RECENT DEVELOPMENT~ Martin J. McMahon, Jr

RECENT
DEVELOPMENT~
~DERAL
I.
TAXATION
Ira B. Shepard
Professor of Law
University of Houston
Law Center
Houston, Texas 77204
Martin J. McMahon,Jr.
Clarence TeSelle Professor of Law
University of Florida
College of Law
Gainesville, Florida
Tele: 352-846-1903
Fax: 352-392-7647
e-mail: [email protected]
50th Am3u~
University(
No’
INCOME
tax: / lJ-/,~J-z~J x
e-mail: [email protected]
on Conference
School of Law
9, 2002
ACCOUNTING
at m
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amendments to regulations under §§ 441,442
approval of the Commissionerto adopt, chart
1.441-1 through 1.441-4 generally are substant
4T, including the general rules for the per
requirement that partnerships, S corporations,
and obtain approval to adopt or retain a tax~
proposed regulations are reorganized.
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Prop. t
filing the first federal incometax return using tl
extension, or makingestimated tax payments, i
adoption of that year. [Rev. Rul. 57-589 (195
holding that the filing of an extension and es
superseded.]
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The pr,
taxpayer demonstrate a business purpose for c~
v
Prop. Reg. § 1.442-1(b), Form 1128 would have
monthof the first effective [the short] year. The
the standards of Rev. Proc. 2000-11, 2000-3I.t~
1030,infra.
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Prop. i
rules and the least aggregate deferral standard.
Reg. § 1.706-1T, but the proposedregulations e]
profits and capital for purposes of applying th~
taxable income, not book income, and capita
liquidation. Procedural roles for requesting aye
Prop. Reg. § 1.442-1 procedures.
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Prop.
changes, but procedural roles for requesting a y,
Prop. Reg. § 1.442-1 procedures.
a.
Notice 2001-3
proposed revenue procedure dealing with pro¢
pting and changing taxable years. REG-106917(6/13/01). The Treasury has published proposed
md 1378 regarding the requirement to obtain the
etain an annual accounting period. Prop Reg. §§
same as Temp. Reg. §§ 1.441-1T through 1.441computing tax, numerous def’mitions, and the
;s generally must demonstrate a business purpose
other than their required taxable year, but the
.441-1 (c) provides that a taxable year is adopted
ble year. Filing an application for an EIN, filing an
g a particular taxable year wouldnot constitute an
~. 298), and Rev. Rul. 69-563 (1969-2 C.B. 104),
regulations under § 442 continue to require that the
txable years. The proposed regulations use the term
less purpose" of the temporary regulations, but,
the language change to change the standard. Under
led by the 15th day of the third [rather than second]
ic approval provisions have been deleted in favor of
superseded by Rev. Proc. 2002-37, 2002-22 I.R.B.
.706-1 reflects the 1986 Act required taxable year
y speaking the substantive rules incorporate Temp.
the standards for determininga partner’s interests in
- income interests are determined with respect to
;ts are determined with respect to a hypothetical
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o
1.1378-1 would not implement any substantive
than a required year have been removedin favor of
¯ 23 I.R.B. 1302 (6/4/01). The IRS has published
ruder § 442 for taxpayers outside the scope of the
~cinnt
r’hanoo
nr rotnin
n tzxahle,
year [~e.e
e p
taxable. Under the proposed revenue procedun
stated business purpose against the amount
granted approval to adopt, change to, or ret
procedure. Establishing a natural business ye~
parmership, S corporation, electing S corporatJ
do not establish a natural business year genera
procedureif they agree to certain additional ter
tax effects of substantial distortion of incomer~
b.
Notice 2001-3
proposed revenue procedure that will [super:
procedures under § 442 for certain parmershi
obtain automatic approval to adopt, change, or
c.
Regulations
Accounting Methods, 67 F.R. 35009 (5/3/02).
REG-106917-99]with a number of technical
abandoning the general requirement of strict 1
ownership year. The final regulations remove
53-week taxable
change, anu reLenuonot accounttug pertous.
( 2. ) Autorv
2002-22 I.R.B. 1030 (6/3/02). This revenue
corporations to choose a taxable year to obtat
revenue procedure a corporation can receive
gross receipts natural business year standard no
An automatic change is not available (1) if the
(2) if the corporation has changedits annual
of the requested taxable year (unless the chan~
year ending with the same calendar month, ol
76(a)(1), or if the purposeof the changeis to
majority shareholder that has changed its year)
No audit protection is offered under the reve:
superseded.
( 2 ) Expan
taxable years for pass-through entities and ]
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taxable year other than their statutorily requirec
396 is modified and superseded. There are quit
partnership, S corporation, or PSCmaychang~
25-percent gross receipts test, regardless of wh
present taxable year. Greater flexibility is a~
parmership that would be required to change
ownership mayretain its current taxable year l
certain tax-exempt entities are disregarded for
S corporation, unless the S corporation is wh<
Form1128 is the due date of the taxpayer’s ret
year is under examinationor in litigation or (21
the entity has changed its annual accounting
requested taxable year (unless the change is
ending with the same calendar month, or to coz
If a taxpayer complies with the revenue procec
provided.
S would no longer weigh the merit of a taxpayer’s
,rtion of income. Taxpayers generally would be
ltural business year under the proposed revenue
ally will be the only circumstance under which a
’SC will be granted approval. Other taxpayers that
d be granted approval under the proposed revenue
ditions, and adjustments designed to neutralize the
from the change.
-23 I.R.B. 1314 (6/4/01). This notice orovides
)rporatlons, electing b corporations, and t’~tSS tO
eir taxable years.
I, with minor changes. T.D. 8996, Changes in
¯ easury has finalized the proposed regulations [in
£ying changes. The Treasury specifically rejected
aformity to adopt a year other than a required or
Le proposed regulations specific time and manner
ublished in Rev. Procs. 2002-37 through 2002-39,
t. Modifications were madewith respect to the 52inal regulations are effective 5/17/02.
~s comprehensive guidance on the adoption,
)proval for corporations. Rev. Proc. 2002-37,
are provides the exclusive procedures for most
zatic approval to adopt a taxable year. Underthe
ic approval of a year based on the 25 percent of
mdingholding an interest in a pass-through entity.
tion’s year is under examinationor in litigation or
Lg period within 48 months prior to the last month
a required taxable year, to or from a 52-53 week
nply with Reg. §§ 1.1502-75(d)(3)(v) or 1.1502lidated financial statements with a new ownerof a
ttomatic approval of natural business year
’~ev. Proc. 2002-38, 2002-22I.R.B. 1037(6/3/02).
-35] provides the exclusive procedures for most
?orations to obtain automatic approval to adopt a
nitted taxable year. Rev. Proc. 87-32, 1987-2 C.B.
significant changes from the earlier procedures. A
~tically to a natural business year that satisfies the
ch year results in more deferral of incomethan its
to adopt or change from a 52-53 week year..A
~le year because of a minor percentage change in
~,ear, subject to certain circumstances. Interests of
s of determining the ownership taxable year of an
ted by
such
tax-exempt, entities.
The due date
for
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within 48 months prior to the last month of the
fired taxable year, to or from a 52-53 week year
:h Reg. §§ 1.1502-75(d)(3)(v) or 1.1502-76(a)(1)).
vever, audit protection for prior years generally is
s vou still
have to ask. "Mr. Commish.may I."
automatic approval to adopt a taxable year ot
Rev. Procs. 85-16 and 74-33 are superseded.
business year or by "facts and circumstances,’
granted under the facts and circumstances
"natural business year" test in this revenue
business year for automatic approval under R
on the "annual business cycle" or "seasonal 1
harbor] the "peak" season. Alternatively, the
entities] to end with the two month period for
gross receipts equaling or exceeding 25 pe
described in Rev. Rul. 87-57 will not justit
periods, years based on annual model changes
A taxpayer other than a parmership, S corpo]
business purpose for the requested annual
business purpose if it provides a nontax reaso
specified additional terms, conditions, and
resulting substantial distortion of income. F,
other than its re(
(4) And
Announcement 2002-53, 2002-22 IRB 1063 ((
various changes in approval procedures in Rev.
2
Brookshire Brothers
(6/22/01). The taxpayer filed amendedreturns
from 31.5 and 39 years to 15 years, as permitt~
IRS asserted that the change required consent
Treas. Reg. § 1.446-1(e)(2)(ii)Co) [providing
change] applied to changing the § 168 ACRSc,
3.
IRS ends the small-d(
a.
Act I: IRS cq
gross receipts between $1 million and $5 r
modifying and superseding 2000-22, 2000-20 I
discretion to except a "qualifying taxpayer," i.~
less
Reg.§ 1.448-IT(f)(
Z 1 [as- determined under
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.
.
that are not incidental under Reg. § 1.162-3.
actual purchases of goods or materials to be re~
the capitalized amounts against the amount r~
deduct currently all other manufacturing and
direct and indirect costs that normally must
accounting method to the cash method under
1999-2 C.B. 725. Small businesses using an a(
471 to account for inventories may use the au
These procedures are effective for tax years em
b.
Act II: The st
$10 million of gross receipts, but with sign
(12/11/01). Pursuant to the discretion grante(
provides a proposed revenue procedure that wi:
annual gross receipts" of more than $1 millio:
disbursements method of accounting as descr
eligible trades or businesses.
T~~1"..,.~1
¯ their statutorily required or permitted taxable year.
aess purpose can be established either by a natural
revenue procedure cautions that permission will be
t "only in rare and unusual circumstances." The
are is significantly more flexible than the natural
.2002-38. The "natural business year can be based
" tests ending "soon after" [with a one month safe
business year can be established [except by tiered
the orior three years with the hi~_hest nereentn~rec~f
able year; nor will lalrmg patterns, compensatior
.~ lists, competitors’years, or related entities’ years
¯ PSC[i.e., an individual] that does not establish
.ng period can be deemed to have established
.~ requested annual accounting period and agrees tc
:nts intended to neutralize the tax effects of an~
)urpose, nontax reasons for the requested armua]
nvenience business reasons that are insufficient tc
ship, S corporation, or PSCto adopt a taxable year
axpayer that is not a sole proprietor will be able to
and unusual circumstances." Compliance provides
t off, the IRS explains its reasons for changes.
In the notice the IRS explains the reasons for the
20002-37, 2002-38, and 2002-39.
~, Inc. v. Commissioner, T.C. Memo2001-150
ng its cost recovery period for convenience stores
Specialized Program Coordinated Issue Paper. The
446(e), but the Tax Court (Judge Nims) held
hange of useful life is not an accounting method
very period.
)ect of its crusade against the cash method.
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1111~ ,
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)08 (4/28/00). The Commissionerwill exercise
vith average annual gross receipts of $1 million or
~mthe requirements of accounting for inventories
hases and sales of merchandise. A business that
viii treat inventory items as materials and supplies
:arts that the taxpayer must capitalize the cost or
acorporated into manufactured products and offset
a, hen the goods are resold, but the taxpayer may
g costs (including labor, warehousing, and other
talized under § 263A). An automatic change-.in
oc. 2000-22 is available under Rev. Proc. 99-49,
Lethod of accounting that are not required under §
consent provisions to change to the cash method.
r December16, 1999.
~mmissioner under §§ 446 and 471, this notice
qualifying small business taxpayers with "average
ss than $ 10 million to use the cash receipts and
the proposed revenue procedure with respect to
trade within the meaning of NAICScode 42; ((
and, (e) information industries within the meani
www.census.gov/epcd/naics/naicscod.txt.
*
Eligibl
janitorial, medical, veterinary, photo developin~
bars, hotels, and funeral homes.
c.
Notice 2001-~
2002-8 I.R.B. 548 (2/1/02). The change in me1
any taxable year ending on or after 12/31/0]
(including extensions) income tax return, ill,
National Office, and complywith the provision
d.
This is the re~
2002-28, 2002-18 I.R.B. 815 (4/15/02). Final
receipts of $ 10 million or less may obtain
disbursements method of accounting. Expands
business is the provision of services [includinl
eligible for the cash method, as are taxpayer
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provides revised rules /or automatic consent 1
clarified by Rev. Proc. 2002-54, 2002-35 I.R.B.
b.
Rev. Proc. 2~
procedure provides revised rules for changes in
c.
Really kind ta
19, 2002-13 I.R.B. 696 (1/1/02). This revenue
and Rev. Proc. 2002-9, 2002-3 I.R.B. 327 (1/2
consent to changes in accounting methods. Thq
Proc. 2002-9 are: (1) allowing a taxpayer
audit protection, when the methodto be change,
or an issue under consideration by either an a:
taxpayer-favorable, § 481(a) adjustments into
procedure was amplified and clarified by Rev. ]?
d. And the
mS
703 (1/1/01). This announcement explains th(
2002-9, Rev. Proc. 2002-18, and Proc. 97-27.
p~l auu tu IJt=uuau~ ~a--u ¯ ~t.,~aa~j,-~l~pa
~ v ~u ala
clarifying and modifying Rev. Proc. 2002-19, :
to the one-year adjustment period [for ne~
applications pending on 3/14/02 with respect t(
to a the first year ending on or after 12/31
applications whoelect to defer the year of chan
Inventories
She went to the anim
of her accounting method. Suzy’s Zoo v. C(
A.F.T.R.2d 2001-6916(9th Cir 11/21/01), aff’~
affirmed the Tax Court’s decision that the
263A(b)(2)(B) did not apply to greeting
with independent printers for production of cz
according to taxpayer’s standards. Even thougl
bore risk of loss during production, taxpayer o’
printers had no right to sell producedcards or c
taxoaver was the "producer" of the cards, not:
wade within the meaning of NAICScodes 44 -45;
MCScodes 5111 and 5122. For NAICScodes, see
;sses include those that perform services such as
pairs (including auto repair), as well as restaurants,
be available starting in 2001. Notice 2002-14,
mitted under Notice 2001-76 will be available for
,~o_r~ mnet attaah
a l~orm q l 1~ tn ~ timely-filed
’. Proc. 2002-9, 2002-3 I.R.B. 327.
¯ ocedure promisedin Notice 2001-76. Rev. Proc.
by which a qualifying small businesses with gross
ttic consent to change to the cash receipts and
2001-76 to provide that taxpayers whose principal
)vision of property incident to those services] are
;principal business activity is the fabrication or
,~mand in accordance with customer design or
Lg method change procedures.
)2-3 I.R.B. 327 (1/22/02). This revenue procedure
,res in accounting methods. It was amplified and
14/02).
2002-13 I.R.B. 678 (4/1/02).
This revenue
ing methods imposed by the IRS.
-favorable § 481 adjustments. Rev. Proc. 2002ure modifies Rev. Proc. 97-27, 1997-1 C.B. 680,
t revises the revised rules for obtaining the IRS’s
dgnificant changes to Rev. Proc. 97-27 and Rev.
its method of accounting prospectively, without
ssue pending for a taxable year under examination
)ffice . or
a federal
court; (2)
taking~.-~1
negative,
i.e.,
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s itself. Announcement2002-37, 2002-13 I.R.B.
icant issues raised by the changes in Rev. Proc.
,s the application of the one-year adjustment
ns. Rev. Proc. 2002-54, 2002-35 I.R.B. (8/14/02),
I.R.B. 696. Makes the change from the four-year
djustments under § 481(a)] available to those
:nding before 12/31/01 to defer the year of change
allows similar relief for those with approved
before 12/13/02.
-
B.
.. the elephant sneezed ... and that was the end
~ner, 273 F.3d 875, 2001-2 U.S.T.C. ¶50,766, 88
; that produced cartoon characters and contracted
other products bearing the characters’ likenesses
atracts provided that printers ownedmaterials and
~- images and had exclusive rights to the cards; the
:haracters to anyoneother than taxpayer. Thus, the
’reseller" to whomthe § 263A(b)(2)(B)exception
pursuant to § 803(d) of the TRA’86, the ye~
subject year, not the year ended June 30, 1987,
Year of Income or Deduction
1.
Tax Court again fin
Chevron doctrine. Square D Companyv. Co
The Tax Court (Judge Gale) adheres to its ho]
(1994), rev "d. and remanded.87 F.3d 99 (3d
regulatory authority granted in § 267(a)(3)
corporation cannot deduct interest accrued tu
would have been exempt from taxes under §§
that the regulation is valid as a permissible cc
the extent our opinion in Tate &Lyle I is incon:
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Tate d
Court majority here relies on the Chevron doc~
467 U.S. 837 (1984), and Bankers Life & Cas. (
doctrine applies to tax regulations, whethe
change was the year ending June 30, 1994, the
~,r’s first year after the effective date of § 263A.
C.
t"~ncrr’~eei~n~l
intent
,xr~
nzat
rl~,~r
th~ zall~t
vtLt~p~llW~tit.t ~¢; ~ z..,y#¢:
x uatczy xx¢xv~.,
section 267(a) into "an harmonious
267(a)(3) authorizes only regulations
method of accounting, then it would
relation to section 267(a)(2), as the
is because section 267(a)(2) would
covering, paymentsowedto a related fi
for such payments.
A close examination of the legislati
Secretary’s authority under section 2
method on the payor where the foreign
with respect to the amounts owed. Se
Congress felt "The application of * *
payee is a foreign person that does not,
1986-3C.B. (Vol. 3) 1,959. In this pa.,
application of section 267(a)(2)
source, non-effectively connected incor
purposes, be included in U.S. gross iT
incomeis that the foreign recipient lac[
need not be included in U.S. gross incol
Respondent’s interpretation of the reg
reasonable in light of the legislative hi
Chevron U.S.A., Inc. v. Natural Res.
permissible construction, the regulati¢
statute.
2.
Elective deferral rule~
Bob
W0ndries
Motors,
Inc. v. Commissioner,
....
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, § 1.267(a)-3 valid, this time based upon the
,ner, 118 T.C. No. 15 (3/27/02) (reviewed, 10-6).
Tate & Lyle, Inc. v. Commissioner, 103 T.C. 656
i), that Reg. § 1.267(a)-3 is a valid exercise of
a U.S., corporation
wholly owned
by
a foreign
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~n of the statutory language that authorizes it. To
~,e will no longer follow it."
was decided on the matching principle. The Tax
vron U.S.A., lnc. v. Natural Res. Def. Council lnc.,
~ited States, 142 F.3d 973 (7th Cir. 1998) (Chevron
ative or interpretive)],
which held that where
vhether the regulation is based on a permissible
’,trine in Brown&Williamson, we believe
insufficient attention to fitting all parts of
If, as we held in Tare & Lyle L section
~ss mismatchesresulting from the payee’s
" that section 267(a)(3) is redundant
)peals for the Third Circuit reasoned. That
;ach, and implicitly authorize regulations
~erson with a (U.S.) methodof accounting
~ry
reveals that" Congress
intended
theI
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57(a)(3) was added to the Code because
3n 267(a)(2)] is unclear when the related
Ly Code purposes, include in gross income
rmected with a U.S. trade or business." H.
2) 1,939; S. Rept. 99-313, at 959 (1986),
ongress expressed its uncertainty as to the
n where the foreign person has foreign
leed not, for manyInternal RevenueCode
A characteristic of the foregoing type of
methodof accounting for it if the income
authority granted in section 267(a)(3)
~,J~.u.,~,~.at, "’JL~,,.:D --T~J/ ~,.J.i.,J, ’J.-" I ~J, j,..1~/, z 1. O
so facto not manifestly contrary to the
,t available without adhering to the conditions.
d 1156, 2001-2 U.S.T.C. ¶50,733, 88 A.F.T.R.2d
turn paid for insurance [to which is added an i
than six years]. But the taxpayer deviated frc
year’s worth of the insurance premiumexpens,
the contract. The Ninth Circuit affn-med tt
disallowance of the deferral method. Elective
conditions.
3.
The money was sire
paid out for an offsetting deduction. Gale
taxpayer’s lawyer received the proceeds fro~
attorney’s escrow account pending resolution c
respect to that case and other matters. Judg~
constructively received by the cash method t~
lawyer by the defendant, but a deduction was
paid, would not have been deductible.
asly constructively received and constructively
nmissioner, T.C. Memo.2002-54 (2/27/02). The
a~z a lawsuit, but the oroceeds were held in the
l~elO mat me lull amount ot the proceeds were
in the year they were paid over to the taxpayer’s
under § 461 (f), except to the extent that the fees,
D.
States,
Installment Method
Beware of farmers h:
283 F.3d 939, 89 A.F.T.R.2d 2002-:
F’actor] over the life of the agreement[but not more
Proc. 92-97 by amortizing in the first year a full
than a pro-rated amountbased on the actual date of
Court’s decision upholding the Commissioner’s
fl rules are not available without adhering to the
I,U lt~L lil~.t& i~ UJ.JLIJIA.tJ
v
A,.,
§ 453(1)(2)(A) applies only to property that
sales of farm equipment by a non-farmer equip
There is no special exception for single purpos
used only in famaing. The dissent, rather tha
between "produced" and "used," discusses co
and missing "relative pronouns" and verbs, w[
his Jaguar convertible on the installment metho
dissenting judge ever sold one of his cars on l
ownJaguars, let alone use them to haul hay!]
BUSINESS INCOME AND DEDUCq
II.
A.
Income
B.
Deductible Expenses versus (2
INDOPCO
aftermath: ’
(Blackrnun. J.]
inc.
v. unltect
~tates,
At)/ r.Jct
31u, ~ ox.t ~. I.
937, 2000-1 U.S.T.C. ¶50,538, 85 A.F.T.R.I
environmental remediation expenses to clean.
stations on the site of a conveniencestore. Eve
time of the purchase and thus "overpaid" for t
because they "increased the value of the prope
Sixth Circuit concluded that "when a taxpaye
taxpayer acquired the property, the remediati
taxpayer has improved defects that were pres¢
Union Water Co. v. Commissioner, 39 T.C. 3:
lnc. v. United States, 219 F.3d 359, 2000-2 U.S
¯
On ant
& Young in connection with a corporate ree
capitalized.
2.
Boylston Market~ rei[
329 (11/2/99). An accrual method trucking con
and insurance that had an effective period
ray in their Jaguar convertibles. Thomv. United
)02-1 U.S.T.C. ¶50,293 (8th Cir. 3/19/02).
orted credit sales of center pivot irrigation systems
:laiming that the § 453(1)(2)(A) exception
r dealers for "’any property used or producedin the
peals (in a 2-1 decision by Judge Magill) held that
ased in farming by the seller; it does not apply to
’,aler to a farmer that is "to be used" by the farmer.
ment, like center pivot irrigation systems, that are
;ing on Congressional intent and the parallelism
such as "past participles, .... subordinate clauses,"
aserted, and raised the specter of a farmer selling
asing it once to haul hay. [Wewonderwhether the
t car market. Wealso wonder how many farmers
ration
ions are exceptions to the normof capitalization."
ntal remediation costs. United Dairy Farmers,
01-6116 (6th Cir. 10/3/01), aff’g 107 F. Supp. 2d
)-2235 (S.D. Ohio 5/23/00). Taxpayer incurred
ution caused by prior owners who operated gas
a the taxpayer was unawareof the pollution at the
~rty, the expenses were required to be capitalized
v. Rul. 94-38, 1994-1 C.B. 35 did not apply. The
yes property defects that were present when the
aose defects are capital in nature ..... [W]hena
a the taxpayer acquired the property, [Plainfield3] does not aoolv." Rather. DominionResources.
~e, mecourt held mat accounting lees paid to Ernst
ion incident to making an S election had to be
,. Freightways Corp. v. Commissioner, 113 T.C.
as required to capitalize expenditures for licenses
lg beyond the tax year. Judge Nirns held that
currently deductible if their benefit extends
inapplicable to an accrual methodtaxpayer. J
rules, rather than on the "clear reflection of
Commissioner.
a.
Maybe? Re~
if the same result follows under the "ch
A.F.T.tL2d 2001-6703, 2001-2 U.S.T.C. ¶5
Appeals (Judge Wood) reversed the Tax
prorated over the two taxable years. Judg
capitalization rules applied to cash methodta
U.S. Freightways’ expenses when like expen.,
to be capitalized [a point that the Tax Court
untenable. The Court of Appeals remanded fl
nevertheless should be prorated over the t~
standard of § 446(b).
3.
Kudos from taxpay(
Rulemaking ("ANPRM") REG-125638-01,
capitalization is:
l~laLl.J.l~
LU ;~11UItL lmvl~ldL 1111L,adL.IL~.ILOIII~llll~l~IdL
IIIUL (O
types of expenditures under a specified dollar ~
Specit
(A.2) amountspaid for § 197 intangibles would
the 12-monthrole; 032) prepaid items beyond
paymentswould have to be capitalized but not
governmentlicenses that are valid indefinitely
contractual fights wouldhave to be capitalized,
or renegofiated agreement; 036) amountspaid
over the remaining period of the lease; *** (C)
would not require capitalization of employee
exceed a specified dollar amountsuch as $5,00¢
¯
Note
decisions in Wells Fargo & Co. v. Commissi(
Commissioner, 212 F.3d 822 (3d Cir. 2000),
Lvchuck v. Commissioner. 116 T.C. 374 (200
Kehoe memo for LMSB and SB/SE emplc
pending adoption of the above ANPRM
nofin
does note that "it is likely that Treasury an(
regulations."
b.
The Chief (
(3/15/02). This Notice announces a change i
under § 263(a) of transaction costs related
assets or benefits, i.e., that the Service wf
overhead, or de minimis transaction costs mus
to litigate these issues while in the process of
deduction for such costs.
c.
LMSB and S
memofor LMSBand SB/SE employees dated
Chief Counsel Notice CC-2002-021.
¯
The rr
change of accounting methods pursuant to § 4z
hrna~
12 months
into on
the§ 263
subsequent
period" is
relied,
however,
and the tax
capitalization
standard of § 44609), which also was argued by the
n the capitalization holding and remandedto see
ection of income" standard. 270 F.3d 1137, 88
7th Cir. 11/6/01). The Seventh Circuit Court of
ecision that § 263 required that the deduction be
1 found the Tax Court’s distinction of how the
:asn memodtaxpayer rmgnt not nave been require(
concede but accepted arguendofor this case] to b(
Io the Tax Court to consider whether the deductio]
ble years under the "clear reflection of income’
is from professors. Advanced Notice of Proposec
ice Regarding Deduction and Capitalization o:
:s and standards Treasury and IRS plan to propose
L) or 263A] to provide a frameworkfor addressin~
a’red in acquiring, creating, or enhancingintangible
luding a "one-year rule" under which expenditure.,
dized and "de minimis rules" under which certaLt
are not required to be capitalized.
A1) loan portfolios would have to be capitalized;
be capitalized; 031) no capitalization required unde]
ths wouldhave to be capitalized; 033) market entr3
obtain ISO9000 certification; 034) amountspaid foz
rove to be capitalized; 035) amountspaid to modify
those paid wherethe parties do not enter into a new
;or to terminate a lease wouldhave to be capitalized
tion costs wouldhave to be capitalized, but this rule
asation, fixed overhead costs, or costs that do not
,~c ptupu~cut uacb ~ttsccpt utc L,ottrmol ~ppeals
!4 F.3d 874 (8th Cir. 2000), and PNCBancorp v.
a cold shoulder on the Commissioner’svictory in
;e proposed regulations also reject the Tax Court’s
,. Commissioner,supra.
- except for the 12-month rule. Langdon &
ated 2/26/02. Contains "meanwhile" instructions
le positions therein are "not Service position," but
ervice will ultimately adopt [a 12-month] rule in
speaks. Chief Counsel Notice CC-2002-021
:rvice’s litigating position regarding capitalization
¯ quisition, creation, or enhancementof intangible
ssert that certain employee compensation, fixed
talized, becauseit is an inefficient use of resources
)How their attorney’s advice. Langdon & Kehoe
, reversing their 2/26/02 memorandum
by reason of
:es that the requirementsrespecting the adoption and
ltinue to be applicable, i.e., that a taxpayer maynot
4.
Impact fees must t
(2/15/02). Impact fees are one-time charges
or expanded real estate developments to fman,
use necessitated by the development. These" fe
constructed. These impact fees are capitalized
The ruling also contains provisions for changi~
5.
You don’t have to c
prove on average you use for less than om
Memo.2002-103 (4/23/02). The taxpayer was
most of its incomefrom services related to the
emblazonedwith customers’ logos and fitted tc
deducted the cost of the uniforms [for
Commissioner, under § 446(b), sought to cha~
depreciation. Judge Cohen found that the taxp
garments was less than one year, even though
allowed the taxpayer to continue to expense th~
C.
Reasonable Comvensation
F ULLLLU~LLULL~qJ~I~
.....
1--LIA 4... 4.1,.,-
528 F.2d 176 (10th Cir. 1975) [citing the Gol~
deduction for $353,911 out of $1,113,80t
employee/shareholders. Notably, Judge Begh
hypothetical independent investor as a factor,
Eberl’s Claim Service or Pepsi Cola Bottling C
Miscellaneous Expenses
The employer’s dedu
And it was legal! Sutherland Lumber-Southwe
curiam, 255 F.3d 495, 88 A.F.T.R.2d 2001-507
Reg. § 1.162-25T, an employer-corporation t
owned airplane to employees was permitted tc
market value of the flights was included in th
2 l(b). Accordingly, pursuant to § 274(e)(2),
airplane otherwise could be considered to bc
deduction was not limited to the lesser amount
:alized. Rev. Rul. 2002-9, 2002-10 I.R.B. 614
aposed by a state or local governmentagainst new
tic offsite capital improvementsfor general public
:fundable if the new developmentultimately is not
tocable to the building under §§ 263(a) and 263A.
ating methodsto complywith its provisions.
e and depreciate business assets that you can
Prudential Overall Supply v. Commissioner, T.C.
strial uniform rentaFlaundrv business that derived
: customers" emptoyees, the taxpayer consistently
and financial accounting purposes], but the
~xpayer’s accounting method to capitalization and
I proven that the average useful service life of the
,sical life of the garments exceeded one year, and
tts.
he hypothetical independent investor test. B&D
262 (10/3/01). In a reasonable compensation case
]ae multi-factor test of Eberl’s ClaimService, lnc.
epsi Cola Bottling Co. of Salina v. Commissioner,
I to uphold the Commissioner’s disallowance of a
:ompensation paid to the husband and wife
led an extensive discussion of the return to a
ough that item was not a factor applied in either
D.
vas more than the includible compensation~. Commissioner,114 T.C. 197 (3/28/O0),aff’dper
-2 U.S.T.C. ¶50,503 (8th Cir. 7/3/01). Pursuant
~lded private_ nonbus-messflightson a co rnpan.y
-j .....
£--
I.R.B.
Commissioner in Sutherland Lumber.
2.
The IRS never seem,,
gasoline. Rev. Proc. 2001-54, 2001-48 I.R.B. 5
570. The optional standard mileage rate for 1:
34.5 cents per mile to 36.5 cents per mile, the ]
cents per mile to 13 cents per mile, and the m
will remain at 14 cents per mile.
a.
And more tin
I.R.B. (9/18/02). The rate for the business use
cents per mile. The rate for the charitable use
rate for using an automobile for medical and
per mile.
3.
A taxpayer who set
complain about the anchorage. Beech Truce
The taxpayer trucking company "leased" its
addition to paying for the drivers’ services on
..........
£’-
...................
c:7-
o ....
Ltations of § 274 did not apply even though the
tertainment facility. Furthermore the employer’s
Lble by the employeesunder special fringe benefit
459 (2/11/02).
Acquiescence by the
) catch up with the movementsin the price of
701), updating Rev. Proc. 2000-48, 2000-49 I.R.B.
use of automobiles will increase on 1/1/02 from
rate for medical and movingwill increase frorn..12
tte for giving services to a charitable organization
s in store for 2003. Rev. Proc. 2002-61, 2002-39
atomobile is 36.0 cents per mile, downfrom 36.5
- Jr- - -
¯
,
safe harbor of a Revenue Procedure can’t
Inc. v. Commissioner,118 T.C. No. 27 (5/23/02).
ivers from another [related] company (ATS).
per mile basis and paying other expenses, Beech
[~letecl the filll zmcmntnf the navrnent.~ hut the
[which was crucial to allowing any deduction
diem, which was for meals and incidental expe~
The per diem was treated under Rev. Proc. 96-"
computed on the same basis as compensation[
the taxpayer’s argument that because it lease
payment to ATS. On the facts [which were spa1
drivers were the taxpayer’s commonlaw emp
control over who was hired and who was fir~
percent of the per diem was deductible. The pro
solely for meals and incidentals because it was
conflict with Reg. § 1.62-2(d)(3)(ii), and
the taxpayer was relying on Rev. Proc. 96-28
of actual substantiation, it wouldnot be heard t(
4.
A deeply divided Ta~
but the interpretative issue regarding the
Commissioner, 119 T.C. No. 4 (9/5/02) [at
9T(b)(2)(i)(A) treats interest on any noncorpoJ
x - -
invalid to the ext~
Judge Chabot, the Tax Court overruled its pr
regulations as applied to an underpaymentattrib
¯
The plt
163(h)(2)(A), which excludes trade or busines:
interest, were not intended to incorporate the pr
Redlark: "In Redlark v. Commissioner, 106 T.(
enacted TRA1986 language (’in connection
allocable to’) were different from the ’in carryinl
TRA1986 opinions." Section 163(h) itself is
regulations represent a permissible construction o
appeals that have addressed the validity of the re
173 F.3d 533 (4th Cir.1999); McDonnell v.
Commissioner, 190 F.3d 791 (7th Cir.1999); Mil
supra. Unlike in its earlier Redlark opinion, the
Bluebook.
-
T.,., A~,,-"1
Wherethere is no corroboration in the:
disregard the General Explanation [of
concerned. * * * Given the clear thrust
Explanation [of the Blue Book] is with
conclude otherwise would elevate it t(
simply is not entitled. Other opinions o:
direct corroboration of congressional
expressions thereof.
Chief J
Vasquez)dissented:
The meaning of section 163(h)(2)(A)
language of that section. Moreover,prio
interest expense on a deficiency and a
the taxpayer did not otherwise prove that the per
I for lodging, was less that the federal M&IE
rate].
ng solely for meals and incidentals because it was
~r mile[. The Tax Court (Judge Thorton) rejected
rivers from ATS, § 274(n) did not apply to its
3 the taxpayer’s failure to introduce evidence], the
ecause it controlled their activities and had final
;, under Rev. Proc. 96-28 and § 274(n), only
rocedure was not otherwise invalid. Finally, since
ted substantiation, in the absence of any evidence
tge the conditions in the revenue procedure.
overrules the substantive decision in Redlark,
)f the Bluebook remains opaque. Robinson v.
to the Fifth Circuit]. Temp. Reg. § 1.163~me tax underpayment as nondeductible personal
trade or business. In Redlark v. Commissioner,
~), the Tax Court held that the Regulations were
rsonal interest any interest paid with respect to an
ated business. In a reviewed opinion (6-4-5)
fion in Redlark, and upheld the validity of the
the taxpayer’s law practice.
~asoned that the words "properly allocable" in §
st from the definition of nondeductible personal
case law upon which the Tax Court had relied in
,37, we did not deal with the fact that both the
] the enacted TAMRA
1988 language (’properly
[d ’attributable to’ languageinterpreted in the preambiguouswith respect to the question, and the
h)(2)(A). The plurality noted that the five courts
us all had upheld them. See Allen v. United States.
nuea orates, o3 r.Jo o~/ usm ~tr.iv~3); Kealar~c,
ourt plurality accorded some weight to the 1986
(along with Gerber and Gale) concurred in the
’,gislative history, weshall not hesitate to
,~ Book]as far as congressional intent is
:onference committee report, the General
tdation and must fall by the wayside. To
Ls and accord it a deference to which it
~urt echo the notion that we require some
ions before we defer to Blue Book
,~
.,
~
-
~ .....
~
......
discerned from a plain reading of the
w defined the required nexus between an
business, and Congress did not indicate
Judge
and Laro) emphasized that because the regula
without either a specific delegation of authorit3
533 U.S. 218 (2001), the regulations were not
lnc. v. Natural Res. Def. Council, lnc., 467 U.:
... respect proportional to its ’powerto persuz
(1944). United States v. MeadCorp., supra
in relying on courts of appeals decisions uphol
cases.
Depreciation & Amortizatio
"Modern"golf green
greens are not. Rev. Rul. 2001-60; 2001-:
guidance clarifying what golf course land
undertaken in the original construction or rec(
associated with the land and, therefore, the co
However, the costs of land preparation of rn
;z’s dissent (joined by Judges Wells, Swift, Colvin
question were Temporary Regulations promulgated
:e and comment,under United States v. MeadCorp.,
to deference under the standard of ChevronU.S.A.
t984). He wouldaccord "the agency’s interpretation
;uant to Skidmorev. Swift & Co., 323 U.S. 134 ...
237." The dissent concludedthat the plurality erred
regulations because those decisions were pre-Mead
E.
~¢~te
e11~h
~ ~ n~laxr~rlc
a~1nA~r~nrallntl
Atoll
deprecmtect
ove
¯ _ °
"undemanding"standard. O’Shaughnessy v.
¶50,235 (D. Minn. 9/29/01). The S corporatic
glass using a "float process" that involved the
the manufacturing process, requiring periodic
the amountof tin consumedin glass productior
tin to the bath and depreciated the cost of the (
C.B. 19, which was directly on point, the IRS
apply the revenue ruling, because it was not
system, and held that the original volumeof t
completely exhausted by volume and purity los
3.
The Job Creation an(
first-year depreciation of 30 percent for certa:
1 / 1/06. Property qualifying is (1) § 168 proper
software other than computer software covere
improvement property. For passenger automob
~t~ A fhh rT’rl__"
......
L__" ....
1 ......
1" _- ~._ _" ............
claiming the additional 30 percent first-year (
procedure also explains howa taxpayer may e
qualified property.
4.
