Friday May 24, 2013
Washington News
Tax Season Opens New Year
The IRS announced that the filing date for this year will be April 17th. Normally, income tax returns are due on April 15th. But this year the 15th is a Sunday. April 16th is Emancipation Day, a holiday for the District of Columbia. Therefore, the filing date for tax returns this year will be April 17, 2012.
IRS Commissioner Doug Schulman noted, "At the IRS, we're working hard to make the process of filing your taxes as quick and easy as possible. Providing quality service is one of our top priorities. It not only reduces the burden on taxpayers, but also helps in filing an accurate return right from the start."
The IRS will start accepting eFile returns on January 17. The IRS Free File Program will also be effective on that date. Taxpayers with incomes of $57,000 or less may use the online Free File method. On www.irs.gov there is information about Free File and online filing of tax returns.
Smartphone users will again have available IRS2Go, the application that lets taxpayers check on their refund. Apple iPhone users may use the App Store and Android Smartphone users may use Marketplace to download the free app. Users will appreciate the "Where's my refund" feature of IRS2Go.
There are also other levels of assistance available. Taxpayers with incomes of $50,000 or less may use the Volunteer Income Tax Assistance Program. Those over age 60 may use Tax Counseling for the Elderly. Information on these programs is available at www.irs.gov.
In an information letter, the IRS outlined seven specific changes in the 2011 law that will be useful to taxpayers filing their tax returns this year. Some of the 2011 tax law changes may reduce your taxes.
1. Energy Credits – The energy credit was reduced from the $1,500 limit for 2010 to a maximum of $500 for 2011. Up to 10% of qualified expenditures for high-efficiency heating and air conditioning systems, water heaters, biomass stoves, energy-efficient windows and doors and other energy improvements will qualify. The 2011 limit is $500. This credit is reduced by previously-taken energy credits and will generally be available for taxpayers who made their first energy improvements in 2011.
2. 2008 Homebuyer Credits – Some purchasers of new homes in 2008 qualified for a first-time homebuyer credit. The credit was essentially an interest-free loan to be paid back over 15 years. For these taxpayers, the second repayment of the credit amount will apply for 2011.
3. Capital Gains and Losses – Previously, capital gains and losses were recorded on Schedule D. There is a new Form 8949 to report gains and losses. Schedule D will still be used for a summary of capital gains and losses.
4. Roth Conversions – Those individuals who converted a traditional IRA to a Roth IRA in 2011 must report their taxable income. In previous years, only half of the income was reported each year for two years. However, for 2011 conversions the full amount is reportable.
5. Standard Mileage Rates – The standard mileage rates changed on July 1 for business use, medical travel, moving or charitable services. For the first half of 2011, the rates are business travel at 51 cents, medical and moving travel at 19 cents, and charitable travel at 14 cents per mile. For July 1 through the end of the year, business travel is 55.5 cents, medical and moving travel at 23.5 cents and charitable travel remains 14 cents per mile.
6. Alternative Minimum Tax Exemption – The AMT exemption for 2011 will be $74,450 for a married couple, $37,225 for married persons filing separately and $48,450 for single person or heads of household.
7. Health Insurance – Generally, self employed persons who operate a small business will qualify for deduction of health insurance premiums.
In Kayln M. Carpenter et al. v. Commissioner; T.C. Memo. 2012-1; Nos. 15589-10, 15590-10, 15591-10, (3 Jan. 2012), the Tax Court denied charitable deductions for gifts of conservation easements.
On December 23, 2003, Kayln Carpenter, Scott Van Wyhe and John and Sharon McSween purchased parcels of land in Teller County, Colorado. The next day on December 24, 2003, the purchasers conveyed conservation easements to Greenlands, a Colorado non-profit that focuses on conservation of natural resources.
Carpenter reported a $385,600 deduction for year 2004, Van Wyhe claimed a $272,998 contribution deduction for 2004 and the McSweens reported deductions of $336,500 on both their 2003 and 2004 joint tax returns.
The conservation easements deeds included an extinguishment provision. Under that provision, "This conservation easement can be terminated or extinguished, whether in whole or in part, by judicial proceedings, or by mutual written agreement of both parties, provided no other parties will be impacted and no laws or regulations are violated by such termination."
