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Monthly Newsletter for ncpe Fellowship Members

TaxingTimesVol. 1 No. 3 July 2010

Remarks from Beanna4th of July by the NumbersThe Ragin CaginLearning by DegreesInterim Procedures Provide for Validation of SSNs to Stop Backup WithholdingIRS Launches New Program to Determine Employer’s Share of FICA Taxes on Unreported TipsRelated Parties Complicate Tax Rules for Like-Kind ExchangesIRS Initiative on Uncertain Tax Positions Produces an Outpouring of Critical Comments from the Tax Professional CommunitiesSon Liable for Fathers’s Unpaid Tax as Transferee of CondoGoing Concern Opinions on the DeclineYou May Get the IRS to Withdraw Tax LienIRS Announces New Examination Process for Large and Mid-size Business Tax PayersIRS explains Workings of Husband and Wife’s Joint Venture ElectionHow the New Health Tax Will Hit YouScams on Rise in Wake of Health Care LawTemporary Regs Fill in Statutory Gaps on New Indoor Tanning TaxIRS Provides Guidance on Measuring Owner Shifts in Loss CorporationsTIGTA Audit Examines the Issue of Unpaid Taxes by Participants in TARPReturns and Allowances Don’t Reduce Gross Income in Applying 6-Year Limitation Period TestIRS Not Following District Court Ruling that Severance Payments Aren’t Subject to FICA Tax

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ContentsRemarks from Beanna

Whatever happened to the “off season?” Remember thegood old days when after the April 15th rush the phonesdidn’t ring, the faxes quit coming and walk-ins were a thingof the past. A tax professional’s life has changed!

What OFF SEASON!

And we love it!

It is time for Education – What Happens WithoutEducation? – NOTHING!

NCPE’S Summer Sessions, Corporate, Partnership & LLChas begun. Do not miss this as many enacted andpending law changes must be examined in order to helpyour taxpayers adjust to this changing tax scene.

In this month’s Taxing Times be sure and pay closeattention to Jerry and Wayne’s columns. Much ishappening as I write and as always, NCPE will keep youinformed as to what is going on in the business of tax.

It has been wonderful to see so many of you join. I inviteyou to tell your colleagues about the Fellowship and thevalue of NCPE education. If you refer them to theFellowship, make sure they tell me so that I canappropriately give you credit.

Best wishes for a fabulous 4th of July and enjoy the factsabout this holiday I could not resist adding to yournewsletter.

Beanna

Beanna@ncpefellowship.com

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4th of July , By the Numbers

On this day in 1776, the Declaration of Independencewas approved by the Continental Congress, startingthe 13 colonies on the road to freedom as a sovereignnation. As always, this most American of holidays willbe marked by parades, fireworks and backyardbarbecues across the country.

Patriotic Places30

Number of places nationwide with “liberty” in theirname. The most populous one is Liberty, Missouri,(26,232). Iowa has more of these places than any otherstate: four (Libertyville, New Liberty, North Liberty andWest Liberty).

· Eleven places have “independence” in theirname. The most populous of these isIndependence, Missouri, with 113,288residents.

· Five places adopted the name “freedom.”Freedom, California, with 6,000 residents, hasthe largest population among these.

· There is one place named “patriot” — Patriot,Indiana, with a population of 202.

· And what could be more fitting than spendingthe day in a place called “America”? There arefive such places in the country, with the mostpopulous being American Fork, Utah, with21,941 residents.

Fourth of July Barbecue Cookout

As with many holidays, the 4th of July celebrationincludes food, drink and the realization of howfortunate we are as a nation.

More than 66 million

Number of Americans who said they have taken partin a barbecue during the previous year. It’s probablysafe to assume a large number of these events tookplace on the Fourth.

Although we do not have a fixed menu for thecelebration of the Fourth, you can almost count ontraditional favorites such as hamburgers and hot dogs,chicken, ribs, garden salads, potato salad, chips andwatermelon. Following is a summary of where thesefoods come from:

· There’s a 1-in-6 chance the beef on yourbackyard grill came from Texas. The Lone StarState is the leader in the production of cattleand calves.

· The chicken on your barbecue grill probablycame from one of the top broiler-producingstates: Georgia, Arkansas, Alabama, NorthCarolina and Mississippi...

· The lettuce in your salad or on your hamburgerprobably was grown in California, whichaccounts for nearly three-quarters of USAlettuce production.

· Fresh tomatoes in your salad most likely camefrom Florida or California, which, combined,produced more than two-thirds of U.S.tomatoes. The ketchup on your hamburger orhot dog probably came from California, which

Survey Finds CPA Are Asked to Address More Technology Risk Questions from ClientsIRS Catching Employers Claiming Fictitious COBRA Subsidy CreditsUSCIS Redesigns E-Verify WebsiteTaxpayer Lost Most Arguments but Court Gives Him a Chance to Keep his PensionRemand Gives Taxpayer a Shot at Keeping PensionIRS Website Notes Changes to Forms W2, W3TIGTA Evaluates IRS’s Processing and Depositing of Paper ChecksExpanded Student Loan Relief for Health Care Professionals Creates Refund OpportunityKingston Springs Woman Goes to Prison for Filing False Tax ReturnsSwiss to Help IRS Identify Secret UBS Accounts in Tax ProbePlano Man Sentenced to 6 Years for Tax FraudJustice Dept Announces ArrestsTax Extenders Die Many DeathsWayne’s WorldIRS Release Form for Applying for the Therapeutic Discovery Tax Credit

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accounted for 95 percent of processed tomatoproduction last year.

· As to potato salad or potato chips or fries, Idahoand Washington produces about one-half ofthe nation’s spuds.

· For dessert, six states — California, Florida,Texas, Georgia, Arizona and Indiana —combined to produce about 80 percent ofwatermelons last year.

Fourth of July Fireworks$128.8millionThe value of fireworks imported from China,representing the bulk of all U.S. fireworks imports($135.6 million) in 2002. U.S. exports of fireworks, bycomparison, amounted to $13.5 million, with Germanypurchasing more than any other single country ($5.0million).

Import s of U.S. Flags$7.9millionThe dollar value of U.S. imports of American flags in2002; more than half of this amount ($5.2 million) wasfor U.S. flags made in China. This was down from the2001 dollar value of U.S. flag imports ($51.7 million),but still considerably higher than the total for 2000($747,800). That was the last full year prior to 9/11..

$646,452Dollar value of exports of U.S. flags in 2002. Japanwas the leading customer, purchasing $86,189 worth.

125,000Number of U.S. flags flown over the U.S. Capitol lastyear at the request of House and Senate members.On July 4 alone, 1,200 were flown over Washington,DC. (From the U.S. Capitol Flag Room.)

$272millionAnnual dollar value of shipments of fabricated flags,banners and similar emblems by the nation’smanufacturers, according to the latest economiccensus (1997) for which there is data.

The British are coming!

“The British are coming! The British are coming!”These days, this cry applies to tourists rather than“redcoats.” Nearly 5 million tourists from the UK visited

the United States in a recent year, more than fromany other country except Japan.

$74billion

Dollar volume of trade last year between the UnitedStates and the United Kingdom, making the U.K., ouradversary in 1776, our sixth-leading trading partnertoday.

The Ragin Cagin

Accenture to run program for t ax prep arers for IRS

Management consulting and outsourcing companyAccenture PLC has been awarded a contract to designand operate the return preparer registration programfor the Internal Revenue Service.

The contract includesa one-year baseordering period andpotentially four one-year options. Terms ofthe deal were notdisclosed.

The company willwork with the IRS todevelop a system foronline registration andrenewal, collection ofuser fees andassignment ofidentification numbersfor paid tax return preparers.

The goal of the program is to improve the quality ofpaid tax return prepares and regulate it, by requiringregistration and testing.

Accenture, based in Dublin, has offices in Washington,New York, Chicago, and San Francisco.

U.S.-listed shares in Accenture rose 34 cents to $38.14at the announcement.

As this program develops and unfolds, NCPE will keepyou abreast of these very important developments.

Jerry

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Learning by Degrees

The safest of all degrees to be acquiring this year isin accounting: forty-six per cent of graduates in thatdiscipline have already been offered jobs. Businessmajors are similarly placed: forty-four per cent will havebarely a moment to breathe before undergoing thetransformation from student to suit. Engineers of allstripes—chemical, computer, electrical, mechanical,industrial, environmental—have also fared relativelywell since the onset of the recession: they dominate aranking, issued by Payscale.com, of the disciplinesthat produce the best-earning graduates. Particularcongratulations are due to aerospace engineers, whotop the list, with a starting salary of just under sixtythousand dollars—a figure that, if it is not exactlystratospheric, is twenty-five thousand dollars higherthan the average starting salary of a graduate in thatother science of the heavens, theology.

Economics majors aren’t doing badly, either: theirstarting salary averages about fifty thousand a year,rising to a mid-career median of a hundred and onethousand. Special note should be taken of the factthat if you have an economics degree you can,eventually, make a living proposing that other peopleshouldn’t bother going to college. This, at least, is theapproach of Professor Richard K. Vedder, of OhioUniversity, who is the founder of the Center for CollegeAffordability and Productivity. According to the Times,eight out of the ten job categories that will add themost employees during the next decade—includinghome-health aide, customer-service representative,and store clerk—can be performed by someonewithout a college degree. “Professor Vedder likes toask why fifteen percent of mail carriers have bachelor’sdegrees,” the paper reported.

The skip-college advocates’ contention—that, with theeconomic downturn, a college degree may not be thebest investment—has its appeal. Given the high costof attending college in the United States, the questionof whether a student is getting his or her money’s worthtends to loom large with whoever is paying the tuitionfees and the meal-plan bills. Even so, one needn’tnecessarily be a liberal-arts graduate to regard asdistinctly and speciously utilitarian the idea that highereducation is, above all, a route to economicadvancement. Unaddressed in that calculus is anyquestion of what else an education might be for: to

nurture critical thought; to expose individuals to thesignal accomplishments of humankind; to develop inthem an ability not just to listen actively but to respondintelligently.

Interim procedures provide for validationof SSNs to stop backup withholding

Ann. 2010-41, 2010-25 IRB

IRS has announced a change in the procedures thatindividual payees use to obtain validation of socialsecurity numbers (SSNs) from the Social SecurityAdministration (SSA) to prevent or stop backupwithholding under Code Sec. 3406, following thereceipt of a second “B notice” from a payor. The interimprocedures provided by IRS can be used untiladditional guidance, including a revision of Rev Proc93-37, 1992 CB 477, is published.

Background on backup withholding . A payor (suchas a bank) must send a notice under Code Sec.3406(a)(1)(B) (i.e., a “B notice”) to a payee after beingnotified by IRS or a broker that the payee has providedan incorrect name and taxpayer identification number(TIN) combination for an account. Following the firstnotification from IRS or a broker, the payor must senda first B notice to a payee directing the payee to certifythe TIN on Form W-9, Request for TaxpayerIdentification Number and Certification, in order to stopor prevent backup withholding on reportable paymentsby the payor.

If the payor receives a second notice of incorrect TINfrom IRS or a broker within three years, the payormust send a second B notice to the payee requiringthe payee to provide TIN validation. After the secondB notice, the payor cannot accept a TIN certificationon Form W-9 but must receive validation of the payee’sTIN from the SSA or IRS. Absent receipt of propervalidation, the payor must backup withhold from futurereportable payments it makes to the payee.

Rev Proc 93-37 provides the rules on the form, contentand manner of delivery of B notices. It includes specificinstructions on the TIN validation which must beincluded in the second B notice sent to payees. Underthe instructions in Rev Proc 93-37, a payee whoneeded to validate an SSN had to: contact the localSSA office to inquire about SSN validation, provide acopy of the B notice to SSA, and request and authorizeSSA to send Form SSA-7028, Notice to Third Party of

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Social Security Number Assignment, to the payor tovalidate the payee’s SSN. However, effective Jan. 1,2010, SSA has discontinued the availability of FormSSA-7028 for purposes of verifying SSNs to avoidbackup withholding.

Interim guidance . Since Form SSA-7028 is no longeravailable, Ann. 2010-41 now provides updatedinstructions for TIN validation. To obtain validation ofthe payee’s SSN from the SSA for purposes ofresponding to a second B notice, each individualpayee should now contact the local SSA office andrequest a Social Security Number Printout. The SocialSecurity Number Printout will validate the SSN of theindividual and will serve as acceptable validation ofthe individual’s TIN for Code Sec. 3406 purposes.

An individual may request one free copy of the SocialSecurity Number Printout, which will verify the SSNassigned to that individual. The individual shouldprovide a copy of the Social Security Number Printoutto the payor who sent the second B notice. Ann. 2010-41 provides that a payor who receives a copy of theSocial Security Number Printout validating the SSNof a payee will not be required to commence backupwithholding, and may stop backup withholding, onreportable payments made to that payee.

A payor sending a second B notice to an individualpayee should inform the payee of this change inprocedure. Ann. 2010-41 provides that the followinglanguage is acceptable: “Note that the Instructions forIncorrect Social Security Numbers have changed andthe SSA no longer uses Form SSA-7028. You mustrequest a Social Security Number Printout from SSArather than Form SSA-7028. You must send a copy ofthe Social Security Number Printout directly to us,along with a copy of this notice.”

