The Kansas Post-secondary Education Savings Program ("Education Savings Program") was created by the 1999 Kansas Legislature. This program permits people to contribute to education savings accounts to pay post-secondary education expenses for individuals they designate. The program allows tax advantages under both state and federal law. The Education Savings Program becomes operational on July 1, 2000. Deposits may be made any time after that date.

The program will be administered by the State Treasurer. The Treasurer will develop rules and regulations to implement the program, select the financial organizations that will handle education savings accounts, and ensure that all aspects of the Education Savings Program comply with Internal Revenue Service guidelines applicable to educational savings plan accounts.

Withdrawals from education savings accounts may be used to pay educational expenses at many post-secondary institutions in Kansas and in other states. Eligible institutions are defined in federal law to be accredited post-secondary institutions that offer credit toward an undergraduate or graduate degree or other recognized post-secondary education credential. The institution also must be eligible to participate in federal student aid programs. In Kansas, these institutions are Regents institutions, Washburn University, public community colleges, independent colleges and universities, technical colleges, area vocational schools, and licensed proprietary schools.

There is no limit on who may open an account or who could be a beneficiary. It also will be possible for more than one person to contribute to an account. In addition, a contributor can change the beneficiary on an account after it has been established. However, federal law requires that an account be transferred only to another member of the beneficiary's family, which is broadly defined to include parents, grandparents, siblings, step-siblings, certain in-laws, and the spouses of the aforementioned relations. A local government or organization described in Section 501(c)(3) of the Internal Revenue Code is permitted to open education savings accounts to fund scholarships for persons whose identities would be determined at the time the scholarship is awarded.

There will be an aggregate contribution limit from all sources for each beneficiary equal to the average expenses for five years of higher education in midwestern states. As long as the total in the account does not exceed this limit, a contributor may deposit in one lump sum or in smaller annual or more frequent deposits.

Under federal law, money can be withdrawn from an account without penalty (a "qualified withdrawal") if it is to pay for allowable educational expenses. The only exceptions would be if the beneficiary dies, becomes disabled, or receives a scholarship (under conditions spelled out in the federal law). If the withdrawal is not for educational purposes or does not fall under one of the allowable exceptions, a 15 percent penalty is imposed on the amount withdrawn, plus the interest on the withdrawn portion would be forfeited. In addition, there is a two-year wait before qualified withdrawals could be made. An education savings plan must be opened before a beneficiary reaches the age of 25. Once a qualified withdrawal is made, qualified withdrawals must be completed within ten years or by the time the beneficiary reaches the age of 30, whichever comes first.

Contributions to an education savings account do provide income tax benefits. Interest earned on money in a post-secondary education savings account will not be taxed by either the state or federal government until withdrawn to pay the educational expenses of the beneficiary of the account. In addition, an account contributor will be permitted to deduct from their Kansas taxes up to $2,000 in contributions each year for each designated beneficiary.

For some individuals, an education savings account will provide a valuable way to save for the high cost of a post-secondary education.

Consider Year-End Charitable Giving

We recommend that all of our clients consider their income tax situation before year end with a view toward determining how the timing of charitable giving will be to their benefit.

It has been a very long time since income tax rates were higher than they now are. High income tax rates make deductions for charitable contributions more valuable. Nothing in recent Congressional or Administration tax proposals give us any reason to believe that income tax rates will get any higher for quite some time. In fact, both Congress and the President have been talking about tax cuts. Therefore, from a tax standpoint, 1999 could be the optimum time for charitable giving.

Income tax deductions for contributions are limited to percentages of your adjusted gross income. If you haven't used your percentage limits for 1999, the opportunity to do so will be forever lost unless you act by December 31. There is no way to utilize your 1999 deduction limitation after that.

If you are thinking of selling some appreciated property such as stock or real estate, it may be fruitful to weigh other methods of disposition. At today's high tax rates, considerable leverage is possible through charitable giving. If you contribute the appreciated property instead of selling it, you will save income taxes two ways. First, you won't have to pay income tax on the gain on the sale. Second, you will be able to deduct the full value of the property (within the applicable percentage-of-income limits).

