FEDERAL TAX ALERT PAGE 1 OCTOber 2012

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Presidential Candidates’ tax Platforms

NEWS StoriESto the premium assistance tax credit. Olson expressed disappointment that planning communications strategy is

News Items Page 3

irs UPs PriCe for doCUment reqUests

IRs actIoN News Page 4

CoUrts sPlit on severanCe Pay

couRt oPINIoNs Page 9

rPo direCtor says farewell

ethIcs coRNeR Page 11

tax on texts?et ceteRa Page 12

ContentsNews Items ..............................1IRS Action News.....................4Court Opinions.......................9Ethics Corner ....................... 11Et Cetera................................ 12Quotes.................................... 12

insertsFederal Tax Update Seminars RTRP Exam Prep Courses NSTP Has MovedFall Tax Client Newsletter

sHUlman andolson testify on irs HealtHCare Plan imPlementation efforts

IRS Commissioner Douglas Shulman testified at a House Oversight and Government Reform Committee hearing in August on the agency’s efforts to phase in the health care law provisions. Shulman provided updates on the IRS’s staged implementation of the Afford- able Care Act and reported that IRS has made “substantial prog- ress.” The IRS has conducted an extensive outreach program for the Small Business Health Care Tax Credit. It also has issued guidance and updated forms and instructions for the existing Adoption Credit, which the Affordable Care Act expanded and made refundable. The IRS’s most determined efforts relate to the development of rules for the premium assistance tax credits that are designed to help millions of American families afford health insurance starting in 2014, according to Shulman.

Committee Chairman Darrell Issa (R-California) said in a statement that the Committee is concerned about the new law’s complicated subsidy scheme and the challenges the IRS faces with implementation. Issa noted that taxpayers will have to provide notification to

a government agency about key information in their lives within

30 days of certain events: didthey get a raise or take another job; did a family member move into the household; were they married or divorced; what is the nature of their employer-paid health care coverage. The IRS is also ill-equipped to handle the massive staffing and technology ramp-ups required to handle this data, he said.

NTA Says IRS Required to Step Out of it Historical Role

National Taxpayer Advo- cate Nina Olson also testified, stating that the IRS has done a good job

implementing healthcare reform, but she indicated that concerns remain regarding taxpayer advocacy, communications, outreach, inter-agency referrals, identity theft, small business guidance, and resources. Olson noted that, in recent years, Congress has tasked the IRS with admin- istering a number of social and economic benefit programs that require the IRS to go beyond its main historical role as the nation’s tax collector. For example, benefits administra- tion requires customer service and social work training. She urged IRS to immediately begin including trained Taxpayer Advocate Service representa- tives on its Affordable Care Act teams. She believes that the IRS and sister agencies must formu- late a communications strategy in anticipation of public ques- tions, particularly those related

FEDERAL TAX ALERT PAGE 2 OCTOber 2012

proceeding slowly. The 2013deadlines are fast approaching, and IRS call centers may be flooded with inquiries because the subsidy takes the form of a tax credit, Olson noted.

For Shulman’stestimony, s e e

h tt p:// o v e r si g h t. h o u s e . g o v/ wp-c o n t e n t/ u p l o ad s/2012/ 08 / S h u l m a n- T e s t i m o n y . p d f .

For Olson’s testimony, see h t t p : / / o v e r s i g h t . h o u s e . g o v / wp-c o n t e n t/ u p l o ad s/2012/ 08/ O l s o n- T e s t i m o n y . p d f .

To view a video of the hearing, s e e h tt p:// o v e r si g h t. h o u s e . g o v/ h e a r i n g/i r s-en f o r ci n g- o b a m ac - a r es- n e w- r u les- a n d- t a x es/ .

irs rUle CoUld limit aCCess to affordaBle HealtH insUranCe, Gao says

The Government Account- ability Office (GAO) reported in June that a small but significant number of uninsured children from low-to moderate-income homes would not qualify for a premium tax credit under the IRS’s proposed definition of “access to affordable employer- sponsored insurance.” Under the 2010 Patient Protection and

Affordable Care Act, about 1,750,000

children who were uninsured in January of2009 would be ineligible for Medicaid, the State Children’s Health Insurance

Program (CHIP) or the new premium tax credit because they would be considered to have access to employer-sponsored insurance

FroM tHE EDitorTaxmageddon is upon us and no one in Congress is backing down. They are

too busy trying to get re-elected. The comparison of the Presidential candidates’ tax platforms in this issue will help you understand the direction the tax law may go in January. Of course, just because a President is elected does not mean that Congress will move quickly on his proposals. However, with the expiration of the Bush tax cuts and tax filing season set to begin, Congress must take immediate action. I predict a quick, six-month or one-year extension of the Bush tax cuts. Let’s see how I do.

The IRS Action News feature, which begins on page 4, covers a wide range of topics from payroll reporting agent authorization rules to obtaining tax transcripts to higher processing fees for document requests. The good news from IRS statistics is that adjusted gross income rose 6.1 percent from 2009 to 2010, compared to the 7.7 percent decrease recorded from 2008 to 2009. See page 5.

I read so many interesting court opinions each month that it is hard to pick out a few to cover in the newsletter. This month I had no problem. A federal appeals court in the middle of the country ruled that severance pay is not subject to FICA taxation. Several years ago, a federal court in D.C. came to the opposite conclusion. Thus, we have a split in the circuits, so taxpayers in other regions of the country face uncertainty. Congress or the Supreme Court may have to step in to resolve the issue. See page 9 for an explanation.

The biggest news in Ethics Corner this month is the latest revision to Circular230. The IRS has addressed much of the complexity of the Circular 230 requirements by formulating one standard for all written advice. It also has reconsidered the required disclaimer and decided that the disclaimers were being used so much, that no one was paying attention to them. Read the IRS Explanation of the proposed rules, found atthe link to the regulations on page 11. Also, this issue covers outgoing Return PreparerOffice Director Dave Williams’ farewell to tax practitioners on page 11.

Et Cetera warns you of a little-publicized proposal of the Federal Communications Commission to tax consumers on internet services. Even more disturbing to parents of teenagers is the possible imposition of a tax on text messages. See page 12. Et Cetera also describes the conundrum of the heirs of a famous art dealer who inherited a famous work that is illegal to sell, but is valued at $65 million by the IRS. See page 12.

Best wishes,

volUnteer-PrePared retUrns still sHow siGnifiCant inaCCUraCies

The accuracy rate of returns prepared by volunteers improved 10 percentage points from the 2011 to the 2012 filing season, but still fell below the 50% mark, according to a new audit by the Treasury Inspector General for Tax Administration (TIGTA). Three of 16 tax topics tested contributed the most errors -- the deductions for Educator Expenses, Individual Retirement Arrange- ment contributions, and small business expenses. The accuracy rates for three other topics ranged from 77 to 83 percent, and the accuracy rates for the remaining 10 tax topics were greater than 90 percent. TIGTA found that tax returns were prepared incor- rectly because “volunteers did not follow all guidelines.” For example, volunteers did not always use the intake sheets correctly.

The IRS has implemented an extensive quality review process, but it has limitations and may not be providing reliable results, TIGTA said. The accuracy rate for the IRS’s statistical sample of prepared tax returns is92 percent. This year, the IRS also conducted53 anonymous shopping visits. Volunteers prepared tax returns for IRS shoppers with a60 percent accuracy rate. The IRS has taken numerous actions to ensure the integrity of volunteers. It has strengthened the Volun- teer Standards of Conduct and requires that all volunteers take ethics training. It also made improvements to the Volunteer Program hotline to better track and control contacts received through its internal and external referral processes.

Intake Sheets Key to TIGTA’sRecommendations

Lucia Smeal, Esq.EditorProfessor, Masters in Taxation ProgramGeorgia State University lucia@nstp.org

Technical Editor:Ronald F. Larson, Esq.

Contributing Writers:Robert J. LandyKimberly Keeley

TIGTA recommended that the IRS continue to emphasize with volunteers the necessity of reviewing the intake sheet with taxpayers during tax return preparation to ensure tax returns are prepared accurately. The IRS should also establish minimum due diligence standards for volunteers when

per the IRS’s proposed affordability stan- dard. This standard interprets the Afford- able Care Act as defining affordability for an employee’s eligible family members based on the cost of an employee-only plan. The IRS’s interpretation does not consider the higher cost of family insurance and

could result in some children remaining uninsured, especially since under the Act, the State CHIP program is not funded beyond 2015. In May, the IRS finalized its

rule but deferred finalizing the proposed affordability standard. The GAO recom- mended that the Secretary of the Treasury and the Commissioner of Internal Revenue consider the impact of the proposed afford- ability standard in future rulemaking. Editor’s Note: This news item illustrates the complex and expanded role the IRS

will be taking on as one of the key federal agencies charged with enforcing compliance with the new health care law.

preparing tax returns. In their response to the report, IRS officials agreed with the recommendations. The IRS updated Form13614-C, Intake/Interview and Quality Review Sheet, and plans to continue to emphasize training on proper intake and interview techniques. The IRS plans to adjust volunteer training and resource materials to clarify and underscore the due diligence obligations of volunteers when preparing tax returns.

Presidential Candidates’ tax Platforms 2012This year’s Presidential election comes in the midst of a potential fiscal crisis that could occur just weeks after the November 6,

2012 vote—the expiration of the Bush tax cuts, which have now been in place for almost 12 years. The Congressional Budget Office has warned that if taxes on all Americans are allowed to go up suddenly, when the lower rates expire on December 31, 2012, it could trigger another economic crisis in the United States. Deep spending cuts also will automatically take place without Congressional action.

The Presidential candidates’ tax platforms, outlined below, show the key elements in the debate over which tax plan would successfully move the economy in the right direction. This side-by-side comparison will give you a preview of what tax changes to expect within the coming months. We also hope this information will give you a basis for comparing the different candidates so you can make an informed decision when you vote.

For further information, see the links below to the two parties’

platforms. Democratic Party:

h tt p:// w w w .de m o cr a ts. o r g/ a b o u t/ p a r t y_ p l a t f o r m Republican Party:

h tt p:// w w w . g o p .c o m/2012- r e p u b lic a n- p l a t f o r m_ h o m e/

INDIVIDUAL TAX PROVISIONS DemOcRAT: ObAmA RePUbLIcAN: ROmNey

TAX RATES and BUSH TAX CUTS:Currently 6 brackets: 10%, 15%, 25%, 28%,33% and 35%.

Long-Term Capital Gains Rate:Now, 0% for taxpayers in the 15% bracket and15% for individuals in the 25% bracket andhigher. Increases to 20% in 2013.

Dividend Rate:Now, 0% for taxpayers in the 15% bracket, 15%for individuals in the 25% bracket and higher.Expires in 2013 when dividends will be taxedin regular brackets up to 39.6%.

End Bush Tax cuts for individuals with income above $200,000 and married couples with income above $250,000. Top rate would be39.6%.Implement the “Buffett Rule” to make house- holds with over $1 million in income pay a minimum effective rate of 30%;

Allow the current reduced tax rates on divi- dends and capital gains to expire as scheduled for upper-income taxpayers..

The maximum dividend and capitalgains tax rate for upper-income taxpayers($200,000/$250,000) would increase from15% to 20%. Other taxpayers would keepexisting lower rates

Extend Bush tax cuts for all income levels pending tax reform.Enact tax reform to reduce each bracket by20%. The top bracket would be 28% and thelowest bracket would be 8%.

Keep 15% capital gains and dividend rate; Eliminate tax on capital gains, dividends,and interest for taxpayers with yearly income under $200,000.

ESTATE and GIFT TAXES:Current estate and gift tax exemption is $5million per person with a tax rate of 35%.These numbers will revert to a $1 millionexclusion with a 55% tax rate in 2013.

Make permanent the estate tax levels from2009 with a top rate of 45 % and an exclusionof $3.5 million per person. Make permanentthe ability of a surviving spouse to use anyunused estate and gift tax exclusion of thedeceased spouse (portability)

Completely repeal the estate tax.

HEALTHCARE TAX INCENTIVESand FUNDING PROVISIONS:Net Investment Tax and IncreasedMedicare tax set to take effect in 2013

Supports full implementation of Affordable Care Act which provides health insurance premium tax credits up to 35% for individuals and small businesses; also imposes penalties on large employers that do not offer insur- ance to their employees. Includes increased Medicare tax on higher-income individuals from 2.9% to 3.8% and a new 3.8% tax on netinvestment income of individuals with income above the $200,000/$250,000 married jointfiler threshold. Investment income includes flow-through business income, interest, divi- dends and capital gains.

Repeal the Affordable Care Act, including the0.9% additional Medicare tax on wages andthe 3.8% tax on net investment income ofhigh-income individual taxpayers which is setto begin in 2013.

ALTERNATIVE MINIMUM TAX (AMT) Index to inflation the AMT exemption amount; permanent fix would rely on the Buf- fet rule described above

Repeal the AMT.

