TOO MANY EXEMPT ORGANIZATIONS ARE ENDORSING CANDIDATES

Generally, Section 501(c)(3) organizations and politics do not mix well. Under Section 501(c)(3), tax-exempt organizations are absolutely prohibited from directly or indirectly participating in, or intervening in, any political campaign on behalf of (or in opposition to) any candidate for federal, state or local public office. Violation of this prohibition may result in denial or revocation of tax-exempt status and the imposition of excise taxes.

It appears that many tax-exempt organizations are either not getting the message, or the temptation to support political candidates is too great to resist. In a review of the 2004 election cycle, the IRS determined that in nearly three-quarters of 82 examinations it conducted, tax-exempts, including churches (which term for tax purposes includes "temples" for those religions who practice through temples), engaged in some level of prohibited political activity. Mostly these were one-time, isolated occurrences, which IRS addressed through written advisories to the organizations. However, in three cases involving tax-exempts that weren't churches, the prohibited activity was so egregious that IRS proposed the revocation of the organizations' tax-exempt status. Violations that were found to occur included:

-Charities, including churches, distributing diverse printed materials that encouraged their members to vote for a preferred candidate

-Religious leaders using the pulpit to endorse or oppose a particular candidate

-Charities, including churches, criticizing or supporting a candidate on their website or through links to another website

-Charities, including churches, disseminating improper voter guides or candidate ratings

-Charities, including churches, placing signs on their property that show they support a particular candidate

-Charities, including churches, giving improperly preferential treatment to certain candidates by permitting them to speak at functions

-Charities, including churches, making cash contributions to a candidate's political campaign.

Where to draw the line between permissible educational activities and permissible non-partisan political activities on the one hand, and impermissible advocacy on the other hand, can be difficult to discern. For those who are interested, the IRS has provided some key points in this regard for many common fact situations. These key points include:

-Intervention in a political campaign includes not only endorsing a candidate for office, but also contributions to political campaign funds, public statements of position (verbal or written) in favor of or opposed to a candidate, distributing prepared statements that favor or oppose candidates, and, if other candidates aren't given an equivalent opportunity, allowing a candidate to use the tax-exempt's assets or facilities.

-If carried out in a non-partisan manner, tax-exempts can conduct certain voter education activities (including the presentation of public forums and the publication of voter education guides). They can also sponsor voter registration and get-out-the-vote drives, as long as they aren't conducted in a biased manner that favors (or opposes) a candidate.

-Tax-exempt's leaders cannot make partisan comments in official organization publications or at official functions of the organization. But they can speak for themselves, as individuals, on political matters or important issues of public policy. To avoid potential attribution of their comments, tax-exempt's leaders who speak or write in their individual capacity are encouraged to clearly indicate that their comments are personal and not intended to represent the views of the organization.

-An organization may invite political candidates (in their capacity as candidates or in their individual capacity) to speak at its events. Candidates may also appear without an invitation at organization events that are open to the public. When a candidate is invited to speak as a political candidate, the tax-exempt must ensure that: (1) it provides an equal opportunity to other political candidates seeking the same office; (2) it doesn't indicate any support for or opposition to the candidate (this should be stated explicitly when he is introduced and in communications concerning his attendance); and (3) no political fundraising occurs. In determining whether candidates are given an equal opportunity to participate, a tax-exempt should consider the nature of the event to which each candidate is invited, as well as the manner of presentation. For example, an invitation for one candidate to speak at a well attended annual banquet, and for his opponent to speak at a sparsely attended general meeting, will likely have violated the political campaign prohibition, even if the manner of presentation is otherwise neutral.

-A tax-exempt may take positions on public policy issues, including issues that divide candidates in an election. But, a statement by a tax-exempt is at risk of violating the political campaign prohibition if there is any message favoring or opposing a candidate, even it doesn't expressly tell an audience to vote for or against a candidate (who can be identified not only by name but also by other means, such as showing his picture, referring to his party, or other distinctive features of his platform or biography).

