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Tax Quote of the Week
"If your goal is to get rid of the income tax, creating a variety of
unnecessary complexities is a strategic advantage. It gives people a reason
to move to another tax system."
-- William G. Gale
Senate Passes Extenders
By a vote of 62-36, the Senate on March 10 passed the American Workers,
State and Business Relief Act of 2010.
The bill included a combination of the tax extenders, energy provisions and
business provisions. Senate Finance Chair Max Baucus (D-MT) was clearly
pleased and hoped that the bill will help with economic recovery.
Sen. Baucus stated, "This recession shook the foundation of our
economy, leaving many Americans without work and many business owners
questioning their future. Extending these tax cuts and the critical
safety-net programs in this bill will give businesses the tax certainty
they need to move forward and families the support they need to make ends
meet."
The bill will now be sent to the House. Acting Ways and Means Committee
Chair Senator Sander Levin (D-MI), indicated that he hopes to convene a
conference committee to finalize the bill in the near future. Rep. Levin
also hopes to persuade the Senate to tax hedge fund managers on most of
their income at ordinary rates rather than capital gain rates. This
"carried interests as ordinary income" provision would raise
$24.6 billion over 10 years.
The four sections of the bill include energy, tax extenders, business
credits and disaster relief. Energy sections include incentives for biodiesel,
biomass, energy-efficient homes and reduced coal pollution. Extenders
include the popular teachers' supplies deduction, local and state sales tax
deductions, qualified tuition deduction and a low-income housing tax
credit. Businesses will be pleased with the research credit and fifteen
year depreciation for restaurants and retail buildings. Finally, there are
disaster relief extensions for the Gulf Coast and the Midwest.
Charitable Extenders Likely to Pass
As part of the American Workers, State, and Business Relief Act of 2010, a
package of approximately 40 tax extenders have been included. Seven of the
extenders directly affect charities and charitable giving. The extenders
bill will be effective from January 1 to December 31 of 2010.
The seven charitable provisions are as follows:
1. IRA Charitable Rollover – An IRA owner age 70½ or older may make a
"qualified charitable distribution" of up to $100,000 each year.
The distribution from the IRA must be directly to a qualified public
charity (but not to a supporting organization or donor advised fund).
Fortunately, while the required minimum distribution will apply in 2010,
the IRA distribution to charity may fulfill that requirement.
2. Qualified Conservation Easements – A transfer of an interest in real
estate to a qualified conservation charity will produce a charitable
deduction. The conservation purpose of the transfer could include
preservation of outdoor recreation land, protection of natural habitat for
wildlife, preserving open space where there is a significant public benefit
or preserving an historic area or structure. The normal deduction for a
gift of appreciated property is limited to 30% of the contribution base,
which is usually your adjusted gross income. For a conservation easement, the
appreciated property deduction may be taken up to 50% of adjusted gross
income. In addition, the qualified conservation deduction may be carried
forward not for the regular five years, but for as long as 15 years.
Finally, for a farmer or rancher who receives over 50% of income from that
activity, the deduction limit is expanded to 100% of adjusted gross income.
3. Food Inventory – A corporation or business with food inventory may
receive an enhanced deduction. The deduction is the lesser of basis plus one-half
of appreciation or twice the basis. The deduction must be for
"apparently wholesome food."
4. Book Inventory to Schools -- A gift by a C corporation of text books to
K-12 schools that can use those books in their educational programs also
qualifies for the enhanced deduction. The deduction is the lesser of basis
plus one-half of appreciation or twice the basis. The school must certify
the appropriate use of the books.
5. Computer Technology – A C corporation may give computers to a school or
public library and qualify for the enhanced contribution. The deduction is
the lesser of basis plus one-half of appreciation or two times the basis.
The computers must be used for educational purposes.
6. Payments from a Controlled Subsidiary – Many charitable organizations
have controlled subsidiaries that pay rent, royalties, interest or
annuities to the parent. The rent, in cases where the subsidiary has
unrelated business income, would be UBI to the parent. However, the
payments to the extent they are at "arm's length" will not be
UBI.