IRS launches new program to determineemployer ’s share of FICA taxes on

unreported tip s

A new IRS program is using data from employees’Forms 4137, Social Security and Medicare Tax onUnreported Tip Income, to determine the employer’sshare of FICA taxes on unreported tips

Employees use Form 4137 to report and pay theirshare of Social Security and Medicare taxes (FICAtaxes) on tips that they did not report to their employer.The amount on Form 4137 includes any tips allocated

to employees of large food and beverageestablishments.

The IRS believes that employers in industries wheretipping is common know that they must pay theemployer’s share of FICA taxes on tips that employeesreport to them. However, the IRS feels that manyemployers do not realize that they may be liable forthese taxes on tips employees do not report to them.Employers are subject to FICA tax on unreported tipsunder IRC §3121(q).

An employer’s liability for its share of the FICA taxeson unreported tips does not arise until it receives a“Section 3121(q) Notice and Demand” from the IRS.A “Section 3121(q) Notice and Demand” instructs theemployer to include the FICA taxes shown on thenotice and demand on the employer’s next Form 941,Employer’s Quarterly Federal Tax Return. An employerwill not be subject to any interest charges or depositpenalties if it properly reports the taxes as instructedin the notice and demand, and remits the tax due withits Form 941, or if it timely makes a deposit that isrequired to be made in accordance with the noticeinstructions.

In the past, the IRS issued notice and demands basedon tip audits using estimates, including data from Form8027, Employer’s Annual Information Return of TipIncome and Allocated Tips. Under the new initiative,the Section 3121(q) Notice and Demand will be basedon information that the IRS collects from employees’Forms 4137.

The IRS generally intends to notify an employer atleast 30 calendar days in advance of the issuance ofa Section 3121(q) Notice and Demand by issuing apre-notice. The IRS has a designated staff to helpresolve any discrepancies that are noted by employerson the pre-notice.

The IRS expects to include the tip adjustment line onthe 2011 Form 941.

Related p arties complicate t ax rules forlike-kind exchanges

Before ’89, taxpayers were able both to receive cashand defer tax on like-kind exchanges conducted withrelated parties. In response to this perceived loophole,Congress added Code Sec. 1031(f). While thissubsection does not completely rule out tax-deferredtreatment for exchanges between related parties, the

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rather subjective language of the disallowanceexception seriously tilts the odds in favor of IRS.

Code Sec. 1031(f), generally. Code Sec. 1031(f)provides that if a taxpayer engages in a transactionwith a related party that would otherwise qualify fortax-deferral under Code Sec. 1031 , thenonrecognition of gain or loss is disallowed if, lessthan two years after the exchange, either:

· The relinquished property is sold by the relatedparty, or

· The taxpayer sells the acquired property.

The realized gain or loss on the like-kind exchange isthen recognized in the year of the disposition. Thistwo-year rule does have exceptions, however, whichare discussed below.

Related p arties . For purposes of Code Sec. 1031(f),“related parties” refer to, among other relationships:

· Certain family members (i.e., siblings, spouse,ancestors, and lineal descendants).

· An individual and corporation in which more than50% of the value of the stock is effectivelyowned by such individual.

· Two corporations that are part of the samecontrolled group.

· A corporation and a partnership, if the samepersons own more than 50% of the value ofthe corporation and more than 50% of thecapital or profits interest in the partnership.

· An S corporation and C corporation, if the samepersons own more than 50% of the value ofoutstanding stock in each corporation.

· An individual and a partnership in which theindividual effectively owns more than 50% ofthe capital or profits interest in the partnership.

· Two partnerships in which more than 50% of thecapital and profits interest are effectively ownedby the same persons. (Code Sec. 1031(f)(3),Code Sec. 267(b), Code Sec. 707(b)(1))

Exceptions to the two-year rule . The two-yeardisposition period does not apply, and hencenonrecognition is allowed, in the three followingsituations:

· The disposition occurs after the earlier of thedeath of the taxpayer or death of the relatedperson.

· The disposition occurs in a compulsory orinvoluntary conversion if the like-kind exchangeoccurred before the threat of such conversion.

· Neither the exchange nor the disposition hadavoidance of federal income tax as a principalpurpose. (Code Sec. 1031(f)(2))

While the tax avoidance exception in the Code issubjective, the Senate Committee Report lists threeapplications:

· Transactions involving certain exchanges ofundivided interests.

· Dispositions in nonrecognition transactions.

· Transactions that do not involve the shifting ofbasis between properties. (S. Rpt. No. 101-56,101st Cong., 1st Sess. 152 (1989).

The meaning of the third application is unclear, as allbona fide like-kind exchanges involve property basisshifting. The legislative history and IRS letter rulingsindicate that a situation in which a taxpayer shifts froma high-basis property to a low-basis property inexpectation of selling the low-basis property is taxavoidance. (H. Rep’t No. 101–247, 101st Cong., 1stSess. 218 (1989); PLR 200616005, PLR 200440002)

Further tightening the related-party rules, Code Sec.1031(f)(4) states that any transaction that is structuredto avoid the related-party disallowance rules regardinglike-kind exchanges is indeed subject to those veryrules.

Taxpayers have had a fair amount of recent successregarding related-party like-kind exchanges. In severalletter rulings, IRS has allowed taxpayersnonrecognition treatment in related-party transactions.(PLR 200820025, PLR 200728008, PLR 200440002)This success has generally been attributable to thetax-avoidance exception applications from thecommittee reports combined with the idea that taxdecisions favor economic substance over form.

However, as two recent court cases involving related-party like-kind exchanges show, failure to position atransaction under one of these tax avoidanceexception applications is bad news for taxpayers.

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(Teruya Brothers, 124 TC 45 (2005) aff’d, 580 F3d1038, 104 AFTR 2d 2009-6274 (CA-9, 2009), cert.denied 130 S Ct 1526 (2010); Ocmulgee Fields, 132TC 105 (2009). See also Rev Rul 2002-83, 2002-2CB 927)

Conclusion. Taxpayers who purchase real estate intoday’s market will undoubtedly be taking a relativelylow cost basis in their properties. If history is anyindication, taxpayers will eventually return in drovesto real estate investment, and prices will riseaccordingly. Once this happens, many of today’sbuyers will be sitting on potential large gains, and like-kind exchanges will be increasingly attractive.

Involving a related party in one of these exchangescan prove to be fruitful, even if the taxpayer wishes todispose of one of the properties inside of the two-year rule. Because no regs on the tax avoidanceexception have been enacted or proposed, taxpayerswill have to structure the transactions so that theycomply with Congress’ intent.

IRS’s Initiative on Uncert ain Tax PositionsProduces an Outpouring of Critical

Comment s from the T ax ProfessionalCommunity

Criticism of IRS’s new initiative on reporting uncertaintax positions has come from numerous quarters withinthe tax professional community. In a June 1 commentletter to IRS, the American Institute of Certified PublicAccountants (AICPA) said the IRS proposal “couldsignificantly impede rather than enhance” the agency’sgoals of increasing the certainty, consistency andefficiency of the tax compliance system. Theorganization’s “most significant concerns” about theproposal include the following: [it] “potentiallyundercuts the integrity of the financial statementprocess; imposes increased burden and costs ontaxpayers which will be substantially disproportionateto any actual benefit to IRS; creates new tensionamong and between taxpayers, tax advisors, and IRS,and alters the current self-assessment system;produces complexity and results in distortions that willimpede the stated IRS goals; disproportionatelyimpacts small business; and calls for taxpayerreporting at a higher level than mandated byCongress.” The IRS proposal “will undermine theprotections afforded by the attorney-client privilegeand attorney work product doctrine, as well as the

related 26 U.S.C. Sec. 7525 tax practitioner’sprivilege,” the American Bar Association’sGovernmental Affairs Office said in a May 28 letter.“These privileges and protections are of fundamentalimportance to our legal system and are designed toensure access to effective legal advice andrepresentation, which in turn promotes legalcompliance,” the letter said. The ABA Section onTaxation submitted a separate comment letter. TheBig Four accounting firms—Deloitte, Ernst and Young,KPMG and PricewaterhouseCoopers—also submittedcomment letters voicing their particular concerns. June1 marked the closing date for comments.

Son liable for father ’s unp aid taxes astransferee of condo

Scott E. Rubenstein, T ransferee, (2010) 134 TC No.13

The Tax Court has sustained an IRS determinationthat a son has transferee liability of $41,000 plusinterest as provided by law, arising from his father’stransfer to him of a Florida condominium.

Facts. Scott E. Rubenstein moved from his home inNew Jersey to live with his parents in Florida in ’89after his mother’s health declined. She passed awayin ’93 and Scott remained with his dad, JerryRubenstein. Scott cared for Jerry out of love. Therewas no agreement for Scott to be compensated forthe care.

In March 2002, Jerry bought a condo in Delray Beach,Florida for $35,000. On Feb. 21, 2003, he transferredthe condo to Jerry by warranty deed for statedconsideration of $10 and “other good and valuableconsideration.” The fair market value of the condo wasthen $41,000.

As of the day of the condo transfer, Jerry was insolventand unable to pay his debts and Scott knew of thissituation. Jerry’s debts included $112,420 that he owedIRS for unpaid federal income taxes, penalties, andinterest for his tax years ’94 through 2002.

On May 13, 2002, Jerry had submitted to IRS an offer-in-compromise of $10,000 to settle his income taxliabilities for taxable years 1994 through 2001. IRShad rejected the offer on the ground that it was lessthan Jerry’s reasonable collection potential (RCP) of$34,475. In calculating Jerry’s RCP, IRS had

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determined that his “Net Realizable Equity” in thecondominium was zero.

Eighteen months after Jerry had transferred thecondominium to Scott, IRS filed, for the first time, anotice of federal tax lien with respect to Jerry’s unpaidassessments for income taxes, penalties, and interestfor the years ’94 through 2002.

By notice dated Oct. 17, 2005, IRS determined thatScott had liability of $44,681 (later reduced to $41,000by agreement of the parties as to the condo’s valueon the date of transfer), plus interest as provided bylaw, as Jerry’s transferee of the condo, with respectto Jerry’s unpaid income tax, penalties, and interestfor tax years ’98 through 2002.

Code Sec. 6901(a) provides that the liability of atransferee of a taxpayer’s property may be “assessed,paid, and collected in the same manner and subjectto the same provisions and limitations as in the caseof the taxes with respect to which the liabilities wereincurred.” It doesn’t create or define a substantiveliability but merely provides IRS a procedure to assessand collect from the transferee of property thetransferor’s existing liability. The existence and extentof the transferee’s liability are determined by the lawof the State in which the transfer occurred, Florida inthis case.

IRS argued that Scott is liable as a transferee underFla. Stat. Ann. sec. 726.106 (Florida’s UniformFraudulent Transfer Act or FUFTA), which is identicalto section 5 of the Uniform Fraudulent Transfer Act(UFTA). Scott asserted and IRS did not deny thatunder Florida law the condominium was his father’sexempt homestead property. Consequently, Scottargued, because the condominium was “generallyexempt under nonbankruptcy law,” it was not an“asset” for purposes of the FUFTA and its transfer toScott was not avoidable under the FUFTA.

The Tax Court held that insofar as the condo wassubject to judicial process for collection by IRS ofJerry’s federal income tax liabilities, it is properlyconsidered to be an “asset” for purposes of the FUFTA.Clearly the condo was subject to judicial process byIRS to collect Jerry Rubenstein’s taxes,notwithstanding any homestead exemption. IRS couldhave reached the condo by bringing a lien-foreclosuresuit in Federal District Court under Code Sec. 7403(a)or by administrative levy under Code Sec. 6331(a).

The Tax Court also held that the care that Scottprovided for his father did not constitute “reasonablyequivalent value” for the condominium within themeaning of the FUFTA, and that the transfer wasconstructively fraudulent under the FUFTA. In addition,it concluded that IRS is not equitably estopped fromasserting transferee liability by virtue of havingpreviously determined that the condo had zero netequity value as to Jerry for purposes of calculatinghis reasonable collection potential.

Going concern opinions on the decline

Auditors’ going concern opinions are dropping afterreaching a 10-year high in 2007, according to a studyby Audit Analytics. However, while the number of goingconcerns is expected to be less than the prior year’s,the report said that much of the decline is due to thereduction in the number of public companies becauseof the 2008 financial crisis.

The report by the Sutton, MA, researcher reviewedthe auditor opinions in annual reports filed with theSEC as of April 29, 2010. A going concern opinionstates that the auditor no longer can assume that acompany can survive as a business entity. The reportfound that there were 3,284 going concern opinionsin 2007, the highest number during the decade. Yearend 2008 was a close second with 3,275.

Don Whalen, director of research for Audit Analytics,said 205 companies with negative auditorassessments deregistered in 2008. The total is lessthan 10% of the companies with negative opinions.But Whalen said, “These kinds of things makeinvestors very anxious.” “It’s not the kind of thing youwant to see in an audit opinion,” he said.

