Line Items

BY MICHAEL LYNCH

Alimony Deductible When “Almost-Exes” Live Together

Two taxpayers married in 1972. In 1994, the husband filed for a divorce and the couple signed a temporary agreement under IRC section 71(b)(1)(A), which provided that the husband would pay the wife $2,000 a month in alimony but both parties would continue to reside in the home. The husband continued to live in the home for a year and a half, but after several unsuccessful attempts at reconciliation he moved out.
The husband deducted the monthly payments as alimony on his return. The IRS denied the deduction because the husband had continued to live with his wife.

The court sided with the taxpayer and held that the “residing apart” requirements apply only when the taxpayers are legally separated under a court-ordered divorce or separation decree. ( Benham v. Commissioner, TC Memo 2000–165.)

Minister’s Housing Allowance Not Limited to Rental Value

A minister founded a church in 1980. By 1992, its congregation had grown to over 18,000. At that time, the minister and his wife purchased a home for $360,000. The fair rental value of the home in 1993 was $58,061, and the minister’s salary for that year was $77,663. The minister earned close to $200,000 that year by selling religious tapes and books.

Since the entire amount of his pay was designated by the church as a housing allowance and the family used all of it to pay household expenses, the minister excluded all his 1993 salary from his gross income.

The IRS said the exclusion in IRC section 107(2) was limited to the fair market rental value of the home. The Tax Court rejected this argument and found nothing in the code to support this position. ( Warren v. Commissioner, 114 TC no. 23.)

Spouse Relief Can Now Be Challenged

The Tax Court recently ruled a taxpayer could challenge the IRS’s grant of innocent spouse relief to his former wife. According to the court, when Congress passed the 1998 IRS Restructuring and Reform Act it intended to provide a nonelecting spouse with the standing to contest the service’s determination. Prior to this case, an individual did not have the right to challenge the government’s decision to grant relief to a spouse or to a former spouse. ( Corson v. Commissioner, 114 TC no. 24, 5-18-00.)

Church Loses Tax-Exempt Status Over Campaign Ads

Prior to the 1992 presidential election, a 501(c)(3) religious organization purchased full-page advertisements in major newspapers. The ads urged voters not to vote for the Democratic presidential candidate, Bill Clinton. In addition, each ad identified the church and its pastor, detailed the church’s opposition to Clinton’s stand on various social issues and contained the words “tax-deductible donations for this advertisement gladly accepted.”

The IRS informed the organization that it had violated the code’s prohibition on political activity and its tax-exempt status had been revoked.

The church filed suit in district court and the court granted the IRS’s motion for summary judgment. The appellate court affirmed. ( Branch Ministries v. Commissioner, CA-DC, 5-12-2000.)

Loan Organization Costs Deductible As Business Expenses

In the past, the Tax Court held that banks, whose primary business was accepting deposits and making loans, had to capitalize loan organization costs under IRC section 263(a). However, the Third Circuit recently found that costs such as marketing, research, credit reports, appraisals, recording fees, and related salaries and benefits can be currently deducted as ordinary and necessary business expenses under IRC section 162.

The Third Circuit noted that FASB Statement no. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases, requires these costs to be amortized over the life of the loan for financial accounting purposes. But the court found Statement no. 91 does not have controlling authority for tax purposes. ( PNC Bancorp, Inc., CA 3, 5-19-00, 85 AFTR 2d 2000-679.)

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

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