Dear Clients & Friends:

The following is a summary (as of 7/10/10) of the most important tax developments that have occurred in the past three months that may affect you, your family, your investments, and your livelihood. Please call us for more information about any of these developments and what steps you should implement to take advantage of favorable developments and to minimize the impact of those that are unfavorable.

Deadline extended for closing home purchase to qualify for homebuyer credit. Relief has been provided to taxpayers who couldn't meet a key June 30, 2010, closing date for qualifying for the homebuyer credit. In general, both the regular first-time homebuyer credit of $8,000 and the reduced credit of $6,500 for long-term residents expired for homes purchased after Apr. 30, 2010. However, if a written binding contract to purchase a principal residence was entered into before May 1, 2010, the credit could be claimed if the purchase closed before July 1, 2010. Under the relief measure, if a written binding contract to purchase a principal residence was entered into before May 1, 2010, the credit may be claimed if the purchase is closed before Oct. 1, 2010. Thus, this extension allows homebuyers who signed a contract no later than the April 30th deadline to complete their closing by the end of September.

Guidance addresses tax breaks for hiring new employees. Employers are exempted from paying the employer 6.2% share of Social Security (i.e., OASDI) employment taxes on wages paid in 2010 to newly hired qualified individuals. These are workers who: (1) begin employment with the employer after Feb. 3, 2010 and before Jan. 1, 2011, (2) certify by signed affidavit, under penalties of perjury, that they haven't been employed for more than 40 hours during the 60-day period ending on the date the individual begins employment with the qualified employer; (3) do not replace other employees of the employer (unless those employees left voluntarily or for cause), and (4) aren't related to the employer under special definitions. The payroll tax relief applies only for wages paid from Mar. 19, 2010 through Dec. 31, 2010.

Employers may qualify for an up-to-$1,000 tax credit for retaining qualified individuals. The workers must be employed by the employer for a period of not less than 52 consecutive weeks, and their wages for such employment during the last 26 weeks of the period must equal at least 80% of the wages for the first 26 weeks of the period.

The IRS has issued guidance on these tax breaks in the form of frequently asked questions. They carry valuable information on subjects such as the scope of the exemption, how it interacts with other tax breaks, and when an employer must receive the employee's certification of former unemployment status. For example, the IRS explains that the exemption and credit can be claimed for a new employee replacing a downsized employee.

Detailed guidance released on new small business health care credit. The IRS has issued detailed guidance on the small employer health insurance credit created by the recently-enacted health reform legislation. Under the new law, effective for tax years beginning after Dec. 31, 2009, an eligible small employer (ESE) may claim a tax credit for nonelective contributions to purchase health insurance for its employees. An ESE is an employer with no more than 25 full-time equivalent employees (FTEs) employed during its tax year, and whose employees have annual full-time equivalent wages that average no more than $50,000. However, the full credit is available only to an employer with 10 or fewer FTEs and whose employees have average annual full-time equivalent wages from the employer of not more than $25,000. The new guidance adopts a liberal approach to the new law's requirements, including three alternative methods for figuring total hours of service (important for determining how may FTEs an employer has), and also explains how small employers claim the credit if their State provides a credit or subsidy for employee health coverage. The IRS has released a state-by-state table of average health insurance premiums for the small group market for the 2010 tax year. The table is needed to calculate the credit for this year.

Guidance issued on new under-age-27 rule for health coverage of children. The IRS has issued guidance on the tax treatment of health coverage for children under age 27 under the new health reform law. The new under-age-27 rule, which went into effect March 30, 2010, applies broadly to employer-provided coverage or reimbursements, cafeteria plans, flexible spending arrangements (FSAs), health reimbursement arrangements (HRAs), voluntary employees' beneficiary associations (VEBAs), and the above-the-line deduction for a self-employed individual's medical care insurance costs.

Availability of FICA exception for medical residents to be resolved. The Supreme Court has agreed to review a 2009 decision of the Court of Appeals for the Eighth Circuit, which upheld the validity of regulations that generally prevent medical residents from qualifying for the FICA student exception. Under these regulations, an employee includes a medical resident who works 40 hours or more for a school, college or university is not eligible for the student exception. The

States address estate planning uncertainty. As of now, there is no estate or generation-skipping transfer (GST) tax for individuals who die this year. There are issues as to how formula clauses in wills and trusts using estate or GST tax terms (e.g., “the applicable exclusion amount,” or “the marital deduction”) will be construed, if the decedent dies in 2010. Several states have addressed this situation by enacting laws providing a special rule of construction under which formula clauses that refer to certain estate and GST tax terms generally will be construed as referring to the federal estate tax and GST tax laws which applied to estates of decedents dying on Dec. 31, 2009. These statutes could impact the amount that will pass under one's will to a person's spouse and children.

Deadline extended for retirement plans in federally declared disaster areas in eight States. The IRS has administratively extended to July 30, 2010, the April 30, 2010, deadline for restating affected pre-approved defined contribution plans and, if applicable, for submitting determination letters to the IRS, and the Code Sec. 401(b) remedial amendment period for these retirement plans. The relief applies to sponsors of defined contribution plans that were affected by the storms and other severe weather in counties in Alabama, Connecticut, Massachusetts, Mississippi, New Jersey, Rhode Island, Tennessee and West Virginia that were federally declared disaster areas in the period from March 1 through May 31, 2010.

