This week, Joe Kristan (CPA & Shareholder, Roth & Company (Des Moines, Iowa); Editor, Tax Update Blog) discusses a Tax Court case illustrating the importance of complying with the technical requirements for deducting gifts of long-term capital gain property to charity.
Aircraft donation fails to clear runway.
Sometimes it’s easier to land an airplane in the fog than to land a charitable deduction.
When you donate appreciated long-term capital gain property to charity, you can get a deduction for the full fair market value, even if your cost is much less than that. You never have to include the appreciation in income. That makes such donations a great tax planning tool. It also gives taxpayers incentive to value such donations aggressively.
To rein in abuses, Congress required donations of property to be carefully documented with appraisals when claimed deductions exceed $5,000. Only publicly-traded securities are excepted from this rule. The appraisal has to meet requirements as to form and appraiser qualifications. The taxpayer has to file Form 8283 with the return claiming the charitable deduction, and the appraiser has to sign it. The taxpayer also has to get a letter from the charity acknowledging the deduction and stating whether goods or services were received for the contribution by the time the return for the contribution year is due.
Taxpayers are always pushing the limits, and when claimed charitable deductions for cars got out of control, Congress enacted new restrictions on donations for cars, boats and airplanes. The recipient of the vehicle has to provide a Form 1098-C to the IRS that has the donor’s tax ID number. If the recipient sells the vehicle, the deduction is limited to the vehicle sales price.
The taxpayer donated a half-interest in a 1969 Hawker-Siddeley DH124-400A jet to the Houston Aeronautical Heritage Society on the last day of 2010. He had bought the half-interest for $21,000 in 2007.
The claim for the charitable deduction was handled in a strange way. He apparently never claimed a deduction on the 1040 he filed for 2010. He was examined on the return for other issues, and while the exam year was still open he decided to claim a $338,080 deduction for his donation. Judge Lauber explains:
On April 14, 2016, petitioner filed a Form 1040X, Amended U.S. Individual Income Tax Return, for 2010. On this return he claimed for the first time a deduction of $338,080 for his alleged contribution to the Society of a 50% interest in the aircraft. Petitioner included with this amended return: (1) an acknowledgment letter addressed to Philippe Tanguy, dated December 30, 2010, and signed by Drew Coats as president of the Society; (2) a Form 8283 executed by Amy Rogers, managing director of the Society, and dated April 13, 2016; (3) a copy of an “Aircraft Donation Agreement” allegedly executed on December 31, 2010, by Drew Coats as president of the Society but bearing no other signatures; and (4) an appraisal by Winston McKenzie dated April 7, 2011, opining that the fair market value of petitioner’s 50% interest in the aircraft, as of December 30, 2010, was $338,080. Respondent represents that the IRS “will not process petitioner’s amended 2010 tax return.”
Here the deduction crashed due to cascading system failures. The lack of a timely-filed 1098-C alone was enough to wreck the deduction. The taxpayer tried to claim that the information given to the IRS was good enough, but Judge Lauber disagreed (my emphasis):
Petitioner’s request that we “read together” multiple documents would be more compelling if the Society had filed (as section 170(f)(12)(D) required) a Form 1098-C that timely supplied the IRS with petitioner’s TIN and the other information specified in paragraph (12)(B). But the Society did not file Form 1098-C, with the result that the IRS received no information about petitioner’s alleged gift until years after it was supposedly made. Here, there is no contemporaneous document with which the Aircraft Donation Agreement could be “read together” to cure its omission of the statutorily-required information.
The deduction never gets off the ground. Judge Lauber again, with some citations omitted:
In sum, we conclude that petitioner did not include with his amended 2010 return, as required by section 170(f)(12)(A)(i), “a contemporaneous written acknowledgment * * * by the donee organization that meets the requirements of subparagraph (B).” Congress enacted this provision after identifying serious tax compliance problems relating to charitable contributions generally and to gifts of used vehicles in particular. Congress accordingly imposed very strict requirements and provided explicitly that “no deduction shall be allowed” unless these requirements are met. Sec. 170(f)(8)(A), (12)(A)(i). We are not at liberty to override this legislative command.
There are some other problems with the deduction even if it had survived the lack of a Form 1098-C. The biggest is that the deduction was not claimed on a Form 8283 submitted with the taxpayer’s original return. No 8283 on a timely return normally kills the deduction forever.
