TIGTA beats up on tax return preparers

The following TIGTA Reports represent an ogoing push to put return preparers out of business if they are involved in tax shelter. I have had return preprar clients under civil and criminal examination on tax shelter issues. What I learned is that most return preparers cannot recognize a tax shelter or a transaction that can be perceived to be a tax shelter. The IRS and the courts apply "substance over form" principles in evaluating tax shelters. In short, what looks like a valid series of transactions could be viewed substantively as a tax avoidance scheme. If you even "smell" that your client is involved with a tax shelter (i.e., it it is "too good to be true"), have your client contact an experienced tax attorney. Read the TIGTA reports below. TIGTA wants return preparers who prepare returns based on any tax shelter to be put out of business. If you have any concerns about this year or prior year matters, contact ab@irstaxattorney.com.

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The Treasury Inspector General for Tax Administration (TIGTA) concluded in a report released on February 26 ("The Process Taxpayers Must Use to Report Complaints Against Tax Return Preparers Is Ineffective and Causes Unnecessary Taxpayer Burden," Reference No. 2009-40-032) that IRS procedures for filing and processing complaints against tax preparers are confusing and inconsistent.

In a second report released on the same day ("Tax Practitioners Promoting Abusive Tax Shelters Are Still Able to Represent Taxpayers Before the Internal Revenue Service," Reference No. 2009-10-039), TIGTA determined that IRS divisions are not consistently referring to the Office of Professional Responsibility (OPR) the names of licensed practitioners who have been assessed penalties, sentenced in a criminal proceeding or enjoined for tax shelter violations.

Several offices are involved in resolving complaints against tax preparers, including Criminal Investigation, Small Business/Self-Employed and Wage and Investment Divisions, OPR and TIGTA. Because of the confusion in handling preparer complaints, the same complaint may be mailed to multiple offices and reviewed multiple times. The IRS thus spends unnecessary time sorting and redirecting complaints.

Furthermore, many complaints are not controlled or tracked. As a result, the IRS does not know the volume of complaints received, their status and resolution or whether multiple complaints have been filed against the same firm or return preparer. The IRS also fails to acknowledge many complaints, creating distrust with the system as taxpayers believe their complaints are being ignored.

"The tax return preparer community provides a unique opportunity to affect taxpayer behavior and compliance with the tax laws," TIGTA said in the report. "Taxpayer complaints about tax return preparers can provide valuable information about understanding the root causes of taxpayer problems [and] identify areas of noncompliance."

TIGTA noted that taxpayers can file complaints by calling the IRS, visiting a Taxpayer Assistance Center, sending a letter, e-mail or fax, or contacting TIGTA. However, IRS guidelines for submitting a complaint require the taxpayer to identify whether the preparer is an unenrolled preparer and a "practitioner" (lawyer, accountant or enrolled agent) and whether the complaint involves fraud or a tax code violation. Complaints against practitioners must be sent to the OPR.

The form for submitting complaints against unenrolled preparers does not solicit adequate information for working on the complaint. Out of 50 complaints sampled, 15 (30 percent) did not provide enough information to identify the preparer or the grounds for the complaint, or they involved allegations about tax-avoidance schemes that did not point to return-preparation misconduct.

TIGTA recommended that the IRS clarify guidance on its website regarding the preparer complaint process and develop a form specifically for return preparer complaints that goes to the correct office and provides sufficient information for the IRS to review the complaint. The IRS should also establish a database or tracking system to efficiently control the complaints. The IRS agreed to update the guidance on its website and to take action to address the other problems.

The second report identified 160 penalized practitioners who were still eligible to represent over 9,700 taxpayers before the IRS. TIGTA recommended that the OPR inform other IRS offices of the need to make referrals to the OPR about practitioners penalized for tax shelter activities. The report noted that taxpayers who use a practitioner who was guilty of tax shelter violations could themselves face additional taxes, penalties and interest.
Treasury Inspector General for Tax Administration (TIGTA) Press Release: TIGTA Releases Reports on the IRS's Oversight of Tax Preparers

February 27, 2009

Treasury Inspector General for Tax Administration (TIGTA) press release : TIGTA reports : Internal Revenue Service : Tax return preparers : IRS oversight .


TIGTA Releases Reports on the IRS's Oversight of Tax Preparers


The Treasury Inspector General for Tax Administration (TIGTA) today publicly released two reports regarding the Internal Revenue Service's (IRS) oversight of paid tax preparers.

The reports assessed whether: the IRS's Office of Professional Responsibility (OPR) is taking action against licensed tax practitioners who have employed abusive tax shelters; and whether the process used by taxpayers to report complaints against paid tax preparers is effective.

There are no national standards that a tax return preparer is required to satisfy before selling tax preparation services to taxpayers. Paid preparers wishing to represent taxpayers before the IRS must be licensed as a certified public accountant, attorney, or enrolled agent. These preparers, known as practitioners, are regulated by OPR, which sets and enforces standards of competency, integrity and conduct. The OPR may impose disciplinary actions through private or public reprimand, suspension or debarment.

TIGTA found that IRS divisions are not consistently referring to OPR licensed practitioners who have been assessed penalties, sentenced in a criminal proceeding, or enjoined for tax shelter violations. As a result, these tax practitioners were still eligible to represent taxpayers before the IRS. Taxpayers who use a licensed tax practitioner who has been identified by the IRS for tax shelter violations could face additional taxes, penalties and interest.

"Abusive tax shelters continue to present formidable challenges to the IRS," commented J. Russell George, the Treasury Inspector General for Tax Administration. "The IRS agreed with TIGTA's recommendations to improve its procedures for referring to OPR licensed tax practitioners who have been identified by the IRS for tax shelter violations for appropriate disciplinary action."

In the second report, TIGTA concluded that the IRS cannot determine how many complaints against paid preparers it receives, how many complaints it works, and the total number of multiple complaints against a specific firm or preparer. According to the report, the IRS's guidelines on how to file a complaint are difficult to understand and IRS employees do not consistently provide taxpayers with sufficient information or what information to include in a complaint. As a result, many complaints cannot be investigated.

The IRS does track some complaints filed by taxpayers against tax practitioners (CPA's, attorneys and enrolled agents). Complaints against unlicensed and uncertified preparers are not tracked.

"Paid preparers are a critical component and stakeholder in tax administration, but there are occasions when the need arises for a taxpayer to file a complaint against preparers," George commented. "The IRS's processes for receiving and processing complaints about tax preparers need to be improved."

TIGTA recommended that the IRS improve the guidance provided to taxpayers about the complaint filing process and develop a form, both web-based and paper, for use by taxpayers in filing preparer complaints. The IRS said it would clarify the preparer complaint information posted on its website ( www.irs.gov ) and agreed to review the complaint process.

To view the reports, including the scope, methodology and IRS response:

The Process Taxpayers Must Use to Report Complaints Against Tax Return Preparers Is Ineffective and Causes Unnecessary Taxpayer Burden http://www.treas.gov/tigta/auditreports/2009reports/200940032fr.html

Tax Practitioners Promoting Abusive Tax Shelters Are Still Able to Represent Taxpayers Before the Internal Revenue Service http://www.treas.gov/tigta/auditreports/2009reports/200910039fr.html

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Treasury Inspector General for Tax Administration (TIGTA) Report: The Process Taxpayers Must Use to Report Complaints Against Tax Return Preparers Is Ineffective and Causes Unnecessary Taxpayer Burden (Reference Number: 2009-40-032)

February 27, 2009

Treasury Inspector General for Tax Administration (TIGTA) report : Tax return preparers : Complaints against preparers : Unnecessary taxpayer burden .


TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION




The Process Taxpayers Must Use to Report Complaints Against Tax Return Preparers Is Ineffective and Causes Unnecessary Taxpayer Burden

February 24, 2009

Reference Number: 2009-40-032

This report has cleared the Treasury Inspector General for Tax Administration disclosure review process and information determined to be restricted from public release has been redacted from this document.

Phone Number | 202-622-6500

Email Address | inquiries@tigta.treas.gov

Web Site | http://www.tigta.gov


DEPARTMENT OF THE TREASURY



WASHINGTON, D.C. 20220


February 24, 2009

MEMORANDUM FOR DEPUTY COMMISSIONER FOR SERVICES AND ENFORCEMENT

FROM: Michael R. Phillips Deputy Inspector General for Audit

SUBJECT: Final Audit Report - The Process Taxpayers Must Use to Report Complaints Against Tax Return Preparers Is Ineffective and Causes Unnecessary Taxpayer Burden (Audit # 200840015)

This report presents the results of our review to determine whether the process for taxpayers to report complaints against tax return preparers to the Internal Revenue Service (IRS) is effective. This audit was part of our Fiscal Year 2008 Annual Audit Plan.



Impact on the Taxpayer

In Calendar Year 2007, the IRS processed approximately 83 million individual Federal income tax returns prepared by paid tax return preparers. With its current processes, the IRS cannot determine how many complaints against tax return preparers it receives, how many complaints are worked, and the total number of multiple complaints against a specific firm or preparer. Taxpayer complaints about tax return preparers can provide valuable information about understanding the root causes of taxpayer problems, identify areas of noncompliance, and help the IRS address core processes that need improvement.



Synopsis

Paid tax return preparers are a critical component and stakeholder in tax administration and represent an important intermediary between taxpayers and the IRS. The tax return preparer community provides a unique opportunity to affect taxpayer behavior and compliance with the tax laws. Taxpayers can file complaints against preparers by calling the IRS, visiting one of the IRS' 401 local offices, sending a letter or fax, or contacting the Treasury Inspector General for Tax Administration.

Guidelines provided to taxpayers and employees about filing a tax return preparer complaint are confusing and inconsistent. Taxpayers must first be able to determine whether the preparer is an unenrolled agent or a practitioner 1 and then determine if the complaint involves fraud and/or a violation of the tax code. Many taxpayers do not know their tax return preparer's designation to ensure that their complaints are sent to the correct IRS office and do not know what constitutes fraud or a violation of the tax code. Finally, the form used to submit complaints against unenrolled preparers is not designed to provide adequate information with which complaints can be worked.

We selected a judgmental sample of 50 complaints to determine the types of complaints submitted and whether sufficient details were present to allow the IRS to identify the tax return preparer and the issue and to determine its merits. Of the 50 complaints reviewed, 35 (70 percent) identified a preparer and provided allegations about a violation of tax law or a fraud issue. The other 15 (30 percent) complaints either did not provide enough information to identify the tax return preparer, did not contain information related to a tax return preparer, or involved allegations about tax avoidance schemes being used by individuals or investment companies.

The IRS' current process for handling taxpayer complaints against preparers does not identify potential problem preparers so that the IRS can determine the extent of noncompliance, if any, or how the noncompliance should be addressed. Complaints are generally not controlled and tracked. Therefore, neither the volume of complaints received from taxpayers and worked nor their resolutions are known. Moreover, complaints are reviewed multiple times and mailed to multiple offices before most are ultimately destroyed.

The current complaint process does not identify potential problem preparers so that the IRS can determine the extent of the problem, if any, or how the problem should be addressed.

Several offices, including the Criminal Investigation, Small Business/Self-Employed and Wage and Investment Divisions, the Office of Professional Responsibility, and the Treasury Inspector General for Tax Administration, are involved in the process of resolving taxpayer complaints. Complaints are not centrally recorded to identify duplicates, and many complaints are redirected to another function. Because of this, the IRS spends unnecessary time sorting and redirecting complaints. In addition, the IRS does not acknowledge all taxpayer complaints. An ineffective complaint system erodes public trust as taxpayers become frustrated with the IRS' apparent non-response.



Recommendations

We recommended that the Deputy Commissioner for Services and Enforcement 1) clarify guidance to taxpayers on the public IRS web site (IRS.gov) regarding the preparer complaint process, and 2) develop a form, both web-based and paper, specifically for tax return preparer complaints that routes to the correct function based on type of tax return preparer and includes the items necessary for the IRS to appropriately evaluate the legitimacy of the complaint. Once a form is developed to ensure that sufficient information is captured about the complaint, a database(s) or tracking system should be developed to efficiently control the complaints.



Response

The Deputy Commissioner for Services and Enforcement agreed to update guidance on IRS.gov and create a cross-functional team to develop recommended action items to identify opportunities for improvement that may include changes to forms and creation of an automated tracking system. Management's complete response to the draft report is included as Appendix V.

Copies of this report are also being sent to the IRS managers affected by the report recommendations. Please contact me at (202) 622-6510 if you have questions or Michael E. McKenney, Assistant Inspector General for Audit (Returns Processing and Account Services), at (202) 622-5916.


Table of Contents


Background

Results of Review
Guidance Provided to Taxpayers to Report Complaints Against Tax Return Preparers Creates Taxpayer Burden

Recommendation 1 :

The Process Used to Control and Track Complaints Against Tax Return Preparers Is Not Efficient or Effective

Recommendation 2 :



Appendices
Appendix I - Detailed Objective, Scope, and Methodology

Appendix II - Major Contributors to This Report

Appendix III - Report Distribution List

Appendix IV - How Do You Report Suspected Tax Fraud Activity?

Appendix V - Management's Response to the Draft Report


Abbreviations



IRS Internal Revenue Service

TAC Taxpayer Assistance Center





Background

Paid tax return preparers are a critical component and stakeholder in tax administration and represent an important intermediary between taxpayers and the Internal Revenue Service (IRS). The tax return preparer community provides a unique opportunity to affect taxpayer behavior and compliance with the tax laws. In Calendar Year 2007, the IRS processed approximately 83 million individual Federal income tax returns prepared by paid tax return preparers.

Paid preparers can be self-employed or work for accounting firms, large tax preparation services, or law firms and include the following:
 Licensed professionals, such as attorneys and certified public accountants. These licensed professionals are regulated by the State licensing authority and the related associations such as the American Bar Association and the American Institute of Certified Public Accountants.

 Enrolled agents. These professionals pass an IRS examination or present evidence of qualifying experience as a former IRS employee and have been issued an enrollment card. Enrolled agents are the only taxpayer representatives who receive their right to practice from the Federal Government.

 Unenrolled or unlicensed preparers. These individuals range from those who might receive extensive training to those with little or no training. Currently, only three States, California, Maryland, and Oregon, have requirements for unenrolled paid preparers. In these States, unenrolled paid preparers must register with State agencies and meet continuing education requirements.

Currently, there are no national standards that a tax return preparer is required to satisfy before selling tax preparation services to the public. Anyone --regardless of training, experience, skill, or knowledge --is allowed to prepare Federal income tax returns for others for a fee.

All paid tax return preparers are subject to Internal Revenue Code penalties --both civil and criminal. For example, civil penalties apply if paid tax return preparers do not sign the tax returns they prepare, do not provide the taxpayers with copies of the tax returns, or deliberately understate a taxpayer's tax liability. Criminal penalties apply when a paid tax return preparer willfully prepares or makes a false statement regarding a false or fraudulent tax return or knowingly provides fraudulent tax returns to the IRS.

However, application of other regulations depends on whether the tax return preparer is an attorney, a certified public accountant, an enrolled agent (referred to by the IRS as a practitioner), or an unenrolled preparer. For example:
 Attorneys, certified public accountants, enrolled agents, and enrolled actuaries are governed by the Internal Revenue Code, Treasury Department Circular 230, 1 and the individual States in which they practice. These authorities have established requirements, penalties, and disciplinary actions for noncompliance and/or issue licenses and require continuing education to maintain them.

 Unenrolled preparers are governed by the Internal Revenue Code. However, neither the Circular 230 nor individual State requirements, with the exception of the States of California, Maryland, and Oregon, 2 apply to them.

The IRS Office of Professional Responsibility regulates attorneys, certified public accountants, and enrolled agents who practice before the IRS. Practice is defined broadly in Treasury Department Circular 230 as comprehending all matters connected with a presentation to the IRS relating to a taxpayer's rights, privileges, or liabilities under laws or regulations administered by the IRS.

The IRS has additional regulations for any paid tax return preparers who are authorized to file tax returns electronically. Applicants to the Electronic Filing Program must pass certain IRS checks, including background and credit history checks. Participants are also monitored.

Taxpayers can file complaints against preparers using the following methods:
 Calling the IRS toll-free telephone number (1-800-829-1040). An assistor should advise the caller/taxpayer to complete an Information Referral (Form 3949 A) or to submit information via a letter and mail it to the IRS, Fresno, California, 93888. Form 3949 A can be obtained from the public IRS web site (IRS.gov) or can be mailed to the taxpayer.

 Calling the Tax Fraud Referral Line (1-800-829-0433). This is an automated line that provides instructions for filing a complaint.

 Visiting 1 of the IRS' 401 local walk-in offices called Taxpayer Assistance Centers (TAC). 3 An assistor should provide the taxpayer with Form 3949 A and either take the completed Form from the taxpayer or advise him or her to mail it to Fresno, California.

 Sending a letter or fax directly to an IRS office.

 Accessing the public Treasury Inspector General for Tax Administration web site (TIGTA.gov) and completing an online form, emailing the complaint, or calling the toll-free Hotline (1-800-366-4484).

This review was performed in the Wage and Investment Division Accounts Management function in Fresno, California; the Office of Professional Responsibility in Washington, D.C.; the Small Business/Self-Employed Division Exam Planning and Delivery function in Austin, Texas; and the Gulf States Area Planning and Special Programs function in Austin and Houston, Texas, and Atlanta, Georgia, during the period May through October 2008. Discussions were also held with personnel in the Criminal Investigation Division and South Atlantic Area Planning and Special Programs function. We conducted this performance audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objective. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objective. Detailed information on our audit objective, scope, and methodology is presented in Appendix I. Major contributors to the report are listed in Appendix II.


Results of Review




Guidance Provided to Taxpayers to Report Complaints Against Tax Return Preparers Creates Taxpayer Burden

Tax preparer complaint reporting guidelines provided to taxpayers and employees are confusing and inconsistent. Taxpayers must first be able to determine whether the tax return preparer is an unenrolled agent or a practitioner and then determine if the complaint involves fraud and/or a violation of the tax code. Many taxpayers do not know their tax return preparer's designation, to ensure that their complaints are sent to the correct IRS office, and do not know what constitutes fraud or a violation of the tax code. Finally, the IRS Form used to submit complaints against unenrolled preparers is generic and does not instruct taxpayers to include adequate information with which complaints can be worked.



Guidelines for taxpayers to use to report complaints against tax return preparers are confusing and inconsistent

Taxpayers obtain information about filing a complaint from a variety of IRS sources: 1) IRS.gov; 2) the toll-free telephone service; and 3) the TACs. Only IRS.gov provides written instructions to taxpayers on how to file, what form to use, and where to submit a complaint.
1) If a taxpayer visits IRS.gov, he or she will not find a direct link on the main page to file a complaint. The taxpayer must search to obtain information on how to file a complaint. The taxpayer can click on "Contact IRS," then click on: 4


How Do You Report Suspected Tax Fraud Activity?


If you have information about an individual or company you suspect is not complying with the tax law, report this activity.


At the top of the resulting webpage, the IRS advises the taxpayer to complete Form 3949 A or to draft a letter and mail either to the IRS Fresno office.


At the bottom of the webpage, the IRS explains that if the preparer is an attorney, certified public accountant, or an enrolled agent, the taxpayer should instead report the suspicious actions to the email address of the IRS Office of Professional Responsibility.


Alternatively, if a taxpayer searches on "taxpayer complaints" or "preparer complaints," one of the results includes How to File a Complaint Against a Tax Professional . Clicking on this link directs the taxpayer to a webpage that explains how to submit complaints against attorneys, certified public accountants, enrolled agents, and enrolled actuaries. The webpage explains:

A complaint should be written in a letter format. The letter should include the tax practitioner's name, address, telephone number, designation (i.e., attorney, certified public accountant, enrolled agent, enrolled actuary, etc.), a detailed description of the allegations, and any documents that support those allegations. Please direct all questions and referrals to:

Internal Revenue Service

Office of Professional Responsibility

SE:OPR, Room 7238/IR

1111 Constitution Avenue NW

Washington, DC 20224

However, the definition of an enrolled agent is not provided. The taxpayer must complete a search for the term "enrolled agent" to understand how this might affect where to send a complaint. Once the taxpayer finds the definition of an enrolled agent, there is no database or list of enrolled agents on the webpage to let the taxpayer identify whether his or her tax return preparer is an enrolled agent.
2) If the taxpayer calls the IRS, a toll-free telephone service assistor should advise the taxpayer to mail a complaint via Form 3949 A or a letter to the IRS in Fresno, California. The assistor will not take the complaint information from the taxpayer but should offer to help the taxpayer obtain the Form by directing the taxpayer to IRS.gov or by having the Form mailed to the taxpayer.

3) If the taxpayer visits a TAC, an assistor should advise the taxpayer to correspond directly with the Office of Professional Responsibility and to refer to the written guidelines located on IRS.gov by searching the keyword "complaint" for complaints concerning practitioners (i.e., attorneys, certified public accountants, enrolled agents). A taxpayer with a complaint against an unenrolled agent is provided a copy of Form 3949 A. The assistor will not complete the Form for the taxpayer but will forward the completed Form to Fresno, California, if the taxpayer requests.

We placed 10 calls to the IRS main toll-free telephone number (1-800-829-1040). For:
 6 (60 percent) calls, assistors attempted to determine the type of practitioner or if the complaint was related to fraud. In the other 4 calls, the assistors did not make this attempt which could later hinder the processing and evaluation of the complaints.

 7 (70 percent) calls, assistors provided instructions on how to obtain Form 3949 A or what should be included if the caller opted to submit the complaint via letter. For the remaining 3 calls (30 percent), the assistors provided information related to sending a letter to the Office of Professional Responsibility: 2 provided an incorrect name, address, or fax number; 1 provided correct information.

We visited five TACs to determine what assistance is given to a taxpayer with a complaint against a tax return preparer. Figure 1 presents the results of the TAC visits.
Figure 1: Results of Visits to TACs



____________________________________________________________________________________
Number of TACs Information Provided by Assistor Asked if Tax
Assistor Return Preparer Was
Enrolled

____________________________________________________________________________________
3 Form 3949 A No

____________________________________________________________________________________
1 List of IRS telephone No
numbers

____________________________________________________________________________________
1 Address for the Director of No
Practice *

____________________________________________________________________________________
* = The Director of Practice was renamed the Office of Professional Responsibility
in Fiscal Year 2003.

Source: Our analysis of visits to five TACs.



None of the five TAC assistors provided a complete response, and one of the assistors referred us to another function in the IRS. Because the assistors did not ask whether the preparers in question were enrolled and whether the complaints were related to fraud for 11 (73 percent) of our 15 in-person and telephone contacts, these potential complaints might have been misrouted to the incorrect office. This creates additional processing for the IRS and delays actions, if any, on the taxpayer complaints.



The IRS Form taxpayers use to submit complaints against tax return preparers is not designed to provide adequate information with which to process the complaints

The IRS states that Form 3949 A is used to report alleged violations of tax law by individuals and businesses to the IRS. However, it is a general information referral form used by multiple IRS functions and is very generic --the word "preparer" is not referenced anywhere on the Form.

Form 3949 A also does not provide sufficient room for the taxpayer to report the complaint because it includes only eight lines on which the taxpayer is to provide a description of an "alleged violation." Users of the Form are instructed to attach another sheet, if needed.

Figure 2 presents an excerpt of the top of Form 3949 A.


In addition, the Form does not ask for specific information so that the IRS can adequately understand and/or consider the claim(s). We selected a judgmental sample of 50 complaints to determine the types of complaints submitted and whether sufficient details were present to allow the IRS to identify the tax return preparer and the issue and to determine its merits.

Of the 50 complaints reviewed, 35 (70 percent) identified a preparer and provided allegations about a violation of tax law or a fraud issue. The other 15 (30 percent) did not provide enough information with which to identify the tax return preparer, did not contain information related to a tax return preparer, or involved allegations about tax avoidance schemes being used by individuals or investment companies. Of the 35 complaints:
 15 (30 percent) involved allegations of falsifying exemptions, credits, or deductions.

 11 (22 percent) involved allegations of fraudulent activities or refund theft.

 5 (10 percent) involved allegations of tax return preparers failing to file tax returns or to return records to the taxpayers.

 2 (4 percent) involved allegations of tax return preparers representing taxpayers while disbarred or engaging in misconduct.

 2 (4 percent) involved allegations of tax return preparers disclosing information to unauthorized individuals.



Many of the complaints received could have been avoided if the IRS better educated taxpayers and clarified instructions

Many of the complaints reviewed did not meet any criteria under which the IRS could or would be able to take action(s). In addition, because of the lack of specificity on Form 3949 A, taxpayers are not providing the IRS with information from which it could take action. IRS employees who evaluate the Forms for leads confirmed that the complaints received often do not provide enough information to identify the tax return preparer or the issue. Therefore, the complaints evaluated are generally not considered valuable enough to pursue additional actions.

The Government Accountability Office Standards for Internal Control in the Federal Government 5 requires that the agency assess the risks it faces from both external and internal sources. The agency must establish clear, consistent objectives and should consider all significant interactions between the entity and other parties to identify risks. Once risks have been identified, they should be analyzed for their possible effect.



Recommendation

Recommendation 1: The Deputy Commissioner for Services and Enforcement should clarify guidance on IRS.gov when the taxpayer searches for "preparer complaint" so that taxpayers can understand the differences in the types of tax return preparers, the jurisdiction the IRS has over enrolled and unenrolled tax return preparers, and to which function taxpayer complaints about tax return preparers should be sent and by what method.
Management's Response: The Deputy Commissioner for Services and Enforcement concurs with the recommendation and will ensure that the guidance on IRS.gov is updated to assist taxpayers in understanding the process to file complaints against tax return preparers.



