Line Items

BY MICHAEL LYNCH

IRC sections 263(a) and 263A generally require taxpayers to capitalize all costs related to the installation or production of an asset. However, newly issued revenue ruling 2000-7 (IRB 2000-9) allows businesses to currently deduct the costs of retiring and removing old assets even though the costs were incurred while installing replacement assets.

In the ruling, a telephone company removed two old poles. It replaced an old pole on the company’s property with a new pole in the same location. It removed the second from private property and replaced it with a new telephone pole in a different location.

The service found that the company incurred the removal costs for the purpose of retiring the old poles, not for installing the new poles. Therefore, the company did not have to capitalize the costs of removal. Instead, it could write off the costs in the year they were incurred and not over the life of the pole.

Businesses that want to change accounting methods for assets, whether located on public or private property, to conform to this ruling must follow the guidelines in revenue procedure 99-49 (1999–52 IRB 725).

No Signature, No Exemption Rule Upheld

In a divorce proceeding, a mother was awarded sole custody of her two children, while the father was given a permanent right to claim them as dependents on his federal income tax return. The father attached the divorce order to his return and claimed both children.

The IRS disallowed the exemptions because the father did not attach Form 8332, Release of Claim to Exemption for Child or Divorced or Separated Parents, signed by the mother, to his return.

The Tax Court sided with the service and held that taxpayers must strictly comply with the requirement of IRC section 152(c)(2) for the custodial parent’s signature. ( Miller v. Commissioner, 114 TC no. 13, 2000.)

Joint Estimated Payments Can Be Allocated on Separate Returns

Married couples often make joint estimated tax payments. If the spouses then file separate returns for the year, what happens if they both claim the joint payments or if together they claim more than the joint amount paid?

According to IRS legal memorandum 200011047, if the spouses can agree to an allocation of payments, the service will accept the allocation. However, if the spouses cannot agree, the government will rely on the formula in regulations section 1.6015(b)-1(b) and allocate the payments in proportion to the spouses’ separate tax, regardless of the source of the actual payments.

IRA Divided Into Separate IRAs Still Tax-Exempt

Wealthy individuals often establish trusts as beneficiaries for their IRAs. If a trust satisfies the requirements of proposed regulations section 1.401(a)(9)-1, Q&A 5 through 7, the beneficiaries of the trust will be treated as the designated beneficiaries of the IRA and their life expectancies will be used to determine the required minimum distributions.

This allows taxpayers to maximize the tax-deferral period without having to leave the IRA assets directly to their children.

In letter ruling 20008044, the service said such a trust may divide an inherited IRA into four equal IRAs and form trusts with separate trustees without creating a taxable event.

In the ruling, a taxpayer named a trust as his IRA beneficiary. The taxpayer had four children, three of whom survived him. The deceased child had one child. The IRA trust provided that upon the taxpayer’s death, the IRA trust’s interest in the IRA was to be divided into four equal parts for the benefit of the three children and one grandchild.

Upon reaching 70 1/2 , the taxpayer began receiving the minimum distribution based on his and his eldest child’s joint-life and last-survivor expectancy. Upon the taxpayer’s death, the trustees sought to divide the IRA into four separate accounts so that each of them would have direct control over his or her 25% interest. Such an arrangement would give each trustee more flexibility in investing the funds allocated to a particular beneficiary.

The IRS said dividing the IRA would not affect its tax-exempt status. The service also concluded that any distributions from the four IRAs would not be subject to the 10% excise tax under IRC section 72(t)(1).

IRA Rolled Over Through Trust Not Taxable

Generally, if both spouses are living, a husband cannot roll over his IRA into his wife’s and vice versa. However, upon the death of the first spouse, the surviving spouse can roll over the decedent’s IRA tax-free unless it passes through a trust.

In letter ruling 200011062, the IRS said a surviving spouse could roll over her husband’s IRA even though she took the proceeds through a trust as long as the surviving spouse was the sole trustee and beneficiary of the trust and had the power to invade the trust corpus. Under the ruling, the surviving spouse is treated as having received the proceeds directly from the decedent (not from the trust), and the rollover is tax-free.

IRS Informant Asks for Bigger Reward

An informant furnished to the IRS information resulting in the arrest of an individual, the seizure of more than $5 million dollars in cash and property, and the assessment of more than $72 million in taxes and penalties. The informant applied for a reward and was given $1,500. The informant asked the U.S. Court of Federal Claims to review the case. The court said that it lacked jurisdiction in such matters and that, in the absence of a binding written contract, the payment of a reward is based purely on the government’s discretion. ( Confidential Informant v. United States, Fed Ct of Claims, 2/4/00.)

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

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