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Sunday October 25, 2020

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Convenient IRA Gift in 2020

The Coronavirus Aid, Relief, and Economic Security (CARES) Act waived the requirement to take a required minimum distribution (RMD) in 2020. This closely followed the SECURE Act, which recently changed the age for RMDs from 70½ to 72.

The required minimum distribution (RMD) applies to most retirement plan owners over age 72. Because the 2020 RMD was calculated based on the December 31, 2019 value when the markets were at a high level, Congress decided RMDs should be waived for 2020. The 2020 RMD waiver also applies to inherited IRAs. The RMD for IRA owners over age 72 will resume in 2021.

Fortunately, the IRA charitable rollover is still available for IRA owners over age 70½. While it does not fulfill the 2020 RMD because of the waiver, there are reasons many loyal donors will make IRA charitable rollovers, also known as qualified charitable distributions (QCDs) in 2020.

An IRA charitable rollover is a convenient way to make a gift in 2020. Many friends of nonprofits have IRA balances that have recovered from the March downturn. By fall 2020, these IRA balances may be an attractive source for loyal donors to use for charitable gifts. IRA owners may contact their IRA custodians to arrange a transfer directly to a favorite nonprofit.

Each IRA owner over age 70½ may give up to $100,000 per year in QCD gifts. The gifts are made to public charities for the general fund or a designated purpose. They may not be made to a donor advised fund, supporting organization or life income plan.

The QCD is not included in taxable income so there is no charitable deduction. It is simply a convenient way to support a favorite nonprofit. Many donors have made QCD gifts in past years and will choose to make the same IRA gift this year. In a year when the nation needs all of the services of the nonprofit community to help those in need, an IRA charitable rollover gift is an excellent way to help.

Bypass of Gain on Stock Gifts


In Jon Dickinson et ux. v. Commissioner; No. 9526-19; T.C. Memo. 2020-128, the Tax Court ruled that a charitable donation of stock bypassed capital gain, even though there was a pattern of redemptions.

Dickinson was the chief financial officer and a shareholder in Geosyntec Consultants, Inc. (GCI). The GCI Board authorized donations of GCI shares to Fidelity Investments Charitable Gift Fund (Fidelity), a qualified Section 501(c)(3) organization. The authorization from GCI acknowledged that Fidelity "has a donor advised fund program, which incorporates procedures requiring * * * [Fidelity] to immediately liquidate the donated stock."

The stock donations were approved in years 2013, 2014 and 2015 by written minutes of the GCI Board meetings. After each stock gift, GCI confirmed in writing that Fidelity was the owner of the transferred shares. Taxpayer signed a letter of understanding (LOU) with Fidelity that stated the gifted stock was "exclusively owned and controlled by Fidelity." Fidelity had full control over any subsequent sale of the stock and "is not and will not be under any obligation to redeem, sell, or otherwise transfer" the gifted shares.

Fidelity provided a letter that stated it had "exclusive legal control over the contributed assets." Following the gifts, Fidelity promptly tendered the shares to GCI and received cash payments.

Taxpayers reported a deduction for the fair market value of the gifted shares. The IRS issued a notice of deficiency for the failure of taxpayer to pay the capital gains tax on the gifted shares. The IRS also assessed a penalty under Section 6662(a).

Taxpayers are permitted to deduct the fair market value of appreciated property gifts to charity. Reg. 1.170A–1(c)(1). Dickinson intended to benefit from the gift of appreciated property rather than a gift of cash proceeds.

The IRS claimed that the substance of the transaction was a redemption by the taxpayer of the GCI shares followed by a gift of cash to Fidelity. The Tax Court stated, "We respect the form of this kind of transaction if the donor (1) gives the property away absolutely and parts with title thereto (2) before the property gives rise to income by way of a sale."

The court reviewed the documents to determine whether donor transferred all rights in the GCI stock. The court stated, "GCI's letters to Fidelity confirming ownership and transfer, Fidelity's letters to petitioners, explaining that Fidelity had 'exclusive legal control' over the donated stock, and the LOUs to the same effect all support petitioners' claim that petitioner husband transferred all his rights in the shares. Respondent makes much of the fact that Fidelity regularly redeemed the GCI shares shortly after each donation, according to what the Board understood to be Fidelity's internal procedures."

The IRS claimed there was a pre-existing understanding that Fidelity would promptly redeem the shares. However, a pattern of stock redemptions does not change the fact that Fidelity had clear title to the stock and could decide whether or not to redeem.

The IRS also claimed assumption of income because the pattern indicated that a redemption was imminent. See Rev. Rul. 78–197, 1978–1 C.B. 83. The Court noted the redemption was under the control of Fidelity and there had been no decision that required a redemption. The court stated, "The ultimate question, as noted in Palmer, is whether the redemption and the shareholders' corresponding right to income had already crystallized at the time of the gift." See Palmer v. Comm., 62 T.C.at 694–695.

The Court determined there was an absolute and clear gift of the GCI shares. The pattern of redemptions did not change the fact that title had clearly been transferred and the redemption was under the control of the charity. The bypass of capital gain on the gift was permitted.

Editor's Note: This case is similar to Rauenhorst v. Comm., 119 T.C.157 (2002). It restates the position of the Tax Court in Rauenhorst that there is no recognition of the capital gain unless it has ripened. If there is no binding obligation to redeem and it is clear that under state law title has been transferred, the bypass of capital gain will be permitted.

Conservation Easement Case Settlement


In IR–2020–196, the IRS announced the first settlement under its new offer to resolve conservation easement syndicated partnership cases. The IRS noted it has sent letters to "dozens of partnerships" that were involved in syndicated conservation easements.

IRS Chief Counsel Mike Desmond stated, "We are seeing movement on these settlements. Given the potential for significant penalties, we anticipate more taxpayers will take similar actions and ultimately accept these offers, and we encourage them to do so."

The IRS has approximately 80 syndicated partnership conservation easement cases in process. This is part of "vigorous efforts to combat abuse in this area."

There are multiple requirements for settlement with the IRS of a disputed conservation easement charitable deduction. All partners must agree to settle. The partnership must pay the tax, penalties and interest. There will be a penalty for the partners of at least 10% and a penalty for the promoter of 40%.

A syndicated partnership, Coal Property Holdings, was attempting to deduct $155 million for a conservation easement placed on a 3,700 acre tract of land in Tennessee. In Coal Property Holdings v. Comm., 153 T.C. 126, the Tax Court ruled the conservation easement deed failed the "judicial extinguishment" provisions under Reg. 1.170A–14(g)(6).

The settlement required the partnership to pay all taxes, penalties and interest. Partners were permitted to deduct the cost of investing in the transaction and assessed a 10% penalty. The promoter was assessed a 40% penalty.

IRS Commissioner Chuck Rettig stated, "The IRS is pleased that the partnership in the Coal Property transaction has agreed to the settlement, and we encourage other participants in qualifying easement cases to accept the terms of the Chief Counsel's initiative."

Attorney Christopher Rizek represented Coal Property and commented, "In light of the significance of the Court's ruling on the perpetuity issue, our client decided to take advantage of an assured penalty reduction in the IRS initiative and settle this matter under the IRS's terms, and it is pleased that this case is resolved."

Applicable Federal Rate of 0.4% for September -- Rev. Rul. 2020-16; 2020-37 IRB 1 (17 August 2020)


The IRS has announced the Applicable Federal Rate (AFR) for September of 2020. The AFR under Section 7520 for the month of September is 0.4%. The rates for August of 0.4% or July of 0.6% 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 2020, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return.


Published September 4, 2020

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