Hurricane Katrina Capital Gain
Compliance Roth Sec. 401(k) Prop. Reg.
Comments FLPs and Sec. 2036(a) Energy-Efficient Buildings Tax Work by Auditors

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

AICPA Activities

Capital Gain Compliance

In July 2005, members of the AICPA Tax Divisions Individual Tax Technical Resource Panel met with Government Accounting Office (GAO) officials to discuss (1) steps the IRS could take to improve individual income tax compliance of publicly traded securities and (2) barriers to improving such compliance.

Improvements: The AICPA suggested improving information reporting. Currently, matching is only done on Forms 1099-B, Proceeds from Broker and Barter Exchange Transactions, and 1099-S, Proceeds from Real Estate Transactions, but no matching is done for put-and-call stock option transactions conducted through a broker, because they are exempt from Form 1099-B reporting.

Although matching problems do not arise if gross proceeds reported on Form 1040 match the totals on Forms 1099-B and 1099-S, a compliance problem could still occur if basis is in error or transactions not reported on Forms 1099 are part of the totals. If Form 1099-B includes both gross proceeds and basis information and matching is done on an individual basis, the IRS could more easily monitor compliance on reporting the accurate amount of gains or losses. The GAO will follow up to see whether Form 1099-B matching procedures can be improved.

Barriers: One of the most significant barriers to improved compliance is the burden on third parties to track basis. Although many companies offer basis histories on their websites, and most brokerage houses now track basis for their clients, two complications remain: (1) when clients transfer assets into an account without telling their broker the basis; and (2) when clients and/or brokers change firms.  AICPA members observed that, when clients move their accounts, some brokerage firms appear to be reluctant to supply historical data to the new firm. Recordkeeping is also difficult for taxpayers.

In discussing whether the complexity of capital gain law is an issue, members agreed that most software packages can compute the various rates and holding periods adequately. The complexity surrounding stock options, particularly the Sec. 83(b) election, was also discussed.

E-filing may be a barrier to compliance, because attachments are not permitted with e-filed returns.

The GAO raised the issue of the complexity of the specific identification method for selling some stockholdings when various blocks of the same stock are owned. It expressed concern that taxpayers may not be properly reporting and tracking these sales and, short of a labor-intensive audit, there is no simple way of enforcing compliance.

Roth Sec. 401(k) Prop. Reg. Comments

In comments to the IRS, the AICPA Tax Divisions Tax Executive Committee and its Employee Benefits Taxation Technical Resource Panel stated that, in general, proposed amendments to Sec. 401(k) and (m) regulations providing guidance on designated Roth contributions are sufficient for plan sponsors and their providers to administer plans with Roth contributions.

However, in its comment letter, the AICPA noted several areas in the regulations that require further clarification and guidance, including the meaning of separate accounts, the five-year holding requirement, the ordering rules (i.e., pre-tax, after-tax) applicable to nonqualified distributions from designated Roth accounts and the automatic enrollment default. The comment letter is available at www.cpa2biz.com/ResourceCenters/Tax/Employee+Benefits/Roth+401k.htm.

Court Decisions

FLPs and Sec. 2036(a)

In Albert Strangi, 5th Cir., 7/15/05, the Fifth Circuit affirmed a Tax Court decision
(TC Memo 2003-145) that assets transferred to a family limited partnership (FLP) were includible in the estate under Sec. 2036(a)(1). For details, see Tax Trends, Taxpayer Loses FLP Appeal on Retained Rights, TTA, September 2005.

This case continues to serve as a reminder of what not to do with a FLPretain actual possession or use of property (without reimbursement) after the transfer; make improperly planned distributions; and pay personal expenses. These factors and many others are highlighted in the AICPA Tax Divisions Trust, Estate, and Gift Tax Technical Resource Panels Checklist of Issues to Consider in Yearly Administration of Family Limited Partnerships, at www.cpa2biz.com.

