The Taxpayer Refund and Relief Act of 1999

The Taxpayer Refund and Relief Act of 1999

Article posted in Legislative on 28 August 1999| comments
audience: Partnership for Philanthropic Planning, National Publication | last updated: 18 May 2011
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Summary

The Joint Committee on Taxation released a summary of the Taxpayer Relief Act of 1999 (H.R. 2488). Although President Clinton has threatened the bill would be dead on arrival at his desk, the editors of PGDC believe that charitable gift planners would benefit by having a summary of those sections that are of particular interest, along with PGDC editorial comments.

On August 5, 1999, the House and Senate approved the Taxpayer Refund and Relief Act of 1999 (H.R. 2488), a $792 billion tax cut that is anticipated to be vetoed by President Clinton when presented to him. His press releases consistently indicate that this tax bill ignores the commitment to the continued financial solvency of social security and Medicare, the reduction in aid to education and debt reduction. House Ways & Means Committee Chair, Bill Archer, R-Tx, retorts that, it's as simple as "ABC: if the president and vice president want to improve our children's education, the president should sign the education initiatives included in our tax relief plan."

The latest salvo came from the Clinton administration on August 25, 1999, saying it would be "irresponsible" for him to sign the tax bill. The Office of Management and Budget indicated that the GOP tax bill, as written, would trigger spending cuts totaling nearly $100 billion for such programs as Medicare, crop insurance, veterans programs, student loans, social service block grants, and child support enforcement. The latest salvo was in response to a joint letter sent by House Speaker J. Dennis Hastert, R-Ill, and Senate Majority Leader Trent Lott, R-Miss, asserting that "there is no honest reason to veto this common-sense tax relief legislation."

Adding to the mayhem, Senator John Breaux, D-La, has sponsored a $500 billion bipartisan tax bill which proposes to increase the standard deduction, expand the 15% tax bracket, exclude the first $750 ($1,500 for joint filers) of net long-term capital gains, increase IRA contribution limits from $2,000 to $3,500, and accelerate the estate tax unified credit exemption to $1,000,000 by the year 2004. This compromise package also contains the favorable charitable giving incentives found in the original Senate bill (i.e., the charitable IRA rollover and the increase in individual and corporate percentage deduction limitations).

The Joint Committee on Taxation released a summary of this bill on August 6, 1999. The editors of PGDC believe that charitable gift planners would benefit by having a summary of those sections of H.R. 2488 that are of particular interest, along with specific editorial comments.

PARTIAL SUMMARY OF REVENUE PROVISIONS OF H.R. 2488, THE TAXPAYER REFUND AND RELIEF ACT OF 1999 (JCT)

I. INCOME TAX CHANGES

A. Reduction in Individual Income Tax Rates And Expansion of Lowest Individual Regular Income Tax Rate Bracket

The conference agreement reduces the 15-percent individual regular income tax rates to 14.5 percent for 2001 and 2002 and to 14 percent in 2003 and thereafter. Beginning in 2005, all other individual income tax rates (including individual AMT rates) are reduced by 1 percentage point.

The conference agreement widens the 14-percent regular income tax rate bracket for unmarried individuals and head of households by $3,000 for taxable years beginning after December 31, 2005. For taxable years beginning after December 31, 2006, the $3,000 amounts are indexed for inflation. (See, also, the provision described in B., below, to widen the 14-percent bracket for married couples filing joint returns.)

B. Marriage Penalty Relief Provisions Relating to The Rate Structure And Standard Deduction Amounts

Basic standard deduction -- The conference agreement increases the basic standard deduction for a married couple filing a joint return to twice the basic standard deduction for an unmarried individual. This increase is phased in by increasing the standard deduction for a married couple filing a joint return as follows: (1) 1.728 times the standard deduction for an unmarried individual in 2001; (2) 1.801 times the standard deduction for an unmarried individual in 2002; (3) 1.870 times the standard deduction for an unmarried individual in 2003; (4) 1.935 times the standard deduction for an unmarried individual in 2004; and (5) 2,000 times the standard deduction for an unmarried individual in 2005 and thereafter. Also, the basic standard deduction for a married taxpayer filing separately will be increased so that it will continue to equal one-half of the basic standard deduction for a married couple filing jointly. The provision is effective for taxable years beginning after December 31, 2000.

