• Revenue Procedure provides safe harbor for certain deductions under Internal Revenue Code Section 162—Rev. Proc. 2019-12 clarifies the federal deductibility of contributions made by businesses to charities when the business expects a state or local tax credit in return for the contribution.
Under IRC Section 162, ordinary and necessary expenses paid or incurred in carrying on a trade or business are deductible. However, Section 162 provides no deduction for contributions that otherwise would be deductible under IRC Section 170 as a charitable donation.
In 2018, proposed regulations under Sections 170 and 642(c) provided that if a payment is made to a charitable organization and the taxpayer receives or expects to receive a state or local tax credit in return, the tax credit is a benefit in exchange (a quid pro quo) that reduces the charitable contribution.
However, now under Rev. Proc. 2019-12, the Internal Revenue Service confirmed that to the extent the taxpayer expects to receive that state or local tax credit, there’s a direct benefit to the business, and therefore, the payment is an ordinary and necessary business expense under Section 162. So, it’s clear that the business can deduct that portion of the charitable contribution for which a return benefit/tax credit is expected under Section 162 as a business expense and the balance under Section 170 as a charitable donation.
The safe harbor applies to C corporations and to pass-through entities that are separate taxpayers operating a trade or business.
• IRS prevails on summary judgment motion to impose liability on beneficiaries of estate for unpaid estate tax, penalties and interest—In U.S. v Ringling et al. (D.Ct. S.D. Feb. 21, 2019), the government sought a judgment against each of the decedent’s three daughters and grandson for payment of unpaid federal estate tax, as well as penalties and interest, under IRC
Harold Arshem died on Dec. 24, 1999, and his estate was left to his three daughters under his will. In addition, he owned certain other property (bank accounts, government bonds and trucks) jointly with his daughters and grandson and owned life insurance that named his daughters as beneficiaries. He also had entered into several transactions with his grandson regarding real estate. In one transaction, he sold real property to his grandson but forgave the debt just before Harold died. In another transaction, he retained a life estate in a certain other real property but gave his grandson the remainder interest. In the last transaction, within one year of his death, he sold real property to his grandson, whose debt was still outstanding on Harold’s death.
The daughters were appointed as personal representatives of the estate and filed a local inheritance tax return with South Dakota. The South Dakota court ultimately appointed a special administrator, however, to investigate tax issues. The special administrator concluded that the value of the property on the South Dakota return should have been determined by fair market value, instead of assessed value. He further determined that a federal estate tax return should have been filed. The court ordered the state tax return to be amended and a federal return to be filed.
The estate filed its federal estate tax return on April 14, 2008, reporting estate tax due of just under $30,000. That summer, the IRS assessed the estate tax, additional penalties and interest, for a total of over $65,000, and sent notices of intent to levy and requests to pay. The estate requested abatements, but the IRS denied those requests, finding that there wasn’t reasonable cause or a showing of due diligence by the estate. For the next three years, the IRS sent additional notices requesting payment. In 2015, the IRS then sent the beneficiaries and the estate a notice of federal tax lien. Each of the daughters made a small payment of about $4,500, but a balance remained outstanding. The IRS then filed suit against the beneficiaries
personally, seeking a judgment for the unpaid taxes, penalties and interest under Section 6324(a) and moved for summary judgment.
The court upheld the motion for summary judgment, holding that: (1) the estate tax wasn’t paid when due, and (2) the beneficiaries received property that was included in the gross estate. As a result, the beneficiaries were liable for the unpaid portion of the estate’s liability under Section 6324(a). The estate failed to refute any of the government’s statements of fact. The estate did assert several affirmative defenses: that the government’s claims were barred by accord and satisfaction, waiver, estoppel, the statute of limitations and reasonable care. However, even though the estate alleged that one of the daughters had been told by an IRS employee that the interest and penalties would be waived, the court held that the estate didn’t provide enough evidentiary support for any of its affirmative defenses. The government’s motion was granted, and the court ordered it to file a proposed order containing the total amount for which the beneficiaries were liable (jointly and severally).