Tax Watch: IRS making it easier to change the tax year

The Internal Revenue Service has issued proposed revenue procedures that would allow partnerships, S corporations, electing S corporations and personal service corporations to have automatic approval for a change in annual accounting period.

The proposed procedure supersedes Revenue Procedure 87-32, 1987-2 C.B. 396, the current guidance on automatic approval for an adoption, change or retention in annual accounting periods.

The notice clarifies that:

* A partnership, S corporation, electing S corporation or PSC may automatically change its taxable year.

* Those businesses may automatically change to a natural business year that satisfies the 25% gross income test, regardless of whether such a year results in greater income deferral than its present taxable year.

* They may adopt, change to or retain a 52/53-week taxable year ending with reference to the required taxable year, natural business year or ownership taxable year.

Finally, the proposed revenue procedure extends the due date for filing Form 1128, “Change in Accounting Method or Period,” to the due date of the taxpayer’s federal income tax return (including extensions) for the first tax year for which the change in accounting period is to be effective.

Those proposed guidelines, while not an actual departure from the current ruling position of the IRS National Office, should help significantly reduce the administrative complexities and uncertainties.

The IRS is seeking comments.

Cite: IRS Notice 2001-35

Monthly payments by employers eased

The IRS has issued final regulations that raise to $2,500, from $1,000, the quarterly threshold at which small businesses are required to make monthly payments of employment taxes.

The final regulations adopt temporary regulations issued in December.

Under the final rules, the IRS explains, businesses that owe less than $2,500 in employment taxes for a return period do not have to make deposits but may instead remit their full liability with a timely filed return.

Businesses that owe $2,500 or more in a quarter will continue to pay their employment tax obligations monthly.

Previously, a business had to pay monthly if it owed employment taxes of $1,000 or more per quarter.

The final regulations, effective May 23, apply to quarterly and annual return periods beginning on or after Jan. 1.

Cite: T.D. 8946, 66 Fed. Reg. 28370 (5/23/01)

Family farm trips over transfer rules

If it were not for Section 351 of the tax code, incorporating a sole proprietorship, partnership, etc., would be a taxable event.

That would mean that a taxpayer would have to recognize gain on the transfer of an asset to the new corporation.

Fortunately, that’s not the case, and most incorporations are tax free.

Unfortunately, Section 351 has a number of rules. Make a mistake, and a taxable transaction will usually result.

In a recent case before the U.S. Tax Court, a family transferred farm equipment to a new corporation. Their basis, or book value, in the equipment was less than the liabilities assumed by the new corporation.

The court ruled that the difference was taxable income to the family.

Ronald Seggerman and his sons owned and operated a farm as a joint venture.

In 1993, Mr. Seggerman incorporated Seggerman Farms and distributed the stock to himself and his family.

Mr. Seggerman and his sons transferred assets with liabilities in excess of the adjusted basis of the assets to Seggerman Farms.

After the incorporation, Seggerman Farms refinanced the transferred debt, and the family members remained personally liable for the assumed debt.

Naturally, none of the loan proceeds were disbursed directly to the family members.

The family members argued that because they weren’t relieved personally from the assumed debt, they shouldn’t be required to recognize gain on the liabilities that exceeded the basis of those transferred assets.

Tax Court Judge Mary Ann Cohen decided that even if the family members remained liable on the transferred debt, they had to recognize gain under the rules of Section 357, “Assumed Liabilities.”

The court rejected the family members’ reliance on two decisions granting relief from recognizing a gain under Section 357, finding that those cases were substantially different from their situation.

The court determined that the family members had not contributed to Seggerman Farms loan receivables or personal notes covering the difference between the transferred liabilities and the adjusted basis of the transferred properties.

The court concluded that the petitioners’ personal guaranties of the debt weren’t the same as incurring indebtedness to the corporation, since a guaranty is a promise to pay in the future if certain events occur.

The court held that the guaranties weren’t economic outlays, which are required in order to convert a loan guaranty into an investment.

Cite: Seggerman Farms Inc., et al., v. Commissioner, T.C. Memo. 2001-99

Property partners get split decision

A federal court has ordered the government to reimburse real estate tax payments that the joint owners of property made on tax liens pending the property’s private sale.

The court, however, stopped short of deciding whether the owners were entitled to recover other expenses.

The estate of Walter Fong, together with Edward Wong and Farmers Market, owned property. Farmers Market failed to pay assessed federal income taxes, and the IRS issued tax liens against its interest in the jointly owned property.

The IRS seized that interest and tried unsuccessfully to sell it at an auction. The property was later listed with a real estate agent and sold for $1 million.

After the costs of the sale, Farmers Market’s tax debt was satisfied, and the IRS discharged the property for the tax liens under the rules of Section 6325, “Release of Lien.”

The Fong estate and Edward Wong argued that the government’s interest in the sale proceeds was less than the amount paid.

They sought to recover $190,000 for real estate tax payments and their expenses for the preservation, maintenance, marketing and sale of the property, which included a toxic-waste cleanup.

The government conceded that the plaintiffs were entitled to a $60,000 reimbursement of the real estate taxes, but contended that they couldn’t recover other expenses under any theory.

Judge Frank C. Damrell Jr. of the U.S. District Court for the Eastern District of California granted summary judgment to the plaintiffs on the real estate tax reimbursement issue but refused to do the same on the remaining expenses.

Noting that a real estate agent, not the government, sold the property, the court found that factual issues existed regarding which plaintiff expenses would have been incurred by the government if it had foreclosed on its own lien and sold the property.

Cite: Wanda Fong, et al., v. United States, E.D. Calif.