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Tax News - Washington News
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Sunday December 21, 2014

Washington News

Washington Hotline

Tax Extenders Signed by President

On December 16 the Senate passed the Tax Increase Prevention Act of 2014 (H.R. 5771). The 76-16 vote showed overwhelming support for a one-year retroactive extension of 55 tax extenders. The bill also included the Achieving a Better Life Experience (ABLE) Act. This bill allows families who have a disabled child to create a tax-favored savings account similar to a 529 plan. The ABLE account may enable the child to receive funds for education, housing, medical and transportation expenses. It will generally not limit other private insurance or Medicaid benefits.

During passage of the tax extenders bill, Senate Finance Committee Chairman Ron Wyden (D-OR) commented, “With this stop-and-go tax extender bill, Congress is turning in its tax homework 11 months late and expecting to earn full credit. This package of incentives – which applies only to 2014 – will last two more weeks before families and business will be thrown back into the dark about what taxes they owe. This tax bill doesn’t have the shelf life of a carton of eggs.”

Majority Leader Harry Reid (D-NV) acknowledged that the temporary tax provisions were not the solution. He commented, “This legislation also provides more incentives for American companies to create jobs by giving them a tax incentive for research and development. I hope that as we move into the 114th Congress, Republicans will join us in making many of these tax cuts permanent.”

President Obama signed the bill on Dec. 19. The major charitable provisions in the bill are the IRA Charitable Rollover for individuals age 70½ and older, an enhanced deduction for gifts of food inventory, expanded deductions for conservation easements and benefits for gifts of appreciated property by Subchapter S corporations.

Editor’s Note: The comment by Majority Leader Reid suggests that there is now bipartisan agreement that many of the tax extender provisions could be made permanent. Sen. John Thune (R-SD) has indicated that in January he may again introduce the bill to make the charitable tax extender provisions permanent.

2015 Tax Reform Principles

In January the Senate Finance Committee Chairman will be Orrin Hatch (R-UT). He spoke on December 16th on the Senate floor and explained his principles for 2015 tax reform. Both he and Ranking Member Ron Wyden (D-OR) have expressed confidence that they will be able to move forward with major tax reform next year.

Sen. Hatch outlined seven principles for tax reform. These are a summary of the “Comprehensive Tax Reform for 2015 and Beyond” report that he recently published.

1. Economic Growth – The high corporate and personal tax rates limit the ability of the economy to increase employment.

2. Fairness – The tax code is “riddled with exclusions, exemptions, deductions and credits.” Hatch would eliminate many of the tax expenditures, broaden the base and lower the rates.

3. Simplicity – With four million words, the tax code has grown extremely complex. The time and expense it takes each year to comply with the tax code could employ three million workers full time at $25 per hour.

4. Permanence – There are over 100 tax provisions that are temporary and will expire in the next decade. Good tax policies should be permanent.

5. Competitiveness – With the highest corporate rate in the industrial world and a system of taxation on worldwide income, U.S. companies are continuing to move their operations overseas. A tax structure with lower rates would keep companies here in America.

6. Savings and Investments – Tax reform needs to be designed to encourage Americans to save and invest. This will lead to economic development and greater employment.

7. Revenue Neutral – A major tax reform bill will not pass if it attempts to raise $1 trillion in new taxes. The changes that are proposed can be accomplished without a net increase in actual tax payments.

Editor’s Note: The efforts by Hatch and Wyden perhaps are encouraging the White House and Department of Treasury to publish an administration bill. A spokesman for the White House suggested that the White House may produce a detailed plan in 2015. While tax reform is a difficult process, it will occur in 2015 only if the House, Senate and White House all seek to move that effort forward.

Not Perpetual – No Conservation Easement Deduction

In B.V. Belk Jr. et ux. v. Commissioner; No. 13-2161 (4th Cir. 2014), the court determined that a power of substitution precluded the creation of a perpetual conservation easement. Because the conservation easement was not perpetual, the deduction was denied.

In 1994 and 1996, B.V. and Harriet Belk acquired 410 acres near Charlotte, North Carolina. They transferred the property to Olde Sycamore, LLC and developed a golf course and 402 residential lots. The lots were sold to developers and the Belks retained the golf course with 184 acres.

In 2004, they transferred a conservation easement on the 184 acres to the Smoky Mountain National Land Trust, Inc. The easement was appraised and they claimed a charitable deduction of $10,524,000.

While they attempted to create a grant in perpetuity of the conservation easement, Olde Sycamore retained the right to “substitute an area of land owned by it which is contiguous to the conservation area for an equal or lesser area of land comprising a portion of the conservation area.” In addition, the easement included a savings clause that stated that there would be no power retained that could result in the conservation easement failing to qualify.

The Tax court noted that under Reg. 1.170A-14(g)(6)(i), a conservation easement is required to exist in perpetuity. The two exceptions to that requirement are that a change in conditions makes the easement impossible or impractical, or there is a restriction extinguished by a judicial proceeding. Because the right to substitute property did not fall under either exception, the deduction was denied.

The Belks claimed that there was a right to an easement on similar property that should qualify for the “perpetuity” requirement. In addition, the savings clause should be sufficient to preserve the charitable deduction.

The court noted that all property is unique and the statute requires a perpetual easement on the donated property. There is no exception for a right of substitution. In addition, a savings clause is generally not recognized by the courts on public policy grounds. Because the retained substitution power eliminates the grant in perpetuity, the conservation easement deduction was denied.

Applicable Federal Rate of 2.2% for January -- Rev. Rul. 2015-1: 2015-1 IRB 1 (19 Dec 2014)

The IRS has announced the Applicable Federal Rate (AFR) for January of 2015. The AFR under Section 7520 for the month of January will be 2.2%. The rates for December of 2.0% or November of 2.2% 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 2015, 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 December 19, 2014
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