Permanent Tax Extenders Effort
The Brady plan is likely to involve negotiating some permanent tax extenders with the balance renewed for 2015 and 2016. Ways and Means Committee member David Reichert (R-WA) indicated that there is ongoing discussion about which extenders would be permanent. He also suggested that some extenders “will not make it to the bill.”
The Democratic position was outlined by Rep. Richard Neal (D-MA). He stated, “I think now we have to get down to what is going to make it and perhaps what is not going to make it.” Neal emphasized that Democratic Members were seeking permanent status for the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC).
Chairman Brady expressed concern that both the CTC and EITC have fairly high rates of usage by individuals who do not qualify for the benefit. He is hopeful that the legislation would include provisions to increase compliance for these benefits. If a compromise on the compliance measures can be reached, there may be a bill with permanent business, charitable, CTC and EITC extenders.
A final bill is not expected before Thanksgiving. It is quite possible that a tax extenders bill will be incorporated into the budget bill scheduled for December 11, 2015.
Editor’s Note: The House has previously passed permanent versions of the IRA Charitable Rollover, enhanced deductions for conservation easements and increased deductions for gifts of food inventory. If there is a permanent tax extenders bill, these three provisions are likely to be included. The White House has previously stated that it will not support permanent tax extenders unless the CTC and EITC are included. The White House also would like to make permanent the American Opportunity Tax Credit (AOTC). While it will be after Thanksgiving before the final compromise is known, there is a potential compromise between the White House, Senate and House that could produce permanent status for these three charitable provisions. If the compromise talks break down (as happened in December of 2014), then the two-year extension of all provisions is likely. In this case, the IRA Rollover will be enacted retroactive to January 1, 2015.
Democratic Debate Discusses Taxes
At the November 14 Democratic Presidential candidates debate in Des Moines, IA, both individual and capital gains taxes were discussed.
Former Maryland Governor Walter O’Malley was asked about funding for his proposals for paid family leave and free college education. As Governor of Maryland, O’Malley raised multiple taxes. At the debate he advocated increased taxes on upper-income persons. O’Malley stated that his proposals will be covered by “elimination of one big entitlement that we can no longer afford as a people, that is the entitlement that many of our super-wealthiest citizens feel they are entitled to pay – namely, a much lower income tax rate and a lower tax rate on capital gains.” O’Malley continued with the proposal that capital gains should be taxed at the same rate as ordinary income.
Sen. Bernie Sanders (D-VT) has supported paid family leave, free college tuition and $1 trillion in infrastructure repairs. When asked how he would pay for these proposals, Sanders responded, “We bailed out Wall Street. It is their time to bail out the middle class, help our kids be able to go to college tuition-free. So we pay for this by demanding that the wealthiest people and the largest corporations, who have gotten away with murder for years, start paying their fair share.”
The moderator asked Sen. Sanders what his proposed top rate would be. He stated that it would be lower than the 90% rate that existed under President Eisenhower.
Former Secretary of State Hilary Clinton also supports free college. She stated, “I think it ought to be a compact – families contribute, kids contribute. And together we make it possible for a new generation of young people to refinance their debt and not come out with debt in the future. And I will pay for it by, yes, taxing the wealthy more, closing corporate loopholes, deductions, and other kinds of favorable treatment.”
Editor’s Note: As a service to our readers, your editor will cover major tax proposals by candidates of both parties.
Political Ads Are Taxable Expenditures
In Loren E. Parks et al. v. Commissioner; 145 T.C. No. 12; Nos. 7043-07, 7093-07 (17 Nov 2015), the Tax Court held that 30- and 60-second ads costing $639,073 were taxable expenditures under Sec. 4945(a).
Donor Loren E. Parks created The Parks Foundation in 1977. It was recognized by the IRS as a Sec. 509(a) private foundation in 1979. Parks was the sole donor to his private foundation.
During the years 1997-2000, The Parks Foundation produced a series of radio ads. The ads were created by Gregg K. Clapper through the Clapper Agency. They supported or opposed various Oregon ballot initiatives.
The IRS determined that the ads were taxable expenditures because their purpose was “to influence legislation.” Therefore, under Sec. 4945(d)(1) and (5), they subjected the foundation to excise tax. Because the taxable expenditure was not corrected, the second tier excise tax also became applicable.
Parks claimed that the ads were educational. In addition, he maintained that Sec. 4945 violates his First Amendment rights.
The court noted that Sec. 4945(a)(1) creates a 10% excise tax if the private foundation engages in a taxable expenditure. Under Sec. 4945(a)(2), the foundation manager may also be subject to a 2.5% tax for taxable expenditures. If the taxable expenditure is not corrected, then Sec. 4945(b)(1) adds a second tier tax of 100% of the expenditure.
While Parks claimed the ads were educational, the court held that they were intended to influence legislation and therefore were taxable expenditures. Because Congress has provided for a potential structure with a Sec. 501(c)(3) and a Sec. 501(c)(4) entity, the code and regulations are not subject to a strict scrutiny standard. If an organization desires to influence legislation, then a Sec. 501(c)(4) entity is available. Gifts to a Sec. 501(c)(4) entity do not qualify for charitable income tax deductions.
Because Parks did not show that the regulations were “unconstitutionally vague,” the foundation is liable for both first and second tier excise taxes. In addition, Parks was the “knowing and willful participant” in creating the ads and therefore the tax on the manager is also applicable.
Editor’s Note: The Sec. 4945 tier one excise taxes were increased to 20% for the foundation and 5% for the manager by the Philanthropy Protection Act of 2006. The Park Foundation ads were in a year prior to the increases.
Applicable Federal Rate of 2.0% for December — Rev. Rul. 2015-25; 2015-49 IRB 1 (20 Nov 2015)
The IRS has announced the Applicable Federal Rate (AFR) for December of 2015. The AFR under Section 7520 for the month of December will be 2.0%. The rates for November of 2.0% or October of 2.0% 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 2015, pooled income funds in existence less than three tax years must use a 1.2% deemed rate of return. Federal rates are available by clicking here.