IRS Issues Notice Relating to Abusive Charitable Transactions, Notice 2007-72, 2007-36 IRB 1
One of the abusive charitable tax transactions currently under scrutiny by the Senate Finance Committee has prompted the Treasury to issue a notice labeling it a “transaction of interest.” Here’s how the gift transaction is structured. The advisor owns an LLC that holds real estate subject to a long-term lease. The advisor and taxpayer agree to split the interest in the LLC (often by creating two LLCs) so that the advisor continues to hold the LLC with the long-term lease interest while the taxpayer purchases the LLC with the remainder or successor interest following the lease term. The taxpayer then holds the interest for more than one year (to achieve long-term capital gain status) and contributes it to charity, valuing that interest for gift purposes at many multiples of its purchase price. Typically, the charity holds the interest beyond the period for which Form 8282 must be filed and then sells the LLC with the remainder interest to an entity owned by the taxpayer at a high discount to the contribution value. These transactions can be further complicated by the creation of additional LLCs as participants in the original purchase from advisors, contribution to the charity, and ultimate purchase from charity. In this notice the IRS noted the transaction raises partial interest gift issues, valuation issues, and charitable intent issues among others, declared it a “transaction of interest,” and required taxpayers who have participated in such transactions since November 2, 2006 to disclose that participation or face penalties.
IRS Offers Faster Online Process to Request Employer Identification Number (EIN), IR-2007-161, www.irs.gov
The IRS now offers an interactive online EIN application process that allows the immediate generation of an EIN for a charitable remainder trust, charitable lead trust, or tax exempt organization, as well as other new entities. Users will find help screens that coach the process, and if the new entity passes the validity screens, it automatically issues a number.
Leona Helmsley’s Will Makes Interesting Reading—Annual Charitable Remainder Trust Distributions Contingent on Beneficiary Behavior, http://multimedia.nydailynews.com/pdf/2007/08/28/leona_helmsley_will/index.html
While most of the headlines about Leona Helmsley’s estate—valued at $4–$8 billion—focus on the benefits provided to her dog, the bulk of her estate is allocated to the Leona M. and Harry B. Helmsley Charitable Trust. Ms. Helmsley’s will also created three charitable remainder unitrusts, a $10 million, 5% CRUT for her brother Alvin, and a $5 million 5% CRUT for each of two grandsons, all three of which terminate to the Leona M. and Harry B. Helmsley Charitable Trust. Each grandson's CRUT has a qualified contingency under IRC §664(f) directing that the beneficiary’s interest ceases in the year he fails to visit his deceased father’s grave and sign the register (exceptions were allowed for physical or mental disability). This may spark interesting qualified contingencies in future charitable remainder trust drafts.
Change in Filing Location for Form 1098-C for Gifts of Motor Vehicles, Airplanes, and Boats for Returns Filed After December 31, 2007, Notice 2007-70, 2007-40 IRB 1 (September 17, 2007)
Charitable organizations receiving gifts of motor vehicles, airplanes, or boats with a donative value of more than $500 have been required to provide the donor with a completed Form 1098-C to provide the donor with a contemporaneous written acknowledgement of the gift. These forms are currently filed with the IRS Service Center in Ogden Utah; returns filed after December 31, 2007 should be filed with the IRS Service Center in Kansas City, Missouri.
Advance Notice of Proposed Regulations for Type III Supporting Organizations, Announcement 2007-87; 2007-40 IRB 753
In October the IRS issued an advance notice of proposed rulemaking for Type III supporting organizations (SOs) in the four areas directed by the Pension Protection Act of 2006. The proposed regulations address: 1) the payout requirements for a non-functionally integrated Type III SO; 2) how to determine when a Type III SO is functionally integrated; 3) how a Type III SO organized as trust can show responsiveness; and 4) the reports/information a Type III SO must provide to the public charities they support. Included in the new rules are an annual payout requirement for a non-functionally integrated SO equal to the distribution requirements of a private non-operating foundation and a limit of five publicly supported organizations. Planners should read the Announcement for full details.
Statistics of Income Bulletin Shows Increase in Those Who Itemize and Charitable Deduction Values on 2005 Income Tax Returns
The spring 2007 Statistics of Income Bulletin provides a state-by-state extraction of data on charitable giving drawn from income tax returns of taxpayers who itemize. The most current report provides data from the 2005 tax year. Americans who claimed itemized charitable deductions gave $181.6 billion to charity in 2005, an increase from $133.1 billion in 2004. The percentage of those itemizing also increased from 34.95% in 2004 to 35.61% in 2005. Ililnois had a higher percentage of residents who itemized deductions and a higher percentage of itemizers taking charitable deductions from the country as a whole.