Therapeutic Discovery Project Program implemented. The IRS has established the guidelines for applying for the new Therapeutic Discovery Project Program created by the recently enacted health reform legislation. The program will provide tax credits and grants to small firms that show significant potential to produce new and cost-saving therapies, support good jobs and increase U.S. competitiveness. Small firms may apply for certification for tax credits or grants under the program on Form 8942, which must be postmarked no later than July 21, 2010.

Temporary regulations fill in statutory gaps on new indoor tanning tax. The IRS has issued temporary regulations on the health reform's legislation's new 10% excise tax on indoor tanning services provided on or after July 1, 2010. The regs address practical considerations that may not have been contemplated when the law was drafted. For example, they addresses prepayments for tanning services and services provided as part of a gym membership.

Please give us a call if you have any questions or comments regarding these issues.

I continue to feel that the U.S. and California governments don’t have a revenue (raising taxes) problem, they have (and have had for decades) an expenditure problem. President Ronald Reagan and Gov. Schwarzenegger have said the same over time. Even President Clinton, with all his foibles, cut the size of government by 6% during his terms in office.

Look at the linked article from the WSJ. Regardless of what Mr. Geithner is saying on behalf of the Obama Administration, or your politics either way, the chart relays the tragic size and scope of our debt problem. Under the BEST scenario, the US federal debt will increase from about 50% of Gross Domestic Product today, to 100% of GDP in 2030. That’s the BEST scenario. The worst is 50% to over a 150%. I add, that we absolutely know these are bogus, understated, numbers that ignore many of the U.S. government’s “Off-Balance Sheet” debts.

We should have no expectation our children will volunteer to live under such a debt burden. Any business that is mobile will leave the U.S.

It is only a matter of about 5 years before our newly working and voting children re-group “to form a more perfect union” once again. They will walk away from this mountain of debt, leaving the baby-boomers to fend for themselves in retirement, and reset – as has been done many times before over history – our deeply flawed federal treasury and monetary system.

Many people, including my wife, are outraged that BP will obtain a tax deduction, and a resulting reduction in their corporate tax liability to the I.R.S. (and state tax authorities), for the Gulf Coast Clean-Up costs.

They view the tax reduction as a subsidy by U.S. taxpayers to BP, whom some feel, should be punished for an environmental disaster.

To be clear, I’m a very “green” West Coast person and feel the “evil against nature” done by the well-blowout may be the result of criminal negligence by management. But we are focused on the tax law, here.

The tax system is no place to impose a penalty for non-tax related misdeeds. BP is a very large American business and is entitled to the same burdens and benefits of the tax system as any other business. Railroads, Airlines, Pharmaceutical and other businesses have failures where people and animals unfortunately die and the environment is injured. Rarely is it proposed that the taxpayer is not entitled to their tax deduction for losses incurred in connection with their “trade or business.” Nor should it be.

Rather, I’d like to propose that the focus should be other legal penalties/remedies. That is, the Clean-Up costs should be, and have every right to be, tax deductible. However, if an appropriate legal authority imposes a penalty on BP for violations of our laws:

1) That is the appropriate process to obtain retribution for, when proven, any wrongdoing.

2) THE PAYMENT of that PENALTY is NOT tax deductible. Congress, long ago passed tax laws to disallow a tax deduction for fines and penalties. Otherwise, the cost of getting, for example, parking tickets by a delivery business, would be subsidized by all taxpayers.

Therefore, I argue, give BP a full tax deduction for all their legitimate business losses related to the well blow-out. All $30 Billion of it.

…And don’t ask or pressure BP to not take a legally available tax deduction on their corporate tax return (as some in Congress have suggested). Pressuring a taxpayer to waive a deduction means we have two tax systems in place. The real tax system under the “rule of law” and a second tax system subject to political pressures. That’s a dangerous precedent.

But then, when legally proven, impose some real financial pain on BP for their alleged evil deeds through a separate, non-deductible penalty, completely independent of the U.S. tax system.

That way, we don’t start changing tax laws based on moral judgments for a specific situation. Our tax system has enough obscene complexity in it already….

Here’s a Wall Street Journal Article of July 28, 2010 on the subject.

http://online.wsj.com/article/SB10001424052748703292704575393640168030582.html?KEYWORDS=BP+Seeks+Tax+Cut

Update: July 29, 2010

See what happens when politics brings moral judgments into the tax code? Further to my blog, above. Since Goldman Sachs waived their tax deduction, they are held as precedent for others...creating a second parallel tax law. It is absolutely irrelevant what Goldman Sachs did, if you believe, as a first principal, in the blind and even application of the law.

“U.S. Rep. Eliot Engel (D-NY) criticized BP for its pursuit of a tax break at the expense of the American people, calling it "simply shameful."

"If this is not proof positive that corporate greed is out of control, then I shudder to think what could be next. When Goldman Sachs [Group Inc.] was fined over $500 million due to their business practices, they did not seek tax deductions [last month], as was their right. When your company is making Goldman Sachs look like a model of corporate behavior, then you have clearly lost any credibility," Engel said in a written statement.

