Wednesday, June 22, 2011
IRS Advisory Panel Offers Recommendations Related To Tax-Exempt And Government Entities
The IRS Advisory Committee on Tax Exempt and Government Entities (ACT) presented final recommendations and its annual report at a June 15 public meeting. The year-long projects that culminated in the recommendations covered topics related to the following: tax-exempt bonds; federal, state, and local governments; Indian tribal governments; exempt organizations; and employee plans. The ACT report and recommendations are available at http://www.irs.gov/pub/irs-tege/tege_act_rpt10.pdf.
IRS Names Low Income Taxpayer Clinic Grant Recipients
IRS has awarded $10 million in matching Low Income Taxpayer Clinic (LITC) grants to 165 organizations for the 2011 grant cycle. (IR 2011-65) The grant cycle covers calendar year 2011. As described by the agency, LITCs are organizations that represent low-income taxpayers in federal tax controversies with IRS at no cost or for a nominal charge. They also may offer tax education and outreach for taxpayers who speak English as a second language. IRS awards matching grants of up to $100,000 a year to qualifying organizations. Additional information, including the names of grantees, is located at http://www.irs.gov/newsroom/article/0,,id=240433,00.html.
TIGTA Finds IRS Does Not Have A Perfect Record Regarding Seizure Provisions Of The Code
IRS does not always comply with the seizure provisions of Code Sec. 6330 through Code Sec. 6344, the Treasury Inspector General for Tax Administration (TIGTA) said in a recent audit. (Audit Report No. 2011-30-049) TIGTA arrived at this conclusion after reviewing a random sample of 50 of the 578 seizures conducted from July 1, 2009, through June 30, 2010. In the majority of seizures, the agency followed all legal and internal guidelines, the audit said, adding that TIGTA was unable to identify any cases in which taxpayers were adversely affected. However, auditors found instances in which the amount of the liability for which the seizure was made was not the amount on the notice of seizure. In addition, there were cases where the sale of the seized property was not advertised as required. “When legal and internal guidelines are not followed, it could result in the abuse of taxpayers' rights,” TIGTA said. The audit noted that in recent years, IRS has “implemented procedures and controls significantly improving compliance with legal and internal guidelines.” The audit can be found at http://www.treasury.gov/tigta/auditreports/2011reports/201130049fr.pdf.
Tax Breaks Are Available For Travelers Who Mix A Bit Of Pleasure With Their Business Travel
Although video conferencing has made inroads in the ranks of business travelers, there still are many situations where it's necessary to travel away-from-home overnight for face-to-face meetings with staff, management, or customers. Businesspeople or professional who must travel for work reasons should keep in mind that they may be able to qualify for a travel bargain by piggybacking a vacation onto an out-of-town business trip. In effect, the business traveler gets free vacation airfare if the trip is set up the right way. And if the travel is undertaken for an employer, a properly set up reimbursement arrangement for the business portion of the trip will be income- and payroll-tax-free. This Practice Alert takes a closer look at how this combination works for domestic travel, along with a review of other business travel strategies that may yield personal savings. It doesn't cover some of the more specialized rules, such as those that apply to travelers in the transportation industry, or the per diem reimbursement rules.
Deductions for trip undertaken primarily for business. A taxpayer who mixes a bit of pleasure with business while away from home nonetheless may deduct all of the round-trip transportation costs as long as the trip was undertaken primarily for business reasons. (Reg. §1.162-2(b)(1)) The cost of lodging plus 50% of meals while on business status is deductible. Additionally, if the traveler is an employee reimbursed for all expenses under an accountable plan that requires a timely accounting of the time, place, and business purpose of the travel, plus receipts, the reimbursement is tax-free to the traveler (but the personal portion of the trip yields no tax benefit to the traveler).
Observation: In effect, the 100% deduction for the round-trip travel costs works as a kind of tax subsidy for a personal vacation, or as a partially tax-free perk.
Illustration 1: Jane, a self-employed information technology specialist, flies from the East Coast to Los Angeles for a 5-day business trip. She takes in three days of vacation and sight-seeing after the business part of the trip is over.
Result: Because Jane can deduct the entire air fare, part of her mini-vacation is, in effect, subsidized by the tax break.
Illustration 2: The facts are the same as in illustration (1), except that Jane is employed by a corporation that reimburses her for the business portion of the trip after she submits detailed records and receipts. She pays for the personal portion of the trip (meals and lodging during the three personal days).
Result: Under the accountable plan rules, the reimbursement for the round-trip airfare (as well as for meals and lodging while on business status) is tax-free to Jane, and is not subject to FICA or income tax withholding. (Reg. §1.62-2(c)(2)(i), Reg. §1.62-2(d)(1)) That's true even though she took a mini-vacation after her business trip ended. The corporation deducts the travel costs it pays (but only 50% of the cost of meals is deductible).
Illustration 3: The facts are the same as in illustration (2), except that the corporation reimburses Jane for the cost of the entire trip, including the 3-day mini-vacation.
Result: Her cost for the personal portion of the trip consists of the tax she pays on the personal portion's value (hotel, meals, etc.), which must be treated as compensation income. The corporation's deduction consists of 50% of the meal costs while Jane is on business travel status, 100% of the round-trip air fare, 100% of the lodging costs while she is on travel status, and (assuming that her entire compensation package is “reasonable”) 100% of the cost of the mini-vacation since that was treated as compensation paid to Jane.
When is a trip treated as undertaken primarily for business? There is no hard-and-fast rule. It depends on the facts and circumstances of each case. The regs do say, however, that the way travelers split their time between business and personal pursuits is “an important factor.” (Reg. §1.162-2(b)(2))
Illustration 4: Fred works in Atlanta and travels to New Orleans on business. On his way home, he stops in Mobile to visit his parents. During the nine days he is away from home, he spends $1,999 for travel, meals, lodging, and other travel expenses. Had he not stopped in Mobile, Fred would have been away from home for only six days and his trip would have cost only $1,699.
Result: Fred can deduct $1,699 for his trip, including the round-trip transportation to and from New Orleans. The 50% deduction limit applies to his meals while on business status. (IRS Pub. 463 (2010), p. 6)
Observation: As is evident from illustration (4), the personal part of a trip need not occur at the business destination. It can take place on the way home from the business destination (or, for that matter, en route to the business destination).
Caution: Taxpayers who make a stop for personal reasons en route to a business location or on the way home should be sure to keep records of what their round-trip transportation costs would have been without the personal stop.
Saturday night stayovers. Although an employee's out-of-town business chores conclude on Friday, he may extend his business trip to take advantage of a low-priced fare requiring a Saturday night stayover, where the savings in airfare are higher than the costs of the weekend meals and lodging. The employee doesn't pay tax on the reimbursement for his Saturday meal and lodging expenses. (PLR 9237014) In this case, IRS said that under a “common sense test,” payments to the employee for the Saturday stay were deductible if a “hardheaded business person would have incurred such expenses under like circumstances.”
When a personal day may not be a personal day. An away-from-home business trip may straddle a weekend. For example, a traveler may have to attend business meetings on Thursday, Friday, and Monday. He is too far away to travel home and then come back (and besides, the trip back and forth would cost more than staying put), so he spends the weekend relaxing at the out-of-town location. Because he must remain at the location for business reasons, the weekend days (Saturday and Sunday) should under the “common sense test” be treated as business days the expenses for which are deductible (50% of meal costs, 100% for other expenses) or excludible if the traveler is reimbursed under an accountable plan. Note that in the context of foreign travel, IRS Pub. 463 (2010), p. 8, treats such standby days as business days.
Tax break for weekend travel home. A business traveler on an extended out-of-town assignment may decide to fly home for a weekend to be with family or friends. The cost of the weekend trip home is deductible up to the amount the traveler would have spent on meals and lodging at the out-of-town location. Note, however, that this rule applies only if the traveler checks out of the out-of-town hotel before leaving for the weekend trip home, and then re-registers. If the traveler retains the hotel room, its cost is deductible, but the deduction for the weekend trip home (i.e., the air fare) is limited to what the traveler would have spent on meals during the weekend at the out-of-town location. (IRS Pub. 463 (2010), p. 4)
Tax breaks when spouse or companion comes along. The expenses of a spouse or other companion accompanying a traveler aren't deductible unless (1) the spouse or other companion is an employee of the taxpayer and travels for a bona fide business purpose, and (2) the expenses would otherwise be deductible by the spouse or other companion. (Code Sec. 274(m)(3)) Nevertheless, even if the spouse's or other companion's travel expenses aren't deductible, a tax benefit may still be salvaged from traveling together. That's because the business traveler's deduction isn't based on 50% of the trip expenses. The deduction is based on what it would have cost the taxpayer to travel alone. (Rev Rul 56-168, 1956-1 CB 93) This rule can be a money saver on accommodations. For example, where the cost of a hotel room is $200 for one occupant and $149 for two, a taxpayer on business status may deduct $149 per night, not $100, when he gets a room for two. (IRS Pub. 463 (2010), p. 5)
Similarly, where the taxpayer travels out of town on business via rental car, and his spouse or other companion accompanies him for nonbusiness purposes, the entire cost of the rental is deductible, because the cost would have been the same for the taxpayer even if his spouse did not join him on the trip. (Pohl, Kenneth, (1990) TC Memo 1990-298, PH TCM ¶90298, IRS Pub. 463 (2010), p. 5)
Observation: For client letters related to business travel, see FTC Client Letters ¶2130 (business travel away from home within the U.S.), and FTC Client Letters ¶2133 (deducting the costs of a spouse on a business trip).
