House and Senate Tax Extenders Vote
House Ways and Means Chairman Dave Camp (R-MI) has chosen a distinctly different path. Each of the six tax extenders passed by the House Committee has been a separate bill. The first tax extender was a simplified version of the research credit and it would be extended permanently. The bill passed in the full House on May 9th by a 274-131 vote.
Cristina Crooks of the National Association of Manufacturers was pleased with the bill and stated, “The alternative simplified credit formula makes it easier for companies of all sizes to use the research and development credit.” Under the new formula, a company would receive a 20% credit for research expenditures that exceed half of their prior three year average amounts.
The House passed the research and development credit with no tax offsets. The Democratic leadership and White House expressed concern about that decision. Minority Leader Nancy Pelosi (D-CA) stated, “Republicans are willing to make permanent changes in the law that would add more than $150 billion to the deficit.” She expressed concern that other provisions have not been passed because they did not include appropriate offsets.
The White House also expressed opposition to the permanent passage of extenders without offsets. In a press release, it stated opposition to passing the bill because it would add $156 billion to the deficit over the next decade. The release stated, “If the President were presented with H.R. 4438, his senior advisors would recommend that he veto the bill.”
Chairman Camp noted that in 2006, 2008 and other years, the research credit was passed without offsets.
Editor’s Note: Following the expected Senate passage of the tax extenders bill, the House will continue to vote on individual bills for a permanent extension of selected tax provisions. The Ways and Means Committee has suggested that they may pass other tax extenders in the future. Chairman Camp appears to be seeking a House-Senate Conference Committee to resolve the differences. He has indicated that he hopes to create three categories of extenders. First, some would be extended permanently. Second, some other extenders (perhaps including the IRA charitable rollover) would be extended for two years as is the case in the Senate bill. Third, some provisions would be allowed to lapse. The major question for donors interested in the 2014 IRA rollover is whether the Conference Committee will be held this summer or in November after the election.
Final 2% “Unbundled Fee” Regulations
In T.D. 9664, Treasury published final regulations on the specifics of unbundled fee deductions for trusts or estates. In the decision Michael J. Knight v Commissioner, 552 U.S. 181 (2008), the Supreme Court determined that fees and costs “commonly or customarily incurred” are subject to the 2% floor for miscellaneous deductions under Sec. 67(a).
The IRS published four notices and proposed regulations in 2007 and in 2011 to provide guidance on this decision. The final regulations generally follow most of the proposed regulation provisions. The general rule is that the commonly or customarily incurred costs will be subject to the 2% floor.
Commentators had suggested that ownership costs should be excluded, but those will be subject to the floor.
The IRS had received suggestions that gift tax returns and other tax preparation costs should be excluded. Most of the tax preparation costs will be included. However, there is a specific list of tax preparation costs that will be excluded.
Investment advisory fees are commonly incurred and subject to the 2% floor.
Commentators had suggested that appraisal fees and other fiduciary expenses should not be included and there are exceptions for some appraisal fees. Valuations at date of death or alternate valuation date are excluded because these are not customarily completed by individuals.
Finally, fiduciaries will be required to unbundle fees and allocate their fee structure according to the regulations. Part of their fees will be excluded from the 2% floor and the balance will be subject to that floor. The final regulations apply to taxable years beginning on or after May 9, 2014.
Conservation Easement Deduction Reduced
In Palmer Ranch Holdings Ltd. et. al. v. Commissioner; T.C. Memo. 2014-79; No. 17017-11 (6 May 2014), the Tax Court reduced a claimed $23,942,500 charitable deduction to $19,955,014. It also determined that there was reasonable cause to not assess an accuracy-related penalty.
Hugh Culverhouse owned 98% of the Palmer Ranch and his corporation, Palmer Ranch Holdings, Inc., owned the balance of the land. Parcel B-10 included 82.19 acres of land near Sarasota, Florida.
In 2003 and 2004, Culverhouse negotiated several agreements for sale of the property to Pulte Homes for development of the land. However, the local board denied the required rezoning and there was no development. On December 19, 2006, Culverhouse deeded a conservation easement to Sarasota County. The easement limited the use of parcel B-10 to various conservation purposes. A major part of the property was made into a public park.
Culverhouse secured the services of appraiser Chad Durrance and a land planning firm WilsonMiller. Based on the land use determination by WilsonMiller that a 360 unit multifamily development could be constructed, Durrance determined the difference in “before and after” valuation of Parcel B-10 to be $23,940,000. This was based on four comparable valuations with property values between $237,200 and $510,600 per acre.
The IRS contested the valuation. IRS Appraiser Bradly Page disagreed with the WilsonMiller determination that 360 units could be built. Based on a substantially smaller level of development, Page determined that the before value was not $25,200,000 as Durrance claimed, but instead with more limited development would be $7,750,000.
The Court systematically reviewed all of the valuation factors. First, the rezoning denial was a 3 to 2 vote and a change of one vote would result in a different decision. Second, there is a bald eagle nest on the eastern part of the parcel. However, a wildlife corridor could be created that would permit development.
Third, the roads in the vicinity were sufficiently close that it is possible there could be rezoning to provide access for development. Fourth, neighborhood opposition existed, but could perhaps be overcome by an appropriate development plan. Fifth, the 1.5% appreciation factor assumed by Durrance was higher than appropriate given the soft real estate market in Florida in 2006. Therefore, the Court reduced that appreciation rate. Based on the reduced appreciation factor, the Court determined that the before and after difference in value was $19,955,014.
Finally, the difference in value was a 20% valuation overstatement. Under Sec. 6664(c), there is a reasonable cause defense for a 20% overstatement. Because Culverhouse obtained advice from qualified counsel and an appropriately certified appraiser, there was no penalty.
Applicable Federal Rate of 2.4% for May — Rev. Rul. 2014-13: 2014-19 IRB 1 (21 Apr 2014)
The IRS has announced the Applicable Federal Rate (AFR) for May of 2014. The AFR under Section 7520 for the month of May will be 2.4%. The rates for April of 2.2% or March of 2.2% 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 2014, pooled income funds in existence less than three tax years must use a 1.4% deemed rate of return. Federal rates are available by clicking here.