|
August 4,
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 |
August 4,
2008 |
GiftLaw Weekly eNewsletter -
August 4, 2008
- WASHINGTON
HOTLINE
- PLR THIS
WEEK
- CASE OF THE
WEEK
- ARTICLE OF THE
MONTH
|
WASHINGTON HOTLINE
Tax Quote of the Week
"I want to find
out who this FICA guy is and how come he's taking so much of my
money."
-- Nick Kypreos
Tax Extenders
Deadlocked Until September
On June 29, 2008, the tax
extenders bill failed to pass for the fourth time. The Jobs, Energy,
Families, and Disaster Relief Act of 2008 (S. 3335) was voted down
on a 51-43 ballot. Republican senators again denied the Democrats
the 60 votes needed to break a filibuster.
The failure was in
part due to White House pressure. In a press release, the White
House stated, "The administration does not believe that efforts to
avoid tax increases on Americans need to be coupled with provisions
to increase revenue. Although the Senate has avoided pairing AMT
relief with tax increases, the bill contains a host of objectionable
provisions." The White House also indicates that the advisors to
President Bush "would recommend a veto" of the bill in its current
status.
Sen. Max Baucus (D-MT) was clearly disappointed. He
lamented the failure and stated, "Today, the Senate missed a huge
opportunity to stand up and stand together, for jobs, energy, and
families. This is the fourth time that Senators have failed to do
what is right on this tax relief bill, and they are going to hear
about it over the August recess."
The deadlock is due to a
major policy difference between the Democratic and Republican Party.
The Democratic Party wants to apply "pay-go" principles to the bill.
However, as the Republicans note, the Democratic Party pay-go
version applies only to taxes and not to spending. That is, in order
to extend expiring tax provisions, the Democratic Party advocates
increasing taxes elsewhere. The Republican Senators suggest that
continuation of existing tax breaks should not require new taxes.
However, they also observed that the offsets should include a
combination of both tax increases and spending
decreases.
Sen. Charles Grassley (R-IA) is both a good friend
of Sen. Baucus and the Republican spokesman on the issue. He noted,
"Folks across the country must wonder why the Senate can't pass the
popular expiring tax relief provisions. There's no disagreement
between the parties on the merits alone. Nearly all members of this
body and the other body support the AMT patch and extenders. They'd
be crazy not to."
However, Sen. Grassley claims that the
deadlock is due to an unwillingness by Democrats to look beyond tax
increases and include limits on spending. He notes that the Senate
Democrats have passed a budget with non-defense discretionary
spending of an additional $350 billion over the White House
proposal. He suggests, "This extra $350 billion is like an extra
checkbook that Congress is carrying around in addition to the
already fat checkbook. We simply ask that they take a few checks out
of this extra checkbook over the next ten years to help pay for part
of the needed tax relief provided in the tax extenders
package."
Editor's Note: While there are over 60 tax
extenders, for most charitable organizations the IRA rollover
extension is the most important provision. With the delay until
September, the earliest the IRA rollover could be passed is early
October. Senate Majority Leader Harry Reid (D-NV) stated, "We need
to do that," and indicated the importance he places on passing the
extenders bill. Therefore, it still remains nearly certain that the
extenders bill will be passed before the end of the year. As a
result, donors, advisors and charities are advised to make plans for
a very focused IRA rollover program during October and November of
2008.
Will the Housing Bill Lead to a
Rebound?
The U.S. housing market remains in the doldrums
as a result of the subprime mortgage crisis. With the dramatic
increases in house payments facing many homeowners with
interest-only adjustable mortgages, there were 1.5 million
foreclosures last year and an expected 2.5 million foreclosures this
year.
Given the depth of the despair in the housing industry,
Congress and the President have worked diligently to develop a
housing bailout bill. The housing bill (HR 3221) was signed by the
President on July 29, 2008. It provides $3.9 billion to state and
local governments to purchase foreclosed homes, includes a line of
credit for mortgage giants Fannie Mae and Freddie Mac and a number
of other tax provisions.
