Federal Taxation:
YOUR CHOICE OF AN IRA BENEFICIARY AFFECTS TAXATION OF DISTRIBUTIONS BEFORE AND AFTER YOUR DEATH

The beneficiary you designate on your traditional Individual Retirement Account ("IRA") (or the default beneficiary under the terms of the IRA plan) will affect the timing of required distributions, and income tax thereon, both before and after your death. Distributions from IRA's are taxed as income when they are taken, so ordinarily people want to defer distributions, and thus taxation, as long as possible. Regarding distributions before your death, unless you deplete your IRA before you reach age 70½, distributions must begin at age 70½, and may spread out over (1) your life, (2) your life and the life of your beneficiary, (3) your life expectancy, or (4) the life expectancy of you and your beneficiary. You should consult with your IRA plan administrator as to your plan's provisions and optional elections regarding distributions both before and after your death, and to make sure any elections are properly made.

Some of the currently applicable requirements for post-death distributions under a qualified plan are discussed below, separated by who is the beneficiary. You should check with your IRA plan administrator to make sure your beneficiary is who you want and is properly named, and should verify the current status of the law before taking any action.

1. Any person, including your spouse, is the beneficiary.
   If you die after distributions have begun, the IRA must be distributed at least as rapidly as under the method of distribution in place at the time of your death.

   If you die before distributions have begun, the IRA must be distributed:

   • (a) within five years after your death; or
   • (b) over the life or life expectancy of your beneficiary, and distributions must begin no later than December 31 of the calendar year after the year of your death.

2. Your spouse is the beneficiary.
   Only your surviving spouse may roll the IRA into his or her own IRA and name his or her own beneficiaries. This also allows your surviving spouse to make his or her own distribution election. If your spouse does not roll your IRA into a new IRA, and where distributions are to be made over the life or life expectancy of your surviving spouse, distributions to your surviving spouse need not begin until the later of (a) December 31 of the calendar year after the year of your death or (b) December 31 of the calendar year you would have reached age 70½.

3. A trust is the beneficiary.
   If a trust which meets IRS qualifications is named as your IRA beneficiary, the trust beneficiary will be treated like any other beneficiary for purposes of determining distribution schedules both before and after your death, as set forth above. In addition to the requirements for the trust itself, certain documentation must be provided to the plan administrator.

4. No plan provision.
   Where there is no plan provision for optional methods of distribution after your death, only a surviving spouse/beneficiary will be able to spread distributions over his or her lifetime or life expectancy. As to all other beneficiaries, distribution must be completed within five years of your death.

For quite some time, the Internal Revenue Service has had an Offer in Compromise program whereby taxpayers could compromise past tax liabilities for less than the full amount. Recently the Department of Treasury enacted changes to the Offer in Compromise program which are favorable to the taxpayer. First of all, the new regulations have expanded the situations in which the IRS will consider an Offer in Compromise. Furthermore, the IRS now allows the taxpayer a longer time period in which to pay off an accepted offer.

Previously, the IRS was permitted to consider an Offer in Compromise only on grounds (1) of doubt as collectibility or (2) doubt as to liability. After considering the taxpayer's position and financial circumstances, the IRS would then determine whether or not the offer made was reasonable in light of the tax liability and circumstances of the particular case.

The Treasury Regulations now provide that the IRS may consider an Offer in Compromise based upon specific hardship and/or equitable criteria if such a compromise would promote effective tax administration. A compromise would be allowed where the collection of the liability would create economic hardship or exceptional circumstances exist such that collection of the liability would be detrimental to voluntarily compliance. However, the Regulations provide that a compromise based on these hardships and equity bases may not be authorized if it would undermine compliance.