"Claiming billions of dollars in losses is an affront to the hardworking people of the Gulf Coast who have lost their livelihood as a result of this spill," Engel said. "I call on BP to show, for once, a glimmer of humanity in this situation and halt its claim for this tax break immediately."

Robert Gibbs at the White House has this one absolutely right:

Gibbs said: "I don’t think anybody would prefer that they do that. (meaning, take a tax deduction). There are tax laws in this country that have been written for quite some time."

"The [Obama] administration will ensure that any action that BP takes respects the law as it is," Gibbs added.”

Meaning, the law comes before a few political points.

I would have added: “But if they are found guilty, don’t worry. We’ll impose other penalties to recover a heck of a lot more than their tax benefits.”

Dear Clients & Friends:

The President recently signed into law the “Hiring Incentives to Restore Employment Act of 2010” (the HIRE Act, P.L. 111-47 ). The HIRE Act includes a comprehensive set of measures to reduce offshore noncompliance by giving IRS new administrative tools to detect, deter and discourage offshore tax abuses, as well as a three-year delay (through 2020) of implementation of worldwide allocation of interest—the liberalized rule for allocating interest expense between U.S. sources and foreign sources for purposes of determining a taxpayer's foreign tax credit limitation. An overview of these provisions follows.

Increased disclosure of beneficial owners

Reporting on certain foreign bank accounts. The Act imposes a 30% withholding tax on certain income from U.S. financial assets held by a foreign institution unless the foreign financial institution agrees to disclose the identity of any U.S. individual with an account at the institution (or the institution's affiliates) and to annually report on the account balance, gross receipts and gross withdrawals/payments from such account. Foreign financial institutions would also be required to agree to disclose and report on foreign entities that have substantial U.S. owners. Congress expects that foreign financial institutions will comply with these disclosure and reporting requirements in order to avoid paying this withholding tax. These provisions are effective generally for payments made after 2012.

Reporting on owners of foreign corporations, foreign partnerships and foreign trusts. The Act requires foreign entities to provide withholding agents with the name, address and tax identification number of any U.S. individual that is a substantial owner of the foreign entity. Withholding agents are to report this information to the U.S. Treasury Department. The Act exempts publicly-held and certain other foreign corporations from these reporting requirements and provides the Treasury Department with the regulatory authority to exclude other recipients that pose a low risk of tax evasion. Any withholding agent making a withholdable payment to a foreign entity that does not comply with these disclosure and reporting requirements is required to withhold tax at a rate of 30%. These provisions are effective generally for payments made after 2012.

Extending bearer bond tax sanction to bearer bonds designed for foreign markets. Bearer bonds (i.e., bonds that do not have an official record of ownership) allow individuals seeking to evade taxes with the ability to invest anonymously. Recognizing the potential for U.S. individuals to take advantage of bearer bonds to avoid U.S. taxes, Congress took a number of steps in the 1980's to eliminate bearer bonds in the U.S. First, they prevented the U.S. government from issuing bearer bonds that would be marketed to U.S. investors. Second, they imposed sanctions on issuers of bearer bonds that could be purchased by U.S. investors. The Act extends many of these sanctions to bearer bonds that are marketed to foreign investors and prevents the U.S. government from issuing any bearer bonds. These provisions apply to debt obligations issued after Mar. 18, 2012.

Foreign financial asset reporting

Disclosure of information with respect to foreign financial assets. The new law requires individuals to report offshore accounts and other foreign financial assets with values of $50,000 or more on their tax returns. Individuals who fail to make the required disclosures are subject to a penalty of $10,000 for the tax year; an additional penalty can apply if Treasury notifies an individual by mail of the failure to disclose and the failure to disclose continues. These provisions apply for tax years beginning after Mar. 18, 2010.

Penalties for underpayments attributable to undisclosed foreign financial assets. For tax years beginning after Mar. 18, 2010, the Act imposes a penalty equal to 40% of the amount of any understatement that is attributable to an undisclosed foreign financial asset (i.e., any foreign financial asset that a taxpayer is required to disclose and fails to disclose on an information return).

New 6-year limitations period. For returns filed after Mar. 18, 2010, as well as for any other return for which the assessment period has not yet expired as of Mar. 18, 2010, the Act imposes a new six-year limitations period for omissions of items from a tax return that exceed $5,000 and are attributable to one or more reportable foreign assets. The Act also clarifies that the statute of limitations does not begin to run until the taxpayer files the information return disclosing the taxpayer's reportable foreign assets.

Other disclosure provisions

New reporting rule for PFICs. Effective on Mar. 18, 2010, activities with respect to passive foreign investment companies (PFICs) are subject to a new reporting rule. Unless otherwise provided by IRS, each U.S. person who is a shareholder of a PFIC must file an annual information return containing such information as IRS may require. A person that meets this new reporting requirement could, however, also have to meet the new reporting rule requiring disclosure of information with respect to foreign financial assets (see above). It is anticipated that IRS will exercise its regulatory authority to avoid duplicative reporting.

Electronic filing. For returns the due date for which (determined without regard to extensions) is after Mar. 18, 2010, the Act creates an exception to the general annual 250 returns threshold for electronic filing: IRS will be permitted to issue regs requiring filing on magnetic media for any return filed by a financial institution with respect to any taxes withheld by it for which it is personally liable. Thus, IRS will be authorized to require a financial institution to electronically file returns with respect to any taxes withheld by the financial institution even though the financial institution files less than 250 returns during the year.

