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Tax Quote of the Week
The best legislator is the one who votes for all appropriations and against
all taxes.
– Walter P. Brownlow
(attributed)
HIRE Act Passes House
On March 4, 2010, the House passed an expanded version of the Senate HIRE
bill. The House version expands the "Build America Bonds" portion
of the Senate bill and has increased the cost from $15.5 billion to $17.6
billion.
The bill passed by a rather narrow margin of 217 to 201. This margin
reflected the concern by both Democratic and Republican members that the
hiring credit will not have much impact on decisions to increase staff by
small and mid-size businesses. The bill now will be returned to the Senate
and reasonably prompt action is expected to pass the legislation.
The HIRE Act includes three specific provisions to encourage employment and
several offsets or tax increases. The provisions to increase employment are
as follows:
- For new employees who have been previously
unemployed and are hired between February 4, 2010 and the end of the
year, there is an exemption from the 6.2% Social Security tax. This
exemption could save approximately $2,000 to $5,000 for employees
hired during the balance of this year. If the employee retains his or
her position for 52 weeks, there is an additional $1,000 credit.
- Small businesses are permitted to expense costs up
to $250,000 for new equipment. This expensing benefit phases out if
the business acquires $800,000 or more of equipment this year.
- The "Build America Bonds" provisions are
designed to provide special purpose tax credit bonds for schools,
energy conservation and renewable energy projects and will be expanded
under the House bill. The purchasers of the bonds could receive a
direct payment from the Government, rather than the tax credit.
There are two major offsets. First, the implementation of a
provision allowing businesses with overseas operations to deduct a portion
of their worldwide interest was initially scheduled to take effect in 2008.
It now has been deferred until 2021 under the bill.
Second, there are multiple changes to implement provisions of the Foreign
Account Tax Compliance Act of 2009. These provisions include:
- A 30% withholding rate on payments to foreign bank
accounts if the bank is not releasing information to the U.S.
- A 40% penalty on underpayments due to interest that
is not reported in foreign accounts.
- The requirement to disclose the foreign account if
there is more than $50,000 in assets in a financial institution.
- An increase in the statute of limitations from the
normal three years to six years for underpayments that are connected
with a foreign bank account.
All of these provisions are designed to address tax evasion by
some Americans who transferred funds to Swiss and other foreign bank
accounts and then did not report the taxable income.
Senate Tax Extenders Bill
On March 1, 2010, the Senate began consideration of an expanded tax
extenders bill. Originally, there was a compromise tax extenders and HIRE
bill negotiated by Senate Finance Chair, Max Baucus (D-MT) and Ranking
Member, Charles Grassley (R-IA). However, Majority Leader Harry Reid (D-NV)
decided to separate the tax extenders section from the HIRE Act. Therefore,
Sen. Reid presented an expanded bill to the Senate this week.
The revised tax extenders bill includes four major provisions. These
include the following:
- Tax Extenders – The tax extenders include the
teachers' classroom expense deduction, a standard deduction for state
and local property taxes, the option to deduct state and local sales
taxes, extension of the expanded deductions for gifts of conservation
easements, the qualified tuition deduction and the IRA charitable
rollover.
- Unemployment compensation – It is extended and
expanded to attempt to minimize impact on the economy of the current
9.7% unemployment.
- COBRA coverage – Healthcare assistance for
unemployed workers will be extended. A partial credit is provided to
assist unemployed individuals who are using the COBRA program to
maintain their health insurance.
- Medicare Doctors' Reimbursements – Under existing
law, the reimbursement rates for doctors are reduced by 21%. The
"Doc Fix" each year restores the full reimbursement rates
for doctors providing Medicare services.
Sen. Max Baucus supported the expanded bill with the title
"The American Workers, State, and Business Relief Act of 2010."
He stated, "Among the provisions that expired yesterday are these:
expanded unemployment insurance benefits, COBRA subsidies to help people
keep their health insurance, a provision that keeps folks right at the
poverty line from losing their benefits, the small business loan program,
the temporary measure to prevent a 21% cut to doctors under Medicare, the
flood insurance program and the Satellite Home Viewer Act."
