Thank you IRS! IRS Website Provides links to Tax Code, Regulations and Official Guidance

For those of us who practice in the tax arena, getting access to the Internal Revenue Code ("IRC"), Treasury Regulations, and other official guidance is usually not a problem.

However, for the average person who wants to look up a specific IRC section they've heard about (e.g., section 1221 which defines a "capital asset" in determining whether a disposition of an asset gives rise to a capital gain or loss), it's often a frustrating task.  And let's not even get started on where they can find Treasury Regulations or various IRS pronouncements (like IRS Revenue Rulings).

Thankfully, the IRS in an effort to make the increasingly-complex tax law more accessible to the public, has created a resource that puts a portal to these authorities right on its website at http://www.irs.gov/taxpros/article/0,,id=98137,00.html.

Moreover, it has even provided a page entitled Understanding IRS Guidance - A Brief Primer that explains the relevance of a number of different types of authorities. Since it's fairly brief (just like the title), I've reproduced it here:

For anyone not familiar with the inner workings of tax administration, the array of IRS guidance may seem, well, a little puzzling at first glance. To take a little of the mystery away, here's a brief look at seven of the most common forms of guidance.

In its role in administering the tax laws enacted by the Congress, the IRS must take the specifics of these laws and translate them into detailed regulations, rules and procedures. The Office of Chief Counsel fills this crucial role by producing several different kinds of documents and publications that provide guidance to taxpayers, firms and charitable groups.

Regulation
A regulation is issued by the Internal Revenue Service and Treasury Department to provide guidance for new legislation or to address issues that arise with respect to existing Internal Revenue Code sections. Regulations interpret and give directions on complying with the law. Regulations are published in the Federal Register. Generally, regulations are first published in proposed form in a Notice of Proposed Rulemaking (NPRM). After public input is fully considered through written comments and even a public hearing, a final regulation or a temporary regulation is published as a Treasury Decision (TD), again, in the Federal Register.

Revenue Ruling
A revenue ruling is an official interpretation by the IRS of the Internal Revenue Code, related statutes, tax treaties and regulations. It is the conclusion of the IRS on how the law is applied to a specific set of facts. Revenue rulings are published in the Internal Revenue Bulletin for the information of and guidance to taxpayers, IRS personnel and tax professionals. For example, a revenue ruling may hold that taxpayers can deduct certain automobile expenses.

Revenue Procedure
A revenue procedure is an official statement of a procedure that affects the rights or duties of taxpayers or other members of the public under the Internal Revenue Code, related statutes, tax treaties and regulations and that should be a matter of public knowledge. It is also published in the Internal Revenue Bulletin. While a revenue ruling generally states an IRS position, a revenue procedure provides return filing or other instructions concerning an IRS position. For example, a revenue procedure might specify how those entitled to deduct certain automobile expenses should compute them by applying a certain mileage rate in lieu of calculating actual operating expenses.

Private Letter Ruling
A private letter ruling, or PLR, is a written statement issued to a taxpayer that interprets and applies tax laws to the taxpayer's specific set of facts. A PLR is issued to establish with certainty the federal tax consequences of a particular transaction before the transaction is consummated or before the taxpayer's return is filed. A PLR is issued in response to a written request submitted by a taxpayer and is binding on the IRS if the taxpayer fully and accurately described the proposed transaction in the request and carries out the transaction as described. A PLR may not be relied on as precedent by other taxpayers or IRS personnel. PLRs are generally made public after all information has been removed that could identify the taxpayer to whom it was issued.

Technical Advice Memorandum
A technical advice memorandum, or TAM, is guidance furnished by the Office of Chief Counsel upon the request of an IRS director or an area director, appeals, in response to technical or procedural questions that develop during a proceeding. A request for a TAM generally stems from an examination of a taxpayer's return, a consideration of a taxpayer's claim for a refund or credit, or any other matter involving a specific taxpayer under the jurisdiction of the territory manager or the area director, appeals. Technical Advice Memoranda are issued only on closed transactions and provide the interpretation of proper application of tax laws, tax treaties, regulations, revenue rulings or other precedents. The advice rendered represents a final determination of the position of the IRS, but only with respect to the specific issue in the specific case in which the advice is issued. Technical Advice Memoranda are generally made public after all information has been removed that could identify the taxpayer whose circumstances triggered a specific memorandum.

Notice
A notice is a public pronouncement that may contain guidance that involves substantive interpretations of the Internal Revenue Code or other provisions of the law. For example, notices can be used to relate what regulations will say in situations where the regulations may not be published in the immediate future.

Announcement
An announcement is a public pronouncement that has only immediate or short-term value. For example, announcements can be used to summarize the law or regulations without making any substantive interpretation; to state what regulations will say when they are certain to be published in the immediate future; or to notify taxpayers of the existence of an approaching deadline.

Page Last Reviewed or Updated [by IRS]: October 06, 2010

IRS has released its finalized (and revised) Schedule UTP for reporting Uncertain Tax Positions

For those working in the corporate tax arena, you probably remember the controversy surrounding the IRS's January 2010 announcement of their plan to create a new tax form to disclose a taxpayer's "uncertain tax positions" (see http://tax-fishing-and-other.blogspot.com/2010/02/uncertain-tax-positions-policy-of.html).

As you probably also know, they followed that announcement with an advance copy in April of the proposed version of the form, and requested comments on it.  (see http://tax-fishing-and-other.blogspot.com/2010/04/irs-announcement-2010-30-re-disclosure.html).

Well, just last Friday, the IRS released its revised and finalized version of Schedule UTP, along with explanatory Announcements 2010-75 and 2010-76.

