Tax research

For the first time, the Internal Revenue Service's Statistics of Income Bulletin takes a detailed look at taxable real estate investment trust subsidiaries. The REIT Modernization Act of 1999 provided for the creation of taxable REIT subsidiaries, corporations that could be 100 percent owned by REITs. The just-released Spring 2005 issue of the SOI Bulletin shows that in 2001, the first year of TRS tax returns, 480 firms elected to be TRSs. Of these, a total of 404 filed corporate income tax returns, reporting total gross income of $8.1 billion and total assets of $19.4 billion, and remitting $85.4 million in total taxes. Although TRSs tend to be highly leveraged, with 31 percent of those that reported Schedule L data showing negative book equity, loans from shareholders, including parent REITs, account for only 3.3 percent of total TRS debt. In other bulletin news, 3.2 million S corporation returns were filed for tax year 2002, an increase of 5.6 percent from tax year 2001. S corporations continue to be the most popular corporate entity choice, representing 59.8 percent of all corporate entities. Women-owned sole proprietorships grew faster than those owned by men in terms of numbers and net income from 1985 to 2000, according to the bulletin. However, male-owned businesses were larger and more disparate in terms of business earnings.

The Internal Revenue Service has certified the 2006 Toyota Highlander hybrid as being eligible for the clean-burning fuel deduction. This certification means that taxpayers who purchase one of these hybrid vehicles new during calendar year 2005 may claim a tax deduction of up to $2,000 on Form 1040. Under the Working Families Relief Act of 2004, the clean-burning fuel deduction is limited to up to $2,000 for certified vehicles first put into service in 2005, and $500 for vehicles placed in service in 2006. No deduction will be allowed after 2006. Federal law allows individuals to claim a deduction for the incremental cost of buying a motor vehicle that is propelled by a clean-burning fuel. By combining an electric motor with a gasoline-powered engine, these hybrid vehicles obtain greater fuel efficiency and produce fewer emissions than similar vehicles powered solely by conventional gasoline-powered engines. This one-time deduction must be taken in the year that the vehicle is originally used. The taxpayer must be the original owner. Individuals do not have to itemize deductions on their tax return to claim this deduction. This benefit can be taken as an adjustment to income on the Form 1040.

The Internal Revenue Service will install a software upgrade for e-Services from July 21 through Aug. 4. During installation of the upgrade, e-Services will not be available. This is a scheduled outage and is needed to upgrade the current e-Services software, according to the IRS. E-Services are Web-based products that allow tax pros and taxpayers to do business with the IRS electronically. They include preparer tax identification number application, online e-file application, and taxpayer identification number matching. In addition, tax professionals who e-file five or more accepted business or individual tax returns in a season are also eligible to use three additional e-Services products -- disclosure authorization, electronic account resolution and a transcript delivery system.

QuickBooks users can now calculate sales tax using Avalara's AvaTax ST for Intuit's QuickBooks Pro, Premier and Enterprise Editions. The Web-based AvaTax ST automates the sales tax compliance function by performing address validations, jurisdiction and rate research, tax calculations, and detailed reporting. It also automatically generates prepopulated returns for any of the over 800 North American taxing jurisdictions. AvaTax ST is designed to meet the needs of firms that are running operations where the person processing orders and setting up new customers may be the same person who could be out making sales or generating billable hours. The integrated AvaTax ST for Pro, Premier and Enterprise QuickBooks users can be downloaded now at www.avalara.com, and will be available for purchase in late July 2005. QuickBooks users can order the service at $9.95 per month with per-transaction and activation fees, or purchase transactions-included packages starting at $29.95 monthly, plus activation fee.

A federal jury has cleared Joseph Banister of charges of federal criminal tax fraud and conspiracy. Banister, a CPA and former Internal Revenue Service Criminal Investigative Division special agent, was indicted for preparing false income tax returns and conspiring to defraud the United States. Banister advised Al Thomson, a California business owner, that the IRS lacked the authority to impose income taxes on his workers, and that there was no legal requirement for the business to withhold any taxes from the workers' paychecks. He also prepared corrected tax returns for Thompson claiming that his taxable income was zero. Banister himself reports and pays income tax, and was not charged with failure to do so. However, courts have routinely rejected his position that paying tax is voluntary, and Thompson is currently serving a six-year sentence for failure to withhold.

The Panel on the Nonprofit Sector, a collaboration of leaders of America's charitable organizations, presented its final report to Sens. Chuck Grassley, R-Iowa, and Max Baucus, D-Mont., chairman and ranking member of the Senate Finance Committee.The report contains more than 120 actions to be taken by charitable organizations, Congress and the Internal Revenue Service, which together would strengthen the sector's transparency, governance and accountability.If implemented, these recommendations would be the most sweeping changes to the operation and regulation of charities and foundations in three decades.Among its proposals, the panel recommended that:-- Charitable organizations adopt audit procedures and policies on travel expenses, conflicts of interest and whistleblower protection.-- Audits be required of charitable organizations with annual revenue of $1 million or more.-- Non-cash contributions support charitable causes, rather than providing improper tax deductions for donors.-- Penalties be strengthened on board members who approve and executives who receive excessive compensation."The panel report will inform the committee and its work, particularly in the important areas of governance and transparency," said Grassley. "I recognize, though, that the IRS is the one that must shoulder the burden of enforcing the law and so we will certainly look to Commissioner [Mark] Everson and his staff, as well as the Treasury, for their judgment on reforms, particularly in addressing the abusive situations that the commissioner highlighted with such candor in his April letter to the committee. My time line is to have legislation this summer for Finance Committee members to be able to review, and then to have the committee mark up legislation soon after that."

