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September 21,
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 |
September 21,
2009 |
GiftLaw Weekly eNewsletter -
September 21, 2009
- WASHINGTON
HOTLINE
- PLR THIS
WEEK
- CASE OF THE
WEEK
- ARTICLE OF THE
MONTH
|
WASHINGTON HOTLINE
Tax Quote of the Week
"The purse of the
people is the real seat of sensibility. Let it be drawn upon
largely, and they will then listen to truths which could not excite
them through any other organ."
-- Thomas Jefferson
Baucus
Promotes "America's Healthy Future Act"
On September 16,
2009, Senate Finance Chairman Max Baucus released the America's
Healthy Future Act of 2009.
The comprehensive health reform
bill had been long-anticipated. Sen. Baucus and the "gang of six"
senators had been working on a planned bipartisan health care bill
for nearly one year.
However, because the three Democratic
and three Republican Senators were not able to come to full
agreement, Sen. Baucus decided to release his version of the
bill.
Because the health care system is extremely complex and
affects approximately one-sixth of the entire American economy, even
the summary of the bill is quite extensive. Sen. Baucus indicated,
"The cost of America's broken health care system has stretched
families, businesses and the economy too far for too long. This is a
unique moment in history where we can finally reach an objective so
many of us have sought for so long."
In his view, the bill
will ensure health care for patients, assist health care providers
and be good for the economy. His goal is to "rein in health care
costs and deliver quality, affordable care to the American
people."
The Baucus bill is designed to enable all legal
residents to acquire health insurance. It offers tax credits for
lower-income individuals to purchase health care insurance. There is
a similar tax credit for businesses with fewer than 25 employees who
have average wages under $40,000.
While the intention is to
permit individuals with existing coverage to retain that coverage,
there are four new definitions of policies. Insurance companies will
be required to modify policies to conform to those new
standards.
Insurance companies will not be able to exclude
coverage based on pre-existing conditions and will not be able to
terminate coverage if consumers become ill. $6 billion from the plan
is allocated to the funding of health care co-ops in every
state.
Funding for the plan will come primarily from two
sources. First, there is a 35% excise tax on health care plans over
$8,000 for single persons and $21,000 for families. This tax will be
paid by the insurance companies, but is likely to have some impact
on health care premiums.
The balance of the corporate tax
will be paid by pharmaceutical companies, medical device companies
and similar companies providing health care products or services.
The tax on all medical companies is expected to produce over $300
billion in revenue during the 10-year period.
The balance of
the funding will come from improvements and enhancements in managing
Medicare. With a Congressional Budget Office cost estimate of $856
billion over 10 years for the Baucus plan, there will need to be
approximately $400 to $500 billion of various types of Medicare and
Medicaid savings. With the combination of the taxes on companies
providing healthcare insurance and medical products and the
Medicare/Medicaid savings, the Baucus bill is projected to raise $49
billion over 10 years.
Supports and Critics of Baucus
Health Care Proposal
Given the magnitude of the impact of
health care reform, it is to be expected that many members of
Congress offered comments on his health care bill.
Criticism
of the bill came from several sides of the political spectrum.
However, there also was support for the bill.
Rep. Stephanie
Herseth Sandlin (D-SD) is a Co-Chair for Administration of the House
Blue Dogs. She and the other conservative Democratic representatives
were generally supportive of the Baucus health care bill.
She
noted that it achieved "two central goals of the Blue Dog
Coalition." These are for the bill to be deficit neutral and to take
steps to reduce the total cost of health care. She stated, "I
applaud Chairman Baucus and his colleagues in the Senate for their
progress today and look forward to working together as we move to
make health care reform a reality."
The President of AFFCME
represents union interests and observed, "The Senate Finance
Committee Health Care Bill is deeply flawed. There is no employer
mandate, no public option and no help for retirees." Union leaders
have frequently opposed the tax on "Cadillac" health care plans
because some union members have negotiated for these more expensive
plans.
Sen. Charles Grassley is the ranking Republican on the
Senate Finance Committee. He has been deeply involved with the
negotiations with Sen. Baucus over the development of the bill.
However, he does not support the new bill as drafted.
Sen.
Grassley did note that the bill included his proposal with respect
to the charity care provided by non-profit hospitals. Sen. Grassley
has frequently urged a review of the practices of non-profit
hospitals and suggested that they should be diligently attempting to
provide charity care to those who are in financial need.
The
Baucus Bill did not include a minimum percentage requirement for
charity care by non-profit hospitals. Sen. Grassley stated, "There's
no minimum percentage requirement for charity care and community
benefit." He indicated that such a requirement "needs more study."
His hope is that there will be a new formula developed that will
encourage maximum "expenditures for charitable purposes" by
non-profit medical centers.
Donor Control Voids FLP
Discounts
In Estate
of Roger D. Malkin et al. v. Commissioner; T.C. Memo.
2009-212; Nos. 9222-05, 9252-05, 9253-05, 9531-05 (16 Sep 2009), the
Tax Court sustained IRS estate and gift tax deficiencies of
approximately $17 million.
