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August 31, 2009
Funny Quote of the Day à We
didn't lose the game; we just ran out of time. ~ Vince Lombardi
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Indiana Community Foundations
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August 31, 2009
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GiftLaw
eNewsletter - August 31, 2009
- WASHINGTON HOTLINE
- PLR THIS WEEK
- ARTICLE OF THE MONTH
- CASE OF THE WEEK
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WASHINGTON
HOTLINE
Healthcare Reform by
the "Gang of Six"
Tax Quote of the Week
"Complexity does not enter the tax code so much
out of malevolence as through misguided reform efforts and excessive
demands made on tax laws as the vehicle for implementing public
policy."
-- Sheldon D. Pollack
Healthcare Reform by the "Gang of Six"
Six Senators (who are now being called the "Gang
of Six") continue to labor during a hot August over healthcare reform.
Three Democrats and three Republicans are considering plans that may impact
a major part of the entire American economy.
Sen. Max Baucus (D-MT), Sen. Kent Conrad (D-ND) and
Sen. Jeff Bingaman (D-NM) are joined by Sen. Charles Grassley (R-IA), Sen.
Olympia Snowe (R-ME) and Sen. Mike Enzi (R-WY).
Under Senate rules, it is possible for a small group
of Senators to block most legislation. While the budget legislation may be
passed by a vote of 51 Senators, the complexity of health reform suggests
that it may be difficult under Senate rules to use that method. Therefore,
Senator Baucus has been attempting to create a bipartisan plan with six
members of the Senate Finance Committee.
Because the healthcare reform is expected to cost
approximately $1 trillion over 10 years, the most challenging part of a
healthcare reform bill is determining the new taxes necessary to pay for
reform. The House healthcare reform bill creates a surtax of 5.4% on
taxpayers with incomes over $1 million, with a lower surtax of 1% to 3% on
individuals with incomes over $350,000 and over $500,000, respectively.
Because of the reluctance by House leaders to move the healthcare tax to
lower brackets, the upper level bracket was raised from an initial proposed
rate of 3% to 5.4%.
The Senate "Gang of Six" has so far been
reluctant to adopt the House strategy of taxing high-income persons. It
generally has favored the concept of a tax on "gold-plated"
healthcare plans. Because of union opposition to that tax, the current
proposal is for insurance companies rather than individuals to pay this
tax. To date, the White House has not been willing to support a tax
deduction limit on healthcare plans.
Editor's Note: The "Gang of Six" has
been conducting weekly conference calls and members have maintained contact
during August. The primary challenge for crafting the healthcare bill is
determining an acceptable method of producing approximately $600 billion in
new tax revenue. The balance of the $1 trillion cost is also controversial
because it involves savings in Medicare and Medicaid.
Director Orszag Promises "Fiscally
Sustainable Path"
On August 25, 2009, the White House Office of
Management and Budget (OMB) released an updated economic forecast. Based
upon the deepening recession, OMB predicts that the deficit over 10 years
has increased from the projected $7 trillion of May 2009 to a present
estimated number of $9.05 trillion.
The review by Director Orszag includes both bad news
and good news. The bad news is that the deficit projection has increased by
$2 trillion. Director Orszag states that this is due to "a
deeper-than-expected recession." With the recession, there are
increases in expenditures for unemployment insurance and food stamps that
increase the deficit.
The good news is that the bank bailout costs are
lower than projected. The costs for the bank bailout are reduced by $262
billion. With this savings, the projected deficit this year is reduced from
$1.84 trillion to $1.58 trillion. The lower deficit is a reflection of the
improving bank status. While there still are record levels of foreclosures
for 2009, bank reserves and profits have improved substantially during the
last three months.
Senate Finance Chair Max Baucus noted, "Today's
budget reports serve as a clear illustration that healthcare spending is
out of control and threatens the healthcare programs families rely on, such
as Medicare and Medicaid. We simply can't afford these skyrocketing
healthcare costs and that's a key reason why healthcare reform is so
important."
The ranking Republican on the Senate Budget Committee
Judd Gregg (R-NH) responded by stating, "While the U.S. healthcare
system does need to be reformed, we cannot ignore the fiscal realities of
our situation. We are in a very deep budgetary hole, and the CBO has
confirmed that the current Democratic plans unveiled so far would only
increase government spending on healthcare, not lessen it."
Editor's Note: With the very large impending
deficit, Sen. Kent Conrad (D-ND) continues to propose a bipartisan
committee similar to the base-closing committees. The bipartisan committee
would set targets for expenditures and taxes and propose a solution that
would be subject to a yes or no vote by the House and the Senate. Sen.
Conrad believes that this may be the best method to resolve the budget
deficit.
State Property Law Protects LLC Discount
In Suzanne
J. Pierre v. Commissioner; 133 T.C. No. 2: No. 753-07 (24 Aug
2009), the Tax Court upheld a check-in-the-box LLC discount.
Suzanne Pierre received a $10 million cash gift from
a wealthy friend in 2000. She decided to create a trust for her son and a
second trust for her granddaughter. Pierre created the Pierre Family LLC
under the laws of the state of New York on July 13, 2000.