Proposed guidance
method. REG-103823-99, Guidance on Cost
38025 (5/31/02). The Treasury has published
1996] to govern depreciation under the incoxl
recovery period recomputations where condi
income forecast was erroneous. "Catch-up" de]
§ 263A] is redetermined; contingent amount
performance test. Unlike under other § 167 d~
salvage value is not subtracted from basis b
revaluated annually for accuracy. Incomefore(
with very limited grouping available. The § 46
the property is $100,000or less in the year th~
not applied if forecasted income (and, if app
more than 90 percent and less than 110 of re
epreciable, but costs associated with traditional
3. 587 (11/29/01). This revenue ruling provide~
:ion costs can be depreciated. Land preparation
on of push-up or natural soil greens is inextricabl~
ratable to that land preparation are not depreciable.
teens that are closely associated with depreciable
s or pipes, that the land preparation will be retired~
~se depreciable assets are to be capitalized and
;iable assets with which the land preparation is
d tear" prerequisite for depreciation is an
ssioner, 89 A.F.T.R.2d 2002-658, 2002-1 U.S.T.C.
lich the taxpayer was a shareholder manufactured
a molten tin "bath" that lost volumeand purity in
hment. The amount of tin added each year equaled
the year. The taxpayer deducted the cost of adding
volume of tin. Applying Rev. Rul. 75-491, 1975-2
wed the depreciation. The district court refused to
; and because it predated the ACRSdepreciation
5epreciable because over time it would have been
a recovery period of 20 years or less, (2) computer
197, (3) water utility property, and (4) leasehold
§ 280F(a)(1)(A)(i) limitation is to be increased
used property.
2002-20 I.R.B. 963 (4/29/02). Procedures for
5on provided by § 168(k) [and § 1400L(B)].
to deduct the additional first-year depreciation for
now statutory "nonstatutory" depreciation
;ry Under the Income Forecast Method, 67 E,R.
d proposed regulations under § 167(g) [added
ast method. The proposed regulations allow mid;cessitate it, e.g., facts indicate that the original
in is allowed in a year that basis [determined under
)mputing depreciation. Income forecasts must be
:eciation is generally elected property-by-property,
look-backinterest rules do not apply if the basis of
tck wouldoccur. In addition, the look-back role is
revised forecasted income) for each prior year is
tal forecasted income for the recomoutation year.
¶50,583 (9th Cir. 8/12/02), affg Vanalco In
operated an aluminumsmelting plant that had
36 inches high]. A cell shell had a life of ove
years. The cost of relining a cell was 22.21 pe
aside from the superstructure "by far the mos~
two years in issue, the taxpayer replaced the
million each year, which it deducted as a rep~
holding that the expenses were capital. After
rather than all of them together- was a set
rejected the taxpayer’s argument that the TI
Commissioner, 39 T.C. 333 (1962) (nonacq.
incidental, "the significance of the part under 1
Because each cell completely lost functionali
process was "integral to ’putting’ the cell back
state of functional exhaustion to full functiol
critical componentof the cell and its replacem
the relining process
l, effectively rebuilt the cell,
I
~
1 11
roofing work do:
noergiass sneers ana not asphalt, l ney maae
replacementor substitution of the roof. Petitio~
to prevent the leakage and keep her rental hour,
property, increase its value, or makeit adaptabl,
Credits
1.
The final research er
Increasing Research Activities, 66 F.R. 280 (1/2
computationof the credit under § 4 l(c) and th~
regulations immediately came under witherin~
move, m Notice 2001-19, 2001-10 I.R.B. 7~
actually) announcedthat it will review the "f’m
and requesting additional commentson the rega
to the regulations will be madein proposed fort
be effective until the review is complete, exc
taxpayer-friendly changes to internal-use compl
~mmissioner, T.C. Memo1999-265. The taxpayer
uction cells [each 22 feet long, 76 inches wide, and
ars and its lining had a life of approximatelythree
’the cost of a completely rehabilitated cell and was
;ive part of the cell to replace." Duringeach of the
of approximately 200 cells, at a cost of over $4
lse. The court of appeals affirmed the Tax Court’s
ding that the Tax Court’s holding that each cell -nn~rtv’T~<:ned-c-l~rlxr
~rr’,an~,,~.e
,1,,= ~.,-,,,,-,
41.,....,
tier to determine whether the repair was merel3
the operation of the property is a critical inquiry.’
suit of the deterioration of the lining, the relinin~
original functional state ...[and] restoring it from
ation." The court concluded that "the lining is
ntamountto reconstituting the cell itself." Because
rred a newlife expectancyon the cell.
, T.C. Summary Opinion 2002-117 (9/6/02)
ial Judge Pajek held the $8,000 expenditure for
luctible repair, and need not be capitalized. As set
isting top layers of the roof and recovered it with
uctural changes to the roof....
There was no
y purpose in having the work done to the roof was
srating condition and not to prolong the life of the
t.her use."
F.
cover the requirements to qualify for the credit
revoking the election of the alternative incremel
the Tax Relief and Extension Act of 1999.
¯
The fin
from that in the Proposed Regulations. REG-105
¯
The
regulations that a taxpayer seek to discover in
knowledgeof skilled professionals in the partic
commentsregarding the discovery requirement, t
In orde
undertaken for the purpose of discovering inform
skilled professionals had they performeda reasoI
parncular field of science or engineering [mstea~
a taxpayer actually conduct such an investigatior
example, that trade secrets generally are not
~lations that weren’t. In T.D. 8930, Credit for
e IlLS promulgatedfinal regulations relating to the
:ion of qualified research under § 41 (d). The final
sm from the business sector, and, in an unusual
t/01), the Treasury (Secretary O’Neill, himself,
d~ticm¢hv r~o~ne~d,~rir~the, ,-.,-,n-~,-,-,~,-,,
-
....
1.,,,,,
; ** .. A
v
regulations, including any future changes, will not
the retroactive effective date [12/31/85] of the
tware rules. Taxpayers mayrely on the final roles
ended final regulations said. The final regulations
~r computingthe credit, and rules for electing and
fit, and take into account the Legislative history of
~fions do not changethe definition of gross receipts
63F.R.66503
(12/2/98).
rations retain the requirement in the proposed
m that exceeds, expands, or refines the common
ld of science or engineering.2 But, in response to
regulations makea numberof chan~es.
at IS oeyono me maowleagemat snoula be known to
,esfigation of the existing level of knowledgein the
nologyor science], but there is no requirementthat
:r to claim the credit. The regulations also state, by
the commonknowledge of skilled professionals
(because they are not reasonably available to
owner of such trade secrets). Underlying princ
be novel. Obtaining a patent [other than:
presumption.
¯
The
experimentation in Prop. Reg. § 1.41-4(a)(5)
¯
The i
1.41-4(a)(5) has been eliminated.
¯
The
comments. Reg. § 1.41-4(b).
¯
The e
commencedhas been retained. Theper se exck
¯
Resea
the general conditions for credit eligibility a
regulations retain the definition of internal-use
regulations, but provide a new exception (pl
¯
,
¯ t-
¯
¯
Act, the final re~
aeveiopea primarily for mtemmuse.
¯
The fi
proposed regulations is the high threshold of it
the three-part part high threshold of innovation
respect to intemal-use software is credit eligil
commonknowledge of skilled professionals (
substantial and economicallysignificant.
a.
The new rese:
01, new proposed regulations under § 41 that
the "discovery test" included in the 1/3/01 regu
¯
Treasu
the requirement that qualified research must be
refines the commonknowledge of skilled pro
Rather, Treasury and the/RS believe that the:
purpose of discovering information which
teehncdc+crienl
re+qP.nr~h which m~v mmlifv fr~r t
¯
The p
1.174-2(a)(1) by stating that research is
intended to eliminate uncertainty concerning fl
Uncertainty, for purposes of this requirement,
establish the capability or methodof developin
design of the business component.
¯
The t
conformit to the rule in the legislative history to
the shrinking-back rule may not itself be app]
eligibility.
¯
No set
included in these proposedregulations.
¯
The p]
return positions that are consistent with the prop
b.
The court clo,,
Tax
and Accounting
Software Corp. v. Unitel
/’x" 0 /"l(~//’~tl\
"lOl_ _ r’l~_ _J1 ,r~" "~ /’r 1
,rofessionals not employed,hired, or licensed by the
science or engineering used in the research need not
I patent] raises a conclusive taxpayer favorable
bed four-step
process in the definition
of
liminated.
ent of experimental record keeping in Prop. Reg. §
t of most activities after commercialproduction ha~
retains debugging,but not correction of flaws.
t respect to internal-use software that satisfies boff
three-part test is eligible for the credit. The fma
¯ e and the additional qualifying test in the proposec
:o § 41(d)(4)(E)) under which certain internal-use
.tomers with features that are not yet offered by
tests. Following the Conference Report to the 199~
ended to be used to provide noncomputerservices tc
t is to be used to provide computerservices is nol
ulafions clarify (1) that the three-part test in the
n test, and not a separate requirement, and (2) how
)plements the discovery requirement. Research with
’ if it is intended to exceed, expand, or refine the
led in Reg. § 1.41-4(a)(3)(ii)) to a degree
~dit proposed regulations that are. REG-112991the definition of qualified research by eliminating
66 F.R. 66362(12/26/01).
IlLS have eliminated in these nronosed rem]lntinn~
tls ma partxcular tield of science or engineering.
nero that qualified research be "undertaken for the
nological in nature" is intended to distinguish
trch credit, from non-technological research, which
regulations repeat the requirement from Reg. §
Or the purpose of discovering information if it is
opment or improvement of a business component.
the information available to the taxpayer does not
9roving the business component,or the appropriate
L regulations revise the shrinking-back role to
6 Act. Theseproposedregulations also reiterate that
t reason to exclude research activities from credit
notes that the Service will not generally challenge
ulation.
barn door after the Treasury let the horse out.
,301 F.3d 1254, 90 A.F.T.R.2d 2002-6107 (10th
"discover" new technological information th
which is separate from the product. To meet t]
the process of experimentation can include re:
to achieve a result that it is not yet knowncan
the credit is allowable only wherethe feasibil:
undertaken. Onthe facts, the taxpayer could n(
¯
Note i
Increasing Research Activities, 66 F.R. 66362 (
particularly with respect to the "newknowledge
2.
The AMTcan bite e’
T.C. No. 1 (1/04/02). Section 38(c)(1)
taxpayer’s net income tax minus the greater of
$25,000. This generally this prevents the credi
was not subject to AMTfor the year in questk
the credit if, because the taxpayer claimed the
280C were applied in calculating AMTIto
limitation by § 38(c)]. The Tax Court (Judge
independent tax system’ that operates in parall
calculations .... "Hefound no support in the cc
regular taxable income as modified by § 55(b)(
Act Bluebook on the grounds that the Blueboc
that this is especially true with respect to the 1!
succeeding Congress].
¯
Judge i
AMTwas a separate and independent tax systen
have been inclined to hold for the taxpayer.
¯
This c~
because the same statutory structures apply to
Research Activities Credit.
G.
Natural Resources Deduction
1.
To "produce" or to
Pir~eline Co. v. United States. 2001-2 U.S.T.C.
l~.Zl - anct musare aeprecmoieover 1 ~ years ]
Energy Natural Gas Corp. v. Commissioner, 1",
2.
No second bite at t]
Petroleum v. United States, 50 Fed. C1. 524,
C1. 10/12/01). The government was granted s~
credit. Hydrocarbons produced by means of e
4/2/80 are crude oil, not "tar sands oil." Oil p:
[from the Emergency Petroleum Allocation Ac
viscous hydrocarbon which is not recoverable
methods including currently used enhanced rec
from litigating the meaning of "currently us
previously litigated in Shell v. United States, 1
entitled to the § 29 credit for oil producedusin~
3.
Goodfellow v. CommJ
not entitled to depletion deductions on mat
contracts with the general contractor because
place. Pursuant to these contracts, taxpayer
plied toward the development of a product, 3 but
the research must expand existing knowledge. But
a which the taxpayer tries already-known methods
bed by the methodsbeing tried. On the other hand,
e end result is uncertain at the time the research is
hese standards.
proposed regulations, REG-112991-01, Credit for
L) imposeless stringent requirementsthan this case,
the general business credit may not exceed the
FI" or (2) 25 percent of taxable incomein excess
ffsetting AMT.This case involved a taxpayer who
those tentative minimumtax would have exceeded
~eted jobs credit [now WorkOpportunity Credit] §
deduction for the amount of the credit [before
Ld that in computing AMTIand tentative AMTfor
~ductions required by § 280Cby virtue of a credit
~ductible expenditure must be taken into account
rive minimumtax in that year. Judge Laro rejected
~,ommissioner) that the AMT
was a "’separate and
the RT[regular tax] system and requires separate
e reports for treating AMTIas anything other than
rejected any inference to the contrary in the 1986
ot part of the statute’s legislative history" [noting
Bluebook, which was prepared by the staff of the
,ted that if he had accepted the argumentthat the
)emtes in parallel with regular tax system, he would
implications beyond the WorkOpportunity Credit
’r~
Wr~rk/~r~dlt
q-ln~han l"~n t~r~rl~t
anti
ln.r.ae.rl
.~dits
port" gas, that is the question. Saginaw Bay
!, 88 A.F.T.R.2d 2001-6019 (E.D. Mich. 8/23/01).
:as [Class 46.0] - not in production [Asset Class
an seven years. The District Court described Duke
L253(10th Cir. 1999), as "wronglydecided."
e on the definition of "tar sands oil." Shell
LS.T.C. ¶50,724, 88 A.F.T.R.2d 2001-6448 (Fed.
judgment that Shell did not qualify for the § 29
1 recovery techniques in commercial use prior’to
from tar sands is defined by FEARuling 1976-4
I produced from rock types containing "extremely
aatural state by conventional oil well production
chniques." Shell was barred by collateral estoooel
Z.,IZ., ~,DU~..,II.
l~’~’~’,]:p
WIIII~Ulll~lU.
Llli::IL
OUt~I1Wi::t~b llUL
ae methods.
T.C. Memo.2002-128 (5/28/02). Taxpayer was
excavated from construction sites pursuant to
Lot have an economicinterest in the materials in
rtitted to remove materials excavated which the
general contractors deemedto be unusable; t
taxpayer’s quarry and sold them as crashed rq
no interest in it in the ground, because whel
general contractor, or "unusable" was decidec
entitled to depletion deductions on materials il
4.
Enhanced oil recove
2002-53, 2002-30 I.R.B. 187 (7/29/02). Tile
15 percent of qualified costs for the taxable y
in whichthe reference price of crude oil (dete
(adjusted for inflation); the credit is wholly
adjusted for inflation. For taxable years b
determined without regard to the phase-out for
5.
Percentage depletiol
enhanced for 2002. Notice 2002-54, 2002-30
available
to independent producers and royalt
3
percentage depletion rote on oil or gas that
maximumrate of 25 percent, for each dollar
crashed these materials with equipment located at
; taxpayer made no investment in the rock and had
rock was "usable," and would be retained by the
general contractor after excavation. (Taxpayer was
;d from its ownquarry.)
credit amountis alive and well for 2002. Notice
:for domestic "enhanced oil recovery costs" equals
credit is subject to phase-out for any taxable year
nnAc, r R")O[A’W’O’W’C’~~e~,. *h,~
"
. .........
,4., a,,’~o
oroduced from n
; in 2002, the enhanced oil recovery credit i,
il price increases.
n marginal oil or gas that is production is no1
89 (7/29/02). Percentage depletion [15%] remains
under §613A(c). Section 613A(e)(6) increases
ginal production," by one percentage point, to
:h the "reference price" for crude oil B generally
:ic crude oil B for the preceding calendar year falls
determining percentage depletion for oil and gas
rot.
1.
Is reporting interest i
& Co. v. Commissioner, 254 F.3d 258, 2001-:
6/6/01). The taxpayer advanced over $1 millic
the sibling corporations went out of business,
upheld the Commissioner’s disallowance of 1
transfers did not warrant treating them as loans
fbxed maturity date or repayment schedule, no
and appeared dependent on financial success, ;
thin capitalization and no historical success.
discretion standard, vacated and remanded, sta
OLs
a "super factor" in debt/equity analysis? Cerand
.C. ¶50,518, 88 A.F.T.R.2d 2001-5061 (D.C. Cir.
¯ ee sibling corporations on "open account." When
,ayer claimed bad debt deductions. The Tax Court
actions, finding that the evidence relating to the
~rere no debt instruments or signed agreements, no
trained interest rate, repaymentswere inconsistent
objective likelihood of repayment was low due to
;tract of Columbia Circuit, applying an abuse oJ
follows:
The critical flaw in the tax court’s;
contemporaneous treatment of sums re
payment of "interest," taxable as inc(
Cerand received $414,220 from the tt
from its sister corporations as in part the
Cerand. Over a period of several years,
potations, of which it booked more than
Although the tax court abused its di
significant bit of evidence, we cannc
evidence, it necessarily would have re
knowwhat weight it assigned to the ott
by omitting from its analysis a highly
tat, had the court properly weighed this
different conclusion, because we do not
:nee.
a.
On remand, t
result. T.C. Memo.2001-271 (10/9/01). On
reporting of interest that was not uniform in
percent, with an average far below the going
debtor-creditor relationship. Furthermore, purp
were offset by larger advances. The bad debt d~
2.
Intermet Corp. v. Corr
F.3d 901, 2001-1 U.S.T.C. ¶50,382, 88 A.F.’I
version of § 172(f), state tax deficiencies and
liability losses subject to a 10-year carrybact
Court, not surprisingly, still reaches the same
Judge Gerber found that the somewhat sporadic
or percentage, ranging from 4.7 percent to 11.3
was disallowed.
er, 117 T.C. 133 (10/2/01), on remand from 209
301-1387 (6th Cir. 4/20/00). Under the pre-1999
n state and federal tax deficiencies were specified
Wells followed Host Marriott Corp. v. United
affd, 171 F.3d 655 (9th Cir. 1999) [holding
Securities Act and ERISA
were not specified 1
3.
"Substance over for
but the taxpayerstill loses. Rogersv. Unite(
U.S.T.C.¶50,240(10th Cir. 2/22/02), aff’g 5
(Judge Henry)affirmed the district court’s
recharacterize a purported nonrecourseloan
owned50 percent of the stock of the Kansas
financial difficulties, on July 31, 1990,Kaufm
relent to Fogelmanon a nonrecoursebasis, s.
1991. Simultaneously, Fogelmangranted the~
to purchase Kaufman’sstock on which Fogeh
was the amountdue on the note. The Royals
stock, with the closing deferred to January4,
attemptedauction sale of the entire Royalsfrm
and J.P. Morganopined that Fogelman’s50 pq
1991Fogelmantransferred his stock of the c
- -
in substancea ol
type cases. Herejected the taxpayer’s argume:
waslimitedto tax shelter cases.
4.
NOLsfrom the gr.’
(1/25/02). The husbandtaxpayer, whohad NO]
which time the husband’s NOLshad been tm
Pursuant to Fed. R. Banla’.P. 1016, the banb
1994, as if he had not died. Thehusband’sNC
return for 1994. JudgeLaroheld that under§§
deductible on the joint return. Section 13980
estate’s NOLs;the "debtor" was the husband,e
wasentitled to use themon his final tax return.
5.
"The Northern Light
T.C. Memo.2002-036 (2/8/02). The AMT
incmxed
by a Canadianresident/UScitizen tax
t
of"doubletaxation." Section 59(a)(2) wasin
not apply to invokea treaty override.
limit on NOL
carryovers for AMT
purposesis l
a.
Amendedret
2002-23 I.R.B. 1096 (5/22/02). This revenue
operating losses incurred in 2001 or 2002 m
carryback period enacted in the Job Crea~
taxpayerswhofiled returns for the 2001or 200
carryback, whetherby using the 2-year carryb
172(b)(3) to forgo the NOL
carryback period,
they mayuse the five-year carrybackperiod (iJ
election). See also, REG-122564-02
and T.D.
groups, permitting themto waivethe preacqui:
losses attributable to acquiredmembers.
7.
No bad debt deductio
ownactions to further other business goals.
A.F.T.R.2d2002-1524, 2002-1 U.S.T.C. ¶50,!
ESOP,to., which it- ,-had lent
substantial
sums
¯
¯ .
.
~r~ ,
:ounting and other costs to complywith the 1934
losses].
different doctrine from "economicsubstance,"
281 F.3d 1108, 89 A.F.T.R.2d2002-1115, 2002-1
~p.2d 1235 (D. Kan. 1999). The Court of Appeals
n applying the substance over form doctrine to
eclosure as a sale. KauYman
and Fogelmaneach
~yals S corporation. WhenFogelmanencountered
-
.
.......
./ -:
ion an option to purchasehis stock (and an optior
an option). The option price on Fogelman’sstock
ately exercised the option to purchaseFogelman’s
the fall of 1990, J.P. Morgan&Co. conductedan
:a minimum
of $80,000,000;there were no bidders
tterest wasof only "nominalvalue." OnJanuary3,
on to the corporation, in lieu of foreclosure. The
as an S corporation passed a § 166 bad debt loss
oan wasnot bona fide and that the transaction was
n a loan, JudgeHenryexplainedthat the substance
stance" doctrine that maybe applied in tax shelter~e two were the sameand the proper application
tssiter v. Commissioner, T.C. Memo.2002-25
in chapter 11 bankruptcyin 1994whenhe died [at
t to the banla’uptcyestate pursuantto § 1398(i)].
)roceeding was continued and concludedlater in
survived the banlmaptcyweredeductedon a joint
1) and 1398(i), the husband’sNOLswere properly
les that the "debtor" succeeds to the banla~ptcy
Le wasnot alive whenthe estate terminated,and he
~,1
iullluauuil
tu
3,u
p~it~tzttt
Ul
..El.VIII
OI a I~UL
d not violate the US-Canada
tax treaty elimination
¢" with the treaty andthus the last-in-time rule did
’ker Assistance Act of 2002 extends the NOL
i years ending in 2001and 2002. The 90 percent
fily suspended
for these years.
ust be filed by 10/31/02. Rev. Proc. 2002-40,
tire provides proceduresthat taxpayers with net
pwto apply or elect out of the special five-year
t WorkerAssistance Act of 2002. Qualifyingars without taking advantageof the five-year NOL
od, not claiminga carryback, or electing under§
’e until 10/31/02to file amended
returns in which
:, if appropriate,the revocationof the ~ 172(b~(3~
Jitiull iul tiic .tivc-,v~Fal
l~Ub t.;~c111.,VU~t~K~llOtI lOl-
)d wherethe default is causedby the creditor’s
mericas, Inc. v. UnitedStates, 52 Fed. C1. 41, 89
t. C1. 3/20/02) The taxpayer had established an
:hase shares of its stock. To further a planned
___1__-" ._1_- ....
~__
_
1 I 1-
-.
Court of Federal Claims (Judge Futey) upheld
deduction. First, the court held that immedL
considered to be a solvent debtor, because
paymentson the note. Second, the court treat~
the reorganization plan as the release of a soh
of the creditor. Citing AmericanFelt Co. v. B
bad debt deduction is allowed under the circ~
I.
At-Risk and Passive Activit)
The statute was se
regulations on self-charged managementfe
taxpayer’s S corporation performed manage
taxpayer directly or indirectly was a partner. ]
the S corporation and passthrough passive ded
legislative history, under circumstances anal
(4/5/91), permitting the offsetting of"self-chaJ
offset passive managementfee deductions agaJ
,~ec.tinn
4~q(I~(2~
nrovide~ that the 1R,~ "~hMl
treatment or exl
....
~ .............................
JL"-"
recipient of interest wasallowed, to someexte
interest income. The Comzmssioner
arguedtha
because the IRS had not issued regulations fi
limited the offset. The court (Judge Gerber)
the taxpayer was entitled to offset the p~
managementincome. Such self-charged treatm
also for other appropriate items, and the Com
substance between interest and management
involved were 1993 and 1994.
a.
Well, now, no
"plain meaning" giveth in GRlitz, it taket
U.S.T.C. ¶50,354; 87 A.F.T.R.2d 2001-1731 (z
88 A.F.T.R.2d 2001-5292 (6/30/01). The Couz
in the plain language of IRC section 469 su~
prohibition against a taxpayer’s deducting pas
of"two extremely narrow exceptions to the Ph
the statutory language at issue produces an ou
congressional intent to the contrary" or (2)
’results in an outcome that can truly be char
general moral or commonsense.’" In the eyes (
b.
On remand,
taxpayer relief from § 469 by reason of the For
Unfortunately, petitioners have been sl
to be, most inequitable circumstances.
was designed to limit the use of losses
income generated by nonpassive activ
these practices, Congress recognized
transactions between related taxpayers
income.
’,’s disallowance of the taxpayer’s claimed bad debt
fore its termination, the ESOPshould have been
)een continued, it could have continued to make
3luntary termination of the ESOPin furtherance of
tor from liability to further other business purposes
8 F.2d 530 (D.C. Cir. 1932), the court held that
.
_
Lla~X V° ~.~JItJL~JLJ.JL~JLUIJL~I~ ¯ JL’=IP I .~.s.
JLU,.~ ~f-~/J-d~/UU). 111I:
:rvices for real estate partnerships in which the
tyer received passthrough nonpassive income from
from the parmerships. Based on § 469(/)(2) and
) those in Prop. Reg. § 1.469-7, 56 F.R. 14034
:erest incurred in lending transactions, the taxpayer
:orresponding nonpassive managementfee income.
lgate regulations "which provide that certain items
:rmining incomeor loss from any activity (and the
~rop. Reg. § 1.469-7 permits offsetting of "selfut the IRS did not issue any regulation for self¯ egulations, a taxpayer whowas both the payor and
Tset passive interest deductions against nonpassive
:payer could not set off the deductions and income
:barged items other than interest and had thereby
the substantive set-off rule was self-executing and
nanagement deductions against the nonpassive
congressionally intended not only for interest, but
er did not argue that there was any distinction of
ithin the self-charged regime. The taxable years
is taxpayer and not in the Fourth Circuit. What
tin
,g-lillman_
Rovor~od_
950 F "~d 99R 913A1_1
peals (Judge Hamilton) reversed, finding "nothing
aat an exception to IRC section 469(a)’s general
Iivity losses from nonpassive activity gains exists
y paid a managementfee to himself." The court
n language of the statute could prevail only if one
:ing Rule" applied: (1) "whenliteral application
mt is demonstrably at odds with clearly expressed
sral application of the statutory language at issue
t as absurd, i.e., that is so gross as to shock the
urt, neither of those situations was present.
C. No. 17 (4/9/02).
Judge Gerber, in deny~g
uit’s decision, stated
’the reach of section 469 in, what appears
,though section 469 was designed to stop
would be inappropriate to treat certain
:g rise to passive expense and nonpassive
be provided for in the regulations. In ]
self-charged interest. Although more t
section 469 and 10 years have passed
proposed, no action has been taken to
to self- chargeditems other than intere.,
gulations were proposed that provided for
years have passed since the enactment of
e self- charged regulation for interest was
Lnequity that maybe suffered with respect
Although we find petitioners’ plight ]
Circuit has held that the courts are inca
)le, the Court of Appeals for the Fourth
c.
"So there, M]
Losses and Credits-Treatment of Self-Charge(
Final regulations under § 469 on self-charged
extend self-charged treatment to items beyon(
469(c)(7) to real estate professionals. (Section
The preamble states:
cnargea
regulations, Congress considered the
transactions and enacted specific reli
professionals for taxable years beginn
legislative history of section 469(c)(7)
estate transactions necessary or desira
complexity of a self-charged rule in fl
because that change substantially re&
would benefit from a self-charged rule
self-charged treatment to other transacti
2.
A rule that usually
Commissioner, T.C. Memo.2001-296 (11/07/I
short term contracts- less than seven days- is
rental activities under § 4690)(8) and Reg. §
are not taken
into1 ¯ account
in
determining the t~
g’.
~ ,41 f’f~t /_’%/’,w"T\ ....... a._"_
_ JL1
taxpayer’s personal services hours for the year]
3.
The IRS consistently’
547, 2002-1 U.S.T.C. ¶50,219, 89 A.F.T.R.2d
and Mrs. Kx~owskiowned an interest in a bui]
organized as a "C" corporation of which Mr.
received all of his earned income. The Knako~
against which they deducted passive activity 1,
recharacterize the rental incomeas active incor.
Circuit affirmed the Tax Court’s decision uphc
§ 1.469-5T(f)(3), which provide that participat
other spouse in the activity during the taxable
as active and the passive activity losses were di
4.
Shucks, it doesn’t
disposition for purposes of § 469(g)(1)(A).
explains the effect under § 469 of the Internal ]
2001, pursuant to an election under § 31 l(e)
tan!" T.D. 9013, Limitations on Passive Activity
af Income and Expense, 67 F.R. 54087 (8/21/02).
f income and expense. The regulations decline to
;t because Congress in 1993 provided relief in §
r) is applicable to years beginningafter 12/31/93.)
to identify other situations in which self,mmentators suggested that self-charged
olving rental real estate activities, such as
5es. After publication of the proposed
t of section 469 on rental real estate
;eetion 469(c)(7) for certain real estate
,~r 1993. There was no indication in the
lgress considered additional relief for real
)reover, there is less justification for the
after the enactment of section 469(c)(7)
,~ numberof real estate transactions that
’dingly, the regulations do not extend the
olving rental real estate.
fh~
f~lvn~v~r
h~ ~,
d~rk
~id~
R~il~v
v
;d by Reg. § 1.469-1T(e)(3) from the definition
)(3). As a result, hours devoted to such an activity
’s participation in a real estate rental business for
passive activity rules [material participation for
tsinesses that constitutes more than one-half of
this issue. Knakowskiv. Commissioner, 279 F.3d
7 (7th Cir. 2/5/02), aff’g 114 T.C. 366 (2000). Mr.
tt they leased to Kxukowski&Costello, a law fu’m
~,ski was a sole shareholder and from which he
ated the rental income as passive activity income, "
he Commissionerapplied Reg. § 1.469-2(f)(6)
Lisallowed the passive activity losses. The Seventh
e validity of Reg. § 1.469-2(f)(6) and Temp.
il
Deemed sale election will not constitute
a
)02-29, 2002-17 I.R.B. 797 (4/29/02). This notice
:Code of a deemedsale of property on January 1,
xpayer Relief Act of 1997 (TRA97). A question
had arisen whether electing a deemed sale
disposition of that property under § 469(g)(11
Job Creation and Worker Assistance Act
disposition for purposes of § 469(g)(1)(A).
to-market election maybe passive activity gr,
but the election does not otherwise affect the
under § 469.
IIl.
INVESTMENT
,perty under § 31 l(e) of TRA97 is treated
a technical correction to § 311 (e), § 414(a)(2)
clarifies that a mark-to-market election is not
gain included in gross income by reason of a mark.
me that can be offset by passive activity deductions
nation of the passive activity loss that is disallowec
GAIN
A.
Capital Gain and Loss
The 18°/$ rate and
I.R.B. 488 (11/13/01). An individual who
treat his principal residence as being both soh
order to secure the 18%capital gains rate for
thereafter- may not exclude from gross incc
result was enacted statutorily in § 414(a)(1)
a.
Notice 2002
original return, excluding extensions.
2.
Dad, the accommod:
about sonny boy? Friedland v. Commissionel
a bank appreciated stock in a closely held co
bank. Whenthe son defaulted on the loan,
Vasquez held that the taxpayer had no amounl
§ 1.1001-2(a)(1) treats as an amountrealized,
discharged by the transfer of property- not th
v. Commissioner, 50 T.C. 803 (1968) [guarant
from a debt].
3.
You have to transfer
Baker v. Commissioner, 118 T.C. No. 28 (5/2!
sold policies exclusively for State Farm as
developing clients, hiring employees, and pa3A
State Farm’s property to it, but transferred
"terrninntinn
nzvrnent" -- the incllrnnc’~
nnllr-la
capital gain treatment w~mrespect to me terr
the telephone number and at-will employm,
goodwill, because he transferred nothing to wl
was ordinary income without regard to the por
4.
The IRS has got you
sales results in gains in earlier year and 1(
(7/15/02). If stock to close an existing short:
date in one year and a settlement date the foil,
settlement date, pursuant to § 1259 any gain
stock has fallen in value- is recognized in
acquired, not the later year the short sale is cl
stock has risen in value - § 1259 does not app
84, 1993-2the loss is realized in the year of th,
5.
Arkansas Best didn’
statutory definition of "capital asset." Davi,,
wonthe California lottery and received the ri,
taxpayer sold a portion of his fight to eleve
ee step-up? No way! Rev. Rul. 2001-57, 2001-4
Ler § 31 l(e) of the TaxpayerRelief Act of 1997
lcquired for an amount equal to FMVon 1/1/01 Lcquiredon or after that date and held for five year
of the gain recognized from the deemedsale. Thi
) Creation and WorkerAssistance Act of 2001.
02-35 1.1LB. (8/12/02). Instructions on how
i 311 (e) of the TaxpayerRelief Act of 1997 to trea
m that date, in order to reduce the § 10a) rates fo
held for more than five years thereafter. Notes tha
ended return within 6 monthsof the due date of th~
tedgor, escapes tax on the foreclosure, but wha
/lemo. 2001-236(9/10/01). The taxpayer pledged
n to secure an indebtedness of his adult son to the
payer’s stock was transferred to the bank. Judg~
d on the transfer and thus recognized no gain. Reg
amountof the taxpayer’s ownindebtedness that i,
at of indebtedness of a third party - citing Landrett
not realize CODincome when debtor is dischargec
~ther business asset before you can sell ¢roodwill
lepencient contractor, operating his own agency,
,’nses. Uponretirement, the taxpayer returned all of
~ntifiable assets of his own, and he received a
d written were assigned to a successor agent. (The
Le Tax Court (Judge Panuthos) denied the taxpayer
payment. He transferred no assets that he owned;
:ionships were not assets. He could not transfer
,dwill could attach. The entire termination payment
t allocable to a covenantnot to compete.
:and going. Year-end straddle coverage of short
later year. Rev. Rul. 2002-44, 2002-28 I.R.B.’ 84
, e.g., from a short sale, is purchased with a trade
.~ar, e.g., a December
31 trade date and a January 5
t with respect to the short position- because ~e
of the trzcle,
date on whiah th~ ctnr-1; t~ t-,-,,,,~,-
~o
ursuant to Keg. ~ l.lz~-l(a)(l)
and Kev. Rul.
9he death knell for all judicial exceptions to the
artissioner, 119 T.C. No. 1 (7/03/02). The taxpayei
) annual payments of $679,000. Subsequently, the
fourteen remaining payments for approximately
Lake, Inc., 356 U.S. 260 (1958); Commission~
United States v. Midland-Ross Corp., 381
opinion.4 In holding that the taxpayer realize
Court specifically held that the "right to rec
capital asset within the meaningof section 1Z
division. [CompareMcAllister v. Commission
(1947).] In this regard, footnote 9 of the Davis
It is well established that the purpose
treatment only in situations typically
accrued over a substantial period of ti
of the entire gain in one year. * * * [
U.S. 130, 134, 80 S.Ct. 1497, 4 L.Ed.
103, 106, 53 S.Ct. 74, 77 L.Ed. 199 (1
a.
United States
Summary
judgment
was entered in the go
_
__
Section 1031
1.
The erosion of the
exchanges. REG-107175-00, Definition of ]
Amendmentsto Reg. § 1.1031 (k)-I (k)(4)
controlled group that includes an investment
disqualified person [with respect to deferrec
because the investment banking or brokerage f
a two-year period ending on the date of the
Proposed effective date: 1/17/01.
a.
Nowfinal. T.I
Reg. § 1.1031(k)-l, 67 F.R. 4907 (2/1/02).
2.
Ruling guidelines for
Proc. 2002-22, 2002-14 I.R.B. 733 (4/8/02),
Service has announced the conditions under
undividedfractional interest in rental real prop.
Procedure irnooses 15 condition.~ 5 for nhtzin
lette MotorTransp., Inc., 364 U.S. 130 (1960); and
(1965), citing footnote 5 of the Arkansas Best
ary income, not capital gain, on the sale, the Tax
are annual lottery payments does not constitute a
aout placing much,if any emphasis on the temporal
F2d 235 (2d Cir. 1946), cert. denied, 330 U.S. 826
states:
,..,,.
thus to ameliorate the hardship of taxation
sioner v. Gillette MotorTransp., Inc., 364
(1960) (citing Bumet v. Harmel, 287 U.S.
innis, 2002-1 U.S.T.C. ¶50,494 (D. Ore. 5/29/02)
it’s favor, holding that gain recognized on the
lump-sum cash payment was not capital gain, bul
C.
Footnote5 states:
Petitioner mistakenly relies on cases in
definition of capital asset, has "construed
items or accretionsto the value of a capital
thoughthese items are property in the brc
MotorCorp.("capital asset" does not inclu
rental valueof its facilities); P. G. Lake("c
paymentfights); Hort ("capital asset" dc
unexpiredportionof a lease). Thisline of
not include claims or fights to ordinary
Petitioner sold capital stock, not a claimto
5 Theconditions underwhichthe IRSwill consider:
propertyis not an interest in a businessentity, i.e., a
the co-ownersmust hold title as tenants in common
mustact and hold themselvesout as co-ownersand
nronertv_any ~le_ le~e hlnnko.t e.n~llrnhr~n~hiri
Steagall Act changes the face of like kind
fled Person, 66 F.R. 3924 (1/17/01). Proposed
erally provide that a bank that is a memberof a
g or brokerage firm as a memberwill not be a
ind exchanges through an intermediary] merely
provided services to an exchange customer within
r of the relinquished property by that customer.
