Washington Hotline – March – Week 3 – 2012

Treasury Secretary Promotes Revenue Increase
On March 15, Treasury Secretary Timothy Geithner spoke to the Economic Club of New York.  Sec. Geithner discussed the improving economy, the challenges that remain and proposed revenue increases to help the USA achieve fiscal sustainability.

In Geithner’s view there are a number of positive economic factors.  During the past two years, 3.9 million jobs have been created.  Business investment has increased 33% and exports are up 25%.

American households have been reducing debt for the past 3 years.  Household saving rates were near zero in 2007, but now have increased to 4.5% of income.

The total output of the economy is now close to the pre-crisis peak.  As a result, deficits are starting to trend lower, although they still are in excess of $1 trillion per year.

Geithner then moved on to the challenges facing America.  Unemployment is still “very high and is improving more gradually than any of us would like.”  The unemployment rate continues to be over 8% and is moving down quite slowly.

Housing remains quite weak.  There is a very low level of new residential construction.  Home prices have declined in many parts of the country and home equity is down substantially.

Finally, the economy has grown at a much slower rate than most other recessions.  During the first 2½ years following the recession of 2009, the economy grew at a much slower rate than in prior recessions.

Geithner then suggested the solutions that are needed for fiscal sustainability.  In his view, a combination of $4 trillion in budget reductions and tax increases are needed.  The spending compromise of August 2011 will cover approximately $1 trillion, leaving a balance of $3 trillion.

Under that compromise, there will be reductions in spending over the next decade.  Half of the reductions will be from the Department of Defense and half will be from reduced payments to Medicare providers.

While there is a need for additional spending cuts, Geithner suggests that tax increases will also be necessary.  The tax increases in his view should be “roughly $1.5 trillion over 10 years.”  If these increases are not made, there would be additional cuts in defense and entitlement programs.

Geithner noted, “We can’t offer Americans the illusions of tax cuts that pay for themselves.  No responsible politician can offer the nation fiscal sustainability through trillions in unpaid-for tax cuts.”

He suggested that there will be negotiations following the election in November.  Under current law there will be an expiration of the existing tax cuts and major “across-the-board cuts in spending.”  Therefore, Washington has a “strong incentive to agree on a balanced package of reforms.”

Editor’s Note: Secretary Geithner is setting forth the White House plans for the November negotiation.  The White House budget proposes substantial increases in taxes for upper-income taxpayers.  This could include increased income tax rates, increased rates on long-term capital gains and reduced itemized deductions.

Sen. Reid – Pass Tax Extenders Now

Following the passage by the House and Senate of a major transportation bill, Majority Leader Harry Reid (D-NV) spoke on the Senate floor about the need to move forward with a bill on tax extenders.

Reid noted, “I would welcome the opportunity to work with my friend from Kentucky in finding a path forward soon on tax extenders.  It is important that we take care of this early in the year so that taxpayers can plan and make decisions.”

The ranking Republican leader is Sen. Mitch McConnell (R-KY).  He agreed with Reid that the “tax provisions certainly are important to millions of American family and businesses and I would expect that Congress would act on these sooner rather than later.”

However, McConnell also noted that it was important to have a critical review of the extenders and make decisions about which should be passed and which should be dropped.  In his view, some provisions should be eliminated, others should be modified and the balance may be extended.

Sen. Finance Chair Max Baucus (D-MT) also supported a prompt extension of extenders.  He indicated, “We should provide certainty to taxpayers by extending them through this year as soon as possible.”  Baucus also noted that it will be important to have a review of the extenders for 2013.

Sen. Oren Hatch (R-UT) is the ranking Republican on the Senate Finance Committee.  He expressed concern about the “explosion” in the tax extenders.  The number has increased from 42 in 1998 to 154 in 2011.  Hatch prefers to evaluate all of the extenders and decide which should be dropped and which should be continued.

Editor’s Note: The tax extender of great interest to many friends of philanthropy is the IRA charitable rollover.  It is probable that the extenders bill will be passed this year and the IRA charitable rollover may be retroactive to January 1.  While there still are good prospects for passage, it is quite likely that the tax bill will not be passed until after the November election.

