THE FEDERAL TAX ALERT - NSTP FTA.pdf · THE FEDERAL TAX ALERT ... Disaster Tax Relief Act of 2012, ... Professor, Masters in Taxation Program [email protected] Technical Editor:

FEDERAL TAX ALERT PAGE 1 january 2013

THE FEDERAL TAX ALERTTHE FEDERAL TAX ALERTNEWS StoriES

a PuBLICaTIOn OF THE naTIOnaL SOCIETy OF TaX PrOFESSIOnaLS january 2013a PuBLICaTIOn OF THE naTIOnaL SOCIETy OF TaX PrOFESSIOnaLS january 2013

Charities Gear Up for fiGht on Chari-table DeDUCtions News Items Page 3

net investment meDi-Care tax reGs releaseD

IRs actIoN News Page 4

private CoaChinG aC-tivity was bUsiness, not hobby

couRt oPINIoNs Page 10

more QUestions on eitC DUe DiliGenCe CheCklist

ethIcs coRNeR Page 11

state tax ChanGeset ceteRa Page 11

ContentsNews Items ..............................1IRS Action News .....................4Court Opinions .......................8Ethics Corner ....................... 11Et Cetera ................................ 11Quotes.................................... 12

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sChUmer, menenDeZ to introDUCe bill to reDUCe taxes on those impaCteD by hUrriCane sanDy

U.S. Senator Charles E. Schumer, D-NY, and U.S. Senator Robert Menendez, D-NJ, are sponsoring compre-hensive legislation to reduce the tax burden on those financially impacted by Hurricane Sandy. Schumer and Menendez’s Sandy Tax Package will contain a number of Superstorm Sandy-specific tax provisions that provide relief to people impacted by the storm. The legislation, entitled The Hurricane Sandy and National Disaster Tax Relief Act of 2012, also includes provisions that will apply to any state that has suffered from a FEMA-declared major disaster this year.

The tax package includes provisions that: allow a full deduction for expenses paid or incurred as a result of disaster cleanup; waive penalties for individuals who withdraw from their retirement plan early; allow individuals who provided free housing to displaced individuals to claim additional exemptions; offer a worker retention credit for disaster-damaged businesses that continued to pay their employees’ wages even though their business was inoperable; and allow accelerated depre-ciation for business equip-ment. The Senators said the changes build on existing laws and programs to maximize the

speed with which aid gets to Sandy victims.

Description of PackageThe major provisions in the

package include several benefits allowed for all areas declared by FEMA to be disaster areas and also include tax benefits specifi-cally limited to Hurricane Sandy victims. The various provisions are described below.

Generally-Applicable for all 2012 FEMA Major Disaster Declarations

• Deduction for disaster c l e a n u p e x p e n s e s - - The proposal would allow a full deduction for expenses paid for disaster cleanup.

• Increased Limitation on Charitable Contributions for Disaster Relief-- Under present law, contributions to quali-fied charitable organizations may not exceed 50 percent of the taxpayer’s Adjusted Gross Income. Under the proposal, this limitation is lifted for quali-fied disaster contributions.

• Expanded availability of and reduced limitations for casualty loss deductions--Under present law, a taxpayer may claim a deduction for any loss sustained during the taxable year not compensated by insurance. These losses are allowable if they exceed a $100 limitation per casualty or theft and the losses are deductible to the extent that they exceed 10 percent of an individual taxpay-er’s adjusted gross income. The

proposal would waive the $100 and ten percent AGI limitation for disaster losses not compen-sated by insurance. Addition-ally, it would allow taxpayers who do not itemize to increase their standard deduction by the amount of disaster losses not covered by insurance.

• Extended Net Operating L o s s ( N O L ) c a r r y b a c k - - Generally, taxpayers can carry back NOLs to offset taxes paid over the previous two years. The proposal allows victims a five-year carry back for NOLs attributed to disaster losses.

• Relaxed mortgage revenue bond rules—This proposal lifts the current-law requirement that one must not have owned a home in the previous three years to qualify for the mort-gage revenue bond program for homeowners who lost their homes in Sandy.

• Increased business expens-ing allowances— Businesses may elect to expense up to a certain amount or dollar limit of qualified disaster assistance property. The proposal would increase the dollar limit that is normally available for a particular tax year by the lesser of $100,000 or the cost of quali-fied property placed in service that year.

• Increase in New Markets Tax Credit allocation for Com-munity Development Entities serving in disaster areas-- This provision allows an additional allocation of the new markets tax credit in an amount equal to $500 million each year (for three years) to be allocated among community develop-

FEDERAL TAX ALERT PAGE 2 january 2013 FEDERAL TAX ALERT PAGE 3 january 2013

FroM tHE EDitorAt press time, there still was nothing to report as far as final action on the fiscal

cliff. We hope to be able to tell you next month what the tax situation will be in 2013 and what our expectations are for the filing season.

In other Congressional news, delegations from New York and New Jersey have proposed comprehensive tax bills to provide relief to victims of Hurricane Sandy and other 2012 disasters. Among the tax breaks are higher limits for charitable contributions and for casualty losses, increased expensing, and a longer NOL carryback period. Also examined this month are the efforts by advocacy groups for nonprofits to head off attempts to limit the charitable contribution deduction. See page 3.

The Court Opinions feature this month includes a case where a high school and college track coach was able to convince a court that his side business as a private coach was a business, not a hobby, and thus he was able to deduct expenses without limitation. See the Parks case on page 9. Other cases involve gain from cancellation of a life insurance policy and qualifying for the first time homebuyer’s credit.

Ethics Corner this month looks at new questions on Form 8867, the EITC checklist. Practitioners are concerned about the trend the new questions reveal, where they are called upon more and more to police the taxpayers’ tax claims. See page 11. Also included in the Ethics section this month are recommendations by an IRS advisory group on preparer regulation. See page 11.

The Et Cetera feature covers more state tax initiatives from the November elections and a new lawsuit against the IRS for not enforcing election activities by churches. Also included is a story on a famous French actor’s own personal tax protest, leaving his home country because of his personal income taxes. See page 12.

Happy New Year!

Lucia Smeal, Esq.EditorProfessor, Masters in Taxation [email protected]

Technical Editor:Ronald F. Larson, Esq.

an early withdrawal from a retirement plan for withdrawals by victims of Hurricane Sandy. The maximum amount that can be withdrawn without penalty is $100,000. It also increases the amount that Hurricane Sandy victims may borrow from their retirement plans without immediate tax consequences.

• Housing exemption for displaced individuals—This provision allows indi-viduals who provide free housing for at least 60 consecutive days to persons displaced by Sandy to claim personal exemptions for those persons. The exemption is $500 per person, with a maximum of four exemptions per year. In order to qualify, the displaced person must have had on October 27, 2012, a principal place of abode in the Hurricane Sandy disaster area.

• Discharge of indebtedness (mortgage cancellation relief)— This provision allows victims of Hurricane Sandy to exclude non-business debt that was forgiven by a governmental agency or certain financial institutions if the discharge occurrs between October 27, 2012, and January 1, 2014.

• Worker retention credit—This provi-sion gives a credit for disaster-damaged businesses that continued paying wages to their employees, regardless of whether they performed services (i.e., the business was not operating, but kept paying employees). Eligible employers would be those who: (1) had active businesses that were rendered inoperable in the disaster area due to damage caused by the severe weather, and (2) employed no more than 200 employees per day during the year before the disaster. The credit would equal 40% of the employ-ee’s first $6,000 in wages paid between the date the business became inoperable and the date it resumed significant operations, but before March 1, 2013.