Definition of Disqualified Person, amendmentsto
:o transfers oforooertv madeon or after 1/17/01.
amg Key. t’roc, zuuo-4o, 2002-2 12.15. 4315. The
it will consider a request for a ruling that an
:ot an interest in a business entity. Section 6 of the
aling, with a facts-and-circumstances alternative
4
ais Court, in narrowly applying the general
Lsset’ to excludeproperty representingincome
mselvesproperly attributable to income,"even
of the word.MidlandRoss. See, e.g., Gilette
msationawardedtaxpayerthat representedfair
set" does not include proceedsfromsale of oil
aclude
payment
to lessor for cancellation of
¯
.o
............
.t
.
income.(citations abbreviated)
ruling that an undividedfractional interest in rental real
tip interest, are limited; among
the requirements
are: (1)
:al law; (2) not morethan 35 co-owners;(3) co-owners
tners; (4) co-ownersmustretain the right to managethe
nana~er or management~ontr;mt rn~t he nn~nirnn~lv
Under § 1.761-1(a) and §§ 301.7701
does not include mere co-ownership c
to keeping the property maintained, in
venture join together capital or set’v5
enterprise and of sharing the profits aa
business entity) is created. Furthermo
participants are not derivative of thei
relationship toward a commongoal,
as a partnership (or other business entil
D.
1033
Fire, wind, and pest
Commissioner, 118 T.C. No. 7 (2/12/02).
maturity by reason of various casualties [win
those trees into its usual products. Taxpayersq
of qualified replacement property exceeded tl
Section
,,.1,.,,,,-,.,.41~,,41.,..., ,..,-,.,1,.~,,,,~.,.~.-.,~4
,.,..r,,.,..,-+-,
,1+1-,.-.,..,,.,,~.~,,.~,.,
processing. The
wa~u
wxuxuuL
tgh 301.7701-3, a federal tax partnership
v£ where the owners’ activities are limited
’ented or leased .... Wherethe parties to a
the intent of conducting a business or
s from the venture, a partnership (or other
¯ e the economicbenefits to the individual
nership, but rather comefrom their joint
nership arrangement will be characterized
a.tiy
xt~t~x~x
/Jlu~,~xLt~j.
x.t~
x~o
taxpayers were "prematurely forced to salvage
Rul. 80-175 rejected imposing a requirement
voluntary sale. Judge Gerber stated that the p~
been "relatively small or resulted in a nominal
He further stated that if taxpayer’s "salvag
taxpayers[,] that is not a reason for denial of rel:
Section 1041
1. Is it property or is it:
037 (2/8/02). Pursuant to the taxpayer’s divoro
amountsequal to the interest and principal pa,.
ownedby her husband. [The facts indicated thai
corporation, but the parties and the court analy:
there was no transfer of beneficial ownership J
apply to treat the note as transferred to the w
carrvnver ha.~i~ in the nnte The navrnent~ recei
wing tax benefits. Willamette Industries Inc. v.
was forced to harvest some of its trees before
torm, wildfires, insect damage], and it processed
defer under § 1033 [presumably because the cost
of the downed timber, but the opinion does not
ain on the sale of the resulting inventory equal to
lately after the casualty and before salvaging and
abe deferral was permitted under the holding and
which timber downed by a hurricane was sold for
hat in both the ruling and the instant case, the
r use) the damagedtrees," and stressed that Rev.
conversion must be directly into cash without a
y that the partial damageto the trees might have
of reduction in gain is not a reason to deny relief."
:s were more successful than [those of] other
E.
representea Interest on tile unclerlylng note, ,
husband as having transferred to the wife a i
schedule identical to the underlying note.
2.
A sensible ruling tha~
on the transfer of vested stock options and,
divorce. Rev. Rul. 2002-22, 2002-19 I.R.B. :
transfers interests in nonstatutory stock options
undividedinterests in the property, (8) all co-owl
propertyin proportionto their undividedinterest.,
activities of their agents, mustbe limited to tho
maintenanceof rental property, (10) management
subjectto renewalno less often than annually,(11 )
respect to the propertyof the undividedinterests mu
the syndication, and (13) any paymentsfor acquisit
ownershipinterest (or services rendered) and may
tho
n,xrnor~
m~v ~ntor
int¢~
~ r,,_r~xtnorChin
~onvoomor
? Y kwich v. Commissioner, T.C. Memo. 2002asband was obligated to remit to her, as received,
received on a promissory note from a third oartv
Lssues as lz me nusoana owneome note.l tsecause
ote itself to the taxpayer-wife, § 453B(g) did not
§ 1041 transaction, and thus she did not take a
aa the husband were excludable by the wife under
he underlying note; to the extent the payments
did not apply. In essence, the court treated the
h a principal amount, interest rate, and payment
§ 1041 over the assignment of income theory
onqualified deferred compensation incident to
;/02). This ruling held that: (1) a taxpayer v~ho
~qualified deferred compensationto the taxpayer’s
t share in any blanket indebtedness encumberingthe
:rage agreementswith respect to the property must be
on the propertymustbe bonafide, (12) any lender with
.qated to all owners,lessees, managers,and sponsorsof
e interest mustreflect the fair marketvalue of the coon the profits derivedfromthe propertyby any person;
n~ cross rights of first refusal at fair marketvalue and
former spouse incident to divorce is not requir,
and (2) the former spouse, and not the taxpayc
the former spouse exercises the stock optiol
available to the former spouse.
¯
The rt
doctrine in divorce cases to tax the transferor SlZ
from the property transferred in the divorce wol
spouses. That tax treatment would impose su~
such property and thwart the purpose of allow
propertywith as little tax intrusion as possible. I
to alter the principle established in the pre-1041
Cir. 1998)] that the application of the assigm
context of divorce." The ruling also cited Hemp
by wayof analogizing § 1041 to § 351.
This ruling does not apply to transt
connection with divorce. This ruling
Litlt ,11.,~. Alu~.,A
:lude an amountin gross income upon the transfer,
luired to include an amount in gross income when
hen the deferred compensation is paid or made
ted, "Similarly, applying the assignment of income
ten the transferee spouse ultimately receives income
~te the purpose of § 1041with respect to divorcing
burdens on marital property settlements involving
v
ach as Meisner[v. United States, 133 F.3d 654 (8th
income doctrine generally is inappropriate in the
Inc. v. United States, 490 F.2d 1172(3d Cir. 1974),
property between spouses other than in
es not apply to transfers of nonstatutory
,n rights, or other future incomerights to
d at the time of transfer or to the extent
are subject to substantial contingencies
v. Commissioner, 92 F.3d 957 (9th Cir.
1996). [Emphasis added]
¯
This ru
held that § 1041did not apply to accrued interes
cashed in, was based on § 454 rather than on assi
IV.
COMPENSATION ISSUES
Fringe Benefits
1.
T.D. 8878, Tax Treat[
Reg. § 1.125-4 permits a mid-year cafeteria p
insurance by an employee who has a change
dependents, employment,work site, etc., durix
elections between cash or qualified tax free ben
a.
REG-117162-9
Cafeteria Plans, 65 F.R. 15587 (3/23/00). Prt
rifled that Rev. Rul. 87-112, 1987 C.B. 207, which
nsferred U.S. savings bonds that were subsequently
of incomeprinciples.
A.
elections with respect to medical and group ten
b.
T.D. 8921, 66
under § 125 on midyear election changes mod
to elect to increase or decrease group-termlife
of-status event, including birth, adoption, or de~
e.
T.D. 8966, Ad
66 F.R. 52675, 10/17/01). The Treasury has
changes made by the Family and Medical Leaw
2.
Fundamental change:
2001-10, 2001-5 I.R.B. 459 (1/9/01). This noti,
contracts. It notes that the P.S. 58 rates no 1
protection.
The Notice requires that employer
1
under § 7872, (2) investments by the employc
Service had long rejected interest-free loan tr~
split dollar life insurance, but the enactmentot
used as a valid model. The alternative is to h
¯ =.v,.,..1..... ~,-, "
"
,-.
.....
,; .... ,~11
Cafeteria Plans, 65 F.R. 15548 (3/23/00). Final
:tion
with1 respect
to"_~__1
medical
and group term
life1
.....
1 ....
_ _ _ " "~
....
_a__~___ _ _
1
Ly at the beginningof the plan year.]
ce of Proposed Rulemaking, Tax Treatment of
amendments to various subsections of Regs. §§
’.istance and adoption assistance the availability of
;tams, under the same terms that apply to mid-year
surance under Reg. § 1.125-4.
37 (1/10/01). The final cafeteria plan regulations
vlarch 2000 final regulations to permit employees
ce or disability coverage in response to a changeto Final Cafeteria Plan Regulations Under § 125,
regulations relating to cafeteria plans that reflect
1993 in Q&Aform.
treatment of split-dollar life insurance. Notice
:s be consistently treated as: (1) interest-free loans
, contract, or (3) payments of compensation. The
of the employer investment in the cash value of
in 1984 enables interest-free loan treatment to be
true cost of insurance protection reflected in the
nits,
el tn nrn~t’]~
r~t~
~t whio.h
enrnnnrnhl~,
t~rm
past). This notice revokes Rev. Rul. 55-747,
maynot be used.
a.
IRS revokes
require taxation under one of two mutual
(1/3/02), revoking Notice 2001-10, 2001-5 I.l~
regulations providing comprehensive guidanc
arrangements, thee regulations will provide in
¯
If the
insurance contract, then the employerwill be m
economicbenefits to the employee. A transfer c
under § 83, but an employerwould not be treat
purposes of § 83 "solely because the interest ¢
contract cause the cash surrender value to exce~
effect of leaving that issue unresolved, and wot
wouldbe taxed under § 83 on the transfer of a b
¯
If the
paid by the employer would be treated as a
t,4;a./~cd,
t..t~J1
! takltl~i.~.el
¯
Effecti
publication of final regulations. Provisions for
1/28/02 (P.S. 58 is OK)and for arrangements
b.
Notice 2002-8
proposed regulations that provide guidance on
life insurance arrangements, 67 F.R. 45414 (7
effective for split-dollar life insurance arran
regulations in the Federal Register.
c.
Crackdown
designed to understate the value of benefits
36 I.R.B. (8/19/02). The IRS held that neither
published premiumrates maybe relied on to w
"purpose of establishing the value of policy!
reverse split-dollar arrangements, one party v
various techniques to confer policy benefits otk
¯
Accor{
after Treasuryofficials read a 7/28/02 story in t]
had developed this technique based upon a 1996
3.
Employers may stru¢
cash the optional choice. Rev. Rul. 2002-27,
provide for automatic enrollment in emp
commensuratesalary reduction, subject to an
health insurance and receive full salary. Such
non-automatic option. The plan also mayprohil
insurance unless he proves that he has other me
¯
The ru
use if it permits an employeeto elect cash in li<
certify that he or she has other health coverage.
4.
Pass the cafeteria tr
Followingan asset purchase and sale of a porti¢
whohad elected to participate in uninsured hea
.B. 228, and provides that, after 2001, P.S. 58 rates
.’ 2001-10 and will for future arrangements
lsive regimes. Notice 2002-8, 2002-4 I.R.B. 398
. Whenthe Treasury and Service publish proposed
Ling the tax treatment of split-dollar life insurance
ment-related arrangements:
cer is formally designated as owner of the life
ving madea transfer of the cash surrender value for
turnings credited to the cash surrender value of the
,rtion thereof payable to the employer."This has the
ge the position in Notice 2001-10that the employee
interest in the cash surrendervalue.
=e is formally designated as owner, the premiums
r loans by the employer to the employee - if the
race proceeds or otherwise. The loans are subject to
he § 7872 compensation-related below-market loan
,~ employer, then the premiumspaid are treated as
arrangements entered into after the date of
torrent life insurance protection entered into before
:o before the date of publication of final regulations.
ied into proposed regulations. REG-164754-01,
ome, employmentand gift taxation of split-dollar
Carries out the concepts of Notice 2002-8. To be
entered after the date of publication of final
-dollar life insurance arrangements that are
ameor gift tax purposes. Notice 2002-59, 2002minm rate.~
in Table
9001 nor th~ inc:llr.r’c
lr~xxr~r
to which another party may be entitled." Under
ght to current life insurance protection may use
current life insurance protection on another party,
of other policy benefits "distorts the income,
nt."
?ax Notes, 2002 TNT161-4, this notice was issued
York Times, which stated that Jonathan Blattmachr
letter ruling [identified as LTR9636033].
feteria plans to force-feed insurance and make
) IRB 925 (5/20/02). A § 125 cafeteria plan
dy group health insurance coverage with a
provision whereby the employee may decline the
may also include family insurance coverage as a
aployee from electing out of employee-onlyhealth
........................
j~
..........
j
,up health coverage only if the employeeis able to
. Rul. 2002-32, 2002-23 I.R.B. 1069 (6/10/02).
eller’s business, the seller’s transferred employees
expense flexible spending arrangements under the
nnllnt.~
nnd m~.cli~l
roimhllr¢~m~nt¢
ffr~m
o-r~ee
125 cafeteria plan, at the same level of cove
buyer.
5.
Health reimbursem
a.
Excludable
of unused amounts. Notice 2002-45, 2013
treatment of employer-provided medical car
arrangement" (HRA). An HRAis a plan th~
pursuant to salary reduction election or other
which is reimbursement to employees [or ce
the employee, and the employee’s spouse
maximumdollar amount for a coverage perio
the end of a coverage period is carried for
subsequent coverage periods. An HRAthat,
health plan, and coverage and reimbursemem
106 and 105. An HRAmay allow a particil:
later coverage periods because the requireme
are generally not applicable to HRAs.To ret
......
a. 1 ....
1_1 ....
¯
P
1 ¯
¯
..,
not aepenaent on salary rectuctlon, available 1
and their spouses and dependents, under med:
even though amounts unused in earlier years
permitted under a § 125 salary reduction plan].
6.
Well, duh! Rev. R
reimbursed under a self-insured medical expe
an employeeprior to the establishment of the
under § 105(b).
B.
flout interruption, after becomingemployeesof the
mgements.
reimbursement arrangements" with carryovers
LB. 93 (7/15/02). This notice describes the tax
se reimbursements under a "health reimbursemen!
paid for solely by the employer and not provided
:ler a § 125 cafeteria plan, (2) the only benefit from
rrn~r ~rnnlaxr,~e]
¢,-w. m~A;r,~l .v...o.o
; ......
,4 L.
Ly unused portion of the maximumdollar amount a
increase the maximumreimbursement amount i]
~se conditions is an employer-provided accident o:
eluded from the employee’s gross income under §!
arry forward unused reimbursement allowances t(
flexible spending arrangements (FSAs) under § 12.’
aption from the § 125 FSArequirements, the
y or indirectly paid for pursuant to salary reductior
ying lIRA. Rev. Rul. 2002-41 2002-28 1.1LB. 7.’
?loyer financed medical expenses reimbursements
’deductibles for employees and retired employees
lrance provided pursuant to a § 125 cafeteria plan
ver and are available in future years [which is nol
)2-58, 2002-38 I.R.B. 541 (9/23/02). Amounts
abursement plan for medical expenses incurred by
not excludable from the employee’s gross income
Qualified Deferred Compen~
1.
The 2001 Act made e:
pension plans. The unindexed benefits limit
$90,000 to $160,000. The unindexed contrib
from $30,000 to $40,000.
¯
Specia
contributions to defined contribution plans by e:
’lans
: technical changes in the rules governing qualified
( 1 ) Guid:
42 7 (10/16/01), modifying Rev. Rul 98-1. Prox
limitations of § 415 enacted as part of the 20(
and answers on: (1) Benefit increases that 2
(2) Plan amendmentsthat may be adopted
effect of the increased § 415 limitations on o
provision of EGTRRA
is taken into account fo
(2)
How
142499-01, Proposed Regulations on Catch-ul:
regulations would implement new section 41,
violating any provision of the Codesolely bec
catch-up contributions. Catch-up contributio~
eligible participant that exceed an otherw
contributions under the plan, but only to the e~
contributions permitted for the taxable year.
information on howto report participants’ ele
totals renorted for code.~ 13 thrnll~h I-I ~nd .q
§ 415 changes. Rev. Rul. 2001-51,2001-45 I.R.B.
dance in Q&A
form relating to the increases in the
;pecifically, this revenue ruling provides questions
tided as a result of the increased § 415 limitations;
account the increased § 415 limitations; (3) The
lification requirements; and (4) Howthe "sunset"
es of §§ 412 and 404.
y the "ketchup" at the 2001 Act picnic. REG,utions, 66 ElL 53555 .(10/23/01)..These proposed
¯ ~n~rl r-z~ntrihl,*;~n nl~r~eh,~ol,--,-,,
; .......
,4 ¢-..,..~.
in new § 414(v) allow increased elective
,~s age 50 or older. Employeesage 50 and older may
for 2002, increasing in $1,000 annual increments to
rally are elective deferrals made by a catch-up
[icable limit and that are treated as catch-up
y do not exceed the maximumamount of catch-up
Announcement2001-93, 2001-44 I.R.B. 416, for
nsion deferrals on Form W-2, Box 12, and in the
401 (a)(17) [and related sections], increasing
years beginning on or after 1/1/02, even if th
before 1/1/02; (2) § 416, regarding determioati,
after 12/31/0, even if the determination date is
to hardship distributions under § 40 l(k)(2)(B)(i
to effective for calendar years beginning after 1
3.
Sample plan amendnl
IRS has published sample plan amendments t~
EconomicGrowth and Tax Relief Re_conciliatio
4.
Prolong the GUSTo.
Service has extended the GUSTremedial ame
retirement plans to 2/28/02. For plans affected
6/30/02, with a possible further extension to 12J
"GUSI
AgreementsAct, Pub. L. 103-465; (2) the Unifo:
of 1994, Pub. L. 103-353; (3) the Small Busin
Taxpayer Relief Act of 1997, Pub. L. 105-34; (
w
6586 (D.C_Cir.
the group entitled to bring an action under § 74"
a qualified plan [except in cases involving plan
to challenge the IRS’s favorable determination
been adversely affected.
6.
Flahertys Arden Bowl
¶50,770, 88 A.F.T.R.2d 6850 (8th Cir. 11/16/011
corporation [57% ownedby participant]. Even 1
their ownaccounts from the definition of fiduc
the corporation was a disqualified person under
upheld, because participant followed the advice
violate ERISAor cause liability under {} 4975.
¯
Rev. Pr~
that maybe taken to ensure the qualified stattu
employeeleasing organizations (also called profe
"Worksite Employees," where there may be unce
c~rcrItni7ntion The PF.I") retirement nlan mayeitl
"/.
K.P_,U-1U3~3-~, L:O
CompensationPlans, 67 F.R. 30826 (5/8/02).
Reg. §§ 1.457-1 through 1.457-12] to provide g
governments and tax exempt entities deferred
changes made to § 457 by the Tax Reform t
1996,the Taxpayer Relief Act of 1997, the Econ
the Job Creation and WorkerAssistance Act of’
8.
They’re taking all
distributions
from plans and IRAs. REG-130z
Retirement Plans, 66 F.R. 3928 (1/17/01). Pro
simplify the calculation of minimumrequired d
retirement savings vehicles. The changes in t!
uniform lifetime distribution period. The regula
calculate his or her yearly MRDamount by plu
his or her retirement account or IRA. The t
expectancy, determine a designated beneficiar.
incidental death benefit rule: The proposed regu
~ensation limit [to $200,000] - effective for plan
lses annual compensation for a period beginning
)-heavy status- effective for plan years beginning
/1/02, and (3) revisions to the regulations relating
; mandated by § 636(a) of EGTRRAregulations
atice 2001-57, 2001-38 I.R_B. 279 (9/17/01). The
m qualified plans to the changes effected by the
: 2001_
period under § 401Co) of the code for qualified
’,eptember11 th terrorist attack, the extension is to
s to the following:
(1) the Uruguay Round
rvices Employmentand ReemploymentRights Act
Protection Act of 1996, Pub. L. 104-188; (4) the
tternal RevenueService Restructuring and Reform
newal Tax Relief Act of 2000, Pub. L. 106-554.
3d 1064, 2001-2 U.S.T.C. ¶50,737, 88 A.F.T.R.2d
¯ The Court of Appeals affirmed the Tax Court’s
ties" role, which excludes former employees from
nga declaratory judgment regarding the status of
fions]. Accordingly, the taxpayer lacked standing
ng a plan amendment, even though he may have
Commissioner, 271 F.3d 763, 2001-2 U.S.T.C.
triam). Participant’s plan madeloans to taxpayer
ERISA§ 404(c) excepted participants who direct
~975 does not contain any parallel provision and
975 excise tax provisions. But penalties were not
.~omey who advised him that the loans would not
mea conmoutlon rettrement plans maintained by
~mployerorganizations or PEOs)for the benefit of
Ls to whetherthe employeris the PEOor the client
-onverted into a "multiple employer plan" or be
ion Deferred
Under Eligible
Deferred
;ury has promulgated proposed regulations [Prop.
on compensation of employees of state and local
§ 457(d). The proposed regulations reflect the
986, the Small Business Job Protection Act of
"owth and Tax Relief Reconciliation Act of 2001,
d other legislation.
n out of calculating
minimum required
nd REG-130481-00,Required Distributions from
egulations under 8 401(al(ql ete qllhqtnntiallv
~seu regulauons are oasea on me concept or a
~vide a single table that any recipient can use to
his or her age and the prior year-end balance of
aainates the need to elect recalculation of life
," required beginning date, or satisfy a separate
¢ill resu!t in reducing MRDs
for the yast majority
made over the life expectancy of the benef
participant’s death.
a.
Regulations
§ 401(a)(9), 67 F.R. 18988 (4/17/02).
distribution rules for separate accounts pro
calculation of the MRDduring the individual
final regulations to reflect updated mortality
determining the designated beneficiary to Sepl
death (to permit sufficient time to calculate
regulations provide a number of changes to
reflected the 1987 proposed regulations. Effecl
minimumdistributions for the 2002 year, taxp
regulations, or the 1987 proposed regulations.
b.
Just "snap o:
new MRDregulations. Rev. Proc. 2002-29,
provides model plan amendmentsfor plans to
§ 401(a)(9)
minimum
distribution rules.
¯
r..
I /1 /~,,-~
revenue procedtu
ires revenue procedure updates the c
sponsors of retirement plans that , are iT
403(a), § 403(b), or § 408(k), but
time. This system, the Employee PI~
permits plan sponsors to correct thes,
employees with retirement benefits on
are the Self-Correction Program ("SC]
and the Audit Closing Agreement Progl
It goes
eligible plans should be encouragedto establis]
these plans are operated properly in accordance
C.
Nonqualified Deferred Comp
Although the exercise
income, it does result in wages for FICA/ ]
provided in Notice 2001-14, 2001-6 1.1LB. 5,
31.3401(a)- 1 (b)(9) wouldprovide that the
receives wages for FICAand FUTApurposes t
because no gross income has been received. T
market value of the stock over the amounl
convenience" permitting employers to deem fl
specific period of time.
a.
Notice 2001-7!
requested commentson proposed "rules of ad
the wages to have been paid on a specific dat~
could be treated as paid on a pay period, quarte~
b.
Notice 2001-7;
requested commentson proposed rules regardi
obligations on the sale by an employeeof stoc~
The employer is not required to withhold, but
the employer has madereasonable efforts to dq
fl/’~ ¢,¢’~
~signated by the close of the year following the
,. T.D. 8987, final and temporary regulations under
tlations retain the simplifications to the minimum
a the 2001 proposed regulations, including the
ae using a uniform table (which is changed in the
tions). The final regulations change the date for
I0 of the year following the year of the employee’s
R D hefore the end nf the. vear~ The. t~.mnnr~rar
~.003 and following calendar years; for determining
ay rely on the final regulations, the 2001 proposed
.~ model plan amendmentsto comply with the
4 I.R.B. 1176 (5/28/02). This revenue procedure
with the final and temporary regulations under the
ans must be amendedby the end of the first year
2002-47, 2002-29 I.R.B. 133. According to the
snsive system of correction programs for
to satisfy the requirements of § 40 l(a),
ot met these requirements for a period of
apliance Resolution System ("EPCRS"),
es and thereby continue to provide their
avored basis. The components of EPCRS
Voluntary Correction Program ("VCP"),
udit CAP").
state that, "Sponsors and other administrators of
6strative oractices and vrocedures that ensure that
a, Section 83, and Stock Options
atutory stock option does not result in taxable
)urposes- but not until 2003. REG-142686-01,
t, Federal UnemploymentCompensation Act, and
:ock Options, 66 F.R. 57023(11/14/01), issued
,. Regs. §§ 31.3121(a)-l(k), 31.3306(b)-1(/),
statutory stock option [§ 422 ISO or {}423 ESPP]
:rcise of the option, but no withholding is required
mt of the wages received is the excess of the fair
The IRS will develop "rules of administrative
s to have been paid on a specific date or over a
49 I.R.B. 549 (12/3/01). The IRS announced and
tive convenience" permitting employers to deem
.......
7 .....
7 ............
49 I.R.B. 548 (12/3/01). The IRS announced and
;mployer’s income tax withholding and reporting
,d pursuant to exercise of a statutory stock option.
ed to report if the amountis at least $600, unless
:if reporting is necessary and has been unable to
completion of its review and the issuance of
taxes (nor will it seek federal incometax wil
disposition of stock acquired by an employe,
Notice further provides that it is contemplat
taxes to statutory stock options will not apply
January 1 of the year that follows the second
2.
A contractual forfe
period isn’t good enough to avoid currel
(12/10/01). Pursuant to an agreement to acqt
agreement that restricted his sale of stock b3
acquisition, he would be subject to see. 16~
taxpayer received a nonstatutory employee:
option. He pledged someof this stock as colla
lender. The Commissionerdetermined that thc
stock option based on the difference between
the date the option was exercised. The taxpay
forfeiture under§ 83(c)(3) as a result of the
mant of the omit
time the oplaon was exercised.
3.
Falling into Black-q
parachute purposes. Rev. Proc. 2002-13, 2
options, including a Black-Scholes safe hart
option[s] for stock that, on the valuation date,
purposes oft.he §§ 280Gand 4999 golden para,
¯
See al
Rev. Rul. 98-21, 1998-1 C.B. 975.
4.
The employee-COO’~
the refund claim. Robinsonv. United States, :
Court of Federal Claims followed Venture Fun
curiam, 198 F.2d 248 (6th Cir. 1999), cert. d~
deduction for the value of a compensatory tr
amountof the discount is actually "included" 1
not reported as income by the employee. Sinc
with resnect to the incomeitem attributable to
represenmuve oi me corporauon, even mougt
corporation- an overwhelming majority], the
claim was not ripe. Taxpayers claimed that er
million and madethe § 83(b) zero election wit
time; taxpayers did not fred out about the § 8.years later (when they sent the COOan amend,
¯
Query
contract at the time of transfer?
Individual Retirement Aceot
1.
Retroactive taxes an
U.S.T.C. ¶50,167, 89 A.F.T.R.2d 2002-497 (
2002-2 U.S.T.C. ¶50,466, 89 A.F.T.R.2d 200~
408 on July 22, 1998, providing that distribut
that are allocable to the funds rolled over are,
not unconstitutional because Congress was co~
States v. Carlton, 512 U.S. 26 (1994), followe
guidance, the IRS will not assess FICAor FUTA
g) upon the exercise of a statutory stock option or
sat to the exercise of a statutory stock option. The
any final guidance that would apply employment
:ises of statutory stock options that occur before the
u’y of the publication of the final guidance.
rovision piggy-backed on an extended § 16(b)
gnition. Tanner v. Commissioner, 117 T.C. 237
rol of a coroomfion, the taxnaver .~ianacl a 1,aelom
Securities Exchange Act of 1934. On 6/9/93, the
~tion from C; on 9/7/94, he exercised this stock
a loan, and the stock was subsequently sold by the
er realized income in 1994 from the exercise of the
on price and the price the stock was selling for on
’,d that during 1994the stock was subject to risk ot
xeement.
z held that § 83(c)(3) was inapplicable because
.’s ExchangeAct of 1934 commencedon the date oi
’,ise. Furthermore,for purposesof § 83(c)(3) the
;nt. Accordingly,the taxpayer re.a!ized incomeat the
.~s again: Valuing stock options for golden
.R.B. 549 (2/19/02). Guidance for valuing stock
valuing "nonpublicly traded compensatory stock
icly traded on an established securities market" for
les.
valuation of stock options for gift tax purposes in
iour vis-A-vis the shareholders was as unripe as
C1. 725, 90 A.F.T.R.2d. 2002-5003 (6/24/02). The
d. v. Commissioner,110 T.C. 236 (1998), aff’d per
~z resuacteu stoc,¢ to an emptoyee omywnen me
mployee, not when the amount is "includable" but
aaployee was appealing from an unfavorable audit
r of the transfer [in which the employee-COO
had
element as zero, giving notice to himself as a
:payers ownedall of the remaining stock of the S
’inclusion was not yet established and the refund
received restricted stock worth $28 million for $2
dsing them or anyoneelse at the corporation at the
tion until negotiating the COO’stermination three
w-2).
i taxpayers have dealt with this possibility
--
by
D.
Fed. Cir. 5/1/02). The retroactive amendmentof
Roth IRAs made within five years of a rollover
o the ten percent additional tax under § 72(t), was
a mistake in the 1997 Taxpayer Relief Act. United
0 percent additional tax applied to the 44-year old
l:Pr~th I’K> A ;ntr~ x~trhir, h h;e r~mllc~r 1"~ A h~rl h~r~
2.
He was just a condl
(9/24/02). The taxpayer had a self-directed
corporation that was not publicly traded. Alth
matter of policy, refused to purchase the stoct
were accommodated by the custodian issui
corporation, which was sent to the taxpayer
transaction, the custodian required the taxpay~
that "(Use of this formwill result in a distril:
Form 1099-R [Distributions
From Pension,
Insurance Contracts, etc.] )." The corporatior
taxpayer received the stock and delivered it to
argumentthat these had been a distribution fi
The court distinguished Lemishow v. Comm
taxpayer
did not receive cash, and the IRA, 1
r
even though the IRAmight not have been in pl
V.
PERSONAL INCOME AND DEDU
,
’~NN’~_I N T D l:~
liability by reason of the receipt or personal
benefits attributable to the taxpayer’s busines:
taxability of these benefits will be applied prosl
¯
The sa
cash, to compensation paid in the form of ben
purposes."
2.
The Clergy Housing
limit the amount"ministers of the gospel" may
fair rental value of the home,including fumisln
utilities." The legislation applies to tax years be
before January 1, 2002, for which the taxpayer
exclusion under [IRC{} 107] as provided in [thi
a.
Warren v. Con
If a parsonage allowance is paid to a minister, t
expenses actually paid out of the allowance, e~
court rejected the Commissioner’sargument th~
rental value of the minister’s home where t
$77,000 to $99,000 designated as an annual pa
on qualifying expenditures. The excess of the d
taxable.
b.
In Warren v. (
decision, the Ninth Circuit ordered briefing on
majority, also appointed Professor Erwin Ch~
School to serve as amicus curiae.
Judge"
Because the constitutional issue was n
by the parties on appeal, and because i
colleagues sua sponte, I respectfully d
court-appointed amicus briefing. This
constitutionality of the statutory exclusi
lis IRA. Ancira v. Commissioner, 119 T.C. No. 6
tsked the custodian to purchase commonstock of a
,~ investment was not prohibited, the custodian, as a
e it was not publicly traded. The taxpayer’s desires
beck drawn on the IRA account to the issuing
brwarded it to the corporation. To effectuate the
aplete a "Distribution Request Form," which stated
~portable to the IRS [Internal RevenueService] on
ifi~¢
I~eflr~rn.nf
ar Drr~f_~ha~,~r,
DI~.-.~
I’D
^,~
:odian. The Tax Court rejected the Commissioner’,
IRA to the taxpayer. The taxpayer was a conduit
, 110 T.C. 110 (1998), because in this case, the
axpayer, at all times was the owner of the shares
lossession of the stock certificate.
S
er for frequent flyers. Announcement 2002-18,
ninistrative policy, the Service has announced,
t that any taxpayer has understated his federal tax
frequent flyer miles or other in-kind promotional
icial travel," and that any furore guidance on the
y.
3r is inapplicable to benefits that are converted to
" where these benefits ’are used for tax avoidance
tee Clarification Act of 2002 amends § 107(2)
,~ from gross incomeas housing allowances to "the
d appurtenances such as a garage, plus the cost of
after 12/31/01 and "to any taxable year beginning
aer, 114 T.C. No. 23 (5/16/2000) (reviewed 14-3)
107(2) it is excludable up to the amountof eligible
lgh the amountof the allowance exceeds the "fair
he allowance covers mortgage payments in full, as
rnishings for a home ownedby the minister. The
:clusion under {} 107(2) was limited to the $58,000
$76,000 and $80,000 of total compensation of
allowance over three taxable years was expended
d allowance over actual housing expenditures was
~ioner, 282 F.3d 1119 (9th Cir. 3/5/02), in a 2-1
~timtionality of § 107(2). Judge Reinhardt, for the
-3’ of the University of Southern California Law
¯
¯
.
¯¯
.
t in the Tax Court, nor briefed or argued
:cessarily and improvidently raised by my
om the order directing supplemental and
a easily be decided without reaching the
(1989)], because it accorded clergy a benefit
plaintiff in the case, despite a stipulation of dis]
e.
Warren v. C
LEXIS17647 (9th Cir. 8/26/02). Denies
discontinuance filed by all "correct" parties.
3.
The court will not
"visits" his wife. McAdamsv. Commissione~
of Social Security receipts if the sum of "In(
Security benefits exceeds the § 86(c) "base
filing a joint return, whosebase amountis $3;
live together, whose base amountis zero. The
most of the year awayfrom his wife’s resider,
30 days, but stayed in a separate bedroom.Re:
case law under § 66(a) by analogy, Judge
wife. His base amount was zero, which res~
receipts.
B.
Profit-~eekino
lndividnal
D~
1 to others. The amicus has movedto intervene as a
~reed to by the IR and the taxpayer.
ioner, 2002-2 U.S.T.C. ¶50,~, 2002 U.S. App.
amicus to intervene in light of the stipulation of
e the quality of a marriage," when a husband
.C. No. 24 (5/15/02). Section 86 includes a portion
Ldjusted gross income" plus one half of the Social
’ xxrhioh ie g:gK 13/313~v,-~nt Cr~,- l’1 h m,~,-,4,-n .....
1~,,
r, whofiled a married filing separately rental, spenl
/ever, he did "visit" his wife’s house for morethan
~ "explore the quality of a marriage," and looking at
eld that the taxpayer did not "live apart" from his
inclusion of a large portion of the social security
Is
ax ("AMT’) trap for attorneys’ fees on large
recoveries.
an individual in a nonbusiness profit- seeking
[§67] and may not be deducted for AMTpurpc
recent years have argued the portion of a ta
attorney as a contingent fee is excluded fro]
earned directly by the attorney. The Tax Col
results on this question. Generally, the Tax (
plaintiffs attorney [or the portion of a damage
are nevertheless includable in the litigant’s
deduction, subject to any applicable limitati,
purposes if it is a §212deduction. Bagley v. Ct
Cir. 1997). Accord Baylin v. United States, 4!
938, 96-1 U.S.T.C. ¶50,011 (lst Cir. 1995), aft
1187, 2000-1 U.S.T.C. ¶50,528 (9th Cir. 2000]
2 U.S.T.C. ¶50,595 (9th Cir. 7/18/00).
b.
But the Fifth
T~ /"~_,
includable by the litigant. The court of appeal:
ownership of the portion of the award repr~
Subsequently, in Srivastava v. Commissioner,
1), rev’g, T.C. Memo.1998-362, a majority de
attorneys’ fees under Texas law because th~
taxpayer-plaintiff’
between Alabamaand Tex:
not affect the analysis required by the anticip
Dennis distinguished Cotnam on the ground
greater power than does Texas law.
( 2 ) Estate
U.S.T.C. ¶50,158, 85 A.F.T.R.2d 2000-405 (61
not required to include the portion of the tax:
§ 104(a)(2) that was paid directly to the taxpay
attorney’s fee statutory lien law in Cotnam,fo
be similar to the Alabama law involved in C
court also provided a broader explanation for~
wei~lat of authoritv, e.g., Bavlin v. United State
~t years by the First, Fourth, Ninth and Federal
~ed on board in 2001. Attorney’s fees incurred by
:ion are [§ 212] miscellaneous itemized deductions
avoid this result, taxpayers in a numberof cases in
amage award retained by the taxpayer-plaintiff’s
axpayer-plaintiff’s income and treated as income
most Courts of Appeals have reached conflicting
aids that attorney’s fee awards paid directly to a
that is the attorney’s contingent fee that is so paid]
acome, and that the taxpayer then may claim a
:luding disallowance of the deduction for AMT
9ner, 105 T.C. 396 (1995), aff’d 121 F.3d 393 (8th
1A’~1 ¢’~ad C’ir 1OO~- dlov,~,,,4
....
rP~’ "7")~" aA
-Woodwardv. Commissioner, 219 F.3d 941, 2000th Circuits see things differently.
Commissioner, 263 F.2d 119 (5th Cir. 1959),
so paid directly to a plaintiff’s attorney are not
ed that under the Alabamaattorney’s lien law, the
attorney’s fees vested in the attorney ab initio.
i 353, 2000-2 U.S.T.C. ¶50,597 (5th Cir. 2000) (2f a Fifth Circuit panel held that Cotnamapplied to
difference in the "economic reality facing the
tey’s liens and any distinction between them does
sigmaaent of income doctrine. A dissent by Judge
abamalaw gives the holders of attorney’s liens
;rest attached to a damageaward excluded under
mey. The court discussed the particularities of the
Michigan attorney’s fees commonlaw lien law to
md stated that it was following Cotnam. But the
ion, concluding that the opinions representing the
3d 1451(Fed. Cir. 1995), malapropriately relied
(3) In
Circuit precedents6), under the Golsen rl
Alabamataxpayer who received a large p~
1346, 2000-1 U.S.T.C. ¶50,431, 85 A.F.T.R.7
248 (7/7/98). The Eleventh Circuit panel heh
Cotnam.
c.
