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Tax Quote of the Week
"[T]wo things are abundantly clear. One, tax simplification is
desperately needed. Two, any effort is likely to be an unmitigated
disaster."
-- Jonathan Clements
House Healthcare Bill Includes Public Option
On October 29, 2009, House Speaker Nancy Pelosi (D-CA) unveiled the House
version of healthcare reform. She feels that The Affordable Healthcare for
America Act (H.R. 3962), "is fiscally sound. It will not add one dime
to the deficit as it expands coverage, implements key insurance reforms and
promotes prevention and wellness across the House system."
The House vote on the bill is expected in the first or second week of
November.
The House healthcare bill is expected to raise the percentage of insured
persons in America to approximately 96%. It will subsidize insurance for
lower income persons. There will be health insurance exchanges to make it
easier for individuals or groups to purchase insurance. Insurance companies
would not be permitted to deny coverage for pre-existing conditions.
There are several revenue-raising provisions in the bill that are intended
to cover the estimated $894 billion cost over 10 years. The House Ways and
Means Committee released a summary of these specific financial changes.
They include the following:
1. No health reimbursement account deductions for vitamins, supplements or
other items that are not prescribed by a doctor.
2. Health reimbursement account funding limit will be $2,500.
3. The penalty for making nonqualified expenditures from health savings
accounts will be increased from 10% to 20%.
4. The major funding burden will be a surtax of 5.4% on incomes over $1
million (married) or $500,000 (single).
5. There is a new tax of 2.5% on medical devices.
6. There is increased information reporting that will improve tax
compliance.
Republican Minority Leader John Boehner (R-OH) responded to the
introduction of the healthcare bill by Speaker Pelosi. He indicated that
the proposal will be "costly and unsustainable." He suggested
that there are four substantial problems with the bill. His concerns are as
follows:
1. Substantial Medicare benefit reductions with savings allocated toward
the bill.
2. An 8% payroll tax penalty for small businesses that do not provide
healthcare.
3. An increase in health insurance premiums for the general public.
4. A reduction in wages, overtime and new employees as employers face the
new mandated costs.
Editor's Note: Your editor and this organization recognize that
healthcare reform is a very sensitive but important issue. We take no
specific position on statements by any of the leading political figures. We
merely attempt to offer a fair overview of statements by all the above
individuals because healthcare is so important to our readers.
Baucus Proposes Extending Homebuyer Credit
Senate Finance Chair Max Baucus (D-MT) and Senate Majority Leader Harry
Reid (D-NV) announced a new bill to extend the new-homebuyer credit and
provide additional unemployment insurance benefits.
The new Senate bill will add 14 weeks of additional coverage for the
unemployed throughout the nation. States where the unemployment is over
8.5% will also benefit from six additional weeks. The unemployment
extension is paid for by additional taxes under the Federal Unemployment
Tax Act (FUTA).
There also is a homebuyer credit extension similar to the proposal by Sen.
Johnny Isakson (R-GA) and Sen. Chris Dodd (D-CT). The homebuyer credit of
$8,000 for first-time purchases will be extended to April 30, 2010. In
addition, for homeowners who have lived in their current residence for five
years or more, there will be a new $6,500 credit that will allow them to
move up to their next home.
Sen. Baucus stated, "Senators will have another chance to cast the right
vote for our economy, for helping unemployed Americans get back on their
feet and for creating new jobs."
Sen. Isakson has been a strong advocate of extending the homebuyer credit.
There have been controversies surrounding the credit because individuals
from age four to 18 have claimed the credit. The IRS has been asked to
discover persons who have committed fraud in claiming the credit.
IRS Deputy Commissioner for Services and Enforcement Linda Stiff spoke to
the Subcommittee on Oversight of the House Committee on Ways and Means. She
indicated that the IRS "recognizes that there is potential for both
fraud and errors whenever a new refundable tax credit like the FTHBC is
enacted."
She indicated that the IRS is going to act to find erroneous and fraudulent
claims. She continued, "We will vigorously pursue those who filed
fraudulent claims for the credit and have already opened up scores of
criminal investigations."
Ms. Stiff noted that have been 1.5 million returns that claimed the $8,000
first-time homebuyer credit. While there have been approximately 100,000
returns selected for audit, the vast majority of the homebuyers are
properly qualified for the credit.
Bill Will Fight Offshore Tax Evasion
House Ways and Means Committee Chair Charles Rangel (D-NY) and Senate
Finance Committee Chair Max Baucus (D-MT) announced on October 27 a new
bill to fight offshore tax evasion.
The Foreign Account Tax Compliance Act will aid the IRS in its current
battle to collect tax from funds that Americans are keeping in overseas
accounts. The major tax provisions include:
1. A 30% U.S. excise tax on the U.S. branches of foreign banks who refuse
to disclose assets held overseas.
2. A 30% excise tax on foreign corporations with U.S. operations if there
is a 10% or more U.S. owner.
3. Penalties up to $50,000 for U.S. citizens with $50,000 or more in
overseas accounts that are not reported.
4. A 40% penalty on tax understatements for overseas accounts.
5. A six-year statute of limitations if the omitted amount is over $5,000
and 25% of the reported income.
The offshore tax efforts will succeed the IRS collection program that
closed on October 15, 2009. Under the voluntary disclosure program that
recently closed, over 7,500 individuals came forward and will plead guilty
to failure to pay tax on overseas funds. The IRS considers the program
"a great success." The IRS also plans to pursue civil and
criminal action against Americans who have not voluntarily disclosed
assets. Several thousand offenders may be revealed through Swiss Bank UBS
disclosures to Treasury. Given the magnitude of the current budget deficit,
it is expected that the IRS will continue to seek new and effective ways to
close the "offshore funds" tax gap.