The IRS audited taxpayers and denied the deductions for the gifts of conservation easements. Under Reg. 1.170A-14(g)(6)(i), the conservation easements must be granted in perpetuity. Because they could be terminated by mutual agreement, the IRS determined that there would be no charitable deduction permitted.
The court reviewed the requirements for conservation easements. Sec. 170(h)(1) requires that a qualified property interest be given to a qualified organization in a deed that states the gift is exclusively for conservation purposes.
The requirement for perpetuity must be legally enforceable and may not include "uses of the retained interest inconsistent with the conservation purposes of the donation." Reg. 1.170A-14(g)(1).
The court noted that conservation easement property may experience changes that make the conservation use "impossible or impracticable." However, the provision that allows extinguishment of a conservation easement must require the use of judicial proceedings.
The taxpayer claimed that the deeds created a charitable trust under Colorado law. Because a charitable trust was created, the doctrine of cy pres was applicable. Therefore, a change or extinguishment of the conservation easement requires a judicial proceeding and complies with the law.
Under Colorado law, conservation easements may be extinguished or terminated in a number of ways, including by mutual consent of the parties. Because there was no indication in the transfer document that a trust was created, the court held that the deed did not create a trust under Colorado law. Rather, the donations created "restricted gifts" because there were limitations on the rights of the charitable organization.
Under the provisions of the deed, there was a transfer of the property with intent to "preserve and protect in perpetuity the conservation values of the property," but there also was retention of various rights. The property owners retained "all uses of the property that are not expressly prohibited herein and are not inconsistent with the purpose of the conservation easement."
If the conservation easement were to be extinguished by mutual agreement, there is no further requirement to use the property for charitable purposes. Because the property did not have a dedicated charitable purpose, the doctrine of cy pres does not apply.
Because the provision on mutual consent permits the extinguishment of the conservation easement without judicial action, it fails the perpetuity requirements of Reg. 1.170A-14(g). The conservation easement deductions were denied.
The IRS has announced the Applicable Federal Rate (AFR) for January of 2012. The AFR under Sec. 7520 for the month of January will be 1.4%. The rates for December of 1.6% or November of 1.4% 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 2012, pooled income funds in existence less than three tax years must use a 1.8% deemed rate of return. Federal rates are available by clicking here.
IRS Commissioner Doug Schulman noted, "At the IRS, we're working hard to make the process of filing your taxes as quick and easy as possible. Providing quality service is one of our top priorities. It not only reduces the burden on taxpayers, but also helps in filing an accurate return right from the start."
The IRS will start accepting eFile returns on January 17. The IRS Free File Program will also be effective on that date. Taxpayers with incomes of $57,000 or less may use the online Free File method. On www.irs.gov there is information about Free File and online filing of tax returns.
Smartphone users will again have available IRS2Go, the application that lets taxpayers check on their refund. Apple iPhone users may use the App Store and Android Smartphone users may use Marketplace to download the free app. Users will appreciate the "Where's my refund" feature of IRS2Go.
There are also other levels of assistance available. Taxpayers with incomes of $50,000 or less may use the Volunteer Income Tax Assistance Program. Those over age 60 may use Tax Counseling for the Elderly. Information on these programs is available at www.irs.gov.
Save Taxes with These 2011 Changes
In an information letter, the IRS outlined seven specific changes in the 2011 law that will be useful to taxpayers filing their tax returns this year. Some of the 2011 tax law changes may reduce your taxes.
1. Energy Credits – The energy credit was reduced from the $1,500 limit for 2010 to a maximum of $500 for 2011. Up to 10% of qualified expenditures for high-efficiency heating and air conditioning systems, water heaters, biomass stoves, energy-efficient windows and doors and other energy improvements will qualify. The 2011 limit is $500. This credit is reduced by previously-taken energy credits and will generally be available for taxpayers who made their first energy improvements in 2011.
2. 2008 Homebuyer Credits – Some purchasers of new homes in 2008 qualified for a first-time homebuyer credit. The credit was essentially an interest-free loan to be paid back over 15 years. For these taxpayers, the second repayment of the credit amount will apply for 2011.
3. Capital Gains and Losses – Previously, capital gains and losses were recorded on Schedule D. There is a new Form 8949 to report gains and losses. Schedule D will still be used for a summary of capital gains and losses.
