Washington Hotline


Tax Quote of the Week

“[A]ll governments must have a regard not only for what the people are able to bear, but what they are willing to pay, and the manner in which they are willing to pay without being provoked to a rebellion.”

– Henry Fox

Fiscal Commission Faces Massive Deficit

On April 27, 2010, the National Commission on Fiscal Responsibility and Reform held its first meeting. Co-chair Erskine Bowles plans to hold seven meetings and publish a final report on Dec. 1. Separate groups will meet to discuss mandatory spending, discretionary spending and taxes.

Speakers on the first day were President Obama, Chairman of the Federal Reserve Ben Bernanke and former directors of the Congressional Budget Office (CBO) Robert Reischauer and Rudoph Penner. The CBO directors said that the large budget deficits could lead to a severe financial crisis.

Co-chair Bowles warned, “We’re going to have to make really tough choices. And that’s going to involve entitlements, it’s going to involve the military and it’s going to involve discretionary items. And it’s going to involve revenues and we have to face up to that.”

The fiscal commission’s 18 members include six Democrats, six Republicans and six Presidential appointees. During opening remarks, the Democratic members expressed concern about protecting social programs. Republican members observed that there is too much federal spending.

Bowles hopes to facilitate an agreement by 14 of the 18 members for the final report.

The fiscal commission was a joint proposal by Sen. Kent Conrad (D-ND) and Sen. Judd Gregg (R-NH) of the Senate Budget Committee. In his opening remarks, Sen. Conrad stated, “We are headed very quickly for a debt that will be 100% of the gross domestic product of the United States. On the current trend line, CBO tells us we’re going to have a debt that will be 400% of the gross domestic product of the United States. We’ve never had a debt anything like that in the history of the United States and we know we will never get there, because those who are lending us the money to float this boat will never permit it. Already, the Chinese have warned us publicly and privately that they have grave doubts about continuing to lend money to this country.”

Sen. Conrad called the debt a “tsunami” that could cause America to become a “second-tier power.” He hoped that all members would place “everything on the table.”

House Ways and Means Committee Ranking Member Dave Camp (R-MI) highlighted a probable area of conflict by opposing the valued added tax (VAT) suggested by White House Advisor Paul Volcker last week. He stated, “Given a national unemployment rate stuck at almost 10% and the precarious position of American families and employers, it is difficult to imagine asking them to pay – on top of everything else and when they can least afford it – what amounts to a national sales tax on everything they buy – including food, clothing, medicine and housing.”

At a meeting on April 28, 2010, Co-chair Erskine Bowles said that the fiscal commission could educate the American people and encourage them to force “elected officials to actually face up to these big problems.”

IRS Publishes FAQ on Automatic Revocation of Exempt Status

If a nonprofit fails to file an annual Form 990, 990-EZ or 990-PF for three years, it will lose its tax exempt status. To clarify the rules and requirements, the IRS released Frequently Asked Questions (FAQs) on the topic.

With the exception of churches or associations of churches, all nonprofits must file an annual return. Failure to file will result in a termination of exempt status on the filing date of year three. If exempt status is revoked, the nonprofit will be removed from Publication 78.

After losing exempt status for nonfiling, the nonprofit may request a new exemption by filing IRS Form 1023. If the automatic revocation was due to a reasonable cause failure by the nonprofit, the IRS may restore exempt status retroactively.

Mortgage Defeats Façade Deduction

In Gordon Kaufman et ux. v. Commissioner; 134 T.C. No. 9; No. 15997-09 (26 Apr 2010), the Tax Court ruled in a summary judgment that a façade deduction failed due to an existing mortgage on the property.

Rowhouse owners Gordon and Lorna Kaufman lived in a Boston historic district. In 2003 they deeded a façade conservation easement to the National Architectural Trust (NAT). The “before and after” appraisal valued the conservation easement at $220,800. Because the appreciated property deduction was limited to 30% of gross income, they deducted $103,377 in 2003 and $117,423 in 2004.

The IRS denied the deduction and assessed taxes and Sec. 6662(a) penalties.

The Tax Court noted that a conservation easement is an exception to the partial interest rule on charitable deductions. A conservation easement deduction is permitted for gifts of a “qualified real property interest * * * exclusively for conservation purposes.” Sec. 170(h)(1). The interest must be deeded in perpetuity. Reg. 1.170A-14(b)(2).

However, the rowhouse was subject to a mortgage. Under the mortgage terms, the bank had a “prior claim” to the property. If it were destroyed by fire, the proceeds belonged first to the bank. The Kaufman’s maintained that there were sufficient funds to pay both the bank and NAT but the court observed that the easement could not be conditional. Because NAT did not have an unrestricted right to maintain the façade easement, the charitable deduction was not qualified.

With respect to the Sec. 6662(a) penalties for overstatement, the Kaufman’s had relied on their accountant. Even though Mr. Kaufman suggested to NAT in an e-mail that the façade easement may have no value, his reliance on the accountant creates a factual question that negates the possibility of a summary judgment on the penalty issue.

Bonnie Nawara | Director of Estate & Asset Services
National Home Office | American Cancer Society, Inc.
Great Lakes Division, 129 Jefferson SE, Grand Rapids MI 49503 | cancer.org
616.551.4051 | mobile: 616.821.0459 | fax: 616.364.6451
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