No Tax on Overtime
Published July 25, 2025
In the recent Presidential election, both candidates supported the concept of removing taxes on overtime. The One Big Beautiful Bill Act signed on July 4, 2025, created an overtime exclusion of up to $12,500 for years 2025 to 2028. The overtime pay must be in excess of the normal full-time pay rate. If an employee earns $18 per hour and is paid $27 per hour for overtime, only the $9 added pay is deductible.
There is a limited exclusion of up to $12,500 ($25,000 for joint filers) for overtime income. The overtime exclusion applies to taxpayers with a modified adjusted gross income of $150,000 ($300,000 for a joint return). There is a 10% phaseout above those levels. The overtime benefit phases out for single taxpayers with income of $275,000 and for joint taxpayers with income over $425,000.
The overtime exclusion will be subject to Treasury Secretary regulations to define the methods for determining regular and overtime compensation. Generally, the definitions will follow Section 7 of the Fair Labor Standards Act of 1938. This law generally limits overtime to the amount of time over 40 hours per week. All overtime pay will still be subject to Social Security and Medicare taxes.
The overtime deduction will also be allowed in addition to the standard deduction. It is not necessary to itemize to qualify for the overtime deduction. There will be a reporting requirement for employers to designate the amount of overtime. This information will also be reported to the IRS.
Editor’s Note: Because most employees qualify for the overtime deduction, there may be attempts to structure compensation plans to maximize overtime. The Treasury Secretary is likely to be quite specific in listing the qualified overtime rules to limit potential improper use of this deduction.
IRS Levy on Religious Entity Upheld
In The Society of Apostolic Church Ministries Bishop, et al. v. United States; No. 24-1765 (9th Cir. 2025), the Ninth Circuit affirmed a District Court decision that upheld an Internal Revenue Service (IRS) levy of funds on a religious entity to satisfy the tax obligations of the couple that controlled the entity, Elizabeth and Frederic Gardner.
The Society of Apostolic Church Ministries Bishop (the Society) brought suit against the IRS to oppose a levy on the Society’s Apache Knolls residence and on the Society’s bank account. The IRS issued a levy of $826,381.05 for unpaid taxes by the couple for years 2002 through 2004.
The IRS claimed that the Society was the nominee of the Gardners. A nominee is "one who holds bare legal title to property for the benefit of another." The District Court granted summary judgment in favor of the IRS.
A determination of the nominee status is dependent on the "totality of the circumstances." The key issue is "whether the taxpayer exercised active or substantial control over the property." Because the Gardners exercised "active or substantial control" over the Apache Knolls property, the levy was upheld.
Elizabeth Gardner transferred the property multiple times into various controlled entities. The benefits of the Apache Knolls residence accrued to both of the Gardners. The Society and other entities paid their utilities, living expenses, cable and Internet services and their residential homeowners’ insurance policy.
The Society claimed that a corporation sole may own and manage property. However, the issue is whether or not the Gardners had control of the Apache Knolls property. The Gardners also had control of the Society bank account. Frederick Gardner was a co-assignor on the account.
The dissent claimed there must be an asset-by-asset analysis. However, the Society did not raise this argument at trial or on brief. The Society under the “totality of the circumstances” test was subject to the “active or substantial control” of the Gardners. There also is a dispute with respect to a $50,000 donation made by a deceased Society member. This was purportedly intended to help a member in need. However, the gift instruction stated that it could also be used for the benefit of the Gardners and the funds were under the control of Elizabeth Gardner.
In addition, the dissent claimed the government was not respecting minority religions and practices. However, the Ninth Circuit determined there was a “straightforward determination of whether the Society held bare legal title to property for the benefit of the Gardners.” The summary judgment was properly granted for the IRS.
Finally, the dissenting judge suggested there could be issues at trial. The potential question could be whether a portion of the property or the bank account was used to benefit the Gardners and part to benefit the Society. The dissent suggested the specific use of the funds could raise an issue at trial. The majority opinion rejected this analysis.
Charitable Easement Deduction Reduced 99.9%
In Rock Cliff Reserve LLC et al. v. Commissioner; No. 12472-20; No. 12482-20; No. 12483-20; No. 13758-20; T.C. Memo. 2025-73, the Tax Court disallowed charitable deductions for conservation easement gifts because the appraisals were not qualified. It also reduced the related deductions to the Internal Revenue Service (IRS) determination on the final partnership administrative adjustment (FPAA).
There were four partnerships in Walton County, Georgia, that claimed conservation easement deductions of over $62.7 million and related deductions of $6.67 million. The total claimed deduction was $69.4 million. The Tax Court determined the appraisals were not qualified and reduced the related deductions to the FPAA amount of $56,870.