Between 1980 and 2000, the
decedent Roger D. Malkin was CEO of Delta & Pine Land
(D&PL). During that time he acquired over $1 million D&PL
shares with value in excess of $35 million.
Mr. Malkin
engaged in very complex and sophisticated estate planning between
1998 and his death from pancreatic cancer on Nov. 22, 2000. The
planning included two family limited partnerships (FLPs), four
trusts for his two children, at least four LLCs, two SCINS,
additional sales with installment notes and various other gift
transfers.
The net result of the transfers was designed to
permit him to move approximately $20 million of D&PL stock from
his estate into the two FLPs. His stated goal was to transfer the
majority of his D&PL stock to children, but "he did not want
them to sell those shares."
In addition, Mr. Malkin had
personal loans from Bank of America and Morgan Guaranty. The loan
from Morgan Guaranty was collateralized through the stock held by
the two FLPs.
As a result of transfers to the FLPs, the SCINS
and the loan in excess of $12 million owned to Morgan Guaranty, the
estate was insolvent when Mr. Malkin passed away.
The IRS
reviewed the various transfers and accessed deficiencies for the
estate and for the 1998, 1999 and 2000 gifts in the amount of
approximately $17 million.
The key issues were whether or not
there was a Sec. 2036(a)(1) retention of control of the shares of
the stock and whether the transfers of stock to LLCs and FLPs
created indirect gifts.
The Court reviewed the facts and
various precedent. Because the stock had been used as collateral for
the personal loans from Morgan Guaranty, the Court determined that
there was an implied agreement that Mr. Malkin retained "the right
to use that transferred stock." Since the decision to pledge the
stock had been approved by Mr. Malkin and other FLP trustees, but
was not "a business decision made at arm's length," the stock was
held to be an estate asset under Sec. 2036(a)(1).
While the
estate claimed that there was a "bona fide" sale of the stock, the
Court determined that there was no significant non-tax reason for
using the stock as collateral.
With respect to the transfers
under the gift tax returns, the Court noted that the transfers of
shares of D&PL stock were essentially indirect gifts. Any
claimed sale of a partnership interest "was a sham." As a result,
the transfers were treated as gifts in all cases.
The debt of
nearly $13 million to Morgan Guaranty was permitted as a deduction,
but only to the extent of the collateral value. The obligation was
treated as nonrecourse debt and therefore limited to that
value.
DC Easement Charitable Deductions
Reduced
In Dorothy
Jean Simmons v. Commissioner; T.C. Memo. 2009-208; Nos.
18647-06, 18654-06 (15 Sep 2009), the Tax Court upheld a reduced
deduction for a conservation easement on two District of Columbia
(DC) rowhouses.
Ms. Simmons owned a home in Washington D.C.
on Logan Circle and a second home on Vermont Avenue. The rowhouses
were subject to the Historic Landmark and Historic Preservation Act
of 1978.
L'Efant is a D.C. non-profit organizationthat
enforces conservation easements. Ms. Simmons deeded façade easements
on both rowhouses to L'Efant. The Logan Circle deed was dated
November 18, 2003 and the Vermont Avenue deed date was January 24,
2004.
For unstated reasons, Ms. Simmons did not file tax
returns in 2003 or 2004. After the IRS sent a notice of deficiency
to Ms. Simmons, she subsequently filed the tax returns in
2007.
The tax returns claimed a conservation easement
charitable deduction for $162,500 for the Logan Circle property and
$93,000 for the Vermont Avenue rowhouse.
The IRS opposed any
conservation easement charitable deduction on five grounds. These
are as follows:
1. The deeds did not create a qualified
conservation easement because they were not in perpetuity.
2.
There were mortgages on both properties and they were not correctly
subordinated to the easements.
3. The appraisals did not
comply with the appropriate requirements.
4. There was no
receipt as required for a gift over $250.
5. Because the
rowhouses are already subject to the federal requirements that apply
to a façade of historic homes, the easement did not produce any
deduction in value.
The Court responded to all five claims by
the IRS as follows:
1. The deed of the conservation easement
to L'Efant did comply with statutory requirements and created a
legal and enforceable conservation easement.
2. There was a
proper subordination of the mortgage interests of the two banking
entities.
3. Because the deed was signed by L'Efant, there
was not a requirement for a separate receipt.
4. The
appraiser did conduct a reasonably comprehensive appraisal. While
the appraisal did not contain the explicit statement that it was
prepared for income tax purposes, the language indicated that it was
contemplated there would be a charitable deduction. This language
was sufficient for "substantial compliance" under the law.
5.
The value of a conservation easement does affect price. Due to
budget constraints, the District of Columbia is essentially unable
to provide proper enforcement of the federal historic façade
preservation requirements. However, because L'Efant insists that a
cash gift be made to facilitate enforcement, there is a higher level
of probable enforcement of the easement and therefore a reduction in
value. While there is reduced value, the claimed 13% reduction for
the Logan Circle property and 11% reduction for the Vermont Avenue
property were both too high. Rather, the Court permitted a 5%
reduction in value for the conservation
easement.
