Washington News

The Internal Revenue Service (IRS) published an updated frequently asked questions (FAQs) fact sheet on energy-efficient home improvement credits. The two credits available are the Energy Efficient Home Improvement Credit and the Residential Clean Energy Property Credit.

The Energy Efficient Home Improvement Credit encourages homeowners to make qualified energy efficient improvements. Qualified improvements include exterior doors, exterior windows and skylights, and insulation or air sealing materials. Exterior doors can qualify for a credit of $250 per door up to a total of $500 when more than one is installed. New windows and skylights qualify for 30% of costs up to $600. Insulation or air sealing materials are qualified for a credit of 30% of costs up to $1,200.

The total credit is generally limited to $1,200 for a tax year, with some items qualifying for an additional $2,000 credit. The $1,200 could also include a home energy audit with a value of up to $150.

The additional $2,000 credit is for electric or natural gas heat pump water heaters, heat pumps or biomass stoves or boilers. If a taxpayer qualifies for both the $1,200 credit and the $2,000 credit, the total Energy Efficient Home Improvement Credit could reach $3,200.

There are specific requirements for most of the credit items. Doors and skylights must meet Energy Star most efficient certification requirements. For the $2,000 credit, electric or natural gas heat pump water heaters, heat pumps or other such items must meet the highest efficiency level established by the Consortium for Energy Efficiency (CEE).

The taxpayer must install the energy efficient property in a home that is the taxpayer’s principal residence in the United States. The installation may also be claimed for improvements made if the owner is a tenant-stockholder in a cooperative housing corporation or a condominium where the taxpayer holds a proportionate share as specified by the management association. The Energy Efficient Home Improvement Credit is not refundable and may not be carried forward.

A new requirement in 2025 is that the items must be produced by a qualified manufacturer and there must be a product identification number (PIN). The PIN is provided by the manufacturer and must be included on the tax return. The PIN is a 17-character number assigned by the qualified manufacturer.

Taxpayers should keep records "sufficient to establish the amount of the credit on their tax returns."

The Residential Clean Energy Property Credit is a 30% credit for the installation of qualifying energy efficient property, with no lifetime credit limit. This may include solar panels, solar water heaters, qualified fuel cells, small wind energy units, geothermal heat pumps or battery storage.

U.S. homeowners that install these various energy production and storage items will qualify for a 30% credit. The geothermal heat pump must qualify under the Energy Star program. A qualified battery storage property must have a capacity of 3 kilowatt-hours or greater.

The Residential Clean Energy Property Credit may reduce the taxpayer’s tax liability and may be carried forward to future years. It is a non-refundable personal tax credit. The taxpayer may use IRS Form 5695, Residential Energy Credits to claim the credit for 2025.

Editor's Note: It is expected that there will be a comprehensive tax bill in 2025. Some of these energy credits may be modified or changed after January 1, 2026. Many homeowners will decide to take advantage of the Energy Efficient Home Improvement Credit or the Residential Clean Energy Property Credit in 2025.

Vacant Land Value Reduces Charitable Deduction

In Seabrook Property LLC et al. v. Commissioner; No. 5071-21; T.C. Memo. 2025-6, a claimed charitable deduction of approximately $32.6 million was reduced to approximately $4.7 million. The deduction was claimed by a syndicated partnership conservation easement on vacant land in Liberty County, Georgia. The 40% gross misstatement penalty also applied.

The 622-acre property is approximately 25 miles southwest of Savannah. It is a picturesque property and includes roughly 370 upland acres that are developable. There is potential access to electricity, but no utilities on the property. Nearby, a high-end development that started in 2003 had stalled with no further development since 2017.

The property was initially acquired during the 1930s and 1940s by John Porter Stevens and later transferred to his granddaughter Meredith Devendorf Belford and her mother Laura Devendorf. The owners were seeking funding and were approached by Charles Kiene and an appraiser, Clay Weibel. After various discussions, they created Seabrook Investors, LLC (InvestCo) and Seabrook LLC. It was projected that investors who purchased a $100,000 membership in InvestCo would receive a $400,000 charitable easement deduction which could save an estimated $158,400 in federal tax and $24,000 in state tax, for a total tax savings of $182,400. After Seabrook LLC was funded, Ms. Belford received $4.74 million for the property.