First, the "good" news:

To their credit, the IRS made some significant changes to the April draft version of Schedule UTP in response to public comments.  Key among these changes are:

• Five-year phase-in of the reporting requirement based on a corporation’s asset size - As originally proposed in January, the reporting requirement would apply to business taxpayers with total assets of at least $10 million.  In April, the IRS announced that only certain corporations would be required to file the schedule.  With their latest revision, 2010 Schedule UTP filings will generally only be required for corporations that issue (or are included in) audited financial statements and that have at least $100 million of assets.  The asset threshold will be reduced to $50 million starting with 2012 tax years and down to $10 million starting with 2014 tax years.  In addition, the IRS will consider whether to apply the UTP reporting rules to other taxpayers for 2011 or later years (e.g., for pass-through and/or tax-exempt entities).
• No longer being required to report the maximum tax adjustment amounts - While the April draft contemplated that the reporting corporation would disclose a maximum potential tax adjustment (i.e., the maximum US federal income tax liability for the tax position if not sustained upon IRS audit), the IRS ultimately removed this proposed requirement.  It replaced this provision with a requirement for the reporting corporation to rank its UTPs by size (e.g., in descending order), as well as identify those positions that exceed 10% of the total reported positions. The size of the UTP is determined at the affiliated group level.
• No longer being required to report the rationale and nature of uncertainty in the concise description of the position - In response to commentators' concerns, including the fact that such disclosures are not required by FIN 48 (now known as FASB ASC 740-10), the instructions have limited the description of the UTP to "a concise description of the tax position, including a description of the relevant facts affecting the tax treatment of the position and information that reasonably can be expected to apprise the Service of the identity of the tax position and the nature of the issue."  In addition, the final instructions expressly provide that a corporation is not required to include an assessment of the hazards of a tax position or an analysis of the support for or against the tax position.
• No longer being required to report administrative practice tax positions - The finalized instructions eliminated the requirement in the April draft that required reporting corporations to disclose tax positions for which a reserve had not been recorded based on an expectation to litigate or an IRS administrative practice (i.e., the IRS had historically not challenged the position upon audit when dealing with that tax position re that taxpayer or similar taxpayers).

In addition, no change (or merely clarification) was made to the instructions to provide that:

• An affiliated group of corporations filing a consolidated return will file a single Schedule UTP for the affiliated group for each year.
• The affiliated group need not identify the member of the group to which the UTP relates.
• A complete and accurate disclosure of a tax position on the appropriate year's Schedule UTP will be treated by the IRS as if the corporation filed a Form 8275 (Disclosure Statement) or Form 8275-R (Regulation Disclosure Statement) regarding the tax position.  A separate Form 8275 or 8275-R need not be filed to avoid certain accuracy-related penalties with respect to that position.
• Whether a reserve has been recorded for Schedule UTP disclosure is determined by reference to those reserve decisions made by the corporation (or related party) for audited financial statement purposes.  If it was determined that (under applicable accounting standards) either no reserve was required because it was either immaterial or sufficiently certain, then it need not be reported on the schedule.
• Schedule UTP requires the reporting of U.S. federal income tax positions but not foreign or state tax positions.
• Corporations report their own tax positions on Schedule UTP and do not report the tax positions of a related party.
• Tax positions taken in years before 2010 need not be reported in 2010 or a later year even if a reserve is recorded in audited financial statements issued in 2010 or later.
• Schedule UTP need not be filed for short tax years ending in 2010.
• Worldwide assets are used to determine whether a corporation that files a Form 1120-F (including a protective return) must file Schedule UTP.
• The definition of audited financial statement was revised such that an "audited financial statement" is one on which an independent auditor expresses an opinion and that compiled or reviewed financial statements are excluded from the definition of audited financial statement.

Next, the "bad" (or at least not "good") news:

• Schedule UTP isn't going away, and will apply to an increasing number of taxpayers as time goes on.
• There remain unanswered questions (e.g., issues related to the reporting of tax positions in the year in which a corporation is acquired or disposed of; the level or type of due diligence required to obtain reserve information from a related party or information from a pass-through entity relating to a corporation's uncertain tax position involving the pass-through entity; how penalties will be imposed for reporting failures).
• The Notice of Proposed Rulemaking ("NPRM") published on September 9 expressly authorizes the IRS to require filing of Schedule UTP, but is not expected to be finalized until some time before the end of the year.  This authorization is established pursuant to new Prop. Treas. Reg. section 1.6012-2(a)(4) and (5).

As always, let me know if you have any questions or comments!

Links:

• IRS Announcement 2010-75
• IRS Announcement 2010-76
• Schedule UTP - Uncertain Tax Position Statement
• Schedule UTP - Instructions
• IRS internal directive regarding UTP reporting
• Notice of Proposed Rulemaking (REG-119046-10) at page 415 of the document.
• AICPA article (extensive coverage)

Therapeutic Discovery Project Tax Credit / Grant - IRS Releases Form 8942, Instructions, and Additional Guidance

More information to follow as soon as I've had a chance to review, but in the interim:

• Form 8942: http://bit.ly/cNFF2Y
• Form 8942 instructions: http://bit.ly/9hdjI9
• IRS Q&A: http://bit.ly/depaMx

Let me know if you have any questions, I'd love to help!

 

IRS releases guidance on Therapeutic Discovery Project Credit / Grant

This morning, the IRS released advance guidance on the Therapeutic Discovery Project Credit / Grant.

