Tax News & Views Imaginary Values and Moldy Cheese Roundup

Tax Court Calls Easement Valuation an ‘Exercise in Imagination’ - Kristen Parillo, Tax Notes ($). "A $16.8 million charitable contribution deduction claimed by a syndicated conservation easement partnership was an “outrageous overstatement,” according to a Tax Court opinion limiting the deduction to $93,690."

The taxpayer won some important issues - the IRS's attempt to disallow the entire loss based on alleged paperwork errors failed - but losing over 99% of your claimed deduction has to count as an overall loss.

The fact pattern in this case was typical of the conservation easement tax shelters of recent vintage. The promoters bought some cheap rural land in the southeast US, identified a potential natural resource there (in this case, kaolin clay), invented an alternative universe where that resource could be profitably extracted, and valued a conservation easement donation of the land based on that alternate reality. Tax-shelter investors who had bought into the deal shared in the resulting fabulous deduction.

In this case, the land was purchased for about $168,000, but generated a tax deduction of $16.8 million.

Tax Court Judge Urda wasn't having any of it:

We begin with the simple observation that the evidence before us, including the testimony of market participants, firmly establishes that no one involved in the kaolin industry would have paid nearly $17 million for the easement property even if a person were to credit the GMT report and the discounted cashflow analyses that followed it. To put it another way, no rational businessperson would pay the net present value of a business simply to buy the property, as is implicit in Beasley Timber's position equating the two values.

The Judge found a valuation of the deduction based on the alternate reality cash flows... unconvincing:

Use of the discounted cashflow method with so few reliable inputs and so many variables and unknowns is simply an exercise in imagination. As such it is altogether unreliable, and we would ignore the laughable results it generated even if we thought mining were the easement property's highest and best use. We caution taxpayers in the future who choose to use this method without strong support that we will view the income approach and the discounted cashflow method with skepticism, particularly in the conservation easement context.

The moral? Even if you get all the deduction paperwork right, charitable deductions based on valuations found only in a happier world only survive in that world.

Final regs. target syndicated conservation easement transactions - Martha Waggoner, The Tax Adviser. "The final regulations clarify that participants and material advisers must report these transactions to the IRS, including any transactions that were completed in tax years that are still open."

Ex-Atlanta Braves Players Appealed Conservation Easement Early - Tristan Navera, Bloomberg ($):

The Eleventh Circuit won’t hear an appeal by former Atlanta Braves players Ryan Klesko and John Smoltz over the denial of their conservation easement.

The panel of judges said Monday the US Tax Court’s April opinion—denying the partnership a $47.6 million conservation easement deduction—isn’t yet finalized, so it can’t be appealed. That decision had been entered under Rule 155, which allows the court to hold off on entry of a decision to allow parties to submit computations of the taxpayer liability.

Politics and Tax Policy

Cutting Taxes Is Easy; Paying for It Is Not - Doug Sword and Cady Stanton, Tax Notes ($).

No matter who wins the presidency, the next president is going to have a lot of tax-related promises to keep.

Former President Trump’s plan to extend the TCJA tax cuts, exempt overtime pay from taxation, repeal the state and local tax deduction limitation, and partially pay for the package with tariffs, alongside various other provisions, would add $7.5 trillion over 10 years to federal deficits, according to estimates from the Committee for a Responsible Federal Budget.

Meanwhile, Vice President Harris’s proposals, including extending the TCJA tax provisions for those earning under $400,000, raising the minimum wage, and raising the corporate income tax rate to 28 percent, would cost $3.5 trillion over 10 years. The group noted that because of the many uncertainties in the plans there is a wide margin of error for each estimate.

No-Tax-Increase Pledges May Be Good Politics, But They Make Tax Policy Goals Harder to Achieve - Adam Looney and Elena Spatoulas Patel, TaxVox. "Candidates promise to insulate 'middle-class' households (and voters) from tax increases. But these income-specific, no-tax pledges complicate the tax code and hamper efforts at reform."

Leveraging Tax Policy to Bolster US Economic Growth Amid Competition with China - Alex Muresianu, Alex Durante, and Erica York, Tax Foundation. "Restoring expensing for R&D, machinery, and equipment; extending better cost recovery to structures investment; and avoiding raising the corporate tax rate would create a stronger, pro-investment policy environment for the US economy. We estimate better cost recovery could boost US economic output by 1.7 percent and the size of the capital stock by 3.3 percent, at about half the budgetary cost of the Inflation Reduction Act’s green energy tax credits and the CHIPS and Science Act’s tax credits, grants, and spending authorizations."

