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section 6694 penalty + injuction

2011-02-07T05:40:00.000-05:00

U.S. v. DOVE, Cite as 107 AFTR 2d 2011-XXXX, 01/26/2011
________________________________________
UNITED STATES OF AMERICA, Plaintiff, v. SIDNEY DOVE, individually, and d/b/a Sid's Tax, Defendant.
Case Information:
Code Sec(s):
Court Name: UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION,
Docket No.: 10 C 60,
Date Decided: 01/26/2011.
Disposition:
HEADNOTE
.
Reference(s):
OPINION
UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION,
MEMORANDUM OPINION
Judge: CHARLES P. KOCORAS, District Judge:
This case comes before the court on two motions submitted by Plaintiff the United States of America (“the Government”). The Government moves for the entry of summary judgment on Count I of the Complaint pursuant to Fed. R. Civ. P. 56. The Government also asks for a permanent injunction against Defendant Sidney Dove, individually, and doing business as Sid's Tax, pursuant to 26 U.S.C. § 7407. For the reasons set forth below, the motions are granted.
BACKGROUND 1
Defendant Sidney Dove (“Dove”) operated a business, Sid's Tax, out of his home in Joliet, Illinois. Dove prepared or assisted in the preparation of federal income tax returns for others in return for monetary compensation. Dove prepared nearly 330 federal income tax returns in 2008, 263 returns in 2009, and 95 returns in 2010.
Dove was recently the subject of an investigation by the Internal Revenue Service (“IRS”). The IRS examined 79 of the returns Dove prepared and assessed additional tax for all but one of those tax returns. 2 As a consequence of its limited examination of the returns Dove prepared, the IRS assessed an additional $610,000 in taxes. The IRS' investigation revealed a pattern of overstatement of charitable contributions, employee business expenses, and Schedule C expenses on the examined returns. The IRS also sent an undercover special agent to Dove's place of business. Dove prepared a return for the undercover agent which included education credits that the agent would not have been entitled to under the tax code.
Dove later described some of his tax preparation practices during a preliminary injunction hearing. Dove testified that he routinely deducted 10% of a client's income as a charitable contribution without determining whether his customer had documentation to support such a deduction. Dove also stated that he prepared a return for a customer in which he improperly reported various deductions for a piece of investment property that the customer never used as rental property. Dove also testified that he would report whatever information his customers told him without requesting any documents to support their oral representations.
The Government instituted this action against Dove on January 6, 2010. Count I of the Complaint alleges that Dove prepared income tax returns which understated the taxpayer's liability in violation of 26 U.S.C. § 6694. On March 23, 2010, we held a preliminary injunction hearing and granted the Government's motion for a preliminary injunction against Dove precluding him from preparing 2009 tax returns for the duration of the filing season. The Government now moves for summary judgment under Fed. R. Civ. P. 56 and for a permanent injunction against Dove pursuant to 26 U.S.C. § 7407. 3
LEGAL STANDARDS
I. Motion For Summary Judgment Pursuant To Fed. R. Civ. P. 56
Summary judgment is appropriate only when “the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” Fed. R. Civ. Proc. 56(c). A genuine issue of material fact exists when the evidence is such that a reasonable jury could find for the nonmovant. Buscaglia v. United States, 25 F.3d 530, 534 (7th Cir. 1994). The movant in a motion for summary judgment bears the burden of demonstrating the absence of a genuine issue of material fact by specific citation to the record; if the party succeeds in doing so, the burden shifts to the nonmovant to set forth specific facts showing that there is a genuine issue of fact for trial. Fed. R. Civ. Proc. 56(e); Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986). In considering motions for summary judgment, a court construes all facts and draws all inferences from the record in favor of the nonmoving party.Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 255 (1986).
II. Motion For Permanent Injunction Under 26 U.S.C. § 7407
When a party requests an injunction which is explicitly authorized by statute, courts refrain from using the standard permanent injunction test and instead determine whether the moving party has established that the statutory conditions for injunctive relief are present. SEC v. Mgmt. Dynamics, Inc., 515 F.2d 801, 808 (2d Cir. 1975). To enjoin an individual from acting as a tax preparer pursuant to section 7407, the Government must show that: (1) the defendant is an “income tax return preparer” within the meaning of 26 U.S.C. § 7701(a)(36); (2) the defendant continually or repeatedly engaged in conduct described in 26 U.S.C. § 7407(b)(1)(A)–(D); and (3) an injunction prohibiting such conduct would not be sufficient to prevent that person's further interference with the proper administration of the tax code.See 26 U.S.C. § 7407(b)(2); United States v. Reddy, 500 F. Supp. 2d 877, 882 [99 AFTR 2d 2007-2742] (N.D. Ill. 2007).
DISCUSSION
We will discuss the Government's motion for summary judgment first before turning to its motion for a permanent injunction.
I. Motion For Summary Judgment As To Count I
The Government asks that we grant summary judgment in its favor on Count I because no genuine issues of fact exist regarding whether Dove violated 26 U.S.C. § 6694. To demonstrate an individual's liability under section 6694, the Government must show that: (1) the individual qualified as an “income tax preparer” as defined in 26 U.S.C. § 7701(a)(36); (2) a tax return prepared by the individual contained an understatement of tax liability due to a position for which there was not a realistic possibility of being sustained on the merits; (3) the individual knew (or reasonably should have known) of such position; and (4) such position was not disclosed pursuant to section 6662(d)(2)(B)(ii) and was not frivolous. 26 U.S.C. § 6694(a)(1)–(3).
The undisputed facts demonstrate that Dove violated 26 U.S.C. § 6694. From 2008 until 2010, Dove acted as an “income tax preparer” as that term is defined by the Internal Revenue Code in that he prepared hundreds of income tax returns in exchange for compensation. 26 U.S.C. § 7701(a)(36). Dove prepared a number of returns that significantly understated the taxpayer's liability because of positions that had no possibility of being sustained on the merits. For example, Dove habitually deducted 10% of his clients' income as charitable donations without ensuring whether the taxpayer had any documents to support the deduction. Additionally, the record contains no evidence to suggest that Dove disclosed the positions in a manner authorized by the tax code or that the positions could be considered frivolous. In the absence of disputes regarding Dove's repeated preparation of returns with unrealistic positions, we find the Government is entitled to summary judgment as to Count I.
II. Motion For Permanent Injunction Pursuant To 26 U.S.C. § 7407
The Government also moves for a permanent injunction against Dove prohibiting him from acting as an income tax preparer. To enjoin an individual from acting as a tax preparer pursuant to section 7407, the Government must show that: (1) the defendant is an “income tax return preparer” within the meaning of 26 U.S.C. § 7701(a)(36); (2) the defendant continually or repeatedly engaged in any of the conduct described in 26 U.S.C. § 7407(b)(1)(A)–(D); and (3) an injunction prohibiting such conduct would not be sufficient to prevent that person's further interference with the proper administration of the tax code. We have already concluded that Dove may be classified as an income tax preparer because he operated a business in which he prepared returns for other taxpayers in exchange for money. The court also finds that Dove repeatedly committed one of the improper tax preparation practices listed in 26 U.S.C. § 7404(b)(1)(A)–(D). Specifically, Dove prepared dozens of returns over the course of three years that understated the taxpayer's liability and contained assertions that had little chance of being sustained on the merits in violation of 26 U.S.C. § 6694.
Finally, we find that the circumstances surrounding Dove's conduct in this case show that an injunction prohibiting further violations of the tax code would be insufficient to prevent his continued interference with the tax code. In assessing the likelihood of an individual's future violations of the Internal Revenue Code, a court should examine the totality of the circumstances, including factors as:
the gravity of harm caused by the offense; the extent of the defendant's participation and his degree of scienter; the isolated or recurrent nature of the infraction and the likelihood that the defendant's customary business activities might again involve him in such transaction; the defendant's recognition of his own culpability; and the sincerity of his assurances against future violations.
United States v. Kaun, 827 F.2d 1144, 1149–50 [60 AFTR 2d 87-5623] (7th Cir. 1987) (quoting SEC v. Holschuh, 694 F.2d 130, 144 (7th Cir. 1982). The IRS' limited investigation into Dove's tax practices revealed that he had prepared 78 returns which understated his customers' tax liability by $610,000. Dove knowingly violated section 6694 on a number of occasions by asserting positions on returns that had little chance of surviving scrutiny and deliberately refusing to obtain documents to determine the validity of his customers' contentions. See United States v. Nobles, 69 F.3d 172, 185 (7th Cir. 1995) (“It is well settled that willful blindness or conscious avoidance is the legal equivalent to knowledge[]”). Additionally, Dove has submitted a document to the court indicating that he desires to continue preparing tax returns for others. Dove's continuous and knowing violations of the tax laws over the last three years and his stated intention to continue preparing tax returns in the future demonstrates the need for the Government's requested relief in this case. Accordingly, the motion for a permanent injunction under 26 U.S.C. § 7407 is granted.
CONCLUSION
The Government's motion for summary judgment is granted. The Government's motion for permanent injunction is granted.
PERMANENT INJUNCTION
Upon Plaintiff United States of America's Motion for Permanent Injunction against Defendant Sidney Dove, it is hereby:
ORDERED that Defendant Sidney Dove, individually or doing business as Sid's Tax, or any other name or using any other entity is permanently enjoined from directly or indirectly acting as income tax return preparers and are hereby prohibited from preparing, filing, or assisting in the preparing and filing of federal income tax returns, amended returns, or other related forms and documents on behalf of any person other than himself;
ORDERED that Defendant Sidney Dove, individually or doing business as Sid's Tax, or any other name or using any other entity is permanently enjoined from advising, assisting, counseling, or instructing anyone about the preparation of a federal tax return;
ORDERED that Defendant Sidney Dove prepare and provide counsel for the United States of America a list of everyone for whom he has prepared (or helped to prepare) a federal income tax return since January 1, 2006, and set forth on said list all of the names, addresses, e-mail addresses, telephone numbers, and Social Security numbers within fifteen (15) days of the entry of this order;
ORDERED that Defendant Sidney Dove shall mail or otherwise deliver a copy of this Permanent Injunction and the Memorandum Opinion and Order to all customers for whom he has prepared federal income tax returns or assisted in the preparation of their federal income tax returns, on or before February 28, 2011. By March 4, 2011, Defendant Dove shall file with this Court — and serve upon Plaintiff — an affidavit stating, under penalty of perjury, that he has fully complied with this Order. In that affidavit, Defendant Dove shall specifically name the clients to whom he has mailed or otherwise delivered a copy of this Permanent Injunction and the Memorandum Opinion and Order.
Charles P. Kocoras
United States District Judge
Dated: January 26, 2011
________________________________________
1
On October 28, 2010, the Government sent Dove a statement advising him of the required procedures for answering their motion for summary judgment pursuant to Local Rule 56.2. Despite Dove's receipt of this notice, he did not submit a response to the Government's statement of facts or a statement of facts of his own. The Seventh Circuit Court of Appeals has “consistently held that a failure to respond by the nonmovant as mandated by the local rules results in an admission.” Smith v. Lamz, 321 F.3d 680, 683 (7th Cir. 2003). While courts must construe pro se pleadings liberally, Dove's unrepresented status does not absolve him from complying with Local Rule 56.1. See Greer v. Bd. of Ed. of City of Chicago, 267 F.3d 723, 727 (7th Cir. 2001). As Dove has neglected to submit a response in compliance with Local Rule 56.1, by operation of the rule all facts asserted by the Government are admitted.
________________________________________
2
One improperly prepared return resulted in the refund of $33 to the taxpayer.
________________________________________
3
The Government has also requested preliminary injunction under 26 U.S.C. § 7402 and a permanent injunction pursuant to 26 U.S.C. § 7408. As a result of our conclusion that the Government is entitled to an injunction under 26 U.S.C. § 7407, we need not address the Government's alternative grounds for injunctive relief.

voluntary reporting requirements

2011-01-03T14:06:00.000-05:00

Part III
Administrative, Procedural, and Miscellaneous
26 CFR 601.105: Examination of returns and claims for refund, credit or abatement;
determination of correct tax liability.
(Also: Part 1, §§ 6662, 6694, 1.6662-4, 1.6694-2)

Rev. Proc. 2011-13

SECTION 1. PURPOSE

This revenue procedure updates Rev. Proc. 2010-15, 2010-7 I.R.B. 404, and
identifies circumstances under which the disclosure on a taxpayer's income tax return
with respect to an item or a position is adequate for the purpose of reducing the
understatement of income tax under section 6662(d) of the Internal Revenue Code
(relating to the substantial understatement aspect of the accuracy-related penalty), and
for the purpose of avoiding the tax return preparer penalty under section 6694(a)
(relating to understatements due to unreasonable positions) with respect to income tax
returns. This revenue procedure does not apply with respect to any other penalty
provisions (including the disregard provisions of the section 6662(b)(1) accuracy-related 2
penalty, the section 6662(i) increased accuracy-related penalty in the case of
nondisclosed noneconomic substance transactions, and the section 6662(j) increased
accuracy-related penalty in the case of undisclosed foreign financial asset
understatements).
This revenue procedure applies to any income tax return filed on 2010 tax
forms for a taxable year beginning in 2010, and to any income tax return filed on
2010 tax forms in 2011 for short taxable years beginning in 2011.
SECTION 2. CHANGES FROM REV. PROC. 2010-15
01 This revenue procedure has been updated to include reference to: (i) the.
section 6662(i) increased accuracy-related penalty in the case of nondisclosed
noneconomic substance transactions; (ii) the section 6662(j) increased accuracy-related
penalty in the case of undisclosed foreign financial asset understatements; and (iii) the
Schedule UTP, Uncertain Tax Position Statement, a new schedule required of certain
corporations.

01 If SECTION 3. BACKGROUND
01 If section 6662 applies to any portion of an underpayment of tax required to.
be shown on a return, an amount equal to 20 percent of the portion of the
underpayment to which the section applies is added to the tax (the penalty rate is 40
percent in the case of gross valuation misstatements under section 6662(h),
nondisclosed noneconomic substance transactions under section 6662(i), or
undisclosed foreign financial asset understatements under section 6662(j)). Section
6662(b)(2) applies to the portion of an underpayment of tax that is attributable to a 3
substantial understatement of income tax.
02 Section 6662(d)(1) provides that there is a substantial understatement of.
income tax if the amount of the understatement exceeds the greater of 10 percent of the
amount of tax required to be shown on the return for the taxable year or $5,000.
Section 6662(d)(1)(B) provides special rules for corporations. A corporation (other than
an S corporation or personal holding company) has a substantial understatement of
income tax if the amount of the understatement exceeds the lesser of 10 percent of the
tax required to be shown on the return for a taxable year (or, if greater, $10,000) or
$10,000,000. Section 6662(d)(2) defines an understatement as the excess of the
amount of tax required to be shown on the return for the taxable year over the amount
of the tax that is shown on the return reduced by any rebate (within the meaning of
section 6211(b)(2)).
03 In the case of an item not attributable to a tax shelter, section.
6662(d)(2)(B)(ii) provides that the amount of the understatement is reduced by the
portion of the understatement attributable to the item if the relevant facts affecting the
item’s tax treatment are adequately disclosed in the return or in a statement attached to
the return, and there is a reasonable basis for the tax treatment of the item by the
taxpayer..
04 Section 6694(a) imposes a penalty on a tax return preparer who prepares a.
return or claim for refund reflecting an understatement of liability due to an
“unreasonable position” if the tax return preparer knew (or reasonably should have
known) of the position. A position (other than a position with respect to a tax shelter or 4
a reportable transaction to which section 6662A applies) is generally treated as
unreasonable unless (i) there is or was substantial authority for the position, or (ii) the
position was properly disclosed in accordance with section 6662(d)(2)(B)(ii)(I) and had a
reasonable basis. If the position is with respect to a tax shelter (as defined in section
6662(d)(2)(C)(ii)) or a reportable transaction to which section 6662A applies, the
position is treated as unreasonable unless it is reasonable to believe that the position
would more likely than not be sustained on the merits. See Notice 2009-5, 2009-3
I.R.B. 309 (January 21, 2009) for interim penalty compliance rules for tax shelter
transactions.

05 In general, this revenue procedure provides guidance for determining when.
disclosure by return is adequate for purposes of section 6662(d)(2)(B)(ii) and section
6694(a)(2)(B). For purposes of this revenue procedure, the taxpayer must furnish all
required information in accordance with the applicable forms and instructions, and the
money amounts entered on these forms must be verifiable..
06 Fiscal and short tax year returns. (a) In general. This revenue procedure.
may apply to a return for a fiscal tax year that begins in 2010 and ends in 2011. This
revenue procedure may also apply to a short year return for a period beginning in 2011
if the return is to be filed before the 2011 forms are available. (Note that individuals are
generally not put in this position as a decedent's final return for a fractional part of a
year is due the fifteenth day of the fourth month following the close of the 12-month
period which began with the first day of such fractional part of the year. See Treas.
Reg. § 1.6072-1(b).) In the case of fiscal year and short year returns, the taxpayer must 5
take into account any tax law changes that are effective for tax years beginning after
December 31, 2010, even though these changes are not reflected on the form.
(b) Tax law changes effective after December 31, 2010. This document does not
take into account the effect of tax law changes effective for tax years beginning after
December 31, 2010. If a line referenced in this revenue procedure is affected by such a
change and requires additional reporting, a taxpayer may have to file Form 8275,
Disclosure Statement, or Form 8275-R, Regulation Disclosure Statement, until the
Service prescribes criteria for complying with the requirement.
07 A complete and accurate disclosure of a tax position on the appropriate.
year’s Schedule UTP, Uncertain Tax Position Statement, will be treated as if the
corporation filed a Form 8275 or Form 8275-R regarding the tax position. The filing of a
Form 8275 or Form 8275-R, however, will not be treated as if the corporation filed a
Schedule UTP.
SECTION 4. PROCEDURE
01 General.
(1) Additional disclosure of facts relevant to, or positions taken with respect to,
issues involving any of the items set forth below is unnecessary for purposes of
reducing any understatement of income tax under section 6662(d) (except as otherwise
provided in section 4.02(3) concerning Schedules M-1 and M-3), provided that the forms
and attachments are completed in a clear manner and in accordance with their
instructions.
(2) The money amounts entered on the forms must be verifiable, and the 6
information on the return must be disclosed in the manner described below. For
purposes of this revenue procedure, a number is verifiable if, on audit, the taxpayer can
prove the origin of the amount (even if that number is not ultimately accepted by the
Internal Revenue Service) and the taxpayer can show good faith in entering that
number on the applicable form.

(3) The disclosure of an amount as provided in section 4.02 below is not
adequate when the understatement arises from a transaction between related parties.
If an entry may present a legal issue or controversy because of a related-party
transaction, then that transaction and the relationship must be disclosed on a Form
8275 or Form 8275-R.
(4) When the amount of an item is shown on a line that does not have a
preprinted description identifying that item (such as on an unnamed line under an “Other
Expense” category) the taxpayer must clearly identify the item by including the
description on that line. For example, to disclose a bad debt for a sole proprietorship,
the words “bad debt” must be written or typed on the line of Schedule C that shows the
amount of the bad debt. Also, for Schedule M-3 (Form 1120), Part II, line 25, Other
income (loss) items with differences, or Part III, line 35, Other expense/deduction items
with differences, the entry must provide descriptive language; for example, "Cost of noncompete agreement deductible not capitalizable.” If space limitations on a form do not
allow for an adequate description, the description must be continued on an attachment.

(5) Although a taxpayer may literally meet the disclosure requirements of this
revenue procedure, the disclosure will have no effect for purposes of the section 6662 7
accuracy-related penalty if the item or position on the return: (1) Does not have a
reasonable basis as defined in Treas. Reg. § 1.6662-3(b)(3); (2) Is attributable to a tax
shelter item as defined in section 6662(d)(2); or (3) Is not properly substantiated or the
taxpayer failed to keep adequate books and records with respect to the item or position.
(6) Disclosure also will have no effect for purposes of the section 6694(a) penalty
as applicable to tax return preparers if the position is with respect to a tax shelter (as
defined in section 6662(d)(2)(C)(ii)) or a reportable transaction to which section 6662A
applies.

02 Items.
(1) Form 1040, Schedule A, Itemized Deductions:
(a) Medical and Dental Expenses: Complete lines 1 through 4, supplying all
required information.
(b) Taxes: Complete lines 5 through 9, supplying all required information. Line 8
must list each type of tax and the amount paid.
(c) Interest Expenses: Complete lines 10 through 15, supplying all required
information. This section 4.02(1)(c) does not apply to (i) amounts disallowed under
section 163(d) unless Form 4952, Investment Interest Expense Deduction, is
completed, or (ii) amounts disallowed under section 265.
(d) Contributions: Complete lines 16 through 19, supplying all required
information. Enter the amount of the contribution reduced by the value of any
substantial benefit (goods or services) provided by the donee organization in
consideration, in whole or in part. Entering the value of the contribution unreduced by
the value of the benefit received will not constitute adequate disclosure. If a contribution
of $250 or more is made, this section will not apply unless a contemporaneous written
acknowledgment, as required by section 170(f)(8), is obtained from the donee
organization. If a contribution of cash of less than $250 is made, this section will not
apply unless a bank record or written communication from the donee, as required by
section 170(f)(17), is obtained from the donee organization. If a contribution of property
other than cash is made and the amount claimed as a deduction exceeds $500, attach
a properly completed Form 8283, Noncash Charitable Contributions, to the return. In
addition to the Form 8283, if a contribution of a qualified motor vehicle, boat, or airplane
has a value of more than $500, this section will not apply unless a contemporaneous
written acknowledgment, as required by section 170(f)(12), is obtained from the donee
organization and attached to the return. An acknowledgment under section 170(f)(8) is
not required if an acknowledgment under section 170(f)(12) is required.
(e) Casualty and Theft Losses: Complete Form 4684, Casualties and Thefts,
and attach to the return. Each item or article for which a casualty or theft loss is claimed
must be listed on Form 4684.
(2) Certain Trade or Business Expenses (including, for purposes of this section,
the following six expenses as they relate to the rental of property):
(a) Casualty and Theft Losses: The procedure outlined in section 4.02(1)(e)
must be followed.

(b) Legal Expenses: The amount claimed must be stated. This section does not
apply, however, to amounts properly characterized as capital expenditures, personal 9
expenses, or non-deductible lobbying or political expenditures, including amounts that
are required to be (or that are) amortized over a period of years.
(c) Specific Bad Debt Charge-off: The amount written off must be stated.
(d) Reasonableness of Officers' Compensation: Form 1120, Schedule E,
Compensation of Officers, must be completed when required by its instructions. The
time devoted to business must be expressed as a percentage as opposed to "part" or
"as needed." This section does not apply to "golden parachute" payments, as defined
under section 280G. This section will not apply to the extent that remuneration paid or
incurred exceeds the employee-remuneration deduction limitations under section
162(m), if applicable.
(e) Repair Expenses: The amount claimed must be stated. This section does
not apply, however, to any repair expenses properly characterized as capital
expenditures or personal expenses.
(f) Taxes (other than foreign taxes): The amount claimed must be stated.
(3) Differences in book and income tax reporting.
For Schedule M-1 and all Schedules M-3, including those listed in (a)-(f) below,
the information provided must reasonably apprise the Service of the potential
controversy concerning the tax treatment of the item. If the information provided does
not so apprise the Service, a Form 8275 or Form 8275-R must be used to adequately
disclose the item (see Part II of the instructions for those forms).
Note: An item reported on a line with a pre-printed description, shown on an
attached schedule or “itemized” on Schedule M-1, may represent the aggregate 10
amount of several transactions producing that item (i.e., a group of similar items,
such as amounts paid or incurred for supplies by a taxpayer engaged in
business). In some instances, a potentially controversial item may involve a
portion of the aggregate amount disclosed on the schedule. The Service will not
be reasonably apprised of a potential controversy by the aggregate amount
disclosed. In these instances, the taxpayer must use Form 8275 or Form 8275-R
regarding that portion of the item.

Combining unlike items, whether on Schedule M-1 or Schedule M-3 (or on an
attachment when directed by the instructions), will not constitute an adequate
disclosure.

Additionally, for taxpayers that file the Schedule M-3 (Form 1120), the new
Schedule B, Additional Information for Schedule M-3 Filers, must also be completed.
For taxpayers that file the Schedule M-3 (Form 1065), the new Schedule C, Additional
Information for Schedule M-3 Filers, must also be completed. When required, these
new Schedules are necessary to constitute adequate disclosure.

(a) Form 1065. Schedule M-3 (Form 1065), Net Income (Loss) Reconciliation for
Certain Partnerships: Column (a), Income (Loss) per Income Statement, of Part II
(reconciliation of income (loss) items) and Column (a), Expense per Income Statement,
of Part III (reconciliation of expense/deduction items); Column (b), Temporary
Difference, and Column (c), Permanent Difference, of Part II (reconciliation of income
(loss) items) and Part III (reconciliation of expense/deduction items); and Column (d),
Income (Loss) per Tax Return, of Part II (reconciliation of income (loss) items) and 11
Column (d), Deduction per Tax Return, of Part III (reconciliation of expense/deduction
items).

(b) Form 1120. (i) Schedule M-1, Reconciliation of Income (Loss) per Books
With Income per Return.
(ii) Schedule M-3 (Form 1120), Net Income (Loss) Reconciliation for
Corporations with Total Assets of $10 Million or More: Column (a), Income (Loss) per
Income Statement, of Part II (reconciliation of income (loss) items) and Column (a),
Expense per Income Statement, of Part III (reconciliation of expense/deduction items);
Column (b), Temporary Difference, and Column (c), Permanent Difference, of Part II
(reconciliation of income (loss) items) and Part III (reconciliation of expense/deduction
items) and Column (d), Income (Loss) per Tax Return, of Part II (reconciliation of
income (loss) items); and Column (d), Deduction per Tax Return, of Part III
(reconciliation of expense/deduction items).

(c) Form 1120-L. Schedule M-3 (Form 1120-L), Net Income (Loss)
Reconciliation for U.S. Life Insurance Companies With Total Assets of $10 Million or
More: Column (a), Income (Loss) per Income Statement, of Part II (reconciliation of
income (loss) items) and Column (a), Expense per Income Statement, of Part III
(reconciliation of expense/deduction items); Column (b), Temporary Difference, and
Column (c), Permanent Difference, of Part II (reconciliation of income (loss) items) and
Part III (reconciliation of expense/deduction items); and Column (d), Income (Loss) per
Tax Return, of Part II (reconciliation of income (loss) items) and Column (d), Deduction
per Tax Return, of Part III (reconciliation of expense/deduction items).

(d) Form 1120-PC. Schedule M-3 (Form 1120-PC), Net Income (Loss)
Reconciliation for U.S. Property and Casualty Insurance Companies With Total Assets
of $10 Million or More: Column (a), Income (Loss) per Income Statement, of Part II
(reconciliation of income (loss) items) and Column (a), Expense per Income Statement,
of Part III (reconciliation of expense/deduction items); Column (b), Temporary
Difference, and Column (c), Permanent Difference, of Part II (reconciliation of income
(loss) items) and Part III (reconciliation of expense/deduction items); and Column (d),
Income (Loss) per Tax Return, of Part II (reconciliation of income (loss) items) and
Column (d), Deduction per Tax Return, of Part III (reconciliation of expense/deduction
items).

(e) Form 1120S. Schedule M-3 (Form 1120S), Net Income (Loss) Reconciliation
for S Corporations With Total Assets of $10 Million or More: Column (a), Income (Loss)
per Income Statement, of Part II (reconciliation of income (loss) items) and Column (a),
Expense per Income Statement, of Part III (reconciliation of expense/deduction items);
Column (b), Temporary Difference, and Column (c), Permanent Difference, of Part II
(reconciliation of income (loss) items) and Part III (reconciliation of expense/deduction
items); and Column (d), Income (Loss) per Tax Return, of Part II (reconciliation of
income (loss) items) and Column (d), Deduction per Tax Return, of Part III
(reconciliation of expense/deduction items).
(f) Form 1120-F. Schedule M-3 (Form 1120-F), Net Income (Loss) Reconciliation
for Foreign Corporations With Total Assets of $10 Million or More: Column (b),
Temporary Difference, Column (c), Permanent Difference, and Column (d), Other 13
Permanent Differences for Allocations to Non-ECI and ECI, of Part II (reconciliation of
income (loss) items) and Part III (reconciliation of expense/deduction items).

(4) Foreign Tax Items:
(a) International Boycott Transactions: Transactions disclosed on Form 5713,
International Boycott Report; Schedule A, International Boycott Factor (Section
999(c)(1)); Schedule B, Specifically Attributable Taxes and Income (Section 999(c)(2));
and Schedule C, Tax Effect of the International Boycott Provisions, must be completed
when required by their instructions.
(b) Treaty-Based Return Position: Transactions and amounts under section
6114 or section 7701(b) as disclosed on Form 8833, Treaty-Based Return Position
Disclosure Under Section 6114 or 7701(b), must be completed when required by its
instructions.

(5) Other:
(a) Moving Expenses: Complete Form 3903, Moving Expenses, and attach to
the return.
(b) Employee Business Expenses: Complete Form 2106, Employee Business
Expenses, or Form 2106-EZ, Unreimbursed Employee Business Expenses, and attach
to the return. This section does not apply to club dues, or to travel expenses for any
non-employee accompanying the taxpayer on the trip.
(c) Fuels Credit: Complete Form 4136, Credit for Federal Tax Paid on Fuels, and
attach to the return.
(d) Investment Credit: Complete Form 3468, Investment Credit, and attach to the 14
return.

SECTION 5. EFFECTIVE DATE
This revenue procedure applies to any income tax return filed on a 2010 tax form
for a taxable year beginning in 2010, and to any income tax return filed on a 2010 tax
form in 2011 for a short taxable year beginning in 2011.
SECTION 6. DRAFTING INFORMATION
The principal author of this revenue procedure is Francis M. McCormick of the
Office of Associate Chief Counsel (Procedure & Administration). For further information
regarding this revenue procedure, contact Branch 2 of Procedure and Administration at
(202) 622-4940 (not a toll free cal

Restitution cannot be abated in an Offer in Compromise

2011-01-03T09:59:00.000-05:00

Thomas M. Gillum v. Commissioner, TC Memo 2010-280 , Code Sec(s) 6330; 7122.
________________________________________
THOMAS M. GILLUM, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent .
Case Information:
Code Sec(s): 6330; 7122
Docket: Docket No. 16110-07L.
Date Issued: 12/22/2010
Judge: Opinion by THORNTON
HEADNOTE
XX.
Reference(s): Code Sec. 6330 ; Code Sec. 7122
Syllabus
Official Tax Court Syllabus
Counsel
Kenneth R. Boiarsky, for petitioner.
Elizabeth Downs, for respondent.
Opinion by THORNTON
MEMORANDUM FINDINGS OF FACT AND OPINION
Pursuant to sections 6320(c) and 6330(d), petitioner seeks judicial review of respondent's determination sustaining the filing of a Federal tax lien with respect to petitioner's Federal income tax liabilities for 1998, 2000, 2001, and 2002, and sustaining a proposed levy to collect petitioner's Federal income tax liabilities for each of the years 1996 through 2002. 1Petitioner also seeks judicial review of various letters that respondent allegedly sent to various entities, as petitioner's nominees or alter egos, denying them collection due process hearings with respect to respondent's filing of Federal tax liens.
FINDINGS OF FACT
The parties have stipulated some facts, which we incorporate by this reference. When he filed his petition, petitioner resided in Arkansas.
Petitioner is a veterinarian. He operates his practice under the business name Cloverdale Animal Hospital, LLC (Cloverdale).
In 2004 petitioner was criminally prosecuted for willful failure to file tax returns, in violation of section 7203, for taxable years 1996 through 2002. In December 2005 petitioner pleaded guilty to one count of criminal failure to file a Federal income tax return for 2000. His criminal plea agreement provided, inter alia, for entry of an order of mandatory restitution under 18 U.S.C. section 3663A for “the full amount of the taxes due and owing for all prosecution years.” The plea agreement stated: “At this time, the United States and the defendant agree that the amount of restitution payable by the defendant is $416,210.” The plea agreement also stated: “Except to the extent otherwise expressly specified herein, this Agreement does not bar or compromise any civil or administrative claim pending or that may be made against the defendant, including but not limited to tax matters.” The plea agreement stated further: “This Agreement is binding only upon the United States Attorney's Office for the Eastern District of Arkansas and the defendant. It does not bind *** any other federal, state or local prosecuting, administrative, or regulatory authority.”
In its judgment filed December 12, 2005, the District Court reduced the amount of restitution, labeled “criminal monetary penalties”, to $246,226. 2 The District Court also ordered a schedule of payments, with a lump sum of $25 due immediately and the balance due in monthly installments equaling 10 percent of petitioner's monthly gross income. 3
While the criminal proceedings were pending against petitioner, on August 13, 2004, he filed amended returns for taxable years 1996, 1997, and 1998, and on September 7, 2004, he filed an amended return for taxable year 1999. 4 Also on September 7, 2004, petitioner filed delinquent returns for taxable years 2000, 2001, and 2002.
On October 25, 2004, respondent assessed the taxes that petitioner had reported on his delinquent returns for 2000, 2001, and 2002. On March 14, 2005, respondent assessed the tax that petitioner had reported on his amended 1998 return, and on June 26, 2006, respondent assessed the taxes that petitioner had reported on his amended returns for 1996, 1997, and 1999. In each instance, respondent also assessed applicable additions to tax and interest.
On October 18, 2006, respondent sent petitioner Letter 3172, Notice of Federal Tax Lien Filing and Your Right to a Hearing Under IRC 6320 (the lien notice), with respect to petitioner's taxable years 1998, 2000, 2001, 2002, and 2003. On October 26, 2006, respondent sent petitioner Letter 1058, Final Notice, Notice of Intent to Levy and Notice of Your Right to a Hearing (the levy notice), with respect to petitioner's taxable years 1996 through 2003. The levy notice indicated that as of November 25, 2006, petitioner would owe $839,856 of tax, penalties, and interest for these years. 5
On November 21, 2006, petitioner timely submitted Form 12153, Request for a Collection Due Process Hearing, indicating that he disagreed with both the lien notice and the levy notice. 6
The request covered petitioner's tax years 1996 through 2002 but not 2003. In his request petitioner asserted that the criminal plea agreement and judgment reflected the full settlement of his tax liabilities for 1996 through 2002. He asserted that “payment on these years is exclusively covered under an agreed court order for restitution”, that he was making payments to the IRS for these tax years under this agreement, and that unless he failed to meet his obligations under the court order, the IRS must “cease and desist from further collection activity.” Petitioner did not propose any collection alternative in his hearing request.
On October 26, 2006, in anticipation of submitting a request for a hearing, petitioner submitted Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, with respect to himself, and on October 27, 2006, petitioner submitted Form 433-B, Collection Information Statement for Businesses, with respect to Cloverdale. On these forms petitioner failed to provide complete information. For example, on Form 433-A he did not provide requested bank account numbers and routing information, detailed credit card information, the estimated value of three vehicles, or required information with respect to his personal assets and living expenses. In response to a question asking whether he had transferred any assets for less than their actual value within the past 10 years, he checked “No” but then wrote “Possible”. The form required several attachments, including proof of current expenses, which petitioner failed to provide.
On Form 433-B petitioner did not provide detailed information with respect to Cloverdale's accounts receivable, business assets, bank accounts, or available credit. In response to a question requesting detailed information with respect to Cloverdale's income and expenses, petitioner replied “see statement attached”, but did not attach any such statement. The form also required several other attachments, which petitioner failed to provide.
On May 15, 2007, the settlement officer held the first of three telephone conferences with petitioner's representative. In this conference the settlement officer opined that neither the criminal plea agreement nor the judgment barred the IRS from any civil or administrative actions with respect to petitioner's civil tax liabilities and did not compromise those liabilities. The settlement officer asked the representative whether he wished to propose any collection alternatives. The representative proposed as a collection alternative that the IRS limit its collection action to the terms of the plea agreement and judgment. They agreed to have a second conference.
Before the second conference the settlement officer reviewed the collection administrative case file, which included, among other things: (1) A memorandum, dated February 22, 2007, from Revenue Officer Robert Brown to IRS district counsel in Oklahoma City, Oklahoma, requesting approval to file alter ego and nominee liens and levies against several entities created by petitioner
(the request); (2) a memorandum from respondent's associate area counsel in Oklahoma City responding to the request (the memorandum); and (3) several diagrams detailing petitioner's alleged alter ego and nominee activities. 7
The request indicated on the basis of findings contained therein that, notwithstanding his prior criminal conviction, petitioner was still using various sham trusts, nominees, and alter egos to shield assets and income from taxation. More particularly, the request included findings that petitioner had funneled unreported cash payments from Cloverdale to grantor trusts and other entities to pay his and his family's personal expenses, including cable TV bills, college tuition, life insurance premiums, vacation expenses, car payments, and hardwood flooring for petitioner's residence. The request concluded that petitioner had created certain nominee entities, including a trust known as Lestat Ops, to hold personal assets and real estate for the purpose of placing them out of the reach of creditors, mainly the Government. 8
The memorandum indicates that “nominee” refers to an entity or person to whom a taxpayer has transferred property in an attempt to conceal it. According to the memorandum, a Federal tax lien encumbers such property because although a third party may have legal title, the taxpayer actually owns the property and enjoys its full use and benefit. The memorandum also indicates that an alter ego generally involves a sham corporation or other entity used by the taxpayer as an instrumentality to avoid his or her own legal obligations. In the memorandum respondent's associate area counsel approved nominee liens against three trusts created by petitioner, including Lestat Ops, as well as against petitioner's wife, and approved alter ego liens againstCloverdale, another limited liability company, and two other trusts that petitioner had created.
Cloverdale and Lestat Ops received from the IRS Letters 3172, dated May 15, 2007, providing notice of the filing of Federal tax liens and advising of the right to a collection due process (CDP) hearing. By letters dated June 20, 2007, requests for CDP hearings with respect to these two entities were timely submitted. Shortly thereafter, Cloverdale and Lestat Ops received letters from Revenue Officer Robert Brown, dated June 25, 2007, acknowledging receipt of the hearing requests but advising that CDP rights were not available to these entities because petitioner previously had been afforded CDP rights with respect to the same tax periods listed in the lien notices. The letters indicated, however, that the entities were entitled to a “Collection Appeal” with the revenue officer's manager.
On May 21, 2007, the settlement officer held a second telephone conference with petitioner's representative. Petitioner's representative continued to maintain, as a collection alternative to the proposed levy, that collection should be limited to the amount specified in the criminal plea agreement and judgment. The settlement officer indicated that he had reviewed financial statements and related information in the collection administrative file and concluded that the financial statements did not provide full disclosure of petitioner's income and assets. Consequently, he was unable to recommend acceptance of petitioner's proposed collection alternative. Petitioner's representative requested details of the alleged nondisclosure. The settlement officer declined to discuss the details at that time, indicating that he would research the matter. They agreed to have another conference.
After seeking advice of IRS counsel, on May 24, 2007, the settlement officer held the third and final telephone conference with petitioner's representative. The settlement officer asserted that petitioner had failed to completely disclose his income, expenses, and assets, making it impossible to adequately evaluate his ability to pay. Without specifically referencing the request or memorandum that he had reviewed, the settlement officer asserted that petitioner had diverted income into various entities and paid personal expenses through these entities for no apparent legitimate business reason. He also asserted that petitioner had attempted to place numerous assets beyond respondent's reach in various nominee or alter ego entities. According to the settlement officer's case activity record, petitioner's representative expressed surprise at this information, indicated that petitioner apparently had not disclosed all the facts to him, and stated that he understood why the settlement officer could not consider a collection alternative. After another discussion about the effect of the criminal plea agreement and judgment, the settlement officer advised the representative that the proposed collection actions would be sustained.
On June 15, 2007, respondent's Office of Appeals mailed petitioner a Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330 (the determination), sustaining the Federal tax lien filing and the proposed levy. With respect to petitioner's underlying liability the determination stated:
In this case the taxpayer agreed to pay restitution for the full amount of the taxes due for all prosecution years (1996 through 2002), but the judge, who is not bound by the plea agreement, subsequently ordered payment of restitution in the amount that is equivalent of the tax liability for only one count of the total criminal case. The restitution amount relates to the tax liability, but it is not the equivalent of the tax liability. It is the determination of Appeals that neither the plea agreement nor the court judgment represent a settlement or compromise of the tax liability, and do not bar IRS from taking additional collection actions. The determination also rejected petitioner's proposed collection alternative of limiting collection to the terms of the criminal plea agreement and judgment, stating:
Appeals has determined from this review that the taxpayer has not accurately reported income and expenses, which make it impossible to determine his true ability to pay the tax liability. The taxpayer has done this by diverting income through various entities (trusts, limited liability companies, and his wife) and paying personal expenses through these entities for no apparent reason other than to avoid taxes and the collection of taxes. He has also placed assets beyond the reach of IRS by purchasing them in the name of various entities he controls or transferring them to these entities. It is clear that the taxpayer maintains full use and benefits of these assets, which include real estate, vehicles, watercraft, and all-terrain vehicles. Because these assets and any encumbrances against these assets have not been disclosed, Appeals is not able to determine their net equity and collection potential. For these reasons Appeals cannot accept the only collection alternative proposed by the taxpayer's representative. The determination also concluded that the proposed tax lien filing and levy action properly balanced the need for efficient collection of taxes with the concern that collection action be no more intrusive than necessary.
Petitioner timely petitioned this Court for judicial review of this determination. The petition also seeks judicial review of letters which petitioner asserts respondent mailed on June 25, 2007, to four entities created by petitioner, including Cloverdale and Lestat Ops, denying them the opportunity for CDP hearings with respect to the filing of tax liens against them as petitioner's alleged nominees, transferees, or alter egos. 9
OPINION
I. Statutory Framework Section 6321 imposes a lien in favor of the United States on all property and property rights of a person who is liable for and fails to pay tax after demand for payment has been made. The lien arises when assessment is made and continues until the liability is paid or becomes unenforceable by lapse of time. Sec. 6322. For the lien to be valid against certain third parties, the Secretary must file a notice of Federal tax lien; within 5 business days thereafter, the Secretary must provide written notice to the taxpayer. Secs. 6320(a), 6323(a). The taxpayer then has 30 days to request an administrative hearing before an Appeals officer. Sec. 6320(a)(3)(B), (b)(1); sec. 301.6320-1(c)(1), Proced. & Admin. Regs. To the extent practicable, a hearing requested under section 6320 is to be held in conjunction with a related hearing requested under section 6330. Sec. 6320(b)(4).
Section 6330 requires the Secretary to furnish a person notice and opportunity for a hearing before levying on the person's property. At the hearing, the person may raise any relevant issue relating to the unpaid tax or proposed levy, including spousal defenses, challenges to the appropriateness of the collection action, and offers of collection alternatives. The person may challenge the underlying tax liability if the person did not receive a notice of deficiency or did not otherwise have an opportunity to dispute the liability. Sec. 6330(c)(2)(B); Sego v. Commissioner, 114 T.C. 604 (2000). After receiving a notice of determination, the person may seek judicial review in this Court. Sec. 6330(d)(1); Pension Protection Act of 2006, Pub. L. 109-280, sec. 855, 120 Stat. 1019. If the validity of the underlying tax liability is properly at issue, we review Sego v. Commissioner, supra. Other issues that issue de novo. we review for abuse of discretion. Id.
II. Petitioner's Challenge to His Underlying Liabilities
Petitioner contends that respondent erred in sustaining the lien and levy notices because they contravene the criminal plea agreement and judgment. Petitioner's contention represents in part a challenge to his underlying liabilities for 1996 through 2002. 10 Respondent concedes that petitioner is entitled to make such a challenge but contends that it is without merit.
Respondent assessed petitioner's taxes for the years in question on the basis of the amounts petitioner self-reported on his amended or delinquent returns for these years. Petitioner does not contend that he incorrectly reported his tax liabilities on these returns. Rather, he contends that his aggregate tax liability for 1996 through 2002 is limited to the $246,226 of restitution ordered in the criminal judgment. We disagree.
Pursuant to 18 U.S.C. section 3663(a) (2006), a District Court may order restitution to the victim of a criminal offense. In some circumstances, as in petitioner's criminal case, restitution is mandatory. See 18 U.S.C. sec. 3663A (2006). An order to pay restitution is a criminal penalty rather than a Creel v. Commissioner, 419 F.3d 1135, 1140 [96 AFTR 2d 2005-5487] (11th civil penalty. Cir. 2005). Although restitution is based upon an estimation of civil tax liability, it is not a determination of civil tax liability and generally does not bar the Commissioner from assessing a greater amount of civil tax liability. See Morse v. Commissioner, 419 F.3d 829, 833-835 [96 AFTR 2d 2005-5814] (8th Cir. 2005), affg. T.C. Memo. 2003-332 [TC Memo 2003-332]; Hickman v. Commissioner, 183 F.3d 535, 537-538 [84 AFTR 2d 99-5346] (6th Cir. 1999), affg. T.C. Memo. 1997-566 [1997 RIA TC Memo ¶97,566]; M.J. Wood Associates, Inc. v. Commissioner, T.C. Memo. 1998-375 [1998 RIA TC Memo ¶98,375]. In fact, the restitution statute expressly contemplates that a civil claim may be brought after the criminal prosecution by providing that the amount paid under a restitution order “shall be reduced by any amount later recovered as compensatory damages for the same loss by the victim in *** any Federal civil proceeding”. 18 U.S.C. 3664(j)(2) (2006). 11
Petitioner relies upon Creel v. Commissioner, supra, in support of his contention that respondent's proposed collection actions contravene the restitution order. Petitioner's reliance on Creel is misplaced. In Creel, the Court of Appeals found that a restitution order, which specifically encompassed “any interest and penalties which may be imposed by the Internal Revenue Service”, included the civil penalties that the Id. at Commissioner later sought to recover in a civil suit. 1140. Furthermore, at the time of the civil suit the taxpayer in Creel had fully settled the ordered restitution, and the U.S. attorney had filed a satisfaction of judgment and had also recorded a cancellation and release that of the judgment lien.
Taking into account these unusual circumstances, the Court Id. of Appeals held that the Government had discharged the taxpayer's civil tax liabilities as part of the criminal case.
By contrast, petitioner's plea agreement expressly states that it “does not bar or compromise any civil or administrative claim pending or that may be made against the defendant, including but not limited to tax matters.” Further, the plea agreement states that it is “binding only upon the United States Attorney's Office for the Eastern District of Arkansas and the defendant” and “does not bind *** any other federal, state or 11(...continued) this statement or the appropriateness of this treatment. Consequently, we give this issue no further consideration. local prosecuting, administrative or regulatory authority.” The criminal judgment refers to the restitution payments as “criminal monetary penalties” and makes no mention of civil liabilities or penalties. Furthermore, there is no evidence that petitioner has satisfied his criminal restitution order or received any discharge.
We conclude and hold that petitioner's criminal plea agreement and judgment ordering restitution did not discharge, and do not limit respondent's assessment and collection of, petitioner's civil tax liabilities for his taxable years 1996 through 2002.
III. Petitioner's Proposed Collection Alternative We review the settlement officer's denial of a collection alternative for abuse of discretion. See Sego v. Commissioner, 114 T.C. 604 (2000). The U.S. Court of Appeals for the Eighth Circuit, to which any appeal of this case would lie, describes the abuse of discretion standard as “markedly deferential: if the amount of tax owed is not in dispute, courts may disturb the administrative decision only if it constituted `a clear abuse of discretion in the sense of clear taxpayer abuse and unfairness by the IRS.” Fifty Below Sales & Mktg., Inc. v. United States, 497 F.3d 828, 830 [100 AFTR 2d 2007-5551] (8th Cir. 2007) (quoting Robinette v. Commissioner, 439 F.3d 455, 459 [97 AFTR 2d 2006-1391] (8th Cir. 2006), revg. 123 T.C. 85 (2004)).
The only collection alternative that petitioner has proposed is to limit his 1996 through 2002 liability to $246,226; i.e., the amount of restitution ordered by the District Court in the criminal proceeding. Insofar as this “collection alternative” represents petitioner's reassertion of his challenge to his underlying civil tax liabilities, it was properly rejected for the reasons just discussed. And for essentially those same reasons, the restitution order does not require respondent to adhere to the restitution payment schedule set forth therein to collect petitioner's civil tax liabilities.
Insofar as petitioner's “collection alternative” might be viewed as representing, in effect, an offer-in-compromise, the settlement officer did not abuse his discretion in rejecting it. The regulations set forth three grounds for compromising a liability: (1) Doubt as to liability; (2) doubt as to collectibility; and (3) promotion of effective tax administration. Sec. 301.7122-1(b), Proced. & Admin. Regs. As just discussed, petitioner has put forward no legitimate issue regarding his civil tax liabilities. Nor has he expressly argued that his collection alternative was for the promotion of effective tax administration. 12 That leaves doubt as to collectibility.
For purposes of evaluating an offer-in-compromise, doubt as to collectibility exists “where the taxpayer's assets and income are less than the full amount of the liability.” Sec. 301.7122- 1(b)(2), Proced. & Admin. Regs. Because he submitted incomplete Forms 433-A and 433-B, petitioner failed to provide the settlement officer all financial information necessary to evaluate his ability to fully pay his civil tax liabilities. For that reason, if for no other, the settlement officer did not abuse his discretion in rejecting any collection alternative based on doubt as to collectibility. See, e.g., Kansky v. Commissioner, T.C. Memo. 2007-40 [TC Memo 2007-40]; Criner v. Commissioner, T.C. Memo. 2003-328 [TC Memo 2003-328].
IV. Fair Hearing Petitioner complains that he was denied a fair collection hearing because the settlement officer did not disclose to his representative all the information in the collection administrative file which the settlement officer had reviewed in reaching his conclusions. 13
Collection hearings are conducted in an informal setting that does not include the right to discovery. See Katz v. Commissioner, 115 T.C. 329 (2000), Davis v. Commissioner, 115 T.C. 35, 41-42 (2000). The information that the settlement officer reviewed related to matters that should have been within petitioner's knowledge, and the settlement officer did in fact share with petitioner's representative the nature of his concerns about petitioner's nondisclosure of income and assets. 14 More fundamentally, as just discussed, petitioner's failure to provide the settlement officer all required financial information was reason enough for the settlement officer to reject his collection alternative. We do not see that the settlement officer's disclosure or nondisclosure of the materials in question had any significant bearing on the fairness or outcome of petitioner's hearing.
V. Denial of CDP Hearings for Nominees and Alter Egos Petitioner asserts that certain entities, including Cloverdale and Lestat Ops, received nominee or alter ego lien notices but were improperly denied CDP hearings. 15 According to the regulations, nominees and alter egos holding property for a taxpayer are not entitled to CDP hearings. Sec. 301.6330- 1(b)(2), Q&A-B5, Proced. & Admin. Regs. In any event, we cannot enter a decision affecting the entities in question because they are not parties to this proceeding. See Dalton v. Commissioner, 135 T.C. , (2010) (slip op. at 15).
V. Conclusion
We sustain respondent's determinations sustaining the filing of the notice of Federal tax lien and the proposed levy.
Decision will be entered for respondent.
________________________________________
1
Unless otherwise indicated, all section references are to the Internal Revenue Code. All figures are rounded to the nearest dollar.
________________________________________
2
This amount corresponded to the amount stated in the plea agreement as representing petitioner's total tax liability for the years 1999 through 2001. The record does not conclusively show why the District Court reduced the restitution in this manner.
________________________________________
3
The record does not establish whether petitioner has complied with the restitution order.
________________________________________
4
Insofar as the record shows, these were the first returns that petitioner filed for these years. Apparently, they were characterized as “amended” returns because respondent had previously prepared substitutes for returns for petitioner's taxable years 1996 through 1999.
________________________________________
5
The notice indicates that $47,567 of this amount relates to petitioner's 2003 taxable year.
________________________________________
6
After petitioner submitted his request for a collection due process (CDP) hearing, on Dec. 8, 2006, respondent issued to petitioner a notice of deficiency with respect to petitioner's taxable years 1998 through 2002. The parties agree that the deficiencies determined in the notice are not at issue in this case.
________________________________________
7
The record does not reveal who prepared these diagrams.
________________________________________
8
The request describes Lestat Ops as a trust which holds the real estate upon which petitioner's veterinary clinic is located and indicates that the trust's beneficiaries are petitioner's children.
________________________________________
9
The record contains the June 25, 2007, letters, described supra , from Revenue Officer Robert Brown to Cloverdale and Lestat Ops. The petition seems to assert that two other entities, Piraeus Group and MRMLBS, received similar letters also dated June 25, 2007. The record does not contain copies of any such letters.
________________________________________
10
Petitioner has stipulated that his 2003 liability (which was encompassed by the lien and levy notices but was not included either in petitioner's request for a CDP hearing or in respondent's determinations) is not at issue in this case.
________________________________________
18