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;

Printer: BRIDGETOWN PRINTING, Portland, Oregon.

bUSINeSS TAX PROVISIONS DemOcRAT: ObAmA RePUbLIcAN: ROmNey

CORPORATE TAX RATE: Lower the top corporate tax rate to 28% from the current 35%.

Lower the corporate tax rate from 35% to25%. Eliminate the corporate AlternativeMinimum Tax.

INTERNATIONAL TAX PROVISIONS: Opposes moving to a “territorial system” of taxing multinational companies;Take away deductions for outsourcing opera- tions; make companies pay an international minimum tax on overseas profits. Create a tax credit equal to 20% for expenses incurred by companies moving their overseas operations back to the U.S. (known as “insourcing”).

Move the U.S. from a worldwide tax system to a territorial system, where income istaxed only in the country where it is earned; allow a “tax holiday” for U.S. corporations bringing corporate profits now held overseas back to the U.S. (known as “repatriating” the income.)

DEPRECIATION AND CAPITAL RECOVERY:

Job-related tax credits:

Extend for 1 year the full expensing of capital costs. Increase expensing deduction limits to$250,000 for capital investment in business property, with an $800,000 purchase limit.

New tax credit of up to $2 billion in each of three years, 2012 through 2014, for compa- nies investing in new factories, equipment, or production in depressed areas. Taxpayers would have to apply for a limited credit allo-cation. Allow a 10% tax credit for

Extend for 1 year the full expensing of capital expenditures.

No specific job tax benefits but favors re- duced regulations on businesses.

RESEARCH & DEVELOPMENT TAX CREDIT:

Make the R&D credit permanent and in- crease the rate of the Alternative Simplified Credit (ASC) from 14% to 17 %.

Make the R& D credit permanent.

ENERGY TAX INCENTIVES: Supports numerous alternative or “clean energy” tax credits.

No specific tax provisions but instead backs increased drilling in the U.S. for oil and natural gas.

NOTICETAX HOTLINE

Monday, Wednesday & Friday9 AM — 2 PM PST

10 AM — 3 PM MST11 AM — 4 PM CST12 PM — 5 PM EST

DIRECT LINE360-695-0556

Technical Tax advice provided by NSTP Hotline staff is based upon specific information conveyed by the member. Members should take special care in relying upon recommendations and opinions that reflect the understanding of the Hotline staff member. NSTP and the Hotline staff are not responsible for misapplication of information given. Members are resposible for the utimate verification and application of any information provided by NSTP.

irS ACtioN NEWS

irs modifies Payroll dePosit rUles for filinG rePortinG aGent aUtHoriZations, eleCtroniC Payments

The IRS has issued updated guidance to instruct that reporting agents who remit payroll taxes to the IRS on a client’s behalf must use the Treasury Department’s elec- tronic federal tax payment system (EFTPS) or the Federal Tax Application system. When new authorizations (Form 8655, Reporting Agent Authorization) are submitted to the IRS for increases/decreases in the authority of a reporting agent to act for its client, the previous authorization will remain in effect, except as modified by the new one. Note that agents are now required to

remind their clients at least quarterly that the client is ultimately responsible for paying the taxes

due on Forms 940 and 941.

The IRS also updated guidance on the EFTPS programs for batch and bulk providers. Reporting agents must use EFTPS or the Federal Tax Application system in remitting federal tax deposits or payments on behalf of multiple taxpayers. Some taxpayers are required to make federal tax deposits and payments using electronic funds transfer. Taxpayers not required to use EFT may do so voluntarily. However, when a reporting agent remits federal tax deposits or payments on behalf of a taxpayer, the agent must use the EFTPS or the federal tax application system, regardless of whether the taxpayer is required to use the electronic system.

The new rules set forth procedures for participating in the programs, obtaining taxpayers’ authorizations, and submitting electronic taxpayer enrollments. Other items addressed in the revenue procedure include proof of payment; refunds; disaster proce-

dures; provider responsibilities; advertising standards; suspensions from the programs; and penalties.

Federal Tax Deposit Reminders

A single bank now serves as Treasury’s financial agent to enroll taxpayers and their agents in electronic tax payment systems. Final regulations issued in 2010 require most employers to use electronic funds transfer for all federal tax deposits. As of January 1,2011, paper coupons can no longer be used to make deposits of payroll taxes at a bank or other financial institution.

The new procedures are effectiveNovember 19, 2012.

S e e R e v . P r o c. 2012-32 a t h tt p:// w w w .i r s. g o v/ p u b/i r s-d r o p/ r p-12- 32. p df

S e e R e v . P r o c. 2012-33 a t h tt p:// w w w .i r s. g o v/ p u b/i r s-d r o p/ r p-12- 33. p df

irs revises eleCtroniCfilinG reqUirements

The IRS has updated and changed Publi- cation 1220, Specifications for Filing Forms1097, 1098, 1099, 3921, 3922, 5498, 8935 and W-2G electronically through the IRS FIRE system. This Revenue Procedure must be used for the preparation of Tax Year 2012 information returns and infor- mation returns for tax years prior to 2012 filed beginning January 1, 2013.

Publication 1220 summarizes changes in a “What’s New for Tax Year 2012” section. Note that the Due Date Table has been rede- signed and updated. Also of note, Form4419, Application for Filing Information Returns Electronically, (FIRE) must now be submitted at least 45 days before the due date of the return(s). There are several changes to Form 1097-BTC. Also, there are changes to Forms 1098-C, 10998-B, 1099-C,1099-DIV, 1099-K and 5498.

S e e P ub li c a t i o n 1220 a t h tt p:// w w w .i r s. g o v/ p u b/i r s-irbs/irb12-33. p df

irs to CHarGe HoUrly fee for ProCessinG BaCKGroUnd doCUment reqUests

The IRS has revised its fees for processing requests for background file documents on letter rulings, determination letters, technical advice memorandums, or chief counsel advice issued by the National Office. The new fee is $100 per hour for

requests received after September 30, 2012. The hourly fee covers all costs associated with processing the request, including the costs to search for, make redactions to, and provide copies of the documents. Previously, the fee was $23.50 for each letter ruling or technical advice memorandum file and $2 per page for deletions and duplications.

Requests for background documents must be made in writing, must include the file number of the written determina- tion, and must specify whether all of the documents in the file are needed, or only a specific document. The requester will be notified by letter of the total cost to process the documents. The IRS will not release documents to the requester until it receives its fee.

For the full text of Rev. Proc. 2012-31, which includes a sample request letter: h tt p:// w w w .i r s. g o v/ p u b/i r s-d r o p/ r p-12-31. p df

interest rates for foUrtH qUarter of 2012 remain tHe same

The IRS has announced that interest rates for the calendar quarter beginning October1, 2012, will remain the same. The interest rates are computed from the federal short- term rate, based on daily compounding determined during July 2012.

The rates will be:

• three percent (3%) for overpayments (two (2) percent in the case of a corpora- tion);

• three percent (3%) for underpayments;

• five percent (5%) for large corporateunderpayments; and

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

irs PUBlisHes statistiCs for2010 individUal retUrns

The IRS has issued Publication 1304, Individual Income Tax Returns, 2010. This report contains complete individual income tax data for Tax Year 2010 on sources of income, adjusted gross income, exemp- tions, deductions, taxable income, income tax, modified income tax, tax credits, self- employment tax, and tax payments. Clas- sifications are by tax status, size of adjusted gross income, marital status, age, and type

of tax computation. It covers almost 142.9 million Forms 1040, 1040A, and 1040EZ, including electronic returns, filed for Tax Year 2010.

Number of Returns, AGI IncreaseThe report shows that for Tax Year 2010,

the number of individual tax returns filed increased by 2.4 million, or 1.7 percent. Adjusted gross income (AGI) rose $462.7 billion, or 6.1 percent from 2009 to 2010, compared to the 7.7 percent decrease recorded from 2008 to 2009. Total tax liability increased 9.0 percent to $1.1 trillion. A few components of AGI showed decreases between 2009 and 2010. The most notable was taxable interest, which decreased 16.9 percent. Conversely, several components showed large increases for 2010. These included total IRA distributions, net capital gain less loss, and unemployment compen- sation, which increased 62.2 percent, 57.4 percent, and 43.9 percent, respectively.

For the full text of the report, see Publica- tion 1304, Individual Income Tax Returns,2010 h e r e: h tt p:// w w w .i r s. g o v/f i le_ s o u r ce/ p u b/i r s- s o i/10i n a lc r . p df

oKlaHoma viCtims of‘freedom wildfire’ eliGiBle for irs disaster relief

Victims of the Freedom Wildfire that began on August 3, 2012 in parts of Okla- homa may qualify for tax relief from the IRS. The President has declared Creek County a federal disaster area. Some return filing and tax payment deadlines normally occur- ring between August 3 and October 2 were postponed until October 2. The IRS also is waiving the failure-to-deposit penalties for employment and excise tax deposits due on or after August 3, and on or before August20, as long as the deposits were made byAugust 20, 2012.

Relief also may be available to some taxpayers not in the covered disaster area. Taxpayers with records necessary to meet a deadline located in the covered disaster area are entitled to relief. All relief workers affiliated with a recognized government or philanthropic organization assisting in the relief activities and any individual visiting the covered disaster area who was killed or injured as a result of the disaster are entitled to relief.

Casualty LossesThe IRS also has offered taxpayers options

for claiming disaster-related casualty losses. Victims may choose between claiming losses on this year’s federal income tax return or last year’s return. Claiming the loss on an original/amended return for last year will get the taxpayer an earlier refund, but waiting to claim the loss on this year’s return could result in a greater tax saving, depending on other income factors. Remember that individuals may deduct personal property losses that are not covered by insurance or other reimbursements. For details, see Form 4684 and its instructions.

The IRS automatically identifies taxpayers located in the covered disaster area and applies automatic filing and payment relief. However, affected taxpayers who reside or have a business located outside the covered disaster area must call the IRS disaster hotline at 1-866-562-5227 to request this tax relief. Affected taxpayers claiming the disaster loss on last year’s return should put the Disaster Designation “OKLAHOMA/ FREEDOM WILDFIRE” at the top of the form. Any taxpayers contacted by the IRS on a collection or examination matter should explain how the disaster impacts them so that the IRS can provide appro- priate consideration to their case.

most trUCKers Had to file HiGHway Use tax retUrn in early sePtemBer

In late August, the IRS reminded truckers and other owners of heavy highway vehicles that, in most cases, their next federal highway use tax return due date was August 31, 2012. The IRS then suspended that deadline until September 7, 2012, to make programming changes to its Modernized eFile system. The deadline applies to Form 2290 and the accompanying tax payment for the tax year that began on July 1, 2012, and ends on June30, 2013. Returns were to be filed and tax payments made by September 7 for vehicles used on the road during July. The August31 deadline was not extended for taxpayers filing paper returns. For vehicles first used after July, the deadline is the last day of the month following the month of first use. This means that the temporary November30 deadline that generally applied in 2011 will not apply this year.

Vehicles Liable for the Tax

The highway use tax applies to highway motor vehicles with a taxable gross weight of 55,000 pounds or more, including trucks,

truck tractors, and buses. Ordinarily, vans, pick-ups, and panel trucks are not taxable because they fall below the weight threshold. The tax of up to $550 per vehicle is based on weight, and a variety of special rules apply. See the instructions to Form 2290 for more details. Although some taxpayers have the option of filing Form 2290 on paper, the IRS prefers that taxpayers file this form electronically and pay any tax due electroni- cally. Please note that taxpayers reporting25 or more vehicles must e-file.

For more information on the federal hi g h w a y u s e t ax, v i s i t h tt p:// w w w .i r s. g o v/ t r u c k e r s.

irs PUBlisHes Utility allowanCe reGs for low- inCome HoUsinG tax Credit

The IRS has published proposed regula- tions that amend the utility allowance rules for the low-income housing tax credit. The rules clarify that utility costs paid by a tenant based on actual consumption in a submetered rent-restricted unit are treated as paid by the tenant directly to the utility company.

Under the proposed regulations, if a submetering arrangement is not based on a unit’s actual consumption of a utility service, the gross rent for that unit cannot include a utility allowance for that partic- ular utility. If two or more utilities such as electricity and water are treated as subme- tered, the building owner must separately state the amount billed to the tenants for each submetered utility. Changes have been made to the structure of the owner’s fee for administering a submetering arrangement, as well as to the rules for determining the utility allowance of rent-restricted units occupied by tenants receiving federal rental assistance.

Comments for the November 27 IRSpublic hearing were due October 9.