Deductions for trip undertaken primarily for business. A taxpayer who mixes a bit of pleasure with business while away from home nonetheless may deduct all of the round-trip transportation costs as long as the trip was undertaken primarily for business reasons. (Reg. §1.162-2(b)(1)) The cost of lodging plus 50% of meals while on business status is deductible. Additionally, if the traveler is an employee reimbursed for all expenses under an accountable plan that requires a timely accounting of the time, place, and business purpose of the travel, plus receipts, the reimbursement is tax-free to the traveler (but the personal portion of the trip yields no tax benefit to the traveler).
Observation: In effect, the 100% deduction for the round-trip travel costs works as a kind of tax subsidy for a personal vacation, or as a partially tax-free perk.
Illustration 1: Jane, a self-employed information technology specialist, flies from the East Coast to Los Angeles for a 5-day business trip. She takes in three days of vacation and sight-seeing after the business part of the trip is over.
Result: Because Jane can deduct the entire air fare, part of her mini-vacation is, in effect, subsidized by the tax break.
Illustration 2: The facts are the same as in illustration (1), except that Jane is employed by a corporation that reimburses her for the business portion of the trip after she submits detailed records and receipts. She pays for the personal portion of the trip (meals and lodging during the three personal days).
Result: Under the accountable plan rules, the reimbursement for the round-trip airfare (as well as for meals and lodging while on business status) is tax-free to Jane, and is not subject to FICA or income tax withholding. (Reg. §1.62-2(c)(2)(i), Reg. §1.62-2(d)(1)) That's true even though she took a mini-vacation after her business trip ended. The corporation deducts the travel costs it pays (but only 50% of the cost of meals is deductible).
Illustration 3: The facts are the same as in illustration (2), except that the corporation reimburses Jane for the cost of the entire trip, including the 3-day mini-vacation.
Result: Her cost for the personal portion of the trip consists of the tax she pays on the personal portion's value (hotel, meals, etc.), which must be treated as compensation income. The corporation's deduction consists of 50% of the meal costs while Jane is on business travel status, 100% of the round-trip air fare, 100% of the lodging costs while she is on travel status, and (assuming that her entire compensation package is “reasonable”) 100% of the cost of the mini-vacation since that was treated as compensation paid to Jane.
When is a trip treated as undertaken primarily for business? There is no hard-and-fast rule. It depends on the facts and circumstances of each case. The regs do say, however, that the way travelers split their time between business and personal pursuits is “an important factor.” (Reg. §1.162-2(b)(2))
Illustration 4: Fred works in Atlanta and travels to New Orleans on business. On his way home, he stops in Mobile to visit his parents. During the nine days he is away from home, he spends $1,999 for travel, meals, lodging, and other travel expenses. Had he not stopped in Mobile, Fred would have been away from home for only six days and his trip would have cost only $1,699.
Result: Fred can deduct $1,699 for his trip, including the round-trip transportation to and from New Orleans. The 50% deduction limit applies to his meals while on business status. (IRS Pub. 463 (2010), p. 6)
Observation: As is evident from illustration (4), the personal part of a trip need not occur at the business destination. It can take place on the way home from the business destination (or, for that matter, en route to the business destination).
Caution: Taxpayers who make a stop for personal reasons en route to a business location or on the way home should be sure to keep records of what their round-trip transportation costs would have been without the personal stop.
Saturday night stayovers. Although an employee's out-of-town business chores conclude on Friday, he may extend his business trip to take advantage of a low-priced fare requiring a Saturday night stayover, where the savings in airfare are higher than the costs of the weekend meals and lodging. The employee doesn't pay tax on the reimbursement for his Saturday meal and lodging expenses. (PLR 9237014) In this case, IRS said that under a “common sense test,” payments to the employee for the Saturday stay were deductible if a “hardheaded business person would have incurred such expenses under like circumstances.”
When a personal day may not be a personal day. An away-from-home business trip may straddle a weekend. For example, a traveler may have to attend business meetings on Thursday, Friday, and Monday. He is too far away to travel home and then come back (and besides, the trip back and forth would cost more than staying put), so he spends the weekend relaxing at the out-of-town location. Because he must remain at the location for business reasons, the weekend days (Saturday and Sunday) should under the “common sense test” be treated as business days the expenses for which are deductible (50% of meal costs, 100% for other expenses) or excludible if the traveler is reimbursed under an accountable plan. Note that in the context of foreign travel, IRS Pub. 463 (2010), p. 8, treats such standby days as business days.
Tax break for weekend travel home. A business traveler on an extended out-of-town assignment may decide to fly home for a weekend to be with family or friends. The cost of the weekend trip home is deductible up to the amount the traveler would have spent on meals and lodging at the out-of-town location. Note, however, that this rule applies only if the traveler checks out of the out-of-town hotel before leaving for the weekend trip home, and then re-registers. If the traveler retains the hotel room, its cost is deductible, but the deduction for the weekend trip home (i.e., the air fare) is limited to what the traveler would have spent on meals during the weekend at the out-of-town location. (IRS Pub. 463 (2010), p. 4)
Tax breaks when spouse or companion comes along. The expenses of a spouse or other companion accompanying a traveler aren't deductible unless (1) the spouse or other companion is an employee of the taxpayer and travels for a bona fide business purpose, and (2) the expenses would otherwise be deductible by the spouse or other companion. (Code Sec. 274(m)(3)) Nevertheless, even if the spouse's or other companion's travel expenses aren't deductible, a tax benefit may still be salvaged from traveling together. That's because the business traveler's deduction isn't based on 50% of the trip expenses. The deduction is based on what it would have cost the taxpayer to travel alone. (Rev Rul 56-168, 1956-1 CB 93) This rule can be a money saver on accommodations. For example, where the cost of a hotel room is $200 for one occupant and $149 for two, a taxpayer on business status may deduct $149 per night, not $100, when he gets a room for two. (IRS Pub. 463 (2010), p. 5)
Similarly, where the taxpayer travels out of town on business via rental car, and his spouse or other companion accompanies him for nonbusiness purposes, the entire cost of the rental is deductible, because the cost would have been the same for the taxpayer even if his spouse did not join him on the trip. (Pohl, Kenneth, (1990) TC Memo 1990-298, PH TCM ¶90298, IRS Pub. 463 (2010), p. 5)
Observation: For client letters related to business travel, see FTC Client Letters ¶2130 (business travel away from home within the U.S.), and FTC Client Letters ¶2133 (deducting the costs of a spouse on a business trip).
E-Filing Advisory Committee's Report To Congress Urges Boosted E-Filing Of Employment Tax Returns
The Electronic Tax Administration Advisory Committee (ETAAC) has filed its annual report to Congress. The 2011 report notes improvement in the e-filing rate, and, among other things, recommends a new push for e-filing of employment tax returns. It also cautions Congress to consider the impact of any new information reporting requirements on businesses, urges Code simplification, and criticizes Congress for its pattern of late-passed legislation.
Following are highlights of ETAAC's findings and suggestions:
... Back in’98, the IRS Restructuring and Reform Act of’98 (P.L. 105-206, 7/22/98) gave IRS a goal of having 80% of tax returns filed electronically by 2007. ETAAC reports that IRS actually is getting closer to achieving that goal. For 2011, it estimates a 65.8% e-file rate for all major return types, mostly driven by a 77.31% e-file rate for individuals. However, ETAAC critiqued IRS for its 15-20% e-file reject rate and called on it to enhance its collaborative efforts with the tax preparation industry to reduce the number of e-file rejections next filing season.
... IRS will achieve an 80% e-filing rate only if it manages to boost the e-filing rate for employment tax returns (Forms 940 and 941), which currently stands at about 24%. ETAAC's detailed recommendations include finding ways to simplify the e-filing process; developing incentives for tax filers, software developers, and services providers to adopt, promote, or increase the e-filing rate; and establishing an e-filing portal on IRS's website to enable employers to file Forms 940 and 941 without charge.
... ETAAC observes that Congress has legislatively reversed its expansion of certain 1099 reporting obligations because of the increased business burden. It recommends that any future consideration of expanded or accelerated information reporting fully evaluate the impact of acceleration on both taxpayers and businesses, especially small businesses that have limited resources. Consideration must also be given to IRS's readiness and the investment required to handle any significant increase or acceleration in electronically filed information returns.
... ETAAC renewed its call for “real tax reform and simplification,” such as simplifying the Code by consolidating the credits and deductions affecting low and middle income individuals and families. ETAAC also criticized Congress for its pattern of late passed tax legislation, which creates taxpayer anxiety and can prevent them from receiving their refunds as planned. It said that late legislation also adversely impacts states, and restricts the amount of time that both IRS and software developers have to program and test their systems.
Following are highlights of ETAAC's findings and suggestions:
... Back in’98, the IRS Restructuring and Reform Act of’98 (P.L. 105-206, 7/22/98) gave IRS a goal of having 80% of tax returns filed electronically by 2007. ETAAC reports that IRS actually is getting closer to achieving that goal. For 2011, it estimates a 65.8% e-file rate for all major return types, mostly driven by a 77.31% e-file rate for individuals. However, ETAAC critiqued IRS for its 15-20% e-file reject rate and called on it to enhance its collaborative efforts with the tax preparation industry to reduce the number of e-file rejections next filing season.
... IRS will achieve an 80% e-filing rate only if it manages to boost the e-filing rate for employment tax returns (Forms 940 and 941), which currently stands at about 24%. ETAAC's detailed recommendations include finding ways to simplify the e-filing process; developing incentives for tax filers, software developers, and services providers to adopt, promote, or increase the e-filing rate; and establishing an e-filing portal on IRS's website to enable employers to file Forms 940 and 941 without charge.
... ETAAC observes that Congress has legislatively reversed its expansion of certain 1099 reporting obligations because of the increased business burden. It recommends that any future consideration of expanded or accelerated information reporting fully evaluate the impact of acceleration on both taxpayers and businesses, especially small businesses that have limited resources. Consideration must also be given to IRS's readiness and the investment required to handle any significant increase or acceleration in electronically filed information returns.
