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July 9,
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 |
July 9,
2007 |
GiftLaw Weekly eNewsletter -
July 9, 2007
- WASHINGTON
HOTLINE
- PLR THIS
WEEK
- CASE OF THE
WEEK
- ARTICLE OF THE
MONTH
|
WASHINGTON HOTLINE
Tax Quote of the Week
"I learned long
ago that logic and the Internal Revenue Code often do not go
hand-in-hand."
William Gray
IRS "Free File" Web
Software Tax Errors
In a press release on June 29, 2007,
Sen. Max Baucus (D-MT) and Sen. Charles Grassley (R-IA) "expressed
serious concern" about errors in web software provided through the
IRS's Free File program. Free File directs low-to-middle income
taxpayers from the IRS web site to online tax preparation firms for
tax assistance. In an audit by Treasury, there were multiple
calculation errors in Free File web software. The audit also
disclosed that the IRS has links to the Free File commercial
software on its web site, but does not even do basic testing to
determine the accuracy of the results.
Sen. Baucus stated,
"When the IRS refers taxpayers to an online filing service, those
taxpayers have a right to expect accurate tax preparation. If the
IRS really doesn't have the authority to require its Free File
partners to get the software right, then they've got a bad agreement
with these companies that doesn't protect taxpayers as it should. At
a minimum, the IRS needs to provide better assurance that Free File
tax software can handle the most basic tax scenarios. But this
report underscores the need for a direct filing portal on the IRS
web site, where the agency makes certain that the tools supplied to
taxpayers comply with the tax code."
Sen. Grassley
continued, "This is frustrating for Congress and taxpayers alike.
We're in the digital age. We have cameras on our cell phones. We
have Blackberries. But we can't get a free electronic filing option
for taxpayers to work right. Some of these software programs can't
properly compute a tax return using common basic scenarios.
Reliability and accuracy are a problem. Taxpayers have every reason
to question whether they'd be better off with a pencil and an abacus
than using the current Free File program."
Treasury also
suggested that the IRS should promote the Free File service. Many
Americans with incomes under $50,000 per year are eligible for the
service, but do not know that it is available.
Editor's
Note: Sen. Baucus and Sen. Grassley have both pushed the IRS to
provide a basic web tax service for Americans with moderate incomes.
While the IRS has resisted, there are continuing efforts to move
forward with an electronic tax-filing system that will permit many
and perhaps most taxpayers to file online. The IRS's reluctance to
provide a government system is a reflection of the complexity of the
tax system. Even the IRS is hesitant to try to build an accurate
income tax software program.
Treasury Explains
Charitable Tax Shelter Returns
In T.D.
9334 (5 Jul 2007), Treasury issued temporary regulations that
explain tax filing requirements for charities and managers involved
in Sec. 4965 tax shelters. Sec. 4965 was enacted to restrict
involvement by nonprofits in a manner that facilitated operation of
a tax shelter. Initial guidance was provided in Notice 2006-65
(2006-31 IRB 102) and Notice
2007-18 (2007-9 IRB 608), which explained circumstances under
which a nonprofit will be treated as a party to a prohibited tax
shelter transaction. If Sec. 4965 applies, then there is disclosure
required by Sec. 6033(a)(2) for the nonprofit and disclosure
required under Sec. 6011(g) by the tax shelter
promoter.
Section 4965 imposes a new excise tax on the
nonprofit and on its managers for participation in prohibited tax
shelters. These shelters include "listed transactions" under Sec.
6707A(c)(2)) and "reportable transactions" under Sec.
6707A(c)(1).
If Sec. 4965 applies, then the nonprofits are
required to file Form 4720, "Return of Certain Excise Taxes Under
Chapters 41 and 42 of the Internal Revenue Code." The due date is
similar to Form 990 and occurs on or before the 15th day of the
fifth month after the end of the nonprofit's tax year. For a
nonprofit manager subject to the excise tax, the due date is on or
before the 15th day of the fifth month following the close of the
manager's taxable year.
The filing requirements are
applicable with respect to prohibited tax shelters entered into by a
nonprofit after May 17, 2006.
Required Disclosure of
Charitable Tax Shelters
In T.D.
9335 (5 Jul 2007), Treasury issued temporary regulations that
explain disclosure requirements under Sec. 6033(a)(2) and Sec.
6011(g). If a nonprofit is a "party to a prohibited tax shelter
transaction," it must disclose on Form 8886-T that : (a) it is a
party to the prohibited tax shelter transaction and (b) the identity
of any other party to the transaction which is known to the
nonprofit.
