2008 Federal Tax Update:
2008
Federal
Tax Update:
The
The
Calm Before
the Storm
Calm Before the Storm
Rick J. Taylor, CPA
Rick J. Taylor, CPA
1
All page numbers refer to Parts 1 and 2
of “2008 Federal Tax Update: The Calm
Before the Storm” (November 6 and
November 19, 2008; 227 pages) Rick J.
Taylor. If you would like a copy of the
entire outline, please send an email
request – rtaylor@wipfli.com
2
FIN 48 Delayed One More Year
• The Financial Accounting Standards
Board (FASB) has granted to all
nonpublic entities a one-year deferral
on implementing FIN 48 until fiscal
years beginning after Dec. 15, 2008.
Decrease in FMV of assets.
• P. 195
3
S Corp Open Account Debt
• T.D. 9428, 10/17/2008; Reg. § 1.1367-2,
Reg. § 1.1367-3.
• Final regulations that limit open
account debt and the basis
adjustments for an S corporation's
debt to its shareholder under Code
Sec. 1367(b)(2).
• $25,000 aggregate principal threshold
amount per shareholder for open
account debt.
• P. 195
4
Forgo Bonus and Accelerated Depreciation
• Rev Proc 2008-65, 2008-44 IRB
• Guidance on recently enacted Code Sec.
168(k)(4), which allows corporations to elect
to treat certain unused research and
alternative minimum tax (AMT) credits as
refundable in lieu of claiming bonus and
accelerated depreciation for “eligible
qualified property.”
• Elect to forgo bonus and accelerated
depreciation and then will be able to claim
unused credits from tax years beginning
before Jan. 1, 2006.
• P. 196
5
Bad Loans Not Subject to 382
• Notice 2008-83, 2008-42 IRB.
• For purposes of Code Sec. 382(h),
any deduction properly allowed after
an ownership change (as defined in
Code Sec. 382(g)) to a bank with
respect to losses on loans or bad
debts (including any deduction for a
reasonable addition to a reserve for
bad debts) will not be treated as a
built-in loss or a deduction that is
attributable to periods before the
change date.
• P. 199
6
Key Provisions - Bailout Bill
• AMT exemption amounts for 2008 are increased to
$46,200 for unmarrieds, to $69,950 for joint filers, and
to $34,975 for marrieds filing separately
• Research credit is retroactively extended to apply to
amounts paid or incurred after Dec. 31, 2007 and
before Jan. 1, 2010
• Alternative simplified research credit is increased to
14% for tax years ending after Dec. 31, 2008 (remains
at 6% if no history)
• Rule allowing tax-free treatment of IRA distributions
donated to charity is extended to 2008 and 2009
• More-likely-than-not standard for preparer penalty for
understatements due to unreasonable positions is
replaced by substantial authority standard, except
for tax shelters and reportable transactions
• Most new farming machinery and equipment placed
in service during calendar year 2009 is designated as
MACRS 5-year property
• P. 211- 227
7
Key Provisions - Farm Bill
• Two-year extension for favorable tax
treatment (50% rather than 30% limit) of
capital gain property donated for qualified
conservation.
• Limitation on deduction of farm losses.
• Dollar thresholds for optional methods of
computing net earnings from selfemployment are increased and indexed.
• Voluntarily pay SE tax to get increased SE
benefits.
• Added tax more than offset by benefit of
earned income credit.
• P. 201- 204
8
Key Provisions - Housing Act
• First-time homebuyers temporary refundable
tax credit equal to 10 percent of the purchase
price of a home, up to $7,500 ($3,750 for
married individuals filing separately).
• The credit begins to phase out for taxpayers
with adjusted gross income in excess of
$75,000 ($150,000 in the case of a joint return).
• The credit is effective for homes purchased
on or after April 9, 2008, and before July 1,
2009.
• Unlike other credits, however, the first-time
homebuyer credit must be repaid in equal
installments over 15 years, essentially making
it an interest-free loan from the government
for most qualifying homeowners.
• P. 205 - 211
9
Favorable PAL Grouping
• Candelaria v. United States, No. EP06-CV-0126-KC (W.D. Tex. 10/5/07).
• Real estate activity may be grouped
with trade or business.
• Reg. §1.469-4(c) provides that one or
more trade or business activities or
rental activities may be treated as a
single activity if the activities
constitute an “appropriate economic
unit.”
• P. 1
10
IRS Ruling on Favorable PAL Grouping
• TAM 200747018.
• Truck leasing activity engaged in by a
QSUB is a rental activity under §469,
but it may be grouped with the trade
or business activities of the S
corporation’s other QSubs.
• Since the S corporation’s shareholder
materially participated in these other
trade or business activities, the
passive activity loss limitations did
not apply to the rental activity.
• P. 34
11
“Item” Narrowly Defined
• Capital One Financial Corporation v.
Commissioner, 130 T.C. No. 11
(5/22/08).
• Credit card issuer may not
retroactively change its method of
accounting for late-fee income on
credit cards.
• Excellent discussion of “item” which
was narrowly defined.
• Can adopt any acceptable method
when encounter new “item.”
• P. 3
12
Accounting Method Rev. Proc. Upheld
• Lehrer v. Commissioner, No. 06-75584 (9th
Cir. 5/23/08).
• The Ninth Circuit affirmed the Tax Court's
denial of taxpayer’s attempted late mark-tomarket election.
• Rejected argument Rev. Proc. 99-17 is not
an agency pronouncement carrying the
force of law.
• Taxpayer’s position that such an election
can be made at any time after the relevant
returns are filed, without seeking or
qualifying for an extension, was
unreasonable.
• P. 4
13
§481(a) Adjustment is BIG
• MMC Corporation v. Commissioner, T.C.
Memo 2007-354 (11/29/07).
• Positive §481(a) adjustment resulting from
change from mark-to-market method
required under the 1998 RRA, was
recognized built-in gain under §1374.
• Incorrect decision.
• If a change in method of accounting is from
one permissible method of accounting to
another permissible method (other than a
change from cash to accrual method), the
resulting §481(a) adjustment should not be
built-in gain, by application of the accrualmethod rule, even if the §481(a) adjustment
relates to amounts attributable to a C year.
• P. 4
14
Investment Sub Respected
• PSB Holdings, Inc. v. Commissioner, 129
T.C. No. 15 (11/1/07).
• Bank is not required under §§265(b) and 291
to include a subsidiary investment
company's tax-exempt obligations that were
purchased and owned by the subsidiary, in
calculating the bank's average adjusted
bases of tax-exempt obligations.
• IRS has indicated it intends to issue
regulations that would require non-financial
institution subsidiaries to be taken into
account for purposes of §265(b)
calculations.
• P. 6
15
§108(e)(5) is a Narrow Exception
• Payne v. Commissioner, T.C. Memo.
2008-66 (3/18/08).
• A taxpayer received cancellation of
indebtedness income when he settled
with a bank for less than the amount
owed on his credit card.
• Court refused to allow use of
purchase money indebtedness
exception included in §108(e)(5).
• P. 6
16
No Deduction for Loss of Customers
• Technicolor USA Holdings, Inc. v.
Commissioner, No. 07-2398 (3d Cir.
7/28/08).
• A corporation could not take a
deduction for the loss of
relationships with its film processing
customers because the client
relationships had no useful life and,
therefore, had a zero basis.
• Valuation was not considered
credible.
• P. 7
17
Ordinary Loss Abandonment Securities
• T.D. 9386, 2008-16 I.R.B. (4/21/08).
• Final regulations clarifying the tax treatment
of losses from abandoned stock or
securities under §165(g).
• Loss established by the abandonment of a
security that is a capital asset is treated as a
loss arising from the sale or exchange of a
capital asset on the last day of the tax year,
unless §165(g)(3) (relating to certain
worthless securities in a corporation
affiliated with the taxpayer) applies.
• Abandonment requires that the taxpayer
permanently surrender and relinquish all
rights in the security for no consideration.
