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Tax Quote of the Week
"[A]ll governments must have a regard not only for what the people are
able to bear, but what they are willing to pay, and the manner in which
they are willing to pay without being provoked to a rebellion."
Henry Fox
Fiscal Commission Faces Massive Deficit
On April 27, 2010, the National Commission on Fiscal Responsibility and
Reform held its first meeting. Co-chair Erskine Bowles plans to hold seven
meetings and publish a final report on Dec. 1. Separate groups will meet to
discuss mandatory spending, discretionary spending and taxes.
Speakers on the first day were President Obama, Chairman of the Federal
Reserve Ben Bernanke and former directors of the Congressional Budget
Office (CBO) Robert Reischauer and Rudoph Penner. The CBO directors said
that the large budget deficits could lead to a severe financial crisis.
Co-chair Bowles warned, "We're going to have to make really tough
choices. And that's going to involve entitlements, it's going to involve
the military and it's going to involve discretionary items. And it's going
to involve revenues and we have to face up to that."
The fiscal commission's 18 members include six Democrats, six Republicans
and six Presidential appointees. During opening remarks, the Democratic
members expressed concern about protecting social programs. Republican
members observed that there is too much federal spending.
Bowles hopes to facilitate an agreement by 14 of the 18 members for the
final report.
The fiscal commission was a joint proposal by Sen. Kent Conrad (D-ND) and Sen.
Judd Gregg (R-NH) of the Senate Budget Committee. In his opening remarks,
Sen. Conrad stated, "We are headed very quickly for a debt that will
be 100% of the gross domestic product of the United States. On the current
trend line, CBO tells us we're going to have a debt that will be 400% of
the gross domestic product of the United States. We've never had a debt
anything like that in the history of the United States and we know we will
never get there, because those who are lending us the money to float this
boat will never permit it. Already, the Chinese have warned us publicly and
privately that they have grave doubts about continuing to lend money to
this country."
Sen. Conrad called the debt a "tsunami" that could cause America
to become a "second-tier power." He hoped that all members would
place "everything on the table."
House Ways and Means Committee Ranking Member Dave Camp (R-MI) highlighted
a probable area of conflict by opposing the valued added tax (VAT)
suggested by White House Advisor Paul Volcker last week. He stated,
"Given a national unemployment rate stuck at almost 10% and the
precarious position of American families and employers, it is difficult to
imagine asking them to pay on top of everything else and when they can
least afford it what amounts to a national sales tax on everything they
buy including food, clothing, medicine and housing."
At a meeting on April 28, 2010, Co-chair Erskine Bowles said that the
fiscal commission could educate the American people and encourage them to
force "elected officials to actually face up to these big
problems."
IRS Publishes FAQ on Automatic Revocation of Exempt Status
If a nonprofit fails to file an annual Form 990, 990-EZ or 990-PF for three
years, it will lose its tax exempt status. To clarify the rules and
requirements, the IRS released Frequently
Asked Questions (FAQs) on the topic.
With the exception of churches or associations of churches, all nonprofits
must file an annual return. Failure to file will result in a termination of
exempt status on the filing date of year three. If exempt status is
revoked, the nonprofit will be removed from Publication 78.
After losing exempt status for nonfiling, the nonprofit may request a new
exemption by filing IRS Form 1023. If the automatic revocation was due to a
reasonable cause failure by the nonprofit, the IRS may restore exempt
status retroactively.
Mortgage Defeats FaƧade Deduction
In Gordon
Kaufman et ux. v. Commissioner; 134 T.C. No. 9; No. 15997-09 (26
Apr 2010), the Tax Court ruled in a summary judgment that a faƧade
deduction failed due to an existing mortgage on the property.
Rowhouse owners Gordon and Lorna Kaufman lived in a Boston historic
district. In 2003 they deeded a faƧade conservation easement to the
National Architectural Trust (NAT). The "before and after"
appraisal valued the conservation easement at $220,800. Because the
appreciated property deduction was limited to 30% of gross income, they
deducted $103,377 in 2003 and $117,423 in 2004.
The IRS denied the deduction and assessed taxes and Sec. 6662(a) penalties.
The Tax Court noted that a conservation easement is an exception to the
partial interest rule on charitable deductions. A conservation easement
deduction is permitted for gifts of a "qualified real property
interest * * * exclusively for conservation purposes." Sec. 170(h)(1).
