|Copyright:||(c) 2011 American Institute of Certified Public Accountants|
This article covers recent developments affecting taxation of individuals, including last year’s tax relief and small business legislation, regulations, cases, and
Sec. 1: Tax Imposed
Sec. 25A: Hope and Lifetime Learning Credits
The American opportunity tax credit was extended through 2012 by the Tax Relief Act. A report titled “The American Opportunity Tax Credit,” issued by the
* The American opportunity tax credit increased tax incentives for higher education by over 90%, or
* 12.5 million students and their families received a tax incentive for higher education in 2009, an increase of 400,000 from 2008.
* American opportunity tax credit recipients in 2009 received an average tax credit of over
* 4.5 million students and families received a tax refund from the American opportunity tax credit in 2009 with an average value of
Sec. 35: Overpayments of Tax
The Sixth Circuit held that the Tax Court properly upheld the
Sec. 36: First-Time Homebuyer Credit
The first-time homebuyer credit expired in 2010 (eligible home purchases must have closed on or before
Sec. 36C: Adoption Expenses
Rev. Proc. 2010-35 modifies and supersedes portions of Rev. Proc. 200950.8 For tax years beginning in 2010, it provides:
Adoption credit under Sec. 36C: The maximum credit is increased to
Exclusion from income under Sec. 137: The amount that an employee can exclude from gross income for the adoption of a child with special needs is increased to
* An adoption credit amount claimed in an earlier tax year that an individual carries forward to a tax year beginning in 2010 is allowed as a refundable tax credit. Amounts carried forward to a tax year beginning in 201 0 are not subject to an income limitation in that tax year.
* For both domestic and foreign adoptions, if an individual pays or incurs qualified adoption expenses (QAEs; these include reasonable and necessary adoption fees, court costs, attorneys’ fees, and other expenses directly related to, and for the principal purpose of, adopting an eligible child) during or after the tax year in which the adoption becomes final, the credit is allowed in the tax year in which the individual pays or incurs the QAEs.
* For domestic adoptions, the credit is allowed for QAEs that an individual pays or incurs in a tax year before the adoption becomes final. However, an individual may not claim the credit for those QAEs until the next tax year.
* For foreign adoptions, the credit is allowed only in the tax year in which the adoption becomes final.
* Expenses for an unsuccessful domestic adoption are aggregated with the expenses of a successful adoption of another child for purposes of applying the dollar limitation.
Sec. 59: Alternative Minimum Tax Definitions and Special Rules
Sec. 61 : Gross Income Defined
Credit card rebates: Use of credit cards may entitle cardholders to rebates, which can be received in the form of cash or donations to charity. Two questions were involved in a recent letter ruling:11 (1) Is the rebate considered income? The
Whether the cardholder is allowed to deduct the donation depends on whether the recordkeeping requirements of Sees. 170(f)(8) and (f)(17) are satisfied. Under Sec. 170(f)(8), for contributions of
Registered domestic partners: In
Additional informal guidance was issued as the 201 1 filing season approached. This information was included in
Foreign accounts: In early 2011, the
Sec. 104: Compensation for Injuries or Sickness
In a Tax Court case, the petitioner allegedly suffered a second heart attack due to harassment by co-workers; he also alleged invasion of privacy.15 A settlement resulted in a payment of
The court found that one-half of the payment was for physical injury and thus was excluded from income. The other half was for emotional distress. The taxpayer could exclude any part of this that was for medical care, but he provided no evidence to support his exclusion, so that half of the payment was deemed taxable. The court waived an accuracy-related penalty because it found the taxpayer’s belief that the settlement was to compensate him for his heart attack and disability was not unreasonable.
Sec. 107: Rental Value of Parsonages
The Tax Court held that a minister who received a parsonage allowance for two homes used personally could exclude the allowance under Sec. 107. 16 The
Sec. 108: Cancellation of Debt Income
In a news release, the
Sec. 117: Qualified Scholarships
Under Sec. 117, a qualified tuition reduction is excludible from the gross income of a highly compensated employee only if the reduction is made on a nondiscriminatory basis. For purposes of the qualified plan minimum coverage rules, a two-part test is applied to determine whether the classification is reasonable and nondiscriminatory. The
Sec. 121: Exclusion of Gain from Sale of Principal Residence
A married couple voluntarily demolished their principal residence and reconstructed a new home on the same property on the site of the original residence. The Tax Court ruled that they were not entitled to a Sec. 121 income exclusion of
Sec. 151: Allowance of Deductions for Personal Expenses
In a Tax Court case, the taxpayer claimed dependency exemption deductions for family members (two parents, two nieces, and a nephew).24 The family members lived in
Observation: This case raises, but does not answer, some interesting questions. Where did the taxpayer get the
Sec. 152: Dependent Defined
In a Tax Court case, the taxpayer claimed a deduction for children as stipulated by a divorce decree.25 However, the stipulation and judgment the taxpayer presented did not conform to the form and substance of Form 8332, Release of Claim to Exemption for Child of Divorced or Separated Parents, as required by Sec. 152(e)(2)(A), so the deduction was denied.
