"Taxes should be proportioned to what may be annually spared by the individual."

-- Thomas Jefferson

At the meeting of the American Council on Gift Annuities in Orlando, Florida, on May 6, 2004, ACGA Chair Clint Schroeder and General Counsel Conrad Teitell announced a new effort to revive the IRA rollover. Attorneys Schroeder and Teitell, two of the most highly-respected persons in the field of philanthropy, indicated that Rep. Earl Pomeroy (D-ND) and a Republican co-sponsor will introduce the IRA Rollover bill in the House.

The efforts of these two dedicated counsel commenced through an American Bar Association committee in 1982. Since that time, both have diligently and persistently pursued the goal of passing a bill that will permit both direct and deferred charitable gifts from IRAs. In 2003 it appeared that the efforts of Teitell, Schroeder, the National Committee on Planned Giving, the Council on Foundations, Independent Sector and many friends of philanthropy would be successful. Last year, the House passed by 408-13 the Charitable Giving Act (H.R. 7) and the Senate passed 95-5 the CARE Act of 2003. However, one Senator blocked the bill from moving to the House-Senate Conference Committee.

Since the CARE Act provisions to limit tax shelters and raise revenue have been moved to other Senate legislation, the current prospects for the CARE Act are poor. Under Senate rules, most tax bills require revenue offsets, and the CARE Act no longer has available revenue-raising provisions. However, an IRA rollover bill would reduce the cost from approximately $14 billion for the full CARE Act to $3 billion.

In an election year, this $3 billion bill may be politically attractive to members of both parties. Therefore, the IRA Rollover bill could still pass and be enacted in 2004.

Editor's Note: This effort will require maximum support from all friends of philanthropy. Since GiftLaw is the largest circulation charitable tax planning newsletter, at the appropriate time your editor will ask every reader, whether professional advisor or gift planner, to make a maximum effort to support the Schroeder-Teitell IRA rollover bill. Please stay tuned for further developments.

Several members of Congress plan to combine charitable functions with the Republican and Democratic National Conventions this summer. Senate Majority Leader Bill Frist (R-TN) plans to hold several AIDS fundraisers in New York during the Republican convention. House Leader Tom DeLay (R-TX) has created a charity, Celebrations for Children, and will hold fundraisers for this organization at the same time. Democratic Senator Blanche Lincoln (D-AR) was slated to chair a benefit concert "Rockin' on the Dock of the Bay" during the Democratic convention in Boston.

However, the Citizens for Responsibility and Ethics in Washington (CREW) filed a request with the Senate Ethics Committee to review the participation of Sen. Lincoln and Sen. Frist in the events. CREW Executive Director Melanie Sloan stated, "The use of charitable organizations -- by both Democrats and Republicans -- to finance convention events is a reprehensible misuse of charities, reflecting poorly on the Senate as well as the charities involved." For the charitable events, gifts of $2,500 to $100,000 permit donors to have backstage passes and opportunity for personal contacts with figures described as "major talent."

Sen. Lincoln indicated that she is confident that her "role in this event is permissible under Senate ethics rules," but she withdrew as chair of the concert. Sen. Frist and Rep. DeLay have not yet responded to actions by CREW. In a press release, CREW indicated that, "The involvement of politicians in charitable events undermines the long-term accountability of charities."

Sen. Charles Grassley (R-IA), Chairman of the Senate Finance Committee, released a letter sent to the Smithsonian requesting information about gifts of Stradivarius violins in 1998. Staff from the Finance Committee are concerned that the deduction values may have been larger than the actual value of the violins.

Sen. Grassley wrote to Smithsonian Secretary Lawrence M. Small and requested a copy of the IRS Form 8283 "Noncash Charitable Contributions" filed with the gift. In the press release, he stated, "We're seeing problems of wildly inflated in-kind donations across the board: cars, land, intellectual property, and now, possibly, donations of musical instruments. Donors shouldn't be able to get away with playing the taxpayers like a fiddle."

In Rev. Rul. 2004-51; 2004-22 IRB 1 (6 May 2004), the Service clarified guidelines for charities conducting joint ventures with for-profit businesses. In this ruling, a university and a technology company create an LLC to conduct teacher education seminars through interactive video. Both hold a 50% ownership interest and elect three directors, giving each 50% control. The university has expertise in teacher education and controls all content and curriculum decisions. The technology company selects the video locations and produces the seminar programs.

Under the decision in Redlands Surgical Services, 113 T.C. 47, 92-93 (1999), aff'd 242 F.3d 904 (9th Cir. 2001), a charity may enter into a joint venture so long as the charity maintains "effective control" of operations. Since the university maintains control over all content, and selects 50% of the board, this standard is met.

In addition, teacher training is an exempt purpose for the university. Therefore, teacher training through distance education is a qualified exempt purpose of the university and the income from LLC will not be unrelated business taxable income.

Editor's Note: This is a very favorable decision for charities. There are many universities or medical centers who would benefit from partnerships with various types of technology companies. This ruling sets forth safe harbors for moving forward with those partnerships. The key is for the charity to maintain content control and operate in a related-use area.

In Edward Frazee v. United States; No. WMN-02-1816 (8 Apr 2004), the Court reduced by 40% a claimed charitable deduction for a gift of land. Marsh Mountain Limited Liability Company (Marsh LLC) owned 2,383 acres in a resort area of western Maryland. To enhance property values in the area, Marsh LLC donated 550 acres to Garrett County Maryland Community Action, Inc, to be used for an adventure sports park. Marsh LLC reported a charitable deduction of $2,700,000 for the gift of land.

The IRS claimed a value of only $1,100,000 and filed a deficiency against Marsh LLC partners for added tax plus interest. Since the claimed $2,700,000 deduction was over 200% of the IRS value, the Service also assessed the Sec. 6662 valuation penalty of 20%.

Based upon the valuation testimony of trial experts, the Maryland District Count set the value at $1,635,425 with the increase attributed to the proximity of the parcel to skiing and golf in the area. Since the claimed deduction was no longer more than 200% of this higher market value, the Sec. 6662 valuation penalty of 20% no longer applied.

Editor's Note: The Sec. 6662 overvaluation (200%) penalty of 20% and gross overvaluation (400%) penalty of 40% are very powerful negotiating tools for the IRS. For this reason, it is most important to obtain careful and realistic appraisals to justify major gifts of real estate. In this area, counsel should follow the old adage that "pigs get fat, but hogs get slaughtered."

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.