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Tax Quote of the Week
"Fundamental [tax] reform almost always runs the risk of making things
worse."
-- Dan Rostenkowski
Conrad-Gregg Budget Panel Proposal
At a Senate Budget Committee hearing on November 10, 2009, Chairman Kent
Conrad (D-ND) outlined a proposal authered by himself and Sen. Judd Gregg
(R-NH). The witnesses included Sen. Joe Lieberman (D-CT), Sen. Diane
Feinstein (D-CA) and Sen. Evan Bayh (D-IN).
In his opening statement, Sen. Conrad noted that the nation faces major
challenges in its effort to improve the "long-term debt outlook."
He suggests that the regular process for both budgeting and taxation in the
House and Senate is failing quite badly in the effort "to address the
imbalances" in fiscal policy.
Sen. Conrad noted that the 2009 deficit was $1.4 trillion, a number that
"should sober us all." He foresees a "sea of red ink"
in the future.
The externally held national debt for the past five decades has been
approximately 40% of gross domestic product (GDP). The current projections
are for the debt to equal 114% of GDP by 2019. his is nearly equal to the
record 121% of GDP for the national debt that occurred during World War II.
With the $1.4 trillion deficit in 2009, 68% of the borrowing was from
foreign nations. The current debt obligation to China is $800 billion, and
Japan is owed $731 billion.
Sen. Conrad noted that the current weak economy has lead to a projection
that the Medicare Hospital Insurance Trust Fund will be insolvent in 2017
and the Social Security Trust Fund will be insolvent by 2037. He indicates
that Social Security will now be out of funds "four years earlier than
forecast just last year."
In a public statement before the Senate Budget Committee in 2007, current
House Majority Leader Steny Hoyer (D-MD) stated, "I have reluctantly
concluded that a task force or commission may be the best way to bring us
to the place where we can spur action on this issue and reach agreement on
solutions." Leader Hoyer was referring to the inability of Congress to
address the fiscal challenges through the regular legislative process.
Sen. Evan Bayh (D-IN) sent a letter signed by 15 Democratic Senators to
Majority Leader Harry Reid (D-NV). Sen. Bayh and his cosigners stated,
"We believe Congress needs to adopt a special process to deal with our
nation's long-term fiscal imbalances." In that letter, Sen. Bayh noted
that the share of the national debt for each American citizen is now over
$38,000.
Sen. Bayh and his supporters plan to attach a bill to the December vote on
increasing the federal debt limit. His bill implements the Conrad-Gregg
Bipartisan Budget Panel proposal. The House leadership has not publicly
stated a position on the budget panel concept.
Editor's Note: Your editor and this organization take no position on
these specific comments from any of the above Senators. This information is
offered because the fiscal challenges facing America are becoming apparent
to all citizens. Members of both parties are steadily moving toward a
conclusion that a new method for determining federal expenditures and taxes
will soon be required.
Senate Healthcare Bill Hold Up?
Three influential Senators have stated they will hold up a Senate
healthcare bill if it includes a public option.
Senate Majority Leader Harry Reid (D-NV) is combining the bill passed by the
Senate Finance Committee with a bill passed under the leadership of the
late Senator Edward Kennedy. Sen. Reid has indicated that his combined
healthcare bill will include a public option.
National media reports on November 12, 2009 suggested that Sen. Reid might
reduce the number of healthcare plans subject to a 40% excise tax in the
Senate bill that is designed to fund the healthcare program. The excise tax
on "Cadillac" plans over $8,000 for an individual or $21,000 for
a family is unpopular with many union members. Sen. Reid is reported to be
considering a higher Medicare tax on individuals with incomes over
$250,000.
Sen. Ben Nelson (D-NE) has opposed the public option in the past. He is
concerned that the $1.1 billion cost of the House healthcare bill is too
high. He indicated to a major news channel that he "won't vote to move
it" if a bill is bad.
Sen. Blanche Lincoln (D-AR) shared a similar opinion as Sen. Nelson. She
voted twice against the public option in the Senate Finance Committee
process. The Senate Finance Committee passed a healthcare bill with co-ops
as an alternative to the public option.