-A web site is a form of communication, and if a tax-exempt posts something on its web site that favors or opposes a candidate for public office, it will be treated the same as if it distributed printed material, oral statements or broadcasts that favored or opposed a candidate. Links to candidate-related material, by themselves, do not necessarily constitute political campaign intervention. IRS will examine all facts and circumstances to assess whether a link produces that result.

FINDING OUT MORE ABOUT THAT CHARITY

Want to confirm the tax exempt status of a charitable organization? Who is serving on their board of directors? How much in assets they have?

One useful place to look online is at http://www.networkforgood.org/. Enter a search for the charity and see what comes up. Not all charitable organizations are listed, and varying levels of information are provided for the organizations that are (generally, the larger the organization the more information that is provided), but it is a good place to start if you are looking for this type of information.

FRAUD VS. FRAUDULENT CONVEYANCE [FLORIDA]

A Florida homestead enjoys significant constitutional protections against creditors of the owner. In Havoco of America, Ltd. v. Hill, 790 So. 2d 1018 (Fla. 2001), the Florida Supreme Court indicated that when funds obtained through fraud or egregious conduct are used to invest in, purchase, or improve the homestead, the homestead protection will not apply.

What happens if an owner transfers funds into a homestead by paying down a mortgage if that transfer constitutes a fraudulent conveyance - does this allow a creditor to reach the homestead? A "fraudulent conveyance" is a transfer that puts funds or assets beyond the reach of present or future creditors in a manner that applicable statutes or the common law provides will not be respected.

In Willis, Willis and Giacomino v. Red Reef, Inc., 4th DCA (2006), Florida’s Fourth District Court of Appeals addressed the issue whether a mere fraudulent conveyance into a homestead is the type of fraud that will expose the homestead to the owner’s creditors. Reversing the trial court, the appellate court held that a fraudulent conveyance is NOT the type of fraud that the Florida Supreme Court was concerned with. An important distinction noted by the court was that the owner did not obtain the funds that went into the homestead by fraud or egregious conduct - merely transferring the funds into the homestead via a fraudulent conveyance is not sufficient to give rise to an enforceable equitable lien.

SUTA DUMPING [FLORIDA]

As long as there are taxes, there will be taxpayers trying to manipulate the rules to lower their taxes. As long as there are taxpayers trying to manipulate the rules, the taxing authorities will enact new rules to try and close the door on those manipulations.

This cycle is playing out in the area of state unemployment taxes. The rate of unemployment taxes of a particular employer is based on the “experience” of an employer with his past employees. Taxpayers have attempted to obtain better rates by transferring employees to related businesses to get away from their bad "experience" ratings, or acquiring businesses with better experience ratings.

In 2004, the federal government passed a law requiring states to pass laws to curb these activities, referred to as SUTA (State Unemployment Tax Act) dumping. In 2005, Florida did its part and enacted new laws, effective January 1, 2006, that impose serious sanctions, including criminal prosecution, on those conducting SUTA dumping. The new law has application to transfers of a business between related entities or owners, and the acquisition of the “experience” of a business.

If this is an area of concern for you, more information on the new Florida law is available at TIP # 0560BB.

USING A GRAT TO OWN INTERESTS IN START-UP VENTURES

Trusts are useful mechanisms to own interests in start-up ventures. If the beneficiaries of the trust are members of younger generations, the growth in value of the business can occur for their benefit without substantial transfer tax consequences.

Often, the funding for the new venture is accomplished in part by loans from parents or other older generation members to the trust. However, such loans can have some tax drawbacks and exposures. These include:

-interest income to the lenders, when the borrowing trust may not be able to effectively deduct the interest;

-risk of a taxable gift if the venture doesn’t work out and the loans cannot be repaid, at least if the lenders don’t aggressively pursue collection of the loans; and

-the general risk of the IRS attempting to recast the loans as taxable gifts.

In a recent article in the Estate Planning Journal, the authors suggest the use of a zeroed out grantor retained annuity trust (GRAT) as an alternative method to funding the initial capital. Instead of loaning money to the trust, the family members providing the funding contribute the funds. As a near zeroed-out GRAT, the grantors make only a de minimis taxable gift to the trust. As a GRAT the grantors receive back regular payments from the trust, until they receive back an actuarial total annuity amount equivalent to the value contributed plus the applicable interest rate factor. Any remaining value belongs to the younger generation beneficiaries.

