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Duly Noted

Team Wins As IRS Changes Its Mind. Perseverance is one of the keys to success on the playing field, and in the front office, too. An unidentified professional sports team recently persuaded the Internal Revenue Service to change its mind, allowing the team to deduct salary payments to a disabled player even though the team collected tax-free disability insurance proceeds on account of the player’s injury. The Chief Counsel’s office ruled early in 2009 that the salary payments were nondeductible because the insurance payments reimbursed the team for the expense. But, on reconsideration, the same office concluded that there was “not enough nexus between the disability insurance payment and the salary expense...to connect the two.” The IRS noted that the team was free to use the insurance funds for any purpose and was entitled to collect the insurance even if it was not obligated to pay the player, as can happen if a player is injured while engaging in an activity prohibited by his contract. CCA 200947035.

Former Law Partner’s Guaranteed Payments Are Ordinary Income. A former Holland & Knight partner could not claim capital gain treatment for payments he received in exchange for certain units in the firm, the Tax Court ruled. Donald Wallis, a tax partner in the firm’s Jacksonville, Fla.,  office, accumulated the “Schedule C” units between 1991, when he became an equity partner, and 2002. He left the firm the following year, after which the law firm repurchased the units over a three-year period. Wallis claimed capital gain treatment. But the court agreed with the Internal Revenue Service that the units, which were awarded without regard to Wallis’ share of the firm’s profits, were a type of deferred compensation in lieu of a retirement plan, and should be viewed as guaranteed payments, which are taxed as ordinary income. Wallis v. Commissioner, T.C. Memo 2009-243.

Insurance Policy Surrender Yields Nasty Results At Tax Time. A New York attorney who owned a policy insuring the life of his elderly mother permitted it to lapse, rather than pay an annual premium of $2,300 plus about $1,600 to repay a policy loan balance. As a result, the attorney owed ordinary income tax on nearly $136,000 of gain in the policy, even though the policy surrender yielded only a check for $11,000. The remainder of the income went to pay policy loans that accumulated over two decades. The Tax Court rejected attorney Harvey Barr’s claim that the circumstances were so exceptional that he should be given capital gain treatment, which is not generally available for surrendered insurance policies. The court told Barr to take his belief that “maybe it’s time for a change in the law” to Congress. The court also upheld a $7,922 penalty against the attorney for failing to report the gain on his 2005 tax return. Barr v. Commissioner, T.C. Memo 2009-250.

If you enjoyed this article, be sure to check out Palisades Hudson’s books, The High Achiever’s Guide To Wealth and Looking Ahead: Life, Family, Wealth and Business After 55. Both are available in paperback and as e-books.