The 2006 Annual Meeting of the California Tax Bar & the California Tax Policy Conference was held in San Jose on November 3-5, 2006. Nina Olsen, National Taxpayer Advocate, gave an illuminating keynote address on the role of the Taxpayer Advocate Service, an independent organization within the IRS that helps taxpayers resolve problems with the IRS and recommends changes as appropriate.
Two of the Conference’s programs were directly relevant to the charitable sector. Here are some highlights from each:
Private Foundation Update: What You Need to Known in 2007 – presented by Grace Allison, The Northern Trust Company
- Pension Protection Act of 2006 ("PPA") increases certain excise taxes for self-dealing, taxable expenditures, excess business holdings, jeopardizing investments, and failing to meet the minimum distribution requirement (typically doubling the penalty tax). For example:
- First tier tax on a disqualified person participating in a self-dealing transaction has increased from 5% to 10% of the amount of the transactions.
- First tier tax on a foundation manager approving a self-dealing transaction has increased from 2.5% to 5% of the amount of the transaction, and the cap has been raised from $10,000 to $20,000 per transaction. Similarly, the cap on the second tier tax on a foundation manager has been raised from $10,000 to $20,000 per transaction.
- First tier tax on a foundation making a taxable expenditure has increased from 10% to 20% of the amount of the taxable expenditure.
- First tier tax on a foundation manager approving a taxable expenditure has increased from 2.5% to 5% of the amount of the transaction, and the cap has been raised from $5,000 to $10,000 per transaction. The cap on the second tier tax on a foundation manager has been raised from $10,000 to $20,000 per transaction.
- Distributions by nonoperating private foundations to certain supporting organizations (Type III, non-functionally integrated) are not qualifying distributions for purposes of meeting the minimum distribution requirement – IRC 4942(g)(4).
- Definition of net investment income (to which a 2% excise tax ordinarily applies) is broadened to include capital gains from appreciation, including those from the sale or other disposition of assets to further an exempt purpose (there is a limited like-kind exchange safe harbor).
- Tax Increase Prevention and Reconciliation Act of 2005 ("TIPRA") provides for a new penalty tax on certain tax-exempt entities, including private foundations, that participate in prohibited tax shelter transactions – IRC 4965. Read more here.
- 501(c)(3) organizations that file unrelated business income tax forms (Forms 990-T) must make them available for public inspection – IRC 6104(d)(1)(A)(ii).
Use of Retirement Benefits in Charitable Planning – presented by William Finestone
- Charity can receive a fractional share of the retirement plan with other fractional shares passing to non-charitable (individual) beneficiaries, but this approach risks losing the option of a "life expectancy payout" for the individual beneficiaries. Consider either (a) falling within an exception to the multiple beneficiary rule (that all beneficiaries must be individuals); or (b) establishing separate IRAs: one payable to the charity and the other payable to the individual beneficiaries.
- A CRT can help solve some of the estate and tax planning problems that exist for retirement plan benefits: (a) benefits left to a CRT, rather than directly to an older non-spouse individual, will result in a steadier income from the CRT that will last for such elderly beneficiary’s life; (b) naming a CRT having several adult beneficiaries as beneficiary of a retirement plan avoids all minimum required distribution problems, because the CRT receives the full distribution immediately upon the participant’s death with no income taxes; (c) if the only death benefit of a qualified retirement plan is a lump sum distribution, a CRT can be used to approximate the life expectancy payout otherwise unavailable under such retirement plan.
- Any non-spouse designated beneficiary who has recently inherited a retirement plan account that pays only a lump sum who would prefer the life expectancy payout method should try to delay distribution until 2007, and then use the new rollover provision that is part of the PPA. The new provision provides that the non-spouse designated beneficiary can transfer funds from an inherited retirement plan account via a direct rollover to an "inherited IRA" established to receive the distribution in the name of the deceased participant and payable to the same beneficiary. Read more on Natalie Choate’s website here.
- The PPA provides for charitable IRA rollovers in 2006 and 2007. Money can be distributed from an IRA directly to a charity (but not a donor-advised fund), and the distribution will be excluded from the IRA owner’s income, subject to the limitations and restriction on these new Qualified Charitable Distributions ("QCDs"). The IRA owner must be at least age 70-1/2. The QCD income exclusion is limited to $100,000 per year. Split-interest gifts (e.g., CRTs and CGAs) will not qualify. The QCD provides tax advantages to, among others, generous donors already giving more than 50% of their AGIs to charity, donors who do not itemize their deductions, and donors who might benefit from the transfer by reducing the percentage of Social Security income subject to tax.