By using a GRAT instead of a loan, the interest issue goes away, as does the risk of the loan being treated as a taxable gift. As a grantor trust, the GRAT will further allow the grantors to be taxable on the income of the trust (which in effect allows for the transfer of more funds through the payment of tax to the trust in a tax-advantaged manner) and may allow to the grantors deductions for any losses relating to the business venture.

The article notes two negative aspects to the use of a GRAT in this context. First, GRATs generally last for a term of years. If the grantor dies during that term, the IRS will likely assert that the grantor will be subject to estate tax on the assets in the trust, including any appreciation that has occurred. While many tax practitioners believe the estate tax inclusion is much more limited than that, a disagreement with the IRS can be anticipated. Second, a GRAT is not a useful planning devise where substantial generation skipping is anticipated.

Consequently, this use of a GRAT to hold interests in start-up ventures will not always make sense, but can be of use in some planning circumstances.

The Opportunity GRAT (OPGRAT) Can Reward Success and Minimize Adverse Tax Risks, R.A. Oshins, M.J. Jones, and G.E. Lunn, Jr., 33 Estate Planning, No. 3, 20 (March 2006)

APPLICABLE FEDERAL RATES - UPDATE FOR MARCH 2006

March 2006 Applicable Federal Rates Summary:

-Short Term AFR - Semi-annual Compounding - 4.53% (4.34%/Feb -- 4.33%/Jan)

-Mid Term AFR - Semi-annual Compounding - 4.46% (4.35%/Feb -- 4.43%/Jan)

-Long Term AFR - Semi-annual Compounding - 4.63% (4.56%/Feb -- 4.68%/Jan)

EXTENDING YOUR TAX RETURN WILL BE EASIER THIS YEAR

For one reason or another, many taxpayers (or their paid preparers) are unable to get their returns filed by the applicable due date. As the due date for many returns fast approaches, it is helpful to know that the IRS has made it easier this year to get extensions on the due date for filing.

For business taxpayers filing for an extension, those who previously filed extension forms 8800, 8736, 7004 and 2758 will now only need to file the revised Form 7004, "Application for Automatic 6-Month Extension of Time to File Certain Business Income Tax, Information, and Other Returns,” to request an automatic extension of time to file. The revised Form 7004 grants taxpayers an automatic six-month extension without the need to file intervening forms.
For the 2005 filing season, business taxpayers must file Form 7004 by the due date of the return in order to receive an automatic six–month extension of time to file. The extension period is calculated from the due date of the return.

New regulations make this option available to most non-corporate business taxpayers, including partnerships and trusts. Previously, only corporations could request an automatic six-month tax-filing extension. All eligible non-corporate business taxpayers had to request an initial three-month extension and, if more time was needed, then had to request another three months.

A similar change was also made recently for individual taxpayers. Individuals who need additional time to file their tax returns may request an automatic six-month extension by filing Form 4868.

REMEMBER, an extension of time to file a return is not the same thing as an extension of time to pay taxes that are due with the return!

PAYORS PUT ON CASH BASIS FOR TREATY INTEREST PAID TO RELATED PAYEES

Code Section 267(a)(2) provides that when a taxpayer pays interest to a related taxpayer, the payor does not get an interest deduction until the payee includes the interest in income. Thus, even though the payor is on the accrual basis of accounting, such an interest payment is not deductible to a cash basis recipient until actually paid (which is when the payee includes the interest in income). The net effect is that when this provision applies, an accrual basis payor is put on the cash method of accounting for purposes of deducting these interest payments.

Code Section 267(a)(3) extends this principal to payments to non-U.S. persons. But what happens if the payee never has to include the interest in U.S. income due to a tax treaty (regardless of whether the payee is on a cash or accrual basis of accounting)? Under Treasury Regulations, this is also used as a circumstance to put an accrual basis payor on the cash basis for purposes of deducting the interest payments.

