Washington News

The April 15 tax deadline is rapidly approaching. The Internal Revenue Service (IRS) reminds taxpayers they should promptly file their tax return. The best practice is to file a return electronically and request any refund directly to your bank account. Electronic filing reduces taxpayer errors and will speed up receipt of your tax refund.

1. Electronic Filing Options— Taxpayers with incomes of $84,000 or less in 2024 may use the IRS Free File software. In addition, Free File Fillable forms are available to all taxpayers, regardless of their income level. Taxpayers in 25 states may use the IRS Direct File program if they have a simple return. The IRS also supports the Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) programs. For members of the military, the Department of Defense offers the MilTax program for members at no cost.
2. Where's My Refund?— The “Where's My Refund?” tool is typically updated within 24 hours after an electronically filed tax return. You will need your Social Security number, filing status and exact refund amount to check your refund status.
3. Payment Options for Taxes— There are multiple payment options for those that owe taxes. You can use Direct Pay to make a transfer from a checking or savings account, or make a payment through an IRS Individual Online Account. Taxpayers may also pay using a debit card, credit card or digital wallet. The Electronic Federal Tax Payment System (EFTPS) is another option to accept payments. Additionally, you can also pay by check, money order or make a cash payment through a retail partner.
4. Unable To Pay Taxes— If you experience financial problems and owe less than $100,000 in combined tax, penalties and interest, you may create a payment plan which provides you with 180 days to pay in full. If you owe less than $50,000, you can create a long-term payment plan. Under this plan, your monthly payments may be stretched out for up to 10 years.
5. Extension to October 15— Taxpayers who cannot complete their filing by April 15 may receive a six-month extension until October 15. All taxpayers, regardless of income, may use the IRS Free File program to file Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. If you make an electronic payment using Direct Pay or a debit or credit card, you qualify for an extension. The tax payment is due on April 15 even if your filing date is extended to October 15.

There are exceptions to the filing and, in some cases, to the payment deadlines. These may apply to taxpayers who serve in an active combat zone, live outside the United States or live in certain disaster areas. Contact your tax professional or go to IRS.gov if you think you may qualify for one of these exceptions.

Taxpayer Gift Tax Valuation Generally Accepted

In Kaleb J. Pierce v. Commissioner; No. 24786-18; T.C. Memo. 2025-29, the Tax Court determined the valuation of a 2014 gift. Taxpayer Kaleb Pierce (Pierce) and his ex-wife each gave a 29.4% interest in Mothers Lounge, LLC (Mothers Lounge) to irrevocable trusts. They also each sold a 20.6% interest in Mothers Lounge to a limited liability company owned by the irrevocable trusts. The issue before the Tax Court is the gift tax value of the 29.4% interest.

Mothers Lounge was a Utah Subchapter S corporation that sold various products to new mothers. The business strategy was to price the products at zero and charge a $7.95 shipping fee. The products generally were manufactured in China for a modest amount and the typical shipping cost was $1.57. The difference represented the profit.

Mothers Lounge would search for low-cost maternity products and flood the internet with ads for that specific item. While the products were poor quality, many first-time mothers wanted the lowest price for these items. CEO Pierce would create a separate subsidiary and website for each product and distribute promotional codes for the free items. Mothers Lounge rejected the industry’s move toward social media and relied primarily on distribution of coupons through affiliates. It faced lawsuits for product infringement and generally settled the lawsuits.

Mothers Lounge generated substantial revenue and sales, but Pierce engaged in an affair with a Mothers Lounge employee. Another employee discovered the affair and demanded $100,000 to not disclose the affair. Pierce revealed the affair to his wife and reported the blackmail to the Federal Bureau of Investigation (FBI).

In 2014, Pierce and his ex-wife decided to transfer 29.4% interests into the Kaleb Jeremiah Pierce Irrevocable Trust and the Jeanette Court Pierce Irrevocable Trust. They also each sold a 20.6% interest to Giving Stream, LLC in exchange for notes. The taxpayer’s IRS Forms 709 valued the 29.4% gift interests at $4,880,400 and the sales were deemed to be at fair market value. The IRS contested the valuation and assessed a gift tax deficiency of $4,824,160 and an accuracy penalty of $1,929,664.

Taxpayer’s appraiser Jeffrey Pickett used the discounted cash flow method to value the gifts. He determined that there was a 25% marketability discount and 5% control discount, and the gift value was $3,913,000.

IRS appraiser Mark Mitchell applied a 30% marketability discount but used a total value of approximately $28 million. He claimed the 29.4% gift interest was each equal to $5,784,421.

The Tax Court and the parties all agreed the discounted cash flow method was preferred and the market approach or asset approach were not applicable.

IRS appraiser Mitchell accepted the analysis of Pickett in his 2017 report. The court noted that an expert may base his or her analysis on "another expert’s forecasted revenue projections only if the relying expert is familiar with the methods used to derive the opinion and the expert independently corroborates the projections." Because Mitchell did not independently verify the data, his analysis was rejected.

Pickett appeared to offer a reasonably clear forecast of Mothers Lounge’s business prospects. He did emphasize there would be increased competition in the future. The IRS claimed Mothers Lounge could have changed its business model or increased prices. The Tax Court rejected both concepts as not realistic.

The subchapter S corporation was “tax affected” and had a potential reduction in value due to future taxation. The fictitious tax was estimated at 26.2%.

The discount rate estimated by appraiser Mitchell was 18% and this was accepted. The final determination was the nonoperating assets or cash. Pickett estimated the excess cash value to be $1,351,978.

