Other Items of Interest

September 30, 2011

Summary

In recent days:

Five days before the first returns for 2011 decedents will start coming due, the IRS finalized instructions for the estate tax return, Form 706.
An acting associate commissioner at the U.S. Patent Office issued a memorandum ("Memo") advising patent examiners tax strategy patent claims can no longer rely on "novelty or non-obviousness" to distinguish them from prior art as a result of patent reform legislation.
As reported in the Chicago Tribune, Illinois Governor Pat Quinn placed a temporary hold on initiating further proceedings to deny property tax exemptions to nonprofit hospitals that provide minimal charity care, pending negotiations to draft legislation to clarify the matter.
Two campaign finance watchdog groups, The Campaign Legal Center and Democracy 21, called upon IRS to investigate whether four advocacy groups, Crossroads GPS, Priorities USA, American Action Network, and Americans Elect, should lose their exempt status under Section 501(c)(4) for intervening in elections.

Extended Summary

1. Form 706 instructions Finalized

As noted in our commentary of September 12, a close reading of Form 706 and its instructions makes it clear that an executor of the estate of a decedent who is survived by a spouse may want to file an estate tax return even if the value of the gross estate is well below the $5 million filing threshold. This is necessary to preserve the unused portion of the "applicable credit amount," i.e., the exemption equivalent, for portability to the surviving spouse's estate. This analysis is to be confirmed later today with the issuance of Notice 2011-82.

The legislation creating portability requires that the amount of the unused "applicable credit amount" be established on a timely filed estate tax return in the first decedent's estate. Although IRS might arguably have created a shortened form for this purpose, it has not done so.

Thus, an executor who intends to preserve the portability of the first decedent spouse's unused credit equivalent will be required to prepare and file a complete estate tax return. With the first deadlines fast approaching, it may be advisable to take an automatic six-month extension by filing Form 4768.

2. Memo on Tax Strategy Patents

The Memo noted that with the enactment of the Patent Reform Act, Pub. L. 112-29 ("Act") which was signed into law on September 16:

"any strategy for reducing, avoiding, or deferring tax liability (hereinafter, 'tax strategy'), whether known or unknown at the time of the invention or application for patent, shall be deemed insufficient to differentiate a claimed invention from the prior art."

The purpose of the Act, the Memo said, is "to keep the ability to interpret the tax law and to implement such interpretation in the public domain, available to all taxpayers and their advisors." The Memo noted that there are two exceptions:

methods "used solely for preparing a tax or information return or other tax filing"; and
methods "used solely for financial management, to the extent that it is se
verable from any tax strategy or does not limit the use of any tax strategy by any taxpayer or tax advisor."

The Memo directed the attention of examiners specifically to tax strategies for employee benefit plans, tax-exempt organizations, or other entities that must be "structured or operated in a particular manner to obtain certain tax consequences." The Memo also noted that the relevant section of the Act applies:

"if the effect of an invention is to aid in satisfying the qualification requirements for a desired tax-favored entity status, to take advantage of the specific tax benefits offered in a tax-favored structure, or to allow for tax reduction, avoidance, or deferral not otherwise automatically available in such entity or structure."

3. Nonprofit Hospital Property Tax Exemption

The governor's action responded to a request from the Illinois Hospital Association in the wake of rulings from the state revenue department, denying exemptions to three major nonprofit hospitals on the ground that they did not provide sufficient charity care. Those denials followed a ruling last year by the state supreme court, denying a property tax exemption to a Catholic hospital on similar grounds (see our earlier commentary).

In a letter announcing the action, Gov. Quinn said that he asked his staff, in collaboration with the revenue director, to work with key stakeholders such as the hospital association, legislators, and the state attorney general. He requested that these parties develop recommendations for legislation that would address the uncertainty surrounding the property tax exemption of nonprofit hospitals. The letter set a deadline of March 1, 2012, for a set of recommendations that would consider, among other things:

"the need for clarity and predictability in making these decisions;
the ways in which hospitals can relieve the burden of government;
mechanisms to improve access to affordable care, especially for poor or underserved populations; and
the need for taxpayers to be assured that any tax benefit is well deserved and advances an important societal interest."

The Tribune reported that 15 evaluations are in the pipeline, along with the three denials. The Governor's action apparently will suspend those proceedings while appeals go forward in the three pending cases. However, as noted in the Governor's letter, if the March 1 deadline is met, "no decisions will be issued on the recent exemption denials while parties are working together in good faith."

4. Electioneering By 501(c)(4)s

The 23-page letter detailed allegations that each of the four organizations had spent and/or planned to spend substantial sums of money in presidential and congressional election campaigns, promoting or attacking specific candidates.

Crossroads GPS was founded with the help of Republican party strategists Karl Rove and Ed Gillespie, and is affiliated with American Crossroads, a Section 527 political organization. A Section 527 organization may spend directly on advocacy, but must disclose the names of its contributors. A Section 501(c)(4) organization need not disclose its funding sources, but it may not spend directly on a candidate's campaign.

Priorities USA and its related political action committee were created expressly to "mimic" the structure of Crossroads GPS and American Crossroads, but to support Democratic rather than Republican candidates.

American Action Network shares office space with Crossroads GPS and American Crossroads and is said to coordinate its activities with theirs.

Americans Elect was initially formed as a Section 527 organization, but then changed its status to Section 501(c)(4). According to the letter, Americans Elect is "seeking to gain a place on the 2012 ballot in all 50 states for a presidential candidate it intends to nominate."

The Campaign Legal Center is an exempted entity under Section 501(c)(3), while Democracy 21 is a Section 501(c)(4) entity, with an associated education fund exempted under Section 501(c)(3).