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February 17th, 2014
IRS Commissioner Koskinen on YouTube
As the tax filing season for 2013 enters a very busy time period, the IRS reports that it is receiving very heavy call volume. Early filers who are desiring tax refunds quite often use the President's Day holiday period to complete their tax returns.
IRS Commissioner John Koskinen stated, "The entire week of the President's holiday marks a peak time in the number of calls to the IRS, and we encourage taxpayers to visit www.irs.gov as the best place to get quick help."
There are six specific common questions that taxpayers have for the IRS.
1. Where is my Refund – The "Where is my refund?" tool on www.irs.gov or the IRS2Go smartphone application provide up-to-date information.
2. No W-2 – Employers are required to send out IRS Form W-2 by January 31. If employees do not have the form by mid-February, they should contact their employer. In some cases, the IRS will send the employer a letter requesting a W-2.
3. Need Prior Tax Return – If there is a requirement to obtain a lost tax return, then a taxpayer may order that on the website with Form 4506-T. That also can be ordered on the IRS2Go smartphone app.
4. Tax Question – The search function on www.irs.gov may be helpful. Recorded answers are also available on TeleTax at 1-800-829-4477.
5. Unable to Pay – There is an Online Payment Agreement on www.irs.gov. For major tax obligations, there also is an Offer in Compromise Pre-Qualifier.
6. Need Additional Help – The 13,000 Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) centers are listed on www.irs.gov.
IRS Commissioner Koskinen has also prepared a three minute video that is available on the IRS website or on the IRS YouTube channel. In the video, Koskinen states, "We want to provide you with the assistance you need to get your taxes filed accurately and on time. And we will work hard to issue refunds quickly while increasing our efforts to stop tax fraud and identity thieves."
Appraiser without Certification = Gift Tax and Penalty
In Estate of Helen P. Richmond et al. v. Commissioner; T.C. Memo. 2014-26; No. 21448-09 (10 Feb 2014), the Tax Court valued a 23.44% share of a family personal holding company (PHC). Because the appraiser was not certified, the Tax Court determined the appropriate value and assessed a penalty.
PHC was initially created in 1928 and held over $52 million in public securities. Approximately $50 million of the holdings were highly appreciated stock. 87% of the total value represented appreciation. Because the stocks were appreciated, the trustees chose to limit turnover to 1.4% of the portfolio each year. The estimated built-in capital gains (BICG) tax was over $18 million.
Decedent passed away on December 10, 2005. She was the second largest owner of PHC with a share of 23.44%.
The estate hired the accounting firm of Belfint, Lyons & Shuman, P.A. to value the stock. Belfint partner Peter Winnington completed a draft valuation and determined that with appropriate discounts for BICG, lack of control (LOC) and lack of marketability (LOM), the value was $3,149,767. This number was reported on IRS Form 706.
The IRS audited the estate and on June 12, 2009 determined that the appropriate valuation should be $9,223,658. The deficiency assessed was $2,854,729 and the 40% gross valuation penalty under Sec. 6662(h) was $1,141,892.
At trial, IRS expert John A. Thompson preferred a net asset value rather than the capitalization of dividends method selected by Winnington. Thompson suggested that there should be a 6% minority discount and a 36% discount for BICG and LOC. He determined the valuation should be $7,330,000.
Defense valuation expert Robert Schweihs used the capitalization of dividends method and determined the value to be $5,046,500.
The court held that there should be a 15% discount in net asset value for BICG, a 7.5% LOC discount and a 32.1% LOM discount. The net valuation by the court was $6,503,804. This represented approximately a 47% combined discount from the underlying public securities value.
The court noted that a capitalization of dividends method is appropriate if the property is difficult to value. Because PHC included public securities, it was preferable to use the net asset valuation method. Using this method, the court permitted a 15% BICG discount based on the present value of the future tax, a 7.75% LOC discount based on comparable funds and the middle range for the LOM discount, which was 32.1%.
The accuracy penalty under Sec. 6662(a) may be avoided if there is reasonable cause and the taxpayer acts in good faith. In this case, the co-executor was a CPA who relied on the Winnington valuation. While Winnington had done 10 to 20 valuation reports and had testified in court, he did not testify at trial. The Tax Court referred to his valuation as "an unsigned draft report prepared by its accountant" and determined that it was not reasonable cause and good faith to rely on this report. In addition, the Winnington report determined a value that was 65% of the claimed estate value at trial. Therefore, the penalty was applicable.
Ways and Means Proposes Delay of Sec. 501(c)(4) Regs
On November 26, 2013 the IRS published proposed regulations (REG 1-134417-13) to govern the candidate and election-related activities of 501(c)(4) organizations. The proposed regulations did not offer specifics on the definition of political activity. The IRS has received a very large number of comments on the proposed regulations.
On February 11, 2014, the Ways and Means Committee voted 23-13 to send a bill sponsored by Ways and Means Chair Dave Camp (R-MI) to the floor. The bill would block implementation of final regulations on Sec. 501(c)(4) social welfare organizations for one year. Camp indicated that he is concerned that the proposed regulations would limit the activities of educational organizations. For example, holding a nonpartisan candidate forum within 60 days of a general election would constitute political activity under the regulations.
Rep. Sander Levin is the Ranking Member of the Ways and Means Committee. He observed that the regulations "are designed to bring certainty in determining whether an organization's primary activities are political."
Editor's Note: The regulation of Sec. 501(c)(4) organizations is a very sensitive political subject. It is likely there will not be further action on this topic by Congress or the IRS until after the November election.
Applicable Federal Rate of 2.4% for February -- Rev. Rul. 2014-6; 2014-7 IRB 1 (23 Jan 2014)
The IRS has announced the Applicable Federal Rate (AFR) for February of 2014. The AFR under Section 7520 for the month of February will be 2.4%. The rates for January of 2.2% or December of 2.0% 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 2014, pooled income funds in existence less than three tax years must use a 1.4% deemed rate of return. Federal rates are available by clicking here.