Tax Season on Schedule

In a December 21 letter (IR-2015-139) the IRS announced the opening of tax season as scheduled on January 19, 2016. Taxpayers may file from January 19 until April 18, 2016. Because Friday, April 15, is Emancipation Day, the due date is Monday, April 18. Two exceptions are the states of Maine and Massachusetts — April 18 is Patriot Day in both states, so filing there is due by April 19.

IRS Commissioner John Koskinen stated, “We look forward to opening the 2016 tax season on time. Our employees have been working hard throughout this year to make this happen. We also appreciate the help from the nation’s tax professionals and the software community who are critical to helping taxpayers during the filing season.”

The IRS has updated www.irs.gov for the 2016 filing season. Most refunds are promised by the IRS within 21 days if the taxpayer is eFiling.

About 70% of taxpayers have individual or family incomes under $62,000. These persons may qualify for the Free File program. Various commercial partners of the IRS will provide software on www.irs.gov for those whose choose to use Free File.

There also are online fillable IRS forms. These are electronic versions of most IRS forms. Taxpayers who are confident in their own knowledge of the tax system may complete their own returns.

Finally, the Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) programs are also available. On the IRS.gov site, you may search for “free tax prep” and find the nearest VITA or TCE site.

Final Type III SO Payout Regulations

In T.D. 9746 the IRS published the final payout regulations for non-functionally integrated Type III supporting organizations.

IRC Section 509(a)(3) specifies the requirements for supporting organizations. They must meet an organizational test, an operational test, a relationship test and a “no disqualified person in control” test. The relationship test may create a Type I, II or III organization. For non-functionally integrated Type III entities, the Philanthropy Protection Act (PPA) of 2006 requires that a “significant amount” be paid each year to one or more supported organizations.

The final regulations create a specific standard for payments. The payout must be the greater of 85% of adjusted net income or a minimum asset amount equal to 3.5% of the value of the non-exempt organization assets.

The valuation methods for the minimum asset amount will be similar to private foundations. See Reg. 53.4942(a)-2(c).

There also is an exception for specific investment assets held for the exempt purposes of the supported organization as described in Reg. 53.4942(a)-2(c)(3).

The IRS expects to produce a new proposed regulation. Under this proposed regulation, Subtitle A taxes will not reduce the annual required distribution. The proposed regulation also is expected to extend the transition relief of Notice 2014-4, 2014-2 IRB 274.

PPA 2006 had initially proposed a 5% annual distribution rule. The IRS opined that the greater of 85% of adjusted income or 3.5% of the value of the non-exempt assets is a balanced solution and an appropriate Type III SO distribution requirement.

Strong Opposition to Charity Donation Substantiation

Nonprofits and their professional advisors are both united in opposition to REG-138344-13. Since 1993 Internal Revenue Code Sec. 170(f)(8) requires a contemporaneous written acknowledgment (CWA) for charitable gifts valued at $250 or more. The CWA must disclose the amount of cash, whether goods or services were provided by the charity in consideration of the gift and include a good faith estimate of the value of goods or services provided by the charitable organization. An exception exists for the valuation of intangible religious benefits.

The taxpayer must receive the contemporaneous written acknowledgment by the earlier of the date of filing his or her return or the due date, with extensions, for that return.

The Code also includes an exception under Sec. 170(f)(8)(D). Under this section the charity may collect the donor’s information and report the gifts to both the donor and the IRS. However, this requires knowing the name and address of the donor and his or her Social Security Number. The donee receipt also must describe the value of any goods or services transferred in exchange for the gift.

The American Bar Association Chair of the Real Property, Trust and Estate Law Section is Robert Krapf. He published a letter urging the IRS to rely on the current contemporaneous written acknowledgment. The ABA recommends not implementing a new requirement for charities to obtain the Social Security Number of donors and report that to the IRS. The proposed practice could raise privacy concerns and may lead to “widespread identity theft.”

A coalition of over 100 nonprofits also sent a letter to IRS Commissioner John Koskinen opposing the new substantiation plan. The coalition raised three primary issues.

1. Privacy—collecting Social Security Numbers from all donors will expose millions of Americans to potential identity theft.
2. Administrative Burdens—for midsize and smaller nonprofits to collect and securely store the Social Security Numbers of donors will be very difficult.
3. Discourage Gifts—donors will be concerned about giving their Social Security numbers to nonprofits. This concern will lead to substantial reductions in giving.

Editor’s Note: With the overwhelming negative response from nonprofits and advisors, it seems possible that the IRS will withdraw the regulations and not require charities to collect the Social Security Numbers of donors.

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.