This treatment has been questioned by taxpayers, who have claimed that these regulations exceed the statute and the authority granted to the Treasury Department. The Tax Court itself has flip-flopped on the validity of these regulations in recent years.

There is now a little more tax certainty on this issue. The 7th Circuit Court of Appeals has recently ruled that the regulation is valid. Square D Co., (2/13/2006)

'TIS THE SEASON FOR...TAX FRAUDS

Like most areas involving money, taxes are an area full of rip-offs and frauds. Some of these are perpetrated on taxpayers - others seek to trick the IRS. During tax return filing season, the IRS publishes a list of the "Dirty Dozen" of frauds that are perpetrated by or on taxpayers. Here is the list and the IRS' explanation of each for the 2006 filing season:

1. Zero Wages. In this scam, new to the Dirty Dozen, a taxpayer attaches to his or her return either a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 that shows zero or little wages or other income. The taxpayer may include a statement indicating the taxpayer is rebutting information submitted to the IRS by the payer. An explanation on the Form 4852 may cite “statutory language behind IRC 3401 and 3121” or may include some reference to the paying company refusing to issue a corrected Form W-2 for fear of IRS retaliation. The Form 4852 or 1099 is usually attached to a “Zero Return.” (See number four below.)

2. Form 843 Tax Abatement. This scam, also new to the Dirty Dozen, rests on faulty interpretation of the Internal Revenue Code. It involves the filer requesting abatement of previously assessed tax using Form 843. Many using this scam have not previously filed tax returns and the tax they are trying to have abated has been assessed by the IRS through the Substitute for Return Program. The filer uses the Form 843 to list reasons for the request. Often, one of the reasons is: “Failed to properly compute and/or calculate IRC Sec 83—Property Transferred in Connection with Performance of Service.”

3. Phishing. Phishing is a technique used by identity thieves to acquire personal financial data in order to gain access to the financial accounts of unsuspecting consumers, run up charges on their credit cards or apply for new loans in their names. These Internet-based criminals pose as representatives of a financial institution and send out fictitious e-mail correspondence in an attempt to trick consumers into disclosing private information. Sometimes scammers pose as the IRS itself. In recent months, some taxpayers have received e-mails that appear to come from the IRS. A typical e-mail notifies a taxpayer of an outstanding refund and urges the taxpayer to click on a hyperlink and visit an official-looking Web site. The Web site then solicits a social security and credit card number. In a variation of this scheme, criminals have used e-mail to announce to unsuspecting taxpayers they are “under audit” and could make things right by divulging selected private financial information. Taxpayers should take note: The IRS does not use e-mail to initiate contact with taxpayers about issues related to their accounts. If a taxpayer has any doubt whether a contact from the IRS is authentic, the taxpayer should call 1-800-829-1040 to confirm it.

4. Zero Return. Promoters instruct taxpayers to enter all zeros on their federal income tax filings. In a twist on this scheme, filers enter zero income, report their withholding and then write “nunc pro tunc”— Latin for “now for then”—on the return. They often also do this with amended returns in the hope the IRS will disregard the original return in which they reported wages and other income.

5. Trust Misuse. For years unscrupulous promoters have urged taxpayers to transfer assets into trusts. They promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes. However, some trusts do not deliver the promised tax benefits, and the IRS is actively examining these arrangements. There are currently more than 200 active investigations underway and three dozen injunctions have been obtained against promoters since 2001. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering into a trust.

6. Frivolous Arguments. Promoters have been known to make the following outlandish claims: the Sixteenth Amendment concerning congressional power to lay and collect income taxes was never ratified; wages are not income; filing a return and paying taxes are merely voluntary; and being required to file Form 1040 violates the Fifth Amendment right against self-incrimination or the Fourth Amendment right to privacy. Don't believe these or other similar claims. These arguments are false and have been thrown out of court. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law.

