Tax Extenders and IRA Charitable Rollover
Approximately 75% of the current tax extenders are included in the bill. There are several significant provisions.
1) AMT Patch – The exemption for alternative minimum taxes for 2012 is indexed to $50,600 for individuals and $78,750 for married couples filing jointly.
2) Teachers’ Expenses – The $250 above-the-line tax deduction for teachers, to offset the cost of books and school supplies, is extended for two years.
3) State and Local Sales Tax – The itemized deduction for local taxes is extended for two years.
4) IRA Charitable Rollover – The option for IRA owners over age 70½ to transfer up to $100,000 per year directly from an IRA custodian to charity is extended for two years.
5) Research and Experimentation Credit – The credit equal to 20% of qualified research expenses is extended for two years.
6) Enhanced Gifts of Food Inventory – The enhanced deduction for gifts of “apparently wholesome food” by taxpayers is extended for two years.
7) Appreciated Subchapter S Corporation Gifts – A provision that facilitates gifts of appreciated property by S Corporations is extended for two years.
Approximately 25% of the existing tax extenders have been omitted. This is a significant change from prior years in which all of the extenders have been included in the bill. Two charitable extenders were not included. These are the enhanced charitable deduction for gifts of book inventories to public schools and the enhanced deduction for corporations who make gifts of computers for educational purposes. Both provisions lapsed on December 31, 2011.
Senate Finance Chair Max Baucus (D-MT) stated, “The Senate Finance Committee worked together to craft a bipartisan extenders package. This effort has proven that legislating can still be done if both sides work together.”
Senator Orrin Hatch (R-UT) continued, “This legislation demonstrates that there is a will to subject long-standing tax policies to the full and much-needed public scrutiny of the American people. This is a first step towards the ultimate goal of comprehensive tax reform that shows that there is a path to resolving the challenges we face as a nation.”
Editor’s Note: There are now reasonable prospects for passage of the tax extenders by the Senate. The key question of interest to charities and their donors is whether the House will also act on the tax extenders. If the House acts prior to September, it will permit charities to promote the IRA Charitable Rollover this fall. Many potential IRA rollover donors are waiting to see if Congress extends this gift plan. If it is passed, the IRA rollover will be valid for qualified gifts from January 1 to December 31 of 2012.
House Passes Tax Cut Extension and Fast Track Process
On August 1, the House of Representatives passed two different tax bills. The Job Protection and Recession Prevention Act of 2012 (H.R. 8) extends taxes at current rates for one year. It differs from the Senate plan in that the income and capital gains tax rates for upper-income taxpayers would be maintained at the current levels for 2013.
The Pathway to Job Creation through a Simpler, Fairer Tax Code Act of 2012 (H.R. 6169) creates a “fast-track” process for major tax reform in 2013. The fast-track bill includes specific goals for tax reform. These include two personal income tax brackets of 10% and 25%, a corporate tax rate of 25%, a tax system that raises revenue equal to 18-19% of gross domestic product and a worldwide tax system. The lower rates are achieved by limiting most itemized deductions.
The fast-track system creates specific procedures designed to force the Senate Finance Committee and the House Ways and Means Committee to submit bills for votes to the full House and Senate by the middle of 2013.
The White House opposed both of the House bills. It believes that extending the tax cuts for upper-income Americans “would hurt the economy both by increasing the long-term deficit and also by taking money out of the pockets of the families most likely to spend it in the near term.”
It also criticized the fast-track legislative method. The White House is concerned that a fast-track system for tax bills would lead to tax cuts for high-income households and corporations.
Editor’s Note: It is not likely that there will be any major action on these bills prior to the November election. However, this positioning by both parties will have major significance for the 2013 tax reform efforts. The level of activity in Congress suggests that many members of Congress now think it is quite probable that there will be major tax reform next year.
Gifts to Disregarded Entities are Deductible
In Notice 2012-52; 2012-35 IRB 1 (1 Aug 2012), the Service approved gifts to disregarded entities created by qualified Sec. 501(c)(3) charitable organizations. Many charities have created single-member LLCs (SMLLCs) for various purposes. A common strategy is to create an SMLLC to receive, hold and manage real estate gifts. The SMLLC may reduce the potential liability risk to the parent. If the real estate is subsequently sold, the cash proceeds may be then distributed to the charitable parent.
Charities and their advisors have long advocated charitable deductions for gifts to the disregarded entities. In Notice 2012-52, the Service approves the use of disregarded entities and confirms that gifts to those organizations will be deductible.
The Notice states, “If all other requirements of Sec. 170 are met, the Internal Revenue Service will treat a contribution to a disregarded SMLLC that was created or organized in or under the law of the United States, a United States possession, a State, or the District of Columbia, and is wholly owned and controlled by a U.S. charity, as a charitable contribution to a branch or division of a U.S. charity.”
The Notice encourages charities to disclose the parent-SMLLC relationship on a receipt or contemporaneous written acknowledgement to the donor. For example, an SMLLC owned by Favorite Charity might include this language on its receipt:
“SMLLC is wholly owned by Favorite Charity of City, State. It qualifies as a branch or division of Favorite Charity. Under Notice 2012-52, gifts to SMLLC are qualified for charitable deductions under Section 170 of the Internal Revenue Code.”
Appraisal Reconsidered and Rejected
In Steven Rothman et ux v. Commissioner; T.C. Memo. 2012-163; No. 17547-10 (Jun 2012) the Tax Court denied a $290,000 façade easement charitable deduction because the appraiser had used a percentage method. Following a decision by the U.S. Court of Appeals for the Second Circuit in Scheidelman v. Commissioner, 682 F.3d 189 (2 d Cir. 2012), the taxpayer petitioned for a reconsideration of that decision.
In Scheidelman, the Court of Appeals stated that a percentage appraisal method with accompanying data could comply with the Reg. 1.170A-13(c)(3) requirements of the Income Tax Regulations. Based upon that decision, the taxpayers requested reconsideration.
In Steven Rothman et ux v. Commissioner; T.C. Memo. 2012-218; No. 17547-10 (30 July 2012) the Tax Court reviewed the 15 requirements of a qualified appraisal. It vacated the portion of the original Tax Court opinion that disqualified the appraisal because of the percentage method, but it noted that there were at least three specific reasons why the Rothman appraisal still did not meet the requirements.
The appraisal did not disclose the terms of the agreement between the National Architectural Trust and the donors, it did not communicate the existence of mortgages on the property and it appraised a property interest greater than the one contributed.
Because the appraisal failed to satisfy eight of the 15 requirements, it still is not valid. However, the taxpayers are permitted to present to the Tax Court their basis for claiming a failure due to reasonable cause.
Applicable Federal Rate of 1.0% for August — Rev. Rul. 2012-21; 2012-32 IRB 1 (18 July 2012)
The IRS has announced the Applicable Federal Rate (AFR) for August of 2012. The AFR under Section 7520 for the month of August will be 1.0%. The rates for July of 1.2% or June of 1.2% 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.