The Process Used to Control and Track Complaints Against Tax Return Preparers Is Not Efficient or Effective

The IRS' current process for handling taxpayer complaints against preparers does not identify potential problem preparers so that the IRS can determine the extent of the problem, if any, or how the problem should be addressed. Complaints are generally not controlled and tracked. Therefore, neither the volume of complaints received from taxpayers and worked nor their resolutions are known. Moreover, complaints are reviewed multiple times and mailed to multiple offices, before most are ultimately destroyed.

Multiple offices handle taxpayer complaints against preparers, including:
 Criminal Investigation Division.

 Small Business/Self-Employed Division.

 Wage and Investment Division.

 Office of Professional Responsibility.

 Treasury Inspector General for Tax Administration.

Several offices, including the Criminal Investigation, Small Business/Self-Employed and Wage and Investment Divisions, the Office of Professional Responsibility, and the Treasury Inspector General for Tax Administration, are involved in the process of resolving taxpayer complaints. Complaints are not centrally recorded to identify duplicates, and many complaints are redirected to another function. Because of this, the IRS spends unnecessary time sorting and redirecting complaints. In addition, the IRS does not acknowledge all taxpayer complaints. For an agency to run and control its operations, it must have relevant, reliable, and timely communications relating to internal as well as external events. Program managers need both operational and financial data to determine whether they are meeting their agencies' strategic and annual performance plans and meeting their goals of accountability for effective and efficient use of resources. An ineffective complaint system erodes public trust as taxpayers become frustrated with the IRS' apparent non-response.



Process for complaints against unenrolled preparers

Tax return preparer complaints are received in the Accounts Management function in Fresno, California. However, they are not worked or investigated from that office; the Accounts Management function is merely a conduit for the complaints. The Accounts Management function staff sort Forms 3949 A that refer to a tax return preparer and forward them to another IRS office. Accounts Management function staff do not determine whether the tax return preparer is enrolled (i.e., is a practitioner).
 All complaints are mailed to the Small Business/Self-Employed Division Examination and Return Selection function in Austin, Texas. An analyst in Austin, Texas, reviews the Forms 3949 A and forwards them to the Planning and Special Programs function.

o Complaints about an attorney, a certified public accountant, or an enrolled preparer are not forwarded to the Office of Professional Responsibility.

 Once shipped to the Planning and Special Programs function, the complaints are forwarded to the Return Preparer Coordinators (16 in total) located in 1 of the 7 Area Offices 6 throughout the IRS. The Return Preparer Coordinators review the Forms 3949 A to determine whether they meet the criteria for evaluation in the field (i.e., the preparer prepares a number of tax returns above a specific threshold, and there is evidence of a recurring theme that is harmful to taxpayers).

 Incoming and outgoing inventory to these locations are not maintained except through use of the number of total documents received and forwarded on a Document Transmittal (Form 3210).

Figure 3 presents a flowchart of how Forms 3949 A are processed for tax return preparer complaints.


Until January 2006, taxpayers could submit complaints against tax return preparers to the IRS over the telephone. An IRS assistor would question the caller to gather information about the complaint. The assistor would record the information on an internal form and submit it to the responsible function for the appropriate action. The Criminal Investigation Division did not generally view these complaints as valuable because they generated few investigative cases. In an effort to cut costs, the IRS discontinued the process for submitting complaints via the telephone in Fiscal Year 2006. The IRS reported $3.5 million in cost savings with this change. This savings does not include cost projections for increased correspondence and for processing that correspondence. The IRS now accepts taxpayer complaints against tax return preparers through the mail and by fax.

Return Preparer Coordinators advised us that Forms 3949 A typically do not provide enough information to enable them to further investigate the complaint by using resources in the field to conduct an audit of returns prepared by the tax return preparer. Our tests of 50 complaints confirmed that taxpayer complaints against preparers either did not always contain enough information to identify the preparer and alleged tax law violations or did not involve preparer issues. For example, the IRS does not have any authority over the return preparation activities of unpaid preparers such as relatives who incorrectly prepare tax returns or investment groups that advertise tax savings for real estate agents.

Because there is no single database of all taxpayer complaints, we could not determine how many complaints the IRS receives against unenrolled preparers or how many yield productive cases. Our tests also identified the following:
 The Accounts Management function does not log in complaints, cannot determine how many complaints the IRS receives, and does not track the complaints to determine their outcome or identify problem preparers. Only the volume of complaints being forwarded to other offices is documented on the Forms 3210.

 The Accounts Management function does not forward complaints about practitioners (i.e., attorneys, certified public accountants, and enrolled agents) to the Office of Professional Responsibility because research is not performed to identify preparer designation. It forwards all tax return preparer complaints to a Small Business/Self-Employed Division analyst in the Examination and Return Selection function.

 The Examination and Return Selection function does not forward complaints about practitioners to the Office of Professional Responsibility because research is not performed to identify preparer designation. However, this function does receive complaints against unenrolled preparers forwarded from the Office of Professional Responsibility.

 Complaints are sorted and filed at each function to which they are sent. However, most of the functions file the complaints by receipt date, so it is not possible for employees to retrieve specific complaints without significant effort. Filed complaints are then destroyed based on the amount of time elapsed from the receipt date. Handling complaints in this manner does not afford the IRS the opportunity to gauge the magnitude of tax return preparer issues because complaints are not analyzed and cannot be retrieved. In addition, shipping complaints to functions where they will ultimately be destroyed wastes IRS resources.

 Taxpayers are not sent acknowledgments that the IRS has received their complaints.

However, from March 29 to August 9, 2008, the IRS expended 2.2 Full-Time Equivalents 7 in the Accounts Management function alone, costing approximately $66,250 in salary without overhead, to sort the complaints sent to an analyst for further sorting and forwarding. Moreover, the Accounts Management function has used overtime hours to sort the Forms 3949 A. Additional costs are incurred in the Examination function when the analyst sorts the complaints by preparer location and forwards them to the appropriate Area Office. Return Preparer Coordinators in the Area Offices receive the complaints and review them to determine whether they meet the Examination function criteria for application of resources.



Process for complaints against practitioners

Taxpayers may also submit complaints against preparers to the Office of Professional Responsibility. Current procedures require taxpayers to submit complaints against practitioners via a letter, which should include the following elements: tax practitioner's name, address, telephone number, and designation (attorney, certified public accountant, enrolled agent, enrolled actuary, etc.); a detailed description of the allegations; and any documents that support those allegations. These letters can be mailed, faxed, or emailed directly to the Office of Professional Responsibility. The Office of Professional Responsibility also receives complaints from taxpayers via Forms 3949 A.

Complaints received in the mail are entered into a database upon receipt, regardless of practitioner designation, and then evaluated for Circular 230 designation and Office of Professional Responsibility jurisdiction. Complaints submitted via email and fax are first evaluated for Circular 230 designation and jurisdiction. Emails and faxes subject to Office of Professional Responsibility jurisdiction are then entered into the database. The types of allegations that warrant entry to the database include, but are not limited to, the following:
 A practitioner who did not exercise due diligence in the preparation of, approving, and filing of tax returns, documents, affidavits, and other papers relating to IRS matters.

 A practitioner who unreasonably delayed the prompt disposition of any matter before the IRS.

 A practitioner who charged an unconscionable fee in connection with any matter before the IRS.

 A practitioner who did not, at the request of a client, promptly return any and all records of the client that are necessary for the client to comply with Federal tax obligations.

Office of Professional Responsibility employees indicated they believe that taxpayers are submitting complaints to both their office and the Accounts Management function. One complaint in our sample of 50 complaints was sent to both the Accounts Management function and the Office of Professional Responsibility. However, because there is no database of all complaints received by the Office of Professional Responsibility or the Accounts Management function, neither we nor the IRS can determine how many duplicate complaints are received. The Office of Professional Responsibility can determine whether it has received more than one complaint against a practitioner for only those complaints subject to Circular 230 designation and jurisdiction.

Figure 4 presents a flowchart of how the Office of Professional Responsibility processes the receipt of taxpayer complaints against practitioners.


If the tax return preparer is a practitioner and the issue is under the Office of Professional Responsibility's jurisdiction (i.e., subject to Circular 230), an acknowledgement is sent to the taxpayer that the complaint was received. Evidence is gathered to determine whether the complaint can be supported; actions taken by the Office of Professional Responsibility resulting from supported complaints range from reprimands to disbarments. Case files for completed cases are retained by the Office of Professional Responsibility for at least 7 years before they are sent to a Federal Records Center. 8 Suspended and disbarred practitioners may continue to prepare returns but may not represent taxpayers before the IRS. If a complaint is not under its jurisdiction, the Office of Professional Responsibility forwards it to another office within the IRS, such as the Criminal Investigation or Small Business/Self-Employed Divisions, or to the Treasury Inspector General for Tax Administration.

The Office of Professional Responsibility receives complaints from a variety of sources, both internal and external to the IRS. Discussions with Office of Professional Responsibility staff indicated that many of the complaints are warranted and result in productive cases. However, a review of the Office of Professional Responsibility's database of complaints showed that most complaints submitted from taxpayers do not result in actions being taken against practitioners. Of the 621 cases closed from January 1 to September 3, 2008, that were coded with taxpayer as the original source, 467 (75 percent) were closed because the Office of Professional Responsibility lacked jurisdiction, 111 (18 percent) were closed with no sanctions, 27 (4 percent) were opened in error, and 10 (2 percent) were closed with various other codes. Only 6 (1 percent) resulted in action being taken against the practitioner. Of the 467 cases closed because of a lack of jurisdiction, 457 were for unenrolled preparers, while 10 were closed because the complaint was against a practitioner but was an issue that was not covered under Circular 230. The large number of complaints about unenrolled preparers indicates complaints from taxpayers are being routed to the incorrect function within the IRS.

Overall, the IRS cannot determine how many complaints against tax return preparers (unenrolled and practitioners) it receives, how many are productive, and the total number of multiple complaints against a specific firm, practitioner, or preparer. Although the Office of Professional Responsibility controls and tracks complaints received by mail against practitioners or unenrolled tax return preparers not subject to Circular 230, it does not do so for all complaints received by fax or email. In addition, the Accounts Management and the Examination and Return Selection functions control and track complaints by volume rather than by practitioners or unenrolled tax return preparers.

Taxpayer complaints against tax return preparers can provide valuable information about recurring problems. They can provide valuable information to understanding the root causes of taxpayer problems and identify noncompliance, as well as help the IRS address core processes that need improvement. The IRS needs to ensure that it has sufficient data with which to identify potential problem preparers. Developing a form to capture all the information necessary to analyze the situation and determine the best course of action to take, if any, is essential. Once a form is developed, the IRS needs to create a means to capture, monitor, and track the complaints.



Recommendation

Recommendation 2: The Deputy Commissioner for Services and Enforcement should develop a form, both web-based and paper, specifically for tax return preparer complaints that routes to the correct function based on type of tax return preparer and includes the items necessary for the IRS to appropriately evaluate the complaint. Once a form is developed to ensure that sufficient information is captured about the complaint, a database(s) or tracking system should be developed to efficiently control the complaints.
Management's Response: The Director, Examination, Small Business/Self-Employment Division, will ensure that the tax return preparer complaint process is reviewed by a cross-functional team to identify opportunities for improvement. The cross-functional team will develop recommended action items to modify the system to produce an appropriate level of efficiency, effectiveness, and accountability that may include changes to forms and creation of an automated tracking system.



Appendix I


Detailed Objective, Scope, and Methodology


Our overall objective was to determine whether the process for taxpayers to report complaints against tax return preparers to the IRS is effective. To accomplish our objective, we:
I. Determined whether the method taxpayers use to file complaints against tax return preparers with the IRS is effective and reduces taxpayer burden.

A. Determined whether guidance for taxpayers lodging a complaint and for IRS employees handling a complaint against a tax return preparer is clear.

B. Determined whether IRS employees provide consistent responses when guiding a taxpayer on reporting a complaint against a tax return preparer. We placed 10 calls to the IRS main toll-free telephone number (1-800-829-1040) between September 19 and September 23, 2008. We also visited five judgmentally selected TACs 1 in Atlanta, Georgia; Austin, Texas; Houston, Texas; San Diego, California; and Washington, D.C., between June 12 and September 4, 2008. To conserve audit resources, we selected TACs in cities where we were conducting other audit work.

C. Determined whether the decision to discontinue "live" services was effective.

II. Determined whether the process the IRS uses to handle, track, and control complaints is effective in stopping problematic tax return preparers from preparing tax returns.

A. Determined responsibilities of staff in the Wage and Investment Division, Small Business/Self-Employed Division, Criminal Investigation Division, and Office of Professional Responsibility for processing complaints.

B. Determined procedures used to process complaints received, retained, forwarded, and destroyed and actions to be taken to document the volumes.

C. Determined procedures used to evaluate complaints to determine next action (retain, forward, destroy).

D. Determined whether a numbering or tracking system exists for each complaint received to identify duplicate and multiple complaints received for processing and historical data.

E. Determined whether the IRS provides an acknowledgement to taxpayers who submit complaints.

F. Reviewed documentation maintained to determine the format of (Form or letter) and reasons for complaints. Because the IRS could not identify the total population of complaints, we could not select a statistical sample. We selected a judgmental sample of paper tax return preparer complaints currently in inventory in the following sites between August 18 and September 3, 2008 (total sample = 50 complaints):

1. Fresno, California - Wage and Investment Division; sample size = 16.

2. Austin, Texas - Small Business/Self-Employed Division, Examination and Return Selection function; sample size = 16.

3. Houston, Texas, and Atlanta, Georgia - Small Business/Self-Employed Division, Examination Gulf States Area Planning and Special Programs function/Return Preparer Program Coordinator; sample size = 7.

4. Washington, D.C. - Office of Professional Responsibility; sample size = 11.

G. Determined whether the IRS could identify the disposition of tax return preparer complaints received from January 1 through December 31, 2007. The IRS could not provide us information on complaints received during this time period. However, we obtained an extract of the database used by the Office of Professional Responsibility to track cases under its jurisdiction. The extract included information for cases closed between January 1 and September 3, 2008, that were based on taxpayer complaints. We did not assess the reliability of the extract because we were only determining whether the closed cases resulted in actions being taken against practitioners.



Appendix II


Major Contributors to This Report


Michael E. McKenney, Assistant Inspector General for Audit (Returns Processing and Account Services)

Augusta R. Cook, Director

Paula W. Johnson, Audit Manager

Lynn Faulkner, Lead Auditor

Robert Howes, Senior Auditor

Jerome Antoine, Auditor



Appendix III


Report Distribution List


Commissioner C

Office of the Commissioner - Attn: Chief of Staff C

Assistant Deputy Commissioner for Services and Enforcement SE

Commissioner, Small Business/Self-Employed Division SE:S

Commissioner, Wage and Investment Division SE:W

Director, Office of Research, Analysis and Statistics RAS

Chief, Criminal Investigation Division SE:CI

Director, Office of Professional Responsibility SE:OPR

Director, Office of Program Evaluation and Risk Analysis RAS:O

Director, Communications and Liaison, Wage and Investment Division SE:W:C

Director, Communications, Liaison, and Disclosure, Small Business/Self-Employed Division SE:S:CLD

Director, Customer Account Services, Wage and Investment Division SE:W:CAS

Director, Customer Assistance, Relationships, and Education, Wage and Investment Division SE:W:CAR

Director, Examination, Small Business/Self-Employed Division SE:S:E

Director, Refund Crimes, Criminal Investigation Division SE:CI:RC

Director, Strategy and Finance, Wage and Investment Division SE:W:S

Chief, Performance Improvement, Wage and Investment Division SE:W:S:PI

Director, Accounts Management, Wage and Investment Division SE:W:CAS:AM

Director, Exam Planning and Delivery, Small Business/Self-Employed Division SE:S:E:EPD

Director, Exam Policy, Small Business/Self-Employed Division SE:S:E:EP

Director, Field Assistance, Wage and Investment Division SE:W:CAR:FA

Field Director, Accounts Management (Fresno), Wage and Investment Division SE:W:CAS:AM:F

Chief Counsel CC

National Taxpayer Advocate TA

Director, Office of Legislative Affairs CL:LA

Office of Internal Control OS:CFO:CPIC:IC

Audit Liaisons:
Deputy Commissioner for Services and Enforcement SE

Commissioner, Small Business/Self-Employed Division SE:S

Commissioner, Wage and Investment Division SE:W

Chief, Criminal Investigation Division SE:CI

Director, Office of Professional Responsibility SE:OPR

Senior Operations Advisor, Wage and Investment Division SE:W:S



Appendix IV




Appendix V


Management's Response to the Draft Report



DEPARTMENT OF THE TREASURY INTERNAL REVENUE SERVICE WASHINGTON. D.C. 20224




DEPUTY COMMISSIONER

February 5, 2009

MEMORANDUM FOR MICHAEL R. PHILLIPS DEPUTY INSPECTOR GENERAL FOR AUDIT

FROM: Linda E. Stiff Deputy Commissioner Services and Enforcement

SUBJECT: Draft Audit Report - The Process Taxpayers Must Use to Report Complaints Against Tax Return Preparers is Ineffective and Causes Unnecessary Taxpayer Burden (Audit No. 200840015)

We have reviewed the draft report titled "The Process Taxpayers Must Use to Report Complaints Against Tax Return Preparers is Ineffective and Causes Unnecessary Taxpayer Burden".

We are committed to improving our overall program actions in regards to paid tax return preparers. We will expand our current efforts to include a cross-functional team assigned to review and revise our tax return preparer complaint process. This updated process will assist our efforts to reduce taxpayer burden and to enhance compliance by tax professionals and unenrolled return preparers.

Attached is a detailed response outlining our corrective actions. If you have questions, please call me at (202) 622-6860 or Monica Baker. Director. Examination at (202) 283-2659.

Attachment



Attachment

RECOMMENDATION 1:

The Deputy Commissioner for Services and Enforcement should clarify guidance on IRS.gov when the taxpayer searches for "preparer complaint" so that taxpayers can understand the differences in the types of tax return preparers, the Jurisdiction the IRS has over enrolled and unenrolled tax return preparers, and to which function taxpayer complaints about tax return preparers should be sent and by what method.

CORRECTIVE ACTIONS:

We concur with this recommendation. The Director, Examination SB/SE Division will ensure the guidance on IRS.gov is updated to assist taxpayers in understanding the process to file complaints against tax return preparers.

IMPLEMENTATION DATE:

June 15, 2009

RESPONSIBLE OFFICIAL:

Director, Examination Policy SB/SE Division

CORRECTIVE ACTION(S) MONITORING PLAN:

The Director, Examination Policy SB/SE will advise the Director, Examination SB/SE of any delays in implementing this corrective action.

RECOMMENDATION 2:

The Deputy Commissioner for Services and Enforcement should develop a form, both web-based and paper, specifically for tax return preparer complaints that routes to the correct function based on type of tax return preparer and includes the items necessary for the IRS to appropriately evaluate the complaint. Once a form is developed to ensure that sufficient information is captured about the complaint, a database(s) should be developed to efficiently control the complaints.

CORRECTIVE ACTION :

The Director, Examination SB/SE Division will ensure the tax return preparer complaint process is reviewed by a cross-functional team to identify opportunities for improvement. The cross-functional team will develop recommended action items to modify the system to produce an appropriate level of efficiency, effectiveness, and accountability that may include changes to forms and creation of an automated tracking system.

IMPLEMENTATION DATE :

By June 15, 2010, the cross-functional team will develop recommended action items.

RESPONSIBLE OFFICIAL(S) :

Director, Examination Planning & Delivery SB/SE

CORRECTIVE ACTION MONITORING PLAN :

The Director, Examination Planning and Delivery SB/SE will advise the Director. Examination SB/SE of any delays in implementation of this corrective action.

1 The IRS refers to tax return preparers who are attorneys, certified public accountants, and enrolled agents as practitioners. Enrolled agents are preparers who have passed an IRS examination or presented evidence of qualifying experience as a former IRS employee and have been issued an enrollment card.

1 Regulations Governing the Practice of Attorneys, Certified Public Accountants, Enrolled Agents, Enrolled Actuaries, Enrolled Retirement Plan Agents, and Appraisers before the Internal Revenue Service (Treasury Department Circular No. 230 (revised 4-2008)).

2 California requires that paid preparers pass a 60-hour approved course and obtain a tax preparer bond to become registered. California also requires 20 hours of continuing education annually. Oregon requires that tax preparers be at least 18 years old, have a high school degree or equivalent, complete 80 hours of income tax law education, and pass a tax preparer examination. Oregon also requires 30 hours of continuing education annually. While Oregon requires enrolled agents to register, enrolled agents must meet far fewer registration requirements than unenrolled preparers. In May 2008, Maryland also enacted paid preparer legislation that will require tax preparers to pass an examination, pay a registration fee, and subsequently comply with continuing education requirements.

3 An IRS office with employees who answer questions, provide assistance, and resolve account-related issues for taxpayers face to face.

4 See Appendix IV for a replica of the webpage, How Do You Report Suspected Tax Fraud Activity?

5 Standards for Internal Control in the Federal Government (GAO/AIMD-00-21.3.1, dated November 1999).

6 An Area Office is a geographic organizational level used by IRS business units and offices to help their specific types of taxpayers understand and comply with tax laws and issues.

7 A measure of labor hours in which 1 Full-Time Equivalent is equal to 8 hours multiplied by the number of compensable days in a particular fiscal year. For Fiscal Year 2008, 1 Full-Time Equivalent was equal to 2,096 staff hours.

8 The National Archives and Records Administration Federal Records Center system is a national network of 17 regional facilities that store and provide access to over 25 million cubic feet of records.

1 An IRS office with employees who answer questions, provide assistance, and resolve account-related issues for taxpayers face to face.

Treasury Inspector General for Tax Administration (TIGTA) Report: Tax Practitioners Promoting Abusive Tax Shelters Are Still Able to Represent Taxpayers Before the Internal Revenue Service (Number: 2009-10-039)

February 27, 2009

Treasury Inspector General for Tax Administration (TIGTA) report : Tax practitioners : Abusive tax shelters : Practice before the IRS .


TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION



Tax Practitioners Promoting Abusive Tax Shelters Are Still Able to Represent Taxpayers Before the Internal Revenue Service


February 20, 2009

Reference Number: 2009-10-039

This report has cleared the Treasury Inspector General for Tax Administration disclosure review process and information determined to be restricted from public release has been redacted from this document.



Redaction Legend :

1 = Tax Return/Return Information

Phone Number | 202-622-6500

Email Address | inquiries@tigta.treas.gov

Web Site | http://www.tigta.gov

DEPARTMENT OF THE TREASURY

WASHINGTON, D.C. 20220

February 20, 2009

MEMORANDUM FOR DIRECTOR, OFFICE OF PROFESSIONAL RESPONSIBILITY


FROM: Michael R. Phillips Deputy Inspector General for Audit




SUBJECT: Final Audit Report - Tax Practitioners Promoting Abusive Tax
Shelters Are Still Able to Represent Taxpayers Before the Internal
Revenue Service (Audit # 200710041)



This report presents the results of our review of the Office of Professional Responsibility's (OPR) actions on licensed tax practitioners that engaged in abusive tax shelter transactions. The overall objective of this review was to determine whether the OPR is effectively identifying and taking appropriate actions against those licensed tax practitioners who have employed or promoted abusive tax shelters. This audit was included as part of our Fiscal Year 2008 Annual Audit Plan under the major management challenges of Tax Compliance Initiatives and Taxpayer Protection and Rights.



Impact on the Taxpayer

The OPR plays an important role in regulating the conduct of licensed tax professionals who act as power of attorneys for taxpayers who might be involved in an audit, collection issues, or appeal of an Internal Revenue Service (IRS) determination. We found that the OPR was unaware of a significant number of licensed tax practitioners who were assessed penalties, sentenced in a criminal proceeding, or enjoined for tax shelter violations. As a result, these tax practitioners were still eligible to represent taxpayers before the IRS. Practitioner misconduct can serve to erode public confidence in the tax system and create unfortunate consequences for taxpayers relying on unscrupulous tax practitioners.



Synopsis

Abusive tax shelters are an area of concern to Congress and continue to present formidable challenges to the IRS. To address tax shelter violations and other misconduct issues, the IRS has developed a number of strategies to ensure attorneys, accountants, and other tax practitioners adhere to professional standards and follow the law. These strategies include outreach and education to tax practitioners and IRS operating divisions related to the standards of conduct, the IRS role in enforcing the standards, and the use of disciplinary actions when appropriate.

The OPR works closely with the other IRS operating divisions to identify improper practitioner behaviors that have an impact on tax administration but generally relies on IRS employees to refer any potential practitioner misconduct. While the IRS has established a referral system for employees to report this information to the OPR, we determined the referral process was not working effectively. We found that the OPR was unaware of a significant number of licensed tax practitioners who engaged in tax shelter violations. As a result, the OPR did not initiate an investigation to determine whether any sanctions were necessary to prevent disreputable practitioners from continuing to be allowed to represent taxpayers. Specifically, the OPR was not aware of 160 practitioners assessed tax penalties, permanently enjoined by a Federal Court, or criminally sentenced for abusive tax shelter activities that caused loss to the Federal Government of approximately $34.9 million. 1 These practitioners are still eligible to represent 9,766 taxpayers before the IRS.

