Federal Tax Update

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

In Letter Ruling 200749013, IRS determined that the costs of investigating and pursuing mutually exclusive transactions must be capitalized as part of the cost of a restructuring and as start up expenses are deductible up to $5,000 (phased out dollar per dollar by the excess over $50,000) or are amortized over a 15-year period; nonmutually exclusive investigatory costs not ultimately consummated are deductible upon abandonment.

In Letter Ruling 200803017, IRS concluded that an accrual taxpayer does not need to recognize income from reimbursement of allowable costs as they are incurred under a cost-plus contract but only as they are billed.

Procedure

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

* Required after enactment the redacting of taxpayer identity information on other beneficiaries of flow-through entitles where returns may be obtained by an S corporation or partnership owner or by an estate or trust beneficiary.

* Extended the period for calculating the monthly failure to file penalty for partnership returns from five to 12 months and increased the per-partner penalty amount from $50 to $85 per partner for returns due after enactment and extended the penalty to S corporations and their shareholders.

Public Law 110-172, the Technical Corrections Act of 2007, clarified that the penalty for incorrect appraisals in 2006 legislation may apply not only to a return preparer but also to a valuator who knew or should have known that it would be used on an estate or gift tax return.

Final Regulations Under Code section 6713 and 7216 set forth rules on third party disclosures by tax preparera with consent to be in twelve-point type on 8 ½ by 11 paper (web consent in standard text), specifically requiring consent from taxpayers if information is being sent offshore for return preparation and with redaction of the taxpayer identification number.

In Don Johnson Motors. Inc. v. United States. 101 AFTR2d 2008-370, a Texas Federal District Court returned to IRS for further consideration an assessment of penalties against the taxpayer for failure to pay its taxes electronically when the depository bank sent an individual for training who had been on the job for two days and failed to properly instruct the taxpayer as to entries to be made in the program.

In Cox v. Commissioner, 101 AFTR2d __________, a divided panel of the Tenth Circuit Court of Appeals disagreed with the Tax Court and determined that an appeals officer who conducted a prior CDP hearing involving the same taxpayer but different years should not have conducted a subsequent hearing involving an additional year.

In Bova v. United States. 101 AFTR2d __________, the US Court of Federal Claims ruled that the statute of limitations on a tax refund claim continues to run during the financial disability of a taxpayer where there is a valid durable power of attorney.

In Chief Counsel Advice 200802030, IRS indicated that a grant of innocent spouse status is not an abatement of an assessment but a mere reduction of the account balance to zero to prevent collection activity and, accordingly, a reversal of the grant of relief due to fraud is not a new assessment prohibited by expiration of the statute of limitations but constitutes the original assessment for which the statute of limitations was suspended.