Other Items of Interest

March 9, 2012

Legislative

Summary

In recent days:

In Notice 2012-25, the Treasury and IRS invited public comment recommending items to be included in the 2012-13 Priority Guidance Plan.
Rep. Dave Reichert (R-WA) introduced H.R. 112-4035, the Philanthropic Enterprise Act of 2012, which would exempt private foundations from the excise tax on excess business holdings in limited circumstances.
In preparation for a hearing, on March 7, before the House Ways and Means Committee on the treatment of closely-held businesses in the context of tax reform, the Joint Committee on Taxation released a report on choosing the form of a business entity.

Extended Summary

1. Notice 2012-25

According to the Notice, in reviewing recommendations for guidance priority, the Treasury and IRS will consider whether the recommended guidance:

would resolve "significant issues relevant to many taxpayers";
would promote sound tax administration;
can be drafted in a manner more easily understood and applied;
can be administered on a uniform basis;
relates to existing guidance that is "outmoded, ineffective, or excessively burdensome" and should be modified or repealed; and
would reduce controversy and lessen burdens on taxpayers or the IRS.

The deadline for comments is May 1, 2012.

2. H.R. 112-4035

Under the Reichert proposal, a private foundation, other than a donor advised fund or a supporting organization, would be exempt from the tax only if:

it held all ownership interests in the business enterprise;
those interests were acquired under the terms of a decedent's will or trust, upon the death of the testator or settlor;
the enterprise distributed all of its net, after-tax operating income to the foundation within 120 days of the close of its taxable year; and
the enterprise was operated independently of control by any substantial contributor.

This latter requirement would be met only if:

no member of the family of a substantial contributor was an officer, director, employee, or contractor with the enterprise;
a majority of the directors of the foundation were not also directors or officers of the enterprise; and
there were no loans outstanding from the enterprise to a substantial contributor or family member.

The required distributions of net operating income would not be treated as unrelated business taxable income under Section 512(b)(13).

These provisions would be effective for tax years beginning after December 31, 2011. The number of foundations whose closely held business holdings would fit within these rather narrowly drawn requirements would appear to be very small.

Reps. Jim Gerlach (R-PA) and John Larson (D-CT) co-sponsored the bill. All three sit on the Ways and Means Committee, to which the bill was referred.

3. JCX Report on "Choice of Entity"

The 72-page report provides a comprehensive overview of federal tax law affecting the choice of the form of a business entity. Of particular interest are Table 10, charting the principle differences between the taxation of partnerships and S corporations, and Table 11, showing the top marginal corporate and individual rates, including the rates on capital gains and dividends, from 1909 to the present.

Martin A. Sullivan, chief economist for Tax Analysts, placed this data in a very clear context in testimony to the Committee. Noting many large businesses are organized as S corporations or limited liability companies, Mr. Sullivan argued that any discussion of "base broadening" in an effort to reduce the top marginal rate on corporations should include taxing these large passthrough entities as C corporations.

Mr. Sullivan also observed, in connection with the ongoing discussion of allowing the Bush-era reductions in the top marginal rates on individuals to expire in 2013, that only about 8% of ordinary income reported by high-income taxpayers is generated by small business employers.

Mr. Sullivan concluded his remarks by urging legislators to focus on simplification, noting the proportionately higher tax compliance costs incurred by smaller businesses.

CPC Commentary

In the past two years, CharitablePlanning.com has submitted comments urging the Treasury and IRS to issue formal guidance on the:

deductibility under Section 170 of gifts made to single-member limited liability companies ("SMLLCs");
scope of a "class of supported charities" for purposes of a Type II (or a Type I) supporting organization; and
tax implications of a gift of an income interest in a charitable gift annuity.

See our commentaries of June 14, 2010 and June 3, 2011. We will renew these requests.

We may also include a request to withdraw or modify Rev. Proc. 2005-24, which requires the settlor of an inter vivos charitable remainder trust to obtain a waiver of the spouse's elective share to make a claim relating to the CRT.

The Rev. Proc. took effect March 20, 2005, but any CRT created prior to June 28, 2005 was "grandfathered." The grandfathering provides, in effect, that the CRT would not be disqualified, unless the surviving spouse actually exercised his or her right of election, in which case the CRT would be disqualified retroactively to its inception. The grandfathering date was extended indefinitely by Notice 2006-15, after numerous commenters urged the Service to withdraw the Rev. Proc. entirely, or to adopt another method of addressing the problem of a surviving spouse taking an elective share.

Although the Notice stated that the Service was "reconsidering the approach" of the Rev. Proc. and "considering alternative safe harbor rules," the subject has not since appeared in any of the agency's annual Priority Guidance Plans.