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July 16,
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 16,
2007 |
GiftLaw Weekly eNewsletter -
July 16, 2007
- WASHINGTON
HOTLINE
- PLR THIS
WEEK
- CASE OF THE
WEEK
- ARTICLE OF THE
MONTH
|
WASHINGTON HOTLINE
Tax Quote of the Week
"Our Constitution
is in actual operation; everything appears to promise that it will
last; but nothing in this world is certain but death and
taxes."
-- Benjamin Franklin
Cost of
Government Day is July 11, 2007
Each year the Americans
For Tax Reform publishes the "Cost of Government Day." This day
represents a combination of Tax Freedom Day, the day that Americans
have finished paying taxes for the year, and Government Regulations
Day. Because tax and government regulations are effectively a cost
of living in America, citizens are now working about half the year
for the federal government.
The Cost of Government Day has
four separate components. Americans for Tax Reform claim that
taxpayers work the following days each year:
| Federal Taxes |
84.5 days |
| State Taxes |
45.7 days |
| Federal Regulations |
41.2 days |
| State Regulations |
20.6 days |
| Total |
192 days |
During the
past several years, the Cost of Government Day has slowly moved from
June 29 in 2000 to July 11 in 2007. The reasons for the increased
cost of government include extra spending to recover from Hurricane
Katrina, the Iraq war costs and increased Medicare and Medicaid
spending. State and local spending also has increased. With the
strong economy in 2004-6, state government revenues increased
sharply. Understandably, state legislators promptly discovered new
"needs" and the excess funds have been spent.
Editor's
Note: The cost of government has risen in part due to the strong
economy. During good times, both federal and state legislatures are
inclined to benefit constituents by increased spending. At the state
levels, budgets must be balanced, and the extra spending comes from
higher tax revenues. However, at the federal level extra spending
often comes from adding to the national debt. While America is the
world superpower and possesses great financial resources, the level
of national debt is fairly substantial. At some point there will be
a need to reduce other federal spending to protect the level of
future spending for Social Security, Medicare and
Medicaid.
May Endowments Invest In Hedge
Funds?
Investments in hedge funds have skyrocketed during
the past decade. Hedge funds are pools of investment assets that are
used in purchasing options, leveraged securities, foreign currencies
and other sophisticated investments. Some hedge fund managers have
produced returns that exceed the general market return by a
substantial margin. With their flexible and aggressive investment
strategies, many hedge funds place resources in tax-favored
investments or tax shelters.
As a result of a desire to
obtain higher returns, the endowments of colleges, universities,
community foundations and many other charities now include hedge
fund investments. In Notice 2007-18, the IRS set forth guidelines
for implementation of Sec. 4965. This section is designed to remove
charities from participation in tax shelters.
On June 26,
2007, John G. Gaine, President of the Managed Funds Association
(MFA), sent a letter to the IRS requesting an exception for
investments by endowments in hedge funds. Mr. Gaine stated,
"Although the investment fund managers represented by MFA generally
do not knowingly participate in prohibited tax shelter transactions,
they nevertheless have a significant interest in the question when a
tax-exempt investor will be treated, for purposes of section 4965,
as a 'party' to transactions (including investments) undertaken by
the fund."
In Notice 2007-18, the Service stated that a
nonprofit will be treated as a "party" if it (1) facilitates the
transaction by reason of its tax-exempt status; or (2) is identified
in published guidance as a party to a prohibited tax shelter
transaction. However, Example 2 in section III B of Notice 2007-18
states that nonprofit investors are not "parties" to the transaction
if they do not facilitate the transaction and are not identified as
parties to a prohibited tax shelter transaction in published IRS
guidance.
Mr. Gaine suggests that passive investment in hedge
funds by nonprofits should be excluded from coverage by Sec.
4965.
Editor's Note: On July 5, 2007 Treasury issued
proposed regulations under Sec. 4965. In REG-142039-06 and
REG-139268-06 (5 Jul 2007), Treasury defined the nonprofit excise
tax, the taxes on managers, the definition of a "Prohibited Tax
Shelter Transaction" and the definition of a tax-exempt party.
Fortunately for nonprofits with hedge fund investments, 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.
Qualifying New Charities For
Exempt Status In Rev. Proc. 2007-52; 2007-30 IRB 1 (9 Jul 2007), the
IRS published guidelines for obtaining exempt status through Form
1023. A summary of key provisions is as
follows:
SECTION 1. WHAT IS THE PURPOSE OF THIS
REVENUE PROCEDURE?
This revenue procedure sets forth
procedures for issuing exempt status determination
letters.
