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Monday May 4, 2015

Washington News

Washington Hotline

NFL 'Punts' on Tax Exemption

In 1942 the IRS granted tax exempt status to the National Football League (NFL). While most of the billions of dollars the NFL receives each year from television rights, licensing agreements and ticket sales are distributed to the 32 teams and therefore taxable, the NFL League Office is tax exempt. This exemption has saved tens of millions of dollars in corporate income tax since 1942.

On April 28, NFL Commissioner Roger Goodell sent a letter to House Ways and Means Chairman Paul Ryan (R-WI) and Ranking Member Sander Levin (D-MI), and stated, “I write to inform you that the NFL owners have determined that the League Office plans to file returns as a taxable entity for our fiscal year 2015.”

NFL Commissioner Goodell also sent a copy of the letter to the 32 team owners. He observed that “the tax exempt status of the league office has been mischaracterized repeatedly in recent years.” With the adverse publicity for the NFL, Goodell indicated that “the League Office and Management Council [will] file returns as taxable entities, and the change in filing status will make no material difference to our business. As a result, the committee decided to eliminate this distraction.”

Members of Congress responded favorably to the NFL decision to drop exempt status. House Oversight and Government Reform Committee Chairman Jason Chaffetz (R-UT) and Ranking Member Elijah Cummings (D-MD) stated, “We are extremely pleased with the decision from the NFL to waive its tax-exempt status. Congress has tried to tackle this issue before, but we made it one of our committee’s priorities this year. It is rewarding to see such an important and positive step toward restoring basic fairness. We hope other professional sports organizations in similar situations will follow the positive example set by the NFL, and we look forward to rightfully returning millions of dollars to the Federal Treasury as a result.”

Ryan Promotes Permanent Extenders

At a Washington breakfast conference on April 30th, House Ways and Means Chairman Paul Ryan indicated he hopes to pass a tax reform bill this summer. The proposed bill may include permanent tax extenders for some of the 55 previously-temporary provisions, taxes for highway funding and reform of international taxation.

Ryan has been meeting weekly with Treasury Secretary Jacob Lew. At the conference, Ryan stated, “I do believe extenders can either be part of a limited tax reform package this summer, or, if we just can’t come together with the administration on that, then we immediately move to extenders and do those as early in the fall as possible.”

The House has voted to utilize dynamic scoring for tax bills. Even with this change, the anticipated tax reform bill would be revenue neutral.

Editor’s Note: Congress previously passed the America’s Small Business Tax Relief Act of 2015 (H.R. 636) and the America Gives More Act of 2015 (H.R. 644). The first bill makes permanent several business tax extenders. The charitable bill makes permanent deductions for gifts of food inventory, enhanced conservation easement deductions and the IRA charitable rollover. The provisions Chairman Ryan is discussing suggest that part but not all of the remaining 55 extenders would be in the next “permanent” bill. House Ways and Means Member Kevin Brady (R-TX) suggested that a potential compromise between the House, Senate and White House is still possible on tax extenders. While a Senate-House effort failed in December of 2014, Chairman Ryan is doing the “right thing” by reaching out to the Department of the Treasury, Senate Republicans and Senate Democrats. Brady opines that a compromise that would lead to passage of the permanent IRA rollover may still be possible this fall.

Penalty Upheld With Zero Value Conservation Easement

In Gordon Kaufman et ux. v. Commissioner; No. 14-1863 (1st Cir. 2015) the First Circuit affirmed a gross valuation penalty on a worthless conservation easement deduction.

Gordon and Lorna Kaufman purchased a personal residence in the South End Boston Historic District. In December 2003 they granted a conservation easement in perpetuity to the National Architectural Trust, since renamed the Trust for Architectural Easements (“Trust”).

While appraiser Tim Hamlon valued the conservation easement at $220,800, the Tax Court determined there was zero value because the conservation easement was similar to existing zoning regulations. The IRS had previously issued a deficiency and a Sec. 6662(a) penalty for a gross overvaluation that was 400% or more in excess of actual value.

The court noted that a penalty may be avoided under Sec. 6664(c) if the “taxpayer acted in good faith” and with respect to the qualified appraisal the “taxpayer made a good faith investigation.” The key issue centered on the good faith of the taxpayers in making the appropriate investigation.

Trust representative Mory Bahar had sent their advisor an email with a copy to the Kaufmans. Bahar reassuringly indicated to them that there had been 26 resales of properties with conservation easements with no loss in value. In addition, over 100 lenders have subordinated 800 loans on properties with easements. This indicated the lenders considered the easements to have no significant value.

The Kaufmans maintained that they had obtained an appropriate appraisal and therefore met the required standard. However, the court indicated that because the Bahar email claimed the conservation easement had no value, the taxpayers were required to make a greater inquiry. The “facts available to the Kaufmans should have alerted them that it was not reasonable to rely on that appraisal.” Therefore, the overstatement penalty applies.

Applicable Federal Rate of 1.8% for May -- Rev. Rul. 2015-8; 2015-17 IRB 1 (17 Apr 2015)

The IRS has announced the Applicable Federal Rate (AFR) for May of 2015. The AFR under Section 7520 for the month of May will be 1.8%. The rates for April of 2.0% or March of 1.8% 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 2015, pooled income funds in existence less than three tax years must use a 1.2% deemed rate of return. Federal rates are available by clicking here.

Published May 1, 2015
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