7. Return Preparer Fraud. Dishonest return preparers can cause many headaches for taxpayers who fall victim to their schemes. Such preparers derive financial gain by skimming a portion of their clients' refunds and charging inflated fees for return preparation services. They attract new clients by promising large refunds. Taxpayers should choose carefully when hiring a tax preparer. As the old saying goes, “If it sounds too good to be true, it probably is.” And remember, no matter who prepares the return, the taxpayer is ultimately responsible for its accuracy. Since 2002, the courts have issued injunctions ordering dozens of individuals to cease preparing returns, and the Department of Justice has filed complaints against dozens of others. During fiscal year 2005, more than 110 tax return preparers were convicted of tax crimes.

8. Credit Counseling Agencies. Taxpayers should be careful with credit counseling organizations that claim they can fix credit ratings, push debt payment plans or impose high set-up fees or monthly service charges that may add to existing debt. The IRS Tax Exempt and Government Entities Division is in the process of revoking the tax-exempt status of numerous credit counseling organizations that operated under the guise of educating financially distressed consumers with debt problems while charging debtors large fees and providing little or no counseling.

9. Abuse of Charitable Organizations and Deductions. The IRS has observed increased use of tax-exempt organizations to improperly shield income or assets from taxation. This can occur, for example, when a taxpayer moves assets or income to a tax-exempt supporting organization or donor-advised fund but maintains control over the assets or income, thereby obtaining a tax deduction without transferring a commensurate benefit to charity. A “contribution” of a historic facade easement to a tax-exempt conservation organization is another example. In many cases, local historic preservation laws already prohibit alteration of the home's facade, making the contributed easement superfluous. Even if the facade could be altered, the deduction claimed for the easement contribution may far exceed the easement's impact on the value of the property.

10. Offshore Transactions. Despite a crackdown by the IRS and state tax agencies, individuals continue to try to avoid U.S. taxes by illegally hiding income in offshore bank and brokerage accounts or using offshore credit cards, wire transfers, foreign trusts, employee leasing schemes, private annuities or life insurance to do so. The IRS and the tax agencies of U.S. states and possessions continue to aggressively pursue taxpayers and promoters involved in such abusive transactions. During fiscal 2005, 68 individuals were convicted on charges of promotion and use of abusive tax schemes designed to evade taxes.

11. Employment Tax Evasion. The IRS has seen a number of illegal schemes that instruct employers not to withhold federal income tax or other employment taxes from wages paid to their employees. Such advice is based on an incorrect interpretation of Section 861 and other parts of the tax law and has been refuted in court. Lately, the IRS has seen an increase in activity in the area of “double-dip” parking and medical reimbursement issues. In recent years, the courts have issued injunctions against more than a dozen persons ordering them to stop promoting the scheme. During fiscal 2005, more than 50 individuals were sentenced to an average of 30 months in prison for employment tax evasion. Employer participants can also be held responsible for back payments of employment taxes, plus penalties and interest. It is worth noting that employees who have nothing withheld from their wages are still responsible for payment of their personal taxes.

12. “No Gain” Deduction. Filers attempt to eliminate their entire adjusted gross income (AGI) by deducting it on Schedule A. The filer lists his or her AGI under the Schedule A section labeled “Other Miscellaneous Deductions” and attaches a statement to the return that refers to court documents and includes the words “No Gain Realized.”

LOTTERY WINNERS AND LOSERS

The good news - you've won the lottery!

The bad news - you died before you received 1/2 of the annual payouts of $209,000.

More bad news - the IRS wants a bite out of your winnings for estate taxes before they pass to your heirs.

In valuing lottery annuities to compute the estate tax, the IRS uses its annuity tables (which are actuarial tables based on applicable interest rates and payout periods). Trying to salvage the best of a bad situation, the Estate of Kenneth Davis tried to include a value reduction in its computation since the estate was not allowed to sell or otherwise dispose of the future lottery payments to third parties. This reduction reduced the applicable taxes by about 50%.

In this recent case, the District Court in New Hampshire has sided with the estate, and it appears it will allow for the additional value reduction due to the restrictions on transfer. However, we will probably be hearing more about this issue, since there is a split among the Circuit Courts of Appeal whether such a reduction is appropriate.