• Work Opportunity Tax Credit— This provision allows the work opportunity credit to be claimed for wages of Hurricane Sandy employees. Eligible employees are individuals who had a principal place of abode in the core disaster area on October 27, 2012, and either (1) are hired during the 2-year period beginning on that date for a position in the area, or (2) were displaced by the hurricane and are hired between October 27, 2012, and January 1, 2013.

• Lookback rule for Earned Income Tax Credit/Child Tax Credit earned income determination—This proposal permits

ment entities to make investments within in a federally-declared major disaster area.

• Disaster mitigation payments-- IRC Section 139 exempts certain disaster miti-gation payments from taxable income. Payments made under the Robert T. Stafford Disaster Relief and Emergency Assistance Act and the National Flood Insurance Act

qualify for this exemption. This provi-sion extends this exemption to state and local flood management and mitigation programs.

Sandy-Specific Relief• Relaxed retirement plan distribu-

tion rules—This provision waives the 10% penalty tax that would otherwise apply on

Contributing Writers:Robert J. LandyKimberly Keeley Steffanie Scialdone


The Federal Tax Alert is published 10 times a year by the National Society of Tax Professionals.

Mailing address: The Federal Tax Alert, 11700 NE 95th St., Suite 100 Vancouver, WA 98682. Telephone: 800-367-8130.

Opinions expressed in The Federal Tax Alert are those of the editors and contributors.

Editor: Lucia Smeal; Technical Editor: Ronald Larson; Subscription Services: Glyness Scott;

taxpayers impacted by Hurricane Sandy to look at income from the previous year for purposes of calculating the Earned Income Tax Credit and Child Tax Credit.

• Increased low-income housing tax credit availability— The low-income housing tax credit allows owners of quali-fied residential rental property to claim a credit over a 10-year period that is based on the costs of constructing, rehabilitating, or acquiring a building with low-income units. Owners must be allocated the credit by a state. Each state is limited in the amount of credits it may allocate to the greater of $2,525,000 or $2.20 times the state’s popula-tion. For 2013, 2014 and 2015, this provi-sion will permit affected states to allocate additional amounts for use in the disaster area of up to $8.00 multiplied by the state’s disaster area population. Additionally, it provides an increased credit value for areas impacted by Hurricane Irene in 2011.

• Increased rehabilitation credits—This provision would increase the rehabilitation tax credit from 10 percent to 13 percent for the rehabilitation of buildings within the disaster zone that were constructed prior to 1936. For the rehabilitation of certified historic structures in the disaster zone, the credit is increased from 20 percent to 26 percent. Expenditures must occur no later than December 31, 2014.

• Recovery Zone bonding authority— This proposal allows disaster states to issue tax-exempt Sandy bonds between the legis-lation’s date of enactment and January 1, 2018. It would also permit affected states to issue tax credit bonds to pay the principal, interest, or premiums on qualified govern-mental bonds or to loan funds to political subdivisions to make these payments.

• Increased depreciation allowance—This provision would allow businesses in the disaster zone to use bonus depreciation for capital expenditures associated with constructing commercial properties and residential rental properties. The provision increases the deduction to 50% of the basis or the value of the property during the first year the property is placed in service.

• Mitigation and preparedness tax credits— Redirects unused New York Liberty Zone tax credits (valued at approxi-mately $2B) into a new tax credit for indi-

viduals and businesses for expenditures related to mitigation and preparedness.

Similar House Bill in Planning Stage, Outlook

Members of the House of Representa-tives’ delegations from New Jersey and New York are working on a bill of their own, the Hurricane Sandy Tax Relief Act of 2012, that has provisions similar to the Senate measure. The key issue for both pieces of legislation is what the programs will cost. With the deficit problem, the issue of paying for numerous tax breaks is problem-atic. The Senate bill may garner additional support from Members of Congress since it broadens the relief to cover various regions of the country that have had natural disas-ters over the last year.

national taxpayer aDvoCate warns of three filinG seasons

As the year drew to a close, Nina Olson, the National Taxpayer Advocate, warned Congress and the Obama Administra-tion that three separate filing seasons may be necessary to deal with a change in tax rates, an increase in alternative minimum tax coverage, and the expiration of many popular tax breaks. She described it this way in the December 10, 2012 issue of Tax Notes Today, published by Tax Analysts, a noted Washington think tank. If Congress and the President do not enact legislation to set the 2012 tax rules, some taxpayers will file early before any resolution of the 2012 tax rates. Other taxpayers will file after final legislation is passed. Then, the taxpayers who filed early before the 2012 tax situa-tion was settled will need to file amended returns, resulting in a third possible filing season in 2012.

For more information on the National Taxpayer Advocate, including reports, videos, blogs, and testimony, see http://www.taxpayeradvocate.irs.gov/Home.

Charities UrGe proteCtion for Charitable DeDUCtions

Many different versions of tax reform have been floating around Washington and a number of them propose changes in the charitable contribution deduction. According to the Independent Sector, an advocacy group for nonprofits, as Congress sets the stage for comprehensive tax reform, there are reports that suggest limits to the charitable deduction may be under consid-eration to help pay for deficit reduction and tax reform.

Two different approaches to limiting charitable deductions have been proposed. The Obama Administration has proposed limiting the benefit of itemized deductions for high-income earners to 28%. Senator Bob Corker, R-Tenn., advocates imposing an aggregate cap on individual itemized deductions at $50,000. While the Indepen-dent Sector opposes both approaches, some nonprofit advocates have noted that the aggregate cap would be worse for charities because with the 28% benefit, there still is some benefit from making deductions. With the cap, the benefit of charitable deductions is lost completely once the cap is reached.

To support its arguments against limiting charitable deductions, the Independent Sector says that research has suggested that a cap on the charitable deduction could reduce charitable giving by as much as $7 billion a year. The group also notes in a letter to the President and Congress that, between 2003 and 2009, charitable organi-zations in the U.S. received $281 million in online donations with more than 22 percent of those donations made on December 30 and 31 each year, underscoring the extent to which tax implications guide donor behavior.

The Independent Sector notes that 945 charitable organizations have signed a letter urging Congress and the White House to protect the charitable deduction. The letter is available at http://independentsector.org/uploads/Policy_PDFs/NonprofitCommu-nityCharitableDeductionLetter-Dec2012.pdf.

OutlookMany commentators agree that true tax

Did you know…The IRS mails over 200 million pieces of correspondence to taxpayers each year, yet it does not track how much of this mail is annually returned as “undeliverable as addressed,” according to the National Taxpayer Advocate.


reform, with lower rates and a broader base, will not be possible without some limitations on the most popular deductions, including the mortgage interest deduction, the state and local tax deduction, and the charitable contribution deduction. However, any proposal that includes limits on these three “sacred cows” of the U.S. tax system will have a very difficult time gaining enough support for passage, given the very orga-nized constituencies backing preservation of these tax benefits.

irS ACtioN NEWS

irs issUes proposeD rUles for hiGher meDiCare tax, net investment tax

The IRS has issued proposed regulations containing guidance for employers and individuals in connection with the Addi-tional Hospital Insurance Tax (“Additional Medicare Tax”) on income above threshold amounts. The IRS also has issued proposed regulations related to the net investment income tax imposed on some individuals, estates, and trusts with investment income above statutory threshold amounts.

