April 28, 2020
IRS sees through eyeglass deduction plan. Donations of appreciated property are a favorite tax planning tool. Done properly, these donations allow taxpayers to get a charitable deduction for the full fair market value of appreciated property donated to charity without ever including the appreciation in taxable income.
Such a tax advantage invites abuse, so the tax law has built in many guardrails to ensure tax compliance. A clever plan to get extra donations for unsold eyeglass frames flipped over the guardrails in Tax Court earlier this month.
The plan was put together by a CPA firm that will go unnamed here. Tax Court Judge Ashford explains (footnotes omitted):
This eyewear charitable contribution program involved ZD Products, Inc. (ZD Products), consolidating over 170,000 designer eyeglass frames it possessed into units of approximately 3,432 frames each and selling these units to 50 buyers for $50,000 per unit; each buyer would then purportedly be eligible to donate his or her frames after a minimum one-year holding period to... a section 501(c)(3) nonprofit organization (or to a different qualified charitable organization of the buyer's choosing), and claim a charitable contribution deduction at the appraised fair market value at the time of donation.
A sweet deal. The taxpayer paid $50,000 for the frames and claimed a $225,596 charitable deduction when it donated the frames a year later.
Unless the donation is a gift of traded securities, appreciated property donations in excess of $5,000 require a "qualified" appraisal. The appraiser must report specific information laid out in the tax regulations, and the appraiser must meet competence and independence requirements. The IRS said the appraisal failed to meet these standards. Judge Ashford considers the IRS assertion:
We agree (as further discussed below), but the 2007 Marshall & Stevens appraisal suffers from a more fundamental problem; that is, it is not an appraisal of what Petitioner donated, i.e., his 3,432 new designer eyeglass frames... but rather is an appraisal premised on valuing 349,629 frames.
The appraisal used to support the deduction valued the entire universe of frames used in the donation program - but not the specific smaller batch contributed by the taxpayer. Judge Ashford:
Tellingly, the 349,629 eyeglass frames that Marshall & Stevens valued varied in price between $37 and $80, yet petitioners could not discern whether Petitioner's 3,432 frames are from the low end of the price spectrum, the high end, or some varying combination.
So did the judge ponder the evidence and determine a more accurate deduction? That's not how this works. If you fail to meet the appraisal requirements, your deduction isn't re-figured. It's obliterated. That's right, zero deduction.
The moral? This case has several lessons. The obvious one is the classic "too good to be true" lesson. If the value of the glasses really was $225,596, do you think the taxpayer could have bought them for $50,000? A more subtle lesson is the importance of making sure your appraisal covers the property donated to the charity, and that the appraisal meets the IRS standards. If your appraisal falls short, the deduction goes from $225,596 to zero in a hurry.
Link to case: T.C. Memo. 2020-41.
Seasonal Employers Allowed to Pick Various 12 Week Periods for Computing Maximum PPP Loan Amount - Ed Zollars, Current Federal Tax Developments. "A key addition is a new provision that allows the use of any 12-week period between May 1, 2019 and September 15, 2019 to calculate the maximum loan amount for a seasonal business."
Working From Home Doesn’t Always Equal A Home Office Tax Deduction Even If You Have No Other Option - Kelly Phillips Erb, Forbes. "As a result of the Tax Cuts And Jobs Act (TCJA), for the tax years 2018 through 2025, you cannot deduct home office expenses if you are an employee."
'Get My Payment' should now help more taxpayers get coronavirus stimulus info - Kay Bell, Don't Mess With Taxes:
On Sunday, the IRS announced that it had completed "significant enhancements" to the online coronavirus payment tool that now should "deliver an improved and smoother experience for Americans eligible to receive Economic Impact Payments."
You can find the tool here.
IRS’s “Get My Payment” App Now Works for Filers Who Neither Owed Tax Nor Received a Refund - Russ Fox, Taxable Talk. "Given that this is a program less than a month old, I must give lots of credit here to the IRS."
Are Dead People Eligible For Coronavirus Recovery Rebates? - Janet Holtzblatt, TaxVox. "If the decedent passed away this year, the answer is 'yes.' If the tax filer died in 2018 or 2019, the answer is 'maybe, maybe not.'"
CARES Act: Changes for Retirement Accounts - Becky Knutson and Jana Luttenegger Weiler, Davis Brown Tax Law Blog. "Individuals and their financial advisors should consider carefully the consequences of withdrawals at this time, and the impact on an employee’s ability to save for retirement in the future."
In Wells Fargo 8th Circuit Holds Reasonable Basis Defense to Negligence Penalty Requires Taxpayers Prove Actual Reliance on Authorities - Leslie Book, Procedurally Taxing. "I anticipate that this will not be the last appellate word on this issue."
Tax Fraud, Alameda Style - Jim Maule, Mauled Again:
How were they caught? Internal Revenue Service software detected suspicious entries on returns. Specifically, the software looks at returns filed by a tax return preparer, and if the refund rate exceeds 50 percent, additional investigation is undertaken. The returns filed by these preparers reached as high as 86 percent. In other words, almost every client received a refund. The IRS sent an agent to the preparers’ office, posing as a client. The agent brought information that, if properly reported, would generate a tax due. During their meeting, one of the preparers told the agent that money would be owed, but that, “it’s your return and I can give you one of those charity things, but once you sign it, it’s you.” The agent agreed, and the preparer added a $2,000 charitable contribution deduction to the return even though the agent had told he preparer that he had not given anything to charity for the year in question. The IRS did not stop at that point. Instead, it interviewed the preparers’ clients and found 35 returns that it considered suspicious.
The clients of these preparers probably received a lot of additional attention from the IRS - enough to make the refunds seem somehow not worth it.
Reviewing the Benefits of Full Expensing for the Post-Pandemic Economic Recovery - Erica York, Tax Policy Blog. "Rather than turn to subsidies that may produce a short-term sugar high and require the government to choose who benefits, broad improvements to the tax code can help businesses and individuals invest, create jobs, and reach higher rates of growth. Permanent full expensing, expanded to additional assets like structures, offers a cost-effective solution to encourage additional investment over the long run."
Quote of the day. From an opinion by Judge Ruwe in Tax Court yesterday:
Petitioner cannot litter his returns with misleading and inaccurate information, selectively rely upon the information, and then expect to bamboozle his way to a procedural victory.
So don't try that.
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