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IRS to Hire 4,500 New Revenue Agents

Tax Quote of the Week

[Twenty-one years after noting to the Senate Finance Committee that Section 341 contains a single sentence that is longer than the entire Gettysburg Address:]

The Senators expressed horror about this, but, needless to say, the sentence is still there and the Senators in question are not.

-- Peter L. Faber

IRS to Hire 4,500 New Revenue Agents

In the 2010 budget proposed by President Barack Obama, there is an increase of $400 million dollars for the IRS. The IRS plans to increase its enforcement budget to $5.5 billion out of the total $12.12 billion IRS budget.

IRS Commissioner Douglas Shulman has been emphasizing the importance of greater enforcement as a method of closing the "tax gap." Increased IRS funds will enable the hiring of 4,500 new revenue agents. IRS Deputy Commissioner Linda Stiff noted that these new agents are the "largest hiring initiative" in recent years.

Treasury Secretary Tim Geithner indicated, "This budget will also expand job-creating investments in local communities, strengthen our nation's security through financial intelligence, launch new initiatives to enforce the tax code and provide the recourses to address global economic challenges." The new IRS accountants, economists, statisticians and revenue agents are part of an ongoing program by President Barack Obama and Secretary Geithner to close the tax gap.

Editor's Note: With the record budget deficits, Washington faces three financial options. The first is to increase taxes, the second to reduce spending and the third to increase tax law enforcement. Because the taxpayers of the United States are among the most honest in the entire world and pay 85% to 88% of the total taxes due, it will be difficult to close the budget gap merely through greater enforcement. However, the current administration is clearly going to make an effort to increase tax revenues with 4,500 new IRS agents.

New IRS Actuarial Tables - Required by July 1, 2009

Under Sec. 7520, the IRS must publish an applicable federal rate each month that is used for charitable deduction purposes. In addition, Congress required the IRS to publish new actuarial tables at least every 10 years.

Because the first Sec. 7520 tables were published on May 1, 1989, Table 90CM was issued on May 1, 1999 and the new Table 2000CM is effective May 1, 2009. In order to permit sufficient time for the IRS to print Pubs. 1457, 1458 and 1459, there is an optional period for use of the tables. In Reg-107845-08 (1 May 2009), the IRS published proposed regulations to implement the new tables. The initial tables with explanation are published in T.D. 9448 (1 May 2009).

The IRS transitional rules for income, gift or estate taxes note that "if the date of a transfer is on or after May 1, 2009, but before July 1, 2009, the donor may choose to determine the value of the gift (and/or any applicable charitable deduction) under tables based on either Life Table 90CM or Table 2000CM."

Below are example deductions. With the lower deductions under Table 2000CM, your donors will generally desire to use the current tables until June 30, 2009 and then change to the required new tables for gifts after that date.

Agreement	Age(s)	Table 90CM	Table 2000CM
Gift Annuity	75	$41,697	$41,097
Gift Annuity	80/75	$35,614	$35,299
Unitrust (5%)	73	$57,659	$57,042
Unitrust (5%)	73/70	$43,914	$43,346

With the transition period, there also are options that involve the use of the applicable federal rate and the appropriate table. The following table illustrates the options:

AFR-Month	Table
March	90CM
April	90CM
May	90CM or 2000CM
June	90CM or 2000CM
July	2000CM

Editor's Note: Because the charitable deductions are greater for gift annuities and remainder trusts, nearly all calculations will use Table 90CM until June 30, 2009. On or after July 1, 2009, it will be mandatory to use table 2000CM. If calculations during May and June use Table 90CM, then the normal rule applies to permit use of the applicable federal rate from the current month or one of the prior two months for all calculations.

IRS Publishes Tax Rules on Insurance Policy Sales

In Rev. Rul. 2009-13; 2009-21 IRB 1 (1 May 2009) and Rev. Rul. 2009-14; 2009-21 IRB 1 (1 May 2009), the IRS published tax rules for surrender or sale of insurance policies.

Rev. Rul. 2009-13 illustrates three scenarios for an insurance owner. These are the surrender of a contract, sale to a third party or the sale of a term of years policy.

1. Surrender of an Insurance Contract. Taxpayer acquires a permanent insurance contract and pays $64,000 in premiums over eight years. At that point, taxpayer surrenders the policy to insurer for $78,000 in cash. Because the taxpayer has a $64,000 investment in the contract and received $78,000, under Sec. 72(e)(5)(A), the $14,000 excess is taxable as ordinary income.

2. Sale of Policy to Third Party. With the same taxpayer who had the permanent contract, he or she sells it to a third party for $80,000. Under Sec. 1001(d), the basis of $64,000 is reduced by $10,000 of insurance value and the taxpayer has gain of $26,000. The same $14,000 increase in cash value on the insurance is ordinary income and the balance of $12,000 is long-term capital gain.

3. Sale of Term Policy. Taxpayer purchased a 15 year term policy and made payments of $45,000 over eight years. The insurance cost during that time is $44,750. Taxpayer sells to third party for $20,000. The basis is reduced by cost of insurance from $45,000 to $250. Taxpayer has a long-term capital gain of $19,750 because the gain is not a "substitute for ordinary income."

Under Rev. Rul. 2009-14, there are three tax scenarios for buyers. One is a buyer of a term policy, the second is the buyer who resells the policy and the third is a foreign corporation purchaser.

