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September 10,
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 |
September 10,
2007 |
GiftLaw Weekly eNewsletter -
September 10, 2007
- WASHINGTON
HOTLINE
- PLR THIS
WEEK
- CASE OF THE
WEEK
- ARTICLE OF THE
MONTH
|
WASHINGTON HOTLINE
Tax Quote of the Week
"Earth gets its
price for what Earth gives us; The beggar is taxed for a corner to
die in."
-- James Russell
Lowell
Bipartisan Support For Mortgage Tax
Relief
As the housing slump continues and payments
steadily increase on adjustable mortgages, President Bush, in a
speech on August 31, supported the concept of mortgage tax relief.
He noted, "If the bank modifies your mortgage and forgives $20,000
of your loan, the tax code treats that $20,000 as taxable income.
When your home is losing value and your family is under financial
stress, the last thing you need to do is to be hit with higher
taxes."
Sen. Debbie Stabenow (D-MI) has introduced a bill
that would exclude certain mortgage forgiveness from income. In
support of the Mortgage Relief Act, she noted, "People in Michigan
and across America are suffering, and it is wrong to unfairly tax
families when they are faced with the prospect of losing their
home."
Sen. Stabenow represents Michigan. For the past year,
Detroit has had the highest percentage of home foreclosures in the
nation. Over 10,000 foreclosures have occurred each quarter in the
Detroit Metro area. One out of 21 households in Detroit was impacted
by a home foreclosure within the past year.
President Bush
indicated that there would be some changes in the Senate and House
versions of the bill. However, with those changes "this
administration can support these bills, and we look forward to
working with them" to pass the Mortgage Relief
Act.
UBI Tax For Endowments Invested in Hedge
Funds?
At a hearing of the House Ways and Means Committee
on September 6, 2007, Council on Foundations Vice President Janne G.
Gallagher discussed endowment investments in hedge
funds.
According to a Council on Foundations (COF) survey,
during 2006 community foundations invested 7.5% of funds in hedge
funds and private foundations invested 8.4% of assets. Overall
returns from hedge funds have been higher than other investment
returns for the past several years. However, COF has also noted that
recent events highlight the increased investment risk of hedge
funds.
Hedge funds typically use borrowed funds and are
structured as limited partnerships. Because the hedge fund limited
partnership debt flows through to charities that may hold a limited
partnership interest, there is potential debt-financed income. Under
Sec. 512(c) and Sec. 514, this debt financing causes the charity to
recognize and pay tax on unrelated business income (UBI).
As
a result, hedge funds have created foreign corporations in "low-tax
jurisdictions." The corporations hold hedge fund investments and pay
dividends to charities. Since the foreign jurisdictions have very
low tax rates on corporations, there are minimal costs for the
corporation. Because corporate dividends paid to charities are
exempt from UBI, there is no payment of tax by the exempt
organizations. The foreign corporations are termed "blocker"
corporations, since they block or stop the payment of UBI tax by the
charities.
Ms. Gallagher noted that the "primary purposes of
the unrelated business income tax, and of the debt-financed property
rules, are to protect the integrity of the corporate income tax."
Since the blocker corporations do not cause any loss of corporate
income tax, she suggests that they should be accepted and charities
should be permitted to make direct investments in hedge funds
without fear of UBI.
Rep. Sander Levin (D-MI) has introduced
a bill to permit charities to invest directly in hedge funds without
UBI. He stated, "As the testimony we heard today made clear, there
is no reason to force tax-exempt entities offshore when they invest
in hedge funds."
Editor's Note: The UBI rules for
debt-encumbered investments were created in 1969 to eliminate a
specific abuse. Taxpaying businesses were selling their headquarters
to charities and then leasing them back. The taxpayer could report
capital gain on the sale and then deduct all lease payments.
Charities borrowed the funds to buy the property and received the
lease payments. The excess of the lease income over interest
payments was a net gain for the charity. To preclude this
transaction, the UBI rules caused the lease payments that were
created through the borrowed funds to be taxable to the charity. The
proposed COF hedge fund UBI change would not alter this effort to
preclude a sale and charitable leaseback.
White House
Addresses Tax Patents
A patent reform bill (H.R. 1908)
has passed the House Judiciary Committee and is nearing a vote on
the House floor. The White House office of Management and Budget
issued a statement this week that is generally in support of the
Patent Reform Act of 2007.
In its report, the White House
stated "The administration understands the concern surrounding
patent protection for tax planning methods and will work with
Congress to address those concerns."
In a July 19 hearing,
the House Judiciary Committee included an amendment that makes tax
strategy methods "unpatentable." These methods include "a plan,
strategy, technique or scheme that is designed to reduce, minimize
or defer, or has, when implemented, the effect of reducing,
minimizing or deferring, a taxpayer's tax liability."
The
Senate bill on patent reform does not include similar language.
