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The Senate Finance Committee conducted
a hearing on July 14, 2010 to discuss the potential extension of tax cuts.
In the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA)
and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA),
there were tax reductions for nearly all Americans. The tax reductions continue
through 2010, but are set to be repealed on January 1, 2011.
The White House has proposed to extend these tax cuts for single persons
with incomes under $200,000 ($250,000 for couples), but to increase the
capital gain rate and top income tax brackets. Under the White House plan,
the capital gain rate will increase from 15% to 20%, the 33% bracket
increases to 36% and the 35% tax bracket is raised to 39.6%.
Senate Finance Chair Max Baucus (D-MT) opened the hearing by stating,
"Americans are struggling to make ends meet, and we need to do all we
can to put more money back in the hands of workers, middle-class families
and small businesses so our economy can grow. I support extending the
middle-class tax cuts permanently, as soon as possible, so working families
can keep more of their hard-earned money."
Sen. Baucus and the White House are both advocating a permanent extension
of the tax cuts for low and middle-income taxpayers, with an increase in
taxes for those in the upper brackets.
Ranking Member on the Senate Finance Committee Charles Grassley (R-IA) has
repeatedly expressed concern about the increase of taxes on small business
owners. He noted, "To those who are pushing the higher marginal rates,
I say the burden is on you to show that you are not harming our primary job
creators." Sen. Grassley has noted that two-thirds of new jobs in the
past decade have been created by the small business owners who will be
subject to the higher taxes.
Douglas Holtz-Eakin is President of the American Action Forum and was
formerly the Congressional Budget Office Director. He testified that
approximately one-half of the $1 trillion in business income that will be
reported in 2011 will be subject to the higher 36% and 39.6% tax brackets.
In his opinion these higher rates will reduce the willingness of small
businesses to hire new employees.
Editor's Note: The hearings on taxes are the first step in creation
of a tax bill. Because the failure to act this year would result in repeal
of all of the tax cuts, it is probable that there will be a tax bill prior
to the end of 2010. However, with the shortened legislative calendar due to
the fall elections, the tax bill is quite likely to be deferred until after
the election.
Kyl-Lincoln Introduce Estate Tax Motion
On July 14, 2010, Sen. Blanche Lincoln (D-AR) and John Kyl (R-AZ)
introduced an amendment to H.R. 5297, the Small Business Lending Bill.
Their amendment would modify the estate tax rules. Sen. Kyl and Sen.
Lincoln claim that they now are close to the required 60 votes in the
Senate for passage of their compromise on estate taxes. The bill includes
five guidelines:
- Phase In – The increase exemptions and reduced rates would
be gradually phased in over a period of 10 years.
- Estate Exemption – The exemption would start at the 2009 level of
$3.5 million and increase to $5 million by 2020.
- Estate Tax Rates – The 2009 estate tax rate of 45% would be reduced
by 1% per year to 35% by 2020.
- Optional 2010 Rules – For estates of 2010 decedents (such as Houston
oilman Dan Duncan who passed away in March with an estate of $9
billion) there is an option to use the 2009 exemption of $3.5 million
or accept the 2010 rules with no estate tax and a loss of the stepup
in basis.
- Tax Offsets – The Senate Finance Committee is tasked with
finding additional new taxes that offset the cost of increasing the
exemption from $3.5 million to $5 million and reducing the top estate
tax rate from 45% to 35%.
Editor's Note: Majority Leader Reid (D-NV) has not yet indicated whether he will
permit a vote on this motion. If the 60 votes in favor of this compromise
are available in the Senate and he permits a vote, then the House will need
to consider the compromise. Previously, the House majority has maintained a
strong preference for extending the $3.5 million exemption without further
increases.
Inadequate Appraisal – No Charitable Deduction
In Huda
T. Scheidelman et al. v. Commissioner; T.C. Memo. 2010-151; No.
15171-08 (14 Jul 2010), the Tax Court considered a transfer of a façade
easement by the taxpayer to the National Architectural Trust (NAT). Because
the appraisal was not sufficient, the deduction was denied.
Ms. Scheidelman purchased property in Brooklyn, NY on Vanderbilt Avenue in
1997. The home is in the Fort Greene Historic District. Because the
Historic District is registered with the National Park Service (NPS), homes
within its boundaries may qualify for donations of façade easements.
NAT periodically conducted seminars in the area for homeowners to encourage
them to make conservation easement donations. Ms. Scheidelman employed CPA
John Somoza and he attended a NAT seminar. After contacts with NAT development
staff, Ms. Scheidelman decided to make the façade easement donation on her
home. Under the rules established with NAT, there was also a requirement to
make a cash donation for 10% of the easement value.
Ms. Scheidelman and CPA Somoza began the lengthy process to obtain NPS and
bank approvals, secure an appraisal and claim the charitable deduction on
her tax return. They initially sought approval from two mortgage holders
for the gift of the façade easement. She also executed National Park
Service Form 10-168, Historic Preservation Certification Application Part I
– Evaluation of Significance. The NPS determined that her home is a
"certified historic structure" and qualifies for the façade
easement deduction.
Appraiser Michael Drazner then was employed to determine the value of the
property. He found that the fair market value was $1,015,000. Because in
his view the IRS permitted façade easement deductions from 10% to 15% of
value, he calculated the reduced value as $115,000 by multiplying the fair market
value by 11.33%.
CPA Somoza filed taxpayer's tax returns and deducted the $115,000 over
years 2004, 2005 and 2006. Ms. Scheidelman did not take a deduction for the
cash payment of $9,275. The tax returns did include Form 8283 with the
signature by the charity and by appraiser Drazner.
