Federal tax update

Regulations

Final Regulations Under Code Section 2504 set forth the required information to be contained on a gift tax return in order to constitute sufficient disclosure to commence the running of the statute of limitations; either an appraisal or a detailed description of the method used to determine the fair market value of the transferred property, including a description of any discounts, must be disclosed.

Cases

In Drye v. United States, the U.S. Supreme Court affirmed an Eighth Circuit Court of Appeals decision, resolving a dispute among the Circuits, and determined that an heir may not disclaim an inheritance to avoid a Federal tax lien.

In Little v. Commissioner, the Tax Court determined that a Personal Representative who reasonably relied on the advice of counsel in closing an estate without payment of tax liabilities is not personally liable for unpaid taxes.

In North Dakota State University v. United States, a North Dakota Federal District Court ruled that early retirement incentive payments to tenured University faculty are not wages subject to withholding but are payments for the surrender of contract rights; payments to untenured administrators were determined to be wages.

In Read v. Commissioner, a divided Tax Court determined that a divorce judgment requiring a spouse to transfer stock to the other spouse, to his controlled corporation or to the corporation's ESOP was an interspousal transfer subject to non-recognition treatment.

In Varal v. United States, the U.S. Supreme Court ended conflict among the Courts by affirming a District of Columbia Circuit Court of Appeals decision that payments submitted to the Internal Revenue Service with an extension request are not tax deposits and, accordingly, are subject to the statute of limitations requirements on refunds.

In Church v. United States, a Texas Federal District Court determined that a family limited partnership set up two days prior to the death of a limited partner had a bona fide business purpose; because IRS put on no testimony as to the specific valuation, the Court accepted a valuation for the partnership interest proffered by the estate that was 42 percent of the value of the assets contributed to the partnership.

In Lund v. United States, a Utah Federal District Court denied a casualty loss for a decline in market value of a vacation home caused by restricted winter access due to avalanches; the Court was motivated by the lack of actual damage to the property itself.

Revenue Rulings, Procedures and Notices

In Information Release 1999-105, IRS announced a fined monthly payment option to compromise a taxpayer's debt to IRS.

In Announcement 200, IRS announced the creation of an arbitration process which would follow unsuccessful negotiations with appeals and would necessarily precede the Court docketing of a matter; arbitration would only be available for certain factual disputes and would not be available for substantiation issues under Code Sections 162 or 274.

In Notice 2000-14, IRS announced that it is looking to modify rules on comparability profit sharing plans, the effect of which would probably put an end to the discrimination currently permitted by such plans.

Letter Rulings

In Chief Counsel Advice Memorandum 199948028, IRS approved joint Offers in Compromise involving states, provided the Offer is consistent with overall policy on acceptance.

In Field Service Advice 200005006, IRS determined that an individual who transferred both incentive and non-qualified stock options to his former spouse as part of their divorce agreement had compensation income at the time of transfer in that the general tax free property settlement rules are not applicable to ordinary income items; the incentive stock options were given the same treatment inasmuch as the transfer necessarily converted them to non-qualified options.

In IRS Legal Memorandum 200006013, IRS accepted a Bankruptcy Court's jurisdiction over a debtor's request for innocent spouse relief even if the taxpayer did not follow administrative procedures; however, it agreed with other Courts that innocent spouse treatment on account of "equitable relief" is solely within the discretion of IRS.

David S. De Jong

Stein Sperling Bennett De Jong et al Rockville, MD

Copyright American Association of Attorney-Certified Public Accountants 2000
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