Tax Law Update: September 2020

• Internal Revenue Service rules that transfers of individual retirement accounts from an estate to trusts and then to inherited IRAs aren’t taxable distributions or rollovers—In Private Letter Ruling 202031007 (May 20, 2020), the IRS ruled on the treatment of an IRA owned by a decedent, which through various transfers between her estate and trust, was ultimately divided into inherited IRA accounts, one for each of her children.

The decedent’s date of death occurred after her required beginning date (RBD) for the IRA. Her estate was the sole beneficiary of the IRA. Her will directed her estate to her trust, which then directed that the residuary trust property be divided and distributed equally to her children. The personal representative of her estate proposed to transfer the IRA into an inherited IRA for each child and requested the IRS to confirm the treatment of the IRAs for each child.

The IRS ruled that the IRA could be divided into distinct inherited IRA accounts, one for each child. It also confirmed that the distributions to each child would be based on the decedent’s remaining life expectancy and that the transfers to each of the accounts wouldn’t be taxable distributions or rollovers. Note that if the decedent died before her RBD, then the IRA would have been required to be paid out within five years. The beneficiaries were fortunate here, but make sure IRAs aren’t payable to estates. Of course, after the Setting Every Community Up for Retirement Enhancement Act, the result would be different in this case: The IRA would have to be paid out within five years and not over the decedent’s remaining life expectancy.

• Tax Court denies charitable deduction for conservation easement—In Cottonwood Place, LLC v. Commissioner (T.C. Memo. 2020-115, Aug. 4, 2020), the Tax Court ruled on a motion for summary judgment regarding an income tax deduction for a conservation easement. The IRS disallowed a charitable deduction of more than $4.5 million for a conservation easement because the language of the deed conveying the easement didn’t comply with the requirements of regulations. The taxpayer appealed, and the IRS filed for summary judgment.

The taxpayer limited liability company (LLC) had deeded a conservation easement of over 135 acres to Georgia Land Trust (GLT). The deed provided that if the easement were to be terminated by extinguishment or condemnation, GLT would receive a proportionate amount of the proceeds. This complied with the regulations under Internal Revenue Code Section 170A, which requires a conservation easement to be granted in perpetuity to qualify for the charitable deduction. If the charity receives a share of the proceeds in this circumstance, the perpetuity requirement is fulfilled, and the proceeds replace the easement. However, the deed further specified that the portion of the proceeds payable to the GLT was to be reduced by the value of improvements to the land made by the LLC after the grant of the easement.

The Tax Court agreed with the IRS, granting partial summary judgment, holding that the clause reducing the proportionate share of proceeds by the value of improvements made after the date of grant didn’t meet the requirements of the regulations. The court declined to overturn the regulations as an impermissible construction of the Tax Code. The court was also unconvinced by the taxpayer’s arguments that local Georgia law provided a permitted exception nor did it find that the LLC “substantially complied” with the regulations.