Death Is Not a Tax Dodge: A Look at the Tax Benefit Rule

tax-benefit-ruleBecause tax accounting is done annually, taxes are assessed on a basis that may prove inaccurate if a particular transaction is altered after the tax year has closed. For example, if a corporation deducts a state tax that it paid in one year, it would receive a windfall if the tax is invalidated and refunded in a later year. To rectify these situations, the tax benefit rule may apply to trigger income recognition if subsequent events are “fundamentally inconsistent” with a prior deduction. Hillsboro Nat’l Bank v. Comm’r, 460 U.S. 370, 383 (1983).

Last week, the Tax Court addressed the tax benefit rule, holding that death is not fundamentally inconsistent with a prior deduction for purchases of seed and other agricultural inputs associated with a farm; as a consequence, the farmer and his wife were able to deduct the same expenses twice in two consecutive years.… Read More

Tax Procedure: Special Estate Tax Liens and Administrative Expenses

tax-lienCongress created statutory liens to assure that taxes are collected. Federal tax liens function very much like judgments, although there is no judge involved. Instead, the administrative determination by the IRS becomes a lien after notice and demand. I.R.C. § 6321; see also Treas. Reg. § 301.6321-1. The lien becomes immediately effective against the taxpayer, but it only has priority against third parties if a notice is filed. I.R.C. § 6323(a). Even then, the general federal tax lien can be primed by certain other types of interests. See I.R.C. § 6323(b).

Estate taxes are treated differently. There is a special tax lien that applies specifically to estate taxes.… Read More