The investor
status would qualify the taxpayer for capital gains recognition,
while dealer status would render profits on sales of seven lots
taxable at higher ordinary income rates.
Bruce Rice is a CPA
who previously did tax planning work. He and his wife Donna started
a company to administer 401k plans and manage investments. They were
very successful in business and receive income of over $1 million
per year.
In order to construct their dream home, they
explored acquisition of various parcels of land in Austin, Texas.
They located a 14 acre parcel and purchased it for $300,000 in cash.
Initially, they planned to build a single residence on the 14 acres.
However, Mrs. Rice determined that it would be better to have
neighbors so they obtained zoning rights to subdivide the property
into ten lots.
Between 2004 and 2008, they sold seven of the
lots. Their advertising consisted of one wooden sign indicating the
lots were for sale. Because they constructed their home on the prime
lot of the ten, they created a homeowners association with
covenants, conditions and restrictions on the lots to protect
property values.
They sold Lot One to friends in 2004 and
reported an $89,329.79 capital gain. The IRS contested the capital
gain and claimed that with the sale of multiple lots, all profit
constituted ordinary income due to dealer status.
Under Sec.
1221(a) assets are capital assets with the exception of stock in
trade, inventory or property held for sale in the ordinary course of
a trade or business. The court noted nine factors that determined
property status. These are as follows:
1. The taxpayer's
purpose and reason for property acquisition.
2. The purpose for
subsequently holding the property.
3. The taxpayer's everyday
business.
4. The frequency and substantiality of sales.
5.
The extent of improvements.
6. The extensive use of advertising.
7. The existence of a business office for property sales.
8.
The degree of supervision over sales agents.
9. The time
habitually devoted to sales.
Because Bruce and Donna Rice
sold primarily to friends, did not advertise widely, held other
fulltime jobs and were not real estate developers, the gain was held
qualified for capital gains treatment.
Editor's Note:
The court observed that the IRS had won cases in which there was a
sale of 456 lots and another with a sale of 158 lots. While the
question of dealer status is a question of fact, most individuals
who hold assets long-term and sell ten or fewer lots over a period
of several years will be deemed investors and asset sales will
qualify for capital gains status. For charitable plans, capital
gains status is quite important because the charitable deduction for
an ordinary asset is limited to cost basis, while an appreciated
capital asset qualifies for a fair market value deduction. The Rice
case will be useful to counsel who are assisting clients in a fairly
typical sale and charitable remainder unitrust plan with the goal of
maximizing cash and achieving a zero-tax
sale.
Applicable Federal Rate of 3.4% for July -- Rev.
Rul. 2009-20; 2009-26 IRB 1 (19 June 2009)
The IRS has
announced the Applicable Federal Rate (AFR) for July of 2009. The
AFR under Sec. 7520 for the month of July will be 3.4%. The rates
for June of 2.8% or May 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 - 200924021 Extension Granted to File Split-Dollar
Loan Election
Employer is
a 501(c)(3) non-profit corporation. After meeting with a consultant,
Employer implemented a split dollar life insurance plan (SDP) after
to retain key employees. The plan was designed to issue non-recourse
premium loans to each participating employee. The loans are secured
by the policies.
Employee entered into the SDP with Employer.
Employee had no prior experience with SDPs and relied on Employer's
third party plan administrator (TPA) for set up, advice and document
preparation for entry in to the plan. TPA was aware of Employees
reliance. Employee was not advised by TPA prior to filing the tax
return for the year in which Employee took the loan under the SDP,
that unless Employer and Employee file a written representation with
the Service the payments on the loan will be classified as
"contingent." If the payments are classified as "contingent,"
adverse tax consequences to both the employee and the employer can
arise. Employer switched TPAs and subsequently discovered that no
written representation had been made either at the time Employee's
initial tax returns were due or within the automatic extension
period. Employer appealed to the Service for an extension and urged
Employee to do the same. Employee requested a Letter Ruling granting
an extension of time to file a written representation under Sec.
1.7872-15(d)(2)(ii).
Sec. 1.7872-15(d)(1) states that if a
payment on a split-dollar loan is non-recourse to the borrower, the
payment is contingent for purposes of Sec. 1.7872-15. However, if
the parties to the SDP represent in writing that a reasonable person
would expect all payments will be made, the payments will not be
classified as contingent. The writings must be signed by each party
(Employer and Employee) to the plan and be submitted to the Service
prior to the last day permitted for filing the federal income tax
return of the borrower (Employee) for the year in which the SDP is
implemented. Sec. 301.9100-1(c) provides that the Commissioner has
discretion to grant a reasonable extension if doing so will not
prejudice the Government and provided that the borrower acted
reasonably and in good faith. The Service determined that Employee
did act in good faith in that employee reasonably relied on the
advice of a tax professional and was unaware of the filing
requirement. Therefore, the extension of time was
granted.
Editor's Note: Many non-profit organizations
are turning to split-dollar life insurance plans as a way to retain
and reward key employees. These types of non-qualified deferred
compensation plans are fraught with intricacies and nuance. Care
should be taken to ensure compliance with Treasury requirements.
Failure to provide written representations, apply an adequate
interest rate and other factors can result in the imposition of
addition tax and/or the disallowance of favorable income tax
deductions.
To view the full PLR Click
Here.
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CASE OF THE
WEEK
Exit Strategies for Real Estate Investors, Part
11
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.
After Karl learned about the benefits of a FLIP CRUT, he
eagerly wanted to move forward. (See Parts 1 and 2 for a full
discussion of this decision.) It looked like the perfect solution.
However, Karl still did have some important questions.
First,
Karl wanted to know what steps are needed in order to validate and
solidify his charitable income tax deduction? He knew the IRS would
not just "take his word for it."
To view the solution to
this Case of the Week Click
Here.
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ARTICLE OF THE
MONTH
Unitrust to Gift Annuity
Rollover
With major
changes in the stock and bond markets the past year, some unitrust
donors may prefer the simplicity and stability of a gift annuity.
The fixed payouts and knowledge that the full assets of the issuing
charity (which often are millions or tens of millions of dollars)
stand behind the gift annuity permit the donors to sleep soundly at
night.
A good solution is to consider taking the income value
of a unitrust or annuity trust and exchanging that amount for a gift
annuity. But what are the rules or guidelines for a unitrust to gift
annuity conversion?
In PLR 200152018, a unitrust donor was
interested in rolling over the income interest of the unitrust into
a gift annuity. The donor had created a standard 5% unitrust that
made payments quarterly for his lifetime. Apparently, a single
charity was a remainder recipient and held a vested
interest.
The charity desired to use the remainder value as a
current gift. While in the past some charities have borrowed against
a vested remainder interest for a current project, the donor and
charity proposed a better solution. The donor desired to receive
income and was not willing to gift the entire income interest to the
charity at present. However, if the income interest from the 5%
unitrust could be converted to a gift annuity, the donor could
receive a reasonable income stream for life and the charity could
use the remainder value immediately for a current
project.
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 |
June 22,
2009 |
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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
| |
