But even after the deal was sealed, there was another hurdle looming: the Vatican had to sign off on the deal, and it was far from a foregone conclusion. Just as the deal was coming together, it was revealed that Pope Benedict XVI was setting up a new Vatican office to vet the construction or purchase of major new churches around the world.

That posed a special challenge because the goal of the commission is to ensure that new cathedrals, unlike some recent designs, are not “buildings composed of cement cubes, glass boxes, crazy shapes and confused spaces (that) remind people of anything but the mystery and sacredness of a church,” as Vatican watcher Andrea Tornielli put it in his story on the new body.

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The proposal was presented to the RCBO in the Fall of 2010 after Crystal Cathedral Ministries (“CCM”) filed for Chapter 11 bankruptcy.  The Busch Firm counseled the RCBO and his advisors in the Chancery Office to develop an offer to purchase the Crystal Cathedral and surrounding campus, which includes more than 30 acres and 350,000 sq. ft. of building space.  The objective was to relocate the school, adjacent parish, the Diocesan Cathedral, and the Chancery Offices to the campus. 

Competing bids from Chapman University and the RCBO continued to be raised in the weeks prior to the confirmation of the Creditors’ Plan. 

Under the Plan of Reorganization, CCM, as the Debtor, had the right to select either offer so long as they achieved enough to pay 100 cents on the dollar to the secured and unsecured creditors which both offers ultimately met.  Late in the game, Chapman decided to increase its offer substantially above the RCBO offer in the form of rental, utility, and maintenance concessions.  However, the majority of the CCM Board ultimately decided that the RCBO’s offer would protect the campus as a place of praise and worship and would provide a smoother transition for  CCM.  The $57.5 million purchase will close December 30, 2011 pursuant to the order of Bankruptcy Judge Robert N. Kwan.

It was a shock to all parties in interest that the CCM Board changed their mind, as reported just prior to the hearing Thursday, November 17, 2011.  “A true miracle!” said Tim Busch who accompanied Bishop Brown to court to witness the Holy Spirit convert hearts.

The Busch Firm’s effort was led by Tim Busch and Kory Kramer on the business side, with law partners Sheila Muldoon and George Mulcaire and paralegal Lynda Wong working on the transactional matters.

The Busch Firm is a corporate and transactional firm which has special expertise in tax and estate planning, and provides advice to business entities, with special focus in its Religious Organization Practice Group (“ROPG”) through which it counsels religious entities including dioceses, schools, religious orders, and nonprofit religious organizations in various faith traditions.  John C. Peiffer II, the Director of the ROPG, may be contacted at jpeiffer@buschfirm.com and (949) 474-7368, ext. 105

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Over the last several months, Busch Firm attorneys Tim Busch and Sheila Muldoon have counseled the Diocese in the structuring and transactional elements of the acquisition including negotiations and drafting of the Purchase Agreement. The Diocese’s latest offer is for $53.6 million and includes a provision for CCM to lease back part of the approximately 31 acre Garden Grove campus for up to 3 years and, if CCM desires, relocating CCM to a local diocesan owned venue.

The Diocese is seeking to acquire the Crystal Cathedral because of its need for a larger cathedral church for its more than 1.2 million Orange County Catholics. The campus also contains office and other buildings which can be used by the Diocese for its chancery offices and related activities including a school.  The campus also includes a cemetery. If successful, the Diocese plans to sell Marywood, its current chancery office, and move to the Crystal Cathedral site.

The bankruptcy court’s next hearing is in September.  In the coming months, the court, CCM and its creditors committee will consider several competing offers including one from Chapman University.

Presenters and/or panelists at the conference included John Peiffer, the director of our Religious Organizations Practice Group; Rev. John Coughlin, O.F.M., Professor of Law and Concurrent Professor of Theology at the University of Notre Dame; Rev. Joseph Fox, O.P. of the Dominican House of Studies in Washington, D.C.; John Eastman, Henry Salvatori Professor of Law & Community Service at Chapman University School of Law; Mike Patterson of Patterson Buchanan; as well as representatives of Arthur J. Gallagher & Co. and Catholic Mutual.

The next semi-annual Diocesan Restructuring and Risk Management Conference is scheduled for January 25 and 26, 2012 in Orange County.

Businesses that rely on processing merchant card payments as their source of revenue will want to pay particular attention to new IRS rules. As a step to closing the tax gap—a direct result of the gap between taxable income and reported income—the Internal Revenue Code now requires companies that process credit and debit card payments, including PayPal and other third-party settlement organizations, to report certain merchant transactions. 

