• "I am deeply grateful to the Masonic Village's employees, and will never be able to express my gratitude to all of them." — Catherine L.

  • "I liked my Masonic Charity Foundation charitable gift annuity so much, I opened three more. Why? I might be old-fashioned, but the scriptures have taught me the virtue of looking out for others. Knowing that the funds left in my gift annuities will care for the Masonic Village residents makes me feel wonderful." — Dorothy B.

  • "I am writing to tell you, from the bottom of my heart, just how wonderful the last two years of my mother's life were, thanks to all of you at the Masonic Village at Burlington." — Carol O.

  • "It's not just the Masonic Village's beautiful facilities and the many services that are offered to the residents – most of all, it's the employees. They are personally dedicated it seems to each and every individual here." — Catherine L.

  • "We are equally grateful for the 'loving arms of hospice' that were wrapped around our family in our hour of need." — M.W.

  • "When we decided to come to the Masonic Village at Burlington, we knew it was going to be a very big change in our lives. When we came here, we were very pleased that it was not difficult. We would recommend the Masonic Village highly to a friend." — Joseph and Bertha B.

  • "There is simply no way to express the depth of gratitude I feel for the Masonic Village at Burlington – thank you!" — Jim C.

  • "We know first-hand how very special Acacia Hospice's caregivers are, and we thank every single one of them from the bottom of our hearts." — J.M.

  • "It is with a grateful heart that we extend to you our deepest gratitude for the loving care that Acacia Hospice afforded our beloved Aunt." — M.W.

  • "It has been a source of tremendous relief that my parents were in such caring and professional hands during the final years of their lives." — Jim C.

  • "It takes a very special person to do the job Acacia Hospice's caregivers do every day. We would like you to know we think you have an incredible group of 'Angels.'" — J.M

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Tuesday June 25, 2019

Washington News

Washington Hotline

October 15 Tax Extension Deadline

In IR-2018-194, the Service reminded taxpayers to file their returns by October 15, if they previously asked for an extension. Over 14 million taxpayers chose to pay their tax by April 18, 2018, but elected an extension of their tax return filing date to October 15, 2018.

Some taxpayers may have even more time to file. Military members who are serving in Afghanistan, Iraq or other combat zones have 180 days after leaving the combat zone to file. They also may delay payment of tax until that 180-day deadline.

Taxpayers in certain parts of California (fire disaster) or the Carolinas and Texas (hurricane disaster) also have extended filing dates. Taxpayers in a disaster zone with extended filing dates were required to pay any applicable tax by April 18, 2018.

All taxpayers should retain tax returns and documents to support their deductions for at least three years. Your prior tax returns include information such as your adjusted gross income (AGI). Your prior year AGI is used to authenticate your identity under new IRS security procedures if you request a tax transcript.

The IRS e-File and Free File programs are still available. You can use www.IRS.gov and click on "Free File Your Taxes." If your income is under $66,000, you may use the "Free File Software." With any income level, you may file using "Fillable Forms." These IRS filing programs may be used by taxpayers filing returns by October 15, 2018.

Excess Benefit Excise Taxes Upheld

In Farr, Joan E. v. Commissioner; No. 18-9002 (10th Cir. 2018), the Tenth Circuit upheld an assessment for Sec. 4958 excess benefit taxes.

Joan Farr is the founder of a Sec. 501(c)(3) organization, Association for Honest Attorneys (AHA). During 2010 to 2012, she paid multiple personal expenses with AHA funds. These payments included "personal purchases from various grocery, retail, automotive and home improvement stores, as well as to make tuition payments for her son and to cover the costs of exhuming her father's remains for DNA analysis."

The IRS determined these expenditures were a Sec. 4958(c)(1)(A) transaction in which "an economic benefit is provided by an applicable tax-exempt organization directly or indirectly to or for the use for any disqualified person if the value of the economic benefit provided exceeds the value of the consideration (including the performance of services) received for providing for such benefit."

The Service determined an excess benefit in the amount of $39,495.34. It assessed a first tier penalty of $9,873.83 and a second tier excise tax of $78,990.68. Farr claimed that the funds were spent on AHA business purposes and also were compensation for her services.

The Tenth Circuit noted, "Farr advances no cogent argument with record support showing that the Tax Court erred in determining that she engaged in excess benefit transactions with AHA." Farr's claim that the IRS was engaging in conspiracy and collusion were rejected. The Tenth Circuit stated she failed to substantiate her personal expenditures and affirmed the Tax Court decision.

Editor's Note: This was a "bad facts" case for the taxpayer. She did not follow normal accounting procedures to set up a budget for the nonprofit and to also take a salary. This case is a warning to leaders of both public and private foundations to guard against direct payments for personal expenses of officers or their families. The first and second tier excess benefit taxes under Sec. 4958 can be very substantial.

Sec. 199A and Charitable Remainder Trusts

Both the American Bankers Association (ABA) and the American College of Trust and Estate Counsel (ACTEC) commented this week on the application of Sec. 199A to charitable remainder trusts (CRTs).

Phoebe A. Papageorgiou, ABA Vice President, Trust Policy, sent a letter to the IRS on October 1, 2018. She outlined the Sec. 199A rules and the application of these rules to four-tier trust accounting.

Under Sec. 199A, there is a 20% deduction for qualified business income (QBI). The income must be received from a partnership, subchapter S corporation or sole proprietorship. The Sec. 199A deduction may be limited by the type of business, the W-2 wages paid by the business and the unadjusted basis immediately after acquisition (UBIA) of qualified property.

The CRT trustee may receive QBI and will need to account for it under the four-tier trust accounting rules. See Sec. 664(b). The ABA proposes three guidelines for CRT trustees.
  1. Trust Level QBI - The trustee should calculate QBI at the trust level as though the CRT is a single taxpayer for purposes of the income, wage and UBIA thresholds.
  2. Tier I Income - Because a CRT usually has no unrelated business taxable income (UBTI), the trustee should define Tier I taxable income under Sec. 664(b)(1).
  3. Sec. 199A Deduction - The Service should permit the trust to pass through a QBI deduction to the beneficiary. The deduction amount would be based on the amount of QBI and the beneficiary share of distributable net income (DNI).
Editor's Note: The ACTEC comment also suggests allocating QBI to Tier I ordinary income. ACTEC suggests that Tier I QBI be distributed only after all non-QBI Tier I income is paid out. The final rules of Sec. 199A and CRTs will be complex. Most CRT trustees will avoid the Sec. 199A issues by holding public stock and bond portfolios. However, some CRTs are funded with assets that will at least initially receive Sec. 199A income. Therefore, the IRS will need to provide guidance on the appropriate CRT accounting rules.

Applicable Federal Rate of 3.4% for October -- Rev. Rul. 2018-27; 2018-41 IRB 1 (20 September 2018)

The IRS has announced the Applicable Federal Rate (AFR) for October of 2018. The AFR under Section 7520 for the month of October is 3.4%. The rates for September of 3.4% or August of 3.4% 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 2018, pooled income funds in existence less than three tax years must use a 1.4% deemed rate of return.

Published October 5, 2018
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