Each year the Internal Revenue Service (IRS) reminds taxpayers over age 73 that they should take a required minimum distribution (RMD) by December 31.

The one exception is for IRA owners who turned age 73 in 2024. These individuals may delay their first RMD until April 1, 2025. However, if they delay the first RMD, they will also need to take a second RMD by December 31, 2025.

RMDs are generally required for most qualified retirement plans. They apply to three types of IRAs: Individual Retirement Arrangements, Simplified Employee Pension (SEP) IRAs and Savings Match Plans for Employees (SIMPLE) IRAs.

The RMDs also apply to traditional 401(k), 403(b) and 457(b) plans. An exception to the RMD withdrawal requirement is a Roth IRA, Roth 401(k) or Roth 403(b) – there are no 2024 distribution requirements for these plans if the original owner is living.

Most taxpayers take the RMD based upon the Uniform Lifetime Table in IRS Publication 590-B. This table assumes there is a beneficiary 10 years younger than the IRA owner and calculates a distribution amount based on both ages. If the IRA owner has a spouse more than 10 years younger, a special calculation is applicable.

Owners of multiple IRAs must calculate the RMD for each plan. However, the owner can elect to withdraw the total RMD amount from any IRA plan.

Some employees over age 73 who are still working and are not major owners of a business may be able to defer RMDs until after retirement. You should consult your tax advisor if this exception applies to you.

Many online calculators are available to determine your RMD. Most large financial companies offer an online determination of the correct amount. RMDs start at approximately 3.7% of the December 31 IRA balance. They increase each year after age 73. There are also online worksheets on IRS.gov that may be helpful.

The IRS released new IRA distribution tables for 2022 and subsequent years. The new tables reflect longer life expectancies and RMDs are somewhat reduced.

Editor’s Note: An excellent way to fulfill an RMD is to give part or all of the IRA payment to a qualified charity. Qualified charitable distributions (QCDs) for individuals over age 70½ may fulfill part or all of your RMD. The QCD is a transfer directly from the IRA custodian to a qualified charity. For 2024, you can transfer up to $105,000, which is the maximum annual limit and is indexed for inflation. It is important to act quickly if you plan to do a QCD this year. Your QCD must be completed by December 31, 2024.

"Exercise in Imagination" Deduction Reduced By 99%

In JL Minerals LLC et al. v. Commissioner; No. 17076-21; T.C. Memo. 2024-93, the Tax Court accepted the IRS appraiser valuation and reduced a conservation easement deduction from $16.745 million to $93,690. The taxpayer also was required to pay a 40% gross misstatement penalty.

Beasley Timber Management, LLC (Beasley), purchased a 64.7-acre tract owned by JL Minerals for $167,837. This purchase was part of the purchase of a larger parcel with a total of 1,116 acres. In 2017 JL Minerals donated a conservation easement on the 64.7 acres to Heritage Preservation Trust (Heritage). JL Minerals claimed a charitable easement deduction of $16.745 million and the IRS disallowed the deduction.

The property includes deposits of kaolin, which is an alumina-silicate material. There are multiple kaolin extraction operations in Georgia. However, kaolin mining declined from 8.8 million metric tons in 2000 to 5.7 million metric tons in 2016.

There are four major processors of kaolin, and they own nearly all mineral rights for the extracted kaolin. There was a kaolin mine operated by the J.M. Huber Corporation adjacent to the conservation easement property. Huber conducted drilling on the property but never proceeded to mine kaolin on the property.

After multiple transactions, the property was purchased by Beasley with the intent of creating a conservation easement. Beasley is a timber entity with extensive timber tracts and several sawmills. Beasely harvested some of the timber on the adjacent tract and eventually granted a conservation easement on the 64.7-acre tract to Heritage. Georgia appraiser, Dale Hayter, reviewed the property. There were multiple efforts to analyze the potential for kaolin extraction. However, the overburden of 92 feet was a problem for mineral extraction.

On December 21, 2017, JL Minerals deeded a conservation easement to Heritage. JL Minerals reserved the right to engage in agriculture and forestry on the property. Mr. Hayter used the "before and after" method to determine a before value of $16.81 million and after value of $65,000, therefore producing a charitable easement value of $16.745 million.

The Tax Court noted that a conservation easement deduction is permitted under Section 170(h)(4). It must be a deed in perpetuity for an exclusive conservation purpose. The conservation purpose may be the preservation of open space and protection of significant natural habitats.

The IRS claimed that the conservation easement was not valid because it did not fulfill the required condition in perpetuity. The Tax Court determined that the tract was not large, but it did qualify because a "relatively natural habitat" was protected in perpetuity. While there were rights retained to conduct minor excavation for repairing and building roads, this is a low-impact disturbance, and the easement did qualify.

The IRS questioned whether qualified appraisal methods under the Uniform Standards of Professional Appraisal Practice (USPAP) were followed. The appraisal methodology by Mr. Hayter was also questioned and the IRS noted that Reg. 1.170A-13(c)(5)(ii) requires the donor not to have "knowledge of facts that would cause a reasonable person to expect the appraiser falsely to overstate the value of the donated property."