• P. 11
18
Escrow Account Taxable Currently
• T.D. 9413, 73 Fed. Reg. 39,614 (7/10/08).
• Final regulations under §468B on the
taxation of income earned on escrow
accounts, trusts, and other funds used
during deferred exchanges of like-kind
property under §1031, and under §7872 on
the treatment of below-market loans
associated with like-kind exchanges.
• Interest on a taxpayer's exchange funds is
taxable in the year earned or credited,
instead of when the interest is paid.
• P. 12
19
Rebates Reduce Gross Income
• Rev. Rul. 2008-26, 2008-21 I.R.B. 985.
• Medicaid rebates paid by a
pharmaceutical manufacturer to a
state Medicaid agency are
adjustments to the sales price in
calculating gross income.
• Price adjustment is not an ordinary
and necessary business expense.
Instead, it is a deduction in arriving at
gross income.
• Lack of guidance as to the timing of
recognition.
• P. 15
20
§118 Change is Account Method Change
• Rev. Rul. 2008-30, 2008-25 I.R.B. 986.
• Public utility’s change from treating
payments received from customers
as non-taxable contributions to
capital to treating the payments as
taxable customer connection fees is a
change in method of accounting
requiring the consent of the IRS.
• Change only applies to timing
differences and not something that
results in permanent difference.
• P. 16
21
Pending Nonautomatic Changes
• Rev. Proc. 2007-67, 2007-48 I.R.B.
1072.
• Procedures for obtaining IRS consent
to change an accounting method
where a filed Form 3115, Application
for Change in Accounting Method is
pending in the National Office.
• IRS acknowledgment that
nonautomatic changes are taking too
long and causing problems for
taxpayers.
• P. 17
22
Safe-harbor §1031 Qualification
• Rev. Proc. 2008-16, 2008-10 I.R.B. 547.
• Safe harbor under which IRS will not
challenge whether a dwelling unit qualifies
as property held for productive use in a
trade or business or for investment for
purposes of §1031.
• Relinquished property and replacement
property owned for 24 months.
• For 12 months before and after, property is
rented to third party for FMV rental for at
least 14 days. Personal days cannot exceed
more than 14 days or 10% of days rented.
• P. 18
23
Accelerate FICA, FUTA and SUTA
• Rev. Proc. 2008-25, 2008-13 I.R.B. 686.
• Safe harbor method of accounting for
taxpayers using an accrual method of
accounting and incurring FICA and
FUTA liabilities.
• Automatic consent procedures to
change to the safe harbor method of
accounting.
• §19.04 of the Appendix in Rev. Proc.
2008-52 extends the treatment to
SUTA as well.
• P. 21
24
Automatic Method Changes
• Rev. Proc. 2008-52 makes a number
of significant changes to Rev. Proc.
2002-9 including:
• Amplification of the requirements for
a complete application (e.g., Form
3115);
• Increase in number of changes
qualifying for automatic change;
• Clarifies need to include UNICAP
considerations in determination of
§481(a) adjustment;
• P. 23
25
Fiscal Yr Trap §179 Expense Confirmed
• Rev. Proc. 2008-54, 2008-38 I.R.B. 722.
• Increased §179 expensing election
applies on a fiscal year basis.
• Bonus depreciation applies on a
calendar year basis.
• Utilization of increased §179
deduction by fiscal year passthrough
entity can result in loss of §179
deduction.
• Fix by electing or revoke election on
amended return.
• P. 27
26
Ptrship Exchange Qualifies for §1031
• PLR 200807005.
• A taxpayer's receipt of all the interests in a
partnership holding real property, through a
disregarded entity created by the taxpayer
to receive the real property, will qualify for
like-kind exchange treatment.
• This is the first ruling IRS addressed a
taxpayer’s acquisition of 100% of the
interest in a “regarded” partnership that
holds replacement property for purposes of
§1031.
• Reinforces Rev. Rul. 99-6 (i.e., the acquirer
is treated as acquiring the partnership
property directly from the partners).
• Taxpayer limited partner; SMLLC general.
• P. 29
27
Bank Not Disqualified Person
• PLR 200803003 and 200803014.
• A proposed qualified intermediary
(QI) (that is a bank as defined in §581)
will not be a “disqualified person”
under Reg. §1.1031(k)-1(k), because
the QI and its controlled group
members provide investment
advisory, brokerage, private planning,
insurance, trust, and retail banking
services for the proposed QI’s
customers and clients.
• P. 29
28
Development Rights Like Kind Property
• PLR 200805012.
• A taxpayer's exchange of a parcel of
real property for development rights
was considered a like-kind exchange.
• Development rights were real
property under local law.
• P. 30
29
Incentive Payments Not Income
• PLR 200816027.
• Customers who received payments
for participating in a promotion did
not have to include the payments in
their gross incomes because the
payments represent a reduction in the
purchase price.
• P. 31
30
Extension Documenting Success Fees
• PLR 200817010.
• Taxpayers granted extension to complete
success-based fees documentation.
• §263(a) and Reg. §1.263(a)-5(a) require
capitalization of amts paid to facilitate acquisition
transactions.
• Under a special exception, success fee is an
amount paid to facilitate the transaction except to
the extent the taxpayer maintains sufficient
documentation to show that a portion of the fee is
allocable to activities that do not facilitate the
transaction.
• The documentation must be completed on or
before the due date of the taxpayer’s timely filed
original federal income tax return (including
extensions) for the tax year during which the
transaction closes.
• P. 31
31
All Events Test Not Met
• CCM 200835019.
• An accrual-based retailer could not
treat its cash rebate liability as
incurred on the date the product was
sold to a customer because the
liability was not fixed until the
customer later mailed a properly
completed rebate form with the
necessary attachments.
• P. 32
32
Loss for Abandoned Transaction
• TAMs 200749013 and 200749014
• §165 loss deduction allowed for transaction
costs of abandoned transactions.
• When a taxpayer investigates and pursues
multiple separate transactions, costs
properly allocable to any abandoned
transactions are deductible even if some
transactions are completed.
• If the proposals are mutually exclusive
alternatives, then no abandonment loss is
proper unless all transaction proposals are
abandoned.
• Demonstrates IRS’ narrow view of what
constitutes non-mutually exclusive
transactions.
• P. 35
33
IRS Attacks Tool Reimbursement
• CCA 200745018.
• Tool reimbursement plan that
recharacterized wages failed the business
connection, substantiation, and return of
excess payment requirements for an
accountable plan and might have
demonstrated a pattern of abuse.
• In Rev. Rul. 2005-52, 2005-2 CB 423, IRS
also attacked a tool allowance plan paid to
auto mechanics based on estimated, rather
than actual expenses, finding it failed the
substantiation and return of excess
payment requirements.
• P. 35
34
Ethanol Property 7 Yr
• CCA 200835032 revoking CCA 200814025.
• Earlier this year, IRS released CCA
200814025 that concluded assets used in an
integrated facility for converting corn to
bioethanol should be depreciated over
seven years rather than over a five-year
MACRS recovery period.
• While Chief Counsel has withdrawn its
memo, this appears to be for procedural
rather than substantive reasons.
• Published guidance will indicate that 7 yrs
is correct.
• P. 35
35
Expansive §1031 Ruling
• CCA 200836024.
• Taxpayer may engage in a reverse
like-kind exchange and a traditional
deferred like-kind exchange using the
same relinquished property in both
exchanges.
• P. 36
36
Gift Card Income Mismatch
• LAFA20082801F.
• A subsidiary that managed corporation's
gift card sales had income from the sale of
those gift cards when its right to the sale
proceeds was fixed and the amount could
be determined with reasonable accuracy.
• This occurred when the gift cards were
purchased by a customer or reloaded by the
subsidiary or a retail store.
• The subsidiary could deduct the expense of
the redeemed card when economic
performance occurs, i.e., when the gift card
customers redeemed the gift cards.
