GiftCharity GiftLaw eNewsletter September 6, 2010

Washington Hotline

President Urges Passage of Small Business Tax Relief

On August 30th, President Obama spoke in a White House Rose Garden press conference about the economy and the Small-Business Tax Relief Bill. He suggested, "The bill, which has failed to pass a procedural vote several times in the Senate, would enable small-business owners to get the credit they need and eliminate capital gains taxes on key investments so they will have more incentive to act right now."

The Senate Small Business Jobs Act of 2010 (H.R. 5297) provides several incentives that are intended to encourage small businesses to hire new workers. There is a one-year extension of bonus depreciation and an expansion of Sec. 179 expensing to $250,000. Sale of stock in new small businesses that may generally be sold with no capital gains tax.

In addition, there are provisions designed to cover the cost of the bill. The bill proposes that landlords file expanded information returns on rents received from tenants. There will also be a new series of withholding requirements for guarantee fees.

Majority Leader Harry Reid (D-NV) responded to the very unpopular requirement for businesses to report all payments of $600 or more by proposing repeal of that provision. The $600 payment provision was part of the Healthcare Reform Bill and small businesses have objected strongly to the potential problems in tracking and reporting large numbers of payments.

President Obama also affirmed again his support for extending the tax cuts for individuals with incomes under $200,000 ($250,000 for married couples). He indicated that he will provide further detail on his plans later this month. However, the President still plans to increase the top two brackets to 36% and 39.6% and increase the capital gains tax rate to 20%.

Senate Minority Leader Mitch McConnell (R-KY) observed that the net result of the plans by the President and the Majority Leader would be to reduce employment. He called the proposed tax increase on upper-income taxpayers, "a massive tax hike on small businesses in the middle of a recession."

Editor's Note: The Non-Partisan Tax Policy Center estimates that the tax increases on upper-income Americans would raise approximately $68 billion each year for the next decade. This increase comes from the higher income tax rates, the increase in capital gains rates, the restoration of phase-outs for personal exemptions and a portion of itemized deductions.

Parking Lot Income is UBI

In Ocean Pines Association, Inc. v. Commissioner; 135 T.C. No. 13; No.5127-08 (30 Aug 2010), the Tax Court held that income from two parking lots was taxable to a non-profit association.

The Ocean Pines Association is a homeowners group in a community with a population of 10,496. It operates many recreational facilities in Ocean Pines, but owns a beach property and two parking lots with some usage restricted to members.

In 2003, the parking lots produced $232,089 in revenue, with $39,092 in expenses. $61,024 of the revenue came from leasing the property to third party businesses from 4:00 pm to 3:00 am each day. The balance of the revenue came from payments made by association members for parking stickers that permitted them to use the parking lots and surrounding facilities during the summer.

The IRS assessed a deficiency for years 2003 and 2004 because the association did not file Form 990-T, Exempted Organization Business Income Tax Return. The IRS stated that the revenue from the parking lot was unrelated business taxable income to the association and accessed a deficiency.

The Association claimed that the revenue from the parking lots was not subject to UBI. First, the parking lot was "substantially related" to its use of facilitating the community welfare. Second, the revenue from the parking lot constituted rent from real property and therefore was exempted.

The court noted that under Sec. 513(a) a charity may escape taxation on revenue for activities that are related to its exempted purpose. However, if the activity is "regularly carried-on" and is "not substantially related" to the exempt purpose, then it is taxable.

Clearly, the parking lots were regularly carried-on business activity. The issue was whether or not a parking lot is related to the community welfare. Because the use of the parking lot was limited to the members, the court determined that it was not exempted. If a homeowner's association provides services to its members, that service is not for the general public and therefore not exempted.

The second claim by the association is that the parking lot fees were "rents from real property." If this is so, then under Sec. 512(b)(3)(A)(i), they would be excluded from unrelated business taxable income. However, the court noted that Reg. 1.512(b-1(c)(5) states that the furnishing of hotel services or "use or occupancy of space and parking lots" is not exempted. However, because the lease revenue for the evening use of the parking lots was a lease payment by a third party, this revenue is exempt from UBI.

Radio Freedom Gift Not Deductible

In Bahman Ahahmadian et ux. v. Commissioner; T.C. Summ. Op. 2010-126; No. 14476-09S (30 Aug. 2010), the Tax Court determined that a deduction of $24,500 was not qualified.

The taxpayers had supported an organization with the title "Radio Freedom." At one time, the taxpayer and other individuals had operated Radio Freedom. It existed for the purpose of "educating the people about the meaning of freedom."

The principal operator of Radio Freedom initially stated that it was a non-profit and documents had been filed with the IRS to obtain tax exemption. Later, the operator claimed it was now a for-profit. Radio Freedom ceased operations in 2007.

Taxpayers contributed $24,500 to Radio Freedom in 2006 and claimed a deduction on their tax return. The IRS denied the deduction and issued a deficiency.

The court noted that gifts are deductible to qualified charities that are operated exclusively for an exempt purpose. Sec. 170(c)(2).

