Line Items


The IRS issued Revenue Procedure 2009-24 that provides 2009 inflation adjustments to the depreciation limitations and lease inclusion amounts for certain automobiles under IRC §§ 280F and 168. For passenger automobiles (other than trucks or vans) placed in service during calendar 2009, the 2009 depreciation limit under IRC § 280F(d)(7) is $2,960 for the first tax year ($10,960 for a car to which 50% bonus depreciation under section 168(k) applies), $4,800 for the second tax year, $2,850 for the third year, and $1,775 for each successive year. Higher limits are provided for trucks and vans.


IRC § 280F(c) likewise limits deductions for the cost of leasing automobiles, expressed as an income inclusion amount according to a formula and tables prescribed under Treas. Reg. § 1.280F-7.




Payments by employers to employees while they are on active military duty for more than 30 days are subject to withholding for federal income tax but are not taxed under the Federal Insurance Contributions Act (FICA) or Federal Unemployment Tax Act (FUTA), the IRS said in Revenue Ruling 2009-11.


To determine the amount of withholding, for total annual compensation of less than $1 million, employers may aggregate differential pay with ordinary wages or withhold at an optional 25% flat rate.


The revenue ruling concerns an employer with employees who enlist in or are called to active military service for periods longer than 30 days. The employer continues paying the employees “differential wage payments,” the difference between the wages they would have been paid if they had been performing services for the employer and their governmental military pay. The ruling modifies the holding of Revenue Ruling 69-136, 1969-1 CB 252, which described a similar arrangement. The earlier ruling provided that differential wage payments to employees who were called to or enlisted in active military for an extended period were not subject to withholding for federal income, FICA, or FUTA taxes. Differential wage payments were not wages within the meaning of IRC § 3401(a) governing income tax withholding or sections 3121(b) and 3306(c) governing FICA and FUTA, respectively, because they were not paid for services performed in the course of employment, Revenue Ruling 69-136 held.


In 2008, the Heroes Earnings Assistance and Relief Tax Act of 2008, PL 110-245, added new IRC subsection 3401(h) applying to differential wage payments after Dec. 31, 2008. Under it, such payments are wages subject to income tax withholding if made during a period of active military duty longer than 30 days and representing all or a portion of wages the individual would have received had he or she continued to perform services for the employer. Since section 3401(h) does not address FICA and FUTA, however, Revenue Ruling 69-136 continues to apply to those taxes, the Service said in the new ruling.




Cars, light-duty trucks and vehicles that share characteristics of both, such as sport utility vehicles, are all like-kind property for the purpose of IRC § 1031 exchanges, the Service said in a private letter ruling. Other requirements of section 1031 that must also be met include that the vehicles are held for productive use in a trade or business or as an investment, the IRS said in the letter ruling, PLR 200912004. It was publicly released in redacted form March 20.


The taxpayer requesting the letter ruling held such vehicles for lease and sold them as the leases expired. Under Treas. Reg. § 1.1031(a)-2(b)(1), depreciable personal property is generally grouped by asset classes for exchanges. Cars and light-duty trucks are of different classes. However, Treas. Reg. § 1.1031(a)-2(a) provides that properties of like kind eligible for exchange may be of different asset classes. Moreover, “[t]he evolution of motor vehicles over the past few decades has blurred the distinctions between cars and lightduty trucks,” the letter ruling noted.




In Revenue Procedure 2009-26, the Service simplified the method by which qualifying small businesses may elect the extended carryback of a 2008 net operating loss (NOL) under the American Recovery and Reinvestment Act of 2009, PL 111-5.


The provision allows eligible small businesses to carry back an NOL for a tax year beginning or ending in 2008 for three, four or five years instead of the otherwise available two-year limit. Eligible small businesses are those with average annual gross receipts of $15 million over the three-year period ending in 2008.


On March 16, 2009, in Revenue Procedure 2009-19, 2009-14 IRB 747, the Service said businesses that had not yet filed a return for the NOL year could make the election by attaching a statement to their return. For an NOL year ending before Feb. 17, 2009, the return with statement must have been filed on or before April 17, 2009.


Then, on April 24, in Revenue Procedure 2009-26, the Service said it had received many claims for the longer carryback that “inadvertently” had not been properly elected under the prior revenue procedure. One reason, it said, was that the earlier revenue procedure had been issued midway through the tax filing season. Consequently, the Service said that if taxpayers had not made the election by filing a statement with the return for the NOL year, they may do so by filing the appropriate form carrying the NOL back for three, four or five years.


The appropriate form for corporations is Form 1139, Corporation Application for Tentative Refund, or Form 1120X, Amended U.S. Corporation Income Tax Return. For individuals, the appropriate form is Form 1045, Application for Tentative Refund, or Form 1040X, Amended U.S. Individual Income Tax Return. However,

although forms 1045 and 1139 are normally due within 12 months after the NOL year, for purposes of timely electing the extended carryback, they or an amended return still must be filed within six months (not including extensions) after the due date of the return for the NOL year, in keeping with section 172(b)(1)(H)(iii).


Revenue Procedure 2009-26 also provided procedures for eligible small businesses to elect the longer carryback if they have previously filed an election (otherwise irrevocable) to forgo one. However, for an NOL year that ended before Feb. 17, 2009, this revocation of an earlier election to waive the NOL carryback period must still have been made on or before April 17, 2009.




In a pair of revenue rulings, the IRS provided guidance for sellers and purchasers of life insurance contracts in the burgeoning industry of life settlement. They cover questions including the character of income and basis and gain on the transaction, as well as tax treatment of related scenarios of the surrender of a policy to its issuer.


In Revenue Ruling 2009-13, the Service said that, generally, the seller of a life insurance contract recognizes gain in the amount received from the sale, less the contract’s basis, which is total premiums paid by the seller minus charges representing cost of the insurance. However, the amount of the proceeds that is characterized as ordinary income is limited under the substitute for ordinary income doctrine to the inside buildup under the contract, that is, the difference between premiums paid and the cash surrender value. The gain in excess of that treated as ordinary income is longterm capital gain if the taxpayer held the contract more than a year prior to its sale. If a covered person surrenders a life insurance policy to the issuer of the policy, the covered person recognizes ordinary income equal to the amount received less his or her investment in the contract.


In Revenue Ruling 2009-14, the IRS described the treatment of a taxpayer who purchases a life insurance policy for profit and has no insurable interest in the life of the covered person except for the purchase of the contract. If the covered person dies, on receipt of the death benefit, the purchaser recognizes as ordinary income the amount of the benefit received less consideration paid for the policy and premiums paid to maintain the policy in force. If the purchaser instead sells the policy to an unrelated third party at a gain, the first purchaser recognizes a gain equal to the amount received less the policy’s adjusted basis. The adjusted basis in the hands of the first purchaser is the cost of the policy plus the (capitalized) premiums paid to keep the policy in force.



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