A practitioners' roundtable on the Taxpayer Bill of Rights 2.

Panel Discussion The Taxpayer Bill of Rights 2, enacted in 1996, expands the options available to taxpayers to reduce tax administration burdens, imposes greater notice requirements on the IRS and gives the IRS greater authority to mitigate the harsher aspects of its collection efforts. The Taxpayer Advocate post has more authority to address taxpayer concerns. IRS staff can abate interest, withdraw liens, and return levied property more easily, and the threshold for offers-in-compromise tha...

Application of sec. 1503(d) to separate units of S corporations.

The dual resident corporation definition in the regulations under IRC section 1503 excludes S corporations, but the regulations also suggest that separate business units of S corporations may still be subject to the dual consolidated loss (DCL) rules. Despite being a pass-through entity, an S corporation is considered a domestic corporation, and the DCL rules limiting loss deductions apply to separate units of domestic corporations. Subjecting S corporations to these regulations is inconsiste...

Base-year updates can improve quality of LIFO calculations, yet are hard to come by.

Last-in, first-out Taxpayers using dollar-value LIFO inventory accounting find that updating their base year can reduce the distortions that can occur when changes in business and inventory mix make the original base year less relevant. Under the pooling of inventory items in the dollar-value method, base years are used to determine increments and decrements within the inventory pool. New inventory items that did not exist in the base year can distort and overstate income. The IRS allows a n...

Businesses face new and revised information return requirements.

Several information return forms and requirements have been revised for 1997 by the IRS, and few new information return forms have been introduced. The new forms will be used to report Medical Savings Account information and distributions, long-term care insurance payments and accelerated death benefit payments. The revisions to existing information returns focused on withholding requirements and statements from recipients of benefit plan distributions and other forms of payment.

Eligibility of internal-use software for research credit needs clarification.

A U.S. magistrate in Illinois employed questionable interpretations of the legislative history of IRC section 41 in denying research tax credits to the taxpayer in United Stationers. The taxpayer developed seven internal software programs and claimed a research credit for $156,000. The magistrate imposed standards of innovation, uncertainty and experimentation on the software development process that were higher than the standards contemplated by Congress in enacting section 41.

Estimating inventory shrinkage.

The Tax Court has accepted taxpayer use of inventory shrinkage estimates over IRS objections, in several recent cases. The IRS has argued that shrinkage must be verified by a physical count before it can be treated as a loss and incorporated into the cost of goods sold. Taxpayers have argued that estimates are permissible to cover periods between the last cyclical inventory count of the year and the end of the year. The Court has found that reasonable estimation methods can result in inventor...

Excluding workers from benefit plans - conflicting guidance from the courts.

The US Court of Appeals for the Ninth Circuit found in Vizcaino v. Microsoft Corp. that freelance workers were entitled to participate in benefit plans, but other case law is split on such issues. Two other cases also rewrote the plan language to provide leased employees with coverage. In several other cases, the courts accepted plan language that excluded certain categories of workers. Employers should review plan language to ensure that workers that the employers do not wish to cover are ex...

Exercise caution when taking advantage of new S corporation legislation.

Relaxation of several restrictions on S corporations enacted under the Small Business Job Protection Act of 1996 may make electing qualified subchapter S subsidiary (QSSS) treatment more attractive, but there may be other adverse tax consequences to making such an election. Members of consolidated groups with excess loss accounts or deferred intercompany transactions may trigger gain recognition by electing S status. State tax laws may not yet be updated to conform with federal laws, and the ...

Final regs. on contingent payment debt instruments leave questions on nonmarket-based contingencies.

The final IRS regulations under IRC section 1275 provide long-awaited guidance on the tax treatment of contingent payment debt instruments, but the information required under the regulation's noncontingent bond method (NBM) may be difficult to determine in some instances. The regulations divide debt instruments into two classes and impose two original issue discount methods, the NBM and the wait and see method, on them. The NBM is particularly difficult to apply when comparable yields are not...

