Line items


In Notice 2011-82, the IRS alerted executors of the estates of decedents dying after Dec. 31, 2010, of the need to file a Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, to elect a portability exclusion, even if the executor is not otherwise obligated to file the return.


The exclusion allows the decedent’s surviving spouse to take advantage of the deceased spouse’s unused exclusion amount under Sec. 2010(c)(5)(A). Until the IRS revises Form 706 to expressly contain the computation of the deceased spousal exclusion amount, a timely filed and complete Form 706 that is prepared in accordance with the instructions for that form will be deemed to contain the computation of the deceased spousal unused exclusion amount, thereby satisfying the requirements in Sec. 2010(c)(5)(A) for making an effective election.


The notice says the IRS intends to issue regulations under Sec. 2010(c) to address issues arising with respect to the portability election.




In Notice 2011-88, the IRS postponed for a year the effective date of the backup withholding requirement for payments in settlement of payment card and third-party network transactions that are subject to reporting under Sec. 6050W (Sec. 6050W payments). Under the notice, backup withholding will now apply only to such payments made after Dec. 31, 2012. The Service also created an FAQ Web page ( explaining the new requirements.


The IRS also issued Notice 2011-89, which provides transitional relief from penalties under Secs. 6721 and 6722 for incorrect or incomplete information on information returns and payee statements required under Sec. 6050W.


Sec. 6050W requires any “payment settlement entity” to file annual information returns and payee statements reporting credit card or other payment card transactions and third-party network transactions. The requirement applies to payment settlement entities with respect to each payee to which the entity makes more than 200 payments during a calendar year having a gross aggregate total of more than $20,000. The total (with monthly subtotals) must be reported on Form 1099-K, Merchant Card and Third Party Network Payments (which as of this writing was still available only in draft form for 2011).


The penalty relief is for calendar 2012. Reporting entities still must file and issue the forms and make good-faith efforts to provide accurate information on them.


Sec. 3406 requires backup withholding (currently 28%) if the payee fails to furnish a correct taxpayer identification number (TIN) or the payer has been notified by the IRS that the payee has previously underreported interest or dividend income. Payers, however, can use the TIN matching procedures of Rev. Proc. 2003-9 (see Announcement 2009-6).


Amount not required on payee income tax returns for 2011. The 2011 version of Form 1040, Schedule C, Profit or Loss From Business (Sole Proprietorship), and Schedule E, Supplemental Income and Loss, contain a line for merchant card and third-party payments reported to taxpayers on Forms 1099-K but directs taxpayers to enter a zero on the line for 2011.




  The Fourth Circuit Court of Appeals affirmed the Tax Court’s decisions (130 T.C. 147 and 133 T.C. 136) in Capital One Financial Corp., No. 10-1788 (10/21/11), denying the credit card issuer’s attempt to defer income recognition of late fees it collected in the late 1990s and denying an advance deduction for “reward points” redeemable for airline tickets. For previous Tax Matters coverage of the Tax Court opinions, see “Credit Card Fees Are OID,” Jan. 2010, page 58, and “What’s in Their Wallet?” Sept. 2008, page 89. When original-issue discount (OID) treatment of a pool of debt instruments subject to prepayment became available in 1997 under Sec. 1272(a)(6) by amendments made by the Taxpayer Relief Act of 1997, P.L. 105-34, Capital One filed an automatic request for change of accounting method to recognize income from some credit card fees (but not late-payment fees) as OID. Later, it sought to retroactively recharacterize late fees as OID as well and thereby to reduce its taxable income for 1998 and 1999 by approximately $400 million.


  The Court of Federal Claims in Wasson , No. 11-203T (10/14/11), applied the full-payment rule of Flora, 357 U.S. 63 (1958), to hold that it lacked jurisdiction to hear a taxpayer couple’s refund suit stemming from a claimed net operating loss carryback to a tax year for which the couple still owed taxes. According to the IRS, the taxpayers still owed more than $9,000 for 1995. In 2002, the taxpayers filed an amended return for 1998 claiming a business theft loss, which resulted in a net operating loss they sought to carry back to 1995. The IRS denied the refund claims for both years. Although the IRS later withdrew its argument that the 1998 claim was made beyond the statute of limitation, the court nonetheless held that the Flora rule still required full payment of the 1995 liability and dismissed the case.


  The Fifth Circuit Court of Appeals affirmed a district court’s holding in Southgate Master Fund LLC, No. 09- 11166 (9/30/11), aff’g 651 F. Supp.2d 596 (N.D. Tex. 2009), denying tax losses from an investment in Chinese nonperforming loans by a partnership involving Dallas billionaire D. Andrew Beal and a Chinese government-owned financial institution. For prior Tax Matters coverage, see “Court Negates Tax Planning Transaction,” Nov. 2009, page 70. Although Southgate’s acquisition of the loans had economic substance, the Fifth Circuit said, the partnership itself was a sham, as demonstrated by an artificial inflation of Beal’s outside basis in other transactions that lacked economic substance and by analyzing its activities under the tests of Culbertson, 337 U.S. 733 (1949): a lack of intent to join together, a lack of intent to share profits and losses, and lack of a business purpose. However, the appellate court also agreed with the trial court that the partnership should not be held liable for accuracy-related penalties.


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