October 22, 2017 630-250-5700rcolombik@colombik.com






In Douglas James Crawford v. Commissioner, 1996 TCM 460, the taxpayer?s counsel came up with a novel argument relative to a taxpayer?s last known address.  The taxpayer had moved, without filling a change of address notice with the Internal Revenue Service.  The taxpayer also did not file an income tax return for the year following the move.  The Internal Revenue Service sent a Notice of Deficiency to the taxpayer?s ?last known address?.  The deficiency notice was returned to the IRS as ?undeliverable?.  The Internal Revenue Service alleged that since it had sent the notice to the taxpayer?s known address it was valid.

The taxpayer argued that he had received W-2 forms, 1099s and other filings with copies going to the Internal Revenue Service.  Therefore, when the notice came back as ?undeliverable?,  the IRS should have taken reasonable steps to locate the new address.    Since the court found the IRS had not taken any such steps, the Notice of Deficiency was invalid.  The statute of limitations had run in the meantime and the taxpayer won!

It sometimes shows that technical arguments can succeed. 


Many clients have approached us and said they want a 100% deduction for medical insurance, but do not want to be a ?C? corporation.  This has left many clients in a quandary of whether the procedural, documentation and legal fees, as well as additional accounting fees are worthwhile for the medical deduction.

There is a solution!  In Private Letter Ruling 9409006, an issue was presented to the Internal Revenue Service as to whether a sole proprietor could deduct 100% of their medical insurance as a business expense if the individual employed his wife as a bona fide employee.  This issue is novel, as the proprietor could not deduct the entire expenses if he was the insured.  The IRS ruled that amounts paid to a spouse as reimbursement for medical expenses or insurance were fully deductible as a business expense within IRC Section 162(a).  Further, the spouse could exclude these amounts from gross income within IRC Section 105(b).  This ruling expanded upon prior Revenue Ruling 71-588, 1971-2 C.B. 91, holding that amounts paid by a sole proprietor to his spouse under an accident and health plan covering all employees was likewise excludable from the employee spouse?s gross income and deductible.

A way, in essence, to obtain a medical reimbursement plan, without the necessity of incorporation.


In Revenue Ruling 96-51, 1996-43 IRB 5, the Internal Revenue Service ruled on the issue of whether an accrual basis taxpayer may deduct in one year, its FICA and FUTA taxes imposed with respect to year-end wages properly accrued in the year at issue, but not paid until a subsequent year.  The corporation at issue regularly employed the accrual method of accounting and utilized a calendar tax year.  Wages for its final period of employment began December 23rd, 1995, and ended January 5th, 1996.  Such wages were paid on January 12th, 1996.  The corporation during the year at issue deducted its share of FICA taxes and FUTA taxes with respect to the December 23rd through December 31st, 1995, wages that it had accrued, even though the payments themselves were not made until the subsequent year.  The ruling indicated the corporation properly adopted the recurring item exception with Treas. Reg. Sec. 1.461-5, which allowed as a method of accounting, the recurring liability for FICA and FUTA taxes imposed in connection with accrued but unpaid year-end wages.  This made the wages as well as the taxes thereon properly deductible in the year incurred, even though not paid.


Most people are not aware, but IRC Sec. 2511 previously required gifts by check to be actually paid or negotiated prior to December 31st of any year, in order to have the gift deemed completed.  Non-charitable gifts many times resulted in surprises to taxpayers that issued year-end checks that were not actually cleared through their bank until a subsequent year.   Revenue Ruling 67-396, indicated a check technically was still in the dominion and control of a donor until it was actually negotiated.  Therefore, it was not considered a completed gift because it was still in the donor?s dominion and control.

The IRS? logic was overruled in the Estate of Metzgar v. Commissioner, 38 Fd. 3rd118 (4th Cir. 1994).  In Metzgar, the taxpayer made gifts by check dated December 14th during the year at issue.  The checks were deposited on December 31st, but did not actually clear the bank until January 2nd of the following year.  The 4th Circuit held that the gifts were deemed complete on December 31st because the honoring of the checks by a donor?s bank relates back to the date of deposit.  Based upon Metzgar, the Internal Revenue Service has issued Revenue Ruling 96-56, which modified their prior contrary ruling.  The new ruling indicates that the gift will be deemed complete on the earlier of:

1. The date of which the donor parts with dominion and control of the check under local law; or

2. The date on which the donee deposits the check or cashes it against the donee?s fund, or presents it for payment, provided that the check is paid by the drawee bank on its initial presentation, the donor is alive when the check is paid, the donor intended to make a gift, delivery of the check by the donor is unconditional and the check was deposited cash, or presented, within the same calendar year for which completed gift treatment is sought.

It appears  the IRS is using a more rational interpretation of completion of gift by check due to the court?s ruling.


A physician who had atrocious books and records gave his receipts and bank statements to his tax return preparer.  The tax return preparer was not a CPA or attorney, and the resulting tax returns did not accurately reflect the income of the physician.  On audit, the tax returns were found to have  understated the Doctor?s income by more than $40,000.00.  The IRS charged the Doctor with tax fraud.  The Doctor?s counsel countered saying that bad bookkeeping is not fraud.  Fraud requires intent.  The court held that the IRS had not shown that the Doctor had taken steps to conceal his income, so bad bookkeeping and sloppy records is not equivalent to tax fraud.  Kondamodi S. Rao, v. Commissioner, 1996 TCM 500.

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