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NewsNotes Lesli S. Laffie, J.D., LL.M.
Alternate Valuation Date * Sole Shareholder's Legal Expenses * Food and Beverage Deduction * Gift Tax Return Disclosure * Internet Shopping and Taxation (Chart)
Alternate Valuation Date The Tax Court has held that an executor's election to use the Sec. 2032(a) alternate valuation date must occur within one year of the due date (including extensions) of the Federal estate tax return. In Est. of Edward H. Eddy, 115 TC No. 10, the court made clear that an election to use the alternate valuation date, on an estate tax return filed more than 18 months after the filing deadline, was invalid. Thus, the estate was forced to use date-of-death (DOD) valuation. The decedent died in April 1993; the executor hired a major securities firm to value the estate's 237,352 shares of Browning-Ferris Industries, Inc. The estate tax return was due in January 1994, but the executor obtained an extension to file until July 13, 1994, and submitted $2 million with the extension application. The return was filed in January 1996; the executor used alternate valuation. The IRS determined that the estate had to use DOD value; the Tax Court agreed. According to the court, use of Sec. 2032(a) is permitted only if the estate tax return is filed no later than one year (including extensions) after the due date. Because (in this case) the return was filed more than 18 months after the extended due date, alternate valuation was not available; the estate had to use DOD valuation.
Sole Shareholder's Legal Expenses The Tax Court, in Lenward C. Hood, 115 TC No. 14, held that a corporation's payment of its sole shareholder's criminal legal expenses was a nondeductible constructive dividend to the shareholder. The taxpayer (formerly a sole proprietor) incorporated a food, paper and plastic goods business in 1988; he was the sole shareholder and integral to the business's success. There was no written agreement between the taxpayer and the corporation as to the latter's assumption of assets and liabilities stemming from the pre-existing sole proprietorship. In 1990, the taxpayer was indicted for tax evasion, as he had failed to file sole proprietorship returns for 1983 and 1984. He was eventually acquitted; the corporation paid his $103,188 in legal fees and deducted the cost on its 1991 return. The IRS later determined that the corporation was not entitled to deduct the legal fees; further, the taxpayer received a constructive dividend of $86,279 on the corporation's payment of such fees. The Tax Court first noted that, on virtually the same facts, it held in Jack's Maintenance Contractors, Inc., TC Memo 1981-349, rev'd, 703 F2d 154 (5th Cir. 1983), that such fees were deductible. However, the Fifth Circuit later reversed, holding that the payment of the legal fees constituted a nondeductible constructive dividend. The Fifth Circuit reasoned that the payment primarily benefited the shareholder, not the corporation, even though the shareholder was indispensable to the business's success. The Hood court noted that a constructive dividend arises when "a corporation confers an economic benefit on a shareholder without the expectation of repayment...even though neither the corporation or the shareholder intended a dividend." It concluded that, because the (1) taxpayer was not experiencing financial difficulties or otherwise unable to pay his legal fees and (2) the corporation could not show that, had it failed to pay the fees, the taxpayer would have been incarcerated, there was no direct and proximate link between the payment of the legal fees and the benefit to the corporation. Thus, the corporation's legal fee payment was a nondeductible constructive dividend.
Food and Beverage Deduction In IRS Letter Ruling (TAM) 200030001, a brokerage firm provided meals, snacks and cocktails to its independent contractor representatives at its national and regional sales and education conferences and "top producers" conference. The IRS held that the firm's deduction of such expenses was subject to 50% disallowance under Sec. 274(n)(1). According to the ruling, the taxpayer knew the identity of each representative attending the conferences and the aggregate cost of food and beverages provided at each (which ranged from $109–$709 per representative, depending on the conference attended). These values were not included as taxable compensation in the representatives' Forms 1099. The taxpayer deducted these values in full on its return. The IRS noted that the general rule under Sec. 274(n)(1) and (2) is to limit food and beverage deductions by 50%, unless the expense is described in Sec. 274(e)(2), (3), (4), (7), (8) or (9), or is a Sec. 132 de minimis fringe benefit. According to the Service, the taxpayer's expense did not qualify for an exception, as follows:
Further, according to the IRS, at a minimum value of $109 per person, the food and beverages were not a de minimis fringe benefit. The Service concluded that, because the taxpayer's expenses were not exempt under Sec. 274(n)(2), the 50% disallowance rule applied.
Rev. Proc. 2000-34 provides guidance on disclosing a gift if adequate information was not initially submitted with a gift tax return filed in the year the gift was made. To commence the running of the three-year statute of limitations for such gifts, the donor must file an amended gift tax return for the calendar year of the gift. The amended return must identify the transfer and provide the information required by Regs. Sec. 301.6501(c)-1(f) that was not previously submitted. The amended return must be filed with the service center of the originally filed return.
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