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TAX LAW Updated 9-12-07

Federal Headlines

Treasury Weighs Economic Effect of Housing and Credit Woes

The Bush administration's economic, tax and financial policy shops are keeping a close eye on the effect of the tightening credit and housing markets on U.S. economic growth, according to a Treasury spokesman. Treasury Secretary Henry M. Paulson, Jr., recently noted that the current housing downturn will exact a "penalty" on economic growth, but the White House has not yet set a deadline for the President's Working Group on Financial Markets to complete its review of the role played by credit rating agencies and mortgage loan originators in the current housing downturn and credit crunch, according to Jennifer Zuccarelli, a Treasury spokeswoman. The next forecast on federal revenue and deficit estimates that would reflect any changes in the economic growth rate will be completed in December by the Office of Tax Analysis, noted Treasury spokesman, Andrew DeSouza.

Meanwhile, the Treasury Department continues to consider measures, such as lowering the U.S. corporate tax rate, to increase U.S. competitiveness abroad. "We live in a competitive economic environment globally" that requires the U.S. to reexamine its business tax and regulatory schemes, noted White House Press Secretary Tony Snow at a press briefing on September 12. There is no deadline yet for completing the Treasury review of U.S. competitiveness initiatives, confirmed DeSouza.

A top priority item on the administration's tax agenda in 2007 is to pass legislation extending relief from the alternative minimum tax (AMT). "We need a patch right now so that millions of Americans don't have to pay the AMT" before the current extension expires, DeSouza said. "What contributes to economic growth and strengthens it (is) low taxes, low regulations, and rewarding people who work hard and also generate value for the economy," Snow noted at his final briefing before stepping down as White House Press Secretary on September 14.

By Paula Cruickshank, CCH News Staff

Award Turned over to Bankruptcy Trustee Includible in Income (Burns, TCM)

A settlement award payment was includible in an individual's income, even though it was subject to a creditor's claim in the individual's bankruptcy proceeding. The taxpayer argued that she did not exercise dominion and control over the award because it was placed in a trust account and could not be accessed without a court order. However, her argument ignored the fact that she volunteered to place the award in the bankruptcy trustee's custody. Thus, while she did not "constructively receive" the award in the year at issue; she "actually" received it. Further, the doctrine of constructive receipt generally addresses when, not whether, income is realized by a cash basis taxpayer. Finally, the taxpayer was entitled to a miscellaneous itemized deduction in an amount equal to the amount includible in her income.

CCH Comment. The taxpayer actually reported the income on her tax return for the year at issue on line 21 and subtracted it on the same line with the explanation that the amount was not "constructively received." The IRS, however, proceeded as if the income was not reported.

S.J. Burns, TC Memo. 2007-271, Dec. 57,094(M)

Corporation Entitled to Compensation Deduction in Amount Determined; Depreciation Disallowed (Vitamin Village, Inc., TCM)

A corporation was entitled to deductions for compensation paid to its sole executive and shareholder in the amounts determined by the Tax Court for two tax years. The executive was the driving force behind the corporation's success and was underpaid in years during which the company was not profitable. The corporation retained the executive's compensation to further develop and expand its business and promised to reimburse the executive for past underpayment and to pay him bonuses for extraordinary services when it became more profitable.

Moreover, the corporation was entitled to deduct advertising expenses for one tax year. The expenses related to a detailed advertising campaign that resulted in an drastic increase in the corporation's profits. Therefore, the corporation showed a sufficient connection between the amount paid in advertising expenses and its business of producing and selling suntan lotion products. Finally, the corporation was not entitled to a depreciation deduction for certain floating structures. The structures were under construction during one of the tax years at issue and the corporation failed to provide any evidence that the structures were used primarily, or at all, for business in the second tax year at issue.

Related case, Reeves, at TC Memo. 2007-273, Dec. 57,096(M) (TAXDAY, 2007/09/13, J.3).

Vitamin Village, Inc., TC Memo. 2007-272, Dec. 57,095(M)