Both President and Mrs. Obama and Vice President and Mrs. Biden have released their 2011 tax returns.

President and Mrs. Obama received income from his salary and book royalties.  They deducted $49,000 from book royalties for a simplified employee pension contribution, leaving them with an adjusted gross income of $789,674.

The President and Mrs. Obama itemized deductions and their charitable gifts totaled $172,130.  This is 21.8% of their adjusted gross income.

Their largest gift was $117,130 from book royalties to the Fisher House Foundation.  This charity assists children of soldiers killed or wounded in Iraq or Afghanistan.  Other gifts to the 40 listed charities included transfers to the Red Cross, the Boys and Girls Club, Habitat for Humanity, Sidwell Friends School and the United Negro College Fund.

Vice President and Mrs. Biden received both salary and a pension.  Their adjusted gross income was $379,035.  They also itemized deductions and reported charitable gifts of $5,540 or 1.5% of their adjusted gross income.

The 16 charities that were listed included the Diocese of Wilmington, Delaware, the Northern Virginia Community College Alumni Scholarship Fund and the World Food Program, USA.  Mrs. Biden is a member of the faculty at the Northern Virginia Community College.

IRS FAQ on Revocation and Reinstatement

Thousands of smaller charitable organizations have had their exempt status revoked for failure to file IRS Form 990-N.  Each charitable organization is required to file on the 15th day of the fifth month after the close of their fiscal or calendar year.  The filing may be Form 990, Form 990-EZ or for private foundations, Form 990-PF.  Charities with annual receipts of $50,000 or less, are permitted to file Form 990-N, the ePostcard method authorized by Congress and the IRS.

However, thousands of exempt organizations have not filed Form 990-N and failure to do so for three consecutive years results in automatic revocation of exempt status.

As a result of a flurry of questions by board members and staff of small charitable organizations, the IRS has posted a Frequently Asked Questions (FAQ) document on www.irs.gov.

The document is titled "Automatic Exemption Revocation for Non-Filing; Frequently Asked Questions."  It covers four main topics.

1.  Automatic Revocation

Charities that have not filed a required Form 990-N for three consecutive years have had their exemption automatically revoked.  There are two exceptions.  Churches and integrated auxiliaries of churches are not required to file Form 990.  If an organization that is required to file can demonstrate that it has complied during one of the past three years, it should contact the IRS and provide proof of that filing.

2.  Effect of Revocation

If an organization has lost exempt status and is a corporation, it must file Form 1120, U.S. Corporation Income Tax Return.  This is due the 15th day of the third month after the end of a tax year, or March 15 for a calendar-year organization.  Alternatively, a trust is required to file IRS Form 1041, U.S. Income Tax Return for Estates and Trusts.  It is due by the 15th day of the fourth month, or April 15 for calendar-year organizations.

An organization with revoked exempt status is no longer a Sec. 501(c)(3) entity qualified to receive deductible contributions.  It will not be included in Publication 78, Cumulative List of Organizations Described in Section 170(c) of the Internal Revenue Code of 1986.

Finally the organization will be liable for any excise tax, income tax or penalties that were applicable as of the date of revocation.

3.  Reinstatement

After your exempt status has been revoked, it will be necessary to apply for reinstatement by filing IRS Form 1023.  The appropriate user fee must be included with the application.  For the refiling, the organization must use the same employer identification number (EIN) that applied to the initial exempt status.

4. After Reinstatement as a Tax Exempt Organization

Following reinstatement as a tax exempt organization, the charity should make certain to file the appropriate IRS Form 990.  If it is a smaller organization with annual receipts of $50,000 or less, it may use Form 990-N, the ePostcard.  Otherwise, it should file Form 990-EZ or the full Form 990 by May 15 each year (for calendar year organizations).

Expanded Program-Related Investments for Private Foundations

On April 18, 2012, the IRS issued REG-144267-11 to expand the use of program-related investments for private foundations.  The proposed regulations are designed to enable private foundations to comply with the Sec. 4944(a) requirements that a private foundation not make a "jeopardizing investment."  Previous regulations under that section discuss program investments that are permitted to assist economically disadvantaged individuals and deteriorated urban areas.  The expanded examples discuss activities in a foreign country, equity investments with potential high rates of return and credit enhancement arrangements.  These investments may be within the Reg. 53.4944-1(a)(2) "ordinary business care and prudence" standard for private foundations.