S e e t h e p r o p o s e d r eg ul a t i on s h e r e: h tt p:// ww w .g p o . g o v/ f d sys/ p kg/F R -2012-08-07/ h t m l/2012-19179. h t m

irs sets HearinG date on ProPosed Branded PresCriPtion drUG fee reGUlations

The IRS has scheduled a public hearing on proposed regulations on the branded prescription drug fee imposed by the Patient

Protection and Affordable Care Act. This fee is imposed annually on manufacturers and importers of branded prescription drugs. Each covered entity with aggregate branded prescription drug sales of over $5 million is liable for an annual fee based on its sales of branded prescription drugs. The hearing date is November 9.

irs issUes final rUles on treatment of overall foreiGn and domestiC losses

The IRS has released final regulations on the recapture of overall domestic losses. The rules offer guidance on compliance, on overall foreign losses, and on separate limi- tation losses for individuals and corpora- tions claiming foreign tax credits. The final regulations adopt (with some changes) the December 2007 proposed regulations. The corresponding temporary regulations have been withdrawn.

Under current law, if a taxpayer disposes of property used predominantly outside the United States in a trade or business, gain is recognized on that disposition and is treated as foreign-source income. This is true even if the gain would otherwise be included in a separate category of income generated by the property. A number of rules govern the tax treatment of these dispositions. The new regulations explain the computation of gain recharacterized as foreign source income taking into account recapture. The final regulations also revise the provisions on the calculation of an overall domestic loss. They also clarify that coordination with current law requires adjustments not only to capital gains and losses but to qualified dividend income as well.

S e e T . D . 9595 h e r e: h tt p:// w w w .i r s. g o v/ irb/2012-30_IRB/ a r07. h t m l

irs CorreCts examPles in final rUles on HealtH insUranCe PremiUm tax Credit

The IRS has made several corrections to final regulations on the health insurance premium tax credit. The corrections are to examples related to computing the premium assistance credit

amount and reconciling the premium tax credit with advance credit payments.

S e e t h e o r i g i n a l T . D . 9590 h e r e: h tt p://

ww w .i r s. g o v/irb/2012-24_IRB/ a r05. h t m l

S e e t h e c o r r ect i on s h e r e: h tt p:// w w w . g p o . g o v / fd sy s / p kg /F R -2012-07-12 / p df/2012-16985. p df

Gao says ConGress sHoUld raise aPPraisal tHresHold for nonCasH ContriBUtions

Changes to appraisals used to support tax returns could “lead to reduced taxpayer burden or improved agency performance,” according to a recent Government Accountability Office (GAO) report that suggested the IRS require specific and documented appraisal training require- ments for Art Appraisal Services staff. More significantly, the GAO recommended that Congress consider raising the dollar threshold at which qualified appraisals are required for noncash contributions to reflect inflation. The $5,000 threshold has remained unchanged for more than 25 years. This means that some contributors today must hire appraisers to value prop- erty that would not have needed appraisals in the mid-1980s, when the threshold was adopted. The GAO stated that raising the threshold and giving IRS the authority to adjust this value for inflation in the future would maintain the consistent treatment of taxpayers over time. Further, the IRS seldom challenges appraisals for noncash contributions; consequently, there seems to be little risk in Congress raising the $5,000 dollar threshold, GAO observed.

In the most recent years for which GAO had data, appraisers were commonly involved in the valuation of property worth from $75 billion to $167 billion reported on estate tax returns in 2009. In contrast, less than$17 billion worth of gifts in 2009 and less than $10 billion in noncash contributions in 2008 were likely to involve an appraiser. Gift tax returns that used appraisers had higher audit rates than gift returns that were unlikely to have appraisers.

Appraisers and Audit NumbersThe use of appraisers was not associated

with higher audit rates for estate tax returns and for individual returns with noncash contributions. Although IRS does not specifically target tax returns that involve appraisals, the policies and procedures that IRS has in place to audit returns ensures some coverage of returns that involve appraisals. For example, the IRS already

gives priority to the returns of higher- income individuals in the audit selection

process. These returns are more likely to have appraisals supporting noncash contri- butions than the general population of returns.

Although the IRS has not determined the extent to which appraisals contribute to misreporting, data from an IRS study on taxpayer noncompliance showed a 45 percent error rate on noncash charitable deductions, totaling $4.6 billion in lost revenue. For about every five errors favor- able to the taxpayer, one was unfavorable to the taxpayer.

The IRS agreed with GAO’s recommen- dations.

For the full text of the GAO report, see h tt p:// w w w .ga o . g o v/ p r o d u c ts/G A O-12-608 .

How to Get a transCriPt or CoPy of a Prior year’s tax retUrn from tHe irs

The IRS has reminded taxpayers how to obtain a copy or transcript of a previously filed tax return. Taxpayers can get a copy of their federal returns by the web, phone, or by mail. Transcripts are free and are avail- able for the current year and for the past three years.

Return and Account TranscriptsA tax return transcript shows most line items

from the tax return as it was origi- nally filed, including any accompanying forms and schedules. It does not reflect any changes made after the return was filed. A tax account transcript shows any later adjustments made by the taxpayer or by the IRS after a taxpayer filed the tax return. This transcript shows basic data including marital status, type of return filed, adjusted gross income and taxable income.

How to OrderTaxpayers may request either type of tran- script

online on IRS.gov by using the online tool called” Order A Transcript.” To order by phone, call 800-908-9946 and follow the prompts in the recorded message. To request a 1040, 1040A or 1040EZ tax return transcript through the mail, a taxpayer must complete IRS Form 4506T-EZ, Short Form Request for Individual Tax Return Transcript. Businesses, partnerships and individuals who need transcript informa- tion from other forms or need a tax account transcript must use Form 4506-T, Request for Transcript of Tax Return.

Transcripts orders online or by phone should be delivered within five to 10 days from the time the IRS receives the request. It takes 30 calendar days for delivery of a tax account transcript ordered by mail.

Actual Copies of ReturnsIt costs $57 per return for actual copies

of previously filed returns. These requests are made on Form 4506, Request for Copy of Tax Return. Copies are available for the current year and past six years. It can take up to 60 days for delivery of tax return copies. Note that the fee for copies of tax returns may be waived if the taxpayer is in a federal disaster area.

ProPosed reGUlations on alloCation of Costs Under simPlified aCCoUntinG metHods

Under uniform capitalization rules (Section 263A) of the Internal Revenue Code, manufacturers and certain retailers and wholesalers must capitalize the direct costs and indirect costs allocable to real or personal property produced or acquired for resale. The proposed rules address the treat- ment of negative amounts in computing additional costs under simplified methods of accounting, disallowing the inclusion of negative amounts as additional costs. The rules also include hardship provisions for small businesses, those with average annual gross receipts of $10 million or less. The hardship rules allow the inclusion of nega- tive amounts for taxpayers using the simpli- fied production method for allocating indi- rect costs. The IRS has requested comments on the proposed regulations by December4, 2012.

The regulations are available online at h tt p:// w w w .g p o . g o v/ f d sys/ p kg/F R -2012- 09-05/ h t m l/2012-21743. h t m .

fHa mortGaGe insUranCe and first time HomeBUyer Credits Given to federal tax deBtors, Gao finds

The Government Accountability Office (GAO) has issued a report revealing that the Federal Housing Administration (FHA) insured about $1.4 billion in mortgages for about 6300 borrowers who owed the government over $77 million in back taxes. The report also shows that about 60% of these same borrowers claimed and received First-Time Homebuyer tax credits totaling

$27 million. Both programs were authorized under the 2009 stimulus act. Federal policy makes delinquent tax debtors ineligible for FHA mortgage insurance unless the tax debt is repaid or the debtor is in a repay- ment agreement with the IRS. There is no such rule for the First-Time Homebuyers credit; therefore, taxpayers who owe federal taxes are still entitled to claim it.

Recommendations for ExecutiveAction

The GAO recommends that the federal Department of Housing and Urban Devel- opment consult with the IRS on obtaining reliable tax debt information from appli- cants and provide lenders with guidance on approving FHA mortgage insurance policies. For example, FHA could require lenders to obtain consent from borrowers to allow FHA and its lenders to verify with the IRS whether recipients of FHA insur- ance have unpaid federal taxes.

F o r t h e G A O r e p o r t, s e e h tt p:// w w w .ga o . g o v/ a s s ets/600/591174. p d f .

new reqUirements forCHaritaBle HosPitals

The IRS has issued proposed regulations that will require hospitals to meet certain standards to qualify as a 501(c)(3) tax- exempt hospital under the new health care law. One of these requirements is that the hospital organization establishes a written financial assistance policy and a written policy on emergency medical care. All other requirements that need to be considered can be found at h tt p:// w w w . r eg u l a t i o n s. g o v by searching “IRS REG-130266-11” in the search box.

irs advisory Committee on exemPt orGaniZations reCommends foCUs on emPloyee Benefit Plans

The Advisory Committee on Tax Exempt and Government Entities of the IRS has released a report with recommendations that focus on the following: (1) analyzing the scope of the employee plan examination process, (2) updating Form 1023 for exempt organizations, (3) matching taxpayer iden- tification numbers, TINs, on federal, state, and local government returns, (4) applying the general welfare doctrine to the Indian Tribal Government and members, and (5)

surveying the effectiveness of information reporting on IRS forms related to tax-

exempt bonds. The original report can be fo u n d a t t h e f o l l o w i n g w e b add r e s s: h tt p:// ww w .i r s. g o v/ p u b/i r s- t e g e/ t e g e_a c t_ r p t11. p d f .

interest in money marKet fUnd is a CasH item for PUrPoses of reit asset test

Real Estate Investment Trusts, or REITs, are corporations or trusts that use pooled funds from many investors to buy and manage property or invest in mortgages. REITS may deduct dividends paid to members, so, effectively, REITS do not pay tax at the corporate level. Rather, REIT income is passed through to the individual investors as dividends. To qualify as a REIT, certain tests must be met, including asset tests.

One of the asset tests requires that 75% of the total asset value of the REIT must be comprised of real estate assets, cash or cash items, and government (as opposed to investment) securities. The IRS has ruled in Rev. Rul. 2012-17 that interest in money market funds is now considered to be a “cash item” instead of an investment security. The IRS agrees with the Securities and Exchange Commission’s earlier finding that money market fund shares are similar to cash due to the high degree of liquidity and return of the principal amount.

Revenue Ruling 2012-17 may be found at h tt p:// w w w .i r s. g o v/irb/2012-25_IRB/ a r05. h tm l .

irs Provides examPles on waGe reCHaraCteriZation, BUsiness ConneCtions in aCCoUntaBle Plans

The IRS has clarified that an arrangement that recharacterizes taxable wages as nontax- able reimbursements or allowances does not satisfy the business connection requirement of the accountable plan rules under section62(c) and the applicable regulations.

Under the regulations, if a reimbursement or other expense allowance arrangement meets the requirements of business connection and substantiation, the reimbursements will be considered paid under an “accountable plan.” The reimbursement plan also must require that all amounts paid in excess of substanti- ated expenses be returned to the employer. Amounts paid under accountable plans are excluded from an employee’s gross income, are exempt from withholding and payment of employment taxes, and are not reported

as wages on the employee’s Form W-2. If the arrangement fails any one of these require- ments, amounts paid under the arrangement are treated as paid under a non-accountable plan, must be included in the employee’s gross income for the taxable year, are subject to withholding and payment of employment taxes, and must be reported as wages or other compensation on the employee’s Form W-2.

Not only must an employee actually pay or incur a deductible business expense, but the expense must arise in connection with the employment for that employer for a reim- bursement to be excluded under an account- able plan. This is known as the “business connection” requirement. Rev. Rul. 2012-25 presents four scenarios illustrating the busi- ness connection and wage recharacterization elements used to judge accountable plans. Three illustrate arrangements that recharac- terize wages in ways that are impermissible and are not considered accountable plans. The fourth describes a compensation structure that does not impermissibly recharacterize wages and would be considered an account- able plan.

Scenarios for Accountable PlanDeterminations

The first scenario describes a tool/equip- ment reimbursement arrangement in which contracted cable television installers are paid a reduced hourly compensation rate and an hourly tool rate. The hourly tool rate is treated as a nontaxable reimbursement.

The second scenario features a nurse staffing contractor that treats the compensa- tion of nurses traveling away from their tax home as a nontaxable per diem allowance for lodging, meals, and incidental expenses under a per diem plan. For nurses working within commuting distance of their tax home, the employer treats all the nurses’ compensation as taxable wages.

The third scenario describes a construction firm that requires some of its workers to travel between construction sites within a metro- politan area or otherwise use their personal vehicles for business purposes. The employer treats all hourly compensation to its workers as taxable wages and pays all its employees -- including those who are not required to travel as part of their job -- a flat amount per pay period that the employer treats as

a nontax- able mileage reimbursement.

The fourth scenario describes a house- cleaning service that requires its hourly workers to provide their own cleaning products and equipment. The employer later decides to use a reimbursement arrangement to reimburse its employees for these expenses. The employer prospec-

tively alters its compensation structure by reducing the hourly compensation paid to all employees and reimbursing employees who properly substantiate their deduct- ible expenses. Employees who incur no expenses or do not properly substantiate their expenses continue to receive the lower hourly compensation and do not receive any reimbursement. The employer treats the hourly compensation as taxable wages and the reimbursements as nontaxable reimbursements.

