Letter Ruling 8035069, June 6, 1980

Uniform Issue List Information:

UIL No. 7701.00-00

Definitions


In letters dated July 6, 1979, and December 27, 1979, your authorized representative requested rulings concerning the applicability to you of provisions of the Internal Revenue Code of 1954 relating to income tax return preparers.



You have presented the following facts to us:



You are a federally chartered cooperative association of local farmers operating under the Farm Credit Act of 1971. Members of the co-op are those farmers who have previously borrowed from you and those who contemplate borrowing in the future. In connection with your lending activity, you promote and market a computerized data processing system. Using the information submitted by its customers, this system performs a series of processing, computational, and organizational operations that result in a variety of schedules and summaries dealing with the financial results and position of the customer's operation. The final product available to the customer through the system includes:


1. A cash summary listing.


2. A detailed list of entries.


3. A general summary, providing detailed physical and dollar information as to inventories.


4. An enterprise summary, providing detailed information on an entity-by-entity basis.


5. A payroll summary.


6. A tentative depreciable and other asset schedule, providing information relating to asset balances, depreciation, and investment tax credit.


7. A tax planning worksheet, summarizing yearend information pertinent to the estimation of taxable income and tax liability.


8. A tax audit listing, providing month-by-month summaries of receipts and expenses.


9. A completed Schedule F, for use in the preparation of Form 1040.


10. Form W--2, for reporting the wages and related information of employees.


11. Form 941, for reporting withheld income tax and FICA tax.


Some of this information is available monthly, some on a 10-month basis, some annually and some on more than one of the foregoing bases.



Your customers need not receive all of the above information, but are entitled to request such schedules and analyses as they feel would be useful. A standard fee is charged, and whether a customer chooses to receive a completed Schedule F, or other available information, has no effect on the fee. The primary benefit of the system to you is the collection of accurate, well organized, and current information on the financial status of your customers and potential customers.



Your employees who market the system typically are knowledgeable in both the financial and operational aspects of farming, None of the personnel involved are attorneys, certified public accountants, or other trained tax experts and do not represent themselves or any one connected with the system to be such. Their duties include explaining the system to potential customers, assisting existing customers in assembling and coding data for submission to the computer, etc. In some cases, the employees have acquired relatively sophisticated knowledge of farm finance and may render informal advice to the customers with respect to tax planning. Formal tax planning and preparation of Form 1040 is, in most cases, left to outside professionals retained by the customers. In other cases the customers prepare their own Forms 1040.



Employees are not assigned to the accounts of specific customers, and, while a customer may deal with the same employee on a recurring basis, he may also see different employees. The employees in contact with the customer may review the schedules and summaries for business purposes and answer questions about them. They do not, however, usually review the tax-related items for tax purposes.



Farmers who are in a position to benefit from the system generally own large, highly mechanized farms that require sophisticated record-keeping. They have relatively high incomes. In most cases the customers have retained the services of an independent tax advisor who prepares returns and assists them in tax planning. Your employees urge potential customers that their tax advisors should be notified of the customer's interest in the system and that the advisors should review the system for their clients.



You have asked us to rule that you are not an income tax return preparer within the definition of section 7701(a)(36) of the Code or for purposes of sections 6060, 6107, 6694, 6695, or 7216.



Section 7701(a)(36) of the Code defines 'income tax return preparer' as any person who prepares for compensation, or who employs one or more persons to prepare for compensation, any return of tax imposed by Subtitle A or any claim for refund of tax imposed by Subtitle A. The preparation of a substantial portion of a return or claim for refund is treated as if it were the preparation of such return or claim for refund. Specifically excepted from the definition of preparer are persons who merely furnish typing, reproducing, or other mechanical assistance; prepare a return or claim for refund of an employer; prepare as a fiduciary; prepare a claim for refund for a taxpayer in response to a notice of deficiency or waiver of restriction.



A person is not an income tax return preparer in the abstract; he can only be a preparer with respect to a specific return or claim for refund. Thus, the determination whether a person is a preparer can only be made in relation to the returns. In order to be a preparer; a person (or a person in his employ) must satisfy all the elements of the definition of preparer. He must a) prepare b) a return c) for compensation.



In order to be 'preparing,' a person cannot fall within the exception provided by section 7701(a)(36)(B)(i) of the Code relating to typing, reproducing, or mechanical assistance. While you provide services that, in other circumstances, could be construed to be the type of computerized service intended to be excluded from the definition of a preparer, your service provides more than mere mechanical computation. By sponsoring the system and by determining which information should be input, you make substantive decisions as to which items are includible in gross income, which are deductible, which items qualify for investment credit, etc. Unlike the typical computerized tax service, which merely provides computational services to preparers or taxpayers who have already made determinations regarding what should be input, you, by having responsibility for the system, must be considered to be preparing, rather than providing mechanical assistance.



Second, the documents being prepared must be 'returns.' A return, as defined by section 301.7701--15 of the Regulations on Procedure and Administration, is a 'return of tax filed by or on behalf of a taxpayer reporting the liability of the taxpayer under subtitle A.' However, a person who prepares a substantial portion of a return can also be a preparer even if that portion is not a complete return. Section 301.7701--15(b) of the regulations provides that whether a schedule of a return is a substantial portion is determined by comparing the length and complexity of, and tax liability or refund involved in, the return or claim for refund as a whole. A 'safe haven' rule is established under which entries which involve amounts of gross income, amounts of deduction, or amounts on the basis of which credits are determined which are less than $2,000 or less than $100,000 and also less than 20% of the gross income shown on the return are not considered to be a substantial portion of the return.