There are several specific examples that will be helpful to private foundations.  First, a private foundation could purchase shares of stock in a corporation that is developing a vaccine for poor people.  If this particular vaccine could improve healthcare in a manner that "significantly furthers" the exempt purpose of the private foundation, the investment would be permitted.

A second option could involve a below-market-rate loan.  If a public charity exists to support the arts, a low interest loan for new exhibition space could be a program-related investment for a private foundation.

Third, it may be helpful for a private foundation to provide funds for a loan or guarantee a loan.  For example, a child care organization may desire funds to construct a center to serve the needs of low-income persons.  A private foundation could transfer funds to a bank that are then loaned to the child care organization.  Alternatively, it could sign a guarantee agreement with the bank.  Both are permitted if there is a "significant advancement" of the exempt purposes of the private foundation through the actions of the charitable organization.

A fourth option could be an investment in a related business.  A private foundation that has an exempt purpose to improve the environment may purchase stock in a business that constructs recycling centers.  Even if there is a significant potential increase in value of the stock, a substantially related enterprise could be a permissible investment.

The Tax Foundation, a nonpartisan research organization, monitors the taxes paid by Americans each year.  On April 11, 2012, they released their report for the past year.  As Americans prepare to file before the April 17 deadline this year, many may be interested in the impact of taxes on their daily lives.

In tax year 2010, the total federal income taxes paid were $945 billion.  143 million families filed tax returns.  85 million paid taxes and 58 million were not required to make tax payments.  The taxpayers with more modest incomes received refundable credits of $105 billion.

The following table shows the income, effective tax rates and percent of the total tax paid by three groups of taxpayers.

Effective Tax Rates and Payments

Income	Effective Tax Rate	Percent of Taxes Paid
$0 - $50,000	3.5%	6.7%
$50,000 - $250,000	14.1%	47.6%
$250,000+	23.4%	45.7%

About one-third of taxpayers chose to itemize deductions.  Twenty-five percent of taxpayers deducted mortgage interest and saved approximately $381 billion.  Charitable gifts were reported by 27% of taxpayers.  These gifts produced a tax savings of $158 billion.

The tax code continues to grow in size and complexity.  It now has expanded to 3.8 million words.  For the past decade, there has been an average of one change to the tax code every day.  What is the time required to complete taxes this year?  Over seven billion hours will be devoted to complying with the tax code.

Editor's Note: There is great debate on many aspects of tax law.  However, there is a general agreement by Americans from all walks of life that a tax code with 3.8 million words is too long and too complicated.  When Congress turns its efforts toward major tax reform in 2013, it hopefully will be able to reduce the size and complexity.  By working diligently, perhaps Congress might be able to reduce the Internal Revenue Code to only 3.7 million words.

IRS Tweets as Some Taxpayers Extend

As the April 17 filing date approaches, taxpayers can receive the latest updates from the IRS through Twitter.  These Twitter notes are available on http://twitter.com/IRSnews.   If you have an Apple or Android smartphone, you may choose to load the free IRS2Go app.  It includes the handy "Where's My Refund" function and also permits you to follow the IRS on Twitter.

Professionals may choose to follow specific tax advice for CPAs, attorneys and other tax preparers on http://twitter.com/IRStaxpros.

Many of the tweets offer explanations on how to pay taxes and some of the most common tax deductions and rules.

The IRS also has its own YouTube channel.  The official IRS YouTube channel includes five separate sections.  These cover "Tax Tips, Do Your Taxes for Free, Small Business, IRS Tax Pros and Uploaded Videos."

If you need to extend, you may watch the YouTube video on filing IRS Form 4868.  Filing an extension requires you to estimate and pay your taxes, but you may delay filing until October 15.  The payment can be made through the Electronic Federal Tax Payment System (EFTPS) or by credit or debit card.

