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Tax Quote of the Week
"The tariff, then nearly synonymous with federal taxes, was a prime
cause of the Civil War."
-- American Heritage
Magazine
Senate Schedules Saturday Healthcare Vote
The Senate Majority Leader Harry Reid (D-NV) has published the full text of
the Patient Protection and Affordable Care Act (PPACA). He plans to
schedule a vote for the bill on Saturday, November 21, 2009.
Sen. Reid stated, "The American people and President Obama have asked
us for a health insurance reform plan that does two things above all else:
One, make it more affordable for every American to live a healthy life. And
two, do so in a fiscally responsible way that helps our economy
recover."
The Congressional Budget Office (CBO) has estimated the cost over ten years
of PPACA to be $848 billion. This assumes that all of the tax increases
pass and that the anticipated Medicare reductions are implemented. If all
of the tax increases are enacted and the Medicare cuts are made, then the
Senate bill is expected to generate more revenue than new healthcare costs
over a decade.
A major area of discussion has been the tax increases to pay for healthcare
reform. PPACA modifies the previous Senate plan to tax "Cadillac"
healthcare plans. Under the new bill, there will be a 40% excise tax paid
by insurance companies on single person plans with annual costs over $8,500
and family plans over $23,000. The reduction in revenue from the changes in
the tax on "Cadillac" healthcare plans will be covered by an
increase in the 1.45% Medicare tax. Single persons with incomes over
$200,000 and married couples with incomes over $250,000 will have a ½%
increase in the Medicare tax to 1.95%.
The Senate Finance Committee released a summary description of the
healthcare bill. It notes under the "improving the quality and
efficiency of healthcare" section that there will be changes in
Medicare payments. The Medicare plan is "to move away from the a la
carte Medicare fee" toward a payment for "quality and value."
Republican Ranking Member on the Senate Budget Committee Judd Gregg (R-NH)
voiced concern about the Democratic bill. He stated, "American
taxpayers are about to see an unprecedented expansion of the Federal
Government that will cost a staggering $2.5 trillion over 10 years when
fully implemented. The bill includes nearly $500 billion in tax hikes,
nearly $500 billion in Medicare cuts and higher premiums to pay for more
government."
Editor's Note: You editor and this organization take no specific position
on the above comments. This description is offered as a service to our
readers because healthcare is so very important to everyone. The Senate
vote opens the debate on the healthcare bill, with extended debate expected
in December. Sen. Joe Lieberman (ID-CT) has continued to state he will not
permit a bill to pass with the current PPACA public option. It remains
uncertain whether the House and Senate can now complete a healthcare bill
before the end of the year.
Extenders and Estate Tax
House Ways and Means Committee Chair Charles Rangel (D-NY) indicated on
November 19, 2009 that his committee will review a bill on the tax
extenders and estate tax after the Thanksgiving recess.
There are approximately 44 expiring tax provisions that are usually extended
by year-end. These include many provisions that benefit the public, such as
the teachers' supplies deduction. The extenders also include the IRA
charitable rollover provision for transfers up to $100,000. That provision
is of great interest to the field of philanthropy. While current law
permits the IRA rollover for 2009, the extenders will allow gifts in 2010.
Rep. Rangel also will face the estate tax question. Because Members of
Congress are strongly in support of taking action before the estate tax is
repealed on January 1, 2010, it is probable that the extenders bill will
also address extension of the estate tax.
Discussion in the House this week centered around a proposal by Majority
Leader Steny Hoyer (D-MD) to permanently extend the estate tax with a $3.5
million exemption and 45% tax rate. Several members of the House Ways and
Means Committee favored either permanent repeal or a two year extension.
Rep. Chris Van Hollen (D-MD) supported a two-year extension. He stated,
"You don't want a measure that would effectively be perceived as a tax
increase." In his view, a one-year extension might be perceived as a
Democratic commitment to return to a lower estate exemption in 2011.
Editor's Note: The time is short following the Thanksgiving holiday.
It now appears that there is a consensus that waiting to pass estate
legislation in 2010 that could be retroactive is not politically viable. A
one-year or two-year extension of the $3.5 million exemption and 45% estate
tax rate now seems quite likely. However, the final bill passed by both
House and Senate is not expected until late in December.
Food Banks and Charitable Giving
On Nov. 19, 2009, Chairman Jim McDermott (D-WA) held a hearing of the House
Ways and Means Subcommittee on Oversight to highlight the urgent challenges
of food banks.