Provisions related to foreign trusts

Clarifications with respect to foreign trusts. Under present law, a U.S. person is treated as the owner of the property transferred to a foreign trust if the trust has a U.S. beneficiary. Under current Treasury regulations, a foreign trust is treated as having a U.S. beneficiary if any current, future or contingent beneficiary of the trust is a U.S. person. Notwithstanding this requirement, some taxpayers have taken positions that are contrary to this regulation. In order to enhance compliance with this regulation, the Act codifies this regulation into the statute. This provision is effective on Mar. 18, 2010. The Act also clarifies that a foreign trust will be treated as having a U.S. beneficiary if (1) any person has discretion to determine the beneficiaries of the trust unless the terms of the trust specifically identify the class of beneficiaries and none of those beneficiaries are U.S. persons or (2) any written oral or other agreement could result in a beneficiary of the trust being a U.S. person. As a final clarification, the Act clarifies that the use of any trust property will be treated as a payment from the trust in the amount of the fair market value of such use.

Presumption with respect to transfers to foreign trusts. For transfers of property after Mar. 18, 2010, the Act provides that if a U.S. person directly or indirectly transfers property to a foreign trust (other than a trust established for deferred compensation or a charitable trust) IRS may treat the trust as having a U.S. beneficiary unless such person can demonstrate to the satisfaction of IRS that under the terms of the trust, (1) no part of the trust may be paid or accumulated during the year for the benefit of a U.S. person, (2) that if the trust were terminated during the year, no part of the trust could be paid to a U.S. person (3) and that such person provides any additional information as IRS may require with respect to such transfer.

Minimum penalty with respect to failure to report on certain foreign trusts. Under pre-Act law, a taxpayer that fails to file an information return with respect to certain transactions involving foreign trusts (e.g., the creation of a foreign trust, the transfer of money or property to a foreign trust, or the death of a U.S. owner of a foreign trust) is subject to a penalty of 35% of the amount required to be disclosed on such return. If IRS uncovers the existence of an undisclosed foreign trust but is unable to determine the amount required to be disclose on such return, it is unable to impose a penalty. The Act strengthens this penalty by imposing a minimum penalty of $10,000 on any such failure to file. This provision applies to notices and returns required to be filed after Dec. 31, 2009. Notwithstanding this minimum penalty, in no event may the penalties imposed on taxpayers for failing to file an information return with respect to a foreign trust exceed the amount required to be disclosed on the return.

Dividend equivalent payments

Dividend equivalents treated as dividends. For payments made on or after Sept. 14, 2010, the Act treats a dividend equivalent as a dividend from U.S. sources for certain purposes, including the U.S. withholding tax rules applicable to foreign persons. A dividend equivalent is any substitute dividend made pursuant to a securities lending or a sale-repurchase transaction that (directly or indirectly) is contingent upon, or determined by reference to, the payment of a dividend from sources within the U.S. or any payment made under a specified notional principal contract that directly or indirectly is contingent upon, or determined by reference to, the payment of a dividend from sources within the U.S. A dividend equivalent also includes any other payment that IRS determines is substantially similar to a payment described in the preceding sentence. Under this rule, for example, IRS may conclude that payments under certain forward contracts or other financial contracts that reference stock of U.S. corporations are dividend equivalents.

I hope this information is helpful. If you would like more details about these provisions or any other aspect of the new law, please do not hesitate to call.

From Ron Cohen:

As of 2/13/10, U.S. estate tax outcomes -- (and capital gains tax for the heirs) -- for taxpayers who pass away in 2010, are becoming more confusing each day Congress does not act to replace expired laws.

The following is a Wall Street Journal article on the complete mess Congress has made of the U.S. Estate tax and how we are seeing tax winners and losers based on the date of death.

Adam Smith wrote in the 1700s that a tax systems should be fair, simple and predictable. Congress has failed us on all three counts with the Estate tax…and the personal income tax…and the payroll tax…and the corporate income tax…and the excise tax…OK, I’ll stop now.

Good advice from the article:
“Experts are telling those affected to avoid irrevocable actions, like distributing or selling assets, while the situation remains unresolved.”

http://online.wsj.com/article/SB10001424052748703630404575053430667449198.html

Dear Clients & Friends:

In these troubled economic times, many financially distressed borrowers may have had some or all of their debt cancelled or forgiven by their lender last year. While such relief was no doubt welcome to people who received it, what they may not have realized is that debt forgiveness may have tax consequences. Specifically, debt forgiven in 2009 may have to be included as income on your 2009 return. However, not all canceled debts trigger taxable income. And, even if there is no exception or exclusion in a particular case, that may not be the last word. The tax bite may be reduced or eliminated if you can show that the amount reported by the lender is incorrect.

General rule. The tax laws specifically include income from the discharge of indebtedness in gross income. However, there are several exceptions to this rule. In addition, there are numerous exclusions from gross income for certain types of forgiven debts.

Exceptions. If the cancellation of debt by a private lender, such as a relative or friend, is intended as a gift, there is no income. Likewise, a debt cancelled by a private lender's Last Will and Testament triggers no income to the borrower.