1. Buyer of a 15 Year Term Policy. The purchaser is a U.S. investor who buys a policy for $20,000 and makes premium payments of $9,000. The insured passes away 18 months later and the insurance company pays $100,000 to buyer. The buyer recognizes $100,000 of income less $29,000 of basis. Because the funds are received under an insurance contract, the death benefit of $71,000 is ordinary income.

2. Buyer Who Resells Policy. In the second situation, the purchaser buys the term policy for $20,000, pays $9,000 in premiums and sells the policy for $30,000. Because this is a "contract solely with the view to profit," there is no reduction in basis for the insurance value. Purchaser holds a capital asset and reports $1,000 of long-term capital gain.

3. Foreign Corporation Buyer. The scenario is similar to the first buyer scenario with a purchase of a 15 year term policy for $20,000 and premium payments of $9,000. Eighteen months later the insured passes away and the insurance company makes payment of $100,000 to the foreign corporation. Under Sec. 861(a), the $71,000 payment in excess of basis is taxable to the foreign corporation as income from United States source.

Applicable Federal Rate of 2.4% for May -- Rev. Rul. 2009-12; 2009-19 IRB 1 (17 Apr. 2009)

The IRS has announced the Applicable Federal Rate (AFR) for May of 2009. The AFR under Section 7520 for the month of May will be 2.4%. The rates for April of 2.6% or March of 2.4% 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.

PLR THIS WEEK

PLR - 200918014 QTIP Election is Null and Void

Decedent created Trust on date 1 and died on date 2, survived by Spouse. Decedent's will bequeathed certain tangible personal property (TPP) to Spouse and the residue of the estate to Trust. The terms of Trust called for the creation of a Credit Shelter Trust (CST). Trust directed that the CST was to be funded with "the largest amount that can pass free of federal estate tax." However, Decedent's total estate was under the applicable estate tax exemption amount, under Sec. 2010(c). Accordingly, Decedent's entire estate, less the TPP, was placed in the CST. The executor of Decedent's estate filed Form 706, Schedule M and made a qualified terminable interest property (QTIP) election under Sec. 2056(b)(7). Once made, a QTIP election is irrevocable. The executor subsequently determined that the election was not necessary and requested a ruling that the QTIP election is null and void for estate, gift and generation-skipping transfer taxes (GSTT).

Sec. 2001(a) imposes an estate tax on transfers from a taxable estate. Sec. 2056(a) provides a deduction for any value passing to a surviving spouse but is limited by 2056(b)(1). Sec. 2056(b)(1) provides that a marital deduction is not allowed for an interest passing to a surviving spouse that is a "terminable interest." An interest is terminable if it passes to the surviving spouse and will terminate on the elapse of time or the occurrence of some event and, on termination, will pass to another. An exception is made for QTIPs. A QTIP is property that provides an income interest to the surviving spouse with the remainder to another party. If a QTIP election is made, the property comprising the QTIP will be included not in the first decedent's estate but in the surviving spouse's estate at his or her death.

According to Rev. Proc 2001-38, a QTIP election will be declared null and void for purposes of estate, gift and GSTT where the election was not necessary to reduce estate tax liability to zero. The Service determined that the Rev. Proc. applied in the case of Decedent's estate because the election was not necessary. No estate tax liability would have arisen, whether or not the election was made. Accordingly, the election was voided and the property in CST will not be included in the taxable estate of Spouse. Furthermore, Spouse will not be treated as the transferor of the property in Trust of gift or GSTT purposes.

To view the full PLR Click Here.

ARTICLE OF THE MONTH

Life Estate Plus Wind Farm

Will Jeffers Lives Off the West Wind

Will Jeffers has resided in his modest home on 80 acres for many years. His land is located just downwind from two mountain ranges that funnel prevailing winds toward his home. Recently, Will was approached by a company with an offer to lease his land and install a windmill farm. Will leased 70 acres and retained his home on 10 acres. The lease will provide him with future income of $200,000 per year! Will remarked, "My dad always said you can't live on the west wind, but I am going to prove you can. My windmill lease income is terrific. But my taxman now claims I will have to pay an enormous income tax. What is an 80 year-old-rancher to do?"

Will now has an income tax problem. In order to create a charitable deduction to offset his increased taxable income, Will Jeffers contemplates transferring the remainder in his home on ten acres to charity. With his lease income, savings and IRA, he has substantial liquidity and will not need the value of the home for living expenses.

Will decides to deed the remainder interest in the home to his favorite charity. Based upon his age and a 2.4% AFR, he receives a charitable deduction of $236,611. This deduction is an appreciated-type deduction usable to 30% of adjusted gross income. With $200,000 of income, he can deduct about $60,000 per year. Over a period of four years, this charitable deduction will save over $78,000 in income taxes. The deduction is based on assumed values for the residence of $100,000 and for the land of $200,000. Will enjoys watching the windmills produce electricity and earn income for him. He loves living well off the "west wind" and saving taxes at the same time!

To view the full Article of the Month Click Here.

CASE OF THE WEEK

Exit Strategies for Real Estate Investors, Part 5

Karl Hendricks was a man with the golden touch. Throughout his life, it seemed every investment idea that he touched turned 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.

After Karl learned about the benefits of a FLIP CRUT, he eagerly wanted to move forward. (See Parts 1 and 2 for a full discussion of this decision.) It looked like the perfect solution.

However, there was still one issue unresolved. There was a $100,000 debt on the property that Karl incurred at the time of purchase. The debt was a major obstacle to the successful completion of the FLIP CRUT plan. What solutions are available to remove the debt?

To view the solution to this Case of the Week Click Here.

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.

Indiana Community Foundations

May 11, 2009

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.

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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