4. Roth Conversions – Those individuals who converted a traditional IRA to a Roth IRA in 2011 must report their taxable income. In previous years, only half of the income was reported each year for two years. However, for 2011 conversions the full amount is reportable.
5. Standard Mileage Rates – The standard mileage rates changed on July 1 for business use, medical travel, moving or charitable services. For the first half of 2011, the rates are business travel at 51 cents, medical and moving travel at 19 cents, and charitable travel at 14 cents per mile. For July 1 through the end of the year, business travel is 55.5 cents, medical and moving travel at 23.5 cents and charitable travel remains 14 cents per mile.
6. Alternative Minimum Tax Exemption – The AMT exemption for 2011 will be $74,450 for a married couple, $37,225 for married persons filing separately and $48,450 for single person or heads of household.
7. Health Insurance – Generally, self employed persons who operate a small business will qualify for deduction of health insurance premiums.
Conservation Easement Deduction Denied
In Kayln M. Carpenter et al. v. Commissioner; T.C. Memo. 2012-1; Nos. 15589-10, 15590-10, 15591-10, (3 Jan. 2012), the Tax Court denied charitable deductions for gifts of conservation easements.
On December 23, 2003, Kayln Carpenter, Scott Van Wyhe and John and Sharon McSween purchased parcels of land in Teller County, Colorado. The next day on December 24, 2003, the purchasers conveyed conservation easements to Greenlands, a Colorado non-profit that focuses on conservation of natural resources.
Carpenter reported a $385,600 deduction for year 2004, Van Wyhe claimed a $272,998 contribution deduction for 2004 and the McSweens reported deductions of $336,500 on both their 2003 and 2004 joint tax returns.
The conservation easements deeds included an extinguishment provision. Under that provision, "This conservation easement can be terminated or extinguished, whether in whole or in part, by judicial proceedings, or by mutual written agreement of both parties, provided no other parties will be impacted and no laws or regulations are violated by such termination."
The IRS audited taxpayers and denied the deductions for the gifts of conservation easements. Under Reg. 1.170A-14(g)(6)(i), the conservation easements must be granted in perpetuity. Because they could be terminated by mutual agreement, the IRS determined that there would be no charitable deduction permitted.
The court reviewed the requirements for conservation easements. Sec. 170(h)(1) requires that a qualified property interest be given to a qualified organization in a deed that states the gift is exclusively for conservation purposes.
The requirement for perpetuity must be legally enforceable and may not include "uses of the retained interest inconsistent with the conservation purposes of the donation." Reg. 1.170A-14(g)(1).
The court noted that conservation easement property may experience changes that make the conservation use "impossible or impracticable." However, the provision that allows extinguishment of a conservation easement must require the use of judicial proceedings.
The taxpayer claimed that the deeds created a charitable trust under Colorado law. Because a charitable trust was created, the doctrine of cy pres was applicable. Therefore, a change or extinguishment of the conservation easement requires a judicial proceeding and complies with the law.
Under Colorado law, conservation easements may be extinguished or terminated in a number of ways, including by mutual consent of the parties. Because there was no indication in the transfer document that a trust was created, the court held that the deed did not create a trust under Colorado law. Rather, the donations created "restricted gifts" because there were limitations on the rights of the charitable organization.
Under the provisions of the deed, there was a transfer of the property with intent to "preserve and protect in perpetuity the conservation values of the property," but there also was retention of various rights. The property owners retained "all uses of the property that are not expressly prohibited herein and are not inconsistent with the purpose of the conservation easement."
If the conservation easement were to be extinguished by mutual agreement, there is no further requirement to use the property for charitable purposes. Because the property did not have a dedicated charitable purpose, the doctrine of cy pres does not apply.
Because the provision on mutual consent permits the extinguishment of the conservation easement without judicial action, it fails the perpetuity requirements of Reg. 1.170A-14(g). The conservation easement deductions were denied.
Applicable Federal Rate of 1.4% for January – Rev. Rul. 2012-2; 2012-3 IRB 1 (19 Dec. 2011)
The IRS has announced the Applicable Federal Rate (AFR) for January of 2012. The AFR under Sec. 7520 for the month of January will be 1.4%. The rates for December of 1.6% or November of 1.4% 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 2012, pooled income funds in existence less than three tax years must use a 1.8% deemed rate of return. Federal rates are available by clicking here.
Published January 6, 2012
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