Washington Hotline – June 22, 2021


IRS Publishes FAQ on Advance Child Tax Credits

As the payment date nears for the Advance Child Tax Credit (ACTC) distributions, the IRS has published frequently asked questions (FAQs) on IRS.gov. The FAQs are designed to help parents understand who qualifies for the credit and how to obtain their payments.

1. How Much are Advance Child Tax Credit Payments?

The advanced payments will be a total of six payments equal to 50% of the estimated Child Tax Credit for the taxpayer’s 2021 tax return. This payment would normally be received when you file your return in 2022. However, up to 50% of your credit amount may be distributed through advance monthly payments. For a moderate-income family of five with children ages 4, 7 and 10, the total credit will be $9,600. The ACTC amounts will total $4,800 and the 2021 tax credit will be the remaining $4,800.

2. Do You Need to Take Action?

Most individuals will not need to take any action and will receive Advance Child Tax Credit payments based upon the information in their 2020 or 2019 tax return. Some individuals who used the Non-Filer tool on IRS.gov to receive Economic Impact Payments will also receive an automatic distribution. Individuals who have not filed a tax return or used the Non-Filer tool should file a simplified tax return for 2020 in order to receive payments. The simplified return is available on IRS Free File on the IRS website. With all filing methods, you should include your direct deposit account information to receive timely payments.

3. What if You Do Not Have Income?

The Advance Child Tax Credit distributions will be made even if you have $0 of income. You can file a 2020 return with IRS Free File to receive your appropriate payments.

4. Can You Wait and File Your Tax Return to Collect?

There may be individuals who would prefer to wait and collect the Child Tax Credit payment when they file their 2021 tax return. This will be an option that you can elect through IRS.gov when the Child Tax Credit Update Portal is available, which is projected to be launched in late June.

5. When Will an ACTC Payment be Made?

The first ACTC payments will be distributed on July 15, 2021. The remaining five payments will be distributed on the middle of each of the next five months.

6. Who Qualifies for Child Tax Credit Payments?

The American Rescue Plan created a credit of $3,600 for qualified children under age 6 and $3,000 for those between age 6 and 17. One-half of the credit will be distributed through the advanced payments. The credit is phased out for individual taxpayers with modified adjusted gross income over $75,000 or married couples filing a joint return with incomes over $150,000. Generally, parents with a qualifying child will receive the payments. You must live in one of the 50 states or the District of Columbia for more than half of the year. You do not need to live in the same physical location or have a permanent address.

7. Will the IRS Help With My 2021 Tax Return?

If you receive ACTC payments, the IRS will send Letter 6419 in January 2022. This letter will show the total amount of ACTC payments that were sent during 2021. You may use Letter 6419 to complete your 2021 tax return and can claim the balance of your Child Tax Credit.

Editor’s Note: The Advance Child Tax Credit is a substantial benefit, particularly for families with moderate incomes. IRS Commissioner Chuck Rettig stated, “We have been working hard to begin delivering the monthly Advance Child Tax Credit to millions of families with children in July. This new tool will help more people easily gain access to this important credit as well as help people who don’t normally file a tax return obtain an Economic Impact Payment. We encourage people to review the details about this important new effort.”

Five Associations Express Concern About ACE and DAFs

Sen. Chuck Grassley (R-IA) and Sen. Angus King, Jr. (I-ME) have introduced the Accelerating Charitable Efforts (ACE) Act. The act would create two basic types of donor advised funds (DAFs).

The first type of DAF is limited to 15 years. Contributions to a Type I DAF would need to be distributed within 15 years. The second DAF option would permit distributions over 50 years. With the Type II DAF, a donor may bypass capital gain on a gift of appreciated assets, but his or her income tax deductions would be deferred until the funds are distributed to other nonprofits.

Sen. King stated, “Under current rules, donor-advised funds and private foundations allow some to receive tax breaks for donations that never actually reach working charities. The ACE Act will clear up those gray areas and ensure that charitable contributions will swiftly reach the worthy organizations doing good in communities throughout the country and all over the world.”

Five charitable associations sent a June 11, 2021 letter to Members of Congress to express “concerns with the Accelerating Charitable Efforts Act (or ACE Act), legislation recently introduced by Senators Angus King (I-ME) and Chuck Grassley (R-IA).”

