Daily Tax Update: September 14, 2012: IRS Issues Proposed Regulations Updating Circular 230 Practice Standards

IRS ISSUES PROPOSED REGULATIONS UPDATING CIRCULAR 230 PRACTICE STANDARDS:  Today, the IRS and Treasury Department released proposed modifications to update the Circular 230 practice standards. 

  • The proposed regulations:
    • Eliminate the complex rules governing "covered opinions" in current § 10.35 of Circular 230 and thus, the use of Circular 230 disclaimers in documents and transmissions. 
    • Adopt one standard for all written tax advice under proposed § 10.37, specifying that a practitioner must base all written advice on reasonable factual and legal assumptions, exercise reasonable reliance, and consider all relevant facts that the practitioner knows or should know.
    • Remove the requirement that practitioners fully describe the relevant facts and the application of the law to the facts in the written advice itself.
    • Expand the responsibilities for firm managers overseeing Circular 230 compliance from the supervision of the provision of advice concerning Federal tax issues to the supervision of all practice governed by Circular 230, e.g., the preparation of tax returns.
    • Extend the expedited disciplinary procedures to disciplinary proceedings against practitioners who have engaged in a pattern of willfully failing to file tax returns. 
    • Clarify that the Office of Professional Responsibility has exclusive responsibility for matters related to practitioner discipline, including disciplinary proceedings and sanctions.
    • The regulations also provide notice of a public hearing on the proposed regulations.  Comments on the proposed regulations and discussion topic outlines for the December 7 public hearing are due by November 16.
  • The regulations can be accessed here.

For additional information, contact Arthur L. Bailey abailey@steptoe.com  or Alexis A. MacIvor -amacivor@steptoe.com

TREASURY, IRS ISSUE PROPOSED REGULATIONS ON CERT RULES UNDER SECTION 172(h):  Yesterday, Treasury and the IRS issued proposed regulations under sections 172(h) and 1502 that provide guidance on the treatment of a corporate equity reduction transaction (CERT).  The proposed regulations affect C corporations and corporations filing consolidated returns.

  • In 1989, Congress enacted the CERT rules of section 172(b)(1)(E) and (h) in response to the use of NOL carrybacks to finance leveraged buyout transactions.  The rules were intended to limit a corporation’s ability to obtain tax refunds resulting from the carryback of NOLs attributable to interest deductions allocable to such transactions.  Until yesterday, no regulations had been issued with respect to these provisions.
  • Under section 172(h)(3)(A), a CERT is defined as (i) a major stock transaction (MSA) or (ii) an excess distribution (ED).  If an MSA or ED occurs, section 172(b)(1)(E) and (h) limit the carryback of the portion of an NOL that constitutes a corporate equity reduction interest loss (CERIL) of an applicable corporation in any loss limitation year. 
  • The proposed regulations provide general rules addressing whether an MSA or ED has occurred, the calculation of a CERIL, and how to treat successor corporations.
    • The proposed regulations provide that a tax-free transaction that meets the definition of an MSA or ED must be tested as a CERT under section 172(b)(1)(E) and (h).
    • The proposed regulations require taxpayers to test a multiple-step, integrated plan of stock acquisition as a single potential MSA. 
    • In connection with the computation of a CERIL, the proposed regulations provide MSA and ED specific rules for computing costs associated with a CERT.  The proposed regulations also identify additional CERT costs by looking to the capitalization rules under section 263(a).
    • Regarding successor corporations, the proposed regulations define a successor as a transferee or distributee in a transaction to which section 381(a) applies.
  • The proposed regulations also address issues specific to the application of section 172(b)(1)(E) and (h) to consolidated groups, including:
    • Confirmation that a consolidated group is treated as a single taxpayer (thus, avoiding the need to track separately transactions and expenditures of individual members);
    • Determination of the group’s three-year average that is relevant to a particular consolidated return loss limitation year;
    • Application of the above rules if the corporation participating in a CERT becomes a member of a consolidated return group;
    • Application of the above rules if a group member deconsolidates after the group has participated in (or is treated as participating in) a CERT;
    • Apportionment of a CERIL to members of a consolidated group for carryback or carryover to separate return years; and
    • Application of section 172(b)(1)(E) and (h) to a life-nonlife group.
  • Treasury and the IRS declined to provide rules addressing the application of section 172(h) to related parties, pass-through entities, or intermediaries, but said that the circumstances under which those persons should be subject to section 172(b)(1)(E) and (h) is under study.
    • Treasury and the IRS also said that, although they considered including an anti-avoidance rule that would prevent taxpayers from engaging in section 381 transactions to shorten loss limitation years, they decided that the detrimental effects of shortening tax years meant taxpayers would be unlikely to undertake those transactions as a planning technique.
  • The regulations can be accessed here:
  • For additional information, contact Mark J. Silverman - mailto:msilverman@steptoe.com or Gregory N. Kidder - gkidder@steptoe.com

