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HIGH COURT TO HEAR BASIS ISSUE SPLITTING CIRCUITS

The U.S. Supreme Court granted certiorari Sept. 27 in U.S. v. Home Concrete & Supply LLC, one of several cases in which the IRS has claimed that a six-year extended statute of limitation applies when an understatement of gross income arises from an overstatement of basis.

 

Last February, the Fourth Circuit reversed a district court holding in the case to find for the plaintiffs (634 F.3d 249 (4th Cir. 2011)). Counter to recent decisions by the Seventh, Federal and D.C. circuits—but consistent with the Tax Court and Fifth Circuit—the Fourth Circuit held that an overstatement of basis was not an omission of gross income within the meaning of Sec. 6501(e)(1)(A) and that the longer period for assessment of tax did not apply. The Fourth Circuit held that the Supreme Court’s ruling in Colony v. Commissioner (357 U.S. 28 (1958)) precluded the IRS’ argument. It also declined to apply retroactively Regs. Sec. 301.6501(e)-1(a)(1), which provides that, for dispositions of property, an understatement of gross income caused by an overstatement of basis is an omission from gross income for purposes of the statute. For previous Tax Matters coverage of the case and others, see “Circuit Split Deepens on Six-Year Period for Basis Overstatements,” May 2011, page 58.

 

 

ESTATES MUST FILE FORM 706 TO MAKE PORTABILITY ELECTION

With Notice 2011-82, the IRS alerted estate executors that estates of the first spouse of a married couple to die that are not required to file an estate tax return because the gross estate is below the $5 million exclusion amount or for any other reason still must file one to elect to pass the deceased spouse’s unused exclusion amount to a surviving spouse. This “portability” provision and higher exclusion amount apply to estates of decedents dying after Dec. 31, 2010, as enacted by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (P.L. 111-312). For more background, see “Seven Good Reasons Credit Shelter Trusts Remain Relevant,” JofA, June 2011, page 44.

 

However, as of the date of the notice (Sept. 29, 2011) the IRS had not yet revised Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, to provide a means to affirmatively make the election or reflect the deceased spousal exclusion amount. Therefore, the notice stated, with a timely filed (including extensions) and complete Form 706 prepared in accordance with its instructions, estates will be deemed to have made the election and computed the deceased spousal unused exclusion amount.

 

The IRS said it intends to issue regulations under Sec. 2010(c) to address this and other issues. Instructions for Form 706, revised in August 2011, state (but only in a checklist) that executors of estates filing the return but not making the election should attach a statement to that effect or write “No Election under Section 2010(c)(5)” across the top of page 1 of the form.

 

 

GUIDANCE ISSUED ON TAX TREATMENT OF BUSINESS CELLPHONES

The IRS issued Notice 2011-72 on Sept. 14 providing guidance on the tax treatment of employer-provided cellphones as a working condition fringe benefit excludable from the employee’s income.

 

Before the Small Business Jobs Act of 2010 (P.L. 110-240) removed cellphones from listed property under Sec. 280F, employers’ deductions for the cost of cellphones they provided to employees were subject to strict substantiation requirements of Sec. 274(d). However, the law change did not otherwise alter the requirement that an employer-provided cellphone be treated as a fringe benefit, the value of which must be included in the employee’s gross income, unless an exclusion applies.

 

The IRS said in the notice that the value of the business use of an employer-provided cellphone is excludable from an employee’s income as a working condition fringe to the extent that, if the employee paid for the use of the cellphone, the employee would be able to deduct such payment as a trade or business expense under Sec. 162. For such treatment to apply, the cellphone must be provided to the employee for noncompensatory business reasons—for example, to speak with clients when away from the office. The notice says a cellphone provided to promote employee morale or goodwill is not provided primarily for a noncompensatory business reason. The IRS will also treat any personal use of such a cellphone as a de minimis fringe benefit, also excludable from the employee’s income.

 

The notice applies to any use of an employer-provided cellphone occurring after Dec. 31, 2009.

 

 

NOTED IN PASSING

The Court of Appeals for the Federal Circuit upheld the Court of Federal Claims’ decision in combined cases Bush and Shelton (Nos. 2009-5008 and 2009- 5009 (Fed. Cir. 8/24/11)). The long-running Bush case denied a claim that a partner’s closing agreements with the IRS allowed him to use previously disallowed passive losses to offset nonpassive income. See previous coverage in Tax Matters, “Partners’ Agreement Subject to At-Risk Rules,” Feb. 2009, page 70.

 

The Ninth Circuit Court of Appeals affirmed the Tax Court’s denial of stock-loan treatment for a leveraged securities agreement entered into by billionaire Henry Samueli and his wife (Samueli, No. 09-72457 (9th Cir. 9/15/11)). For earlier Tax Matters coverage, see “Reduced Gain Opportunity Means Higher Tax Bill,” Aug. 2009, page 59.

 

The Ninth Circuit concurred except with respect to a fee payment for one of the two tax years in question that the Tax Court had denied but the appellate court said was properly deductible.

 

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