Sec. 163: Interest
In Rev. Rul. 2010-25,26 the
Specifically, the taxpayer may deduct as interest on acquisition indebtedness under Sec. 163(h)(3)(B) interest paid in 2009 on
Sec. 165: Losses
To assist individuals in computing a casualty loss deduction for costs to repair personal residences or appliances for damage stemming from corrosive drywall materials, the
Sec. 170: Charitable Contributions
Conservation easement: The Fifth Circuit reversed a Tax Court ruling on the value of a facade donation and remanded the case for redetermination of the allowed deduction.31
Fire department donation:
Another 2010 case involved a home donated to a fire department, but the claimed charitable contribution deduction was disallowed for reasons different from those in Hendrix?3 In the
Sec. 213: Medical Expenses
When a person pays another person’s expenses, both income tax and gift tax issues can arise. A
The court held for the daughter. With respect to the medical expenses, it found that a donative intent existed and that the treatment for gift tax purposes did not control the income tax treatment. Per Sec. 2503(e)(1), a transfer made directly to another person’s medical care provider is not considered a gift for gift tax purposes. However, for income tax purposes, substance over form indicated that the daughter really made the payment to the doctors and thus was entitled to a deduction. Similarly, for the real estate taxes, the substance controlled and the daughter was considered to have made the payment. The court noted that there was “no danger of a ‘double deduction'” from the decision because taxes are deductible only by the person upon whom they are legally imposed (Regs. Sec. 1.164-l(a)), and that legal obligation was upon the daughter, not the mother.
Sec. 263: Capital Expenditures
In a situation addressed in CCA 201036009, the taxpayer negotiated a purchase agreement with a seller seeking relief under chapter 11 bankruptcy.35 After negotiating with the bankruptcy court, the taxpayer assumed assets and certain liabilities in the transaction (the liabilities would have been discharged in bankruptcy). The taxpayer requested clarification about whether the assumed liabilities should be capitalized as part of tlie purchase price of the assets or currently expensed. The taxpayer did not provide sufficient evidence to preclude capitalization under Sec. 263. The CCA did state that more detail might have supported the taxpayer’s position to not capitalize the liabilities.
Sec. 280F: Listed Property
The Small Business Jobs Act36 includes a provision removing cell phones from the definition of listed property in Sec. 280F(d)(4)(A). The amendment is retroactive to tax years beginning after
In attempting to reach the requisite 750hour threshold to meet the definition of a real estate professional for purposes of Sec. 469(c)(7) (exempting real estate professionals from the passive rule for rental real estate activities), the taxpayer, owner of four residential rental properties, argued that he was on call at all times.37 The owner had a full-time job outside real estate. He handled maintenance, tenant relations, and rent collection for the rental properties. He kept records of his visits to the properties but not how much time he spent. The
The court held that on-call time is not actual time spent and thus cannot count toward the time requirements of Sec. 469(c)(7). The court also upheld the
Sec. 1001: Determination of Amount and Recognition of Gain or Loss
In a Tax Court case, the taxpayer failed to provide evidence of the cost basis of real property sold.39 Selling expenses per the closing statement did not match the statement attached to her 2003 Form 4797, Sales of Business Property, and did not support her recognition of gain.
In another ease, an E&Y IT consulting business partner received shares of
The Tax Court held in another case that a transfer of stock under a 90% stock loan was really a sale.41 The taxpayer transferred the legal title to the stock to a promoter, who sold the stock immediately after the transfer. The only interest the taxpayer retained was the option to purchase the shares’ equivalent at the end of the three-year loan period.
Tax protesters lost arguments that gains from sale of property and capital gain distributions were not income.42 The court did not accept the taxpayers’ selfprepared Forms 1099-B, Proceeds from Broker and Barter Exchange Transactions, and 1099-S, Proceeds from Real Estate Transactions, supporting the taxpayers’ contention that amounts received from sales of property and securities are not taxable income under the Internal Revenue Code. Having no evidence of the taxpayers’ basis in the securities sold, the court concluded that the basis was zero; it also accepted the
In another case, the Tax Court did not uphold the
Sec. 1012: Basis of Property
The double category method for determining basis of mutual fund shares has been abolished.44 Single category averaging is still available by election. FIFO is the default method.
Sec. 1031: Like-Kind Exchange
The Eleventh Circuit upheld a Tax Court decision disallowing nonrecognition of gain from a multiparty iike-kind exchange between related parties.46 The parties’ convoluted transaction was determined to be a tax avoidance scheme without other valid business reasons.