... ETAAC renewed its call for “real tax reform and simplification,” such as simplifying the Code by consolidating the credits and deductions affecting low and middle income individuals and families. ETAAC also criticized Congress for its pattern of late passed tax legislation, which creates taxpayer anxiety and can prevent them from receiving their refunds as planned. It said that late legislation also adversely impacts states, and restricts the amount of time that both IRS and software developers have to program and test their systems.
Low-Income Housing Credit Requirements Are Suspended To Help Missouri Storm Victims
Notice 2011-47, 2011-27 IRB
In a Notice, IRS has suspended certain requirements under Code Sec. 42 for low-income housing credit projects as a result of the devastation caused by severe storms, tornadoes, and flooding in Missouri beginning on Apr. 19, 2011.
Request for low-income housing relief. Missouri has asked, and IRS has agreed, to allow owners of low-income housing credit projects to provide temporary housing in vacant units to individuals who lived in areas of that state designated for individual assistance in Missouri by FEMA (Federal Emergency Management Agency) and who have been displaced because their residences were destroyed or damaged as a result of severe storms, tornadoes, and flooding (displaced individuals).
Relief for owners of low-income housing. Notice 2011-47 provides for:
... The suspension of income limits for low-income housing projects approved by the Missouri Housing Development Commission (Commission), in which vacant units are rented to displaced individuals. The Commission will determine the appropriate period of temporary housing for each project, not to extend beyond July 30, 2012 (temporary housing period). (Notice 2011-47)
... A displaced individual temporarily occupying a unit during the first year of the credit period will be deemed a qualified low-income tenant in determining the project's qualified basis under Code Sec. 42(c)(1) and in meeting the project's 20-50 test or 40-60 test under Code Sec. 42(g)(1). During the temporary housing period established by the Commission, the status of a vacant unit (i.e., market-rate, low-income, or never previously occupied) after the first year of the credit period that becomes temporarily occupied by a displaced individual remains the same as the unit's status before the displaced individual moved in. (Notice 2011-47, Sec. II)
... The suspension of the non-transient use requirement of Code Sec. 42(i)(3)(B)(i) for any unit providing temporary housing to a displaced individual during the temporary housing period determined by the Commission. (Notice 2011-47, Sec. III)
To qualify for relief, the following requirements must be met: (1) the displaced individual must have resided in a jurisdiction designated for Individual Assistance by FEMA as a result of the severe storms, tornadoes, and flooding in Missouri beginning on Apr. 19, 2011; (2) the project owner must obtain approval for the relief from the Commission; (3) the project owner must maintain and certify certain information on each displaced individual temporarily housed in the project; (4) rents for the low-income units housing displaced individuals can't exceed the existing rent-restricted rates established under Code Sec. 42(g)(2); and (5) existing tenants in occupied low-income units cannot be evicted or have their tenancy terminated to provide temporary housing for displaced individuals. (Notice 2011-47, Sec. IV)
All other Code Sec. 42 rules and requirements continue to apply during the temporary housing period established by the Commission. After the end of that period, the applicable income limitations in Code Sec. 42(g)(1), the available unit rule under Code Sec. 42(g)(2)(D)(ii), the non-transient requirement of Code Sec. 42(i)(3)(B)(i), and the requirement to make reasonable attempts to rent vacant units to low-income individuals will resume. (Notice 2011-47, Sec. IV)
Effective date. Notice 2011-47 is effective May 9, 2011 (the date of the President's major disaster declarations as a result of the severe storms, tornadoes, and flooding in Missouri beginning on Apr. 19, 2011).
References: For the low-income housing credit, see FTC 2d/FIN ¶L-15701; United States Tax Reporter ¶424; TaxDesk ¶383,001; TG ¶15200.
In a Notice, IRS has suspended certain requirements under Code Sec. 42 for low-income housing credit projects as a result of the devastation caused by severe storms, tornadoes, and flooding in Missouri beginning on Apr. 19, 2011.
Request for low-income housing relief. Missouri has asked, and IRS has agreed, to allow owners of low-income housing credit projects to provide temporary housing in vacant units to individuals who lived in areas of that state designated for individual assistance in Missouri by FEMA (Federal Emergency Management Agency) and who have been displaced because their residences were destroyed or damaged as a result of severe storms, tornadoes, and flooding (displaced individuals).
Relief for owners of low-income housing. Notice 2011-47 provides for:
... The suspension of income limits for low-income housing projects approved by the Missouri Housing Development Commission (Commission), in which vacant units are rented to displaced individuals. The Commission will determine the appropriate period of temporary housing for each project, not to extend beyond July 30, 2012 (temporary housing period). (Notice 2011-47)
... A displaced individual temporarily occupying a unit during the first year of the credit period will be deemed a qualified low-income tenant in determining the project's qualified basis under Code Sec. 42(c)(1) and in meeting the project's 20-50 test or 40-60 test under Code Sec. 42(g)(1). During the temporary housing period established by the Commission, the status of a vacant unit (i.e., market-rate, low-income, or never previously occupied) after the first year of the credit period that becomes temporarily occupied by a displaced individual remains the same as the unit's status before the displaced individual moved in. (Notice 2011-47, Sec. II)
... The suspension of the non-transient use requirement of Code Sec. 42(i)(3)(B)(i) for any unit providing temporary housing to a displaced individual during the temporary housing period determined by the Commission. (Notice 2011-47, Sec. III)
To qualify for relief, the following requirements must be met: (1) the displaced individual must have resided in a jurisdiction designated for Individual Assistance by FEMA as a result of the severe storms, tornadoes, and flooding in Missouri beginning on Apr. 19, 2011; (2) the project owner must obtain approval for the relief from the Commission; (3) the project owner must maintain and certify certain information on each displaced individual temporarily housed in the project; (4) rents for the low-income units housing displaced individuals can't exceed the existing rent-restricted rates established under Code Sec. 42(g)(2); and (5) existing tenants in occupied low-income units cannot be evicted or have their tenancy terminated to provide temporary housing for displaced individuals. (Notice 2011-47, Sec. IV)
All other Code Sec. 42 rules and requirements continue to apply during the temporary housing period established by the Commission. After the end of that period, the applicable income limitations in Code Sec. 42(g)(1), the available unit rule under Code Sec. 42(g)(2)(D)(ii), the non-transient requirement of Code Sec. 42(i)(3)(B)(i), and the requirement to make reasonable attempts to rent vacant units to low-income individuals will resume. (Notice 2011-47, Sec. IV)
Effective date. Notice 2011-47 is effective May 9, 2011 (the date of the President's major disaster declarations as a result of the severe storms, tornadoes, and flooding in Missouri beginning on Apr. 19, 2011).
References: For the low-income housing credit, see FTC 2d/FIN ¶L-15701; United States Tax Reporter ¶424; TaxDesk ¶383,001; TG ¶15200.
The Effect Of Mayo On The Precedential Value Of Regs And Other IRS Pronouncements
The Supreme Court's decision in Mayo Foundation v. U.S., (S Ct 1/11/2011) 107 AFTR 2d 2011-341, purported to resolve a long-standing dispute regarding the level of deference afforded to interpretive Treasury regs. This two-part Practice Alert examines various types of IRS pronouncements, their weight as authority, and their practical use to tax professionals and taxpayers. Part I, in this article, considers the effect of the Mayo case on their precedential value. Part II (see ¶43) continues the discussion of different types of IRS documents and also addresses which are “substantial authority” for purposes of the accuracy-related and return preparer penalties.
Regulations. These may be final (no prefix before the word “Reg.”), temporary (designated with the letter T in the citation), proposed (“Prop Reg”), or proposed reliance regs (designated as “Prop Reg... Taxpayers may rely”).
A final reg represents IRS's authoritative explanation and interpretation of a Code provision. Final regs sometimes are not amended until many years after enactment of tax laws (or court cases) that affect the subject of a final reg and, until then, may be of little use in interpreting a current Code provision.
Before the Supreme Court's decision in Mayo, the precedential value of a final reg depended on whether it was legislative (i.e., enacted pursuant to a specific grant of authority mandated by the Code itself) or interpretive (enacted under the IRS's general authority to issue Code-related rules and regs). Interpretive regs were typically subject to the standard set out in National Muffler, (S Ct 1979) 43 AFTR 2d 79-828, under which the reg was evaluated for whether it harmonized with the language, origin, and purpose of the statute, considering factors such as the consistency of IRS's interpretation and whether the reg was contemporaneous with the statute's enactment. Legislative regs were generally subject to “Chevron deference,” meaning that they were afforded controlling weight unless “arbitrary, capricious, or manifestly contrary to the statute.” (Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc., (S Ct 1984) 467 U.S. 837) However, there was confusion among the courts and tax practitioners as to which standard governed interpretive regs following Chevron, especially in situations where IRS's authority to issue guidance was implicit (i.e., to address an ambiguity or fill in gaps in the enacted law). Many commentators reasoned that tax law was simply different from other types of law, and tax regs should continue to be analyzed under the National Muffler standard.
In early 2011, the Supreme Court spoke on the issue in the Mayo case. The Court clarified that Treasury regs, whether legislative or interpretive, that are issued under the Administrative Procedures Act's (APA's) “notice and comment” procedures (which was previously identified by the Supreme Court in Mead Corp., 553 US 218, as an indication that Chevron deference is warranted) and fall within the statutory grant of authority are entitled to Chevron deference. In so holding, the Court largely repudiated National Muffler and its factor-based test.
Observation: It's not completely clear, however, whether the National Muffler approach will still be viable for regs or other pronouncements that aren't subject to the notice and comment process.