Five Rivers Conservation Group, LLC (Five Rivers) is the tax matters partner for the four partnerships. The partnerships were created by various owners and transferred to Five Rivers. Since 2011, Todd Collins has been the managing partner of Five Rivers.
In a March 31, 2015, letter of intent to purchase the Rock Cliff Property for $1.1 million, Mr. Collins claimed that it would produce a conservation easement with a value of approximately $14.4 million. This letter of intent was over a month prior to Collins contacting Ronald Foster, the appraiser who eventually prepared the appraisals.
The transactions for the other three partnerships in Walton County were similar in format. There was an estimate of the value of the conservation easement that preceded the contact between Collins and Foster to obtain an appraisal. The estimates of the easements were generally 9 to 15 times the value paid for the property. Collins and Five Rivers managed the syndication and the marketing materials. Collins indicated that there could be a ratio of 4.58 for the charitable contribution deduction for every dollar of investment.
The deeds to the Atlantic Coast Conservancy, Inc. (ACC) were prepared by its Chief Executive Officer. Members of the four partnerships voted that they wanted to proceed with the conservation easement. The deeds were recorded on November 13, 2015.
The IRS expert at trial was Leslie Sellers, who has published two books on real estate appraisal and is a member of the Appraisal Institute (MAI). The principal taxpayer appraiser expert is Thomas Spears, who failed the MAI exam twice. The reports by Mr. Spears on the valuations were in part “copy and pasted” from Wikipedia articles.
The IRS audited the returns and issued an FPAA. The IRS determined that the appraisals were not qualified. There was a 40% gross misstatement penalty under Section 6662(h) or an alternative 20% penalty under Section 6662(a).
For a gift in excess of $500,000, a taxpayer must obtain a qualified appraisal and attach it to the return. The appraisal is qualified if “conducted by a qualified appraiser in accordance with generally accepted appraisal standards” and meets the requirements set forth by the Treasury Secretary. Section 170(f)(11)(E)(i). The qualified appraiser must have earned an appraisal designation or have otherwise met minimum education and experience requirements.
Taxpayer appraiser Foster meets the general requirements. However, the IRS contended that he was not qualified under Reg. 1.170A-13(c)(5)(ii). This states that the person is not a qualified appraiser “if the donor had knowledge of facts that would cause a reasonable person to expect the appraiser falsely to overstate the value of the donated property.”
This is not a disqualification simply because there is an overstated value. The appraiser must be making a “falsely” overstated value. This false value occurs when there is an agreement prior to the appraisal that the excessive value will be produced.
The Tax Court noted that Collins was aware the value of a conservation easement may not exceed the property value. Collins suggested that Foster provided a verbal estimate of the $14.4 million appraised value on the Rock Cliff property. However, the charitable value stated in the email prior to Collins contacting Foster was very close to the value in the final appraisal. The final appraised amount was within 2% of the valuation stated by Collins prior to initiating the contact with Foster.
A similar process occurred for all four properties subject to the conservation appraisals. Therefore, the Tax Court noted that Mr. Collins and Mr. Foster “made an agreement concerning the amount at which the property would be valued and Mr. Collins knew that such amount exceeded the fair market value of the respective property." Therefore, the Tax Court determined that the appraisals were not valid and the conservation easement deductions were denied.
The remaining issue was determination of whether the penalties were applicable. The preferred valuation method is a sales comparison approach. Both Spears and Sellers provided valuation comparisons. The Tax Court rejected the comparables of Spears because they were not appropriate. Mr. Spears claimed that the Rock Cliff property should be valued at $18.4 million. This was less than one year after it had been purchased for $1.1 million.
The Tax Court disregarded his analysis and determined that the $1.1 million sale of a 96% interest shortly before the easement gift was the best determination of value. All four properties were valued by the Tax Court with this same methodology. Based on these values, the Tax Court determined that the overevaluation was from 740% to 1,908%. Therefore, there was a greater than 200% overvaluation and the 40% gross misstatement valuation penalty applied.
In the alternative, the IRS also urged a 20% valuation penalty. The taxpayer claimed there was a reasonable cause defense. However, Collins did not receive any formal tax opinions because he stated at trial, "tax opinions really were not worth the paper they were written on." Therefore, there was no reasonable cause defense.
Editor's Note: The Tax Court has consistently reduced the charitable conservation easement deductions on most of the cases in Georgia. The reduction of 99.9% in this case is an indication of the concern the Tax Court has with the valuation methodology used for conservation easements.
Applicable Federal Rate of 4.8% for August: Rev. Rul. 2025-14; 2025-32 IRB 1 (15 July 2025)
The IRS has announced the Applicable Federal Rate (AFR) for August of 2025. The AFR under Sec. 7520 for the month of August is 4.8%. The rates for July of 5.0% or June 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.”