• P. 37
37
Location Incentives
• Coordinated Issue Paper All Industries—
State and Local Location Tax Incentives
(LMSB-04-0408-023, 5/23/2008).
• Location tax incentive, whether in the form
of an abatement, credit, deduction, rate
reduction, or exemption, is not an item of
gross income under §61.
• Incentive is a reduction of state or local tax
expense.
• Applies whether the taxpayer first pays the
tax and then receives a rebate or refund, or
pays the net.
• Location tax incentive is not a
nonshareholder contribution to capital
under §118 that reduces a taxpayer's basis
in assets under §362(c).
• P. 38
38
Charitable Contributions Challenged
• Bergquist v. Commissioner, 131 T.C. No. 2
(7/22/08).
• The Tax Court slashed the charitable contribution
deductions claimed by a group of doctors and hit
them with an accuracy-related penalty for gross
valuation misstatements.
• Doctors could not avoid penalties by relying on
appraisal because the planned from the beginning
to donate the stock on the brink of the
consolidation as a way to reap a potential windfall.
• Moreover, the court said that the doctors'
knowledge of the letter from the tax-exempt entity,
the fact that they were advised not to bring their
own tax advisers to the stockholders meeting, and
were directed to withhold information from their
own tax advisers, should have put them on notice
as to the inaccuracy of the claimed donations.
• P. 41
39
Business Use Required for §179
• Birdsill v. Commissioner, T.C.
Summary 2008-55 (5/20/08).
• Taxpayer was subject to recapture of
§179 expense because he failed to
comply with the strict substantiation
requirements to prove that he used a
vehicle more than 50 percent of the
time for business.
• P. 42
40
Travel Expense Denied
• Burski v. Commissioner, T.C.
Summary 2007-212 (12/17/07).
• The term “home” means a taxpayer’s
principal place of business and not
where the taxpayer’s personal
residence is located, if different from
the principal place of business.
• An exception to the rule exists when
a taxpayer accepts work away from
the taxpayer’s personal residence
and the work is temporary rather than
indefinite (1 year or less).
• P. 43
41
Travel Expense Denied – 2
• Cornelius v. Commissioner, T.C.
Summary 2008-42 (4/23/08).
• Taxpayer could not deduct travel and
meal expenses for work assignments
in other cities because he was in each
city for more than one year; however,
a moving expense deduction could be
appropriate.
• P. 43
42
Travel Expense Allowed
• Estate of Lease v. Commissioner, T.C.
Summary 2008-11 (1/30/08).
• A millwright who had to find jobs far
from his usual work area when work
was scarce was entitled to a travel
expense deduction for travel costs to
the farther locations.
• P. 45
43
Travel Expense Denied - 3
• Walker v. Commissioner, T.C.
Summary 2008-41 (4/22/08).
• A Union electrician who worked
sporadically up and down the east
coast could not deduct his meals and
lodging expenses as business
expenses incurred while traveling
away from home because they related
to a period for which he had no tax
home.
• Taxpayer found to have no tax home.
• P. 66
44
Travel Expense Denied - 4
• Yanke v. Commissioner, T.C. Memo 2008131 (5/15/08).
• An individual who was training to become a
journeyman electrical power lineman could
not deduct expenses for travel, meals, and
lodging relating to his training in California
because he lacked a business reason for
maintaining a tax home in another state.
• Taxpayer did not have a reasonable
business reason or justification for
maintaining a tax home in Boise.
• According to the court, when taxpayer
enrolled in the lineman training program, he
knew that for the next 3-1/2 years he would
be working with contractors only in
California and/or Nevada.
• P. 68
45
Leasing Arrangement Ignored
• Doyle v. Commissioner, T.C.
Summary 2008-107 (8/21/08).
• Married taxpayers could not claim
Schedule C deductions with respect
to their claimed business of leasing
out a truck where the lease
agreement was really a financing
arrangement that merely served to
pass money between the bank and
the supposed truck lessor.
• IRS attack probably inspired by fact
lease was to taxpayer’s father.
• P. 44
46
No Deduction for Alimony
• Emmel v. Commissioner, T.C. Summary
2007-205 (12/6/07).
• Payments a taxpayer made to his estranged
wife under an oral agreement are not
deductible as alimony because they were
not required by a written divorce or
separation instrument.
• A divorce or separation agreement must be
made in writing. A payment made pursuant
to an oral agreement is not a payment made
pursuant to a divorce or separation
instrument unless there is some type of
written instrument memorializing the
agreement.
• P. 45
47
No Deduction for Alimony - 2
• Katchmeric v. Commissioner, T.C.
Summary 2007-213 (12/19/07).
• An individual was not entitled to an
alimony deduction for payments
made to his ex-wife before the entry
of an order providing for alimony
because the payments were not made
pursuant to a written separation
agreement.
• P. 52
48
No Deduction for Alimony - 3
• Rafferty v. United States, No. 07-cv00903-EWN-BNB (D. Colo. 7/8/08).
• A district court held that an exhusband was not entitled to an
alimony deduction for payments he
deposited into the couple’s joint bank
account after they separated because
the amounts were paid prior to the
execution of a written divorce or
separation agreement.
• P. 64
49
No Deduction for Alimony - 4
• Raga v. Commissioner, T.C. Summary
2008-46 (4/29/08).
• Unallocated payments an individual
received from her ex-husband were
alimony includible in her income
because state law provided that the
ex-husband's obligation to make the
payments would end on her death.
• P. 64
50
No Deduction for Alimony - 5
• Salzman v. Commissioner, T.C.
Summary 2007-190 (11/7/07).
• A taxpayer's payments to his former
spouse would not have terminated on
her death and, thus, were not
deductible alimony.
• P. 64
51
Spousal Health Insurance Allowed
• Frahm v. Commissioner, T.C. Memo.
2007-351 (11/27/07).
• Taxpayers were entitled to a
deduction for amounts husband, as
wife’s employer, paid to wife to
reimburse her for the premiums that
she paid for the policies issued in
husband's name.
• The paperwork establishing the plan
was in order.
• All the checks for premiums and
reimbursement were properly drawn.
• P. 46
52
Spousal Health Insurance Disallowed
• Eyler v. Commissioner, T. C. Memo
2007-350 (11/27/07)
• Taxpayers denied deduction because
no written plan, no reimbursement,
proper paperwork flow not evident.
• No - Francis, TCM 2007-33 (2/8/07)
insufficient documentation of
spouses’ services.
• No – Snorek, TCM 2007-34 (2/8/07)
improper payment by employer rather
than spouse.
• No – Albers, TCM 2007-144 (6/7/07)
improper reimbursement.
53
Gambler was in Trade or Business
• Gagliardi v. Commissioner, T.C. Memo. 2008-10
(1/24/07).
• Slot machine gambling losses claimed by a
pathological gambler were sufficiently
substantiated by documentary evidence and the
testimony of the taxpayer and expert witnesses.
• It accepted clinical psychologists opinion that
taxpayer was a pathological gambler.
• Found the methodology and assumptions made
by casino gambling expert to calculate the
likelihood and extent of taxpayer's losses to be
reasonable.
• Further, although taxpayer's claimed losses were
less than the casino gambling expert’s estimate of
losses, the claimed losses were within the error
range calculated.
• P. 47
54
Gambler Not in Trade or Business
• Merkin v. Commissioner, T.C. Memo. 2008146 (6/5/08).
• Because a psychiatrist relied on a casino for
his recordkeeping, he could not adequately
substantiate that he was in the trade or
business of gambling.
• The court based its determination primarily
on its view that taxpayer did not carry on his
gambling activity in a businesslike manner.
• The court noted that taxpayer did not
maintain any receipts, books, or records but
relied solely on the casino to track all of his
playing time, betting history, wins, and
losses through his player's club card.
• P. 60
55
Gambler in Trade or Business
• Myers v. Commissioner, T. C.
Summary 2007-194 (11/19/07).
• Taxpayer was able to successfully
rebut IRS assertions that she was not
a professional gambler. As a result,
the Tax Court held that she could
deduct her gambling losses as an
above-the-line deduction.
