E-Newsletter from RDI Consulting 

Greetings from RDI Consulting.  We are pleased to share with you the latest updates on the GiftLaw web site by GiftLaw editor A. Charles Schultz. The GiftLaw web site, Weekly E-mail Service and Satellite Teleconference are public services from Crescendo Software. We provide this update each week to our professional advisor friends. If you are looking for assistance with your planned giving program, a capital campaign or resources to expand your existing development program, give us a call at 800-659-7445.  We have resources for you!

    RDI Consulting

December 26, 2011   

  GiftLaw Weekly eNewsletter - December 26, 2011

• WASHINGTON HOTLINE
  • Payroll Tax Extension Passed
• PLR THIS WEEK
  • PLR - 201150034 Coffee House Denied Exempt Status
• CASE OF THE WEEK
  • Living on the Edge, Part 5
• ARTICLE OF THE MONTH
  • Gift Annuity Marketing in 2012

WASHINGTON HOTLINE

Payroll Tax Extension Passed

After lengthy debate, the House and Senate passed a two month extension of the payroll tax cut on a unanimous voice vote. The President signed the bill on Friday, December 23.

Under the bill, the employee payroll tax will be reduced from 6.2% to 4.2% for the months of January and February of 2012. The federal unemployment benefits were in danger of lapsing for 1.8 million long-term unemployed Americans. These will also be continued for two months.

Each year since 2003, Congress has passed the "Doc Fix." Medicare reimbursements would decline by 27% if Congress did not change the physician reimbursement rules. However, the American Medical Association points out that even with reimbursements at the current rate, most physicians are receiving payments from Medicare that are 20% below the amounts received for other patients.

President Obama lobbied in favor of the payroll tax reduction. He stated, "At a time when so many Americans are working harder and harder just to keep up, the extra $1,000 or so that the average family would get from this tax cut makes a real difference when you're trying to buy groceries or pay the bills, make a mortgage or make a repair."

The Ranking Republican on the Senate Finance Committee is Orrin Hatch (R-UT). He also supported the bill and stated, "Though I remain concerned with the continued extension of a temporary payroll tax holiday and its long-term implications for Social Security, I'm supporting this legislation because it allows the construction of the Keystone XL Pipeline to move forward and prevents physicians from getting hit with a 27.4% pay cut that could hinder access to quality care for American seniors."

Editor's Note: After the holiday break, Congress will return in January and commence negotiations on a full year extension. Because this is an election year, the extension is likely to be passed. However, the debate will continue over the methods to pay for the cost of the payroll tax cut.

Baucus Promotes Tax Extenders

The payroll tax reduction bill signed by President Obama failed to include two important tax provisions. Each year for the past two decades, Congress has passed approximately 40 different "tax extenders" and has also adjusted the alternative minimum tax (AMT) exemption for inflation. Neither of these provisions were included in the payroll tax bill.

Senate Finance Committee Chairman Max Baucus (D-MT) has supported the tax extenders bill each year. He published a press release and indicated that he will fight "to find a bipartisan path forward for these tax extenders, including the research and development (R&D) tax credit, teachers' expense deduction and job-creating clean energy tax incentives. It is critical to extend these tax provisions early in the year to maximize their effect and provide certainty for the 2012 tax year."

The tax extenders include six charitable provisions. The most popular of these is the IRA charitable rollover. Since 2006, IRA owners have been permitted to transfer up to $100,000 directly from the IRA to qualified charities. In prior years (such as 2010) the extension was passed later in the year and it was difficult for many IRA owners to assist their charities through an IRA rollover. Chairman Baucus is asking members of Congress to act early in the year so that donors may plan their 2012 IRA rollovers well before the end of the year.

Editor's Note: Because 2012 is an election year, there is a reasonably good prospect for passage of the tax extenders. The IRA charitable rollover now has been effective for the past six years. While there are great differences in Congress, there could be passage of the IRA charitable rollover and other tax extenders for 2012. Hopefully, Congress will follow the advice of Chairman Baucus and take action before the very end of the year. Even though the tax extenders bills have been retroactive to January 1, it is difficult for many IRA owners to plan if Congress passes the bill very late in the year.

