|
|
Tax Quote of the Week
"Government expands to absorb revenue and then some."
– Tom Wicker
Should Banks Pay a TARP Tax?
During the financial crisis in October of 2008, Congress passed the
Emergency Economic Stabilization Act. Part of that Act created the Troubled
Asset Relief Program (TARP) with a $700 billion fund for loans to banks.
As part of TARP, the banks borrowed $248 billion. Approximately $199
billion of that amount has been repaid.
However, TARP was also extended to auto companies and auto-financing
entities. In addition, because of the fear of collapse of the entire system
if securities insurance funds went under, the government funded a
loan/guarantee of over $100 billion to financial giant AIG. The total
distribution to General Motors, AIG, CIT and related entities was $244
billion. Most of this amount is still unpaid.
Part of the Emergency Economic Stabilization Act was a requirement that
Treasury eventually determined the best means for the government to be
repaid the TARP funds. As a result, Treasury Secretary Timothy Geithner has
proposed a 0.15% tax on the covered liabilities of banks with over $50 billion
in assets.
Sec. Geithner appeared on May 4, 2010 before the Senate Finance Committee
to explain the administration proposal. He noted that it is appropriate for
the banks to pay for TARP. The TARP Program put out "a financial
fire" and the banks benefited from it. Sec. Geithner stated that the
purpose of "the Financial Crisis Responsibility Fee proposed by
President Obama in January is to make sure that the direct costs of TARP
are paid for by the major financial institutions, not by the taxpayer."
In response to concerns by senators that a TARP tax may cause lending to
small businesses to be reduced, Sec. Geithner responded, "Small
businesses would not be harmed by the tax for the simple reason that it
leaves untouched 99% of American financial institutions."
The tax on large banks is estimated to raise approximately $90 billion over
10 years. The cost of TARP is currently estimated by the Congressional
Budget Office to be approximately $110 billion.
Sen. Max Baucus (D-MT) indicated that a TARP tax is "inevitable."
He stated, "We need to understand the best way to design the tax so
that it's fair and achieves its purpose. We need to understand who should
pay the tax. And we need to understand what effect the tax would have on
small businesses and the economy."
Predictably, the American Bankers Association opposed the tax. Their
representative James Chessen responded, "Had the TARP been limited to
the banking industry, there would be no losses on that program." The
ABA maintained that it was not fair to tax the banks because government
losses on TARP will be primarily related to the auto companies and other
non-bank recipients of TARP loans.
Tax Foundation Highlights 2010 Charitable Gift Benefits
The Tax Foundation, a non-partisan, nonprofit organization that monitors
federal fiscal policy, published a news release that suggested high-income
taxpayers should make major charitable gifts in 2010.
According to the Tax Foundation, 2010 is an excellent year for large gifts
because the PEP and Pease provisions are not applicable for this year.
However, they are likely to be restored in 2011.
The PEP limit refers to the personal exemption phase-out for higher-income
individuals. The Pease provision is named after former Congressman Donald
Pease (D-OH). It creates a 3% floor on itemized deductions for high-income
taxpayers. A high-income taxpayer could lose up to 80% of his or her
itemized deductions due to that floor.
Neither the PEP nor the Pease limits apply to 2010. Therefore, it is a very
good year to make large charitable gifts because the deductions will
qualify in full.
However, under the proposed budgets by President Obama, the Pease itemized
floor will apply in 2011 for married couples with income over $254,550 and
single persons with incomes over $203,650.
The effect in 2011 is that the proposed 36% tax bracket (increased from 33%
in 2010) will actually be raised effectively to 39.2% due to the PEP and
Pease limits. In addition, the 39.6% proposed bracket in 2011 (raised from
the 2010 35% bracket) will effectively be approximately 43% due to the PEP
and Pease limits.
Because the PEP and Pease limits do not apply in 2010, the Tax Foundation
recommends large charitable gifts be made this year.
Should Government Mandate 401(k) Annuities?
Recent hearings in the House and Senate have focused on the need for 401(k)
and IRA accounts to provide better retirement income. Vice President Joe
Biden referred to these discussions in the White House Task Force on the
Middle Class. He suggested creating "guaranteed retirement accounts
(GRAs)."
The guaranteed retirement accounts may replace conventional 401(k)s and
could eventually provide annuity income to individuals.
In response to a White House request, the General Accounting Office (GAO)
released a report on April 28, 2010 that discussed some of these retirement
issues. The GAO noted that a couple age 62 has at least a 47% probability
that one of the two spouses will live to age 90. While life expectancy is
in the mid-to-late 70s when one is born, the age at maturity increases as
we grow older. Therefore, the average retirement age couple in America has
a reasonable prospect that the survivor will live to be age 90.