Big Four firm KPMG, which is sweating out a possible indictment from the Department of Justice over its sale of tax shelters, is working to limit its liability from civil suits by negotiating with class-action firm Milberg Weiss Bershad & Schulman.According to The New York Times, Milberg Weiss is working with the firm to reach a "prepackaged settlement" with clients of the shelters who claim that they were hurt by purchasing the products.According to documents filed in federal district court in Hot Springs, Ark., KPMG had recently began talks with Milberg Weiss; under the reported settlement terms, KPMG would pay $195 million.A representative from Milberg Weiss told WebCPA that the firm could not comment. Currently, the firm faces a class-action suit filed by Bernstein Litowitz Berger & Grossmann, and the class includes purchasers of a KPMG shelter from January 1998 to Oct. 31, 2000.Other defendants in the class action are Presidio, an investment advisory firm started by former KPMG partners; Deutsche Bank; and Sidley Austin Brown & Wood, a law firm that issued favorable opinion letters on the shelters.

President Bush's Advisory Panel on Federal Tax Reform will likely hold a July meeting to review the information and comments gathered during the ten days of public hearings that the panel has convened since its inception in January. According to Tax Analysts, the reform panel groups have been reviewing materials in preparation for their final recommendations, which is scheduled to be presented to Treasury Secretary John Snow Sept. 30. Prior to that, however, the panel's final recommendations will probably be presented in a September public hearing.

The Internal Revenue Service said that tuition paid for two children who have been diagnosed as having disabilities caused by medical conditions including dyslexia to attend school now qualify as medical care expenses deductible under Section 213(a). The children take part in the school's program of special education, which is designed to enable them to deal with their medical handicaps and move on to study at a mainstream school. However, Ltr. Rul. 200521003 points out that overcoming the learning disabilities must be a principal reason for attending the school, and any ordinary education received must be incidental to the special education provided.

The Multistate Tax Commission, a consortium of 47 state governments that works to hone the administration of tax laws applicable to multistate enterprises, has named Joe Huddleston Esq. as its executive director. Huddleston begins begin Aug. 1, and succeeds interim ED Rene Y. Blocker. Huddleston was most recently vice president of tax solutions for Liquid Engines Inc., a tax software firm focused on state income tax planning models and methodologies for multi-state and multinational companies. Prior to that, he was a state and local tax partner at national CPA firm Grant Thornton, serving middle-market and Fortune 500 companies He also served as commissioner of the Tennessee Department of Revenue from 1987 to 1995. "I look forward to working with state tax organizations as we address the challenges that will define the next several years," said Huddleston in a statement. "The MTC has made enormous strides in recent years, and I very much intend to help write the next chapter of the continuing success story at the commission."

J.J. Pickle, former Congressman, tax writer and an ardent reformer of Social Security, died last week here at the age of 91. While serving as chair of the Ways and Means Committee Social Security Subcommittee, Pickle was a key figure in Social Security legislation to keep the system from becoming insolvent and was, according to reports, responsible for the provision that gradually raised the age of eligibility for benefits from 65 to 67. Pickle also served as chair of the Ways and Means Oversight Subcommittee, where he promoted research incentives and investigated a host of tax issues. He retired from Congress 10 years ago, after serving more than three decades.

Richard J. Morgante and Pamela G. Watson have been named to the top two posts in the Wage and Investment Division, the Internal Revenue Service unit that serves most individual taxpayers. Morgante, currently the division's deputy commissioner, will move up to W&I commissioner, and Watson, now the division's compliance director,will succeed him as W&I's second highest executive. Both appointments will take effect in early July. Morgante succeeds Henry Lamar, who is retiring after 34 years with the IRS, the last two as W&I commissioner."Rich and Pam make a strong team, and their leadership and experience will help us effectively serve taxpayers and enforce the law," said IRS Commissioner Mark W. Everson. Based in Atlanta, W&I has processing and customer service responsibility for virtually all taxpayers, processing approximately 175 million paper and electronic returns for individuals and businesses last year, answering 67.3 million automated and assistor calls, and serving over 7 million customers face-to-face.

With tax season over, now is the time for tax practitioners to tinker with different software to find a better fit for their practices. At the same time, vendors hope to get a head start on next season's sales by offering special summer season discounts and tryouts.Meanwhile, there is good reason for preparers to be open to new software solutions.

FINANCE COMMITTEE TAKES AIM AT AMT: A bipartisan coalition of members of the U.S. Senate Finance Committee, including chairman Charles Grassley, R-Iowa; ranking member Max Baucus, D-Mont.; Ron Wyden, D-Ore.; and Jon Kyl, R-Ariz., have introduced legislation to repeal the alternative minimum tax.The Individual Alternative Minimum Tax Repeal Act of 2005 would amend the Internal Revenue Code to end the AMT beginning in the 2006 tax year.

Since its first meeting in February, the president's Advisory Panel on Federal Tax Reform has heard testimony and statements from more than 80 witnesses, and examined everything from the philosophical underpinnings and history of our current tax system, to the economic impact of potential tax systems.

In a victory for accounting firm BDO Seidman, a federal appeals court judge reversed a district court decision and ruled this week that a group of investors can't sue BDO Seidman over the sale of an illegal tax shelter, and instead must arbitrate their claim.

The President's Advisory Panel on Tax Reform will get an additional two months to complete its work.

The Senate Finance Committee has marked up the Energy Policy Tax Incentives Act of 2005, the title of the energy policy bill now before the full Senate.

CCH Tax and Accounting has added two major new stand-alone libraries in the Miller accounting and auditing series to its Accounting Research Manager.

Big Four firm KPMG LLP, which is in talks with the Justice Department related to the agency's ongoing tax shelter probe, said that it takes "full responsibility" for the past unlawful conduct by some its former partners.