Refund Denied Due to Executor Delay

In W.E Davis v. United States: No. 2:11-cv-00034 (14 Dec 2011), a U.S. District Court denied a request by an estate to toll the statute of limitations and allow a late refund request.

Decedent Anthony Walker Smith passed away in 2002 and executor W.E. Davis filed IRS Form 706 on February 3, 2003. The estate reported an estate tax liability of $491,521 and on April 17, 2003 made a payment of $406,791.83. The estate reported fee simple ownership of a farm in Tate County, Mississippi.

However, on November 3, 2003, the Chancery Court of that county ruled that decedent Smith held a remainder interest rather than a fee interest in the Mississippi farmland. This ruling was affirmed by the Mississippi Court of Appeals on January 20, 2005 and the Mississippi Supreme Court denied certiorari on March 2, 2006.

Executor Davis then filed a claim for refund on November 4, 2008. The IRS denied the refund claim because it was untimely.

The government moved to have the court dismiss the case for lack of subject matter jurisdiction. The government noted that it had not waived sovereign immunity and that the general sovereign immunity waiver provisions apply only if actions are taken within the required time period. Sec. 6511(a) states that claims for refund "shall be filed by the taxpayer within three years from the time the return was filed or two years from the time the tax was paid, whichever of such periods expires the later."

Because the filing of the refund claim was over five years after the IRS Form 706 was filed, the IRS claimed that the matter was "untimely."

Executor Davis indicated that the court should have jurisdiction to apply the principle of equitable tolling. Because the title to the property was not clearly settled until the denial of certiorari on March 2, 2006, the estate indicated that it was unable to comply with the three year requirement and due process requires a tolling of the statute.

The court indicated that it was sympathetic to the position of the estate. The remainder interest value clearly is smaller than the fee interest amount and the estate had overpaid the estate tax.

However, the court noted that the estate had notice of the change in title in 2003 and even the Court of Appeals decision was within the required three year period to file for refund. Because the estate did not make a protective filing at that time, the opportunity to file later lapsed. The court noted that there was no obligation to apply equitable tolling to the claim for relief from the untimely filing date. Therefore, the case for the refund was dismissed.

Applicable Federal Rate of 1.4% for January – Rev. Rul. 2012-2; 2012-3 IRB 1 (19 Dec. 2011)

The IRS has announced the Applicable Federal Rate (AFR) for January of 2012. The AFR under Sec. 7520 for the month of January will be 1.4%. The rates for December of 1.6% or November of 1.4% 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 2012, pooled income funds in existence less than three tax years must use a 1.8% deemed rate of return. Federal rates are available by clicking here.

PLR THIS WEEK

PLR 201150034 - Coffee House Denied Exempt Status

Coffeehouse applied for tax-exempt status as a public Charity under Sec. 501(c)(3). Coffeehouse will raise most of its funds by selling coffee and tea drinks at market rates. To accomplish its goal of serving as a "community hub," Coffeehouse will provide various groups, charities and individuals a place to host meetings and otherwise "serve as a forum where many different topics are covered in order to help people better understand their lives and purpose." Coffeehouse will donate approximately 8% of its proceeds to charities. Coffeehouse will raise most of its funds by selling coffee and tea drinks are market rates.

Section 501(c)(3) provides that organizations organized and operated exclusively for charitable, educational and other purposes are considered tax exempt so long as no part of the net earning inure to the benefit of any private shareholder or individual. Regulation 1.501(c)(3)-1(c)(1) states that an organization will not be regarded as "operated exclusively" for an exempt purpose only if more than an insubstantial part of its activities are not in furtherance of an exempt purpose. Regulation 1.501(c)(3)-1(e)(1) states that an organization may meet the requirements even if it operates a business as a substantial part of its activities, if the operation is in furtherance of its exempt purpose. Rev. Rul. 68-72 deals with a case similar to Coffeehouse's yet there the organization was formed by local churches for the purpose of furthering the religious development through the operation of the "coffee house." That facility charged a nominal fee for admission, but not for refreshments and entertainment. That organization meets it expenses from contributions and the admission charges.

