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Tax Quote of the Week
"The appropriation of public money always is perfectly lovely until
someone is asked to pay the bill."
-- Calvin Coolidge
President Creates Fiscal Commission
On February 18, 2010, President Obama signed an executive order to create
the "National Commission on Fiscal Responsibility and Reform."
The Fiscal Commission was created after the Senate failed to achieve the 60
votes necessary to establish a statutory commission. The Fiscal Commission
by Executive Order will include 18 members.
President Obama and the Co-Chairs of the Commission appeared at the press
conference on Feb. 18. The Co-Chairs will be former Senator Alan Simpson, a
Republican from Wyoming, and former Clinton Chief of Staff Erskine Bowles.
Under the Commission terms, the Co-Chairs must represent the Republican and
Democratic Parties.
The President is permitted to appoint four other individuals who may be
financial experts or former members of Congress. The Democratic Senate
Majority Leader and Republican Minority Leader may each appoint three
Senators. Finally, the Speaker of the House and the Minority Leader may
each appoint three House members.
The Executive Order outlines specific goals for the Commission. The
Commission is charged with recommending actions that will "balance the
budget, excluding interest payments on the debt, by 2015." It is also
expected that by 2015 the debt to Gross Domestic Product (GDP) ratio will
be stabilized at an "acceptable level." However, the order
recognizes that there is considerable uncertainty in meeting that goal
because of the potential for the economy not to experience full recovery.
A report is due from the Fiscal Commission on December 1, 2010. At least 14
of the 18 members must vote in favor of the report. This requirement is
designed to make certain that there is a measure of bipartisan support for
the recommended actions.
Support and Concerns About the Fiscal Commission
The Fiscal Commission has been strongly supported by Senate Budget Chair
Kent Conrad (D-ND). He introduced the bill to create a statutory commission
in the Senate, but he was unable to secure the required 60 votes.
Sen. Conrad still supported the President's Fiscal Commission. He stated,
"Importantly, the President's Commission is coupled with firm commitments
from Congressional leaders to bring the panel's recommendations to a vote.
With these commitments, the President's executive order is as close as we
can get to establishing a statutory commission, where the votes will be
guaranteed."
Sen. George Voinovich (R-OH) had joined with Sen. Conrad and Sen. Judd
Gregg (R-NH) in support of the statutory commission. He still indicated,
"Frankly, I believe that the Conrad-Gregg Fiscal Task Force Amendment
is a far better alternative to the President's executive order, because it
is statutory in nature and has the teeth necessary to force Congress to act
if 14 of its 18 members agree with its recommendations." Sen.
Voinovich continued to urge a reconsideration of the statutory fiscal
commission, but acknowledged that the President's commission may be
helpful. Nevertheless, Sen. Voinovich is concerned about the "national
debt and unbalanced budgets for as far as the eye can see."
There still is the question of whether Senate and House Republicans will
participate in the panel. Minority Leader Mitch McConnell (R-KY) expressed
serious concern about the commission's ability to recommend tax increases.
He stated, "After trillions in new and proposed spending, Americans
know our problem is not that we tax too little, but that Washington spends
too much – that should be the focus of this commission."
Finally, House Majority Leader Steny Hoyer had praise for the Co-Chairs of
the bipartisan fiscal commission. He remarked, "I worked with Erskine
Bowles on the Balanced Budget Act of 1997, and know from experience that he
is committed to fiscal responsibility and has the ability to build the
bipartisan consensus that will be necessary to achieve the commission's
goals. And Alan Simpson has a well-earned reputation for rising above petty
politics while fighting strongly for his principles."
Editor's Note: There is a general understanding of the path to
fiscal solvency by the year 2015. The political challenge is that this path
inevitably will include a combination of limits on growth of government
spending and tax increases. Because the limits on spending growth and the
tax increases will both have impact on a very large number of citizens, it
will be difficult to make great progress in an election year. Nevertheless,
the fiscal commission is at least a start and will give higher visibility
to this issue during the coming election campaigns.
Tenancy by the Entirety Leads to Estate Tax
In Estate
of Oscar Goldberg et al. v. Commissioner; T.C. Memo. 2010-26; No.
16822-08 (16 Feb. 2010), the Tax Court determined that property in an
estate was held as tenants by the entirety. As a result, the full value was
taxable in the estate of the second spouse to pass away.
Decedent Oscar Goldberg was one of three children. On September 16, 1968,
his mother Rachael Goldberg transferred interests in two real properties in
Jackson Heights, NY to her three children. Oscar Goldberg subsequently married
Judith Goldberg. On November 10, 1977, he signed deeds for his partial
interest in both properties that transferred then to "Oscar Goldberg
and Judith Goldberg, his wife."
Judith Goldberg passed away in 2001. Prior to that time, the income from
the properties was distributed equally to Oscar and Judith. Judith's will
did not mention the properties, but created a bypass trust with the balance
of her estate transferred outright to Oscar.
As executor of Judith's estate, Oscar executed a deed conveying his wife's
interest in the property to the bypass trust. This deed was not recorded.
After Oscar Goldberg passed away, his IRS Form 706 was filed on July 25,
2005. It reported ownership of his half of the Jackson Heights properties.
The IRS accessed a deficiency of $384,432.96 based upon the assumption that
the properties were held as tenancy by the entirety and, therefore, the
full value was taxable in his estate.
