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December 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 |
December 17,
2007 |
GiftLaw Weekly eNewsletter -
December 17, 2007
- WASHINGTON
HOTLINE
- PLR THIS
WEEK
- CASE OF THE
WEEK
- ARTICLE OF THE
MONTH
|
WASHINGTON HOTLINE
Tax Quote of the Week
"Capital
punishment: The income tax."
-- Jeff Hayes
Ping-Pong
Alternative Minimum Tax (AMT) Bill
After failing last
week to obtain Senate agreement on his proposed AMT bill, Ways and
Means Committee Chair Charles Rangel (D-NY) brought to the House a
new AMT Relief Act of 2007. The bill passed December 13, 2007 by a
party-line vote of 226-193.
The new AMT relief bill increases
the exclusions for married persons to $66,250 and for single persons
to $44,350. However, it also includes "offsets" to pay for the tax
relief. The offsets or tax increases are on hedge-fund managers, on
businesses with international divisions and other tax compliance
changes.
Chairman Rangel noted, "Once again, the House has
fulfilled it's constitutional responsibility and reported out a bill
to provide immediate tax relief for more than 23 million families
who would otherwise face a tax increase this year under the AMT."
Recognizing that the bill will be opposed in the Senate, he
continued, "With passage of this bill, we are giving the Senate
Republicans another opportunity to be responsible and hopefully,
this time, they will do the right thing and support this critical
relief."
The Ranking Republican on the House Ways and Means
Committee, Rep. Jim McCrery (R-LA), responded by noting that the
bill faced a certain defeat in the Senate. Rep. McCrery indicated,
"The Senate wisely rejected the idea of including tax increases in
the AMT, passing a 'clean' AMT patch by a vote of 88-5. House
Democrats, however, continue to insist on adding tax increases to
the AMT, an approach that the Senate has rejected, the President
said he will veto, and which twists the idea of paygo on its
head."
Editor's Note: Sen. Orrin Hatch (R-UT) responded to
passage of the second AMT bill by the House and noted, "How long
will this game of ping-pong between the House and Senate continue?"
Senate Republicans will almost certainly reject the AMT bill while
IRS voices continue to warn of an impending tax disaster during the
filing season because the printed IRS forms are now wrong and the
House and Senate cannot come to an agreement. It seems quite
possible that the Senate will refuse to take action and present the
House with the option of passing an AMT Relief Act with no other
provisions.
Failing Grade For Rector FLP
In
Estate
of Concetta H. Rector et al. v. Commissioner; T.C. Memo.
2007-367; No. 20860-05 (13 Dec 2007), the Tax Court added to the IRS
victories on "bad facts" family limited partnerships. The Court
sustained an IRS deficiency of $1,633,049 and Sec. 6662(a)
accuracy-related penalty of $92,790.
The decedent, Concetta
Rector, was born in 1906, married Jack Rector and was the
beneficiary of a marital trust and a bypass trust funded through his
estate in 1975. Subsequently, the decedent created a 1991
irrevocable trust and transferred all of the marital trust assets to
that trust.
In 1998, when she was age 92, the decedent became
a resident of a convalescent hospital and she and her son, John
Rector, created the Rector Limited Partnership (RLP). The RLP
Agreement listed her as a 2% general partner and 98% limited
partner. RLP was funded with virtually all of her assets and held
over $8.8 million in liquid investments. The bypass trust from her
husband's estate at that time held approximately $2.5 million in
assets.
The Tax Court noted that RLP had no business plan, no
investment strategy, no investment management, no balance sheets, no
income statements, no other financial statements and no formal
meetings. Distributions from RLP for its first three years were over
90% to the decedent.
Prior to her demise, the decedent made
gifts valued at $595,000 to sons John Rector and Fred Rector. When
she passed away, she owned 72.27% of RLP. The estate allocated that
percentage of assets to her, claimed a 19% discount for lack of
control and lack of marketability and reduced the approximately $8.1
million in assets to $4.8 million in assets for estate tax purposes.
The IRS claimed that she held under Sec. 2036(a) a "retained
possession or enjoyment" of the assets and included the assets at
full value in the estate.
