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July 28, 2008 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 28, 2008
GiftLaw Weekly eNewsletter - July 28, 2008 WASHINGTON HOTLINE Offshore Tax Havens = Tax Gap PLR THIS WEEK PLR - 200816032 CRT Termination Not Self-Dealing CASE OF THE WEEK The Ivy League CRAT, Part 1 ARTICLE OF THE MONTH Mega-Income Inheritance
WASHINGTON HOTLINE Tax Quote of the Week "The marvel of all history is the patience with which men and women submit to burdens unnecessarily laid upon them by their governments." -- William E. Borah Offshore Tax Havens = Tax Gap At a July 24, 2008 hearing of the Senate Finance Committee, several witnesses discussed the growing tax abuse of offshore tax havens. Sen. Max Baucus,(D-MT), Chair of the Senate Finance Committee, noted that a five-story building in the Cayman Islands named the "Ugland House" had 12,748 tenants in 2004. During the past four years, without "even adding a new floor" there are now 6,000 additional tenants. Sen. Baucus stated, "Offshore evasion costs Americans tens of billions of dollars every year. And that contributes to our nation's $345 billion annual tax gap, the difference between the taxes legally owed and the taxes timely paid. We owe it to hardworking, honest taxpayers to make sure that their tax burden is not increased because sophisticated tax cheats moved dollars offshore." But it is not easy for the government to collect taxes from people who are hiding assets overseas. Sen. Charles Grassley (R-IA) noted, "Finding these tax cheats is a bit like a game of cat and mouse. Only the mouse is hiding its cheese offshore. The IRS needs to be able to stay ahead of the scammers who hide their income offshore." Sen. Kent Conrad (D-ND) was once a State Tax Commissioner. He blasted the IRS for lack of a serious effort in pursuing tax evasion. Sen. Conrad noted that the transfers to offshore shell companies during the time he was Tax Commissioner of North Dakota were "absolutely shocking" and "there is absolutely no question, none, that this was done to avoid and evade legitimate U.S. tax." Sen. Baucus and Sen. Grassley are planning to introduce measures that will allow a longer statute of limitations or time for the IRS to pursue offshore tax evaders, and increased reporting and filing requirements to make it more difficult to hide assets and income offshore. Editor's Note: Sen. Conrad stated that he did an internet search on "offshore tax havens" and over two millions hits occurred. He emphasized that Congress and the IRS are going to proceed aggressively to uncover hidden assets offshore. The IRS is currently pursuing an estimated 19,000 American accounts in the Swiss Bank of UBS AG. Given the urgent need to collect an increasing part of the $345 billion tax gap, further pursuit of offshore funds is certain. Inflated Charitable Gift Appraisal Produces Tax Penalties In Bradley J. Bergquist et al. v. Commissioner; 131 T.C. No. 2; Nos. 17530-06, 17535-06, 17537-06, 17541-06, 17545-06, 17549-06 (22 Jul 2008), the tax court rejected an inflated appraisal on a charitable gift of stock and assessed back taxes and substantial penalties. From 1994-2001 six medical doctors who were all anesthesiologists operated a professional service corporation named University Anesthesiologist, P.C. (UA) Due to changes in the medical field, the Oregon Health and Science University Hospital (OHSU) organized a charitable subsidiary, the OHSU Medical Group (OHSUMG). Approximately 30 different medical groups were in discussions to join OHSUMG. On January 1, 2002 the 30 medical groups, including UA, did consolidate their medical practices as part of OHSUMG. During the year leading up to the consolidation, the six doctors in UA and their tax advisors discussed the possibility of generating a substantial charitable deduction and tax saving through a gift of stock in UA to OHSUMG. Previously, the doctors each paid $100 for 100 shares, so each physician had a basis of $1 per share. On May 23, 2001, there was a 4 for 1 stock dividend, with 4 shares of nonvoting stock transferred to each holder of one share of voting stock. On September 14, 2001, the six doctors each gave their 400 shares of nonvoting stock and 40 shares of their voting stock to OHSUMG. Based upon the assumption that UA was an ongoing business, the Houlihan Valuation Advisors firm appraised the stock for the amount of $401.79 per share. On January 8, 2002, the OHSUMG