Width of 14-percent rate bracket for a married couple filing a joint return -- The conference agreement increases the size of the 14-percent regular income tax rate bracket for a married couple filing a joint return to twice the size of the corresponding rate bracket for an unmarried individual. This increase is phased-in by increasing the lowest regular income tax rate bracket for a married couple filing a joint return as follows: (1) 1.737 times the width of the lowest regular income tax rate bracket for an unmarried individual in 2005; (2) 1.761 times the width of the lowest regular income tax rate bracket for an unmarried individual in 2006; (3) 1.881 times the width of the lowest regular income tax rate bracket for an unmarried individual in 2007; and (4) 2.000 times the width of the lowest regular income tax rate bracket for an unmarried individual in 2008 and thereafter. The provision is effective for taxable years beginning after December 31, 2004.

C. Individual Alternative Minimum Tax Provisions

The conference agreement allows personal credits to be taken against the entire regular tax (without regard to the minimum tax, effective for taxable years after 1998) for the taxable years beginning after December 31, 1998. The conference agreement also phases out and repeals the individual minimum tax.

The phase-out of the AMT is effective for taxable years beginning after December 31, 2004. The repeal of the AMT is effective for taxable years beginning after December 31, 2007.

The conference agreement repeals the 90-percent limitation on the utilization of the AMT foreign tax credit for taxable years beginning after December 31, 2001.

D. Individual Capital Gains

The conference agreement reduces the rate of tax on individual capital gains from 10 and 20 percent to 8 and 18 percent and reduces the rate of tax on unrecaptured depreciation from 25 percent to 23 percent for taxable years beginning after December 31, 1998. The conference agreement also allows individuals to index the basis of assets acquired after 1999 for inflation.

PGDC Editorial Comment: In the charitable arena, we have long debated the impact of tax deductions (a decrease in rates or an increase in deductions) for donors contributing to charities. One camp vigorously contends that donors are primarily motivated by charitable desires and that a complete repeal of the tax deduction or the flattening of tax rates would not deter their philanthropy. This camp would use as an example the recent reduction in capital gains rates, but with a corresponding increase in charitable giving.

The other camp would contend that actual giving per household, in terms of real (not inflated) dollars, has gone down over the last twenty years, citing the Price Waterhouse report issued in April, 1997. This camp would argue vigorously that outright and planned gifts would be significantly and detrimentally affected in the event of a repeal of the charitable deduction.

The truth of the matter is that the charitable income tax deduction has been a mainstay in the American tax structure since 1917. What message is Congress sending as it debates in committee the repeal of the charitable income tax deduction? What evidence do staffers on the tax writing committees of Congress have that would support retaining the current deduction or repealing it?

Of course, outright repeal of the charitable income tax deduction is not what is being suggested in this current bill. H.R. 2488 proposes to reduce the capital gains rate retroactive to January 1, 1999 and incrementally reduce income taxes over time.

This tax bill is bizarre, however. Many of its provisions are delayed until some time in the future. Provisions that have been a mainstay of the tax code since 1916 (i.e., the estate tax structure) are repealed, but only from January 1, 2009 until October 1, 2009. More on this in a moment. Significant questions also remain as to whether the Congress-of-the-future will agree with these tax law changes. The likelihood of such a bill passing is very questionable, considering the current make-up of Congress and the Presidency. Will this or a similar tax bill have a greater chance of success if a Republican President and a Republican Congress are elected into office?

The end result of this bill is that tax planning and tax preparation increase exponentially, almost to a point of impossibility. It seems as if those legislators who most favor a simplified tax system are attempting to pass (and have passed in the recent past) tax laws that are so complex that the only alternative is to "tear the tax system out by its roots" (a refrain of the "flat taxers").

II. ESTATE, GIFT, AND GENERATION-SKIPPING TRANSFER CHANGES

A. Reduction and Repeal of Estate, Gift, and Generation-skipping Transfer Taxes

Under the conference agreement, the estate, gift, and generation-skipping transfer ("GST") taxes are reduced until they are repealed in 2009. Beginning in 2001, the unified credit is replaced with a unified exemption, and the estate and gift tax rates above 53 percent and the 5-percent surtax (which phases out the benefit of the graduated rates) are repealed. In 2002, the rates above 50 percent are repealed. Beginning in 2003 and through 2006, each tax rate is reduced by 1 percentage point; in 2007, each tax rate is reduced by 1.5 percentage point; and in 2008, each tax rate is reduced by 2 percentage points. The estate, gift, and GST taxes are repealed beginning in 2009, after which a carryover basis regime is phased in for transfers of assets from large estates. The phase-in of the carryover basis begins with estates exceeding $1.3 million. The full carryover basis applies to estates valued over $2 million. For estates valued up to $3 million passing to a surviving spouse, the spouse would still receive a step-up in tax basis. The executor or marital estates over $3 million must allocate the $3 million step-up benefit among the estate assets.

