IRS Extends Disclosure Deadline for Syndicated Conservation Easement Participants

maxresdefault-3 On April 27, 2017, the IRS issued Notice 2017-29 which extended the deadline for disclosing certain participation in syndicated conservation easements.

On December 23, 2016, the IRS announced disclosure requirements for participants in syndicated conservation easements and substantially similar transactions in Notice 2017-10. Section 3 of that notice required that participants with disclosure obligations under Treas. Reg. § 1.6011-4(e)(2)(i) file their disclosure by June 21, 2017. That deadline has been extended to October 2, 2017.

The May 1 deadline in the original notice remains for material advisors under Treas. Reg. § 301.6111-3(e). Finally, the new guidance clarifies that a donee under IRC § 170(c) is not a material advisor under IRC § 6111.

Notice 2017-29

Contact Asbury Law Firm with any questions for you or your clients.

IRS marks Syndicated Conservation Easements as Listed Transactions

This morning the IRS released Notice 2017-10 identifying syndicated conservation easements as listed transactions.

The notice describes a syndicated conservation easement as a transaction in which “an investor receives promotional materials that offer prospective investors in a pass-through entity the possibility of a charitable contribution deduction that equals or exceeds an amount that is two and one-half times the amount of the investor’s investment.” The rule applies whether the interest is purchased directly or indirectly, i.e., through another pass-through entity.

Transactions of the type described in the above paragraph are now “listed transactions” under Treas. Reg. Sec. 1.6011-4(b)(2) and IRC Secs. 6111 and 6112. Investors, material advisors and appraisers should disclose any such transaction for periods dating back to January 1, 2010. The notice provides that any disclosures required before May 1, 2017 will be considered timely filed if they are filed by that date.

Contact Asbury Law Firm with additional questions about this notice and its application to you or your clients.

IRS Notice 2017-10

Federal Judge Puts New FLSA Overtime Rules in Timeout

dol-logoOn November 22, 2016, U.S. District Judge Amos L. Mazzant granted a nationwide preliminary injunction in favor of the 21 states and more than 50 business groups that sued to enjoin the new Fair Labor and Standards Act (“FLSA”) overtime rule that would increase the minimum salary level for exempt employees from $455 per week ($23,660 annually) to $921 per week ($47,982 annually). The new rule, issued under an executive order of the President, had an effective date of December 1, 2016 and would have required employers to pay overtime to employees who worked more 40 hours per week and were salaried at less than $921 per week or $47,982 annually. Those rules will not go into effect because of this order.

The Court found that the Plaintiffs’ stood a significant chance of success on the merits and would suffer irreparable financial harm if the rule was put into effect as scheduled on Dec. 1, 2016. The Court granted the injunction across the country because the scope of the alleged injury extends nationwide. The judgment stops enforcement of the new overtime rules until and unless the government is successful with an appeal from the Fifth Circuit Court of Appeals.

The rules apply to “white collar” exempt employees, which includes workers that perform administrative, executive or professional duties. CPAs, EAs and other tax return preparers are directly affected by this rule. Many of those employers hire exempt employees on weekly salaries for administrative and professional purposes during the tax filing season. Before the injunction, those seasonal tax workers would have been eligible for overtime unless their weekly salary was in excess of $921/week. Unless the government is successful with an appeal, those rules will not go into effect for the upcoming tax season.

Read the full opinion here: Nevada v. United States Department of Labor, Docket No. 00731

IRS Places Micro Captive Insurance Companies under the Microscope

microscopeOn November 1, 2016, the IRS issued Notice 2016-66 imposing reporting requirements on certain transactions by small captive insurance companies. The notice places heightened scrutiny on micro-captives by describing them as “transactions of interest.” That designation subjects them to additional reporting requirements for 2016 returns as well as earlier years.

Generally, captive insurance companies are corporations that are formed to insure related businesses. The related business (the insured) pays premiums to the captive insurance company in exchange for property and casualty-type insurance coverage. These arrangements are often established to provide coverages that might not otherwise be available commercially. Under section 831(b) of the Code, so-called small or “micro” captives can elect to exclude up to $1.2 million of premiums received from income and only pay tax on investment income. The premiums exclusion is set to go up to $2.2 million beginning in 2017. The premiums paid by the related business that set up the captive also may be deducted as a business expense under section 162.