During our audit, we obtained IRS data readily available outside of the OPR to identify potentially disreputable tax practitioners engaged in abusive tax shelters that had not been referred to the OPR as required. We discussed with OPR management the feasibility of OPR personnel performing similar proactive analyses to identify tax practitioners who have been assessed penalties, received a criminal sentence, or enjoined for potentially disreputable behavior. OPR management agreed that obtaining some available information from IRS systems is a sound approach; however, management stated that this would generally require extensive additional information gathering and case building that is not supported by their current resources.



Recommendations

We recommended that the Director, OPR, take the following actions: 1) determine whether additional disciplinary actions are warranted for the tax practitioners penalized for abusive tax shelter violations; 2) establish written procedures for controlling and reviewing case referrals on the inventory system; 3) determine whether additional disciplinary actions are warranted for the tax practitioners who were permanently enjoined for abusive tax shelter violations; 4) determine whether additional disciplinary actions are warranted for those tax practitioners sentenced for abusive tax shelter violations; 5) undertake additional outreach efforts with other IRS functions to increase awareness of the requirement to refer to the OPR licensed tax practitioners involved in disreputable behavior; and 6) develop a methodology when resources become available to proactively identify licensed tax practitioners who might have engaged in disreputable activity.



Response

IRS management agreed with all of our recommendations. The OPR will review the identified 143 tax practitioners penalized for abusive tax shelter actions and take appropriate action. To the extent these practitioners are not within the OPR's jurisdiction, the Director, OPR, will refer the individuals to the appropriate IRS function. In addition, the OPR is in the process of revising its Internal Revenue Manual guidelines governing the control and processing of each complaint, referral, license application, and/or renewal that is input to their information management system. Further, the OPR will also ensure that each of the nine cases involving abusive tax shelters injunctions and the eight cases involving practitioners subject to criminal prosecution are reviewed for appropriate action. If these individuals do not fall within the OPR's jurisdiction, the Director, OPR, will refer the individuals to the appropriate IRS function. The OPR will also continue to provide awareness training to both internal and external stakeholders to ensure that licensed tax practitioners involved in potentially disreputable behavior are brought to the attention of the OPR and are appropriately sanctioned. Finally, the OPR will look to develop and sustain a more proactive model of case identification and development, as resources permit. Management's complete response to the draft report is included as Appendix VI.

Copies of this report are also being sent to the IRS managers affected by the report recommendations. Please contact me at (202) 622-6510 if you have questions or Nancy A. Nakamura, Assistant Inspector General for Audit (Management Services and Exempt Organizations), at (202) 622-8500.


Table of Contents


Background

Results of Review
Tax Practitioners Engaged in Abusive Tax Shelter Actions Are Still Able to Practice Before the Internal Revenue Service

Recommendation 1 :

Recommendation 2 :

Recommendation 3 :

Recommendations 4 through 6 :

Appendices
Appendix I - Detailed Objective, Scope, and Methodology

Appendix II - Major Contributors to This Report

Appendix III - Report Distribution List

Appendix IV - Outcome Measures

Appendix V - Internal Revenue Code Practitioner Penalties

Appendix VI - Management's Response to the Draft Report


Abbreviations



CAF Centralized Authorization File

DOJ Department of Justice

IRS Internal Revenue Service

OPR Office of Professional Responsibility




Background


An abusive tax shelter is a tax transaction or scheme that shelters income from normal taxation by taking an unrealistic position. A 2006 Senate report 1 included an estimate that Americans now have more than $1 trillion in assets offshore and illegally evade between $40 and $70 billion in United States taxes each year through the use of offshore tax schemes alone. Abusive tax shelters are an area of concern to Congress and continue to present formidable challenges to the Internal Revenue Service (IRS).

In the IRS' 2005-2009 Strategic Plan, the IRS stated that it would vigorously enforce the law to stop willful noncompliance through tax shelters. One area in which the IRS has focused its enforcement is on tax practitioners who promote abusive tax avoidance transactions such as abusive tax shelters. The IRS has developed a number of strategies to ensure attorneys, accountants, and other tax practitioners adhere to professional standards and follow the law. These strategies include outreach and education to tax practitioners and IRS operating divisions related to the standards of conduct, the IRS role in enforcing the standards, and the use of disciplinary actions when appropriate. As a means of deterrence, the IRS has tools at its disposal including injunctions, 2 criminal sanctions, and monetary penalties against persons who participate in or promote abusive tax shelters.

When the IRS determines that a licensed tax practitioner has participated in or promoted an abusive tax shelter, the IRS' Office of Professional Responsibility (OPR) should be advised so it can take appropriate action. 3 The OPR is responsible for regulating licensed tax practitioners who represent taxpayers before the IRS by setting and enforcing standards of competency, integrity, and conduct. The OPR provides oversight of licensed tax practitioners based on the regulations in Treasury Department Circular No. 230 (Circular 230). 4 Circular 230 is the legal authorization for the OPR to institute proceedings against tax practitioners who violate these regulations. The OPR may impose disciplinary actions through private reprimand, censure (a public reprimand), suspension, or disbarment.

In September 2007, the IRS updated Circular 230 after Congress passed legislation targeting promoters and investors of abusive tax shelters. 5 The law was designed to impose penalties for misconduct by tax shelter promoters, advisors, and investors. The current law also enables the OPR to impose monetary penalties against licensed practitioners who fail to comply with Circular 230 rules.

Over the past few years, the IRS has substantially increased the OPR's budget and staffing to help ensure that it has adequate oversight over licensed tax practitioners. In Fiscal Year 2002, the OPR had a budget of $1.8 million and a staff of 15. By Fiscal Year 2007, the OPR had a budget for oversight of approximately $5.4 million and was authorized a staff of 58, although staffing difficulties have not allowed it to reach this maximum level.

In performing its oversight role, the OPR relies internally on IRS employees to refer to the OPR any potential practitioner misconduct identified during an examination. Referrals should be made to the OPR as soon as it appears that a practitioner might be in violation of Circular 230 regulations. The referral process is discussed in the various operating division's policy manuals 6 and highlighted on the OPR's web site. The OPR informed us that when a referral is received from an IRS employee, it is evaluated to ensure that the tax practitioner is within the OPR's jurisdiction, the referral is actionable under Circular 230, and the practitioner is representing taxpayers before the IRS. If so, the OPR opens an enforcement case and controls the case on its inventory system.

The OPR works closely with the other IRS operating divisions to identify improper practitioner behaviors that have an impact on tax administration. Both the IRS and OPR plan to use referral information to develop IRS-wide coordinated strategies to deter, detect, and address such practitioner misconduct. In Fiscal Year 2007, the OPR appointed a new Director to oversee the enforcement function. One of the Director's first acts was to help organize an internal IRS conference to improve the level of communication of referral information.

This review was performed at the OPR in Washington, D.C., during the period October 2007 through August 2008. However, certain information needed to evaluate the OPR's referral process was not available. Specifically, the OPR does not maintain complete information related to the number and source of referrals received. These issues are discussed in further detail in the Results of Review section. With the exception of these impairments, we conducted this performance audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objective. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objective. Detailed information on our audit objective, scope, and methodology is presented in Appendix I. Major contributors to the report are listed in Appendix II.


Results of Review


The OPR plays an important role in regulating the conduct of licensed tax professionals who act as power of attorneys for taxpayers who might be involved in an audit, collection issues, or appeal of an IRS determination, especially if these licensed professionals engage in tax abuses. We determined that the OPR was unaware of a significant number of licensed tax practitioners who were assessed penalties, sentenced in a criminal proceeding, or enjoined for tax shelter violations because this misconduct may not have been referred by IRS employees as required. As a result, the OPR did not initiate an investigation to determine whether any sanctions were necessary to prevent disreputable practitioners from continuing to be allowed to represent taxpayers.

During our audit, we obtained IRS data readily available outside of the OPR to identify potentially disreputable tax practitioners engaged in abusive tax shelters that had not been referred to the OPR as required. We discussed with OPR management the feasibility of OPR personnel performing similar proactive analyses to identify tax practitioners who have been assessed penalties, received a criminal sentence, or enjoined for potentially disreputable behavior. OPR management agreed that obtaining some available information from IRS systems is a sound approach; however, management stated that this would generally require extensive additional information gathering and case building that is not supported by their current resources.

The practitioner misconduct identified constitutes only a portion of the total number of individuals assessed penalties, enjoined by Federal courts, or with criminal convictions that might be representing taxpayers. Our scope included only tax shelter abuses reported during a 3-year period. In addition, we did not review State convictions or other types of Federal Government convictions, such as those involving dishonesty, breach of trust, or a felony, that could warrant sanction by the OPR. Practitioner misconduct can serve to erode public confidence in the tax system and create unfortunate consequences for taxpayers relying on unscrupulous tax practitioners. To effectively address practitioner misconduct, we believe the OPR should reemphasize with IRS operating divisions the importance of the referral process in identifying disreputable practitioners. In addition, we believe OPR management should consider more proactive analyses, as resources become available, to minimize its reliance on referrals to identify and investigate disreputable tax practitioners. Collectively, these actions will ensure that OPR resources continue to be focused on practitioner misconduct most threatening to tax administration and reduce the risk that disreputable tax practitioners are allowed to represent taxpayers before the IRS.



Tax Practitioners Engaged in Abusive Tax Shelter Actions Are Still Able to Practice Before the Internal Revenue Service

Depending on the severity of the tax shelter offense, the IRS may assess civil penalties, pursue criminal sanctions, or request that the District Courts impose injunctions against persons involved. We found that the OPR was not aware of a significant number of licensed tax practitioners who perpetrated tax shelter abuses. The tax practitioners we identified had been penalized, enjoined, and/or convicted of promoting or practicing significant tax shelter abuses and were still able to represent taxpayers before the IRS. At the time of our audit, no disciplinary action had been taken against these practitioners, thereby allowing them to continue to represent taxpayers before the IRS.



Some practitioners assessed tax penalties for abusive tax shelter transactions are still authorized to practice before the IRS

The IRS uses penalties as a means of encouraging voluntary compliance and deterring taxpayers and tax practitioners from engaging in abusive tax shelters. IRS procedures require that an information referral be sent to the OPR when specific tax shelter penalties are assessed on licensed tax practitioners. This referral should be prepared by the IRS enforcement employee who assessed the penalty against the licensed practitioner and enables the OPR to initiate a proceeding for sanction against a practitioner who might have engaged in disreputable conduct.

We obtained information maintained on the Individual Master File 7 which tracked specific tax shelter penalties assessed during Fiscal Years 2005 through 2007. During these 3 fiscal years, the IRS assessed penalties 8 totaling $82.3 million for specific tax shelter violations against 1,175 individuals. We then researched the IRS Centralized Authorization File (CAF) 9 to determine whether any of these individuals had represented taxpayers before the IRS. We also researched State licensing authorities to determine whether any of these persons were licensed tax practitioners.

Of the 1,175 individuals, we identified 280 that could potentially be licensed practitioners. Based on our analysis, the OPR identified and took action on 137 (49 percent) of the 280 individuals who received tax shelter penalties. For these individuals, the OPR controlled the case referral and applied sanctions for disreputable conduct where applicable.

However, we found that the OPR was not aware of a significant number of licensed tax practitioners the IRS penalized for tax shelter violations. The OPR's inventory system contained no information on 73 (26 percent) of the 280 licensed tax practitioners. OPR management believed that these cases were most likely not referred to them by the applicable IRS enforcement personnel. These 73 practitioners were assessed penalties totaling approximately $1.8 million for promoting abusive tax shelters. 10 Currently, these 73 penalized licensed tax practitioners are identified on the CAF as representing 3,867 taxpayers before the IRS. These taxpayers might be unaware that their licensed tax practitioners have been identified by the IRS for tax shelter violations. This might result in the IRS assessing these taxpayers additional taxes, penalties, and interest due to the incompetence or disreputable conduct of the tax practitioner.

In addition, the remaining 70 of the 280 tax practitioners are listed on the CAF as attorneys, certified public accountants, or enrolled agents. We could not verify if the information on the CAF was correct based on our review of information maintained by State licensing agencies or the IRS' Enrolled Agent computer system. 11 These 70 tax practitioners were assessed penalties totaling approximately $1.4 million for promoting abusive tax shelters and are currently eligible to interact with the IRS in some capacity for 4,920 taxpayers. If these 70 practitioners do not have verifiable licenses, they would not be under the jurisdiction of the OPR. Therefore, the applicable IRS function would be responsible for investigating the possible misrepresentations or potential misconduct on the part of these non-licensed practitioners. 12

Section 10.53(a) of Circular 230 requires IRS employees to make a written report to the OPR when there is reason to believe that a tax practitioner has violated the rules in Circular 230. In performing its oversight role, the OPR relies on employees within the compliance functions to refer cases when penalties are assessed as a result of an abusive tax shelter. OPR management agreed that individuals assessed penalties for abusive tax shelters were not always referred by IRS compliance employees and stated that the penalty referral process could be problematic if the OPR is not notified when these types of penalties are assessed.

In a previous Treasury Inspector General for Tax Administration review, 13 several IRS operating divisions were contacted to evaluate their procedures and processes to ensure that appropriate cases are referred to the OPR. Although the IRS operating divisions had procedures to send referrals to the OPR, they generally did not maintain a record or list of referrals sent to the OPR.

We previously reported that the OPR's guidance is not sufficient to ensure that referrals are consistently processed. At that time, management agreed with our recommendation to develop procedures to better define which cases will be recorded on the OPR case management system and how the source, nature, and outcome of referrals will be monitored to help target outreach efforts. However, OPR management informed us in this audit that not all referrals received are recorded on their inventory system, and they are in the process of evaluating procedures for controlling and reviewing referrals. We believe that written procedures will ensure consistent case processing and adherence to requirements and assist the OPR in operating more effectively.

OPR management informed us that prior to the second quarter of Fiscal Year 2008, they were not recording on their inventory system referrals involving non-licensed practitioners or referrals in which they did not plan to open an investigation against a licensed practitioner. In addition, their current inventory system is unable to provide critical data on the source of referrals. We believe referral source information would assist OPR management in potentially identifying which IRS operating divisions have a low number of referrals and could be in violation of the referral procedures. This information could be used by OPR management to target future outreach activities to reinforce the requirement for employees to prepare written referrals identifying potentially disreputable behavior by licensed practitioners. In addition, improvements in the referral process will also positively affect the referrals of tax practitioners involved with tax-related crimes other than tax shelter issues that warrant OPR involvement. OPR management informed us they are planning to replace their current inventory system with a new case management system in mid-2009, which should be able to provide information on the source of referrals.



Recommendations

The Director, OPR, should:

Recommendation 1 : Review the 143 identified tax practitioners penalized for abusive tax shelter actions to determine whether additional disciplinary actions are warranted. If the individuals do not fall under the jurisdiction of the OPR, then the Director should refer the cases to the appropriate IRS function for applicable action.
Management's Response : Management agreed with the recommendation. The OPR will review the 143 identified tax practitioners penalized for abusive tax shelter transactions and take appropriate action. To the extent these practitioners are not within the OPR's jurisdiction, the OPR will refer the individuals to the appropriate IRS function which will be responsible for investigating any potential misconduct on the part of these non-licensed practitioners.

Recommendation 2 : Establish written procedures for controlling and reviewing case referrals for the current inventory system, as well as for the new planned inventory system, to ensure consistent case tracking and processing.
Management's Response : Management agreed with the recommendation. The OPR is in the process of revising its Internal Revenue Manual guidelines governing the control and processing of each complaint, referral, license application, and/or renewal and all other OPR operations including mail processing and case referral receipt that is input to its information management system.



Some practitioners permanently enjoined by a Federal Court for abusive tax shelter transactions are not always reviewed by the OPR

The Department of Justice (DOJ) Tax Division uses its civil power to stop illegal tax schemes by seeking and obtaining injunctions in Federal Court. Injunctions prohibit practitioners and promoters from selling illegal tax schemes on the Internet, at seminars, or through other means. However, we identified some tax practitioners who have been enjoined by a Federal Court due to involvement in abusive tax shelter activities but still remain authorized to represent taxpayers before the IRS. Failure to identify these tax practitioners in a timely manner could have serious adverse consequences to both taxpayers and the IRS if practitioners continue to be allowed to promote, market, and sell abusive tax shelter schemes to unsuspecting taxpayers.

We obtained an IRS database extract of permanent injunctions and final judgments decreed by United States District Courts against individuals during Fiscal Years 2005 through 2007. 14 We found that the IRS was granted permanent relief or injunctions against 48 individuals for tax shelter issues and/or abusive tax schemes. We researched State licensing authorities to determine whether any of these individuals were licensed tax practitioners under the OPR's jurisdiction and researched the CAF to determine whether they had represented taxpayers before the IRS.

Of the 48 individuals, we identified 17 that could potentially be licensed tax practitioners. We found the OPR reviewed and applied sanctions, when applicable, for 8 of the 17 permanently enjoined licensed practitioners. However, the OPR was unaware of*****

Seven of the 17 tax practitioners we identified are listed on the CAF as attorneys, certified public accountants, or enrolled agents. We could not verify if the information on the CAF was correct based on our review of information maintained by State licensing agencies or IRS' Enrolled Agent computer system. These 7 tax practitioners caused an estimated harm to the Federal Government of $13.9 million dollars and are currently eligible to represent 517 taxpayers before the IRS. If these seven practitioners do not have verifiable licenses and are not under the jurisdiction of the OPR, then the applicable IRS function should further investigate them for possible misrepresentation or potential misconduct on the part of a non-licensed practitioner.



Recommendation

Recommendation 3 : The Director, OPR, should review the nine identified tax practitioners permanently enjoined for abusive tax shelter actions to determine whether additional disciplinary actions are warranted. If the individuals do not fall under the jurisdiction of the OPR, then the Director should refer the cases to the appropriate IRS function for applicable action.
Management's Response : Management agreed with the recommendation. The OPR will ensure that each of the nine cases involving abusive tax shelter injunctions are reviewed for appropriate action.



Some practitioners who have been convicted and sentenced for abusive tax shelter activities have not been restricted from practicing before the IRS

For those taxpayers who commit severe tax offenses, the IRS pursues criminal sanctions. Criminal Investigation Division special agents who investigate criminal offenses are required to send a referral to the OPR related to misconduct by licensed practitioners. According to Circular 230, the Director of the OPR may expedite suspension of any practitioner who, within 5 years, has been convicted of any tax-related crime, any crime involving dishonesty or breach of trust, or any felony for which the conduct involved renders the practitioner unfit to practice before the IRS. However, we identified some licensed tax practitioners criminally sentenced for tax shelter abuses who were still authorized to represent taxpayers before the IRS at the time of our audit.

Our review of the Criminal Investigation Division database for Fiscal Years 2005 through 2007 identified 40 individuals sentenced for tax shelter issues or abusive tax schemes. 15 Of the 40 individuals, we identified 30 that could potentially be licensed tax practitioners. We found that the OPR took action to review and apply sanctions for 22 of the 30 criminally sentenced practitioners. However, the OPR was unaware of and had not reviewed 5 (17 percent) of the 30 sentenced tax practitioners. These 5 tax practitioners were engaged in tax shelter schemes that caused an estimated harm or loss to the Federal Government of $4.4 million and are representing or still eligible to represent 249 taxpayers before the IRS.

Three of the 30 tax practitioners identified are listed on the CAF as attorneys, certified public accountants, or enrolled agents. However, we could not verify if the information on the CAF was correct based on our review of information maintained by State licensing agencies or IRS' Enrolled Agent computer system. These 3 tax practitioners caused an estimated harm to the Government of $10.9 million and are currently eligible to represent 261 taxpayers before the IRS. If these three practitioners do not have verifiable licenses and are not under the jurisdiction of the OPR, then the applicable IRS function should further investigate for possible misrepresentation or potential misconduct on the part of a non-licensed practitioner.

OPR management informed us that they might not always receive referrals from the Criminal Investigation Division at the point where they can initiate a proceeding for disreputable conduct against a practitioner. For example, the Criminal Investigation Division can complete an investigation involving a licensed practitioner and refer the case for prosecution to the DOJ and at the same time refer the information to the OPR. However, the OPR will generally not take action on a licensed practitioner until there is a final or decisive violation of Circular 230. Further, we determined that the OPR does not have a consistent process to follow up with the Criminal Investigation Division for referrals received once a final decision is made by the DOJ.

In our prior review, we recommended that the OPR work with other law enforcement agencies, including the DOJ, to improve the referral process by obtaining timely, relevant conviction information for tax crimes and State or Federal convictions involving dishonesty and breach of trust in a format that is useful to the OPR. OPR management agreed in principle with our recommendation, but believed they were doing all that could reasonably be done at that time. We discussed again with OPR management the feasibility of OPR personnel obtaining data readily available within the IRS to identify tax practitioners who have been assessed penalties, received a criminal sentence, or enjoined for potentially disreputable behavior. OPR management agreed that obtaining some available information from IRS systems was a sound approach; however, management stated that this would generally require extensive additional information gathering and case building that is not supported by their current resources. Given the extreme nature of the violations committed by some of the licensed tax practitioners, we believe the IRS needs to develop alternative approaches to protect tax administration and prevent further abuses.



Recommendations

The Director, OPR, should:

Recommendation 4 : Review the eight identified tax practitioners sentenced for abusive tax shelter actions to determine whether additional disciplinary actions are warranted. If the individuals do not fall under the jurisdiction of the OPR, then the Director should refer the cases to the appropriate IRS function for applicable action.
Management's Response : Management agreed with the recommendation. The OPR will review the eight identified tax practitioners subject to criminal prosecution and determine whether additional disciplinary actions are warranted. If the individuals do not fall within the jurisdiction of the OPR, appropriate jurisdictional and disciplinary decisions will be made.

Recommendation 5 : Initiate additional outreach efforts with other IRS functions to increase awareness of the requirement to refer to the OPR for appropriate action licensed tax practitioners involved in potentially disreputable behavior.
Management's Response : Management agreed with the recommendation. The OPR will continue to provide awareness training to both internal and external stakeholders to ensure that licensed tax practitioners involved in potentially disreputable behavior are brought to the attention of the OPR and are appropriately sanctioned.

Recommendation 6 : Develop a methodology, when resources become available, to perform proactive analyses of information available from other IRS functions, including the Modernization and Information Technology Services organization, the Criminal Investigation Division, and the Small Business/Self-Employed Division Lead Development Center, to identify and appropriately address licensed tax practitioners engaged in potentially disreputable activity.
Management's Response : Management agreed with the recommendation. The OPR will look to develop and sustain a more proactive model of case identification and development, as resources permit.



Appendix I


Detailed Objective, Scope, and Methodology


The overall objective was to determine whether the OPR is effectively identifying and taking appropriate actions against those licensed tax practitioners who have employed or promoted abusive tax shelters. To accomplish this objective, we:
I. Determined the procedures and guidance for the OPR and IRS employees regarding the identification, referral, discipline, and monitoring of abusive tax practitioners/preparers.

A. Reviewed Treasury Regulations [e.g., Treasury Department Circular No. 230 (Circular 230)], 1 Delegation Orders, and Revenue Procedures for tax practitioner/preparer requirements and IRS jurisdiction.

B. Reviewed the Internal Revenue Manual for the Large and Mid-Size Business Division, Small Business/Self-Employed Division, and Criminal Investigation Division for requirements to identify and refer abusive tax practitioners/preparers to the OPR. We discussed with IRS functional employees how referrals are developed and sent to the OPR.

C. Discussed with OPR management their current strategic priorities.

D. Obtained workload information for the OPR that included current Business Performance Reviews, staffing information, and budgets.

II. Determined whether the OPR is effectively able to identify or investigate those tax practitioners who have been penalized for tax shelter violations.

A. Obtained an Individual Business Master File 2 extract of all tax shelter and understatement of liability penalties (by IRS Master File penalty reference numbers) assessed during Fiscal Years 2005, 2006, and 2007. We determined the data were reliable by comparing and matching extracted data to online data listed on the IRS Integrated Data Retrieval System. 3

B. Identified licensed practitioners with assessed tax shelter or tax avoidance penalties during Fiscal Years 2005 through 2007 from the IRS Master File extract and discussed with OPR management those tax practitioners who were penalized but were not identified by the OPR and were listed on the CAF without restrictions.

III. Determined whether the OPR is effectively able to identify or investigate those tax practitioners who have been enjoined (Civil Injunction) or convicted for employing or promoting abusive tax shelters.

A. Obtained a database extract from the IRS Small Business/Self-Employed Division Lead Development Center inventory system of individuals who were permanently enjoined for abusive tax shelter promotions, schemes, or transactions during Fiscal Years 2005, 2006, and 2007. We determined the data were reliable by comparing and matching extracted data to online Small Business/Self-Employed Division internet web site data and DOJ internet web site data.

B. Identified licensed practitioners who were enjoined for abusive tax shelter actions during Fiscal Years 2005 through 2007 and discussed with OPR management those tax practitioners who were not identified by the OPR and were listed on the CAF without restrictions.

C. Obtained a database extract from the IRS Criminal Investigation Division inventory system of individuals who were sentenced for abusive tax shelter promotions, schemes, or transactions during Fiscal Years 2005, 2006, and 2007. We determined the data were reliable by comparing and matching extracted data to online Criminal Investigation Division internet web site data and DOJ internet web site data.

D. Identified licensed practitioners who were sentenced for abusive tax shelter actions during Fiscal Years 2005 through 2007 and discussed with OPR management those tax practitioners who were not identified by the OPR and were listed on the CAF without restrictions.



