Tax Brief - 2012

Broker Basis Reporting: The IRS announced a delay in the effective date, until 1/1/14, for broker reporting of basis in debt instruments and options under IRC Sec. 6045 . The IRS allowed the delay after receiving comments from brokers and other parties complaining that the original effective date of 1/1/13 did not provide sufficient time to build and test the systems required to implement the reporting rules. Notice 2012-34, 2012-21 IRB .

Expiring Tax Provisions: A Congressional Research Service (CRS) report reviews the tax provisions set to expire at the end of 2012 and examines the budgetary costs and policy considerations associated with extending them. These provisions include the so-called Bush tax cuts, the AMT patch, the payroll tax cut, and miscellaneous tax extenders. The Bush tax cuts reduced tax rates and the marriage penalty, repealed limitations on personal exemptions and itemized deductions, expanded refundable credits and increased the estate and gift tax exclusion amount. Expiration of the AMT patch would subject an estimated 26 million taxpayers to AMT. The tax extenders affect individuals, businesses, charitable giving, energy, community development, and disaster relief. For the full report, see http://www.fas.org/sgp/crs/misc/R42485.pdf .

Limitations Period for Basis Overstatement: There's a six-year statute of limitations for assessment under IRC Sec. 6501(e)(1) when a taxpayer omits more than 25% of the gross income reported on the return. Several appellate courts have disagreed on whether an overstatement of basis is an omission from income triggering the six-year limitations period. In a 5-4 ruling, the Supreme Court held that basis overstatements don't trigger the extended limitations period. It found that the current case is a re-enactment of its decision in Colony Inc. [357 U.S. 28 (1958) ]. The operative language in the Internal Revenue Code for Colony, Inc. (enacted 1939) is identical to the current provision (enacted 1954). The majority opinion stated, "it would be difficult . . . to give the same language here a different interpretation" under the basic principles of stare decisis . U.S. v. Home Concrete — Supply LLC , 109 AFTR 2d 2012-XXXX (S. Ct.).

Local Lodging Expenses: The IRS issued proposed reliance regulations (REG-137589-07 ) concerning the deductibility of expenses for lodging when not traveling away from home (local lodging). The proposed regulations provide a safe harbor for treating local lodging as an ordinary and necessary business expense if: (1) the lodging is necessary to participate fully in or be available for a bona fide meeting, conference, training activity, or other business function; (2) the lodging period is no longer than five calendar days and is not more frequent than once per quarter; (3) the employer requires the employee to remain at the function overnight; and (4) the lodging is not lavish or extravagant and does not provide any significant element of personal pleasure, recreation, or benefit. The proposed regulations may be applied to expenses paid in years for which the period of limitation on credits or refunds, under IRC Sec. 6511 , has not expired. Prop. Regs. 1.162-31 and 1.262-1(b)(5) .

PTIN Holders' Personal Information: The Freedom of Information Act requires the IRS to release certain information about Preparer Tax Identification Number (PTIN) holders. To help PTIN holders maintain the privacy of personal information, the IRS has revised the PTIN application by (1) changing the "Permanent Mailing Address" box to "Personal Mailing Address," which is exempt from public disclosure; and (2) removing the prohibition on entering a post office box in the "Business Mailing Address" box. PTIN holders can search "FOIA Awareness for PTIN Holders" on www.irs.gov for more information and directions on how to update their PTIN contact information for these changes.

Accounting Method Change for Depreciation: The IRS issued the procedures for taxpayers to obtain automatic consent to change to the accounting methods provided in recently released Temp. Regs. (TD 9564 ) for amounts paid to acquire, produce, or improve tangible property. This revenue procedure adds new method changes on depreciating leasehold improvements, changing from one permissible MACRS method to another, disposing of a building or structural component, disposing of tangible depreciable assets, and electing general asset account treatment. The procedure is effective for tax years beginning on or after 1/1/12. Rev. Proc. 2012-20, 2012-14 IRB.

Accounting Method Change for Repair Costs: In addition to the new method changes on depreciation (see above item), the IRS added procedures for the following method changes concerning repair costs under the recent Temp. Regs. (TD 9564 ): deducting repair and maintenance costs, change to the regulatory accounting method, deducting incidental and non-incidental materials and supplies, deducting non-incidental rotable and temporary spare parts, change to the optional method for rotable and temporary spare parts, deducting dealer and nondealer expenses that facilitate the sale of property, deducting de minimis amounts, deducting certain costs for investigating or pursuing the acquisition of real property, and change to the safe harbor for routine maintenance on property other than buildings. The procedure is effective for tax years beginning on or after 1/1/12. Rev. Proc. 2012-19, 2012-14 IRB.

