I reported on the following updates at the September 12, 2017 meeting of the Southwestern Planned Giving Council:
1. Pennsylvania Budget
The Legislature and the Governor are still discussing various options to close a significant budget gap of approximately 2 billion dollars. Given the failure to agree on the revenue side of the budget, it appears that state spending will be curtailed.
2. Prospects for Federal Tax Reform
The Senate Finance Committee and House Ways and Means Committee are both expected to have Tax Reform hearings in the near future. However, both the House and Senate legislative calendars are limited, and it appears that it will be difficult for any action to be taken on Tax Reform before year end. Charities are well advised to keep informed on the status of the charitable tax deduction and limitations on itemized deductions.
3. Charitable Substantiation Rules
Two recent cases are illustrative of the importance of substantiating charitable tax deductions. In Big River Development, LP, et al. v. Commissioner, T.C. Memo 2017-166 (August 27, 2017) the Tax Court held that the deed for an easement constituted adequate substantiation. This case involved the Armstrong Cork Building, a historic property in Southwestern ’s Strip District. The taxpayer obtained a qualified appraisal and reported a $7.14 million charitable deduction, but did not obtain an acknowledgement letter from the charity until 2 years later. Fortunately for the taxpayer, the Tax Court found that the deed of easement constituted the contemporaneous written acknowledgement. The point of this case is that the taxpayer had to litigate and spend considerable money on supporting its charitable tax deduction, while this is a relatively simple matter that could have been handled by the charity providing a contemporaneous acknowledgement letter.
In another case involving a remainder interest in real estate, the taxpayer lost a $33 million deduction because the taxpayer did not list its $2.95 million cost basis on IRS Form 8283, as required. Of course, reporting the $2.95 million cost basis would have called into question the $33 million valuation of the remainder and the taxpayer’s claimed deduction. In any event, the Tax Court ruled that because the taxpayer did not comply with the substantiation requirement, it was not entitled to any charitable deduction. This case shows the importance of and the strict construction the IRS places on the charitable substantiation rules.
4. Overtime Final Rule
A federal judge in Texas recently ruled that the Overtime Final Rule issued by the Obama Administration was invalid because the U.S. Department of Labor exceeded its authority in doubling the salary level test from $455.00 a week to $913.00 a week. The U.S. Department of Labor published a recent Request for Information (“RFI”) that asks for comments on the salary level test, how to adjust it for inflation, and what changes to the duties test, if any, are appropriate. Nonprofits are encouraged to respond to the RFI to help ensure that any future Overtime Rule reflects how work is actually performed in nonprofit settings. Comments are due by Monday, September 25, 2017.
Note: This provides general information regarding matters of interest to tax-exempt organizations. Such information is neither legal advice nor legal opinion concerning particular situations. If legal advice or opinion is required, legal counsel should be consulted.