A few taxpayers are given special extensions.  Citizens outside the U.S. and military on duty outside America may file and pay on June 15.  They will need to pay interest from April 17 through June 15 on those payments.  Military serving in combat zones in Iraq or Afghanistan have 180 days after departing the combat zone to file and pay tax.  Finally, several Midwestern areas affected by the tornadoes and other natural disasters are permitted to file and pay on May 31.

Final Regulations on Charitable Lead Trust Income

In TD 9582, the Department of the Treasury published final regulations for the rules on charitable trust income distributions.

Generally, charitable lead trusts and other charitable trusts may make distributions of income to qualified exempt charities and are permitted charitable deductions under Sec. 642(c).  Some counsel have used ordering provisions for distribution of income to charities through charitable lead trusts in an effort to reduce the potential tax paid by the family members who eventually receive distribution of trust principal.

In Reg-101258-08, Treasury published proposed regulations on June 18, 2008 that indicated this ordering would not be respected for lead trusts because there was not "economic effect independent of income tax consequences."  All distributions would follow the general provision under Subchapter J, Sec. 652(b) that the payments must come pro rata from all of the various classes of income.

Commentators observed that because there was an impact on the value of the trust remainder for the family beneficiaries, the IRS might consider this to be an independent economic effect.  Treasury rejected that argument, stating that the attempt to minimize liabilities of the remainder beneficiaries was not a present economic effect.  The annuity payment from a charitable lead annuity trust must be paid to the charity regardless of the ordering methods specified in the trust document.

A second commentator suggested that there is a public policy to encourage charitable giving and the ordering should be respected for these policy reasons.  However, Treasury determined that this general policy does not permit creation of a special rule for charitable lead trusts.

Therefore, Reg. 1.642 (c)-3(b)(2) states, "In the absence of such specific provisions in the governing instrument or in local law, the amount to which Section 642(c) applies is deemed to consist of the same proportion of each class of the items of the income or of the estate or trust as the total of each class bears to the total of all classes."

An example states that a lead trust may include a provision that deems distributions to charity "to come first from ordinary income, second from short-term capital gain, third from 50% of the unrelated business income, fourth from long-term capital gain, fifth from the balance of unrelated business taxable, sixth from tax-exempt income and seventh from principal."  The provision will not be respected under the regulation and all distributions will be "of the same proportion of each class of the items of income of the trust."

In a second example, a trust pays all income to charity with remainder to a family member.  This allocation is permitted because the amount of income has direct economic effect.  It is not a fixed unitrust or annuity amount and therefore an allocation of all income is permitted.

Applicable Federal Rate of 1.4% for April – Rev. Rul. 2012-11; 2012-14 IRB 1 (16 Mar 2012)

The IRS has announced the Applicable Federal Rate (AFR) for April of 2012.  The AFR under Section 7520 for the month of April will be 1.4%.  The rates for March of 1.4% or February of 1.4% 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 2012, pooled income funds in existence less than three tax years must use a 1.8% deemed rate of return. Federal rates are available by clicking here.

Each year, The Tax Foundation publishes the "Tax Freedom Day."   For this year, Tax Freedom Day will be on April 17.

Based on averages of incomes and taxes, Americans will work 107 days from January 1 to April 17 to pay the combined 29.2% tax bill for federal, state and local taxes.  If the budget deficit amount were paid for through taxes, Tax Freedom Day would be extended to May 14, an additional 27 days.

Tax Freedom Day has typically arrived earlier during the past five years.  The latest Tax Freedom Day was May 1, 2000, when the total tax revenue was 33%.  Generally, because of the downturn in the economy and reductions in the stimulus bill enacted in 2008, Tax Freedom Day has come earlier during the past four years.

Several states collect lower taxes and have an earlier Tax Freedom Day.  These states' Tax Freedom Day include Tennessee on March 31, Louisiana and Mississippi on April 1 and South Carolina on April 3.

The highest tax state is Connecticut, with Tax Freedom Day on May 5.  However, New Jersey and New York both celebrate Tax Freedom Day on May 1.

The Tax Foundation also estimates the number of days that you work to pay taxes in these separate categories.

