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Tax Quote of the Week
"I can't make a thing out of this tax problem. I listen to one side and
they seem right -- and then I talk to the other side and they seem just as
right and here I am where I started. What a job!"
-- President Warren
G. Harding
Estate Tax Repeal?
On January 1, 2010 there will be no estate tax or generation skipping transfer
tax. If Congress remains deadlocked, the estate tax returns on January 1,
2011 with a $1,000,000 exemption and 55% tax rate.
When the repeal was passed in 2001, Americans expected Congress to act to
provide a reasonable level of certainty by passing legislation during the
next nine years to enable sound estate planning. While the House passed an
extension of the 2009 $3.5 million estate exemption and 45% estate tax
rate, the Senate was deadlocked and left Washington in late December with
no resolution.
At a hearing on November 14, 2007 by the Senate Finance Committee, estate
planning attorney Conrad Teitell compared estate planning law to a game of
Monopoly. In this game, the rent for landing on Boardwalk for the first
person is high, for the second is moderate, for the third is zero and for
the fourth is very high. For Americans with large estates, the cost of
passing away in 2008 was high, in 2009 was moderate, in 2010 is zero and in
2011 is very high. Mr. Teitell observed that it is neither logical nor fair
for taxpayers to be treated so differently based only on their date of
demise.
On December 23, 2009, attorney Teitell wrote a letter to Sen. Max Baucus,
Chair of the Senate Finance Committee and urgently requested an extension
of existing law until the Senate can pass a compromise on estate taxes. Mr.
Teitell noted, "Many estate plans key the amount that various
beneficiaries would receive to the federal estate tax exemption. Under many
formula clauses, a spouse and other beneficiaries can be disinherited or
receive different bequests than intended. The formula clauses are based on
the assumption that an estate tax exists and that there is an
exemption."
Particularly for blended families or in states with an inheritance tax, the
formula clauses in current documents may not function correctly. For second
marriages, the plan is often to divide the estate between the children of
the first marriage and the second spouse. With no federal estate tax, a
formula clause may transfer an entire estate to one or the other, a result
that is obviously not intended.
For states with an inheritance tax, transfer of the entire estate to a
trust to bypass future estate tax may be good federal tax planning, but it
could accelerate payment of the state inheritance tax.
With this uncertainty, Sen. Baucus hopes to pass a bill that restores the
estate tax retroactively to Jan. 1, 2010. However, it is now uncertain
whether this will be possible.
Happy New Year Congress - Unfinished Tax Bills Are Waiting
Many tax provisions will expire on Jan. 1, 2010. When Congress returns to
Washington in January, the House Ways and Means Committee and the Senate
Finance Committee will take up legislation to update the tax laws.
Major provisions that lapsed include the following:
- AMT Exemption - The exemption amounts for married
couples and single persons are usually indexed for inflation.
- Business Benefits - Bonus depreciation, expensing
of up to $250,000 of new purchases and a host of energy credits are
likely to be passed.
- Tax Extenders - The House passed its Tax Extenders
bill in December 2009, but the Senate failed to act. An extenders bill
with state and local sales tax deductions, deductions for college
tuition and teachers' classroom expenses is anticipated.
- Charitable Extenders - As part of the Tax Extenders
Act of 2010, there may be included an IRA charitable rollover,
enhanced deductions for gifts of books, computers, apparently
wholesome food and other deductions.
Hopefully, updated tax laws can be passed early in this year.
Sen. Baucus (D-MT) and Sen. Grassley (R-IA) have said they will move
quickly. By mid 2010, Congress will be focused on the fall elections. If
the tax bills are delayed until fall, they may need to be passed after the
election.
No Substantiation - No Charitable Deductions
In Rhett
Rance Smith et al. v. Commissioner; Nos. 08-72402, 08-74160 (11 Dec
2009), the Ninth Circuit held that the donors did not fully or
substantially comply with the standards for charitable deductions for gifts
of noncash assets.
Joel and LaRhea Smith were parents of Rhett and Zane Smith. Joel and LaRhea
owned 50.1% of Beneco, Inc., an Arizona C corporation that provided
retirement benefits management. Rhett and Zane Smith and their wives each
owned 24.95% of Beneco.
In 1995, all three couples created Arizona FLP's through attorney Robert A.
Kelly, Jr. The FLP's held the respective Beneco stock interests of each of
the three couples. During the years 1995 through 2001, the three couples
gifted various percentages of their FLP interests to charity and claimed
contribution deductions totaling well over one million dollars. Because the
gifts were over $5,000, IRS Forms 8283 and appraisals were required. While
most of the required Forms 8283 were filed by their CPA Edward Kramer,
there were numerous irregularities. A number of Forms 8283 did not include
the required signature of the appraiser. In addition, rather than securing
an outside appraisal, CPA Kramer conducted some of the appraisals.
The IRS denied deductions for the FLP charitable gifts for failure to
comply with the requirements of Sec. 170. Reg. 1.170A-13(c)(i) generally
requires that a property gift charitable deduction over five thousand
dollars must be supported by a qualified appraisal, by the attachment of
the Form 8283 appraisal summary and by maintenance of appropriate records.