A "party to a prohibited tax shelter transaction"
is a nonprofit that (i) facilitates a prohibited tax shelter
transaction; (ii) enters into a listed transaction that reduces its
liability for applicable Federal employment, excise or unrelated
business income taxes, or (iii) is identified in published guidance
as a party to a prohibited tax shelter transaction.
Sec.
6011(g) requires the tax shelter promoter to disclose the tax
shelter to the nonprofit. This disclosure must be made within 60
days after the later of: (i) the date the taxable person becomes a
taxable party or (ii) the date the taxable party knows or has reason
to know that the nonprofit is a party.
T.D. 9335 disclosure
applies to transactions entered into after May 17,
2006.
Tax Shelter Excise Tax on Charities and
Officers
In REG-142039-06
and REG-139268-06 (5 Jul 2007), Treasury issued proposed
regulations that explain the excise taxes for charities and managers
involved in Sec. 4965 tax shelters. Sec. 4965 imposes a new excise
tax on the nonprofit and on its managers for participation in
prohibited tax shelters. These shelters include "listed
transactions" under Sec. 6707A(c)(2)) and reportable transactions
under Sec. 6707A(c)(1).
Nonprofit Excise Tax. There
are two potential levels of tax on a nonprofit participating in a
prohibited tax shelter. These are the "Did Not Know" tax and the
"Did Know" tax. If the nonprofit "Did Not Know" or have reason to
know that it was a party to a tax shelter, then the tax is the top
income tax rate times the greater of: (i) the nonprofit's net income
from the prohibited tax shelter or (ii) 75% of the proceeds received
by the nonprofit from the tax shelter. However, if the nonprofit
"Did Know" or had reason to know it was a party to a prohibited tax
shelter, the excise tax is the greater of the top rate times (i)
100% of the nonprofit's net income from the tax shelter or (ii) 75%
of the proceeds received by the nonprofit from the tax
shelter.
Tax on Managers. There is also an excise tax
under Sec. 4965(b)(2) in the amount of $20,000 on managers who "know
or have reason to know" that the nonprofit is a party to a
prohibited tax shelter. A nonprofit manager is a person who has
authority or responsibility as an officer, director or trustee and
approves or otherwise causes the nonprofit to become a party to the
prohibited tax shelter.
Prohibited Tax Shelter
Transactions. The proposed regulations define the term
"prohibited tax shelter transaction" by reference to the definition
of the term "reportable transaction" in Sec. 6707A(c)(1) and (c)(2)
and the regulations under Sec. 6011. The proposed regulations define
a subsequently listed transaction as a transaction (other than a
reportable transaction within the meaning of Sec. 6707A(c)(1)) to
which a tax-exempt entity becomes a party before the transaction
becomes a listed transaction within the meaning of Sec. 6707A(c)(2).
Treasury did not create exceptions for nonprofits in this
definition.
Definition of Tax-Exempt Party. Excise
taxes under Sec. 4965 apply only if a tax-exempt entity is a party
to a prohibited tax shelter transaction. A "party to a prohibited
tax shelter transaction" is a nonprofit that (i) facilitates a
prohibited tax shelter transaction (ii) enters into a listed
transaction that reduces its liability for applicable Federal
employment, excise or unrelated business income taxes, or (iii) is
identified in published guidance as a party to a prohibited tax
shelter transaction. However, there is an investment exception. A
nonprofit does not become a party to a prohibited tax shelter
transaction solely because it invests in a partnership or hedge
fund.
Nonprofit Managers. The manager must "approve
or otherwise cause" the nonprofit to become a party. Under Sec.
4965(a)(2), a manager is liable only if the manager approves through
an affirmative act of the nonprofit's participation in a prohibited
tax shelter.
Knows or Has Reason to Know. The level of
tax on the nonprofit depends upon whether it knows or has reason to
know that it is becoming a party to a prohibited tax shelter
transaction. The liability of the entity manager for the tax under
Sec. 4965(b)(2) also depends on whether the entity manager knows or
has reason to know that the transaction is a prohibited tax shelter
transaction. However, complying with the Sec. 6033(a)(2) disclosure
requirement is a factor and not proof of knowing that a transaction
is a prohibited tax shelter.
