IRS Commissioner Doug Shulman was pleased to announce a substantially enhanced application for iPhone and Android phones. The IRS2GO application was first announced in 2011 and had 350,000 downloads. Commissioner Shulman expects the new application to be widely used.

He stated, "The new smartphone app provides an easy way for people to get helpful information about their taxes. IRS2GO reflects a wider commitment at the IRS to find innovative ways to serve taxpayers in a rapidly changing world."

The new version has five major sections:

1. YouTube – The smartphone app includes links to many short YouTube videos. The videos have titles such as "Tax Tips: Taxable and Non-Taxable Income," "Tax Tips: When Will I Get My Refund," "Healthcare: Small Business Healthcare Tax Credit," and "Free Help Preparing Your Tax Return."

2. News – The IRS periodically produces news releases. These news items may be viewed on your iPhone or Android phone.

3. Get My Tax Record – By entering your Social Security Number and other identifying information, you may have access to your personal tax records.

4. Get My Refund Status – By entering your Social Security Number and other information, it is possible to obtain your refund status.

5. Follow Us – If you so desire, you may follow the IRS on Twitter.

Editor's Note: The IRS has developed a good smartphone application. It is easy to use and includes very helpful content. This updated IRS application will be very popular with taxpayers. Finally, it is not very often that your editor uses the words "IRS" and "popular" in the same sentence.

House Charitable Deduction Up in Flames

In Theodore Rolfs et al. v. Commissioner; No. 11-2078 (8 Feb 2012), the 7th Circuit affirmed a Tax Court decision. Taxpayers had given a home to the Village of Chenequa Fire Department and it was burned down as part of normal firefighter training. The Tax Court denied a deduction.

Theodore Rolfs and wife Julia Gallagher purchased a three acre lakefront property in the Village of Chenequa, Wisconsin. The value of the land was $599,000 and the value of the home was $76,000. They planned to tear down the home and build a new residence.

Rather than incur the $10,000 cost of demolition, the Rolfs transferred the home to the Village of Chenequa with the condition that the fire department burn down the house as part of their normal training activities. The taxpayers claimed a charitable deduction for the $76,000 value of the home. The IRS denied the deduction and the Tax Court determined that there would be no charitable deduction.

The Circuit Court noted that deductions are permitted under Sec. 170(a)(1) for gifts to public entities such as the Village of Chenequa. Taxpayers did comply with the contemporaneous written acknowledgement and Form 8283 Appraisal Requirements. Therefore, there was a potential charitable contribution.

There have been numerous cases where individuals donated property to fire departments for training purposes. The key question is the benefit to the donor versus benefit to the public. The Court also noted that "The fair market value of donated property must take into account conditions on the donation that affect the fair market value."

The Tax Court determined that the requirement for the Fire Department to burn down the property was a condition of the gift. The 7th Circuit held that the claimed $76,000 deduction did not reflect the requirement that the fire department must burn down the home. Therefore, "the valuation must incorporate any reduction in value resulting from a restriction on the gift."

The appraisal of $76,000 by the taxpayer applied to a gift of a fee interest. The taxpayer argued that the conservation easement test of "before and after" should be applied. However, the Court noted this was not a conservation easement.

Because moving the home to a new lot would cost $100,000, there was no value to the property if it had been sold apart from the land. In addition, there also was no value to the property after it had been burned down by the Fire Department, a condition of the gift. Therefore, the gift value with the property subject to the condition was zero and the charitable deduction was denied.

Gravel Easement Value Does Not Hold Water

In Esgar Corp. et al. v. Commissioner; T.C. Memo. 2012-35; Nos. 23676-08, 23688-08, 23689-08 (6 Feb 2012), the Tax Court greatly reduced three claimed conservation easement deductions.

A Colorado C corporation with the name Esgar Corp. and couples Delmar and Patricia Holmes and George and Georgetta Tempel jointly owned ranch land approximately 200 miles southeast of Denver, Colorado. On December 17, 2004, they transferred conservation easements to the Greenlands Reserve and claimed a total deduction value of approximately $1.9 million. The IRS audited their returns, denied the deductions and accessed deficiencies, interest and penalties.

The Court noted that there were two questions at issue. First, what is the actual fair market value of the conservation easements? Second, if the valuation claimed is not correct, should the Sec. 6662(a) accuracy penalties apply?

The three taxpayers and a fourth party initially each owned one-fourth of approximately 2,200 acres of real property near Holly, Colorado. Following the sale of 661.75 acres, they owned approximately 1,479 acres that were titled the "Midwestern Farms." A portion of the Midwestern Farms was an alluvial gravel pit that was leased to E. Colorado Aggregates. The royalties received by the partners from Gravel Extraction increased to approximately $390,000 by the year 2004. There were four gravel pits in the county, but Midwestern was the largest of the group.

