Friday October 30, 2020
IRS Faces Challenges in Reopening Offices
The IRS continues to maximize telework for employees who can perform duties at home. The IRS offices that are open will implement new protections for employees through social distancing. IRS staff continues to develop new strategies and procedures to protect employees.
- Self-Screening – All employees are expected to self-screen. If an IRS employee is experiencing COVID-19 symptoms, is required to self-quarantine or has been in close contact with a person who has a confirmed case of coronavirus within the last two weeks, that employee should not report for work.
- High-Risk Populations – If an IRS employee is in a high-risk group as defined by the Centers for Disease Control and Prevention, he or she may telework or request leave.
- Additional Cleaning Procedures – IRS facility staff at each location will implement expanded procedures for the cleaning and disinfecting all public areas.
The IRS is also struggling to process returns filed on paper. It published a press release and explained, "We are experiencing delays in processing paper tax returns due to limited staffing. If you already filed a paper return, we will process it in the order we received it. Do not file a second tax return or contact the IRS about the status of your return or your Economic Impact Payment.”
The IRS urges taxpayers to be proactive in obtaining assistance. An excellent resource for questions about tax law, refund status, tax payments and Economic Impact Payments is www.IRS.gov. You can check on your Economic Impact Payment on the “Get My Payment” page or your refund status at the “Where’s My Refund?” page. If you need a tax transcript, select “Get Transcript.”
Taxpayers can make payments through Direct Pay. The tax payments for Tax Year 2019 are due on July 15, 2020. If you have tax law questions, use the Interactive Tax Assistant.
The IRS continues to offer limited phone support. Tax compliance and IRS support lines with customer service representatives for taxpayers and tax professionals are available. You may check your tax refund status on an automated line by calling (800) 829-1954.
Editor's Note: Both the filing and tax payment deadlines this year are delayed until July 15, 2020. As a result, June and the first two weeks of July will be a busy season for both taxpayers and the IRS. Millions of Americans have not yet filed or paid taxes and need assistance from the IRS.
SBA Revises PPP Loan Forgiveness Application
On June 17, 2020, the Small Business Administration (SBA) and Department of the Treasury published a borrower–friendly Paycheck Protection Program (PPP) Loan Forgiveness Application. The new application reflects the changes made by the Paycheck Protection Program Flexibility Act, signed by the President on June 5, 2020.
The SBA also published a simplified Form 3508EZ. The new form simplifies the calculations for PPP Loan forgiveness. It is permitted for PPP Loan borrowers who are self-employed, who did not reduce salaries or wages of employees by more than 25% and did not reduce the number of employees.
The new application reflects the change from the original 8–week covered period. It permits payroll and facility expenses to be determined based on a 24–week covered period. This expanded period of time is designed to facilitate full forgiveness of PPP Loans.
With the new extended 24–week covered period, the maximum payroll cost per individual is changed from $15,835 over 8 weeks to $46,154 over 12 weeks.
The prior rules required that at least 75% of the PPP Loan forgiveness amount must be allocated to payroll. The PPP Flexibility Act reduces the required payroll amount to 60% of the loan. Up to 40% of PPP Loan forgiveness may cover facility costs.
The newest Interim Final SBA rule also clarifies options for owner compensation and self–employed persons. Business owners who report on Schedule C or F may base forgiveness on an eight-week period of 2019 net profit up to $15,385 or a 24-week period 2019 net profits up to $20,833.
The SBA explained the new rule and stated, "This approach is consistent with the structure of the CARES Act and its overarching focus on keeping workers paid, and will prevent windfalls that Congress did not intend. Specifically, Congress determined that the maximum loan amount is generally based on 2.5 months of the borrower's average total monthly payroll costs during the one–year period preceding the loan.”
Conservation Easement Deed Fails Perpetuity Requirement
In David F. Hewitt et ux. v. Commissioner; No. 23809-17; T.C. Memo. 2020-89 (2020), the Tax Court denied a deduction for a charitable gift of a conservation easement. The deed to the nonprofit organization failed to "protect in perpetuity” the charitable interest because it allowed the increased value of improvements to be allocated to the owner rather than the nonprofit in the event of a judicial extinguishment.
David Hewitt resided in Alabama and jointly owned approximately 1,325 acres of pastureland and wooded areas with his sister. He decided to grant an easement on 257 acres of land that was accessible from paved roadways. This was the best potential land for development.
On December 28, 2012, Hewitt granted a conservation easement in the 257 acres to Pelican Coast Conservancy, Inc. (“Conservancy”). The easement purposes were “to preserve and protect the scenic enjoyment of the land, agricultural land, and production, and a creek within the Tallapoosa Basin watershed. The deed states that the easement will maintain the amount and diversity of natural habitats, protect scenic views from the roads, and restrict the construction of buildings and other structures, the removal or destruction of native vegetation, changes to the habitats, and the exploration of minerals, oil, gas, or other materials.”
