During the summer season, the Internal Revenue Service (IRS) reminds consumers to protect themselves from potential identity thieves. There has been a dramatic increase in online shopping and emails or texts from friends and family. Be aware of common scams.

The IRS states, "We urge people to be extra careful with their personal and financial information during this period while shopping online or getting suspicious emails or texts. Taking a few simple steps can keep people from becoming victims of identity theft and protect their sensitive personal information needed for tax returns and refunds."

The IRS cautions that identity thieves continue to update and enhance their strategies. They are always attempting to obtain personal and sensitive information. This information may then be used to file a fraudulent tax return and claim a refund.

The IRS offered its “Top Seven Security Tips.”

1. Security Software— All computers, tablets and mobile phones should have security software that is regularly updated. Parents should be cautious with the electronic devices of teens and younger children. All computers should have anti-virus software that protects against malware.
2. Phishing Scams— The most common way identity thieves steal personal data is through emails that contain phishing links. If you do not know the sender, do not open a link or click on an attachment. Many of the phishing emails this year will likely focus on the new tax bill.
3. Strong Passwords— You should use strong passwords. Many individuals use a phrase or a series of words that can be easily remembered. An excellent option is to use a password manager on your smartphone.
4. Two-Factor Authentication— Many email providers and social media sites offer two-factor authentication. Nearly all banks and financial institutions also enable you to use this security option. You will enter your password and receive a six-digit code on your phone. Entering both a password and the phone code ensures a higher level of security.
5. Public Wi-Fi— Be careful when using public Wi-Fi. Your home Wi-Fi normally is protected with a password. However, public Wi-Fi is frequently which allows identity thieves a chance to monitor your session. This could give the identity thief the opportunity to learn your logins and passwords for key accounts.
6. Backup Files— Your computer and smartphone contain extensive information. You may want to use a cloud service or an external hard drive to backup information. You can use a search engine to learn about "backup computer options" and learn more about many of the options.
7. Virtual Private Network (VPN)— A VPN is a secure way to connect to your office network. The VPN protects the data transferred back and forth from being viewed by an identity thief.

Editor's Note: You may also want to consider viewing YouTube videos from the IRS for more tips. Two of the more popular videos are "Easy Steps to Protect Your Computer and Phone" and "Avoid Phishing Emails." The videos are concise and informative.

Charitable Deduction of $22 Million Reduced 99%

In Beaverdam Creek Holdings LLC et al. v. Commissioner; No. 12362-21; T.C. Memo. 2025-53, a charitable deduction of $21,972,000 was determined to be invalid and the deduction amount was reduced to $193,250. A 40% Section 6662(h) gross valuation misstatement was also applied.

In northeastern Georgia, there is a granite deposit that is approximately six miles wide, 35 miles long and over two miles deep. Several granite quarries operate in the area, making Georgia the leading state for production of granite.

The easement property is 85 acres in Oglethorpe County, Georgia. Three different entities operated a quarry on the property until February of 2012. At that time, the quarry was abandoned, and the property remained largely vacant.

In early 2017, property owner Strategic Seek One, LLC (SSO) contacted experts to discuss creating a conservation easement on the property. After determining an easement was feasible, Beaverdam Creek Holdings LLC (Beaverdam) was formed on June 29, 2017. Beaverdam acquired the easement property and transferred a 97% interest to SSO for $228,000.

Prior to the transfer of the easement, an appraisal was prepared by Martin Van Sant and Thomas Wingard of Van Sant & Wingard, LLC (VSW). The appraisal determined an operating quarry could create a present value of over $20 million under a discounted cash flow analysis.

Beaverdam Creek Investors, LLC (BCI) was formed in 2017. It sold units at $25,000 per unit. The offering claimed that an investment of $50,000 would produce a charitable contribution deduction of $207,245 and save taxes of $89,115. Based on the assumption that the investors would have a substantial net profit by investing and saving income tax, 183 units were sold. On December 27, 2017, the investors were offered one day to vote on the decision to create the conservation easement. On December 28, 2017, Beaverdam transferred a conservation easement to Foothills Land Conservancy (FLC).

Beaverdam filed IRS Form 1065, U.S. Return of Partnership Income and claimed a charitable deduction of $21,972,000. The deduction was supported by the VSW appraisal and claimed this amount was based on the "highest and best use of the subject property."

VSW stated that properties with "similar mineral resources as compared to the subject property have not been identified." Therefore, a discounted cash flow (DCF) analysis was proper. Based on the DCF analysis, the before value was $22,100,000 and the value of the charitable deduction was $21,972,000. The IRS denied the charitable deduction and assessed a 40% penalty under Section 6662(h) for a gross valuation misstatement.

At trial, BCI offered expert testimony from three experienced appraisers. They claimed under the DCF analysis that the valuation of the property would be from $20 to $33 million. However, one of the taxpayer experts stated "it was not feasible for other companies – both financially and from an industry expertise perspective – to enter the quarry market."

The IRS offered testimony from two qualified experts. In the opinion of the IRS experts, the VSW appraisal "analysis and assignment result is not credible and should not be relied upon." The IRS determined the before value was $215,000 based on seven sales of comparable properties, and the after value was $85,500. One of the IRS experts noted that the taxpayer valuation per acre was 112 times the average of the comparable properties.