7. S Corporation Appreciated Gifts – The basic rule when a Subchapter S
corporation makes a gift of appreciated property to a charity is that the
deduction flows to shareholders. However, under the basic rule the
shareholders must reduce their basis by the amount of the gift. The basis
adjustment rule is modified so that share holders only have to reduce the
basis in their stock by the basis of the corporation in the gift property.
This greatly increases the ability of Subchapter S corporations to give
property to charity and enable the shareholders to take the full charitable
deduction.
Editor's Note: While the House and Senate Conference Committee will
need to come to agreement on the bill, it is nearly certain that all of these
charitable provisions will pass retroactive to January 1, 2010. Therefore,
charitable organizations should plan to move forward (after passage) with
marketing programs for charitable IRA rollover gifts.
Charitable Equipment Deductions Denied as Not Substantiated
In Newton
J. Friedman et ux v. Commissioner; T. C. Memo. 2010-45; Memo.
19018-07 (11 Mar 2010), the Tax Court denied deductions and also assessed
penalties on donors for lack of appropriate substantiation.
Newton and Bonnie Friedman acquired various items of laboratory equipment
in 2000 and 2001. In 2001, they donated 29 items to Global Operations and
Development (Global Operations). In 2002, they donated 19 items to Global
Operations and to the University of Southern California (USC).
They obtained appraisals for the 2001 returns on various items by
appraisers Shulman and LeVan. They received a receipt from Global
Operations only for the Shulman items. The appraisals for the 2002 items
were completed by appraisers LeVan and Handelman. Once again, they received
a receipt from Global Operations for only a portion of the appraised items.
The IRS audited the Friedmans and denied the deductions.
The Tax Court noted that a deduction for a gift of appreciated property
exceeding $5,000 requires donors to obtain a completed appraisal, to attach
Form 8283 as the appraisal summary to the tax return, and to maintain
records in accordance with Reg. 1.170A-13(b)(c).
The appraisal must indicate the physical condition of the property, the
valuation method used and the specific basis for the appraisal. The
appraisal summary must include sufficient detail on the property, a summary
of the property's physical condition, the manner of acquisition and the
cost basis. Reg. 1.170A-13(c)(4)(ii). Finally, for a contribution over $250
there must be a contemporaneous written acknowledgement that states whether
the charitable recipient provided any goods or services in exchange for the
item.
The court noted that the Friedmans agreed their Forms 8283 did not comply
with the regulation. However, they claimed that the materials submitted to
the IRS "substantially complied" and the deductions should
therefore be permitted.
The court determined that the initial appraisal was inadequate. When the
IRS audited the Friedmans in 2004, they obtained a more comprehensive
appraisal from Mr. Handelman. However, this was not timely submitted.
The documents "failed to even indicate the valuation method used"
and therefore were not sufficient. The court noted that valuations may
utilize the comparable sales method, the income approach or the
replacement-costs-less-depreciation method.
In addition, the petitioners did not mention the manner of acquisition or
the cost basis of the items that had been donated. There was no reasonable
cause or adequate explanation for that failure.
Finally, the receipts from Global Operations did not contain the statement
that "no goods or services were provided" by the charity.
Therefore, because the appraisals were inadequate and the receipts did not
comply with the statute, the court determined that the Friedmans
"failed to strictly or substantially comply with the requirements of
Section 1.170A-13" and failed to provide the required Sec. 170(f)(8)
contemporaneous written acknowledgement.
While the deductions were denied, the court also assessed penalties under
Sec. 6662(a). The Friedmans noted that they relied on their CPA Mr. Reed
Spangler. However, the court indicated the "mere fact that Mr.
Spangler is a CPA does not necessarily make him a competent tax
advisor." In addition, the court determined that the Friedmans
withheld information from Mr. Spangler and therefore were subject to the penalty.
