Small Business Taxes & Management

News On The Tax Front--The latest tax news.

Jobs and Growth Tax Relief Reconciliation Act of 2003--Part II--Part 2 of a 3-part review of the new tax law.

In Brief:--Tax, business, and personal finance tips.

News On The Tax Front

Previously Reported In Daily Update

Until you pay the IRS for any outstanding taxes, interest continues to mount. That can get expensive. And you don't have much recourse against the IRS for taking it's time. There is an exception. If you can show that the delay resulted from the performance of ministerial act by the IRS, you may have a case for abatement of interest. In John M. Mekulsia (T.C. Memo. 2003-138) the Court found the delay of several years was not the result of a ministerial act. Moreover, the Court noted that part of the delay resulted from the Service's difficulty in obtaining records during the audit.

Be careful of what you sign. In In re Dorvin Eugene Sloan and Margaret Ann Sloan (2003-1 USTC 50,449; U.S. Bankruptcy Court, West. Dist. Mo.) the taxpayer objected to some $135,000 in IRS assessments relating to undeposited employment taxes. The taxpayer was a bookkeeper for his father's business and was considered a responsible person by the IRS and thus liable for the withheld taxes. The taxpayer signed a Form 2751 waiver, Agreement To Assessment and Collection of Trust Fund Recovery Penalty. The form provides that the signer consents to the assessment and collection of the total taxes undeposited. The signer also waives the privilege of filing a claim for abatement after assessment. The Court held that it was too late to object to the proof of claim because he is not a responsible party with respect to the taxes. The Court noted that other courts have held that the Form 2751 waiver is not a waiver of a right to civil action against the government, it is a waiver for the right to an administrative appeal and to file a claim for abatement after the assessment.

The IRS has long held that private letter rulings have no precedential value in that they do not represent the IRS's position as to taxpayers generally and thus are irrelevant in the context of litigation brought by other taxpayers (Code Sec. 6110(k)(3). In Florida Power & Light Company (2003-1 USTC 50,542; U.S. Court of Federal Claims) the company alleged that other utility companies, operating as competitors and in a similar situation, were the beneficiaries of private letter rulings granting them exemption from the highway use tax for certain specialized equipment. Consequently, the taxpayer argued, that under the ruling in IBM (343 F.2d 914 (Ct. Cl. 1965)) favorable private letter rulings purportedly granted to competitors must also be granted to the taxpayer. The Court did not agree. Private letter rulings represent the IRS's individual response to a particularized inquiry from a specific taxpayer and, as such, have no precedential value. The Court noted that under Treas. Reg. Sec. 601.201(l)(6) "A ruling issued to a taxpayer with respect to a particular transaction represents a holding of the Service on that transaction only." What it does mean, however, is that the taxpayer cannot claim entitlement to a particular tax treatment on the basis of a ruling issued to another taxpayer.

The IRS has released Publication 1854, How to Prepare a Collection Information Statement (Form 433-A).

In yesterday's News section we mentioned the Senate bill to make the child tax credit refundable. The House has now designed a companion bill.

The Treasury Department announced that the United States and Japan have reached an agreement in principle on the text of a new income tax treaty. The two governments now are moving forward toward signing of the proposed treaty. The proposed treaty is a complete modernization of the existing treaty. Most significantly, the proposed treaty provides for substantial reductions in the withholding taxes imposed on cross-border dividends, interest, royalties and other income, including the complete elimination of source-country withholding taxes on royalties, certain interest, and certain intercompany dividends. The new agreement also incorporates modern rules to ensure that the benefits of the treaty are enjoyed as intended by the businesses and residents of the two countries and to prevent improper exploitation of the treaty.

The noncustodial parent can only claim a child as a dependency exemption if the separation agreement or divorce decree so provides or the spouse who is entitled to the exemption agrees to release it by signing Form 8332. In Michael Kevin and Vickie P. Boltinghouse (T.C. Memo. 2003-134) the taxpayer, a noncustodial parent, provided the Court with a separation agreement, valid under state law that specified the taxpayer was entitled to the exemption. The Service had argued that the failure to incorporate the separation agreement into the final divorce decree meant the requirements for claiming the exemption weren't met. The Court sided with the taxpayer, allowing the exemption.

