Recent IRS Developments — October 2008

The Housing and Economic Recovery Act of 2008 includes a new credit of $7,500 for first-time homebuyers. The credit is refundable, and applies to home purchases made after April 8, 2008 and before July 1, 2009. It operates as a 15-year interest free loan, with one-fifteenth of the credit being reported as additional tax each year beginning in 2010. IR-2008-106.

The credit applies only to a principal residence — not to a vacation homes or rental property — located in the U.S. Taxpayers who have not owned a home during the three-year period preceding their purchase qualify as first-time homebuyers. The credit is phased out for joint filers whose AGI is between $150,000 and $170,000, and for others whose AGI is between $75,000 and $95,000. The credit is claimed on new Form 5405.

¶ Final Regs under IRC §408A provide guidance concerning the tax consequences of converting a non-Roth IRA annuity to a Roth IRA. The effective date of the final regulations is July 29, 2008. T.D. 9418.

¶ Proposed Regs were issued providing guidance on the manner in which an S corporation reduces its tax attributes under IRC §108(b) for taxable years in which the S corporation has discharge of indebtedness income that is excluded from gross income under IRC §108(a). Reg-102822-08.

¶ Rev. Proc. 2008-36, modifying and superseding Rev. Proc. 2002-9, provides guidance concerning automatic consent procedures by which taxpayers may obtain the Commissioner’s consent to make changes in accounting.

¶ Rev. Proc. 2008-54 provides guidance under §§ 102 and 103 of the Economic Stimulus Act of 2008 concerning IRC §179 deductions. The Stimulus Act provides a 50 percent additional first year depreciation deduction for certain new property acquired and placed in service during 2008.

¶ PLR 200805012 stated that transferable development rights (TDRs) granted by a city were “like kind” to improved or unimproved land. In reaching this conclusion, the IRS relied on an analysis of state law. Previous rulings had held that air rights were also of like kind to real property.

¶ A recent IRS study shows large gaps between reported and true income among several groups. The study concludes that (i) while 99 percent of wages reported on income tax returns match verification reports provided by employers, only about half of Schedule C profits are reported; (ii) only 88 percent of capital gains are reported (only the amount realized is reported; investors are trusted to maintain accurate basis records); and (iii) while taxpayers reporting “negative” income garner little audit attention, some such taxpayers — among them full time real estate professionals — report negative income annually. The Joint Committee on Taxation in a 2007 report concluded that most under reporting of capital gains was made by taxpayers claiming to be in the 15 percent bracket but who should be in a higher bracket. [IRS National Research Compliance Study, 2008]

¶ Proctor & Gamble has commenced a refund suit seeking to recover $435 million in paid taxes. P&G claims the IRS improperly limited deductions for technologies donated to universities, medical centers and research foundations. In one example, P&G donated technology for anti-periodontal disease rinse to Columbia University which it valued at $19.5 million. The lawsuit alleges that the IRS allowed a deduction of only $4.9 million. (SD Ohio; 9/10/08).

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