The number of going concern opinions increased eachyear from 2004 through 2008. The study predictedthat once all the data is in for 2009, there would be3,007 going concern opinions. Whalen said thedecline from 2007 can be attributed to the decreasein the number of public companies.

Many foreign filers and non-accelerated U.S.companies, which the SEC defines as companies withpublic floats of less than $75 million, that report oncalendar years had not filed an annual report with theSEC by the end of April.

Because 2,611 going concern opinions were filed for2009 as of April 29, 2010, Whalen projected that 19.8%

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of auditor opinions in 2009 annual reports will containa qualification regarding the company’s ability tocontinue as a going concern. If Whalen’s forecast isborne out, the 2009 total will be the third highest inthe past decade.

Audit Analytics found that a large operating loss wasthe most common reason for an auditor to issue anegative opinion about a client’s ability to continue.Other reasons included a company’s young age or anincreased threat from competition. The number ofaccelerated and large accelerated companies with agoing concern assumption rose significantly in 2008,but came down in 2009. Accelerated filers have publicfloats between $75 million and $700 million. A largeaccelerated filer has a float of $700 million.

The FASB decided in March to issue an expandedproposal of Exposure Draft (ED) No. 1650-100, GoingConcern. The board released draft guidance inOctober 2008, but after the comments were reviewed,decided to expand the project’s scope. Among otherthings, the FASB wants management to disclose theconditions that gave rise to the going concernassessment; the possible effects of the conditions; andmitigating factors and steps management it may taketo offset the conditions.

The revised proposal will include principles-basedguidance on the adoption and application of theliquidation basis of accounting and require entities to:

· Prepare financial statements on a going concernbasis unless liquidation is I imminent;

· Recognize the costs to dispose of assets orliabilities; and

· Report the expenses and income they will incurthrough liquidation

You may get the IRS to withdraw t ax lien

Ignoring a lien isn’t smart. Besides the additional fast-growing interest and penalties you are certain toaccrue, your credit score may be hurt by a lien. A poorcredit score can translate into being rejected for autoloans or a home mortgage, and might also causebanks (including your outstanding credit cards) tocharge higher interest rates.

Because you are assumed to be at a greater risk fordefault, banks take precautions to lower their risk byraising your rates. It is a cruel but inevitable outcomeof a poor credit record that can drive consumersdeeper into the debt spiral.

As stated, tax liens can ruin your score. Even if youeventually pay the debt, the lien can remain a blemishon your credit score for years.

There is an alternative. In some cases, you may beable to have the IRS “withdraw” the tax lien. Unlike atax lien release, a withdrawn lien retroactively removesthe lien as if it was never filed. The resulting withdrawalwill help prevent your credit score from being affected.Unfortunately, most taxpayers — and many taxpreparers — do not know about this procedure, andfiling the paperwork can be difficult withoutprofessional help.

Obviously, the IRS will withdraw a lien if the filing wasdetermined to be made in error because the tax hasalready been paid. However, even if the tax has notbeen paid, a withdrawal is still possible.

If the IRS has failed to follow its own administrativeprocedures, or if an agreement on repayment can benegotiated, the government may be willing to issue awithdrawal (particularly if iy is convinced a withdrawalwill facilitate a faster payment). The key is to actpromptly. If may be very helpful to use a certified publicaccountant with experience dealing with the IRS.

If you are successful in having the lien withdrawn, itwill take some time to have it removed from your creditreport, and you may need to contact the reportingagencies directly to make the request. If the agenciesfail to correct the record, you may want to ask theCPA to assist you with this as well.

Whatever you do, do not ignore IRS notices.

IRS announces new examination processfor large and mid-size business t axpayers

In a new publication on its website, IRS has announcedthe implementation of the Quality Examination Process(QEP)—”a systematic approach for engaging andinvolving Large and Mid-Size Business (LMSB)taxpayers in the tax examination process, from theearliest planning stages through resolution of allissues.” It replaces IRS’s Audit Planning Process, andthe LMSB Guide for Quality Examinations in Internal

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Revenue Manual § 4.46 is being updated to reflectthis change.

New examination procedures. IRS has announceda new LMSB examination process on its website (http://www.irs.gov/businesses/article/0,,id=224139,00.html)and has developed a publication in conjunction withQEP, “Achieving Quality Examinations throughEffective Planning, Execution and Resolution.” LMSBrevenue agents will review the publication withtaxpayers at the start of most new tax examinations.The publication outlines the LMSB examinationprocess from start to finish, explaining that the newguidelines emphasize the importance of ongoingdialogue between the exam team and taxpayerthroughout execution of the exam plan. IRS saystimely, clear, and consistent communication betweenits examiners and the taxpayer during the process candirectly influence the scope of the examination andthe depth of the analysis for issues under audit.In the Pub 4837, IRS explains that the examinationcan generally be divided into three phases: planning,execution, and resolution.The planning phase includes:

· Pre-exam analysis. The exam team gathers andreviews information about the taxpayer that is availablepublicly and within IRS.

· Initial planning meeting. The exam team holdsan initial planning meeting with the taxpayer, reviewingthe preliminary risk analysis and the anticipated examprocess for the issues identified.

· Subsequent planning meetings. The exam teamand the taxpayer discuss prior audit cycle or examresults, materiality thresholds relating to identificationand selection of examination issues, other potentialcompliance issues and required compliance checks,affirmative issues and/or claims the taxpayer expectsto file, strategies the parties will use for resolvingcompliance issues, and the use of a mid-cycle riskanalysis.

· Taxpayer orientation. The taxpayer provides theexam team with a comprehensive orientation of itsbusiness operations. IRS’s Quality ExaminationReference Guide says this taxpayer information shouldinclude:

- A general overview of business activities.- A list of significant transactions for the current

examination and any other information that is new and/or different from previous examination(s) (e.g.,acquisitions, dispositions, tax shelters, accountingmethod changes - Forms 3115, etc.).

- Access to general ledgers; a complete audittrail from these ledgers and financial statements totaxable income; identification and full description ofall significant Schedule M-3 book/tax differences andthe requisite supporting documentation; breakdownof all general ledger accounts aggregated in ScheduleM-3, and reconciliation of Schedule M-3 items todisaggregated general ledger accounts; and any othertax reconciliation workpapers and/or other workpapersin accordance with the Service Policy outlined in IRM4.10.20.3 (Requesting Audit, Tax Accrual, or TaxReconciliation Workpapers).

- Financial information (such as the generalledger) in electronic format.

- List of known and anticipated claims andrequested audit adjustments (with all supportingdocumentation made readily available) to ensure thatthese items are included in the audit plan.

· Exchange of additional transactional and financialinformation. The taxpayer provides the exam team withbusiness and financial information on acquisitions,dispositions, accounting method changes, tax shelters,book-to-tax reconciliations, etc.

· Finalizing the exam plan. The exam teamdevelops and finalizes an examination plan thatspecifies the issues to be examined, time frames,personnel required, processes to be followed, and therespective responsibilities.The execution phase includes:

· Changes to the exam scope. The exam teamkeeps the taxpayer aware of any potential scope and/or depth changes.

· Ongoing monitoring. The exam team and thetaxpayer regularly review their progress towardsachieving the agreed upon milestones.

· Discussion of issues. Once the examination of acompliance issue begins, the exam team explains tothe taxpayer why the issue was selected forexamination.

· Information Document Requests (IDR). The examteam and the taxpayer reach agreement on theprocedures for administering IDRs (e.g., notification,IDR content, time frames for IDR responses, etc.).The resolution phase includes:

· Confirming the facts. Before issuance of a Form5701, Notice of Proposed Adjustment, the taxpayerand the exam team discuss the issues under theproposed adjustment. The taxpayer confirms the factsand clarifies its position.

· Engaging specialists and experts. If appropriate,the exam team engages specialists (e.g., economists,

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engineers, and financial products experts), technicaladvisors, Counsel and/or other experts.

· Issue resolution strategies. The exam teamsencourage the use of appropriate issue resolutionstrategies (i.e., Fast Track, Rules of Engagement,Early Referrals to Appeals, etc.) while exams are inprogress.

· Other issues. The exam teams discuss withtaxpayers any potential identified issues that maywarrant settlement initiative treatment.

· Determining areas of agreement. The examteams memorialize the final determinations of issues(i.e., agreed, unagreed, no change).

· Next/final steps. The exam teams informtaxpayers of next steps in the examination processup through resolution of remaining issues, issuanceof the final report and exam case closing.IRS also noted that LMSB “Quality ExaminationProcess Reference Guide” (a tool for LMSB revenueagents and exam teams) is available.

Note: Checkpoint subscribers can view the followingfull-text documents by clicking the links in this articleon today’s Newsstand tab:

· Text of IRS’s “Achieving Quality Examinationsthrough Effective Planning, Execution and Resolution.”

· Text of IRS’s “Quality Examination ProcessReference Guide.”

IRS explains workings of husband andwife’ s qualified joint venture election

In the SSA/IRS Reporter, Summer 2010, IRS explainsthe workings of the qualified joint venture election,which allows eligible married co-owners to avoid filingpartnership returns and both spouses to receive creditfor social security and Medicare coverage purposes.

Background on qualified joint ventures . The SmallBusiness and Work Opportunity Act of 2007 (SmallBusiness Act, P.L. 110-28, 5/25/2007) generally allowsa qualified joint venture whose only members are ahusband and wife filing a joint return not to be treatedas a partnership for federal tax purposes. (Code Sec.761(f)) A qualified joint venture is a joint ventureinvolving the conduct of a trade or business, if:

(1) the only members of the joint ventureare a husband and wife,

(2) both spouses materially participatein the trade or business, and

(3) both spouses elect to have theprovision apply. (Code Sec. 761(f)(2))

The meaning of material participation is the same asunder the passive activity loss rules in Code Sec.469(h) and its regs.

Where the election is made, all items of income, gain,loss, deduction, and credit are divided between thespouses according to their respective interests in theventure, and each spouse takes into account his orher respective share of these items as if they wereattributable to a trade or business conducted by thespouse as a sole proprietor.

Benefit s of the election. In the SSA/IRS Reporter ,Summer 2010, IRS explains that the qualified jointventure option simplifies the taxpayer ’s filingrequirements by allowing husband and wifebusinesses to be treated as sole proprietorships andenabling them to file a Form 1040, U.S. IndividualIncome Tax Return, rather than a Form 1065, U.S.Return of Partnership Income.

Spouses electing qualified joint venture status aretreated as sole proprietors for federal tax purposes.To determine their net earnings from self-employment,each spouse’s share of income or loss from a qualifiedjoint venture is taken into account just as it is for federalincome tax purposes in accordance with theirrespective interests in the venture. Under the rulesfor sole proprietors, an employer identification number(EIN) isn’t required unless the sole proprietorship isrequired to file excise, employment, alcohol, tobacco,or firearms returns. If the spouses previously had anEIN for their partnership, that EIN can only be used ifthe spouses do not elect qualified joint venture status.

The option also helps ensure that each spouse getsproper Social Security credit. The election generallydoesn’t increase the total tax on the return, but it doesgive each spouse credit for social security earningson which retirement benefits are based, providedneither spouse exceeds the Social Security taxlimitation.

Treatment as employee . A spouse is considered anemployee if there is an employer/employeerelationship—i.e., the first spouse substantiallycontrols the business in terms of management

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decisions and the second spouse is under the directionand control of the first spouse. If an employer/employee relationship exists, then the second spouseis an employee subject to income tax and FICA, SocialSecurity and Medicare withholding.

If a taxpayer’s spouse is his or her employee, and nota partner, the taxpayer must pay Social Security andMedicare taxes for him or her. IRS noted that thewages for the services of an individual who works fora spouse in a trade or business are subject to incometax withholding and Social Security and Medicaretaxes, but not FUTA tax.

If the business has other employees, either of the soleproprietor spouses may report and pay theemployment taxes due on wages paid to theemployees, using the EIN of that spouse’s soleproprietorship. If the business already filed Forms 941,Employer’s Quarterly Federal Tax Return, or depositedor paid taxes for part of the year under the partnership’sEIN, the spouse may be considered the “successoremployer” of the employee in determining whether thewages have reached the social security and Federalunemployment wage base limits.

Electing to be treated as a qualified joint venture .IRS explains that spouses make the election on ajointly filed Form 1040 by dividing all items of income,gain, loss, deduction, and credit between them inaccordance with each spouse’s respective interest inthe joint venture, and each spouse filing with the Form1040 a separate Schedule C (Form 1040), Profit orLoss From Business (Sole Proprietorship) or ScheduleF (Form 1040), Profit of Loss From Farming, and, ifotherwise required, a separate Schedule SE (Form1040), Self-Employment Tax.

Note: Checkpoint subscribers can view the followingfull-text documents by clicking the links in this articleon today’s Newsstand tab:

· Text of “Benefits of Qualified Joint Ventures forFamily Businesses” in SSA/IRS Reporter, Summer2010.