There is also an exception for certain student loans. For example, doctors, nurses, and teachers agreeing to serve in rural or low income areas in exchange for cancellation of their student loans won't have income from the cancellation if they meet certain conditions.

Also keep in mind that there is no income from cancellation of deductible debt. For example, if a lender cancels home mortgage interest that could have been claimed as an itemized deduction on Schedule A of Form 1040, there is no tax problem to contend with.

Price adjustment. There is no income if an individual purchases property and the seller later reduces the price. The purchaser's basis (yardstick for measuring gain or loss on a later sale) in the property, however, is reduced by the amount of the purchase price adjustment.

Exclusions. In addition to the above exceptions, there are exclusions from the general rule for reporting canceled debt as income for:

• discharge of debt through bankruptcy,
• discharge of debt of an insolvent taxpayer,
• discharge of qualified farm debt,
• discharge of qualified real property business debt, and
• discharge of qualified principal residence debt.

These exclusions are quite complicated and a detailed discussion of them is beyond the scope of this letter. However, it is worth pointing out that the qualified principal residence debt exclusion applies where individuals restructure their acquisition debt on a principal residence, lose their principal residence in a foreclosure, or sell a principal residence in a short sale (where the sales proceeds are insufficient to pay off the mortgage and the lender cancels the balance). Also, the exclusions require certain tax attributes to be reduced and must be reported to the IRS on its Form 982.

Repurchased business debt. Income from certain repurchased business debt can be stretched out over several years. Although all of the deferred debt discharge income will eventually be recognized, you benefit from the deferral of tax to later years.

Form 1099-C, Cancellation of Debt. A taxpayer should receive a Form 1099-C from a federal government agency, financial institution, or credit union that forgives a debt of $600 or more. The amount of the canceled debt is shown in box 2. Any forgiven interest included in the amount of canceled debt in box 2 will also be shown in box 3. As noted above, if the interest would otherwise be deductible, it does not have to be included in income.

An individual who doesn't agree with the amount shown on Form 1099-C should contact the lender in writing and request it to issue a corrected Form 1099-C showing the proper amount of canceled debt. Even if the lender refuses to issue a corrected report, there still may be recourse if you have adequate documentation to show that the lender incorrectly reported the amount canceled.

If you had a debt forgiven last year, we can determine how it may affect your 2009 taxes, make sure you gain maximum advantage from any exception or exclusion that may apply, and guide you through various choices that may be available to you, depending on the specific circumstances of your situation. We also may be able to help you to resolve any discrepancy concerning the amount reported by the lender.

Please call GROCO at (510) 797 8661 is you have any questions or comments.

• Remember to File by April 15

California imposes “Use” tax on the purchase of tangible personal (non-real estate) property purchased in another state and transported into California for “use”…hence the “Use” Tax name. While taxpayers play various games to avoid sales tax, the biggest problem comes from internet purchases, where the seller charges no California sales tax when it is obvious tangible personal property is being sold and shipped to a California purchaser.

For the complete story on the Use Tax see my blog at:
http://community.groco.com/cs/blogs/tax_expert/archive/2010/01/07/32504.aspx

The BOE (State Board of Equalization – the Sales/Use tax authority) is currently sending requests for use tax returns to 180,000 California businesses and will send account and login information during the tax season.

Although the BOE states that only about 1% of the businesses have requested the required immediate registration (as discussed below), those who have - and have filed use tax returns - are receiving threatening letters from the BOE demanding returns and payment.

The BOE's computers automatically respond to any appropriate and timely use tax registration with a demand for returns and payment, threatening of penalties as if the taxpayer has automatically done something wrong. How ironic, and normal for our dysfunctional California tax authorities!

If you have registered and have any problems now, we suggest you contact the BOE's Ms. Ana Paulos at (916) 323-4240 Or, you can e-mail: ana.paulos@boe.ca.gov I checked the phone number. Ms. Paulos actually answered the phone!

The Original Problem – The Registration Requirement

The original problem arose in September, 2009 with this BOE Notice:
http://www.boe.ca.gov/news/pdf/l232.pdf and many taxpayers responded by registering.

In early March 2010, the BOE will mail account number and express login information to all individuals and businesses that reported more than $100,000 in gross receipts (not net or taxable income) from a business or rental property on their 2007 federal return.

Under law, our friends at the Internal Revenue Service share this information with the BOE.

These taxpayers will have a use tax account and must electronically file their 2009 use tax return by April 15. The taxpayer must also file 2007 and 2008 returns, which may also be filed electronically.

A return is required even if there is no use tax due. If no use tax is due, file the return with zeros. Because the penalty for failure to file is based on 10% of the tax liability, there will be no penalty for failure to file if there is no tax liability. However, taxpayers who do not file will continue to receive notices from the BOE.

Beware: The BOE will estimate a use tax liability for anyone who fails to file a return!

If no return is filed, the BOE will make an estimate - based on available information - of the total purchases subject to use tax, "based on income." The BOE will then add a penalty equal to 10% of estimated tax. So, to do nothing and not file will just add to your problems.

The BOE will also automatically impose a late-payment penalty for the 2007 and 2008 tax returns. After you file any late 2007 and 2008 returns, you should immediately file with the BOE Form BOE-735, Request for Relief of Penalty…as if you had nothing better to do with your time, Aye? We have been told that the BOE will normally abate penalties for taxpayers who voluntarily come forth to file and pay the tax for the 2007 and 2008 years.