• P. 61
56
Theft Loss for Portion of Loss
• Johnson v. United States, Nos. 01-428T, 032803T, 05-1265T (Fed. Cl. 1/9/08).
• A married couple who were victims of a
fraud scheme were entitled to a theft loss
deduction for the portion of the loss that
they determined they had no prospect of
recovering.
• Taxpayers were not required to wait until
the total amount of recovery from every
source was established to take a theft loss
deduction for a portion of their loss.
• In this case, the taxpayers did establish with
reasonable certainty that a portion of their
loss would not be recovered.
• P. 49
57
Theft Loss for Loss Not Allowed
• Kaplan v. United States, No. 8:05-cv1236-T-24 (M.D. Fla. 8/15/07).
• A couple could not claim a theft loss
deduction for phantom gains that
disappeared when a Ponzi scheme
collapsed, or for taxes paid on the
purported gains. Could not deduct
because prospect for recovery was
unknown.
• P. 51
58
Theft Loss not Allowed for Corp Fraud
• Taghadoss v. Commissioner, T.C.
Summary 2008-44 (4/29/08).
• An individual could not take a theft
loss deduction for the loss of value in
his stock options and holdings based
on fraud committed by company
officials.
• One in a series of similar cases
involving WorldCom.
• P.65
59
No Theft Loss for Bad Workmanship
• Wanchek v. Commissioner, T.C. Memo.
2007-366 (12/11/07).
• A couple could not claim a theft loss
deduction for poor workmanship in the
construction of their home where they could
not show fraudulent intent on the
contractor’s part.
• Taxpayers fell short of proving that the
contractor had the specific intent to cheat or
deceive them when he took their money in
exchange for building their house. At most,
contractor’s failure to carry out the
construction plans constituted a breach of
contract or negligence on his part, but not
fraud.
• P. 67
60
No Theft Loss for Bad Workmanship
• Electronic Picture Solutions, Inc., TC
Memo 2008-212.
• Corporation was not entitled to a theft
loss deduction under §165 for an
investment in stock that became
worthless because of alleged fraud by
the issuer and a stockbroker.
• P. 77
61
No De Minimis Rule Charitable Substantiation
• Gomez v. Commissioner, T.C. Summary 2008-93
(7/30/08).
• Couple denied deduction for cash gifts that
were undisputed made to their church but for
which they did not have the proper
substantiation.
• Despite the fact that the taxpayer’s clearly made
the contributions, the Code requires a
contemporaneous written acknowledgment for
contributions of $250 or more for a charitable
contribution deduction to be allowed.
• The acknowledgment letter was dated January
22, 2008, and was not received by the earlier of
the taxpayer’s filing of their income tax return or
the return's due date of April 17, 2006.
• P. 48
62
Must Seek Daily Profit to be “Trader”
• Holsinger v. Commissioner, T.C.
Memo. 2008-191 (8/11/08).
• Where a significant amount of the
taxpayers’ stock holdings were held
for more than 31 days, it indicated
that the taxpayers were not traders,
but rather investors that could not
take ordinary loss deductions on their
stock sales.
• To be a trader must seek to profit
from daily swings in the market.
• P. 49
63
COD Income Calculation
• Keith v. Commissioner, T.C. Summary 2007214 (12/26/07).
• A married couple that was forgiven the debt
on a home lost in foreclosure was insolvent
at the time of foreclosure and the
discharged debt was substantially excluded
from their gross income.
• Financial status immediately after the
discharge is not relevant, and since they
were insolvent before the foreclosure they
could exclude most of the discharged debt
from income.
• Take a lesson from the unreasonableness in
the IRS position – and this position was
litigated!
• P. 53
64
Investment Advisory Subject 2% Floor
• Knight v. Commissioner, No. 06-1286, (S. Ct.
1/16/08).
• Unanimous Supreme Court holds that
investment advisory fees incurred by trusts are
subject to the 2-percent floor for miscellaneous
deductions.
• The decision may give trustees an angle to
argue that other expenses should be fully
deductible. The question that courts will now
have to answer is what expenses would or
would not have been incurred by an individual
in the same situation as a trustee.
• The court suggested that some trust-related
investment advisory fees may be fully
deductible if an investment advisor were to
impose a special, additional charge applicable
only to its fiduciary accounts.
• P. 54
65
Implications of Disallowance
• Subjecting fees to this 2-percent
limitation will shrink the allowable
deduction for regular tax purposes
and increase taxable income.
• More importantly, such amounts are
subject to AMT.
• As usual, IRS “jumps the gun” and
adopts and unreasonable position in
proposed regulations that applies the
2-percent floor to all expenses of an
estate or trust except those that are
“unique” to an estate or trust.
• P. 57
66
“Unique” Fully Deductible-Prop Regs
• Fiduciary accountings;
• Required judicial filings;
• Preparation of fiduciary income tax and
estate tax returns;
• Distributions to beneficiaries;
• Trust or will contests or constructions;
• Fiduciary bond premiums; and
• Communications with beneficiaries
regarding estate or trust matters.
• P. 57
67
Not Fully Deductible-Prop Regs
•
•
•
•
Custody or management of property;
Investment advice;
Preparation of gift tax returns;
Defense of claims by creditors of the
decedent or grantor; and
• The purchase, sale, maintenance,
repair, insurance, or management of
non-trade or business property.
• P. 58
68
Unbundling Postponed
• Interim guidance does not require
unbundling of fiduciary fees for any
taxable year beginning before
January 1, 2008 (Notice 2008-32).
• The full amount of the bundled
fiduciary fee is deductible until
unbundling guidance is issued.
• This does not apply to payments by
the fiduciary to third parties for
expenses that are readily identifiable
as being subject to the 2-percent
floor.
• P. 58
69
IRS Challenges Mortgage Interest Deduction
• Njenge v. Commissioner, T.C. Summary 2008-84
(7/15/08).
• A couple was entitled to mortgage interest and
property tax deductions with respect to their
home which had been purchased by their son
and was held in his name. Couple had filed for
bankruptcy in 2001 and were unable to obtain a
mortgage. As a result, their son purchased the
house for them.
• Courts have a long history of recognizing
agency relationships and the IRS should never
have challenged the deduction in this case.
• See Roccaforte v. Commissioner, 77 T.C. 263
(1981), and National Carbide Corporation v.
Commissioner, 336 U.S. 422 (1949).
• P. 63
70
FLP Charitable Strategy Failed
• Smith v. Commissioner, T.C. Memo
2007-368 (12/17/07).
• Three related couples were denied
deductions for non-cash charitable
contributions of family limited
partnerships; and two of the couples
were also denied business expense
deductions for activities that were not
run with a profit motive.
• P. 64
71
Must Separate After Reach 55
• Williams v. Commissioner, T.C.
Summary 2008-53 (5/19/08).
• An individual who retired from his job
at age 53 and withdrew funds from
his retirement plan at age 55 did not
meet the age 55 exception to the early
distribution penalty.
• The "age 55 exception" applies only
where the taxpayer separates from
employment after reaching age 55.
• P. 68
72
Lesson in Bad Bookkeeping
• Bynum v. Commissioner, T.C. Memo
2008-14 (1/28/07).
• A married couple was not entitled to
business bad debt deductions for
amounts the husband advanced on
behalf of their corporation because
the advances were not bona fide
loans.
• Could have gotten deductions if paid
inside the corporation.
• Could have taken 1244 loss.
• P. 43
73
Strict Charitable Prop Regs
• Reg–140029-07, 73 Fed. Reg. 45,908 (8/7/08).
• Proposed regulations related to Congressional
efforts to end charitable contribution abuses.
Incorporates 2004 and 2006 tax law changes.
• Implement the requirement (§170(f)(17)) that no
deduction is allowed for any contribution by cash,
check, or other monetary gift unless the donor
maintains a bank record or written communication
from the donee.
