Washington Hotline – September – Week 4 – 2010

 

   
Small Business Jobs Bill Passes
A week after the Senate passed the Small Business Jobs Bill, the House passed the same legislation by a vote of 237-187. President Obama is expected to sign the bill on Monday, September 27, 2010.

The White House issued a statement and noted, “The Small Business Jobs Bill passed today will help provide loans and cut taxes for millions of small business owners.”

House Minority Leader John Boehner (R-OH) expressed concern about the bill. He noted that the bill does not “end the uncertainty that is crippling job creation and hurting small businesses.”

The bill includes seven separate strategies to facilitate hiring of employees by small businesses. Since small businesses are responsible for 70% of new job creation, the hope is that the bill will increase employment by up to 500,000 new jobs.

1. Bank Fund of $30 Billion – The principal expenditure is a fund of $30 billion that will be distributed to community banks with less than $10 billion in assets. Because community banks make a large percentage of all loans to small businesses, these funds are intended to increase the available credit. If small businesses have greater borrowing power, they may be able to increase employment.

2. State Lending Fund – A fund of $1.5 billion will be distributed to the states. Many states have programs with loans to small businesses. With the state funding deficits, these programs have been sharply curtailed. This $1.5 billion fund will restore some of these state programs.

3. Small Business Administration Loans – There will be easier access to loans and lower costs for small businesses that use this funding option.

4. Zero Capital Gains Tax Rate – There will be no tax on the sale of a limited category of stock in C corporations that is held for five years. The corporations must have less than $50 million in business assets.

5. Equipment Expensing – The current expensing limit for small businesses is $250,000 per year. This will be increased to $500,000 for purchases of equipment in 2010.

6. Bonus Depreciation – Business will benefit from the ability to depreciate up to 50% of newly-acquired equipment in 2010.

7. Start-Up Businesses – If there is $60,000 or less in start-up costs, then up to $10,000 may be deducted this year.

Editor’s Note: While it is not likely that there will be substantial impact on jobs prior to the election in November, the hope of the House and Senate members in Washington is that this bill will start to produce recovery in the small business sector.

Façade Easement Charitable Deduction Denied

In Billy L. Evans et ux. v. Commissioner; T.C. Memo. 2010-207; No. 8309-08 (21 Sep 2010), the Tax Court disallowed a deduction for two façade easements transferred to charity.

Billy and Renetta Evans acquired townhomes in the Capital Hill Historic District in 1995 and 2004. On December 29, 2004, they transferred two façade conservation easements to the Capital Historic Trust, Inc.

Based upon a list of appraisers recommended by Capital Historic Trust, the Evans employed Mr. Wood and Mr. Keegan to provide an appraisal of the two façade conservation easements. The appraised value used a percentage method and the total contribution deduction was $154,350. The taxpayers attached page two of Form 8283 for each conservation easement to their Form 1040 and claimed that deduction amount. The IRS audited the return and denied the entire deduction.

Before the Tax Court, the taxpayers noted that because they had filed Form 8283 with an appraised value, the burden of proving the deduction value had shifted to the IRS. However, the Court determined that the appraisal failed to present “credible evidence of fair market value” and required the taxpayers to sustain the burden of proof.

The taxpayers called as a witness Sandy Lassere, a certified residential appraiser in the District of Columbia. She indicated that she had previously completed 30 conservation easement appraisals and had also appraised the two façade conservation easements.

However, the Court noted that there were numerous mistakes in her appraisal. She incorrectly described restrictions, was in error on size adjustments for comparables, did not review deeds for other conservation easements, was not familiar with the IRS regulations on appraisals and the appraisal was completed four years after the gift. This appraisal, therefore, was not within the required window of 60 days before the gift to the date the tax return was due (potentially extended if a valid extension was approved).

Therefore, the Court determined that the appraisal by Lassere was not valid. Because taxpayers did not call Wood or Keegan to defend their appraisal, the court determined that the taxpayers had failed to support the deduction and it was denied.

In its answer, the IRS also applied a Sec. 6662(a) penalty of 20% on the underpayment due to the denied deduction. The Court noted that there is a reasonable cause exception for the penalty. Because the taxpayers did obtain a qualified appraisal, they had reasonable cause that negated the penalty.

Finally, the IRS asserted that the Wood and Keegan appraisal was not qualified under Reg. 1.170A-13(c)(3). While it was completed on January 6 and 7, 2005 and, therefore, was timely, the appraisal did not include required information. It failed to list the qualifications of the appraiser, did not have a sufficient description of the property, failed to identify the method of valuation and did not describe the specific basis for evaluation. The appraisal appeared to use an 11% discount factor to determine the value of the façade conservation easement. The Court agreed that the appraisal did omit several items, but the IRS was not able to show that these failures disqualified the appraisal.

Editor’s Note: For appraisals of conservation easement gifts, the IRS has vigorously opposed a flat percentage deduction method. The appraiser must consider all relevant factors in a “before and after” method. If the appraiser uses a simple percentage, the IRS will oppose the charitable deduction. It was somewhat unusual in the Evans case that the Wood/Keegan appraisal was deemed valid to avoid a penalty, but invalid to substantiate the charitable deduction.

No Appraisal – No Timeshare Gift Deduction

In Maria Elena Towell v. Commissioner; T.C. Summ. Op. 2010-141; No. 8002-09S (20 Sep 2010), the Tax Court affirmed an IRS denial of a deduction for a gift of a timeshare.

Maria Towell acquired a timeshare in 2001 from Westgate Miami Beach, Limited Ltd. for $12,396. After completing payments on the timeshare in 2004, she deeded the timeshare to an agent for the Tracets Foundation on November 30, 2006. The Tracets Foundation claimed to be a Sec. 501(c)(3) that was involved in lake and stream preservation.

The taxpayer filed Form 8283 and claimed a charitable deduction of $12,900. The IRS audited taxpayer and denied the deduction.

The Tax Court noted that a noncash contribution greater than $5,000 must be supported by filing IRS Form 8283 and a qualified appraisal. A real estate appraisal must be done by an independent appraiser who is appropriately certified. The appraisal must be not earlier than 60 days prior to the gift and must be completed by the due date for the return (including potential extensions). If the appraisal is not completed on time, it may be excused if there is reasonable cause and not willful neglect.

Ms. Towell did not present any evidence of the claimed appraisal to the Court. Because she did not actually obtain an appraisal, the Form 8283 was not valid and the deduction was denied.

Editor’s Note: While this deduction was denied for failure to obtain an appraisal, it is quite possible that the actual timeshare fair market value was less than the $5,000 threshold. If this were the case, then Form 8283 would still be required because the noncash asset is over $500 in value. However, through stating a reasonable method for valuation less than $5,000, Ms. Towell could have filed Form 8283 without an appraisal and obtained a charitable deduction.

Applicable Federal Rate of 2.0% for October – Rev. Rul. 2010-24; 2010-40 IRB 1 (17 Sept. 2010)

The IRS has announced the Applicable Federal Rate (AFR) for October of 2010. The AFR under Sec. 7520 for the month of October will be 2.0%. The rates for September of 2.4% or August of 2.6% 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 2010, pooled income funds in existence less than three tax years must use a 4.6% deemed rate of return.

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