How the New W ealth Taxes Will Hit YouThe health-care bill that Congress passed in Marchcontained two surprising new taxes to help pay forthe changes: an extra 0.9% levy on wages for couplesearning more than $250,000 ($200,000 for singles)and a new 3.8% tax on investment income on those

same people (technically, people with “adjusted grossincomes” above those amounts).

Each tax signals a radical change in policy. Forworkers, the extra 0.9% levy puts a progressiveelement in what used to be a totally flat tax. The 3.8%tax on investment income also knocks down alongstanding wall by applying a “payroll” tax tounearned income. Until now, FICA taxes for SocialSecurity and Medicare have applied only to wages,not investment income.While many details remain unclear and the InternalRevenue Service hasn’t issued any guidance, hereare preliminary answers to the most importantquestions taxpayers are asking.

These t axes t ake effect in 2013, two elections away .Might they be repealed first?Not likely. “Congress would have to undo the healthreform, and budget constraints would still be there,”says Clint Stretch of Deloitte Tax. “Even if Republicanstake control of Congress, President Obama holds theveto pen until Jan. 20, 2013.”

How does the 0.9% t ax work?If Joe and Mary each earn $175,000, their totalemployment income is $350,000. Currently they owe1.45%—$5,075—of regular Medicare tax, and theiremployers owe a matching amount. In 2013, thecouple will owe an extra 0.9%—$900—on their wagesabove $250,000, which is $100,000. Their employerspay nothing extra.

What about the 3.8% t ax on net investmentincome?This levy is keyed to “modified adjusted gross income,”with a threshold of $250,000 for couples and $200,000for singles. (This is simply adjusted gross income fornearly everybody except expatriates, who must addback certain exclusions.) The tax is a flat 3.8% oninvestment income above the threshold.

How would this work?Example 1: John and Jane, a married couple, have$400,000 of AGI—$200,000 of wages plus $200,000of investment income. Because they have $150,000of investment income above the $250,000 threshold,they would owe an extra $5,700.

Example 2: Anne, a single filer, earns $40,000 buthas an investment windfall of $190,000, for total

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income of $230,000. Because she has investmentincome of $30,000 above her $200,000 threshold, shewould owe $1,140 of additional tax.

Example 3: Retirees Mary and Bill have no wages butthey do have a taxable IRA payout of $90,000, plusinvestment income of $150,000, for a total of $240,000.They don’t owe the new tax, because they have noinvestment income above the $250,000 threshold.

What is investment income?Interest, except municipal-bond interest; dividends;rents; royalties; and capital gains on the sales offinancial instruments like stocks and bonds. Thetaxable portion of insurance annuity payouts alsocounts, unless it is from a company pension. So dogains from financial trading, as well as passive incomefrom rents and businesses you don’t participate in. Allare subject to the 3.8% tax on amounts above the$250,000 or $200,000 threshold, as described above.Not taxed: Distributions from regular and Roth IRAsand other retirement accounts, including pensions andSocial Security, and annuities that are part of aretirement plan. Life-insurance proceeds, muni-bondinterest and veterans’ benefits don’t count, nor doesincome from a business you participate in, such as aSubchapter S or partnership.

Could the 3.8% t ax apply to gains on the sale of ahome?Yes, if there is a taxable gain above the $500,000($250,000, single) exclusion for gains on the sale ofyour residence.

Example: Fred and Fran, who bought their home in aNew York suburb for $50,000 in 1972, sell it in 2013for $1 million. After subtracting the $50,000 cost and$500,000 exclusion, they have investment income of$450,000. If they also have a taxable IRA payout of$70,000 and a pension of $30,000, they would owethe tax of $11,400 on $300,000.

What happens if a t axpayer who owes the new t axon investment s also has a large itemizeddeduction—say , medical expenses or a thef t loss?Even if taxable income is zero because of deductions,he or she could still owe the 3.8% tax. Example: Myrais a single filer with investment income of $100,000and wages of $200,000. But during the same yearshe loses $300,000 in a Ponzi scheme. She pays no

income tax, but she still owes the new Medicare tax of$3,800 on her net investment income

Does the 3.8% t ax affect trust s and est ates?Yes, and it can hit them hard. The tax is levied oninvestment income as low as $12,000 that isn’t paidout to beneficiaries. Some believe the tax may alsohit children’s unearned income subject to the “kiddietax” if the parents owe it themselves.

Scams on Rise in W ake of Health CareLaw

State insurance commissioners and attorneys generalare warning consumers about a new wave of scamsthat are exploiting uncertainties about the new healthcare law.

Con artists may call, e-mail or show up at your doorsaying that under the law you must have healthinsurance or go to jail. They may even identifythemselves as government officials and describe thepolicies they’re selling as “ObamaCare” insurance.

People are terribly confused and in some casesfrightened about the new law. The opportunity is thereto take advantage of someone who does not knowbetter.

For the record: The requirement to have healthinsurance does not begin until 2014, and even thenyou cannot be jailed for not having it. No realgovernment official sells insurance, no limitedenrollment period exists and there is no such thing asObamaCare coverage.

Never sign up for an insurance policy without callingyour state insurance department to find out whetherthe policy is legitimate and the seller is licensed. Never give your credit card, bank account or SocialSecurity number to anyone you do not know. Familiarize yourself with at least the mainrequirements of the health care reform law.

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Temporary regs fill in st atutory gap s onnew indoor t anning t ax

T.D. 9486, 06/11/2010; Reg. § 49.5000B-1T;Preamble to Prop Reg 06/1 1/2010; IR 2010-73

IRS has issued temporary and proposed regs on thehealth reform’s legislation’s new Code Sec. 5000B10% excise tax on indoor tanning services providedon or after July 1, 2010.

The regs fill in many statutory gaps in ways that IRSdetermined without input from providers of tanningservices. The lack of input no doubt was because ofthe short time IRS had to issue guidance. However,the temporary regs seek comments generally andspecifically on a presumption (see below) in thetemporary regs. Thus, the final regs may end up beingsomewhat different. In the meantime, the temporaryregs address practical considerations that may nothave been contemplated when the statute was drafted.

The regs apply to amounts paid after June 30, 2010,for indoor tanning services. Statutory provisionsgoverning the tax, along with the reg rules addressingthem, are discussed under separate headings below.

Indoor tanning services, as defined in Code Sec.5000B(b), do not include any phototherapy serviceprovided by a licensed medical professional. The regsdefine phototherapy service and clarify that it mustbe performed by, and on the premises of, a licensedmedical professional. (Reg. § 49.5000B-1T(c)(1))

Liability for the tax arises at the time of payment forthe indoor tanning services. (Reg. § 49.5000B-1T(c)(1)) In some cases (such as purchase of anundesignated payment card, as discussed below), itmay not be possible to determine whether there is apayment for indoor tanning services. In thesesituations, a payment is treated as made, and the taxis imposed, when it can reasonably be determinedthat the payment is made specifically for indoor tanningservices. However, the regs provide a different rulefor membership fees paid to physical fitness facilitiesproviding indoor tanning services, as discussed below.(Reg. § 49.5000B-1T(b))

The “amount paid” for purposes of determining thetax base includes all amounts paid to the provider forindoor tanning services, including any amount paidby insurance. (Reg. § 49.5000B-1T(d)(1)) Providersof indoor tanning services, however, often sell other

goods and services (such as protective eyewear,footwear, towels, and tanning lotions; manicures,pedicures and other cosmetic or spa treatments; andaccess to sport or exercise facilities) in addition toindoor tanning services. Here, the provider mayexclude charges for other goods and services if thecharges are separable, do not exceed the fair marketvalue of the other goods and services, and are shownin the exact amounts in the provider’s recordspertaining to the indoor tanning services charge. (Reg.§ 49.5000B-1T(d)(2)) If the charges aren’t separatelystated, but the total amount paid covers indoor tanningservices, then the tax is based on the portion of theamount paid that is reasonably attributable to theindoor tanning services. (Reg. § 49.5000B-1T(d)(3))

A payment for indoor tanning services is treated asmade, and liability for the tax is imposed, when it canreasonably be determined that the payment is madespecifically for indoor tanning services. If a paymentis made with a gift certificate, gift card or similar devicewith a monetary value that can be redeemed for goodsor services that may, but do not necessarily, includeindoor tanning services (an undesignated paymentcard), it can reasonably be determined that a paymentis made specifically for indoor tanning services whenthe undesignated payment card is redeemed to payspecifically for indoor tanning services. In these cases,the provider calculates the tax on the amount of theundesignated payment card that is redeemed forindoor tanning services when it is redeemed. (Reg. §49.5000B-1T(b)(2))

If a provider sells bundled services in which accessto indoor tanning services (in a specified or unlimitedamount) over a period of time is bundled with othergoods and services, it can reasonably be determinedthat the payment is made specifically for indoor tanningservices when the bundled services are purchased,because there is value attributable to the access toindoor tanning services. Payments for indoor tanningservices are subject to tax, regardless of actual usage.Thus, the tax applies to the amount paid that isreasonably attributable to the access to indoor tanningservices. (Reg. § 49.5000B-1T(d)(3))

Special rules apply for a payment of a membershipfee to a qualified physical fitness facility (QPFF) (asdefined in the reg) that includes access to indoortanning services. IRS has determined that the accessis incidental to the QPFF’s predominant business oractivity and any amount attributable to such access

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would be difficult to calculate and administer. Thus,an amount paid to a QPFF is not a payment for indoortanning services and the tax is not imposed on theamount paid. (Reg. § 49.5000B-1T(b)(3), T.D. 9486,06/11/2010)

To constitute a QPFF, among other things, thepredominant business or activity of the facility mustbe to serve as a physical fitness facility, taking intoconsideration all of the facts and circumstances. Thus,for example, a business predominantly engaged inproviding indoor tanning or other cosmetic servicescannot become a QPFF by allowing users access toexercise classes or pieces of exercise equipment.(T.D. 9486, 06/11/2010) A QPFF cannot chargeseparately for indoor tanning services, offer suchservices to the public, or offer different membershipfee rates based on access to indoor tanning services.(Reg. § 49.5000B-1T(c)(4))

Under Code Sec. 5000B(c)(2), the person liable forthe tax is the individual on whom the indoor tanningservice is performed. In some cases, a person mightpay for services to be performed on someone else,such as by purchasing a gift certificate for indoortanning services. Because the tax is calculated on theamount paid for the indoor tanning services, andbecause the statute contemplates that the tax will becollected when payment is made, the person who paysfor the services (payor) is deemed to be the personon whom the services are performed for purposes ofcollecting the tax. Thus, the payor is liable for the taxon the services. If a person pays for a gift certificatefor indoor tanning services (or for bundled servicesthat includes indoor tanning services), then the liabilityfor the tax arises at the time of payment. However, if aperson purchases an undesignated payment card,then a payment has not been made for indoor tanningservices until the undesignated payment card isredeemed specifically to pay for indoor tanningservices. In that case, the liability for the tax arises atthe time the undesignated payment card is redeemed.The person who redeems the card for indoor tanningservices is deemed to be the person on whom theservices are performed for purposes of collecting thetax, and that person is liable for the tax on the services.(Reg. § 49.5000B-1T(e))

Under Code Sec. 5000B(c)(2), the person receivingthe payment on which tax is imposed (the provider)generally must collect the tax from the payor and paythe tax over quarterly to the government. The regs

provide that the amount paid by the payor to theprovider is presumed to include the tax if the tax is notseparately stated. (Reg. § 49.5000B-1T(e)) IRS seekscomments on whether this presumption is consistentwith the manner in which providers maintain booksand records and specifically whether such a rule isuseful for purposes of minimizing recordkeepingburdens. (Preamble to Prop Reg 06/11/2010)

If the payor does not pay the tax at the time paymentfor the indoor tanning services is made, Code Sec.5000B(c)(3) provides that, to the extent the tax is notcollected, the provider must pay the tax. Thus, theregs provide that if the provider fails to collect the taxfrom the payor at the time the payor makes a paymentfor indoor tanning services, the provider is liable forthe tax. (Reg. § 49.5000B-1T(e)(3))

Whether paid by the payor or the provider, the tax isreported by the provider on Form 720 “QuarterlyFederal Excise Tax Return.” Full payment of the tax isdue quarterly at the time Form 720 is timely filed. Oncea Form 720 must be filed for a calendar quarter, aForm 720 must be filed for each subsequent calendarquarter, whether or not liability is incurred (or tax mustbe collected and paid over) during that subsequentquarter, until a final return under Reg. § 40.6011(a)-2. For providers operating at separate locations, eachbusiness unit that has, or must have, a separateemployer identification number is treated as a separateperson that must file a separate Form 720. (T.D. 9486,06/11/2010)

Any person who willfully fails to collect and pay overthe tax may be subject to the Code Sec. 6672 penalty.IRS says it will generally administer the indoor tanningservices tax the same way it administers thecommunications and transportation excise taxes.However, the reporting provisions in Reg. § 49.4291-1, do not apply to the tax on indoor tanning services.(T.D. 9486, 06/11/2010)

IRS Provides Guidance on MeasuringOwner Shif ts in Loss Corporations

Notice 2010-50, 2010-27 IRB

In a Notice, IRS says it will accept a taxpayer’sreasonable attempt to measure increases in ownershipwhere fluctuations in value are present. IRS will notchallenge any reasonable application of either a FullValue Methodology or the Hold Constant Principle

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(HCP)—including certain HCP alternativemethodologies—if a single methodology is appliedconsistently. Pending further guidance, taxpayers mayrely on the new Notice.

