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August 31,
2009
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 31,
2009 |
GiftLaw Weekly eNewsletter -
August 31, 2009
- WASHINGTON
HOTLINE
- PLR THIS
WEEK
- CASE OF THE
WEEK
- ARTICLE OF THE
MONTH
|
WASHINGTON HOTLINE
Tax Quote of the Week
"Complexity does
not enter the tax code so much out of malevolence as through
misguided reform efforts and excessive demands made on tax laws as
the vehicle for implementing public policy."
-- Sheldon D.
Pollack
Healthcare Reform by the "Gang of
Six"
Six Senators (who are now being called the "Gang of
Six") continue to labor during a hot August over healthcare reform.
Three Democrats and three Republicans are considering plans that may
impact a major part of the entire American economy.
Sen. Max
Baucus (D-MT), Sen. Kent Conrad (D-ND) and Sen. Jeff Bingaman (D-NM)
are joined by Sen. Charles Grassley (R-IA), Sen. Olympia Snowe
(R-ME) and Sen. Mike Enzi (R-WY).
Under Senate rules, it is
possible for a small group of Senators to block most legislation.
While the budget legislation may be passed by a vote of 51 Senators,
the complexity of health reform suggests that it may be difficult
under Senate rules to use that method. Therefore, Senator Baucus has
been attempting to create a bipartisan plan with six members of the
Senate Finance Committee.
Because the healthcare reform is
expected to cost approximately $1 trillion over 10 years, the most
challenging part of a healthcare reform bill is determining the new
taxes necessary to pay for reform. The House healthcare reform bill
creates a surtax of 5.4% on taxpayers with incomes over $1 million,
with a lower surtax of 1% to 3% on individuals with incomes over
$350,000 and over $500,000, respectively. Because of the reluctance
by House leaders to move the healthcare tax to lower brackets, the
upper level bracket was raised from an initial proposed rate of 3%
to 5.4%.
The Senate "Gang of Six" has so far been reluctant
to adopt the House strategy of taxing high-income persons. It
generally has favored the concept of a tax on "gold-plated"
healthcare plans. Because of union opposition to that tax, the
current proposal is for insurance companies rather than individuals
to pay this tax. To date, the White House has not been willing to
support a tax deduction limit on healthcare
plans.
Editor's Note: The "Gang of Six" has been
conducting weekly conference calls and members have maintained
contact during August. The primary challenge for crafting the
healthcare bill is determining an acceptable method of producing
approximately $600 billion in new tax revenue. The balance of the $1
trillion cost is also controversial because it involves savings in
Medicare and Medicaid.
Director Orszag Promises
"Fiscally Sustainable Path"
On August 25, 2009, the White
House Office of Management and Budget (OMB) released an updated
economic forecast. Based upon the deepening recession, OMB predicts
that the deficit over 10 years has increased from the projected $7
trillion of May 2009 to a present estimated number of $9.05
trillion.
The review by Director Orszag includes both bad
news and good news. The bad news is that the deficit projection has
increased by $2 trillion. Director Orszag states that this is due to
"a deeper-than-expected recession." With the recession, there are
increases in expenditures for unemployment insurance and food stamps
that increase the deficit.
The good news is that the bank
bailout costs are lower than projected. The costs for the bank
bailout are reduced by $262 billion. With this savings, the
projected deficit this year is reduced from $1.84 trillion to $1.58
trillion. The lower deficit is a reflection of the improving bank
status. While there still are record levels of foreclosures for
2009, bank reserves and profits have improved substantially during
the last three months.
Senate Finance Chair Max Baucus noted,
"Today's budget reports serve as a clear illustration that
healthcare spending is out of control and threatens the healthcare
programs families rely on, such as Medicare and Medicaid. We simply
can't afford these skyrocketing healthcare costs and that's a key
reason why healthcare reform is so important."
The ranking
Republican on the Senate Budget Committee Judd Gregg (R-NH)
responded by stating, "While the U.S. healthcare system does need to
be reformed, we cannot ignore the fiscal realities of our situation.
We are in a very deep budgetary hole, and the CBO has confirmed that
the current Democratic plans unveiled so far would only increase
government spending on healthcare, not lessen
it."