However, despite the Supreme Court's seemingly clear pronouncement, subsequent case law has shown that there is still room for interpretation. For instance, there is currently a split among the courts as to the validity of regs stating that an overstatement of basis is an omission of income for purpose of the six-year limitations period under Code Sec. 6501(e)(1)(A). These retroactively effective regs were issued by IRS issued after a number of taxpayer victories on the issue. The Fourth Circuit, citing Mayo, stated that Chevron deference didn't apply to the reg since the underlying statute was unambiguous. (Home Concrete & Supply, LLC v. U.S., (CA 4 2/7/2011) 107 AFTR 2d 2011-767) The Tax Court, also citing Mayo, held that the Supreme Court's decision in Colony, Inc. v. Com., (S Ct 1958) 1 AFTR 2d 1894, that the extended limitations period applies to omissions and not overstatements, remained binding until clearly and unequivocally repudiated by IRS's regs. (Carpenter Family Investments, LLC, (2011) 136 TC No. 17) Thus, while Mayo has clarified a number of issues and arguably made it more difficult to challenge an IRS reg, its precise effect remains to be seen.
A temporary reg provides taxpayers with guidance they can follow pending issuance of final regs, and has the same precedential value as a final reg. (Temporary regs issued after Nov. 10,’88 expire three years after their issuance date, which is why they also must be issued as proposed regs.)
A proposed reg is issued to give taxpayers and practitioners notice of how IRS interprets a provision, and the opportunity to comment on and critique that interpretation. It has little precedential value. Courts have said proposed regs “carry no more weight than a position advanced on brief” and are “suggestions made for comment; they modify nothing.” The Court of Federal Claims similarly stated that “[i]n general, proposed regulations have no legal force or effect until they become final.” (Yocum v. U.S., (2006, Ct Fed Cl) 96 AFTR 2d 2005-5030)
Nevertheless, proposed regs are useful for tax planning. In many cases (although there have been notable exceptions), final regs follow the broad outline presented in proposed regs. One court has ruled that where a taxpayer relies on proposed regs, differing final regs cannot be imposed to his detriment. This was so even though the proposed regs were not ones IRS said the taxpayer could rely on. (Elkins, Paul, (1983) 81 TC 669) However, other courts have leaned the other way. For example, the Court of Appeals for the Federal Circuit held that where existing final regs provided an unfavorable result to a taxpayer while proposed amendments to those regs indicated a position more favorable to him, the taxpayer's reliance on the proposed regs wasn't justified. (Garvey Inc v. U.S., (1983, Cl Ct) 51 AFTR 2d 83-721, 1 Ct Cl 108, 83-1 USTC ¶9163, affd (1984, CA Fed Cir) 53 AFTR 2d 84-776, 726 F2d 1569, 84-1 USTC ¶9214)
A proposed reliance reg is one which states that taxpayers may rely on it, with any more stringent provisions in a later final reg to be effective only prospectively. These regs can be relied on as if they are final regs. In an infrequently used variation, IRS states that it will not challenge tax return positions that are consistent with a proposed reliance reg.
Revenue Ruling (“Rev Rul”). Rev Ruls are official interpretations by IRS that have been published in the Internal Revenue Bulletin (IRB) reflecting IRS's conclusion on how the law is applied to a specific set of facts. Because Rev Ruls are interpretive, IRS may issue then without complying with the notice and hearing requirements of the APA. (National Restaurant Assn. v. Simon, (1976, DC Dist Col) 37 AFTR 2d 76-1144) They are issued only by the Associate Office and are published for the information and guidance of taxpayers, IRS personnel, and others concerned. They may arise from various sources, e.g., private letter rulings to taxpayers, technical advice to district offices, or court decisions. Most Rev Ruls apply retroactively unless otherwise stated. (Code Sec. 7805(b)(8)) A Rev Rul's conclusions are limited to the pivotal facts stated in it.
Rev Ruls don't have the force and effect of regs, but may nonetheless be cited and relied on. (See Exxon Mobil Corp & Affiliated Co., (2011) 136 TC No. 5) Assuming that the facts and circumstances at issue are substantially the same as those in a Rev Rul, practitioners and their clients generally may rely on it and don't have to ask for a private ruling for their particular cases. However, Rev Ruls, like regs, can become outdated (e.g., by the passage of subsequent legislation) and may be modified or distinguished by subsequent rulings.
The Supreme Court stated in Skidmore v. Swift & Co., (1944) 323 U.S. 134, that it was not bound by Rev Ruls, and that the weight that they are afforded is dependent on their persuasiveness and the consistency of IRS's position over time. However, this standard has done little to resolve the precise level of deference afforded, and is often cited for the proposition that Rev Ruls are entitled to “some” deference. (See, e.g., U.S. v. Mead, (2001, Sup Ct) 533 U.S. 218)
Cases over the past decade have afforded Rev Ruls varying degrees of deference. For instance, in Ammex, Inc., (2004, CA6) 93 AFTR 2d 2004-2187, the Sixth Circuit held that Rev Ruls should get the same level of deference as regs, reasoning that they are issued in the same manner and under the same authority. (This reasoning is debated—commentators cite differences ranging from the submission of regs for public comment to who formulates and supervises each.) However, in PSB Holdings, Inc., (2007) 129 TC 131, the Tax Court stated that it isn't bound by an interpretation in a Rev Rul.
Revenue Procedure (“Rev Proc”). Rev Procs are statements of practice and procedure published in the IRB. They also are published in the Federal Register when required by the APA. They contain information that affects the rights or duties of taxpayers and other members of the public under the tax law and related statutes, or they contain information that should be made public even if it does not affect the rights and duties of the public. They address broad subjects such as accounting method changes, how to compute depreciation allowances, or how to obtain innocent-spouse equitable relief. The precedential value of a Rev Proc is the same as that of a Rev Rul. However, unlike Rev Ruls, Rev Procs fall outside of Code Sec. 7805(b) and apply prospectively.
Observation: Although Mayo didn't address the level of deference afforded to Rev Ruls or other similar types of IRS guidance, there was speculation following the decision that arguments advocating for such published rulings to receive Chevron deference would soon follow. However, on May 7, Gilbert, Rothenberg, appellate section chief in the Department of Justice's (DOJ's) Tax Division, announced that the DOJ would not argue that Chevron deference applies to Rev Ruls or Rev Procs.
Announcement (“Ann”) or Notice (“Not”). These address a timely topic of wide interest (e.g., extension of the period in which a Roth IRA can be recharacterized) and can be relied on and cited as precedent by taxpayers. IRS is bound to what it says in an Announcement or Notice to the same extent it would be with a Rev Rul or Rev Proc.
News release or information release (“IR”). This document is issued to the press to bring public attention to general-interest items, rather than items of a technical nature. IRS's statement of policy in an IR has been held to bind it in its dealings with taxpayers.
General Counsel Memorandum (“GCM”). This is a legal memo prepared by the IRS's Chief Counsel's Office in response to a formal request from within IRS ranks for legal advice. It can't be used or cited as precedent. Some courts have held that a GCM can be relied on for interpretive guidance, but IRS has resisted this conclusion. IRS stopped issuing GCMs after’95.
Observation: In a case of first impression, the Second Circuit relied substantially on what IRS had said in GCMs. It noted that while it wasn't giving precedential value to the GCMs cited, it was necessary to rely on them for interpretive advice. (Morganbesser v. U.S., (1993, CA2) 71 AFTR 2d 93-825) IRS subsequently nonacquiesced in the decision and revoked a GCM relied on in that case.
Action on Decision (“AOD”). This is a legal memo prepared by IRS Chief Counsel when IRS loses a court case. It sets forth the issue, a brief discussion of the facts, and the reasoning behind the recommendation to acquiesce (“acq,” follow) or nonacquiesce (“nonacq,” not follow) a decision, or to acquiesce in result only. IRS says that an AOD isn't an affirmative statement of its position, isn't intended to serve as public guidance and can't be cited as precedent. As a practical matter, acqs or nonacqs can be relied on (e.g., if the taxpayer's situation is the same as the one decided in a court case to which IRS has acquiesced, the taxpayer may assume his position won't be challenged by IRS).
Observation: However, in a December 2010 speech, Commissioner Douglas Shulman cautioned taxpayers not to “read too much” into IRS's AOD regarding the Tax Court's 2009 VERITAS transfer pricing decision (133 TC No. 14), stating that IRS's attorneys will continue to litigate these types of cases when appropriate to do so.
Regulations. These may be final (no prefix before the word “Reg.”), temporary (designated with the letter T in the citation), proposed (“Prop Reg”), or proposed reliance regs (designated as “Prop Reg... Taxpayers may rely”).
A final reg represents IRS's authoritative explanation and interpretation of a Code provision. Final regs sometimes are not amended until many years after enactment of tax laws (or court cases) that affect the subject of a final reg and, until then, may be of little use in interpreting a current Code provision.
Before the Supreme Court's decision in Mayo, the precedential value of a final reg depended on whether it was legislative (i.e., enacted pursuant to a specific grant of authority mandated by the Code itself) or interpretive (enacted under the IRS's general authority to issue Code-related rules and regs). Interpretive regs were typically subject to the standard set out in National Muffler, (S Ct 1979) 43 AFTR 2d 79-828, under which the reg was evaluated for whether it harmonized with the language, origin, and purpose of the statute, considering factors such as the consistency of IRS's interpretation and whether the reg was contemporaneous with the statute's enactment. Legislative regs were generally subject to “Chevron deference,” meaning that they were afforded controlling weight unless “arbitrary, capricious, or manifestly contrary to the statute.” (Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc., (S Ct 1984) 467 U.S. 837) However, there was confusion among the courts and tax practitioners as to which standard governed interpretive regs following Chevron, especially in situations where IRS's authority to issue guidance was implicit (i.e., to address an ambiguity or fill in gaps in the enacted law). Many commentators reasoned that tax law was simply different from other types of law, and tax regs should continue to be analyzed under the National Muffler standard.