Internal controls methodology

Internal controls relate to management's plans, methods, and procedures used to meet their mission, goals, and objectives. Internal controls include the processes and procedures for planning, organizing, directing, and controlling program operations. They include the systems for measuring, reporting, and monitoring program performance. We determined the following internal controls were relevant to our audit objective: the various IRS operating divisions' policies and procedures for referring to the OPR licensed tax practitioners who were assessed penalties, enjoined, and/or sentenced for abusive tax shelter actions. We evaluated these controls by interviewing management and reviewing applicable information and documents.



Appendix II


Major Contributors to This Report


Nancy A. Nakamura, Assistant Inspector General for Audit (Management Services and Exempt Organizations)

Jeffrey M. Jones, Director

Janice M. Pryor, Audit Manager

Joseph P. Smith, Acting Audit Manager

Mark A. Judson, Lead Auditor

John J. Chiappino, Senior Auditor

Stephanie K. Foster, Senior Auditor

Yasmin B. Ryan, Senior Auditor

Ahmed M. Tobaa, Senior Auditor

Arlene Feskanich, Information Technology Specialist

Martha Stewart, Information Technology Specialist



Appendix III


Report Distribution List


Commissioner C

Office of the Commissioner --Attn: Chief of Staff C

Deputy Commissioner for Operations Support OS

Deputy Commissioner for Services and Enforcement SE

Commissioner, Wage and Investment Division SE:W

Chief Technology OS:CTO

Director, Customer Account Services Consolidation, Wage and Investment Division SE:W

Director, Customer Account Services, Wage and Investment Division SE:W:CAS

Associate Chief Information Officer, Business Systems Development OS:CIO:I:B

Director, Compliance Services, Chief Information Officer OS:CIO:I:B:CS

Chief Counsel CC

National Taxpayer Advocate TA

Director, Office of Legislative Affairs CL:LA

Director, Office of Program Evaluation and Risk Analysis RAS:O

Office of Internal Control OS:CFO:CPIC:IC

Audit Liaisons:
Deputy Commissioner for Operations Support OS

Deputy Commissioner for Services and Enforcement SE

Director, Office of Professional Responsibility SE:OPR



Appendix IV


Outcome Measures


This appendix presents detailed information on the measurable impact that our recommended corrective actions will have on tax administration. These benefits will be incorporated into our Semiannual Report to Congress.



Type and Value of Outcome Measure :
 Taxpayer Burden - Actual; 8,700 taxpayers are being represented by 143 licensed or potentially licensed tax practitioners who have been penalized by the IRS for abusive tax shelter actions (see page 5). 1



Methodology Used to Measure the Reported Benefit:

To evaluate the number of tax practitioners assessed a monetary penalty by the IRS for tax shelter violations, we obtained an IRS Individual Master File 2 database extract of specific tax shelter assessments made during Fiscal Years 2005 through 2007. We found the IRS assessed penalties totaling $82.3 million for tax shelter violations on 1,175 individuals. We then researched the IRS CAF to determine whether any of these individuals had represented taxpayers before the IRS. We also researched State licensing authorities to determine whether any of these individuals were licensed tax practitioners. Of the 1,175 individuals, we identified 280 that could be under the OPR's jurisdiction.

The OPR took action on 137 of the 280 individuals. However, we found that the OPR was not aware of a significant number of licensed tax practitioners the IRS penalized for tax shelter violations. The OPR's inventory system contained no information on 73 (26 percent) of the 280 licensed tax practitioners. These 73 practitioners were penalized a total of $1.8 million for abusive tax shelter actions and are representing 3,867 taxpayers before the IRS. The remaining 70 of the 280 tax practitioners are listed on the CAF as attorneys, certified public accountants, or enrolled agents. However, we could not verify if the information on the CAF was correct based on our review of information maintained by State licensing agencies or the IRS' Enrolled Agent computer system. These 70 tax practitioners were assessed penalties totaling approximately $1.4 million for promoting abusive tax shelters and are currently eligible to interact with the IRS in some capacity for 4,920 taxpayers.



Type and Value of Outcome Measure :
 Taxpayer Burden - Actual; 595 taxpayers are being represented by 9 licensed or potentially licensed tax practitioners who have been enjoined for promotion of an abusive tax shelter scheme or strategy (see page 5).



Methodology Used to Measure the Reported Benefit :

To evaluate the number of tax practitioners permanently enjoined from preparing tax returns, representing taxpayers before the IRS, or from continuing a tax shelter scheme or abusive tax transaction, we obtained an IRS database extract of permanent injunctions and final judgments decreed by United States District Courts against individuals during Fiscal Years 2005 through 2007. 3 We found that the IRS was granted permanent relief or injunctions against 48 individuals for tax shelter issues and/or abusive tax schemes. We researched the State licensing authorities to determine whether any of these individuals were licensed tax practitioners under the OPR's jurisdiction and the CAF to determine whether they represented taxpayers before the IRS.

Of the 48 individuals, we identified 17 that could potentially be licensed tax practitioners. We found that the OPR reviewed and applied sanctions, when applicable, for 8 of the 17 permanently enjoined licensed practitioners. However, for of the 17 licensed tax practitioners, the OPR was unaware that ***** We also could not verify the licensing status for 7 of the 17 practitioners through the State licensing agencies maintained on internet web sites or the IRS' Enrolled Agent computer system. However, these representatives are listed on the CAF with designations as attorneys, certified public accountants, or enrolled agents. These 7 permanently enjoined, potentially licensed practitioners caused an estimated harm to the Government of $13.9 million and are eligible to represent 517 taxpayers before the IRS.



Type and Value of Outcome Measure :
 Taxpayer Burden - Actual; 471 taxpayers are being represented by 8 licensed or potentially licensed tax practitioners who have been sentenced for an abusive tax shelter scheme, strategy, or transaction (see page 5). 4



Methodology Used to Measure the Reported Benefit :

To evaluate the number of sentenced tax practitioners, we obtained and reviewed a Criminal Investigation Division database of individuals who received a final conviction and sentence for a tax-related crime during Fiscal Years 2005 through 2007. We found that 40 individuals were sentenced for tax shelter issues or abusive tax schemes. Of the 40 individuals, we identified 30 that could potentially be licensed tax practitioners. We found that the OPR took action and applied sanctions to 22 of these sentenced tax practitioners.

However, the OPR was unaware of and ultimately had not reviewed five. These 5 licensed tax practitioners were engaged in tax shelter schemes that caused an estimated harm or loss to the Government of $4.4 million and are representing or still eligible to represent 249 taxpayers before the IRS. In addition, we could not verify the licensing status for three of the tax practitioners. However, these representatives are identified on the CAF with designations as attorneys, certified public accountants, or enrolled agents. These 3 individuals caused an estimated harm to the Government of $10.9 million and are still eligible to represent 261 taxpayers before the IRS.



Appendix V


Internal Revenue Code Practitioner Penalties



____________________________________________________________________________________
Code
Section Description Penalty

____________________________________________________________________________________
6700 Promoting abusive tax shelter Lesser of $1,000
or 100 percent
of gross income
derived from the
activity.

____________________________________________________________________________________
6701 Aiding and abetting understatement of tax liability $1,000 per
person per
period.

____________________________________________________________________________________
6707 Failure to furnish information regarding tax shelters Multiple
calculations.

____________________________________________________________________________________
6707A Failure to disclose reportable transaction $10,000/natural
person or
$50,000/other
taxpayer.

____________________________________________________________________________________
6708 Failure to maintain list relating to reportable $10,000 per day
transactions after failure to
provide list.

____________________________________________________________________________________
6694(a) Understatement of taxpayer's liability by Return Preparer $250 per return
or claim.

____________________________________________________________________________________
6694(b) Understatement of taxpayer's liability due to intentional $1,000 per
disregard of rules and regulations or to willful or return or claim.
reckless conduct

____________________________________________________________________________________
Source: Internal Revenue Code.





Appendix VI


Management's Response to the Draft Report


DEPARTMENT OF THE TREASURY INTERNAL REVENUE SERVICE WASHINGTON, D.C. 20224


January 29, 2009


MEMORANDUM FOR MICHAEL R. PHILLIPS DEPUTY INSPECTOR GENERAL FOR AUDIT

FROM: Carolyn Hinchman Gray Acting Director, Office of Professional Responsibility

SUBJECT: Draft Audit Report --Tax Practitioners Promoting Abusive Tax Shelters Are Still Able to Represent Taxpayers Before the Internal Revenue Service (Audit No. 200710041)

I have reviewed the draft report titled "Tax Practitioners Promoting Abusive Tax Shelters Are Still Able to Represent Taxpayers Before the Internal Revenue Service". I concur with your conclusions that abusive tax shelters are an area of concern to Congress and continue to present formidable challenges to the IRS.

The OPR works closely with the other IRS operating divisions to identify practitioner misconduct that has a negative impact on tax administration. In addition, the OPR works closely with the Department of Justice (DOJ) to ensure that Tax Professionals covered by Treasury Department Circular 230 and who engage in the promotion of abusive tax shelters are identified and appropriately sanctioned. As resources are available, we will explore additional methodologies to proactively identify licensed tax practitioners who may be engaged in disreputable activity

Attached is a detailed response outlining our corrective actions. If you have questions, please call me at (202) 622-9730 or Robert Johnson, Senior Management/Program Analyst at (202) 622-8320.

Attachment



Attachment



RECOMMENDATION 1:

Review the 143 identified tax practitioners penalized for abusive tax shelter actions to determine whether additional disciplinary actions are warranted. If the individuals do not fall under the jurisdiction of the OPR, then the Director should refer the cases to the appropriate IRS function for applicable action.



CORRECTIVE ACTIONS;

The Director, Office of Professional Responsibility, will review the 143 identified tax practitioners penalized for abusive tax shelter transactions and take appropriate action. To the extent these practitioners are not within OPR's jurisdiction. OPR will refer the individual to the appropriate IRS function which will be responsible for investigating any potential misconduct on the part of these non-licensed practitioners. OPR will also determine if any of these potentially non-licensed practitioners fall within the criminal jurisdiction of the TIGTA Office of Investigations for misrepresenting their professional status.



IMPLEMENTATION DATE:

By September 30, 2009



RESPONSIBLE OFFICIAL;

Director, Office of Professional Responsibility



RECOMMENDATION 2;

Establish written procedures for controlling and reviewing case referrals for the current inventory system, as well as for the new planned inventory system, to ensure consistent case tracking and processing.



CORRECTIVE ACTION;

The OPR recently completed Internal Revenue Manuals (IRMs) governing the control and processing of each complaint, referral, license application and/or renewal and all other OPR operations including mail processing and case referral receipt/input into OPR's information management system, including both I-Trak and E-Trak.. Specific IRMs were completed for Mail Processing, the Enrolled Practitioner Program, the Case Development & Licensure Branch and Enforcement Branches I and II. The IRMs are currently being reviewed by OPR's newly appointed Information Management Document (IMD) Coordinator and will be forwarded for approval and publishing.



IMPLEMENTATION DATE:

June 30, 2009



RESPONSIBLE OFFICIAL:

Director, Office of Professional Responsibility



RECOMMENDATION 3:

The Director, OPR, should review the nine identified tax practitioners permanently enjoined for abusive tax shelter actions to determine whether additional disciplinary actions are warranted. If the individuals do not fall under the jurisdiction of the OPR, then the Director should refer the cases to the appropriate IRS function for applicable action.



CORRECTIVE ACTION:

The Director, OPR, will ensure that each of the nine cases involving abusive tax shelter injunctions are reviewed for appropriate action. The OPR conducted extensive liaison with the Department of Justice (DOJ) which resulted in DOJ hosting a nationwide training session for its attorneys who handle IRS injunction cases. One of the purposes of the training was to ensure that when DOJ enjoins a practitioner from "promoting tax shelters" or "preparing tax returns", the injunction language also includes a prohibition against "practicing before the IRS". The Service's Lead Development Center (LDC) subsequently reviewed all previous injunctions against preparation to ensure that those involving practitioners also included the new injunction language. OPR will review each of these nine cases for appropriate action.



IMPLEMENTATION DATE;

September 30, 2009



RESPONSIBLE OFFICIAL:

Director, Office of Professional Responsibility



RECOMMENDATION 4:

Review the eight identified tax practitioners sentenced for abusive tax shelter actions to determine whether additional disciplinary actions are warranted. If the individuals do not fall under the jurisdiction of the OPR, then the Director should refer the cases to the appropriate IRS function for applicable action.



CORRECTIVE ACTION:

The Director, OPR, will review the eight identified tax practitioners subject to criminal prosecution and determine whether additional disciplinary actions are warranted. If these individuals do not fall within the jurisdiction of OPR, appropriate jurisdictional and disciplinary decisions will be made.



IMPLEMENTATION DATE:

September 30, 2009



RESPONSIBLE OFFICIAL:

Director, Office of Professional Responsibility



RECOMMENDATION 5:

Initiate additional outreach efforts with other IRS functions to increase awareness of the requirement to refer to the OPR for appropriate action licensed tax practitioners involved in potentially disreputable behavior.



CORRECTIVE ACTION:

The OPR continues to provide awareness training to both internal and external stakeholders to ensure licensed tax practitioners involved in potentially disreputable behavior are brought to the attention of the OPR and are appropriately sanctioned. OPR recently completed Area Reviews/Visitations of several Area PSP Offices and met with numerous Return Preparer Coordinators (RPCs) as part of a review/outreach process to evaluate and enhance the effectiveness and quality of OPR referrals. OPR personnel attend annual RPC Training events and training/liaison opportunities with LDC personnel. OPR continues to provide training involving disreputable conduct scenarios at the IRS' Nationwide Tax Forums on an annual basis. Feedback from these presentations has been overwhelmingly positive. OPR is currently exploring options associated with the dedication of an FTE to a specialized communications position.



IMPLEMENTATION DATE;

September 30, 2009



RESPONSIBLE OFFICIAL:

Director. Office of Professional Responsibility



RECOMMENDATION 6:

Develop a methodology, when resources become available, to perform proactive analyses of information available from other IRS functions, including the Modernization and Information Technology Services organization, the Criminal Investigation Division, and the Small Business/Self-Employed Division Lead Development Center, to identify and appropriately address licensed tax practitioners engaged in potentially disreputable activity.



CORRECTIVE ACTION:

As resources permit, OPR will increasingly look to develop and sustain a more proactive model of case identification and development.



IMPLEMENTATION DATE;

June 30, 2010



RESPONSIBLE OFFICIAL:

Director, Office of Professional Responsibility

1 See Appendix IV for more detailed information.

1 Tax Haven Abuses: The Enablers, the Tools, and Secrecy (United States Senate Permanent Subcommittee on Investigations, dated August 1, 2006).

2 An injunction is a writ or order from a court that enjoins or prohibits a person or group from carrying out a given action, or ordering a given action to be done. The IRS must initiate a proceeding for an injunction to be imposed against a taxpayer.

3 If an abusive tax shelter involves a non-licensed authorized representative such as an unenrolled paid preparer, then the IRS Small Business/Self-Employed Division is responsible for investigating and regulating the possible misconduct.

4 Regulations Governing the Practice of Attorneys, Certified Public Accountants, Enrolled Agents, Enrolled Actuaries, Enrolled Retirement Plan Agents, and Appraisers before the Internal Revenue Service.

5 The American Jobs Creation Act of 2004 (Pub. L. No. 108-357, 118 Stat. 1418) was signed into law on October 22, 2004.

6 The Internal Revenue Manual is the official source for IRS policies, directives, guidelines, procedures, and delegations of authority in the IRS.

7 The IRS database that maintains transactions or records of individual tax accounts.

8 See Appendix V for a list of penalties.

9 A computerized system of records that houses authorization information from powers of attorney, tax information authorizations, and estate tax returns.

10 The penalties included intentional disregard of rules and regulations, willful and reckless conduct, as well as aiding and abetting understatement of tax liability.

11 The Enrolled Practitioner Program System is used to record and monitor individuals granted enrolled agent status by the IRS.

12 The IRS OPR oversees the regulation of practice of attorneys, certified public accountants, enrolled agents, and other licensed professionals. If an abusive tax shelter involves a non-licensed authorized representative such as an unenrolled paid preparer, then the IRS Small Business/Self-Employed Division will investigate and/or regulate the possible misconduct.

13 The Office of Professional Responsibility Can Do More to Effectively Identify and Act Against Incompetent and Disreputable Tax Practitioners (Reference Number 2006-10-066, dated March 2006).

14 The IRS Small Business/Self-Employed Division has a Lead Development Center that maintains a database for abusive tax transactions worked and completed.

15 The Criminal Investigation Division database extract was pulled from its Criminal Investigation Management Information System.

1 Regulations Governing the Practice of Attorneys, Certified Public Accountants, Enrolled Agents, Enrolled Actuaries, Enrolled Retirement Plan Agents, and Appraisers before the Internal Revenue Service (Rev. April 2008).

2 The IRS database that stores various types of taxpayer account information. This database includes individual, business, and employee plans and exempt organizations data.

3 IRS computer system capable of retrieving or updating stored information; it works in conjunction with a taxpayer's account records.

1 ***** To avoid double counting, we adjusted the totals for taxpayers represented by penalized practitioners (8,787 - 87 = 8,700 taxpayers).

2 The IRS database that maintains transactions or records of individual tax accounts.

3 The IRS Small Business/Self-Employed Division has a Lead Development Center that maintains a database for abusive tax transactions worked and concluded.

4 ***** To avoid double counting. we adjusted the totals for taxpayers represented by sentenced practitioners (510 - 39 = 471 taxpayers).

IRS focus on international tax issues

Shulman Says IRS Focus Includes International Tax Abuses and Taxpayers' Economic Struggles


The IRS has made international tax abuses a major focus, IRS Commissioner Douglas H. Shulman stated on February 25. At the same time, the IRS is trying to help compliant taxpayers deal with the fallout from current economic struggles. Shulman spoke at the Tax Council Policy Institute Symposium on resolving cross-border tax controversies.



There has been a tremendous increase in global activity, not only for large business but for small corporations and individuals, Shulman declared. The number of multinational corporations has increased from 3,000 in 1990 to over 65,000; foreign tax credit claims have jumped 70 percent and cross-border capital flows increased to $8.2 trillion.


International Issues


Shulman has made international issues a major IRS focus. The average citizen must believe that corporations are playing by the rules; there is "little tolerance" for tax avoidance, Shulman said. The IRS has an aggressive agenda in the international area, including increased guidance, challenging taxpayers who "push the envelope," and understanding complexity, which creates a greater potential for tax evasion. IRS initiatives include offshore tax avoidance, the qualified intermediary (QI) program, global securities dealing, hybrid structures and expanding international collaboration through the Joint International Tax Shelter Information Centre (JITSIC).



The IRS is engaged in a multi-year effort to develop experts on international issues through increased hiring, training and retention. During the current budget freeze, Shulman moved funds from other areas to maintain this effort.



The Service is focusing on offshore institutions that facilitate offshore tax avoidance and will continue to pressure taxpayers on this issue. Presumably, this focus includes recent activities, such as Swiss banks, offshore bank accounts and John Doe summons enforcement efforts. Shulman again stressed the IRS's voluntary disclosure programs for settling potential liabilities. He noted that offshore tax abuse is also a focus of President Obama.



The IRS is examining and evaluating the QI program, a 10-year-old program that he described as an opt-in system for taxpayer withholding on foreign income. Shulman said it is a good program that has seen some high-profile lapses; again, an apparent reference to Swiss banks and UBS AG in particular. He noted that proposed amendments to the QI program would require accounting firms to oversee QIs and to report to the IRS any internal control failures. The IRS continues to be interested in comments in this area. Other possible changes include enhanced information reporting and enhanced documentation retention policies.



Shulman said that the IRS would like to see an enhanced statute of limitations of at least six years for offshore cases. This would be particularly helpful for cases involving bank secrecy jurisdictions, he commented.



For larger corporate taxpayers, a concern is transfer pricing and other income shifting to low- or no-tax areas. Shulman noted that there is proposed guidance dealing with contract manufacturing and efforts to avoid subpart F income. Global securities dealing is another area of concern, again involving potential income-shifting to low-tax jurisdictions.



The IRS is also looking at hybrid structures, both entities and instruments, which taxpayers may use to exclude income or to take a double deduction. Foreign tax credit generator transactions may also be used improperly to generate a deduction for two taxpayers based on the same payment. The IRS has a docketed case on this latter issue, he indicated.


Taxpayers in Distress


Taxpayers are struggling, so the IRS needs to be attuned and to respond in real time to economic problems, Shulman pointed out. With corporations in a loss situation, the IRS needed to look at the processing of net operating losses, particularly corporate refunds on IRS Form 1139. So the IRS increased staff in that area and reexamined its procedures. The IRS is also focusing on the tax implications of bankruptcies and business workouts.



On the individual front, the IRS has new initiatives to help keep compliant taxpayers in the system during a rough patch when their income has dropped and they may have lost their job. "We want to do the right thing with people in economic distress," Shulman said. One step is to give more discretion to IRS collection staff addressing distressed taxpayer situations. Another step is to beef up the real estate valuation section and to step up reviews of offers-in-compromise that are initially rejected.



The IRS is taking the lead on administering a number of programs under the new economic stimulus act, Shulman noted, including the Making Work Pay Credit, the NOLs for small businesses, expanded COBRA benefits, and numerous business benefits, such as energy deductions and credits. Shulman said the IRS estimates it will issue $330 billion in refunds in 2009.

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The above statement was released today. I am personally aware of the IRS focus on offshore or international tax issues. Those transactions are "red flag" audit issues.

My advice for tax return preparers is to put a lot of time into those tax return issues. Assume that those transactions will be examined. I also recommend disclosure of these red flag issues to take advantage of the "reasonable basis" standard. Curiously, without disclosure I believe any error on this high visibility issue would make a return preparer vulnerable to the "reckless" $5,000 penalty under 6694(b).

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On another topic, I get a lot of personal comment sent to ab@irstaxattorney.com.

Let me know what topics are of interest to any of those who follow this blog, including any of the hot current tax issues.

This blog has picked up a large following. An average of about 50 new IP addresses connect to this blog every day in addition to the current body of tax professionals.

Feel free to disagree or add to any of the discussion. In addition, any of the professionals following this blog can offer your own blog data.

I welcome technical contributions of any of the growing body of those who read this blog.

6694 - written determinations

Substantial authority may be established from written determinations from the IRS as the result of requests for a "ruling" issued by the office of the IRS Chief Counsel.

Reg sections 1.6663-4(d)(3)(iv)(A) and 301.6110-2(d) and (e) are uploaded below.

The advantage of an advance ruling from the IRS on any technical issue is that return preparers and their clients can rely on that determination even if that determination turns out to be wrong. It provides a certain way to avoid return preparer penalties and client penalties. More importantly, it will prevent penalties on clients. In corporate reorganizations and similar transactions, it will provide certainty at the corporate level and the shareholder level.

This procedure for should be transactions or tax issues that are highly complex and involve transactions with large dollar impact or high risk tax positions. Obviously, the IRS has the option or ruling favorably or unfavorably. My advice is to first get an opinion from a tax expert to evaluate the changes of getting a favorable ruling from the IRS National Office.

Although the regulations do not address 6694(b), it is my opinion that it would be impossible for the IRS to assess penalties under section 6694(b) with a favorable ruling from the IRS National Office.



1.6662-4. Substantial understatement of income tax

(d) Substantial authority

(3) Determination of whether substantial authority is present

(iv) Special rules

(A) Written determinations. --There is substantial authority for the tax treatment of an item by a taxpayer if the treatment is supported by the conclusion of a ruling or a determination letter (as defined in §301.6110-2(d) and (e)) issued to the taxpayer, by the conclusion of a technical advice memorandum in which the taxpayer is named, or by an affirmative statement in a revenue agent's report with respect to a prior taxable year of the taxpayer ("written determinations"). The preceding sentence does not apply, however, if --

(1) There was a misstatement or omission of a material fact or the facts that subsequently develop are materially different from the facts on which the written determination was based, or

(2) The written determination was modified or revoked after the date of issuance by --

(i) A notice to the taxpayer to whom the written determination was issued,

(ii) The enactment of legislation or ratification of a tax treaty,

(iii) A decision of the United States Supreme Court,

(iv) The issuance of temporary or final regulations, or

(v) The issuance of a revenue ruling, revenue procedure, or other statement published in the Internal Revenue Bulletin.

§301.6110-2. Meanings of terms

(d) Ruling. --A "ruling" is a written statement issued by the National Office to a taxpayer or to the taxpayer's authorized representative (as such term is defined in §601.201(e)(7) of this chapter) on behalf of the taxpayer, that interprets and applies tax laws to a specific set of facts. A ruling generally recites the relevant facts, sets forth the applicable provisions of law, and shows the application of the law to the facts.

(e) Determination letter. --A "determination letter" is a written statement issued by a district director in response to a written inquiry by an individual or an organization that applies principles and precedents previously announced by the National Office to the particular facts involved.
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Continue to send confidential questions to ab@irstaxattorney.com for those who do not want to upload those questions to this blog.

