National Tax Security Awareness Week
The IRS Security Summit sponsors this week each year. Security Summit professionals warned about increased risks during the coming months. Fraudsters continue to trick people into sharing financial information. The scammers may use email, text messages or online methods to attempt to gain information, file tax returns and steal refunds.
IRS Commissioner Chuck Rettig noted, "The nation's tax community has successfully joined forces to protect taxpayers through the Security Summit effort, but we need help in this continuing battle. Taxpayers and tax professionals are the first line of defense against scammers looking for refunds. We are entering a sensitive holiday and tax period and we urge people to protect their personal information and avoid problems at tax time."
The focus of the educational materials for Tax Security Awareness Week will be to explain schemes connected with COVID, stimulus payments and tax refunds. There will be additional efforts to provide information for young individuals and older Americans.
The Security Summit partners have uploaded several YouTube videos. Individuals may access the YouTube videos on "Easy Steps to Protect Your Computer and Phone" or "Security Measures Help Protect Against Tax-Related Identity Theft."
The National Tax Security Awareness Week schedule includes tips for five days.
- Cyber Monday — Individuals should be aware of methods to protect data. All computers and phones should have security software that updates daily. You should understand phishing scams, especially those connected with COVID-19 or Economic Impact Payments. Use strong and unique passwords and two-factor authentication if possible. When using a financial website, check to see that the web address starts with "https" and is using appropriate security.
- Giving Tuesday — Many nonprofits highlight the opportunity to make gifts on November 30, also known as Giving Tuesday. However, taxpayers need to be careful to avoid being duped by fake charities. Do not let callers purportedly from a charity pressure you into giving an immediate donation. Ask a caller for the name and website of the nonprofit, go to the website and confirm the mailing address. Make gifts by check or credit card, not by gift card or wiring funds. Be sure to keep your records for donations.
- Tax Professionals — Identity thieves continue to ramp up attacks on tax professionals. CPAs and other tax advisors should use two-factor authentication for software accounts available to clients. Use a Virtual Private Network (VPN) if you are working remotely. Tax professionals are required to have a written data security plan. It is also helpful to create a data theft recovery plan. The IRS website has a helpful "Taxes-Security-Together" checklist for professional advisors.
- Digital Signatures — The IRS has begun to accept a number of digital signatures. Tax professionals may use their Tax Pro Account to create Power of Attorney and Tax Information Authorization requests. Taxpayers with an online account may have the ability to connect with their tax professional.
- Business Safeguards — Most cyber-attacks are against businesses with fewer than 100 staff. Small businesses should be aware of good security practices. Avoid Form W-2 scams that attempt to steal your employees' income information. If you experience an identity theft, you should file Business Identity Theft Affidavit — Form 14039-B.
Mortgage Blocks Façade Easement Deduction
In 901 South Broadway Ltd. Partnership et al. v. Commissioner; No. 14179-17; T.C. Memo. 2021-132, a California partnership (Partnership) granted a façade easement to a non-profit on a building that was subject to five mortgages. Because the mortgages were not properly subordinated, the Tax Court held that the deduction was denied.
Partnership granted a conservation easement on the 901 S. Broadway Avenue building to the Los Angeles Conservancy. Based on a qualified appraisal, Partnership claimed a deduction of $20.01 million on the gift date of November 1, 2007. The IRS audited Partnership and noted there were five deeds of trust with improper subordination agreements. Therefore, the IRS denied the deduction.
A façade easement deduction is permitted if the property interest is granted to a qualified nonprofit in perpetuity and exclusively for conservation purposes. Section 170(h)(1). If there is a mortgage, the right of the mortgagee must be subordinated to the interests of the nonprofit. Reg. 1.170A-14(g)(2).
The GMAC Commercial Mortgage Corporation deed of trust language stated, "If the premises covered hereby, or any part thereof, shall be damaged by fire or other hazard against which insurance is held, the amounts paid by any insurance company in pursuance of the contract of insurance to the extent of the indebtedness then remaining unpaid, shall be paid to the Beneficiary and, at its option, may be applied to the debt or released for the repairing or rebuilding of the premises."
