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Wednesday September 23, 2020

Washington News

Washington Hotline

IRS Sends Stimulus Payments

The IRS has commenced distribution of the Coronavirus Aid, Relief, and Economic Security (CARES) Act stimulus checks. Millions of Americans have received direct deposits, but many others are awaiting their payments. With economic downturn due to COVID–19, there are great needs throughout the nation.

The stimulus payments are $1,200 to single filers and $2,400 to married couples filing jointly. There is also a payment of $500 per qualifying child. A couple with four children could receive $4,400. The stimulus payments are phased out for individuals with incomes from $75,000 to $99,000 and married couples with incomes from $150,000 to $198,000.

Direct deposits will continue to be made to the estimated 80 million Americans who filed electronic tax returns or receive Social Security checks through bank direct deposits. In May, the IRS will issue paper checks for all other qualified recipients. Distribution of the paper checks may require four to ten weeks.

The IRS website has a new tool to track your stimulus check. You can use the "Get My Payment" tool on IRS.gov to track your stimulus check.

Government officials urge consumers to be on guard for scammers. With billions of federal dollars being sent to millions of Americans, scammers will be attempting to steal stimulus checks.

North Carolina Attorney General Joshua Stein stated, "With 100% certainty, I know when the checks get mailed, the scammers will come to try to steal your money. People just need to be careful and skeptical."

A common scam is "spoofing" over the phone. A scammer calls individuals on their cell phones and claims to be from their bank. The Caller ID phone number may even appear to be from the bank. The scammer explains that he or she is helping to expedite distribution of the victim's stimulus check. In order to promptly receive the check, the victim is asked to state his or her bank debit card number, the expiration date and the three-digit security code. The scammer then uses this data to steal funds from the victim's bank account, including the stimulus check.

Lori Hodges is Vice President of North America Risk at Visa. She stated, "Your bank or credit union is not going to call and ask for personal pieces of information. They already have it. When you call them, they authenticate you."

IRS Commissioner Chuck Rettig also warned individuals to watch out for scams. He stated, "The IRS is not going to call you asking to verify or provide your financial information so you can get an economic impact payment or your refund faster."

Editor's Note: With millions of unemployed Americans, the stimulus checks are a welcome and immediate relief. Even those Americans who have savings and other assets will appreciate their stimulus check. Some loyal donors who have good reserves may decide to help others at this important time by giving their stimulus check to a favorite charity.

Conservation Easement Deduction Denied Due to Retained Rights

In Hoffman Properties II LP et al. v. Commissioner; No. 19-1831 (6th Cir. 2020), the Sixth Circuit affirmed a Tax Court decision to deny a conservation easement charitable deduction due to a retained right to modify the fašade or airspace over the building.

Hoffman Properties II LP (HP) owned the historic Tremaine Building in Cleveland, Ohio. It granted an easement to the American Association of Historic Preservation (AAHP). HP promised not to alter the fašade or use the airspace over the building. However, it could alter the fašade or use the airspace if it gave notice to AAHP and the nonprofit did not object within 45 days.

HP obtained an appraisal and claimed a $15 million charitable deduction. The IRS denied the deduction and the Tax Court held that the right to modify the conservation easement violated the "enforceable in perpetuity" requirement of Sec. 170(h)(5)(A).

The Sixth Circuit reviewed the case and determined the key issue was the retained power by HP to change the easement terms. HP held the right to "alter, reconstruct, or change the appearance of the fašade... contrary to the Secretary's Standards or to alter or change the appearance of the Air Space in a manner contrary to the Secretary's Standards."

If HP desired to modify the easement, it was required to give notice to AAHP and the nonprofit had 45 days to object. The agreement stated that AAHP's "failure... to act within forty-five (45) days of receipt of a proposed change shall be deemed to constitute approval and to permit Hoffman to undertake the proposed activity."

Because the deed gave HP a substantial right to change the terms within 45 days of giving notice, it failed the "perpetuity" requirement. In addition, the permitted changes were extremely broad. HP could "alter, reconstruct, or change" the fašade in a substantial manner.

HP claimed the deed met the perpetuity requirement of Sec. 170(h)(5)(A) because the restrictions were part of the agreement and will always apply. The Sixth Circuit explained that perpetuity is not a requirement for the document, but for the actual easement on the property.

In addition, a court-approved 45-day limit was potentially modifiable for future conservation easements with other property. The Court reasoned, "If a 45-day restriction satisfies the 'perpetuity' requirement, what about others? Could Hoffman have required AAHP to respond to a requested change within a week? Or a day? Or even an hour? Rather than to draw lines — where none exist — we will stick with the statutory text. Forever really means forever."

