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Tax Quote of the Week
"When you listen to tax-cut rhetoric, remember that giving one class
of taxpayers a 'break' requires – now or down the line – that an equivalent
burden be imposed on other parties. In other words, if I get a break,
someone else pays. Government can't deliver a free lunch to the country as
a whole. It can however, determine who pays for lunch."
– Warren Buffett
Senate Budget Plan Includes Estate Tax
On April 22, 2010, the Senate Budget Committee passed the Democratic budget
plan for fiscal year 2011. Sen. Budget Chair Kent Conrad (D-ND) was very
pleased with the passage. He noted that the five year plan should bring the
deficit down to 3% of the gross domestic product by 2015.
Sen. Conrad stated, "This plan is fiscally-disciplined when it comes
to spending. It freezes non-security discretionary spending for three years
and enforces those levels with spending caps. It cuts discretionary
spending by $4 billion below the President's requested levels."
The budget also makes provision for potential deficit reductions by the
President's Bipartisan Fiscal Commission. The Fiscal Commission will hold
its first meeting on April 27, 2010. Any deficit reductions achieved as a
result of Fiscal Commission efforts will be used to reduce the federal
deficit and will not be permitted to increase spending.
Sen. Judd Gregg (R-NH) is the Ranking Member of the Senate Budget
Committee. He was disappointed with the budget. Sen. Gregg noted,
"Despite massive deficits and debt as far as the eye can see, this
budget fails to make any progress on getting the government's spending and
borrowing spree under control. It fails to effectively restrain spending,
finding only $4 billion in cuts in a $3 trillion budget, a comparative drop
in the bucket."
Under the proposed Senate budget, the tax cuts enacted in 2001 and 2003
would be continued for individuals in the four lower brackets. However, the
33% bracket will be increased to 36% and the 35% top bracket will be
stepped up to 39.6%.
Capital gains tax rates will increase from 15% to 20%. The estate tax is
assumed to be extended based on the 2009 exemption of $3.5 million per
person. The Senate budget projects that the estate tax will be extended at
that level for the years 2010 and 2011.
ABA Requests Senate Finance Hearing on Estate Taxes
Stuart M. Lewis and Roger D. Winston of the American Bar Association
Sections on Taxation and Real Property, Trusts and Estate Law sent a letter
to Sen. Finance Chair Max Baucus (D-MT) on April 15, 2010. Lewis and
Winston requested a Senate hearing on "the significant issues"
resulting from the temporary repeal of the estate tax.
In the letter they observed that there are four major issues that are
causing huge problems in the estate planning community. Lewis and Winston
hope that a hearing before the Senate Finance Committee could encourage
Congress and the IRS to resolve these issues. The issues are as follows:
1. Carry-over Basis in 2010 – Because many estate planners did not
anticipate carry-over basis would actually take effect, there has been very
minimal preparation in understanding and interpreting the carry-over basis
rules.
2. 2010 Estates – For individuals who pass away in 2010, many
formula clauses are based on an assumed estate tax exemption. With no
estate exemption, there may be many unintended problems and a significant
level of accidental disinheritances. Fifteen states have proposed
legislation to resolve this issue, but the diversity of estate formula
clauses makes legislative reform very difficult.
3. 2010 Estate Tax Gap – There could be future tax problems if the
estate tax repeal holds for 2010. In particular, some generation skipping
transfer tax trusts created in 2010 will extend far into the future. There
is great uncertainty about their potential transfer tax taxation.
4. Legislative Uncertainty – Even if Congress passes an estate tax
retroactive to January 1, 2010, it may be years before the Supreme Court
rules on the validity of that retroactive law. This uncertainty will
continue to cause major estate administration problems.
Therefore, Mr. Lewis and Mr. Winston, on behalf of the American Bar
Association, request a hearing on estate taxes by the Senate Finance
Committee.
Editor's Note: With the current press of Congressional business and
reelection campaigns gearing up to launch in September, it is now very
possible that the Senate will not consider action on estate taxes until
after the November election. If legislation is passed in December, it still
could be retroactive to January 1, 2010.
Gifts to Foreign Churches Are Not Deductible
In Anonymous
vs. Commissioner of Internal Revenue; T.C. Memo. 2010-87; No.
6851-08 (22 Apr 2010), the Tax Court determined that an individual did not
qualify for charitable contribution deductions for gifts made through her
cousin to foreign churches.
Taxpayer was born in a foreign country. Her parents and family were
"devout Catholics." There was a civil war and the guerrilla
forces attacked her hometown. Her uncle, a Catholic priest, and 400 other
Catholics were killed by being buried alive. The local Catholic church and
seminary were destroyed.
Taxpayer left her native country and moved to the United States. She now is
a naturalized citizen and member of a Catholic church in her home state.
Following completion of her education in 1996, she accepted an engineering
position with a large company. She has continued to send funds to her home
country to rebuild Catholic churches. However, because she fears for her
life she transfers the funds to a cousin who then makes the gifts to the
foreign Catholic churches.
Taxpayer claimed contributions in 2006 of approximately $25,050 and also
deducted an airplane ticket of $1,025 to travel and support the Catholic
churches. The IRS subsequently audited her return. Because the gifts were
not made to a qualified charity, the IRS denied the deductions.
The court noted that under Sec. 170(c)(2), gifts are deductible if made to
a qualified charitable organization. The taxpayer did not make gifts to a
qualified charitable organization and the IRS therefore denied the
deduction.
Taxpayer responded that the gifts were transferred to the cousin and
directly supported the Catholic churches. Because the gifts were
transferred "for the use of" a qualified organization and the
Catholic churches are part of a worldwide organization with many exempt USA
entities, the taxpayer claimed that the deduction should be permitted.
