Feb 1, 2007 12:00 PM

Rorie M. Sherman Editor in Chief

Christopher R. Hoyt, professor of law at the University of Missouri-Kansas City Law School, and Bruce D. Steiner, attorney in the New York office of Kleinberg, Kaplan, Wolff & Cohen, P.C., give us this lowdown on Notice 2007-5, 2007-5 IRB 1. With this notice, the Internal Revenue Service has issued guidance under the Pension Protection Act (PPA), including guidance on charitable payments from individual retirement accounts (IRAs) and direct rollovers from qualified plans to inherited IRAs. The full text appears at www.irs.gov/pub/irs-drop/n-07-07.pdf. Hoyt and Steiner write:

• Re: charitable payments from IRAs

  We have new legal guidance from the IRS about “charitable IRA rollover” legislation — the ability for someone over age 70 1/2 to have up to $100,000 distributed directly from an IRA to a qualifying charity and to have the distribution excluded from income. Some of the rules we already knew are in the notice. Here are the new developments:

  1. Yes — charitable IRA distributions can satisfy pledges without violating the self-dealing prohibited transaction rules. “The Department of Labor, which has interpretive jurisdiction with respect to section 4975(d), has advised Treasury and the IRS that a distribution made by an IRA trustee directly to a section 170(b)(1)(A) organization (as permitted by section 408(d)(8)(B)(i)) will be treated as a receipt by the IRA owner under section 4975(d)(9), and thus would not constitute a prohibited transaction. This would be true even if the individual for whose benefit the IRA is maintained had an outstanding pledge to the receiving charitable organization.”

  2. Yes — a person over age 70 ½ who is the beneficiary of an inherited IRA can take advantage of the charitable IRA exclusion.

  3. The prohibition of using a SEP IRA or a SIMPLE IRA for the charitable exclusion applies only to an “ongoing” SEP IRA or SIMPLE IRA. Such an IRA is an ongoing IRA only if a contribution was made to it during the year. Thus, a retired individual who had an SEP IRA or a SIMPLE IRA to which contributions were made during a working career but who is now retired can make charitable distributions from that IRA since no employer contributions were deposited in the same year.

  4. No withholding of income taxes. A qualified charitable distributions is not subject to withholding under Internal Revenue Code Section 3405, because an IRA owner that requests such a distribution is deemed to have elected out of withholding under IRC Section 3405(a)(2).

  5. The exclusion applies to any of these charitable distributions made during 2006, even those made before the PPA was enacted on Aug. 17, 2006. This may be advantageous to people who have “IRA checkbooks” (typically at brokerage houses) in which they can write checks directly from an IRA. A person over age 70 ½ who wrote such a check to a qualifying charity early in 2006 can take advantage of the exclusion.

  6. The IRA administrator does not have to mail the check to the charity to qualify. It is acceptable for the IRA administrator to issue the check naming the charity as payee, mail the check to the IRA owner and then have the IRA owner forward it to the charity. This is a good development, because, in a survey of charities that received such gifts, 10 percent of such IRA gifts did not list the donor's name and address and the charity had to track the gift.

• Re: nonspousal direct rollovers

  The PPA allows a beneficiary other than a spouse to transfer a deceased participant's qualified plan benefits to an inherited IRA beginning in 2007. Such a transfer is called a “direct rollover.”

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Topics of Interest

Estate Tax	Donor Advised Funds
GSTs	Family Offices
Private Foundations	Life Insurance
2010 Tax Act News	Industry Trends Surveys

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