Academic journal article Journal of Accountancy

Creative Capital Gains

Academic journal article Journal of Accountancy

Creative Capital Gains

Article excerpt

Because capital gains have so many benefits over ordinary income, taxpayers often invent creative methods to generate them. To recognize capital gains, however, the taxpayer must be able to prove the sale or exchange of a capital asset.

Charles Trantina was an independent insurance agent employed by State Farm Insurance Co. In 1978 he incorporated his business as Trantina Insurance Agency Inc. The corporation executed a corporation agency agreement with State Farm that replaced Trantina's individual agent agreement. In 1996 Trantina notified State Farm he was retiring and the corporation, therefore, was entitled to termination payments; in 1997 the corporation's assets were liquidated and Trantina received the right to the termination payments. On his 1997 and 1998 tax returns, he reported the termination payments as ordinary income. Later, he filed amended returns for those two years that reclassified the income as capital gains, saying the payments were from the sale of the agency back to State Farm. The IRS refunded the amount requested.

In 2003 Trantina filed an amended return for 1999 again reclassifying the termination payments as capital gains from the sale of his agency. When the IRS rejected his refund claim, he filed suit in district court.

Result. For the IRS. The court first had to decide whether it had jurisdiction over the case. Because the case introduced new issues, the IRS argued, the court could not hear it. The court agreed: It determined the taxpayer should have notified the IRS of all the grounds for a refund on the original claim for refund. Therefore, the court would consider only the initial argument, that the payments were received for a capital asset, contained in the amended return. Thus, to ensure a court will consider all of the relevant issues, taxpayers must carefully identify all reasons for a requested refund. …

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