Washington News

Both the House and Senate have passed H.R. 4348, the Moving Ahead for Progress in the 21st Century Act (The Highway Bill). The House passed the Highway Bill on a bipartisan vote of 373-52.

Senate Finance Committee Chairman Max Baucus (D-MT) was clearly pleased with the cooporative effort by leaders of the House and Senate. He stated, "This bill provides the transportation infrastructure and access to education our economy and businesses need to create jobs. It's an investment in our economic future. This shows that when we put partisan differences aside, we can come together and find solutions to tackle the challenges facing America."

The bill had been held up in the conference committee until there was a compromise on the tax increases or offsets.

House Ways and Means Committee Chair Dave Camp (R-MI) also supported the compromise. He stated, "This legislation reflects that effort and serves as a reminder that Washington must learn to live within its means. To that end, House Republicans ensured that the provisions in this conference report promote job creation and do not add to the national debt."

The Highway Bill includes five major sections.

1. Highway Trust Fund - The allocations for current highway and bridge projects are funded through September 13, 2014.

2. Highway-Related Taxes - The three taxes on motor fuels and three taxes on heavy vehicles are extended at current rates.

3. General Fund Revenue - In order to continue to fund highway projects, there will be $18.8 billion transferred from the general fund to the highway trust fund over two years.

4. Pension Offset - In order to pay for highway fund projects, the required funding levels for corporate plans will not be based upon the current low interest rates. Corporate pension plans may be funded using an average of bond interest rates over 25 years. This lower funding rate will spread out the pension contributions by corporations and result in $9.4 billion in additional revenue over the next decade.

5. Pension Benefit Guarantee Corporation (PBGC) - The rates employers pay for premiums to insure employee pension plans will increase. These increased premium payments are estimated to produce total savings of $10.5 billion.

Editor's Note: There was bipartisan support for the transportation bill. Members from both parties recognize the positive benefit to the economy and to the nation that occurs with good roads and safe bridges.

Consulting Nonprofit Denied Exemption

In Asmark Institute, Inc. v. Commissioner; No. 11-1553 (2 Jul 2012), the 6th Circuit affirmed a Tax Court decision denying charitable exempt status for a nonprofit engaged in consulting.

In 1990, Asmark, Inc. (AI) was incorporated. It was a consulting business and enabled farms and other agricultural industry companies to comply with various state and federal requirements. AI started with 25 clients, but grew to 985 clients by 2005. In that year, it had revenue of $1.6 million and business income of $472,000.

On March 22, 2005, the three managers of AI incorporated Asmark Institute, Inc. as a nonprofit Kentucky corporation. They requested exemption as an entity "organized to help agricultural businesses comply with the myriad of OSHA, EPA and DOT regulatory requirements."

In 2006, they dissolved AI and continued to operate the Asmark Institute.

The IRS reviewed the Form 1023 application and denied federal tax exemption. The Commissioner observed that the entity projected $2 million in revenue, but no gift or grant income. It failed the Section 501(c)(3) test in five respects. It was a commercial business, the earnings inured primarily to the benefit of the three key officers, the potential revenue-sharing affiliations with trade associations would benefit some for-profit entities, it did not lessen any burdens of government and the private benefit was "more than incidental."

The Tax Court considered the request for exempt status and on February 4, 2011, upheld the IRS denial of exemption.

The Court noted that Sec. 501(c)(3) requires operation "exclusively" for tax exempt purposes. The "exclusively" requirement specifies that "not more than an insubstantial part of an organization's activities can be in furtherance of a nonexempt purpose."

The Asmark Institute did provide a small percentage of services free to members, but there was no significant public benefit. While the Tax Court did rely on the IRS principle that a predecessor for-profit entity "weighs heavily against exemption," Asmark Institute did not demonstrate that the five claims of the IRS were incorrect.

Finally, the fact that IRS Form 1023, Application for Exempt Status, reflected no anticipated future gifts or grants suggests that the primary benefit of Asmark Institute was for private shareholders. Therefore, Asmark Institute does not qualify for a charitable exemption.

Estate Tax Refund Request Untimely

In W.E. Davis v. United States; No. 12-60011 (27 Jun 2012), the 5th Circuit affirmed a District Court dismissal of a tax refund suit. The court determined that the refund request was not within the required three year period under Sec. 6511.

Decedent Anthony Walker Smith passed away having previously signed a deed to Wyatt Farm. Executor Davis paid a tax liability of $491,521 on February 3, 2003. Subsequently, the decedent's father, Raymond Smith, filed suit and successfully claimed scrivener's error on the deed. The Chancery Court of Mississippi, on November 3, 2003, determined that there was scrivener's error and reformed the deed to reserve a life estate for Raymond Smith.

On November 4, 2008, the estate filed a claim for refund of $215,323. The refund was based on the claim that the estate had incorrectly included the fee interest in Wyatt Farm rather than reflecting the encumbrance of the life estate.

The IRS disallowed the refund and the Federal District Court dismissed the refund claim.

The executor argued two grounds for substantiating the refund. First, he claimed that the court could toll the statue because there was no certainty on the life estate issue until the Mississippi Supreme Court denial of certiorari on March 2, 2006. Second, executor Davis claimed that the three year time limit for filing should start only after that Mississippi Supreme Court decision.

The court noted that the Supreme Court has held specifically that lower courts may not toll the statutory time for filing tax refund claims. While Congress did amend Sec. 6511 to suspend the time limits "during any period of such individuals life that such individual is financially disabled," the general principle that tolling is not permitted continues to apply.

Because the action was not commenced within the required three year period and the Chancery Court decision did occur during that time period, thereby permitting a protective claim for refund at that time, the request for refund was not timely and is denied.

Applicable Federal Rate of 1.2% for July -- Rev. Rul. 2012-20; 2012-27 IRB 1 (17 June 2012)

The IRS has announced the Applicable Federal Rate (AFR) for July of 2012. The AFR under Section 7520 for the month of July will be 1.2%. The rates for June of 1.2% or May of 1.6% 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 2012, pooled income funds in existence less than three tax years must use a 1.8% deemed rate of return. Federal rates are available by clicking here.