THE ELITE QUARTERLY – Taxation

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Volume XXI, Number 2, Summer 2012 Issue – 4 Hours of CPE Credit (Taxation)Phone and fax # – 1-800-950-0273, e-mail – cpeliteinc@aol.com, web site – www.cpelite.com

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We hope that you are having a great summer. If youhave not renewed your newsletter subscription for 2012,you may still do so. Please see our subscriber advantageson page 19. For online testing access, you may purchaseyour 2012 subscription or individual newsletters bynavigating to www.cpelite.com, clicking on the OnlineTesting tab, and following instructions to process yourpayment through www.test.com.

As mentioned in the Spring 2012 issue, we areundergoing substantial changes to our website and ouronline testing process. Our new website will permit allpurchasing, online testing, and records maintenance tobe done conveniently at the website. We will announcethe launching of our revised website by email. All ourcourses are updated through June 2012 and are availableon-line or by mail at your request. In addition, we nowoffer a 15-Hour package for Registered Tax ReturnPreparers (RTRP) at an introductory price of $90.Under this promotion offer, you will receive a $30referral discount off the price of your subscription (ora $30 check, if you have already subscribed) when yourefer a RTRP who orders the 15-Hour package. Formore information about the 15-Hour RTRP package seepage 19. If you are an owner of a company that employsRTRPs, please call us at 1-800-950-0273 – we offerquantity discounts. As always, we thank you for beinga customer – we appreciate your business! Here aresome of the items in this issue of the newsletter.

1. IRS Rulings and Other Items (pages 1-4),including IRS guidance on electronically-sent K-1sto partners, an IRS’s reversal of an initially deniedamended tax return, and updated inflation-adjustedamounts related to HSAs and depreciation limitson passenger vehicles.

2. Court Decisions (pages 4-12), including aSupreme Court case that upheld most of theprovisions of the “The Patient Protection andAffordable Care Act,” a Supreme Court case thatfinally settles whether a basis overstatementextends the statute of limitations, and a Tax Courtcase that rules on the residence interest expenselimitation when homes are co-owned.

3. Treasury Items (pages 12-13) dealing withproposed changes to the retirement plan minimumdistribution rules and proposed regulationspermitting the deduction of certain local lodgingexpenses.

4. An Elite Possibility (pages 13-14), which providesplanning opportunities to reduce payroll taxeswhen taxpayers experience Schedule C income insome years and losses in other years.

5. Quiz Questions (pages 15-16).

6. Newsletter and Subscription Information (page19), providing three options for using ournewsletter for CPE credit.

7. Course Information (pages 19-20).

8. Enrolled Agent, Registered Tax ReturnPreparer, and CFP Information (page 19).

9. CPA and Licensed Accountant Self-Study CPEInformation (page 19).

LEARNING OBJECTIVE AND CONTENT LEVEL– The primary learning objective of this newsletter is tomake accounting and tax practitioners aware of recentIRS and Treasury items, and court decisions which arelikely to have an impact on most tax practices. Thecontent level of the newsletter material is an overviewof these items.

PREREQUISITES – There are no prerequisites nor isadvance preparation required for our newsletters.

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K-1s MAY NOW BE SENT TO PARTNERSELECTRONICALLY

In Revenue Procedure 2012-17 [2/13/12], the IRSprovides rules describing when partnerships mayprovide K-1s electronically to partners. The partnershipmust receive the partner's consent before providing K-1selectronically instead of on paper. These new rules aresimilar to the rules that govern the electronic furnishingof 1099s and W-2s. The procedure contains rules for:(1) obtaining recipients' consents to receive ScheduleK-1 in electronic format; (2) notifying recipients ofchanges in electronic format after consent; (3) requireddisclosures including, but not limited to, the scope andduration of the consent and updating recipient contactinformation; (4) the format and content of the electronicSchedule K-1; (5) notifying recipients when theSchedule K-1 is posted to a website and the accessperiod; (6) providing an amended electronic ScheduleK-1; and, (7) providing paper statements when recipientconsent is withdrawn. The recipient must haveaffirmatively consented to receive the Schedule K-1 inan electronic format. The consent may be madeelectronically in any manner that reasonablydemonstrates that the recipient can access the ScheduleK-1 in the electronic format in which it will befurnished to the recipient. Alternatively, the consentmay be made in a paper document if the consent isconfirmed electronically by the recipient and thatconsent reasonably demonstrates that the recipient can

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access the Schedule K-1 in the electronic format inwhich it will be furnished to the recipient. Theprocedure provides three examples satisfying theconsent requirement, including one where the recipientreceives a letter containing instructions on how he cango to a website to make the consent.

IRS IMPROPERLY DENIES TAXPAYER’SREFUND AS UNTIMELY

Over the 2003 - 2006 period the taxpayer invested inwhat turned out to be a Ponzi scheme. For 2003, thetaxpayer received a Form 1099-INT, and reported theamount of interest shown on the form on a timely-filed2003 return. When the taxpayer learned in 2006 that thescheme had been embezzling funds, she timely filedForm 1040X for 2003 and eliminated the interest income(she never had received it). Also, the taxpayer claimeda theft loss on her 2006 return for the unrecoveredamount of her investment in the scheme. Subsequently,the IRS disallowed the taxpayer’s refund claim for 2003,and explained its reasons for denying the theft loss(recall that the 2003 refund claim was for interestincome reported but not received). The taxpayer laterfiled Form 843, “Claim for Refund and Request forAbatement,” for the 2003 tax year, again requesting arefund with respect to the reported / unreceived interestincome. Form 843 was filed beyond the statutory timelimit prescribed for filing a refund claim for 2003 (perSection 6511, three years from time return was filed ortwo years from time tax was paid, whichever is later). InChief Counsel Advice Memorandum 201216033, theIRS considered whether the taxpayer’s Form 843 was apermissible amendment to her timely filed Form 1040X,or it was a new, untimely claim for refund for thetaxpayer’s 2003 tax year. The ruling stated that tworequirements are relevant. The two requirements are: (1)the supplemental claim will not be considered anamendment to the original claim if it would require theinvestigation of new matters that would not have beendisclosed by the investigation of the original claim – inthat case, the supplemental claim is a new claim, not anamendment to the existing timely claim; and, (2) asupplemental claim generally will not be considered anamendment if the IRS took final action on the originalclaim by either rejecting or allowing the claim in wholeor in part – in either case, the supplemental claim isuntimely because once the IRS has taken final action onthe original claim, there is no longer any claim left toamend. With respect to the second requirement, thereare certain narrow exceptions, for example the IRS’sdisallowance of a claim will not constitute final action ifthe IRS did not fully consider all grounds for the refund.In the ruling, the IRS held that the Form 843 for tax year2003 did not require investigation of new matters: theForm 843 and the Form 1040X claimed the same basisfor refund (taxpayer claimed zero interest income, ratherthan the amount reported to her on Form 1099-INT).Also, it held that the IRS’s issuance of a notice of claimdisallowance for 2003 was not a “final action,” becauseit overlooked the grounds stated in the Form 1040X.That is, the taxpayer was seeking a refund based on afictitious amount of interest income, not seeking to claimthe amount of her loss from the scheme. It decided thatthe taxpayer’s Form 843 should be viewed as a

permissible amendment to the timely filed Form 1040X,and therefore her refund for tax year 2003 was not time-barred by the statute of limitations.

IRS RELEASES AMOUNTS RELATED TOHEALTH SAVINGS ACCOUNTS FOR 2013

In Revenue Procedure 2012-26 [4/27/12], the IRSreports annual inflation adjustments related to healthsavings accounts (HSAs) for 2013. The maximumdeduction for 2013 contributions is $3,250 for self-onlycoverage (up $150 from 2012) and $6,450 for familycoverage (up $200 from 2012). The high-deductiblehealth plan must have an annual deductible that is notless than $1,250 for self-only coverage (up $50 from2012) and $2,500 for family coverage (up $100 from2012). The 2013 annual out-of-pocket expensemaximums of $6,250 for self-only coverage and$12,500 for family coverage increased by $200 and$400, respectively, from 2012.

I R S P R O V I D E S L I M I T A T I O N S F O RPASSENGER VEHICLES

In Revenue Procedure 2012-23 [3/2/12], the IRSspecifies the inflation-indexed depreciation deductionlimitations for owners of passenger vehicles and theincome inclusion amounts for lessees of passengervehicles first purchased or leased in calendar year 2012.Separate limitations are provided for trucks and vans.The term “trucks and vans” refers to passenger vehiclesthat are built on a truck chassis, including minivans andsport utility vehicles that are built on a truck chassis.The amounts for passenger automobiles for whichadditional first-year depreciation is not elected out ofand which are placed in service in 2012 are: 2012 –$11,160 ($3,160 if the taxpayer elects out of additionalfirst-year depreciation); 2013 – $5,100; 2014 – $3,050;and, each succeeding year – $1,875. These representincreases of $100, $200, $100, and $100, respectively,from 2011. For trucks and vans placed in service incalendar year 2012 to which additional first-yeardepreciation applies, the annual deduction limitationsare: 2012 – $11,360 ($3,360 if the taxpayer elects outof additional first-year depreciation); 2013 – $5,300;2014 – $3,150; and, each succeeding year – $1,875.Only the first two amounts increased from 2011 ($100each).