6694 - substantiation issues

6694 issues will surfact on substantiation issues. For that reason, I upload current cases as a "heads up" on issues that require substantiation and, with that, the necessary "substantial authority." For example, there is a good discussion of an abandonment loss - that justification must be made factuallly and technically, under the statute and regulations in order to avoid the 6694 penalty

In this case married taxpayers were found not entitled to a deduction for the employee business travel expenses of the husband, but were entitled to deductions for some of their other unreimbursed business expenses, charitable contributions, and an abandonment loss. First, the husband who was an airline mechanic was not entitled to deductions for vehicle, meal and lodging expenses because he was not "away from home" when the expenses were incurred. Second, the couple was denied most of their claimed deductions for numerous unreimbursed business expenses including union dues, purchase of a computer, cell phone and Internet services, uniform maintenance, and depreciation. Third, the taxpayers were entitled to a deduction for a cash contribution to a charitable organization of less than $250 where they substantiated the donation with a cancelled check. However, for their charitable donations of noncash property in excess of $250, the couple failed to provide a contemporaneous written acknowledgment of the donation from the donee that met the substantiation requirements. Finally, the taxpayer's were entitled to an abandonment loss for amounts they had invested to purchase a franchise in a restaurant chain.


Abdasslam and Susan Alami El Moujahid v. Commissioner, Dkt. No. 20795-07 , TC Memo. 2009-42, February 23, 2009.











MEMORANDUM FINDINGS OF FACT AND OPINION



VASQUEZ, Judge: Respondent determined a $2,480 deficiency in petitioners Abdasslam (Mr. Alami) and Susan (Ms. Alami) Alami El Moujahid's Federal income tax for 2004 and a $9,021 deficiency in petitioners' Federal income tax for 2005. After concessions by both parties, 1 the issues left for decision are: (1) Whether petitioners are entitled to unreimbursed employee business travel expense deductions for 2004 and 2005; (2) whether petitioners are entitled to other unreimbursed employee business expense deductions for 2004 and 2005; (3) whether petitioners are entitled to charitable contribution deductions for 2004 and 2005; and (4) whether petitioners are entitled to an abandonment loss deduction for 2005.



On the basis of the analysis herein, we find: (1) Petitioners are not entitled to a deduction for the employee business travel expenses incurred in 2004 or 2005; (2) petitioners are entitled to deductions for some of the other unreimbursed business expenses incurred in 2004 and 2005; (3) petitioners are entitled to deductions for some of the charitable contributions claimed to have been made in 2004 and 2005; and (4) petitioners are entitled to an abandonment loss deduction in 2005.





FINDINGS OF FACT



Some of the facts have been stipulated and are so found. The stipulation of facts and the attached exhibits are incorporated herein by this reference. Petitioners resided in Minnesota at the time their petition was filed. For 2004 and 2005 petitioners filed joint Federal income tax returns.




I. Expenses Incurred in Newark and Portland


Mr. Alami worked as an airline mechanic for Northwest Airlines, Inc. (NWA), from 1995 to July 2005. Petitioners claimed deductions on their 2004 and 2005 tax returns related to Mr. Alami's employment with NWA. In both years petitioners claimed deductions for vehicle, travel, meals, and entertainment expenses arising from Mr. Alami's work locations in Newark, New Jersey, and Portland, Oregon.



Mr. Alami was a member of the Aircraft Mechanics Fraternal Association (AMFA) (a union that contracted with NWA), and he was subject to a seniority-based employment displacement system. Mr. Alami was subject to displacement from employment should a member with higher seniority bump him from his position.



NWA began reducing the number of mechanics it employed at the end of March 2003. In May 2003 Mr. Alami lost his position in Minneapolis, Minnesota, when a senior mechanic bumped him. Pursuant to the system, Mr. Alami had 5 days to decide between the options of being laid off or exercising his seniority to displace a junior employee. Mr. Alami wanted to stay in Minneapolis but was unable to use his seniority to get a position in Minneapolis. Instead, he used his seniority to get a position in Newark, New Jersey.



A. Newark



Mr. Alami worked in Newark, New Jersey, from May 2003 to July 2004. At the time Mr. Alami took the position in Newark, he did not know how long he would remain there. In a written statement, the AMFA said the duration of Mr. Alami's employment in Newark was "foreseeably limited" and "temporary". In a written statement, NWA stated the position he took in Newark was "temporary".



Mr. Alami rented a room in Newark, and his family stayed in Minnesota while he worked in Newark. Mr. Alami flew home to Minneapolis from Newark almost every weekend to see his family. Petitioners claimed deductions for vehicle, travel, meals, and entertainment expenses on Form 2106-EZ, Unreimbursed Employee Business Expenses, in 2004. Mr. Alami incurred these expenses while working in Newark. The following is a table of the Newark expenses:





Item Amount

Vehicle (6,410 miles @ $.375) $2,404

Travel expenses (while away from
home) 3,200

Meals and entertainment 2,964

Total $8,568





B. Minneapolis



In July 2004 Mr. Alami was recalled to Minneapolis to work as a lead mechanic from July 2004 to June 2005. In a written statement, NWA stated the position he took in Minneapolis was "temporary".



In June 2005 he was bumped again. As before Mr. Alami had 5 days to decide between the options of being laid off or exercising his seniority to displace a junior employee. Mr. Alami wanted to stay in Minneapolis but was unable to use his seniority to get a position. Instead, he used his seniority to get a position in Portland, Oregon.



C. Portland



Mr. Alami worked in Portland, Oregon, from June to July 2005. At the time he took the position in Portland, he did not know how long he would remain there. In a written statement, the AMFA said the duration of Mr. Alami's employment in Portland was "foreseeably limited" and "temporary".



Petitioners claimed deductions for vehicle, travel, meals, and entertainment expenses on Form 2106-EZ in 2005. These were expenses Mr. Alami incurred while working in Portland. The following is a table of the Portland expenses:





Item Amount

Vehicle (5,135 miles @ $.405) $2,080

Travel expenses (while away from
home) 1,400

Meals and entertainment 716

Total $4,196





In July 2005 Mr. Alami's position with NWA was eliminated, he was unable to use his seniority to get another position with NWA, and his employment with NWA ended.




II. Other Unreimbursed Employee Business Expenses Claimed


In 2004 and 2005 petitioners claimed deductions for other unreimbursed employee business expenses they had incurred.



A. Mr. Alami's NWA Employment Expenses



Mr. Alami was employed by NWA during all of 2004 and in 2005 until July. Petitioners claimed employee business expense deductions for paying union dues, purchasing a computer, Internet service, cell phone service, tools, maintaining Mr. Alami's uniforms, and depreciation.



In both 2004 and 2005 petitioners claimed a deduction for Mr. Alami's union dues. In 2004 petitioners claimed a $1,404 deduction for union dues, and respondent conceded that petitioners were entitled to a $761 deduction for union dues. In 2005 petitioners claimed a $1,044 deduction for union dues, and respondent conceded that petitioners were entitled to a $938 deduction for union dues. Petitioners submitted the "dues" portion of Mr. Alami's union contract and a "Dues Rate Increase-Effective May 12, 2001" in support of such expenses.



In 2004 petitioners claimed a deduction for purchasing a computer for Mr. Alami to use in his Newark apartment in the course of his employment with NWA. NWA required employees to check for flights and to submit their expenses online but did not require employees to own a computer. Petitioners also incurred the expense of providing Internet service for the computer.



In both 2004 and 2005 petitioners claimed a deduction for cell phone use by Mr. Alami. Among the reasons Mr. Alami needed the cell phone was that it enabled him to be reached by NWA. Specifically, in Newark Mr. Alami needed the cell phone because he did not have a phone in the room he rented. Mr. Alami was not required by NWA to have a cell phone.



In 2005 petitioners claimed a deduction for purchasing tools to use in the course of Mr. Alami's employment with NWA.



In 2005 petitioners claimed a deduction for cleaning Mr. Alami's work uniforms. Mr. Alami was issued a uniform by NWA to wear in the course of his employment. Mr. Alami was responsible for cleaning his uniform. Mr. Alami provided a uniform maintenance schedule for 2005 that claimed he washed his work shirts 10 times a month and his work pants 4 times a month for the 12 months of 2005. Each load had a unit cost of $1.50.



Petitioners claimed a deduction in 2004 for depreciation in the total amount of $685 for equipment in the amount of $156 and a computer in the amount of $529. Petitioners presented no evidence of the use of such depreciated items.



Petitioners claimed a deduction of $176 in 2005 for depreciation of a computer. Petitioners presented no evidence of the use of the computer.



B. Mr. Alami's Soccer Coach Employment Expenses



Mr. Alami became employed as a soccer coach in the school district of Lakeville, Minnesota, during 2005 and earned $2,398. Petitioners claimed a deduction of $550 for unreimbursed soccer coaching expenses Mr. Alami incurred in 2005.



Petitioners did not produce receipts for expenses incurred but did submit a photo showing the items Mr. Alami bought. Petitioners did not produce any evidence that such purchases were required by Mr. Alami's employer.



C. Ms. Alami's Nurse Employment Expenses



Ms. Alami worked as a registered nurse during 2004 and 2005 in the pediatric intensive care unit of Children's Hospital in Minneapolis. Ms. Alami was responsible for purchasing her uniforms, and she was not reimbursed by her employer for such purchases. She was required to purchase and wear royal/marine blue scrubs to work. Ms. Alami was also responsible for cleaning her own uniforms.



Ms. Alami was periodically required by her employer to be on call. While on call, Ms. Alami had to arrive at the hospital within a certain window of time. Ms. Alami's employer did not require her to own a cell phone; but among the reasons she purchased a cell phone was that she would not have to wait by her home phone while on call.



In 2004 petitioners claimed a $2,048 deduction for Ms. Alami's unreimbursed employee business expenses. These claimed expenses consisted of $360 in cell phone expenses, $500 in job-related education expenses, $255 in financial publication expenses, $88 in license expenses, $325 in uniform expenses, and $520 in uniform maintenance expenses. Respondent conceded the license expenses and uniform maintenance expenses after the expenses were combined with Mr. Alami's uniform maintenance expenses for 2004.



In 2005 petitioners claimed a $775 deduction for Ms. Alami's unreimbursed employee business expenses. These claimed expenses consisted of $255 in publications expenses and $520 in uniform maintenance expenses. Respondent conceded $260 of the uniform maintenance expenses.




>III. Charitable Contribution Deductions


Petitioners claimed a charitable contribution deduction of $2,735 in 2004. Petitioners claim to have contributed $1,885 in cash and $850 in noncash. Petitioners claim to have made other than cash contributions of clothing and miscellaneous household goods with a value of $500 to the Goodwill Industries in Apple Valley, Minnesota, and clothing and miscellaneous household goods with a value of $350 to the Veterans Association in Minneapolis, Minnesota. Petitioners said they used the "thrift shop value" method to determine the value of the contributions. Respondent conceded $500 of the noncash charitable contributions petitioners claimed.



Petitioners claimed a charitable contribution deduction of $1,890 in 2005. Petitioners claim to have contributed $1,000 in cash and $890 other than cash. Petitioners claim to have made noncash contributions of clothing and miscellaneous household goods with a value of $890 to the Veterans Association in Minneapolis, Minnesota. Again, petitioners used the "thrift shop value" method to arrive at the amount of the contribution.



Petitioners produced a copy of a $100 check donation to the Islamic Relief Fund in 2004. They also produced the following: (1) An undated receipt for a bag of clothing and miscellaneous items donated to the Vietnam Veterans of America, (2) a receipt for a bag of clothing and miscellaneous items donated to the Lupus Foundation in September 2004, (3) a blank donation receipt from the Veteran's Thrift Store with a "10-01" date, (4) a handwritten list of what was included in 2004 for noncash donations with an estimate of each item's value, (5) a handwritten list of what was included in 2005 for noncash donations with an estimate of each item's value, and (6) a 2002 value guide for used clothing and other items commonly donated to charity.




IV. Quiznos Franchise


Petitioners paid a $25,000 nonrefundable franchise fee to Quiznos Franchising, L.L.C. (Quiznos), on October 27, 2003, with the intent of opening up a Quiznos restaurant. The Quiznos franchise agreement stated that petitioners would execute a lease for a location within 1 year from the date the agreement was signed. It also allowed the franchisor (Quiznos) to extend this period by 3 months when events outside of the franchisees' (petitioners') control occurred in selecting a location. In January 2004 petitioners paid $750 to form the limited liability corporation Casa Star, Inc., to run their Quiznos restaurant.



Pursuant to petitioners' franchise agreement, petitioners were to begin looking for potential store locations but were not permitted to have any direct contact with owners or real estate agents in arranging the store location. Quiznos was to handle the leasing arrangements.



Petitioners began looking for a location for their Quiznos restaurant immediately after paying their franchise fee. The location of petitioners' Quiznos restaurant was supposed to be in Lakeville, Minnesota (a suburb of Minneapolis where petitioners resided). After two Quiznos restaurants had opened in Lakeville, petitioners expanded their search for a location in the entire Twin Cities area because petitioners did not think there was a sufficient business base to support a third (their) Quiznos restaurant in Lakeville, Minnesota.



Petitioners began working with a representative of Quiznos (Quiznos representative) to find and make arrangements for a location for their store in October 2003 and continued their efforts through 2004. Petitioners would call the Quiznos representative to try and get a location for their Quiznos restaurant, and weeks, sometimes months, would go by without a response. Petitioners would also e-mail the Quiznos representative and would not receive a response.



In 2005 petitioners discovered many Quiznos restaurants were bankrupt or were close to filing for bankruptcy. Petitioners also discovered a class action lawsuit had been filed against Quiznos by some Quiznos restaurant owners. The lawsuit's allegations focused on Quiznos's "conduct in selling franchises throughout the United States and its post-contractual efforts to bilk its franchisees through a scheme to overcharge for the essential goods, supplies, services and equipment necessary to run a Quiznos franchise."



When Quiznos did respond to petitioners' inquiries, Quiznos encouraged petitioners to buy an existing restaurant that was for sale by the owner. Petitioners had already learned that similar existing locations were not turning a profit, failing, and close to bankruptcy. Petitioners had spoken with other Quiznos owners and discovered the other franchise owners had put $250,000 into their store, in addition to the franchise fee of $25,000, only to have it go bankrupt.



Petitioners believed that Quiznos's structure prevented the restaurants from being profitable because Quiznos required store owners to purchase everything through specific suppliers. As of December 5, 2005, petitioners no longer wanted to open a Quiznos restaurant because they thought it was not worth the additional $250,000 investment necessary to actually open the restaurant.



Petitioners contacted the Quiznos representative in 2005 to ask that their $25,000 franchise fee be refunded. The Quiznos representative refused to refund petitioners' money. Petitioners asked for Quiznos's refusal to refund the franchise fee to be put in writing, but the Quiznos representative would not provide the refusal in writing and told petitioners to contact Quiznos's corporate office. Petitioners contacted Quiznos's corporate office and did not receive a response.



When petitioners did not receive a response to their request for a refund of the franchise fee, petitioners contacted the attorney general of Minnesota (attorney general). Petitioners did not hire an attorney because they could not afford one. Petitioners did not attempt to join in the class action lawsuit because the participants were Quiznos restaurant owners who had already opened a store, and there was a fee for joining the lawsuit.



The attorney general wrote a letter to Quiznos on October 4, 2005, requesting a written response to petitioners' request for a refund in 10 days. Quiznos did not timely respond, and the attorney general wrote another letter to Quiznos requesting a response. Quiznos responded on October 31, 2005, but did not address whether petitioners would be refunded their money. Petitioners contacted the attorney general after receiving a copy of Quiznos's response, and petitioners' letter was forwarded to Quiznos by the attorney general on November 14, 2005. In a letter dated December 2, 2005, Quiznos refused to refund petitioners' franchise fee of $25,000. The attorney general forwarded this letter to petitioners on December 5, 2005. Petitioners have taken no further action to try to procure a refund of the franchise fee.



Petitioners claimed a $25,750 abandonment loss deduction on their 2005 tax return for the $25,000 Quiznos franchise fee and for the $750 they paid to incorporate Casa Star, Inc. Petitioners also claimed a $1,667 depreciation deduction for their Quiznos franchise. Petitioners did not take any actions to formally dissolve Casa Star, Inc. Petitioners were unaware that any action had to be taken to dissolve Casa Star, Inc., and do not know whether or not Casa Star, Inc., remains active today.





OPINION



Petitioners have not claimed that they satisfied the requirements of section 7491(a) to shift the burden of proof to respondent with regard to any factual issue. Accordingly, petitioners bear the burden of proof. See Rule 142(a).



Deductions are a matter of legislative grace, and the taxpayer has the burden of showing that he is entitled to any deduction claimed. Id.; New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).




I. Traveling Expenses Incurred in Newark and Portland


A taxpayer's expenses for his own food and lodging are "personal, living, and family expenses" within the meaning of section 262(a) and therefore nondeductible unless a deduction is expressly permitted by some other section. See sec. 1.262-1(b)(3), (5), Income Tax Regs. Section 162(a) permits a taxpayer to deduct ordinary and necessary traveling expenses (including meals and lodging) incurred during the taxable year in carrying on any trade or business if: (1) The expense is incurred "while away from home", and (2) the expense is incurred in the pursuit of a trade or business. See also Commissioner v. Flowers, 326 U.S. 465, 470 (1946).



In order to determine whether an expense is incurred away from home, it is necessary to determine the location of the taxpayer's home. Hantzis v. Commissioner, 638 F.2d 248 (1st Cir. 1981), revg. T.C. Memo. 1979-299. In the context of section 162(a)(2), a taxpayer's home generally refers to the area of a taxpayer's principal place of employment, whether or not in the vicinity of the taxpayer's personal residence. Daly v. Commissioner, 72 T.C. 190, 195 (1979), affd. 662 F.2d 253 (4th Cir. 1981); Kroll v. Commissioner, 49 T.C. 557, 561-562 (1968). Accordingly, when a taxpayer's principal place of employment changes but the taxpayer does not change the location of his permanent personal residence, the taxpayer's home for purposes of section 162 generally changes to the taxpayer's new principal place of business.



An exception to the general rule in defining a taxpayer's home may exist where the taxpayer has accepted "temporary" employment away from his permanent personal residence. Peurifoy v. Commissioner, 358 U.S. 59, 60 (1958). In that event the taxpayer's tax home may remain in the area of his permanent personal residence so that he is "away from home" while stationed at the temporary job site. If such employment is found to be "indefinite" or "indeterminate" rather than temporary, the general rule will classify a taxpayer's tax home as the area of the taxpayer's principal place of employment. Kroll v. Commissioner, supra at 562. Whether employment is temporary, indefinite, or indeterminate is a question of fact. Peurifoy v. Commissioner, supra at 61. However, section 162(a) provides that a taxpayer shall not be treated as being temporarily away from home during any period of employment if such period exceeds 1 year.



"[I]n the pursuit of a trade or business" has been read to mean: "The exigencies of business rather than the personal conveniences and necessities of the traveler must be the motivating factors." Commissioner v. Flowers, 326 U.S. at 474.



This Court previously has dealt with the question of whether bumped NWA airline mechanics are entitled to deduct vehicle/lodging/meal expenses incurred while working away from their primary residences. See Riley v. Commissioner, T.C. Memo. 2007-153; Wilbert v. Commissioner, T.C. Memo. 2007-152, affd. 553 F.3d 544 (7th Cir. 2009); Farran v. Commissioner, T.C. Memo. 2007-151; Bogue v. Commissioner, T.C. Memo. 2007-150; Stockwell v. Commissioner, T.C. Memo. 2007-149. In all five aforementioned NWA cases, we disallowed deductions claimed by taxpayers because in each case there were no business exigencies for the taxpayers to maintain their primary residence in the Minneapolis area away from their place of employment. Accordingly, the taxpayers had not maintained their residences in the pursuit of business. See Riley v. Commissioner, supra; Wilbert v. Commissioner, supra; Farran v. Commissioner, supra; Bogue v. Commissioner, supra; Stockwell v. Commissioner, supra. This conclusion was recently affirmed by the Court of Appeals for the Seventh Circuit in Wilbert v. Commissioner, 553 F.3d 544 (7th Cir. 2009).



A. Newark



Mr. Alami's employment in Newark lasted approximately 14 months (May 2003 through July 2004). Section 162(a) provides that a taxpayer shall not be treated as being temporarily away from home during any period of employment if such period exceeds 1 year. Because Mr. Alami was not temporarily away from home when he was working in Newark, his tax home shifted to Newark. See Peurifoy v. Commissioner, supra at 60-61. Accordingly, Mr. Alami was not away from home when he incurred the Newark expenses and petitioners may not deduct the Newark expenses as section 162(a)(2) traveling expenses.



B. Portland



After Mr. Alami was bumped from Newark, New Jersey, he became employed with NWA in Minneapolis and worked there from July 2004 until June 2005. In June 2005 when Mr. Alami was bumped again from his position in Minneapolis, he was able to secure a position in Portland. He worked in Portland from June to July 2005, when he lost his job with NWA. During 2005 Mr. Alami also worked in the Minneapolis area as a soccer coach for the Independent School District of Lakeville, Minnesota.



Whether his position in Portland was temporary is a question of fact. Mr. Alami's position in Portland lasted less than 2 months. However, we need not decide whether Mr. Alami's employment in Portland was temporary because he did not maintain his Minneapolis residence in the pursuit of business.



In order for Mr. Alami's Portland expenses to be deductible, he must have maintained his Minneapolis area residence in the pursuit of a trade or business. In Wilbert, Stockwell, Bogue, Farran, and Riley, we concluded that none of the taxpayers had maintained their Minneapolis area homes in the pursuit of business. In all five cases, after the taxpayers had been bumped from Minneapolis to places of employment outside of Minneapolis, we noted that the taxpayers' chances of becoming employed by NWA in Minneapolis (again) depended on NWA's needs. We concluded it was unforeseeable that any of the taxpayers would be able to return to employment in Minneapolis at any time because of the seniority system. Accordingly, we concluded that the taxpayers maintained homes in the Minneapolis area for personal reasons. This reasoning recently was affirmed by the Court of Appeals for the Seventh Circuit in Wilbert v. Commissioner, 553 F.3d at ___ (slip op. at 10), when the court stated: "We might well have a 20-different case if Wilbert had had a firm, justified expectation of being restored to his job at the Minneapolis airport within a short time of his initial layoff."



The circumstances in this case are most analogous to those in Wilbert. The taxpayer in Wilbert had a real estate business 2 in addition to his employment with NWA, and the taxpayer's wife was employed intermittently in the Minneapolis area. We concluded that because the taxpayer's principal employment was with NWA and not his real estate business, the latter was not a significant factor in our analysis. Wilbert v. Commissioner, T.C. Memo. 2007-152 n.5. This reasoning was affirmed by the Court of Appeals, which noted that if selling real estate had been Mr. Wilbert's main business, it would have provided Mr. Wilbert a good argument that he had a business reason to maintain his Minneapolis area residence (Mr. Wilbert's real estate business was based in the Minneapolis area). Wilbert v. Commissioner, 553 F.3d at ___ (slip op. at 10-11). Here, in circumstances similar to those in Wilbert, it does not appear that Mr. Alami's soccer coaching job was his main business in 2005. There is no evidence that Mr. Alami considered his soccer coaching employment his main employment when he accepted employment in Portland. Rather, Mr. Alami worked for NWA and accepted employment outside the Minneapolis area in order to stay employed with NWA as long as possible. Accordingly, the soccer coaching job did not provide Mr. Alami with a business reason to maintain his Minneapolis area residence during the period of his employment with NWA.



The Court of Appeals considered whether Mrs. Wilbert's having a business in Minneapolis would provide a business reason for Mr. Wilbert to maintain the Minneapolis area residence. Wilbert v. Commissioner, 553 F.3d at ___ (slip op. at 12). The court noted that her employment would make it more reasonable for Mr. Wilbert to not move away from Minneapolis but would not permit a deduction of traveling expenses. Id. Mr. Wilbert's decision to live with his wife would be a personal rather than business decision. Id. ("'in this respect, Mr. and Mrs. Hantzis' situation is analogous to cases involving spouses with careers in different locations. Each must independently satisfy the requirement that deductions taken for travel expenses incurred in the pursuit of a trade or business arise while he or she is away from home'" (quoting Hantzis v. Commissioner, 638 F.2d at 254 n.11)). Here, although Ms. Alami was employed in Minneapolis, this does not provide a business reason for Mr. Alami's maintenance of the Minneapolis area residence.



Similar to the taxpayers in Wilbert, Stockwell, Bogue, Farran, and Riley, Mr. Alami did not appear at any point to have a realistic prospect of resuming working for NWA in Minneapolis after he was bumped from his Minneapolis employment for the second time in June 2005. Accordingly, Mr. Alami did not have a business reason to maintain his Minneapolis area residence, and he is not entitled to deduct the Portland expenses.




II. Other Unreimbursed Business Expenses Claimed


The Commissioner's determinations are generally presumed correct, and the taxpayer bears the burden of proving the determinations erroneous. Rule 142(a). The taxpayer bears the burden of proving that he is entitled to the deduction claimed, and this includes the burden of substantiation. Id.; Hradesky v. Commissioner, 65 T.C. 87, 90 (1975), affd. per curiam 540 F.2d 821 (5th Cir. 1976). A taxpayer must substantiate amounts claimed as deductions by maintaining the records necessary to establish he or she is entitled to the deductions. Sec. 6001.



A taxpayer may deduct ordinary and necessary expenses paid or incurred in carrying on a trade or business during the year. Sec. 162(a). Personal, living, or family expenses are not deductible. Sec. 262. Services performed by an employee constitute a trade or business, and, accordingly, a taxpayer may deduct unreimbursed employee business expenses incurred. O'Malley v. Commissioner, 91 T.C. 352, 363-364 (1988); sec. 1.162-17(a), Income Tax Regs.