IRS ConclusionsOnly the fourth scenario is acceptable to

the IRS as an example of an accountable plan that fulfills the business connection requirement. Arrangements cannot operate to pay the same or a substantially similar gross amount to an employee regardless of whether the employee incurs -- or is reasonably expected to incur-- expenses related to the employer’s business. The reimbursement must be paid in addi- tion to the employees’ wages rather than as a substitute for wages that would otherwise be paid. As long as the substantiation and return of excess amounts requirements are also met, the employer’s reimbursement arrangement qualifies as an accountable plan.

R e v . R u l . 2012-2 5 i s a v a il ab l e a t h tt p:// w w w . i r s. g o v/ p u b/i r s-irbs/irb12- 37. p d f .

irs Has 450,000 identity tHeft Cases, says national taxPayer advoCate, aCCoUnt freeZes HUrt Honest taxPayers

The IRS’s efforts to curtail identity theft and other tax fraud are having a negative effect on honest taxpayers, according to National Taxpayer Advocate (NTA) Nina Olson. In a recent report on its FY 2013Objectives, the NTA says potential fraudu- lent returns were up 72 percent in FY2011 over the previous year. The IRS is aggres- sively trying to identify fraud cases but the fraud detection filters are “imperfect” and can cause potential harm and delayed refunds for honest taxpayers, the report warns. The NTA’s report identifies a number of other areas of concern, as summarized below.

Impact of Tax Fraud and Tax-Related Identity Theft. Tax fraud and tax-related identity theft are growing. In FY 2011, the IRS’s Electronic Fraud Detection System

identified more than one million returns as potentially fraudulent, a 72 percent increase from the previous year. The IRS blocked nearly one million additional refund claims

using other means. While not all fraudulent returns involve identity theft, many do. The IRS recently reported an inventory of more than 450,000 identity theft cases.

Tax Fraud. The report notes that the IRS’s automated fraud-detection filters are inher- ently imperfect and can create unnecessary delays for honest taxpayers. The IRS has an11 week hold policy on refunds in suspected tax fraud cases, but because of a higher case load and budget limitations, the IRS is now placing “hard freezes” on cases it cannot handle within that time, meaning that claimed refunds must be manually released or will not be paid. The report expresses concern that the IRS has little incentive to prioritize a case once a hard freeze has been imposed, resulting in harm to honest taxpayers whose returns inadvertently tripped a filter.

Balancing Speedy Refunds, Fraud Prevention, and Victim Assistance. The report notes the IRS faces competing pres- sures to issue refunds quickly and investi- gate suspicious claims. The IRS now notifies certain affected taxpayers by letter when it has a problem processing their returns and instructs them to call the new Taxpayer Protection Unit to provide more informa- tion. However, this unit has been unable to answer about two out of every three calls it has received from taxpayers so far this year. At times during the filing season, it was answering only about one out of every nine calls it received -- and those who managed to get through waited an average of over an hour to speak with an employee.

Taxpayer Assistance Orders (TAOs) and Taxpayer Advocate Directives (TADs). The report also raises concerns about the level of attention the IRS has given recently to Taxpayer Assistance Orders and Taxpayer Advocate Directives. While the NTA has been given authority to act by Congress, the report says over the past year, the IRS has ignored and sought to limit the NTA’s authority to issue Taxpayer Advocate Direc- tives, giving the following examples:

IRS Has Yet to Comply with Proposed and Final Directive Designed to Assist Victims of Preparer Fraud. In June 2011, the National Taxpayer Advocate issued a proposed TAD to the head of an IRS operating division directing him to issue guidance and implement a procedure for adjusting the accounts of taxpayers who have been victimized by fraudulent return preparers. The official did not comply,

prompting the Advocate to issue a final TAD on the same issue in January 2012. The operating division still has not issued comprehensive guidance or implemented procedures to assist taxpayer victims of preparer fraud.

Directive to Improve Audit Process Challenged. In January 2012, the National Taxpayer Advocate issued a TAD to address problems taxpayers were facing in connec- tion with the correspondence examination process. The IRS challenged the National Taxpayer Advocate’s authority to issue a TAD to the Chief Counsel or to interpret the law. The report claims that the IRS’s posi- tion significantly reduces the utility of these directives and undermines the purpose for which they were created.”

Automated Examination and Adjust- ment Procedures. The IRS’s increasing use of automated examination and other tax adjustment procedures limits opportunities for taxpayers to interact directly with an IRS employee and often do not protect the taxpayer rights traditionally associated with audits.

Offshore Accounts and International Compliance. The NTA also is concerned with the impact of the IRS’s crackdown on persons with offshore accounts, which often subjects individuals who were not engaged in tax evasion to draconian penal- ties, and the related issue of modifying the terms of the Offshore Voluntary Disclosure Program so that individuals who made honest mistakes can correct them without fear of excessive penalties. The NTA also wants to improve taxpayer service options for international taxpayers to help alleviate their compliance challenges.

T h e t ext o f t h e r e p o r t i s a v a il a b le a t h tt p:// w w w . t a x p a y e r a d v o c a te .i r s. g o v/ A n n u a l - R e p o r ts- T o- C o n g r e s s/ f y-2013- o b j ec t i v es- r e p o r t- t o-c o n g r e s s- f u l l- r e p o r t.

CoUrt oPiNioNS

CoUrts sPlit on wHetHer severanCe Payments are sUBJeCt to fiCa taxes

The 6th Circuit Court of Appeals has ruled in U.S. v. Quality Stores, Inc., (No.10-1563) that severance payments are not subject to FICA taxes. The ruling, which was handed down on September 7, 2012, allowed a refund of over $1 million in employer and employee FICA taxes paid

on severance benefits the failing company gave to its discharged workers. Specifically, the Court Circuit found that severance payments are “supplemental unemployment compensation benefits” and are not “wages” for FICA purposes. Under the facts in the case, the payments were a direct result of a reduction in force or discontinuance of a plant or operation. The payments were not connected to the receipt of state unemploy- ment compensation and were not attribut- able to the any particular services performed by the employees. Both the bankruptcy court and the District Court who reviewed the bankruptcy action concluded that the payments were not FICA wages. The 6th Circuit broke with an earlier Federal Circuit decision and affirmed the two lower courts.

In 2008, the Federal Circuit Court of Appeals came to the opposite conclusion, denying a refund for FICA taxes paid on severance payments. In CSX Corp. v. U.S, the Federal Circuit reversed a Federal Court of Claims decision holding that severance payments for involuntary termination were not FICA wages. At the time, many taxpayers had refunds pending which never materialized in view of the Federal Circuit’s definitive ruling.

Now the 6th Circuit has reopened the issue of the IRS’s authority to collect FICA taxes on severance payments, and both Congress and the Supreme Court may be called upon to resolve the issue. While some practitioners are recommending that employers consider filing refund claims, the legal situation is far from settled, and taxpayers need to carefully analyze their particular situation with tax counsel before acting.

What’s a Taxpayer to Do?

When two federal appeals courts come to an opposite conclusion, taxpayers are left guessing which ruling their own Circuit will follow. If a taxpayer is in the 6th Circuit, then the taxpayer can apply that Circuit’s law. The 6th Circuit is made up of Michigan, Kentucky, Ohio, and Tennessee. The Tax Court, under what’s called the Golsen Rule, has to apply the law of the taxpayer’s circuit, if that circuit has spoken. However, other Circuits can make their own decisions, so taxpayers who reside in other circuits have an uncertain situation regarding the FICA taxation of severance payments.

The Federal Circuit only hears cases that come up from the Court of Federal Claims and similar government administrative

tribunals. It is an influential court because it is a court of national jurisdiction, sitting in Washington, D.C. Thus, the IRS is likely to cite the Federal Circuit’s decision in CSX to bolster its position. Still, taxpayers will have to wait to see what the Tax Court does when not constrained by a circuit court’s ruling and what other Circuits do when faced with this same issue.

Meanwhile, the government is likely to request a rehearing in the case by the October 22, 2012 deadline. Depending on the outcome of that request, we may see the IRS issue an Action on Decision on the6th Circuit opinion stating that it will not acquiesce to the decision and will continue to litigate the issue in other jurisdictions. Ultimately, with the split in the Circuits, both Congress and the Supreme Court may have to step in.

For a copy of the Quality Stores case, s e e h tt p:// w w w . c a6. u s c o u r ts. g o v/ o p ini o n s. p df/12a0313p- 06. p d f .

For a copy of the 2008 Federal Circuit op ini o n in CSX C o r p . v . U .S h tt p:// c a s e l a w . f i n d l a w .c o m/u s- f e der a l-ci r c u i t/1235982. h tm l .

same-sex surviving spouse allowed marital deduction Based on Unconstitutionality of federal defense of marriage act:WINDSOR v. U.S.U.s. distriCt CoUrt: soUtHern distriCt of new yorKno. 1:10-cv-08435June 6, 2012

Issue: Whether a same-sex surviving spouse can claim the unlimited marital deduction.

Facts: The taxpayer, Edie Windsor, and her late spouse, another female, were married in New York City in 1993. Windsor’s spouse died in February 2009 and willed her entire estate to Windsor. Section three of the federal Defense of Marriage Act (DOMA) defines marriage as a legal union between one man and one woman as husband and wife. This definition prohibits the taxpayer from qualifying for the unlimited marital tax deduction under IRC Sec. 2056(a) and requires her to pay federal estate tax on her spouse’s estate. Windsor paid the estate tax in her capacity as executrix and filed for a refund in U.S. District Court claiming that

Section three of DOMA violates the EqualProtection Clause of the Fifth Amendment.

Analysis and Conclusion: The Court declined to classify homosexuals as a “suspect class” under the equal protection clause, which generally refers to a class that cannot be discriminated against on the basis of race, ethnicity, religion, etc. Instead, it held the DOMA provisions unconstitu- tional under the lower “rational basis” test, which requires a statute to be rationally related to a legitimate government interest. The Court held that DOMA did not logically further any of the government’s intended goals such as protection of the institution of marriage, protection of childbearing and procreation, consistency and uniformity of federal benefits, and preserving govern- ment resources. Thus, the Court found that DOMA was unconstitutional because it violates the equal protection clause.

married same-sex Couple may file Joint return; defense of marriage act Unconstitutional:PEDERSEN v. OFFICE OF PERSONNEL MANAGEMENT U.s. distriCt CoUrt, distriCt of ConneCtiCUtno. 10-Cv-1750July 31, 2012

Issue: Whether a married same-sex couple can file as Married Filing Jointly if the marriage is not recognized under the federal Defense of Marriage Act.

Facts: The taxpayers, Suzanne Artis and Geraldine Artis, were married in Connect- icut in 2009. For the 2009 tax year, Suzanne filed as Head of Household and Geraldine filed as Single. Both Suzanne and Geraldine subsequently filed an amended tax return for 2009 changing their status to married filing jointly and requested a refund of$1,465. The IRS denied the refund because, for federal tax purposes, a marriage is a legal union between one man and one woman, as husband and wife, as defined in federal Defense of Marriage Act. (DOMA). The government argued that regardless of DOMA, the couple would be barred from filing jointly under IRC Sec. 6013(a) which states “husband and wife may make a

single return jointly of income taxes.” However, the taxpayers argued the terms “husband and wife” used in Sec. 6013 are gender neutral according to Title I, Section 1 of the United States Code which states that “when

determining any Act of Congress, unless the context indicates otherwise, the words importing the masculine gender includes the feminine as well.” The couple received a Determination Letter from the IRS citing DOMA as the reason they could not file jointly.

Analysis and Conclusion: The Court found that absent DOMA, the gendered terms of husband and wife in Sec. 6013 would not bar married same-sex couples from filing jointly based on the Internal Revenue Code’s adoption of the Section 1 gender-neutral directive. The Court also held DOMA unconstitutional under the Equal Protection Clause because the lack of any “rational basis” for the provision.

Notes on DOMA Cases: Prior to DOMA, which was enacted in 1996, the IRS looked to state law to determine marital status of same- sex couples. Since the passage of DOMA, the IRS has stood fast in the position that, even if same-sex marriages are allowed under state law, same-sex couples are not entitled to marital status under federal tax law. The rulings in the Court cases discussed above have very narrow application and only apply to taxpayers in those districts. However, seven different federal courts have held DOMA unconstitutional, and one of those cases may be heard by the Supreme Court. Numerous federal tax benefits hinge on the constitu- tionality of the federal Defense of Marriage Act, including joint tax return filing rates and permissions, favorable timing and roll- over provisions for IRAs and other qualified retirement plan distributions to a surviving spouse, and portability of the estate and gift tax unified credit amounts between spouses. The Democratic platform and President Obama have called for repeal of the Defense of Marriage Act, but it is more likely that the Supreme Court will address the constitutional issue than that Congress will take up a contro- versial repeal bill any time soon.