In 2010, the Affordable Care Act added the Additional Medicare Tax. It increases the employee portion of the Medicare tax for wages received in any taxable year

beginning after December 31, 2012 by an additional 0.9 percent of FICA wages in excess of certain threshold amounts. The Additional Medicare Tax differs from the regular Medicare tax; it is not imposed until wages exceed threshold amounts, which are based on the modified adjusted gross income and filing status of the individual. The threshold amount is $250,000 of modi-fied adjusted gross income (MAGI) in the case of a joint return, $125,000 in the case of a married taxpayer filing a separate return, and $200,000 in any other case.

Calculation of the Net Investment Tax

The Health Care and Education Recon-ciliation Act of 2010 added the net invest-ment income tax on tax years beginning after December 31, 2012. This additional 3.8% tax is imposed on the net investment income of individuals, estates, and trusts based on the same threshold amounts as those applicable to the Additional Medicare Tax. Specifically, the tax is imposed on the LESSER of: 1) the net investment income for the tax year; or 2) any excess of modified adjusted gross income for the tax year over the threshold amount.

Example: Assume a married couple files a joint return, earns $275,000 in wages, and have $25,000 in net investment income. Also assume that their MAGI is $300,000. For 2013, the couple will have to pay a 3.8% Medicare tax on the lesser of $25,000 (net investment income) or $50,000, the amount by which their MAGI exceeds the married filing jointly threshold of $250,000 ($300,000 MAGI - $250,000 threshold). Thus, the couple will pay $950 in additional Medicare tax (.038 x $25,000).

The proposed regulations related to the Additional Medicare Tax provide rules for the withholding, computation, reporting, and payment of the Additional Medicare Tax on wages, self-employment income, and Railroad Retirement Tax Act compen-sation. Rules are also provided for when and how employers may make an interest-free adjustment to correct an overpayment or an underpayment of the tax, how to file a return reporting the Additional Medicare Tax, and the procedure for employers/employees to claim refunds for overpayments. The rules for interest-free adjustments are similar to the existing rules that apply to Income Tax Withholding, rather than the rules that apply to FICA tax. The IRS says this is because the Additional Medicare Tax, like income tax

withholding, does not include an employer portion and the ultimate liability is recon-ciled on the individual employee’s income tax return. Even though employers will not withhold the Additional Medicare Tax, an employee can request additional income tax withholding on Form W-4 to cover the new tax liability.

Definition of Net Investment Income The net investment income rules under

new Code Section 1411 include general operating rules, as well as definitions of net investment income, including how to deter-mine net investment income derived from trades or businesses that are passive activi-ties or from trading in financial instruments or commodities, for gross income and net gain on the investment of working capital, for dispositions of interests in partner-ships and S corporations, for distributions from qualified plans, for determining self-employment income, and for controlled foreign corporations and passive foreign investment companies. The guidance also provides a regrouping “fresh start” under the long-term contract rules. There also are special rules for charitable remainder trusts.

The IRS says it will closely review trans-actions that manipulate a taxpayer’s net investment income to reduce or eliminate this new tax. In appropriate circumstances, the IRS will challenge such transactions.

The IRS will hold a public hearing on the net investment tax on April 2, 2013 and on the Additional Medicare Tax on April 4, 2013.

Click here for the Proposed Regulations on the Additional Medicare Tax.

Click here for the Proposed Regulations on the Net Investment Income Tax.

Click here for the IRS’s Q&As on the new taxes.

2013 stanDarD mileaGe rates inCrease sliGhtly for bUsiness, meDiCal, anD movinG pUrposes

The IRS has provided the 2013 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes. For costs paid or incurred in the use of a car, van, pickup, or panel truck beginning January 1, 2013, the standard

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mileage rate has increased 1 cent from 2012, to 56.5 cents per mile. The rate for medical or moving costs also increased 1 cent from the 2012 rate, to 24 cents per mile driven. The rate for charitable purposes remains 14 cents per mile driven. The charitable mileage rate is set by Congress.

The IRS also has provided the amount taxpayers must use in calculating reduc-tions to basis for depreciation taken under the business standard mileage rate as well as the maximum standard automobile cost that may be used in computing the allowance under a fixed and variable rate plan. For automobiles a taxpayer uses for business purposes, the portion of the business standard mileage rate treated as depreciation is 21 cents per mile for 2009, 23 cents per mile for 2010, 22 cents per mile for 2011, 23 cents per mile for 2012, and 23 cents per mile again for 2013. For purposes of computing the allowance under a fixed and variable rate plan, the standard automobile cost may not exceed $28,100 for automobiles (excluding trucks and vans) or $29,900 for trucks and vans.

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates. However, taxpayers may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 expensing deduction for that vehicle. Note also that the business standard mileage rate cannot be used for more than four vehicles simultaneously.

Click here for the Notice.

irs issUes GUiDanCe on reDUCtion of penalties for frivoloUs tax sUbmissions

The IRS has provided guidance in the form of a revenue procedure describing the limited circumstances in which a person may be eligible for a one-time reduction to $500 of any unpaid Section 6702 frivo-lous tax submission penalties. Under this Code section, taxpayers may be fined up to $5,000 for submitting frivolous tax returns. The guidance also explains the eligibility requirements for the reduction and how a person may request a reduction.

Effective November 5, 2012, any indi-vidual who has not paid a $5,000 penalty assessed by the IRS under Section 6702

in full may apply for a reduction to $500. To request the reduction, a person must make a written request on IRS Form 14402. Eligibility requirements include making a payment of $500, filing all tax returns due and having paid (or arranged to pay) all taxes and related interest due (other than the 6702 penalty). The application must be filed before the United States files suit against the person, either for collection of the penalty or to reduce any assessment of the penalty to judgment.

A person will not qualify for the reduction if they have received a prior reduction of a frivolous submission penalty, submitted an offer in compromise, or entered into either a partial payment installment agreement or closing agreement with IRS that includes a Section 6702 penalty. A person also will be ineligible if they make a frivolous submis-sion after requesting a reduction, or if the penalty is dischargeable under an open bankruptcy case.

The IRS is authorized to reduce the frivo-lous tax submission penalty if it determines that a reduction would promote compliance with federal tax laws and would aid tax administration. The IRS plans to assess the success of this program after it gains experi-ence in applying the revenue procedure.

Click here for the Revenue Procedure.

irs aChieves hiGh level of teChniCal CompetenCe

The IRS has announced that its applica-tions development group has achieved a recognized, high level of technical profi-ciency, the Capability Maturity Model Integration (CMMI) Level 3. The applica-tion development group’s mission is to build, test, deliver, and maintain integrated information applications that support modernized systems and the production environment to achieve the IRS’s vision and objectives. According to industry standards, Level 3 means that its tech-nical processes are well-characterized and understood and are described in standards, procedures, tools, and methods. The stan-dards, process descriptions, and procedures for a project are tailored from the organi-zation’s set of standard processes to suit a particular project or organizational unit. Processes are managed proactively using an understanding of the interrelationships of the process activities and detailed measures of the process, its work products, and its

services.

The CMMI standards were developed by the Software Engineering Institute at Carn-egie Mellon University. According to SEI, CMMI is a process improvement approach that provides organizations with the essen-tial elements of effective processes that will improve their performance. CMMI-based process improvement includes identifying organizational process strengths and weak-nesses and making process changes to turn weaknesses into strengths. The IRS is the only large civilian U.S. government agency to have achieved this level of process matu-rity.