Finally, Sen. Joseph Lieberman (ID-CT), an independent who caucuses with
the Democratic Party, indicated that he will filibuster against the public
option in order to "stop a final vote."
Editor's Note: Your editor and this organization take no specific
position on the comments by the above Senators. This information on
healthcare is offered as a service to our readers because it is such an
important issue.
Sen. Thune Supports Full Charitable Deductions
Sen. John Thune (R-SD) and 30 Republican Senators signed a letter that was
sent to the entire Senate in support of full deductions for charitable
donations. Sen. Thune earlier obtained a favorable Senate vote on an
amendment to a budget bill that would have affirmed support for full
charitable deductions. The Thune amendment was removed in the House-Senate
conference.
Sen. Thune stated, "The American tradition of charitable giving is
particularly important in difficult economic times. People do not give to
charity because it results in a tax break, but reducing the deduction would
likely lead to a reduction in giving nationwide. With many families
struggling today, such a limitation would come at a very bad time."
Sen. Thune points out that the Independent Giving USA Foundation indicated
the reduced giving in 2008 was the largest drop since 1956. In addition, it
is quite possible that charitable giving will not rebound substantially in
2009.
The Republican Senators are raising the visibility of this issue because
the proposed healthcare plan from The White House included a limit on
charitable deductions for major gifts. Individuals in the top proposed 2011
tax brackets of 36% or 39.6% would not receive the full tax savings for
their gifts.
Editor's Note: Many presidents of universities, medical centers and
national organizations have contacted U.S. Senators and Representatives.
The proposed limit would have direct impact on lead gifts for capital campaigns.
While it is difficult to gauge the specific impact, the obvious concern of
charitable leaders is that it would be more difficult to raise capital
campaign lead gifts if there are reduced tax savings. Given the importance
of lead gifts for a capital campaign, the protection of full deductions for
charitable major gifts is quite important to the entire field of
philanthropy.
Disability Association Fails Exemption Test
In Ohio
Disability Association v. Commissioner; T.C. Memo. 2009-261; No.
25436-07X (12 Nov 2009), the Tax Court determined that a non-profit
corporation was not able to demonstrate it would operate exclusively for exempt
purposes and therefore failed the exemption test.
Ohio attorney and CPA Charles S. Lineback formed the Ohio Disability
Association (ODA) as an Ohio Non-profit Corporation on March 16, 2004. Mr.
Lineback has previously managed attorney trust accounts, and intended to
create a pooled trust as permitted under federal and Ohio law to manage
funds for persons with disabilities.
ODA is intended to assist "poor and needy" persons with $1,500 or
less in assets. Under Ohio law, a pooled trust fund is permitted for
individuals who are (i) defined as disabled, (ii) have a separate account
for investment and management, (iii) the funds are provided by a parent,
grandparent, legal guardian or a court, (iv) the amounts remaining on death
are retained by the trust or paid to the state to reimburse for state
expenditures and (v) cash distributions are treated as unearned income by
the recipient.
Pooled fund trusts may be created and managed by non-profit associations
for the benefit of disabled individuals.
Mr. Lineback was the sole incorporator, sole member, sole director,
president, sole officer and sole employee of ODA. The IRS initially
requested more information on Form 1023 Application for Exempt Status.
After receiving additional information, the IRS denied the exemption. It
noted that ODA may not be "exclusively operated" for charitable
purposes.
The Tax Court reviewed the requirements under Ohio law for the pooled trust
fund and also the federal operational requirements under Reg.
1.501(c)(3-1)(c)(1). The Tax Court noted that there are "no procedures
or personnel in place to insure that either the stated policy will be
followed or a private inetment will not occur." Because there was no
oversight or other process to prevent ODA being operated for the benefit of
Mr. Lineback, the exempt status request was denied.
