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Friday December 2, 2022

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Treasury Secretary Promises Improved IRS

On September 15, 2022, Treasury Secretary Janet Yellen spoke to IRS staff in New Carrollton, Maryland. She highlighted IRS improvements that will result from the Inflation Reduction Act.

Yellen started by explaining she favors a simple tax filing system. She noted that the typical American takes 13 hours to file a tax return. This is a dramatic contrast with Sweden, where many taxpayers file automatically through a text message.

Yellen admitted that the IRS Tax Assistance Centers have been "massively understaffed and under-resourced." She insists that all Americans should be able to receive in-person assistance as needed. During the past tax season, 900,000 Americans received in-person assistance. The IRS target for the 2023 filing season is to assist 2.7 million Americans.

Second, the IRS phone assistance program has been seriously deficient. During the last filing season, the IRS responded to less than two out of every ten calls, averaging a 10% to 15% response rate. Through hiring 5,000 additional customer service representatives, the IRS hopes to increase this level to 85% in 2023. This should cut the average wait time for a taxpayer seeking IRS phone assistance from 30 minutes in 2022 to 15 minutes in 2023.

Third, the IRS is committed to modernizing its computer system. Paper tax returns currently are manually entered into the system. The IRS is developing software that will scan paper returns and use a digital processing system. This will greatly accelerate tax refunds that are sent after taxpayers file a paper return.

In addition, the IRS is committed to working with customer service experts from many private industries. Yellen notes, "We recognize that customer service in the future will look differently than customer service today. Consulting these experts -- and employees at the IRS -- will help us sketch out our vision of what the IRS of the next decade looks like."

With new information technology (IT) resources, the IRS should be able to issue prompt refunds in 2023. Yellen continued, "For taxpayers, this means faster processing and faster refunds. The IRS will also build online capabilities to enable taxpayers to fully interact with the agency digitally."

Yellen concluded with a promise to the American taxpayers, "In addition to an IRS that can finally serve the American people, we will also have an IRS that makes sure that everyone pays their fair share."

DAF Class Action Suit Dismissed


In Philip Pinkert v. Schwab Charitable Fund et al.; No. 21-16299 (9th Cir. 2022), the Ninth Circuit affirmed a dismissal of a donor advised fund (DAF) class action suit.

A donor advised fund allows donors to make a large gift or series of gifts and build up a fund with a sponsoring organization. Section 4966(d)(2)(A). The fund account is owned by the sponsoring organization, but the DAF advisor may recommend distributions to other qualified exempt charities. The sponsoring organization provides a contemporaneous written acknowledgment for gifts and is not required to make the recommended grants by the fund advisor.

Pinkert funded a DAF with Schwab Charitable (Schwab) in 2007. The DAF agreement explained that Schwab Charitable would charge both an administrative fee and an investment fee. The administrative fee covers the "expense of operating the accounts and processing charitable donations." The investment fee is based on the rates set for various Schwab investment funds.

Pinkert claimed that Schwab Charitable charged higher fees than were needed. The District Court determined that Pinkert did not have standing under Article III to bring the action.

Article III requires that a plaintiff suffers a concrete injury, the injury was likely caused by the defendant and the injury would likely be redressed through judicial relief. Pinkert claimed he retained a property right to direct the funds, that he has a reputational benefit that would be damaged by imprudent management and that the fund level must be fully maintained in order to reflect his personal values.

Pinkert did not claim that a specific donation was denied or any other prior injury. Therefore, his only potential claim was a property right to the DAF.

The Schwab "Program Policies" provide that DAF gifts "are subject to the exclusive legal authority and control of Schwab Charitable as to their use and distribution." Therefore, Schwab has final authority with respect to the donor advised fund and future grants. Pinkert may advise, but Schwab is not obligated to follow that advice.

Pinkert claims that the advisory right should extend to every cent of the account, including the amounts spent for administrative and investment fees. However, there was no retained right by Pinkert to advise Schwab Charitable on the arrangements with respect to the fees. Therefore, the only retained right was to provide nonbinding advice on charitable grants. This right to offer advice was not infringed upon. Therefore, Pinkert lacked standing under Article III to pursue this action.

Editor's Note: This case is a solid affirmation of the general functions of a donor advised fund. The DAF sponsoring organization should make reasonable disclosure of both the administrative and investment fees in the fund agreement. However, the donor does not retain any property rights to the DAF or control of the operational elements that include administrative and investment fees.

Surface Mining and Conservation Easements


In ILM 202236010, the Internal Revenue Service (IRS) stated that a potential surface mining operation on a conservation easement property would not be permitted and the charitable deduction would be denied.

If a donor owns property with both the surface rights and mineral interests, there is a restriction on the ability to permit any mineral extraction. Under Section 170(f)(3)(A), a gift of property is generally not qualified for a charitable deduction if there is a partial interest. However, Section 170(f)(3)(B)(iii) permits a partial interest charitable deduction for a gift of a qualified conservation easement.

The easement must be on real property and exclusively for conservation purposes. In order to have an easement in perpetuity, any retained qualified mineral interest is not permitted if there could be surface mining or other extraction of minerals. An exception to the mining prohibition exists if the surface estate and mineral interest have been separated and the probability of surface mining is so remote as to be negligible. Section 170(h)(5)(B)(ii).

Reg. 1.170A-14(g)(4)(i) specifies restrictions with respect to retained mineral interests and conservation easements. The mineral interests may not be removed through a surface-mining method. However, if the surface rights and the mineral interests are separately owned, it is permitted for mineral interests to be removed in a way and in a manner that is "not irremediably destructive of significant conservation interests." This limited mineral removal exception does not permit surface mining.

Therefore, with separate ownership of surface rights and mineral interests, under Reg.1.170A-14(g)(4)(i) surface mining is prohibited, but some potential extraction of minerals may be permitted if there is no damage to the conservation easement.

Because in this example the surface estate and mineral interests are not separate legal entities, the exception under Section 170(h)(5)(B)(ii) does not apply. The fact that the charitable donee must approve any minerals extraction is not sufficient. A charitable donee is not permitted to allow extraction that includes surface mining. Therefore, this charitable conservation easement gift is a nondeductible partial interest due to the potential for surface mining and the fact that the surface and mineral interests have not been segregated.

Applicable Federal Rate of 4.0% for October -- Rev. Rul. 2022-18; 2022-40 IRB 1 (16 October 2022)


The IRS has announced the Applicable Federal Rate (AFR) for October of 2022. The AFR under Section 7520 for the month of October is 4.0%. The rates for September of 3.6% or August of 3.8% 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 2022, pooled income funds in existence less than three tax years must use a 1.6% deemed rate of return.

Published September 16, 2022

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