Effective Dates of the
Taxes. Taxes under Sec. 4965 are effective for taxable years
ending after May 17, 2006, with respect to transactions entered into
before, on or after such date, except that no tax under Sec. 4965(a)
applies with respect to income or proceeds that are properly
allocable to any period ending on or before August 15, 2006. When
finalized, the regulations under Sec. 4965 are proposed to be
applicable for taxable years ending after July 6, 2007. Taxpayers
may rely on these proposed regulations for periods ending on or
before such date.
Editor's Note: Sen. Baucus and Sen.
Grassley are strongly urging the IRS to start enforcing Sec. 4965.
Most nonprofit planning with individual donors will not be affected
by the new excise taxes. However, if any gift strategy is advocated
and marketed to a substantial number of donors and there is a tax
shelter element other than normal charitable tax deduction savings,
or there is systematic excessive valuation for gifts of appreciated
property, then nonprofits and their managers risk taxation under
Sec. 4965.
Applicable Federal Rate of 6.0% for July.
Rev. Rul. 2007-44; 2007-28 IRB 1 (15 Jun. 2007)
The IRS
has announced the Applicable Federal Rate (AFR) for July of 2007.
The AFR under Sec. 7520 for the month of July will be 6.0%. The
rates for June of 5.6% or May 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 - 200725044
B created NIMCRUT (net income plus make-up charitable
remainder unitrust) to pay the lesser of the net trust earnings or
10% of the unitrust amount to himself for life. B served as the
trustee of NIMCRUT and E was the proscribed charitable beneficiary.
Later, B changed the charitable beneficiary from E to 12 other named
charitable organizations. Subsequent to the change, B and the 12
named charitable beneficiaries agreed to terminate NIMCRUT and to
divide the trust along actuarial values at their respective
interests. B sought a letter ruling from the Service declaring that
the termination would not be an act of self-dealing under Section
4941(a) and that the termination would not give rise to termination
tax under Sec. 507 of the Code. The Service ruled that the
termination of NIMCRUT would not be an act of self-dealing so long
as the actuarial valuation method is performed according to the
special factor rules of Reg. 1.7520-3(b)(1)(ii). Essentially,
because NIMCRUT pays out the lesser of the trust's net income or 10%
of the trust value annually, the valuation method must use the
lesser of the trust payout percent (in this case 10%) or the Sec.
7520 applicable federal rate. If this method is utilized then the
self-dealing exception of Reg. 53.4947-1(c)(2)(i) applies. Finally,
the Service noted that when the trust is terminated the income and
remainder interests vest in the charitable beneficiaries. As such,
the trust would no longer be a split-interest trust and the
termination tax provisions of Sec. 507 would no longer
apply.
To view the full PLR Click
Here.
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CASE OF THE
WEEK
Getting Back to the "Art of the Matter", Part
3
Paulo Frambini, 45, is a
talented artist and a self-proclaimed leader of the art purist
movement. He lives, breathes and eats art history and culture. Paulo
refuses to be characterized as any one particular type of artist.
Accordingly, Paulo's artistic creations are very diverse and varied.
In fact, during the past year, he painted a traditional 17th century
landscape piece and he sculpted a giant dolphin out of a 2000-pound
marble block. In addition, he also purchased a modern abstract piece
made entirely out of used car parts.
Not surprisingly, Paulo
strongly supports the arts in his community. He frequently gives
workshops and tours at the local art museum. In addition, Paulo also
is fond of the local art college where young new talent is groomed
and developed everyday.
Paulo desires to make a substantial
contribution to charity this year. Specifically, he would like to
give his three new pieces to charity. However, he wants to take full
advantage of the tax benefits associated with charitable
giving.
What are the tax consequences if Paulo gives the
modern abstract piece to the art museum? Does it matter whether the
art museum displays the piece? Why or why not?
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 III -- Charitable
Bailouts
The majority of
family businesses are sold when the founders retire. However,
perhaps one-third of the time children or other heirs will be
capable of taking over the business. In this circumstance, the
parents typically have three goals. First, they desire to have a
secure source of retirement income. Second, there is the desire to
transfer the business to children. However, in most circumstances,
some children will be operating the business and other children will
be pursuing independent lives and careers. For most small
businesses, the children operating the business will need to have
both control and ownership to assure the long-term success of that
business. Thus, goal number two is to achieve transfer of the
business to children, generally with zero gift or estate taxation.
Third, there are usually other children who will not be involved in
the business. Since children view an inheritance from the parents as
a representation of the love of the parents, it is desirable for
there to be at least general equivalence to the overall inheritance.
Therefore, the third goal is to acquire resources appropriate to
provide a substantial inheritance for children who are not involved
in the business.
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 |
July 9,
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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