Line Items



    Under Protest

  • On April 15, 1992, Lawrence McCormick filed and signed his 1991 tax return, but wrote under protest beneath his signature. The IRS did not consider the return to be properly filed and penalized the taxpayer for filing a frivolous return. The district court in New York's Eastern District sided with McCormick. It held that adding under protest didn't alter the meaning of the signature on the return. The court stated that McCormick was merely expressing his First Amendment right to protest while fulfilling his obligation to file a timely return. ( McCormick v. Peterson , 73 AFTR 2d 94597).

Michael Lynch

    Court Just Says No

  • A CEO and owner of a company was responsible for collecting and paying his company's taxes. Because of a drug and alcohol addiction, he argued, he was not a responsible person under Internal Revenue Code section 6672 and therefore not subject to any penalties for not paying taxes. The Second Circuit Court of Appeals, however, found that the CEO willfully failed to remit the taxes. (US v. Landau, CA2 [8-25-98]).



  • A corporation can deduct the worthlessness of stock of an affiliate as an ordinary loss if it meets the two main requirements of IRC section 165(g)(3). First, the corporation must directly own at least 80% of the voting stock and of each class of nonvoting stock of the affiliate. Second, the affiliate must have received more than 90% of its gross receipts from active sources. To determine if interest, rent, and the like qualify as an active source, examine the assets generating the revenue. If the sale of these assets would result in ordinary income, the receipts are counted as coming from an active source. If the sale would result in a capital gain, the source of the receipts is considered passive (PLR 9817002).

Edward Schnee

    Thinking About Retiring...

  • Before owners of family businesses contemplate retirement, they should make sure that they will have sufficient cash flow. One frequently used approach is to redeem stock the retiree owns and invest the proceeds in assets that pay a high fixed income. For the sale of stock to qualify for capital gains, retirees must waive the attribution rules as provided in IRC section 302(c)(2). One important limitation is that the retiree can have no interest in the corporation other than as a creditor. The determination of what interests are prohibited has been a source of controversy. According to several recent letter rulings, leasing property to the corporation for fair market rent is not prohibited (PLR 9743007 and PLR 9811051).


    Still Thinking About Retirement

  • The redemption of stock by a retiring owner of a family business can cause cash-flow problems for the corporation. To solve this problem, many redemptions involve both cash and a corporate note payable in future installments. The note itself must be carefully structured so it is considered debt, not equity. In addition, the IRS usually prohibits creditors from obtaining stock in cases of corporate default. Recently, the IRS made a ruling conditional on the existence of sufficient unencumbered assets to enforce the note if necessary. If this condition becomes standard, fewer corporations will be able to meet this test (PLR 9837022).


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

Edward Schnee, CPA, PhD, is the
Joe Lane Professor of Accounting and
director, MTA program, Culverhouse
School of Accountancy, University of
Alabama, Tuscaloosa


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