Monday September 25, 2023
Natural Disaster Tax Deadline October 16
Many taxpayers in these states experienced natural disasters and the Federal Emergency Management Agency (FEMA) declared certain counties qualified as federal disaster areas.
- Alabama Storms, winds and tornadoes on January 12, 2023 caused counties Autauga, Barbour, Chambers, Conecuh, Coosa, Dallas, Elmore, Greene, Hale, Mobile, Morgan, Sumter and Tallapoosa to be declared disaster zones.
- Georgia The January 12 storm also led to disaster designations for Butts, Crisp, Henry, Jasper, Meriwether, Newton, Pike, Spalding and Troup counties.
- California Three disasters that included exceptional drought, fire and flooding led to FEMA designations for 55 of 58 California counties. The only exceptions are Lassen, Modoc and Shasta counties.
The IRS reminded taxpayers in Florida, Georgia and South Carolina they may also qualify for extensions due to Hurricane Idalia. These taxpayers have until February 15, 2024 to file. This delay is only for filing and not for tax payments. The fire in Lahaina, Maui also led to a FEMA designation of Maui and Hawaii counties. Similarly, taxpayers in these two counties must pay on time, but may delay filing until February 15, 2024.
The IRS connects the address of record for taxpayers with FEMA designations and automatically provide filing and penalty relief. You do not need to contact the IRS. If you are in one of the designated areas and receive a late filing or penalty notice, you should call the number on the notice to have the penalty removed.
Some taxpayers live outside the designated disaster areas but may also qualify. This group includes workers for a recognized government or nonprofit organization who are assisting with relief activities in the disaster area. There is additional information on disaster recovery at DisasterAssistance.gov.
IRS Plans to Audit 75 Large Partnerships
The IRS has launched a new program to audit 75 of America's largest partnerships. On September 21, 2023, the IRS conducted a briefing for revenue agents on this initiative. Monique Gabel is Director of Passthrough Entities with the IRS Large Business and International Division. She confirmed the orientation and training for the examiners was conducted on September 21.
The IRS plans to use the Inflation Reduction Act funding to launch the new program. The exams will start "by the end of the month" on these large partnerships. The partnerships include hedge funds, real estate investment partnerships, publicly traded partnerships and large law firms. Generally, each of these partnerships has more than $10 billion in assets.
At a Washington conference, an attorney asked how the IRS selected the 75 partnerships. The attorney wondered whether the IRS is doing a random sampling or whether there were specific targeted characteristics for the audited partnerships.
Clifford Scherwinski is the LB&I Director of Passthrough Entities. He indicated, "You do want to think about it in terms of our large corporate compliance program. These are the largest of the large, so they deserve special attention because they could require a team audit."
The IRS claims these 75 partnership audits will use the latest updates in artificial intelligence and data analytics. Scherwinski continued, "We looked at the algorithm to see what the computer can tell us about differences and changes, et cetera. We also paired that with our technical experts' insight into the issues that could potentially be on the return."
The IRS emphasizes that it is using the new audit program to enhance its analytics and improve the effectiveness of future audits.
IRS Commissioner Danny Werfel concluded, "This is another part of our effort to ensure the IRS holds the nation's wealthiest filers accountable to pay the full amount of what they owe. We are honing-in on areas where we believe non-compliance among our wealthiest filers has proliferated over the last decade of IRS budget cuts, and pass-throughs are high on our list of concerns."
Donating "Deconstructed" Homes to Charity
Two senior tax professionals with a major CPA firm published an article on September 19, 2023 that discussed deduction options for donors of homes that will be destroyed or demolished. David Kirk and Ankur Thakkar are senior members in the tax section of this national financial services firm.
A charitable contribution deduction for a gift of property is qualified at fair market value. Reg. 1.170A-1(c)(2) establishes "a willing buyer and a willing seller" test, provided there is no compulsion to buy or sell and both are knowledgeable about the relevant facts.
A gift of more than $250 requires a contemporaneous written acknowledgement (CWA). The CWA must include the name of the nonprofit, the date and location of the gift, a reasonably detailed description of the gift, and a note stating that the nonprofit did not provide any goods or services in consideration for the gift. It is also preferred that the CWA state the nonprofit has exclusive legal control over the gifted assets.
