reasonable cause under 6664 vs 6694

This blog contrasts the “reasonable case” 6694 regulations with the 6664 regulations. First note the 6664 regulations on reasonable cause. Note the emphasis on reliance on “tax professionals.” Most of the case law on reasonable cause under 6664 deals with issues involving reliance on professionals.


Reasonable cause and good faith exception to section 6662 penalties – the section 6664 regulations -
1.6664-1(a) In general. --No penalty may be imposed under section 6662 with respect to any portion of an underpayment upon a showing by the taxpayer that there was reasonable cause for, and the taxpayer acted in good faith with respect to, such portion. Rules for determining whether the reasonable cause and good faith exception applies are set forth in paragraphs (b) through (h) of this section.
(b) Facts and circumstances taken into account
(1) In general. --The determination of whether a taxpayer acted with reasonable cause and in good faith is made on a case-by-case basis, taking into account all pertinent facts and circumstances. (See paragraph (e) of this section for certain rules relating to a substantial understatement penalty attributable to tax shelter items of corporations.) Generally, the most important factor is the extent of the taxpayer's effort to assess the taxpayer's proper tax liability. Circumstances that may indicate reasonable cause and good faith include an honest misunderstanding of fact or law that is reasonable in light of all of the facts and circumstances, including the experience, knowledge, and education of the taxpayer. An isolated computational or transcriptional error generally is not inconsistent with reasonable cause and good faith. Reliance on an information return or on the advice of a professional tax advisor or an appraiser does not necessarily demonstrate reasonable cause and good faith. Similarly, reasonable cause and good faith is not necessarily indicated by reliance on facts that, unknown to the taxpayer, are incorrect. Reliance on an information return, professional advice, or other facts, however, constitutes reasonable cause and good faith if, under all the circumstances, such reliance was reasonable and the taxpayer acted in good faith. (See paragraph (c) of this section for certain rules relating to reliance on the advice of others.) For example, reliance on erroneous information (such as an error relating to the cost or adjusted basis of property, the date property was placed in service, or the amount of opening or closing inventory) inadvertently included in data compiled by the various divisions of a multidivisional corporation or in financial books and records prepared by those divisions generally indicates reasonable cause and good faith, provided the corporation employed internal controls and procedures, reasonable under the circumstances, that were designed to identify such factual errors. Reasonable cause and good faith ordinarily is not indicated by the mere fact that there is an appraisal of the value of property. Other factors to consider include the methodology and assumptions underlying the appraisal, the appraised value, the relationship between appraised value and purchase price, the circumstances under which the appraisal was obtained, and the appraiser's relationship to the taxpayer or to the activity in which the property is used. (See paragraph (g) of this section for certain rules relating to appraisals for charitable deduction property.) A taxpayer's reliance on erroneous information reported on a Form W-2, Form 1099, or other information return indicates reasonable cause and good faith, provided the taxpayer did not know or have reason to know that the information was incorrect. Generally, a taxpayer knows, or has reason to know, that the information on an information return is incorrect if such information is inconsistent with other information reported or otherwise furnished to the taxpayer, or with the taxpayer's knowledge of the transaction. This knowledge includes, for example, the taxpayer's knowledge of the terms of his employment relationship or of the rate of return on a payor's obligation.
(2) Examples. --The following examples illustrate this paragraph (b). They do not involve tax shelter items. (See paragraph (e) of this section for certain rules relating to the substantial understatement penalty attributable to the tax shelter items of corporations.)

Example 1. A, an individual calendar year taxpayer, engages B, a professional tax advisor, to give A advice concerning the deductibility of certain state and local taxes. A provides B with full details concerning the taxes at issue. B advises A that the taxes are fully deductible. A, in preparing his own tax return, claims a deduction for the taxes. Absent other facts, and assuming the facts and circumstances surrounding B's advice and A's reliance on such advice satisfy the requirements of paragraph (c) of this section, A is considered to have demonstrated good faith by seeking the advice of a professional tax advisor, and to have shown reasonable cause for any underpayment attributable to the deduction claimed for the taxes. However, if A had sought advice from someone that A knew, or should have known, lacked knowledge in the relevant aspects of Federal tax law, or if other facts demonstrate that A failed to act reasonably or in good faith, A would not be considered to have shown reasonable cause or to have acted in good faith.

Example 2. C, an individual, sought advice from D, a friend who was not a tax professional, as to how C might reduce his Federal tax obligations. D advised C that, for a nominal investment in Corporation X, D had received certain tax benefits which virtually eliminated D's Federal tax liability. D also named other investors who had received similar benefits. Without further inquiry, C invested in X and claimed the benefits that he had been assured by D were due him. In this case, C did not make any good faith attempt to ascertain the correctness of what D had advised him concerning his tax matters, and is not considered to have reasonable cause for the underpayment attributable to the benefits claimed.

Example 3. E, an individual, worked for Company X doing odd jobs and filling in for other employees when necessary. E worked irregular hours and was paid by the hour. The amount of E's pay check differed from week to week. The Form W-2 furnished to E reflected wages for 1990 in the amount of $29,729. It did not, however, include compensation of $1,467 paid for some hours E worked. Relying on the Form W-2, E filed a return reporting wages of $29,729. E had no reason to know that the amount reported on the Form W-2 was incorrect. Under the circumstances, E is considered to have acted in good faith in relying on the Form W-2 and to have reasonable cause for the underpayment attributable to the unreported wages.

Example 4. H, an individual, did not enjoy preparing his tax returns and procrastinated in doing so until April 15th. On April 15th, H hurriedly gathered together his tax records and materials, prepared a return, and mailed it before midnight. The return contained numerous errors, some of which were in H's favor and some of which were not. The net result of all the adjustments, however, was an underpayment of tax by H. Under these circumstances, H is not considered to have reasonable cause for the underpayment or to have acted in good faith in attempting to file an accurate return.

(c) Reliance on opinion or advice
(1) Facts and circumstances; minimum requirements. --All facts and circumstances must be taken into account in determining whether a taxpayer has reasonably relied in good faith on advice (including the opinion of a professional tax advisor) as to the treatment of the taxpayer (or any entity, plan, or arrangement) under Federal tax law. For example, the taxpayer's education, sophistication and business experience will be relevant in determining whether the taxpayer's reliance on tax advice was reasonable and made in good faith. In no event will a taxpayer be considered to have reasonably relied in good faith on advice (including an opinion) unless the requirements of this paragraph (c)(1) are satisfied. The fact that these requirements are satisfied, however, will not necessarily establish that the taxpayer reasonably relied on the advice (including the opinion of a tax advisor) in good faith. For example, reliance may not be reasonable or in good faith if the taxpayer knew, or reasonably should have known, that the advisor lacked knowledge in the relevant aspects of Federal tax law.
(i) All facts and circumstances considered. --The advice must be based upon all pertinent facts and circumstances and the law as it relates to those facts and circumstances. For example, the advice must take into account the taxpayer's purposes (and the relative weight of such purposes) for entering into a transaction and for structuring a transaction in a particular manner. In addition, the requirements of this paragraph (c)(1) are not satisfied if the taxpayer fails to disclose a fact that it knows, or reasonably should know, to be relevant to the proper tax treatment of an item.

(ii) No unreasonable assumptions. --The advice must not be based on unreasonable factual or legal assumptions (including assumptions as to future events) and must not unreasonably rely on the representations, statements, findings, or agreements of the taxpayer or any other person. For example, the advice must not be based upon a representation or assumption which the taxpayer knows, or has reason to know, is unlikely to be true, such as an inaccurate representation or assumption as to the taxpayer's purposes for entering into a transaction or for structuring a transaction in a particular manner.

(iii) Reliance on the invalidity of a regulation. --A taxpayer may not rely on an opinion or advice that a regulation is invalid to establish that the taxpayer acted with reasonable cause and good faith unless the taxpayer adequately disclosed, in accordance with §1.6662-3(c)(2), the position that the regulation in question is invalid.

(2) Advice defined. --Advice is any communication, including the opinion of a professional tax advisor, setting forth the analysis or conclusion of a person, other than the taxpayer, provided to (or for the benefit of) the taxpayer and on which the taxpayer relies, directly or indirectly, with respect to the imposition of the section 6662 accuracy-related penalty. Advice does not have to be in any particular form.

(3) Cross-reference. --For rules applicable to advisors, see e.g., §§1.6694-1 through 1.6694-3 (regarding preparer penalties), 31 CFR 10.22 (regarding diligence as to accuracy), 31 CFR 10.33 (regarding tax shelter opinions), and 31 CFR 10.34 (regarding standards for advising with respect to tax return positions and for preparing or signing returns).

(d) Underpayments attributable to reportable transactions. --If any portion of an underpayment is attributable to a reportable transaction, as defined in §1.6011-4(b) (or §1.6011-4T(b), as applicable), then failure by the taxpayer to disclose the transaction in accordance with §1.6011-4 (or §1.6011-4T, as applicable) is a strong indication that the taxpayer did not act in good faith with respect to the portion of the underpayment attributable to the reportable transaction.

(e) Pass-through items. --The determination of whether a taxpayer acted with reasonable cause and in good faith with respect to an underpayment that is related to an item reflected on the return of a pass-through entity is made on the basis of all pertinent facts and circumstances, including the taxpayer's own actions, as well as the actions of the pass-through entity.

(f) Special rules for substantial understatement penalty attributable to tax shelter items of corporations

(1) In general; facts and circumstances. --The determination of whether a corporation acted with reasonable cause and in good faith in its treatment of a tax shelter item (as defined in §1.6662-4(g)(3)) is based on all pertinent facts and circumstances. Paragraphs (f)(2), (3), and (4) of this section set forth rules that apply, in the case of a penalty attributable to a substantial understatement of income tax (within the meaning of section 6662(d)), in determining whether a corporation acted with reasonable cause and in good faith with respect to a tax shelter item.

(2) Reasonable cause based on legal justification

(i) Minimum requirements. --A corporation's legal justification (as defined in paragraph (f)(2)(ii) of this section) may be taken into account, as appropriate, in establishing that the corporation acted with reasonable cause and in good faith in its treatment of a tax shelter item only if the authority requirement of paragraph (f)(2)(i)(A) of this section and the belief requirement of paragraph (f)(2)(i)(B) of this section are satisfied (the minimum requirements). Thus, a failure to satisfy the minimum requirements will preclude a finding of reasonable cause and good faith based (in whole or in part) on the corporation's legal justification.

(A) Authority requirement. --The authority requirement is satisfied only if there is substantial authority (within the meaning of §1.6662-4(d)) for the tax treatment of the item.