B. Modify Generation-Skipping Transfer Tax Rules

The conference agreement modifies the GST tax rules as follows:

  • GST tax exemption is automatically allocated to transfers made during life that are "indirect skips," which are transfers to GST trusts that are not direct skips. This provision applies to transfers subject to estate or gift tax made after December 31, 1999, and to estate tax inclusion periods ending after December 31, 1999;

  • Retroactive allocation of GST tax exemption is permitted when there is an unnatural order of death. This rule applies to deaths of non-skip persons occurring after the date of enactment;

  • Trusts holding property with an inclusion ratio greater than zero may be severed at any time in a "qualified severance," in order to achieve a trust with an inclusion ratio of one and a trust with an inclusion ratio of zero. The severance provisions are effective for severance of trusts occurring after the date of enactment;

  • The valuation rules are modified such that, for timely and automatic allocations of GST tax exemption, the value of the property for purposes of determining the inclusion ratio is its finally determined gift tax value or estate tax value depending on the circumstances of the transfer;

  • The Treasury Secretary is authorized and directed to grant extensions of time to make the election to allocate GST tax exemption and to grant exceptions to the time requirement; and

  • The conference agreement provides that substantial compliance with the statutory and regulatory requirements for allocating GST tax exemption will suffice to establish that GST tax exemption was allocated to a particular transfer or trust.

PGDC Editorial Comment: Would would happen if the estate and gift tax was repealed? A repeal would directly and undeniably impact our planned giving efforts. First and foremost, the tax-luster of charitable bequests would be lost for many families. Of course, some families will continue to fear leaving too much wealth to their heirs, and charitable legacies will continue to flourish in those families. However, many other families feel that charity begins at home. In addition, the concept of social capital and "converting dollars otherwise allocated to estate taxes over to charity" would be extinct. Certainly, the pages referencing the Code and Regulations regarding the charitable gift and estate tax deductions would become irrelevant. Non-grantor inter vivos or testamentary CLATs and CLUTs would have no relevance in a donor's financial and estate plan (At least we wouldn't need to worry about only using a CLUT for GST tax purposes). The estate tax savings associated with CRTs and pooled income funds would become illusory. However, by the year 2009, the carryover basis rule would kick in and CRTs would be looking pretty good to wealthy heirs for highly appreciated assets.

Will this repeal pass? The President has consistently vowed to veto this bill. It is highly unlikely that any tax bill in 1999 will include a complete repeal of the estate and gift tax regime. However, the ball is clearly on the playing field, and the batter is in the batter's box.

Is anybody wondering why the repeal becomes effective in the year 2009? Due to a technicality called the Byrd Rule, the estate and gift tax repeal will sunset 9 months following its repeal. The Byrd Rule allows any Senator to raise a motion to strike a provision that would increase the deficit after the 10-year period covered by a reconciliation bill. Sixty votes are required from the Senate to override a motion to strike. The Senate did not have 60 votes in favor of the tax bill. Thus, the complete repeal will apparently last after only nine months and the estate and gift tax regime would be reinstated on October 1, 2009!

If an absolute repeal passed against all odds, charities and charitable giving will never end. The reality is that non-profit organizations (or associations) have been recognized as a distinguishing feature of America's societal fabric since the time of its inception (and well before the inception of the Internal Revenue Code.) But it does get a little disconcerting when the federal government reduces entitlements, relying more on state governments to take care of their citizenry. The state governments are no better equipped to efficiently handle all of these matters. In the meantime, charities are asked to fill more of the gaps when federal and state governments cut back on these programs. So with one hand the government expects more from our nation's charities, and takes away with the other hand major incentives for direct means of support from the general public.

III. INDIVIDUAL RETIREMENT ACCOUNTS

A. IRC Limitations

  • Increase in IRA contribution limit -- The conference agreement increases the annual dollar IRA contribution limit from $2,000 to $3,000 for 2001-2003, $4,000 in 2004-2005, $5,000 in 2006-2008, with indexing thereafter.

  • Increase Roth IRA AGI limits -- The AGI limits for Roth IRA contributions is increased to $200,000 - $210,000 for joint filers (the limit is $100,000 - $110,000 for all other filers), effective for taxable years beginning after December 31, 2002.

  • Increase Roth IRA conversion limit -- The conference agreement increases the AGI limit on conversions of traditional IRAs to Roth IRAs to $200,000 for joint filers (the limit is $100,000 for all other filers) for taxable years beginning after December 31, 2002.