IRS ANNOUNCES RELIEF FOR CERTAINTAXPAYERS WHO OWE TAX

In IRS News Release IR-2012-31 [3/7/12], the IRSannounced a major expansion of its "Fresh Start"initiative to help struggling taxpayers by taking steps toprovide new penalty relief to the unemployed andmaking installment agreements available to morepeople. The request for an extension of time to pay willresult in relief from the failure to pay penalty for taxyear 2011 only if the tax, interest and any otherpenalties are fully paid by Oct. 15, 2012. Penalty reliefwill be available to two categories of taxpayers: (1)wage earners who have been unemployed at least 30consecutive days during 2011 or in 2012 up to the April17 deadline for filing a federal tax return this year, and

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(2) self-employed individuals who experienced a 25percent or greater reduction in business income in 2011due to the economy. This penalty relief is subject toincome limits. A taxpayer's income must not exceed$200,000 for joint returns and $100,000 for taxpayersfiling as single or head of household. This penalty reliefis also restricted to taxpayers whose calendar year 2011balance due does not exceed $50,000. Taxpayersmeeting the eligibility criteria will need to complete anew Form 1127A to seek the 2011 penalty relief. Withrespect to installment agreements, the threshold for usingan installment agreement without having to supply theIRS with a financial statement has been raised from$25,000 to $50,000. Taxpayers who owe up to $50,000in back taxes will now be able to enter into a streamlinedagreement with the IRS that stretches the payment outover a series of months or years. The maximum term forstreamlined installment agreements has been raised to 72months from the current 60-month maximum.Taxpayers seeking installment agreements exceeding$50,000 will still need to supply the IRS with aCollection Information Statement (Form 433-A or Form433-F). Taxpayers may also pay down their balance dueto $50,000 or less to take advantage of this paymentoption.

IRS RELEASES ITS FISCAL YEAR 2011 DATABOOK In IRS News Release IR-2012-36 [3/22/12], the IRSannounces the release of its 2011 Data Book, a snapshotof its 10/1/10 - 9/30/11 Fiscal Year activities. The IRSstates that taxpayers e-filed more than 133 millionbusiness and individual income tax returns – 77% of allindividual income tax returns were e-filed. About 83%of all individual returns resulted in refunds. The IRSexamined 1.1% of all individual income tax returns, and1.5% of all corporation income tax returns (excluding SCorporation tax returns). Generally, individual incometax returns with higher amounts of adjusted grossincome were audited at a higher rate. From 2010 to2011, there was a decline in regular C Corporationreturns filed, while there was an increase in SCorporation, partnership, and individual income taxreturns filed. Also from 2010 to 2011, there was adecline in individual estimated tax. The child tax creditwas claimed on about 14.4% of individual income taxreturns filed, while the earned income tax credit wasclaimed on about 20.2% of individual income tax returnsfiled. Note: To view the 2011 IRS Data Book, go towww.irs.gov, and type “2011 IRS Data Book” in theSearch Box.

**REVIEW QUESTIONS AND SOLUTIONS**

True False Questions

1. As a result of a recent IRS revenue procedure,partnerships may not provide K-1s to their partnerselectronically.

Multiple Choice Questions

2. Regarding a recent ruling on the taxpayer’s filingForm 843 that was related to a previously filed

Form 1040X, which one of the followingstatements is false?

a. The claim on the original Form 1040X was toclaim a theft loss for the unrecovered amountof an investment in a Ponzi scheme.

b. Form 843 was filed beyond the statutory limitfor filing a refund claim.

c. The IRS decided that the Form 843 was apermissible amendment to the Form 1040Xthat previously was filed.

3. Regarding Health Savings Accounts and 2013inflation adjustments, which one of the amountsincreased the most from 2012 to 2013?

a. The maximum deduction for contributions forself-only coverage plans.

b. The minimum annual deductible for familycoverage plans.

c. The annual out-of-pocket expense maximumfor family coverage plans.

4. Regarding, the 2012 limitations for passengervehicles, which one of the following statements isfalse?

a. The 2012 first-year limitation for passengerautomobiles increased by $100 from the 2011limitation.

b. If additional first-year depreciation is taken in2012, the first year limitation for trucks andvans is $11,360.

c. The 2012 limitations for the first three yearsincreased more for trucks and vans than forpassenger automobiles.

5. Concerning recent IRS expansion of the “FreshStart” program, which one of the followingstatements is true?

a. Assuming the taxpayer satisfies the incomelimits, a self-employed taxpayer who suffers a20% decline in business income in 2011 willqualify for penalty relief.

b. The threshold for using an installmentagreement without having to supply the IRSwith a financial statement has been raised to$50,000.

c. The maximum term for streamlined installmentagreements has been increased to 60 months.

6. Regarding the IRS’s 10/1/10 - 9/30/11 Fiscal Yearactivities, which one of the following statements istrue?

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a. 83% of all individual income tax returns weree-filed.

b. The earned income tax credit was reported onmore individual income tax returns than thechild tax credit.

c. The IRS examined 1.5% of all individualincome tax returns.

Solutions

1. False is the correct response. As a result of recentIRS guidance, a partnership may electronically sendK-1s to its partners if it follows certain rules.

True is the incorrect response. The IRS providesseven rules governing the electronic furnishing ofK-1s. Perhaps the most important rule is the firstone, which requires the partner’s consent. RevenueProcedure 2012-17.

2. "A" is the correct response. The claim on theoriginal Form 1040X was for interest that thetaxpayer reported but that she never received.

“B" is an incorrect response. Form 843 was filedbeyond the statutory time limit prescribed for filinga refund claim for tax year 2003 for which theoriginal Form 1040X was timely filed.

"C" is an incorrect response. The IRS decidedthe taxpayer’s Form 843 was a permissibleamendment to the timely filed Form 1040X, and herrefund for tax year 2003 was not time-barred by thestatute of limitations. Chief Counsel AdviceMemorandum 201216033.

3. "C" is the correct response. While all amountsincreased from 2012 to 2013, the $400 increase inthe annual out-of-pocket expense maximum forfamily coverage plans was the largest.

“A" is an incorrect response. The maximumdeduction for contributions for self-only coverageplans increased $150.

"B" is an incorrect response. The minimumannual deductible for family coverage plansincreased $100. Revenue Procedure 2012-26.

4. "C" is the correct response. The depreciationlimitations for trucks and vans increased only $100in years one and two and had no change in yearthree. For passenger automobiles, the first threeyears of increases are $100, $200, and $100,respectively.

“A" is an incorrect response. The 2012 first-yearlimitation for passenger automobiles increased $100from 2011.

"B" is an incorrect response. The $11,360 first-year limitation (with additional first-yeardepreciation) for trucks and vans is $200 more than

the limitation for passenger automobiles. RevenueProcedure 2012-23.

5. "B" is the correct response. The threshold forusing an installment agreement without having tosupply the IRS with a financial statement doubledfrom $25,000 to $50,000.

“A" is an incorrect response. To qualify for relieffrom the failure to pay penalty, the percentagereduction in 2011 business income must be at least25%, not 20%.

"C" is an incorrect response. The maximum termfor streamlined installment agreements has beenincreased to 72 months. The prior maximum termwas 60 months. IRS News Release IR-2012-31.

6. "B" is the correct response. The child tax creditwas claimed on about 14.4% of individual incometax returns filed, the earned income tax credit onabout 20.2%.

“A" is an incorrect response. 77% of allindividual income tax returns were e-filed.

"C" is an incorrect response. The IRS examined1.1% of all individual income tax returns, versus1.5% of all regular C Corporation income taxreturns. IRS News Release IR-2012-36.

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SUPREME COURT UPHOLDS PPACA

In a 5-4 decision, the Supreme Court in NationalFederation of Independent Business et al. versusSebelius [6/28/12] upheld most of the provisions of the“The Patient Protection and Affordable Care Act”(PPACA). The most controversial provision, whichrequires most individuals to maintain minium essentialhealth insurance coverage or pay a penalty (betterknown as the individual mandate) was rejected underthe commerce clause but was upheld under Congress’taxing power. While the court also held that thePPACA’s expansion of Medicaid is constitutional, itruled that states that do not opt in on this expansioncannot be penalized by Congress’ taking away theirexisting Medicaid funding. The minimum tax penaltyimposed on nonexempt taxpayers who do not maintainhealth insurance coverage rises from $94 a month in2014 to $695 a month in 2016. The penalty is increasedif a set percentage of the taxpayer’s household incomeexceeds the flat amount. The percentage rises from 1percent in 2014 to 2.5% in 2016. All of the taxprovisions in the PPACA as well as those in the “HealthCare and Education Reconciliation Act of 2010” remainintact, although many are not effective until 2014.Some of the provisions affecting individuals are(effective date in parenthesis): (1) increasing the AGIlimitation from 7.5% to 10% for medical expensesclaimed as an itemized deduction (2013); (2)eliminating over-the-counter medicines and drugs asqualified expenses for health savings accounts (HSAs),Archer medical savings accounts (MSAs), health

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flexible spending arrangements, and healthreimbursement arrangements (2011); (3) increasing theadditional tax rate to 20% for distributions from HSAsand Archer MSAs that are not used for qualified medicalexpenses (2011); (4) increasing the employee’s share ofMedicare tax by .9% for wages and self-employmentincome in excess of $200,000 ($250,000 for joint returntaxpayers where the wages of both spouses arecombined) (2013); (5) adding a 3.8% Medicare tax equalto the lesser of (a) an individual's net investment incomefor the tax year, or (b) modified AGI in excess of$200,000 ($250,000 for joint return taxpayers) (2013);and, (6) increasing the age of a child dependent to underage 27 for purposes of the exclusion for reimbursementsfor medical care expenses under an employer-providedaccident or health plan (March 30, 2010). Some taxprovisions which affect businesses are (effective date inparenthesis): (1) adding tax penalties to “largeemployers” (at least 50 full-time employees) of either$2,000 or $3,000 per employee for failing to complywith certain health coverage requirements (2014); (2)adding a tax credit for “small employers” (less than 25full-time equivalent employees) for premiums they paytoward health coverage for employees (2010 - 2013);and, (3) reducing the maximum contribution to a healthflexible spending arrangement as part of a cafeteriacompensation plan from $5,000 to $2,500 (2013).