President notified UA that it would retain this gifted stock with a zero book value. At a January 29, 2002 stockholder's meeting, the six UA doctors were directed not to bring personal tax advisors. While some doctors expressed concern about the high level of the appraised value and suggested they should take a lower deduction, counsel for UA indicated that all doctors should take the same appraised value deduction to reduce IRS scrutiny. The six doctors were also told not to disclose the minutes of this meeting to their personal tax advisors. Subsequently, all six doctors reported the gift of stock deduction at the $401.79 value and the IRS contested the deductions. The IRS auditor reviewed the values and an IRS appraiser determined that the actual asset value of the stock was $37 per share for the voting stock and $35 per share for the non voting stock. The Tax Court noted that valuation is primarily a "willing buyer and a willing seller" test. Subsequent events are normally "not considered" but may have value if they were foreseeable. Because in the view of the Tax Court there was not "any realistic possibility that the consolidation would not occur by year-end 2001," the Houlihan appraisal was deemed invalid since the buyer would obviously know that UA was no longer a going concern. Therefore, the doctors' "experts valuations are based entirely on an incorrect valuation premise" and the Court determined that it would accept the IRS appraiser's value. The IRS appraiser valued UA assets at $1,458,387 and then applied a 35% lack of control discount and a 45% lack of marketability. Based on all of the discounts, the value was deemed as $37 for voting and $35 for non voting stock. With respect to the Sec. 6662(h) 40% accuracy-related penalty for gross valuation misstatement, the Tax Court determined that it was applicable. The six doctors were put on notice that OHSUMG was booking the stock at zero value. While they claimed they should be able to rely on the Houlihan appraisal, the Tax Court determined that this was an "unreasonable" assumption that the doctors knew or had reason "to know is unlikely to be true." The 40% penalty was applicable, except that tax underpayments of $5,000 or less were subject to the 20% accuracy penalty. Editor's Note: Each of the six doctors was promised a "$150K" benefit. Instead of receiving this benefit, the doctors ended up paying taxes, penalties and interest of over $100,000 each. When they were told not to involve their personal tax advisors in the meeting, the red flags were waving wildly in the wind. While the appraisal firm also bears some responsibility for an assumption the Court deemed highly unreasonable, the doctors and their advisors should also have been forwarned of future problems. No Restricted Management Account Discount After years of applying discounts to asset values in family limited partnerships (FLPs), creative counsel developed a "Restricted Management Account" (RMA) to achieve a similar goal. The RMA is typically a five-year management account with a bank. Cash is transferred to the account and there are restrictions that state that the bank will reinvest all proceeds, the taxpayer will be taxed on income during that period of time and at the end of the five years, but the account plus growth will be returned to the taxpayer. However, during the five-year period, the taxpayer is permitted to make gifts of part or all of the RMA. If the taxpayer transfers part of the RMA to a child or a grandchild, the bank will then sever the gifted amount and create a new RMA with the appropriate funds. For example, assume that Eleanor creates an RMA with $50x. In year two, the RMA has grown to $60x and she gives 1/6 to her daughter. The daughter's RMA is now $10x and Eleanor's RMA is $50x. In year four, the RMA term is extended by mutual agreement to seven years. In year five, Eleanor passes away with RMA value of $75x. The question that is raised is whether or not the gift or the estate value will be subject to reduction in a manner similar to an FLP interest. In Rev. Rul. 2008-35; 2008 29 IRB 116 (21 Jul 2008), the IRS refused to allow RMA discounts. First, the IRS compared the RMA to an IRA and noted that the potential tax on an IRA is not deemed subject to a discount for estate tax purposes. See Smith ex. rel. Estate of Smith v. United States, 391 F.d 621, 628 (5th Cir. 2004.). In this case no discount was allowed for potential income tax on