Line Items

Tax Pros Get New IDs
  • All tax returns must include a number by which the return preparer can be identified. Currently, individual preparers must use their social security numbers. New regulations, effective for returns filed after December 31, 1999, allow preparers to elect an alternative number. The IRS is developing a form to be used in applying for this number.

Signature Needed

  • The Tax Court ruled that a tax return signed by an attorney and submitted to the IRS on behalf of an individual taxpayer was not a valid return because it was not properly signed.

The attorney had written “Under Power of Attorney” on the form 1040, but had not included Form 2848, Power of Attorney and Declaration of Representative , with the return. In addition, neither the taxpayer nor his attorney obtained the consent of the IRS district director for the attorney to file as agent for the taxpayer. As a result, the taxpayer was penalized for failing to file a timely return under IRC section 6651(a) ( Herbert C. Elliot v. Commissioner , 113 TC No. 7, 8-10-99).

Tough Luck on IRA Withdrawal

  • The IRS announced it was unable to help a group of taxpayers that took money out of qualified IRAs. The taxpayers believed their tax adviser had invested the funds in qualified tax-free rollover accounts, but he had not. Subsequently, local IRS personnel told them the 60-day rollover period could be waived if the funds were placed in qualified accounts in a reasonable period of time. However, the IRS announced a different position in Field Service Advice 1999-33038. According to the FSA, withdrawals such as those the taxpayers made are currently subject to income tax and a 10% penalty. The FSA also discusses the types of situations in which tax-free treatment is granted.

Court Okays Shareholder Deduction

  • The Tax Court held that the $1.75 million a professional service company paid to its sole shareholder was deductible as reasonable compensation. The shareholder was an attorney and the corporation’s only professional employee. The court found his services were vital to the operation of a complex and highly specialized business. The deduction was allowed even though it was partially funded with a loan from the sole shareholder and caused a deficit in the corporation’s retained earnings ( Richard Ashare, PC v. Commissioner , TC Memo 1999-282).

Long-Term T&E

  • Generally, a taxpayer away from home on business for more than a year is not allowed to take a deduction for meals or lodging as a business expense. In a recent Tax Court case, however, a self-employed consultant worked for a single client at a distant location over a five-year period. The court concluded the taxpayer could deduct his business travel costs because the work was “on again and off again” in nature and the taxpayer was free to work for other clients ( Mitchell v. Commissioner , TC Memo 1999-283).

Developer Gets to Save A Lot

  • In most cases, if a real estate developer purchases a tract of land, subdivides it and sells the parcels, the related profits are taxed as ordinary income. What if legal problems prevent a developer from selling the individual lots to the public as originally planned? If the lots are sold to another developer, the Tax Court allows the profits to be taxed at the lower capital gains rates. According to the court, it is the developer’s intent at the time of sale, not his or her intent at the time of purchase, that matters ( Olstein v. Commissioner , TC Memo 1999-290).

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


Get your clients ready for tax season

These year-end tax planning strategies address recent tax law changes enacted to help taxpayers deal with the pandemic, such as tax credits for sick leave and family leave and new rules for retirement plan distributions, as well as techniques for putting your clients in the best possible tax position.


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