Effective Oct. 2, Revenue Procedure 2000-38 provides guidance on three accounting methods that mutual fund distributors may use to account for commissions paid on the sales of mutual fund B shares.
Under all three methods, the distributor capitalizes the commissions paid.
Under the distribution-fee-period method, the distributor amortizes the commissions ratably during the period in which it receives fees from the fund under Securities and Exchange Commission Rule 12b-1.
The other two methods are the five-year method and the useful-life method. The amortization periods for these methods are five years and the estimated useful life of the commissions, respectively.
Distributors must obtain the consent of the Internal Revenue Service if they wish to change to one of these accounting methods. Details on obtaining the necessary consent are included in the revenue procedure, which may be found on the IRS website at www.irs.gov.
According to Larry Langdon, who heads the IRS division for large and midsize businesses, this procedure illustrates the priority his office places on the quick resolution of issues affecting taxpayers.
An initiative under consideration "would develop a process where we can resolve long-standing issues for a large number of taxpayers, establish consistent positions that eliminate uncertainty of tax treatment, and reduce costs and burden for both taxpayers and the IRS," Mr. Langdon says.
IRS changes tune
on abducted kids
* Executing an about-face, no doubt with an eye toward Capitol Hill, the IRS has backed off of its controversial position in the matter of exemption for a child kidnapped by a person not related to the child.
The IRS now says that parents of abducted children can continue to claim dependency exemptions.
In an earlier ruling, the IRS had held that the parents of such children may take a dependency exemption for a child in the year of the kidnapping, but they may not meet the support test for the years after the kidnapping even though they continue to maintain a room and incur expenses to search for the child.
Meanwhile, the House of Representatives voted 419-0 for a measure that would allow parents to take deductions until the missing child's 18th birthday. A similar bill is pending in the Senate.
It takes two parties to make settlement
* The U.S. Tax Court recently rejected a couple's argument that a one-time tax payment had amounted to a binding settlement of all their tax debts. The Tax Court ruled that the government had correctly disallowed their claimed loss deductions resulting from their investments in two tax shelters.
Thomas and Ann Fisher invested in White Rim Oil and Gas Associates and Syn-Fuel, two tax-shelter limited partnerships, in the late 1980s.
They claimed loss deductions on their income tax returns for the years 1980-85, which the government disallowed.
The government, however, announced at a court hearing that it was accepting settlement offers from White Rim and Syn-Fuel investors that granted them an ordinary loss deduction for the amount of cash invested in the partnerships. The government's offer expired with no response from the Fishers.
On Dec. 28, 1988, the Fishers sent the government 10 checks total ing $130,836, indicating on each that it should be applied to taxes or to interest owed for each year.
No mention of a settlement was made, nor did the checks show whether the payments were being made for tax liabilities relating to White Rim or Syn-Fuel, or both.
Between 1989 and 1997, the Fishers and their lawyer discussed with the government the couple's tax liabilities, which they had partially satisfied with the December 1988 checks.
The Fishers also filed refund claims in 1990 and 1994 for taxes paid for the years 1981-85, including the $130,836 they paid in 1988.
In 1995, 1997 and 1999, the Fishers and the government settled the income tax deficiency from the 1982 tax year and issues relating to the Fishers' White Rim investment for 1980 and 1981.
U.S. Tax Court Judge Stephen J. Swift found that, except for the agreements documented in 1995, 1997 and 1999, no settlements were made regarding the Fishers' tax liabilities from 1980-85.
The court rejected their contention that the $130,836 they paid in 1988 should be treated as a binding settlement of their 1980-1985 tax liabilities.
Mr. Swift wrote that a binding settlement agreement of a federal tax dispute requires that the parties comply with contract principles such as offer and acceptance, and that a mutual agreement exists.
The Fishers never accepted the terms of any pending settlement from the government and, in fact, sought refunds of the $130,836 they paid.
The court also pointed out that the refund claims, filed in 1990 and 1994, disproved the Fishers' argument that they had settled with the government in 1988.
Furthermore, the amount of the Fishers' 1988 payments did not match the government's settlement offers.
The court concluded that the Fishers could not claim loss deductions from their investments on their 1980-85 tax returns because they did not have a binding agreement with the government.
Cite: Thomas J. Fisher, et ux., et al. v. Commissioner T.C. Memo 2000-284
A Lloyd's member loses on deduction
* The U.S. Tax Court has held that the gain from the sale of stock that secured a letter of credit by a member of Lloyd's of London is portfolio income under our tax rules. As portfolio income, of course, it cannot be offset by the member's passive losses.
Howard More was a member of a syndicate for Lloyd's from 1970 to 1992. To reduce risk, a member often participates in a number of syndicates and chooses which to participate in each year.
Members make a profit when claims are less than premiums plus investment income, but are required to cover percentages of the losses as well.
Mr. More pledged his stock portfolio in 1988 to secure a letter of credit to become a member. During 1992 and 1993, he underwrote $726,000 of Lloyd's premiums secured by a letter of credit for $218,000. During those years, several of Mr. More's syndicates incurred losses, and his pledged stock was sold, realizing substantial gains.
Under a 1990 closing agreement between the underwriters, Lloyd's and the IRS, all U.S. members are required to report all underwriting profits and losses and all investment income from Lloyd's activities as income or loss from a passive activity.
The agreement did not address the tax treatment of gains or losses realized on the disposition of assets held as security.
Mr. More reported the gain on the sale of the pledged stock as passive income and offset the gain by the passive losses from his underwriting activities.
The IRS argued that certain income is not treated as income from a passive activity. That includes any gross income from interest, dividends, annuities or royalties not derived in the ordinary course of a trade or business.
And it includes any gain or loss not derived in the ordinary course of a trade or business that is attributable to the disposition of property producing income of the type described or property held for investment (the portfolio-income exception).
Agreeing with the IRS, Tax Court Judge Juan F. Vasquez ruled that Mr. More's gain was attributable to the disposition of dividend-producing property, which was not derived in the ordinary course of business. Therefore, it is portfolio income that may not be offset with passive losses.
The IRS contended, and the court agreed, that Mr. More's gain was not derived in the ordinary course of a trade or business.
He did not show that the acquisition of any of the pledged stock was an ordinary and necessary part of his underwriting activities.
Cite: Howard V. More v. Commissioner, 115 T.C. No. 9
