Ten Things Tax-Exempt Organizations Need to Know About the Oct. 15 Due Date

A crucial filing deadline of Oct. 15 is looming for many tax-exempt organizations that are required by law to file their Form 990 with the Internal Revenue Service or risk having their federal tax-exempt status revoked. Nonprofit organizations that are at risk can preserve their status by filing returns by Oct. 15, 2010, under a one-time relief program.

The Pension Protection Act of 2006 mandates that most tax-exempt organizations must file an annual return or submit an electronic notice, with the IRS and it also requires that any tax-exempt organization that fails to file for three consecutive years automatically loses its federal tax-exempt status.

Here are 10 facts to help nonprofit organizations maintain their tax-exempt status.

1. Small nonprofit organizations at risk of losing their tax-exempt status because they failed to file required returns for 2007, 2008 and 2009 can preserve their status by filing returns by Oct. 15, 2010.

2. Among the organizations that could lose their tax-exempt status are local sports associations and community support groups, volunteer fire and ambulance associations and their auxiliaries, social clubs, educational societies, veterans groups, church-affiliated groups, groups designed to assist those with special needs and a variety of others.

3. A list of the organizations that were at-risk as of the end of July is posted at IRS.gov along with instructions on how to comply with the new law.

4. Two types of relief are available for small exempt organizations — a filing extension for the smallest organizations required to file Form 990-N, Electronic Notice and a voluntary compliance program for small organizations eligible to file Form 990-EZ, Short Form Return of Organization Exempt From Income Tax.

5. Small tax-exempt organizations with annual receipts of $25,000 or less can file an electronic notice Form 990-N also known as the e-Postcard. To file the e-Postcard go to the IRS website and supply the eight information items called for on the form.

6. Under the voluntary compliance program, tax-exempt organizations eligible to file Form 990-EZ must file their delinquent annual information returns by Oct. 15 and pay a compliance fee.

7. The relief is not available to larger organizations required to file the Form 990 or to private foundations that file the Form 990-PF.

8. Organizations that have not filed the required information return by the extended Oct. 15 due date will have their tax-exempt status revoked.

9. If an organization loses its exemption, it will have to reapply with the IRS to regain its tax-exempt status and any income received between the revocation date and renewed exemption may be taxable.

10. Donors who contribute to at-risk organizations are protected until the final revocation list is published by the IRS.

IRS Provides Relief for Homeowners with Corrosive Drywall

The Internal Revenue Service today issued guidance providing relief to homeowners who have suffered property losses due to the effects of certain imported drywall installed in homes between 2001 and 2009.

Revenue Procedure 2010-36 enables affected taxpayers to treat damages from corrosive drywall as a casualty loss and provides a ”safe harbor” formula for determining the amount of the loss.

In numerous instances, homeowners with certain imported drywall have reported blackening or corrosion of copper electrical wiring and copper components of household appliances, as well as the presence of sulfur gas odors. In November 2009, the Consumer Product Safety Commission (CPSC) reported that an indoor air study of a sample of 51 homes found a strong association between the problem drywall, levels of hydrogen sulfide in those homes and corrosion of metals in those homes.

Revenue Procedure 2010-36 provides the following relief:

• Individuals who pay to repair damage to their personal residences or household appliances resulting from corrosive drywall may treat the amount paid as a casualty loss in the year of payment.

• Taxpayers who have already filed their income tax return for the year of payment generally have three years to file an amended return and claim the deduction.The amount of a loss that may be claimed depends on whether the taxpayer has a pending claim for reimbursement (or intends to pursue reimbursement) of the loss through property insurance, litigation or otherwise.

• In cases where a taxpayer does not have a pending claim for reimbursement, the taxpayer may claim as a loss all unreimbursed amounts paid during the taxable year to repair damage to the taxpayer’s personal residence and household appliances resulting from corrosive drywall.

• If a taxpayer does have a pending claim (or intends to pursue reimbursement), a taxpayer may claim a loss for 75 percent of the unreimbursed amount paid during the taxable year to repair damage to the taxpayer’s personal residence and household appliances that resulted from corrosive drywall.

A taxpayer who has been fully reimbursed before filing a return for the year the loss was sustained may not claim a loss. A taxpayer who has a pending claim for reimbursement (or intends to pursue reimbursement) may have income or an additional deduction in subsequent taxable years depending on the actual amount of reimbursement received.

For purposes of this revenue procedure, the term “corrosive drywall” means drywall that is identified as problem drywall under the two step identification method published by the CPSC and the Department of Housing and Urban Development in their interim guidance dated January 28, 2010.

Further details and limitations can be found in Revenue Procedure 2010-36 on IRS.gov.

Taxpayers Face Oct. 15 Deadlines: Due Dates for Extension Filers, Non-Profits Approach

Oct. 15 is fast approaching and is a key deadline for millions of individual taxpayers who requested an extension to file their 2009 tax returns. It is also a crucial due date for thousands of small nonprofit organizations at risk of losing their tax-exempt status because they have not filed the required forms in the last three years.

“The Oct. 15 deadline is particularly important this year because it’s the last chance for many small charities to comply with the law under the one-time relief program the IRS announced in July,” said IRS Commissioner Doug Shulman. “And as always, it’s an important deadline for taxpayers who took an extension to file their returns.”

Don’t Miss Your 1040 Deadline

The IRS expects to receive as many as 10 million tax returns from taxpayers who used Form 4868 to request a six-month extension to file their returns. Some taxpayers can wait until after Oct. 15 to file, including those serving in Iraq, Afghanistan or other combat zone localities and people affected by recent natural disasters.

The IRS encourages taxpayers to e-file. E-file with direct deposit results in a faster refund than by using a paper return. Electronic returns also have fewer errors than paper returns. Oct. 15 is the last day to take advantage of e-file and the Free File program.

Free File is a fast, easy and free way to prepare and e-file federal taxes online. The Free File program provides free federal income tax preparation and electronic filing for eligible taxpayers through a partnership between the IRS and the Free File Alliance LLC, a group of private sector tax software companies.

File If You Are Tax Exempt

Small nonprofit organizations at risk of losing their tax-exempt status because they failed to file the required returns for 2007, 2008 and 2009 can preserve their status by filing returns by Oct. 15 under the one-time relief program.

The IRS has posted on a special page of IRS.gov the names and last-known addresses of these at-risk organizations, along with guidance about how to come back into compliance. The organizations on the list have return due dates between May 17 and Oct. 15, 2010, but the IRS has no record that they filed the required returns for any of the past three years.

Two types of relief are available for small exempt organizations — a filing extension for the smallest organizations required to file Form 990-N, Electronic Notice (e-Postcard) , and a voluntary compliance program (VCP) for small organizations eligible to file Form 990-EZ, Short Form Return of Organization Exempt From Income Tax.

Small organizations required to file Form 990-N simply need to go to the IRS website, supply the eight information items called for on the form, and electronically file it by Oct. 15. That will bring them back into compliance.

Under the VCP, tax-exempt organizations eligible to file Form 990-EZ must file their delinquent annual information returns by Oct. 15 and pay a compliance fee. Details about the VCP are on the IRS website, along with frequently asked questions.

Check Your Withholding

With little more than three months remaining in the calendar year, individual taxpayers are encouraged to double check their federal withholding now to make sure they are having enough taxes taken out of their pay.

“Now is a good time to make sure your employer is withholding the proper amount,” Shulman said. If you face a shortfall in your federal withholding, there is still time left in the year to make up the difference.”

The average refund for 2009 was $2,887, up 8 percent from 2008. Even though the Making Work Pay Tax Credit lowered tax withholding rates in 2009 and 2010 for millions of American households, some workers and retirees still need to take steps to be sure enough tax is being taken out of their checks.

Those who should pay particular attention to their withholding include:

• Married couples with two incomes

• Individuals with multiple jobs

• Dependents

• Some Social Security recipients who work and

• Workers who do not have valid Social Security numbers.

Retirees who receive pension payments may also need to check their federal withholding.

As was the case in 2009, taxpayers who wind up owing tax because too little was taken out of their paychecks during 2010, may qualify for special relief on a penalty that sometimes applies. Depending on their personal situation, some people could have less withheld from their paychecks than they need or want. Failure to adjust withholding could result in potentially smaller refunds or in limited instances may cause a taxpayer to owe tax rather than receive a refund next year.

The IRS withholding calculator on IRS.gov can help a taxpayer compute the proper tax withholding. Worksheets in Publication 919, How Do I Adjust My Withholding?, can also be used to do the calculation. If the result suggests an adjustment is necessary, the taxpayer should submit a new Form W-4, Withholding Allowance Certificate, to his or her employer, or adjust the amount of quarterly tax paid.

IRS Issues Guidance on Expanded Adoption Credit Available for Tax-Year 2010

The Internal Revenue Service today issued guidance on the expanded adoption credit included in the Affordable Care Act. The IRS also released a draft version of the form that eligible taxpayers will use to claim the newly-expanded adoption credit on 2010 tax returns filed next year.

The Affordable Care Act raises the maximum adoption credit to $13,170 per child, up from $12,150 in 2009. It also makes the credit refundable, meaning that eligible taxpayers can get it even if they owe no tax for that year. In general, the credit is based on the reasonable and necessary expenses related to a legal adoption, including adoption fees, court costs, attorney’s fees and travel expenses. Income limits and other special rules apply.

In addition to filling out Form 8839, Qualified Adoption Expenses, eligible taxpayers must include with their 2010 tax returns one or more adoption-related documents, detailed in the guidance issued today.

The documentation requirements, designed to ensure that taxpayers properly claim the credit, mean that taxpayers claiming the credit will have to file paper tax returns. Normally, it takes six to eight weeks to get a refund claimed on a complete and accurate paper return where all required documents are attached. The IRS encourages taxpayers to use direct deposit to speed their refund.

Taxpayers claiming the credit will still be able to use IRS Free File to prepare their returns, but the returns must be printed out and sent to the IRS, along with all required documentation.

Related Items:
• Notice 2010-66
• Revenue Procedure 2010-31
• Revenue Procedure 2010-35

Employee Withholding Taxes Likely to Increase in 2011

There are many reasons why employees are likely to see more taxes withheld from their paychecks in 2011.

