|
|
Tax Extenders in Limbo
On the third effort to submit the legislation that would provide both
employment benefits and tax extenders, the Senate failed in a 57-41 vote to
attain the required 60 votes for passage. The American Jobs and Closing Tax
Loopholes Act of 2010 (H.R. 4213) is now on hold.
The bill combines several separate sections. One section would increase
over 40 different tax extenders that have been passed regularly for the
past two decades. Another section would extend unemployment insurance for
900,000 individuals who have now reached the limit of their payments. A
third section covers various healthcare related programs.
Senate Majority Leader Harry Reid (D-NV) indicated that he was "very
disappointed" in the vote. Senate Finance Committee member Olympia
Snowe (R-ME) responded that the bill was far from what taxpayers want. Sen.
Snowe opposed increasing taxes on Subchapter S corporation shareholders.
The Senate has attempted three different times to reduce the cost of the
bill. The initial $200 billion cost had been reduced to approximately $30
billion in the third version of the bill. Tax reductions for the extenders
and unemployment benefits were offset in part by increased taxes on hedge
fund managers, Subchapter S corporations and international corporations.
Supporters of the bill included Sen. Max Baucus (D-MT). He stated,
"For millions of Americans who have lost a job through no fault of
their own, the Senate debate on the job extenders bill has been a fight for
the unemployment benefits that help keep a roof over their heads."
However, Senate Minority Leader Mitch McConnell (R-KY) pointed out that
even the current bill adds "$30 billion to an already staggering $13
trillion national debt." He prefers a proposal that would pass the tax
extenders while reducing the deficit.
Editor's Note: Tax extenders have been passed every year for the
past two decades. It is still likely that the popular tax extenders could
be attached to another bill and passed in September. Even with the short
legislative session before the fall campaign and November election, there
will be a strong desire to pass the extension of the teachers' expense
deduction, the research and development credit, the IRA charitable rollover
and many other tax extenders.
Sen. Sanders Proposes Estate Tax Bill
In December of 2009, the House passed an estate tax bill that continued the
estate exemption at $3.5 million per person ($7.0 million for a couple).
However, the Senate could not agree and the estate tax was repealed on
January 1, 2010.
Sen. John Kyl (R-AZ) and Sen. Blanche Lincoln (D-AR) claim they are close
to an agreement for an estate tax compromise. Both advocate increasing the
exemption to $5 million and reducing the rate to 35%. They believe that
they are near the 60 votes needed for a 10-year phased-in plan.
While it has not been publicly released, one version of the proposed
Kyl-Lincoln compromise starts with an exemption of $3.5 million and an
estate tax rate of 44%. Over a term of 10 years, the amounts are adjusted
to a $5 million estate exemption and an estate tax rate of 35%. However,
Sen. Max Baucus (D-MT) is not willing to bring the proposed compromise
before the Senate Finance Committee for a formal vote.
Sen. Bernard Sanders (I-VT) is an Independent but participates in the
Democratic caucus. He has been joined by Sen. Tom Harkin (D-IA) and Sen.
Sheldon Whitehouse (D-RI) in introducing a new estate tax bill.
The three senators sent a letter to their colleagues and outlined the
reasons for enacting an estate tax increase for Americans with larger
estates. Sen. Sanders notes that a wealthy Houston resident named Dan
Duncan passed away early in 2010 with an estimated $9 billion estate. If
the Senate does not take action, this estate could be transferred to family
with a savings of several billion in estate tax.
Total estate tax savings in 2010 for heirs of Duncan and others with large
estates are estimated to be $14.8 billion. This amount is lost revenue to
the federal government in a time when all possible avenues for raising
revenue are being explored.
Sen. Sanders proposes the "Responsible Estate Tax Act of 2010."
This act would tax the first $3.5 million of an estate at 45%. Estates over
$10 million would be taxed at 50%, with estates over $50 million paying tax
at a rate of 55%.
In addition, there would be a "billionaire" surtax of 10%. Sen.
Sanders would "protect family farmers" by allowing a Sec. 2032A
reduction in farm land for heirs who are actively farming of up to $3
million, an increase over the current $1 million limit. Finally, for estate
conservation easements, the exclusion would be increased to $2 million and
the base percentage to 60%.
This proposal would also incorporate the Obama Administration's
recommendation to set a minimum term for the GRAT of 10 years and also to
modify the rules to reduce minority and lack of marketability discounts for
family limited partnerships.
Sen. Charles Grassley (R-IA) did not support the Sanders bill but suggested
that it may have been useful for Sen. Sanders and his supporters to place a
plan on the table. He indicated that there are "quiet supporters of
the junior senator from Vermont" and they will be influencing the
overall result.
Editor's Note: Your editor and this organization take no specific
position on any of the estate tax proposals. This information is offered as
a service to our readers. The challenge for the Senate is the required 60
votes for passage do not yet exist for any of the proposed compromise
bills. It now seems quite possible that the Senate will not act on estate
taxes prior to the November election. If that is the case, it is likely
that an effort to develop an estate tax compromise will take place in late
November.