Code Sec. 382 limits, after an ownership change, theamount of a loss corporation’s taxable income for anypost-change year that may be offset by pre-changelosses. The amount of the limitation each year is equalto the product of the fair market value (FMV) of all thestock of the loss corporation immediately before theownership change multiplied by the applicable long-term tax-exempt rate (Code Sec. 382 limitation). Anownership change is a change in the percentage ofownership of the loss corporation’s stock owned bythe 5% shareholders of more than 50 percentagepoints (by value) over a 3-year period. (Code Sec.382(g), Reg. § 1.382-2T(a)(1))

Under Code Sec. 382(l)(3)(C), except as provided inregs, any change in proportionate ownership of thestock of a loss corporation attributable solely tofluctuations in the relative FMVs of different classesof stock will not be taken into account. The Code Sec.382 regs don’t provide specific guidance, and thisissue is reserved for further guidance in temporaryreg Reg. § 1.382-2T(l).

IRS is aware that taxpayers employ a number ofdifferent methodologies in interpreting and applyingCode Sec. 382(l)(3)(C). Some interpret more generalprovisions of the regs to require the valuation of alloutstanding shares of stock of a corporation on everytesting date. Others have interpreted Code Sec.382(l)(3)(C) more broadly, factoring out fluctuationsin value on a testing date based on relative value ratiosamong different classes of stock established at thetime a particular share of stock was acquired. Further,there are variations in the methods that apply the HCPapproach.

Notice 2010-50 describes the Full Value Methodology,and the Hold Constant Principle, and twomethodologies that implement the HCP, as follows:

Under this method, the determination of thepercentage of stock owned by any person is made onthe basis of the relative FMV of the stock owned bythe person to the total FMV of the outstanding stockof the corporation. Thus, changes in percentageownership as a result of fluctuations in value are takeninto account if a testing date occurs, regardless of

whether a particular shareholder actively participatesor is otherwise party to the transaction that causesthe testing date to occur. Essentially, all shares aremarked to market on each testing date. Thismethodology is a narrow interpretation of Code Sec.382(l)(3)(C) . Notice 2010-50 notes that it may beviewed as giving effect to the Code language by notrequiring value marks more frequently than eachtesting date (e.g., daily fluctuations in value betweenvarious classes are ignored, where the fluctuationsoccur between testing dates).

Under the HCP, the value of a share, relative to thevalue of all other stock of the corporation, isestablished on the date that share is acquired by aparticular shareholder. On later testing dates, thepercentage interest represented by that share (thetested share) is then determined by factoring outfluctuations in the relative values of the losscorporation’s share classes that have occurred sincethe acquisition date of the tested share. Thus, asapplied, the HCP is individualized for each acquisitionof stock by each shareholder. In addition, theownership interest represented by a tested share isadjusted for the dilutive effects of later issuances andthe accretive effects of later redemptions following thetested share’s acquisition date. Notice 2010-50 notesthat the HCP may be viewed as giving effect to theCode language by factoring out fluctuations in thevalue of stock held by passive shareholders acrossmultiple testing dates. The factoring out processgenerally continues for a particular share until theholder is no longer treated as owning the tested sharefor Code Sec. 382 purposes (e.g., the holder engagesin affirmative activity such as a taxable sale). Twomethodologies that implement the HCP are as follows:

(1) Look Back from T esting Date (AlternativeMethodology (1)) . This methodology recalculates thehold constant percentage represented by a testedshare to factor out changes in its relative value sincethe share’s acquisition date. Generally, thismethodology calculates the percentage interestrepresented by a tested share on a testing date,beginning with the value of the tested share on thetesting date, and then making adjustments based onthe changes in relative value of the tested share tothe value of all the stock of the loss corporation thathave occurred since the tested share’s acquisitiondate.

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(2) Ongoing Adjustment s from Acquisition Date(Alternative Methodology (2)). The secondmethodology tracks the percentage interestrepresented by a tested share from the date ofacquisition forward, adjusting for later dispositions andfor the later issuance or redemption of other stock.Generally, the increase in percentage ownershiprepresented by the acquisition of a tested share duringthe testing period is established on the date the testedshare is acquired. This increase is reduced (but notbelow zero) for later dispositions of shares by theowner. To the extent the particular shareholder isn’tengaging in acquisitions or dispositions, thepercentage ownership calculation “rolls over” from onetesting date to another. While under Alternative (1),the loss corporation generally determines the relativevalue of shares of its stock at the beginning of thetesting period, or an earlier date, this may not benecessary under Alternative (2). Thus, Alternative (2)may involve fewer calculations on a particular testingdate.

The common elements in both the HCP methodologiesinclude:

Under either of the HCP alternative methodologies,the loss corporation determines, on each testing dateduring a testing period, the value of a tested shareacquired on that testing date as compared to the valueof all the stock of the loss corporation on that date(i.e., neither alternative factors out value fluctuationsfor actual acquisitions).

Under either of the HCP alternative methodologies, ashareholder’s increase in proportionate interest duringa testing period will be reduced by share dispositions.

Code Sec. 382 takes into account not only trading inloss corporation shares, but also the redemptions andissuances of shares, for purposes of tracking changesin percentage ownership by 5% shareholders. For thispurpose, a redemption may be analogized to a pro-rata acquisition by non-redeeming shareholders of theredeemed shares, while an issuance may beanalogized to a pro-rata sale of shares byshareholders holding stock immediately before theissuance to those shareholders acquiring shares inthe issuance. There are a variety of possibleapproaches in applying the HCP to stock redemptionsand issuances.

In applying a method based on the HCP, an owner ofloss corporation stock isn’t treated as disposing of oracquiring loss corporation stock to the extent theowner remains treated as an owner of the losscorporation, or its successor, under Code Sec. 382and its regs. The original acquisition date and otherhold constant characteristics are preserved.

In Notice 2010-50, IRS has concluded that it’sappropriate to accept a taxpayer’s reasonable attemptto measure increases in ownership where fluctuationsin value are present. IRS will not challenge anyreasonable application of either a Full ValueMethodology or the HCP, if a single methodology (seebelow) is applied consistently to the extent specified.IRS believes that each of the HCP alternativemethodologies discussed in Notice 2010-50 —including the common elements of both for dealingwith various transactions such as issuances andredemptions—are reasonable applications of the HCP.

Notice 2010-50, provides that all reasonableapplications of either the Full Value Methodology orthe HCP must determine the increase in ownership inthe acquisition of a share of stock by dividing theshare’s FMV on the acquisition date by the FMV of allof the outstanding stock of the loss corporation onthat date. For this purpose, an acquisition doesn’tinclude a deemed acquisition of stock by non-redeeming shareholders resulting from a redemption.Under an HCP methodology, an acquisition isn’t anevent on which the acquiring shareholder marks toFMV other shares that it holds. IRS will challenge anyalternative treatment of an acquisition.

In general, a taxpayer may employ any methodologythat is a reasonable application of either a Full ValueMethodology or the HCP in determining when anownership change has occurred. For prior years, ataxpayer may change its methodology by amendingreturns. But a taxpayer must generally employ a singlemethodology consistently to all testing dates in aconsistency period. For a particular testing date (thecurrent testing date), the consistency period includesall prior testing dates, beginning with the latest of: (1)the first date on which the taxpayer had more thanone class of stock; (2) the first day following anownership change; or (3) the date six years beforethe current testing date.

In some cases, an HCP methodology may treat asthe acquisition date for a tested share a date that is

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later than the date the share was actually acquired.The issuance of a second class of stock generallyestablishes the acquisition date for the preexistingclass as well as the second class. Taxpayers may alsosubstitute certain other dates, if later, for the dateshares were acquired, if used consistently.

Notice 2010-50 provides that a taxpayer can’t employa methodology in a year not barred by the statute oflimitations (an open year) if using that methodologywould have changed the taxpayer’s Federal incometax liability for a year barred by the statute of limitations(a closed year) in the consistency period, unless theposition taken in the closed year is not consistent withany reasonable methodology. A taxpayer taking aposition in a closed year that is not consistent withany reasonable methodology may adopt any singlemethodology that is a reasonable application of eitherthe Full Value Methodology or the HCP, regardless ofwhether use of that methodology would have changedits liability in a closed year, if that adopted methodologyis applied consistently to the greatest extent permittedby the statute of limitations. Thus, a taxpayer isgenerally is free to adopt any reasonable methodologyas long any inconsistent returns in the consistencyperiod can be and are amended. There is nonecessary correlation between the start of aconsistency period, which governs the taxpayer’schoice of methodology, and the acquisition date forshares of stock, which is an element of HCPmethodologies.

For purposes of Notice 2010-50 , a “singlemethodology” means a methodology that applies aconsistent treatment to a given situation, even ondifferent testing dates (e.g., applying a LIFOconvention for all share disposition sourcingdeterminations if using an HCP alternative). A singleHCP methodology might treat the accretive effect ofredemptions differently from other acquisitions butshould not treat the dilutive effect of issuancesdifferently from other dispositions.

IRS plans to issue proposed or temporary regs on theapplication of Code Sec. 382(l)(3)(C) in fluctuation invalue situations, and requests comments, includingwhether interpreting Code Sec. 382(l)(3)(C) broadlyto require rules for factoring out fluctuations in value,such as may be done through methodologiesemploying the HCP, is appropriate.

TIGTA audit examines the issue of unp aidtaxes by p articip ants in TARP [Audit

Report No. 2010-30-050]

The bulk of unpaid federal taxes owed by participantsin the Troubled Asset Relief Program (TARP) havebeen resolved, according to an audit just released bythe Treasury Inspector General for Tax Administration(TIGTA). IRS records showed 130 of the 558institutions included in the audit had unpaid taxestotaling almost $531 million when agreements weresigned by the Treasury Department and theinstitutions. TARP participants were required toindicate in the agreements that all material federaltaxes were paid. The audit found that 97% of theunpaid taxes were resolved by December 2009. “Inconsidering the significance of the unpaid taxes, it isimportant to recognize that when the agreements weresigned, the Department of the Treasury was in thebeginning stages of establishing” the TARP, the auditsaid. “As a result, the focus on stabilizing the financialsystem may have taken priority over establishing thecontrols needed to identify unpaid taxes so that theimpact of the liabilities could be evaluated,” TIGTAadded. There is another important point that addsperspective on the amount of unpaid taxes, the auditsaid. “The five publicly traded institutions that receivedthe most TARP funds (of the institutions included inthis audit) voluntarily paid $16 billion of corporateincome and employment tax liabilities during the timetheir accounts contained $227 million of unpaid taxes,”TIGTA said. “Records also showed that as of theirrespective agreement execution dates, their accountscontained nearly $17 billion of credits,” the audit said.The audit can be viewed at http://treas.gov/tigta/auditreports/2010reports/201030050fr.pdf.

Returns and allowances don’t reducegross income in applying 6-year

limit ations period test

Chief Counsel Advice 201023053

A Chief Counsel Advice (CCA) concludes that, whendetermining gross income for purposes of the 6-yearlimitations period under Code Sec. 6501(e)(1)(A)(i),the total amounts received or accrued from the saleof goods or services is not reduced by returns andallowances.

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Code Sec. 6501(a) generally provides that a validassessment of income tax liability may not be mademore than 3 years after the later of the date the taxreturn was filed or the due date of the tax return.However, under Code Sec. 6501(e), a 6-year periodof limitations applies when a taxpayer omits from grossincome an amount that’s greater than 25% of theamount of gross income stated in the return. For atrade or business, gross income, for this purpose,means the total of the amounts received or accruedfrom the sale of goods or services (if such amountsare required to be shown on the return) prior todiminution by the cost of such sales or services. (CodeSec. 6501(e)(1)(A)(i))

The CCA observed that returns and allowances arenot specifically mentioned in Code Sec.6501(e)(1)(A)(i). The CCA further noted that the 25%gross income omission test could be met or faileddepending on how returns and allowances are treated.This could occur, for example, where an IRS exammake adjustments in both gross receipts and returnsand allowances. An example in the CCA shows anomission not exceeding 25% where returns andallowances are not subtracted from gross receipts butexceeding 25% (and thus tripping the 6-yearlimitations period) where they are. Specifically, theCCA describes a return reporting gross receipts of$500,000 and returns and allowances of $50,000,which on examination are adjusted to $600,000, and$5,000. If gross receipts are not reduced by the returnsand allowances, the test is not met because 25% of$500,000 is $125,000 (i.e., the $100,000 omissiondoes not exceed $125,000). When gross income isreduced by the returns and allowances, the test ismet because 25% of net gross receipts of $450,000is $112,500 (i.e, the $145,000 omission exceeds$112,500).