Here’s the link to Form BOE-735 for your enjoyment.
http://www.boe.ca.gov/pdf/boe735.pdf

Due Dates
The 2009 use tax return is due April 15, 2010, for the 2009 tax year. The April 15 due date applies to both calendar and fiscal year taxpayers. While not mandatory, the BOE will provide information on how to e-file to all registered taxpayers by mid-March 2010. The BOE is working with software providers to enable businesses to e-file use tax returns for multiple accounts at once (currently, you may e-file one taxpayer at a time).

No Contact Letters
Businesses that are required to register but did not receive an initial contact letter must register to pay use tax.
Taxpayers may register by calling the BOE at: (915) 323-7654
Taxpayers may also register by downloading Form BOE-404-A, Use Tax Registration, and mailing it to BOE. The form is available at: www.boe.ca.gov/pdf/boe404a.pdf

BOE Bills to Filers
For those 1,800 taxpayers who already responded to the BOE's initial contact letter, the BOE assigned account numbers and mailed use tax forms to file 2007 and 2008 returns.
Almost immediately thereafter, the BOE began sending letters demanding returns and threatening to assess tax, penalties, and interest for any year that no return was filed. Unfortunately, the BOE sent the threats prior to processing returns and cashing checks.

Paying the tax
You may pay use tax by check, credit card, or Electronic Funds Transfer.

Here’s info on the BOEs Electronic Funds Transfer program.
http://www.boe.ca.gov/elecsrv/eft.htm

To participate in the Sales and Use Tax EFT Program, complete Form BOE-555-EFT, http://www.boe.ca.gov/pdf/boe555st.pdf Authorization Agreement for Electronic Funds Transfer. After your completed form has been received, the BOE will confirm your EFT start date.

Mail or fax the completed form to:
Attn: EFT Group
State Board of Equalization
P.O. Box 942879
Sacramento, CA 94279-0035
Fax: (916) 322-8457

We hope you find this information helpful, and can survive this additional burden placed on honest taxpayers who, by no fault of their own, unfortunately do business in the State of California.

We can be reached for questions or comments at GROCO at (510) 797 8661.

IRS Announcement 2010-9
http://www.irs.gov/pub/irs-drop/a-10-09.pdf

Comment from Ron Cohen: Unfortunately, with the absurd complexity of U.S. tax laws, tax audits are an adversarial, confrontational, and litigious process. Rather than change the laws to make tax more rational, the IRS wants taxpayers to put “all their cards on the table” since, in most cases, the IRS has neither the education, time, technology nor resources to do a proper audit of large businesses. But, don’t mind me.  I’m just a voice in the wilderness.

Of course, your state tax authority will have access to and will utilize the same list!

To additional observations:

1) The Ivory Tower people at the IRS in Washington, D.C., don’t realize (or don’t care) that businesses can set-up in other countries where these rules don’t apply.

This rule provides just another reason to avoid U.S. operations that might create or add to U.S. tax filing requirements. If a top level decision is made to minimize operations (including research and development) in the U.S., of course, those jobs are lost to another country.

2) A big “Two Thumbs Down” to the Financial Accounting Standards Board (FASB). When they issued FIN 48 with the lofty goal of recording every possible, uncertain, obscure tax liability (most of which will never arise in the real world), the community of tax advisors warned the IRS would ask for the FIN 48 workpapers as a road map to possible tax return audit issues.   That is, the IRS will wisely leverage off the work of the financial auditors to have an unfair advantage in a tax audit. It puts the taxpayer in the position of being “crucified for their honor” in completing the FASB FIN 48 requirements.

The FASB replied “Oh, No.  That won’t happen. This is just for GAAP accounting purposes. The IRS has no right to those estimates.”

Well, the FASB was right.  The IRS declines to ask for the workpapers. The IRS has now gone EVEN FURTHER!

Comments from IRS Commissioner Doug Shulman on 1/26/10:

“We do not believe we will be adding substantial new work or burden on taxpayers. These taxpayers are already required to establish tax reserves for uncertain tax positions in determining their financial statement income under US or foreign accounting standards, such as FIN 48. So the work is already being done. We are asking for more transparency.”

So, why not just fill out another form in your tax return, and tell us exactly the issues you’ve already had to identify under FIN 48. Thank you, FASB! Well done.

3) In a comment that can only be viewed as the height of hypocrisy, the IRS Commission goes on to say:

“We believe we have crafted a proposal that gives us the information we need to do our job without trying to get in the heads of taxpayers as to the strengths or weaknesses of their positions.”

If any of you have ever dealt with the IRS, here’s how things normally work:

1) “We have identified an issue and the taxpayer’s position is 100% wrong.”

2) You spend 6 months to a year educating the IRS on the law and the facts involved. Often, their tactic is to just out-last the taxpayer until they concede, regardless of the merits of the issue and the Rule of Law.

3) If they don’t back down, you file an appeal and spend a long time waiting to plead your case to an Appeals Officer, who is usually pretty reasonable. If they are not reasonable, you’re off to a 2 year adventure filing a Tax Court Petition.

