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August 20,
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 |
August 20,
2007 |
GiftLaw Weekly eNewsletter -
August 20, 2007
- WASHINGTON
HOTLINE
- PLR THIS
WEEK
- CASE OF THE
WEEK
- ARTICLE OF THE
MONTH
|
WASHINGTON HOTLINE
Tax Quote of the Week
"Taxes: Of life's
two certainties, the only one for which you can get an automatic
extension."
-- Anonymous
61% of Sole
Proprietors Underreporting Income
The Government
Accountability Office released a report on August 13, 2007 on sole
proprietors and small businesses. According to the government
report, 61% of sole proprietors are not reporting the full amount of
their business income.
There are approximately 10 million
sole proprietors in the nation. Over half of them an estimated $903
understatements. However, 10% of the sole proprietors had
substantial understatements. The 1 million sole proprietors with
substantial understatements owe the IRS an average of
$6,200.
The GAO report noted, "Slightly more than 1 million
sole proprietors accounted for most of the understatements." In the
top group of underreporting businesses, 5% of sole proprietors owed
the IRS $18,000 or more.
The report offered four suggestions
to improve the tax payment record of sole proprietors. These
included greater assistance to taxpayers, more convenient tax
returns, additional reporting from sole proprietors and increased
IRS audits.
Sen. Charles Grassley (R-IA) offered a balancing
comment on the report. He noted, "Compliance with federal tax laws
is already a major expense and headache for America's small
businesses. The burden is on the IRS to streamline filing processes
and demonstrate better use of information it already has about
compliance problems before sole proprietors are asked to do
more."
Editor's Note: Sen. Baucus and Sen. Grassley
have been holding Senate Finance Committee hearings on the estimated
$345 billion dollar "tax gap." The IRS has made efforts to close
this tax gap and collect added tax focus on a number of areas,
including sole proprietors. However, Sen. Grassley's comment
reflects the dilemma for both senators. With 10% of sole proprietors
underreporting, Sen. Grassley is cautioning the IRS not to create
undue burdens for the 90% who generally are paying their
taxes.
Charities Must Report LLC Tax Shelter
Gift
In 2006, the Senate Finance Committee was concerned
about charities participating in tax shelter strategies and Sec.
4965 was passed. Under Sec. 4965, there is an excise tax on
non-profits involved in "Listed Transactions and Reportable
Transactions." In T.D. 9335 (July 2007) temporary regulations
created a requirement for charities who are a "party to a prohibited
tax shelter transaction" to disclose that gift on Form
8886-T.
In Notice
2007-72; 2007-36 IRIRB 1 (14 Aug 2007), the Service gave notice
of a reportable LLC gift transaction. The transaction involves three
steps and creates a reportable gift to a charitable
organization.
In a typical LLC gift transaction, the first
step is the creation of an LLC that owns real property. Frequently,
the real property is leased on a long-term basis to a third
party.
Second, the LLC creates a term of years and a
successor interest. The successor interest is sold to a taxpayer.
Following the expiration of the term of years, the taxpayer would
then own the LLC interest. These LLC future interests are discounted
under Sec. 7520 principles.
Third, the taxpayer holds the
interests for one year and a day to obtain long-term capital gain
status, and then gives the LLC interest to a public charity. The
taxpayer frequently claims a much larger charitable deduction for
the gifted interest than the purchase price one year
previously.
With this gift of LLC interest to charity, the
notice indicates that "the IRS and the Treasury are concerned with
the large discrepancy between (1) the amount taxpayer paid for the
Successor Member Interests and (2) the amount claimed by taxpayers
as a charitable contribution."
If a charitable organization
receives a gifted interest under this or a similar plan after
November 2, 2006, then that organization must "disclose the
transaction as described in Reg. 1.6011-4." This regulation states
that a charity receiving a reportable gift must file IRS Form 8886
Reportable Transaction Disclosure Statement.
Editor's
Note: This is the first of what could be a number of notices
from the IRS that require disclosure by charitable organizations.
Charities should be particularly sensitive to transactions in which
an LLC or other business interest is transferred to the charity, the
donor requests a specific holding period and the donor or a related
person is interested in repurchasing the assets. While public
charities are not bound by the Sec. 4941 self-dealing rules and,
therefore, may sell assets to donors, it is especially important in
the current regulatory environment that the sale be clearly
documented as commercially reasonable and at fair market value. In
addition, any gift of LLC interests should be reviewed for potential
compliance requirements under the above notice.
IRS
Wins 5% Art Discount Case
In Robert Grove Stone et
al. v. United States; No. 306-cv-00259 (10 Aug 2007), the estate
included a 50% interest in 19 paintings. The paintings were valued
at $5,532,500 and the estate's 50% interest was valued at
$2,766,250, less any applicable discount. Following an initial
determination of value by the court, Treasury and the estate were
asked to negotiate an appropriate discount. The estate initially
claimed a discount of 44% for lack of marketability, while Treasury
was willing to grant a 5% discount.
Following the inability
of the parties to agree on the appropriate discount percentage, the
court determined the discount to be the 5% amount offered by
Treasury.
There were three principal reasons why the court
rejected the request by the estate for a substantial discount.
First, the art is "simply not fungible." Since it is unique, buyers
may purchase a 50% interest even though there is another owner.
