Jonathan Ackerman Law

Some Happenings

Charity Advisor Resource Newsletter - Volume 3.1 (2012)

BY JONATHAN D. ACKERMAN, ESQUIRE

Tax Provisions of Obama 2013 Budget — In the "General Explanations of the Administration's Fiscal Year 2013 Revenue Proposals" (February 13, 2012), the Treasury Department explained several important changes in the estate, gift, GST, income tax and to the nonprofit sector. These changes include:

Reinstate the 39.6% and 36% tax rates for high-income taxpayers (i.e., adjusted gross income over $250,000 for taxpayers filing joint returns, over $125,00 for married individuals filing separately, over $225,000 for head-of-household taxpayers, and over $200,000 for taxpayers filing individual returns ("High-Income Taxpayers"));

Limit the tax rate for itemized deductions (including charitable contributions) to 28% for High-Income Taxpayers. The proposal does not describe in detail the mechanics of the 28% limitation. However, taxpayers in the 36% tax bracket with a $10,000 itemized deduction or exclusion would essentially be able to reduce their tax liability by only $2,800 on account of the deduction or exclusion, rather than $3,600 — which represents a tax increase of $8 per $100 of itemized deductions compared to current law. This provision would be effective for tax years beginning after December 31, 2012;

The Affordable Care Act of 2010 included a provision that increased the employee portion of the "Medicare hospital insurance" tax (currently 1.45% of wages) by an additional 0.9% on wages exceeding specified threshold amounts, effective for wages received in tax years beginning after 2012. The threshold amounts are $250,000 for married couples filing a joint return, $125,000 for married taxpayers filing separately, and $200,000 for all other individuals. This 2010 act also imposed a "Medicare contribution" tax of 3.8% on net investment income (i.e., unearned income) of individuals to the extent it exceeds specified threshold amounts. The threshold amounts are the same as for the Medicare hospital insurance tax increase. This would also be effective for tax years beginning after 2012;

Reinstate the limitation on itemized deductions for High-Income Taxpayers - Itemized deductions (other than medical expenses, investment interest, theft and casualty losses, and gambling losses) would, as before EGTRRA, be reduced by 3% of the amount by which AGI exceeds statutory thresholds, but not by more than 80% of otherwise allowable deductions;

Reinstate the phase-out of personal exemptions for High-Income Taxpayers. EGTRRA temporarily reduced this personal exemption phase-out, for 2006 through 2009, and it was temporarily eliminated for 2010 through 2012;

Tax net long-term capital gains at a 20% rate for High-Income Taxpayers. For other individuals, the current 0% and 15% maximum rates would continue to apply, and the special rates applicable to depreciation recapture, collectibles, and small business stock would be retained. The provision would be effective for long-term capital gains realized after December 31, 2012;

Tax qualified dividends as ordinary income for High-Income Taxpayers. Other taxpayers would continue to treat their qualified dividends under the rules for long-term capital gains, at a 0% or 15% rate. This provision would be effective for dividends received after December 31, 2012;

Extend temporary 2% reduction in the social security payroll tax rate for employees and self-employed individuals to the first $110,100 of taxable wages or self-employment income during 2012 (NOTE - Congress on February 17, 2012 passed H.R. 3630 which would continue through 2012 the 2% reduction in the payroll tax to 4.2%); Eliminate the deduction for contributions of conservation easements on golf courses;

Impose a $5,000 penalty for tax-exempt organizations that fail to comply with a requirement to file electronic returns;

Grant regulatory authority to the Treasury Department to require additional filing of electronic returns by reducing the current threshold of filing 250 or more returns during a calendar year;

Change the excise tax rate imposed on the net investment income of private foundations from the current 1% or 2% to a single rate of 1.35%;

Affect tax-exempt bonds-these include provisions that would: - Reform and extend Build America Bonds - Modify tax-exempt bonds for Indian tribal governments - Allow current refunding of state and local governmental bonds - Simplify tax-exempt bonds by simplifying arbitrage investment restrictions, simplify single-family housing mortgage bond targeting requirements, and streamline private business use limits on governmental bonds;