IRS Notice 2016-66 identifies certain small captives, and substantially similar transactions, as a “transaction of interest.” The new “transaction of interest” designation throws small captive insurance company transactions, and their advisors, into a tax reporting regime that can potentially lead to penalties and examinations. The notice applies the “transaction of interest” tag to small captives that (1) have liabilities for covered losses and expenses in an amount less than 70 percent of the total premiums earned, or (2) provide premium payments as financing to an insured or related party in a transaction nontaxable to the recipient (e.g., loans).

Taxpayers will have to report the small captive “transaction of interest” annually by filing a Form 8886 with their tax returns beginning with the 2016 tax year. The disclosure information suggested by the notice includes (1) whether liabilities incurred are less than 70 percent of premiums (minus certain dividends and loans); (2) whether any loan or other financing arrangement has occurred between the captive and related parties; (3) the captive’s jurisdiction; (4) a description of the types of coverage(s); (5) how the premium(s) was/were determined, including the names and contact information for any actuary or underwriter involved; (6) a description of the claims paid; and (7) a description of the captive’s assets.

Taxpayers may also have to report separate Forms 8886 for each prior year. The Notice requires retroactive reporting for described captives that were formed on or after November 2, 2006, the date the “transaction of interest” regulations first went into effect. Under existing regulations, those prior year disclosures may be due by January 30, 2017.

Each unfiled or late-filed Form 8886 is subject to a penalty in the amount of $50,000, or $10,000 for natural persons, under section 6707A. Material advisors must also file Form 8918 and are subject to additional list maintenance requirements. Under section 6707, an unfiled or late-filed Form 8918 is subject to a penalty in the amount of $50,000 and further potential penalties.

Substantial Compliance Returns for the Charitable Contribution of Real Property

pni0802clayexploreIn a division opinion, the U.S. Tax Court reestablished the prospect of substantial compliance for taxpayers who claim charitable contribution deductions that require an appraisal. Three partners in a LLC sold property to Arizona’s Maricopa Flood Control District (you may have heard of Maricopa here) for less than fair market value. After obtaining two separate appraisals, the taxpayers claimed a charitable contribution on the difference between the lesser of the two valuations and the sale price.

The IRS disallowed the deductions on the grounds that: the appraiser was not qualified; there was not a detailed description of the property; there was no statement that the appraisal was for income tax purposes; the valuation date was not the date of the contribution; and the appraisers’ definition of fair market value did not match that of the regulations. The IRS also argued that the value of the property was less than the sales price.

The government lost on every count. The court rejected the IRS’s nit pick approach to each of the appraisal documentation requirements – including the government’s argument that the Form 8283 did not include the signatures of both appraisers even though the form only has one signature line for an appraiser. The Court found that the difference of 11 to 21 days between the valuation date and the contribution date should not matter without “any significant event that would obviously affect the value of the property.” The Court also found that there are no magic words to fulfill the requirement that the appraisal state that it is for income tax purposes and the inclusion of the statement “for filing with the IRS” with the appraisal constituted substantial compliance with the regulation. With regard to each alleged violation of the charitable contribution regulations, the Court found that the taxpayers’ were in substantial compliance.

Finally, the Court rejected the valuation by the government’s expert which was based on “unreasonable assumptions” and adopted the appraisal presented by the taxpayers’ expert at trial (which was more than claimed on the original returns).

Read the opinion here: Cave Buttes, LLC v. Commissioner

IRS issues AOD on Home Mortgage Interest Deduction Debt Limits

View More: http://aimeeburchard.pass.us/tinyhomeIf you happened to read our article on individual debt limitations for the home mortgage interest deduction, you may be interested to know that the IRS issued an Acquiescence on Decision last week to the Ninth Circuit’s ruling in Voss v. Commissioner, 796 F.3d 1051 (9th Cir. 2015).

IRS AOD 2016-02

Anyone for Tennis? Technical Foot Faults & the Conservation Easement Tax Deduction

TennisBallOnCourtWe just wrapped up the 2016 Wimbledon fortnight. Andy Murray took the Men’s bracket while the Williams sisters are once again making news.

We found the rules that govern the grass courts can be instructive in understanding the outcome of several recent conservation easement tax cases. We put together our thoughts for the new issue of the Bloomberg BNA Real Estate Journal. Most of the article discusses the surprising decisions being reached by the courts but we do manage to reference the ITF, the USTA, Serena Williams and one of Eric Clapton’s old bands.

