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                                           IRS Announces Exemptions for
                                           2019 and Clarifies Post-TCJA Issues
                                           The Tax Cuts and Jobs Act (TCJA) of       of $500,000 to charity for 20 years,
                                           2017 amended Internal Revenue             after which the remainder will pass
                                           Code Section 2010(c)(3) to provide        to the donor’s children. Because the
                                           that, for decedents dying and gifts       present value of the charity’s income
                                           made after December 31, 2017, and         is approximately $7.2 million, only
                                           before January 1, 2026, the “basic        the balance of approximately $2.8
                                           exclusion amount” that acts as an         million will be treated as a taxable
                                           equivalent exemption against federal      transfer. Regardless of how much
                                           gift and estate tax be increased from     the trust grows during the trust term,
                                           $5 million per taxpayer to $10 million    no additional amount will ever be
                                           per taxpayer, indexed for inflation.      subjected to gift or estate tax when
                                                                                     the remainder is distributed to the
                                           Even after this significant increase in   children.
Together with our millions of              the amount individuals can pass on
supporters, the American Cancer            free of estate or gift tax, careful and   Recent actions by the IRS related to
Society is on a mission to save            creative charitable planning remains      gift and estate taxes may affect how
lives, celebrate lives, and lead the       a vital tool—especially for those with    taxpayers will conduct their planning,
fight for a world without cancer.          estates that exceed the maximum           both charitable and noncharitable.
                                           equivalent exemption.
                                                                                     For 2019 the IRS has announced that
                                           For instance, high-net-worth              the inflation-adjusted amount will
     IRS Announces                         individuals can reap significant          be $11.4 million (Revenue Procedure
     Exemptions for                        transfer-tax savings by employing         2018-57). This means that a couple
                                           a nongrantor charitable lead trust        could make up to $22.8 million of
   2019 and Clarifies                      that directs a stream of payments         tax-free transfers. The amount of
                                           to charity during the trust term          current gifts of present interests that
    Post-TCJA Issues                       and then distributes the remaining        are excluded from gift tax remains at
 Volume XXVII, Issue 27                    assets to noncharitable beneficiaries.    $15,000 per donee.
                                           While such vehicles do not generate
          2019                             income-tax deductions, they               TCJA also added IRC § 2001(g)
                                           do generate gift- or estate-tax           (2), which directs the Treasury to
                                           deductions equal to the present           prescribe such regulations as may
                                           value of the charitable interest in the   be necessary or appropriate to
                                           trust at the time of creation.            carry out IRC § 2001 with respect
           IN THIS ISSUE                                                             to any difference between the basic
                                           A donor who regularly makes               exclusion amount (BEA) applicable
                                           large annual charitable gifts could       at the time of a decedent’s death and
                                           decide, for example, to create a          the BEA applicable with respect to
      When a Gift Is Not a Gift
                                           $10 million nongrantor lead trust         any gifts made by the decedent for
     IRS: Advertising Income Is            that will make annual distributions       estate-tax purposes.
             Not UBTI

             BRIEFLY…
The issues this presents are            to the language of the proposed            to allow any amount sheltered from
especially important in light of the    regulations, “[T]his would effectively     gift tax by some or all of a BEA higher
fact that, absent further action by     reverse the benefit of the increased       than the BEA in effect at the date of
Congress, the increased exemption       BEA available for gifts made during        death to be exempt from estate tax.
amount created by TCJA goes away        the increased BEA period.”
at the end of 2025 and the exemption                                               It is important to note that the
reverts to $5 million adjusted for      4. Effect of decrease in BEA on            proposed regulations also indicate
inflation on January 1, 2026. While     estate tax. How does a drop in the         that only the amount of the
it is theoretically possible that the   BEA after 2025 affect the estate           increased BEA used to shelter gifts
equivalent exemption amount could       tax for a decedent who dies after          during the increased BEA period will
go down from one year to the next       2025 and who made gifts during             be available in determining estate
between 2019 and 2025, the major        life the tax on which was fully or         tax after 2025. For example, if a
question is what happens starting in    partially sheltered by a BEA larger        taxpayer makes $9 million of taxable
2026.                                   than the amount in effect at the           transfers prior to 2026 and, therefore,
                                        date of death? Conclusion: A literal       uses $9 million of the available $10
The Treasury has responded to IRC §     reading of the application of IRC §        million equivalent exemption, the
2001(g)(2) by announcing Proposed       2001(b), which sets out the steps for      balance of $1 million will not carry
Regulations. It has announced a         calculating estate tax, would subject      forward to be used against post-2025
public hearing on those proposed        any amount of the BEA in effect at         estate tax. (NOTE: The equivalent
regulations for March 13, 2019, and     the time of the lifetime transfer that     exemption amounts noted in the
set a deadline of February 21, 2019,    is in excess to the BEA in effect at the   examples above are not adjusted
for receiving comments.                 time of death to federal estate tax.       for inflation.)

