In CA-2018-13, the IRS granted tax relief to three California counties devastated by wildfires. Residents of Butte, Los Angeles and Ventura counties have until April 30, 2019 to file most tax returns. Between November 8 and November 16, 2018, these three counties experienced major wildfires.
The Camp Fire in Butte County was devastating. Over 142,000 acres and 11,862 buildings burned. There are 63 confirmed fatalities and 631 missing people. Some of the missing individuals may be in refugee camps, but many are feared lost.
The entire town of Paradise was destroyed by the fire. At publication time, the Camp Fire was 45% contained and still threatens other northern California communities.
At a joint news conference, U.S. Interior Secretary Ryan Zinke and California Governor Jerry Brown agreed that both federal and state efforts were needed to protect residents. Zinke stated, "It is unsustainable to have this happen year after year or have a season like this where you have hundred-thousand-acre fires becoming routine."
Governor Brown explained the efforts to coordinate the federal and state first responders and other fire protection personnel. Brown agreed that there should be improvements in forest management. He stated, "We have got to get on the side of nature. We cannot just fight it."
The Woolsey Fire in southern California burned 98,362 acres in Los Angeles County and Ventura County. It destroyed 616 buildings and there are three confirmed fatalities. At publication time, it was 69% contained.
The IRS tax relief permits residents of Butte, Ventura and Los Angeles counties with filing dates from November 8, 2018 until April 30, 2019 to file on April 30, 2019. Nonprofits with a tax extension to November 15, 2018 are included in this relief.
Payroll deposits due between November 8, 2018 and November 23, 2018 will be timely if made by November 23, 2018.
Casualty losses in federally-declared disaster areas may be reported in the year of the fire or the prior year. See IRS Pub. 547 for more information.
Foundation Liable for $33 Million Tax Bill
In Diebold Foundation Inc. v. Commissioner;
No. 17-3622 (2nd Cir. 2018), the Second Circuit held the Diebold Foundation liable as transferee and assessed a $33.5 million income tax bill.
In 1999, Double-D Ranch, a personal holding company, sold $300 million of assets. The tax on the built-in gain was approximately $81 million. Double-D executed a "Midco" transaction to avoid the potential capital gains tax. The Diebold Foundation (DF) subsequently received $33.5 million from one of the Midco entities.
The IRS audited and assessed a $97.3 million deficiency. Because Double-D no longer held the assets, in 2008 the IRS issued a "Notice of Transferee Liability" and sought to collect $33.5 million from DF.
DF claims that the Notice of Transferee Liability was invalid because it showed a tax year of July 1 to July 2, 1999, while the correct tax year was actually July 1, 1999 to June 30, 2000. The Second Circuit noted that there are specific requirements for a Notice of Transferee Liability. The Notice must "identify the taxpayer, indicate that the Commissioner has made a determination of deficiency and specify the taxable year and amount owed."
While the Notice may not always be technically perfect, the Court continued, "It is not the existence of a deficiency but the Commissioner's determination of a deficiency that provides a predicate for Tax Court Jurisdiction."
The Tax Court under Sec. 6214(b) may determine a deficiency for only the specific tax year. However, there is no requirement to state accurately the specific dates for that tax year. The requirement is to correctly "determine the amount of such deficiency, but in so doing shall have no jurisdiction to determine whether or not the tax for any other year has been overpaid or underpaid."
Because there is no requirement to state the specific dates for that tax year, the notice to DF that the reference tax year was July 1 to July 2, 1999 was sufficient to enable the Tax Court to have jurisdiction. Therefore, the $33.5 million IRS Notice of Transferee Liability is valid.
2019 Tax Table, Exemptions and Deductions
In Rev. Proc. 2018-57; 2018-49 IRB 1
(15 Nov 2018), the IRS published tax tables, exemptions and deduction limits for 2019. Due to a slowly increasing rate of inflation for the mid-2017 to mid-2018 base period, most changes are modest.
The standard deduction will be $24,400 for couples filing jointly and $12,200 for single filers. The head of household standard deduction is up to $18,350. All three standard deductions were nearly doubled by the Tax Cuts and Jobs Act (TCJA) for 2018.
The TCJA eliminated the reduction in itemized deductions for upper-income taxpayers. It also repealed the personal exemptions.
Each taxpayer must calculate both the regular and alternative minimum tax (AMT) amounts. The tax payable is the higher of the two numbers. The 2019 AMT exemptions are $111,700 for married couples and $71,700 for single filers. The AMT exemption is phased out for married couples with income over $1,020,600 or for single filers with income over $510,300. The AMT tax is 26% at the lower level and 28% over $194,800.
Cafeteria plans are available for medical reimbursement of qualified expenses. The flexible spending account (FSA) plan limit for 2019 is $2,700.
Charities are permitted to transfer token gift premiums to donors who make gifts above a specific level. In 2019, a donor who makes a gift over $55.50 may receive a premium gift with the logo or other identification of the nonprofit if valued at $11.10 or less. Donors who make larger gifts may receive a premium up to 2% of the value of the charitable gift, with a limit of $111.
The estate tax applicable exclusion amount increases from $11.18 million to $11.4 million. A couple in 2019 may have an estate of $22.8 million with no transfer tax.
Special use agricultural land under Sec. 2032A may qualify for $1.16 million of reduced value. If an estate qualifies for installment payment of the estate tax under Sec. 6166, the 2% interest amount is levied on $1,550,000.
Finally, the annual gift exclusion remains at to $15,000. This is a per donor-per donee exclusion. An individual or couple with a large family may make substantial tax-free transfers each year through the use of annual gift exclusions.
Applicable Federal Rate of 3.6% for December -- Rev. Rul. 2018-30; 2018-49 IRB 1 (16 November 2018)
The IRS has announced the Applicable Federal Rate (AFR) for December of 2018. The AFR under Section 7520 for the month of December is 3.6%. The rates for November of 3.6% or October of 3.4% 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 2018, pooled income funds in existence less than three tax years must use a 1.4% deemed rate of return.