The new regulations have also added provisions granting revenue officers flexibility in considering Offers in Compromise. Previously, when the IRS would review an Offer in Compromise based upon doubt as to collectibility, they would calculate the taxpayer's monthly cash flow. In making such a determination, the revenue officer would utilize national and local standards for certain types of expenses (housing, transportation, groceries and clothing). Often, taxpayers whose monthly expenses exceeded the national or local standards would be forced to submit an Offer in Compromise beyond their ability to pay. Revenue officers reviewing such Offers did not have any flexibility in determining whether or not the expense was reasonable. The new regulations now allow revenue officers to consider facts and circumstances justifying an expense in excess of the national or local standard. It is expected that such additional flexibility will ease the acceptance of certain types of Offers in Compromise.

Previously, regardless of the grounds for which an Offer was accepted, the taxpayer would have up to two years to pay the accepted compromise amount. If the full amount was not paid within two years, then the agreement would be deemed to be defaulted and the full amount of the liability would be considered to be owed. The IRS now can consider a deferred payment plan for accepted Offers in Compromise. Taxpayers now can pay an accepted Offer in Compromise over the course of the remaining life of the collection statute which is usually greater than 2 years. It has been our experience that many taxpayers have difficulty complying with an accepted Offer in Compromise due to the short period in which offers were to be paid. This additional time period will provide greater flexibility in the payment of accepted Offers in the future.

The Offer in Compromise program is a great opportunity for many taxpayers to come to terms with their past debts and start anew. Although it was a good program, certain taxpayers simply were unable to submit an acceptable Offer based on the prior standards and terms of the IRS. These new modifications to the Offer in Compromise program will expand the group of individuals and businesses who can successfully submit an Offer in Compromise.

Property Taxes:
RECEIPT OF SECOND INSTALLMENT OF TAX BILLS IS NOT THE TIME TO FIRST CONTEST YOUR ASSESSMENT

As a result of the Great Depression in the 1930s the Illinois legislature allowed for real estate taxes to be paid a year after they were normally due. In Cook County the second installment of real estate taxes reflects any change for that tax year since the first installment of real estate taxes in Cook County is always half of the prior year's bill. Therefore, when a property owner receives the second installment tax bill in Cook County, if they had not addressed the assessment, they may be in for quite a shock. While there may be limited means of recourse to address a high second installment tax bill, the best approach is to address it the year before when you receive notice of any change in assessment. For the 1999 triennial reassessment, the western and southern suburbs were reevaluated by the Assessor and will not be reviewed again until 2002. In the year 2000 the city of Chicago will be reassessed and in 2001 the following north and northwest townships will be reassessed: Barrington, Elk Grove, Evanston, Hanover, Leyden, Main, New Trier, Niles, Northfield, Norwood Park, Palatine, Schaumburg and Wheeling.

If the Assessor's proposed assessed valuation appears too high, you should, within approximately 30 days of receipt of the notice of proposed assessment, file a real estate valuation complaint with the Assessor's Office. Depending upon the type of property (i.e., residential, commercial, etc.) you are contesting, you may require different documentation to substantiate your complaint. The most common basis for complaints are lack of uniformity (my neighbor's property, similar to mine, has a lower assessment), vacancy/income analysis (my commercial property has had large vacancies and therefore I need relief from the County), however many other basis are recognized by the Assessor. Depending upon the basis for your complaint, you may either obtain relief for the one year (such as vacancy) or for the entire triennial (i.e., uniformity).

If you feel that you were unable to obtain the proper resolution to your complaint with the Assessor's Office, there are appeal processes from the Assessor to the Cook County Board of (Tax) Appeals or the Property Tax Appeal Board of Illinois, as well as the Circuit Court of Cook County. However, starting with the Assessor is always recommended, and sometimes required, in order to obtain relief from the other reviewing bodies.

It is very important for a property owner to insure the reasonableness of the Assessor's triennial proposed assessment when they receive the proposed assessment card. Whether your mortgagee pays your property taxes or not, it is incumbent upon the property owner to try to minimize their tax obligation and insure the reasonableness of the Assessor's proposal. Therefore, the proposed assessment card should not be ignored since the time to contest is within 30 days of receipt of that notice, not a year later when you pay the taxes.

