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Tax Quote of the Week
[A] democratic government is the only one in which those who vote for a tax
can escape the obligation to pay it.
-- Alexis De
Tocqueville
Senate Increases Debt Limit to $14.3 Trillion
On January 28, 2010, the Senate voted 60-39 to increase the Federal debt
limit from $12.4 trillion to $14.3 trillion. The Senate resolution will now
be sent to the House. It's expected that the House will also pass the same
resolution and send it to President Obama for his signature.
As part of the resolution, a "pay-go" provision was included. The
pay-go concept has been enacted in prior legislation. However, this pay-go
provision in H.J. Res. 45 includes a number of exemptions. Congress would
be able to index the alternative minimum tax exemption in 2010 and 2011,
and they could set the estate exemption at $3.5 million with a 45% estate
tax rate for those years. The tax brackets below 33% would be extended at
their current reduced levels. However, the pay-go rules would permit the
33% tax bracket to increase to 36%, and the 35% bracket would be raised to
39.6% for two years.
Majority Leader Harry Reid (D-NV) supported the pay-go provision. He
stated, "Pay-as-you-go in the 1990s led to record surpluses. Its
absence in the next decade led to record deficits. The road back to
economic recovery is a long one. If we are to travel it successfully and
prudently -- if we are to create jobs and govern responsibility --
pay-as-you-go must be one of the rules of that road."
Sen. Judd Gregg (R-NH) is the Ranking Member on the Senate Budget
Committee. He was opposed to the pay-go provision because of the various
exemptions. Sen. Gregg responded, "Pay-go isn't pay-go. Pay-go is
Swiss cheese-go." Sen. Gregg has been a strong voice during the past
year for moving forward with spending reductions to reduce the deficit.
Finally, Sen. Kent Conrad (D-ND) acknowledged that Sen. Gregg is correct in
stating that the pay-go provision is not very rigid. Sen. Conrad continued,
"To be clear, I would have much preferred a stricter statutory pay-go.
But the bottom line is the statutory pay-go provision being adopted today
will serve as a useful additional barrier against the adoption of
legislation that does not have broad bipartisan support."
Senate Rejects Budget Commission
On January 26, 2010, the Senate rejected a proposed Budget Commission by a
vote of 53 to 46. The Budget Commission bill would have required 60 votes.
The proposed Budget Commission was developed by Senate Budget Chair Kent
Conrad (D-ND) and Ranking Member Judd Gregg (R-NH). Both Senators
maintained that only a bipartisan commission with the authority to propose
legislation that could not be amended on the Senate floor would make
meaningful progress in reducing the deficit.
At a hearing on the Budget Commission, CBO Director Douglas Elmendorf
projected the fiscal 2010 deficit to be $1.35 trillion. This is 9.2% of the
gross domestic product, down slightly from the $1.41 trillion deficit in
2009.
Director Elmendorf noted, "The country faces a fundamental disconnect
between the services that people expect the government to provide,
particularly in the form of benefits for older Americans, and the tax
revenues they are prepared to send to the government to finance those
services."
The Budget Commission was opposed by Sen. Max Baucus. As Chair of the
Senate Finance Committee, he has great influence in all of the budget and
tax legislation. Sen. Baucus noted that there have previously been
deficit-cutting budgets that were passed using the "normal order"
of the Senate. He suggests, "That's the process that Congress should
employ to implement any bipartisan agreement today."
President Obama supported the Budget Commission. He indicated that the
Budget Commission is necessary to address the "serious fiscal
situation that our country faces." The Budget Commission will make
"tough choices" but could be helpful in creating future jobs and
economic growth.
Following the failure of the Budget Commission bill, President Obama issued
an executive order to implement a Budget Commission. Sen. Conrad approved
of the concept and concluded, "We now face a perfect storm of
exploding debt, brought on by rising healthcare costs, a retiring baby boom
generation, and an outdated and inefficient revenue system. Now is the time
to act."
State of the Union and Taxes
President Obama spoke to a joint session of the House and Senate on January
28, 2010. In the State of the Union Address, he included two short
sentences on taxes.
President Obama stated, "To help working families, we will extend our
middle-class tax cuts. But at a time of record deficits, we will not
continue tax cuts for oil companies, investment fund managers and those
making over $250,000 a year."
Following the State of the Union Address, Senate Finance Chair Max Baucus
(D-MT) indicated he would pursue the middle-class tax cuts. He stated,
"In the coming weeks, I will work with my colleges to pursue targeted
tax cuts that fulfill the President's goals of strengthening the
middle-class, bolstering our economy and creating American jobs."
