Washington Hotline – August 21 2012

Wind Energy – Calm or Gust?

The Energy Department released the “2011 Wind Technologies Market Report” this week. It noted that there was substantial growth for wind energy, but significant uncertainty about its future.

In a parallel development this week, the Federal Aviation Administration issued tentative approval of Cape Wind, a planned wind farm off the shore of Cape Cod and Nantucket Island. The 130 wind turbines of Cape Wind will stand 440 feet tall. The wind farm is opposed by the Alliance to Protect Nantucket Sound. However, the FAA approved the wind farm and noted that the towers would be required to include appropriate lights and be painted in colors that made them more visible to aircrafts. With the FAA approval, the Cape Wind developers may now seek final financing and could receive a 25 year lease from the federal government.

The energy report on wind technology showed significant growth in 2011. Approximately 6.8 GW (gigawatts) of new wind energy capacity were added in the United States.

Of all the new energy facilities created, wind represented 32% of the total in 2011. However, total wind capacity is now just 3.3% of America’s electricity demand. Cape Wind will be the first major offshore U.S. wind project.

The world leader in wind energy is China. The U.S. is now in second place with about 20% of global wind capacity. The states with major commitments to wind energy are Texas, California, Iowa, Minnesota, North Dakota and South Dakota.

The major concern affecting wind energy in 2013 is the potential loss of federal and state wind tax benefits. In addition, wind faces substantial competition from natural gas. With the development of “fracking,” natural gas production has substantially increased. With a large new supply of natural gas, there are now sufficient reserves to support the U.S. needs for 100 years. This increased supply reduces the cost of natural gas and makes it more attractive than wind energy.

Whistleblowers Help IRS Find Assets Hidden Overseas

On August 15, IRS attorney John McDougal spoke on an American Bar Association Section of Taxation webcast. He indicated that the IRS is now moving forward in making payments to whistleblowers who disclose information that uncovers overseas assets of Americans.

This whistleblower program is part of the IRS campaign to find assets Americans have hidden overseas to reduce their taxes. The IRS has had significant success in the past year in obtaining information from several Swiss banks on accounts owned by U.S. citizens. If a whistleblower participates in that process, under Sec. 7623(b) the IRS may authorize a cash payment.

Sen. Charles Grassley (R-IA) has been a strong advocate of the whistleblower program. Responding to requests from Sen. Grassley, IRS Commissioner Douglas Shulman reported significant progress. Shulman stated that three cash payments have currently been made, seven payments are pending and 60 other whistleblower cases are in process.

In addition to the whistleblower program, the IRS has offered a partial amnesty for voluntary disclosure of overseas accounts. Over 33,000 taxpayers have voluntarily made disclosure and paid various amounts in penalties.

The IRS continues to seek information from Swiss banks and other overseas institutions to uncover any hidden assets owned by U.S. taxpayers.

Trout Ranch Conservation Easement Value Affirmed

In Trout Ranch LLC el al. v. Commissioner; No. 11-9006 (15 Aug 2012), the 10th Circuit affirmed a Tax Court valuation for a conservation easement.

Trout Ranch, LLC (Trout Ranch) purchased 453 acres in Gunnison County, Colorado. They planned to develop homes and a variety of recreation facilities on the property. In December of 2003 Trout Ranch granted an easement to Crested Butte Land Trust for 384 of the 453 acres.

Trout Ranch appraiser Jonathan Lengel normally would use a “before-and-after” method to value the conservation easement, but at the request of the Trout Ranch owners he completed a comparable sales valuation. Based on four bargain sales of conservation easements in Gunnison County, he determined that the value of the easement was $2.2 million.

IRS appraisers Lou Garone and Michael Nash determined that the probable development would include 22 lots. They disregarded comparable sales and determined that under a before-and-after method, the value of the easement was zero.

The Tax Court did not accept the findings of Lengel or the IRS appraisers. It determined that the four bargain sale comparables were not adequate. While the taxpayers claimed that the comparable method must be used if the comps were sufficient, the court noted that there were substantial differences on the restrictions for the comparables and concluded that it was not required to use that method. Based on its own analysis of the data, the Tax Court determined that with a 22 lot plan, the value before would be $4.45 million and after $3.89 million, producing a charitable deduction of $560,000.

On appeal to the 10th Circuit, Trout Ranch maintained that the regulations required use of comparables if available and that data subsequent to the date of the gift could not be considered in the valuation process.

The court noted that a Tax Court judge is permitted to use all data. Reg. 1.170A-14(h)(3)(i) permits the use of all appropriate data. The Tax Court may consider subsequent information in a manner similar to the use of Sec. 7520 actuarial tables to predict valuation following a life or lives.

In this case, the Tax Court weighed all of the data and determined the before-and-after valuation. While there was an expansion of development around Crested Butte, a ski resort in an adjacent area, it had modest impact on the valuation. The Tax Court decision that the easement value was $560,000 was affirmed.

Applicable Federal Rate of 1.0% for August — Rev. Rul. 2012-21; 2012-32 IRB 1 (18 July 2012)

The IRS has announced the Applicable Federal Rate (AFR) for August of 2012. The AFR under Section 7520 for the month of August will be 1.0%. The rates for July of 1.2% or June 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 2012, pooled income funds in existence less than three tax years must use a 1.8% deemed rate of return. Federal rates are available by clicking here.