These proposed regulations attempt      That, of course, is a huge potential
to address the thorny issues raised     problem. The proposed regulations          When a Gift Is Not a Gift
by the increase in the equivalent       offer an example of a decedent who         A recent Tax Court case addresses
exemption and its subsequent            made an $11 million gift in 2018           the intriguing question of when
reversion to pre-2018 levels under      when the BEA was $10 million and           transfer of funds constitutes a gift
TCJA. The Background section of         dies in 2026 with a taxable estate of      and when it constitutes taxable
the proposed regulations discusses      $4 million when the BEA is $5 million.     income (Felton v Commissioner, T.C.
several scenarios:                      A literal reading of IRC § 2001(b)         Memo. 2018-168, October 10, 2018).
                                        would lead to a conclusion that the
1. Impact of pre-2018 gifts on          decedent’s taxable estate would            Members of a St. Paul, Minnesota,
which gift tax was actually paid on     be $9 million—the $4 million the           church could choose to make their
the BEA available. Conclusion: The      decedent has at the date of death          contributions in three different
increased BEA is reduced only by the    and the $5 million by which the BEA        envelopes, each of a different
amount of BEA allowable against         in effect in 2018 exceeded the $5          color. According to church policy,
the pre-2018 gifts, not by the entire   million BEA in effect in 2026. Estate      contributions in white envelopes
amount of the transfer.                 tax would be $3,600,000 (40% of $9         were deemed to be contributions
                                        million).                                  for general purposes for the general
2. Impact of pre-2018 gifts on                                                     operation of the church. Those in
which gift tax was actually paid        It follows with an even more extreme       gold envelopes were for special
when a decedent dies during the         example in which the facts are the         programs and projects. The church
increased BEA period. Conclusion:       same except the decedent dies with         provided reports and receipts to
The results are the same as in          no taxable estate. Even with no            members for funds received in
number 1 above. The increased BEA       taxable estate at death, estate tax        white and gold envelopes and
is reduced only by the amount of BEA    would be $2 million (40% of the $5         treated them as tax-deductible
applied to the pre-2018 gift, not the   million by which the BEA in existence      contributions.
entire transfer.                        in 2018 exceeds the $5 million in
                                        effect in 2026).                           However, if church members wanted
3. Effect of decrease in BEA on gift                                               to make what they understood
tax. In other words, if the amount of   The proposed regulations would             to be a nondeductible gift
exemption used between 2019 and         address this problem by amending           directly to their pastor, Reverend
2025 is greater than the exemption      Regs. § 20.2010-1 to provide               Wayne Felton, they did so in blue
amount available after 2025, will the   a special rule in these kinds of           envelopes—understanding that the
excess be deemed to be a taxable        situations. That rule would, in effect,    contributions would not be recorded
transfer? Conclusion: No. According     change the computation of estate tax
as tax-deductible gifts but rather         amounts given in those envelopes       The charity in question publishes a
treated as personal gifts to the           were intended to provide incentive     scholarly journal. It has contracted
pastor.                                    for Reverend Felton to continue        with a company to publish the
                                           preaching at their church, which       journal. The agreement provides that
Based on this long-standing process,       would call into question whether the   the charity will cover all expenses
Reverend Felton did not report any         gifts were given in “detached and      of gathering and preparing editorial
of the gifts earmarked for him in          disinterested generosity.”             materials in the journal and also
the blue envelopes when he filed                                                  provides that the publisher will pay
his income tax. The IRS, however,          It also believed receipt of those      an annual stipend for salaries and
viewed them differently and wants          donations was pursuant to a            expenses of the journal’s editorial
back taxes and penalties for 2008          “routinized, highly structured         office and expenses for the annual
and 2009, the years in question in         program.” Ironically, the court        editorial board meeting.
this case. The amounts given in blue       opined that the very existence of
envelopes for those years were,            the blue envelope system itself        Beyond that, the publisher will
respectively, $258,001 and $234,826.       was evidence of such a structured      “publish, produce, sell, distribute,
                                           program. This weighed against          and internationally promote the
The court was personally                   finding the contributions to           Journal at its own expense” and
complimentary of Reverend Felton           be gifts as opposed to taxable         will be responsible for fulfilling
and his wife for their hard work in        compensation.                          subscription orders. In essence, this
serving the church and in planting                                                allows the charity to be able to have
multiple additional churches around        In addition, the Court determined      a journal at little or no expense to the
the country and around the world. It       that the fact that Reverend Felton     organization.
noted that he regularly followed the       did not receive a separate salary
direction and policies of the board        from the church supported a            This raises the question of what is in
and that while the board did budget        conclusion that the “gifts” in the     it for the publisher? The publisher
a salary for him, he did not take it. He   blue envelopes really were intended    also has the sole responsibility for
did though, take a $6,500 per month        to be his primary compensation,        selling advertising space in the
parsonage allowance that Reverend          notwithstanding the extremely          journal at rates determined in the
Felton himself classified as a “very,      generous nature of his parsonage       publisher’s sole discretion, with the
very nice and handsome housing             allowance. Accordingly, the            charity reserving only the right to
allowance” that was nontaxable to          Court upheld the IRS’s claim for       ensure the advertisements meet its
the extent it was used for qualifying      underpayment of taxes and also         reasonable advertising standards.
