Washington News

In IR–2020–134, the Service announced that taxes must be paid by July 15, 2020. While there had been discussion about delaying tax filing and payments, the IRS confirmed the July 15 date for 2019 tax returns. This date was extended from the normal April 15 filing date due to COVID–19.

Taxpayers should pay their taxes and file by July 15. If they are not prepared to file, taxpayers may file IRS Form 4868 to obtain an automatic extension until October 15, 2020.

Everyone who owes tax should pay the proper amount by July 15, regardless of whether they have obtained an extension. If a taxpayer cannot pay the full amount of his or her tax bill, there are several options to consider.

IRS Commissioner Chuck Rettig stated, “The IRS understands that those affected by the Coronavirus may not be able to pay their balances in full by July 15, but we have many payment options to help taxpayers. These easy-to-use payment options are available on IRS.gov and most can be done automatically without reaching out to an IRS representative.”

There are three convenient ways to file an extension request. A taxpayer may file Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. Tax software programs provide an electronic version of the extension form. You also can use IRS Free File and request an extension on IRS.gov.

Another convenient method for obtaining an extension to file is to make a payment. A taxpayer may use Direct Pay, the Electronic Federal Tax Payment System (EFTPS) or a credit or debit card. When you make a tax payment, you may elect the automatic extension.

There are also specific options for taxpayers who are not able to make full payments when taxes are due.

• Online Payment Agreement – An individual who owes $50,000 or less in tax, penalties and interest or a business that owes $25,000 or less in payroll taxes, penalties and interest may apply for an extended payment agreement. You can apply on IRS.gov/PA.
• Installment Agreement – You may submit Form 9465, Installment Agreement Request to the IRS. If your proposal is accepted, transfers can be made directly from a bank account or through payroll deduction.
• Temporarily Delaying Collection – If you are unable to pay and can convince the IRS you have a financial need, you may obtain a delay until your finances are improved. You still will be subject to penalties and interest during that period of delay.
• Offer in Compromise – Some taxpayers may be able to settle their tax bill for less than the amount payable. Go to IRS.gov and use the Offer in Compromise Pre–Qualifier tool.

Conservation Easement Deed Defective

In Habitat Green Investments LLC et al. v. Commissioner; No. 14433-17; No. 14434-17; No. 14435-17 (2020), the Tax Court denied conservation easement deductions for three partnerships because the deeds did not include the correct extinguishment provision.

MM Bulldawg Manager, LLC was the tax matters partner for Habitat Green Investments, LLC ("Habitat Green"), Turtle River Properties, LLC ("Turtle River") and Green Creek, LLC ("Green Creek"). The three LLCs owned land in Glynn County, Georgia.

On December 31, 2013, the LLCs deeded approximately 95% of each entity’s parcel to Georgia Land Trust, Inc. ("GLT"). The deeds enumerated purposes under Sec. 170(h)(4)(A)(ii) included "the protection of relatively natural habitat of fish, wildlife, or plants, or similar ecosystem."

There were retained rights in the deeds. The rights permitted construction of firebreaks, roads and footpaths. The Tax Court determined these retained rights were consistent with the conservation purposes.

Conservation easement deeds must provide provisions for the potential judicial extinguishment of the easement. The deed stated, "This Conservation Easement constitutes a real property interest, immediately vested in Grantee at the time Grantor conveys this Conservation Easement to Grantee, which, as required under Treasury Reg. 1.170A–14(g)(6)(ii), the parties stipulate to have a current fair market value determined by multiplying the fair market value of the property unencumbered by this Conservation Easement (minus any increase in value after the date of this Conservation Easement attributable to improvements) by the ratio of the value of the Conservation Easement at the time of this conveyance to the value of the Property at the time of this conveyance without deduction for the value of the Conservation Easement."

Habitat Green reported a deduction of $19.1 million, Green Creek deducted $19.63 million and Turtle River deducted $28.5 million. The IRS denied all deductions.

A deduction for a conservation easement is permitted under Sec. 170(h)(1) for a restriction granted in perpetuity of a qualified real property interest to a qualified organization. The deed must make provision for the potential judicial extinguishment of the interest. Regulation 1.170A–14(g)(6)(i) states that in the event of a judicial extinguishment, the donee must 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.”

The IRS contended that the deed failed this standard because it did not “allow the Grantee” a share of proceeds that are attributable to post–gift improvements. The taxpayer contended that the regulation was not valid.

The Tax Court noted that the regulation had been reviewed in other cases and was valid in that it stated "the value of post–easement improvements may not be subtracted out of the proceeds before determining the donee's proportionate share."

The taxpayer contended that this provision did not change the value of the easement, but the IRS noted that the question was not the value of the easement, but the total value of the property in the event of extinguishment. Therefore, the charitable deduction was denied.

Conservation Easement Deduction Denied

In Charles W. Harris et ux. v. Commissioner; No. 24201-15 (2020), the Tax Court denied a conservation easement deduction.

Taxpayers owned approximately 132 acres in Columbus, North Carolina. In December of 2007, the taxpayers donated an easement on 95 acres to Pacolet Area Conservancy, Inc. ("PAC"). The deed allocated 72 acres to the "Natural Area" and 23 acres were set aside for potential development. The IRS initially objected to the permitted boundary modifications for the reserved areas. The IRS also objected to a provision in the deed. If the conservation easement were extinguished, the nonprofit receives "a fair market value equal to the proportionate value that the Conservation Easement bears to the value of the Protected Property as a whole (minus any increase in value after the date of this grant attributable to improvements)."

The taxpayers obtained an appraised value for the deduction of $1,327,000. They reported this deduction for years 2007 and 2008 and carried forward part of the deduction to years, 2009, 2010 and 2011. Taxpayers also carried back an excess deduction to year 2004. The IRS denied the deductions for 2009, 2010, 2011 and the carry back to 2004.

A conservation easement deduction is permitted under Sec. 170(f)(3) if a "qualified conservation contribution" is made of a "qualified real property interest" to a "qualified organization."

The restriction must be granted in perpetuity. If there were a judicial extinguishment of the easement, the nonprofit must 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 court notes that this ratio must be unchanged from the date of contribution to the date of extinguishment. Because the deed subtracts the value of improvements from the amount allocated to the nonprofit under the extinguishment provision, the easement is not protected in perpetuity and the deduction was denied.

Applicable Federal Rate of 0.6% for July -- Rev. Rul. 2020-14; 2020-28 IRB 1 (15 June 2020)

The IRS has announced the Applicable Federal Rate (AFR) for July of 2020. The AFR under Section 7520 for the month of July is 0.6%. The rates for June of 0.6% or May of 0.8% 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 2020, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return.