To trigger the reporting requirement, merchants must: 1) execute at least 200 transactions in a year, and 2) the aggregate amount of those transactions for the year must exceed $20,000. Payment providers will submit Form 1099-K to the IRS for merchants that meet both thresholds.  Form 1099-K will report the gross amount paid to the merchant with no adjustments for fees or chargebacks, returns or sales tax.

Previously, the IRS did not have access to credit and debit card revenues or third-party payments to small business owners and could not monitor underreporting of income.  The new 1099-K will be used by the IRS to ensure small businesses are accurately reporting their income.

The IRS developed the concept of the tax gap as a way to gauge taxpayers’ compliance with their federal tax obligations.  The IRS periodically releases estimates of the tax gap.  The latest IRS estimates show a tax gap of about $350 billion for tax year 2011. 

Please contact us if we can answer questions regarding the new Form 1099-K reporting requirements or assist you in filing tax returns or other tax compliance issues.

Family loans are a common thing.  Particularly common are parent loans to children. Parents often charge little or no interest for such loans.  Even where interest is required on paper, many parents do not actually require children to pay the interest when due.  Properly administered family loans can be a very effective estate planning tool, transferring wealth to children or later generations gift and estate tax-free.  However, if not properly administered, family loans may very easily trigger adverse tax consequences, including penalties and interest.

In 1984, the U.S. Supreme Court determined that the interest-free use of money constituted a gift for federal gift tax purposes.  Thereafter, Congress enacted a tax provision which reaffirms that interest-free or below market rate loans are taxable transfer, both for income and gift tax purposes. 

When a person makes an interest-free loan, the law imputes two (2) transfers that do not actually occur: (i) a gift transfer from the lender to the borrower of the foregone interest, and (ii) the payment of interest by the borrower to the lender. 

The full value of the foregone interest is treated as a taxable gift to the borrower.  The amount changes based on the interest rate that applies.  The IRS sets the “applicable interest rate” for such gifts based on the length of the loan.  The applicable interest rate is promulgated by the IRS in a monthly publication.  For example, for June 2011, the IRS applicable rate for long-term loans (i.e., more than 9 years) with interest payable annually is 4.05%.

To calculate the gift tax due, the lender is treated as transferring cash in the amount of the excess of the amount lent over the present value of all payments required under the loan (calculated using the applicable interest rate in effect at the time of transfer).  This is the gift amount.  This amount is then treated as retransferred by the borrower to the lender over the course of the loan period.  This is the lender’s income amount.

For example, an interest-free loan of $100,000 may be treated as the equivalent of a $75,000 loan at the prescribed applicable interest rate.  The $25,000 would constitute the amount of the immediate gift.  This $25,000 amount is then treated as retransferred by the borrower to the lender as interest paid over the loan period.

This second segment of the transaction will produce interest income to the lender, taxable at ordinary income rates. The deemed payment may also produce an interest expense deduction for the borrower, but the deductibility is dependent upon the borrower’s use of the funds. Failure of the lender to report the interest income may result in IRS imposed penalties and interest.  

There are two (2) general exceptions for the requirement to charge and report interest in family loans.   The first exception is where the amount of all combined parent loans to a child does not exceed $10,000.  This exception does not apply, however, where the loan money is used to purchase or carry income-producing assets.

Second, where the loan is less than $100,000, the amount of the imputed interest may be limited to the borrower’s net investment income for the year.  If the borrower’s net investment income is less than $1,000, the imputed interest on the loan is zero.  However, this limitation does not apply where one of the principal purposes of the loan is to avoid federal taxes.

In sum, family interest-free or below market rate loans can be very complicated tax-wise.  The main goal of the IRS is to curb abuses by imposing the results of what would normally take place if the parties dealt with each other on an arm’s-length basis.  Failure to properly document the loan, charge the proper rate of interest, receive actual interest payments, and report interest income, may result in severe penalties.

Again, properly administered family loans can be a very effective estate planning tool, transferring wealth to children or later generations gift and estate tax-free.  If you plan to make loans to family members, or if you have already, please contact us today so we can help you ensure the loans are properly documented, administered, and reported for tax purposes.

The Firm’s Religious Organizations Practice Group (“ROPG”) has been busy working with a number of southern California private schools in recent months on issues relating to financing, corporate structure and governance, and tax-exempt status. Private religious education has been developed as an area of particular expertise through the experience of advising two start-up schools, St. Anne School and JSerra Catholic High School, both of which were co-founded by Tim Busch and which are now thriving in southern Orange County. This tradition of advising religious educational institutions continues.

