Federal tax update

Cases

In Coady v. Commissioner, No. 00-1326, the TJ.S. Supreme Court for a second time by denying certiorari from the Ninth Circuit passed up an opportunity to resolve a split among the courts as to whether the recipient of taxable damages must report the gross proceeds and deduct the attorney's portion as a miscellaneous itemized deduction; the First, Ninth and Federal Circuit Courts of Appeal as well as the Tax Court back the IRS position while the Fifth, Sixth and Eleventh Circuit Courts of Appeal take the opposite position with the Eleventh Circuit reiterating its position in Foster v. United States, 87 AFTR2d 2001-2011.

In United States v. Cleveland Indians Baseball Company, 87 AFTR2d 2001-1706, the U.S. Supreme Court unanimously reversed the Sixth Circuit Court of Appeals and determined that back pay is taxed for FICA and FUTA purposes when it is paid and not when it should have been paid.

In Popov v. Commissioner, 87 AFTR2d 2001-1735, the Ninth Circuit Court of Appeals reversed the Tax Court and, agreeing with a long-standing Second Circuit case, permitted a symphony violinist who used her living room exclusively for practice to claim the office in home deduction; the Court passed on determining the location with the greatest relative importance and made a determination based on the time spent at each place.

In Hillman v. Internal Revenue Service, 87 AFTR2d 2001-1731, the Fourth Circuit Court of Appeals reversed the Tax Court and denied an individual's offset of his S corporation management income (business) by his share of management deductions in partnerships (passive) paying fees to his S corporation.

In Eberl's Claim Service, Inc., v. Commissioner, No. 99-9033, the Tenth Circuit Court of Appeals agreed with the Tax Court and applied a multi-factor test of reasonableness in denying $3,000,000 in compensation deductions to the sole owner over a two-year period; the Court still allowed $3,420,000 as reasonable compensation for two years of services relating to providing independent claims adjusters to major insurance companies.

In Grojean v. Commissioner, 87 AFTR2d 20011673, the Seventh Circuit Court of Appeals agreed with the Tax Court that an S corporation shareholder gained no basis through "subordinated participation" in a bank loan to his controlled corporation; the arrangement was determined to be akin to a guarantee.

In Gribauskas v. Commissioner, 116 T.C. No. 12, the Tax Court disagreed with a prior California Federal District Court holding on the same issue and determined that installments of lottery winnings due at a decedent's death must be valued for estate tax purposes using Code Section 7520 tables without marketability discount.

In United States v. Fretz, 87 AFTR2d 2001-1380, the Eleventh Circuit Court of Appeals reversed an Alabama Federal District Court which had agreed with the prior Bankruptcy Court decision and determined that eleven years of income tax liabilities coupled with a plea to criminal willful failure to file precluded discharge of an alcoholic doctor's tax liabilities upon his third bankruptcy.

In In re Olson, No. 00-265, a Florida Bankruptcy Court agreed with the Sixth Circuit Court of Appeals that a taxpayer who files his own returns after returns are "prepared" by the Government may not discharge the tax debt in bankruptcy.

Letter Rulings

In Service Center Advice 200115032, IRS concluded that no miscellaneous itemized deduction is allowed for a fee charged by a credit card company for using a credit card to pay personal income taxes.

In Field Service Advice 200117005, IRS determined that a Personal Representative of a deceased spouse's estate may not make a claim for innocent spouse under two of the three alternative subsections; the Court did not comment on the "equitable relies" provision which does not require the "individual" to seek relief.

In Letter Ruling 200118023, IRS permitted a taxpayer to swap real estate for the 100 percent interest in a one-member Limited Liability Company owning real estate; the value of any other assets of the LLC besides real estate was treated as taxable "boot."

Copyright American Association of Attorney-Certified Public Accountants 2001
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