The five associations are the Community Foundation Public Awareness Initiative, the Council on Foundations, Independent Sector, The Philanthropy Roundtable and the United Philanthropy Forum. The five organizations expressed their belief in the importance of DAFs. They note that donors use DAFs for many purposes. DAFs have “proven to be a lifeline for charities during the pandemic, with grantmaking from the vehicles increasing to record levels.”

There are many community foundations and nonprofits who can share stories of DAFs making an essential difference during the pandemic. These investments have been enormously helpful to communities struck by economic downturns or individuals who need assistance with health care, relief services or education.

The five associations note there already are restrictions on DAFs and private foundations. With respect to DAFs, there is no data to indicate that the ACE provisions would increase charitable giving. The current experience of the five organizations indicates DAFs are functioning very well and provide a huge benefit to their communities.

The five associations hope that Congress will be willing to work with them to improve DAF rules and regulations. They note, “We are ready to work with you to support foundations and ensure philanthropy can meet the challenges of today and into the future.”

Editor’s Note: Extensive data indicates that most DAFs make larger annual grants than the typical private foundation. The five associations are concerned that the ACE Act rules will discourage DAF donors. It seems highly unlikely that many donors will be willing to defer an income tax deduction in order to extend the DAF past 15 years. Even the 15-year DAF rules would require extensive financial work to track contributions over multiple years and make certain that all contributions are distributed within 15 years.

No Summary Judgment on Conservation Easement Gift

In Montgomery-Alabama River LLC et al. v. Commissioner; No. 9254-19 (Montgomery), the Tax Court denied both motions for partial summary judgment. The conservation easement donation case was unique because the donor gave the conservation easement and then, one week later, deeded the fee interest to the nonprofit. The Tax Court determined there were genuine disputes of material fact that required determination by the trial.

Montgomery was formed in July 2014. Later that year, Montgomery sold a 95% interest in 132 acres of land in Elmore County, Alabama to Montgomery River Group LLC. On December 15, 2014, Montgomery deeded a conservation easement to the National Wild Turkey Federation Research Foundation (Foundation). The deed was followed one week later (on December 22, 2014) with a deed of the fee simple interest in the property to a pass-through entity of the Foundation. In March 2019, the pass-through entity sold the fee simple interest in the conservation property (and 2 other properties) in an arms-length transaction for $875,000.

The conservation deed reserved a right for the donor to construct improvements. It also acknowledged that there could be a judicial extinguishment of the easement at a future date. Montgomery filed a tax return for 2014 and claimed a $16.9 million charitable contribution deduction for the two gifts. The IRS denied the deduction and claimed the fair market value of the property was $543,000.

A conservation easement must be “protected in perpetuity” under Sec. 170(h)(5)(A). Regulation 1.170A-14(g)(6) states that it is protected in perpetuity if there is a judicial extinguishment and the nonprofit will receive a proportionate share of the proceeds. The regulation may be overridden by state law if the donor may retain “the full proceeds from the conversion without regard to the terms of the prior perpetual conservation restriction.” The Tax Court rejected the claim that Alabama law eliminates benefits to the Foundation.

In the event of a judicial extinguishment, the deed reduces the benefit to the nonprofit by “any increase in value after date of the grant attributable to improvements.” Therefore, the deed does not provide a full proportionate share to share to the nonprofit. Montgomery claimed that any potential defect in the deed was not relevant because the grant of the fee simple interest resulted in the Foundation owning “the entire bundle of sticks that constituted the Property’s value.”

The IRS responded that the claim of merger of interests at the hearing was irrelevant because the donation of the fee simple interest was one week after the easement gift.

The Tax Court concluded that there were “genuine disputes of material fact” that required denial of both motions for partial summary judgment. If there were a merger of interests, then the actual question is simply valuation. The taxpayer claimed a charitable deduction of $16.9 million, while the IRS maintained the value was $543,000. The issues will now be submitted to trial.

Editor’s Note: The IRS has won multiple conservation easement cases based on defective deed language in the judicial extinguishment clause. It has attempted to avoid valuation contests. In this case, it is likely that the Tax Court will be required to determine the proper value. The subsequent sale of the property and two other parcels for $875,000 five years after the gift suggests that the IRS may have a substantial argument on the question of valuation.

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.