At the end of last year, Sheila Muldoon acted as lead borrower’s counsel for Lutheran High School Association of Orange County (“Orange Lutheran”) in a bank-qualified private placement bond financing of up to $18.5 million. The tax-exempt financing allowed Orange Lutheran to refinance existing debt of approximately $11.4 million, and pay the costs of issuance, as well as set up construction financing for new improvements at the school of almost $6.8 million. Through this refinancing, Orange Lutheran was able to save approximately 3% per year (i.e., about $350,000 in annual interest) on existing debt!

Please contact John Peiffer at 949.474.7368, ext. 105 to discuss the various services that The Busch Firm can provide for your private religious school, other public nonprofit, or private foundation.

An individual or married couple’s family home is usually one of their largest assets. Removing the present day value of the home from the estate can often result in huge estate tax savings because of the future appreciation of the home. Recently, changes in the tax law increased the estate and gift tax exemption to $5 million for tax years 2011 and 2012. While it is unclear whether the exemption will remain at $5 million beyond 2012, it is wise to take advantage of the $5 million gift tax exemption now. One interesting estate planning opportunity is amplified by the increased exemption amount when coupled with the current depressed real estate market.

Qualified Personal Residence Trust

A technique used by estate planners to utilize the gift tax exemption in effectively removing the home from the estate is a Qualified Personal Residence Trust or QPRT. In a QPRT, the home owners transfer their personal residence or vacation home to an irrevocable trust for a number of years (the trust term) and continue to live in the home. At the end of the trust term, the residence will pass to the beneficiaries of the trust (often your children). If the home owner would like to remain living in the home or using the vacation home after the trust term, they must pay fair market rent to the beneficiary, who is now the owner of the home. The payment of rent further reduces the former home owner’s estate. In addition, significant estate and gift tax benefits may be realized by transferring the home into a QPRT because any future appreciation of the home should not be subject to gift or estate tax.

Generally, QPRTs are not considered effective in a low interest rate environment as we are currently experiencing. However, the interest rate used to value the various interests involved in a QPRT is on the rise and together with the increased exemption amount and the depressed real estate markets, the QPRT may be beneficial. Here is why:

First, why is a low interest rate unfavorable?
The transfer of the home to a QPRT is a taxable gift, however the value of the gift is not the fair market value of the home at the time of the transfer, but rather the value of the beneficiary’s future ownership interest of the home (called a remainder interest). To calculate the value of the gift, the present value of your right to live in the home is subtracted from the fair market value of the home at the time you establish the trust. A lower interest rate results in a higher gift value, which is undesirable because it exhausts the gift and estate tax exemption.

Home values in Orange County are said to be down 25 percent in the past five years. The combination of a depressed real estate market and an increased estate and gift tax exemption may allow you to remove your home from your estate with little gift tax liability. Thereafter, any potential future appreciation from a real estate market turn around would not be subject to estate tax.
Let’s see how this would play out in an example:
John and Mary Smith are a married couple and are 55 and 53, respectively. The Smiths have not previously used any of their gift tax exemption. The Smiths own a personal residence in Orange County which they purchased for $5 million in March 2006, when the interest rate was 5.4 percent. If they created a QPRT with a 10 year term, the taxable gift to their children would be $2,930,900. The gift tax exemption in 2006 was $1,000,000. Thus, the exemption sheltered $1,000,000 of the gift, however, $1,930,900 would have been subject to tax at a rate of 46 percent.

Fast forward to March 2011, the interest rate is 3 percent and Orange County home values are down 25 percent. The Smith’s home is now worth $3.5m. If they created the same QPRT with a 10 year term, the taxable gift to their children would be $2,583,070 and they would not pay gift tax because the gift tax exemption is now $5,000,000. Additionally, any future appreciation in the home will not be subject to the estate or gift tax because the home has been removed from the Smith’s estate.

While the illustration above demonstrates that a QPRT can be a powerful estate planning tool it has a few disadvantages. Upon the expiration of the QPRT term, if the former home owners would like to continue living in the home or use the vacation home, they must pay fair market rent to the beneficiaries to avoid unintended gifts. The most significant disadvantage of a QPRT is mortality risk. Meaning if you do not survive the trust term, the home’s full value will be included in your estate.

Remainder Purchase Marital Trust

If you are a married couple, a Remainder Purchase Marital Trust or RPM trust may be an alternative to a QPRT because it eliminates mortality risk and can offer greater flexibility than a QPRT.

An RPM trust works as follows:
The home owner transfers the home to the RPM trust and gives his or her spouse an income interest in the trust for life or a term of years (the income interest is the right to live in the home) and simultaneously sells the remainder interest (the right to own the home at the end of the trust term) in the RPM trust to another grantor trust for its fair market value. The “purchasing” grantor trust will be for the benefit of the beneficiaries (usually the children). The transfer to the RPM trust will be designed to qualify for the gift tax marital deduction and avoid being included in the spouse’s estate at his or her death. Thus, no gift or estate tax will be due at the time of the transfer or on death of the couple. However, the beneficiaries must pay fair market value for the remainder interest.

