Taxation Newsletters

Closing Agreements

The Internal Revenue Service is authorized to enter into written agreements with a taxpayer relating to the taxpayer’s total tax liability or to specific issues affecting that tax liability for a specified period. These closing agreements may be used when there is an advantage in having a case closed or when the taxpayer shows a good reason for the agreement and the IRS concludes that there is no disadvantage to the government. In addition, the IRS may ask a taxpayer to enter into a closing agreement as a condition to the issuance of a letter ruling.

Drilling and Exploration Costs

The costs of developing oil, gas, or geothermal wells include wages, fuel, repairs, hauling, and supplies incident to and necessary for the preparation of the wells. A taxpayer who is developing these wells in the United States has the choice of treating the costs as capital expenditures and recovering them through depreciation or depletion or deducting the costs as current business expenses. If the costs of determining the existence, location, extent, or quality of any mineral deposit lead to the development of a mine, they are usually treated as capital expenditures and recovered through depletion as the mineral is removed from the ground. However, the taxpayer can choose to deduct exploration costs in the United States paid or incurred before the development stage began. This rule does not apply to oil, gas, or geothermal wells.

Payroll Deduction IRAs

One of the simplest retirement arrangements that a business can set up for its employees is a payroll deduction IRA. Under this type of plan, an employee sets up either a traditional or Roth IRA with a financial institution. The employee authorizes a payroll deduction for the IRA, and the employer’s only obligation is to transmit the authorized deduction to that institution. Generally, an employer who offers a payroll deduction IRA to any employee should offer it to all employees.

Tax Benefit Rule

The purpose of the tax benefit rule is to create a balance between what appeared to be a proper deduction at the time it was taken and the fact that the assumptions on which the deduction was based were erroneous. If a taxpayer deducted an amount from his gross income in one year resulting in a tax benefit to him, and an event occurred in a later year that was fundamentally inconsistent with the premise on which the deduction was based, then the taxpayer must include an amount in gross income of the current year to the extent that the amount was deducted in the prior year.

Transfer of Property between Spouses

In general, if you transfer property to or receive property from your spouse, no gain or loss is recognized. This rule applies even if the transfer is made to a trust for the benefit of your spouse or to a former spouse if it was incident to a divorce. The Internal Revenue Code defines a transfer as "incident to a divorce" if the transfer occurs within one year after the date on which the marriage ends, or if the transfer is related to the ending of the marriage.