At the close of this year, IRS Commissioner John Koskinen and National Taxpayer Advocate Nina Olson both outlined their visions for the future of the IRS.
Koskinen has experience as a manager of private and public turnarounds. He has sought to change the IRS to make it function like a large financial services company. In his view, this change will be beneficial, although it will inevitably require a much higher focus on online services.
Nina Olson has been the Taxpayer Advocate for the past 15 years. She warns that Koskinen's concept is a significant change in how the IRS functions. There will be less focus on personal service for taxpayers with the change to a preference for online services.
Olson stated, "I view the Future State vison - which the IRS says is a response to the funding, as well as something they should be doing anyway because they are trying to move into the 21st century ... as a radical restructuring of the relationship between the taxpayer and the tax system. It has such import that if we don't start talking about it now, by the time it is actually implemented it will be too late."
The IRS responded to Olson's statement by noting, "The National Taxpayer Advocate's Report does not paint a full picture of these evolving Future State efforts. The Advocate seems to want the IRS to continue to do business the way we did ten years ago. Our Future State work is fueled by taxpayer demand for new and different options for getting services, including expanding secure online options."
This transition by the IRS will require some specific changes. Commissioner Koskinen noted, "We have to make sure that we are not locked in and are not able to adjust to either additional thoughts from employees or stakeholders or changes in the way the digital world operates."
- Education - The tax system is complex. Many taxpayers need personal IRS advice. It may require taxpayer education to use an automated system to obtain tax advice.
- Human Support - Even if the IRS improves its computers with "natural language" capability to answer questions, there are many taxpayers who still will need personal help.
- MySocialSecurity - The Social Security Administration experience suggests some caution. It attempted to increase the security on the "MySocialSecurity" accounts by requiring a text to be sent to your cell phone. Over 40% of seniors could not use this system and it required major staff efforts by the Social Security Administration to correct the situation.
House Ways and Means Chairman Kevin Brady (R-TX) indicates that the Republicans are planning to "redesign" the IRS during 2017.
There will be a major effort by Chairman Brady to pass tax reform by the middle of 2017. Comprehensive tax reform will be a huge undertaking. It seems likely that this change in the structure of the IRS will be delayed until tax reform is completed. Nevertheless, the need for the IRS to offer good services more efficiently will be likely to force more and more future activity online.
Praise for Syndicated Conservation Easements as Listed Transactions
In Notice 2017-10, 2017-4 IRB 1, the IRS required many syndicated conservation easements to be reported as listed transactions.
Some promoters have created LLC's or partnerships to acquire land and create conservation easements. The promoters then offer units to investors. The promotional materials promise a charitable deduction of 2 to 2.5 times the initial investment. The claimed deduction is achieved by a very high valuation of the potential use of the real estate and a large conservation easement deduction. The IRS indicates that it will challenge this perceived overvaluation and excessive charitable deduction.
While the IRS action is likely to reduce the number of syndicated conservation easements, the action was supported by the Land Trust Alliance (LTA), a major conservation organization.
LTA President Andrew Bowman published a statement in support of the IRS action and noted, "We have been hoping that this guidance would zero in on transactions that disguise a profitable tax shelter as a charitable donation for conservation, and it appears they have done just that. By making these arrangements a listed transaction, the IRS has taken an important first step in stopping donations structured to give donors back more than they give."
Conservation easements have been favored in prior years. There now is a permanent rule that permits most easements to benefit from a 50% of AGI limit (rather than 30%) and a 15-year (rather than a 5-year) carryforward. This and other charitable deductions must be protected from abuse. Reasonable regulations to preclude abuse is generally beneficial for philanthropy. Other reasonable regulations passed in response to abuses are the requirements for appraisals for gifts of real property valued at $5,000 or more and the requirements for qualified appraisers. Because charitable deductions will be under review if there is major tax reform in 2017, preventing abuse is very beneficial for philanthropy because it reduces the political pressure to eliminate deductions.
