"The taxing power of government must be used to provide revenues for legitimate government purposes. It must not be used to regulate the economy or bring about social change."

-- Ronald Reagan

Chairman Alan Greenspan spoke April 21, 2004 to the Joint Economic Committee of Congress. He indicated that the economy now is recovering from "an extended stretch of subpar growth and entered a period of more vigorous expansion." Chairman Greenspan noted that the gross domestic product (GDP) grew by over 6% the last half of 2003.

Chairman Greenspan attributes this growth to a combination of the federal tax cuts, low interest rates and rising wealth. He pointed out that business executives have been very cautious in expanding and hiring new employees. However, he suggests that now there may be a "growing confidence in the durability of the expansion."

Fortunately, Chairman Greenspan now believes that the "worrisome trend of disinflation presumably has come to an end." This allows increasing productivity in the economy to facilitate growth without an increase in inflation.

Even with the estimates of low future inflation, there will be an increase at some point in the federal funds rate. This increase will be sufficient in Chairman Greenspan's view to maintain price stability.

Editor's Note: Chairman Greenspan is quite upbeat on the economy. He expects the recovery to continue and companies to start hiring more employees. This continued recovery is an essential part of the current plan by both Congress and the President for reducing the deficit. If corporate profits and employment rise, then tax revenue can increase. While it perhaps will not cover the entire deficit, the increased revenue could reduce substantially the level of the deficit.

Now that the tax returns for 2003 have been filed, it is possible to examine the level of tax savings for different groups.

Overall, taxpayers saved as a result of the lower brackets and increased exemptions. The average 2003 tax-saving was $1,544. This resulted in a typical refund check of over $2,000.

Families of four benefited from both the lower brackets and the increase in the child exemption. A family of four paid $1,933 less in tax.

Seniors received tax cuts in two different ways. Many of them benefited from the lower brackets. In addition, seniors own a substantial portion of the stocks that pay dividends. Since the federal tax rate on dividends was reduced to 15%, there were additional savings on dividends. The seniors on average saved $1,795.

Many of the tax savings will sunset or expire by 2005. Congress is especially focused on extending benefits in three areas. The $1,000 child credit, marriage penalty relief and the expansion of the 10% bracket are all very popular. If Congress fails to act, a family of four could face a tax increase of $915. Therefore, the election year extension seems quite probable.

Treasury has released two notices that promise updated regulations on charitable lead trusts and private foundations. Notice 2004-35; 2004 19 IRB 1 indicates that Reg. 53.4940-1(d)(2) will be modified to change the definition of net investment income. Notice 2004-36; 2004-19 IRB 1 states that Reg. 53.4942(a)-(b)(2) will be modified to change the definition of the income portion of distributions from trusts.

The changes resulted from the decision in Ann Jackson Family Foundation v. Commissioner, 97 T.C. 534 (1991), aff'd, 15 F.3d 917 (9th Cir. 1994). Donor Ann Jackson had created both a private foundation and a 20-year charitable lead trust in 1979. The lead trust was funded with $5 million and distributed $350,000 annually to the private foundation. The private foundation then distributed 5% of its assets annually for charitable purposes.

However the IRS referred to Reg. 53.4940-1(d)(2) and issued a deficiency for $1,569,641. The IRS claimed that the regulations required that charitable lead trust assets must be included in the formula for purposes of determining the minimum 5% payout from the private foundation. This interpretation would greatly increase the required private foundation distributions.

In the Jackson case, the 9th Cir. Court rejected that argument. The court noted that this requirement did not exist in the statute under Sec. 4942. The IRS now indicates that it will amend the regulations to conform with the Jackson decision of 1994.

The IRS Notices indicate that private foundations may immediately follow the Jackson decision in calculating their minimum required distributions.

Editor's Note: The wheels of justice sometimes turn slowly. Still, while it has taken the IRS 10 years to decide to conform the rules to the Jackson decision of the 9th Cir. in 1994, the change is quite welcome. There are substantial lead trusts created by donors who desire for the charitable distributions to fund a private foundation. This promised change in the regulations may lead to greater use of an excellent planning method.

The IRS has announced the Applicable Federal Rate for May of 2004. The AFR under Section 7520 for the month of May will be 3.8%. The rates for April of 3.8% or March of 4.0% may also 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 2004, pooled income funds in existence less than three tax years must use a 4.8% deemed rate of return. Federal rates are available at www.irs.gov/businesses/small/article/0,,id=112482,00.html.

Internal Revenue Bulletins are available at http://www.irs.gov/businesses/lists/0,,id=98230,00.html.