________________________________________
11
Conversely, payments made pursuant to restitution orders are applied against tax liabilities. See United States v. Clayton, 613 F.3d 592 [106 AFTR 2d 2010-5556] (5th Cir. 2010); United States v. Tucker, 217 F.3d 960, 962 [89 AFTR 2d 2002-409] (8th Cir. 2000); M.J. Wood Associates, Inc. v. Commissioner, T.C. Memo. 1998-375 [1998 RIA TC Memo ¶98,375]. The record is silent as to what amounts, if any, of restitution petitioner has paid. On brief respondent states that petitioner's “restitution payments will ultimately be applied to his civil tax liability for the taxable year 2000, and if in excess of that liability to other years”. Petitioner, who filed no reply brief, has not challenged
________________________________________
11

________________________________________
12
The Commissioner may compromise a tax liability for promotion of effective tax administration if: (1) Collection in full could be achieved but would cause economic hardship; or (2) if there are compelling public policy or equity considerations identified by the taxpayer. Sec. 301.7122-1(b)(3), Proced. & Admin. Regs.; see Speltz v. Commissioner, 124 T.C. 165, 172-173 (2005), affd. 454 F.3d 782 [98 AFTR 2d 2006-5364] (8th Cir. 2006). Petitioner has not argued and the record does not suggest that he meets these conditions. Nor does the record suggest that petitioner raised these issues at the collection hearing; accordingly, he is not entitled to raise them in this proceeding. See Giamelli v. Commissioner, 129 T.C. 107, 114 (2007).
________________________________________
13
The materials which the settlement officer reviewed included Revenue Officer Brown's request to IRS district counsel to file alter ego and nominee liens and levies and district counsel's memorandum approving the filing of alter ego and nominee liens. Petitioner contends that these materials were not included in the administrative file. The parties have stipulated, however, that the stipulated exhibits, which include the materials in question, “constitute the complete administrative record in this case”. Petitioner has not raised, and consequently we do not consider, any issue as to whether the settlement officer's review of such materials entailed any improper ex parte communication.
Over respondents' objection, petitioner called the settlement officer as a witness at trial, attempting to show that the settlement officer failed to adequately explain the reasons for his determination. Cf. Robinette v. Commissioner, 439 F.3d 455, 461 [97 AFTR 2d 2006-1391] (8th Cir. 2006) (indicating that judicial review based on the administrative record may permit “the receipt of testimony or evidence explaining the reasoning behind the agency's decision”), revg. 123 T.C. 85 (2004). The settlement officer's testimony, however, had little probative value or relevancy. On brief respondent renews his objection to the settlement officer's testimony. Because we have not relied upon this testimony in our analysis or holdings, it is unnecessary to address further respondent's objection.
________________________________________
14
Shortly before the second telephone conference between petitioner's representative and the settlement officer on May 21, 2007, the IRS had mailed to Cloverdale and Lestat Ops (and, according to petitioner's allegations, at least two other entities) nominee notices of Federal tax lien filing.
________________________________________
15
Respondent issued the nominee notices of Federal tax lien filing for Cloverdale and Lestat Ops (and, according to petitioner's allegations, for at least two other entities) on May 15, 2007, months after respondent had issued petitioner the notice of Federal tax lien filing upon which this case is predicated.

PTIN numbers

2010-12-31T10:37:00.001-05:00

Notice 2011-6, 2011-3 IRB, 12/30/2010, IRC Sec(s).

Headnote:

Reference(s):

Full Text:

Purpose

This notice provides guidance regarding the implementation of new Treasury regulations governing tax return preparers. Section 1 of this notice provides guidance regarding the requirement to obtain a preparer tax identification number (PTIN) under section 1.6109-2 and identifies the forms that qualify as tax returns or claims for refund for purposes of those regulations. Section 2 of this notice provides interim rules applicable to certain PTIN holders during the implementation phase of the new regulations governing tax return preparers.

Background

The IRS made findings and recommendations in Publication 4832, “ Return Preparer Review,” which was published on January 4, 2010, concerning the results of an in-depth review of the tax return preparer industry. The IRS recommended increased oversight of tax return preparers through the issuance of regulations governing tax return preparers. The IRS published: (1) final regulations (75 FR 60309) addressing tax return preparer PTIN requirements on September 30, 2010; (2) final regulations (75 FR 60316) regarding the user fee to apply for or renew a PTIN on September 30, 2010; and (3) proposed regulations (REG-138637-07) addressing competency testing requirements, continuing education requirements, and extension of the ethics rules under 31 CFR Part 10 (reprinted in Treasury Department Circular 230 (Circular 230)) for tax return preparers on August 23, 2010.

1. Guidance under section 1.6109-2

.01 PTINs Obtained After September 28, 2010

Section 1.6109-2 provides that beginning after December 31, 2010, all tax return preparers must have a PTIN that was applied for and received at the time and in the manner as prescribed by the IRS. This notice confirms that tax return preparers who obtain a PTIN or a provisional PTIN and pay any applicable user fee after September 28, 2010, have applied for and received a PTIN in the manner prescribed by the IRS for purposes of the section 6109 regulations.

.02 Individuals Who May Obtain a Ptin

Section 1.6109-2(d) provides that for returns or claims for refund filed after December 31, 2010, the identifying number of a tax return preparer is the individual's PTIN or other number prescribed by the IRS. Additionally, after December 31, 2010, all individuals who are compensated for preparing, or assisting in the preparation of, all or substantially all of a tax return or claim for refund of tax must have a PTIN.

Section 1.6109-2(d) also provides that, except as provided in paragraph (h), beginning after December 31, 2010, a tax return preparer must be an attorney, certified public accountant, enrolled agent, or registered tax return preparer to obtain a PTIN. Section 1.6109-2(h) provides that the IRS may prescribe exceptions to the PTIN rules in appropriate guidance, including the requirement that an individual be an attorney, certified public accountant, enrolled agent, or registered tax return preparer before receiving a PTIN.

The IRS has decided to allow certain individuals who are not attorneys, certified public accountants, enrolled agents, or registered tax return preparers to obtain a PTIN and prepare, or assist in the preparation of, all or substantially all of a tax return in certain discrete circumstances.

a. Tax Return Preparers Supervised by Attorneys, Certified Public Accountants, Enrolled Agents, Enrolled Retirement Plan Agents, and Enrolled Actuaries

Until further guidance is issued, the IRS, in accordance with the authority to provide exceptions to the PTIN rules under section 1.6109-2(h), will permit any individual eighteen years or older to pay the applicable user fee and obtain a PTIN permitting the individual to prepare, or assist in the preparation of, all or substantially all of a tax return or claim for refund for compensation if:

(i) the individual is supervised by an attorney, certified public accountant, enrolled agent, enrolled retirement plan agent, or enrolled actuary authorized to practice before the IRS under Circular 230 § 10.3(a) through (e);
(ii) the supervising attorney, certified public accountant, enrolled agent, enrolled retirement plan agent, or enrolled actuary signs the tax returns or claims for refund prepared by the individual;
(iii) the individual is employed at the law firm, certified public accounting firm, or other recognized firm of the tax return preparer who signs the tax return or claim for refund; and
(iv) the individual passes the requisite tax compliance check and suitability check (when available).
For purposes of this provision, a law firm is a law partnership, professional corporation, sole proprietorship, or any other association authorized to practice law in any state, territory, or possession of the United States, including a Commonwealth, or the District of Columbia. A certified public accounting firm is a partnership, professional corporation, sole proprietorship, or any other association that is registered, permitted, or licensed to practice as a certified public accounting firm in any state, territory, or possession of the United States, including a Commonwealth, or the District of Columbia. A recognized firm is a partnership, professional corporation, sole proprietorship, or any other association, other than a law firm or certified public accounting firm, that has one or more employees lawfully engaged in practice before the IRS and that is 80 percent or a greater percent owned by one or more attorneys, certified public accountants, enrolled agents, enrolled actuaries, or enrolled retirement plan agents authorized to practice before the IRS under sections 10.3(a) through (e) of Circular 230, respectively.

Individuals applying for a PTIN under this provision will be required to certify on the PTIN application that they are supervised by an attorney, certified public accountant, enrolled agent, enrolled retirement plan agent, or enrolled actuary who signs the tax return or claim for refund prepared by the individual and provide a supervising individual's PTIN or other number if prescribed by the IRS. If at any point the individual is no longer supervised by the signing attorney, certified public accountant, enrolled agent, enrolled retirement plan agent, or enrolled actuary, the individual must notify the IRS as prescribed in forms, instructions, or other appropriate guidance and will not be permitted to prepare, or assist in preparing, all or substantially all of a tax return or claim for refund for compensation under this provision.

Individuals who obtain a PTIN under this provision and prepare, or assist in preparing, all or substantially all of a tax return or claim for refund for compensation will not be subject to a competency examination or continuing education requirements. These individuals, however, may not sign any tax return they prepare or assist in preparing for compensation, represent taxpayers before the IRS in any capacity, or represent to the IRS, their clients, or the general public that they are a registered tax return preparer or a Circular 230 practitioner.

Although individuals who obtain a PTIN under this provision are not practitioners under Circular 230, they are, by preparing, or assisting in the preparation of, a tax return for compensation, acknowledging that they are subject to the duties and restrictions relating to practice in subpart B of Circular 230. The IRS may, by written notification, revoke a PTIN obtained under this provision if the tax return preparer willfully violates applicable duties and restrictions prescribed in Circular 230 or engages in disreputable conduct. The tax return preparer may, within 30 days after receipt of the notice of revocation of the PTIN, file a written protest of the notice of revocation as prescribed in the revocation notice. A protest is not a proceeding under subpart D of Circular 230.

b. Individuals Who Prepare Tax Returns Not Covered by the Registered Tax Return Preparer Competency Examination(s)

The Treasury Department and the IRS have proposed rules that will require an individual to pass a registered tax return preparer minimum competency examination (competency examination). The IRS anticipates, however, that the tax returns and claims for refund covered by the competency examination(s) initially offered will be limited to individual income tax returns (Form 1040 series tax returns and accompanying schedules). Although the IRS anticipates the types of returns and claims for refunds covered by the competency examination(s) may expand in the future, the IRS recognizes that certain compensated tax return preparers do not prepare Form 1040 series tax returns or related claims for refunds and that the tax returns and claims for refunds prepared by some of these individuals may not be covered by the competency examinations for a significant period of time. The IRS has determined that individuals should not be required, as a condition to obtaining a PTIN, to pass a competency examination covering tax returns and claims for refunds not prepared by the individual. Therefore, until further guidance, this notice, in accordance with the authority under section 1.6109-2(h), provides that any individual eighteen years or older may pay the applicable user fee and obtain a PTIN if:

(i) the individual certifies that the individual does not prepare, or assist in the preparation of, all or substantially all of any tax return or claim for refund covered by the competency examination(s) for registered tax return preparers administered under IRS oversight (1040 series until further notice); and
(ii) the individual passes the requisite tax compliance check and suitability check (when available).
Individuals who obtain a PTIN under this provision and prepare, or assist in preparing, all or substantially all of a tax return or claim for refund for compensation will not yet be subject to a competency examination. These individuals are not currently required to satisfy the same continuing education requirements that a registered tax return preparer must complete to renew their PTIN. In the future, the IRS may require through forms, instructions, or other appropriate guidance that these individuals complete continuing education to renew their PTIN.

Individuals who obtain or renew a PTIN under this provision may sign the tax returns or claims for refunds that they prepare for compensation as the paid preparer. These individuals may also represent taxpayers before revenue agents, customer service representatives, or similar officers and employees of the IRS (including the Taxpayer Advocate Service) during an examination if the individual signed the tax return or claim for refund for the taxable year under examination. They may not, however, represent to the IRS, their clients, or the general public that they are a registered tax return preparer or a Circular 230 practitioner. Enrolled retirement plan agents and enrolled actuaries who obtain a PTIN under this provision may continue to practice and represent as provided in Circular 230.

Although individuals who obtain a PTIN under this provision are not practitioners under Circular 230, they are, by preparing, or assisting in the preparation of, a tax return for compensation, acknowledging that they are subject to the duties and restrictions relating to practice in subpart B of Circular 230. The IRS may, by written notification, revoke a PTIN obtained under this provision if the tax return preparer willfully violates applicable duties and restrictions prescribed in Circular 230 or engages in disreputable conduct. The tax return preparer may, within 30 days after receipt of the notice of revocation of the PTIN, file a written protest of the notice of revocation as prescribed in the revocation notice. A protest is not a proceeding under subpart D of Circular 230.

.03 Forms Requiring a Ptin

Section 1.6109-2(h) provides that the IRS may specify in appropriate guidance the returns, schedules, and other forms that qualify as tax returns or claims for refund for purposes of the PTIN regulations. Consistent with that authority, the IRS hereby specifies that all tax returns, claims for refund, or other tax forms submitted to the IRS are considered tax returns or claims for refund for purposes of section 1.6109-2 unless otherwise provided by the IRS. For purposes of this provision, the term tax forms is interpreted broadly. An individual must obtain a PTIN to prepare for compensation all or substantially all of any form except those specifically identified by the IRS as not subject to the requirements of § 1.6109-2. At this time, the IRS identifies the following forms as not subject to the requirements of § 1.6109-2:

Form SS-4, Application for Employer Identification Number;

Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding;

Form SS-16, Certificate of Election of Coverage under FICA;

Form W-2 series of returns;

Form W-7, Application for IRS Individual Taxpayer Identification Number;

Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding;

Form 870, Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment;

Form 872, Consent to Extend the Time to Assess Tax;

Form 906, Closing Agreement On Final Determination Covering Specific Matters;

Form 1098 series;

Form 1099 series;

Form 2848, Power of Attorney and Declaration of Representative;

Form 3115, Application for Change in Accounting Method;

Form 4029, Application for Exemption From Social Security and Medicare Taxes and Waiver of Benefits;

Form 4361, Application for Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders and Christian Science Practitioners;

Form 4419, Application for Filing Information Returns Electronically;

Form 5300, Application for Determination for Employee Benefit Plan;

Form 5307, Application for Determination for Adopters of Master or Prototype or Volume Submitter Plans;

Form 5310, Application for Determination for Terminating Plan;

Form 5500 series;

Form 8027, Employer's Annual Information Return of Tip Income and Allocated Tips;

Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests;

Form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests;

Form 8508, Request for Waiver From Filing Information Returns Electronically;

Form 8717 User Fee for Employee Plan Determination, Opinion, and Advisory Letter Request;

Form 8809, Application for Extension of Time to File Information Return;

Form 8821, Tax Information Authorization;

Form 8942, Application for Certification of Qualified Investments Eligible for Credits and Grants Under the Qualifying Therapeutic Discovery Project Program

The IRS may in future guidance modify the list of documents that do not qualify as tax returns or claims for refund for purposes of section 1.6109-2(h).

2. Interim Rules

.01 Provisional PTINs

As discussed in section 1 of this notice, an individual may be designated as a registered tax return preparer if the individual successfully completes a competency examination or otherwise meets requisite standards prescribed by the IRS. The IRS, however, does not expect to offer the competency examination before mid 2011. Therefore, to allow tax return preparers to obtain a PTIN and continue to prepare tax returns or claims for refund until the competency examination is available, the IRS, as an interim rule, will allow individuals who are not attorneys, certified public accountants, or enrolled agents to obtain a provisional PTIN before the date that the competency examination is first offered (“ initial test offering date” ). Individuals may obtain a provisional PTIN through the IRS' new online PTIN application system or by submitting to the IRS a paper Form W-12, IRS Paid Preparer Tax Identification Number (PTIN) Application. The individual must annually renew the provisional PTIN and pay the applicable user fee.

The IRS generally will not issue provisional PTINs in accordance with this provision after the initial test offering date. After the initial test offering date, only attorneys, certified public accountants, enrolled agents, and registered tax return preparers, or individuals defined in section 1.02(a) or (b) of this notice will be eligible to obtain a PTIN in accordance with section 1.6109-2, subject to any future IRS guidance identifying additional individuals who may obtain a PTIN.

Until December 31, 2013, a provisional PTIN may be renewed upon proper application and payment of the applicable user fee, even if the individual holding the provisional PTIN is not an attorney, certified public accountant, enrolled agent, or registered tax return preparer. After December 31, 2013, provisional PTINs generally will not be renewed, and the holder of a provisional PTIN obtained in accordance with this provision may keep the PTIN only if the holder of the provisional PTIN is eligible to obtain a PTIN in accordance with section 1.6109-2, section 1.02(a) or (b) of this notice, or future guidance.

.02 Return Preparation by Provisional Ptin Holders

Tax return preparers who properly obtain a provisional PTIN before the initial test offering date will be permitted, subject to the requisite federal tax compliance check and suitability check (when available), to prepare for compensation all or substantially all of any tax return or claim for refund until December 31, 2013. During the transition period from the initial test offering date through December 31, 2013, tax return preparers who hold a provisional PTIN may, subject to the payment of the applicable user fee, take the competency examination as often as the examination is offered.

These interim rules apply to those tax return preparers who obtain a provisional PTIN prior to the initial test offering date. An individual who is subject to the competency testing requirement for becoming a registered tax return preparer who does not obtain a PTIN before the initial test offering date must pass the competency examination and be designated as a registered tax return preparer to be permitted to prepare for compensation all or substantially all of a tax return or claim for refund.

The holder of a provisional PTIN may represent that the holder is authorized to practice before the IRS by preparing and filing tax returns or claims for refund, but the holder of a provisional PTIN may not represent that the holder is a registered tax return preparer or has passed the competency examination necessary to become a registered tax return preparer.

.03 Practice Based on Return Preparation

The proposed Circular 230 regulations include registered tax return preparers in the definition of individuals described as practitioners and authorize these individuals to practice before the IRS. Practice as a registered tax return preparer generally is limited to preparing tax returns, claims for refund, or other documents for submission to the IRS and to limited representation as described below. A registered tax return preparer may prepare all or substantially all of a tax return or claim for refund. The IRS will prescribe by forms, instructions, or other appropriate guidance the tax returns and claims for refund that a registered tax return preparer may prepare and sign.

Registered tax return preparers may represent taxpayers before revenue agents, customer service representatives, or similar officers and employees of the IRS during an examination if the registered tax return preparer prepared and signed (or prepared and was not required to sign) the tax return or claim for refund for the taxable period under examination.

Prior to January 1, 2011, any individual generally may prepare a tax return or claim for refund for compensation. An individual who prepares and signs a taxpayer's return or claim for refund as the preparer generally may represent that taxpayer during an examination of the taxable period covered by that return or claim for refund. The proposed Circular 230 regulations generally do not extend this right of representation to individuals who are not practitioners after December 31, 2010. To ensure that tax return preparers have sufficient time to become registered tax return preparers, these interim rules provide that an individual may represent a taxpayer during an examination provided the individual prepared and signed the taxpayer's return or claim for refund as the preparer for the taxable period under examination and the individual was permitted under the regulations or other published guidance to prepare the taxpayer's return or claim for refund for compensation. This right to represent the taxpayer does not, however, permit an individual who is not an attorney, certified public accountant, enrolled agent, enrolled retirement plan agent, or enrolled actuary to represent the taxpayer before appeals officers, revenue officers, Counsel, or similar officers or employees of the IRS or the Department of Treasury.

.04 Continuing Education

The proposed Circular 230 regulations require registered tax return preparers to complete fifteen hours of continuing education each registration year. As an interim rule, there is no continuing education requirement for registered tax return preparers or tax return preparers who obtain a provisional PTIN during the first year of registration, which commenced on September 30, 2010.

.05 Ethics and Conduct

The proposed Circular 230 regulations include registered tax return preparers in the definition of individuals described as practitioners and authorize these individuals to practice before the IRS. Practice as a registered tax return preparer, therefore, will be subject to applicable duties and restrictions relating to practice before the IRS under Circular 230. Accordingly, as an interim rule, practice before the IRS by a tax return preparer who obtains a provisional PTIN or any individual who for compensation prepares, or assists in the preparation of, all or a substantial portion of a document pertaining to any taxpayer's tax liability for submission to the IRS also is subject to applicable duties and restrictions relating to practice before the IRS under Circular 230. Tax return preparers holding a provisional PTIN and other individuals who for compensation prepare, or assist in the preparation of, all or a substantial portion of a document pertaining to any taxpayer's tax liability for submission to the IRS must not engage in disreputable conduct under section 10.51 of Circular 230. The IRS may, by written notification, revoke a provisional PTIN if the tax return preparer willfully violates applicable duties and restrictions prescribed in Circular 230 or engages in disreputable conduct under section 10.51 of Circular 230. The tax return preparer may, within 30 days after receipt of the notice of revocation of the provisional PTIN, file a written protest of the notice of revocation as prescribed in the revocation notice. A protest is not a proceeding under subpart D of Circular 230.

The interim rules described in this notice and any final regulations apply to all tax return preparers who prepare all or substantially all of a tax return or claim for refund for compensation. As discussed in section 1 of this notice, all tax returns, claims for refund, or other documents submitted to the IRS unless otherwise provided for in section 1 of this notice or other guidance are tax returns for purposes of the PTIN regulations.

Contact Information

The principal author of this notice is Matthew D. Lucey of the Office of Associate Chief Counsel (Procedure and Administration). For further information regarding this notice contact Matthew D. Lucey on (202) 622-4940 (not a toll-free call).

New 2011 6694 disclosure guidelines

2010-12-29T09:07:00.000-05:00

IRS updates disclosure rules to lessen understatement and preparer penalties
Rev Proc 2011-13, 2011-3 IRB
A revised revenue procedure identifies when disclosure on a taxpayer's return for an item or a position is adequate to reduce a Code Sec. 6662(d)understatement of income tax under the accuracy-related penalty, and to avoid the Code Sec. 6694(a) preparer penalty for understatements due to unreasonable positions. It applies to any income tax return filed on 2010 tax forms for tax years beginning in 2010, and to any income tax return filed on 2010 tax forms in 2011 for short tax years beginning in 2011.
Background. Under Code Sec. 6662 , a 20% penalty applies to the portion of a tax underpayment that is attributable to a substantial understatement of income tax. The penalty rate is 40% in the case of gross valuation misstatements under Code Sec. 6662(h) , nondisclosed noneconomic substance transactions under Code Sec. 6662(i) , or undisclosed foreign financial asset understatements under section Code Sec. 6662(j) . An understatement is “substantial” if it exceeds the greater of 10% of the amount of tax required to be shown on the return for the tax year or $5,000. However, a corporation (other than an S corporation or personal holding company) has a substantial tax understatement if the understatement exceeds the lesser of (1) 10% of the tax required to be shown on the return for a tax year (or, if greater, $10,000), or (2) $10 million. ( Code Sec. 6662(d) )
For a non-tax shelter item, the understatement is reduced to the extent the relevant facts affecting the item's tax treatment are adequately disclosed in the return or in a statement attached to the return, and there is a reasonable basis for the taxpayer's tax treatment. ( Code Sec. 6662(d)(2)(B)(ii) )
Under Code Sec. 6694(a) , a penalty is imposed on a tax return preparer who prepares a return or refund claim reflecting an understatement of liability due to an “unreasonable position” if he knew (or reasonably should have known) of the position. A position (other than for a tax shelter or a reportable transaction) is generally treated as unreasonable unless (1) there is or was substantial authority for the position; or (2) the position was properly disclosed under Code Sec. 6662(d)(2)(B)(ii)(I) and had a reasonable basis. If the position is with respect to a tax shelter or a reportable transaction, the position is treated as unreasonable unless it is reasonable to believe that the position would more likely than not be sustained on the merits. ( Notice 2009-5, 2009-1 CB 309 )
Revised procedure. In Rev Proc 2011-13 , IRS sets out the circumstances under which disclosure of information on a return is considered to be adequate to avoid the substantial understatement penalty under Code Sec. 6662(d) and the preparer penalty under Code Sec. 6694(a) for understatements due to unreasonable positions. A corporation making a complete and accurate disclosure of a tax position on the appropriate year's Schedule UTP (Uncertain Tax Position Statement), will be treated as if it had filed a Form 8275 (Disclosure Statement) or Form 8275-R (Regulation Disclosure Statement) regarding the tax position. However, the filing of a Form 8275 or Form 8275-R, will not be treated as if the corporation filed a Schedule UTP.
Additional disclosure of relevant facts or positions taken with respect to issues involving any of the items listed in Rev Proc 2011-13 is unnecessary for purposes of reducing any understatement of income tax under Code Sec. 6662(d) (except as otherwise provided in Rev Proc 2011-13, Sec. 4.02(3) , concerning Schedules M-1 and M-3), if forms and attachments are completed in a clear manner and in accordance with instructions.
Although a taxpayer may literally meet Rev Proc 2011-13 's disclosure requirements, the disclosure won't have an effect for purposes of the Code Sec. 6662 accuracy-related penalty if the item or position on the return: (1) doesn't have a reasonable basis as defined in Reg. § 1.6662-3(b)(3) ; (2) is attributable to a tax shelter item as defined in Code Sec. 6662(d)(2) ; or (3) isn't properly substantiated or the taxpayer failed to keep adequate books and records with respect to the item or position. Disclosure will have no effect for purposes of the Code Sec. 6694(a) penalty as applicable to tax return preparers if the position is with respect to a tax shelter (as defined in Code Sec. 6662(d)(2)(C)(ii) ) or a reportable transaction to which Code Sec. 6662Aapplies.
Rev Proc 2011-13, Sec. 4.01(2) provides that money amounts entered on forms must be verifiable, and the information on the return must be disclosed in the manner described in Rev Proc 2011-13, Sec. 4.02(3) . A number is verifiable if, on audit, the taxpayer can prove the origin of the amount (even if that number is not ultimately accepted by IRS) and can show good faith in entering that number on the applicable form. Further, the disclosure of an amount as provided in Rev Proc 2011-13, Sec. 4.02 , isn't adequate when the understatement arises from a transaction between related parties. If an entry may present a legal issue or controversy because of a related-party transaction, then that transaction and the relationship must be disclosed on Form 8275 or Form 8275-R.
When the amount of an item is shown on a line that doesn't have a preprinted description identifying that item, the taxpayer must clearly identify the item by including the description on that line. For example, to disclose a sole proprietorship's bad debt, the words “bad debt” must be written or typed on the line of Schedule C that shows the amount of the bad debt. Also, for Schedule M-3 (Form 1120), Part II, line 25, Other income (loss) items with differences, or Part III, line 35, Other expense/deduction items with differences, the entry must provide descriptive language (e.g., “Cost of non-compete agreement deductible not capitalizable”). If space limitations on a form do not allow for an adequate description, the description must be continued on an attachment.
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Rev. Proc. 2011-13, 2011-3 IRB, 12/28/2010, IRC Sec(s).
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1. Purpose
This revenue procedure updates Rev. Proc. 2010-15, 2010-7 I.R.B. 404, and identifies circumstances under which the disclosure on a taxpayer's income tax return with respect to an item or a position is adequate for the purpose of reducing the understatement of income tax under section 6662(d) of the Internal Revenue Code (relating to the substantial understatement aspect of the accuracy-related penalty), and for the purpose of avoiding the tax return preparer penalty under section 6694(a) (relating to understatements due to unreasonable positions) with respect to income tax returns. This revenue procedure does not apply with respect to any other penalty provisions (including the disregard provisions of the section 6662(b)(1) accuracy-related penalty, the section 6662(i) increased accuracy-related penalty in the case of nondisclosed noneconomic substance transactions, and the section 6662(j) increased accuracy-related penalty in the case of undisclosed foreign financial asset understatements).
This revenue procedure applies to any income tax return filed on 2010 tax forms for a taxable year beginning in 2010, and to any income tax return filed on 2010 tax forms in 2011 for short taxable years beginning in 2011.
2. Changes From Rev. Proc. 2010-15
.01. This revenue procedure has been updated to include reference to: (i) the section 6662(i) increased accuracy-related penalty in the case of nondisclosed noneconomic substance transactions; (ii) the section 6662(j) increased accuracy-related penalty in the case of undisclosed foreign financial asset understatements; and (iii) the Schedule UTP, Uncertain Tax Position Statement, a new schedule required of certain corporations.
3. Background
.01. If section 6662 applies to any portion of an underpayment of tax required to be shown on a return, an amount equal to 20 percent of the portion of the underpayment to which the section applies is added to the tax (the penalty rate is 40 percent in the case of gross valuation misstatements under section 6662(h), nondisclosed noneconomic substance transactions under section 6662(i), or undisclosed foreign financial asset understatements under section 6662(j)). Section 6662(b)(2) applies to the portion of an underpayment of tax that is attributable to a substantial understatement of income tax.
.02. Section 6662(d)(1) provides that there is a substantial understatement of income tax if the amount of the understatement exceeds the greater of 10 percent of the amount of tax required to be shown on the return for the taxable year or $5,000. Section 6662(d)(1)(B) provides special rules for corporations. A corporation (other than an S corporation or personal holding company) has a substantial understatement of income tax if the amount of the understatement exceeds the lesser of 10 percent of the tax required to be shown on the return for a taxable year (or, if greater, $10,000) or $10,000,000. Section 6662(d)(2) defines an understatement as the excess of the amount of tax required to be shown on the return for the taxable year over the amount of the tax that is shown on the return reduced by any rebate (within the meaning of section 6211(b)(2)).
.03. In the case of an item not attributable to a tax shelter, section 6662(d)(2)(B)(ii) provides that the amount of the understatement is reduced by the portion of the understatement attributable to the item if the relevant facts affecting the item's tax treatment are adequately disclosed in the return or in a statement attached to the return, and there is a reasonable basis for the tax treatment of the item by the taxpayer..
.04. Section 6694(a) imposes a penalty on a tax return preparer who prepares a return or claim for refund reflecting an understatement of liability due to an “ unreasonable position” if the tax return preparer knew (or reasonably should have known) of the position. A position (other than a position with respect to a tax shelter or a reportable transaction to which section 6662A applies) is generally treated as unreasonable unless (i) there is or was substantial authority for the position, or (ii) the position was properly disclosed in accordance with section 6662(d)(2)(B)(ii)(I) and had a reasonable basis. If the position is with respect to a tax shelter (as defined in section 6662(d)(2)(C)(ii)) or a reportable transaction to which section 6662A applies, the position is treated as unreasonable unless it is reasonable to believe that the position would more likely than not be sustained on the merits. See Notice 2009-5, 2009-3 I.R.B. 309 (January 21, 2009) for interim penalty compliance rules for tax shelter transactions.
.05. In general, this revenue procedure provides guidance for determining when disclosure by return is adequate for purposes of section 6662(d)(2)(B)(ii) and section 6694(a)(2)(B). For purposes of this revenue procedure, the taxpayer must furnish all required information in accordance with the applicable forms and instructions, and the money amounts entered on these forms must be verifiable.
.06. Fiscal and short tax year returns. (a) In general. This revenue procedure may apply to a return for a fiscal tax year that begins in 2010 and ends in 2011. This revenue procedure may also apply to a short year return for a period beginning in 2011 if the return is to be filed before the 2011 forms are available. (Note that individuals are generally not put in this position as a decedent's final return for a fractional part of a year is due the fifteenth day of the fourth month following the close of the 12-month period which began with the first day of such fractional part of the year. See Treas. Reg. § 1.6072-1(b).) In the case of fiscal year and short year returns, the taxpayer must take into account any tax law changes that are effective for tax years beginning after December 31, 2010, even though these changes are not reflected on the form.
(b) Tax law changes effective after December 31, 2010. This document does not take into account the effect of tax law changes effective for tax years beginning after December 31, 2010. If a line referenced in this revenue procedure is affected by such a change and requires additional reporting, a taxpayer may have to file Form 8275, Disclosure Statement, or Form 8275-R, Regulation Disclosure Statement, until the Service prescribes criteria for complying with the requirement.
.07. A complete and accurate disclosure of a tax position on the appropriate year's Schedule UTP, Uncertain Tax Position Statement, will be treated as if the corporation filed a Form 8275 or Form 8275-R regarding the tax position. The filing of a Form 8275 or Form 8275-R, however, will not be treated as if the corporation filed a Schedule UTP.
4. Procedure
.01. General
(1) Additional disclosure of facts relevant to, or positions taken with respect to, issues involving any of the items set forth below is unnecessary for purposes of reducing any understatement of income tax under section 6662(d) (except as otherwise provided in section 4.02(3) concerning Schedules M-1 and M-3), provided that the forms and attachments are completed in a clear manner and in accordance with their instructions.
(2) The money amounts entered on the forms must be verifiable, and the information on the return must be disclosed in the manner described below. For purposes of this revenue procedure, a number is verifiable if, on audit, the taxpayer can prove the origin of the amount (even if that number is not ultimately accepted by the Internal Revenue Service) and the taxpayer can show good faith in entering that number on the applicable form.
(3) The disclosure of an amount as provided in section 4.02 below is not adequate when the understatement arises from a transaction between related parties. If an entry may present a legal issue or controversy because of a related-party transaction, then that transaction and the relationship must be disclosed on a Form 8275 or Form 8275-R.
(4) When the amount of an item is shown on a line that does not have a preprinted description identifying that item (such as on an unnamed line under an “ Other Expense” category) the taxpayer must clearly identify the item by including the description on that line. For example, to disclose a bad debt for a sole proprietorship, the words “ bad debt” must be written or typed on the line of Schedule C that shows the amount of the bad debt. Also, for Schedule M-3 (Form 1120), Part II, line 25, Other income (loss) items with differences, or Part III, line 35, Other expense/deduction items with differences, the entry must provide descriptive language; for example, “Cost of non-compete agreement deductible not capitalizable.” If space limitations on a form do not allow for an adequate description, the description must be continued on an attachment.
(5) Although a taxpayer may literally meet the disclosure requirements of this revenue procedure, the disclosure will have no effect for purposes of the section 6662 accuracy-related penalty if the item or position on the return: (1) Does not have a reasonable basis as defined in Treas. Reg. § 1.6662-3(b)(3); (2) Is attributable to a tax shelter item as defined in section 6662(d)(2); or (3) Is not properly substantiated or the taxpayer failed to keep adequate books and records with respect to the item or position.
(6) Disclosure also will have no effect for purposes of the section 6694(a) penalty as applicable to tax return preparers if the position is with respect to a tax shelter (as defined in section 6662(d)(2)(C)(ii)) or a reportable transaction to which section 6662A applies.
.02. Items
(1) Form 1040, Schedule A, Itemized Deductions:
(a) Medical and Dental Expenses: Complete lines 1 through 4, supplying all required information.
(b) Taxes: Complete lines 5 through 9, supplying all required information. Line 8 must list each type of tax and the amount paid.
(c) Interest Expenses: Complete lines 10 through 15, supplying all required information. This section 4.02(1)(c) does not apply to (i) amounts disallowed under section 163(d) unless Form 4952, Investment Interest Expense Deduction , is completed, or (ii) amounts disallowed under section 265.
(d) Contributions: Complete lines 16 through 19, supplying all required information. Enter the amount of the contribution reduced by the value of any substantial benefit (goods or services) provided by the donee organization in consideration, in whole or in part. Entering the value of the contribution unreduced by the value of the benefit received will not constitute adequate disclosure. If a contribution of $250 or more is made, this section will not apply unless a contemporaneous written acknowledgment, as required by section 170(f)(8), is obtained from the donee organization. If a contribution of cash of less than $250 is made, this section will not apply unless a bank record or written communication from the donee, as required by section 170(f)(17), is obtained from the donee organization. If a contribution of property other than cash is made and the amount claimed as a deduction exceeds $500, attach a properly completed Form 8283, Noncash Charitable Contributions, to the return. In addition to the Form 8283, if a contribution of a qualified motor vehicle, boat, or airplane has a value of more than $500, this section will not apply unless a contemporaneous written acknowledgment, as required by section 170(f)(12), is obtained from the donee organization and attached to the return. An acknowledgment under section 170(f)(8) is not required if an acknowledgment under section 170(f)(12) is required.
(e) Casualty and Theft Losses: Complete Form 4684, Casualties and Thefts, and attach to the return. Each item or article for which a casualty or theft loss is claimed must be listed on Form 4684.
(2) Certain Trade or Business Expenses (including, for purposes of this section, the following six expenses as they relate to the rental of property):
(a) Casualty and Theft Losses: The procedure outlined in section 4.02(1)(e) must be followed.
(b) Legal Expenses: The amount claimed must be stated. This section does not apply, however, to amounts properly characterized as capital expenditures, personal expenses, or non-deductible lobbying or political expenditures, including amounts that are required to be (or that are) amortized over a period of years.
(c) Specific Bad Debt Charge-off: The amount written off must be stated.
(d) Reasonableness of Officers' Compensation: Form 1120, Schedule E, Compensation of Officers , must be completed when required by its instructions. The time devoted to business must be expressed as a percentage as opposed to “part” or “as needed.” This section does not apply to “golden parachute” payments, as defined under section 280G. This section will not apply to the extent that remuneration paid or incurred exceeds the employee-remuneration deduction limitations under section 162(m), if applicable.
(e) Repair Expenses: The amount claimed must be stated. This section does not apply, however, to any repair expenses properly characterized as capital expenditures or personal expenses.
(f) Taxes (other than foreign taxes): The amount claimed must be stated.
(3) Differences in book and income tax reporting.
For Schedule M-1 and all Schedules M-3, including those listed in (a)-(f) below, the information provided must reasonably apprise the Service of the potential controversy concerning the tax treatment of the item. If the information provided does not so apprise the Service, a Form 8275 or Form 8275-R must be used to adequately disclose the item (see Part II of the instructions for those forms).
Note: An item reported on a line with a pre-printed description, shown on an attached schedule or “ itemized” on Schedule M-1, may represent the aggregate amount of several transactions producing that item (i.e., a group of similar items, such as amounts paid or incurred for supplies by a taxpayer engaged in business). In some instances, a potentially controversial item may involve a portion of the aggregate amount disclosed on the schedule. The Service will not be reasonably apprised of a potential controversy by the aggregate amount disclosed. In these instances, the taxpayer must use Form 8275 or Form 8275-R regarding that portion of the item.
Combining unlike items, whether on Schedule M-1 or Schedule M-3 (or on an attachment when directed by the instructions), will not constitute an adequate disclosure.
Additionally, for taxpayers that file the Schedule M-3 (Form 1120), the new Schedule B, Additional Information for Schedule M-3 Filers, must also be completed. For taxpayers that file the Schedule M-3 (Form 1065), the new Schedule C, Additional Information for Schedule M-3 Filers, must also be completed. When required, these new Schedules are necessary to constitute adequate disclosure.
(a) Form 1065. Schedule M-3 (Form 1065), Net Income (Loss) Reconciliation for Certain Partnerships: Column (a), Income (Loss) per Income Statement, of Part II (reconciliation of income (loss) items) and Column (a), Expense per Income Statement, of Part III (reconciliation of expense/deduction items); Column (b), Temporary Difference, and Column (c), Permanent Difference, of Part II (reconciliation of income (loss) items) and Part III (reconciliation of expense/deduction items); and Column (d), Income (Loss) per Tax Return, of Part II (reconciliation of income (loss) items) and Column (d), Deduction per Tax Return , of Part III (reconciliation of expense/deduction items).
(b) Form 1120. (i) Schedule M-1, Reconciliation of Income (Loss) per Books With Income per Return.
(ii) Schedule M-3 (Form 1120), Net Income (Loss) Reconciliation for Corporations with Total Assets of $10 Million or More: Column (a), Income (Loss) per Income Statement , of Part II (reconciliation of income (loss) items) and Column (a), Expense per Income Statement, of Part III (reconciliation of expense/deduction items); Column (b), Temporary Difference, and Column (c), Permanent Difference, of Part II (reconciliation of income (loss) items) and Part III (reconciliation of expense/deduction items) and Column (d), Income (Loss) per Tax Return , of Part II (reconciliation of income (loss) items); and Column (d), Deduction per Tax Return, of Part III (reconciliation of expense/deduction items).
(c) Form 1120-L. Schedule M-3 (Form 1120-L), Net Income (Loss) Reconciliation for U.S. Life Insurance Companies With Total Assets of $10 Million or More: Column (a), Income (Loss) per Income Statement, of Part II (reconciliation of income (loss) items) and Column (a), Expense per Income Statement, of Part III (reconciliation of expense/deduction items); Column (b), Temporary Difference, and Column (c), Permanent Difference, of Part II (reconciliation of income (loss) items) and Part III (reconciliation of expense/deduction items); and Column (d), Income (Loss) per Tax Return, of Part II (reconciliation of income (loss) items) and Column (d), Deduction per Tax Return, of Part III (reconciliation of expense/deduction items).
(d) Form 1120-PC. Schedule M-3 (Form 1120-PC), Net Income (Loss) Reconciliation for U.S. Property and Casualty Insurance Companies With Total Assets of $10 Million or More: Column (a), Income (Loss) per Income Statement, of Part II (reconciliation of income (loss) items) and Column (a), Expense per Income Statement, of Part III (reconciliation of expense/deduction items); Column (b), Temporary Difference, and Column (c), Permanent Difference, of Part II (reconciliation of income (loss) items) and Part III (reconciliation of expense/deduction items); and Column (d), Income (Loss) per Tax Return, of Part II (reconciliation of income (loss) items) and Column (d), Deduction per Tax Return , of Part III (reconciliation of expense/deduction items).
(e) Form 1120S. Schedule M-3 (Form 1120S), Net Income (Loss) Reconciliation for S Corporations With Total Assets of $10 Million or More: Column (a), Income (Loss) per Income Statement, of Part II (reconciliation of income (loss) items) and Column (a), Expense per Income Statement , of Part III (reconciliation of expense/deduction items); Column (b), Temporary Difference, and Column (c), Permanent Difference, of Part II (reconciliation of income (loss) items) and Part III (reconciliation of expense/deduction items); and Column (d), Income (Loss) per Tax Return, of Part II (reconciliation of income (loss) items) and Column (d), Deduction per Tax Return, of Part III (reconciliation of expense/deduction items).
(f) Form 1120-F. Schedule M-3 (Form 1120-F), Net Income (Loss) Reconciliation for Foreign Corporations With Total Assets of $10 Million or More: Column (b), Temporary Difference, Column (c), Permanent Difference , and Column (d), Other Permanent Differences for Allocations to Non-ECI and ECI, of Part II (reconciliation of income (loss) items) and Part III (reconciliation of expense/deduction items).
(4) Foreign Tax Items:
(a) International Boycott Transactions: Transactions disclosed on Form 5713, International Boycott Report; Schedule A, International Boycott Factor ( Section 999(c)(1)) ; Schedule B, Specifically Attributable Taxes and Income ( Section 999(c)(2)); and Schedule C, Tax Effect of the International Boycott Provisions , must be completed when required by their instructions.
(b) Treaty-Based Return Position: Transactions and amounts under section 6114 or section 7701(b) as disclosed on Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), must be completed when required by its instructions.
(5) Other:
(a) Moving Expenses: Complete Form 3903, Moving Expenses, and attach to the return.
(b) Employee Business Expenses: Complete Form 2106, Employee Business Expenses, or Form 2106-EZ, Unreimbursed Employee Business Expenses, and attach to the return. This section does not apply to club dues, or to travel expenses for any non-employee accompanying the taxpayer on the trip.
(c) Fuels Credit: Complete Form 4136, Credit for Federal Tax Paid on Fuels, and attach to the return.
(d) Investment Credit: Complete Form 3468, Investment Credit, and attach to the return.
5. Effective Date
This revenue procedure applies to any income tax return filed on a 2010 tax form for a taxable year beginning in 2010, and to any income tax return filed on a 2010 tax form in 2011 for a short taxable year beginning in 2011.
6. Drafting Information
The principal author of this revenue procedure is Francis M. McCormick of the Office of Associate Chief Counsel (Procedure & Administration). For further information regarding this revenue procedure, contact Branch 2 of Procedure and Administration at (202) 622-4940 (not a toll free call).

