On November 5, 2009, an unemployment insurance extension bill was approved by the House of Representatives that allows businesses with net operating losses (NOLs) for 2008 or 2009 to carry those losses back for up to five years. The bill also extends and modifies the first-time homebuyer credit that was established by the American Recovery and Reinvestment Act of 2009. The Senate earlier this week approved The Worker, Homeownership, and Business Assistance Act of 2009, and the bill now heads to the White House; President Obama is expected to sign it into law. The bill includes revenue offsets including a delay in the effective date of the worldwide interest allocation election, an increase in the corporate estimated tax payments for certain large taxpayers, and an increase in the penalty for failure to file a partnership or S corporation return, among other provisions.

We usually defer the dissemination of proposed legislation until passed by Congress and signed by the President. We’re getting lots of questions about what Congress is considering in its proposed Health Reform Bill, so here are a few key highlights coming out of the Senate Finance Committee which passed earlier this week:

- Starting in July 2013, the bill would establish a requirement for U.S. legal residents to obtain insurance and would in many cases impose a financial penalty on people who don’t do so.
- A 40% nondeductible excise tax would be levied on health coverage in excess of $8,000/$21,000 (indexed for inflation), effective for tax years beginning after 2012. Increased thresholds would apply for over age 55 retirees and certain high-risk professions (e.g., firefighters, construction and mining workers), and a higher threshold would apply for health insurance plans maintained in the 17 states in which health care was least affordable for the year ended Dec. 31, 2012. For employees, the employer would aggregate the coverage subject to the limit and issue an information return for insurers indicating the amount subject to the excise tax. The excise tax would be levied at the insurer level.
- Employers would be required to report the value of health benefits on employees’ Form-W-2s, effective for tax years beginning after 2009. For purposes of employer provided health coverage (including health reimbursement accounts (HRAs) and health flexible savings accounts (FSAs), HSAs, and Archer medical savings accounts (MSAs)), the definition of medicine expenses deductible as a medical expense would generally be conformed to the definition for purposes of the itemized deduction for medical expenses. But this change would not apply to doctor prescribed over-the-counter medicine. Thus, the cost of over-the-counter medicine (other than doctor prescribed) could not be reimbursed through a health FSA or HRA. In addition, the cost of over-the-counter medicines (other than doctor prescribed) could not be reimbursed on a tax-free basis through an HSA or Archer MSA. These changes would be effective for tax years beginning after 2009.
- The penalty for nonqualified HSA distributions would be increased from 10% to 20%, effective for disbursements made during tax years beginning after 2010.
- Allowable contributions to health FSAs in cafeteria plans would be capped at $2,500, effective for tax years beginning after 2010.
- Effective for tax years beginning after the enactment date, Code Sec. 501(c)(3) hospitals would be subject to new requirements, e.g., a community health needs assessment, promulgation and dissemination of a written financial assistance policy, and new reporting and disclosure rules.
- Effective for payments made after 2011, the bill would modify the general information reporting requirement by eliminating the exception for payments to corporations. The class of payments with respect to which reporting is required would be clarified to include gross proceeds for both property and services.
- The floor beneath itemized medical expense deductions would be raised from 7.5% of adjusted gross income (AGI) to 10%, effective for effective for tax years beginning after 2012. The AGI floor for individuals age 65 and older (and their spouses) would remain unchanged at 7.5%.
- The deduction for expenses allocable to Medicare Part D subsidy would be eliminated, effective for tax years beginning after 2010. A $500,000 deduction limit would apply to the remuneration of officers, employees, directors, and service providers of covered health insurance providers. This limit would be effective for remuneration paid in tax years beginning after 2012 with respect to services performed after 2009.
- For tax years beginning after 2010, the bill would provide for a safe harbor from the nondiscrimination requirements for cafeteria plans for an eligible small employer. The safe harbor would also apply to the nondiscrimination requirements for specified qualified benefits offered under the cafeteria plan, including group term life insurance, coverage under a self insured group health plan, and benefits under a dependent care assistance program. The safe harbor would require that the cafeteria plan satisfy minimum eligibility and participation requirements and minimum flex-credit contribution requirements.
- The bill would create a temporary tax credit, subject to an overall cap of $1 billion, to encourage investments in new therapies to prevent, diagnose, and treat chronic diseases, effective for expenditures paid or incurred after 2008, in tax years beginning after 2008. The credit would sunset at the end of 2010.

Have you ever had income from a foreign bank account that wasn’t reported on your U.S. income tax return? That income is subject to U.S. tax and the Internal Revenue Service is stepping up enforcement by going directly to the source, foreign banks, to obtain names of U.S. citizens that hold these accounts to cross check the reporting of the income.

A settlement offer was recently announced by the IRS to encourage compliance, and the agency has just announced that it is postponing the deadline for taxpayers to act on its settlement offer to report previously unreported offshore income. This is a “one-time only” postponment from September 23, 2009 to October 15, 2009.

