The AICPA has submitted comments to the House Ways and Means Committee on HR 285, the Fairness, Simplification and Competitiveness for American Business Act of 2003, concluding that the bill is both timely and a welcome simplification. The AICPA supports the following provisions of the bill:

• Expanding the subpart F de minimis rules.

• Deleting overlapping provisions (e.g., by repealing the foreign personal holding company and foreign investment company rules).

• Repealing the controlled foreign corporation rules on foreign base company sales and services income.

• Reducing the number of foreign tax credit (FTC) baskets to three.

• Eliminating the reporting requirements for foreign-owned domestic corporations with immaterial cross-border transactions.

• Allocating interest on a worldwide basis.

• Rationalizing the FTC rules.

The AICPAs comments are available at www.cpa2biz.com/ResourceCenters/Tax/International/HR285.htm.

According to Letter Ruling 200318017, a woman who cannot conceive a child using her own eggs may claim a medical deduction for the costs of obtaining an egg donor, including associated legal costs.

In the ruling, a woman unsuccessfully underwent repeated assisted reproductive technology procedures to enable her to conceive using her own eggs. She now wants to attempt pregnancy using donated eggs. While her health plan will pay the costs of fertilizing and transferring an egg or embryo to her, it will not cover the costs of obtaining an egg donor; she has to pay those expenses herself.

The IRS held that the following are medical expenses for Sec. 213 purposes:

1. The egg donors fee for her time and expense in following proper procedures to ensure successful egg retrieval.

2. The agency fee for recruiting the donor and coordinating the transaction between the donor and the recipient.

3. The cost of the donors pre-procedure medical and psychological testing and insurance for any post-procedure medical or psychological assistance the donor may need.

4. Legal fees for preparing a contract between the recipient and the donor.

The IRS concluded that the egg recipient could deduct all of the above-listed costs as medical expenses. According to the ruling, the costs of a procedure facilitating pregnancy by overcoming infertility, and expenses that prepare for and are directly related to this procedure, are deductible as medical expenses. The costs of obtaining an egg donor (including the donors expenses) are directly related and preparatory to the receipt of the donated egg or embryo and can be deducted by the recipient as medical expenses. Related legal expenses can be deductible medical expenses if they bear a direct or proximate relationship to the provision of medical care.

Costs directly related to obtaining an egg donor are deductible as medical expenses whether or not the attempt to conceive succeeds. Taxpayers who attempt to conceive using donated eggs and who participate in company medical flexible spending accounts are now eligible for reimbursement from the plan, thus giving them the equivalent of a deduction without the adjusted-gross-income limits.

Rev. Rul. 2003-36 clarifies that an executor can continue an innocent spouse claim started while the decedent was alive (and can even initiate one after the spouse died), provided the decedent met applicable innocent spouse requirements before death. The IRSs previous position, in FSA 200117005, was that an executor could continuebut not initiatea request for innocent spouse relief on a deceaseds spouse behalf.

Example 1: H and W claimed deductions on their 2001 joint return for an investment H owned. In June 2003, the IRS proposed to disallow the deductions and make adjustments. W filed Form 8857, Request for Innocent Spouse Relief, to seek relief under Sec. 6015(b) (regular innocent spouse relief) and Sec. 6015(c) (relief for divorced and separated individuals) or, alternatively, under Sec. 6015(f) (equitable relief). W died in July 2003, before the IRS acted on her request. Her executor pursued the relief request

Example 2: The facts are the same as in Example 1, except that IRS did not propose adjustments until 2002; W died in July 2003 without seeking innocent spouse relief and her executor instituted a claim for relief on her behalf in October 2003.

According to Rev. Rul. 2003-36, because an executor assumes the rights of a decedents estate under Sec. 6903 and has specific authority to make and disaffirm joint returns under Sec. 6013(a)(3), he or she is also authorized to seek any form of relief from joint and several liability under Sec. 6015 on a decedents behalf. Thus, an executor may pursue an existing request for relief from joint and several liability made while the spouse was alive.

However, an executor can pursue or initiate a claim for relief only if the spouse met the requirements for relief before death. The Sec. 6015(c) requirement that the joint filers (1) no longer be married, (2) be legally separated or (3) not be members of the same household, cannot be met by the requesting spouses death.

An executor who learns that the IRS is seeking taxes owed on a joint return filed by the decedent and his or her spouse or former spouse should investigate the facts surrounding the joint return and the claimed underpayment to determine whether there are grounds for pursuing an innocent spouse claim.

Regulations

New proposed regulations (REG-100420-03) describe a potential framework for a safe harbor that would meet the Sec. 475 mark-to-market requirements that apply to securities dealers. The IRS invites comments on the safe harbor and other alternative valuation methods.

Dealers in securities must mark their securities to market, under Sec. 475(a). If a security is inventory, it must be included in inventory at its fair market value (FMV). If it is not inventory and is held at the end of the tax year, the security must be treated as if it were sold at FMV on the last business day of the tax year. Mark-to-market treatment is available on an elective basis to commodities dealers (Sec. 475(e)) and traders in securities or commodities (Sec. 475(f)).

The IRS notes that it is difficult to determine FMV in certain situations. To reduce administrative burdens, it is considering whether to publish proposed rules that, by allowing values used on a financial statement to be used on the return, would provide an elective safe harbor for satisfying the statutory requirement to value securities and commodities. Three broad principles would guide eligibility for the safe harbor:

1. Any mark-to-market method used on a financial statement submitted for financial reporting purposes would have to be sufficiently consistent with the method used under Sec. 475.

2. The financial statement would have to be one for which the taxpayer has a strong incentive to report values fairly.

3. If requested, the taxpayer would have to timely provide to the IRS the information and documents needed to verify the relationship between the values reported on the financial statement and those used for Sec. 475.

The safe harbor is being considered for securities dealers. Whether it would be extended to securities traders and commodities dealers and traders would depend on whether the extension would comport with the principles described above.

The IRS notes that Sec. 475 applies to a wide variety of securities and commodities and that it is relatively easy to determine the FMV of positions for which pricing information is readily available, such as most actively traded personal property. The need for a safe harbor is most pressing for positions for which pricing information is not readily available, including more complex notional principal contracts, derivative instruments and various hedges.