IRS Announces Online EO Search Tool

The IRS announced this week that it has created an online search tool called Exempt Organizations Select Check.  The new search tool is very useful in understanding whether a charitable organization currently qualifies for deductible gifts.

On www.IRS.gov, select Charities and Nonprofits – More Topics.  On the right side of the screen, select Search for Charities and load the Exempt Organizations Select Check page.

The new page allows three types of searches.

1. Exempt Organization Publication 78 – Organizations qualified to receive deductible contributions.
2. Non-exempt Organizations – Because many smaller organizations did not file Form 990-N (ePostcard), their exemptions were automatically revoked.
3. Qualifying Form 990-N Organizations – Those organizations that did comply with the ePostcard notice are listed.

Editor’s Note: Advisors or board members of charities may find the new EO Select Check useful in determining whether a charity has complied with the requirements to file IRS Form 990, Form 990-EZ or IRS Form 990-N. If an organization is no longer exempt it may be appropriate to file a new IRS Form 1023 and apply for exempt status.

Executors Personally Liable for Tax Lien

In United States v. David A. Tyler et al.; No. 2:10-cv-01239 (12 Mar 2012), the District Court held that the co-executors were personally liable as estate fiduciaries for payment of a prior income tax deficiency.

David J. Tyler and Paula I. Tyler were married when the IRS issued deficiencies for their income taxes in years 1992-1998. The Tylers held real property at 585 Cricket Lane in Radnor, PA as tenants by the entirety.

Following receipt of the IRS deficiency, on August 20, 2003, Mr. Tyler executed an indenture transferring the residence to Mrs. Tyler for consideration of $1. Mr. Tyler died on August 15, 2006 and Mrs. Tyler passed away on June 26, 2007.

On September 11, 2008, the IRS sent notices to the co-executors David A. Tyler and Lewis J. Ruch that they were obligated to make payments for the income tax deficiency.  The co-executors did not make the payments and in July 2009 sold the Cricket Lane property for $525,019, with net proceeds of $313,206.  Executor David Tyler testified that the proceeds were invested but “pretty much got blown away in the market.”

On March 22, 2010, the IRS filed for collection of the deficiency amount.  The proceeding before the US District Court resulted in motions for summary judgment.

The court noted that a major issue is whether or not the lien for income taxes attached to the property after the transfer from husband to wife for consideration of $1.  Liens for tenants in the entirety are attached to a one-half interest in the real estate.  Under Notice 2003-60, 2003-39 I.R.B. 643(2003), if a lien is attached to one-half of a tenancy by the entirety and the decedent who caused the lien passes away, then “there is no longer an interest of the taxpayer to which the federal tax lien attaches and the surviving non-liable spouse takes the property unencumbered by the tax lien.”

However, in this case the action of the decedent husband in transferring the property to the decedent spouse for consideration of $1 severed the tenancy by the entirety under the law of the State of Pennsylvania.  Therefore, the lien remained attached to the property of the surviving spouse.

Taxpayers noted that the decedent’s husband had suffered a stroke and claimed that he did not have the capacity to sever the tenancy by the entirety.  However, the court observed that the co-executors did not demonstrate Tyler’s lack of capacity by appropriate evidence.

Because the transfer of the property for $1 of consideration was not “adequate and full consideration in money or money’s worth” and therefore spouse Paula Tyler was not a purchaser, the tenancy was severed and the lien was valid when she passed away.

If a fiduciary of an estate pays a debt “before paying a claim of the government,” that fiduciary may be personally liable for the unpaid claims of the government.  Because the co-executors were fiduciaries with notice of the government claim and conveyed the real estate from the estate without payment of that claim, they are personally liable for payment of the income tax lien.

Applicable Federal Rate of 1.4% for March – Rev. Rul. 2012-9; 2012-11 IRB 1 (20 Feb 2012)

The IRS has announced the Applicable Federal Rate (AFR) for March of 2012.  The AFR under Section 7520 for the month of March will be 1.4%.  The rates for February of 1.4% or January of 1.4% 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.

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