GAO reports that Social Security is the primary support for lower income
retired Americans. For the median retired person, Social Security is
expected to provide approximately 47% of retirement income. The balance
will come from savings or investments, a qualified plan such as a 401(k) or
IRA and retirement earnings from employment.
The GAO report notes that an annuity may provide more income than a
conservative investment, such as a bond or CD.
Republican lawmakers this week wrote a letter to Treasury Secretary Timothy
Geithner and expressed concern about the guaranteed retirement accounts.
They noted that a number of the witnesses before the various committees
would "dismantle the present private-sector 401(k) system" and
replace it with the GRA.
Their letter expressed concern and opposition to any effort to
"nationalize" the 401(k) system. The Republican lawmakers
continued by noting that over 90% of households have a favorable opinion of
401(k) or IRA accounts.
Applicable Federal Rate of 3.4% for May -- Rev. Rul. 2010-12; 2010-18
IRB 1 (18 Apr. 2010)
The IRS has announced the Applicable Federal Rate (AFR) for May of 2010.
The AFR under Sec. 7520 for the month of May will be 3.4%. The rates for
April of 3.2% or March of 3.2% 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.
Foundation, a tax-exempt organization under Secs. 501(c)(3)
and 509(a) of the Internal Revenue Code, proposes to enter into an
employer-related grant program. The program would entitle children and/or
grandchildren of employees of C to apply for college or university
education scholarships. To be eligible, the applicant's parent or
grandparent must be, at the time of application, an employee of C. In
addition, the applicant must carry a minimum grade point average, complete
a standardized test, submit letters of recommendation, copies of his/her
transcripts and demonstrate dedication to extra-curricular activities. An
independent scholarship selection committee will be created that will be
completely unrelated to the Board of Directors of Foundation and C. All
scholarships will be awarded on a non-discriminatory basis and the grants
will be paid directly to the selected educational organization. No
scholarship may be awarded to any members of the Trustees of Foundation or
C or the children or grandchildren of either organization, or any member of
the Scholarship Selection Committee or their children or grandchildren.
Foundation will maintain records that include the evaluation methods used
by the selection committee, identification of scholarship awardees, the
amount and purpose of each grant and awardees reports on their use of
funds.
Sec. 4945(a) and (b) imposes an excise tax on taxable expenditures of a
private foundation. Sec. 4945(d)(3) includes grants in the term "taxable
expenditure." However, Sec. 4945 (g) states that grants are not
taxable expenditures if it can be demonstrated that the grant will be used
solely for study at an educational organization described in Sec.
170(b)(1)(A)(ii) and that the grant constitutes a scholarship or award.
Rev. Proc 76-47 sets out the guidelines that are to be used when a grant is
made by a private foundation under an employer-related program.
The Service determined that Foundation's grant program complies with the
requirements of Sec. 4945 and Rev. Proc. 76-47. Therefore, the
employer-related grant program will not result in the application of excise
taxes on taxable expenditures.
"How can I be sure the real estate sale will be done
properly?"
Donors have been asking this question for many years. If a property is
transferred into a charitable remainder unitrust, the income to the donor
is dependent on the value received from the property. Donors are frequently
very appreciative of the charitable work of their favorite organization,
but may have doubts about the real estate expertise of that same
organization. The "Prearranged Sale," simply put, exists under
state contract law when there is a binding agreement to sell the property.
In effect, there is a identified purchaser, an identified price and a
legally-enforceable agreement to sell the property.
Is there any latitude for creativity? How close to the sale is too close?
It may be possible to have a sale with reasonable safety in a very short
period of time, so long as the rules are followed quite carefully. The key
is that there is no "binding obligation" when the trust is
funded. See Rev. Rul. 78-197, 1978-1 C.B. 83. The three possible options
include buyer waiting in the wings, a contingent oral agreement and a
contingent escrow agreement.
Donald Developer was a very creative and entrepreneurial
person. His business and personal affairs were often headline news in the
newspapers. Through a stormy and turbulent career, he acquired many large
parcels of property. Many of these properties were developed with either
commercial buildings or residential structures.
Don has a parcel of very valuable property. It is waterfront property that
is adjacent to the main wharf in this seaport city. Don recently called
Glenda Giftplanner and they talked about the possibility of selling the
property tax-free through a charitable remainder unitrust.
Don noted that the property could be sold for perhaps $2 million. He
suggested that he might be willing to transfer the property to a unitrust
with Glenda's charity as trustee. After discussing other areas such as debt
and arrangements for sale, Don stated, "While there is no debt on the
property, it does have a 'minor' toxic waste problem."
Glenda immediately was concerned. What is a "minor" toxic waste
problem? Don indicated that an environmental firm had examined the property
and there was some spillage of oil on the land, but he did not think it
should be a major problem. How can this unitrust be created? Is there such
a thing as a "minor" toxic waste problem?
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.
|
|
