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Tax Quote of the Week
"The point to remember is that what the government gives it must first
take away."
– John Strider
Coleman
Obama and Biden Release Tax Returns
It has become customary for the President and Vice President to release tax
returns on April 15th each year. President Obama and Vice President Biden
have both released their 2009 returns.
President Obama had adjusted gross income of $5,505,409. Approximately $5.1
million of his income was from royalties on sales of his books. A
substantial portion of the royalties were from sales overseas.
President and Mrs. Obama paid income tax of $1,792,414. They donated
$329,100 to 40 charities.
In addition, President Obama took advantage of the tax provision that
allows his Nobel Peace Prize Award of $1.4 million to be given directly to
charities. He directed the transfer of his Nobel Prize to 10 different charities.
With that action he avoided reporting the income on his tax return, but did
not receive an additional charitable deduction.
The personal gifts were made to numerous charities. The largest personal
gifts included $50,000 to CARE, $50,000 to the United Negro College Fund
and $20,000 to the Boys and Girls Clubs. There were numerous gifts of
$5,000 and $10,000 to other charities.
The Nobel Peace Prize of $1.4 million was allocated to 10 charities. The
Fisher House Foundation of Rockville, Maryland and the Clinton-Bush Haiti
Fund each received $250,000. The American Indian College Fund, Appalachian
Leadership and Education Foundation, College Summit, Posse Foundation,
Hispanic Scholarship Fund and United Negro College Fund all received
$125,000. Africare and the Central Asia Institute each received $100,000.
Vice President and Mrs. Biden reported adjusted gross income of $333,182.
They paid tax of $71,147. Vice President and Mrs. Biden made charitable
gifts of $3,920. The gifts to 14 charities ranged from $40 to $500.
Sen. Schumer Predicts IRA Rollover by June
The House and Senate continued to work on the resolution of differences in
the "tax extenders" bills passed by both chambers. Sen. Charles
Schumer (D-NY) is a member of the Senate Finance Committee and Vice-Chair
of the Senate Democratic Caucus. He stated this week that the extenders
bill (H.R. 4213) "will be done this work period." He indicated
that it would pass prior to the month of June.
The two bills have been under discussion because of differences in the $31
billion of tax increases to pay for the tax extenders. The Senate bill tax
offsets were used in the healthcare legislation, so they are no longer
available. The House bill taxes hedge fund managers on "carried
interests." Hedge fund managers will pay future taxes at ordinary
income rates rather than the current capital gain rates. With the potential
increase of top ordinary income rates from 35% to 39.6% in 2011, there
would be a very substantial increase in their taxes.
The House bill also includes strict standards for international compliance.
Recent successful efforts by the IRS to collect taxes from individuals who
have been hiding funds in Swiss bank accounts would be bolstered by the
House provisions.
After House and Senate negotiators have agreed upon the tax provisions, it
is expected that the bills will easily pass the House and Senate. The tax
extender of greatest interest to the philanthropic community is the IRA
charitable rollover. It permits transfers of up to $100,000 per IRA owner
each year directly from the IRA to qualified charities. The tax extenders
bill will enact the IRA charitable rollover retroactive to January 1, 2010.
Estate Must Pay Income Tax Liens
In the Matter
of the Estate of Jerry Wayne Young Sr.; No. 1:09-cv-00814 (7 Apr 2010),
a District Court sided with the IRS in upholding a tax lien.
Decedent Jerry Wayne Young Sr. passed away intestate on July 28, 2003. His
spouse Betty G. Young was appointed Administratrix of the Estate. On
January 26, 2004, the United States filed a notice of a tax obligation
against the estate in an amount of $240,459.73. The obligation was based
upon a Notice of Federal Tax Lien (NOFTL) that had been created on October
8, 1997. The NOFTL was valid until June 11, 2007.
On December 3, 2009, the estate filed an amended objection to the claim of
tax lien and claimed that the lien had expired after 10 years.
The court noted that a lien under 26 U.S.C. Sec. 6502(a) is valid if there
is a "proceeding begun" within 10 years of the assessment of the
lien. The estate claimed that the mere filing of the notice was not a
"proceeding begun."
However, the court reviewed the precedents and noted that in states where
the probate court has full jurisdiction to adjudicate claims, the filing of
the notice is sufficient to constitute the commencement of a proceeding.
Under Mississippi law, the Chancery Court has "full jurisdiction"
to decide various matters. Therefore, the IRS claim was validly filed
within the 10 year period.
The estate also claimed that the NOFTL had not been timely refiled. The
court noted that this does not invalidate the IRS tax lien, but merely may
change the priority of the IRS claim with respect to other estate
creditors, since they had not received timely notice.
Applicable Federal Rate of 3.2% for April – Rev. Rul. 2010-11; 2010-14
IRB 1 (18 Mar. 2010)
The IRS has announced the Applicable Federal Rate (AFR) for April of 2010.
The AFR under Sec. 7520 for the month of April will be 3.2%. The rates for
March of 3.2% or February 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 2010, pooled income funds in existence less than
three tax years must use a 4.6% deemed rate of return. Federal rates are
available by clicking
here.