Higher tax brackets. Unless Congress acts, the provision in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA, PL 107-16) that provided for lower income tax rates will no longer be in effect beginning in 2011. Income tax brackets would change as follows:

1. The 10% bracket would disappear (the lowest tax bracket would be 15%).

2. The size of the 15% tax bracket for joint filers and qualified surviving spouses would be 167% (rather than 200%) of the 15% tax bracket.

3. The top four tax brackets would rise from 25%, 28%, 33%, and 35% to 28%, 31%, 36%, and 39.6%.

Making Work Pay credit. The American Recovery and Reinvestment Act of 2009 (ARRA) included a provision that provides a refundable income tax credit (the Making Work Pay credit) to individuals below a certain income tax level on their 2009 and 2010 personal income tax returns. Employees receive the credit incrementally through a reduction in the amount withheld from their paychecks. The credit expires after the 2010 tax year. Withholding tables will need to be adjusted in 2011 to take into account the fact that employees will no longer be able to claim this credit.

Advance earned income credit. This credit allowed certain low-income employees to receive an advance payment of the earned income credit in their paychecks. Their withholding was lowered to take into account the payment. The advance earned income credit has been repealed beginning with the 2011 tax year.

Supplemental wage rates. Unless Congress acts to extend this EGTRRA provision, the supplemental wage rate on compensation paid to employees in addition to their regular wages (e.g., bonuses, commissions, severance pay) will increase from 25% to 28% on supplemental wages totaling $1 million or less in the calendar year. For supplemental wage payments totaling more than $1 million in a calendar year, the rate will increase from 35% to 39.6%.

Backup withholding. Backup withholding is required on certain non-wage payments made to payees for whom an information return was filed which had either a missing or an incorrect taxpayer identification number. The backup withholding rate is currently 28%. It will increase to 31% in 2011 unless Congress acts to extend this EGTRRA provision.

Employer-provided educational assistance. Current law allows employers to reimburse up to $5,250 of an employee's non-job-related educational expenses on a tax-free basis if the reimbursement is made through an educational assistance program that meets the requirements in IRC §127. This fringe benefit is no longer available beginning in the 2011 tax year unless Congress acts to extend this EGTRRA provision. The educational assistance exclusion will also no longer be available on payments for graduate level education after 2010 unless Congress acts to extend this provision.

Tax Court Once Again Invalidates Reg Placing Time Limit on Request for Equitable Innocent Spouse Relief

Hall, (2010) 135 TC No. 19

In a reviewed opinion appealable to the Sixth Circuit, the Tax Court has once again invalidated Reg. § 1.6015-5(b)(1), which provides that a spouse must request equitable relief under Code Sec. 6015(f) no later than two years from the first collection activity against the spouse. The Court said it would not go along with the Seventh Circuit's contrary holding in Lantz outside of that Circuit.

Background. Each spouse is jointly and severally liable for the tax, interest, and penalties (other than the civil fraud penalty) arising from a joint return. Code Sec. 6015(f) allows relief to a requesting spouse if, among other conditions, taking into account all the facts and circumstances, it is inequitable to hold the individual liable.

To be eligible for relief under Code Sec. 6015(b) (innocent spouse relief) or Code Sec. 6015(c) (separate liability relief), the Code explicitly provides that the requesting spouse must elect relief not later than the date that is 2 years after the date that IRS has begun collection activities with respect to the individual making the election. (Code Sec. 6015(b)(1)(E), Code Sec. 6015(c)(3)(B)) However, there is no such limitation in Code Sec. 6015(f).

Reg. § 1.6015-5(b)(1) provides that a spouse requesting relief under Code Sec. 6015(f) must do so by filing Form 8857 (Request for Innocent Spouse Relief) or a similar statement with IRS no later than two years from the date of the first collection activity against the requesting spouse for the joint tax liability.

In Lantz, (2009) 132 TC No. 8, the Tax Court concluded that Reg. § 1.6015-5(b)(1) is an invalid interpretation of Code Sec. 6015(f) (see Federal Taxes Weekly Alert 04/09/2009).

The Tax Court held that to be eligible for relief under Code Sec. 6015(b) (innocent spouse relief) or Code Sec. 6015(c) (separate liability relief), the Code explicitly provides that the requesting spouse must elect relief not later than the date that is 2 years after the date that IRS has begun collection activities with respect to the individual making the election. (Code Sec. 6015(b)(1)(E), Code Sec. 6015(c)(3)(B)) However, it said no such limitation is imposed in Code Sec. 6015(f). The Court found that the reg, by imposing a limitation that Congress explicitly incorporated into Code Sec. 6015(b) or Code Sec. 6015(c) but omitted from Code Sec. 6015(f), failed to give effect to the unambiguously expressed intent of Congress. The Court concluded that the equitable remedy which is available under Code Sec. 6015(f) only if relief is not available to an individual under Code Sec. 6015(b) or Code Sec. 6015(c) was meant to be broader than those provisions.

Earlier this year, the Seventh Circuit reversed the Tax Court and held the reg was valid (Lantz, CA 7 06/08/2010, 105 AFTR 2d ¶ 2010-935, see Federal Taxes Weekly Alert 06/17/2010). The Seventh Circuit said that the fact that Congress designated a deadline in two provisions of the same statute and not in a third was not a compelling argument that it meant to preclude IRS from imposing a deadline applicable to cases governed by that third provision. Whether IRS borrowed the two-year limitations period from the other two provisions or simply decided that two years was the right deadline was of no consequence because IRS was doing nothing unusual in imposing a deadline. The Seventh Circuit also observed that if there was no deadline for equitable relief, the two-year deadlines for regular and separate relief “will be set largely at naught” because the substantive criteria of Code Sec. 6015(b) and Code Sec. 6015(c) are virtually the same as those of Code Sec. 6015(f).

Tax Court sticks to its guns. In a new case dealing with Code Sec. 6015(f) and the Reg. § 1.6015-5(b)(1) two-year deadline, the Tax Court in a reviewed opinion has once again invalidated the reg using essentially the same reasoning it employed inLantz, and indicated it wouldn't follow the Seventh Circuit's holding outside of the latter's jurisdiction.

In holding that the taxpayer in the new case was entitled to equitable relief under Code Sec. 6015(f), even though she submitted her request more than 2 years after collection activities had commenced, the Tax Court once again ruled that Reg. § 1.6015-5(b)(1) wasn't entitled toChevron deference (IRS regs are given controlling weight unless they are “arbitrary, capricious and manifestly contrary to the statute”).

Seven Tax Court judges agreed with the majority, and five agreed with a concurring opinion that advanced an additional reason why the reg should be held invalid.

Observation: This dispute is far from over. A recent Chief Counsel Notice revealed that the issue of whether Reg. § 1.6015-5(b)(1) is valid is pending in the Second and Third Circuits, that IRS is holding firm on the issue and that IRS is considering appeals in additional Circuits (see article in Federal Taxes Weekly Alert 07/10/2010). IRS may well add to its list the Sixth Circuit, to which Hall is appealable.

Research References: For equitable innocent spouse relief, see FTC 2d/FIN ¶ V-8553; United States Tax Reporter ¶ 60,154.04; TaxDesk ¶ 570,928.

EBSA Issues FAQs on Health Care Reform Implementation

EBSA, FAQs regarding Affordable Care Act Implementation Compliance, 9/20/2010

DOL's Employee Benefits Security Administration (EBSA) has issued a series of frequently asked questions addressing various implementation issues arising under the Affordable Care Act with respect to grandfathered health plans, claims and internal and external appeals, dependent coverage, and out-of-network emergency services.

EBSA, IRS, and HHS are working together with employers, issuers, states, providers, and other stakeholders to help them come into compliance with the new law, EBSA said. For the three departments, compliance assistance is a high priority, and their approach to implementation emphasizes assisting (rather than imposing penalties on) plans, issuers, and others that are working diligently and in good faith to understand and come into compliance with the new law. (Q1)

Among the issues addressed by the FAQs are the following:

Grandfathered plans. Addressing the interim final regs applicable to grandfathered plans (see RIA Pension and Benefits Week 6/21/2010), EBSA responded to a concern from some issuers that they do not always have the information needed to know whether (or when) an employer plan sponsor changes its rate of contribution towards the cost of group health plan coverage. EBSA stated that an insured group health plan that is a grandfathered health plan will continue to be considered a grandfathered health plan, if, no later than January 1, 2011 for policies renewed before January 1, 2011, issuers—

• Require a plan sponsor upon renewal, to make a representation regarding its contribution rate for the plan year covered by the renewal, as well as its contribution rate on March 23, 2010, and

• Have policies, certificates, or contracts of insurance that disclose in a prominent and effective manner that plan sponsors are required to notify the issuer if the contribution rate changes at any point during the plan year.

However, this relief will no longer apply as of the earlier of: (a) the first date on which the issuer knows that there has been at least a five-percentage-point reduction, or (b) the first date on which the plan no longer qualifies for grandfathered status without regard to the five-percentage-point reduction. (Q2)

Similarly, with respect to multiemployer plans, if multiemployer plans and contributing employers follow steps similar to those outlined above, the same relief will apply to the multiemployer plan unless or until the multiemployer plan knows that the contribution rate has changed. (Q3)

Claims, internal appeals, and external review. Following up on the interim final regs addressing the Affordable Care Act's rules on claims processing, internal appeals, and external review (see RIA Pension and Benefits Week 7/26/2010), as well as Technical Release 2010-01 (see RIA Pension and Benefits Week 8/30/2010), EBSA stated that, among other things, plans that do not strictly comply with all the standards set forth in the technical release may in some circumstances still be considered to be in compliance with PHSA Sec. 2719(b). Here, compliance will be determined on a case-by-case basis under a facts and circumstances analysis. For example, a self-insured group health plan's failure to contract with at least three independent review organizations (IROs) does not mean that the plan has automatically violated PHSA Sec. 2719(b). Instead, a plan may demonstrate compliance via other steps taken to ensure that its external review process is independent and without bias. (Q8)

EBSA also said that the technical release does not require a plan to contract directly with any IRO. Instead, the requirements are met where a self-insured plan contracts with a third-party administrator that, in turn, contracts with an IRO. However, such a contract does not automatically relieve the plan from responsibility if there is a failure to provide an individual with external review. (Q9)

Furthermore, EBSA made it clear that an IRO is not required to be in the same state as the plan. Rather, plans may contract with an IRO in another state. (Q10)