General speCifiCations for sUbstitUte forms 1096, 1098, 1099 anD other information retUrns

The IRS has provided specifications for the private printing of red-ink substitutes for the 2012 revisions of Forms 1096, 1098, 1099, 3921, 3922, 5498, W-2G, 1042-S, and 8935. The revenue procedure containing the specifications will be reproduced as the next revision of Publication 1179.

Click here for the Revenue Procedure.

irs annoUnCes CorreCtions, ClarifiCation to pUbliCation on eleCtroniC filinG reQUrements

The IRS has announced corrections and clarifications to Publication 1220, Specifica-tions for Filing Forms 1097, 1098, 1099, 3921, 3922, 5498, 8935, and W-2G Electronically.

Click here for the Announcement.

irs plans forthCominG reGs on DeDUCtion anD CapitaliZation of tanGible assets

The IRS has issued guidance to alert taxpayers that the IRS expects to issue final regulations at some point in 2013 regarding the tax treatment of amounts paid to acquire, produce, or improve tangible prop-erty under the business expense deduc-tion and capitalization rules as well as the accounting for, and disposition of, property subject to depreciation under Code Section 168. The IRS expects to make changes in the temporary regulations issued in 2011. (See page 6 of the January 2012 edition of


the Federal Tax Alert for a description of the temporary regulations.) Some sections of the temporary regulations may be revised in a way that might affect, and in some cases simplify, taxpayers’ implementation of the rules, according to the IRS.

Date Change for Implementation Gives Taxpayers More Flexibility

The IRS also amended the temporary regulations to apply to taxable years begin-ning on or after January 1, 2014, while permitting taxpayers to apply the tempo-rary regulations for taxable years beginning on or after January 1, 2012, and before the applicability date of the final regula-tions. Taxpayers who choose to apply the provisions of the temporary regulations to taxable years beginning on or after January 1, 2012 and before the applicability date of the final regulations, may continue to obtain the automatic consent of the Commissioner of Internal Revenue to change their method of accounting. For taxpayers who choose to apply the provisions of the final regulations to tax years beginning on or after January 1, 2012, the IRS expects to publish procedures for obtaining automatic consent to change a method of accounting when the final regu-lations are published.


Click here for the Amended Temporary Regulations.

irs postpones transitional relief DeaDline for exempt orGaniZations affeCteD by hUrriCane sanDy

The IRS has postponed the filing date for some small tax-exempt organizations impacted by Hurricane Sandy, allowing them to take advantage of transitional relief when applying for reinstatement of their exempt status. Organizations that did not file a required information return or elec-tronic notice for their taxable years begin-ning in 2007, 2008, and 2009 automatically lost their tax-exempt status and must apply if they want to be reinstated.

Previously, the IRS gave transitional relief through December 31, 2012 for some small organizations that were not required to file annual information returns for taxable years beginning before 2007 and that were eligible in 2007-2009 to file a Form 990-N e-Postcard. These organizations had to apply for reinstatement of tax-exempt status on or

before December 31, 2012. Under the relief provision, these organizations are permitted to file an application for tax exemption, and, if approved, they will have their tax-exempt status reinstated retroactively to the date the status was revoked. These organizations are also eligible for a reduced application fee of $100.

The IRS now has given organizations with a principal place of business located in the covered disaster area until February 1, 2013 to file their applications for exemption. Organizations located outside the affected areas must still apply for transitional relief by December 31, 2012. Organizations located outside the affected area that think they may qualify for the relief should contact the IRS at 866-562-5227.

Click here for the new Notice.

Click here for the 2011 Notice.

Click here for all IRS News Releases related to Hurricane Sandy.

irs releases CasUalty loss anD salvaGe DisCoUnt faCtors for 2012 aCCiDent year

The IRS has released salvage discount and casualty loss factors for insurance compa-nies to use in computing taxable income and losses. Calculating insurance company income is a complex process of determining the present value of unpaid losses and applying multiplication factors provided under the Code that take into consideration current interest rates. Salvage discount factors are used to compute discounted esti-mated salvage recoverable, which is taken into account in computing the deduction for losses incurred. Detailed information on the discount factors is contained in two new Revenue Procedures, available at the links given below.

Click here for the Revenue Procedure on salvage discount factors.

Click here for the Revenue Procedure on discount factors.

irs UpDates aCCUraCy-relateD penalty GUiDanCe

The IRS has issued editorial changes to its previous guidance on the circumstances under which the disclosure on a taxpayer’s income tax return is adequate for the purpose of reducing the accuracy-related

penalty under Section 6662(d) and the preparer penalty under Section 6694(a). None of the changes are substantive in nature, according to the IRS explanation.

The revenue procedure does not apply to any other penalty provisions. If an item is not included in the revenue procedure, disclosure is adequate with respect to that item only if made on a properly completed Form 8275 or 8275-R attached to the return for the year or to a qualified amended return. The guidance applies to any income tax return filed on 2012 tax forms for a taxable year beginning in 2012 and to any income tax return filed on 2012 tax forms in 2013 for short taxable years beginning in 2013.

Click here for the new Revenue Proce-dure (editorial changes only).

Click here for the original Revenue Procedure.

aDvisory GroUp says irs shoUlD streamline the aUDit proCess

One of the IRS’s main advisory panels for tax administration has issued its 2012 annual report covering a range of key issues affecting taxpayers. The Internal Revenue Service Advisory Council (IRSAC) draws its members from the tax professional community and members of academia. Its primary purpose is to provide an organized public forum for senior IRS executives and representatives of the public to discuss pressing tax administration issues. Among other suggestions, IRSAC recommended that the IRS improve lien withdrawal processing, enhance the availability of electronic completion and filing for Form 1099-Miscellaneous, and increase Business Master File (BMF) electronic filing.

Specifically, IRSAC made recommenda-tions in the following areas:

Streamlining the Audit Process •

Managing Knowledge in the Issue Prac- •tice Groups and International Practice Networks

Improving Lien Withdrawal Processing •

Enhancing the availability of elec- •tronic completion and filing for Form 1099-Miscellaneous

Increasing BMF Electronic Filing •

Enhancing the reporting of dispositions •


of capital assets on various forms

Tax Practitioner obligations and compe- •tency

A description of the group’s recommen-dations on Circular 230 and tax practitioner regulation appears in this issue in the Ethics Corner feature beginning on page 11.

Acting IRS Commissioner Steven T. Miller said that “IRSAC members provide valuable feedback on products, programs, and services of the IRS” and that “we welcome their perspectives as we address future challenges.”

For the full text of the report, see http://www.irs.gov/Tax-Professionals/2012-IRSAC-Public-Meeting-Briefing-Book.

taxpayer aDvoCaCy panel says irs shoUlD improve e-file matChinG

The Taxpayer Advocacy Panel (TAP) has released its 2011 Annual Report, which describes its activities and includes recom-mendations to improve IRS service and customer satisfaction. The panel consists of citizen volunteers from across the nation who are appointed by the Treasury Depart-ment. Members serve 3 year terms before being replaced by new volunteers and participate in projects intended to improve customer service such as outreach activi-ties with the taxpaying public and teaming with the IRS on special events. The panel also recommended that the IRS improve the process for matching a taxpayer’s name with IRS records to increase the acceptance of e-filed tax returns and revise its proce-dures to help individuals who failed to file required returns in prior years obtain the instructions, forms and information necessary to prepare and file those past-due returns.

irs fall 2012 statistiCs of inCome bUlletin shows inCrease in 2010 aGi

The IRS has announced that the Fall 2012 issue of the Statistics of Income Bulletin is available. This issue features individual income tax return data for Tax Year 2010. Nearly 143 million individual income tax returns were filed for Tax Year 2010, an increase of 1.7 percent over 2009. The adjusted gross income (AGI) reported on these incomes increased 6.1 percent from the previous year, to $8.1 trillion.

