Washington Hotline – May 25, 2021


Advance Child Credit Payments Start in July

In IR-2021-113, the IRS and Department of Treasury explained their plan to send monthly payments for the advance Child Tax Credits (CTCs). The first payments will be disbursed on July 15, 2021.

Over 88% of children in the United States will qualify for this benefit. Most of the 39 million eligible households will receive the monthly payment in their bank accounts without any action needed.

The CTC payments will be made on the 15th of each month from July through December. The payment will be $250 per month for children ages six to seventeen and $300 per month for children ages five and under.

These amounts will be half of the maximum Child Tax Credit under the American Rescue Plan. Children under age six qualify for $3,600, and children between age six and seventeen qualify for $3,000.

An estimated five million children are projected to be lifted out of poverty by the American Rescue Plan. Over 65 million children and their households will qualify to receive CTC payments. Homes with parents who have filed electronic returns and shared their bank account information with the IRS will receive direct deposits. Other families may receive the payments through a paper check or debit card.

The IRS also published a letter on May 19, 2021 to urge nonprofits to assist individuals experiencing homelessness in receiving stimulus payments or the advance Child Tax Credit.

These individuals should file their 2020 tax return even if they are not required to file. By filing the return and providing their information to the IRS, they will be able to receive Economic Impact Payments and the Child Tax Credit.

When an individual files, he or she will need to claim the 2020 Recovery Rebate Credit. An excellent solution for individuals experiencing homelessness is to use the IRS Free File tool. Individuals who file can expect to receive two payments under the Recovery Rebate Credit. They may receive a third Economic Impact Payment later.

The third round of payments for individuals will usually be $1,400. However, if they have eligible dependents, they could receive an additional $1,400 for each dependent.

An individual may receive a payment even if he or she does not have a permanent address or bank account. An individual may list the address of a friend, relative or shelter. Some individuals may also open a low-cost or no-cost bank account to receive the stimulus payment through direct deposit.

Editor’s Note: The IRS urges all nonprofit organizations to assist individuals experiencing homelessness and underserved persons so they receive Economic Stimulus Payments.

IRS Procedures for Advisors of Nonfilers

In Rev. Proc. 2021-24; 2021-23 IRB 1, the IRS provided procedures to enable individuals who are not required to file tax returns to receive the advance Child Tax Credit, Recovery Rebate Credit and Economic Impact Payments.

Individuals who are not required to file tax returns may not have a 2020 or 2019 tax return on file with the IRS. These nonfilers may still qualify for multiple benefits. Friends and advisors of individuals who are nonfilers may refer to this Revenue Procedure for guidance on the benefits and filing methods.

Child Tax Credit (CTC)

The taxpayer may claim a Child Tax Credit for each qualifying child. This CTC is fully refundable if the taxpayer has a principal residence in the United States. The CTC for 2021 is $3,000 for a qualifying child age six to seventeen or $3,600 if the child is under age six on December 31, 2021.

The parent may receive up to 50% of the refundable child tax credit through advanced payments. Each advanced payment will be 1/6 of the 50% amount. Payments will be made each month during the last half of 2021.

2020 Recovery Rebate Credit

Individuals who have not yet received an Economic Impact Payment may qualify for the initial Recovery Rebate credit of $1,200 per individual or $2,400 per couple filing a joint return. The first rebate also includes $500 per qualified child.

Additional 2020 Recovery Rebate Credit

The additional Recovery Rebate Credit is $600 per individual or $1,200 for a couple filing a joint return and an added $600 per qualifying child. The qualifying child must have a valid Social Security Number (SSN) or an Adoption Taxpayer Identification Number (ATIN). The $1,200 amount is reduced to $600 if only one spouse has an SSN, and neither spouse is a member of the Armed Forces of the United States.

2021 Recovery Rebate Credit

The third stimulus payment may include the 2021 Recovery Rebate Credit. This is $1,400 per individual or $2,800 for a couple filing jointly. It also includes an additional $1,400 for each eligible dependent under age 18. The payment is determined based on the filer’s 2020 Federal income tax return. If the IRS does not have a current tax return, it may use the taxpayer’s 2019 Federal income tax return.

Simplified Filing Method

Individuals with low or no income may use a simplified filing method. The return will require the name, address, SSN or individual taxpayer identification number (ITIN) and the name and SSN or ITIN of a spouse. The return requires general information about the children along with their SSNs. Those who file a simplified return will select the standard deduction amount and use a worksheet to add together the 2020 Recovery Rebate Credit and the additional 2021 Recovery Rebate Credit. It is best if the simplified return includes direct deposit information for a bank or other financial institution.

The simplified return is a Federal income tax return and must be filed electronically.

Editor’s Note: The IRS guidance is intended to help advisors and nonprofits who are assisting individuals with low or no income. The Revenue Procedure is part of an IRS effort to enlist the assistance of nonprofits and volunteers to ensure that all possible efforts are made to distribute the Recovery Rebate Credits and the advance Child Tax Credits.

Conservation Easement Deduction Not Saved by State Law

In Montgomery-Alabama River LLC et al. v. Commissioner; No. 9254-19; T.C. Memo. 2021-62 (Montgomery), the Tax Court denied a conservation easement charitable deduction and held that the state law exception under Reg. 1.170A-14(g)(6)(ii) was not applicable.

Montgomery was a Georgia LLC that acquired 132 acres of land in Alabama. A second LLC acquired a 95% interest in the property on December 2, 2014 for $3.4 million. On December 15, 2014, Montgomery granted a conservation easement on the property to the National Wild Turkey Federation Research Foundation.

Montgomery obtained an appraised value of $12,675,000 for the easement donation. The IRS issued a notice of final partnership administrative adjustment (FPAA) and denied the deduction. The alternative FPAA statement was that if the deduction were allowable, the fair market value of the easement was not established to be over $543,000.

Montgomery petitioned the Tax Court to submit a question of law to the Supreme Court of Alabama. Under Reg. 1.170A-14(g)(6)(ii), the charitable grantee is required to receive “a proportionate share of the proceeds upon any subsequent sale of the property” if there is a judicial extinguishment. There is an exception to this requirement if Alabama law allocates to the donor “the full proceeds from the conversion without regard to the terms of the prior perpetual conservation restriction.”

The Tax Court declined to certify this question to the Supreme Court of Alabama. Under Alabama state code, a conservation easement is “a property right that entitles its holder to compensation in the event the property is taken by condemnation.” Therefore, the donor is not entitled to the full amount of proceeds and the state law exception does not apply.

Montgomery claimed that the provision was ambiguous and should be certified by the Tax Court to the Alabama Supreme Court.

However, in 1997 Alabama enacted the Uniform Conservation Easement Act that created a property interest for the conservation easement. Therefore, the law is not silent and explicitly provides the nonprofit with “just compensation” for its interest. The petition for certification of the Alabama law provision was denied.

Editor’s Note: While charitable conservation easement deductions have frequently been denied on technical grounds, the obvious issue is that in a period of 13 days, property that sold for $3.4 million was claimed to have produced a conservation easement charitable deduction of $12,675,000. The IRS claimed the easement value was a fraction of this amount at $543,000. The valuation issue was not addressed because of the technical failure of the deed, but it seems probable it was a major factor in the decision of the IRS to deny the deduction.

Applicable Federal Rate of 1.2% for June — Rev. Rul. 2021-9; 2021-23 IRB 1 (16 May 2021)

The IRS has announced the Applicable Federal Rate (AFR) for June of 2021. The AFR under Section 7520 for the month of June is 1.2%. The rates for May of 1.2% or April of 1.0% 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.