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August 17, 2009
Nobody can go back and start a new beginning, but anyone can
start today and make a new ending.
~Maria Robinson
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Indiana Community Foundations
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August 17, 2009
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GiftLaw
eNewsletter - August 17, 2009
- WASHINGTON HOTLINE
- PLR THIS WEEK
- ARTICLE OF THE MONTH
- CASE OF THE WEEK
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WASHINGTON
HOTLINE
Deficit Reaches $1.3
Trillion in Ten Months
Tax Quote of the Week
There may be liberty and justice for all, but there
are tax breaks only for some.
-- Martin A. Sullivan
Deficit Reaches $1.3 Trillion in Ten Months
According to projections from the Congressional
Budget Office (CBO), the deficit for the first ten months of Federal
Government Year 2009 was $1.3 trillion.
The fiscal year of the federal government runs from
October 1, 2008 to September 30, 2009. The first ten months of that fiscal
year ended on July 31, 2009.
For that ten month period, receipts were down by 17%
($350 billion) compared to the prior year. In addition, spending increased
substantially by $880 billion compared to the prior year.
Much of the new spending was the direct result of the
financial crisis in the fall of 2008. The Troubled Asset Relief Program
(TARP) expenditures to support banking institutions were $169 billion. In
addition, $83 billion was spent to support government loan enterprises
Fannie Mae and Freddie Mac. Both institutions held large numbers of
subprime loans that have subsequently gone into default.
For the ten month period, the government received
approximately $1.7 trillion in revenue and spent $3 trillion on all
government programs. The difference produced the net deficit amount of $1.3
trillion.
Editor's Note: Treasury Secretary Geithner
indicated on August 14, 2009 that the financial crisis is now passing. He
promised that the federal government would act to protect the public from the
banking system "reverting to past practice." In the future, banks
wiill operate with "much less leverage" and "much more
conservative liquidity cushions."
With the recovering economy and the large deficit,
the IRS will now refocus its efforts to collect all potential tax revenue.
Congress will also be seeking new and creative methods to collect
additional revenue through changes in the income tax and deduction rules.
IRS and UBS Agreement to Disclose Tax Evaders
There has been an ongoing struggle between the IRS
and Swiss bank UBS. The IRS filed a John Doe summons in the U.S. District
Court for the Southern District of Florida and sought information on 52,000
UBS accounts. The IRS contends that the U.S. account holders include many
who are not reporting their income and paying appropriate tax.
United States citizens with a foreign bank account
with assets in excess of $10,000 must disclose that fact on Schedule B,
Part III of their IRS Form 1040. A failure by a U.S. citizen to disclose a
foreign bank account may constitute a felony punishable by imprisonment for
up to three years and a fine of $250,000.
After extensive negotiations between the United
States and the Swiss Government, a compromise was reached this week. IRS
Commissioner Doug Shulman noted, "We are pleased to have initiated an
agreement with the Swiss Government which protects the United States
Government's interests. We will release more details when the Swiss
Government signs the agreement as early as next week."
Under the proposed agreement, the Swiss will continue
to claim that their law appropriately protects investors but that they are
complying with a provision of Swiss law that permits the disclosure of
names of those persons likely to be tax evaders. UBS will disclose to the IRS
approximately 5,000 names of those U.S. citizens who are believed to be
committing tax fraud.
As a result of the agreement between the IRS and UBS,
Judge Alan Gold of the U.S. District Court for the Southern District of
Florida declared the John Doe case administratively closed. However, he and
other U.S. District Judges will be actively processing the cases for U.S.
citizens who decide to disclose their UBS accounts to the IRS.
Therefore, U.S. taxpayers with overseas accounts are
now faced with a challenging decision. They are permitted under IRS
guidelines to come forward voluntarily until September 23, 2009. If they
come forward before that time and enter into a plea agreement with the IRS,
they will receive reduced criminal and civil penalties.
However, the penalties plus taxes and interests could
still require distribution of almost the entire foreign account to the IRS.
Therefore, individuals with UBS accounts are faced with a rather difficult
decision.
