Monday November 20, 2017
Sen. Hatch and Rep. Neal Discuss Tax Reform
Senate Finance Committee Chairman Orrin Hatch (R-UT) was interviewed by national media on August 6. He was asked about the White House proposal to reduce rates to 10%, 25%, and 35%. Hatch responded, "If we could get to those rates, that would be miraculous, and it would be very beneficial for the country."
Hatch then went on to describe a number of obstacles to lowering rates. "Looking at what we have going on in Congress right nowall the difficulties and catfights across the board and the slowdown of everything by the Democrats, the desire not even to let legislation come forthyeah, it would be very difficult to get there."
Rep. Richard Neal (D-MA) is the Ranking Minority Member in the House Ways and Means Committee. He expressed hope that a forthcoming tax bill could help middle-class Americans, rather than reduce payments for those with higher incomes. Neal noted that a tax reform bill should be developed "from the middle out, understanding that concentration of wealth in America is acknowledged by everybody."
Neal suggested that his party could be open to reducing rates for upper-income taxpayers if there are offsetting benefits for the middle class. He continued, "I think one of the challenges you have today - if you have a joint filing of $200,000 and you have three kids in college, you don't feel very wealthy. So I am amenable to the idea of moving that ceiling to make adjustments based on what the other side might be willing to give to the middle class in terms of more incentives."
White House National Economic Council Director Gary Cohn spoke to media on August 4. He continued to promote a lower business tax rate. Cohn stated, "We have to do something structural to the U.S. economy. We cannot be substantially higher than the OECD average tax rate out there." Cohn was referring to the average tax rate of 25% for first world nations who are members of the Organization for Economic Cooperation and Development.
Editor's Note: Sen. Hatch continues to promise protections for both charitable giving and mortgage interest. He stated, "One would be the charitable deduction and the other one would be the mortgage deduction." Hatch suggested that it will not be possible to lower corporate rates to the White House proposed 15% number, but that a corporate rate of 25% is more likely.
Tax Professional Impersonation Scheme
In IR-2017-121, the IRS continued a series of warnings for CPAs and other tax professionals. The latest tax scam is a sophisticated strategy to steal usernames and passwords.
Most tax professionals use tax software from a major company. The tax scammer sends an email to a CPA or other tax professional. The email is designed to appear to have been sent by the tax software company.
The email subject line is "Software Support Update." The body text of the email highlights an "Important Software System Upgrade." In order to receive the upgrade, a tax professional must revalidate his or her login.
When the tax professional types in his or her username and password on the page that is designed to duplicate the actual login page from the tax provider, the information is transferred to the tax scammer.
After the tax scammer has the username and password, he or she may then log on to the tax professional's account and steal client data. The tax scammer then uses the stolen client data to file false returns and claim large refunds.
The IRS urges several specific steps for protecting against this tax scheme.
- Logins - You should only login directly on the website of your tax provider. Never login on a form sent by email.
- Save and Forward - Save the email as a "text only" file. Forward this text file as an attachment to your tax software provider.
- Report to the IRS - You also should send the email as an attachment to the IRS. The IRS email address for reporting any fraudulent emails is email@example.com.
100% Farmer Conservation Easement Deduction Denied
In Rutkoske, Mark A. Sr. et al. v. Commissioner; No. 16300-14; No. 16301-14; 149 T.C. No. 6 (7 Aug 2017), the Tax Court held that two lifelong farmers were not permitted a 100% ("farmer or rancher") limit on a charitable conservation easement deduction.
In 2009, Mark and Felix Rutkoske owned seven parcels of Maryland and Delaware farmland. They both worked over 2,500 hours in 2009 raising corn, barley, wheat and soybeans.
On June 5, 2009, the two partners in Browning Creek Farm (355 acres) conveyed a conservation easement in a bargain sale transaction with Eastern Shore Land Conservancy, Inc (Eastern Shore). The unencumbered property was appraised at $4,970,000 and the post-easement value was $2,130,000.
After conveying the conservation easement, Mark and Felix then sold the property to Quiet Acre Farm for $1,995,040.
Browning Creek reported a gain of $1,264,132 on the conservation easement and $489,983 as the prorated gain on the bargain sale. The claimed charitable deduction was $1,335,040. This deduction was based on the initial fair market value less the post-conservation easement value and the $1,504,960 payment by Eastern Shore.
The brothers each reported gain of $877,057 and deductions of $667,520. These gain and deduction amounts reflected the 50% ownership in the Browning Creek partnership by each brother. Because they were both active farmers, they claimed the deduction was applicable to 100% of adjusted gross income (AGI) under Sec. 170(b)(1)(E)(iv). The IRS contested use of the 100% deduction limit and also the value of the conservation easement.
The Tax Court noted that conservation easements are permitted under Sec. 170(b)(1)(E)(i). Under this provision they are deductible to 50% of AGI. However, a "qualified rancher or farmer" is permitted under Sec. 170(b)(1)(E)(iv) to take a charitable deduction up to 100% of AGI. The "qualified rancher or farmer" definition is specified in Sec. 2032(A)(e)(5).
Browning Creek is a partnership for federal tax purposes. Therefore, under Sec. 702(a)(4) the charitable deduction for a gift of a conservation easement flows through to the partners. The taxpayers maintained that, as active farmers both before and after year 2009, they periodically engage in sales of farm equipment and land. These transactions should therefore constitute income from farming and they should be permitted to use the 100% deduction limit.
However, the Tax Court observed that the sale of farmland was not included in the Sec. 2032(A)(e)(5) description of farming activities. The Tax Court stated, "being a farmer does not make one a 'qualified farmer' for purposes of Sec. 170(b)(1)(E)(iv)(1)."
Therefore, the charitable deduction was limited to 50% of AGI because a sale of farmland is not a farming activity.
Applicable Federal Rate of 2.4% for August -- Rev. Rul. 2017-15; 2017-32 IRB 1 (19 July 2017)
The IRS has announced the Applicable Federal Rate (AFR) for August of 2017. The AFR under Section 7520 for the month of August will be 2.4%. The rates for July of 2.2% or June 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.