Legislation

Energy-Efficient Buildings

The Energy Policy Act of 2005 (EPA 05), enacted on Aug. 8, 2005, created a new deduction for expenses incurred for energy-efficient commercial buildings. Sec. 179D, as added by EPA 05 Section 1331, provides a major incentive for (1) building owners to upgrade their systems and (2) those building new structures to design them in an energy-efficient way.

New deduction: Under Sec. 179D(b) and (d), the maximum energy-efficient commercial building (EECB) deduction equals (1) $1.80 per building square foot (60 per building square foot, for certain separate building systems) less (2) the aggregate amount of EECB deductions allowed for the building for prior years. There is no overall per-building dollar limit on the deduction.

However, under Sec. 179D(c), the deduction is available only if the EECB property is:

• Otherwise depreciable or amortizable.

• Installed on or in any building located in the U.S. that is within the scope of Standard 90.1-2001 of the American Society of Heating, Refrigerating, and Air Conditioning Engineers and the Illuminating Engineering Society of North America.

• Installed as part of the (1) interior lighting systems; (2) heating, cooling, ventilation and hot water systems; or (3) building envelope.

• Certified as being installed as part of a plan designed to reduce the total annual energy and power costs for the buildings interior lighting, heating, cooling, ventilation and hot water systems, by 50% or more in comparison to a reference building that meets the minimum requirements of Standard 90.1-2001 (as in effect on April 2, 2003). Detailed certification requirements must be met to qualify for the deduction; the IRS will issue regulations explaining how to measure the fuel savings targets.

Partial allowance: In general, under Sec. 179D(d), if a building does not meet the 50% energy savings test, a partial deduction is allowed for each separate building system that comprises energy-efficient property and that is certified by a qualified professional as meeting or exceeding the Services applicable system-specific savings targets.

The commercial propertys basis is reduced by the EECB deduction, under Sec. 179D(e). The deduction applies to property placed in service after 2005 and before 2008, according to Sec. 179D(h). 

Miscellaneous

Tax Work by Auditors

The Public Company Accounting Oversight Board (PCAOB) unanimously adopted rules governing audit firms provision of tax services to public company clients. Once approved by the Securities and Exchange Commission (SEC), the PCAOBs new rules will ban auditors from providing three primary types of tax services to their public company audit clients, including:

• Services involving contingent fee arrangements;

• Marketing, planning or advice in favor of tax treatments considered confidential under PCAOB Rule 3501, or based on an aggressive interpretation of applicable tax laws and regulations, including listed transactions (as defined by Treasury); and

• Services to (1) certain corporate managers who serve in financial reporting oversight roles or (2) their immediate family members.

The new rules promoting the ethics and independence of public company auditors draw clear lines to distinguish inappropriate services that impair auditor independence from permissible services that are not detrimental, according to PCAOB Chair William J. McDonough.

The rules ban auditor participation in tax-motivated transactions that the IRS has already identified as problematic, that must be kept secret or that do not meet the standard of having at least a 51% chance of being allowable, but also preserve public companies ability to look to the expertise of their auditor for garden-variety tax planning advice and compliance assistance.

The PCAOB modified proposed rules it issued in December 2004 to require auditors seeking preapproval to instead provide audit committees a description of the proposed services, rather than the actual engagement letters. Under the final rules, auditors must:

1. Describe proposed tax service engagements in writing for the audit committee;

2. Discuss with the audit committee the potential effects of the services on the firms independence; and

3. Document the substance of that discussion.

When necessary, the PCAOB can still change an audit firms practices during inspections; it is already seeing internal reforms in firms.

The final rules also state that an associated person must not cause a violation due to an act or omission the person knew, or was reckless in not knowing, would directly and substantially contribute to a violation.

Effective date: The PCAOB rules will not take effect until approved by the SEC, as required by Sarbanes-Oxley Act of 2002 Section 107(b).