The Small Business Jobs Act of 2010

2010-10-01T10:19:00.001-04:00

The recently enacted Small Business Jobs Act of 2010 includes a wide-ranging assortment of tax changes generally affecting business. Two of the most significant changes allow for faster cost recovery of business property. Here are the details.
Enhanced small business expensing (Section 179 expensing). In order to help small businesses quickly recover the cost of certain capital expenses, small business taxpayers can elect to write off the cost of these expenses in the year of acquisition in lieu of recovering these costs over time through depreciation. Under pre-2010 Small Business Act law, taxpayers could expense up to $250,000 for qualifying property—generally, machinery, equipment and certain software—placed in service in tax years beginning in 2010. This annual expensing limit was reduced (but not below zero) by the amount by which the cost of qualifying property placed in service in tax years beginning in 2010 exceeded $800,000 (the investment ceiling). Under the new law, for tax years beginning in 2010 and 2011, the $250,000 limit is increased to $500,000 and the investment ceiling to $2,000,000.
The new law also makes certain real property eligible for expensing. For property placed in service in any tax year beginning in 2010 or 2011, the up-to-$500,000 of property that can be expensed can include up to $250,000 of qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property).
Extension of 50% bonus first-year depreciation. Businesses are allowed to deduct the cost of capital expenditures over time according to depreciation schedules. In previous legislation, Congress allowed businesses to more rapidly deduct capital expenditures of most new tangible personal property, and certain other new property, placed in service in 2008 or 2009 (2010 for certain property), by permitting the first-year write-off of 50% of the cost. The new law extends the first-year 50% write-off to apply to qualifying property placed in service in 2010 (2011 for certain property).

The recently enacted Small Business Jobs Act of 2010 includes a wide-ranging assortment of tax changes generally affecting business. Two of the most significant changes allow for faster cost recovery of business property. Here are the details.
Enhanced small business expensing (Section 179 expensing). In order to help small businesses quickly recover the cost of certain capital expenses, small business taxpayers can elect to write off the cost of these expenses in the year of acquisition in lieu of recovering these costs over time through depreciation. Under pre-2010 Small Business Act law, taxpayers could expense up to $250,000 for qualifying property—generally, machinery, equipment and certain software—placed in service in tax years beginning in 2010. This annual expensing limit was reduced (but not below zero) by the amount by which the cost of qualifying property placed in service in tax years beginning in 2010 exceeded $800,000 (the investment ceiling). Under the new law, for tax years beginning in 2010 and 2011, the $250,000 limit is increased to $500,000 and the investment ceiling to $2,000,000.
The new law also makes certain real property eligible for expensing. For property placed in service in any tax year beginning in 2010 or 2011, the up-to-$500,000 of property that can be expensed can include up to $250,000 of qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property).
Extension of 50% bonus first-year depreciation. Businesses are allowed to deduct the cost of capital expenditures over time according to depreciation schedules. In previous legislation, Congress allowed businesses to more rapidly deduct capital expenditures of most new tangible personal property, and certain other new property, placed in service in 2008 or 2009 (2010 for certain property), by permitting the first-year write-off of 50% of the cost. The new law extends the first-year 50% write-off to apply to qualifying property placed in service in 2010 (2011 for certain property).
If you've recently started a business, or if you're in the process of starting one now, you should be aware of a recent tax law change that could make a big difference in your tax bill. The recently enacted 2010 Small Business Jobs Act doubles the amount of start-up expenses that someone starting a business in 2010 can write off this year. Here are the details.
Generally, expenses incurred before a business begins don't generate any deductions or other current tax benefits. However, under pre-2010 Small Business Jobs Act law, taxpayers, whether they were individuals, corporations or partnerships, were permitted to elect to write off up to $5,000 of “start-up expenses” in the year business began, and the rest could be deducted over a period of 180 months. The $5,000 figure was reduced by the excess of total start-up costs over $50,000. You were deemed to have made this election unless you opted out.
The new law doubles the amount that can be written off for 2010 to $10,000 and increases the phaseout threshold from $50,000 to $60,000. It is important to note that this increased deduction is temporary, and only applies to tax years beginning in 2010.
Start-up expenses include, with a few exceptions, all expenses incurred to investigate the creation or acquisition of a business, to actually create the business, or to engage in a for-profit activity in anticipation of that activity becoming an active business. To be eligible for the election, an expense also must be one that would be deductible if it were incurred after the business actually began. An example of a startup expense is the cost of analyzing the potential market for a new product.
As you can see, it's important to keep a record of these start-up expenses, and to make the appropriate decision regarding the write-off election. As mentioned above, if you opt out of the election, there is no current tax benefit derived for the eligible expenses covered by the election. Also, you should be aware that an election either to deduct or to amortize start-up expenditures, once made, is irrevocable.
Analysis of the Tax and Pension Provisions of the Small Business Jobs Act of 2010 (i.e., Title II of HR 5297, generally referred to in the Analysis as the “2010 Small Business Act”), as signed into law by the President on Sept. 27, 2010 ( PL 111-240, 9/27/2010 ).
The 2010 Small Business Act includes a number of important tax provisions, including liberalized and expanded expensing for 2010 and 2011, revived bonus depreciation for 2010, five-year carryback of unused general business credits for eligible small businesses, removal of cell phones from the listed property category, and liberalized Code Sec. 6707A penalty rules.
RIA observation: “The Small Business Jobs Act of 2010” is a bit of a misnomer because the legislation carries many tax provisions affecting large as well as small businesses, plus changes that affect individuals, such as eased Roth IRA rules.
Here are the highlights of the tax and pension changes in the 2010 Small Business Act.
Dollar amounts for expensing liberalized. For tax years beginning in 2010, the 2010 Small Business Act increases the maximum Code Sec. 179 expensing amount from $250,000 to $500,000 and the beginning-of-phaseout amount from $800,000 to $2,000,000. For tax years beginning in 2011, the same $500,000 maximum expensing amount and $800,000 beginning-of-phaseout amount will apply even though, under pre-2010 Small Business Act law, those amounts had been scheduled to revert to $25,000 and $200,000, respectively.
RIA observation: Virtually all small businesses and many medium sized businesses that don't have heavy machinery and equipment needs would be able to use expensing. For property placed in service in tax years beginning in 2010 or 2011, the Code Sec. 179 deduction won't phase out completely until the cost of expensing-eligible property exceeds $2,500,000 ($2,000,000 beginning-of-phaseout amount) + $500,000 (dollar limitation)).
RIA observation: The 2010 Small Business Act provides a welcome tax-saving windfall to taxpayers that already have placed in service Code Sec. 179 eligible property at a cost that exceeded the pre-2010 Small Business Act dollar amount limits.
Qualified real property expensing. For any tax year beginning in 2010 or 2011, a taxpayer can elect to treat up to $250,000 of qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property) as expensing-eligible property. (Certain types of property, such as that used for lodging, would not be eligible.) (Code Sec. 179(f)(1) ) The dollar cap applies to the aggregate cost of qualified real property. This change applies to property placed in service after Dec. 31, 2009, in tax years beginning after that date.
RIA observation: This is the first time that Code Sec. 179 expensing can be claimed for realty. Under pre-2010 Small Business Act law, the expensing election was limited to depreciable tangible personal property purchased for use in the active conduct of a trade or business, including “off-the-shelf” computer software.
However, no amount attributable to qualified real property can be carried over to a tax year beginning after 2011, but to the extent that any amount cannot be carried over to a tax year beginning after 2011, the Code will be applied as if no Code Sec. 179 expensing election had been made for that amount.
Other expensing changes. The 2010 Small Business Act also provides that a taxpayer's ability to revoke a Code Sec. 179 election without IRS consent applies to any tax year beginning after 2002 and before 2012 (instead of before 2011, as under pre-2010 Small Business Act law). (Code Sec. 179(c)(2) ) Additionally, computer software is qualifying property for purposes of the Code Sec. 179 election if it is placed in service in a tax year beginning after 2002 and before 2012 (instead of before 2011, as under pre-2010 Small Business Act law). (Code Sec. 179(d)(1)(A)(ii) )
Bonus first-year depreciation extended through 2010. The 2010 Small Business Act extends 50% bonus first-year depreciation for one year, i.e., makes it available for qualifying property acquired and placed in service in 2010 (as well as 2011, for certain long-lived property). (Code Sec. 168(k)(2)(A)(iv) and Code Sec. 168(k)(2)(A)(iii) )
RIA observation: Bonus depreciation provides an extra writeoff to all businesses, large or small, and a windfall to taxpayers that already have bought and placed in service bonus-depreciation-eligible property in 2010.
First year dollar cap for autos increased by $8,000. Under Code Sec. 280F , depreciation deductions (including Code Sec. 179 expensing) that can be claimed for passenger autos is subject to dollar limits that are annually adjusted for inflation. The 2010 Small Business Act boosts the first year business-auto write-off by $8,000 (i.e., from $3,060 to $11,060 for autos and from $3,160 to $11,160 for light trucks or vans) for vehicles that are qualified property for bonus depreciation purposes (i.e., are new and acquired and placed in service in 2010). (Code Sec. 168(k)(2)(A)(iv) )
Special long-term contract accounting rule for bonus depreciation. Bonus depreciation will be decoupled from allocation of contract costs under the percentage of completion accounting method rules for assets with a depreciable life of seven years or less. More specifically, for property placed in service after Dec. 31, 2009, solely for purposes of determining the percentage of completion under Code Sec. 460(b)(1)(A) , the cost of qualified property will be taken into account as a cost allocated to the contract as if bonus depreciation had not been enacted. (Code Sec. 460(c)(6) ) Qualified property is property otherwise eligible for bonus depreciation that has a MACRS recovery period of 7 years or less and that is placed in service after Dec. 31, 2009, and before Jan. 1, 2011 (Jan. 1, 2012, in the case of Code Sec. 168(k)(2)(B) property (certain longer-lived property)).
Deduction for startup expenses increased. For tax years beginning in 2010, the deduction for startup expenses under Code Sec. 195 is increased from $5,000 to $10,000 and the phaseout threshold is increased from $50,000 to $60,000. Code Sec. 195(b)(3) )
100% exclusion for gain from qualified small business (QSBS) stock. There is a 100% exclusion of gain from the sale of QSBS stock (a) acquired after Sept. 27, 2010 and before Jan. 1, 2011, and (b) held for at least five years. (Code Sec. 2012 )
Five-year carryback of small business unused general business credits. The general business credit (GBC) generally can't exceed the excess of the taxpayer's net income tax over the greater of the taxpayer's tentative minimum tax or 25% of so much of the taxpayer's net regular tax liability as exceeds $25,000. Credits in excess of this limitation may be carried back one year and forward up to 20 years. The 2010 Small Business Act extends the carryback period from one to five years for eligible small business (ESB) credits determined in tax years beginning in 2010. (Code Sec. 39(a)(4) )
ESB credits, for a tax year beginning in 2010, include all of the component credits of the GBC, but only as determined with respect to eligible small businesses (ESBs). ESBs are businesses that (1) are corporations the stock of which isn't publicly traded, partnerships or sole proprietorships and (2) have average annual gross receipts, for the three-tax-year period preceding the tax year, of no more than $50 million.
ESB credits not subject to AMT. For ESB credits determined in tax years beginning in 2010, ESBs, as defined above for purposes of the longer credit carryback, may use all types of general business credits to offset their alternative minimum tax (AMT). (Code Sec. 38 ) More specifically, the tentative minimum tax will be treated as being zero for ESB credits. Thus, an ESB credit can offset both regular and AMT liability.
Reduced recognition period for S corp built in gains tax. Where a C corporation elects to become an S corporation (or where an S corporation receives property from a C corporation in a nontaxable carryover basis transfer), the S corporation is taxed at 35% on all gains that were built-in at the time of the election if the gains are recognized during the recognition period. The recognition period generally is the first ten S corporation years (or the ten-period after the transfer). For tax years beginning in 2009 and 2010, no tax is imposed on the net unrecognized built-in gain of an S corporation if the seventh tax year in the recognition period preceded the 2009 and 2010 tax years.
For any tax year beginning in 2011, the 2010 Small Business Act shortens the holding period of assets subject to the built-in gains tax to 5 years if the fifth tax year in the recognition period precedes the tax year beginning in 2011. (Code Sec. 1374(d)(7) )
One year self-employment tax break. For tax years beginning after Dec. 31, 2009, but before Jan. 1, 2011, when calculating self-employment taxes, the deduction for health insurance costs of a self-employed taxpayer under Code Sec. 162(l) can be taken into account (i.e., can be deducted) in computing net earnings from self-employment. (Code Sec. 162(l)(4) )
The Joint Committee on Taxation's Technical Explanation of H.R. 5297 says that it is intended that earned income within the meaning of Code Sec. 401(c)(2) be computed without regard to the deduction for the cost of health insurance.
Cell phones no longer listed property. For tax years beginning after Dec. 31, 2009, cell phones (and similar telecommunications equipment) are removed from the definition of listed property under Code Sec. 280F (Code Sec. 280F(d)(4)(A) )
Relaxed penalty for failure to include reportable transaction information with return. Retroactively effective to penalties assessed after Dec. 31, 2006, the controversial Code Sec. 6707A penalty is revised so that the penalty for failure to disclose a reportable transaction (i.e., a transaction IRS has identified as a listed tax shelter or as having the characteristics of a tax shelter) to IRS is commensurate with the tax benefit received from the transaction. Thus, under the 2010 Small Business Act, the penalty is 75% of the tax benefit received, with a minimum penalty of $10,000 for corporations and $5,000 for individuals. For listed transactions, the maximum penalty is $200,000 for corporations and $100,000 for individuals, while for other reportable transactions, the maximum penalty is $50,000 for corporations and $10,000 for individuals). (Code Sec. 6707A(b) )
The 2010 Small Business Act pays for its tax breaks with the following revenue raisers:
Information reporting for rental income. For payments made after Dec. 31, 2010, persons receiving rental income from real property will have to file information returns to IRS and to service providers reporting payments of $600 or more during the year for rental property expenses. Exceptions are provided for individuals temporarily renting their principal residences (including active members of the military), taxpayers whose rental income doesn't exceed an IRS-determined minimal amount, and those for whom the reporting requirement would create a hardship (under IRS regs). (Code Sec. 6041(h) )
Increased penalty for failure to timely file information returns. For information returns required to be filed after Dec. 31, 2010, the 2010 Small Business Act increases the Code Sec. 6721 penalties for failure to timely file information returns to IRS. The first-tier penalty increases from $15 to $30, and the calendar year maximum increases from $75,000 to $250,000. The second-tier penalty increases from $30 to $60, and the calendar year maximum increases from $150,000 to $500,000. The third-tier penalty increases from $50 to $100, and the calendar year maximum increases from $250,000 to $1,500,000. For small business filers, the calendar year maximum increases from $25,000 to $75,000 for the first-tier penalty, from $50,000 to $200,000 for the second-tier penalty, and from $100,000 to $500,000 for the third-tier penalty. The minimum penalty for each failure due to intentional disregard increases from $100 to $250.
Increased penalty for failure to furnish a payee statement. The Code Sec. 6722 penalty for failure to furnish a payee statement is revised to provide tiers and caps similar to those applicable to the penalty for failure to file the information return. A first-tier penalty will be $30, subject to a maximum of $250,000; the second-tier penalty will be $60 per statement, up to $500,000, and the third-tier penalty will be $100, up to a maximum of $1,500,000. Limitations will apply on penalties for small businesses and increased penalties for intentional disregard that parallel the penalty for failure to furnish information returns.
Exception to pre-levy CDP hearing rule for Federal contractors. For levies issued after Sept. 27, 2010, IRS may issue levies before a CDP hearing with respect to Federal tax liabilities of Federal contractors identified under the Federal Payment Levy Program. When a levy is issued before a CDP hearing, the taxpayer will have an opportunity for a CDP hearing within a reasonable time after the levy. (Code Sec. 6330(f)(4) )
Code Sec. 457(b) plans could include Roth accounts. For tax years beginning after Dec. 31, 2010, retirement savings plans sponsored by state and local governments (i.e., governmental Code Sec. 457(b) plans) will be able to include Roth accounts. (Code Sec. 402A(e)(1) , Code Sec. 402A(e)(2) )
Certain retirement plans can rollover distributions into Roth accounts. For distributions after Sept. 27, 2010, 401(k), 403(b), and governmental 457(b) plans will be able to permit participants to roll their pre-tax account balances into a designated Roth account. If the rollover is made in 2010, the participant may elect to pay the tax in 2011 and 2012. (Code Sec. 402A(c)(4) )
Limit on credit for production of biofuel from cellulosic feedstocks. For fuels sold or used after Dec. 31, 2010, eligibility for the Code Sec. 40 tax credit for the production of biofuel from cellulosic feedstocks will be limited to fuels that are not highly corrosive (i.e., fuels that could be used in a car engine or in a home heating application). (Code Sec. 40(b)(6)(E)(iii) )
Annuitization of nonqualified annuity allowed. For amounts received in tax years beginning after Dec. 31, 2010, the 2010 Small Business Act will permit a portion of an annuity, endowment, or life insurance contract to be annuitized while the balance is not annuitized, if the annuitization period is for 10 years or more, or is for the lives of one or more individuals. (Code Sec. 72(a) )
Sourcing of guarantee income. Amounts received directly or indirectly for guarantees of indebtedness of the payor issued after Sept. 27, 2010 will be sourced like interest and, as a result, if paid by U.S. taxpayers to foreign persons will generally be subject to withholding tax. (Code Sec. 861(a)(9) ) This change prospectively overturns the holding in Container Corporation, Successor to Interest of Container Holdings Corporation, Successor to Interest of Vitro International Corporation, (2010) 134 TC No. 5 , that fees paid by a U.S. subsidiary to its foreign parent for guaranteeing the subsidiary's debt were analogous to payments for a service and therefore were not U.S. source income.
Accelerated estimated tax payment for large corporations. Estimated taxes for large corporations (those with assets of not less than $1 billion) otherwise due for July, August, or September of 2015, will be increased by 36%.
Cites in the analysis to the appropriate Committee Reports ( JCX-47-10 for the 2010 Small Business Act) are cited as Com Rept.
Click here for the relevant text of JCX-47-10.
The Analysis of the Tax and Pension Provisions of the Small Business Jobs Act of 2010 is reproduced at ¶101 et seq.
The Client Letters and Interoffice Memos begin at ¶901 et seq.
© 2010 Thomson

Tax and Pension Provisions of the Small Business Jobs Act of 2010
RIA's Complete Analysis of the of the Tax and Pension Provisions of the Small Business Jobs Act of 2010 (i.e., Title II of H.R. 5297, generally referred to in the An, signed into law by the President on September 27. The 2010 Small Business Act (P.L. 111-240) includes a number of important tax provisions, including liberalized and expanded expensing for 2010 and 2011, revived bonus depreciation for 2010, five-year carryback of unused general business credits for eligible small businesses, removal of cell phones from the listed property category, and liberalized Code Sec. 6707A penalty rules. The Small Business Jobs Act of 2010 is a bit of a misnomer because the legislation carries many tax provisions affecting large as well as small businesses, plus changes that affect individuals, such as eased Roth IRA rules.
Code Sec. 179 expensing limit increases to $500,000 and phaseout threshold increases to $2,000,000 for tax years beginning in 2010 and 2011
Code Sec. 179(b)(1), as amended by 2010 Small Business Act §2021(a)(1)
Code Sec. 179(b)(2), as amended by 2010 Small Business Act §2021(a)(2)
Generally effective: Property placed in service in tax years beginning after Dec. 31, 2009
Committee Reports, see ¶5605
Generally, taxpayers can elect to treat the cost of any section 179 property (defined below) placed in service during the tax year as an expense which is not chargeable to capital account, and any cost so treated is allowed as a deduction for the tax year in which the section 179 property is placed in service, see FTC 2d/Fin ¶L-9900; et seq. USTR ¶1794; et seq. TaxDesk ¶268,400; et seq.
Under pre-2010 Small Business Act law, the deductible Code Sec. 179 expense could not exceed $250,000 (dollar limitation) in the case of a tax year beginning in 2008 through 2010, and the maximum deductible expense had to be reduced (i.e., phased out, but not below zero) by the amount by which the cost of section 179 property placed in service during a tax year beginning in 2008 through 2010 exceeded $800,000 (beginning-of-phaseout limitation). FTC 2d/Fin ¶L-9900; , FTC 2d/Fin ¶L-9907; USTR ¶1794.01; TaxDesk ¶268,411; The $250,000 and $800,000 amounts were not adjusted for inflation, see FTC 2d/Fin ¶L-9907.1; USTR ¶1794.01; TaxDesk ¶268,411; .
RIA illustration 1: In 2010, T, a calendar-year taxpayer, places into service section 179 property with a cost of $1,000,000. Under pre-2010 Small Business Act law, the maximum amount T could elect to expense was $50,000: $250,000 (maximum expense for 2010) − $200,000 (the amount by which the cost of section 179 property placed in service, $1,000,000, exceeded the beginning-of-phaseout amount for 2010, $800,000).
Under pre-2010 Small Business Act law, for tax years beginning after 2010, the dollar limitation was to be $25,000 and the beginning-of-phaseout amount was to be $200,000. FTC 2d/Fin ¶L-9900; , FTC 2d/Fin ¶L-9907; USTR ¶1794.01; TaxDesk ¶268,411; The $25,000 and $200,000 amounts were not to be adjusted for inflation, see FTC 2d/Fin ¶L-9907.1; USTR ¶1794.01; TaxDesk ¶268,411; .
Under pre-2010 Small Business Act law, qualifying property for purposes of the Code Sec. 179 expensing election (“section 179 property”) was limited to depreciable tangible personal property purchased for use in the active conduct of a trade or business, including “off-the-shelf” computer software placed in service in tax years beginning before 2011. FTC 2d/Fin ¶L-9901; , FTC 2d/Fin ¶L-9922; USTR ¶1794.02; TaxDesk ¶268,424;
The following concepts and computations are affected by the amount of the Code Sec. 179 deduction limit, and the beginning-of-phaseout amount, for a particular tax year:
• 50% bonus depreciation for “qualified disaster assistance property,” see FTC 2d/Fin ¶L-9366; USTR ¶1684.085; TaxDesk ¶267,756; ;
• the expense deduction ceiling amount for partnerships and partners, S corporations and their shareholders. FTC 2d/Fin ¶L-9900; FTC 2d/Fin ¶L-9909; USTR ¶1794.01; TaxDesk ¶268,414; ; and
• the maximum Code Sec. 179 expense deduction and phaseout amount for enterprise zone businesses, see FTC 2d/Fin ¶L-9951; , FTC 2d/Fin ¶L-9952; USTR ¶13,97A4; , USTR ¶1794.01; TaxDesk ¶268,402; , TaxDesk ¶268,413; .
New Law. The 2010 Small Business Act provides that, for tax years beginning in 2010 or 2011:
... the dollar limitation on the Code Sec. 179 expense deduction is $500,000 (Code Sec. 179(b)(1)(B) as amended by 2010 Small Business Act §2021(a)(1)) , and
... the reduction in the dollar limitation starts to take effect when property placed in service in a tax year exceeds $2,000,000 (beginning-of-phaseout amount). (Code Sec. 179(b)(2)(B) as amended by 2010 Small Business Act §2021(a)(2))
Thus, for tax years beginning in 2010 and 2011, the maximum amount a taxpayer can expense is increased to $500,000 and the phase-out threshold amount is increased to $2 million. (Com Rept, see ¶5605)
RIA observation: Thus, the $500,000 amount (discussed above) of qualified property that can be expensed is reduced (but not below zero) by the amount by which the cost of qualifying property placed in service during 2010 or 2011 exceeds $2,000,000. Accordingly, for property placed in service in tax years beginning in 2010 or 2011, the Code Sec. 179 deduction phases out completely when the cost of the property exceeds $2,500,000 ($2,000,000 (beginning-of-phaseout amount) + $500,000 (dollar limitation)).
For tax years beginning after 2011, the 2010 Small Business Act provides for a $25,000 dollar limitation on the Code Sec. 179 expense deduction (Code Sec. 179(b)(1)(C) as amended by 2010 Small Business Act §2021(a)(1)) and a $200,000 beginning-of-phaseout amount. (Code Sec. 179(b)(2)(C) as amended by 2010 Small Business Act §2021(a)(2))
RIA observation: Thus, the reversion to the $25,000 dollar limitation and $250,000 beginning-of-phaseout amount will take effect for tax years beginning in 2012 and later, one year later than under pre-2010 Small Business Act law.
RIA observation: The 2010 Small Business Act's increased expensing limits should help stimulate the economy by motivating taxpayers, in the short term, to invest in section 179 property (as defined above) before the lower deduction ($25,000) and phaseout thresholds ($200,000) take effect in 2012 and later tax years. According to a Senate News release dated July 28, 2010, expensing is an important tool for small businesses because it is the most accelerated type of depreciation. A Floor Statement of Senator Max Baucus dated July 28, 2010, provides that the increase in the Code Sec. 179 thresholds in the 2010 Small Business Act will effectively decrease the cost of newly purchased equipment (making it more economical for businesses to invest), increase businesses' cash flow, and encourage them to make further capital investments.
RIA illustration 2: Z, a calendar-year taxpayer, places into service in 2010 section 179 property with a cost of $1,000,000. The maximum amount Z can elect to expense is $500,000: $500,000 (maximum expense for 2010) − $0 (the amount by which the cost of section 179 property placed in service during 2010, $1,000,000, exceeds the beginning-of-phaseout amount for 2010, $2,000,000).
For the eligibility for a Code Sec. 179 deduction of “qualified real property” placed in service in tax years beginning in 2010 or 2011, see ¶102 .
For the one-year extension of the provision permitting revocation of a Code Sec. 179 election without IRS consent to apply to Code Sec. 179 elections made for tax years beginning in 2011, see ¶103 .
For the one-year extension of the eligibility of off-the-shelf computer software for Code Sec. 179 expensing to apply to property placed in service in tax years beginning in 2011, see ¶103 .
Effective: Property placed in service after Dec. 31, 2009, in tax years beginning after Dec. 31, 2009. (2010 Small Business Act §2021(e)(1))

Code Sec. 195 specified deduction limit and phaseout for start-up costs are increased to $10,000 and $60,000, respectively, for 2010
Code Sec. 195(b)(3), as amended by 2010 Small Business Act §2031(a)
Generally effective: Tax years beginning after Dec. 31, 2009 and before Jan. 1, 2011
Committee Reports, see ¶5608
Start-up expenses of a trade or business are not deductible unless the taxpayer elects to deduct them. A taxpayer is deemed to have made this election unless it chooses to forgo the election by clearly electing to capitalize those costs on the return for the tax year in which the trade or business began, see FTC 2d/Fin ¶L-5001; , FTC 2d/Fin ¶L-5001.1; USTR ¶1954; , USTR ¶1954.03; TaxDesk ¶301,001; , TaxDesk ¶301,001.1; .
Under Code Sec. 195(b)(1)(A)(ii) , a taxpayer can elect a current deduction for up to $5,000 of start-up expenditures in the tax year in which the active trade or business begins. However, this $5,000 amount is reduced (but not below zero) by the amount by which the cumulative cost of start-up expenditures exceeds $50,000 (the deduction phaseout threshold). FTC 2d/Fin ¶L-5000; FTC 2d/Fin ¶L-5001; USTR ¶1954; TaxDesk ¶301,001; The remainder of the start-up expenditures can be claimed as a deduction ratably over 180 months starting with the month the active trade or business began, see FTC 2d/Fin ¶L-5001; USTR ¶1954; TaxDesk ¶301,001; .
RIA observation: Thus, in the tax year in which an active trade or business begins, a taxpayer may be able to claim both the up-to-$5,000 deduction and the ratable portion of any excess start-up costs.
RIA observation: These rules primarily benefit smaller businesses. They can elect to deduct currently all or most of their start-up expenditures. Larger start-ups have to deduct their start-up expenditures over 180 months.
All start-up expenditures related to a particular trade or business, whether incurred before or after Oct. 22, 2004 (the date that the $5,000/$50,000 rule discussed above came into effect), are considered in determining whether the cumulative cost of start-up expenditures exceeds the deduction phaseout threshold, see FTC 2d/Fin ¶L-5001; USTR ¶1954; TaxDesk ¶301,001; .
New Law. The 2010 Small Business Act provides that, in the case of a tax year beginning in 2010, Code Sec. 195(b)(1)(A)(ii) (discussed above) is applied— (Code Sec. 195(b)(3) as amended by 2010 Small Business Act §2031(a))
(A) by substituting “$10,000” for “$5,000,” and (Code Sec. 195(b)(3)(A) )
(B) by substituting “$60,000” for “$50,000.”(Code Sec. 195(b)(3)(B) )
Thus, for tax years beginning in 2010, the 2010 Small Business Act increases the amount of start-up expenses a taxpayer can elect to deduct from $5,000 to $10,000. The 2010 Small Business Act also increases the deduction phaseout threshold so that the $10,000 is reduced (but not below zero) by the amount by which the cumulative cost of start-up expenditures exceeds $60,000. (Com Rept, see ¶5608)
RIA observation: If a taxpayer begins an active trade or business in a tax year beginning in 2010 and the taxpayer's business start-up expenses are $10,000 or less, the taxpayer can deduct those expenses in full in 2010.
RIA illustration 1: X Corp., a calendar year taxpayer, incurs $10,000 of start-up expenditures that relate to an active trade or business that begins on July 1, 2010. If X elects to forgo the election to capitalize start-up expenses (as discussed above), X could deduct the entire amount of the start-up expenditures for tax year 2010.
RIA illustration 2: The facts are the same as in Illustration 1, above, except that X incurs start-up expenditures of $56,000. For 2010, X can deduct $10,000 plus $1,533, the portion of the remaining $46,000 ($56,000 − $10,000) that is allocable to July 2010 through Dec. 2010 ($46,000/180 × 6).
RIA illustration 3: Y Corp. is a fiscal year taxpayer with a fiscal year of July 2010 through June 2011, and incurs start-up expenditures of $56,000 for an active trade or business that begins on July 1, 2010. For that fiscal year, Y can deduct $10,000 plus $3,067, the portion of the remaining $46,000 ($56,000 − $10,000) that is allocable to July 2010 through June 2011 ($46,000/180 × 12).
RIA observation: As Illustrations 2 and 3 above show, for total expenditures up to and including $60,000 for a trade or business that begins in 2010, a taxpayer can deduct, in the year the trade or business began, $10,000 of the start-up costs, plus the ratable portion of start-up costs over $10,000 incurred in the tax year in which the active trade or business began.
RIA illustration 4: The facts are the same as in Illustration 1, above, except that X incurs start-up expenditures of $69,500. For 2010, X can deduct $500 ($10,000 − ($69,500 − $60,000)) plus $2,300, the portion of the remaining $69,000 ($69,500 − $500) allocable to July 2010 through Dec. 2010 ($69,000/180 × 6).
RIA illustration 5: The facts are the same as in Illustration 1, above, except that X incurs start-up expenditures of $210,000. For 2010, X can deduct $7,000 ($210,000/180 × 6), the amount allocable to July 2010 through Dec. 2010.
RIA observation: Since the $10,000 and $60,000 amounts discussed above only apply for tax years beginning in 2010, presumably, for tax years beginning in 2011 and beyond, the $5,000 and $50,000 amounts will again apply, in the absence of additional legislation.
Effective: Tax years beginning after Dec. 31, 2009 (2010 Small Business Act §2031(b)) and before Jan. 1, 2011 (Code Sec. 195(b)(3) )

Gain exclusion for qualified small business stock (QSBS) is temporarily increased to 100% for both regular tax and AMT purposes
Code Sec. 1202(a)(3), as amended by 2010 Small Business Act §2011(b)(2)
Code Sec. 1202(a)(4), as amended by 2010 Small Business Act §2011(a)
Generally effective: Stock acquired after Sept. 27, 2010 and before Jan. 1, 2011
Committee Reports, see ¶5601
Noncorporate taxpayers can, within limits (see below), exclude a percentage of the gain realized on the sale or exchange of “qualified small business stock” (QSBS) held for more than five years. Under pre-2010 Small Business Act law, the excluded percentage was 50% (60% for certain gain attributable to QSBS in a qualified business entity, see below), but was 75% for any QSBS acquired after Feb. 17, 2009 and before Jan. 1, 2011. FTC 2d/Fin ¶I-9100; et seq.USTR ¶12,024; TaxDesk ¶246,600; et seq.
For regular income tax purposes, the portion of the gain that is includible in taxable income is taxed at a maximum rate of 28% (Com Rept, see ¶5601) . FTC 2d/Fin ¶I-5100; FTC 2d/Fin ¶I-5110.13; USTR ¶14.08; TaxDesk ¶223,323; . Thus, for regular tax purposes, the gain from QSBS that is subject to the 50% exclusion is taxed at a maximum effective rate of 14%, and the gain from QSBS that is subject to the 75% exclusion is taxed at a maximum effective rate of 7%, see FTC 2d/Fin ¶I-9100.1; et seq. USTR ¶12,024; TaxDesk ¶246,600.1; et seq.
For alternative minimum tax (AMT) purposes, under pre-2010 Small Business Act law, a percentage of the excluded gain was a preference item, and, thus, included in income, regardless of when the stock was acquired. For dispositions made in tax years beginning before Jan. 1, 2011, the percentage of the otherwise-excluded gain that was a preference item (the preference percentage) was in all cases 7% (7% preference stock). For dispositions in tax years beginning after Dec. 31, 2010 of stock whose holding period began after Dec. 31, 2000 (except for stock acquired under an option, or other right or obligation, acquired before Jan. 1, 2001), the tax preference percentage was to be in all cases 28% (28% preference stock). For dispositions in tax years beginning after Dec. 31, 2010 of stock whose holding period began before Jan. 1, 2001 (and for stock acquired under an option, or other right or obligation, acquired before Jan. 1, 2001), the tax preference percentage was to be in all cases 42% (42% preference stock). FTC 2d/Fin ¶A-8300; FTC 2d/Fin ¶A-8304; FTC 2d/Fin ¶A-8304.1; USTR ¶574; TaxDesk ¶697,004; TaxDesk ¶697,004.1;
For AMT purposes, the portion of the total gain that is includible in taxable income is taxed at a maximum rate of 28%. Thus, for AMT purposes: (1) gain from 7% preference stock subject to the 50% exclusion is taxed at a maximum effective rate of 14.98%; (2) gain from 28% preference stock subject to the 50% exclusion is taxed at a maximum effective rate of 17.92%; (3) gain from 42% preference stock subject to the 50% exclusion is taxed at a maximum effective rate of 19.88%, and (4) gain from 28% preference stock subject to the 75% exclusion is taxed at a maximum effective rate of 12.88% (see the observation below), see FTC 2d/Fin ¶A-8304; , FTC 2d/Fin ¶A-8304.1; TaxDesk ¶697,004; , TaxDesk ¶697,004.1; .
RIA observation: The 75% exclusion is treated, immediately above, as applying only to 28% preference stock (and not to 7% or 42% preference stock) for the following reasons: (1) stock is 7% preference stock only if disposed of in a tax year beginning before Jan. 1, 2011 (above), but, because, the 75% exclusion apples only to stock acquired after Feb. 17, 2009 (see above), stock eligible for the 75% exclusion cannot both meet the 5-year holding period requirement for QSBS and be disposed of in a tax year beginning before Jan. 1, 2011, and (2) stock acquired after Feb. 17, 2009 can be 42% preference stock only in the unlikely event that it was acquired under an option, or other right or obligation, acquired before Jan. 1, 2001 (above).
Generally, for gain to be excludible, the taxpayer must acquire the stock at original issue, and after Aug. 10, '93, see FTC 2d/Fin ¶I-9102; USTR ¶12,024; TaxDesk ¶246,636; . The gain excludible by a taxpayer for the QSBS of any one corporation is the greater of: (1) ten times the taxpayer's basis (excluding post-issuance basis increases) in that corporation's QSBS disposed of by the taxpayer in the tax year, or (2) $10 million ($5 million if married filing separately), and the $10 million (or $5 million) amount is reduced by the total amount of eligible gain taken into account by the taxpayer on dispositions of that corporation's QSBS in earlier tax years (referred to below as the basis-or-dollar-amount limit rule), see FTC 2d/Fin ¶I-9112; USTR ¶12,024.01; TaxDesk ¶246,603; . QSBS must be issued by a corporation that meets a gross assets limit and certain other requirements, see FTC 2d/Fin ¶I-9103; et seq. USTR ¶12,024.02; TaxDesk ¶246,641; et seq.
Under pre-2010 Small Business Act law, for QSBS in a corporation that also qualified as a “qualified business entity” (QBE), the exclusion rate was 60% (but 75% if the 75% rate discussed above would otherwise apply). No gain attributable to periods after Dec. 31, 2014 was eligible for the 60% (or 75%) rate. A QBE for purposes of the QSBS rules is a corporation that meets the requirements of a QBE under the empowerment zone rules, except that the DC Enterprise Zone isn't treated as an empowerment zone.FTC 2d/Fin ¶I-9100; FTC 2d/Fin ¶I-9100.1B; USTR ¶12,024; TaxDesk ¶246,602;
New Law. The 2010 Small Business Act provides that for QSBS acquired after Sept. 27, 2010 and before Jan. 1, 2011— (Code Sec. 1202(a)(4) as amended by 2010 Small Business Act §2011(a))
(1) the 50% gain exclusion for QSBS for regular tax purposes is increased to 100%; (Code Sec. 1202(a)(4)(A) )
(2) the 60% gain exclusion for QSBS issued by a QBE (see above) doesn't apply; (Code Sec. 1202(a)(4)(B) )
(3) and the treatment of a percentage of the excluded gain for QSBS as an AMT preference item (see above) doesn't apply. (Code Sec. 1202(a)(4)(C) )
Additionally, the 2010 Small Business Act changes the last day on which QSBS can be acquired to be eligible for the 75% gain exclusion from Dec. 31, 2010 to Sept. 27, 2010 . (Code Sec. 1202(a)(3) as amended by 2010 Small Business Act §2011(b)(2))
RIA observation: Code Sec. 1202(a)(4)(B) (item (2) on the above list) assures that for QSBS acquired after Sept. 27, 2010 and before Jan. 1, 2011 and issued by a QBE, the 100% exclusion provided by Code Sec. 1202(a)(4)(A) (item (1) on the above list) applies, and not the 60% exclusion that would have otherwise applied to QSBS issued by a QBE under pre-2010 Small Business Act law (see above).
RIA observation: The date change made by the 2010 Small Business Act to Code Sec. 1202(a)(3) (see above) assures that for QSBS acquired after Sept. 27, 2010 and before Jan. 1, 2011, the 100% exclusion provided by Code Sec. 1202(a)(4)(A) applies, and not the 75% exclusion that would have otherwise applied under pre-2010 Small Business Act law (see above).
RIA observation: For QSBS acquired after Sept. 27, 2010 and before Jan. 1, 2011, no regular tax or AMT is imposed on the sale of QSBS held for more than five years (see above).
RIA illustration : On Oct. 1, 2010, T, an individual, acquires at original issuance 100 shares of QSBS at a total cost of $100,000. The stock isn't acquired under an option, or other right or obligation, acquired before Jan. 1, 2001. T sells all of the shares on Oct 2, 2015 for $1.1 million. Assuming that none of the possible income exclusion is barred by the “basis-or-dollar-amount limit rule” (see above), T can exclude from income all of the $1 million of gain for regular tax and AMT purposes.
RIA observation: If pre-2010 Small Business Act law had applied in the above illustration, the maximum effective tax rates on the $1 million of gain would have been a regular tax rate of 7% (under the 75% exclusion, see above) and an AMT rate of 12.88% (because the stock is 28% preference stock, i.e., stock disposed of after Dec. 31, 2010 that wasn't acquired under an option, or other right or obligation, acquired before Jan. 1, 2001, see above).
RIA observation: Unless Congress extends beyond Dec. 31, 2010, the deadline for acquiring QSBS eligible for the 100% gain exclusion, the 50% and 60% gain exclusion rules will again be in effect, and the percentage of otherwise-excluded gain treated as an AMT preference item will be, in most cases, 28% (see above).
Effective: Stock acquired after Sept. 27, 2010 (2010 Small Business Act §2011(c)) and before Jan. 1, 2011. (Code Sec. 1202(a)(4) as amended by 2010 Small Business Act §2011(a))

