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August 24, 2009
Wisdom is what's left after we've run out of personal
opinions.
~ Cullen Hightower
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Indiana Community Foundations
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August 24, 2009
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GiftLaw
eNewsletter - August 24, 2009
- WASHINGTON HOTLINE
- PLR THIS WEEK
- ARTICLE OF THE MONTH
- CASE OF THE WEEK
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WASHINGTON
HOTLINE
VAT on Back Burner
Tax Quote of the Week
"The less people know about how sausages and
laws are made, the better they'll sleep at night."
-- Otto von Bismarck
VAT on Back Burner
A value added tax (VAT) is now on the back burner in the
debate over paying for healthcare reform. However, two prominent Washington
figures have recently mentioned the possibility of a future VAT.
On August 2, 2009, the former Chair of the Federal
Reserve Board, Alan Greenspan, described a VAT as "the least worst
solution" for addressing the growing deficit.
In a discussion on healthcare and the deficit, Sen.
Kent Conrad (D-ND) indicated that a VAT must at least be "on the
table" if it is "carefully designed."
How does a VAT work? Assume that an item of furniture
is manufactured and sold by the manufacturer for $100 to a retailer. The
retailer then sells the item of furniture for $300 to a consumer.
With a VAT of 10%, the price from the manufacturer
would be $110. The manufacturer would pay $10 in VAT tax. When the retailer
sold the item, it would charge the consumer $330 and pay another $20 in
tax. The total additional tax by the consumer would be 10% or $30.
The major objection to the VAT is that it is a tax on
consumption. While it would potentially reduce the sale of some items
because the price is higher, it also has the disadvantage of being a tax on
low and middle-income Americans. Because low and middle-income persons tend
to spend a higher percentage of their income, their share of a VAT would be
substantial.
Currently, there is widespread opposition to an
increase in taxes on the middle class. The White House has indicated a
preference for tax increases to be on persons with incomes of $250,000 or
more. Both Republican and Democratic members of Congress are not favorably
disposed towards a tax increase on the middle class.
As a result, for the present, the VAT is on the back
burner in both houses of congress.
Editor's Note: The fact that there is any
discussion of a VAT is an indication that Congress is now starting to
consider the need for higher taxes. With the deficit at a record level,
Congress is actively seeking new ways to collect more tax revenue.
UBS Banker To Receive Reduced Sentence?
Former Swiss Bank UBS AG employee Bradley Birkenfeld
pleaded guilty to fraud on June 19, 2008. Mr. Birkenfeld agreed to
cooperate with the IRS in disclosing the efforts by UBS to enable U.S.
citizens to hide millions of dollars in Swiss bank accounts. In return, the
IRS has recommended a reduced sentence of 30 months in prison for
Birkenfeld.
Many of the U.S. citizens did not complete the
required FBAR form for disclosing overseas banks accounts in excess of
$10,000. They also committed tax fraud by signing their IRS Form 1040
without disclosing the foreign accounts.
Mr. Birkenfeld was directly involved in assisting a
California billionaire named Igor Olenicoff hide $200 million in overseas
accounts. Mr. Olenicoff pleaded guilty in December of 2007.
With the active cooperation of Birkenfeld, the IRS
was able to obtain an admission by UBS that it was a participant in the
efforts by U.S. citizens to commit tax fraud. UBS paid a fine of $780
million as a penalty for facilitating that tax fraud.
Subsequently, UBS released information on 250 U.S.
taxpayers. An additional agreement this week will apparently result in the
release of approximately 4,400 additional names.
Several tax fraud guilty pleas have already been
submitted. Robert Moran, Steven Michael Rubinstein and Jeffery Chernick
pleaded guilty in Florida. John McCarthy has been charged with similar
fraud in California.