Dependent coverage. According to EBSA, a group health plan or issuer does not fail to satisfy PHSA Sec. 2714 and the interim final regs on dependent coverage (see RIA Pension and Benefits Week 5/17/2010) merely because the plan or issuer conditions health coverage on support, residency, or other dependency factors for individuals under age 26 who are not described in Code Sec. 152(f)(1). Thus, a plan may limit health coverage for children until the child turns 26 to sons, daughters, stepchildren, adopted children (including children placed for adoption), and foster children, while imposing additional conditions on eligibility, such as a condition that the individual be a dependent for income tax purposes–for individuals not described in Code Sec. 152(f)(1), such as a grandchild or niece. (Q14)

Out-of-network emergency services. The interim final regs under PHSA Sec. 2719A set forth minimum payment standards to ensure that a plan or issuer does not pay an unreasonably low amount to an out-of-network emergency service provider who, in turn, could simply bill the balance to the patient (see RIA Pension and Benefits Week 6/28/2010). According to EBSA, these minimum payment standards are not intended to apply in circumstances where state law prohibits balance billing. Similarly, if a plan or issuer is contractually responsible for any amounts balance billed by an out-of-network emergency services provider, the plan or issuer does not have to satisfy the payment minimums. However, in either case, patients must be provided with adequate and prominent notice of their lack of financial responsibility with respect to such amounts. In addition, even if state law prohibits balance billing, or if the plan or issuer is contractually responsible for amounts balance billed, the plan or issuer may not impose any copayment or coinsurance requirement that is higher than the copayment or coinsurance requirement that would apply if the services were provided in network. (Q15)

All the FAQs can be viewed on the EBSA website at http://www.dol.gov/ebsa/faqs/faq-aca.html.

Paid Ppreparer Identification Number Application Form Now on IRS Website

The IRS has posted new Form W-12,IRS Paid Preparer Tax Identification Number (PTIN) Application, on its website. The form replaces Form W-7P,Application for Preparer Tax Identification Number.

Who must apply for a PTIN. Anyone who is a paid tax return preparer must apply for and receive a paid preparer tax identification number (PTIN). For purposes of these rules, a tax return preparer is any individual who is compensated for preparing, or assisting in the preparation of, all, or substantially all, of a tax return or claim for refund of tax. David Williams, IRS Director of Electronic Tax Administration, indicated on a September 8 payroll industry telephone conference call that employees who only prepare employment tax returns for their employer will not be subject to the new rules.

After Dec. 31, 2010, paid tax return preparers must use the assigned PTIN on returns that they are paid to prepare. They will no longer be permitted to enter their Social Security Number (SSN) in lieu of their PTIN on returns that they are paid to prepare.

The IRS is currently charging a $64.25 user fee to request a PTIN. All paid tax return preparers must file Form W-12 to apply for a PTIN, and pay the $64.25 fee associated with the application for a PTIN, even if they previously received a PTIN. They will be required to renew their PTINs annually and pay an associated user fee. The amount of the fee might change in future years, as the actual program costs will be periodically reevaluated.

Paid tax return preparers may complete the application on the IRS website, or they mail the form and fee to: IRS Tax Pro PTIN Processing Center, 104 Brookeridge Drive #5000, Waterloo, IA 50702. It will take four to six weeks to receive a PTIN if the application is mailed to the IRS.

There is a web page on the IRS website calledReturn Preparer Regulations - Getting Started that has further information on the new rules. Here are links to view the website and the new Form/instructions:

IRS Return Preparer Regulations - Getting Started website http://www.irs.gov/taxpros/article/0,,id=221009,00.html.

Form W-12 (and instructions) http://www.irs.gov/pub/irs-pdf/fw12.pdf.

Anti-Offshoring Tax Bill Introduced in Senate

Late on September 21, Senator Dick Durbin (D-IL) introduced S. 3816, the “Creating American Jobs and Ending Offshoring Act.” The Senate may vote on the measure during the week of September 27.

This new “anti-offshoring” bill would provide businesses with relief from the employer share of the Social Security payroll tax on wages paid to new U.S. employees performing services in the U.S., but only to businesses certifying that the U.S. employee is replacing an employee who had been performing similar duties overseas. This payroll tax relief would be available for 24 months for employees hired during the three-year period beginning Sept. 22, 2010.

Effective on the enactment date (with transitional rules for existing transactions), S. 3816 also would prohibit a firm from taking any deduction, loss or credit for amounts paid in connection with reducing or ending the operation of a domestic trade or business and starting or expanding a similar trade or business overseas. The prohibition would not, however, apply to any severance payments or costs associated with outplacement services or employee retraining provided to any employees that lose their jobs as a result of the offshoring. Firms could apply for exemptions for transactions that don't result in the loss of employment in the U.S.

The bill also would end the rule allowing U.S. companies to defer paying U.S. tax on income earned by their foreign subsidiaries until that income is brought back to the U. S. The change would apply to tax years of foreign corporations beginning after the enactment date, and to tax years of U.S. shareholders within which or with which the tax years of such foreign corporations end. However, U.S. companies that locate facilities abroad in order to sell their products overseas would not be affected by this proposal.

“On Call” Time didn't Count Towards Qualification as Real Estate Professional Under PAL Rules

Moss (2010), 135 TC No.18

The Tax Court has held that the time that a taxpayer was “on call” to perform activities for his rental properties didn't count toward satisfying the 750-hour service performance requirement for a real estate professional under Code Sec. 469(c)(7)(B) of the passive activity loss (PAL) rules. As a result, the taxpayer's losses from his rental properties were limited to the $25,000 allowance under Code Sec. 469(i) (subject to phaseout limitations).

Background. Under Code Sec. 469(c)(1), the passive activity loss disallowance rules apply to any trade or business in which the taxpayer does not materially participate. A taxpayer is treated as materially participating in an activity if he meets at least one of the seven tests in Reg. § 1.469-5T. In general, any rental activity is per se a passive activity regardless of the taxpayer's participation in the activity. (Code Sec. 469(c)(2)) However, there are two principal exceptions to the general per se rule: (1) the qualifying real estate professional rule under Code Sec. 469(c)(7); and (2) subject to conditions and limitations, an individual who actively participates in a rental activity may deduct up to $25,000 of losses from the activity against nonpassive income under Code Sec. 469(i).

The Code Sec. 469(c)(2) per se rule for rental activities doesn't apply to a qualifying real estate professional. A taxpayer qualifies as such for a particular tax year if:

1. more than half of the personal services that he performs during that year are performed in real property trades or businesses in which he materially participates; and

2. he performs more than 750 hours of services during that tax year in real property trades or businesses in which he materially participates. (Code Sec. 469(c)(7)(B))

Observation: A taxpayer who is a qualifying real estate professional isn't automatically entitled to treat a real estate rental activity as non-passive. He must meet the general material participation standard with respect to that activity in order to use its losses or credits to offset non-passive activity income.

In the case of a joint return, the requirements for qualification as a real estate professional are satisfied if either spouse separately satisfies the requirements. Thus, if either spouse qualifies as a real estate professional, the rental activities of the real estate professional aren't per se passive under Code Sec. 469(c)(2). (Code Sec. 469(c)(7))

A natural person who: (1) has at least a 10% interest in any rental real estate activity, and (2) otherwise actively participates in that activity, may offset up to $25,000 of nonpassive income with that portion of the passive activity loss, or of the deduction equivalent of the passive activity credit, attributable to that activity. The $25,000 allowance ($12,500 for marrieds filing separately) is reduced (but not below zero) by 50% of the amount by which taxpayer's adjusted gross income (AGI) as specially computed exceeds (1) $100,000 ($50,000 for marrieds filing separately), or (2) $200,000 ($100,000 for marrieds filing separately) for any portion of the passive activity credit that is attributable to the rehabilitation credit. (Code Sec. 469(i))

Facts. James and Lynn Moss owned rental properties (four apartments and three single family homes) that generated losses for the year in issue. James worked full time at a nuclear power plant (40 hours a week, plus “call out” time (where an employee works unscheduled overtime) and “standby time” (where an employee is ordered to await a call for emergency work outside scheduled working hours).

The Mosses contended that they weren't subject to the Code Sec. 469 passive activity loss limitations because James qualified under the real estate professional exception. They offered a summary of the time James worked on the rental properties. The summary showed that James worked on the properties for less than the 750 hours required by Code Sec. 469(c)(7)(B)(ii) . However, the taxpayers contended that, in addition to the time James actually worked, he was “on call” for work on the rental properties during the time that he wasn't at his full-time job and that the “on call” hours should count toward meeting the 750-hour requirement.

They don't serve who only stand and wait. The Tax Court held that James' time being “on call” didn't count toward satisfying the 750-hour requirement under Code Sec. 469(c)(7)(B) because he didn't perform any actual work on the rental properties during the “on call” hours. Accordingly, the losses from the taxpayers' rental properties were subject to the limited offset allowed under Code Sec. 469(i).

Research References: For real estate professionals (qualifying taxpayers) defined under passive activity loss rules, see FTC 2d/FIN ¶ M-5168; United States Tax Reporter ¶ 4694.63; TaxDesk ¶ 413,808. For the $25,000 allowance for active rental real estate owner, see FTC 2d/FIN ¶ M-5131; United States Tax Reporter ¶ 4694.60; TaxDesk ¶ 413,601.

Disaster Victims in Wisconsin Qualify for Tax Relief and More Disaster Victims in Iowa and Texas Qualify for Tax Relief

IRS has announced on its website that victims of severe storms, flooding and tornadoes in counties of Wisconsin that are designated as federal disaster areas qualifying for individual assistance have more time to make tax payments and file returns. In addition, IRS has also announced on its website that 2 additional counties in Iowa and 1 in Texas have been designated as federal disaster areas qualifying for individual assistance. Victims of recent severe storms and flooding in numerous states have more time to make tax payments and file returns if they are affected taxpayers in counties that have been designated as federal disaster areas qualifying for individual assistance. Certain other time-sensitive acts also are postponed. The main disaster page can be viewed on the IRS website at http://www.irs.gov/businesses/small/article/0,,id=156138,00.html.