Extend certain expiring provisions, including: - Tax-free distributions from IRAs to certain public charities for individuals age 70 1/2, or older, not to exceed $100,000 per taxpayer per year - Enhanced charitable contribution deductions for contributions of food inventory, book inventories to public schools, and corporate contributions of computer inventory for educational purposes - Special exclusion from unrelated business taxable income of certain payments from control;

Restore the 2009 estate, gift and GST tax rules on January 1, 2013. These would include a top estate, gift and GST tax rate of 45%, $1 Million gift tax exclusion amount, and a $3.5 Million estate and GST exclusion amount. These provisions would be effective for the estates of decedents dying, and for transfers made, after December 31, 2012;

Making the portability of the deceased spousal unused exclusion amount permanent;

Require consistency in valuation for income and estate tax purposes, so that beneficiaries were required to use estate tax value to determine the adjusted basis of property received from a decedent. For instance, (i) the basis of property received by reason of death (under Code Section 1014) would equal the value of that property for estate tax purposes, (ii) the basis of property received by gift during the life of the donor (under Code Section 1015) would equal the donor's basis, and (iii) the basis of property acquired from a decedent to whose estate Code Section 1022 is applicable, would be the basis of that property, including any additional basis allocated by the executor, as reported on the Form 8939 filed by the executor. A reporting requirement would be imposed on the executor of the decedent's estate and on the donor of a lifetime gift to provide the necessary valuation and basis information to both the recipient and the IRS;

Create an additional category of Code Section 2704(b) restrictions that are ignored if they will lapse or may be removed by the transferor and/or the transferor's family after the transfer. In making this determination, certain interests held by charities or non-family members would be deemed to be held by the transferor's family. The new disregarded restrictions would include (i) limitations on a holder's right to liquidate that holder's interest that are more restrictive than a standard identified in regulations, and (ii) limitations on a transferee's ability to be admitted as a full partner or to hold an equity interest in the entity, so as to reduce the use of valuation discounts for such entities. The transferred interest would be valued by substituting certain assumptions (to be specified by regulations) for the disregarded restrictions. This proposal would also grant regulatory authority for various purposes, including the creation of safe harbors under which the governing documents of a family-controlled entity could be drafted to avoid the application of Code Section 2704. The proposal would make conforming changes relating to the interaction of the proposal with the marital and charitable deductions, and would be applicable for transfers after the date of enactment of property subject to restrictions created after October 8, 1990 (the effective date of Code Section 2704);

Require a minimum 10-year term for GRATs, a maximum term of the life expectancy of the annuitant plus 10 years, require a positive value to the remainder interest in a GRAT and prevent the use of decreasing payments in a GRAT to in effect create some downside risk in the use of this technique. The provision would apply to trusts created after the date of enactment.

Coordinate certain income and transfer tax rules applicable to grantor trusts - the lack of coordination between the income and transfer tax rules applicable to a grantor trust creates opportunities to structure transactions between the deemed owner and the trust that can result in the transfer of significant wealth by the deemed owner without transfer tax consequences. To the extent that the income tax rules treat a grantor of a trust as an owner of the trust, the proposal would (1) include the assets of that trust in the gross estate of that grantor for estate tax purposes, (2) subject to gift tax any distribution from the trust to one or more beneficiaries during the grantor's life, and (3) subject to gift tax the remaining trust assets at any time during the grantor's life if the grantor ceases to be treated as an owner of the trust for income tax purposes. In addition, the proposal would apply to any non-grantor who is deemed to be an owner of the trust and who engages in a sale, exchange, or comparable transaction with the trust that would have been subject to capital gains tax if the person had not been a deemed owner of the trust. In such a case, the proposal would subject to transfer tax the portion of the trust attributable to the property received by the trust in that transaction, including all retained income therefrom, appreciation thereon, and reinvestments thereof, net of the amount of the consideration received by the person in that transaction. The proposal would reduce the amount subject to transfer tax by the value of any taxable gift made to the trust by the deemed owner. The transfer tax imposed by this proposal would be payable from the trust. The proposal would not change the treatment of any trust that is already includable in the grantor's gross estate under existing provisions of the Internal Revenue Code, including without limitation the following: grantor retained income trusts (GRITs); grantor retained annuity trusts (GRATs); personal residence trusts (PRTs); and qualified personal residence trusts (QPRTs). The proposal would be effective with regard to trusts created on or after the date of enactment and with regard to any portion of a pre-enactment trust attributable to a contribution made on or after the date of enactment. Regulatory authority would be granted, including the ability to create transition relief for certain types of automatic, periodic contributions to existing grantor trusts.