Sen. Baucus urged the Senate to pass the bill in order to enact the various
tax extenders and also provide assistance for the unemployed. Sen. Reid
indicated that the Senate vote on the bill should take place next week.
Blue Dogs Propose Balanced Budget by 2020
Lead by Rep. Bobby Bright (D-AL), the Blue Dog Democrats in the House of
Representatives introduced a "Balanced Budget Amendment" on Mar.
2, 2010. The House Joint Resolution 78, sets a target date of 2020 for
balanced budgets.
The Blue Dogs have urged the Democratic leadership to consider the impact
on the country of the unprecedented deficits in 2009 and 2010. Rep. Bright noted,
"Balancing the budget is a simple concept that Alabama families follow
everyday, but unfortunately the federal government doesn't play by the same
rules. This Amendment is an essential part of our larger efforts to bring
real and effective fiscal reform to government." Rep. Bright concluded
that, "balancing the budget on a yearly basis" is the only
potential solution to the current record deficits.
The Balanced Budget Amendment requires three actions by Congress as well as
the President. First, the President is required each year to submit a
balanced budget to Congress. Second, Congress is required to pass a
balanced budget. Third, Congress can fund a deficit only if there is a vote
by 3/5 of both the House and the Senate to spend more than the estimated
revenue received through taxes.
As with all constitutional amendments, it will require ratification by both
the House and the Senate and 3/4 of the states within a period of seven
years.
Editor's Note: The creation by the President of a Fiscal Commission
through an Executive Order and the introduction of the Balanced Budget
Amendment by the Blue Dog Democrats show that both parties now are talking
about solving the deficit. The challenge is that a true balanced budget
would require both increasing taxes and reducing spending. The total tax
increase would be approximately 8% to 10% and the spending reduction would
similarly be on the order of 8% to 10% of total expenditures. These changes
in both areas are so large that it will be a major political challenge for
the balanced budget to actually come into existence.
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.
PF is a private foundation under Sec. 509(a) of the Code. PF
requested advanced approval of a grant program under Sec. 4945(g)(3). The
program will make grants for land trust education and training to practitioners
in the field. The purpose of the grants is to increase the effectiveness of
land trust practitioners in promoting and conserving the biodiversity of
the area. Grant opportunities will be announced to members of Charity.
Recipients of the grants will be chosen based on four sets of criteria.
First, the applicants must describe how the grants will assist in training
to protect land and river resources. Second, applicants must describe how
training will benefit their conservation organization. Third, applicants
must demonstrate a cost-share match plan for the training. Finally, the
applicant must demonstrate a need for financial assistance. Members of the
selection committee are unable to receive the grants or any other private
benefit. Once selected, the grantee must annually submit a report detailing
the training attended and submit copies of receipts.
Sec. 4945(a) imposes an excise tax on the taxable expenditures of private
foundations. Sec. 4945(d)(3) defines "taxable expenditures" as
"any amount paid or incurred by a private foundation as a grant to an
individual for travel, study or similar purpose unless the grant satisfies
the requirements of Subsection (g)." 4945(g) provides that the grant
is not classified as a taxable expenditure if it is awarded on a
non-discriminatory basis pursuant to a procedure approved in advance by the
Service. The private foundation must demonstrate that the grant is a
scholarship to an approved educational organization and the purpose of the
grant is to achieve a specified purpose. To obtain approval PF, as required
by Sec. 53.4945-4(c)(1), must demonstrate that the grants will be awarded
on a non-discriminatory basis, the award procedure is reasonably calculated
to achieve the intended purpose and that PF will obtain reports on
awardees' activities. The Service determined that PF's grant program met
all of the requirements mentioned above. Therefore, the program will not
result in classification as taxable expenditure subject to the excise tax
in Sec. 4945(a).
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.
George had always loved nature. He interviewed with 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. 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 Scrubber were in
great demand.
Seven 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. At age 82, he and Helen now know they need to
sell Green Scrubber (GS). Fortunately, MegaScrubber is very interested in
purchasing GS. So George called CPA Arnie Arnst again and asked, "What
should I do now? We don't want to pay a large tax. The unitrust worked fine
before and I suppose that we could sell tax-free again. But the trust is
over $9,000,000, and we have no need for more income. We are swimming in a
sea of cash. What should we do?"
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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