However, Sens. Carl Levin (D-MI), Norm Coleman (R-MN) and Barack
Obama (D-IL) have introduced legislation that would adopt language
similar to the House Bill and preclude further issuance of tax
patents.
Editor's Note: White House support for tax
patent reform is very helpful. The U. S. Patent and Trademark Office
(USPTO) has issued approximately 50 tax patents. There are presently
80 applications for tax patents pending. One pending tax patent
application by attorney Gerald Treacy would apply to charitable
remainder and lead trusts funded with business assets. Many
professional advisors think that the existence of charitable tax
patents may create major problems for both donors and tax
practitioners.
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 Sec. 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 by clicking
here.
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PLR THIS
WEEK
PLR - 200723014 Dividing the Marital Trust Without
Disqualifying QTIPs
Decedent and Spouse created a revocable living trust
(Trust), naming themselves as co-trustees and the survivor of them
as sole trustee. Upon the death of the first of the die, Trust shall
be divided into three separate trusts: The Survivor's Trust, the
Exemption Trust, and the Marital Trust. The Marital Trust is to
consist of the balance of all trust assets following allocation of
the surviving spouse's property to the Survivor's Trust and a
pecuniary amount of the deceased spouse's contributions to the
Exemption Trust as determined by formula. The Trustee is to pay the
Marital Trust net income to the surviving spouse for life and, if
insufficient, principal for specified limited purposes. At the
survivor's death, the Trustee shall add the Marital Trust balance to
the Exemption Trust and divide the Exemption Trust among the
Decedent and Spouse's living children and any deceased children
survived by issue in separate trusts. Trust also included a
spendthrift clause and provided the Trustee with powers to divide
any Trust estate assets according to the Trustee's discretion.
Following Decedent's death, Decedent's Executor elected to treat the
Trust assets in the Marital Trust as qualified terminable interest
property (QTIP). Decedent was survived by Spouse (the Trustee and
income beneficiary of the Marital Trust), and Child (no issue), the
only living contingent remainder beneficiary. Spouse sought, under
state law, Court permission to divide the Marital Trust into Marital
Trust A and Marital Trust B on a non-prorata basis and thereafter
terminate Marital Trust B for distribution of the assets to lifetime
and remainder beneficiaries.
The Service ruled division of
the Marital Trust in two on a non-prorata basis disqualifies neither
Marital Trust A nor Marital Trust B as QTIP trusts. The Service
noted the division of the Marital Trust affects neither Spouse's nor
Child's beneficial interests. Spouse retains a qualifying income
interest for life in Marital Trusts A & B, and Child remains the
remainder beneficiary in each as well. Spouse and Child receive the
actuarial present values of their respective interests from Marital
Trust B based on Sec. 25.2519-1(f) and Rev. Rul. 98-8. Additionally,
termination of Marital Trust B results in a gift under Sec. 2519
from Spouse to the remainder beneficiary Child of the fair market
value of the assets less the qualifying income interest value in the
assets on the date of disposition. Finally, termination of the
Marital Trust B does not disqualify Marital Trust A as a QTIP under
Sec. 2056 because of the interest.
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 6 - The Untouchable
Donor
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. After attending a recent fundraising function for
at-risk youth, Tommy personally decided to give approximately
$1,000,000 to the local at-risk youth center. 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 decision to give and the
lifetime support of at-risk programs was not a surprise to the
people who know Tommy's story.
In determining the best way to
fund the $1,000,000 gift, Tommy realizes Ely Motorsports owns the
perfect asset, specifically highly appreciated investment land. Ely
Motorsports frequently buys vacant land for potential new car
dealership sites. This particular land holding was purchased six
years ago for $500,000 and has since doubled in value. However, Ely
Motorsports elected not to build upon this site. Therefore, the
property was going to be sold which would result in $500,000 in
taxable income.
Can Ely Motorsports transfer the land
directly to charity? What are the tax benefits and pitfalls, if any,
associated with this outright gift of land by an S
corporation?
To view the solution to this Case of the
Week Click
Here.
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ARTICLE OF THE
MONTH
Guide to IRA Charitable
Rollovers
The Pension
Protection Act of 2006 (PPA 2006) created a new charitable planning
opportunity for both 2006 and 2007. 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).
IRA Rollover gifts may be made to Sec.
509(a)(1) and Sec. 170(b)(1)(A) public charities. This can also
include Sec. 170(b)(1)(A) conduit foundations. In most cases, IRA
rollover gifts will be a transfer from a regular or Roth IRA to a
public charity for the general purposes of that charity. However, it
is permissible to make a transfer to a field of interest fund or for
a qualified charitable purpose. For example, a transfer from an IRA
owner age 71 to a college or university for a particular scholarship
fund is permitted. Similarly, a transfer to a relief organization
for a specific disaster relief fund is also
acceptable.
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 |
September 10,
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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