Organizations that are eligible for charitable gifts are reported in IRS Publication 78, Cumulative Lists of Organizations described in Sec. 170(c) of the Internal Revenue Code of 1986. Publication 78 is available on www.irs.gov.

Radio Freedom was not listed in Publication 78. While it is still possible for some gifts to be deductible because some charitable organizations are not listed in Publication 78, the obligation rests with the taxpayer to demonstrate that the organization is a qualified recipient. In this case, the taxpayers did not meet that burden and the deduction was denied.

Applicable Federal Rate of 2.4% for September -- Rev. Rul. 2010-20; 2010-36 IRB 1 (18 August 2010)

The IRS has announced the Applicable Federal Rate (AFR) for September of 2010. The AFR under Sect. 7520 for the month of September will be 2.4%. The rates for August of 2.6% or July of 2.8% 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 2010, pooled income funds in existence less than three tax years must use a 4.6% deemed rate of return. Federal rates are available by clicking here.

Private Letter Ruling

Display of Art is Not Self-Dealing

ORG is tax-exempt under Sec. 501(c)(3) and classified as a private foundation as defined in Sec. 509(a). ORG carries out its charitable purposes through the promotion of public awareness and appreciation of the leading twentieth century artists and their creations. ORG was gifted a significant collection of modern art ("Collection") by Founder. Director 1 and Director 2, the daughter of Founder, are married and sit on the Board of ORG. ORG lends Collection to Art Center for public display. However, with over 350 pieces of art, Collection is so sizable that only one-third of Collection can be exhibited at Art Center at one time. ORG wishes to display five to ten pieces of Collection at Shopping Center, which is over 35% owned by Director 1 and Director 2. In addition to indicating that ORG is owner of the art and encouraging viewers to visit Art Center, Shopping Center will not attempt to capitalize commercially upon the display. ORG states that displaying Collection at Shopping Center will be valuable for building and maintaining public awareness and appreciation of art. ORG requests that the display of Collection at Shopping Center will not constitute an act of self-dealing as described in Sec. 4941.

Sec. 4941 imposes an excise tax on each act of self-dealing between a disqualified person and a private foundation. Self-dealing is defined in Sec. 4941(d)(1)(C) and (E) and Sec. 53.4941(d)-2(d)(1) as the furnishing of goods between a private foundation and disqualified persons or the use of the assets of a private foundation by or for the benefit of disqualified persons. Under Sec. 4946, disqualified persons with respect to a private foundation are defined as substantial contributors, foundation managers, 20% owners of a substantial contributor, family members of an individual who is one of the above and entities 35% owned by one of the above.

Pursuant to Sec. 4946(1), the directors of a private foundation qualify as foundation manager. Shopping Center is a disqualified person as an entity more than 35% owned by Director 1 and Director 2, who are disqualified persons by way of being ORG's foundation managers, as well as by Director 2 being a family member of Founder. As such, ORG's display of Collection at Shopping Center would constitute an act of self-dealing, unless an exception applies.

One such exception to the self-dealing rule occurs when the benefits to disqualified persons are found to be incidental or tenous under Sec. 53.4941(d)-2(f)(2). Here, the Service found that the primary beneficiary of the artwork is the public who views it, regardless of whether the art is exhibited in Art Center or Shopping Center. Because of the inability of Art Center to hold all of Collection at once, the works not displayed at Art Center would likely be in storage if not on display at Shopping Center. Further, the Service found no evidence that disqualified persons had retained control over public access to view Collection. As such, the Service held that the display of Collection at Shopping Center would not constitute an act of self-dealing.

Case of the Week

Wild Bill Russell Donates Art - Qualified Appraisal

Bill Russell grew up on the Great Plains. During his youth, he was a rodeo bull rider, and gained fame as "Wild Bill" for his daring exploits. But Wild Bill was an artist at heart and soon decided to move on to his artistic pursuits. He traveled throughout America and Europe and studied all of the great modern and classical artists. In France he was greatly impressed by the delicate works of Impressionist painters Monet and Manet and the bold colors and brush strokes of Van Gogh. Upon his return to his beloved great plains of the West, Wild Bill combined the subtlety of the Impressionists, the colors of Van Gogh and his own unique skills. His Impressionist Western landscapes and paintings of cowboys and life on the ranch became treasured by art collectors nationwide.

One day Bill received a call from Wolf Point, Montana. A local attorney told him that a distant relative had passed away and Bill had inherited a sketch done many years ago. Bill asked about the sketch and was told that it was done by his great-great-great Uncle Charles Russell. While it is a small sketch, the attorney thought that it might be quite valuable.

After inheriting the Russell sketch, Bill admired it for a year. But the Cowboy Western Museum called and suggested that the sketch would be a great addition to their Charles Russell collection. So Bill called his CPA, Helen Swenson, and asked about donating the painting. He thought, "Maybe I could receive a large tax deduction and save taxes. But how does this work? What do I need to do to give my Russell to the museum and get a large deduction. I don't want to get into any trouble with the IRS."