Revenue ruling 81-282 states that, if a taxpayer contributes voting stock to a qualified charitable recipient but retains the right to vote, IRC section 170 (f)(3), which disallows charitable deductions for partial interests in property, will deny a charitable contribution deduction if that right is a substantial interest.

Recently, letter ruling 200108001 outlined when a donation of nonvoting stock qualifies as a charitable contribution. In the ruling, the taxpayer owned stock in a closely held corporation for over a year. Eight years ago, to make the sale of the company easier to negotiate, the taxpayer and other corporate shareholders entered into a voting agreement that required all of them to transfer their voting rights to an unrelated third party. The taxpayer asked the IRS if a donation of the stock subject to the voting agreement was deductible under IRC section 170.

The IRS said the voting rights were a substantial right and ruled that, even though the taxpayer was contributing only a partial interest to the charity, a deduction equal to the full fair market value of the shares (less the value of the rights) would be allowed because the voting rights had been transferred years earlier for a legitimate business purpose and the taxpayer had no tax-avoidance motive in creating the partial interest.

Working in Florida, Living in New Jersey

A taxpayer, who owned a principal residence in New Jersey, in 1982 began spending the winter months with his son in Florida. In 1988 the taxpayer purchased two apartment buildings and two cottages in Florida; one apartment became a home for his son and the other properties were rentals. The son managed the rental properties. During the winter months, the father stayed in the son’s apartment.

In 1992 the taxpayer registered to vote in Florida and got a job that required a Florida commercial driver’s license and a Florida-registered truck. He earned enough money during the winter to stop working in New Jersey, and he did not file a New Jersey tax return. He even listed the Florida residence as his home address on his federal income tax return.

However, from 1992 to 1996, he continued to reside in New Jersey during the spring, summer and part of the fall. He kept all his possessions at the New Jersey residence except for some clothing and a car that remained in Florida.

In 1996 he sold the New Jersey home and moved all his belongings to the Florida apartment. The son moved out, and the taxpayer began to oversee the rental properties.

On his 1996 federal income tax return, the taxpayer excluded the gain from the sale of the residence under IRC section 121. The IRS denied the exclusion stating that, at the time of the sale, the house was no longer the taxpayer’s principal residence.

The Tax Court held that because the taxpayer had never abandoned, rented or held out the New Jersey home to be rented and had consistently owned and used the residence until he sold it, the gain on the sale could be excluded (Taylor v. Commissioner, TC Summary Opinion 2000-17).

No Ownership Means No Capital Gains Tax

While still married, a woman purchased a home and recorded title in her name only. However, the mortgage was recorded in both her name and her husband’s. Years later when they divorced, the decree stated that the residence “shall remain in the names of both the wife and the husband and that each shall be entitled to one-half of the net proceeds from any future sale. The decree did not require the wife to transfer title in the residence to the husband. In the interim, the wife was granted exclusive possession of the house, and the husband was required to pay the mortgage, taxes and insurance.

After the home was sold, the IRS argued that the language in the divorce decree coupled with the fact that the husband received one-half the sales proceeds meant that the husband owned the residence and was liable for the capital gains tax on one-half of the gain.

The Tax Court stressed that there is a difference between marital property (property either or both spouses acquired and owned during the marriage) and ownership in such property. According to the court, the right to receive proceeds from the sale of property is not an ownership interest in such property.

The court held that since the wife was not forced to transfer title to the husband, he was not an owner of the home and therefore, not liable for the capital gains tax on its sale (Robert W. Suhr v. Commissioner, TC Memo 2001-28).

Protecting Confidentiality in Domestic Abuse Cases

If a taxpayer files for innocent spouse relief, the law requires the IRS to inform the taxpayer’s spouse (or former spouse) of the request. However, this requirement poses a problem for victims of domestic violence, who may want to apply for relief but also keep their whereabouts a secret to avoid retaliation by an abusive spouse.

In Informational Release 2001-23, the IRS told such taxpayers to write “Potential domestic abuse case” at the top of Form 8857, Request for Innocent Spouse Relief, and explain their concerns in an attached statement. All these cases will be handled at one IRS location so spouses cannot guess the whereabouts of domestic abuse victims through a postmark or local IRS office address.

According to the IRS, agents assigned to these cases will receive special training on how to protect the confidentiality of sensitive information that could endanger victims’ safety.

The IRS stresses that, in deciding a case, it will not give special consideration to the “potential domestic abuse case” designation but will weigh it as a factor for innocent spouse relief. Ultimately, it is still the taxpayer’s responsibility to explain why he or she qualifies for the relief.

Special Features Deductible in Year Home Completed

A taxpayer built a home to accommodate his wife’s medical needs on her doctor’s recommendation. He contracted with an architect in 1992, construction began in 1993 and the house was completed in 1995. The contract called for periodic payments throughout the construction period. The home, which was designed of steel and concrete, had special ventilation and filtering systems; the construction costs for these features exceeded the fair market value of the house by $646,000.

When the house was completed, the taxpayer deducted the $646,000 as a medical expense and claimed a refund of $262,000 on his 1995 return. The IRS only allowed a refund of $20,800 based on the medical expenses that were actually paid in 1995. It stated that the medical expenses should have been deducted in earlier years when paid. However, the 712% AGI limit would have drastically reduced the deduction in those years.

The taxpayer argued that the 712% limit should be applied only once and only in the year the house was completed. The taxpayer’s wife received no medical benefit until the house was habitable, and the amount of the deduction (the excess of the actual construction cost over the fair market value) couldn’t be determined until it was finished.

The court sided with the taxpayer and held that the deduction should be taken in the year the house became habitable (Laurence S. Zipkin v. United States, no 99-762; DC MN 10-18-00; 86 AFTR2d 2000-5571).

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