Federal Tax Update

Attorney-CPA, The, Winter 2008 by De Jong, David S

Individuals

Public Law 110-141 excludes from gross income payments distributed from the memorial fund for the victims of the April 16, 2007 shooting at Virginia Tech.

Public Law 110-142. the Mortgage Relief Act of 2007:

* Created an exclusion for 2007-2009 on forgiveness of up to $2 million of acquisition mortgage debt including refinancings ($1 million for married taxpayers filing separately) resulting from decline in value of a principal residence with a reduction of basis required by the excluded amount but not below zero; a taxpayer may use in the alternative the existing debt forgiveness exclusion for insolvent taxpayers.

* Extended the treatment of qualified purchase money insurance as qualified residence interest through 2010 to cover PMI paid before 2011 on 2007-2010 acquisitions.

* Expanded the test needed to permit tenantstockholders of a cooperative housing corporation to deduct pro rata payments of interest and property taxes effective 2007.

* Created for 2008-2011 an exclusion of up to $30 per month for members of a qualified volunteer emergency response organization receiving payments or tax benefits for services; expenses otherwise deducible must first be netted against the excluded payments.

* Allowed widows and widowers who remain unmarried the $500,000 exclusion on post-2007 sales upon disposition of a principal residence for two years from a spouse's death in addition to any step-up in basis where the requirements for the exclusion were met immediately before death.

Public Law 110-166. the Tax Increase Prevention Act of 2007, boosts the alternative minimum tax exemption amounts to $66,250 for married individuals filing jointly and $44,350 for unmarried individuals but leaves intact the current phase out rules and continues to allow personal nonrefundable credits to offset AMT.

Public Law 110-172. the Technical Corrections Act of 2007:

* Increased the refundable alternative minimum tax credit allocable during 2007-2012 against regular tax liability for those below the phase-out amounts tied to the personal exemption partial phaseout to effectively allow in most cases that 20 percent of the original long-term credit is refundable in each year rather than applying the 20 percent to the remaining unused long-term credit.

* Clarified for open affected years that a charitable recipient's use of donated personal property related to its exempt function, avoiding application of a fair market value limited to the resale price, must be "substantial."

P.L. 110-185, the Economic Stimulus Act of 2008, created rebates of $300 to $600 for most individuals (double on a joint return) with an additional $300 per child phased out for individuals with adjusted gross income above $75,000 ($150,000 for joint returns).

In Myers v. Commissioner. TC Summary Opinion 2007194, the Tax Court determined that a woman who ran a trucking business but who devoted about 40 hours per week to playing the slot machines was in the business of gambling and could deduct losses on a Schedule C rather than as miscellaneous itemized deductions.

In Revenue Ruling 2007-69, IRS reversed a 42-year old Revenue Ruling and determined that payments made by Veterans Administration for work performed under "compensated work therapy programs" are exempt from federal income tax as veterans benefits.

In Revenue Ruling 2007-72, IRS indicated that self-diagnosis test kits such as for blood pressure or pregnancy qualify as a deductible medical expense making them reimbursable under medical reimbursement and cafeteria plans.

In Revenue Ruling 2008-5, IRS determined that the "wash sale" rule applies when an individual sells stock at a loss and reacquires it within 30 days before or after the date of sale through an IRA; the individual's basis in the IRA is unaffected by the unused basis in the securities which were disposed.

In Notice 2008-5, IRS clarified that a potential dependent is not treated as a "qualifying child" of a parent or other taxpayer who is not required to file an income tax return including one who files solely to obtain a refund of withheld tax (not covering a refund due to application of the earned income credit).

In Letter Ruling 200805012, IRS ruled that development rights were like kind and could be swapped for a fee interest in property as long as the development rights do not set an expiration date.

Retirement Plans

In General Mills v. United States. 101 AFTR2d 2008-381, a Minnesota Federal District Court agreed with the Ninth Circuit Court of Appeals and disagreed with a New Jersey Federal District Court in determining that a corporation can deduct payments to redeem stock held in its employee stock ownership plan (ESOP) based on law prior to final regulations in 2006 which would deny the deduction.

In Letter Ruling 200751032, IRS did not allow a married couple additional time beyond the 60 days to complete a rollover where the withdrawal was a result of dissatisfaction with earnings and the wife underwent surgery with ten days remaining in the rollover period.