Tax Watch: Where’s that refund? Soon you can learn online

Taxpayers soon will be able to check the status of their refunds on the Internet, the Internal Revenue Service says.

The online tracking program, now in the trial stage, is expected to be fully operational for the 2003 filing season.As part of a pilot program, the IRS offered access to the service through its Internet home page. The service can be used by taxpayers who filed forms 1040, 1040-A or 1040EZ and are due a refund.

Information will be available on whether the return has been processed, whether a refund will be mailed or direct-deposited and whether a check was returned to the IRS as undeliverable.

Taxpayers also apparently can learn whether there are problems with their refunds and receive recommendations for resolving those problems.

And don’t forget the new telephone system for scheduling meetings with the IRS.

The agency is creating a nationwide system of local telephone numbers to allow the scheduling of face-to-face meetings between taxpayers and IRS employees at Taxpayer Assistance Centers.

The agency says that personal meetings can address matters such as resolving IRS account and notice issues, making installment agreements to pay tax liabilities, requesting the release of federal tax liens and levies, and filing Innocent Spouse claims for taxpayers who may not be liable for a spouse’s share of joint liabilities.

State income tax collections down

* State income tax collections plummeted in the first four months of this year, according to a recent study.

As a result, state governments will face tight budgets despite an improving economy, it concludes.

Collection of state personal income taxes between January and April fell by 14%, or $14.7 billion, when compared with the same period last year, according to the study.

The period is considered a bellwether for states because they collect a large share of personal income taxes when individuals file returns to meet April 15 deadlines.

Most ominous for states is that estimated tax payments – an indication of what people expect to receive in income and pay in taxes in the coming year – were down 27% from a year earlier.

Among the sharpest falloffs were in taxes paid on non-wage income, such as capital gains and stock options, with many states reporting declines of 25% or more.

The study is based on a survey of 41 states with broad-based personal income taxes. It was prepared by the Nelson A. Rockefeller Institute of Government, a think tank based at the State University of New York at Albany.

Nicholas W. Jenny, a senior policy analyst at the Rockefeller Institute and author of the study, says state income tax collections typically lag behind economic rebounds, meaning state budgets take longer to recover.

Although many states managed to avoid general tax increases this year by cutting deeply into programs, Mr. Jenny said, it appears that the states again will have to weigh whether to slice deeper or to boost taxes when they write next year’s budgets.

Insurance agent’s final pay taxable

* The U.S. Tax Court has ruled that the termination payment received by an insurance agent upon his retirement is taxable as ordinary income – not as capital gain, as many agents previously had been led to believe.

The taxpayer apparently entered into “agent’s agreements” with an insurer wherein he agreed to write policies exclusively for that company.

The agreement provided that all property – including a computer, books and records, customer lists and information about policyholders – belonged to the insurer.

In addition to providing the agent with support, equipment and materials, the company under the agreement also was to pay him based on a percentage of net premiums.

The agreement also had detailed provisions governing termination.

Under the agreement, the taxpayer was entitled to a termination payment based on the percentage of policies that either remained in force after termination or were in force for the 12 months preceding termination.

When the taxpayer retired, he returned the account information, computers and the rest to the insurance company and the successor agent.

The agent received a termination payment that he and his spouse duly reported on their 1997 return as long-term capital gain.

The IRS disallowed capital gain treatment and determined that the payment was ordinary, fully taxable income.

The Tax Court ruled that the termination payment was taxable as ordinary income and not as gain from the sale or exchange of a capital asset.

It noted that because the taxpayer didn’t own the various items that he returned to the insurance company, he couldn’t have sold them to the insurance company.

The court concluded that the taxpayer therefore didn’t own a capital asset or sell a capital asset to the insurance company.

The court further concluded that the termination payment the taxpayer received from the insurance company didn’t represent payment for the transfer of a capital asset to the insurance company or to the successor agent and was fully taxable as compensation.

Cite: Baker v. Commissioner, 118 T.C. No. 28 (5/29/02)

Job-creation law made simple

* The Internal Revenue Service has issued a new publication titled “Highlights of the Job Creation and Worker Assistance Act of 2002” (IRS Publication No. 3391).

The publication includes two new law-related supplements that the IRS issued earlier. One is a supplement to IRS Pub. No. 463 (“Travel, Entertainment, Gift and Car Expenses”) and the other supplements IRS Pub. No. 945(2001) (“How To Depreciate Property”).

The new law highlights publication is a useful summary in lay language of the 2002 Job Creation and Worker Assistance Act, clarifying many of the law’s provisions. Notable is the material on wash-sale rules and Section 1256 contracts.

IRS Pub. No. 3991 points out that the 2002 act clarifies that the wash-sale rules don’t apply to any loss arising from Code Section 1256 contracts. Generally, positions in regulated futures contracts, foreign currency contracts, non-equity options and dealer security options in an exchange using the mark-to-market system are treated as if they were sold on the last day of the year.

Under the act, however, the wash-sale rules don’t apply to losses arising from Section 1256 contracts.

Tax Court renders a split decision

* Ordinarily, a three-year statute of limitations exists on auditing returns and assessing deficiencies.

The U.S. Tax Court, however, recently ruled that inasmuch as a taxpayer had fraudulently underreported income, the IRS wasn’t barred by the normal statue of limitations and could pursue its case against the closely held company and its principals.

The IRS argued that the principals received a constructive dividend from the company because they had control over company cash that was kept in their home.

But the Tax Court sided with the taxpayers, finding that they sometimes used their home for business meetings, had a safe in their home that was sometimes used for business purposes and believed this was a more secure location than the company’s offices.

Thus, the money remained the company’s and wasn’t a constructive dividend to the principals.

Cite: Sam and Anna Zhadanov, et al., T.C. Memo. 2002-104.

A limit on deducting donations of stock

* The U.S. Tax Court has ruled that a couple’s charitable deduction for the donation of property to a private foundation was limited to their basis.

The court concluded that no further deduction was allowed because the stock wasn’t publicly traded and thus didn’t meet the requirements for qualified appreciated stock under the rules of Section 170, “Charitable Deduction.”

The fact that the couple had failed to meet the substantiation requirements for gifts of appreciated stock didn’t help.

John and Tate Todd formed the Todd Family Foundation on Dec. 20, 1994. One week later, Mr. Todd transferred to the foundation 6,350 shares of Union Colony Bancorp. stock.

On the transfer date, the foundation was a “private foundation” that fell outside the description of such an entity in the charitable-deduction rules.

The couple filed a 1994 Form 1040 and claimed a charitable deduction for the transferred stock. The couple included a Form 8283, “Non-cash Charitable Contributions,” on which they provided information about the transfer, including their basis, the fair market value and a statement as to how the value was determined – but no appraiser’s certification or appraisal was attached.

Because of contribution limitations, the couple claimed a deduction of $88,879 in 1994 and proceeded to continue claiming deductions for the gift from 1995 through 1997.

The form included a statement that the fair market value was based on the foundation’s sale of shares for that amount to First National of Nebraska Inc.

On that transfer date, Union Colony Bancorp owned all the outstanding shares of stock of Union Colony Bank, but the holding company’s shares weren’t listed on any stock exchange. Nor were they regularly traded in any over-the-counter market for which published quotations are available.

Before 1994, Union Colony Bancorp stock was available only through an officer of the bank or a local broker that specialized in the stock.

On Dec. 1, 1994, eight individuals, including John Todd, controlled 50.5% of the company’s outstanding shares.

After an audit, the IRS disallowed the charitable deduction except to the extent of the couple’s basis in the stock, an amount which the IRS allowed as a 1994 deduction.

The IRS said the couple had failed to establish that the disallowed deductions met the requirements of Section 170, “Charitable Deduction.” The couple petitioned the Tax Court.

The IRS argued that the couple wasn’t entitled to the deductions because the shares weren’t qualified appreciated stock under the rules.

Alternatively, the IRS argued that the couple shouldn’t be entitled to a deduction because they had failed to comply with the substantiation requirements for claiming charitable contributions.

Tax Court Judge James Halpern, agreeing with the IRS, concluded that the shares weren’t qualified appreciated stock and that the couple failed to substantiate the transfer as required by regulations.

Thus, the couple wasn’t entitled to the deductions beyond what previously had been allowed by the IRS.

The judge discussed the requirements for qualified appreciated stock and determined that the substantiation requirements apply unless, on the transfer date, the shares were publicly traded securities to which these regulations don’t apply.

Because he found that on the transfer date, market quotations for the shares weren’t readily available on any established securities market, the judge held that the shares weren’t qualified appreciated stock.

The court concluded that because the stock isn’t qualified appreciated stock, the couple was subject to the substantiation requirements and wasn’t entitled to the disallowed deductions.

They failed to meet the substantiation requirements, having failed to provide an appraisal certification or summary, or to maintain records.

Cite: Todd v. Commissioner, 118 T.C. No. 19 June 4, 2002