housing expenses.                          upheld the application of penalties    Subject to a few minor provisions,
                                           for failure to timely file and for     the publisher retains the revenue
The white envelopes did have a line        accuracy-related penalties.            from the sale of advertisements.
that could be checked to designate
gifts for compensation for Reverend                                             The agreement does call for
Felton—and which the donors                IRS: Advertising Income Is           payment of “earned royalties” to
understood to be deductible for            Not UBTI                             the charity based on a percentage of
themselves—and the Feltons also            Many charitable organizations        “revenues,” but advertising revenues
received funds from a separate             publish journals, yearbooks, and     are specifically excluded from the
counseling business. As such, they         various other publications in the    definition of “revenues” for this
reported approximately $70,000-            course of and in pursuit of their    purpose. Presumably, the majority of
$80,000 for taxable compensation           exempt purposes. Occasionally such revenues would come in the form of
each year in 2008 and 2009. However,       publications contain advertisements, subscriptions for the magazine.
they also claimed approximately            a fact that reasonably raises the
$50,000 each year for charitable                                                In analyzing the case, the IRS turned
                                           question: “When does receipt of
contributions which, along with                                                 to IRC § 512(a) for definition of the
                                           advertising revenue constitute
other deductions and exemptions,                                                term “unrelated business taxable
                                           unrelated business activity giving
resulted in no taxable income.                                                  income.” A key element of that
                                           rise to unrelated business taxable
                                                                                definition is a requirement that the
                                           income?”
The court conceded that blue                                                    activity generating the revenue be
envelopes were not routinely               The IRS addresses such a situation   “regularly carried on” by the entity.
distributed but only given out by          in a recent Technical Advice
ushers when one was requested                                                   The memorandum also noted that
                                           Memorandum (TAM 201837014).
by a member of the congregation.                                                Regs. § 1.513-1(b) provides that
However, they also concluded that                                               activities of soliciting, selling, and
publishing commercial advertising                        Rule 10-b(5)-1 and volume issues                           would be subject to determination by
do not lose identity as a trade                          under SEC Rule 144(e), the nature                          an independent trustee to be at least
or business even though the                              of involvement and activity of an                          the minimum amount that would be
advertising is published in an exempt                    additional trust and an additional                         deemed not to be de minimis—and
organization periodical that contains                    LLC came into play in the analysis.                        the balance of the required annual
editorial matter related to the exempt                                                                              unitrust amount would be payable to
purpose of the organization.                             The ruling relied on representations                       charitable beneficiaries. Because the
                                                         that the collective parties had not                        amount payable to the noncharitable
That turned the focus clearly on                         contributed an aggregate of more                           beneficiaries was required to be more
whether or not the charity was                           than 10% of the corporate stock to a                       than de minimis, the trusts would
regularly involved in the business                       nonoperating private foundation and                        qualify as CRUTs.
of selling advertising. After citing                     that no transfers would otherwise run
several prior cases for purposes                         afoul of SEC requirements. Therefore,                      Further, the ruling found that since
of comparison, the memorandum                            since the stock contributed had                            the settlor had retained the right to
concluded that, based on the                             appreciated beyond its adjusted                            revoke his wife’s survivor interest
facts in this case, there was no                         basis, had been held more than                             and to change the identity of the
indication that the charity engaged                      one year, and was publicly traded                          charitable income beneficiaries,
in any advertising activities or that                    on exchanges for which there                               those gifts would not be complete
any portion of the payment from                          were readily available quotes, it                          for gift or estate tax. In addition, it
the publisher was attributable to                        constituted qualified stock within the                     confirmed that upon the death of the
the advertising. Thus it was the                         meaning of IRC § 170(e)(5)(B) and                          settlor the amount passing to charity
publisher, not the charity, involved                     was deductible at fair-market value.                       in the trust in which he was the only
in the business of selling advertising,                                                                             noncharitable beneficiary would
and the charity did not receive any                      CRUTs with charitable and                                  qualify for an estate-tax charitable
unrelated business taxable income                        noncharitable beneficiaries                                deduction—and in the case of the
from advertising.                                        qualified. The IRS has determined                          other trust, any interest passing to
                                                         that a pair of charitable remainder                        his wife, if she survives him, would
                                                         unitrusts with both charitable and                         qualify for the estate-tax marital
Briefly…                                                 noncharitable income beneficiaries                         deduction and the interest passing to
Gift to private foundation deemed                        will be treated as qualifying CRUTs                        charity would qualify for the estate-
“qualified stock.” A recent private                      (PLR 201845014). A taxpayer had                            tax charitable deduction.
letter ruling determined that a                          proposed to create a pair of trusts,
contribution of stock by an LLC                          the first of which would name him
constituted a gift of “qualified stock”                  an income beneficiary along with
and was deductible at fair-market                        one or more qualified charities. The
value (PLR 201848005). A revocable                       second would be similar except that
trust was the sole member of the                         his wife, if she survives him, would
LLC, and the taxpayer ultimately                         be an income beneficiary along with
affected by the outcome was the                          charitable beneficiaries.
sole settlor and trustee of the trust.
Because of application of insider                        The trusts provided that the amount
trading considerations under SEC                         paid to either the taxpayer or his wife

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