Federal tax update

Legislation

The Miscellaneous Trade and Technical Corrections Act was enacted with language effectively negating a 1998 Ninth Circuit decision which had provided that a transferor's own promissory note upon incorporation counted as an asset for purpose of determining whether liabilities transferred to the corporation are greater than the basis of transferred assets.

Regulations

Proposed Regulations Under Code Section 6045, scheduled to be effective January 1 for payments made after December 31, 1999, provide that all payments to attorneys and law firms irrespective of amount by a payor engaged in business must be reported on Form 1099-MISC; the reporting requirement extends to payments delivered to an attorney or law firm even when there is another named payee on the check if the attorney or law firm served as counsel to the payee.

Final Regulations Under Code Section 467, generally effective for rental agreements entered into after May 18, 1999, apply to rental agreements with a value in excess of $250,000 and create rules for landlords and tenants with deferred or prepaid rent.

Temporary Regulations Under Internal Revenue Code Section 7122 allow acceptance of Offers in Compromise not only based on doubt as to liability or doubt as to collectibility but also based upon economic hardship or exceptional circumstances such that collection of theliability would be detrimental to voluntary compliance.

Cases

In Miller v. Miller, the Tennessee Court of Appeals affirmed a Trial Court decision requiring that the custodial parent alternate the dependency allowance with the non-custodial parent; it ignored Federal law which gives the dependency allowance to the custodial parent in the absence of a release of this right.

In Ames v. Commissioner, the Tax Court determined that renowned spy Aldrich Ames was not in constructive receipt of $2 million purportedly set aside for him in a bank account in the Soviet Union, inasmuch as that country retained the ability to withhold or control funds and Ames did not have a legally enforceable claim; the Court agreed with. the IRS that the income was reportable in a subsequent year.

In McDonnell v. United States, the Sixth Circuit Court of Appeals affirmed a Tennessee Federal District Court decision and, agreeing with the Fourth, Eighth and Ninth Circuits and disagreeing with the Tax Court, held that interest payable by an individual to the Internal Revenue Service is always personal in nature.

In Estate of Magnin v. Commissioner, the Ninth Circuit Court of Appeals, agreeing with the Third and Fifth Circuits and disagreeing with the Tenth and Federal Circuits as well as a North Carolina Federal District Court, reversed the Tax Court and determined that the value of property is not included in a decedent's estate when the remainder interest in the property had been previously sold during the decedent's lifetime for adequate consideration.

In Estate of Cartwright v. Commissioner, the Commissioner, Ninth Circuit Court of Appeals, citing language in the shareholder agreement that insurance proceeds were not only for stock redemption but also were for release of any claim to cases and work in progress, affirmed a Tax Court decision holding that part of the payment to the estate of a deceased shareholder was "income in respect of a decedent" not eligible for the step up in tax basis.

In Hickman v. Commissioner, the Sixth Circuit Court of Appeals agreed with the Tax Court that a calculation of tax liability for purpose of determining appropriate restitution in a criminal tax case does not bar IRS from determining a higher liability in a subsequent civil proceeding.

Revenue Rulings, Procedures and Notices

In Notice 99-32, the Internal Revenue Service indicated that Proposed Regulations will be modified to permit the claiming of the Hope Scholarship Credit and the Lifetime Learning Credit on both late filed and amended tax returns.

In Announcement 99-57, IRS gave taxpayers a sixmonth window until October 15, 1999 to recharacterize 1998 Individual Retirement Account contributions as going into traditional or Roth IRAs; the window does not apply to taxpayers who do not file timely 1998 tax returns.

In Revenue Ruling 99-28, IRS revoked a 1979 ruling and now permits the unreimbursed costs of smoking cessation programs to be deducted as a medical expense even in the absence of a specific ailment or disease; IRS reiterated that prescription drugs designed to alleviate nicotine withdrawal are deductible but non-prescription nicotine patches and gums are not deductible.

Letter Rulings

In Field Service Advice 199929019, IRS stated that the Tax Court had no review authority over equitable innocent spouse relief, the "catch-all" of the three methods of avoiding liability when a joint return has been signed.

In Letter Ruling 199929043, IRS concluded that the value of financial consulting provided to family members of terminally ill employees and to survivors of deceased employees is taxable income to the employee and survivors respectively.

David S. De Jong

Stein Sperling Bennett De Jong et al

Rockville, MD

Copyright American Association of Attorney-Certified Public Accountants 1999
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