Hewitt reserved the right to place homes on 5 one-acre lots. The location of each lot was to be subsequently determined, with the Conservancy holding the right to grant or withhold approval for construction of a home within 60 days of receiving notice.
As is required for conservation easement deeds, there was a provision for allocation of proceeds if there were an involuntary extinguishment. The deed stated, "This Easement shall have at the time of Extinguishment a fair market value determined by multiplying the then fair market value of the Property unencumbered by the Easement (minus any increase in value after the date of this grant attributable to improvements) by the ratio of the value of the easement at the time of this grant to the value of the Property, without deduction for the value of the Easement, at the time of the grant."
The deed was reviewed by accounting firm Large & Gilbert. They obtained an appraisal by Jim Clower. Based on the before value of $3,214,000, an after value of $420,000 and an assumption by Mr. Clower that a mobile home park could be built on the 257 acres, Hewitt deducted $2,788,000. The deduction for 2012 was limited to $57,738 under Section 170(b)(1)(A). The balance of the charitable deduction was carried forward. The 2013 deduction was $1,868,782 and the 2014 deduction was $861,480.
Large & Gilbert prepared the tax returns and included Form 8283, Noncash Charitable Contributions with the 2012 return. Because Hewitt had inherited the property from his father, who purchased it many decades earlier, he included a statement with Form 8283 that he was unable to obtain basis information on the property.
Hewitt reviewed the appraisal and believed that the value was reasonable for the 257 acres. The IRS did not challenge the 2012 deduction, but issued a notice of deficiency for the 2013 and 2014 deductions. It denied both deductions due to a lack of substantiation. The IRS also assessed Section 6662(h) 40% penalties for a gross valuation misstatement and, alternatively, a 20% Section 6662(a) penalty for negligence.
After 2012, Hewitt acquired other property and, with the help of accounting firm Large & Gilbert, sold over $3.5 million of property to passthrough entities that than created easements. Individuals from Large & Gilbert were among the investors in the passthrough entities who claimed large charitable easement deductions.
At trial, the IRS claimed that the deed failed the "protected in perpetuity" requirement of Section 170(h)(5)(A).
The Tax Court noted that Reg.1.170 A–1(g)(6)(i) states “The conservation purpose can nonetheless be treated as protected in perpetuity if the restrictions are extinguished by judicial proceeding and the donee uses all of the donee’s proceeds from a subsequent sale or exchange of the property in a manner consistent with the conservation purposes of the original contribution."
Under the extinguishment provisions, Reg.1.170A–14(g)(6)(ii) states “At the time of the gift, the donor must agree that the donation of the perpetual conservation restriction gives rise to a property right, immediately vested in the donee organization, with a fair market value that is at least equal to the proportionate value that the perpetual conservation restriction at the time of the gift, bears to the value of the property as a whole.”
The deed did not follow the proportionate value rule because it first subtracted the value of posteasement improvements. Taxpayers argued the Tax Court should liberally construe this regulation because charitable deductions are favored. However, the Tax Court noted that the language of the extinguishment provision applies to the property as of the time of the grant, and therefore must exclude the posteasement improvements provision.
The taxpayer also observed that Reg.1.170A–14(g)(6)(ii) created an exception if state law allocates the "full proceeds from the conversion without regard to the terms of the prior perpetual conservation restriction.”
However, where there are multiple interests, Alabama law states that each owner has a corresponding right to share in the condemnation award in accordance with his or her respective ownership interest. Because the value of improvements is subtracted, under Alabama law, "the donor would not be entitled to the full amount of the proceeds from a judicial extinguishment.”
The IRS had assessed a 40% gross misstatement penalty. IRS expert appraiser Petkovich had appraised the entire 1,325 acres at $1,850 per acre and determined a $190,000 value for the easement. The court noted that the taxpayers’ appraisers had properly valued the 257 acres as suitable for a mobile home development. Because the taxpayer's appraisers were generally correct in valuing the property at $13,600 per acre and Petkovich did not appraise the 257 acres separately, the taxpayer valuation was more accurate. The misstatement of value penalty was therefore not applicable.
In addition, Hewitt met with accountants from Large & Gilbert, relied on the appraisal by Mr. Clower and obtained advice from conservation expert Dr. Keller. Therefore, even though the Tax Court was concerned by the activity of Hewitt in syndicating partnerships and recognizing $3.5 million of gain through property sales, these subsequent actions did not change his reasonable cause and good faith defense to the penalties. Both penalties were denied.
Applicable Federal Rate of 0.6% for July -- Rev. Rul. 2020-14; 2020-28 IRB 1 (15 June 2020)
The IRS has announced the Applicable Federal Rate (AFR) for July of 2020. The AFR under Section 7520 for the month of July is 0.6%. The rates for June of 0.6% or May of 0.8% 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.