Sen. Max Baucus was delighted with
the housing bill and indicated, "This is an enormous win for
millions of American families facing foreclosure and for our housing
sector at the core of this economic downturn. It took ingenuity and
great cooperation, and today I'm pleased to say that we passed a
bill that will bring property tax relief to tens of millions of
homeowners, help refinance subprime loans, and reduce the number of
vacant homes on the market."
The housing bill includes four
specific tax provisions. These are:
- Repayable $7,500 credit -- New homeowners acquiring
their first residence may receive a credit of $7,500. The credit
is repaid over the next 15 years. In effect, it is an
interest-free loan in that amount. The credit is limited to 10% of
new home value, so the full value is available for homes costing
$75,000 or more. The credit phases out for married couples with
modified adjusted gross incomes between $150,000 - $170,000. For
single persons, the credit phases out between incomes of $75,000 -
$95,000.
- Standard deduction for property taxes -- For
individuals who take the standard deduction and do not itemize,
there is a new above-the-line deduction for property taxes up to
$1,000 married or $500 single.
- Vacation home converted to principal residence - Some
homeowners have sold their principal residence and used the
$250,000 ($500,000 married) capital gains exclusion. Then they
move to a vacation residence, reside for two years and again sell
and receive the exclusion. Starting in 2009, the exclusion will be
prorated based upon the length of time the property was a vacation
home and the length it was a personal residence. This will reduce
the value of the exclusion for many owners of vacation
properties.
- Merchant bank reports -- Many individuals have a
relationship with a bank that receives credit card amounts from
items sold on eBay or in a business. In 2011 and later years,
these banks will be required to report the total gross receipts to
the individual and to the IRS. This reporting will enable the IRS
to check claimed earnings from eBay businesses and other similar
sales businesses against the receipts reported by the merchant
bank.
Hardline Tax Court Judge Denies Charitable
Deductions
In Daniel
Gomez et ux. v. Commissioner; T.C. Summ. Op. 2008-93: No.
13167-07S (30 Jul 2008), the taxpayers were members of the Apostolic
Assembly, a church body. During 2005, they tithed to the Assembly
and gave $6,548.27. Their total charitable deductions claimed on
their 2005 IRS Form 1040 were $6,885.
An IRS auditor
discovered that while they had checks to prove the gifts, they did
not have the required receipts. On January 22, 2008, they received a
letter from Apostolic Assembly indicating gifts that totaled $6,552.
Because the letter was late, the IRS denied the
deductions.
The Court noted that deductions under Sec. 170(a)
and 170(c) require appropriate substantiation. For gifts of $250 or
more, there must be "contemporaneous written acknowledgement from
the donor organization." See Sec. 170(f)(8)(A). The contemporaneous
acknowledgement must be obtained on the earlier of the date the
taxpayer files the return or the due date (including extensions) for
this filing. Sec. 170(f)(8)(C).
In this case, the judge and
the IRS agreed that the gifts had been given and that the Apostolic
Assembly was a qualified charity. However, even though the letter of
January 22, 2008, from the Apostolic Assembly substantiated the
gifts, the statute required the letter to have been received by the
due date of the income tax return on April 17, 2006. Therefore, the
Court denied the charitable deduction.
Editor's Note:
This is a very hard case. Everyone acknowledged that the gifts were
indeed made to a qualified charity and the taxpayers did have
cancelled checks. However, it reinforces the importance of taxpayers
obtaining receipts for gifts over $250 prior to filing their tax
returns and also the importance for all charities to distribute the
receipts. Most charitable organizations will send receipts
immediately following a gift or a cumulative gifts receipt each
January for the prior calendar year.
IRS Publishes
Charitable Lead Unitrust (CLUT) Forms
In Rev.
Proc. 2008-45; 2008-30 IRB 224 and Rev.
Proc. 2008-46; 2008-30 IRB 238 (28 Jul 2008), the IRS published
forms for both inter vivos and testamentary lead unitrusts.