In August, 1999 the governor signed into law an act that would streamline the process to allow taxpayers to obtain refunds on Certificates of Error. A Certificate of Error is a mechanism by which the assessor provides relief on over assessed properties to a property owner for prior years if numerous criteria are met. In the past, after a taxpayer had gone through the hoops and hurdles to obtain a Certificate of Error, they were met with a bureaucratic scheme that would insure that the Certificate of Error would not result in a refund of taxes for several years. The governor has now eliminated the need for Certificates of Error, affecting changes in the assessed valuation of $100,000 or less to be reviewed by the Circuit Court of Cook County.

Recently Mayor Daley has proposed numerous taxes for helping the city of Chicago's infrastructure. Those proposed taxes will be the subject of debate in the political process. However, a little more than a year ago, the city enacted a zoning ordinance involving the sale of residential properties that will shortly become the subject of litigation, questioning whether it was a proper fee or a hidden tax.

The Chicago City Zoning Ordinance requires that the seller of any residential property in Chicago, prior to selling that property, obtain a zoning certificate from the City to insure its proper zoning as residential to "protect" the buyer of the property. Despite the buyer's ability to inspect the property, as well as hire professionals and investigate the property, the City of Chicago has determined it necessary to enact the zoning ordinance and charge a fee for its services.

As a result of the City implementing this zoning ordinance, several lawyers have questioned whether the fee charged to sellers is that of a user fee or a disguised tax on the transaction. Based upon the City's services provided, one law firm will soon file a class action lawsuit to challenge the validity of the city zoning ordinance. If this ordinance is defeated, it will show the public that there are safeguards on actions taken by the legislature.

Estate Planning:
REGULATION XXX LURES CONSUMERS TO "BUY TERM NOW" BY: TJ MORAN, CFP

January 1, 2000 - it's not just the date when Y2K is supposed to send computers crashing into a worldwide tailspin. It's also the date that will mark a major turning point in the way term life insurance is designed, marketed and sold in this country.

Term life insurance is "pure insurance" with no savings feature or cash value, and typically provides initially the highest death benefit for the premium dollar. This benefit is for a particular period of time, or "term". Today's term life policies offer guaranteed premiums and level death benefits for a choice of 10, 15, 20, 25 and even 30 years.

Pursuant to a new regulation, known as Triple X, adopted by the National Association of Insurance Commissioners, insurers are required to raise the cash reserves they must set aside to cover claims. Insurance companies will be left with two choices - either increase premium rates to fund the additional reserves that are needed or shorten the policy guarantees. Therefore, watch for term life insurance rates to skyrocket or guarantees of level premiums to disappear, as insurance companies increase their reserve requirements to comply.

The bottom line for consumers is now is the best time and perhaps the last time to get a great deal on term life insurance before the new regulation goes into effect. Based on Regulation XXX you should review your current life coverage and purchase what you anticipate that you will need by December 31.

Under Internal Revenue Code section 2042, the value of the decedent's gross estate shall include the "value of all property receivable by beneficiaries, other than the executor, to the extent of the amount receivable by all other beneficiaries as insurance on the policies on the life of the decedent with respect to which the decedent possessed at his death any of the incidents of ownership, exercisable either alone or in protection with any other person." I.R.C. § 2042 defines "incident of ownership" to include a reversionary interest only if the value of such reversionary interest exceeded 5% of the value of the policy immediately before the death of the decedent. This term includes a possibility that the policy, or the proceeds of the policy, may return to the decedent or his estate, or may be subject to a power of disposition by him.

