Monday February 6, 2023
IRS Promises Full Staff at Taxpayer Assistance Centers
The new individual taxpayer advisory specialists will be available to assist taxpayers with face-to-face assistance. The new jobs are promised to have "highly competitive pay and benefits, including on-the-job training, opportunities for advancement, health and life insurance and a federal retirement."
The IRS has already used the special hiring authority to expand the number of customer service representatives by 4,000. The agency has permission to hire up to 10,000 new customer service representatives by the end of 2023.
Edward S. Karl, a representative of the American Institute of CPAs, explained, "The idea that they are hiring more people is terrific. The more they get in place, the better it will be for taxpayers and for practitioners."
The new acting Commissioner of the IRS, Douglas O'Donnell, indicated that the primary focus during his interim tenure will be to improve taxpayer service. O'Donnell stated, "We are working across the enterprise to understand what we can do better and more efficiently, more quickly, to improve service to everyone that we interact with."
A former acting Commissioner of the IRS, David Kautter, agreed that increasing the staff would be helpful for taxpayers. Kautter noted, "Staffing these centers and focusing on taxpayer assistance will do a lot for the tax system itself, a lot for taxpayer attitudes, and it is the right thing to do in any event." Kautter noted that the IRS will also eventually increase taxpayer enforcement, but it is important to address the frustration taxpayers and tax practitioners have with the IRS at this time.
Nina Olson was the National Taxpayer Advocate from 2001 to 2019. She hopes that the "full staff" promise will be fulfilled. Olson stated, "Now what we need to see is the IRS expand the issues and matters taxpayers can resolve at a TAC, but the hiring is excellent."
Conservation Easement Notice 2017-10 Ruled Invalid
In Green Valley Investors LLC et al. v. Commissioner; No. 17379-19; No. 17380-19; No. 17381-19; No. 17382-19; 159 T.C. No. 5, the Tax Court determined that IRS Notice 2017-10, 2017-4 IRB 544 is not valid due to a violation of the Administrative Procedure Act (APA). Notice 2017-10 requires reporting of syndicated conservation easement partnerships as listed transactions.
Four LLCs transferred conservation easements to Triangle Land Conservancy (TLC) in 2014 and 2015. The Green Valley, Big Hill Partners, Tick Creek Holdings and Vista Hill Investments partnerships each claimed deductions of approximately $22.6 million, with a total deduction over $90 million. While the deductions were for tax years, 2014 and 2015, the IRS issued Notice 2017-10 on December 23, 2016, and required syndicated conservation easement transactions after January 1, 2010 to be reported as "listed transactions."
The IRS audited the four LLCs and disallowed the deductions. The IRS claimed the LLCs contributions did not meet the requirements of Section 170 and failed to establish that the values were greater than zero. The IRS assessed gross valuation misstatement penalties under Section 6662(h), negligence penalties under Section 6662(b)(1), substantial understatement penalties under Section 6662(b)(2) and reportable transaction penalties under Section 6662A. Section 6662A states, "If a taxpayer has a reportable transaction understatement for any taxable year, there shall be added to the tax an amount equal to 20% of the amount of such understatement."
The IRS assessed the reportable transaction penalty and maintained the syndicated partnerships were "listed transactions" even though Notice 2017-10 was effective retroactively. The taxpayer claimed Notice 2017-10 was not valid because it was a legislative rule that required notice and comment under the Administrative Procedure Act.
Legislative rules require a notice and comment process, while interpretations of the Internal Revenue Code may be published without notice and comments under the APA. Identifying a conservation easement syndicated partnership as a listed transaction is a substantive rule and not merely an interpretive rule. The Tax Court noted the reporting obligations for listed transactions are significant. The IRS Form 8886 required for a listed transaction includes an extensive description of the transaction, identity of all the individuals and an outline of the involvement of each individual. If the LLC fails to report on Form 8866, Section 6707A imposes a reporting penalty of 75% of the decrease in tax resulting from the transaction, with a limit of $200,000.
With a listed transaction, tax advisors also have a significant reporting requirement. If the tax advisor fails to report a listed transaction, the penalty under Section 6708 can be up to $10,000 per day until the reporting is completed.
The IRS claimed that in the American Jobs Creation Act of 2004 Congress authorized the IRS to publish a Notice to identify a syndicated partnership listed transaction without requiring the APA notice and comment process.
However, the Tax Court noted that Section 6707A does not specify that the IRS is exempt from APA requirements. Generally, APA requirements are mandatory unless there is a specific exclusion. Because the IRS did not follow the normal procedures for the APA notice and comment, Notice 2017-10 was declared invalid.
Editor's Note: While two Tax Court judges claimed the statute authorizing the IRS to issue the Notice overrode the requirement for the APA, the majority of judges determined that the American Jobs Creation Act of 2004 and its legislative history did not support this exclusion. Unless this decision is overturned on appeal, the IRS will lose a substantial tool in its battle against syndicated partnership conservation easements.
ABA Comments on Estate Deduction Proposed Regulations
The American Bar Association (ABA) Section of Taxation has submitted several comments on proposed regulations (REG-130975-08) specifying the appropriate use of present value principles and procedures for estate deductions.
The main comments of the ABA Tax Section reference methodology for discounting present value of future payments, the rules regarding qualification of loans so the interest may be deductible and appraisal standards for determining claims against the estate.
- Present Value Guidelines — Under the Proposed Regulations, if the payment is due after a three-year grace period, the discounted present value of the payment qualifies for a Section 2053 deduction. However, there is not clarity about the relationship of the valuation principles if there are marital and charitable deductions. The Tax Section hypothetical assumes a gross estate of $20 million and a $5 million claim payable in five years with a present value of $4 million. Thus, in this hypothetical, even if the entire estate is transferred to a spouse or charity, the deduction is $15 million for the transfer to the spouse and $4 million on the future claim. Therefore, there is a taxable estate of $1 million under the proposed regulations, even though the entire estate is transferred to spouse or charity.
- Deductions for Interest on Estate Loans — If an estate obtains a loan for estate taxes or other liabilities, there is a "facts and circumstances" test for deductibility. The interest must be "bona fide in nature, based on all the facts and circumstances, it must be from a debt under applicable income tax regulations, and it must be actually and necessarily incurred in the administration of the estate" and essential to proper settlement. The Tax Section notes that deductible interest is not qualified if there has been an intentional creation of illiquidity. However, it requests that the final regulations "clarify that legitimate business planning and funding arrangements are not the target of the regulations."
- Substantiation and Appraisers — The existing regulations allow Section 2053 deductions for ascertainable amounts of claims. However, the Proposed Regulations specify that the claims must be based on the appraisal by a qualified appraiser who is not a member of the family and signs the appraisal "under penalties of perjury." The requirement to sign under penalty of perjury creates liability exposure for the appraiser. In many cases, the appraiser may not have firsthand knowledge of the assets. Therefore, the Tax Section asks the IRS to simply require a signature.
Applicable Federal Rate of 4.8% for November -- Rev. Rul. 2022-20; 2022-45 IRB 1 (16 October 2022)
The IRS has announced the Applicable Federal Rate (AFR) for November of 2022. The AFR under Section 7520 for the month of November is 4.8%. The rates for October of 4.0% or September of 3.6% 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 2022, pooled income funds in existence less than three tax years must use a 1.6% deemed rate of return.