Wednesday December 8, 2021
September is National Preparedness Month
There was major destruction in the French Quarter of New Orleans. More than one million people are without power for possibly a week or more. Ida made landfall at Port Fourchon where a 172 mph wind gust was recorded. The nearby town of Grand Isle was devastated by wind with a maximum gust reaching 148 mph.
Hospitals in southern Louisiana were seriously damaged but weathered the storm with substantial water supplies and emergency generators. The hurricane was the most devastating storm to hit Louisiana since Hurricane Katrina in 2005.
While the wind and torrential rains were harmful to Louisiana, Ida continued its rampage up to New York and New Jersey. New York City experienced a torrential downpour with 3.1 inches of rain falling in Central Park in one hour. New York City Mayor Bill de Blasio declared a state of emergency on Wednesday evening and noted there was "record breaking rain across the city, brutal flooding and dangerous conditions on our roads." All travel was banned for four hours on Thursday morning.
New Jersey also experienced pouring rain and flooding. Newark Liberty International Airport reported 3.24 inches of rain in one hour. Newark authorities grounded all flights and diverted passengers from flooded ground-level areas. In addition to the storm and flooding, there was a tornado warning in the Bronx and a "large and extremely dangerous" tornado was spotted near Philadelphia.
Given the serious damage caused by Ida, the IRS published a letter encouraging individuals to make preparations for natural disasters such as hurricanes, floods, fires, earthquakes, tornados or tsunamis. Americans should consider creating a disaster preparedness plan. This plan should include several components that will safeguard records if one's home is destroyed by earthquake, fire or flood.
- Secure Waterproof Containers — Critical documents, such as tax returns, birth certificates, deeds, titles and insurance policies should be kept in safe, waterproof containers. Copies of records may also be sent to a trusted person in another area that is far away from any potential natural disaster near your home.
- Document Your Assets — If your home or business is destroyed, you will need to show the type and value of property to claim insurance or tax benefits. Especially for expensive or high–value items, you should retain photographs or videos of your property. There are IRS disaster–loss workbooks that may help you compile lists of your belongings or business equipment.
- Know Where There Is Assistance — After a natural disaster, you may need to reconstruct your records in order to receive federal assistance or insurance reimbursements. Your financial institutions will have records and may provide statements. You may also obtain records through state agencies for vehicle titles, tax and other real estate records in your county office.
- IRS Assistance — If you are in a federally declared disaster area, you may visit the IRS Tax Relief in Disaster webpage. In most cases, the IRS identifies taxpayers in covered disaster areas and may apply automatic filing and payment relief. You also may call 866–562-5227 to speak with an IRS specialist.
Bipartisan Opposition to Taxing Gains at Death
President Biden's plan to tax capital gains at death faces opposition from members of both major political parties.
Nearly all Republicans have opposed capital gain taxation at death. Senator John Thune (R–SD) sponsored a nonbinding resolution in the Senate that was unanimously passed by the Republican caucus. It opposed the taxation of unrealized capital gains at death.
A dozen House Democrats who represent rural districts sent a letter to colleagues opposing the tax.
Former Democratic Senator Heidi Heitkamp of North Dakota recently launched a nonprofit educational organization to oppose the new tax. Saving America's Family Enterprises (SAFE) is dedicated to opposing the new tax and educating voters as to its implications. Heitkamp stated, "What we are opposing is the idea that you can impose capital gains tax on unrealized capital gains."
The President's proposal is intended to affect only high net worth individuals. Key provisions to mitigate the impact on middle class families include an exemption for the first $1 million of capital gain per person and a 15-year period for payment of gains for assets such as real estate and other nonliquid items. There will also be a deferral of tax paid on family–owned businesses until the property is sold or transferred.
The primary concern of opponents to the new tax is the protection of family farms and small businesses. However, there are individuals and organizations that support the tax. The Center for American Progress (CAP) states that the new tax is "the most important way that Biden's plan combats the tax code's preferential treatment of income from wealth over income from work."
Advocates for the tax highlight the strategies designed to protect family farms and businesses. They suggest that a combination of raising capital gains taxes during life and then taxing gain at death is necessary to minimize tax avoidance.
A representative of Americans for Tax Fairness expressed concern that the tax would be applied differently to family members and other individuals such as employees. Bob Lord stated, "If you step back, why should the policy of not immediately taxing the gain on the farm be limited to where it is left to a family member? Why not encourage it just as much if it is left to a couple of loyal employees?"
Lord suggested that there are a number of "sympathetic situations" that should be considered in creating this new tax.
Editor's Note: Your editor does not take a specific position on any pending legislation. This information is offered as a service to our readers.
Conservation Easement Case Penalties Approved
In Oconee Landing Property LLC et al. v. Commissioner; No. 11814-19, the Tax Court approved penalties that accompanied a denial of a $20.7 million charitable deduction for a gift of a conservation easement.
Oconee Landing Property LLC is a Georgia LLC that claimed a conservation easement charitable deduction of $20.67 million in tax year 2015. The IRS audited the LLC. Revenue Agent Tehan assessed a gross valuation misstatement penalty under Sec. 6662(h). The penalty was approved in writing by her supervisor Ms. Carriero-Smithson, who signed as "Team Manager."
Revenue Agent Tehan prepared a draft final partnership administrative adjustment (FPAA) and consulted with James Fee, an IRS attorney. Fee recommended additional penalties be claimed under Section 6662(c) and (d). Revenue Agent Tehan added the new penalties as a "Team Member" and Carriero-Smithson signed again as "Team Manager." There was no date on the signature, but an IRS email showed that her signature was completed on April 3, 2019. The FPAA was issued on April 4, 2019.
Following a petition to the Tax Court by the taxpayer, IRS lead counsel Benjamin Weaver determined that an alternate penalty under Section 6662(a) should also be assessed. The alternate penalty was approved in writing by supervising attorney James Hartford.
The taxpayer claimed that the approval form was not sufficient "to warrant judgment as a matter of law." Specifically, the taxpayer noted that the initial approval by Carriero-Smithson was not dated and it did not specify or analyze the penalties.
The Tax Court noted, "We have repeatedly rejected any suggestion that a penalty approval form must demonstrate the depth or comprehensiveness of the supervisor's review." The process is an approval rather than an explanation of the assessment. Therefore, the signature by Carriero-Smithson was timely and sufficient.
In addition, the IRS may issue an additional penalty during later proceedings. There is "no requirement that all potential penalties be initially determined" and the alternate penalty asserted by IRS Attorney Weaver with the written approval of his supervisor, Mr. Hartford, was valid.
Finally, the taxpayer noted that attorneys Weaver and Hartford were "necessary witnesses" on the topic of the penalty approval and therefore could not represent the IRS at trial. However, if an attorney is providing testimony that is merely cumulative, he or she is not disqualified as counsel. The Tax Court determined that questioning the IRS attorneys was irrelevant to the issue of whether supervisory approval was obtained. Therefore, the deduction was disqualified and the penalties were applicable.
Applicable Federal Rate of 1.0% for September -- Rev. Rul. 2021-16; 2021-36 IRB 1 (15 Aug 2021)
The IRS has announced the Applicable Federal Rate (AFR) for September of 2021. The AFR under Section 7520 for the month of September is 1.0%. The rates for August of 1.2% or July of 1.2% 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 2021, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return.