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Tax talk.


Under Code |Section~ 338, a corporation that made a qualified stock purchase can elect to treat the transaction as an asset purchase--receiving a stepped-up basis in the target's assets. The target corporation is treated as if it sold all its assets at fair market value to a new corporation that purchased all the assets. Under |Section~ 332, a corporation that owns 80% or more of the stock of another corporation does not recognize gain or loss on a liquidating distribution of its property.

In 1988, the Service ruled privately that an S corporation could not make an election under |Section~ 338 because IRC |Section~ 1371 (a)(2) treats an S corporation in its capacity as a shareholder of another corporation as an individual. Late last year, in a technical advice memo, the service reversed this position.

In the ruling, an S corporation that owned 7% of the target corporation purchased all of its assets other than its outstanding shares. The S corporation immediately dissolved the target and took over its name. If |Section~ 1371 (a)(2) operated to treat the S corporation as an individual for these purposes, (1) its purchase of T's stock would not have been a qualified stock purchase under |Section~ 338 (d); and (2) the dissolution of the target into the S corporation would not have been a |Section~ 332 liquidation.

In addition, the S corporation's momentary control of the target corporation did not cause it to terminate its S election. (PLR 9245004)

Taxpayer Representatives May Damage Taxpayer Position

A taxpayer and his spouse were indicted for violating Federal income tax laws. Prior to the indictment, their lawyer and accountants met with officials of the Service pursuant to written powers of attorney from the taxpayers. These representatives allegedly made "inculpatory statements" concerning the defendant's activities. A district court held the government may admit these statements at trial without court conducting an evidential hearing to determine the admissibility of the statements.

The taxpayers argued that the statements were beyond the authority granted by the powers of attorney. They also contended that introduction of statements by their lawyer may violate the attorney-client privilege. Finally, they stated that they were never warned that the statements would be used against them in subsequent proceedings.

The taxpayers signed printed power of attorney forms prepared and supplied to their representatives by the Service in connection with a civil proceeding. They argued that the powers gave no authority to respond to a criminal investigation. The Court observed, however, that the powers gave the representatives authority "to perform any and all acts the principals(s) can perform," which was broad enough to empower them to respond to a criminal investigation. Language on the forms directed the taxpayers to list any excludable powers but they did not exclude any powers.

The court also found that any attorney-client privilege was waived when the taxpayers sent their lawyer to represent them before the IRS. In addition, since the meeting was of a voluntary nature, no Miranda warnings are required to be issued. (United States v Pappas, D NH Oct 23, 1992)

Non-filers Who Come Forward Will Not Be Prosecuted

Many nonfilers want to come forward and file delinquent tax returns but are reluctant to do so because they are concerned about criminal investigations. Recognizing this--and in an effort to further the goals of its Non-filer Program began last October--the Service has issued a news release explaining its long-standing position that nonfilers who come forward voluntarily would not be prosecuted.

Since 1952, the Service has made a practice of taking into consideration the fact of a taxpayer's voluntary disclosure when determining whether to recommend criminal prosecution to the Department of Justice. This effectively reduces taxpayers concerns to filing and paying the tax liability owed.

The Service will not assure that it would never, under any circumstances, recommend criminal prosecution of an individual who comes forward "voluntarily" to report the failure to file one or more returns; however, its practice has been not to do so where the taxpayer:

* informed the Service that he has not filed for one or more tax periods;

* had only legal sources of income;

* made the disclosure prior to being contacted by the Service that he is under criminal investigation;

* either filed a true or correct return or cooperated with the Service in ascertaining the correct tax liability; and,

* either paid in full or made bona fide arrangements to pay.

The Service has no intention of altering its past practice or departing from the consistent manner in which it applied the voluntary disclosure in determining whether to recommend prosecution for nonfilers. Michael Dolan, IRS Deputy Commissioner, reinforced earlier statements of IRS policy in early January with the statement that taxpayers should not look for an announcement of a full amnesty program; some cases are so egregious and so significant the IRS may recommend criminal prosecution.

Additionally, the IRS is stressing cooperation with practitioners to provide preparation assistance to these non-filers. The IRS is not looking at these non-filer situations as traditional "shoebox" audits; the IRS is willing to make available information, such as past W-2 and 1099 Forms, to practitioners at the non-filers consent.

Penalties Delayed For Interest Reporting

Effective for tax years beginning after 1991, a taxpayer claiming a deduction for interest on a seller-financed residential mortgage must include on his income tax return the name, address and ID number of the payor. The payor and recipient are required to furnish their ID numbers to each other. However, the 1992 forms do not make provision for reporting this information.

The penalty for failure to include the name, address and tax ID number of another person is $50 per failure. The Service will not assert penalties for failure to provide tax ID numbers on 1992 returns. The waiver of the penalties was announced at the end of last year.