However, it has been held that I.R.C. § 2042(2) does not apply in situations where a corporation or a partnership is the owner of a life insurance policy on the life of the decedent who is either a shareholder or a partner. Estate of Frank H. Kanipp v. Commissioner, 25 T.C. 153 (1955). In that case, a partnership held 10 insurance policies on a decedent/partner's life, at his death. The partnership paid the premiums on all of the policies, and the insurance proceeds were payable to the partnership. The court found that the partnership purchased the policies in the ordinary course of business and that the decedent, in his individual capacity, had no incidents of ownership in the policies. Accordingly, the court held that the policies were not includable in the decedent's gross estate under the predecessor to I.R.C. § 2042(2).

The Tax Regulations provide that "incidents of ownership" is not limited in its meaning to ownership of the policy in a technical legal sense. Generally speaking, the term makes reference to the right of the insured or his estate to the economic benefits of the policy. Therefore, it includes the power to change the beneficiary, to surrender or cancel the policy, to assign the policy, to revoke and assign it, to pledge the policy for a loan, or to obtain from the insurer a loan against the surrender value of the policy.

If, for example, the decedent created a corporation which, in turn, held an insurance policy on the decedent's life and paid the policy premiums, then the insurance proceeds upon the decedent's death would be payable to the corporation and not includible in the decedent's gross estate. However, the decedent's shares in the corporation would be includible in his gross estate. Yet, even this ownership interest in the corporation could be minimized if the decedent takes steps to dispose of his shares prior to death, thus leaving a minimal, if any, ownership interest in that corporation or partnership.

Transfer tax exemption increasing for 2000. For 1999, an individual can transfer during life or at death $650,000 worth of assets without paying any gift or estate tax (collectively referred to as the "transfer tax"). This figure increases to $675,000 for transfers in 2000 and 2001 and gradually rises to $1 million for transfers after 2005. Remember that because the estate tax reaches so many assets (e.g., home, cash, investments, retirement plans, IRAs, and life insurance), many individuals will have estates that will be subject to the tax in spite of the increasing exemption. Moreover, married individuals must plan their estates in such a way so that each spouse takes full advantage of the available exemption.

No inflation increase yet for annual exclusion. Apart from the exemption explained above, be advised that individuals can use the gift tax annual exclusion to transfer $10,000 each year to an unlimited number of individuals without paying any gift tax. While the $10,000 amount is indexed for inflation, due to the low current inflation rate and the way the indexing mechanism works, there is no increase in the amount for 2000. Also, if a spouse lacks funds to make an annual exclusion gift, the other spouse can transfer $20,000 and it will be considered a $10,000 gift by each spouse if the other spouse consents to gift-splitting.

New tax saving opportunity for married owners of closely-held corporations. An unlimited marital deduction makes it possible to transfer assets from one spouse to another free of gift or estate tax. Many individuals give their spouses some assets outright and also set up a trust for them that gives the spouse income for life. Such a typical marital trust is called a QTIP trust. The marital deduction doesn't permanently eliminate tax, it merely defers tax until the surviving spouse dies. A new development in this area may offer a tax saving opportunity for some clients. It deals with the rule that requires the QTIP assets to be taxed in the survivor's estate. At one time, the IRS took the position that if the assets of the QTIP included closely-held stock and the surviving spouse also individually owned shares in the same company, the QTIP shares and the individually-owned shares had to be valued as a block. This could have resulted in a higher value than if each were valued separately. However, the IRS now agrees that the QTIP shares and the individually owned shares don't have to be valued in combination. The result can be that the separate holdings can be valued at a discount, thereby reducing estate taxes.

New QTIP flexibility. Suppose a surviving spouse who is receiving income from a QTIP trust finds that she doesn't need all of the income and would like to make a gift to a child. She can give her entire income interest or a portion of it to the child. However, if she does that, a current gift tax would have to be paid both on the income interest given away and on the present value of the entire remainder (i.e., the value of the property in the trust less the actuarial value of the spouse's life income interest). The IRS has shown some new flexibility in this area by allowing a QTIP trust to be severed into two trusts. The IRS said that the spouse could give up one of the two trusts without being treated as giving away the other one.