In 2001, the ]
( 1 ) Wiso
of assignment of income doctrine. Tax Cour
that courts can cure the problem, Kenseth v.
A.F.T.R.2d 2001-5376(7th Cir. 8/7/01), aff’~
adhered to its prior decisions that contingent ~
includible in taxpayer’s gross income. The Se~
[Kenseth] concedes as he must that h~
would have been an expense. It woul
his gross income ***. Wecannot see
exnen.~e.
of the payor. But the plaintiff conced~
make the contingent-fee lawyer a joint
more than the commission salesmat
receivable. ***
There is nothing exotic about this~
particular contractual setting, that of
which this case arises. The settlemenl
former employer presumably replaced
many of the expenses of producing th
not have been deductible. So inco:
anomalous or inappropriate.
Wement
the operation of a construction busine
outlays to subcontractors
and mal
~11h~nntra~tnr~
h~v~ li~n~
nn th~
wnrlc
Enough;for in any event it is not a fea
in taxation *** especially whenthe r~
which Kenseth argues is created by1
creating another inequity (differential
contingent legal fees). Andif it were
a proper one, equity m taxation being
cases that reject the Tax Court’s posi~
taxpayers. *** [The Cotnam] rational
often the case that to obtain incomefr,
there and the inherent conflict with Est
(2)
The
Commissioner, 240 F.3d 369, 2001-1 U.S.T.,
aff’g, 113 T.C. 152 (8/20/99). A former husba
former wife in a divorce settlement in 1989
enth Circuit (as derived from pre-split Fifth
,rney’s fees are not included in the income of
iamages award. Davis v. Commissioner, 210 F.3d
1567 (2000) (per curiam), aff’g T.C. Memo.1998ith respect to Alabamataxpayers, it was boundby
Seventh, and Tenth Circuits join the parade.
.~orney’s fees subject to the AMTtrap because
tar hcdrl¢ that it ~xr~e Prmm-~ee’eAr,~,~¢.- A; ....
,~ ,,..,...
.C. 399 (5/24/00) (reviewed, 8-5). The Tax Courl
’s fees paid in an age discrimination settlement are
rcuit afftrmed the Tax Court’s decision.
id the law finn on an hourly basis, the fee
~een a deduction from, not a reduction of,
ference it makes that the expense happened
tys a salesman on a commissionbasis, the
irm and his commissions are a deductible
9n his makingsales. Of course there is a
:itutes the recipient a kind of joint venturer
;ain he must, that Wisconsin law does not
of his client’s claim in the legal sense any
ioint owner of his employer’s accounts
- nothing, indeed, that depends on the
ngent-fee contract with a lawyer, out of
lseth’s age-discrimination suit against his
ome, which would have been taxable; and
he, such as the cost of commuting, would
le comrmsslonea salesman; consider now
:eceipts are counted as gross income, and
n are deductible,
even though these
:n though the general contractor could say
iicial undertaking to achieve global equity
ggested for eliminating one inequity (that
native minimumincome tax) consists of
;nt for purposes of that tax of fixed and
;judicial undertaking, it still wouldnot be
:al rather than a jural concept. Indeed the
ri based on little more than sympathyfor
larks was ignored.).
Circuit rejects
Cotnam too. Youn~ v.
!44, 87 A.F.T.R.2d 2001-889 (4th Cir. 2/1¢5/01),
alted on a $1.5 million promissory note given his
;fled a iud~zrnent on the note by transferrm~ real
estate, which he had received in the original
estate equaled the sumof the principal of the I
and certain costs. The Tax Court held that tu
recognized gross income equal to the value tt
affirming the Tax Court’s decision, the Cou~
argumentthat it should follow the reasoning (
to exclude the amount, noting that only the S
854 (6th Cir. 2000), has followed Cotnamand
( 3 ) The
Commissioner, 274 F.3d 1312, 2002-1 U.S.T.I
Attorneys’ fees in pre-1991 Title VII sex discr
AMT.
d.
The AMT tn
the plaintiff-taxpayer’s award. Sinyard v. C
A.F.T.R.2d 2001-6034 (9th Cir. 9/25/01) (2-1
to include in gross income the portion of the
attorneys as their fee pursuant to the settlemer
’[JJtl;I,£/,U,ltJLi.O¢.~.i,I, VltlU
v
dissented. He reasoned that the instant case w:
Trust on the grounds that by virtue of the
attorney’s fees incurred in an ADEA
suit neve
indirect payment of a damageaward or settle
ADEAattorney’s fees provision being to mak~
noted that it is still up to Congressto solve tt
dissent drawsa fine line, but wethink he is cot.
e.
The expense c
to the trade or business of being an employe
with the performance of services as an empl
No. 29 (5/30/02). The taxpayer successfully
addition to damages, pursuant to his emplo
attorney’s fees. The taxpayer [who lived in tt
plaintiff’s cannot exclude attorney’s fees, see
2001)] the attempted to avoid the AMTtrap
~ttnrnev’~
fee~
were
emnlover
reimhnr.~ernent
mougn me expenses were ~ l oz emptoyee t)
trade or business of being an employee, the e
that the expensesbe "paid or incurred by the e:
an employeeof the employer." This latter req
employer’s behalf, which clearly was not true
are incurred after the employmentrelationship
2.
Schoolteachers shoe
Assistance Act of 2002 provides for an abov
teachers’ purchase of books, supplies, equipm
beginning after 12/31/01.
3.
Auditing the audit,
A.F.T.R.2d 2002-5294, 2002-2 USTC¶ 50,52
who was a licensed attorney and to whomtJ
during off duty hours. In connection with an I3
IRS working hours, the taxpayer incurred su[
expenses of his law practice, and which result<
years in question. The court upheld the IRS,
to his former wife in 1992. The value of the real
:rued but unpaid interest, the wife’s attorney’s fees,
! Colony Trust Co., 279 U.S. 716 (1929), the wife
rty attributable to her attorney’s fees and costs. In
~eals for the Fourth Circuit rejected Mrs. Young’s
mv. Commissioner, 263 F.2d 119 (5th Cir. 1959),
cuit in Estate of Clarks v. United States, 202 F.3d
ty joined the circuits that have rejected Cotnam.
¢’~.*....
-
-~’
.*~.
.....
.......
(.;...~
4...^
~,
99 TT..1.1
................
.....
~ ....
L _11 __
I
n areincludable
in plaintiff’s
income
in computin~
;shuton attorney’s
feesthataren’t
evenpartoJ
ioner,268F.3d756,2001-2U.S.T.C.
¶50,645,
8~
I’.C. Memo.1998-364. The taxpayer was requirec
mt of an ADEA
suit that was paid directly to the
aent, even though had the suit gone to trial and the
ld have been statutorily liable for the taxpayer¢ damages to the plaintiff.
Judge McKeown,who
t v. Commissioner, 219 F.3d 941 (9th Cir. 2000),
uded in the successful plaintiffs gross income,
lguishable from Benci-Woodward and OMColony
statutory attorney’s fees provisions, contingent
te a debt of the taxpayer and the paymentis not an
the taxpayer. He focused on the purpose of the
iintiff whole without inctmSngattorney’s fees. He
’trap for contingent attorney’s fees generally. His
your former employer might be "attributable"
t’s not "incurred by the employeein connection
’the employer." Biehl v. Commissioner,118 T.C.
former employer for wrongful termination and, in
x ~trcmt, wmcnnas atreaoy rulea mat successma
~inyard v. Commissioner, 268 F.3d 756 (9th Cir.
ellaneous itemized deductions by arguing that the
162 employee business plan excludable under an
i2-2(c) and (d). Judge Beghe held that that
expenses because they were "attributable" to his
did not meet the requirement of Reg. § 1.62-2(d)
:in connection with the performance of services as
t is met only if the expenses were incurred on the
:ase. Furthermore, it cannot be met if the expenses
1 terminated, which was true in this case.
’
p receipts.
The Job Creation and Worker
e § 162 deduction of up to $250 for K-12 school
used in the classroom. Effective for taxable years
Ix. ~uuz~). i uc ti~piay~l
wet~ ~ul ~ iOvwLtUW et~Clt~
had granted permission to practice law part-time
;tigation that he conductedhis law practice durin~
legal fees, which he deducted on Schedule C as
law practice operating at a substantial loss for the
Lation that the legal fees were employeebusiness
Hobby Losses and § 280A H
1.
Dancing at the Ras
(1/30/02). The taxpayer’s sole proprietorship
daughter who was enrolled as full time stude
conducted for profit. Expenses for school ,
inherently personal under § 262 and compl
business expenses were deductible under § ]
income from the activity (reduced by any expe
C.
Deductions and Credits for ]
1.
You don’t have to re
Medical Savings Account has been extended
allow a deduction for contributions to an M’,
Announcement2001-99, 2001-42 I.R.B. 340 (i
a.
The Job Cre~
MSAdeadline through 2003.
2.
The IRS just might t
[ice and Vacation Homes
r. Bush v. Commissioner, T.C. Memo. 2002-33
agency, the only client of which was his teenage
ing ballet in a school for arts, was not a business
pointe shoes, clothing, and dance tuition were
mdeductible. Expenses that otherwise would be
ae extent they did not exceed the talent agency’s
)wable without regard to profit motive).
D.
they develop a d
not ooese) magnoseuoy a puys~cmsaaxe ucuuq
directed by a physician to lose weight as trealz
not deductible. Rev. Rul. 79-151 and Rev. Rul.
¯
Those
are looking at manufacturersof fattening foods.
3.
How a dead client m:
U.S.T.C. ¶50, (10th Cir. 6/7/02) (nonprecedel
attorney’s fees in the divorce was not deductib
law] he wouldhave been obligated to pay those
4.
Spell it out in the di,
gaps. Lovejoy v. Commissioner, 293 F.3d 12
(10th Cir. 6/18/02), aff’g T.C. Memo.1999-2~
terminate upon the payee’s death (under either
alimony by reason of § 71Co)(1)(D). In this
that a temporary unallocated family support all
though her death would have abated the divorc
E.
Education: Helping Pay Coil
1.
Notice 2001-55, 2001.
qualified tuition programsdescribed in § 529
on investment direction described in § 529(b)C
permit investments in a § 529 account to be
beneficiary of the account.
2.
Notice 2001-81, 200]
record keeping, reporting, and other requirem(
of the 2001 Act amendments.
3.
T.D. 8992, final and t
requirements under § 6050S for payments (
(4/29/02).
4.
REG-161424-01, prc
requirements under § 6050S for qualified tuiti
determining any of educational tax credits alh
hi~_her education exDensesk67 F.R. 20923 (4/~
taDIlSll your M~A.I ne aeacumeIor estaDllSlamg
. Section 62(a)(18) was added by the 2001 Act
L taxpayer who does not itemize deductions. See
).
ld WorkerAssistance Act of 2002 extended the
ing to the AMA:Obesity is a disease and weighl
. Rev. Rul. 2002-19, 2002-16 I.R.B. 778 (4/22/02)
cipation in a weight-loss program [meetings where
ture, and discuss problems encountered in dieting]
tg obesity and hypertension (even if the taxpayer is
; medical expenses under § 213 if they have been
he cost of purchasing diet food items, however, is
are distinguished.
~yers whomissed out on the big tobacco settlemen!
r attorney’s fees. Berry v. Commissioner, 2002-1
te0. Former husband’s payment of former wife’s
my under § 71Co)(1)(D) because [under Oklahoma
ter her death.
tstrument~ don’t rely on state law to fill in the
A.F,T.R.2d
2002-2989,
2002-2
.o
,.
,~
........U.S.T.C. ¶50.473
her the divorce instnwnent nor state law provided
:pendente lite terminated upon wife’s death. Even
law [Colorado] provided that child support orders
law was at best unclear, and because the taxpayer
te husbandand not includable by the wife.
tion (or is it helping colleges increase tuition?)
3. 299 (9/24/01). This notice provides guidance
cipants in § 529 programsregarding the restriction
ets forth a special rule under whicha program.Lo-ay
d annually and upon a change in the designated
.B. 617 (12/11/01). Provides guidance regarding
Licable to § 529 qualified tuition programsin light
:st on qualified education loans, 67 F.R. 20901
regulations relating to information reportin~
¯ elated expensesto assist taxpayers and the IRS in
ruder § 25A(as well as any other tax benefits fo~
B.
Distributions and Redempti
X.
Recourse debts are
Assumedin Certain Corporate Transactions,
rules similar to those of § 357(d) [for
determining when the amount of a distribul
regulations in REG-106791-00(1/3/01).] A
and circumstances, the transferee has agreed
has been relieved of liability vis-/l-vis the ere
debt encumberingproperty it receives, but the
the amount of the debt secured by assets no!
(and is expectedto) satisfy, or (2) the fair rnar~
a.
Final regulal
Transactions, 66 F.R. 49278 (9/27/01). Temp.
1 (g), whichis identical to the temporaryregul;
2.
The mark of the d
compete to goodwill produces a double tm
2001-260 (10/1/01). In a [pre-§ 197] sale~
¢,91 "7 A~I "Far fh~
was only $334,000 and that $666,000 allocate
goodwill. Thus, the corporation realized an a
intangible assets, and the shareholders whorec
3.
Rogers v. United Sta
U.S.T.C. ¶50,240 (10th Cir. 2/22/02), aff’g 51
stock redemption by the Kansas City Royal
nondeductible under § 162(k). See also, II.H.,
4.
Didn’t Judge Swift
Commissioner, T.C. Memo2002-040 (2/11/02
capo in the Gambinocrime family. In connect
Capital Video, was indicted, inter alia, for coi
and Capital Video paid Guafino’s attorney’s t
the payment of Guarino’s attorney’s fees wa:
were disguised shareholder distributions.
Th~rR ic no ~xrirl~n~
h~r~in
that
indi
ed" only if they really are. T.D. 8924, Liabilities
. 723 (1/3/01). Temp. Reg. § 1.301-IT(g) applies
tg when a liability
is assumed] for purposes of
[be reduced under § 301(b). [Identical proposed
[ebt has been assumedonly if, based on all the facts
he debt regardless of whether or not the transferor
transferee is treated as assuming any nonrecourse
.~ of the other assets securedby the debt.
D. 8964, Liabilities Assumedin Certain ¯ Corporate
.301-IT(g) has been replaced by final Reg. § 1.301.
eallocation of $666,000 from covenant not t¢
[ji Distributing Co. v. Commissioner, T.C. Memo.
orporation’s assets, no amount was allocated tc
:ern value, but $1,000,000 was allocated to the
) to a two-year consulting contract [compared to
:umstances, e.g., the seller’s ability to competeand
(Judge Parr) found that the value of the covenant
covenant by the taxpayer was really the price of
d $666,000 of gain on the sale if its [zero basis]
e payments recognized constructive dividends.
1 F.3d 1108, 89 A.F.T.R.2d 2002-1115, 2002-1
9p.2d 1235 (D. Kan. 1999). Purported loan was
,all team S corporation, so related expenses are
e The Godfather? Capital Video Corporation v.
al Video Corporation paid "tribute" to Richichi, a
i these payments, Guarino, the sole shareholder of
to obstruct the IRS in collecting Richichi’s taxes.
;oucuole oy ~apltai v loeo because me payments
Ractucla]’s taxes and ~1 tSapltal Videoh
at Richichi would not have provided the
t participated in the conspiracy relating to
aid Guarino’slegal fees ....
Apart from whether the tribute payme
to protect the business of Capital Vid(
participation in the conspiracy to av(
payment of the legal fees in dispute
protection or promotion of Capital Vid
by Capital Video to Richichi were made
loners have not established that Guarino’s
Lichi’s income taxes and Capital Video’s
sufficient business relationship with the
iness.
5.
After the taxpayer’s
tax problems were probably the least of hi.,
104 (4/25/02). Zhadanov’s wholly owned
nearly $750,000 of income from its business
dealers. Amongthe badges of fraud were that
bank account, but were diverted to a safe in
found that the diversion of possession of the c~
because, althou~la he had ohvsical control of fl
I~...l
......
4.
.....
C ....
.~1 ~IL--A.
L-- l____~t
L_ _1__ l_-_
n was found to have fraudulently underreported
Lfacturing plastic bottles for sale to crack cocaine
h receipts were not deposited in the corporation’s
shareholder’s home. Nevertheless, Judge Marvel
sole shareholder was not a constructive dividend
he never used any of it for personal purposes, and
C.
Liquidations
More check-the-b~
Amendment,Check the Box Regulations, 6,
wouldprovide that if an unincorporatedentil
elects to convertto a parmership,it is treat,
taxable liquidation, followedby the contribul
entity elects to convert froma corporationtc
assets to its owner.Sections 332 and 337 can~
of § 332, the proposedregulations provide t~
immediatelybefore the deemedliquidation r
unless a formalplan of liquidation that conte~
earlier date.
a.
T.D. 8970, 6~
elective changesin entity classification adopt
to elections filed on or after 12/17/01, wit]
11/29/99if the parties take consistentposition:
not
91.~/4
DUlJt1
,
¯
vv.,.jL..,.v.,.,.,,.,..,.v,,..%/F
vw,,,,~,,,6aJ.,,ua.
~,..-J.~,I,,u.J.LL.,,I~,J.
qua.uj.j.j.j.~l
~U,JJ.~
631(a), (b), or (c) with respect to a timber
retained economicinterest. TheIRS applied b
that the extraction and oil froma workingint~
Section 631 was intendedto provide a tax bene
deemedcapital gain treatment wasintended to~
2.
If they had followed
additional basis. Estate of Alton Beanv. Co
A.F.T.R.2d2001-6111(8th Cir. 10/1/01). The
holding that the shareholders of an S corp
corporationby virtue of the transfer of assets,,
the S corporation, in a transaction originally
realized]. Evenif there wasequity in the party
not the shareholder/ partner’s equity.
The partnership was an entity distir
1
, .
,1 - ¯
* ,1
. *
the transaction that the taxpayerschos
to the corporation. Oncechosen, the
transactionas structured, evenif hindsi
out. REG-110659-00, Proposed Regulations,
3959(1/16/01). Prop. Reg. § 301.7701-3(g)(2)(ii)
reviously had elected to be taxed as a corporation
stributing all of its assets to its shareholdersin a
Lll the assets to a newlyformedpartnership. If the
:gardedentity, it is deemedto havedistributed its
the owneris a corporation.Tofacilitate application
¯ n ~" li,-,,,;A,a+;,-,.,
;~,A .....4 +^ I. ....
,.,
1,. ....-,__,~__,
:
., ............
the filing of the elective changewasadoptedat an
4911(12/17/01). Thefinal regulations relating
;osed regulations without modification. Applicable
ctivity permissible to elections filed on or after
F a timber, coal or iron-ore mining company
is
[.R.B. 343(10/10/01). The§1374built in gains tax
corporation that acquired the property from a C
r recognition period and recognizes gain under §
Ltract or disposal of timber, coal or iron ore with a
gy Reg. § 1.1374-4(a)(3), Ex. (1), whichprovides
d on the conversiondate is not subject to § 1374.
perating incomeandthere is not indication that the
applicationof § 1374.
rent form, maybethey could have gotten some
mer, 268 F.3d 553, 2001-2 U.S.T.C. ¶50,669, 88
Circuit (Judge Hansen)affirmed the Tax Court’s
acquired no additional basis in their stock of
:o liabilities, froma partnershipthey controlled,to
¯-
-
.,1.
¯
,,it
.,,;
a its partners, and the partner’s cannot
tsfers madeby the partnership.... Thefact
e sale in 1992does not changethe formof
ize-selling the assets fromthe partnership
rs are boundby the consequencesof the
als a morefavorabletax treatment.
3.
The technical result
statutoryanalysis mighthave everlasting lift
reverses the result of Gitlitz v. Commissioner,
provide that excludedcancellation of indebt,
adjustment to the basis of stock in the han
discharges of indebtednessafter 10/11/01(but
to a plan of reorganizationfiled with a bankmp
4.
ESBTRegulations az
67 F.R. 34388(5/13/02). TheTreasury has prc
treatmentof electing small businesstrusts (ES]
Protection Act of 1996, the TaxpayerRelief Ac
Relief Actof 2000.Treas. Reg.§ 1.641(c)- 1
litz sleeps the big sleep, but the method--of
)b Creation and WorkerAssistance Act of 2002
Ct. 701 (1/9/01), by amending§ 108(d)(7)(A)
ncomeof S corporations is not to result in an
"h’areh°lders’-Thestatut°ry ru_le is applicableto
nerr~if~n~ TT.~RTc tn ho normiffoA C ~ .... +
’e.hnlcle.r~ T Tnrl~r th~ ~n~l r~mliat~n¢ fpmnr~v~nr
..................
/.
"real. T.D. 8994, Electing SmallBusinessTrusts,
d final regulationsregardingthe qualification and
ich reflect amendments
in the SmallBusinessJob
7 and section 316 of the Community
RenewalTax
adments to Reg. § 1.1361-1 implement§ 1361(0,
trust consists of a grantor portion and a non-S
to § 641 (c). Whena trust consists of an S-porti
their taxation to beneficiaries. A QSSTmayc
qualifies. The f’mal regulations [Reg. § 1.444-,
501 (c)(3) that is tax-exemptunder § 501 (a)
Reg. § 1.444-2T.
5.
What happens when
a.
In the Tax C
applied. Co~i’n Automotive Corp. v. Commis
holding company that had a number of co~
vehicles. The subsidiaries maintained their
corporations filed a consolidated return. In 1’
new S corporations were formed to becom~
subsidiary contributed its dealership assets to
interest, following which the subsidiaries were
each. The Commissioner asserted that the t
inclusion of the affiliated m’ouo’s ore-S-elec
l~ xxa~ XlV puaUi.
argument, holding that the restructuring wa
substance, compelled by business realities anc
Jacobs accepted the Commissioner’s seconc
approach [rather than the entity approach] to
Thus, the taxpayer was treated as owninga pro
of its election it was required to include $4.8 rnJ
¯
In reac
followed Casel v. Commissioner, 79 T.C. 424q
disallow losses betweenrelated parties; Holid~.
(Fed. Cir. 1985), applying the aggregate approac
a corporation distributed a partnership interest’
1316 (D.C.Cir.1991) in determining permanen
approach applied in P.D.B. Sports, Ltd. v. Com
§1056; Madison Gas & Elec. Co. v. Commissi
Cir.1980), applying the entity approach in deter
.......,....1~..1.....,v.~1..1~
,~,~,,....v,. ........
..,1~,~ ...... ..,1 ,;.1.....
YT:
rather than the aggregate approach, should be us
partnership. The differences, the court found, w
in enacting the non-subchapter K provision invol
b.
But the Elev~
Tax Court. "Plain language" requires applic
2002-2826, 2002-1 U.S.T.C. ¶50,448 (llth Ch
principle, the Eleventh Circuit (Judge Hill)
1363(d) LIFOrecapture is triggered only if
LIFOinventory. Since the result turned on "i
pattern, Judge Hill was spared the need to write
Affiliated Corporations.
E.
1.
The Federal Circuit.
consolidated returns. Regulation § 1.150
transactions involving, inter alia, "duplicate
statute." Rite Aid Corp. v. United States, 255 ]
5058h(Fed.
Cir. g6/6/01),
rev’g 46 Fed. C1. 500,
I°’~ 1 I/’$/’$\
-’a._ A-" 2 - -- 1 _1.... 1__ _" -1 _" _ __
, subject to normal rules, and an S portion, subject
I non-S portion, the source of distributions controls
:o an ESBT; an ESBTcan convert to a QSSTif it
te that an ESBT,or a trust described in § 401 (a)
le, is not treated as a deferral entity for purposesof
pter S and Subchapter K collide?
e aggregate theory of partnership taxation was
~ries under the LIFO method, and all of th~
taxpayer restructured to make an S election. Si~
;neral partners in six limited partnerships. Eac[
t partnership in exchangefor a limited partnershil:
ted and the taxpayer becamethe limited partner in
’s conversion to an S corporation triggered the
FO reserves (approximately $5 million) under
tat the restructuring should be disregarded because
:, and (2) that under the aggregate approach
LIFO reserves (approximately $4.8 million) was
t (Judge Jacobs) rejected the Commissioner’sfirst
nuine multiple-party transaction with economic
:1 with tax-independent considerations. But Judge
lent, holding that application of the aggregate
ship taxation furthered the purpose of §1363(d).
are of the partnerships’ inventories and as a result
’LIFO recapture.
decision regarding Subchapter K, the Tax Court
applying the aggregate approach to apply § 267 to
e Shopping Center v. United States, 773 F.2d 276
trposes of determining depreciation recapture when
;r, 109 T.C. 423, (1997), for purposes of applying
~. T.C. 521, 564 (1979), afff’d. 633 F.2d 512 (7th
whether expenditures are deductible under § 162 or
rcuit’s decision in Brown Group. Inc. & Subs. v.
C. 105 (1995), concluding that the entity approach,
aractefizing income (subpart F income)earned by
d on dete~g the relevant Congressional intent
ach case.
reuit sees things differently, and reverses the
:the entity theory. 392 F.3d 1326, 89 A.F.T.R.2d
). Expressly applying the Gitlitz "plain language"
he Tax Court. The Court of Appeals held that §
,ration electing S status itself directly ownedthe
aguage" rather than the purpose of the statutory
appear to buy into the single entity theory of
,hich prohibited recognition of loss in the
~," was held to be "manifestly contrary to the
7, 2001-2 U.S.T.C. ¶50,516, 88 A.F.T.R.2d 2001J.S.T.C. ¶50,429, 85 A.F.T.R.2d 2000-1439 (Fed.
..,1 ..,,,,1~.-.^,.1
.., 4. ....
1,.1.,. 1 ....
.d:" ~"~’} -.-’11" ....
..1 -_
of the stock of a subsidiary. Under Reg. § 1.1
the sum of (1) income or gain resulting fror~
dispositions of capital assets, depreciable p]
dispositions, and discharge of indebtedness int
attributable to extraordinary gain dispositions
subsidiary’s asset bases and loss carryovers ov
of these amounts are deductible. Reg. § 1.1:
deduction by both the parent and subsidiary
upheld the validity of Reg. § 1.1502-20 and b
by Rite-Aid] exceeded Rite-Aids’ economic lq
that Rite Aid could have avoided Reg. § 1.1501
election.
¯
The ]
"duplicated loss factor" in Reg. § 1.1502-20im
§ 165and is "manifestly contrary to the statute.’
stem from the filing of a consolidated return,.
otherwise would not be taxed," something that
,1,,i.v
IL,d~VAV
~k,,..v
~.,m.q.,~
vw,~.L
V~
rnl~e
1-~rm1¢~ *h
loss factor distorts rather than reflects the tax l
otherwise uniform treatment of limiting deducti¢
¯
B. Jott
Counsel- represented the taxpayer.
a.
At first the IS
CC-2001-042(8/30/01), the Service has advise
Federal Circuit decision in Rite Aid Corp. v. UJ
banc with the Federal Circuit.
b.
But six mont
change the regulations instead. Notice 2002-1
the amountof loss that is disallowed is limited to
)rdinary gains dispositions," which are defined as
used in the trade or business, certain bulk asset
) positive investment adjustments (other than those
3) "duplicated loss," which is the aggregate of the
due of the subsidiary’s assets. Anylosses in excess
is designed to prevent "duplicated losses" ~ the
ame economic loss. The Court of Federal Claims
7ner~r~’e hllilt_in
Irate
r~£ ~99 m~ll;r~n I’ac r,,~lr.~l,~f--A
finding a buyer who would agree to a § 338(h)(10)
Circuit (Judge Meyer) reversed, declaring the
ause it disallows a loss that is otherwise allowed by
e "realization of the loss [on the stock sale] does not
nial of the deduction imposes a tax on incomethat
does not authorize the Treasury to do. The Federal
t that Reg. § 1.1502-20 is necessary to prevent a
iuctions were not created by the consolidated return
Le consolidated return context, and Congress has
t 383. Judge Mayerconcluded that "the duplicated
of consolidated groups and contravenes Congress’
the subsidiary’s losses."
tins of Shearman & Sterling- the new IRS Chief
ted to keep on fighting. In Chief Counsel Notice
"counsel attorneys that it does not agree with the
~tes and that it has filed a petition for rehearing en
r, the IRS caved and announced that it will
-7 I.R.B. 526 (2/1/02). The Notice reads:
In Rite Aid, the Federal Circuit held tt
of the Income Tax Regulations, whicl
memberof a consolidated* group, was
Internal RevenueService believes that t
~ws certain losses on sales of stock of a
zlid exercise of regulatory authority. The
t’s analysis and holding were incorrect.
Nevertheless, the Service has decided
not be served by continuing to litigat
1.1502-20. Moreover, because of the i
disallowance factors, the Service has d~
on sales of stock of a memberof a cons
interests of sound tax administration will
didity of the loss duplication factor of §
:ionship in the operation of all of the loss
aat new roles governing loss disallowance
¯ group should be implemented.
Accordingly, the Service intends to p
from the date of their issuance, wil
allowable loss on a sale or disposition (
instead of under § 1.1502-20. For trat
been filed) completed before the date
there is a binding contract before that
respect to a disposition of subsidiary s
amended. The Service and Treasury a
provisions necessary to implement§ 3!
te interim regulations that, prospectively
e consolidated groups to determine the
-
\
.....
~ .....................
..i
race of interim regulations, or for which
)ups will be allowed certain choices with
eluding a choice to apply § 1.337(d)-2
rtaking a broader study of the regulatory
the Internal RevenueCode in the context
~nd xxrill
r~al~c*
r,r,mm~nte
in r.r,n~lnr,
f~,~n
It is the Service’sposition that the R
aspect of the loss disallowancereguh
return regulations conferred on the S
Secretary, in his discretion, has d(
consolidatedtax liability.
e.
Notice 2002that it andthe Treasury"intend to issue regul~
a tax benefit fromboth the utilization of a los
the basis of stock) andthe utilization of a los:
same economicloss. For example, where a
memberof the group in exchangefor stock (
stock is determined,directly or indirectly, in
the transferor membersells such stock witho
maybenefit from the built-in loss in the o
regulationswill defer or otherwiselimit utiliz
transactionsthat facilitate the group’sutil~ati(
nllhliqh~cl
flnal
the sale of the stock of a subsidiary by a mel
taxpayercan provethat the loss is not attributz
any asset, including stock and securities. Ga
gain" to the extent that the gain is attributabl~
basis of the stock. Thus, the newrule focus~
subsidiary’s stock attributable to gains recog~
that on deconsolidation of a subsidiary, the
consolidated group must be reduced to an am
that the taxpayercan showthat the required lz
gain. The newrules do not deal with the d
20(c)(1)(iii). Thenewregulations are applica
3/7/02 (or pursuantto a binding contract ente
Reg. § 1.1502-20.
e.
A glitch is fix
Rules, 67 F.R. 37998 (5/31/02); REG-102305
Re~. ~ 1.337(d)-2T(a~(4)nrovides nettin~
me extent
mat,
as
a
consequence oI
me same
1~
with respect to stock of the samesubsidiary
2T(b)(4)providesa similar netting role for
temporaryregulations are also issued as propo:
2.
Deferred intereomt
accounting. REG-125161-01,ConformingAn
proposed regulations would conformReg. § 1
1995,whichprovidesthat the deferred interco:
members
are required to apply in addition to th
¯
In Ge~
the TaxCourtheld that the timing rule of forn
accountingfor purposesof § 446(e). Theprop
rules of current § 1.1502-13are a methodof acc
3.
The IRS acts to elim
in consolidated returns. REG-137519-01,
C,
Law:Nonapplicability of Section 357(c), 66]
1.1502-80(d)wouldclarify that liabilities des(
~pinionimplicates only the loss duplication
I that the authorityto prescribeconsolidated
is limited only by the requirementthat the
d such rules necessary clearly to reflect
2-12 1.1LB. 644 (3/11/02). The Service announced
Lat will preventa consolidatedgroupfromobtaining
_ _ _112 .....
~’~_" ....
/’~ _,. ¯ /
.~
_.
~f a groupcontributesbuilt-in loss assets to anothe
nemberin a transaction in whichthe basis of sucl
’in part, by referenceto the basis of suchassets an~
ng the deconsolidationof the transferee, the groul
~d assets morethan once. It is expected that th~
the loss on the stock in such transactions and othe
ingle loss morethan once."
s are here. T.D. 8984, Loss Limitation Rules, 6"
:tation Rules, 67 F.R. 11070(3/7/02). TheIRShat
;under §§ 337(d) and 1502. NewTemp. Reg.
; regulations disallowdeductionsfor any losses or
a consolidated group except to the extent that tN
he recognitionof built-in gain on the dispositiono:
gnized on the disposition of any asset is "built-ix
, excessof valueover basis that is reflected in the
on losses attributable to basis adiustmentsto the
r the subsidiary. Thenewregulations also require
~f stock of the subsidiary held by membersof
t exceedingthe stock’s value, exceptto the exteni
ruction is not attributable to recognitionof built-in
’,d losses formerly disallowed by Reg. § 1.1502tispositions after 3/6/02. For dispositions orior to
the taxpayer’sfavor. T.D. 8998, Loss Limitation
; Limitation Rules, 67 F.R. 38040(5/31/02). New
milar to that in former Reg. § 1.1502-20(a)(4)],
spect to the dispositionof stock of a subsidiary,to
rrangement,gain is taken into account by members
the same material terms. NewReg. § 1.337(d):tions on deconsolidationsof subsidiary stock. The
lations.
,ansaction timing rules are a method of
~ts to Section446, 66 F.R. 56262(11/7/01). These~)(2)(iii) to Reg. § 1.1502-13(a)(3),promulgated
ransaction rules are a methodof accounting,which
1 methodsof accounting.
,~latlons contimathe IRS’sposition that the timing
L anomalythat would hurt corporate taxpayers
ted Returns: Applicability of OtherProvisions of
~21 (11/14/01). A proposed amendmentto Reg.
t § 357(C)(3)are not taken into accountas a basis
the § 1504(a)(3)(4)bar fromjoining in
memberwithin the preceding sixty months.
5
T.D. 9002, Agent
Reg.§§l.1502-77 ~nd-78 [proposed in REG(9/25/00)] clarify and supplementthe rules
designation of a newagent for the group. The
regulations, with clarifying changes.Underth
as it continuesto exist as a corporation,even:
the agent also is the agent for any corpora
regulationscontinuethe current rule that if fl
member
of the group as its successor agent, i
successoragent, except in case wherethe par~
the agent, by default, uponnotification to
membersto designate the successor agent will
v. Commissioner,112 T.C. 103 (1999), probk
a NOLunder § 172 should be paid to the col
regulations generallyare effective with respec
..... ,.,1 "ii~ ~,.,,,..,,, 1,
Reg. § 355-7 and withdrewproposedregulatic
8/24/99). Theproposedregulations provided
plan is determinedbasedon all the facts andc]
circumstancesto be consideredin makingthe c
¯
If an
acquisitionare consideredpart of a plan if the
or any of their controlling shareholdersintend
similar acquisition occur in connectionwith th
distribution and acquisition are consideredpar
intendedon the date of the acquisition that a
acquisitionsof stockof a corporationthat are pl
percentthresholdof § 355(e)(2)(A)(ii)
¯
Facts
factors to consider,onelist tends to demonstrat~
the other list tends to demonstrate
that a distribt
-
,t tb,~~.,i, vj
acquisitiondistributions and3 with respect to p
respective controlling shareholdersdiscussedt]
the first transaction occurred.Theseventhfac
purposeto facilitate the acquisitionor a simil~
there wasa reasonablecertainty that within 6
agreement,understanding,or arrangementwoui
acquisition. Elaborate"operating rules" descl
considerswhetheran acquisition anda distribul
was an agreement,understanding, arrangement:
(or, if an acquisition is the secondtransacti
transaction. Theninth factor considerswhether
Dor C likely in orderto servicethe debt.
¯
Facto
respect to pre-acquisition distributions and 2
absenceof any discussions betweenD, C, or tl
regarding. the
secondtransaction
of the pair beJ
..,, . .,,i
. ¯
.. ,,,. ¯ ¯
t return with a groupof whichit hadceasedto be a
~onsolidated Group, 67 F.R.43538 6/27/02).
-99, Agentfor ConsolidatedGroup,65 F.R. 57755
ning he agent for a consolidated group and the
gulations are substantially the sameas the proposed
.tions the common
parent remainsthe agent as long
~es to be the common
parent. Thecommon
parent is
~rooerlv included in the consolidated return. The
:n cteslgnatlon is made,metK~maycteslgnate me
single domesticsuccessor, that successor becomes
aissioner. Theprior rule permitting the remainin~
oved. Theregulations deal with the lnterlake Corp.
¯ ovidingthat a refundresulting froma cma3,back
ot
arent or agent for the carrybackyear. Therevised
ble years beginningon or after 6/28/02.
isions
ties repeal rewritten. REG-107566-00,
Notice o1
:): Recognitionof Gainon Certain Distributions ot
a, 66 F.R. 66 (1/2/01). TheTreasuryrevised Prop.
?.R. 76) issued in REG-116733-98
(64 F.R. 46155,
,~ther a distributionandan acquisitionare part of a
races. Theyincludednonexclusivelists of facts and
ration andsix safe harbors.
don follows a distribution, the distribution and
ring corporation(D), the controlledcorporation(C),
he date of the distribution that the acquisitionor a
)ution. If an acquisitionprecedesa distribution, the
lan if D, C, or anyof their controllingshareholders
ition occur in connectionwith the acquisition. All
~c~ n nl~n nr~ ~aor~trzt~cl tc~ cl~t~r’min~, wh~th~r the ql3
¯ cumstancesm Thereare two nonexclusivelists of
distribution andan acquisitionare part of a planand
t an acquisitionare not part of a plan. Theweightof
t on merelycountingfactors.
ating a plan: Six factors [3 with respect to pre~sition distributions]focuson whetherD, C, or their
d transactionof the pair with outsideparties before
;iders whetherthe distribution wasmotivatedby a
tion of Dor C; evidenceof such a purposeexists if
ffter the distribution an acquisitionwouldoccur,~anor substantial negotiationswouldoccur regardingan
impact of numerousscenarios. The eighth factor
a’red within6 monthsof eachother, or whetherthere
tantial negotiationsregardingthe secondtransaction
..................................