• The bank record or written communication must
show the name of the donee, the date of the
contribution, and the amount of the contribution. No
de minimis exception.
• Exemption where the charitable beneficiary has not
yet been identified or because the charitable
beneficiary has no firsthand knowledge of the
amount of the payment.
• P. 69
74
Condition of Goods Must be Listed on Receipt
• The proposed regulations provide that no
deduction is allowed for any contribution of
clothing or a household item unless it is in
good used condition or better.
• If a donor claims a deduction of less than
$250, the proposed regulations require that
the donor obtain a receipt from the donee or
maintain reliable written records of the
contribution. Prop. Reg. §1.170A-16(a).
• A reliable written record for a contribution
of clothing or a household item must
include a description of the condition of the
item.
• P. 70
75
Body Scan Deductible Medical Expense
• Rev. Rul. 2007-72, 2007-50 I.R.B. 1154.
• Amounts paid by individuals for
whole body scanning diagnostic,
pregnancy test, or annual physical,
not compensated by insurance are
deductible medical care expenses.
• P. 71
76
Restitution is Deductible Expense
• PLR 200834016.
• Under New Jersey law, restitution is
primarily compensatory in nature with
the goal of compensating the victim
for the victim’s loss; as a result, the
restitution is deductible.
• P. 73
77
QJV does not Create SE Income
• CCM 200816030.
• If rental real estate business income is
otherwise excludable from net earnings
from self-employment, the election of
qualified joint venture status does not
convert such income into net earnings from
self-employment.
• The Office of Chief Counsel advised that if
income is otherwise excludable from NESE,
the election of QJV status will not convert
such income into NESE.
• P. 75
78
Prejudgment Interest Not Deductible
• CCA 200836025.
• Prejudgment interest is not deductible
under §163 since it is not interest on
indebtedness;
• Prejudgment interest stemming from
product liability is ordinary and necessary
business expense deductible under §162;
and post-judgment interest relating to
product liability is deductible under either
§162 or §163.
• Prejudgment and/or post-judgment interest
on product liability claims does not qualify
as product liability damages under
§172(f)(4) and thus is not eligible for 10-year
carryback.
• P. 78
79
PSC Found Regardless of EE-Owner Time
• Grutman-Mazler Engineering, Inc. v.
Commissioner, T.C. Memo. 2008-140
(5/21/08).
• In determining if a corporation is a
qualified personal service
corporation, there is no requirement
that employee-owners perform a
certain percentage of their time in the
qualifying field or in connection with
the qualifying field.
• P. 80
80
Use of S Corp to Avoid SE Shot Down
• Jarrett v, Commissioner, T.C. Summary
2008-94 (7/31/08).
• Taxpayers were subject to self-employment
taxes on income earned through their sole
proprietorships but passed through to them
by their S corporation set up to engage in
tax return preparation.
• Held taxpayers operated their businesses as
sole proprietors and the passthrough
income from the S corporation is
considered earned by the taxpayer
individually and is subject to selfemployment taxes.
• P. 80
81
S Corp Attribute Reduction for COD
• REG-102822-08, 73 Rd. Reg. 45,656, August 6,
2008.
• Proposed regulations on the manner in which
an S corporation must reduce its tax attributes
for tax years in which it has discharge of debt
income that is excluded from gross income.
• Unless a taxpayer elects to first reduce the
basis of depreciable property, the first attribute
reduced is any NOL for the year of discharge
and any NOL carried over to the year of
discharge.
• The rules for the exclusion of COD income and
for the reduction of tax attributes are applied at
the corporate level.
• The reduction of tax attributes occurs after the
S corporation’s items of income, loss,
deduction, and credit for the tax year of the
discharge pass through to its shareholders.
• P. 83
82
Prop Regs-Modify Antiabuse Rule 704(c)
• REG-100798-06, 73 F.R. 28765-28767,
5/19/08.
• For purposes of apply the §704(c)
anti-abuse rule, the tax liabilities of
both the partners in a partnership and
the direct and indirect owners of such
partners should be taken into
account.
• Also provide that a §704(c) allocation
method cannot be used to obtain tax
results that are inconsistent with the
intent of subchapter K.
• P. 85
83
Election Treat Disposition as Taxable Sale
• REG-143544-04, 73 Fed. Reg. 49,965 (8/25/08).
• Proposed regulations that would provide an
election to treat qualified dispositions of
another corporation's stock as taxable sales of
that corporation's assets; the regs are proposed
to apply only to domestic transactions.
• The proposed regs are designed to provide
relief from the potential multiple taxation of the
same economic gain that can result when a
transfer of appreciated stock is taxed to a
corporation without providing a corresponding
step-up in the basis of the assets of the
corporation.
• Because §336(e) requires a corporate seller, the
election isn't available in transactions involving
the stock of an S corporation.
• P. 86
84
Accounting Method Consistency
• REG-151884-03, 72 Fed. Reg. 64,545 (11/16/07).
• Proposed regulations that seek to provide
consistency on which accounting method or
combination of methods should be used after certain
corporate reorganizations and tax-free liquidations
under §381(a).
• General rule that the principal method generally is
that used by the acquiring corporation before the
§381(a) transaction.
• If the distributor or transferor corporation is larger
than the acquiring corporation, the principal methods
for the overall accounting method and for the method
for a particular item or type of goods are the methods
used by the distributor or transferor corporation
before the transaction.
• The proposed regs explain the rules for determining
whether the distributor or transferor corporation is
larger than the acquiring corporation.
• P. 87
85
Definition W-2 Wages for DPAD
• T.D. 9381, 73 Fed. Reg. 8,798 (2/15/08).
• Final regulations on the definition of W-2 wages for
purposes of the domestic production activities
deduction.
• §199 deduction for any tax year may not exceed 50
percent of the W-2 wages of the taxpayer for the tax
year.
• Under a change made by the Tax Increase Prevention
and Reconciliation Act of 2005 (TIPRA), W-2 wages,
for purposes of calculating the §199 deduction,
include only amounts that are properly allocable to
domestic production gross receipts (DPGR).
• The regulations provide safe harbors for determining
the amount of W-2 wages properly allocable to
DPGR.
• The wage expense safe harbor may be used by
taxpayers using either the §861 method of cost
allocation or the simplified deduction method.
• P. 89
86
Alternative Simplified Credit
• T.D. 9401, 6/13/2008; Reg. § 1.41-6T, Reg. § 1.41-8T,
Reg. § 1.41-9T.
• Temporary and proposed regs to provide rules
relating to the alternative simplified credit (ASC),
which may be elected under §41(c)(5) to figure a
taxpayer's research credit.
• At the election of the taxpayer, the credit is equal to
12% of so much of the QREs for the tax year as
exceeds 50% of the average QREs for the three tax
years preceding the tax year for which the credit is
being determined.
• A special rule provides that the credit is equal to 6%
of the QREs for the tax year if the taxpayer does not
have QREs in each of the three tax years preceding
the year for which credit is being determined.
• ASC election applies to the tax year for which made
and all succeeding tax years unless revoked with IRS
consent.
• P. 94
87
Investment Interest Passthrough
• Rev. Rul. 2008-12, 2008-10 I.R.B. 520.
• The Service determined that a
noncorporate limited partner’s
distributive share of interest expense,
on debt allocable to the partnership’s
trade or business of trading
securities, is subject to the §163(d)(1)
limitation on the deduction of
investment interest, if the limited
partner does not materially
participate in the trading activity.
• P. 96
88
Investment Interest Can Be Sch E Deduction
• Rev. Rul. 2008-38, 2008-31 I.R.B. 249.
• The IRS issued Announcement 2008-65 concurrently.
• Limited partner in first situation of Rev. Rul. 2008-38
would properly include the allowable amount of its
distributive share of the securities trading
partnership’s interest expense in computing the
limited partner’s ordinary business income or loss
on Schedule E.
