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Tax Quote of the Week
"I trust that the Congress will give its immediate consideration to
the problem of future taxation. Simplification of the income and profits
taxes has become an immediate necessity."
-- Woodrow Wilson
Baucus Backs Three Month Extension on Homebuyer Credit
According to the Treasury Inspector General for Tax Administration (TIGTA),
J. Russell George, over 1.2 million tax returns are claiming the $8,000
"first-time homebuyer" tax credit. These homebuyers have
benefited from credits valued at approximately $8.5 billion.
Several members of Congress have been advocating an extension of the credit
and an expansion to allow all purchasers of a principal residence to
receive the credit. Sen. Johnny Isakson (R-GA) and Sen. Christopher Dodd
(D-CT) have proposed opening up the credit to individuals with incomes of
$150,000 single or $300,000 for couples, and extending the deadline from
the current November 30, 2009 to June 30, 2010.
Sen. Max Baucus this week endorsed a short extension of the credit. He
would extend the credit for three months after the November 30, 2009
deadline and would limit it to the current group of first-time homebuyers.
Sen. Baucus also indicated that the extension would be offset with a tax
increase so that it would be deficit neutral.
Editor's Note: If an offset is required for extending the $8,000
first-time homebuyer credit, it is likely that the time period will be
fairly short and there will continue to be the current limit to first-time
home buyers. Under the TIGTA report, the credit was claimed improperly by
over 90,000 individuals. In addition, over 600 persons age 4 to age 18
claimed they had purchased a home and qualified for the $8,000 credit. The
extent of improper claims for the first-time homebuyer credit makes it less
likely that it will be expanded or extended.
Final Estate Tax Regulations on Post-Death Claims
In T.D.
9468; 74 F.R. 53652-53665 (20 Oct. 2009), the IRS published final
regulations that provide guidance on estate deductions for potential claims
under Sec. 2053.
The deduction of potential claims against an estate has long been a subject
of litigation. The Supreme Court in Ithaca Trust Co. v. U.S., 279
U.S. 151 (1929), indicated that the deduction could be taken based on an
appraised or estimated value. The Circuit Courts have split on the topic
and the IRS determined that it will resolve the issue with regulations.
The final regulations reflect the general position taken in proposed
regulations published in April 2007. Deductions are permitted under Section
2053 when the claims are paid. If an estate has a potential claim, it may
file a protective claim for refund with the IRS, but the deduction will be
granted after the claim has been paid.
Commentators raised multiple objections to the position taken in the
proposed regulation. In the analysis for the final regulations the IRS
responded to commentators who advocated permitting the deduction based on
appraised or estimated value in the estate. The IRS refused, as a general
rule, to permit those estimated deductions and indicated that the amounts
deducted will be "limited to amounts actually paid by the estate in
satisfaction of deductible expenses and claims."
However, there are two exceptions to the general rule. First, some assets
in an estate include both a claim against a third party and an offset to
that claim. Where the offset and the includable amount are
"substantially related," a deduction is permitted.
In addition, if cumulative claims do not exceed $500,000, they may be
deducted. In both cases, the deduction "is subject to adjustment to
reflect post-death events" and therefore could result in a
redetermination of the estate tax.
Counsel will necessarily file protective claims for a potential future
refund if there is possibility of a claim against the estate. The final
regulations delete a rebuttable presumption that a claim by a family member
is presumed not to be bona fide.
There is extensive discussion of recurring, non-contingent obligations and
contingent obligations. If an estate purchases an annuity to satisfy the
non-contingent obligation, that amount is deductible. Because the tax
effect upon transfer of an annuity to a beneficiary could be to accelerate
the income to the recipient, it is permitted for the estate to own the
annuity and give a security interest in the annuity to that beneficiary.
IRS Promises Limited Review of Protective Estate Claims
In Notice
2009-84; 2009-44 IRB 1 (16 Oct 2009), the IRS provided a measure of
reassurance for executors who file protective claims.
Under the final regulations for deductions under Sec. 2053, the estate
generally is not entitled to a deduction until the claim has been paid.
Because there may be uncertain or contingent claims against an estate, in
order to close the estate and make distribution of assets to beneficiaries
executors will now be required to file protective claims for potential
future refunds. If the estate is later subject to actual payment on a
claim, then the appropriate recalculation and refund can be granted by the
IRS.