,.1
..........
2ting the absenceof a plan: Five factors [3 with
pect to post-acquisitiondistributions] focuson the
ective controllingshareholders,with outsideparties
first transactionoccurred.Oneof the factors in each
similaracquisition,for the distribution[usingp~
that the distribution wouldhaveoccurredat ap]
the acquisition or a previouslyproposedsimilar
¯
Safe h
plan if theyare describedin oneof the safe barb
(1) An acquisition more than 6
understanding, anangement,or substantial ne8
monthsafter the distribution and the distrib
corporate business purposeother than a busine
This safe harborapplies if the distribution was
business purpose.
(2) Anacquisition more than 6 montl
understanding,arrangement,or substantial neg
monthsafter the distribution is not part of a ]
motivatedin wholeor substantial part by a bu:
33%of the stock of either D or C, and no In(
stock wasacquiredin the acquisition that moti’
similar Reg.§ 1.355-2(b)(1)].Theseventhfactor
:ely the sametime and in similar formregardless of
Oil.
A distribution andan acquisition are not part of a
fter a distribution if there was no agreement,
concerningthe acquisition before a date that is 6
’as motivated in wholeor substantial part by a
~,u ~t ,vaxvz,,,,
vJ, ouuot,cult,
LCt[ ~.KIJLI. Uff a llUlliak;qUlSlUOll
a distribution for whichthere wasno agreement,
; concerningthe acquisition before a date that is 6
is safe harbor applies wherethe distribution was
n-poseto facilitate an acquisition of no morethan
20 percent of the stock of the corporation whose
.~ distribution waseither acquiredor the subject of
al negotiationsbeforea date that is 6 monthsafter
t,J.LIl,,,,
t,.LJL
0U.JkUI, ii,J.%JLJ.o
!.--
v
.
4
distribution or within6 monthsthereafter is not
(4) An acquisition more than 2 ye~
understanding, arrangement,or substantial ne~
acquisitionor within6 monthsthereafter is not 1
(5) If Dor C is listed on an established
shareholders of D or C whoare not 5- percer
subject to certain exceptions.
(6) Anacquisition of stock by an emp
services, includingan acquisition resulting fro]
not part of a plan.
For al
circumstances,parties can have an agreement,t
reachedagreementon all terms. Undercertain ch
C stock, an agreement, understanding, arrange
acquisitionevenif the acquirerhas not beenspecJ
355(e); Recognition of Gain on Certain Distl
Acquisition, 66 F.R. 40590(8/3/01). The Tre~
the ProposedRegulations, except that the temp
running of any time period during which the:
principles of § 355(d)(6)(B))andExample
acquisition"in the contextof a situation involvt
b.
The third (f
regulations. 67 F.R. 20632 (4/26/02), and
(4/26/02). These regulations amendTemp.
forth newguidelines in the anti-MorrisTrust re
disregard the presumptionof § 355(e)(2)(B)
are part of a plan is determinedbasedon all the
7T(b)(2) provides a "super-safe harbor" for
withintwo years followingthe date of a distfib~
part of a plan only if there was an agreement,
regardingthe acquisitionor a similar acquisitior
of the distribution."[italics added].
er a distribution if there was no agreement,
as concerningthe acquisition at the time of the
a plan.
)re a distribution if there was no agreement,
is concerningthe distribution at the time of the
¯ plan.
, an acquisitionif the stock is transferred between
aolders is not part of a plan. This safe harboris
r director in connection with the performanceof
~ercise of certain compensatory
stock options, is
ices, suchas in public offeringsor auctionsof Dor
r substantial negotiations can exist regarding an
dentified. Specialrules deal with options.
government thinks it did a better job on the
]e around. T.D. 8960, Guidance Under Section
of Stock or Securities in ConnectionWith an
promulgatedtemporaryregulations identical to
gulations reserve § 1.355-7(e)(6)(suspending
substantial diminutionof risk of loss under the
posed Regulations(interpreting the term "similar
ple acquisitions).
time’s the charm. T.D. 8988, temporary
;892-01, proposed regulations, 67 F.R. 20711
5-7T and identical Prop. Reg. § 1.355-7, and set
d circumstances." However,Temp.Reg. ~ 1.355Ltion not involvinga public offering that occurs
he distribution and acquisition "will be treated as
anding, arrangement,or substantial negotiations
." time duringthe 2-yearperiodendingon the date
circumstances to be evaluated. If an acquis
distribution with the acquirer by either the c
period precedingthe acquisition indicate the e
distribution during the two year period prec
distribution werenot part of a plan. Discussic
precedingan acquisition by public offering az
business purpose [as defined in Reg. § 1.3;
acquisition, is a factor indicating the absence
approximatelythe sametime and in similar fo:
plan.
Adistribution andan acquisition are not 1:
sevensafe harbors:
(1) An acquisition occurs more than six
understanding, arrangement,or substanti~
before the distribution to six monthsafte
wholeor substantial part by a corporatebu,
(2) An acquisition occurs morethan six1
business our
acquisition was either acquired or the su
substantial negotiationsduringa periodfroz
the distribution.
(3) An acquisition occurs after the distl
arrangement,or substantial negotiationsco:
within one-year thereafter. This provisiox
presumption
andreplaces it with a one-yq
(4) A distribution occurs morethan two
understanding,arrangement,or substantial j
acquisitionor withinsix monthsthereafter.
(5) Anacquisition of stock of the distribt
marketoccursas a result of transfers betwe
controlling shareholders[five percent shah
shareholders. This safe harbordoes not app
by the acquired corporation, is a memt
comomtion,
or is an underwriterwith resoec
I,.;ULI.tJI.U.I.IIIIII~
~lli:tl.~;llUIU~l~]
ILL ~U/.H..I.~LIUIq
WlH
(7) Anacquisition by a qualified pension
2.
Fromqualified stock
transaction doctrine’s magicwand.Rev. Rul
mergingP’s shell subsidiaryS into T in a fever.,
70 percent P voting stock and 30 percent cash
part of the plan," T mergedinto P (the Upstr~
prohibition against the application of the step
apply to treat the AcquisitionMergerand the I.
of all the assets of T," and (2) "the single
requirements of a reorganization under §368(
qualified stock purchase under § 338 followec
transaction is a statutory mergerof T into P tu
ruling reaches the same result- type (A) mez
[instead of a §368(a)(1)(E)reverse triangular
¯
The IR~
if P acquiresthe stock of T in exchange
for P vot
¯ ecedes the distribution, discussions regarding a
d or distributing corporation within the two year
of a plan. Theabsenceof discussions regarding a
he acquisition indicates that the acquisition and
an investment banker during the two year period
or indicating the existence of a plan. A corporate
, other than a business purposeto facilitate the
an. That the distribution wouldhave occurred at
plan if they are describedin one of the following
s after a distribution, there was no agreement,
iations regarding the acquisition from one year
stribution, and the distribution wasmotivatedin
wposeother than to facilitate an acquisition.
after a distribution and there was no agreement,
iations regarding the acquisition from one year
tribution, the distribution wasnot motivatedby a
ter the distributing or controlledcorporations,and
the corporation whosestock was acquired in the
f an agreement, understanding, arrangement, or
ear before the distribution to six monthsfollowing
and there was no agreement, understanding,
g the acquisitionat the time of the distribution or
aates the statutory two-yearpost-distribution
~ harbor.
~er an acquisition and there was no agreement,
ions concerningthe distribution at the time of the
controlled corporation listed on an established
managemenqor ten percent
wuu p~u:tlt;lpate
m
.),.,I/-
1.91.11,
: transferor or transferee of the stock is controlled
a controlled group that includes the acquired
acquisition.
tirector, or independentcontractor [other than
formanceof services.
ent plan.
ase to tax-free mergerwith a wave of step
6, 2001-42I.R.B. 321 (9/25/01). P acquired T
ular mergerin whichthe T shareholder’s received
quisition Merger).Followingthe acquisition, ’°as
rger). The ruling assumesthat (1) "absent some
ion doctrine, the step transaction doctrine would
a Mergeras a single integrated acquisition by [P]
tted transaction wouldsatisfv the nonstamtnrv
llqllll.tial.lOll,
Ul:~te~ttl
IIlal~
Tile
mtegrateo
68(a)(1)(A). No§ 338 election is available.
ae T shareholders receive solely P voting stock
lowedby a § 332 liquidation].
Rev. Rul. 67-274, 1967-2C.B. 141, holding that
k andtherea~erliquidates T into P, the transaction
the mergerof T into P will be treated as a qua
T.
¯
Purst
challenge a taxpayer’s contrary position with
stock of the target corporation meeting the r
pursuant to a written agreement binding on 9/7
filed and (2) the taxpayer does not take an into
¯
The I
principles of the ruling, but nevertheless allo,~
requires or permits the § 338(h)(10) election.
3.
Treasury does an "~
126485-01, Statutory Mergers and Consol
withdrawn proposed regulations [REG- 10618
that neither the merger of a disregarded entit
into a disregarded entity was a statutory merg
has proposed new more liberal regulations
remdzticm.~_
a mer~rer
nf z cnrnnrztinn
intr
regulauons mtr(
"Combiningentity" means a business entity t
that is not a disregarded entity. "Combiningu
if any, the assets of whichare treated as ownec
the proposed regulations, a statutory merger
pursuant to the laws of the United States o~
mergers still do not qualify, but the domestic :
following events must occur simultaneously:
transaction) and liabilities (except to the exten
of one or more combiningunits (each a transt
members of one other combining unit (the
transferor unit ceases its separate legal existen
the rules: (Ex. 1) Divisive mergers [see Rev.
Forwardtriangular mergers (into a disregardec
disregarded entity must be a corporation; (Ex.
qualify; and (Ex. 6) None of the consideratic
4.
Backing into control
§ 355. McLaulin v. Commissioner, 276 F.3d
(llth Cir. 12/21/01), aff’g 115 T.C. 255 ((.
corporation. Until 1993, RPI owned 50 perce
percent was owned by Hutto. In 1993, aft~
purchase Hutto’s stock in Sunbelt or Hutto shq
Hutto’s stock for cash [$828,943], which was
as Sunbelt’s sole shareholder. Later on the sax
Sunbelt to RPI’s three equal shareholderstax-free spinoff under § 355. The stated pu
potential liabilities arising from Sunbelt’s op
RPI’s S election [the controlling version of {}
affiliated group from being an S corporation].
¯
The
distribution of the stock of Sunbelt occurred 1
transaction in which gain or loss was recogni
)ck purchase of T followed by a § 332 liquidation of
§ 7805(b) the IRS will not apply the rtding
to an acquisition before 9/25/01, or acquisition of
rots of § 1504(a)(2) by the purchasing corporation
(1) a timely § 338(g) or 0a)(10) or § 338(g)
position.
nsidering whetherto issue regulations that reflect the
tee" on mergers into disregarded entities. REG.
, 66 F.R. 57400 (11/15/01). The Treasury ha,
; FR 31115 (5/16/00)], which would have providec
corporation nor the merger of a target corporatior
lying as a reorganization under § 368(a)(1)(A),
Reg. § 1.368-2(b)(1)].
Under the new proposec
egarded entity that is wholly owned by anothej
le IRS is wont to do these days, the new proposec
rm "disregarded entity" meansa business entity (a,
an entity separate from its owner for Federal ta~
LLCs, qualified REITsubsidiaries, and Q-Subs.
L corporation [as defined in Reg. § 301.7701-2(b)i
arts a combiningentity and all disregarded entities:
:h combiningentity for Federal tax purposes. Undel
solidation under § 368(a)(1)(A) must be effected
e or the District of Columbia. [Foreign statutory
lo longer needs to be a "corporate" law.] All of the
of the assets (other than those distributed in the
.~d or discharged in the transaction) of each member
it) becomethe assets and liabilities of one or more
ree unit); and (2) the combining entity of each
11 nnrncme.~ The examnle.~ nrovide all
the detail~
in
ownedby S) are allowed; (Ex. 4) The owner of
gers of disregarded entities into corporations do not
red by the T shareholders maybe interests in the
Is will be effective whenfinalize&
5 years of the spin-off backed them right out of
)02-1 U.S.T.C. ¶50,156, 88 A.F.T.R.2d 2001-7324
The taxpayers were shareholders of RPI, an S
e stock of Sunbelt (a C corporation); the other
tcted negotiations regarding whether RPI should
chase RPI’s Sunbelt stock, Sunbelt redeemedall of
ed from RPI, and property [$101,000], leaving RPI
s the redemption,RPI distributed all of the stock of
ayers ~ in a transaction intended to qualify as a
_J~ a.l__ J’_a._.211___~.."
........
a._ __1_" ....
I"~T~T ~ ........
for the year in question prohibited the parent of
tort (Judge Halpem) held that because RPI’,.
5 years after RPI acquired control of Sunbelt in
, the redemptionof Hutto’s stock], the distributio~
~;(a~(1/(C1~ and (h~(?~(l~l’ii~
hM~re, l--lalnern
re.leered
years in a taxabletransaction. Helikewisedecl
Rev. Rul. 57-144, 1957-1C.B. 123, whichwc
acquisitionof control within 5 years as a disq~
leadingup to the transactionandthe fact that tl
this case there wasno differencebetweenthe t1
¯
Acco
at the corporatelevel; under§ 31 l(b), RPIreo
gain passed through to the RPI sharehok
Commissioner’s
argumentthat the shareholder.
a corporatebusinesspurposeas required by Re;
¯
TheI
minkrnaldiscussion.
Thetax court foundthat the facts of]
present case in any significant way.
distribution of the Sunbeltstock tax
twelveyears.
Asthe tax court said, this is not the m
It is the ’acquisitionof control wherer
5.
Post-spin-off stock
referenceto the policy of § 1032. Rev. Rul.
several questions with respect to transactio~
employees of both corporations following
distributing corporation(D). Thedistributions
designedto exactly preserve the employees’1:
does not recognizeany gain or loss whenrestr
in the spin-off with respect to their restricted
---Jc
it
-,
lapse on D stock held by C employees that
recognizegainor loss as a result of the exerci,,
in the spin-off with respect to optionson D stc
deductions for amountsincludible in D emplq
and C stock and the exercise of options to a,
amountsincludible in C employee’sincomea
the exercise of options to acquire Dand C stoc
6.
Just a simple earninl
v. Commissioner,118 T.C. No. 5 (1/28/02)."
rata spin-off followed by a prearranged sal
precludingtax-free treatment under{} 355. "I
controlled businessto the shareholdersprior tc
the business. Thatthe distributing corporation
the $5,530,000sale price did not negatethat t
because the earnings and profits that were
controlled corporation’s business. Thedistril
r~fzr~no~ tn the,
cwlllna nrlow nfth~= ~tnolr-
nnf
ollow the Commissioner’s
argumentdirectly to apply
t anyinstance in whicha redemptionresulted in the
; acquisition. Rather,he emphasized
the negotiations
¯ "or the redemption
camefromRPIto concludethat in
n as it occurredanda direct purchaseby RPI.
§ 335(c)(1) did not apply to provide nonrecognition
gain on the distribution of the Sunbeltstock, andthe
ter § 1366(a). [The court did not address the
¯ n nrnve,that the. diqtrihntinn
w~cde.~ion~d tn ~ohi~xzz
:Appeals affirmed the Tax Court’s decision witt
[. 57-144werenot distinguishable fromthe
rect control of Sunbelt by Ridge at 50%
(idge at 100%ownership. Underthe plain
}1 on January15th, the moment
the taxable
s the five- year clock and renders Ridge’s
beit stock that it had held for morethan
~ersionof indirect controlto direct control.
t existedpreviously.’
and restricted stock taxation determinedwith
,2002-2 I.R.B. 268 (1/14/02). This ruling answers
tving restricted stock and stock options held by
~ff economicrights. First, the ruling holds that D
Lapseon C stock that wasreceived by Demployees
¯ Likewise,D does not recognizegain or loss as a
a C stock that werereceived in the spin-off with
does not recognizegain or loss whenrestrictions
ceived before the spin-off. Likewise, C does not
,~mployeesof options on Dstock that werereceived
they held beforethe spin-off. Third, Dis entitled to
acomeas a result of the lapse of restrictions on D
) andC stock, and C is entitled to deductions"for
tt of the lapse of restrictions on DandC stock and
at scheme.SouthTulsa PathologyLaboratory, Inc.
Court~t(Judge
Marvel)
held
that
a pre-§355(e)
_ _
11_ I
_
,"
¯
. ¯
zz ~t .’ .~q,
, evenif there wasa businesspurposeof the sale o1
tgs and profits were only $253,000,comparedwith
action wasa deviceto bailout earningsand profits
}ailed out were the profits from the sale of the
orporation’s recognized gain was computedwith
raised fair marketvalueof the assets transferred by
Commissioner, 104 T.C. 574 (1995), afpd, 1~
31 l(b) a corporation that transferred land
partnership units was treated as distributin~
identifying the distributed asset; in the insu
controlled corporation.
7.
Pooling on the fina~
strange here or are we just naive? NovaC
2002-1553, 2002-1 U.S.T.C. ¶50,389 (3/25/02
exchange for approximately 6 million shares,
former RSCshareholders had disposed of rc
taxpayer sold its RSCsubsidiary in 1995, it
1991 acquisition as a taxable purchase for la(
effect, as interpreted by McDonaM’s
Restaura
1982). [Of course, in the spirit of Enron, Wor]
the acquisition as a pooling for financial
Commissioner, 88 T.C. 1415 (1987), should
a transferred basis. The court (Judge Horn)
holdit.
under Reg. § 1.368- l(e), post-reorganization dis
but gave no weight to the promulgationof the re
8.
When I[RS] use a w~
Rul. 2002-49, 2002-32 I.R.B. 288 (8/12/02).
conduct of a trade or business requirement of
a transaction that otherwise meets the requirem
in a member-managed
limited liability compan
company, contributes a portion of the busin
distributes the stock of the controlled subsidiar.
*
In Sin
LLC, which operated numerousrental propertie:
the LLC, along with the officers of another 2(
management). After two years, D purchased th
disregarded entity. Onthe first day of year 6, tN
which contributed the properties to C in exchat
F)~e eh.’Jr,~l~lrlav~
~a l"D ~ a~..,1;aA
D,-..,,
D,..1 O~
Rev. Rul. 99-6, 1999-1 C.B. 432 [holding that
LLCis treated as the distribution of assets t~
continuing members], the purchase of the 80 pe
355(b)(2)(C), even though gain or loss was
the acquisition of newor different business unde
¯
Situati
20 percent interest in the LLCon the first day
transaction, before the spin-off in year 6. This
acquired the LLC’sbusiness in a transaction ir
distribution period [§ 355(b)(2)(C)]. Although
of the LLCinterest in year 2, if D had directly ~
contributed to the LLC,the exchange would ha
For purposesof § 355(b), therefore, D is treated
which gain or loss was recognized. Huh?
G.
Personal Holding Companies
3..
Accrued tax liabili~
1236 (9th Cir. 1999) (holding that for purposes
fited partnership and then distributed the limitec
ld), was distinguished as involving a question ol
the distributed asset clearly was the stock of the
~xable purchase on the tax return. Is something
v. United States, 52 Fed. C1. 165, 89 A.F.T.R.2d
lyer acquired RSC[in a triangular merger] solely in
its gain using a purchase price basis, treating th,
atinuity of interest under the regulations as then fi
!inois, Inc. v. Commissioner,688 F.2d 520 (7th Cir
Kerox, and who knows who else, NovaCare treate(
hag.] The Commissioner argued that Penrod v
, treat the 1991acquisition as a reorganization witt
ass motions for summaryjudgment, holding that~
RSCshareholders intended, at the time of th(
[ovaCare stock received in the reorganization or tc
ed that for reorganizations occurring after 1/28/98
s are irrelevant with respect to continuity of interest
L to solve the McDonaM’s/Penrod
problem.
means just what I[RS] choose it to mean.7 Rev
~enue ruling deals with whether the 5-year active
is satisfied when, during the 5-year period prior tc
§ 355, a corporation holding a membershipinteresl
ases the remaininginterests in that limited liabilit~
a newly formed controlled subsidiary, and then
;hareholders.
D Corporation’s sole asset was 20 percent of the
80 percent of the interests, and the LLCbecamea
istributed forty percent of the rental properties to D,
dl of C’s stock, following which C was spun-off to
92-1 C.B. 147, to find D was engaged in the active
"§ 355(b)] for the first two years. Notwithstanding
and purchase of all of the remaining interests in an
lling membersand the purchase of assets by the
:crest in the LLCwithin five years did not violate §
in the transaction, because the transaction was not
1.355-3(b)(3)(ii).
the same as Situation 1, except that D obtained’the
>,, in exchangefor appreciated securities in a § 721
n does not qualify because D is treated as having
gain
or loss "was
recognized within the
5-year
pre1 ........
J r~ ~,~ 1 / x-!
T..~,~
....
a transaction in whichgain or loss was recognizeck
ring the LLC’sbusiness in year 2 in a transaction in
cumulated Earnings Tax
different from tax liabilities
¯ ~ ~ .k T
,~ /~,F n.,n ~ n~,,~.~ ~
-
"imposed." Metro
t,. .r
..
proceeding [T.C. Memo.2001-119], the Tax
earnings tax under §§ 531-537. In this supp]
Judge Gerber rejected the taxpayer’s argtu
earnings should be adjusted under §§ 535Co)(i
¯
First,
should be madewith respect to taxes that
transaction that was being reported on the §
future years had not been included in the
accumulated
incomeby the taxes attributable t(
¯
Seco~
deficiency, including the accumulatedeamit
taxpayer continued to contest an underlying
adjustmentwas allowed. The Tax Court speciJ
v. Commissioner,
853 F.2d 1275(5th Cir. 1988
to the contrary. The Tax Court found no basi
differently fromthe taxpayerwhodoes not pay
¯
Third
~LC~LLUL~ LU LIlU~
determinationof the deficiency, the taxpayer,
taxable incomedue to net operating losses, wa
taxes "attributable"to the capital gain, not mere
foundno conflict betweenits secondandthird t
being contested, eventhoughit is not "accrued"
MiscellaneousCorporateIss~
H.
Could they have obl
before structuring the deal? Or would§31
Memo.2002-113 (5/6/02). The taxpayer
corporation. At the time of the sale of the stoc
for lost profits undera business interruption
contract, the claim wasassigned to the parta
indicated that the pricing was in any way
received cash in settlement of the claim, which
of the stock. Judge Ruweupheld the CommJ
J.’~’.L L,.L~V~I*VV,L~
O¢..r,.LV,VV¢,4.~
,,L..m.v~~J..LV~,e.~:~LJ.
I.V .U,,LL,V~LCA.!
the proceeds, the amountrealized was ordinar)
VII. PARTNERSHIPS
Formationand Taxable Yea]
1.
No more "inappropz
corporate partner’s interest in a partnershi
Special Rules, 67 F.R. 15112(3/29/02). The
106702-00,Determinationof Basis of Partnez
intended to prevent what the IRS has detern
adjustedbasis of a corporatepartner’s interest
692] resulting from the partnership’s disposJ
principles of Rev. Rul. 99-57, 1999’2 C.B.
parmershipthat holds stock in the corporation,
for the year in whichthe corporationacquires 1
the stock, then the increase or decreasein tl
resulting from the sale or exchangeof the st
eld that the taxpayerwasliable for the accumulated
opinion, the Tax Court, in a reviewedopinion by
1at the amountof the unreasonably accumulated
35Co)(6)(A)
in three respects.
rt held that no adjustmentfor unpaid"accrued"taxes
,comedue in future years with respect to a closed
ailment method;since the gain to be recognizedin
ited income, it was not appropriate to reduce the
Fn
,.,
..................
JL-
.....
J
thatthetaxpayer
continued
tocontest.
Since
th(
acy,eventhough
payment
hadbeentendered,
nc
;clined
tofollow
J.H.Rutter
RexManufactu~’ng
Co
r.c.Memo1987-296,
inwhich
theFifth
Circuit
helc
ating
a taxpayer
whopaysthecontested
deficienc3
ested
deficiency.
’,ourt
heldthatthedecrease
in thedownwarc
; thetaxes
"attributable,"
i.e."imposed"
under
the
combined
income
taxliability
oncapital
gains
ant
tun,buttakes
intoaccount
thetaxes
dueafter
the
; taxpayer’s
taxliability
exceeded
$100,000
after
the
,rtcd
$35,884
ofnetcapital
gain,
butonly
$17,825
oJ
edtoreduce
thenegative
adjusuncnt
by$15,738
oJ
2,674
oftaxes
shown
asdueonthereturn.
Thecourl
because
a taxis"imposed"
ifithasbeen
paid
andis
aose circumstances.
s
a better result if their advisor hadread Zenz
ken a big tax bite? Steel v. Commissioner,T.C.
trier in a partnership that ownedthe stock of a
corporation, the corporation had a claim pending
to the assignment. Subsequently,the partnership
tners reportedas additionalcapital gain on the sale
’s determinationthat the receipt of the insurance
That the assignmentwouldnot have occurred "but
Since there wasno sale or exchangeon receipt of
’,.
A.
icreases or decreasesin the adjustedbasis oi" a8986,Determination
of Basisof Partner’s Interest;
I has finalized Reg. § 1.705-2 [proposedin R~G.’st; Special Rules, 66 F.R. 315(1/3/01)] which
he. "in~InnrAnriste"
inP.res~ee
nr cl~er~scoc
in th~
me corporate partner’s stock lunoer me general
,hen: (1) a corporation acquires an interest in
partnershipdoesnot havea § 754election in effect
est, and(3) the partnershiplater sells or exchanges
)ration’s adjustedbasis in its partnershipinterest
als the amountof gain or loss that the corporate
corporation acquired the interest, a § 754 e
appropriate adjustments to the basis of tiered
corporation acquires an indirect interest in its
from the sale of stock is subsequently al
retroactively to gain or loss allocated on sales
a.
Proposed an
Amendmentsto Rules for Determination of
(3/29/02). The Treasury has proposed amendn
the proposed amendmentswere published, "to
developmentof the final regulations. The prot
2 to situations in which a corporation ownsa (
that corporation, the partnership distributes
recognizes gain on the distribution during a y(
in effect, and the partnership subsequently se]
clarify that "stock" of a corporate partner it
partner. The proposed amendments would be
exchanges of stock occurring after 3/29/02.
business, run by the decedent’s brother. Thq
consistently reported as equal partners, even tl
the oil and gas business and decedent’s bro
business. After the decedent’s death, the estat(
activity was reportable as the decedent’s brol
maintain capital accounts, the allocation lackl
parmership were determined under the facts an
evidence, the estate could not overcomethe pr(
no record of capital contributions; the amount
withdrawals but the partners’ economic inter
because the partnership books and records werq
"beliefs" that the brothers were 50/50 par
distributions equally. That factor, combined
partners and the absence of any evidence thai
was sufficient to convince Judge Ruwethat the
had been in effect. The final regulations require
¯ ships to prevent evasion of their purpose where a
>ok though a chain of partnerships and gain or loss
to the corporation. The regulation is effective
,ages of stock occuning after 12/06/99.
rots before the ink is dry. REG-167648-01,
r Partner’s Interest; Special Rules, 67 F.R. 15132
Reg. 1.705-2, which was finalized on the same day
remaining issues that rwerel considered durin~ the
mOarectmterest ma partnership that owns stock it
other property to another partner and that partne:
,Xich the partnership does not have a § 754 electior
changes the stock. The proposed amendmentsals(
any position with respect to stock of a corporat(
retroactively to gain or loss allocated on sales o~
irtnership Debt, and Outside Basis
:tnership allocations. Estate of Ballantvne v
decedent taxpayer and his brother for manyyear,
ts business, run by the decedent, and the farmin~
;rship was an oral partnership, and the brother.,
ae decedent consistently withdrewthe profits fro=
asistently withdrew the profits from the fannin~
ae position that all of the income from the fannin~
istributive share. Because the partnership did nol
omic substance, and the partners’ interests in the
nstances test of Reg. § 1.704-1(b)(3). Based on
9n that the partners were equal partners. There was
its of each activity varied from year to year, as did
I interests in cash flow could not be determined
mate. However. the "facts"- mostly the witnesses’
: t~rotners long-trine consistent reporting as equal
)thers’ reporting position involved tax avoidance,
~qual partners.
~een the Partnership and Partners
D.
Sales of Partnership Interest
E.
Inside Basis Adjustments
Partnership Audit Rules
Final Unified Partne
Audit Rules, 66 F.R. 50541 (10/3/01). The
301.6233-1, inclusive, are substantially simil~
Numerous clarifying
changes have been n~
parmershiplevel determinations and judicial ix
¯
Partne
the small partnership exemptionof §6231(a)(1)(
¯
The p:
§301.62331(a)(5)-1] that will be directly
partnership level proceeding.
¯
If the
beginning of an administrative proceeding (t
clarions and Mergers
F.
udit Regulations. T.D. 8965, Unified Partnership
Lership audit regulations, Reg. 301.6221-1 through
; previously proposed and temporary regulations.
reflect subsequent statutory changes impacting
tions of the TemporaryRegulations.
__’~1 ...........
- 1 _ _z _1" _ .... ~L
........
z _
1"/"~ !"
:tivity loss roles of § 469 are an affected item [Reg
fith respect to individual partners following the
ls to provide a partner with timely notice of the
as required by §6223, the partner may, under
¯
The
within 45 daysafter the mailingof the FPAA,
1
¯
The
providingthat partnership- level proceeding..
partnershiplevel, andthat partnerscouldraise
in a subsequentrefundaction.
¯
Reg.
betweenthe tax matters partner and the IRS
respect to partnershipitems, bindspartners otN
¯
Reg.
a 5-percemgroupor pass-thru partner, the me:
in the partnership throughthe pass-thru parl~
liabilities wouldbe increasedif the treatmer
consistent with the trealrnent of parmerskip
beonningon or after 4/2/02).
¯
The t
(7nrnmieeinnar
9~1 lZ ~d lflt~
()it
Dir OII ¢/Nf
Nlations clarify that the election must be mailec
NAP.
~gulations conform to changes in the 1997 Ac
e the determinationof applicable penalties at th~
ner-level
defensesto the impositionof penalties onl
3
.6224(c)-1 clarifies that a settlement agreemenl
,’pect to penalties, like a settlement agreementwi~
,,,..,,v~’~/ J. v=,=.=.=.=.L.¢~=,0~,
u,u~l,~ ~.~,.e~,,,u.o~VJt¢.~.[../~,,t,.EI,,J.%LLL
,IL.LI.K,,,U.U
the groupor the indirect partnersholdingan intere,
L deposit the aggregate amountby whichtheir ta
~ership items on the partners’ returns were mad
1 the parmershipreturn (effective for civil action
dations also incorporate the holding of Callaway
ag that a wife was not bound by the outcomeof
,artnership items convertedto nonpartnershipitem
aunng me proce
,~.~ ,.,.,.,.~,,.,,.,.
,.,vv~.
¯ vJ~-, ~J..~ v~., a.,.,i
.ivl/.
~
not disqualify himfrom consenting to an exl
Transpac Drilling Venture 1982-12 v. Comm
TMPunder INScriminal investigation had a
his partners conflictedwith his desire to ingrat
Twocircumstancesdifferentiate this c
limited partners. Thepartnershipsfor
shownto be the partnerships involved
did what is a routine accommodation
assessment by the IRS - in order
partnerships. Phillips has speculatedth
3.
Are conflicts are wo
Commissioner,295 F.3d 280, 90 A.F.T.R.2d
Ninth Circuit held that a consent to extend th
investigation at the time the consentsweresi~
distinguishedits holding in TranspacDrilling
1998).
4.
Partnerships shoul
redeterminafions.ASAInvesterings Partne]
decision in the tax shelter case, ASAInvester,
aft’d, 201 F.3d 505 (D.C. Cir. 2000) was ente
Tax Court under §6226(a), rather than § 621
redeterminationof a deficiency, and Judge t~
7481(c) to review the Commissioner’sdeterm
for § 7481(c) reviewhadbeenmet. Apetition
expressstatutory prerequisitefor § 7481(c) re~
5.
Gustin v. Commissio
disallowing a portion of a partner’s distribu
704(d), on the groundthat the losses exceede
even though there had been no FPAAand
n~rtn~rehln
i¢ nnt ~ n~rfn~reh~n it~rn
272 F.3d 1172, 2002-1 U.S.T.C ¶50,103, 81
ainal investigation of TaxMatters Partner Hoytdic
of the statute of limitations. Taxpayerarguedtha
-, 147 F.3d 221 (2d Cir. 1998), whichheld that
g conflict of interest becausehis fiduciary duty t(
Lself with the IRS. JudgeNoonanstated:
IRSmadeno attempt to get waivers from
~oyt was being investigated have not been
case. It is not intuitively obviousthat Hoyt
ing a waiver in order to avoid immediate
ltiate himself in the investigation of his
n criminality? MadisonRecycling Associates v.
32, 2002-2U.S.T.C.¶50,515(2d Cir. 7/9/02). The
of limitations executedby an otherwise properly
:rely because the TMPwas under criminal tax
Because the TMPwas unaware of the criminal
hadno conflict of interest. Onthat basis the court
e 1982-12v. Commissioner,147 F.3d 221 (2d Cir.
~other applying for § 7841(c) interest
Commissioner, 118 T.C. No. 26 (5/22/02)..The
¯ tnership v. Commissioner,T.C. Memo.1998-305,
mareto a partnership level proceedingfiled in the
ccordingly, the substantive proceedingwas not a
ld that the TaxCourt lacked jurisdiction under §
,a ....
x--/
-- --
aa interest determination.
;. Memo.2002-64(3/7/02). A deficiency notic~
re of losses from a TEFRA
partnership under {
trtner’s basis in his partnershipinterest, wasvalk
:ship-level proceeding. A partner’s basis in th~
VIII.
TAX SHELTERS
Corporate Tax Shelters
1.
Tax shelter benefits
allowed because the tax shelter is a shaman
Merrill Lynch’s persistence overcomes b
Commissioner, T.C. Memo. 1997-115 (3/5
A.F.T.R.2d 98-6682 (3d Cir. 10/13/98) (2-1),
453 contingent sale partnership tax shelter to
purpose," and "scrv[ing] no economic pm
Commissioner, 364 F.2d 734 (2d Cir. 1966),
shelter Colgate’s $105 million 1988 capital
were affiliates of (a) a foreign bank (about
1%). A bank note was purchased by the parm~
and much smaller future contingent paymcn
temporary regulations [§ 15a.453-1(c)] the
years over which contingent payments could 1
A.
partnership inter
use
to ~[l~lt~L
lt~
i~’O0
453 contingent sale partnership tax shelter not
es no economicpurpose other than tax savings."
)ubts of tax department. ACMPartnership v.
C’d, 157 F.3d 231, 98-2 U.S.T.C. ¶50,790, 82
nied, 526 U.S. 1017 (1999). Judge Laro found a
z’ranged sham, "tax-driven and devoid of economic
mea, ~3 u.~. 1003 [1~o/). unoer uae sct~eme to
~artnership was formed in 1989; its three partners
Colgate (about 9%), and (e) Merrill Lynch (about
td immediately sold for a large immediate payment
.~r the contingent payment sale provisions of the
’s basis was to be allocated ratably over the several
, resulting in a large 1989installment sale gain to
ale gain was allocated to the foreign bank (which
owed by the redemption of the foreign bank’s
at partner. In 1991, the installment sale obligation
Ilion of capital losses, which Colgate attempted to
~t~pxt~i ~aiLt.
*
The T
"economic substance" doctrine, which elimin:
application of the ratable basis recovery role oft
held, however, that out-of-pocket amountswere
a.
Judge Foley fl
not work because, under the facts, there
Commissioner, T.C. Memo. 1998-305 (8/20/!
create capital losses to shelter earlier capital
parties to the partnershipagreement did not joi
bearing instruments, and they did not share pro:
( 1 ) Mfirn
F.3d 505, 2000-1 U.S.T.C. ¶50,185, 85 A.F."
opinion noted that it disagreed with the Tax q
goals" are precluded from having the requisite
essential to the Tax Court’s conclusion that I
rcuit affin’aed the Tax Court’s application of the
.~ capital gains and losses attributable to ACM’s
ingent installment sale provisions. The Third Circuit
)le.
other Merrill Lynch[}453 partnership plan does
partnership. ASAInvesterings Partnership v.
another Merrill Lynch §453 partnership plan to
MliedSigna, lost when Judge Foley held that the
her for a common
purpose of investing in interestlosses.
, A .r
, ¯
-,,.,. .
I .-..
.....
b.
Saba Partners]
Brunswick’s transactions identical to A CM’s,
that the transactions lacked nontax business ]
transactions "regardless of their economicsub
partnership were deductible subject to the 1~
fees paid with respect to the shamtransactions
(i) D.C. (
opinion in ASA Investerings. Saba Partners
¶50,145, 88 A.F.T.R.2d 2001-7318 (D.C. Cir.
Investerings T.C. Memo.1999-359 (10/27/99)
lnvesterings, which was decided on a sham par
Tax Court, which was grounded on a sham ta
affuTn the Tax Court’s decision on the altem
governmentconceded that the sham transactio~
the adjustments under the sham partnership tt
theory [although the government apparently
;ommissioner, T.C. Memo.1999-359 (10/27/99).
md to lack economic substance. Judge Nims held
; and that Congress did not intend to favor such
He held that fees paid for the organization of the
of §709(b) [60-monthamortization], but that the ..
t deductible.
remandsSaba for reconsideration in light of its
~ommissioner, 273 F.3d 1135, 2002-1 U.S.T.C.
