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September 28, 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

Immanuel St. Joseph's Foundation	September 28, 2009
GiftLaw Weekly eNewsletter - September 28, 2009 WASHINGTON HOTLINE Senate Health Care Amendment Marathon PLR THIS WEEK PLR - 200938031 Scholarships Not Taxable Expenditures CASE OF THE WEEK Lucky Lucy Lindstrom's Unitrust ARTICLE OF THE MONTH Current Planned Gifts III - Life Estates
WASHINGTON HOTLINE Tax Quote of the Week "In every free country the power of laying taxes is considered a legislative power over the property and persons of the citizens." -- Salmon P. Chase Senate Health Care Amendment Marathon A marathon is a race of 26 miles and 385 yards. As the runners pass mile 20, some "hit the wall" and have a great challenge completing the marathon. The Senate Finance Committee has been working for over two years on health care reform. As this long marathon now enters its last few miles, the entire committee and staffers are burning the midnight oil to try to produce an actual bill. Earlier this month, Sen. Max Baucus (D-MT) introduced an initial version of his health care bill. However, there now are over 600 proposed amendments to the bill. The Senate Finance Committee will continue work throughout the week to vote on these hundreds of proposed amendments. While the final version is still subject to many modifications, there are a number of changes that probably will be included in the bill. A primary method of funding the health care bill is a tax on "Cadillac" health care plans. For plans that cost over $8,000 for an individual and $21,000 for a couple, the amended tax rate is increased from 35% to 40%. While the tax will be paid by the insurance company, it is possible that this added cost will be reflected in consumer health care insurance rates. For individuals who do not choose to purchase health care insurance, the probable maximum tax will be reduced to $1,900. Finally, the floor for medical deductions will apparently be raised from 7.5% to 10% of adjusted gross income. Sen. Baucus shared his goals for the health care bill by stating, "Out-of-pocket premiums are rising faster than wages -- it doesn't take an economist or a mathematician to realize this is flawed and simply unsustainable. That's why our goal in reform has been to expand coverage and slow the growth of premium costs for both individuals and businesses by cutting waste and controlling spending." The Congressional Budget Office projects that the current version of the Baucus health care bill will be fully offset and reduce the federal deficit by $49 billion over the next decade. Sen. Charles Grassely (R-IA) is the ranking republican on the Senate Finance Committee. He and Senator Baucus spent "hundreds of hours" with four other Senators in a bipartisan effort to produce a bill. Ultimately, Sen. Baucus determined the bipartisan effort would not produce a bill this year and moved forward with his own plan. Sen. Grassley discussed the challenges that faced the bipartisan committee. He noted, "Writing a bill that's actually paid for is very difficult. It requires difficult choices on spending and revenues that those other bills simply avoided. That this process has taken a long time should not be a surprise." Sen. Grassley is pointing out that the four other health care bills that have passed various committees are not making the difficult choices on increased taxes and Medicare savings necessary to produce a "paid for" bill. He continued, "Unfortunately, all the added spending in this bill requires more and more offsets to pay for it. And as the spending goes up, more and more toxic offsets are required to pay for it. This bill has new taxes on everything from Q-tips to pacemakers and cancer screenings to pregnancy tests." The Senate Finance Committee bill is expected to complete its health care bill within the next week. If it passes the Senate Finance Committee, then it will be submitted to the full Senate. Editor's Note: Several Senate amendments proposed an offset that would be funded by limiting the deductions for charitable gifts by high-income taxpayers. For those persons in the 36% and 39.6% bracket in 2011, the deduction value for charitable gifts would be limited to the current 33% and 35% brackets. It is uncertain whether this limitation on charitable gifts by high-income persons will be part of the bill. A coalition of major charitable organizations sent a letter to Sen. Baucus indicating that this provision would have significant negative impact on major donor gifts. Proposed Regulations for Type III Supporting Organizations (SO) In REG 155929-06; 74 F.R. 48672-48687 (24 Sep 2009), the IRS published proposed regulations for Type III supporting organizations. In the Pension Protection Act of 2006 (PPA 2006), there were significant reforms for all Type I, Type II and Type III supporting organizations. In response to perceived abuses of the Type III supporting organizations, significant new requirements were created for qualification and operation. Under PPA 2006, there could be no control of an SO by a prohibited party. The SO is required annually to give notice to the supported organizations. A minimum payout requirement was to be created by Treasury for the non-functionally-integrated Type III SOs. There were also limits on gifts by SOs to some foreign charities. A Type III supporting organization must meet both a responsiveness test and an integral part test. Generally, under the responsiveness test, the SO supported organization elects an officer, director or trustee of the SO. With a "close, continuous working relationship" between the supported organization and the SO, the supported organization needs to have a "significant voice" in the policies of the SO. The integral part test is intended to ensure a "significant involvement" by the SO in the operations of the supported organizations. Under the "but-for" test, the SO carries out functions that normally would be engaged in by the supported organization. Under the "attentiveness test," most SOs distribute 85% or more of adjusted net income to supported organizations. The proposed regulations outline several requirements for functionally integrated and non-functionally integrated Type III supporting organizations. A requirement exists for a Type III SO to notify each supported organization. The notice must