A joint venture exists when two or more associates agree to engage in an enterprise and share the profits. Each associate has the right to participate in the management of the enterprise. For tax purposes, a joint venture is treated as a partnership. In Comtek Expositions, Inc. (T.C. Memo. 2003-135) the Tax Court examined the factors that indicate the existence of a joint venture and found that the there was no joint venture between the taxpayer and a foreign individual to conduct foreign trade shows. The taxpayer had to report all of the income, but could deduct expenses it paid to the foreign individual.

You can take a deduction on an estate tax return for charitable contributions. But in Estate of Avrom A. Silver (120 T.C. No. 14) the decedent was a citizen and resident of Canada when he died. The Court held that the estate could not take a deduction for property going to Canadian charities because the bequests were paid from property outside the U.S. Instead only a proportionate part of the assets in the U.S. qualified for a deduction.

Some Congressmen complained that under the new tax law some low-income taxpayers would not benefit from the expansion of the child credit. Last week the Senate voted overwhelmingly to make the child credit refundable (Relief for Working Families Tax Act of 2003). That is, taxpayers would get the full amount of the credit, whether or not they paid any income tax for the year. (The earned income credit is a refundable credit.) The bill would also provide a standard definition of a child for tax purposes, rather than the multiple definitions that exist for different provisions of the law (dependency exemption, child credit, earned income credit, dependent care credit, and head-of-household filing status). Finally, the bill would also increase the phaseout threshold for married couples. While the House has not shared the same enthusiasm for the bill, President Bush has announced that he supports the Senate bill.

In Rev. Rul. 2003-63 (IRB 2003-25) the IRS announced that the interest rates on under- and overpayments for the third quarter of 2003 will remain unchanged. Thus, the underpayment penalty rate for individuals will be 5% (overpayments for individuals are at the same rate).

What happens if accruals under a defined benefit plan are frozen and accruals under the plan subsequently resume? Must all the years of service for the plan sponsor following the establishment of the plan be taken into account for purposes of vesting? That was one of the questions addressed in Rev. Rul. 2003-65 (IRB 2003-25). The IRS held that the freezing of accruals under a qualified retirement plan, so that a partial termination of the plan occurs, does not constitute a plan termination for purposes of determining whether service for the plan sponsor after the plan was established may be disregarded toward vesting if accruals resume under the plan. Accordingly, all years of service for the plan sponsor following the establishment of the previously frozen plan must be taken into account for purposes of vesting.

The IRS has released Publication 3958, Questions and Answers about Tax Court Proceedings for Determination of Employment Status Under I.R.C. Section 7436.

The IRS has issued proposed regulations (REG-122917-02) on incentive stock options (ISOs). When finalized, these regulations will update the existing regulations to conform to current law, and will replace regulations proposed in 1984. In addition to restating the existing rules, the new proposed regulations include updated rules addressing current issues and practices, such as ISOs issued by limited liability companies and other entities that elect corporate tax treatment. The proposed regulations will apply 180 days after publication of final regulations. Taxpayers may rely on these proposed regulations for any ISO granted after June 9, 2003.

Amounts you receive as a gift or inheritance are not taxable. But if you receive payments outside a will, the amounts might be considered compensation for services. In the case of Mary Dieter and Michael K. McNeal (2003-1 USTC 50,439; U.S. District Court, Dist. Minn.) the taxpayers had provided full-time care for an individual over a 6-year period and anticipated that they would receive the decedant's house as compensation on her death. The Court noted that a settlement agreement from a conservatorship proceeding clearly stated that the house was being transferred in consideration for release of claims by the taxpayers had against the decedant and that they were entitled to compensation for the care provided. The Court noted that the house was not conveyed as part of the will. Be sure to make your intentions clear in any will or trust agreement. The tax consequences can be substantial.

In Edward K. Metcalf (2003-1 USTC 50,444; U.S. Court of Appeals, 9th Circuit) the taxpayer argued that he had 3 years to amend his return and change the reporting of a distribution from an IRA into a rollover of that amount. The Court found he had only 60 days in which to do so.

Alimony is deductible to the payer, income to the recipient. In Frederick W. and Candace J. Tiley (T.C. Memo. 2003-132) the taxpayer Court found that the settlement agreement specifically classified the taxpayer's payments to his ex-spouse as back child support and attorney's fees that were clearly not deductible. The Court also noted that the taxpayer basically acknowledged that in the state court proceeding. The Court sided with the IRS in holding the payment to be nondeductible and also agreed with the imposition of the accuracy-related penalty.

