Friday December 8, 2023
Hurricane Ian Disaster Relief
Florida Emergency Management Director Kevin Guthrie stated on Friday that the number of deaths could be higher than reported. Hurricane Ian was a Category 4 storm when it reached the west coast of Florida on Wednesday with winds over 125 mph during most of its path through Central Florida.
On Friday, President Biden spoke with Florida Governor Ron DeSantis and Federal Emergency Management Agency (FEMA) Administrator Deanne Criswell. The White House indicated that efforts will be made to "prioritize lifesaving actions and ensure delivery of essential services and support to survivors."
At least a dozen Coast Guard aircraft have rescued over 80 individuals in southwest Florida. The Army Corps of Engineers has deployed forces to evaluate all of the bridges, roads and infrastructure in the devastated area.
Governor DeSantis indicated that over 3,000 individuals have been rescued from flooded homes in the areas hit hardest by Hurricane Ian. Over 80% of the devastated counties are without power. Six medical centers in southwest Florida were evacuated due to "problems with water or problems with power for an extended period of time."
In IR-2022-168, the Internal Revenue Service (IRS) determined that Hurricane Ian victims would have extensions until February 15, 2023 to file most individual and business tax returns and make required tax payments.
The IRS determined that a Florida resident or business owner would qualify. The deadlines on or after September 23, 2022 are generally extended to February 15, 2023.
Many Florida residents who had extended their tax return filing date until October 17, 2022 will now have until February 15, 2023 to file. Remittance of tax was due on April 18, 2022, and that obligation remains unchanged.
Some individuals also have quarterly payments due on January 17, 2023 or payroll or excise tax returns due on October 31, 2022 and January 31, 2023. The relief generally applies to these filing deadlines for impacted taxpayers.
The IRS automatically will provide filing and penalty relief for Florida taxpayers. They do not need to call the agency. However, if they receive a late filing or payment penalty notice, they will need to contact the IRS.
The IRS reminded Florida residents in the federally declared disaster area that any uninsured or unreimbursed disaster-related losses may be claimed for tax year 2022 or for tax year 2021. The return needs to have the FEMA number DR-4673-FL to claim the loss.
No Deduction with Crops to CRAT
In Donald Furrer et al. v. Commissioner; No. 7633-19; T.C. Memo. 2022-100, the Tax Court held that gifts of farm crops to two charitable remainder annuity trusts (CRATs) did not qualify for a charitable income tax deduction and the payments from the CRATs were ordinary income.
The taxpayers were engaged in the farming business. They created the Donald and Rita Furrer Charitable Remainder Annuity Trust of 2015 (CRAT I), and their son served as trustee. They transferred 100,000 bushels of corn and 10,000 bushels of soybeans to the trust and those crops were sold for $469,003. CRAT I distributed $47,000 to three charitable remaindermen. Most of the remaining funds purchased a Single Premium Immediate Annuity (SPIA) from Symetra Life Insurance Company (Symetra). The SPIA made payments to Donald and Rita of $84,368 in 2015, 2016 and 2017.
Symetra issued Form 1099-R and reported the annuity payments as "gross distributions" and a small amount of interest as "taxable amount."
In 2016, the taxpayers created CRAT II and funded it with 111,335 bushels of corn and 31,064 bushels of soybeans. The crops were sold for $691,827. CRAT II distributed $69,294 to seven charitable remaindermen and the balance purchased a second SPIA. This SPIA made payments of $124,921 to the recipients in 2016 and 2017. Symetra also issued a Form 1099-R with most of the payout labeled as a "gross distribution" and a small amount of taxable interest.
Taxpayers did not report any charitable deductions and only included the small amount of taxable income from Form 1099-R for each year. They claimed that the majority of the CRAT payouts were nontaxable return of corpus under Section 664(b)(4). They also filed IRS Form 709 for 2016 and reported the transfer to the trust with a cost basis of zero.
The trustee filed IRS Form 5227, Split-Interest Trust Information Return for 2015 and 2016 and included Form 4797, Sales of Business Property. It reported the sale to the CRAT and claimed a loss of $1,997 in 2015 and a gain of $24,852 in 2016.
The IRS determined that the SPIA distributions were taxable income and increased their Schedule F farm income for 2015, 2016, and 2017. During the examination by the revenue agent, the Furrers claimed they qualified for a noncash charitable deduction for the remainder value of their gifts to the CRATs. The IRS Revenue Agent initially allowed the deductions, but assessed penalties and deficiencies for 2015 through 2017. The IRS later conceded that the penalties were not valid because of untimely supervisory approval. The IRS subsequently filed a motion to disallow the noncash charitable contribution deductions.
The two issues submitted to the Tax Court were whether the taxpayers were entitled to noncash charitable contribution deductions and whether the annuity distributions were taxable as ordinary income.
Income tax deductions are valid "only if verified under regulations prescribed by the Secretary." Section 170(a)(1). For gifts of crops over $5,000, a taxpayer must obtain a qualified appraisal and attach IRS Form 8283 to the return. The taxpayer also must maintain records that substantiate the deduction. Reg. 1.170A-13(b)(2)(ii)(D).
The taxpayers did not obtain an appraisal, did not attach Form 8283 to their returns and failed to maintain the required written records. Therefore, they are not qualified for a charitable deduction.
