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July 27, 2009
Those who dream by day are cognizant of many things which
escape those who dream only by night.
~Edgar Allan Poe
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Indiana Community Foundations
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July 27, 2009
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GiftLaw
eNewsletter - July 27, 2009
- WASHINGTON HOTLINE
- PLR THIS WEEK
- ARTICLE OF THE MONTH
- CASE OF THE WEEK
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WASHINGTON
HOTLINE
Healthcare Reform on
Hold Until Fall
Tax Quote of the Week
The corporate income tax is one of the best examples
in American political history of the law of unintended consequences. It was
originally intended as a means to tax the rich, but it quickly became one
of the prime means by which the rich have avoided taxes.
-- John Steele Gordon
Healthcare Reform on Hold Until Fall
Following approval of the America's Affordable Health
Choices Act of 2009 by the House Ways and Means Committee, Speaker Nancy
Pelosi (D-CA) planned to vote on the healthcare bill by the end of July.
The House healthcare bill is funded by a surtax of up to 5.4% on incomes
over $1,000,000. Speaker Pelosi suggested that she may be willing to remove
the surtax on lower incomes in the current bill.
Earlier in the week, Sen. Max Baucus (D-MT) indicated
that he was close to an agreement on the tax provisions for funding the
Senate version of healthcare reform. He and other Senators met on July 23
with Douglas Elmendorf, Director of the Congressional Budget Office, and
Thomas Barthold, Chief of Staff of the Joint Committee on Taxation, to
review tax options.
However, the Senate Finance Committee was unable to
finalize a bipartisan agreement on healthcare tax provisions. Sen. Baucus
and Sen. Budget Chair Kent Conrad have supported a cap on healthcare
insurance deductions, but President Obama and Speaker Pelosi continue to
oppose a limit on healthcare deductions.
President Obama accepted the inevitable delay. He
stated, "My attitude is that I want to get it right, but I also want
to get it done promptly. And so as long as I see folks working diligently
and consistently, then I am comfortable with moving a process forward that
builds as much consensus as possible."
Editor's Note: There continues to be
differences of opinion on who will pay the taxes necessary for healthcare
reform. The House and the White House prefer new taxes on higher-income
Americans. Centrist Senators of both parties are seeking to find tax
options within the healthcare system. The required new tax revenue to fund
universal healthcare coverage totals approximately $600 billion. With
unemployment nearing 10% in many states, this level of new taxation is a
challenge for Congress.
Treasury Final Regulations on ePostcard Return For
Small Nonprofits
In T.D. 9454; 74 F.R. 36395-36397 (23 July 2009), the
IRS published final regulations that require smaller nonprofits with normal
gross receipts under $25,000 to file electronic information returns.
Under Sec. 6044(a)(1), smaller nonprofits must
annually file an electronic return with the following information:
The legal name of the organization;
Any name under which the organization operates or
does business;
The organization's mailing address and Internet Web
site address (if any);
The organization's taxpayer identification number;
The name and address of a principal officer;
Evidence of the continuing basis for the
organization's exemption from the filing requirements under section
6033(a)(1); and
Additional information necessary to process the
notification.
The purpose of this regulation is to require smaller
nonprofits to have annual electronic contact with the IRS. If the smaller
nonprofit does not want to file the electronic information return, it may
elect to file Form 990-EZ, "Short Form of Return of Organization
Exempt From Income Tax."
Not all small nonprofits are required to file an
annual electronic return. Those exempted from filing include churches, an
integrated auxiliary of a church, an exclusively religious activity of any
religious order, a church mission society with over one-half of activities
in foreign countries, a church educational organization below college level
and governmental units or affiliates.
Bankrupt Heir Still Owes Estate Tax
In David
Blain Carroll v. United States; No. 5:08-cv-01181 (6 May 2009), an
Alabama District Court affirmed a Bankruptcy Court determination that a
bankrupt heir who owed estate tax on his father's estate is not permitted a
release from that obligation.
David Carroll's father, George Carroll, died on March
17, 1998. He and his siblings were co-executors and elected to make
installment payments under Sec. 6166 on the estate tax of $2,554,547. The
payments were to continue until 2012, but were halted in 2004. Total
payments were approximately $1.2 million.