Applicable Federal Rate of 3.2% for November -- Rev. Rul. 2009-35;
2009-44 IRB 1 (19 Oct. 2009)
The IRS has announced the Applicable Federal Rate (AFR) for November of
2009. The AFR under Sec. 7520 for the month of November will be 3.2%. The
rates for October of 3.2% or September 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 2009, pooled income funds in existence
less than three tax years must use a 4.8% deemed rate of return. Federal
rates are available by clicking
here.
Charity acquired scrips at a bargain price and sold them at
face value to Taxpayer. After the purchase, Charity allowed Taxpayer to
either claim a rebate between the Charity's purchase price and the face
value of the scrip at the time of sale to Taxpayer or donate the rebate
back to Charity. Taxpayer proposed to purchase the scrip at face value and
allow Charity to keep the value of the rebate. Before completing the
transaction, Taxpayer requested two rulings from the Service. First, the optional
rebate would not result in taxable gross income to Taxpayer. Second, waiver
of the rebate will entitle Taxpayer to a charitable income tax deduction.
The Service cited various Revenue Rulings and ruled that "a rebate...
is an adjustment in purchase price, not an accession to wealth and is not
included in the buyer's (Taxpayer's) gross income." Next, the Service
ruled that under Sec. 170, a deduction is allowed to the extent payment to
the charitable organization is made within the taxable year. Because
Taxpayer donated the right to the rebate to Charity, Taxpayer is entitled
to a charitable income tax deduction provided that the substantiation
requirements of Sec. 170(a) are met.
Editor's Note: A "scrip" is document evidencing a
fractional interest in stock. Scrips are normally received by way of
corporate spin-offs, stock splits or in the form of stock dividends.
Essentially, Charity would acquire a portion of an interest in a stock or
stocks and turn around and sell this investment to the public.
"Predictions are difficult, especially about the
future."
Danish Physicist
Niels Bohr
As the financial professionals and gift planners enter a new decade, what
is likely to occur? While predictions are indeed difficult, by examining
the past and the present it is possible to make several projections about
the future. Part I of this article will discuss the economy and wealth, the
impending tax increases on the affluent and the probable boom in financial
counseling. Part II will analyze charitable financial planning options for
the depression babies group and the baby boomers.
The sections for each will include a prediction, an analysis of the factors
surrounding that prediction, and an explanation of the likely impact on
major and planned gift donors.
Lucky Lucy Lindstrom finished college and headed west. She
started as a financial analyst with a large company in Seattle. After just
four years, she became a Registered Investment Advisor (RIA) and began
advising clients. Lucky Lucy also managed her own investments. With her
keen insight into financial markets, Lucy soon began to move from traditional
stocks and bonds into futures and commodities markets. Lucky Lucy was so
successful in these markets that she now manages only her mega-dollar
personal portfolio.
Somewhat late in life, Lucky Lucy discovered the wonderful world of
philanthropy. She volunteered at her favorite charity, and learned that
giving someone in need a helping hand is even more gratifying than making
another million in the futures market. Lucy had invested $1,000,000 in
stock in a Canadian oil "wildcatter" with the name Northern Long
Shot, Inc. This company has been drilling new exploratory wells in the far
north. Recently, the stock rose from the $1 per share that she paid to over
$5 per share. Lucy was delighted with her gain and decided to give the
$5,000,000 to in a charitable foundation to help those in need.
Lucy discussed options with her attorney and her favorite charity. Lucy was
very interested in a private foundation. She asked her attorney for reasons
to select a private foundation. Her attorney noted that private foundations
are more expensive to operate, appreciated gifts are deductible only to 20%
of AGI, deductions for gifts of real estate to a PF are limited to basis,
there is usually a 2% excise tax on investment income, and the PF is
subject to various rules on self-dealing, minimum distributions and excess
business holdings. However, a private foundation would give Lucy full
control. Lucy said, "Wow! There are a lot of negatives about private
foundations. So why set up a private foundation? And if I fund a private
foundation, can I manage the investments and receive my normal RIA payments
from the foundation?"
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 1999-2009 Crescendo Interactive, Inc.
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