Tax Update May 20, 2010 Wichita, KS

1. Wichita State University Accounting & Auditing Conference Tax Update May 20, 2010Wichita, KS

2. What We’re Going to Cover • 7216 Guidance • Disclosure of uncertain tax positions • Tax preparer registration • Tax provisions in health care bill • HIRE Act • Prospective legislation • Levin’s list

3. Section 7216 • Brief History • Only criminal penalty applicable to preparers • Prohibits misuse of taxpayer information • Regs 1/1/09 required advance written permission for any use other than tax preparation • New guidance in late December 2009 satisfied many of our concerns

4. IRS Clarifications • Advance approval not required for: • Newsletters – even if: • Written and distributed by unrelated third party • Filtered by type of client • Disclosure of statistical data of practice • i.e. in practice development activity • Disclosures for • Quality, peer review or conflict reviews • Professional liability insurance matters

5. Acknowledged “normal course of accounting services” exception • May make return information available to: • Taxpayers regarding changes in tax law and regulations • Third parties such as stockholders, management, suppliers or lenders • Providing K-1 to CPA preparing a partner’s return? • Next steps • Continue to work with Treasury • To provide further guidance on the “normal course” language

6. What We’re Going to Cover • 7216 Guidance • Disclosure of uncertain tax positions • Tax preparer registration • Tax provisions in health care bill • HIRE Act • Prospective legislation • Levin’s list

7. Disclosure of Uncertain Tax Positions - Background • US v. Arthur Young (1984) gave IRS access to tax accrual workpapers • Historical IRS “policy of restraint” • 1/26/2010 - IRS Commissioner Shulman introduced Announcement 2010-9 • Fin 48 calculation is stated impetus for IRS proposal • Proposal status - not yet effective • Would require most business tax returns to annually disclose “uncertain tax positions”

8. Disclosure of Uncertain Tax Positions - Concerns Being Considered • May alter traditional notion of voluntary and cooperative tax reporting system • May cause taxpayers to seek non-traditional preparers • Possible effects on financial statement reporting • Difficult to apply to “factual” situations • Allocation between land and building • Executive compensation • Difficult to apply to flow-thru entities

9. What We’re Going to Cover • 7216 Guidance • Disclosure of uncertain tax positions • Tax preparer registration • Tax provisions in health care bill • HIRE Act • Prospective legislation • Levin’s list

10. Tax Preparer Registration - Drivers • Driven by significant errors with refundable tax credits, i.e., EITC and home buyers credit • IRS commenced a review to: • Enhance competency, and • Elevate the ethical conduct of preparers Confidential

11. Tax Preparer Registration – Overview • January 4th – IRS released proposal • Commissioner announced his intent to implement: • PTIN • All preparers subject to Circular 230 • CPE component • Testing • Phased in implementation – not applicable to 2010 filing season • Non-signing preparer issue

12. AICPA Positions • Support PTIN requirement • Support Circular 230 requirement for all preparers • AICPA succeeded in exempting CPAs from education and testing requirements • Concerns • About the exam creating taxpayer confusion • If “non-signing” preparers subject to registration

13. Comparing CPA and IRS-registered tax preparer requirements CPA requirements IRS requirements • College graduate • 150 hours college education • Uniform CPA exam • 120 hours CPE over 3-year period • High school graduate • 18 years old • IRS exam – levelunknown • 15 hours annual tax education

14. What We’re Going to Cover • 7216 Guidance • Disclosure of uncertain tax positions • Tax preparer registration • Tax provisions in health care bill • HIRE Act • Prospective legislation • Levin’s list

15. HealthCareTaxes

16. Health Care Individuals – Health Coverage • No insurance then pay greater of • $95 or 1% of income (2014) • $325 or 2% of income (2015) • $695 or 2.5% of income (2016) • Premium assistance (2013) • Ranges between 2% - 9.5% of income • Available up to 400% of poverty level

17. Health Care Individuals – Medical Expenses • Hurdle for itemized deduction (2013) • Increases from 7.5% to 10% AGI • Transition rule for seniors thru 2016 • Change in definition of medical expenses (2011) • Over-the-counter medications • Coverage for adult children

18. Health Care Medicare Tax (2013) • 3.8% on investments • 0.9% on earned income • Affects high income taxpayers • >$200,000 of income (single) • > $250,000 of income (joint)

19. Health Care Taxes (cont’d)

20. Health Care Cadillac Plans • $10,200 single; $27,500 family • Higher limits for high risk professions and over 55 • 40% excise tax • Effective 2018

