Tuesday November 21, 2017
Will Tax Reform Include New Charitable Deductions?
As the House Ways and Means Committee staff continues to draft a massive tax reform bill, a new proposal could expand charitable giving. This week, Rep. Mark Walker (R-NC) introduced the Universal Charitable Deduction Act (UCDA).
The UCDA proposes allowing "above the line" charitable deductions in an amount equal to up to one third of the new standard deduction. If the standard deduction is increased from $12,700 for married couples to a proposed level of $24,000, then couples who take the standard deduction could also deduct up to $8,000 in charitable gifts. The deduction limits are lower for single persons, but they also would be able to take both the standard deduction and charitable gift deduction.
With the existing standard deduction, about 30% of taxpayers itemize and may deduct cash gifts each year up to 50% of adjusted gross income. However, the proposed tax bill would double the current standard deduction. If a larger standard deduction passes, there will be fewer taxpayers who itemize and take charitable deductions. The UCDA would permit most taxpayers to take the increased standard deduction and also claim their charitable gifts.
Two Washington associations of nonprofits welcomed the bill. Independent Sector President Daniel Cardinali stated, "This proposal would also move us closer to another important goal for Independent Sector making a tax incentive for charitable giving available to all those who pay taxes in the United States."
National Council of Nonprofits President Tim Delaney noted, "The nonprofit community was pleasantly surprised by the introduction of the Universal Charitable Deduction Act, a bill that would extend to all taxpayers a tax deduction for donations for the work of charitable nonprofits."
Editor's Note: Tax reform in 2017 is still a big challenge for Congress. On October 12, Speaker of the House Paul Ryan (R-WI) said he expects to pass a tax reform bill in November. Because this is a large legislative project, he is willing to keep the House Members in Washington until December 25. Ryan stated, "I do not care . . . We have got to get this done."
Mortgage Precludes $33 Million Easement Deduction
In Palmolive Building Investors LLC et al. v. Commissioner; No. 23444-14; 149 T.C. No. 18 (10 Oct 2017), the Tax Court rejected a claim for a $33.4 million charitable deduction for a facade easement. The Tax Court determined the building mortgages were not properly subordinated to the easement.
Palmolive Building Partners LLC (PB) owned the Palmolive Building on North Michigan Avenue in Chicago, Illinois. On December 21, 2004, PB executed an easement deed to the Landmarks Preservation Council of Illinois (LPCI). The deed granted a facade easement for the Palmolive Building to LCPI.
The Palmolive Building was subject to two mortgages totaling $55.6 million. The fair market value was $257 billion and the facade easement value was $33.41 million.
The two lenders subordinated their loans to the façade easement, but retained a prior right to potential insurance proceeds. The IRS denied the $33.41 million deduction because the easement was not in perpetuity.
The Tax Court noted that a facade easement is permitted under Sec. 170 (f)(3)(B). The easement must be exclusively for conservation purposes under Sec. 170(h)(5).
If there is a mortgage, the mortgagee must subordinate "its rights in the property to the right of the qualified organization to enforce the conservation purposes of the gift in perpetuity." See Reg. 1.170A-14 (g)(2). Under the "extinguishment" principle, if the building is destroyed, "the donation of the perpetual conservation restriction gives rise to a property right, immediately vested in the donee organization, with a fair market value that, at the time of the gift, is at least equal to the proportionate value that the perpetual conservation restriction bears to the value of the property as a whole."
PB claimed that the mortgage was only an incidental burden and the potential for loss was "so remote as to be negligible."
The Tax Court noted that subordination required the nonprofit to have priority for the receipt of insurance proceeds. In this case, LPCI did not have priority. The language in the agreement did create priority for the lenders rather than LPCI.
Because the parties clearly intended the lenders to have a prior claim, this was not an incidental issue. Therefore, the charitable dedication was denied because the subordination was improper.
Rental Allowance for Ministers Rejected
In Gaylor, Annie, Laurie et al. v. Steve Mnuchin et al; No. 3:16-cv-00215 (6 Oct 2017), the United States District Court for the Western District of Wisconsin held unconstitutional the Sec. 107(2) ministers' rental allowance.
Taxpayers Gaylor and Barker are co-presidents of the Freedom from Religion Foundation. In an amended 2012 tax return, they stated they are "not clergy" and their employer "is not a church." However, they claimed a deduction for housing expenses under Sec. 107(2).
On June 27, 2016, the IRS denied the deduction because the return "avows that neither of you are ministers of the gospel."
The District Court determined that the ministers' rental allowance was not permitted. The judge stated, "I've concluded that Sec. 107(2) was invalid under either the plurality or concurring opinion. The provision was invalid under the plurality opinion because it gave an exemption to religious persons without a corresponding benefit to similarly situated secular persons. As to the concurring opinion, because a primary function of a minister of the gospel is to disseminate a religious message, a tax exemption provided only to ministers results in preferential treatment for religious messages over secular ones."
The court determined that the ministerial rental allowance is therefore unconstitutional.
Editor's Note: The judge suggested that if Congress were to extend the allowance to all nonprofits, it would be constitutional. Congress is likely to wait for review by an appellate court before taking action.
Applicable Federal Rate of 2.2% for October -- Rev. Rul. 2017-20; 2017-41 IRB 1 (19 Sep 2017)
The IRS has announced the Applicable Federal Rate (AFR) for October of 2017. The AFR under Section 7520 for the month of October will be 2.2%. The rates for September of 2.4% or August of 2.4% 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 2017, pooled income funds in existence less than three tax years must use a 1.2% deemed rate of return.
Published October 13, 2017
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