Before the Tax Court, the executor of decedent Oscar Goldberg claimed that
only one-half of the property was included. The executor indicated that
Oscar and Judith "intended to hold the property as tenants in
common." Alternatively, the estate claimed they had converted the
property to tenancy in common.
However, the court noted that the New York statute creates a presumption
that a deed to husband wife creates a tenancy by the entirety. The creation
of a deed to husband and wife that is a tenancy in common must be
"only by clear expression of intent." Because there was no clear
intent on the deed and oral evidence to contradict the deed was not
permitted, the property was held as tenancy by the entirety. When Judith
passed away, the full value of their interest was owned by Oscar and
subject to tax in his estate.
There also was an inclusion in the estate of funds spent for attorney's
fees but not properly documented and taxable gifts in 1997.
Editor's Note: It is a fundamental rule in estate planning that
property titles must be carefully examined. If the property is
unintentionally held in joint tenancy with right of survivorship or as
tenancy by their entirety, the estate plan may have highly adverse estate
tax impact. Alternatively, with improper titles to real estate there is a
significant risk of an accidental disinheritance.
Applicable Federal Rate of 3.2% for March -- Rev. Rul. 2010-6; 2010-6
IRB 1 (22 Feb. 2010)
The IRS has announced the Applicable Federal Rate (AFR) for March of 2010.
The AFR under Sec. 7520 for the month of March will be 3.2%. The rates for
February of 3.4% or January of 3.0% 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.
N is a charitable remainder trust (CRT). M, a Sec. 501(c)(3)
charity classified as an educational organization under Secs. 509(a)(1) and
170(b)(1)(A)(ii), is both the trustee and charitable remainder beneficiary
of N and several other CRTs. M proposes to create a contractual
relationship with its CRTs to issue units of M's endowment to them so that
the CRTs may benefit from its investment returns. M's endowment is mostly
invested in publicly traded stocks but does hold some private investments
such as real estate and some partnership interests. While most of the
income produced is passive in nature, some debt-financed investments and
other assets create unrelated business taxable income (UBTI). The CRTs
would have no right to the underlying assets of M's endowment but would
receive payments based on its performance (valued monthly). N requested a
ruling that the issuance of units in M's endowment would not give rise to
UBTI in the CRTs.
Sec. 512(a)(1) defines "unrelated business taxable income" as
gross income derived by an organization which is regularly carried on and
is unrelated to the organization's business. Sec. 512(b) modifies the
definition to exclude income derived from dividends, royalties, rent, real
property and gain on the sale of property. Reg. 1.513-1(a) provides that
gross income of an exempt organization subject to the tax imposed under
Sec. 511 is included in the UBTI computation if: (1) it is income from a
trade or business; (2) the business is regularly carried on; and (3) the
business is not substantially related to the organization's exempt purpose.
The Service ruled that if M were to charge a fee for investment advice or
management of N's endowment units, the service may be considered a trade or
business regularly carried on which would result in UBTI. However, M is not
proposing to charge a fee. Therefore, no UBTI would be created under the
arrangement as proposed. Finally, the CRTs will have no ownership in the
assets of the endowment. The relationship between M and the trusts does not
establish a partnership or agency agreement and the income earned by the
CRTs will be all ordinary income. Therefore, no UBTI will flow through the
endowment to the CRTs.
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.
George Green was a man of humble beginnings. He was born in
Bulgaria and lived with his parents on their farm. But George was a
diligent student and determined to become a successful business owner.
After high school, he was able to come to America to go to college. George
applied to several colleges and was accepted as a work-study student at a
state college. He lived in the dorm and worked nights in the cafeteria. On
weekends, he moonlighted as a waiter at a five-star restaurant.
George was both resourceful and determined to succeed. He enrolled in
chemical engineering and studied every spare moment. His industry was
quickly recognized by faculty. After graduating with honors, he became a
graduate assistant and also earned a master's degree in engineering. With
his early years on the farm, George always loved nature. He interviewed and
became a product development engineer with a company that built emissions
control equipment for automobiles. Soon, George met Helen Wilson and they
married.
But George was too energetic to stay in one place. After saving $5,000, he
convinced Helen that it was time for him to go out on his own. George
started a company and initially did environmental consulting. As soon as he
could gather and borrow the funds, he also started to produce components
for emissions control equipment. After a terrific struggle, the business
took off and George began to manufacture probes for company smokestacks.
When asked if that was a good business, George responded, "It is a
great business. Companies buy my probes to measure their smokestack
emissions and then the government changes the rules! They all then have to
buy upgraded probes!"
George incorporated the probe manufacturer as Green Probe. Ever the
entrepreneur, he later had a chance to buy a company that built converters
for automobiles. He bought the assets of that company and transferred them
into Green Converters. Finally, George started a third company to build
"smokestack scrubbers" that would clean the emissions from the
smoke of power plants. Since there later was a huge increase in the cost of
energy, power companies began to build more coal-burning plants and his
"smokestack scrubbers" from Green Scrubber were in great demand.
George is now age 75 and is finally thinking about slowing down. He owns
three C Corporations - Green Probes, Green Converters and Green Scrubbers -
and asks his CPA Arnie Arnst what he could do. "How do I phase back
without paying a huge tax bill? I love America, and I support my country,
but I HAVE supported my country!"
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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