A few items stand out:

• Applications must be filed on Form 8942 (and in conformity with the form's instructions) and each project must be applied for separately.
• That form is expected to be released no later than June 21, and applications must be filed (i.e., postmarked) no later than July 21.
• The Department of Health & Human Services seems to be the primary determiner of which projects should be funded.
• There will be a $5 million per-taxpayer limitation on allocations of credits/grants (for 2009 and 2010 together), regardless of the number of projects sponsored.
• In the first round of allocations, the IRS will approve or deny applications no later than October 29, 2010 and will notify taxpayers by letter.
• Taxpayers will not have a right to Conference or Appeal related to any matters under the Notice.  i.e., all decisions are final.
• The 250-employee limit includes both full-time and part-time employees (but not leased employees).
• Taxpayers are required to inform the IRS of any significant changes in plans that arise prior to the date of IRS certification of the projects.  A significant change is any change (including any change that would affect the continuing accuracy of a statement made in the application) that a reasonable person would conclude might have influenced HHS’ evaluation.
• Grant applicants must provide a DUNS number with their application.  If the applicant does not already have a DUNS number, it may request one at no cost by calling the dedicated toll-free DUNS Number request line at 1-866-705-5711.
• Grant applicants must also register with the Central Contractor Registration ("CCR"). To register, go to
  http://www.ccr.gov/startregistration.aspx. The registration must be completed before a payment can be made.
• Approved credit and grant applicants are advised that the IRS will publicly disclose their identities, and the amount of their credit or grant.
• The statute authorizes public disclosure of more information for taxpayers awarded grants than for those awarded credits (e.g., types of projects).  As a result, the IRS requests authorization to publish such information for approved projects awarded credits.  While such consent is not required to receive a credit allocation, it's not clear whether withholding it could have any impact on a borderline project being approved.
• Unnecessarily elaborate applications are discouraged and brochures or other presentations are not permitted as part of the applications and will not be considered.

The release read as follows:

Notice 2010-45 establishes the qualifying therapeutic discovery project program under § 48D of the Internal Revenue Code.   Section 9023(a) of the Patient Protection and Affordable Care Act (Act) added § 48D to the Code as part of the investment credit under § 46.  Section 48D provides a nonrefundable tax credit equal to 50 percent of an eligible taxpayer’s qualified investment in a qualifying therapeutic discovery project.  Under section 9023(e) of the Act, an eligible taxpayer may elect to receive a grant in lieu of credits.  Section 48D(d)(1)(B) limits the total amount of credits or grants to be allocated under the program to $1 billion during the two-year period from 2009 through 2010.  The Service, in consultation with Department of Health and Human Services, will award certifications for qualified investments.  The credits or grants will only be available to taxpayers having 250 or fewer full-time and part-time employees.

Notice 2010-45 will appear [in] IRB 2010-23, dated June 7, 2010. 

link to Notice:   http://bit.ly/aDH2li

Draft application for Therapeutic Discovery Project Tax Credit (or Grant)

Many of you have heard about the very lucrative Therapeutic Discovery Project Tax Credit, which can alternatively be taken as a nontaxable (for federal income tax purposes) grant.

Unfortunately, there has been no official guidance (except for the text of new IRC section 48D itself) about how taxpayers will be able to apply for an allocation from the $1 billion available for the program.  Treasury has until May 21, 2010 to provide that guidance.  However, since (a) there is a limited pool of funds available, (b) the promised turnaround time for application review is 30 days from receipt by Treasury, and (c) there is likely to be a mad rush to apply, it makes sense for all qualified taxpayers to submit their applications as soon as possible.

For that reason, I've prepared a draft  and unofficial application for use in gathering the information until further information becomes available.  The standard caveats apply (i.e., my version is not official, use at your own risk, talk to your professional tax advisor before taking any action on this, etc.).  Nevertheless, I hope you find it useful in starting the application process.  If you do use it, I'd love to hear from you.  If you want to use it for others, please go ahead and do so but (1) please keep my attribution on it, and (2) please provide caveats to your users as well.

Quick recap of my post from April 5 on this subject:

• QUALIFYING THERAPEUTIC DISCOVERY PROJECT CREDIT
• Provides a 50% nonrefundable investment tax credit to certain small businesses (with no more than 250 employees) that invest in qualifying “therapeutic discovery” projects in years beginning in 2009 or 2010. Covered projects are those designed to:
• Treat or prevent diseases or conditions via pre-clinical activities, clinical trials, and clinical studies, or carrying out research protocols, for the purpose of obtaining approval of a product under specific sections of the Federal Food, Drug, and Cosmetic Act or the Public Health Service Act;
• Diagnose diseases or conditions or to determine molecular factors related to diseases or conditions by developing molecular diagnostics to guide therapeutic decisions; or
• Develop a product, process or technology to further the delivery or administration of therapeutics.
• Qualified investments are the aggregate amount of costs paid or incurred for the tax year for expenses necessary for and directly related to the conduct of a qualifying therapeutic discovery project, but exclude (1) compensation paid to the CEO and the four highest paid officers other than the CEO, (2) interest expense, (3) facility maintenance expenses, (4) service costs as determined under the uniform capitalization rules, and (5) any other expense determined by the Secretary to be appropriate under the circumstances.
• Alternatively, qualifying taxpayers may generally elect to receive a grant instead of a credit with respect to their qualifying investment.
• Note: This provision is not automatic for potentially qualifying small businesses. It requires potential recipients to apply to the program which is to be established by the Secretary (in consultation with the Department of Health and Human Services) within 60 days after 3/23/10. Following the submission of an application, the Secretary will have 30 days to approve or reject the application. Selection criteria will take into consideration only those projects
• That show reasonable potential to result in new therapies to treat areas of unmet medical need, or to prevent, detect, or treat chronic or acute diseases and conditions, to reduce long-term health care costs in the United States, or to significantly advance the goal of curing cancer within 30 years, and
• That have the greatest potential to create and sustain high quality, high-paying jobs in the United States, and to advance U.S. competitiveness in the fields of life, biological, and medical sciences.
• Effective for amounts paid or incurred in tax years beginning after 12/31/08.

http://www.docstoc.com/docs/document-preview.aspx?doc_id=37142261

IRS releases new Form 3115 for tax accounting method changes

The IRS issued today an advance copy of Announcement 2010-32 (which will be published in Internal Revenue Bulletin 2010-19 on May 10, 2010) discussing the new December 2009 revision of Form 3115, which is required for both automatic tax accounting method changes as well as non-automatic tax accounting method change requests.