The SOI Bulletin also includes informa-tion on partnership returns, nonprofit charitable organizations, and transactions between large foreign-owned domestic corporations and related foreign persons.

Click here for the IRS website where you can download the SOI Bulletin.

irs Gets aUDiteD: Gao says internal weakness UnDermineD irs finanCial reportinG

The Government Accountability Office (GAO) audits the financial statements of the IRS on an annual basis to determine whether: (1) the financial statements are fairly presented; and (2) IRS management maintained effective internal control over financial reporting. GAO also tests the IRS’s compliance with selected provisions of significant laws and regulations.

Although the GAO found that the IRS’s fiscal 2011 and 2012 statements are “fairly presented in all material respects,” it also found that the IRS did not maintain effec-tive internal control over financial reporting because of a “material weakness” in internal control over unpaid tax assessments.

The material weakness in internal control over unpaid tax assessments was primarily caused by financial system limitations and data entry errors that necessitated the use of a statistical estimates rather than the summation of individual account balances to determine the amount of taxes receiv-able, the most material asset on the IRS’s balance sheet. Serious control deficiencies over unpaid tax assessments are likely to continue to exist until the IRS takes the following steps: (1) significantly enhances or replaces the software applications it uses to maintain the subsidiary taxpayer infor-mation necessary to support its unpaid tax assessment amounts; and (2) remedies the deficiencies that continue to result in significant errors in taxpayer accounts.

Editor’s Note: It is interesting to see the audit process turned on the IRS itself and to find out the weaknesses in the IRS’s own bookkeeping practices.

Click here for the full GAO report.

irs issUes GUiDanCe on branDeD presCription DrUG fee

The IRS has provided guidance on the

branded prescription drug fee for the 2013 fee year. This annual fee affects entities engaged in the business of manufacturing or importing branded prescription drugs.

Temporary and proposed regulations were released in August 2011 describing the method by which each covered entity’s annual fee is calculated and defining the terms for the administration of the fee. The new guidance is related to the submission of Form 8947, “Report of Branded Prescrip-tion Drug Information”, the time and manner for notifying covered entities of their preliminary fee calculation, the time and manner for submitting error reports for the dispute resolution process, and the time for notifying covered entities of their final fee calculation.

Form 8947 asks for information on National Drug Codes, orphan drugs, desig-nated entities, rebates, and other informa-tion. A covered entity that chooses to submit Form 8947 must file the form by December 17, 2012. The existing regulations provide that, for each sales year, the IRS will make a preliminary fee calculation for each covered entity and notify each entity. Each covered entity will be provided the opportunity to dispute the calculation. According to the new guidance, a covered entity that chooses to submit an error report regarding its preliminary fee calculation for the 2013 fee year must mail the error report by May 16, 2013. Per the existing regulations, the IRS will notify each covered entity of its final fee calculation for 2013 by August 31, 2013. The fee must be paid by September 30, 2013.

The previous guidance for the 2012 fee year is now obsolete.

Click here for Notice 2012-74.

irs issUes proposeD revenUe proCeDUre on appliCation of General welfare exClUsion to inDian tribes

The IRS has proposed a revenue procedure on the application of the general welfare exclusion to benefits provided under Indian tribal governmental programs. The guid-ance will provide safe harbors under which the IRS would presume that the exclusion’s individual need requirement is met.

The IRS has consistently concluded that payments made to or on behalf of individ-uals by governmental units under legisla-


tively-provided social benefit programs for the promotion of the general welfare are not included in a recipient’s gross income.

Under the proposed revenue procedure, the IRS would conclusively presume that the individual need requirement is met for each tribal member, spouse, or dependent receiving a benefit under housing programs, educational programs, elder and disabled programs, other assistance programs, and cultural and religious programs described in the proposed revenue procedure. The IRS also would conclusively presume that benefits provided under programs described in the revenue procedure do not represent compensation for services.

Even though the revenue procedure is in proposed form, taxpayers may rely on its rules until the IRS publishes additional guidance as long as the period of limitation on refund or credit has not expired.


irs issUes final reGs on meDiCal DeviCe exCise tax, alonG with interim GUiDanCe to aUGment the final reGs

The IRS has released final regulations providing guidance on the 2.3 percent excise tax imposed on the sale of medical devices enacted as part of the Health Care and Education Reconciliation Act of 2010 in conjunction with the Patient Protection and Affordable Care Act. The regulations affect manufacturers, importers, and producers of taxable medical devices.

The IRS issued proposed regulations in February of 2012 and received numerous written comments from the public and from a hearing held in May of 2012. These final regulations adopt the proposed regula-tions with changes based on the comments the IRS received. The rules take effect on December 7, 2012 for taxable medical devices sold after December 31, 2012.

Medical Devices Covered by Tax, Retail Exemption

For the purposes of the medical device excise tax, a taxable medical device is defined as a device intended for humans that is listed with the Food and Drug Administration (FDA) as defined in the Federal Food, Drug & Cosmetic Act. There is a retail exemption to the FDA listing requirement for devices that are of a type that is purchased by the

general public at retail for individual use, such eyeglasses, contact lenses, hearing aids, etc.

The proposed regulations provide a “facts and circumstances” approach to evaluating whether a medical device falls within the retail exemption. They provide a non-exclusive list of factors to be considered in determining whether a device is regularly available for purchase and use by individual consumers who are not medical profes-sionals.

The final regulations retain the facts and circumstances approach to determining whether a particular device falls within the retail exemption and explain that this approach requires a balancing of the various positive and negative factors, with no single factor being determinative. The final rules give seven examples that illustrate the process for determining whether a device falls within the retail exemption.

The regulations adopted some suggestions from commentators related to the factors involved in determining whether a device falls under the exemption. These include considering whether consumers who are not medical professionals can purchase the device in person, over the telephone or over the Internet, through retail businesses such as drug stores, supermarkets, or medical supply stores and retailers that primarily sell medical devices.

Several commenters requested transi-tion relief for installment sales and leases of taxable medical devices under circum-stances where the contract is entered into prior to the effective date of the tax on January 1, 2013. Although the final regula-tions do not provide transition relief for all such contracts, they do provide transition relief for contracts entered into prior to the date the Affordable Care Act was enacted, which was March 30, 2010.

The final regulations do not address certain issues that the IRS and the Treasury Department continue to study. These issues include the determination of price, the tax treatment of medical software licenses, the taxability of donated medical devices, and the taxability of medical convenience kits.

The IRS has issued interim guidance on these issues to augment the final regulations. Additional guidance may be published in the future, but IRS and Treasury recognized that manufacturers needed rules that will apply on an interim basis. The guidance

provides transition relief to medical device manufacturers from failure to deposit penalties.

Click here for the Final Regulations.