On September 15, 2000 she transferred $4.25 million
in cash and securities to Pierre LLC. Twelve days later on September 27,
2000, she gave a 9.5% interest in Pierre LLC to each of the two trusts and
sold for a promissory note a 40.5% interest to each trust. At that time, she
had effectively transferred 100% of her interest. Her appraiser, James
Shuey, determined that the LLC under New York law should qualify for a 30%
discount, although Pierre admitted that an improper discount of 36.55% was
used in filing IRS Form 709, United States Gift Tax Return.
The IRS contested the gift tax return discounts and
claimed that "check-in-the-box" regulations caused the
single-member LLC to be a disregarded entity. Therefore, the gifts were
valued at the underlining asset value. With no discount, the IRS deficiency
was $1,130,216.11 for gift tax and $24,969.19 for generation skipping
transfer tax.
The Tax Court majority of 10 judges determined that,
historically, property rights have been defined by state law. Because
"state law creates legal interests and rights" in property and
Pierre LLC was a valid entity under New York law, the 30% discount
reflected the rights and limitations of that LLC. While the
check-in-the-box regulations create a disregarded entity for income tax
purposes, the Tax Court majority determined that state law still determines
property rights. The discounts therefore are permitted.
In a dissenting opinion, Judge Halpern indicated that
he and five other judges would interpret the "disregarded entity"
regulations literally and would also disregard the LLC for gift tax
valuation purposes.
Editor's Note: In a concurring opinion, Judge
Cowen noted, "Congress has the ability to, and on occasion has opted
to, modify the willing buyer, willing seller standard." With the current
budget crunch in Washington, there are several bills in Congress that would
limit or eliminate LLC and FLP discounts for passive assets. Given the
continual quest for revenue that is likely to be a decade-long effort,
there will be extensive discussion in Congress of the potential for
reducing valuation discounts through legislation.
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 - 200932060 Scholarships
Not Taxable Expenditures
B is a private foundation within the meaning of Sec.
509(a) of the Internal Revenue Code. B decided to award scholarships to
high school seniors in the area. Scholarships will be available to any high
school senior attending a school in the area where B is located who: (i)
has at least a 3.0 grade point average; (ii) has been active in
extra-curricular and/or leadership activities; and (iii) has applied for
admission to C. The award process will be publicized and conducted
primarily though the counselors at the high schools. The scholarship
committee will not discriminate on the basis of religion, race, race,
gender or ethnicity. However, B has indicated that family members of any
officer, director or member of the scholarship committee are not eligible.
As an additional safeguard against misappropriation of scholarships, no one
with a family member who is a senior at one of the local high schools may
serve on the committee. The scholarship committee will: (i) verify the
recipient's enrollment; (ii) verify the accreditation of the institution or
program; (iii) rrequest any documentation the Selection Committee
determines is necessary to support the recipient's use of the funds; and
(iv) investigate if a recipient fails to file a report or respond to a
request for additional information. Furthermore, B will maintain records
regarding awardees, receipts from payments, accounting records and
evaluation materials.
Sec. 4945 imposes a tax on private foundations for
any "taxable expenditures" made. However, scholarships are not
classified as taxable expenditures under Reg. 53.4945-4(c)(1) of the
Regulations provided that the private foundation demonstrates that: (i) its
grant procedure includes an objective and nondiscriminatory selection
process; (ii) the procedure is reasonably calculated to result in
performance by grantees of the activities that the grants are intended to
finance; and (iii) the foundation plans to obtain reports to determine
whether the grantees performed activities that the grants are intended to
finance. Because B demonstrated to the Service's satisfaction that it
observes these requirements, the scholarship payments will not be
classified as taxable expenditures.
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
No Marital Deduction
Needed
Keith and Karen Crosby, ages 75 and 72, own a parcel
of undeveloped real estate that they have held since 1979. They purchased the
property for $10,000 and the current fair market value is approximately
$800,000. Their goal for this property was to transfer it to their two
children upon their passing, but they could use more income now. Since
their estate is approximately $2.5 million and each has an estate exemption
of $3.5 million (total of $7 million), they are not facing estate taxes.
They have not considered selling the property because
of the capital gains tax consequences, so they find themselves
"between a rock and a hard place" on how to increase their
income. They are both in relatively good health, but Keith did suffer a
heart attack seven years ago and Karen recently suffered a minor stroke.
They have both recovered nicely and are continuing to experience an active
lifestyle which involves a good deal of traveling.
Keith and Karen are active philanthropists and were
recently presented an award which honored their years of service and
financial support of a local charity. They are interested in leaving a
bequest to this favorite charity, but would also like to couple this gift
with benefits for their children. Also, because they plan to travel more
extensively in the future, additional income would be a worthwhile
objective in their planning. In discussions with Susan Collins, the
Director of Major Gifts at favorite charity, she explained the concept of
funding a lifetime charitable remainder unitrust with the undeveloped real
estate. Susan then suggested that they could replace the asset by
purchasing insurance through a life insurance trust. By utilizing the
"Crummey" powers, the insurance could pass to the children free
of gift and estate tax.
Susan did not realize that because of Keith and
Karen's health history, they probably would not qualify for life insurance.
Therefore, since the replacement insurance idea is not available to Keith
and Karen, is there some other method to transfer value to the children and
also provide for charity?
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 31, 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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