While some modifications have been permitted in conservation easement deeds, the Sixth Circuit explained that the 45-day requirement was excessive. The 45-day requirement "divests the organization of the power to enforce those protections if it fails to act within a limited window of time. Nonprofits might hesitate before they abandon a donation that they have a legal duty to protect."

Therefore, the Tax Court decision to deny the deduction was affirmed.

Editor's Note: The IRS continues to deny deductions for partnerships that make gifts of conservation easements. The IRS and the courts are carefully examining the deeds, appraisals and other substantiation documents for errors. Counsel must exercise great care to make certain that the appropriate substantiation materials and procedures are followed.

Eye Wear Gift Deduction Denied

In Roderick M. Campbell et ux. v. Commissioner; No. 30224-12; T.C. Memo. 2020-41 (2020), the Tax Court denied a deduction for a gift of 3,432 eyeglass frames. The gift deduction failed due to an improper appraisal and the failure to receive a complete contemporaneous written acknowledgment.

Taxpayers Roderick and Sandra Campbell were informed about a gift opportunity by their CPA, Victor Kawana. ZD Products, Inc. (ZDP) acquired 170,000 designer eyeglass frames and was willing to sell lots of 3,432 frames for $50,000. After the purchasers held the frames for more than a year, the purchasers would make a donation of those frames to Lions in Sight, a Section 501(c)(3) organization, and claim a related use deduction at fair market value. ZDP obtained an appraisal of the 170,000 frames and claimed that the gift value for the 3,432 frames would be $225,322.

The Campbells bought 3,432 frames for $50,000 on December 22, 2006. They held the frames for over one year and donated them to Lions in Sight on December 26, 2007. Based upon an appraisal by Marshall and Stevens, Inc., CPA Kawana reported a $225,322 deduction for 2007. Because the Campbells had no income in 2007, the carryforward charitable deduction was reported in 2008.

The IRS audited and denied the deduction for failure to obtain a qualified appraisal and failure to receive a proper contemporaneous written acknowledgment. The IRS also assessed an accuracy–related penalty.

The Tax Court noted a property gift over $5,000 requires a qualified appraisal and a gift at or over $250 requires a contemporaneous written acknowledgment. Reg. 1.170A–13(b)(2). Reg. 1.170A–13(f)(1).

An appraisal of the 170,000 eyeglass frames was completed by Marshall and Stevens, Inc. Because the value of the 170,000 frames varied, the 3,432 frames sold to the Campbells for $50,000 could have a different cumulative value than the 170,000 frames acquired by ZDP. Therefore, the appraisal failed to comply with Reg. 1.170A–13(b)(2). A qualified appraisal must be of the specific donated property. The Court noted, "The appraised property must be the same property that was donated and that gave rise to the claim to deduction."

The appraisal of the entire lot of 170,000 frames fails to correctly describe the value of the 3,432 donated frames. The appraisal was, not a "description of the property in sufficient detail for a person who is not generally familiar with the type of property to ascertain that the property that was appraised is the property that was contributed." Reg. 1.170A–13(e)(3)(ii)(A).

The contemporaneous written acknowledgment from Lions in Sight also failed to state "no goods or services were provided" in exchange for the gift. This is a mandatory requirement. The taxpayer claimed substantial compliance. However, the Sixth Circuit noted, "a taxpayer cannot be excused from strict compliance where the taxpayer fails to meet each essential requirement of Section 170 or a substantive requirement of the regulations thereunder."

The deduction was denied because the appraisal was not of the donated property and the contemporaneous written acknowledgment failed to show no goods or services were provided. Due to a procedural failure by the IRS, the accuracy–related penalty was not valid.

Editor's Note: This was a classic gift-investment promotion. The donor buys the assets, holds it for one year and claims a charitable deduction 4.5 times the initial investment. These charitable tax shelters have a high failure rate.

Applicable Federal Rate of 0.8% for May -- Rev. Rul. 2020-11; 2020-19 IRB 1 (17 Apr 2020)

The IRS has announced the Applicable Federal Rate (AFR) for May of 2020. The AFR under Section 7520 for the month of May is 0.8%. The rates for April of 1.2% or March of 1.8% 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 2020, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return.

Published April 17, 2020

Previous Articles

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Coronavirus Rebate Checks Proposed

Second Coronavirus Relief Bill