5-year carrybacks are allowed for unused eligible small business credits determined in the first tax year beginning in 2010
Code Sec. 39(a)(3)(A), as amended by 2010 Small Business Act §2012(b)
Code Sec. 39(a)(4), as amended by 2010 Small Business Act §2012(a)
Generally effective: Credits determined for the taxpayer's first tax year beginning in 2010
Committee Reports, see ¶5602
Code Sec. 38 provides a tax credit (the general business credit or GBC) that consists of the component credits listed in Code Sec. 38(b) , see FTC 2d/Fin ¶L-15201; USTR ¶384.01; TaxDesk ¶380,501; .
Under Code Sec. 38(c)(1) (the tax liability limit), the GBC is limited to the excess, if any, of the taxpayer's “net income tax” (generally, the taxpayer's regular income tax and alternative minimum tax (AMT), reduced by most non-refundable credits other than the GBC) over the greater of (1) the taxpayer's tentative minimum tax or (2) 25% of the portion of the taxpayer's “net regular tax liability” (generally, the regular income tax reduced by most non-refundable credits other than the GBC) that exceeds $25,000 (the 25%-in-excess-of-$25,000 rule), see FTC 2d/Fin ¶L-15202; USTR ¶384.02; TaxDesk ¶380,502; .
Code Sec. 39 provides that amounts of GBC that aren't used because of the tax liability limit can be carried back and carried forward for specified periods. Under pre-2010 Small Business Act law, the carryback period was, generally, one tax year, and the carryforward period was, generally, 20 tax years. FTC 2d/Fin ¶L-15200; FTC 2d/Fin ¶L-15209; USTR ¶394.01; TaxDesk ¶380,509; Specifically,Code Sec. 39(a)(1) provides that the unused credit is a carryback to the tax year preceding the unused credit year and a carryforward to each of the 20 tax years following the unused credit year. Additionally, Code Sec. 39(a)(2)(A) provides that the unused credit is carried to the earliest of the 21 tax years to which the credit can be carried, and Code Sec. 39(a)(2)(B) provides that the unused credit is carried to each of the other 20 tax years to the extent that the unused credit can't be taken into account for an earlier year because of Code Sec. 39(b) and Code Sec. 39(c) (which, in substance, apply the tax liability limit to carrybacks and carryforwards), see FTC 2d/Fin ¶L-15209; USTR ¶394.01; TaxDesk ¶380,509; .
However, under Code Sec. 39(d) , no component credit is allowed to be carried back to any tax year before the first tax year for which the credit is allowable (i.e., any tax year before the tax year that the legislation which provides the component credit first allows the credit (the Code Sec. 39(d) limitation)), see FTC 2d/Fin ¶L-15209; USTR ¶394.01; TaxDesk ¶380,509; .
Under an exception to the generally applicable one-year carryback period, Code Sec. 39(a)(3) provides that an unused portion of the GBC that is attributable to the marginal well production credit (the marginal well portion) is a carryback to each of five tax years preceding the unused credit year (instead of to the tax year preceding the unused credit year, see above). Additionally, the unused marginal well portion is carried to the earliest of the 25 tax years (instead of 21 tax years, see above) to which the portion can be carried, and to each of the other 24 tax years (instead of 20 tax years, see above) to the extent that the unused marginal well portion can't be taken into account for an earlier year because of Code Sec. 39(b) and Code Sec. 39(c) (see above), see FTC 2d/Fin ¶L-15209.1; USTR ¶394.01; TaxDesk ¶380,509.1; .
Code Sec. 39(a)(3) also provides that the five-year carryback period and other rules discussed immediately above apply notwithstanding the Code Sec. 39(d) limitation (and, thus, an unused marginal well portion can be carried back to years otherwise barred by the Code Sec. 39(d) limitation), see FTC 2d/Fin ¶L-15209.1; USTR ¶394.01; TaxDesk ¶380,509.1; .
In addition, Code Sec. 39(a)(3) provides that, for the marginal well portion, the carryback and carryforward rules apply separately from the business credit, except for the marginal well portion (the marginal well separate application rule), see FTC 2d/Fin ¶L-15209.1; USTR ¶394.01; TaxDesk ¶380,509.1; .
Under Code Sec. 196 , some components of the GBC, if not allowed by the end of the carryforward period, can be deducted at that time, see FTC 2d/Fin ¶L-15212; USTR ¶1964; TaxDesk ¶380,510; .
New Law. “Eligible small business credits” (as defined below and in ¶301 ) that are determined in the first tax year of the taxpayer beginning in 2010 but are unused (i.e., aren't allowed due to the tax liability limit described above): (Code Sec. 39(a)(4) as amended by 2010 Small Business Act §2012(a))
(1) are carried back to each of the five tax years preceding the unused credit year (instead of to the tax year preceding the unused credit year as provided in Code Sec. 39(a)(1) , see above), (Code Sec. 39(a)(4)(A)(i) )
(2) are carried, in their entire amount, to the earliest of the 25 tax years (instead of 21 tax years as provided in Code Sec. 39(a)(2)(A) , see above) to which the credits can be carried, and(Code Sec. 39(a)(4)(A)(ii) )
(3) are carried to each of the other 24 tax years (instead of 20 tax years as provided in Code Sec. 39(a)(2)(B) , see above) to the extent that the eligible small business credits can't be taken into account for an earlier year because of Code Sec. 39(b) and Code Sec. 39(c) (which, in substance, apply the tax liability limit to carrybacks and carryforwards, see above). (Code Sec. 39(a)(4)(A)(iii) )
RIA illustration 1: T, an eligible small business (see “Eligible small business credits” below), has a tax year that ends on June 30. For its tax year beginning July 1, 2010 (the 2011 tax year), T has determined an eligible small business credit of $100,000. However, because of the tax liability limit (see above), T isn't allowed any of the $100,000 of unused eligible small business credit in the 2011 tax year. T carries the entire $100,000 of unused eligible small business credit back to the tax year ending June 30, 2006 (the 2006 tax year), which is the both the earliest year in the five-year carryback period and the earliest tax year in which the tax liability limit doesn't bar the allowance of the $100,000 credit.
RIA illustration 2: The facts are as in illustration (1) except that, because of the tax liability limit, T is allowed only $30,000 of the $100,000 of unused eligible small business credit for the 2006 tax year. T is allowed the other $70,000 of the credit in the tax year ending June 30, 2007 (the 2007 tax year), to the extent that the tax liability limit doesn't bar the allowance of the $70,000 of credit in the 2007 tax year.
The rules discussed above apply notwithstanding Code Sec. 39(d) . (Code Sec. 39(a)(4)(A) )
RIA observation: Thus, as is true for the marginal well production credit portion of the GBC, unused eligible small business credits can be carried back to years otherwise barred by the Code Sec. 39(d) limitation (i.e., to a tax year before the first tax year that the carried-back component credit of the GBC was allowable, see above).
RIA illustration 3: The facts are as in illustration (1) except that it is additionally specified that the $100,000 of unused eligible small business credit consists solely of the agricultural chemicals security credit, which is effective only for amounts paid or incurred after May 22, 2008, see FTC 2d/Fin ¶L-18301; USTR ¶45O4; TaxDesk ¶384,064; . The $100,000 of credit is allowed in the 2006 tax year because the Code Sec. 39(d) limitation doesn't bar the carryback of the credit to that year.
Eligible small business credits.
For purposes of the rules discussed above, “eligible small business credits” are as defined in Code Sec. 38(c)(5)(B) . (Code Sec. 39(a)(4)(B) ) Thus, eligible small business credits are the sum of the general business credits as determined for the tax year for an eligible small business. (Com Rept, see ¶5602)
RIA observation: That is, under Code Sec. 38(c)(5)(B) as amended by the 2010 Small Business Act, eligible small business credits (ESB credits), for a tax year beginning in 2010, include all of the component credits of the GBC, but only as determined with respect to eligible small businesses (ESBs). ESBs are businesses that (1) are either corporations the stock of which isn't publicly traded, partnerships or sole proprietorships and (2) have average annual gross receipts, for the three-tax-year period preceding the tax year, of no more than $50 million. For further discussion, see ¶301 .
For the rule that requires that Code Sec. 39 (the carryback and carryforward rules, see above) apply separately to eligible small business credits, see ¶301 .
Coordination with marginal well production credit.
The marginal well separate application rule (see above) is amended to provide that for the marginal well portion of the GBC, the carryback and carryforward rules apply separately from the business credit, except for the marginal well portion or the eligible small business credits. (Code Sec. 39(a)(3)(A) as amended by 2010 Small Business Act §2012(b))
Effective: Credits determined in tax years beginning after Dec. 31, 2009 (2010 Small Business Act §2012(c)) but only for the first tax year of the taxpayer beginning in 2010.(Code Sec. 39(a)(4)(A) )
Eligible small businesses (ESBs) can offset AMT liability with general business credits in tax years beginning in 2010
Code Sec. 38(c)(5), as amended by 2010 Small Business Act §2013(a)
Code Sec. 38(c)(2)(A)(ii)(II), as amended by 2010 Small Business Act §2013(c)(1)
Code Sec. 38(c)(3)(A)(ii)(II), as amended by 2010 Small Business Act §2013(c)(2)
Code Sec. 38(c)(4)(A)(ii)(II), as amended by 2010 Small Business Act §2013(c)(3)
Generally effective: Credits determined in tax years beginning after Dec. 31, 2009, and to carrybacks of those credits
Committee Reports, see ¶5603
Code Sec. 38 provides a tax credit (the general business credit) that consists of the component credits listed in Code Sec. 38(b) , see FTC 2d/Fin ¶L-15201; USTR ¶384.01; TaxDesk ¶380,501; .
Under Code Sec. 38(c)(1) (the tax liability limitation), the general business credit is limited to the excess, if any, of the taxpayer's “net income tax” (generally, the taxpayer's regular income tax and alternative minimum tax (AMT), reduced by most non-refundable credits other than the general business credit) over the greater of:
(1) the taxpayer's tentative minimum tax for the tax year (see the observation immediately below), or
(2) 25% of the portion of the taxpayer's “net regular tax liability” (generally, the regular income tax reduced by most non-refundable credits other than the general business credit) that exceeds $25,000 (the 25%-in-excess-of-$25,000 rule). FTC 2d/Fin ¶L-15202; USTR ¶384.02; TaxDesk ¶380,502;
RIA observation: Under Code Sec. 55 , the tentative minimum tax is the taxpayer's alternative minimum taxable income (in excess of an exemption amount) multiplied by a percentage, and the taxpayer's actual AMT is the excess of the tentative minimum tax over the taxpayer's regular tax (after the regular tax is reduced by the foreign tax credit and certain other amounts), see FTC 2d/Fin ¶A-8101; , FTC 2d/Fin ¶A-8103; , FTC 2d/Fin ¶A-8105; USTR ¶554.01; TaxDesk ¶691,001; , TaxDesk ¶691,003; , TaxDesk ¶691,005; . Thus, a taxpayer has an AMT liability only in those tax years in which the tentative minimum tax exceeds the regular tax (reduced as described above). Accordingly, in a tax year in which a taxpayer has an AMT liability, the general business credit generally isn't allowed against either the AMT or the regular tax (if any). And, in a tax year in which the taxpayer doesn't have an AMT liability, but the tentative minimum tax is in excess of the amount computed under the 25%-in-excess-of-$25,000 rule (above), the excess may limit the extent to which the general business credit is allowed against the regular tax (if any).
Under pre-2010 Small Business Act law, the following general business credits could offset AMT liability:
... the empowerment zone employment credit (including renewal community employment credits for tax years beginning before 2010) could offset 25% of AMT under Code Sec. 38(c)(2) (see FTC ¶L-15202.1; USTR ¶384.02; TaxDesk ¶380,503; );
... the New York Liberty Zone employment credit (that was in effect for certain wages paid or incurred before 2004) could offset 100% of AMT under Code Sec. 38(c)(3) (see FTC ¶L-15202.2; USTR ¶384.02; TaxDesk ¶380,503.5; ); or
... certain enumerated specified credits could offset 100% of AMT under Code Sec. 38(c)(4) , see FTC ¶L-15202.3; USTR ¶384.02; TaxDesk ¶380,503.1; .
Under Code Sec. 39 , amounts of otherwise allowable general business credits that aren't allowed because of the tax liability limit can, generally, be carried back one year to the tax year before the unused credit year, and carried forward to each of the 20 years following the unused credit year, see FTC 2d/Fin ¶L-15209; USTR ¶394.01; TaxDesk ¶380,509; . And, under Code Sec. 196 , some components of the general business credit, if not allowed by the end of the carryforward period, can be deducted at that time, see FTC 2d/Fin ¶L-15212; USTR ¶1964; TaxDesk ¶380,510; .
New Law. For eligible small business (ESB) credits (defined below) determined in tax years beginning in 2010 (Code Sec. 38(c)(5)(A) as amended by 2010 Small Business Act §2013(a)) ,Code Sec. 38 and Code Sec. 39 are applied separately with respect to ESB credits. (Code Sec. 38(c)(5)(A)(i) )
Specifically, in applying Code Sec. 38(c)(1) (the limitation based on a taxpayer's tax liability, see FTC 2d/Fin ¶L-15202; USTR ¶384.02; TaxDesk ¶380,502; ) to ESB credits (Code Sec. 38(c)(5)(A)(ii) ) in tax years beginning in 2010: (Code Sec. 38(c)(5)(A) )
(1) the tentative minimum tax is treated as being zero, and (Code Sec. 38(c)(5)(A)(ii)(I) )
(2) the limitation based on a taxpayer's tax liability under Code Sec. 38(c)(1) (as modified by item (1), above) is reduced by the credit allowed under Code Sec. 38(a) for the tax year (i.e., the sum of the current year, carryforward, and carryback business credit amounts), other than ESB credits. (Code Sec. 38(c)(5)(A)(ii)(II) )
Since the 2010 Small Business Act provides that the tentative minimum tax is treated as being zero for ESB credits (see item (1) above), an ESB credit can offset both regular and AMT liability. (Com Rept, see ¶5603)
For five-year carryback of ESB credits permitted under the 2010 Small Business Act, see ¶203 .
RIA observation: As explained below, ESB credits include all of the credits listed in Code Sec. 38(b) (the list of the credits comprising the current year business credit, see FTC 2d/Fin ¶L-15201; USTR ¶384.01; TaxDesk ¶380,501; ). As a practical matter, a taxpayer's current year business credit for a tax year beginning in 2010 won't include any general business credits other than ESB credits. Thus, for tax years beginning in 2010, the phrase “other than the ESB credits” in Code Sec. 38(c)(5)(A)(ii)(II) (see item (2) above) is presumably only relevant for determining the treatment of carryforwards and carrybacks of credits other than ESB credits from other tax years (i.e., from a tax year not beginning in 2010).
RIA observation: The rules for ESB credits described in items (1) and (2) above are essentially identical to the rules that permit certain specified credits to offset AMT liability, see FTC ¶L-15202.3; USTR ¶384.02; TaxDesk ¶380,503.1; .
RIA illustration 1: T, a sole proprietor, is an ESB (see below) and uses the calendar year as his tax year. For 2010, T has (1) a regular tax liability of $30,000 (before taking into account any credits), (2) an AMT of $15,000 (before taking into account any credits) and (3) a tentative minimum tax of $45,000. T has ESB credits of $50,000 and no other tax credits.
Under Code Sec. 38(c)(5)(A)(i) , the tax liability limitation is separately computed and applied. The limitation is equal to the excess of $45,000 (T's net income tax for the year) over the greater of: (a) $0 (T's tentative minimum tax treated as being zero), or (b) $1,250 (25% of the excess of T's net regular tax liability of $30,000 over $25,000). Since (b) is greater than (a), T's $45,000 of net income tax for the year is reduced by $1,250 and, thus, the tax liability limit is $43,750. Thus, for 2010, T is allowed $43,750 of his $48,000 of ESB credits in reduction of his regular tax liability and AMT. The $4,250 ($48,000 minus $43,750) of disallowed ESB credits can be separately carried back or forward to other tax years to the extent permitted by Code Sec. 39 (see above and ¶203 ).
ESB credits defined.
For purposes of Code Sec. 38(c) , the term “ESB credits” means the sum of the credits listed in Code Sec. 38(b) (the list of the component credits of the current year business credit, see FTC 2d/Fin ¶L-15201; USTR ¶384.01; TaxDesk ¶380,501; ) that are determined for the tax year with respect to an ESB (defined below). (Code Sec. 38(c)(5)(B) )
The ESB credits cannot be taken into account under:
... the rules permitting the empowerment zone employment credit (including the renewal community employment credit that applied for tax years beginning before 2010) to offset 25% of AMT under Code Sec. 38(c)(2) ,
... the rules permitting the New York Liberty Zone employment credit (for certain wages paid or incurred before 2004) to offset AMT under Code Sec. 38(c)(3) , or
... the rules permitting specified credits to offset AMT under Code Sec. 38(c)(4) . (Code Sec. 38(c)(5)(B) )
RIA observation: Thus, any credit meeting the definition of an ESB credit can't be taken into account as an empowerment zone credit, a New York Liberty Zone employment credit, or as a specified credit under Code Sec. 38(c)(2) ,Code Sec. 38(c)(3) , or Code Sec. 38(c)(4) . Due to the five-year carryback for ESB credits described at ¶203 , it is generally more advantageous for a taxpayer's credits that qualify as ESB credits to be taken into account as ESB credits rather than as empowerment zone employment credits, New York Liberty Zone employment credits, or specified credits, since these credits can only be carried back one year. Also, the treatment of an empowerment zone employment credit as an ESB credit permits that credit to offset 100% (instead of only 25%) of AMT.
ESB defined.
For purposes of Code Sec. 38(c) , an ESB is, with respect to any tax year: (Code Sec. 38(c)(5)(C) )
... a corporation the stock of which is not publicly traded, (Code Sec. 38(c)(5)(C)(i) )
... a partnership, or (Code Sec. 38(c)(5)(C)(ii) )
... a sole proprietorship, (Code Sec. 38(c)(5)(C)(iii) )
if the average annual gross receipts of the corporation, partnership, or sole proprietorship for the three-tax-year period preceding the tax year does not exceed $50,000,000. (Code Sec. 38(c)(5)(C) ) For example, a calendar year corporation meets the $50 million gross receipts test for the 2010 tax year, if as of Jan. 1, 2010, its average annual gross receipts for the three-tax-year period ending on Dec. 31, 2009, does not exceed $50 million. (Com Rept, see ¶5603)
RIA observation: A fiscal year taxpayer meets the $50 million gross receipts test for its tax year beginning in 2010 if its annual gross receipts for its tax years beginning in 2007, 2008, and 2009 (the three-tax-year testing period) does not exceed $50 million.
RIA illustration 2: ABC Corporation, a calendar year taxpayer, had gross receipts of $75 million in 2007, $45 million in 2008, and $36 million in 2009. ABC's average annual gross receipts for the three-tax-year testing period are $52 million [($75 million + $45 million + $36 million) ÷ 3]. Since ABC's gross receipts for the three-tax-year testing period exceed $50 million, ABC isn't an ESB and its general business credits can't offset the AMT under Code Sec. 38(c)(5) .
RIA observation: Although ABC's general business credits aren't ESB credits in illustration (2), any credits that are specified credits or empowerment zone employment credits can still offset ABC's AMT liability.
For purposes of applying the $50 million gross receipts test described above, rules similar to the rules of Code Sec. 448(c)(2) and Code Sec. 448(c)(3) (relating to the $5 million gross receipts exception to the prohibition on the use of the cash method of accounting by certain entities, see FTC 2d/Fin ¶G-2069; et seq. USTR ¶4484; TaxDesk ¶440,806; et seq.) apply. (Code Sec. 38(c)(5)(C) ) Thus, an ESB is, with respect to any tax year, a corporation, the stock of which is not publicly traded, or a partnership, which meets the gross receipts test of Code Sec. 448(c) , substituting $50 million for $5 million each place it appears. For a sole proprietorship, the gross receipts test is applied as if it were a corporation. (Com Rept, see ¶5603)
RIA observation: Thus, for purposes of applying the gross receipts test in Code Sec. 38(c)(5)(C) , the following rules apply:
... the Code Sec. 448(c)(2) rule aggregating gross receipts of related entities in determining whether the gross receipts test is met (see FTC 2d/Fin ¶G-2071; USTR ¶4484; TaxDesk ¶440,808; ). For this purpose, entities are related if they would be treated as a single employer under Code Sec. 52(a) (aggregation of members of controlled groups of corporations, see FTC 2d/Fin ¶L-17787; USTR ¶514; TaxDesk ¶380,719; ) or Code Sec. 52(b) (aggregation of commonly controlled businesses, whether or not incorporated, see FTC 2d/Fin ¶L-17787; USTR ¶514; TaxDesk ¶380,719; ), or under Code Sec. 414(m) (aggregation of certain affiliated organizations that provide services, see FTC 2d/Fin ¶H-7953; USTR ¶4144.05; ) or Code Sec. 414(o) (aggregation under authority of IRS to prevent avoidance of employee benefit requirements through the use of separate organizations, employee leasing or other means, see FTC 2d/Fin ¶H-7925; USTR ¶4144.01; TaxDesk ¶295,340; ). Thus, even if a taxpayer would have been an ESB based on its own gross receipts, its credits aren't ESB credits, if taking into account the gross receipts of all related entities, the total average gross receipts for the three-tax-year testing period exceeded $50 million. Also, gross receipts attributable to transactions between the related entities aren't taken into account for purposes of the $50 million gross receipts test.
... the Code Sec. 448(c)(3)(A) rule regarding the determination of gross receipts for corporations not in existence for the entire three-year period (see FTC 2d/Fin ¶G-2069; USTR ¶4484; TaxDesk ¶440,807; ). Thus, if a taxpayer (for example, a corporation) hasn't been in existence for the entire three-year period, the gross receipts test is applied on the basis of the period in which the corporation has been in existence.
... the Code Sec. 448(c)(3)(B) rule annualizing gross receipts in the case of a short tax year (see FTC 2d/Fin ¶G-2069; USTR ¶4484; TaxDesk ¶440,807; ). Thus, the gross receipts for any tax year of less than 12 months are annualized by multiplying the gross receipts for the short period by twelve and then dividing the result by the number of months in the short period.
... the Code Sec. 448(c)(3)(C) rule reducing gross receipts for returns and allowances (see FTC 2d/Fin ¶G-2070; USTR ¶4484; TaxDesk ¶440,808; ).
... the Code Sec. 448(c)(3)(D) rule taking predecessor corporations into account in determining whether a corporation meets the gross receipts test (see FTC 2d/Fin ¶G-2069; USTR ¶4484; TaxDesk ¶440,807; ).
RIA illustration 3: Partnership X and Partnership Y are treated as a single entity under the Code Sec. 448(c)(2) aggregation rules. Partnership X had gross receipts of $30 million in 2007, $25 million in 2008, and $15 million in 2009. Partnership Y had gross receipts of $20 million in 2007, $35 million in 2008, and $19 million in 2009. Each partnership uses the calendar year as its tax year. Assume Partnership X has $5 million of current year business credits for 2010 and Partnership Y doesn't have any general business credits for 2010.
For purposes of determining whether the average annual gross receipts exceed $50 million, Partnership X and Partnership Y's average gross receipts for the three-tax-year testing period are $48 million [($30 million + $25 million + $15 million + $20 million + $35 million + $19 million) ÷ 3]. Since Partnership X and Partnership Y's average annual gross receipts ($48 million) for the three-tax-year testing period don't exceed $50 million, Partnership X and Partnership Y are both ESBs. Thus, Partnership X's general business credits are ESB credits. For the requirement that partners also must satisfy the gross receipts requirement, see below.
RIA observation: For the first tax year of an entity's existence, the entity will qualify as an ESB, unless its gross receipts have to be aggregated with an existing entity (or entities) under Code Sec. 448(c)(2) , or the entity is treated as having a predecessor entity under Code Sec. 448(c)(3)(D) that had average annual gross receipts in excess of $50 million for the three-tax year testing period.
Partners and S corporation shareholders.
Credits determined with respect to a partnership or S corporation are not treated as ESB credits by any partner or shareholder unless the partner or shareholder meets the gross receipts test under Code Sec. 38(c)(5)(C) for the tax year in which the credits are treated as current year business credits. (Code Sec. 38(c)(5)(D) ) Thus, credits determined with respect to a partnership or S corporation are not treated as ESB credits by a partner or shareholder unless the partner or shareholder meets the gross receipts test for the tax year in which the credits are treated as current year business credits. (Com Rept, see ¶5603)
RIA observation: Thus, for ESB credits of a partnership or an S corporation, the gross receipts requirement has to be satisfied at the entity level and at the partner or S shareholder level.
RIA illustration 4: The facts are the same as in illustration (3). Partnership X has two individual partners, D and E, who each own 50% of Partnership X.
For the three-tax-year testing period, D had average annual gross receipts of $40 million and E had average annual gross receipts of $51 million. Since D's average annual receipts don't exceed $50 million, D can use his distributive share ($2.5 million) of X's ESB credits to offset any AMT liability. On the other hand, E, whose average annual gross receipts for the three-tax-year testing period exceed $50 million, can't use his distributive share ($2.5 million) of Partnership X's ESB credits to offset any AMT liability, unless the credits are specified credits (that can offset 100% of AMT) or empowerment zone employment credits (that can offset 25% of AMT).
RIA observation: Code Sec. 38(c)(5)(D) doesn't expressly provide any rules for determining the gross receipts of individual partners and S corporation shareholders. The rules provided in Code Sec. 448(c)(2) andCode Sec. 448(c)(3) (that are incorporated by reference in Code Sec. 38(c)(5)(C) , see above) don't address issues related to individuals because the prohibition on the use of the cash method of accounting under Code Sec. 448 applies to entities rather than individuals, see FTC 2d/Fin ¶G-2054; et seq. USTR ¶4484; TaxDesk ¶440,806; . Thus, IRS may need to provide guidance on certain issues including:
... whether the gross receipts of an individual partner or shareholder would include his pro-rata share of the gross receipts of the partnership or S corporation even if those receipts haven't been distributed to the partner or S shareholder.
... whether the gross receipts of an individual partner would include the gross receipts of his spouse.
Ordering rules.
The 2010 Small Business Act makes conforming changes to the ordering rules used for calculating the tax liability limitation under Code Sec. 38(c) for the following credits by inserting “ESB credits” in the list of credits that require separate calculations for purposes of Code Sec. 38 and Code Sec. 39 :
... the rule permitting the empowerment zone employment credit to offset 25% of AMT. (Code Sec. 38(c)(2)(A)(ii)(II) as amended by 2010 Small Business Act §2013(c)(1))
... rules permitting the New York Liberty Zone employment credit (that was in effect for certain wages paid or incurred before 2004) to offset AMT. (Code Sec. 38(c)(3)(A)(ii)(II) as amended by 2010 Small Business Act §2013(c)(2))
... rules permitting specified credits to offset AMT. (Code Sec. 38(c)(4)(A)(ii)(II) as amended by 2010 Small Business Act §2013(c)(3))
RIA observation: Presumably, the effects of the amendments to Code Sec. 38(c)(2)(A)(ii)(II) , Code Sec. 38(c)(3)(A)(ii)(II) , and Code Sec. 38(c)(4)(A)(ii)(II) are to require that the taxpayer separately apply the general business credit tax liability limitations on ESB credits after doing:
... the combined calculation required for most other credits that make up the general business credit;
... the separate calculation required for the empowerment zone employment credit (including the renewal community employment credit that applied for tax years beginning before 2010) under Code Sec. 38(c)(2)(A) ;
... the separate calculation of the general business credit tax liability limitations on the New York Liberty Zone business employee credit for certain wages paid or incurred before 2004 under Code Sec. 38(c)(3)(A) ; and
... the separate calculation of the general business credit tax liability limitations on the specified credits under Code Sec. 38(c)(4)(A) .
For a tax year beginning in 2010, the above rules will presumably only affect a taxpayer's carryforwards of the empowerment zone employment credit, the New York Liberty Zone business employee credit, and the specified credits, because the ESB credits for that tax year will include those credits.
RIA observation: Thus, as is true for the empowerment zone employment credit, the New York Liberty Zone business employee credit, and the specified credits, carrybacks and carryforwards of any unused ESB credits are calculated separately (rather than in a combined calculation). For five-year carryback for ESB credits, see ¶203 .
Redesignation.
The 2010 Small Business Act redesignated pre-2010 Small Business Act Code Sec. 38(c)(5) (providing special rules for determining the general business credit of married individuals, controlled groups, estates and trusts, and banks, regulated investment companies, and real estate investment trusts) as Code Sec. 38(c)(6) . (2010 Small Business Act §2013(a))
Effective: Credits determined in tax years beginning after Dec. 31, 2009, and to carrybacks of those credits. This effective date applies to the rules of 2010 Small Business Act §2013(a) (i.e.,Code Sec. 38(c)(5) , as discussed above). (2010 Small Business Act §2013(d))
RIA observation: The 2010 Small Business Act doesn't provide an effective date for the conforming changes made to the ordering rules (see above) by 2010 Small Business Act §2013(c) . Presumably, the effective date for those changes is Sept. 27, 2010.
Rules for apportioning the limitation on the minimum tax credit among members of a controlled group of corporations are corrected
Code Sec. 55(e)(5), as amended by 2010 Small Business Act §2013(b)
Generally effective: Sept. 27, 2010
Committee Reports, see ¶None
In computing the otherwise allowable minimum tax credit (see FTC 2d/Fin ¶A-8800; et seq. USTR ¶554.01; TaxDesk ¶691,500; et seq.) for a tax year that a corporation is exempt from the alternative minimum tax (AMT) as a small corporation (as defined in FTC 2d/Fin ¶A-8140; et seq. USTR ¶554.01; TaxDesk ¶691,200; et seq. ), the corporation has to reduce its regular tax liability for that year (after reduction by specified credits) by 25% of the excess of the liability over $25,000. Under pre-2010 Small Business Act law, Code Sec. 55(e)(5) provided that the $25,000 amount was apportioned among members of a controlled group of corporations under rules similar to the rules of Code Sec. 38(c)(3)(B) for purposes of computing the limit on the general business credit. FTC 2d/Fin ¶A-8807; USTR ¶554.01; TaxDesk ¶691,507;
RIA observation: The reference to Code Sec. 38(c)(3)(B) in Code Sec. 55(e)(5) is incorrect because Code Sec. 38(c)(3)(B) contains the definition of the New York Liberty business employee credit rather than rules for apportioning the limit on the general business credit among members of a controlled group of corporations. The incorrect reference resulted from Congress's failure to change the reference in Code Sec. 55(e)(5) to reflect two earlier redesignations of the rules formerly provided in Code Sec. 38(c)(3)(B) by 2002 Job Creation and Worker Assistance Act §301(b)(1) (Sec. 301(b)(1), PL 107-147, 3/9/2002 ) and 2004 Jobs Act § 711(a) (Sec. 711(a), PL 108-357, 10/22/2004 ). Under pre-2010 Small Business Act law, the apportionment rules were provided in Code Sec. 38(c)(5)(B) , see FTC 2d/Fin ¶L-15202.2; USTR ¶384.02; TaxDesk ¶380,503.5; . For the redesignation of Code Sec. 38(c)(5)(B) by the 2010 Small Business Act as Code Sec. 38(c)(6)(B) , see ¶301 .
New Law. The 2010 Small Business Act strikes the reference to Code Sec. 38(c)(3)(B) in Code Sec. 55(e)(5) and inserts a reference to Code Sec. 38(c)(6)(B) .(Code Sec. 55(e)(5) as amended by 2010 Small Business Act §2013(b))
RIA observation: According to a Senate Summary of Changes Made in the Substitute Amendment (dated July 21, 2010), the 2010 Small Business Act provides a correct cross reference to the general business credit provision on controlled groups from elsewhere in the Code.
Effective: Sept. 27, 2010

Employer-provided cell phones don't require strict “listed property” substantiation for employer's deduction and employee's exclusion as fringe benefit
Code Sec. 280F(d)(4)(A), as amended by 2010 Small Business Act §2043(a)
Code Sec. 274(d), 2010 Small Business Act §2043(a)
Code Sec. 280F(d)(3), 2010 Small Business Act §2043(a)
Code Sec. 132, 2010 Small Business Act §2043(a)
Code Sec. 179, 2010 Small Business Act §2043(a)
Generally effective: Tax years beginning after Dec. 31, 2009
Committee Reports, see ¶5611
Under Code Sec. 274(d) , no deduction or credit is allowed for an item of “listed property” (as defined in Code Sec. 280F(d)(4) ) unless the taxpayer substantiates, by adequate records or by the taxpayer's own statement supported by sufficient corroborating evidence, the following elements for the item: the amount of each separate expenditure for the item (e.g., the cost of buying it), the amount of each business or investment use of the item based on the appropriate measure (e.g., time), the total use of the item for the tax period, the date of each expenditure for or use of the item, and the business purpose for each expenditure for or use of the item. ( FTC 2d/Fin ¶L-4644; USTR ¶2744.10; TaxDesk ¶295,333; )
Additionally, if, for the year listed property is placed in service, it isn't used more than 50% for business purposes, the property: (1) doesn't qualify for the Code Sec. 179 expensing election (see FTC 2d/Fin ¶L-9900; et seq. USTR ¶1794; et seq. TaxDesk ¶268,400; et seq.), and (2) is depreciable only under straight-line depreciation using the alternative depreciation (ADS) recovery periods (see FTC 2d/Fin ¶L-9402; USTR ¶280F4; TaxDesk ¶267,502; ). ( FTC 2d/Fin ¶L-10018; USTR ¶280F4; TaxDesk ¶267,615; )
Except as otherwise provided, employer-provided fringe benefits are included in an employee's gross income as compensation for services. The employee must include in gross income the amount by which the fair market value of the fringe benefit exceeds the sum of (a) any amounts paid for the benefit by or for the employee, and (b) any amount specifically excluded by a Code section. ( FTC 2d/Fin ¶H-1055; USTR ¶1324; TaxDesk ¶134,003; ) A specific exclusion is provided for working condition fringe benefits (WCFBs). A WCFB is any property or services provided to an employee by the employer to the extent the cost of the property or services would have been deductible by the employee under either Code Sec. 162 (as trade or business expenses) or Code Sec. 167 (as depreciation expenses), taking into account the appropriate substantiation requirements, if the employee had paid for the property or services himself. Thus, for example, if the employer-provided property is “listed property,” the employee can't exclude the item as a WCFB unless the Code Sec. 274(d) substantiation requirements are met. ( FTC 2d/Fin ¶H-1701; USTR ¶1324.05; TaxDesk ¶134,010; )
And, under Code Sec. 280F(d)(3) , an employee who owns or leases listed property that he uses in his employment isn't allowed any depreciation deduction, expensing allowance, or deduction for lease payments for that use unless it's for the convenience of the employer and required as a condition of employment. ( FTC 2d/Fin ¶L-10022; USTR ¶280F4; TaxDesk ¶267,618; )
Under pre-2010 Small Business Act law, “listed property” as defined by Code Sec. 280F(d)(4) included cellular telephones (cell phones) and other similar telecommunications equipment (e.g., PDAs and Blackberry devices). (FTC 2d/Fin ¶L-10000; FTC 2d/Fin ¶L-10002; USTR ¶280F4; TaxDesk ¶267,616; ) This meant that the Code Sec. 274(d) substantiation requirements had to be met in order for employers to be able to deduct the cost of cell phones they provided to employees for employment-related business use, and for employees to treat employer-provided cell phones as excludible WCFBs. Employees couldn't deduct the costs of using their own cell phones for work unless a “convenience of the employer” test was met. Responding to complaints by individual businesses as well as business groups that treating cell phones as listed property was archaic and unreasonably burdensome, IRS issued Notice 2009-46 , which proposed simplified substantiation procedures for employer-provided cell phones and requested comments on those proposals (see FTC 2d/Fin ¶L-4644.1; TaxDesk ¶295,333.1; ).
New Law. The 2010 Small Business Act (the Act) removes cellular telephones (cell phones) and other similar telecommunications equipment from the categories of “listed property” under Code Sec. 280F(d)(4) .(Code Sec. 280F(d)(4)(A) as amended by 2010 Small Business Act §2043(a)) Thus, the heightened substantiation requirements and special depreciation rules that apply to listed property don't apply to cell phones. (Com Rept, see ¶5611)
RIA observation: According to the Senate Finance Committee Summary dated July 21, 2010, the Act “delists” cell phones so their cost can be deducted or depreciated like other business property costs, without onerous recordkeeping requirements. This means employers may deduct the cost of providing cell phones to their employees for employment-related business use, without having to satisfy the strict substantiation requirements for listed property. To support a deduction for the cell phones, the employer need only substantiate their cost, in much the same way as the employer supports the deduction for other types of business equipment (see FTC 2d/Fin ¶L-4501; et seq. USTR ¶1624; TaxDesk ¶257,001; et seq.).
RIA observation: The removal of cell phones from the Code Sec. 280F(d)(4) categories of “listed property” has important tax consequences for employers providing cell phones to employees for employment-related business use, employees using cell phones in connection with their employment, and self-employed individuals using cell phones in their businesses.
RIA observation: The “delisting” of cell phones also means that cell phones are no longer subject to the limitations described above for listed property that isn't used more than 50% for business purposes. That is, a taxpayer won't be denied a Code Sec. 179 expensing election for a cell phone (see FTC 2d/Fin ¶L-9900; et seq. USTR ¶1794; et seq. TaxDesk ¶268,400; et seq.), and won't be limited to using straight-line depreciation under the ADS system for a cell phone (see FTC 2d/Fin ¶L-9402; USTR ¶280F4; TaxDesk ¶267,502; ), solely because the cell phone isn't used more than 50% for business purposes in the year it's placed in service (see FTC 2d/Fin ¶L-10018; USTR ¶280F4; TaxDesk ¶267,615; ).
RIA observation: The Act also makes it easier for employees to claim deductions for their own cell phones if used for employment-related purposes. The elimination of “listed property” treatment means that the employee's use of his own cell phone won't have to be “for the convenience of the employer” and “as a condition of employment” (required under Code Sec. 280F(d)(3) for listed property) for the deductions (e.g., depreciation, expensing, lease payments) to be available. But the employee's use of his cell phone still must be in connection with the performance of services as an employee; i.e., the deductions are available only to the extent the cell phone is used for employment-related purposes. The costs associated with the employee's personal use of his own cell phone continue to be personal expenses, which are nondeductible under Code Sec. 262(a) (see FTC 2d/Fin ¶L-1009; USTR ¶2624; TaxDesk ¶255,507; ).
Employer-provided cell phones as an excludible fringe benefit.
RIA observation: For employees, the elimination of “listed property” treatment for cell phones makes it easier to claim employer-provided cell phones as excludible WCFBs. The Code Sec. 274(d) substantiation requirements no longer apply to the cell phones, so the employee won't have to meet those requirements to be allowed a Code Sec. 162 deduction for the phone. This, in turn, means the employee can exclude the cost of the phone as a WCFB, without having to keep the detailed records that Code Sec. 274(d) requires for listed property.
The Act doesn't affect IRS's authority to determine the appropriate characterization of cell phones as a WCFB under Code Sec. 132(d) . (Com Rept, see ¶5611)
RIA observation: Although the Act makes it easier for employees to claim the WCFB exclusion for employer-provided cell phones, it doesn't address the employee's personal use of the phone. It doesn't appear that a cell phone used for some personal use as well as for employment-related business use would pass muster as a WCFB. As explained above, a WCFB is any property or service provided to an employee of the employer to the extent that, if the employee paid for the property or services, the amount paid would be allowable as a deduction under Code Sec. 162 or Code Sec. 167 (see FTC 2d/Fin ¶H-1701; USTR ¶1324.05; TaxDesk ¶134,010; ). However, under Code Sec. 262(a) , no deduction is allowed for personal, living, or family expenses, unless otherwise provided (see FTC 2d/Fin ¶L-1009; USTR ¶2624; TaxDesk ¶255,507; ). Thus, absent a specific exclusion for personal cell phone use (e.g., as a de minimis fringe benefit, see below), an employee's exclusion for an employer-provided cell phone is limited to an amount based on his employment-related business use of the phone.
The Act doesn't affect IRS's authority to determine that the personal use of cell phones that are provided primarily for business purposes may qualify as a de minimis fringe benefit. (Com Rept, see ¶5611)
RIA observation: Code Sec. 132(a)(4) provides a specific exclusion from gross income for de minimis fringe benefits. As defined in Code Sec. 132(e) , a de minimis fringe benefit is any property or service whose value is so small that accounting for it is unreasonable or administratively impracticable, taking into account the frequency with which similar fringe benefits are provided by the employer to its employees (see FTC 2d/Fin ¶H-1801; et seq. USTR ¶1324.06; TaxDesk ¶134,013; et seq.). IRS could declare an employee's personal use of an employer-provided cell phone to be a tax-free de minimis fringe benefit.
Effective: Tax years beginning after Dec. 31, 2009. (2010 Small Business Act §2043(b))
RIA recommendation: Taxpayers that are subject to estimated tax in 2010, and that expect to report cell phone-related expenses for any of the remaining estimated tax installments for a tax year beginning after Dec. 31, 2009 (e.g., the installment for the fourth quarter of 2010, for calendar year taxpayers, see FTC 2d/Fin ¶S-5241; USTR ¶66,544.02; TaxDesk ¶571,335; ), should take advantage of the relaxed substantiation requirements for cell phones used for business purposes. That is, taxpayers may claim otherwise allowable deductions for the cell phones without having to comply with the strict “listed property” substantiation requirements.