The Service determined that the Coffeehouse operates for a commercial purpose in a manner substantially similar to for-profit businesses. Therefore, the Service denied Coffeehouse its request for tax-exempt status under the theory that Coffeehouse fails to meet the operational test of Reg. 1.501(c)(3)-1(c).


To view the full PLR Click Here.

CASE OF THE WEEK

Living on the Edge, Part 5

Rhea Jones, 75, lives in a beautiful coastal town in northern California. Rhea's home occupies three magnificent acres of bluff property that overlooks the crashing waves of the Pacific. Since her home sits just steps away from the dramatic cliffs, Rhea frequently jokes to her friends about her "living on the edge" lifestyle.

John, Rhea's husband of 50 years, built the custom home ten years ago. It was truly the realization of a lifelong dream of John and Rhea. Unfortunately, John passed away unexpectedly five years ago. Now, Rhea lives alone in the large home. Nevertheless, Rhea is looking forward to spending her remaining days in this lovely home. Not surprisingly, she frequently plays host to her children, grandchildren and friends.

Rhea is an active philanthropist. In fact, she spends three days a week volunteering with local charities. While very wealthy and philanthropic, Rhea makes only modest yearly gifts. However, she intends to make a substantial bequest upon her death. Specifically, Rhea plans on distributing her entire estate to her children and grandchildren, except for her cliff-side home. Rhea's will provides that the home passes to John and Rhea's favorite charity upon her death. The home is worth $3 million.

However, at a recent estate planning presentation, Rhea discovered the benefits of a gift of a remainder interest in a personal residence. In particular, she liked the potential significant tax savings and the home's avoidance of the probate process. Also, because the gift is irrevocable, the local charity would recognize and honor Rhea for her generous gift at the annual fund raising gala. Of course, Rhea would retain the right to live in her home for the rest of her life, which is an absolute requirement to any potential gift arrangement.

Rhea is very excited about this gift arrangement, but she has many questions. Before she commits to the gift plan, she wants to address several issues. In order to compute the charitable income tax deduction, Rhea is required to determine the estimated useful life of her home. How does she do this? Are there some rules regarding this determination? What are the four basic options to make this determination?


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

ARTICLE OF THE MONTH

Gift Annuity Marketing in 2012

The ACGA Board of Directors announced updated gift annuity rates effective on January 1, 2012. The new rates for senior annuitants will be 0.5% to 0.8% lower than the 2011 ACGA schedule.

The primary factor in reducing the rates is a lower yield on the ten-year Treasury bond. During 2011, the Treasury bond yield changed from 3.3% in January to below 2.0% in October. With the ongoing issues over the Euro, there is a continued cash "flight to safety" of Treasury bonds. This may lead to even lower Treasury bond yields during 2012.

Because the ACGA gift annuity reserve portfolio assumes 40% equities, 55% bonds or fixed income and 5% cash, a reduction in bond yields changes the total assumed return. The 2012 assumed return will be 4.25% with a 1% load, for a net return of 3.25%.

The new rates will pass the Sec. 514(c)(5) minimum 10% charitable deduction test. The target minimum deduction is at least 20%. Rates above age 80 are adjusted lower than the actuarial formula to provide a greater margin of safety.

In 2012 gift planners will often ask the question – How can I increase my number of closed gift annuities this year? First, it is helpful to consider the goals of your typical donors.

Most donors have a goal to receive certificate of deposit (CD) payouts of 3% to 4%. As recently as 2007, a one-year CD had a payout rate of 3.8%. Your typical donor might comment, "If I could just reach a payout of 3% to 4%, I would be very happy."


To view the full Article of the Month Click Here.