TCMP: The Next Generation

Every three years, the IRS conducts thousands of detailed, line-by-line research audits so it can compile data on compliance. The statistics compiled during the course of this Taxpayer Compliance Measurement Program (TCMP) help in targeting areas of noncompliance, which the Service then focuses on in future audits. The next battery of audits, which begin in October 1992, will target 1992 tax returns and should be less cumbersome for both taxpayers and IRS examiners. The sample size will be cut to 25,000 and auditors will have the option of skipping trivial items and items that are clearly documented. The 12-page checklist has been eliminated.

The Service has changed the audit scope because of its ability to acquire information from alternative methods. The TCMP will focus on those areas in which the Service is seeking information.

Standard Mileage Rates For 1993

Despite the recent increase in gasoline prices, the standard mileage rates have not increased for 1993. They remain as follows:

* Business Use: 28 |cents~

* Charitable Use: 12 |cents~

* Medical and Moving Use: 9 |cents~

The depreciation component of the standard mileage rate remains 11.5 |cents~ per mile for 1993.

The special mileage rate for rural mail carriers is 42 |cents~ per mile for 1993.

Although the mileage rate figures did not change, there is a modification for employers that reimburse employees for the business use of their personally owned cars by way of the fixed and variable rate method (FAVR). For 1993, the FAVR allowance can be based on the costs associated with a standard auto that costs no more than $23,900 (up from $22,500). (Revenue Procedure 92-104, 1992-52 IRB 24)

IRS Posturing on Independent Contractor Issues

The misclassification of employees and their treatment as independent contractors is widespread and increasing. The IRS conservatively estimates there are over 3 million workers misclassified by about 750,000 employers.

Employers have many incentives to classify workers as independent contractors, as they avoid the costs of providing employee benefits and other overhead costs associated with employers. In addition, audits of targeted business are determining that the majority of good-faith attempts to comply with the controversial law are misapplied.

As a result, the IRS is implementing new initiatives to increase compliance with the law. We will see more effective pursuit of whistle-blowers' tips, increased emphasis on education and outreach programs, specialized training of IRS personnel (by industry and sector) and increased audits of target businesses.

New Administration and Compliance 2000

The Clinton Administration will most likely continue to give careful consideration to Internal Revenue Service's Compliance 2000 initiative. Serious questions remain about the future of Compliance 2000 as a continuing program--almost all directly associated with the new administration.

We will most likely see the administration consider various alternative programs or modifications to the initiative.

Nevertheless, voluntary compliance as a cornerstone will have to continue and take a key role in the future of any strategic initiative. It is the only way to administer the present tax system. A central element of the Compliance initiative, voluntary compliance relied heavily on the support of the Bush pledge of tax simplification. With the Clinton tax system focusing on new taxes, complex credits and additional marginal brackets, tax simplification is slowly becoming a philosophical debate rather than a practical program. Most likely, the Service will revise operational procedures to focus on another element of Compliance 2000. Look for emphasis on taxpayer service and reducing taxpayer compliance burdens as the primary objectives under the new IRS Commissioner.

Additionally, in an effort to deal with the mounting problem of IRS receivables, the IRS will probably focus more attention on the already active and successful offers-in-compromise program (up 200%), installment agreements programs (up 47%) and elimination of duplicate penalties and uncollectible accounts (revised IRM); and of course the IRS will increase reliance on the electronic filing initiative. However, the use of private collection agencies could be tested for low priority taxpayer accounts during 1993.

To Be or Not To Be, That Is The Election

Owners of qualifying corporations may elect to be exempt from corporate tax and to have the corporation's income or loss passed through directly to them by making an S election. The Service has just issued final regulations providing rules that govern, among other things, the time and manner of making the election, how to revoke it and when it is otherwise terminated.

* An election is valid only if an electing corporation qualifies as a small business corporation on the date of the election and on each day of the tax year for which the election is effective.

* An election is not invalid because a corporation fails to qualify as a small business corporation after the date of the election and before the first day of the tax year for which it is effective.

* An election made during the first 2 1/2 months of a corporation's tax year can be made effective for the following year.

The final regulations clarify who must consent to the election.

An S status election is terminated if the corporation either ceases to qualify as a small business corporation or if the corporation has C corporation earnings and profits and passive investment income in excess of 25% of gross receipts for three consecutive tax years. In addition, an election may be terminated by revocation.

If an election terminates on a day other than the first day of the tax year, the tax year in which the termination occurs is divided into a short S year and a short C year. Subject to three exceptions, items are allocated on pro rata basis to each day of the termination year.

The final regulations are effective for tax years of corporations beginning after 1992. (Reg |Section~ 1.1362-2)
COPYRIGHT 1993 National Society of Public Accountants
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Title Annotation:tax accounting
Author:Green, Gary L., Jr.
Publication:The National Public Accountant
Date:Mar 1, 1993
Previous Article:The A word: where do we go with it?
Next Article:FAS 105: the future of disclosure standards for financial instruments.

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