The Moral? If you are looking to claim a deduction for a donation of appreciated property on your 2016 return, you need to have all of the paperwork in order before you file. You need your acknowledgement from the charity in the proper form. If you donated a vehicle, you need your 1098-C. If you claim a donation over $5,000 for property that’s not publicly-traded, you need a properly prepared donation and you need your Form 8283 properly signed off by the charity and the appraiser. If you need to extend to get the paperwork done, do it. Shortcuts don’t get off the runway.
Cite: Izen v. Commisioner, 148 T.C. No. 5 (Mar. 1, 2017).
Here’s the rest of this week’s Tax Roundup:
Monday, February 27, 2017
Annette Nellen, Global tax blogs includes 21st Century Taxation Blog. “Feedspot has gathered the global list of top 100 tax blogs based on various criteria.”
Jack Townsend, FBAR Due Date Reminder – April 18, 2017 Extended to October 16, 2017. “And, FinCen is providing an automatic extension (no filing required to obtain the extension) until October 15 (which, for the 2016 report, will be October 16, 2017, because October 15 is a Sunday).”
Jason Dinesen, Getting Your Business of to a Good Start, Part 8: Estimated Tax Payments. “First of all, tax refunds are not a magical creation (regardless of what the H & R Block and TurboTax commercials might imply).”
Jim Maule, When Tax Revenues Are Better Than Expected But Less Than Required. “Now comes news that for its first month, the revenues from the [soda] tax exceeded what was expected but fell short of the amount needed to fund the programs that the revenue from the tax is intended to support.”
Kay Bell, Coloradans hate the state’s new ‘tattletale’ sales tax law, but it will take effect this summer:
Under the new law, remote sellers that make more than $100,000 in sales must notify Colorado customers that their purchases are taxable. Plus, the sellers must send reports to the state tattling showing the total amount paid by the purchaser that year for online purchases.
The Direct Marketing Association (DMA) sued to stop the tax. It went all the way to the U.S. Supreme Court, which declined to hear the case, thereby leaving the law in place.
As the states continue to erode the “physical presence” test for online sellers, this sort of thing will lose its importance.
Kristine Tidgren, Iowa Supreme Court Broadly Interprets Elder Abuse Statute (Ag Docket)
Lew Taishoff, STIPULATE FACTS, NOT JURISDICTION. “And here ex-Ch J Iron Mike finds himself bemused by the contrapuntal motions.”
Morgan Scarboro, Testimony: Tax Reform Proposals in Maine (Tax Policy Blog). “At a current top rate of 10.15 percent, Maine has a relatively high top marginal income tax rate, both regionally and nationally. Taxation should be neutral; however, high individual income tax rates can distort decision making.”
News from the Profession. H&R Block Will See AICPA’s Sternly-Worded Letters and Raise You a Kitten (Adrienne Gonzalez, Going Concern)
Robert Goulder, Will Delay Doom the DBCFT? (Tax Analysts Blog):
For a moment, let’s ponder the stupendous inefficiency involved in transitioning the world’s largest economy to an alternate tax code, only to be forced to unwind the whole project a few years down the road. Why bother? (Unless you enjoy chaos for the sake of chaos.) So why aren’t more members of Congress screaming about the obvious WTO obstacle presented by the blueprint? Probably because they realize that the plan faces more pressing concerns (the retail lobby). And also because drawing public attention to our WTO obligations implies a subtle forfeiture of sovereignty that doesn’t play well in an era of rampant populism. So it’s better not to fixate on how unelected foreign bureaucrats might dictate what tax laws Congress can pass — wiser to sit back and let Wal-Mart and Target pick apart the DBCFT. They’re already doing a fine job of that.
One lesson we might take from the disastrous Affordable Care Act is that we shouldn’t be in a hurry to blow up the existing system.
Roger McEowen, Joint Employment Situations In Agriculture – What’s the FLSA Test? “A common scenario in many agricultural settings is that a farmer will have crops harvested by an independent contractor. In this situation, the farmer is considered to be a joint employer with the contractor who supplies the harvest hands if the farmer has the power to direct, control, or supervise the work, or to determine the pay rates or method of payment for the harvest hands.”
Russ Fox, The Hidden Bitcoin Trap: FBAR. “Coinbase is located in San Francisco; it’s not a foreign financial firm. However, Blockchain is based in Luxembourg. Any American who is using Blockchain who has a tax filing requirement must note they have a foreign financial account on Question 7a.” Yikes.
