Federal tax update

Proposed Regulations Under Code Section 79 reduce the cost of access group term life insurance after June 30, 1999, as a result of significant improvements in mortality.

Proposed Regulations Under Code Section 221 deny the deduction for interest paid on student loans where the proceeds of borrowing are used in part for any other purpose.

Proposed Regulations Under Section 453 require that all 25-percent gain be reported prior to any 20percent gain in the case of an installment sale; IRS will not challenge pro rata reporting prior to the date of Final Regulations.

Temporary Regulations Under Code Section 6103 govern the use of credit cards to pay IRS; the date of payment is considered to be the date the transaction is authorized by the credit card issuer.

Temporary Regulations Under Code Sections 6320 and 6330 set forth the Collection Due Process (CDP) procedure for appealing liens and levies and for litigating after issuance of a "Notice of Determination."

Final Regulations Under Code Section 6695 allow a tax preparer to satisfy the requirement of retaining return copies through use of an electronic storage system. Cases

In Dobra v. Commissioner, the Tax Court determined that payments received from a state for foster care are excluded from gross income only if the provider resides in the house where foster care is provided and not if the care occurs in another house owned by the provider.

In Seminole Thriftway, Inc. v. United States, the Court of Federal Claims determined that guarantor fees paid pro rata by a corporation to its shareholders for personal guarantee of corporate debt, although reasonable in amount and customary in the type of business, were constructive dividends when they were granted several years after the guarantees; the corporation was profitable and had no history of dividend payments.

In Watson v. Proctor, the Ninth Circuit reversed a Nevada Bankruptcy Court and ruled that creditors can reach the one-person profit-sharing plan of a bankrupt individual inasmuch as an owner is not an "employee" for ERISA purposes.

Revenue Rulings, Procedures and Notices

In Revenue Ruling 99-5, IRS indicated that the sale of a 50% interest in a one person limited liability company is treated as a sale of a 50% interest in each underlying asset followed by formation of a partnership for tax purposes while a cash contribution to a one member LLC in exchange for a 50% interest is treated solely as a nontaxable partnership formation.

In Revenue Ruling 99-6, IRS determined that the sale of an entire interest by one of two members in a limited liability company is treated for tax purposes by the selling member as a sale of a partnership interest and is treated by the continuing member as a liquidating distribution from a partnership of one-half of the assets of the partnership coupled with a purchase of the other one-half of the assets, while the sale by all members of a multi-member LLC of their interests to a single unrelated party is considered for tax purposes as a sale of partnership interests by the sellers and as an acquisition of assets by the purchaser.

In Revenue Ruling 99-7, IRS set forth three exceptions to the general rule that transportation expenses between a residence and place of employment are non-deductible, including: (1) expenses incurred in going between a taxpayer's residence and temporary work location outside of the metropolitan area where the taxpayer lives and normally works; (2) expenses incurred going between the taxpayer's residence and a temporary work location when the taxpayer has one or more regular work locations away from the residence; and (3) expenses incurred going between the residence which is the taxpayer's principal place of business and any other work location.

In Revenue Procedure 98-60, IRS updated its procedures for obtaining automatic consent to numerous specified changes in accounting methods; automatic consents may now be filed on an amended return for up to six months following the original due date of the tax return.

In Notice 98-61, IRS set forth interim guidance for equitable relief under the "catch-all" portion of the innocent spouse rule, indicating that factors favoring relief include marital separation, hardship, abuse and/or an agreement that the obligation be paid by the other spouse.

In Notice 99-6, IRS indicated that, until formal procedures are provided, one person limited liability companies and qualified S corporation subsidiaries may report employment taxes within separate entities or as a combined entity with the income tax "alter ego" .

Letter Rulings

In Letter Ruling 98-48001, IRS determined that crowns and bridges were not an income producing factor in a dentist's practice and, accordingly, the dentist could use cash basis accounting.

In Letter Ruling 98-52015, IRS determined that the added costs of a program within a school for attention deficit disorder are deductible as medical expenses but not the basic private school tuition inasmuch as the school as a whole is not a "special school" for medical treatment.

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