Ludwig, Daniel K. & Gertrude V. Madden, Blaine M. & Virginia C. Marbut, Dorothy H. Mason, Dan E. & Beverly R. McDowell, C. Blake, Inc. Taxpayer Morris, John E., Est. of, John M. Morris, Francis H. Morris & Eugene Palmer, Daniel D. & Agnes H.22 38 • United States Board of Tax Appeals. 1 Acquiescence in result in the issue relating to whether the taxpayer can be required to inventory costs incurred for losses and research and experiment expenditures where such items are specifically allowed as deductions by the Code. 2 Acquiescence "in result" means acceptance of the decision of the Court but disagreement with some or all the reasons for the decision. 3 Acquiescence in the issue relating to whether certain items are excludable from inventory because they are not manufacturing expenses. Estate Tax decision. See Rev. Rul. 78-125, 1978-1 С.В. 292. Gift Tax decision. 7 Acquiescence published in 1976-2 C.B. 3 is withdrawn and acquiescence in result is substituted. (See footnote 2) 8 Acquiescence published in 1964-1 C.B. 4 in the issue relating to whether a "wage dividend" death benefit paid to decedent's widow in the year following decedent's death is includible in decedent's gross estate under section 2039, and in the issue relating to whether a "salary" death benefit paid to decedent's widow is includible in decedent's gross estate under section 2039, is withdrawn and acquiescence in result is substituted therefor. (See footnote 2) • Acquiescence in the issue relating to whether the payment of two months post-mortem rent on decedent's apartment is a deductible administration expense. 10 Acquiescence in the issue relating to whether the life tenant's reimbursement to the charitable remaindermen of the additional estate taxes resulting from an election to claim administration expenses as income tax deductions qualified for the charitable deduction where the reimbursement was required by state law. 11 See Rev. Rul. 78-124, 1978-1 С.В. 147. 13 Acquiescence in the issue, relating to whether in computing the proper allowable amount of the deduction under section 691 (c), the "estate tax attributable to the net value" of the section 691 (a) items must be computed on the basis of removing the net value of the section 691 (a) items from the gross estate and assuming no further change in facts or whether the residual charitable bequest must also be reduced. 13 Acquiescence in the issue relating to whether under New York law an executor may renounce a decedent's interest in a testamentary bequest. 14 Acquiescence in result in the issue relating to whether the renunciation of decedent's interest in a testamentary bequest 33 months after its creation was within a reasonable time. (See footnote 2) 15 Nonacquiescence published in 1972-2 C.B. 3 is withdrawn and acquiescence is substituted therefor. 16 Acquiescence in result in the issue relating to whether during 1971, petitioner, the wife of an employee of an international organization, was a resident alien entitled to file a joint return and claim certain exemptions under section 871. (See footnote 2) 17 Acquiescence in the issue relating to deductibility of amounts paid in settlement of an antitrust action. 18 Acquiescence in the issue relating to whether decedent's transfer of certain state and municipal bonds within three years of his death was made "in contemplation of death" within the meaning of section 2035. 19 Acquiescence in the issue relating to whether dividend credits, net of interest due, made by petitioner against stock purchase contracts executed by certain of its employees constitute additional compensation. 20 Acqiuescence in the issue relating to whether amounts received constituted distributions with respect to the stock of the parent. 21 See Rev. Rul. 78-123, 1978-1 С.В. 87. See Rev. Rul. 78-197, 1978-1 С.В. 83. 23 Acquiescence in the issue relating to whether petitioner realized dividend income for his transfer of 238 shares of stock in his family corporation to his family foundation pursuant to a prearranged plan whereby the foundation thereafter immediately redeemed such stock for assets of the corporation. 24 Nonacquiescence published in 1971-2 C.B. 4 is withdrawn and acquiescence is substituted therefor. 25 Nonacquiescence published in 1969-2 C.B. xxvi is withdrawn and acquiescence is substituted therefor. 26 See Rev. Rul. 78-301, page 103, this Bulletin. Acquiescence in the issue relating to whether petitioner is entitled to deduct a truck license registration fee as an ordinary and necessary business expense. Acquiescence in the issue relating to whether participating agreements in a mutual fund should be valued for estate tax purposes by adding to the liquidation value a portion of the sales load attributable to such agreements. 29 Nonacquiescence in the issue relating to whether the taxpayer can be required to inventory costs incurred for taxes and repairs where such items are specifically allowed as deductions by the Code or regulations. 30 Nonacquiescence in the issue relating to whether a claim by decedent's sister which was allowed by the Surrogate's Court with the consent of the only parties in interest is a deductible claim against the estate. Nonacquiescence in the issue relating to whether, assuming a section 691 (c) deduction is allowable, respondent was precluded from arguing on brief or on Rule 155 that the deduction is an offset to the section 691 (a) income rather than a deduction from gross income, the statutory notice having disallowed the entire section 691 (c) deduc tion. 33 Nonacquiescence in the issue of whether petitioner's receipts of clearing house and marketing functions constitute gross income. 