Earlier in the year, the IRS provided the following settlement for all taxpayers that make voluntary disclosure requests:
1) The taxpayer must file amended returns going back 6 years (2003 to 2008) and pay taxes and interest.
2) IRS will assess either a delinquency penalty or an accuracy penalty and no reasonable cause exception will apply.
3) A penalty equal to 20% of the amount in a foreign bank account in the year with the highest aggregate account or asset value will be assessed, in lieu of other penalties that may apply.

The IRS has indicated that no further extensions will be provided and that taxpayers who do not voluntarily disclose their hidden accounts by the new deadline face much harsher civil penalties and where applicable, criminal prosecution.

I had lunch with a colleague recently who is a partner at a national accounting firm. The conversation turned to staff and he communicated how frustrated he was with his. Apparently he had just returned from vacation, reviewed timesheets and was very disappointed in the level of effort that they put in while he was away. He commented on how he needed to be on his people all of the time in order to get any work out of them. When I mentioned that I never feel that way, that our people are very focused on producing results and are even more so when I’m not there, he responded that we have different people and that his firm doesn’t have “those people”. So who are “those people” and how did our firm get them?

We only recruit from the top firms. Firms like his. We recruit high achievers who have a history of success in academics, career, and other aspects of life such as athletics and community service. Successes that require personal responsibility and accountability, hard work, discipline, and devotion. But we don’t have an HR department or recruiting staff to post positions, screen resumes or interview candidates like the national firms do. That can’t be our advantage. As a matter of fact, I am sure that they recruit the same people that we do and have an easier time doing it.

So how did his people, who are such high achievers, become so lazy and unmotivated that they won’t do any work unless someone is standing over them? I doubt that the people changed. I am positive that they are still out there achieving tremendous things in life and in the office. Maybe they are just being measured on, and held accountable to the wrong thing. Maybe when no one is looking, they feel like they can stop the charade and actually get something done. Maybe they should be held accountable for their results instead of activity and time. Maybe then, they would be viewed as one of “those people”.

Summary

On August 13, 2009, the U.S. Court of Appeals for the First Circuit (“Court of Appeals”) ruled 3-2 to overturn the U.S. District Court for the District of Rhode Island’s (“District Court”) decision in United States of America vs. Textron, Inc. and Subsidiaries. As a result, Textron’s income tax accrual workpapers are subject to an IRS summons.

Background

• In 2005, the Internal Revenue Service (“IRS”) issued an administrative summons for “all of the tax accrual workpapers” for Textron’s tax year ending in 2001. Textron refused to produce its tax accrual workpapers, asserting they were privileged and that the summons was issued for improper purposes. Textron’s tax accrual workpapers included:
   1. A spreadsheet that contained:
     a. Lists of items on Textron’s tax returns, which, in the opinion of Textron’s counsel, involved issues on which the tax laws are unclear and, therefore, may be challenged by the IRS;
     b. Estimates by Textron’s counsel expressing, in percentage terms, their judgments regarding Textron’s chances of prevailing in any litigation over those issues; and
     c. The dollar amounts reserved to reflect the possibility that Textron might not prevail in such litigation.
   2. Backup workpapers consisting of the previous year’s spreadsheet and earlier drafts of the spreadsheet together with notes and memoranda written by Textron’s in-house tax attorneys reflecting their opinions as to which items should be included on the spreadsheet and the percentage that should apply to each item.

• Textron is a publicly-traded company and is required by federal securities law to have public financial statements are certified by an independent auditor. Ernst & Young (“E&Y”) are Textron’s independent auditors. E&Y accessed and reviewed Textron’s tax accrual workpapers in conjunction with Textron’s financial statement audit for the year ending in 2001. The workpapers provided E&Y with evidence supporting Textron’s assertion that they had recorded an adequate reserve for uncertain tax positions in their financial statements.

District Court Ruling

In 2007, the District Court ruled that Textron did not have to comply with the IRS’ summons. The District Court found that the tax accrual workpapers were covered by work-product privilege. Work-product privilege applies to materials prepared or gathered by an attorney in anticipation of litigation.
The District Court agreed with Textron that the tax accrual workpapers would not have been prepared at all but for the fact that Textron anticipated the possibility of litigation with the IRS. If Textron had not anticipated a dispute with the IRS, they would have had no reason to record a reserve for potential tax liabilities and would not have had to prepare tax accrual workpapers for E&Y to audit.

Court of Appeals Ruling

On August 13, 2009, the Court of Appeals overturned the District Court ruling. The Court of Appeals agreed with the IRS that Textron did not prepare the tax accrual workpapers in anticipation of litigation, but to support their financial filings and gain auditor approval. As such, the tax accrual workpapers did not qualify for work-product privilege and are subject to the IRS summons.
In May of 2010, the Supreme Court denied the writ of certiorari.

