|
|
Tax Quote of the Week
"There is nothing in the Constitution which requires a state to adopt
the best possible system of taxation."
-- Harlan F. Stone
Expanded Homebuyer Credit Bill Passes
By a vote of 98-0 in the Senate and 403-12 in the House, Congress passed
the Worker, Homeownership and Business Assistance Act (WHBAA). It is
expected that President Obama will sign the legislation next week.
The language of the bill was primarily drafted by Sen. Max Baucus (D-MT).
He stated, "Today, families that depend on this help to pay their rent
and stay in their home are a step closer to getting assistance. Today we
acted, and not a moment too soon. Today, we gave unemployed Americans the
chance they need to get back on their feet, get through this tough time and
get working again."
Sen. Baucus was referring to the extension of unemployment benefits. The
act will extend unemployment benefits for 14 weeks. For those states with
unemployment levels over 8.5%, there is an additional extension of six more
weeks. The unemployment provisions are offset by an extension of the
Federal Unemployment Tax Act until June 30, 2011.
The bill also extends and expands the homebuyer credit program. Under the
act, first-time homebuyers who are in a binding contract by April 30, 2010
will continue to qualify for the $8,000 homebuyer credit. In addition, the
proposal by Sen. Johnny Isakson (R-GA) and Sen. Chris Dodd (D-CT) to expand
the homebuyer credit has been accepted. For homeowners who have lived in
their principal residence for five years and acquire a new principal
residence with a cost of $800,000 or less, there is a credit of $6,500.
Both credits are limited to specific income ranges. The credit for a single
person will phase out with income over $125,000 and the credit for married
couples will phase out for those with incomes over $225,000.
Other provisions of the act include an extension of net operating losses.
Small businesses with income of $15 million or less will be permitted to
carry back net operating losses for up to five years.
Military families also may benefit from WHBAA. If a military person is
forced to sell a home at a loss because of a permanent reassignment, he or
she may qualify for compensation under the Military Homeowner Assistance
Program. The payments under this program will be tax-free to military
personnel.
Editor's Note: The $6,500 credit for new principal residence
purchases may be of interest to snowbirds. A snowbird who is thinking of
changing residence to a southern community and is willing to purchase a new
residence where he or she will live more than half the year could qualify.
House Healthcare Bill Vote Nears
At publication time, the House was moving toward a vote on the Affordable
Healthcare for America Act (H.R. 3962). Speaker Pelosi (D-CA) had given
notice to House members to be present at 9:00 am on Saturday, November 7,
2009 for a rather rare weekend session. It is expected that the House will
vote on the healthcare bill.
Speaker Pelosi was asked whether she had the required 218 vote majority to
pass the bill. She responded, "We will."
House Minority Leader John Boehner (R-OH) repeated his opposition to the
bill. He noted, "This bill is the greatest threat to freedom that I
have seen in the 19 years I have been here in Washington, taking away your
freedom to choose your doctor, the freedom to buy health insurance on your
own."
The Congressional Budget Office has estimated the cost over 10 years for
the bill at $1.06 trillion. The bill is designed to cover an additional 36
million Americans with healthcare insurance. There are credits for
individuals who have lower incomes. Insurance companies will not be
permitted to exclude or terminate coverage for pre-existing or
healthcare-related conditions. The bill does include a public healthcare
insurance option.
Funding for the bill is provided by a surtax of 5.4% on individuals with
$500,000 per year income (single) or $1 million per year (filing jointly).
There also is a new 2.5% tax on the sale of medical devices.
The cost of the House healthcare bill is expected to be covered by the tax
raised from high-income Americans and those who purchase medical devices,
plus the savings projected from reductions in Medicare costs. As a result,
the Congressional Budget Office estimates that the plan will have excess
revenue over 10 years of $18 billion.
House Republicans unveiled their version of healthcare reform on November
4, 2009. Their plan would expand health savings accounts and reform medical
liability rules to reduce malpractice insurance costs for doctors. The
Republican plan could expand insurance coverage by three million persons.
Editor's Note: If the Democratic bill does pass with the required
218 vote majority, it still may be 2010 before there is a completed
healthcare bill. The Senate has been called the "world's most
deliberative body" and is moving much more slowly on healthcare.
Because of different opinions among the 60 Democratic and Independent
Senators, there may be further delay before the Senate votes on a
healthcare bill.
Insurance Policy Surrender is Ordinary Income
In Harvey
S. Barr et ux. v. Commissioner; T.C. Memo. 2009-250; No. 8705-08 (3
Nov 2009), the Tax Court determined that surrender of an insurance policy
created ordinary income. In addition, the experienced attorney who failed
to report the gain upon surrender was liable for a Sec. 6662(a)
accuracy-related penalty.
In 1980, Lillian Barr, mother of Harvey Barr and Susan Barr Roe, was
persuaded by her son to acquire an insurance policy with a face value
amount of $200,000. The policy was issued by New England Mutual and had an
annual premium payment of $8,929.
Ms. Barr gifted half of the premium to son Harvey and half to daughter
Susan. They each paid the premium and jointly owned the policy. The gifts
by Ms. Barr and premium payments continued for nine years. Following that
time, from 1990-2005, automatic policy loans were used to pay the premiums.
