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September 17,
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 17,
2007 |
GiftLaw Weekly eNewsletter -
September 17, 2007
- WASHINGTON
HOTLINE
- PLR THIS
WEEK
- CASE OF THE
WEEK
- ARTICLE OF THE
MONTH
|
WASHINGTON HOTLINE
Tax Quote of the Week
Pothinus: Is it
possible that Caesar, the conqueror of the world, has time to occupy
himself with such a trifle as our taxes?
Caesar: My friend,
taxes are the chief business of a conqueror of the world.
-- George Bernard Shaw
"Back To
School" Tax Credits and Deductions
As the school year
started, the Internal Revenue Service released a letter that reminds
parents and teachers about school credits and deductions. IRS Acting
Commissioner Linda Stiff noted, "The start of the school year is a
good time to remind parents, students and teachers to save all
receipts related to tax-advantaged education expenses. Good
recordkeeping makes sense because it can help avoid missing a
deduction or credit at tax time."
Teachers who work 900 hours
per year may qualify for the educator expense deduction. This amount
is $250, and may be deducted "above the line." The ability to deduct
even if the teacher does not itemize is important, since about
two-thirds of taxpayers no longer itemize deductions. The total
educator expense deduction is anticipated to be nearly $1 billion
for 2007.
Students who are attending college and their
parents may also qualify for other tax deductions. The three
deductions for college students and their parents are the tuition
and fees deduction, the Hope credit and the Lifetime Learning
credit. In tax-year 2005, students and parents claimed deductions
for tuition and fees of approximately $11 billion. The education
credits equal approximately $6.2 billion.
It is permitted to
take an education credit or a tuition and fees deduction for a
student in one year, but students or parents usually must select one
of the three tax-saving methods. Individuals should discuss with
their tax advisor which strategy is most beneficial. Generally, the
tuition deduction may be up to $4,000, the Hope Credit may be up to
$1,650 per student and the Lifetime Learning Credit is up to $2,000
per tax return. All are phased out for higher income
taxpayers.
IRS Publication 970, Tax Benefits For Education,
is available on www.irs.gov/formspubs/
to explain education credits and deductions. The publication also
covers popular other education plans such as the Sec. 529 plan to
enable students to receive education funds tax-free.
Editor's Note: There are a large number of tax
benefits for students. However, the Sec. 529 plan with tax-free
growth and qualified tax-free distributions, the tuition and fees
deduction, the various credits and other plans, education tax-saving
benefits are quite complicated. Parents and students will benefit
from reading publications from the IRS, reviewing information
available on the Internet and discussing options with tax
advisors.
White House Economic Advisor In Tax Patent
Flap
On September 13, 2007, it was revealed that a
company named Liquid Engines had filed a tax patent application with
the United States Patent and Trademark Office (USPTO) for a software
program to reduce corporate taxes. The tax-planning program had been
developed in part by Edward Lazear. Mr. Lazear is the top White
House economic advisor. In March of 2000, he co-founded Liquid
Engines, a company specializing in tax software.
Following
the revelation, the White House noted that he was one of the two
inventors, but stated that he had severed all ties with Liquid
Engines. White House Spokesman Tony Fratto indicated that Mr. Lazear
would not receive any royalties from the patent if issued by
USPTO.
Former IRS Commissioner Don Alexander was quoted as
suggesting that this situation highlights the reasons why tax
patents should not be permitted.
House Bill May Halt
Tax Patents
On September 7, 2007, the House by a vote of
220 to 175 approved a patent reform bill (H.R.1908). Barry C.
Melancon, President of the American Institute of Certified Public
Accountants (AICPA) was delighted with this bill. The AICPA has
expressed great concern over the existing 60 tax strategy patents
and the 99 pending tax patents.
Mr. Melancon noted, "The
patents are not limited to esoteric sections of the tax code. They
cover a broad array of areas, including estate and gift taxes and
pension plans that affect millions of taxpayers."
In the view
of AICPA, tax patents "violate the core principle of equity" since
they may limit specific tax strategies to only those organizations
that own the patents.
The House Bill would preclude patents
for "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 taxpayers tax
liability."
The tax patent focus now moves to the Senate.
There is a Senate patent reform bill that does not include the tax
patent prohibition. However, Sens. Carl Levin (D-MI), Barack Obama
(D-IL) and Norm Coleman (R-MN) have introduced a bill with a tax
patent prohibition similar to the House Bill.
Proposed
Charitable Trust Tax Patent
Attorney Gerald B. Treacy,
Jr. has filed U.S. Patent Application 20070208646 for a "Business
Yield-Enhancement Trust." The proposed tax patent is a "Continuation
In-Part" patent application. He previously filed patent applications
for "Financial Methods Using A Charitably Integrated Business
Operation" and "Financial Methods Using Non-Trust Based Charitably
Integrated Business Operation."
The 116 page application is a
comprehensive set of charitable planning options and strategies. The
principal Yield-Enhancement Trust (YET) is a term of years
charitable remainder trust funded by a corporation with business
assets. However, there are also provisions in the application for
life insurance payable to the corporation or to an individual, a
life estate with a business executive receiving the life use
interest in a home and a charity the remainder, and both charitable
remainder and charitable lead trusts.
Editor's Note:
Given the passage of the House Patent Reform Act with a prohibition
on tax patents, it seems probable that USPTO will refrain from
issuing tax patents pending potential action by Congress. If the
Patent Reform Act is passed by the House and Senate and signed by
the President this year, the pending tax patents will almost
certainly not be permitted. However, the existing 60 tax patents may
still have legal impact.
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 - 200729028 Qualified Terminable Interest Property
Election is Void
During
life, Decedent and Spouse created Trust. Upon the first to die,
Trust was to divide into Trust A and Trust B. Trust A was to provide
income to the survivor for life. The surviving spouse would have an
unfettered right to withdraw principal and income during life and
the right to appoint trust assets at death. Any unappointed assets
would be poured into Trust B. The surviving spouse was to be paid
the net income of Trust B for life and was to have the
non-cumulative right to withdraw the greater of $5,000 or 5% of
Trust B principal. Upon Decedent's death, the executor completed and
timely filed United States Estate Tax Form 706. On Schedule M, the
executor listed all of Decedent's community property interests. By
doing so, the executor made a QTIP election with respect to the
assets passing to Trust B. Spouse requested a ruling that the QTIP
election be declared null and void as the election was not necessary
to avoid estate tax on Decedent's estate.
The Service ruled
that under Sec. 2056(a) the value of a taxable estate is determined
by deducting the value of property that passes to a surviving spouse
but only to the extent that the property is included to determine
the value of the decedent's gross estate. Sec. 2056(b)(1) excludes a
marital deduction for property passing to a spouse that is a
"terminable interest." However, Sec. 2056(b)(7) provides an
exception for "qualified" terminable interest property (QTIP).
Because the QTIP election was not required to reduce the Decedent's
estate to zero, the Service found that the election was null and
void and that the property passing to Trust B would not be included
in Spouse's estate at death. In addition, Spouse will not be treated
as the transferor of Trust B property for generation-skipping
transfer tax under Sec. 2652.
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 7 - The Untouchable Donor's
CRT
Tommy Ely, 58, owns
and operates eight car dealerships spread throughout the city and
surrounding area. 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 realized Ely Motorsports owns the
perfect asset: 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 into a
charitable remainder trust (CRT)? What type of trust is best? What
are the tax benefits and pitfalls, if any, associated with an S
corporation creating and funding a CRT?
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 17,
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
| |