In short, the IRS will generally accept either the new or the old (December 2003) version through May 30, 2010, after which it will only accept the December 2009 version.  Nevertheless, taxpayers are urged to use the new version before the deadline.

All links are to Adobe Acrobat (PDF) files.

• Copy of Announcement 2010-32 is available at http://bit.ly/btMBtS

• Copy of December 2009 version of Form 3115 is available at http://bit.ly/bTLbbz

• Copy of December 2009 version of Form 3115 instructions is available at http://bit.ly/dvBdnT

I hope to get a chance soon to review the specific changes between the old and new versions and will update when I'm done.

IRS Announcement 2010-30 re disclosure of Uncertain Tax Positions (UTPs)

Just received the following advance release of Announcement 2010-30:

Announcement 2010-30 releases the draft schedule, Schedule UTP, accompanied by draft instructions that provide a further explanation of the Service’s proposal requiring reporting of uncertain tax positions, and invites public comment on the draft schedule and instructions.

Announcement 2010-30 will be in IRB 2010-19, dated May 10, 2010.

The advance is available at http://bit.ly/dn4Ubm but does not include a copy of proposed "Schedule UTP."

EDIT 4/20/10:

The IRS has now uploaded Schedule UTP  http://bit.ly/dugHbf and the instructions http://bit.ly/aHZ7Kn

House passes "Taxpayer Assistance Act of 2010" (HR 4994)

This Bill passed the House by a large margin (399-9), and now goes to the Senate. I haven't yet seen any public comments on its chances for eventual enactment, but (1) its strong bipartisan support, (2) fairly limited scope, and (3) lack of highly controversial provisions suggests smooth sailing.

It isn't as massive as the recent Health Care legislation, which you can see from the following outline. If you want to see the full text, see http://bit.ly/awAhpf

TITLE I--CELL PHONES AND ELECTRONIC FILING

• Sec. 101. Removal of cellular telephones and similar telecommunications equipment from listed property.
• Sec. 102. Electronic filing exemption for religious reasons.
• Sec. 103. Accelerate interest on refunds for returns filed electronically.

TITLE II--COLLECTION

• Sec. 201. Study on the effectiveness of collection alternatives.
• Sec. 202. Repeal of partial payment requirement on submissions of offers-in-compromise.

TITLE III--TAXPAYER ASSISTANCE AND PROTECTION IMPROVEMENTS

• Sec. 301. Referrals to Low-Income Taxpayer Clinics permitted.
• Sec. 302. Programs for the benefit of low-income taxpayers.
• Sec. 303. EITC outreach.
• Sec. 304. Taxpayer notification of suspected identity theft.
• Sec. 305. Clarification of IRS unclaimed refund authority.
• Sec. 306. Study on delivery of tax refunds.
• Sec. 307. Study on timely processing and use of information returns.
• Sec. 308. Study on easing the burden of in-person tax payments.

TITLE IV--REVENUE PROVISIONS

• Sec. 401. Expansion of bad check penalty to electronic payments.
• Sec. 402. Increase in information return penalties.
• Sec. 403. Budget compliance.

More to come...

IRS Posts Employer Q&A re Tax Benefits for Certain Employers

Following the recent enactment of the HIRE Act, the IRS has posted on its website [http://bit.ly/aM1xzo] a set of questions and answers for employers that stand to benefit from some of the Act's new provisions by hiring certain qualified employees. The introductory text reads as follows, and is accompanied by links to IRS Q&As, News releases related to the HIRE Act, and References/Related Topics.

"Under the Hiring Incentives to Restore Employment (HIRE) Act, enacted March 18, 2010, two new tax benefits are available to employers who hire certain previously unemployed workers (“qualified employees”).

The first, referred to as the payroll tax exemption, provides employers with an exemption from the employer’s 6.2 percent share of social security tax on wages paid to qualifying employees, effective for wages paid from March 19, 2010 through December 31, 2010.

In addition, for each qualified employee retained for at least 52 consecutive weeks, businesses will also be eligible for a general business tax credit, referred to as the new hire retention credit, of 6.2 percent of wages paid to the qualified employee over the 52 week period, up to a maximum credit of $1,000."

Well worth a visit.

The New Health Care Law - How Does it Affect You?

As if the entire process and components of the Health Care legislation weren’t confusing enough, the first part (H.R.3590) not only modified itself in certain areas, but the second part (H.R.4872) partially modified the first just one week later!

If you do feel compelled to read through the actual legislation yourself, it’s probably a good idea to first review the Joint Committee’s explanation, which you can find at http://www.jct.gov/publications.html?func=startdown&id=3673 (released on 3/21/10 as document JCX-18-10 and entitled Technical Explanation Of The Revenue Provisions Of The “Reconciliation Act Of 2010,” As Amended, In Combination With The “Patient Protection And Affordable Care Act”).