21. Health Care Taxes (cont’d)

22. Health Care Employer Requirements • If no plan, penalty • $2,000 x (number of employees-30) • Not applicable if fewer than 50 employees • Effective 2013 • Small business credits (2011-2013) • 35% premiums (<10 employees) • 9% premiums (<25 employees)

23. Codification of Economic substance Included in health care legislation Applicableif no benefit other than tax savings Penalty 40% tax savings (20% if disclosed) Revenue increase $5.5 bil

24. What We’re Going to Cover • 7216 Guidance • Disclosure of uncertain tax positions • Tax preparer registration • Tax provisions in health care bill • HIRE Act • Prospective legislation • Levin’s list

25. Hiring Incentives to Restore Employment Act If • New hire after 3/19/10 and before 1/1/11 • Must be unemployed for >60 days Then • Social Security Tax Exemption • 6.2% of wages paid up to FICA limit of $106,800 (i.e., max. of $6,621) • Would still owe Medicare tax • Income Tax Credit • Up to $1,000 • Must retain worker for 52 weeks • 2010 benefit but taken on 2011 returns

26. HIRE Act • Extends 179 exp through 2010 - $35 mil • Expands Build America Bonds - $4.56 bil • Subsidizes 65% interest payment to issuer

27. 179 – $250,000 expensing allowance • Phase out dollar for dollar starts at $800,000 Note – • Not subject to mid-year or mid-quarter convention • Not a preference item for AMT – 56(a)(1)(B) • Can be new or used property • Illinois conforms to federal law • If not extended beyond ‘10 • ‘11 – 25k write off – phase out begins at $200k

28. What We’re Going to Cover • 7216 Guidance • Disclosure of uncertain tax positions • Tax preparer registration • Tax provisions in health care bill • HIRE Act • Prospective legislation • Levin’s list • S 2917 Small Business Jobs Act • Estate Tax • Extenders Bill

29. Levin’s List • Estate tax • Permit an election of 2009 or 2010 rules • AMT • 2-year patch • Marginal rates • Extend 2001 cuts for middle-class (10,15, 25 and 28% rates) • Bring back the 39.6% rate • Extend unemployment benefits

30. What We’re Going to Cover • 7216 Guidance • Disclosure of uncertain tax positions • Tax preparer registration • Tax provisions in health care bill • HIRE Act • Prospective legislation • Levin’s list • S 2917 Small Business Jobs Act • Estate Tax • Extenders Bill

31. Small Business Tax Relief House and S 2917 • 100% exclusion from gain sale small business stock • Purchase directly from Corp between 3/15/10 and 12/1/12 • When corp has less than $50 mil in assets • Hold for 5 years • Start-up expenses • Immediate deduction $20,000 (currently $5,000) but reduce dollar for dollar to extent expenses exceed $75,000 • Extend “Build America Bonds” to 2013 • IDB bonds issued in 2011 exempt from AMT

32. S 2917 Penalty Relief 6707A failure to report listed transaction • Strict liability penalty • $100k/individual - $200k for other taxpayers • IRS extended until June 1 its moratorium on collecting penalty and/or filing liens • S 2917 • reduce penalty to 75% tax benefit • Retroactive to1/1/07

33. S 2917 Small Business and Infrastructure Jobs Act • Revenue offsets • 1099’s for expenses related to rental property • Clamp down on federal contractors and vendors • Minimum term of 10 years for GRATs • Various international tax provisions

34. What We’re Going to Cover • 7216 Guidance • Disclosure of uncertain tax positions • Tax preparer registration • Tax provisions in health care bill • HIRE Act • Prospective legislation • Levin’s list • S 2917 Small Business Jobs Act • Estate Tax • Extenders Bill

35. Estate Tax ?? • Temporary fix for confusion • Permit an election to follow 2010 repeal or 2009 rates and exemption • Exemption $5 mil • Rate – 35% • New features • Portability between spouses • Conformity with gift, GST and special use valuations • Exemption indexed to inflation

36. What We’re Going to Cover • 7216 Guidance • Disclosure of uncertain tax positions • Tax preparer registration • Tax provisions in health care bill • HIRE Act • Prospective legislation • Levin’s list • S 2917 Small Business Jobs Act • Estate Tax • Extenders Bill