EtHiCS CorNErone standard for all written tax adviCe Under new CirCUlar 230 rUles

Heeding the strong advice of many

comments it received, the IRS has issued proposed regulations making significant changes to the Circular 230 rules for written tax advice. The new regulations do away

with the complex rules for “covered opin- ions,” special rules for opinions on state and local bonds, and the need for disclaimers. Instead, the proposed rules create one stan- dard for all written advice.

Proposed §10.37 would require prac- titioners to base all written advice on “reasonable factual and legal assumptions, exercise reasonable reliance, and consider all relevant facts that the practitioner knows or should know.” The proposed removal of the covered opinion rules will eliminate the requirement that practitioners fully describe the relevant facts (including the factual and legal assumptions relied upon) and the application of the law to the facts in the written advice itself. The new regulations also dispense with the necessity of using Circular 230 disclaimers in documents and transmissions, including e-mails.

Practitioners must “exercise competence” when engaged in practice before the IRS, the rules state. Also, practitioners are prohibited from endorsing or otherwise negotiating a government payment made to a taxpayer by check or by any means, electronic or otherwise. The new rules also expand the categories of violations subject to the expedited disciplinary proceedings to include failures to comply with a practitioner’s personal tax filing obligations in a way that demonstrates a pattern of “willful disreputable conduct.” Finally, the rules clarify that the IRS Office of Professional Responsi- bility has exclusive responsibility for matters related to practitioner discipline, including disciplinary proceedings and sanctions.

Comments RequestedComments on the proposed rules are due on

November 16, 2012. The IRS will hold a public hearing on the regulations on December 7, 2012. Instructions on submit- ting comments are given in the preamble to the proposed regulations.

For the text of the 35-page set of regulations, s e e h tt ps://s3. a m az o n a ws.c o m/ p u b lic-i n s p e c - t i o n. f e der a l r e g i s t e r . g o v/2012-22836. p d f .

williams leaves retUrn PreParer offiCe witH Plea to taKe test

David Williams, the outgoing director of the IRS Return Preparer Office, wrote a goodbye letter directed to tax preparers making “one final plea” for tax preparers to take the competency exam. “I can promise you that this test requirement will not go away. So, why wait until the last minute next year

when you might not get a convenient spot or any spot at all? Or you could take the Special Enrollment Exam and become an Enrolled Agent,” Williams said. He also told preparers that “one of my guiding principles…was to work with you, not against you.”

Williams pointed to the IRS’s decision not to go forward with fingerprinting preparers as an example of how his office listened to practitioner concerns. He noted that the IRS has since “gone back to the drawing board to explore other options.” Noting that many older preparers have expressed concern about test anxiety, Williams urged those preparers to continue their careers. “Please, take the test and stay in the profession that I know you love,” said Williams.

Nonsigning PreparersThe former Director also assured preparers

that the IRS has made it a ‘high priority” to “halt preparer fraud and root out non-signing preparers.” However, Williams noted that “getting a handle on problematic preparers will not be easy and it will take time.”

With his characteristic friendliness, Williams ended his letter as follows: “I have enjoyed this job immensely and enjoyed meeting with many of you personally. I wish you nothing but the best. And, remember: schedule that RTRP (or EA) test today! Dave.”

To read David Williams farewell letter, go t o h tt p:// w w w .fac e b o o k.c o m/#!/ n o t es/i r s- r e t u r n- p r e p a r e r - o ff ice/f a r e w e l l- m e s s a g e- f r o m- d a v id- wil l i am s/346387632114221 .

irs Professional resPonsiBiltiy offiCe CensUres attorney for ConfliCts of interest

The IRS’s Office of Professional Respon- sibility (OPR) has censured an attorney due to his violating Circular 230 for his failure to disclose multiple conflicts of interest. While the attorney was composing a list of tax opinions for participants in a benefit plan, the attorney also had an attorney-client relationship with the promoter of the plan. The attorney was not only compensated by the promoter but also failed to inform his clients of this conflict of interest. The problem is that the attorney created a risk that his representation of his clients would be “materially limited” by his responsi- bilities to his other clients, OPR found. After this incident, OPR Director Karen Hawkins stated the following: “Whenever a tax practitioner represents more than one

Return Preparer Office Federal TaxReturn Preparer Statistics

Data current as of 06/01/2012Number of Individuals with Current Preparer Tax Identification Numbers (PTINs) for 2012† 717,161Professional Credentials‡Attorneys 31,189Certified Public Accountants 212,975Enrolled Actuaries 537Enrolled Agents 42,895Enrolled Retirement Plan Agents 530Registered Tax Return Preparers 4,893Other CategoriesSupervised Preparers* 54,818Non-1040 Preparers* 42,524Preparers with provisional PTINswho have not yet passed the RTRP test 338,127† Cumulative number of individuals issued PTINs since 9/28/2010: 849,951‡ Some preparers have multiple professional credentials.* These numbers do not include attorneys, certified public accountants, or

enrolled agents. Also, preparers may be both supervised and non-1040 filers.

client with respect to the same transaction, that practitioner must think through the ramifications of what she or he is doing. The conflict of interest provision in Circular230 is not a mere nicety: taxpayers who pay handsomely for tax advice and representa- tion have a fundamental right to expect competent and diligent representation unfettered by a practitioner’s responsibili- ties or obligations to someone else, or by the practitioner’s self-interest.”

Circular 230 Rules on Conflicts ofInterest

Under Circular 230, the rules of practice before the IRS, conflicts of interest are defined as representation of one client that is directly adverse to that of another client, or as representing a client in circumstances creating a significant risk that the represen- tation of a client will be materially limited by the practitioner’s responsibilities to another client, a former client or a third person, or by a personal interest of the practitioner. However, a practitioner may represent a client despite a conflict of interest if the practitioner reasonably believes he or she can provide competent and diligent repre- sentation to each affected client and if all affected clients waive the conflict by giving their written informed consent.

The best practice is to avoid any potential conflict by insisting on independent repre- sentation of all parties to a transaction.

retUrn PreParer statistiCs sHow HiGH nUmBer ofnon-test taKers

The IRS has posted on its website statis- tics on the different categories of tax return preparers, which statistics reveal the high

number of provisional PTIN holders who have yet to take the competency exam, some338,127 as of June 2012. Of professionally- credentialed preparers, CPAs make up the largest segment. Less than 5,000 preparers have received their Registered Tax Return Preparer title from the IRS. See the IRS numbers below.

Et CEtErAfCC ConsiderinG tax on internet serviCes, text messaGes

The Federal Communications Commis- sion has proposed taxing broadband internet services to subsidize the expansion of Internet access through the Connect America Fund, which will be used to construct high-speed internet access in underserved areas. The move comes as its current tax on telephone service, the Universal Service Fund line item you see on your phone bill, is not bringing in the needed cash because of consumers’ switch from long-distance calls to emails. The FCC requested comments on its proposal in April, and a number of service companies, including AT&T, Sprint, and Google, have expressed support for the idea. The FCC also asked for comments on whether it should tax text messages as an alternative. (Tell that to your teenagers!)

The comment period ended in the summer, and the FCC is unlikely to impose the levy before the elections. Instead, the decision on whether or not to go forward with the new internet tax will be made by the Presidential candidate who holds office in 2013.

Heirs fiGHt $29 million estate tax Bill for famoUs eaGle sCUlPtUre

The heirs of a New York art dealer are in a dispute with the IRS over the value of a sculpture created by famous artist Robert Rauschenberg that incorporates a stuffed eagle shot by one of President Theodore Roosevelt’s Rough Riders. The IRS claims the famous work, Canyon, is worth $65 million, as determined by its Art Advisory Panel. The owners argue that the piece has no value because it would be illegal to sell it under the federal Bald and Golden Eagle Protection Act. As a result, the heirs’ appraisers have valued the piece at zero. The bird was stuffed before the Act was put in place in 1940, but the

eagle still cannot be legally sold or exported.

A case has been filed in the Tax Court, though the parties are still negotiating to try to reach a settlement. Nina Sundell and Antonio Homem, the beneficiaries of the estate of Ileana Sonnabend, already have sold off about $600 million of the inherited collection to pay $471 million in federal and state estate taxes. The Tax Court case is scheduled for trial on October 22, 2012 in New York.

To view a photograph of the eagle, see h t t p : / / ww w . n y t i m e s . c o m / i ma g e p - a g es/2012/07/21/ u s/E A GLE2. h t m l .

QUotES“It’s a decision that’s right for the times,”…“In a rough economy where you’ve got layoffs, this makes it easier for the employer to pay severance becausethey don’t have to pay FICA tax on it, and employees come out better because they keep more of the severance.”

-- Thomas Sykes, attorney with Green- berg Traurig in Chicago, commenting on6th Circuit’s ruling that severance pay is not subject to FICA taxes.

“I don’t know of any instance where the I.R.S. has assumed taxpayers will engage in an illegal activity in order to value their assets at a higher amount. Al Caponewent to jail for not paying income taxes on his illegal income, but this is very different than that.”

-- James Joseph, tax lawyer at Arnold & Porter, Washington, D.C., commenting on IRS’s valuation of Rauschenberg’s Canyon.

“I hold in my hand 1,379 pages of tax simplification.”

-- Congressman Delbert L. Latta(R-Ohio), reported by U.S. News & WorldReport, Dec. 23, 1985.

““In contrast, the current IRS code is like a patchwork quilt, stitched together over time from mismatched pieces, and is beyond the comprehension of the average citizen.”

-- The2012 Republican platform.

Kerry Freeman EA: He wanted a safer job as a crash test dummy, Less chance to get hurt! 8-)

-- From Facebook comments on RPO Director David Williams’ farewell

message.

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ALABAMABirmingham

Oct 30

Holiday Inn

5000 Richard Arrington

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N Birmingha

m, AL 35212Phone:

ARIZONACamp Verde

Dec 14

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Nov 26

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Dec 12

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CONNECTICUTHartford Dec 13

BaymontSuites

260 MainEast Windso

CT 06088Phone: 860-627-

6585

FLORIDA - GRAND EVENTOrlando Dec 10-11, 201

2SpringHill Suites Orlando Airport

5828 Hazeltine National Drive

407-816-

FLORIDA

Ft. Lauderdale/Hollywood

Dec 12Sherat

Lauder

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Cruis

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Hotel

1825Dania,

Phone:

Tampa

Nov 29

Holiday

4750MabryTampa,

Phone:

GEORGIA

Atlanta

Dec 4

Cobb

2 GalleriaAtlanta,Phone:

Savannah Nov 14

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Sylvester

Formey DriveSavannah,

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Four PointsSheratonNewAirport64Metairie,

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HanoveMD

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CoHoliday InnCollegePark10000Baltimore AvenueCollegePark,MD20740

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MABL6 Randolph, MA

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5000

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9000

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Day 1 :7:15 AM Registration

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Orlando, FL December 10-11, 2012 SpringHill Suites12 CPE Orlando International Airport

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Las Vegas, NV January 7- 8, 2013 The Orleans Hotel and Casino16 CPE 4500 West Tropicana Ave.

Las Vegas, NV 89103Telephone: 800-675-3267 ww w .orleanscasino.com/groups Room Rates:Jan. 6 - $39.00Jan. 7-10 - 42.00Reservation Methods:Online: www.orleanscasino.com/groups -

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Orlando Agenda Las Vegas Agenda

Course level addresses Up-To-Date issues facing the Profession. It is recommended that participants have a working knowledge of the principles of Federal Income Tax Law.Advance preparation is not required.The course instruction is presented live by seasoned instructors who will allow your questions to be asked.

Course Level: Intermediate to Advanced

The National Society of Tax Professionals (NSTP) is registered with the National Association of State Boards of Accountancy (NASBA), as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be addressed to the National Registry of CPE Sponsors, 150 Fourth Avenue North, Suite 700, Nashville, TN, 37219-2417. NASBA web site: ww w .nasba.org

These courses are recommended for CPA’s, Accountants, Tax Professionals, Lawyers and Enrolled Agents with basic knowledge of tax accounting.

Program Schedule 7:30 AM Registration

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Administrative PoliciesNSTP follows strict administrative policies.REFUNDS: NSTP provides refunds to registrants up to 14 days prior to the date of the education. For those registrants canceling within 14 days prior to the education date NSTP will allow attendance at another seminar site. If there are extraordinary circumstances NSTP will allow the participant to attend a future education course. An administrative charge of $25 will be assessed if cancelled.CONTACT INFORMATION: For more information regarding refund, complaint and/or program cancellation policies, please contact our offices at (800)367-8130.CANCELLATION: NSTP reserves the right to cancel any program or course for circumstances that are not under direct control of NSTP. If a course or program is cancelled, participants will be refunded 100% of their registration fee.