You can deduct investment advice and similar fees on your personal tax return, but only to the extent they exceed 2% of your adjusted gross income. A similar 2% rule applies in the case of estates and trusts. In J.H. Scott, et al. (2003-1 USTC 50,248; U.S. Court of Appeals, 4th Circuit) the taxpayer relied on the exception in Sec. 67(e), which states that estates and trusts are subject to the same 2% floor except to the extent that trust-related administrative costs would not have been incurred if the property were not held in such trust or estate. If the fees qualify for the exception, they are fully deductible in calculating adjusted gross income of the trust or estate. The Court held the fees were subject to the 2% floor. (Note, there is disagreement among the circuits on this issue.)

You can't avoid a deficiency notice by simply ignoring it. In Gregory J. Raft (2003-1 USTC U.S. District Court, No. Dist. Ohio, West. Div.) the taxpayer claimed he was too ill to retrieve the notice from his post office box. The Court held that made no difference. The notice was considered delivered.

The IRS has issued guidance to make permanent two programs that allow taxpayers and the IRS to reach agreement on tax disputes more quickly. The announcement makes the Fast Track Mediation program permanent. This program gives small businesses, self-employed taxpayers and the IRS the opportunity to mediate disputes through an IRS appeals officer, who acts as a neutral party. In this program, most tax disputes are resolved within 40 days compared to several months though the regular appeal process. Since June 2002, more than 200 cases have been mediated with 100 percent resolution in more than half of those cases. The Fast Track Settlement program is now also permanent. The program enables the IRS to resolve tax disputes with large and mid-size businesses at an earlier stage often within a much shorter time than through the normal audit and appeal processes. The IRS also announced a pilot program to expedite the resolution of Tax Exempt Bond dispute. The IRS guidance on these fast track programs will be published in Internal Revenue Bulletin 2003-25.

If the IRS can show that fraud exists the statute of limitations can be extended beyond the usual 3-year period. In Kyl Christians (T.C. Memo. 2003-130) the IRS could not convince the court fraud existed. The Court found that the case reflected a general pattern of dereliction, but not one of deceit and fraud. The Court noted the taxpayer's expertise was in the operational side of his construction business and that he was young and experienced regarding administrative necessities of the business. As a result, petitioner relied exclusively on his father to look after the administrative matters, including tax reporting. The taxpayer perfunctorily signed documents, including tax returns, that his father prepared and placed before him for signature. Additionally, there has been no showing that petitioner collaborated or colluded with his father to defraud the IRS.

You may be able to deduct employee business expenses as an itemized deduction, but only if your employer has a policy of not reimbursing you for the expenditures. In Alex B. Rhodes, Jr. (T.C. Memo. 2003-133) the Court noted that where taxpayers would have been reimbursed by their employers for business expenses incurred, but where they failed to receive reimbursement because they failed to request reimbursement, the expenses will not be considered "necessary" and will not be deductible. That rule applies whether you're an employee of some large corporation or an employee and sole shareholder of your own corporation.

In IR-2003-74 the IRS made it easier for retirement plans to stay within complex rules and to reduce barriers that discourage some businesses, particularly small businesses, from adopting such employee benefits. The IRS is streamlining its system of voluntary correction programs designed to help retirement plan sponsors and administrators retain the favorable tax status of their plans, including simplifying the fee structure for voluntary submissions. The changes will make it easier for employee retirement plans to come into compliance with the law and to protect the retirement benefits of participating employees. In Revenue Procedure 2003-44, the IRS revises and simplifies the Employee Plans Compliance Resolution System (EPCRS). EPCRS permits plan sponsors to correct technical and administrative problems with their plans and thereby retain the tax-favored status of their plans. Rev. Proc 2003-44 modifies and supersedes Rev. Proc. 2002-47.

You may be able to escape the negligence penalty if you can show you relied on your accountant for advice or in the preparation of your return. But that argument only goes so far. In Manus E. Suddreth (2003-1 USTC 50,417; U.S. Court of Appeals, 4th Circuit) the taxpayer argued that his substantial reliance on his incompetent accountant showed his case was not one of false tax return filing. The Court noted that it's not uncommon for a person who intends to file a false return to rely on or even act in consort with an accountant. A taxpayer can try to transfer the blame to the preparer, which the defendant did in this case. The Court found that the taxpayer vastly under-reported his income and was aware of how much money he was diverting from the company to his personal use. The Court overturned a District Court jury finding.