Editor's Note: With the very large impending
deficit, Sen. Kent Conrad (D-ND) continues to propose a bipartisan
committee similar to the base-closing committees. The bipartisan
committee would set targets for expenditures and taxes and propose a
solution that would be subject to a yes or no vote by the House and
the Senate. Sen. Conrad believes that this may be the best method to
resolve the budget deficit.
State Property Law
Protects LLC Discount
In Suzanne
J. Pierre v. Commissioner; 133 T.C. No. 2: No. 753-07 (24
Aug 2009), the Tax Court upheld a check-in-the-box LLC
discount.
Suzanne Pierre received a $10 million cash gift
from a wealthy friend in 2000. She decided to create a trust for her
son and a second trust for her granddaughter. Pierre created the
Pierre Family LLC under the laws of the state of New York on July
13, 2000.
On September 15, 2000 she transferred $4.25 million
in cash and securities to Pierre LLC. Twelve days later on September
27, 2000, she gave a 9.5% interest in Pierre LLC to each of the two
trusts and sold for a promissory note a 40.5% interest to each
trust. At that time, she had effectively transferred 100% of her
interest. Her appraiser, James Shuey, determined that the LLC under
New York law should qualify for a 30% discount, although Pierre
admitted that an improper discount of 36.55% was used in filing IRS
Form 709, United States Gift Tax Return.
The IRS contested
the gift tax return discounts and claimed that "check-in-the-box"
regulations caused the single-member LLC to be a disregarded entity.
Therefore, the gifts were valued at the underlining asset value.
With no discount, the IRS deficiency was $1,130,216.11 for gift tax
and $24,969.19 for generation skipping transfer tax.
The Tax
Court majority of 10 judges determined that, historically, property
rights have been defined by state law. Because "state law creates
legal interests and rights" in property and Pierre LLC was a valid
entity under New York law, the 30% discount reflected the rights and
limitations of that LLC. While the check-in-the-box regulations
create a disregarded entity for income tax purposes, the Tax Court
majority determined that state law still determines property rights.
The discounts therefore are permitted.
In a dissenting
opinion, Judge Halpern indicated that he and five other judges would
interpret the "disregarded entity" regulations literally and would
also disregard the LLC for gift tax valuation
purposes.
Editor's Note: In a concurring opinion,
Judge Cowen noted, "Congress has the ability to, and on occasion has
opted to, modify the willing buyer, willing seller standard." With
the current budget crunch in Washington, there are several bills in
Congress that would limit or eliminate LLC and FLP discounts for
passive assets. Given the continual quest for revenue that is likely
to be a decade-long effort, there will be extensive discussion in
Congress of the potential for reducing valuation discounts through
legislation.
Applicable Federal Rate of 3.4% for
September -- Rev. Rul. 2009-29; 2009-37 IRB 1 (18 Aug.
2009)
The IRS has announced the Applicable Federal Rate
(AFR) for September of 2009. The AFR under Sec. 7520 for the month
of September will be 3.4%. The rates for August of 3.4% or July of
3.4% 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 2009, 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 - 200932060 Scholarships Not Taxable
Expenditures
B is a
private foundation within the meaning of Sec. 509(a) of the Internal
Revenue Code. B decided to award scholarships to high school seniors
in the area. Scholarships will be available to any high school
senior attending a school in the area where B is located who: (i)
has at least a 3.0 grade point average; (ii) has been active in
extra-curricular and/or leadership activities; and (iii) has applied
for admission to C. The award process will be publicized and
conducted primarily though the counselors at the high schools. The
scholarship committee will not discriminate on the basis of
religion, race, race, gender or ethnicity. However, B has indicated
that family members of any officer, director or member of the
scholarship committee are not eligible. As an additional safeguard
against misappropriation of scholarships, no one with a family
member who is a senior at one of the local high schools may serve on
the committee. The scholarship committee will: (i) verify the
recipient's enrollment; (ii) verify the accreditation of the
institution or program; (iii) rrequest any documentation the
Selection Committee determines is necessary to support the
recipient's use of the funds; and (iv) investigate if a recipient
fails to file a report or respond to a request for additional
information. Furthermore, B will maintain records regarding
awardees, receipts from payments, accounting records and evaluation
materials.