1), remandingfor reconsideration in light of ASA
~-,vvv v, .,.
\.,.-.v.
v,,~...,,
.L,
vvj.
.L~v .~..v.
VIIVMe,I.,.
statements that persons with "divergent business
to form a partnership; however, this view was not
ies did not intend to join together as partners to
avoidance. The court held that there was a single
..... j ~ w-- --_t-_r- ......... ~ ....................
)n theory.
Thecourtofappeals
refused
to simply
oundthatthepartnerships
wereshams.Eventhe
tampartnership
approaches
yielddifferent
results;
)laldbe different
thanundertheshampartnership
~d at oral argument that under either approach;
,r,t’]~nel
~rh~ err~xrt~mm~nt
~T’m’l~t’]
that
th~ t-t~llrt
r~¢
court of appeals accepted the taxpayer’s argl
regarded as a partnership for federal tax put
taxpayer to address the question to the trial cc
are inadequate because of ’significant differer.
taxpayer] in this case and those of [the taxpay,
far as we can tell, the only difference betwee
meet in Bermuda." In remanding, Judge Tatel J
mt the "question of whether ’an entity should be
. inherently factual,’" and remanded to allow the
n though it doubted that the Tax Court’s "findings
leged by the taxpayer "between the actions of [the
~A." Indeed, the court of appeals opinion said: "As
ase and ASAis that Brunswick and ABNdid not
owed what he expected to be the result on remand:
In any case, ASAmakes clear that "th(
the argument that the Commissioner
*** Here, the Tax Court specifically
Saba and Otrabanda were organized s,
Arguably, this broader finding subsum
this case and ASA.
’.~ nf ~ nant~v hrlcln~,ec nl~rnac~ ie f~t~l" t~
*** Although the present record migt
~ly suggest that Saba and Otrabanda were
rpose of generating paper tax losses for
)t affirm on this ground. In particular, in
ck mayhave acted on the mistaken belief
’roperties, Inc. v. Commissioner,319 U.S.
tablished a two-part test under which Saba
~e they engagedin somebusiness activity,
.a..~,L
~L.L,i.I,,7
VV
a.,
c.
436, 87 L. Ed. 1499, 63 S. Ct. 1132 (1
and Otrabanda must be respected simpl
an interpretation that ASAsquarely reje
¯
Query
overwhelmingevidence in the record that
generate tax benefits for Brunswick." ***
actual differences that might exist between
,~ct of this opinion on the Boca lnvesterings case,
noted below?
c.
Merrill Lyncl
Did they pay too soon? News Release IR-200
to settle a penalty case the IRS had brought a
etc.], 6701 [aiding and abetting understateme
regarding tax shelters by persons subject to th
6708 failure to maintain lists of investors
promotion of the contingent installment sale sh
(8th Cir. 1998), cert. denied, 526 U.S. 1017 (19
d.
Same arrang(
:,....i...^
~4-9,,,
,~ k..,-,;
....
,.I^,-,|~^~ ~ ,~1~^!+^..
1D^
[now Wyeth] entered into a Merrill Lynch r
Partnership v. Commissioner, 157 F.3d 231, 91
1997-115 (3/5/97), cert. denied, 526 U.S. 101
201 F.3d 505, 2000-1 U.S.T.C. ¶50,185 (D.C
Saba Partnership v. Commissioner, T.C. Men
sheltered the gain on the sale of a corporate
existed and that the losses were allowable
purpose and an objective profit potential in en
District of Columbia Circuit in Horn v. Comm
straddle case], which stated the test as: "To t
taxpayer was motivated by no business put
transaction, and that the transaction has no e
profit exists." Judge Friedman found, as rr
considered by AHP,it was understood that AI:
necessary under the Merrill Lynch presentati,
excluded muchof the evidence offered by the i
analysis oortions of AHP’sin-house lawyer’:
for the contingent installment sale tax shelter.
/28/01). IRS announced that Merrill Lynch agreed
t under §§ 6700 [promoting abusive tax shelters,
c~ liability], 6707 [failure to furnish information
¯ ement to re~.~ter
a tax ~helter 11nder 8 ¢ql 1 11 and
ACMPartnership v. Commissioner, 157 F.3d 231
i other cases.
ts earlier failed shelters, different trial court
~terings Partnership v. United States, 167 F. Supp.
6252 (D. D.C. 10/5/01). American HomeProducts
L tax shelter virtually identical to those in A CM
r.c. ¶50,790 (3d Cir. 10/13/98), aff’g T.C. Memo.
), ASA Investerings Partnership v. Commissioner,
1/00), aff’g T.C. Memo.1998-305 (8/20/98), and
)-359 (10/27/99). The losses from the transaction
a’y. Judge Friedmanheld that a valid partnersllip "
he found that the taxpayer had both a business
Lto the transaction. He applied the test used by the
,968 F.2d 1229 (D.C. Cir. 1992), [a commodities
: substance because no reasonable possibility of
,f fact, that "while potential tax benefits were
lot committingto engage in all of the transactions
rder to give rise to a tax loss." Judge Friedman
luding [under the attorney client privilege] the tax
ng memorandum,but not the business planning
Merrill Lynchbanker whoparticipated in thq
former Merrill Lynchbankerbecausehe was1
Identified "taxavoic
2.
a.
Someof thes
2001-34I.R.B. 190 (8/20/01), superseding1
sixteen listed transactions for purposesof R~
transactions include:(1) Rev. Rul. 90-105,
certain pensionplans attributable to future 3
certain trust arrangements(purportedmultiple
C.B. 334, "lease strips"; (4) Notice98-5, 199
profit is insubstantial in comparisonto the v
A CM-typetransactions; (6) Treas. Reg. § 1.6
remaindertrusts; (7) Rev. Rul. 99-14, 1999
Notice 99-59, 1999-2C.B. 761, transactions i
taxpayers claim tax losses for capital outl~
1.7701(1)-3 fast-pay arrangements,(10)
involving the acquisition of two debt ins
v
Notice 2000-613
emptoyees,aria meeventual llquloatlon or sa
569, transactions purportingto apply § 935to.
intermediary sales transactions; (15) Notice
transfer transactions; and (16) Notice 2001-~
transactions not subject to U.S. tax in which
taxpayer.
b.
Loan assump
Notice 2002-21, 2002-14 I.R.B. 730 (3/18/02
wherethe taxpayer uses a loan assumptionag~
tax-indifferent party, and thus generate a loss
loan over the fair marketvalue of the acquired
term basis and uses the proceeds to purchase
the assets are transferred to the taxpayer, who
the assets transferred equals the present value
disposesof the assets for their fair marketvalu
c.
Accrual over
i.~.,~AJLI~,,~.I.O ~.~’V....~.~a.L.a.,vv,.e
~v9 ,.,vv,.,
,.,.L .......~.08.~.
for paymentcomprisedof noncontingent an~
inclusion into incomeor deductionof a the nc
the term of the NPC.Interest must also be
3(f)(2) (ii) or (iii), and1.446-3(g)(4).
Taxp~
based on the three-monthLIBOR
multiplied b
the end of 18 months,the counterparty will
principal amountof $92,000,000[or, $8,280,0C
$8 milliontimesthe percentageincreasein the
times the percentagedecreasein the stock in&
quarterly payments,the taxpayermustratably ~
will receivefromthe counterpartyat the endof
(1) An
identified as a listed tax shelter. Notice200:
the use of a notional principal contract to c]
taxpayer,
while disregarding
the accrual
of a z
.~ .Tv~ r~, .
*
*
¯ ,
1
- 1-
udge Friedmandid not credit the testimony of the
~eachableand impeached.
ansaetions."
ill beingpeddledto yourclients. Notice 2001-51.
000-15, 2000-1 C.B. 826. The IRS has identified
;011-4T(b)(2) and § 301.6111-2T(b)(2).The
B. 69, tmmactions(deductions for contributions tc
)mpensation); (2) Notice 95-34, 1995-1 C.B.
,er welfarebenefit ftmds~:(3) Notice95-53_1995-2
the expected FTCs;(5)ASAlnvesterings-type an~
transactions involvingdistributions fromcharitabl
835, lease-in/lease-out [LILO]transactions) ; (8
g the distribution of encumbered
property in whic]
they have in fact recovered; (9) Treas. Reg.
2000-12, 2000-11I.R.B. 744 certain transaction
; the values of which are expected to chang,
ections; (11) Notice 2000’!.4, 2000-36I.R.B. 25:
lly inflating the basis of partnershipinterests; (12
olving the purchaseof a parent corporation’s stoc]
ed parent stock fromthe subsidiary to the parent’:
e subsidiary; (13) Notice 2000-61, 2000-49I.R.B
fian trusts; (14) Notice2001-16,2001-9I.R.B. 730
7, 2001-91.1LB. 730, contingent liability § 351
1-33 I.R.B. 129 (certain redemptionsof stock iT
s of the redeemedstock purports to shift to a U.S
reementused to claim an inflated basis in assets
aotice addsto the list of "listed transactions"on(
to claim an inflated basis in assets acquiredfrom
:o the excessof the stated principal amountof th(
rhe tax-indifferent party borrowsmoneyon a long
aan’s principal paymentat maturity. Taxpayerthen
laims a loss for federal incometax purposes.
.~rm of the notional principal contract of the
mentto be received at the end of the term is
6/02). Whena notional principal contract provides
gent components,the appropriate methodfor the
gent componentof the nonperiodic paymentis over
d for in a mannerconsistent with Reg. §§ 1.446ees to makequarterly paymentsto counterparty.
real principal amountof $100,000,000.In return, at
payer 6 percent per year multiplied by a notional
in addition, the counterpartywill either paytaxpayer
lex, or taxpayerwill paythe counterparty$8 million
,.
nent similar to that of Rev. Ru]. 2002-30 i
C)2-21I.R.B. 992 (5/6/02). Thetransaction involve
rent deductions for periodic paymentsmadeby:
eceive offsetting paymentsin the future. Underth,
component. The noncontingent component,
component, may be based upon a fixed or fl
changesin the value of a stock index or currer
¯
This
investment by the taxpayer. The counterparty
installments as purportedly deductible paymer
interest rate collars, for purposesof limiting ris]
¯
Taxp;
paymentto whichthat portion relates, but taxp;
paymentuntil the year the paymentis received.
¯
The 1:
2002-30, that the nonperiodic payment to be ]
must be accrued ratably over the term of the NF
¯
Trans
transaction described are identified as "listed I~
and 301.601 l-2T(b)(2).
rl"lL
.........
22 I.R.B. 1023
contingent casn payments, the comparaole y
wouldissue a fixed rate nonconvertible debt it
interest on the insmmaent.
(i) But
arrangementsare merely the subject of an i
22 I.R.B. 1029 (5/6/02). The Service and
convertible debt insmunents.
3.
IRS announces a tax
waivers. Announcement2002-2, 2002-2 I.R.E
any of the § 6662 accuracy-related penalties if
an issue about the disclosed item is raised dud
inter alia (1) the material facts of the item;
years affected by the item; (5) the namesand
the item and (if known) the parties who adv
agreement to provide [if requested] all transac
provide a legal analysis of the item.
IIIVUIV~U/Ii:IIdUI.II~;ILL
~Ull~i~ldLlll~llt
UI
IdLl~ i:1111Ul
concealment of an interest over a foreign fman
from, a Wansferof assets to, or that taxpayer wa
personal, household, or living expensesas dedu,
a.
Larry Langd¢
provides guidelines for applying the about
(12/21/01). The IRS will not assert that a dis
waiver of the attorney-client privilege.
b.
According to
that the tax shelter initiative resulted in 1,633
1,506 tax returns and involved more than $30 t
e. IR-2002-99
(9
2002, the IRS Office of Tax Shelter Analysis 1
disclosed their questionable transactions."
d.
In a 6/27/02 n
PricewaterhouseCoopers (PwC) to resolve tax
news release, which is similar to one issued
is relatively large in comparison the contingent
aterest rate; the contingent componentmayreflect
Lon may be entered into without any initial cash
ad the moneyto the taxpayer, who pays it back in
taxpayer may engage in other transactions, such as
spect to the NPCtransaction.
as to deduct the ratable daily portion of each periodic
,~atment of the paymentsis as set forth in Rev. Rul
by the taxpayer at the end of the term of the NP(
hat are the sameas, or substantially similar to, th~
ns" for purposes of Temp.Reg. {}§ 1.6011-4T(b)(2
bond method applies to a convertible
deb~
tingent cash payments. Rev. Rul. 2002-31, 2002.
,thod described in Reg. § 1.1275-4(b) applies
e issuer and that also provides for one or more
o be determined as that yield at which the issueJ
.at, which is to be used to determinethe accruals oJ
rrangement similar to Rev. Rul. 2002-31. These
,n for taxpayer comments.Notice 2002-36, 2002Lsk for commentson the treatment for contingenl
disclosure initiative through 4/23/02 for penalty
12/21/01). The initiative wouldresult in waiver ot
tre is madebefore the earlier of 4/23/02 or the date
:amination. The disclosure statement must contain,
¯ v .... -.- l,,,,,v,..,l.~v,,v~.~,,, L.,,~LJ.V...*,V.LL.,,,
1~*.1.,.~AVVV,t.U.AJ.,LVJ.t~.~’~,&O
’,Jab
’,promoter, solicitor or recommender;and (6)
.ocuments, intemal memoranda,and materials that
r transactions that: (I) did not in fact occur; (2)
~urce of any item of gross income; (3) involved
rant; (4) involved the concealmentof a distribution
or of a foreign trust; or (5) involvedthe treatment
de or business expenses.
arandum, dated 12/20/01, for LMSBpersonnel
sued Announcement 2002-2, 2001 TNT 24"7-8
madeunder the tax shelter initiative constitutes a
¯ 1 IRS "Tax Talk Today" webcast, the IRS stated
res from 1,180 taxoayers. The disclosures covered
l il~,l.£~,J
OdLIIIUI.UlI~,~KI
i,JId.O, IL, ~1.~ UiILLIL~;;~;III£
UI.,/’~L.Ul~I.,L~I
~rded 1,664 disclosures from 1,206 taxpayers whc
:ase, the IRS announcedthat it has cut a deal wi~
registration and list maintenance issues. The IRS
~gust regarding Merrill
Lynch, says that withoul
]
.1.--
-- ¢,i__.k
_a.___a.
--1 .......
~99 .L_ A.’IL _ ~ O z .....
¯
develop processes to ensure ongoing con
maintenance requirements, according to the re
e.
Warm-up t
Announcement2002-63, 2002-27 I.R.B. 72 (’
tax benefits from a "listed transaction," see N
accrual workpapers. Listed transactions will
attorney client privilege nor the § 7525 ta~
workpapers.
£.
No third-pa
review. Chief Counsel Notice CC-2002-028
similar documentsthat identify third parties,
with the Associate Chief Counsel (Procedure,
4. Fifth Circuit and Ei
(ADR)arbitrage transactions do not lack e~
a.
New Rule il
Gal?). Royal Dutch Shell ADRs peddle
substance. Compaq. Computer Corp. v. Con
af
an
AT)I?
arh
ADRscure dividend, followed by sales of th
Compaqthen carried back $20 million of los~
$3.4 million foreign tax credit for taxes withh~
held that the transaction lacked economic sl
without regard to tax consequences was a $]
negligence penalty was imposed.
¯
Judge
a cash flow analysis, nor did it investigate the h
provided by the promoter and "has chosen not
the advice of its tax departmentor counsel. TI~
negligence penalty.
¯
Judge
business purpose requirement of the economics
rationally related to a useful nontax purpose
economicsituation." She continued, "This inqu~
.... I;,.÷;,..,.,,.,AI~,.;4-;,.,..,~4,-,
k..o;.aoo
¢,~oh;n~ +h,
¯
"The
for the purpose of partially shielding a capital
transaction was less than businesslike with
multimillion-dollar transaction based on one n
reference .... Weconclude that [Compaq]
transaction, and no other business purpose exist
b. But the Eigh
same investment banker and concludes tha
~’k~" that taxpayer satisfied the new "two-meeti
on securities law and tax law, or was it that
dividend income received (so taxpayer h,,
"prudence," as opposed to "sham." IES In
¶50,471, 87 A.F.T.R.2d 2001-2492 (8th Cir.
¶50,470 (N.D. Iowa 9/22/99). Taxpayer purch
no U.S. taxes, but were subject to foreign wi!
created foreign tax credits (as in the Co~
~avernment_ Judge McManusheld that the A
with the shelter registration
and investor list
,toeopier for those tax accrual workpapers.
In auditing returns filed after 7/1/02 that claim any
01-51,2001-34 I.R.B. 190, the IRS mayrequest tax
~rmined "at the time of the request." Neither the
loner privilege protects the confidentiality of the
coordination of the disclosure of these document:
nistration).
ireuit agree that AmericanDepository Receipt:
: substance.
ax Court: No More Mr. Nice Guy! (Ms. Nic~
Ln investment banking firm lacked eeonomiq
Ler, 113 T.C. 214 (9/21/99). Compaqrecognized
tly afterwards, an investment firm [Twenty-Firs
partment with the suggestion that it take advantage
tory Receipts are transferable units in a trust tha
I purchases of $888 million of Royal Dutch Shel
~Rs ex dividend within the hour for $868 million
,t the previously recognized gain. It also claimed
1 the $22.5 million dividend received. Judge Coher
.~ because the net cash flow from the transactior
ion loss. The foreign tax credit was denied and
considered it important that Compaqdid not perfom
nt. She noted that Compaqshredded the spreadshee~
ose any communications"indicating any reliance or
:ors were also important to the court in upholding
e doctrtne is only satistied when"’the transaction [is]
~lausible in light on the taxpayer’s conduct and ...
;into account whetherthe taxpayer conducts itself in
¢ considering and analyzing the ramifications of a
nsaction," citing the UPScase.
aasaction was marketedto petitioner by Twenty-First
6ously realized .... [Its] evaluation of the proposed
.ssistant Treasurer] committing [Compaq]to this
Mth Twenty-First and on his call to a Twenty-First
~tivated by the expected tax benefits of the ADR
.
uit looks at different ADRdeals peddled by the
iid have economic substance. Wasthe difference
," or was it that taxpayer sought outside advice
, v,.,..’,d.IL11,.....l,.,1;....,.-..
4. .... ,,.ll;,,,al ....,^.d. ,..^.,al .... 41-II. ....... ,i..,,.C
v. United States, 253 F.3d 350, 2001-2 U.S.T.C
), rev’g 84 A.F.T.R.2d 99-6445, 2001-2 U.S.T.C
; ADRsfrom tax-exempt organizations, which pai~
g on the dividends. The ADRarbitrage transactiol
e). On a motion for summary judgment by th~
tsactions "did not change IES’s economicpositio~
*
The ]
distinguishingCompaq.
First, the court rejecte~
the sole reasonfor the transactions, [because]e
economicloss." It rejected the government’s
v.
not the gross dividend"---a viewwhichif accet
it receivedthe foreigntax credit. Rather,the cc
be analyzed by considering the gross income
economicbenefit to IES was the amountof th~
fact that the taxes werewithheld,andthen paid
by the ADRs,so that IES received only 85%ot
for the tax .... Becausethe entire amountof thq
resultedin a profit, an economic
benefit to IES.’
¯
Secon
r applyingthe business purposetest is "whether
relating to tax considerationsor whethera non
court describedthe business purposetest as "a
F293U.S. 465, 469 (1935)] for the vrovosition
UUULUt~.IL~ ~um m~,ILL
..oL~4.1m......
~IK.......
transactions were shamsbecausethere wasno~
risk of nonpayment
of the dividends, and dis1
minimal,but that wasin part becauseIES did i’
officials met twice with Twenty-Firstrepresen
consulted its outside accountantsand its sec~
transactions and their tax consequences."Theq
someof the ADR
trades that Twenty-Firstpropc
trades whenthe U.S. marketswere closed, in o
ADRs
betweenthe purchase and sale and to pre
avoid "’any morerisk than necessary," was ch
subjective intent to treat the ADR
trades as monq
that a transaction should be tagged a shamfor
risk." Finally, the court emphasized
that all of
"legitimate business,andthe transactionswerea
¯
Inafc
r
............................
for the foreigntax credit. Butit attachednoimp,
c.
Compaqreve
Commissioner,277 F.3d 778, 2002-1 U.S.T.C
T.C. 214 (9/21/99). The Fifth Circuit follow~
Frank Lyon Co. v. United States, 435 U.S.
multiple-party transaction with economicsub
regulatory realities, is imbuedwith tax-indet
avoidancefeatures that havemeaninglesslabei
rights and duties effectuated by the parties."
erred by disregarding the gross amountof the
of OMColonyTrust Co. treated Compaq
as ha’
5.
Lease-strip transacti
Court. Nicole Rose Corp. v. Commissioner,1
wassold to an intermediary [which then merge
prearrangedultimate purchaser. Tooffset the 1
§ 351transaction interests in certain equipmei
n;ronl~r
o~eh ¢i.~,r’l
that
h~rl
nr~ ~et~r~¢~hl~
~r~
2ircuit reversed, finding a business purpose and
;emment’sargumentthat "the tax benefits that were
.~s of ADR
trade pairs resulted, as pre-planned,in an
"IES purchasedonly the right to the net dividendld result in IESrealizing an economic
benefit only if
:luded that the profitability of the transactionshould
by IES, not the cash flow. It concludedthat "the
lividend, beforethe foreigntaxes werepaid .... The
-
..,
.,
lividends wasincometo IES, the ADR
transactions
ighth Circuit concludedthat the properinquiry when
tyer wasinducedto commitcapital for reasons only
ire, or legitimate profit motive,wasinvolve&"The
ive economicsubstancetest," and invokedGregory
e legal fight of a taxpayerto decreasethe amountof
k them, by meanswhichthe law permits, cannot be
mt to avoid taxes thus will not by itself determine
¯ ejected the government’s argument that the
oss, focusingon the legal, as opposedto economic,
mgCompaqby stating: "The risk mayhave been
workbefore engagingin the transactions. Company
mdstudied the materials provided.After that, IES
ounsel for reassurances about the legality of the
,ted that IES did its owninvestigationandrejected
at IESstructuredthe transactions[e.g., makingsome
avoidthe risk of fluctuationsin marketprice of the
aird party fromattemptingto breakup the trades] to
~ed as "good business judgmentconsistent with a
no
tr~n~etion~
" The.
cnl]rt
wa~
"not nran~re.d
tn
~nv
ies involved wereunrelated to IES and engagedin
[ength.
the court noted that in 1997, Congressamended§
of time an ADRmust be held within a thirty-day
Or the foreigntaxes paid on the dividendto qualify
o that changeeither way.
’ the Fifth Circuit. CompaqComputerCorp. v.
4, 88 A.F.T.R.2d2001-7339(12/28/01), rev’g 113
ighth Circuit’s IES opinion and relied heavily on
78), to the effect that where"there is a genuine
vhich is compelledor encouragedby business or
considerations, and is not shapedsolely by taxed, the Government
should honor the allocation of
ldded)
Judge Edith
Jones
held
that the Tax
Court
,~ , ¯ i~11 11 1" " ¯
¯
¯
z_ ] zl _ z zl
¯
" 1
v
~seudo-blaekbox intermediaryfails in the Tax
328 (12/28/01). Thetaxpayer corporation’s stock
;tream], followingwhichits assets weresold to the
dized on the asset sale, the taxpayeracquiredby a
ack transactions[securedby trusts that resulted in
ich it immediatelvtransferred to a Dutchbank. the
economic substance under "any version" oJ
business purpose and economic substance
articulation of the test in UPSthat "a transac
goingconcern ..., as long as it figures in a bo:
6.
The Tax Court han
"purpose"of the legislative plan." Andante,
Norwest, through its equipment leasing sub
worth] purchase and leaseback tax shelter tr~
under lease to end-users. The promoter [Con
owned by two nonresident aliens, which
responsibilities to the end-users; the LLCsold
value, thereby accelerating incomerealization
Less than three months later, one of the nor
interest to a trust established by promoter, and
percent interest in the LLC[thereby closing tl
an amount roughly equal to one half of one
computers. Norwest subsequently reported i,
~,t,~a.,tj ,.v,L,L,L,W~,M,*,,,,A,
sts. Judge Swift held that the transaction lacked
.measured against the Eleventh Circuit’s broad
a ’business purpose’ when we are talking about a
profit-seeking business."
tnother shelter, and in the process tells us the
3. v. Commissioner, T.C. Memo.2002-97 (4/9/02).
engaged in a complex [seven PowerPoint slides
1 involving 40 IBMmainframe computers already
amof rental paymentto be received for net presen’
~plied the proceeds to the balance due on the note
:aliens [indirectly] transferred his 2 percent LLC
’.t, thorough a subsidiary, acquired the remaining9~
le year in which the income had been realized] fol
t of the approximately $122 million basis of the
3utive share of depreciation deductions, but was
; were reconveyed to the promoter, pursuant to a~
"economicsof the transaction ... mandate[d]," and
th~ T T (" xxr~ lit1
the original LLC,with the foreign partners, no]
member,was a valid partnership to be recognize
partners intend to join together as partners for t
together to share in the profits or losses from
would have disregarded the participation of th,
transaction doctrine [applying either the end res
sale-leaseback transaction with the promoter’
transaction, (2) lacked economicsubstance, (3)
(4) was shaped solely by tax-avoidance feature~
transaction was not respected because it lacked
and Norwest’s subsidiary, had no reasonable pc
were morethan sufficient to cover any potential
and burdens of ownership of the depreciabl,
deductions. In addition, the LLC’sdebts were nc
Finall)
In Higgins v. Smith, 308 U.S. [473] at
There is no illusion about tt
according to a legislative plan
purpose here is to tax eamin~
one or the other factor in any ¢
of the particular taxpayer to
paying group. * * *
The sale-leaseback
distortion.
transaction
was
It is axiomatic that taxpayers maystmc
struck downthe shelter. He concluded that neithei
~sequent LLCof which Norwest’s subsidiary was a
;deral tax purposes; in neither case did the purported
ose of carrying on a business, i.e., they did not join
pmentleasing activity. Alternatively, Judge Jacobs
n LLCmembersin the transactions under the step
utual interdependence test]. Furthermore, the LLC’s
ham because it (1) was not a true multiple-party
:compelled or encouragedby business realities, and
: as Norwestand its subsidiary were concerned, the
miness purpose and economic substance. The LLC,
r of makin~an economict~rofit, but the tax benefits
ment, ana mus was not enttttea to ctepreclanon
7de and no interest deductions were allowable.
Jacobs concluded by looking back to early Supreme
’[ 1940], the SupremeCourt stated:
tent of a tax exaction. Each tax,
L~mdsto carry on government. The
rofits less expenses and losses. If
on is unreal, it distorts the liability
tent or advantageof the entire tax-
;d by Comdisco to create
just
such a
asactions to take advantage of tax benefits.
schemedevised and orchestrated b
beganto wagthe dog." Id.
7.
A tax shelter that
Commissioner,113 T.C. No. 13 (9/7/99).
corporation of the amountof a related bank
were §956assets and were not excludible as’
a.
Does work i
The Limited, Inc. v. Commissioner,286 F.3
(6th Cir. 4/11/02). CDspurchasedby a foreJ
banking business were not investments in U
persons carrying on the bankingbusiness.":
applicableto this transaction.
8.
Third Circuit con
government
will love. Internal RevenueSex~
96, 90 A.F.T.tL2d 2002-5850,2002-2 U.S.q
U.S.T.C. ¶50,79!, 86A.F.T.R.2d6470 (D. ]~
Apartfromtax savings fromthe interest dedu,
from the COLIplan in any year and could not
continuouslyremainedat zero throughoutthe t
Interest deductionsweredisallowedand §666:
the transaction lacked economicsubstance.
expectationof profit- in the absenceof the i
fromeither the inside build-upor mortalitycorl
*
The"
the groundthat the "COLIpolicies lacked eco
court did not reachthe issue of whetherthe t~
handthe needto examinethe "intersection of..
[P]ursuant to Gregoryv. Helvering,2
364 U.S. 361 (1960), courts have loo
Codeand analyzed the fundamental.,
for obtaininga deduction,if it lacks
federal taxation purposes,for better o
In holding for the government,the court r~
Knetsch, A CMPartnership and other cases]
doctrine properlyhingeson the "’fleeting mac
Rather, the court concludedthat: "Duration
substance. The appropriate examinationis of
term. The point of our analysis in A CMPart
net effect on ACM’s
financial position.’" b
"striking similarities" to Knetsch.Thecourt fi
pre-tax profit shouldhavebeen"grossed-up"1
[t]he point of the analysis is to remo~
and evaluate the transaction on its n
meretax arbitrage. Courtsuse "pre-t~
th~ rn.~ m~ct im~.n~ ~ ~x~nrlA
~,ht
isco "reachedthe point wherethe tax tail
t work in the Tax Court. The Limited, Inc.
nvolvedthe exclusion fromthe incomeof a foreig;
.cates of deposits. Judge Halpemheld that the CD
s with [a] personcarrying on the bankingbusiness.’
xth Circuit: Anothertaxpayer victory on appeal
srty for purposesof § 956, but were"deposits wi~
no related party prohibitionin ~
the portion of § 9.
,n hard on COLI, with lots of language tt
MHoldingsInc. (In re CMHoldingsInc.), 301 F.3
,596 (3d Cir.8/16/02), aff’g 254 B.R. 578, 20006/00). In CMI’sbankruptcy,the IRSfiled proofs
st
a deductions that CMIclaimed for its COLIpl
’,ourt held no interest deductionwasallowabletmd¢
L substance"that lackedsubjective businesspurpos~
MIcould not reasonablyexpecta positive cash flo~
:o benefit fromthe inside cash value build-up[whic
profit fromthe death benefits on coveredemployee:
atial understatementpenalties were imposedbecaus
ansaction was entered into without a reasonabl
]eductions- over the life of the 40-year tmnsactio
:of the plan.
a’cuit Court of Appeals(Judge Ambro)affirmed
ubstance and therefore were economicshams."[Th
~ns were factual shams.]Thecourt dismissedout c
465 (1935), and Knetschv. United States,
’ond taxpayers’ formal compliancewith the
e of transactions. Economic
substanceis a
provision allowingdeductions.... It is the
~n compliesprecisely with all requirements
: substanceit "simplyis not recognizedfor
c’se."
the taxpayer’s argument that [based on Gregory,
lication of the application of the economicshams
;quential’ nature" of the transaction underscrutiny.
:annot sanctify a transaction that lacks economic
financial effect to the taxpayer, be it short or long
is that
the transactions
’offset
one another
with no
¯ .t
. ,~
¯ .1
..-~
..-~
.r
,r ....
¯
...
tticipated tax benefits because,
.,
¯
¯
¯ onsiderationthe challengedtax deduction,
see if it makessense economicallyor is
orthandfor this, but they do not implythat
: zncl
evnh~te
the
tr~nc~tinn
~nrclincrlv
purposes." [citation omitted] Choosi
engaging in an empty transaction
generatinga deductionis not.
¯
Finall
"the transaction had objective non-tax eeonon
district court improperlyapplieda subjectiveaa
an inquiry into motive."If Congressintends te
taxes as a meansto do it, then a subjective n
activity solely for the purposeof avoidingtax
transaction." Becausethe court foundthat no~
leveragedCOLIinvestments,the inquiry into r
plan was marketedas a tax-driven investment
economic
position, ... it fails the objectiveprc
"legitimate business purposebehindthe plan,
upheld.
¯ .,r I. . ...
¯
The n<
other reportable transactions underReg.§ 1.60]
that participate, directly or indirectly, in listed
reportabletransaction. Ataxpayerindirectly pat
has reason to knowthat the tax benefits cla
transaction.
¯
TheII~
"substantiallysimilar" standardin Reg.§§ 1.60]
disclosure,andthe regulationsto clarify that the
expectedto obtain the sameor similar types of
the sameor similar tax strategy. Further,the ten
of disclosure.
IX.
EXEMPT ORGANIZATIONS AND
Exempt
Organizations
_
Y,
.uo ¯
-
..
- .L +L
imposeexcise taxes against disqualified per
section 501(c)(3) and 501(c)(4) organizations
spirit under which § 4958 was enacted, whi
insiders (including board members);these
that are not reported as compensation.
a.
Regulations
regulationsrelating to the excise taxes on exc,
3076(1/23/02).
2.
Notice 2001-78, 200]
charities regarding paymentsmadeby reason
as a result of the September11,2001terroris
charity to individuals and their families as r
paymentsare madein good faith using objec
final legislation or 12/31/02.
a.
The Victims
by charities are for an exemptpurposeevenil
~rnnd faith
under an nhiective
¯
ourt rejected the taxpayer’s argumentthat because
ts ... the Courtmustnot look further," andthat the
.Lather, the Courtof Appealsread Gregoryto permit
lge
an activity,
andto use
taxpayers’
desire
to avoid
,~ .
.,i
¯
. .,.
° ....
~, i,~i.~s.i,i,~.~JLI.,~.tl,i.J.,L~.s~l,l.61..t.,I.t,~,,~ ~:~Vt..l.~
,1.~I-V’I~,VJLJ.I~I.U.~.,,I,
(,LOllr.~LJ
ttute to indicate that Congressintendedto encourag<
’as proper.In this regard,it wassignificantthat "th~
tse the COLI"plan had no net effect on Camelot’:
le economicshamanalysis." Becausethere was n(
s the subjective prongas well." Penalties werealso
A,,,,~t n,
¯ J,.v5
41362(6/18/02]
A.
x-favored investment vehicle is fine, but
dries payments for the sole purpose of
formula
/)~_
cnn~i~te
92, Return Filing Requirement, 67 F.tL 41324 &
flat’ions modifythe disclosure, registration andlis
’. withrespectto tax shelters.
lations extendthe requirementto disclose listed ant
, individuals,trusts, partnerships,andS corporation,
ions. Further,they clarify indirect participationin
in a reportabletransactionif the taxpayerknowso]
omthe transaction are derived from a reportable
that sometaxpayersand promotershaveapplied the
td 301.6111-2T
in an overly narrowmannerto avoid
mbstantiallysimilar"includesanytransactionthat i.,
refits andthat is either factually similar or basedor
tantiallv similar" mustbe broadlyconstruedin favol
ITABLE GIVING
lations are out; breakout the supplyof 1099s.
regulations under§ 4958, whichpermits the IRSto
Lo participate in excess benefit transactions with
~. 2144& 2173, 1/10/01). Theserules reflect the
to tax "excess" benefits provided by charities to
~enefits also include benefits providedto insiders
final. The Treasury has promulgated t~nal
fits transactions under § 4958. T,D. 8978, 67 F.R.
.B. 576 (12/10/01). Provides interim guidance
the charity’s exemptpurposeprovided that tht
adards. Thenotice is effective until the earlier o:
,rism TaxRelief Act clarifies that paymentsmade
vithout demonstrationof financial needif madeit
lied.
owned,not-for-profit hospital on its tax exem
with HCA,Inc. [a for-profit health care co~
interests of 45.9 percent and in whichthe foz
forfeiture of hospital’s § 501(c)(3) exemptioz
not absolutely require a communityboard, a
appointed only half the board memberswh
appointee. There was languagein the partner
operate in accordancewith the community
be1
andSt. David’scan unilaterally dissolvethe p~
¯
Query
an exampleof an acceptablejoint venturein wt
will still be consideredvalid. See also, Redlan
aff’dper curiam, 242 F.3d 904, 2001-1U.S.T.C
Charitable Giving
B.
Is the cost of religio
Advice 2000-1 (7/11/97). Tuition payments
_..._,.....:,._...,,.:..._...
+..,1..... +^_+
rear...... +~+L^+
+~
return for paym~
O(.;l~lltUIO~y
Iml,l,~U UUU~LIIUIII~Ill UuIImI~ILJLUImWII&I
a.
Taxpayers sh,
Sk]ar v. Commissioner,T.C. Memo.2000-118
Nameroff, relied on Hernandezand found tt
becausethe "auditing" involved there was"n~
involvedin the case at hand]in their organizati,
c.
b.
Affirmed, 27
withdrawnand reissued as amended,882 F.3d
affirmed the Tax Court in an opinion by Judg4
majority opinion explored the apparent conflic
Churchof Scientology and concludedthat (11
Scientology closing agreement, (2) the clo:
religions, but that (3) the SEars are not
inconsistency"in the treatmentof their tuition
because taxpayers failed to showthat their 1
exceededthe tuition chargedby other private s
that the proper course of action is a lawsui
Scientology,"not to requirethe IRSto let others
2.
Price guesstimates ar
No. 19 (4/19/02). Thefair market value, raft
appreciated stock to a private foundationund~
available. Judge Halpemheld that an estimat,
whichsporadically traded over the counter, bl
did not qualify as a marketquotation. Thestc
Reg. § 1.170A-13(c)(xi)(A),and the deduction
3.
The high cost of kno
contributions. Addis v. Commissioner,118
charitable split-dollar life insurance scheme
organization [prior to the enactmentof § 170q
charitable split-dollar life insurancepayments]
of 1997 and 1998 and claimed charitable c~
amountsas premiumson a charitable split-&
;. Thehospital’s entering into a limited partnership
in whichit had general and limited partnership
)artner wasthe managingpartner, did not result in
ourt held that the community
benefit standard did
St. David’ssatisfied this standard even thoughit
chairman’s seat was reserved for a St. David’s
cementrequiring all the partnership’s hospitals to
adard outline in Rev. Rul. 69-45, 1969-2C.B. 117,
n if" thPv fail tn rln ~n
"
¯
-----
Jt-
.......
aonprofit partner has numericalcontrol of the boar&
!cal Services v. Commissioner,
113 T.C. 47 (1999):
1, 87 AFTR2d
¶2001-642(9th Cir. 2001).
azction in day schools deductible?Field Service
~h day schools were not deductible as charitable
5ren’s educationconsistedof religious instruction.