Foundation is an exempt organization under Sec. 501(c)(3),
classified as a private foundation within the meaning of Sec. 509(a) and
was incorporated by Husband. Husband and Wife created Trust with the intent
that Trust would qualify as a charitable remainder unitrust (CRT) as
described in Sec. 664(d)(2). Article 5, Section 1 of Trust provides that
upon the death of Husband and Wife, Trust will terminate and trustee will
distribute all of its principle and income to Foundation. Section 3
provides that any charitable remainder beneficiary of Trust must be a
Qualified Organization. Section 13 defines Qualified Organization as, among
other criteria, "of a type described in" Sec. 170(b)(1)(A).
The requirement to satisfy Sec. 170(b)(1)(A) is inconsistent with the
designation of Foundation as a charitable beneficiary of the Trust as
Foundation is not an organization described in Sec. 170(b)(1)(A). As a
result, Foundation is prevented from qualifying as a charitable remainder
beneficiary of Trust. Drafting Attorney represented the inclusion of Sec.
170(b)(1)(A) requirement as a scrivener's error. Wife filed a petition in
State Court requesting the court's approval to correct the scrivener's
error by reforming the trust to delete the reference to Sec. 170(b)(1)(A). The
State Court granted relief to Wife, contingent upon the issuance of a
favorable private letter ruling by the Service.
The Service held that the proposed reformation would not violate Sec. 664
because it merely corrects a scrivener's error and is in accordance with
the original intent of Husband and Wife. Under Revenue Ruling 76-8, 1976-1
C.B. 179, a trust that otherwise qualifies as a CRUT under Sec. 664 may
provide the grantor the power to designate the remainder beneficiary.
However, the ruling does not require the remainder beneficiary be an
organization described in Sec. 170(b)(1)(A). As a result, the Service ruled
that the proposed reformation of Trust will not adversely affect Trust's
qualification as a CRUT if it otherwise meets the requirements of Sec. 664
and the applicable regulations.
In PLR 200152018, a donor requested a ruling on converting the
income interest from a charitable remainder unitrust into a charitable gift
annuity. The PLR had four specific requests. First, that the donor would
receive an income tax deduction for a portion of the value of the income
stream transferred to charity for the gift annuity. Second, that there
would be a charitable gift tax deduction for the same portion. Third, that
the transfer of the unitrust income interest for a gift annuity would not
accelerate underlying capital gain in the income interest. Finally, that
the percentage of capital gain and basis as of the date of creation of the
trust could be utilized for calculating the tax-free portion of the gift
annuity payouts.
In the ruling, the IRS found that there was an income tax deduction
allowable for the present value of the remainder interest in the charitable
gift annuity. It also found that there would similarly be a gift tax
deduction and the transfer of the unitrust income interest in exchange for
the gift annuity would not accelerate the underlying capital gain. On the
last issue, the IRS found that a prorated basis would not be allowed and
all payouts to the annuitant would be ordinary income and capital gain.
Mac Swenson loved the great outdoors. He grew up in the Big
Sky country of Montana. As soon as he could walk, Mac was on a pony. By his
teen years, Mac was riding horses every day. On weekends, he watched with
admiration as the older cowboys practiced riding bucking broncos at the
local rodeo grounds.
By age twenty, Mac was riding the rodeo circuit. He soon moved up to the
most exciting event at the rodeo – bareback riding on the wild and powerful
Brahma bulls. Mac was lean and tough and soon gained a national reputation
as a skilled and fearless Brahma bull rider. At a rodeo in Burwell,
Nebraska, Mac watched with great interest as a lovely and charming young
lady named Glenda Olson was crowned the rodeo queen. Mac was head over
heels in love. They soon married and he used the rest of his rodeo winnings
to buy a small ranch near the Beartooth Mountains in Montana. Over the
years, Mac and Glenda raised four children and steadily built up the ranch.
Both loved the great Big Sky country and planned to spend the rest of their
days watching the sun set over the Beartooth Mountains.
As Mac and Glenda reached their sunset years, the ranch was now more than
7,000 acres. One day a new neighbor moved in to the ranch next door. Glenda
said, "You know Mac, our four children have left for the city, and no
one is here to manage the ranch. I know we both love it here, but
eventually you may need to think about selling." A few weeks later,
their neighbor, Bob Brown, stopped in for a visit. He and Mac enjoyed
talking about cattle, the weather and the hay crop. After hearing how Mac
and Glenda had built up their ranch over the years, Bob mentioned that he
was looking for a way to expand the size of his ranch.
Thirteen years ago, Mac and Glenda used a sale and unitrust to sell the
ranch tax free. They transferred half of the ranch to a unitrust and half
to a revocable trust. Their neighbor Bob Brown paid $1,000,000 to the
unitrust and $1,000,000 to a revocable trust for the entire ranch except
the home quarter section. Since that 160 acres included their home, the
barn and other buildings, it had a value to $400,000. Thus, eight years ago
they gave the remainder interest in the home quarter to favorite charity,
which immediately sold the remainder value to Bob Brown.
Mac and Glenda are now age 83. They both love the ranch, but his old rodeo
injuries are "acting up" and Mac now needs to be closer to
medical care. Mac and Glenda called the gift planner from Favorite Charity
and asked if there were any options to consider. What should they do with
their right to live on the ranch for their lifetimes?
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.
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Copyright 1999-2010 Crescendo Interactive, Inc.
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