Click here for the Interim Guidance Augmenting the Final Regulations.

interest rates UnChanGeD in first QUarter of 2013

The IRS has announced that the interest rates for the first quarter beginning January 1, 2013, will remain the same. The rates will be:

three (3) percent for overpayments [two •(2) percent in the case of a corporation];

three (3) percent for underpayments; •

five (5) percent for large corporate •underpayments; and

one-half (0.5) percent for the portion •of a corporate overpayment exceeding $10,000.

irs seleCts new eleCtroniC aDvisory GroUp members

The IRS has announced the selection of four new members and a chairperson to the Electronic Tax Administration Advisory Committee (ETAAC). ETAAC provides an organized forum for discussion of issues in electronic transactions between tax profes-sionals and the IRS. For more information on the group, see http://www.irs.gov/uac/Electronic-Tax-Administration-Advisory-Committee-(ETAAC).

CoUrt oPiNioNS

irs won’t aCQUiesCe in DeCision on DefineD valUation ClaUse

The IRS has issued an Action on Decision announcing it will not acquiesce in the Tax Court’s March 2012 Wandry v. Commis-sioner holding. (See page 9 of the November 2012 Federal Tax Alert for a summary of the case.) In Wandry, the Tax Court approved a defined valuation clause allowing taxpayers to avoid paying additional gift tax after the value of transferred property increased following an IRS audit.

In the Action on Decision, the IRS refer-enced Treasury Regulations and prior cases


in support of its position that the applica-tion of the gift tax is based on the objective facts and circumstances of a transfer rather than on the intent of the donor. The IRS’s position is that the donor’s retention of an interest that is dependent on the occurrence of an event beyond the donor’s control does not cause the transfer to be incomplete. The IRS believes that the Tax Court erred in dismissing entries from the involved LLC’s books and records, gift tax returns, and income tax returns in valuing the gifts. The IRS does not agree with the Tax Court’s determination that the property transferred for federal gift tax purposes was anything other than the fixed percentage member-ship interests, transferred on the date of the gift to each donee. Instead, the IRS believes the gifts should be valued on the date the taxpayers relinquished all dominion and control, at the higher percentage, instead of later when some portion of the interests were returned to the donors under the valu-ation clause.

To read the AOD, see http://www.irs.gov/pub/irs-aod/AOD%202012-04.pdf.

private Coaching was not a hobby, taxpayer entitled to business Deductions:

JOHN DALTON PARKS III v. COMMISSIONER U.s. tax CoUrt t.C. sUmmary opinion 2012-105 october 25, 2012

Issue: Whether a high school and college coach’s private coaching activities were a business or a hobby subject to deduction limitations.

Facts: During the years in issue, Peti-tioner was a teacher and a high school and college athletic coach specializing in track. Petitioner began devoting a substantial portion of his nonemployment time to a private (after-school) track and field coaching activities. He focused on college and professional runners and started conducting track camps and clinics. Peti-tioner also started a running club. Petitioner had several unprofitable years due to travel between track meets and his loss of the use of high-quality facilities. For example, Peti-tioner’s 2007 year was unprofitable because several of the athletes he was coaching at the time qualified for national meets, and he incurred large expenditures for travel. Petitioner incurred those travel expenses

because of his belief that national exposure of his athletes would eventually lead to more coaching opportunities including the coaching of professional athletes.

In the summer of 2008 a gifted athlete named Ryan Bailey, whom Petitioner had begun coaching in 2006, became a qualifier for the Olympic trials in Oregon. Bailey ran the sixth-fastest time for an American runner in the 100 meters, and his race times indicated that he was one of the world’s fastest runners in the 100- and 200-meter distances. In 2009, Petitioner became Bailey’s professional coach and manager and entered into a contract with Bailey which entitled Petitioner to $5,000 for 2009 and $10,000 in subsequent years, plus a percentage of any bonus that Nike agreed to pay Bailey. As a result, Petitioner’s reputa-tion and the quality of athletes he coached improved. As of the time of trial, Petitioner had acquired a contract with Nike which would enhance his reputation and success as a track coach even further.

Petitioner opened a separate bank account solely for the use of his private coaching activity. During the years in issue, Petitioner maintained records for his private coaching activity on a computer, and he entered receipts of income from coaching contemporaneously on the computer. He also maintained all of his expense receipts for his activity and periodically recorded them on the computer.

Despite these successes, the IRS reclas-sified Petitioner’s expenses incurred in the conduct of his private coaching activity from Schedule C, Profit or Loss From Busi-ness, to Schedule A, Itemized Deductions, so that expenses in excess of income were not deductible, thereby generating the income tax deficiencies. The adjustment was based on the IRS’s determination that Petitioner’s private coaching activity was an “activity not engaged in for profit” within the meaning of Code Section 183, the hobby loss rules.

Analysis and Conclusion: The Court analyzed each aspect of the Petitioner’s activities against the factors listed in Trea-sury Reg. Section 1.183-2, Activity not engaged in for profit defined. The factors include:

1) The manner in which the taxpayer carries on the activity.

(2) The expertise of the taxpayer or his advisors.

(3) The time and effort expended by the taxpayer in carrying on the activity.

(4) Expectation that assets used in activity may appreciate in value.

(5) The success of the taxpayer in carrying on other similar or dissimilar activities.

(6) The taxpayer’s history of income or losses with respect to the activity.

(7) The amount of occasional profits, if any, which are earned.

(8) The financial status of the taxpayer.

(9) Elements of personal pleasure or recreation.

Looking at these factors, the court found that the Petitioner had ample experience to carry on his private coaching activities. It also found that Petitioner spent substantial nonemployment time on private coaching. The Court also noted that the Petitioner had a series of losses and only one year with a nominal profit. However, the trend showed increases in income, reduction of expenses, and more potential for profit. In addition, Petitioner continually imple-mented changes in his operation to boost his likely financial success. Finally, the Court observed that Petitioner’s profes-sional and personal pursuit had always been teaching and coaching and that, even though the Petitioner may derive personal pleasure from his involvement, it was his profession.

The Court concluded that the Petitioner was entitled to business expense deductions under Code Section 162, because he had established that he engaged in his private coaching activities with the predominant objective of realizing a profit. Thus, Peti-tioner was not subject to the hobby loss rules.

Notes: These hobby loss versus business loss cases are very factually driven. The Courts carefully examine all of the facts of the case and apply them to the nine factors listed above from the Section 183 regula-tions. Thus, it is important for tax practitio-ners to do the same when determining how a client should report their deductions from side businesses and other, similar activities.

taxpayer realizes Gain from involuntary Cancellation of life insurance policy:


payment for participating in medical study includible in Gross income, not excludible as Compensation for sickness or as Gift:

O’CONNOR v. COMMISSIONER U.s. tax CoUrt t.C. memo. 2012-317 november 14, 2012

Issue: Are payments received by an indi-vidual for participating in a medical study includible in gross income?

Facts: The taxpayer suffered from gout since 1983. In 2008, the taxpayer entered into a contract with a medical facility to participate in a gout study and received a payment of $5,550 from the study. The medical facility also issued the taxpayer a 1099-MISC, Miscellaneous Income, for the amount of $5,550. The taxpayer argued that the payment is excludible from gross income as either compensation for sickness or injury under IRC §104 or as a gift under §102.

Analysis and Conclusion: The Court held the payment was neither a gift nor compensation for sickness or injury. The Court found no “direct causal link” between the taxpayer’s gout and the payment from the medical facility. The 1099-MISC issued to the taxpayer by the medical facility demonstrates an absence of the dona-tive intent necessary for the payment to be considered a gift. Furthermore, the taxpayer failed to produce his contract with medical facility at trial, so the Court could not determine if the payment was for anything other than compensation for his participation in the study. The Court noted that mere participation in the study does not result in compensation for damages received on account of physical injury or physical sickness.