What a washing machine saga says about Trump’s tariffs - Joseph Politano, Washington Post. "The cost of tariffs on imported washing machines might be borne primarily by consumers, but tariffs on imported lithography machines, construction equipment, steel and much more would be borne primarily by American businesses and workers."

Direct File for 2025

How Direct File Will Work in 2025: Free Tax Filing, Explained - Erin Slowey, Bloomberg ($):

Taxpayers in two dozen states will be able to file their federal tax returns for free with Direct File. State tax returns will have to be filed separately using a different software.

Direct File will be available in Alaska, Arizona, California, Connecticut, Florida, Idaho, Kansas, Maine, Maryland, Massachusetts, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Oregon, Pennsylvania, South Dakota, Tennessee, Texas, Washington, Wisconsin, and Wyoming.

...

For the 2025 tax year, Direct File will support individuals who qualify for the credit for other dependents, child and dependent care credit, premium tax credit, retirement savings contributions credit, and the deduction for health savings accounts. This is in addition to tax situations from its pilot season, when the IRS phased in users starting with federal and state workers and then more broadly opening up the tool in the middle of filing season to taxpayers filing simple returns.

Blogs and Bits

Oct. 15 tax filing extension deadline extended for disaster area, and other, taxpayers - Kay Bell, Don't Mess With Taxes"

Where Oct. 15 isn't the tax deadline: Since these taxpayers, both business owners and individuals, many who just recently went through a major natural disaster, are worried about more pressing things than taxes, here’s another, separate look at the who, when, and where this added time to file applies.

...

May 1, 2025, is the new deadline for taxpayers in seven states in Hurricane Helene’s deadly path. The disaster areas cover the entire states of Alabama, Georgia, North Carolina, and South Carolina, and parts of Florida, Tennessee, and Virginia.

8 Ways For Small Business Owners To Still Lower Their 2024 Taxes - David Rae, Forbes. "The more income you have, the more beneficial optimizing your small business retirement can be when it comes to minimizing taxes. Also, having the right retirement plan for your business can help you achieve financial freedom more quickly."

IRS Whistleblower Program — Awards And More Good News - Dean Zerbe, Forbes. "The IRS Whistleblower Office (WBO) has in recent weeks taken the best step it can to encourage whistleblowers to come forward – issue awards."

Things That Don't Work Department

Corona man sentenced to 6 years in prison for filing false tax returns for clients and causing at least $28 million loss to IRS - IRS (Defendant name omitted, emphasis added):

A Riverside County man has been sentenced to 72 months in federal prison for preparing and filing false tax returns for his clients, a decade-long scheme that caused a tax loss to the IRS of at least $28 million, the Justice Department announced today.

Defendant, of Corona, was sentenced on Monday by United States District Judge Jesus G. Bernal, who also ordered him to pay $403,908 in restitution.

Defendant pleaded guilty on June 17 to three counts of aiding and assisting in the preparation of false tax returns.

Starting in 2013, Defendant operated Grace’s Lighthouse Resource Center, Inc., a Corona-based tax return-preparation business. During that time, on thousands of returns he prepared for clients, Defendant consistently directed his clients to create a phony corporation and to title their homes, cars, and other assets in the name of that corporation. Defendant then referred those clients to an associate to prepare these sham corporation’s tax returns. The associate would provide the clients with a blank spreadsheet and request that they input their business expenses into that spreadsheet.

In other words, the Defendant was pretty much applying some of the "put everything in an LLC and deduct it" advice floating around social media on an industrial basis.

At Defendant’s direction, the clients would include personal expenses such as their mortgage payments, car payments, and utility bills, and then provide the spreadsheet to the associate. The associate would, in turn, use the spreadsheet to prepare the business tax returns, which inevitably would show a loss. These fabricated losses flowed through to the clients’ individual income tax returns, and fraudulently reduced the amount of individual income taxes they paid.

Defendant then prepared the clients’ individual income tax returns, which incorporated the fraudulent business losses and offset their income. To further reduce the clients’ taxes owed to the IRS, Defendant also fabricated deductions on the personal returns such as unreimbursed employee expenses, cash contributions to charity, and medical and dental expenses. As a result of Defendant’s fraudulent return-preparation practices, his clients paid less taxes than they owed.

The clients probably thought they had the best tax preparer ever, until the IRS wanted their tax "savings" back, with interest.

What day is it?

It's National Moldy Cheese Day! I'm sure I can find some in the back of the fridge somewhere.

Tax News & Views Imaginary Values and Moldy Cheese Roundup

We're Here to Help

Joe B. Kristan, CPA