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Saturday August 1, 2015

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Senate Finance Committee Passes Tax Extenders

On a bipartisan vote of 23-3 on July 21, the Senate Finance Committee passed "An Original Bill to Extend Certain Expired Tax Provisions." The tax extenders bill is retroactive to January 1, 2015 and applicable until December 31, 2016. The bill extends 54 tax provisions for a two year period.

Five of the provisions are important to nonprofit organizations and donors.

1. IRA Charitable Rollover - IRA owners over age 70½ may transfer up to $100,000 each year directly from the IRA custodian to qualified charities.

2. Conservation Easements - There are expanded charitable deductions for gifts of conservation easements.

3. Food Inventory Gifts - Apparently wholesome food inventory gifts qualify for an enhanced charitable deduction.

4. Subchapter S Corporation Gifts - Appreciated property gifts from Subchapter S corporations are facilitated by favorable basis rules.

5. Rent Payments by Charitable Subsidiaries - If they are at fair market value, rent payments from subsidiaries of charitable organizations will not cause unrelated business taxable income.

Chairman Hatch (R-UT) expressed a strong preference to pass permanent provisions. However, he acknowledged that it would be difficult "to create more permanence in our tax code system so that individuals, families, and businesses do not have to wonder whether the tax code is going to change from year to year."

Although he prefers permanent tax extenders, Hatch continued, "For the sake of making this markup less contentious and to ensure we can move more quickly to provide much needed relief to taxpayers, I have agreed to defer litigating the issue of permanence until a later time. But, make no mistake, as Chairman of this committee, my goal is to see many of these provisions made permanent."

Chairman Hatch noted that during the markup of the bill he would enforce a fairly strict "germaneness rule" that limited the number of amendments.

Ranking Member Ron Wyden (D-OR) agreed that the bill should go forward but also preferred permanence. Wyden noted, "We need to extend these tax provisions now in order to provide greater certainty and predictability for middle class families and business alike. However as we look beyond next week, it is critical we all recognize and take action to end this stop and go approach to tax policy through extenders."

Editor's Note: The tax extenders bill is expected to be voted on by the full Senate prior to the August recess. The House leadership also prefers permanent extenders, but could very easily decide to pass this bill in September. If the House and Senate pass the bill, the President may sign it by the end of September. This potential timeframe would allow donors and charitable organizations greater opportunity to plan for 2015 IRA charitable rollover gifts.

Permanent Tax Extenders in 2017?


It is now quite possible that the Senate will pass a two-year tax extenders bill. If so, the House may follow the Senate plan with September passage of a tax extenders bill.

Leaders of both parties in the House and Senate have expressed strong preference for permanent tax extender legislation. The House previously passed permanent business and charitable tax extender bills with bipartisan support. Senate Finance Committee Chairman Hatch and Ranking Member Wyden continue to express strong support for a permanent bill. Therefore, if the two-year bill passes, there are good prospects for a permanent tax extender bill in 2017.

The Senate Finance Committee "marked up" the tax extenders bill on July 21. While the 100 amendments submitted on that bill were largely excluded, it is quite important for nonprofits to understand which Senators supported permanent and expanded charitable provisions.

First, the five charitable provisions in the two-year extender Senate bill all have strong support. In addition, documents from Senate Finance Committee staff show support for four specific charitable amendments. While none were included in the 2015 bill, in 2017 these amendments are likely to have solid bipartisan support.

1. Sen. Thune Amendment #2 - With cosponsors Stabenow, Schumer and Wyden, he proposed permanent passage of the America Gives More Act. This bill makes permanent the IRA charitable rollover, enhanced deductions for food and conservation easement gifts, and a 1% simplified excise tax for private foundations.

2. Sens. Heller-Stabenow #3 - With cosponsors Schumer, Isakson, Bennet, Roberts and Portman, the enhanced deductions for conservation easements would be made permanent.

3. Sens. Schumer-Thune #4 - With support from Sens. Portman, Stabenow and Brown, IRA rollovers would be expanded to allow gifts to donor advised funds.

4. Sen. Schumer #8 - With cosponsors Stabenow and Brown, the IRA rollover would be made permanent and expanded to include transfers from IRAs to charitable gift annuities, unitrusts, annuity trusts and pooled income funds.

Editor's Note: This bipartisan Senate support is excellent for the eventual permanent passage of five charitable provisions and the 1% simplified private foundation excise tax. The two potential additions for the IRA charitable rollover are gifts to donor advised funds and IRA transfers to life income plans. The Charitable IRA Initiative, Inc. is a coalition with leaders from the American Council on Gift Annuities, the Partnership for Philanthropic Planning and the National Catholic Development Conference. The Initiative will continue to build support for both a permanent and expanded IRA charitable rollover.

Estate Victory on Battle of Appraisers


In Estate of John A. Pulling Sr. et al. v. Commissioner; T.C. Memo. 2015-134; No. 1660-09 (22 Jul 2015), the Tax Court accepted the proposed valuation of the estate appraiser.

Decedent John Pulling Sr. passed away on April 17, 2005. The issue before the court involved valuation of three parcels of land in Collier County Florida. The estate owned 100% of the three parcels with an area of approximately 20 acres and also owned 28% of the Temple Citrus Land Trust (TCLT). TCLT owned two larger parcels adjacent to the estate property.

The estate obtained two appraisals of the property by Raymond E. Carroll. The December 1, 2004 appraisal valued all five parcels as a single tract. Subsequently, an appraisal on March 24, 2011 valued the property as of the date of death with the three parcels owned entirely by the estate determined as separate assets.

The IRS audited and questioned the second valuation of $940,000. The IRS claimed that if there were a valuation of all five properties based on the assumption there would be residential development, the three estate parcels should have a value of $2,370,000. The IRS assessed a deficiency of $1,155,065.

The Tax Court noted that the question required determination of whether or not there was a "reasonable likelihood" of assemblage of the properties. If the reasonable likelihood existed, then the higher valuation was appropriate. If not, then the estate valuation would be correct.

The estate noted that TCLT had previously received an offer to combine the property and developed the land for residential sites. TCLT had declined that offer. Therefore, there was not a reasonable likelihood of assemblage.

The IRS observed that the estate held title to the three assets and owned 28% of TCLT. Because the estate only needed to obtain permission from a minority of the TCLT owners for assemblage and development of the properties, the higher valuation should apply.

The court ruled that the IRS had not shown any evidence that the other owners would agree to the assemblage. Therefore, there was no "reasonable likelihood" of assemblage. The $940,000 estate valuation was determined to be appropriate.

Applicable Federal Rate of 2.2% for August -- Rev. Rul. 2015-16; 2015-31 IRB 1 (17 July 2015)


The IRS has announced the Applicable Federal Rate (AFR) for August of 2015. The AFR under Section 7520 for the month of August will be 2.2%. The rates for July of 2.2% or June of 2.0% 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 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 July 24, 2015

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