The inter vivos lead trust forms were published for both a
"nongrantor CLUT" and a "grantor CLUT." The grantor CLUT qualifies
the donor for a charitable income tax deduction. However, subsequent
income distributions by the trustee to charity generate no further
deductions, and the grantor remains taxable on those
amounts.
The grantor CLUT guidelines cover a unitrust for a
term of years or one life, permit retention of the right to change
charitable beneficiaries, allow apportionment by the trustee of the
unitrust amount and selection of alternative charitable
beneficiaries. The grantor trust includes Sec. 675(4) language to
grant a power for a third party acting in a nonfiduciary capacity to
substitute property of equivalent value for trust assets.
The
nongrantor CLUT covers trusts for both a term of years or one life.
There are provisions with suggested language for valuation,
additional contributions, allocation of unitrust amounts and
prohibited transactions. Testamentary charitable lead trust forms
include similar provisions. There are testamentary lead trust
examples for a term of years or for one life.
All of the
CLUT forms do not include any ordering of the distributions under a
structure similar to the four-tier ordering methodology of
charitable remainder trusts. The IRS position is that distributions
shall be prorated among all categories of
income.
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 - 200830011 No Passive Rental Income for S
Corporation
Company (X),
an S corporation, owns several commercial and rental real estate
properties that are leased to tenants. Through its agent, X provides
certain services in connection with leasing the properties which
include maintaining and repairing the buildings, common areas and
grounds, cleaning, painting, electrical, plumbing, roof and
structural maintenance, garbage and recycling, landscaping and
extermination services. In Year 1, X collected $a in gross rents and
incurred $b in relevant operating expenses. X requested that the
Service classify the $a income received as active rather than
passive investment income in order to avoid the Sec. 1375(a) tax on
S corporations with excess passive income.
The Service
concluded that X's $a rental income is not passive investment income
and the Sec. 1375(a) tax does not apply. "Rents" are included in the
Sec. 1362(d)(3)(C)(i) definition of passive investment income. Sec.
1.1362-2(C)(5)(ii)(B)(1)-(2) further defines rent as amounts
received for the use of, or right to use, property. However, rents
derived from the active trade or business of renting property, such
as a corporation providing significant services or incurring
substantial costs in the rental business are not passive investment
income. In maintaining, repairing, cleaning, recycling, etc., X
provided significant services with respect to the property
management and therefore rents received are not passive investment
income.
Editor's Note: Although X desired to avoid
classifying the rental income as passive, in a charitable context,
passive income classification is preferred in order to avoid
unrelated business income tax (UBIT). While a charity may hold stock
in a Subchapter S corporation, if the corporation is an active trade
or business, all income will be UBIT and taxable for the
charity.
To view the full PLR Click
Here.
|
CASE OF THE
WEEK
The Ivy League CRAT, Part 2
Nancy Franks, 80, is a loving and giving woman.
Nowhere is this truer than when it comes to her two grandchildren,
Tommy and Cathy. Ever since the twins 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
alumnus, 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."
As a result, Nancy created a $400,000 term-of-years charitable
remainder annuity trust (CRAT). (See "The Ivy League CRAT, Part 1")
The CRAT provided three wonderful benefits: 1) fixed payments to
cover education costs, 2) income tax savings and 3) remainder gift
to charity. However, Nancy wondered if the trust arrangement was
subject to gift tax?
Is the CRAT for Tommy and Cathy subject
to gift tax? Does Nancy have to file a Form 709 Gift Tax Return? How
much gift tax, if any, is due?
To view the solution to
this Case of the Week Click
Here.
|
ARTICLE OF THE
MONTH
Life Estate Opportunities in a Down
Market
With home prices
falling and real estate markets down, more of your senior donors are
deciding to remain in their homes. Contractors report remodels are
on the rise with additions that include first floor living quarters
and bathrooms equipped with safety-bars for those desiring to
maximize in-home longevity.
The prospect of more and more of
your donors wishing to remain in their homes presents the perfect
opportunity for marketing a charitable life estate gift. The goal of
this article is to cover the basics of life estates and address some
of the gift acceptance issues including MIT agreements and life
estate rollover options.
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 |
August 4,
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
| |