Gifts of property over $5,000 require a qualified appraisal under Section 170(f)(11)(D). If the gifted property value is more than $500,000, the appraisal must be attached to the return. There must be both a "qualified appraisal" and "qualified appraiser" for these gifts.
IRS Form 8283, "Noncash Charitable Contributions" will be required for gifts over $500. Most real estate and tangible personal property gifts require the completion of Section B of Form 8283.
In Rolfs v. Commissioner, 668 F.3d 888 (7th Cir. 2012), aff'g, 135 T.C. 471 (2010), the Seventh Circuit upheld a Tax Court determination that the charitable deduction was not qualified. The taxpayer held lakefront property in Wisconsin. Taxpayer gifted the house to the local fire department to conduct a training exercise and burn it down. Subsequently, the taxpayer erected a new residence on the lakefront property. The taxpayer claimed a deduction for the value of the house, but the Seventh Circuit determined the gift was made subject to a condition that the house be burned down. Therefore, the appraisal was not in compliance.
In Loube v. Commissioner, T.C. Memo. 2020-3, the Tax Court determined the IRS Form 8283 failed to substantially comply with the appraisal requirements and thus negated the charitable deduction. The taxpayers acquired a home in Maryland and planned to demolish it and construct a new home. They transferred the rights to salvage various home materials to a nonprofit and claimed a $297,000 noncash charitable deduction. While the deduction was denied based on the failure of both the appraiser and nonprofit to sign IRS Form 8283, the IRS also claimed that the deduction failed because the appraisal did not actually value the salvaged materials.
In Mann v. United States, 984 F.3d 317 (4th Cir. 2021), aff'g, 364 F. Supp. 3d 553 (D. Md. 2019), the taxpayers planned to demolish a home in Maryland and construct a new property. The Fourth Circuit denied the deduction because the appraisal did not value the property actually donated. The gift of the property was not a donation of a home but a donation of the various salvageable materials after the deconstruction. A charitable deduction would only have been permitted if the property were severed, each item was identified and the separate items were valued.
A general rule on valuation is that the deduction is permitted only if there is a gift of the entire interest in property. A gift of salvaged materials from a home does not constitute a gift of the home because it is a nondeductible partial interest under Reg. 1.170A-7(a). The taxpayer may only have a charitable deduction for a deconstructed home if the severed items are specifically identified and valued.
IRS Form 8283 also requires the taxpayer to specify the basis of gifted property. Because the taxpayer generally cannot prove any basis in specific deconstructed assets, the charitable deduction will be an appreciated property deduction, often with a zero basis. A gift of tangible personal property for an unrelated use is deductible at cost basis. The fair market value deduction could be available if the deconstructed assets were used by a nonprofit in its charitable mission.
The specific appraisal requirements state the qualified appraisal must contain "a description in sufficient detail under the circumstances, taking into account the value of the property, for a person who is not generally familiar with the type of property to ascertain that the appraised property is the contributed property." Reg. 1.170A-17(a)(3)(i)(A).
The deconstructed property could include flooring, roofing, brick, stone, windows, doors, toilets, sinks, tubs, light fixtures, plumbing equipment, siding, kitchen equipment and other items. A transfer of tangible personal property also requires a description of the condition of the property. Reg. 1.170A-17(a)(7). A potential issue is there may be separate appraisals required for the different categories of deconstructed assets. A qualified appraiser must have experience in valuing the specific type of property or have earned a recognized appraiser designation with respect to that type of property.
Editor's Note: Given the requirements to sever the tangible personal property, to obtain a CWA, to obtain a qualified appraisal by a qualified appraiser of the deconstructed items, to list each specific item category with a description of the condition and to complete IRS Form 8283 with the appropriate description and basis of each asset, the pathway to a deduction for a deconstructed home is rather challenging.
Applicable Federal Rate of 5.4% for October -- Rev. Rul. 2023-18; 2023-40 IRB 1 (15 September 2023)
The IRS has announced the Applicable Federal Rate (AFR) for October of 2023. The AFR under Sec. 7520 for the month of October is 5.4%. The rates for September of 5.0% or August of 5.0% 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 2023, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return. Charitable gift receipts should state, "No goods or services were provided in exchange for this gift and the nonprofit has exclusive legal control over the gift property."