Health insurance costs for self and family are deductible in computing 2010 self-employment tax
Code Sec. 162(l)(4), as amended by 2010 Small Business Act §2042(a)
Generally effective: Tax years beginning after Dec. 31, 2009, and before Jan. 1, 2011
Committee Reports, see ¶5610
Income tax deduction for self-employed individual's health insurance costs.
A self-employed individual can deduct as a trade or business expense the amount paid during the tax year for health insurance for:
... the taxpayer;
... the taxpayer's spouse;
... the taxpayer's dependents; and
... effective Mar. 30, 2010, any child of the taxpayer who hasn't attained age 27 as of the end of the tax year. ( FTC 2d/Fin ¶L-3510; USTR ¶1624.403; TaxDesk ¶304,420; )
The deduction isn't available for any month for which the taxpayer is eligible to participate in a subsidized health plan maintained by an employer of the taxpayer or of the taxpayer's spouse, dependent, or under-age-27 child. ( FTC 2d/Fin ¶L-3510; USTR ¶1624.403; TaxDesk ¶304,420; )
The deduction is limited to the earned income (within the meaning of Code Sec. 401(c) , i.e., net earnings from self-employment) from the trade or business for which the health insurance plan was established. ( FTC 2d/Fin ¶L-3511; USTR ¶1624.403; TaxDesk ¶304,420; )
Health insurance costs not deductible for self-employment tax.
With certain exceptions, each U.S. citizen or resident alien who has self-employment income for the tax year must pay a 15.3% self-employment (SE) tax consisting of:
(1) a 12.4% old-age, survivors, and disability insurance (OASDI) tax, commonly referred to as “social security tax”; and
(2) a 2.9% hospital insurance (HI) tax, commonly referred to as “Medicare tax.”
Both taxes are applied to net earnings from self-employment above a “floor” amount. There is also an annually-adjusted “ceiling” limitation on the OASDI tax ($106,800 in 2010), but no ceiling on the HI tax. ( FTC 2d/Fin ¶A-6001; USTR ¶14,014; TaxDesk ¶575,501; )
Net earnings from self-employment are generally an individual's trade or business income, less the deductions permitted by the Code that are attributable to that trade or business, plus the individual's distributive share of partnership income or loss. ( FTC 2d/Fin ¶A-6101; USTR ¶14,024; TaxDesk ¶576,012; )
However, under pre-2010 Small Business Act law, a self-employed individual's health insurance costs, although deductible for income tax purposes, weren't deductible in determining net earnings from self-employment. FTC ¶A-6113; USTR ¶1624.403; TaxDesk ¶576,023;
RIA observation: Thus, business owners couldn't deduct the cost of health insurance for themselves and their family members for purposes of calculating self-employment tax. (Senate Finance Summary, July 21, 2010)
New Law. Under the 2010 Small Business Act, the rule disallowing a deduction of a self-employed individual's health insurance costs in determining net earnings from self-employment applies only for tax years beginning before Jan. 1, 2010, or after Dec. 31, 2010.(Code Sec. 162(l)(4) as amended by 2010 Small Business Act §2042(a))
Thus, for the taxpayer's first tax year beginning after Dec. 31, 2009, the income tax deduction allowed to self-employed individuals for the cost of health insurance for themselves, their spouses, dependents, and children who haven't attained age 27 as of the end of the tax year is also allowed in calculating net earnings from self-employment for purposes of self-employment tax. (Com Rept, see ¶5610)
RIA observation: By reducing the after-tax cost of health insurance coverage, the provision makes it easier for the self-employed to afford coverage or to increase their existing coverage.
RIA illustration : For 2010, a self-employed individual (X) paid $13,770 for health insurance coverage for himself, his spouse, his 13-year-old son, and his 11-year-old daughter. As a result of the new provision, X can deduct the $13,770 in computing his net earnings from self-employment.
The 15.3% self-employment tax rate applied to the $13,770 of premiums is $2,107. But X's actual tax saving will be less.
If X's net earnings from self-employment are at least $120,570 (the $106,800 OASDI ceiling plus the $13,770 deduction), there will be no reduction in X's 12.4% OASDI tax. Only X's 2.9% HI tax, which has no ceiling, will be reduced.
In addition, an above-the-line income tax deduction is allowed for one-half of self-employment tax. (See FTC 2d/Fin ¶K-4401; USTR ¶1644.07; TaxDesk ¶326,002; ) So, any reduction in X's self-employment tax as a result of the new provision will cause an increase in X's income tax.
Effect on earned income limitation.
It's intended that earned income, within the meaning of Code Sec. 401(c) , be computed without regard to the self-employment tax deduction for health insurance costs. Thus, the self-employment tax deduction won't affect the earned income limitation on the income tax deduction for self-employed individual's health insurance costs. However, a technical correction may be needed to achieve this result. (Com Rept, see ¶5610)
Effective: Tax years beginning after Dec. 31, 2009 (2010 Small Business Act §2042(b)) , and before Jan. 1, 2011 (Code Sec. 162(l)(4) ) , i.e., the above rule only applies for the taxpayer's first tax year beginning after Dec. 31, 2009.(Com Rept, see ¶5610)
RIA recommendation: Because the rule permitting deduction of health insurance costs for purposes of the self employment tax is retroactive to the beginning of 2010, individuals who didn't reduce their earned income from self-employment for these amounts in calculating their 2010 estimated tax should consider recalculating and adjusting any remaining estimated tax payments for 2010 (e.g., for the installment for the fourth quarter of 2010, for most calendar year taxpayers, see FTC 2d/Fin ¶S-5241; USTR ¶66,544.02; TaxDesk ¶571,335; ).

Retirement plan distributions may be rolled over to a designated Roth account, but not tax-free; 2010 rollovers are taxed in 2011 and 2012
Code Sec. 402A(c)(4), as amended by 2010 Small Business Act §2112
Generally effective: Distributions made after Sept. 27, 2010
Committee Reports, see ¶5617
A qualified profit-sharing plan may include a cash or deferred arrangement, i.e., a 401(k) plan, which allows employees to make an election between receiving cash or having “elective contributions” made to the plan. Similarly, a 403(b) plan may allow employees to enter into a salary reduction agreement, under which employees may make an election between receiving cash or having “salary reduction contributions” made to the plan. The amount of elective deferrals (including elective contributions to a 401(k) plan and salary reduction contributions under a 403(b) plan) that an employee is permitted under either a 401(k) plan or a 403(b) plan is limited to an aggregate amount for a tax year ($16,500 for 2010), with an additional annual “catch-up” amount ($5,500 for 2010) for employees over age 50. ( FTC 2d/Fin ¶H-8975; ; FTC 2d/Fin ¶H-8975.1; ; FTC 2d/Fin ¶H-9151; ; FTC 2d/Fin ¶H-12471; USTR ¶4014.176; ; USTR ¶4024; ; USTR ¶4034.11; TaxDesk ¶284,011; ; TaxDesk ¶284,025; Pension Analysis ¶28,125.1; ; Pension Analysis ¶28,402; ; Pension Analysis ¶36,072; Pension & Benefits Explanations ¶401-4.176; ; Pension & Benefits Explanations ¶402-4; ; Pension & Benefits Explanations ¶403-4.11; )
If an “applicable retirement plan” (such as a 401(k) plan or a 403(b) annuity plan) includes a “qualified Roth contribution program,” then plan participants may elect to make either (i) non-excludable contributions to a “designated Roth account” in the plan, or (ii) excludable elective or salary reduction contributions in a non-Roth account. A participant who receives a plan distribution from a 401(k) plan or 403(b) plan generally must include in gross income the amount of elective or salary reduction contributions received in the distribution, and the earnings on these contributions. In contrast, after a five-tax-year holding period, a participant may receive from a designated Roth account qualified distributions—of both the elective or salary reduction contributions and the earnings on the elective deferrals—that are completely excludable from gross income. Qualified distributions from a designated Roth account must be made after the participant reaches age 59-1/2, dies, or becomes disabled. ( FTC 2d/Fin ¶H-12290; ; FTC 2d/Fin ¶H-12295; ; FTC 2d/Fin ¶H-12295.1; et seq. USTR ¶4014.1745; ; USTR ¶402A4; TaxDesk ¶283,401; et seq. Pension Analysis ¶35,251.1; et seq. Pension & Benefits Explanations ¶401-4.1745; ; Pension & Benefits Explanations ¶402A-4; )
A participant may receive a distribution of elective contributions under a 401(k) plan, or salary reduction contributions under a 403(b) plan, only after attainment of age 59-1/2, severance from employment, plan termination, hardship, disability, or death. ( FTC 2d/Fin ¶H-8975; ; FTC 2d/Fin ¶H-8978; ; FTC 2d/Fin ¶H-9200; ; FTC 2d/Fin ¶H-9201; ; FTC 2d/Fin ¶H-12479; USTR ¶4014.1763; ; USTR ¶4034.12; TaxDesk ¶284,005; Pension Analysis ¶28,128; ; Pension Analysis ¶28,502; ; Pension Analysis ¶36,080; Pension & Benefits Explanations ¶403-4.1763; ; Pension & Benefits Explanations ¶403-4.12; )
Eligible rollover distributions from eligible retirement plans (i.e., generally, plan distributions other than periodic distributions, minimum required distributions, or hardship distributions) may be contributed, without an annual dollar limit, to a 401(k) plan or a 403(b) plan and certain other plans, if certain requirements are met. Distributions rolled over to an eligible retirement plan generally are not includible in gross income. ( FTC 2d/Fin ¶H-3300; ; FTC 2d/Fin ¶H-3305.1; ; FTC 2d/Fin ¶H-11400; ; FTC 2d/Fin ¶H-11402; ; FTC 2d/Fin ¶H-12400; ; FTC 2d/Fin ¶H-12491; USTR ¶4024.04; ; USTR ¶4034.03; ; USTR ¶4574; TaxDesk ¶135,714; ; TaxDesk ¶144,001; ; TaxDesk ¶284,706; Pension Analysis ¶32,803; ; Pension Analysis ¶36,092; ; Pension Analysis ¶40,406.1; Pension & Benefits Explanations ¶402-4; ; Pension & Benefits Explanations ¶403-4.03; ; Pension & Benefits Explanations ¶457-4; )
Under pre-2010 Small Business Act law, rollovers to a designated Roth account could have been made only from another designated Roth account. FTC 2d/Fin ¶H-12290.17A; FTC 2d/Fin ¶H-12295.3; USTR ¶4014.1745; Pension Analysis ¶35,251.3; Pension & Benefits Explanations ¶401-4.1745;
Individuals who receive eligible rollover distributions from qualified Code Sec. 401(a) plans, 403(b) annuities, traditional IRAs, and governmental section 457 plans, may roll over these distributions directly into a Roth IRA, subject to the respective requirements for rollovers from these plans. ( FTC 2d/Fin ¶H-12290; ; FTC 2d/Fin ¶H-12290.17; USTR ¶408A4; TaxDesk ¶283,318; Pension Analysis ¶35,218; Pension & Benefits Explanations ¶408A-4; )
RIA observation: Thus, eligible rollover distributions from a qualified Code Sec. 401(a) plan, a 403(b) annuity plan, and a governmental section 457 plan, may be rolled over to a Roth IRA—but under pre-2010 Small Business Act law, these distributions could not have been rolled over to a designated Roth account.
The tax-free treatment that ordinarily applies for rollovers from eligible retirement plans does not apply to a qualified rollover contribution from an eligible retirement plan to a Roth IRA. Rather, for any distribution made with respect to an individual from an eligible retirement plan that is contributed to his Roth IRA in a qualified rollover contribution, the individual must include in gross income any amount that would have been includible in gross income if it were not part of a qualified rollover contribution. The Code Sec. 72(t) 10% early withdrawal tax does not apply to the rolled over amounts includible in gross income. ( FTC 2d/Fin ¶H-12290; ; FTC 2d/Fin ¶H-12290.20; USTR ¶408A4; TaxDesk ¶283,326; Pension Analysis ¶35,221; Pension & Benefits Explanations ¶408A-4; )
However, any portion of a distribution from a Roth IRA that: (i) is allocable to a qualified rollover contribution that was made to the Roth IRA from an applicable retirement plan, (ii) is made within the five-tax-year period beginning with the tax year in which the rollover contribution was made, and (iii) was includible in gross income as part of the qualified rollover contribution, is subject to the 10% early withdrawal tax, as if the distribution were includible in income. ( FTC 2d/Fin ¶H-12290; ; FTC 2d/Fin ¶H-12290.38; USTR ¶408A4; TaxDesk ¶283,346; Pension Analysis ¶35,239; Pension & Benefits Explanations ¶408A-4; )
Any amount that is includible in an individual's gross income for a tax year beginning in 2010 by reason of a distribution from an eligible retirement plan that is rolled over to a Roth IRA in a qualified rollover contribution, must be included in gross income ratably over the two-year period beginning with the first tax year beginning in 2011. An individual may elect out of the two-year ratable inclusion in gross income of the taxable portion of a 2010 distribution rolled over to a Roth IRA. However, the ratable inclusion of distribution income in gross income in 2011 and 2012 is accelerated if rollover amounts are distributed from the Roth IRA before 2012, or generally, if the individual dies before 2012. ( FTC 2d/Fin ¶H-12290; ; FTC 2d/Fin ¶H-12290.20B; et seq. USTR ¶408A4; TaxDesk ¶283,326.1; et seq. Pension Analysis ¶35,221B; et seq. Pension & Benefits Explanations ¶408A-4; )
The employer maintaining a plan, the plan administrator, or the person issuing annuities, under which designated distributions may be made, or all of these persons (whichever is appropriate), must include additional information in reports required underCode Sec. 408(i) or Code Sec. 6047 that IRS may require to ensure the proper reporting of gross income from distributions rolled over to Roth IRAs. ( FTC 2d/Fin ¶S.3399.4; et seq. USTR ¶4084.04; ; USTR ¶408A4.04; TaxDesk ¶813,032; ; TaxDesk ¶813,039; Pension Analysis ¶56,315; ; Pension Analysis ¶56,352; Pension & Benefits Explanations ¶408-4; ; Pension & Benefits Explanations ¶408A-4; )
New Law. The 2010 Small Business Act provides that, for an “applicable retirement plan”—a qualified 401(k) plan, 403(b) annuity plan, or governmental section 457 plan (see ¶502 )—that maintains a qualified Roth contribution program, a distribution to an individual from (i) the portion of the plan that is not a designated Roth account, may be rolled over, in a qualified rollover contribution (within the meaning of Code Sec. 408A(e) , i.e., the Roth IRA rules), to (ii) the designated Roth account maintained under the plan for the benefit of the individual to whom the distribution was made. (Code Sec. 402A(c)(4)(B) as amended by 2010 Small Business Act §2112(a)) However, the rollover is not tax-free, see below.
RIA observation: Under the Roth IRA rules, a “qualified rollover contribution” means a rollover contribution from (i) another Roth IRA, or (ii) an eligible retirement plan, provided the rollover rules for that type of eligible retirement plan (e.g., Code Sec. 402(c) , for qualified plans) are met. Thus, a qualified rollover contribution to a designated Roth account is a rollover contribution from an applicable retirement plan that maintains a qualified Roth contribution program.
A plan that includes a designated Roth program is permitted, but not required, to allow rollover contributions (described above) to a designated Roth account. (Com Rept, see ¶5617)
A rollover contribution to a designated Roth account, if elected by an employee (or his surviving spouse), may be made through a direct rollover, i.e., the transfer of assets from the account that is not a designated Roth account, to the designated Roth account. (Com Rept, see ¶5617)
Any distribution from an applicable retirement plan (other than from a designated Roth account) that is contributed in a qualified rollover contribution to the designated Roth account, is not taken into account as a designated Roth contribution. (Code Sec. 402A(c)(4)(C) )
RIA observation: Thus, qualified rollover contributions to a designated Roth account do not count towards the maximum limit on the amount of elective deferrals for the tax year that an employee may designate as “designated Roth contributions.”
Requirements for rollovers to designated Roth accounts.
To be eligible for rollover to a designated Roth account, a distribution must be (i) an eligible rollover distribution, (ii) otherwise allowed under the plan, and (iii) allowable in the amount and form elected. For example, an amount in a 401(k) plan account that is subject to distribution restrictions cannot be rolled over to a designated Roth account under the new rollover rules. However, an employer may expand its distribution options beyond those currently allowed by the plan—e.g., a 401(k) plan can be amended to provide for in-service distributions, or distributions before normal retirement age—in order to allow employees to make a direct rollover of plan amounts to the designated Roth account within that plan. Indeed, a plan may condition an employee's eligibility for a new distribution option (e.g., eligibility for in-service distributions) on the employee's election to have the distribution directly rolled over to the designated Roth account.(Com Rept, see ¶5617)
RIA caution: If a 401(k) plan is so amended to allow in-service distributions, on (or not on) condition that the distributions be rolled over to a designated Roth account, the Code Sec. 401(k)(2)(B) distribution restrictions continue to apply, generally precluding 401(k) plan distributions before the employee's (i) attainment of age 59-1/2, (ii) severance from employment, (iii) death or disability, or (iv) hardship.
Plan amendments.
If a plan allows rollover contributions to a designated Roth account, the plan must be amended to reflect this plan feature. Congress intends that IRS will provide employers with a remedial amendment period that allows employers to offer this rollover option to employees (and surviving spouses) for 2010 distributions, with sufficient time to amend the plan to reflect this option. (Com Rept, see ¶5617)
Designated Roth account vs. Roth IRAs.
Although there are many similarities between the treatment of Roth IRAs and designated Roth accounts, one difference is that, in determining the taxation of Roth IRA distributions that are not qualified distributions, after-tax contributions are considered recovered before income. This basis-first recovery rule for Roth IRAs does not apply to distributions from designated Roth accounts. Another difference is that a first-time home buyer expense can be a qualified distribution from a Roth IRA (even without the occurrence of another event, such as the individual reaching age 59-1/2), but cannot by itself be a qualified distribution from a designated Roth account. (Com Rept, see ¶5617)
RIA observation: A taxpayer who can roll over an amount from an applicable employer plan to either a Roth IRA or a designated Roth account, might consider whether taking withdrawals from the Roth account or Roth IRA within the five-tax-year holding period for qualified distributions would result in additional tax on a distribution from a designated Roth account (because of the unavailability of the basis-first recovery rule). Also, a taxpayer who is contemplating a withdrawal from the Roth account or Roth IRA to purchase a home as a first-time home buyer, but who hasn't yet reached age 59-1/2, should consider that such a withdrawal can be a qualified distribution from a Roth IRA, but not from a designated Roth account, if the taxpayer has not reached age 59-1/2.
Rollovers to a designated Roth account are taxable.
Under the 2010 Small Business Act, the tax-free treatment of rollovers that ordinarily applies (under Code Sec. 402(c) for qualified plans, under Code Sec. 403(b)(8) for 403(b) annuities, and under Code Sec. 457(e)(16) for governmental section 457 plans) does not apply for distributions rolled over from an applicable retirement plan to a designated Roth account (as described above). Rather, the amount that an individual receives in a distribution from an applicable retirement plan that would be includible in gross income if it were not part of a qualified rollover distribution, must be included in his gross income. (Code Sec. 402A(c)(4)(A)(i) )
If a direct rollover is made by a transfer of property to a designated Roth account, then the amount of the distribution is the fair market value of the property on the date of the transfer. (Com Rept, see ¶5617)
Early withdrawal tax.
The Code Sec. 72(t) 10% tax on early withdrawals (which generally applies to the taxable portion of a plan or IRA distribution made before the participant has reached age 59-1/2, unless an exception applies) does not apply to distributions from applicable retirement plans that are contributed to a designated Roth account in a qualified rollover contribution. (Code Sec. 402A(c)(4)(A)(ii) )
However, although the Code Sec. 72(t) 10% early withdrawals tax generally does not apply to the portion of an early withdrawal that is rolled over in a qualified rollover contribution to a designated Roth account, a “recapture” rule applies to distributions within a specified five-tax-year holding period (under the rules of Code Sec. 408A(d)(3)(F) ). (Code Sec. 402A(c)(4)(D) )
RIA observation: Thus, any portion of a distribution from a designated Roth account that: (i) is allocable to a qualified rollover contribution from an applicable retirement plan other than a designated Roth account, (ii) is made within the five-tax-year period beginning with the tax year in which the rollover contribution was made, and (iii) was includible in gross income as part of the qualified rollover contribution, is subject to the 10% early withdrawal tax, as if the (latter) distribution were includible in income.
RIA observation: A participant who receives a distribution in Year 1 and rolls it over to a designated Roth account generally has basis in that account, to the extent of the amount includible in gross income from the distribution rolled over. Thus, a designated Roth account distribution received before the end of the specified five-tax-year holding period (for example, in Year 3) ordinarily, in part, would not be includible in the participant's gross income (to the extent the distribution is a return of basis). But under the recapture rules, the 10% early withdrawal tax would apply to the Year 3 distribution as if the Year 3 distribution were includible in income, up to the amount of the qualified rollover contribution that was includible in income in Year 1. As a result, the 10% early withdrawal tax will apply to the Year 3 distribution, up to the amount of the rollover distribution includible in gross income in Year 1.
Reporting.
The employer maintaining a plan, the plan administrator, or the person issuing annuities under which designated distributions may be made, or all of these persons (whichever is appropriate), must include additional information in reports required under Code Sec. 408(i) orCode Sec. 6047 that IRS may require to ensure the proper reporting of gross income from distributions rolled over to designated Roth accounts, as described above (as provided in Code Sec. 408A(d)(3)(D) ).(Code Sec. 402A(c)(4)(D) )
2010 rollover distribution taxed in 2011 and 2012.
Any amount that is includible in a taxpayer's gross income for any tax year beginning in 2010 by reason of a distribution from an applicable retirement plan that is rolled over to a designated Roth account (as described above) is included in gross income ratably over the two-year period beginning in the first tax year beginning in 2011. However, the taxpayer may elect to not have this two-year deferral apply (and thus, to include the taxable portion in gross income in the 2010 tax year). Any such election for any distributions made during a tax year may not be changed “after the due date for such taxable year.” (Code Sec. 402A(c)(4)(A)(iii) )
RIA observation: Presumably, the “due date for such taxable year” refers to the due date for 2010, i.e., for most individuals, Apr. 15, 2011. Neither the Act nor the Committee Reports indicate that the “due date” includes extensions.
Distributions or death before 2012.
The deferral of the tax on applicable retirement plan distributions to an individual that are rolled over to a designated Roth account in 2010 must be accelerated (under the rule of Code Sec. 408A(d)(3)(E) ) if the individual receives distributions from the designated Roth account in 2010 or 2011. Acceleration is also required if the individual dies before 2012, unless a surviving spouse acquires the entire account and elects to continue the deferral. These rules apply to a distribution from an applicable retirement plan that is rolled over to a designated Roth account (as described above). (Code Sec. 402A(c)(4)(D) )
Effective: Distributions made after Sept. 27, 2010. (2010 Small Business Act §2112(b))
¶ 502. Governmental section 457 plans can include a “qualified Roth contribution program”
Code Sec. 402A(e)(1)(C), as amended by 2010 Small Business Act §2111(a)
Code Sec. 402A(e)(2)(B), as amended by 2010 Small Business Act §2111(b)
Generally effective: Tax years beginning after Dec. 31, 2010
Committee Reports, see ¶5616
An “applicable retirement plan,” such as a 401(k) plan or a 403(b) annuity plan, has the option of including a “qualified Roth contribution program.” Under this program, plan participants are allowed to elect to make non-excludable “designated Roth contributions” to a “designated Roth account” in the plan, instead of excludable elective deferrals in a non-Roth account. A participant who elects to forego the exclusion from gross income for elective deferrals and makes designated Roth contributions instead, may receive qualified distributions from the designated Roth account that are excludable from gross income, after (i) waiting for a five-year holding period, and (ii) reaching age 59-1/2. Distributions after the five-tax-year holding period may also be qualified distributions if made on account of the participant's death or disability.
A “designated Roth contribution”—any contribution that a participant makes to a designated Roth account under a qualified Roth contribution program—is treated as an “elective deferral,” even though it is not excludable from gross income. An “elective deferral” under the qualified Roth contribution program rules means (i) employer contributions to 401(k) plans that would not be includible in employees' gross income (but for the Code Sec. 402A designated Roth account rules); and (ii) employer contributions to purchase a 403(b) annuity contract under a salary reduction agreement. FTC 2d/Fin ¶H-12290; ; FTC 2d/Fin ¶H-12295; ; FTC 2d/Fin ¶H-12295.1; et seq. USTR ¶4014.1745; ; USTR ¶402A4; TaxDesk ¶283,401; et seq. Pension Analysis ¶35,251.1; et seq. Pension & Benefits Explanations ¶401-4.1745; ; Pension & Benefits Explanations ¶402A-4; )
Under pre-2010 Small Business Act law, only qualified Code Sec. 401(a) plans and 403(b) annuity plans were “applicable retirement plans” that could have offered a qualified Roth contribution program. Thus, designated Roth contributions included only elective deferrals under a 401(k) plan or a 403(b) annuity plan. FTC 2d/Fin ¶H-12295; FTC 2d/Fin ¶H-12295.2; FTC 2d/Fin ¶H-12295.4; USTR ¶402A4; TaxDesk ¶283,402; TaxDesk ¶283,404; Pension Analysis ¶35,251.2; Pension Analysis ¶35,251.4; Pension & Benefits Explanations ¶402A-4;
New Law. The 2010 Small Business Act adds governmental section 457 plans (i.e., Code Sec. 457(b) eligible deferred compensation plans of a Code Sec. 457(e)(1)(A) eligible employer) to the definition of “applicable retirement plans” that can offer a qualified Roth contribution program. (Code Sec. 402A(e)(1)(C) as amended by 2010 Small Business Act §2111(a))
Thus, a section 457 plan maintained by a state, its political subdivision, agency, or instrumentality, or the state subdivision's agency or instrumentality, can include a qualified Roth contribution program. (Com Rept, see ¶5616)
RIA observation: Thus, governmental section 457 plans may allow participants to make contributions to a designated Roth account.
To be consistent with permitting governmental section 457 plans to provide a qualified Roth contribution program, the 2010 Small Business Act amends the definition of “elective deferral” to include any elective deferral of compensation by an individual under a governmental section 457 plan. (Code Sec. 402A(e)(2)(B) )
Effective: Tax years beginning after Dec. 31, 2010. (2010 Small Business Act §2111(c))

Partial annuitization of nonqualified annuity contracts is possible after 2010
Code Sec. 72(a), as amended by 2010 Small Business Act §2113
Generally effective: Amounts received in tax years after Dec. 31, 2010
Committee Reports, see ¶5618
Amounts “received as an annuity” under a life insurance, endowment, or annuity contract are includible in gross income, unless an exception is available. The payment may be over a specific period or during one or more lives. FTC 2d/Fin ¶J-5001; USTR ¶724; Pension Analysis ¶32,252; Pension & Benefits Explanations ¶74-4;
Under the annuity rule, a portion of each payment received is excluded based on an “exclusion ratio” (i.e., the “investment in the contract” divided by the “expected return”). The excludable amount of each payment is computed by multiplying it by the exclusion ratio. The “investment in the contract” is determined as of the “annuity starting date.” FTC 2d/Fin ¶J-5101; USTR ¶724; Pension Analysis ¶32,352; Pension & Benefits Explanations ¶72-4;
Before the 2010 Small Business Act, IRS, in Rev. Proc. 2008-24 , had ruled on the treatment of the partial exchange of annuity contracts, but IRS specifically said that the ruling did not apply to partial annuitization, which is the conversion of only a portion of an annuity, endowment or life insurance contract into annuity payments. In Rev. Proc. 2010-3 , IRS identified partial annuitization as a no ruling area that is under study by IRS.
New Law. Under the 2010 Small Business Act, the basic annuity taxation rule described above is retained without change. (Code Sec. 72(a)(1) as amended by 2010 Small Business Act §2113(a)) However, the 2010 Small Business Act adds a new rule that will permit the partial annuitization of a nonqualified annuity, endowment, or life insurance contract.
Under this new rule, if any amount is received as an annuity for a period of 10 years or more, or during one or more lives, under any portion of an annuity, endowment, or life insurance contract:
• that portion will be treated as a separate contract for annuity taxation purposes;
• for purposes of applying Code Sec. 72(b) (dealing with the calculation of the exclusion ratio for annuity distributions), Code Sec. 72(c) (definitions of “investment in the contract,” “expected return,” and “annuity starting date”), and Code Sec. 72(e) (dealing with the taxation of distributions from an annuity, endowment, or life insurance contract, that are not received as an annuity), the investment in the contract will be allocated pro rata between each portion of the contract from which amounts are received as an annuity, and the portion of the contract from which amounts are not received as an annuity, and
• a separate annuity starting date under Code Sec. 72(c)(4) (which defines “annuity starting date”) will be determined for each portion of the contract from which amounts are received as an annuity. (Code Sec. 72(a)(2) )
RIA observation: Thus, in its summary of the 2010 Small Business Act, dated July 21, 2010, the Senate Finance Committee indicates that the provision will allow holders of nonqualified annuities to elect to receive a portion of an annuity contract in the form of a stream of annuity payments, leaving the remainder of the contract to accumulate income on a tax-deferred basis.
RIA observation: Since “any portion” of an annuity contract is not defined, IRS guidance is needed to expand on this area of the new partial annuitization rule. Theoretically, “any portion” of a variable annuity could be a percentage of all the mutual fund assets in which the annuity is invested, or one mutual fund could be selected to annuitize.
RIA observation: The new partial annuitization rule does not apply to the special rules for qualified employer retirement plans under Code Sec. 72(d) .
The new rule is not intended to change the current-law rules for amounts received as an annuity (or as a lump sum) from Code Sec. 401(a) qualified plans, Code Sec. 403(a) annuity plans, Code Sec. 403(b) annuity plans, or individual retirement plans. (Com Rept, see ¶5618)
Effective: For amounts received in tax years beginning after Dec. 31, 2010. (2010 Small Business Act §2113(b))

Exception to pre-levy CDP hearing requirement extended to tax liability of certain federal contractors
Code Sec. 6330(f)(4), as amended by 2010 Small Business Act §2104(a)
Code Sec. 6330(h), as amended by 2010 Small Business Act §2104(b)
Generally effective: Levies issued after Sept. 27, 2010
Committee Reports, see ¶5615
IRS may not levy against a person's property or right to property unless it notifies the person in writing of his right to a hearing before the levy, i.e., a pre-levy Collection Due Process hearing (CDP hearing). The written notification informing a taxpayer of his right to a pre-levy CDP hearing accompanies the written notice of intent to levy. FTC 2d/Fin ¶V-5255; USTR ¶63,304; TaxDesk ¶902,505; .
IRS, however, doesn't have to hold a pre-levy CDP hearing if it determines that collection of tax is in jeopardy or before levying on a state to collect a federal tax liability from a state tax refund or in the case of a “disqualified employment tax levy.” In those cases, however, the taxpayer must be given an opportunity for a post-levy CDP hearing within a reasonable time period after the levy. FTC 2d/Fin ¶V-5257; USTR ¶63,304; TaxDesk ¶902,507; .
Under pre-2010 Small Business Act law, a “disqualified employment tax levy” was any levy to collect employment taxes for any tax period if the person subject to the levy (or a predecessor) requested a hearing under Code Sec. 6330 for unpaid “employment taxes” (taxes under Chapters 21, 22, 23 or 24 of the Code) arising in the most recent two-year period before the beginning of the tax period for which the levy was served. FTC 2d/Fin ¶V-5257; USTR ¶63,304; TaxDesk ¶902,507;
The Federal Payment Levy Program (FPLP) is an automated levy program that IRS has implemented with the Department of the Treasury, Financial Management Service (FMS). The FPLP was developed as the means to administer the continuous levy provision. Thus, no paper levy documents are served to levy under this provision. FTC 2d/Fin ¶V-5217; . Before making payments to federal contractors, an automated check for federal tax liabilities generally occurs using the FPLP. When a tax liability is identified, IRS issues a CDP notice to the contractor, but can't levy the payment until the CDP requirements are complete. Thus, under pre-2010 Small Business Act law, the chance to levy payments to the contractor might be lost because the CDP requirements couldn't be completed before the payment was made.
Under the continuous levy program, the effect of a levy on “specified payments” payable to or received by a taxpayer is continuous from the date the levy is first made until the levy is released. Notwithstanding Code Sec. 6334 (which provides exemptions from levy), this continuous levy will attach to up to 15% of any specified payment due to the taxpayer. However, the 15% maximum rate discussed above is increased to 100% in the case of any specified payment that is due to a vendor of goods or services sold or leased to the federal government. FTC 2d/Fin ¶V-5216; USTR ¶63,314.03; TaxDesk ¶902,216; .
A specified payment is: (a) any federal payment for which eligibility isn't based on a payee's income or assets (or both); (b) the minimum exempted amount of salary and wages; (c) worker's compensation payments; (d) annuity or pension payments under the Railroad Retirement Act and benefits under the Railroad Unemployment Insurance Act; (e) unemployment benefits; and (f) certain means-tested public assistance payments. FTC 2d/Fin ¶V-5217; USTR ¶63,314.03; TaxDesk ¶902,216; .
New Law. The 2010 Small Business Act provides that IRS also won't have to hold a pre-levy CDP hearing if IRS has served a “federal contractor levy.” (Code Sec. 6330(f)(4) as amended by 2010 Small Business Act §2104(a)) A federal contractor levy is any levy if the person subject to the levy (or any predecessor of that person) is a federal contractor. (Code Sec. 6330(h)(2) as amended by 2010 Small Business Act §2104(b)) Thus, IRS will be allowed to issue levies before a CDP hearing for federal taxes owed by federal contractors identified under the FPLP. When a levy is issued before a CDP hearing, the taxpayer will have an opportunity for a CDP hearing within a reasonable time after the levy. (Com Rept, see ¶5615)
RIA observation: Although IRS will be allowed to issue levies without a pre–levy CDP hearing regardless of whether the tax liability is identified through the FPLP, as a practical matter most federal contractor levies are likely to result from the FPLP.

Certain recipients of rental income from realty paying rental expenses of $600 or more in a post-2010 tax year will be subject to information reporting
Code Sec. 6041(h), as amended by 2010 Small Business Act §2101(a)
Generally effective: Payments made after Dec. 31, 2010
Committee Reports, see ¶5612
Code Sec. 6041(a) requires information reporting to IRS by all persons engaged in a trade or business who make certain payments in the course of that trade or business of $600 or more in any tax year to another person. Payments subject to information reporting are rent, salaries, wages, premiums, annuities, compensations, remunerations, emoluments and other fixed or determinable income (with certain exceptions set forth in Code Sec. 6041(a) ). For payments made after Dec. 31, 2011, payments subject to information reporting will also include amounts in consideration for property and gross proceeds. FTC 2d/Fin ¶S-3655; FTC 2d/Fin ¶S-3656; USTR ¶60,414; TaxDesk ¶814,001; A taxpayer whose rental activity is a trade or business is subject to this reporting requirement, but, under pre-2010 Small Business Act law, a taxpayer whose rental real estate activity is not considered a trade or business was not subject to the above described reporting requirement. (Com Rept, see ¶5612)
New Law. The 2010 Small Business Act provides that solely for purposes of Code Sec. 6041(a) , and except as provided in Code Sec. 6041(h)(2) (discussed below), a person receiving rental income from real estate will be considered to be engaged in a trade or business of renting property. (Code Sec. 6041(h)(1) as amended by 2010 Small Business Act §2101(a))
Thus, recipients of rental income from real estate generally are subject to the same information reporting requirements as taxpayers engaged in a trade or business. In particular, rental income recipients making payments of $600 or more to a service provider (such as a plumber, painter, or accountant) in the course of earning rental income are required to provide an information return (typically Form 1099-MISC) to IRS and to the service provider. (Com Rept, see ¶5612)
RIA illustration 1: A owns a 12-floor commercial building in the downtown area of City X. A rents out units as office or retail space in the building. A hires a plumber in Year 1 to make repairs to the building and pays the plumber $2,000 for Year 1. A is considered to be in a trade or business and must file an information return showing the $2,000 payment to the plumber.
Exceptions for certain recipients.
The rental property expense payment reporting treatment described above will not apply to:
... any individual who receives rental income of not more than the minimal amount, as determined under IRS regs; (Code Sec. 6041(h)(2)(B) )
RIA observation: Presumably, IRS will timely issue regs that will indicate the minimal amount of rental income that a recipient would need to earn to be subject to the reporting requirement.
... any individual, including one who is an active member of the uniformed services or an employee of the intelligence community (as defined in Code Sec. 121(d)(9)(C)(iv) , see FTC 2d/Fin ¶I-4528.4A; USTR ¶1214; TaxDesk ¶225,708.3A; ) if substantially all rental income is derived from renting the individual's principal residence (within the meaning of Code Sec. 121 , see FTC 2d/Fin ¶I-4522; USTR ¶1214; TaxDesk ¶225,702; ) on a temporary basis; (Code Sec. 6041(h)(2)(A) )
RIA observation: The term “substantially all” rental income is not defined for purposes of Code Sec. 6041(h)(2)(A) , nor is “temporary basis.” Thus, a situation may exist where a person renting his principal residence can reasonably expect to sell his residence within six months, but because the residential real estate market in the area declined, the person may have to wait several years to sell the property or take the property off the market for a period of time. It's unclear whether the taxpayer's intent will control for purposes of the “temporary basis” test, or whether IRS will set a length of time under regs or other guidance.
RIA illustration 2: B is laid off from his job in New Jersey and is hired for a new job in California. B is unable to sell his principal residence in New Jersey before moving, but not wanting to leave it vacant, he rents the house to C in Year 1. B expects his move to be permanent and intends to sell his New Jersey house as soon as he can. It becomes necessary during Year 1 for B to have a leak in the roof repaired for $1,000. Presumably, B will not have to file an information return for his $1,000 payment in Year 1 to a roofing contractor, if he is considered to be renting the principal residence on a temporary basis.
RIA observation: If the house in New Jersey is no longer considered B's principal residence because he buys or rents a residence in California, and the facts and circumstances indicate that B's principal residence is now in California (see Reg §1.121-1(b)(2) ), presumably B would not meet the exception to information reporting in Code Sec. 6041(h)(2)(A) .
RIA observation: If B rented out his house in New Jersey, was employed in California, bought a home in California, moved his family to California, registered to vote in California, obtained a California drivers' license, registered his car(s) in California, filed California resident or part-year resident income tax returns, moved his bank accounts to California, joined a church and social organizations in California, presumably the house in New Jersey would no longer be considered B's principal residence.
RIA observation: The result may be different if B rented his house to C in order to go to California for a four-months' temporary assignment on his job. If B stayed in a hotel, a bed and breakfast, or other temporary lodging in California and intended to return to New Jersey, presumably the house he rented to C would be considered his principal residence. The definition of principal residence is based on all the facts and circumstances under the Code Sec. 121 regs.
RIA observation: An individual who owns several residences will need to look to Code Sec. 121 and the regs under that Code section to determine which residence is the principal residence if one or more residences are rented out, in order to determine whether the individual meets the Code Sec. 6041(h)(2)(A) exception to the treatment of the receipt of rental income from real estate as a trade or business.
RIA illustration 3: R owns a house in Pennsylvania and a house in Florida. R divides his time between these two residences during the year. When R is at one residence, he arranges to rent the other, the Pennsylvania house to S and the Florida house to T. If R is to be considered not to be engaged in a trade or business with respect to one of the residences, he must determine which is his principal residence. This could be difficult if each property is rented for six months of the year. If R determines that the Pennsylvania house is his principal residence, then R is considered engaged in a trade or business with respect to the Florida house.
... any other individual for whom the requirements of Code Sec. 6041 would cause hardship, as determined under IRS regs. (Code Sec. 6041(h)(2)(C) )
RIA observation: Presumably, IRS will timely issue regs that will indicate what constitutes hardship with respect to information reporting requirements for persons receiving income from rental real estate.
Redesignations.
Pre-2010 Small Business Act Code Sec. 6041(h) and Pre-2010 Small Business Act Code Sec. 6041(i) are redesignated as Code Sec. 6041(i) andCode Sec. 6041(j) , respectively. (2010 Small Business Act §2101(a))
Effective: Payments made after Dec. 31, 2010. (2010 Small Business Act §2101(b))