Sec. 1035: Certain Exchanges of Insurance Policies
Sec. 1042: Sales of Stock to Employee Stock Ownership Plans
Sec. 6015: Innocent Spouse
There has been a great deal of activity by the
In another case, Mannella, the Third Circuit also overruled the Tax Court and held that the two-year limitation is valid.50 A third case involving the validity of Regs. Sec. 1.6015-5(b)(l) is on appeal in the Second Circuit.51
Despite the decisions in the Third and Seventh Circuits, the Tax Court, in a divided opinion, maintained its position that Regs. Sec. 1.6015-5b)(l) is an invalid interpretation of Sec. 6015(f).52 In a case appealable to the Sixth Circuit,
The Tax Court revisited its position following the Seventh Circuit ruling in Lantz but found that the application to Sec. 6015(f) of the two-year period in Sees. 6015(b) and (c) renders subsection (f) ineffective. The court also found that the limitation period is not simply a procedural rule in the case of this equitable statute because it makes the time of the claim the only relevant factor. The court explained, “[t]he statute requires consideration of all facts and circumstances to decide whether there is inequity,” and found the limitation period inconsistent with the purpose of the statute. The court distinguished subsection (f) from subsections (b) and (c), explaining that subsection (f) requires the consideration of current circumstances as well as the circumstances that existed during the tax year when the liability was incurred. Both sets of circumstance are to be considered in determining whether holding an individual liable for a joint liability will yield an inequitable result, the court explained, noting that subsections (b) and (c) only require a tax year factual analysis. The court concluded that the harsh and inequitable results of the limitation period are not allowable in a reasonable interpretation of the statute, thus holding Regs. Sec. 1.60155(b)(1) invalid.
Addressing Sec. 6343(a)(1)(D), which provides for the release of a levy where the
Chief Counsel Notice CC-2010-011 updates
Sec. 6041: Information at Source
The Small Business Jobs Act created a new information reporting requirement (Form 1099-MISC, Miscellaneous Income) starting in 2011 for landlords, even if they were not previously considered as being in a trade or business. This requirement was subsequently repealed on
* The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 extended the current individual income tax rates on ordinary income and the rates on qualified dividend and capital gains income for two years through 2012.
* The Tax Court held that the Sec. 121 exclusion of gain from the sale of a principal residence applied only to the home that the taxpayer used as a principal residence and not to a replacement home built on the site of the home that was used as a principal residence.
* In two cases, the Tax Court held that a taxpayer was not entitled to a charitable deduction for the donation of a home to a fire department for use in live fire-training exercises.
The Tax Court held that a minister who received a parsonage allowance for two homes used personally could exclude the allowance under Sec. 107.
1 Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, P.L. 1 1 1-312.
2 Bryant, No. 09-1957 (6th Ck 10/21/10).
3 TlGTA, Additional Steps Are Needed to Prevent and Recover Erroneous Claims for the First-Time Homebuyer Credit (2010-41-069) (
4 Notice 2010-66, 201042 I.R.B. 437; Rev. Proc. 2010-31, 2010-40 l.R.B. 413; Rev. Proc. 2010-35, 2010-42 I.R.B. 438.
5 Enacted by the Patient Protection and Affordable Care Act, RL. 1 1 1-148.
6 Rev. Proc. 2010-31.
7 Rev. Proc. 2005-31, 2005-1 CB. 1374.
8 Rev. Proc, 2009-50, 2009-45 I.R.B. 617.
9 Notice 2010-66.
12 See Rev. Rul. 76-96, 1976-1 CB. 23, as modified by Rev. Rul. 2005-28, 2005-1 CB. 997.
14 For additional information, see Nellen, “Filing Reminders:
15 Parkinson, TC. Memo. 2010-142.
16 Briscoli, 135 T.C. No. 27 (2010).
17 1 U.S.C. §1.
18 TD. 9498.
19 IR-2010-74 (
20 Sec. 108(f)(4).
23 Gates, 135 TC. No. 1 (2010).
26 Rev. Rul. 2010-25, 2010-44 1.R.B. 571.
27 Pau, T.C Memo. 1997-43.
28 Catalano, T.C Memo. 2000-82.
29 Rev. Proc. 2010-36, 2010-42 l.R.B. 439. See also
30 Rev. Rul. 72-592, 1972-2 CB. 101.
32 Hendrtx, No. 2:09-cv-l 32 (S.D.
33 Rolfs, 1 35 TC. No. 24 (20 1 0).
34 Lang, TC. Memo. 201 0-286.
35 CCA 201036009 (9/10/10).
36 Small Business Jobs Act of 2010, RL. 1 ?-240.
37 Moss, 135 TC. No. 18 (2010).
38 Sec. 469(i), allowing a
39 Whitaker, TC. Memo. 2010-209.
40 Fort, l:08-CV-3885-TWT (N.D. Ga. 5/20/10).
41 Calloway, 135 TC. No. 3 (2010).
42 O’Boyle, TC. Memo. 2010-149.
43 MacGregor, TC Memo. 201 0-1 87.
44 Regs. Sec. 1.1012-1.
45 Notice 2010-67, 2010-43 I.R.B. 529.
49 Untz, No. 09-3345 (7th Cir. 6/8/10), rev’g 132 TC. No. 131 (2009).
50 Mannella, 631 F.3d 115 (3d Cir.201l), rev’g 132 TC. No. 10(2009).
51 Coulter, No. 10-680 (2d Cir.), appeal from
52 Hall, 135 TC. No. 19 i2010).
53 Comprehensive 1099 Taxpayer Protection ana Repayment of Exchange Subsidy Overpayments Aa of 201 1, RL. 112-9.