DATE: August, 2002

NEWS SOURCES | ARCHIVES OF PAST MONTHS

Credit Card Rebates Can be Donations

The Internal Revenue Service recently was asked to rule on the deductibility of certain rebates that are donated to charity on behalf of a taxpayer by credit card merchants. At issue were rebates offered to cardholders as part of a marketing program that the cardholder could direct to a charitable organization. The Service concluded that the rebates would be deducible to the extent allowed by law if the cardholder makes "an affirmative election to donate" the rebates as opposed to receiving the rebates. Even if the rebates are transferred to a charity, unless the taxpayer makes such an election the rebates are not deducible.

The taxpayer would be entitled to a deduction in the year the transfer to the charity was made and, if a transfer to a particular charity exceed $250, would need written substantiation from the charity. The rebates, whether received by the taxpayer or not, are not included in the gross income of the taxpayer.
source:Planned Giving Design Center

Wealthy Avoid Taxes Through IRS Loophole

A recent article in the New York Times illustrated a tax loophole that allows wealthy taxpayers to avoid significant amounts of income, gift, generation-skipping and estate taxes.

On the surface, it sounds a bit strange. Yet the result is that for every dollar spent, $9 in taxes are saved. The concept revolves around paying significant premiums for life insurance. The article reports, "In recent months, policies with first-year premiums alone of $4.4 million, $10 million, $15 million, $25 million, $32 million and $40 million have been sold by New York Life Insurance, Massachusetts Mutual Life Insurance and other underwriters."

In 1913, Congress exempted life insurance proceeds from tax to assist widows and orphans. Taxpayers are buying large policies structured with the highest premiums allowed. The taxpayer then reports only a fraction of the premium. The government allows this discrepancy because a taxpayer may report whatever premium structure he or she wants to report, even if they wouldn't qualify, as long as it is for the same policy. Routinely, insurance companies have a variety of premium structures for the same policy.

While the proceeds of a life insurance policy are tax free to heirs, the premiums paid for the policy are taxed as a gift. Therefore the taxpayer wants to report the lowest premium possible to minimize gift taxes.

The insurer invests the difference between the reported and the actual premium paid and the investment grows tax free. This increases the amount paid tax free upon the death of the insured to the heirs.

Under a law passed by Congress in 1982 allowing for transfers without tax liability to spouses, even the gift tax can be avoided by transferring the liability to the spouse through a trust.

While there is no way of knowing if this will be reviewed again by the IRS, the article reports that the IRS "blessed" this procedure after reviewing it in 1996.
source NY Times IRS Loophole Allows Wealthy to Avoid Taxes, by David Kay Johnson 7/27/02

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CARE (Charity Aid Recovery and Empowerment Act) Update

Supporters are hopeful that the CARE Act will be scheduled for Senate action this week before the summer recess. However, as of this morning (7/31/02) the CARE Act has not made its way onto the calendar due to the rush of business before the recess.

Republicans in the Senate have hotlined the CARE Act for a possible vote under unanimous consent today, but a spokesman for Senate Majority Leader Tom Daschle is quoted in today's BNA Tax News as saying Daschle has decided NOT to bring the CARE Act up until after the recess.

September is going to be an awfully difficult time to get this legislation enacted and it will have lost all momentum gained.

• Non Itemizer Deduction over $250
• Direct IRA Charitable Gifts over 70 ½
• IRA to CRT or CGA over 59 ½
• Wholesome Food Gifts
• Capital Gain 25% Conservation Exclusion
• Conservation Deduction - 50% AGI

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