LAST CHANCE FOR $100,000 DIRECT TO CHARITY IRA DISTRIBUTIONS?

Currently, individuals over age 70 1/2 can make direct distributions to most public charities from their IRA of up to $100,000 per year. Such a direct distribution avoids the need to include such distributions in income and then seek an offsetting charitable deduction, which complete offset may often not be available.

This direct gift provision is set to expire at the end of 2007. There is a chance that this provision will be extended through 2008. However, President Bush has threatened a veto of the "extender" legislation due to some tax increases that are included in the proposed law (such as taxation of carry interests of hedge fund managers as ordinary income and not capital gain). Therefore, at this point in time, it is hard to say whether the direct to charity rules will survive into next year. Taxpayers who are on the fence about whether to make such transfers in 2007 or 2008 may want to make the transfers in 2007 in case the provision is not extended.

FURTHER LIBERALIZATION IN REORGANIZATION RULES

The IRS, in finalizing proposed Regulations in the tax-free reorganization area, has continued the process of liberalizing "continuity" requirements. In the latest Regulations, the IRS has given its blessing to certain post-reorganization transfers that can be made without jeopardizing required continuity of interest rules.

More particularly, the Regulations allow transfers of stock or assets to shareholders, so long as not all of the stock acquired is so transferred, and the transfer is of such a magnitude as to constitute a liquidation of the distributing corporation. Other transfers of assets or stock are also permitted so long as none of the affected corporations are terminated by such transfers. To use these rules, the continuity of business enterprise rules must also be followed.

Treas. Reg. §1.368-2(k)(1)(i)

IRS INTEREST CONTINUES IN SUCCESSIVE MEMBER INTEREST CONTRIBUTIONS

In August 2007, the IRS issued a Notice [Notice 2007-72] that it was designating a form of charitable contribution as an item "of interest." As such, persons entering into those types of transactions, and their advisors making tax statements with respect to them, are subject to disclosure and list maintenance requirements.

The IRS is now beginning to examine exempt organizations and government entities suspected of participating in successive member interest contribution arrangements. As part of the examination, the organizations receive an extensive questionnaire, which the IRS indicates it is using to determine if these types of transactions should be treated as a tax avoidance type of transaction, and whether the transaction should be designated as a listed transaction.

So what is a successive member interest contribution? According to the IRS:

In a typical transaction, Advisor owns all of the membership interests in a limited liability company (LLC) that directly or indirectly owns real property... that may be subject to a long-term lease. Advisor and Taxpayer enter into an agreement under the terms of which Advisor continues to own the membership interests in LLC for a term of years (the Initial Member Interest), and Taxpayer purchases the successor member interest in LLC (the Successor Member Interest), which entitles Taxpayer to own all of the membership interests in LLC upon the expiration of the term of years. In some variations of this transaction, Taxpayer may hold the Successor Member Interest through another entity, such as a single member limited liability company...After holding the Successor Member Interest for more than one year (in order to treat the interest as long-term capital gain property), Taxpayer transfers the Successor Member Interest to an organization described in § 170(c) (Charity). Taxpayer claims the value of the Successor Member Interest to be an amount that is significantly higher than Taxpayer's purchase price [and]...claims a charitable contribution deduction...based on this higher amount.

The IRS is concerned with the large discrepancy between (1) the amount Taxpayer paid for the Successor Member Interest, and (2) the amount claimed by Taxpayer as a charitable contribution.  It also has the following concerns which may be present in some variations of this transaction: (1) any mischaracterization of the ownership interests in LLC; (2) a Charity's agreement not to transfer the Successor Member Interest for a period of time (which may coincide with the expiration of the applicable period in § 6050L(a)(1)) [relating to the obligation of a charity to report the details of a sale of contributed property that it received within 3 years of the sale]; and (3) any sale by Charity of the Successor Member Interest to a party selected by or related to Advisor or Taxpayer.

It goes without saying that any exempt organization that is approached to participate in one of these contribution arrangements should probably decline, at least until more guidance is issued by the IRS as to when, if , and under what circumstances, such transactions will be respected as legitimate.