Tax Extenders - Permanent or 2 Years?

There were three developments this week that affect the pending tax extenders bill. First, negotiations continue by House and Senate members of both parties. House Ways and Means Chairman Kevin Brady (R-TX) stated, “All parties are negotiating in good faith.”

Minority leader Nancy Pelosi (D-CA) emphasized that Democratic negotiators are very interested in the child tax credit and would like it indexed for inflation.

White House Press Secretary Josh Earnest agreed that it may be possible to pass a permanent extenders package if there is a balance of business and personal tax extenders. He stated, “We believe that if we were looking to extend a tax benefit that is enjoyed by large companies, we need to make sure that there are some tax benefits that are included for middle-class families, too.”

Second, while Chairman Brady continues to negotiate over a larger package that includes 10 to 12 permanent tax extenders, he also introduced the Tax Increase Prevention and Real Estate Investment Act of 2015 (H.R. 34). This bill is a “backup plan” if the permanent extender package does not pass. The backup plan is to extend the current 50 plus provisions for 2015 and 2016. His bill includes extension of the IRA Charitable Rollover, increased deduction benefits for conservation easements, enhanced deductions for gifts of food inventory and favorable basis rules for appreciated property gifts by Subchapter S corporations.

The third factor is the need to pass a federal appropriations bill. The current expenditure limits were scheduled to expire on December 11. While President Obama had stated that he would not sign an extension, the White House, House and Senate all agreed to a 5-day extension. The appropriations bill deadline is now December 16, 2015.

Editor’s Note: If agreement is reached by Tuesday or Wednesday on the provisions for the permanent tax extenders, it may be possible to combine that bill with the appropriations bill scheduled for passage on December 16th. If there is not an agreement on the permanent extenders package by that time, then the plan by Chairman Brady to pass extenders for 2 years is likely to pass. The last scheduled day for the House continues to be December 18th. Members of Congress will attempt to complete all of these major legislative actions by that date.

Golf Course Not Within Conservation Purpose

In John A. Atkinson et ux. et al. v. Commissioner; T.C. Memo. 2015-236; Nos. 2683-11, 2693-11, 2694-11, 2695-11, 2700-11, 18938-12 (9 Dec 2015), the Tax Court rejected a North Carolina conservation easement because it did not qualify for a charitable deduction. However, the reasonable cause defense was accepted and the Sec. 6662(a) penalty provisions were not applicable.

Several individuals who were involved with The Members Club located near the St. James Plantation in North Carolina transferred conservation easements in 2003 and 2005 to the North American Land Trust. The 79 acres in 2003 and 90 acres in 2005 were transferred for the preservation of the property “as a relatively natural habitat of fish, wildlife, or plants or similar ecosystem; and preservation of the conservation area as open space which, if preserved, will advance a clearly delineated federal, state or local governmental conservation policy and will yield a significant public benefit.”

The Members Club retained the rights to maintain the golf course, cut the grass, maintain the rough and remove trees as necessary. They also retained the right to use fungicides, herbicides and insecticides.

On a tax return filed on April 15, 2004, based on an appraisal by F. Bruce Sauter The Members Club claimed a charitable deduction of $5,223,000. The IRS determined that the deduction either failed to qualify or had zero value.

At trial, taxpayers claimed that a golf course conservation easement that maintained “relatively natural habitat” and provided benefits for the public qualified for charitable deduction.

The Court objected on three grounds. There was rather minimal wildlife on the golf course because of the level of human activity. Second, the retained rights to manage the golf course enabled the members to have significant potential impact on the environment. Third, there was not a sufficient level of public use. The golf course was in a gated community and open only to members or their guests.

Therefore, the golf course easement failed to qualify under the “public purpose” standard. However, because taxpayers sought advice of professional advisors and obtained a qualified appraisal, they met the standards for a “reasonable cause” defense and the Sec. 6662(a) penalties did not apply.

Conservation Deduction Penalties Apply

In Brett E. Legg et ux. v. Commissioner ; 145 T.C. No. 13; No. 594-14 (7 Dec 2015), the Tax Court acknowledged a stipulation to reduce a conservation easement deduction from $1,418,500 to $80,000, but held that the Sec. 6662(h) penalties were applicable.

In 2007 Brett and Cindy Legg donated a conservation easement on 80 acres of land to the Colorado Natural Land Trust. Based upon an appraised value of $1,418,500, they claimed a series of charitable deductions for years 2007 through 2010.

The IRS contested the deduction and claimed zero value. Prior to trial, taxpayers and the IRS stipulated the charitable value as $80,000. The IRS claimed the 40% Sec. 6662(h) Gross Overstatement of Value penalty was applicable.

Taxpayers maintained that the IRS agent failed to provide the Sec. 6751(b) “initial determination” for the 40% penalty because the first examination report calculated a 20% penalty. However, the Court observed that the report also referenced the 40% gross overvaluation penalty. Because there is no reasonable cause defense under Sec. 6662(h), that penalty is applicable.

Applicable Federal Rate of 2.0% for December—Rev. Rul. 2015-25; 2015-49 IRB 1 (20 Nov 2015)

The IRS has announced the Applicable Federal Rate (AFR) for December of 2015. The AFR under Section 7520 for the month of December will be 2.0%. The rates for November of 2.0% or October of 2.0% 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 2015, 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.