The estate claimed that decedent
relinquished enjoyment of the right to income and transferred the
assets in a bona fide sale for adequate and full consideration. The
Tax Court cited the Estate of Bigelow v. Commissioner, .3d
955 (9th Cir. 2007) and noted that the evidence showed her retained
possession. The Court determined that there was indeed an implied
agreement that she would have full benefits of the assets and the
overwhelming use of the assets was for her benefit.
The
estate noted that the bypass trust held $2.5 million in assets.
Under that trust, she received income and could have received
principal. Therefore, the estate maintained that she was not
dependent exclusively on RLP for her medical care and other costs
that approached $100,000 the last year of her life. The Court noted
that the record indicated that she was indeed depending on RLP for
support and that "Trust B was not available in any significant
sense" for her living expenses.
Citing Bigelow again,
the Court stated that this also was not "a bona fide sale for an
adequate and full consideration in money or money's worth." In view
of the Court, there was no significant non-tax business purpose for
the trust. Finally, because son John Rector was involved in
management and held various securities, insurance and financial
planning licenses, he was deemed to be financially knowledgeable.
Therefore, the Sec. 6662(a) accuracy-related penalty was
affirmed.
Editor's note: This case is a good study on
the current state of the "bad facts" FLPs. Judge Laro made repeated
references to the Bigelow, Bongard, Thompson,
and Strangi cases. In circumstances in which the formalities
of the FLP are not followed and the decedent transfers virtually all
assets to the FLP, the courts are likely to give the FLP a failing
grade. However, if the FLP follows good business practices, there
are other assets and the family residence outside the FLP, there is
management and business purpose demonstrated through investment
diversification and other characteristics of a business entity, then
it is very probable that an FLP discount will be
permitted.
Sen. Baucus Pursues Mortgage
Relief
Following passage by the Senate of a mortgage
relief bill that reduces requirements for an FHA loan, Sen. Max
Baucus indicated that he hoped to pass a home mortgage debt relief
act by the end of the year. At a hearing on December 13, 2007, he
indicated that "According to the Center For Responsible Lending, two
million Americans will go to bed tonight in fear of losing their
homes, because their mortgage payments are about to
jump."
Sen. Baucus referred to a family in Missoula, Montana
in which the breadwinner is a bricklayer earning $23 per hour. That
is a sufficient wage to support a family in Missoula. However, he
and his wife have an adjustable rate mortgage and their payment is
going to increase from $1,400 to $1,800 a month in 2008. This 29%
increase in mortgage payments places their home at risk.
A
mortgage relief bill was introduced by Sen. Debbie Stabenow (D-MI)
and Sen. Baucus hopes to pass a temporary version of that bill
before the end of the year.
The ranking Republican on the
Senate Finance Committee, Sen. Charles Grassley (R-IA), also
responded to the mounting mortgage challenges. But Sen. Grassley
stated, "There is no single silver bullet that will solve this
problem, but there may be a silver lining if the suffering of those
afflicted can be alleviated and we can work to prevent this
situation from occurring again."
Sen. Grassley noted that the
mortgages are often pooled by the banks and then invested by
brokerage firms in structured investment vehicles (SIVs). Because
5.6% of mortgage holders are now behind on payments, there are
thousands of mortgages in these pools potentially in default. The
change in the tax code would permit lenders to forgive a portion of
these loans and allow individuals to benefit from debt forgiveness
without having to pay income tax.
Applicable Federal
Rate of 5.0% for December. Rev. Rul. 2007-70; 2007-50 IRB 1 (20 Nov.
2007)
The IRS has announced the Applicable Federal Rate
(AFR) for December of 2007. The AFR under Sec. 7520 for the month of
December will be 5.0%. The rates for November of 5.2% or October of
5.2% 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 - 200724034 Administration of Employee Health Plan
Doesn't Jeopardize Tax Status or Trigger
UBIT
501(c)(3) Charity's
exempt purpose is to promote and support federal agency M's research
program. Charity operates at M, manages fellowship and research
grants supporting M's programs and also administers group health and
other types of insurance for employees, contractors and volunteers
of M who do not qualify for federal health insurance. Charity
administers the insurance plans issued by insurance company O, in a
manner similar to an employer and not that of an insurance company.