Wisconsin: The following are federal disaster areas qualifying for individual assistance on account of severe storms, flooding and tornadoes on July 20, 2010: Grant and Milwaukee counties. For these Wisconsin counties, the onset date of the disaster was July 20, 2010, the extended due date has been postponed retroactively to Sept. 20, and the deposit delayed date was Aug. 4, 2010. http://www.irs.gov/newsroom/article/0,,id=227922,00.html

Iowa: The following are federal disaster areas qualifying for individual assistance on account of severe storms, flooding and tornadoes on June 1: Appanoose, Black Hawk, Cherokee, Clayton, Decatur, Delaware, Dubuque, Fayette, Franklin, Hamilton, Howard, Humboldt, Ida, Jackson, Jasper, Jones, Kossuth, Lee, Lucas, Lyon, Mahaska, Marion, O'Brien, Osceola, Polk, Ringgold, Sioux, Story, Taylor, Union, Wapello, Warren, Webster and Wright counties. For these Iowa counties, the onset date of the disaster was June 1, 2010, the extended date was Aug. 2, 2010, and the deposit delayed date was June 16, 2010. http://www.irs.gov/newsroom/article/0,,id=226628,00.html

Texas: The following are federal disaster areas qualifying for individual assistance on account of Hurricane Alex beginning on June 30, 2010: Cameron, Hidalgo, Jim Hogg, Lubbock, Maverick, Starr, Val Verde, Webb and Zapata counties. For these Texas counties, the onset date of the disaster was June 30, 2010, the extended due date was Aug. 30, 2010, and the deposit delayed date was July 15, 2010. http://www.irs.gov/newsroom/article/0,,id=226298,00.html

Biden Supports New Legislation on Misclassified Workers

CPA Daily News
Legislative Watch—

•Biden Supports New Legislation on Misclassified Workers
New Developments At A Glance—

•Disaster Victims in Wisconsin Qualify for Tax Relief and More Disaster Victims in Iowa and Texas Qualify for Tax Relief
•TIGTA Audit Calls on Chief Counsel to Streamline its Efforts on Private Letter Rulings
•IRS Complies with the Intent of Assessment Statute on Taxpayer Notification
Featured Articles—

•Comments Requested on Application of Nondiscrimination Rule to Insured Group Health Plans
•“On Call” Time didn't Count Towards Qualification as Real Estate Professional Under PAL Rules
•Participation in Benistar Plan Triggered Reportable Transaction Penalty
Accounting News—

•Liquidity Rules Underscore Importance of MD&As
•SEC Staff Accountants Explain Ins-and-Outs of Filing Reviews
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Legislative Watch—

Biden Supports New Legislation on Misclassified Workers

Vice President Joe Biden supports new House and Senate legislation that would provide guidance on the proper classification of workers. The legislation is called the “Fair Playing Field Act of 2010.” It was recently introduced in the House of Representatives (H.R. 6128) by Rep. James McDermott (D-Wa.) and in the Senate (S. 3786) by Senator John Kerry (D-Mass.).

The legislation would repeal Section 530 of the Revenue Act of 1978. Under Section 530, employers that meet the following three requirements are protected from potentially large employment tax assessments, even though they incorrectly categorized a worker as an independent contractor: (1) reasonable basis, (2) substantive consistency, and (3) reporting consistency. An employer can meet the “reasonable basis” requirement if judicial precedent, IRS rulings, a past IRS audit, or industry practice supports the classification of a worker as an independent contractor. An employer meets the substantive consistency requirement if it (and any predecessor business) consistently treated the workers in question as independent contractors. The reporting consistency requirement is met if the employer has not classified the workers as employees on any required federal tax returns, including information returns.

The legislation would also lift the current moratorium on the issuance of federal regulations and revenue rulings that would make it easier to understand the worker classification rules. Any new guidance on the worker classification rules would only be applied on a prospective basis.

“When employees are classified as independent contractors, whether by design or because the rules are unclear, they are denied access to critical benefits and protections, at significant cost to government at all levels,” said Vice President Biden. “For these reasons, stopping worker misclassification is a priority for the President's Middle Class Task Force, which I chair, and I applaud Senator Kerry and Congressman McDermott for introducing this bill. The legislation is timely, as misclassification is an increasing problem, one that puts employers who properly classify their workers at a disadvantage in the marketplace and costs the government billions of dollars in unpaid taxes. I urge the Congress to stand up for workers and create a level playing field for law-abiding businesses by supporting this bill” [Senator Kerry Press Release, 9/15/10; http://kerry.senate.gov/press/release/?id=cd7f5a6e-7feb-41ae-8e8f-6004669821fc].

The McDermott bill has been referred to the House Ways and Means Committee. The Kerry bill was forwarded to the Senate Finance Committee.

Senate Passes Small Business Jobs Bill Containing Tax Breaks for Large and Small Enterprises

NOTE: This is a long article.....

On September 16, the Senate by a vote of 61-38 passed H.R. 5297, the Small Business Lending Funding Act, as amended. The tax title of this bill is called the “Small Business Jobs Act of 2010”. The bill is headed to the House of Representatives, which is expected to pass it without change, thereby clearing the measure for the President's signature. The small business jobs bill includes a number of important tax provisions, including liberalized and expanded expensing for 2010 and 2011, revived bonus depreciation for 2010, five-year carryback of unused general business credits for eligible small businesses, removal of cell phones from the listed property category, and liberalized Code Sec. 6707A penalty rules.

Observation: The “Small Business Jobs Act” is a misnomer because it carries many tax provisions affecting large as well as small businesses, plus changes that affect individuals, such as eased Roth IRA rules.

Here's a detailed summary of the tax changes in the small business jobs bill as it passed the Senate, along with Code Sections affected:

Dollar amounts for expensing liberalized. Under current law, the Code Sec. 179 expensing limit for tax years beginning in 2010 is $250,000, and the maximum expensing amount is reduced (i.e., phased out, but not below zero) by the amount by which the cost of Code Sec. 179 property placed in service exceeds $800,000 (the beginning-of-phaseout amount). For tax years beginning after 2010, these amounts are to revert to $25,000 and $200,000 respectively.

The small business jobs bill would for tax years beginning in 2010 and 2011 increase the maximum Code Sec. 179 expensing amount to $500,000 and the beginning-of-phaseout amount to $2,000,000. (Code Sec. 179(b)(1) and Code Sec. 179(b)(2))

Observation: Virtually all small businesses and many medium sized businesses that don't have heavy machinery and equipment needs will be able to use expensing. For property placed in service in tax years beginning in 2010 or 2011, the Code Sec. 179 deduction wouldn't phase out completely until the cost of expensing-eligible property exceeds $2,500,000 ($2,000,000 beginning-of-phaseout amount) + $500,000 (dollar limitation)).

Observation: The small business jobs bill would grant a welcome tax-saving windfall to taxpayers that already have placed in service Code Sec. 179 eligible property and would not have been able to expense the full cost under current law but will be able to if the bill is enacted.

Qualified real property expensing. For any tax year beginning in 2010 or 2011, a taxpayer could elect to treat up to $250,000 of qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property) as expensing-eligible property. (Certain types of property, such as that used for lodging, would not be eligible.) (Code Sec. 179(f)(1)) The dollar cap would apply to the aggregate cost of qualified real property.

Observation: This would be the first time that Code Sec. 179 expensing could be claimed for realty. Under current law, the expensing election is limited to depreciable tangible personal property purchased for use in the active conduct of a trade or business, including “off-the-shelf” computer software.

However, no amount attributable to qualified real property could be carried over to a tax year beginning after 2011, but to the extent that any amount could not be carried over to a tax year beginning after 2011, the Code would be applied as if no Code Sec. 179 expensing election had been made for that amount.

Other expensing changes. The small business jobs bill also provides that a taxpayer's ability to revoke a Code Sec. 179 election without IRS consent applies to any tax year beginning after 2002 and before 2012 (instead of before 2011, as under current law). (Code Sec. 179(c)(2)) Additionally, computer software would be qualifying property for purposes of the Code Sec. 179 election if it is placed in service in a tax year beginning after 2002 and before 2012 (instead of before 2011, as under current law). (Code Sec. 179(d)(1)(A)(ii))

Bonus first-year depreciation extended through 2010. The Act extends 50% bonus first-year depreciation for one year, i.e., makes it available for qualifying property acquired and placed in service in 2010 (as well as 2011, for certain long-lived property). (Code Sec. 168(k)(2)(A)(iv) and Code Sec. 168(k)(2)(A)(iii))

Observation: Bonus depreciation would grant an extra writeoff to all businesses, large or small. And it would be a windfall to taxpayers that already have bought and placed in service bonus-depreciation-eligible property this year.

First year dollar cap for autos boosted by $8,000. Under Code Sec. 280F, depreciation deductions (including Code Sec. 179 expensing) that can be claimed for passenger autos is subject to dollar limits that are annually adjusted for inflation. For passenger automobiles placed in service in 2010, the adjusted first-year limit is $3,060. The adjusted first year limit is $3,160 for light trucks or vans. These are passenger automobiles built on a truck chassis, including minivans and sport-utility vehicles (SUVs) built on a truck chassis that are subject to the Code Sec. 280F limits because they are rated at 6,000 points gross (loaded) vehicle weight or less.

The small business jobs bill would boost the first year business-auto writeoff by $8,000 (i.e., to $11,060 for autos and $11,160 for light trucks or vans) for vehicles that are qualified property for bonus depreciation purposes (i.e., are new and acquired and placed in service in 2010). (Code Sec. 168(k)(2)(A)(iv))

Special long-term contract accounting rule for bonus depreciation. Bonus depreciation would be decoupled from allocation of contract costs under the percentage of completion accounting method rules for assets with a depreciable life of seven years or less. More specifically, for property placed in service after Dec. 31, 2009, solely for purposes of determining the percentage of completion under Code Sec. 460(b)(1)(A), the cost of qualified property would be taken into account as a cost allocated to the contract as if bonus depreciation had not been enacted. (Code Sec. 460(c)(6)) Qualified property would be property otherwise eligible for bonus depreciation that has a MACRS recovery period of 7 years or less and that is placed in service after Dec. 31, 2009, and before Jan. 1, 2011 (Jan. 1, 2012, in the case of Code Sec. 168(k)(2)(B) property (certain longer-lived property)).