  • Deemed IRAs under employer plans -- The conference agreement permits Roth IRA and traditional IRA contributions to be made to a separate account or annuity that is part of a qualified retirement plan or section 403(b) annuity, effective for plan years beginning after December 31, 2000.

  • Catch-up contributions -- The conference agreement allows individuals age 50 and older to make additional contributions to an IRA. The additional contribution is 10 percent of the otherwise applicable dollar limitation in 2001, 20 percent in 2002, 30 percent in 2003, 40 percent in 2004, and 50 percent in 2005 and thereafter. The provision is effective for taxable years beginning after December 31, 2000.

PGDC Editorial Comment: These IRA provisions will promote savings. However, the balance of the IRA distribution rules and excise taxes still plague this retirement savings device. Thus, the IRA continues to be a terrible wealth transfer vehicle and thus, a great vehicle for consideration as a testamentary charitable bequest. BUT READ ON.

B. Tax-free Withdrawals from IRAs for Charitable Purposes

The conference agreement provides an exclusion from gross income for qualified charitable distributions from an IRA to a charitable organization to which deductible contributions can be made. A qualified charitable distribution is any distribution from an IRA which is made after age 70-1/2 and which is made directly to the charitable organization. The provision is effective with respect to distributions after December 31, 2002.

PGDC Editorial Comment: The Senate version of the charitable IRA rollover was more favorable in that it permitted the income exclusion for transfers of IRAs to a CRUT, a CRAT, a pooled income fund, and in return for a charitable gift annuity. "Scoring" is the estimated cost or revenue produced by a particular provision of a tax bill.

For instance, the charitable IRA rollover bill was scored at a cost of approximately $350 million over ten years. On a $792 billion tax bill, that cost doesn't sound material. However, scoring is conducted mysteriously by the Joint Committee on Taxation behind closed doors, and justification for these numbers is not even made available to all Congressmen.

Wouldn't the cost of the charitable IRA rollover provision be reduced if CRTs and other life income plans are included?

It is our understanding the Breaux compromise package includes the charitable IRA rollover for both outright and planned gifts, placing these gifts on an equal footing.

IV. CHARITABLE SPLIT-DOLLAR ARRANGEMENTS

The conference agreement restates present law to provide that no charitable contribution deduction is allowed for a transfer to or for the use of a charitable organization if, in connection with the transfer, the organization directly or indirectly pays, or has previously paid, any premium on any personal benefit contract with respect to the transferor, or there is an understanding or expectation that any person will directly or indirectly pay any premium on any personal benefit contract with respect to the transferor.

The provision also imposes on the charitable organization an excise tax in the amount of the premiums paid. The provision applies generally to transfers, or premiums paid, after February 8, 1999. This legislation represents the death bill to charitable split dollar. Any premium profit after February 8, 1999, is asking for major attention and heartache.

PGDC Editorial Comment: This legislation represents the death knell to all charitable split-dollar arrangements. Any premium payment after 2/8/99 is asking for major attention and liability.

But what happens if this entire tax package gets derailed and this provision is not enacted? Will donors and charities attempt to make additional premium payments? This would be highly unlikely considering the apparent consensus among the two houses of Congress on this issue, the significant adverse press and the IRS' affirmative attack on this structure in Notice 99-36.

V. MISCELLANEOUS

A. Education

Expand education savings accounts -- The conference agreement increases the annual contribution limit to education IRAs (renamed "education savings accounts") from $500 to $2,000 per beneficiary. The conference agreement expands the definition of qualified education expenses to include qualified elementary and secondary expenses, including certain homeschooling expenses. Further, the conference agreement allows contributions to be made on behalf of special needs beneficiaries after they reach age 18.

The conference agreement also allows:

  • contributions for a taxable year to be made until April 15 of the following year;

  • coordination of distributions from education savings accounts with the HOPE and Lifetime Learning credits; and

  • contributions by corporations and other entities. The conference agreement provisions generally are effective for taxable years beginning after December 31, 2000.

Allow tax-free distributions from state and private education programs -- The conference agreement expands the definition of "qualified tuition program" to include certain prepaid tuition programs established and maintained by one or more eligible educational institutions (which may be private institutions). In the case of a qualified tuition program maintained by one or more private educational institutions, persons will be able to purchase tuition credits or certificates on behalf of a designated beneficiary, but will not be able to make contributions to a savings account plan. The provisions generally are effective after December 31, 1999.

Under the conference agreement, an exclusion from gross income is provided for distributions made in taxable years beginning after December 31, 1999, from qualified State tuition programs to the extent that the distribution is used to pay for qualified higher education expenses. This exclusion is extended to distributions from qualified tuition programs maintained by educational institutions for distributions made in taxable years after December 31, 2003. The conference agreement allows a taxpayer to claim a HOPE credit or Lifetime Learning credit for a taxable year and to exclude from gross income amounts distributed from a qualified tuition program on behalf of the same student as long as the distributions are not used for the same expenses for which a credit was claimed.

