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Jack Owen’s Tax-Exempt Alert September 2018

I presented the following update to the Southwestern Planned Giving Council on Tuesday September 11, 2018:

1. The IRS released final regulations for the charitable contribution and substantiation rules which implement amendments made by the 2004 American Jobs Creation Act and the 2006 Pension Protection Act. Charities have been operating under a good faith compliance with the proposed regulations, and the IRS clarified certain items in the final regulations. Among other items clarified, the regulations provide that an email can constitute a written communication for substantiation. Also, new requirements related to qualified appraisals and appraisers are delayed, now to be effective for contributions made after January 1, 2019, to allow appraisers more time to meet the new education and experience requirements.

2. The IRS recently issued Notice 2018-67, which covers the principles for implementing the separate trade or business rules with respect to the unrelated business income tax. The notice will be followed by proposed regulations at a future date, and tax preparers may use this notice as a reasonable, good faith interpretation of the new rules in the Tax Cuts and Jobs Act (“TCJA”).

In general, the new TCJA rules require that gains and losses of separate businesses be separately reported by tax-exempt organizations, and an aggregation of gains and losses is no longer permitted. Notice 2018-67 provides that the standard for determining a separate trade or business is a reasonable, good faith determination of what constitutes a separate entity. The IRS is considering the use of the North American Industry Classification System (‘NAICS”) Codes. Prior to the issuance of proposed regulations, the IRS will consider the use of the NAICS 6-digit codes to be a reasonable, good faith interpretation.

3. Regarding the IRA charitable rollover, there still is confusion over its use and I continue to come across misunderstandings among charities. I have two observations. First, it has come to my attention that some charities think that it is possible to accept an IRA charitable rollover in exchange for a planned gift like a charitable gift annuity. Unfortunately, current law does not allow an IRA charitable rollover to be used to fund a charitable gift annuity, charitable remainder trust, or gift other than a direct, charitable gift. There are proposals before Congress to expand the IRA charitable rollover, and charities are encouraged by our parent organization, the National Association of Charitable Gift Planners, to lobby Congress. For more information see charitablegiftplanners.org. Second, there is a potential loss of the exclusion if a donor receives any amount of personal benefit from the recipient charity in connection with an IRA charitable rollover. If any personal benefit is received, the entire amount of exclusion is disallowed, meaning that an IRA charitable rollover should not be solicited or made in connection with a fundraising activity where an incentive is provided to a donor, such as a meal, golf, or other return benefit.

4. Unfortunately, the “Queen of Soul” Aretha Franklin recently passed away at age 76 without a will. The probate process, which of course is very public, is now proceeding in Oakland County, Michigan. Ms. Franklin owned 4 homes in Michigan, but the primary value of her estate is her intellectual property, including her many recordings, musical compositions and likeness. Ms. Franklin was extremely successful, and her estate property value could be in the tens, or even hundreds, of millions of dollars. The IRS is likely to be very interested in the collection of the federal estate tax from Ms. Franklin’s estate. Ms. Franklin’s four sons filed documents in Oakland County probate court indicating that they are interested persons. Because Ms. Franklin’s estate is likely valued over the 2018 exemption of $11.2 Million, her four sons and the IRS are likely going to be in a contentious battle over valuation. The valuation contest with the IRS, including the tax and appellate courts, could take almost a decade or even longer. Much of this controversy could have been avoided with tax and estate planning.

Please do not hesitate to contact us if you have any questions or need any additional information.

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