In your case, items 1 through 8 enumerated above are clearly not returns or portions of returns, although the information might be useful for return purposes. Items 10 (Form W--2) and 11 (Form 941) are specifically excluded from the definition of income tax returns by section 391.7701--15(c)(1)(ii) of the regulations. Item 9 (Schedule F), however, may be a substantial portion of a return for an individual taxpayer engaged in farming as his primary business, depending on the facts in each particular case. A determination of whether you are a preparer with respect to Schedules F prepared by you must, therefore, be made on a case-by-case basis by making the comparison outlined in section 301.7701--15(b).



Third, the preparation of the return must be 'for compensation.' In your case, nothing is paid directly and specifically for Schedule F. However, compensation is paid to you for the package which includes Schedule F. The fact that Schedule F constitutes a relatively small portion of the total output of the system has no bearing on whether you are an income tax return preparer.



Although in many cases your customers retain outside tax advisors who may also be categorized as income tax return preparers, you may still be a preparer because more than one person may be a preparer with respect to the same return. Thus, you may be subject to various provisions of the Code with respect to those Schedules F which are substantial portions of returns.



Section 6060 of the Code requires information returns from any person who employs an income tax return preparer.



Section 1.6060--1 of the Income Tax Regulations provides that section 6060 of the Code is satisfied if any employer of a preparer retains a list of preparers in its employ and keeps that list available for inspection by Internal Revenue Service. Although you may be a preparer with respect to certain returns because of your sponsorship of the system, whether or not your employees are preparers is an independent question to be answered in the context of their activities with respect to the Schedule F. For example, if the employee in question merely fills in the blanks of a computer form and makes no determinations regarding inclusion of income, deductions, capitalization, etc., he fits within the mechanical assistance exception and will not be considered a preparer. On the other hand, if he gives advice on the tax treatment of certain items or if he makes determinations as to how various input items should be treated, he may be a preparer if the items in question constitute a substantial portion of the customer's return. Thus, the question of the status of your employees must be determined on a case-by-case basis. Accordingly, you are required to keep a list of those employees who are income tax return preparers because of their activity with respect to specific returns.



Section 6107(a) of the Code requires any person who is an income tax return preparer with respect to any return or claim for refund to furnish a completed copy of such return or claim for refund to the taxpayer not later than the time such return or claim is presented for such taxpayer's signature.



Schedule F is not a return by itself and there is no requirement to sign the schedule. Accordingly, when you present Schedule F to a customer the schedule is not presented for the taxpayer's signature. Therefore, you do not need to furnish a copy of the schedule to the taxpayer.



Section 6107(b) of the Code requires any person who is an income tax return preparer with respect to a return or claim for refund to retain a completed copy of such return or claim for refund, or retain on a list the name and taxpayer identification number of the taxpayer for whom such return or claim for refund was prepared and to make such copy or list available for inspection upon request by the Secretary.



Even in those cases in which the Schedule F constitutes a substantial portion of the entire return you do not prepare the entire return. Your responsibility under Section 6107(b) of the Code is limited to retaining either a completed copy of the schedules prepared or a list of taxpayers for whom the schedules were prepared. In either instance, your responsibility is further limited to those cases in which Schedule F constitutes a substantial portion of the return.



Section 6694 of the Code imposes civil penalties against income tax preparers who, on a return or claim for refund, willfully understate a tax liability or negligently or intentionally disregard rules and regulations.



Section 6695 of the Code imposes civil penalties upon any person who is an income tax return preparer with respect to a claim for refund who:


a. fails to comply with section 6107(a)


b. fails to sign such return or claim for refund


c. fails to furnish his identifying number


d. fails to comply with section 6107(b)


e. fails to make the information return provided for by section 6060


f. endorses or otherwise negotiates a refund check.



You are subject to the penalties imposed by sections 6694(a) and 6694(b) of the Code with respect to those Schedules F which constitute a substantial portion of the return. You are also subject to the penalties imposed by sections 6695(a), 6695(d), 6695(e) and 6695(f) of the Code in those cases in which Schedule F constitutes a substantial portion of the return. You are not, however, subject to the penalties imposed by section 6695(b). Under section 1.6695--1(b) of the Income Tax Regulations, an individual who is an income tax return preparer with respect to a return shall manually sign the return in the appropriate space provided on the return after it is completed and before it is presented to the taxpayer for signature. You are not an individual. Moreover, there is no space on Schedule F for signature, and a completed schedule is not presented for signature, but for attachment to Form 1040. Therefore, you do not have to sign Schedule F in those cases in which it constitutes a substantial portion of the return.



Section 7216 of the Code imposes criminal penalties on any person who is engaged in the business of preparing or providing services in connection with the preparation of returns, claims for refund, or declarations of estimated tax, or any person who for compensation prepares any such return or declaration for any other person, and who discloses any information furnished to him for, or in connection with, the preparation of any such return or declaration, or uses any such information for any purpose other than to prepare or assist in preparing any such return or declaration.



While you may not be an income tax return preparer for purposes of other sections of the Code, with respect to certain of the Schedules F prepared by you, you are engaged in the business of providing services in connection with the preparation of returns. Accordingly, you are subject to the criminal penalties imposed by section 7216.



Pursuant to the power of attorney on file in our office, a copy of this letter is being sent to your authorized representative.



(Signed) Richard L. Crain
Chief, Wage, Excise and Administrative Provisions Branch