Editor's Note: Two U.S. citizens entered plea
agreements this week with the IRS. The agreements to plead guilty to tax
fraud note that the IRS will recommend reduced criminal penalties to the
U.S. District Court for the Southern District of Florida. However, under
the plea agreements the defendants are potentially still liable for three
years of prison and a fine up to $250,000. The defendants also must
cooperate with the IRS in determining of the civil liability and agree to
pay 50% of the highest year balance in the foreign account as a penalty. In
one of the two cases with plea bargains, the amounts involved in the UBS
account exceeded $10,000,000.
Supporting Organizations Become Regular Public
Charities
In the Pension Protection Act of 2006, P.L. 109-280
(PPA), Congress created a number of restrictive provisions that affected
Sec. 509(a)(3) supporting organizations. One of the specific limitations is
that IRA rollover gifts of up to $100,000 per year were permitted for Sec.
509(a)(1) organizations, but not permitted for Sec. 509(a)(3) supporting
organizations.
As a result, many supporting organizations desired to
change status to Sec. 509(a)(1) in order to receive IRA rollover gifts.
Most supporting organizations with a diverse donor base were able to
qualify as Sec. 509(a)(1) regular charities. The principal standard for
509(a)(1) qualification is that at least one-third of the gifts received
are from donors who give 2% or less of the total revenue. This is termed
the "broad public support" test and many supporting organizations
with a large donor base qualify for exemption under this test.
In Announcement 2009-62; 2009-33 IRB 1 (10 Aug 2009),
the IRS updated procedures for supporting organizations requesting a change
to regular public charity status under Sec. 509(a)(1) or Sec. 509(a)(2).
On the updated Form 990, Return of Organization
Exempt from Income Tax, issued September 9, 2008, the IRS included a more
comprehensive description of public support over a five-year period.
Therefore, the announcement aligns the request for qualification of public
status by including this five-year period.
A request for reclassification includes the
following:
1. A bold, underlined or all capitals font indicating
"REQUEST FOR DETERMINATION AS TO PUBLIC CHARITIES STATUS."
2. The statement requesting reclassification to Sec.
509(a)(1) and Sec. 170(b)(1)(A)(vi) or Sec. 509(a)(2).
3. A copy of Form 990 with the completed Schedule A,
Public Charity Status and Public Support, or supporting information for the
past five tax years.
The request must be signed by an officer, director,
trustee or other authorized official under penalty of perjury.
Applicable Federal Rate of 3.4% for August -- Rev.
Rul. 2009-22; 2009-31 IRB 1 (21 Jul 2009)
The IRS has announced the Applicable Federal Rate
(AFR) for August of 2009. The AFR under Section 7520 for the month of
August will be 3.4%. The rates for July of 3.4% or June of 2.8% 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 at clicking
here.
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PLR
THIS WEEK
PLR - 200932003 Reformation
of CRT Does Not Violate Sec. 664, Not Self-Dealing
Taxpayer created a charitable remainder unitrust
(CRUT) under Sec. 664 of the Internal Revenue Code and funded it with
highly appreciated and illiquid property. Taxpayer desired for the CRUT to
be drafted as a net income plus makeup charitable remainder unitrust
(NIMCRUT) with a "flip" provision upon the sale of the illiquid
assets. However, the attorney whom drafted the trust did so without the
flip provision, resulting in the trust operating as a NIMCRUT for its
entire term. Charity, acting under its role as trustee and with permission
from Taxpayer, petitioned the trial court to allow a reformation of the
trust to conform to Taxpayer's initial wish of a flip provision. The trial
court allowed the reformation and the trustee requested a letter ruling
that the reformation would not violate the CRT requirements of Sec. 664 and
that the reformation would not violate the self-dealing rules of Sec. 4942.
The Service ruled that Sec. 1.664-3(a)(4) prohibits
the amendment or revocation of a CRT after its creation. However, Sec. 664
is not violated if the reformation is made in order to reform the trust to
the grantor's intent. The reformation meets the requirements under Sec.
