Peak IRS Filing Season after Presidents Day Holiday
The two weeks after Presidents Day is usually peak IRS filing season. The IRS reports that the number of tax returns and refunds is down slightly from last year. As of February 7, 2020, the IRS had issued 10.83 million refunds. This is down from the 11.38 million refunds issued at this time last year. The total refunds issued were $21.16 billion, down 4.6% compared with $22.18 billion distributed by February 8, 2019.
However, the average refund was slightly higher. The average refund as of February 7, 2020, was $1,952. This is up from $1,949 at this time last year.
Most tax returns so far have been e-filed. Self–preparers e-filed approximately 17.18 million returns as of February 7. This is up 3.5% compared with last year.
Tax professionals e-filed 10.59 million returns as of February 7, 2020. This number is down 3.7% compared with last year.
In IR-2020-30, the IRS offered tax tips and urged taxpayers to avoid the late February tax rush.
IRS.gov to Track Refunds – The IRS reports that nine out of ten refunds are issued within 21 days. You can use the “Where’s My Refund?” tool on IRS.gov or the IRS2Go app to check your refund status. You also can call the IRS refund hotline at 800–829–1954.
Earned Income Tax Credit (EITC) or the Additional Child Tax Credit (ACTC) – If you qualify for the EITC or ACTC, you also may use the “Where’s My Refund?” tool to track refunds. The EITC and ACTC refunds cannot be issued before February 15. Most of these refunds will be available by the first week of March.
Tax Help or Tax Questions – If you have questions about taxation, there are multiple tools on IRS.gov that will help you. You can use the Interactive Tax Assistant, Tax Topics, Frequently Asked Questions or Tax Trails for quick and useful answers.
Free Tax Software – The IRS Free File program is available for taxpayers with 2019 incomes under $69,000. If you are a taxpayer who qualifies, go to IRS.gov and select a Free File software program to complete your taxes.
Trusted Tax Professional – If you would like help finding a tax professional, visit IRS.gov. There is guidance on how to select a qualified tax professional on IRS.gov/chooseataxpro.
No Basis on Form 8283 – No Charitable Deduction
In Oakhill Woods LLC et al. v. Commissioner; No. 26557-17; T.C. Memo. 2020-24 (2020), the Tax Court determined that omission of the basis on IRS Form 8283 required denial of a $7 million conservation easement charitable deduction.
In 2007, HRH Investments, LLC (HRH) acquired property in Georgia for $1,008,796. The 405 acre tract had an average price of $2,491 per acre. On December 1, 2009, HRH transferred 388 acres to Oakhill Woods LLC (“Oakhill”). On December 7, 2010, Oakhill executed a conservation easement deed on 379 acres to Georgia Land Trust (GLT). GLT is a conservation organization qualified under Section 170(h)(3). Oakhill obtained services from Forever Forests, LLC to complete the transaction.
The conservation easement deed preserved the property with “significant open space, forest, agricultural, watershed, wildlife and plant habitat features.” Oakhill filed IRS Form 1065 for 2010 and reported a conservation easement charitable deduction of $7,949,000. This was approximately $20,975 per acre for the 388 acres covered by the conservation deed.
The deduction was based on an appraisal by David R. Roberts. He used the “before and after” method to determine this valuation. Roberts noted that the property currently had a five acre required lot size, but it could be rezoned with a one quarter acre lot size. Even though there were several foreclosed residential subdivisions in the market area due to the market downturn in 2010, he valued the property based upon potential rezoning into 219 homesites and determined the potential value was $8,535,000. Based on this value, the conservation easement was worth $7,949,000.
Oakhill filed IRS Form 8283 based on the appraisal. It reported a conservation easement on 379 acres, with a fair market value of $7,949,000 and a transfer on August 1, 2007 for purposes of the initial basis. Rather than reporting the basis for this transfer, the letter stated, “A declaration of the taxpayer’s basis in the property is not included in the attached Form 8283 because of the fact that the basis of the property is not taken into consideration when computing the amount of the deduction. Furthermore, the taxpayer has a holding in excess of 12 months in the property.”
The IRS audited the Oakhill partnership return and denied the deduction. It assessed a 40% gross valuation misstatement penalty under Section 6662(a) and a 20% accuracy-related penalty under Section 6662(a).
The Court noted that a conservation easement deduction in excess of $5,000 requires an appraisal summary attached to the return. Section 170(f)(11). The IRS claimed that because Oakhill declined to report its cost basis, the appraisal summary is not in compliance and the deduction was denied. Oakhill claimed substantial compliance or that the regulation is invalid.
The Court determined that Oakhill intentionally refused to report its cost basis. The Court noted, “Oakhill asserted that taxpayers are free to ignore the requirement that they report cost basis. Asserting that one may ignore a requirement does not constitute strict compliance with it.”
