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June 15, 2009
Life is 10% of what happens to me and 90% of how I
react to it.
John Maxwell
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Indiana Community Foundations
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June 15, 2009
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GiftLaw
eNewsletter - June 15, 2009
- WASHINGTON HOTLINE
- PLR THIS WEEK
- ARTICLE OF THE MONTH
- CASE OF THE WEEK
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WASHINGTON
HOTLINE
Will Pay-Go Reduce the
Deficit?
Tax Quote of the Week
"[T]here are dangers in having the tax laws up
in the air all the time . . . ."
-- Martin Neil Baily
Will Pay-Go Reduce the Deficit?
On June 9, 2009, President Obama publicly proposed a
reinstatement of the "Pay-Go" principles. His press conference
was attended by many of the House "Blue-Dog" conservative
Democrats who have historically supported the pay-go system.
Under the proposed reinstatement of pay-go, the White
House indicates that a "new tax cut or entitlement program" must
be funded.
The proposed reinstatement of pay-go by President
Obama includes very large exceptions. These exceptions cover Medicare
payments to doctors, estate and gift tax, alternative minimum tax and the
2001 and 2003 tax cuts.
Speaker Pelosi supported pay-go and noted that the
existence of pay-go during the 1990s led to "fiscal discipline"
that produced an "economic boom with rising household incomes."
The Blue-Dog Democrats in the House have continually
emphasized the importance of fiscal discipline. Rep. Jim Cooper (D-TN) is
Vice-Chairman of the Blue-Dog Budget Committee and noted that it's
essential to restore pay-go or America's competitiveness could be damaged
"for generations."
Republican response to President Obama's version of pay-go
was not enthusiastic. Sen. Charles Grassley (R-IA) noted that pay-go sounds
reasonable but "in practice it's been a failure." The exceptions
to pay-go are so large that it fails to provide any fiscal discipline.
Sen. Kent Conrad (D-ND) is the very influential Chair
of the Senate Budget Committee. He expressed "serious concerns"
with the exceptions of President Obama proposals under pay-go. He calls the
nation's "dire budget outlook" a mandate for restoring fiscal
discipline through prompt action.
Editor's Note: America is now on track for the
national debt to increase to 70% of gross domestic product by 2011. This
will be the highest debt level in the past six decades. With a potential
$10 trillion in new deficits over the next decade, Sen. Conrad is now
explaining that there are some difficult budget choices ahead. The pay-go
debate is a start, but there will be much more contentious budget debates
to follow.
Potential Healthcare Bill Tax Increases
Senator Max Baucus (D-MT) and Senator Ted Kennedy
(D-MA) are both working with their respective Senate committees on major
healthcare reform bills. Because Senator Baucus is Chair of the Senate
Finance Committee, his bill deals directly with the potential tax increases
that will be necessary to fund healthcare reform. Sen. Baucus promises a
draft of his healthcare reform bill by June 17, 2009.
At the request of Sen. Baucus, the Joint Committee on
Taxation provided estimates of the revenue raised with seven potential tax
increases. They are as follows:
1. Limit Healthcare Insurance Deduction -- At
present, employers deduct healthcare insurance costs and employees are not
taxable. The proposal is to limit the exclusion for the employee to the
federal employee's health benefit plan amount. Any expenditure above this
amount would be taxable to employees.
2. Cap the Healthcare Exclusion -- For higher
income individuals with incomes above $200,000 (joint) or $100,000
(single), the exclusion would be limited to a Blue Cross/Blue Shield
"standard option." Excess healthcare costs by employers will be
taxable to employees.
3. Exclude 50% of Healthcare Insurance -- Of
the amount the employer spends on health insurance, one-half would be
taxable to the employee.
4. Repeal Healthcare Itemized Deductions -- At
present, medical expenses that exceed 7.5% of adjusted gross income may be
deducted. This healthcare itemized deduction would be repealed.
5. Repeal Flexible Spending and Healthcare
Reimbursement Accounts -- Many companies have a plan that allows
employees to set aside funds to pay for medical expenses. These
contributions would no longer be deductible.
6. Tax on Soft Drinks -- There would be a
three cent tax on each 12 ounce sugar-sweetened beverage.
7. Alcohol Tax -- A $16 per proof gallon tax
would be levied on all alcoholic beverages.
Sen. Baucus and Sen. Charles Grassley (R-IA) both
acknowledged that any of these tax increases will be very controversial.
While not all of the potential tax increases will pass, there will need to
be a very substantial tax increase to pay for healthcare reform. If the
marginal tax rates also increase in 2011 for higher-income taxpayers, it is
possible that losing the exclusion on part of healthcare coverage could
push the top effective federal tax bracket well over 40%.
Climate Bill Would Tax Greenhouse Gas Emissions
The House Ways and Means Committee members are now
considering the climate bill introduced by Henry Waxman (D-CA) and Rep.
Edward Markey (D-MA). The climate change bill creates a cap on greenhouse
gas emissions.