This issue has implications beyond mere lottery winnings. It has potential application to other interests that are valued under actuarial tables for estate tax purposes when those interests are nontransferable under contractual provisions or even spendthrift clauses.

Davis v. U.S., 97 AFTR 2d 2006-332 (2005).

A TAXPAYER FALLS THROUGH THE CRACKS

Taxpayers generally have a fixed period of time to amend a tax return and claim a refund - usually they must file for the refund no later than 2 years from when they paid the tax or 3 years after the due date of the applicable return. In a recent case, an estate filed an income tax return regarding the sale of property owned by a decedent, reporting the gain from the sale by the estate. Based on basis rules, the amount of the gain on the sale was based on the estate tax value of the property that was sold.

Due to estate tax litigation, the value of the property that was sold was not finally determined by a court until after the income tax statute of limitations expired. Since the value of the property was increased in the estate tax litigation, the estate desired to amend its earlier return for the sale and report a higher tax basis, which would have substantially reduced the gain(and thus the income tax) from the sale. However, since the income tax refund statute of limitations had expired, no refund was allowable under normal rules.

In situations such as these, the "mitigation" provisions of the Internal Revenue Code can often allow a refund even if the applicable statute of limitations has expired. However, in Malm v. U.S. (DC ND 20050, and notwithstanding a contrary decision in the Fourth Circuit Court of Appeals, the District Court found that the mitigation provisions were not applicable, and thus the taxpayer ended up paying more tax than was legally required. The unfortunate taxpayer fell through the cracks in the tax system and could not get the excess tax back.

Some commentators believe that a taxpayer in this kind of situation may be able to obtain relief under the equitable recoupment doctrine. This doctrine allows a party litigating a tax claim in a timely proceeding to recoup in that same proceeding a related and inconsistent, but time-barred, tax claim arising from the same transaction.

HOMESTEAD PROTECTION AND THE REVOCABLE TRUST [FLORIDA]

One legal concept relating to payment of expenses and claims of a decedent’s estate is that a Florida homestead is protected against claims of creditors of a decedent, when the homestead will pass to the heirs of the decedent. This is based on Florida’s Constitution. Another legal concept is that assets held in a revocable trust of a decedent must generally be used to pay expenses and claims against a decedent’s estate, to the extent that a probate estate has insufficient assets. This is based on Florida statutory provisions.

What happens if the homestead (which will pass under the trust to heirs of the decedent) is held in a revocable trust - can the probate estate require that the homestead be used to pay probate estate expenses? One would expect that the homestead protection, which is under the Constitution, will trump the merely statutory provision requiring the use of revocable trust assets for probate expenses.

Okay, but what happens if the revocable trust has an explicit provision in it that generally provides for the use of revocable trust assets to pay expenses of and claims against the probate estate - has the constitutional protection been waived or lost? This is a provision found in many revocable trust agreements.

No, the constitutional protection also trumps such an explicit clause in the trust, according to the 4th District Court of Appeals in Engelke v. Engelke (4th DCA 2006). In that case, the 4th DCA provided that the general payment of expenses and claims clause will not act to override the constitutional homestead protections.

PROTECTION OF PROCEEDS OF SALE OF HOMESTEAD FROM A CREDITOR

Florida generally allows for the protection of an individual’s homestead from the claims of his or her creditors (although bankrutpcy law requires residence in Florida for an extended period of time to avail oneself of the full protection). A recent case illustrates what happens when someone sells their homestead with the intent of reinvesting the proceeds in a new homestead.

In Rossano v. Britesmile, Inc., 3rd DCA (December 28, 2005), a judgment creditor learned that a debtor planned to sell her homestead and to purchase a less expensive residence. The creditor served a writ of garnishment on the closing agent at the sale, and the trial court allowed the entire amount to be garnished.

On review, the appeals court noted that under Florida law, the proceeds of a voluntary sale of a homestead are exempt from creditor claims just as the homestead is, if the seller can show an abiding good faith intention prior to and at the time of the sale to reinvest the proceeds in another homestead within a reasonable time. However, any surplus of the funds from the sale that are not reinvested in another homestead lose their exemption.