Therefore, the Tax Court accepted Pickett’s valuation, the marketability discount of 25% and the 5% control discount. However, the Tax Court chose the 18% discount rate for present value of cash flows proposed by Mitchell.

Editor's Note: In essence, the Tax Court accepted the appraisal of the taxpayer. The IRS appraiser made a fatal error by using the assumptions and data of one of the taxpayer’s appraiser without independent corroboration or substantiation.

Reasonable Cause Defense Approved for Qualified Appraisals

In WT Art Partnership LP et al. v. Commissioner; No. 28440-15; No. 19604-16; T.C. Memo. 2025-30, taxpayer Oscar Liu-Chen Tang gave five Chinese paintings to the Metropolitan Museum of Art in New York City (Met). Tang paid $5 million in 1997 to acquire 12 paintings through WT Art Partnership LP (WT Art). In April 1997 he promised to give the paintings to the Met in future years. He donated five paintings during 2010 through 2012 and claimed deductions of approximately $73 million. The appraisals for the deductions were prepared by China Guardian Auction Co. Ltd. (China Guardian), a large art auction house in China.

The IRS denied the charitable deductions because China Guardian was not a "qualified appraiser" and there was, therefore, not a qualified appraisal attached to the return as required. In the alternative, the IRS claimed that WT Art had overvalued the paintings.

The IRS and taxpayer reached an agreement as to the fair market value of four paintings but the court needed to determine the fair market value of Palace Banquet. The claimed deduction for this painting was $26 million.

The Tax Court determined the China Guardian appraisals were permitted because the failure was "due to reasonable cause and not to willful neglect" under Section 170(f)(11)(A)(ii)(II). It was also determined that the value of Palace Banquet was $12 million. Therefore, there was a 40% valuation misstatement penalty for tax year 2010 under Section 6662(a) and (h). The court did not sustain an accuracy-related penalty for tax years 2011 or 2012.

Tang was born in China and became cofounder of an investment management firm in New York City. He served on the board of trustees of the Met for over 28 years. He was interested in 10th and 11th century Chinese art. Art collector C.C. Wang had a large collection and agreed to sell 12 Chinese paintings for $5 million if the donor promised the art would eventually be gifted to the Met.

Tang created an LLC owned by family trusts to acquire the WT Art partnership. WT Art made initial gifts to the Met during 2005 through 2008. The IRS accepted appraisals by China Guardian for these gifts, even though China Guardian did not regularly perform appraisal services or hold itself out as a formal appraiser. The appraisals for the earlier gifts involved a cover sheet and three pages and were signed by Wang Yannan, President of China Guardian.

During 2010 through 2012, WT Art made gifts of five paintings. Once again, there were appraisals by China Guardian with a claimed total value in excess of $73 million. The IRS and the taxpayer stipulated the 2011 and 2012 gifts would be reduced from the reported value of $47.9 million to $41.5 million. The issue before the Tax Court was the claimed $26 million deduction for 2010 gift of Palace Banquet.

The taxpayer offered expert counsel from Dr. Wei Yang. She determined a value of $21 million for Palace Banquet. IRS expert Dr. Patricia Graham noted that there were very few comparables. While Dr. Yang claimed the painting dated to the Northern Song Dynasty in the 10th Century, Dr. Graham estimated the painting dated to the Southern Song Dynasty in the 12th Century. Based on the comparables, Dr. Graham determined the value should be $10 million. The final valuation issue was whether there was a deaccession restriction on the Met. IRS expert Michael Conroy claimed a deaccession restriction would lead to a discount for lack of marketability ranging from 26% to 31%.

The Tax Court noted China Guardian and President Yannan were not qualified appraisers. She did not possess "education and experience" in valuing ancient Chinese art. However, the IRS had previously accepted the China Guardian valuations for the 2005 gifts. Therefore, it was reasonable for Tang to have a good faith belief that China Guardian was an acceptable appraisal firm. The IRS had agreed the 2005 deduction would be approximately 90% of the China Guardian value. The Tax Court noted, "We have previously recognized that a taxpayer's past experience with the IRS may form the basis for a reasonable cause defense." As a result, the reasonable cause defense was accepted, and the appraisals were deemed valid.

All parties agreed that Palace Banquet was difficult to value. However, the analysis by Dr. Yang did not do a side-by-side comparison and create a rating scale based on six comparable paintings. Her analysis also assumed an earlier date than the probable 12th century date supported by Dr. Graham. Dr. Graham did find a reasonable comparable and based her valuation on that amount. In addition, Tang admitted that his expectation was for the valuation to be about $11 million.

Finally, there was no restriction on the gift and the Met has a history of retaining rather than deaccessioning high-value artwork. As a result, the Tax Court determined there was no legally binding deaccession restriction and the value of Palace Banquet was thus $12 million.

Because the 2010 claimed value was more than 200% of the correct value, under Section 6662(h)(2)(A)(i), there is a 40% gross misstatement penalty. The other penalties did not apply to 2011 or 2012 gifts because the stipulated valuation was less than 150% of the initial reported value.

Applicable Federal Rate of 5.0% for April: Rev. Rul. 2025-8; 2025-15 IRB 1 (17 March 2025)

The IRS has announced the Applicable Federal Rate (AFR) for April of 2025. The AFR under Sec. 7520 for the month of April is 5.0%. The rates for March of 5.4% or February of 5.4% 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 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.”