In an attempt to clarify the overall impact, this overview incorporates the following two Acts that recently became law and addresses the law as it stands after their combined passage. They are as follows:

• H.R.3590 - Patient Protection and Affordable Care Act - signed into law on 3/23/10. (Available at http://hdl.loc.gov/loc.uscongress/legislation.111hr3590)
• H.R.4872 - Health Care and Education Affordability Reconciliation Act of 2010 - signed into law on 3/30/10. (Available at http://hdl.loc.gov/loc.uscongress/legislation.111hr4872)

While the thousands of pages of text in the new law address a host of issues relating to health care related items, including taxes (as well as seemingly unrelated items such as student loans), the key tax issues fall into a handful of categories that affect individuals and businesses:

• New and/or Increased Taxes and Fees
• New and/or Expanded Credits and Incentives
• Deduction/Exclusion Limitations and/or Restrictions
• Information Reporting and Disclosure
• New and/or Expanded Administrative Requirements

Without further ado, here is a brief discussion of the more widely-applicable tax related provisions.

NEW AND/OR INCREASED TAXES AND FEES

   BUSINESSES

• EXCISE TAX ON HIGH COST EMPLOYER-SPONSORED HEALTH COVERAGE
• Imposes a new nondeductible 40% excise tax on “coverage providers” of employer-sponsored health insurance if the aggregate value of such coverage for an employee exceeds a specified threshold. Depending on the type of coverage, “coverage providers” are generally employers, and/or plan administrators.
• The threshold for 2018 for individuals is $10,200 and for families it is $27,500, but will be subject to adjustment for differences in increases in health care costs between 2010 and 2018 compared to projections. In addition, adjustments will be made based on differences in age, gender, and high-risk profession rates.
• Effective for taxable years beginning after 12/31/17.
• IMPOSITION OF ANNUAL FEE ON BRANDED PRESCRIPTION PHARMACEUTICAL MANUFACTURERS AND IMPORTERS
• Imposes an annual nondeductible fee on entities that manufacture and/or import branded prescription drugs for sale to (or attributable to) certain government programs. The multi-billion dollar fees are to be apportioned amongst the covered businesses based on their relative shares of branded prescription drug sales for the prior year (more heavily weighted for businesses with higher sales).
• Effective for calendar years beginning after 12/31/10.
• IMPOSITION OF ANNUAL FEE ON HEALTH INSURANCE PROVIDERS
• Imposes an annual nondeductible fee on certain entities that provide health insurance coverage of United States health risks as part of their business.
• The multi-billion dollar fees are to be apportioned amongst the covered businesses based on their relative shares of their health insurance net written premiums for the prior year (more heavily weighted for businesses with higher sales).
• Effective for calendar years beginning after 12/31/13.
• EMPLOYER RESPONSIBILITY FOR EMPLOYEE COVERAGE
• Requires certain “large” employers (generally those with an average of at least 50 full time employees during the prior calendar year) to offer minimum essential health care coverage. Those failing to do so are generally subject to a nondeductible excise tax of $166.67 per employee per month (in excess of a 30-employee threshold).
• Also imposes a nondeductible excise tax on large employers that do offer employees the opportunity to sign up for minimal essential coverage, but one or more instead purchase coverage through an exchange that allows or pays a premium tax credit or cost-sharing reduction. The penalty for this situation is $250 per employee per month, and is limited to the amount of the first penalty noted above (which also serves as an overall limitation).
• Each of the dollar amounts above will be adjusted for inflation after 2014.
• Effective starting after 12/31/13.
• EXCISE TAX ON MEDICAL DEVICES
• Imposes a 2.3% excise tax on the sale of certain medical devices, to be borne by manufacturers, producers, or importers of covered devices. Taxable medical devices are those defined in section 201(h) of the Federal Food, Drug, and Cosmetic Act (21 U.S.C. 321) that are intended for humans. This generally means the following:
• An instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article, including any component, part, or accessory, which is (1) recognized in the official National Formulary, or the United States Pharmacopeia, or any supplement to them, (2) intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment, or prevention of disease, in man or other animals, or (3) intended to affect the structure or any function of the body of man or other animals, and which does not achieve its primary intended purposes through chemical action within or on the body of man or other animals and which is not dependent upon being metabolized for the achievement of its primary intended purposes. (One example might be an Ultrasonic air embolism monitor used as a monitoring device in the area of Anesthesiology.)
• However, the following items are generally excluded:
• Eyeglasses, contact lenses, hearing aids, and any other items determined to be typically purchased at retail by the general public for their own personal use.
• Effective for sales after 12/31/12.

   INDIVIDUALS

• ADDITIONAL HOSPITAL INSURANCE TAX ON HIGH-INCOME TAXPAYERS
• Imposes an additional 0.9% tax on wages (and self-employment income) of those earning more than a threshold amount. That threshold is $250,000 for joint (or surviving spouse) returns, $125,000 of married-filing-separate returns, and $200,000 for other returns.
• Effective for compensation received in tax years beginning after 12/31/12.
• EXCISE TAX ON INDOOR TANNING SERVICES
• Imposes (on the individual using the services) a 10% tax on the amount paid for the indoor tanning services.
• Effective for services performed on or after 7/1/10.
• INCREASE IN ADDITIONAL TAX ON DISTRIBUTIONS FROM HSAS AND ARCHER MSAS NOT USED FOR QUALIFIED MEDICAL EXPENSES
• Increases from 10% to 20% the additional tax imposed on disqualifying distributions from an HSA or Archer MSA.
• Effective for disqualifying distributions made during tax years starting after 12/31/10.
• EXCISE TAX ON INDIVIDUALS WITHOUT ESSENTIAL HEALTH BENEFITS COVERAGE
• Requires most U.S. citizens and legal residents, as well as their dependents, to maintain a minimum level of health care coverage. Those who do not will generally be subject to a penalty. This penalty is based on household income, with a maximum penalty (per month, per person) of $95 for 2014, $325 for 2015, $695 for 2016, and indexed for inflation thereafter. Penalty amounts for minors (under 18) are 50% of the adult amounts, and the maximum family penalty is 300% of the individual adult penalty (but further limited to certain national averages).
• Effective for tax years starting after 12/31/13.
• UNEARNED INCOME MEDICARE CONTRIBUTION
• Imposes 3.8% Medicare tax on individuals, trusts, and estates with unearned income and that have modified adjusted gross income in excess of certain thresholds.
• For individuals, that tax is based on the lesser of (1) net investment income or (2) modified AGI over $250,000 (for joint or surviving spouse returns; $125,000 for married filing separate; all other individuals have a threshold of $200,000).
• For trusts and estates, the tax is based on the lesser of (1) undistributed net investment income or (2) the excess of AGI over the dollar amount where the highest income tax bracket starts. Caveat: For trusts and estates, the threshold (for 2010) starts at only $11,200, far below the those applicable to individuals.
• Note that tax-free investments (e.g., certain bonds) are exempt from this tax.
• Effective for tax years beginning after 12/31/12.

