Expanded Tax Benefits For 2021 Gifts
1. Non-itemizer Taxpayers Because the Tax Cuts and Jobs Act of 2017 dramatically increased the standard deduction, almost 90% of taxpayers do not itemize. At one time, taxpayers who did not itemize could not use the benefits of a charitable deduction. However, for 2021, the CARES Act made it possible to deduct cash gifts up to $300 for an individual or $600 for a married couple filing jointly. These additional deductions are available for taxpayers who take the standard deduction.
There are some limits on the $300 or $600 deduction for nonitemizers. Gifts must be cash and made to a qualified public charity. These gifts may not be to a donor advised fund, most private foundations or charitable remainder trusts. Gifts of cash include those made by check, credit card or debit card. Volunteers who have unreimbursed out-of-pocket expenses will also qualify for this deduction.
2. Cash Deductions Up to 100% AGI In recent years, cash gifts to public charities have deduction limits of 60% of a donor's adjusted gross income (AGI). Donors who contribute more than the 60% limit may carry forward the deduction for up to five years after the year of the gift.
The limit for cash gifts made in 2021 is temporarily expanded to 100% of AGI. Once again, there are some special rules. These gifts must be in cash and may not be to a donor advised fund, supporting organization or charitable remainder trust. Taxpayers must make an election on their IRS Form 1040 to use the 100% of AGI deduction limit.
3. Increased Corporate Deductions Large corporations are typically structured as "C" corporations. They usually have a limit for charitable gifts of 10% of taxable income. However, for 2021, C corporations may donate up to 25% of their taxable income. The gift must be a cash gift and elected on the corporate tax return.
4. Donations of Food Inventory C corporations are permitted to take an enhanced deduction for gifts of food inventory for the benefit of the ill, needy and infants. In 2021, the deduction limit is increased from 15% to 25% of taxable income. Special rules apply to business entities other than C corporations.
The IRS urges all taxpayers to keep records supporting their charitable deductions. Most gifts require obtaining an acknowledgment letter from the nonprofit. Gifts of property may require filing an additional IRS Form 8283. Gifts of property valued in excess of $5,000 may also require a qualified appraisal.
Editor's Note: Some donors with large IRAs are taking substantial distributions this year and making major gifts to their favorite nonprofits using the 100% AGI limit. Others who have large incomes or have sold a highly-valued property may also choose to give generously under the 2021 expanded gift rules.
"No SALT, No Deal" Caucus Threatens $3.5 Trillion Bill
The House of Representatives is working diligently to pass a $3.5 trillion bill. To pay for part of the new spending, the House Ways and Means Committee passed a $2.2 trillion tax bill that will be incorporated into the overall legislation. The current version of the Build Back Better Act does not include a restoration of the previous state and local tax (SALT) deduction. The current $10,000 SALT limit would still apply.
New Jersey Representatives Tom Malinowski, Mikie Sherrill, Josh Gottheimer and Bill Pascrell, Jr. are members of the "No SALT, No Deal" caucus. The caucus has been formed to oppose any tax bill that does not include a restoration of the SALT deduction.
Malinowski stated on September 17, "We cannot be for this reconciliation bill, despite all of the good things that it does, unless and until it restores the SALT deduction for our middle-class constituents."
The SALT limit of $10,000 has primarily impacted states with high taxes. Therefore, taxpayers experiencing the largest impact are Maryland, California, New York, New Jersey and Connecticut. A Joint Committee on Taxation study determined that the benefit of restoring the SALT deduction would be enjoyed primarily by households with incomes over $1 million per year. Some progressive Members of Congress have opposed a full repeal of SALT because it would primarily benefit upper-income taxpayers.
At the press conference on September 17, Rep. Sherrill stated, "This is the issue we all ran on, a promise that we made. It was not just the four members standing here today it was the entire Democratic Party that made it in 2018. It is important that each one of us makes it crystal clear: Repealing the state and local tax deduction is a must-do in the House for the reconciliation bill. Without it, there is simply no path forward for this critical piece of legislation."
Editor's Note: The $3.5 trillion Build Back Better Act will require support from 217 of the 220 Democratic Representatives. The "No SALT, No Deal" caucus could hold up the entire bill. It is likely that that there will be a negotiated solution, but the bill could be delayed. Your editor does not take a position on specific provisions of this bill. This information is offered as a service to our readers.