In 2005, New England Financial sent a letter to Mr. Barr and stated that
the cash value was $361,353.58, the indebtedness was $354,399.25 and the
potential taxable gain was $135,963.44. Following receipt of this letter,
Harvey Barr surrendered the policy on December 20, 2005. At that time he
was sole owner and beneficiary. He received a check for $11,648.33 and a
$304.20 dividend. New England Financial issued a Form 1099-R showing a
taxable distribution amount of $135,963.44 and a Form 1099-DIV reflecting
the $304.20 dividend. Mr. Barr filed his IRS Form 1040 for 2005 and did not
report either the distribution or the dividend.
The IRS audited Mr. Barr and assessed a deficiency of $39,608 with a Sec.
6662(a) accuracy-related penalty of $7,922.
The Tax Court noted that a surrender of an insurance policy is not a
"sale or exchange" of a capital asset. Therefore, this surrender
does not qualify as capital gain. Mr. Barr claimed that it was an
"exceptional circumstance" and in such a situation it should
qualify as a distribution of capital gain. The Court noted that there are
some circumstances such as a life settlement in which the excess amount
received over the cash value could be treated as capital gain. However,
that was not applicable here, and the relief from indebtedness constituted
ordinary income.
Mr. Barr also was an experienced attorney first admitted to the Bar in
1964, and qualified to practice before the U.S. Tax Court and the U.S.
Supreme Court. Under Sec. 6662(d)(1)(A), an understatement in tax that
exceeds 10% of the required tax or $5,000 may be subject to a penalty
unless the taxpayer adequately discloses his or her position, has a
reasonable basis for the claimed deduction or exemption and has substantial
authority for that tax position. Because Mr. Barr was an experienced
attorney and did not disclose his position on the 2005 return, the penalty
was applicable.
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.
Grantor proposes to create an irrevocable trust
("Trust") for the benefit of Grantor and Grantor's family. Trust
shall pay income and principal to Grantor and Grantor's family in amounts
and proportions as determined in the sole and absolute discretion of
Trustee. Any income not paid shall be accumulated and added to principal.
Upon the death of Grantor and Grantor's spouse, Trust assets shall be
distributed to Grantor's living descendents to be held in separate trusts.
If no descendants are living, Trust shall be distributed to an organization
described in Secs. 170, 2055 and 2522. Trustee shall not be Grantor, a
relative of Grantor or other interested beneficiary of Trust. Grantor
cannot remove any Trustee. Grantor will have the power to acquire Trust
property by substituting it with property of equal value in a manner that
will not shift interests of the beneficiaries and Trustee has an obligation
to ensure Grantor's compliance. Trustee shall not pay Grantor or Grantor's
executors in discharge of Grantor's income tax liability. Grantor seeks a
ruling that Grantor's contribution to Trust is a completed taxable gift and
Trust assets will not be includible in Grantor's gross estate.
The Service ruled that Grantor's contribution will be a completed taxable
gift and none of the Trust assets will be includible in Grantor's gross
estate. Sec. 2511 provides that Sec. 2501 transfers are taxable gifts even
when transferred in trust. Reg. 25.2511-2(b) deems a gift complete if the
donor retains no dominion or control over the gift while Reg. 25.2511-2(c)
deems a gift incomplete where the donor retains power to change beneficial
interests. Grantor's contribution to Trust will constitute a completed gift
because Grantor will not have sufficient dominion or control over the gift
and retention of the power to substitute Trust assets will not permit a
shift in beneficiaries' interests.
With respect to Grantor's estate, Sec. 2036 requires inclusion of property
in which Grantor retained possession, enjoyment of or the right to income
from property at death. Under Reg. 20.2036(a)(1), the gross estate
specifically includes transferred property that will discharge a legal
obligation of the decedent. Rev. Rul. 2008-16, 2008 I.R.B. 796 provides
that a substitution power will not, by itself, cause inclusion in the
Grantor's estate so long as the fiduciary ensures compliance and the
substitution cannot shift beneficiaries' interests. Rev. Rul. 2004-64,
2004-2 C.B. 7 provides that an unexercised discretionary right to reimburse
a grantor's tax liability will not cause inclusion of trust assets in a
grantor's estate. Here, Trust assets will not be includible in Grantor's
gross estate because Grantor will only hold a substitution right that
prohibits shifting interests of the beneficiaries and Trust specifically
prohibits Trustee from discharging Grantor's tax liability.
"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 a charitable foundation to help those in need.
Lucy discussed options with her attorney and her favorite charity. She
could create a private foundation (PF), or she could set up a supporting
organization (SO) with favorite charity. If the SO were created, favorite
charity wanted to elect three of the five directors, and Lucy would elect
two directors. Since the SO is controlled by favorite charity, it also
qualifies as a public charity. Lucy could give the stock and take a
deduction up to 30% of her adjusted gross income with a five year
carry-forward for the excess value.
Lucy thought about the SO, but was also very interested in a PF. She asked
her attorney for reasons to select one or the other. Her attorney noted
that PFs are usually 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, a 2% excise tax on investment income is common and
the PF is subject to various rules on self-dealing, minimum distributions
and excess business holdings. Lucy said, "Wow! There are a lot of
negatives about PFs. So why do some of my friends set up a PF?"
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.
|
|
