Commentary: Spouses can use suspended losses, and more IRS news

Daily Record (Rochester, NY), Aug 29, 2008 by James W Rahmlow

The IRS recently finalized regulations relative to S corporation provisions of the American Jobs Creation Act of 2004.

One provision deals with suspended losses in the name of an S corp shareholder. Under the old rules, a loss was available only in the name of the shareholder who had the loss generated. Otherwise the loss was disallowed upon shareholder stock transfer.

Apparently recognizing an inequity relating to divorcing shareholders and their spouses, the IRS clarified that if the transfer of S corp stock is incident to a divorce, any suspended loss related to the stock will be treated as incurred by the S corp in the succeeding year with respect to the transferee.

It's hard out there for a stock trader

Affirming its long held position on the difference between a security trader and a security investor, the Tax Court denied a couple's attempt for benefits, citing their failure to seek profits from short-term swings in the daily market as well as the insubstantial nature of their trading.

In the case at hand, the taxpayers, a retired couple, incorporated their trading activity and filed a timely Code Sec. 475(f) election to use the mark-to-market method of accounting, which allows all gains and losses to be treated as ordinary, regardless as to whether they are recognized.

During the two years in question, the taxpayers executed almost 300 trades per year. Ordinary losses were claimed in each year, as opposed to capital losses.

As to the volume of transactions, the court ruled it was not substantial. It is, of course, a number that's difficult to quantify, but the court referenced one case in which 1,100 transactions were considered substantial. Concerning their alleged attempt to profit from short-term swings in the daily market, the court concluded the taxpayers rarely bought and sold on the same day. Additionally, they held large positions for more than 31 days, so the trader bar remains high.

Proposed regs define qualified appraisal

Following legislative action more than three years ago on charitable substantiation, the IRS issued proposed regulations clarifying the requirements of a qualified appraisal. The regulations deal with many aspects of charitable giving legislated in The American Jobs Creation Act of 2004.

Taxpayers must have a qualified appraisal whenever a non-cash contribution exceeds $5,000. Attempting to put an end to the sometimes shoddy appraisals that accompany Form 8283, Non-cash Charitable Contributions, the regulations state that appraisers must identify both their education as well as their experience in valuing the particular type of property being donated. Additionally, the appraisal itself must comply with the Uniform Standards of Professional Appraisal Practice (USPAP).

Revised Form 990 draft instructions

The long awaited Instructions for Form 990, Return of Organization Exempt from Income Tax, have been released in draft form and are available in the Charities and Non-Profits tab at the IRS Web site, www.irs.gov. The instructions generally are effective for 2008 tax year forms, which will be filed beginning in 2009. Two of the provisions appearing in the updated instructions relate to the definition of a key employee and provide a revised standard for determining independence of a voting member of a not-for-profit's governing body.

While the final instructions may not be released until later this year, the IRS emphasized that more significant changes are not anticipated.

First-time homebuyer tax credit

While a detailed discussion of the new first-time homebuyer tax credit, enacted as part of the Housing and Economic Recovery Act of 2008, is beyond the scope of this column, I want to bring to your attention the facts that:

* The credit is available for home purchases (closings) made from April 8 through July 1, 2009;

* The credit begins to phase out for joint taxpayers with adjusted gross income in excess of $150,000 ($75,000 for individual filers);

* The maximum refundable credit is $7,500 for individuals and married taxpayers and $3,750 for married-filing-separate filers.

August interest rates

The IRS released short-term, mid-term and long-term applicable interest rates for August transactions:

Applicable Adjusted

Federal Applicable

RatesFederal Rates

Short-term 2.51 percent 2.07 percent

Mid-term 3.49 percent 3.43 percent

Long-term 4.49 percent 4.56 percent

James W. Rahmlow, a certified public accountant, is a partner with Mengel, Metzger, Barr & Co. He may be contacted at jrahmlow@mmb- co.com.