33 Nonacquiescence in the issue relating to whether decedent retained sufficient rights in a trust created for the benefit of his grandson to require its inclusion in his gross estate under the provisions of sections 2036 (a) (2) and 2038 (a) (1). Nonacquiescence in the issue relating to whether sales under petitioner's coupon book installment plan qualify as "sales on the installment plan" under section 453 (a) of the Code. 35 Nonacquiescence in the issue relating to whether the available earnings and profits computation should be reduced by the fair market value of appreciated securities do nated to a charitable foundation. 3 Acquiescence published in VIII-2 C.B. 27 (1929), is withdrawn and nonacquiescence is substituted therefor. 37 See Rev. Rul. 78-62, 1978-1 С.В. 226. 38 Nonacquiescence in the issue relating to whether petitioner is entitled to a charitable contribution deduction at the rate of $863 per share for his transfer to the founda. tion. 39 Nonacquiescence in the issue relating to whether petitioner is entitled to deduct the required payment of his pro-rata share of the cost of providing a nonexclusionary organized mess for the firemen at his place of employment as an ordinary and necessary business expense. 40 Nonacquiescence in the issue relating to whether petitioner is entitled to an estate tax credit for a life interest in her predeceased husband's share of the community property, which life interest decedent received when she elected to take under her husband's will in lieu of claiming her rights in the community property, when as part of such election decedent was required to relinquish the remainder interest in her share of the community property. 41 Acquiescence published in 1961-2 C.B. 5 is withdrawn and nonacquiescence is substituted therefor. Subpart A.-Income Taxes Chapter 1.-Normal Taxes and Surtaxes Section 38. - Investment in Certain Depreciable Property 26 CFR 1.38-1: Investment in certain depreciable property. Whether an aircraft used for testing by the manufacturer to obtain required federal certification prior to delivery is new section 38 property when placed in service by the purchaser. See Rev. Rul. 78-433, page 121. Section 43. - Earned Income Earned income credit; net earnings from self-employment. Earned income, for purposes of the earned income credit under section 43 of the Code, includes the amount properly reported on Schedule SE as net earnings from self-employment by a taxpayer who earned no net income but qualified for the election to treat $1,600.00 as earned income under section 1402(a). Rev. Rul. 78-313 ISSUE Is a farmer considered to have "earned income" for purposes of the earned income credit under section 43 LAW AND ANALYSIS Section 43(a) of the Code provides that for certain taxable years an eligible individual shall be allowed a refundable credit against tax of an amount equal to ten percent of so much of the individual's earned income for the year as does not exceed $4,000. The amount of the credit allowable to an eligible individual shall be reduced (but not below zero) by an amount equal to ten percent of so much of the individual's adjusted gross income (or, if greater, the earned income) for the taxable year as exceeds $4,000. Section 43 (c) (2) (A) of the Code defines earned income as wages, salaries, tips and other employee compensation, plus the amount of the taxpayer's net earnings from self-employment for the taxable year within the meaning of section 1402(a). Section 1402(a) of the Code provides that in the case of any trade or business which is carried on by an individual or by a partnership and in which, if such trade or business were carried on exclusively by employees, the major portion of the services would constitute agricultural labor as defined in section 3121(g) ... (ii) in the case of an individual, if the gross income derived by him from such trade or business is more than $2,400 and the net earnings from selfemployment derived by him from such with of the Internal Revenue Code of 1954, trade or business (computed when there is no actual net income? FACTS A farmer, who is otherwise eligible for the earned income credit, received $20,000 in gross income from farm operations. However, for the taxable year the farmer sustained a net loss of $5,000. The farmer had no other income that year. Since the gross income from farming was more than $2,400, the farmer exercised the option available in section 1402(a) of the Code to deem net earnings from self-employment to be $1,600. out regard to this sentence) are less than $1,600, the net earnings from self-employment derived by him from such trade or business may, at his option, be deemed to be $1,600. Section 1402(a) also makes this election available under certain instances to taxpayers engaged in a business other than farming. For purposes of the credit under section 43 of the Code, earned income includes any amount reported on line 13 of Schedule SE of Form 1040 as net earnings from self-employment. Net earnings from self-employment are to be taken into account even though they are less than $400 (and not subject to the self-employment tax). See S. Rep. No. 94-36, 94th Cong., 1st Sess. 34 (1975), 1975-1 С.В. 590, 604. HOLDING The $1,600 deemed to be net earnings from self-employment under section 1402(a) of the Code and reported on line 13 of Schedule SE of Form 1040 is considered "earned income" for purposes of the earned income credit under section 43 of the Code. The conclusion of this Revenue Ruling also applies to taxpayers involved in businesses other than farming, provided they qualify for the election under section 1402 (a) of the Code. 26 CFR 1.43-1: Earned income credit. (Also Section 7701; 301.7701-16.) Earned income credit; household in Puerto Rico. An individual, who maintains a household in Puerto Rico that is the principal place of abode for that individual and a qualified child of that individual, cannot qualify for the earned income credit. Rev. Rul. 78-400 Section 43(a) of the Internal Revenue Code of 1954 provides that in the case of an eligible individual, there is allowed as a credit against the federal income tax for the