Partnership claimed the deeds of trust required the three lenders holding the five mortgages to use insurance or condemnation proceeds to repair or restore the building. However, the Court noted "The implied duty of good faith and fair dealing, as interpreted by California law, would allow GMAC to exercise its right to use insurance or condemnation proceeds to satisfy the indebtedness secured by its mortgages to the extent that it could demonstrate that the casualty or condemnation impaired the security for that indebtedness."
Partnership then claimed that the probability of failure to repair the building would be remote and, therefore, the mortgage subordination provision still qualified under Reg 1.170A-14(g)(3). The taxpayer also noted that the intent of Partnership was to create a qualified easement in perpetuity.
However, the Court stated that while in some circumstances the Lenders would have a good-faith obligation to repair the building, there are circumstances in which "the Lenders would have priority rights to use insurance or condemnation proceeds to satisfy the indebtedness secured by their mortgages." Therefore, the potential right of the lenders to use the proceeds of insurance or condemnation to satisfy their mortgage causes the deduction to be denied.
Will Amended Deed Save Deduction?
In Buckelew Farm LLC et al. v. Commissioner; No. 14273-17, the Tax Court denied an IRS motion for partial summary judgment. While the conservation easement extinguishment provision in the original deed was not sufficient, there was a question of fact with respect to an amended deed that had subsequently been filed by the taxpayer.
Buckelew Farms LLC is a Georgia limited liability company. Between 1999 and 2006, it acquired 1,544 acres in Jones County, Georgia. On December 12, 2013, Buckelew sold 99% of the partnership interests for $6 million to Big K LLC. Eight days later, on December 20, 2013, the Partnership donated a conservation easement to the Southeast Regional Land Conservancy (SERLC). Based on an appraisal, Buckelew claimed a $47.57 million charitable contribution deduction for the gift of the easement. The easement was designed to protect diverse habitats, rare species and important green space per Sec. 170(h)(4)(A)(ii). The deed was recorded on December 26, 2013.
The IRS audited and issued a Notice of Final Partnership Administrative Adjustment (FPAA). It denied the charitable deduction on the grounds that the extinguishment provision in the deed was not qualified, and claimed the conservation easement deduction value was $324,000 rather than $47.5 million.
A conservation easement will qualify for a charitable deduction if the purpose is protected in perpetuity. The deed may recognize that circumstances may make the continued use of the conservation purpose impossible or impractical. Reg. 1.170A-14(g)(6)(i).
If there is a judicial extinguishment of the easement, the nonprofit must receive a proportionate share of the proceeds. Reg. 1.170A-14(g)(6)(ii). The regulations require the nonprofit to receive "a fair market value that is at least equal to the proportionate value that the perpetual conservation restriction at the time of the gift bears to the value of the property as a whole at that time."
The IRS claimed that the deed did not qualify because the value for the conservation nonprofit did not meet these requirements. As permitted by Georgia law, with consent of all parties the taxpayer subsequently filed an amended deed with compliant language. The taxpayer claimed the amended deed related back to the date of the original deed and therefore the deduction is qualified.
State law determines property rights, while federal law determines the tax treatment. The Court stated, "The question here is whether the correction to the deed was permitted under Georgia law, and if so, whether the correction can retroactively relate back to the time of granting the Easement and comply with the Proceeds Regulation."
The IRS argued that the deed must be correct as of the time of the gift. Reg. 1.170A-14(g)(2). The Court noted, "Viewing the facts and the inferences in the light most favorable to petitioner, we conclude that a genuine dispute of material fact exists, as to the correction of the deed, precluding summary adjudication."
In response to the IRS claim that a reformed deed could not change the federal impact with respect to taxes, the Court stated, "Although the Court is doubtful that equitable reformation can operate to change the Federal tax consequences of a completed tax transaction; since the Court has found there remains a genuine dispute of material fact precluding summary adjudication, it is not necessary for the Court to determine now whether the facts of this case warrant the equitable remedy of reformation under Georgia law."
Editor's Note: The preferred course of action for many courts is to avoid summary judgment and proceed to trial. The Tax Court did not yet rule on the substance of whether a later reformation of the deed can correct the drafting error for federal tax purposes.
Applicable Federal Rate of 1.6% for December Rev. Rul. 2021-213 2021-49 IRB 1 (15 Nov 2021)
The IRS has announced the Applicable Federal Rate (AFR) for December of 2021. The AFR under Section 7520 for the month of December is 1.6%. The rates for November of 1.4% or October of 1.0% 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 2021, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return.