(B) Belief requirement. --The belief requirement is satisfied only if, based on all facts and circumstances, the corporation reasonably believed, at the time the return was filed, that the tax treatment of the item was more likely than not the proper treatment. For purposes of the preceding sentence, a corporation is considered reasonably to believe that the tax treatment of an item is more likely than not the proper-tax treatment if (without taking into account the possibility that a return will not be audited, that an issue will not be raised on audit, or that an issue will be settled) --

(1) The corporation analyzes the pertinent facts and authorities in the manner described in §1.6662-4(d)(3)(ii), and in reliance upon that analysis, reasonably concludes in good faith that there is a greater than 50-percent likelihood that the tax treatment of the item will be upheld if challenged by the Internal Revenue Service; or

(2) The corporation reasonably relies in good faith on the opinion of a professional tax advisor, if the opinion is based on the tax advisor's analysis of the pertinent facts and authorities in the manner described in §1.6662-4(d)(3)(ii) and unambiguously states that the tax advisor concludes that there is a greater than 50-percent likelihood that the tax treatment of the item will be upheld if challenged by the Internal Revenue Service. (For this purpose, the requirements of paragraph (c) of this section must be met with respect to the opinion of a professional tax advisor.)

(ii) Legal justification defined. --For purposes of this paragraph (f), legal justification includes any justification relating to the treatment or characterization under the Federal tax law of the tax shelter item or of the entity, plan, or arrangement that gave rise to the item. Thus, a taxpayer's belief (whether independently formed or based on the advice of others) as to the merits of the taxpayer's underlying position is a legal justification.

(3) Minimum requirements not dispositive. --Satisfaction of the minimum requirements of paragraph (f)(2) of this section is an important factor to be considered in determining whether a corporate taxpayer acted with reasonable cause and in good faith, but is not necessarily dispositive. For example, depending on the circumstances, satisfaction of the minimum requirements may not be dispositive if the taxpayer's participation in the tax shelter lacked significant business purpose, if the taxpayer claimed tax benefits that are unreasonable in comparison to the taxpayer's investment in the tax shelter, or if the taxpayer agreed with the organizer or promoter of the tax shelter that the taxpayer would protect the confidentiality of the tax aspects of the structure of the tax shelter.

(4) Other factors. --Facts and circumstances other than a corporation's legal justification may be taken into account, as appropriate, in determining whether the corporation acted with reasonable cause and in good faith with respect to a tax shelter item regardless of whether the minimum requirements of paragraph (f)(2) of this section are satisfied.
(g) Transactions between persons described in section 482 and net section 482 transfer price adjustments. --[Reserved]

(h) Valuation misstatements of charitable deduction property

(1) In general. --There may be reasonable cause and good faith with respect to a portion of an underpayment that is attributable to a substantial (or gross) valuation misstatement of charitable deduction property (as defined in paragraph (h)(2) of this section) only if --

(i) The claimed value of the property was based on a qualified appraisal (as defined in paragraph (h)(2) of this section) by a qualified appraiser (as defined in paragraph (h)(2) of this section); and

(ii) In addition to obtaining a qualified appraisal, the taxpayer made a good faith investigation of the value of the contributed property.

(2) Definitions. --For purposes of this paragraph (h):

Charitable deduction property means any property (other than money or publicly traded securities, as defined in §1.170A-13(c)(7)(xi)) contributed by the taxpayer in a contribution for which a deduction was claimed under section 170.

Qualified appraisal means a qualified appraisal as defined in §1.170A-13(c)(3).

Qualified appraiser means a qualified appraiser as defined in §1.170A-13(c)(5).

(3) Special rules. --The rules of this paragraph (h) apply regardless of whether §1.170A-13 permits a taxpayer to claim a charitable contribution deduction for the property without obtaining a qualified appraisal. The rules of this paragraph (h) apply in addition to the generally applicable rules concerning reasonable cause and good faith. [Reg. §1.6664-4.]

.01 Historical Comment: Proposed 3/4/91. Adopted 12/30/91 by T.D. 8381. Amended 8/31/95 by T.D. 8617, 12/1/98 by T.D. 8790 and 12/29/2003 by T.D. 9109.


THE FOLLOWING ARE THE 6694 REASONABLE CAUSE REGULATIONS, AS PROPOSED.

1.6694-2(d) Exception for reasonable cause and good faith . The penalty under section 6694(a) will not be imposed if, considering all the facts and circumstances, it is determined that the understatement was due to reasonable cause and that the tax return preparer acted in good faith. Factors to consider include:

(1) Nature of the error causing the understatement . The error resulted from a provision that was complex, uncommon, or highly technical and a competent tax return preparer of tax returns or claims for refund of the type at issue reasonably could have made the error. The reasonable cause and good faith exception, however, does not apply to an error that would have been apparent from a general review of the return or claim for refund by the tax return preparer.

(2) Frequency of errors . The understatement was the result of an isolated error (such as an inadvertent mathematical or clerical error) rather than a number of errors. Although the reasonable cause and good faith exception generally applies to an isolated error, it does not apply if the isolated error is so obvious, flagrant, or material that it should have been discovered during a review of the return or claim for refund. Furthermore, the reasonable cause and good faith exception does not apply if there is a pattern of errors on a return or claim for refund even though any one error, in isolation, would have qualified for the reasonable cause and good faith exception.

(3) Materiality of errors . The understatement was not material in relation to the correct tax liability. The reasonable cause and good faith exception generally applies if the understatement is of a relatively immaterial amount. Nevertheless, even an immaterial understatement may not qualify for the reasonable cause and good faith exception if the error or errors creating the understatement are sufficiently obvious or numerous.

(4) Tax return preparer's normal office practice . The tax return preparer's normal office practice, when considered together with other facts and circumstances, such as the knowledge of the tax return preparer, indicates that the error in question would rarely occur and the normal office practice was followed in preparing the return or claim for refund in question. Such a normal office practice must be a system for promoting accuracy and consistency in the preparation of returns or claims for refund and generally would include, in the case of a signing tax return preparer, checklists, methods for obtaining necessary information from the taxpayer, a review of the prior year's return, and review procedures. Notwithstanding these rules, the reasonable cause and good faith exception does not apply if there is a flagrant error on a return or claim for refund, a pattern of errors on a return or claim for refund, or a repetition of the same or similar errors on numerous returns or claims for refund.

(5) Reliance on advice of others . For purposes of demonstrating reasonable cause and good faith, a tax return preparer may rely without verification upon advice and information furnished by the taxpayer or other party, as provided in §1.6694-1(e). The tax return preparer may reasonably rely in good faith on the advice of, or schedules or other documents prepared by, the taxpayer, another advisor, another tax return preparer, or other party (including another advisor or tax return preparer at the tax return preparer's firm), and who the tax return preparer had reason to believe was competent to render the advice or other information. The advice or information may be written or oral, but in either case the burden of establishing that the advice or information was received is on the tax return preparer. A tax return preparer is not considered to have relied in good faith if --

(i) The advice or information is unreasonable on its face;

(ii) The tax return preparer knew or should have known that the other party providing the advice or information was not aware of all relevant facts; or

(iii) The tax return preparer knew or should have known (given the nature of the tax return preparer's practice), at the time the return or claim for refund was prepared, that the advice or information was no longer reliable due to developments in the law since the time the advice was given.

(6) Reliance on generally accepted administrative or industry practice . The tax return preparer reasonably relied in good faith on generally accepted administrative or industry practice in taking the position that resulted in the understatement. A tax return preparer is not considered to have relied in good faith if the tax return preparer knew or should have known (given the nature of the tax return preparer's practice), at the time the return or claim for refund was prepared, that the administrative or industry practice was no longer reliable due to developments in the law or IRS administrative practice since the time the practice was developed.

COMMENT:

I see the proposed regulations as a “trap.” On one hand they are liberal by opening up the person who you can rely on to a broader field and it offers “reliance on generally accepted or industry practice” as a new factor. BUT OTHER FACTORS WILL BE CONSIDERED BY THE IRS BEFORE THEY PERMIT “REASONABLE CAUSE.” As always, “reasonable cause” is a discretionary rule. For those of us with an IRS controversies tax practice, the IRS is currently aggressive on all discretionary rules. This is little IRS oversight. The last time the IRS considered IRS abuses of power and abuses of discretion occurred in 1997 with the famous Senate Hearings at that time. Since then, the IRS has gotten increasingly difficult on discretionary issues. And the proposed 6694 regulations create some new thresholds such are frequency of errors and the, materiality of the error, Are we going to have the IRS look at the return preparers to see how many times they made errors? Once an error is discovered, it can always be argued by the IRS that it should have been discovered with an adequate review of the return before it was filed. Any error can be argued by the IRS as one that should have been discovered. Any error that impacts on a tax liability can be viewed as a “material” error; the penalty would not even apply without an understatement of tax. That “materiality” provision is a huge opening for any IRS examiner to deny a claim for reasonable cause. There is much more predictability under the 6664 regulations that emphasize reliance on a professional. If the return preparer does use a tax professional, the chances of error would be minimized. It appears that the ability to rely on another return preparer who may not have a strong technical background will facilitate error to the detriment of the return preparers.

The other compliance issues on “analysis” of the relevant technical “authority” would be better accomplished by the best available tax expert rather than another preparer and thereby eliminate the understatement of tax that would necessitate the “reasonable cause” exception.

The proposed regulations also reference “reasonable cause” in the 6695 regulations without indicating whether that term will be defined with reference to the 6664 regulations or the 6694 regulations.

1.6694-2(c)(iii) disclosure

(iii) Requirements for advice . For purposes of satisfying the disclosure standards of paragraphs (c)(3)(i) and (ii) of this section, each return position for which there is a reasonable basis but for which the tax return preparer does not have a reasonable belief that the position would more likely than not be sustained on the merits must be addressed by the tax return preparer. The advice to the taxpayer with respect to each position, therefore, must be particular to the taxpayer and tailored to the taxpayer's facts and circumstances. The tax return preparer is required to contemporaneously document the fact that the advice was provided. There is no general pro forma language or special format required for a tax return preparer to comply with these rules. No form of a general boilerplate disclaimer, however, is sufficient to satisfy these standards. A tax return preparer may choose to comply with the documentation standard in one document covering each position, or in multiple documents covering all of the positions.

The above is a quotation from the proposed regulations dealing with "reasonable basis" disclosures. The return preparer must justify EACH POSITION taken.

IMPORTANT! the return preparer must DOCUMENT advice given and relied upon. Obviously, this means that advice given by a tax attorney or some other tax advisor must be in writing and cite the relevant technical authority as applied to the relevant facts. The legal memorandum must provide an analysis of the authority cited. One cannot just say that they have an oral opinion from a tax expert. The IRS wants to see and evaluate the "document" or memorandum received.

Although this is the only place in the proposed regulations where the word "document" is used, it stands to reason that all positions taken should be document whether or not the position is disclosed and whether or not the tax return preparer relies on the advice of a tax professional.

The documentation of the technical analysis is imortant for another reason other than avoiding the 6694 penalty. The return preparer will also want to supply "substantial authority" to avoid the negligence penalty. Although the "reasonable basis" standard is lower than the "substantial authority" standard, as a matter of wise tax practice, all disclosed positions should meet the "substantial authority" standard to avoid a negligence penalty for a client. This higher standard will also justify the need for your client to pay for the expert technical opinion letter.

It is a strange "trap" for the drafters of the proposed regulations to draft a disclosure rule to avoid the 6694 penalty that is insufficient to negate the client's negligence penalty.