Estate Refund of Interest Denied
In a complicated tax case that involved three decisions by the Fifth
Circuit Court of Appeals and five Tax Court cases, the calculation of tax
and interest for the Estate of Algernine Allen Smith was finally concluded.
In James
Allen Smith v. United States; No. 08-20705 (26 Oct 2009), the
estate requested a refund of $85,336.83 of interest that it claims was an
overpayment.
Ms. Smith died November 16, 1990. She was the defendant in a suit by Exxon
Corporation for $2.48 million. In February 1991, Exxon prevailed on the
suit and her estate was deemed liable. The estate filed the tax return in
July 1991 and deducted the full $2.48 million.
However, in March 1992 the estate settled with Exxon for $681,840. The IRS
then issued a notice of deficiency for $663,785 with an accuracy-related
penalty of $132,785. In the first Tax Court case in 1998, the estate tax
deficiency was upheld at $564,429.87. In 1998, the estate paid the tax and
interest. However, later that year the IRS determined that there was
additional interest owed of $410,848.76. The estate determined that it had
also overpaid its income taxes in 1992. Following additional litigation at
Tax Court for recalculation of the tax and interest, the IRS determined
that the estate overpaid estate tax by $238,847.24, but owed $85,336.83 in
other interest. The IRS refunded the estate the difference.
The estate brought an action in 2004 in Tax Court for recovery of the
$85,336.83, claiming that this interest was not due and payable. The Tax
Court approved the refund and the Fifth Circuit denied the refund on
appeal. The estate filed again in 2007 for refund of the $85,336.83. The
District Court granted the IRS motion for summary judgment. On appeal, the
Fifth Circuit Court of Appeals determined that the interest payment as
calculated in the 2002 Tax Court decision was correct.
Editor's Note: This was a 19 year fight over estate taxes, but
particularly over conflicting claims on the interest owed by the estate.
After 19 years and eight court proceedings, the estate is finally settled.
The final regulations recently published by the IRS in T.D. 9486 that
permit deduction of claims against the estate under Sec. 2053 after they
have been paid is in part a result of the extended litigation from this
complicated case. If in the original IRS Form 706 return the estate had
paid the tax, under the new rules the estate would have then filed for a
refund after payment of the settlement amount. It would simply have been
necessary to calculate the refund and the appropriate interest on that
amount. While the estate would have had to wait until 1993 to reach the
final result, it could have been accomplished in much less time than the
nineteen year proceedings.
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.
Organization is tax-exempt under Sec. 501(c)(3) and classified
as a public charity under Sec. 509(a). As part of Organization's charitable
activities, Organization makes grants to other nonprofit organizations.
Organization elected to have their lobbying activities governed under the
expenditure test, which allows Organization to make permissible lobbying
expenditures without losing its tax-exempt status. Organization makes
general support grants that are not earmarked for lobbying and treats these
grants as non-lobbying expenditures. Organization desires to make specific
project grants to public charities, not earmarked for lobbying, and also
treat these grants as non-lobbying expenditures. Organization requested
rulings that: (1) grants restricted for use with a specific project of
public charity not be automatically classified as a lobbying expenditure
and (2) general and specific grants not earmarked for lobbying be treated
as non-lobbying expenditures, even if the funds are subsequently expended
for lobbying.
While no provision expressly addresses the treatment of a grant from one
public charity to another public charity, the Service held the standard for
public charities should not be more stringent than that which applies to a
private foundation. Under Reg. 53.4945-2(a)(6)(i), general support grants
by private foundations to public charities are not treated as expenditures
for lobbying so long as the grant is not earmarked for lobbying. Under Reg.
53.4945-2(a)(6)(ii), private foundations are permitted to make grants to
public charities that are earmarked for use in a specific project, even if
the project includes some lobbying, without treating the grant as earmarked
for lobbying. To qualify under Reg. 53.4945-2(a)(6)(ii), the grant must not
be earmarked for lobbying, the amount of the grant (combined with other
grants from the same organization for the same project during the year) may
not exceed the amount budgeted by the grantee for non-lobbying activities
of the project and the Organization does not doubt, or have reason to
doubt, the budget information provided by the public charity. Consequently,
the Service held a grant restricted for use within a specific project of a
public charity is not solely, by the virtue of that restriction, earmarked
for lobbying. Further, general and specific support grants may be treated
as non-lobbying expenditures so long as they are not earmarked for
lobbying, even if some or all of the funds are ultimately expended by the
recipient charity for lobbying.
"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 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
supporting organization (SO) with a favorite charity. For the first two
years the SO distributed grants for charitable purposes. By year three, Lucy
was so committed to favorite charity that she wanted to increase the annual
grants. As a creative investor, Lucy suggested that the SO would start an
LLC and jointly invest with Lucy and others in more Canadian oil well
developments. She calls the new project the "Wheeler-Dealer Charity
LLC."
With a recent dramatic increase in the price of oil, Lucy has several
friends who are eager to participate. She and the SO will each contribute
$1 million to Wheeler-Dealer Charity LLC. Total funding will be $10 million.
With this amount, Wheeler-Dealer Charity LLC will become a partner in
wildcat oil wells. As Lucy says, "The sky is the limit! Profits will
soon be gushing forth!" Will this plan work? Can the supporting
organization be a partner in the oil well venture?
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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