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Monday June 25, 2018

Washington News

Washington Hotline

Tax Scam Uses Prepaid Debit Card

While the IRS campaign to stop tax scammers has been partly successful, the fraudsters continue to develop new attacks. The latest scam involves a prepaid debit card that the tax scammer claims is linked to the Electronic Federal Tax Payment System (EFTPS).

The scammer typically calls the victim and claims the IRS has sent two certified letters. The victim is told not to contact his or her tax preparer, attorney or CPA until making the tax payment. If the victim does not buy a prepaid debit card, he or she is threatened with immediate arrest.

IRS Commissioner John Koskinen noted, "This is a new twist to an old scam. Just because tax season is over, scams and schemes do not take the summer off. People should stay vigilant against IRS impersonation scams. People should remember that the first contact they receive from the IRS will not be through a random, threatening phone call."

The EFTPS is an automated method for paying taxes. You may pay taxes on the internet or by phone. EFTPS does not require you to use a debit card, but has multiple options for payments.

The IRS recommends several strategies to protect yourself. Do not give out personal information on the phone. If you suspect a tax scam, report the call to the Treasury Inspector General for Tax Administration at 800-366-4484. You also can report to the Federal Trade Commission with the "FTC Complaint Assistant" on Type "IRS Telephone Scam" in the notes on the FTC form.

If you think you owe tax to the IRS, call 800-829-1040 for assistance. The IRS staff will assist you in determining whether you owe any tax.

Sens. Thune and Casey Introduce CHARITY Bill

On June 13, Sen. John Thune (R-SD) and Sen. Bob Casey (D-PA) introduced the Charities Helping Americans Regularly Throughout the Year (CHARITY) Act. The bill number is S. 1343.

Both Senators spoke in support of the new bill. Thune stated, "Each year, millions of hard-working Americans donate time, money, goods and services to charities around the country. That is why removing unnecessary barriers that make it more difficult for these charitable organizations to fulfill their philanthropic mission is an idea with which most people should be able to agree. If Congress sent this bipartisan bill to the President, which I am hopeful we will be able to do, we would encourage an already generous nation and help charitable organizations continue serving Americans in all walks of life."

Sen. Casey noted, "This legislation will make it simpler for more Americans to support worthy charitable causes. Charities across the nation and in Pennsylvania are doing important work that impacts countless people. This legislation will help these organizations continue and deepen their charitable endeavors in our communities."

There are five principal provisions for the bill.

1. Charitable Mileage - The rate for charitable mileage would change from the flat $0.14 per mile to the rate for medical and moving travel ($0.17 per mile in 2017).

2. Form 990 - All nonprofits that file any version of IRS Form 990 would be required to use electronic filing.

3. IRAs to Donor Advised Funds (DAFs) - IRA owners over age 70½ may transfer up to $100,000 per year in a qualified charitable distribution to a nonprofit. The CHARITY Act would permit this transfer to fund a DAF. There would be specific new charity disclosure requirements. The charity would be required to disclose the number of DAFs that have been in existence for 36 months, the grants from these DAFs and the policies to monitor and handle inactive DAFs.

4. Private Foundation Excise Tax - The existing and complicated 2% and 1% tax system would be simplified to a flat 1% excise tax on private foundation income.

5. Philanthropic Enterprise - A new exemption would be created for the excess business holding rules. This exemption would allow private foundations (PFs) to create 100%-owned Philanthropic Enterprises (PEs). All profits over reasonable business reinvestment amounts must be distributed by the PE to the PF. The PE must be operated independently from the PF.

Editor's Note: Community foundations have been supporting the expansion of the IRA rollover to permit gifts to DAFs. This change would accelerate the current rapid growth of DAFs.

Façade Easement Deduction Denied

In Twenty Two Six Investors et al. v. Commissioner; No. 29483-14; T.C. Memo. 2017-115 (14 Jun 2017), the Tax Court denied an $11,355,000 charitable easement deduction because the nonprofit failed to record the deed for two years.

Twenty Two Six Investors is a New York limited partnership. It owned a ten story warehouse in New York City built in 1928. The warehouse was designed by Cass Gilbert, who also was architect for the Woolworth Building and the U.S. Supreme Court Building.

In December 21, 2004, the limited partnership deeded a façade easement to National Architectural Trust (NAT). A NAT representative signed the deed on December 30, 2004. However, NAT did not record the deed until December 14, 2006. On the partnership return for 2004, there were deductions for a charitable façade easement in the amount of $11,355,000 and a cash gift to NAT of $531,975.

The IRS audited the return and denied the deductions.

The Tax Court reviewed the provisions for a façade easement deduction. Under Sec. 170(h)(5)(A) the easement "shall not be treated as exclusively for conservation purposes unless the conservation purpose is protected in perpetuity." Reg 1.170A-14(g)(1) also notes that the interest "must be subject to legally and enforceable restrictions (for example, by recordation in the land records of the jurisdiction in which the property is located) that will prevent uses of the retained interest inconsistent with the conservation purposes of the donation."

The IRS maintained that the deed was titled "Conservation Deed of Easement" and clearly intended to create a façade easement. However, it was not valid until recorded and, therefore, did not qualify for a 2004 charitable deduction. The taxpayer responded that the deed created a restriction, not an easement. The proof of delivery to NAT created a restrictive covenant that should qualify for the deduction.

The court quoted the New York statute, which states that "an instrument for the purpose of creating, conveying, modifying or terminating a conservation easement shall not be effective unless recorded." Because there was a clear intent to create an easement and not a restrictive covenant, the deduction did not qualify. In addition, the deduction was not perpetual as of the date of gift in 2004. The limited partnership could have sold the warehouse without giving notice of the easement and potentially have defeated the charitable purpose. Therefore, there was no charitable deduction.

Applicable Federal Rate of 2.2% for July -- Rev. Rul. 2017-14; 2017-27 IRB 1 (16 June 2017)

The IRS has announced the Applicable Federal Rate (AFR) for July of 2017. The AFR under Section 7520 for the month of July will be 2.2%. The rates for June of 2.4% or May of 2.4% 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 2017, pooled income funds in existence less than three tax years must use a 1.2% deemed rate of return. Federal rates are available by clicking here.

Published June 16, 2017
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