I also read the above quoted language as a message to return preparers to have all disclosed or undisclosed positions supported with a legal memeorandum. Obviously, one would want to do this only for problematical positions or positions that are factually and legally complex. One has to have a sense of the issue and supply written technical support for those issues that could be challanged in an audit examination. For example, we know that the IRS will likely challange home office expenses or travel and entertainment expenses, etc. Those are the positions that should be supported by the statute, regulations, case law, IRM and other authority.
Otherwise, you rund the risk of the section 6694 penalty.

All of the positions taken or discussed in this blog are open for discussion by adding comment to these blogs. Otherwise, you can contact ab@irstaxattorney.com for a discussion of this or any other provision in the proposed regulations.

Please understand that when the 2008 tax returns are filed, you will want to make sure that the tax returns are not selected for audit. Otherwise, you can expect that the disclosed positions will be identfied by the IRS for audit examination. It will be far less expensive for your client to pay for the effort needed to submit a position that is fully documented based on the facts and the law and thereby reduce the risk for audit examination

Liability of return preparer firms - 6694 regs

The proposed regulations confirm that the firm employing the tax return preparer is also liable for the 6694 penalty by reference to the fact that section 1.6694-2(a)(2) and section 1.6694-3(a)(2) of the existing regulations still apply. In short, a firm employing a tax return preparer will also be liable for the 6694 penalty in the following circumstances:


(i) One or more members of the principal management (or principal officers) of the firm or a branch office participated in or knew of the conduct proscribed by section 6694(a);

(ii) The employer or partnership failed to provide reasonable and appropriate procedures for review of the position for which the penalty is imposed; or

(iii) Such review procedures were disregarded in the formulation of the advice, or the preparation of the return or claim for refund, that included the position for which the penalty is imposed.


How many tax preparation firms have no member of prinicpal management or principal officers not involved in reviewing a tax position?

How many tax preparation firms prvide reasonable and appropriate procedures for the preparation of a return? And if there are such procedures, are they "reasonable" and "appropriate?"


The fact is that the prior $250 penalty was so low that there has been close to not attention paid to section 6694 either by the IRS or tax practitioners. I have had numerous tax return preparers involved in civil and criminal examinations and the IRS never raised a 6694 issue. The large size of the penalty will change IRS enforcdement. IRS examiners will not overlook the potential liability of the firm.
Additionally, the word "reckless" in section 6694(b) suggests to me that it should be fairly easy to go after the larger $5,000 penalty because any "negligence" can be viewed as "reckless."

This would be the time for the return preparer professional organizations to write some standards of "review" of a position that industry practice that the industry proposes are "reasonable" and "appropriate" geared to the various size of the return firms. The proposed regulations suggest that the IRS will follow industry practice.

Quite frankly the terms "reasonable" and "appropriate" are so broad that most IRS examiners can charge the "firm" with the negligence penalty.

Section 7206 - return preparer fraud

It is very important to seek the immediate attention of a tax attorney when a return preparer is being investigated by the IRS Criminal Tax Division. The very best time to defend actions taken is before the IRS. It is far more difficult to fashion a defense at the time the case is being considered by the Department of Justice.


Section 7206 fraud by return preparers apply when the preparer willfully makes and subscribes any return, statement, or other document, which contains or is verified by a written declaration that it is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter; or willfully aids or assists in, or procures, counsels, or advises the preparation or presentation under, or in connection with any matter arising under, the internal revenue laws, of a return, affidavit, claim, or other document, which is fraudulent or is false as to any material matter, whether or not such falsity or fraud is with the knowledge or consent of the person authorized or required to present such return, affidavit, claim, or document.

There was a conviction in the case just published. The tax preparer was sentenced following his conviction for aiding in the preparation and filing of false tax returns. In determining the base offense level under the sentencing guidelines, the tax loss was properly calculated based on the aggregate amount of underpaid income tax determined by an IRS examination of each fraudulent return.

The district court was not required to reduce the government's tax loss from the fraud by any unclaimed worthless investment capital loss deductions to which the preparer's taxpayer clients were legitimately entitled. The investors' offsetting capital losses were unrelated to the tax fraud committed by the preparer, and the losses that he had his clients fraudulently claim were ordinary business losses that were neither related to nor in lieu of the worthless investment losses. Additionally, the unclaimed capital losses were tax benefits available to the investor-taxpayers, not to the tax preparer. Consequently, the tax preparer's fraud did not result in any offsetting tax benefit to the government.
Affirming an unreported DC Mo. decision.



United States of America, Plaintiff-Appellee v. Leon Travis Blevins, Defendant-Appellant.

U.S. Court of Appeals, 8th Circuit; 07-3298, September 16, 2008.Affirming an unreported DC Mo. decision.

[ Code Sec. 7206]

Tax crimes: Aiding in preparation and filing of false returns: Conviction and sentence: Sentencing Guidelines: Tax loss calculation. --


LOKEN, Chief Judge: Tax preparer Leon Travis Blevins prepared and filed twenty federal income tax returns for seven taxpayers that falsely claimed Schedule C business losses, Schedule E rental losses, and Form 4797 losses from the sale of business property for the 1999-2002 tax years. At least six of the taxpayers were investors in a foundering business run by Blevins that bought and sold home mortgages and engaged in other real estate activities. Some returns falsely claimed the business's ordinary losses as if they were incurred by the investor-taxpayers. Other claimed losses were wholly fictitious. Blevins pleaded guilty to twenty counts of aiding in the preparation and filing of false tax returns in violation of 26 U.S.C. § 7206(2). He appeals his twenty-one month sentence, arguing that the district court 1 erred in determining tax loss under U.S.S.G. § 2T1.1 because the court failed to take into account the tax effect of investment losses to which his taxpayer clients were entitled. The court released Blevins on his personal recognizance pending resolution of the appeal. Reviewing the district court's interpretation of the Sentencing Guidelines de novo, we affirm. See United States v. Vickers, 528 F.3d 1116, 1120 (8th Cir. 2008) (standard of review).

For sentencing purposes, the Guidelines provide that the base offense level for the offense of filing fraudulent tax returns is the tax loss level from § 2T4.1, or six if there is no tax loss. U.S.S.G. § 2T1.1(a). Tax loss is "the total amount of loss that was the object of the offense ( i.e., the loss that would have resulted had the offense been successfully completed)." § 2T1.1(c)(1). Notes (A)-(C) to § 2T1.1(c)(1) provide that tax loss equals 28% of the underreported income and improperly claimed deductions (34% if the taxpayer is a corporation), plus 100% of any falsely claimed tax credits, "unless a more accurate determination of the tax loss can be made."

At sentencing, the government argued that the tax loss attributable to Blevins's offense conduct was $100,029, the aggregate amount of underpaid income tax determined by an IRS examination of each fraudulent return. 2 This level of loss produced a base offense level of sixteen, see U.S.S.G. § 2T4.1(F), and an advisory guidelines range of 21-27 months in prison. Blevins countered with a letter report from his tax and business valuation expert. Using investment data from the fraud investigation, the expert opined that each taxpayer's investment in Blevins's failed business was "a total loss" and that these losses "appear to be capital losses." Based on the assumption that each investor would use these losses to offset $3,000 of ordinary income each year until the losses were exhausted, the expert calculated that the investors were entitled to capital loss deductions totaling $32,177, "resulting in a net tax loss to the government of $68,074." 3 This lower level of tax loss would produce a base offense level of fourteen, see § 2T4.1(E), resulting in an advisory guidelines sentencing range of 15-21 months in prison.

Relying on the expert's calculations and on the Second Circuit's decision in United States v. Gordon, 291 F.3d 181, 187 (2d Cir. 2002), cert. denied, 537 U.S. 1114 (2003), Blevins argued to the district court, as he does on appeal, that the determination of tax loss under § 2T1.1(c)(1) must take into account the legitimate, unclaimed capital loss deductions to which his taxpayer clients are entitled on account of their worthless investments. The government disagreed, urging the court instead to follow decisions in other circuits concluding that the definition of tax loss in § 2T1.1(c)(1) --"total amount of loss that was the object of the offense" --does not allow a sentencing court to take into account "other unrelated mistakes on the return such as unclaimed deductions." United States v. Chavin, 316 F.3d 666, 677 (7th Cir. 2002); accord United States v. Delfino, 510 F.3d 468, 472-73 (4th Cir. 2007), petition for cert. filed, 76 U.S.L.W. 3569 (Apr. 7, 2008); United States v. Phelps, 478 F.3d 680, 681-82 (5th Cir. 2007), cert. denied, 128 S. Ct. 436 (2007); United States v. Spencer, 178 F.3d 1365, 1368-69 (10th Cir. 1999). The district court agreed with the government.

On appeal, the parties again frame the issue as turning on a conflict between other circuits on the broad question of whether a taxpayer's "unclaimed" deductions or losses may ever be taken into account in determining tax loss for purposes of § 2T1.1(c)(1). The apparent conflict developed after § 2T1.1 was amended in 1993. The prior version defined "tax loss" as "the greater of (1) the total amount of tax that the taxpayer evaded or attempted to evade or (2) 28% of the amount by which the greater of gross income and taxable income was understated;" a comment explained that alternative (2) "should make irrelevant the issue of whether the taxpayer was entitled to offsetting adjustments that he failed to claim." U.S.S.G. § 2T1.1 & cmt. n.4 (1992). The 1993 amendment deleted this comment, leading the Second Circuit to suggest in dicta that § 2T1.1 no longer precluded using legitimate unclaimed deductions to offset a tax loss. United States v. Martinez-Rios, 143 F.3d 662, 670-71 (2d Cir. 1998). The Seventh Circuit disagreed, concluding that the comment was deleted "because the new tax-loss definition specifically excludes consideration of unclaimed deductions on its face by defining tax loss as the 'object of the offense.'" Chavin, 316 F.3d at 678. Three other circuits have agreed with the Seventh.

In Gordon, defendant was convicted of tax evasion for failing to report income he received from a company he controlled. On appeal, he argued that the district court erred in refusing to reduce the tax loss resulting from this unreported income by the tax benefit the company would have received if it had treated the payments as a deductible salary expense. Adopting the reasoning of Martinez-Rios, the Second Circuit agreed in principle but concluded that the error was harmless because Gordon failed to prove that the company would have treated the income he received as a salary expense, as opposed to non-deductible dividends. 291 F.3d at 187.

The theory argued but not proved in Gordon presents the strongest case for allowing unclaimed tax benefits to reduce the government's tax loss because the unclaimed deduction in that case was a tax consequence of the fraud. Taking this type of offsetting tax benefit into account at least arguably comports with the plain language of § 2T1.1(c)(1) --"the loss that would have resulted had the offense been successfully completed." On the other hand, the defendant's failure to claim the offsetting tax benefit in Gordon by taking a corporate salary expense deduction for payments he intended not to report as income helped conceal the fraud. No doubt reflecting this aspect of the issue, the four circuits that have rejected the Second Circuit's reasoning explicitly refuse to interpret § 2T1.1(c)(1) "as giving taxpayers a second opportunity to claim deductions after having been convicted of tax fraud." Spencer, 178 F.3d at 1368, quoted in Chavin, 316 F.3d at 679, in Phelps, 478 F.3d at 682, and in Delfino, 510 F.3d at 473.

