Federal Tax Update

Attorney-CPA, The, Nov 2003 by De Jong, David S

Regulations

Final Regulations Under Code Sections 61, 83 and 7872 concerning split dollar generally follow the proposed regulations taxing the employee based upon the true "economic benefit" (the cost of current term life insurance protection plus the amount of a policy cash value to which the employee first had access during the year) of an employer-owned policy or would require the employee to repay the employer with interest for premiums paid by the employer in the case of an employee-owned policy; the Regulations will apply to any split dollar life insurance policy entered into after September 17, 2003 or to one materially modified after that date.

Final Regulations Under Code Section 66 allow community property rules to be avoided for income tax reporting when spouses live apart for the entire year and none of the community income is transferred from one spouse to another or the spouse earning the income did not notify the other spouse of the nature and amount of the income; IRS may grant equitable relief in additional circumstances.

Final Regulations Under Code Section 274 allow IRS to establish a per diem allowance for incidental expenses while traveling away from home.

Proposed Regulations Under Section 422 allow the transfer of an Incentive Stock Option to a trust if the original optionee remains the beneficial owner but continue to disallow the transfer to a spouse pursuant to a marital termination (the Option then converts to a Non-qualified Option).

Final Regulations Under Section 7122 establish a $150 user fee for Offers in Compromise not applicable to low-income taxpayers and considered in the amount of the Offer except in cases of doubt as to liability.

Cases

In Robinson v. United States, 92 AFTR2d 2003-5227, the Federal Circuit reversed the Court of Federal Claims and, disagreeing with an earlier Tax Court decision affirmed by the Sixth Circuit, determined that an employer may deduct the bargain element in a stock transfer to an employee based on the amount that the employee should have included in income even though it was not reported by the worker.

In Banaitis v. Commissioner, 92 AFTR2d 2003-5834, the Ninth Circuit Court of Appeals reversed the Tax Court and reached a different result than it had in a prior case, permitting the recipient of a taxable settlement to report only the net amount after attorneys fees as income; the Court interpreted Oregon law as giving the attorney a property interest in the settlement (the Courts are deeply divided on the subject with the Fifth, Sixth and Eleventh Circuits as well as a Vermont Federal District Court allowing the reporting of only the net amount while the First, Third, Fourth, Tenth and Federal Courts of Appeal agree with IRS and the Tax Court that the gross amount must be reported and the attorneys fees claimed as an itemized deduction).

In Hopkins v. Commissioner, 121 TC No. 17, the Tax Court determined that a prior closing agreement does not preclude assertion of the innocent spouse rule under the broad 1998 legislation.

In Townsend Industries v. United States, ______ AFTR2d ______, the Eighth Circuit Court of Appeals reversed an Iowa Federal District Court and determined that a company's annual fishing trip in which business discussions were conducted on an ongoing basis but at which there was only one organized activity had a business purpose despite additional attendance.

In Hackl v. Commissioner, 92 AFTR2d 2003-5254, the Seventh Circuit agreed with the Tax Court that the transfer of interest in a limited liability company may not be a gift of a present interest when there is no substantial present economic benefit.

In Estate of Gribauskas, 92 AFTR2d 2003-5914 , the Second Circuit Court of Appeals reversed the Tax Court, agreeing with the Ninth Circuit in an earlier case, and determined that unpaid lottery winnings did not need to be valued for estate purposes using IRS tables but could be valued using usual valuation principles reflecting state-imposed restrictions including lack of marketability.

In Beall v. United States, 92 AFTR2d 2003-5001, the Fifth Circuit Court of Appeals reversed a decision of a Texas Federal District Court and determined that federal district courts as well as the Tax Court have authority to abate interest otherwise payable to the Internal Revenue Service where statutory grounds for relief apply.

In Macher v. United States, 91 AFTR2d 2003-2654, a Virginia Bankruptcy Court ruled that IRS is required to process Offers in Compromise from taxpayers who are in bankruptcy.

In Hassan v. United States, 92 AFTR2d 2003-5764, a Florida Federal District Court agreed with the Bankruptcy Court that a physician who filed his tax returns late and made only occasional payments willfully attempted to evade his tax obligations and could be denied discharge of the tax obligation; in McDow v. Smith, 92 AFTR2d 2003-5037, a Virginia Federal District Court reversed a Bankruptcy Court decision and determined that a "lavish" lifestyle including $80,000 per year for house rental, $73,000 per year in credit card payments and $68,000 per year in private schooling on income of more than $450,000 does not in and of itself cause dismissal of a bankruptcy petition as being in "bad faith" where the tax liability is in excess of $5 million.