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NEW HAMPSHIREManchester Dec 12

Executive Court Banquet Facility1199 South Mammoth Road

Manchester, NH 03109Phone: 603-626-4788

NEW JERSEYAtlantic City Dec 7

TBA

Carteret Nov 12Holiday Inn

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Toms River Dec 18Quality Inn

815 Route 37Toms River, NJ 08755Phone: 732-341-2400

NEW MEXICOAlbuquerque Dec 10

Courtyard by MarriottAlbuquerque Airport

1920 Yale Boulevard SE Albuquerque, NM 87106

Phone: 505-843-6600

NEW YORKLong Island Nov 19

Hilton Long Island598 Broadhollow Road

Melville, NY 11747Phone: 631-845-1000

New York City Dec 19Courtyard by Marriott LaGuardia

90-10 Grand Central ParkwayEast Elmhurst, NY 11369

Phone: 718-446-4800

NORTH CAROLINACharlotte Dec 3

Marriott Charlotte Executive Park5700 W Park Drive

Charlotte, NC 28217Phone: 704-527-9650

OHIOCanton Dec 6

Courtyard by Marriott Canton4375 Metro Circle NW

Canton, OH 44720Phone: 330-494-6494

Dayton Nov 27Holiday Inn Dayton Airport NW

10 Rockridge RoadEnglewood, OH 45322

Phone: 937-832-1234

OREGONPortland Dec 7

Hilton Garden InnPortland Airport

12048 NE Airport WayPortland, OR 97220

Phone: 503-255-8600

PENNSYLVANIAPhiladelphia Dec 20

Holiday Inn Stadium900 Packer Avenue

Philadelphia, PA 19148Phone: 215-755-9500

Pittsburgh Dec 10Holiday Inn Pittsburgh Airport

8256 University BoulevardMoon Township, PA 15108

Phone: 412-262-3600

TEXASDallas/Ft. Worth Dec 7

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Houston Dec 6Holiday Inn

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Houston, TX 77032Phone: 281-449-2311

San Antonio Dec 4Holiday Inn

San Antonio International Airport77 NE Loop 410

San Antonio, TX 78216Phone: 210-349-9900

VIRGINIAFredericksburg Nov 12

Fredericksburg Expo & Conference Center

2371 Carl D Silver ParkwayFredericksburg, VA 22401

Phone: 540-548-5555

Springfield Dec 5Hilton Springfield

6550 Loisdale RoadSpringfield, VA 22150Phone: 703-971-8900

Williamsburg Dec 17Holiday Inn Patriot

3032 Richmond RoadWilliamsburg, VA 23185

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WASHINGTONTacoma/Seattle Dec 18

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1425 East 27th StreetTacoma, WA 98421

Phone: 253-383-0

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ARIZONAPhoenix Nov 278 CPE Credits Sheraton Phoenix Airport Hotel

1600 S 52nd StreetTempe, AZ 85281

Phone: 480-967-6600

Tucson Dec 138 CPE Credits Holiday Inn & Suites

Tucson Airport

GEORGIAAtlanta Oct 26-2715 CPE Credits Cobb Galleria Centre

2 Galleria ParkwayAtlanta, GA 30339

Phone: 770-955-8000

Savannah Nov 158 CPE Credits Wingate by Wyndham

Savannah Airport

National Society of Tax Professionals2012 RTRP REGISTRATION FORM

Please register me for the following seminar:

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NSTP 2012 Registered Tax Return Preparer (RTRP) Exam Preparation Course

Pricing:Members Non-members

1 Day (8 CPE) Course: $189 $239***2 Day (15 CPE) Course: $369 $419***

4550 S Palo Verde RoadTucson, AZ 85714

50 Sylvester C. Formey DriveSavannah, GA 31408

Pricing: Members Non-members ***Includes complimentary NSTP membership through 12/31/2012.

CALIFORNIA

Phone: 520-746-1161

LOUISIANA

Phone: 912-544-1180 1 Day (8 CPE) Course: ❏ $189 ❏ $239***2 Day (15 CPE) Course: ❏ $369 ❏ $419***

**Includes complimentary NSTP membership through 12/31/2012

1 Day (8 CPE) Course:3 credits - Federal Tax Law Update5 credits - Other Federal Tax Law Topics

2 Day (15 CPE) Course:2 credits - Ethics3 credits - Federal Tax Law Update10 credits - Other Federal Tax Law Topics

Long Beach Dec 178 CPE Credits Holiday Inn Long Beach Airport

2640 N Lakewood BlvdLong Beach, CA 90815

Phone: 562-597-4401

San Jose Dec 148 CPE Credits Courtyard San Jose Airport

1727 Technology DriveSan Jose, CA 95110

Phone: 408-441-6111

FLORIDAOrlando Nov 5-615 CPE Credits SpringHill Suites Orlando Airport

5828 Hazeltine National DriveOrlando, FL 32822

Phone: 407-816-5533

Tampa Nov 308 CPE Credits Holiday Inn Express

4750 N Dale Mabry HwyTampa, FL 33614

Phone: 813-875-0353

New Orleans Dec 18 CPE Credits Holiday Inn Metairie

New Orleans Airport2261 N Causeway Blvd

Metairie, LA 70001Phone: 504-373-5946

MARYLAND

College Park/Beltsville Nov 29 - 3015 CPE Credits Holiday Inn

College Park10000 Baltimore AvenueCollege Park, MD 20740

Phone: 301-345-6700

MASSACHUSETTSBoston/Randolph Nov 2-315 CPE Credits Lombardos

6 Billings StreetRandolph, MA 02368Phone: 781-986-5000

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“Registered Tax Return Preparer

Minimum

Competency

Exam Preparati

on Program

”

� NSTP’s RTRP Exam Preparation Course is geared to get every Tax Professional “ready to sit

for and pass the minimum competency exam”. The course

focuses on the tax principles needed

minimum competency that the exam addresses. Each participant will receive the most updated classroom materials available and will be able to review the information with NSTP’s seasoned instructors who are all tax preparers just like you.

� This live program includes course materials designed by NSTP’s test prep course of choice “Fast Forward Academy”. They are an experienced professional test prep group whose materi- als and methods have resulted in high pass rates for the EA examination and other professional

2 day events also include:Ethics in 2012 and the Amended Circular 230 Issues

This course provides the Tax Professional with a common sense approach to the world of “ethics” as it applies to the tax preparing community in today’s changing and challenging environment. The standards that are required and needed in order to continue to be in compliance with the recent amendments to the IRS Circular 230 Regulations will be reviewed.

A review of the role of the Enrolled Agent, CPA and tax return preparer will be discussed and examined.

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Program Schedule

1 Day (8 CPE) Event Schedule

7:45 AM Registration Begins8:15 AM Course Begins10:15 AM - 10:30 AM Break12:00 PM - 1:00 PM Lunch - Included in registration fee1:00 PM - 3:00 PM Continuation of Program3:00 PM - 3:15 PM Break3:15 PM - 4:45 PM Continuation of Program

2 Day (15 CPE) Event Schedule - Each Day

8:00 AM Registration - Continental Breakfast8:30 AM Class Begins10:15 AM - 10:30 AM Break12:00 PM - 1:00 PM Lunch - Included in registration fee2:30 PM - 2:45 PM Break4:30 PM Class Concludes

Course level addresses the challenges of the experienced tax professional with an introduction approach for the develop- ing practitioner. A working knowledge of tax law is recommended and the instructional method is a “Group Live” offering.

The course is a “roll up your sleeves” workshop course.

Advanced preparation is not required

These courses provide for 8-15 hours of continuing education credits. Registered with NASBA and IRS.

Course Level: Review to Intermediate

The National Society of Tax Professionals (NSTP) is registered with the National Association of StateBoards of Accountancy (NASBA), as a sponsor of continuing professional education on the National

authority on the acceptance ofindividual courses for CPE credit. Complaints regarding registered sponsors may be addressed to the National Registry of CPE Sponsors, 150 Fourth Avenue North, Suite 700, Nashville, TN, 37219-2417. NASBA web site: ww w . nasb a .o r g

This course is recommended for CPA’s, CFP’s, Accountants, Tax Practitioners, Lawyers and Enrolled Agents with basic knowledge of tax accounting.

MICHIGANDetroit Nov 88 CPE Credits Four Points by Sheraton

Detroit Metro Airport8800 Wickham RoadRomulus, MI 48174

Phone: 734-729-9000

NEVADALas Vegas Nov 2-315 CPE Credits Gold Coast Hotel & Casino

4000 West Flamingo RoadLas Vegas, NV 89103Phone: 702-367-7111

NEW HAMPSHIREManchester Dec 118 CPE Credits Executive Court Banquet Facility

1199 South Mammoth RoadManchester, NH 03109

Phone: 603-626-4788

NEW JERSEYAtlantic City Sept 218 CPE Credits TBA

Carteret Nov 138 CPE Credits Holiday Inn

1000 Roosevelt AvenueCarteret, NJ 07008

Phone: 732-541-9500

NEW MEXICOAlbuquerque Dec 118 CPE Credits Courtyard by Marriott

Albuquerque Airport1920 Yale Boulevard SE Albuquerque, NM 87106

Phone: 505-843-6600

NEW YORKLong Island Nov 9-1015 CPE Credits Hilton Long Island

598 Broadhollow RoadMelville, NY 11747

Phone: 631-845-1000

New York City Nov 12-1315 CPE Credits Courtyard by Marriott LaGuardia

90-10 Grand Central ParkwayEast Elmhurst, NY 11369

Phone: 718-446-4800

NORTH CAROLINA

Charlotte Dec 48 CPE Credits Marriott Charlotte Executive Park

5700 W Park DriveCharlotte, NC 28217

Phone: 704-527-9650

OREGONPortland Dec 68 CPE Credits Hilton Garden Inn

Portland Airport12048 NE Airport Way

Portland, OR 97220Phone: 503-255-8600

PENNSYLVANIAPhiladelphia Oct 18-1915 CPE Credits Holiday Inn Stadium

900 Packer AvenuePhiladelphia, PA 19148

Phone: 215-755-9500

Pittsburgh Dec 118 CPE Credits Holiday Inn Pittsburgh Airport

8256 University BoulevardMoon Township, PA 15108-2591

Phone: 412-262-3600

TEXASDallas/Ft. Worth Dec 68 CPE Credits TBA

Houston Dec 78 CPE Credits Holiday Inn

Houston-Intercontinental Arpt15222 JFK Blvd

Houston, TX 77032Phone: 281-449-2311

VIRGINIASpringfield Sept 138 CPE Credits Hilton Springfield

6550 Loisdale RoadSpringfield, VA 22150Phone: 703-971-8900

Williamsburg Dec 188 CPE Credits Holiday Inn Patriot

3032 Richmond RoadWilliamsburg, VA 23185

Phone: 757-565-2600

WASHINGTONSeattle/Tacoma Dec 178 CPE Credits LaQuinta Inn & Suites

and Convention Center1425 East 27th Street

Tacoma, WA 98421Phone: 253-383-0146

NSTP HAS MOVED

Please note our new address:

11700 NE 95th St.,Suite 100

Vancouver, WA98682

All other contact information remains the same. Phone:1-800-367-8130Fax: 360-695-7115Email: t a x es @ ns t p . o rg Website: www . ns t p .o r g

Fall 2012 TAX CLIENT NEWSLETTER

INTRODUCTIONEveryone in Washington is

complaining about the uncertainty of the reduced tax rates which expire at the end of the year but no one seems to be able to do anything about it. With a deadlocked Congress focused only on the elec- tion, we will have to wait until after November6th to find out if Congress will head off auto- matic tax increases and spending cuts before the end of the year. The tax platforms of the two candidates in this issue offer you a preview of what may come. The IRS updates in this issue offer guidance on reporting of tips, the limita- tion on meal and entertainment deductions, the tanning excise tax, and business use of an aircraft. A brief review of recent court opin- ions includes an important ruling that sever- ance pay is not subject to social security taxes. This ruling only applies to certain taxpayers, so read my analysis in the Court Opinion section. Other court cases address inherited IRAs, the mortgage interest deduction limit, and income from cancellation of credit card debt. I also of- fer you some pointers on deciding whether to do a Roth IRA rollover, and, finally, I explain the higher Medicare tax for upper-income tax- payers which is set to go into effect in January2013. I hope you find this information useful as the tax year winds down.

CONGRESSIONAL UPDATESENATE COMMITTEE CLEARS TAX EXTENSIONS BUT FINAL ACTION WILL HAVE TO WAIT UNTIL AFTER ELECTIONS

The Senate Finance Committee has ap-proved a bill to extend the many tax breaks thatexpired at the end of 2011. The measure, theFamily and Business Tax Cut Certainty Act of2012, is the first major action this year address-ing only the most pressing expiring tax provi-sions. The bill does not include an extension ofthe Bush tax cuts which expire at the end of thisyear. (See discussion below.) The bill also in-cludes a statement supporting “comprehensivetax reform.” Included in the $200 billion pack-age are the research and development credit,the tuition deduction, the state and local salestax deduction, the mortgage debt forgiveness

exclusion, the deduction for mortgage insur-ance, and alternative minimum tax relief. Thebill also includes higher expensing limitationsfor investments in depreciable property.

