NewsNotes

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

Timeliness of Refund Suit • Capital-Gain-Rate Election • Split-Dollar Life Insurance • Sarbanes-Oxley Act • Circular 230 Alert! • Per-Capita Federal Tax Burden (Chart)

Court Decisions

Timeliness of Refund Suit

According to the Ninth Circuit in A.E.A. Omohundro, 8/19/02, a refund suit by an individual who had filed a refund claim with the IRS within three years of filing her return was timely, regardless of when the return was filed.

In refusing to follow its prior holding in R.D. Miller, 38 F3d 473 (9th Cir. 1994), the Ninth Circuit concluded that the decision had been made without considering Rev. Rul. 76-511, which was on point and in effect when Miller was decided. In Rev. Rul. 76-511, the IRS determined that a return filed within the Sec. 6511(a) three-year limitations period constituted a timely refund claim.

Although the IRS's interpretation of Sec. 6511(a) may have rendered the time limits somewhat illusory, the Sec. 6511(b) lookback provisions eliminated any disparity in stale claims. In addition, the Taxpayer Relief Act of 1997 eliminated any disparity in deadlines between a district court and the Tax Court, by amending Sec. 6512(b)(3) to allow a three-year lookback period for a refund claim filed in Tax Court when no return had been filed and the mailing date of the deficiency notice was during the third year after the return due date.

The Ninth Circuit also noted that other circuit courts that addressed the issue in the past had reached the same decision, and that Rev. Rul. 76-511 was consistent with subsequent IRS pronouncements and legislative history.

From the IRS

18% Capital-Gain-Rate Election

Notice 2002-58 explains how to make a Taxpayer Relief Act of 1997 (TRA '97) Section 311(e) election to treat certain assets held on Jan. 1, 2001 as having been sold and then reacquired on that date, to take advantage of the 18% capital-gain rate (for background, see Whitlock, "Capital Asset Deemed-Sale Election Available until Oct. 15, 2002," TTA, August 2002, p. 521).

A taxpayer makes the election using Form 4797, Sales of Business Property, or Schedule D of Form 1040, 1120, 1120S, 1065 or 1041. The taxpayer must report the resulting gain on the return for the tax year that includes the date of the deemed sale and attach a statement that the election is being made under Section 311(e) and a list of the assets to which the election applies. The IRS will grant late-election requests in certain cases. The return on which the gain is reported must be filed by its due date, including extensions.

Under Regs. Sec. 301.9100-2, taxpayers who timely filed returns without making the Section 311(e) election for eligible assets may still make it by filing an amended return within six months of the due date of the original return (excluding extensions). The taxpayer must write at the top of the amended return: "Election Under Section 311 of the Taxpayer Relief Act of 1997" or "FILED PURSUANT TO 301.9100-2."

If a taxpayer (1) did not timely file an original return on which a Section 311(e) election could have been made or (2) failed to make a Section 311(e) election as to eligible assets on a timely filed original or amended return, the taxpayer may apply for Regs. Sec. 301.9100-3 relief.

Split-Dollar Life Insurance

Notice 2002-59 explains the standards for valuing current life insurance protection under a split-dollar life insurance arrangement. The guidance intends to stop the spread of an abusive tax avoidance transaction using split-dollar life insurance, in which the parties attempt to avoid taxes by using inappropriately high current term insurance rates, premium prepayments or other techniques to understate the value of taxable policy benefits.

A party participating in a split-dollar life insurance arrangement may use the premium rates in Notice 2002-8's Table 2001 or the insurer's lower published premium rates only to value current life insurance protection for Federal tax purposes when (and to the extent that) such protection is conferred as an economic benefit by one party on another, determined without regard to consideration or premiums paid by such other party.

Thus, if one party has a right to current life insurance protection, neither the premium rates in Table 2001 nor the insurer's lower published premium rates may be relied on to value such party's current life insurance protection to establish the value of any policy benefits to which another party may be entitled.

Legislation

Sarbanes-Oxley Act

On July 30, 2002, President Bush signed into law the most significant legislation affecting the accounting profession since 1933—the Sarbanes-Oxley Act of 2002 (Act), which may have implications for CPA tax advisers.

The Act creates a five-member Public Company Accounting Oversight Board (Board), with authority to set and enforce auditing, attestation, quality control and ethics (including independence) standards for public companies. It is also empowered to inspect the auditing operations of public accounting firms that audit public companies and impose disciplinary and remedial sanctions for violations of the Board's rules, securities laws and professional auditing standards.

Among other provisions, the Act lists eight types of services that are "unlawful" if provided to a publicly held company by its auditor:

1. Bookkeeping.

2. Information systems design and implementation.

3. Appraisals or valuation services.

4. Actuarial services.

5. Internal audits.

6. Management and human resources services.

7. Broker/dealer and investment banking services.

8. Legal or expert services related to audit services.

A "catch-all" category authorizes the Board to determine by regulation any service it wishes to prohibit. Other nonaudit services–including tax services–require pre-approval by the audit committee on a case-by-case basis. Pre-approved nonaudit services must be disclosed to investors in periodic reports.

The Act does not define "expert" services; it is not known how broadly the Board or the SEC will define this term. Some traditional tax services may be construed as "expert" services that any firm providing audit services to publicly held audit clients cannot also provide. The AICPA will work with the Board or the SEC to help it understand the importance of auditors providing tax services for publicly held audit clients. In addition, tax services performed by an auditor for a publicly held company would require pre-approval by the client's audit committee.

For a detailed description of the Act, see www.aicpa.org/info/sarbanes_ oxley_summary.htm.