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Offers in Compromise • Acquisitive Transactions without Stock • Patents for Tax Strategies (box) • Depreciation and Sec. 1031

Lesli S. Laffie, J.D., LL.M.

From the IRS

Offers in Compromise

According to IR-2007-50, the IRS has issued a revised application for an offer in compromise (OIC) (Form 656). An OIC is an agreement between a taxpayer and the Service that resolves a tax liability. Under certain circumstances, the IRS has the authority to settle Federal tax liabilities by accepting less than full payment.

The Form 656 package was last revised in 2004 to help taxpayers correctly and completely prepare an OIC and reduce its chances of being returned for omissions. The new form retains the taxpayer burden-reduction features, while adding significant changes as a result of the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA). These changes include:

New payment terms and submission rules;
A new matrix to assist in determining the number of Forms 656, $150 application fee(s) and TIPRA payments to submit to the Service, depending on the number of individuals submitting the offer and the types of liabilities being compromised;
A checklist, redesigned as a result of the TIPRA, to help taxpayers determine if they are eligible to file an OIC before they invest time in form preparation;
Revised Section V, defining the contractual terms of the offer;
OIC Application Fee and Payment Worksheet, to determine eligibility for claiming exception to payment of the $150 application fee and the mandatory offer payments imposed by the TIPRA;
Form 656-PPV, Periodic Payment Voucher, a removable form designed to be used to remit the required TIPRA payments to the IRS while the offer is under investigation; and
Form 656-A, renamed Income Certification for Offer in Compromise Application Fee and Payment.
The package can be ordered by calling the IRS at (800) 829-3676 or visiting the “Forms and Publications” section of www.irs.gov.

Regulations

Acquisitive Transactions when Acquiring Corporation Issues No Stock

Temporary regulations (TD 9313; NPRM REG-157834-06, 3/1/07) clarify older temporary regulations (TD 9303, 12/18/06) by providing that the deemed issuance of a nominal share of stock of a transferee corporation in a transaction otherwise described in Sec. 368(a)(1)(D) (a D reorganization) does not apply if the transaction otherwise qualifies as a triangular reorganization under Regs. Sec. 1.358-6(b)(2) or Sec. 368(a)(1)(G) (certain bankruptcy reorganizations) by reason of Sec. 368(a)(2)(D). Thus, if a transaction qualifies as a triangular reorganization without regard to the temporary regulations, it will not be treated as a D reorganization.

Call for comments: Written or electronic comments and any request for a public hearing must be received by May 30, 2007. Send submissions to CC:PA:LPD:PR (REG-157834-06), IRS, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may also be hand-delivered to CC:PA:LPD:PR (REG-157834-06), Courier Desk, IRS, 1111 Constitution Avenue NW, Washington, DC, or sent electronically, via www.irs.gov/regs or www.regulations.gov.

Depreciating MACRS Property in Tax-Free Exchanges

Final regulations (TD 9314, 2/26/07) explain how to depreciate certain property acquired in a like-kind exchange under Sec. 1031. The rules address how to determine annual depreciation allowances using the modified accelerated cost recovery system (MACRS) under Sec. 168 for replacement property acquired in a like-kind exchange.

The guidance also applies to involuntary conversions under Sec. 1033, when both the acquired and relinquished property are subject to MACRS by the acquiring taxpayer.

The rules finalize proposed regulations (REG-106590-00) and remove temporary regulations (TD 9115) issued Feb. 27, 2004; the final rules said that while no public hearing on the 2004 regulations was requested, the Service received several recommendations in submitted comments and incorporated some of them into the final rules. These rules were effective Feb. 26, 2007 and apply to like-kind exchanges or involuntary conversions of MACRS property for which the time of disposition and the time of replacement both occur after Feb. 27, 2004. For exchanges or involuntary conversions occurring before that date, taxpayers may apply the final rules or rely on prior guidance.

Permitted methods: The final rules provide guidance on how taxpayers may determine the annual depreciation allowance under Sec. 168 while electing to use optional tables to determine depreciation allowances for replacement property instead of using Sec. 168 formulas. One commenter stated that presenting a choice of depreciation methods may confuse taxpayers, but the regulations said the Service retained the optional tables to provide taxpayers with an alternative method of calculating depreciation. The guidance contained rules on choosing the optional table that would correctly calculate the depreciation.

Multiple properties and depreciation conventions: Commenters requested examples of how to determine basis in Sec. 1031 exchanges when multiple properties are involved and when Sec. 1033 applies to a compulsory exchange. The IRS declined to address these issues in the final rules, stating that any basis adjustments are subject to Sec. 168 and, thus, could not be addressed in final rules under Secs. 1031 and 1033.

The final rules, at the request of a commenter, did include an example to show how depreciation is calculated on replacement property received in exchange for property used only partially for business purposes.

The Service heeded other suggestions as well. For example, it added Regs. Sec. 1.168(i)-6(c)(5)(ii)(A) and a new rule to provide explanations for electing applicable depreciation conventions separate from explanations for the rules determining recovery periods of MACRS property.

AICPA Position on Patents for Tax Strategies

by Eileen Sherr, CPA, MT, AICPA Technical Manager—Taxation, Washington, DC

The AICPA and its members have extensive experience in rendering advice to taxpayers on tax planning and compliance matters. From this unique vantage point, the AICPA has considered the broad effect of tax-strategy patents on taxpayers, professional tax advisers and the public interest.

Background

The patentability of tax strategies is a growing concern among tax practitioners and taxpayers. In 1998, the Federal Circuit, in State Street Bank & Trust v. Signature Financial Group, Inc., 149 F3d 1368, held that business methods could be patented. Since then, 51 patents for tax strategies have been granted; as of Feb. 28, 2007, 83 patent applications for tax strategies were pending.

These patents have already been granted in a variety of areas, including the use of financial products, charitable giving, estate and gift tax, pension plans, tax-deferred exchanges and deferred compensation. The AICPA expects many more tax-strategy patents to be issued, directly targeting average taxpayers in a host of areas, including income tax, alternative minimum tax and itemized- deduction maximization. (For more details on this subject, see Hoops, DC Currents, “Tax-Strategy Patents and the Tax Gap,” this issue.)

AICPA’s Position

The AICPA believes that patents granted for tax strategies:

Limit taxpayers’ ability to use fully interpretations of tax law intended by Congress;
May cause some taxpayers to pay more tax than Congress intended and some to pay more tax than others similarly situated;
Complicate the provision of tax advice by professionals;
Hinder compliance by taxpayers;
Mislead taxpayers into believing that a patented strategy is valid under the tax law; and
Preclude tax professionals from challenging the validity of tax-strategy patents.

The AICPA believes that patents for tax strategies undermine the integrity, fairness and administration of the tax system and are contrary to sound public policy. It would like to work with Congress to develop and enact legislation to restrict this type of patent as soon as possible.

Legislative Recommendations

The AICPA encourages the 110th Congress to develop legislation to eliminate the harmful consequences of tax strategy patents, by either (1) restricting the issuance of patents for tax strategies or (2) providing immunity from patent-infringement liability for taxpayers and tax practitioners.

Contact

For more information on this issue, visit http://tax.aicpa.org/Resources/Tax+Patents or contact Eileen Sherr at (202) 434-9256 or esherr@aipca.org.