Life Insurance Proceeds Increase the Value of Closely Held Corporation
In Thomas A. Connelly et al. v. United States et al.; No. 4:19-cv-01410, brothers Michael and Thomas Connelly owned shares in Crown C Supply, Inc. The St. Louis-based-company sold various roofing and siding materials.
In 2001, the brothers and the corporation signed a Stock Purchase Agreement. If one brother passed away, the other brother and Crown C had the right to redeem the deceased brother's shares. Crown C bought a $3.5 million life insurance policy on each brother to fund the agreement.
The Stock Purchase Agreement required the brothers to create a Certificate of Agreed Value each year. If the brothers did not create the certificate, the agreement required the determination of the "Appraised Value Per Share" through two or more appraisals. The brothers did not sign a single Certificate of Agreed Value prior to Michael's death on October 1, 2013.
Following his death, Crown C received $3.5 million in life insurance proceeds. It used $3 million of the proceeds to buy Michael's shares from his estate. There was no appraisal, but there was a Sale and Purchase Agreement for the redemption.
The estate valued Michael's Crown C shares at $3 million but deducted this amount from the IRS Form 706 value of Crown C because of the obligation to redeem the stock. The IRS contested the deduction and issued a deficiency for $1 million of additional tax. The estate paid the tax and filed for a refund.
The estate maintained the Stock Agreement was an "enforceable contractual obligation" with respect to the life insurance and therefore the proceeds of the insurance policy would be disregarded in valuation of the company. The IRS included the $3 million in value as a non-operating asset.
Section 2001 levies a tax on the estate of the decedent for "the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated." The Estate claimed the Crown C value of $3 million of life insurance is offset by the $3 million obligation for the redemption.
The Stock Agreement is a buy-sell agreement. To be valid under Section 2703(b), the agreement must be a bona fide business arrangement, not a device to transfer property for less than full and adequate consideration. The terms must be comparable to similar arrangements in an arms' length transaction. The price under Reg. 20.2031-2(h) of a buy-sell agreement must be fixed and determinable, legally binding both during life and after death and have been entered into for a bona fide business reason. It may not be a substitute for a testamentary disposition for less than full-and-adequate consideration.
The estate claimed the Stock Agreement met the requirements. The IRS maintained the price was not determinable, the terms of the Stock Purchase Agreement were not binding, it was not a bona fide business arrangement and it was an impermissible substitute for a testamentary disposition.
Because the estate did not follow the pricing mechanisms established in the Stock Agreement, the IRS contends it did not comply with the requirements. The court noted that because the brothers entered into the Stock Agreements to ensure continued family ownership of Crown C, there was a bona fide business arrangement.
However, the estate did not show that the Stock Agreement was not a device to transfer wealth for less than full-and-adequate consideration. The Stock Agreement did not include a minority discount for Thomas' shares or a control premium for Michael's shares. It stated, "appraisers shall not take into consideration premiums or minority discounts." In addition, the estate disregarded the Stock Agreement in determining the $3 million price for the redemption.
The IRS claimed the price was not fixed and determinable. During life, the brothers did not sign a Certificate of Agreed Value. The estate's claim that there was a potentially applicable pricing method in the Stock Agreement was deemed insufficient.
The actions of the brothers and the estate in ignoring the Stock Agreement provisions indicated that the terms were not binding. The court considered the valuation of the of Crown C stock was augmented by the life-insurance policies. The estate value was increased by a "non-operating asset, including proceeds of life-insurance policies payable to or for the benefit of the Company." Reg. 20.2031-2(f)(2).
Therefore, the court noted the value for a willing buyer and willing seller at the date of death would be $6.86 million, rather than the $3.86 million reported by the estate. Because the $3 million valuation was "far below fair market value," the court rejected the estate determination. Therefore, the actual value was $6.86 million and the IRS deficiency was sustained.
Applicable Federal Rate of 1.0% for October Rev. Rul. 2021-18; 2021-40 IRB 1 (15 Sep 2021)
The IRS has announced the Applicable Federal Rate (AFR) for October of 2021. The AFR under Section 7520 for the month of October is 1.0%. The rates for September of 1.0% or August of 1.2% also may 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 2021, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return.