In early 2011, the Supreme Court spoke on the issue in the Mayo case. The Court clarified that Treasury regs, whether legislative or interpretive, that are issued under the Administrative Procedures Act's (APA's) “notice and comment” procedures (which was previously identified by the Supreme Court in Mead Corp., 553 US 218, as an indication that Chevron deference is warranted) and fall within the statutory grant of authority are entitled to Chevron deference. In so holding, the Court largely repudiated National Muffler and its factor-based test.
Observation: It's not completely clear, however, whether the National Muffler approach will still be viable for regs or other pronouncements that aren't subject to the notice and comment process.
However, despite the Supreme Court's seemingly clear pronouncement, subsequent case law has shown that there is still room for interpretation. For instance, there is currently a split among the courts as to the validity of regs stating that an overstatement of basis is an omission of income for purpose of the six-year limitations period under Code Sec. 6501(e)(1)(A). These retroactively effective regs were issued by IRS issued after a number of taxpayer victories on the issue. The Fourth Circuit, citing Mayo, stated that Chevron deference didn't apply to the reg since the underlying statute was unambiguous. (Home Concrete & Supply, LLC v. U.S., (CA 4 2/7/2011) 107 AFTR 2d 2011-767) The Tax Court, also citing Mayo, held that the Supreme Court's decision in Colony, Inc. v. Com., (S Ct 1958) 1 AFTR 2d 1894, that the extended limitations period applies to omissions and not overstatements, remained binding until clearly and unequivocally repudiated by IRS's regs. (Carpenter Family Investments, LLC, (2011) 136 TC No. 17) Thus, while Mayo has clarified a number of issues and arguably made it more difficult to challenge an IRS reg, its precise effect remains to be seen.
A temporary reg provides taxpayers with guidance they can follow pending issuance of final regs, and has the same precedential value as a final reg. (Temporary regs issued after Nov. 10,’88 expire three years after their issuance date, which is why they also must be issued as proposed regs.)
A proposed reg is issued to give taxpayers and practitioners notice of how IRS interprets a provision, and the opportunity to comment on and critique that interpretation. It has little precedential value. Courts have said proposed regs “carry no more weight than a position advanced on brief” and are “suggestions made for comment; they modify nothing.” The Court of Federal Claims similarly stated that “[i]n general, proposed regulations have no legal force or effect until they become final.” (Yocum v. U.S., (2006, Ct Fed Cl) 96 AFTR 2d 2005-5030)
Nevertheless, proposed regs are useful for tax planning. In many cases (although there have been notable exceptions), final regs follow the broad outline presented in proposed regs. One court has ruled that where a taxpayer relies on proposed regs, differing final regs cannot be imposed to his detriment. This was so even though the proposed regs were not ones IRS said the taxpayer could rely on. (Elkins, Paul, (1983) 81 TC 669) However, other courts have leaned the other way. For example, the Court of Appeals for the Federal Circuit held that where existing final regs provided an unfavorable result to a taxpayer while proposed amendments to those regs indicated a position more favorable to him, the taxpayer's reliance on the proposed regs wasn't justified. (Garvey Inc v. U.S., (1983, Cl Ct) 51 AFTR 2d 83-721, 1 Ct Cl 108, 83-1 USTC ¶9163, affd (1984, CA Fed Cir) 53 AFTR 2d 84-776, 726 F2d 1569, 84-1 USTC ¶9214)
A proposed reliance reg is one which states that taxpayers may rely on it, with any more stringent provisions in a later final reg to be effective only prospectively. These regs can be relied on as if they are final regs. In an infrequently used variation, IRS states that it will not challenge tax return positions that are consistent with a proposed reliance reg.
Revenue Ruling (“Rev Rul”). Rev Ruls are official interpretations by IRS that have been published in the Internal Revenue Bulletin (IRB) reflecting IRS's conclusion on how the law is applied to a specific set of facts. Because Rev Ruls are interpretive, IRS may issue then without complying with the notice and hearing requirements of the APA. (National Restaurant Assn. v. Simon, (1976, DC Dist Col) 37 AFTR 2d 76-1144) They are issued only by the Associate Office and are published for the information and guidance of taxpayers, IRS personnel, and others concerned. They may arise from various sources, e.g., private letter rulings to taxpayers, technical advice to district offices, or court decisions. Most Rev Ruls apply retroactively unless otherwise stated. (Code Sec. 7805(b)(8)) A Rev Rul's conclusions are limited to the pivotal facts stated in it.
Rev Ruls don't have the force and effect of regs, but may nonetheless be cited and relied on. (See Exxon Mobil Corp & Affiliated Co., (2011) 136 TC No. 5) Assuming that the facts and circumstances at issue are substantially the same as those in a Rev Rul, practitioners and their clients generally may rely on it and don't have to ask for a private ruling for their particular cases. However, Rev Ruls, like regs, can become outdated (e.g., by the passage of subsequent legislation) and may be modified or distinguished by subsequent rulings.
The Supreme Court stated in Skidmore v. Swift & Co., (1944) 323 U.S. 134, that it was not bound by Rev Ruls, and that the weight that they are afforded is dependent on their persuasiveness and the consistency of IRS's position over time. However, this standard has done little to resolve the precise level of deference afforded, and is often cited for the proposition that Rev Ruls are entitled to “some” deference. (See, e.g., U.S. v. Mead, (2001, Sup Ct) 533 U.S. 218)
Cases over the past decade have afforded Rev Ruls varying degrees of deference. For instance, in Ammex, Inc., (2004, CA6) 93 AFTR 2d 2004-2187, the Sixth Circuit held that Rev Ruls should get the same level of deference as regs, reasoning that they are issued in the same manner and under the same authority. (This reasoning is debated—commentators cite differences ranging from the submission of regs for public comment to who formulates and supervises each.) However, in PSB Holdings, Inc., (2007) 129 TC 131, the Tax Court stated that it isn't bound by an interpretation in a Rev Rul.
Revenue Procedure (“Rev Proc”). Rev Procs are statements of practice and procedure published in the IRB. They also are published in the Federal Register when required by the APA. They contain information that affects the rights or duties of taxpayers and other members of the public under the tax law and related statutes, or they contain information that should be made public even if it does not affect the rights and duties of the public. They address broad subjects such as accounting method changes, how to compute depreciation allowances, or how to obtain innocent-spouse equitable relief. The precedential value of a Rev Proc is the same as that of a Rev Rul. However, unlike Rev Ruls, Rev Procs fall outside of Code Sec. 7805(b) and apply prospectively.
Observation: Although Mayo didn't address the level of deference afforded to Rev Ruls or other similar types of IRS guidance, there was speculation following the decision that arguments advocating for such published rulings to receive Chevron deference would soon follow. However, on May 7, Gilbert, Rothenberg, appellate section chief in the Department of Justice's (DOJ's) Tax Division, announced that the DOJ would not argue that Chevron deference applies to Rev Ruls or Rev Procs.
Announcement (“Ann”) or Notice (“Not”). These address a timely topic of wide interest (e.g., extension of the period in which a Roth IRA can be recharacterized) and can be relied on and cited as precedent by taxpayers. IRS is bound to what it says in an Announcement or Notice to the same extent it would be with a Rev Rul or Rev Proc.
News release or information release (“IR”). This document is issued to the press to bring public attention to general-interest items, rather than items of a technical nature. IRS's statement of policy in an IR has been held to bind it in its dealings with taxpayers.
General Counsel Memorandum (“GCM”). This is a legal memo prepared by the IRS's Chief Counsel's Office in response to a formal request from within IRS ranks for legal advice. It can't be used or cited as precedent. Some courts have held that a GCM can be relied on for interpretive guidance, but IRS has resisted this conclusion. IRS stopped issuing GCMs after’95.
Observation: In a case of first impression, the Second Circuit relied substantially on what IRS had said in GCMs. It noted that while it wasn't giving precedential value to the GCMs cited, it was necessary to rely on them for interpretive advice. (Morganbesser v. U.S., (1993, CA2) 71 AFTR 2d 93-825) IRS subsequently nonacquiesced in the decision and revoked a GCM relied on in that case.
Action on Decision (“AOD”). This is a legal memo prepared by IRS Chief Counsel when IRS loses a court case. It sets forth the issue, a brief discussion of the facts, and the reasoning behind the recommendation to acquiesce (“acq,” follow) or nonacquiesce (“nonacq,” not follow) a decision, or to acquiesce in result only. IRS says that an AOD isn't an affirmative statement of its position, isn't intended to serve as public guidance and can't be cited as precedent. As a practical matter, acqs or nonacqs can be relied on (e.g., if the taxpayer's situation is the same as the one decided in a court case to which IRS has acquiesced, the taxpayer may assume his position won't be challenged by IRS).
Observation: However, in a December 2010 speech, Commissioner Douglas Shulman cautioned taxpayers not to “read too much” into IRS's AOD regarding the Tax Court's 2009 VERITAS transfer pricing decision (133 TC No. 14), stating that IRS's attorneys will continue to litigate these types of cases when appropriate to do so.
Code Sec. 6611 Overpayment Interest Allowable On Overpayment Through Date Of Tentative Refund
PLR 201123029
In a Technical Advice Memorandum, IRS has determined that where a taxpayer had an overpayment resulting from an IRS-initiated general adjustment that was preceded by a net operating loss (NOL) carryback and tentative refund that was later disallowed, interest was payable under Code Sec. 6611 from the date of the overpayment to the date of the tentative refund, subject to administrative adjustments.