SUPREME COURT RULES THAT BASISOVERSTATEMENT IS NOT GROSS INCOMEOMISSION THAT EXTENDS STATUTE OFLIMITATIONS TO SIX YEARS

Over the years we have reported cases on whether thetaxpayer’s overstatement of basis for property is anomission of gross income for purposes of the six-yearstatute of limitations. Under Section 6501(a), generallythe statute of limitations for assessing income taxes isthree years after the original return is filed. It is threeyears after the due date of the return if filed before thedue date. However, under Section 6501(e), if thetaxpayer omits from gross income an amount in excessof 25% of the amount of gross income stated in thereturn, a six-year limitation period on assessmentapplies. In Beard [1/26/11], the Seventh Circuitreversed the Tax Court, and held that an overstatementof basis in property ownership interests is an omission ofgross income, extending the statute of limitations to sixyears. The Seventh Circuit agreed with the Fifth Circuiton this issue. In contrast, the Tax Court in a number ofcases has held that overstatement of basis does notconstitute an omission of gross income. The Tax Courthas relied on a 1958 Supreme Court case (Colony) inwhich the company was a real estate company whichunderstated its business income from selling residentiallots by erroneously including unallowable items ofdevelopment expense in the calculation of the lots'bases. The court interpreted a provision in the 1939code which is the predecessor to current Section6501(e)(1)(A). It noted that the statute wasunambiguous and its legislative history providedpersuasive evidence that Congress was addressing actualomissions of income and not errors of calculation arisingfrom other causes. The Federal Circuit, the FourthCircuit, and the Ninth Circuit have agreed with the Tax

Court in deciding that Colony does apply and that anoverstatement of basis is not an omission of grossincome. On December 14, 2010, the Treasury issuedretroactive final regulations which define an omission ofgross income for purposes of the six-year statute oflimitations. The Treasury included a basis overstatementas an omission of gross income. Recently, the SupremeCourt has resolved the conflict on the statutory oflimitations issue. In Home Concrete & Supply, LLC[4/25/12], the Supreme Court affirmed the FourthCircuit, in deciding that the taxpayer’s overstatement ofbasis for an asset that resulted in an understatement ofgross income is not an “omission from gross income”that triggers the extension of the statute of limitationsperiod from three years to six years – Colony governsthe result.

NINTH CIRCUIT DECIDES THAT A ROTH IRAIS NOT AN ELIGIBLE S CORPORATIONSHAREHOLDER

An individual incorporated the taxpayer under Nevadalaw. The taxpayer elected S Corporation statusimmediately, and for its first tax year (2003) filed Form1120S. The corporation issued all of its outstandingshares to a custodial Roth IRA held by a trust companyfor the benefit of the individual. The taxpayer had netordinary income of $2,229 and interest income of$8,549 for its first tax year. The IRS issued the taxpayera notice of deficiency for its first tax year finding,among other things, that the Roth IRA did not qualify asan eligible shareholder of an S Corporation. So, thetaxpayer was deemed taxable as a regular C Corporationfor its first tax year. In Taproot AdministrativeServices, Inc. [3/21/12], the Ninth Circuit considered aTax Court decision that upheld the IRS’s position thata Roth IRA is not an eligible S Corporation shareholder.A corporation’s eligibility to make the election to betreated as an S Corporation depends on three traits: (1)number of shareholders; (2) class of stock; and, (3)types of shareholders. The taxpayer argued that theindividual beneficiary of a custodial account that alsoqualifies as a Roth IRA should be considered theshareholder for purposes of the S Corporation statute.Alternatively, the taxpayer argued that a Roth IRAshould be treated as a grantor trust, an acceptable SCorporation shareholder. The Ninth Circuit agreed withthe Tax Court on several points of law: (1) no statute orregulation in effect for the tax year in questionprohibited a traditional or Roth IRA from owning SCorporation stock; (2) in a 1992 revenue ruling, the IRSprovided the only guiding legal authority, which heldthat a trust that qualifies as an IRA is not a permitted SCorporation shareholder; and, (3) there is a functionaldifference between IRAs (traditional and Roth IRAs)and grantor trusts – though governed by distinct Codesections, both IRAs exist separately from their ownersfor federal taxation purposes, while grantor trusts donot. The Ninth Circuit noted further the legislativehistory of the S Corporation statute, which favorslimited eligibility for a permissible S Corporationshareholder. The court found the IRS’s reasoning in the1992 ruling to be persuasive, sound, and subsequentlyapplied by the IRS consistently. The court also held thatcustodial IRAs and Roth IRAs are different in kind and

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thus distinguishable from other custodial accounts, suchas those involving minors or disabled individuals. In thelater cases, where shares are held for a person whocannot otherwise legally hold them, the income is taxedcurrently to that person. Shares held by an IRA coulddefer or exempt income from current taxation. TheNinth Circuit affirmed the Tax Court’s decision inagreeing with the IRS that a Roth IRA is not an eligibleS Corporation shareholder.

TAX COURT RULES THAT TAXPAYERS MUSTINCLUDE FOSTER CARE PAYMENTS ININCOME

In Stromme [3/13/12], taxpayers owned two homes, onein which they lived in and another they purchased as aninvestment. After the death of the wife’s brother, whohad severe developmental disabilities and was cared forby the taxpayers, a case manager suggested that theyconsider developing their second home as a group homefor foster care. They added a fourth bedroom, abathroom, and a living area in the basement and addeda deck with a wheelchair ramp on the outside. Afterthese preparations, the county licensed them as fostercare service providers for developmentally disabledadults. They hired six employees, mostly familymembers, to help handle the clients’ demands. Thetaxpayers organized events for the clients, took them todoctor’s appointments, bought groceries, cooked meals,worked in the yard, and spent the night on manyoccasions, usually sleeping on either a futon or aconvertible sofa. During 2005 and 2006, they received$256,662 and $305,561, respectively, from the state fortheir foster care services. The issue in this case iswhether these payments are excludable from incomeunder Section 131. The exclusion has threerequirements: (1) the payments are made pursuant to afoster care program of a State; (2) they are paid by aState or political subdivision thereof, or a qualifiedagency; and, (3) they are paid to a foster care providerfor the care of a qualified foster individual in the fostercare provider's home. The decision, which was reviewedby the full Tax Court, hinged on the last requirement.The Tax Court noted that there are no regulations underSection 131 and there is not much case law on this issue.The only case dealing with the meaning of home underSection 131 was a 1998 Tax Court case, which held thehome must be the taxpayer’s principal residence. Ittherefore indicated that precedent “fences us in,” thatmere ownership of the house is insufficient to make itthe taxpayers’ home for purposes of the exclusion. Thetaxpayer argued that the property was in a sense theirhome in that they spent a lot of time there, the neighborsregularly saw them there and many in fact thought theylived there, and they had a place to sleep there, whichthey did on a regular basis. The Tax Court interpretedhome under Section 131 to mean the house where aperson regularly performs the routines of his private life– for example, shared meals and holidays with family, orfamily time with children or grandchildren. In this case,it was at the other home where they spent time with theirchildren and grandchildren. It was the house where theylived their private life, while they worked at the otherproperty in providing foster care services. Therefore, thefoster care payments were not eligible for incomeexclusion under Section 131.

TAX COURT CLARIFIES DEBT LIMITATIONON A CO-OWNED RESIDENCE

Two types of debt qualify for the residence interestexpense deduction: (1) acquisition debt, and (2) homeequity debt. The first debt is limited to $1,000,000($500,000 in the case of a married individual filing aseparate return) and the second debt is limited to$100,000 ($50,000 in the case of a married individualfiling a separate return). What if the residence is ownedby two taxpayers as joint tenants? Are the above limitsper taxpayer or per residence? The Tax Court in theconsolidated cases of Sophy and Voss [3/5/12]addresses this issue. The two taxpayers acquired twohomes as joint tenants and held the property as jointtenants during the years in issue. For 2006 and 2007,the total average balances for the two mortgages andhome equity loans were $2,703,568 and $2,669,136,respectively. The taxpayers argued that each taxpayerwas allowed to deduct residence interest on $1,100,000of residence debt ($1,000,000 of acquisition debt and$100,000 home equity debt) for the years in question.The IRS limited the total interest deduction to intereston $1,100,000 of debt rather than on $2,200,000 ofdebt. The Tax Court began its interpretation of thestatute by looking at the definition of acquisition debtand home equity debt. Specifically, in the phrase“acquiring, constructing, or substantially improving anyqualified residence of the taxpayer and is secured bysuch residence” the Tax Court notes that the word“taxpayer” is used only in relation to the qualifiedresidence, not the indebtedness. Similarly, the operativelanguage in the definition of home equity debt is "anyindebtedness" that is secured by a qualified residence(other than acquisition indebtedness). Once again, thephrase "any indebtedness" is not qualified by languagerelating to an individual taxpayer. After analyzingadditional phrases of the statute, the Tax Court indicatesthat when the statute limits the amount that may betreated as acquisition indebtedness, it appears that whatis being limited is the total amount of acquisition debtthat may be claimed in relation to the qualifiedresidence, rather than the amount of acquisition debtthat may be claimed in relation to an individualtaxpayer. Because of references to an individualtaxpayer in other provisions of Section 163(h), thetaxpayers argued that the debt limitations should beapplied on a per-taxpayer basis, rather than aper-residence basis. The Tax Court disagreed notingthat, while Congress references "a taxpayer" and "thetaxpayer" several times in section 163(h), any referenceto an individual taxpayer is conspicuously absent in thelanguage of the debt limitations. After finding that thelegislative history of this provision did not suggest anyintention other than what the Tax Court found from itsanalysis, it concluded that the residence debt limitationsare applied on a per-residence basis.