Stu Bassin, The Sixth Circuit’s Summa Bomb-shell (Procedurally Taxing). “Recognizing the stakes which would be at risk in a Supreme Court ruling on Summa, the Service and the Solicitor General are more likely to dodge the issue by offering a narrow reading of Summa, attempting to confine its reach to cases involving statutory grants of narrow tax benefits to a particular favored category of taxpayers such as DISCs.”
TaxGrrrl, Taxgirl Goes To The Movies (Oscars Edition): Arrival. “Curious about the potential tax consequences of activities in your favorite movies? Here’s the rundown. First up: Arrival.”
Tax Justice Blog, Tax Justice Digest: The Problems with a Border Adjustment Tax.
TaxProf, Is Sixth Circuit Approval Of Funding Roth IRAs With DISC Commissions A Harbinger Of Greater IRS Adherence To Language Of Tax Code?
Tuesday, February 28, 2017
Andrew Mitchell, Being Engaged in U.S. Business Through Independent Agents. “Some people believe that there is a bright line test that allows them to avoid being ETOB by only acting through independent agents in the U.S. There is no such bright line test. In fact, foreign persons can be ETOB even though they are utilizing only independent agents in the U.S.” ETOB = engaged in the conduct of a trade or business in the U.S.
Kay Bell, 6 signs married couples should consider separate tax returns. “Just how do y’all feel about each other?”
Keith Fogg, Quick Follow Ups on Vigon v. Commissioner and Private Debt Collection (Procedurally Taxing). “The IRS recently released sample CP40 notice letter. The letter alerts the taxpayer that their account has been assigned to a PDC. The hope is that the letter will prepare the taxpayer for the call(s) from the PDC and keep the taxpayer from having concerns that the PDC is a scam artist.”
Len Burman, What Markets Tell Us About The Prospects For a BAT (TaxVox):
Currency markets may provide a clue to what traders think is going to happen. If they thought that the dollar was going to appreciate significantly in six months, they’d be dumping foreign currency and buying dollars until the price was close to where they expect it to be. If prospects are uncertain, you’d still expect to see a bump in the value of the dollar—just not as much.
Yet, the value of the dollar has barely budged from its pre-election level, when few expected the House GOP plan would become law.
That could change in a hurry, of course, but people betting real money don’t seem to see the House GOP plan becoming law anytime soon.
Lew Taishoff, SO DEAR TO MY HEART. “No, not the 1948 Disney feel-good movie; rather, today’s off-the-bencher from STJ Lewis (‘Oh, that Spelling!’) Carluzzo concerns two subjects dear to my heart… legal fees and deductible business expenses.”
News from the Profession. And the Award For Worst Oscars Gaffe Goes To… PwC (Adrienne Gonzalez, Going Concern).
Robert Wood, Non-Cash Income IRS Requires To Be Reported On Your Taxes:
Finally, phantom income from entities can also be a big problem. Partnerships, limited liability companies (LLCs) and S corporations are pass-through entities. They are generally not taxed themselves; their owners are taxed. Each owner receives a Form K-1 that reports his or her appropriate share of the income (or loss), even if that income is retained by the business and not distributed to the owners. You are obligated to report it, regardless of whether you received any payout. The IRS matches Forms K-1 against individual tax returns.
The amount of cash you receive from a pass-through can be a poor indicator of how much tax you will have to pay when you get your K-1.
TaxProf, CBO: U.S. Is On Path To Highest Budget Deficits And Debt In Our History. Have a nice day!
Wednesday, March 1, 2017
Jack Townsend, Great Second Circuit Dissent on Potential Overreach in Tax Obstruction. “Some of the crimes deployed in the fight against tax misbehavior, however, are much loosier-goosier.”
Jason Dinesen, Getting Your Business Off to a Good Start, Part 9: Wrapup Post
Jim Maule, Judge Judy Almost Eliminates the National Debt. “I wonder if anyone from the IRS watched the show.”
Joseph Henchman, D.C. to Enact Remaining Tax Cuts After Projection of Large Recurring Surplus (Tax Policy Blog). “Some people still don’t believe us when we say the District of Columbia passed bipartisan tax reform in 2014.”
Kay Bell, Amazon collecting sales tax in 40 states & D.C. Including Iowa.
Keith Fogg, What Does “Prior Opportunity to Dispute a Liability” Mean? (Procedurally Taxing). “The result here is disappointing for those of us hoping that the CDP process can provide a pre-payment forum for tax liabilities, usually a penalty, that do not have the benefit of the deficiency process and are not divisible.”
