Washington Hotline – July 13, 2021


July IRS Events Promote Advance Child Tax Credit Payments

The IRS hosted events in 12 cities on Friday, July 9 and Saturday, July 10, to help individuals register for the Advance Child Tax Credit (ACTC) payments.

These events were held in 12 cities. Most meetings take place at IRS Taxpayer Assistance Centers. Most of the IRS Taxpayer Assistance Centers hosted the events on Saturday from 10:00 am to 7:00 pm local time.

IRS Wage and Investment Commissioner Ken Corbin stated, “This is part of a wider effort by the IRS to reach as many people as possible who do not file a tax return but may be eligible for the Child Tax Credit and Economic Impact Payments. We encourage people to share this information widely and encourage those who need help to visit these locations.”

Volunteers and IRS employees were on hand to assist individuals with the Non-Filer Sign-up Tool on IRS.gov. The tool may also help some individuals register for the $1,400 third round of Economic Impact Payments. Some individuals may also want to determine if they qualify to receive payments by using the Advance Child Tax Credit Eligibility Assistant.

Individuals who wish to use the tool online should be prepared. The tool will require Social Security numbers for children, the personal Social Security numbers or Tax Identification Numbers for the caregiver, a mailing address, an email address and direct deposit account information.

The Child Tax Credit (CTC) is refundable. Even if an individual owes no tax, the IRS will issue the credit as a refund. An individual must file a 2020 tax return or use the Non–Filer Sign-up Tool on IRS.gov.

The Advance Child Tax Credit payments start on July 15. Individuals may receive a payment of $300 each month for children under age 6 and $250 per month for children ages 6 to 17. The payments will be phased out for individuals with larger incomes.

The IRS encourages individuals to request the payments by direct deposit. The Federal Deposit Insurance Corporation website has details on how to open a bank account online. The ACTC was authorized by the American Rescue Plan in March of 2021. Most eligible individuals will receive direct deposits to their bank accounts in the middle of each month for the last half of this year. The balance of the Child Tax Credit amounts will be distributed when the 2021 tax return is filed.

Conservation Coalition Group Supports Easement Act

A group of 13 land conservation organizations sent a letter on July 1, 2021 to Congressional leaders. The group urged immediate action to pass the Charitable Conservation Easement Program Integrity Act (H.R. 4164 and S. 2256).

The coalition notes that syndicated conservation easements have cost taxpayers billions of dollars. They are concerned that syndicated easements are abusive and “threaten one of our nation’s most important voluntary private land conservation tools.” The coalition urges Congress to immediately stop the abuse by a few “bad actors.”

In Notice 2017—10, the Internal Revenue Service designated easement syndications as “listed transactions.” However, these strategies are still aggressively marketed. Taxpayers claimed deductions for syndicated conservation easement partnerships of $6 billion in 2016, $6.8 billion in 2017 and $9.2 billion in 2018. The coalition notes, “This means $22 billion in unwarranted tax deductions were claimed in the three years after the IRS put these bad actors on notice.”

In 2020, the Senate Finance Committee published a bipartisan report on the syndicated partnership abuse. The report indicated that investors were not interested in legitimate conservation, but rather had “no interest in a wide variety of land—investment possibilities; they just wanted to buy tax deductions.”

The opponents to the Charitable Conservation Easement Program Integrity Act claim that this legislation will reduce land conservation. Coalition leaders explain that around 2,000 to 2,500 conservation easement donations are made by private landowners each year. These donations total about $1 billion in reported charitable deductions per year. This is in great contrast with the $9.2 billion in charitable deductions claimed by 296 syndicated partnerships in 2018.

The bill is retroactive, a move opponents of the bill claim is unfair. However, the coalition calls this a “disingenuous argument.” The IRS has placed the bad actors on notice and warned them to halt abusive transactions. The coalition notes, “Fair and repeated warnings to the bad actors negates any argument about retroactivity. Changes to the effective date would only serve to protect the massive profiteering enjoyed by the bad actors.”