Background. A taxpayer who receives a refund or a credit is entitled to interest at the rate prescribed under Code Sec. 6621 on the amount of the overpayment. (Code Sec. 6621(a)) For refunds, interest starts running from the date of the overpayment to a date (set by IRS) which is not more than 30 days before the date of the refund check. (Code Sec. 6621(b)(2)
The date of the overpayment is generally the point in time when a payment (or payments) of tax first exceeds the liability. (Reg. §301.6611-1(b)) If the payment that results in an overpayment is made before the last day prescribed for payment, then it's treated as made on the due date. (Code Sec. 6513(a)) If the overpayment results from an NOL carryback, the date of the overpayment is deemed to be no earlier than the filing date for the tax year in which the NOL is claimed. (Code Sec. 6611(f)(1))
IRS administratively establishes an end date of less than 30 days for interest computation purposes under the Internal Revenue Manual (IRM). For instance, for individual master file (IMF) accounts, overpayment interest stops 13 days before the refund, whereas for business master file (BMF) accounts, it stops nine days before.
When an overpayment is credited to another tax liability, interest on the overpayment runs from the overpayment date to the due date of the liability to which the overpayment is credited. (Code Sec. 6611(b)(1)) The due date for the liability credited is the last day by law or regs for the payment of the tax without regard to extensions (Reg. §301.6611-1(h)(2)), typically the unextended due date of the return on which the tax is required to be reported. (Code Sec. 6151(a))
However, when an overpayment results from an IRS-initiated adjustment, interest thereon is computed by subtracting 45 days from the period for which interest is allowable. (Code Sec. 6611(e)(3)) Additionally, no interest is payable from the date the refund claim is filed until the day the refund is made if the overpayment is refunded within 45 days after the taxpayer filed a credit or refund claim. (Code Sec. 6611(e)(2))
Facts. Taxpayer timely filed a federal income tax return for tax year 1 (TY1) and paid the liability shown thereon (Amount 1) prior to the due date of the return. Sometime after the due date, IRS issued taxpayer a tentative refund resulting from an NOL carryback from TY2. The requested amount was paid within 45 days of taxpayer's request, so no overpayment interest was paid under Code Sec. 6611(e)(2).
In a later examination, IRS disallowed the entire NOL carryback, assessed the amount that was previously refunded, and also made a general adjustment reducing taxpayer's TY1 liability. Around that time, IRS also abated an additional amount for TY1 resulting from a TY3 carryback. In the end, the combined amount of the general adjustment decrease and other abatement was slightly more than the disallowed NOL carryback.
IRS allowed overpayment interest arising from the general adjustment for the period beginning on the due date of the TY1 payment through the due date for the TY2 liability. Taxpayer argued that the overpayment interest on that amount should run until the date that IRS issued the tentative refund.
Taxpayer-favorable ruling. The TAM concluded that because the overpayment was attributable to IRS's general adjustment to taxpayer's TY1 liability, and the overpayment was effectively refunded to taxpayer, overpayment interest is allowable under Code Sec. 6611 from the date of the overpayment to the date of the tentative refund, subject to administrative adjustments.
The overpayment began, and interest was therefore allowable, beginning on the date that Amount 1 was considered to have been paid, and continuing until a date not more than 30 days before the overpayment was refunded to taxpayer. (Code Sec. 6611(b)(2)) In computing interest for that period, 45 days must be subtracted under Code Sec. 6611(e)(3) since the overpayment resulted from an IRS_initiated adjustment. The TAM clarified that since Code Sec. 6611(b)(2) was controlling, Code Sec. 6611(b)(1) didn't apply (because the overpayment wasn't credited to a liability), nor did the rules for determining the interest period in cases of NOL carrybacks. Rather, the actual overpayment was based on an adjustment to taxpayer's liability, and wasn't the result of an NOL.
The TAM analyzed and ultimately rejected the two cases cited in the request for advice—AT&T Corp. & Subsidiaries v. U.S., (Ct Fed Cl 10/18/2004) 94 AFTR 2d 2004-6444, and Marsh & McLennan Cos. v. U.S., (CA Fed Cir 9/6/2002) 90 AFTR 2d 2002-6216 —as factually distinguishable, notably based on the fact that both of those cases involved Code Sec. 6611(b)(1).
References: For the end of the interest period on overpayment, see FTC 2d/FIN ¶T-8031; United States Tax Reporter ¶66,114; TaxDesk ¶807,019; TG ¶70905.
In a Technical Advice Memorandum, IRS has determined that where a taxpayer had an overpayment resulting from an IRS-initiated general adjustment that was preceded by a net operating loss (NOL) carryback and tentative refund that was later disallowed, interest was payable under Code Sec. 6611 from the date of the overpayment to the date of the tentative refund, subject to administrative adjustments.
Background. A taxpayer who receives a refund or a credit is entitled to interest at the rate prescribed under Code Sec. 6621 on the amount of the overpayment. (Code Sec. 6621(a)) For refunds, interest starts running from the date of the overpayment to a date (set by IRS) which is not more than 30 days before the date of the refund check. (Code Sec. 6621(b)(2)
The date of the overpayment is generally the point in time when a payment (or payments) of tax first exceeds the liability. (Reg. §301.6611-1(b)) If the payment that results in an overpayment is made before the last day prescribed for payment, then it's treated as made on the due date. (Code Sec. 6513(a)) If the overpayment results from an NOL carryback, the date of the overpayment is deemed to be no earlier than the filing date for the tax year in which the NOL is claimed. (Code Sec. 6611(f)(1))
IRS administratively establishes an end date of less than 30 days for interest computation purposes under the Internal Revenue Manual (IRM). For instance, for individual master file (IMF) accounts, overpayment interest stops 13 days before the refund, whereas for business master file (BMF) accounts, it stops nine days before.
When an overpayment is credited to another tax liability, interest on the overpayment runs from the overpayment date to the due date of the liability to which the overpayment is credited. (Code Sec. 6611(b)(1)) The due date for the liability credited is the last day by law or regs for the payment of the tax without regard to extensions (Reg. §301.6611-1(h)(2)), typically the unextended due date of the return on which the tax is required to be reported. (Code Sec. 6151(a))
However, when an overpayment results from an IRS-initiated adjustment, interest thereon is computed by subtracting 45 days from the period for which interest is allowable. (Code Sec. 6611(e)(3)) Additionally, no interest is payable from the date the refund claim is filed until the day the refund is made if the overpayment is refunded within 45 days after the taxpayer filed a credit or refund claim. (Code Sec. 6611(e)(2))
Facts. Taxpayer timely filed a federal income tax return for tax year 1 (TY1) and paid the liability shown thereon (Amount 1) prior to the due date of the return. Sometime after the due date, IRS issued taxpayer a tentative refund resulting from an NOL carryback from TY2. The requested amount was paid within 45 days of taxpayer's request, so no overpayment interest was paid under Code Sec. 6611(e)(2).
In a later examination, IRS disallowed the entire NOL carryback, assessed the amount that was previously refunded, and also made a general adjustment reducing taxpayer's TY1 liability. Around that time, IRS also abated an additional amount for TY1 resulting from a TY3 carryback. In the end, the combined amount of the general adjustment decrease and other abatement was slightly more than the disallowed NOL carryback.
IRS allowed overpayment interest arising from the general adjustment for the period beginning on the due date of the TY1 payment through the due date for the TY2 liability. Taxpayer argued that the overpayment interest on that amount should run until the date that IRS issued the tentative refund.
Taxpayer-favorable ruling. The TAM concluded that because the overpayment was attributable to IRS's general adjustment to taxpayer's TY1 liability, and the overpayment was effectively refunded to taxpayer, overpayment interest is allowable under Code Sec. 6611 from the date of the overpayment to the date of the tentative refund, subject to administrative adjustments.
The overpayment began, and interest was therefore allowable, beginning on the date that Amount 1 was considered to have been paid, and continuing until a date not more than 30 days before the overpayment was refunded to taxpayer. (Code Sec. 6611(b)(2)) In computing interest for that period, 45 days must be subtracted under Code Sec. 6611(e)(3) since the overpayment resulted from an IRS_initiated adjustment. The TAM clarified that since Code Sec. 6611(b)(2) was controlling, Code Sec. 6611(b)(1) didn't apply (because the overpayment wasn't credited to a liability), nor did the rules for determining the interest period in cases of NOL carrybacks. Rather, the actual overpayment was based on an adjustment to taxpayer's liability, and wasn't the result of an NOL.
The TAM analyzed and ultimately rejected the two cases cited in the request for advice—AT&T Corp. & Subsidiaries v. U.S., (Ct Fed Cl 10/18/2004) 94 AFTR 2d 2004-6444, and Marsh & McLennan Cos. v. U.S., (CA Fed Cir 9/6/2002) 90 AFTR 2d 2002-6216 —as factually distinguishable, notably based on the fact that both of those cases involved Code Sec. 6611(b)(1).
References: For the end of the interest period on overpayment, see FTC 2d/FIN ¶T-8031; United States Tax Reporter ¶66,114; TaxDesk ¶807,019; TG ¶70905.
Defined Value Formula Clauses Set Value Of Charitable And Noncharitable Gifts
Hendrix, TC Memo 2011-133
In a case involving millions of dollars of asserted gift tax deficiencies, the Tax Court has held that defined value formula clauses properly set the fair market value of S corporation stock transferred by married donors to various family trusts and a charitable foundation. Rejecting IRS's arguments, the Court found that the formula clauses were reached at arm's length and were not void as contrary to public policy.
Facts. The dispute involved gifts of stock in the John H. Hendrix Corp. (JHHC) by John H. Hendrix and his wife, Karolyn M. Hendrix (Donors). IRS and Donors agreed to the facts, the key ones of which follow.
JHHC was incorporated in’76. Upon the advice of counsel, it converted to S status in’98 after changing its stock structure in a series of steps to voting and nonvoting common.
In’99, Donors sought estate planning advice from an attorney because they wanted to give some of their JHHC stock to their three adult daughters and to a charitable entity. Because the stock was hard to value, the attorney suggested that Donors use a formula clause to define the stock transfer at the time of the gift in terms of dollars rather than in percentages, while fixing for Federal gift tax purposes the value of the transfer of the stock. He also advised them to establish a donor-advised fund at a nonprofit community organization. They followed this advice and chose the Greater Houston Community Foundation (Foundation) to administer their contemplated donor-advised fund.
