Scope of innocent spouse rules narrowed by recent developments

Article Abstract:

Spouses filing joint returns are jointly and severally liable for tax due, but if conditions are met, the innocent spouse rules provide an exception which allows the taxpayer to avoid the tax, interest, and penalties arising when a spouse makes unjustified deductions or omits income. For a spouse to qualify for relief, four requirements must be met: the filing of a joint return, substantial understatement of tax caused by the grossly erroneous items of one spouse, establishment by the innocent spouse of lack of knowledge and need of knowledge of the substantial understatement, and the inequity of holding a spouse liable for the substantial understatement under the circumstances. A recent Tax Court decision has restricted the availability of relief under the innocent spouse doctrine by positing an innovative interpretation of the grossly erroneous standard. The case is not consistent with precedent, however, and may be overturned on appeal.

Revenue

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Tax-exempt partners can avoid UBIT under new rules

Article Abstract:

Partnerships can avoid the unrelated business income tax (UBIT) for income derived from real property financed through debt under an exemption promulgated by the IRS in Notice 90-41, IRB 1990-26, 7. To qualify for the exemption, at least one partner has to be a qualified tax-exempt entity. The new provisions were issued for the purpose of preventing partnerships from allocating income to tax-exempt partners while allocating losses to partners that are taxed. Under the Section 514(c)(9)(E)(i)(I) fractions rule, items cannot be allocated that result in a partner having a greater share in the partnership income than the share in the overall loss. However, a partnership can provide preferred returns for guaranteed payments within reason.

Analysis, Tax exemption, Tax exemptions, United States. Internal Revenue Service, Real estate limited partnerships

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TC broadens availability of special-use valuation

Article Abstract:

Two cases involving the transfer of farm properties to heirs upon the death of the property owner, Davis Estate (86 TC No. 67) and Clinard Estate (86 TC No. 68), are discussed with regard to their special-use valuations. In both cases, the Tax Court overruled lower courts' decisions and allowed the estates to value property using special-use provisions. The rules and regulations of Internal Revenue Code Section 2032A, which provides for special-use valuations, are briefly discussed.

United States, Transfer taxes, Valuation, Assets (Accounting)

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