So, Dear IRS and FASB: You have to understand, our shock at this new rule is that we expect the IRS will review the form and start the process by asserting, in every case, the taxpayer is 100% wrong.

Well, I guess that’s more work for tax advisors, but it’s not good for capitalism or job creation.

Corporations and some partnerships that are covered by shareholder-transparency rules and have assets over $10 million will be required to file a list of uncertain tax positions along with their tax return, Mr. Shulman said.

Wall Street Journal Article:
http://online.wsj.com/article_email/SB10001424052748703906204575027320135790934-lMyQjAxMTAwMDIwNzEyNDcyWj.html

From USA Today:

“Calling the announcement "a shock and awe" move, Jeremiah Coder, a contributing editor for Tax Analysts, a non-profit that studies tax issues, said some large firms would mount a "pushback" to the IRS' justification for the disclosure.”

"This puts the audit relationship" with the IRS "in a more confrontational mode," said Matt Miller of Financial Executives International, a 15,000-member group of senior tax officials, CFOs, treasurers and controllers. "It involves the disclosure of exposure items to possible adversaries."

Here’s the IRS Announcement:

http://www.irs.gov/pub/irs-drop/a-10-09.pdf

“The schedule will require a concise description of each uncertain tax position in sufficient detail so that the Service can determine the nature of the issue. The sufficiency of a description will depend on the taxpayer’s particular facts and the nature of the underlying transaction. As currently contemplated, this concise description will include the rationale for the position and a concise general statement of the reasons for determining that the position is an uncertain tax position. To be sufficient, the description must contain:

1. The Code sections potentially implicated by the position;
2. A description of the taxable year or years to which the position relates;
3. A statement that the position involves an item of income, gain, loss, deduction, or credit against tax;
4. A statement that the position involves a permanent inclusion or exclusion of any item, the timing of that item, or both;
5. A statement whether the position involves a determination of the value of any property or right; and
6. A statement whether the position involves a computation of basis.

IRS Commissioner Comments:

http://www.irs.gov/newsroom/article/0,,id=218705,00.html

We have been taking a hard look at transparency regarding business tax issues.  Accounting for income taxes and tax risk has changed over the past several years.  Accounting for uncertain tax positions is much more articulated now than in the past. And auditing firms are conducting much more extensive reviews of materials used to make decisions on tax reserves reflected in a taxpayer’s financial statement.

Several months ago, I announced that the IRS was studying these changes and was exploring ways to improve transparency regarding material tax issues so that we can achieve the three objectives of certainty, consistency, and efficiency for us and taxpayers.

The IRS is taking a major step towards transparency that I want to announce today related to changes we are proposing to reporting requirements regarding business taxpayers’ uncertain tax positions

The Announcement we are issuing today does two things. First, it describes proposed reporting requirement at the “time-of-filing.” Second, it highlights specific areas where we are requesting public comment and thus serves to further our continuing dialogue with practitioners, business taxpayers, and others regarding how to improve tax administration and compliance regarding many of our nation’s business taxpayers.

Before I get into the meat of the proposal, let me set some context.

Today we spent up to 25 percent of our time in a large corporate audit searching for issues rather than having a straightforward discussion with the taxpayer about the issues. It would add efficiency to the process if we had access to more complete information earlier in the process regarding the nature and materiality of a taxpayer's uncertain tax positions. The goals of our proposal are simple: to cut down the time it takes to find issues and complete an audit… ensure that both the IRS and taxpayer spend time discussing the law as it applies to their facts, rather than looking for information…and to help us prioritize selection of issues and taxpayers for examination.

Let me explain the Announcement and what it means to business taxpayers. Reporting uncertain tax positions would be required at the time a return is filed by certain business taxpayers: those who have both a financial statement prepared under FIN 48 or other similar accounting standards reflecting uncertain tax positions and assets over $10 million. Under the Announcement, these taxpayers would be required to annually disclose uncertain tax positions in the form of a concise description of those positions and the maximum amount of US income tax exposure if the taxpayer’s position is not sustained. By concise, we mean a few sentences that inform us of the nature of the issue, and not pages of factual description or legal analysis.

Let me say a few things about this proposal. We have taken what I believe is a reasonable approach. We could have asked for more…a lot more… but chose not to. We believe we have crafted a proposal that gives us the information we need to do our job without trying to get in the heads of taxpayers as to the strengths or weaknesses of their positions

We will be looking only for a brief description of the issue and the maximum amount of US income tax exposure. The proposal does not require the taxpayer to disclose the taxpayer's risk assessment or tax reserve amounts. We are asking for a list of issues that the taxpayer has already prepared for financial reporting purposes, in order to improve the efficiency and effectiveness of tax examinations. We are also looking for the maximum exposure, so we can allocate our exam resources appropriately. We need to have a sense of materiality and whether we should spend exam resources on an issue.

We do not believe we will be adding substantial new work or burden on taxpayers These taxpayers are already required to establish tax reserves for uncertain tax positions in determining their financial statement income under US or foreign accounting standards, such as FIN 48. So the work is already being done. We are asking for more transparency.

Just to be clear again, this proposal would not require that taxpayers disclose how strong or weak they regard their tax positions or report to us the amounts they reserved on the books regarding those positions.

And as part of this proposal, the IRS would otherwise retain its longstanding policy of restraint as it applies to tax accrual workpapers.