However, the court noted that the gifts were to the cousin and therefore
not to a qualified charitable organization under Sec. 170(c)(2).
With respect to the airline ticket for $1,025, taxpayer did not show that
the trip was under the control or supervision of any of the Catholic
churches. Therefore, it also did not qualify for a charitable deduction.
Finally, the court noted that the taxpayer was "sincere" and
"her actions were brave and heartfelt," but determined that the
gifts were not deductible because they were not given to a qualified exempt
organization.
Editor's Note: Charitable gifts for the benefit of foreign organizations
are deductible if there is a U.S. charity that receives the gifts and then
expends them in foreign lands as part of its exempt purpose. The gifts
would have been deductible if she had made the transfers through a
qualified U.S. charity that engaged in charitable endeavors in the foreign
land.
Gifts to "Needy Saints" Not Deductible
In Jeffrey
N. Wilkes et ux. v. Commissioner; T.C. Summ. Op. 2010-53; No.
4038-08S (22 Apr 2010), the court determined that most of the taxpayer's
gifts were not deductible.
Taxpayers Jeffrey and Patricia Wilkes are members of the Church of Jesus
Christ. This church has no clergy, no hierarchical structure and no formal
leadership. Local churches are all autonomous and conduct regular religious
services. The Wilkes are members of the Westside Church of Jesus Christ in
Golden, Colorado.
Church elders periodically determine that certain individuals are qualified
as "Needy Saints" and gifts may be made to them by church
members. The Wilkes made contributions in 2005 of $3,450 directly to seven
"Needy Saints."
In addition, the Wilkes supported Churches of Jesus Christ in Flint,
Michigan and Raleigh, North Carolina. These two mission churches designated
a Mr. Smith and Mr. Small as their agents. The Wilkes made a gift of $6,000
to Mr. Smith for the church in Flint, Michigan and $6,500 to Mr. Small for
the church in Raleigh, North Carolina. Finally, they made a gift of $6,000
to Mr. Saayman for a church in South Africa.
Deductions are permitted for gifts to a charitable organization. Under Sec.
170(c)(2), gifts to "individuals for their personal benefit" are
not qualified deductions. Therefore, the gifts directly to "Needy
Saints" were not deductible.
The gifts to Mr. Smith and Mr. Small were held deductible. Mr. Smith and
Mr. Small were both members of U.S. churches that qualify under IRS
guidelines for charitable deductions. Both church entities granted Mr.
Smith and Mr. Small the right to act as their agent. They were under elder
board control and filed regular financial reports with their respective
churches. Because there was a "proper agency relationship" with
the qualified exempt churches, the gifts of $12,500 payable to Smith and
Small were deemed "to" the church and therefore deductible.
However, the gift to Mr. Saayman was held not deductible because he was in
South Africa. Therefore, there was no gift to a qualified U.S. charity and
the deduction was denied.
Taxpayers also claimed that the denial of deduction infringed their First
Amendment right to practice freedom of religion. The court noted that the
deduction under Sec. 170 "is neither to advance nor inhibit
religion." While an individual may lose his or her deduction, the free
exercise of religion is not inhibited by that loss. Therefore, the above
denial of deductions for the Needy Saints and for the church in South
Africa was maintained.
Applicable Federal Rate of 3.4% for May -- Rev. Rul. 2010-12; 2010-18
IRB 1 (18 Apr. 2010)
The IRS has announced the Applicable Federal Rate (AFR) for May of 2010.
The AFR under Sec. 7520 for the month of May will be 3.4%. The rates for
April of 3.2% or March of 3.2% 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 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 exempt from tax as a private non-operating
foundation under Sec. 509(a) of the Code. Foundation was formed from the
residue of the trust of B upon the demise of the settler, C. Charity
initiated litigation with Foundation. Charity contested the disposition of
the trust residue to Foundation. On date X, Charity and Foundation settled
the litigation. The settlement agreement established a grant protocol that
requires Charity to present to Foundation's board its program, project and
land priorities. Grant proposals that Foundation receives from other
organizations must be sent to Charity for prioritization. Foundation agreed
to review all grant proposals and select those that it will fund in an
amount not less than Foundation's "distributable income" as
defined in Sections 4942(d) and (e) of the Code. E, the successor to
Charity through a merger, filed a suit against Foundation stating that E is
entitled to receive all of Foundation's distributable income. Foundation
filed a counterclaim for breach of contract. Foundation has been ordered by
the reviewing court to cease any distributions until the lawsuit is
resolved.
Foundation requested a ruling that the set-aside of funds until litigation
is resolved will not result in the imposition of excise tax under Sec.
4942. Sec. 53.4942(a)-3(b)(9) provides that if a private foundation is
involved in litigation and may not distribute assets or income because of a
court order, the private foundation may request a set-aside of funds. The amount
to be set-aside shall be equal to that portion of the private foundation's
distributable amount which is attributable to the assets or income that are
held pursuant to court order. The Service determined that Sec.
53.4942(a)-3(b)(9) is applicable and that the set-aside of funds pursuant
to a court order will not subject foundation to excise taxes under Sec.
4942.
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. 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.
Glenda passed away in November at age 88. Suffering from a broken heart,
Mac passed away the next month. Their executor is now tending to their
final affairs and the distribution of their estate. Two years ago, Mac and
Glenda had called their gift planner and mentioned that they still held one
other parcel of land. This ranchland was leased to a neighbor. Since they
wanted to continue the lease, they gave the remainder interest in that
ranchland to Favorite Charity and continued to receive the lease income.
Favorite charity immediately sold this remainder interest in that land to
Mac's neighbor Bob Brown. Executor and estate attorney now want to complete
the estate tax return. How do they treat the remainder interest in that
last parcel?
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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