The appraisal must not be earlier than 60 days prior to the date of the
contribution and completed by the due date of the return, including
extensions. The appraiser must be qualified, hold himself or herself out to
the public as an appraiser for that type of property, include a statement
that the appraisal has been made for income tax purposes, and describe in
"sufficient detail" the characteristics of the property, the date
of the gift, the fair market value and the method of evaluation.
Despite a failure to include appraisal summaries in all of the tax years
and failure to have a qualified appraiser sign some of the Forms 8283, the
three families claimed "substantial compliance" that should be
sufficient to support the charitable deductions for the FLP gifts. While
there was a valuation by CPA Kramer and a 2001 evaluation by Mr. Koehl of
Management Planning, Inc., neither were acceptable to the IRS or the Tax
Court. Even the appraisal by Mr. Koehl "fell far short of meeting the
statutory and regulatory requirements for an appraisal summary."
Because the appraisals were inadequate and the appraisal summaries were not
signed and dated by qualified appraisers, the FLP gift deductions failed to
meet Reg. 1.170A-13(c)(4)(ii) requirements. They also did not meet the
"substantial compliance" standard. Therefore, the deductions were
denied. However, since the three Smith couples relied on CPA Kramer and
other tax professionals, the Sec. 6662 penalty on the charitable deduction
deficiency was avoided through the "good faith" exception.
Applicable Federal Rate of 3.0% for January -- Rev. Rul. 2010-1; 2010-2
IRB 1 (21 Dec. 2009)
The IRS has announced the Applicable Federal Rate (AFR) for January of
2010. The AFR under Sec. 7520 for the month of January will be 3.0%. The
rates for December of 3.2% or November 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 www.irs.gov/businesses/small/article/0,,id=112482,00.html
Grantor created Trust on Date1. Grantor later amended Trust so
that upon his death, Trust became irrevocable. The terms of Trust required
income and specific assets to be distributed to named beneficiaries. The
trustee was then required to distribute the remaining assets in Trust to
Foundation, a nonprofit public benefit corporation. Upon Grantor's death,
Trust became irrevocable and became part of Grantor's estate (Estate).
Estate received income of X amount in the year following Grantor's death
but did not report the income on Estate's Year 1 return. In Years 1 and 2,
Estate made offsetting distributions to Foundation but did not claim a
charitable deduction for the gifts. In addition, Estate failed to make a
timely election under Sec. 642(c)(1) in order to treat the distributions
made in Year 2 as made in Year 1 and requested an extension of time to file
a Sec. 642(c)(1) election for Year 1.
Sec. 642(c)(1) provides that an estate or trust shall be allowed a
deduction relating to charitable contributions. If a contribution is made
after the close of a tax year and on or before the last day of the year
following the close of subsequent tax year, then the estate or trust may
elect to treat the contribution as if it was paid during the previous tax
year. However, under Sec. 1.642(c)-1(b)(2), the election must be made by the
filing date, with extensions. Sec. 1.642(c)-1(b)(3) requires a statement to
accompany the election that states the name and address of the charitable
organization accepting the contributions, states the name and address of
the estate or trust fiduciary, indicates that the fiduciary is making a
Sec. 642(c)(1) election and states the amount of the contribution. Estate
requested an extension to file the election under Sec. 301.9100-3(a).
The IRS determined under the requirements of Sec. 301.9100-3(a) that the
fiduciary acted in good faith and that the grant of the extension will not
prejudice the claims of the Government were met and, therefore, the
extension was granted.
When a charity receives a gift annuity, it has the option to
retain the annuity contribution amount in a designated reserve fund or to
reinsure. If the charity retains the contribution, it is self-insuring the
gift annuity. In that case, the contribution is invested and the charity
makes payments from the fund.
An alternative is for the charity to 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.
Should a charity reinsure? 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.
Barbara Banker started with nothing. Not only she did not own a
bank, she had nothing to place in the bank. Barbara lived in a midsized
town and worked in the local hardware store. But the store owner noticed
her industrious efforts and strong work ethic. When he decided to retire,
he suggested that Barbara could take over the hardware store and pay him
over a term of ten years from store profits. Barbara did exactly that. In
fact, when the town drugstore owner wanted to retire, she bought it under a
similar plan. Later, Barbara started buying apartment buildings in town.
Since she needed financing, Barbara became good friends with the town
bankers.
Two bankers approached Barbara about starting a new local bank. She agreed
to be one of the initial directors and they all invested in the local bank
(with the name LoBank). Years later, the bank services and value have
greatly increased. Barbara is a respected businesswoman and now has a large
block of stock in LoBank. As a strong community supporter, Barbara gives
regularly to favorite local charity. She would like to make a large gift of
bank stock to a local charity for a new youth center. But as a director she
knows that LoBank is discussing a sale of all stock to MegaBank from a
nearby large city. Barbara met with her CPA to discuss the gift.
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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