Notes: Under Sec. 104(a)(2), damages must be received on account of personal injury or sickness to be excludible from gross income. Generally, excludible damages only result from an underlying cause of action based on tort or tort type rights, in other words, personal injuries. The payments in this case were not damages based on a lawsuit against anyone. Rather, they were payments for participation in a medical study.

Issue: Is a married couple eligible for the first-time homebuyer’s credit if only one spouse has not owned a present interest in a principal residence within the last three years?

Facts: On October 31, 2003, Cheung purchased a home on Vidalia Court in Dumfries, Virginia. Mr. Cheung married his wife on January 18, 2006. On March 31, 2009, Mr. Cheung purchased another home on Crystal Downs Terrace, and the couple moved into the new home together. On their 2008 joint income tax return, the taxpayers claimed the first-time homebuyer credit of $8,000 for the purchase of the Crystal Downs property. The IRS disal-lowed the first-time homebuyer credit and issued a Sec. 6662 accuracy-related penalty. The taxpayers claimed they relied on the Federal Housing Administration (FHA) and U.S. Department of Housing and Urban Development (HUD) websites for the definition for “first-time homebuyer,” which defined the term as “an individual who has had no ownership in a principal residence during the 3-year period ending on the date of the purchase of the property. This includes a spouse (if either meets the above test, they are considered first-time homebuyers.)” The taxpayers also argue that Sec. 36(c)(1) only requires one spouse to meet the ownership requirements for both spouses to be eligible for the credit.

Analysis and Conclusion: The Court held that the definition of “first-time home-buyer” provided on the HUD and FHA websites carry no authority in this case. The applicable definition is provided in IRC Sec. 36(c)(1). The Court interpreted the parenthetical phrase in Sec. 36(c)(1), “and if married, such individual’s spouse,” as meaning both spouses must meet the requirement of not having a present owner-ship interest in a principal residence during the three year period ending on the date of the purchase of the principal residence for which they are claiming the credit. Therefore, the taxpayers in this case are not eligible for the credit. The Court also upheld the accuracy-related penalty.

Notes: Section 36(c)(1) defines a first-time homebuyer as ”any individual if such individual (and if married, such individual’s spouse) had no present ownership interest in a principal residence during the 3-year period ending on the date of the purchase of the principal residence to which this section applies.”

BROWN v. COMMISSIONER CoUrt of appeals, seventh CirCUit no. 11-2508 september 11, 2012

Issue: When computing the amount of income on an involuntary surrender of a life insurance policy, is the net investment in the contract reduced by the amount of additional insurance previously surren-dered?

Facts: Mr. Brown purchased a $100,000 whole-life insurance policy in 1982. The dividends credited to the policy were used to purchase additional life insurance coverage. Mr. Brown often borrowed against the policy’s cash value to pay the premiums. In 2004, his indebtedness exceeded the cash value of the policy. This happened once more in 2005, and, as a result, the insurance company terminated the contract, using the policy’s $37,000 cash surrender value to pay the policy debt. The IRS issued a deficiency notice for 2005 of approximately $29,000 (cash surrender value of $37,000, less Mr. Brown’s investment in the insurance policy of approximately $8,000). In computing this amount, Mr. Brown’s actual investment of $44,205 in paid premiums was decreased by $31,000 in additional insurance he received and $4,800 of dividends used to pay premiums. The Tax Court upheld the deficiency determination and a Sec. 6662 understatement penalty. On appeal, Mr. Brown contended that he had realized a net loss when the policy was involuntarily cancelled.

Analysis and Conclusion: The Seventh Circuit Court of Appeals affirmed the Tax Court’s decision. The taxpayer realized income to the extent the policy’s cash value exceeded the amount paid for the policy which is decreased by the dividends, the additional insurance coverage, and policy-related debt. The Sec. 6662 accuracy-related penalty was upheld because Mr. Brown made no effort to research the legal basis of his position

married Couple’s first-time homebuyers Credit is Denied; both spouses must meet ownership requirements:

CHEUNG v. COMMISSIONER U.s. tax CoUrt t.C. sUmmary opinion 2012-114 november 19, 2012


EtHiCS CorNErnew 2012 eitC CheCklist QUestions troUblinG for preparers

The IRS has released the new form and instructions for Form 8867, the Paid Preparer’s Earned Income Credit Checklist. The new checklist puts further due dili-gence requirements on tax preparers, now asking them to question clients claiming a child who is not their own about why the child’s parents are not claiming the child and also requiring preparers to explain the tiebreaker rules to clients. Preparers must document these conversations carefully or they will face a stiff penalty.

As NSTP Board member Dana Minot pointed out, there is a $500 penalty for every failure to comply with the due diligence requirements on each individual return. Steve Cairns, EA and NSTP Member, also is concerned about the significant burdens imposed on practitioners by the ever-increasing duties they must perform when gathering information to complete a return. Cairns notes that preparers are not trained as auditors, though the IRS is requiring them to perform more and more audit-type responsibilities when completing this form.

The IRS estimates that preparing and sending the EITC due diligence checklist will take, on average, 1 hour and 49 minutes to complete. Given the back and forth that may be required as the preparer gathers the required information from the client, this estimate appears low. Further, EITC clients generally have limited resources to pay preparers. Despite these realities, the last sentence of Form 8867 gives this warning:

“If you checked “No” on line 20, 21, 22, 23, 24, or 25, you have not complied with all the due diligence requirements and may have to pay a $500 penalty for each failure to comply.”

For a copy of the new form, see http://www.irs.gov/pub/irs-pdf/f8867.pdf.

irs aDvisory CoUnCil says CirCUlar 230 obliGations neeD hiGher profile on irs website

The IRS Advisory Council Subgroup on Professional Responsibility has submitted its yearly report to the IRS recommending that the IRS do more to publicize the Circular 230 obligations of tax preparers who now come under its purview. Specifi-cally, the group notes that Circular 230 has been extended to an additional 500,000 previously unlicensed preparers and the For Tax Pro section of the www.irs.gov website should more prominently display the links to information concerning practi-tioner obligations under Treasury Circular 230 and the Internal Revenue Code. The group recommends that the IRS consider the addition of an acknowledgement of the applicability of Treasury Circular 230 to application and renewal forms for PTINs and for enrollment before the IRS as an enrolled agent or an enrolled retirement plan agent.

Recommendations on Informing Practitioners of Their Obligations

The Advisory Council recommends that the IRS continue its efforts to inform practitioners regarding Treasury Circular 230 at the IRS Nationwide Tax Forums and through presentations in the SB/SE webinars. It also supports the recording and archiving of these presentations in order to make them available to the entire popula-tion of tax practitioners.

Noting that the above steps may not reach all practitioners, the Council asks that the IRS develop a publication that explains in detail the obligations of practitioners under Treasury Circular 230 and of “tax return preparers” under the Internal Revenue Code. This publication should be available in both .html and .pdf format on the IRS website. The publication should describe in detail both ethical responsibilities and administrative obligations, including due diligence, PTIN requirements, tax return preparation and signing, tax advice (and the limitations on tax advice by registered tax return preparers), confidentiality, conflicts of interest, contingent fees, client records, solicitation, and the responsibilities under §§ 6060, 6107, 6109, and 6695. The publica-tion should also describe in general terms the possible sanctions under the Internal Revenue Code or Treasury Circular 230 for violating these standards.