Individuals can only deduct losses from passthrough entities (S corporations, partnerships, LLCs, or trusts) only if they materially participate in the activities of the entity. In The Mattie K. Carter Trust (2003-1 USTC 50,418; U.S. District Court, North. Dist. Tex.) the Court held that under Sec. 469 the trust is a taxpayer and the work performed by the trust employees and trustee in the activity (here, ranching) had to be evaluated in determining whether the trust materially participated in the activity. The Court concluded that the material participation of the trust in the ranch operations should be determined by reference to the persons who conducted the business of the ranch on the trust's behalf, not just the manager.

In Rudolph H. Beaver (T.C. Memo. 2003-129) the taxpayer had a substantial capital loss as a result of a bad investment in the stock market. He used a large portion of the loss and carried forward the remainder. In the next year officers of the brokerage firm who persuaded the taxpayer to make the investment were indicted on criminal charges. The taxpayer then claimed a theft loss equal to the entire amount of the original loss. The Court refused to decide whether or not a theft loss had occurred under state law, because, even if there was a theft loss the taxpayer could not show that he had any basis remaining in the stock. (Most had been deducted in the year the stock was sold.)

Here's another case of the IRS making a technical error in a deficiency notice. In Virgil B. Elings (2003-1 USTC 50,357; U.S. Court of Appeals, 9th Circuit) the taxpayer argued that, since the IRS failed to indicate the last day for filing a Tax Court petition (the "calculated date") invalidated the notice. The notice did carry the date of the notice and indicated the taxpayer had 90 days in which to file a petition to contest the deficiency. The Court noted the taxpayer did not the IRS's help to determine the filing date. He timely filed the petition and contest jurisdiction, based on the failure to indicate the calculated date. The Court concluded the failure to include the calculated date does not invalidate if the taxpayer suffers no prejudice as a result.

If you think records held by your accountant are protected from the IRS, think again. In Scotty's Contracting & Stone, Inc. (2003-1 USTC 50,413; U.S. Court of Appeals, 6th Circuit) the Court noted that Sec. 7602 now grants the IRS the authority to issue summonses for the purpose of investigating "any offense" relating to the tax code, we conclude that the IRS may validly issue summonses for the purpose of investigating a criminal offense, even if that is the sole purpose for the summonses. The Court also held that Sec. 7525, which creates a limited federal accountant-client privilege is narrow and does not purport to federalize any state's accountant-client privilege and that the taxpayer has not asserted that the limited federal accountant-client privilege protects the information sought by the IRS.

In American Electric Power Company, Inc., et al., (2003-1 USTC 50,416; U.S. Court of Appeals, 6th Circuit) the Court upheld a District Court finding that policy loans on life insurance policies the company purchased on the lives of its employees (COLI) were part of a sham transaction and denied the taxpayer interest deductions on the loans. The Court held the transactions lacked economic substance and were designed to gain the benefits of deductible interest on the loans.

The IRS has published (Rev. Rul. 2003-53) a list of the average annual effective interest rates on new loans under the Farm Credit Bank system to be used in computing the special use value of real property as a farm for which an election is made under Sec. 2032A. The rates in this revenue ruling may be used by estates that value farmland under Sec. 2032A as of a date in 2003.

It's tough to escape a determination notice or similar notice on a technicality. In Rockie D. Elmore (T.C. Memo. 2003-123 the taxpayer argued that the notice of determination was not valid because it was not signed by the Appeals officer. The Court noted the law does not require the notice to be signed. The IRS followed internal policy when the notice was reviewed, approved and signed by the Appeals team managers.

In Notice 1036 the IRS has published the new withholding tables and withholding allowances based on the new law. Publication 15-T is scheduled to be mailed to employers by June 18, 2003. Employers should begin using the new tables effective immediately. In addition, effective for wages paid after May 28, 2003 (or as soon as possible thereafter), the supplemental flat withholding rate has dropped to 25%. The rate is 28% for backup withholding.

In Gloria J. Spurlock (T.C. Memo. 2003-124) the taxpayer tried to exclude from evidence third-party records including W-2s filed by employers showing wages and withholdings and 1099s filed by IRA trustees showing distributions to the taxpayer. The Court found the evidence were regularly kept business records that could be used in court. The Court also rejected the taxpayer's argument that records weren't provided to her far enough in advance of them being offered into evidence. The Court also noted that the taxpayer had the burden of proving the IRS was incorrect in its determination of her income.