Provide that the allocation of GST exemption to a transfer protects that transfer from GST tax for no more than 90 years - This proposal provides that, on the 90th anniversary of the creation of a trust, the GST exclusion allocated to the trust would terminate. Specifically, this would be achieved by increasing the inclusion ratio of the trust (as defined in Code Section 2642) to one, thereby rendering no part of the trust exempt from GST tax. Because contributions to a trust from a different grantor are deemed to be held in a separate trust under Code Section 2654(b), each such separate trust would be subject to the same 90-year rule, measured from the date of the first contribution by the grantor of that separate trust.

Extend the lien on estate tax deferrals provided under Code Section 6166 - The proposal would be effective for the estates of all decedents dying on or after the effective date, as well as for all estates of decedents dying before the date of enactment as to which the Code Section 6324(a)(1) lien has not expired on the effective date.

The now coined "Buffett rule" generally provides that people making over $1 million should not pay lower taxes than the middle class. This rule is not a legislative provision or even scored in the Budget proposal, but is stated as a goal. However, the Administration's Budget proposal does describe the rule this way — "[I]n observance of the Buffett rule, those making over $1 million should pay no less than 30% of their income in taxes. The administration will work to ensure that this rule is implemented in a way that is equitable, including not disadvantaging individuals who make large charitable contributions... [T]he Buffett rule should replace the alternative minimum tax, which now burdens middle-class Americans rather than stopping the richest Americans from paying too little as was originally intended."

April 26, 2012 Hearing on Expiring Tax Provisions - Partnership for Philanthropic Planning strongly supported extension of the IRA Charitable Rollover provision that expired at the end of 2011 and supported the Public Good IRA Rollover Act of 2011 (H.R. 2502), which is co-sponsored by Reps. Wally Herger (R-CA) and Earl Blumenauer (D-OR) - View the entire letter of support which includes a report on the favorable impact of the IRA Charitable Rollover based on a limited survey.

Nonprofit Governance — Lois Lerner, IRS Director, Exempt Organizations, Speaks Out - Ms. Lerner presented at the Georgetown Law Annual Conference - Representing and Managing Tax-Exempt Organizations. She affirmed the IRS' belief that there is a direct relationship between exempt organizations adopting and following good governance practices and their compliance with the tax code. Since October 2009, agents have filled out the governance checksheet (which is made available on the IRS website) at the end of every public charity exam. This effort generated a lot of data, based upon at least 1300 cases. Some of the basic findings of this non-statistically valid sampling were: (i) charities that have a written mission statement, use comparability data when determining executive compensation and review their Form 990 with their Board of Directors are more likely to be tax compliant, and (ii) organizations, in which control is concentrated in a small number of people, are less likely to be compliant. The IRS does intent on conducting a statistically valid study across the entire nonprofit sector. View the entire transcript from her presentation.

Jonathan Ackerman, 2002 President of NCPG (now known as Partnership for Philanthropic Planning), represents donors and tax-exempt organizations on a national basis. His advice is often sought by charities in their creation and operation, especially with respect to contributions and other funding opportunities, as well as by families (and their advisors) who desire to integrate philanthropy into their estate plans.