PGDC Editorial Comments: These provisions will promote individual savings for the purpose of accumulating funds for education costs. In addition, schools would now be able to offer a statutory tuition plan, which was previously permitted to be offered only by state governments. The Deferred Gift Annuity Tuition Plan remains a viable alternative to the statutory structure.

B. Unrelated Business Income Tax

Modify Section 512(b)(13) -- The conference agreement provides that the general rule of section 512(b)(13), which includes interest, rent, annuity, or royalty payments made by a controlled entity to a tax-exempt organization in the latter organization's unrelated business income, applies only to the portion of payments received in a taxable year that exceed the amount of the specified payment which would have been paid if such payment had been determined in an arm's length transaction. The conference agreement also imposes an addition to tax of 20 percent of the excess amount of any such payment. The provision applies to payments received or accrued after December 31, 1999.

PGDC Editorial Overview: Is this Armageddon? Does it feel like "the world as we know" it is ending? The charitable gift planning community is under assault. Big for-profit companies are marketing planned gifts as tax shelters. The press is challenging the essential nature of charitable giving as evidenced by recent articles by the Wall Street Journal on charitable split-dollar arrangements, charitable family limited partnerships, the accelerated CRT, donor advised funds, and supporting organizations. The problem is that valid charitable vehicles and valid uses of charitable vehicles are linked together with potentially abusive uses of those vehicles. Congress reads.

Legislation over the last several years has changed the potential donor-base for planned gifts and has increased the accountability among gift planners and charities alike. A class action lawsuit was brought (and finally dismissed after several years of tremendous pain and effort) against basically every charity in the United States arguing technical antitrust and securities violations in the promotion and use of a planned gift.

The Internal Revenue Service has become acutely aware of these "charitable" gift plans and disenchanted with their use. The IRS has resorted on certain issues, such as income deferral NIMCRUTs, to issue "chilling effect" pronouncements without providing a legal justification for its position or clear guidance for donors/taxpayers. Certain branches of the IRS are now regularly arguing in private letter ruling requests that any charitable gift plan constitutes a step transaction, even if it's unlikely such an argument would pass muster with a court.

So, is Armageddon coming? That depends on how you define it. One definition in The American Heritage Dictionary is "The scene of a final battle between the forces of good and evil, prophesied in the Bible to occur at the end of the world." The second definition is "A decisive conflict." It does not appear that we are at the end of the world, but we are at a crossroads in how we are perceived. We are in a decisive conflict. The greatest risk to our future as gift planners is not the press, Congress, or the IRS. The charitable gift planning community is in a deceptively silent civil war. The battle between good and evil represents the dichotomy between for-profit and non-profit interests. In jest, for-profit enterprises are referred to as "the dark side." As a joke it's funny, and in reality, it's a killer. If a union between these two groups cannot be garnered, then both will surely loose. The National Committee on Planned Giving (NCPG) has played a critical role in bringing together these two groups across the country. NCPG has issued Model Standards of Practice for the Charitable Gift Planner by which all 12,000+ members must agree to abide. NCPG has been reaching out to IRS personnel, legislators and their aides in educating them regarding planned giving and its uses. Considering the current state of affairs, NCPG has a heavy burden to carry.

However, we should all do out part. Gift planners should follow the NCPG ethical standards, work harder to understand the perspective of all gift planners and their respective roles in the gift planning process, and reach a consensus on each conflict in the best interests of the community as a whole. The press should disclose potential abuses in a responsible fashion, conduct adequate research to accurately reflect the nature and use of valid charitable vehicles and more often publish the heartwarming and real-life impact of charitable gifts. The IRS should publicly provide swift and clear guidelines on charitable tax issues, which will thwart Congressional intervention and provide a roadmap for donors to legitimately structure their charitable giving. Congress should carefully weed through real and perceived abuses and legislate accordingly, and gather all perspectives on a particular charitable tax issue. The IRS and Congress should expand their use of NCPG as a practical and technical resource in analyzing these issues.

Both for-profit and non-profit gift planners are good. We are doing good deeds. We should continue to do good deeds and must be prepared to fight for the privilege of doing them. Nonetheless, our world is clearly getting smaller and we are being viewed under a microscope. The planned giving community as a whole cannot control the acts of every person, but it must be in a position to act as a single unified voice in fighting any future decisive conflict.

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