The attorney advised Foundation that Donors wanted to contribute (1) $20,000 to establish a donor-advised fund and (2) JHHC nonvoting stock. The donor-advised fund was established on Nov. 9,’99.
A draft agreement between Foundation and the Donors indicated that Donors would give JHHC stock to the Foundation and would transfer (part as a gift and part as a sale) JHHC stock to the trusts benefiting the daughters. The draft indicated that a formula clause would set the portion of JHHC stock transferred to the trusts and the remaining portion given to the Foundation.
After an appraiser was retained to estimate the value of the JHHC nonvoting stock, each Donor decided to give $50,000 of JHHC nonvoting stock to the Foundation and to transfer $10,519,136 of JHHC nonvoting stock to a generation-skipping tax (GST) trust and $4,213,710.10 of JHHC nonvoting stock to an issue trust benefitting the daughters. The trusts were executed on Dec. 29,’99. The trustees were two individuals, one of whom was a daughter of Donors.
On Dec. 31,’99, each Donor, the trustees, and Foundation executed an agreement that irrevocably assigned 287,620 shares of the Donors' JHHC nonvoting stock to the GST trust and to the Foundation. Each agreement effected the transfer pursuant to a formula. Under the formula, (1) a portion of the assigned shares having a fair market value as of the effective date equal to $10,519,136 was assigned to the trustees to be held in equal shares for the benefit of the daughters, and (2) any remaining portion of the assigned shares was assigned to the Foundation for the benefit of the donor-advised fund. The assignment agreements required that the trusts pay proportionally any gift taxes imposed as a result of the transfer. The assignment agreements required that the trustees sign promissory notes obligating the trustees to pay $9,090,000 to each Donor.
On the same day, a second set of assignment agreements was executed containing the same terms, except that each Donor transferred 115,622 of JHHC nonvoting stock to his or her issue trust and to the Foundation, and the fair market value of the stock for the benefit of the daughters was set at $4,213,710. The trustee had to deliver a note to each Donor in the amount of $3,641,233.
Donors had no right or responsibility for allocating the shares among the transferees on a per-share basis. The agreements left that allocation to the transferees under a dispute resolution and buy-sell agreement. It required that any dispute related to the fair market value between or among JHHC, the shareholders, assignees, or any party be resolved by arbitration, if it could not be resolved by agreement.
The trustees delivered the notes in exchange for the shares on Dec. 31,’99.
About a month after the transfers, following two appraisals setting the per-share value at $36.66, the Foundation and the trustees entered into confirmation agreements, effective as of Dec. 31,’99, that allocated the shares among them according to the $36.66 per-share value.
Each Donor claimed a charitable contribution deduction of $50,000 and a total taxable gift of $1,414,581 on’99 gift tax returns filed in April of 2000.
IRS and Donors agreed that if a final decision in this case determined that the defined value formula clauses do not control the valuation of the transferred shares, then the fair market value of the transferred shares would be based on a per-share value of $48.60 times the number of shares agreed to by each transferee in the confirmation agreements.
Dispute over validity of formula clauses. Before the Tax Court, the parties disputed the validity of the formula clauses. Donors contended that the formula clauses were valid because the clauses were used to fix the transferred amount of JHHC's hard-to-value stock and the parties to those clauses conducted themselves at arm's length. Donors claimed that the applicable value of the stock was $36.66 per share, as reported, and that they could deduct the $100,000 claimed as charitable contributions.
IRS argued that the formula clauses were invalid because they were not reached at arm's length and they were contrary to public policy. IRS said that the value of the stock was $48.60 per share and that each Donor could deduct charitable contributions totaling $66,285 (i.e., $48.60 multiplied by the number of shares transferred to the Foundation).
Observation: Had IRS prevailed on its claim that the shares were each worth $48.60, while the donors would have been allowed a higher charitable contribution deduction, they would have had to pay substantially more gift tax on the gift portion of the transfers to the trusts for their daughters.
Donors argued that the formula clauses were valid under precedent in the Fifth Circuit to which this case was appealable. Specifically, they argued that these clause were upheld in Succession of McCord, Jr. v. Comm., (CA 5 08/22/2006) 98 AFTR 2d 2006-6147 revg 120 TC 358 (2003). IRS argued that Succession of McCord was not controlling because the Fifth Circuit did not consider specific arguments IRS was making in this case. These arguments were that the formula clauses were invalid because they were not reached at arm's length and that they were void as contrary to public policy.
Clauses were at arm's length. IRS argued that they weren't at arm's length because Donors and their daughters (or their trusts) were close and lacked adverse interests, the daughters benefitted from Donors' estate plan, and the clauses were not thoroughly negotiated. The Tax Court disagreed. It said that the mere facts that Donors and their daughters were “close” and that Donors' estate plan was beneficial to the daughters did not necessarily mean that the formula clauses failed to be reached at arm's length. The Court also noted that economic and business risk assumed by the daughters' trusts as buyers of the stock (i.e., the daughters' trusts could receive less stock for their payment if the JHHC stock was overvalued) placed them at odds with Donors and the Foundation. In addition, for a variety of reasons, the Court found no collusion between Donors and Foundation.
Clauses were not void as against public policy. IRS argued that the formula clauses were void as contrary to public policy. The Tax Court disagreed. While the Court observed that it can disallow a deduction on public policy grounds if allowing such a deduction would severely and immediately frustrate sharply defined national or State policies proscribing certain conduct, the formula clauses at issue did not immediately and severely frustrate any national or State policy. To the contrary, they supported a fundamental public policy of encouraging gifts to charity.
IRS relied on Commissioner v. Procter, (CA 4 1994) 32 AFTR 750, which found a gift tax savings clause to be void. In that case, the clause provided that if any part of the transfer was found to be a gift, the property would remain property of the taxpayer. The Tax Court found Procter to be distinguishable from the current case. Unlike Procter, in the current case, there was no condition subsequent that would defeat the transfer. Moreover, the formula clauses encouraged charitable giving.
Accordingly, the Court held that the Donors could each deduct $50,000 as a charitable contribution. IRS argued that the parties agreed to a $48.60 per-share value. However, the Tax Court read the stipulation differently. Under its reading, the $48.60 value was inapplicable because the formula clauses control the valuation.
References: For disregarded gift adjustment clauses, see Federal Tax Coordinator 2d ¶Q-1982; TaxDesk ¶711,023; TG ¶40063.
In a case involving millions of dollars of asserted gift tax deficiencies, the Tax Court has held that defined value formula clauses properly set the fair market value of S corporation stock transferred by married donors to various family trusts and a charitable foundation. Rejecting IRS's arguments, the Court found that the formula clauses were reached at arm's length and were not void as contrary to public policy.
Facts. The dispute involved gifts of stock in the John H. Hendrix Corp. (JHHC) by John H. Hendrix and his wife, Karolyn M. Hendrix (Donors). IRS and Donors agreed to the facts, the key ones of which follow.
JHHC was incorporated in’76. Upon the advice of counsel, it converted to S status in’98 after changing its stock structure in a series of steps to voting and nonvoting common.
In’99, Donors sought estate planning advice from an attorney because they wanted to give some of their JHHC stock to their three adult daughters and to a charitable entity. Because the stock was hard to value, the attorney suggested that Donors use a formula clause to define the stock transfer at the time of the gift in terms of dollars rather than in percentages, while fixing for Federal gift tax purposes the value of the transfer of the stock. He also advised them to establish a donor-advised fund at a nonprofit community organization. They followed this advice and chose the Greater Houston Community Foundation (Foundation) to administer their contemplated donor-advised fund.
The attorney advised Foundation that Donors wanted to contribute (1) $20,000 to establish a donor-advised fund and (2) JHHC nonvoting stock. The donor-advised fund was established on Nov. 9,’99.
A draft agreement between Foundation and the Donors indicated that Donors would give JHHC stock to the Foundation and would transfer (part as a gift and part as a sale) JHHC stock to the trusts benefiting the daughters. The draft indicated that a formula clause would set the portion of JHHC stock transferred to the trusts and the remaining portion given to the Foundation.
After an appraiser was retained to estimate the value of the JHHC nonvoting stock, each Donor decided to give $50,000 of JHHC nonvoting stock to the Foundation and to transfer $10,519,136 of JHHC nonvoting stock to a generation-skipping tax (GST) trust and $4,213,710.10 of JHHC nonvoting stock to an issue trust benefitting the daughters. The trusts were executed on Dec. 29,’99. The trustees were two individuals, one of whom was a daughter of Donors.
On Dec. 31,’99, each Donor, the trustees, and Foundation executed an agreement that irrevocably assigned 287,620 shares of the Donors' JHHC nonvoting stock to the GST trust and to the Foundation. Each agreement effected the transfer pursuant to a formula. Under the formula, (1) a portion of the assigned shares having a fair market value as of the effective date equal to $10,519,136 was assigned to the trustees to be held in equal shares for the benefit of the daughters, and (2) any remaining portion of the assigned shares was assigned to the Foundation for the benefit of the donor-advised fund. The assignment agreements required that the trusts pay proportionally any gift taxes imposed as a result of the transfer. The assignment agreements required that the trustees sign promissory notes obligating the trustees to pay $9,090,000 to each Donor.
On the same day, a second set of assignment agreements was executed containing the same terms, except that each Donor transferred 115,622 of JHHC nonvoting stock to his or her issue trust and to the Foundation, and the fair market value of the stock for the benefit of the daughters was set at $4,213,710. The trustee had to deliver a note to each Donor in the amount of $3,641,233.
Donors had no right or responsibility for allocating the shares among the transferees on a per-share basis. The agreements left that allocation to the transferees under a dispute resolution and buy-sell agreement. It required that any dispute related to the fair market value between or among JHHC, the shareholders, assignees, or any party be resolved by arbitration, if it could not be resolved by agreement.