Sec. 4945 imposes a tax on private foundations for
any "taxable expenditures" made. However, scholarships are not
classified as taxable expenditures under Reg. 53.4945-4(c)(1) of the
Regulations provided that the private foundation demonstrates that:
(i) its grant procedure includes an objective and nondiscriminatory
selection process; (ii) the procedure is reasonably calculated to
result in performance by grantees of the activities that the grants
are intended to finance; and (iii) the foundation plans to obtain
reports to determine whether the grantees performed activities that
the grants are intended to finance. Because B demonstrated to the
Service's satisfaction that it observes these requirements, the
scholarship payments will not be classified as taxable
expenditures.
To view the full PLR Click
Here.
|
CASE OF THE
WEEK
No Marital Deduction Needed
Keith and Karen Crosby, ages 75 and 72, own a parcel
of undeveloped real estate that they have held since 1979. They
purchased the property for $10,000 and the current fair market value
is approximately $800,000. Their goal for this property was to
transfer it to their two children upon their passing, but they could
use more income now. Since their estate is approximately $2.5
million and each has an estate exemption of $3.5 million (total of
$7 million), they are not facing estate taxes.
They have not
considered selling the property because of the capital gains tax
consequences, so they find themselves "between a rock and a hard
place" on how to increase their income. They are both in relatively
good health, but Keith did suffer a heart attack seven years ago and
Karen recently suffered a minor stroke. They have both recovered
nicely and are continuing to experience an active lifestyle which
involves a good deal of traveling.
Keith and Karen are active
philanthropists and were recently presented an award which honored
their years of service and financial support of a local charity.
They are interested in leaving a bequest to this favorite charity,
but would also like to couple this gift with benefits for their
children. Also, because they plan to travel more extensively in the
future, additional income would be a worthwhile objective in their
planning. In discussions with Susan Collins, the Director of Major
Gifts at favorite charity, she explained the concept of funding a
lifetime charitable remainder unitrust with the undeveloped real
estate. Susan then suggested that they could replace the asset by
purchasing insurance through a life insurance trust. By utilizing
the "Crummey" powers, the insurance could pass to the children free
of gift and estate tax.
Susan did not realize that because of
Keith and Karen's health history, they probably would not qualify
for life insurance. Therefore, since the replacement insurance idea
is not available to Keith and Karen, is there some other method to
transfer value to the children and also provide for
charity?
To view the solution to this Case of the Week Click
Here.
|
ARTICLE OF THE
MONTH
Current Planned Gifts II - UT, DAF &
AT
The combination of a
charitable remainder unitrust and a donor advised fund (DAF) enables
a very flexible plan. This might appropriately be called a "Personal
Foundation." A donor may create a charitable remainder trust. So
long as there is no pre-arrangement, the donor may then make annual
distributions from the charitable trust to the DAF. The trust
instrument could include a statement as follows:
"If a
grantor is a current income recipient, then a grantor shall retain
the right to direct the trustee to distribute an undivided
percentage of trust assets to qualified exempt charities on the last
day of any trust taxable year."
With this sentence and the
right to select the charities, a unitrust grantor may decide to
distribute part or all of the trust principal each year. It is
preferable for this power to be exercised at the end of the taxable
year in order not to affect the calculation of the unitrust payout.
The trust on January 1 of the following year will then be reduced by
the amount of the transfer to the DAF.
The flexibility of
this plan is very high. If the trust increases in value, that growth
may be transferred to a DAF. A donor is able to make the decision
concerning the amount of the transfer at the end of each calendar
year. The funds in the DAF may then be distributed with the
recommendation of the donor to a wide variety of qualified
charitable purposes.
Because the DAF is maintained by a
public charity, the donor receives the benefit of the public charity
income tax deduction limits of 50% for cash or 30% for appreciated
property. In addition, the donor benefits from a full fair market
value charitable deduction. Each year when the gift is made, the
donor will receive a charitable deduction for the value of the
income interest. See PLR 9550026.
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 1999-2009
Crescendo Interactive, Inc.
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| Immanuel St. Joseph's
Foundation |
August 31,
2009 |
| |
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
| |