• Consistent with the reporting requirements of Notice
88-37, 1988-1 C.B. 522, the interest deduction of the
limited partner that is properly reportable on
Schedule E should be identified on a separate line in
Part II, Line 28, column (a), as “investment interest,”
followed by the name of the trading partnership that
paid or incurred the interest expense, and the
amount of such interest expense should be entered
in column (h).
• P. 98
89
S Corp Property Contributions
• Rev. Rul. 2008-16, 2008-11 I.R.B. 585.
• Guidance on the amount of the deduction
for shareholders of S corporations that
made charitable contributions of
appreciated property in tax years beginning
after December 31, 2005, and before
January 1, 2008, in light of changes made by
the Pension Protection Act of 2006 and the
Tax Technical Corrections Act of 2007.
• Treatment extended 1 yr by Bailout Bill. See
page 222.
• P. 96
90
“Protective” S Corp Election
• Rev. Rul. 2008-18, 2008-13 I.R.B. 674.
• Guidance on employer identification
numbers (EINs) when an S corporation
becomes a qualified subchapter S
subsidiary (QSub) in a transaction treated
as an F reorganization.
• The Service recognized that its Service
Centers may have difficulty in recognizing
the S corporation status of Newco without
an S election being filed for Newcompany
• Taxpayers engaging in similar transactions
to Situation 1 or Situation 2 should consider
filing a protective S election for
Newcompany.
• P. 97
91
Merger then Liquidation not Tax-free Reorg
• Rev. Rul. 2008-25, 2008-21 I.R.B. 986.
• Acquisition of target’s stock in a statutory
merger followed by target liquidation not a taxfree reorganization under §368(a).
• This ruling reaffirms the principle that, absent a
§338 election, a stock acquisition, followed by a
prompt liquidation of the acquired corporation
into the acquiring corporation, does not result in
a taxable asset acquisition with a stepped-up
basis in the acquired assets.
• Depending on what type of consideration is
issued, corporate taxpayers can plan their
transactions by essentially choosing between
either making a taxable stock acquisition and
acquiring the assets of the target corporation via
liquidation or acquiring the assets of the target
corporation in reorganization.
• They can also plan whether to obtain a steppedup basis in the assets of the target corporation
by choosing whether to make a §338 election.
92
Flow Through Investment Fees
• Rev. Rul. 2008-39, 2008-31 I.R.B. 252.
• Guidance on a limited partner’s tax
treatment of its distributive share of
management fee expense from an
upper tier partnership engaged solely
in holding limited partnership
interests in lower tier partnerships
that are securities trading
partnerships.
• P. 100
93
LI Premiums do not Reduce AAA
• Rev. Rul. 2008-42, 2008-30 I.R.B. 175.
• Premiums paid by an S corporation on an
employer-owned key-man life insurance
policy, of which the S corporation is either a
direct or indirect beneficiary, do not reduce
an S corporation’s accumulated adjustment
account.
• The benefits received by reason of the death
of the insured from an employer-owned life
insurance contract that meets an exception
under §101(j)(2) do not increase the S
corporation’s AAA.
• P. 101
94
Surrender Shares to Cancel Debt=Redemption
• PLR 200750001.
• An individual shareholder’s surrender
of corporate shares in cancellation of
a debt owed to the corporation is a
redemption that is a complete
termination of the shareholder’s
interest in the corporation.
• P. 102
95
Administrative Dissolution No Tax Impact
• PLR 200806006 and 200835002.
• The Service ruled that a corporation that
was administratively dissolved under state
law for failure to pay franchise taxes, but
continued to file Form 1120, continued to
pay all corporate taxes, and reincorporated
under state law after learning of the
administrative dissolution, did not terminate
its corporate status for federal tax
purposes, resulting in no distribution or
transfer of property.
• It appears that the Service viewed the
administrative dissolution and subsequent
reincorporation of Taxpayer as not giving
rise to a realization event for federal tax
purposes (i.e., nothing happened).
• P. 104 and 107
96
No §382 Issue if Move Below Parent
• PLR 200810008.
• The Service has determined that a for-profit
corporation will not have an owner shift or
an ownership change within the meaning of
§382(g) as a result of a distribution of all of
its stock by a tax-exempt hospital to a taxexempt holding corporation, the
contribution by the tax-exempt holding
corporation of all of the distributed stock to
another for-profit entity, and a merger
between the for-profit corporations.
• This ruling illustrates that an internal
restructuring of a group below a parent
corporation often has no §382 ramifications.
• P. 105
97
SMLLC Ignored – S Election Preserved
• PLR 200816002.
• The IRS ruled that the contribution of
S corporation stock by the S
corporation's sole shareholder to a
limited liability company in exchange
for a 100-percent membership
interest in the LLC did not terminate
the S corporation election.
• P. 105
98
Methodology for Allocating 704(c) Gain
• PLR 200829023.
• The IRS approved a partnership’s
proposed methodology for allocating
excess §704(c) tax gain resulting from
a like-kind exchange.
• P. 105
99
Allocation of Merger Costs
• PLR 200830009.
• The surviving company that was acquired in a
merger was allowed to allocate merger transaction
costs either to itself or to the acquisition
company, which merged into it, based on the
entity to which services were rendered and/or on
whose behalf services were provided.
• §1.263(a)-5(f) does not require time records. Other
records are suitable to establish an appropriate
allocation.
• Costs related to the securitization financing plan
were eligible for an abandonment loss under §165.
The financing plans were not mutually exclusive
and when the final financing plan was adopted,
Company received no further benefit from the
securitization plan financing that was never
implemented.
• P. 106
100
S Corp Deduction Health Insurance
• Notice 2008-1 2008-2 IRB 251.
• This notice reverses unreasonable IRS position that
an S corporation's sole shareholder-employee could
not buy health insurance in his or her own name and
get the above-the-line deduction for the premium
expense.
• Now a deduction is allowed if:
• the S corporation makes the premium payments for the
accident and health insurance policy covering the 2percent shareholder-employee (and his or her spouse
or dependents, if applicable) in the current tax year; or
• the 2-percent shareholder makes the premium
payments and furnishes proof of premium payment to
the S corporation and then the S corporation
reimburses the 2-percent shareholder-employee for the
premium payments in the current tax year.
• P. 108
101
Amended Returns Possible
• In order for the 2-pecent shareholderemployee to deduct the amount of the
accident and health insurance premiums,
the S corporation must report the accident
and health insurance premiums paid or
reimbursed as wages on the 2-percent
shareholder-employee’s Form W-2 in that
same year.
• Taxpayers who did not claim deductions for
fringe benefits described in Notice 2008-1
may file amended tax returns to claim the
deduction under Code §162(l) if the
taxpayers satisfy the necessary
requirements. The statement “Filed
Pursuant to Notice 2008-1” should be
written on the top of any amended return.
• P. 110
102
Request for PAL Grouping Comments
• Notice 2008-64, 2008-31 I.R.B. 268.
• Require taxpayers to report to the IRS, as
part of their regular annual return, changes
to a taxpayer’s groupings.
• A written statement would be required for:
• The first tax year in which one or more trade or
business activities or rental activities are
originally grouped as a single activity or as
separate activities;
• The first tax year in which a taxpayer adds a new
trade or business activity or a rental activity to an
existing grouping; and
• A tax year in which the taxpayer disposes of a
specific trade or business activity or a rental
activity from an existing grouping.
• P. 110
103
Not Grouping Precludes Later Grouping
• If a taxpayer is engaged in two or more
trade or business activities or rental
activities and fails to report whether the
activities have been grouped as a single
activity or as separate activities in
accordance with the proposal, then each
trade or business activity or rental activity
will be treated as having been grouped as a
separate activity for purposes of applying
the passive activity loss and credit
limitation rules.
• In Thomas P. Krukowski, et ux., 114 TC 366,
the 7th Circuit stated “to make an election, a
taxpayer must clearly notify the
Commissioner of the taxpayer’s intent to do
so.”
• P. 111
104
IRS Aggressively Auditing Research Credit
• Research Credit Claims Audit Techniques Guide
(RCCATG): Credit for Increasing Research Activities
Code Sec. 41 (LMSB-04-0508-030, May 2008).
