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Saturday February 8, 2025

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Top Tax Tips for Easy Filing

On January 30, 2025, the Internal Revenue Service (IRS) published six top tips to make filing a 2024 tax return easier. The IRS explained these tips are also available on IRS.gov on the “Let us Help you” webpage. Taxpayers are encouraged to use these helpful suggestions to make filing easy this year.

1. Gather Important Tax Paperwork — Taxpayers should have a list of common items needed for filing tax returns. These include Social Security numbers (SSNs) for the individuals on the tax return, your bank account and routing numbers, tax forms such as a W-2s, 1099s, 1098s and digital asset sale records. You should keep IRS Form 1095-A, Health Insurance Marketplace Statement as well as any letters sent to you by the IRS.

2. Report All Income — Taxpayers are reminded that all income from any category is taxable. This could include income from goods that you created and sold online, investment income, part-time income, self-employment or business income and funds received for services through mobile apps.

3. Avoid Paper Returns — The best and safest way to file is with an electronic return or tax software. The software checks your math and guides you through each section of the return. After you have completed your data entry, a powerful benefit of tax preparation software is that it conducts hundreds of checks on your entries to ensure you have a correct return. If you file a paper tax return, your refund may be significantly delayed and the potential for filing errors increases dramatically.

4. IRS Free Resources — There are multiple resources to assist taxpayers. The IRS Free File program offers commercial software at no cost to individuals with income in 2024 of $84,000 or less. There are 25 states that participate this year in the Direct File program on IRS.gov. The web-based service is free for individuals with simple tax returns and guides you through the filing process with a series of questions and enables you to use your state’s tools to complete your state tax return. If your income is over $84,000, you can use the IRS Free File Fillable Forms. Most taxpayers with incomes of $67,000 or less, with a disability or limited English capabilities, or those age 60 and over, can benefit from the Volunteer Income Tax Assistance (VITA) or the Tax Counseling for the Elderly (TCE) programs. Military members may use the MilTax program.

5. Tax Filing Options — There are multiple methods for tax filing. Last year, over 54% of taxpayers used the services of a tax return preparer. The IRS maintains the Directory of Federal Tax Return Preparers with Credentials and Select Qualifications on IRS.gov. Many individuals will use commercial software, the IRS Free File system or the IRS Direct File system. Only a small percentage of individuals are expected to prepare their own taxes without outside assistance.

6. Online Resources — Taxpayers can use multiple resources on IRS.gov. The most popular resources are the Interactive Tax Assistant and the “Let us Help you” webpage.

Bargain Sale Deduction Reduced 67%

In Karl W. Leo et al. v. Commissioner; No. 12519-20; T.C. Memo. 2025-9, the Tax Court rejected the taxpayer's valuation of $12.425 million, accepted the Internal Revenue Service (IRS) value of $4.05 million and upheld a 40% gross valuation misstatement penalty.

Taxpayers Karl and Fay Leo were residents of Alabama who acquired 136.4 acres of property in Union County, Mississippi. The property was used in 1948 for construction of a furniture factory. There were multiple owners who leased the property to various furniture manufacturers, including Newport Furniture Co., Inc. (Newport Furniture Co.), which later filed for bankruptcy in 2013.

On July 16, 2013, Vanguard Properties, a business entity owned by the Leos, signed a nonbinding letter of intent with the Mercy Foundation (Mercy). The plan was for Mercy to purchase the property in a bargain sale transaction for $575,000. The letter stated that the appraised value must be a minimum of $15 million or Mercy could cancel the contract. There was a potential lease with the successor to the bankrupt Newport Furniture Co.

On December 9, 2013, Tioga Environmental Consultants did an environmental assessment and determined there was water damage to floors and walls, ceilings, mold and rust. On December 19, 2013, there was a lease signed by the successor to the bankrupt furniture company for $202,500 each year. On December 31, 2013, the bargain sale from Vanguard Properties to the Mercy Foundation was completed for a $10,000 cash payment and a promissory note for $565,000. Subsequently, the note was exchanged for a cash payment of $40,000 from the Mercy Foundation.

An appraisal was completed with a charitable deduction of $15.225 million. This amount was reported on the tax return of Mr. and Mrs. Leo for 2013. Their adjusted gross income (AGI) was substantial and the claimed 30% of AGI deduction was $3,249,390. They carried forward $11,975,610.