Planning

In light of the Court of Appeals’ decision, it may be difficult to withhold tax accrual workpapers from taxing authorities. However, implementing the following procedures may add some protection and/or limit the scope of what the IRS requests.
   1. Create a separate set of workpapers for each uncertain tax position.
   2. Within each set of workpapers, create multiple folders – separate the attorney’s analysis from the accountant’s analysis; separate all analysis from the determination of potential reserves.
   3. Do not allow financial statement auditors to keep copies of tax accrual workpapers.
   4. Require a signed confidentiality statement from financial statement auditors that specifically references the tax accrual workpapers.

Full Text

U.S. District Court for the District of Rhode Island http://www.rid.uscourts.gov/opinions/torres/08282007_1-06CV0198T_USA_V_TEXTRON_INC_P.pdf
U.S. Court of Appeals for the First Circuit
http://www.ca1.uscourts.gov/ (Click on Opinions, Search using keyword, “Textron”)

It is with pleasure that we announce that Rebecca Godkin has joined TaxOps, LLC as a Director. Rebecca’s primary area of emphasis is accounting for income taxes, in accordance with both U.S. GAAP and IFRS. She has extensive experience preparing and reviewing income tax provisions and is intimately familiar with the income tax provision complexities associated with uncertain tax positions, business combinations, share-based compensation, foreign subsidiaries and affiliates, foreign currency transactions and translations, intraperiod and interperiod tax allocations, detailed tax planning strategies and the evaluation of valuation allowances. Rebecca has worked with some of the largest publicly-held companies in the world as well as local privately-held enterprises. Rebecca has developed and delivered training, nationally and locally, for both FAS 109 and IAS 12. Rebecca’s income tax provision expertise is built upon a strong foundation of technical tax compliance, including tax accounting for natural resources.  See Rebecca’s full bio at www.taxops.com/team

Please join us in welcoming Rebecca to the TaxOps team!

A recent Tax Court decision has ruled that investors in LLC’s and LLP’s are not limited partners for passive activity loss limitation purposes, thereby allowing an offset of losses against certain other income. The IRS has long contended that losses incurred by LLCs and LLPs are not deductible by the member, as they are considered passive investors. The Tax Court ruled that the Treasury Regulations governing limited partnerships do not apply to members of an LLC or LLP and thus losses incurred are not limited. A similar ruling was also handed down in 2000 from a district court but it only applied to Oregon taxpayers. While this ruling is a positive step for entrepreneurs it may have some negative consequences for those profitable LLCs and LLPs whose members are hoping to avoid additional tax by claiming a passive investment. This is not the last step for this ruling and it’s expected the IRS will either appeal or have Congress clarify the regulations.

While the work environment in most CPA firms leads to bypass surgery, our environment recently allowed for a much different bypass experience.  On July 11th, I rode an organized bike ride called The Triple Bypass, a personal goal that I’ve had for some time.  The ride is 120 miles long from Evergreen to Avon, Colorado and covers three mountain passes; Squaw/Juniper Pass, Loveland Pass, and Vail Pass.  For me, the training that was required (I needed a lot of work) was significant and the schedule that I needed to keep was far from traditional.  This could only be accomplished in a work environment that is completely focused on results, not perceptions or meaningless statistics.  It’s in this environment that we can create our own balance, whatever that may be. 

Equally important, is a focus on personal goals and accomplishments outside of the workplace, whether it’s photography, running, scuba, book clubs, or killing yourself on mountain passes, and how the achievement of those goals fires up all aspects of our lives.  The day before my ride, I was scheduled to play in a client golf tournament.  Due to an injury that I had, I felt that playing would seriously jeapordize my ride, so I asked Dan DeLau, a Director at TaxOps (not a golfer), to play in my place.  And he did!  I know he ended up working over the weekend to catch up so that I could ride on Saturday and achieve my goal.  I don’t recall that focus at the Big 4.

To step back for a moment, the results that we are after are significant.  As we continue to build our world class tax team, we strive not only to compete with the largest firms in the world in the tax arena, but to simply be better.  However, we are significantly different in our methodologies as to how we will achieve those goals.  We feel, very simply, that it’s better.

Let’s face it, hiring employees can be expensive; not just the cost of the services provided, but all of the administration that surrounds it, like payroll taxes and unemployment taxes. Now, at least in Colorado, add to that a state assessed fine beginning July 1, 2009 for all situations where the Division of Employment finds that an employer “with willful disregard of the law, misclassified employees” as independent contractors. And the fines are steep: $5,000 for each misclassified employee the first time, and $25,000 for each misclassified employee for the second and subsequent violations. OUCH!

In determining whether an independent contractor relationship exists, the sincle most important test is the amount of control maintained by the employer. If the employer controls the contractor then generally an employment relationship exists. In order to substantiate a contractor relationship, we suggest documenting the specific reasons why each independent contractor is not being classified as an employee, focusing on the lack of employer control.

Effective January 1, 2009, the IRS has started to automatically assess a $10,000 penalty for each late filed Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations. The penalty has been on the books for years, but has rarely been enforced. Now, in order to encourage greater compliance, the IRS is automatically assessing a $10,000 penalty for each Form 5471 that is filed late. Another reason to file extensions and returns on a timely basis, even if there is no tax due.