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Friday February 27, 2015

Washington News

Washington Hotline

“Phishing” Warning for Tax Preparers

In IR-2015-31, the IRS warned tax preparers to be on guard for “bogus emails.”

IRS Commissioner John Koskinen stated, “I urge taxpayers to be wary of clicking on strange emails and websites. They may be scams to steal your personal information.”

The bogus emails are sent by potential identity thieves to tax preparers. Each tax preparer has an Electronic Filing Identification Number (EFIN).

A potential identity thief will send an email to a tax preparer that links to a computer controlled by the thief. If the tax preparer clicks on a link and tries to log in, the identity thief will capture the username and password. The identity thief may then attempt to use that login to obtain the tax preparer’s information and file for improper tax refunds.

Phishing is one of the “Dirty Dozen” IRS scams. Identity thieves typically will send unsolicited emails claiming to be from the IRS or an IRS-related organization such as the Electronic Federal Tax Payment System (EFTPS). Anyone receiving a bogus email should forward it to phishing@irs.gov.

Commissioner Koskinen reminded taxpayers that the IRS generally does not initiate contact by email in order to request personal information.

House Passes Permanent Small Business Tax Extenders

On a bipartisan vote of 272-142, the House passed America’s Small Business Tax Relief Act of 2015 (H.R. 636).

House Ways and Means Chair Paul Ryan (R-WI) was pleased with the bipartisan vote. He noted, “Let’s stop this crazy notion of injecting all this uncertainty into small businesses and make this provision that is bipartisan, this provision that we know creates jobs, let’s make it permanent so that the small business men and women of America can plan.”

The bill has three major sections. First, under Sec. 179 small businesses would be able to expense up to $500,000 each year for investments in new equipment. This deduction is phased out if the investments exceed $2 million per year.

A second provision makes permanent a five-year recognition period for built-in gains of Subchapter S corporations. This permits a C corporation to elect Subchapter S status and facilitates an asset sale of that business after five years.

The third provision encourages charitable gifts of appreciated property by Subchapter S corporations. The reduction in shareholder basis under that provision is not the fair market value, but the internal Subchapter S corporation basis in the gifted property.

Ranking Member Sander Levin (D-MI) opposed the bill. He stated, “The bill before us on Sec. 179 addresses an important subject. It will likely be part of any tax reform. And until then, it will be renewed. That is certain. But it deserves not to be left out of a tax reform process that should give careful and comprehensive consideration to all of the tax provisions in our code.”

Editor’s Note: The America’s Small Business Tax Relief Act (H.R. 636) now joins the America Gives More Act (H.R. 644). Both bills passed the House with strong bipartisan majorities. The Senate moves more slowly, but is likely to consider both bills this spring. The Senate may follow the strategy from December of 2014 to combine these bills with other provisions that are likely to produce bipartisan support. The White House continues to threaten to veto the permanent extender bills. It also has requested permanent status for the Earned Income Tax Credit (EITC) and the American Opportunity Tax Credit (AOTC). If the Senate does move forward this spring, it is possible that the House, Senate and White House may enter into a compromise by mid-year.

Charitable Deduction Denied Due to Estate Litigation

In Estate of Eileen S. Belmont et al. v. Commissioner; 144 T.C. No. 6: No. 9409-11 (18 Feb 2015), an estate received a retirement account and “permanently” set aside most of those funds for charity. Because part of the set aside funds were spent on litigation expenses, the Tax Court denied the estate charitable income tax deduction.

Decedent Eileen S. Belmont passed away on April 1, 2007. Her estate consisted of her Ohio home, a California condo and a State Teachers Retirement Pension Fund of Ohio account. The estate received a distribution from the retirement account of $243,463 and set aside $219,580 “permanently” for charity. The charitable amount was not segregated. When the estate income tax Form 1041 was filed on July 17, 2008, the charitable gift had not been completed.

Decedent’s brother David lived rent-free in the California condo from mid-2006 until Belmont’s death in 2007. Counsel for David initiated proceedings in the Los Angeles County Probate Court and claimed a “resulting trust” that entitled him to a life estate in the condo. The probate court held in favor of David on January 26, 2012 and the California Appellate Court affirmed the decision on February 28, 2013.

As a result of the litigation, the estate depleted part of the $219,580. On September 11, 2013, the estate checking account was approximately $185,000.

The Tax Court noted that under Reg. 1.642(c)-2(d) the estate claimed a charitable deduction for funds “permanently set aside for a purpose specified in Section 170(c), or is to be used exclusively for religious, charitable, scientific, literary or educational purposes.” However, the court noted that the risk of not funding the charitable purpose must be “so remote as to be negligible.”

The estate maintained that the “unanticipated litigation costs” were not foreseeable. However, the Tax Court noted that brother David had stated his claim prior to the estate filing date of IRS Form 1041 on July 17, 2008. Because the estate had notice of the claim, it failed the “so remote as to be negligible” test. The charitable deduction was denied.

Editor’s Note: This is a textbook case why IRD should not be transferred to the estate, but through selecting the charity as a designated beneficiary. While some IRD transfers through the estate are qualified, the tax disaster in this case highlights the evident risk. The charitable recipient waited eight years and lost approximately one-half of the value due to litigation costs and income tax.

Applicable Federal Rate of 1.8% for March -- Rev. Rul. 2015-4: 2015-10 IRB 1 (18 Feb 2014)

The IRS has announced the Applicable Federal Rate (AFR) for March of 2015. The AFR under Section 7520 for the month of March will be 1.8%. The rates for February of 2.0% or January 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 February 20, 2015

Previous Articles

IRS “Dirty Dozen” Tax Scams

Selecting Your Tax Preparer

IRS Tips to Avoid Identity Theft

White House Tax Proposals

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