Washington Hotline – August 25, 2020


Washington Hotline

Strong Passwords Protect Your Data

The primary method for protection of your online security is a strong password. Security experts recommend using a different password for each account. However, it is easy to use similar passwords for many accounts. A person may have passwords for social media, streaming, bank accounts and other applications. Many individuals have 40, 60 or even 100 passwords.

A weak password is an invitation for identity theft. There were over 5,000 corporate data breaches last year. Many of these security breaches exposed login information. At present, there are over 500 million stolen passwords on hacker websites.

Keep a Written List

Many individuals continue to rely on a basic written list. The list should be on paper, not on a word processor or spreadsheet. If your list is stored electronically, a hacker could gain access to it.

While the paper list requires time to maintain and must be hidden in a secure location, it is a viable method. You should keep the paper list in a locked desk drawer or cabinet. There should only be one or two individuals who know where the list is kept and have a key to the drawer or cabinet.

With your paper or electronic list, there are several rules to follow for passwords. Do not use “password” or similar words that may easily be discovered. You should not use your name, your pet’s name, your street name or any common information for a password. A hacker can often acquire your name, nickname, street address and other similar information.

Passwords are typically 8 to 14 characters in length. A longer password provides better protection. The password can include upper and lower case letters, numbers and special characters.

One password should not be used on multiple accounts. If one account is compromised, the hacker could gain access to other accounts that use the same password. This is particularly the case for financial accounts.

Using the same password with a different prefix or suffix is also a potential security risk. A hacker could determine the basic password and then use multiple login efforts to guess the resulting password.

Use an Online Password Manager

Many individuals will find a password manager to be a safe and convenient alternative to a paper list. Password managers can be located using your favorite search engine. Most password managers use 256–bit encryption and SSL certificates to create a secure connection when you are entering or retrieving data.

With a password manager, you will still need to memorize one master password to open the manager. This must be a strong password with upper and lower case letters, numbers and at least one special character.

Strong passwords are an essential method for protecting your data. Using different passwords for each of your accounts, updating passwords on a regular basis and using an online password manager will greatly increase your chances of protecting your data and reducing the risk of identity theft.

Substantial Compliance Saves $4 Million Deduction

In Peter C. Emanouil et ux. v. Commissioner; No. 5089-17; T.C. Memo. 2020-120 (2020), the taxpayers purchased 197 acres of undeveloped property in Massachusetts. They eventually received approval to develop 164 units on 104 of the acres. The taxpayers donated outright 16 acres of the remaining property in 2008 and 71 acres of the property in 2009.

The 2008 deduction was appraised at $1.5 million and the 2009 deduction was appraised at $2.5 million. Taxpayers reported the deductions with carryforwards from 2008 until 2012.

The IRS examined the 2010, 2011 and 2012 returns and denied the charitable deduction carryforwards. The IRS claimed the taxpayers did not have a qualified appraisal under Section 170(f)(11)(C). The IRS further maintained that the contributions were a quid pro quo transferred in exchange for zoning approvals by the governmental agency. The IRS denied the deductions and assessed deficiencies and penalties of approximately $1 million.

After purchasing the 197 acres, taxpayers and the municipality engaged in complex negotiations to determine the appropriate development. These negotiations eventually led to an approval for the project. Taxpayers granted a conservation restriction on 68 acres of the land and donated two parcels. The donations were not a condition of receiving the zoning approval.

The appraisals were completed within 30 days of the dates of the deed. The appraisals did not include a statement that they had been prepared for income tax purposes and did not include the date of contribution.

Section 170(a)(1) states that a taxpayer may deduct gifts made each year. Regulation 1.170A–13(c)(3)(i) notes that there are 11 required items of information on the appraisal. These include, “The date (or expected date) of contribution to the donee,” and “A statement that the appraisal was prepared for income tax purposes.”

The court discussed the difference between strict compliance and substantial compliance. Taxpayers noted that they had provided substantially all of the appraisal information. The court noted this was not a “tax shelter promotion” case, but taxpayers had gifted the fee simple interest in the property to the city. Because this was a gift in fee simple and there was a valuation within 30 days of the gift, the court stated, “We hold that the Emanouils provided sufficient information to permit the IRS to evaluate the reported contributions and to investigate and address concerns about overvaluation and other aspects of the reported charitable contributions.”

The IRS also claimed that taxpayers received a quid pro quo. However, the IRS did not produce “any documents or other evidence that shows the town directing the [Zoning Board of Adjustment] not to approve the project unless the additional donations of the Allie Lane parcel and lots 2 and 3 were included.”

Therefore, there was no evidence of a quid pro quo. Finally, the IRS noted that the appraisal done by Pamela McKinney for the Emanouils was not valid. Appraiser McKinney determined that the property could be subdivided. IRS appraiser Michael Hart appraised the value based on passive recreation use. Hart claimed that there was no evidence that the required waivers and zoning approval would be granted. However, the court noted that for parcels the size of the gifted property, it is reasonable to assume that the required zoning and access permits would be granted and the valuation could assume the property would be subdivided.

Because the court found that the appraisal substantially complied with the 11 requirements and the valuation totaling $4 million was correct, there was no Section 6662(a) penalty.

Conservation Easement Deduction Denied

In Red Oak Estates, LLC et al. v. Commissioner; No. 13659-17; T.C. Memo. 2020-116 (2020), the partnership and tax manager Effingham LLC granted a conservation easement to a qualified nonprofit. The Tax Court determined that the deduction would be denied because the deed did not comply with the required judicial extinguishment provisions.

HRH Investments, LLC purchased 1,490 acres in Effingham County, Georgia, in 2007 and subsequently transferred a parcel of land to Red Oak Estates, LLC. On December 31, 2009, the partnership granted a conservation easement on 150.02 acres of property to the Georgia Land Trust, Inc. Red Oak claimed a $4.343 million charitable deduction.

The taxpayer and the IRS stipulated that the value of the conservation easement divided by the total value created a ratio for the value allocation between the landowner and the nonprofit. The judicial extinguishment provisions under Reg. 1.170A–14(g)(6)(I) state that the property must be protected in perpetuity. If there is a judicial extinguishment of the easement, the nonprofit must receive a “proportionate share of the proceeds.”

Regulation 1.170A–14(g)(6)(I) states “The donation of the perpetual conservation restriction gives rise to a property right, immediately vested in the donee organization, with 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 contended the extinguishment provision violated the regulation because the proceeds allocated to the nonprofit were “reduced by the value of improvements to the land made by Red Oak after the grant of the easement.”

The court noted that there is no provision in the regulation to subtract any amount from the proceeds. While the taxpayer contended that the regulation was invalid, the court noted, “Congress has not spoken directly to the allocation of proceeds upon extinguishment of conservation easements and that the proceeds regulation is a permissible construction of the statute.”

Taxpayers also claimed they have “substantially complied” with the requirements. However, the court stated, “A substantial compliance does not work here.” Because the deed allows for improvements to be subtracted from the proceeds transferred to the nonprofit, it fails the “in perpetuity” requirement. The deduction was denied.

Applicable Federal Rate of 0.4% for September — Rev. Rul. 2020-16; 2020-37 IRB 1 (17 August 2020)

The IRS has announced the Applicable Federal Rate (AFR) for September of 2020. The AFR under Section 7520 for the month of September is 0.4%. The rates for August of 0.4% or July of 0.6% 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 2020, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return.