Jobs and Growth Tax Relief Reconciliation Act of 2003--Part II

Growth Incentives for Business

Increase and Extension of Bonus Depreciation

In early 2002 Congress passed the Job Creation and Worker Assistance Act of 2002 which introduced the 30% bonus depreciation. The new law increases the first-year bonus depreciation to 50% from 30% and extends the deadline for the provision. The 50% bonus depreciation applies to new property purchased after May 5, 2003 and before January 1, 2005.

As with the 30% bonus depreciation, the 50% depreciation only applies to new property. Thus, a new truck qualifies, but not a used one. The exact wording in the law requires that the "original use" must start with the taxpayer.

The bonus depreciation only applies to property with a recovery period of 20 years or less, qualified leasehold improvement property, and certain other property. Thus, (with the exception of qualified leasehold improvement property) it does not apply to buildings. It doesn't apply to property purchased after May 5, 2003 if there was a written binding contract for the purchase of the property in effective before May 6, 2003. Thus, even that new truck may not qualify if you had a binding contract for the purchase before the applicable date. Generally, the property must be placed in service before January 1, 2005. (Certain property qualifies for an extension to January 1, 2006.) That means, equipment ordered in late December, 2004 and not in house before January 1, 2005 won't qualify. You can take the bonus depreciation on computer software, but not on listed property (e.g., autos) where the business use is 50% or less.

Example--Madison Inc. purchases bulldozer for $100,000. Madison elects to use $10,000 of the Section 179 expense option on the equipment, reducing the adjusted basis to $90,000. Madison then applies the 50% bonus depreciation, taking $45,000 of depreciation (50% of $90,000). The remaining basis, $45,000 is written off using the regular depreciation rules.

Unless you elect out of the bonus depreciation, you must take the 50% writeoff. You can elect out of the bonus depreciation for any class of assets. For example, you can take the bonus depreciation on furniture, fixtures, etc. property (7-yr property) placed in service during the year, but elect not to do so on cars, computers, etc. (5-yr. property). The election is made on your tax return by attaching a statement. You can find a sample statement at www.smbiz.com/sbfrm011.html.

Tax Tip--Why would you want to elect out? The bonus depreciation simply accelerates the normal depreciation deduction. That's good from a cash flow standpoint. All things being equal, getting a tax deduction today is better than one tomorrow. You'll have more cash upfront. But there are other factors. Taking a big deduction doesn't make sense if you'll end up in a low bracket this year only to be in a much higher one next year because you're left with a much lower depreciation deduction. You want to try and minimize your tax rate over as many years as possible. Best advice? Work through the numbers with your accountant.

Tax Tip--Like the 30% bonus depreciation, the 50% bonus is a major benefit to taxpayers who make qualified leasehold improvements. Leasehold improvements to nonresidential property are normally be written off over 39 years. That's a long time to recover your investment. (You can, of course, write off any undepreciated amount if you dispose of or abandon the improvement.) This provision allows you to write off 50% in the first year, a big advantage. But not all leasehold improvements qualify. Some improvements are really tangible personal property. They include movable partitions, carpeting, fixtures that aren't attached, etc. They're depreciated using the rules for personal property. Qualified leasehold improvement requirements:

• Only the interior portion of a nonresidential property qualifies.
  
• Additions that enlarge the building don't qualify.
  
• Elevators, escalators, improvements to the internal structure or structural components benefiting a common area don't qualify.
  
• The improvement must be made under a lease by the lessee, lessor, or sublessee and must be placed in service more than 3 years after the date the building was first placed in service.
  
• The lease may not be between related persons (defined in Sec. 267(b), but substituting more than 50% for the phrase 80% or more).

In order for autos to benefit from the increased bonus depreciation, the bonus depreciation that can be taken in conjunction with autos is increased from $4,600 (applicable for the 30% bonus) to $7,650. Thus, if the regular first-year depreciation limit for an auto is $3,060 (the amount for 2003 hasn't been published yet), it will be increased to $10,710 (3,060 + 7,650).

The new law makes conforming amendments to property in the New York Liberty Zone (Section 1400L).

Section 179 Expense Option Benefits Expanded

Dollar limitation increased. The Section 179 expense option allows a taxpayer to expense qualifying property (generally, tangible personal property) up to a certain dollar amount. The property to be expensed must be identified on the tax return. You can pick individual items from any property class. The maximum amount that could be expensed in 2003 was scheduled to be $25,000. Under the new law, the amount will be $100,000. The $100,000 maximum applies to taxable years beginning after 2002 and before 2006. Thus, for calendar-year taxpayers, the higher limit applies to 2003, 2004, and 2005.