Private annuities benefited by new valuation tables. Earlier this year, IRS revised its tables for valuing annuities, life estates, remainders, and reversions to reflect more recent mortality experience showing that people are living longer. Some types of interests have a higher value under the new tables than they had under the old tables. For example, an annuity for life has a higher value. This can be advantageous in connection with a private annuity, which offers a number of income, gift and estate tax advantages. A private annuity also can save estate administration expenses and offer other non-tax advantages as well. In the typical private annuity transaction, a parent transfers property to his child in return for that child's unsecured promise to pay the parent a fixed, periodic income for life. If the fair market value of the property transferred equals the present value of the annuity under the IRS valuation tables, there is no gift tax due. The new table has the effect of lowering the annual payment amount that the younger family member would have to make to the older family member to prevent a gift from arising on the transfer. This is good because a senior family member often will prefer to transfer property at the lowest possible cost to a younger family member.

IRS attacks charitable split dollar life insurance. The traditional split-dollar life insurance arrangement involves employers and employees - the employer pays the policy premiums and is entitled to recoup its advances from the investment value of the contract or the death benefit, while the net proceeds go to employees' beneficiaries. Some promoters started touting split-dollar arrangements involving individual taxpayers and charities as a way in which wealthy individuals could pay life insurance premiums with deductible dollars while reducing the tax bite on their estates. IRS has issue a strong warning that charitable split-dollar life insurance transactions won't produce the tax benefits advertised by their promoters and may subject the parties to other adverse tax consequences, including penalties. The tax bill that President Clinton recently vetoed also contained provisions to curb use of charitable split-dollar life insurance. Tell individuals to steer clear of charitable split-dollar arrangements.

Used car donations under IRS scrutiny. Charitable donations of used cars have come under scrutiny by the IRS, which is concerned that charities are promising larger deductions than are legally permissible. Remember to document the property's condition, and to not be overly aggressive in stating a value for the contributed property.

Real Estate/Taxation:
EXCLUSION OF GAIN FROM SALE OF PRINCIPAL RESIDENCE

The Internal Revenue Code has changed in recent years regarding a homeowner's right to exclude from income gain on the sale or exchange of their principal residence. The Code no longer requires that the gain be used to purchase a replacement home. The new Code section 121 replaces former provisions allowing for rollover of gain into a new home and the one-time exclusion for taxpayers aged 55 and over.

Now effective for sales or exchanges after May 6, 1997, unmarried taxpayers can exclude up to $250,000 in gain, and married taxpayers filing jointly can exclude $500,000.

To qualify for the exclusion, the taxpayer must have owned and occupied the home as his principal residence for an aggregate of two of the five years preceding the sale or exchange. However, if the home was acquired in a rollover of gain from the sale of a previous home (under the repealed Code section), the period of ownership of the previous home may be included in the aggregate. There is no limit on the number of times a taxpayer can use the exclusion, as long as it is not used more often than once every two years.

Married taxpayers filing jointly qualify for the $500,000 exclusion if: (1) either spouse owned the home for a total of two out of the preceding five years; (2) both spouses occupied the home for the same time period; and (3) neither spouse has used the exclusion within the past two years. However, even if just one spouse qualifies for the exclusion, that spouse can exclude up to $250,000 of gain.

Hardship relief is available for taxpayers who do not qualify for the exclusion because of a change in the place of employment, health or "unforeseen circumstances", the latter to be elaborated on in regulations. The hardship relief allows the taxpayer a prorated exclusion based on the actual period of ownership, occupancy or time since the last sale or exchange from which gain was excluded.