If a taxpayer establishes that he or she paid or incurred a deductible business expense but does not establish the amount of the expense, we may approximate the amount of the allowable deduction, bearing heavily against the taxpayer whose inexactitude is of his or her own making. Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). However, for the Cohan rule to apply, there must be sufficient evidence in the record to provide a basis for the estimate. Vanicek v. Commissioner, 85 T.C. 731, 743 (1985). Certain expenses may not be estimated because of the strict substantiation requirements of section 274(d). See sec. 280F(d)(4)(A); Sanford v. Commissioner, 50 T.C. 823, 827 (1968), affd. per curiam 412 F.2d 201 (2d Cir. 1969).



A. Mr. Alami's Other NWA Employee Expenses



The expenses petitioners claim as employee business expense deductions in 2004 which are still in dispute are as follows: Union dues expenses, a computer expense, cell phone and Internet expenses, and a depreciation expense.



The expenses petitioners claim as employee business expense deductions in 2005 which are still in dispute are as follows: Union dues expenses, cell phone expenses, tool expenses, uniform maintenance expenses, and a depreciation expense.



1. Union Dues



The amounts of union dues expenses still in dispute for 2004 and 2005 are $643 and $106, respectively.



Petitioners have failed to present any evidence that they actually paid such union dues. Petitioners have submitted evidence as to the amounts of dues required in 2004 and 2005; however, they have failed to substantiate that they actually paid them. Accordingly, petitioners are not entitled to employee business expense deductions for union dues in 2004 and 2005 above those respondent conceded.



2. Computer



A computer is "listed property" and subject to the strict substantiation requirements of section 274(d). Sec. 280F(d)(4)(A)(iv). Petitioners introduced a Gateway receipt dated September 2, 2003, as substantiation for the computer expense.



Mr. Alami claimed to have used the computer to check on job-related information. However, he was not able to produce any evidence that he was required by his employer NWA to have a computer, nor did he prove how much of the computer's overall use was for business (as distinct from personal) purposes. Mr. Alami's purchase of the computer was not shown to be an ordinary and necessary business expense of being an employee of NWA. See Riley v. Commissioner, T.C. Memo. 2007-153; Wasik v. Commissioner, T.C. Memo. 2007-148.



However, even if petitioners had shown the computer to be an ordinary and necessary business expense of being an employee of NWA, petitioners have not substantiated the purchase of the computer. Petitioners submitted a receipt dated 2003 in support of a deduction claimed for 2004. Petitioners have not shown that they incurred such an expense in 2004. Petitioners' deduction for a computer expense is disallowed.



3. Cellular Phone



A cellular phone is "listed property" and subject to the strict substantiation requirements of section 274(d). Sec. 280F(d)(4)(A)(v). A taxpayer must establish the amount of business use and the amount of total use for the property to substantiate the amount of expenses for listed property. Nitschke v. Commissioner, T.C. Memo. 2000-230; sec. 1.274-5T(b)(6)(i)(B), Temporary Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985). Petitioners introduced cellular phone bills and checks used to pay these cellular phone bills that partially substantiate the amounts of the claimed deductions.



Mr. Alami claimed the cellular phone was a necessity in Newark and Portland where he did not have a land phone line. Mr. Alami also stated that the amounts of the claimed deductions were a quarter of the total of his phone bills for 2004 and 2005.



Mr. Alami has failed to establish the amount of time he used his cell phone for business and personal purposes. Additionally, Mr. Alami conceded that his employer did not require that he have a cell phone. See Riley v. Commissioner, supra; Stockwell v. Commissioner, T.C. Memo. 2007-149; Wasik v. Commissioner, supra. Petitioners' deductions for cellular phone expenses are disallowed.



4. Internet



Internet expenses have been characterized as utility expenses. See Verma v. Commissioner, T.C. Memo. 2001-132. Strict substantiation therefore does not apply, and we may estimate the business portion of utility expenses under the Cohan rule. See Pistoresi v. Commissioner, T.C. Memo. 1999-39.



Petitioners introduced checks with Charter Communications as payee which exceed the claimed amounts of Internet deductions, but petitioners did not introduce evidence as to how much Mr. Alami used the Internet for NWA employee matters and personal matters. Additionally, petitioners did not produce evidence that NWA required Mr. Alami to have Internet access. The Internet expenses petitioners incurred were not ordinary and necessary employee business expenses. See Riley v. Commissioner, supra; Stockwell v. Commissioner, supra. Petitioners' deductions for Internet expenses are disallowed.



5. Tools



The amount of the tool expenses deduction still in dispute for 2005 is $1,100. Petitioners submitted the following four receipts to substantiate the tool expenses: Sears, $179.91 on 07/13/05; Home Depot, $112.37 on 10/26/05 (but petitioners claimed only $99.97 of that amount as a deductible employee business expense); Fleet Farm, $41.48 with an unknown date, and Home Depot, with an unknown amount and date.



The strict substantiation requirements of section 274(d) do not apply to these expenses, and the Cohan rule may apply; however, petitioners must still provide minimum substantiation of such expenses because petitioners bear the burden of proof. See sec. 6001; Rule 142(a). We allow petitioners a $279.88 deduction for tools (Sears receipt, $179.91 plus Home Depot receipt, $99.97). Petitioners were not able to provide the dates of the Fleet Farm receipt or the Home Depot receipt, nor were they able to provide further information about the other tool purchases during 2005.



6. Uniform Maintenance



The amount of uniform maintenance expense deductions still in dispute for 2005 is $140. Expenses for uniforms are deductible if the uniforms are of a type specifically required as a condition of employment, the uniforms are not adaptable to general use as ordinary clothing, and the uniforms are not worn as ordinary clothing. Yeomans v. Commissioner, 30 T.C. 757, 767-769 (1958); Wasik v. Commissioner, supra; Beckey v. Commissioner, T.C. Memo. 1994-514. Mr. Alami was required to wear a uniform provided by NWA to work every day.



Petitioners introduced a document on the letterhead of their C.P.A. that purports to indicate how the sum was calculated, but it suggests an excessive amount. The document alleges that Mr. Alami washed his uniform 14 times per month at $1.50 per wash and dry cycle for 12 months in 2005.



We may estimate the amount of these expenses using the Cohan rule. See Riley v. Commissioner, supra; Stockwell v. Commissioner, supra. We adopt the unit cost of $1.50 listed on petitioners' exhibit as the cost to wash and dry one load of laundry. We find that approximately eight loads of laundry for each of the months Mr. Alami worked is a reasonable number to yield 22 clean shirts, pants, and a jacket per month. Mr. Alami worked only 7 months for NWA in 2005. This yields a deduction for uniform maintenance that does not exceed the amount respondent conceded. 3 Accordingly, petitioners are not entitled to deduct any uniform maintenance expenses above that respondent conceded.



7. Depreciation



Petitioners claimed a computer depreciation expense of $529 for 2004, an equipment depreciation expense of $156 for 2004, and a computer depreciation expense of $176 for 2005.



A deduction is allowed for depreciation of property used in a trade or business or held for the production of income. Sec. 167(a). Petitioners have failed to show that the computer or the equipment being depreciated was used in a trade or business or held for the production of income. Accordingly, petitioners' depreciation deductions are disallowed.



B. Mr. Alami's Soccer Coach Employment Expenses



The amount of soccer coaching expenses still in dispute is $355. Petitioners did not produce any receipts but did produce a photo of the items Mr. Alami purchased and a catalog of prices. The photo showed 18 soccer balls, three soccer ball bags, a ball pump, and other items which were unclear. Mr. Alami testified he purchased these items for his job as a soccer coach.



Mr. Alami failed to present sufficient evidence that he actually incurred the expenses of purchasing these items. Accordingly, these expenses are not deductible.



C. Ms. Alami's Nurse Employee Expenses



The amount of Ms. Alami's employee business expenses still in dispute for 2004 is $1,440. Petitioners claim this amount resulted from cell phone expenses, job-related education expenses, financial publication expenses, and uniform expenses. Petitioners substantiated $360 of cell phone expenses and provided a catalog listing scrub prices (required work attire).



The amount of Ms. Alami's employee business expenses still in dispute for 2005 is $515. Petitioners claim this amount resulted from $255 in publication expenses and $260 in unconceded uniform maintenance expenses. Petitioners substantiated $260 of uniform maintenance expenses.



A cellular phone is "listed property" for purposes of section 274(d)(4) and subject to the strict substantiation requirements of section 274(d). Sec. 280F(d)(4)(A)(v). A taxpayer must establish the amount of business use and the amount of total use for the property to substantiate the amount of expenses for listed property. Nitschke v. Commissioner, T.C. Memo. 2000-230; sec. 1.274-5T(b)(6)(i)(B), Temporary Income Tax Regs., supra.



Petitioners provided copies of their cellular phone bills but failed to establish that they incurred any expense to use Ms. Alami's cellular phone for employee business purposes in addition to those expenses they would have incurred if she had used it only for personal purposes. Ms. Alami was not required by her employer to have a cellular phone. Accordingly, petitioners' deduction for Ms. Alami's cellular phone is disallowed. See Riley v. Commissioner, T.C. Memo. 2007-153; Stockwell v. Commissioner, T.C. Memo. 2007-149; Wasik v. Commissioner, T.C. Memo. 2007-148.



Petitioners have failed to provide adequate substantiation of the remaining expenses Ms. Alami claimed as business expense deductions in 2004 and 2005. Accordingly, the remaining employee business expense deductions are disallowed.




III. Charitable Contribution Deductions


Petitioners claim deductions for cash and noncash charitable contributions made in 2004 and 2005. The amounts of charitable contribution deductions still in dispute for 2004 and 2005 are $1,985 and $1,640, respectively.



A. 2004



The amounts of cash and noncash charitable contributions still in dispute for 2004 are $1,635 and $350, respectively.



Substantiation of the disputed amounts is sparse at best. Petitioners have produced a copy of a check written on December 31, 2004, to the Islamic Relief Fund in the amount of $100. Petitioners have also produced receipts from the Vietnam Veterans of America and the Lupus Foundation. Neither receipt contains the amount of the donation. The Lupus Foundation receipt is dated "09/04" and the Vietnam Veterans of America receipt is not dated. Petitioners submitted an undated handwritten list of items that were donated to both organizations in 2004.



In general, a taxpayer is entitled to deduct charitable contributions made during the taxable year to or for the use of certain types of organizations. Sec. 170(a)(1), (c). A taxpayer is required to substantiate charitable contributions; records must be maintained. Sec. 6001; sec. 1.6001-1(a), Income Tax Regs.



A contribution of money in an amount less than $250 made in a tax year beginning before August 17, 2006, may be substantiated with a canceled check, a receipt, or other reliable evidence showing the name of the donee, the date of the contribution, and the amount of the contribution. Sec. 1.170A-13(a)(1), Income Tax Regs. The copy of the check to the Islamic Relief Fund submitted by petitioners contains the name of the donee, the date, and the amount of the contribution. Respondent has not disputed the status of this organization as a qualified charitable donee. Accordingly, petitioners have substantiated a $100 cash charitable contribution and are entitled to a charitable contribution deduction in that amount.



Contributions of cash or property in excess of $250 require the donor to obtain contemporaneous written acknowledgment of the donation from the donee. Sec. 170(f)(8). At a minimum, the contemporaneous written acknowledgment must contain a description of any property contributed, a statement as to whether any goods or services were provided in consideration, and a description and good faith estimate of the value of any goods or services referred to. Sec. 170(f)(8)(B).



Petitioners claim to have made noncash charitable contributions of clothing and miscellaneous items worth $500 and $350 to Goodwill Industries and the Veterans Association, respectively. The receipts petitioners submitted to substantiate the noncash charitable contributions do not meet the statutory requirements. Petitioners have submitted a Lupus Foundation receipt as substantiation although they do not claim to have made a charitable contribution to the Lupus Foundation. Petitioners have not submitted a contemporaneous written acknowledgment from Goodwill Industries to substantiate a charitable contribution. Petitioners submitted a receipt from the Vietnam Veterans of America, but it is does not meet the statutory requirements of a contemporaneous written acknowledgment because it does not contain a description of the property contributed. Moreover, the receipt is undated and cannot be shown to be contemporaneous. Accordingly, petitioners are not entitled to a deduction for noncash charitable contributions claimed in 2004 above that conceded by respondent.



B. 2005



The amounts of cash and noncash charitable contributions still in dispute for 2005 are $750 and $890, respectively.



Substantiation of petitioners' claimed charitable contributions is also sparse for 2005. Petitioners have failed to produce any evidence of the cash charitable contributions. For the reasons stated supra, without substantiation we must disallow petitioners' deduction for cash charitable contributions above that conceded by respondent.



Petitioners claim to have made noncash charitable contributions of clothing and miscellaneous items worth $890 to the Veterans Association. Petitioners submitted a receipt from the Veteran's Thrift Store as substantiation for the noncash charitable contribution and a handwritten list of items contributed. The receipt did not contain an estimated amount donated or a description of the items donated. Further, it listed "10-01" as the date acknowledged. As stated supra, a noncash contribution in an amount over $250 requires contemporaneous written acknowledgment to substantiate the contribution. At a minimum, this acknowledgment must contain a description of the property donated. The receipt submitted from the Veteran's Thrift Store does not contain such a description. Additionally, the date listed as "10-01" is unclear; it could either mean October 1 (year unknown) or October 2001. Without a clear date, we are unable to determine whether petitioners made the charitable contribution in 2005 or another tax year or whether petitioners received the contemporaneous acknowledgment required. Accordingly, petitioners are not entitled to a deduction for noncash charitable contributions in 2005.




IV. Quiznos Franchise


Petitioners claim a $25,750 abandonment loss for their Quiznos restaurant franchise. This includes the amount petitioners paid to incorporate Casa Star, Inc., for the purpose of running petitioners' Quiznos restaurant.



Section 165(a) allows a deduction for any uncompensated loss sustained during the taxable year. The loss must be incurred in a trade or business, in any transaction entered into for profit, or in a casualty or theft. Sec. 165(c). The amount of the loss is the adjusted basis of the property. Sec. 165(b). The loss is allowed for the year in which the act of abandonment takes place. See Buda v. Commissioner, T.C. Memo. 1999-132, affd. without published opinion 230 F.3d 1357 (6th Cir. 2000); sec. 1.165-1(d)(1), Income Tax Regs.



In order for the loss of an intangible asset to be deductible, there must be (1) an intention on the part of the owner to abandon the asset and (2) an affirmative act of abandonment. JHK Enters. Inc. v. Commissioner, T.C. Memo. 2003-79 (quoting A.J. Indus., Inc. v. United States, 503 F.2d 660, 670 (9th Cir. 1974)). An affirmative act of abandonment must be ascertained from all the facts and circumstances, United Cal. Bank v. Commissioner, 41 T.C. 437, 451 (1963), affd. per curiam 340 F.2d 320 (9th Cir. 1965), and "the Tax Court [is] entitled to look beyond the taxpayer's formal characterization", Laport v. Commissioner, 671 F.2d 1028, 1032 (7th Cir. 1982), affg. T.C. Memo. 1980-355. Abandonment of an intangible property interest should be accomplished by some express manifestation. Citron v. Commissioner, 97 T.C. 200, 210 (1991).



Losses claimed with respect to nondepreciable property must also meet the requirements of section 1.165-2(a), Income Tax Regs., which provides in part:



A loss incurred in a business or in a transaction entered into for profit and arising from the sudden termination of the usefulness in such business or transaction of any nondepreciable property, in a case where such business or transaction is discontinued or where such property is permanently discarded from use therein, shall be allowed as a deduction under section 165(a) for the taxable year in which the loss is actually sustained. * * *



JHK Enters. Inc. v. Commissioner, T.C. Memo. 2003-79.



Conveyance or even tender of title is not necessary to consummate an abandonment. Echols v. Commissioner, 935 F.2d 703, 706 (5th Cir. 1991), revg. 93 T.C. 553 (1989). When the taxpayer has not relinquished possession of an asset, there must be a concurrence of the act of abandonment and the intent to abandon, both of which must be shown from the surrounding circumstances. A.J. Indus., Inc. v. United States, 503 F.2d at 670.



Petitioners claim an abandonment loss deduction of $25,750. Of this amount, $25,000 is the initial amount paid for the Quiznos franchise and $750 is the amount paid for incorporating Casa Star, Inc., the limited liability corporation petitioners planned to use to operate their Quiznos restaurant. Respondent argues that petitioners should be denied the total abandonment loss claimed because they took no action to formally dissolve Casa Star, Inc. We disagree.



Petitioners expressed their intent to abandon their Quiznos franchise by the end of 2005. Throughout 2005 petitioners clearly and repeatedly expressed to Quiznos representatives their desire to have their franchise fee refunded because they no longer sought to open a Quiznos restaurant.



When Quiznos representatives failed to even respond to petitioners' repeated requests for a refund, petitioners filed a complaint with the attorney general. After the attorney general was unable to procure a refund of petitioners' franchise fee, petitioners discontinued their attempts to open a Quiznos restaurant and attempts to collect a refund. Accordingly, petitioners intended to abandon their Quiznos franchise.



Petitioners actually abandoned their Quiznos franchise by the end of 2005. Petitioners repeatedly expressed to Quiznos representatives that they were discontinuing their efforts to open a Quiznos restaurant and that they were abandoning their Quiznos franchise. Petitioners did not contribute the additional money needed to open a Quiznos restaurant or select a location within the 1-year limit in the initial franchise agreement (or request an extension of time because of circumstances beyond their control). These were clear and unequivocal indications to Quiznos that petitioners were abandoning their franchise. In consideration of all the facts and circumstances of the situation, particularly that petitioners' communication with Quiznos was primarily unilateral, these were sufficient signs of actual abandonment by petitioners in 2005.



Petitioners abandoned their Quiznos franchise by the end of 2005. Neither the Code nor the regulations specify the physical methods or legal procedures for abandoning a franchise. Nevertheless, petitioners' expression of their intent to abandon and actual act of abandonment, both occurring by the end of 2005, are sufficient proof of petitioners' abandonment. Accordingly, petitioners are entitled to an abandonment loss of the Quiznos franchise on their 2005 income tax return.



At the end of 2005 petitioners also had abandoned Casa Star, Inc. Although petitioners had not formally dissolved Casa Star, Inc., the surrounding facts and circumstances show petitioners' abandonment. Casa Star, Inc., existed solely for the purpose of running petitioners' Quiznos restaurant. When petitioners expressed their intent to abandon their Quiznos franchise, petitioners also expressed their intent to abandon Casa Star, Inc. Under the facts of this case, petitioners' abandonment of their Quiznos franchise was also an abandonment of Casa Star, Inc., because Casa Star, Inc., ceased to be of use to petitioners once they abandoned their Quiznos franchise. There is no evidence that petitioners have taken any steps to use Casa Star, Inc., for purposes other than running their Quiznos franchise; rather, at trial petitioners were not even aware whether Casa Star, Inc., was in existence. Accordingly, petitioners are entitled to an abandonment loss of Casa Star, Inc., on their 2005 income tax return.



To reflect the foregoing,



Decision will be entered under Rule 155.


1 Petitioners conceded the following unreimbursed employee business expenses: An education expense of $500 incurred in 2004 and a publication expense of $255 incurred in 2005.

Respondent conceded the following unreimbursed employee business expenses incurred by Mr. Alami: Union dues expenses of $761 incurred in 2004 and $938 incurred in 2005, tool expenses of $1,052 incurred in 2004 and $180 incurred in 2005, uniform maintenance expenses of $552 incurred in 2004 and $140 incurred in 2005, a license expense of $115 incurred in 2004, and a soccer expense of $195 incurred in 2005.

Respondent conceded the following unreimbursed employee business expenses incurred by Ms. Alami: A license expense of $85 incurred in 2004 and a uniform maintenance expense of $260 incurred in 2005.

Respondent conceded $500 of petitioners' claimed noncash charitable contribution made in 2004. Respondent further conceded that petitioners are entitled to a $250 charitable contribution deduction in each of the years 2004 and 2005 for hosting an exchange student for 5 months in 2004 and 2005 pursuant to sec. 170(g)(2).

Unless otherwise indicated, all section references are to the Internal Revenue Code (Code), and all Rule references are to the Tax Court Rules of Practice and Procedure.

2 Mr. Wilbert's income from the real estate business was $2,000 in the relevant tax year but he did not actually receive the money (a commission) until the following year.

3 $1.50 ´ eight loads per month equals $12 per month ´ 7 months equals $84.

Inconsistency in 6694 Final Regulations

Note the language in "bold" that identifies the difference between §1.6694-2(a), dealing with the "substantial authority" standard and §1.6694-2(b)dealing with the "more likely than not" standard. You will note that "facts and circumstances" and "due diligence" are taken into account for §1.6694-2(b) and not for §1.6694-2(a). In addiltion 1.6662-4(d)(3)(iii)authorities are referenced for §1.6694-2(b) but not for §1.6694-2(a). The apparent implication from a plain reading of §1.6694-2(a)and §1.6694-2(b)suggests that the fact & cirumstances test and 1.6662-4(d)(3)(iii) authorities do not apply to §1.6694-2(a). But that conclusion would make no sense at all. There are zero reasons to make this disctinction. Therefore, I have to conclude that these two distinctions represent sloppy draftsmanship by the IRS and Treasury. Contact me at ab@irstaxattorney.com if you would like to discuss the two anamolies.


§1.6694-2 Penalty for understatement due to an unreasonable position .

(a) In general --(1) Proscribed conduct . Except as otherwise provided in this section, a tax return preparer is liable for a penalty under section 6694(a) equal to the greater of $1,000 or 50 percent of the income derived (or to be derived) by the tax return preparer for any return or claim for refund that it prepares that results in an understatement of liability due to a position if the tax return preparer knew (or reasonably should have known) of the position and either --

(i) The position is with respect to a tax shelter (as defined in section 6662(d)(2)(C)(ii) ) or a reportable transaction to which section 6662A applies, and it was not reasonable to believe that the position would more likely than not be sustained on its merits;

(ii) The position was not disclosed as provided in this section, the position is not with respect to a tax shelter (as defined in section 6662(d)(2)(C)(ii) ) or a reportable transaction to which section 6662A applies, and there was not substantial authority for the position; or

(iii) The position (other than a position with respect to a tax shelter or a reportable transaction to which section 6662A applies) was disclosed as provided in this section but there was no reasonable basis for the position.

(2) Special rule for corporations, partnerships, and other firms . A firm that employs a tax return preparer subject to a penalty under section 6694(a) (or a firm of which the individual tax return preparer is a partner, member, shareholder or other equity holder) is also subject to penalty if, and only if --

(i) One or more members of the principal management (or principal officers) of the firm or a branch office participated in or knew of the conduct proscribed by section 6694(a) ;

(ii) The corporation, partnership, or other firm entity failed to provide reasonable and appropriate procedures for review of the position for which the penalty is imposed; or

(iii) The corporation, partnership, or other firm entity disregarded its reasonable and appropriate review procedures through willfulness, recklessness, or gross indifference (including ignoring facts that would lead a person of reasonable prudence and competence to investigate or ascertain) in the formulation of the advice, or the preparation of the return or claim for refund, that included the position for which the penalty is imposed.

(b) Reasonable to believe that the position would more likely than not be sustained on its merits --(1) In general . If a position is with respect to a tax shelter (as defined in section 6662(d)(2)(C)(ii) ) or a reportable transaction to which section 6662A applies, it is "reasonable to believe that a position would more likely than not be sustained on its merits" if the tax return preparer analyzes the pertinent facts and authorities and, in reliance upon that analysis, reasonably concludes in good faith that the position has a greater than 50 percent likelihood of being sustained on its merits. In reaching this conclusion, the possibility that the position will not be challenged by the Internal Revenue Service (IRS) (for example, because the taxpayer's return may not be audited or because the issue may not be raised on audit) is not to be taken into account. The analysis prescribed by §1.6662-4(d)(3)(ii) (or any successor provision) for purposes of determining whether substantial authority is present applies for purposes of determining whether the more likely than not standard is satisfied. Whether a tax return preparer meets this standard will be determined based upon all facts and circumstances, including the tax return preparer's diligence. In determining the level of diligence in a particular situation, the tax return preparer's experience with the area of Federal tax law and familiarity with the taxpayer's affairs, as well as the complexity of the issues and facts, will be taken into account. A tax return preparer may reasonably believe that a position more likely than not would be sustained on its merits despite the absence of other types of authority if the position is supported by a well-reasoned construction of the applicable statutory provision. For purposes of determining whether it is reasonable to believe that the position would more likely than not be sustained on the merits, a tax return preparer may rely in good faith without verification upon information furnished by the taxpayer and information and advice furnished by another advisor, another tax return preparer, or other party (including another advisor or tax return preparer at the tax return preparer's firm), as provided in §§1.6694-1(e) and 1.6694-2(e)(5).

