Line Items


Too Late to Transfer

A married couple owned assets in excess of twice the unified credit “exemption equivalent.” The husband had a terminal illness. Through his will he wanted to establish a unified credit shelter trust, but he owned insufficient assets to fund the trust. However, he jointly owned with his wife a brokerage account, which they intended to transfer into his name only to fund the trust. Before the transfer was complete, the husband died. The husband’s estate, without the brokerage account, was incapable of funding the unified credit shelter trust.

The wife blamed the brokerage firm for failing to convert the joint account into the husband’s name only. She and the firm agreed that she should make a post-death transfer to the firm in an amount needed to take full advantage of the unified credit. The firm would then transfer the funds to the trust established under the husband’s will.

The wife asked the service to rule on her plan to save the husband’s otherwise wasted unified credit.

Because the plan had not been put into effect in time, the IRS said the plan would fail and could possibly trigger a transfer tax on the wife (PLR 200025032).

Debt Income Split Between Separate Returns

The cancellation of indebtedness generally results in income to the debtor. But what happens when a married couple’s joint debt is forgiven in a year in which they file separate returns?

According to Chief Counsel Advice 200023001, the service concluded that the income should be allocated between the spouses based on each party’s portion of the debt.

The IRS will look at who received the proceeds, who received basis in property bought with the debt and who deducted the related interest expense.

If a proper allocation cannot be made, the government will issue a notice of deficiency to each spouse for the full amount of the debt that was discharged.

Can’t Sue an IRS Employee

The IRS audited a taxpayer and his wife. During the audit, the taxpayer alleged that an IRS agent had called and left a voice message full of ethnic slurs and vulgarities. The taxpayer filed a civil rights action against the agent and the IRS alleging that he was denied his constitutional right to a fair hearing due to the religious discrimination of the IRS agent. The taxpayer sought recovery of his attorney fees and compensation for mental anguish and punitive damages.

The Third Circuit Court of Appeals, affirming a district court decision, ruled that an individual may not sue an IRS employee for damages resulting from a constitutional violation he or she claimed occurred in connection with the assessment of a tax liability.

According to the court, IRC section 7433 provides the exclusive remedy for recovering damages in these situations. Gerald B. Shreiber v. Robert A. Mastrogiovanni, no. 99-5230 (3d Cir. 5-31-00).

Lottery Winnings Are Income in Year Paid

A cash-basis taxpayer bought a lottery ticket on December 11, 1992, and selected the cash-option method of payment. He won the December 12 drawing, which had an annuity value of $20 million and net present value of $9 million. He presented his ticket on December 14 and received a receipt. The state lottery commission immediately issued a news release declaring the taxpayer a winner.

The lottery commission didn’t verify the claim until January 4, 1993. The commission then paid the taxpayer $6.1 million (after taxes), which he deposited in his bank on January 28, 1993.

The cash-basis taxpayer sought to be taxed in 1992 when the tax rate was 20% rather than in 1993 when it was 28%.

The Sixth Circuit Court of Appeals, however, agreed with the IRS and held that the lottery winnings were taxed in the year the winning ticket was verified and paid, and not in the earlier year when the drawing took place and he presented his claim. Roy V. Thomas v. United States, no. 99-3532 (66 Cir. 5-26-00) 85 AFTR2d 7, 2000-688.

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


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