TAX COURT DECIDES FOR SELF-EMPLOYEDTAXPAYER

The Tax Court recently decided against the IRS that thetaxpayer was involved in a trade or business, andsubstantially complied in making an election to expensecosts. The taxpayer was a law firm partner (earningover $1 million during the three tax years at issue –

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2006 - 2008) who had a strong interest in the arts. Sheorganized a film production company in 2005, andultimately produced a documentary film entitled “Smile‘Til It Hurts.” She did not have an interest in the activityuntil many years into her marriage – her husband was an“Up With People” singer. She billed 30 to 35 hours aweek as an attorney, and spent evenings and weekendson her “Smile ‘Til It Hurts” project. She took time fromher lawyering activities to educate herself about filmmaking, negotiated the rights to the archival footage of“Up With People,” worked nights and weekendslawyering, took time off as necessary to pursue her filmmaking journey, launched a U.S. and foreign version ofthe film, attended film festivals to market the film,received best director award at a film festival, used herlawyer expertise to comply with the extensive legalrequirements and obligations of documentary filmproduction, got insurance for the project, soughtinvestors and obtained loans to finance the project, hireda bookkeeper and tax accountant, and engaged in variousother business actions with respect to the documentary.In Storey [4/19/12], the IRS determined deficienciesagainst the taxpayer regarding the deductions that sheclaimed with respect to the film production activity. TheTax Court first decided whether the taxpayer’s filmproduction activity was a trade or business. The courtstated that to be in a trade or business, the taxpayer mustmeet two tests: (1) be involved in the activity withcontinuity and regularity; and, (2) conduct the activitywith a profit motive. The court quickly concluded the“regularity and continuity” test was met, then conducteda lengthy analysis regarding the “profit motive” test (thetaxpayer had no income from the activity, and the IRSsought to deny deductions for all expenses for theactivity). The court stated that the taxpayer must showprofit as her predominant, primary, or principalobjective. Whether an activity is engaged in for profit isdecided on a case by case basis, taking into account thefacts and circumstances. Based on the facts andcircumstances, the taxpayer’s profit expectation need notbe reasonable, but it must be bona fide. It applied thenine factors in not-for-profit Treasury Regulation 1.183-2(b), noting that no factor or set of factors is controlling,and key are the objective facts, not the taxpayer’sstatement of intent. Certain factors may be weightedmore heavily than others, and all nine factors do notapply in every case. The court found the followingfactors favored the taxpayer: (1) manner in which thetaxpayer conducted the activity; (2) expertise oftaxpayers or advisers; (3) taxpayer’s time and effort; (4)expectation that property in the activity will appreciate;and, (5) taxpayer’s success in other activities (taxpayerhad success as an attorney and accomplishments in thearts). The court found that the taxpayer’s financialstatus and elements of personal pleasure favored theIRS, and it placed little weight on the factors of thetaxpayer’s history of income or losses, and amount ofoccasional profits. It decided that the taxpayer wasengaged in the film making activity with the dominantobjective and intent of realizing a profit. The court ruledthat the taxpayer was involved in a trade or business.

Next, the court determined whether the taxpayer hadproperly elected to immediately deduct the “Smile ‘TilIt Hurts” production costs under Section 181, rather thanto capitalize them. If the taxpayer properly and timely

elects, the taxpayer may treat certain production costs ofqualified films and television productions as expensesin the year the costs are incurred, rather than capitalizingthem. The court considered only the adequacy of theelection, not whether the taxpayer was eligible to makethe election. This was the court’s first review of theelection. It observed that Section 181 was enacted toencourage production of films and television programsin the U.S. rather than abroad. It found that the taxpayerhad timely made the election. While the court held thatthe taxpayer had not satisfied specifically therequirements for electing, it accepted the taxpayer’sSection 181 elections as adequate by applying thedoctrine of substantial compliance. The court noted thatthe doctrine can excuse a taxpayer from strictcompliance with procedural requirements if the taxpayersubstantially complies by fulfilling the essentialstatutory purpose. The critical question in applying thedoctrine is whether the requirements relate to thesubstance or essence of the statute (strict adherence isrequired), or whether the requirements are procedural ordirectory (met by substantial, if not strict compliance).The court held that the statute gives no requirementsbeyond timely notifying the IRS of the intent to make anelection, and decided that omissions from the taxpayer’selections were not of the substance or essence of thestatute. It decided that the taxpayer’s Section 181elections were adequate under the doctrine ofsubstantial compliance.

THIRD CIRCUIT’S DECISION MAY SURPRISEYOU AS TO WHAT IS TAX-EXEMPT INTEREST

Interest on tax-exempt bonds issued by a state or localgovernment is excludable from gross income. Howabout if the interest paid by state government is not ona tax-exempt bond? In DeNaples [3/19/12], the ThirdCircuit disagreed in part with both the IRS and the TaxCourt on what interest paid by a state government isexcludable from the taxpayer’s gross income underSection 103. The taxpayers were equal partners incompanies that owned an interest in several parcels ofPennsylvania real property. The State of Pennsylvaniawanted to acquire the property to build an industrialhighway. Pennsylvania initiated condemnationproceedings, the taxpayers objected, but ultimatelyPennsylvania paid compensation to the taxpayers for allof their ownership interest in the property. The $40.9million award that Pennsylvania paid was described inthe agreement as $24.6 of principal, and $16.3 millionof “settlement interest.” Pennsylvania lacked sufficientfunds to pay the award in full. It struck an agreementwith the taxpayers, under which it agreed to pay thesettlement money in five installment payments. Eachinstallment payment was subject to the interest rate(“installment interest”) specified in Pennsylvania rulesthat governed the interest rate for tort suits. The issue inthe case was whether the “settlement interest” and the“installment interest” were excludable from thetaxpayers’ gross income. The IRS decided that none ofthe interest was excludable, and the Tax Court agreed.Regarding the “installment interest,” the Third Circuitnoted that with respect to the tax-exempt interestexclusion provision of Section 103, the courts haverecognized the provision was designed primarily toprotect the borrowing power of the states. The Supreme

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Court has held that the purpose of the provision is toencourage loans in aid of governmental borrowingpower, and what is an “obligation” should not beextended to include interest on debt that is not incurredunder the borrowing power. The court stated that whena government’s obligation to pay interest arises byoperation of law, it does not implicate the state’s abilityto borrow money. So, when the state pays interest at afixed rate pursuant to a statutory or judicial command, itis plainly not excludable under Section 103. However,when the state’s obligation to pay interest arises out ofvoluntary bargaining, the Section 103 exclusion mayplay an important role in allowing the state to reduce itsborrowing costs: this implicates the state’s borrowingauthority and may be excludable under Section 103.The court concluded that when the taxpayers agreed totake installment payments because the state neededcredit, the interest the state paid arose from a voluntaryobligation, not a mandatory obligation. The courtconcluded that the state’s obligation to pay interest at theselected rate arose by operation of a freely-negotiatedcontract, and the parties were free to select any interestrate or none at all. Therefore, the installment agreementimplicated the state’s borrowing authority. It held thatthe taxpayer could exclude the interest from incomeunder Section 103. With respect to the “settlementinterest,” the court did not find evidence enough in thecase to be able to determine the prevailing commercialrate at the time of the settlement agreement. Whileinterest beyond that rate might be excludable if paidvoluntarily, the court decided that amount could not bedetermined from the record. So, it agreed with the IRSand the Tax Court that the “settlement interest” was notexcludable from income.

TAX COURT RECLASSIFIES PART OF SCORPORATION SHAREHOLDER’S PROFITDISTRIBUTION AS WAGES

One major advantage of service professionals operatingtheir business as an S Corporation rather than as ageneral partnership is that the S Corporationshareholder’s share of earnings is not subject to self-employment taxes. On the other hand, a partner’sguaranteed payments and share of partnership incomeare subject to self-employment tax. An S Corporationdoes not want to be too greedy by paying a shareholder-employee too little in wages, thereby exposing thecorporation to undercompensating the employee. Suchwas the case in Watson, P.C. [2/21/12]. The taxpayerwas an S Corporation formed by its sole shareholder,who was a CPA and 25% owner in a CPA firm operatingas a partnership. The CPA transferred his partnershipinterest to the S Corporation in exchange for SCorporation stock. Through an employment agreement,the corporation employed the shareholder, but theshareholder exclusively provided his accounting servicesto the CPA firm for the period relevant to this dispute.In both 2002 and 2003, the corporation distributed$24,000 to the shareholder as employmentcompensation. Through the corporation, the shareholderalso received $203,651 in 2002 and $175,470 as profitdistributions from the partnership. On the basis of theexpertise of an IRS employee , a district court ruled thatthe proper wages for the shareholder were $91,044 ineach of the two years. The taxpayer appealed on two