Increase in phaseout start. The amount that can be expensed is phased out for taxpayers who place more than a certain amount of qualifying assets in service in any taxable year. Under the old law, the phaseout began at $200,000. The new law increases the limit to $400,000. The reduction is on a dollar-for-dollar basis. Thus, taxpayers who $425,000 in qualifying assets in service during the year can only expense $75,000. The effective dates are the same as above.

Computer software. Under the old law off-the-shelf computer software did not qualify for the Section 179 expense option. Under the new law such computer software is qualifying property. The effective dates are the same as for the increased dollar limitation.

Other points. Qualifying property is tangible personal property used in the active conduct of a trade or business. Air conditioning and heating units are specifically excluded. The $100,000 and $400,000 amounts will be indexed for inflation. Under prior law, once made, you could not revoke an election to expense any property, except by permission of the IRS. That could be a major disadvantage if you decide soon after the filing the return. You would have wasted part of the maximum amount that could be expensed. Under the new law, you can revoke the election with respect to any property. However, once such revocation is made, it is irrevocable.

Tax Tip--Now that the depreciation and expensing options are more generous, should you buy equipment? The changes make equipment purchases more attractive since you can write off the assets faster, increasing your cash flow through upfront tax savings. However, while the tax benefits lower the effective cost of the asset, the effect isn't substantial and varies with the class life of the property. The longer the life of the property, the bigger the benefit. You've still got to compute a rate of return using net present value, internal rate of return, or another technique.

Section 179 vs. bonus depreciation. While both the 50% bonus depreciation and expense option allow you to write off equipment much faster, there are differences between the two approaches. And there is some interaction. If you take the expense option, you'll have reduced your cost basis so that you won't be able to claim as much bonus depreciation. You don't want to use the Section 179 option on equipment that might be disposed of early in the life of the asset if you're over the $100,000 limitation. And you should use the option on the longest lived assets.

The Section 179 election can be made on new or used assets. The bonus depreciation only applies to new assets.

The Section 179 limitation applies at both the entity and shareholder or partner level in the case of passthrough entities. If the S corporation has only one shareholder and the shareholder has no other business interests, that's not a problem. But that's often not the case, so you've got to do some analysis before making the election. For example, if you own 100% of two S corporations each corporation could take the $100,000 expense option. But on your personal return you'll be limited to $100,000.

The amount expensed for Section 179 cannot exceed the net income from the business. Any excess can be carried forward to be used in a later year when the income limitation isn't exceeded. If you anticipate the income from the business to be low for a number of years yet you'll have significant qualifying asset purchases, you might want to forego the expense option rather than accumulate carryforward amounts.

Keep in mind that state law may not follow federal. In some cases your state may not allow the higher expense option or the 50% bonus depreciation. Check the rules carefully.

In Brief:

Previously Reported In Daily Update

Dealing with a mega-corporation? . . . Think twice before doing so. If you're selling out, going into a joint venture or distributorship, etc. make sure you get good legal and financial advice. While most large corporations deal fairly, many do not. And even if you've got a contract, etc. on your side, they've got enough attorneys on staff to wear you out or at least do considerable financial damage. You can minimize problems by investigating the company (some have a reputation for not dealing fairly), structuring the deal to minimize your exposure (if you're selling out, do so for all cash and up front with no recourse), making sure you have other options (other sources of supply, other markets, etc.) should the other party back out, etc. Your accountant, attorney, financial advisor, etc. should be consulted. A couple of hours of their time up front may run several thousand dollars. If you run into problems later, you'll be looking at tens of thousands.

Consider rugged laptop . . . Laptops are great, but they're definitely more prone to problems than a desktop computer and they take more abuse. Many of the components are packed tighter, it's more difficult to dissipate the heat generated, the units are susceptible to being dropped or jarred, etc. If you depend on your laptop and travel with it even moderately extensively, you should consider a ruggedized version. While they start at $2,000 to $3,000, you should get your money back in repair savings and a longer life for the unit. That's particularly true today since there's less technological obsolescence. Even so, the best advice for laptop owners is to back up often.

