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Tax Quote of the Week
"Tax complexity itself is a kind of tax." -- Max Baucus
Baucus Healthcare Bill Vote Nears
In one of the longest Senate bill markups in history, Sen. Max Baucus
(D-MT) finally completed work on over 500 proposed amendments to his health
care bill. The America's Healthy Future Act (AHFA) language is now
complete. Following a determination of cost for the bill by the
Congressional Budget Office, it is anticipated that the Senate Finance
Committee will pass the bill this week.
Sen. Baucus was pleased with the result. He published a statement early
Friday morning that stated, "We have a bill that will improve the
lives of every American. And one that does so in a fiscally responsible
way."
There were several important votes during the extended review by Senate
Finance Committee members. Sen. Jay Rockefeller (D-WV) proposed that the
bill include a "public option." The public option is included in
the other four proposed bills and has been a controversial proposal.
Rockefeller's amendment for the public option was voted down, with Sen.
Baucus and Sen. Kent Conrad (D-ND) opposing the public option.
Sen. Conrad has been the primary advocate for a system of public co-ops
rather than the public healthcare option managed by the federal government.
The health care bill includes $6 billion in startup funding for the
proposed co-ops.
An amendment by Sen. Bill Nelson (D-FL) will benefit seniors. Because the
Baucus bill increased the floor for deduction of medical expenses to 10% of
adjusted gross income, seniors would have reduced medical deductions. Under
the amendment by Sen. Nelson, the threshold for deducting medical expenses
for seniors would remain 7.5% of adjusted gross income.
The amended bill includes two types of benefits to help small businesses
acquire health insurance for employees. First, there will be small business
health care purchasing pools called "SHOP" exchanges. A SHOP will
enable a business with fewer than 100 employees to purchase health
insurance at favorable rates.
In addition, small businesses with 25 or fewer employees may qualify for
partial tax credits for up to 35% of the cost of employee health insurance.
These small businesses will be required to cover at least 50% of employee
health care costs.
Editors Note: The Senate Finance Committee markup has been a
marathon session. Yet the remaining process is still lengthy. Therefore,
the challenges for passing a health care bill this year are significant.
First, the Senate Finance bill must pass and be merged with another Senate
bill developed by the late Sen. Edward Kennedy. If health care bills then
pass both the House and the Senate, there will be a fairly contentious
conference committee to resolve the substantial differences in the House
and Senate plans. Only if all of those differences can be resolved by the
end of the year, will there be a health care bill passed in 2009.
Conservation Easement Vanishes Into Thin Air
In J.
Maurice Herman v. Commissioner; T.C. Memo. 2009-205; No. 14005-07
(14 Sep 2009), the Tax Court denied a deduction for a conservation
easement.
Mr. J. Maurice Herman owned a building on 5th Avenue in New York. It was
designed by Henry Odis Chapman in 1923 and was eight stories high in front
and 11 stories high in the rear. The building also included development
rights of 22,000 square feet that could permit an addition from three to
six stories.
The building is in the "Upper East Side Historic District" and is
a "certified historic structure."
On December 15, 2003, Mr. Herman contributed a conservation easement for
10,000 unspecified feet of the 22,000 feet of potential development rights.
The recipient was the National Architectural Trust, Inc. (NAT), a nonprofit
Sec. 501(c)(3) organization that is willing to enforce the easement. Based
on an appraisal of the "before and after" value of the airspace
rights conducted by Jefferson Lee Appraisals, Inc., the value of the
charitable deduction claimed by Mr. Herman was $21,850,000.
Mr. Herman claimed that deduction on his 2003 Form 1040. The IRS denied the
deduction, assessed a deficiency and imposed a Sec. 6662(h) penalty of
approximately $5.5 million.
A conservation easement is a real property interest given to a qualified
organization exclusively for conservation purposes. Sec. 170(h)(1). In this
case, the underlying property is a "certified historic structure"
under Sec. 170(h)(4)(A)(iv). However, this conservation easement does not
protect the historic structure. The underlying structure had been
transferred to Mr. Herman's controlled entity Windsor LLC. Owning 10,000
feet of unspecified airspace rights does not preclude Windsor from making
major modifications to the historic structure.
Because the 10,000 feet of unspecified rights leave another 12,000 feet in
the ownership of Mr. Herman, it would be possible to build a six-story
addition on the front half of the building and the donated air rights would
have no aesthetic impact.
In addition, the easement does not protect the underlying land. See Sec.
170(h)(4)(A)(iv). Finally, an easement on property that is close to a
certified structure is not considered to preserve that structure.
Because the grant of 10,000 feet of unspecified air rights from the
original 22,000 feet does not preserve the building or the land, the
conservation easement vanishes into thin air.
Applicable Federal Rate of 3.2% for October -- Rev. Rul. 2009-33;
2009-40 IRB 1 (18 Sept. 2009)
The IRS has announced the Applicable Federal Rate (AFR) for October of
2009. The AFR under Sec. 7520 for the month of October will be 3.2%. The rates
for September of 3.4% or August 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 of Trust died on Date 1. Trust provides for bequests
to Charity upon Grantor's death. In Year 1, Trust claimed an income tax
deduction for amounts set aside from Trust's gross income for Charity. These
amounts were actually distributed to Charity in Year 2, but Trust failed to
file a Sec. 642(c)(1) election to claim the deduction for taxable Year 1.
Trust requested an extension of time to make the Sec. 642(c)(1) election.
The Service ruled that under Reg. 301.9100-3 of the Procedure and
Administration Regulations, the Commissioner may grant an extension for
Trust to make the Sec. 642(c)(1) election. Sec. 642(c) provides that an
estate or trust may claim a deduction (from gross income) for any amount
paid for a Sec. 170(c) charitable purpose during the taxable year. The
charitable contribution must be made pursuant to the governing instrument.
If the contribution is paid after the close of that taxable year but on or
before the last day of the succeeding taxable year, an election to treat
the contribution as paid during the initial taxable year is permitted. This
election must be made not later than the federal income tax return due date
for the succeeding taxable year (including extensions) under Reg.
1.642(c)-1(b)(2). Reg. 301.9100-1(c) permits the Commissioner to grant a
reasonable time extension to make a regulatory election and the
Commissioner may do so if (1) the taxpayer acted reasonably and in good
faith and (2) granting relief will not prejudice government interest. See
Reg. 301.9100-3. The Commissioner granted Trust 60 days to file Sec. 642(c)
elections and stipulated the amended returns must be filed within the same
period.
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. Lucky Lucy was so
successful in the markets that she now manages only her mega-dollar
personal portfolio. Somewhat late in life, Lucy discovered the wonderful
world of philanthropy. She volunteered at her favorite charity and has
learned that giving someone in need a helping hand is even more gratifying
than making another million in the futures market. After reading in the
charity's weekly eNewsletter about a charitable remainder trust, Lucy
called Clara Johnson, the gift planner for favorite charity.
Lucy recently 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 $3 per share. Lucy
thinks that the stock could move much higher next year, but she would like
to receive a deduction this year. She suggested to Clara that she might
fund a unitrust, serve as self-trustee and hold the stock for another two
years. Would this plan work? May Lucy serve as trustee? Is it permissible
to hold the highly speculative stock in the unitrust?
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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