Deduction for startup expenses would be increased. For tax years beginning after Dec. 31, 2009, and before Jan. 1, 2011, the deduction for startup expenses under Code Sec. 195 would be increased from $5,000 to $10,000 and the phaseout threshold would be increased from $50,000 to $60,000. (Code Sec. 195(b)(3))

100% exclusion for gain from qualified small business (QSBS) stock. There would be a 100% exclusion of gain from the sale of QSBS stock (a) acquired after the enactment date of the small business jobs bill and before Jan. 1, 2011, and (b) held for at least five years. (Code Sec. 2012)

Five-year carryback of small business unused general business credits. The general business credit (GBC) generally can't exceed the excess of the taxpayer's net income tax over the greater of the taxpayer's tentative minimum tax or 25% of so much of the taxpayer's net regular tax liability as exceeds $25,000. Credits in excess of this limitation may be carried back one year and forward up to 20 years. Under the small business jobs bill, the carryback period for eligible small business (ESB) credits would be extended from one to five years. (Code Sec. 39(a)(4))

ESB credits, for a tax year beginning in 2010, would include all of the component credits of the GBC, but only as determined with respect to eligible small businesses (ESBs). ESBs would be businesses that (1) are corporations the stock of which isn't publicly traded, partnerships or sole proprietorships and (2) have average annual gross receipts, for the three-tax-year period preceding the tax year, of no more than $50 million.

ESB credits not subject to AMT. For the first tax year beginning after Dec. 31, 2009, ESBs, as defined above for purposes of the longer credit carryback, would be able to use all types of general business credits to offset their alternative minimum tax (AMT). (Code Sec. 38) More specifically, the tentative minimum tax would be treated as being zero for ESB credits. Thus, an ESB credit could offset both regular and AMT liability.

Reduced recognition period for S corp built in gains tax. Where a C corporation elects to become an S corporation (or where an S corporation receives property from a C corporation in a nontaxable carryover basis transfer), the S corporation is taxed at 35% on all gains that were built-in at the time of the election if the gains are recognized during the recognition period. The recognition period generally is the first ten S corporation years (or the ten-period after the transfer). For tax years beginning in 2009 and 2010, no tax is imposed on the net unrecognized built-in gain of an S corporation if the seventh tax year in the recognition period preceded the 2009 and 2010 tax years.

The small business jobs bill would, for any tax year beginning in 2011, shorten the holding period of assets subject to the built-in gains tax to 5 years if the fifth tax year in the recognition period precedes the tax year beginning in 2011. (Code Sec. 1374(d)(7))

One year self-employment tax break. For tax years beginning after Dec. 31, 2009, but before Jan. 1, 2011, when calculating self-employment taxes, the deduction for health insurance costs of a self-employed taxpayer under Code Sec. 162(l) could be taken into account (i.e., could be deducted) in computing net earnings from self-employment. (Code Sec. 162(l)(4))

The Joint Committee on Taxation's Technical Explanation of H.R. 5297 as taken up by the Senate says that it is intended that earned income within the meaning of Code Sec. 401(c)(2) be computed without regard to the deduction for the cost of health insurance. Thus, earned income for purposes of the limitation applicable to the health insurance deduction would be computed without regard to this deduction.

Cell phones no longer listed property. Cell phones (and similar telecommunications equipment) would be removed from the definition of listed property under Code Sec. 280F, for tax years beginning after Dec. 31, 2009. (Code Sec. 280F(d)(4)(A))

Relaxed penalty for failure to include reportable transaction information with return. Retroactively effective to penalties assessed after Dec. 31, 2006, the controversial Code Sec. 6707A penalty would be revised so that the penalty for failure to disclose a reportable transaction to IRS would be commensurate with the tax benefit received from the transaction.

Reportable transactions are transactions that IRS has identified as listed tax shelters or that have characteristics of tax shelters, including large losses or confidentiality agreements.

Under the small business jobs bill, the penalty would be 75% of the tax benefit received, with a minimum penalty of $10,000 for corporations and $5,000 for individuals, and for listed transactions a maximum penalty of $200,000 for corporations and $100,000 for individuals (for other reportable transactions, the maximum penalty would be $50,000 for corporations and $10,000 for individuals). (Code Sec. 6707A(b))

The small business jobs bill would pay for its tax breaks with the following revenue raisers:

Information reporting for rental income. For payments made after Dec. 31, 2010, persons receiving rental income from real property would have to file information returns to IRS and to service providers reporting payments of $600 or more during the year for rental property expenses. Exceptions would be provided for individuals temporarily renting their principal residences (including active members of the military), taxpayers whose rental income doesn't exceed an IRS-determined minimal amount, and those for whom the reporting requirement would create a hardship (under IRS regs). (Code Sec. 6041(h))

Increased penalty for failure to timely file information returns. For information returns required to be filed after Dec. 31, 2010, the Code Sec. 6721 penalties for failure to timely file information returns to IRS would be increased. The first-tier penalty would go from $15 to $30, and the calendar year maximum from $75,000 to $250,000. The second-tier penalty would be increased from $30 to $60, and the calendar year maximum from $150,000 to $500,000. The third-tier penalty would be increased from $50 to $100, and the calendar year maximum from $250,000 to $1,500,000. For small business filers, the calendar year maximum would go from $25,000 to $75,000 for the first-tier penalty, from $50,000 to $200,000 for the second-tier penalty, and from $100,000 to $500,000 for the third-tier penalty. The minimum penalty for each failure due to intentional disregard would be increased from $100 to $250.

Increased penalty for failure to furnish a payee statement. The Code Sec. 6722 penalty for failure to furnish a payee statement would be revised to provide tiers and caps similar to those applicable to the penalty for failure to file the information return. A first-tier penalty would be $30, subject to a maximum of $250,000; a second-tier penalty would be $60 per statement, up to $500,000, and the third-tier penalty $100, up to a maximum of $1,500,000. Limitations would apply on penalties for small businesses and increased penalties for intentional disregard that parallel the penalty for failure to furnish information returns.

Exception to pre-levy CDP hearing rule for Federal contractors. For levies issued after the enactment date, the small business jobs bill would allow the IRS to issue levies prior to a CDP hearing with respect to Federal tax liabilities of Federal contractors identified under the Federal Payment Levy Program. When a levy is issued prior to a CDP hearing, the taxpayer would have an opportunity for a CDP hearing within a reasonable time after the levy. (Code Sec. 6330(f)(4))

Code Sec. 457(b) plans could include Roth accounts. For tax years beginning after Dec. 31, 2010, retirement savings plans sponsored by state and local governments (i.e., governmental Code Sec. 457(b) plans) would be able to include Roth accounts. (Code Sec. 402A(e)(1), Code Sec. 402A(e)(2))

Certain retirement plans can rollover distributions into Roth accounts. For distributions after the enactment date, 401(k), 403(b), and governmental 457(b) plans could permit participants to roll their pre-tax account balances into a Roth account. If the rollover is made in 2010, the participant could elect to pay the tax in 2011 and 2012. (Code Sec. 402A(c)(4))

Limit on credit for production of biofuel from cellulosic feedstocks. For fuels sold or used after Dec. 31, 2010, eligibility for the Code Sec. 40 tax credit for the production of biofuel from cellulosic feedstocks would be limited to fuels that are not highly corrosive (i.e., fuels that could be used in a car engine or in a home heating application). (Code Sec. 40(b)(6)(E)(iii))

Annuitization of nonqualified annuity allowed. For amounts received in tax years beginning after Dec. 31, 2010, the small business jobs bill would permit a portion of an annuity, endowment, or life insurance contract to be annuitized while the balance is not annuitized, provided that the annuitization period is for 10 years or more, or is for the lives of one or more individuals. (Code Sec. 72(a))

Sourcing of guarantee income. Amounts received directly or indirectly for guarantees of indebtedness of the payor issued after the enactment date would be sourced like interest and, as a result, if paid by U.S. taxpayers to foreign persons would generally be subject to withholding tax. (Code Sec. 861(a)(9)) The change would prospectively overturn the holding in Container Corporation, Successor to Interest of Container Holdings Corporation, Successor to Interest of Vitro International Corporation, (2010) 134 TC No. 5, that fees paid by a U.S. subsidiary to its foreign parent for guaranteeing the subsidiary's debt were analogous to payments for a service and therefore were not U.S. source income. No inference would be intended with respect to the treatment of guarantees issued before the enactment date.

Accelerated estimated tax payment for large corporations. Estimated taxes for large corporations (those with assets of not less than $1 billion) otherwise due for July, August, or September of 2015, would be increased by 36%.

Senate Passes Small Business Tax Relief

The Senate on Thursday passed the Creating Small Business Jobs Act of 2010 (part of the Small Business Jobs and Credit Act, HR 5297) by a vote of 61–38, and sent it back to the House of Representatives. The bill as passed by the Senate differs from the version the House passed in June, with several provisions added, and some dropped, including a provision that would have required grantor retained annuity trusts (GRATs) to last for a term of not less than 10 years.

The Senate bill contains several tax items affecting small businesses and some revenue raisers.

Small Business Tax Relief

Section 179 expensing and bonus depreciation. The bill increases the maximum amount a taxpayer may expense under IRC § 179 to $500,000 and increases the phaseout threshold amount to $2 million for tax years beginning in 2010 and 2011. The first-year 50% bonus depreciation available under IRC § 168(k) is extended for one year to apply to property acquired and placed in service in 2010 (or 2011 for certain long-lived and transportation property). The bill also allows taxpayers using the percentage-of-completion method to take into account the cost of qualified property as if bonus depreciation had not been enacted.

Qualified small business stock. The bill amends IRC § 1202 to increase the exclusion from gross income of gain from the sale or exchange of qualified small business stock from 50% to 100%, and the minimum tax preference does not apply. This provision applies to eligible stock acquired after the date of enactment and before Jan. 1, 2011.

Business credits. The carryback period for eligible small business credits under IRC § 38 is extended from one to five years. The bill also allows taxpayers to use eligible small business credits to offset both regular and alternative minimum tax liability. Both provisions are effective for credits determined in the taxpayer’s first tax year beginning after 2009.

Built-in gains tax. For tax years beginning in 2011, the bill provides that for purposes of computing the section 1374 built-in gains tax, the recognition period is the five-year period beginning with the first day of the first tax year for which the corporation was an S corporation.