NEW AND/OR EXPANDED CREDITS AND INCENTIVES

   BUSINESSES

• ESTABLISHMENT OF SIMPLE CAFETERIA PLANS FOR SMALL BUSINESSES
• Provides eligible small employers with a safe harbor exemption from some of the nondiscrimination rules that otherwise apply to cafeteria plans. Eligible employers are generally those that (1) allow all employees to participate and elect any available benefit under the plan, (2) provide a minimum contribution for all non-highly-compensated employees, and (3) have no more than 100 employees (as an average for the 2 prior years).
• Effective for tax years beginning after 12/31/10.
• QUALIFYING THERAPEUTIC DISCOVERY PROJECT CREDIT
• This provision is a real sleeper and has had surprisingly little press despite its generous provisions. It provides a 50% nonrefundable investment tax credit to certain small businesses (with no more than 250 employees) that invest in qualifying “therapeutic discovery” projects in years beginning in 2009 or 2010. Covered projects are those designed to:
• Treat or prevent diseases or conditions via pre-clinical activities, clinical trials, and clinical studies, or carrying out research protocols, for the purpose of obtaining approval of a product under specific sections of the Federal Food, Drug, and Cosmetic Act or the Public Health Service Act;
• Diagnose diseases or conditions or to determine molecular factors related to diseases or conditions by developing molecular diagnostics to guide therapeutic decisions; or
• Develop a product, process or technology to further the delivery or administration of therapeutics.
• Qualified investments are the aggregate amount of costs paid or incurred for the tax year for expenses necessary for and directly related to the conduct of a qualifying therapeutic discovery project, but exclude (1) compensation paid to the CEO and the four highest paid officers other than the CEO, (2) interest expense, (3) facility maintenance expenses, (4) service costs as determined under the uniform capitalization rules, and (5) any other expense determined by the Secretary to be appropriate under the circumstances.
• Alternatively, qualifying taxpayers may generally elect to receive a grant instead of a credit with respect to their qualifying investment.
• Note: This provision is not automatic for potentially qualifying small businesses. It requires potential recipients to apply to the program which is to be established by the Secretary (in consultation with the Department of Health and Human Services) within 60 days after 3/23/10. Following the submission of an application, the Secretary will have 30 days to approve or reject the application. Selection criteria will take into consideration only those projects
• That show reasonable potential to result in new therapies to treat areas of unmet medical need, or to prevent, detect, or treat chronic or acute diseases and conditions, to reduce long-term health care costs in the United States, or to significantly advance the goal of curing cancer within 30 years, and
• That have the greatest potential to create and sustain high quality, high-paying jobs in the United States, and to advance U.S. competitiveness in the fields of life, biological, and medical sciences.
• Effective for amounts paid or incurred in tax years beginning after 12/31/08.

   INDIVIDUALS

• EXCLUSION FOR ASSISTANCE PROVIDED TO PARTICIPANTS IN STATE STUDENT LOAN REPAYMENT PROGRAMS FOR CERTAIN HEALTH PROFESSIONALS
• Excludes from income amounts received by individuals under the National Health Service Corps loan repayment program (as well as certain state programs) intended to provide for increased health care availability in underserved areas.
• Effective for amounts received in tax years starting after 12/31/08.
• EXPANSION OF ADOPTION CREDIT AND ADOPTION ASSISTANCE PROGRAMS
• Raises the maximum adoption credit (as well as the income exclusion for employer-provided adoption assistance) to $13,170 for 2010, with additional changes to the inflation adjustment and income limitation threshold for post-2010 years. Also makes the credit refundable starting in 2010.
• The sunset of these provisions (which reduces the amounts to prior, lower amounts) is also delayed by 1 year (i.e., for tax years beginning after 12/31/11).
• PREMIUM ASSISTANCE TAX CREDIT
• Provides a refundable tax credit for individuals and families to help subsidize the purchase of health insurance through an exchange. The amount of the credit is based on the insured person’s income and is generally available for those with household incomes between 100% and 400% of the federal poverty level and who do not receive (or are not offered) health insurance through an employer.
• Effective for tax years ending after 12/31/13.
• REDUCED COST-SHARING FOR INDIVIDUALS ENROLLING IN QUALIFIED HEALTH PLANS
• Establishes a subsidy to help lower-income individuals and families (household incomes between 1 and 4 times the poverty level) afford health care coverage.
• Effective from 3/31/10.