• The audit guide targets prepackaged material
submitted to support research credit claims that
frequently fails to substantiate that the taxpayer paid
or incurred qualified research expenses.
• The Audit Guide is concerned that a significant
number of research credit claims are prepared using
a method that does not properly establish the
required nexus between the qualified research
expenses and qualified research activities.
• According to IRS, §41 requires a taxpayer to identify
qualified research expenses by business component
(qualified activity).
• While project based accounting captures research
costs at the “business component” level, generally
establishing the required nexus, cost center
accounting does not always provide the nexus
between qualified activities and their related costs.
• P. 112
105
IRS Aggressively Auditing Research Credit
• Taxpayers employ a variety of
methodologies to reconstruct the amount
claimed for the research credit. Most
research credit studies reflect a combined
(project and cost center methods) hybrid
approach.
• Typically, the manner in which the
information is compiled does not support
the relationship between the accounting
records and the research activities or
qualified research expenses, failing to
establish nexus. In other words, there is an
inability to connect specific research
projects and the underlying activities to the
qualified expenses.
• P. 113
106
IRS Aggressively Auditing Research Credit
• A common example of the hybrid/nexus
problem is in qualified wages established by
capturing W-2 wage amounts by cost center
and multiplying a qualified percentage to
individual employee's wages or department
total wages.
• The determination of the qualified
percentage is often based on a manager's
recollection or estimate of the amount of
time particular employees devoted to an
activity.
• The Audit Guide cautions that arbitrary and
unsupported allocations should not be
accepted. These estimates are not sufficient
to support a claim.
• P. 113
107
IRS Aggressively Auditing Research Credit
• In Eustace v. Comm. (2001), TC Memo 2001-66, affd
(2002, CA7) 90 AFTR 2d 2002-7661, a case that the
Audit Guide found to be a typical research credit
claim involving an accounting firm study and a
prepackaged submission, the Court found the
taxpayer's reconstruction of qualifying expenses to
be unreliable, inaccurate, incomplete, and wholly
insufficient. The Court held that the taxpayer was
required to tie salaries to qualified activities at the
subcomponent level. Further, the Court refused to
apply the Cohan rule and make a reasonable
allocation of salaries to the activities. The taxpayer
must show what expenses it paid or incurred in the
performance of qualified research activities.
• The Audit Guide also advises that a taxpayer should
be treated as having made a valid reduced credit
election under Code Sec. 280C(c)(3) only if it clearly
indicates its intent to claim the reduced research
credit on its timely filed original return for the tax
year.
• P. 113
108
QDRO Not Found
• Amarasinghe v. Commissioner, No. 08-1226 (4th
Cir. 6/23/08).
• A state court order for a taxpayer to cash out
his pension plan and distribute the proceeds to
his ex-wife to satisfy obligations related to his
divorce was not a qualified domestic relations
order.
• If a QDRO, then the alternate payee is taxable on
the distribution.
• A domestic relations order (DRO) qualifies as a
QDRO if it: (1) creates or recognizes the
existence of an alternate payee’s right to, or
assigns to an alternate payee the right to,
receive all or a portion of the benefits payable
with respect to a participant under a plan; (2)
clearly specifies certain facts; and (3) does not
alter the amount or form of the plan benefits.
• P. 115
109
FLP Discounts Revised Downward
• Astleford v. Commissioner, T.C. Memo 2008128 (5/5/08).
• The Tax Court adjusted discounts for lack of
control and lack of marketability applied to
gifts of interests and assets in a family
limited partnership.
• The court generally felt the appraiser was
overly aggressive and so reduced the
discounts from 40 to 30%.
• In addition, it valued partnership interest as
general interest rather than assignee
interest.
• Finally, court used a 10% discount rate to
determine discount required to reflect true
value of land that would flood the market
and therefore need four years to sell.
• P. 115
110
SEP Denied Where Wife Not Covered
• Brown v. Commissioner, T. C.
Summary 2008-56 (5/20/08).
• S corporation's shareholder denied
deduction for the corporation's
contributions to his SEP account
because it did not also make
contributions for the only other
employee of the corporation, his wife.
• P. 115
111
Loans not Equity for Estate Purposes
• Estate of Farnam v. Commissioner,
130 T.C. No. 2 (2/4/08).
• Loan interests held by the decedents,
directly and indirectly through
controlled partnerships, were not
qualified family owned business
interests and, thus, the decedent's
estates were denied a deduction.
• P. 117
112
FLP Respected-Death Unexpected
• Estate of Mirowski v. Commissioner, T. C. Memo.
2008-74 (3/26/08).
• Tax Court disagrees with IRS argument that
taxpayer’s gifts were made with retained rights
causing them to violate §2036.
• Taxpayer’s primary reasons for forming MFV
included: (1) joint management of the family's assets
by her daughters and eventually her grandchildren;
(2) maintenance of the bulk of the family's assets in a
single pool of assets in order to allow for investment
opportunities that would not be available if Taxpayer
were to make a separate gift of a portion of her
assets to each of her daughters or to each of her
daughters' trusts; and (3) providing for each of her
daughters and eventually each of her grandchildren
on an equal basis.
• The Tax Court held that Taxpayer’s asset transfers to
MFV were bona fide sales for adequate and full
consideration in money or money's worth.
• P. 119
113
FLP Ignored for 92 Yr Old Invalid
• Estate of Rector v. Commissioner, T.C.
Memo. 2007-367 (12/13/07).
• Value of real property transferred to a
limited partnership was includible in a
decedent’s gross estate because the
decedent had an implied understanding that
she would retain possession, income, and
the right to economic enjoyment from the
property, and that the transfer was not a
bona fide sale for adequate and full
consideration.
• FLP established to hold elderly taxpayer’s
assets when she was 92 as she was moving
to a nursing home. Court found the
payment of personal expenses a persuasive
factor.
• P. 122
114
FLP-6 Days Enough to Beat Step Transaction
• Holman v. Commissioner, 130 T.C. No. 12
(5/27/08),
• The Tax Court rejected the IRS's argument
that a gift of LP interests of an FLP was an
indirect gift of stock to the children for
whose benefit the transfers were made.
• The step transaction doctrine did not apply
because the six days separating the
contribution of stock to the FLP and the
taxpayers' gift of LP interests subjected the
taxpayers to a real economic risk of a
significant change in the value of the LP
interests.
• P. 122
115
FLP 2703(b) Applies-Discounts Reduced
• Holman Continued
• 2703(b) applies so cannot take restrictive
agreement into consideration in valuing the
interests.
• In assessing the appropriate level of
discounts to be given the gifts, the court
found more persuasive the computations of
discounts for minority and marketability
interests presented by the IRS's expert.
• Lack of marketability discount of 35%
reduced to 12.5%. Minority discount of
between 5 and 15% allowed.
• P. 122
116
100% Reduction for Corp Double Tax
• Jelke v. Commissioner, No. 05-15549 (11th
Cir. 11/15/07).
• 11th CA reversed Tax Court holding when
valuing a decedent's stock in a closely held
company, the estate is entitled to a 100
percent dollar-for-dollar discount for the
company's entire contingent capital gains
tax liability.
• Follows rationale of the 5th CA in Estate of
Dunn v. Commissioner, 301 F.3d 339 (5th
Cir. 2002), noting that such rationale
eliminates the crystal ball and coin flip
approach and provides certainty and finality
to valuing closely held stock.
• P. 123
117
Not Disable for Penalty Purposes
• Kowsh v. Commissioner, T.C. Memo. 2008-204
(8/28/08).
• Although a taxpayer received insurance
disability payments for depression, he was not
disabled for purposes of avoiding the 10percent additional tax on an early pension
distribution.
• Held that the taxpayer was not disabled and
depression was not reasonable cause for his
failure to timely file his return and pay his taxes.
