Ask the tax adviser
By George Saenz • Bankrate.com

To all my readers this week

I've gotten a lot of questions since we started this column in January. And now it's time to file your tax returns and you may not have the answer you need. If you haven't heard back from me and you really need to know, consider filing for an extension of time to file your federal and state returns. But remember to pay what you might owe to avoid interest and penalties.

April 14, 2000 -- The Tax Adviser helps a couple understand the rules concerning reimbursed travel expenses and helps a couple straighten out an issue involving conflicting child exemptions.

Taxing good works

Dear Tax Talk:
Last year, my wife ran a marathon through the Leukemia Society's Team in Training. She raised $3,200 and in return the Leukemia Society paid for her $900 travel expenses to the marathon. Recently we received a 1099-MISC form from the Leukemia Society stating my wife had received $900 in non-employee compensation.

It appears that my wife has to pay taxes on the travel expenses that a nonprofit organization spent for her to travel and participate in the marathon -- even after she raised $3,200. Is this true?

Regards,
Kyle

Dear Kyle:
You're absolutely right that it does not sound fair. Travel expenses incurred in connection with volunteering for a charitable organization would be deductible as charitable donations. Similarly, the reimbursement of such expenses should not be income. This is still the case, even though your wife may have enjoyed the participation in the event, provided that the travel was primarily connected with attending the event. I would think that the travel was primarily connected with attending the event given the fact that it was reimbursed.

I think the Leukemia Society erred on the side of caution in issuing the 1099 for the travel expenses. I would call them and ask them to rescind the 1099. If they do not feel it is appropriate, then you will have to make appropriate adjustments on your tax return. I would file a Schedule C including the 1099 as gross receipts and deducting the associated travel expenses.

Conflicting child exemptions

Dear Tax Talk:
My husband is divorced with two children, ages 11 and 12. My sister allows her ex-husband to claim the oldest child on his taxes every year. My husband spoke to his ex-wife about this (as he does pay out much more than the child support), and she agreed and signed the Form 8332 (Release of Claim to Exemption for Child of Divorced Parents), releasing claim of the oldest from 1998 to 2006 (until age 18).

Knowing that we were paying a lot of taxes last year, she also allowed us to claim the younger child just for that year, 1998, as she did not work that year and was not going to file. She also signed the release for that year on the second child. Now we have received a letter from the government, saying she also claimed the same Social Security number.

My husband reminded her of what she said and of what she signed. Now she is talking about going back on what she already signed to, not wanting us to be able to even continue claiming the one child. Can she do that after she already signed the Form 8332? The form says it is good for all future years, but I want to know exactly what our rights really are.

Thank you very much.
Sky

Dear Sky:
Your question is cutting edge. In one of its newest forms of disseminating tax advice, IRS addressed your issue in Chief Counsel Advisement 200007031. It is the ex-wife's prerogative to revoke the release of the dependency exemption.

However, the IRS has not developed a procedure or form for its revocation. Accordingly, if you do not agree to the revocation by the ex-wife and continue to claim the child an "audit will result because the IRS will have to determine which parent is properly entitled to claim the child for that year."

I recommend that you come to an agreement with the ex-wife that splits the financial benefit of the exemption and respond to the IRS letter accordingly to avoid further audit investigation.

-- Posted April 14, 2000

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