Power companies, industry and other emitters of
greenhouse gas would be permitted to purchase emission permits. A portion
of the permits would also be given away. The initial estimate for tax
revenue produced by cap-and-trade carbon permits is $165 billion over ten
years.
The inevitable result of the additional cost for
permits for power companies will be higher electric and other utility costs
for consumers. These higher energy costs will be a significant burden for
middle-income and low-income families.
To reduce the impact of higher energy costs, Rep.
Waxman now proposes to offer refundable tax credits to low income persons.
He proposes a refundable credit for persons with incomes below $6,000 to
offset the increased energy costs.
Speaker Nancy Pelosi (D-CA) has requested a completed
bill from the Ways and Means Committee by June 19, 2009.
Applicable Federal Rate of 2.8% for June -- Rev.
Rul. 2009-16; 2009-22 IRB 1 (18 May 2009)
The IRS has announced the Applicable Federal Rate
(AFR) for June of 2009. The AFR under Sec. 7520 for the month of June will
be 2.8%. The rates for May of 2.4% or April of 2.6% 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 - 200922061
Endowment Units Not UBTI
M, a tax-exempt educational organization, is an
irrevocable remainder beneficiary and serves as the trustee of a number of
charitable remainder trusts (CRTs). In an effort to receive the best
possible return on trust investments, M proposes to invest CRT proceeds in
its endowment. Most of the endowment earnings consist of passive
investments, though some are debt-financed, resulting in unrelated business
tax. M proposes to allow the CRTs to purchase "units" in its
endowment. While the CRTs would not have any ownership rights to the
endowment's underlying assets, they would receive periodic payments based
on the units owned by each. Thus, each CRT would receive an investment
return equal to that of the M endowment. M requested a ruling that the
issuance of endowment units would not result in the imposition of unrelated
business income tax to the CRTs.
In order for there to be unrelated business taxable
income (UBTI), three factors must be present. First, the income must be from
a trade or business. Second, the trade or business must be regularly
carried on. And third, the conduct of the trade or business must not be
substantially related to the exempt purpose of the organization.
The Service ruled that if M were to charge a fee for
investment advice or management of the CRTs endowment units, the service
would rise to the level of a trade or business regularly-carried on.
However, M is not proposing to charge a fee. Therefore, no UBTI would be
created under the arrangement as proposed. Finally, because the CRTs will
have no ownership in the assets of the endowment, the relationship between
M and the trusts does not establish a partnership or agency agreement.
Income earned by the CRTs will be all ordinary income; no UBTI will flow
through the endowment to the CRTs.
To view the full PLR Click
Here.
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ARTICLE
OF THE MONTH
Unitrust to Gift Annuity
Rollover
With major changes in the stock and bond markets the
past year, some unitrust donors may prefer the simplicity and stability of
a gift annuity. The fixed payouts and knowledge that the full assets of the
issuing charity (which often are millions or tens of millions of dollars)
stand behind the gift annuity permit the donors to sleep soundly at night.
A good solution is to consider taking the income
value of a unitrust or annuity trust and exchanging that amount for a gift
annuity. But what are the rules or guidelines for a unitrust to gift
annuity conversion?
In PLR 200152018, a unitrust donor was interested in
rolling over the income interest of the unitrust into a gift annuity. The
donor had created a standard 5% unitrust that made payments quarterly for
his lifetime. Apparently, a single charity was a remainder recipient and
held a vested interest.
The charity desired to use the remainder value as a
current gift. While in the past some charities have borrowed against a
vested remainder interest for a current project, the donor and charity
proposed a better solution. The donor desired to receive income and was not
willing to gift the entire income interest to the charity at present.
However, if the income interest from the 5% unitrust could be converted to
a gift annuity, the donor could receive a reasonable income stream for life
and the charity could use the remainder value immediately for a current
project.
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 10
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. For instance, about three months ago, Karl discovered a
great investment property. It was a "fixer-upper" commercial
building in a great area. While other nearby buildings sold for over $2
million, the seller needed to sell quickly and was asking just $1 million.
The condition of the building turned many buyers
away. It was being sold "as-is." But Karl was not deterred. He
could see great potential with the building and knew it would not take much
to get it to market condition. Therefore, Karl swooped in, bought the
building for $1 million and instantly hired contractors to refurbish the
place.
After three months of hard work refurbishing the
building, the place looked like new! In the end, Karl invested $250,000 in
the building bringing his total investment in the property to $1.25
million. One month after the completion of the work, Karl was contacted
informally by a company that expressed an interest in the building - a $2
million interest! This was no surprise to Karl. He knew the building was
another great buy.
There was one downside to the idea of selling - the
big tax bite on Karl's gains. However, after Karl learned about the
benefits of a FLIP CRUT, he eagerly wanted to move forward. It looked like
the perfect solution. (See Part 1 for this discussion.) However, there was
still one question in Karl's attorney's mind.
Given Karl's real estate investment activity over the
years, could the Service argue that Karl is a developer or dealer of real
estate? More importantly, could the Service win on this argument? What is
the downside if Karl is classified as a developer or dealer?
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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June 15, 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
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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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