Oakhill also pointed out that the 379 acres would have a difficult-to-determine cost basis. Because the cost basis was not easily determined, Oakhill claimed it did not need to report a cost basis.
The Tax Court noted that Oakhill only disclosed the cost basis after the IRS audit. Oakhill intentionally refused to disclose the cost basis on IRS Form 8283. Therefore, Oakhill did not comply with Reg.1.170A–13(e)(4). With respect to the claim that Oakhill had substantially complied, the Court noted that the appraisal claimed the “379 acres had appreciated by more than 800%” during the worst real estate crisis since the Great Depression. Because the regulation requires reporting of the basis and Oakhill refused to report the basis, substantial compliance was not met. There was a “conscious election not to supply the required information.”
Oakhill also claimed the regulation was not valid. In 1984, Congress required the IRS to create regulations that would substantiate the charitable deduction value of appreciated property. IRS Form 8283 was created in response to the specific mandate of Congress to create a proper substantiation methodology for appreciated gifts. Therefore, the IRS Form 8283 requirements are reasonably responsive to the mandate by Congress and the regulation was upheld.
The IRS had assessed a 40% gross valuation misstatement penalty and Oakhill claimed that it had reasonably relied on Forever Forest and its CPA for filing Form 8283. The Court noted that “advice must generally be from a competent and independent advisor unburdened with a conflict of interest and not from promoters of the investment.” Because there remained questions whether Forever Forest was competent and independent, and whether Oakhill had reasonably relied on this legal advice, there was a material fact to be determined later by the trial court.
Editor’s Note: The IRS continues to win conservation easement cases. When the property is claimed to have appreciated by 800% in a relatively short period of time, the Tax Court simply looks for a technical reason to deny the charitable deduction.
No Easement Protection in Perpetuity –– No Deduction
In Rock Creek Property Holdings, LLC et al. v. Commissioner; No. 5599-17 (2020), the Tax Court denied a conservation easement charitable deduction because the property value was not protected in perpetuity. If the conservation easement were extinguished by eminent domain or other judicial action, the nonprofit would not receive a proportionate value in the proceeds.
Georgia resident, Robert B. Akin inherited property in 2008. In 2013, there were multiple transfers that resulted in property being transferred to Fund XVIII, LLC. The LLC owned Rock Creek Property Holdings, LLC (Rock Creek Holdings). On December 23, 2013, Rock Creek Holdings transferred a conservation easement deed on 719 acres to Southeast Regional Land Conservancy, Inc. (“SERLC”).
The judicial extinguishment provision of the conservation deed stated, “For purposes of this conservation easement, the fair market value of SERLC’s right and interest (which value shall remain constant) shall be equal to the difference between (a) the fair market value of the conservation area as if not burdened by this conservation easement and (b) the fair market value of the conservation in the area burdened by this conservation easement, and such values are determined as of the date of this conservation easement.”
The conservation easement also included a savings clause. The savings clause stated, “If any provision of this conservation easement is determined by final judgment of a court having competent jurisdiction to be invalid, such determination shall not have the effect of rendering the remaining provisions of this conservation easement invalid.”
The IRS Form 1065 filed for 2013 claimed a charitable conservation easement deduction of $7,875,000. The property sold for $1.2 million in September of 2013 and Taxpayer claimed it was worth over $7.9 million three months later.
The Court noted that under Section 170(h)(2)(C) a conservation easement property interest must be protected in perpetuity. The question in this case was whether the property interest of the nonprofit would be protected in perpetuity under the judicial extinguishment clause. In order for the easement to be protected, the nonprofit must receive a proportionate value of the extinguishment proceeds.
The Rock Creek Holdings deed was insufficient. While the partnership claimed that the donee must be entitled to “at least” the initial value, the Court determined that the “at least” language did not save the deduction. The nonprofit must have an absolute right to a proportionate share of the extinguishment proceeds. The Court stated, “The share to which the donee is entitled shall include the donee’s proportionate share of any appreciation in value of the property occurring after the date of the donation.” Because the deed fixed the amount and did not allow the nonprofit to receive potential appreciation during a judicial extinguishment, the deduction was denied.
Editor’s Note: The Court denied the deduction because of a technical defect in the deed. However, it seems probable that the claimed increase from $1.2 million to over $8 million in value over a period of three months was an unstated factor in the decision. This was a very aggressive appraisal.
Applicable Federal Rate of 2.2% for February — Rev. Rul. 2020-3; 2020-6 IRB 1 (16 Jan 2020)
The IRS has announced the Applicable Federal Rate (AFR) for February of 2020. The AFR under Section 7520 for the month of February is 2.2%. The rates for January of 2.0% or December of 2.0% 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.