Tax News & Views Transfers Credits and Pretzels Roundup

IRS Keeps Short Leash on Energy Credit Transferability - Mary Katherine Browne, Tax Notes ($):

In final regulations (T.D. 9993) issued April 25, Treasury and the IRS describe rules for the election to transfer eligible credits under section 6418 in a tax year, including special rules regarding partnerships and S corporations, excessive credit transfers, and recapture events.

Members of the clean energy sector asked the government during an August 2023 public hearing to consider additional flexibility in transferring credit portions, a grouping rule for the transfer of some credits, and changes to the recapture rules.

They didn’t get their wish.

Final regs. issued for clean energy credit transfers - Martha Waggoner, The Tax Adviser. "For tax years beginning after Dec. 31, 2022, eligible taxpayers can choose to transfer all or a portion of eligible credits to unrelated taxpayers for cash. The unrelated taxpayers can then claim the transferred credits on their tax returns. The cash payments are not included in the eligible taxpayers' gross income and are not deductible by the unrelated taxpayers."

Treasury Issues Final Rules for Energy Credit Transfers - Erin Slowey and Erin Schilling, Bloomberg:

The final rules (RIN 1545-BQ64) clarify who is eligible to monetize the credits and how credits can be transferred. Transferability is expected to bring in a wider array of buyers and capital into clean energy financing.

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Multiple commenters requested that a transferee taxpayer that is also an applicable entity be permitted to make an elective payment for a credit that the transferee taxpayer purchased, referred to as “chaining.” The IRS said that was outside the scope of the final regulations.

The proposed rules confirmed that when a tax credit is bought through a transferability deal and there is a recapture event, the risk falls on the buyer of the credit. Those rules were adopted without change in the final regulations.

Congress: the 2024 tax bill, and the big one in 2025

Let's make (another) deal? Burgess Everett, Politico. The article addresses the agenda of Senate Majority Leader Chuck Schumer for the rest of 2024, including the House-passed tax bill that has been languishing in the Senate:

He’s not at the point where he wants to jam the Senate GOP with the tax bill, though some Democrats think the bill’s prospects improve if Schumer schedules an uncertain floor vote. Sen. Mike Crapo (R-Idaho), the top Finance Committee Republican, said this week he still has issues with the bill.

“I’d love to get tax done. That’s a problem with Crapo. But maybe we can get it done,” Schumer said. “We could still do it. You might be able to come up with a compromise. You might have some new element that goes in there.”

Biden vs. GOP: Tax fight heats up ahead of election - Tobias Burns, The Hill:

Starting in 2026, the individual tax rate reductions in the TCJA will also expire, along with the cap on state and local tax deductions, the boost in the child tax credit, the increase in the standard deduction, the limit on personal exemptions and the repeal of an alternative minimum tax on corporations.

If Republicans can retake the White House and Senate while holding the House, they will have the chance to extend many — if not all — of these expiring provisions. Anything short of a full sweep would force Republicans to negotiate with Democrats, who fiercely oppose much of Trump’s marquee tax law.

Capitol Hill Recap: ‘Tax Teams’ Announced - Jay Heflin, Eide Bailly:

Legislative outlook: As has been written in prior Recaps, the outcome of the 2024 elections will have an enormous impact on how these tax measures are debated, meaning the final conclusions from the Tax Teams about the 2017 tax reform may only matter if the current Republican majority maintains control of the House.

During the debate about extending the 2017 tax reform bill, cost will be a big topic of discussion. This debate will be over whether extending these expenditures need to be offset, and if they are offset, how are they offset. Congress basically has two levers when it comes to raising revenue: Tax increases or spending cuts.

The debate over how to pay for extending the tax reform measures could decide which provisions get extended and which don’t.

To avoid a huge, deficit increasing tax bill while also extending nearly all tax measures, tax staffers have told Eide Bailly that extending the 2017 tax measures might be done a year at a time. This is because the cost to extend them for a longer period would be too expensive and a political liability.

Determining whether something is "expensive" is based on Congressional scoring rules, which assume a tax provision that scheduled to expire actually will. A one-year tax break that is extended annually for 10 years in real life costs the same as a 10-year provision, but that's not how Congressional scoring works.

Juuust a bit outside

Tax Court Slashes $47M Easement Break For Former Braves - Anna Scott Farrell, Law360 Tax Authority ($):

The U.S. Tax Court reduced a $47.6 million conservation easement donation deduction Thursday for a partnership founded by former Atlanta Braves players John Smoltz and Ryan Klesko, finding the Internal Revenue Service properly pegged the deduction at one-tenth the amount.

The partnership's claim was based on an inflated valuation of over 1,500 acres in Jones County, Georgia, on which it had donated an easement to the Southeast Regional Land Conservancy Inc., the court found. The partnership, most recently called Buckelew Farm LLC, was formed in 1999, with Smoltz, a Baseball Hall of Fame member, transferring his share to his wife before the December 2013 easement donation for unrelated reasons, the court said.

Tax Court Rejects Easement Litigant’s ‘Fantasy’ Valuation - Kristen Parillo, Tax Notes ($):

Buckelew — formed in 1999 by Ryan Klesko and John Smoltz, both former Major League Baseball players — acquired the land for $4 million between 1999 and 2006. Klesko and Smoltz purchased the land for its timber value and for various recreational uses, including hunting, fishing, and other outdoor sporting activities. They unsuccessfully tried to sell the property in 2012 for $9 million. Klesko initially wanted to list it for $14 million but was told by a broker that market conditions wouldn’t support that price.