In this case, we need not decide whether an unclaimed tax benefit may ever offset tax loss determined by aggregating the offense conduct of underreported income, improper deductions, and false tax credits. First, Gordon is clearly distinguishable. Here, the investors' offsetting capital losses that Blevins is claiming are unrelated to the tax fraud he committed. The Schedule C and Schedule E losses that Blevins had his clients fraudulently claim were ordinary business losses. Such losses presuppose an on-going business, however distressed, not a failed business that has become a worthless investment. Thus, the fraudulently claimed losses were neither related to nor in lieu of worthless investment losses. Indeed, the worthless investment losses were tax benefits that the investors could claim whether or not the fraud was perpetrated. Taking into account unclaimed tax benefits wholly unrelated to the offense of conviction is contrary to the plain meaning of the definition of tax loss in § 2T1.1(c)(1), "the total amount of loss that was the object of the offense ( i.e., the loss that would have resulted had the offense been successfully completed)."

Second, the unclaimed capital losses in this case are tax benefits available to the investor-taxpayers, not to Blevins. So far as this record reveals, those capital losses have not been claimed and remain potentially available to the taxpayers in the future (if they have not already been claimed). Thus, Blevins's fraud did not result in any offsetting tax benefit to the government. Indeed, should the investors properly claim and be entitled to worthless investment capital losses on future returns (or amended past returns), the government will incur a loss of tax revenue in addition to the loss that was the object of Blevins's offense. In these circumstances, the district court properly declined to reduce the government's tax loss from the fraud by the taxpayers' allegedly unclaimed capital loss deductions.

The judgment of the district court is affirmed.

1 The HONORABLE RICHARD E. DORR, United States District Judge for the Western District of Missouri.

2 Application of the 28% default rule in the notes to § 2T1.1(c)(1) would have produced a tax loss of $164,326. However, the IRS calculated its losses based on the investor-taxpayers' marginal tax rates, which were less than 28%. The government proposed the lower figure as reflecting a "more accurate determination," as the notes to § 2T1.1(c)(1) envision.

3 The expert's letter report relied on assumptions not supported by the record. First, the expert opined that capital loss treatment of the taxpayers' worthless investments "is consistent with IRC Section 165." But the record contains no evidence that the investments would qualify as "worthless securities" as defined in 26 U.S.C. § 165(g)(2). Then, having assumed the investments are worthless and qualify for capital loss deductions, she assumed that each investor-taxpayer would offset his or her loss against $3,000 of ordinary income in each tax year to which any unused portion of the losses could be carried forward under 26 U.S.C. § 1212(b). But an investor must apply such losses to any capital gains before offsetting up to $3,000 in ordinary income. See 26 U.S.C. § 1211(b). Nothing in the record supports the expert's assumption that the investors would have no capital gains in the tax years in question. Like the district court, we need not consider these failures of proof.

United States of America, Appellant v. Talmus R. Taylor, Defendant-Appellee.

U.S. Court of Appeals, 1st Circuit; 06-2216, July 9, 2008.

On remand from the SCt, 2008-2 USTC ¶50,432, Remanding an unreported DC Mass. decision..

[ Code Sec. 7206]


A sentence of probation and time in a halfway house imposed on an individual for aiding and assisting in the preparation of false tax returns was remanded for reconsideration. The sentencing court was directed to provide justifications for its sentence in light of the scope and extent of the sentencing court's discretion under the federal sentencing guidelines.


Michael J. Sullivan, United States Attorney, John A. Capin, Paul G. Levenson, Assistant United States Attorneys, for appellant. Bruce T. Macdonald, for defendant-appellee.

Before: Lynch, Chief Judge, and Newman and Torruella, Circuit Judges.

Before Lynch, Chief Judge, Newman and Torruella, Circuit Judges. *


ON REMAND FROM THE SUPREME COURT OF THE UNITED STATES


TORRUELLA, Circuit Judge: Talmus Taylor was sentenced to one year in a halfway house, five years of probation, and a $10,000 fine, for aiding and assisting in the preparation of false tax returns, in violation of 26 U.S.C. §7206(2). Following an appeal by the Government, we vacated the sentence as substantively unreasonable and remanded to the district court. See United States v. Taylor [ 2007-2 USTC ¶50,653], 499 F.3d 94 (1st Cir. 2007), vacated, 128 S.Ct. 878 (2008). The case returns to us on remand from the Supreme Court for further consideration in light of Gall v. United States, 128 S.Ct. 586 (2007).

The Court's decision in Gall, combined with its decisions in Kimbrough v. United States, 128 S.Ct. 558 (2007), and Rita v. United States, 127 S.Ct. 2456 (2007), makes clear that in the post- Booker world, district judges are empowered with considerable discretion in sentencing, as long as the sentence is generally reasonable and the court has followed the proper procedures. In accordance with these decisions, our recent opinions have elaborated on the broad scope of this discretion. See, e.g., United States v. Martin, 520 F.3d 87 (1st Cir. 2008); see also United States v. Rodríguez, 527 F.3d 221 (1st Cir. 2008); United States v. Politano, 522 F.3d 69 (1st Cir. 2008). Recently, in another sentencing case vacated by Gall, we noted this expanded discretion and concluded that the fairest course of action was to provide the district court the opportunity to reconsider its sentence in view of the Supreme Court's elucidation of sentencing procedures, as well as some of the concerns we had expressed in the prior opinion. See United States v. Tom, No. 07-1074, 2008 WL 1886608 (1st Cir. Apr. 30, 2008) (unpublished). We think that course appropriate under the circumstances here as well.

In so doing, we first reiterate some of the important sentencing principles underscored in all of these recent decisions. As clearly outlined in Gall, we review a district court's sentence under a deferential abuse of discretion standard, which involves both a procedural and a substantive inquiry. See Gall, 128 S.Ct. at 597; see also Politano, 522 F.3d at 72. This deference arises from the advantages inherent in the district court's position: "a superior coign of vantage, greater familiarity with the individual case, the opportunity to see and hear the principals and the testimony at first hand, and the cumulative experience garnered through the sheer number of district court sentencing proceedings that take place day by day." Martin, 520 F.3d at 92. Indeed, once the district court has followed the proper procedures, our review of substantive reasonableness is highly discretionary. See id. ("[R]eversal will result if - and only if - the sentencing court's ultimate determination falls outside the expansive boundaries of that universe [of reasonableness].").

Yet, along with this increased discretion to fashion an appropriate sentence goes an accompanying "need for an increased degree of justification commensurate with an increased degree of variance." Martin, 520 F.3d at 91. To be clear, there is no strict formula for determining the bounds of an appropriate sentence, but there is "a certain `sliding scale' effect [that] lurks in the penumbra of modern federal sentencing law; the guidelines are the starting point for the fashioning of an individualized sentence, so a major deviation from them must `be supported by a more significant justification than a minor one.' " Id. (quoting Gall, 128 S.Ct. at 597).

In our prior review of the sentence in this case, we expressed concern that the district court had failed to take all of the 18 U.S.C. §3553(a) factors into account in fashioning the defendant's entirely non-jail sentence for such a serious crime. Our conclusion was not based on any requirement that the justification be "proportional" to the deviation or that the result comply with a mathematic formula defining the outer bounds of reasonableness. Rather, it was that in our view, the court's explanations had failed to justify the overall result.

As in Tom, a ruling on the sentence based on the present record would not fully actualize Gall's effect in "shed[ding] considerable light on the scope and extent of a district court's discretion under the now-advisory federal sentencing guidelines." Martin, 520 F.3d at 88. Given the intervening cases which have further elucidated the district court's discretion in sentencing (as well as underscored the importance of the district court's justifications for that sentence), we think it best to remand to the district court for reconsideration with the benefit of all of these developments, as well as the concerns we expressed in our prior opinion.

So ordered.

* Of the Federal Circuit, sitting by designation.
Sentence. --Fraud and False Statements: Sentence

The Court upheld the taxpayer's conviction for wilfully and knowingly subscribing to joint returns which he did not believe to be true and correct as to every material matter. The taxpayer was not deprived of his constitutional rights by the District Court's denial of his motion to reduce the sentence to merely a fine and not a jail sentence. The sentence was within the maximum penalties provided for violations of Code Sec. 7206(1).

J. Brown, CA-7, 70-2 USTC ¶9521, 428 F2d 1191. Cert. denied, 400 US 941.

There was no error in the refusal of the district court to disclose the contents of a pre-sentence report to the taxpayer's attorney, where there was no constitutional necessity for disclosure and the report contained no adverse information.

J.C. Knupp, CA-4, 71-2 USTC ¶9637, 448 F2d 412.

The trial judge did not abuse his discretion in sentencing the taxpayer to jail for one year for aiding in the preparation of a false return merely because others convicted of similar offenses in the same district were not incarcerated.

W.M. Metcalf, CA-4, 76-1 USTC ¶9192.

The court held that the sentencing judge improperly conditioned taxpayer's probation for willfully and knowingly filing a false income tax return on the condition that he resign as a member of the bar. The court held that this special condition denied him due process by depriving him of his license to practice law without notice or an appropriate hearing.

V.M. Pastore, CA-2, 76-2 USTC ¶9513, 537 F2d 675.

An accountant's conviction for violating Code Sec. 7206(2), which prohibits willfully aiding or assisting in the preparation of a false or fraudulent tax return, constituted a conviction of a criminal offense under the revenue laws of the United States for which he was validly disbarred from practice before the IRS.

P.C. Washburn, DC, 76-1 USTC ¶9323, 409 FSupp 3.

The defendants were not sentenced unduly severely because of their failure to cooperate with the government. The trial judge did not state that leniency would be conditioned upon cooperation, nor was the trial judge required to explain each sentence imposed.

R.S. Bacheler, CA-3, 79-2 USTC ¶9695, 611 F2d 443.

Because 18 U.S.C. §3651 limits to six months the permissible period of actual confinement when a part of a sentence is suspended upon probation, a suspended sentence that involved thirteen months of incarceration was invalid.

M.H. Cohen, CA-4, 80-1 USTC ¶9288, 617 F2d 56.

The sentence of a taxpayer who was convicted of tax fraud was vacated and remanded for resentencing because no record was available to show why his sentence was increased at a second trial.

F.F. Solomon, Jr., CA-9, 87-2 USTC ¶9482, 825 F2d 1292.

The trial court did not abuse its discretion by considering all of the evidence for sentencing purposes, including conduct of which the taxpayers had been acquitted at trial.

C.W. Lawrence, Jr., CA-7, 91-2 USTC ¶50,522.

A federal district court properly determined the sentence of an individual who was convicted of preparing fraudulent tax returns. The trial record supported enhancement of the base offense level under the U.S. Sentencing Guidelines due to the amount of the tax loss, and no evidentiary hearing was necessary.

M.G. Marshall, CA-8, 96-2 USTC ¶50,678, 92 F3d 758.