The appraisal by Harold E. Campbell Jr., MAI, indicated the property was "older but has been mostly well maintained over its life." Because appraiser Campbell determined the income approach was not reliable, he used a cost approach and estimated the cost of constructing the new buildings would be $16.2 million. He therefore valued the property at $15.8 million. The Mercy foundation had paid a total of $50,000 for the bargain sale. After negotiations, the Mercy Foundation sold the property to New Albany Acquisitions, LLC for $1.13 million.

The IRS audited the Leos, denied the deduction and mailed a Notice of Deficiency. The Notice of Deficiency also stated a 40% gross valuation misstatement penalty under Section 6662(h)(1) was applicable.

The Tax Court noted the key issue was valuation. The taxpayers claimed value was $12.425 million. The fair market value of property is "the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts." Reg. 1.170A-1(c)(2).

The appraisal by Campbell was dated December 5, 2013. The Tax Court determined the "precommitment impaired his objectivity" because he had promised a value of at least $15 million before viewing the property. In addition, the sale by the Mercy Foundation, which occurred 16 months later for $1.13 million, indicates the Campbell valuation was not proper.

Taxpayer called appraiser Singleton at trial, who offered comparables, including one based on a furniture factory in Ecru, Mississippi, and another on a manufacturing facility in Stillwater, Oklahoma. The Tax Court determined that neither comparable was relevant.

IRS appraiser, Everette E. Ladner III, viewed the property and stated it was near the end of its economic life. Ladner used comparable sales and estimated the property was worth $4.05 million.

The Leos also submitted a fallback position with valuation of $7.941 million. This fallback position was based on the land value, the value of interior finishes and the buildings. The Tax Court determined that these values were not supported by evidence and accepted the IRS appraiser Ladner valuation of $4.05 million. Because the claimed value was substantially over 200% of the accepted value, the 40% gross valuation misstatement penalty applied.

Editor's Note: Bargain sales under Section 1011 are a common and beneficial gift for nonprofits. The charitable deduction is the difference between the fair market value and the price paid by the nonprofit. The taxpayer lost in this case for two reasons. First, there was a commitment to a specific valuation number prior to the appraisal. Second, the appraiser valued the 65-year-old dilapidated buildings as near the value of new buildings.

40% Penalty on Syndicated Conservation Easement

In Park Lake II LLC et al. v. Commissioner; No. 12115-20; T.C. Memo. 2025-11, the Tax Court sustained a gross valuation misstatement penalty under Section 6662 and reportable transaction understatement penalties.

Park Lake is an Alabama LLC that acquired land in Montgomery County, Alabama in 2016. After soliciting investors for the partnership, it granted a conservation easement to National Farmer’s Trust and reported a charitable contribution deduction of $17.6 million. The Internal Revenue Service (IRS) denied the deduction and assessed penalties under Sections 6662 and 6662A.

IRS Revenue Agent (RA) Andrea Rowan determined the penalty and acting team manager, David Blackburn, signed the penalty as Supervisory Revenue Agent. He served in this role from February 16, 2020 to June 6, 2020. The penalty was assigned in that role on March 27, 2020. The penalty was assessed in a Final Partnership Administrative Adjustment (FPAA) on July 8, 2020.

The taxpayer claimed the penalty was not valid under Section 6751(b)(1). This provision states that "[n]o penalty under this title shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination."

The Tax Court stated the taxpayer "struggles mightily, but in vain, to gin up a dispute of material fact." Taxpayer noted RA Rowan did not make the "initial determination" because another individual had recommended the penalty. However, the effective penalty was determined by RA Rowan before the FPAA. The Tax Court noted "petitioner is again grasping at straws." The IRS internal working documents may include the creation of forms by other individuals, but the actual "determination" is by the revenue agent.

In addition, David Blackburn was not Team Manager on the dates prior to or after the date of approval on March 27, 2020. However, the Tax Court noted, "It is a fact of life in the IRS (as in any large organization) that staff members change jobs, are reassigned, get promoted, or retire." The fact that Mr. Blackburn was not the supervisor of RA Rowan during all the events was inconsequential. The penalties were upheld.

Applicable Federal Rate of 5.4% for February: Rev. Rul. 2025-5; 2025-7 IRB 1 (16 January 2024)

The IRS has announced the Applicable Federal Rate (AFR) for February of 2025. The AFR under Sec. 7520 for the month of February is 5.4%. The rates for January of 5.2% and December of 5.0% 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 2025, pooled income funds in existence less than three tax years must use a 4.0% deemed rate of return. Charitable gift receipts should state, “No goods or services were provided in exchange for this gift and the nonprofit has exclusive legal control over the gift property.”


Published January 31, 2025

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