Per return rates for information return penalty doubled and maximum and minimum penalty amounts increased
Code Sec. 6721(a)(1), as amended by 2010 Small Business Act §2102(a)
Code Sec. 6721(b)(1), as amended by 2010 Small Business Act §2102
Code Sec. 6721(b)(2), as amended by 2010 Small Business Act §2102(c)
Code Sec. 6721(d)(1), as amended by 2010 Small Business Act §2102(d)
Code Sec. 6721(e)(2), as amended by 2010 Small Business Act §2102(e)
Code Sec. 6721(f), as amended by 2010 Small Business Act §2102(f)
Generally effective: Information returns required to be filed after Dec. 31, 2010
Committee Reports, see ¶5613
Code Sec. 6721 imposes penalties for failing to provide timely, complete, and correct information returns, see FTC 2d/Fin ¶V-1803; USTR ¶67,214; TaxDesk ¶861,025; . Under pre-2010 Small Business Act law, if a person didn't file a correct information return on or before Aug. 1 of the calendar year in which the required filing date occurred, the amount of the penalty was $50 per return (third-tier penalty), with a maximum penalty of $250,000 per calendar year. If a person filed a correct information return after the prescribed filing date but on or before the date that was 30 days after the prescribed filing date, the amount of the penalty was $15 per return (first-tier penalty), with a maximum penalty of $75,000 per calendar year. If a person filed a correct information return after the date that was 30 days after the prescribed filing date but on or before Aug. 1 of the calendar year in which the required filing date occurred, the amount of the penalty was $30 per return (second-tier penalty), with a maximum penalty of $150,000 per calendar year. FTC 2d/Fin ¶V-1805; USTR ¶67,214; TaxDesk ¶861,026;
Under pre-2010 Small Business Act law, if a failure was due to intentional disregard of a filing requirement, the penalty calculations above did not apply. Instead the penalty for each failure was the greater of $100 (the $100 minimum) or an amount that varied based on the type of return, with no $250,000 maximum. The penalty applied regardless of the period of the failure and the small business reduction described below did not apply. FTC 2d/Fin ¶V-1811; USTR ¶67,214; TaxDesk ¶861,027;
Under pre-2010 Small Business Act law, the maximum penalties for small businesses (firms having average annual gross receipts for the most recent three tax years that don't exceed $5 million) were much lower than the above maximum limits. They were $25,000 if the failures were corrected on or before 30 days after the prescribed filing date; $50,000 if the failures were corrected on or before Aug. 1; and $100,000 if the failures weren't corrected on or before Aug. 1. FTC 2d/Fin ¶V-1805; USTR ¶67,214; TaxDesk ¶861,026;
The Code specifies the information returns and other statements that are subject to these penalties, see FTC 2d/Fin ¶V-1804; USTR ¶67,214; TaxDesk ¶861,029; .
New Law. The 2010 Small Business Act increases the third-tier penalty (for failures not corrected within the time limits described above) from $50 to $100 (Code Sec. 6721(a)(1) as amended by 2010 Small Business Act §2102(a)(1)) and increases the calendar year maximum limit on it from $250,000 to $1,500,000. (Code Sec. 6721(a)(1) as amended by 2010 Small Business Act §2102(a)(2))
The 2010 Small Business Act increases the first-tier penalty (for failures corrected within the 30-day period described above) from $15 to $30 (Code Sec. 6721(b)(1)(A) as amended by 2010 Small Business Act §2102(b)(1)) and increases the calendar year maximum limit on it from $75,000 to $250,000. (Code Sec. 6721(b)(1)(B) as amended by 2010 Small Business Act §2102(b)(2))
The 2010 Small Business Act increases the second-tier penalty (for failures corrected by the Aug. 1 deadline described above) from $30 to $60 (Code Sec. 6721(b)(2)(A) as amended by 2010 Small Business Act §2102(c)(1)) and increases the calendar year maximum limit on it from $150,000 to $500,000. (Code Sec. 6721(b)(2)(B) as amended by 2010 Small Business Act §2102(c)(2))
For small businesses (firms having average annual gross receipts for the most recent three tax years that don't exceed $5 million, see FTC 2d/Fin ¶V-1806; ) the calendar year maximum is increased from $100,000 to $500,000 for the third-tier penalty, (Code Sec. 6721(d)(1)(A) as amended by 2010 Small Business Act §2102(d)(1)(A)) from $25,000 to $75,000 for the first-tier penalty, (Code Sec. 6721(d)(1)(B) as amended by 2010 Small Business Act §2102(d)(1)(B)) and from $50,000 to $200,000 for the second-tier penalty. (Code Sec. 6721(d)(1)(C) as amended by 2010 Small Business Act §2102(d)(1)(C))
RIA observation: Thus, for the first-tier penalty (for failures corrected within the 30-day period described above), small businesses will have a maximum limit ($75,000) that will be the same as the maximum first-tier penalty limit for other businesses under pre-2010 Small Business Act law. In other cases, small businesses will have a maximum limit that will be higher than the generally applicable maximum under pre-2010 Small Business Act law, although it will still be much lower than the 2010 Small Business Act maximum for other businesses. Thus, for the third-tier penalty (for failures not corrected within the periods described above), small businesses will have a maximum penalty limit ($500,000) that will be twice the maximum third-tier penalty limit for other businesses ($250,000) that applied under pre-2010 Small Business Act law, but that will still be only one third of the 2010 Small Business Act maximum ($1,500,000) for other businesses.
The above changes are illustrated by the following table:
Pre-Small Business Act general penalty Pre-Small Business Act small business penalty New general penalty New small business penalty
First tier penalty $15 (maximum $75,000) $15 (maximum $25,000) $30 (maximum $250,000) $30 (maximum $75,000)
Second tier penalty $30 (maximum $150,000) $30 (maximum $50,000) $60 (maximum $500,000) $60 (maximum $200,000)
Third tier penalty $50 (maximum $250,000) $50 (maximum $100,000) $100 (maximum $1,500,000) $100 (maximum $500,000)
RIA observation: For returns required to be filed after 2010, the above changes double the basic per return penalty amount, but they increase the maximum limits even more dramatically. The maximum limit on the third-tier penalty is six times as large as under pre-Small Business Act law.
RIA illustration 1: A Corporation (X) with average annual gross receipts for the most recent three tax years that exceed $5 million fails to timely file 10,000 Forms 1099-MISC for Calendar Year 1. X eventually files these on Sept. 28, Year 2, after the period for reduction of the penalty has elapsed. Under pre-2010 Small Business Act law, X was subject to a $250,000 penalty for the 10,000 forms that weren't filed by Aug. 1 ($50 × 10,000 = $500,000 subject to a $250,000 limit). Under 2010 Small Business Act law, X is subject to a $1,000,000 penalty for the 10,000 forms that weren't filed by Aug. 1 ($100 × 10,000 = $1,000,000, or less than the $1,500,000 limit).
RIA illustration 2: A Corporation (Y) with average annual gross receipts for the most recent three tax years that exceed $5 million fails to timely file 11,500 Forms 1099-MISC for Calendar Year 1. 6,000 of these returns are filed with correct information within 30 days, and 5,500 after 30 days but on or before Aug. 1. For the same year, Y fails to timely file 500 Forms 1099-INT. Y eventually files these on Sept. 28, Year 2, after the period for reduction of the penalty has elapsed. Under pre-2010 Small Business Act law, Y was subject to a $25,000 penalty for the 500 forms that weren't filed by Aug. 1 ($50 × 500 = $25,000), $150,000 for the 5,500 forms filed after 30 days ($30 × 5500 = $165,000, limited to $150,000), and $75,000 for the 6,000 forms filed within 30 days ($15 × 6,000 = $90,000, limited to $75,000), for a total penalty of $250,000. Under 2010 Small Business Act law, Y is subject to a $50,000 penalty for the 500 forms that weren't filed by Aug. 1 ($100 × 500 = $50,000), $330,000 for the 5,500 forms filed after 30 days ($60 × 5,500 = $330,000, not subject to reduction by the $500,000 maximum limit), and $180,000 for the 6,000 forms filed within 30 days ($30 × 6,000 = $180,000, not subject to reduction by the $250,000 maximum penalty), for a total penalty of $560,000. Thus, the penalty more than doubled due to the combination of doubled per return amounts and maximum amounts that more than doubled.
The 2010 Small Business Act increases the minimum penalty for each failure due to intentional disregard from $100 to $250. (Code Sec. 6721(e)(2) as amended by 2010 Small Business Act §2102(e))
The new law also provides that the penalty amounts will be adjusted for inflation every five years with the first adjustment to take place after 2012, effective for each year thereafter. (Com Rept, see ¶5613) Specifically, for each fifth calendar year beginning after 2012, each of the dollar amounts under Code Sec. 6721(a) (relating to the third tier penalty), Code Sec. 6721(b) (relating to the first and second tier penalties), Code Sec. 6721(d) (relating to the special limits for small businesses), and Code Sec. 6721(e) (relating to intentional disregard) will be increased by the dollar amount multiplied by a cost-of-living adjustment. But, this won't apply to the $5,000,000 gross receipts test amount in Code Sec. 6721(d)(2)(A) ). The inflation adjustment will be determined under Code Sec. 1(f)(3) determined by substituting “calendar year 2011” for “calendar year 1992” in Code Sec. 1(f)(3)(B) . (Code Sec. 6721(f)(1) as amended by 2010 Small Business Act §2102(f))
RIA observation: Tax bracket amounts are indexed for inflation under Code Sec. 1(f) . The cost-of-living adjustment for a calendar year under Code Sec. 1(f)(3) is generally the percentage (if any) by which the consumer price index (CPI) for the preceding calendar year exceeds the CPI for calendar year '92 (the permanent base year). FTC 2d/Fin ¶A-1103; USTR ¶14.08; TaxDesk ¶568,203; . Thus, 2011 will be the base year for the inflation adjustments of the penalty amounts described above.
Amounts adjusted for inflation under the above rules are rounded differently depending on whether they are large or small amounts. If any amount adjusted for inflation under the above rules is $75,000 or more, it will be rounded to the next lowest multiple of $500 (if it is not itself a multiple of $500). (Code Sec. 6721(f)(2) )
If any amount adjusted for inflation under the above rules is less than $75,000, it will be rounded to the next lowest multiple of $10 (if it is not itself a multiple of $10). (Code Sec. 6721(f)(2) )
RIA observation: Thus, the per return penalties will be rounded to the next lowest multiple of $10, while the aggregate amounts will be rounded to the next lowest multiple of $500.
RIA observation: The 2010 Small Business Act also increases Code Sec. 6722 penalties for failure to furnish correct payee statements, see ¶603 .
Effective: Information returns required to be filed after Dec. 31, 2010. (2010 Small Business Act §2102(h))
Per statement rates for payee statement penalty and maximum and minimum penalty amounts increased
Code Sec. 6722, as amended by 2010 Small Business Act §2102(g)
Generally effective: Information returns required to be filed after Dec. 31, 2010
Committee Reports, see ¶5613
Code Sec. 6722 imposes penalties for (a) any failure to furnish a payee statement to the person prescribed, on or before the date prescribed, and (b) any failure to include all of the information required to be shown on the payee statement or any inclusion of incorrect information on the payee statement. FTC 2d/Fin ¶V-1814; USTR ¶67,224; TaxDesk ¶861,066; . Under pre-2010 Small Business Act law, except in cases of intentional disregard, persons who committed such failures were subject to a $50 penalty for each payee statement with respect to which a failure occurred, but the total amount imposed on any person for all such failures during any calendar year could not exceed $100,000. FTC 2d/Fin ¶V-1816; USTR ¶67,224; TaxDesk ¶861,068;
Under pre-2010 Small Business Act law, where the failure act was due to intentional disregard of the requirement to furnish a correct statement, the penalty for each such failure was $100 or, if greater:
(1) 10% of the aggregate amount of the items required to be reported correctly, in the case of a payee statement other than a statement required under any of the following:
• Code Sec. 6041A(e) , in respect of returns required under Code Sec. 6041A(b) (statements concerning payments to direct sellers),
• Code Sec. 6045(b) (statements concerning transactions, including real estate transactions, reportable by brokers),
• Code Sec. 6050H(d) (statements of payments of $600 or more in a calendar year of mortgage interest that is received in the course of a trade or business),
• Code Sec. 6050J(e) (statement concerning foreclosures or abandonments of property held as security for business loans),
• Code Sec. 6050K(b) statements concerning certain exchanges of partnership interests),
• Code Sec. 6050L(c) (statements concerning certain dispositions of donated property),
or:
(2) 5% of the aggregate amount of the items required to be reported correctly in the case of a payee statement required under Code Sec. 6045(b) (statements concerning transactions, including real estate transactions, reportable by brokers), Code Sec. 6050K(b) (statements concerning certain exchanges of partnership interests), or Code Sec. 6050L(c) (statements concerning certain dispositions of donated property).
In the case of the intentional disregard penalties described above, there was no $100,000 limitation on the amount of penalties that may be imposed on a taxpayer for a given calendar year. In addition, these intentional disregard penalties were not taken into account in applying the $100,000 limitation to other penalties. FTC 2d/Fin ¶V-1818; USTR ¶67,214; TaxDesk ¶861,070;
New Law. The 2010 Small Business Act revises the penalty for failure to furnish a payee statement to provide tiers and caps similar to those applicable to the penalty for failure to file the information return, discussed at ¶602 .(Com Rept, see ¶5613) Thus, the 2010 Small Business Act increases the basic penalty from $50 to $100 and increases the calendar year maximum limit on it from $100,000 to $1,500,000. (Code Sec. 6722(a)(1) as amended by 2010 Small Business Act §2102(g)) The Committee Reports refer to this penalty as the third-tier penalty. (Com Rept, see ¶5613)
The definition of a failure is the same as under pre-2010 Small Business Act law. (Code Sec. 6722(a)(2) )
However, the 2010 Small Business Act reduces the penalty for failures corrected on or before the day 30 days after the required filing date. In such cases the basic penalty is reduced from $100 to $30 (first-tier penalty). (Code Sec. 6722(b)(1)(A) ) The calendar year maximum limit per person for all such corrected failures is $250,000. (Code Sec. 6722(b)(1)(B) )
The 2010 Small Business Act also provides for a less significant reduction if a failure subject to the penalty is corrected after the 30-day deadline above, but on or before Aug. 1 of the calendar year in which the required filing date occurred. In such a case the basic penalty is reduced from $100 to $60 (second-tier penalty). (Code Sec. 6722(b)(2)(A) ) The calendar year maximum limit per person for all such corrected failures is $500,000. (Code Sec. 6722(b)(2)(B) )
Under the 2010 Small Business Act, the maximum penalties for small businesses are much lower than the above maximum limits. They are $500,000, rather than $1,500,000 if the failures aren't corrected on or before Aug. 1 of the calendar year in which the required filing date occurred (Code Sec. 6722(d)(1)(A) ) , $75,000 rather than 250,000 if the failures are corrected on or before 30 days after the prescribed filing date (Code Sec. 6722(d)(1)(B) ) , and $200,000 rather than $500,000 if the failures are corrected on or before Aug. 1. (Code Sec. 6722(d)(1)(C) ) Small businesses are defined as in Code Sec. 6721(d)(2) (firms having average annual gross receipts for the most recent three tax years that don't exceed $5 million, see FTC 2d/Fin ¶V-1806; USTR ¶67,214; TaxDesk ¶861,056; ).(Code Sec. 6722(d)(2) ) Thus, the 2010 Small Business Act changes the penalty structure in cases not involving intentional disregard from a simple structure ($50 per statement penalty up to a $100,000 maximum) into the complex structure illustrated by the following table:
New general penalty New small business penalty
Penalty for failure corrected within 30 days $30 (maximum $250,000) $30 (maximum $75,000)
Penalty for failure corrected by Aug. 1 $60 (maximum $500,000) $60 (maximum $200,000)
Penalty for failure not corrected by Aug. 1 $100 (maximum $1,500,000) $100 (maximum $500,000)
RIA observation: The exception for small business is particularly important because it relates to the maximum amount of the penalties. Although the above changes double the basic penalty amount where the statement doesn't meet the Aug. 1 deadline, they actually reduce it if the statement meets the 30-day deadline. But, the changes increase the maximum limits dramatically, except in the case of small businesses. Even the lowest maximum limit for persons other than small businesses (where the 30-day deadline is met) is $250,000 compared to the $100,000 limit under pre-Small Business Act law. Small businesses in this situation get a $75,000 maximum. The importance of the new law changes in the maximum limit are illustrated below.
RIA illustration 1: A Corporation (X) with average annual gross receipts for the most recent three tax years that exceed $5 million fails to timely furnish 10,000 statements for Calendar Year 1. X eventually files these on Sept. 28, Year 2, after the period for reduction of the penalty has elapsed. Under pre-2010 Small Business Act law, X was subject to a $100,000 penalty for the 10,000 statements ($50 × 10,000 = $500,000, subject to a $100,000 limit). Under 2010 Small Business Act law, X is subject to a $1,000,000 penalty for the 10,000 statements because they weren't filed by Aug. 1 ($100 × 10,000 = $1,000,000, which is less than the $1,500,000 maximum limit).
RIA illustration 2: A Corporation (Y) with average annual gross receipts for the most recent three tax years that exceed $5 million fails to timely file 12,000 statements for Calendar Year 1. 6,000 of these are filed with correct information within 30 days of the required date, and 5,500 after 30 days but on or before Aug. 1, Year 2. 500 statements are eventually filed on Sept. 28, Year 2, after the period for reduction of the penalty has elapsed. Under pre-2010 Small Business Act law, Y was subject to a $100,000 penalty for the 12,000 statements ($50 × 12,000 = $600,000 subject to a $100,000 limit). Under 2010 Small Business Act law, Y is subject to a $50,000 penalty for the 500 statements that weren't filed by Aug. 1 ($100 × 500 = $50,000), $330,000 for the 5,500 statements filed after 30 days ($60 × 5,500 = $330,000, not subject to reduction by the $500,000 maximum limit), and $180,000 for the 6,000 statements filed within 30 days ($30 × 6,000 = $180,000, not subject to reduction by the $250,000 maximum penalty), for a total penalty of $560,000. Thus, the penalty greatly increased due to the greatly increased maximum amounts. If there were no maximum limits under pre-2010 Small Business Act law, the penalty would actually have decreased (from $600,000 to $560,000).
Except as provided below, a de minimis number (as defined below) of payee statements that do not include all of the information required to be shown on the statement or that include incorrect information will be treated as having been furnished with all of the correct required information, if the failure is corrected on or before Aug. 1 of the calendar year in which the required filing date occurs. (Code Sec. 6722(c)(1) ) The de minimis number is the greater of 10 or one half of 1 percent of the total number of payee statements that the person is required to file during that calendar year. (Code Sec. 6722(c)(2) )
RIA illustration 3: Thus, if a corporation is required to file 10,000 payee statements for Year 1, the calculation of the de minimis exception is based on the 10,000 and therefore the de minimis number is 50.
The 2010 Small Business Act increases the minimum penalty for each failure due to intentional disregard from $100 to $250. (Code Sec. 6722(e)(2) ) The Act also provides that the penalty for each such failure is not affected by the reductions for correction within 30 days or by Aug. 1, the lower limits for small business and the exception for de minimis failures. (Code Sec. 6722(e)(1) ) In the case of these intentional disregard penalties, there is no $1,500,000 limitation on the amount of penalties that may be imposed on a taxpayer for a given calendar year. In addition, these intentional disregard penalties are not taken into account in applying the $1,500,000 limitation to other penalties. (Code Sec. 6722(e)(3) )
The calculation of the intentional disregard penalties is the same as under pre-2010 Small Business Act law, except for the increased minimum penalty. (Code Sec. 6722(e)(2) )
The 2010 Small Business Act also provides that the penalty amounts will be adjusted for inflation every five years with the first adjustment to take place after 2012, effective for each year thereafter. (Com Rept, see ¶5613) . Specifically, for each fifth calendar year beginning after 2012, each of the dollar amounts under Code Sec. 6722(a) (relating to the basic penalty), Code Sec. 6722(b) (relating to the reductions for correction within 30 days or by Aug. 1), Code Sec. 6722(d) (relating to the lower limits for small businesses), and Code Sec. 6722(e) (relating to intentional disregard) will be increased by the dollar amount multiplied by a cost-of-living adjustment. But, this won't apply to the $5,000,000 gross receipts test amount in Code Sec. 6722(d)(2) ). The inflation adjustment will be determined under Code Sec. 1(f)(3) determined by substituting “calendar year 2011” for “calendar year 1992” in Code Sec. 1(f)(3)(B) . (Code Sec. 6722(f)(1) )
RIA observation: Tax bracket amounts are indexed for inflation under Code Sec. 1(f) . The cost-of-living adjustment for a calendar year under Code Sec. 1(f)(3) is generally the percentage (if any) by which the consumer price index (CPI) for the preceding calendar year exceeds the CPI for calendar year '92 (the permanent base year). FTC 2d/Fin ¶A-1103; USTR ¶14.08; TaxDesk ¶568,203; . Thus, 2011 will be the base year for the inflation adjustments of the penalty amounts described above.
Amounts adjusted for inflation under the above rules are rounded differently depending on whether they are large or small amounts. If any amount adjusted for inflation under the above rules is $75,000 or more, it will be rounded to the next lowest multiple of $500 (if it is not itself a multiple of $500). (Code Sec. 6722(f)(2)(A) )
If any amount adjusted for inflation under the above rules is less than $75,000, it will be rounded to the next lowest multiple of $10 (if it is not itself a multiple of $10). (Code Sec. 6722(f)(2)(B) )
RIA observation: Thus, the per statement penalties will be rounded to the next lowest multiple of $10, while the aggregate amounts will be rounded to the next lowest multiple of $500.
RIA observation: The 2010 Small Business Act also increases Code Sec. 6721 penalties for failure to file information returns, see ¶602 .
Effective: Information returns required to be filed after Dec. 31, 2010. (2010 Small Business Act §2102(h))
RIA observation: The effective date above seems to be tailored to the related changes in the Code Sec. 6721 penalties for failure to file information returns, see ¶602 . The above changes to the Code Sec. 6722 penalty seem to be effective for statements due after Dec. 31, 2010.
Penalties for failing to report reportable and listed transactions retroactively reduced for post-2006 assessments
Code Sec. 6707A(b), as amended by 2010 Small Business Act §2041(a)
Generally effective: Penalties assessed after Dec. 31, 2006
Committee Reports, see ¶5609
Code Sec. 6707A imposes a penalty on any person who fails to include on any return or statement any information regarding a “reportable transaction” which is required under Code Sec. 6011 to be included with the return or statement. The penalty applies regardless of whether the transaction results in a tax understatement. The penalty also applies in addition to any other penalty that may be imposed under the Code. Regulations under Code Sec. 6011 require taxpayers to disclose with their returns certain information regarding each reportable transaction in which they participated. FTC 2d/Fin ¶V-2531; USTR ¶67,07A4; TaxDesk ¶866,501; .
Under pre-2010 Small Business Act law, the penalty for failure to report reportable transactions was $10,000 in the case of a natural person and $50,000 for others. These amounts were increased, however, if they involved a listed transaction to $100,000 for a natural person, and $200,000 for all others. FTC 2d/Fin ¶V-2532; USTR ¶67,07A4; TaxDesk ¶866,502;
Reportable transactions are certain types of transactions IRS has identified as having a potential for tax avoidance or evasion. A listed transaction for Code Sec. 6707A purposes means a reportable transaction which is the same as, or substantially similar to, a transaction specifically identified by IRS as a tax avoidance transaction for Code Sec. 6011 purposes. Such identification may be made by notice, reg or other forms of published guidance. FTC 2d/Fin ¶V-2533; USTR ¶67,07A4; TaxDesk ¶866,503; , TaxDesk ¶866,504; .
After noting a Congressional commitment to enact legislation to address the perceived inequities caused by the imposition of the high listed transaction penalties described above on small businesses, IRS announced, on July 6, 2009, a suspension of Code Sec. 6707A collection enforcement through Sept. 30, 2009, in cases where the annual tax benefit from the transaction was less than $100,000 for individuals or $200,000 for other taxpayers per year. On Sept. 24, 2009, this suspension was extended through Dec. 31, 2009 to give Congress time to address the issue. On Dec. 23, 2009, IRS announced its intention to further extend the suspension until Mar. 1, 2010 and said it would hold off until Mar. 1, 2010 on filing new notices of lien where the amount due was solely related to Code Sec. 6707A penalties. IRS said it would work with taxpayers experiencing financial hardship due to existing liens covered by the moratorium. On Mar. 2, 2010, a further extension until June 1, 2010, was announced along with a continued intention to hold off on filing new notices of lien on amounts due that were solely related to Code Sec. 6707A penalties. FTC 2d/Fin ¶V-2531; USTR ¶67,07A4; TaxDesk ¶866,501;
New Law. The 2010 Small Business Act completely replaces the Code Sec. 6707A penalty structure. The new law says that, except as otherwise provided below, the amount of the penalty with respect to any reportable transaction shall be 75% of the decrease in tax shown on the return as a result of the transaction (or which would have resulted from the transaction if the transaction were respected for federal tax purposes). (Code Sec. 6707A(b)(1) as amended by 2010 Small Business Act §2041(a))
The 2010 Small Business Act changes the general rule for determining the amount of the applicable penalty to achieve proportionality between the penalty and the tax savings that were the object of the transaction. (Com Rept, see ¶5609)
Regardless of the amount determined under the general rule, the penalty for each such failure may not exceed certain maximum amounts. (Com Rept, see ¶5609) The new law provides that the amount of the penalty with respect to any reportable transaction for any tax year can't exceed:
(A) in the case of a listed transaction, $200,000 ($100,000 in the case of a natural person),
(B) in the case of any other reportable transaction, $50,000 ($10,000 in the case of a natural person). (Code Sec. 6707A(b)(2) )
RIA observation: Thus, the above rules provide for a dramatic lowering of the penalties. Note that the previously applicable penalty amounts required to be imposed with respect to listed transactions ($100,000 for natural persons and $200,000 for others) are now the maximum penalties for such persons with respect to listed transactions. The maximums apply to limit the penalty if the decrease in tax that triggered the penalty was more than $133,333.33 (.75 × $133,333.33 = $100,000) for natural persons and more than $266,666.67 (.75 × $266,666.67 = $200,000) for others.
Similarly, the previously applicable penalty amounts required to be imposed with respect to reportable transactions ($10,000 for natural persons and $50,000 for others) are now the maximum penalties for such persons with respect to reportable transactions. These maximums apply to limit the penalty if the decrease in tax that triggered the penalty was more than $13,333.33 (.75 × $13,333.33 = $10,000) for natural persons and more than $66,666.67 (.75 × $66,666.67 = $50,000) for others.
The 2010 Small Business Act also establishes a minimum penalty with respect to failure to disclose a reportable or listed transaction. (Com Rept, see ¶5609) Thus, the new law provides that the amount of the penalty with respect to any transaction can't be less than $5,000 for a natural person and $10,000 for any other person. (Code Sec. 6707A(b)(3) )
Illustration 1: Two individuals participate in a listed transaction through a partnership formed for that purpose. Both partners, as well as the partnership, are required to disclose the transaction. All fail to do so. The failure by the partnership to disclose its participation in a listed or otherwise reportable transaction is subject to the minimum penalty of $10,000, because income tax liability is not incurred at the partnership level nor reported on a partnership return. The partners in the partnership who also failed to comply with the reporting requirements of Code Sec. 6011 are each subject to a penalty based on the reduction in tax reported on their respective returns, but not in excess of $100,000 for each. (Com Rept, see ¶5609)
Illustration 2: A corporation participates in a single listed transaction over the course of three tax years. The decrease in tax shown on the corporate returns is $1 million in the first year, $100,000 in the second year, and $10,000 in the third year. If the corporation fails to disclose the listed transaction in all three years, the corporation is subject to three separate penalties: a penalty of $200,000 in the first year (as a result of the cap on penalties), a $75,000 penalty in the second year (computed under the general rule) and a $10,000 penalty in the third year (as a result of the minimum penalty) for total penalties of $285,000. (Com Rept, see ¶5609)
RIA observation: The 2010 Small Business Act also requires an annual report to Congress relating to the above penalty, see ¶703 .
Effective: Penalties assessed after Dec. 31, 2006. (2010 Small Business Act §2041(b))
RIA observation: Thus, not only does the 2010 Small Business Act provide for a dramatic lowering of the potentially applicable penalties, but it also makes the change retroactive to a date that long precedes the moratorium declared on July 6, 2009.
RIA recommendation: Taxpayers who have already paid a Code Sec. 6707A penalty should consider filing a refund claim due to the retroactive nature of the above change.

IRS required to submit annual reports to Congress on penalties and other enforcement actions
Code Sec. 6662A, 2010 Small Business Act §2103
Code Sec. 6700, 2010 Small Business Act §2103
Code Sec. 6707, 2010 Small Business Act §2103
Code Sec. 6707A, 2010 Small Business Act §2103
Code Sec. 6708, 2010 Small Business Act §2103
Code Sec. 6501(c)(10), 2010 Small Business Act §2103
Generally effective: Sept. 27, 2010
Committee Reports, see ¶5614
Under Code Sec. 6662A , a 20% accuracy-related penalty applies for “reportable transaction understatements” for any tax year (referred to below as the “reportable transaction understatement penalty”). The penalty rises is 30% for any portion of any reportable transaction understatement for which certain disclosure rules are not met. There is a reasonable cause exception to the penalty that isn't available if the 30% penalty rate applies. An item is subject to the penalty rules if the item is attributable to: (a) any listed transaction and (b) any reportable transaction (other than a listed transaction) if a significant purpose of the transaction is federal income tax avoidance or evasion. Reportable transactions are certain types of transactions IRS has identified as having a potential for tax avoidance or evasion. A listed transaction means a reportable transaction which is the same as, or substantially similar to, a transaction specifically identified by IRS as a tax avoidance transaction for Code Sec. 6011 purposes. FTC 2d/Fin ¶V-2281; ; FTC 2d/Fin ¶V-2282; USTR ¶66,62A4; TaxDesk ¶868,101; .
Code Sec. 6700 imposes a civil penalty on any person who:
• organizes (or assists in the organization of) or participates (directly or indirectly) in the sale of any interest in (a) a partnership or other entity, (b) any investment plan or arrangement, or (c) any other plan or arrangement, and
• makes or furnishes, or causes another person to make or furnish, in connection with such organization or sale (a) a statement on the allowability of any deduction or credit, the excludability of any income, or the securing of any other tax benefit by reason of holding an interest in the entity or participating in the plan or arrangement, which he knows (or has reason to know) is false or fraudulent as to any material matter, or (b) a gross valuation overstatement as to any material matter. FTC 2d/Fin ¶V-2401; USTR ¶67,004; .
IRS is authorized to waive all or part of any Code Sec. 6700 penalty resulting from a gross valuation overstatement, if there was a reasonable basis for the valuation and the valuation was made in good faith. FTC 2d/Fin ¶V-2409; USTR ¶67,004; .
Code Sec. 6707 provides that a material advisor (as defined in Code Sec. 6111 , i.e., any person who provides any material aid, assistance, or advice with respect to a reportable transaction, and who directly or indirectly derives gross income in excess of a threshold amount for the advice or assistance) who fails to file a timely information return required under Code Sec. 6111(a) , or who files a false or incomplete information return, for a reportable transaction (including a listed transaction) is subject to a penalty. The penalty is ordinarily $50,000 for each failure. However, if the failure relates to a listed transaction, the penalty is increased. The Code Sec. 6707A rules below apply to the rescission of this penalty. Thus, the penalty won't be rescinded for a listed transaction and there will be no right to a judicial appeal of a refusal to rescind a penalty. FTC 2d/Fin ¶V-2501; USTR ¶67,074; TaxDesk ¶866,505; .
Code Sec. 6707A imposes a penalty on any person who fails to include on any return or statement any information regarding a “reportable transaction” which is required under Code Sec. 6011 to be included with the return or statement. Regulations under Code Sec. 6011 require taxpayers to disclose with their returns certain information regarding each reportable transaction in which they participated. FTC 2d/Fin ¶V-2531; USTR ¶67,07A4; TaxDesk ¶866,501; . IRS may rescind all or any portion of the penalty for failing to disclose a reportable transaction imposed by Code Sec. 6707A for any violation if: (a) the violation is for a reportable transaction other than a listed transaction, and (b) rescinding the penalty would promote compliance with the Code and effective tax administration. A rescission determination isn't reviewable in any judicial proceeding. FTC 2d/Fin ¶V-2535; USTR ¶67,07A4; TaxDesk ¶866,505; . The Small Business Act retroactively reduced the amount of the above penalty, see ¶701 .
Each material advisor must maintain a list with respect to any reportable transaction and furnish the list to IRS on request. FTC 2d/Fin ¶S-4408.1; USTR ¶61,124; . Under Code Sec. 6708 , any person required to maintain a list of advisees with respect to reportable transactions who fails to make that list available to IRS on its written request within 20 business days after the request, is liable for a penalty of $10,000 per day for each day of the failure after the 20th day, see FTC 2d/Fin ¶V-2503; USTR ¶67,084; .
IRS is required to maintain records and report on the administration of the penalties for failure to disclose a reportable transaction in two ways. First, each decision to rescind a penalty imposed under Code Sec. 6707 orCode Sec. 6707A must be memorialized in a record in the Office of the Commissioner. Second, IRS must provide an annual report to Congress on the administration of rescission under both Code Sec. 6707 andCode Sec. 6707A . The information relating to Code Sec. 6707A must be in summary form, while the information on rescission of penalties imposed against material advisors must be more detailed. But, the report isn't required to address administration of the other enforcement tools described above. FTC 2d/Fin ¶V-2535; USTR ¶67,07A4; .
New Law. The 2010 Small Business Act provides that IRS must submit to the Committee on Ways and Means of the House of Representatives and the Committee on Finance of the Senate an annual report on the penalties assessed by IRS during the preceding year under certain specified provisions.
The penalty provisions specified as the subjects of the above annual report are:
(1) Code Sec. 6662A (relating to the accuracy-related penalty on understatements with respect to reportable transactions).
(2) Code Sec. 6700(a) (relating to promoting abusive tax shelters).
(3) Code Sec. 6707 (relating to failure to furnish information regarding reportable transactions).
(4) Code Sec. 6707A (relating to failure to include reportable transaction information with a return).
(5) Code Sec. 6708 (relating to failure to maintain lists of advisees with respect to reportable transactions). (2010 Small Business Act §2103(a))
A summary of the penalties assessed for the preceding year is required. (Com Rept, see ¶5614)
The report required by the above rules must also include information on the following with respect to each year:
(A) Any action taken under 31 USC § 330(b) , with respect to any reportable transaction (as defined in Code Sec. 6707A(c) ).
(B) Any extension of the time for assessment of tax enforced, or assessment of any amount under such an extension, under Code Sec. 6501(c)(10) . (2010 Small Business Act §2103(b))
31 USC § 330(b) , cited at (A) above, authorizes the Treasury Department to impose sanctions on those appearing before the Department, including monetary penalties and suspension from practice before the Department. Thus, actions taken against practitioners appearing before the Treasury or IRS with respect to a reportable transaction must be reported to Congress. (Com Rept, see ¶5614)
Code Sec. 6501(c)(10) , cited at (B) above, provides that if a taxpayer fails to include on any return or statement for any tax year any information with respect to a listed transaction that is required under Code Sec. 6011 to be included with that return or statement, the time for assessment of any tax with respect to that transaction won't expire before one year after the earlier of: (a) the date when the required information is furnished to IRS, or (b) the date that a material advisor meets the list-maintenance requirements with respect to a request by IRS under Code Sec. 6112(b) relating to the transaction with respect to the taxpayer. FTC 2d/Fin ¶T-4163; USTR ¶65,014.147; TaxDesk ¶838,055; .
Thus, instances in which IRS attempted to rely on the exception to the limitations period for assessment based on failure to disclose a listed transaction must be reported to Congress. (Com Rept, see ¶5614)
The first report required under the above rules must be submitted not later than December 31, 2010. (2010 Small Business Act §2103(c))
Effective: Sept. 27, 2010.

Certain 2015 estimated taxes due for corporations with assets of $1 billion or more increase to 159.25%
Code Sec. 6655, 2010 Small Business Act §2131
Generally effective: Sept. 27, 2010
Committee Reports, see ¶5621
Generally, corporations are required to pay estimated income tax for each tax year in 4 equal installments due on the 15th day of the 4th, 6th, 9th, and 12th month of the tax year, see FTC 2d/Fin ¶S-5324.1; USTR ¶66,554; TaxDesk ¶609,201; .
RIA illustration 1: D Corp. uses a tax year beginning on Jan. 1. The due dates for its installments are: Apr. 15, June 15, Sept. 15, and Dec. 15.
Under 2010 HIRE Act §561(2) (Sec. 561(2), PL 111-147, 3/18/2010 ), before amended by 2010 HELP Act §12(b) (Sec. 12(b), PL 111-171, 5/24/2010 ), before amended by 2010 Burmese Import Restrictions Act §3 (Sec. 3, PL 111-210, 7/27/2010 ), before amended by 2010 Manufacturing Act §4002 (Sec. 4002, PL 111-227, 8/11/2010 ), and before amended by 2010 Firearms Excise Tax Act §4(a) (Sec. 4(a), PL 111-237, 8/16/2010 ), in the case of a corporation with assets of at least $1 billion (determined as of the end of the previous tax year), the amount of any required installment of corporate estimated tax otherwise due in July, Aug., or Sept. 2015 was 121.5% of that amount. 2010 HELP Act §12(b) (Sec. 12(b), PL 111-171, 5/24/2010 ) raised the percentage under 2010 HIRE Act §561(2) (Sec. 561(2), PL 111-147, 3/18/2010 ), in effect on May 24, 2010, by 0.75 percentage points, 2010 Burmese Import Restrictions Act §3 (Sec. 3, PL 111-210, 7/27/2010 ) raised the percentage under 2010 HIRE Act §561(2) (Sec. 561(2), PL 111-147, 3/18/2010 ), in effect on July 27, 2010, by 0.25 percentage points, 2010 Manufacturing Act §4002 (Sec. 4002, PL 111-227, 8/11/2010 ), raised the percentage under 2010 HIRE Act §561(2) (Sec. 561(2), PL 111-147, 3/18/2010 ), in effect on Aug. 11, 2010, by 0.5 percentage points, and 2010 Firearms Excise Tax Act §4(a) (Sec. 4(a), PL 111-237, 8/16/2010 ) raised the percentage under 2010 HIRE Act §561(2) (Sec. 561(2), PL 111-147, 3/18/2010 ), in effect on Aug. 16, 2010, by 0.25 percentage points. Thus, under 2010 HIRE Act §561(2) (Sec. 561(2), PL 111-147, 3/18/2010 ), as amended by 2010 HELP Act §12(b) (Sec. 12(b), PL 111-171, 5/24/2010 ), as amended by 2010 Burmese Import Restrictions Act §3 (Sec. 3, PL 111-210, 7/27/2010 ), as amended by 2010 Manufacturing Act §4002 (Sec. 4002, PL 111-227, 8/11/2010 ), and as amended by 2010 Firearms Excise Tax Act §4(a) (Sec. 4(a), PL 111-237, 8/16/2010 ), in the case of a corporation with assets of at least $1 billion (determined as of the end of the previous tax year), the amount of any required installment of corporate estimated tax that would otherwise be due in July, Aug., or Sept. 2015 was 123.25% of that amount.
The amount of the next required installment after an increased installment must be appropriately reduced to reflect the amount of the increase. FTC 2d/Fin ¶S-5320; FTC 2d/Fin ¶S-5324.1; USTR ¶66,554; TaxDesk ¶609,201;
New Law. The 2010 Small Business Act provides that the percentage under 2010 HIRE Act §561(2) (Sec. 561(2), PL 111-147, 3/18/2010 ) in effect on Sept. 27, 2010 is increased by 36 percentage points. (2010 Small Business Act §2131) Thus, the 2010 Small Business Act increases the required payment of corporate estimated tax otherwise due in July, Aug., or Sept. 2015 by 36 percentage points. (Com Rept, see ¶5621)
RIA observation: Accordingly, the 2010 Small Business Act increases the corporate estimated tax payment due in July, Aug., or Sept. 2015 from 159.25% (123.25% + 36%) of the payment otherwise due.
RIA illustration 2: X Corp., a calendar-year taxpayer with assets of $2 billion, calculates its estimated tax payment otherwise due in Sept. 2015 to be $100,000,000. Instead, X must make a payment of $159,250,000 ($100,000,000 × 159.25%) by the due date in Sept. 2015. X calculates its estimated tax payment otherwise due in Dec. 2015 to be $100,000,000. X reduces the estimated tax payment otherwise due in Dec. 2015 by $59,250,000 ($159,250,000 − $100,000,000). Thus, X must make a payment of $40,750,000 ($100,000,000 − $59,250,000) by the due date in Dec. 2015.
RIA observation: Corporations with a fiscal year that begins July 1 will not be affected by the above rule, because they do not have any estimated tax payments due in July, Aug., or Sept.
RIA illustration 3: Z Corp. uses a tax year beginning on July 1. For Z's tax year beginning July 1, 2015, the due dates for its installments are: Oct. 15, 2015, Dec. 15, 2015, Mar. 15, 2016, and June 15, 2016.
RIA observation: The federal government's fiscal year begins Oct. 1. Thus, the 2010 Small Business Act effectively moves revenues from one fiscal year to another to meet budgetary requirements.
Effective: Sept. 27, 2010. (Com Rept, see ¶5621)
¶ 802. Crude tall oil and other fuels with acid numbers over 25 that are sold or used after Dec. 31, 2009 aren't eligible for the cellulosic biofuel producer credit
Code Sec. 40(b)(6)(E)(iii)(III), as amended by 2010 Small Business Act §2121(a)(3)
Generally effective: Fuels sold or used after Dec. 31, 2009
Committee Reports, see ¶5619
The cellulosic biofuel producer credit is a component of the alcohol fuel credit. This credit is a nonrefundable income tax credit for each gallon of qualified cellulosic fuel production of the producer for the tax year, and is in addition to any other credit available under the alcohol fuels credit, see FTC 2d/Fin ¶L-17501; USTR ¶404.01; TaxDesk ¶382,202; . The cellulosic biofuel producer credit applies to qualified cellulosic biofuel production after Dec. 31, 2008 and before Jan. 1, 2013, see FTC 2d/Fin ¶L-17516.1; USTR ¶404.07; TaxDesk ¶382,213; .
Cellulosic biofuel is any liquid fuel that:
... is produced from any lignocellulosic or hemicellulosic matter that is available on a renewable or recurring basis; and
... meets the registration requirements for fuels and fuel additives established by the Environmental Protection Agency (EPA) under §211 of the Clean Air Act (42 USC 7545).
Cellulosic biofuel doesn't include any alcohol with a proof of less than 150. For this purpose, the determination of the proof of any alcohol is made without regard to any added denaturants. See FTC 2d/Fin ¶L-17516.5; USTR ¶404.01; TaxDesk ¶382,213; . Also, under pre-2010 Small Business Act law, cellulosic biofuel (as defined above) does not include unprocessed fuels (sometimes referred to as black liquor) that are:
... more than 4% of the fuel (determined by weight) is any combination of water and sediment, or
... the ash content of the fuel is more than 1% (determined by weight). FTC 2d/Fin ¶L-17516.5A; USTR ¶404.11;
The kraft process for making paper produces a by-product called black liquor, which has been used for decades by paper manufacturers as a fuel in the papermaking process. Black liquor is composed of water, lignin and the spent chemicals used to break down the wood. The amount of the biomass in black liquor varies. The portion of the black liquor that is not consumed as a fuel source for the paper mills is recycled back into the papermaking process. Black liquor has ash content (mineral and other inorganic matter) significantly above that of other fuels. (Com Rept, see ¶5619)
Crude tall oil is generated by reacting acid with “black liquor soap.” Crude tall oil is used in various applications, such as adhesives, resins, and coatings. It also can be burned and used as a fuel. (Com Rept, see ¶5619)
New Law. Under the 2010 Small Business Act, cellulosic biofuel (as defined above) does not include any fuel if the fuel has an acid number greater than 25. (Code Sec. 40(b)(6)(E)(iii)(III) as amended by 2010 Small Business Act §2121(a)(3)) In other words, the 2010 Small Business Act modifies the cellulosic biofuel producer credit to exclude from the definition of cellulosic biofuel fuels with an acid number of greater than 25. (Com Rept, see ¶5619)
The acid number is the amount of base required to neutralize the acid in the sample. The acid number is reported as weight of the base (typically potassium hydroxide) per weight of sample, or milligram (“mg”) potassium hydroxide per gram. The normal acid number for crude tall oil is between 100 and 175. As a comparison, ASTM (American Society for Testing and Materials) D6751 for biodiesel specifies that the acid number be less than 0.5 mg potassium hydroxide. ASTM D4806 for ethanol does not have acid value but instead limits “acidity” to 0.007 mg of acetic acid per liter, which is significantly below an acid number of 25. (Com Rept, see ¶5619)
RIA observation: Since crude tall oil normally has an acid number between 100 and 175 (i.e., an acid number greater than 25), it is excluded from the definition of cellulosic biofuel and thus, isn't eligible for the cellulosic biofuel producer credit.
RIA observation: According to a Senate Summary (dated July 21, 2010) of the 2010 Small Business Act, 2010 Small Business Act §2121 limits eligibility for the tax credit to fuels that are not highly corrosive (i.e., fuels that could be used in a car engine or in a home heating application).
Effective: Fuels sold or used after Dec. 31, 2009. (2010 Small Business Act §2121(b))
RIA caution: If a producer uses a fiscal year as its tax year, the producer may have already filed an income tax return that contains a claim of the cellulosic biofuel producer credit based on crude tall oil sold or used in 2010. In that case, the producer will need to consider filing an amended return to change its claim of the cellulosic biofuel producer credit to reflect the exclusion of crude tall oil from the definition of cellulosic biofuel for any fuels sold or used after Dec. 31, 2009.