A tax protestor convicted of various tax crimes under Code Secs. 7206 and 7212 was appropriately sentenced under the United States Sentencing Guidelines. Instead of the usual tax protestor tactic of ignoring tax administration, the defendant filed income tax forms seeking a refund, setting forth huge and obviously fictitious sums of money as his earnings. Although the IRS never considered making the claimed refunds, and the returns harassed and impeded IRS employees, there was no tax evasion, tax loss or false tax credits involved. Thus, the government did not suffer the actual loss required to impose a longer sentence.

M. Krause, DC N.Y., 92-1 USTC ¶50,193, 786 FSupp 1151.

A defendant's conviction for conspiracy to defraud the IRS was upheld because there was no reversible error. The government was permitted to seek enhancement of the defendant's sentence because it proved his intent to accomplish illegal transactions that would cause a tax loss to the government, even though the tax loss would not occur in the year of the transactions.

R.M. Hirschfeld, CA-4, 93-1 USTC ¶50,098.

An individual's conviction and sentence for filing false tax returns were upheld based on sufficient evidence of underreported income. A transaction in which amounts were loaned from a business account of the individual's S corporation to his friend, the loan repayment was deposited into the individual's personal account, and the loan was deducted as a business expense, along with the resulting tax loss to the government, were properly treated as relevant conduct in sentencing the individual under the U.S. Sentencing Guidelines.

T.G. Georges, CA-8, 98-1 USTC ¶50,477.

An individual convicted of aiding and abetting a tax fraud was properly denied a withdrawal of his guilty plea and a continuance to seek assistance of a lawyer at his sentencing. Furthermore, he was correctly adjudged to serve an enhanced sentence in light of the evidence and given his behavior during the proceedings.

R.J. Jagim, CA-8, 93-1 USTC ¶50,093, 978 F2d 1032.

An office manager's conviction for filing a fraudulent return was upheld. However, the trial court erred in imposing a sentence of three years' supervised release because a conviction under Code Sec. 7206(1) is a Class E offense, not a Class D felony. Therefore, a sentence of a one year's supervised release was imposed.

E.A. Pratt Stokes, CA-5, 93-2 USTC ¶50,545, 998 F2d 279.

An unlicensed professional sports agent, who was convicted of aiding in the preparation of false income tax returns and sentenced to a prison term, several years of supervision, and a fine, unsuccessfully appealed his prison sentence, but prevailed in obtaining a reduced period of supervised release. The trial court properly followed the sentencing guidelines for organized tax fraud from which one derives a substantial part of one's income and the guidelines applicable to those in the business of preparing or assisting in the preparation of false returns. However, the trial court improperly classified the nature of the agent's felony.

A.Q. Welch, CA-5, 94-2 USTC ¶50,358.

An individual's sentence following conviction for filing false tax returns was upheld where there was no clear error in the trial court's determination.

J. Swanson, III, CA-4 (unpublished opinion), 97-1 USTC ¶50,398, aff'g, per curiam, an unreported District Court decision.

The trial court erred in failing to determine whether state (California) law prohibited payments for unsolicited client referrals in calculating the base offense level for a former attorney's tax fraud conviction based on his deduction of referral payments. The trial court erroneously used the entire amount that the taxpayer deducted to compute the tax loss for sentencing purposes without considering whether it constituted illegal payments for which deductions were disallowed under Code Sec. 162(c)(2). Since state law did not prohibit payments for unsolicited referrals, the taxpayer was entitled to deduct such payments as business expenses. As a result, payments for unsolicited referrals should not have been included for purposes of computing the tax loss.

R.M. Standard, CA-9, 2000-1 USTC ¶50,319.

The sentence imposed on a taxpayer who was convicted of filing a false return was properly enhanced by the trial court in light of his use of sophisticated means to conceal his offense, his abuse of a position of trust, and his actions in obstructing or impeding the administration of justice during his case.

J.D. Tindall, CA-8 (unpublished opinion), 2000-2 USTC ¶50,585, aff'g an unreported District Court decision.

An individual's conviction for aiding another to file a fraudulent tax return and subsequent sentencing were upheld. The sentence requested by the government was reasonable under the sentencing guidelines given the number of violations and the amount of tax involved. The court was also within its discretion to enhance the sentence because of taxpayer's attempts to intimidate government witnesses before trial.

C. Bruno, CA-2 (unpublished opinion), 2001-1 USTC ¶50,112, aff'g an unreported District Court decision.

A taxpayer who pled guilty to 12 counts of aiding and assisting in the preparation of false tax returns was properly sentenced to a period of 41 months of imprisonment, which was longer than the three-year maximum sentence authorized by statute for each count. The district court had the discretion to run consecutively the sentences for separate counts. However, the court could not sentence him to 41 months for each of his 12 convictions because 41 months exceeded the statutory maximum for any single count.

J. Darden, CA-9 (unpublished opinion), 2002-1 USTC ¶50,291, vac'g and rem'g an unreported District Court decision.

Sentencing guidelines imposed with respect to an individual convicted of tax evasion permitted the inclusion of conditions that the taxpayer refrain from consuming alcohol and participate in community service activities. Those conditions were reasonably related to the goals of probation and rehabilitation. Further, amounts previously remitted by the taxpayer were not deducted from the current taxes owing because those funds were paid in connection with a fraudulent offer-in-compromise that was entered into after the crimes were committed.

F.F. Paul, CA-6 (unpublished opinion), 2003-1 USTC ¶50,222, aff'g, per curiam, an unreported District Court decision.

Sentences imposed were upheld.

K.P. Kontny, CA-7, 2001-1 USTC ¶50,197. Cert. denied, 5/14/2001.

K.L. Utecht, CA-7, 2001-1 USTC ¶50,311.

M. Wick, CA-9 (unpublished opinion), 2002-1 USTC ¶50,456, aff'g an unreported District Court decision.

W.N. Jackson, CA-2 (unpublished opinion), 2003-1 USTC ¶50,478, 65 FedAppx 754, aff'g an unreported District Court decision.

The sentence imposed on an individual convicted of aiding and assisting in the preparation of false federal income tax returns was affirmed. The individual failed to demonstrate that the court's consideration of the relevant sentencing factors was deficient or that the sentence imposed was unreasonable.

A. Jones, CA-6 (unpublished opinion), 2007-1 USTC ¶50,340, 218 FedAppx 488, aff'g an unreported DC Mich. decision.

A federal district court erred in imposing four consecutive one-year terms of supervised release on an individual who pleaded guilty to tax fraud and agreed to make restitution to the IRS. The federal sentencing guidelines require multiple terms of supervised release to run concurrently.

M.J. Spangler, CA-11 (unpublished opinion), 2007-1USTC ¶50,400, 224 FedAppx 890, aff'g in part, vac'g and rem'g in part an unreported DC Fla. decision.

A federal district court did not miscalculate the tax loss when sentencing an individual convicted for filing a false income tax return and assisting others in the preparation of false returns. The calculation was based on the fraudulent tax returns and the testimony of two IRS agents and the taxpayers for whom the individual had prepared false returns.

J.H. Bell, CA-7 (unpublished opinion), 2007-1 USTC ¶50,407, 226 FedAppx 596, aff'g an unreported DC Ill. decision.

A four-level leadership enhancement to the sentence imposed on a tax return preparer who was convicted for aiding and assisting in the preparation of false federal income tax returns was proper. The individual organized a tax fraud scheme that involved a number of taxpayers and caused a large tax loss.

R.E. Reiss, CA-8 (unpublished opinion), 2007-2 USTC ¶50,532, 230 FedAppx, aff'g, per curiam, an unreported DC Minn. decision.

A lawyer and former federal prosecutor's sentence for tax fraud was substantially and procedurally reasonable. Although the individual failed to report as income bribes he received from city vendors while the mayor of Atlanta, the trial court imposed the minimum sentence recommended by the sentencing guidelines. The court followed Booker to calculate the sentence; first establishing the base level of the offense by estimating the government's tax loss and then enhancing the base level for use of sophisticated means of concealment and obstruction of justice. The individual failed to show that his public service was so extraordinary as to justify a downward departure from the sentencing guidelines. The sentence was not excessive because it was less than the maximum allowed by Code Sec. 7206.

W.C. Campbell, CA-11, 2007-2 USTC ¶50,609, 491 F3d 1306.

A federal district court's adoption of the government's tax loss calculation when sentencing an individual convicted for willfully filing false tax returns was reasonable. The court reasonably concluded that, even though he had not reported all of his sales income, the individual had claimed all of his deductible expenses.

V. Roudakov, CA-3 (unpublished opinion), 2007-2 USTC ¶50,700, 239 FedAppx 776, aff'g an unreported DC Pa., decision.

An individual's conviction and sentence for aiding and abetting the filing of fraudulent tax returns was upheld. The trial court properly considered the pre-sentence report, the amount of loss, the severity of the crime, the necessity for deterrence and the defendant's statement, and the sentence imposed was 18 months less than the minimum in the applicable sentencing guidelines range. Therefore, the sentence imposed was reasonable.

C. Contreras, CA-2 (unpublished opinion), 2007-2USTC ¶50,712, 247 FedAppx 293, aff'g an unreported DC N.Y. decision.

The sentence imposed on a certified public accountant for aiding and advising the filing of a false income tax return was reasonable. The trial court properly imposed a sentence of a one year's supervised release, as recommended by the sentencing guidelines, since he was convicted of a Class E felony and also sentenced to more than one year imprisonment. Further, the trial court had a reasoned basis for imposing the sentence.

L.P. Bridges, CA-9 (unpublished opinion), 2007-2 USTC ¶50,779, aff'g, an unreported DC Wash., decision.

A tax return preparer's sentence for aiding in the preparation of a false tax return was upheld. The trial court did not err in calculating the tax loss attributable to his conduct, and the court was entitled to consider uncharged and acquitted conduct in determining the return preparer's sentence when such conduct was proven by a preponderance of the evidence.

A.T. Fokkoun-Ngassa, CA-4 (unpublished opinion), 2007-2 USTC ¶50,794, aff'g, per curiam, an unreported DC Va., decision.

The sentence imposed on an individual for filing false, fictitious and fraudulent income tax returns was reasonable. The district court did not abuse its discretion when it denied a downward departure or variance of the sentence based on exceptional family circumstances because it found that the individual's criminal history and utilization of family members in the commission of his offense constituted as factors weighing against a variance. Moreover, the court considered the properly calculated guidelines range before imposing the sentence and did not treat the sentencing guidelines as mandatory.

V.T. Carter, CA-6, 2008-1 USTC ¶50,124, 510 F3d 593.

The winner of a reality television show failed to establish that he was improperly convicted and sentenced for filing false tax returns. The sentence imposed, which was at the higher end of the sentencing guidelines range, was not unreasonable. The court was entitled to accept the testimony of the government's witness as providing a more accurate determination of the tax loss than would be determined using the sentencing guidelines. A perjury enhancement was also properly applied after the court noted that he lied on the witness stand.

R. Hatch, CA-1, 2008-1 USTC ¶50,166.

Sentence imposed on a tax preparer for willfully preparing false or fraudulent income tax returns was reasonable and within the Sentencing Guidelines range. The court did not err in applying a sentencing enhancement for obstruction of justice or in calculating the tax loss based on IRS interviews with the individual's customers.