The most advantageous aspect of the RPM Trust is the ability to eliminate mortality risk. As discussed above, in a QPRT, if the original home owner passes away the value of the home will be brought back into the estate. Because there is no mortality risk in an RPM trust, the home owner can stretch the length of the trust term, which decreases the value of the beneficiary’s remainder interest and the purchase price paid. However, there is risk associated with the RPM trust because it is not a creature of the Internal Revenue Code or Treasury Regulations, as is a QPRT. Therefore, this technique should only be considered after careful consideration and discussion with a qualified advisor.

Although this article provides a general overview of certain issues that are involved in determining whether a QPRT or RPM trust is right for you, it only scratches the surface of various legal and tax issues to consider. We welcome the opportunity to address any of your questions. If you would like to discuss whether estate planning for your residence or vacation home is right for you please feel free to contact Gregory J. Cobucci at The Busch Firm, (949) 474-7368 Ext. 185, email: gcobucci@buschfirm.com or any of the professionals at The Busch Firm denoted below.

Several important tax bills were passed in 2010 that may have a significant impact on your 2010 tax liability.  The most recent legislation, The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (“2010 Tax Relief Act”) extended several Bush-era tax cuts for the next two years.  Discussed below are a few of these tax cuts that have been extended.

Bonus Depreciation on Certain Passenger Automobiles and SUVs
 
The Internal Revenue Code imposes a  dollar limit on the depreciation deductions that can be claimed with respect to “passenger automobiles” that are used in business.    The law in effect prior to the 2010 Tax Relief Act law provided some relief by allowing certain qualifying passenger automobiles to be eligible for an additional $8,000 “bonus deprecation” in the first year the automobile was placed in service.  However, bonus depreciation did not apply to passenger automobiles “placed-in-service” after December 31, 2010.
 
The 2010 Tax Relief Act extended the placed-in-service deadline for certain passenger automobiles to December 31, 2012.  Therefore, if a business owner was to place a qualifying passenger automobile into service prior to the end of the 2011 or 2012, tax year he would be eligible for $8,000 “bonus deprecation.”  The business owners first year depreciation would be $11,060 (assuming the dollar limitation on deprecation deductions remains the same as in 2010) as opposed to $3,060 without the extension.  It should be noted that  a first year depreciation deduction will be reduced proportionally to the extent the vehicle isn’t exclusively used in business.
 
Tax Free IRA Distributions to Charity
 
For tax years beginning prior to January 1, 2010, a taxpayer could make a tax free “qualified charitable distribution” of up to $100,000 directly from her Individual Retirement Account (“IRA”) to a charitable organization.  A “qualified charitable distribution” is an otherwise taxable distribution from a traditional or ROTH IRA that is made directly to an Internal Revenue Code section 170(b)(1)(A) charitable organization and made after the taxpayer has attained age 70 ½ .
 
The 2010 Tax Relief Act  extended the exclusion for qualified charitable distributions to tax years beginning after December 31, 2009 and before January 1, 2012.  Certain distributions made in January 2011 may be treated as made in 2010.
 
Repeal of the Reduction of Itemized Deductions and Personal Exemptions
 
High-income taxpayers are generally subject to a reduction of their itemized deductions and personal exemptions as their income exceeded certain levels.  The 2001 Economic Growth and Tax Relief Reconciliation Act (EGTRRA), scheduled a gradual elimination of the itemized deduction and personal exemption reduction beginning in 2006 with complete elimination in 2010.  Absent legislation, the pre-2001 Act reductions would have been reinstated.  However, the 2010 Tax Relief Act extended the repeal though 2012.
 
IRS Update on Processing Tax Returns with Itemized Deductions
 
On December 23, 2010, the IRS announced that it would need to reprogram its processing systems because of tax law changes in the 2010 Tax Relief Act.  At that time, the IRS specifically advised taxpayers who itemize deductions on Form 1040 Schedule A to delay filing their tax returns until tax processing systems were ready, which the IRS estimated would be in mid- to late February.  Recently, the IRS announced that it will start processing the 2010 tax returns of certain taxpayers who had previously been advised to delay filing, including those planning to file Form 1040 Schedule A on February 14, 2011.  Additionally, the IRS has extended the deadline to file 2010 income tax returns or extensions to April 18, 2010.
 
As noted above and in our previous tax alert, the newly implemented and enacted tax laws may affect individual, business and estate and gift tax liabilities.  Please contact us if we can assist you in filing 2010 tax returns or other tax compliance issues.