Editor's Note: Because the items were purchased in 2000 and 2001 and
donated the next year, it is possible that they were acquired for the
purpose of making the donations to charity. While this is permissible, it
is likely that the court determined that such a practice should require
full compliance with both the receipt and the appraisal requirements.
Clearly, the taxpayers failed in both areas and were subject to payment of
taxes and penalty. The result was quite punitive and should encourage all
advisors to be careful in ensuring that donors complete all required
substantiation items.
Applicable Federal Rate of 3.2% for March – Rev. Rul. 2010-8; 2010-10
IRB 1 (19 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.
Decedent created his will on date 1, executed a codicil on
date 2 and died, survived by Spouse and Sister, on date 3. Decedent's will
and applicable codicil provided for the creation of Trust 1. Trustee is to
pay the net income of Trust 1 to Spouse during his lifetime. Upon Spouse's
death, trustee is to pay the net income of Trust 1 to Sister, during her
lifetime. Upon Sister's death, remaining property in Trust 1 is to be
allocated per stirpes to Sister's living decedents by distributing the
property to Trust 2, a trust created by Sister, to be held for her
descendents. The executor of Decedent's estate timely filed Form 706,
Schedule M and made a qualified terminable interest property (QTIP) election
under Sec. 2056(b)(7). However, the executor did not make the
"reverse" QTIP election or allocate the unused portion of
Decedent's GST exemption to Trust 1. Decedent's estate requested an
extension of time to make a "reverse" QTIP election, as well as
allocate the unused GST to Trust 1.
Secs. 301.9100-1 through 301.9100-3 provide the standards a Commissioner
will use to determine the granting of extensions. Under Sec. 301.9100-3,
requests for relief will be granted if a taxpayer is deemed to have acted
reasonably and in good faith and the grant of relief will not prejudice the
interests of the Government. Based on the facts submitted and
representations made, the Service concluded the requirements of Sec.
301.9100-3 were satisfied and Decedent's estate was granted a 60-day
extension to make a "reverse" QTIP election. The Service held
Decedent's remaining GST exemption will be allocated to Trust 1 under Sec.
2632(e)(1).
Ms. Ella Kelly was a fortunate and very healthy annuitant.
When she was age 92, she purchased a gift annuity paying 14% from a private
university in Florida (14% was the rate at that time for annuitants over
age 90). Ms. Kelly was so encouraged by her 14% gift annuity payouts that
she lived to be 111!
Another donor purchased a $100,000 gift annuity for cash from a west coast
charity. She also received a high percentage rate of return and was paid
one quarterly payment before passing away.
Some gift annuitants live a very long time – some pass away fairly quickly.
It is quite difficult to know what the probable life expectancy will be of
an individual. The concept of gift annuities and insurance is that the two
extremes will balance in the middle.
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 was determined to become a successful business owner.
After high school, he obtained permission 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 earned a master's degree in engineering. During 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 that offered 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! Then, they all have to buy
upgraded probes!"
George incorporated the probe manufacturer as Green Probe (GP). 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 a company named Green Converters (GC). Finally, George started a third
company to build "smokestack scrubbers" that would clean the
emissions from the smoke of power plants. Later, there was a huge increase
in the cost of energy and power companies began to build more coal-burning
plants. His "smokestack scrubbers" from Green Scrubbers (GS) were
in great demand.
Fourteen years ago, George funded a unitrust with the GC stock and then GC
sold all assets to General Auto. Three years earlier, George sold Green
Probe to Major Power Company. Over the years the unitrust has grown to over
$10,000,000. At age 88, he and Helen now would like to fund a major
building at Favorite Charity. But they need to make a $2,000,000 gift for
the "Green Center." How can they do this? George called CPA Arnie
Arnst again and asked, "What should I do now? We would like to make a
$2,000,000 gift, but the funds are in our unitrust. The unitrust is now
over $10,000,000, and we have no need for more income."
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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