Self-employed individuals’ health insurance. The bill allows self-employed individuals who deduct the cost of health insurance for themselves and their spouses, dependents, and children who have not attained age 27 as of the end of the tax year to take the deduction into account in calculating net earnings from self-employment for purposes of SECA taxes. This provision applies to the taxpayer’s first tax year beginning after 2009.

Startup expenses. The bill increases the section 195 deduction for trade or business startup expenses from $5,000 to $10,000 for tax years beginning in 2010 and 2011. The start of the limitation on the deduction is increased from $50,000 to $60,000. So for 2010 and 2011 the amount of the deduction is the lesser of (1) the amount of the startup expenses or (2) $10,000, reduced (but not below zero) by the amount by which the startup expenditures exceed $60,000.

Reportable and listed transactions. The bill limits the section 6707A penalty for failure to disclose a reportable transaction (that is, a transaction determined by the IRS to have a potential for tax avoidance or evasion) to 75% of the decrease in tax resulting from the transaction. The maximum annual penalty allowed will be $10,000 in the case of a natural person and $50,000 for all other persons for failure to disclose a reportable transaction. For listed transactions, the maximum penalty will be $100,000 in the case of a natural person and $200,000 for all other persons. The minimum penalty is $5,000 for natural persons and $10,000 for all other persons.

The bill also requires the IRS to report to Congress by Dec. 31, 2010, and then annually, on penalties assessed for certain tax shelters and reportable transactions (under sections 6662A, 6700(a), 6707, 6707A and 6708). The penalty under section 6707A has been criticized because the penalty amounts often exceed the tax benefit of the targeted transactions. The IRS has since last July been working under a self-imposed moratorium on collection enforcement of the section 6707A penalty to give Congress time to amend the penalty amounts. The AICPA has recommended that the IRS be allowed to abate the section 6707A penalty in cases where the taxpayer has acted reasonably and in good faith. The AICPA also believes that judicial review should be allowed in cases where the IRS has assessed a penalty under section 6707A. The Senate bill does not adopt either of these recommendations.

Cell phones. The bill removes cell phones from the definition of listed property. Thus, the heightened substantiation requirements and special depreciation rules that apply to listed property under IRC § 280A will no longer apply to cell phones. However, the Joint Committee on Taxation notes that this change “does not affect Treasury’s authority to determine the appropriate characterization of cell phones as a working condition fringe benefit under section 132(d) or that the personal use of such devices that are provided primarily for business purposes may constitute a de minimis fringe benefit, the value of which is so small as to make accounting for it administratively impracticable, under section 132(e).”

The AICPA recommended this statutory change in comments to the IRS in April 2008 and September 2009.

Revenue Raisers

The bill also contains several revenue-raising provisions.

Section 457 plan Roth contributions. The bill allows participants in government section 457 plans to treat elective deferrals as Roth contributions, effective for tax years beginning after 2010.

Rollovers to Roth accounts. The bill also allows rollovers from elective deferral plans to Roth-designated accounts. If a section 401(k) plan, section 403(b) plan or governmental section 457(b) plan has a qualified designated Roth contribution program, a distribution to an employee (or a surviving spouse) from an account under the plan that is not a designated Roth account is permitted to be rolled over into a designated Roth account under the plan for the individual. This provision is effective for distributions made after the date of enactment.

Annuitization. The bill permits a portion of an annuity, endowment or life insurance contract to be annuitized while the balance is not annuitized, provided that the annuitization period is for 10 years or more, or is for the lives of one or more individuals.

Reporting rental income. The bill makes recipients of rental income from real estate generally subject to the same information reporting requirements as taxpayers engaged in a trade or business. In particular, rental income recipients making payments of $600 or more to a service provider (such as a plumber, painter or accountant) in the course of earning rental income are required to provide an information return (typically Form 1099-MISC) to the IRS and to the service provider. This provision will apply to payments made after Dec. 31, 2010.

Information returns. The bill also increases the penalties for failure to file a correct information return. The first-tier penalty increases from $15 to $30, and the calendar-year maximum increases from $75,000 to $250,000. The second-tier penalty increases from $30 to $60, and the calendar-year maximum increases from $150,000 to $500,000. The third-tier penalty increases from $50 to $100, and the calendar-year maximum increases from $250,000 to $1,500,000. For small business filers, the calendar-year maximum increases from $25,000 to $75,000 for the first-tier penalty, from $50,000 to $200,000 for the second-tier penalty, and from $100,000 to $500,000 for the third-tier penalty. The minimum penalty for each failure due to intentional disregard increases from $100 to $250.

Federal contractor levies. The bill allows the IRS to issue levies prior to a collections due process hearing with respect to federal tax liabilities of federal contractors identified under the Federal Payment Levy Program, effective for levies issued after the date of enactment.

Cellulosic biofuels. The bill excludes so-called crude tall oil from the definition of cellulosic biofuel for purposes of the section 40 tax credit for alcohol used as fuel. Crude tall oil is a byproduct of the paper-making industry. Earlier this year, the Health Care and Education Reconciliation Act of 2010, PL 111-152, removed another paper byproduct—black liquor—from the definition of cellulosic biofuel.

Income from guarantees. This bill overrides the Tax Court’s recent decision in Container Corp., 134 TC no. 5 (2010), by amending the section 861 and 862 source rules to address income from guarantees issued after the date of enactment. Under new IRC § 861(a)(9), income from sources within the United States includes amounts received, whether directly or indirectly, from a noncorporate resident or a domestic corporation for the provision of a guarantee of indebtedness of such person.

Corporate estimated taxes. Finally, the bill increases the required corporate estimated tax payments factor for corporations with assets of at least $1 billion for payments due in July, August or September 2015.

IRS Expands Use of Electronic Payments, Discontinues Paper Coupons

The IRS has issued proposed regulations that would eliminate paper coupons for deposits of employment taxes, corporate income and estimated taxes, and many other taxes (REG-153340-09). The paper coupon payment system will be shut down at the end of this year.

With this change, taxpayers will be required to use the IRS’ Electronic Federal Tax Payment System (EFTPS) to make federal tax deposits of various withheld and estimated taxes. The preamble to the proposed regulations notes that over 97.5% of all federal tax deposits are already deposited electronically through EFTPS.

The proposed regulations do continue the exception under Temp. Treas. Reg. § 31.6302-1T(f)(4) for businesses that are depositing a minimal amount of withheld income and FICA taxes. Businesses that qualify can make their payments with their tax returns. Employers with a deposit liability of less than $2,500 for a return period can remit employment taxes with their quarterly or annual return.

The proposed regulations will require the following taxes to be deposited electronically:

1. Corporate income and corporate estimated taxes under Treas. Reg. § 1.6302-1;

2. Unrelated business income taxes of tax-exempt organizations under IRC § 511 under Treas. Reg. § 1.6302-1;

3. Private foundation excise taxes under IRC § 4940 under Treas. Reg. § 1.6302-1;

4. Taxes withheld on nonresident aliens and foreign corporations under Treas. Reg. § 1.6302-2;

5. Estimated taxes on certain trusts under Treas. Reg. § 1.6302-3;

6. FICA taxes and withheld income taxes under Treas. Reg. § 31.6302-1;

7. Railroad retirement taxes under Treas. Reg. § 31.6302-2;

8. Nonpayroll taxes, including backup withholding, under Treas. Reg. § 31.6302-4;

9. Federal Unemployment Tax Act (FUTA) taxes under Treas. Reg. § 31.6302(c)-3; and

10. Excise taxes reported on Form 720, Quarterly Federal Excise Tax Return, under Treas. Reg. § 40.6302(c)-1.

As proposed, the new rules would be effective for payments made on or after the date the final regulations are published in the Federal Register, but no earlier than Jan. 1, 2011, and the IRS says it expects to finalize the regulations before then.

The IRS has invited comments on the proposal, which can be submitted electronically at regulations.gov (IRS REG-153340-09). A public hearing will be held at the IRS Building in Washington on Sept. 21.

Business Owners in 419, 412i, Section 79 and Captive Insurance Plans Will Probably Be Fined by the IRS Under Section 6707A

September 2010
By: Lance Wallach

Taxpayers who previously adopted 419, 412i, captive insurance or Section 79 plans are in big trouble. In recent years, the IRS has identified many of these arrangements as abusive devices to funnel tax deductible dollars to shareholders and classified these arrangements as “listed transactions.” These plans were sold by insurance agents, financial planners, accountants and attorneys seeking large life insurance commissions. In general, taxpayers who engage in a “listed transaction” must report such transaction to the IRS on Form 8886 every year that they “participate” in the transaction, and you do not necessarily have to make a contribution or claim a tax deduction to participate. Section 6707A of the Code imposes severe penalties ($200,000 for a business and $100,000 for an individual) for failure to file Form 8886 with respect to a listed transaction. But you are also in trouble if you file incorrectly. I have received numerous phone calls from business owners who filed and still got fined. Not only do you have to file Form 8886, but it has to be prepared correctly. I only know of two people in the United States who have filed these forms properly for clients. They tell me that was after hundreds of hours of research and over fifty phones calls to various IRS personnel. The filing instructions for Form 8886 presume a timely filing. Most people file late and follow the directions for currently preparing the forms. Then the IRS fines the business owner. The tax court does not have jurisdiction to abate or lower such penalties imposed by the IRS.

Many business owners adopted 412i, 419, captive insurance and Section 79 plans based upon representations provided by insurance professionals that the plans were legitimate plans and were not informed that they were engaging in a listed transaction. Upon audit, these taxpayers were shocked when the IRS asserted penalties under Section 6707A of the Code in the hundreds of thousands of dollars. Numerous complaints from these taxpayers caused Congress to impose a moratorium on assessment of Section 6707A penalties.

The moratorium on IRS fines expired on June 1, 2010. The IRS immediately started sending out notices proposing the imposition of Section 6707A penalties along with requests for lengthy extensions of the Statute of Limitations for the purpose of assessing tax. Many of these taxpayers stopped taking deductions for contributions to these plans years ago, and are confused and upset by the IRS's inquiry, especially when the taxpayer had previously reached a monetary settlement with the IRS regarding its deductions. Logic and common sense dictate that a penalty should not apply if the taxpayer no longer benefits from the arrangement.