The legislation gathered Republican sup- port by limiting the extenders included in the measure. Instead of potentially extend- ing 73 tax provisions, the Finance Commit- tee only addressed 54, representing about a 25 percent reduction. Senator Orrin Hatch (R- Utah), ranking member of the Senate Finance Committee, praised the Committee action as “a step towards the ultimate goal of compre- hensive tax reform.” Six out of 11 Republicans

on the Finance Committee voted in favor of the legislation, setting the stage for a bipartisan effort to enact the bill.

Lame Duck Session and the Bush Tax CutsKey tax writers in the House of Representa-

tives are working on their own legislation to ex-tend expired tax provisions. However, a Housetax subcommittee Chairman, Patrick J. Tiberi,R-Ohio, has indicated that his Committee willnot move it to a vote until after the Novemberelections. After the elections, Congress willcome back in a so-called “lame-duck” sessionto address unfinished business. Many observ-ers believe that Congress will take up not onlythe expired 2011 tax breaks listed above, but italso may consider an extension of the Bush taxcuts which are set to expire December 31, 2012,in an event that has been dubbed “Taxmaged-don.” Even if Congress acts quickly during thelame-duck session to extend the Bush tax cutsfor a short time, the IRS has warned that theuncertainty from last-minute Congressionalaction is likely to make for a very difficult fil-ing season.

IRS WARNS OF DELAYED FILING SEASON FROM TAX UNCERTAINTY

With the upcoming election and the uncer-tainty regarding what the lame-duck Congresswill do with expired and expiring provisions,the IRS has begun warning of another difficultfiling season with filing and refund delays. Ittakes the IRS at least six to eight weeks to makechanges to its forms, tables, and other docu-ments when tax changes occur. The timing ofso many provisions expiring or expired at oncemeans that Congress may be approving exten-sions at the very last minute and some exten-sions will be retroactive to the beginning of2012. According to the IRS Oversight Board,this scenario will put billions of dollars in re-funds on hold. Last year, the IRS had to delayreturn processing by a month because of last-minute tax changes. This year could be worse.

My RecommendationAs your tax professional, I will be watching

events in Washington closely, and I will takesteps to expedite your return processing in anyway that I can. I recommend that you start as-sembling your tax information early this year sowe will be ready to move on your tax filings assoon as the IRS is ready to begin processing.

GOVERNMENT STUDY FINDS HEALTHCARE CREDIT NOT BEING USED BY SMALL BUSINESSES

A congressional agency, the GovernmentAccountability Office (GAO), has reportedthat the healthcare tax credit provided to smallbusiness employers was barely used in 2010.One factor limiting the credit’s use is that mostvery small employers, 83 percent by one esti-

mate, do not offer health insurance. The report also concluded that the complexity of the tax credit contributed to its low use. Many com- ments sent to the GAO stated that it was too much of an administrative burden for a busi- ness to supply the IRS with additional work- sheets to support the application for the tax credit. The GAO recommended that the IRS improve the instructions for the credit to en- courage employers to apply. Although the fate of the credit is uncertain pending the elections and the promised repeal of the health care law by Presidential candidate Romney, I can help you analyze your eligibility and file the neces- sary information with the IRS to get approval for the credit, if you have an insurance plan for your employees.

6.6 MILLION YOUNG ADULTS NOW ON PARENT’S HEALTH INSURANCE PLAN

A new report by the Commonwealth Fundsays that about half of the 13.7 million youngadults insured under their parents’ healthplans in 2011 were made eligible by PresidentObama’s health care law. The group, which sup-ports the President’s plan, got its numbers froma health insurance tracking survey of morethan 1,800 young adults aged 19 to 25 betweenlate 2010 and late 2011. More than one in ten19-to-29-year-olds told the CommonwealthFund they were unemployed.

PRESIDENTIAL CANDIDATES’ TAX PLATFORMS

This year’s Presidential election comes in themidst of a potential fiscal crisis that could occurjust weeks after the November 6, 2012 vote—the expiration of the Bush tax cuts, which havenow been in place for almost 12 years. TheCongressional Budget Office has warned thatif taxes on all Americans are allowed to go upsuddenly, when the lower rates expire on De-cember 31, 2012, it could trigger another eco-nomic crisis in the United States, when com-bined with deep spending cuts which also willautomatically take place without Congressionalaction.

The Presidential candidates’ tax platforms, outlined below, show the key elements in the debate over which tax plan would successfully move the economy in the right direction. This side-by-side comparison gives you a preview of what tax changes to expect within the coming months, depending on who wins the election. I also hope this

information will give you a basis for comparing the different candidates so you can make an informed decision when you vote. For further information, see the links below to the two parties’ platforms.

Democratic Party: h tt p:// w w w .de m o cr a ts. o r g /about/party_platform

Republican Party: h tt p:// w w w . g o p .c o m/

2012- r e p u b li c a n- p l a t f o r m_ h o m e/

INDIVIDUAL TAX PROVISIONS DEMOCRAT: OBAMA REPUBLICAN: ROMNEYTAX RATES and BUSH TAX CUTS:Currently 6 brackets: 10%, 15%, 25%, 28%,33% and 35%.

Long-Term Capital Gains Rate:Now, 0% for taxpayers in the 15% bracket and15% for individuals in the 25% bracket andhigher. Increases to 20% in 2013.

Dividend Rate:Now, 0% for taxpayers in the 15% bracket,15% for individuals in the 25% bracket andhigher. Expires in 2013 when dividends willbe taxed in regular brackets up to 39.6%.

End Bush Tax cuts for individuals with in- come above $200,000 and married couples with income above $250,000. Top rate would be 39.6% and lowest rate would be 10%.Households with income over $1 million would have a minimum tax rate of 30%.

Allow the current reduced tax rates on divi- dends and capital gains to expire as scheduled for upper-income taxpayers..

The maximum dividend and capitalgains tax rate for upper-income taxpayers($200,000/$250,000) would increase from15% to 20%. Other taxpayers would keep

Extend Bush tax cuts for all income levels pending tax reform.Enact tax reform to reduce each bracket by20%. The top bracket would be 28% and thelowest bracket would be 8%.

Keep 15% long-term capital gains and dividend rate; Eliminate tax on capital gains, dividends, and interest for taxpayers with yearly income under $200,000.

ESTATE and GIFT TAXES:Current estate and gift tax exemption is $5million per person with a tax rate of 35%.These numbers will revert to a $1 millionexclusion with a 55% tax rate in 2013.

Set permanent estate tax rate at 45% with an exclusion of $3.5 million per person. Make permanent the ability of a surviving spouse to use any unused estate and gift tax exclusion of the deceased spouse (portability).

Completely repeal the estate tax.

HEALTHCARE TAX INCENTIVESand FUNDING PROVISIONS:Net Investment Tax and IncreasedMedicare tax set to take effect in 2013

Supports health insurance premium tax credits of up to 35% for individuals and small businesses; penalties on large employers that do not offer insurance to their employees; and increased Medicare tax on high-income indi- viduals (from 2.9% to 3.8%). New Medicare tax on net investment income would be 3.8% for singles with income above $200,000 and married couples with more than $250,000 in income. Investment income includes flow- through business income, interest, dividends and capital gains.

Repeal the Affordable Care Act, including the0.9% additional Medicare tax on wages andthe 3.8% tax on net investment income ofhigh-income individuals.

ALTERNATIVE MINIMUM TAX (AMT) Index the AMT exemption amount to inflation.

Repeal the AMT.

BUSINESS TAX PROVISIONS DEMOCRAT: OBAMA REPUBLICAN: ROMNEY

CORPORATE TAX RATE: Lower the top corporate tax rate to 28% from the current 35%.

Lower the corporate tax rate from 35% to25%. Eliminate the corporate AlternativeMinimum Tax.

INTERNATIONAL TAX PROVISIONS: Eliminate deductions for outsourcing opera- tions; make companies pay an international minimum tax on overseas profits. Create a tax credit of 20% for U.S. companies moving their overseas operations back to the U.S.

Move the U.S. from a worldwide tax system to a territorial system, where income is taxed only in the country where it is earned; allowa “tax holiday” for U.S. corporations bringing overseas profits back to the U.S.

DEPRECIATION AND CAPITAL RECOVERY:

Job-related tax credits:

Extend for 1 year the full expensing of capital costs. Increase expensing deduction limits to$250,000 for capital investment in business property with an $800,000 purchase limit.

New tax credit in 2012 through 2014 for companies investing in new factories, equip- ment, or production in depressed areas; 10% tax credit for companies that

Extend for 1 year the full expensing of capital costs.

No specific job tax benefits but favors reduced regulations on businesses.

RESEARCH & DEVELOPMENT TAX CREDIT:

Make the R&D credit permanent and increase the rate of the Alternative Simplified Credit (ASC) from 14% to 17 %.

Make the R& D credit permanent.

ENERGY TAX INCENTIVES: Supports numerous alternative or “clean energy” tax credits.

No specific tax provisions but backs increased drilling in the U.S. for oil and natural gas.

IRS UPDATEIRS OFFERS NEW DETAILS ON FICA

TAXATION OF TIPS, AUTOMATIC GRATUITIES The IRS has updated its guidance on FICA taxation of tips to explain in detail both em- ployer and

employee responsibilities for report- ing and paying the tax. Employees who received

$20 or more in cash tips in a single calendar month must furnish written documentation of the tips to employer. If this is not done, then the employee is liable for the employee portion of the FICA taxes and is subject to penalties. In this situation, the employer is only liable for the employer portion of FICA taxes after IRS issues a “notice and demand.” The employer is not li- able to withhold and pay the employee share of FICA taxes on the unreported tips. Cash tips include tips received from customers, charged tips (e.g., credit and debit card charges) distrib- uted to the employee by the employer, and tips received from other employees under any tip- sharing arrangement. On the other hand, au- tomatic gratuities are not tips and are not used in computing the hourly tip rate or the tip tax credit.

Tip v. Service Charge

The IRS explained the difference in tips and service charges, which are reported as non-tip wages. The following criteria apply to tips:

• The payment must be made free from com- pulsion.• The customer must be able to determine the

amount of the payment.• The payment should not be negotiated or be

dictated by the employer.

• The customer should have the right to de- cide who receives the payment.

For example, if a restaurant charges a set amount for parties of six or more, the charge is not a tip, but rather is a service charge.

The IRS is granting extra time for businesses not currently in compliance to revise their busi- ness practices and make needed system changes to comply with the new rules.NEW RULES MAKE IT EASIER FOR SHARE- HOLDERS TO INCREASE BASIS ON LOANS TO S CORPORATIONS

Under current law, S Corporation sharehold- ers can only take losses and deductions into ac- count if they have sufficient “basis” in the entity. A shareholder’s basis reflects the shareholder’s economic investment in the corporation and includes the adjusted basis of the shareholder’s stock in the corporation as well as the basis of any debt the corporation owes the shareholder. In the past, the IRS and the courts have typi- cally denied a basis increase to shareholders who borrow funds from a related entity (instead of a third-party lender) that are then loaned to the S Corporation, referred to as a “back-to- back loan.” New proposed regulations relax the IRS position and allow a basis increase for legitimate loans to the S corporation. The loan must run directly to the shareholder, meaning that there must be a bona fide creditor/debtor relationship between the shareholder and the

S Corporation. This is an important development that I will be glad to discuss with you because basis computations are key to your ability to de- duct any losses you incur on your investment in an S Corporation.

PROPOSED RULES CLARIFY HOW 50% LIMIT ON MEALS AND ENTERTAINMENT DEDUCTION APPLIES TO MULTIPLE PARTIES

The IRS has issued proposed regulations that explain how the 50% deduction limitation on meals and entertainment expenses applies when multiple parties are involved. The rules are designed to impose the deduction limit on only one party. The new regulations explain how the limitation applies when a taxpayer is performing services for another person under a reimbursement arrangement. In the case of independent contractors, the parties can en- ter into their own agreement as to who will be subject to the 50% deduction limitation. If no agreement is reached, the limit will be applied to the independent contractor if the contractor does not substantiate the expense or to the cli- ent or customer if the contractor properly sub- stantiates the expense. Anyone who reimburses an employee is subject to the deduction limita- tion if the payment is not treated as compensa- tion or wages to the employee.