I think this is a sound proposal that will significantly advance the ball in the transparency area. We understand this proposal will generate a good deal of discussion and debate, and we welcome that. We look forward to public comments and the upcoming dialogue regarding this important announcement.

Our mission with respect to our large business audit program, indeed our entire audit program, is to collect the proper amount of tax and to use our compliance tools to foster on-going compliance by all taxpayers, including our largest taxpayers. Our responsibility is the same as the responsibility of our taxpayers – apply the law as it currently exists, not how we would like it to be, and do so with neither a thumb on the scale in favor of the government, nor in favor of the taxpayer.

Our ultimate goal with respect to our large case audit program is to bring taxpayers into compliance and keep them there with strategies that are less time and resource intensive than our traditional audit process. Our work on corporate governance is part of this strategy as is the transparency proposal I outlined today. In fact, we have moved down this path with the Compliance Assurance Program or “CAP.” This program allows taxpayers that are transparent with us with respect to their tax issues to get certainty with respect to their tax obligations at the time their return is filed. Indeed, with regard to several of our CAP taxpayers that have been in the program for a number of years, we will be moving them to what we refer to as a monitoring program, where we address and resolve issues with a taxpayer as they arise. We are looking to expand and make permanent the CAP program in the near future.

While we understand that there will always be a need for our traditional audit process, we will continue to try to work smarter. We will use new techniques, and count on enhanced transparency, to help us maximize the use of our resources and spend our time on the issues and taxpayers who pose the greatest compliance risk. In the future, the IRS will depend more and more on information and new alternatives to the traditional audit process to ensure compliance with the tax laws.

Update: 8/12/10

Here’s the Draft Form: New Form 1120, Schedule UTP, Uncertain Tax Position Statement

http://www.irs.gov/pub/irs-utl/df1120.pdf

Here’s the comments of the American Institute of Certified Public Accountants (AICPA)

http://www.aicpa.org/InterestAreas/Tax/Resources/IRSPracticeProcedure/Advocacy/DownloadableDocuments/F%20AICPA%20Comments%2006.01.2010%20on%20Ann%202010.9.pdf

Of all the thoughtful comments, I think the last comment is the most compelling.  Congress never, never, never intended taxpayers to self-disclose every strategic thought they have regarding their tax returns that are filed within the law.

Gray area exist. Congress intentionally creates gray areas.  If you look at this miserable draft form, above, I hope you share my view that, as the AICPA says, it calls for taxpayer reporting at a higher level than mandated by Congress.

Thomas Jefferson would call this a higher level of “tyranny” and so should taxpayers and the tax community in an effort to get the IRS to reverse and dispose of, in my view, this illegal filing requirement.

Our most significant concerns with the IRS proposal are that the proposed UTP disclosure regime:

• Potentially undercuts the integrity of the financial statement process;
• Imposes increased burden and cost on taxpayers which will be substantially disproportionate to any actual benefit to the IRS;
• Creates new tension among and between taxpayers, tax advisors, and the IRS, and alters the current self-assessment system;
• Produces complexity and results in distortions that will impede the stated IRS goals;
• Disproportionately impacts small businesses; and
• Calls for taxpayer reporting at a higher level than mandated by Congress.

I can’t wait to see the first law suit to challenge the IRS’s authority to require this form.

Unfortunately, about 5,000 corporations will have to endure the time and angst of trying to figure out how to complete this form in a manner to void penalties and the second guessing of the IRS in audit situations. As the AICPA mentions, anything on this form goes straight to your GAAP financial auditors for FIN 48 analysis…and if you have to disclose it to the IRS, you bet your financial auditors are going to strongly consider making you record a liability on the financial statements unless the issue is immaterial. Actually, the FIN 48 analysis will come first, since large companies complete their GAAP audit before they complete their tax returns, and your GAAP auditor must ANTICIPATE this disclosure on the new Schedule UTP.  That will certainly figure into the auditor “Probability” estimate for the potential liability when they do their FIN 48 analysis…WHICH IS EXACTLY WHAT THE IRS WANTS. It becomes a circular argument of self-incrimination. Most unfortunate for CPAs, even more so than now, we straddle being an advocate for our clients AND for the IRS to determine the proper tax liability. Now, between FIN 48 and Schedule UTP, we are forced to play a constant game of “got ya!” with our clients.

Will more tax be collected by the IRS? And if so, what is the cost/benefit analysis to the economy?  I believe the “yield” from this form will, ultimately, be very low.

Here’s the IRS link with a list of all the IRS Announcements on the issue. For me, it was impossible to follow their twisted logic on why they have the legal authority to impose this on taxpayers. After a few beers, it made more, but not much, sense.

http://www.irs.gov/businesses/corporations/article/0,,id=221533,00.html

The remarks of the IRS Commissioner (in the link above) are a hoot! He basically says, in my view: We can’t figure out our own laws or follow your accounting, so you need to serve-up every possible issue we might disagree with if we were smart enough, had trained staff, and had more time. Oh, What a World!

In my view, the IRS has gone beyond interpreting the laws and enforcing them. Rather, on this issue, the IRS Commissioner has become an “activist judge” and is taking the law somewhere no one intended it to go!

We would be happy to assist taxpayers with how to comply with these oppressive filing requirements.