Line Items

After O.J. Simpson was charged with murder, his Brentwood, California neighborhood was overrun with reporters, law enforcement officials and curious bystanders. As a result, the owners of the adjacent house and land experienced a sudden decline in the value of their property. This prompted them to claim a $751,247 casualty loss on their 1994 tax return.

The court disallowed the deduction because there was no actual physical damage to the taxpayers’ property ( Chamales v. Commissioner, TC Memo 2000-33).

IRS’s Fax to Workplace Didn’t Violate Privacy Act

An IRS attorney faxed two confidential letters to a taxpayer’s place of employment where coworkers had access to incoming messages. The taxpayer claimed that the IRS had violated the Federal Privacy Act. The Eleventh Circuit Court of Appeals sided with the service because the taxpayer had supplied the fax machine number to the government and the IRS attorney testified he was unaware others had access ( Johnston v. Commissioner, CA-11, 2000-1 USTC 50,189).

Options Transferred in Divorce Considered Income

As part of a divorce agreement, a man transferred half his incentive and nonqualified stock options to his ex-wife. She later exercised the options, and the corporation issued a form 1099 to the ex-husband showing the bargain element (the difference between the stock’s fair market value and the exercise price) as compensation income. He included this on his tax return but later filed a refund claim.

In field service advice no. 200005006, the IRS concluded that the stock options were exchanged for the release of marital rights or property. Therefore the transfer was at arm’s length and subject to IRC section 83, which states stock options are taxable when transferred. The service said the ex-husband had compensation income equal to the fair market value of the options on the date of transfer. Also, when the ex-wife exercised the options, there were no tax consequences to either party. However, when she sells the stock, the ex-wife will be taxed on the difference between the stock’s selling price and her basis (the carryover basis from the ex-husband plus her exercise price).

The IRS anticipated that the ex-husband might wish to argue that IRC section 1041 shields him from tax. Section 1041 prevents gains from being taxed on a transfer to a former spouse incident to a divorce, so the Service noted the ex-husband’s compensation was ordinary income and not a “gain.”

1998 Tax Refund Not Credited Against 1989 Taxes

A taxpayer’s employer submitted $4,104 of withholdings on his behalf to the IRS in 1988. Concerned that this would be insufficient, the taxpayer mailed in an additional $1,100 in January 1989. In April 1989, he properly extended the deadline to file his 1988 return to August 15, 1989. However, he did not file the 1988 return until June 1, 1993. That return showed an overpayment of taxes of $1,175 which the taxpayer asked the IRS to credit against his 1989 taxes. The IRS refused.

The U.S. Supreme Court recently sided with the service. In Baral v. United States (S. Ct. 2-22-00), 85 AFTR 2d 2000463, the Court relied on IRC section 6511 (b)(2)(A), which states that “the amount of the credit or refund shall not exceed the portion of the tax paid within the period immediately preceding the filing of the claim, equal to 3 years plus the period of any extension of time for filing the return.” According to this “lookback” rule, the taxpayer missed the deadline because the relevant payment period covered only February 1, 1990, through June 1, 1993.

The Court held that since no portion of the tax was paid during this period, no tax credits would be allowed.

Relying on Ford v. United States, 618 F.2d 357 (1980), the taxpayer had argued the withholding and estimated tax payments were merely “deposits” and not tax payments until he filed his income tax return on June 1, 1993.

The Supreme Court disagreed and held that IRC section 6513(b) required that the withholding and estimated taxes be considered paid on April 15, 1989, which was outside the lookback period.

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