INDOOR TANNING EXCISE TAX FOR SINGLE-OWNER ENTITIES

New IRS regulations explain the responsibil-ity of disregarded entities for the indoor tan-ning excise tax. A “disregarded entity” is anentity that elects to be disregarded as an entityseparate from its owner.” For example, if a “dis-regarded entity” is owned by an individual, it istreated as a sole proprietor. If the “disregardedentity” is owned by any other entity, it is treatedas a branch or division of its owner. Under thenew rules, for taxes imposed on amounts paidon or after July 1, 2012, the excise tax form mustbe filed under the name and employer identifi-cation number of the entity instead of the own-er. This rule affects excise tax returns due on orafter October 31, 2012. For taxes imposed onamounts paid before July 1, 2012, the IRS willtreat payments made by a disregarded entity ashaving been made by the owner of that entity.

IRS TIGHTENS RULES FOR ISSUING TAX NUMBERS TO NONCITIZENS

Reacting to criticism, the IRS has changedits procedures for issuing Individual TaxpayerIdentification Numbers (ITINs) to noncitizens,including illegal aliens. The IRS issues ITINs topeople who are required to pay taxes but whoare not eligible to obtain a Social Security Num-ber. ITINs are issued regardless of immigrationstatus because both resident and nonresidentaliens may have a U.S. filing or reporting re-quirement. The number has nine-digits andalways begins with the number 9 and has a 7or 8 in the fourth digit, for example, 9XX-7X-XXXX.

The new rules are stricter on the documenta- tion requirements. Now the IRS will only accept documents from an issuing agency including: passports, birth certificates, or certified docu- ments. Notarized documents are no longer ac- cepted to support applications. Spouses and de- pendents of U.S. military personnel who need ITINs are not subject to these changes.

DEDUCTION RULES FOR ENTERTAINMENT USE OF BUSINESS AIRCRAFT

The IRS has finalized rules on the deductionlimitation for entertainment use of businessaircraft. The final rules continue the policy es-tablished in 2007 that companies must allocateexpenses between business and personal useon the basis of occupied seat hours or occupiedseat miles, calculated as the yearly total hoursor total miles flown by passengers multipliedby the number of occupied passenger seats. Thetotal aircraft operating costs for the year are di-vided by occupied seat hours or occupied seatmiles to arrive at cost per occupied seat hour or

occupied seat mile. Taxpayers also may allocate costs on a flight-by-flight basis which divides the total aircraft operating costs for the year by the number of flight hours or flight miles for the year to determine cost per hour or cost per mile. The cost per flight is then allocated to its passengers on a per capita basis.

IRS HAS PLAN TO HELP U.S. CITIZENS OVERSEAS CATCH UP WITH TAX FILINGS

The IRS has developed a plan to help U.S.citizens residing overseas, including those claim-ing to be dual citizens, to catch up with tax fil-ing obligations and to provide assistance forpeople with foreign retirement plan issues. Anew option that went into effect on September1, 2012 allows U.S. citizens and others livingabroad who have not been filing tax returns tocome into compliance without paying penal-ties. Eligible taxpayers are those who have sim-ple tax returns and owe $1,500 or less in tax forany of the covered years. The new streamlinedprocedures also will allow resolution of issuesrelated to foreign retirement plans, such as Ca-nadian Registered Retirement Savings Plans.These taxpayers must file three years of delin-quent returns and six years of foreign financialaccount reports.

AMERICAN FAMILIES’ NET WORTH DROPS40 PERCENT

If you own a home or have an IRA, no one

needs to tell you something’s awry. We hear ev-ery day that housing prices have plummeted tolevels that left many homeowners underwater.The other side of most American family wealthhas been in IRAs, and the lost value in these ac-counts is just beginning to be fully understood.Every three years, the Federal Reserve issuesa report, the “Survey of Consumer Finances.”The most recent report revealed that the me-dian family had a net worth of $77,300 in 2010,compared with $126,400 in 2007, a reductionof about 40 percent. Seventy-five percent of thedrop was blamed on the housing mess, but mostof the rest was lost in quickly dwindling IRAs,where close to a trillion dollars disappearedfrom the family balance sheets.

TAX PLANNING

THINGS TO CONSIDER FOR ROTH CONVERSIONS

If you are thinking of converting your tradi-

tional IRA into a Roth IRA, you need to con-sider the possible changes to the tax code thatcould be coming after the elections. To convertyour regular IRA into a Roth, you will have topay income tax on the amount of the accountthat reflects any deductible contributions youmade to the IRA as well as any untaxed earningsin the account. If you are in a high tax bracketnow, it may make sense to wait until retirementage to withdraw your funds from a traditionalIRA when your tax rate is likely to be lower. Onthe other hand, with the Bush tax cuts fully ineffect, individual tax rates, especially those onupper-income taxpayers, are at an all-time low.You can take advantage of these low rates byconverting your traditional IRA into a Roth be-fore the end of the year.

Even if Mitt Romney wins the presidency and the Republicans take over Congress, it will take time for any longer-term tax reform plan with lower individual tax rates to be put in place. Thus, converting now could be a good compro- mise. The benefit of converting to a Roth IRA is that you will not have to pay tax on withdraw- als later when you begin receiving distributions. Also, the earnings on your Roth IRA will never

be taxed if you hold any Roth IRA for 5 years and you delay receiving distributions until you are age 59 ½. Roths are more liquid than tradi- tional IRAs, because you can withdraw rollover IRA contributions within 5 years after moving them into a Roth without a penalty. In short, this gives you better access to your savings without penalty while you still retain some of the benefits of a tax-qualified retirement plan. The rules are complex, though, and it is impor- tant to get the strategy right, depending on your individual financial goals. I will be glad to help you decide whether making a Roth rollover be- fore the end of the year would be right for you.

COURT OPINION SUMMARIESCourt opinions in tax disputes are an

impor-tant source of law that tax professionals use toadvise their clients. What courts contribute toour understanding of tax law is an explanationof how the rules apply to different fact situa-tions. Below I summarize several recent courtcases that illustrate important tax rules.

ROLLOVER OF INHERITED IRAA taxpayer’s mother died leaving her

daugh-ter a traditional IRA managed by Citi SmithBarney. Citi made two death benefit distribu-tions to the daughter with checks made out toher. The daughter kept some of the money anddeposited the balance into a new inherited tra-ditional IRA account at another institution. Thetaxpayer reported as income the portion shekept, but did not report the amount she put inthe new IRA account. The IRS determined thatall of the retirement income was taxable. Thetaxpayer said she intended to transfer the fundsfrom the trustee of one account to the trusteeof the second account, and argued that she hadsubstantially complied with the rollover rules.

The Tax Court upheld the IRS assessment saying that because the funds were from an inherited IRA, the funds must be transferred directly from one account trustee to the other account trustee. If the taxpayer had control of the funds at any time, the distribution is taxable. The Court also noted that a taxpayer’s “good in- tentions” do not determine the tax consequenc- es of a transaction. The lesson here is that the rules for IRA rollovers are very strict and you should consult with a professional before mak- ing changes in your retirement accounts. (Beech v. Commissioner)

CANCELLATION OF CREDIT CARD DEBTGross income includes income from the

dis-

charge of indebtedness. In other words, if yourdebt is cancelled by a lender, you may have topay tax on the amount of cancelled debt. The ra-tionale is that the cancellation of debt gives thedebtor an economic benefit that is equivalent toincome. Financial institutions are required tosend people 1099s when debt is discharged.

In a victory for taxpayers and those down on their luck, the Tax Court has decided that a tax- payer did not have cancellation of indebtedness income from unpaid credit card debt where the collection period had expired. Even though the debt collector issued a 1099-C for 2008, the Court found the debt was actually discharged much earlier. The Court looked at how long the debt had been outstanding and the creditor’s ef- forts to collect the debt. It concluded that there was an “identifiable event’ that indicated the debt would never be repaid. Note that even if you receive a Form 1099-C from a creditor, you do not necessarily owe tax on discharged debt because several exceptions apply. Please give me any Form 1099-C you receive for analysis. (Stewart v. Commissioner)

FEDERAL COURT SPLIT OVER WHETHER SEVERANCE PAYMENTS ARE SUBJECT TO FICA TAXES

The 6th Circuit Court of Appeals has ruledthat severance payments are not subject to FICAtaxes which include social security and Medi-care taxes. The ruling allowed a refund of over$1 million in employer and employee FICA tax-es paid on severance benefits a company gave toits discharged workers. In 2008, another federalcourt came to the opposite conclusion in a dif-ferent case when it found severance paymentswere subject to FICA.

When two federal appeals courts come to an opposite conclusion, taxpayers are left guess- ing which ruling their own Circuit court will follow. If a taxpayer is in the 6th Circuit, then the taxpayer can apply that Circuit’s law. The6th Circuit is made up of Michigan, Kentucky, Ohio, and Tennessee. However, other Circuits can make their own decisions, so taxpayers who reside in other circuits have an uncertain situa- tion regarding the FICA taxation of severance payments. Thus, the IRS is likely to keep tax- ing severance pay until either Congress or the Supreme Court steps in to resolve the conflict. While some practitioners are recommending that employers consider filing refund claims, the legal situation is far from settled, and you need to have me, as your tax professional, care- fully analyze your particular situation before any decision is made on how to treat severance payments. (U.S. v. Quality Stores, Inc.)

CONTRIBUTION OF RECEIVABLES TO AN S CORPORATION

The Tax Court was recently called upon todecide whether the distribution of one S corpo-ration’s accounts receivables to its shareholders,followed by their contribution of the receiv-ables to a related S corporation, increased theshareholders’ basis in the second S corporation’sstock and allowed them to deduct its losses. Thetransfer involved an auto dealership and its re-lated finance company. The finance companyoperated at a profit and the dealership oper-ated at a loss. The shareholders did not havesufficient basis in the dealership to deduct itslosses but had substantial basis in the financecompany. The finance company distributed re-ceivables to the shareholders who contributedthem to the related dealership to allow the tax-payers to claim loss deductions on the dealer-ship. The IRS disallowed the loss. The Tax Courtheld that the shareholders in the two related Scorporations are not prohibited from receivinga distribution of assets from one S corporationand then contributing those assets to anotherof their S corporations to increase their basis.The Court made the point that while it is ap-propriate to scrutinize the validity of transac-tions between related parties in this situation,the fact that the corporations were related doesnot mean that there was not an honest shift inbasis in the transaction. (James Maguire v. Com-missioner)

MORTGAGE INTEREST DEDUCTION LIMIT FOR MARRIED FILING SEPARATE TAXPAYER

Taxpayers may take a deduction for mortgageinterest on their principal residence for loans ofup to $1 million or $500,000 for married tax-payers filing separate returns. The taxpayer inthis case had obtained a $1 million mortgageto help finance her purchase of a home ownedby herself and her father-in-law. She and herfather-in-law were liable on the mortgage. Al-

though she was married, Petitioner paid themortgage only with her own funds. On her taxreturn, she deducted the interest paid on the

entire $1 million mortgage debt. The IRS dis- allowed the deduction and said she could only deduct the interest on $500,000 of the debt. The Tax Court agreed with the IRS and ruled that the $1 million limitation is only available to co- owners who are married and who file a joint return. In this case, the taxpayer’s husband did not have joint ownership of the property and the couple did not file a joint return. Therefore, the full interest deduction was not available to them. (Bronstein v. Commissioner)

CLIENT ADVISORY

BRACE FOR INCREASED MEDICARE TAX ON HIGH INCOME EARNERS

Beginning in 2013, the Medicare tax rate for

high wage earners will increase by 0.9%, from1.45% to 2.35% for the employee’s portion, onwages paid over $200,000. The increase is onlyfor the employee portion of the tax and will notbe matched by employers. Specifically, an indi-vidual is liable for the additional Medicare taxif the individual’s wages, other compensation,or self-employment income (together with thatof a spouse if filing a joint return) exceed thethreshold amount for the individual’s filing sta-tus as follows:

F i li n g S t at us Th r esho l d A m o u n t Married filing jointly

$250,000Married filing separately

$125,000Single

$200,000Head of household(with qualifying person)

$200,000Qualifying widow(er)with dependent child

$200,000

Married Couples May Overpay

The law requires an employer to withhold additional Medicare tax on compensation in excess of $200,000 in a calendar year. This may cause an employee to overpay the Medicare tax if the employee is married filing a joint return and together the couple’s income does not exceed $250,000. Note that you may need to increase your withholding to avoid large tax liabilities at filing time, particularly if

you are self-employed. I will be glad to evaluate your situation and make a recommendation.

THANK YOU FOR YOUR BUSINESSAs your tax professional, I will be carefully

following any post-election tax legislation mov-ing through Congress. I will apprise you of anydelays I expect in the tax filing season whenthe tax rate situation becomes more clear. I willbe happy to address any concerns and answerquestions you have about any of the issues cov-ered in this newsletter. Thank you for the op-portunity and privilege of allowing me to serveas your tax professional.

Best regards,

QUOTATION“I’m proud to be paying taxes in the United

States. The only thing is – I could be just asproud for half the money.”

--Arthur Godfrey, American television and radio personality.