Unable to find a buyer, in December 2013 Klesko and Smoltz sold their interests in Buckelew to Big K LLC, an entity formed by several individuals who intended to use the land for a syndicated conservation easement transaction. Buckelew donated a conservation easement to the Southeast Regional Land Conservancy at the end of the month and claimed a $47.6 million deduction for the contribution on its 2013 partnership tax return.

The Tax Court rejected civil fraud penalties, but upheld a 40% "gross valuation misstatement" penalty against the partnership. The partnership's appraiser. a Mr. Hayter, valued the property assuming a high-end resort could be developed there if the land were not preserved for conservation. The Tax Court disagreed. From the opinion:

Mr. Hayter's “before” value conclusion is based on the use of a discounted cashflow analysis using sales data from developments he deemed comparable to the Subject Property. However, only three of the developments are located in Georgia, with the other two being in South Carolina. All selected comparable developments can fairly be classified as high-end luxury resorts far from Jones County, with vastly different market conditions and amenity offerings, such as marinas, award-winning golf courses, restaurants, hotels, etc.

The IRS has been going after these syndicated conservation easement tax shelters by finding technical faults in their easement documents or tax filings. The courts have limited this IRS tactic, so the IRS is attacking the valuations, successfully.

Blogs and bits

Texans get sales tax break with emergency supplies tax holiday - Kay Bell, Don't Mess With Taxes. "Texas' special storm-related sales tax holiday begins this year at 12:01 a.m. on Saturday, April 27, and ends at midnight on Monday, April 29."

Tax Court Finds IRS Lacked Authority to Assess Sec. 6038(b) Penalties - Parker Tax Pro Library. "The Tax Court held, in a case challenging the IRS's notice of determination related to approximately $11 million of foreign reporting penalties under Code Sec. 6038(b) and Code Sec. 6677, that a settlement officer did not violate the taxpayer's Fifth Amendment due process rights or abuse his discretion in rejecting the taxpayer's collection alternatives that were significantly below his reasonable collection potential."

Fiscal '23 IRS Audits Resulted in $32B in Additional Taxes! Ronald Marini, The Tax Times. "22.7 percent of exams were conducted in the field, yielding over $24.1 billion in additional recommended tax."

Tax Policy Corner

Why Are the Individual Tax Cuts Expiring? - Alex Muresianu, Tax Policy Blog:

Congress made the individual tax cuts (and the accompanying revenue offsets) temporary and large rather than permanent but scaled back. One reason is the precedent for “temporarily” cutting taxes only to ultimately extend them when they are scheduled to expire. The Bush tax cuts were scheduled to expire at the end of 2010, but policymakers fully extended them for another two years, setting up the 2012 fiscal cliff. Ultimately, most of the tax cuts were made permanent, with the exception of the reduction in the top marginal tax rate.

Another reason is the political dimension. Frontloading benefits and backloading costs is (unfortunately) a feature of Washington policymaking. A common piece of folk wisdom says that politicians can only see as far as their next election. That might be slightly exaggerated, but regular elections create incentives to deliver large short-term benefits rather than steady long-term benefits.

Temporary Tax Laws Make Advising Clients a Tea Leaf Reading Game - John Harrington, Dentons via Bloomberg:

As a tax adviser, I often have to tell clients that a particular benefit is scheduled to expire on the date set in the statute. Even if the temporary provision has a track record of extensions, I must warn the taxpayer that it may not occur this time. “Everyone expected it to be extended again” is yet to be accepted as a valid defense to a legal malpractice claim.

Tax Fraud Friday

Attys, Insurance Agent Found Guilty Of Tax-Avoidance Scheme - Hayley Fowler, Law360 Tax Authority ($):

Two St. Louis tax attorneys and a North Carolina insurance agent on Thursday were found guilty on all counts of conspiring to defraud the federal government and aiding in the filing of false tax returns for their role in a tax avoidance scheme that prosecutors claim cost the Internal Revenue Service more than $4 million.

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The linchpin of the government's case lay in the defendants' "gain elimination plan," which involved lowering clients' taxable income through a web of partnership agreements, charities and life insurance policies.

The presence of life insurance you would not otherwise buy is at least a yellow flag in any income tax strategy.

Minnesota businessman sentenced for tax evasion - IRS (Defendant name omitted, emphasis added.):

A Minnesota businessman was sentenced today to 21 months in prison for evading the payment of federal individual income taxes he owed for the years 2007 through 2019.

According to court documents and statements made in court, Defendant owned and operated Custom Christmas Lighting, a business that installs Christmas lighting, special event lighting and decoration displays for its customers. In 2018, Defendant filed for bankruptcy and listed the IRS as a creditor. At that time, Defendant had unpaid debts due to the IRS going back to 2007.

As part of his bankruptcy, Defendant was required to sign and file, under penalty of perjury, a bankruptcy petition and schedules providing information regarding his assets, income and other financial affairs. But the schedules he filed contained materially false statements and omissions regarding his assets and income. Defendant also testified during bankruptcy proceedings and made materially false statements, specifically about his ownership of two speedboats. Defendant evaded payment of his federal income taxes by filing false bankruptcy schedules and making false statements during bankruptcy proceedings that concealed assets from the IRS.

Two speedboats. For 21 months, they'd better be very nice ones.

What day is it?

It's National Pretzel Day and Stop Food Waste Day, so finish those pretzels.

Tax News & Views Transfers Credits and Pretzels Roundup

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Joe B. Kristan, CPA