You can see the article here: Anyone for Tennis? Technical Foot Faults & the Conservation Easement Tax Deduction

Understanding the Conservation Easement Tax Deduction (or Strawberry Fields Forever)

We’ve covered developments in the litigation of conversation and facade easement cases here for some time now.  We’ve recently taken that experience, added a little historical perspective, and put it together for an article in the Federal Lawyer.  (Yes, we mention the Beatles too).

Check it out here:  Understanding the Conservation Easement Tax Deduction (or Strawberry Fields Forever)

Through a Glass Darkly: Sophy, Voss and Interpretation of the Internal Revenue Code

We’ve been away from the blog for a bit while we have focused our efforts on more traditional publications. If you’re up for an article about the home mortgage interest deduction that includes references to the bible, the Rolling Stones, the Tax Reform Act of 1986, the National Center for Lesbian Rights, Long Beach Island and Josh Ritter, then you might like what we recently published in BNA Tax Management Memorandum.

Download a copy here: Through a Glass Darkly: Sophy, Voss and Interpretation of the Internal Revenue Code 

Marijuana Dispensary’s Deductions go Up in Smoke

Medical-Marijuana-SymbolIn an opinion that would make Willie Nelson shake his head, the Tax Court held that a taxpayer was not entitled to deduct business expenses related to his “Health Care” business (read: medical marijuana dispensary).  The Court also disallowed the taxpayer’s cost of goods sold (COGS) and casualty loss for items seized during the Drug Enforcement Administration’s (DEA) raid of his dispensary in 2007.

The taxpayer resided in California and owned two medical marijuana dispensaries in 2007 operating under the name Alternative Herbal Health Services (“AHHS”).  AHHS sold various strands of marijuana, pre-rolled marijuana joints, and edible food items prepared with marijuana.  It did not sell any pipes, papers, or vaporizers, however they were made available to customers to medicate on site.  AHHS provided several educational activities to its customers at no charge including “loading, grinding, and packing marijuana for customers’ use of bongs, pipes and vaporizers.”  On January 11, 2007 the DEA searched the taxpayer’s dispensary in West Hollywood and seized marijuana, food items suspected to contain marijuana, and marijuana plants.

The taxpayer had a very short record retention policy, as his typical practice was to shred all sales and inventory records at the end of the day or by the next day.  When it came time to prepare his 2007 tax return, the taxpayer gave the numbers to his attorney who then gave them to his tax return preparer.  The Schedule C for his 2007 tax return reported a “Health Care” business with $1,700,000 in gross receipts and $1,429,614 in COGS and $194,094 in expenses.  The taxpayer included $600,000 attributable to the value of the marijuana seized by the DEA in his gross receipts and COGS entries for 2007.  All of the gross receipts and expenses reported on the taxpayer’s 2007 return were from the sale or expenses associated with AHHS’s marijuana or marijuana edibles.  After three amended answers, the IRS asserted a tax deficiency of $1,047,743 and assessed a $209,549 accuracy-related penalty under section 6662(a) for the 2007 tax year.

Under IRC § 280E a taxpayer may not deduct any amount paid or incurred in carrying on a trade or business if such trade or business consists of trafficking controlled substances which is prohibited by Federal law or the law of any state in which the trade or business is conducted.  The Court relied on its own decision in Californians Helping To Alleviate Med. Problems, Inc. (CHAMP) v. Commissioner, 128 T.C. 173 (2007) and the U.S. Supreme Court’s decision in Gonzales v. Raich, 545 U.S. 1 (2005) to determine that the taxpayer was trafficking in a controlled substance within the meaning of IRC § 280E.

However, Judge Goeke distinguished this case from CHAMP, where a potion of the taxpayer’s operating expenses were allowed because the taxpayer’s activities included those unrelated to the sale or distribution of marijuana.  In this case, the taxpayer provided no evidence that AHHS sold any non-marijuana-related items.

The Court also disallowed the taxpayer’s IRC § 165 casualty loss deduction and denied his characterization of the marijuana seized by the DEA as COGS in 2007.  The Court found that characterizing the marijuana seized by the DEA as COGS was difficult the taxpayer’s record retention policy left little substantiation for the value of items seized.  Even if he had been able to provide substantiation the product could not be considered COGS because was confiscated and, in fact, was not sold.  When the smoke cleared, Jude Goeke unsurprisingly upheld the accuracy-related penalty under IRC § 6662(a).

Read the full opinion here: Beck v. Commissioner, T.C. Memo. 2015-149.