Dr. Ben Carson Proposes a Flat Tax

Following in the path of ten presidential candidates of both parties, Dr. Ben Carson published his proposed tax reform plan on January 5, 2016.

Carson proposes a 14.9% flat tax on income. He would protect those with lower incomes. They would pay a very small amount until they have reached 150% of the Federal Poverty Level (FPL). For a family of four, this amount is $36,375. Over that income amount, the 14.9% flat tax will apply.

The tax rate would be the same for personal income, corporate income, partnerships, limited liability companies and other small businesses.

The Carson plan eliminates itemized deductions. There would no longer be deductions for home mortgage interest, gifts to charitable organizations or for state and local tax payments.

He also eliminates several substantial taxes. There would be no tax on capital gains, dividends or interest. The alternative minimum tax (AMT) and the estate tax are also eliminated.

Carson does not plan to add other taxes. In contrast to plans offered by some other candidates, he notes, “Nor does it falsely claim to be a flat tax while still deriving the bulk of its revenues through higher business flat taxes that amount to a European-style value-added tax (VAT).”

A prime benefit of the plan is simplicity. Carson continued, “Through my flat tax plan, we will improve transparency and restore equal treatment in the collection of taxes.”

The Carson plan sets a goal of increasing the economy by 1.6% each year. If this growth is achieved, there will be five million new jobs over a decade and incomes would increase by over 10%.

The nonpartisan Tax Foundation estimates the plan will cost $5.6 trillion in lower tax revenue. If the projected economic growth occurs, there will be increased tax revenue, but the plan still would cost $2.5 trillion over a decade.

Editor’s Note: As a service to our readers, your editor will cover tax proposals by Presidential candidates from both parties.

Charity Gift Reporting Regulations Withdrawn

On January 6, 2016, the IRS withdrew proposed regulations (REG-138344-13) that permitted charities to report donor gifts. Under the proposed regulations, the charities could have submitted “a specific-use information return that would include the donor’s name, address, and taxpayer identification number.” Unlike a contemporaneous written acknowledgement, the donee reporting information return would be sent to the IRS.

The IRS goal was to implement an alternative to the required contemporaneous written acknowledgement under Sec. 170(f)(8) for gifts of $250 or more. Subsection “(D)” of that paragraph permitted the IRS to draft regulations for a charity, rather than a donor, to substantiate those gifts.

The IRS emphasized that it was attempting to minimize the requirements by making this charity report voluntary. However, if the charity were to report gifts, then the IRS notes that it necessarily must have the taxpayer identification number in order to connect the gift with the correct tax return.

The IRS acknowledged that it received a large number of comments on the proposed regulation and stated, “Many comments expressed significant concerns about donee organizations collecting and maintaining taxpayer identification numbers for purposes of these specific-use information returns.”

Recognizing the level of opposition to the plan, the IRS withdrew the proposed regulations.

Editor’s Note: There was a firestorm of opposition to the IRS plan. A representative of the National Council of Nonprofits, David Thompson, stated, “Protection of Social Security Numbers, fear of identity theft, damage to the nonprofit community by scam artists abusing this wrinkle or loophole is what motivated people to express outrage and opposition.” With the withdrawal of the proposed regulations, donors will continue to use the current rules for contemporaneous written acknowledgements for gifts of $250 or more. The acknowledgement must be received by the donor prior to the date he or she files an income tax return or the due date for that return.

Façade Easement Deduction Denied

In David R. Gemperle et ux. v. Commissioner; T.C. Memo. 2016-1; No. 19599-12 (4 Jan 2016) the Tax Court denied a charitable façade easement deduction due to failure to attach the appraisal to the donors’ tax return.

David and Kathryn Gemperle purchased a home in the Lakewood section of Chicago in 1975. The property was built in 1898 and the National Park Service listed the home on the National Register of Historic Places.

Because the home was on a qualified historic property list, in 2007 the taxpayers deeded a façade easement to Landmarks Preservation Council of Illinois, a qualified nonprofit. Appraiser Gwendolyn J. Fiorenzo determined the charitable deduction value as of Nov. 28, 2007 to be $108,000. Her appraisal used a 12% reduction in value rather than a “before and after” comparables method.

Taxpayers filed IRS Form 8283 with their 2007 tax return, but failed to include their appraisal. The IRS denied the charitable deduction, assessed deficiencies for years 2007 and 2008 and assessed penalties.

At trial taxpayers failed to present Fiorenzo as a witness and the court denied permission to admit the appraisal into evidence. The IRS appraiser valued the façade easement at zero to $35,000.

A qualified façade easement must be in perpetuity and protect the entire exterior. Sec. 170(h)(5)(A). The IRS contended that the appraisal was inadequate, it was not attached to the return and the easement was not in perpetuity. Because taxpayers failed the Sec. 170(h)(5)(A) requirement for the appraisal to be attached to the return, the Tax Court denied the deduction.

Finally, the failure to attach the appraisal demonstrated a lack of “reasonable diligence” and the Sec. 6662(a) penalty applied. In addition, because the claimed $108,000 charitable deduction was over 200% of the IRS $35,000 value, the 40% penalty applied. Sec. 6662(h)(1).

Applicable Federal Rate of 2.2% for January—Rev. Rul. 2016-1; 2016-2 IRB 1 (21 Dec 2015)

The IRS has announced the Applicable Federal Rate (AFR) for January of 2016. The AFR under Section 7520 for the month of January will be 2.2%. The rates for December of 2.0% or November 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 2016, 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.