Getting back to basics - proposed continuity regulations.

The IRS has released proposed regulations under IRC section 368 that would return the focus of continuity-of-interest analysis to the adequacy of consideration in determining the tax-free status of corporate reorganizations. Post-reorganization dispositions of stock by target shareholders would become less significant in analyzing such transactions. The regulations also revise the continuity-of-business-interest standards. Businesses seeking tax-free reorganizations should have more flexibili...

HIPAA 'creditable coverage' rules affect group health plans, insurers.

Health Insurance Portability and Accountability Act The Departments of Labor and Health and Human Services have released temporary and interim regulations that identify what employers and insurers must do to satisfy the creditable coverage rules established by the Health Insurance Portability and Accountability Act of 1996. The regulations identify how creditable coverage must reduce preexisting condition exclusion periods. They also identify when certification must be required. The regulati...

Letter ruling addresses timing issue for nonidentified hedging transactions.

The IRS found in Letter Ruling 9706002 that the taxpayer's failure to identify interest-rate swaps as hedging transactions for tax purposes did not adversely impact the availability of the hedging transaction timing regulations under IRC section 446. Contemporaneous identification of hedging transactions is binding on characterization of gains and losses under the IRC section 1221 regulations, but character was not at issue. Because timing and not character was the focus of the taxpayer's req...

May businesses use statistical sampling to verify expense accounts?

IRS responses to tax practitioner comments regarding accountable plan substantiation of business expenses suggest that statistical sampling methods may be a permissible form of expense accounting, but there are no assurances that such methods will be accepted without district director approval. The IRS has also stated that there is no de minimis exception other than the $75 threshold found in the IRC section 274 temporary regulations. Taxpayers may attempt to use statistical sampling, but if ...

Miller provides clues for preventing treatment of intrafamily loan as gift.

The Tax Court found in its Miller memorandum opinion that the taxpayer had failed to establish a bona fide creditor-debtor relationship in helping her sons finance home purchases. She loaned $100,000 to each son, having them sign noninterest-bearing demand notes. One son made a one-time payment of $15,000, but she eventually forgave the debts. The IRS recharacterized the loans as gifts. Based on a series of factors, including interest, security, repayment and written documentation, the Tax Co...

New, improved Form 872.

Tax assessment extension form The IRS has revised, and improved, Form 872 by limiting the termination date of the form to the date agreed upon by the parties. Form 872 is a request to extend the time to assess tax. The old form set the expiration date as the earlier of the agreed upon date and the date of final determination. The "date of final determination" language had the effect at times of barring refund claims. Practitioners should note that other Form 872 series forms have not been re...

New revenue procedure outlines electronic record retention rules and allows for destruction of originals.

IRS Revenue Procedure 97-22 establishes that taxpayers using adequate electronic tax records storage systems are allowed to destroy hard copy books and records and delete original computer-based records. The Procedure identifies that the electronic storage system must ensure the accuracy and completeness of the records, that a standard system of retrieval must be used and that an indexing system must be used to ensure accessibility. The IRS District Director may periodically assess the adequa...

Nontax considerations for a client planning to become self-employed.

Clients considering becoming self-employed should review a number of nontax matters before or immediately after leaving their current employer. They should attempt to obtain any needed credit and should maximize their cash reserves before leaving their current job. They should continue health insurance coverage under the Consolidated Omnibus Budget Reconciliation Act. Business insurance needs. noncompetition agreements, local restrictions on the use of homes for business, bookkeeping and part...

Offers in compromise.

The usage of the IRS' Offer in Compromise (OIC) program has grow significant since 1992, when the IRS changed its acceptance policy. Both the number of OIC requests and the acceptance rate have increased substantially since then. The IRS has been working to accommodate this increase in requests, and it has established criteria for rejecting applications as nonprocessable and for rejecting an offer in substance. Other issues that the OIC program is addressing include identifying fraudulent req...