37. Senate Extenders Bill Individuals • Energy efficient home credits • Standard deduction for real estate taxes • Itemized deduction for sales taxes • Qualified tuition deduction • Charitable contributions from retirement plans • Refundable low-income housing credits Businesses • R&D credit • 15 yr life for leasehold, restaurant and retail improvements • Charitable deduction for food inventory Offsets • Repeal Black liquor credit - $21.7 bil • Increase reporting requirements for first time home buyer – negligible • Codify economic substance doctrine - $5.5 bil • Information reporting for rental property expense payments $2.5 bil

38. Codification of Economic substance Included in health care legislation Applicableif no benefit other than tax savings Penalty 40% tax savings (20% if disclosed) Revenue increase $5.5 bil

39. Cases & Rulings

40. 61 – Settlement Credit Card Debt • Payne, Jr. 8th Cir. 2009-7793, affrmg TC • Facts • Taxpayer renegotiated lower credit card debt • Lower amount was not less than result if “normal” interest rate had applied • Taxpayer argued reduction should be regarded as purchase price adjustment • Decision • Court denied taxpayer both arguments • Reduction in debt was income

41. 61(a)(12) – Income from Forgiveness of Debt Paul Neal Jensen; T.C. Memo. 2010-77 Facts • Husband was obligor on a bank debt • Wife agreed to assume the liability in divorce decree • Debt was cancelled by bank Issue • Who recognizes the income from discharge of indebtedness, H or W? Decision • Husband because he was the obligor the bank looked to for payment

42. 67(a) – Miscellaneous Itemized Deductions James Purdy, TC Sum 2010-26 Facts • Purdy was an employee of Merrill Lynch • Merrill Lynch terminated him • Purdy claimed wrongful termination • Case went to arbitration • Purdy reported award as wages but legal expenses on Sch C Issue • Were the legal expenses unreimbursed employee business expenses subject to 67(a) 2% AGI limitation?

43. Decision • Although the expenses were incurred after Purdy’s employment, they were a direct result of his employment and therefore are subject to the 2% AGI rule

44. 72(t) – Early Distributions from IRA Welker, TC Summ., Op. 2009-193 Facts • Taxpayer rec’d various distributions ($69k, $44k, $81k, etc.) from 2001-2005 • Taxpayer was a cancer survivor. Left job from telephone company in 2001 as a result of treatments. • Taxpayer rec’d wages 2001-2003 (book store), 2005 (“modest” income) and 2006 (new job as asst. nurse) Issue • Was the distribution in 2005 exempt from the 10% additional tax on early distributions under the exceptions for disability or part of a series of substantially equal periodic payments?

45. 72(t) – Early Distributions from IRA Decision • Qualify under disability exception? NO • “Disabled” only if unable to engage in any substantial gainful activity • Taxpayer started a new career in 2006 • Example in regs is “Cancer which is inoperable and progressive” • Qualify under substantial equal periodic payments? NO • Notice 89-25 requires calculation of payments under 1 of 3 methods: (1) RMD method; (2) fixed amortization method; or (3) fixed annuitization method

46. 152 – Dependency Exemption Aaron Lee Hill, TC sum Op 2009-188 Facts • Hill took in sister’s 2 children • Provided housing, meals, etc. Issue • Can Hill claim exemption for children that are not his own? Decision • Yes under 152(c)(1) – also eligible for • Child tax credits • Earned income credit • But not head of household because no evidence of cost of maintaining household

47. 163 – Interest Deduction Adams, TC Memo, 2010-72 Facts • Homeowner put house in land trust • Remained primarily liable for mortgage • Rented house - renters • Had option to buy • Paid rent equal to mortgage and taxes • Obligated to carry insurance and maintain house • But were not obligated on the mortgage Issue • Can “renters” take home mortgage interest deduction for portion of “rent” they pay equal to the mortgage interest?

48. Decision • Yes, the terms of the agreement made “renters” the equitable owners of the residence

49. 165 – Theft Loss INFO 2009-05 (Information Letter) Facts • Stock loses value due to fraudulent or criminal acts committed by corporate officers or directors Issue • Does this qualify for ordinary loss treatment under Rev Rul 2009-9 and Rev Proc 2009-20 (guidance related to Ponzi schemes)? Conclusion • No, distinguishable from Ponzi scheme because criminal act not directly related to the acquisition of the stock

50. 165 - Casualty Loss Justin Rohrs TC Sum 2009-190 Facts • Rohrs was DWI on winding road • Car damaged when it ran off road • Insurance did not cover DWI incidents Issue • Was Rohrs eligible for casualty deduction? Decision Yes – • level of intoxication and manner he drove did not indicate he was indifferent to hazard • Exact cause of accident not determined (DWI, speed, road condition)