G.D. Goosby, CA-6, 2008-1 USTC ¶50,331.

An individual who pleaded guilty to two counts of filing false income tax returns was properly sentenced to the statutory maximum of three years imprisonment on each count, to be served concurrently. The court could have imposed the sentences consecutively, its comment comparing the individual's tax offense to drug trafficking crimes was not illegal or improper and the court acted within its discretion by allowing and considering testimony regarding the basis of a pending state charge to address the history and character of the individual.

B. Tockes, CA-7, 2008-2 USTC ¶50,411.

An individual could not appeal the sentence imposed on him following his conviction for conspiracy and aiding and assisting in the preparation of false tax returns. The individual had entered a guilty plea and waived his right to appeal.

D. Shields, CA-9 (unpublished opinion), 2008-2 USTC ¶50,425, aff'g an unreported DC Calif. decision.

The U.S. Supreme Court has summarily vacated and remanded a Court of Appeals ruling that a sentence of probation and time in a halfway house imposed on a part-time income tax preparer for aiding and assisting in the preparation of false tax returns was unreasonable. The Court requested the Appeals court reconsider its ruling in light of Gall v. United States, 128 S. Ct. 586 (2007).

T.R. Taylor, SCt, 2008-2 USTC ¶50,432, vac'g and rem'g, CA-1, 2007-2 USTC ¶50,653.

A sentence of probation and time in a halfway house imposed on an individual for aiding and assisting in the preparation of false tax returns was remanded for reconsideration. The sentencing court was directed to provide justifications for its sentence in light of the scope and extent of the sentencing court's discretion under the federal sentencing guidelines.

T.R. Taylor, CA-1, 2008-2 USTC ¶50,436, on rem'd from SCt, 2008-2 USTC ¶50,432.

The sentence imposed on an individual for tax preparer fraud was vacated and remanded a second time for resentencing because the government did not prove the amount of the tax loss by a preponderance of the evidence and did not consider family circumstances as a mitigating circumstance. The court prejudged the amount of tax loss without giving due consideration to the individual's challenges to the amount of tax loss and whether the individual was responsible for the loss, thereby undermining the fairness of the sentencing hearing. Further, the district court did not consider whether the individual's incarceration would impose an extraordinary hardship on his family, thereby constituting a mitigating factor that would justify imposing a below-guidelines sentence.

J.P. Schroeder, CA-7, 2008-2 USTC ¶50,477.


SEC. 7206. FRAUD AND FALSE STATEMENTS.
Any person who --

7206(1) DECLARATION UNDER PENALTIES OF PERJURY. --Willfully makes and subscribes any return, statement, or other document, which contains or is verified by a written declaration that it is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter; or

7206(2) AID OR ASSISTANCE. --Willfully aids or assists in, or procures, counsels, or advises the preparation or presentation under, or in connection with any matter arising under, the internal revenue laws, of a return, affidavit, claim, or other document, which is fraudulent or is false as to any material matter, whether or not such falsity or fraud is with the knowledge or consent of the person authorized or required to present such return, affidavit, claim, or document; or

7206(3) FRAUDULENT BONDS, PERMITS, AND ENTRIES. --Simulates or falsely or fraudulently executes or signs any bond, permit, entry, or other document required by the provisions of the internal revenue laws, or by any regulation made in pursuance thereof, or procures the same to be falsely or fraudulently executed or advises, aids in, or connives at such execution thereof; or

7206(4) REMOVAL OR CONCEALMENT WITH INTENT TO DEFRAUD. --Removes, deposits, or conceals, or is concerned in removing, depositing, or concealing, any goods or commodities for or in respect whereof any tax is or shall be imposed, or any property upon which levy is authorized by section 6331, with intent to evade or defeat the assessment or collection of any tax imposed by this title; or

7206(5) COMPROMISES AND CLOSING AGREEMENTS. --In connection with any compromise under section 7122, or offer of such compromise, or in connection with any closing agreement under section 7121, or offer to enter into any such agreement, willfully --

7206(5)(A) CONCEALMENT OF PROPERTY. --Conceals from any officer or employee of the United States any property belonging to the estate of a taxpayer or other person liable in respect of the tax, or

7206(5)(B) WITHHOLDING, FALSIFYING, AND DESTROYING RECORDS. --Receives, withholds, destroys, mutilates, or falsifies any book, document, or record, or makes any false statement, relating to the estate or financial condition of the taxpayer or other person liable in respect of the tax;

shall be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation) or imprisoned not more than 3 years, or both, together with the costs of prosecution.

------------------


For more information about tax return preparer fraud or taxpayer fraud, contact ab@irstaxattorney.com 888 712-7690 ex 106

6694 proposed regs - the "responsible preparer"

The proposed regulations eliminate the "one preparer per firm" rule. A return preparer is the person primarily responsible for the position on the return or claim for refund giving rise to the understatement. Under proposed §1.6694-1(b)(1), only one person within a firm will be considered primarily responsible for each position giving rise to an understatement and subject to the penalty. Proposed §1.6694-1(b)(2) provides that the individual who signs the return or claim for refund as the tax return preparer will generally be considered the person that is primarily responsible for all of the positions on the return or claim for refund giving rise to an understatement. The "one preparer per firm" rule, however, is revised by these proposed regulations if it is concluded based upon information received from the signing tax return preparer (or other relevant information from a source other than the signing tax return preparer) that another person within the signing tax return preparer's same firm was primarily responsible for the position(s) giving rise to the understatement. However, the proposed regulations also consider reliance on another professional at the same firm with greater knowledge of, and responsibility for, the accuracy of a position giving rise to the understatement.

With a one penalty per position rule within the tax preparation firm, the IRS could create fights within the firm. Suppose the firm has three persons who look at the return: A, B, and C. Client paid $6,000 for the 1120 return. A signs the return and does most of the data input. B is the reviewer and C is the technical advisor. If the IRS says B should be hit with the penalty, B might be able to argue that C has the "greater knowlede." This scenario is probable because the penaly would be $3,000 and there is a predictable conflict within the tax preparation firm. B and C could each present argument to the IRS that the other person should be hit with the penalty. Given the word "reckless" in 6694(b), I believe that the penalty can be $5,000 in any case that the IRS argues "reckless" conduct. Who could argue that a return preparer is not "reckless" for misapplying a complex tax issue.
"Reckless" conduct is deemed "negligence" in section 6662(c).


Send comment to ab@irstaxattorney.com

Substantial Authority Standard change in law

The Renewable Energy and Job Creation Act of 2008, introduced by Rangle, provides for
an amendment to 6694(a) to provide for a "substantial authority" standard in lieu of the "more likely than not" standard. There is little doubt this will become law The same provision is in a Senate Bill that has been controversial because of other legislation that is part of the same bill.

There is no apparent opposition to this amendment which was heavily lobbied by the tax preparer professional organization.

It will reduce the standard of conduct to more than 40% accuracy instead of more than 50%. It does not change the need for the return preparers to support their positions with a technical "analysis" of the relevant "authorities" (i.e., all of the relevant tax law). The standard is still a subjective standard, and the return preparer industry still needs to wake up and understand that the days of taking positions without verifying and supporting the positions taken with a technical analysis are over. Clients have the same "substantial authority" standard to negate the section 6662 penalty.

The Senate action on the same legislative change should be taken before the end of September.

House Ways and Means Committee Release: Chairman Rangel Introduces Renewable Energy and Job Creation Act of 2008

September 24, 2008

110th Congress

The Honorable Charles B. Rangel, Chairman



FOR IMMEDIATE RELEASE



Contact: Matthew Beck (202) 225-1417



September 23, 2008




Chairman Rangel Introduces Renewable Energy and Job Creation Act of 2008





Senate now has an opportunity to pass and help enact energy tax incentives without adding to the deficit


Washington, DC - In response to recent action by the U.S. Senate, Ways and Means Committee Chairman Charles B. Rangel today introduced H.R. 6049, the Renewable Energy and Job Creation Act of 2008. This bill would amend Senate-passed legislation to ensure that tax incentives provided to encourage renewable energy and energy conservation fit within the scope of the offsets approved by the Senate.

"Tonight, the U.S. Senate finally approved a package of energy tax provisions and offsets to help establish America's energy independence and reduce our dependency on foreign oil," said Chairman Rangel. "Sadly, they did not live within their means, and their bill would add billions to the national deficit at a time when we can hardly afford it. The House will soon consider, and pass, legislation providing the Senate with an opportunity to help enact these tax incentives, fully offset by the provisions they have already blessed. This vote should be a no-brainer for the Senators already on record supporting these provisions."

A more detailed summary of the provisions is included below. The bill is ready for consideration by the House of Representatives as early as Wednesday, September 24.




H.R. 6049





Renewable Energy and Job Creation Tax





Act of 2008





September 23, 2008


Summary: The House Amendment to the Senate Amendment to H.R. 6049, the Renewable Energy and Job Creation Tax Act of 2008 , will provide approximately $16 billion of tax incentives for investment in renewable energy, carbon capture and sequestration demonstration projects, energy efficiency and conservation. The bill will also extend $27 billion of expiring temporary tax provisions, including the research and development credit, special rules for active financing income, the State and local sales tax deduction, the deduction for out-of-pocket expenses for teachers, and the deduction for qualified tuition expenses. In addition, the bill provides $3 billion of additional tax relief for individuals through an expansion of the refundable child tax credit. The bill would be offset using the same revenue-raising provisions that were included in the Senate amendment to H.R. 6049, which would (1) prevent the understatement of foreign oil and gas extraction income in calculating foreign tax credits; (2) freeze the section 199 deduction for oil and gas companies at 6%; (3) provide for broker reporting of customer's basis in securities; (4) extend the FUTA surtax for one year; (5) extend and increase funding for the Oil Spill Liability Trust Fund; and (6) close a tax loophole that allows individuals that work for certain offshore corporations, such as hedge fund managers, to defer tax on their compensation. These revenue-raising provisions passed the Senate today by a vote of 93 to 2.




Energy Tax Incentives




I. Energy Production Incentives




Renewable Energy Incentives


Long-term extension and modification of renewable energy production tax credit. The bill would extend the placed-in-service date for wind facilities for one year (through December 31, 2009). The bill would also extend the placed-in-service date for two and a half years (through June 30, 2011) for certain other qualifying facilities: closed-loop biomass; open-loop biomass; geothermal; small irrigation; hydropower; landfill gas; and waste-to-energy facilities. The bill would also include a new category of qualifying facilities that will benefit from the longer June 30, 2011 placed-in-service date --facilities that generate electricity from marine renewables (e.g., waves and tides). The bill would cap the aggregate amount of tax credits that can be earned for these qualifying facilities placed in service after December 31, 2009 to an amount that has a present value equal to 35% of the facility's cost. The bill would update the definition of an open-loop biomass facility, the definition of a waste-to-energy facility, and the definition of a non-hydroelectric dam. This proposal is estimated to cost $5.983 billion over 10 years.

