Washington Hotline – May 20, 2014

Washington News

Washington Hotline

Senate Tax Extenders Brouhaha

On May 15th the Senate voted to delay action on the Expiring Provisions Improvement Reform and Efficiencies (EXPIRE) Act of 2014 (S. 2260). While members of both parties support the bill and it is eventually likely to pass, the two parties had a major conflict over amendments and chose to delay action.

Majority Leader Reid (D-NV) supported the bill. He stated, “The Senate begins debate on legislation that continues to help many Nevadans and countless Americans, as they recover from the recession. This bill extends current tax provisions that have bolstered American families and businesses, saving money and growing our economy.”

Senate Finance Chair Ron Wyden (D-OR) views the tax extenders bill as a bridge to tax reform. He stated, “There is a real opportunity now to break the gridlock on tax reform. There is an ideal window over the next year and a half for Democrats and Republicans here in the Senate to build a bipartisan coalition to pass comprehensive tax reform, and to work with colleagues on the other side of the Capital who have expressed significant interest in tax reform.”

Sen. Orrin Hatch (R-UT) is the Ranking Member on the Senate Finance Committee. He worked with Wyden to build bipartisan support for the EXPIRE Act. However, Hatch insisted that there should be full debate on the bill. He stated, “The EXPIRE Act has already had full and fair consideration in the Finance Committee. The bill was drafted in consultation with all the members of the committee. And, when we held a markup, all Senators were allowed to offer amendments and receive votes on those amendments. Why not continue that process here on the floor?”

Majority Leader Reid used a Senate tactic to eliminate the possibility of amendments. He wanted to avoid voting on proposed amendments because several of the submitted amendments would delay or repeal tax increases under the Affordable Care Act.

Because Majority Leader Reid refused to allow any amendments to the bill, the Senate voted 53-40 on cloture or the decision to close the debate. Because the vote failed to gather the needed 60 votes, the full Senate did not vote on the EXPIRE Act.

Editor’s Note: The EXPIRE Act is expected to pass with a very large majority in the Senate. The issue is not the EXPIRE Act – it is whether or not the minority party will be permitted to offer amendments on the floor. Because many Senators are facing challenging reelection races, Majority Leader Reid is not willing to allow votes on a large number of amendments. The parties will negotiate over a limited number of amendments. If an agreement on the amendments can be created, then a vote to pass the EXPIRE Act could occur before the end of May.

Schock Proposes Permanent IRA Rollover

House Ways and Means Committee Member Aaron Schock (R-IL) introduced H.R. 4619 this week. His bill would make permanent the IRA charitable rollover. The original co-sponsor was Earl Blumenauer (D-OR). He was later joined by co-sponsors Mike Kelly (R-PA), Todd Young (R-IN) and Patrick Tiberi (R-OH).

Rep. Schock explained why he introduced the bill. He stated, “Last year, total charitable giving in the United States passed $316 billion, with individual gifts comprising 72% of the total. As a nation, we must continue to incentivize charitable giving, without which the burden of meeting many community needs would overwhelm federal, state and local budgets. This bipartisan measure provides certainty for charities and increased opportunities for donors. I anticipate broad support and swift passage of this important tax provision.”

In a press release from his office, Schock also shared the opinions of philanthropy leaders. Mark Roberts, CEO of the Community Foundation of Central Illinois stated, “H.R. 4619 is a much-needed step that will enable donors to direct critical resources to philanthropic organizations engaged in strengthening communities and serving our neighbors in need. We thank Congressman Schock for leading the effort to pass this important legislation.”

Brian A. Gallagher, President and CEO of United Way Worldwide, also was an advocate for the bill. He indicated, “The IRA rollover is a critical component of tax policy that reflects America’s long-standing tradition of charitable giving.”

The IRA rollover bill will make permanent the ability for IRA owners over age 70½ to transfer up to $100,000 per year to qualified charities. The transfer may also fulfill the required minimum distribution of the IRA owner.

Editor’s Note: House Ways and Means Chair Dave Camp (R-MI) has previously passed six business tax extenders. He plans to hold markup sessions for permanent passage of other tax extenders. This action by Rep. Schock is a very favorable bipartisan effort to move the IRA charitable rollover to the front of that list. If the IRA charitable rollover is presented for a vote, it is likely that the House will move forward with making it permanent. Even if a compromise bill passes later this year with a two-year extension, once the full House has voted to make the IRA rollover permanent, it is highly probable that will occur.

Charitable Easement Deduction Denied

In Logan M. Chandler et ux. v. Commissioner; 142 T.C. No. 16; No. 16534-08 (14 May 2014), the Tax Court determined that two Boston home façade easements had no value. The Court also held that the basis on one of the homes was overstated when it was sold.

Logan M. Chandler and Nanette Ambrose-Chandler purchased two homes in the Boston historic district in 2003 and 2005. They transferred façade easements to the National Architectural Trust (NAT) for both homes. Charitable deductions for the easements were reported in tax years 2004, 2005 and 2006. In 2005, they sold the first home and claimed an increase in the basis of $245,150 for various improvements.

NAT recommended the use of appraisers George Riethof and George Papulis. Based on their determinations of approximately a 16% reduction in value for the façade easements, the claimed deductions were $191,400 for the first home and $371,250 for the second.

The property purchased in 2003 for $755,000 was subsequently sold in 2005 for $1,540,000. It had been substantially renovated and the claim was made that the improvements increased the basis by $245,150. However, the receipts for those improvements only totaled $147,824.

The IRS disallowed the façade easement charitable deduction, claiming that it had no value. It also disallowed the $245,150 of improvements on the theory that amount already had been deducted under a business section of the tax return.

At trial, the taxpayer submitted valuation from appraiser Michael Ehrmann, and the IRS responded with a valuation determination by appraiser John C. Bowman III.

Ehrmann viewed seven properties, four in Boston and three in New York City. Based on his comparables, he estimated a 16% reduction in value for both homes. The Ehrmann valuation for the easements was $220,000 for the first property and $470,000 for the second.

The Court noted that Ehrman’s comparables were not persuasive. The New York comparables reflected a different circumstance and the Boston comparables did not appropriately consider existing land use restrictions.

Bowman reviewed nine Boston properties. Following creation of the façade easements, all sold for increased prices. Therefore, Bowman concluded that the façade easement caused no reduction in value. However, Bowman had failed to consider the renovations of the properties. Because he had not fixed other variables, his determination was also not accurate.

However, the Court was able to compare the façade easements with local zoning and land use restrictions. There was no significant difference in the restrictions and therefore a purchaser would not deem the easements to change the value. The charitable façade easement deductions were denied.

With respect to the home sale, the Court allowed an increase in basis for the $147,820 in receipts. While taxpayers did have pictures of the various improvements, the pictures did not constitute adequate proof of the expenditures.

The Sec. 6662(a) penalty for overvaluation with respect to the façade easement was rejected. The taxpayers met the reasonable cause standard due to their reliance on qualified appraisers and other advisors. However, there was no reasonable cause for claiming that the pictures supported the $245,150 improvements change in the cost basis. That penalty was applicable.

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.

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