taxable year an amount equal to 10 percent of so much of the earned income for the taxable year as does not exceed $4,000. Section 43 (c) (1) of the Code defines an eligible individual as an individual who for the taxable year maintains a household in the United States which is the principal place of abode of that individual and a child of that individual who is under 19 years of age or a full-time student (whether or not that individual is entitled to claim the child as a dependent) or that individual's adult disabled child whom the individual is entitled to claim as a dependent. Section 7701 (a) (9) of the Code provides that the term "United States" when used in a geographical sense includes only the States and the District of Columbia. Held, the term "United States" as used in section 43 of the Code includes only the States and the District of Columbia and does not include Puerto Rico. Therefore, an individual, who maintains a household in Puerto Rico that is the principal place of abode of that individual and a qualified child of that individual, cannot qualify for the earned income credit under section 43 of the Code. Section 44.-Purchase of New 26 CFR 1.44-4: Recapture for certain dispositions. Housing credit; recapture; husband and wife separated. Married taxpayers who purchased a new residence, claimed the housing credit on their joint return, and, in the following year, separated and agreed to live apart and sold the residence are treated separately in applying the recapture provisions of section 44(d)(1) and (2) of the Code. Rev. Rul. 78-259 Advice has been requested whether, under the circumstances described below, taxpayers must recapture all or a portion of the credit claimed for the purchase of a new principal residence under section 44 of the Internal Revenue Code of 1954. On April 1, 1975, A and B, married taxpayers, purchased a new principal residence for $50,000. They took title to the property as tenants by the entirety. In all respects, the transaction entitled the taxpayers to the housing credit pursuant to section 44 of the Code. They filed a joint income tax return for 1975 and claimed the credit in the amount of $2,000. In 1976, A and B separated and agreed to live apart. They sold their principal residence on March 1, 1976. The adjusted sales price for their principal residence was $60,000. Under state law, A and B were each entitled to one-half of the proceeds from the sale of the residence. A separately purchased and occupied a new principal residence on July 1, 1976, that had not been previously occupied. The purchase price of the new residence was $35,000. A continued to own and occupy the new residence through April 1, 1978. As of September 1, 1977, B had not purchased or commenced construction of a separate new replacement residence. A and B were not legally separated under a decree of divorce or separate maintenance on the last day of the taxable years 1976 and 1977 and filed joint income tax returns for both of those years. Section 44(a) of the Code provides the general rule that in the case of an individual there is allowed, as a credit against the tax imposed by chapter 1 for the taxable year, an amount equal to 5 percent of the purchase price of a new principal residence purchased or constructed by the taxpayer. Section 44(b) (1) provides that the credit allowed may not exceed $2,000. Section 44(d) (1) of the Code provides that if the taxpayer disposes of property with respect to the purchase of which a credit was allowed under section 44(a) at any time within 36 months after the date on which the taxpayer acquired the property as a principal residence, then the federal income tax for the taxable year in which the replacement period described in section 44 (d) (2) terminates is increased by an amount equal to the amount allowed as a credit for the purchase of such property. Section 44(d) (2) of the Code provides that if the taxpayer purchases or constructs a new principal residence within the replacement period prescribed in section 1034, the provisions of section 44(d) (1) shall not apply. Instead the tax imposed by chapter 1 for the taxable year following the taxable year during which disposition occurs is increased by an amount that bears the same ratio to the amount allowed as a credit for the purchase of the old residence as (A) the adjusted sales price of the old residence (within the meaning of section 1034) reduced (but not below zero) by the taxpayer's cost of purchasing the new residence (within the meaning of section 1034) bears to (B) the adjusted sales price of the old residence. Rev. Rul. 74-250, 1974-1 C.B. 202, holds that the nonrecognition provisions of section 1034(a) of the Code apply separately to the gains realized by a husband and wife from the sale of their principal residence where they have agreed to live apart and each timely purchased and occupied a separate replacement residence. In the instant case, the taxpayers disposed of their principal residence acquired on April 1, 1975, prior to the expiration of the 36-month holding period required under the provisions of section 44(d) (1) of the Code. Because A and B agreed to live apart, they are treated separately in the application of the recapture provisions under section 44(d) (1) and (2) similar to the separate application of the provisions of section 1034 illustrated in Rev. Rul. 74-250. A and B are considered to be equal owners of the principal residence sold and a housing credit of $1,000 is considered to have been claimed by each taxpayer. Because A separately purchased a replacement residence within the 18month replacement period prescribed by section 1034, the recapture rules of section 44(d) (2) apply. The price of the replacement residence ($35,000) is in excess of one-half of the adjusted sales price of the principal residence. sold ($30,000). Therefore, none of A's previously claimed credit of $1,000 |