accounts: (1) the district court erred in allowing the IRSemployee to testify as an expert witness, and (2) theamount of profits reclassified as wages was excessive.The Eighth Circuit noted that under the federal rules ofevidence, a witness may qualify as an expert by hisknowledge, skill, experience, training, or education andacademic training is not ranked over practicalexperience. The IRS employee spends about 40% ofhis time dealing with compensation issues and he hasworked on about 20 to 30 reasonable compensationcases. As a result, the Eighth Circuit concluded that hehas demonstrated practical experience which qualifieshim as an expert in the field. It then ruled that thedistrict court did not clearly err in determining the fairmarket value of the shareholder’s services. Factors onwhich it based its ruling include the following: (1) theshareholder was an exceedingly qualified accountantwith an advanced degree and nearly 20 years experiencein accounting and taxation; (2) he worked 35-45 hoursper week as one of the primary earners in a reputablefirm, which had earnings much greater than comparablefirms; (3) the CPA firm had gross earnings over $2million in 2002 and nearly $3 million in 2003; (4)$24,000 of compensation is unreasonably low comparedto other similarly situated accountants; and, (5) giventhe financial position of the CPA firm and theshareholder’s experience, a $24,000 salary wasexceedingly low when compared to the profitdistributions the S Corporation received from the CPAfirm. Note: Although the taxpayer lost the case, it stillbenefitted the shareholder that his S Corporation, ratherthan the shareholder, was the owner of the partnershipinterest. Only $91,044 was included as wages andsubject to payroll taxes. As a general partner in a CPAfirm, the entire amount of a partner’s share of profits(plus the $24,000) is included each year in computingthe self-employment tax. In this case, even though mostof the distribution would have been in excess of theFICA wage limit, considerable medicare tax savingswas realized (2.9% for each dollar over $91,044 thatwas received by the shareholder in each year).

TAXPAYER WINS LOTTERY BUT LOSES(SOMEWHAT) TAX CASE

In Dickerson [3/6/12], the taxpayer was a server at arestaurant. A daily customer handed the taxpayer anenvelope, which she did not open until shortly after sheleft work. The customer had a reputation of givingaway lottery tickets, frequently giving tickets toindividuals including the taxpayer and her coworkers.As it turns out, the ticket was one of two winning ticketswhich had been drawn the night before. The ticket wasvalued at $10,015,000 if paid out over 30 years and thecash payout amount was just below $5.1 million.According to the taxpayer, her family had a tradition ofbuying lottery tickets so she wanted to share thewinnings with the family. After discussing this with herfather, an S Corporation was formed where the taxpayerreceived 49% of the stock and the remaining 51% of thestock was issued equally among the taxpayer’s mother,sister and brother. The taxpayer claimed the prize in thename of the corporation and signed the applicable formsas president of the corporation. She made anirrevocable election for the corporation to receive thelottery winnings in 30 annual installments of $354,000.

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The day before the taxpayer claimed the lottery prize,four of her former coworkers met with a lawyer arguingthat they and the taxpayer had agreed to split lotterywinnings if any of them won. Shortly thereafter, alawsuit was initiated and the case eventually was heardby the Alabama Supreme Court. The taxpayer won thecase. The primary issue in the current case is whether ataxable gift occurred at the time the ticket wastransferred to the S Corporation and the taxpayer’sfamily members received 51% of the stock of the SCorporation. The taxpayers made two arguments: (1)no taxable gift occurred because at the time of the lotteryticket transfer there had previously existed and remainedin effect a binding and enforceable contract underAlabama State law requiring the transfer; and, (2)alternatively, the family members were all members ofan existing partnership under federal tax law which wasthe true owner of the lottery ticket. The court examinedstate law to determine whether a binding andenforceable contract existed. The taxpayer argued thather family had a history of sharing assets and gaveseveral examples such as when her father divided afamily lot into four plots. The Tax Court indicated thatthe terms of the so-called family agreement consistsolely of offhand statements made throughout the yearsabout sharing and taking care of one another in the eventsomeone came into a substantial amount of money.There was no requirement that each family member buylottery tickets. There was no pattern or pooling of moneyand no predetermined sharing percentages. Therefore,it ruled that there was no enforceable contract among thefamily as the terms were too indefinite, uncertain, andincomplete. For similar reasons, the Tax Court alsoruled that there was not a valid partnership agreement.It distinguished the case from Estate of Winkler, wherethe facts suggested that family members had acted ingood faith with a business purpose in regularly buyinglottery tickets over an extended period. Therefore, theTax Court ruled that the taxpayer gifted 51% of thevalue of the lottery ticket. But all was not lost. Thepresent value of the entire proceeds was estimated to be$4,730,172. However, because the ownership of thelottery ticket was contested by the four other waitresses,the Tax Court made a substantial discount on the valueof the ticket at the time of transfer. Specifically, 80%(the lawsuit alleged that each of the four other serversowned a 20% interest in the ticket) of the present valueof the lottery proceeds was discounted 67% by the TaxCourt. The total gift (51% of 20% plus a 67% discounton 51% of 80%) was valued at $1,119,348.

TAXPAYERS FAIL FIRST-TIME HOMEBUYERTAX CREDIT RULE

In order to qualify for the homebuyer tax credit, thetaxpayer must be a “first-time homebuyer.” This isdefined as any individual having no present ownershipinterest in a principal residence for three years prior tothe date of purchase of a principal residence. In Foster[1/4/12], the taxpayers purchased a residence on July 28,2009. Thus, taxpayers are eligible as first-timehomebuyers if they had no interest in a principalresidence after July 27, 2006, and before July 28, 2009.In February 2006, the taxpayers listed their home forsale and began to spend considerable time at the wife’sparents’ home. Their home was not sold until June 6,

2007. So the issue in this case was whether thetaxpayers abandoned their old home as their principalresidence before July 28, 2006. Unfortunately for thetaxpayers, they had not. While they did spend time atthe wife’s parents’ home, they did not pay rent orcontribute towards the cost of utilities. At the old home,they also continued to receive bills and correspondence,maintained utilities, kept furniture and otherpossessions, frequently slept overnight, and hostedfamily during holidays. At the time the taxpayersentered into an unconditional contract to sell their oldhome (April 7, 2007, which was well within the three-ear period), they filled out an apartment rentalapplication on which they listed the old house as theircurrent address. On the basis of these facts, the TaxCourt disagreed with the taxpayers that they ceasedusing the old home as their principal residence inFebruary 2006, and ruled it was not abandoned beforeJuly 28, 2006. Accordingly, the Tax Court ruled thatthe taxpayers are not entitled to the first-timehomebuyer tax credit.

PART OF SERVICE-CONNECTED DISABILITYRETIREMENT PAY IS TAXABLE

After many years of employment with countygovernment, and because of service-connected injuries,the taxpayer was placed on involuntary medicaldisability leave. He was eligible for two types ofretirement plans: (1) service retirement based on lengthof service (service retirement); and, (2) service-connected disability retirement based on service-connected injuries (SCD retirement). After hisdisability leave expired, he elected to take a serviceretirement. His retirement payment was determined byreference to his length of service, and was $12,861 permonth. About seven months later, he applied for andwas granted SCD retirement, which replaced his serviceretirement. He was eligible for SCD retirement becausehe was permanently incapacitated due to an injury ordisease that arose from his county employment. TheSCD provided him with one-half of his finalcompensation ($7,046), or his full service retirementallowance ($12,861), whichever was higher. For taxyears before his SCD retirement became effective, hereceived Forms 1099-R indicating that his serviceretirement payments were taxable. After his SCDretirement became effective, the county sent himamended Forms 1099-R indicating that the taxableamount was not determined. Likewise, in the ensuingthree tax years, the Forms 1099-R he received from thecounty indicated the taxable amount was notdetermined. Then, the next tax year, the county notifiedthe taxpayer that 50% of his final compensation wastaxable. For that tax year, the taxpayer did not reportany part of the SCD retirement payment as taxable. TheIRS issued the taxpayer a notice of deficiency that aportion of his SCD retirement payments was taxable. InSewards [4/2/12], the Tax Court determined the amountof the SCD payment that was taxable. The court statedthat Section 104 provides that retirement payments areexcludable from gross income if they are receivedpursuant to a workmen’s compensation act or a statutein the nature of a workmen’s compensation act.However, the court stated that payments determined byreference to the employee’s age, length of service, or his

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prior contributions are not excludable. The court heldthat the taxpayer’s payments were authorized under alaw that was in the nature of a workmen’s compensationact, and the taxpayer suffered an injury that arose in thecourse of his employment. It observed that SCD retireeswere guaranteed an annual retirement allowance equal to50% of their final compensation (guaranteed amount).Further, the court noted that his service benefit of$12,861 was higher than the $7,046 guaranteed amount.So, it found that the retirement benefit amount wasincreased to his service retirement benefit amount,which was determined by reference to his length ofservice. It decided that the portion of the payment thatexceeded the guaranteed amount was not excludablefrom income. While the taxpayer substantiallyunderstated his income tax by reporting none of theretirement amount as taxable for the tax year in question,the court did not apply the accuracy-related penalty,noting he had reasonable cause for the underpayment,and the county government over the course of severalyears had provided varied guidance on what part of theretirement payment was taxable.

**REVIEW QUESTIONS AND SOLUTIONS**

True False Questions

7. The Third Circuit recently decided that “installmentinterest” that a state paid on a condemnation awardis excludable from the taxpayer / recipient’s grossincome.

8. The Tax Court recently decided that none of aperson’s service-connected disability retirement isincludible in gross income.

Multiple Choice

9. On his tax return, the taxpayer reports a sale ofproperty for $200,000 with an adjusted basis of$190,000. On audit, the basis is determined to be$70,000. The reporting error of $120,000 causesgross income omitted on the return to exceed 25%of gross income stated in the return. Based on arecent Supreme Court decision, how long is thestatute of limitations for the IRS’s assessment oftaxes on the return?

a. Three years.b. Six yearsc. There is no statutory limit.