Bill Bolling, Founder and Executive Director of the Atlanta Community Food
Bank, testified that his organization saw a "dramatic 47% spike in
demand for food" in late 2008. He observes that with unemployment now
over 10%, the ongoing demand on all food banks nationwide has continued to
grow, while gifts of food by corporations are declining. There have been
urgent appeals to donors to make cash gifts in order to acquire the needed
food for distribution.
Several witnesses discussed various actions that Congress could take in
order to facilitate increased gifts of food. These actions should recognize
that foundation and donor advised fund gifts to food banks have been
essential in maintaining supplies.
United Way President Brian Gallagher spoke at the hearing. He supported
three principal ways to continue to encourage charitable giving. First, he
suggested that the proposed cap on charitable giving should be opposed by
all members of Congress. In his view, "Any cap on charitable
deductions means some people will be taxed on income they are contributing
to advance the common good." This limit on charitable deductions would
reduce support for "those who most need the help."
Second, he notes that extending the IRA charitable rollover for individuals
over age 70½ is essential. He strongly urged the extension and expansion
of the IRA rollover.
Third, he referred to The Public Good IRA Rollover Act of 2009 (H.R. 1250).
Mr. Gallagher noted that this bill will remove the $100,000 limit on
donations, make the IRA rollover provision permanent and would allow IRA
owners to rollover IRAs into gift annuities and charitable remainder
trusts.
Estate Claim That "IRS Not Sufficiently Aggressive" Fails
In Estate
of Gertrude M. Ball et al. v. Commissioner; T.C. Memo. 2009-262;
No. 25175-07 (18 Nov 2009), the estate sought abatement of interest on a
late tax payment.
The decedent Gertrude M. Ball was a lifelong resident of Rhode Island. She
acquired a rental residence in South Kingston, Rhode Island. The residence
was leased and the lease provided the lessee an option to purchase the
property.
On October 10, 1994, the lessee exercised that option and Ms. Ball realized
a $381,080 capital gain, with a $95,704 income tax liability.
Ms. Ball passed away March 31, 1995. Her executor and attorney filed the
1994 income tax return and paid tax of $28. The sale of the property was
not reported.
On July 31, 1996, the IRS filed a claim against the estate for $145,269.30
in tax, interest and penalties. The IRS sent seven letters to the estate
requesting payment of the tax with interest and penalties. The estate made
the tax payment on December 21, 2004, but did not pay the penalties or
interest. The IRS agreed to abate the penalties, but still demanded payment
of the interest.
In Tax Court the estate claimed that the interest should be abated due to
"error or delay" by the IRS under Sec. 6404(e)(1)(A). The estate
claimed that the IRS was not "sufficiently aggressive" in
pursuing the interest and tax payment. Therefore, the interest should be
abated.
The Tax Court found the estate's position unpersuasive. The seven letters
sent by the IRS to the estate were deemed to be "sufficiently
aggressive" in pursuit of tax payment. The estate remained obligated
to pay the interest.
Applicable Federal Rate of 3.2% for December -- Rev. Rul. 2009-38;
2009-49 IRB 1 (17 Nov. 2009)
The IRS has announced the Applicable Federal Rate (AFR) for December of
2009. The AFR under Sec. 7520 for the month of December will be 3.2%. The
rates for November of 3.2% or October 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 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.
PF is a tax-exempt private foundation (PF) under Secs.
501(c)(3) and 509(a) of the Code. PF provides loans and investments to
low-income and economically distressed persons in several foreign nations.
PF plans to make several grants to C, a non-governmental entity formed
under the laws of a foreign nation, and several local affiliates of C. The
grants will be used to make loans to small micro-finance entities to
support the local population. However, C was unable to determine the exact
licensing requirements of Country X. As part of PF's exercise of
expenditure responsibility, PF is unable to make the grants to C until the
licensing requirements are determined. PF requested a ruling that the
set-aside of funds for C will be qualifying distributions within the
meaning of Sec. 4942(g)(1).
The Service determined that PF's request was timely filed under Sec.
53.4942(a)-3(b)(7)(i) and that the set-aside complies with the purpose of
Sec. 4942(g)(2)(A) in that the funds will be used for a charitable purpose
described in Sec. 170(c)(2)(B). Because PF credibly demonstrated that the
set-aside funds will be paid out within 60 months and that the funds are
better set-aside now than spent on the proposed purpose, the set-side is a
qualifying distribution.
Editor's Note: The Service called PF's attention to Sec.
53.4942(g)(2)(B)(i) which requires a foundation to enter in its books a
dollar amount as an obligation for the amount of the funds set-aside. This
demonstrates a commitment by PF to make the distribution within the next
five years.
"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. This is important to Lucy, since she wants to make grants for
disaster relief directly to those in need. 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 make grants to people
who suffered so greatly in a hurricane?"
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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