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August 27,
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 27,
2007 |
GiftLaw Weekly eNewsletter -
August 27, 2007
- WASHINGTON
HOTLINE
- PLR THIS
WEEK
- CASE OF THE
WEEK
- ARTICLE OF THE
MONTH
|
WASHINGTON HOTLINE
Tax Quote of the Week
Taxation, in
reality, is life. If you know the position a person takes on taxes,
you can tell their whole philosophy. The tax code, once you get to
know it, embodies all the essence of life: greed, politics, power,
goodness, charity.
-- Sheldon S. Cohen
Increased Tax
Receipts Reduce 2007 Deficit
In a report on August 23,
2007, the Congressional Budget Office reduced the 2007 budget
deficit by $47 billion. The projected deficit is now $158 billion,
or just 1.2% of the gross domestic product (GDP). This deficit is
down from 1.9% in 2006. Because the average deficit for the past
three decades is approximately 2.5% of GDP, the lower 2007 deficit
is welcome news in Washington.
CBO director Peter Orszag
suggested that these figures show an excellent "improvement" in the
budget picture. But he cautioned that there remains a major risk to
the budget due to rapidly growing costs for Social Security and
Medicare. With the future growth of Medicare and Medicaid spending,
he indicated, "The Federal Government is increasingly becoming a
health insurance firm with various side businesses."
Under
CBO projections, by the year 2050 Medicare and Medicaid spending
will equal 20% of GDP. This percentage of GDP is the approximate
amount spent today by the Federal Government for all
purposes.
Senators and Representatives promptly responded to
the CBO lower deficit report. Senate Budget Committee Chair Kent
Conrad (D-ND) observed that there are still huge problems ahead. He
responded, "In total, the nation's debt has already climbed by more
than $3 trillion under President Bush -- much of it borrowed from
foreign nations like China and Japan. I don't hear anyone in the
administration crowing about that statistic."
The ranking
Republican on the House Budget Committee, Paul Ryan (R-WI), was
pleased with the reduced deficit but also expressed caution. He
noted, "Since the start of this year, Congress has veered onto a
dangerous massive spending increase and growth-busting tax hikes,
while simply ignoring the coming financial crisis of our entitlement
programs."
Finally, Acting Director Stephen McMillan of the
White House Office of Management and Budget was pleased with the
report but concerned that Congress has not been able to pass any
budget bills. He noted, "Further, I am concerned that Congress is
not moving quickly on their fundamental responsibility to act on the
President's budget request. With only 19 legislative days to
complete work before the fiscal year ends, Congress has yet to send
a single one of the twelve annual spending bills to the President's
desk."
No New Gas Tax for Bridge
Repairs
Following the collapse of the I-35 bridge in
Minneapolis and the loss of 13 lives, Rep. James Oberstar (D-MN)
held a hearing of the House Transportation and Infrastructure
Committee. He proposed the creation of a National Highway System
Bridge Construction Trust Fund. Rep. Oberstar and Rep. Don Young
(R-AK) have floated the possibility of a 5 cent increase in the
federal gas tax to fund bridge repair.
In an August 16
interview with the Associated Press, Senate Finance Committee Chair
Max Baucus(D-MT) expressed opposition to the "increased gas tax to
refund bridge repair" concept. He indicated that he will oppose an
increase in the federal gas tax because taxpayers will "react
adversely" to the concept. Sen. Baucus did support the concept of a
bridge repair fund, but did not indicate the source of funds for
much-needed bridge projects.
Editor's Note: Each
summer, the surge in gasoline usage for vacation travel leads to
increased gas prices. As a result, there will be few Americans who
support a gas tax increase even for essential bridge repair
projects. Sen. Baucus is recognizing this fact. He and colleagues
from Congress will seek to fund the bridge repairs through other
sources.
Battle of the Appraisers II
In Estate of
Josephine T. Thompson et al. v. Commissioner; Nos. 06-0815,
06-1132 (23 Aug 2007), the Second Circuit vacated and remanded the
decision to the Tax Court to correct a technical calculation error.
Josephine Thompson was a member of the family who
collectively owned Thomas Publishing Co., Inc (TPC). Thomas produces
business-to-business directories in print, CD Rom and Internet
formats. When Ms. Thompson passed away on May 2, 1998, her estate
owned approximately 20% of the TPC shares. During the six years
prior to her death, the company's sales grew to approximately $273
million, with annual operating income of $25 million.
The
estate secured the services of an Alaska attorney and CPA to conduct
the valuation of the 20% TPC interest in the estate of Ms. Thompson.
The assumed annual income for the five years preceding her death was
$7.9 million, with $10 million set aside for technology
expenditures. The estate then used a capitalization rate of 30.5%,
and reduced the resulting value by a combined marketability and
minority discount of 67%. The net result was a 20% TPC interest at
$1.75 million.
The IRS appraiser used a comparable public
company method and two different discounted cash flow methods. The
composite value of the three methods produced an estate value for
the TPC shares of $46.3 million. With a 30% discount for lack of
marketability, the IRS result was an estate value of $32
million.
