Federal tax update

Final Regulations Under Code Section 408A permit recharacterization of IRAs from traditional to Roth, and vice versa, by redesignation as opposed to the opening of a new account; transfers from a traditional IRA to a Roth and back to a traditional IRA may not subsequently be converted to a Roth in the same calendar year effective 2000.

Final Regulations Under Code Section 3121 retain the basic structure of the . Proposed Regulations concerning the applicability of FICA and Medicare to deferred compensation and permit calculation after application of a discount to reflect the time value of money and the risk that benefits will not be paid due to death; no discount is permitted based on the credit worthiness of the employer.

Case

In Ertman v. United States, the Second Circuit Court of Appeals affirmed a Connecticut Federal District Court and, agreeing with the Sixth, Ninth and Tenth Circuits (and disagreeing totally with the Fifth and Eighth Circuits and disagreeing with the Third and Federal Circuits as well as the Tax Court which apply a "facts and circumstances" test), determined that a remittance with an automatic extension is a tax payment subject to the statute of limitations rather than a deposit.

In Allen v. United States, the Fourth Circuit Court of Appeals agreed with the Eighth and Ninth Circuits and reversed a North Carolina Federal District Court, holding that interest paid by an individual to the Internal Revenue Service is always personal in nature; only the Tax Court remains in disagreement with the Appeals Courts, but that Court may have retreated from its prior position in Carlson v. Commissioner, holding that the interest payable to IRS by an S corporation shareholder on deferred taxes on dealer installment sales is not business in nature.

In Alpha Medical, Inc. v. Commissioner, the Sixth Circuit Court of Appeals reversed the Tax Court and determined that compensation paid to the company founder in excess of $4.4 million in a single year was reasonable based on his 80 hour work week, his past financial sacrifices and the profitability of the company; IRS had claimed that only $400,000 was reasonable and the Tax Court had allowed $2.3 million.

In United States v. Hindenlang, the Sixth Circuit Court of Appeals reversed an Ohio District Court and determined that tax returns filed by an individual in substantially the same manner as IRS had previously assessed through substitute returns do not constitute the filing of returns for purpose of commencing of the twoyear period before income tax liability can be discharged in bankruptcy; in In Re Pierchoski, a Pennsylvania Federal District Court tentatively reached the same result, allowing the taxpayer to show a "tax purpose" for the filing to the Bankruptcy Court.

In Picard v. Commissioner, the Ninth Circuit Court of Appeals reversed the Tax Court and held that a disability retirement pension on account of on-the-job injuries of 75 percent of base salary, converting after the worker would have completed 25 years of service to the benefit he would have received with 25 years of service, is non-taxable even after the reduction; the Court determined that the second tier benefit continued to be paid on account of disability although in the same amount of a retirement benefit on account of years of service.

In Caan v. United States, a California Federal District Court denied a casualty loss to a neighbor of O.J. Simpson for an alleged $400,000 loss in value to real estate following the murders and subsequent publicity; although the murders were "sudden, unexpected, and unusual", there was no physical damage to property causing the loss of value.

In Simmons v. United States, a Georgia Federal District Court determined that the period on dischargability of tax liability in bankruptcy is suspended during the period of a prior bankruptcy reorganization.

In Traina v. Sewell, a Louisiana Federal District Court agreed with the Seventh Circuit Court of Appeals, a Michigan District Court and a Virginia Bankruptcy Court in determining that a non-qualified deferred compensation plan subject to ERISA is exempt from the reach of creditors in a bankruptcy.

In Estate of Mellinger v. Commissioner, the Tax Court determined that a minority interest in a business owned by a widow is not combined with a second minority interest owned by a QTIP Trust includable in her estate; a separate minority discount could be taken on each interest.

Revenue Rulings, Procedures and Notices

In Revenue Procedure 99-23, IRS announced a oneyear delay in the remedial amendment period for documenting changes to Qualified Retirement Plans; they must now be updated by the last day of the Plan Year beginning in 2000.

In Announcement 99-37, IRS indicated that the 2'h month extension on Form 5500 series forms will now be an automatic extension.

In Information Release 1999-30, IRS announced changes in the Offer in Compromise Program, formally adopting a 20 percent discount on the gross value of most assets for "quick sale" and permitting deferred payment offers over the life of the collection statute.

In Information Release 1999-36, IRS announced a policy of granting installment arrangements generally to taxpayers who agree to pay a balance not in excess of $25,000 within a five-year period.

Letter Rulings

In Letter Ruling 1999050L, IRS determined that a purchaser of a principal residence may elect to amortize home loan points on a purchase as opposed to deducting the points currently.

In Letter Ruling 199906014, IRS determined that real estate containing a house used as a vacation home but which also included a separate apartment rented to unrelated individuals qualifies as a personal residence for purpose of a Qualified Personal Residence Trust.

In Letter Ruling 19990803, IRS determined that the termination of a QTIP Trust by children in favor of their parent is a gift of the remainder interest to the parent.

In Letter Ruling 19990900, IRS determined that a deceased partner in a partnership collecting lottery proceedings may not claim discounts for minority interest, lack of marketability or deferred taxes.

Copyright American Association of Attorney-Certified Public Accountants 1999
Provided by ProQuest Information and Learning Company. All rights Reserved