The CCA observed that Code Sec. 61(a)(2) providesthat gross income means all income from whateversource derived, including gross income derived frombusiness. Under Reg. § 1.61-3, for a manufacturing,merchandising, or mining business, gross incomemeans the total sales, less the cost of goods sold,plus any income from investments and from incidentalor outside operations or sources. However, returnsand allowances are not specifically mentioned in Reg.§ 1.61-3.

A number of other Code provisions and regs addressthe issue of whether a taxpayer reduces its gross

income by the amount of returns or allowances forpurposes of those sections. For example, Code Sec.41(c)(7), pertaining to the credit for increasingresearch activities, provides that gross receipts forany tax year are reduced by returns and allowancesmade during the tax year. On the other hand, Reg. §1.1244(c)-1(e) provides that gross receipts are notreduced by returns and allowances for purposes ofCode Sec. 1244(c)(1)(C) (losses on small businessstock) in determining whether a corporation’s stock is“section 1244 stock.”

The Tax Court has held that returns and allowancesare subtracted from gross receipts to determine grossincome (see Pittsburgh Milk Co., (1956) 26 TC 707).

No reduction for 6-year limitation period. The CCAsaid that the general definition of gross income andthe statutes, regs, and case law on the subject,however, do not apply for purposes of Code Sec.6501(e)(1)(A)(i). According to the CCA, Code Sec.6501(e)(1)(A)(i) creates its own special definition forgross income by defining it as the total of the amountsreceived or accrued from the sale of goods or services,if such amounts are required to be shown on the return,prior to subtracting the cost of sales or services. Thisdefinition is synonymous with gross receipts and salesas the amount includes both money received andmoney due from sales during the tax year (accountsreceivable). The CCA says there is no case law onpoint that definitively indicates whether this amountshould be reduced by returns and allowances tocalculate gross income for purposes of Code Sec.6501(e)(1)(A)(i).

The CCA says its determination that amounts receivedor accrued should not be reduced by returns andallowances is based on a plain reading of the statute.The specific language states “the total of the amountsreceived or accrued from the sale of goods or services(if such amounts are required to be shown on thereturn)...”

IRS not following District Court ruling thatseverance p ayment s aren’t subject to

FICA tax

Forum on Federal Payroll Issues at the AmericanPayroll Association’ s (APA) 28th Annual Congress

In February 2010, a federal district court ruled thatpayments made to involuntarily terminated workers

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by a company going out of business (Quality Stores,Inc.) should not be classified as “wages” for FICA taxpurposes (see U.S. v. Quality Stores, Inc., DC MI, 105AFTR 2d 2010–¶533, Feb. 23, 2010, Federal TaxesWeekly Alert 3/4/2010). The district court rulingcontradicted a 2008 ruling by the U.S. Court of Appealson this issue (see CSX Corp. v. U.S., 101 AFTR 2d¶2008-553, Federal Taxes Weekly Alert 3/13/2008).

The IRS has stated several times recently that it iscontinuing to follow the CSX decision, and not thepro-taxpayer Quality Stores decision. Mary Gorman,Assistant Division Counsel, Office of Chief Counsel,for the IRS Small Business/Self-Employed Division,indicated during the Forum on Federal Payroll Issuesat the American Payroll Association’s (APA) 28thAnnual Congress, that the IRS is still denying claimsthat seek a refund of FICA tax paid on severancepayments. She said that the IRS will appeal the QualityStores decision.

The Issue . IRC §3402(o) provides for income taxwithholding on certain payments other than wages,including “any supplemental unemploymentcompensation.” The term supplemental unemploymentcompensation benefits (SUBs) is defined in IRC§3402(o)(2) as “amounts which are paid to anemployee, pursuant to a plan to which the employeris a party, because of an employee’s involuntaryseparation from employment (whether or not suchseparation is temporary), resulting directly from areduction in force, the discontinuance of a plan oroperation or other similar conditions ....”

FICA tax. IRC §3121(a) defines “wages” for FICA taxpurposes as “all remuneration for employment,including the cash value of all remuneration (includingbenefits) paid in any medium other than cash.”“Employment” is defined as “any service, of whatevernature, performed by an employee for the personemploying him.” IRC §3121(a) does not specificallyexclude SUBs from FICA wages.

In Rev Rul 90-72, 1990-2 CB 211, the IRS held thatthe definition of SUB pay under IRC §3402(o) is notapplicable for FICA or FUTA purposes. The ruling saysthat to be exempt from FICA tax, SUBs must meet anumber of unique conditions. For example, weeklybenefits must be payable based on stateunemployment benefits, or other compensationallowable under state laws.

The IRS contends that the severance payments atissue were “wages” for FICA tax purposes and thatthere was no statutory exception to exclude them fromtaxation. Further, the payments did not qualify underthe “supplemental unemployment benefits” exceptionset forth in Rev Rul 90-72, 1990-2 CB 211, becausethe severance payments were not conditioned oneligibility for, or receipt of, state unemploymentbenefits.

In the Quality Stores ruling, the district court said that“where severance payments are intended to serve thesame purpose as Social Security benefits, i.e., supportfor workers in lieu of a lost ability to earn wages, thecollection of social benefit taxes on the wage-replacement benefits makes little sense.” The courtbelieved that the severance payments at issue wereproperly viewed as wage-replacement social benefits,not taxable remuneration for the employees’ servicesor wages. Therefore, the court reasoned that theseverance payments were not subject to taxation forFICA purposes.

Protective Refund Claims . Both Mary Gorman, andDavid R. Fuller, Partner, for the law firm of Morgan,Lewis, & Bockius LLP, encouraged attendees at APACongress to file protective claims to preserve theiropportunity to receive a refund if the courts wereultimately to decide that severance payments aren’tsubject to FICA tax. Protective refund claims are filedto preserve a taxpayer’s right to claim a refund whenthe taxpayer’s right to the refund is contingent on futureevents (e.g., future litigation), and may not bedeterminable until after the statute of limitationsexpires. Without a protective refund claim, taxpayerswill only have a three-year statute of limitations inwhich to seek a refund. A taxpayer who paid significantFICA tax in 2007 on severance pay will only be eligibleto receive a FICA refund on these payments until April15, 2011, unless the taxpayer files a protective refundclaim.

Survey finds CP As are asked to addressmore technology risk questions from

client s

CPAs are increasingly being asked to solveinformation technology problems for clients andprospective clients, according to an AICPA survey. Thesurvey found that CPAs believe data security willcontinue to be the most pressing concern for their

clients and employers over the year. “The tide hasreally turned this year with the economy and increasingregulations,” said Joel Lanz, co-chairman of theAICPA’s technology initiatives task force, said in astatement. “Clients are coming to CPAs and askingthem, ‘How do we handle technology risk?’ Theyexpect CPAs to know enough to be able to discussand manage the issues.”

The survey asked AICPA members to rank a list ofquestions heard most often from audit committees,CFOs, and chief information officers. Some of thequestions include:

· Are we ensuring that our data and technologyresources are protected against hacking, viruses, orother compromises?

· Are we considering or implementingorganizational security precautions even though wehaven’t had a data breach or loss?

· Are our current internal controls and ITgovernance policies and procedures effective?

· Are we receiving the most relevant and currentinformation from our reporting functions or are thereareas for improvement?

· Have we implemented sound, appropriate privacypolicies and procedures in place within theorganization and for our customers?

· Can our data remain safe if we use cloudcomputing, or software as a service (SaaS)?

· Can we deliver on our service and productpromises to our customers if we utilize cloudcomputing services?

The questions on cloud computing reflected thegrowing interest in Web-based technology andconcerns about the risks that they may introduce.CPAs are providing vendor due diligence for theirclients to ensure appropriate controls are in place inWeb-based applications.

“As small and medium-size companies increasinglyplace IT under their chief financial officers, it’sbecoming much more of a broad scope ofresponsibility,” said Ron Box, who co-chairs the taskforce with Lanz. “With this survey we are preparingCPAs for the kinds of IT questions they will most likely

confront by giving them resources with answers andtools to address client concerns.”

AICPA members who were selected for the surveywere e-mailed the questions between April 22 and May12.

IRS catching employers claiming fictitiousCOBRA subsidy credit s [GAO Report 10-804R, Proactive T esting of COBRA Tax

Credit s, 6/14/10]

The U.S. Government Accountability Office (GAO) hasissued a favorable report on IRS internal controls thatare in place to detect new companies that are falselyclaiming COBRA subsidy credits on their employmenttax returns. Under the American Recovery andReinvestment Act of 2009 (ARRA, P.L. 111-5) andsubsequent amendments, workers who have beeninvoluntarily terminated (i.e., assistance-eligibleindividuals or AEIs) between Sept. 1, 2008 and May31, 2010, may receive a 65% subsidy on their COBRAcontinuation health insurance premiums for up to 15months. The person providing the subsidy (e.g., anemployer) receives a credit for the subsidy on theperson’s employment tax return. Most employers claimthe credit on either Form 941, Employer’s QuarterlyFederal Tax Return, or Form 944, Employer’s AnnualFederal Tax Return. The GAO notes that employersare not required to provide any supporting informationon Form 941 or Form 944 about the former employeeswho opted to enroll in COBRA, or the amount ofpremiums paid on their behalf. Therefore, thispotentially allows “unscrupulous employers to lowertheir payroll taxes by fraudulently claiming COBRAcredits.”

The GAO study. To determine the effectiveness ofthe IRS’ internal controls, the GAO performed coverttesting to identify what controls, if any, the IRS had inplace to detect suspicious tax returns. The GAOcreated five new fictitious businesses that had notpreviously filed corporate income tax returns. For threeof the five companies, the GAO filed quarterly federaltax returns using Form 941 for all four quarters of 2009.Form 944 was filed for the other two companies. Thereturns incorporated false invoices from an existinghealth insurance carrier and proof of payment ofCOBRA premiums produced from publicly availableinformation, hardware, and software. In some cases,

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the GAO paid small amounts of monthly payroll taxesto appear legitimate.

The result s. The IRS controls successfully picked upall five fictitious companies, and prevented thosecompanies from obtaining $8,999 of the $9,182 inrefunds that were requested. The IRS did pay threesmall refunds, ranging from $38 to $145, but initiatedinvestigations of all five bogus companies. The IRSinvestigators also linked four of the five companies tothe same fraud scheme. IRS officials told the GAOthat they identified the companies as potentiallyfraudulent based on factors such as their relativelynew employer identification numbers, their lack ofprevious tax returns, and their large COBRA creditclaims relative to their sizes. However, IRS officialssaid that they cannot guarantee that a company usingCOBRA subsidy credits to reduce its payroll tax liabilityby a modest amount will be detected.

The GAO did not test whether established companiescould use COBRA subsidy credits to lower their payrolltaxes. Employers are required by the IRS to keeprecords of the COBRA premium assistance, includingthe names and Social Security numbers of coveredemployees, but the IRS only obtains this informationduring a tax examination. The entire GAO report maybe viewed at http://www.gao.gov/new.items/d10804r.pdf .

USCIS redesigns E-V erify website : On June 13, the E-Verify website was redesigned. E-Verify is an Internet-based system that comparesinformation from an employee’s Form I-9, EmploymentEligibility Verification, to data from the U.S Departmentof Homeland Security (DHS) and Social SecurityAdministration (SSA) records to confirm employmenteligibility for new hires. U.S. Citizenship andImmigration Services (USCIS) says that theredesigned website will “enhance E-Verify’s usability,security, accuracy and efficiency.” The new home pagewelcomes users by name, displays the user ID, andthe last login date and time. The website now featuressimplified terms. For example, “Initiate (or run) a query”has been replaced with “Create a case.” In addition,“Request additional verification” has been replacedwith “Request name review,” and “Resolve case” hasbeen replaced with “Close case.”USCIS says that verifying an employee’s employmenteligibility with the redesigned E-Verify has never beeneasier. Most cases only require three steps. Accordingto USCIS, the redesigned E-Verify website features

can’t-miss case results that are displayed prominentlyon the screen. The new design will let users pick thenumber of cases they want to be displayed per page,up to 100 cases. Cases may be sorted by severalvariables, except Social Security Number. When auser creates a case for an employee who presents awork authorization document with an expiration date,E-Verify will remind the user when the document isabout to expire. The redesigned E-Verify allowsprogram administrators to download theirelectronically signed Memorandum of Understanding(MOU).There are two new “How to” videos on the E-Verifywebsite, which demonstrate how to create a case andhow to respond to a tentative nonconfirmation (TNC).There are new user manuals, quick reference guides,and video tutorials. Existing user IDs and passwordsare still valid and all cases will still be there whenusers log into the new system. The first time users login on or after June 13, they will be required to take ashort tutorial to learn about the changes to the website.

Taxpayer lost most argument s but Courtgives him a chance to keep his pension

Vance Wadleigh, (2010) 134 TC No. 14

In a dispute over whether IRS could get access to ataxpayer’s pension to cover his delinquent taxes, theTax Court rejected most of the taxpayer’s numerousarguments. However, it sent the case back to the IRSAppeals Office for further proceedings to determinewhether the taxpayer would be living exclusively offof the pension or would be working as well. The TaxCourt said it needed this additional information beforeit could determine whether IRS abused its discretionin determining that it could proceed with collection.

