Federal Tax Update

Attorney-CPA, The, Oct 2004 by De Jong, David S

In In Re Steinkrauss. 94 AFTR2d 2004-5291, a Massachusetts Bankruptcy Court denied a discharge of taxes for a couple (attorney and real estate broker) who failed to file returns for eight years while they constructed an expensive new house.

Revenue Rulings, Procedures and Notices

In Revenue Ruling 2004-38, IRS indicated that the required high deductible for establishment of a health savings account is violated by participation in a health plan offering prescription drug coverage subject to a lower deductible.

In Revenue Ruling 2004-55, IRS clarified that, in order for disability income on an employer-paid policy to be tax free, the employee must have irrevocably elected such treatment prior to the start of the plan year in which the disability occurs.

In Revenue Ruling 2004-60, IRS reiterated that the transferor spouse of non-qualified deferred compensation (including non-qualified stock options) upon a marital termination is subject to FICA taxes when the taxable event occurs to the recipient; however, the recipient's proceeds are charged with the tax cost.

In Revenue Ruling 2004-41, IRS treated a multimember limited liability company akin to a corporation in determining that members may be liable personally only for the trust portion.

In Revenue Procedure 2004-34, IRS expanded the ability of accrual basis taxpayers to defer to succeeding taxable years the inclusion of advance payments having a term beyond the end of year following the year of receipt; previously applicable only to services, the rule is expanded to include certain non-services.

In Notice 2004-27, IRS cautioned that losses caused by the decline in the market value of publicly traded stock as a result of misrepresentations made by corporate officials or other illegal misconduct do not constitute a theft loss for tax purposes.

In Notice 2004-54, IRS approved alternative methods for preparers to sign tax returns and extension requests including rubber stamp, mechanical device or computer software program; the alternative methods are not applicable to other filings such as tax elections and powers of attorney.

Letter Rulings

In Letter Ruling 200428034, IRS waived the 60-day rollover rule for amounts that an unemployed individual withdrew from his IRA beyond amounts needed to pay for living expenses because he relied upon incorrect advice from his financial advisor that he could only receive a single distribution in each calendar year; however, IRS denied a waiver for the amounts expended; in Letter Rulings 200433024 and 200433027, IRS waived the 60-day rollover rule for a taxpayer whose IRA account was subject to an improper levy and for a taxpayer who believed the rollover period was 90 days.

In Letter Ruling 200415011. the son of a decedent was not allowed to extend the 60-day rollover period on a predeath withdrawal of his parent; however, in Letter Ruling 200415012, the spouse of a similarly situated decedent was allowed to extend the period.

In Letter Ruling 200417004, IRS indicated that the winner of a sweepstakes promotion could not offset the income received each year with losses from wagering transactions.