New rules provided for sourcing guarantee income
Code Sec. 861(a)(9), as amended by 2010 Small Business Act §2112(a)
Code Sec. 862(a)(9), as amended by 2010 Small Business Act §2122(b)
Code Sec. 864(c)(4)(B)(ii), as amended by 2010 Small Business Act §2122(c)
Generally effective: Guarantees issued after Sept. 27, 2010
Committee Reports, see ¶5620
Nonresident alien individuals and foreign corporations are generally subject to a 30% gross basis withholding tax on payments of U.S. source fixed or determinable annual or periodical (FDAP) income that is not effectively connected with a U.S. trade or business. ( FTC 2d/Fin ¶O-10101; ; FTC 2d/Fin ¶O-10103; ; FTC 2d/Fin ¶O-11903; USTR ¶8714.02; ; USTR ¶8814.02; ; USTR ¶14414; ; USTR ¶14424; TaxDesk ¶630,101; ; TaxDesk ¶632,001; ; TaxDesk ¶634,001; ) Foreign persons are also subject to U.S. income tax (in the same manner and at the same rates as U.S. persons) on income that is effectively connected with the conduct of a U.S. trade or business (ECI). Foreign source income is treated as ECI only if it falls into one of three specific statutory categories, and only if the foreign person has an office or other fixed place of business in the U.S. to which the income is attributable. Under pre-2010 Small Business Act law, one of these categories included interest or dividends derived in the active conduct of a banking, financing, or similar business within the U.S., or received by a corporation whose principal business is trading in stocks or securities for its own account. FTC 2d/Fin ¶O-10622; FTC 2d/Fin ¶O-10632; FTC 2d/Fin ¶O-10635; FTC 2d/Fin ¶O-10640.2; USTR ¶8614.11; USTR ¶8644.04; USTR ¶8644.05; TaxDesk ¶642,011;
The Code and regs provide sourcing rules for certain categories of income. For example, interest income is generally sourced to the residence of the obligor and personal services income is generally sourced to where the services are performed. Courts have sourced some items of income in categories that are not subject to a specific source rule by analogy, i.e., by applying the rule that applies to the most similar type of income. ( FTC 2d/Fin ¶O-10900; et seq. USTR ¶8614.01; TaxDesk ¶633,000; et seq.)
Under pre-2010 Small Business Act law, guarantee fees were not covered by a specific sourcing rule and courts had sourced them by analogy. Certain credit fees were sourced as income from services when they were charged for specific services, for example, the negotiation of letter of credit commissions. Acceptance and confirmation payments on export letters of credit to third party banks, on the other hand, have been treated as more closely analogous to interest because they involved a substitution of credit and the assumption of increased risk by the guarantor. In Container Corp. 134 TC No. 5 (Feb. 17, 2010), the Tax Court treated guarantee fees paid to a foreign parent as analogous to payments for services when the parent had no primary obligation to make payments on the underlying debt. The Court concluded that credit support — as opposed to credit substitution — was more in the nature of personal services and should be sourced as payments for services. Since the guarantee was based on the parent's assets and creditworthiness, the fees were held to be foreign source income and withholding was not required under Code Sec. 1442 .FTC 2d/Fin ¶O-10907.1;
New Law. The 2010 Small Business Act (Act) provides specific sourcing rules for guarantee fees that are intended to legislatively overrule Container Corp.(Com Rept, see ¶5620) Under the Act, gross income from sources within the U.S. includes amounts received, directly or indirectly, from:
(A) a noncorporate resident or domestic corporation for the provision of a guarantee of any indebtedness of that resident or corporation (Code Sec. 861(a)(9)(A) as amended by 2010 Small Business Act §2122(a)) , or
(B) any foreign person for the provision of a guarantee of any indebtedness of such person, if those amounts are connected with income that is effectively connected (or treated as effectively connected) with the conduct of a U.S. trade or business. (Code Sec. 861(a)(9)(B) )
Any amounts received, directly or indirectly, from a foreign person for the provision of a guarantee of indebtedness of that person, other than amounts derived from sources within the U.S. described in Code Sec. 861(a)(9) are treated as income from foreign sources. (Code Sec. 862(a)(9) as amended by 2010 Small Business Act §2122(b)) )
Illustration : A foreign bank pays a guarantee fee to a foreign corporation (FC) for FC's guarantee of debt owed to the bank by FC's U.S. subsidiary. The cost of the guarantee fee is passed on to the U.S. subsidiary as additional interest on the debt. The guarantee is treated as U.S. source income because it is treated as paid indirectly by the U.S. subsidiary. (Com Rept, see ¶5620)
RIA observation: This allows IRS to tax payments of guarantee fees from U.S. subsidiaries to foreign parents as it taxes other payments received by foreign companies in connection with financing U.S. risks by treating the fees like any other U.S. source FDAP income without regard to the nature of the underlying credit and economic arrangements. IRS had earlier ruled that (i) guarantee fees paid to a foreign parent for third party loans could not be treated as fees in exchange for services under U.S. tax principles, (ii) that guarantee fees were more closely analogous to interest payments and should be sourced under the interest sourcing rules, but (iii) that guarantee fees could not be characterized as interest under an income tax treaty (because the third party loans were not made for the use or forbearance of money) and payment were therefore ineligible for treaty benefits. FTC 2d/Fin ¶O-10907.1; .
RIA observation: This provision prevents foreign multinationals from stripping out income from U.S. subsidiaries by guaranteeing their debts through a tax haven entity. If the guarantee fees were treated as foreign source (as they would be under Container Corp.), the payments would be deductible against U.S. earnings but not be limited by the Code Sec. 163(j) earnings stripping provisions (which limit the deductibility of certain interest payments to related persons, including interest on a loan from an unrelated tax-exempt or foreign person that is guaranteed by a related tax-exempt or foreign person, see FTC 2d/Fin ¶K-5364; ). Furthermore, they would not be subject to U.S. withholding tax, even if the payee was in a non-treaty country. (A taxpayer could not achieve these tax benefits with a guarantee from a CFC to the extent the CFC had inbound guarantees treated as investments in U.S. property under Code Sec. 956 , see FTC 2d/Fin ¶O-2549; USTR ¶9564.02; .)
RIA observation: Most U.S. income tax treaties do not have specific rules on the treatment guarantee payments, but many include a catchall provision that governs the treatment of income not otherwise subject to a specific provision in the treaty. Some treaties provide an exemption from source country tax on other income. This type of provision would likely prohibit U.S. tax on guarantee fees paid by a U.S. subsidiary to a resident of the other treaty country, unless it was associated with a permanent establishment. Under the U.S.–Canada Treaty, the other income article includes a specific rule that guarantee fees derived by a resident of one country are taxable only in the country of residence unless they are attributable to a permanent establishment in the other country (see FTC 2d/Fin ¶O-19035; ). Payments of guarantee fees to a Canadian corporation for related party guarantees, therefore, are not subject to U.S. withholding tax under the U.S.–Canada Treaty so long as the Canadian corporation does not engage in the trade or business of providing guarantees through a U.S. permanent establishment.
The term "noncorporate residents" is intended to be consistent with Code Sec. 861(a)(1) (in connection with sourcing interest payments), except that foreign partnerships are not included. Payments from a foreign partnership with respect to guarantees of partnership debt are U.S. source if the payments are connected with ECI. (Com Rept, see ¶5620)
RIA observation: This treatment is consistent with the Code Sec. 861(a)(1)(C) source rule for interest paid by a foreign partnership predominantly engaged in the active conduct of a trade or business outside the U.S.. Interest income of a foreign partnership from domestic sources is not U.S. source income unless it is paid by a trade or business engaged in by the partnership in the U.S., or it is allocable to income effectively connected (or treated as effectively connected) with the conduct of a trade or business in the U.S.
The 2010 Small Business Act further provides that amounts received for the provision of guarantees of indebtedness will be treated as effectively connected with the conduct of a foreign corporation's U.S. trade or business if they are attributed to an office or other fixed place of business within the U.S., and either (i) the taxpayer's principal business is the active conduct of a banking, financing, or similar business within the U.S., or (ii) the income is received by a foreign corporation engaged in a U.S. business consisting of trading in stocks or securities for its own account. (Code Sec. 864(c)(4)(B)(ii) as amended by 2010 Small Business Act §2122(c))
RIA observation: This conforming provision allows the U.S. to tax guarantee fees generated in the business of financing U.S. risks through subsidiaries as it taxes other payments received by foreign companies for financing such as interest (see FTC 2d/Fin ¶O-10632; ; FTC 2d/Fin ¶O-10635; USTR ¶8644.04; ).
IRS may provide source rules for other types of payments not covered by Code Sec. 861(a)(9) .(Com Rept, see ¶5620)
Effective: Guarantees issued after Sept. 27, 2010. (2010 Small Business Act §2122(d))
Congress intends no inference regarding the source of income received for guarantees issued before Sept. 27, 2010. (Com Rept, see ¶5620)
© 2010 Thomson

§ 6707A Penalty for failure to include reportable transaction information with return.
________________________________________
(a) WG&L Treatises Imposition of penalty.
Any person who fails to include on any return or statement any information with respect to a reportable transaction which is required under section 6011 to be included with such return or statement shall pay a penalty in the amount determined under subsection (b).
(b) WG&L Treatises Amount of penalty.
(1) New Law AnalysisWG&L Treatises In general.
Except as otherwise provided in this subsection , the amount of the penalty under subsection (a) with respect to any reportable transaction shall be 75 percent of the decrease in tax shown on the return as a result of such transaction (or which would have resulted from such transaction if such transaction were respected for Federal tax purposes).
(2) New Law AnalysisWG&L Treatises Maximum penalty.
The amount of the penalty under subsection (a) with respect to any reportable transaction shall not exceed—
(A) in the case of a listed transaction, $200,000 ($100,000 in the case of a natural person), or
(B) in the case of any other reportable transaction, $50,000 ($10,000 in the case of a natural person).
(3) New Law Analysis Minimum penalty.
The amount of the penalty under subsection (a) with respect to any transaction shall not be less than $10,000 ($5,000 in the case of a natural person).
(c) WG&L Treatises Definitions.
For purposes of this section —
(1) WG&L Treatises Reportable transaction.
The term “reportable transaction” means any transaction with respect to which information is required to be included with a return or statement because, as determined under regulations prescribed under section 6011, such transaction is of a type which the Secretary determines as having a potential for tax avoidance or evasion.
(2) Listed transaction.
The term “listed transaction” means a reportable transaction which is the same as, or substantially similar to, a transaction specifically identified by the Secretary as a tax avoidance transaction for purposes of section 6011.
(d) Authority to rescind penalty.
(1) In general.
The Commissioner of Internal Revenue may rescind all or any portion of any penalty imposed by this section with respect to any violation if—
(A) the violation is with respect to a reportable transaction other than a listed transaction, and
(B) rescinding the penalty would promote compliance with the requirements of this title and effective tax administration.
(2) No judicial appeal.
Notwithstanding any other provision of law, any determination under this subsection may not be reviewed in any judicial proceeding.
(3) Records.
If a penalty is rescinded under paragraph (1), the Commissioner shall place in the file in the Office of the Commissioner the opinion of the Commissioner with respect to the determination, including—
(A) a statement of the facts and circumstances relating to the violation,
(B) the reasons for the rescission, and
(C) the amount of the penalty rescinded.
(e) Penalty reported to SEC.
In the case of a person—
(1) which is required to file periodic reports under section 13 or 15(d) of the Securities Exchange Act of 1934 or is required to be consolidated with another person for purposes of such reports, and
(2) which—
(A) is required to pay a penalty under this section with respect to a listed transaction,
(B) is required to pay a penalty under section 6662A with respect to any reportable transaction at a rate prescribed under section 6662A(c), or
(C) is required to pay a penalty under section 6662(h) with respect to any reportable transaction and would (but for section 6662A(e)(2)(B)) have been subject to penalty under section 6662A at a rate prescribed under section 6662A(c),
the requirement to pay such penalty shall be disclosed in such reports filed by such person for such periods as the Secretary shall specify. Failure to make a disclosure in accordance with the preceding sentence shall be treated as a failure to which the penalty under subsection (b)(2) applies.
(f) Coordination with other penalties.
The penalty imposed by this section shall be in addition to any other penalty imposed by this title.

retrn preparer identification number requirements

2010-09-29T09:39:00.000-04:00

return preparer identifying number requirements

Preamble to TD 9501, 09/28/2010 , Reg. § 1.6109-2
IRS has issued final regs under Code Sec. 6109 providing guidance on the new, post-2010 requirement for tax return preparers to obtain and furnish a preparer tax identification number (PTIN) on tax returns and claims for refund of tax that they prepare. The regs, which are effective on Sept. 30, 2010, largely adopt proposed regs issued earlier this year and reject numerous commentator requests to limit the scope of the PTIN requirement. For companion regs establishing a new user fee for PTINs and the procedure for obtaining a PTIN, see ¶ 21 .
Background. Under Code Sec. 6109(a)(4) , any return or claim for refund prepared by a tax return preparer must include the identifying number for securing the proper identification of the preparer, his employer or both. Reg. § 1.6109-2(a)(2) provides that the identifying number of an individual tax return preparer is that individual's social security number (SSN), or such alternative number as may be prescribed by IRS in forms, instructions, or other appropriate guidance.
At the end of 2009, IRS released a 50-page study on the U.S. return preparer industry which carries detailed recommendations for new standards (registration, competency testing, continuing education, ethical standards), see Weekly Alert ¶ 31 01/07/2010 ). See Publication 4832, Return Preparer Review (Rev. 12-2009).
Click here for IRS's “Return Preparer Review.”
Earlier this year, IRS issued proposed regs explaining the new PTIN requirements for tax return preparers (see Weekly Alert ¶ 13 04/01/2010 ). Now, IRS has essentially finalized the proposed regs, and, in doing so, rejected many of the criticisms that had been leveled against the approach it took in proposed regs.
Here's a summary of what the final regs provide.
Requirement to use a PTIN. For tax returns or refund claims filed after Dec. 31, 2010, the identifying number that a tax return preparer must include with the preparer's signature on tax returns and refund claims is his PTIN or such other number as IRS prescribes in forms, instructions, or other guidance. Tax return preparers won't be able to use a SSN as a preparer identifying number unless specifically prescribed by IRS in forms, instructions, or other guidance. ( Reg. § 1.6109-2(a)(2) )
The regs don't distinguish between domestic or foreign tax return preparers. IRS recognizes that foreign preparers don't know how to obtain a PTIN and says that it intends to issue transitional guidance before Dec. 31, 2010, explaining how foreign and other preparers who don't have SSNs can obtain a PTIN. ( Preamble to TD 9501, 09/28/2010 ) See ¶ 21 for guidance on applying for a PTIN for applicants without a SSN.
For tax returns or claims for refund filed before Jan. 1, 2011, a tax return preparer's identifying number remains the preparer's SSN or PTIN. ( Preamble to TD 9501, 09/28/2010 )
Who can obtain a PTIN. Beginning after Dec. 31, 2010, all tax return preparers must have a PTIN or other IRS-authorized identification number. To obtain a PTIN or other prescribed identifying number, a tax return preparer must be an attorney, certified public accountant, enrolled agent, or registered tax return preparer authorized to practice before IRS under 31 USC § 330. ( Reg. § 1.6109-2(d) ) However, IRS may prescribe exceptions to the PTIN requirements, including the requirement that an individual be authorized to practice before IRS before receiving a PTIN or other prescribed identifying number, as necessary in the interest of effective tax administration. IRS may also specify specific returns, schedules, and other forms that qualify as tax returns or claims for refund for purposes of the regs. ( Reg. § 1.6109-2(h) )
IRS rejected calls to exempt (or grandfather) from the PTIN requirement state licensed tax return preparers, and to exempt return preparers of long-standing or those who prepare a small number of tax returns. IRS concluded that tax return preparers who prepare tax returns and claims for refund for compensation should be subject to uniform standards of qualification and practice, and that taxpayers should be assisted by tax return preparers subject to the same Federal regulations, regardless of a taxpayer's state of residence or variable circumstances such as the size of the business or the number of years a tax return preparer has been in the industry. ( Preamble to TD 9501, 09/28/2010 )
The regs don't cover tax return preparation software, as developers of such software aren't return preparers. ( Preamble to TD 9501, 09/28/2010 )
IRS concluded that arrangements for tax return preparation as part of a sales transaction are inherently agreements to prepare tax returns for compensation, notwithstanding any claim by tax return preparers that the tax return or refund claim preparation is not separately compensated. As a result, an individual who, in connection with a sale of goods or services, prepares all or substantially all of a tax return or claim for refund filed after Dec. 31, 2010, and does not furnish a valid PTIN on the tax return or claim for refund may be liable for the Code Sec. 6695(c) penalty, unless the failure to furnish a valid PTIN was due to reasonable cause and not due to willful neglect. ( Preamble to TD 9501, 09/28/2010 )
Who is a tax return preparer. For purposes of the requirement to obtain a PTIN, a tax return preparer is any individual who is compensated for preparing, or assisting in the preparation of, all or substantially all of a tax return or claim for refund of tax. Factors to consider in determining whether an individual is a tax return preparer include, but are not limited to:
... the complexity of the work performed by the individual relative to the overall complexity of the tax return or claim for refund of tax;
... the amount of the items of income, deductions, or losses attributable to the work performed by the individual relative to the total amount of income, deductions, or losses required to be correctly reported on the tax return or claim for refund of tax; and
... the amount of tax or credit attributable to the work performed by the individual relative to the total tax liability required to be correctly reported on the tax return or claim for refund of tax. ( Reg. § 1.6109-2(g) )
Under the final regs, preparing a form, statement, or schedule, such as Schedule EIC (Form 1040), Earned Income Credit, may constitute the preparation of all or substantially all of a tax return or claim for refund based on the application of the above factors. ( Reg. § 1.6109-2(g) )
Like the proposed regs, the final regs provide that a tax return preparer for purposes of the PTIN rule excludes an individual who is not defined as a nonsigning tax return preparer in Reg. § 301.7701-15(b)(2) . That reg defines a nonsigning tax return preparer as any tax return preparer who, while not a signing tax return preparer (the individual who has the primary responsibility for the overall substantive accuracy of the preparation of a tax return or claim for refund of tax), prepares all or a substantial portion of a tax return or claim for refund. ( Reg. § 1.6109-2(g) , Preamble to TD 9501, 09/28/2010 ) A tax return preparer also does not include an individual described in Reg. § 301.7701-15(f) (such as volunteers, those who do tax counseling for the elderly, those preparing returns for their employers, those preparing returns for free). ( Reg. § 1.6109-2(g) )
Four examples help explain who is a tax return preparer. They make it clear that someone who inputs client data into computer software but doesn't exercise any discretion or judgment about the underlying tax positions is not a tax return preparer. However, that person must get a PTIN if he also interviews clients, obtains information from them to prepare a return, and figures the amount and character of return entries and whether the client's information is sufficient for return preparation. ( Reg. § 1.6109-2(g) , Exs. 1 and 2)
If a signing tax return preparer has an employment arrangement or association with another person, then that other person's employer identification number (EIN) must also be included on the tax return or refund claim. ( Preamble to TD 9501, 09/28/2010 )
IRS rejected requests from commentators in the industry and the Chief Counsel for Advocacy of the Small Business Administration to exempt tax return preparers who don't sign returns or refund requests, and act under the supervision of signing preparer who reviews the return or refund claim. IRS said that granting the requests would have meant exempting a sizeable segment of tax return preparers and thereby undercut effective oversight by IRS of the tax return preparer community. ( Preamble to TD 9501, 09/28/2010 )
RIA observation: However, in IR 2010-99 , issued at the same time as the final regs, IRS said it was considering exempting from the new return preparer testing and education requirements those who engage in return preparation for someone else. See ¶ 21 .
Other rules. Under Reg. § 1.6109-2(e) , IRS may designate an expiration date for any PTIN other prescribed identifying number and may further prescribe the time and manner for renewing a PTIN or other prescribed identifying number, including the payment of a user fee. Additionally, IRS may provide that any identifying number it issued before the Sept. 30, 2010, effective date of the regs will expire on Dec. 31, 2010, unless properly renewed as specified by IRS.
Under Reg. § 1.6109-2(f) , as prescribed in guidance, IRS may conduct a Federal tax compliance check on a tax return preparer who applies for or renews a PTIN or other prescribed identifying number.
References: For who is a tax return preparer, see FTC 2d/FIN ¶ S-1117 ; United States Tax Reporter ¶ 77,014.24 ; TaxDesk ¶ 867,002 ; TG ¶ 71753 . For the return preparer penalty, see FTC 2d/FIN ¶ V-2631 ; United States Tax Reporter ¶ 66,944 ; TaxDesk ¶ 867,019 ; TG ¶ 71769 .
TD 9501. Furnishing Identifying Number of Tax Return Preparer
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final rule.
SUMMARY: This document contains final regulations under section 6109 of the Internal Revenue Code (Code) that provide guidance on how the IRS will define the identifying number of tax return preparers and set forth requirements on tax return preparers to furnish an identifying number on tax returns and claims for refund of tax they prepare. Additional provisions of the regulations provide that tax return preparers must apply for and regularly renew their preparer identifying number as the IRS may prescribe in forms, instructions, or other guidance.
DATES: Effective Date: These regulations are effective on [INSERT DATE OF PUBLICATION OF THIS DOCUMENT IN THE FEDERAL REGISTER].
Applicability Date: For dates of applicability, see §1.6109-2(i).
FOR FURTHER INFORMATION CONTACT: Stuart Murray at (202) 622- 4940(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in these final regulations has been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) under control number 1545-2176. The collection of information in these final regulations is in §1.6109-2(d) and (e). This information is required in order for the IRS to issue identifying numbers to tax return preparers who are eligible to receive them.
An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid control number. Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103.
Background
This document contains final amendments to regulations under section 6109 of the Code relating to furnishing a tax return preparer's identifying number on tax returns and claims for refund of tax. Section 6109(a)(4) requires tax return preparers to furnish on tax returns and claims for refund of tax an identifying number, as prescribed, to ensure proper identification of the preparer, the preparer's employer, or both. In addition, section 6109(c) authorizes the Secretary "to require such information as may be necessary to assign an identifying number to any person." The requirement to furnish an identifying number on tax returns and claims for refund of tax applies to information returns described in §301.7701- 15(b)(4) and to electronically filed tax returns.
In 2009 the IRS conducted a comprehensive review of tax return preparers, culminating in Publication 4832, Return Preparer Review (Rev. 12-2009) (the Report). The Report recommended that tax return preparers be required to obtain and use a preparer tax identification number (PTIN) as the exclusive preparer identifying number. The Report also recommended that the IRS establish new eligibility standards to prepare tax returns -- including testing, continuing education, and Federal tax compliance checks. The proposed regulations adopted several of the recommendations made in the Report. The Treasury Department and the IRS conclude that adopting these provisions in the final regulations will increase tax compliance and help to ensure that tax return preparers are knowledgeable, skilled, and ethical.
To implement recommendations made in the Report, on March 26, 2010, the Treasury Department and the IRS published in the Federal Register (75 FR 14539) a notice of proposed rulemaking (REG-134235-08) proposing amendments to §1.6109-2 regarding the identifying number that a tax return preparer must furnish on tax returns and claims for refund of tax. A public hearing was held on the proposed regulations on May 6, 2010. The IRS received written public comments responding to the proposed regulations.
Summary of Comments and Explanation of Revisions Over 200 written comments were received in response to the notice of proposed rulemaking. All comments were considered and are available for public inspection. Most of the comments are summarized in this preamble.
1. Requiring the Use of PTINs
The final regulations adopt the proposed amendments to §1.6109-2, which provide that for tax returns or refund claims filed after December 31, 2010, tax return preparers must obtain and exclusively use the identifying number prescribed by the IRS in forms, instructions, or other guidance, rather than a social security number (SSN), as the identifying number to be included with the tax return preparer's signature on a tax return or claim for refund. Prior to these final regulations, the identifying number of a tax return preparer was the tax return preparer's SSN or an alternative number as prescribed by the IRS. The alternative number that the IRS has prescribed is a PTIN. After December 31, 2010, tax return preparers can only use a PTIN (or other number that the IRS prescribes in the future as a replacement to the PTIN) and may not use an SSN as a preparer identifying number unless the IRS directs otherwise. For tax returns or claims for refund filed before January 1, 2011, the identifying number of a tax return preparer will remain the preparer's SSN or PTIN.
The requirement to use a PTIN will allow the IRS to better identify tax return preparers, centralize information, and effectively administer the rules relating to tax return preparers. The final regulations will also benefit taxpayers and tax return preparers and help maintain the confidentiality of SSNs. Most of the comments received on the notice of proposed rulemaking support the requirement to use a PTIN as the exclusive identifying number for tax return preparers beginning next year.
Under the final regulations, a tax return preparer must sign and furnish a PTIN on a tax return or claim for refund if the tax return preparer has primary responsibility for the overall substantive accuracy of the preparation of the tax return or claim for refund. If a signing tax return preparer has an employment arrangement or association with another person, then that other person's employer identification number (EIN) must also be included on the tax return or refund claim. Tax return preparers who are required but fail to include a PTIN on a tax return or refund claim, or fail to include the EIN of any person with whom they have an employment arrangement or association, are subject to a penalty under section 6695(c), unless the failure to include an identifying number is due to reasonable cause and not due to willful neglect.
a. Supervised tax return preparers who do not sign tax returns
The proposed regulations provided that for purposes of the provisions of §1.6109-2 that would be applicable after December 31, 2010, the term tax return preparer means any individual who is compensated for preparing, or assisting in the preparation of, all or substantially all of a tax return or claim for refund of tax. The proposed regulations further provided that a tax return preparer for purposes of these provisions excludes an individual who is not defined as a nonsigning tax return preparer in §301.7701-15(b)(2). A nonsigning tax return preparer is defined in §301.7701-15(b)(2) as any tax return preparer who, while not a signing tax return preparer (the individual who has the primary responsibility for the overall substantive accuracy of the preparation of a tax return or claim for refund of tax), prepares all or a substantial portion of a tax return or claim for refund.
Some commentators recommended that individuals who prepare or assist in preparing all or substantially all of a tax return or claim for refund should not be required to obtain a PTIN if they do not sign the tax return or claim for refund and if they act under the supervision of another tax return preparer who substantively reviews the tax return or claim for refund and signs it. Commentators explained, for example, that in some accounting firms, employees who have passed the Uniform Certified Public Accountant Examination and are working toward their license as a certified public accountant are often involved in, or assist with, the preparation of tax returns. Although these employees do not sign tax returns or claims for refund as a tax return preparer, under the regulations as proposed, they are tax return preparers who must have a PTIN after December 31, 2010, if they prepare all or substantially all of a tax return or claim for refund. The commentators proposed an exemption for these individuals.
The Chief Counsel for Advocacy of the Small Business Administration (SBA) submitted similar comments, on behalf of small businesses, on the proposed amendments to §1.6109-2 as applied to tax return preparers who do not sign tax returns or claims for refund, in particular the provisions requiring tax return preparers to obtain and renew a PTIN as the IRS may prescribe. The SBA heard from small accounting firms that those firms would incur a substantial financial burden if the regulations include certified public accountant candidates and other paraprofessional employees who are involved in tax return preparation under the supervision of a certified public accountant who is a signing tax return preparer. The SBA also observed that requiring these individuals to register with the IRS as tax return preparers would not improve the accuracy of tax returns prepared in small accounting firms because the firms and certified public accountants within these firms are already subject to ethical and competency rules administered by state boards of accountancy, as well as Treasury Department Circular No. 230, 31 CFR Part 10. The SBA recommended that the regulations either exclude outright employees of firms engaged in certified public accountancy who are nonsigning tax return preparers or exclude these employees if they are supervised by a certified public accountant, attorney, or enrolled agent.
These final regulations are intended to address two overarching objectives. The first overarching objective is to provide some assurance to taxpayers that a tax return was prepared by an individual who has passed a minimum competency examination to practice before the IRS as a tax return preparer, has undergone certain suitability checks, and is subject to enforceable rules of practice. The second overarching objective is to further the interests of tax administration by improving the accuracy of tax returns and claims for refund and by increasing overall tax compliance.
The final regulations define a tax return preparer in §1.6109-2(g) as an individual who prepares for compensation, or assists in preparing, all or substantially all of a tax return or claim for refund of tax. The final regulations retain this definition from the proposed regulations without including the requested exemption. It is critical to the IRS's tax administration efforts that, in the first instance, the IRS is readily able to identify all individuals who are involved in preparing all or substantially all of a tax return or claim for refund. Additionally, by requiring regular renewal of a PTIN, tax return preparers will confirm their continuing competence and suitability to be tax return preparers. Accordingly, were the Treasury Department and the IRS to provide an exemption in these regulations for a sizeable segment of tax return preparers, it would undercut effective oversight by the IRS of the tax return preparer community. An exemption for some tax return preparers, as requested in the comments, would allow the exempt individuals to prepare tax returns and claims for refund without identifying themselves to the IRS as tax return preparers and without undergoing competency examinations and suitability checks and being subject to enforceable rules of practice.
b. Licensed tax return preparers, tax return preparers of longstanding, and those who prepare a small number of tax returns
In the proposed regulations, no distinction was made between tax return preparers licensed by a state authority as tax return preparers and unlicensed tax return preparers. A number of comments were received from state-licensed tax return preparers, particularly from those who are Licensed Tax Preparers or Licensed Tax Consultants in Oregon. These comments almost uniformly requested that state-licensed tax return preparers be "grandfathered" into the regulations and not be required to apply for a PTIN, renew an existing PTIN, or comply with requirements that the IRS may prescribe to obtain or renew a PTIN after December 31, 2010. Other commentators asked that the IRS consider an exemption from the regulations for tax return preparers who have been preparers for a certain period of years or who prepare annually a volume of tax returns below a certain (relatively small) number. Some commentators, however, were opposed to exemptions or grandfather provisions. The Report discussed at some length state licensing and regulation of tax return preparers, including state-by-state descriptions, but in the Report's recommendations, exemptions were not made for tax return preparers licensed or otherwise regulated under a state program. The Report also concluded that the IRS would not provide "grandfather" exemptions based on experience in preparing tax returns. The proposed regulations, consistent with the Report's recommendations, did not include any exemption for state-based licensure, length of experience, or number of tax returns prepared.
After careful consideration of the comments received on this issue, the final regulations do not include any exemption for state-based licensure, length of experience, or number of tax returns prepared. The Treasury Department and the IRS conclude that tax return preparers who prepare tax returns and claims for refund for compensation should be subject to uniform standards of qualification and practice. When obtaining the services of a tax return preparation business, taxpayers should be assisted by tax return preparers subject to the same Federal regulations, regardless of a taxpayer's state of residence or variable circumstances such as the size of the business or the number of years a tax return preparer has been in the industry.
c. Volunteers and other unpaid tax return preparers
The proposed regulations did not include volunteers and other unpaid tax return preparers as tax return preparers required to obtain a PTIN. Consistent with the definition of a tax return preparer under section 7701(a)(36), which requires a compensation element for an individual to be a tax return preparer, the definition of tax return preparer in the proposed regulations excluded an individual described in §301.7701-15(f), which lists, among others, any individual who provides assistance in the preparation of tax returns as part of a Volunteer Income Tax Assistance (VITA), Tax Counseling for the Elderly (TCE), or Low-Income Taxpayer Clinic (LITC) program. Section 301.7701-15(f)(1)(xii) also excludes from the definition of a tax return preparer anyone who prepares a tax return or claim for refund without an explicit or implicit agreement for compensation. An insubstantial gift, favor, or service received for the preparation of a tax return or refund claim is not considered compensation.
Several commentators recommended that the final regulations require volunteer tax return preparers to obtain a PTIN. According to the commentators, putting volunteers under the regulations would provide several benefits, including increased tax compliance and improvement of the volunteer programs. Although commentators suggested that the PTIN and other requirements applicable to paid tax return preparers also apply to volunteers, it was noted that associated fees could be waived for volunteers. The comments also noted that extending the regulations to all tax return preparers who hold themselves out to the public as tax return preparers would unambiguously include individuals who prepare tax returns for customers purportedly for "free" but incident to a customer's purchase of a product or other service.
The final regulations adopt the same definition of tax return preparer as in the proposed regulations. The Treasury Department and the IRS conclude that the final regulations are properly limited to paid tax return preparers. The focus on paid tax return preparation in the Report and in these regulations is consistent with both the current reality of tax return preparation and applicable legal provisions, including §301.7701-15(f). As noted by the figures in the Report, volunteer tax return preparers are a small fraction of all tax return preparers and the tax returns prepared by volunteers are a small fraction of all prepared tax returns.
Only volunteers or other truly unpaid tax return preparers, however, are not tax return preparers for purposes of these regulations. As an example, individuals who prepare tax returns without compensation for relatives or friends as a personal favor are not within the definition of the term tax return preparer.
The Treasury Department and the IRS conclude that arrangements for tax return preparation as part of a sales transaction are inherently agreements to prepare tax returns for compensation under these regulations, notwithstanding any claim by tax return preparers that the tax return or refund claim preparation is not separately compensated. No change in these regulations is necessary to reflect this result. As a result, an individual who, in connection with a sale of goods or services, prepares all or substantially all of a tax return or claim for refund filed after December 31, 2010, and who does not furnish a valid PTIN on the tax return or claim for refund may be liable for the section 6695(c) penalty, unless the failure to furnish a valid PTIN was due to reasonable cause and not due to willful neglect.
d. Tax return preparation software
The proposed regulations did not specifically include any provisions on commercially available tax return preparation software or software developers. Several commentators expressed the concern that some tax return preparers use tax return preparation software to prepare multiple "self-prepared" tax returns for clients in order to hide the tax return preparers' involvement and avoid identifying themselves on the tax returns. The commentators proposed that the final regulations include limits on the purchase or use of software, such as a requirement built into the software to enter a PTIN to use the software to prepare more than one tax return.
The final regulations do not include any provisions with respect to software. Software developers are not tax return preparers for purposes of these final regulations, and the regulation of software is beyond the scope of these amendments to §1.6109-2.
e. Requiring the use of a PTIN after December 31, 2010
Under the proposed regulations, the amendments to §1.6109-2 would apply to tax returns and claims for refund filed after December 31, 2010. For tax returns and claims for refund filed before then, the existing provisions of §1.6109-2 apply. Some commentators questioned whether, as a matter of implementation, January 1, 2011, is a realistic date for the requirements of these regulations. The final regulations maintain the distinction between tax returns and claims for refund filed on or before December 31, 2010, and those filed after that date. To the extent a transitional period may be necessary, the Treasury Department and the IRS may, under §1.6109-2(h) of the final regulations, prescribe in other guidance interim procedures for tax return preparers to apply for a PTIN or register with the IRS.
2. Eligibility to Receive a PTIN
a. Foreign tax return preparers
The proposed regulations did not specifically address foreign tax return preparers who prepare tax returns or refund claims. A frequent question in the public comments was whether the regulations as proposed would apply to foreign tax return preparers. These commentators also asked whether foreign tax return preparers who do not have an SSN will be eligible for a PTIN. Currently, both Form W-7P, "Application for Preparer Tax Identification Number," and the existing online process at www.irs.gov that can be used to apply for a PTIN require an applicant to provide the applicant's SSN. Many foreign tax return preparers are uncertain as to how they will obtain a PTIN, if they are required to have a PTIN.
The final regulations apply to tax return preparers regardless of United States or foreign citizenship or residency. The IRS will establish a process to obtain a PTIN for tax return preparers who do not have SSNs. The Treasury Department and the IRS intend to issue transitional guidance before December 31, 2010, which describes the process to obtain a PTIN for foreign and other tax return preparers who do not have SSNs.
b. User fees
The proposed regulations provided that, in applying for a PTIN, tax return preparers must pay a user fee that the IRS prescribes in forms, instructions, or other guidance. The proposed regulations also provided for the IRS to prescribe the manner for renewing a PTIN, including the payment of a user fee. Some commentators objected to the proposed requirement of a user fee to obtain or renew a PTIN. Sole proprietors and small preparation firms commented that a user fee, combined with the potential costs of minimum competency testing and for continuing education, would materially increase their business expenses.
The final regulations adopt the proposed provisions under which the IRS may prescribe requirements to apply for or renew a PTIN, including the payment of a user fee. By statute (31 U.S.C. 9701), Congress authorized Federal agencies to establish user fees. The Treasury Department and the IRS will prescribe in regulations the requirement to pay a user fee, the amount of any fee, and the time and manner of payment. A user fee to obtain or renew a PTIN will be necessary to recover the costs that the IRS will incur to implement and administer the processes to apply for and renew a PTIN. The amount of a user fee will be reasonable and based on accepted methods of calculation that reflect the costs to the government, the value of the service to the recipient, the public policy or interest served, and other relevant factors.
3. Terminology
a. Preparation of all or substantially all of a tax return or claim for refund
The requirement to obtain a PTIN applies to individuals who for compensation prepare, or assist in preparing, all or substantially all of a tax return or claim for refund. Section 1.6109-2(g) of the proposed regulations identified the following non-exclusive list of factors to determine whether an individual prepared or assisted in preparing all or substantially all of a tax return or claim for refund:
The complexity of the work performed by the individual relative to the overall complexity of the tax return or claim for refund of tax;
The amount of the items of income, deductions, or losses attributable to the work performed by the individual relative to the total amount of income, deductions, or losses required to be correctly reported on the tax return or claim for refund of tax; and
The amount of tax or credit attributable to the work performed by the individual relative to the total tax liability required to be correctly reported on the tax return or claim for refund of tax.
Examples are included in the proposed regulations to illustrate the provisions of paragraph (g). The final regulations retain these provisions, including the examples, consistent with the definition of a tax return preparer adopted in paragraph (g) of the final regulations. As explained, this definition of tax return preparer for purposes of these regulations is necessary for meaningful oversight of tax return preparation. The factors in paragraph (g) provide guidance for applying the test of whether an individual has prepared or assisted with preparing all or substantially all of a tax return or claim for refund. Paragraph (g) of the final regulations, however, also adds a sentence not in the proposed regulations to clarify that the preparation of a form, statement, or schedule, such as Schedule EIC (Form 1040), "Earned Income Credit," may constitute the preparation of all or substantially all of a tax return or claim for refund based on the application of the factors in paragraph (g).
Paragraph (h) of the final regulations clarifies that the IRS may specify in other appropriate guidance the returns, schedules, and other forms to which these regulations will apply.
b. Registered tax return preparers
As provided in the proposed regulations, to obtain a PTIN or other prescribed identifying number, a tax return preparer must be an attorney, certified public accountant, enrolled agent, or registered tax return preparer authorized to practice before the IRS under 31 U.S.C. 330 and Circular 230. This requirement will apply after December 31, 2010, unless the IRS prescribes exceptions, such as for a transitional period, as necessary for effective tax administration. A number of the comments noted a concern that the term registered tax return preparer is likely to cause confusion in the marketplace for tax return preparation. The commentators are concerned that this designation for a certain group of tax return preparers, when listed with attorneys, certified public accountants, and enrolled agents, may lead the public to mistakenly infer that registered tax return preparers have credentials and qualifications similar to those of attorneys, certified public accountants, and enrolled agents. Several commentators observed that some registered tax return preparers might even attempt to exploit this confusion to their commercial advantage. To avoid the potential for misperception, the commentators advocate that the IRS explain the distinctions between registered tax return preparers and other practitioners authorized to practice before the IRS under Circular 230. At least one commentator also recommended changing the term to "authorized tax return preparers."
The final regulations adopt the term registered tax return preparer. The Treasury Department and the IRS conclude that the term does not reasonably imply that registered tax return preparers are authorized to practice law or certified public accountancy or act as enrolled agents or that the term will cause material confusion or misunderstanding by the public. The role of registered tax return preparers and their authority to practice before the IRS will be addressed in amendments to Circular 230. The requirements and process to become a registered tax return preparer will be set forth in forms, instructions, and other appropriate guidance. In that regard, some commentators that employ tax return preparers requested that the IRS allow the employers to mass register their employees (with a means for employers to subsequently validate through the IRS an employee's standing as a registered tax return preparer with a current PTIN). The purpose of these final regulations, however, is not to provide guidance on the specific process for registration.
Special Analyses
It has been determined that these final regulations are not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations.
It has been determined that a final regulatory flexibility analysis under 5 U.S.C. 604 is required for this final rule. The analysis is set forth under the heading, "Final Regulatory Flexibility Analysis."
Pursuant to section 7805(f) of the Code, the notice of proposed rulemaking preceding these final regulations was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business. The Chief Counsel for Advocacy submitted comments on the notice of proposed rulemaking, which are discussed elsewhere in this preamble.
Final Regulatory Flexibility Analysis
When an agency either promulgates a final rule that follows a required notice of proposed rulemaking or promulgates a final interpretative rule involving the internal revenue laws as described in 5 U.S.C. 603(a), the Regulatory Flexibility Act (5 U.S.C. chapter 6) requires the agency to "prepare a final regulatory flexibility analysis." A final regulatory flexibility analysis must, pursuant to 5 U.S.C. 604(a), contain the five elements listed in this final regulatory flexibility analysis. For purposes of this final regulatory flexibility analysis, a small entity is defined as a small business, small nonprofit organization, or small governmental jurisdiction. 5 U.S.C. 601(3)-(6). The Treasury Department and the IRS conclude that the final regulations (together with other contemplated guidance provided for in these regulations) will impact a substantial number of small entities and the economic impact will be significant.
A statement of the need for, and the objectives of, the final rule
The final regulations are necessary for tax administration. The final regulations are needed to identify tax return preparers and the tax returns and claims for refund that they prepare, to aid the IRS's oversight of tax return preparers, and to administer requirements intended to ensure that tax return preparers are competent, trained, and conform to rules of practice. Mandating a single type of identifying number for all tax return preparers and assigning a prescribed identifying number to registered tax return preparers is critical to effective oversight.
Taxpayers' reliance on paid tax return preparers has grown steadily in recent decades, and a large number of U.S. taxpayers rely on paid tax return preparers for assistance in meeting the taxpayers' income tax filing obligations. Beyond preparing tax returns, tax return preparers also help educate taxpayers about the tax laws and facilitate electronic filing. Tax return preparers provide advice to taxpayers, identify items or issues for which the law or guidance is unclear, and inform taxpayers of the benefits and risks of positions taken on a tax return, and the tax treatment or reporting of items and transactions. Competent tax return preparers who are well educated in the rules and subject matter of their field can prevent costly errors, potentially saving a taxpayer from unwanted problems later on and relieving the IRS from expending valuable examination and collection resources.
Given the important role that tax return preparers play in Federal tax administration, the IRS has a significant interest in being able to accurately identify tax return preparers and monitor their tax return preparation activities. The final regulations, therefore, enable the IRS to more accurately identify tax return preparers and improve the IRS's ability to associate filed tax returns and refund claims with the responsible tax return preparer. The final regulations are intended to accomplish this result, and thereby advance tax administration, by requiring all individuals who are paid to prepare all or substantially all of a tax return or claim for refund of tax to obtain a preparer identifying number prescribed by the IRS. Pursuant to the final regulations, the IRS will require individuals who sign tax returns or claims for refund to furnish the tax return preparer's PTIN on a tax return or claim for refund when the return or refund claim is signed. The final regulations also provide that the IRS may require tax return preparers to apply for, and regularly renew, their PTINs. Under the final regulations, the IRS may prescribe a user fee payable when applying for a number and for renewal.
Summaries of the significant issues raised in the public comments responding to the initial regulatory flexibility analysis and of the agency's assessment of the issues, and a statement of any changes made to the rule as a result of the comments
The IRS did not receive specific comments from the public responding to the initial regulatory flexibility analysis in the proposed regulations that preceded these final regulations. The IRS did receive comments from the public on the proposed amendments to §1.6109-2. A summary of the comments is set forth elsewhere in this preamble, along with the Treasury Department's and the IRS's assessment of the issues raised in the comments and descriptions of any revisions resulting from the comments.
A description and an estimate of the number of small entities to which the rule will apply or an explanation of why an estimate is not available
The final regulations apply to individuals who prepare tax returns and claims for refund of tax. The estimated number of paid tax return preparers is as high as 1.2 million, which means the final regulations are likely to impact a large number of individuals. Most paid tax return preparers are employed by firms. A substantial number of paid tax return preparers are employed at small tax return preparation firms or are selfemployed tax return preparers. Any economic impact of these regulations on small entities generally will be on self-employed tax return preparers who prepare and sign tax returns or on small businesses that employ one or more individuals who prepare tax returns.
The appropriate NAICS codes for PTINs are those that relate to tax preparation services (NAICS code 541213), other accounting services (NAICS code 541219), offices of lawyers (NAICS code 541110), and offices of certified public accountants (NAICS code 541211). Entities identified as tax preparation services and offices of lawyers are considered small under the SBA's size standards (13 CFR 121.201) if their annual revenue is less than $7 million. Entities identified as other accounting services and offices of certified public accountants are considered small under the SBA's size standards if their annual revenue is less than $8.5 million. The IRS estimates that approximately 70 to 80 percent of the individuals subject to these final regulations are tax return preparers operating as, or employed by, small entities.
A description of the projected reporting, recordkeeping, and other compliance requirements of the rule, including an estimate of the classes of small entities subject to the requirements and the type of professional skills necessary for preparation of a report or record
The final regulations do not directly impose any reporting, recordkeeping, or similar requirements on any small entities. Rather, the final regulations provide that the IRS may prescribe in forms, instructions, or other guidance (including regulations) requirements for PTINs issued to tax return preparers, regular renewal of PTINs, and payment of a user fee when applying for or renewing a PTIN. In addition, other guidance may require certain tax return preparers to complete competency testing, complete continuing education courses, and adhere to established rules of practice governing attorneys, certified public accountants, enrolled agents, enrolled actuaries, and enrolled retirement plan agents.
Applying for a PTIN and subsequent renewal will require reporting of certain information, but they are not expected to require recordkeeping. No particular or special professional skills will be necessary. These activities also will not require the purchase or use of any special business equipment or software. To the extent it will be necessary to apply for a PTIN (or similar identifying number that may subsequently replace a PTIN) online at www.irs.gov, most if not all tax return preparation businesses have computers and Internet access. The IRS estimates that applying for a PTIN will take 10 to 20 minutes per individual, with an average of 15 minutes per individual.
Under amendments to Circular 230 that the IRS will issue to implement recommendations in the Report, tax return preparers who apply to be registered tax return preparers and who regularly renew their status may be subject to recordkeeping requirements because they may be required to maintain specified records, such as documentation and educational materials relating to completion of continuing education courses. These requirements do not involve any specific professional skills other than general recordkeeping abilities already needed to own and operate a small business or to competently act as a tax return preparer. It is estimated that tax return preparers will annually spend approximately 30 minutes to 1 hour in maintaining records relating to the continuing education requirements, depending on individual circumstances.
A separate regulation addressing reasonable user fees has been proposed. Tax return preparers may be required to pay a user fee when first applying for a PTIN and at every renewal. Small entities may be affected by these costs if the entities choose to pay some or all of these fees for their employees. Under the amendments to Circular 230, tax return preparers may also incur costs for commercial continuing education courses and minimum competency examinations, plus incidental costs, such as for travel and accommodations, in order to maintain their status as registered tax return preparers under Circular 230. Course prices can vary greatly, from free to hundreds of dollars. Many small tax return preparation firms may choose, as with the user fee, to bear these costs for their employees. In some cases, small entities may lose sales and profits while their employed tax return preparers attend training or educational classes or are studying and sitting for examinations. Some small entities that employ tax return preparers may even need to alter their business operations if a significant number of their employees cannot satisfy the necessary registration and competency requirements. The Treasury Department and the IRS conclude, however, that only a small percentage of small entities, if any, may need to cease doing business or radically change their business model due to the final regulations.
Although each of the reporting and recordkeeping requirements and the costs identified above (in connection with the final regulations and the other anticipated guidance necessary to implement the Report) is not expected to singly result in a significant economic impact, taken together it is anticipated that they may have a significant economic impact on a substantial number of small entities.
A description of the steps the agency has taken to minimize the significant economic impact on small entities consistent with the stated objectives of applicable statutes, including a statement of the factual, policy, and legal reasons for selecting any alternative adopted in the final rule and why other significant alternatives affecting the impact on small entities that the agency considered were rejected
The Treasury Department and the IRS are not aware of any steps that could be taken to minimize the economic impact on small entities that would also be consistent with the objectives of these final regulations. These regulations do not impose any more requirements on small entities than are necessary to effectively administer the internal revenue laws. Further, the regulations do not subject small entities to any requirements that are not also applicable to larger entities covered by the regulations.
The Treasury Department and the IRS have determined that there are no viable alternatives to the final regulations that would enable the IRS to accurately identify tax return preparers, other than through the use of a PTIN, as provided in the regulations.
The Treasury Department and the IRS considered alternatives at multiple points. These final regulations are, in large measure, an outgrowth of, and in part carry out, the Report, which extensively reviewed different approaches to improving how the IRS oversees and interacts with tax return preparers. As part of the Report, the IRS received a large volume of comments on the issue of increased oversight of tax return preparers generally and on the proposed recommendation requiring tax return preparers to use a uniform prescribed identifying number. The comments were received from all categories of interested stakeholders, including tax professional groups representing large and small entities, IRS advisory groups, tax return preparers, and the public. The input received from this large and diverse community overwhelmingly expressed support for the proposed requirements.
Among the alternatives contemplated at the time were:
(1) Requiring all paid tax return preparers to comply with the ethical standards in Circular 230 or an ethics code similar to Circular 230, but not requiring any paid preparers to demonstrate their qualification and competency;
(2) Requiring tax return preparers who are not currently authorized to practice before the IRS to register with the IRS, complete annual continuing education requirements, and meet certain ethical standards, but not to pass a minimum competency examination;
(3) Requiring all paid tax return preparers to pass a minimum competency examination and meet other registration requirements; and
(4) Requiring all paid tax return preparers who are not currently authorized to practice before the IRS to pass a minimum competency examination and meet other registration requirements, but "grandfather in" tax return preparers who have accurately and competently prepared tax returns for a certain period of years.
These and other issues were raised in the public comments to the proposed regulations and were carefully considered in developing the final regulations. After consideration of all of the various alternatives and the responses received in the public comment process, the Treasury Department and the IRS conclude that the provisions of the final regulations will most effectively promote sound tax administration. Establishing a single, prescribed identifying number for tax return preparers will enable the IRS to accurately identify tax return preparers, match preparers with the tax returns and claims for refund they prepare, and better administer the tax laws with respect to tax return preparers and their clients.
Under the final regulations and the additional guidance described, the IRS will establish a process intended to assign PTINs only to qualified, competent, and ethical tax return preparers. The testing requirements that may be set forth in other guidance will establish a benchmark of minimum competency necessary for tax return preparers to obtain their professional credentials, while the purpose of the continuing education provisions is to require tax return preparers to remain current on the Federal tax laws and continue to develop their tax knowledge. The extension in other, prospective guidance of the rules in Circular 230 to any paid tax return preparer will require all practitioners to meet certain ethical standards and allow the IRS to suspend or otherwise appropriately discipline tax return preparers who engage in unethical or disreputable conduct. Accordingly, the implementation of qualification and competency standards is expected to increase tax compliance and allow taxpayers to be confident that the tax return preparers to whom they turn for assistance are knowledgeable, skilled, and ethical.
Drafting Information
The principal author of these final regulations is Stuart Murray of the Office of the Associate Chief Counsel, Procedure and Administration.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
List of Subjects in 26 CFR Part 602
Reporting and recordkeeping requirements.
Amendments to the Regulations
26 CFR part 1 is amended as follows:
TAXES
The authority citation for part 1 continues follows:
U.S.C. 7805 ***
1.6109-2 also issued under 26 U.S.C. 6109(a). ***
Section 1.6109-2 is amended by revising the revising paragraphs (a)(2) and (d), and adding f), (g), (h), and (i) to read as follows:
Reg § 1.6109-2.
return preparers furnishing identifying numbers claims for refund and related requirements. returns or claims for refund filed on or 2010, the identifying number of an return preparer is that individual's social such alternative number as may be prescribed by the Internal Revenue Service in forms, instructions, or other appropriate guidance.
(ii) For tax returns or claims for refund filed after December 31, 2010, the identifying number of a tax return preparer is the individual's preparer tax identification number or such other number prescribed by the Internal Revenue Service in forms, instructions, or other appropriate guidance. *****
(d) Beginning after December 31, 2010, all tax return preparers must have a preparer tax identification number or other prescribed identifying number that was applied for and received at the time and in the manner, including the payment of a user fee, as may be prescribed by the Internal Revenue Service in forms, instructions, or other appropriate guidance. Except as provided in paragraph (h) of this section, beginning after December 31, 2010, to obtain a preparer tax identification number or other prescribed identifying number, a tax return preparer must be an attorney, certified public accountant, enrolled agent, or registered tax return preparer authorized to practice before the Internal Revenue Service under 31 U.S.C. 330 and the regulations thereunder.
(e) The Internal Revenue Service may designate an expiration date for any preparer tax identification number or other prescribed identifying number and may further prescribe the time and manner for renewing a preparer tax identification number or other prescribed identifying number, including the payment of a user fee, as set forth in forms, instructions, or other appropriate guidance. The Internal Revenue Service may provide that any identifying number issued by the Internal Revenue Service prior to the effective date of this regulation will expire on December 31, 2010, unless properly renewed as set forth in forms, instructions, or other appropriate guidance, including these regulations.
(f) As may be prescribed in forms, instructions, or other appropriate guidance, the IRS may conduct a Federal tax compliance check on a tax return preparer who applies for or renews a preparer tax identification number or other prescribed identifying number.
(g) Only for purposes of paragraphs (d), (e), and (f) of this section, the term tax return preparer means any individual who is compensated for preparing, or assisting in the preparation of, all or substantially all of a tax return or claim for refund of tax. Factors to consider in determining whether an individual is a tax return preparer under this paragraph (g) include, but are not limited to, the complexity of the work performed by the individual relative to the overall complexity of the tax return or claim for refund of tax; the amount of the items of income, deductions, or losses attributable to the work performed by the individual relative to the total amount of income, deductions, or losses required to be correctly reported on the tax return or claim for refund of tax; and the amount of tax or credit attributable to the work performed by the individual relative to the total tax liability required to be correctly reported on the tax return or claim for refund of tax. The preparation of a form, statement, or schedule, such as Schedule EIC (Form 1040), "Earned Income Credit," may constitute the preparation of all or substantially all of a tax return or claim for refund based on the application of the foregoing factors. A tax return preparer does not include an individual who is not otherwise a tax return preparer as that term is defined in §301.7701-15(b)(2), or who is an individual described in §301.7701-15(f). The provisions of this paragraph (g) are illustrated by the following examples:
Example 1. Employee A, an individual employed by Tax Return Preparer B, assists Tax Return Preparer B in answering telephone calls, making copies, inputting client tax information gathered by B into the data fields of tax preparation software on a computer, and using the computer to file electronic returns of tax prepared by B. Although Employee A must exercise judgment regarding which data fields in the tax preparation software to use, A does not exercise any discretion or independent judgment as to the clients' underlying tax positions. Employee A, therefore, merely provides clerical assistance or incidental services and is not a tax return preparer required to apply for a PTIN or other identifying number as the Internal Revenue Service may prescribe in forms, instructions, or other appropriate guidance.
Example 2. The facts are the same as in Example 1, except that Employee A also interviews B's clients and obtains from them information needed for the preparation of tax returns. Employee A determines the amount and character of entries on the returns and whether the information provided is sufficient for purposes of preparing the returns. For at least some of B's clients, A obtains information and makes determinations that constitute all or substantially all of the tax return. Employee A is a tax return preparer required to apply for a PTIN or other identifying number as the Internal Revenue Service may prescribe in forms, instructions, or other appropriate guidance. Employee A is a tax return preparer even if Employee A relies on tax preparation software to prepare the return.
Example 3. C is an employee of a firm that prepares tax returns and claims for refund of tax for compensation. C is responsible for preparing a Form 1040, "U.S. Individual Income Tax Return," for a client. C obtains the information necessary for the preparation of the tax return during a meeting with the client, and makes determinations with respect to the proper application of the tax laws to the information in order to determine the client's tax liability. C completes the tax return and sends the completed return to employee D, who reviews the return for accuracy before signing it. Both C and D are tax return preparers required to apply for a PTIN or other identifying number as the Internal Revenue Service may prescribe in forms, instructions, or other appropriate guidance.
Example 4. E is an employee at a firm which prepares tax returns and claims for refund of tax for compensation. The firm is engaged by a corporation to prepare its Federal income tax return on Form 1120, "U.S. Corporation Income Tax Return." Among the documentation that the corporation provides to E in connection with the preparation of the tax return is documentation relating to the corporation's potential eligibility to claim a recently enacted tax credit for the taxable year. In preparing the return, and specifically for purposes of the new tax credit, E (with the corporation's consent) obtains advice from F, a subject matter expert on this and similar credits. F advises E as to the corporation's entitlement to the credit and provides his calculation of the amount of the credit. Based on this advice from F, E prepares the corporation's Form 1120 claiming the tax credit in the amount recommended by F. The additional credit is one of many tax credits and deductions claimed on the tax return, and determining the credit amount does not constitute preparation of all or substantially all of the corporation's tax return under this paragraph (g). F will not be considered to have prepared all or substantially all of the corporation's tax return, and F is not a tax return preparer required to apply for a PTIN or other identifying number as the Internal Revenue Service may prescribe in forms, instructions, or other appropriate guidance. The analysis is the same whether or not the tax credit is a substantial portion of the return under §301.7701-15 of this chapter (as opposed to substantially all of the return), and whether or not F is in the same firm with E. E is a tax return preparer required to apply for a PTIN or other identifying number as the Internal Revenue Service may prescribe in forms, instructions, or other appropriate guidance.
(h) The Internal Revenue Service, through forms, instructions, or other appropriate guidance, may prescribe exceptions to the requirements of this section, including the requirement that an individual be authorized to practice before the Internal Revenue Service before receiving a preparer tax identification number or other prescribed identifying number, as necessary in the interest of effective tax administration. The Internal Revenue Service, through other appropriate guidance, may also specify specific returns, schedules, and other forms that qualify as tax returns or claims for refund for purposes of these regulations.
(i) Effective/applicability date. Paragraph (a)(1) of this section is applicable to tax returns and claims for refund filed after December 31, 2008. Paragraph (a)(2)(i) of this section is applicable to tax returns and claims for refund filed on or before December 31, 2010. Paragraph (a)(2)(ii) of this section is applicable to tax returns and claims for refund filed after December 31, 2010. Paragraph (d) of this section is applicable to tax return preparers after December 31, 2010. Paragraphs (e) through (h) of this section are effective after [INSERT DATE OF PUBLICATION OF THIS DOCUMENT IN THE FEDERAL REGISTER]. PART 602-OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT
Par. 3. The authority citation for part 602 continues to read as follows:
Authority: 26 USC 7805.
Par. 4. In § 602.101, paragraph (b) is amended by revising the entry for "1.6109-2" in the table to read as follows:
§ 602.101 OMB Control numbers. *****
(b) ***
CFR part or section where Current OMB control Identified and described No.
1.6109-2....................................1545-2176
Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
Approved: August 11, 2010
Michael Mundaca,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2010-24653 Filed 09/28/2010 at 11:15 am; Publication
Date: 09/30/2010]
§ 6109 Identifying numbers.
________________________________________
(a) WG&L Treatises Supplying of identifying numbers.
When required by regulations prescribed by the Secretary:
(1) Inclusion in returns.
Any person required under the authority of this title to make a return, statement, or other document shall include in such return, statement, or other document such identifying number as may be prescribed for securing proper identification of such person.
(2) Furnishing number to other persons.
Any person with respect to whom a return, statement, or other document is required under the authority of this title to be made by another person or whose identifying number is required to be shown on a return of another person shall furnish to such other person such identifying number as may be prescribed for securing his proper identification.
(3) Furnishing number of another person.
Any person required under the authority of this title to make a return, statement, or other document with respect to another person shall request from such other person, and shall include in any such return, statement, or other document, such identifying number as may be prescribed for securing proper identification of such other person.
(4) Furnishing identifying number of tax return preparer.
Any return or claim for refund prepared by a tax return preparer shall bear such identifying number for securing proper identification of such preparer, his employer, or both, as may be prescribed. For purposes of this paragraph, the terms “return” and “claim for refund” have the respective meanings given to such terms by section 6696(e) .