CREDIT/DEDUCTION/EXCLUSION LIMITATIONS AND/OR RESTRICTIONS

   BUSINESSES

• MODIFICATION OF ITEMIZED DEDUCTION FOR MEDICAL EXPENSES
• Increases the lower limit for taking an itemized deduction for unreimbursed medical expenses from 7.5% to 10% of Adjusted Gross Income (for regular tax purposes, but leaves the threshold for AMT purposes unchanged). If taxpayer (or their spouse) reaches age 65 during any of the tax years 2013 through 2016, this increase does not apply to such years.
• Effective for taxable years beginning after 12/31/12.
• LIMITATION ON EXCESSIVE REMUNERATION PAID BY CERTAIN HEALTH INSURANCE PROVIDERS
• Denies a deduction for executive compensation in excess of $500,000 to certain health insurance providers. This generally excludes employers with self-insured plans. In addition, performance-based compensation does not escape this limitation.
• Effective for compensation for tax years beginning after 12/31/12 that are attributable to services performed during years beginning after 12/31/09.
• ELIMINATION OF DEDUCTION FOR EXPENSES ALLOCABLE TO MEDICARE PART D SUBSIDY
• Reduces the deduction for expenses attributable to retiree prescription drug expenses by the amount of the subsidy (to the extent the subsidy is excluded from income).
• Effective for tax years beginning after 12/31/12.
• MODIFICATION OF SECTION 833 TREATMENT OF CERTAIN HEALTH ORGANIZATIONS
• Restricts certain special insurance company tax benefits to those entities satisfying a minimum medical loss ratio of 85% for the year (i.e., the percentage of its total premium revenue expended on reimbursement for clinical services provided to enrollees during the year).
• These rules generally allow Blue Cross, Blue Shield, and similar organizations a deduction of 25% of the year’s claims and liabilities under cost-plus contracts as well as administrative expenses related to such claims and contracts (minus the prior year’s surplus for regular tax), as well as other tax benefits.
• Effective for tax years beginning after 12/31/09.
• ELIMINATION OF UNINTENDED APPLICATION OF CELLULOSIC BIOFUEL PRODUCER CREDIT
• Changes the cellulosic biofuel producer credit so that it no longer applies to unprocessed fuels with specified percentages of water, sediment, or ash content, such as “black liquor.”
• Effective for fuels sold or used after 1/1/10.

   INDIVIDUALS

• DISTRIBUTIONS FOR MEDICINE QUALIFIED ONLY IF FOR PRESCRIBED DRUG OR INSULIN
• Restricts allowable distributions from Health FSAs, HSAs, HRAs, and Archer MSAs to (1) prescribed drugs, including over-the-counter medicines if prescribed by a doctor and (2) insulin.
• Effective for expenses incurred after 12/31/10.
• LIMITATION ON HEALTH FLEXIBLE SPENDING ARRANGEMENTS UNDER CAFETERIA PLANS
• Imposes an upper limit on Health FSAs under cafeteria plans of $2,500 per year (indexed for future inflation).
• Effective for taxable year beginning after 12/31/12.

INFORMATION REPORTING AND DISCLOSURE

   BUSINESSES

• INCLUSION OF COST OF EMPLOYER-SPONSORED HEALTH COVERAGE ON W-2
• Requires employers to disclose the value of health insurance coverage on each employee’s W-2.
• Effective for tax years beginning after 12/31/10.
• EXPANSION OF INFORMATION REPORTING REQUIREMENTS
• Requires businesses to file information returns for all payments totaling $600 or more, even if the recipient is a corporation (but not including tax-exempt corporations).
• Also expands the scope of the type of payments for which reporting is required to include all payments in consideration for property, and other gross proceeds for both property and services.
• Effective for payments made after 12/31/11.

   BUSINESSES AND INDIVIDUALS

• CODIFICATION OF ECONOMIC SUBSTANCE DOCTRINE AND PENALTIES
• Having been discussed for quite some time, places the Economic Substance doctrine into the Code. The Economic Substance doctrine generally stands for the proposition that there should be no tax benefits to the extent that there was no real financial motive aside from saving federal taxes.
• Also establishes an increase in the penalty where the transaction(s) at issue did not have economic substance (i.e., 40% instead of 20%).
• Effective from 3/31/10.

NEW AND/OR EXPANDED ADMINISTRATIVE REQUIREMENTS

   BUSINESSES

• ADDITIONAL REQUIREMENTS FOR CHARITABLE HOSPITALS
• Sets new requirements for charitable hospitals, in addition to those previously established. These include (1) performance of a community health needs assessment once every 3 years, (2) creation/implementation of a written financial assistance policy, (3) limitation on charges billed for emergency or other medically necessary care for those qualifying for financial assistance, and (4) limitation on extraordinary collection efforts without first trying to determine if the responsible persons are eligible for financial assistance.
• Also imposes a penalty of up to $50,000 for failures to conduct the community health needs assessment.
• Generally effective for tax years beginning after 3/23/10, except for the community health needs assessment (effective for tax years beginning after 3/23/12) and the penalty for failure to perform the assessment (effective for failures after 3/23/10).
• TIME FOR PAYMENT OF CORPORATE ESTIMATED TAXES
• Increases the amount of the required federal estimated tax due in the 3rd quarter 2014 by 15.75 percentage points.
• Effective from 3/31/10.

As always, I look forward to your questions and comments.

The Reconciliation Act was signed into law today

As you may already know by now, the second part of the Health Care legislation (H.R. 4872 - Health Care and Education Affordability Reconciliation Act of 2010) was signed into law today, March 30, 2010.

While I'm still working on a combined write-up for the Reconciliation Act and the preceding Patient Protection and Affordable Care Act (H.R. 3590), you can access the actual laws here:

• H.R. 3590
• H.R. 4872

Caveat:  H.R. 3590 at times changes its own provisions (e.g., section 9001 is modified by section 10901), and H.R. 4872 goes on to further change H.R. 3590 (e.g., section 1401 of H.R. 4872 further changes section 10901 of H.R. 3590 which modified section 9001 of that Act), so read carefully!  Not exactly easy to follow.

