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• Tax Season is Here!
• 'Tis the season for referrals
• Showroom furniture is not depreciable
• Non-controlling shareholders are subject to below-market loan rules
• IRS launches binding arbitration procedure
• Guidance for depreciating exchange or involuntary conversion property
• ISO 9000 certification expenses ruled currently deductible
• Greeting card company subject to Uniform Capitalization rules
• Installment sale reporting repealed for accrual-basis taxpayers
• Net rental income from controlled C corporation isn't passive
• Estate plan with family limited partnership defeated
• Visit our new articles
• Subscribe to Michael Gray, CPA's Tax and Business Insight

Tax Season is Here!

The year 2000 has arrived and banks and brokerage houses are already sending 1099 forms. If we are preparing your income tax returns, please send us your information as soon as possible to "get in the queue." If you need a tax data organizer, see our web site (www.taxtrimmers.com) or call Dawn at (408) 918-3162 immediately. If you need to make an appointment, call Dawn. We have a very limited number of time slots available, so make your appointment now.

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'Tis the season for referrals.

Please tell your friends, family members and associates about us. Our CPA firm needs your support to survive and grow. Many times our clients feel sorry for us at this time of the year, and they're afraid to refer their friends, family members or associates to us. But this is the time of year everyone seems to need an accountant! Have them call Mike Gray at (408) 918-3161. Thanks!

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Showroom furniture is not depreciable.

The IRS national office, in a field service advice memorandum, said that furniture displayed in showrooms by a furniture manufacturer is inventory and not eligible for depreciation. (FSA 199949031.)

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Non-controlling shareholders are subject to below-market loan rules.

The below-market loan rules specify minimum interest rates to be charged for loans. When the minimum interest rates aren't charged, the interest is imputed, which can result in dividend income for shareholders or gifts for family members. The Tax Court recently ruled these rules apply to non-controlling shareholders of corporations. (Roundtree Cotton Co., Inc. v. Commissioner, 113 T.C. No. 28 (12/36/99).)

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IRS launches binding arbitration procedure.

The IRS is conducting a two-year test of a binding arbitration procedure for matters in IRS Appeals that deal exclusively with factual issues. The purpose of this change is to expedite tax cases and relieve the courts.

Arbitration is not available for the following issues:

• Cases in which arbitration is not appropriate under the general federal arbitration statute, 5 USC sections 572 and 575
• Issues involving the substantiation of business or entertainment expenses
• Issues designated for litigation or docketed in any court
• Industry Specialization Program issues or an Appeals Coordinated Issue
• An issue for which the taxpayer has filed a request for competent authority assistance

Arbitration is voluntary on both sides. Each party forgoes the right to judicial review when they elect binding arbitration.

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IRS issues guidance for depreciating property received in exchange or involuntary conversion.

The IRS has issued temporary guidance about how to depreciate property received in a tax-free exchange or an involuntary conversion. The part of the basis up to the amount of the exchanged or converted property should be depreciated under the method and remaining life of the surrendered property. Any excess of the basis of the acquired property over the adjusted basis of the surrendered property is treated as newly acquired MACRS property.

This method must be used for property received from an exchange or involuntary conversion after January 2, 2000.

A taxpayer who treated property acquired before January 3, 2000 as newly-acquired MACRS property and it qualifies for faster depreciation under the IRS notice may elect to change the method of accounting for that property in either the first or second tax year ending after January 3, 2000. The procedure for making the change is explained in the notice.

(Notice 2000-4.)

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ISO 9000 certification expenses ruled currently deductible.

The IRS has ruled that the costs incurred to obtain, maintain and renew ISO 9000 certification are generally deductible as ordinary and necessary business expenses.

However, the expenses must be capitalized to the extent expenditures result in the creation or acquisition of an asset having a useful life substantially beyond the tax year. For example, the costs of creating a quality manual are deductible, but the cost of updating the manual is currently deductible.

The cost of any machinery or equipment acquired to meet the certification requirements must be depreciated.

(Rev Rul 2000-4.)

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Greeting card company subject to the Uniform Capitalization rules.

The Tax Court ruled that a greeting card company did not qualify for the small reseller exception to the uniform capitalization rules. The company is a producer, not a reseller, of its paper products. (Suzy's Zoo v. Commissioner, 114 T.C. No. 1 (1/6/00).)

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Installment sale reporting repealed for accrual-basis taxpayers.

A surprise provision in the Tax Relief Extension Act of 1999 was the repeal of the installment method for accrual basis taxpayers, effective for sales or other dispositions on or after December 17, 1999. This provision will cause real problems for taxpayers who use the accrual basis and want to dispose of business assets in an installment sale. Stand by - there is a chance this provision will be repealed during 2000.

There was no "binding contract" exception in the legislation.

The installment method continues to be available for dispositions of property used or produced in the trade or business of farming, timeshares or residential lots when the taxpayer elects to pay interest under section 453(l), or sales by cash method taxpayers.

The conference agreement also modifies the installment sale pledge rule to provide that entering into any arrangement that gives the taxpayer the right to satisfy an obligation with an installment note will be treated as the direct pledge of the installment note and gain required to be exercised.

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Net rental income from controlled C corporation isn't passive.

A. R. Fransen, Jr. challenged the regulations that state net rental income from property leased to a controlled C corporation isn't passive. The Fifth Circuit Court of Appeals upheld a summary judgment by a Federal District Court against the taxpayer. (A.R. Fransen, Jr., 99-2 U.S.T.C. ¶50,882 (th Cir. 1999).)

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Estate plan with family limited partnership defeated.

Family limited partnerships are currently very popular tools used in estate planning. Taxpayers have been very successful in claiming valuation adjustments (discounts) for minority partnership interests.

Sometimes, this strategy can backfire.

A taxpayer transferred securities to a family partnership and transferred minority interests to members of his family. However, he retained the right to vote the shares as the sole general partner.

The IRS ruled that the securities would be includable in the taxpayer's estate because he made a transfer with a retained interest.

Bear in mind this is an IRS Technical Advice Memorandum, and doesn't set legal precedent. But it does indicate the position the IRS would take in litigating this issue, so you should consider it when designing a family partnership. The right to vote the shares should be assigned to someone other than the person transferring securities to the partnership.

(TAM 199938005.)

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Visit our new articles!

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