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Tax Quote of the Week
"Taxation is but a way of apportioning the cost of government among
those who in some measure are privileged to enjoy its benefits and must
bear its burdens. Since no citizen enjoys immunity from the burden, its retroactive
imposition does not necessarily infringe due process."
– Harlan F. Stone
Proposed Healthcare Tax Changes Released
On March 18, 2010, the proposed tax changes for the House healthcare bill
were released. At publication time, the vote is scheduled for Sunday, March
21. However, regardless of the outcome of the vote, the potential exists
for tax changes to be included in healthcare legislation.
The five major changes in the legislation affect the "Cadillac"
healthcare tax, an increase in the Medicare tax for upper income taxpayers,
flexible spending accounts, a new tax on medical devices and added taxes on
health insurance companies. The tax changes proposed in the House bill are
as follows:
1. "Cadillac" Healthcare Plan Tax – The proposed tax is reduced
yet again. The 40% excise tax will start in the year 2018 and will apply to
insurance companies for plans for single persons over $10,200 and family
medical plans over $27,500. It will also apply to retired persons, but
their limits are increased to $11,850 for single and $30,950 for married
persons. With the expanded limits, the revenue raised by this tax has been
reduced to approximately 80% to $32 billion over 10 years.
2. Medicare Tax Increase – For single persons with incomes over $200,000 and
couples with incomes over $250,000, the Medicare tax is increased to 3.8%.
The major proposed change is to apply the new 3.8% tax to passive income.
This new tax will cover interest, dividends, royalties, rents, passive
business income and capital gains. Because it covers annuities, it would
cover the ordinary income and capital gain paid on charitable gift annuity
contracts. This new tax raises $210 billion over ten years.
3. Flexible Spending Accounts – The accounts will be limited to $2,500 per
year in 2013.
4. Excise Tax of 2.9% on Medical Devices – It will apply starting in 2013.
Eyeglasses, hearing aids and contact lenses will be excluded from the tax.
5. Health Insurance Tax – Providers will pay an additional tax starting in
2014.
Editor's Note: Your editor and this organization take no specific
position on these new taxes. This information is offered as a service to
our readers.
FLP Gifts Do Not Qualify For Gift Tax Exclusion
In John
W. Fisher et ux. v. United States; No. 1:08-cv-00908(11 Mar. 2010),
a district court determined that gifts of FLP interests were not present
interests and, therefore, did not qualify for the Sec. 2503(b)(1) gift tax
exclusion.
John W. Fisher and Janice B. Fisher are the parents of seven children. They
created Good Harbor Partners LLC (Good Harbor) and transferred a parcel of
undeveloped land bordering Lake Michigan to that entity. In 2000, 2001 and
2002, they transferred 4.762% interests in Good Harbor to each of their
seven children.
The IRS audited their Form 709 Gift Tax Returns and assessed a deficiency
of $625,986. The IRS denied their claim for 42 gift exclusions on the
transfers because it determined that the FLP interests were not qualified.
The Fishers paid the deficiency and filed for a refund. The court noted
that a present interest is defined as "an unrestricted right to the
immediate use, possession, or enjoyment of property." Reg.
25.2503-3(a). The key issue is whether or not the FLP gifts qualified under
this standard.
The Fisher family made three principal arguments. First, they indicated
that the children received an "unrestricted right to receive
distributions" from Good Harbor. However, the court noted that the
right to receive distributions was explicitly under the control of the
general manager and with no income it is possible that there would be no
distributions.
Second, the Fishers maintained that the children had an unrestricted right
to make use of the Lake Michigan beachfront land. The court noted that the
right to make use of land for recreational purposes is not a pecuniary
right and, therefore, not qualified.
Third, the Fishers claimed that the children had the "unrestricted
right to unilaterally transfer their interests." The court noted that
the LLC documents created a right of first refusal for the LLC and that
sale was only permitted with the purchaser receiving nonnegotiable
promissory notes payable over 15 years. The court deemed sale under these
conditions "impossible" and therefore the Fisher children did not
have any capability "to presently realize the substantial economic
benefit." Therefore, gifts of LLC units were not present interests.
Editor's Note: Counsel for the Fishers created very significant
limitations on the FLP interests. These limitations are frequently
beneficial in enabling a higher discount for the interest. However, counsel
was so effective in creating high-discount limitations on sale that the
ability to qualify as a present interest no longer existed.
Late Filing of Form 990 – Penalties of $52,460
In Service
Employees International Union et al. v. United States; Nos.
07-17256, 08-16105 (17 Mar 2010), the 9th Circuit required a tax-exempt
labor organization to pay the full penalty for late filing of IRS Form 990.
