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July 6, 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

Immanuel St. Joseph's Foundation	July 6, 2009
GiftLaw Weekly eNewsletter - July 6, 2009 WASHINGTON HOTLINE "Do Not Tax" Grassley vs. "Do Tax" Sebelius PLR THIS WEEK PLR - 200816032 Early Termination Not Self-Dealing; No Termination Tax CASE OF THE WEEK Exit Strategies for Real Estate Investors, Part 13 ARTICLE OF THE MONTH Current Planned Gifts I - Gift Annuities
WASHINGTON HOTLINE Tax Quote of the Week "Politicians certainly must be considered the most formidable barrier to fundamental tax reform." -- David A. Hartman "Do Not Tax" Grassley vs. "Do Tax" Sebelius As America watches Congress develop landmark healthcare legislation, the debate on the taxes necessary to pay for healthcare continues. Health and Human Services Secretary Kathleen Sebelius spoke on June 29, 2009 and stated that the White House continues to prefer additional taxes on upper-income taxpayers. She indicated that the President continues to support limiting charitable deductions and other itemized deductions for high income taxpayers to the 28% bracket. For taxpayers in the current 33% and 35% brackets and potentially higher brackets in the future, a portion of their charitable deductions and other itemized deductions would be disallowed. Sec. Sebelius also indicated that President Obama is opposed to the Senate Finance Committee suggestion that there should be limitations on deductions for employer-provided health insurance. She indicated that President Obama has "grave concerns" about taxing these benefits because "it will discourage employers from offering coverage." A very different viewpoint was articulated by Sen. Charles Grassley (R-IA). This week he introduced the "Small Business Tax Relief Act of 2009." The bill increases the expensing limit for small businesses from $250,000 to $500,000, expands the lower C corporation rates for smaller businesses, and would permit small C corporations to elect Subchapter S status and avoid tax on built-in-gain after five years. Sen. Grassley indicated, "My bill will leave more money in the hands of small business owners so they can hire more workers, keep paying the salaries of their employees, and make additional investments that will lead to new jobs. Unfortunately, the White House seems to see a lot of small business owners as a cash cow for other priorities and wants to raise their taxes." Sen. Grassley observed that even with the stimulus bill, unemployment is now likely to exceed 10% this year. His bill would promote job development. He emphasizes that "70% of net new jobs" are directly created through small business. Sen. Grassley advocates reducing taxes on small business in order to increase employment. Editor's Note: During this debate on healthcare and taxes, there are three very different directions being pursued by the House, the Senate and the White House. The House solution for raising $500 to $600 billion dollars necessary to pass health care reform is a surtax on higher-income individuals. The White House continues to seek a limit on charitable and other itemized deductions for high-income persons. Finally, the Senate Finance Committee continues to say "health for health" and to seek to find funding for healthcare reform by reducing the benefit of the existing healthcare deductions. While the concept of universal health coverage is generally popular, finding over half a trillion dollars necessary to pay for health care reform is proving difficult. After Madoff Sentenced, IRS Explains Theft Loss Deduction Judge Danny Chin sentenced Bernard Madoff to the maximum 150 years on June 29, 2009. He stated, "The message must be sent that Mr. Madoff's crimes were extraordinarily evil." Because Mr. Madoff is 71 years old, it is quite possible that he will spend the rest of his life in prison. At the sentencing hearing, many of the Madoff victims spoke. Even though they recognize that Mr. Madoff is now going to be giving up his lavish lifestyle, they still favored a long sentence. Many of the victims are famous persons with considerable wealth, but some victims had fairly modest resources and suffered a very painful loss. On June 26, the IRS released a series of information letters sent to Members of Congress in response to their inquiries about Madoff victims from their state or district. The IRS pointed out that it had issued guidance in Rev. Rul. 2009-9 and Rev. Proc. 2009-20 on theft losses from "Ponzi schemes" similar to that run by Mr. Madoff. There were five specific provisions in the Rev. Rul. 2009-9. These are as follows: A Ponzi victim will receive a theft loss with no limits similar to capital losses. The investment theft loss is not subject to the limits that apply to personal casualty losses. A theft loss in a Ponzi scheme may be deducted in the year discovered. The theft loss deduction amount equals the investment and previously taxed income. The theft loss deduction may be carried back (normally three years) and forwarded to generate tax refunds in other years. Editor's Note: The Madoff Ponzi scheme was conducted for over fifteen years. The apparent initial investment by clients was approximately $14 billion. However, with the claimed growth, the final value of those investments exceeded $50 billion. Investors paid tax on much of the $36 billion in "phantom" growth. While investors will lose massive amounts of funds, there at least is some income tax offset. Margin Securities Lead to Unrelated Business Taxable Income In Henry E. and Nancy Horton Bartels Trust for the Benefit of Cornell University et al. v. United States; No. 1:03-cv-02526 (30 Jun 2009), the United States Court of Federal Claims denied the requests of the Bartels Trust for summary judgment on a refund claim. Henry E. and Nancy Horton Bartels created trusts for the benefit of both the University of New Haven and Cornell University. Both trusts invested in margin accounts in order to produce enhanced returns. In both cases, the IRS audited the trusts and claimed that the margin accounts produced unrelated business taxable