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Saturday September 24, 2016

Washington News

Washington Hotline

House Passes Senior Medical Care Bill

On September 13, the House voted 261 to 147 and approved the Halt Tax Increases on the Middle Class and Seniors Act (H.R. 3590). This bill would restore the medical deduction threshold limit to 7.5% of income, rather than the current 10% threshold that applies for taxpayers over age 65.

In the Patient Protection and Affordable Care Act, the threshold for itemized medical deductions was raised from 7.5% of adjusted gross income (AGI) to 10%. However, taxpayers age 65 and over were permitted to use the 7.5% threshold for a period of four years. In 2016 the threshold is changed to 10% for everyone.

For taxpayers over age 65, the increased 10% threshold will make it more difficult to qualify for medical deductions. If a taxpayer over age 65 has AGI of $50,000, then only his or her medical expenses over the 10% limit of $5,000 will be deductible. If the taxpayer has $6,000 in medical expenses that year, then only $1,000 is deductible (the excess over the $5,000 threshold).

The House bill was supported by AARP. The comment on an AARP blog suggested that most of the taxpayers who claimed the additional medical deduction have incomes less than $75,000.

House Ways and Means Committee Chairman Kevin Brady (R-TX) spoke in favor of the bill. He stated, "The committee believes that individuals with high health care cost should not be subject to a tax increase after 2016."

The Ranking Member of the House Ways and Means Committee is Sander Levin (D-MI). He noted that the revenue from the bill is designed to help fund the Affordable Care Act benefits. Rep. Levin cited Joint Committee on Taxation information that suggested two thirds of the tax benefits from the 7.5% threshold would accrue to upper-income persons. Rep. Levin indicated that he would continue to oppose the bill and prefers to leave the medical deduction threshold at the current 10% level.

"Vow of Poverty" Pastor Must Pay Tax

In Ronald W. White v. Commissioner: T.C. Nemo. 2016-167: No. 2616-13 (11 Sep 2016), the Tax Court required a pastor to pay tax on his income even though he had signed a vow of poverty.

Pastor Ronald W. White planted the World Evangelism Outreach Church (WEOC) in DeFuniak Springs, Florida in 1983. In 2001 WEOC created a Nevada nonprofit corporation sole. Pastor White signed a "vow of poverty" and agreed to transfer all income and assets to WEOC. In exchange, the church would provide for his personal needs.

Pastor White did not file income tax returns and also did not file a Sec. 1402(e) exemption from self-employment tax. The IRS audited White and determined that taxes and penalties for years 2006 through 2009 were over $100,000.

Pastor White agreed that the expenditures had been made for his personal living costs, but claimed that they were exempt under his vow of poverty.

The Court noted that a vow of poverty permits an individual to receive income and not be subject to tax so long as the proceeds are remitted to the religious order. See Rev. Rul. 77-290, 1977-2 C.B. 26.

White claimed that this ruling only applied to payments from a third party, and that his payments from WEOC were nontaxable under his vow of poverty. However, because Pastor White controlled the bank account and there is a general principle that one cannot assign income in order to avoid taxes, he is taxable on the income. In addition, because there was no Sec. 1402(e) filing for exempt status, he is also subject to payment of the self-employment tax.

Editor's Note: A number of individuals have attempted to avoid payment of taxes under the vow of poverty principle. This does apply to members to religious orders, but care must be taken to ensure that the religious organization is in control of all funds.

Supplement Sales Taxable Even with Nonprofit

In Daniel H. George Jr. v. Commissioner: No. 15-2305 (1st Cir. 2016), the Court ruled income from sale of supplements was taxable, even though the taxpayer later founded a Sec. 501 (c)(3) organization.

Chemist Daniel H. George created and sold health supplements in Rockport, Massachusetts. He was very successful with his sales and retreats.

George lived on his Social Security disability payments and deposited $5.65 million in 14 bank accounts from supplement sales between 1995 and 2002.

In 2002 the IRS investigated. They subsequently charged George with tax evasion. He was convicted and sentenced to 30 months in federal prison. United States v. George, 448 F.3d 96 (1st Cir. 2006).

The IRS also pursued a deficiency action in the amount of $3.79 million for taxes and penalties.

In May 2003, six weeks after George had been indicted for tax evasion, he incorporated Biogenesis. The Biogenesis organization was intended to be a research center focusing on health supplements. The IRS granted tax exempt status to Biogenesis in December of 2003. In 2011, George claimed Biogenesis was a Sec. 501(c)(4) organization for years 1995 to 2002. Therefore, the funds in his bank accounts were for the purpose of creating Biogenesis and were not taxable.

George maintained that because the IRS granted Sec. 501(c)(3) status, it automatically affirmed Biogenesis' tax exempt Sec. 501(c)(4) status from 1995 to 2002.

The First Circuit noted that an IRS grant of exemption status is based on the representations by the applicant. It does not preclude judicial review.

However, because there was no operating organization between 1995 and 2002, a detailed analysis of the exempt status is not required. George was in control of the purchase and sale of supplements, the retreats attended by individuals who purchased supplements and the bank accounts. Therefore, the organization was not formed and could not have exempt status. George is subject to the deficiency for taxes, penalties and interest.

Applicable Federal Rate of 1.6% for October -- Rev. Rul. 2016-25; 2016-41 IRB 1 (11 October 2016)

The IRS has announced the Applicable Federal Rate (AFR) for October of 2016. The AFR under Section 7520 for the month of October will be 1.6%. The rates for September of 1.4% or August of 1.4% 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 2016, pooled income funds in existence less than three tax years must use a 1.2% deemed rate of return. Federal rates are available by clicking here.

Published September 16, 2016
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