Background . Under Code Sec. 6321, when ataxpayer fails to pay a tax liability after notice anddemand, a lien arises that attaches to all the taxpayer’sproperty and rights to property. Under Code Sec. 6331,IRS is authorized to seize and sell the taxpayer’sproperty and rights to property subject to a federal taxlien. Thus, IRS may seize any property or propertyright (unless it’s exempt under Code Sec. 6334(a)) ofa delinquent taxpayer (whether held by him orsomeone else), sell it, and apply the proceeds to paythe unpaid taxes. Seized property may be real,personal, tangible, or intangible, including receivables,bank accounts, evidences of debt, securities, and

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salaries, wages, commissions or compensation. (CodeSec. 6331(a), Reg. § 301.6331-1(a))

Generally, a levy extends only to property held by thetaxpayer or a third party at the time of the levy. Propertyreceived after the notice of levy is served can only bereached by a later levy. (Code Sec. 6331(b)) But, alevy on wages and salary is a continuous levy untilthe tax liability covered by the levy is satisfied orbecomes unenforceable because of a lapse of time.(Code Sec. 6331(e), Reg. § 301.6331-1(b)) Anyperson in possession of property or property rightssubject to levy on which a levy has been made must,on IRS’s demand, surrender the property or rights toIRS. There are only two defenses to not honoring alevy: (1) the person isn’t in possession of or obligatedwith respect to the property; or (2) the property issubject to a prior judicial attachment or execution.(Code Sec. 6332, Reg. § 301.6332-1(a))

Code Sec. 6320(a)(1) requires IRS to give a taxpayerwritten notice of the filing of a tax lien upon his property.The notice must inform him of the right to request ahearing in IRS’s Appeals Office. (Code Sec.6320(a)(3)(B), Code Sec. 6320(b)(1)) At the hearing,the taxpayer may raise any relevant issues includingappropriate spousal defenses, challenges to theappropriateness of collection actions, and collectionalternatives. (Code Sec. 6330(c)(2)(A)) However, thetaxpayer may challenge the underlying tax liability onlyif he did not receive a statutory notice of deficiencyfor the tax liability or did not “otherwise have anopportunity to dispute” the tax liability. (Code Sec.6330(c)(2)(B)) In addition to considering issues raisedby the taxpayer under Code Sec. 6330(c)(2), theAppeals officer must verify that the requirements ofany applicable law or administrative procedure havebeen met. (Code Sec. 6330(c)(1), Code Sec.6330(c)(3)) Where the validity of the underlying taxliability is properly in issue, the Tax Court will reviewthe matter de novo. Where it is not properly in issue,however, the Tax Court will review IRS’s determinationfor abuse of discretion. (Sego, (2000) 114 TC 604,Goza, (2000) 114 TC 176)

Facts. IRS issued a notice of intent to levy on VanceWadleigh’s pension income to collect his unpaidFederal income tax for 2001. Vance timely requesteda hearing under Code Sec. 6330. At the hearing, hemade the following arguments:

(1) His liability for the unpaid 2001Federal income tax was discharged inhis 2005 bankruptcy;

(2) The notice of intent to levy wasinvalid because his pension was not yetin payout status; and

(3) A prior notice of levy for a similaramount of unpaid tax was issued andlater released.

IRS’s Office of Appeals determined that the proposedlevy could proceed. Vance then brought an action inTax Court contending that Appeals abused itsdiscretion.

Court’ s conclusions . The Tax Court held that theCode Sec. 6321 lien that attached to Vance’s interestin his pension was not discharged by his 2005bankruptcy because his interest in his pension wasexcluded from his bankruptcy estate pursuant to 11USC 541 (2006).

In addition, the Tax Court held that, although Vance’sdischarge in bankruptcy relieved him of personalliability for the unpaid 2001 Federal income tax, thedischarge did not prevent IRS from collecting Vance’sunpaid 2001 Federal income tax in rem by levy on hispension income, notwithstanding IRS’s failure to filea valid notice of Federal tax lien with respect to the2001 Federal income tax liability.

Moreover, the Tax Court held that, although IRS maynot enforce a levy on Vance’s interest in his pensionuntil it enters payout status, IRS’s notice of intent tolevy was not invalid merely because it was mailed tohim 9 months before the pension entered payoutstatus.

Furthermore, the Court concluded that IRS’s releaseof a prior levy did not release the Code Sec. 6321 lienthat IRS held with respect to Vance’s interest in hispension.

Remand gives t axpayer a shot at keeping pension .

The Tax Court determined that the Appeals Officeassumed that Vance’s wage income would continueafter he started receiving his pension without anysupport in the administrative record for theassumption. Accordingly, the Tax Court exercised itsdiscretion and sent the case back to Appeals for furtherproceedings to determine whether Vance would be

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living exclusively off of the pension or would beworking as well. The Tax Court said it needed thisadditional information before it could determinewhether IRS abused its discretion in determining thatit could proceed with collection.

IRS website notes changes to Forms W -2/W-3 and instructions due to HIRE Act

[ h t t p : / / w w w . i r s . g o v / f o r m s p u b s / a r t i c l e /0,,id=109875,00.html]: There have been recentrevisions to 2010 Forms W-2, W-3, and W-3c, and tothe IRS publication that provides the general rulesand specifications for substitute Forms W-2c and W-3c.2010 Forms W-2, W-3, and W-3c. The IRS isreminding employers that downloaded 2010 FormsW-2, W-3, and W-3c, and their correspondinginstructions, before April 23, 2010, that the forms andinstructions have been revised to include the payrolltax exemption in the Hiring Incentives to RestoreEmployment Act (HIRE Act, P.L. 111-147). TheInstructions for Employee on the back of Form W-2,Copy 2 have been revised to add code CC for HIREexempt wages and tips to the list of codes for Box 12.On Forms W-3 and W-3c, Box 12 was split into Boxes12a, Deferred compensation, and 12b, HIRE exemptwages and tips. No changes were made to theFebruary 2009 version of Form W-2c, Corrected Wageand Tax Statement. For further information on therevisions.Substitute Forms W-2c and W-3c filing specifications.The IRS has posted a December 2009 version of IRSPublication 1223, General Rules and Specificationsfor Substitute Forms W-2c and W-3c, on its website.The publication was last updated in March 2006. Thepublication is a reprint of Rev Proc 2009-48, 2009-51IRB 864.

TIGTA evaluates IRS’ s processing anddepositing of p aper checks [Audit Report

No. 2010-40-048]Taxpayers’ checks are being accurately processedthrough an IRS electronic system but only 13% of the771,000 payments analyzed in an audit weredeposited the next business day, the TreasuryInspector General for Tax Administration (TIGTA) saidin a report recently posted on the TIGTA web site. The electronic system is known as the Remittance

Strategy for Paper Check Conversion (RS-PCC). TheLost Opportunity Cost associated with the checksanalyzed, which measures the interest value of moneynot deposited by the close of business the day afterreceipt, was $696,000, the audit said. “The IRS’sexpectation is that all funds be deposited with 24hours,” TIGTA noted. Payments of $100,000 or moremust be deposited the same day as received. Theaudit is located at http://treas.gov/tigta/auditreports/2010reports/201040048fr.pdf.

Expanded student loan relief for healthcare professionals creates refund

opportunity

IR 2010-74 (http://www .irs.gov/newsroom/article/0,,id=224387,00.html)

In a news release, IRS reminds health careprofessionals that they may be due a refund on their2009 returns if they received student loan relief understate programs rewarding those who work inunderserved communities. They (and their employers)also may be due a refund for FICA (Federal InsuranceContributions Act) tax paid in 2009 on such studentloan relief. The broadened student loan relief wasenacted as part of the Patient Protection andAffordable Care Act (the Affordable Care Act) (P.L. 111-148), retroactively effective for amounts received intax years beginning after 2008.

Background . Although a discharge of debt generallyresults in income to the debtor, income fromcancellation of certain government andnongovernment student loans is excluded from grossincome where the debt discharge is under a loanprovision requiring the student to work for a certainperiod of time in certain professions for any of a broadclass of employers. For loans made by a tax-exempteducational institution, the student’s work must alsofulfill a public-service requirement. The discharge isn’texcluded if it is on account of services performed forthe lender.

Similarly, although loan repayment programs generallyresult in income to the debtor, an individual mayexclude amounts received under a state programdescribed in Section 338I of the Public Health ServiceAct, which provides federal grants to states for theirloan repayment programs. Similarly, an individual mayexclude amounts received under the National HealthService Corps (NHSC) Loan Repayment Program

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(Section 338B(g) of the Public Health Service Act).These provide student loan repayments to participantswho provide medical services in a geographic areathat the Public Health Service identifies as having ashortage of health-care professionals.

Under the Affordable Care Act, for amounts receivedby an individual in tax years beginning after Dec. 31,2008, the exclusion for amounts received under theNational Health Service Corps loan repaymentprogram or State loan repayment programs includesany amount received by an individual under any Stateloan repayment or loan forgiveness program that isintended to provide for the increased availability ofhealth care services in underserved or healthprofessional shortage areas (as determined by theState). (Code Sec. 108(f)(4))

Income t ax refund . IRS’s news release informs healthcare professionals impacted by the broadenedexclusion that they may be due refunds if they reportedincome from repaid or forgiven loan amounts on their2009 income tax returns. IRS suggests that those whobelieve they qualify for a refund should consult theirState loan program offices to determine whether theprogram is covered by the Affordable Care Act.

Those filing for a refund on Form 1040X, AmendedU.S. Individual Income Tax Return, are advised toclaim the exclusion by writing “Excluded student loanamount under 2010 Health Care Act” in theExplanation of Changes box. Health careprofessionals may request an employer or other issuerto provide a Form W-2c, Corrected Wage and TaxStatement, or 1099, and may attach the corrected formto the Form 1040X. However, IRS stresses that Form1040X may be filed without attaching a corrected form.

Payroll t ax refund . An individual whose employerwithheld and paid taxes under the Federal InsuranceContributions Act (FICA) on payments excluded underthe Health Care Act should request that the employerseek a refund of withheld FICA on the employee’sbehalf. Employers may claim a refund for their portionof FICA tax by filing a separate Form 941-X, AdjustedEmployer’s QUARTERLY Federal Tax Return or Claimfor Refund, for each Form 941, Employer’s QuarterlyFederal Tax Return, which needs to be corrected. Anemployer filing a Form 941-X also is required to fileForms W-2c for each employee who benefits from thebroadened exclusion under the Health Care Act.

Kingston S prings W oman Going to Prisonfor Filing False T ax Returns

A Kingston Springs woman who worked as a taxpreparer will serve three years in federal prison afterpleading guilty to filing false tax returns.

Susan Sperl, 68, was sentenced Wednesday. She wasalso ordered to pay $83,339 in restitution.

According to the U.S. Attorney’s office in Nashville,she helped a Houston businessman avoid payinghundreds of thousands of dollars in taxes his nursingbusiness owed.

By creating fake deductions and shifting money aroundin accounts between Texas and Tennessee, authoritiessaid, she created a tax return that claimed a fictitiousdeduction of $240,000. She was also accused ofcreating false tax returns for two other clients.

Swiss to help IRS identify secret UBSaccount s in t ax probe

The Swiss parliament has approved a deal to helpthe Internal Revenue Service obtain the names ofAmericans with secret accounts at Switzerland’slargest bank.The approval averted a renewed conflict between theU.S. and Swiss governments over bank secrecy. Ifthe deal had collapsed, Swiss banking giant UBSfaced the threat of potentially crippling U.S. legalaction.Instead, the breakthrough paves the way for the Swissgovernment to turn over the names and account detailsof as many as 4,450 U.S. clients of UBS suspected ofusing undeclared accounts to hide income and evadetaxes.The fate of the international agreement was in limboduring the past week after the lower house ofparliament initially rejected the deal and tried to put itto a national referendum, which could have delayedresolution until next year. Lawmakers agreed Thursdaynot to seek the referendum.In ratifying the deal, the parliament in effect gave itsblessing to a weakening of Swiss bank secrecystandards. The issue stirred deep passions inSwitzerland, where bank secrecy is not just a traditionbut one of the keys to the success of the nation’seconomically important banking industry. The promiseof privacy has helped Switzerland attract deposits from

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around the world. The U.S. government’s pursuit oftax dodgers has posed a threat to that system.UBS acknowledged last year that it had defraudedthe U.S. government by helping Americans hide moneyfrom the IRS. To avert criminal prosecution, it agreedto pay the U.S. government $780 million.Separately, the U.S. government pursued a lawsuitagainst UBS, trying to compel the bank to hand overdetails on about 52,000 accounts. UBS said its handswere tied by Swiss law, and the Swiss governmentstepped in to negotiate a solution.The governments reached an agreement last Augustcalling for the Swiss to process a request for detailson 4,450 accounts. The deal meant that the Swisswould consider the request under a moreaccommodating interpretation of national law.

