Line Items

Company Safe on Home-Expense Deductions

• To encourage employee transfers, a computer manufacturer engaged the services of a relocation company to buy relocated employees residences. A transferred employee could then buy a replacement home before the old residence was sold. In Amdahl Corp. v. Commissioner , 108 TC no. 24 (1997), the corporation was allowed to deduct any losses and expenses related to such sales as ordinary and necessary business expenses. The IRS had argued that such losses were capital losses and could be offset only against capital gains (see revenue ruling 82-204, 1982-2 CB 192). The court disagreed because the relocated employee retained legal title to the residence and remained legally responsible for the mortgage and real estate tax payments until a sale to a third party took place.

No Looking Back

• In accordance with the Taxpayer Relief Act of 1997, the IRS issued final regulations (TD 8775) effective July 2, 1998, that allow manufacturers and construction contractors with long-term contracts subject to the look-back methodand completed in tax years ending after August 5, 1997to elect not to apply that method in de minimis cases. To make the election, a manufacturer or contractor simply attaches the statement to a return (including extensions) that is filed on time and writes on the statement Notification of Election Under Section 460(b)(6). In the final regulations, the choice not to apply the look-back method automatically revokes an election under regulations section 1.460-6(e) to use the delayed reapplication method.

Ad Designs Currently Deductible

• RJR Nabisco, Inc., spent $1.8 million to develop graphic designs for its cigarette products. The IRS said these costs had to be capitalized because they resulted in goodwill or indefinite future benefits. The IRS argued that there is a difference between the costs of developing advertising campaigns and the cost of executing those campaigns by producing a specific piece of advertising. The court held that RJR Nabisco could currently deduct the costs of the graphic designs as an advertising expense under regulations section 162 even though those costs might produce long-term benefits. RJR Nabisco Inc., et al. v. Commissioner , TC Memo 1998-252.

Pay for Your Own Mistakes

• The IRS has issued procedures to follow when a taxpayers refund is erroneously deposited in another account. According to the IRS, if a bank improperly deposits the money to the wrong account, through no fault of the IRS, the government does not have to pay the bank. The bank must recover the erroneous deposits from the account owner. However, if the IRS caused the mistake, the refund must still be issued to the proper taxpayer and the IRS must rectify its own error.

Research Credit Test Tested

• In Norwest Corporation v. Commissioner , 110 TC no. 34 (June 29, 1998), the court, in a case of first impression, closely examined the seven tests that must be satisfied in order to obtain the qualified research credit under regulations section 41 for internal-use software. The court held that the three tests for internal-use software set forth in the conference report accompanying the Tax Reform Act of 1986 require a higher threshold of technical advancement than that for other fields of research.

Michael Lynch, CPA, Esq., associate professor of tax
accounting at Bryant College, Smithfield, Rhode Island.