Treas. Reg. Sec. 1.6011-4(c)(3)(i) provides that a taxpayer has participated in a listed transaction if the taxpayer's tax return reflects tax consequences or a tax strategy described in the published guidance identifying the transaction as a listed transaction or a transaction that is the same or substantially similar to a listed transaction. Clearly, the primary benefit in the participation of these plans is the large tax deduction generated by such participation. It follows that taxpayers who no longer enjoy the benefit of those large deductions are no longer “participating ' in the listed transaction. But that is not the end of the story.

Many taxpayers who are no longer taking current tax deductions for these plans continue to enjoy the benefit of previous tax deductions by continuing the deferral of income from contributions and deductions taken in prior years. While the regulations do not expand on what constitutes "reflecting the tax consequences of the strategy”, it could be argued that continued benefit from a tax deferral for a previous tax deduction is within the contemplation of a “tax consequence” of the plan strategy. Also, many taxpayers who no longer make contributions or claim tax deductions continue to pay administrative fees. Sometimes, money is taken from the plan to pay premiums to keep life insurance policies in force. In these ways, it could be argued that these taxpayers are still “contributing”, and thus still must file Form 8886.

It is clear that the extent to which a taxpayer benefits from the transaction depends on the purpose of a particular transaction as described in the published guidance that caused such transaction to be a listed transaction. Revenue Ruling 2004-20 which classifies 419(e) transactions, appears to be concerned with the employer's contribution/deduction amount rather than the continued deferral of the income in previous years. This language may provide the taxpayer with a solid argument in the event of an audit.

Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, is a frequent speaker on retirement plans, financial and estate planning, and abusive tax shelters. He writes about 412(i), 419, and captive insurance plans. He speaks at more than ten conventions annually, writes for over fifty publications, is quoted regularly in the press and has been featured on television and radio financial talk shows including NBC, National Pubic Radio’s All Things Considered, and others. Lance has written numerous books including Protecting Clients from Fraud, Incompetence and Scams published by John Wiley and Sons, Bisk Education’s CPA’s Guide to Life Insurance and Federal Estate and Gift Taxation, as well as AICPA best-selling books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots. He does expert witness testimony and has never lost a case. Contact him at 516.938.5007, wallachinc@gmail.com or visit www.taxaudit419.com or www.taxlibrary.us.

The information provided herein is not intended as legal, accounting, financial or any other type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.

IRS to Hold Special Open House Saturday, Sept. 25 for Veterans and Persons with Disabilities

WASHINGTON — The Internal Revenue Service will host a special nationwide open house on Saturday, Sept. 25 to help taxpayers –– especially veterans and people with disabilities –– solve tax problems and respond to IRS notices.

One hundred offices, at least one in every state, will be open from 9 a.m. to 2 p.m. local time. IRS staff will be available on site or by telephone to help taxpayers work through issues and leave with solutions.

In many locations, the IRS will partner with organizations that serve veterans and the disabled to offer additional help and information to people in these communities. Partner organizations include the National Disability Institute (NDI), Vets First, Department of Veterans Affairs, National Council on Independent Living and the American Legion.

“Taxpayers have tremendous success solving their tax issues at our open houses,” IRS Commissioner Doug Shulman said. “I want to encourage veterans and people with disabilities to come in on Sept. 25. Just like we reached out earlier this year to small businesses and victims of the Gulf Oil Spill, we want to help other taxpayers put their toughest problems behind them.”

IRS locations will be equipped to handle issues involving notices and payments, return preparation, audits and a variety of other issues. At a previous IRS open house on June 5, over 6,700 taxpayers sought and received assistance and 96 percent had their issues resolved the same day.

At the Sept. 25 open house, anyone who has a tax question or has received a notice can speak with an IRS employee to get an answer to their question or a clear explanation of what is necessary to satisfy the request. A taxpayer who cannot pay a balance due can find out whether an installment agreement is appropriate and, if so, fill out the paperwork then and there. Assistance with offers-in-compromise — an agreement between a taxpayer and the IRS that settles the taxpayer’s debt for less than the full amount owed — will also be available. Likewise, a taxpayer struggling to complete a certain IRS form or schedule can work directly with IRS staff to get the job done.

Taxpayers requiring special services, such as interpretation for the deaf or hard of hearing, should check local listings and call the local IRS Office/Taxpayer Assistance Center ahead of time to schedule an appointment.

The open house on Sept. 25 is the third of three events scheduled after this year’s tax season. Plans are underway for similar events next year. Details will be available at a later date.

Reminder for Small Tax-Exempt Organizations

The IRS also encourages representatives of small tax-exempt charitable community organizations, many of which serve people with disabilities and veterans, to file Form 990-N before the Oct. 15 deadline. Community organizations that fail to file a Form 990-N by this date risk losing their tax exempt status. As of June 30, more than 320,000 organizations were at risk of losing their exempt status.

September 25th – IRS Open House for Veterans and Persons with Disabilities

The Internal Revenue Service will host a special nationwide open house in 100 offices across the country on Saturday, Sept. 25 to help taxpayers –– especially veterans and people with disabilities –– solve tax problems and respond to IRS notices. IRS staff will be available on site or by telephone to help taxpayers work through issues and leave with solutions.

Here are five things you need to know about the special open house.

1. One hundred offices, at least one in every state, will be open from 9 a.m. to 2 p.m. local time.

2. In many locations, the IRS will partner with organizations that serve veterans and the disabled to offer additional help and information to people in these communities.

3. IRS locations will be equipped to handle issues involving notices and payments, return preparation, audits and a variety of other issues.

4. Taxpayers requiring special services, such as interpretation for the deaf or hard of hearing, should check local listings and call the local IRS Office/Taxpayer Assistance Center ahead of time to schedule an appointment.

5. A complete list of IRS offices open on Saturday, Sept. 25 is available at IRS.gov.

SSA Changing Social Security Number Assignment Process

The Social Security Administration (SSA) has announced that, beginning in June 2011, it will assign Social Security Numbers (SSNs) to new applicants randomly. Since SSNs were first introduced in 1936, the SSA has assigned the first three digits of the SSN based on the state in the mailing address on the SSN application. However, this will change in June 2011 when the numbers assigned will no longer have any geographic correlation. The change is designed to make more SSNs available, and to help fight identity theft [Social Security Administration, Social Security Number Randomization - Frequently Asked Questions, 8/30/10].

Other changes. Beginning in June 2011, an SSN may begin with either the number "7" or "8." The number "8" has never been used before as the first number in the SSN. The number "7" has never been used before as the first number in the SSN for the general population. It is currently reserved for members of the Railroad Retirement System and for people applying for SSNs from outside of the United States.

The SSA notes that employers may need to revise their computer programs to account for these changes.

What won't change? The length of the SSN will not change, and SSNs will not be revised for current SSN holders. The SSA will continue not issuing SSNs beginning with the number "9." It will also continue not issuing SSNs beginning with the numbers: (1) "000" or "666" in positions 1-3; (2) "00" in positions 4-5; or (3) "0000" in positions 6-9. The current SSN verification process will also remain the same.

During the month of September, the SSA will be offering a series of conference calls to provide more information about the randomization process. Interested persons can register to participate in one of the sessions by sending an e-mail to Irene.C.Saccoccio@ssa.gov.

IRS Issues Guidance Explaining 2011 Changes to Certain Tax-Favored Arrangements

The IRS has issued new guidance on legislation in the Patient Protection and Affordable Care Act (Affordable Care Act), effective for tax years beginning after Dec. 31, 2010, that changes the rules on use of certain tax-favored arrangements, such as flexible spending arrangements (FSAs), to pay for over-the-counter medicines and drugs. The guidance includes frequently asked questions (FAQs) on the new legislation [Notice 2010-59, 2010-39 IRB; Rev Rul 2010-23, 2010-39 IRB].

Effective Jan. 1, 2011, any amount paid or distributed out of a health flexible spending arrangement (health FSA), health reimbursement arrangement (HRA), health savings account (HSA), or Archer medical savings account (Archer MSA), to pay for the cost of an over-the-counter medicine can't be reimbursed by an employer tax-free without a prescription. This new rule does not apply to reimbursements for the cost of insulin, which will continue to be permitted, even if purchased without a prescription [IRC §106(f)].

The IRS notes in a FAQ that the new rules only affect purchases of over-the-counter medicines and drugs without a prescription after Dec. 31, 2010. The new rules do not apply to purchases of over-the-counter medicines and drugs in 2010, even if they are reimbursed after Dec. 31, 2010.

The new rules also do not apply to items for medical care that are not medicines or drugs. Thus, equipment such as crutches, supplies such as bandages, and diagnostic devices such as blood sugar test kits will still qualify for reimbursement by a health FSA or HRA if purchased after Dec. 31, 2010, and a distribution from an HSA or Archer MSA for the cost of such items will still be tax-free, regardless of whether the items are purchased using a prescription.

The IRS also notes that if a plan allows an employee to use a debit or credit card to pay for over-the-counter medicine or drugs, the card must be reprogrammed no later than Jan. 15, 2011, so that the card can no longer be used to purchase these items.

An employee that uses funds from an HSA or Archer MSA to reimburse the cost of over-the-counter medicines or drugs purchased after Dec. 31, 2010 without a prescription will be required to include the distribution in income and will also be subject to an additional 20% tax.

IRS Alerts Taxpayers to EFTPS Fraud Scheme

The IRS has issued a Problem Alert to advise taxpayers of a scheme targeting users of the Electronic Federal Tax Payment System (EFTPS). The scam begins with an e-mail telling the taxpayer the a tax payment has been rejected. The e-mail recipient is directed to a website for "additional information," but in fact that website contains malware that can potentially infect computers.

The IRS emphasizes that it does not initiate e-mail communications with taxpayers. Anyone who receives a message purporting to be from the IRS or EFTPS should:

(1) Not reply to the sender, open any links included in the email, or submit any information; and

(2) Report this, or other "phishing" e-mail scams or false IRS websites, to the IRS by forwarding the information to phishing@irs.gov.

[IRS Website, Problem Alerts –EFTPS Scam, 8/20/10].

Domestic Per Diem Rates Issued for Year Beginning in October

The General Services Administration (GSA) has released the federal domestic per diem rate table for fiscal year 2011. The rates are in effect from Oct. 1, 2010 through Sept. 30, 2011.