4942(a)(2) and therefore does not violate the self-dealing rules.
Editor's Note: The Service cites Commissioner v. Estate of Bosch. This case
established that the Service is not bound to follow the ruling of state
trial courts underlying issues of state law. Rather, the Service is only
bound to follow the rulings of the highest courts in each state. When
determining if a trial court's ruling should be accepted and where the
highest stat court has not rules, the Service will give "proper
regard" to the trial court but determine for itself what the state law
is. More often than not, the Service will reach the same result as the
local trial court.
To view the full PLR Click
Here.
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ARTICLE
OF THE MONTH
Current Planned Gifts
II - UT, DAF & AT
The combination of a charitable remainder unitrust
and a donor advised fund (DAF) enables a very flexible plan. This might appropriately
be called a "Personal Foundation." A donor may create a
charitable remainder trust. So long as there is no pre-arrangement, the
donor may then make annual distributions from the charitable trust to the
DAF. The trust instrument could include a statement as follows:
"If a grantor is a current income recipient,
then a grantor shall retain the right to direct the trustee to distribute
an undivided percentage of trust assets to qualified exempt charities on
the last day of any trust taxable year."
With this sentence and the right to select the
charities, a unitrust grantor may decide to distribute part or all of the
trust principal each year. It is preferable for this power to be exercised
at the end of the taxable year in order not to affect the calculation of
the unitrust payout. The trust on January 1 of the following year will then
be reduced by the amount of the transfer to the DAF.
The flexibility of this plan is very high. If the
trust increases in value, that growth may be transferred to a DAF. A donor
is able to make the decision concerning the amount of the transfer at the
end of each calendar year. The funds in the DAF may then be distributed
with the recommendation of the donor to a wide variety of qualified
charitable purposes.
Because the DAF is maintained by a public charity,
the donor receives the benefit of the public charity income tax deduction
limits of 50% for cash or 30% for appreciated property. In addition, the
donor benefits from a full fair market value charitable deduction. Each
year when the gift is made, the donor will receive a charitable deduction
for the value of the income interest. See PLR 9550026.
To view the full Article of the Month Click
Here.
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CASE
OF THE WEEK
The Gas Guzzler's
Deduction, Part 2
Brandon Bigtop loves his truck, which he
affectionately named "the Beast." It was a gift for Brandon's
eighteenth birthday. It is painted bright red and is two tons of metal,
muscle and noise. Indeed, many neighbors would grumble as Brandon drove by
because the rumbling engine could be heard three blocks away. As you can
imagine, eighteen-year old Brandon was in truck heaven.
Brandon is now twenty years older and a university
professor, but he never could part with his beloved truck. So, the Beast
now sits quietly in the driveway collecting dust and serving as merely an
"eye sore" according to his wife. Every once in a while, Brandon
will take the truck out for a spin but the nine miles per gallon truck make
it a costly joy ride. Plus, Brandon still gets the glares from neighbors as
he passes through the neighborhood, something he does not relish anymore.
After much deliberation regarding what to do with the
Beast, Brandon decides to give his truck to a local charity. It is time to
part ways with his old childhood companion. Before deciding to contribute
the truck to charity, Brandon checked with his tax advisor regarding the
tax benefits of his gift. Brandon wanted to make sure he received the
maximum tax benefit from his gift while at the same time not risking an IRS
challenge to his gift.
What are the tax rules for gifts of automobiles? The
local charity plans to hold and use the truck in further of its exempt
purpose. Does this affect Brandon's charitable deduction in any way?
To view the solution to this Case of the Week Click
Here.
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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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Indiana Community Foundations
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August 17, 2009
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Thank
you for your interest in the Community Foundation of Grant County. To
contact us, please call 765.662.0065 or check out our website at www.comfdn.org.
If you do not wish
to receive future emails, please click
here to unsubscribe.
Thank you for your
continued interest in a better quality of life in Grant County.
Yours in Philanthropy,
Elizabeth A. Wright and Dawn M. Brown...
on behalf of the entire
Community Foundation Team
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