}0 U.S. 680(1989) (substantial benefit received
he 1993 Churchof Scientology settlement nor of
reed "not to contest the deductibility of Churchof
~d religious services."
ve suedIRSofficials like the Scientologists did.
)). Thecourt, in an opinionby Special Trial Judge
Churchof Scientology settlement was irrelevant
[cal [to the general, includingreligious, education
zture or purpose."
597, 2002-1U.S.T.C. ¶50,210 (9th Cir. 1/29/02),
A.F.T.R.2d2002-808(2/27/02). The Ninth Circuit
ardt, with a concurrenceby Judge Silverman. The
en the Hernandezease and the settlement with the
.S improperlyrefused to disclose the terms of its
zts and the paymentsto the Churchof Scientology
!s for tuition were "dual payments"in that they
citing United States v. AmericanBar Endowment,
an’s concurrence was based upon the conclusion
,p the preferential policy towards the Churchof
te improperdeduction,too."
rket quotations. Toddv. Commissioner,118 T.C.
the basis, is the deductionfor a contribution of
(e)(5) only if actual marketquotationsare readily
:e by the broker whoexecutedtrades in the stock,
aich marketquotationswere not readily available,
mt meet the standard for marketquotations under
ited to the taxpayer’sbasis in the stock.
.....
\ .......
/ ......
I’"J
...........
,..,..,,.,,v
,..,
ze National Heritage Foundation, a § 501(c)(3)
which wouldimposea 100 percent excise tax on
idises paid approximately$36,000to NHFin each
on deductions for the payments. NHFused the
: insurance
policy on Mrs. Addis’ life. NHFwas
~
~,,axravc
"Fam;lxr
~-,-no+,~r,~, an+(+laA+~ fha va.r’~ai.~,’lav
or services to them in return for the paymenl
the entire amount of their payments to NHF
any charitable contribution deduction. The t
170(f)(8) and Reg. § 1.170A-13(f)(7)
the benefits provided to the taxpayers throu
1.170-1(h)(4)(ii)
and 1.170-13(0(6)
deduction under the circumstances.
X.
TAX PROCEDURE
A.
and Prosecutions
Eight commonly u~
taxpayers not to fall victim to eight commonl
from your wages; (2) "I don’t pay taxes";
tax, then get the prize"; (5) "Untax yourself
you a big refund.., for a fee!"; and (8) IR
1-800-829-0433, except for #1 (1-800-829-10
a.
Nowthere ,’
Penalties
wuy ~uuuzu you
._~a.__..*
tyers claimed charitable contribution deductions foz
Colvin upheld the Commissioner’s disallowance o:
s did not meet the substantiation requirements of !
failed to makea good faith estimate of the value ol
family trust’s share of the death benefits. Reg. §~
:ed to deny completely a charitable contributior
..........
Money in a Trust And Never Pay Taxes Ag
access credit for pay phones; and (12) an IRS
2.
Plead it’s wrong or l
(5/3/02). Section 749 l(c) provides that the
penalties in all cases. The taxpayer, in her
Commissioner’s determination that § 6662 ac
pursuant to Tax Court Rule 34(b)(4), the
§ 7491 (c), the Commissionerwas not requirec
The penalty was upheld.
3.
These guys better 1
advance sheets. Lyon v. United States, 2002
6/4/02). The president and sole shareholder of
§ 6672 penalty because he was merely a "fron
from the true parties in interest who owned
evade union contract limitations [because they
A[
T"~.--f".-,.,=,,-;..,
.,,. T T,.,;+.-.A ¢,
enhanced penalties of between $25,000 ant
include the names of the payors of cash exce,
of § 60501and the regulations thereunder. PL
nineteen Forms 8300 filed during the year we:
held that if that were so, penalties wouldnot t
to demonstrate factually that the namesof the
Discovery: Summonses and
1.
Seawright v. Commie
§ 7602(c), which generally requires the IRS
connection with examinations and collectiol
potential witnesses in the course of litigatic
2(f)(7).
2.
Hambarianv. Commi
criminal
proceeding
arisingfromthesame
proceeding,
thetaxpayer’s
criminal
defense
I
largeramount
in thepossession
of theprosec
seams. IR-2001-19 (2/12/01). The Service warn
~x seams. They include (1) No taxes being withhel,
m-Americansget a special tax refund; (4) "Pay
95"; (6) Social Security tax scheme; (7) "I can
comesto your house to collect. To drop a dime, ca]
#8 (1-800-366-4484).
)irtv Dozen." IR-2002-12 (1/31/02) The commol
m wages; (2) the concept that "I don’t pay taxes
ix refund; (4) paying the tax and getting a prize;
~me;(7) the concept that "I can get you a big refun~
c credit dependents; (9) the concept of "Put You
0) improper home-based business; (11) a disablec
pmingto your house to collect your taxes.
y to pay. Swain v. Commissioner, 118 T.C. No. 2;
oner bears the burden of production with respect t(
a to the Tax Court, failed to assign error to th~
:elated penalties were due. Judge Halpemheld tha
aceded the penalties issue, and that notwithstandin~
luce any evidence that the penalty was appropriate
at the UMWA
rank and file doesn’t read ta~
F_C_¶50511_00 A P’ T 11 9rl 9009-~13~Q(W13 V~
holding title to stock on behalf of and taking orders
maged the unionized corporation anonymously to
and managedother nonunionized companies].
002-2 U.S.T.C. ¶50, (S.D. Tex. 8/5/02). Summary
g to penalties under § 6721(e), which provides for
)00 for intentional disregard of the obligation to
0,000 on Forms 8300 pursuant to the requirements
~orneys contended that the names of the payors on
,~ged under the attorney-client privilege. Judge Lake
ed. Plaintiffs are to be given the opportunity at trial
vere privileged.
" "
B.
117 T.C. 294 (12/18/01). Judge Thornton held that
y the taxpayer before contacting a third person in
A.~,,,n~..,.,. A~VVJ.:OJL,.’~’~JULI,
VVJLe=JL~
~. Ll.l[J. :.~,.~,q~). ~ .J~’,L. I I,.tVg....,"
118 T.C. No. 35 (5/13/02). In the course of a stat~
ions that gave rise to the Tax Court deficienc3
elected 100,000 pages of documents from a muct
:orney and converted the documents into compute~
product. Judge Gerber held that since over
involved, it washighly unlikely that attome2
selection of particular documentsby the
documentsinto work product. Becausethe t~
the selected documentswouldreveal the defe:
documentsand computerizedelectronic media
3.
The "I relied on ad
discussed"defense to tax fraud doesn’t cut
deficiency proceeding in which the Commi
penalties, the taxpayerasserted the affin-natiw
tax returns in question. The Commissioner
m
the fight to assert attorney-client privilege
producing notes madeby the lawyer regardiJ
personregardingthe transactions giving rise t
arguedthat the taxpayer had waivedthe privi
penalties. The Tax Court (Judge Nims)first
had beenwaivedwas one of federal law, not s
.... ~;7 .....
information
J -- .I --
at i
the various pleadingsthe court rejected the tax
experts" referred to an accountant, not his 1
referred to his formerlawyer, whohad provid~
prongof the test waseasily satisfied: "to the
reasonable because it was based on advice ot
received." Finally, because the Commissioner
prong was met: "To ’defend" against this def
such reliance either was unreasonableor did
knowledgeof what tax advice Mr. Johnston re,
lawyer]." Having invoked reliance on e:
communicationsfrom particular experts wt
communications
from other experts.
C.
Litigation Costs
3..
Hownot to represent
43 (2/12/02). Judge Gerber imposeda $15,00£
v
-
.,
q.,
2.
Thehigh price of ze:
Commissioner,289 F.3d 452, 89 A.F.T.R.2d2
116 T.C. 111 (2/27/01). In a case involving
Cohen)imposedsanctions and costs under
[at $150per hour] and $807.06of expensesa
described,with citations to prior cases, as "h~
multiplying the proceedings "unreasonably I
rejected so frequentlythat they are ’entirely x~
of harassmentor delay or for other improperpl
orders."
The C
upheldthe impositionof the government’scosts
the taxpayer’s attorney under§6673,the attorr
’extremelynegligent’ conduct"satisfies that st
after being threatened with sanctions and prom
TaxCourtproperly took into accountIzen’s beh
pages of otherwise discoverable documentswere
al impressions wouldbe discemable and the mere
r’s lawyer did not automatically transmute the
failed to otherwise demonstratehowdisclosure ot
~ey’s mentalimpressionsof the case, the requested
)t protectedby the workproductdoctrine.
counsel, but I won’t let him tell you what we
son v. Commissioner,
119 T.C. No. 3 (8/8/02). In
an order in advanceof trial denyingthe taxpaye
=nt his former attorney from testifying about o:
titular meetingbetweenthe taxpayer and anothe:
serted deficiency and penalties. TheCommissione~
claimingreliance on counsel’s adviceto avoid th~
t the question of whetherattorney client privileg~
Next,the court held that there wasa three part tes~
vilege wasa result of someaffirmativeact, sucha,
firmative act, the asserting party put the protectec
.-; and (3) application of the privilege wouldhav~
to his defense."Withrespect to the first prong,or
argumentthat his defenseof reliance on "qualified
and the court found that the affnTaative defense
ax advice during the years in question. Thesecond
fiat ...[the taxpayer]claimsthat its tax position is
:1, ... [the taxpayer]puts at issue the tax adviceit
he burden of proving fraud [§ 7454(a)], the third
F reliance on counsel], respondentmustshowthat
fact occur. Respondentcan do so only through
and such wouldinclude communications
from [Iris
the taxpayer could not selectively withhold
ided tax advice, while allowing disclosure of
t. Carpentier v. Commissioner,T.C. Memo.2002¢ on the taxpayer whowasrepresented by counsel
rigible" "spuriousattacks on the authority and/or
Lureto complywith requestsfor stipulations.
or-dragging in representing a client. Johnsonv.
8, 2002-1U.S.T.C.¶50,402(7th Cir. 5/3/02), a.ff’g
f a shamtrust arrangement,the TaxCourt (Judge
the amountof $8,587.50 of IRS counsel expenses
~xpayer’scounsel [Joe AlfredIzen, Jr.]. Izen was
Longhistory of involvementwith shamtrusts" for
atiously" by "pursu[ing] claims that have been
olomblepretext or basis and are taken for reasons
"and by "chronic failure to complywith discovery
---_r"JL"
.....................
\,----~--
~. v~,~.~v,~
JudgePosnerfoundthat for costs to be imposedon
:have acted in "bad faith," and that "’reckless’ or
"Izen’s repeated flouting of discoveryorders even
complyestablishedhis badfaith all by itself." The
prior cases. "[D]ogged
goodfaith persistencein bad
1.
Anoptional statutot
(5/21/01). Section 3463(a) of the IRSRestruc
states that the IRS"shall include on eachnoti4
last day on whichthe taxpayermayfile a petit
valid deficiencynotice that omittedthe last cls
days late. In a reviewedopinion (10-6) by Jud
nevertheless was valid and dismissed the tax
[providingthat a petition filed by the date in(
does not result in unlimitedtime to file a p~
confused,misled, or prejudicedby the notice o
¯
Judge
the groundsthat "shall" means"shall" and "e
directed to do must have consequences,specif
wouldhave found the notice valid but would
consequenceof noncompliancewith § 3463(a)
Judges Foley and Colvin would have found t]
ision? Rochelle v. Commissioner,116 T.C. 356
sad ReformAct of 1998, an uncodified provision,
[iciency ... the date determinedby [the IRS]as the
te Tax Court." Thetaxpayer received an otherwise
ling a TaxCourt petition and filed his petition 56
luez, the TaxCourtheld that the deficiencynotice
untimelypetition. Thecourt held that § 6213(a)
)n the deficiencynotice as the last date is timely]
.~ _A .I.°A
.........
.1..4...
I-
" .....
"42:,...4
’T~^ + ...........
~,-, ,.,,.,,+
¯
(joined by Galeand Marvel)dissented, basically
ans "each" and that failure to do what the IRS is
;ndering the deficiencynotice invalid. Judge Swift
weda "reasonableextension"of time to file as the
998 Act and wouldhave found the petition timely.
ieficiency notice wasvalid, but that there wasno
n.tcirle Ante. fnr filin~r
z net’it’ion_
/4U, 5~ A.I~. 1.1~
vv ¯
J.v,.~,.,,../
~ ............................
Statute of Limitations
1.
Just where on the
Commissioner,116 T.C. 31 (1/17/01). This cas
determiningwhetherthe six-year statute of lira
Chabot),in a matterof first impression,held tt
partnership (the upper tier partnership) that
partnership) includes the uppertier partnershi~
partnership and not merelythe gross incomeof
a.
CC-2002-03(3
2.
Robinson v. Commis.,
periodof limitationsfor assessingtax attributat
the shareholder’sreturn, not with respect to the
3.
A "not so simple" ap
UnitedStates, 51 Fed. C1. 443, 2002-1U.S.T.C
failed to file a tax return, but filed an inform~
E.
I~IULLLULIIUJI~; ULlCXtt ULJUL~.y~aJL~ ¢tJLt~X UtJt~, UUt~, ~t~tt~
Thelate-filed tax return did not relate backis
permit the three year look backrule of § 6511
year look-backrule of § 6511(a).
4.
Maybethe IRS shoul
and penalty go. Hoffmanv. Commissioner,
two partnerships in whichthey did not materi
on information returns from the partnerships
expired, and two days before the six year st~
reporting additional incomefor m the partr
proceededto assess penalties and interest in
taxpayersraised the statute of limitations as a
but the Commissioner
determinedthat the six
Laro) applied the special definition of gross
providesthat for a trade or business"gross inc
fromthe sale of goodsor services before
sawno reasonto limit the previouslyestablist
tally taxpayer-friendlyFifth Circuit. 293 F.3d
47 (5th Cir. 6/4/02). TheFifth Circuit affirmedthe
rsing Judge Vasquez’smajority opinion. The panel
the Tax Court.
a do you find "gross income"? Harlan v.
red the calculation of gross incomefor purposesof
in § 650 l(e)(1)(A) applied. TheTaxCourt
aant to § 702(c)the gross incomeof a partner in a
n interest in another partnership (the lower tier
ibutive share of the gross incomeof the lowertier
er tier partnership.
¯ Acquiescencein Harlan.
117 T.C. 308 (12/19/01). Under § 6501(a),
~n of the refundstatute of limitations. Wertzv.
)2, 89 A.F.T.R.2d2002-491(1/9/02). The taxpayer
d claim [for withheld taxes] morethan two years
ter the duedate; he filed a tax return claimingthe
urt held that the claim wasuntimelyunder § 6511.
) the date of an untimelyinformalclaim, so as to
k) to permit a refund otherwisebarred by the two
acceptedthe cheekfor taxes andlet the interest
¯ No. 7 (9/24/02). Thetaxpayers werepartners
:icipate. Theyfiled a timely return for 1990based
)8, after the three year statute of limitations had
limitations expired, they filed an amendedreturn
and paid the additional tax. The Commissioner
ttute
oflimitations
applied.
TheTaxCourt
(Judg~
)f a trade or business in§ 6501(e)(1)(A)(i),
:ludes the total of the amountsreceivedor accrued
by the cost of those sales or services. Judge Lar¢
ication of this principle to partnershipsto cases
h~e,~,1~ th~ (’~r~mmicclc~n~r f’niled
tn intrndne.e,
zn~
determinedby reference to the partnerships’
was inapplicable. The assessmentwas tmtime]
5.
Even the governme
States, 300 F.3d 1065, 90 A.F.T.tL2d2002-5~
Circuit followed Rev. Rul. 76-511, 1976-2(
timelyis timelyif it is filed withinthree year.
whenthe return is filed, andoverruledits prio~
473 (9th Cir. 1974). [Note, however,that the
year look-backrule in § 6511(b)(2).]
Liens andCollections
1.
Foreign postmarks
IRB811 (5/6/02). The Service will accept
with the Service, based upona timely mailing
as well as by timely deliveryto a designatedix
a.
But, too late
(9/25/01). Neither the timely mailed/timely
tion returns, andthe six-year period of limitations
the taxpayer was right. Omohundrov. United
2-2 U.S.T.C.¶ 50,590(9th Cir. 8/19/02). TheNinth
l, holding that under § 6511(a) a refund claim
ae date the incometax return is filed, regardless of
n to the contrary in Miller v. UnitedStates, 38 F.3d
of the refundcontinuesto be limited by the three-
F.
wminedate of filing. Rev. Rul. 2002-23, 2002-1
led any documentrequired or permitted to be filet
raced by an official postmarkin a foreign country
hal deliveryservice.
Sarrell. Sarrell v. Commissioner,
117 T.C. No. 11
of § 7502(a) that generally applies to Tax Cour
(a) for petitions fromtaxpayersreceiving a notice
LSunder § 6330(d). Thepetition wasdismissedfo]
lack ofjurisdict
merule "snatt apply mmecase o~ postmarksno
extent providedby regulations prescribedby th
filing rule of section 7502(a)does not apply
158, 168(1999),andcases cited therein; see als
’Section 7502 does not apply to any docume
opinionstated that "section 7502(b)providesthai
)y the UnitedStates Postal Serviceonly if andto the
ary.’ It is wellsettled that the timelymailing/timely
1 postmarks. See Pekarv. Commissioner,113 T.C.
~1.7502-1(c)(1)(ii),Proced.&Admin.Regs., stating:
h is deposited with the mail service of any othe,
country. ’"
2.
Whena "hearing" isl
a.
Lunsford v. C
In decidingthe validity of a notice of determ~
has jurisdiction to reviewthe IRSdeterminatie
Ruweheld that the court will not look behinq
whether the taxpayer was afforded a proper]
overruledto the extentit is to the contrary.
b.
Lunsford v. C~
notice of determination to levy under § 6330,
face-to-face hearing but instead wasprovided
~oot.,ooxxxt.,~t,.
~.tx~ u.t~.,
z-x~lJ~.,~..o
vJ.atz~.,~,x
Jt~,o/Jvx, t.L~
Assessments and Payments. The majority no
question requires an actual hearing. Sevendis
prerequisite to upholdingthe notice of determt
e.
Johnson v. C
Section 6330(d)does not confer on the Tax
levy pursuant to an assessed § 6702frivolous
Court’sjurisdiction to types of taxes over whi~
Es v. Commissioner,115 T.C. 324 (10/13/00),
Court will no longer look behind a the face c
taxpayer wasafforded a proper hearing as rec
(2000),is overruledto the extentit is to the col
3.
Agaz~e v. Commissio
immediateassessment [by signing Form4589,
a § 6330per-levy administrative hearing. That
§ 6330is not relevant.
4.
Moredue process. [
tring, but just a letter fromthe IRS.
ioner, 117 T.C. 159 (11/30/01) (reviewed, 8-3-5).
3r purposesof ascertaining whetherthe Tax Court
6330[due process before levy] proceeding, Judge
ce,,, of the notice of determination
to inquire as to
P.
.................
oner, 117 TC183 (11/30/01) (reviewed, 7-2-7).
/alid even though the taxpayer was not afforded a
nentary response by mail to his inquiry regarding
whether there was a valid summaryrecord of
mdingthe taxpayer a Form4340, Certificate of
other cases might arise wherethe nature of the
iudges wouldhave required an actual hearing as a
oner, 117 T.C. 204 (11/30/01) (reviewed, 9-7).
diction to reviewan Appealsdecision not to stay a
)enalty. Section 6330(d)does not expandthe
~x Courtdoes not ordinarily havejurisdiction. Van
d. If subject matterjurisdiction is lacking, the Tax
,tice of determinationto inquire as to whetherthe
’"t,,,W,t.,A.~"~.m..l,,,A~.i.’,,,#,J.~.~,.~A
~,m.,,LA~,.~,~,.L,~,.,a.L
~.#~,~.~#.~,~---~
~.~,,~,a.J~,.’~,,W~i~.
T.C. 324 (12/28/01). Ataxpayer whoconsents
Tax ExaminationChanges]has waivedthe fight tc
aa 4589wasexecutedprior to the effective date o~
v. Commissioner,118 T.C. No. 2 (1/7/02). The
5.
T.D. 8979 & 8980, J
hearing following lien filing under § 6320 and
67 F.R. 2558 & 2549 (1/18/02).
6.
Have due process h
Commissioner, 118 T.C. No. 10 (2/19/02)
taxpayer [who was described in a concurring
precluded from challenging his underlying tm
received were invalid because they were not p~
of the Service Center whoprepared and issued
in a § 6330 hearing. Section 6330(c)(2)(B)
because he [concededly] received the deficie
sentence), which requires that a copy of the
entitle the taxpayer to receive or be shown
hearing, and the taxpayer was not prejudiced 1
the § 6330 hearing. The taxpayer’s other argtm
¯
Judge
~hnnld
nnt 1~ ~nnetmad
tn n~.rmit
the
~nmmi
neea. .not - De col~
J Ul.lk~
prejudicial error" ~ that in reviewing adminis
evenstatutorily required prerequisites, unless th.
of the AppealsOfficer in the conduct of the heat
¯
Judge
practice for the Appeals Officer to provide the
but in this case the failure washarmlesserror.
¯
Judge i
result, but was of the opinion that § 6330(e)(]
regulatory, and administrative requirements for~
a Form4330is not always alone sufficient, althc
Judge
have a record of assessment at the hearing or
constituted a failure to complywith the reqt
compliancewith applicable laws and regulations
"7 _
A m~inr nrnnm]neerr
U.5. I.C. ~13U,501, ~ A.P.I.K.ZO ZUUZ-AUU3
taxes, but Mrs. Craft did not. The IRS filed
entirety. Under state [Michigan] law, the Sl;
interests in the property and his creditors couJ
Mr. Craft quit claimed the property to Mrs. C]
on the condition that one-half of the proceeds
title action seeking the escrowedproceeds. Th,
in an opinion by Justice O’Connor, held (6-:
"property" or "rights to property" to which fed
... "[W]e look initially to state law 1
property the Governmentseeks to re~
taxpayer’s state-delineated fights qual
compassof the federal tax lien legisla
S.Ct. 474, 145 L.Ed.2d 466 (1999).
~lations on the fight to a collection due process
fight to a similar hearing before levy under § 6330,
become the playground of frivolity? Nestor v.
Judge Colvin, writing for the majority, held the
¯ as a "flagrant tax protestor"] was not improperly
y- on the grounds that the deficiency notices he
ar issued by the Secretary and because the Director
ices. The court further held that § 6203 (seconc
)f assessment be delivered upon demand, did no1
,~ documentation relating to the assessment at the
tct that he received a copy of the Forms4330 afte]
:re "frivolous."
concurring opinion noted that the majority opinior
Io withhold computerized transcripts of account o]
ra), he wouldhave held that "tax protester issues[l
:fion hearings under section 6330(b) and that ta~
¯ by the courts."
a’s concurring opinion focused on the "rule oJ
teflon the court should disregard procedural errors:
aining party was prejudiced by the error. Anyerrors
harmless error.
s concurrence stated that it should be standard
r a Form4340 at or before the due process hearing.
,ined by Judges Vasquez and Gale) concurred in the
"es the AppealsOfficer to verify that all statutory,
mt and collection have been met, and that providing
the facts of this case it was.
loe me taxpayer warn a form ,+.~.~u at me neanng
of § 6330(C)(1) that the Appeals Officer verify
uld have afforded the taxpayer a new hearing.
the SupremeCourt: the existence of "property
United States v. Craft, 122 S. Ct. 1414, 2002-1
!). Mrs. Craft’s husband owed delinquent income
a against property held by them as tenants by the
tad no individual fight to sever or convey their
vy on the property under state law. Subsequently,
en she sold the property, the IRS released the lien
awed, following which Mrs. Craft brought a quiet2ircuit held for Mrs. Cmi%but the SupremeCourt,
he husband, as tenant by the entirety, possessed
lien could attach.
I to zeaeml mwto aetermme wnemer me
)roperty’ or ’rights to property’ within the
rye v. United States, 528 U.S. 49, 58, 120
determines only which sticks are in
"property" for purposes of the federal
a’s bundle. Whetherthose sticks qualify as
¯ statute is a questionof federal law.
In looking to state law, we m
state law provides, not merelythe lal:
draws from them. Such state law lat
bundles of rights constitute property t
treful to consider the substance of the rights
~tate gives these rights or the conclusions it
irrelevant to the federal question of which
be attached by a federal tax lien ....
The bundle of rights consisting of the taxpa
exclude thkd parties from it, to receive one
proceeds from its sale (with the consent of
"’property’" or ’rights to property" for purpo:
otherwise, the entireties property would belo
that "[e]xcluding property from a federal tax ]
unilaterally alienate it would, moreover,exer~
oronertv." Andit nointed out that in United,
ieaerm
tax
ta~, a -,F::rt,Lo
v- am v,vvxaxulj , tO u~ utJtw plt)pt;1-ty,
[q
the income from the property and one half of th,
e), and to bar his wife from selling it constituteq
e federal tax lien statute." "[I]f the conclusion wer,
) one for the purposes of § 632 I." The court note~
fly because the taxpayer does not have the powert~
ler large amountof what is commonlythought of a
Rodgers, 461 U.S. 677 (1983), it had already heh
texas homestead] nevertheless could be subject to
uen.
u~Ls., V(,~U,,LL7V,Luz~., ZZ~,,Z.L~
L.SUU,
I.,LZS., L..;S.nvvs.,.LS./.L IJJ.t.,
subject to an equitable accounting for the value
Jusfic,
respected the state law characterization of Mrs.
attach.
8.
A rare opportunity
established. Wagnerv. Commissioner,118 "I
may voluntarily withdraw his appeal of the A
hearing. Estate of Mingv. Commissioner, 62 :
withdraw without prejudice a petition in a &
7459(d) treats an order dismissing the petition
the deficiency; but § 7459(d) does not apply
9.
It can be expensive
hearing primarily for purposes of delay.
reviewing the Appeals Officers decision in a
shownon the return but not paid was warrant¢
on the taxpayer for petitioning for review of t~
of delay.
10. The Supreme Courl
Equitable tolling keeps the claim for taxes
v. United States, 122 S. Ct. 1036, 89 A.F.T.R
507(a)(8)(A)(i) of the Bankruptcy Code,
before an individual taxpayer files a bankrul:
paid the taxes shownon a return due and filet
petition in 1996. In March1997, the taxpaye]
was dismissed; they were subsequently disch;
taxes, the taxpayers claimed that the taxes we~
before their Chapter 7 filing. The Court, in an
subject to equitable tolling. Because the Chap
the IRS from collecting the unpaid taxes, whe~
period excluded time during which their Cha
discharged. Tolling was appropriate regardless
the Rodgers case, the SupremeCourt upheld not jus
Court to order a forced sale of the entire property
ontaxpayer spouse’s interest.
a, Thomasand Stevens dissented. They would have
rights to the property to whicha creditor’s lien couk
i away from Tax Court jurisdiction once it’,,
18 (4/15/02). The Tax Court held that a taxpaye]
3fficer’s decision in a § 6320pre-lien due process,
) (1974), holding that taxpayer maynot voluntaril)
y case, was distinguished. In a deficiency case,
reason other than lack of jurisdiction as sustaining
v. Commissioner, 118 T.C. No. 23 (5/3/02).
)/6330 due process hearing that collection of a tax
e Chiechi held that a computer generated record of
e requirements of Reg. § 301.6203-1; a signed
$10,000 penalty under § 6673(a)(1) was imposed
~.0/6330 due process hearing primarily for purposes
rs to be infatuated with tax procedure eases:
ough successive bankruptcy proceedings. Young
!-1258, 2002-1 U.S.T.C. ¶50,257 (3/4/02). Under
~es for which a return was due within three years
tion are not dischargeable. The taxpayers had not
three years prior to filing a Chapter 13 bankruptcy
t Chapter 7 petition, and their Chapter 13 petition
~
...........
j .............
,,.~,.-.,.-
,~vv 7v~.,u.,..
by Justice Scalia, held that the look-backperiod is
~tition resulted in an automatic stay that prevented
apter 7 petition was filed, the three-year look-back
petition was pending. Thus, the tax debt was no!
ther the Chapter 13 petition was filed in goodfaith
[because the taxpayer received a deficienc3
liability, eventhoughIRSAppealsofficer rec(
G.
Innocent Spouse
1.
Whenthe legislativ
majorityholds that the test for knowledge
the sameas that under former § 6013(e)1
incomeis sufficient to denyrelief even if t~
was reportedon the return was correct. Ch
11-4). Aspouse whohas actual knowledgeof
know"of the understatementandis not entitle
proposed standard based on a prudent taxp~
rejected as providingtoo broad an escape hal
Jacobs)held that for the spouseto be denied
actual knowledgeof whether the entry on
standard under § 6015(c)(3)(C)is "an actual
existence of an item whichgives rise to the
aoDortionedliab
oecimeo[o iouow a smmment
m n. ~,oni. r~e:
electing spouse had actual knowledgethat an:
the extent any deficiency is attributable tq
Commissioner
abusedhis discretion in faflin~
even thoughthe failure to grant equitable r,
discretion. Thetaxpayer relied on her husban,
andhis representations that he hadbeenadvise
¯
Judge
properly denied innocent spouse treatment m
husbandhad receiveda distribution fromhis re
accountant had advised himthat amountsused
samewaythat the portionof the distribution th~
wife does not need to haveknowledgeof the ta
incorrect. Thecourt relied on former§ 6013c;
Cir. 2000), aff’g withoutpublishedopinionT.C.
(1990),aft’d, 992F.2d1132(11 th Cir. 1993),
¯
lne (1
basedon the legislative history, wouldlimit d
spouse actually knewof the understatement
conclusion that § 6015(c) was enacted to make
the treatmentof the item on the tax return wash
a.
Affirmed by
A.F.T.R.2d2002-900, 2002-1U.S.T.C. ¶50,21
the case was an erroneous deduction case to
wasapplicable; the IRSarguedthat the case v
transaction test wasapplicable. TheCourtof !
reason to know"of the understatement under
959 (9th Cir. 1989)] erroneous deductionstan
Section 6015(c)apportionedliability relief
of income,deduction, or credit, rather than 1
argument that § 6015(c)(30(C) precludes
reporting wasinconsistent with the general ru
deficiency." TheCourtdeclinedto interpret th
I, the Tax Court will not review the underlying
it andaddressedit the notice of determination.
T is ambiguous, read the statute. Tax Court
the § 6015(e)(3)(C)separate liability election is
vhieh is that knowledgeof aa item of omitted
e has no reasonto believe that the waythe item
Commissioner.115 T.C. 183 (8/30/00/ (reviewed_
)cent spouserelief under§ 6015(b). Thetaxpayer’s
ng expected to knowof the understatement was
liability. Moreimportantly, the TaxCourt (Judge
ted liability relief, § 6015(c)(3)(C)
doesnot require
a is or is not correct. The applicable knowledge
r awareness(as opposedto reasonto know)of the
icy (or portion thereof)." Thusbecause whenthe
5 the joint return, she wasawareof the amount,the
tion received by her then husband, she wasdenied
mderstoodhowmuchof the retirement distribution
Le amountof incomewas understated. The court
599, at 253(1998) that "if the IRSprovesthat the
a return is incorrect, the election will not applyto
item." The court did, however, find that the
it equitable relief frompenalties under § 6015(f),
the underlying deficiency was not an abuse of
’,ription of the tax consequences
of the transaction
’,PA and had no reasonto doubthim.
writing for the majority held that the wife was
5015(c)(3)(C) where she had knowledgethat
t plan. Thewife wastold by her husbandthat their
ff the mortgagecould be excludedfrom incomethe
~l.&~,,atat~,~
v,t i.a.at~,Jati,~,~atatatvat cllq, a~l,"-’at~~,SaUt’-"
~ VaUL
I,atat~,Jat~,ql,l,atatatatat~
:h as Wiksell v. Commissioner,215 F.3d 1335(9th
1999-32, and Bokumv. Commissioner,94 T.C. 126
feet that knowledge
of the legal consequences
of an
te item.
opinions(Judges Parr, Colvin, Marvel,and Gale),
relief under§ 6015(c)(3)(C)to cases in which
item). Judge Colvin’s dissent is based uponthe
at the spousemusthavehad "actual knowledgethat
’ in order to be deniedinnocentspousetreatment.
meaning"interpretation. 282 F.3d 326, "89Eir. 2/8/02). Onappeal, Mrs. Cheshirearguedthat
he knowledge-of-the-incorrect-deductionstandard
~itted incomecase and that the knowledge-of-the"Judge Kimz)held that Mrs. Cheshire"knewor had
ttt:~,
~ uuidLu)Li)L~.,)
uati~uttuat~,c;ttt
:~l~uu~c; i~u~i.
because"the term [’item’] refers to an actual item
Feet reporting of such an item." Mrs. Cheshire’s
y if the spouse has knowledgeof incorrect tax
ignoranceof the tax laws is not a defenseto a tax
tive history as compellinga different result for two
First, wheninterpreting a statute, thi
statute what it meansand meansin
Unlessthe text of a statute is ambigt
plain meaning.... Section6015(e)(3)((
"mustpresumethat a legislature says in a
e whatit says there." [citations omitted.]
its face, this court adheresto that statute’s
facially ambiguous.
Second,the legislative history of §
history appear to support the Commis
the history, however,suggest that th
spouses with knowledgeof the trans
spouseswith knowledge
that the tax r~
allow inconclusivelegislative history
§ 6015(c)(3)(C).
3)(C) is ambiguous.Someportions of
position. [citations omitted.] Otherparts of
The Court of Appealsnoted that subsequent
198 (2001), the TaxCourt interpreted the appl
to relief becaus(
lYJdtl~ l.Jti;)~., LVIddt~., ~.,J..t~,,J.~,,U.~" JJ.It Q.t.ILt.LILLLIL/LII,U
ncorrect. [citations omitted.] Wedecline to
: our interpretation of the plain meaningof
~g Cheshire, in King v. Commissioner,116 T.C
nowledgestandard in erroneousdeduction cases tc
,hich madethe item unallowableas a deduction.’
,~als concludedthat Mrs. Cheshirewasnot entitled
~r. Cheshire’sretirementdistributionsatisfied the
cases.
d~ ¯
~ JULLLJLqt,,.
¯ lb, e.JL ~U,~.,qWL
¯ qb. ¯
U.S.T.C. ¶50,]08, 88 A.F.T.~2d 2001,7020
before the effective date of § 6015has been
innocentspouserelief is availablewith respect
3.
Only limited apperti
erroneous deductions exceeded his income,
Morawas denied innocent spouse relief uric
understatementattributable to her husband’se
of the spouse’s combinedsalary income (o:
investmentwas solely her husband’sand she h
Commissioner,116 T.C. 198 (2001), "factual
that Mrs. Morawasentitled to § 6015(c) appo
requestingapportionedliability evenif the spc
could not qualify for apportionedliability wit]
of the deductions. Nevertheless, Mrs. Morarec
exceeded
her husband’s
incomeand~she
receix
,~. ¯ t¯ ¯ . f,~1P/
~lX/
¯ ¯
,1
Commissioner,
118 T.C. No. 6 (1/28/02). In
was appealable to the Tenth Circuit, the Ta:
Price v. Commissioner, 887 F.2d 959 (9th
"establish that she did not knowand had nc
substantial understatement,on the basis of a J
opinion. However,the Tax Court denied § 60]
her husband’sfinancial affairs, hadfull know]
understatement. The deceased wife’s pers
apportioned liability election more than 12
challengethe representative’s proceduralright
personal representative "stepped into the sho
6015(c)relief becauseat the time of her deal~
were membersof the same household. Althc
taxpayeris no longer manfedif he or she is x~
estate of a spouse whowas"happily married"
was denied.
Na "hi.in
lanm]ao~"
Flores v. UnitedStates, 51 Fed.C]. 49, 2002-1
’01). If a portion of the a tax liability that arose
td a portion remainedunpaid, § 6015(f) equitable
ntire liability if the facts warrantrelief.
ability relief granted to wife whosehusband’s
v. Commissioner,117 T.C. 279 (12/17/01). Mrs.
)15(b) because she had "reason to know"of
s tax shelter deductionsthat offset over two-thirds
ban $40,000). However,because the tax sheltex
Lvolvement
with it or, underthe standardof Kingv.
Ir the denial ofe the deductions,"Judge Begheheld
1;.1-~;1;/-~r r~li~a q’~ie nrinr.inl,~ .nnl;,~¢ tt~ *h~ Cnt~(:,~
:t to the item- had no "factual basis for the denial
aly partial relief becausethe disalloweddeductions
benefit from the excess deductions. To the extent
aiesrelief.
try to get § 6015(e) relief. Jonson’s Estate v.
nt spousecase involvingtax shelter deductionsthat
applied the Ninth Circuit’s liberal standard from
89), requiring only that a spouse seeking relief
to knowthat the deduction wouldgive rise to a
,~ citation to Price in an unpublishedTenthCircuit
iefbecause the spouse waswell educated, active in
the facts of the investment,and benefitedfromthe
?resentative [her husband] made a § 6015(e)
after her death [and the Commissionerdid not
d her husbandwere not divorced or separated an(
~ept. No. 105-559at page 252, n.16 states that
. Congressdid not intend § 6015(c)to apply to the
ime of death. Equitablerelief under§ 6015(f)als(
ion of the TaxCourt’s iurisdietion in this case
and mailed a notice of determination that wa
actually received by the 88th day after it was
92 days after the mailing of the notice, and
movedto dismiss on the ground that the peti
the issue of whether it had jurisdiction unde
where no deficiency had been asserted. [Secl
denials of § 6015 relief, as amendedby the
case of an individual against whoma deficier
or (c) apply..."] In a reviewed opinion by
jurisdiction to review an denial of § 6015(f)
relief from liability of tax shownon the reta
further held that the petition was timely be(
submitted her request for relief [see. § 6015(e
to taxpayer’s last knownaddress, and the mist
petition within 90 days after the mailing of the
IT]he language "against whoma defi~
VVAU’-LU’-L~
~ee~rt~d
allowed to submit a request to the Co]
the issue was raised by the IRS.