Vision Plan Nonprofit Exemption Denied
In Re:
Vision Service Plan Tax Litigation; No. 2:07-cv-00780 (21 Jun
2010), a U.S. District Court granted summary judgment to the IRS in denying
a tax exemption for the Vision Service Plan (VSP).
VSP functions through multiple corporations in various states. Its Articles
of Incorporation identify the primary purpose of VSP as "to defray and
assume the costs of professional vision care by establishing a fund from
periodic payments by subscribers or beneficiaries, from which funds said
costs may be paid." VSP affiliates create prepaid medical care
programs through companies and also offer self-funded care programs. They
are available to employers in many different states.
VSP has been involved in litigation of its tax-exempt status at both the
district level and the Court of Appeals level. In 2004, the U.S. District
Court for the Eastern District of California determined that VSP operated
primarily for the benefit of its members and denied tax exempt status.
VSP claims that under Sec. 501(c)(4) it should be permitted tax-exempt
status through an "operational model" argument. It claims that
there are certain "operational characteristics" that qualify it
for exempt status. Specifically, it provides vision care to broad segments
of the population, employees of small employers, rural individuals and
those who participate in Medicaid, Medicare and SCHIP.
The courts have uniformly rejected that argument. VSP claims that the
courts have not fully appreciated its charitable efforts. The charitable
efforts include a "Sight for Students" program with free
eyeglasses and various services for children of families up to 200% of the
poverty level, disaster relief in conjunction with other relief
organizations providing free exams and glasses for victims and education
and community outreach.
However, the court noted that the percentage of charitable activities were
7% in one state and 3% in another state for the Sight for Students program.
Therefore, the organization does not exist "primarily" for
charitable purposes and the exemption was denied.
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.
Church is a tax exempt charity under Sec. 501(c)(3) and
classified as a church under Secs. 509(a)(1) and 170(b)(1)(A)(i). Between
2007 and 2008, an employee of Church created a software system that runs Y,
an interactive communications system. Church represents that Y was created
for non-commercial use. As word spread about Y, many other church
organizations inquired about it. Eventually, for-profit organizations
inquired about acquiring the intellectual property rights to Y. In the
summer of 2008, Church opted to sell the rights to Y for $X to W. Church
requested a letter ruling that income from the sale of the intellectual
rights to Y does not constitute unrelated business income under Sec. 512
and will not be subject to unrelated business income tax under Sec. 511.
Sec. 511(a)(1) imposes a tax on any unrelated business taxable income of
tax exempt organizations. "Unrelated business taxable income" is
defined in Sec. 512(a)(1) as the income derived by an organization for any
unrelated trade or business regularly carried on. Sec. 512(b) defines
"unrelated trade or business" as any trade or business the
conduct of which is not substantially related to the performance of an
organization's exempt purpose. Sec. 1.513-1(a) income derived from an activity
is unrelated business taxable income, if the activity (1) is a trade or
business; (2) is regularly carried on; and (3) is not substantially related
to the tax-exempt organization's exercise or performance of its tax-exempt
functions or purpose, a three part test. The activity must meet all three
tests before income from the activity is taxable under Sec. 512.
The Service determined that while the sale of Y was income from a trade or
business, it is not a regularly carried on trade or business and therefore,
the income produced will not result in the imposition of unrelated business
income tax under Sec. 511.
Note: At publication date the House and Senate are close to
agreement on the provisions of the tax extenders bill. It is very likely to
be passed and enacted, but has not yet been signed by the President.
In The American Jobs and Closing Tax Loopholes Act of 2010 (H.R. 4213),
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.
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 solely owns the 45-acre parcel and home.
She enjoys the peaceful country view out 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 eventually some
planning will have to be accomplished.
After a thorough understanding of Mother's needs and desires, a wonderful
four-part solution was suggested which 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.)
This solution seemed like the perfect fit until Mother requested a special
favor.
You see, after Father's death, Mother began making small arts and crafts to
pass the time. Apparently, Mother has a real talent because friends and
neighbors have been buying up everything Mother creates. Seeing the joy
this newfound hobby brings, Mother, with the support of her family, wants
to open a small "five and dime" general store on the rear 20-acre
parcel where she could sell her arts and crafts. Because the rear 20-acre
parcel borders on a major country road, it would get plenty of passer-by
traffic.
As one component of the four-part solution, Mother really likes the idea of
putting the rear 20-acre parcel into a unitrust. Given her new business
idea, she wonders if she can lease a very small portion of the rear 20-acre
parcel from the unitrust. Mother would agree to any fair and reasonable
lease agreement. Moreover, the university does not object to such a simple
and modest use.
Can Mother, the university and the trustee agree to this "five and
dime" lease arrangement? Must the lease arrangement represent a fair
market lease value to both parties? What are the rules governing
transactions between donors and charitable remainder trusts?
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.
|
|
