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Real Estate Reversal, Commuter Tax, Art Valuation Ruling

Berdon Alerts 01.22.2015 | eVisor

Real Estate

Reversal: Sale of Lawsuit Rights Results in Capital Gains

The U.S. Tax Court had ruled that the $5.75 million a real estate developer received from the sale of rights in a lawsuit was ordinary income. An appeals court, however, has overturned the decision and allowed the developer to treat the proceeds as capital gains.1

The appeals court decision focused on the fact that the developer never actually owned the land. What the developer sold was the exclusive right to purchase the land. In the view of the appeals panel, that contractual right and not the land itself was the real asset in the matter.

With this framework established, the court came in on the side of treating the sale proceeds as capital gains.  The IRS had argued, unsuccessfully, that the proceeds from the sale of the contract rights were merely a lump sum substitution for the ordinary income the developer would have earned if he had developed the land and sold it to the buyers.

1 Long v. Commissioner, 11th Circuit, 2014 BL 326907, No. 14-10288, 11/20/14 

Federal Tax

Procedures for Handling Retroactive Commuter Tax Break

The IRS has issued guidance for employers to manage the retroactive commuter tax break Congress passed in December 2014.1 The break for commuter fares was increased to $250 a month to match the amount allowed for parking — retroactive to Jan. 1, 2014 and good through Dec. 31, 2014.

The Service has provided simplified procedures for employers to use in filing Form 941, Employer’s Quarterly Federal Tax Return, for the fourth quarter of 2014 to reflect changes in the excludable amount for transit benefits provided in all quarters of 2014 and in filing Forms W-2.

The procedures only address overcollected FICA taxes due to the lower transit benefit amount. Employers are generally required to repay or reimburse employees the amount of overcollected FICA tax. However, employers cannot adjust overpayments of income tax after the end of the calendar year.  

1Notice 2015-2

New Standard Mileage Rates Now in Effect

Effective January 1, 2015, the optional standard mileage rates for cars, vans, pickups or panel trucks will be as follows:

  • 57.5 cents per mile for business miles driven, up from 56 cents in 2014;
  • 23 cents per mile driven for medical or moving purposes, down half a cent from 2014; and 
  • 14 cents per mile driven in service of charitable organizations.

These rates are used to calculate the deductible costs of operating a vehicle for business, charitable, medical, or moving purposes. You have the option of claiming deductions based on the actual costs of using the vehicle rather than the standard mileage rates.

Trusts and Estates

Nominal Art Valuation Discount Rejected -- $14 Million Refund

The Fifth Circuit Court held that the Tax Court should not have applied a mere 10% discount to a late art collector’s interests — resulting in a $14.4 tax refund to the estate1 .

The deceased held fractional interests in art works by Pollock, Picasso, and Cezanne — valued at an estimated $35 million — with his children owning the remaining interests.  The executors applied discounts for lack of control and marketability that amounted to 44.75%. The IRS did not accept any discounts and assessed a tax deficiency, and the Tax Court only agreed to a 10% discount from the pro rata share of the fair market value.

The Fifth Circuit saw no viable evidence to support the nominal 10% discount asserted by the IRS and Tax Court.  It did find the estate’s evidence to support the 44.75% discount to be “uncontradicted, unimpeachable and eminently credible.” The court noted that the children’s interest in the art supported the higher discount rate. A potential buyer would likely ask for a steep discount in a purchase because it would be unlikely that the art could be resold immediately.       

1 Estate of James A. Elkins v. Commissioner, No. 13-60472 (5th Circuit 2014, Doc 2014-22524)

Questions? Contact your Berdon advisor or Saul Brenner at 212.331.7630 | sbrenner@berdonllp.com