M pays Charity the premiums on behalf of the employees, and Charity
then pays the premiums to O. Any surplus at the end of the year that
results in a difference between the premium payments to O and
Charity's potential contract liability is used in furtherance of
Charity's exempt purpose, to support M's research activities. M
receives an annual administrative fee for administering the plan. M
contracted with Charity rather than with O to administer the plans
in order to save money, maximize efficiency, and relive itself of
administrative burdens. Charity requests a ruling that (1) Charity's
administration of M's health insurance plan does not jeopardize
Charity's status as a 501(c)(3) tax-exempt organization and (2) that
income Charity receives from M related to administration of the plan
is not subject to unrelated business income tax (UBIT).
A
tax exempt organization must be "organized and operated exclusively
for charitable, educational or scientific purposes." Sec. 501(c)(3).
Lessening the burdens of government qualifies as "charitable"
purpose under Sec. 1.501(c)(3)-1(d)(2). Activities lessen the burden
of government if the activities are those the government unit
considers to be burdensome and the charity's activities do actually
lessen the government's burden. This is partly evidenced by a close
working relationship between the charity and government. Rev. Rul.
85-1, 1985-1 C.B. 177-8. Sec. 5119(a) imposes UBIT tax on 501(c)(3)
organizations and Sec. 513(a) defines unrelated trade or business as
conduct "not substantially related" to the organization's exempt
purposes.
The Service ruled that Charity's activities do not
jeopardize its tax-exempt status because they lessen the burdens of
M. First, M considers administering plans for employees to be its
burden because health care is a well established government
function, administration of the plan allows M to attract needed
research personnel and M bears the financial responsibility for the
plan. Second, M's burden is actually lessened because Charity's
administration of the plan saves M money, ensures maximum efficiency
and lowers overall costs. Charity and M showed a close working
relationship. The Service also ruled that the income Charity
receives from M to administer the plan is not subject to UBIT under
Secs. 511-3, as the activity is substantially related to Charity's
tax-exempt purposes.
To view the full PLR Click
Here.
|
CASE OF THE
WEEK
Family Feud Insurance, Part
1
Rodney and Kelly Griggs,
both 60, are active sponsors of community programs and local
charities. As part of a program called "Building Communities From
The Ground Up," a local land preservation charity decided to
purchase large blocks of vacant land. The land would be preserved
for future parks and recreational facilities in accordance with the
charity's mission.
Despite the wonderful future benefits, any
current land purchases would put a financial strain on the charity's
resources. To help ease the strain, the charity plans to purchase
the land with a long-term, interest-only, $1 million mortgage.
Despite the financial strain, the charity wants to proceed because
these land purchases represent a great opportunity for the
community.
The charity is hopeful that a major donor will
emerge in the future whose gift will pay off the outstanding
mortgage balance. Believing the Griggs may be the major donor they
are hoping for, the charity approaches them with the following
proposal.
The charity proposes that the Griggs create a
two-life charitable remainder trust (CRT) with $1 million. The CRT
will distribute income each year to the Griggs and, therefore,
provide a steady stream of income to them. Upon the Griggs' death,
the remaining trust principal would pass to the charity. Given the
modest 6% payout of the CRT, it is very likely that the charity will
receive $1 million or more at the end of the trust term. In other
words, the charity would have more than enough money to extinguish
the mortgage balance.
The Griggs love the plan. They have
over a $1 million of oil and gas stock, and they have wanted to
diversify for quite some time. Moreover, the lifetime income and
major gift to charity make the plan even better. However, there are
four major objections to the plan - the Griggs' four children! In
particular, the four children do not like the idea of their
inheritance potentially droping by $250,000 per child when their
parents use $1 million to fund the CRT.
Although the Griggs
are committed to the charity, they want to address the financial
concerns of their children before they proceed. In other words, they
need a plan that provides for the children as well as the charity.
What can the charity suggest?
To view the solution to
this Case of the Week Click
Here.
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ARTICLE OF THE
MONTH
IRA Bequests and Testamentary
Unitrusts
Document
Options to Transfer IRAs to Charities or to CRTs
With the
growth of IRAs, there will be a dramatic increase in the number of
individuals who choose to bequeath IRAs to charity or to
testamentary unitrusts. Some of these persons will transfer an IRA
to a unitrust for the life of a spouse. Other parents will transfer
an IRA to a unitrust for a term of years or for the lives of
children.
What form is required in the actual documents? In
order to create a legal transfer of an IRA, profit sharing or 401(k)
account to a charity or charitable trust, certain legal procedures
must be followed.
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 |
December 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
| |