Depreciation Deduction Limitations: The IRS issued the (1) Section 280F depreciation limitations for owners of passenger autos, trucks, and vans first placed in service during 2012; and (2) lease inclusion amounts for lessees of passenger autos, trucks, and vans first leased in 2012. The 2012 depreciation limits for passenger autos will be $3,160 for the first tax year or $11,160 taking bonus depreciation into account, while the 2012 limit for trucks and vans will be $3,360 for the first tax year or $11,360 with the bonus depreciation. Bonus deprecation is not available if the taxpayer (1) purchases a used vehicle, (2) does not use the vehicle more than 50% for business purposes during 2012, (3) elects out of the bonus depreciation deduction, or (4) elects to increase the AMT credit limitation in lieu of claiming bonus depreciation. Rev. Proc. 2012-23, 2012-14 IRB.

Residential Interest Deduction: IRC Sec. 163(h)(3) allows a deduction for qualified residence interest on acquisition indebtedness up to $1 million and $100,000 of home equity indebtedness. In this case, unmarried taxpayers purchased homes together as joint tenants with joint and several liability on the mortgages and home equity debt. They used one of the homes as their principal residence and the other as a second residence. The taxpayers claimed they were each allowed a deduction on up to $1.1 million of acquisition debt because the interest limitations applied on a per-taxpayer basis for co-owners who were not married to each other. The Tax Court disagreed and noted that the statute's focus is on the entire amount of debt with respect to the residence. Qualified residence interest is applied on a per-residence basis rather than per-individual basis. Charles Sophy , 138 TC No. 8 (Tax Ct). See NTA-801 in this issue.

Small Business Healthcare Tax Credit: The IRS encouraged small employers to review the requirements for claiming the credit under IRC Sec. 45R that was designed to help small businesses and tax-exempt organizations provide health insurance for their employees. The maximum credit goes to employers with 10 or fewer Full-time Equivalent (FTE) employees paying annual average wages of $25,000 or less. The credit is claimed on Form 8941 (Credit for Small Employer Health Insurance Premiums) or Form 990-T for tax-exempt organizations. News Release IR-2012-33 .

Other Current Releases

Applicable Federal Rates (AFRs) for April: The Section 7520 rate for April 2012 is 1.4%, while the Applicable Federal Rates (AFRs) are as follows (Rev. Rul. 2012-11, 2012-14 IRB ):

Employment Taxes—Worker Classification: The taxpayer co-owned an auto paint and body shop where he employed various repair technicians, two secretaries, and an individual who started out cleaning the shop and was eventually trained to write repair estimates. Payroll taxes were not withheld for any workers nor were any Form W-2 or Form 1099-MISC issued. After reviewing the common law rules for worker classification, the Tax Court found that the repair technicians were independent contractors, but the remaining three individuals were employees. The taxpayer was not entitled to Section 530 relief because he failed the reporting consistency requirement since no information returns were ever filed. John Keller , TC Memo 2012-62 (Tax Ct.).

Employment Taxes—Worker Classification: The taxpayer was a one-third owner and president of a mortgage company where his compensation was based solely on commissions and reported to him on Form W-2 . He was named president because he had the largest individual ownership share in the business. The Tax Court sided with the taxpayer in finding that he was an independent contractor based on its consideration of the following factors: (1) the mortgage company did not have control over his hours of business, office location, and methods of obtaining clients, nor did he control any facet of the mortgage company; (2) the taxpayer did not have an office at the mortgage company, and his only interactions with the company centered around a weekly meeting; (3) taxpayer had no guaranteed compensation; and (4) no benefits (e.g., health and retirement) were provided. Dean Cibotti, TC Summ. Op. 2012-21 (Tax Ct.).

Income Tax—Adoption Credit Carryforward: Prior to its redesignation as IRC Sec. 36C , the adoption credit under former IRC Sec. 23 was nonrefundable, but had a five-year carryforward. For tax years 2010 and 2011, the credit was made refundable. The IRS indicated in this emailed advice that a carryforward of credit from a nonrefundable year to 2010 or 2011, to the extent no tax benefit could have been obtained by filing a timely claim for refund, entitled the taxpayer to a refundable credit in those years. For example, a taxpayer who met all the criteria for claiming the adoption credit in 2005, but had no tax liability for any of the years 2005–2010, would be entitled to a refundable credit of the entire 2005 amount in 2010. CCA 201211021.

Income Tax—Adoption Tax Credit: The IRS listed six facts concerning the credit under IRC Sec. 36C that may be claimed by taxpayers who adopted an eligible child in 2011: (1) the 2011 adoption credit ($13,360) is refundable, but for adoptions occurring in 2012 the credit ($12,650) will be nonrefundable; (2) a paper return must be filed along with Form 8839 (Qualified Adoption Expenses) and the supporting documents, which may include a final adoption decree, placement agreement from an authorized agency, court documents and/or the state's determination for special needs children; (3) qualified adoption expenses include adoption fees, court costs, attorney fees, and travel expenses; (4) an eligible child must be under 18 or physically or mentally incapable of caring for himself; and (5) the credit phase-out begins when modified AGI is more than $185,210, and is eliminated if modified AGI exceeds $225,210. IRS Tax Tip 2012-42.