(2) Authorities . The authorities considered in determining whether a position satisfies the more likely than not standard are those authorities provided in §1.6662-4(d)(3)(iii) (or any successor provision).

section 6694(b) and "willful" tax fraud under 7201

The Stephen Barker case, reporeted on February 12, 2009, is fully uploaded below. Barker was conviced and sentenced for tax fraud. When you read this case, focus on the discussion of "willful" because that is the same word used in 6694(b). If one brings this point to its logical conclusion, facts that justify a 6694(b) $5,000 penalty may also support criminal tax fraud. This case is also interesting because the court appears to say that if the IRS can prove a person is "aware" of his tax obligations, that is enough to meet the "willfulness" term in tax fraud cases. The court used objective circumstancial facts (evidence) to show that "awareness." For that reason, this 8th circuit case should make it easier to get tax court convictions going forward. I found the rationale in this case to be a liberal interpretation of the word "willful." The taxpayer in this was a non-filier. That is not the point. The interesting part of this case is how the 8th ciruit currently looks are the term "willful." My point to the return preparation industry is that anytime you are confronted with a 6694(b) penalty, you need good representataion to make sure that the civil examiner does not refer the case to the IRS criminal investigation unit. The creative advocacy of the facts and circumstances can negate "willfulness." Negligence is a defense to tax fraud and "reckless" negligence is also a defense to tax fraud. The advocacy is to convince the IRS that the errors or omissions are negligence and not the "willful" intent to evade taxes or conspire to evade on behalf of a client. The IRS criminal examiners operate as "prosecutors" and "judges" of the facts their review. The criminal examinations are nightmares for clients and likely nightmares for return preparers if there is also a 6694(b) issue in the same case. The best way to avoid the issue is to make disclosure of the problematical issues to the IRS. I do not believe the DOJ can ever win a crimnal fraud conviction against a return preparer where the preparer has made a disclosure to the IRS.

United States of America, Appellee/ Cross-Appellant v. Stephen Richards Barker, Appellant/ Cross-Appellee.

U.S. Court of Appeals, 8th Circuit; 08-1067, 08-1250, February 12, 2009.

Affirming in part, vacating and remanding in part an unreported DC Minn. decision.

[ Code Sec. 7201]


A federal district court properly convicted an individual of willful tax evasion; however, his sentence was vacated and remanded for resentencing. The government was not required to refute the individual's good-faith belief that payment of taxes was voluntary because it presented sufficient evidence showing that the individual was aware of his obligation to pay taxes and acted willfully. However, the 42-month sentence of imprisonment imposed on the individual was remanded for resentencing because the court committed significant procedural error by concluding that tax evasion under Code Sec. 7201 was not a continuing offense. That error led the court to use an incorrect version of the sentencing guidelines manual, thereby resulting in a lower advisory sentencing guidelines range. Because tax evasion is a continuing offense, the date of the individual's last act of evasion was the date of the offense of conviction, which was to be used to determine the correct guidelines to calculate the advisory guidelines range.



Before: Murphy, Riley and Gruender, Circuit Judges.

GRUENDER, Circuit Judge: A jury found Stephen Barker guilty of four counts of tax evasion --evading and defeating the payment of income taxes, penalties and interest --in violation of 26 U.S.C. §7201, and the district court sentenced him to 42 months' imprisonment. Barker appeals his conviction, arguing that the Government's evidence was insufficient to prove that he acted willfully in light of his good-faith belief that he did not owe any federal income taxes. The Government cross-appeals Barker's sentence, arguing that the district court committed significant procedural error. For the reasons discussed below, we affirm Barker's conviction, vacate the sentence and remand to the district court for resentencing.



I. BACKGROUND

From 1994 to 1997, Stephen Barker worked in the investment-brokerage business and earned over $3,800,000 in personal income. During this period, however, Barker did not pay all of the federal income taxes that he owed. For the 1994 tax year, Barker underpaid his taxes by $9,650, and for the 1995, 1996 and 1997 tax years, Barker did not file any tax returns or pay any taxes despite owing $1,367,947. The Internal Revenue Service ("IRS") assessed Barker's unpaid taxes and interest for the 1994 tax year in August 1997, and it filed a tax lien in November 1997. The IRS assessed Barker's taxes and interest for the 1995, 1996 and 1997 tax years in December 1999, and it notified Barker that it intended to levy his assets in March 2000. Even after the IRS's assessments, tax lien and threat to levy his assets, Barker did not satisfy his tax debt. In July 2006, a federal grand jury returned an indictment charging Barker with four counts of tax evasion by evading and defeating the payment of his taxes, penalties and interest for each of the relevant tax years. Barker pled not guilty to the charges, and the case proceeded to trial.

In its case-in-chief, the Government presented evidence demonstrating Barker's tax liability, the IRS's assessment of his tax debt, and the IRS's unsuccessful efforts to collect from Barker. The Government also presented evidence of Barker's alleged efforts to willfully evade the payment of his assessed tax liability. In 1996, after Barker stopped paying his taxes, Barker and his wife created offshore trusts and business entities in the countries of Andorra and St. Kitts and Nevis. Barker owned and controlled these entities and had signatory authority over their associated financial accounts. Later, Barker hired three related companies, the Laughlin Group, the Privatech Group and the Nevis American Trust, to create domestic corporations and limited liability companies that would not appear to be owned by Barker but would, in fact, be controlled by him. Barker used these offshore and domestic entities as shells for receiving and holding his personal income. Barker continued to transfer his personal assets to these entities, even after the IRS assessed Barker's back taxes in December 1999 and notified him of its intent to levy his assets in March 2000. From March 2000 through at least December 2006, these entities held nearly all of Barker's personal assets, including $1.5 million from a personal disability benefits settlement, nearly $1.2 million in consulting income, automobiles, boats and homes. One particular entity, Shasta Property Management, Inc., held Barker's homes in Minnesota, Florida and Rhode Island.

The Government also presented evidence that before April 2003, the IRS began investigating and prosecuting members of Laughlin, Privatech and Nevis American for assisting others in evading taxes. After Barker learned of the IRS's investigation, he terminated his relationship with these companies. In an April 7, 2003 facsimile letter to Jim Fontano at the Privatech Group, Barker wrote:
This [investigation] may have jeopardized my business going forward. I don't need the IRS connecting me to Shasta, which they have now done, while I am going through a Collection Due Process Hearing and Tax Court on two separate matters from the late '90s. By seizing Laughlin's and your records, they can now make a lot of connections. I didn't pay major dollars for that to happen. Terry, Aaron and I have had more than one conversation about this type of scenario, and they assured me that a connection could never be made.

In this same letter, Barker directed Fontano to "please erase any files for Shasta." During a May 2003 interview with the IRS, Barker denied having any knowledge of or involvement with Shasta Property Management.

At the close of the Government's case-in-chief, Barker moved for a judgment of acquittal, arguing that the Government's evidence was insufficient to sustain a conviction for tax evasion because it did not prove that Barker willfully evaded and defeated the payment of federal income taxes. The district court denied Barker's motion.

In his case-in-chief, Barker did not dispute the Government's allegations that the IRS had assessed his taxes and that he had not paid them. Instead, Barker testified that starting in 1996, he developed a belief that according to certain provisions of the tax code, the payment of federal income taxes was voluntary. In 1999, Barker came to the additional conclusion that he was a nonresident alien not subject to federal income taxes because he was a citizen of the "United States of America" rather than the "United States" mentioned in the tax code. According to Barker, the "United States" of the tax code is an entity that governs only the District of Columbia, Puerto Rico and the Marinara Islands, and it is different from the "United States of America," which governs the fifty states. In 2003, Barker further supplemented his tax beliefs by subscribing to a "chargeback redemption strategy," by which he believed that he had satisfied any outstanding IRS debts. According to this strategy, a citizen may satisfy a tax debt by taking control of an account, which the United States Federal Reserve creates in each citizen's name at birth, and charging the tax debt against the funds in the account. Barker allegedly believed that this strategy discharged his tax debts because the account in the name "STEPHEN RICHARDS BARKER" was funded with between $500,000 and $1,000,000 at his birth fifty years earlier and had been accruing annual interest at a rate of six to eight percent since its creation. Barker also disputed the Government's evidence of his willfulness by testifying that his practice of keeping personal funds in foreign and domestic entities was innocent and done only to protect his personal assets from his litigious brokerage clients. The jury found Barker guilty on all four counts.

Prior to sentencing, the United States Probation Office prepared Barker's Presentence Investigation Report ("PSR"). In the "offense conduct" section of the PSR, the Probation Office chronicled Barker's acts of evasion, which continued through at least December 2006. The Probation Office then proceeded to calculate Barker's advisory sentencing guidelines range by first determining the applicable version of the United States Sentencing Guidelines ("U.S.S.G."). See U.S.S.G. §1B1.11(a)-(b)(1) (instructing courts to use "the Guidelines Manual in effect on the date that the defendant is sentenced" unless doing so would "violate the ex post facto clause of the United States Constitution," in which case the manual "in effect on the date that the offense of conviction was committed" should be used). Rather than using the December 2006 date for this determination, the Probation Office concluded that Barker's offense conduct occurred "through April 15, 1998," apparently relying on the date upon which his 1997 tax return was due.

Using the April 15, 1998 date, the Probation Office found that Barker's advisory sentencing guidelines range should be calculated using the November 1997 U.S.S.G. manual, the version effective as of April 15, 1998, instead of the November 2006 U.S.S.G. manual, the version effective on Barker's expected sentencing date, because using the November 2006 version would result in a higher guidelines range, thereby violating the Ex Post Facto Clause of the United States Constitution. See U.S.S.G. §1B1.11; U.S.S.G. amend. 617 (amending U.S.S.G. §2T1.1 to alter the definition of "tax loss" to include interest and penalties (in addition to the actual tax loss) for willful evasion of payment cases under §7201 and amending U.S.S.G. §2T4.1 to change the tax loss amounts in the tax table, effective November 2001). Using the November 1997 U.S.S.G. manual, the Probation Office calculated an advisory guidelines range of 37 to 46 months' imprisonment based upon the $1,377,597 tax loss under §2T1.1(a) and its corresponding base offense level of 19 under §2T4.1(N), a two-level increase under §2T1.1(b) due to Barker's use of sophisticated means of concealment, and Barker's criminal history category of I.

The Government objected to the PSR, contending that the Probation Office used the wrong version of the guidelines based on its improper conclusion that an evasion of payment offense under §7201 is not a continuing offense. Because evasion of payment is a continuing offense and because the PSR found that Barker's acts of evasion continued through December 2006, the Government argued that Barker's advisory sentencing guidelines range should have been calculated using the November 2006 U.S.S.G. manual under U.S.S.G. §1B1.11, resulting in a higher advisory guidelines range.

The Probation Office did not revise the PSR in response to the Government's objection, stating that "[t]he issue as to whether the instant offense is a continuing offense remains unclear." However, the Probation Office noted that
Should the Court concur with the Government, the Guideline Manual applicable November 1, 2006, would be used to calculate the guidelines in this case. Pursuant to §2T1.1, Application Note 1, the tax loss in evasion of payment cases includes interest and penalties (effective November 1, 2001); therefore, the tax loss in this case would increase from $1,377,597 to $3,600,821.53. As a result, the total offense level would be 26. Combined with a criminal history category I, the advisory guideline imprisonment range would be 63 to 78 months.

At sentencing, the Government renewed its objection to the PSR's legal conclusion that an evasion of payment under §7201 is not a continuing offense. The district court overruled the Government's objection and adopted the findings and recommendations in the PSR, including the advisory guidelines range calculation of 37 to 46 months' imprisonment. After considering both parties' sentencing arguments and the sentencing factors enumerated in 18 U.S.C. §3553(a), the court sentenced Barker within its calculated advisory guidelines range to 42 months' imprisonment.



II. DISCUSSION



A. Sufficiency of the Evidence

Barker appeals his conviction, arguing that the Government's evidence of his willfulness was insufficient to sustain his conviction for tax evasion.
[We] review the sufficiency of the evidence de novo, viewing evidence in the light most favorable to the government, resolving conflicts in the government's favor, and accepting all reasonable inferences that support the verdict. This standard of review is strict; we will uphold the verdict if there is any interpretation of the evidence that could lead a reasonableminded jury to find the defendant guilty beyond a reasonable doubt.

United States v. Cole, 525 F.3d 656, 661 (8th Cir.) (quoting United States v. Hamilton, 332 F.3d 1144, 1148-49 (8th Cir. 2003)) (internal quotation marks omitted), cert. denied, Gilbert v. United States, 555 U.S. ---, 129 S.Ct. 309 (2008).

A conviction for "willfully attempting to evade or defeat the payment of a tax" under 26 U.S.C. §7201 requires proof of three elements: "willfulness; the existence of a tax deficiency; and an affirmative act constituting an evasion or attempted evasion of the tax." United States v. Schoppert, 362 F.3d 451, 454 (8th Cir. 2004) (quoting Sansone v. United States [ 65-1 USTC ¶9307], 380 U.S. 343, 351 (1965)). The willfulness element "requires the Government to prove that the law imposed a duty on the defendant, that the defendant knew of this duty, and that he voluntarily and intentionally violated that duty." Cheek v. United States [ 91-1 USTC ¶50,012], 498 U.S. 192, 201 (1991). However, where a defendant seeks to defeat a finding of willfulness through a "good-faith belief that he was not violating any of the provisions of the tax laws ...[,] the issue is whether, based on all the evidence, the Government has proved that the defendant was aware of the duty at issue." Id. at 201-02; see also United States v. Gustafson [ 2008-1 USTC ¶50,393], 528 F.3d 587, 591 n.3 (8th Cir. 2008) (holding that a "good-faith misunderstanding of the law or a good-faith belief that [they were] not violating the law" negates willfulness (alteration in original) (quoting Cheek [ 91-1 USTC ¶50,012], 498 U.S. at 201)).

Barker argues that the Government's evidence of his willfulness was insufficient to sustain his conviction because it did not refute his good-faith beliefs that the payment of federal income taxes was voluntary under the tax code, that he was a nonresident alien not subject to federal income tax, and that he discharged any tax liability through his chargeback redemption strategy. We disagree. Because Barker's argument merely raises the issue of whether he "knew of the duty purportedly imposed by the provision of the statute or regulation he is accused of violating," we need only determine whether "the Government has proved that the defendant was aware of the duty at issue." Cheek [ 91-1 USTC ¶50,012], 498 U.S. at 201-02. Viewing all of the evidence in the light most favorable to the jury's verdict and drawing all reasonable inferences in the Government's favor, we find that the evidence was sufficient for a reasonable jury to conclude beyond a reasonable doubt that Barker was aware of his obligation to pay federal income taxes and that Barker, therefore, acted willfully.

At trial, the Government presented significant circumstantial evidence showing that Barker was aware of his obligation to pay federal income taxes. The Government produced evidence that Barker maintained his personal assets in domestic and offshore entities from 1996 until at least December 2006. Given the temporal proximity between the IRS's assessment of his taxes in August 1997 and December 1999, the IRS's November 1997 tax lien and March 2000 threat to levy his assets, and Barker's attempts to shield his assets, a reasonable jury could conclude that Barker's attempt to place his assets beyond the reach of the IRS demonstrated Barker's knowledge of his duty to pay federal income taxes. See United States v. Brooks, 174 F.3d 950, 955 (8th Cir. 1999) (finding sufficient evidence of willfulness where the defendant "made a concerted effort to dissociate himself from his property and income" by transferring property to a trust).

The Government also produced evidence that Barker sought to terminate his relationship with Laughlin, Privatech and Nevis American after he discovered that the IRS was investigating the companies for assisting others in evading payment of their taxes and was learning the identity of their clients. Given the close temporal proximity between the IRS's attempts to levy Barker's assets and Barker's April 2003 statements that "I don't need the IRS connecting me to Shasta," "I didn't pay major dollars for that to happen," and "they assured me that a connection could never be made," a reasonable jury could conclude that Barker's letter demonstrated his awareness of his duty to pay taxes and his efforts to avoid payment. Cf. United States v. Noske [ 97-2 USTC ¶50,538], 117 F.3d 1053, 1059 (8th Cir. 1997) (finding sufficient evidence of a defendant's willfulness in a conspiracy to evade taxes where she sought to liquidate her client's assets after an adverse tax court determination).

The Government also elicited testimony that Barker falsely denied having any knowledge of or involvement with Shasta Property Management, Inc. during the course of the IRS's investigation of Laughlin, Privatech and Nevis American. Barker's false statement to the IRS would also allow a reasonable jury to conclude that Barker was aware of his duty to pay taxes and attempted to avoid that duty. See Brooks, 174 F.3d at 955 (holding that a defendant's submission of false information to the IRS supported a finding that the defendant willfully evaded taxes).

Although the jury could have accepted Barker's testimony regarding his goodfaith beliefs, "in reviewing the denial of a judgment of acquittal, it is not our role to assess [the defendant's] credibility." United States v. Garcia-Hernandez, 530 F.3d 657, 662 (8th Cir. 2008). Because a reasonable interpretation of the Government's evidence "could lead a reasonable-minded jury to find the defendant guilty beyond a reasonable doubt," we must affirm Barker's conviction. See Cole, 525 F.3d at 661 (quoting Hamilton, 332 F.3d at 1149).



B. Procedural Error in Sentencing

The Government cross-appeals Barker's sentence, arguing that the district court erred in its conclusion that an evasion of payment under §7201 is not a continuing offense for the purpose of determining the correct guidelines version under U.S.S.G. §1B1.11. Because this error led the court to use the wrong guidelines version in calculating Barker's advisory sentencing guideline range, the Government argues that the district court committed a procedural error requiring us to vacate Barker's sentence and remand for resentencing. "We review a sentence in two parts: first, we review for significant procedural error, such as an improper calculation of the advisory sentencing guidelines range; and second, absent significant procedural error, we review for substantive reasonableness." United States v. Fischer, 551 F.3d 751, 754 (8th Cir. 2008). In reviewing a sentence for procedural error, we review the district court's factual findings for clear error and its application of the guidelines de novo. See United States v. Yah, 500 F.3d 698, 702 (8th Cir. 2007).

We agree with the Government that the district court erred in its legal conclusion that an evasion of payment under §7201 is not a continuing offense. See United States v. Marchant [ 85-2 USTC ¶9724], 774 F.2d 888, 891 (8th Cir. 1985) ("the violation of section 7201 is a 'continuing offense'"). Because tax evasion is a continuing offense, the date of the defendant's last act of evasion is the "date of the offense of conviction" in determining the appropriate version of the guidelines under U.S.S.G. §1B1.11. See United States v. Maggard, 156 F.3d 843, 849 (8th Cir. 1998) ("Some offenses ... are 'continuing offenses' for which the completion date controls which version of the Sentencing Guidelines should apply." (quoting United States v. Reetz, 18 F.3d 595, 598 (8th Cir. 1994))); U.S.S.G. §1B1.11 cmt. 2 ("Under subsection (b)(1), the last date of the offense of conviction is the controlling date for ex post facto purposes." (underline omitted)).

The district court's error constitutes significant procedural error because it led the court to use the wrong version of the guidelines manual, thereby resulting in a lower advisory sentencing guidelines range. Based on its erroneous legal conclusion that tax evasion was not a continuing offense, the court used April 15, 1998, the day that Barker's 1997 tax return was due, rather than December 2006, the date of Barker's last acts of evading payment, as the "date of the offense of conviction" under §1B1.11. This led the court to use the November 1997 U.S.S.G. manual under §1B1.11(b)(1) and resulted in an advisory guidelines range of 37 to 46 months' imprisonment. If, however, the court had used the December 2006 date, which was well supported by the evidence at trial and the PSR's offense conduct paragraphs adopted by the district court, then the court would have used the November 2007 U.S.S.G. manual, the version of the guidelines manual in effect as of the date of sentencing. 1 See U.S.S.G. §1B1.11(a). Under the November 2007 U.S.S.G. manual, which included the November 2001 amendments to U.S.S.G. §§2T1.1 and 2T4.1, Barker's advisory sentencing guidelines range would have been 63 to 78 months' imprisonment. 2 Because the district court's error resulted in an improperly calculated advisory guidelines range, we find that the court committed a significant procedural error. See Fischer, 551 F.3d at 754.

Furthermore, we find no merit in Barker's contention that the court's procedural error is harmless based on Barker's assertion that the district court would have imposed the same sentence even if the November 2007 version of the guidelines had been applied. Barker has failed to identify any evidence to support his claim that the court would have given the same sentence had it correctly calculated the advisory guidelines range, and we have independently determined that none of the court's statements at sentencing could be reasonably construed to support Barker's position. Thus, we do not find the district court's procedural error to be harmless. See United States v. Gutierrez, 437 F.3d 733, 736 (8th Cir. 2006) ("The party benefitting from the error has the burden to prove that it was harmless.").

Because the district court committed a significant procedural error, we do not review the sentence for substantive reasonableness, but we instead remand for resentencing. See United States v. Vickers, 528 F.3d 1116, 1120 (8th Cir. 2008). 3



III. CONCLUSION

For the foregoing reasons, we affirm Barker's conviction, vacate the sentence and remand to the district court for resentencing.

1 The Probation Office referred to the November 2006 U.S.S.G. manual in the PSR because it anticipated that sentencing would occur prior to November 1, 2007, the effective date of the November 2007 U.S.S.G. manual. Because sentencing occurred on December 20, 2007, however, we recognize that the November 2007 U.S.S.G. manual was the version of the guidelines "in effect as of the date of sentencing." See U.S.S.G. §1B1.11(a).

2 This calculation is based upon the amended tax table in §2T4.1 and the PSR's finding that the tax loss, with penalties and interest included, is $3,600,821.

3 We note that Barker submitted three pro se filings on November 6, 2008, November 10, 2008, and December 4, 2008, after this case had been fully briefed. We do not consider these pro se filings because "[w]e generally do not accept pro se motions or briefs when an appellant is represented by counsel." United States v. McIntosh, 492 F.3d 956, 961 n.2 (8th Cir. 2007); see also United States v. Moore, 481 F.3d 1113, 1114 n.2 (8th Cir.), cert. denied, 552 U.S. ---, 128 S. Ct. 122 (2007).

Willful evasion of tax. --Willful Failure to File Return, Supply Information, or Pay Tax: Willful evasion of tax

Before a defendant can be found guilty of a felony for willful attempt to evade or defeat the income tax there must be proof other than that necessary to make out the misdemeanors for failure to file returns, submit information, or pay tax. Use of the word "attempt" in the Code indicates the need for some willful commission in addition to the willful omissions that make up the misdemeanors.

Spies, 43-1 USTC ¶9243, 317 US 492.

J.H. Jones, CA-5, 47-2 USTC ¶9402, 164 F2d 398.

G.L. Smith, CA-3, 53-2 USTC ¶9538, 206 F2d 905.

E.J. Mesheski, CA-7, 61-1 USTC ¶9233, 286 F2d 345.

A. Burrell, CA-5, 75-1 USTC ¶9152, F2d 904.

Conviction and sentence for willfully attempting to evade tax were affirmed.

Orzechowski, CA-3, 1930 CCH ¶9100, 37 F2d 713.

R. Capone, CA-7, 2 USTC ¶786, 51 F2d 609. Cert. denied, 284 US 669.

G.G. Oliver, CA-7, 1931 CCH ¶9649, 54 F2d 48. Cert. denied, 285 US 543.

Pappas, CA-10, 54-2 USTC ¶9637, 216 F2d 515.

Clayton-Kennedy, DC, 1933 CCH ¶7079, 2 FSupp 233.

J.J. Sullivan, CA-2, 38-2 USTC ¶9429, 98 F2d 79.

J.J. McCormick, CA-2, 3 USTC ¶1187, 67 F2d 867. Cert. denied, 291 US 662.

D.D. Battjes, CA-6, 49-1 USTC ¶9149, 172 F2d 1.

J.F. Keenan, CA-7, 59-1 USTC ¶9349, 267 F2d 118.

R.G. Carlisle, CA-6, 59-1 USTC ¶9462, 266 F2d 551.

S. Lefkowitz, DC, 59-1 USTC ¶9449, 173 FSupp 932.

Yarborough, CA-4, 56-1 USTC ¶9295, 230 F2d 56. Cert. denied, 351 US 969.

A.C. Willingham, CA-5, 61-1 USTC ¶9401, 289 F2d 283. Cert. denied, 368 US 828.

L.A.E. Mollet, CA-2, 61-1 USTC ¶9444, 290 F2d 273.

L.M. Bernard, CA-7, 61-1 USTC ¶9221, 287 F2d 715. Reh'g denied, on other grounds, CA-7, 61-1 USTC ¶9378.

H.L. Taylor, CA-4, 62-2 USTC ¶9590, 305 F2d 183. Cert. denied, 371 US 894.

G.E. Baldwin, CA-7, 62-2 USTC ¶9644, 307 F2d 577. Cert. denied, 371 US 947.

N. Madden, CA-4, 62-1 USTC ¶9378, 300 F2d 757.

F.W. Malone, CA-5, 62-2 USTC ¶9582, 304 F2d 878.

A.C. Cain, CA-7, 62-1 USTC ¶9226, 298 F2d 934. Cert. denied, 370 US 902.

I. Woodner, CA-2, 63-2 USTC ¶9515, 317 F2d 649. Cert. denied, 375 US 903.

M. Sherwin, CA-9, 63-2 USTC ¶9550, 320 F2d 137. Cert. denied, 375 US 964.

D.S. Fago, CA-2, 63-2 USTC ¶9576, 319 F2d 791. Cert. denied, 375 US 906.

A.M. Katz, CA-1, 63-2 USTC ¶9600, 321 F2d 7. Cert. denied, 375 US 903.

J.B. Cooper, CA-5, 63-2 USTC ¶9651, 321 F2d 274. Cert. denied, 375 US 964.

B. Mortimer, CA-7, 65-1 USTC ¶9301, 343 F2d 500. Cert. denied, 382 US 842.

J. Grandinetti, CA-3, 64-2 USTC ¶9822, 337 F2d 1010.

E.O.D. Campbell, CA-2, 65-2 USTC ¶9664, 351 F2d 336. Cert. denied, 383 US 907.

