Summer 2009

Tax Court Grants Innocent Spouse Relief to Widow
A wife who learned--only after the death of her husband--of the extent of the couple's financial liabilities, which included substantial unpaid taxes, has been granted equitable innocent spouse tax relief under IRC Section 6015. IRC Section 6015 was enacted to provide relief to spouses who had no knowledge of an underlying income or deduction item that created a federal tax deficiency and who did not significantly benefit from it. A taxpayer can claim innocent spouse relief in one of three ways: by timely filing IRS Form 8857 and meeting its associated requirements, seeking separation of liability relief or seeking equitable relief. Read more...

Taxation of Lost Profit Damages
In contrast to personal injury and wrongful death awards, business injury awards are generally considered taxable income to the plaintiff. However, the nature and characterization of any damages recovered by a business will generally determine whether they must be recognized as ordinary income or capital gain. Lost profit damages in the hands of a plaintiff-business owner are typically considered ordinary income. As a result, a professional valuation expert and careful planning are necessary, as a significant percentage of lost profit damages may have to be allocated to offset the associated tax liability. Read more...

IRS Reverses Position on Intangibles Relating to Like-Kind Exchanges
In a recent Chief Counsel Advice, the IRS has reversed some of its own prior rulings and has stated that certain intangible assets, which can be valued separately from goodwill, qualify as like-kind property for IRC Section 1031 purposes. In general, under IRC Section 1031, no gain or loss is recognized where business or investment property is exchanged solely for like-kind property. In a stark turnaround, the IRS has ruled that intangibles--such as trademarks, trade names, mastheads and customer-based intangibles that can be separately described and valued apart from goodwill-- qualify as like-kind property for IRC Section 1031 purposes. Furthermore, the IRS's position is now that, except in rare and unusual circumstances, these intangibles can be valued separately from goodwill. This new approach is a complete departure from the IRS's previous position, which had been reaffirmed quite recently, that exchanged intangibles such as those mentioned above could never be property eligible for like-kind exchange treatment. Read more...

First Circuit Vacates Textron Decision
The First Circuit Court of Appeals has vacated its decision in U.S. v. Textron, Inc. (CA-1, 1/21/09), which held in part that the work product privilege extended to "tax accrual workpapers." The appeals court had previously upheld a determination to that effect by a federal district court in U.S. v. Textron, Inc. (DC-RI, 8/29/07), although it set aside the lower court’s determination that the privilege was not waived and remanded the matter for proceedings. Read more...

Somerset News

Somerset Blogs. We recently celebrated the one year anniversary of our Somerset Success Strategies blog and have created several new blogs--Successful Tax Strategies, The Business of Medicine, Driving Successful Dealerships and Women's Guide to Financial Success. Please visit www.SomersetBlogs.com and post your comments and questions.

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This newsletter is provided by Somerset CPAs for our clients and other interested persons upon request. Since technical information is presented in generalized fashion, no final conclusion on these topics should be made without further review. For additional information on the issues discussed, please contact Steve Riddle, Tom Thieme, Rex Collins or Doug Ayres of our Litigation & Valuation Team.

This document is not intended or written to be used, and cannot be used, for the purpose of avoiding tax penalties that may be imposed on the taxpayer.