The IRS denied the deduction and claimed that it failed to meet the
requirements of Reg. 1.170A-13(c). Under that subsection, the appraisal
must include "the method of valuation" and "the specific
basis for the valuation."
The IRS noted that multiplying value by a percentage is not a specific
method as required by the regulation. In addition, the Drazner report did
not describe the property, did not include the terms of the easement, did
not include the required statement that it was prepared for income tax
purposes and failed to show the specific basis for the valuation.
The taxpayer did not dispute those claims by the IRS, but maintained that
the deduction should be permitted because the appraisal was in substantial
compliance with the regulations.
The court noted that appraisals must use a "before and after"
method. The appropriate method for appraising a façade easement is to
determine the fair market value under the highest and best use test without
the easement and then to apply the same standard with the easement. The
difference between the before and after value is the charitable deduction.
The Tax Court noted that a percentage of fair market value method "can
not constitute a method of valuation as contemplated" under the
regulations.
Because there was no appropriate method and no specific basis for
determining the charitable deduction, it was denied.
With respect to the cash payment of $9,275, there was no substantiation to
show whether there was a "quid pro quo" that would reduce the
deduction amount. Therefore, this amount was also deemed not substantiated
and thus not deductible.
Because Ms. Scheidelman relied on CPA Somoza and Appraiser Drazner, there
was no assessment of the accuracy-related penalty. She was not a tax expert
and therefore was entitled to rely in good faith on her professional
advisors.
Applicable Federal Rate of 2.8% for July – Rev. Rul. 2010-18; 2010-27
IRB 1 (17 June 2010)
The IRS has announced the Applicable Federal Rate (AFR) for July of 2010.
The AFR under Sec. 7520 for the month of July will be 2.8%. The rates for
June of 3.2% or May 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.
ORG was a tax-exempt organization under Sec. 501(c)(3). ORG's
organizing documents state that assets would be distributed to Sec.
501(c)(3) organizations upon dissolution. During an audit by the Service,
it was brought to ORG's attention that ORG's primary and exclusive activity
was the conducting of motto games for senior citizens, which did not
qualify as an activity that furthers a charitable purpose. ORG willingly
began the necessary steps to dissolve with the state and terminate with the
Service. As a result, ORG distributed its remaining assets to local
organizations, including the volunteer fire department, first aid squad, a
few hospitals and ORG member's homeowners association.
All organizations exempt under Sec. 501(c)(3) must, upon dissolution,
distribute their assets to other organizations exempt under Sec. 501(c)(3).
Section 1.501(c)(3)-1(a)(4) states that an organization is not organized
exclusively for one or more exempt purposes unless its assets are dedicated
to an exempt purpose. The example is given that an organization would not
meet the organizational test if its assets would, upon dissolution, be
distributed to members or shareholders. Here, ORG distributed 72% of its
assets to organizations that are not exempt under Sec. 501(c)(3). As a
result of ORG's failure to comply with its organizing documents and
properly distribute its assets, ORG failed to operate in a manner that is
required of Sec. 501(c)(3) organizations. ORG was therefore subject to
revocation of its tax-exempt status.
Note: At publication date the House and Senate are still not in
agreement on the provisions of the tax extenders bill. It is very likely to
be passed and enacted by the end of 2010, but has not yet been signed by
the President.
In The American Jobs and Closing Tax Loopholes Act of 2010 (H.R. 4213),
which is still in negotiations in the Senate, Congress permits a 2010
rollover directly from an IRA to a qualified public charity.
This act enables an IRA owner age 70½ or older to make a direct transfer
to charity. The transfer may be up to $100,000 in one year. See Sec.
408(d)(8)(A). The IRA rollover first created by the Pension Protection Act
(PPA) of 2006 is (after enactment of H.R. 4213) extended to the end of
2010.
Donor Profiles
There are five donor profiles for IRA rollover gifts. First are the
convenience donor who finds it a very simple and easy method for an end of
year gift. The second is the generous donor, who wants to give past the 50%
of AGI limit. The third is a major donor. This person may be a board member
or trustee who is looking for a favorable opportunity to make a major gift.
Fourth, the Social Security recipient may reduce taxes with an IRA rollover
gift. Finally, a standard deduction donor will benefit from a direct IRA to
charity gift.
Facts: Several years ago Mother and Father built a very unique
home on 45 acres of beautiful rolling hills and woods. Father passed away
three years ago and Mother now owns the 45-acre parcel and home.
She enjoys the peaceful country view from her front window. However, the
university adjacent to the property is very interested in acquiring the
property for eventual future growth. Not surprisingly, Mother is concerned.
She does not want a new dormitory filled with college students in her front
yard. In fact, she enjoys the peace and protection of her lovely home in
the wooded countryside. However, at age 80, she recognizes that some
planning will have to be accomplished.
After a thorough understanding of Mother's needs and desires, a wonderful
four-part solution was suggested that incorporated an outright sale, a
unitrust, a gift annuity and a gift of a remainder interest in a home. (See
Case Study "Peace in the Countryside" for a full explanation.)
One part of the plan involved Mother's 20-acre rear parcel of land.
Specifically, Mother's unitrust would receive the 20-acre rear parcel,
which the university intends on eventually developing. To generate the
necessary trust income, the university would purchase the land from the
trust with a 7% interest-only note. After the payment of the 6% unitrust
payout each year and trust expenses, the trust would accumulate any excess
income.
Son is the sole owner of Bank Co. Wanting the very best for Mother, Son
wants to provide trust and banking services to Mother's unitrust. Son knows
Bank Co. would provide excellent services at very reasonable prices.
May Bank Co., Son's wholly owned company, provide trust and banking
services to Mother's unitrust? Will this trigger any self-dealing taxes?
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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