SECTION 2. NATURE OF CHANGES AND RELATED REVENUE
PROCEDURES
Rev. Proc. 90-27, 1990-1 C.B. 514 is hereby
superseded. The responsibility for processing applications is now
centralized in the EO Determinations office in Cincinnati, Ohio. Key
district offices no longer exist.
SECTION 3. WHAT ARE THE
PROCEDURES FOR REQUESTING RECOGNITION OF EXEMPT
STATUS?
An organization seeking recognition of exemption
under § 501(c)(3) and §§ 501(e), (f), (k), (n) or (q) must submit a
completed Form 1023. A substantially completed application,
including a letter application, is one that:
(1) is signed by
an authorized individual.
(2) includes an Employer
Identification Number (EIN).
(3) includes a statement of
receipts and expenditures and a balance sheet for the current year
and the three preceding years (or the years the organization was in
existence, if less than four years).
(4) includes a detailed
narrative statement of proposed activities, including each of the
fundraising activities of a § 501(c)(3) organization, and a
narrative description of anticipated receipts and contemplated
expenditures.
(5) includes a copy of the organizing or
enabling document that is signed by a principal officer or is
accompanied by a written declaration signed by an authorized
individual certifying that the document is a complete and accurate
copy of the original or otherwise meets the requirements of a
"conformed copy" as outlined in Rev. Proc. 68-14, 1968-1 C.B.
768.
(6) if the organizing or enabling document is in the
form of articles of incorporation, includes evidence that it was
filed with and approved by an appropriate state official
(e.g., stamped "Filed" and dated by the Secretary of
State).
(7) if the organization has adopted by-laws, includes
a current copy. The by-laws need not be signed if submitted as an
attachment to the application for recognition of exemption.
Otherwise, the by-laws must be verified as current by an authorized
individual.
(8) is accompanied by the correct user fee and
Form 8718, when applicable. Terrorist organizations not eligible to
apply for recognition of exemption
SECTION 4. WHAT ARE
THE STANDARDS FOR ISSUING A DETERMINATION LETTER OR RULING ON EXEMPT
STATUS?
Exempt status must be established in application
and supporting documents. The applicant is responsible for the
accuracy of any factual representations. Any additional facts must
be reduced to writing over the signature of an authorized
individual. Failure to disclose a material fact on the application
may adversely affect the issuance of a favorable determination
letter or ruling.
Exempt status may be recognized in advance
of actual operations. A determination letter or ruling on exempt
status will not ordinarily be issued if an issue involving the
organization's exempt status is pending in litigation. If an
application is incomplete, the Service may return it. Even if
application is complete, additional information may be required.
Expedited handling of an application may be approved where a request
is made in writing and contains a compelling reason. This could
include a pending grant or a disaster relief organization where time
is of the essence.
SECTION 5. WHAT OFFICES ISSUE AN EXEMPT
STATUS DETERMINATION LETTER OR RULING?
Under Rev. Proc.
2007-4, EO Determinations is authorized to issue determination
letters. EO Determinations will refer to EO Technical those
applications that present issues which are not specifically covered
by statute or regulations.
SECTION 6. WITHDRAWAL OF AN
APPLICATION
An application may be withdrawn upon the
written request of an authorized individual at any time prior to the
issuance of a determination letter or ruling. Generally, the user
fee will not be refunded.
SECTION 7. WHAT ARE THE
PROCEDURES WHEN EXEMPT STATUS IS DENIED?
If EO
Determinations or EO Technical reaches the conclusion that the
organization does not satisfy the requirements for exempt status,
the Service will generally issue a proposed adverse determination
letter and advise the organization of its opportunity to appeal and
request a conference. The organization must submit a statement of
the facts, law and arguments in support of its position within 30
days from the date of the adverse determination letter.
A
proposed adverse ruling issued by EO Technical will advise the
organization of its opportunity to file a protest statement within
30 days and to request a conference. If an organization does not
submit a timely appeal of a letter from EO Determinations or a
timely protest of a proposed adverse ruling issued by EO Technical,
a final adverse determination letter or ruling will be issued to the
organization. If an organization submits an appeal, EO
Determinations will first review the appeal, and may issue a
favorable exempt status determination letter. If EO Determinations
maintains its adverse position after reviewing the appeal, it will
forward the appeal and the exemption application case file to the
Appeals Office.
The Appeals Office will consider the
organization's appeal. If the Appeals Office agrees with the
proposed adverse determination, it will either issue a final adverse
determination or, if a conference was requested, contact the
organization to schedule a conference. At the end of the conference
process, which may involve the submission of additional information,
the Appeals Office will either issue a final adverse determination
letter or a favorable determination letter.