Long-term extension and modification of solar energy and fuel cell investment tax credit. The bill would extend the 30% investment tax credit for solar energy property and qualified fuel cell property and the 10% investment tax credit for microturbines for eight years (through the end of 2016). It also would increase the $500 per half kilowatt of capacity cap for qualified fuel cells to $1,500 per half kilowatt of capacity. The bill would remove an existing limitation that prevents public utilities from claiming the investment tax credit. The bill would also provide a new 10% investment tax credit for combined heat and power systems. The bill would also allow these credits to be used to offset alternative minimum tax (AMT). This proposal is estimated to cost $1.765 billion over 10 years.

Long-term extension and modification of the residential energy-efficient property credit. The bill would extend the credit for residential solar property for eight years (through the end of 2016). The bill would also eliminate the annual credit cap (currently capped at $2,000) for solar electric property. The bill would include residential small wind equipment and geothermal heat pumps as property qualifying for this credit. The bill would also allow the credit to be used to offset alternative minimum tax (AMT). This proposal is estimated to cost approximately $1.316 billion over 10 years.

Sales of electric transmission property. The bill would extend the present-law deferral of gain on sales of transmission property by vertically integrated electric utilities to FERC-approved independent transmission companies. Rather than recognizing the full amount of gain in the year of sale, this provision would allow gain on such sales to be recognized ratably over an 8-year period. The rule applies to sales before January 1, 2010. This proposal is revenue neutral over 10 years.




Carbon Mitigation Provisions


Carbon capture and sequestration (CCS) demonstration projects. The bill would provide $1.1 billion of tax credits for the creation of advanced coal electricity projects and certain coal gasification projects that demonstrate the greatest potential for carbon capture and sequestration (CCS) technology. Of these $1.1 billion of incentives, $950 million would be awarded to advanced coal electricity projects and $150 million would be awarded to certain coal gasification projects. These tax credits would be awarded by Treasury through an application process, with the applicants that demonstrate the greatest carbon capture and sequestration percentage of total CO/2/ emissions receiving the highest priority. Applications would not be considered unless applicants can demonstrate that either their advanced coal electricity project would capture and sequester at least 65% of the facility's carbon dioxide emissions or that their coal gasification project would capture and sequester at least 75% of the facility's carbon dioxide emissions. Once these credits are awarded, recipients that fail to meet these minimum levels of carbon capture and sequestration would forfeit these tax credits. This proposal is estimated to cost $1.044 billion over 10 years.

Refund of certain coal excise taxes unconstitutionally collected from exporters. The Courts have determined that the Export Clause of the U.S. Constitution prevents the imposition of the coal excise tax on exported coal and, therefore, taxes collected on such exported coal are subject to a claim for refund. The bill would create a new procedure under which certain coal producers and exporters may claim a refund of these excise taxes that were imposed on coal exported from the United States. Under this procedure, coal producers or exporters that exported coal during the period beginning on or after October 1, 1990 and ending on or before the date of enactment of the bill, may obtain a refund (plus interest) from the Treasury of excise taxes paid on such exported coal and any interest accrued from the date of overpayment. This proposal is estimated to cost $199 million over 10 years.

Solvency for the Black Lung Disability Trust Fund. The bill would enact the President's proposal to bring the Black Lung Disability Trust Fund out of debt. Under current law, an excise tax is imposed on coal at a rate of $1.10 per ton for coal from underground mines and $0.55 per ton for coal from surface mines (aggregate tax per ton capped at 4.4 percent of the amount sold by the producer). Receipts from this tax are deposited in the Black Lung Disability Trust Fund, which is used to pay compensation, medical and survivor benefits to eligible miners and their survivors and to cover costs of program administration. The Trust Fund is permitted to borrow from the general fund any amounts necessary to make authorized expenditures if excise tax receipts do not provide sufficient funding. Reduced rates of excise tax apply after the earlier of December 31, 2013 or the date on which the Black Lung Disability Trust Fund has repaid, with interest, all amounts borrowed from the general fund of the Treasury. The President's Budget proposes that the current excise tax rate should continue to apply beyond 2013 until all amounts borrowed from the general fund of the Treasury have been repaid with interest. After repayment (or January 1, 2019, if earlier), the reduced excise tax rates of $0.50 per ton for coal from underground mines and $0.25 per ton for coal from surface mines would apply (and the aggregate tax per ton would be capped at 2 percent of the amount sold by the producer). This proposal is estimated to raise $1.287 billion over 10 years.

Carbon audit of the tax code. The bill directs the Secretary of the Treasury to request that the National Academy of Sciences undertake a comprehensive review of the tax code to identify the types of specific tax provisions that have the largest effects on carbon and other greenhouse gas emissions and to estimate the magnitude of those effects. This proposal has no revenue effect.



II. Transportation and Domestic Fuel Security

Expansion of allowance for property to produce cellulosic alcohol. Under current law, taxpayers are allowed to immediately write off 50% of the cost of facilities that produce cellulosic ethanol if such facilities are placed in service before January 1, 2013. Consistent with other provisions in the bill that seek to be technology neutral, the bill would allow this write off to be available for the production of other cellulosic biofuels in addition to cellulosic ethanol. This proposal is estimated to be revenue neutral over 10 years.

Extension of biodiesel production tax credit; extension and modification of renewable diesel tax credit. The bill would extend for one year (through December 31, 2009) the $1.00 per gallon production tax credits for biodiesel and the small agri-biodiesel producer credit of 10 cents per gallon. The bill would also extend for one year (through December 31, 2009) the $1.00 per gallon production tax credit for diesel fuel created from biomass. The bill would eliminate the current-law disparity in credit for biodiesel and agri-biodiesel and eliminates the requirement that renewable diesel fuel must be produced using a thermal depolymerization process. As a result, the credit would be available for any diesel fuel created from biomass without regard to the process used so long as the fuel is usable as home heating oil, as a fuel in vehicles, or as aviation jet fuel. The bill would also clarify that the $1 per gallon production credit for renewable diesel is limited to diesel fuel that is produced solely from biomass. Diesel fuel that is created by co-processing biomass with other feedstocks (e.g., petroleum) would be eligible for the 50 cent per gallon tax credit for alternative fuels. This proposal is estimated to cost $401 million over 10 years.

Plug-in electric drive vehicle credit. The bill establishes a new credit for each qualified plug-in electric drive vehicle placed in service during each taxable year by a taxpayer. The base amount of the credit is $3,000. If the qualified vehicle draws propulsion from a battery with at least 5 kilowatt hours of capacity, the credit amount is increased by $200, plus another $200 for each kilowatt hour of battery capacity in excess of 5 kilowatt hours up to 15 kilowatt hours. Taxpayers may claim the full amount of the allowable credit up to the end of the first calendar quarter after the quarter in which the manufacturer records 60,000 sales. The credit is reduced in following calendar quarters. The credit would be available against the alternative minimum tax (AMT). This proposal is estimated to cost $1.056 billion over 10 years.

Incentives for idling reduction units and advanced insulation for heavy trucks. The bill would provide an exemption from the heavy vehicle excise tax for the cost of idling reduction units, such as auxiliary power units (APUs), which are designed to eliminate the need for truck engine idling (e.g., to provide heating, air conditioning, or electricity) at vehicle rest stops or other temporary parking locations. The bill would also exempt the installation of advanced insulation, which can reduce the need for energy consumption by transportation vehicles carrying refrigerated cargo. Both of these exemptions are intended to reduce carbon emissions in the transportation sector. This proposal is estimated to cost $95 million over 10 years.

Restructuring of New York Liberty Zone tax credits. The bill would implement a proposal included in the President's FY 2009 Budget to restructure disaster relief that was provided to the City of New York and the State of New York to rebuild Ground Zero in the wake of the September 11\th/ terrorist attacks on Lower Manhattan. Because these benefits have not served their intended purpose, the President asked Congress to provide the City of New York and the State of New York with tax credits for expenditures made for mass transit projects connecting with the New York Liberty Zone. This proposal is estimated to cost $1.129 billion over 10 years.

Fringe benefit for bicycle commuters. The bill would allow employers to provide employees that commute to work using a bicycle limited fringe benefits to offset the costs of such commuting (e.g., bicycle storage). This proposal is estimated to cost $10 million over 10 years.

Extension and increase of alternative refueling stations tax credit. The bill would increase the 30% alternative refueling property credit for businesses (capped at $30,000) to 50% (capped at $50,000). The credit provides a tax credit to businesses (e.g., gas stations) that install alternative fuel pumps, such as fuel pumps that dispense E85 fuel and natural gas. The bill would also extend this credit through the end of 2010 (through the end of 2014 in the case of natural gas refueling property). In addition, the bill would increase the 30% alternative refueling property credit for individuals (capped at $1,000) to 50% (capped at $2,000) and would extend the availability of this credit for natural gas home refueling pumps through 2017. This proposal is estimated to cost $237 million over 10 years.

Publicly Traded Partnership Income Treatment of Alternative Fuels. Under current law, a publicly traded partnership is taxable as a corporation unless 90% or more of its income is qualifying income. Although income derived from transporting oil and gas through pipelines is qualifying income, income derived from transporting certain alternative fuels, such as ethanol, is not qualifying income. The bill would permit publicly traded partnerships to treat the income derived from the transportation or storage of certain alternative fuels as qualifying income. This proposal is estimated to cost $76 million over 10 years .



III. Energy Conservation and Efficiency

Extension and modification of credit for energy-efficiency improvements to existing homes. The bill would extend the tax credits for improvements to energy-efficient existing homes for 2009 and would include energy-efficient biomass fuel stoves as a new class of energy-efficient property eligible for a consumer tax credit of $300. This proposal is estimated to cost $725 million over 10 years.

Extension of energy-efficient commercial buildings. The bill would extend the energy-efficient commercial buildings deduction for five years (through December 31, 2013). This proposal is estimated to cost $891 million over 10 years.

Modification and extension of energy-efficient appliance credit. The bill would modify the existing energy-efficient appliance credit and extend this credit for three years (through the end of 2010). This proposal is estimated to cost $323 million over 10 years.

Accelerated depreciation for smart meters and smart grid systems. The bill would provide accelerated depreciation for smart electric meters and smart electric grid systems. Under current law, taxpayers are generally able to recover the cost of this property over the course of 20 years. The bill would cut the cost recovery time in half by allowing taxpayers to recover the cost of this property over a 10-year period. This proposal is estimated to cost $921 million over 10 years .

Extension and modification of qualified green building and sustainable design project bond. The bill would extend the authority to issue qualified green building and sustainable design project bonds through the end of 2012. Authority to issues these bonds is currently set to expire on September 30, 2009. The bill would also clarify the application of the reserve account rules to multiple bond issuances. This proposal is estimated to cost $45 million over 10 years.




Extension of Temporary Tax Provisions




I. Extenders Primarily Affecting Individuals

Extension of the deduction of State and local general sales taxes. The bill would for one year (through 2008) extend the election to take an itemized deduction for State and local general sales taxes in lieu of the itemized deduction permitted for State and local income taxes. This proposal is estimated to cost $1.742 billion over 10 years.

Extension of above-the-line deduction for qualified tuition and related expenses. The bill would for one year (through 2008) extend the above-the-line tax deduction for qualified education expenses. For tax year 2007, the maximum deduction was $4,000 for taxpayers with AGI of $65,000 or less ($130,000 for joint returns) or $2,000 for taxpayers with AGI of $80,000 or less ($160,000 for joint returns). This proposal is estimated to cost $1.223 billion over 10 years.