• Qualifying for disability insurance is not
dispositive in determining whether an individual
is disabled for purposes of the 10-percent
additional tax.
• Taxpayer offered no documentary evidence to
corroborate his depression or anxiety. No
doctors testified nor did the taxpayer provide
any affidavits from medical professionals.
118
• P. 126
Extension of Time for GST Elections
• REG-147775-06, 73 Fed. Reg. 20,870
(4/17/08).
• The IRS issued proposed regulations
providing guidance as to the circumstances
and procedures under which an extension
of time will be granted to individuals (or
their estates) who failed to make a timely
allocation of the generation-skipping
transfer exemption to a transfer, and
individuals (or their estates) who failed to
make a timely election under Code
§2632(b)(3) or (c)(5).
• P. 133
119
Estate Inclusion Rules for GRATs and QPRTs
• T.D. 9414, 73 Fed. Reg. 40,173
(7/14/08).
• Final regulations provide guidance on
the portion of property transferred to
a trust that is includible in a grantor’s
gross estate if the grantor has
retained the use of the property or the
right to an annuity, unitrust, or other
payment from such property for life.
• P. 133
120
Wash Sale Rules Apply Individual and IRAs
• Rev. Rul. 2008-5, 2008-3 I.R.B. 271.
• Purchase of securities by IRA or Roth
IRA taken into account in determining
whether individual taxpayer is subject
to the wash sale rules on stock he or
she sold individually.
• P. 135
121
IRS Again Provides Favorable IDGT Ruling
• Rev. Rul. 2008-22, 2008-16 I.R.B. 796.
• A grantor's retained power, exercisable in a
nonfiduciary capacity, to acquire property
held in trust by substituting property of
equivalent value will not, by itself cause the
value of the trust corpus to be includible in
the grantor's gross estate, provided certain
conditions exist.
• Essentially, this ruling along with Rev. Rul.
2004-64 gives the “green light” to the
classic intrafamily sale using a defective
grantor trust.
• P. 135
122
No Discount for Restricted Mgmt Account
• Rev. Rul. 2008-35, 2008-29 I.R.B. 116.
• The fair market value of an interest in
a restricted management account for
estate and gift tax purposes is
determined based on the fair market
value of the assets held in the
account without any discount for
restrictions imposed by the account
agreement.
• P. 137
123
Gain on Sale after Death not IRD
• PLR 200744001.
• The gain from a sale of real property by a
decedent's revocable trust was not income
in respect of decedent.
• Gain realized from the sale of the property
after the decedent's death does not
constitute income in respect of a decedent
because important issues still needed to be
addressed before the sale of the property
could be closed. The closing was delayed
until after the decedent's death because of
these issues. The trust needed to attend to
substantive as well as ministerial matters.
• P. 139
124
Rare Case Allowing Innocent Spouse Relief
• Nihiser v. Commissioner, T.C. Memo. 2008135 (5/20/08).
• The IRS abused its discretion in denying a
request for equitable innocent spouse relief.
• Although she and husband remained under
the same roof because of their financial
situation, wife (innocent spouse claimant)
was living apart from her husband. This
factor favored granting relief.
• The court also found that taxpayer had been
subject to psychological abuse, which also
favored granting relief.
• For the most part, this case was decided
based on equitable factors. The facts were
good and the court sympathized with the
taxpayer.
• P. 157
125
Taxpayer Failed Provide Adequate Documents
• Qi v. Commissioner, T.C. Memo. 2008-200
(8/27/08).
• Taxpayer who could not show that she
provided adequate materials to her tax
return preparer or that she adequately
examined her return did not qualify for the
reasonable cause and good faith exception
to the accuracy-related penalty.
• Three requirements:
• The adviser was a competent professional who
had sufficient expertise to justify reliance;
• the taxpayer provided necessary and accurate
information to the adviser, and
• the taxpayer actually relied in good faith on the
adviser's judgment.
• P. 159
126
Revised Preparer Penalty Rules
• REG-129243-07, 73 Fed. Reg. 34,559 (6/17/08).
• Expand the definition of a non-signing preparer
and include a de minimis rule under which a
preparer will not be considered a non-signing
preparer.
• Substitute a one-preparer-per-position rule for the
current one-preparer-per-firm rule.
• Determining whether a tax return preparer is a
signing tax return preparer or non-signing tax
return preparer is important because a signing tax
return preparer will generally be considered the
person who is primarily responsible for all the
positions on the return or the claim for refund.
• If there is no individual that meets the definition of
a signing tax return preparer, a non-signing tax
return preparer will be primarily responsible for
the return or claim for refund positions.
• P. 164
127
Revised Preparer Penalty Rules
•
•
•
•
Any time spent on advice that is given with respect to
events that have occurred that is less than 5 percent of the
aggregate time incurred by the person with respect to the
position giving rise to an understatement will not be taken
into account in determining whether an individual is a nonsigning tax return preparer.
This less-than-5-percent test will encourage tax
professionals who principally rendered advice regarding
events that have not yet occurred to provide follow-up
advice requested by a taxpayer without the concern that,
by providing such advice, the advisor would become a tax
return preparer
The more-likely-than-not standard was retroactively
changed to substantial authority as a result of the passage
of H.R. 1424 – Emergency Economic Stabilization, Energy
Improvement and Extension, and Tax Extenders and AMT
Relief Acts of 2008 – Signed into law on October 3, 2008.
The proposed regulations obviously do not reflect this
important law change.
P. 165
128
Revised Preparer Penalty Rules
• The proposed regulations expand on the
current regulations to provide that a return
preparer may rely in good faith and without
verification on information furnished by
another advisor, another tax return
preparer, or other party.
• Similarly, a tax return preparer may rely in
good faith without verification on a tax
return that has been previously prepared by
a taxpayer or another tax return preparer
and filed with the IRS.
• The preparer, however, may not ignore the
implications of information furnished to or
actually known by the preparer, and must
make reasonable inquiries if the information
appears to be incorrect or incomplete.
• P. 166
129
Strict Disclosure Rules
• T.D. 9375, 73 Fed. Reg. 1,058 (1/7/08).
• Disclosure and use of return information by return
preparers and the requirements for a valid taxpayer
consent to such disclosure or use.
• Must obtain taxpayer consent, either by paper or
electronically depending on how the return is being
filed, before tax return information can be disclosed
to any third party or used for any purpose other than
filing the return.
• The rules also provide that tax return information
encompasses a wider range of information than what
taxpayers literally furnish to a tax return preparer.
• If taxpayers fail to set a time period, the consent is
valid for a maximum of one year.
• Paper consent documents to be in 12-point type on 8
1/2 by 11 inch paper, and require electronic consent
requests to be in the same type as the Web site's
standard text, all to prevent consent requests from
being too difficult to read.
• P. 171
130
Shorten Due Date Partnerships and Trusts
• T.D. 9407, 73 Fed. Reg. 37,362 (7/1/08); REG115457-08, 73 Fed. Reg. 37,389 (7/1/08).
• The IRS issued final, temporary, and
proposed regulations which reduce from six
months to five months, the automatic
extension period for partnerships filing
Form 1065, U.S. Partnership Return of
Income, or Form 8804, Annual Return for
Partnership Withholding Tax, and estates
and trusts filing Form 1041, U.S. Income Tax
Return for Estates and Trusts.
• P. 172
131
Adequate Disclosure Circumstances
• Rev. Proc. 2008-14, 2008-7 I.R.B. 435.
• The circumstances under which the
disclosure on a taxpayer's return with
respect to an item or a position is
adequate for the purpose of reducing
the understatement of income tax and
for the purpose of avoiding the
preparer penalty have been updated.
• P. 174
132
Contingent Fees Rarely Allowed
• Notice 2008-43, 2008-15 I.R.B. 748,
clarifying T.D. 9359, 72 Fed. Reg.
54,540 (9/26/07).
• IRS examination.
• Interest and penalty reviews.
• Services rendered in connection with
any judicial proceeding arising under
the Code.
• P. 176
133
Questions?
134