Nearly all the 1.3 million taxpayers with an adjusted gross income (AGI) of $200,000 or more (1% of all taxpayers) paid  some income tax in 1995.

According to the proposed regulations, the IRS will survey taxpayers and use questionnaires to determine customer satisfaction with its operating units. Taxpayers will be asked whether or not they received courteous, timely and professional treatment from IRS personnel. The collected confidential information will be one element used to evaluate individual IRS employees and the service's operating units.

Employee satisfaction will also play a part in performance measurement. Service employees will be surveyed to rate their operating units. The information will then be used to assess not only employee satisfaction but also the quality of supervision in each unit and the adequacy of training and support services.

Business results measures will be determined by using both quality and quantity measures. A team of IRS employees will gather information for the quality measures. For instance, when evaluating the performance of exam or collections units, this team will determine whether taxpayers were treated properly and in a timely manner, if tax laws were correctly applied and if agents accurately answered taxpayer questions. The information will be quantified to rate employees' performance.

Quantitative measures will consist of weighing "outcome-neutral" production data, such as the number of cases closed, work items completed and hours expended on a case. In short, the information derived from such data will not be based on the actual tax enforcement results in any case.

INDIVIDUAL

Defining the Temporary Workplace

For most taxpayers getting to and from work—no matter how arduous, frustrating or costly their daily commute—is a nondeductible personal expense.

Taxpayers whose residences are their principal places of business, however, may deduct daily transportation expenses between a home office and other temporary or regular work locations related to their trade or business. A home office qualifies as a principal place of business even if it is used only for administrative or managerial activities.

In the past, the IRS defined a "temporary" location as any location at which the taxpayer performed services on an irregular or short-term (days or weeks) basis.

In Walker v. Commissioner (101 TC 537, 1993), the Tax Court held a lumberjack could deduct daily transportation expenses even though his only regular place of work was his home and the home did not qualify as his principal place of business.

Taxpayers following Walker could thus deduct the costs of commuting to temporary work sites even if they didn't have a home office.

In revenue ruling 99-7 (1999-5 IRB), however, the IRS has redefined the meaning of "temporary employment" illustrated in Walker.

According to the new ruling, employment is temporary only if

• It is realistically expected to last (and does, in fact, last) for one year or less.
• It is initially expected to last for one year or less, but at some later date it becomes apparent the work will exceed one year (the work is temporary only until the date of the changed expectation).

If employment at a certain location is realistically expected to last for more than one year and is completed in less than a year, the employment is not considered temporary under the new ruling.

The following is an example of how the new definition might be applied. A foreman is asked to oversee a new production process at another plant for a temporary period. She normally commutes to work by bus, but the new plant is 40 miles away. She drives to and from the distant site for nearly four months until the project is completed.

Prior to the issuance of revenue ruling 99-7, this probably would not have been considered a qualified trip. Under this ruling, however, it qualifies as a deductible transportation expense.

What would happen if the foreman's work at the temporary site had lasted 13 months?

According to the new regulation, the foreman would not be able to deduct her travel expenses after she realized her assignment would last more than one year. Her expenses would not be deductible from the fifth month or the tenth month, or whenever she knew her work would exceed the year. Her expenses prior to the change in her expectation would remain deductible.

Observation. Taxpayers who work out of their homes, but whose homes, like Walker's, do not qualify as principal places of business, may not be able to deduct transportation expenses under revenue ruling 99-7. In order for a home office to qualify, the taxpayer must conduct substantial administrative or management activities at the location.

Consequently, CPAs should advise their clients to perform administrative tasks in their home offices or to open another regular place of business (shop) outside of their homes. Doing so will enable these taxpayers to deduct the expenses of commuting to work locations.

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

Spinoff to Permit Employee Stock Purchases

If a key employee threatens to leave and start a competing company, one way to deal with the situation is to allow him or her to purchase an ownership interest in the existing business. However, if the business is large or has multiple divisions or locations, selling the employee an ownership interest sufficient to prevent defection may not be practical. It may be possible, though, in some cases, to spin off part of the business tax-free and sell some of the distributed stock to the employee.

Clark Pulliam owns a corporation that runs several funeral homes. When the manager of one quit because he wanted to open a competing funeral home, Pulliam tried to head off the competition by having his corporation establish a new subsidiary to own the funeral home the employee had previously managed. The corporation distributed the stock to Pulliam in a transaction he reported as a nontaxable spinoff. Pulliam sold 49% of the distributed stock to his former employee, who had agreed to return and manage the funeral home. The IRS argued that the transaction in which the stock was distributed to Pulliam was a taxable dividend distribution. He disagreed, and appealed.

Result. For the taxpayer. To qualify as a tax-free spinoff, a transaction must satisfy four basic requirements:

1. Only stock or securities of the controlled corporation can be distributed.

2. All the stock of the controlled corporation (or an amount constituting control) must be distributed.

3. The distribution must not be a device for distributing earnings.

4. The business must meet the active business requirement.

The regulations also require the transaction to have a corporate business purpose. The IRS argued that Pulliam failed both the business purpose and device tests. The regulations further say there must be a corporate purpose for both a business separation and a stock distribution. Pulliam argued the need to rehire the employee and prevent competition justified the business separation. He believed that, under state law, funeral homes must be owned by licensed funeral directors and that, therefore, the controlled corporation stock had to be distributed to him rather than be owned by the original corporation. The Tax Court agreed there was a corporate business purpose for both the division and the distribution—in part because it found reasonable Pulliam's belief that individuals must own funeral home stock.

Under the regulations, the sale of distributed stock is evidence of a device to distribute earnings; a prearranged sale is strong evidence of a device. This evidence can be overcome, however, by—among other things—the significance of the transaction's business purpose. The Tax Court concluded that the business purpose of the transaction Pulliam undertook was sufficient to overcome the presumption of a device to distribute earnings.

The IRS recently published a notice of nonacquiescence to the Tax Court decision, saying it intends to object to all tax-free spinoffs in which the stock is sold shortly after distribution. Although, under current law, the distributing corporation must recognize gain if the recipient shareholders dispose of control of the distributed (controlled) corporation, the IRS has not changed its interpretation of the device test. A sale of distributed stock is a device. In the future, taxpayers attempting to duplicate Pulliam's success may be forced to prove in court that a spinoff is tax-free.

• Clark D. Pulliam v. Commissioner, TC Memo 1997-274.

Prepared by Edward J. Schnee, CPA, PhD, Joe Lane Professor of Accounting and director, MTA program, Culverhouse School of Accountancy, University of Alabama, Tuscaloosa. n