As the election clock continues to race forward, the Senate Finance Committee this week passed several retirement plan bills.

Many Americans have a 401(k) plan. With a traditional 401(k) plan, the employee may make tax free contributions and enjoy tax free growth. Distributions must commence after age 70½, with a starting payout rate of approximately 3.8% of the plan balance. Distribution percentages increase as the person becomes more senior.

A common plan also involves a very favorable employer match of typically 3% to 5%. In 2016, the employee may make a contribution of up to $18,000. Workers over age 50 are permitted an additional “catch up” contribution of $6,000.

The bipartisan Lifetime Disclosure Act (S. 1317) is designed to increase employer disclosures to workers. The bill is cosponsored by Sen. Johnny Isakson (R-GA) and Sen. Chris Murphy (D-CT). They seek to help workers to have a better understanding of the value of their 401(k) and their likely retirement income.

The bill is modeled on the Social Security disclosures each year. In 1969, Congress directed the Social Security Administration to send an annual statement to each worker. The annual statement shows all Social Security contributions and also projects the individual’s monthly income upon retirement.

Isakson and Murphy believe that 401(k) owners should have a similar disclosure each year. Isakson stated, “American workers need access to the best available information about their investment choices and exactly what they will yield upon retirement. This information not only helps them to plan, but promotes increased savings while they are still in the workforce. Defined contribution plans such as 401(k)s are increasingly the retirement plans American workers count on, and this legislation will encourage participants to think of their 401(k) investments as a vehicle for lifetime income.”

Bargain Sale Deduction Approved Based on Probable Easement

In Cave Buttes LLC et al. v. Commissioner: 147 T.C. No. 10; No. 5788-11 (20 Sep 2016), the Tax Court approved a $1,432,000 charitable deduction for a bargain sale. The landlocked property was valued at $2,167,000 based upon the assumption that an easement for access would be available.

Cave Buttes LLC owned an eleven acre hillside parcel with views of downtown Phoenix. It was adjacent to a dam owned by the Maricopa County Flood Control District. Because the District opposed building luxury homes on the parcel, the LLC finally decided to sell the property to the Flood District for $735,000.

While there were some legal issues regarding the existence of a legal easement for access to the parcel, the appraiser assumed that the easement either was valid or would be granted. Two different appraisers determined the property value to be $1.5 million and $2.0 million. Cave Buttes LLC filed a tax return and claimed the $1.5 million land value. The difference between that amount and the payment of $735,000 was treated as a charitable deduction under Sec. 1011 bargain sale rules.

The IRS denied the deduction. It claimed that there was not a valid access easement, there were technical errors in the appraisal and the value was not correctly determined.

The Tax Court noted that the appraisal and appraiser must both fulfill specific Reg. 1.170A-13(c) requirements. The IRS technical concerns were overcome in view of the court by substantial compliance by the taxpayers.

While both appraisers signed the appraisal, only one signed IRS Form 8283. However, the court noted that the IRS has taken the position all appraisers should sign the form, but have included only one signature line on the form. Therefore, the signature was determined sufficiently compliant. While the property description and address were not perfect and the “prepared for income tax purposes” statement was not exact, they were both deemed sufficient. Finally, the evaluation was done within 11 to 21 days after the gift and that was sufficiently close in time to the gift to meet IRS requirements.

With respect to the easement, the court determined that there was an express easement in the deed and an implied easement based on a 1937 government document. Therefore, the value of the final appraisal at $2,167,000 that depended upon the assumed access easement was valid.

Editor’s Note: This case shows the IRS propensity to interpret strictly the appraisal and appraiser requirements. The case is an excellent guide for appraisers and donors on requirements to substantiate charitable deductions.

Leave Donations for Louisiana Flood Victims

In Notice 2016-55; 2016-40 IRB 1, the IRS approved a leave donation program for victims of Louisiana floods. In August, record rainfall led to serious flooding in Baton Rouge and central Louisiana.

Many employers sought to help. If employees decided to give up vacation, sick or personal leave days, their employers may choose to make cash gifts to disaster relief nonprofits.

Previously, the IRS permitted leave donation programs for Hurricane Sandy and Hurricane Katrina. The IRS determined that an employee who foregoes his or her leave benefit is not in constructive receipt of wages. However, because the gifts were not included in taxable income, the employee is not entitled to a charitable deduction.

The employer may then make cash gifts and qualify for a charitable deduction. The gifts must be prior to January 1, 2018 and must be made to a qualified charity for Louisiana disaster relief.

Applicable Federal Rate of 1.6% for October—Rev. Rul. 2016-25; 2016-41 IRB 1 (11 October 2016)

The IRS has announced the Applicable Federal Rate (AFR) for October of 2016. The AFR under Section 7520 for the month of October will be 1.6%. The rates for September of 1.4% or August of 1.4% 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 2016, 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.