10. Regarding a recent case on S Corporations, whichone of the following statements is false?

a. The taxpayer argued that the individualbeneficiary of a Roth IRA is the shareholder forpurposes of the S Corporation statute.

b. The court observed that S Corporation sharesheld by an IRA could defer or exempt incomefrom current taxation.

c. Even though the court decided that a Roth IRAis not a permitted shareholder, the corporationstill was treated as an S Corporation.

11. In a recent case involving the tax consequences offoster care payments, which one of the followingstatements is false?

a. The Tax Court interpreted home to mean wherea person regularly performs the routines of hisprivate life.

b. Because the foster care providers spent manyhours at the group home and even slept theremany nights, the Tax Court ruled that the fostercare payments were excludable from income.

c. In addition to the group home, the taxpayersowned another home.

12. On the basis of a recent court decision involvingthe residence interest deduction limitation, whichone of the following statements is true?

a. The $1,000,000 acquisition debt limitation isapplied on a per-taxpayer basis rather than ona per-residence basis.

b. The $100,000 home-equity debt limitation isapplied on a per-taxpayer basis rather than ona per-residence basis.

c. In studying the language of the Code provisiongoverning the residence interest deduction, theTax Court noted that the word “taxpayer” isused only in relation to the qualified residence,not the indebtedness.

13. The Tax Court recently examined the nine factorsin not-for-profit Treasury Regulation 1.183-2(b) indeciding that a taxpayer’s film production activitywas conducted with a profit motive. Which one ofthe following factors did the court decided favoredthe taxpayer?

a. The taxpayer’s history of income or losses.

b. The taxpayer’s success in other activities.

c. The taxpayer’s financial status.

14. The Tax Court recently decided that a taxpayer’selection under Section 181 was permitted.Regarding the case, which one of the followingstatements is false?

a. The court considered only the adequacy of theelection.

b. The court decided that even though thetaxpayer had not timely made the election, herelection was permitted.

c. The court decided that the taxpayer’s omissionsfrom the election were not substantive enoughfor it to deny the election.

15. In a recent case involving self-employment taxesand reasonable compensation, which one of thefollowing statements is true?

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a. The court found that the $24,000 salary paid tothe S Corporation shareholder each year wastoo low.

b. The court held that the owner of the partnershipinterest was deemed to be the S Corporationshareholder rather than the S Corporation.

c. The court held that none of the S Corporation’sprofit distributions from a CPA partnership wasincluded in the S Corporation shareholder’scompensation.

16. In a recent court case involving lottery winnings,which one of the issues below was not an issue inthe case?

a. Whether a taxable gift occurred at the time thelottery ticket was transferred to a corporationowned 49% by the taxpayer.

b. Who must report the annual lottery installmentsin income.

c. What was the value of the gift for purposes ofcomputing a gift tax.

17. What was the major reason the taxpayers weredenied the homebuyer tax credit in a recent case?

a. They owned a previous home within three yearsfrom the date of the purchase of the secondhome.

b. The closing date of the home purchase occurredafter the expiration of the homebuyer tax creditprovision.

c. They already claimed the homebuyer tax creditin the previous year.

Solutions

7. True is the correct response. The court held thatsuch interest implicated the state’s borrowing powerand was excludable from the payee’s gross incomeunder Section 103.

False is the incorrect response. To the contrary,“settlement interest” that was not freely negotiatedwas not excludable under Section 103. DeNaples.

8. False is the correct response. The court decidedthat the part of the payment determined with respectto the taxpayer’s length of service was includible inincome.

True is the incorrect response. Only the part ofthe payment it found not to be determined withrespect to the taxpayer’s length of service wasexcludable from income. Sewards.

9. "A" is the correct response. The Supreme Courtrecently decided that basis overstatement is not agross income omission that extends the statute fromthree years to six years.

“B" is an incorrect response. Were basisoverstatement a gross income omission, the statutewould be extended from three years to six years.

"C" is an incorrect response. If a return isfraudulent, there is no statutory limit. HomeConcrete & Supply, LLC.

10. "C" is the correct response. The court’s decisionthat a Roth IRA is not an acceptable S Corporationshareholder resulted in the corporation’s beingdeemed taxable as a regular C Corporation for itstax year.

“A" is an incorrect response. The taxpayerargued that the individual beneficiary of a custodialaccount that also qualifies as a Roth IRA should beconsidered the shareholder for purposes of the SCorporation statute.

"B" is an incorrect response. Where shares areheld for a person who cannot otherwise legally holdthem (for example a minor or disabled individual),the income is taxed currently to that person. Sharesheld by an IRA could defer or exempt income fromcurrent taxation. Taproot Administrative Services,Inc..

11. "B" is the correct response. Although the fostercare providers did spend many nights at the grouphome, another home was considered to be theirresidence so the Tax Court ruled that they did notsatisfy the third requirement of the exclusionprovision.

“A" is an incorrect response. Activities such asfamily time with children and shared meals andholidays with family members were examples of“routines” of the taxpayer’s private life, which theTax Court ruled should be the focus in determiningthe taxpayer’s home.

"C" is an incorrect response. The other home,not the group home, was ruled to be the foster careprovider’s home. Stromme.

12. "C" is the correct response. The Tax Court ruledthat the phrase “any indebtedness” is not qualifiedby language relating to an individual taxpayer.

“A" is an incorrect response. Unfortunately forthe taxpayer, the Tax Court ruled that the$1,000,000 acquisition debt limitation is applied ona per-residence basis rather than on a per-taxpayerbasis.

"B" is an incorrect response. As in the case ofacquisition debt, the home-equity debt limitation isapplied on a per-residence basis. Sophy and Voss.

13. "B" is the correct response. The court found thatfive of the nine factors favored the taxpayer’s beingin a business: this was one of them.

“A" is an incorrect response. The court foundthat two of the nine factors were accorded littleweight: this was one of them.

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"C" is an incorrect response. The court foundthat two of the nine factors favored the IRS’sposition that the taxpayer was not in a business: thiswas one of them. Storey.

14. "B" is the correct response. The court found thatthe taxpayer had timely made the election.

“A" is an incorrect response. The courtconsidered only the adequacy of the election, notwhether the taxpayer was eligible to make theelection.

"C" is an incorrect response. The court held thatSection 181 gives no requirements beyond thetaxpayer’s timely notifying the IRS of the taxpayer’sintent to make an election, and decided thatomissions from the taxpayer’s elections were not ofthe substance or essence of the statute. Storey.

15. "A" is the correct response. Based on thetaxpayer’s qualifications, experience, hours worked,and success of the accounting firm, the EighthCircuit ruled that the $24,000 paid the shareholderwas an unreasonably low salary.

“B" is an incorrect response. The owner of thepartnership interest was not an issue raised by theIRS or considered by the court.

"C" is an incorrect response. The compensationof the shareholder was increased from $24,000 to$91,044. So $67,044 ($91,044 - $24,000) of theprofit distributions was reclassified ascompensation. Watson, P.C.

16. "B" is the correct response. The issue of whomust report the lottery winnings was not consideredin the case. The primary issues were whether a giftoccurred and, if so, what was the value of the gift.

“A" is an incorrect response. The primary issuein the current case is whether a taxable gift occurredat the time the ticket was transferred to the SCorporation and the taxpayer’s family membersreceived 51% of the stock of the S Corporation.

"C" is an incorrect response. Because the lotteryticket winnings were contested by four other serversat the restaurant where the taxpayer was given thelottery ticket, a second issue was whether the valueof the lottery winnings should be discounted at thetime it was received. Dickerson.

17. "A" is the correct response. In order to beeligible for the homebuyer tax credit, the taxpayermust be a “first-time” homebuyer, which is definedas one owning no interest in a residence three yearsprior to the purchase of a residence (the taxpayersowned an interest within the prior three years).

“B" is an incorrect response. The home purchasewas in 2009, which was well within the time periodof the credit provision.

"C" is an incorrect response. The case did notmention whether a homebuyer tax credit wasclaimed previously. Based on the facts of the case,this provision was not available the last time thetaxpayers had purchased a home. Foster.

4444444444444 TREASURY 44444444444444

TREASURY PROPOSES C HANGES TOR E T I R E M E N T P L A N M I N I M U MDISTRIBUTION RULES

In REG-115809-11 [2/3/12], the Treasury issuedproposed regulations which relax the retirement planminimum distribution rules under certain conditions.The Treasury and IRS are concerned that sometaxpayers may outlive their retirement savings.Purchasing longevity annuity contracts (LACs) couldhelp participants hedge the risk of drawing down theirbenefits too quickly and thereby outliving theirretirement savings. This risk is of particular importbecause of the substantial, and unpredictable, possibilityof living beyond one's life expectancy. Purchasing aLAC would also help avoid the opposite concern thatparticipants may live beneath their means in order toavoid outliving their retirement savings. If the longevityannuity provides a predictable stream of adequateincome commencing at a fixed date in the future, theparticipant would still face the task of managingretirement income over the period until the annuitycommences, but that task generally is far lesschallenging than managing retirement income over anuncertain period. With this in mind, the Treasury hasproposed modifying the minimum distribution rules incases involving the purchase of a LAC. The TreasuryDepartment and the IRS have concluded that any specialtreatment under the required minimum distribution rulesto facilitate the purchase of such a longevity annuitycontract should be limited to a portion of a participant'saccount balance. A percentage limit is necessary inorder to be consistent with Section 401(a)(9)(A), whichrequires the entire interest of each participant to bedistributed, beginning by the required beginning date, inaccordance with regulations, over the life expectancy ofthe participant (or the participant and a designatedbeneficiary). Accordingly, the proposed regulationslimit the amount of the premiums paid for the LACunder the plan to 25% of the employee's accountbalance on the date of payment. If a LAC is purchasedunder an IRA, the 25% limit is on the value of all of theparticipant’s IRA account balances as of December 31of the calendar year before the year in which the LACpremium is paid. The amount of the premiums paid fora LAC under the plan may not exceed $100,000. If asecond LAC is purchased, the $100,000 limitation isreduced by the amount of premiums paid for the firstcontract. In addition to these limitations, the LAC mustprovide that distributions under the contract commenceon the first day of the month or next month of the yearthe participant attains the age of 85. This age reflectsthe approximate life expectancy of an employee atretirement. The proposed regulations permit a qualifiedLAC to allow a participant to elect an earlier annuitystarting date than the specified annuity starting date.

