Line Items

BY MICHAEL LYNCH

An English department chairman in a San Francisco public high school audited two university extension program courses overseas. The courses—one in Thailand and one in Greece— were taught by university professors and met on a regular basis. For each the taxpayer had to follow a structured syllabus, complete extensive reading assignments and participate in planned tours of historically and culturally significant sites directly related to the course of study. The taxpayer didn’t seek credit for the courses nor did her employer require her to take these courses as a condition of retaining her employment.

The teacher deducted the cost of her trips, including meals and lodging, as ordinary and necessary business expenses that maintained or improved the skills required in her employment. She argued that her mission as a teacher was to promote both intellectual growth and cultural and linguistic sensitivity thus enabling students from diverse cultural backgrounds to succeed.

The IRS disallowed the deductions, saying the overseas trips were primarily for personal enjoyment and not for professional development; travel—for educational purposes only—is nondeductible.

The Tax Court rejected the IRS’s arguments and found the taxpayer’s duties as an English teacher encompassed more than teaching reading and writing. The court noted her employer’s requirement that the English curriculum reflect the cultural and racial diversity of its Asian-American student body and allowed the deductions. ( Jorgensen v. Commissioner, TC Memo 2000-138.)

Spouse Not Liable for Unreported Tip Income

Generally, if a husband and wife file a joint tax return, each is jointly and severally liable for any income tax, interest or penalties related to the return. However, in a recent legal memorandum (ILM 200016018), the IRS concluded that joint and several liability doesn’t apply to unpaid employee FICA taxes on the unreported tip income of one spouse, even though a couple filed a joint return. Since the employee FICA tax is an employment tax imposed by subtitle C, the income tax liability provisions of IRC section 6013 under subtitle A does not apply.

State Income Tax on Royalties Not Above-the-Line Deduction

A taxpayer earned royalty income from oil and gas wells in several states. Each state imposed a nonresident income tax on the net royalty income derived from the property within its borders. On his federal income tax return, the taxpayer deducted these state income taxes “above the line” on schedule E to arrive at his adjusted gross income.

The IRS denied the deductions because state taxes on net income are only allowed as itemized deductions.

The taxpayer argued that deductions “which are attributable to” property held for the production of rents or royalties are allowed by IRC section 161 in arriving at adjusted gross income.

The Tax Court sided with the IRS, holding that the state taxes were paid on the taxpayer’s net royalty income and not on the property held for the production of that income. ( Charles E. Strange v. Commissioner, 114 TC no. 15 (2000).)

Power-of-Attorney Must Specify Power to Give Gifts

A legally blind woman, who had been living in a residential nursing home, was hospitalized in late 1990. Upon her release, she returned to the nursing home and granted a durable general power of attorney to her nephew that attempted to vest in him the power to manage and dispose of her property.

Shortly thereafter, in an attempt to minimize her estate taxes, the nephew prepared, signed and delivered 38 checks, from the taxpayer’s accounts, to 38 separate individuals in the amount of $10,000 each. Two weeks later, the taxpayer died.

The estate filed a federal estate tax return that included the $380,000 in gifts and paid a tax of $336,664. The estate then filed an amended return, excluding the $380,000 and seeking a refund of $161,479 ($146,039 of which related to the exclusion).

The IRS denied the refund. It argued that the gifts the nephew made were beyond the powers granted to him by the durable power of attorney, that the taxpayer retained the power to revoke the gifts and that the gifts were void under state law. Therefore, under IRC section 2038(a)(2), the gifts were includable in the estate.

The estate argued that the taxpayer had granted the nephew broad authority and discretion. The nephew testified that he had read a list of 40 donees to the taxpayer. By nodding her head, she approved only 38 of the 40.

The Court of Federal Claims granted the government’s motion to dismiss and stated that a power to make gifts must be expressly stated and cannot be implied. According to the court, the taxpayer’s nodding at the reading of names was insufficient to ratify the nephew’s acts. ( Estate of Swanson, Fed. Cl. 3-13-00, 85 AFTR 2d 2000-1196.

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

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