Saturday November 22, 2014

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IRA Rollover and Tax Extenders Debate

As the House and Senate return for the November lame-duck session, both leadership elections and tax extenders are on the front burner. Sen. Mitch McConnell (R-KY) will be the Majority Leader and Sen. Harry Reid (D-NV) will be the Minority Leader in the Senate in January. Next year, Rep. John Boehner (R-OH) will be the Speaker of the House and Rep. Nancy Pelosi (D-CA) will be the Minority Leader.

With the leadership elections over, the focus now turns to tax extenders. House Ways and Means Chairman Dave Camp (R-MI) advocates making several tax extender provisions permanent. The House passed bills with six business and six charitable provisions that would be permanent. While there is substantial cost with a permanent extension, Chairman Camp observes that the extenders previously were passed without any offsets or tax increases.

Camp enters the tax extenders negotiation with a hope that most or all of these 12 provisions could be permanent. He stated to reporters this week, “It has been the House’s position and my view that we should get as much policy permanent as possible.” When asked whether a one year extension would be acceptable, he noted that this is an alternative. Camp continued, “But I think we want to get as much policy as long as possible.”

Senate Finance Committee Chairman Ron Wyden (D-OR) is an advocate for the Expiring Provisions Improvement Reform and Efficiency (EXPIRE) Act. The Senate Finance Committee approved 53 tax extender provisions for the years 2014 and 2015 in that act. The full Senate did not vote on the bill.

Wyden stated, “The Senate feels strongly about our package, but we know that we are in a negotiation.”

The Senate Democratic Whip is Richard Durbin (D-IL). In discussions with reporters, he stated that there may be some “horse trading” in these negotiations on the tax extenders.

Editor’s Note: Will the IRA charitable rollover be made permanent? Or will it be extended for all of 2014 and 2015? The “horse trading” that Senator Durbin mentions is the potential for the Senate to accept the House request for permanent status of some or all of the 12 provisions. In exchange for permanent status for some extenders, the House would approve the balance of the 53 Senate extenders for a period of two years. Because the legislative time is short, the outcome of these negotiations is highly uncertain. America is waiting with great anticipation for the House and Senate to announce their compromise plan.

Parsonage Exemption Challenge Rejected

In Freedom from Religion, Inc. et al. v. Jacob J. Lew et al.; No. 14-1152 (12 Nov 2014), the Seventh Circuit vacated a U.S. District Court decision by Judge Barbara Crabb of the Western District of Wisconsin. Crabb held that the parsonage exemption for ministers under Sec. 107(2) violates the Constitution under the three part standard of Lemon v. Curtsman, 403 U.S. 602, 612-13 (1971).

There are two separate provisions of Sec. 107. The first provision under Sec. 107(1) exempts from taxable income a parsonage or housing provided by a religious organization to a minister. Sec. 107(2) permits a rental allowance for a minister to be tax exempt. The plaintiff Freedom from Religion Foundation, Inc. (FFRF) objected to that provision.

FFRF staff Laurie Gaylor and Dan Barker both received a housing allowance from the organization. However, because they are not ministers of a religious organization, they do not benefit from a tax exempt distribution. FFRF, Gaylor and Barker therefore claimed that for them to make payment of tax while housing allowances for ministers were tax free was a violation of the Constitution under the three part test in Lemon.

Judge Crabb determined that Sec. 107(1) was not applicable to Gaylor and Barker because they had not been provided with housing, but that Sec. 107(2) did apply and violated the three-part standard.

The Department of Treasury maintained in both District Court and before the Seventh Circuit that the plaintiffs did not have standing to pursue this action. The Seventh Circuit noted that a plaintiff must demonstrate “(1) a concrete and particularized ‘injury in fact’ (2) that is fairly traceable to the challenged action of the defendant.” Because Gaylor and Barker had not claimed the deduction and had it denied, the Seventh Circuit determined that there was a lack of standing. The plaintiffs were never denied the parsonage exemption because they never asked for it.

The court continued that the “mere fact that discrimination is occurring” is not sufficient to overcome the requirement of standing.

District Court Judge Crabb addressed this argument in her opinion. She stated, “If this court were to deny standing in this case, the plaintiffs would simply protest the payment and collection of the state’s sales tax, and refile their suit.” She did not believe that this requirement to demonstrate injury and prove standing should stand in the way of a decision by the court on the constitutional issue.

However, the Seventh Circuit noted that standing is a fundamental principle required to obtain judicial relief. Therefore, these plaintiffs did not demonstrate the requisite injury and lacked standing. The case was dismissed.

Editor’s Note: Gaylor and Barker are likely to pursue an IRS deduction for the housing allowance and the Service may eventually assess a deficiency. If that occurs, they have stated their intention to return to the District Court. Eventually, it is probable that the Supreme Court will have opportunity to rule on the constitutionality of the parsonage exemption.

One Per Year IRA Rollover

In Announcement 2014-32; 2014-48 IRB 1 (10 Nov 2014), the IRS has clarified the “one IRA rollover per year” rule. Starting in the year 2015, all IRAs will be aggregated for purposes of the rule.

In Bobrow v. Commissioner, T.C. Memo. 2014-21 (2014), the Tax Court determined that there should be just one IRA rollover permitted per year. The taxpayer had created multiple IRAs and was extending the loan longer than the normal 60 day rollover period through sequential IRA distributions and rollovers. The court determined that rollovers under Sec. 408(d)(3) would be limited to one per year.

However, the IRS determined that there should be a transition rule. The Announcement notes that the 2014 rollovers “will have no impact on any distribution and rollovers during 2015 involving any other IRAs owned by the same individual.” The purpose of the announcement is to allow a transition rule that enables an individual to have a “fresh start” for 2015. If there were rollovers from IRAs in 2014, those will not impact a rollover from another IRA during 2015. However, all IRAs in 2015 and subsequent years will be aggregated and treated as one IRA for rollover purposes.

Editor’s Note: The 60 day period under Sec. 408(d)(3)(A)(i) was intended to facilitate rollovers of IRAs where the individual actually received funds. The new rule continues to allow this type of rollover. However, it will not be possible to create multiple IRAs and in effect use a series of 59 day rollovers to create a permanent loan against the IRA. There now will only be one permitted rollover per year.

Applicable Federal Rate of 2.2% for November -- Rev. Rul. 2014-28: 2014-45 IRB 1 (17 Oct 2014)

The IRS has announced the Applicable Federal Rate (AFR) for November of 2014. The AFR under Section 7520 for the month of November will be 2.2%. The rates for October of 2.2% or September of 2.2% 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 2014, pooled income funds in existence less than three tax years must use a 1.4% deemed rate of return. Federal rates are available by clicking here.

Published November 14, 2014

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