There is nothing in the legislative h
6015(e) ***, was intended to elimina
relief under section 6015(f) over
purpose for inserting the language "a!
section 6015(e) was to clarify the pro:
Commissionerfor relief under section
that the amendmentof section 6015(e
denial of equitable relief under section
In the instant case, petitioner filed a elf
amount of tax correctly shown on tt
respondent has not challenged the ta~
ailed to the taxpayer’s last knownaddress, but was
The taxpayer’s petition for review was postmarked
ived and filed seven days later. The Commissioner
not timely filed. The Tax Court sua sponte raised
5(e) to review the IRS’s denial of § 6015(0 relict
5(e), granting the Tax Court jurisdiction to review
dated Appropriations Act of 2001, begins, "In the
)een
asserted and whoelects to have subsection (b)
.~,.... 41.,.-..,,.~,,~,.~.,~4-,, [1’~ A\ 11....1..1 4.1L._-- -11__,1",___ /",t__ .
rout a deficiency having been asserted. The couz
was filed more than 6 months after the date shq
, the IRS failed to mail the notice of determinatio]
d notice prejudiced the taxpayer’s ability to file he
The court concluded that:
as been asserted" was inserted into section
a submitting premature requests to the
ficiencies before the Commissioner had
: Congress was concerned with the proper
ed tax and intended that taxpayers not be
,ner regarding underreported tax until after
ndicating that the amendment of section
urisdiction regarding claims for equitable
;previously had jurisdiction.
The stated
rhom a deficiency has been asserted" into
.~ for a taxpayer to submit a request to the
garding underreported taxes. Weconclude
mt oreclude our Jurisdiction to review the
relief Iromjoint and several liability for an
n but not paid with the return. Because
ed on the return, no deficiency has been
:entitled to relief under section 6015(f)
equitable to hold the individual liable for
any unpaid tax or any deficiency."
¯
Judge
to reviewthe denial of § 6015relief in the abser
a "clear statutory mandatefrom Congress" limil
relief to deficiency cases.
6.
It’s not "inequitablq
unreported income. Mitchell v. Commissi
A.F.T.R.2d 2002-2961 (D.C. Cir. 6/14/02).
distribution from the taxpayer’s late husband
return, the Court of Appeals held the denial
disposition of the distribution and thus had the
consequences of the transactions. A spouse w
omitted income has "reason to know"of the tt
liability." The taxpayer’s proposed standard b;
knowof the understatement was rejected; the q
annlied to erroneous deduction c~.~e.~ under Pri
assent argued that the Tax Court lacked jurisdiction
teficiency, because he considered § 6015(e)(1) to
tax Court’s jurisdiction to review denials of § 6015
Beet taxes from widows on their husband’s
92 F.3d 800, 2002-2 50,U.S.T.C. ¶50,475, 89
e involving receipt of a unrolled-over lump-sum
.....
1__ .t_l__~t.
........
.L ......
--L_ ]
,1
rr,,
1-1 ¯ ¯ .
e "knowledge"even if she did not knowof the tax
tctual knowledgeof the transaction giving rise to
.~ment- "ignorance of tax law is not a defense to
whether a prudent taxpayer would be expected to
pressly refused to apply the more relaxed standard
mmissioner. 887 F.2d 959 (9th Cir. 1989~. Section
loss of spouse is not only not the sort of c
normalcondition of manyof the taxpayers cc
7.
Proposed § 6015 re
Liability, 66 F.R. 3888(1/17/01). The Tre~
reflect changesin the law madeby the IRS1~
replacedwith § 6015.Theyclarify that case 1
used to interpret that same language made
understatementexists only wheneither the re
rise to the understatement, or a reasonable
item. Knowledgeof an item under the pr¢
expenditure. The proposed regulations wouh
asserts and establishes that he or she signed
return, and he or she is not jointly and sever
the fast collection activity, but not beforeth
there might be outstanding liability. Fin~
nonrequestingspousemust be given notice tl
givenan opportunityto participate in the pro,
F.R. 47278(7/
me nonrequestmgspouse must be beyond non
¯
With
deductions, the final regulations provide that
madethe item not allowableas a deduction"[t
final regulations also negate application of t
involvingdomesticabusewithout specific dure,
8.
Proposed § 66 regul
states whodo not file joint returns. REGIndividualsNot Filing Joint Returns,67 F.R. 2
under§ 66, relating to the treatmentof marrie
joint incometax returns. Theproposedregula
community
property rules].
H.
Miscellaneous
The quality of equil
31.
F.3d 904, 2001-2 U.S.T.C. ¶50,622, 88 A.F.T
/
i
......
j~
..............
lacks jurisdiction to apply equitable recoupm~
of an incometax overpaymentfor same year
contrary in Estate of Mueller v. Commission
underpayment[resulting from an underval
overpayment [resulting form the conseque
transaction to whichequitable recoupmentapl:
2.
9-11 relief
a.
Notice 2001-(
sections 6081, 6161, and 7508Afor taxpaye
Taxpayerswhohave difficulty in meeting t
transportation and delivery of documentsby r
attack, and whodo not otherwise qualify fol
paymentsrequired to be madefrom 9/11/01, tt
b.
Notice 2001-¢
for all federal tax obligationsfalling between
time covers the filing of returns and claims
ace that makesit inequitable to collect tax, it is
¢ the provisionsof the innocentspouserule."
Is. REG-106446-98,Relief FromJoint and Severa
s published proposedregulations under § 6015t¢
a’ing and ReformAct of 1998, where§ 6013(e) wa:
preting the languageunderformer§ 6013(e)will
L5. Also, "knowledgeor reason to know"of at
; spouseactually knewof the erroneousitem givin~
--"
-
-1--
-
¯ amendReg. § 1.6013-4to clarify that if a spous
return under duress, then the remmis not a joir
le. Relief must be requested within two years froz
’or receives a notification of an audit or notice th~
; proposed regulations would provide that th
equestingspousehas filed a claim for relief andb
;. At the request of one spouse,the IRSwouldornJ
Lablyidentify that spouse’slocation.
13, final regulations on innocentspouserelief, 6
t knowledgestandard for § 6015(b) relief that
at receipt of propertytraceableto itemsomittedb’.
)ort beforethey are considereda si~ificant benefi!
to the "knowledge"
standard applicable to erroneou
;dge of the item meansknowledgeof the facts tha
g King v. Commissioner,116 T.C. 198 (2001)]. Th,
alknowledge
limitation
onrelief
incertain
case,~
For married individuals in community
propert2.
-01, Treatment of Community
Incomefor Certail
).2/02). TheIRShas publishedproposedregulation:
duals in community
property states whodo not fik
;al primarilywith issues under~ 66(c) [relief fron
strained. Estate of Bransonv. Commissioner,264
)01-5726(9th Cir. 9/5/01), cert. denied, 122S. Ct.
mer v. GoochMilling & Elevator Co., 320 US418,
[under the predecessorof § 6214(b)] the TaxCourt
:ometax cases, does not bar equitable recoupment
; tax deficiency. (TheSixth Circuit has held to the
F.3d 302 (6th Cir. 1998).) Theestate’s estate
~f an asset] and the beneficiary’s income tax
;r-than-appropriate §1014 basis] were a single
-40 I.R.B. 305(9/21/01). Providestax relief under
ted by the September11, 2001, Terrorist Attack.
-
---M
..............
~ .........
~,.A.1. v.LAo
will haveuntil 11/15/01to file returns and mak~
0/31/01.
-40 1.1LB.308 (9/17/01). Postponesthe due dat~
and 9/24/01 until 9/24/01. This postponemento:
rod, the paymentof tax (including estimated ta~
¯ ~1 tz~¢ dnr.wlm~nt~
postponementis granted. Notice 2001-68alse
of trusts whoare not themselves affected
partnershipsthat fail to file returns by magn<
last day for performingthe act involvedwoul,
postponementswith respect to § 1031 excha
between9/11/01 and 11/30/01.
(i) Anne
IRSgrants relief to partners, shareholders, ,
9/11/01and11/2/01, but did not file the retur
120 day postponementsolely by virtue of tl
waiveany failure to file penaltyif the taxpay~
anyfailure to paypenalty.
(2) Anno
+ Modifies and expands the relief granted i
beneficiaries of an affected taxpayerare eligi
2001-68.Thus,for example,a partner that is
October15, 2001,for the 2000return will hay
Ibll,l~llll~ J.VJI. J.~Jl.J.!
AA
example,a corporate partner with an original
automaticsix-monthextensionof time to file
additional 120 daypostponement
of time to file
( 3 ) Notic(
frominterest and expandedrelief fromthe faih
d.
Notice 2001-(
assert that paymentsmadeby an employert,
vacation, sick, or personalleave that the emplc
employee, provided that the paymentsare n
Service will not assert that the opportunityt(
gross incomeor wagesfor employees.
e.
Notice 2001&
intend to issue regulations permitting taxpaye
containedin § 168(d)(3) to property placed
quarter.
CIA Aa.£A.
year exceeds40 percent of the aggregatebasis,
placed
in service duringthe taxableyear, the a
t
propertydescribedin {} 168(d)(2))to which
mid-quarterconvention.
( 1 ) Notio
2001-70to also include taxpayers for whomS
taxpayers whopurchase substantial amounts
llth.
Rev. Proc. 204
time for whichis postponedby reasonof servi,
g.
Notice 2001guidance to charities regarding paymentsm
individual incurred as a result of the Septem]
paymentsmadeby a charity to individuals an
providedthat the paymentsare madein goodt
the earlier of final legislation or 12/31/02.
h.
Congress pass
s relief available to S corporationsandbeneficiaries
: disaster. Further, it extends relief for affected
ia. Thenotice postponesIRSdeadlines only if the
rise be on or after November
2, 2001. Alsocontains
1ere the last date for performingan act wouldfall
lit 2001-117,2001-49I.R.B. 567 (11/13/01). The
5ciaries that had incometax returns due between
.,,,,~ +K,.. +,-..~....^ ....
k,,l:......I 4.k,,~d.k_ T’no 1___1 ____~.__1_
,,
......
,¢ ............
Lisreturn
by12/15/01.
Similar
relief
isprovided
fo~
at 2001-124, 2001-52 I.tLB. 630 (12/10/01)
,uncement 2001-117.Partners, shareholders, anc
dl the relief granted by Notice 2001-61and Notice
dual incometaxpayer with an extendeddue date ol
’ebruary12, 2002,to file the return.
~hareholder,or beneficiary of an affected taxpayel
1 duedate fell withinthe specifiedperiod, andsucl:
ained an extension of time to file, the IR will
Notice 2001-61and/or Notice 2001-68. Thus, foi
e duringthe specified period that has obtainedthe
~anteda six-monthextension of time to pay and an
~ to pay.
~0, 2002-24I.R.B. 1152. The IRS provides relict
ly penalty.
1-46 I.tLB. 491 (10/24/01). TheService will not
;anization described in § 170(c), in exchangefor
:ts to forgo, constitute gross incomeor wagesof an
such organizations before 1/1/03. Similarly, the
such an election results in constructivereceipt of
ect not to apply tlae mad-quarterconventionrules
in the taxableyear that includes9/11/01in its third
)(3) generally providesthat, except as provided
t service duringthe last three monthsof the taxable
rty (other than propertydescribedin § 168(d)(3)(B))
depreciationconventionfor all property(other than
lies placedin service duringthe taxableyear is the
’4, 2001-49I.tLB. 551 (11/12/01). ExpandsNotice
:r 11 th falls in the fourthquarter. Thiswouldcover
,erty to replace property destroyed on September
001-47I.tLB. 506 (11/2/01).Lists certain acts, the
reason of the death, injury or woundingof an
2001terrorist attacks. TheServicewill treat such
.~amilies as related to the charity’s exemptpurpose
lg objectivestandards.Thenotice is effective until
’ietims of TerrorismTax Relief Act on 12/20/01.
provisionsby reasonof presidentially declare,
6103 to permit Treasury to share return i~
agenciesengagedin terrorist investigations.
i.
Notice 2002-~
the § 412 minimumfunding requirements (a
those directly affected by the Terrorist Attack
have been madebetween 9/11/01 and 9/23/(
waiversoriginally due between3/15/01 and 2/
j.
Relief from
Notice 2002-25, 2002-15 I.I~B. (3/27/02).
acknowledgment"requirement for donors wh
9/11/01 and 12/31/01 provided they either
organization by 10/05/02 or have evidence of
requesting the acknowledgment
sent to the dot
k.
Notice 2002-(
12 l(c) reduced maximum
exclusion of gain
principal
residence for two years prior to sal
.
:r or terrorist or militaryactions. It also broadens§
n with federal law enforcementand intelligence
5 I.R.B. 489 (1/24/02). Thedue date for satisfying
:omparable requirements of § 302 of ERISA)for
/01 for makingcontributions originally required to
~tponedto 9/24/02, and the date for applying for
postponedto 3/1/02.
naraneaus
written
9cknawledomont
do2dlin~
charitable contributions of $250or morebetween
the required acknowledgmentfrom the donee
:’aith effort to obtainit. Acopyof a letter or e-mail
aization is evidenceof a goodfaith effort.
!-36 I.R.B. (8/22/02). Providesrelief under the
for taxpayers whohave not ownedand used their
:ha]age, but wereaffected by the 9/11/01 terrorist
LB. 307 (10/1/01). The IRS has published
~t qualify for the timelymailingis timelyfiling or
;and UPSWorldwideExpress have been added to
undatedlist of d
thelist¯
4.
lhnen v. United States
2001-6976(8th Cir. 11/27/01). Taxpayerswer(
- in a settlement on Form870-AD-where tl
coveredby the settlement agreement.
5.
T.D. 8969, Payment b
TheIR has promulgatedfinal regulations undq
6.
Canyou believe it? ~[
enoughfor payment!Smith v. Commissionei
to abate interest on the taxpayer’sdeficiency,
the reason that she did not pay the deficiency
.3d 577, 2001-2 U.S.T.C. ¶50,786, 88 A.F.T.R.2d
ed to obtain a refundof taxes to whichthey agreed
te of limitations had run on the IRSfor the years
t Card and Debit Card, 66 F.R. 64740(12/14/01).
1.
~ayer complainedthat the IRS didn’t houndher
demo.2002-001(1/02/02). Judge Thorton refused
)ugh the taxpayer offered the novel argumentthat
lely mannerwas that the IRSfailed to "houndher
erlough."
7.
The Commissioner
Commissioner,118 T.C. No. 20 (4/22/02). Th,
nondischargableincometax liabilities in thq
bankruotcycourt confirmedthe plan of reorga
UI~tL ¯ t~J j/gtgt~tgggg
tdtl~t
uvL alJIJxy
t.~,~.,att,3~
~t~ xxx~
Collateral estoppel did not apply becausethe d
estoppedfromdeterminingthe additional doric
8.
The taxpayer gets ’a
Troutman,89 A.F.T.R.2d2002-2271,2002-1 1
refund suit contemporaneously
with the filing
claim within six months, and the taxpayer fi
Complaint,’"whichthe court characterized as
later. Thegovernmentmovedto dismiss the t;
had been filed prematurely.Thecourt held th~
the administrativeclaim satisfactorily remedie~
9.
The "duty of consisl
don’t wantto. Blonienv. Commissioner,
111
claimed, in an "affected items" petition, foU
partner to whom
a distributive share of the par
that partnership status is a partnership proq
distributive shares. Furthermore,the duty of q
¯
1 ......
~_ .....
.L"
T’9_’__
1 ___"
~lh,,. ib,.,~,.a, u,l,~ ~, a. i,~,,. ~ ~ ~u~,, N.j[~j[~JL~.,I J.J.~.JL.U.t,LL
J.VJ.’~¯ ¯
fissioner had filed uncontestedproofs of claim for
yer’s chapter 11 bankruptcyreorganization; the
I withoutdecidingthe merits of the tax liabilities.
cos for additionaltax liabilities. JudgeGerberheld
te claim werenot litigated in the bankruptcycourt.
y wasa different issue. The Commissioner
wasnot
a on premature
f’ding of a refundsuit. Tobinv.
¶ 50,392(W.D.Ky. 4/19/02). Thetaxpayer filed
ministrative claim for refund. TheIRSrejected her.
leading styled ’First Amended
and Supplemental
a underFed. R. Civ. P. 15(d), less than two weeks
refund suit on the groundsthat under§ 7422(a)
~ng of the amendedcomplaintafter the IR denied
......
d ..........
j
.......
d ..........
d ,.,,~
[o. 34 (6/12/02). Aformer Finley Kumblepartner
partnership level proceeding, that he wasnot a
’s COD
incomepassed-through.Judge Beg, he held
level issue whenit affects the other partners’
icy
barred the taxpayer from arguing that he was
¯
÷h--,ra,a.- +k--,.~a,-t~.-roh;,.,,,-.- ,.d ; .-, -- A("~(’IT’~
his partnership interest, rather than as emplo’
failed to file a Form8082 notifying the Corer
Schedule K-1.
10. The kinder and quk
I.R.B. 1184 (6/17/02). The IRS announced
technical advice memoranda, dubbed TEAM
jurisdiction of the Income Tax & Accounting
11. Let’s mediate, not i
The IRS has formally established the volunta
procedure significantly expandsthe availabil:
floor. Legal issues are subject to mediation, a~
a.
Or should ~
(6/7/02).The pilot arbitration programin Rev.
30, 2003.
a.2.
REG-126024-01, Re
t
35064 (5/17/02). IRS and Treasury amende(
which, inter alia, eliminates the delivery rule
X" ~lt-
...........
reauired to ten(
reporting threshold.
a.3. Modifications of Ci]
providing advice regarding tax shelters;:
compliance. REG-111835-99, proposed Circ
proposed to Circular 230 include:
¯
§ 103
¢~ complied with revenue laws of the manner in
consequencesof not taking such corrective acti(
¯
§ 10.2
person only to matters constituting practice bef(
¯
New
opinions at the more-likely-than-not (or higher,
makeinquiry as to all relevant facts, and be s~
described in the opinion. The regulations und(
opinions that satisfy the standards of Circular 2.
¯
§ 10.
associated with, or employedby a firm must t~
responsibility for the firm’s practice advising cl
makecertain that the firm has adequate proce4
.C 10.33, 10.34, and 10.35.
t)~
a.
T.D. 9011, f
’
respect only to non-tax shelter related provisic
¯
Unde:
regarding the identity of persons having posse
makingreasonable inquiry of the practitioner’s
¯
Unde:
failure to take corrective action is limited (
regulations of such noncompliance,error, or on
¯
Unde:
reliance on the work product of another persol
standard with resoect to the engaeementof an
pensation. Finally, for the year in question, he hac
r that he was taking a position inconsistent with the
ice of Chief Counsel. Rev. Proc. 2002-30, 2002-24
program for a "streamlined" process for issuin~
[’EAMpilot program is limited to issues under the
9f IRS Chief Counsel’s Office.
Rev. Proc. 2002-44, 2002-26 I.R.B. 10 (6/10/02).
;n/’]ino"
Ann~le rn~tti~atit~n
nrru.~dnv~e
Th~ .........
uccessful attempts to enter into closing agreement.,
trate. Announcement 2002-60, 2002-26 IRB 2:
000-4 has been modified and extended though Jun
ff Gross Proceeds Payments to Attorneys, 67 F.R
.,proposed regulations under {}§ 6041 and 6045(~
delivered to non-payee attorney does not constimt
the § 6041 "payor" definition be used for § 6045(t
neither the tort claim defendant nor the insurer ar,
s the suggestion that no report is required under
.ayment under {}{} 6041 or 6051; and adopts a $60q
Z30 are proposed, including the standards fo~
rill be required to have procedures to ensur,
~0 regulations, 66 F.R. 3276 (1/12/01). Change:
i require practitioners to advise a client whohad no
: error or omissionmaybe corrected and the possibl,
I limit the dissociation from a disbarred or suspende(
~LS.
wnn|d
nr~¢o~h~
now ~t~nd~lrd~
fnr
t~Y
eh~lt~
hat the material facts are accurately and completely
;62 and 6664 will be modified to provide that only
)e relied upon.
d apply to all tax shelter opinions not governed by
~ents for compliance.
d require that a practitioner who is a memberof,
mable steps, consistent with his or her authority and
,rarding matters arising under the Federal tax laws, to
effect for purposes of ensuring compliancewith {}§
Nations governing practice before the IRS (with
?.R. 48760(7/26/02).
20, a practitioner’s duty to provide information
control of requested documentsis "limited only to
l, me amy to amase as to me consequences oI
the consequences "provided under the Code an
2(b), the standard for due diligence with respect
based on "commonsense and experience," and th
specialist "will be more focused on the reasonabl
¯
Unde
request, regardlessof a fee dispute, is restricte
obligations.
¯
Unde
with the recently revised ABA
ModelRule 1.7
*
Unde
and also "expandsthe prohibition of deceptive
wellas public,solicitations."
14. T.D. 9014, Furnishin
F.R. 52862 (8/14/02). The IR has made
regulations, whichprovide for alternative ide
refund claimsin lieu of social security numb~
W-7P,Applicationfor Preparer TaxIdentifica
XI.
WITHHOLDINGAND EXCISE Tt
A.
!8, the requirementto return client’s records upon
;e records necessaryfor compliancewith Federal tax
9, the conflict of interest rules in close conformance
¯ equireswrittenconsent).
0, solicitation roles followrelevant state bar roles,
er impropersolicitation practicesto coverprivate, as
__
x,,~t;. ~¢ x.vlv:,-z ~axuc~:proposeu~notemporary.
m numbersfor tax preparers to use on returns ant
:edures under the temporaryregulations [file Fore
nber] hadbeen in place since 1999.
EmploymentTaxes
~ .....
_ell|
~tl_ ¯ _ e,eb ¯
U.S.T.C. ¶50,22
ups on me oasis oI all aggregate computal
Followingboth the Federal and Eleventh Ch’e
collect an employer’sFICAtaxes without fu-’sl
Securities earnings records. Judge Coffeyalso
2.
But that same inte~
howit plays in Washington,DC, nowthat q
States, 242 F.3d 844, 2001-1U.S.T.C. ¶50,26
granted, 122 S. Ct. 865 (1/11/02), aff’g 21
authority to assess the employer’sshare of
employees). The IRS assessment of FICAta:
applyingthe averagetip rate on credit card re,
and then subtracting reported employeetip in~
authority to assess employerFICAtaxes on
not account for tips that mightbe outside the
monthor abovethe social security wagebase]
fact that cash tips are usually less than credit
unavailing to the IRSbecauseit does not appl
applyingto FICAtaxes is that the IRShas no
does § 3121(q) provide any such authority.
taxes without assessing a deficiency against
employees’records to determinetip incomeon
Judge
HubbardRestaurant Corp. v. United States, 2
States, 159F.3d 553 (Fed. Cir. 1998);and Mort
Cir. 1997),all of whichupheldas reasonableIR:
¯
Neithe
Californiacity in whichthe restaurant is locat,
saint.
3.
SupremeCourt revel
v. Fior D’Italia, Inc., 122S. Ct. 2117,2002-21
3). TheCourt held that the IRShas broad pow~
assessments,and that its use Of the "aggregat~
in CoccoPazzo?Sameinterpretation as Federal
ant Corp. v United States, 203 F.3d 990, 2000-1
U15/00). Under§§ 3111(a) & Co) and 3121(q),
with respect to restaurant employees’unreported
ithout determining individual employees’shares
SeventhCircuit held that the IRSis authorizedtc
ng individual employeesand crediting their Social
I to the IRSinterpretationof § 3121(q).
n isn’t reasonableon the WestCoast. Let’s see
Lri has beengranted.Fior D’Italia, Inc. v. United
..F.T.R.2d 2001-1118
(9th Cir. 3/7/01) (2-1), cert.
). 2d 1097(N.D. Calif. 9/18/98) (The IRS lacks
~ithout determiningthe tip incomeof individual
anreported tip income, which was determined by
tpplying
that rate
to 4the..............
employer’sgross receipts,
¯
,i.
~
v
band"[which excludes tips of less than $20 per
[CAtax. The IRS methoddoes not account for the
s, that tip sharing with busboys,dishwashers,etc.
r month,or "for an upscale restaurant like Fior
,cial security wagebase. Section 446 authority is
A taxes, and the negative implication of § 446 not
r to rely on estimatesin assessing FICAtaxes. Nor
the IRS can assess the employer’sshare of FICA
tployees, it maynot do so without auditing the
loyee-by-employeebasis.
-- ..
,wn, in dissent, would have followed 330 West
990 (7th Cir. 2000); BubbleRoom,lnc. v. United
:taurants, Inc. v. UnitedStates, 118F.3d1526(1 lth
~aents basedon similar methodolo~¢.
consumnonat
oecauseit is nameaalter a ¢Sathollc
enth Circuit andupholdsthe IRS. United States
¶50,459, 89 A.F.T.R. 2d 2002-2883(6/17/02) (6§ 6201(a) to, determinethe methodit uses to make
Iion methodto determinethe total amountof tip
percentageof total restaurant checks (extmpc
with credit cards) minusthe tip incomereportq
¯
Justic
employeedetermination was unnecessary. He
that it includestips that shouldnot count in ¢
month]or that a calculation based on credit
customerstend to leave a lower percentageti
violate the law. Theemployeris free to prese
)m the percentageof tips on restaurant checkspaid
ch employeeto the restaurant owner.
r, writingfor the majority,held that an employee-byheld that certain features of an aggregateestimatelg FICAtax [e.g., tips amountingless than $20 per
a overstate the aggregateamount[e.g., cash-paying
not showthat the methodis so unreasonableas to
:nee that an assessmentis inaccuratein a oarticular
case.
¯
Justic
notes that the statute and regulatiom expre
information on an employee-by-employee
basis
4.
S corporation share
avoid employmenttaxes. Veterinary Surf
(10/15/01). The taxpayer was an S corpomti~
whoprovidedany services
on behalf of the q
~
......
J 1 ....
..~’_..a_____ _.t
.....
_" ..........
_*J _ _1 Jr_ _ .1 ,
[subjeetto § 13(
salary. ~ecuon 3~u reuez was not avauaoie
treating the shareholder as an employee.Ac
shareholder personally had paid the maximu=
anothercorporationwasnot relevant to the emj
a.
Same seam, s
Memo2001-284 (10/15/01). Veterinary Sur~
(10/15/01), was followed with respect to a
contractingbusinessthat treated all of its work
b.
Tax planner i
decideda year earlier cited as authority. J(
119 T.C. No. 5 (9/16/02). Thetaxpayer was
individual whoprovided any services on be~
incomewas earned by virtue of services pro~
paid the sole shareholder somefees as an "ind
the taxpayer’s remaining incomeunder § 136
The corporation paid no employment
taxes. Ju
that the shareholderwasan employeeof the c(
paid to him as salary. Under§ 3121(d)(1),
the corporationandperformedall of his servic
the corporation had no reasonable basis for r
under section 530 is not available with res
deficiency wasupheld.
5.
"Expense reimburse
ShotgunDelivery, Inc. v. UnitedStates, 269
6391 (9th Cir. 10/16/01). "Mileage reimbur
employeedrivers were wages because they,
Drivers were invariably paid a total mount,
charges, with an amountequal to minimum
w
"mileage," without any regard to even approxi~
6.
Full service employx
Inc. v. Commissioner,117 T.C. 263 (12/11/01
not entitled to relief under § 530 of the Reve:
- (joined by Justices Scalia and Thomas)in dissen
ruse employersfrom the obligation to keep tip,
the tip amountsaetuaUyreported by each employee.
, can’t take unreasonablylow compensationt(
resultants P.C.v. Commissioner, 117 T.C. 14]
a single shareholder, whowasthe only individual
ion. All of the taxpayer-corporation’sincomewa,.
’by the shareholder. Thecorporationpaid the sole
le under § 1366; the incomewasdistributed to h~
nent taxes. Judge Jacobs held that the shareholdel
recharacterization of the mountspaid to himas
:the corporation had no reasonable basis for nol
ly the wagetax deficiency was upheld. That the
vee FICAfor the year by virtue of employment
b)
:wagetax.
Lswer. Yeagle DrywallCo. v. Commissioner,T.C.
’onsultants P.C. v. Commissioner,117 T.C. 141
nt shareholder/officer in case involving a drywall
tdependentcontractors.
I sameseamas his client, withhis client’s case
i. Grey Public Accountant, P.C.v. Commissioner,
3ration
with ¯a11single
shareholder,
whowasthe
only
|1 .....
~"_
/’~ JL1
~t
.*
¯
at contractor," but no salary, andhe reported all of
ncomewas distributed to him [subject to §1368].
!peru applied VeterinarySurgical ConsultantsP.C.
[ge Halpemnoted involveda client of the taxpayer
:ment be used to avoid employment
taxes], to hold
)n and upheldthe recharacterization of the amounts
ident, the shareholder wasa statutory employeeof
:h. Section530 relief wasnot available because(1)
Lngthe shareholderas an employee,and (2) relief
statutory employees.Accordinglythe wage.tax..
under an unaccountable plan are "wages."
9, 2001-2 U.S.T.C. ¶50,700, 88 A.F.T.R.2d2001" paid by an employer-messengerservice to its
............
(;;7
--
~’ --
-1 .........
JU ...............
J
ominated "wages"and the remainder denominated
Lcmalmileage.
litigation in the Tax Court. Ewensand Mille~
ry’s workers were employees,and the bakery was
of 1978[because it had before 1992treated such
, wnrk~.r~ whn rwcwhl~cl ~ncl rn~rlc~.t~.cl
th~ r~rncln~l
the parties believed they were creating] of
curiam, 60 F.3d 1104(4th Cir. 1995), and
3121(d)(3)(A) agent-driver / commission
¯
Judge
workerclassification gaveit the jurisdiction to
to decidethe properadditions to tax andpenalt
determine employmentstatus and employmen
does not expressly provide jurisdiction to det
taxes. Nevertheless,jurisdiction to determines~
reference in Title 26 to a tax imposedby Til~
additional amounts,andpenalties providedby (
68 of subtitle F and it applies to taxes imposed
or penalties fromthe definition of employment
Self-employment
B.
C.
~. Commissioner,103 T.C. 378 (1994), aff’d per
oute drivers were statutory employeesunder the §
ion.
z fiaaher held that the TaxCourt’sjurisdiction over
he correct amountsof employment
taxes, as well as
ion 7436,whichgrants the TaxCourtjurisdiction to
~ciencies in connectionwith such a determination,
}.....................
6656 penalties for underpaymentof employment
;8 of subtitle F] because§ 6656penaltyis in chapte]
26, and{} 7436(e)doesnot excludeadditionsto tax
Excise Taxes
AO
1.
The Victims of Terr
President Bushon 1/23/02. Pub. L. 107-134p]
terrorist attacks on 9/11/01, the Oklahoma
Cit
or after 9/11/01and before1/1/02.
¯
Waive
providesa minimum
benefit of $ l 0,000to eacl~
estate tax. Providestax-free treatmentof deathb
¯
Clarifi
purpose even if madewithout demonstration(
formulaconsistentlyapplied.
¯
Imposq
settlements for a lumpsumunless the transac
interest.
¯
Exem
t
ffc~m ~irllnec
nnd e~rtnin
nther "n]mlified
n~vrne
up to one year someCodeprovisions by reas(
actions.
It also broader
federal law enforcementand intelligence agenci
2.
The Job Creation an
116 Stat. 21, wassigned by President Bushon
3.
P.L. 107-181, the Ch
signed by President Bushon 5/20/02. See V.A
4.
The Sarbanes-Oxley
CompanyAccounting Reformand Investor 17
7/30/02. Oneprovision in the Act is a "sense ~
signed by the CEO.See also, Act § 307 for lay
C.
Pending
]..
H.R. 4069, the Social
was passed
by the Houston on 5/14/02 by
. .
provlsmns.
Fax Relief Act, Pub. L. 107-134, was signed by
tax relief for those whodied or wereinjured in the
ing in 1995, and bioterrorism involving anthrax on
Le taxes for the year of deathandthe prior year and
Shieldsthe first $8.5 millionin assets fromfederal
)aid by an employer.
payments madeby charities are for an exempt
:ial needif madein goodfaith under an objective
¢xlJlJZ~VS~S~ off ~ s,A.Iutzt,
~ os~z.tzl ~ z.t.t
t.t.ts.,
VZ~LXXlX
~ U~t
1 gross incomedisaster relief paymentsreceived
~ivedby individualsin a "qualifieddisaster."
; that the Secretaryhas the authorityto disregardfor
;sidentially declareddisaster or terrorist or military
; to permitTreasuryto share return informationwith
;ed in terrorist investigations.
:er Assistance Act of 2002, Pub. L. No. 107-147,
using AllowanceClarification Act of 2002 was
~ab. L. 107-204, formerly knownas the Public
stleblowingrequirements.
t’ Benefit Enhancements
for Women
Bill of 2002,
mousvote. Contains several taxpayer protection
_ _ _*1 -l_*J~_
~’~lr
1
_ ¯ ~
-1
~
l- _
T~’11 _ ¯
3.
H.R. 4626, the Encol
passed by the Houseon 5/21/02 by a 409-1 vc
for married couples filing jointly, as well
credits.
4.
S. 2119, the Reversin
the Corporate Patriot EnforcementBill of
inversions."
Workand Supporting Marriage Bill of 2002 was
ld accelerate the increase in the standarddeduction
the work opportunity and welfare-to-work tax
:patriation of Profits OffshoreAct, and H.R.3884,
tould both legislate against so-called "corporate
RECENT DEVELOPMENt
I.
ACCOUNTING
............................
A. Accounting
Methods
..............
B. Inventories
..............................
C. Year of Incomeor Deduction.
Method
................
D. Installment
0. BUSINESS INCOMEANDDED
A. Income
....................................
B. Deductible Expensesversus C
.....
C. ReasonableCompensation
D. Miscellaneous
Expenses
........
E. Depreciation & Amortization.
F_ ~redit~....................................
EDERAL INCOME TAXATION
.............................
¯ °" ................................................
1
................................................................................
................................................................................
................................................................................
~S ...............................................................
................
° ...........
6
° ..............................................................
6
ition.......................................................................6
...............................................................................
..............................
. ....
°.°° ........................................
8
.............................................................................
0
................................ .............................................
11
[its........................................................................
13
,Ls........................................................................
14
................................. ............................................
16
...........................................
. .................................
18
1"1.
ill. IN VP.;~STMENI"
(_iAIN...................
A. CapitalGainandLoss.............
B. Interest
.....................................
1031
............................
C. Section
D. Section
1033
............................
E. Section
1041
............................
IV. COMPENSATION
ISSUES..........
A. Fringe
Benefits
........................
B. Qualified Deferred Compensat
C. Nonqualified Deferred Compe:
D. Individual RetirementAccounl
V. PERSONALINCOMEANDDEI3
A. Miscellaneous
Income
.............
.............................................................................
8
.............................................................................9
.........................................................
. ...................19
.............................................................................
0
.............................................................................
0
.............................................................................1
.............................................................................1
is .........................................................................
23
NS
.......................................................................27
.............................................................................
27
.............................................................................
.......
d
.........
o
.........
D. Deductionsand Credits for Pe:
E. Education: Helping Pay Col
tuition?)
...................................
VI. CORPORATIONS
.........................
A. EntityandFormation
..............
B. Distributions and Redemption:
C. Liquidations
............................
D. SCorporations
.........................
...........
E. AffiliatedCorporations
F. Reorganizationsand Corporat~
G. Personal Holding Companies
H. MiscellaneousCorporateIssue
VII.PARTNERSHIPS
..........................
A. Formation and Taxable Years.
A 11 ~----a.:
....
o l’X:-a-..:l..._aA___
01_.
8
:e andVacation
Homes
.......................................
31
xpenses
............................................................... 31
ition (or is it helping colleges increase
.............................................................................
1
.............................................................................
1
............................................................................
31
............................................................................2
............................................................................3
............................................................................3
............................................................................
_. o
maulated
Earnings
Tax.......................................
42
............................................................................3
............................................................................3
............................................................................3
~ ,’.,,-ol~,;v.,, "r~,..,1.¢t. ,’~ AI’~-,,+t,;A ,.. "[~,a r,.~ ,’,
AA
F. Parmership
AuditRules .........
G.Miscellaneous
........................
VIII. TAXSHELTERS
...................
A. CorporateTaxShelters ..........
B. IndividualTaxShelters ..........
IX.
EXEMPTORGANIZATIONSA~
A. Exempt
Organizations............
B. Charitable
Giving...................
X. TAXPROCEDURE
.....................
A. Penalties andProsecutions.....
B. Discovery: Summonsesand Fq
Costs......................
C. Litigation
D. Statutory
Notice.....................
............................
¯ .......
° .............
° ............
°. .......
° ....
44
.............................................................................
5
.................................................................
° ...........
46
............................................................................
°46
.............................................................................
4
~TABLE
GIVING
............................................
.............................................................................
..............................................
54
,.s,,i
¯ ..............................
56
.............................................................................
.........................
...................................
° ...................................................
° .........................................
6
56
57
...........................
.................................................
57
...........................
° .................................................
58
.............................................................................
~0
9
.............................................................................
2
.............................................................................
5
XI. WITHHOLDING
AND EXCISE q
.............................................................................
9
Taxes..................
A. Employment
B. Self-employment
.....................
...........................
C. ExciseTaxes
XII.TAX
LEGISLATION
....................
.............................................................................
A. Vetoed
.....................................
B. Enacted
....................................
C. Pending
....................................
9
.............................................................................
1
.............................................................................
1
.............................................................................
1
.............................................................................
.............................................................................
.............................................................................
1
71
1