describe the amount and type of support for the past year, include the most recent Form 990 of the SO and in the initial year include the SO governing documents. While the IRS considered limiting the number of supported organizations, the proposed regulations do not include a numerical limit. A key definition is whether the Type III SO is "functionally integrated." Treasury determines that functional integration exists if "substantially all" of the SO activities are directly involved in supported organization functions, it is directly responsive to the supported organization and the supported organization would normally engage in those functions. There is an exception for a Type III SO that is created to support a single government entity. If an organization does not meet the standard, it is classified as a non-functionally-integrated Type III SO and must comply with extensive restrictions. A non-functionally-integrated Type III SO is required to distribute 5% of the fair market value of non-exempt-use assets each year and to pass an attentiveness test. The 5% payout does not permit any set asides. There is an exception for the first year and any carry forward may be counted first in future distributions. A reasonable cause distribution exception is permitted. Under the attentiveness requirement, a non-functionally-integrated Type III SO must provide 10% or more of the total support, or provide support necessary to carry on a key function of the supported organization, or provide sufficient support under a "facts and circumstances" test. IRS Notice on IRA Required Minimum Distribution (RMD) Holiday In the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA), a "holiday" for 2009 was passed with respect to the required minimum distribution (RMD) for IRAs and other qualified plans. For the year 2009, plan participants and IRA owners are not be required to take a distribution. Because many plans include in the plan document a requirement for workers to take their RMD, amendments are required for the RMD holiday. Notice 2009-82; 2009-41 IRB 1 (24 Sep 2009) includes two sample plan amendments that may be used to recognize the 2009 RMD holiday. In addition, there are specific provisions for rollovers and for various plan distributions. Individuals who have received a 2009 RMD generally are permitted until November 30, 2009, or 60 days after the date of distribution, to elect a 2009 rollover option. Applicable Federal Rate of 3.2% for October -- Rev. Rul. 2009-33; 2009-40 IRB 1 (18 Sept. 2009) The IRS has announced the Applicable Federal Rate (AFR) for October of 2009. The AFR under Sec. 7520 for the month of October will be 3.2%. The rates for September of 3.4% or August 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.
PLR THIS WEEK PLR - 200938031 Scholarships Not Taxable Expenditures B is a private foundation. B previously received a Private Letter Ruling from the Service approving a scholarship program for X purpose. The Ruling indicated that the program would not be classified as a taxable expenditure under Sec. 4945(d)(3). B now proposes to create a second scholarship program for the purpose of advancing entrepreneurship in America. The scholarships will be awarded to post doctoral researchers legally in the United States who conduct scientific research who seek to translate their work for society's benefit. B 's selection committee is made up of qualified leaders in the community with business and science backgrounds. None of the committee members are employees of B. In addition, B will ensure that none of the committee members are in a position to derive a private benefit from the scholarship awards. B has indicated that it will make every effort to see that scholarships are spent solely for its stated purpose by keeping records and requiring awardees to submit written expenditure and research progress reports. Sec. 4945 imposes a tax on private foundations for any "taxable expenditures" made. However, scholarships are not classified as taxable expenditures under Sec. 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) Such 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 will observe these requirements, the scholarship payments will not be classified as taxable expenditures. Editor's Note: This Ruling indicates just how careful a private foundation must be with regards to creating a scholarship program. Note that B already obtained a PLR for its prior program. Nonetheless, B sought an additional PLR for the new program and did not take a chance by relying on an older PLR. This is good practice. A ruling from the Service can provide a charity great assurance going forward. To view the full PLR Click Here.
CASE OF THE WEEK Lucky Lucy Lindstrom's Unitrust Lucky Lucy Lindstrom finished college and headed west. She started as a financial analyst with a large company in Seattle. After just four years, she became a Registered Investment Advisor and began advising clients. Lucky Lucy also managed her own investments. With her keen insight into financial markets, Lucy soon began to move from traditional stocks and bonds into futures and commodities markets. Lucky Lucy was so successful in these markets that she now manages only her mega-dollar personal portfolio. Somewhat late in life, Lucky discovered the wonderful world of philanthropy. She volunteered at her favorite charity, and has learned that giving someone in need a helping hand is even more gratifying than making another million in the futures market. After reading in the charity's weekly eNewsletter about a charitable remainder trust, Lucy called Clara Johnson, the gift planner for favorite charity. Lucy suggested that she would transfer $5,000,000 of securities to a 5% net plus makeup unitrust. She would serve as trustee, make the investments and favorite charity would be the remainder recipient. Since Lucky Lucy normally earns 18% per year on her futures and commodities investments, she feels that it would be easy to make the unitrust grow to $10,000,000 or more. Would this plan work? May Lucy serve as trustee? Is it permissible to invest unitrust assets in the futures market? To view the solution to this Case of the Week Click Here.
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.
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.
Immanuel St. Joseph's Foundation	September 28, 2009

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