SECTION 8.
DISCLOSURE OF APPLICATIONS AND DETERMINATION LETTERS AND
RULINGS
The applications, any supporting documents, and
the favorable determination letter or ruling issued are available
for public inspection. However, there are certain limited disclosure
exceptions for a trade secret or patent if the Service determines
that disclosure would adversely affect the organization. The public
can request this information. The exempt organization is required to
make its exemption application, supporting documents and
determination letter or ruling available for public inspection
without charge. The Service is required to make adverse
determination letters and rulings available for public inspection.
These documents are made public after the deletion of names,
addresses, and any other information that might identify the
taxpayer. The Service may notify the appropriate State officials of
a refusal to recognize an organization as tax-exempt under §
501(c)(3).
SECTION 9. REVIEW OF DETERMINATION LETTERS BY
EO TECHNICAL
Determination letters may be reviewed by EO
Technical to assure uniformity. If EO Technical takes exception to a
determination letter issued by EO Determinations, the manager of EO
Determinations will be advised.
SECTION 10. DECLARATORY
JUDGMENT PROVISIONS OF § 7428
Generally, a declaratory
judgment proceeding under § 7428 of the Code can be filed in the
United States Tax Court, the United States Court of Federal Claims,
or the district court of the United States for the District of
Columbia with respect to an actual controversy involving a
determination by the Service under § 501(c)(3). Before filing a
declaratory judgment action, an organization must exhaust its
administrative remedies.
SECTION 11. EFFECT OF
DETERMINATION LETTER OR RULING RECOGNIZING EXEMPTION
A
determination letter or ruling recognizing exemption is usually
effective as of the date of formation of an organization if its
purposes and activities prior to the date of the determination
letter or ruling were consistent with the requirements for
exemption. A determination letter or ruling recognizing exemption
may not be relied upon if there is a material change inconsistent
with exemption in the character, purpose, or method of operation of
the organization. A determination letter or ruling may not be relied
upon if it was based on any inaccurate material factual
representations.
SECTION 12. REVOCATION OR MODIFICATION OF
DETERMINATION LETTER OR RULING RECOGNIZING EXEMPTION
A
determination letter or ruling recognizing exemption may be revoked
or modified by (1) a notice to the taxpayer to whom the
determination letter or ruling was issued, (2) enactment of
legislation or ratification of a tax treaty, (3) a decision of the
United States Supreme Court, (4) the issuance of temporary or final
regulations, or (5) the issuance of a revenue ruling, revenue
procedure, or other statement published in the Internal Revenue
Bulletin. Revocation or modification of a determination letter or
ruling may be retroactive
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 - 200725045 Sale of Property Not Subject to
UBIT
PF, a private
foundation, was created over 100 years ago and was originally funded
with many thousands of acres of raw land. Between 1978 and 1982, PF
arranged for the development of this land for residential
condominiums. PF still owned the land but not the condominium units.
PF received rent payments from the owners of the individual units or
condominium associations. PF's exempt purpose was to provide
education and basic needs to orphans and destitute children. PF
determined that it was no longer in PF's best interests to hold on
to the real estate. PF decided to diversify its holdings by selling
the land to the unit holders of record. Before proceeding with the
sale, PF sought a letter ruling declaring that the sale of its real
estate would not give rise to unrelated business tax on the proceeds
and that the sale would not endanger PF's exempt status. The Service
noted that PF obtained the land by gift and held the property for
nearly 100 years and that PF did not intend to advertise the sale of
the land and will offer the right of first refusal to the individual
unit owners and/or the applicable condominium associations. The
Service also distinguished the Brown case where developers
acquired, developed and sold land primary for the sale to customers.
PF did not acquire, has not and will not improve the land and did
not subdivide the property for sale to customers. As such, the
Service ruled, the sale of land by PF does not constitute a
regularly carried on business and will not be subject to UBIT under
Sec. 511 of the Code. Finally, the Service noted that the sale of
the real estate will be used to further PF's exempt purpose and will
not become the primary focus of PF's operations and, as such, will
not give rise to a revocation of PF's exempt purpose.
To
view the full PLR Click
Here.
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CASE OF THE
WEEK
Getting Back to the "Art of the Matter", Part
4
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. In
addition, Paulo knows the tax rules can be "tricky," and he wants to
make sure his tax deductions could withstand an IRS
audit.
What forms must Paulo file to substantiate his gifts?
How does Paulo determine the value of his works of art? Does it
matter who determines the value?
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 16,
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
| |
