Senate Passes Tax Cut Extension
On July 25, the Senate passed the Middle Class Tax Cut Act (S. 3412) by a vote of 51 in favor to 48 opposed. Under the reconciliation rules for tax bills, the act required only a majority vote.
Senate Finance Committee Ranking Minority Member Orrin Hatch (R-UT) offered an amendment that failed. It would have replaced the language of the bill with the Republican Tax Hike Prevention Act of 2012 (S. 3413). The Republican bill extends all of the 2001-2003 tax cuts for one year.
The Middle Class Tax Cut Act extends the 2001-2003 tax cuts for persons with incomes up to $250,000. It restores the 36% and 39.6% top brackets for incomes above that level. The act also extends for one year the American Opportunity Tax Credit, the Expanded Child Tax Credit, the Earned Income Tax Credit and the increased Section 179 expensing rules.
Senate Majority Leader Harry Reid (D-NV) expressed hope that House Speaker Boehner (R-OH) would permit a vote on the bill. Reid noted, "We're one vote away from passing this legislation. Speaker Boehner should have the same vote in the House of Representatives. With a vote, it will pass."
Senate Finance Committee Chair Max Baucus (D-MT) supported the bill. He stated, "This legislation guarantees that millions of American families don't see a tax hike come January, including 400,000 people in my home state of Montana. It also extends critical tax breaks for the middle-class, helping families afford college, cover their bills and provide for their children." Baucus also continued that he hoped there could be a House-Senate Conference Committee to craft a legislative compromise. He indicated it is now time "to get serious and find a way to work together."
Speaker Boehner responded that he would permit a vote on the Middle Class Tax Cut Act. He stated he is "more than happy to give them a vote." Boehner also announced that he expected to present a House bill similar to the Tax Hike Prevention Act of 2012 for a vote this summer. The House Pathway to Job Creation through a Simpler, Fairer Tax Code Act of 2012 (H.R. 6169) extends the 2001/2003 tax cuts for all brackets for one year. Significantly, it also includes a "fast track" tax reform procedure for 2013.
Editor's Note: Senate Finance Committee Chair Baucus recognizes that the House and Senate bills are likely to be different and therefore will require a conference committee. It is quite probable that the conference committee will not act until after the November election. A key provision in the House bill is the "Fast Track" method for major tax reform in 2013. The House proposal is that tax reform bills would be passed by both House and Senate committees on April 30, 2013 and voted on by both bodies on May 15. This would be world record speed for comprehensive tax reform.
Should Education Tax Incentives be Reformed?
On July 25, the Senate Finance Committee held a hearing on education tax incentives. Senate Finance Committee Chair Max Baucus noted that there are approximately $30 billion in education tax benefits each year. He observed that Congress needs to continue to focus on education.
Baucus stated, "For older generations up to age 64, the United States ranked second in the world in college graduation rates. But for younger generations, the U.S. is slipping. For those ages 25-34, the U.S. has fallen to 16th in the world. And in today's global economy, an education is more important than ever."
Baucus discussed many of the "multitudes of education tax benefits" and indicated that the eight different types of benefits in the current tax system create great complexity.
Ranking Member of the Senate Finance Committee Orrin Hatch (R-UT) discussed the three specific categories for education benefits. First, there are current expenditures such as the Hope, American Opportunity and Lifetime Learning Credits, the deduction for higher education expenses and tax-free payments for scholarships. Second, there are benefits on student loans such as a deduction for the interest and exclusion for certain types of student loan forgiveness. Third, there are plans to save for college. These include Sec. 529 plans, Coverdell plans, education savings bonds and an option to make penalty-free withdrawals from IRAs for college expenses.
Hatch noted that the increasing cost of education is particularly a problem for lower-income persons. While this is partly addressed by increased Pell grants, he suggested that complexity is a major problem. He quoted Michael Graetz, a tax scholar who stated, "The education tax incentives represent the greatest increase in federal funding for higher education since the GI bill. But no one can tell you what they are, how they work or how they interact."
Sen. Charles Grassley (R-IA) has been involved in education tax incentives for over a decade. He noted that the charitable deduction for gifts to educational institutions costs the government $32 billion and the tax exemption for educational institution bonds costs $18 billion. Grassley stated, "All education related tax expenditures should be examined to insure that students and families, in addition to taxpayers, are getting the most bang for their buck."
Editor's Note: All of these senators clearly desire to find ways to enable students from lower-income families to attend college. The major debate is whether to pursue that goal through tax savings or direct grants. If there is major tax reform in 2013, these education tax incentives may be substantially changed.
Executor Personally Liable for Taxes
In United States v. Rodney Richel; No. 2:08-cv-01313 (22 Jul 2012), a U.S. District Court held an executor personally liable for an IRS Notice of Levy on a beneficiary of the estate. The executor was liable for $114,519.68 of payments to the beneficiary after receipt of the Notice.
Decedent Helen M. Burger passed away on April 14, 1995. The majority of her estate was transferred to a trust. Her son, Robert Burger, was a beneficiary of the trust. The trustee was required to pay $1,000 per month or a maximum of 60% of trust net income to the son. The trustee also was permitted to make discretionary distributions to the son or to the decedent's grandsons.
On June 20, 1996, the defendant executor was served with An IRS Notice of Levy and Notice of Federal Tax Lien. Beneficiary Robert Burger owed $359,880.96 to the IRS. The Notice stated, "This levy requires you to turn over to us this person's property and rights to property (such as money, credits and bank deposits) that you have or which you all are already obligated to pay this person."
The executor's attorney Frederick Reuss stated that he should not make payments to beneficiaries but must instead make distribution of those funds to the Internal Revenue Service.
On February 26, 2004, the estate account was $145,228.79. Between 2003 and 2005, payments were made to Robert Burger in the amount of $114,519.68.
The court noted that the IRS has the power to issue a levy in order to collect taxes. Sec. 6332(d)(1) states that a custodian who fails to surrender property subject to levy "shall be liable in his own person and estate to the United States in a sum equal to the value of the property or the rights not so surrendered."
Under New York law, the will required $1,000 per month or a maximum of 60% of income to be distributed to Robert Burger. The additional distribution of principal was a discretionary act by the executor-trustee. While the defendant claimed that he was not in possession of the assets or that they were subject to attachment, neither defense was substantiated.
In addition, the current action was over 10 years since the levy and the defendant claimed it was therefore not timely. However, the court noted that the Notice of Levy was timely and the action to enforce the levy may commence after 10 years. Finally, the defendant executor claimed that his second attorney Joseph Ruchala was in control of the distributions. However, the court noted that the distributions had been authorized by the executor and he was therefore liable.
Because the distributions were not in the amount of the full account balance, the liability of the executor was limited to $114,519.68 plus interest.
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.