income (UBTI). In 2000, the 2nd Circuit determined that the margin accounts for the University of New Haven trust had generated UBTI. The present case is the result of investments in 1999 and 2000 by the trust for the benefit of Cornell. The trust paid a tax on UBTI of $88,249 and then filed for a refund. UBTI is defined in Sections 511, 512, 513 and 514. Sec. 511 requires payment of tax on unrelated business income. Sec. 512 defines it as income from an "unrelated trade or business" that is "regularly carried on." Sec. 513 expands the definition of substantially related to a business that has "a cause or relationship" to the exempt purpose. Sec. 514 notes that "debt-financed property" is an acquisition-indebtedness and subject to UBTI unless the debt is "inherent" in the charity's exempt purpose. The Bartels Trust claimed that margin securities did not produce "periodic" income, they were "substantially related," that securities are not a trade or business and there was no unfair competition. The Court reviewed each of these claims. First, unrelated business income tax (UBIT) applies not just to periodic income but also to gains from sale of property. Second, securities are held by nearly all charities to produce income and this process of producing income is not "substantially related" to its exempt purpose. Third, the act of owning securities does not constitute a business, but still may produce UBIT. Fourth, there is an obvious purpose in the UBIT statutes to avoid unfair competition, but that is not a mandatory requirement. Therefore, since Sec. 514 explicitly intends to include debt-financed income in UBIT, the securities purchased on margin generated taxable income. 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.
PLR THIS WEEK PLR - 200816032 Early Termination Not Self-Dealing; No Termination Tax A and B established C, a charitable remainder unitrust as described in Sec. 664(d)3) of the Code. C was created as a net income plus makeup unitrust (NIMCRUT) to pay A and B the lesser of net income or 10% of the trust's net fair market value, with the possibility for recouping lost payments in future years. A and B later desired to terminate C by selling their income interests to the eight charitable remaindermen of C for an amount equal to the present value of A and B's life income interests in C. The law of state D permits early termination of the trust with agreement among the trustees and beneficiaries. A and B, as trustees and income beneficiaries of C, and all eight of C's remainder beneficiaries agreed to the termination. A and B request a ruling that early termination of C will not constitute an act of self-dealing under Sec. 4941(a)(1) of the Code by A or B as trustees or as donors with respect to C and that the proposed termination of C will not be subject to a termination tax under Sec. 507. As a split-interest trust described in Sec. 4947(a)(2), C is subject to the provisions of Secs. 507, 4941, and 4945, as if it were a private foundation. A and B are disqualified persons with respect to C under Sec. 4946(a)(1)(A). Generally, payments to the income beneficiary would constitute self-dealing. However, because the distribution to the income beneficiaries equals the actuarial value of their income interest, the exception to self-dealing in Reg. 53.4947-1(c)(2)(i) applies and the distribution will not constitute self-dealing. Furthermore, because the charitable remaindermen are public charities, Sec. 4941 does not apply to the transaction between A and B and the charitable remaindermen. In this case, the income beneficiaries are not expected to receive more than the actuarial value of their income interests. The relevant state law also permits early termination. Because the effect of the transaction is to vest the income interest and remainder interest in the remainder beneficiary, the trust no longer will be a split-interest trust and Secs. 4947(a)(2) and 507 will not apply. To view the full PLR Click Here.
CASE OF THE WEEK Exit Strategies for Real Estate Investors, Part 13 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 did still have some important questions. After learning that an appraisal and IRS Form 8283 were required, Karl wondered what reporting requirements were imposed upon the charitable donee or CRT trustee in such a situation. To view the solution to this Case of the Week Click Here.
ARTICLE OF THE MONTH Current Planned Gifts I - Gift Annuities Most planned gifts involve a transfer to charity at a future time. For example, a charitable gift annuity, a charitable remainder trust, a charitable annuity trust, a pooled income fund or a life estate all involve a gift at a future time. However, presidents and CEOs of charities generally prefer current gifts as opposed to planned gifts. All presidents and CEOs have many goals and projects that require current funding. Therefore, the gift planner will be very favorably received if he or she understands the different methods for converting a planned gift into a current gift. It is indeed possible for a charitable gift annuity, a charitable remainder unitrust, a charitable remainder annuity trust, a life estate agreement or a pooled income fund to be converted into a current gift. The methods in some circumstances involve an outright transfer to charity. In other situations, there is the retention of a life income through a qualified plan. In most cases, there will also be additional charitable income tax deductions. When a gift annuity is created, the annuitant receives the right to receive the payment for his or her lifetime. This annuity stream is a property right under state law that may be valued. Under the bargain sale rules, the donor has made a gift to charity but has retained the balance of the value. While the annuity contract typically does not allow assignment, there is an exception that allows assignment of the annuity contract value back to the issuing charity. 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 1999-2009 Crescendo Interactive, Inc.
Immanuel St. Joseph's Foundation	July 6, 2009

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