The Tax Court judge observed that it was unusual to
hire an Alaska attorney and CPA to value a large New York
corporation. Because there was such disparity between the estate
claim at $1.75 million and the IRS claim at $32 million, the Tax
Court determined that it would complete its own valuation. Based
upon an annual income of $7.8 million a capitalization of 18.5% and
the addition of $68 million in short-term investments held by the
corporation which were non-operating assets, the Tax Court
determined the 20% TPC interest to be valued at $22.7 million. With
a 15% discount for minority interest and 30% for lack of
marketability, the Tax Court determined the TPC estate value to be
$13.5 million.
The Second Circuit Court of Appeals generally
supported the Tax Court calculation. However, since the Tax Court
had counted the income from the $67 million in assets twice, the
Second Circuit remanded to correct this error. The IRS claimed that
this correction would reduce the value from $13.5 million to $12.3
million under the Tax Court methods.
The Tax Court had
determined that the Sec. 6602(a) 40% accuracy-related penalty would
not be assessed. However, the Second Circuit reversed that
determination. The Second Circuit pointed out that Alaska attorney
George Goerig did undertake "occasional valuations for small
businesses" and had attended "limited appraisal courses." There was
also "tension" because he had been appointed the Alaska
administrator for the estate. His associate Paul Wichorek, an
accountant from Alaska, had done "occasional valuations for small
businesses," but had membership in "no professional organizations or
associations relating" to appraisal work.
In the view of the
Second Circuit, "Goerig and Wichorek were barely qualified to value
a highly successful and well-established New York city-based company
with annual income in the millions of dollars." As a result, the
Second Circuit vacated the decision not to impose an accuracy
related penalty and remanded it to the Tax Court.
Editor's
Note: With a proposed capitalization rate of 30.5% and cumulative
claimed discount of 67% for lack of marketability and minority
interest, the estate methods can be termed quite aggressive. If an
executor is planning to take a very aggressive position on
valuation, then it is essential to obtain a thorough and complete
appraisal from an appraiser with exemplary credentials. The Thompson
estate was partially successful in obtaining a valuation well below
the IRS number, but risked losing most of that gain through
potential assessment of the accuracy-related
penalty.
Applicable Federal Rate of 5.8% for September.
Rev. Rul. 2007-57; 2007-36 IRB 1 (21 Aug 2007)
The IRS
has announced the Applicable Federal Rate (AFR) for September of
2007. The AFR under Section 7520 for the month of September will be
5.8%. The rates for August of 6.2% or July of 6.0% 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 at www.irs.gov/businesses/small/article/0,,id=112482,00.html
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PLR THIS
WEEK
PLR - 200733007 Provision in Trust is a Deductible
Guaranteed Annuity
Prior
to Decedent's death, Decedent created a revocable living trust. The
trust contained a provision that upon Decedent's death the revocable
trust was to be held in further trust, Trust 2. Under Trust 2
provisions, distributions were to be made to 12 charitable
organizations in equal annual installments of an amount equal to 7%
of the total asset value as of the date of Decedent's death. The
distribution was to come first from net income and to the extent net
income was insufficient, from principal. Payments were to commence
on the date of Decedent's passing. The distributions, and Trust 2
itself, were to continue making payments to the charitable
beneficiaries for a period of 18 years. Upon termination of Trust 2,
the remaining corpus was to be distributed equally among Decedent's
surviving issue. The executor of Decedent's estate sought a ruling
from the Service declaring the proposed arrangement of Trust as a
qualified and deductible charitable contribution under Sec.
2055(e)(2)(B).
Sec. 2055(a) provides that the value of a
taxable estate shall be determined by deducting from the value of
the gross estate the amount of all bequests, legacies, devises or
transfers to or for the use of any corporation organized and
operated exclusively for religious, charitable, scientific,
literary, or educational purposes, no part of the net earnings of
which inures to the benefit of any private stockholder or
individual. Sec. 2055(e)(2) states that the estate tax charitable
deduction is not allowable where an interest passes from the
decedent to a charitable institution and an interest in the same
property passes from the decedent to any other person, unless the
interest is a CRT or a PIF, or is a guaranteed annuity.
The
Service ruled that the interest in Trust 2 was a guaranteed annuity
and qualifies as a deductible interest under Treas. Reg. Sec.
20.2055-2(e)(2)(vi)(a) and is thus deductible from Decedent's
estate.
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 12 - Family Foundation Gets Behind the
Wheel
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 constantly supporting
at-risk youth programs in the local community. In fact, Tommy
created a family foundation several years ago to accomplish his
charitable goals. Surprising to most people, 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, Tommy's lifetime support of at-risk programs
is not a surprise to the people who know Tommy's story.
Tommy
wants to contribute $1 million to his foundation this year.
Specifically, he wants to give approximately 1,000 Ely Motorsports
shares to his foundation. What are the tax consequences to a family
foundation if it receives S corporation stock? Should Tommy proceed
with the current plan or use an alternate asset?
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 27,
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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