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T R E A S U R Y E X P A N D S D E D U C T I O N /EXCLUSION FOR LODGING EXPENSES

In REG-137589-07 [4/25/12], the Treasury issuedproposed regulations that would permit employers todeduct, and employees to exclude from gross income asa working condition fringe benefit or an accountableplan reimbursement, the cost of local lodging in certaininstances. The deduction also would apply to suchexpenses paid by an employee. An expense that servesprimarily to furnish the taxpayer with a social orpersonal benefit, and is only secondarily related tobusiness, is not deductible. For example, a taxpayer’slocal meal costs when he is not traveling away fromhome, and local lodging expenses when he is nottraveling away from home are nondeductible personalexpenses. Examples of nondeductible lodging expensesare the cost of lodging: (1) provided the employee asadditional compensation, for example were the employerto provide the employee a weekend at a luxury hotel orresort; (2) to enable the employee to avoid a long-distance commute; (3) because the employee is requiredto work overtime; (4) as housing for a recently relocatedemployee while the employee searches for permanenthousing; and, (5) for the employee’s indefinite personaluse. The proposed regulations list some examples wherean individual’s local lodging expenses will be businessexpenses deductible by the employer and excluded fromthe employee’s gross income, assuming all otherrequirements (for example, substantiation) fordeductibility and exclusion are met. Here are threeexamples where lodging costs are deductible by theemployer and excludable from the employee’s grossincome (assuming that the employer has anoncompensatory business purpose for paying thelodging expenses): (1) Employer conducts training forits employees at a hotel near employer’s main office.Training is directly connected with employer’s business.Some employees attending the training travel away fromhome, some do not. Employer requires all employeesattending the training to remain at the hotel overnight forbona fide purpose of facilitating training. (2) Same factsas (1), except employees pay their lodging cost,employer reimburses employees, and employer does nottreat the amount as employee compensation. (3)Employer requires employee to be “on duty” each nightto respond quickly to emergencies outside of normalworking hours. Employees who work daytime hourseach serve a “duty shift” once monthly in addition totheir normal work schedule. Emergencies that require“duty shift” employee attention occur regularly.Employer has no sleeping facilities on its businesspremises, and pays for cost of a nearby hotel room wherethe “duty shift” employee stays. Note: While theproposed regulations do not apply until published in theFederal Register, taxpayers may rely on them for taxyears for which the statute of limitations is still open.

**REVIEW QUESTIONS AND SOLUTIONS**

True False Questions

18. Hare Company conducts training connected with itsbusiness for its employees at a nearby hotel. 70% ofits employees come from out of town, and 30% livelocally. Hare requires all employees at the training

to remain at the hotel overnight for the bona fidepurpose of facilitating training. Based on recentTreasury regulations, assuming other requirementsfor deducting the cost of lodging are met and Harehas no compensatory purpose in paying for thelodging, Hare will be permitted to deduct thelodging costs.

Multiple Choice Questions 19. Recently, the Treasury issued proposed regulations

which allow retirement plans to purchase longevityannuity contracts (LACs) with a portion of theparticipant’s account balance. What is themaximum dollar amount of the premiums paid fora LAC under these regulations?

a. $ 50,000.b. $100,000.c. $250,000.

Solutions

18. True is the correct response. This is an examplein recent Treasury regulations in which locallodging costs are deductible.

False is the incorrect response. The lodging costin this example is an expense not intended tofurnish the employee with a social or personalbenefit. REG-137589-07.

19. "B" is the correct response. In keeping with theintent of Section 401(a)(9)(A), which requires thatthe entire retirement interest be distributed over thetaxpayer’s life expectancy, the regulations limit theamount of the premiums paid for the LAC underthe plan to $100,000.

“A" is an incorrect response. The limitation is$100,000, not $50,000. The Treasury does notexplain how it arrived at the $100,000 limitation.Presumably, one could argue that the limitationamount is arbitrary and unnecessary given the 25%account balance limitation.

"C" is an incorrect response. The limitation is$100,000, not $250,000. REG-115809-11.

44444444 AN ELITE POSSIBILITY 444444444

Consider a taxpayer filing Schedule C who has netincome of $100,000 in 2012. Not only is this incomesubject to income tax, it also is subject to self-employment tax. However, what if the taxpayer had a2011 Schedule C Loss of $80,000, which also resultedin a net operating loss NOL of $80,000? If the taxpayerelected not to carry back the NOL, is the NOLdeductible against the 2012 Schedule C income forpurposes of a calculating the self-employment tax? Arecent Tax Court case DeCrescenzo [2/27/12] answersthese questions. Unfortunately for the taxpayer, it is acut and dry case and it serves as this issue’s ElitePossibility as it offers planning opportunities to lessenthe impact of the ruling. The primary issue in this casewas whether the taxpayer could use a NOL carryforward

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of $51,065 to reduce net earnings from self-employmentincome from his accounting business. Section 1402(a)defines net earnings from self-employment incomegenerally as gross income derived by an individual fromany trade or business carried on by such individual, lessthe deductions which are attributable to such trade orbusiness. It also provides a list of items that areexcepted from this general definition. In particular,Section 1402(a)(4) indicates that the deduction for netoperating losses provided in Section 172 shall not beallowed in computing self-employment income. As aresult, the taxpayer was not allowed to reduce his self-employment income in the current year by an NOLcarryforward in computing his self-employment tax.Taxpayers who expect to have a Schedule C loss (or aloss from an ownership interest in a partnership) need toweigh the costs and benefits of maximizing orminimizing this loss. For Schedule C losses thatgenerate an NOL deduction, increasing the loss throughtax planning initiatives allows the taxpayer to increasethe NOL deduction which could be carried back to prioryears to generate income tax savings which could beused to provide working capital for the business.However, these same tax-planning initiatives are likelyto increase self-employment income in future yearswithout the benefit of a NOL carryover. Decreasing theloss will have just the opposite effects. For Schedule Closses that do not generate an NOL deduction, a costbenefit analysis still needs to be done to determine thetax benefit of increasing or decreasing the current loss.Increasing the loss allows additional deductions againstcurrent income resulting in income tax savings whileshifting some of the loss to the next year may save bothincome taxes and self-employment taxes. For example,assume a taxpayer reporting on the cash basis ofaccounting estimates a Schedule C loss of $100,000 thisyear which also will generate an NOL of $100,000. By(1) accelerating billing and collection efforts, (2)postponing the payment of deductible expenses untilnext year, and (3) computing depreciation on newpurchases using the alternative depreciation system, theloss is reduced to $60,000. While this reduces the NOLdeduction against taxable income (or current income if

an NOL is not generated), it potentially saves self-employment tax (at a rate of 15.3%) in future yearsassuming the taxpayer’s Schedule C business becomesprofitable. If the taxpayer has wages from anotherbusiness, the self-employment tax savings may not beas large, as the FICA portion of the self-employment taxends at combined wages and self-employment incomeof $110,100 in 2012. Therefore, taxpayers withestimated Schedule C losses need to conduct a cost-benefit analysis to determine whether to reduce orincrease the estimate by engaging in the tax-planninginitiatives described above.

**REVIEW QUESTIONS AND SOLUTIONS**

True False Questions

20. Assume a taxpayer expects to have a loss from herbusiness this year which will result in a netoperating loss deduction. Delaying the recognitionof deductions near the end of the year to next yearwill save self-employment taxes next year if nextyear’s self-employment income is positive.

Multiple Choice Questions Solutions

20. True is the correct response. Since a netoperating loss carryover is not deductible againstnext year’s self-employment income, reducing acurrent year’s loss by delaying deductions to nextyear will reduce next year’s self-employment tax.

False is the incorrect response. Reducing acurrent year’s loss by delaying deductions has thesame effect of carrying over part of a NOLdeduction to reduce self-employment tax. Since anNOL deduction is not allowed against self-employment income, taxpayers should weigh thecosts and benefits of reducing expenses in yearsthey expect a loss. An Elite Possibility andDeCrescenzo.

444444444444444444444444444444444444444444444444444444444444444444444444444444444All rights reserved. The reproduction or translation of these materials is prohibited without the written permission of CPElite. TheT.M.

material contained in CPElite's courses and newsletters qualifies for CPE credit designed to enhance the professional knowledge ofT.M.

the individual. The material is sold with the understanding that CPElite is not engaged in rendering legal, accounting, tax, or otherT.M.

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"We have entered into an agreement with the Office of Director of Practice, InternalRevenue Service, to meet the requirements of 31 Code of Federal Regulations, Section10(g), covering maintenance of attendance records, retention of program outlines,qualifications of instructors and length of class hours. This agreement does notconstitute an endorsement by the Director of Practice as to the quality of the

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15

***** QUIZ QUESTIONS *****

Place your answers to the following 5 True-False Questions and 15 Multiple Choice Questions on the enclosed answersheet (page 17). ON-LINE TESTERS GO TO CPELITE.COM AND CLICK “ON-LINE TESTING.”