Between the years 1998 and 2006, David Carroll and his
brother, Stephen Carroll, received from the estate shares of stock held by
the estate in two close corporations: United Gunite, Inc., and Pressure
Concrete, Inc. David became President of Pressure Concrete, Inc., and
Stephen was President of United Gunite, Inc. In 2001, Stephen Carroll was
charged with and subsequently pled guilty to "felony bribery of a
public official." Substantial assets were transferred from the estate
to his company United Gunite. It currently has no assets.
David Carroll controlled Pressure Concrete. On
February 28, 2004, he transferred the last of the estate's liquid assets --
$733,613.23 in cash -- to a bank account owned by Pressure Concrete. This
cash infusion was required to ensure Pressure Concrete's continued
existence. In 2006 David purchased Stephen's stock in Pressure Concrete for
approximately $29,500. He also issued Pressure Concrete checks totaling
$25,000 to the "University of Alabama Athletic Dept. -- Tide
Pride" for the purchase of football tickets. The court suggested that
this payment while under financial duress is proof that, "in this
State, Alabama football is a secular religion promoting misplaced and false
values." Shortly thereafter, Pressure Concrete failed.
David Carroll filed for bankruptcy and sought to be
released from his estate tax obligation. He claimed that the debt should be
discharged because: (1) the value of the estate was artificially inflated
for tax assessment purposes; (2) Pressure Concrete failed because he was
not prepared "to handle the business"; and (3) he is broke.
The Court stated that "his arguments are not
relevant to the issue before this court -- i.e., whether the Bankruptcy
Court erred in its holding that the tax debt is excepted from discharge
pursuant to 11 U.S.C. Sec. 523(a)(1)(C)." Tax debts are not discharged
if "the debtor . . . willfully attempted in any manner to evade or
defeat such tax." 11 U.S.C. Sec. 523(a)(1)(C). Because David Carroll
as executor transferred the sum of $733,613.23 from his father's estate
(the last of the estate's liquid assets) to his struggling company, he
satisfies the "conduct requirement" of Sec. 523(a)(1)(C). The
estate tax debt is not discharged through bankruptcy.
A Nonprofit "Church" Fails Fourteen
Factor Test
In Final
Foundation of Human Understanding v. United States; No.
1:04-cv-01441 (21 Jul 2009), the Court of Claims held that the nonprofit
did not qualify as a church.
The Final Foundation of Human Understanding (FFHU)
exists to promote a form of meditation developed by Roy Masters and termed
"psychocatalysis." It received exempt status in 1970, but the IRS
denied status as a church in 1982. In 1987 the Tax Court ruled that it did
qualify as a church.
Following a church tax inquiry in 2001, the IRS again
determined that FFHU was not a church, and FFHU appealed. The sole issue
before the court is whether plaintiff qualifies as a church described in ?
170(b)(1)(A)(i). The fourteen factor IRS test for church status includes:
- Distinct legal existence;
- Recognized creed and form
of worship;
- Definite and distinct
ecclesiastical government;
- Formal code of doctrine and
discipline;
- Distinct religious history;
- Membership not associated
with any church or denomination;
- An organization of ordained
ministers;
- Ordained ministers selected
after completing prescribed studies;
- Literature of its own;
- Places of worship;
- Regular congregations;
- Regular religious services;
- Sunday schools for the
religious instruction of the young; and
- Schools for the preparation
of its ministers.
Some courts have determined
that some of the fourteen IRS criteria are relatively minor, but the
existence of an established congregation served by an organized ministry,
the provision of regular religious services and religious education for the
young, and the dissemination of a doctrinal code, are of central
importance. In addition, there is an "association test." A church
includes a body of believers or communicants who assemble regularly in worship.
To qualify as a church, "an organization must
serve an associational role in accomplishing its religious purpose."
During the tax years in question, the activities of FFHU lacked the
associational aspects which convinced the Tax Court to grant church status
to Foundation in its prior declaratory judgment action. FFHU no longer
provides religious services to an established congregation.
The extent to which FFHU brings people together to
worship is incidental to its main function which consists of a
dissemination of its religious message through radio and Internet
broadcasts, coupled with written publications. When bringing people
together for worship is only an incidental part of the activities of a
religious organization, those limited activities are insufficient to label
the entire organization a church.
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 annuuity, 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 click
here.
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PLR
THIS WEEK
PLR - 200928045
Tax-Exempt Status Revoked for Providing Private Benefit
Charity was a tax-exempt organization under Sec.