The parties created transfer agreements on November 22, 2017. 97% of the property was transferred to InvestCo on December 22, 2017. A conservation easement was transferred to Southern Conservation Trust on December 28, 2017. Appraiser Clay Weibel determined the discounted cash flow value of the property and created a before value of $37 million with a valuation of $100,000 per upland acre, and an after value of $1.15 million. This amounted to a charitable deduction of approximately $36 million. Seabrook LLC filed a partnership return for 2017 and claimed a deduction of $32.6 million. The IRS audited the partnership and denied the deduction.

The taxpayer offered expert testimony from appraiser Gregory Eidson, who claimed the property could be developed as a Master Planned Residential Development. Eidson’s discounted cash flow (DCF) analysis estimated the property to be valued at $32.23 million and the easement value to be $31.045 million.

IRS appraiser Gerald Barber determined there was no reasonable prospect for full development, but that the property would be appropriately used for "recreational use with potential for small scale large tract residential development." Barber determined the charitable deduction to be $1.045 million.

The IRS argued that there was no charitable intent for the transfer, the appraisal was not qualified and the appraiser was not qualified. However, the Tax Court determined there was intent to make a charitable gift, the appraisal was generally in conformance with Reg. 1.170A-13(c)(3) and the appraiser was qualified.

There also was an agreement with the State of Georgia for a reduced property tax rate, but the cost to break that agreement was $51,000. This was not deemed a significant issue.

A qualified appraiser must hold themselves out to the public, be qualified to make the appraisal and acknowledge that the appraisal is done for tax purposes. To be qualified, the appraiser must meet education and experience requirements and must not falsely overstate the value. Here, there was a qualified appraisal and qualified appraiser. The remaining issue was valuation.

Valuation is based on the property’s highest and best use. Taxpayer appraiser Gregory Eidson claimed the 370 upland acres could be a Master Planned Residential Development. His substantial valuation was based on that assumption. The Tax Court noted that both the taxpayer and the IRS appraisals "by the experts for each party shade towards advocacy." As a result, the Tax Court did not accept either side’s appraisals.

Taxpayer appraiser Eidson did not apply relevant comparables. IRS appraiser Barber offered six comparables and three were accepted by the Tax Court. The Tax Court noted the discounted cash flow method of appraiser Eidson was not acceptable because the property was vacant land with no income-producing history and therefore this method was "inherently speculative and unreliable."

After reviewing the different valuations, the Tax Court determined the property had a value of $9,000 per upland acre. The deduction therefore was determined to be $4.718 million.

Because the claimed deduction was in excess of the 40% gross valuation misstatement of Section 6662(h) and there was no "reasonable cause" exception to this penalty, the 40% penalty applied.

Editor's Note: The individuals who invested $100,000 had their charitable deductions greatly reduced and were assessed a 40% penalty. The 40% penalty was likely to be greater than their tax savings on the reduced deduction. This is a lesson for both taxpayers and professional advisors in considering future tax strategies. The Tax Court demonstrated substantial expertise in understanding valuation methods.

Supreme Court Stays Transparency Act Injunction

On December 5, 2024, the U.S. District Court for the Eastern District of Texas issued a nationwide injunction that stopped the implementation of the Corporate Transparency Act (CTA) on January 1, 2025. The government appealed the injunction to the Fifth Circuit Court of Appeals which declined to issue a stay. The government then appealed the decision to the U.S. Supreme Court.

The application for the stay was submitted to Justice Samuel Alito. On January 23, 2025, the Supreme Court granted the application for the stay. Justice Neil Gorsuch published a concurring opinion. Justice Gorsuch stated that the government was entitled to a stay of the universal injunction. He also agreed with the government’s suggestion that the Supreme Court should definitively address the power of a district court to issue a universal injunction.

Justice Ketanji Brown Jackson dissented from the grant of the stay. Justice Jackson noted that the Fifth Circuit is expediting the case. In addition, the law was in existence for four years before the federal government began its enforcement. Therefore, Justice Jackson would continue the injunction while the litigation proceeds in the Fifth Circuit.

Editor's Note: With this decision by the Supreme Court, the CTA requirements apply for 2025. Many advisors will encourage their clients to comply with the CTA.

Applicable Federal Rate of 5.4% for February: Rev. Rul. 2025-5; 2025-7 IRB 1 (16 January 2024)

The IRS has announced the Applicable Federal Rate (AFR) for February of 2025. The AFR under Sec. 7520 for the month of February is 5.4%. The rates for January of 5.2% and December 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.”