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 - 200937038 Private Foundation May Make Grants to
Trust with Independent Directors
B is the sole and initial member of Private
Foundation. B has the ability to appoint additional and successor
members, which also serve as Private Foundation's Directors. R is a
tax-exempt trust under Sec. 501(c)(3) classified as a private
operating foundation within the meaning of Sec. 4942(j)(3). R's
board of trustees acts and by majority vote and its current
directors also serve as trustees. R's Executive Committee, created
by R's trustees, has authority to act for trustees between meetings.
B is expected to bequeath a substantial portion of his estate to
Private Foundation and, at his death, Private Foundation is expected
to make distributions to R. R's Executive Committee passed the
following resolutions effective upon B's death: the majority of
trustees, directors and officers will not be directors or otherwise
disqualified persons with respect to Private Foundation; no
disqualified persons of Private Foundation will have any special
voting rights with respect to R; and the Executive Committee will be
eliminated and, if re-established, the majority of its trustees will
not be disqualified persons. These resolutions can only be amended
by approval of two-thirds of R's trustees. In addition, Private
Foundation will not impose any material restrictions or conditions
on grants to R. Private Foundation seeks a ruling that at all times
after the death of B, Private Foundation will not directly or
indirectly control R under Sec. 4942(g)(1)(A).
The Service
ruled that based on the resolutions passed by R and the assurances
by Private Foundation, under Sec. 4942(g)(1)(A), neither Private
Foundation nor any of its disqualified persons can directly or
indirectly control R within the meaning of Sec. 4942(g)(1)(A) after
B's death. A distribution from a private foundation is a qualifying
distribution if the amount is paid to accomplish one or more
qualifying charitable purpose and excludes contributions to an
organization controlled, directly or indirectly, by the foundation
or one or more of its disqualified persons. Reg. 53.4942(a)-3(a)(3)
provides that an organization is controlled by a foundation or
disqualified person(s) if, by aggregating their votes or positions,
they can require the donee organization to make or prevent an
expenditure. Under Sec. 4946(a), a disqualified person to a private
foundation includes a substantial contributor. Sec. 507(d)(2)
defines substantial contributor as the creator of a trust. While B
is the substantial contributor of Private Foundation, the
resolutions effective at B's death and Private Foundation's
inability to impose material restrictions on distributions to R will
ensure that R is not directly or indirectly controlled by Private
Foundation.
To view the full PLR Click
Here.
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CASE OF THE
WEEK
Stock Unitrust Payouts to
Donors
Jim Thompson, a
retired engineer, and his wife, Janet Thompson, a retired nurse, are
currently considering funding a term-of-years charitable remainder
unitrust (CRUT) with Americans for the Arts charity. Americans for
the Arts is raising money for the construction of a new building
which would house a state-of-the-art theatre and museum. The
Thompsons are active investors and have amassed quite a portfolio
over the past few years. In particular, they have investments in a
medical services company that has quadrupled in value. They would
like to use $800,000 of stock with a cost basis of $100,000 to fund
a five-year CRUT with a 15% quarterly payout. However, they believe
this company is a great investment with acceptable risk and prefer
that the trustee of the CRUT not sell this stock. Furthermore, the
Thompsons would like their CRUT payouts to be the actual stock - an
in-kind distribution - as opposed to cash payouts. Thinking
creatively, the Thompsons then wonder if such a distribution would
avoid capital gain since technically the stock has never been
sold.
Can the Thompsons accomplish their goal of a tax-free
'in-kind' distribution of their technology stock? What are the tax
consequences to the CRUT and the Thompsons of such a
transaction?
To view the solution to this Case of the Week Click
Here.
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ARTICLE OF THE
MONTH
Current Planned Gifts III - Life
Estates
Under Sec.
170(f)(3)(B)(i) of the Internal Revenue Code, a person may give a
remainder interest in a personal residence or farm to a charity and
reserve the right to live there for one or two lives. But what if
circumstances change and the donor no longer desires to live in the
home? Or perhaps mother and father created a two-life estate and
father passes away? Are there options that mother should now
consider? Fortunately, there are several potential flexibility
options for a life estate donor.
Assume that John and Mary
Jones, both age 75, transfer the remainder interest in their
$300,000 home to charity. As owners, they agree to be responsible
for the maintenance, insurance and taxes. To make certain that both
John and Mary understand their obligations, they sign a Maintenance,
Insurance and Taxes (M.I.T.) agreement with the charity.
One
caution must be emphasized with respect to the "M.I.T." agreement -
the charity must have a life estate in the home and there can be no
prearranged obligation to select any of the possible flexibility
options. The IRS will deny the charitable income tax deduction if
any binding obligation exists. In any case, the purpose of having
flexibility options is enhanced by not choosing one until the time
for a later change of ownership.
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 1999-2009
Crescendo Interactive, Inc.
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| Immanuel St. Joseph's
Foundation |
September 21,
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
| |