After extensive discussion with CPA Brian Wurst, on Dec. 17, 2004, Esgar, the Temples and the Holmeses deeded conservation easements on 163 acres to the Greenlands Reserve. Based on valuations by the Bill Milenski Appraisal Service, Inc. the charitable conservation easement deductions were $570,500 for Esgar, $867,500 for Holmes and $836,500 for Tempel. In the opinion of CPA Wurst, Milenski "took a reasonable approach to determine the value."

The Court noted that a charitable deduction for a conservation easement requires a perpetual restriction on the property that is granted to a qualified charity. The valuation of a conservation easement under Reg. 1.170A-14(h)(3)(i) involves one of two preferred methods. If there is a "substantial record of sales of easements comparable to the donated easement," then this is the preferred method. If the comparables are not substantial, then a "before and after" method is necessary to determine the value.

Because there was no good record of comparable sales and the parties stipulated that the after value was $24,000 for the Esgar and Tempel properties and $27,000 for the Holmes property, the remaining question was the fair market value of the properties prior to the easements.

Both parties offered expert opinions. Taxpayer's expert, Jean Cruikshank, was unable to provide any comparables for "gravel-motivated sales." A second expert, Robert B. Frahme, discussed the possibility of mining the gravel and using coal trains to "backhaul" gravel on the return runs after hauling coal to market. However, he was not able to provide any specific data on the process.

A third expert, Gerald K. Ebanks, determined that there were 7.6 million tons of gravel on the properties, and estimated the potential royalties if this gravel were extracted. A fourth expert, John R. Emmerling, concluded that gravel mining was the highest and best use of the property and that 7.6 million tons of gravel could be extracted. He also estimated the potential revenue from royalties, but did not explain when demand would be sufficient to actually extract the gravel.

IRS Appraiser Kevin McCarty determined that the highest and best use of the property was for agriculture. He noted that there was a 35 year estimated supply of gravel in the county within the existing Midwestern's gravel pit. He stated, "The dominance by the two major gravel operators leaves little room available either for expansion by these operators or the entrance of a new operator."

Using the agricultural property assumption, McCarty reviewed 22 sales and suggested that three of the 22 were good comparables for the property. Based on his analysis, he determined that the Holmes property was valued at $36,000 and the Esgar and Tempel properties were valued at $33,000.

The valuation issue faced by the court was a claim by the taxpayer that the conservation easements' total value was $1,991,588 versus the IRS appraiser claim that the value was $9,000.

The Court noted that there had been some increased gravel demand in the area, but that none of the taxpayer experts had provided a basis for determining that this new demand would lead to potential extraction of gravel. In addition, there was no unloading facility for gravel, no willing coal company and the coal trains were not normally used to haul gravel. Therefore, the backhauling option was not supported by any data. As a result, the "highest and best use of the subject properties was agriculture."

Based upon a comparable sale of G.P. Ranches at $411 per acre for the land plus gravel or a sale by City Farm at $160 per acre, the Court adjusted the numbers for the acreage and determined that the comparable value for agriculture purposes on the before valuation was $1,100 per acre for the Esgar and Tempel property and $1,150 per acre for the Holmes property. Therefore, the net value of the conservation easements for Tempel and Esgar was $49,774 and for Holmes, $49,502.50. Finally, the Court considered the Sec. 6662(a) accuracy penalties. The IRS claimed that there was a substantial valuation misstatement that would trigger the 20% penalty. However, Sec. 6664(c) enables avoidance of the penalty if there is reasonable cause and the taxpayer acted in good faith.

Because the taxpayers relied on CPA Wurst, who was a competent professional, and because the taxpayers provided Wurst all relevant information, the taxpayers could rely upon his advice in good faith. Therefore, they met the standard for the reasonable cause exception to the accuracy-related penalty.

Editor's Note: This was a rather dramatic example of the battle of the appraisers on the gravel conservation easement interest. The taxpayers started at $1.9 million and the IRS at $9,000. Both the Tax Court and the 7th Circuit Court analyzed the respective positions and determined that the taxpayers did not have any reasonable basis for their claim. The resulting permitted charitable deduction was just under $150,000. Taxpayers chose to use very aggressive assumptions for their claimed deductions. If a taxpayer chooses to use aggressive assumptions, there is a significant risk that the Tax Court will completely disregard those assumptions.

Applicable Federal Rate of 1.4% for February – Rev. Rul. 2012-7; 2012-6 IRB 1 (19 Jan. 2012)

The IRS has announced the Applicable Federal Rate (AFR) for February of 2012. The AFR under Sec. 7520 for the month of February will be 1.4%. The rates for January of 1.4% or December of 1.6% 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 2012, pooled income funds in existence less than three tax years must use a 1.8% deemed rate of return. Federal rates are available by clicking here.