Tax Category	Days
Federal Income	32
State/Local Income	8
Fed. Social Insurance	23
State Social Insurance	1
Fed. Sales	2
State Sales	12
Property Taxes	12
Fed. Corporation	9
Other Fed.	3
State Corporation	1
Other State	4

Editor's Note: The Tax Foundation publishes these calculations each year.  They are based on overall tax payment averages.  Other publications have observed that the dates would change if the numbers were calculated based upon taxpayer income tiers.  However, no other publication calculates Tax Freedom Days for low-income, mid income and high-income taxpayers.

IRS Help for Last-Minute Tax Filing

The IRS published information letters this week to assist taxpayers who are filing their taxes before the April 17, 2012 deadline.

The IRS YouTube channel is the fourth most popular government channel.  It receives about 1 million views per year.  Taxpayers may find several YouTube programs helpful.  They are available in English, Spanish and American Sign Language.

IRS YouTube Programs

• Need more time to file your tax return?
• Last-Minute Tax Tips
• IRS Tax Payment Options
• Owe Taxes but can't pay?
• When will I get my refund?

The IRS YouTube videos are also available on iPhone or Android through the IRS2Go application that may be downloaded through the App Store or Android Marketplace.

For individuals who need extra time to file, it is possible to request an extension with Form 4868 (either electronically or by paper).  This extension filing requires that you estimate and pay the correct tax, but your time to file is extended to October 15th.

If you do not pay the correct tax, there is interest of 3% per year and a late penalty of 0.5% per month on the balance.

There are three exceptions to the filing date.  If you live and work abroad or are on military duty outside the U.S., you may pay on April 17 and file by June 15.  Military members serving in Iraq or Afghanistan may file 180 days after departing the combat zone.  Finally, several federal disaster areas in the Midwest are permitted to file and pay on May 31.

Some taxpayers may need more time to pay.  If your tax, penalties and interest are $50,000 or less, you may request a payment agreement from the IRS with Form 9465-FS.  If you are unemployed or self-employed with a 25% reduction in income for 2011, you may file Form 1127-A to request permission to pay by October 15, 2012.  You still must pay the tax plus interest at that time.  Finally, if you have a substantial overdue tax obligation, you may be able to negotiate an "offer-in-compromise" with the IRS.  This will require the IRS to review all of your income and assets to make a determination as to the correct tax payment.

Mortgaged Land – Conservation Easement Deduction Denied

In Ramona L. Mitchell v. Commissioner; 138 T.C. No. 16; No. 10891-10 (3 Apr 2012), the Tax Court denied a conservation easement charitable deduction due to a mortgage on the property with no subordination agreement.

Charles and Ramona Mitchell bought 105 acres in the Mancos Valley of Southern Colorado in 1998.  Their son Blake and his wife Melody built a home on that parcel in 2000.  During 2000, Charles and Ramona purchased the remaining 351 acres in the parcel from owner Clyde Sheek.  The property was purchased on a land contract with $83,000 down and 10 payments of $60,000 per year plus interest.

The Mitchells then owned a full 456 acre parcel adjacent to Mesa Verde National Park.  Charles and Ramona also built a home on the ranch.

In December of 2002, they transferred the property to the C.L. Mitchell Properties, L.L.L.P., a family limited partnership (MFLP).  On December 31, 2003, MFLP deeded a conservation easement on the south 180 acres to the Montezuma Land Conservancy.  On December 22, 2005, Clyde Sheek signed a subordination agreement.  In 2006, Charles passed away and Ramona gained sole title to the property.

Following the 2003 MFLP deed for the conservation easement, the Mitchells hired William B. Love Appraisals, Inc. to value that easement.  Love placed a market value on the conservation easement of $504,000.  The Mitchells claimed that deduction on their 2003 and 2004 tax returns.

The IRS issued a notice of deficiency on February 23, 2010 and disallowed the 2003 deduction.  Alternatively, the IRS determined that the value of the deduction should be reduced to $100,100.

The Court noted that there are three requirements for a conservation easement charitable deduction.  The qualified real property must be given to a qualified organization exclusively for conservation purposes.  The IRS agreed that the property was a qualified interest and that Montezuma Land Conservancy was a qualified charity.  It disputed that the gift was exclusively for charitable purposes.

