DOMA Doomed by Estate Tax Refund Claim

us-supreme-courtThe United States Supreme Court has struck down the Defense of Marriage Act (DOMA) as an unconstitutional violation of the “equal liberty” protections of the 5th Amendment.

The dispute in U.S. v. Windsor began when Edie Windsor filed a claim for refund of estate taxes paid after the death of her same-sex spouse, Thea Spyer. Though the court makes little mention of the $353,053 refund claim in its historic opinion, the high court’s ruling affirmed the Second Circuit Court of Appeals’ decision to award the refund.

Read the entire opinion here:
U.S. v. Windsor, Docket No. 12-307 (U.S.S.C. June 26, 2013)

Tax Court: Side Letter Invalidates Facade Easement Donation

tread_HDIn a division opinion that reflects the increasingly technical aspects of defending conservation easement cases, the Tax Court has disallowed deductions for the contribution of cash and a façade easement to a qualified organization.  The charitable contributions were disallowed because the donee issued a “side letter” promising to refund cash contributions and rescind the easement over the donor’s property if the donation was “disallowed” by the Internal Revenue Service.

The taxpayers donated a façade easement over their home in the Treadwell Farms Historic District on the Upper East Side of Manhattan. They obtained a qualified appraisal and took deductions based on their cash contributions and the value of the donated easement. The entire transaction was covered by the side letter. The IRS disallowed the deductions for the cash and easement donations and imposed penalties. The taxpayers petitioned the Tax Court.

The case was submitted to the Court without trial on stipulated facts. The Court found that the promises in the comfort letter made the gifts conditional and thus incomplete for purposes of the deduction. It found that the possibility that the IRS would disallow the contributions was not “so remote as to be negligible” – a standard imposed under the regulations governing the deductibility of conservation easements. The Court noted IRS administrative guidance issued prior to the donation announcing increased scrutiny of somewhat similar transactions and the donee organization’s “standard policy” to refund contributions for challenged transactions as evidence that an IRS disallowance was not “so remote as to be negligible.” The Court did not address the penalties, reserving that issue for future proceedings.

Read the entire opinion here:
Graev v. Commissioner, 140 T.C. No. 17 (2013)

Worker Classification Settlement – Is Now the Time?

IRS_logoIn December 2012, the IRS revised the Voluntary Classification Settlement Program (VCSP) that provides partial relief from federal employment taxes for eligible taxpayers that agree to treat workers as employees prospectively. The updated program relaxes the eligibility requirements and reduces the total tax exposure for participating employers.

The revised standards were accompanied by a special incentive program – Temporary Eligibility Expansion – which considerably relaxed the eligibility standards.

The incentive period for the Expanded Eligibility expires on June 30, 2013.

One enticing aspect of the temporary program is a waiver of the requirement that the employer/business have filed Forms 1099 for its workers for the last three years. In many instances, employers are not only treating workers as independent contractors but also not filing the required Forms 1099 for those workers. Those were the facts of the recent Kurek case where the taxpayer was hit with taxes, interest and penalties for payments to over 30 workers in just one year.

A taxpayer entering the Expanded Eligibility program:

  • pays 25% of the employment tax due for reclassified workers for the most recent tax year;
  • pays a reduced penalty based on a graduated scale; and
  • is not subject to an employment tax audit for those workers for prior years.

The Expanded Eligibility is also available for businesses already selected for or under an employment tax audit – a situation not covered by the standard program.

If you or your taxpayer is currently under an employment tax audit and facing potential exposure for misclassified employees then the Expanded Eligibility VCSP may be the solution. Those taxpayers have until the end of this month to enter the program and avoid certain interest charges and almost certain penalties.

Just Getting Back? The IRS Asked Me to Remind You

soldiers-return_789349iI know you just got back, but the IRS still wants to see that tax return.

Taxpayers who were in military or naval service outside the United States or Puerto Rico (sorry, Fort Buchanan) on April 15 receive an automatic extension of two months to file 2012 returns (no extension filing required). However, the deadline for filing that return is now right around the corner.

Since June 15 falls on a Saturday this year, eligible taxpayers will have until June 17 to file. Remember that the IRS will be closed on Friday, June 14 so it will be unable to accept or acknowledge receipt of electronically-filed returns on that day.

The automatic extension also applies to taxpayers who were living outside the U.S. or Puerto Rico on April 15 and also have a primary place of business or workplace outside the U.S. or Puerto Rico (like those guys in the movie Cocktail).

For service members and taxpayers still not ready to file a complete return, filing a Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return, will give you additional time to empty the shoebox, sort the receipts, and get that return in without penalty.

There, I managed to work the Navy and Tom Cruise into the same post without mentioning that 1980s film about the jets.

Value Matters, Even as Tax Court Denies Conservation Easement Deduction

Autosave-File vom d-lab2/3 der AgfaPhoto GmbHAlthough disappointing to the petitioning taxpayer, yesterday’s Tax Court opinion in Mountanos v. Commissioner is of some relief to practitioners and counsel who follow conservation easement cases closely. Recent decisions in the Tax Court (Belk, Averyt) and the Courts of Appeals (Kaufman, Scheidelman) have turned on technical aspects of the Treasury regulations that govern the deductibility of these charitable contributions.

Mountanos, instead, is a “traditional” conservation easement case in that the validity of the donation, documentation and recordation of the easement were not at issue. We note, however, that the government did argue that the taxpayers did not acquire a “contemporaneous written acknowledgment” from the donee organization or a “qualified appraisal” as required under the applicable statute and regulations but the court did not address these arguments.

Rather this case turned entirely on the value attributed to the taxpayer’s donation of an 882 acre tract of undeveloped land in north central California. The taxpayer’s valuation was based on the before and after approach. Using that method, where the “before” value is based on the highest and best use of the property, the taxpayer’s $4.6 million valuation was based on use of the property as part vineyard and part residential development. The “after” valuation – that is, after the restrictive easement was imposed – was based entirely on recreational use (such as deer hunting).

Judge Kroupa was not persuaded that a 287 acre vineyard “was a legally permissible, physically possible and economically feasible use of the ranch.” The taxpayer’s restricted access to the property (across Federally controlled parkland) and lack of access to proper irrigation made the likelihood of a viable vineyard slim, even if it could have been economically viable (which the court found equally unlikely).

The proposed use of the property for residential development was no more impressive to the court. The entire parcel was subject to a contract with the county, governed by a state statute (the Williamson Act), that forbade residential development – even before the conservation easement donation had been made. The taxpayers did not put on evidence to convince the court that the state law restrictions would not apply if the taxpayer indeed tried to pursue residential development. Accordingly, the court concluded that the taxpayers failed to show that “the conservation easement had any value.”

The court also sustained the 40% gross valuation overstatement penalty asserted against the taxpayers. It is unclear whether the taxpayers put forth a reasonable cause defense to the penalty or not but the court noted that such a defense does not apply “in the case of a gross valuation overstatement with respect to property for which a charitable contribution deduction was claimed under section 170. Sec. 6664(c)(3).”

This was unquestionably a bad result for the taxpayers but still an encouraging note for taxpayers who have made carefully executed and fairly valued conservation or facade easements – you should at least have a day in court.

Read the opinion here:
Mountanos v. Commissioner, TC Memo 2013-138