Happy reading...

Uncertain Tax Positions - Policy of Restraint?

On January 26, 2010, the IRS released an advance copy of Announcement 2010-9 stating its intention to require certain business taxpayers to disclose their "uncertain tax positions" ("UTPs") on their income tax returns. This Announcement (and the IRS's reasoning behind it) was first revealed to the public on that same day as part of IRS Commissioner Doug Shulman's remarks to the New York State Bar Association Taxation Section's Annual Meeting.

While it may not be immediately obvious, the implications are huge.

BACKGROUND
In 2006, the Financial Accounting Standards Board ("FASB") issued its Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes, effective for fiscal years beginning after December 15, 2006. FIN 48 was intended to address the matter of uncertainty in a company's income tax positions in the context of the tax provision reflected in its financial statements (under FASB Statement No. 109, Accounting for Income Taxes).

More specifically, FIN 48 required companies to meet a set of two "more likely than not" (i.e., more than 50%) standards in determining whether they could recognize (for financial statement purposes) the tax benefit from any particular non-routine income tax position. In addition, it imposed new disclosure requirements on affected companies who would then have to report information about their UTPs in their financial statement footnotes.

Not surprisingly, many commentators expressed concern that this new requirement (particularly the footnote disclosures) would inappropriately provide tax authorities with a roadmap in auditing a company's tax returns. The Board responded, in part, by stating that (1) requiring disclosures at the specified aggregate level would not reveal information about a taxpayer's individual tax positions while at the same time providing information that financial statement users would find useful and (2) the FASB was aware that the IRS had recently instituted a detailed reconciliation requirement that provides information about differences between amounts reported in an enterprise s income tax return and its financial statements (i.e., federal form M-3). It went on to state that the FASB believed that this reconciliation requirement and those like it are the sources of information that taxing authorities use to focus their examination. In other words, the FASB didn't believe that such FIN 48 disclosures would end up serving as a roadmap to the taxing authorities. (Note: FIN 48 was subsequently made a part of FASB Accounting Standards Codification (ASC) 740-10, Income Taxes.)

THE ANNOUNCEMENT
Contrary to the FASB's expressed belief, the IRS is now seriously considering not only using that roadmap, but asking affected taxpayers to add signposts and neon signs to that roadmap to light the way!

In its Announcement, the IRS starts off with the following statement:

"The Internal Revenue Service is considering changes to reporting requirements regarding certain business taxpayers uncertain tax positions in order to improve tax compliance and administration. The Service is developing a schedule requiring certain business taxpayers to report uncertain tax positions on their tax returns. This Announcement discusses the potential content of such a schedule and invites public comment on the Service s proposed approach. The schedule will require the annual disclosure of uncertain tax positions in the form of a concise description of those positions and information about their magnitude. The proposal does not require the taxpayer to disclose the taxpayer's risk assessment or tax reserve amounts, even though the Service can compel the production of this information through a summons."

WHAT INFORMATION IS THE IRS CONTEMPLATING?
The Announcement provides that the IRS is currently contemplating that affected taxpayers will be required to provide the following information regarding each of their UTPs:

• The Internal Revenue Code sections potentially implicated by the position;
• A description of the taxable year or years to which the position relates;
• A statement that the position involves an item of income, gain, loss, deduction, or credit against tax;
• A statement that the position involves a permanent inclusion or exclusion of any item, the timing of that item, or both;
• A statement whether the position involves a determination of the value of any property or right;
• A statement whether the position involves a computation of basis; and
• Specification for each UTP, the entire amount of U.S. federal income tax that would be due if the position were disallowed in its entirety on audit. This amount is the maximum tax adjustment for the position reflecting all changes to items of income, gain, loss, deduction, or credit if the position is not sustained. 

Interestingly, while many practitioners and taxpayers would arguably view the above as troublesome (to say the least), Commissioner Shulman went on to say that "We could have asked for more a lot more but chose not to. We believe we have crafted a proposal that gives us the information we need to do our job without trying to get in the heads of taxpayers as to the strengths or weaknesses of their positions." Whether we agree or disagree with his comments (or the IRS's intentions in general on this matter), there is little question that the IRS will rely heavily on this disclosure in both selecting companies for examination and in carrying out those audits.

WHO WOULD THE IRS BE TARGETING?
As currently proposed, the new requirement would apply to business taxpayers with over $10 million in total assets if they have one or more UTPs of the type required to be reported on the contemplated schedule. According to the IRS, this "includes a taxpayer who prepares financial statements, or is included in the financial statements of a related entity that prepares financial statements, if that taxpayer or related entity determines its United States federal income tax reserves under FIN 48, or other accounting standards relating to uncertain tax positions involving United States federal income tax."

As written, the scope of this planned disclosure requirement would be fairly broad and will undoubtedly increase the compliance burden on many affected taxpayers.

HOW COMMITTED IS THE IRS TO THIS INTIATIVE?
Based on my reading of the Announcement, Commissioner Shulman's comments, and the state of the federal budget, it's probably fair to say that they are very committed to it. In addition, the Announcement itself states that the IRS intends to publish the new schedule as quickly as possible and will mandate its use for returns filed after its release. Nevertheless, they have requested comments by March 29, 2010.


Clearly, the new requirements could have very significant reporting implications. As this issue is very new and could have substantial changes be sure to keep an ear open for additional information on this important topic.


If you would like to read the entire Announcement, it is available on the IRS website at http://www.irs.gov/pub/irs-drop/a-10-09.pdf