Then, early this year, after that process had begun,a Swiss court ruled that the deal violated national law.The executive branch of the Swiss government askedthe parliament to salvage the agreement by ratifyingit.The Swiss government has already turned over detailson about 500 UBS clients, the Swiss justicedepartment said Thursday.Under the agreement, the Swiss tax authority mustdecide by August whether the U.S. government isentitled.

Plano man sentenced to 6 years for t axfraud

The owner of a Dallas tax preparation business hasbeen sentenced to almost six years in prison forcheating the government out of nearly $5 million intaxes.

U.S. Attorney James Jacks says Anthony Barber, theowner of Twin Tax, was sentenced Friday in federalcourt in Dallas after pleading guilty in March to aidingand assisting in false and fraudulent tax returns andmaking false statements on tax returns.

Court documents state Barber added unnecessarydeductions and credits to clients’ tax returns duringface-to-face meetings. Barber then added moredeductions and credits and increased the preparationfees without the clients’ knowledge.

About $3.5 million of the $4.8 million has beenrecovered from effected taxpayers. Barber must payrestitution for the rest.

Justice Dep artment Announces Arrest sThe Justice Department has announced the arrestsof nearly 500 people in what it billed as a nationwide“takedown” of mortgage scams, many of them directedat homeowners in financial distress.

Federal and state authorities in the past three monthshave seized or recovered for victims more than $200million in a broad range of criminal and civil cases,the government said. Federal officials said they haveidentified losses of $2.3 billion stemming fromhundreds of mortgage-fraud cases.

“The breadth of the fraud is truly astonishing,” AttorneyGeneral Eric Holder said.

In one recent Minnesota case, former mortgage brokerMichael Fiorito was sentenced to more than 22 yearsin prison for his role in a scheme that stole around$400,000 from homeowners who thought they wererefinancing their homes but were duped into sellingthem.

Mr. Fiorito promised victims they would get home-equity checks but either intercepted the checks orphysically intimidated them into endorsing the checksto him, the Justice department said.

The Federal Bureau of Investigation said suspicious-activity reports of mortgage fraud referred to lawenforcement by financial institutions rose by 5% infiscal 2009.

The FBI has also plowed more resources into tacklingthe problem. The number of FBI investigations intoalleged mortgage frauds more than doubled, to morethan 3,000 this year from around 1,200 in fiscal year2007.

The Obama administration is under intense pressureto hold bankers and financial institutions accountablefor actions that may have contributed to the deepestfinancial crisis since the Great Depression. InNovember, President Barack Obama set up theFinancial Fraud Enforcement Task Force to coordinatefederal, state and local efforts to prosecute financialmisconduct.

But high-profile convictions of Wall Street investmentbankers have eluded authorities. Mr. Holder tried toshowcase smaller cases. “If you want to gauge theefficacy of this task force, you can’t focus on simply

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what has happened with regards to the largeinstitutions on Wall Street,” he said.

Mortgage frauds are varied, targeting banks and homebuyers alike. But this year has seen more scamsinvolving government economic-stimulus programs,fraudulent leasing of foreclosed properties and tax-related fraud, the FBI said.

One prevalent type of fraud targets homeowners infinancial trouble, promising to help save their homesfrom foreclosure. “Most of these foreclosure fraudsterstake your money and run,” says the government’sdedicated website, www.stopfraud.gov.

In some cases, investigators have used undercovertactics. In one, a tax preparer in Corona, N.Y., whowas selling fake documents to support fraudulentmortgage loan applications acted as an FBI informantover an 11-month period, said Preet Bharara, U.S.attorney in Manhattan. The FBI secretly recorded hisinteractions with mortgage brokers, real-estate agentsand others who allegedly purchased fake pay stubs,tax returns and other documents used in connectionwith obtaining fraudulent loans, Mr. Bharara said.

This investigation led to criminal charges filed against17 people for allegedly fraudulently obtaining morethan $15 million in loans, Mr. Bharara said.Prosecutors estimate there could an additional $40million in fraudulent loans in that case based in parton documents found on the tax preparer’s computerand the average home price in the area, Mr. Bhararasaid.

In another case, two people in Miami were chargedthis week with getting $4.4 million in fraudulentmortgages, the Justice Department said. The pairadvertised their services to Haitian-Americans,offering help with immigration and government housingprograms. In fact, they used the personal informationto apply for mortgages without the victims’ knowledge,the Justice Department said.

Tax Extenders Die Many Deaths

The tax extenders bill is struggling and the Senatevoted 56-40 to close debate on the bill. Some punditsargue this type of vote is a final “no,” but Sen. HarryReid (D-Nev.) is trying to pass a revision of this bill bythe July 4 recess.

Sen. Max Baucus (D-Mont.), chairman of the presidingSenate Committee on Finance, says, “The bottom lineis, we’re going to keep trying (on this bill).”The latest round of voting included several importantamendment modifications. (See the text of the lastmodified bill and a summary on the Senate Committeeon Finance Web site.) The latest amendment tookback some of the split between ordinary and carriedinterest—not good news for investment managers. TheSenate removed the two-year phase-in period (with a50/50 split), and the original 75/25 ordinary/carried-interest split in 2011 is back on the table after beinglessened to 65/35 last week. (Perhaps this is to helplessen the harsh impact of a wider repeal of the S-corporation self-employment tax loophole.)Senators listened to venture capitalists and shortenedtheir holding period to five years (rather than seven)for the 50/50 ordinary/carried split.The Senate also narrowed the S-corporation self-employment tax repeal in its last modification; S-corpsthat have a material amount and number of non-ownerprofessionals would be exempt from self-employmenttax. I argue it’s unfair to charge a self-employment taxon the “return on human capital” element in S-corporations, when owners have a material numberof non-owner workers. This last modification says “onlyif 80 percent or more of the professional serviceincome of the S-corporation is attributable to theservices of three or fewer owners of the corporation.”The good news is this bill is failing. Drama andbrinkmanship continue in the Senate instead of agenuine urge to pass it. This fight seems to be thenew battle line for the upcoming midterm elections,with campaigns well under way. Growing heat fromthe Tea Party over excessive spending and deficits ismaking it very difficult for Democrats to enact moreKeynesian spending, including extendingunemployment benefits and helping states, teachers,police and firefighters. Republicans also generally cryfoul when Congress tries to raise taxes on job creators,especially during a jobless recovery and potentialdouble-dip recession.After harried attempts to make changes, which someliken to putting lipstick on a pig, Chairman Baucusseems to be throwing in the towel, but Leader Reidwon’t have it; he vows further revision and votingbefore the July recess. Will this bill be out after threestrikes?Senator Olympia Snowe (R-Me.), an importantmoderate who is courted by Democrats for key votes,was particularly interested in reducing the S-corp self-

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employment tax impact on small-business job creators.Senator Snowe voted for closure along with all otherRepublicans and a few key Democrats.It may be more prudent going into the midtermelections for the Senate to follow the successful leadof the “doc fix” arranged on Thursday. That votesucceeded because Senators on a bi-partisan basisnarrowed the length and amount of this spendingallotment and found savings and revenues, besidestax increases, to pay for this targeted bill. Maybe wehave a new winning formula here.

Wayne’s World

E x t e n d e r sLegislation passedby the House ofRepresenta t iveswould subject theDistributable sharesof certain SC o r p o r a t i o nShareholders andlimited Partners tothe Self-Employment Tax. Itis a proposal tosubject the non-wage earnings of certain S corporation shareholdersto the self-employment tax for the first time. It alsoproposes to expand the current law rule that subjectsa limited partner’s guaranteed payments for servicesto the SET to the Limited Partner’s entire distributableshare if the Limited Partnership provides substantialservices to the professional service business.

For S Corporations, the proposal is limited toshareholders that provide, or through family attribution,are deemed to provide, substantial services to adisqualified S Corporation.

A disqualified S Corporation would be one whereeither:

a. substantially all of its activities are in connectionto a personal service partnership of which the SCorporation is a partner or

b. the professional service S Corporation ‘s principalasset is the reputation and skill of 3 or feweremployees.

The list of professional service businesses that arethe target of the proposal comprises a finite set basedon, but slightly different than, IRC § 1202(e)(3)definition of Qualified Trade or Business.

Corporations targeted by the provision, if enacted,would be able to decide whether to classify earningsas wages or earnings subject to self-employment.

It should be noted that the AICPA is very activelyengaged in discussions with congressionalrepresentative to offer alternatives and amendmentsto this proposal. The Senate is currently consideringamendments to the House proposal.

The AICPA has stated that the IRS currently has theappropriate enforcement tools to re-characterizedistributions as salary subject to employment taxesunder FICA and would support an IRS effort to providetaxpayers with stronger guidance on determining areasonable fair market value of compensation.

NCPE will continue to follow this legislation and havethe latest information during the summer Corporate,Partnership and LLC seminars.

Wayne

IRS releases form for applying for thetherapeutic discovery t ax credit

IR 2010-76

IRS has announced that small firms may now applyfor certification for tax credits or grants under theQualifying Therapeutic Discovery Project Program,created by the Patient Protect and Affordable CareAct (Affordable Care Act, P.L. 111-148) on newlyreleased Form 8942, which must be postmarked nolater than July 21, 2010.

Background. For expenses paid or incurred after Dec.31, 2008, there is a new 50% investment tax credit forqualified investments in qualifying therapeuticdiscovery projects (QTDPs). (Code Sec. 48D) Theprovision allocates $1 billion during the two-yearperiod 2009 through 2010 for the program. IRS, inconsultation with the Secretary of Health and Human

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Services (HHS), will award certifications for qualifiedinvestments. The credit is available only to companieshaving 250 or fewer employees. (Code Sec. 48D(c)(2))

A mechanism exists to allow the taxpayer to receive agrant in lieu of a tax credit. (Code Sec. 48D(f))

The qualified investment for a tax year is the aggregateamount of the costs paid or incurred in the tax yearfor expenses necessary for and directly related to theconduct of a QTDP. Additionally, the costs must satisfycertification and timing requirements (see below) andcan’t be excluded costs (see below). (Code Sec.48D(b))

The amount that is treated as qualified investment forall tax years for any QTDP can’t exceed the amountcertified by IRS as eligible for the QTDP credit. (CodeSec. 48D(b)(2))

An investment is considered a qualified investmentunder Code Sec. 48D(b) only if it is made in a taxyear beginning in 2009 or 2010. (Code Sec. 48D(b)(2))

The qualified investment for any tax year with respectto any QTDP does not include any cost for: (1)remuneration for an employee described in Code Sec.162(m)(3) , (2) interest expense, (3) facilitymaintenance expenses, (4) a service cost identifiedunder Reg. § 1.263A-1(e)(4), or (5) any otherexpenditure as determined by IRS as appropriate tocarry out the purposes of Code Sec. 48D. (Code Sec.48D(b)(3))

A “qualifying therapeutic discovery project” is onewhich is designed to develop a product, process, ortherapy to diagnose, treat, or prevent diseases andafflictions by: (1) conducting pre-clinical activities,clinical trials, clinical studies, and research protocols,or (2) by developing technology or products designedto diagnose diseases and conditions, includingmolecular and companion drugs and diagnostics, orto further the delivery or administration of therapeutics.(Code Sec. 48D(c)(1))

Qualified therapeutic discovery project expendituresdo not qualify for the research credit, orphan drugcredit, or bonus depreciation. If a QTDP credit isallowed under Code Sec. 48D for an expenditurerelated to property of a character subject to anallowance for depreciation, the basis of the propertymust be reduced by the amount of the credit.Additionally, expenditures taken into account in

determining the credit are nondeductible to the extent of the credit claimed that is attributable to such expenditures. (Code Sec. 48D(e))

Code Sec. 48D(d) required IRS, in consultation with the Secretary of HHS, to establish, not later than May 21, 2010, a QTDP program to consider and award certifications for qualified investments eligible for the QTDP credit to qualifying therapeutic discovery project sponsors. Each applicant for certification must submit an application containing the information IRS may require during the period beginning on the date that IRS establishes the program. (Code Sec. 48D(d))

IRS met the statutory directive when it issued Notice 2010-45, 2010-23 IRB on May 21, 2010. Notice 2010-45 established the QTDP program and provides the procedures under which an eligible taxpayer may apply for certification from IRS of a qualified investment with respect to a QTDP as eligible for a credit, or for certain taxpayers, a grant under the program. IRS will consult with HHS in conducting the program.

Form 8942. Notice 2010-45 st ated that applications for certification would be made on Form 8942, “Application for Certification of Qualified Investments Eligible for Credits and Grants Under the Qualifying Therapeutic Discovery Project Program.” IRS has now released Form 8942 (http://www.irs.gov/pub/irs-pdf/f8942.pdf) and its instructions (http://www.irs.gov/pub/irs-pdf/i8942.pdf). The formal application window extends from June 21 to July 21, 2010. Applications postmarked later than July 21, 2010 will not be considered. Notice 2010-45 said that applicants would receive a determination no later than Oct. 29, 2010. IR 2010-76 echoes this by stating that IRS will issue certifications by the end of October, based on the determinations made by HHS.

Taxing T imes next edition – August 1, 2010

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