The taxpayer claimed the IRS position was "arbitrary and capricious on its face." Therefore, the burden of proof should shift to the IRS. However, the Tax Court noted the taxpayer bears the burden of proof for charitable deductions.

The taxpayer claimed there was credible evidence that supported the charitable contribution deduction amount of approximately $22 million. However, the Tax Court noted there were abandoned quarries in the area and there was a low probability that the quarry on the property could be reopened.

The IRS contested the appraisal as not qualified because it had a serious overvaluation and did not follow the Uniform Standards of Professional Appraisal Practice (USPAP) guidelines.

The Tax Court noted an appraisal may be valid even if not in strict compliance with USPAP. However, the failure to follow USPAP may affect the credibility of the appraisal. While the appraisal value was very high, the IRS did not prove that the VSW appraisal was unqualified. Therefore, the Tax Court determined there was a qualified appraiser and qualified appraisal. The primary question was the "amount of the deduction allowable."

Fair market value is determined based on the highest and best use. The taxpayer claimed that only a discounted cash flow method could be used for valuation. However, the IRS offered over ten comparable sales. The general principle is that "comparable sales constitute the best evidence of market value."

Based on the comparable sales, the valuation was determined to be approximately $300,000 prior to the easement grant. The Tax Court stated, "BC Investors’ position is absurd." While BC Investors attempted to explain the reasons for disregarding the IRS comparables, the Tax Court noted that the comparables are valid if the properties are similar, the sales are at arm’s-length and the sales have occurred within a reasonable time of the valuation date. Because the income method is not reliable and is based on a hypothetical business, the DCF value was disregarded. The Tax Court noted that the DCF claimed by BCI "is completely untethered from reality."

Therefore, the before value was $300,000. Because the parties stipulated that the after value was $106,750, the easement charitable deduction is $193,250.

The final determination was whether there was a gross valuation misstatement under Section 6662(h). Because valuation is "gross" if there is a deduction that is more than double the amount of the fair market value, the court determined a deduction of $21,972,000 was greater than the double-the-deduction amount of $386,500. Therefore, there was a gross valuation misstatement.

Editor's Note: The limited partners who invested $50,000 each lost 99% of the claimed charitable deduction and were assessed a 40% penalty. With the loss of the charitable deduction, the 40% penalty, legal fees and court costs, it is probable that each $50,000 investment declined to a very minimal level.

AICPA Opposes SALT Workaround Limit

On June 4, 2025, the American Institute of CPAs hosted a webinar to discuss the state and local tax (SALT) workaround limit in the House budget and tax bill. The bill passed the House on a 215 to 214 vote on May 22.

The tax bill proposes a state and local tax (SALT) deduction limit of $40,000 ($20,000 for married filing separately). However, this would phase down to a base amount of $10,000 for those with modified gross incomes over $500,000.

The bill also includes a limit on the passthrough entity tax (PTET) methods that have been enacted by various states. These are termed "workarounds" to permit taxpayers to benefit from the SALT deduction. In Notice 2020-75, 2020-49 IRB 1453, the IRS indicated it would accept the PTET methods. These PTET statutes allow passthrough entities to pay and deduct SALT taxes. While there is a federal payment and deduction, there then is a credit or exclusion at the state level, so the income is not taxed again.

The House tax bill addresses the PTET methods. These federal tax deductions would still be permitted if the passthrough entity qualifies under Section 199A.

However, under the House bill a specified service trade or business (SSTB) is not permitted to deduct SALT at the entity level. Those entities must pass the tax through to partners and shareholders as separately stated items. This causes the taxes to be deductible at the individual level as limited by the SALT deduction. SSTBs typically include law firms, accounting firms, investment firms, consulting firms, medical practices and many other service-based businesses.

AICPA issued a May 13 release and indicated this provision that targets SSTBs "would indirectly increase taxes on millions of service-based businesses and expand the disparity in how the tax code treats C corporations versus pass-through entities."

Several speakers at the AICPA webinar indicated this targeting of SSTBs could be significant and cause problems. CPA Jan Lewis noted the increase in the SALT deduction to $40,000 sounds good, but that could be a problem for high-income individuals. She stated, "So if your property taxes are high, you may not have a lot left for this. And again, that phases out at higher incomes anyway."

The effort to limit the SALT workarounds is a complicated provision of the tax bill. Lewis continued to note this could be difficult to calculate. She stated, "We would still have PTET, but you would still have to do the calculations and then decide, are they an SSTB or aren’t they? Should we make the PTET election or not?"

While high-income taxpayers may be in the 37% federal tax bracket and have a substantial benefit from deducting state taxes, the determination under Section 199A is quite complicated. It is going to be a challenge for many CPAs to make the decision whether they should take deductions at the entity or at the individual level. AICPA indicates this is going to have a significant impact on clients and acknowledges that the Senate may change the provision, because the bill is not in final form.

The basic consideration is that SSTBs are now being attacked while non-SSTBs are still benefiting from the SALT workaround.

Editor's Note: Your editor does not take a position on specific provisions of the House tax bill. This information is offered as a service to our readers.

Applicable Federal Rate of 5.0% for June: Rev. Rul. 2025-12; 2025-23 IRB 1 (15 May 2025)

The IRS has announced the Applicable Federal Rate (AFR) for June of 2025. The AFR under Sec. 7520 for the month of June is 5.0%. The rates for May of 5.0% or April of 5.0% 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 2025, pooled income funds in existence less than three tax years must use a 4.0% 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.”