However, commentators observed that the uncertainty of this process could
lead to greatly extended periods of time for holding estates open. It was
particularly a concern that when the IRS recalculated the refund, it might
then wish to reopen the balance of the estate and examine the entire
return.
In Notice 2009-84, the IRS indicated that it "generally will
refrain" from examining the entire estate. Rather, it will limit the
examination to the evidence relating to the deduction for the cash payment
on a claim. If the cash payment for the claim is allowable, the IRS will
then recompute the estate tax and allow the deduction.
This ruling applies only to estates where a timely protective refund claim
was filed and the normal statutory period of limitation on assessments has
expired. It also will not apply if there is fraud, malfeasance, collusion,
concealment or misrepresentation of a material fact.
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.
Founders NN created Organization, which was created for the purpose
of establishing an organization described in IRC Secs. 501(c)(3) and
509(a)(3). NN also serve as board members of Organization. Organization's
trust instrument provided for a distribution of X% of adjusted net income
to RR, a named public charity, and X% to at least one organization listed
on Schedule A. RR does not carry out its own activities, but makes grants
to other charities. Some organizations receiving grants from RR have not
been shown to be publicly supported charities described in Secs. 509(a)(1)
or 509(a)(2). Organization made several loans to B, a business controlled
by NN. The loans were not considered by Organization's entire board (only
by NN). No alternative investments for Organization were considered, the
loans were made without any verifiable security, the Promissory Notes were
not reviewed by anyone acting in the Organization's interest and the
payment schedule was not enforced. B received no adverse consequences for
months without making the required monthly payments.
The Service questioned whether Organization qualifies for Sec. 501(c)(3)
exemption because it was not organized exclusively for an exempt purpose.
Sec. 501(c)(3) provides that corporations or foundations must be organized
and operated exclusively for charitable or educational purposes and no part
of the net earnings may inure to the benefit of any individual. Reg.
1.501(c)(3)-1(d)(ii) provides that an organization fails to operate for
exclusively charitable purposes if it serves a "public rather than a
private interest" and must establish it is not operated for the
benefit of private interests such as designated individuals, the creator or
his family... or persons controlled by such private interests. In Better
Business Bureau v. United States, 326 U.S. 279, 283, the court stated
that the presence of a single substantial nonexempt purpose precludes
exempt status for an organization. In this case, Organization's primary
activity has been to act as a source of funds for NN and their business
interests. The gifts to charity are insignificant compared to loans made to
the business interests of NN.
As the economy slowly recovers, real estate will begin to
become attractive again. However, there may be cases in which donors desire
income today, but the best value for their real estate will not be realized
for several years. This person is a "Difficult Donor" because he
or she wants the charity to invest to facilitate the gift. Harry and Helen
Green are age 85 and 83. Harry is a lifelong real estate investor. Four
decades earlier, Harry had the wisdom to buy a property next to a two lane
road. The property was quite inexpensive and at the time four miles from
the nearest town.
During those four decades, the road was expanded and became a four lane
highway. The town steadily increased in population. Commercial development
slowly moved toward the land. Four decades later, Harry and Helen's
property is now a good candidate for a shopping center or other commercial
development. The 20-acre parcel is large enough for a commercial building
and surrounding parking. At age 85 and age 83, Harry and Helen would like
to start receiving cash today from the property. There is no development on
the property, and they have paid fairly modest taxes for the 40 years.
However, they are tired of the negative cash flow and would like to receive
income.
But there is a major obstacle. As a real estate entrepreneur, Harry
understands markets and was quite successful in picking a property that
would eventually have significant value. However, the property cannot be
developed until it is rezoned for commercial use and several water rights
issues are resolved in a way that permits a large commercial building to be
constructed. Because property issues and rezoning takes time in this
community, it may be three to five years before the property could be sold
and developed. How can Harry and Helen receive cash today without great
risk to the charity?
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 supporting organization (SO) with a favorite charity.
For the first two years the SO distributed grants for charitable purposes.
However, in year three, Lucy made a major mistake in her personal
commodities investing. She wants to borrow $3,000,000 from the SO to
"tide her over" through this difficult time. Since she needs all
her assets to cover her leveraged obligations, Lucy would like to have a
no-interest loan for two years. After all, she thinks, "I gave
$5,000,000 to the SO, so it surely would be okay to borrow $3,000,000 at no
interest for two years." Would this plan work? Can the supporting
organization give a no-interest loan to Lucy?
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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