Washington Hotline – December 12, 2017


Washington Hotline

Bipartisan Tax Reform Conference Committee

Both House and Senate leaders have appointed members of the bipartisan conference committee to finalize the Tax Cuts and Jobs Act. The House group will be led by eight Republican and five Democratic members. The Senate will send eight Republican and seven Democratic members.

The conference committee will be chaired by Rep. Kevin Brady (R-TX). He is Chairman of the House Ways and Means Committee. Other tax writer members are House Ranking Member Sander Levin (D-MI), Senate Finance Committee Chairman Orrin Hatch (R-UT) and Senate Ranking Member Ron Wyden (D-OR).

There are major differences in the House and Senate bills that must be reconciled by the conference committee.

  1. Tax Brackets – The House has four brackets with a top rate of 39.6% and the Senate has seven with a top rate of 38.5%.
  2. Mortgage Interest Deductions – The House allows an itemized interest deduction on mortgages up to $500,000. The Senate would continue the existing mortgage limit of $1 million.
  3. Medical Deductions – The Senate permits the current itemized medical deduction. For most taxpayers, the medical deduction is available to the extent that your medical expenses exceed 10% of adjusted gross income. The House eliminates the medical deduction because it assumes the doubling of the standard deduction will cover most taxpayers.
  4. Alternative Minimum Tax (AMT) – The House repeals AMT. The Senate needed more tax revenue to pass its bill and reinstated the AMT with higher exemptions.
  5. Small Business Taxes – Many small businesses are operated as partnerships, proprietorships or LLCs. Both bills reduce the tax rate for income earned in a business, but there are substantial differences between the methods selected by the House and Senate.

Editor’s Note: There is general agreement between the House and Senate on many bill provisions. The standard deduction will be doubled, corporate tax rates will be lowered and there will be a reduced number of itemized deductions. Both bills help generous donors by increasing the cash deduction limit from 50% to 60% of adjusted gross income. With the end of the year quickly approaching, the conference committee faces a substantial challenge in completing its work within the next week or two. House and Senate leaders hope to pass the final tax reform bill prior to the end of December.

Senators Debate Tax Reform Bill

Following a Senate vote of 51 to 49 to pass the Tax Cuts and Jobs Act, Senate leaders have appointed the bipartisan conference committee members. Key senators gave opinions this week on the progress of the comprehensive tax reform bill.

Senate Majority Leader Mitch McConnell (R-KY) supported the bill. He called it a “once in a generation” opportunity for comprehensive tax reform.

McConnell stated, “Earlier this week, our colleagues in the House voted to work with the members of the Senate to produce a final bill to send to the President’s desk. And later today, the Senate will do the same. We will vote to join our colleagues in a conference to finish our work on tax reform. The American people deserve taxes that are lower, simpler, and fairer. By voting to go to conference, we will be one step closer to getting it done.”

Senate Finance Committee Chairman Orrin Hatch (R-UT) highlighted the “years in the making” aspects of the bill. He noted, “This bill is going to boost the economy, grow jobs, and finally help end the wage stagnation we have been faced with for years. This bill is going to unleash the American spirit; bringing businesses back home where they started, and encouraging other businesses to both come from abroad, as well as to grow from within. Once again, America is open for business.”

Sen. Ron Wyden (D-OR) is the Ranking Member of the Senate Finance Committee. He has steadily opposed many of the provisions in the bill. Wyden advocates larger tax cuts for the middle class.

Wyden stated, “The truth is Republicans from the House and Senate are hashing out their differences right now behind closed doors. They are packing the bill with even more goodies and loopholes for special interests. There is no telling what swamp creatures have crawled their way up Capitol Hill to get their fingers on this bill at the eleventh hour. The basic proposition they offer – taking money and healthcare from middle class Americans to pay for tax cuts for multinational corporations and the politically powerful – that proposition is not going to change.”

IRS Guidance on Donor Advised Funds

In Notice 2017-73; 2017-51 IRB 1, the Service discussed three issues for Sec. 4966(d)(2) Donor Advised Funds (DAFs). The Notice provides interim guidance on DAF grants to charities who sponsor an annual donor dinner, DAF grants to charities to whom the donor has made a pledge and the use of DAFs to circumvent private foundation excise taxes. The Service requests submission of comments on these issues by March 5, 2018.

  1. Donor Benefits and DAFs – Commentators proposed that a bifurcation method should be allowed for DAF grants. If a donor dinner has a ticket price of $1,000 and meal value of $100, under the proposal, the DAF grant could be $900 and the donor would pay $100 directly. The Service rejected this proposal and stated that a donor “can make the contribution directly without the involvement of a DAF.”
  2. DAF Pledge Payments – Payment by a DAF of a legally binding pledge “ordinarily constitutes a prohibited act of self-dealing.” See Reg. 53.4941(d)-2(f)(1) of the Excise Tax Regulations. Commentators noted the charity administering the DAF frequently does not know whether a pledge is legally binding. The Service decided “determination of whether an individual’s charitable pledge is legally binding is best left to the distributee charity, which has knowledge of the facts surrounding the pledge.” Therefore, DAF payments where a donor has made a pledge or stated a gift intention may be made under three specific conditions. The DAF sponsoring organization must make no reference to a pledge, the Donor/Advisor must not receive a benefit and the Donor/Advisor may not take a charitable deduction.
  3. Public Charity DAF Grants – Most public charities pass a test with one third of support from donors who give 2% or less of total gifts. This test is intended to show the public charity has broad-base support. However, grants from public charities may enable the distributee nonprofit to qualify. A donor may create a DAF with a public charity. The public charity DAF makes grants to a distributee nonprofit. The distributee nonprofit claims that it is publicly supported and therefore complies with the public support test. In this way, the distributee nonprofit avoids the private foundation excise taxes and other requirements. The IRS plans to cover this issue in future regulations.

Editor’s Note: Most DAF provisions were created in the Pension Protection Act of 2006. Commentators have been waiting for the IRS to address some of these issues. Notice 2017-73 may be relied upon as interim guidance. Therefore, some donors with non-legally binding pledges may, with advice of counsel, decide to make DAF grants to fulfill their pledges.

Applicable Federal Rate of 2.6% for December — Rev. Rul. 2017-24; 2017-49 IRB 1 (17 Nov 2017)

The IRS has announced the Applicable Federal Rate (AFR) for December of 2017. The AFR under Section 7520 for the month of December is 2.6%. The rates for November of 2.4% or October of 2.2% 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 2017, pooled income funds in existence less than three tax years must use a 1.2% deemed rate of return.

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