Extension granted to elect foreign earned income exclusion . . . Individuals who work abroad for an extended period of time may qualify for the foreign earned income exclusion. The amount of the exclusion is limited and you must make the election on a timely filed return. In a recent letter ruling (LR 200321007) the taxpayer asked for an extension of time to elect the exclusion. The affidavit and documentation the taxpayer submitted indicated the taxpayer engaged a CPA to file his 1040 and claim the exclusion, but for various reasons this was not done. Based on the facts, the IRS found the taxpayer acted reasonably and in good faith and granted the taxpayer an extension to elect the exclusion for the tax years at issue.

Municipals or treasury bonds? . . . Municipals now yield significantly more than U.S. government issues (even before factoring in the tax advantages). Of course, there is more risk in buying municipals, but generally not enough to justify all of the yield difference. And, municipals make sense if you're in the 25% or higher tax bracket. They're not for everyone, but you should consider them if you're looking for a safe investment with an attractive yield.

Installment payments of estate tax not thwarted by lease of farmland . . . Under section 6166(a), if an interest in a closely held business included in a decedent's gross estate exceeds 35 percent of the adjusted gross estate, the executor may elect to pay part or all of the estate tax in two or more (but no more than ten) equal installments. Certain activities, however, trigger the acceleration of the payments. In particular, Section 6166(g)(1)(A) provides that if 50 percent or more of the value of an interest in a closely held business which qualified for installment payments is distributed, sold, or otherwise disposed of, then the extension of time to pay the tax shall cease to apply and the unpaid portion of the tax will be due upon notice and demand. The ability to pay the tax on the installment basis (coupled with a below market interest rate) can be a substantial benefit. In a recent letter ruling (LR 200321006) the Service ruled that the leasing of farmland by an estate to two limited liability companies (LLCs) would not be considered a distribution, sale, exchange or other disposition of the interest in a closely held business.

Donor eggs and legal expenses deductible . . . Can you deduct the expenses associated with securing donor eggs in order to become pregnant? That was the question in a recent Letter Ruling (LR 200318017). The individual had unsuccessfully undergone repeated assisted reproductive technology procedures to enable her to conceive a child using her own eggs. The health plan paid expenses to fertilize and transfer the egg or embryo to the woman but would not cover the expenses to obtain an egg donor. The IRS held that the unreimbursed expenses for the egg donor fee, the agency fee, the donor's medical and psychological testing, the insurance for post-procedure donor assistance, and the legal fees for preparation of the contract, are medical care expenses that are deductible under Section 213. The IRS reasoned that expenses preparatory to the performance of a procedure that qualifies as medical care that are directly related to the procedure may also constitute medical care for purposes of Sec. 213. For example, Rev. Rul. 68-452, holds that surgical, hospital, and transportation expenses incurred by a donor in connection with donating a kidney to the taxpayer are deductible medical expenses of the taxpayer-recipient for the years in which the taxpayer pays them. Like other preparatory expenses, legal expenses may be deductible as medical expenses under Sec. 213 if there is a direct or proximate relationship between the legal expenses and the provision of medical care to a taxpayer.

Shred those credit card applications . . . If you've got a half-way decent credit rating, chances are you get more than one unsolicited credit card application a week. Don't just throw them out--shred them. They can be used to obtain cards in your name.

Corporate risk premium narrows . . . You should always be able to get a higher yield on a corporate bond than on a U.S. government issue of similar maturity because there's a much higher risk of default on corporate instruments. But lately the spread has narrowed. In fact it's now just under than 3 percentage points. Check the ratings and do your homework before purchasing any corporate bonds. While a small spread may be acceptable, you only want to take that risk on the safest issues. That's particularly true in the current interest rate environment.

Filed a corporate extension? . . . The IRS has reported that some Forms 7004, Application for Automatic Extension of Time to File Corporation Income Tax Return, have been denied in error. Taxpayers who think they received an erroneous notice denying their extension should call the number provided in the notice. IRS assistors will accept an oral statement from the taxpayer, or the taxpayer may send in a written statement.

Check the commission schedule for funds . . . The "load" or commission varies greatly for mutual funds. Some don't have any load, for some it can be as high as 4.5%. In some cases the load is paid up front; sometimes it's only when you sell, declining each year the investment is held; and sometimes it's an annual charge. If a broker sells you a fund, the commission is often paid up front. Check the prospectus for the load. It's not unusual for a broker to steer you into the fund that provides him with the most commission, and not necessarily the one that best for you.