For purposes of paragraphs (1) , (2) , and (3) , the identifying number of an individual (or his estate) shall be such individual's social security account number.
(b) Limitation.
(1) Except as provided in paragraph (2) , a return of any person with respect to his liability for tax, or any statement or other document in support thereof, shall not be considered for purposes of paragraphs (2) and (3) of subsection (a) as a return, statement, or other document with respect to another person.
(2) For purposes of paragraphs (2) and (3) of subsection (a) , a return of an estate or trust with respect to its liability for tax, and any statement or other document in support thereof, shall be considered as a return, statement, or other document with respect to each beneficiary of such estate or trust.
(c) Requirement of information.
For purposes of this section , the Secretary is authorized to require such information as may be necessary to assign an identifying number to any person.
(d) Use of social security account number.
The social security account number issued to an individual for purposes of section 205(c)(2)(A) of the Social Security Act shall, except as shall otherwise be specified under regulations of the Secretary, be used as the identifying number for such individual for purposes of this title.
(e) Repealed.
(f) Access to employer identification numbers by Secretary of Agriculture for purposes of Food and Nutrition Act of 2008.
(1) In general.
In the administration of section 9 of the Food and Nutrition Act of 2008 ( 7 U.S.C. 2018 ) involving the determination of the qualifications of applicants under such Act, the Secretary of Agriculture may, subject to this subsection , require each applicant retail store or wholesale food concern to furnish to the Secretary of Agriculture the employer identification number assigned to the store or concern pursuant to this section . The Secretary of Agriculture shall not have access to any such number for any purpose other than the establishment and maintenance of a list of the names and employer identification numbers of the stores and concerns for use in determining those applicants who have been previously sanctioned or convicted under section 12 or 15 of such Act ( 7 U.S.C. 2021 or 2024 ).
(2) Sharing of information and safeguards.
(A) Sharing of information. The Secretary of Agriculture may share any information contained in any list referred to in paragraph (1) with any other agency or instrumentality of the United States which otherwise has access to employer identification numbers in accordance with this section or other applicable Federal law, except that the Secretary of Agriculture may share such information only to the extent that such Secretary determines such sharing would assist in verifying and matching such information against information maintained by such other agency or instrumentality. Any such information shared pursuant to this subparagraph may be used by such other agency or instrumentality only for the purpose of effective administration and enforcement of the Food and Nutrition Act of 2008 or for the purpose of investigation of violations of other Federal laws or enforcement of such laws.
(B) Safeguards. The Secretary of Agriculture, and the head of any other agency or instrumentality referred to in subparagraph (A) , shall restrict, to the satisfaction of the Secretary of the Treasury, access to employer identification numbers obtained pursuant to this subsection only to officers and employees of the United States whose duties or responsibilities require access for the purposes described in subparagraph (A) . The Secretary of Agriculture, and the head of any agency or instrumentality with which information is shared pursuant to subparagraph (A) , shall provide such other safeguards as the Secretary of the Treasury determines to be necessary or appropriate to protect the confidentiality of the employer identification numbers.
(3) Confidentiality and nondisclosure rules.
Employer identification numbers that are obtained or maintained pursuant to this subsection by the Secretary of Agriculture or the head of the instrumentality with which the information is shared pursuant to paragraph (2) shall be confidential, and no officer or employee of the United States who has or had access to the social security account numbers shall disclose any such employer identification number obtained thereby in any manner. For purposes of this paragraph, the term “officer or employee” includes a former officer or employee.
(4) Sanctions.
Paragraphs (1) , (2) , and (3) of section 7213(a) shall apply with respect to the unauthorized willful disclosure to any person of employer identification numbers maintained pursuant to this subsection by the Secretary of Agriculture or any agency or instrumentality with which information is shared pursuant to paragraph (2) in the same manner and to the same extent as such paragraphs apply with respect to unauthorized disclosures of return and return information described in such paragraphs. Paragraph (4) of section 7213(a) shall apply with respect to the willful offer of any item of material value in exchange for any such employer identification number in the same manner and to the same extent as such paragraph applies with respect to offers (in exchange for any return or return information) described in such paragraph.
(g) Access to employer identification numbers by Federal Crop Insurance Corporation for purposes of the Federal Crop Insurance Act.
(1) In general.
In the administration of section 506 of the Federal Crop Insurance Act, the Federal Crop Insurance Corporation may require each policyholder and each reinsured company to furnish to the insurer or to the Corporation the employer identification number of such policyholder, subject to the requirements of this paragraph. No officer or employee of the Federal Crop Insurance Corporation, or authorized person shall have access to any such number for any purpose other than the establishment of a system of records necessary to the effective administration of such Act. The Manager of the Corporation may require each policyholder to provide to the Manager or authorized person, at such times and in such manner as prescribed by the Manager, the employer identification number of each entity that holds or acquires a substantial beneficial interest in the policyholder. For purposes of this subclause, the term “substantial beneficial interest” means not less than 5 percent of all beneficial interest in the policyholder. The Secretary of Agriculture shall restrict, to the satisfaction of the Secretary of the Treasury, access to employer identification numbers obtained pursuant to this paragraph only to officers and employees of the United States or authorized persons whose duties or responsibilities require access for the administration of the Federal Crop Insurance Act.
(2) Confidentiality and nondisclosure rules.
Employer identification numbers maintained by the Secretary of Agriculture or the Federal Crop Insurance Corporation pursuant to this subsection shall be confidential, and except as authorized by this subsection , no officer or employee of the United States or authorized person who has or had access to such employer identification numbers shall disclose any such employer identification number obtained thereby in any manner. For purposes of this paragraph, the term “officer or employee” includes a former officer or employee. For purposes of this subsection , the term “authorized person” means an officer or employee of an insurer whom the Manager of the Corporation designates by rule, subject to appropriate safeguards including a prohibition against the release of such social security account numbers (other than to the Corporations) by such person.
(3) Sanctions.
Paragraphs (1) , (2) , and (3) of section 7213(a) shall apply with respect to the unauthorized willful disclosure to any person of employer identification numbers maintained by the Secretary of Agriculture or the Federal Crop Insurance Corporation pursuant to this subsection in the same manner and to the same extent as such paragraphs apply with respect to unauthorized disclosures of return and return information described in such paragraphs. Paragraph (4) of section 7213(a) shall apply with respect to the willful offer of any item of material value in exchange for any such employer identification number in the same manner and to the same extent as such paragraph applies with respect to offers (in exchange for any return or return information) described in such paragraph.
(h) Identifying information required with respect to certain seller-provided financing.
(1) Payor.
If any taxpayer claims a deduction under section 163 for qualified residence interest on any seller-provided financing, such taxpayer shall include on the return claiming such deduction the name, address, and TIN of the person to whom such interest is paid or accrued.
(2) Recipient.
If any person receives or accrues interest referred to in paragraph (1) , such person shall include on the return for the taxable year in which such interest is so received or accrued the name, address, and TIN of the person liable for such interest.
(3) Furnishing of information between payor and recipient.
If any person is required to include the TIN of another person on a return under paragraph (1) or (2) , such other person shall furnish his TIN to such person.
(4) Seller-provided financing.
For purposes of this subsection , the term “seller-provided financing” means any indebtedness incurred in acquiring any residence if the person to whom such indebtedness is owed is the person from which such residence was acquired.

2010-09-25T11:26:00.001-04:00

Wayne C. Evans v. Commissioner, TC Memo 2010-199 , Code Sec(s) 61; 274; 6015; 6501; 6663.

--------------------------------------------------------------------------------
WAYNE C> EVANS, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent .
Case Information: Code Sec(s): 61; 274; 6015; 6501; 6663
Docket: Docket No. 24498-07, 24510-07.
Date Issued: 09/13/2010.
Judge: Opinion by Cohen, J.
Tax Year(s):
Disposition:

HEADNOTE
1.

Reference(s): Code Sec. 61 ; Code Sec. 274 ; Code Sec. 6015 ; Code Sec. 6501 ; Code Sec. 6663

Syllabus
Official Tax Court Syllabus
Counsel
Kirk A. McCarville and Philip C. Wilson, for petitioners.
Heidi I. Hansen, for respondent.

Opinion by COHEN

UNITED STATES TAX COURT
MEMORANDUM FINDINGS OF FACT AND OPINION
In a notice sent July 27, 2007, respondent determined deficiencies in petitioners' Federal income taxes for 1995 and 1996 of $70,311 and $196,814, respectively. Respondent also determined penalties for fraud under section 6663 of $52,733.25 and $147,610.50 against Wayne C. Evans (Evans) for 1995 and 1996, respectively. The issues for decision are whether petitioners had unreported income resulting in an underpayment of tax for each year; whether the underpayment of tax for each year was due to fraud on the part of Evans, justifying the penalty and negating the bar of the statute of limitations; whether petitioners are entitled to any deductions not allowed by respondent; and whether Madelyn F. Evans (Ms. Evans) is entitled to relief under section 6015. Unless otherwise indicated, all section references are to the Internal Revenue Code (Code) in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.

FINDINGS OF FACT
Some of the facts have been stipulated between Evans and respondent, and the stipulated facts are incorporated in our findings by this reference. Ms. Evans declined to stipulate, asserting that she had no knowledge of the relevant facts. She did not contradict any of the facts in the stipulation between Evans and respondent, and the stipulated facts were established with respect to her, pursuant to a motion, order to show cause, and order following the procedures specified in Rule 91. Petitioners resided in Arizona at the time that they filed their petitions. At all material times, they were married to each other and resided together.

From 1986 through the years in issue, petitioners resided on property on West Calle Concordia in Tucson, Arizona (the Concordia property). The Concordia property was purchased by Stephen and Rosalie Olsen (the Olsens) in 1986 and was refinanced in 1989 with a loan of $172,194.71 from Household Finance. Petitioners did not pay rent to the Olsens for their use of the Concordia property, but during 1995 they made payments on the Household Finance mortgage and otherwise to prevent foreclosure on the Concordia property. The sources and amounts of the payments are further described below. The Farming Authority and Huntington Construction On August 22, 1995, Evans entered into an agreement with the Tohono O'odham Farming Authority (the Farming Authority) pertaining to Evans' employment as the full-time general manager of the Farming Authority. Evans had oversight responsibility for the approval and disbursement of Farming Authority funds. The agreement provided, among other things, that The General Manager shall be responsible for causing the accounts of the Authority to be maintained in accordance with an accounting system established by the Authority's accountant or accounting firm. The records and accounts of the Authority will be available at all reasonable times for inspection and examination by authorized officers of the Authority and the Council. The Board may require special examinations to be made at any time. The General Manager shall arrange for an audit to be made at the close of each business year by a certified accounting firm approved by the Board. Evans' employment agreement specifically prohibited him from transacting business on the Farming Authority's behalf with any company in which he held a direct or indirect interest. By transacting business with such a company, Evans would have a conflict of interest. Evans' failure to disclose to his employer that he was conducting Farming Authority business with a company in which he had such an interest would be a breach of the fiduciary duty he owed to his employer. Any such conduct by Evans would be grounds for termination.

Huntington Construction, Inc. (Huntington Construction), was an Arizona corporation effectively operated and controlled by Evans during 1995 and 1996. Evans concealed from the Farming Authority his ownership, operation, and control of Huntington Construction. Evans caused 22 checks totaling $449,005 in 1995 and 28 checks totaling $1,148,208 in 1996 to be paid to Huntington Construction from the Farming Authority.

Willie Gilbert (Gilbert) was paid by Evans to sign checks drawn on the Huntington Construction account to conceal Evans' ownership and control of Huntington Construction. Checks were drawn on Huntington Construction's bank account to pay for Willie Gilbert's travel expenses, including one or more trips to Indiana where Gilbert had family. Records were not maintained to substantiate the business purpose of Gilbert's travel. Payments to Gilbert and other persons for services to Huntington Construction were not reported to the Internal Revenue Service by Huntington Construction.

On September 8, 1997, the Tohono O'odham Nation filed a complaint against Evans, Ms. Evans, Willie Gilbert, Jane Doe Gilbert, Stephen Olsen, Rosalie Olsen, Dawson Riley, Jane Doe Riley, Huntington Construction, Western Pacific Construction, Inc., and Voice of God Recordings, Inc., in the U.S. District Court for the District of Arizona (the District Court) (the civil case).

In June 2000, the civil case was settled with an agreement providing in part that Voice of God Recordings would pay $820,000 to the Tohono O'odham Nation. (Evans had caused the sum of $820,000 to be paid by Huntington Construction to Voice of God Recordings on behalf of petitioners, as further described below.) Ms. Evans was a party to the settlement agreement.

On September 22, 1999, Evans was indicted in the District Court on 18 counts of embezzlement and theft from an Indian tribal organization; theft or bribery concerning programs receiving Federal funds; wire fraud; and frauds and swindles. The first count of the indictment alleged, in part, that beginning on or about December, 1994, and continuing through on or about September, 1997, in the District of Arizona, Wayne C. Evans, *** did embezzle, steal, knowingly convert to his use or the use of another, and did willfully misapply and permit to be misapplied, approximately $1.59 7 million of the moneys, funds, credits, goods, assets and other property belonging to or intrusted to the custody or care of the Tohono O'odham Indian Nation, by causing those funds to be paid to himself through use of Huntington Construction, an entity which he secretly and covertly controlled. On October 12, 2001, an Information was filed in the District Court charging Evans with filing a false tax return for 1996 in violation of section 7206(1). On October 12, 2001, Evans, represented by counsel, entered into a plea agreement in which he pleaded guilty to the first count of the indictment and to the information, specifically admitting facts establishing his guilt beyond a reasonable doubt. The facts admitted included the following:

Huntington Construction, Inc. was an Arizona
corporation. Beginning at least as early as 1985,
Wayne C. Evans effectively operated and controlled the
affairs of Huntington Construction, Inc.
Huntington Construction performed work for the
Farming Authority while Wayne C. Evans was the Farming
Authority's general manager and during the time Evans
controlled its affairs. Between March, 1995 and
August, 1996, the Farming Authority paid Huntington
Construction approximately $1.597 million for work
allegedly performed on Farming Authority projects.
Wayne C. Evans was responsible for authorizing the
payment of those funds. Wayne C. Evans failed to
disclose and concealed from the Farming Authority that
he effectively owned, operated and controlled
Huntington Construction and the funds in its bank
accounts while causing Farming Authority funds to be
paid to Huntington Construction.
Once Wayne C. Evans had effected the transfer of
funds to Huntington, Wayne C. Evans controlled the use
of those funds and used them for personal purposes.
Once the funds were deposited to Huntington's bank
accounts, Evans concealed his control of those funds by
directing third-party nominees to sign checks and make
payments from the Huntington accounts.
On or about January 2, 2001, in Tucson, Arizona,
Wayne C. Evans filed and subscribed to a joint U.S.
Individual Income Tax Return for the calendar year
1996. Wayne C. Evans signed the return under penalties
of perjury. The return understated Wayne C. Evans'
total income for the 1996 tax year, in that Wayne C.
Evans knowingly failed to include the above-mentioned
monies from tribal funds during the 1996 calendar year.
A judgment of conviction pursuant to Evans' guilty plea was entered September 12, 2002. Evans was sentenced to 15 months in prison followed by 3 years of supervised release and was ordered to pay restitution of $138,935 to the Tohono O'odham Nation. The restitution amount was arrived at by taking the total amount of money Evans illegally received reduced by the $820,000 Voice of God Recordings paid in settlement of the civil suit.
On three occasions, in 2004, 2008, and 2009, Evans attempted to have the restitution provision in his sentence vacated, but the District Court and the Court of Appeals for the Ninth Circuit held that he was barred by his plea agreement from contesting the sentence.

No income tax return was filed for Huntington Construction for 1995 or 1996. In January 2001, petitioners filed joint individual income tax returns for 1995 and 1996 on which they reported $12,204 and $7,210 of income from Huntington Construction for 1995 and 1996, respectively. Petitioners did not provide bank records reflecting income or expenses or receipts substantiating their expense deductions to their return preparer when the returns were prepared. The returns did not report all of the income petitioners received as a result of payments from the Farming Authority to Huntington Construction and disbursements from Huntington Construction to or for petitioners.

After examining records of payments made by the Farming Authority to Huntington Construction and checks written on the bank accounts of Huntington Construction, respondent determined that petitioners had unreported income, that certain business expenses and personal itemized deductions were allowable, and that other checks represented payments for the personal benefit of petitioners and constituted taxable income to them. The personal itemized deductions allowed included charitable contributions to Voice of God Recordings.

Checks drawn on Huntington Construction's account payable to its bank for cashier's checks or for cash totaled $39,760.29 in 1995 and $1,174,555.79 in 1996. Specific Items of Unreported Income On May 23, 1995, funds were withdrawn from Huntington Construction's bank account and used to purchase cashier's checks to Voice of God Recordings for $100,000 and to Coots Funeral Home for $5,980. At the same time, $700 in cash was withdrawn from the account. Coots Funeral Home provided funeral services for Evans' brother.

On May 23, 1995, funds were withdrawn from the Huntington Construction account to purchase a $2,000 cashier's check payable to Western Pacific Construction, Inc. (Western Pacific). Western Pacific (sometimes referred to in the stipulation of facts as Pacific Western) was an Arizona corporation owned and controlled by petitioners.

On July 26, 1995, funds were withdrawn from the Huntington Construction account to purchase a $16,025 cashier's check payable to the Olsens.

On October 4, 1995, $11,084 was withdrawn from the Huntington Construction account to purchase a vehicle for one of petitioners' children.

On December 14, 1995, funds were withdrawn from the Huntington Construction account to purchase a $1,500 cashier's check payable to the widow of Evans' brother.

On January 30, 1996, funds were withdrawn from the Huntington Construction account to purchase a $159,422.79 cashier's check payable to Household Finance to be applied to the mortgage on the Concordia property. In conjunction with the payment, the Concordia property was transferred from the Olsens to the Campo Bello Irrevocable Trust. Petitioners are the grantors of the Campo Bello Irrevocable Trust and, along with their children, are the beneficiaries of the trust.

On August 15, 1996, funds were withdrawn from the Huntington Construction account to purchase two $1,000 cashier's checks used to pay personal debts of petitioners.

In September 1996, funds were withdrawn from the Huntington Construction account to purchase $820,000 and $70,000 cashier's checks payable to Voice of God Recordings on behalf of petitioners.

During 1995 and 1996, Western Pacific received income totaling $83,009.92 and $7,603.12. Certain of the income was received from the Farming Authority, and much of it was received from Huntington Construction. No income tax returns were filed for Western Pacific, and petitioners did not include any income from Western Pacific on their return for 1995 or 1996.

On February 1, 1995, funds totaling $26,756.54 were withdrawn from Western Pacific's bank account to make payments by or on behalf of petitioners to prevent a foreclosure on the Concordia property. During the years in issue, 43 checks written on Western Pacific's bank account were payable to petitioners or members of their family or to cash. Ms. Evans signed most of the checks written on the Western Pacific account. Ms. Evans' Liability Petitioners' Federal tax returns for 1995 and 1996 were filed in January 2001. Ms. Evans was aware of Evans' indictment and arrest at the time that she signed the joint returns, and she knew or should have known of the underreporting of income and understatement of taxes on those returns. She signed checks on the Western Pacific account by which that corporation's income was distributed to petitioners or to members of their family; she knew or should have known that such income had not been reported by Western Pacific or by petitioners on their returns. She received the benefits of the unreported income and the resulting underpayment of taxes to the same extent as Evans.

OPINION
Respondent relies on section 6501(c)(1) as a defense to petitioners' assertion of the bar of the statute of limitations and, therefore, must prove that petitioners' 1995 and 1996 tax returns were false or fraudulent with the intent to evade tax. Because the question of fraud is determinative as to the statutory period of limitations as well as the penalty under section 6663 against Evans, we first discuss the evidence and our conclusions with respect to fraud. Respondent has not alleged fraud by Ms. Evans. However, proof of fraud against either spouse prevents the running of the period of limitations as to both spouses with respect to the income tax deficiencies on joint Hicks Co. v. Commissioner, 56 T.C. 982, 1030 (1971), returns. affd. 470 F.2d 87 [31 AFTR 2d 73-382] (1st Cir. 1972).

The penalty in the case of fraud is a civil sanction provided primarily as a safeguard for the protection of the revenue and to reimburse the Government for the heavy expense of investigation and the loss resulting from the taxpayer's fraud. Helvering v. Mitchell, 303 U.S. 391, 401 [20 AFTR 796] (1938); Sadler v. Commissioner, 113 T.C. 99, 102 (1999). The Commissioner has the burden of proving, by clear and convincing evidence, an underpayment for each year in issue and that some part of the underpayment for each of those years is due to fraud. Sec. 7454(a); Rule 142(b). If the Commissioner establishes that any portion of the underpayment is attributable to fraud, the entire underpayment is treated as attributable to fraud and subjected to a 75-percent penalty, unless the taxpayer establishes that some part of the underpayment is not attributable to fraud. Sec. 6663(a) and (b). The Commissioner must show that the taxpayer intended to conceal, mislead, or otherwise prevent the collection of taxes. Katz v. Commissioner, 90 T.C. 1130, 1143 (1988).

The existence of fraud is a question of fact to be resolved upon consideration of the entire record. King's Court Mobile Home Park, Inc. v. Commissioner, 98 T.C. 511, 516 (1992). Fraud will never be presumed. Id.; Beaver v. Commissioner, 55 T.C. 85, 92 (1970). Fraud may, however, be proved by circumstantial evidence and inferences drawn from the facts because direct proof of a taxpayer's intent is rarely available. Niedringhaus v. Commissioner, 99 T.C. 202, 210 (1992). The taxpayer's entire course of conduct may establish the requisite fraudulent intent. Stone v. Commissioner, 56 T.C. 213, 223-224 (1971). Fraudulent intent may be inferred from various kinds of circumstantial evidence, or "badges of fraud", including the consistent understatement of income, inadequate records, implausible or inconsistent explanations of behavior, concealing assets, and failure to cooperate with tax authorities. Bradford v. Commissioner, 796 F.2d 303, 307 [58 AFTR 2d 86-5532] (9th Cir. 1986), affg. T.C. Memo. 1984-601 [¶84,601 PH Memo TC]. Dealing in cash is also considered a "badge of fraud" by the courts because it is indicative of a taxpayer's attempt to avoid scrutiny of his finances. See id. at 308. Additional "badges of fraud" include handling one's affairs to avoid making the records usually made in transactions of the kind. Spies v. United States, 317 U.S. 492, 499 [30 AFTR 378] (1943). Evidence of fraud also includes a taxpayer's use of a business entity to cloak the personal nature of expenses. See Romer v. Commissioner, T.C. Memo. 2001-168 [TC Memo 2001-168].

Although Evans' conviction for subscribing a false Federal tax return does not collaterally estop him from denying that he fraudulently understated petitioners' income tax liability, his conviction is evidence of fraudulent intent. See Wright v. Commissioner, 84 T.C. 636, 643-644 (1985). Evans contends that he entered into the plea agreement solely to protect Ms. Evans in the face of a threat that she might be arrested. The details alleged in the counts of which he was convicted and admitted in the plea agreement are specific and convincing evidence of fraud, and he has not raised any doubt that the facts admitted are accurate. His motivation in entering into the plea agreement is irrelevant and in no way undermines the reliability of the overwhelming evidence of unreported income accompanied by other badges of fraud.

Petitioners also contend that the amounts paid to Huntington Construction from the Farming Authority were for work before the time that Evans became general manager and that, therefore, those amounts were not embezzled from the Farming Authority in breach of his duties. Whether petitioners' business performed services for the Farming Authority before the time that Evans became the general manager is irrelevant in this case. The payments received by Huntington Construction and used for petitioners' personal purposes during the years in issue were income to them during those years. The failure to report that income resulted in underpayments of taxes and is clear and convincing evidence of fraud.

Respondent has thus shown by clear and convincing evidence that petitioners received unreported income during each of the years in issue, at least in the amounts withdrawn from Huntington Construction and Western Pacific as set forth in our findings. Once the receipt of income is shown it is petitioners' burden to come forward with explanations of why receipts are not taxable or of offsetting deductions. See, e.g., Brooks v. Commissioner, 82 T.C. 413, 432-433 (1984), affd. without published opinion 772 F.2d 910 (9th Cir. 1985). Respondent does not have the burden of disproving petitioners' entitlement to deductions, even in a criminal case where the Government bears a heavier burden of See, e.g., Elwert v. United States, 231 F.2d 928, 933-936 [49 AFTR 546] proof. (9th Cir. 1956). Petitioners did not produce any records to substantiate their business expenses. Under the circumstances, we are entitled to infer that they did not maintain required records or that any records that were maintained would be unfavorable to their claims. See Wichita Terminal Elevator Co. v. Commissioner, 6 T.C. 1158, 1165 (1946), affd. 162 F.2d 513 [35 AFTR 1487] (10th Cir. 1947). Petitioners suggest that respondent had a burden to show that "Evans possessed a requisite amount of education and business experience or sophistication to keep such records." Although a taxpayer's education and experience may be considered in determining intent, we are satisfied that the complicated scheme engaged in by Evans is clear and convincing evidence that he had the "requisite *** business experience or sophistication" and that he knew that records are required to substantiate deductions. Under the management agreement with the Farming Authority, Evans was to maintain records and accounts, among other duties. Thus his failure to keep or to produce records may be regarded as concealment.

Evans admitted in the plea agreement that he concealed his ownership of Huntington Construction from the Farming Authority. Petitioners argue that disguising assets or embezzlement, standing alone, does not establish intent to evade taxes. These facts taken together with other badges of fraud, however, are clear and convincing evidence of fraudulent intent.

Respondent refers to the untimely filing of petitioners' tax returns as evidence of fraud. Petitioners argue that late filing, as contrasted with failure to file, is not indicative of fraud. The returns in this case, however, were filed after disclosure of Evans' criminal conduct in misappropriating funds. Returns were not filed for the entities through which the misappropriated funds were channeled to petitioners. Under these circumstances, we agree with respondent.

The evidence is clear and convincing that petitioners dealt in large amounts of cash during the years in issue. Petitioners' response is to point to the paper trail on which respondent relies; petitioners assert that the paper trail negates fraudulent intent. Again the evidence must be considered in the context of the total factual record. That petitioners' schemes were discovered because they did not successfully hide all potential evidence is not an exonerating factor. Even if some portion of the cash was used for business expenses, the "handling of one's affairs to avoid making the records usual in transactions of the kind" has long been recognized as a badge of Spies v. United States, 317 U.S. at 499-500; see Bradford fraud. v. Commissioner, 796 F.2d at 308.

Another badge of fraud in this case is the record of implausible and inconsistent explanations of behavior. Evans attempts to explain away his guilty plea and plea agreement as intended to protect his wife from arrest. He has not shown that the facts admitted in the plea agreement are inaccurate. He attempts to minimize his wrongful conduct toward the Farming Authority by asserting that funds were owed to Huntington Construction prior to his employment as general manager, but the receipt of $1.59 7 million in 1995 and 1996 calls for more than a generalized assertion that it was due before mid-1995. By the nature of the claim, corroborating documentary or witness evidence should have been available. Because such evidence was not produced, a negative inference again may be drawn. See Wichita Terminal Elevator Co. v. Commissioner, supra at 1165. In any event, the failure to report the income, regardless of the legality or illegality of its source, is the key element in this case. Disallowed Deductions As a general rule, with respect to the amounts of the deficiencies in issue, the taxpayer bears the burden of proof. Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 [69 AFTR 2d 92-694] (1992); Rockwell v. Commissioner, 512 F.2d 882, 886 [35 AFTR 2d 75-1055] (9th Cir. 1975), affg. T.C. Memo. 1972-133 [¶72,133 PH Memo TC]. That burden may shift to the Commissioner if the taxpayer introduces credible evidence with respect to any factual issue relevant to ascertaining the taxpayer's tax liability. Sec. 7491(a)(1). However, section 7491(a)(1) applies with respect to an issue only if the taxpayer has complied with the requirements under the Code to substantiate any item, has maintained all records required by the Code, and has cooperated with reasonable requests by the Commissioner for witnesses, information, documents, meetings, and interviews. Sec. 7491(a)(2)(A) and (B). For the reasons discussed above, petitioners' evidence is unreliable, and their claims are unsubstantiated. They have not satisfied the conditions for shifting the burden of proof to respondent.

The deductions in dispute are identified by a list of checks that Evans generally claimed were business expenses of Huntington Construction, including travel expenses, vehicle expenses, and meals expenses that were not substantiated in accordance with section 274(d). Some disputed payments were made to petitioners' sons. Evans' testimony was not corroborated by records or other testimony, and none of the witnesses could identify specific services petitioners' sons performed during 1995 or 1996. Evans professed a lack of recollection with respect to many of the payments. His testimony asserting that certain payments related to loan transactions was not supported by any documentation of loans received or repaid. Testimony concerning attorney's fees was not supported by evidence establishing that the fees were business expenses rather than personal nondeductible expenses, such as fees relating to the criminal case. Business-related litigation referred to during the testimony apparently occurred 5 or more years before the years in issue.

Many of the items that Evans asserted were business related were inherently personal, and the record of diversion of business income to pay personal expenses undermines the credibility of the generalized assertions of business purpose. The failure to keep adequate records, the use of cash, the absence of tax returns for Huntington Construction and Western Pacific, the failure to turn over records to petitioners' return preparer, and the implausible claims together render the uncorroborated testimony unreliable. Petitioners have not shown any error in the deficiency determinations for 1995 and 1996.

Respondent has proven that the fraud penalty applies, and petitioners have not established that any part of the underpayments was not attributable to fraud. See sec. 6663(b). Respondent is not barred from assessing petitioners' 1995 and 1996 tax deficiencies. The penalty under section 6663 will be upheld. Section 6015 Relief Ms. Evans asserted in her petition a claim for relief from joint and several liability for 1995 and 1996 under section 6015. She does not qualify for relief under section 6015(c) because petitioners were married and living together at all material times. Relief under section 6015(b) requires that she establish that in signing the return she did not know, and had no reason to know, that there was an understatement of tax attributable to items of Evans. See sec. 6015(b)(1)(C). Under either section 6015(b)(1)(D) or (f), she must show that taking into account all of the facts and circumstances, it is inequitable to hold her liable for the deficiencies.

At trial, Ms. Evans testified that she did not know anything about her husband's activities giving rise to an understatement of tax for each year, although she signed many of the checks by which funds were diverted to pay petitioners' personal expenses. We are not persuaded that she did not know or have reason to know of the understatements. At the time she signed the tax returns, she knew that Evans was being prosecuted for misappropriation of funds. As far as the record reflects, the unreported income was used by petitioners equally, and she has suggested no particular facts that would support a conclusion of inequity in holding her liable. It is not inequitable to hold her liable for the deficiencies on the joint returns. We need not, therefore, discuss the additional factors generally considered in determining entitlement to relief under section 6015.

We have considered the other arguments of the parties. They are irrelevant to our decision or lack merit justifying discussion. To reflect the foregoing,

Decisions will be entered for respondent.

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