$3.7 Million Conservation Easement Deduction Approved
In Phyllis E. McGrady et vir v. Commissioner;
T.C. Memo. 2016-233; Nos. 20602-12, 11142-13 (21 Dec 2016), the Tax Court reviewed a complex real estate transaction and approved a total charitable deduction of $3,654,792. The deduction was for an outright gift of Parcel A (20 acres) and a conservation easement on Parcel B (25 acres).
Phillis E. McGrady and Christopher R. Antoniacci acquired 25 acres (Parcel B) in Bucks County, PA in 1995. The property included a 17th century residence and various other structures. In 2000, they purchased from Edward and Sarah Rorer an additional 20 acre parcel that was adjacent to their property. The Rorers retained 137 adjacent acres. All property was zoned "CR-1" for single-family homes with a minimum lot size of one acre. There was also an informal agreement that permitted taxpayers to use a gravel road for access to their property.
There were complex negotiations between the taxpayers, the Rorers, the Upper Makefield Township (Township) and the Heritage Conservancy (Heritage), a qualified nonprofit organization. The negotiations centered around the township acquiring a conservation easement that restricted the development to larger lots. After several years of negotiations, the complex transaction was completed. As part of the transaction, taxpayers transferred a fee simple deed to Heritage for Parcel A and a conservation easement that limited development on Parcel B. They also made a $275,000 outright gift to Heritage to cover transaction costs.
Taxpayers obtained a qualified appraisal from Vincent Quinn, MAI. In his opinion, the deduction for the combined gift on Parcel A and conservation easement on Parcel B was $4.7 million. Taxpayers claimed 30%-type charitable deductions for this amount over years 2007-2011.
The IRS denied the deduction under two theories. First, it claimed there was a "quid pro quo" because the taxpayers desired to benefit from living on land with low density development. Second, because taxpayers negotiated with the Township for several years, the IRS maintained they had too much control over the process.
The IRS also obtained a valuation by appraiser Michael J. Acquaro-Mignogna. The IRS appraiser determined that the gift value was $920,000 and that the easement value had a range of $190,000 to $390,000.
The court noted Parcel A was a fee simple gift and there was no reservation of any interest. Parcel B was a conservation easement deeded in perpetuity. Taxpayers obtained the Sec. 170(f)(8) contemporaneous written acknowledgement and filed the appropriate IRS Form 8283 signed by a qualified appraiser. Because the gift was without any reservations, the deductions are valid. While there were extensive negotiations over a period of years, with a complex real estate transaction involving multiple parties, this is very likely to be the case. There was no evidence that the taxpayers controlled the negotiations.
With respect to valuations, the IRS appraiser used a raw land approach while the taxpayer appraiser assumed multiple development lots. The court acknowledged that rezoning could take three years, but it was likely to be approved. Therefore the lot valuation method was accepted, resulting in a charitable deduction of $2,191,896.
With respect to Parcel B, the IRS appraiser decided that the value should be determined as a single estate. The court held that the highest and best use was for development with multiple lots. The "before and after" determination resulted in a charitable deduction of $1,491,896.
Finally, the negotiations led to a formal easement and the value of the benefit to the taxpayers was deemed to be $29,000. The net deduction was $3,654,792. Because taxpayers relied in good faith on qualified advisors, there were no penalties.
This is a good case for taxpayers. In any complex real estate transaction, there will be multiple negotiations. The taxpayers followed the appropriate documentation procedures and the gifts were without limitation. The court correctly determined the charitable deductions.
Applicable Federal Rate of 2.4% for January -- Rev. Rul. 2017-2; 2017-3 IRB 1 (19 Dec 2016)
The IRS has announced the Applicable Federal Rate (AFR) for January of 2017. The AFR under Section 7520 for the month of January will be 2.4%. The rates for December of 1.8% or November of 1.6% 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