Sec. 170(h)(5)(a) indicates that the deduction is only qualified if the property is "protected in perpetuity."  Reg. 1.170A-14(g)(2) states that if there is a mortgage on the property, the mortgagee must agree to "subordinate its rights in the property to the right of the" charitable conservation organization.  Subparagraph (g)(3) of that section also creates a "so remote as to be negligible" test for easements.

The IRS contended that the subordination agreement on December 22, 2005 did not save the charitable deduction for the deed on December 31, 2003.

The taxpayer claimed that the subordination agreement was sufficient because all of the payments had been made in the intervening period.  Second, the taxpayer observed that the "so remote as to be negligible" test was met because there was minimal risk of default.

The court determined that the subsequent subordination agreement was not sufficient to qualify for a charitable deduction.  Because there could have been a default and failure of the conservation easement interest during the nearly two years from the date of the deed to the subordination agreement, the easement did not qualify.  A subordination agreement must be effective as of the date of the conservation easement deed.

Second, the Court determined that the "so remote as to be negligible" standard did not apply to the subordination agreement.  Because a conservation easement frequently involves potential issues with respect to property and the possible termination of existence of the conservation organization, the statute drafters needed to create a standard that did not require certainty with respect to all issues.  However, the "so remote as to be negligible" standard is not to be applied to the subordination agreement.  Therefore, the conservation easement charitable deduction fails.

Finally, because Ramona Mitchell acted with reasonable cause and in good faith, the Sec. 6662(a) penalty is not applicable.

No Attorney Fees to Estate

In Estate of Antonio J. Palumbo et al. v. United States; No. 11-2371 (2 Apr 2012), the 3rd Circuit of the United States Court of Appeals determined that an estate with remainder to be transferred entirely to a charitable trust did not qualify for recovery of attorneys' fees.

Decedent Antonio Palumbo created a charitable trust in 1974.  His various wills transferred the residue of his estate to the charitable trust, with the exception of the last will executed on July 6, 1999.  That document failed to include a provision for distribution of the residue to the charitable trust.  It subsequently was determined that the omission of the residuary provision to the charitable trust was a scrivener's error.  Following the death of Palumbo in 2002, his son contested the will and claimed to be the beneficiary of the estate residue.  The son and the executor reached a settlement for payment of $5.6 million to the son.  This amount was exclusive of costs and taxes, which were to be paid from the residue.  The balance of the residue was transferred to the charitable trust.

The IRS contested the charitable deduction for the $11,721,141 transferred to the charitable trust because it was subject to the settlement.  Following litigation in the United States District Court for the Western District of Pennsylvania, the estate charitable deduction was deemed qualified under Sec. 2055.  However, the district court judge ruled that the IRS position was "substantially justified" and did not grant attorneys' fees to the estate.  The estate appealed.

The 3rd Circuit noted that the payment of fees to the prevailing party under Sec. 7430(c)(4) is permitted when the taxpayer has substantially prevailed and the estate does not meet the net worth restrictions of the Equal Access to Justice Act (EAJA).  The applicable limit for net worth under the combined provisions is $2 million, and the Palumbo estate clearly exceeded that amount.

However, the estate claimed that since the charitable trust was the sole recipient of the estate and would bear the cost of attorney's fees, the exception to the net worth requirements for charitable trusts should apply.

The Court noted that it is bound by the plain language of the statute.  In this case, the estate was legally responsible for payment of the taxes.  In addition, the agreement with the Palumbo son indicated that "the residuary estate will be solely responsible for payment of all inheritance in estate taxes."

While the charitable trust would suffer an "indirect pecuniary consequence" due to payment of fees from the estate, it is not the real party in interest.  There is no language in the statute that permits the court to "look through" the will to the charitable trust as final beneficiary.  While the charitable trust will be impacted, it is not legally responsible.  Therefore, the attorney fee recovery was denied.

Applicable Federal Rate of 1.4% for April – Rev. Rul. 2012-11; 2012-14 IRB 1 (16 Mar 2012)

The IRS has announced the Applicable Federal Rate (AFR) for April of 2012.  The AFR under Section 7520 for the month of April will be 1.4%.  The rates for March of 1.4% or February of 1.4% 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 2012, pooled income funds in existence less than three tax years must use a 1.8% deemed rate of return. Federal rates are available by clicking here.