Modification Request - NOPPA

Technical topics regarding tax preparation.
#1
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One of my clients invested in a syndicated conservation easement a few years back. I did not prepare this return and it predates when the client onboarded.

My client recently received notice from the syndication that the IRS has been auditing the tax year related to the conservation easement deduction, and has issued a Notice of Proposed Partnership Adjustment ("NOPPA") in which the conservation easement deduction is denied and various P&I are assessed. The syndication has indicated they intend to file a petition in tax court and fight for the deduction. The syndication has notified partners that it intends to make a push-out election as well.

The syndication is asking partners to submit a Modification Request if necessary. It's my understanding that this is not necessary given the fact pattern. A push-out election makes this moot. Correct?

Assuming the syndication loses in tax court, we'd prepare a pro-forma return of the audited tax year without the conservation easement charitable deduction, and report any additional tax, P&I in on the tax return of the calendar year in which the Final Partnership Adjustment was submitted by the IRS. Correct?
 

#2
sjrcpa  
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Consider that it is April 13 and my cognitive ability is limited.
Tax will be imposed at the highest rate.
If your client is actually subject to a lower rate, the modification request may be a good idea.
 

#3
JAD  
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Also check out the rules about the exclusion for charitable donations on gift tax returns. If the donation does not qualify for the charitable deduction, it's not going to qualify to be excluded from treatment as a taxable gift. A gift return will be required. Pls let me know if you disagree.

So...if the deduction is disallowed, for example, because the legal docs don't meet the "perpetuity" requirement, this would apply. If the deduction is simply reduced because the valuation was too aggressive, then I don't see a gift tax issue.
 

#4
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Interesting.. I have a number of clients that invest significant amounts of money into a particular fund group. Can you share what deduction multiplier they were using in the funds that were audited? I read that they are going after funds with multiplier s higher than 2.5x, as some funds are super
 

#5
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IDunnoItDepends wrote:Interesting.. I have a number of clients that invest significant amounts of money into a particular fund group. Can you share what deduction multiplier they were using in the funds that were audited? I read that they are going after funds with multiplier s higher than 2.5x, as some funds are super


I don't have access to the K-1 from that year at the moment. I imagine that eventually I'm going to request it from the client.

Coincidentally, at this client's introductory lunch 1-2 years when he was a prospect, he mentioned that he did a syndicated conservation easement "a couple years ago" that provided a nice refund. I told him the IRS was cracking down hard on SCEs and that I didn't think they were a valid tax avoidance strategy. He inferred it was a once-and-done kind of thing for him. The chickens have come home to roost it seems.

sjrcpa wrote:Consider that it is April 13 and my cognitive ability is limited.
Tax will be imposed at the highest rate.
If your client is actually subject to a lower rate, the modification request may be a good idea.


Thank you. I need to do more research into it.

JAD wrote:Also check out the rules about the exclusion for charitable donations on gift tax returns. If the donation does not qualify for the charitable deduction, it's not going to qualify to be excluded from treatment as a taxable gift. A gift return will be required. Pls let me know if you disagree.

So...if the deduction is disallowed, for example, because the legal docs don't meet the "perpetuity" requirement, this would apply. If the deduction is simply reduced because the valuation was too aggressive, then I don't see a gift tax issue.


I'm not following. What becomes a gift? My client's contribution to the syndication?
 

#6
JAD  
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His share of the donation. The amount that he deducted. If you look at the gift tax return instructions, the IRS wants disclosure of charitable donations. If they qualify, they are excluded from the calculation of taxable gifts. If they don't qualify, then they are not excluded. They are taxable gifts. It seems like so far the IRS has missed this huge issue. Can you imagine how p****d donors are going to be if/when they find out that the donations that were disallowed not only cost them penalties and interest but dug into the amount that they can pass to heirs tax-free?

Cites are here. Pls let me know if you disagree.

viewtopic.php?f=8&t=23290&p=197713&hilit=gift+tax+return+donation#p197713

I discussed this with my client. It was her decision as to whether or not to authorize me to prepare the gift tax return. She did authorize that work.
 

#7
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Circling back to this...

sjrcpa, you mentioned below:

sjrcpa wrote:Tax will be imposed at the highest rate.
If your client is actually subject to a lower rate, the modification request may be a good idea.


I agree. But as a push-out election is being made the partner would receive Form 8986 and would use that to file Form 8978 with their reporting year 1040 (which would the the tax year in which they received the 8986 from the pship. On the 8978, we calculate their additional tax due at marginal rates along with P&I.

Is that not correct?
 

#8
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But as a push-out election is being made

And what happens if the partnership is notified that the push-out election is deficient for one reason or another?
 

#9
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It's a good point.

Would you do a "protective" modification request so to speak, noting that possibility.
 


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