Briefs: Customer overpayments not taxable income+

Daily Record (Rochester, NY), Jun 29, 2001 by James Rahmlow

Customer Overpayments - Customer credit balances which are attributable to customer overpayments which remain outstanding as of the close of a taxable year need not be included in taxable income pursuant to the claim of rights doctrine. There is an implicit recognition on the part of the taxpayer and his customer that the customers are entitled to have any overpayments returned to them. (Smarthealth Inc. v. Commissioner, T.C., No. 8048-99, T.C. Memo. 2001- 145, 6/20/01)

In other items of interest this month:

Prepaid expenses - In an unpublished opinion, the court confirmed the district court's conclusion that prepayment of an expense is an allowable business deduction only if the prepayment is made for a valid business purpose and not merely for tax avoidance. Otherwise the expense must be recognized ratably over the period of time that it covers. (Peterson v. United States, 8th Cir., No. 00-3175, 5/24/ 01)

At Risk Rules - (P.L.R. 200120020) - In this private letter ruling for a real estate investment trust, the IRS concluded that unsecured debt and advances under lines of credit will be treated as qualified non-recourse financing. As such, no one will have personal liability.

Compensation for Injuries or Sickness (P.L.R. 200121031) - Compensating damages paid to settle claims arising from the death of a worker due to asbestos exposure qualify for exclusion from gross income under IRC 104(a)(2). However, punitive damages do not qualify for a similar exclusion.

Pre-Death Gifts - (Estate of Swanson v. United States, Fed. Cir., No. 00-5079, 5/25/01) - In an unpublished opinion, the court affirmed the trial court's decision that a durable power of attorney or a written modification of the power of attorney was required for gifts to be valid. Thus, the numerous checks each of $10,000 which were executed by the decedent's nephew prior to decedent's death must be added back to the estate.

IRC Section 168 Depreciation - (F.S.A. 200122002) - The taxpayer owns vehicles which it maintains in operation often in excess of 25 years. The IRS ruled that replacement of tires and tubes on these vehicles must be considered a separate asset from the cost of the vehicles, and must be depreciated separately.

Disclosures of Plaintiff's Tax Returns - (Mohnot v. Bhansali, E.D. La., No. 99-2332, 5/14/01) - It was ruled in this case that for the court to order disclosure of tax returns, it must find that the returns are relevant to the subject matter of the action and that there is a compelling need for the returns because the information contained therein is not otherwise readily obtainable.

Earned Income Tax Credit - (S.C.A. 200120037) - In this Service Center Advice, the IRS concluded that even if a rental activity is a trade or business, it still meets the definition of a passive activity and must be disqualified for purposes of the earned income credit.

Business/Non-Business Bad Debt (Levy v. Commissioner, T.C., No. 11657-99, T.C. Memo. 2001-136, 6/8/01) - The deduction of bad debts as either ordinary or capital is a facts and circumstances decision. This case provides a thorough discussion and contrast of the two types of deductions.

Required Social Security Numbers - (Cansino v. Commissioner, T.C., No. 5085-00-, T.C. Memo. 2001-134, 6/8/01)

Under IRC Section 151, taxpayers are entitled to a dependency exception for their children only if valid Social Security numbers are provided for those children.

Reciprocal Gifts - (Sather v. Commissioner, 8th Cir., No. 00- 2171, 6/7/01) - Transfers of stock in a closely held corporation by three brothers and their wives to their nieces and nephews were reciprocal transfers made in exchange for identical transfers from the nieces and nephews' parents to the donor's own children, and thus only the donor's direct gifts to his or her own children qualify for gift tax exclusion.

Refund Claims - (Vegas v. United States, D. Haw., No. 00-00045 HG- LEK, 5/17/01) - There exists in IRC Section 6511 a statutory period for filing a tax refund claim. However, the statutory period applies only if the refund claim was timely filed, otherwise a taxpayer would be rewarded for filing late tax returns.

Exempt Organization's Tip Jar Proceeds - (Vigilant Hose Co. of Emmitsburg v. United States, D. Md., No. WMN-00-371, 5/18/01) - A volunteer organization's receipts from a tip jar program were not sufficiently extensive to constitute a trade or business. As such, the proceeds were not subject to the tax on unrelated business taxable income.

Memorabilia Charitable Contribution - (Arbini v. Commissioner, T.C., No. 11324, T.C. Memo. 2001-141, 6/15/01) - Limitations on the donation of a collection of old Los Angeles and Chicago newspapers are similar to the restrictions upon donation of art and subject to the same appraisal requirements.

Drywall Contractor - (F.S.A. 200125001) - In a general field service announcement the IRS concluded that the subcontractor was required to use the accrual basis of accounting. Since the drywall materials constitute merchandise that is an income producing factor, the use of the cash receipts and disbursements method was not acceptable. This is one of numerous cash versus accrual cases ruled upon by the IRS in the past month.