Kristine Tidgren, Limiting Damages in Ag Nuisance Lawsuits: A Bill to Watch (Ag Docket)
Lew Taishoff, THE CHECK’S THE THING – PART DEUX. “But the claims don’t work when the documents, and especially the checks, don’t get into the record.”
Lisa Christensen Gee, Return of the Moderate: A Kansas Force Awakens (Tax Justice Blog). “When lawmakers pick up the work again the week of March 6, expect to see another wave of efforts to eliminate the business pass-through exemption and to find agreeable adjustments to income tax brackets and rates.”
News from the Profession. Accountants’ Résumés Are the Worst (John Prumatico, Going Concern). “he bill would limit allowable damages in nuisance lawsuits filed against animal feeding operations that have used ‘existing prudent and generally utilized management practices reasonable’ for their operations.”
Robert Wood, Renounce U.S., Here’s How IRS Computes ‘Exit Tax’. “The Exit Tax is computed as if you sold all your assets on the day before you expatriated, and had to report the gain.”
Roger McEowen, Using Schedule J As A Planning Tool For Clients With Farm Income:
Farm income averaging can provide a significant tax savings for farm (and fishing) clients in certain situations. Watch for the retiring farmer that has carryover grain sales and/or income from a machinery auction. Also, it may be worthwhile to try to cause a farm client’s farm income to spike periodically (every three to four years) to avoid self-employment tax, while simultaneously lowering income tax costs by an election. Also, look to utilize the election on behalf of maximum tax bracket taxpayers.
Farm tax rules are a strange mix of great deals that no other business gets — like income averaging and cash basis deductions for production costs — and weird restrictions to keep non-farmers from using farm tax breaks as tax shelters.
TaxGrrrl, Live Blog, Annotated: Trump Address To Joint Session Of Congress:
9:31 p.m. The President says he is working on historic tax reform. He promises huge cuts for corporations and “massive tax relief for the middle class.” However, he did not offer any specifics.
There seems to be a consensus that tax cuts are coming. Whether those will be simply cuts or actual reform is up to Congress.
You can read what Steve Forbes had to say about how big (and bold) those tax cuts should be here.
In other words, we still don’t really know what the Trump tax package will look like. There was no endorsement of the destination-based cash flow tax, but the strident protectionism might lead to that.
Thursday, March 2, 2017
Annette Nellen, Tax Paternalism – California AB 252. “That is, the state tells the local governments what they can and can’t tax all in the name of helping an industry grow.”
Jack Townsend, Court Denies Suppression and Exclusion Despite Odd Facts Regarding Third Party Recordkeeper Summons. “I write today about what seems to me to be a significant failure on the part of an IRS CI agent with respect to a third party recordkeeper summons.”
Kay Bell, IRS efforts to catch tax and other financial crooks hindered by budget cuts and investigator attrition.
Keith Fogg, Does Failure to List a Refund Claim in a Debtor’s Bankruptcy Schedules Provide the IRS a Defense Barring the Refund (Procedurally Taxing). “In this case, the IRS seeks to knock out their claim because of the failure to list it in the bankruptcy proceeding regardless of the merits of the claim.”
Lew Taishoff, TREATMENT FIRST, DIAGNOSIS AFTERWARD. “All I can say is that, when I was a patient at Duke University, they didn’t ask about my ’emotional, mental, spiritual and environmental influences.’ They just operated and saved my life.”
News from the Profession. Here’s a Photo of AICPA CEO Barry Melancon Having the Most Interesting Conversation of His Life (Caleb Newquist, Going Concern)
Peter Reilly, Florida Man Runs Afoul Of IRS Basis Rules For S Corporations:
You will rarely see a better illustration of Reilly’s Fourth Law of Tax Planning, than the Tax Court’s decision yesterday in the case of William and Amaryllis Tinsley. The Fourth Law by the way is – Execution isn’t everything but it’s a lot. The Tinsleys were hoping to post a good sized negative number ($110,480) from their S Corporation (Command Computers of West Florida Inc) on their individual return. The loss was disallowed because of lack of basis. The Tinselys thought they had solved the problem of basis. Maybe they had in some sense, but not to the satisfaction of the Tax Court.
In tax, paperwork matters.
Renu Zaretsky, Them’s the Breaks: Taxing Retirement Income:
My TPC colleague Howard Gleckman noted that in 2011 “fewer than one percent of seniors moved from state to state after age 65 for any reason. And very few appear to do so to reduce their taxes.” Moreover, he noted in 2016 that “Millionaires hardly ever move from one state to another for any reason, and when they do there is little evidence that their choice is driven by taxes.”