In addition, the crops were inventory that had been fully expensed and had zero basis. Because inventory is taxable as ordinary income, under Section 170(e)(1) there is no charitable deduction. Therefore, even if they had completed the required appraisal and Form 8283, they would not qualify for a charitable deduction.
The CRAT permits appreciated property to be transferred to the trust and sold without tax. Section 664(c)(1). However, the payouts are governed by Section 664(b). CRAT payouts first must pay out all ordinary income, second, capital gain, third, other income, and fourth, nontaxable distribution of trust corpus. The trust accountant must maintain a record of the basis of gifted property under Section 1015(a) and must issue a Schedule K-1 to the income beneficiaries each year.
Because the basis in the crops was zero and under Section 1015(a) the basis carries through to the trust, each CRAT had a basis of zero in the crops. The sale of crops produced ordinary income taxable in Tier I. Therefore, all of the payouts from the CRAT were ordinary income to the taxpayers.
The taxpayers claimed they sold the crops to the CRATs, but there was no sale evidence and they did not pay tax on the sale. They claimed that there was an adjustment of the basis of over $1 million on the two CRATs. The Tax Court called this claim "utterly implausible."
Taxpayers claimed the CRAT distributions are exempt from tax and ignored Section 664(b). Finally, they claimed that the tax would be a "double tax" based on the IRS interpretation and the SPIA is taxed under Section 72, not Section 664. The Tax Court rejected all of these arguments as not relevant and determined that the taxation of distributions from the CRAT was governed by Section 664. Therefore, all payouts were ordinary income.
Editor's Note: Many CRTs have been funded with crops. Because the crop is nearly always expensed and has a zero basis, there is no charitable deduction. In addition, all payouts will be ordinary income. However, because the nature of farming produces unusually large returns some years, the crop CRUT is an excellent planning strategy. When farmers or ranchers have an extremely profitable year, they can transfer crops or cattle to the CRT. The primary benefit is to sell tax-free that year and spread the income out over the two lifetimes of the farm couple. This is an excellent planning strategy. The taxpayers in this case tried to take a good strategy too far. The Tax Court was correct, no charitable deduction is permissible and the payouts are classified as ordinary income.
IRS Crypto Crackdown
The IRS is steadily building its capabilities to attack cryptocurrency-related tax evasion. The Infrastructure Investment and Jobs Act passed last year requires brokers to report individuals "regularly providing any service in effectuating transfers of digital assets on behalf of another" if there is consideration involved. Therefore, the IRS is developing Form 1099-DA to record cryptocurrency transfers.
Some cryptocurrency exchanges believe that IRS regulation will be beneficial to the industry. Cryptocurrency started as a small decentralized system, but consumers now are overwhelmingly choosing to act through the larger exchanges.
The IRS uses the services of Chainalysis, Inc. to analyze transactions on many of the exchanges. With this data, the IRS gathers information on crypto transactions.
Crypto brokers have significant interest in the future of IRS reporting because they want to promote cryptocurrency as an investment. In May 2022, the crypto market was rocked by the losses with TerraUSD, a stablecoin, and its related token LUNA. With the crypto crash and the loss of over 60% of cryptocurrency value this year, there is pressure for greater regulation.
The IRS plans to require brokers to report all transactions in crypto. Large exchanges such as Coinbase or Kraken will undoubtedly comply. Some small, decentralized exchanges may operate in the gray area.
Most crypto sales take place on a single exchange, but some include two exchanges and are more difficult to crack. There are various calculators that are designed to try to collect and link multiple accounts, but the IRS and large accounting firms still have not decided on a specific method.
While brokers are expected to comply with the crypto regulation, it is possible for individuals to use an external hard drive for cold storage of crypto. However, even those in this circumstance may eventually buy and sell crypto and be subject to discovery.
Annette Nellen, past Chair of the AICPA Individual Taxation Technical Resource Panel and a professor at San Jose State University, stated, "It is possible before the reporting officially goes into play that people might want to pull their cryptocurrency out. But in the long run, is that going to help them? I do not think so. If they are going to be a bad actor, [there is a] good chance they are going to get caught at some point."
The IRS has invested resources to develop a cryptocurrency tax enforcement system. They placed a cryptocurrency question at the top of IRS Form 1040 and have engaged the services of data analysis companies such as Palantir and Chainalysis.
The IRS has an Office of Fraud Enforcement with a crypto enforcement effort named Operation Hidden Treasure. It is expected to continue building greater crypto monitoring tools in the future. After January 1, 2023, cryptocurrency brokers will start to track transfers. These will be reported on tax returns after January 1, 2024.
Editor's Note: This is a rapid schedule for brokerage firms and the IRS to prepare for massive reporting of crypto transactions. It is possible that the IRS may delay the implementation of this crypto reporting plan.
Applicable Federal Rate of 4.0% for October -- Rev. Rul. 2022-18; 2022-40 IRB 1 (16 September 2022)
The IRS has announced the Applicable Federal Rate (AFR) for October of 2022. The AFR under Section 7520 for the month of October is 4.0%. The rates for September of 3.6% or August of 3.8% 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 2022, pooled income funds in existence less than three tax years must use a 1.6% deemed rate of return.