The per diem rate table is used by employers who pay a per diem allowance to employees for business travel away from home within the continental United States (CONUS). The per diem allowance is an alternative to reimbursing employees for their actual substantiated expenses for away-from-home lodging, and meals and incidental expenses (M&IE). The per diem rate may not exceed the rate paid by the federal government to its workers on travel status. The rate varies by locality of travel. If employees provide simplified substantiation (time, place, and business purpose), the per diem reimbursement isn't subject to income or payroll tax withholding and isn't reported on the employee's Form W-2.

Total per diem rates by locality for fiscal year 2011 will range from $123 to $340. New York City has the highest per diem rate (i.e., $340) in the table during the period from September-December.

There are six possible M&IE rates. These rates (i.e., $46, $51, $56, $61, $66, and $71) remain unchanged from the previous fiscal year. Lodging rates for locations listed in the per diem rate table will range from $77 to $269 in fiscal year 2011.

The following localities have been added to the table for fiscal year 2011:

• West Des Moines (Dallas County), Iowa;

• Centreville (Queen Anne County), Maryland;

• Moab (Grand County), Utah;

• Richland (Benton County), Washington; and

• Shepherdstown (Berkeley County), West Virginia.

The maximum standard per diem rate for travel locations not listed in the per diem rate table will increase from $116 to $123 ($77 for lodging, $46 for M&IE) in fiscal year 2011. The $7 increase is entirely due to an increase in the lodging rate from $70 to $77.

The following localities that were separately listed in the fiscal year 2010 per diem rate table are no longer separately stated (i.e., their per diem rate for fiscal year 2011 is $123):

• Montgomery, Alabama;

• Bakersfield/Delano and Brawley/Calexico/El Centro, California;

• Putnam/Danielson/Storrs, Connecticut;

• Fort Pierce, Leesburg, and Ocala, Florida;

• Conyers, Duluth/Norcross/Lawrenceville, and Peachtree City/Jonesboro/Morrow, Georgia;

• Boise and Twin Falls, Idaho;

• Elgin/Aurora, Illinois;

• Brownsburg/Plainfield and Michigan City, Indiana;

• Benton Harbor/St. Joseph/Stevensville, Charlevoix, Flint, Mount Pleasant, Ontonagon/Baraga/Houghton, and Warren, Michigan;

• Jefferson City and Springfield, Missouri;

• Grenada, Mississippi;

• Toledo, Ohio;

• Hampton City/Newport News, Virginia; and

• Green Bay and Sheboygan, Wisconsin.

The new per diem rate table is on the GSA's website.

SEC to Review Rules for Effect on Small Companies

Summary: The SEC said it will review some rules issued a decade ago, including one that deals with shareholder communications during corporate takeovers and a second dealing with audit committee reviews of quarterly and annual financial statements. Regulatory agencies are mandated by law to conduct the reviews.

The SEC on September 3, 2010, issued Release No. 33-9138,List of Rules to be Reviewed Pursuant to the Regulatory Flexibility Act. The RFA requires agencies to review their rules that have a significant economic impact on a substantial number of small entities within 10 years of the publication of final rules. Comments are due December 15, 2010.

The following rules and forms handled by the division of corporation finance are found in:

• Release No. 33-7760,Regulation of Takeovers and Security Holder Communications, adopted in October 1999. The rules apply to takeover transactions, including tender offers, mergers, acquisitions and similar transactions. They also permit increased communications with security holders and the markets, balance the treatment of cash and stock tender offers, simplify and centralize disclosure requirements, and eliminate regulatory inconsistencies in mergers and tender offers;

• Release No. 33-7759,Cross-Border Tender and Exchange Offers, Business Combination and Rights Offerings, adopted in October 1999. The rules provide tender offer and Securities Act registration exemptions for cross-border tender and exchange offers, business combinations and rights offerings relating to the securities of foreign companies;

• Release No. 34-41936,International Disclosure Standards, adopted in September 1999. The rules revised disclosure requirements to conform to the international disclosure standards endorsed by the International Organization of Securities Commissions in September 1998; and

• Release No. 34-42266,Audit Committee Disclosure, adopted in December 1999. The rule requires that companies’ independent auditors review the companies’ financial information included in the companies’ quarterly reports prior to the filing of these reports.

• The following rules and forms administered by the division of investment management are found in:

• Release No. 33-7728,Personal Investment Activities of Investment Company Personnel, adopted in August 1999; and Release No. 33-7766,Delivery of Disclosure Documents to Households, adopted in November 1999.

• And the following rules and forms administered by the division of trading and markets are found in:

• Release No. 34-41905,Purchases of Certain Equity Securities by the Issuer and Others, adopted in September 1999; and Release No. 34-41594,Broker-Dealer Registration and Reporting, adopted in July 1999.

President Widely Expected to Propose 100% Writeoff for Machinery & Equipment Through 2011

Today, Wednesday September 8, the President is expected to propose a business stimulus package to help lift the economy out of its doldrums. It is widely anticipated that he will propose allowing businesses to expense 100% of the cost of machinery and equipment acquired on or after Sept. 8, 2010 and before Jan. 1, 2012. Additionally, reports suggest that he also will propose liberalizing the research tax credit and making the credit permanent.

The timing for Congressional consideration of these proposals is uncertain. The legislative calendar before Congress breaks again for the fall elections will be brief, and the other tax legislation it must deal before year-end includes extender legislation and the looming EGTRRA sunsets. And when Congress returns next week, the Senate is slated to once again take up the H.R. 5297, the “Small Business Jobs Act,” which passed the House on June 15 and has languished in the Senate since then.

IRS Reminds Taxpayers to Plan for Disasters and Protect Key Records

Keeping in mind that the hurricane season that is now in full swing, the BP Gulf oil rig explosion, and various flooding and forest fire incidents around the country, individual and business taxpayers are being urged to undertake disaster preparation by safeguarding important records. In this vein, IRS suggests a broad range of actions to take, including: utilizing paperless recordkeeping for financial and tax records; documenting valuables and business equipment; checking on fiduciary bonds; ensuring there is continuity of operations planning for businesses; and updating emergency plans. IRS has a very useful article on disaster preparation that can be found at http://www.irs.gov/businesses/small/article/0,,id=180547,00.html?portlet=7.

Proposed Reg Would Permit IRS to Require Reporting of Uncertain Tax Positions

Preamble to Prop Reg 09/07/2010; Prop Reg § 1.6012-2

IRS has issued a proposed reg giving it the regulatory underpinning to require certain corporations to attach to their returns Schedule UTP (Uncertain Tax Position Statement), or any successor form, in accordance with forms, instructions, or other appropriate guidance issued by IRS.

Background. In Ann. 2010-9, 2010-7 IRB, IRS announced that it was developing a schedule requiring certain business taxpayers to report uncertain tax positions on their tax returns and requested comments by Mar. 29, 2010 (see Federal Taxes Weekly Alert 01/28/2010). The proposed schedule would require the annual disclosure of uncertain tax positions in the form of a concise description of those positions and information on the maximum amount of potential Federal tax liability attributable to each uncertain tax position (determined without regard to the taxpayer's risk analysis regarding its likelihood of prevailing on the merits). It would be filed with the Form 1120, U.S. Corporation Income Tax Return or other business returns.

In addition to positions for which a tax reserve must be established under FIN 48 (FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 (FIN 48, now codified in FASB ASC Topic 740-10 Income Taxes. Income Taxes, Accounting Standards Codification Subtopic 740-10, Fin. Accounting Standards Bd. 2010) or other accounting standards, uncertain tax positions would include any position related to the determination of any U.S. Federal income tax liability for which a taxpayer or a related entity hasn't recorded a tax reserve because (i) the taxpayer expects to litigate the position, or (ii) the taxpayer has determined that IRS has a general administrative practice not to examine the position.

In March, IRS released draft schedule UTP accompanied by draft instructions, along with Ann. 2010-30, 2010-19 IRB. The draft schedule and instructions provide that, beginning with the 2010 tax year, the following taxpayers with both uncertain tax positions and assets equal to or exceeding $10 million will be required to file Schedule UTP if they or a related party issued audited financial statements:

• Corporations required to file a Form 1120, U.S. Corporation Income Tax Return;

• Insurance companies required to file a Form 1120 L, U.S. Life Insurance Company Income Tax Return or Form 1120 PC, U.S. Property and Casualty Insurance Company Income Tax Return; and

• Foreign corporations required to file Form 1120 F, U.S. Income Tax Return of a Foreign Corporation.

For 2010 tax years, IRS won't require a Schedule UTP from Form 1120 series filers other than those identified above (such as real estate investment trusts or regulated investment companies), pass-through entities, or tax-exempt organizations. IRS says it will determine the timing of the requirement to file Schedule UTP for these entities after comments have been received and considered.

IRS received a substantial number of public comments regarding its UTP proposal, much of it critical (see article in Federal Taxes Weekly Alert 06/03/2010).

Justification for Schedule UTP. Preamble to Prop Reg 09/07/2010, carries a justification for IRS's proposal for affected corporations to file Schedule UTP with their returns. In essence, IRS's position is that to discharge its obligation to fairly and uniformly administer the tax laws, it must be able to quickly and efficiently identify those returns, and the issues underlying those returns, that present a significant risk of noncompliance with the Code. Currently, corporations aren't required to separately identify and explain the uncertain tax positions that are identified in the process of complying with generally accepted accounting principles (GAAP). Instead, IRS must select a return for audit and its agents must expend a substantial amount of effort to determine what uncertain tax positions might relate to the return.

IRS position is that corporations that prepare financial statements already are required by GAAP to identify and quantify all uncertain tax positions as described in FIN 48. Other corporations that file returns of income in the U.S. may be subject to other requirements regarding accounting for uncertain tax positions (e.g., International Financial Reporting Standards and country-specific generally accepted accounting standards).

Congress, through the Code, gives IRS broad authority and discretion to specify the form and content of returns, so long as it promulgates regs requiring persons made liable for a tax to file those returns.

New proposed regs. New Prop Reg § 1.6012-2(a)(4) essentially would provide the underpinning for IRS to require affected corporations to attach to their returns Schedule UTP (or any successor form), in accordance with forms, instructions, or other appropriate guidance issued by IRS. Prop Reg § 1.6012-2(a)(4) is proposed to apply for returns filed for tax years beginning after Dec. 15, 2009, and ending after the date that final regs are published.