For example, your capital gains may be taxed at a total of about 26%, federal and state combined, and your other income may be in the 46% bracket. If you own stock with a cost basis of $1,000, which is now worth $10,000, here is what can happen:

The total income tax reduction achieved by contributing the stock to charity rather than selling it is $6,940 ($2,340 + $4,600). In other words, it would only cost you a net of only $3,060 ($10,000 less $6,940) to make your charitable gift, if done by year-end. Again, we don't yet know how much less your charitable deduction may be worth next year.

Substantially the same analysis applies to gifts of other appreciated property, such as real estate. Just be sure the capital gain property has been held at least one year at the time you transfer it to charity, watch for the percentage limitations and consider doing it in 1999, rather than later, for maximum tax benefit.

Also, be sure to obtain a receipt or acknowledgment from each charitable organization to which you have given $250 or more. Congress has required the IRS to disallow a deduction unless a receipt has been obtained by the time your return is due (April 15, 2000). And, in some instances, to obtain a qualified appraisal.

Finally, if you are considering a gift annuity, charitable remainder trust or other deferred charitable arrangement, please see us so that we can help you make sure it gets done right, for maximum benefit. The earlier the better, because we expect to be busier the closer we get to year end.

Single Member Limited Liability Companies

Effective July 1, 1998, the Kansas legislature revised the Kansas limited liability company act to allowed limited liability companies to be formed and operated with only a single member. The Regulations under the Internal Revenue Code ("IRC") allow a taxpayer-owner to elect either to have a single member limited liability company ("SMLLC") be taxed as a entity disregarded from its owner for federal tax purposes or to have it taxed as an association (i.e. a corporation). The default status of non-electing entities with a single owner is that of a disregarded entity, i.e. report income on Schedule C of the owner's Form 1040. The Internal Revenue Service ("IRS") has issued several rulings which provide guidance in using SMLLCs as tax planning tools.

Tax-free exchanges. In Private Letter Ruling ("PLR") 9751012, the IRS ruled that a corporate taxpayer who had transferred property pursuant to the like-kind exchange regulations under IRC § 1031 would be treated as the transferee of replacement property received by an SMLLC wholly-owned by the corporation. Because the SMLLC was disregarded as an entity separate from its owner, the "same taxpayer" requirement of the regulations was satisfied. The IRS applied the same theory for replacement of condemned property under IRC § 1033. PLR 199945038.

Employment taxes. The IRS has issued Notice 99-6 providing temporary procedures for the reporting of employment taxes by disregarded entities. The IRS will allow SMLLCs to report in one of two methods:

1) By the owner (as though employees of the disregarded entity are employed directly by the owner) under the owner's name and taxpayer identification number; or 2) By each state law entity with respect to its employees under its own name and taxpayer identification number.

The Notice cautions that the under the second method, the owner retains ultimate responsibility for employment tax obligations. Typically, an LLC member is not liable for employment tax obligations unless such liability is under the IRC § 6672 trust fund recovery rules. But in PLR 199922053, the IRS held the owner of an SMLLC to be the statutory employer of its employees and liable for the employment tax obligations relating to its employees pursuant to Notice 996.

Collection matters. State law determines LLC member liability and it also controls the nature of the owner's interest in the LLC. The IRS concluded in PLR 199930013 that the mere fact that an SMLLC was disregarded as an entity separate from the taxpayer did not allow the IRS to levy on the assets of the SMLLC for collection of the owner's tax liability. Under the state law in question, the taxpayer/owner had no interest in the SMLLC's property, but did have an interest in distributions from the SMLLC. That distribution interest could be reached for collection purposes, but the SMLLC, if valid under state law, was a third party upon whose assets IRS could not serve a levy. The IRS did conclude, however, that it may be possible depending upon the facts in each case to file a lien on assets of the SMLLC as the "alter ego" of the taxpayer/owner under a theory similar to "piercing the corporate veil." Factors which might indicate that the SMLLC is a mere alter ego include inadequate capitalization, using the LLC form to shield assets from the IRS (such as in this instance where income earned by the taxpayer was being paid directly to the LLC) and where it may be established that the taxpayer and the LLC are not practically operating as separate entities.

The IRS has also issued Revenue Rulings discussing the tax consequences of an SMLLC admitting additional members or a multi-member LLC becoming an SMLLC. If you would like further information on the tax ramifications and planning possibilities of SMLLCs, please contact our office.