Presubmission conference pilot program for technical advice issues.

IRS Revenue Procedure 97-21 established a pilot program for 1997 that will offer taxpayers involved in a matter likely to be submitted for technical advice to request a presubmission conference with the IRS National Office and the chief of appeals or district director involved. Technical advice is generally sought when an issue is complex, novel or not subject to an established IRS position. The taxpayer may make a written request for a presubmission conference when the district director or c...

Simplification proposal could ease complexities of AMT for some businesses.

Alternative minimum tax The US Department of the Treasury has released a proposal that would eliminate alternative minimum tax (AMT) filing for corporations with less than $5 million in average annual gross receipts, but the proposal does little to relieve the AMT burden imposed on individuals and large firms. The AMT forces many taxpayers to do multiple calculations, including many taxpayers that find that they do not have any AMT liability. The Treasury also proposes to revise foreign tax ...

State tax implications of the expanded sec. 338(h) (10) election.

Taxpayers planning to make IRC section 338(h)(10) elections should be aware that state tax laws are not necessarily consistent with the 1994 regulations under section 338 and substantial state tax liability could result. The regulations allow nonconsolidated affiliates and S shareholders to make the election. Some states follow the federal law, and others, like California, actually provide taxpayers with the flexibility of electing at either or both the state and federal level. New York's law...

Temp. regs. explain sec. 382 and built-in loss rules.

The IRS temporary regulations issued in 1996 under IRC section 382 identify when and to what extent the net operating losses and built-in losses of a member of an affiliated group filing a consolidated return may be used following an ownership change. Section 382 allows for the use of these losses but also limits their use based on the usage that would have been available to the prior owner. The regulations adopt a single entity approach, but practitioners should thoroughly review the regulat...

The failure-to-file penalty: nuances every tax practitioner should know.

Tax practitioners should be aware of a couple traps for the unwary involving the failure-to-file penalty under IRC section 6651. The penalty is imposed on the net amount due, and the payment due date is the due date for the return. Some taxpayers make payments on the liability associated with the delinquent return, but such payments only reduce the failure-to-pay penalty and do not reduce the failure-to-file penalty. Taxpayers may assume that since their net amount due is zero that there is n...

The Taxpayer Advocate and the Problem Resolution Program - the impact of TBOR2.

Taxpayer Bill of Rights 2 The Taxpayer Bill of Rights 2 increased the authority and revised the mission of the IRS Office of the Taxpayer Advocate. The Office will be required to make to annual reports to Congress on the plans and accomplishments of the Office. The Office will have greater authority to issue Taxpayer Assistance Orders, and the authority of other IRS officials to rescind these orders will be limited. Other revisions involve selection of Problem Resolution Officers, taxpayer f...

To file or not to file, that is the question for foreign partnerships.

The IRS intends to issue regulations in 1997 that will clarify the tax treatment of foreign partnerships that do not have any connections to the US other than income tax items that are at least 25% allocable to US persons. IRC section 6031 governs when foreign partnerships are required to file a US partnership return. Even if a partnership is required to file because of US partnership interests, the return only functions to report distributive shares and issue K-1s. Failure to file can result...

Waiving a target's loss carryforwards - a preservation of stock basis.

Potential basis reductions resulting from a consolidated group member's acquisition of a corporation that has unused loss carryovers that subsequently expire can be ameliorated by electing to waive the loss carryover held by the acquired corporation. The election is made on the consolidated group's return for the year of the acquisition. The loss carryover will be treated as having expired immediately before the acquired corporation became a member of the consolidated group.

1997 AICPA technology rankings - tax.

The AICPA Information Technology Division has released its list of the ten technologies most important to tax practitioners in 1997. Technology issues in the personnel area include telecommuting and continuous training. The use of electronic mail and voice mail can improve productivity, and the Internet provides research and marketing opportunities. Security issues such as encryption and fire walls will must be addressed. Other technologies to consider are groupware and workflow software, exp...