the IRA. The second claim by the IRS is that Sec. 2703(a) (2) does not permit restrictions created by the donor on an agreement such as an RMA to affect valuation. Because the donor and the bank are still the only two parties involved in the transaction, the restrictions are deemed ineligible for valuation discounts. Therefore, the value of funds in an RMA will be subject to estate tax at their fair market value on date of death. Applicable Federal Rate of 4.2% for August -- Rev. Rul. 2008-43; 2008-31 IRB 1 (17 July 2008) The IRS has announced the Applicable Federal Rate (AFR) for August of 2008. The AFR under Sec. 7520 for the month of August will be 4.2%. The rates for July of 4.2% or June of 3.8% 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 2008, 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 CRT Termination Not Self-Dealing A and B established C, a charitable remainder unitrust as described in Sec. 664(d)(3). The trust agreement provided for a net income plus makeup trust (NIMCRUT) that was to pay A and B the lesser of the annual trust income or 10% of the trust's net asset value with a makeup feature. A and B served as trustees of C and as the sole non-charitable income beneficiaries. A and B desired to terminate C by selling their income interest to the eight charitable remaindermen for an amount equal to the present value of A and B's life income interest in C. State D law permits termination of the trust, provided that there is agreement among the trustees and beneficiaries. The trustees, income beneficiaries and charitable beneficiaries agreed to the termination of C and it was approved by the attorney general of State D. The Service concluded that early termination of C will not constitute an act of self-dealing under Sec. 4941(a)(1). Sec. 4941 applies to certain transactions between private foundations and disqualified persons. C is a split-interest trust described in Sec. 4947(a)(2) and is subject to the private foundation rules under Secs. 507, 4941 and 4945. A and B, as settlors of C, are disqualified persons with respect to C under Sec. 4946(a)(1)(A). A and B are not disqualified persons with respect to the eight charitable beneficiaries, which qualify as public charities, not private foundations. By early termination, C will distribute lump sums to the income beneficiaries. Generally, payments to income beneficiaries would constitute self-dealing. However, because the distribution to A and B equals the actuarial value of their income interest and the charitable remaindermen are public charities, Sec. 4941 does not apply to the transaction between A and B and the charitable remaindermen. To view the full PLR Click Here.
CASE OF THE WEEK The Ivy League CRAT, Part 1 Nancy Franks, 80, is a loving and giving woman. This is especially true when it comes to her two grandchildren, Tommy and Cathy. Ever since they were born, Nancy has smothered the two with attention, gifts and sweets. Although Tommy and Cathy are now 17 years old, Nancy still bakes them cupcakes for their birthdays and knits them sweaters for Christmas. As seniors in high school, Tommy and Cathy are applying for college. They both want to attend Ivy League universities in the fall. As an Ivy League alumnu, Nancy is thrilled. However, Nancy cannot believe the prices for tuition, room and board nowadays. She can remember the days when tuition, room and board did not even reach $1,000. In contrast, the projected cost of four years of tuition, room and board is $150,000 per student or $300,000 for two students. Taking into account the rising cost of higher education and the limited resources of Tommy's and Cathy's parents, Nancy wants to "take care of it all." How could Nancy accomplish her goal? What vehicle could be used? To view the solution to this Case of the Week Click Here.
ARTICLE OF THE MONTH Mega-Income Inheritance Based on Federal Reserve statistics, an estimated 300,000 to 500,000 Americans now have mega-estates of $10 million or above. Most charities with gift planning programs have 20 to 60 potential donor prospects with estates at this level. These families are able to provide added economic security for children and many have thought carefully about the best way to provide a substantial inheritance. 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 1999-2008 Crescendo Interactive, Inc.
Immanuel St. Joseph's Foundation	July 28, 2008

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