Federal tax update

Regulations

Final Regulations Under Code Section 6695 permit tax preparers to retain a photocopy of a manually signed return or to use an electronic storage system.

Cases

In Mueller v. Commissioner, T.C. Memo 2000132, the Tax Court rejected a constitutional challenge by a gay man to the disallowance of a joint return with his domestic partner.

In Bend-Woodward v. Commissioner, No. 997013, the Ninth Circuit and in Kenseth v. Commissioner, 114 T.C. No. 26, the Tax Court held to their prior opinions agreeing with the First and Federal Circuits and disagreeing with the Fifth (which reiterated its position in Srivastrova v. Commissioner, No. 9960437), Sixth and Eleventh Circuits, and required the recipients of taxable settlements to include the gross proceeds in income and to deduct attorneys fees only as a miscellaneous itemized deduction; the effect was a loss of a portion of the deduction due to the 2 percent floor and the application of the alternative minimum tax.

In Jorgensen v. Commissioner, T.C. Memo 2000138, an English teacher was allowed to deduct summer trips to Greece and Southeast Asia as a miscellaneous itemized deduction; the Court determined that the regular lectures, tours and readings were focused educational activities and that the Greek tour's focus on mythology would improve her job skills and that the Southeast Asia tour would help her relate better to her students who were predominantly Asian-American.

In Krukowski v. Commissioner, 114 T.C. No. 25, the Tax Court upheld the validity of Regulations dealing with the "recharacterization rule", denying a taxpayer the ability to offset income realized on the rental of an office building to his Subchapter C law firm by the loss he had on the rental of a building to his Chapter C health club.

In Fernandez v. Commissioner, 114 T.C. No. 21, the Tax Court determined that it had jurisdiction to review "equitable relief" sought by a purported innocent spouse; the Court disagreed with a prior decision of a Federal Bankruptcy Court located in Pennsylvania.

In Carson v. Commissioner, 114 T.C. No. 24, the Tax Court determined that the other spouse may challenge the granting of innocent spouse relief in a docketed case.

In Jim Turin & Sons, Inc. v. Commissioner, No. 99-70130, the Ninth Circuit Court of Appeals agreed with the Tax Court that a paving contractor need not use accrual basis accounting inasmuch as asphalt is not susceptible to being inventoried.

In Davis v. Commissioner, T.C. Memo 2000-101, IRS allowed a taxpayer to claim losses in years five through seven of a breeding business for Arabian horses despite the lack of a separate bank account, a detailed written budget and a significant investigatory process before commencing the activity; the Court determined that their effort coupled with a rise in value of the horses and farm improvements and the fact that no one in the family rode the horses for pleasure showed a profit motive.

In Adams v. United States, No. 99-10497, the Fifth Circuit Court of Appeals reversed a Texas Federal District Court and determined that discounts are appropriate when a partnership agreement upon death of a partner permits, as an alternative to liquidation, the remaining partners to continue the business of the dissolved partnership by paying the estate the value of the interest.

In McIntyre v. United States, No. 98-17192, the Ninth Circuit Court of Appeals agreed with a prior Fifth Circuit decision that IRS may seize the entire pension of a delinquent taxpayer in a community property state notwithstanding that the spouse is not liable for the taxes.

In Raleigh v. Illinois Department of Revenue, No. 99-387, the U.S. Supreme Court unanimously affirmed a decision of the Seventh Circuit Court of Appeals which agreed with the Third and Fourth Circuits and disagreed with the Fifth, Eighth, Ninth and Tenth Circuits, ruling that the burden of proof in a tax matter in Bankruptcy Court is determined by substantive tax law and not by bankruptcy law.

In United States v. Fretz, ND Ala. No. CV-99-J1447-NE, an Alabama Federal District Court agreed with a prior Bankruptcy Court that an alcoholic doctor married to his fourth wife could go bankrupt for the third time and discharge eleven years of income tax liabilities despite his plea to criminal willful failure to file; the Court determined that the taxpayer was simply irresponsible as a result of his alcoholism and did not willfully attempt to defeat or evade his tax obligations.

Revenue Rulings, Procedures and Notices

In Revenue Ruling 2000-24, IRS determined that a parent's costs associated with attendance at a medical conference relating to the chronic disease suffered by a dependent child in which attendees were both medical practitioners and individuals with the disease in their families were deductible.

In Chief Counsel Notice N(35)000-338, IRS indicated that it will no longer contest the right of courts to review an IRS denial of equitable innocent spouse relief.

Letter Rulings

In Letter Ruling 200018057, IRS determined that the designated beneficiary who inherits under an Individual Retirement Account may take distributions over that beneficiary's life upon inheriting the IRA notwithstanding that the decedent had previously chosen to take distributions over a single life expectancy; IRS interpreted the "at least as rapidly" rule to mean a period over which the IRA owner could have taken the distribution and not the period over which the owner was in fact taking the distribution.

In Letter Ruling 20002011, IRS determined that interest on a loan from a commercial lender to pay Federal estate tax deferred under Code Section 6166 qualifies as an administration expense when the loan is reasonably and necessarily incurred in the administration of the estate and not for the individual benefit of a beneficiary.

David S. De long

Stein Sperling Bennett De Jong et al

Rockville, MD

Copyright American Association of Attorney-Certified Public Accountants 2000
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