Since it was presently unknown how much of the sale proceeds would be reinvested, the appellate court directed that the trial court should await the closing on the new home and then order payment to the creditor only of that amount which was not used in good faith for the new residence.

GET YOUR CHARITABLE RECEIPTS NOW!

Anyone who made a charitable contribution of $250 or more in 2005 should be checking to make sure they received back a qualified receipt from the charity. Without that receipt, the charitable deduction will be denied, even if other proof of payment is offered.

And you can't afford to wait until audit to get the receipt - the receipt must be obtained by the earlier of when you file your income tax return or the due date for the return.

How do you know if your receipt is in correct form? The receipt should contain the following information and statements:

(1) the amount of cash and a description (but not the value) of any property other than cash contributed;

(2) whether the donee organization provided any goods or services in consideration, in whole or in part, for the contribution;

(3) a description and good-faith estimate of the value of those goods or services, or, if the goods or services consist entirely of intangible religious benefits, a statement to that effect.

Most public charities will provide you with these receipts without request, but they may not all be on the ball and you may need to request one. Further, if the contribution is to a family-controlled charity, you will need to issue one through the charity. Note that contributions to split-interest (charitable lead and charitable remainder trusts) generally do not require this receipt.

Does the IRS get into the nitty-gritty of whether a receipt contains all the required information? Ask Betty Kendrix. She recently lost a case in Tax Court where some of her receipts did not include all the required language and thus was not allowed a charitable deduction. Betty Kendrix v. Commissioner, TC Memo 2006-9.

STATUTORY MERGER DEFINITIONS MODERNIZED

Under the Internal Revenue Code, the reorganization provisions generally allow corporations to merge or combine without incurring income tax. The nontax treatment generally also applies to the shareholders of the corporations who may be exchanging stock of one corporation for another as part of the transaction. These provisions are an exception to the general tax rules that provide when a taxpayer exchanges property with other property, this is treated as if the property they are giving up has been sold for the value of what is received.

One type of "reorganization" that qualifies for this treatment is an "A" reorganization (named after Code Section 368(a)(1)(A), which generally provides for nonrecognition in regard to "statutory merger" transactions). In regulations issued this week, the Treasury Department has modernized the definition of what type of mergers qualify as an "A" reorganization.

Some important provisions of the new Regulations include:

-provisions that corporate combinations involving a "disregarded entity" under the Code (e.,g., single member LLCs which have not elected to be taxed as an association) will not qualify as an "A" reorganization.

-clarification that the acquisition of control of one corporation by another, and then an election of the acquired entity to be a disregarded entity, while in substance similar to an "A" reorganization since all of the assets of the target end up owned by the acquiring corporation for income tax purposes, does not qualify for "A" reorganization treatment because the target entity does not cease its separate legal existence under local law (although the IRS may revisit this issue in the future).

-a combination transaction between a corporation and a partnership may give rise to "A" reorganization treatment where the resulting entity ends up as a disregarded entity owned by another corporation.

-combinations or amalgamations of corporations into one "new" corporation can qualify for "A" reorganization treatment.

Treas.Regs. Section 1.368-2(b), as finalized.

DID YOU MISS THE SALES TAX DEDUCTION?

The Treasury Department is reporting that many taxpayers who could have benefited from deducting state and local sales taxes did not do so on their 2004 federal income-tax returns. The deduction allows taxpayers to choose to deduct either their state and local income taxes or their sales taxes. In calculating the deduction, taxpayers can use their actual receipts, or they can figure the amount using Internal Revenue Service tables, plus the actual taxes they paid on motor vehicles, boats and certain other items. It is estimated that 1.1 million taxpayers were eligible to take the deduction, but did not.

Thefore, make sure you take the deduction on your 2005 return, and if you were eligible to take it on your 2004 return but did not, it is not too late to file an amended return to obtain a refund of tax.

The deduction has not been renewed by Congress for 2006, but there is hope that Congress may act to extend it.