TRUE-FALSE QUESTIONS

1. A partnership may not electronically provide a K-1to a partner until the partner consents to receive K-1s in electronic format.

2. The Tax Court recently decided that a taxpayer wasnot permitted to deduct immediately costs toproduce a film because the taxpayer had notspecifically satisfied the election requirements.

3. A first-time buyer for purposes of the homebuyertax credit is any individual having no presentownership interest in a principal residence for threeyears prior to the date of purchase of a principalresidence.

4. An example of a nondeductible local lodging costis when the employer pays for the cost of lodgingfor an employee because the employee is requiredto work overtime.

5. For purposes of computing the self-employment taxon self-employment income, the taxpayer’s currentself-employment income may be reduced by a netoperating loss carryforward.

MULTIPLE CHOICE QUESTIONS

6. Which one of the following is not a relevantrequirement when the IRS considers if a taxpayer’sForm 843 claim is a permissible amendment to aForm 1040X claim that previously has been filed?

a. Whether the claim on the Form 843 requiresthe investigation of new matters.

b. Whether both forms are filed within therequired statute of limitations period.

c. Whether the IRS had taken final action on theoriginal claim.

7. For Health Savings Accounts, what is the 2013 out-of-pocket expense maximum for self-only coverageplans?

a. $6,050.b. $6,250.c. $12,500.

8. A business places a passenger automobile that isnot a "truck or van" in service in 2012. Thebusiness elects out of additional first-yeardepreciation. What is the 2013 limit ondepreciation for the automobile?

a. $3,160. b. $5,300. c. $5,100.

9. As a result of recent IRS action, certain taxpayerswho elect to extend their 2011 tax returns mayavoid the failure to pay penalty if their 2011 incomedoes not exceed what amount?

a. $200,000 for joint taxpayers.b. $100,000 for joint taxpayers.c. $50,000 for single taxpayers.

10. For its 10/1/10 - 9/30/11 Fiscal Year, the IRSrecently reported that there was a decline in income tax returns filed for which type of entity?

a. Partnership.

b. S Corporation.

c. Regular C Corporation.

11. Regarding a recent Supreme Court decision on theextension of the statute of limitations period whena taxpayer overstates the basis of property, whichone of the following statements is false?

a. The court decided that overstatement of basisresults in an omission of gross income andextends the statute from three years to sixyears.

b. The court decided that a 1958 case controlledits decision.

c. Three circuits had held that basis overstatementdoes not result in an omission of gross income,while two circuits had held that basisoverstatement does result in an omission ofgross income.

12. Regarding a recent Ninth Circuit decision on an SCorporation whose sole shareholder was a RothIRA, which one of the following statements istrue?

a. The Ninth Circuit agreed with the Tax Courtdecision.

b. The Ninth Circuit found the Roth IRA to be atrust that is an acceptable S Corporationshareholder.

c. The Ninth Circuit found not important a 20-year old revenue ruling in making its decision.

16

13. Which one of the following responses is not arequirement for excluding foster care paymentsfrom gross income?

a. The foster individual must be developmentallydisabled.

b. The payments must be made pursuant to afoster care program of a State.

c. The payments must be made for the care of aqualified foster individual in the foster careprovider’s home.

14. Taxpayers A and B own a home as joint tenants.They are co-borrowers on the home mortgage andshare equally in the monthly mortgage payment.They are unmarried and use the home as theirprincipal residence. For 2011, the average balanceof the home mortgage is $2,400,000. On the basisof a recent court decision, how much of the 2011debt (including the home-equity debt limitation)qualifies for the residence interest deduction withrespect to Taxpayer A?

a. $1,200,000.b. $1,100,000.c. $ 550,000.

15. The Tax Court recently ruled that a taxpayer’sactivity of producing films was a business. Inmaking its decision, the court assessed if thetaxpayer met two tests to be in a business. Whichone of the following was not one of the tests?

a. Whether the taxpayer was involved in theactivity with continuity and regularity.

b. Whether the taxpayer conducted the activitywith a profit motive.

c. Whether the taxpayer was a lawyer.

16. A state pays a taxpayer a condemnation awardwhich includes $10 million of interest paid asrequired by state law (“settlement interest”). Theinterest reflects a rate below the prevailingcommercial rate. Because of its current liquidityproblems, the state negotiates an agreement withthe taxpayer to voluntarily pay the award in tenannual installments with annual interest. The“installment interest” totals $5 million. Based on arecent Third Circuit decision, how much of the $15million in interest paid by the state is the taxpayerpermitted to exclude from his gross income?

a. $15 million.b. $0.c. $5 million.

17. Jay is a CPA who has an ownership interest in ABCCompany, a company involved in the preparation offederal and state tax returns. For 2011, he is paid$100,000 and his share of the income of ABC is$120,000. Assuming the $100,000 payment fairlyrepresents compensation for services provided,how much of the $220,000 ($100,000 plus$120,000) is subject to payroll taxes (FICA,Medicare, or self-employment tax) in 2011?

a. $100,000 if ABC operates as a partnership.

b. $100,000 if ABC operates as an S Corporation.

c. $220,000 if ABC operates as an S Corporation.

18. In a recent court case involving lottery winnings,which one of the following statements is false?

a. The taxpayer argued that she and her familymembers were members of a partnership whichwas the true owner of the lottery ticket.

b. The Tax Court ruled that there was noenforceable contract among the family as theterms were too indefinite, uncertain, andincomplete.

c. The Tax Court refused to discount the value ofthe lottery ticket even though it was contestedby four other waitresses at the time it wastransferred to the S Corporation.

19. A taxpayer receives a $10,000 monthly disabilityretirement payment due to service-connectedinjuries. Of the amount, $7,000 is guaranteed,based on 70% of her final compensation, anddetermined with reference to the taxpayer’sdisability retirement. Based on a recent courtdecision, how much of the $10,000 payment isincludible in the taxpayer’s income?

a. $3,000.b. $7,000.c. $10,000.

20. Recently, the Treasury issued proposed regulationswhich allows retirement plans to purchase longevityannuity contracts (LACs) with a portion of theparticipant’s account balance. What is themaximum percentage of the participant’s accountbalance which can be used to pay the premiums fora LAC under these regulations?

a. 10%.b. 25%.c. 50%.

17

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QUIZ INSTRUCTIONS AND ANSWER SHEET – SUMMER 2012, VOLUME XXI, NUMBER 2, TAXATION(Latest Recommended Completion Date: Within one year of purchase)

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NEWSLETTERS[1] THE ELITE QUARTERLY – Recommended CPE Credit – 4 Hours per issue [O]

To make practitioners aware of recent tax developments in legislation, the IRS, judicial decisions, and the Treasury.The four issues typically are available on-line, by email, or mail by the following dates: May 1, July 15, September15, and November 30. Each issue is 4 hours of CPE and costs $40. An annual subscription to all four issues costs$135. The 2-hour ethics issue for enrolled agents is included in the subscription.

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component required for enrolled agents and RTRPs only. This issue is typically available on-line or by email byAugust 15. It costs $20 and is free to annual subscribers to The Elite Quarterly.

19

20

COURSES (Updated through June 2012)

[1] INCOME ITEMS AND PROPERTY TRANSACTIONS. Recommended CPE Credit: 6 HRS [B]

To provide an explanation of (1) selected income items affecting individual income taxpayers, including socialsecurity income, alimony, and scholarships, and (2) common property transactions involving individual incometaxpayers, such as capital gains, sale of personal residence, and like-kind exchanges.

[2] ABOVE-THE-LINE DEDUCTIONS. Recommended CPE Credit: 6 HRS [B]

To provide an explanation of (1) expenses commonly deducted by Schedule C taxpayers, including travel,transportation, and home office deductions, and (2) and common above-the-line deductions.

[3] ITEMIZED DEDUCTIONS. Recommended CPE Credit: 6 HRS [B]

To provide an explanation of medical expenses, taxes, residence interest, charitable contributions, nonbusinesscasualty and theft losses, miscellaneous itemized deductions, and the standard deduction.

[4] RATES, CREDITS AGAINST TAX, AND SPECIAL ISSUES. Recommended CPE Credit: 6 HRS [B]

To provide an explanation of the tax rate structure, selected credits (including the earned income tax credit and theeducation credits), estimated tax payments, and selected special issues (including filing status and exemptions).

[5] PARTNERSHIP TAXATION – PART I. Recommended CPE Credit: 6 HRS [B]

To provide an explanation of (1) the tax implications of formation, including gain or loss, basis of partnership interest,and basis of partnership assets after formation and (2) general reporting procedures of partnership items.

[6] PARTNERSHIP TAXATION – PART II. Recommended CPE Credit: 6 HRS [B]

To provide an explanation of the special topics involving partnership operations and the tax implications of sales ofpartnership interests, partnership distributions, and redemptions of a partner’s interest.

[7] S CORPORATION TAXATION – PART I. Recommended CPE Credit: 6 HRS [B]

To provide an explanation of (1) considerations in being an S Corporation, (2) requirements and election to be anS Corporation, (3) elections and operations, (4) shareholder basis issues, and (5) reporting and compliance.

[8] S CORPORATION TAXATION – PART II. Recommended CPE Credit: 6 HRS [B]

To provide detailed coverage of S Corporation shareholder basis issues, and an explanation of loss limitation issues,distributions made by an S Corporation to its owners, and S Corporation shareholder changes and income taxes.

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