Michael Gray, CPA's Tax and Business Insight

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• Individual Deadline is Coming.
• Limited availability until November 6.
• Thank you!
• Transfers to foreign trusts may be subject to income tax.
• U.S. transferor could be subject to tax on income of a foreign trust.
• Sole proprietor of a hotel can't deduct or exclude lodging expenses.
• Research Credit allowed for building software "suite."
• IRS issues new meal and lodging per-diems.
• Unrecovered basis deduction allowed for private annuity.
• Unvested options excluded from parachute payments.
• All of gay partner's property is subject to estate tax.
• Visit our new articles.
• Subscribe/Unsubscribe from Michael Gray, CPA's Tax and Business Insight.

Individual Deadline is Coming.

The final extended due date for 1999 individual income tax returns is October 15, 2000. We are doing our best to focus on finishing the few tax returns we have left.

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Limited availability until November 6.

Remember Janet and I will leave for a European tour October 21 and return November 5. Before October 21, I'll be finishing extended income tax returns. The consultation slots before we leave are taken. So, I won't be available until after November 6.

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Thank you!

During the past month, attorney Bob Temmerman referred the Gladys Miller Trust.

Thanks for your confidence in us. Welcome to our new client!

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Transfers to foreign trusts may be subject to income tax.

The IRS has issued proposed regulations explaining rules enacted in the Taxpayer Relief Act of 1997, subjecting the transfer of certain appreciated property to a foreign trust or estate to income tax. Proposed exceptions to the rule would be (1) transfers to a foreign trust that is owned by another person; (2) transfers to foreign trusts that have received a section 501(c)(3) (charitable) exemption ruling; (3) transfers made at death (when certain conditions are satisfied); and (4) transfers to an unrelated foreign trust for fair market value.

The proposed regulations would apply to property transfers to foreign trusts or estates made after August 7, 2000. (NPRM Reg. 1085222-00.)

If you are considering using a foreign trust, including for asset protection, be sure to get help from a qualified attorney who is familiar with these rules.

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U.S. transferor could be subject to U.S. tax on income of a foreign trust with a U.S. beneficiary.

The IRS has also issued proposed regulations relating to transfers of property by U.S. persons to foreign trusts that have one or more U.S. beneficiaries.

Under the proposed regulations, the U.S. transferor would be considered to be the "owner" of a portion of the trust for each year the trust has a U.S. beneficiary, even if the trust would otherwise fail the "grantor trust" rules. This means all or part of the income and deductions of the trust must be reported on the transfer's income tax returns. (NPRM Reg. 209038-89.)

With more foreign nationals in the U.S. and the trend of using foreign trusts for asset protection, more trusts may become subject to these rules. Be sure to review the status of any offshore trusts you may have with an attorney who knows these rules.

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Sole proprietor of a hotel can't deduct or exclude lodging expenses.

A sole proprietor of a hotel who lived on the premises with his wife deducted his meal and lodging expenses on his individual income tax returns as a business expense. The IRS issued Field Service Advice 200031003, affirming that the exclusion under IRC Section 119 does not apply to a sole proprietor because a sole proprietor is not an employee. (If the business was structured as a C corporation, the taxpayer could be an employee and qualify for the exclusion.)

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Research Credit allowed for building software "suite."

Tax and Accounting Software Corporation (TAASC) developed and marketed computer software programs. One program they developed was a software suite that combined a variety of accounting functions and features into one program. The suite enabled professionals to avoid having to use a number of programs to accomplish the same tasks, and was the first of its kind when it was introduced in 1995. TAASC also developed a number of other software applications to help accountants increase their efficiency and effectiveness.

A U.S. District Court in Oklahoma ruled that IRS regulations that state that software development using existing technologies does not qualify for the credit are invalid and allowed the research credit for TAASC.

(Tax and Accounting Software Corporation, et al v. United States (DC OK 7/31/00))

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IRS issues new meal and lodging per-diems.

The per-diem rates for meals and lodging for federal employees in travel status will change effective October 1, 2000. Business may use these rates with reduced substantiation requirements. The IRS will allow taxpayers to either adopt the new rates or to continue to use the old rates for the balance of 2000. For details, see your tax advisor. (Notice 2000-48, 2000-37 IRB)

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Unrecovered basis deduction allowed for private annuity despite related party rules.

Usually losses are not deductible for transactions between certain related parties, such as family members. (IRC Section 267.) Some taxpayers use private annuities for estate planning purposes, to "freeze" the value of their estates, transfer assets to intended beneficiaries, while retaining cash flow for their living expenses. The tax basis of the sold property is applied as an offset against the annuity proceeds received to determine the amount taxable each year. Effective for transactions entered into after July 1, 1986, if the annuitant dies before having fully recovered his or her basis, the unrecovered amount is allowed as a deduction on the decedent's final income tax return. (IRC Section 72(b)(3)(A).)

The IRS Appeals Office had proposed to disallow the deduction for a related party sale. The IRS National Office ruled the deduction is allowed, despite the related party rules. (Field Service Advice 1998-462.)

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Unvested options excluded from parachute payments.

The IRS recently ruled that stock options that aren't vested at the time of a change in control are not considered to be stock owned by an employee for the purpose of identifying disqualifying individuals under the golden parachute rules. (PLR 200036024.)

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All of gay partner's property is subject to estate tax.

A surviving gay partner claimed that one-half of the decedent's partner's assets should be excluded from the decedent's taxable estate because there was a "resultant trust." The Seventh Circuit affirmed the Tax Court's decision that there was insufficient evidence to prove that a resultant trust existed. Therefore, all of the deceased partner's property was subject to estate tax.

This case highlights the importance of having a good estate plan, including getting the most advantageous title for property jointly owned by unmarried persons.

(Scott v. Commissioner, No 99-3216 (7th Circuit, 9/8/00.)

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Visit our new articles!

• "How to Argue And Win Every Time" book review
• "Some Thoughts About Cash Management" Business Improvement article

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IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this communication was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.