Tax Extenders Drama Continues
The Senate and House continue in their efforts to pass the American Jobs and Closing Tax Loopholes Act of 2010 (H.R. 4213). Both parties are debating the cost of the bill and the tax offsets.
On June 17, 2010, Senate Finance Chair Max Baucus (D-MT) offered his latest version of the bill. He has been exploring ways to reduce the cost and gain more votes for the bill. Sen. Baucus received 57 votes of the 60 votes necessary to pass the bill.
Sen. Ben Nelson (D-NE) indicated that he was not going to vote for the bill until it is deficit-neutral. Sen. Olympia Snowe (R-ME) is a potential Republican vote for the bill. However, she and her Senate colleague Susan Collins (R-ME) both wanted “to see more of the bill paid for.”
Sen. Baucus and Majority Leader Reid will pursue additional modifications to the bill and submit a new version next week. The current bill offsets include increased tax on hedge fund managers who would report 75% of payouts as ordinary income. Sen. Baucus also has increased the oil-spill tax from 8 cents to 49 cents per barrel in the latest version. His bill retains the $24 billion in Medicaid funding for the states.
Sen. John Thune (R-SD) proposed an amendment that would use unallocated stimulus funds to pay for the bill. Sen. Thune suggested that this would be a solution that would avoid adding over $50 billion to the debt.
In support of the Thune amendment, Sen. Judd Gregg (R-NH) indicated that the proposal by Sen. Thune “is the way we should be governing now, which is to pay today for things we want to buy today.” Sen. Baucus and other Democratic supporters of the bill opposed the Thune amendment and it failed on a 57-41 vote.
Editor’s Note: The Senate is experiencing difficulty in finding 60 votes for the $50 billion deficit of the current tax extenders bill. While progress is difficult in the Senate, the need to pass tax extenders, Medicaid and unemployment benefits is sufficiently great that Senate action during July is quite probable. The current bill still includes the seven charitable tax extenders. If the bill passes in July, the IRA charitable rollover will be available again in 2010.
House Passes Small Business Bill with 10-Year GRAT
The House passed the Small Business Jobs Tax Relief Act of 2010 (H.R. 5486) on a vote of 247-170. Ways and Means Chair Sander Levin (D-MI) was pleased that the bill passed. The bill includes a capital gain exclusion on new small business stock, tax penalty relief for small businesses, a new $20,000 “start-up expense deduction” for small businesses and the ability to deduct some small business expenses. Chairman Levin stated, “Small businesses need capital to create jobs and lead our economic recovery and these bills contain important tax cuts and lending opportunities that will help give small business owners the resources and flexibility they need to help their businesses grow.”
The Ranking Republican on Ways and Means is Rep. Dave Camp (R-MI). He suggested that the tax relief in the bill “is not enough and won’t actually help small businesses create the jobs we need to reduce our stubbornly high unemployment rate.”
The bill is offset in large part by a $5.3 billion tax saving that is the result of a 10 year minimum term for a grantor retained annuity trust (GRAT). In addition to the minimum 10-year duration, a GRAT will not be permitted to have declining payments and the gift value of a GRAT must be greater than zero.
Editor’s Note: A GRAT is frequently created for two years with a very high payout. The high annuity payout causes the GRAT assets to be returned to the initial donor. However, with the low applicable federal rates there can be substantial appreciation transferred to family if there is a good return during the two years. The “no declining payments” rule is designed to preclude the creation of a 10-year GRAT with two years of very high payments and eight years of nominal payments. This could parallel the current two-year GRAT pattern. Under the proposed act, GRAT payments must be level or increasing. Senate action on the bill is uncertain. It is important to note that with the extremely pressing search for offsets in the Senate, the probability of the 10-year minimum GRAT provision becoming law is reasonably high. While the effective date is still not certain, it is quite possible that it will be effective upon enactment. If it becomes probable that the 10-year GRAT legislation will pass, many counsel will create two-year GRATs prior to enactment.
Inadequate Substantiation of Clothing Gifts
In Edmund Douglas Roberts v. Commissioner; T.C. Summ. Op. 2010-76; Memo. 2716-09S (17 June 2010), the Tax Court determined that clothing and other tangible personal property gifts by the taxpayer did not qualify for a deduction due to inadequate substantiation.
Mr. Roberts filed his 2005 tax return 13 months late in June of 2007. He reported a $200 cash charitable contribution and gifts of 450 items of property valued at $28,655. His tax return included Form 8283, Noncash Charitable Contributions and reported gifts of used clothing, towels, bed sheets, books, costume jewelry, children’s toys and glass lamps. The IRS audited the return and assessed a deficiency of $10,482.
The Tax Court noted that gifts of cash are deductible with a cancelled check, receipt or reliable evidence that shows the donee, the date and the amount of the gift. Reg. 1.170A-13(a)(1). The cash gifts by Mr. Roberts did not include any of that required information and he could not identify the date or the specific charity. Therefore, the cash deduction was not appropriately substantiated.
A noncash deduction is permitted provided there is a receipt with the name of the charity, the date and location of the gift, a reasonably detailed description of the property, the fair market value and an explanation of the valuation method. Reg. 1.170A-13(b)(1).
Mr. Roberts did have five receipts from Goodwill. However, only one of the receipts had a signature. None of the receipts included the “reasonably detailed” description of the items. Since there were no adequate descriptions of the items or the method used for valuation, the deductions were denied, with the exception of a small number of items that had been accepted by the Service.
Editor’s Note: The Tax Court did not address the appraisal requirement for a “collection of similar items” with value over $5,000. If the clothing and other items had been deemed a collection, then the requirement for an appraisal for a gift of property over $5,000 would have been applicable.