The Council also recommends that the IRS consider adding an acknowledgement

of the applicability of Treasury Circular 230 to the following forms:

• Form W-12, IRS Paid Preparer Tax Identification Number (PTIN) Application and Renewal;

• Form 23, Application for Enrollment to Practice Before the Internal Revenue Service;

• Form 23-EP, Application for Enrollment to Practice Before the Internal Revenue Service as an Enrolled Retirement Plan Agent;

• Form 8554, Application for Renewal of Enrollment to Practice Before the Internal Revenue Service; and

• Form 8554-EP, Application for Renewal of Enrollment to Practice Before the Internal Revenue Service as an Enrolled Retirement Plan Agent.

Recommendation on Competency Guidance

The group also endorses the proposed revision to the written advice rules in Section 10.35 of Treasury Circular 230 and urges the IRS to adopt it in final form. The group also recommends that the IRS continue its efforts to provide additional guidance respecting competency, with specific examples of minimal competency requirements similar to the examples which now exist explaining the due diligence requirements under Reg. § 1.6694-1(d)(3).

For the text of the report, see http://www.irs.gov/PUP/taxpros/providers/IRSACFi-nalReport2012.pdf.

Et CEtErA

more state tax ChanGes from november eleCtions

Last month, we presented several inter-esting state tax ballot initiatives voted on in the November election. This month we continue our run-down of new tax laws at the state level as well as some tax proposals that did not make it past the voters. Michigan

The most significant Michigan proposal would have required a 2/3 supermajority vote of the State House and the State Senate, or a statewide vote of the people at a November election, in order for the State of Michigan to impose new or additional taxes on taxpayers or expand the base of taxation or increase the rate of taxation. Proposal 5, however, went down, with voters rejecting

Did you know… that, as of the end of 2013, the IRS had registered more than 885,000 return preparers, and more than 55,000 individuals have taken the new competency test for preparers who are not CPAs, enrolled agents, or attorneys, according to the IRS Return Preparer Office.

FEDERAL TAX ALERT PAGE 12 january 2013

the measure by a 69 to 31 percent margin. Missouri

A “sin” tax was the subject of a tax proposal before Missouri voters in December. Proposition B would have increased the state’s tobacco tax from 17 cents per pack of cigarettes to 90 cents per pack. The revenue was supposed to go to local schools. The increase was defeated 50.8 percent to 49.2 percent. Only 42,581 votes made the differ-ence, of 2.6 million votes cast. Similar proposals were defeated in 2002 and 2006. New Hampshire

New Hampshire voters had to decide whether to make permanent the state’s lack of an income tax. Question 1 on the ballot would have amended New Hamp-shire’s constitution to permanently ban a personal income tax. New Hampshire does not have a general sales tax or an income tax on an individual’s reported W-2 wages. Although the amendment did not get the required supermajority, the vote was 57.1 percent in favor to 42.9 percent opposed, a healthy majority. The proposal needed 67 percent of votes to become law. Oklahoma

Oklahoma voters had to decide on two different tax measures, which they approved. State Question 758 restricts property taxes even further than the cap that was previously in existence. It prevents home values from rising more than three percent per year regardless of the market value. This ballot question passed with about 68 percent of the vote.

Voters also approved 65 percent to 35 percent State Question 766, which eliminates property taxes on businesses’ intangible property, which includes things like client lists, trademarks and goodwill. Oregon

Voters in Oregon split on several tax measures. Measure 84 would have repealed Oregon’s estate and inheritance tax and would have allowed tax-free property transfers between family members. The measure failed 54 percent to 46 percent. Two other tax changes were successful. Measure 79 bans real estate transfer taxes and fees while Measure 85, a constitu-tional amendment, passed by a vote of 59 to 41 percent. It eliminates Oregon’s “corporate kicker” refund program which gave corporations that pay income taxes a rebate when total state corporate income tax revenue collections exceeded the fore-

cast by two or more percent. The new law reallocates the proceeds of the corporate kicker program to the state general fund and to provide more funding for education. South Dakota

South Dakota’s Initiative Measure #15, which was voted down, would have increased the state sales and use tax by 1 percentage point, from 4 to 5 percent. The measure failed by approximately 57 to 42 percent. The revenue from the increase was slated to be used for public educa-tion and payments to Medicaid providers. Washington

Another supermajority law was successful in Washington. Initiative 1185 requires a supermajority of both houses of the state legislature to raise taxes. The vote in favor was almost 65 percent.

frenCh aCtor DeparDieU leaves franCe over tax bill

One of France’s most successful actors, Gerard Depardieu, has moved 800 yards over the border into Belgium in protest of France’s high tax rates. It was reported in Forbes that Depardieu paid $190 million in income taxes over 45 years. In 2012, Depar-dieu said he paid an 85 percent tax rate on his income. Depardieu made his money not just from acting, but also as a successful entrepreneur, investing in restaurants, wine bars and vineyards. French government representatives called the move “unpatri-otic” and “pathetic.” Depardieu shot back with an impassioned letter distributed to the media in which he points to his years of work, including his participation in historical French films, which demonstrates his love of France and its people. Depar-dieu said he was leaving because success, creativity, and talent are “punished” there.

freeDom from reliGion foUnDation sUes irs for not enforCinG ban on politiCal aCtivities of ChUrChes

In the November 2012 issue of the Federal Tax Alert, we reported on Pulpit Freedom Sunday, an annual event sponsored by numerous pastors around the country protesting restrictions on political activities or commentary by churches and religious organizations. (See page 12 in the Et Cetera section.) Now, the other side in this debate is taking action by filing a suit against the IRS for “failure to enforce electioneering restrictions against churches and religious

organizations.” The group, the Freedom From Religion Foundation, argues that the IRS’s failure to curb election activities by churches is a violation of the Establishment Clause of the First Amendment and of the group’s equal protection rights. The suit was filed in federal district court in the Western District of Wisconsin. The group points to public statements by IRS officials that they are no longer auditing churches. The suit also alleges that as many as 1,500 clergy violated the electioneering restrictions on October 7, 2012, Pulpit Freedom Day.

The lawsuit, FFRF v. IRS, (12-CV-818), was filed in November. A copy of the complaint is available at http://ffrf.org/images/uploads/legal/IRSlawsuit2012.pdf.

QUotES

“IRS appears to be continuing in its efforts to force practitioners to become auditors, a function most of us are not trained for.”-- Steve Cairns, EA and NSTP Member, commenting on all of the questions on revised Form 8867, the preparer’s EIC checklist.

“That would be a disaster, an unmitigated disaster for the taxpayers of the United States. It’s just not possible to do that,” --Nina Olson, National Taxpayer Advocate, commenting on the possibility that the alternative minimum tax would not be fixed until after the 2013 filing season has begun.

“The appropriation of public money always is perfectly lovely until someone is asked to pay the bill.” -- Calvin Coolidge, 30th President of the United States.

“I want to find out who this FICA guy is and how come he’s taking so much of my money.” -- Nick Kypreos, retired Canadian profes-sional hockey player who played in the U.S. National Hockey League.

“An income tax form is like a laundry list -- either way you lose your shirt.”-- Fred Allen, American radio comedian.

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THE FEDERAL TAX ALERT - NSTP FTA.pdf · THE FEDERAL TAX ALERT ... Disaster Tax Relief Act of 2012, ... Professor, Masters in Taxation Program [email protected] Technical Editor: