LINE ITEMS.

What an Improvement!

* In the past, the IRS allowed real estate developers to allocate the cost of common improvements (for example, recreational facilities) among lots in a residential subdivision to expedite their sale. The Tax Court has now extended this allocation principle to commercial real estate developments as well. In Norwest Corp. v. Commissioner, 111 TC no. 5 (1998), the Court stated that "when the basic purpose of property is the enhancement of other properties to induce their sale and such property does not have, in substance, an independent existence" the cost of such improvements can be allocated to the other properties.

Ninety Days Same As Cash

* An accrual basis manufacturer promised to pay retailers a cash rebate if they advertised a discounted product by yearend. In order to get paid, the retailers had to submit claim forms and proof of performance to the manufacturer within 90 days after the year's end. In revenue ruling 98-39, (1998-33 IRB), the IRS ruled that, as long as the manufacturer was able to reasonably estimate the amount of its liability, it could deduct the rebate in the year preceding payment to the retailers. According to the IRS, the liability for payment was determined when the retailers advertised the product and the filing of claim forms was merely an administrative act. The IRS stated, however, that in some cases the claim form may be considered a condition precedent to the accrual.

Deferred Taxes for Deceased

* If a decedent's interest in a closely held business exceeds 35% of the decedent's adjusted gross estate, Internal Revenue Code section 6166 allows the estate to defer taxes for up to 14 years by requiring the IRS to accept a 15-year payment schedule (5 interest-only payments, followed by 10 estate tax payments). This delay often gives the business time to buy out the decedent's interest and avoid a distress sale to outside parties. In a new private letter ruling, the IRS said that a decedent's active participation as a landlord in the management and operations of three real estate rental properties was an interest in a closely held business for purposes of IRC section 6166 (LTR 9832009).

Thumbs Down on Post-Mortem Disclaimer

* It makes sense for a person who owes a large amount of back taxes to disclaim any possible inheritance. If he or she does not do so, inherited property can be turned over to the government to satisfy any outstanding liens. However, in Drye Family 1995 Trust v. United States, CA-8 (8-17-98), a taxpayer in Arkansas used this post-mortem strategy and lost. The Court ruled that the disclaimer was not effective for the purpose of defeating a federal tax lien. Courts in other states have ruled differently in this area.

IRS Didn't Agree With Couple

* A couple received a letter from the IRS Appeals Office stating that they owed $2,900 for 1993. They mailed in a check for $2,500, writing "'93 full payment of tax liability" on the notation line and back of the check. The IRS cashed the check and issued a deficiency notice for the difference. Seeking to avoid the rest of the payment, the taxpayers petitioned the Tax Court for relief, but lost. According to the Court, the IRS can be bound only by entering into a closing agreement under IRC section 7121 and there was no such agreement in this case. Tom Kelly, et ux., v. Commissioner, TC Memo 1998-266.

Michael Lynch, CPA, Esq., associate professor of tax accounting at Bryant College, Smithfield, Rhode Island.