Recent Developments in Federal Income Taxation: the Year 2011
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University of Florida Levin College of Law UF Law Scholarship Repository UF Law Faculty Publications Faculty Scholarship 2012 Recent Developments in Federal Income Taxation: The Year 2011 Martin J. McMahon Jr. University of Florida Levin College of Law, [email protected] Ira B. Shepard Daniel L. Simmons Follow this and additional works at: https://scholarship.law.ufl.edu/facultypub Part of the Taxation-Federal Commons, and the Tax Law Commons Recommended Citation Martin J. McMahon Jr., Ira B. Shepard, & Daniel L. Simmons, Recent Developments in Federal Income Taxation: The Year 2011, 12 Fla. Tax Rev. 235 (2012), available at http://scholarship.law.ufl.edu/ facultypub/552 This Article is brought to you for free and open access by the Faculty Scholarship at UF Law Scholarship Repository. It has been accepted for inclusion in UF Law Faculty Publications by an authorized administrator of UF Law Scholarship Repository. For more information, please contact [email protected]. FLORIDA TAX REVIEW Volume 12 2012 Number 5 RECENT DEVELOPMENTS IN FEDERAL INCOME TAXATION: THE YEAR 2011 * Martini McMahon, Jr. Ira B. Shepard*, DanielL. Simmons This recent developments outline discusses, and provides context to understandthe significance of the most importantjudicial decisions and administrative rulings and regulations promulgated by the Internal Revenue Service and Treasury Department during the most recent twelve months - and sometimes a little farther back in time if we find the item particularly humorous or outrageous. Most Treasury Regulations, however, are so complex that they cannot be discussed in detail and, anyway, only a devout masochist would read them all the way through; just the basic topic andfundamental principles are highlighted - unless one of us decides to go nuts and spend several pages writing one up. This is the reason that the outline is getting to be as long as it is. Amendments to the Internal Revenue Code generally are not discussed except to the extent that (1) they are of major significance, (2) they have led to administrative rulings and regulations, (3) they have affected previously issued rulings and regulations otherwise covered by the outline, or (4) they provide Dan and Marty the opportunity to mock our elected representatives; again, sometimes at least one of us goes nuts and writes up the most trivial of legislative changes. The outline focuses primarily on topics of broad general interest (to the three of us, at least) - income tax accounting rules, determination of gross income, allowable deductions, treatment of capital gains and losses, corporate and partnership taxation, exempt organizations, and procedure and penalties. It deals summarily with qualified pension and profit sharing plans, and generally does not deal with international taxation or specialized industries, such as banking, insurance, andfinancial services. Please read this outline at your own risk; we take no responsibilityfor any misinformation in it, whether occasioned by our advancing ages or our increasing indiference as to whether we get any particular item right. Any mistakes in this outline are Marty's responsibility; any political bias or offensive language is Ira's; and any useful information is Dan's. Stephen C. O'Connell Professor of Law, University of Florida Fredric G. Levin College of Law. Professor Emeritus, University of Houston Law Center. Professor of Law Emeritus, University of California Davis School of Law. 235 236 Florida Tax Review [Vol. 12:5 I. ACCOUNTING.........................................237 A. Accounting Methods..............................237 B. Inventories...................... ............... 240 C. Installment Method................ .............. 240 D. Year ofInclusion or Deduction.......................240 II. BUSINESS INCOME AND DEDUCTIONS ..................... 243 B. Deductible Expenses versus Capitalization .............. 249 C. Reasonable Compensation..........................260 D. Miscellaneous Deductions..........................261 E. Depreciation& Amortization........................272 F. Credits........................................279 G. NaturalResources Deductions & Credits ................ 281 H. Loss Transactions,Bad Debts, and NOLs. ............... 281 I. At-Risk and Passive Activity Losses.. .................. 285 III. INVESTMENT GAIN AND INCOME ........................ 292 A. Gains and Losses.................................292 B. Interest, Dividends, and Other CurrentIncome.. ..... 305 C. Profit-Seeking IndividualDeductions .................. 306 D. Section 121...................... ............... 307 E. Section 1031.................... ................ 307 F. Section 1033..................... ............... 