TREASURY, UK SIGN BILATERAL AGREEMENT TO IMPROVE TAX COMPLIANCE, COMBAT OFFSHORE TAX EVASION AND IMPLEMENT FATCA:  The Department of the Treasury announced today that it has signed a bilateral agreement with the United Kingdom to implement the information reporting and withholding tax provisions commonly known as the Foreign Account Tax Compliance Act (FATCA). Enacted by Congress in 2010, these provisions target non-compliance by U.S. taxpayers using foreign accounts. The bilateral agreement signed this week is based on the model published in July of this year and developed in consultation with France, Germany, Italy, Spain, and the United Kingdom and marks an important step in establishing a common approach to combatting tax evasion based on the automatic exchange of information.

SENATE INVESTIGATIONS SUBCOMMITTEE TO EXAMINE OFFSHORE PROFIT SHIFTING:  The Senate Permanent Subcommittee on Investigations has scheduled a hearing on September 20 titled, "Offshore Profit Shifting and the US Tax Code."   According to the Subcommittee, the hearing will "examine the shifting of profits offshore by US multinational corporations and how such activities are affected by the Internal Revenue Code and related regulations."  Witnesses will include representatives from the Internal Revenue Service, the Financial Accounting Standards Board, multinational corporations, and an accounting firm.

TAX POLICY CENTER RELEASES REPORT ON CORPORATE TAX BURDEN:  The Tax Policy Center has released a report titled, "How TPC Distributes The Corporate Income Tax." According to the report, "Recent economic research has improved our understanding of who bears the burden of the corporate income tax. One key finding is that a substantial share of the return to corporate capital is from 'supernormal' returns, the returns to successful risk taking, inframarginal returns, and economic rents in excess of the 'normal' return (the riskless return to waiting). The other key result is that international capital mobility shifts some of the corporate income tax burden on the normal return from corporate capital to labor, which is relatively immobile internationally. Based on these recent research findings, TPC has updated its corporate income tax incidence."  The report adds, "For standard distributional analyses, TPC now treats 20% of the corporate income tax burden as falling on labor, 20% on the normal return to all capital, and 60% on the supernormal returns to corporate equity (shareholders). Previously, we had treated the entire corporate income tax burden as being borne by the total returns to all capital. Our updated approach to incidence reduces somewhat the measured progressivity of the corporate income tax, but has little effect on the distribution of the total federal tax burden. We now also distinguish the incidence of changes in the corporate income tax that affect only the normal return, such as changes in cost recovery rules, which we distribute 50% to labor and 50% to the normal return to all capital. In addition, for short-run analyses of changes in the corporate income tax we now treat all of the burden as falling on shareholders."

The report can be accessed here:

TAX BILLS INTRODUCED SEPTEMBER 13th:

1. [112th] H.R.6398 : To amend the Internal Revenue Code of 1986 to modify and extend the credit for nonbusiness energy property.
Sponsor: Rep Gerlach, Jim [PA-6] (introduced 9/13/2012)   Cosponsors (1)
Committees: House Ways and Means
Latest Major Action: 9/13/2012 Referred to House committee.
Status: Referred to the House Committee on Ways and Means.

2. [112th] H.R.6403 : To provide for grants in lieu of expensing under the Internal Revenue Code of 1986 for energy efficient commercial buildings placed in service by manufacturers.
Sponsor: Rep Murphy, Christopher S. [CT-5] (introduced 9/13/2012)   Cosponsors (None)
Committees: House Ways and Means; House Energy and Commerce
Latest Major Action: 9/13/2012 Referred to House committee.
Status: Referred to the Committee on Ways and Means, and in addition to the Committee on Energy and Commerce, for a period to be subsequently determined by the Speaker, in each case for consideration of such provisions as fall within the jurisdiction of the committee concerned.

INTERNAL REVENUE SERVICE - CIRCULAR 230 DISCLOSURE: 
As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

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