Extension of special rules for regulated investment companies. The bill would for one year (through 2008) extend the tax treatment of interest-related dividends, short-term capital gain dividends, and other special rules applicable to foreign shareholders that invest in regulated investment companies. This proposal is estimated to cost $81 million over 10 years.

Extension of tax-free distributions from individual retirement plans for charitable purposes. The bill would for one year (through 2008) extend the provision that permits tax-free charitable contributions from an Individual Retirement Account (IRA) of up to $100,000 per taxpayer, per taxable year. This proposal is estimated to cost $465 million over 10 years.

Extension of above-the-line deduction for certain expenses of elementary and secondary school teachers. The bill would for one year (through 2008) extend the $250 above-the-line tax deduction for teachers and other school professionals for expenses paid or incurred for books, supplies (other than non-athletic supplies for courses of instruction in health or physical education, computer equipment (including related software and services), other equipment, and supplementary materials used by the educator in the classroom for one year (i.e., to expenses paid or incurred in 2008). This proposal is estimated to cost $190 million over 10 years.



II. Extenders Primarily Affecting Businesses

Extension of R&D credit. The bill would for one year (through 2008) extend the research credit for one year. This proposal is estimated to cost $8.761 billion over 10 years.

Extension of Indian employment credit. The bill would for one year (through 2008) extend the business tax credit for employers of qualified employees that work and live on or near an Indian reservation. The credit is for wages and health insurance costs paid to qualified employees (up to $20,000) in the current year over the amount paid in 1993. Wages for which the work opportunity tax credit is available are not qualified wages for the Indian employment tax credit. This proposal is estimated to cost $59 million over 10 years.

Extension of New Markets Tax Credit . The bill would for one year (through 2008) extend the new markets tax credit, permitting a $3.5 billion maximum annual amount of qualified equity investments. This proposal is estimated to cost $1.315 billion over 10 years.

Extension of railroad track maintenance credit. The bill would for one year (through 2008) extend the railroad track maintenance credit. The railroad track maintenance credit provides Class II and Class III railroads (e.g., short-line railroads) with a tax credit equal to 50 percent of gross expenditures for maintaining railroad tracks that they own or lease. This proposal is estimated to cost $165 million over 10 years.

Extension of 15-year straight-line cost recovery for qualified leasehold improvements and qualified restaurant improvements The bill would for one year (through 2008) extend the special 15-year cost recovery period for certain leasehold and qualified restaurant improvements. Absent an extension of this provision, the cost recovery period for these facilities would be 39 years. This proposal is estimated to cost $3.250 billion over 10 years.

Extension of 7-year straight-line cost recovery period for motorsports entertainment complexes. The bill would for one year (through 2008) extend the special 7-year cost recovery period for property used for land improvement and support facilities at motorsports entertainment complexes. Absent an extension of this provision, the cost recovery period for these facilities would be 15 years. This proposal is estimated to cost $48 million over 10 years.

Extension of accelerated depreciation for business property on an Indian reservation. The bill would for one year (through 2008) extend the placed-in-service date for the special depreciation recovery period for qualified Indian reservation property. In general, qualified Indian reservation property is property used predominantly in the active conduct of a trade or business within an Indian reservation, which is not used outside the reservation on a regular basis and was not acquired from a related person. This proposal is estimated to cost $151 million over 10 years.

Extension of expensing of "brownfields" environmental remediation costs The bill would for one year (through 2008) extend the provision that allows for the expensing of costs associated with cleaning up hazardous ("brownfield") sites. This proposal is estimated to cost $178 million over 10 years.

Extension of deduction allowable with respect to income attributable to domestic production activities in Puerto Rico. The bill would for one year (through 2008) extend the provision extending the section 199 domestic production activities deduction to activities in Puerto Rico. This proposal is estimated to cost $116 million over 10 years.

Extension of special tax treatment of certain payments to controlling exempt organizations. The bill would for one year (through 2008) extend the special rules for interest, rents, royalties and annuities received by a tax exempt entity from a controlled entity. This proposal is estimated to cost $28 million over 10 years.

Reauthorization of Qualified Zone Academy Bonds (QZABs). The bill allows an additional $400,000,000 of QZAB issuing authority to State and local governments, which can be used to finance renovations, equipment purchases, developing course material, and training teachers and personnel at a qualified zone academy. In general, a qualified zone academy is any public school (or academic program within a public school) below college level that is located in an empowerment zone or enterprise community and is designed to cooperate with businesses to enhance the academic curriculum and increase graduation and employment rates. QZABs are a form of tax credit bonds which offer the holder a Federal tax credit instead of interest. This proposal is estimated to cost $201 million over 10 years.

Extension of tax incentives for investment in the District of Columbia. The bill would for one year (through 2008) extend the designation of certain economically depressed census tracts within the District of Columbia as the District of Columbia Enterprise Zone. Businesses and individual residents within this enterprise zone are eligible for special tax incentives. The bill would also for one year (through 2008) extend the $5,000 first-time homebuyer credit for the District of Columbia. This proposal is estimated to cost $129 million over 10 years.

Extension of American Samoa economic development credit. The bill would for one year (through 2008) extend the American Samoa economic development credit. In general, this credit provides certain domestic corporations operating in American Samoa with a possessions tax credit to offset their U.S. tax liability on income earned in American Samoa from active business operations, sales of assets used in a business, or certain investments in American Samoa. This proposal is estimated to cost $16 million over 10 years.

Extension of enhanced charitable deduction for contributions of food inventory. The bill would for one year (through 2008) extend the provision allowing businesses to claim an enhanced deduction for the contribution of food inventory. This proposal is estimated to cost $42 million over 10 years.

Enhanced charitable deduction for contributions of book inventories to public schools. The bill would for one year (through 2008) extend the provision allowing C corporations to claim an enhanced deduction for contributions of book inventory to public schools (kindergarten through grade 12). This proposal is estimated to cost $22 million over 10 years.

Extension of enhanced deduction for corporate contributions of computer equipment for educational purposes. The bill would for one year (through 2008) extend a provision that encourages businesses to contribute computer equipment and software to elementary, secondary, and post-secondary schools by allowing an enhanced deduction for such contributions. This proposal is estimated to cost $252 million over 10 years.

Extension of special rule for S corporations making charitable contributions of property. The bill would for one year (through 2008) extend the provision allowing S corporation shareholders to take into account their pro rata share of charitable deductions even if such deductions would exceed such shareholder's adjusted basis in the S corporation. The bill would also make a technical correction clarifying the application of this provision. This proposal is estimated to cost $63 million over 10 years.

Extension of work opportunity tax credit for Hurricane Katrina employees. The bill would for one year (through 2008) extend the provision that expired in August of 2007 which allowed employers to claim the work opportunity tax credit for hiring employees who were affected by Hurricane Katrina. This proposal is estimated to cost $16 million over 10 years.

Extension of active financing exception. The bill would for one year (through 2009) extend the active financing exception from Subpart F of the tax code. This proposal is estimated to cost $3.970 billion over 10 years.

Extend look-through treatment of payments between related controlled foreign corporations. The bill would for one year (through 2009) extend the current law look-through treatment of payments between related controlled foreign corporations. This proposal is estimated to cost $611 million over 10 years.

Extend special expensing rules for certain film and television productions. The bill would for one year (through 2009) extend the current law special expensing rules for U.S. film and television productions for. This proposal is estimated to cost $11 million over 10 years.



III. Other Extenders

Extension of disclosures of certain tax return information. The bill would permanently extend the current-law terrorist activity disclosure provisions. This proposal estimated to have no revenue effect.

Extension of authority for undercover operations. The bill would permanently extend the authorization for the IRS to engage in certain activities related to undercover operations, such as purchasing property, organizing business entities and use the proceeds from an undercover operation to pay additional expenses incurred in the undercover operation. This proposal is estimated to have a negligible revenue effect.

Extension of temporary increase in limit on cover over of run excise tax revenues to Puerto Rico and the Virgin islands. The bill would for one year (through 2008) extend the provision providing for payment of $13.25 per gallon to cover over a $13.50 per proof gallon excise tax on distilled spirits produced in or imported into the United States. This proposal is estimated to cost $96 million over 10 years.




Additional Tax Relief


Change in refundable child credit. The bill would increase the eligibility for the refundable child tax credit in 2008. The child tax credit is refundable to the extent of 15 percent of the taxpayer's earned income in excess of approximately $12,050 as a result of inflation adjustments to the original floor of $10,000. The bill would reduce this floor to $8,500 for 2008. This proposal is estimated to cost $3.129 billion over 10 years.

Provisions related to film and television productions. Under current law, taxpayers have not been able to take full advantage of tax incentives that are intended to encourage film and television companies to produce films here in the United States rather than overseas because of a number of technical issues. The bill would fix these issues. This proposal is estimated to cost $468 million over 10 years.

Exemption of excise tax on certain wooden and fiberglass arrows designed for use by children. Current law imposes an excise tax of 39 cents, adjusted for inflation, on the first sale by the manufacturer, producer, or importer of any shaft of a type used to produce certain types of arrows. The bill would exempt from the excise tax certain wooden and fiberglass arrows designed for use by children. This proposal is estimated to cost $6 million over 10 years.

Modification of penalty on understatement of taxpayer's liability by tax return preparer. The bill would conform the penalty standards for return preparers with the standards for taxpayers. For undisclosed positions, the penalty standard for return preparers is reduced to substantial authority. For disclosed positions, a return preparer generally must have a reasonable basis for the position. For positions involving tax shelters and certain reportable transactions, a return preparer must have a reasonable belief that the position would more likely than not be sustained on the merits. This proposal is estimated to cost $22 million over 10 years.




Revenue Provisions


Freeze current law section 199 benefits at 6% for oil and natural gas production income. The bill would freeze the domestic production deduction for income of taxpayers that is with respect to oil, natural gas or any primary product thereof at 6% (which is current law). Absent this action, this deduction would increase to 9% in 2010. This is a scaled-back version of the provision proposing outright repeal of section 199 with respect to all oil, natural gas or any primary product thereof that passed the House as part of H.R. 6 (in January 2007) by a vote of 264 to 163 (with 36 House Republicans joining 228 House Democrats in support) and as part of H.R. 2776 (in August 2007) by a vote of 221 to 189 (with 9 House Republicans joining 212 House Democrats in support). This is also a scaled-back version of the provision proposing outright repal of section 199 for the major integrated oil producers (with a 6% freeze for other oil and gas companies) that passed the House as part of H.R. 6 (in December 2007) by a vote of 235 to 181 (with 14 House Republicans joining 221 House Democrats in support), as part of H.R. 5351 (in February 2008) by a vote of 236 to 182 (with 17 House Republicans joining 219 House Democrats in support) and as part of H.R. 6899 (in September 2008) by a vote of 236 to 189 (with 15 House Republicans joining with 221 House Democrats in support). This proposal is estimated to raise $4.906 billion over 10 years.