The Service Employees International Union (SEIU) and its subsidiary 100 Oak
Street Corporation (Oak Street) are labor organizations that are required
to file Form 990 information returns. SEIU filed the 1999 return 635 days
late and its subsidiary Oak Street filed its 1998 Form 990 return 123 days
late. The IRS assessed penalties of $50,000 on SEIU and $2,460 on Oak
Street for the late filing.
At trial, SEIU claimed that its CPA had prepared the return and officers
had signed it in a timely manner. However, for unexplained administrative
reasons the return was filed 635 days late. The District Court determined
that there was not reasonable cause for the delay, but reduced the total
penalty from $52,460 to $13,730.
The 9th Circuit noted that Form 990 is required to be filed by various tax
exempt organizations. If the organization fails to file in a timely manner,
then under Sec. 6652(c)(1)(A), there is a penalty of $20 per day with a
limit of $5,000 for organizations with gross receipts of $1 million or less
per year. For organizations like SEIU with receipts over $1 million, the
penalty is $100 a day with a limit of $50,000.
Under the statutory language there is no provision for a reduced penalty.
The union claimed that the IRS had discretion to reduce the penalty and,
therefore, the reduced penalty permitted by the District Court should
apply. The 9th Circuit noted that the statute is "mandatory, not
discretionary" and there is no provision in the statute for a reduced
penalty. While the IRS does negotiate reduced penalties and taxes for
taxable entities in which a tax amount is to be determined, in this case
there was no reasonable cause for the delay and, therefore, the full
penalty was reinstated.
Editor's Note: The IRS and the courts are becoming more stringent in
applying penalties. Charities would be well advised to be certain that IRS
Form 990s are filed in a timely manner. In addition, those charities and
individuals serving as trustees of charitable remainder trusts should be on
notice that the penalties for late filing of IRS Form 5227 are likely to be
levied in full.
Type III SO Trusts May Receive Refund
In Announcement
2010-19; 2010-14 IRB 1 (18 Mar 2010), the IRS announced an
opportunity for Type III supporting organization (SO) trusts to receive a
tax refund.
A Type III SO is required to meet both a responsiveness test and an
integral part test under Reg. 1.509(a)-4(i)(1). The Pension Protection Act
of 2006 eliminated part of the integral part test for charitable trusts.
Previously, they could meet either the significant voice test or the
charitable trust test to qualify under the integral part test. After 2006,
all SO charitable trusts were required to meet the significant voice test.
If the trust did not meet that test, it reverted to private foundation
status. Some trusts were unable to meet that test, filed Form 990-PF
returns in 2008 and paid the private foundation excise tax.
This announcement permits a trust that believes it can meet the significant
voice test for 2008 to request a ruling and a refund of taxes paid for the
2008 taxable year. The trust will need to show that it is meeting the
significant voice test. There will be no user fee for that ruling.
Applicable Federal Rate of 3.2% for April – Rev. Rul. 2010-11; 2010-14
IRB 1 (18 Mar. 2010)
The IRS has announced the Applicable Federal Rate (AFR) for April of 2010.
The AFR under Sec. 7520 for the month of April will be 3.2%. The rates for
March of 3.2% or February 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.
X is a Sec. 501(c)(3) public charity. X is an organ
procurement organization. As part of its exempt purpose, X is notified by
various hospitals of recent and/or imminent deaths. X then screens the
potential organ donors and determines the organ's suitability for
transplant. Once a match is made between the donor's organ and a recipient
of the organ, X assembles a transplant team to recover the organ and transports
it where needed. Air travel is often required to transport organs.
Arrangements are often made on short notice or are completely unscheduled.
As a result, X often charters specialized airplanes to make the trips. X
requested a ruling that the chartering of the aircraft in furtherance of
its exempt purpose would not subject it to Secs. 4261 and 4267 taxes.
4261(a) imposes a 7.5% tax on amounts paid for taxable transportation of
any person. Sec. 4271(a) imposes a 6.25% tax on amounts paid for the
taxable transportation of property. Sec. v 4261(g) provides that no tax is
imposed under Secs. 4261 or 4271 on any air transportation for the purpose
of providing emergency medical services -- (1) by helicopter, or (2) by a
fixed-wing aircraft equipped for emergency medical services. Therefore, the
Service determined that X was not liable for the taxes imposed on air
travel of persons or property directly related to its purpose of organ
procurement and transportation in the continental United States.
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. 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. But 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.
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 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. The "smokestack scrubbers" from Green Scrubbers (GS) were
in great demand.
Eighteen 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 grew to over
$10,000,000. At age 88, he and Helen made a $2,000,000 gift from the
unitrust to fund the "Green Center" at Favorite Charity. But they
want to make another larger gift to Favorite Charity. How can they do this?
George called CPA Arnie Arnst again and asked, "What should I do now?
We would like to make another large gift, but the funds are in our
unitrust. The unitrust is back up to $9,000,000."
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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