The average taxpayer will not make anywhere near a $250,000 or $500,000 profit on their home, and thus would not need records of capital improvements to show an increase in basis in order to keep the gain within the exclusion limits. However, records of improvements should still be kept if there is any chance that income might be recognizable when the home is sold, such as where there is the potential for a soaring real estate market, where the taxpayer intends to live in the home for a long time or where there is a major rehab of the home. In addition, records of improvements should be kept at least for a while since there is always a chance that the taxpayer will not meet the ownership or occupancy requirements. In that case, the gain will be included in income unless the taxpayer qualifies for hardship relief. Records should also be kept where depreciation deductions are used, such as for a home office, since the exclusion is inapplicable to the extent of such deductions.

Business:
CHOOSING THE BEST BUSINESS FORM

When creating a business, an owner confronts many issues. One of the more important issues that will be addressed is the selection of the business form in which to conduct the business. Such decision is critical in order to enable the individual or group to achieve and accomplish their goals and to avoid unwanted consequences. Before the correct decision can be made, several issues must be considered in light of the attributes of the possible business forms: (1) control over the management of the business; (2) taxation; (3) protecting one's personal assets from the creditors of the business; and (4) control over the profits of the business. The type of entity selected to implement the business will have a dramatic impact on all of the above factors.

The most common form of business ownership is the sole proprietorship. It is the simplest form to create. No formal agreement or documentation is necessary or required. In addition, a sole proprietorship provides one with the greatest ability to control all aspects of the business. In addition, the sole proprietorship does not incur a separate tax liability from that of the owner. The greatest drawback with the sole proprietorship form is that the entity provides no protection to the personal assets of the owner from the creditors of the business.

Another entity one may use is a partnership. A partnership is created where two or more individuals combine their resources in effort to operate a business for profit. The relationship need not be documented by a formal agreement. However, a formal agreement is highly recommended. A partnership, just as a sole proprietorship, does not incur a separate tax from that of the owners. The profits flow through to the partners and are reported on their individual tax returns. One who forms a partnership with another gives up a certain amount of control. Decisions are generally made pursuant to the vote of partners. However, individual partners can bind the partnership and remaining partners to acts normally carried on by the business. Just as with the sole proprietorship, there is no protection for the personal assets of an individual partner from the creditors of the partnership. Finally, profits are only distributed when the partners determine it is in the best interest of the partnership.

Probably the second most common business form is the corporation. A corporation is a distinct legal entity created by the filing of Articles of Incorporation with the Secretary of State. As a distinct legal entity, it can sue or be sued, it employs agents to conduct its business operations, and it generally incurs its own separate income tax liability. The greatest benefit of using a corporate entity is that it protects the assets of the owners of the business from the creditors of the business. Decisions affecting the business, including when to distribute profits, are made by vote of the shareholder (generally, majority rule).

As a separate and distinct entity from that of the owners, a corporation incurs a separate tax liability. Furthermore, when the corporation distributes the profits to the shareholders, such profits are then taxed upon the shareholders. In other words, there is a double taxation of the income of the business. Recognizing that many small corporations are essentially partnerships, Congress has passed provisions allowing certain corporations to be taxed as partnerships. These entities are known as S-Corporations. The profits flow through to the shareholders just as they would with a partnership. At the same time, unlike a partnership, the shareholders would continue to enjoy the limited liability associated with their investments just as with an ordinary corporation.

The limited liability company is another entity which also has the limited liability attribute of the corporation and at the same time pass through tax treatment like a partnership. A limited liability company is similar to a corporation in that it is created with the filing of Articles of Organization with the Secretary of State. It is a separate entity distinct from the owners of the company. Furthermore, the Internal Revenue Service has set forth its position that it would treat such entity as a partnership for tax purposes provided that it more closely resembles a partnership than a corporation. Individuals who create a limited liability company usually do so because they are unable to satisfy the narrow requirements provided by the Internal Revenue Code for creating an S-Corporation. The drawback for creating a limited liability company is that it tends to be more expensive to create than a corporation. That is due to the necessity of preparing an operating agreement much like that of a partnership. An operating agreement is necessary in order to memorialize the understanding of the parties who created the entity and to satisfy taxation concerns. In addition, the filing fee charged by the Secretary of State is $400.00.

