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Tax Law Update: November 2022

David A. Handler and Alison E. Lothes highlight the most important tax law developments of the past month.

• Tax Court vacates earlier decision and allows $151 million charitable deduction—In Battelle Glover Investments LLC v. Commissioner, Docket No. 6904-19 (Sept. 12, 2022), the Tax Court vacated its decision to disallow a $151 million deduction claimed by Battelle Glover Investments LLC (Battelle) for its charitable conveyance of an easement.

In 2015, Battelle granted a conservation easement over 97.8 acres of property in DeKalb County, Ala. to Southeast Regional Land Conservancy, Inc., claiming a $151 million deduction for the contribution. The Internal Revenue Service audited Battelle’s partnership return (Form 1065) and denied the charitable deduction.

The IRS explained that the deed didn’t comply with the requirements of Internal Revenue Code Section 170 because it provided that, in the event of a judicial termination, the donee would only receive the fair market value (FMV) of the easement at the time of the donation. Such a fixed amount, the court stated, wasn’t consistent with Treasury Regulations Section 1.170A-14(g)(6)(ii), which requires that the donation give rise to a property right at least equal to the proportionate value of the perpetual conservation restriction. As a result, the conservation purpose of the contribution (the easement) wasn’t “protected in perpetuity” as required by the IRC. Battelle argued that the regulation was substantively and procedurally invalid, but the court rejected that argument and issued an order in favor of the government.

Battelle also moved for reconsideration arguing that the deed could be reformed under Alabama law, a corrected and compliant deed had been executed and recorded and the risk of the judicial termination was so remote as to be negligible. However, the court denied the motion.

The basis for the disallowance, however, was undercut when several months later, the U.S. Court of Appeals for the 11th Circuit issued its decision in Hewitt v. Comm’r, 21 F.4th 1336 (11th Cir. 2021), declaring the Treasury regulation procedurally invalid under the Administrative Procedure Act (APA). In Hewitt, it was revealed that the Treasury department failed to respond to significant comments filed while promulgating the regulation, constituting a violation of the APA’s “notice and comment” rule-making process. Because the Battelle Glover case would be appealable to the 11th Circuit, the Tax Court was bound to correct its initial ruling and vacated its order.

• Private letter ruling grants relief to taxpayer regarding IRC Section 643(e) election—In PLR 202239006 (July 1, 2022), the taxpayers, as executors of an estate and trustees of a trust, made a Section 645 election to treat the estate as part of the trust. The trust made a distribution to the decedent’s spouse, who then later gave the property to their children. The estate made a further election to treat the distribution to the spouse as a sale of the property under Section 643(e)(3). The estate recognized gain, and the spouse’s basis (and therefore the children’s basis) in the assets was adjusted to the FMV.

Later, a tax preparer for the children realized that Section 643(e) elections aren’t permitted for transactions between related taxpayers. The estate filed an amended return as though the election to treat it as a sale were never made and then filed a request for relief under Treas. Regs. Section 301.9100-3.

The request for relief was granted without explanation, meaning that the request must have been in good faith, and the government’s interests weren’t prejudiced.

• Projected 2023 inflation adjustments issued ahead of IRS release—For 2023, the unified credit amount, generation-skipping transfer (GST) tax exemption, annual exclusion gift amount, income and capital gains tax brackets are all expected to be adjusted upward for inflation as follows:

  • Gift, estate and GST tax exemption amounts:  $12.92 million (up from $12.06 million).
  • Annual gift tax exclusion (IRC Section 2503):  $17,000 (up from $16,000).
  • Top (37%) income tax bracket for estates and trusts: $14,450 (up from $13,450).
  • Zero percent tax bracket for capital gains for estates and trusts: $3,000 (up from $2,800).

The IRS is expected to release official inflation adjustments in a revenue procedure this month.

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