The trustees delivered the notes in exchange for the shares on Dec. 31,’99.
About a month after the transfers, following two appraisals setting the per-share value at $36.66, the Foundation and the trustees entered into confirmation agreements, effective as of Dec. 31,’99, that allocated the shares among them according to the $36.66 per-share value.
Each Donor claimed a charitable contribution deduction of $50,000 and a total taxable gift of $1,414,581 on’99 gift tax returns filed in April of 2000.
IRS and Donors agreed that if a final decision in this case determined that the defined value formula clauses do not control the valuation of the transferred shares, then the fair market value of the transferred shares would be based on a per-share value of $48.60 times the number of shares agreed to by each transferee in the confirmation agreements.
Dispute over validity of formula clauses. Before the Tax Court, the parties disputed the validity of the formula clauses. Donors contended that the formula clauses were valid because the clauses were used to fix the transferred amount of JHHC's hard-to-value stock and the parties to those clauses conducted themselves at arm's length. Donors claimed that the applicable value of the stock was $36.66 per share, as reported, and that they could deduct the $100,000 claimed as charitable contributions.
IRS argued that the formula clauses were invalid because they were not reached at arm's length and they were contrary to public policy. IRS said that the value of the stock was $48.60 per share and that each Donor could deduct charitable contributions totaling $66,285 (i.e., $48.60 multiplied by the number of shares transferred to the Foundation).
Observation: Had IRS prevailed on its claim that the shares were each worth $48.60, while the donors would have been allowed a higher charitable contribution deduction, they would have had to pay substantially more gift tax on the gift portion of the transfers to the trusts for their daughters.
Donors argued that the formula clauses were valid under precedent in the Fifth Circuit to which this case was appealable. Specifically, they argued that these clause were upheld in Succession of McCord, Jr. v. Comm., (CA 5 08/22/2006) 98 AFTR 2d 2006-6147 revg 120 TC 358 (2003). IRS argued that Succession of McCord was not controlling because the Fifth Circuit did not consider specific arguments IRS was making in this case. These arguments were that the formula clauses were invalid because they were not reached at arm's length and that they were void as contrary to public policy.
Clauses were at arm's length. IRS argued that they weren't at arm's length because Donors and their daughters (or their trusts) were close and lacked adverse interests, the daughters benefitted from Donors' estate plan, and the clauses were not thoroughly negotiated. The Tax Court disagreed. It said that the mere facts that Donors and their daughters were “close” and that Donors' estate plan was beneficial to the daughters did not necessarily mean that the formula clauses failed to be reached at arm's length. The Court also noted that economic and business risk assumed by the daughters' trusts as buyers of the stock (i.e., the daughters' trusts could receive less stock for their payment if the JHHC stock was overvalued) placed them at odds with Donors and the Foundation. In addition, for a variety of reasons, the Court found no collusion between Donors and Foundation.
Clauses were not void as against public policy. IRS argued that the formula clauses were void as contrary to public policy. The Tax Court disagreed. While the Court observed that it can disallow a deduction on public policy grounds if allowing such a deduction would severely and immediately frustrate sharply defined national or State policies proscribing certain conduct, the formula clauses at issue did not immediately and severely frustrate any national or State policy. To the contrary, they supported a fundamental public policy of encouraging gifts to charity.
IRS relied on Commissioner v. Procter, (CA 4 1994) 32 AFTR 750, which found a gift tax savings clause to be void. In that case, the clause provided that if any part of the transfer was found to be a gift, the property would remain property of the taxpayer. The Tax Court found Procter to be distinguishable from the current case. Unlike Procter, in the current case, there was no condition subsequent that would defeat the transfer. Moreover, the formula clauses encouraged charitable giving.
Accordingly, the Court held that the Donors could each deduct $50,000 as a charitable contribution. IRS argued that the parties agreed to a $48.60 per-share value. However, the Tax Court read the stipulation differently. Under its reading, the $48.60 value was inapplicable because the formula clauses control the valuation.
References: For disregarded gift adjustment clauses, see Federal Tax Coordinator 2d ¶Q-1982; TaxDesk ¶711,023; TG ¶40063.
IRS Gives Certain Individuals Extra Time To File Fbars For Pre-2010 Years
Notice 2011-54, 2011-29 IRB
In a Notice, IRS has extended the deadline for persons who have signature authority over, but no financial interest in, foreign financial accounts to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR). They now have under Nov. 1, 2011, to report their signature authority over such accounts during 2009 and earlier years. The deadline for 2010, however, remains unchanged at June 30, 2011.
Background. Each U.S. person who has a financial interest in or signature or other authority over any foreign financial accounts, including bank, securities, or other types of financial accounts in a foreign country, if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year, must report that relationship each calendar year by filing TD F 90-22.1 with the Department of the Treasury on or before June 30th of the succeeding year.
In Notice 2009-62, 2009-35 IRB 260, IRS extended the deadline to June 30, 2010, to file a FBAR for years 2008 and earlier, for (i) persons with no financial interest in a foreign financial account but with signature or other authority over that account; and (ii) persons with a financial interest in or signature authority over a foreign financial account in which the assets are held in a commingled fund.
In Notice 2010-23, 2010-11 IRB 441, which modified and supplemented Notice 2009-62, IRS deferred the deadline for persons with signature authority over but no financial interest in a foreign financial account for which a FBAR would otherwise have been due on June 30, 2010, until June 30, 2011. This deadline applied to FBARs reporting foreign financial accounts for the 2010 and prior calendar years. Both of these extensions were provided to give Treasury more the time to develop comprehensive FBAR guidance.
On Feb. 24, 2011, the Treasury Department's Financial Crimes Enforcement Network (FinCEN) issued a final rule to amend the Bank Secrecy Act (BSA) regs regarding FBAR reporting requirements. The rule was made effective as of Mar. 28, 2011 and applies to 2010 reports required to be filed by June 30, 2011, and those for subsequent years. It largely adopted the proposed regs issued on Feb. 26, 2010, which provided additional guidance and clarification regarding who must file FBARs.
Deadline further deferred. In response to comments that individuals with signature authority over, but no financial interest in, foreign financial accounts were having difficulty gathering the necessary information to file complete and accurate FBARs for 2009 and earlier calendar years by the June 30, 2011 deadline, IRS is pushing the deadline back to Nov. 1, 2011. However, the June 30, 2011, deadline for reporting either signature authority over, or financial interest in, foreign financial accounts for the 2010 year remains unchanged.
IRS specifies that the relief provided in Notice 2011-54, does not limit the relief provided in FinCEN's Notice 2011-1, which gave certain individuals with only signature authority until June 30, 2012, to file FBARs. IRS also stressed that Notice 2011-54, has no effect on the requirements to provide information or file FBARs in connection with IRS's 2009 or 2011 Offshore Voluntary Disclosure Programs.
References: For foreign financial accounts reporting requirements, see FTC 2d/FIN ¶S-3650; United States Tax Reporter ¶60,114.06; TaxDesk ¶815,516; TG ¶60611.
In a Notice, IRS has extended the deadline for persons who have signature authority over, but no financial interest in, foreign financial accounts to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR). They now have under Nov. 1, 2011, to report their signature authority over such accounts during 2009 and earlier years. The deadline for 2010, however, remains unchanged at June 30, 2011.
Background. Each U.S. person who has a financial interest in or signature or other authority over any foreign financial accounts, including bank, securities, or other types of financial accounts in a foreign country, if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year, must report that relationship each calendar year by filing TD F 90-22.1 with the Department of the Treasury on or before June 30th of the succeeding year.
In Notice 2009-62, 2009-35 IRB 260, IRS extended the deadline to June 30, 2010, to file a FBAR for years 2008 and earlier, for (i) persons with no financial interest in a foreign financial account but with signature or other authority over that account; and (ii) persons with a financial interest in or signature authority over a foreign financial account in which the assets are held in a commingled fund.
In Notice 2010-23, 2010-11 IRB 441, which modified and supplemented Notice 2009-62, IRS deferred the deadline for persons with signature authority over but no financial interest in a foreign financial account for which a FBAR would otherwise have been due on June 30, 2010, until June 30, 2011. This deadline applied to FBARs reporting foreign financial accounts for the 2010 and prior calendar years. Both of these extensions were provided to give Treasury more the time to develop comprehensive FBAR guidance.
On Feb. 24, 2011, the Treasury Department's Financial Crimes Enforcement Network (FinCEN) issued a final rule to amend the Bank Secrecy Act (BSA) regs regarding FBAR reporting requirements. The rule was made effective as of Mar. 28, 2011 and applies to 2010 reports required to be filed by June 30, 2011, and those for subsequent years. It largely adopted the proposed regs issued on Feb. 26, 2010, which provided additional guidance and clarification regarding who must file FBARs.
Deadline further deferred. In response to comments that individuals with signature authority over, but no financial interest in, foreign financial accounts were having difficulty gathering the necessary information to file complete and accurate FBARs for 2009 and earlier calendar years by the June 30, 2011 deadline, IRS is pushing the deadline back to Nov. 1, 2011. However, the June 30, 2011, deadline for reporting either signature authority over, or financial interest in, foreign financial accounts for the 2010 year remains unchanged.
IRS specifies that the relief provided in Notice 2011-54, does not limit the relief provided in FinCEN's Notice 2011-1, which gave certain individuals with only signature authority until June 30, 2012, to file FBARs. IRS also stressed that Notice 2011-54, has no effect on the requirements to provide information or file FBARs in connection with IRS's 2009 or 2011 Offshore Voluntary Disclosure Programs.
References: For foreign financial accounts reporting requirements, see FTC 2d/FIN ¶S-3650; United States Tax Reporter ¶60,114.06; TaxDesk ¶815,516; TG ¶60611.
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