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Sunday December 17, 2017

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IRS Tips for Students with Summer Jobs

Each summer the IRS offers tax tips for students with summer jobs. As millions of students work this summer and save for fall tuition payments, there are seven helpful IRS guidelines.

1. Withholding - Your employer will withhold funds to pay state and local taxes, payroll taxes and other items from each paycheck.

2. Withholding Allowance - You will need to fill out IRS Form W-4, Employee's Withholding Allowance Certificate. Your employer will use this form to calculate your withholding amounts. You also may want to go to www.irs.gov and use the "IRS Withholding Calculator." This will help you decide how to fill out Form W-4.

3. Self-Employment - If you are self-employed you should keep accurate records. Your expenses may be deductible.

4. Tip Income - All of your tip income is taxable. You should keep a daily log. If you receive over $20 in tips per month, you must report that to your employer.

5. Payroll Taxes - You may not have sufficient income to owe federal income tax, but your employer will still usually withhold tax for Social Security and Medicare.

6. Newspaper Carriers - There are special rules if you have a newspaper route. In some cases, you are considered self-employed and must maintain your own income and expense records.

7. Military Cadet Duty - If you attend ROTC summer advanced camp, your active duty pay is taxable. Some allowances may not be taxable. You may want to check out IRS Publication 3 for further information.

Students who are seeking more information may go to www.irs.gov and search for "Tax Rules for Students."

$33 Million Deduction Denied


In RERI Holdings I LLC et al. v. Commissioner; No. 9324-08; 149 T.C. No. 1 (2 Jul 2017), Tax Court Judge James Halpern denied a $33 million charitable deduction for a gift of a remainder interest.

In October of 2000, the AT&T Corporation leased a 288,000 square foot parcel in Hawthorne, California. The lease of the property to be used for telecommunications equipment was for 15.5 years with several five-year renewal options.

The various legal agreements created a term of years (TOYS) interest and a remainder interest with a title of successor member interest (SMI).

On March 22, 2002, RERI Holdings I LLC (RERI) purchased the SMI for $2.95 million. The TOYS interest holder had limited liability. If the SMI holder claimed waste or breach of any lease provision, its sole remedy was to take immediate possession of the parcel.

On August 27, 2003, RERI transferred its interest to a nonprofit. It obtained an appraisal by Howard Gelbtuch of Greenwich Reality Advisors. Gelbtuch used Sec. 7520 tables to determine a fee interest value of $55 million and an SMI value of $33 million.

RERI filed IRS Form 8283 for 2003 and claimed a $33,019,000 charitable deduction. It failed to include the purchase price of $2.95 million on the "cost or other adjusted basis" line of Form 8283.

The IRS issued a notice of final partnership administrative adjustment (FPAA) and reduced the deduction to $3.9 million. The nonprofit subsequently sold the SMI interest for $1.94 million.

Based upon values submitted by appraisers for both parties, the Tax Court determined the fair market value of the SMI was $3.46 million. Because the remedy for waste by the TOYS holder was limited to the SMI holder acquiring immediate possession of the property, the Tax Court determined that the Sec. 7520 tables were not applicable. Therefore, the fair market value was determined based on appraisals.

Reg. 1.170A-13 (c)(1)(i) requires a "fully completed" appraisal summary. Taxpayer maintained the Form 8283 included a sufficient level of information to meet the "substantial compliance" test.

However, the court noted that failure to disclose a claimed tenfold increase in fair market value over a period of 17 months was not substantial compliance. Because the basis was not disclosed on Form 8283, the charitable deduction was denied.

Taxpayer also claimed that the Gelbtuch appraisal constituted a "good faith investigation" and precluded a Sec. 6662(a) penalty. The court held that the IRS showed a failure by RERI to make a good faith investigation. Therefore, with a fair market value of $3.46 million and a claimed deduction of $33 million, the gross valuation misstatement penalty was applicable.

CHARITY Act Introduced in House


On June 15, Reps. Mike Kelly (R-PA) and Earl Blumenauer (D-OR) introduced the Charities Helping Americans Regularly throughout the Year Act of 2017 (H.R. 2916). The bill is similar to the CHARITY Act (S. 2750) introduced in April by Sens. John Thune (R-SD) and Ron Wyden (D-OR)

There are five principal provisions for the bill.

1. Charitable Mileage - The rate for charitable mileage would change from the flat $0.14 per mile to the rate for medical and moving travel ($0.17 per mile in 2017).

2. Form 990 - All nonprofits that file any version of IRS Form 990 would be required to use electronic filing.

3. IRAs to Donor Advised Funds (DAFs) - IRA owners over age 70½ may transfer up to $100,000 per year in a qualified charitable distribution to a nonprofit. The CHARITY Act would permit this transfer to fund a DAF. There would be specific new charity disclosure requirements. The charity would be required to disclose the number of DAFs that have been in existence for 36 months, the grants from these DAFs and the policies to monitor and handle inactive DAFs.

4. Private Foundation Excise Tax - The existing and complicated 2% and 1% tax system would be simplified to a flat 1% excise tax on private foundation income.

5. Philanthropic Enterprise - A new exemption would exist for the excess business holding rules. This exemption would allow private foundations (PFs) to create 100%-owned Philanthropic Enterprises (PEs). All profits over reasonable business reinvestment amounts would have to be distributed by the PE to the PF. The PE would have to be operated independently from the PF.

Editor's Note: Sen. Thune is the primary creator of this bill. With companion bills in the House and Senate, he hopes Ways and Means Chairman Kevin Brady (R-TX) will include these provisions in the expected tax reform act. While tax reform may be delayed, Members of Congress anticipate introduction of a bill this fall or next spring.

Applicable Federal Rate of 2.2% for July -- Rev. Rul. 2017-14; 2017-27 IRB 1 (16 June 2017)


The IRS has announced the Applicable Federal Rate (AFR) for July of 2017. The AFR under Section 7520 for the month of July will be 2.2%. The rates for June of 2.4% or May of 2.4% 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 2017, 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 July 7, 2017


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