On March 23, 2009, the IRS published a notice that
individuals who have not filed their required FBAR will be permitted an
opportunity to voluntarily disclose the overseas accounts until September
23, 2009. While the individuals will be subject to tax, interest and
penalties, there will also be a waiver of some criminal and civil penalties
for those who voluntarily disclose and pay very large amounts of tax and
penalties.
Editor's Note: The IRS states that voluntary
disclosure will waive or reduce the potential $250,000 fine and five years
in prison for committing tax fraud. Given the current $1.3 trillion U.S.
deficit, there is great pressure on the IRS to move aggressively in prosecuting
individuals who are hiding assets overseas and not paying income tax. It is
probable that there will be many plea agreements forthcoming now that Swiss
banks are releasing information on potential U.S. tax evaders to the IRS.
Applicable Federal Rate of 3.4% for September --
Rev. Rul. 2009-29; 2009-37 IRB 1 (18 Aug. 2009)
The IRS has announced the Applicable Federal Rate
(AFR) for September of 2009. The AFR under Sec. 7520 for the month of
September will be 3.4%. The rates for August of 3.4% or July 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.
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PLR
THIS WEEK
PLR - 200932040 Trust
Modified to Allow Private Foundation Remainder Beneficiary
Husband and Wife created and funded a tax-exempt
private foundation under Sec. 509(a) and a one-life charitable remainder
unitrust (Trust) with Son as trustee and the lifetime income beneficiary.
The donors named Foundation as the remainder beneficiary and also retained
the right to amend or revoke the interests of the remainder beneficiary and
to appoint another "qualified organization." Trust Article 13
defines a qualified organization as one described in Secs. 170(b)(1)(A),
170(c), 2055(a) and 2522(a).
When Husband passed away, Son discovered that Trust
contained a scrivener's error defining a "qualified organization"
as one described in Sec. 170(b)(1)(A) (public charity status). This
definition was inconsistent with the designation of Foundation as the remainder
beneficiary, an organization described in Sec. 170(c) (private foundation
status). Son submitted a petition to amend Trust to correct the error. The
Court permitted the modification pursuant to a favorable private letter
ruling. Son requested a ruling that Trust will be not be disqualified under
Sec. 664 due to the modification and that the right of revocation retained
by Husband will result in the value of his interest in the trust being
included in his estate and that it will qualify for a charitable estate tax
deduction under Sec. 2055.
The Service noted that under Rev. Rul 76-8, 1976-1
C.B. 179, a trust that qualifies as a charitable remainder unitrust may
permit the donor to retain the power to amend the remainder beneficiary
designation if the beneficiary must be a charitable organization described
in Secs. 170(c), 2055(a), and 2522(a). The ruling does not require that the
remainder beneficiary must also be an organization described in Sec.
170(b)(1)(A). Therefore, the Service ruled that the proposed modification
will not disqualify it under Sec. 664. Finally, the Service ruled that
under Reg. 20.2036-1(a), the estate of a decedent includes the value of
property in which the decedent retained or reserved an interest. Sec.
2055(a)(2) allows a deduction for charitable interests in qualified CRTs.
The Service also determined that the Trust qualifies as a CRT and that the
only interest retained by Husband was in regard to the charitable portion
of the trust, therefore the present value of the charitable interest is
included in his estate. Accordingly, Husband's estate will qualify for an
estate tax deduction under Sec. 2055 equal to the amount of Trust corpus
included in Husband's gross estate.
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 3
Brandon Bigtop loves his truck, which he
affectionately named "the Beast." It was a gift for Brandon's 18th
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,
18-year old Brandon was in truck heaven.
Brandon is now 20 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 9 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 that 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 and how
he should structure the gift. To his surprise, Brandon's tax advisor
suggested contributing the truck into Brandon's existing $100,000
charitable remainder unitrust (CRUT). While there was no capital gain
bypass benefit, there still should be a charitable income tax deduction and
increased CRUT income.
Can a truck or other tangible personal property be
contributed to a CRUT? What rules, if any, should Brandon be aware?
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 24, 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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