States may be slow to catch on to the folly of retirement tax breaks. Illinois Governor Bruce Rauner—leading a state that has not passed a budget since 2015—says he’d support the Illinois Senate’s bipartisan budget plan, but only under certain conditions. Among them: No state tax on retirement income.
Other governors are learning more quickly. In Michigan, Republican Rick Snyder said in 2013 that reducing the private pension exemption was an “issue of fairness.”
Being old isn’t the same as being poor. On average, older taxpayers are wealthier than younger ones. A working family shouldn’t have to pay taxes where a wealthy retiree does not.
Richard Phillips, Fact-Checking Tax Policy Points in President Trump’s Address to Congress (Tax Justice Blog). “Returning to a frequent campaign theme, President Trump claimed that his tax and other economic policies would benefit the middle class. The reality is that President Trump’s previously proposed tax plans would do nothing like this.”
Robert Sledz, U.S. IRS Issues Draft Instructions for Filing Country-by-Country Reports (Thomson Reuters Tax & Accounting Blog). “Form 8975 requires the ultimate parent entity of a U.S. MNE group with revenue for the preceding annual accounting period of $850 million or more to report information, on a country-by-country basis, related to the group’s income and taxes paid, together with certain indicators of the location of the group’s economic activity.”
Robert Wood, You Just Filed Your Taxes — With An Oscar Best Picture-Size Mistake. You mean you read the wrong taxpayer’s income on national television?
TaxProf, Morse: A Transition Tax On Deemed Repatriated Foreign Earnings. “This article discusses a transition tax on deemed repatriated foreign earnings. It argues for a simple, rough-justice design and no offset for foreign tax credits.”
Tony Nitti, “Trump’s ‘Massive’ Middle-Class Tax Cuts Are Tiny Compared To Those Promised To The Rich”
Friday, March 3, 2017
Accounting Today, Headlines I Never Expected to See: Firms vie over rights to Arthur Andersen name
Frances Coppola, Would Somebody Please Explain To President Trump The Difference Between VAT And Border Tax?
James Paille, Legislation Updates for 2017 (Thomson Reuters Tax & Accounging Blog). “An early look at tax reform shows that this has a long way to go.”
Jason Dinesen, Glossary: Form W-2. “The W-2 shows the amount of wages paid to the employee during the year, as well as the amount of taxes withheld.”
Jim Maule, A Tax Based on Skin Color, Gender, and Sexual Orientation? “This proposal is a magnificent example of what happens when emotional reactions to a problem trump the use of reasoning.” Not to mention the problems of auditing sexual orientation.
Kay Bell, $1 billion awaiting taxpayers who didn’t file 2013 returns:
Three-year window closing: But you have to do so by April 18.
The deadline is not just the IRS setting a time. It’s the law, which says that if no return is filed to claim a refund within three years, the money becomes the property of the U.S. Treasury.
Since 2013 returns were due in April 2014, that three-year filing window closes forever on 2017’s tax due date.
That window may have already closed for many taxpayers. If you don’t file a return for a year in which there was withholding on your wages, you can lose your refund after only two years. See, for example, Can I Recover Income Tax Refunds When I File My Returns Late? (Tom Regan)
Kyle Pomerleau, Is Trump Supporting a Border Adjustment for the Wrong Reason? (Tax Policy Blog):
Border adjustments are not a trade policy tool. They do not put American goods in foreign countries at a disadvantage; enacting one in the United States would not balance the playing field for goods produced here; and a border adjustment would not reduce our trade deficit.
Instead, border adjustments are a tax policy tool. They switch a tax’s base from an origin-based tax (a tax on goods and services produced in a country) to a destination-based tax (a tax on goods and services consumed in a country). Border adjustments do not have an impact on trade.
Of course, it’s not clear that Trump indeed does support a border-adjusted cash flow tax.
Lew Taishoff, “BRASS” ISN’T THE WORD. “So Joey A sends in a 1040X, six (count ‘em, six) years after the alleged donation.”
Misha Hill, Undocumented Immigrants Pay Their Fair Share (Tax Justice Blog).
Roger McEowen, Farmers, Ranchers and Government Administrative Agencies. “Courts generally consider only whether the administrative agency acted rationally and within its statutory authority. Consequently, a particular farmer or rancher bears the burden of insuring that the record is adequate for the appeal of the issues involved before the matter leaves the administrative process.”
TaxGrrrl, The Man With The Scam (In The Style Of Dr. Seuss)