The court determined that there was not an expectation that Mr. Hayter would overstate the value nor an agreement for a prearranged valuation of the property.

The preferred method for valuation is comparable sales. However, if there are no comparable sales, then a "before and after" valuation must be determined. The key issue was whether or not there was a reasonable prospect for kaolin mining. The Tax Court noted "multiple kaolin processors had taken a close look at the easement property and, in at least two cases (Huber and then its successor, KaMin) decided that it was not worth mining or even keeping it as part of a long-term reserve."

Therefore, the assumption that kaolin mining was the highest and best use was not supported. While there had been substantial drilling and efforts to demonstrate that over 5 million short wet tons of kaolin did exist, the overburden of 92 feet rendered the kaolin not commercially valuable. After extensive analysis of the research by the taxpayer, that Tax Court determined that the evidence failed "to establish the existence of any market for this kaolin."

Since the kaolin extraction was too risky to qualify, the determination by Hayter that the value should be based on the kaolin sales was determined to be incorrect and unsupported.

IRS appraiser Andy Sheppard determined the highest and best use was for agricultural or recreational use. Based on four comparables, he valued the property at $162,000, with an appraised value of the easement of $93,690. The Tax Court noted the taxpayer appraisal was faulty because it determined the conservation easement had a value far greater than the fee simple valuation. Therefore, the Tax Court accepted the IRS appraiser value of $93,690 for the charitable deduction.

Because the claimed deduction value was over 100 times the correct value, the 40% penalty for gross valuation misstatement under Section 6662(h) did apply.

Editor's Note: The Tax Court demonstrated substantial expertise in appraisal methodology. This case is a good analysis of the factors that are relevant to the determination of market risk. There was a thorough analysis and presentation by the taxpayer and appraiser based on extensive exploration and research. However, the taxpayer failed to show a reasonable probability that the proposed use would occur. Therefore, the Tax Court accepted the IRS valuation and referred to the taxpayer valuation as an "exercise in imagination."

Final Regulations on Syndicated Conservation Easements as Reportable Transactions

In T.D.10007; 89 FR. 81341-81358, the IRS published final regulations that require certain syndicated conservation easements to be listed transactions. The IRS had previously determined that some syndicated conservation easements were abusive transactions and therefore must be reported. These syndicated conservation easements have been on the IRS annual list of "Dirty Dozen" tax schemes for the past decade.

IRS Commissioner Danny Werfel stated, "These regulations send a clear signal on abusive syndicated conservation easement arrangements, which generate high fees for promoters and willing participants who gamed the tax system with grossly inflated appraisals. As the Senate Finance Committee has shown in its review, abusive syndicated conservation easement transactions are operating too often as nothing more than retail tax shelters that let taxpayers buy deductions at the end of a given year.”

The regulations note that Section 170(h)(7)(A) was passed shortly after publication of the proposed regulations (REG-106134-22) in December 2022. This statute indicates that the charitable contribution for most syndicated partnerships is limited to 2.5 times the sum of each partners’ relevant basis.

There were specific exceptions to the reporting rule. An exception applies if the entity satisfies the three-year holding requirement. Another exception was created in situations where substantially all the property was owned by members of a family. Lastly, there is an exception if the contribution is related to a certified historic structure.

The IRS responded to many comments by professionals. The professionals were concerned that the final regulations would conflict with the congressional intent to conserve land and suggested that the disclosure was not required because taxpayers are required to file Form 8283, "Noncash Charitable Contributions."

The IRS determined that reporting was required for several reasons. First, Section 170(h)(7) applies to contributions after December 29, 2022, and many of the syndicated easement conservations were prior to that date. However, if prior syndicated conservation easements had been reported, the final regulations indicated a second report is not required. While the regulations acknowledge that Congress intended to provide tax benefits for conservation easement deductions, the IRS determined the reporting provisions are not unduly burdensome and therefore do not conflict with the charitable intent articulated by Congress.

Under Section 4965, qualified organizations are not treated as a party to the syndicated conservation easement transaction. This qualified easement exception for the nonprofit was included in the final regulations. However, the preamble notes, "The Treasury Department and the IRS will consider proposing to eliminate or limit the section 4965 carveout in future regulations if qualified organizations continue to facilitate the syndicated conservation easement transactions (or substantially similar transactions) described in these regulations."

The final regulations also reviewed the status of "similar transactions" to the syndicated conservation easements. If a property interest, including a fee interest, is transferred by an entity and the reporting requirements would otherwise be applicable, then there still will be a requirement for reporting.

Applicable Federal Rate of 4.4% for October: Rev. Rul. 2024-21; 2024-41 IRB 1 (16 September 2024)

The IRS has announced the Applicable Federal Rate (AFR) for October of 2024. The AFR under Sec. 7520 for the month of October is 4.4%. The rates for September of 4.8% and August of 5.2% 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 2024, pooled income funds in existence less than three tax years must use a 3.8% deemed rate of return. Charitable gift receipts should state, “No goods or services were provided in exchange for this gift and the nonprofit has exclusive legal control over the gift property.”