When creating a business, substantial consideration must be given to the business form. The type of business form may mean the difference between a successful operation and a failed business.

Taxation:
DEDUCTIBILITY OF OVERSEAS CHARITABLE CONTRIBUTIONS

In the wake of recent natural disasters, such as earthquakes in Turkey and Taiwan and hurricanes in the eastern United States, United States taxpayers will be increasingly induced to contribute funds to help alleviate the pain and suffering of those affected by these catastrophes. In order to motivate such charitable contributions, the United States Government provides tax deductions for certain kinds of charitable contributions. In particular, the Internal Revenue Service allows tax deductions of contributions or gifts to or for the use of a corporation, trust, or community chest, fund, or foundation which is created or organized in the United States or in any possession or in any of its possessions, and is organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes. I.R.C. § 170(c)(2). In addition, such contribution or gift will be allowed as a tax deduction if no part of the net earnings inures to the benefit of any private shareholder or individual of this organization, and which is not disqualified for tax exemption by reason of attempting to influence legislation. I.R.C. § 170(c)(2)(C), (D).

However, the Internal Revenue Service provides that a contribution or gift by a corporation to a trust, chest, fund, or foundation shall be deductible only if it is to be used within the United States or any of its possessions. I.R.C. § 170(c)(2). On the other hand, however, this restriction does not apply to the charitable contributions by individuals. Treas. Reg. 1.170A-K(k).

When a domestic organization is required by its charter, or by its foreign parent organization to send all funds raised within the United States to the foreign organization, or when the domestic organization tells contributors that their funds will go to a foreign organization, contributions to the domestic organization are not deductible as charitable contributions because the requirements of the tax laws have not been satisfied. Nonetheless, an income tax deduction is not necessarily precluded for contributions made in response to solicitations for specific foreign organizations provided that the domestic organization is more than "merely a conduit to a foreign organization," its activities on behalf of the foreign charity fall within the domestic organization's charitable program, and the domestic organization exercises some degree of supervision over the use or expenditure of the grant once it has been made. Rev. Rul. 75-65, 1975-1 C.B. 79.

According to Revenue Ruling 69-80, the law places no limitation as to deductions by a corporation for charitable contributions to a domestic charitable corporation. Although the statute denies a deduction for a charitable contribution by a corporation to a trust, chest, fund, or foundation if used outside the United States or any of its possessions, the statute does not preclude the deductibility of contributions to a domestic charitable corporation which uses its funds for a charitable purpose in a foreign country. Moreover, Revenue Ruling 63-252 states that where a domestic organization's purposes can be furthered by granting funds to charitable groups organized in a foreign country, and the domestic organization makes such grants for purposes which it has reviewed and approved, the domestic organization will be considered the recipient of such contributions for purposes of applying I.R.C. § 170(c). Contributions received by the domestic organization will not be earmarked in any manner, and use of such contributions will be subject to control by the domestic organization.

Similarly, another acceptable method of supporting causes abroad through contributions to domestic organizations involves the situation where a domestic organization, which does charitable work in a foreign country, forms a subsidiary in that country to facilitate its operations there. The foreign organization is formed for purposes of administration convenience and the domestic organization controls every facet of its operations. In this case, the foreign organization is merely an administrative arm of the domestic organization, and the domestic organization remains the real recipient of any charitable contributions.

In conclusion, any United States taxpayer who wishes to make a charitable contribution for an overseas cause and also wishes to be able to deduct such contribution in his or her income tax return, must inquire into the structure and function of the tax exempt organization in order to determine whether the prospective charitable contribution will actually be tax deductible.

This newsletter is a publication of Lavelle Legal Services, LTD. We attempt to highlight and discuss areas of general legal interest that may lead to planning opportunities. Nothing contained in this Newsletter should be construed as legal advice or a legal opinion. Consultation with a professional is recommended before implementing any of the ideas discussed herein.