Second, the estate's assumptions of 3% per year appreciation and
discount rate for the future value of the art of 18% per year were
not deemed reasonable. Third, a person owning art for investment
purposes would not reasonably expect an 18% or a higher rate return.
The estate's analysis suggested a 20% expected rate of return for
art investors. In the view of the court, this was not "a reasonable
expected rate of return for individuals who invest in
art."
The court did allow a 5% total discount. This was based
on a 2% discount for actual selling costs of the art, $50,000 to
account for legal fees for partition of the art and 1.2% for the
uncertainty involved in the partition. The court acknowledged that
the 1.2% uncertainty discount was quite low, but noted that
"plaintiffs have provided no evidence from which this court could
reasonably base any larger discount."
Editor's Note:
This case is a very clear valuation win for the IRS. The estate
provided a valuation analysis so aggressive in its assumptions that
the court created a "standard of reasonableness." In the view of the
judge, if the estate did not provide a reasonable basis for
valuation that recognized the ability of a willing buyer to force a
partition and sale, then Treasury methods and assumptions would be
accepted. While estate executors are naturally likely to propose
major discounts for fractional interests, it is essential to offer a
rational basis for the claimed discount.
Applicable
Federal Rate of 6.2% for August. Rev. Rul. 2007-50; 2007-32 IRB 1
(18 Jul. 2007)
The IRS has announced the Applicable
Federal Rate (AFR) for August of 2007. The AFR under Section 7520
for the month of August will be 6.2%. The rates for July of 6.0% or
June 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 - 200732021 Unitrust Endowment Investment
Approved
University
proposed creating an investment contract for charitable remainder
trusts. With this contract, the unitrusts will earn the same rate as
the university endowment. The IRS approved the endowment investment
contracts with several requirements.
First, the investment
contracts must receive the appropriate prorated share of the
endowment return, but the trust may have no interest in the
endowment assets and all payments will be ordinary income to the
unitrust. Since Sec. 664 Tier One ordinary income is distributed
first to income recipients, payouts from these unitrusts will be
ordinary income. Second, the trustee will not be permitted to
influence or control endowment investments. Third, the university
must be the sole vested charitable remainder
recipient.
Finally, university will not charge any fee for
managing trust investments and will also be entitled to the fees any
trustee may receive with respect to the administering
trusts.
To view the full PLR Click
Here.
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CASE OF THE
WEEK
S Corporation Gifts - Strategies and Hurdles Every
Advisor Should Know, Part 3 - The Oil & Vinegar
CRT
Tommy Ely, 58, owns
and operates eight car dealerships spread throughout the city and
surrounding areas. Founded in 1977, Tommy is the sole shareholder of
Ely Motorsports, Inc., an S corporation. The eight car dealerships
represent mainly high-end, luxury car lines. Specializing in
providing unparalleled customer service before, during and after the
sale, Ely Motorsports appeals to the affluent and wealthy. Not
surprisingly, Ely Motorsports generates over $250 million annually
in sales and consistently ranks among the nation's top five best
dealerships, a record 12 years in a row.
As a long-time
active member of the community, Tommy is frequently invited to
charity fundraisers and events. Tommy is also one of the top ten
richest people in the city, which probably does not hurt his
popularity either. At a recent fundraising function for at-risk
youth, Tommy publicly pledged $1 million. Tommy is constantly
supporting at-risk youth programs in the local community. In fact,
Tommy was an at-risk youth himself. Having run away from an abusive
home at age fifteen, Tommy actually lived on the streets for a brief
time. Fortunately, Tommy was befriended and taken in by volunteers
of the local at-risk youth center at the age of sixteen. Through
love, support and counseling, Tommy turned his life around and the
rest is "car" history. Consequently, the $1 million pledge
announcement and lifetime support of at-risk programs was not a
surprise to the people who know Tommy's story.
Tommy wants to
satisfy his $1 million pledge obligation with a gift of
approximately 3,000 Ely Motorsports shares (approximate value of $3
million) into a CRUT. The present value of the remainder interest is
more than $1 million, and therefore it would satisfy Tommy's pledge.
What are the tax benefits and pitfalls to Tommy if he contributes S
corporation stock into a CRUT?
To view the solution to
this Case of the Week Click
Here.
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ARTICLE OF THE
MONTH
IRA Charitable Donor Profiles in
2007
The Pension
Protection Act of 2006 (PPA 2006) created a new charitable planning
opportunity. Under PPA 2006, an IRA owner age 70˝ or older may make
a direct transfer to charity. The transfer may be up to $100,000 in
one year and PPA 2006 provided that this option will exist for year
2006 and year 2007. Sec. 408(d)(8)(A).
Who will make IRA
Rollover gifts in 2007? There are five donor profiles for IRA
rollover gifts. The first is the convenience donor who finds it a
very simple and easy method for an end-of-year gift. The second is
the generous donor, who wants to give past the 50% of AGI limit. The
third is a major donor. This person may be a board member or trustee
who is looking for a favorable opportunity to make a major gift.
Fourth, the Social Security recipient may reduce taxes with an IRA
rollover gift. Finally, a standard deduction donor will benefit from
a direct IRA to charity gift.
The majority of IRA owners
delay taking IRA withdrawals until November or December each year.
As the individual approaches the end of the year, he or she will
need to make decisions. If an IRA owner is actively making gifts to
charity during the year, then it may occur to him or her that this
is a good opportunity to make a gift.
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 |
August 20,
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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