307 G. Section 1035.................... ................ 307 H. Miscellaneous....................................308 IV. COMPENSATION ISSUES................ ............... 308 A. FringeBenefits..................................308 B. Qualified Deferred Compensation Plans...........308 C. NonqualifiedDeferred Compensation, Section 83, and Stock Options...................... ................. 309 D. IndividualRetirement Accounts......................310 V. PERSONAL INCOME AND DEDUCTIONS .................... 310 A. Rates.........................................310 B. MiscellaneousIncome .................................... 310 C. Hobby Losses and § 280A Home Office and Vacation Homes .. 313 D. Deductions and CreditsforPersonal Expenses ............. 314 E. Divorce Tax Issues .......................... ..... 316 F Education. ...................................... 317 G. Alternative Minimum Tax ........................... 317 VI. CORPORATIONS ...................................... 317 A. Entity and Formation ........................ ..... 317 B. Distributionsand Redemptions .............. ......... 318 C. Liquidations ........................................... 318 D. S Corporations. .................................. 318 E. Mergers, Acquisitions and Reorganizations...................320 F. CorporateDivisions .............................. 330 2012] Recent Developments in FederalIncome Taxation 237 G. Affiliated Corporationsand ConsolidatedReturns .... ..... 331 H. Miscellaneous CorporateIssues ................. ..... 332 VII. PARTNERSHIPS ..................................... ...... 332 A. Formationand Taxable Years..........................332 B. Allocations ofDistributive Share, PartnershipDebt, and Outside Basis .......................................... 341 C. Distributionsand TransactionsBetween the Partnershipand Partners ........................................ 349 D. Sales ofPartnershipInterests, Liquidationsand Mergers..........349 E. Inside Basis Adjustments.. .................... ....... 349 F. PartnershipAudit Rules ............................ 349 G. Miscellaneous...................................356 VIII. TAX SHELTERS ............................ ..... 357 A. Tax Shelter Cases andRulings .................. ..... 357 B. Identified "tax avoidance transactions ............ ..... 362 C. Disclosureand Settlement.. ................... 372 D. Tax Shelter Penalties, etc......................372 IX. EXEMPT ORGANIZATIONS AND CHARITABLE GIVING...............377 A. Exempt Organizations ........................ ..... 377 B. CharitableGiving................................380 X. TAX PROCEDURE....................................387 A. Interest, Penalties and Prosecutions ................... 387 B. Discovery: Summonses and FOIA .......... ......... 399 C. Litigation Costs..................... .............. 401 D. Statutory Notice ofDeficiency. .................. ..... 401 E. Statute ofLimitations ......................... ..... 402 F. Liens and Collections .................................. 419 G. Innocent Spouse ........................... ...... 423 H. Miscellaneous. ............................ ...... 431 XI. WITHHOLDING AND EXCISE TAXES......................439 A. Employment Taxes .......................... ..... 439 B. Self-employment Taxes............................446 C. Excise Taxes ........................... .... ...... 447 XII. TAX LEGISLATION ................................. ...... 449 A. Enacted........ ....................... ....... 449 B. Pending .................................. ..... 450 I. ACCOUNTING A. Accounting Methods 1. New and improved automatic consent procedures for changes of accounting methods. Rev. Proc. 2011-14, 2011-4 I.R.B. 330 238 Florida Tax Review [Vol. 12:5 (1/11/11). This revenue procedure provides automatic consent procedures for a wide variety of accounting method changes. Rev. Proc. 97-27 clarifiedand modified; Rev. Procs. 2001-10, 2002-28, 2004-34, and 2006-56 modified; Rev. Procs. 2008-52 and 2009-39 superseded in part. a. Rev. Proc. 2011-14 has since been modified by Rev. Proc. 2011-27, 2011-18 I.R.B. 740 (4/4/11), Rev. Proc. 2011-28, 2011-18 I.R.B. 743 (4/4/11), and Rev. Proc. 2011-43, 2011-37 I.R.B. 326 (8/ 19/11). 2. Judge Haines writes a treatise on defective claims to automatic consent to change an accounting method. Capital One Financial Corp. v. Commissioner, 130 T.C. 147 (5/22/08). Following the enactment in 1997 of § 1272(a)(6)(C)(ii), which provides that credit card late-fee receipts create or increase original issue discount rather than constituting an income item when they accrued under the all events test, the taxpayer claimed to have received the IRS's consent to change its accounting method, pursuant to an automatic consent procedure, by filing Form 3115 with its 1998 tax return. However, the taxpayer did