Income Tax—Compensation for Injuries: The taxpayer is a local government with statutes providing that members of the fire and police departments who are unable to work due to an on-the-job injury will receive their regular salary for six months with the municipality having the option to extend the period for up to a year. In this ruling request, the IRS held that these payments are excluded from gross income under IRC Sec. 104(a)(1) since they are paid pursuant to a statute in the nature of workmen's compensation. In addition, because the payments are for injuries sustained in the course of employment they are not subject to federal income tax withholding or FICA. Ltr. Rul. 201210012.

Income Tax—Cost Segregation Study: Under IRC Sec. 168(c) , residential rental property is depreciated over 27.5 years. In this case, a real estate partnership purchased an apartment complex and immediately began a renovation of the units. A cost segregation study categorized the property into small components (e.g., sinks, outlets, paint, finish carpentry, sewer systems, and gas lines) that could be depreciated over shorter periods for a significant tax deferral. The Tax Court rejected the taxpayer's view that the apartments should be compared to a "shell" building with the structural components being only those items necessary to provide lighting, heating/cooling and electricity. The various components were found to be part of the buildings' structure and depreciable over 27.5 years. AmeriSouth XXXII, Ltd. , TC Memo 2012-67 (Tax Ct.).

Energy Efficient Building Deduction: IRC Sec. 179D allows taxpayers to deduct the cost of energy-efficient property installed in commercial buildings. A new notice modifies previous guidance in Notice 2006-52 (2006-1 CB 1175) and Notice 2008-40 (2008-1 CB 725) by providing an additional set of energy savings percentages. The applicable energy savings percentages are 25% for interior lighting systems, 15% for HVAC and hot water systems, and 10% for the building envelope. The new percentages are effective for property placed in service after 5/11/12. Notice 2012-22, 2012-11 IRB .

Estate Tax Portability Election: The IRS announced that estates of married individuals where a spouse died during the period 1/1/11–6/30/11, with assets of $5 million or less, will now have 15 months after the date of death to make a portability election under IRC Sec. 2010(c)(5) . The portability election allows a surviving spouse to take into account any unused exclusion amount from the deceased. The executor should file Form 4768 and Form 706 no later than 15 months after the date of death. The extended time is available even if the estate did not request an automatic six-month extension prior to the regular nine-month filing deadline. Executors should file Form 4768 with the IRS office designated in the form's instructions and enter the notation "Notice 2012-21 , Extension for Good Cause Shown" at the top of the form. News Release IR-2012-24 ; Notice 2012-21, 2012-10 IRB . See NTA-800 for more information.

Identity Theft Victims: In a speech to the American Bar Association on 2/18/12, National Taxpayer Advocate Nina Olsen said that identity theft victims will be able to receive copies of false returns filed under their names and ID numbers as a result of an IRS counsel opinion that has not yet been made public. Allowing identity theft victims to receive copies is not a prohibited disclosure under IRC Sec. 6103 because they already know the ID number and other information is their own.

IRS Has Unclaimed Refunds from 2008: The IRS estimated that over $1 billion in refunds are available to individuals who did not file a federal tax return for 2008, with up to half of potential recipients due over $600. A 2008 return must be filed by 4/17/12 to collect any refund due. A chart included in the news release breaks down by state (1) the number of individuals who have a potential refund, (2) the median potential refund, and (3) the total potential refund in each state. California had the most nonfilers in 2008 (122,500) with total refund potential of $112 million. News Release IR-2012-26 .

Payroll Tax Cut Extension: On 2/22/12, President Obama signed the "Middle Class Tax Relief and Job Creation Act of 2012," extending the 2% payroll tax cut through the end of 2012. The maximum savings for 2012 will be $2,202 (2% of $110,100) per taxpayer. The Act also repeals the recapture provision that was to apply to taxpayers with wages exceeding $18,350 over the first two months of 2012. See NTA-799 for more information.

S Corporation Wages: The CPA taxpayer replaced his individually held partnership interest in an accounting firm with his 100% owned S corporation. For the audit years, the accounting firm paid $24,000 in compensation and made profit distributions of $203K and $175K to the taxpayer through his S corporation. An IRS expert estimated the FMV of taxpayer's accounting services to be $91K per year. The 8th Circuit upheld the District Court's findings that (1) the taxpayer was a qualified accountant with an advanced degree and 20 years experience, (2) he worked 35–45 hours per week as a primary earner in a reputable firm with substantial gross earnings, and (3) the $24,000 salary was unreasonably low compared to other similarly situated accountants. David Watson PC v. U.S. , 109 AFTR 2d 2012-XXXX (8th Cir.).