While there have been criminal indictments and two individuals have pleaded guilty to marketing fraudulent syndicated conservation easement transactions, the coalition believes that these enforcement actions are insufficient. They claim the most effective way to halt ongoing abuse is through passage of the Charitable Conservation Easement Program Integrity Act. The coalition concludes, “We respectfully ask you to stand with us—and all in our community—by taking immediate action to curb abuse and restore the integrity of this cherished and worthy conservation program.”

Editor’s Note: Conservation organizations have been very concerned that abusive and excessive valuations for charitable deductions claimed by syndicated partnerships will lead to harmful changes in conservation law. The Charitable Conservation Easement Program Integrity Act limits charitable deductions to a multiple of 2.5 of the initial investment. There is bipartisan support for this bill.

Donor Lacks Standing to Sue DAF Sponsor

In Pinkert v. Schwab Charitable Fund; No. 20-cv-07657, a DAF donor sought to represent himself and a class of donors in an action against Charles Schwab & Company and the Schwab Charitable Fund. The donor claimed that the investment options should have lower fees and that Schwab Charitable breached its fiduciary duty and violated the California Unfair Competition Law.

Schwab Charitable is the sponsor for a donor advised fund (DAF). Under Sec. 4966(d)(2), a DAF is separately identified for each donor, owned or controlled by the sponsor, and permits a donor to have advisory privileges with respect to his or her account. Schwab Charitable complied with the applicable Internal Revenue Code provisions and created funds with separately identified accounts. The donors were permitted to direct the investments from various options offered through Charles Schwab & Co.

A donor is permitted a charitable deduction if there is a completed gift and the donor relinquishes dominion and control of the donated asset. See Sec. 170(f)(18)(B). Schwab Charitable gave written notice that the donations were irrevocable, they were subject to the exclusive legal authority of the sponsor, no material restrictions were permitted and Schwab Charitable retained final authority over all grants. Based upon these written provisions, Schwab Charitable provided donors with a contemporaneous written acknowledgment to enable the donor to claim a charitable income tax deduction.

Schwab Charitable offered 14 investment options. The donor was permitted to make non-binding recommendations for his or her fund investments.

Pinkert claims there were less expensive investment options available. He argued that Schwab Charitable should have negotiated lower costs and the reduced value in his account was damaging because the donor was not able to “advance his own philanthropic goals, support organizations that are personally meaningful to him and his family and to cultivate the family value of charitable giving.”

Schwab Charitable moved to dismiss because Pinkert lacked standing under Article III and California law after he relinquished control of the assets.

Under federal law, standing requires an injury in fact, traceability to the conduct of defendant and potential for redress through a judicial decision. An injury must “affect the plaintiff in a personal and individual way.”

In this case, Pinkert lacked standing because he gave up title to the investment property. Plaintiff claimed that he retained standing because he may offer advice on investments. However, this is not a recognized property right. If Schwab Charitable had broken “specific promises that it made about . . . how it would liquidate a donation of stock,” then there may be standing, opined the Court. However, the investment advisory rights do not constitute a promise by Schwab Charitable.

Pinkert also claimed an injury to his “reputational and expressive interests.” However, this is not an injury in fact for federal law purposes. With respect to California law, the plaintiff has no retained property rights and Schwab Charitable has exclusive legal control. Therefore, there is no defined interest in property that entitles the plaintiff to standing. Because the plaintiff did not have standing, the action was dismissed.

Editor’s Note: This decision is a victory for DAF sponsors. It emphasizes that donors have only advisory rights and no legal claim to require specific actions with respect to fees or investments. Given the dramatic growth of DAFs for thousands of organizations in the nation, this decision grants DAF sponsors greater assurance of control over the funds.

Applicable Federal Rate of 1.2% for July — Rev. Rul. 2021-12; 2021-27 IRB 1 (16 June 2021)

The IRS has announced the Applicable Federal Rate (AFR) for July of 2021. The AFR under Section 7520 for the month of July is 1.2%. The rates for June of 1.2% or May 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.