The interest must be deeded in perpetuity. Reg. 1.170A-14(b)(2).
However, the rowhouse was subject to a mortgage. Under the mortgage terms,
the bank had a "prior claim" to the property. If it were
destroyed by fire, the proceeds belonged first to the bank. The Kaufman's
maintained that there were sufficient funds to pay both the bank and NAT
but the court observed that the easement could not be conditional. Because
NAT did not have an unrestricted right to maintain the faƧade easement, the
charitable deduction was not qualified.
With respect to the Sec. 6662(a) penalties for overstatement, the Kaufman's
had relied on their accountant. Even though Mr. Kaufman suggested to NAT in
an e-mail that the faƧade easement may have no value, his reliance on the
accountant creates a factual question that negates the possibility of a
summary judgment on the penalty issue.
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.
T is recognized as an exempt organization under 501(c)(3) and
is classified as a private foundation as defined in 509(a). T proposes a
grant-making program which will award scholarships to eligible individuals
in the V area for study at secondary and post-secondary educational
organizations. The purpose of the scholarships will be to provide financial
assistance to eligible individuals who demonstrate financial need. T will
notify and deliver scholarship applications to designated individuals at V
high schools and community organizations offering programs for at-risk
teenagers to ensure potential applicants receive information concerning the
availability of the scholarships. Eligibility for a scholarship requires,
among other criteria, that the individual reside in greater V area and
establish financial need.
The Selection Committee will award the scholarships on an objective and
non-discriminating basis based on: i) financial need, ii) academic
achievement and aptitude, iii) community service, iv) personal background
and interviews with applicant and/or faculty members and referral sources;
and v) leadership. After T has received a bill from the Educational
Institution establishing the recipient is attending the Institution and is
in good academic standing, the scholarship funds will be delivered
direction to the Institution. In a few cases, however, scholarship funds
may be delivered directly to the recipient after the recipient provides
evidence of enrollment, a copy of the invoice(s) to be paid and any other
information required by the Selection Committee. If any part of the
scholarship delivered directly to the recipient is used for improper
purposes, the Selection Committee will take all reasonable steps to recover
the funds or ensure the restoration of the funds for the intended purposes
of the scholarship, as well as withhold any future payments to the
recipient until reasonable steps have been taken to avoid reoccurrence. T
requests advanced approval of the grant-making program under Sec.
4945(g)(1).
Excise taxes are imposed on certain "taxable expenditures" made
by a private foundation. Under Sec. 4945(d)(3) a taxable expenditure is
"any amount paid or incurred by a private foundation as a grant to an
individual for travel, study, or other similar purposes by such individual,
unless such grant satisfies the requirements of subsection (g)."
Section 4945(g) says individual grants awarded on an objective and
nondiscriminatory basis pursuant to a procedure approved in advance will
not constitute taxable expenditures if it is demonstrated that the grant
constitutes a scholarship or fellowship grant and is to be used for study
at an education organization. Based on the information submitted, assuming
the scholarship program will be conducted as proposed, the Service
determined T's procedures for granting the awards comply with the
requirements contained in Sec. 4945(g) of the Code and the awards granted in
accordance with such procedures will not constitute 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.
Lorraine Moore, a widow age 75, has an estate valued at $1
million. Her estate consists of her home valued at $100,000, liquid
investments of $400,000 consisting primarily of bonds and some stock and an
apartment building valued at $500,000. She has fully depreciated the
building and her adjusted basis in the property is only $25,000. She would
love to unload the property and be free from its burdensome responsibilities.
Lorraine has continued in her retirement to be active in tutoring high
school students at the private high school where she taught many years ago.
She has made contributions to the school and to other community related
organizations and would like to see some of her capital preserved for these
types of organizations when she is gone. Lorraine's two sons, who both
teach at a private school, have many similar ambitions and charitable
interests. She would like to see them have control of some of the capital
of her estate for charitable purposes after she passes away. Lorraine's
desire is to sell the apartment building, but she would like to avoid the
capital gains tax. Because she is receiving income from the property, she
would like to continue to receive income from the sales proceeds. Lastly,
she would like to see her sons retain some control over the proceeds of the
sale when she is gone. In other words, Lorraine would like to see the
family administer the estate's "social capital."
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.
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Copyright 1999-2010 Crescendo Interactive, Inc.
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