However, Republican Senators were dismayed that President Obama suggested
he would increase taxes on upper-income persons. Sen. Charles Grassley
(R-IA) has been a strong advocate for small businesses. He observes that
over "70% of new jobs" are typically created by small businesses.
With the unemployment rate in most states over 10%, Sen. Grassley believes
that raising the top two brackets and the capital gain rate will have a
harmful impact on small businesses and job creation.
Sen. Grassley responded, "For job creation, I've urged the President
to get behind a comprehensive tax relief plan to encourage small business
activity, and I introduced a bill last summer (S. 1381) that would leave
more money in the hands of small business owners to hire workers, pay
employee salaries and make investments that lead to new jobs."
Editor's Note: After the State of the Union Address and passage of
the Senate debt increase resolution this week, it is now becoming clear
that the Senate and White House leadership plan to increase the two top
income tax brackets. Unless there is a change in law, on January 1, 2011,
the 33% and 35% brackets increase to 36% and 39.6%. The 15% capital gains
rate will increase to 20%. While the estate tax is scheduled to return with
a $1 million (with indexed increase) exemption and a 55% rate, it is very
possible that there will be a compromise on that tax.
Applicable Federal Rate of 3.4% for February -- Rev. Rul. 2010-6; 2010-6
IRB 1 (20 Jan 2010)
The IRS has announced the Applicable Federal Rate (AFR) for February of
2010. The AFR under Section 7520 for the month of February will be 3.4%.
The rates for January of 3.0% or December 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 at clicking
here.
X is a 501(c)(3) tax-exempt private foundation described in Sec.
509(a). X plans to award grants to promising individuals for the
development of new projects that address societal problems in a manner that
will benefit society at large. X proposes to open the application process
to the general public and award grants on an objective and
non-discriminatory basis. The selection committee will not receive any
private benefit and X's staff and other related parties will be prohibited
from applying. X has created written criteria for evaluating applications,
will require the grant recipient to provide semi-annual reports on the
progress and will reserve the right to recover the funds should they be
diverted from their intended purpose. X seeks a ruling that grants issued
under this program will not constitute taxable expenditures.
Sec. 4945 imposes a tax on private foundations for any "taxable
expenditures" made, which includes amounts paid to an individual
unless the grants are awarded under an approved procedure meeting Service
requirements. Reg. 53.4945-4(c)(1) provides that grants are not taxable
expenditures if the private foundation demonstrates that: (i) its grant
procedure includes an objective and non-discriminatory 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 X demonstrated to the Service's satisfaction that it will observe
these requirements, the grants awarded will not be classified as taxable
expenditures.
Reinsurance of a gift annuity involves
payment of a premium by the charity to a company qualified to issue
annuities in that state.
When a charity receives a gift annuity, it usually has the option to retain
the annuity in a designated reserve fund and invest that fund. The charity
may make payments from the fund or pay a premium to a financial services
company that will then make the required annuity payments. The second
choice is commonly called "reinsurance" of the gift annuity.
Reinsurance involves evaluating the factors that will benefit the charity
with self-insurance, or the favorable factors that might lead to
reinsurance. The primary questions relate to the life expectancy of the
donor, the estimated return of the charity's annuity reserve fund and the
cost of reinsurance.
Bill Russell grew up on the Great Plains. During his youth, he
was a rodeo bull rider and gained fame as "Wild Bill" for his
daring exploits. Wild Bill was an artist at heart and soon decided to move
on to his artistic pursuits. He traveled throughout America and Europe
studying all of the great modern and classical artists. In France he, was
greatly impressed by the delicate works of Impressionist painters Monet and
Manet and the bold colors and brush strokes of Van Gogh. Upon his return to
his beloved great plains of the west, Wild Bill combined the subtlety of
the Impressionists, the colors of Van Gogh and his own unique skills. His
Impressionist western landscapes and paintings of cowboys and life on the
ranch became treasured by art collectors nationwide.
Wild Bill was approached by the Cowboy Western Museum and asked to donate
one of his paintings. The museum director noted that they did not have any
western Impressionist art and a Wild Bill Russell painting would draw art
lovers from America and the world. Bill was now finally selling his
paintings for $75,000 or more, and now had another new experience - paying
large income taxes. He asked, "Could I get a charitable deduction for
this gift of my painting?"
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 1999-2010 Crescendo Interactive, Inc.
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