501(c)(3) and its principal activity was the maintenance of an Internet
site with articles, links to other sources and solicitation for
contributions in addition to advertisements. The Service reviewed content
from several pages of the site spanning three years. The site, in addition
to providing information and solicitations for contributions of Charity,
also contained advertisements for books, CDs and other merchandise of A,
the private business interests of Charity's creator, Director and
President. Additionally, Charity published a statement in opposition to a
candidate for public office on one of the pages of its site.
The Service revoked Charity's tax-exempt status
because Charity served private interests rather than exclusively public
interests and also intervened in a political campaign. Sec. 501(c)(3)
requires tax exempt organizations to be "organized and operated
exclusively for [charitable] purposes...no part of the net earnings of
which inures to the benefit of any private shareholder or individual, no
substantial part of the activities attempting...to influence legislation...
and which does not participate or intervene (including the publishing or
distributing of statement) in any political campaign on behalf of (or in
opposition to) any candidate for public office." 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.
Charity engaged in nonexempt and prohibited activities by promoting the
private business interests of its creator and President through its
Internet website and publishing a statement in opposition to a candidate
for public office as described in Reg. 1.501(c)(3)-1(c)(3(ii).
To view the full PLR Click
Here.
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ARTICLE
OF THE MONTH
Current Planned Gifts
I - Gift Annuities
Most planned gifts involve a transfer to charity at a
future time. For example, a charitable gift annuity, a charitable remainder
trust, a charitable annuity trust, a pooled income fund or a life estate
all involve a gift at a future time.
However, presidents and CEOs of charities generally
prefer current gifts as opposed to planned gifts. All presidents and CEOs
have many goals and projects that require current funding. Therefore, the
gift planner will be very favorably received if he or she understands the
different methods for converting a planned gift into a current gift.
It is indeed possible for a charitable gift annuity,
a charitable remainder unitrust, a charitable remainder annuity trust, a
life estate agreement or a pooled income fund to be converted into a
current gift. The methods in some circumstances involve an outright
transfer to charity. In other situations, there is the retention of a life
income through a qualified plan. In most cases, there will also be
additional charitable income tax deductions.
When a gift annuity is created, the annuitant
receives the right to receive the payment for his or her lifetime. This
annuity stream is a property right under state law that may be valued.
Under the bargain sale rules, the donor has made a gift to charity but has
retained the balance of the value. While the annuity contract typically
does not allow assignment, there is an exception that allows assignment of
the annuity contract value back to the issuing charity.
To view the full Article of the Month Click
Here.
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CASE
OF THE WEEK
Exit Strategies for Real
Estate Investors, Part 16
Karl Hendricks was a man with the golden touch.
Throughout his life, it seemed every investment idea that he touched turn
to gold. By far, Karl was most successful with real estate investments. It
was definitely his passion.
Amazingly, Karl continued to buy and sell real estate
at the age of 85. His most favored tax strategy for buying and selling real
estate revolved around I.R.C. Section 1031. In short, Section 1031 allows
taxpayers to exchange "like-kind" investment property without the
recognition of gain or loss. This Tax Code provision does not exclude the
recognition of gross income indefinitely but merely defers the recognition
to a later date.
Karl currently owns a $2 million building that has
significant appreciation. He acquired the building pursuant to a Section
1031 exchange. In fact, this building is his fifth Section 1031 building.
Like many real estate investors, Karl just kept "trading up" over
the years. As a result, Karl's basis in his $2 million building is
extremely low.
Karl decided he wanted to sell the building, but he
did not want to pay the "ticking tax time bomb." In addition, he
did not want do another 1031 exchange because he decided he was ready to
retire from the real estate investment business.
Around this time, Karl learned of the benefits of a
FLIP CRUT, e.g. income tax deduction, bypass of capital gain and future
income stream. He especially liked the fact the FLIP CRUT could simply
invest in stocks and bonds, which was something a 1031 exchange would not
allow. Thus, after Karl learned about the benefits of a FLIP CRUT, he
eagerly wanted to move forward.
It looked like the perfect solution. However, Karl
did have one concern. Specifically, he acquired his building via a 1031
exchange from his son just nine months ago. Accordingly, Karl wonders if
there is any required holding period before he could dispose of his 1031
property into a FLIP CRUT?
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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July 27, 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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