H.C. Trownsell, CA-7, 66-2 USTC ¶9661.

H. Roy, CA-9, 67-1 USTC ¶9355, 377 F2d 544. Cert. denied, 389 US 936.

C.E. Mansfield, CA-7, 67-2 USTC ¶9586, 381 F2d 961. Cert. denied, 389 US 1015.

W.P. Johnson, Jr., CA-3, 67-2 USTC ¶9750, 386 F2d 630.

J.D. McCarty, CA-10, 69-1 USTC ¶9322, 409 F2d 793. Cert. denied, 396 US 836.

E.E. Haseltine, CA-9, 70-1 USTC ¶9140, 419 F2d 579.

H.G. Browney, CA-4, 70-1 USTC ¶9154, 421 F2d 48.

W.B. Aberson, CA-2, 70-1 USTC ¶9167, 419 F2d 820. Cert. denied, 397 US 1066.

E.E. Matosky, CA-7, 70-1 USTC ¶9210, 421 F2d 410. Cert. denied, 398 US 904.

S.J. Spinelli, CA-9, 71-1 USTC ¶9434, 443 F2d 2.

A.L. Dowell, CA-10, 71-2 USTC ¶9642, 446 F2d 145. Cert. denied, 404 US 984.

A.M. Siragusa, CA-2, 71-2 USTC ¶9730, 450 F2d 592. Cert. denied, 405 US 974.

L.L. Bursten, CA-5, 72-1 USTC ¶9152, 453 F2d 605. Cert. denied, 409 US 843.

L. Potts, CA-7, 72-1 USTC ¶9371, 459 F2d 412.

A.M. Newman, CA-5, 72-2 USTC ¶9719, 468 F2d 791. Cert. denied, 411 US 905.

K. Vanderburgh, CA-9, 73-1 USTC ¶9304, 473 F2d 1313.

G. Stribling, CA-6, 73-2 USTC ¶9604.

G.O. Meriwether, CA-5, 73-2 USTC ¶9731, 486 F2d 498.

D.M. Sarvis, CA-9, 73-2 USTC ¶9787, 488 F2d 526.

L. Kalmanson, CA-5, 74-1 USTC ¶9128.

J.B. Pinner, CA-4, 74-2 USTC ¶9547, 498 F2d 1398.

J.E. Smith, CA-4, 74-2 USTC ¶9709, 502 F2d 1150.

W.A. Lisowski, CA-7, 74-2 USTC ¶9784, 504 F2d 1268.

E. Cook, CA-5, 75-1 USTC ¶9134. Aff'd, per curiam, CA-5, 77-1 USTC ¶9165, 546 F2d 82.

E.J. Barrett, CA-7, 75-1 USTC ¶9340, 505 F2d 1091.

G.B. Parr, CA-5, 75-1 USTC ¶9349, 509 F2d 1381.

N.D. Anderson, CA-4, 75-1 USTC ¶9368.

D.C. Ross, CA-5, 75-1 USTC ¶9428, 511 F2d 757. Cert. denied, 423 US 836.

N.L. Ordoneaux, CA-5, 75-2 USTC ¶9516.

M. Stern, CA-9, 75-2 USTC ¶9637, 519 F2d 521.

J.G. Martin, CA-2, 75-2 USTC ¶9699, 525 F2d 703. Cert. denied, 423 US 1035.

J.L Allen, CA-6, 75-2 USTC ¶9685, 522 F2d 1229. Cert. denied, 423 US 1072.

J.H. Fendley, CA-5, 76-1 USTC ¶9110.

C.E. Prevatt, CA-5, 76-1 USTC ¶9180, 526 F2d 400.

V. Bernabei, CA-6, 76-2 USTC ¶9648.

J.W. Venditti, CA-5, 76-2 USTC ¶9492, 533 F2d 217.

B. Daniels, CA-5, 80-1 USTC ¶9438, 617 F2d 146.

W.L. Davis, CA-6, 81-1 USTC ¶9346.

S. Dwoskin, CA-5, 81-1 USTC ¶9416, 644 F2d 418.

R. Hebel, CA-8, 82-1 USTC ¶9162, 668 F2d 995. Cert. denied, 102 SCt 2014.

L.F. Shelton, CA-7, 82-1 USTC ¶9166, 669 F2d 446.

R.C. Thetford, CA-5, 82-1 USTC ¶9393, 676 F2d 170.

H. Stone, CA-9, 85-2 USTC ¶9652, 770 F2d 842.

D.K. Turner, CA-10, 86-2 USTC ¶9647, 799 F2d 627.

R.A. Copeland, CA-7, 86-1 USTC ¶9314, 786 F2d 768.

W. Jeffries, CA-7, 88-2 USTC ¶9459, 854 F2d 254.

M.C. Frederickson, CA-8, 88-2 USTC ¶9405.

F.C. Parrino, CA-8, 88-1 USTC ¶9348.

D.G. Auen, CA-2, 89-1 USTC ¶9105.

M.W. Williams, CA-11, 89-2 USTC ¶9390, 875 F2d 846.

H. Michaud, CA-1, 88-2 USTC ¶9577, 860 F2d 495.

J.J. Hogan, CA-1, 88-2 USTC ¶9593, 861 F2d 312.

W.A. Connor, Jr., CA-3, 90-1 USTC ¶50,166, 898 F2d 942.

W. Willie, CA-10, 91-2 USTC ¶50,409.

J.J. DiPetto, CA-2, 91-2 USTC ¶50,407, 936 F2d 96. Cert denied, 10/7/91.

R.W. Daniel, CA-6, 92-1 USTC ¶50,095.

E.A. Boone, CA-9, 92-1 USTC ¶50,179.

L. Chesson, Jr., CA-5, 92-1 USTC ¶50,230.

P.B. Bonneau, CA-1, 92-2 USTC ¶50,385, 970 F2d 929.

F.O. Becker, CA-7, 92-2 USTC ¶50,314, 965 F2d 383.

R.L. McGill, CA-1, 92-1 USTC ¶50,052.

W. Rea, CA-2, 92-1 USTC ¶50,191, 958 F2d 1206.

J.A. Brimberry, CA-7, 92-1 USTC ¶50,288, 961 F2d 1286.

R.L. Huguenin, CA-1, 91-2 USTC ¶50,571, 950 F2d 23.

R.W. Charroux, CA-5, 93-2 USTC ¶50,628, 3 F3d 827.

J.L. Martin, CA-4 (unpublished opinion), 97-2 USTC ¶50,727, aff'g, per curiam, an unreported District Court decision.

S.J. Holland, CA-7, 98-2 USTC ¶50,898, 160 F3d 377.

J.E. Codner, CA-10 (unpublished opinion), 2000-1 USTC ¶50,389, aff'g an unreported District Court decision.

L. Tekle, CA-9 (unpublished opinion), 2002-1 USTC ¶50,225, aff'g an unreported District Court decision.

T.P. Brennan, CA-3 (unpublished opinion), 2002-1 USTC ¶50,455, aff'g an unreported District Court decision.

M. Wick, CA-9 (unpublished opinion), 2002-1 USTC ¶50,456, aff'g an unreported District Court decision.

Willfulness may be negated by a good-faith misunderstanding of the law or a good-faith belief that there is no violation regardless of whether the claim is objectively unreasonable.

J.L. Cheek, SCt, 91-1 USTC ¶50,012, 11 SCt 604.

The Seventh Circuit, on remand, reversed and remanded the unreported DC Ill. decision.

J.L. Cheek, CA-7, 91-1 USTC ¶50,232, 931 F2d 1206.

A pilot's contention that the trial court erred in not instructing the jury on the advice of counsel defense was not valid because the court's instructions treated the issues fairly and accurately. Moreover, the court's instructions as to willfulness encompassed any defense claiming a good faith belief of lawful conduct. Thus, the taxpayer's conviction and sentencing for tax evasion and failure to file returns on retrial were upheld, consistent with the U.S. Supreme Court's opinion in J.L. Cheek, SCt, 91-1 USTC ¶50,012.

J.L. Cheek, CA-7, 93-2 USTC ¶50,473, 3 F3d 1057. Cert. denied, 2/22/94.

Similarly.

R.G. Powell, CA-9, 91-2 USTC ¶50,320, 936 F2d 736. Amended, CA-9, 92-1 USTC ¶50,128, 955 F2d 1206.

Evidence was sufficient to find the taxpayer guilty of attempted evasion of income taxes.

M.C. Goldberg, DC, 62-2 USTC ¶9638, 206 FSupp 394. Aff'd on another issue, CA-3, 64-1 USTC ¶9316, 330 F2d 30.

W.A. Mousley, CA-3, 63-1 USTC ¶9245, 311 F2d 795. Cert. denied, 372 US 966.

P.J. Richard, DC, 63-1 USTC ¶9243. Aff'd on other grounds, CA-1, 63-1 USTC ¶9376, 315 F2d 331.

M.R. Scheetz, DC, 64-1 USTC ¶9364, 224 FSupp 789.

V.M. Gase, DC, 66-1 USTC ¶9288, 248 FSupp 704.

M.L. Donovan, DC, 66-1 USTC ¶9231, 250 FSupp 463.

G.L. Mancuso, CA-4, 67-2 USTC ¶9487, 378 F2d 612. Petition for rehearing denied, CA-4, 68-1 USTC ¶9166, 387 F2d 376. Cert. denied, 390 US 955.

D.E. Bartone, CA-6, 68-2 USTC ¶9564, 400 F2d 459.

A.T. Critzer, CA-4, 74-2 USTC ¶9505, 498 F2d 1160.

R.E. Berzinski, CA-8, 76-1 USTC ¶9211, 529 F2d 590.

B. Kaatz, CA-10, 83-1 USTC ¶9156, 705 F2d 1237.

W. Greene, CA-9, 83-1 USTC ¶9175, 698 F2d 1364.

F.J. Hecht, CA-8, 83-1 USTC ¶9233, 705 F2d 976.

J.A. Shorter, Jr., CA-D.C., 87-1 USTC ¶9127, 809 F2d 54.

R.S. Hart, DC Ind., 88-2 USTC ¶9467.

G.M. House, DC Mich., 87-2 USTC ¶9561.

D.E. Dack, CA-7, 93-1 USTC ¶50,162, 987 F2d 1282.

H.J. Sallee, CA-5, 93-1 USTC ¶50,236, 984 F2d 643.

W.J. Benson, CA-7, 95-2 USTC ¶50,540, 67 F3d 641.

J. Klausner, CA-2, 96-1 USTC ¶50,173.

R.A. Valenti, CA-7, 97-2 USTC ¶50,629, 121 F3d 327.

See also ¶41,318.177.

Taxpayer was found not guilty of fraud with intent to evade tax.

F. Palermo, CA-3, 58-2 USTC ¶9850, 259 F2d 872.

A.T. Critzer, CA-4, 74-2 USTC ¶9505, 498 F2d 1160.

L. Harris, CA-7, 91-2 USTC ¶50,433, 942 F2d 1125.

B. Romano, CA-2, 91-2 USTC ¶50,471, 938 F2d 1569.

J.R. Montgomery, DC, 54-1 USTC ¶9247.

M.J. Marler, DC, 56-1 USTC ¶9483.

C. Jannuzzio, DC, 60-2 USTC ¶9512, 184 FSupp 460.

J.C. Tyler, DC, 61-1 USTC ¶9290.

R.E. Ford, Sr., DC, 62-1 USTC ¶9417.

W.B. Archer, DC, 63-2 USTC ¶9632.

J.B. Nicosia, DC, 73-2 USTC ¶9587, 360 FSupp 814.

K. Frosch, BC-DC Pa., 2002-1 USTC ¶50,124.

A judgment by the Court of Appeals for the Fifth Circuit affirming the taxpayer's conviction by a jury for willfully attempting to evade taxes was vacated and remanded on certiorari by the U.S. Supreme Court, which followed the Solicitor General's recommendation that certiorari be granted because the government failed to disclose written or recorded statements or reports of its witnesses in its possession.

N.C. Beasley, SCt, 76-2 USTC ¶9555, 425 US 956, vacating and remanding CA-5, 75-2 USTC ¶9725, 519 F2d 233.

Pursuant to the Supreme Court decision above, the Court of Appeals for the Fifth Circuit remanded the case to the District Court with instructions to consider the issues raised by the Solicitor General's investigation.

N.C. Beasley, CA-5, 76-2 USTC ¶9556, 535 F2d 293, on remand from SCt, 76-2 USTC ¶9555, 425 US 956.

On appeal, after the remand, it was held that the government's failure, albeit in good faith, to produce pre-trial statements given by a key prosecution witness violated the Jencks Act. The viola tion, however, constituted reversible error as to only one of the two charges.

N.C. Beasley, CA-5, 78-2 USTC ¶9586, 576 F2d 626. Defendant's petition for rehearing denied, CA-5, 79-1 USTC ¶9107.

Insufficient evidence was presented to support married taxpayers' convictions for tax evasion where the government failed to prove the required existence of a tax deficiency. Under the "no earnings and profits, no income" rule established in P.F. DiZenzo, CA-2, 65-2 USTC ¶9518, amounts that the couple diverted from their wholly owned corporation could not be taxable to them personally as a constructive dividend, where the company had no earnings or profits. Instead, the diverted funds constituted a nontaxable reduction of the couple's shareholder loan account.

J. D'Agostino, CA-2, 98-1 USTC ¶50,380, 145 F3d 69.

The conviction of a lawyer for tax evasion where the amounts of depreciation on some 90 pieces of taxpayer's property, which were large and important items in the net worth method used to determine his income, were based upon speculative and uncertain values and economic lives was reversed.

R.G. Lenske, CA-9, 67-2 USTC ¶9631, 383 F2d 20.

On evidence that the taxpayer had failed to file returns for the years in issue because he was "unable to pay" but that he submitted or caused others to submit W-2 forms disclosing his tax responsibility to the Government, the Court found an absence of an "evil motive", such as is required for conviction. Accordingly, the motion for judgment of acquittal was granted.

R.R. Power, DC, 68-2 USTC ¶9443.

Where the evidence indicated that the taxpayer's purpose in failing to pay over collected taxes for his clients was to take advantage of the time lag in the government's investigation of delinquent returns to tide him over during a period of personal financial hardship, he was not guilty of willfully attempting to evade the payment of taxes of his clients. District Court reversed.

C.L.O. Edwards, CA-9, 67-1 USTC ¶9356.



A dentist who opened two bank accounts using false personal information in an attempt to prevent the IRS from collecting taxes owed was properly convicted of tax evasion and failure to pay tax. The taxpayer transferred large amounts of income earned from his dental practice to bank accounts upon receiving deficiency notices for the tax years in issue. His use of a false social security number (SSN), birth place and birth date could have easily misled or concealed information from the IRS.

R.S. Carlson, CA-9, 2001-1 USTC ¶50,152.

Conviction for willfully attempting to evade taxes by filing false returns was reversed on two counts because there was insufficient evidence to determine that a bank installment loan department head had received money illegally from a bank client.

G.O. Meriwether, CA-5, 73-2 USTC ¶9731, 486 F2d 498.

The Court of Appeals for the Third Circuit, regarding the lower court's conclusion that there was willful evasion of taxes for 1966, reversed with respect to the taxpayer-husband and reversed and remanded with respect to his wife. There should have been a reasonable doubt as to whether the husband had thwarted the investigation by the IRS by taking steps to conceal their 1965 tax records. Since there was a question for the jury regarding the wife's willfulness, she was granted a new trial because the jury was exposed to considerable evidence bearing on willful conduct in prior years for which the government failed to prove any deficiency.

E.F. House, CA-3, 75-2 USTC ¶9782, 524 F2d 1035, rev'g in part and rem'g in part DC, 75-1 USTC ¶9285. Reh'g denied by CA-3, 76-2 USTC ¶9616.

Willfulness need only exist when the returns are filed. The subsequent payment of enough to satisfy liability cannot be used to show the lack of willfulness.

C.F. Quinn, DC, 77-2 USTC ¶9503.

Willfulness was shown by consistent failure to report large amounts of income, failure to comply with summonses and the making of a false statement to an IRS agent.

C.A. Schafer, CA-5, 78-2 USTC ¶9717, 580 F2d 774.

The evidence showed that tax evasion was willful. The defendant had admitted to the IRS that he knew the tax laws well, that he knew that illegally obtained income was reportable and that he had considered reporting it but feared that if he did his employer would discover his activities.

L. Ojala, CA-8, 78-2 USTC ¶9845, 587 F2d 395.

The jury properly concluded, based on all the psychiatric testimony, that the defendant was not mentally ill during the years in question. No error was involved in allowing the government's doctors to testify as to his competency to commit the offense even though they were initially appointed to determine his competency to stand trial.

B. Klein, CA-10, 80-1 USTC ¶9109.

Evidence of a consistent pattern of not reporting large amounts of income is in itself evidence of wilfulness.

S.R. King, CA-8, 80-1 USTC ¶9251, 616 F2d 1034.

Operators of a legal house of ill repute were properly convicted of tax evasion for failing to withhold tax as to wages paid to auxiliary employees such as maids and bartenders. The amounts received by those persons were wages, not tips. The overall operation established an intent to deprive the government of taxes.

J. Conforte, CA-9, 80-1 USTC ¶9417, 624 F2d 869. Cert. denied, 449 US 1012, 101 SCt 568.

Before the Spies case it was held that willful failure to file a return was in itself evidence of an attempt to evade and defeat the income tax laws.

L.C. O'Brien, CA-7, 1931 CCH ¶9474, 51 F2d 193. Cert. denied, 284 US 673.

Miro, CA-2, 1932 CCH ¶9396, 60 F2d 58.

The filing of a false W-4 form by an insurance agent was found to be the affirmative act necessary to support a felony charge of willful evasion of tax.

J.R. Williams, CA-5, 91-1 USTC ¶50,197, 928 F2d 145. Cert. denied, 10/7/91.

An individual's conviction for attempting to evade assessment of income taxes was upheld because the filing and maintaining on file of Forms W-4, on which he falsely claimed exemption from withholding, constituted the necessary affirmative act of evasion. A reasonable jury could have concluded that the taxpayer filed the forms with the intent of permanently eliminating income tax withholding. The government fulfilled its obligation of showing that the individual willfully attempted to evade assessment, and whether or not he was successful was irrelevant.

R.A. King, CA-7, 97-2 USTC ¶50,746, 126 F3d 987.

A subcontractor who received earned income for services rendered but who directed that his paychecks be made payable to a tax avoidance organization was properly convicted of tax evasion and failure to file income tax returns. Testimony and documentary evidence established that the subcontractor received earned income and filed no returns; thus, the existence of a tax deficiency was proven. Moreover, the taxpayer's admissions to a co-worker, as well as instructions to make checks payable to the tax protest organization, were indicative of his willful evasion of taxes.

L. Beall, CA-7, 92-2 USTC ¶50,417, 970 F2d 343.

The indictment leading to a steam fitter's conviction for tax evasion, which charged conduct constituting both evasion of assessment of tax and evasion of payment of tax, was not duplicitous. The individual's filing of a fraudulent Form W-4 was a sufficient affirmative act to support a felony tax evasion prosecution.

R.S. Mal, CA-9, 91-2 USTC ¶50,518, 942 F2d 682.

An individual's motion for judgment of acquittal notwithstanding jury verdicts that he was guilty of the crimes of tax evasion and the willful failure to file returns was denied. Evidence of fraudulently filed withholding forms established the affirmative act element of the crime of tax evasion. Willfulness was established for both crimes through evidence of an incorrect address and false information provided during the IRS investigation.

J.R. Crocker, DC Del., 92-1 USTC ¶50,008, 753 FSupp 1209.

The IRS did not have to prove that the form filed by a massage parlor operator was a "return" in order to establish tax evasion because the filing of a return is not an element of the crime of tax evasion. Similarly, in proving that the taxpayer filed a false return, the IRS was not required to establish that it was a joint return, as described in the indictment.

S.N. Robinson, CA-5, 92-2 USTC ¶50,565, 974 F2d 575.

A taxpayer who provided false social security numbers to his bank and brokerage firms, which in turn caused these payors to issue Forms 1099 to the IRS under the false social security numbers, was properly convicted on four counts of tax evasion.

J.C. Payne, CA-10, 92-2 USTC ¶50,555, 978 F2d 1177. Cert. denied, 113 SCt 2995.

The IRS failed to prove that a husband and wife willfully attempted to evade or defeat payment of their taxes. There was no fraud on the part of the wife in signing returns and filing for bankruptcy shortly after the taxes were eligible for discharge in bankruptcy. Although the husband claimed excessive exemptions and filed late returns after being contacted by the IRS, the IRS's assertion that he willfully attempted to avoid paying taxes by making minimal payments on the overdue amounts was not supported by the evidence. The sparse stipulated facts that the IRS relied upon did not establish that the husband knew he had a duty to pay the taxes and that he voluntarily and intentionally violated that duty.

R.A. Peterson, BC-DC Wyo., 93-2 USTC ¶50,499, 160 BR 385.

An individual who prepared sham promissory notes for tax protestors, listed the debt on their bankruptcy petition forms and filed the petitions in order to cause the IRS to release tax levies on their wages was properly convicted of aiding and abetting attempted income tax evasion. Although the bankruptcy filings alone did not constitute an unlawful attempt to evade payment of tax, the false assertions of heavy debt and financial distress, which had the purpose of depriving the government of amounts collectible under the levies, supported the conviction. Similarly, convictions for conspiracy to defraud the United States were sustained because the false assertions provided the required element of dishonesty.

R. Huebner, CA-9, 95-1 USTC ¶50,008, 48 F3d 376. Cert. denied, 116 SCt 71.

An attorney who served as administrator of an estate was properly convicted of tax evasion. The attorney's transfers of estate funds among accounts at the same bank were not only part of an embezzlement scheme, but also constituted affirmative acts showing an intent to conceal receipt of embezzled funds. Also, the attorney sought an extension of time to file his tax return and underpaid estimated taxes in order to mislead the government as to his true amount of income.

W.E. Eaken, CA-7, 94-1 USTC ¶50,098, 17 F3d 203.

A married couple and their tax attorney were properly convicted of tax evasion despite their claim that the husband's underlying tax deficiency had been eliminated. His voluntary payments and the proceeds from the sale of his seized property did not eliminate his original tax liability and the IRS was not required to apply the seized amounts in the same manner as he requested for his voluntary payments. The IRS applied the seizure proceeds to his total tax, interest and penalties for the earliest year owed; thus, there continued to be a deficiency even thought the husband's total payments exceeded the amount of tax that he originally owed.

F.Y. Wright, Jr., CA-5, 2000-1 USTC ¶50,438, 211 F3d 233. Aff'g in part and rem'g in part an unreported District Court decision.

A bankruptcy court's determination that the government failed to meet its burden of proving that an individual willfully evaded taxes was erroneous. Prior to the debtor's bankruptcy filing, a federal district court allowed the government's federal tax lien to take priority over the mortgage and that may have implicated a finding of fraud. In addition, the bankruptcy court erred in its finding that the debtor did not have the ability to pay his tax liabilities in light of his substantial income tax liability three years after he allegedly ceased to earn an income. Accordingly, the bankruptcy court was instructed to make a factual determination as to whether evidence of a willful attempt to evade taxes existed under a totality of the circumstances.

S.M. Spiwak, DC Fla., 2002-2 USTC ¶50,568, 285 BR 744.

The IRS reached an agreement with Doctors Benefit Insurance Company (DBIC), assignee of xélan Insurance Company Limited, with respect to group supplemental insurance programs offered to members of xélan. DBIC agreed to stop operations and return $500 million to the programs' participants. DBIC is required to withhold money on these payments, as well as make a $2.34 million payment to the IRS to resolve issues arising in connection with these policies.

IRS News Release IR-2005-114, October 3, 2005.

A dentist who was a persistent "tax protestor" willfully attempted to evade the federal income tax in violation of Code Sec. 7201. The government's evidence established that the dentist earned taxable income, owed substantial income tax, knew that he was required to file an income tax return, failed to pay any income taxes and willfully attempted to evade the taxes he owed. Thus, the evidence was sufficient to establish the offense of willful tax evasion.

R.E. Nolen, CA-5, 2007-1 USTC ¶50,285.

The evidence was sufficient to support a married couple's conviction for willfully attempting to evade or defeat tax. The husband, a certified public accountant, failed to report his accounting income from the nonprofit organization for which his wife was the executive director. He also did not report the rental income received from property that was leased to the organization on the couple's joint tax returns. The wife reported only half the rent she received for the property leased to the organization on her returns. Moreover, she used organization funds for her own purposes and tried to conceal such activities from the organization's auditors and the government by underreporting her income.

W.D. Madison, CA-6 (unpublished opinion), 2007-1 USTC ¶50,495, aff'g in part, rev'g and rem'g in part an unreported DC Tenn. decision.

An individual's conviction for willful tax evasion was not invalidated merely because he was seeking a Collection Due Process hearing to dispute his tax liability. His argument that the offense of tax evasion was not complete until the IRS was unable to collect taxes was without merit. The offense was complete when he failed to make tax payments and used three trusts to conceal his income. Further, the Paperwork Reduction Act did not preclude his conviction. There was no evidence that the control numbers on the tax forms were invalid.

D.R. Patridge, CA-7, 2007-2 USTC ¶50,806, 507 F3d 1092.

The sentence imposed on an individual for willfully attempting to evade payment of taxes was affirmed. After reaching a settlement agreement with the IRS, the individual submitted an offer in compromise in which he failed to disclose substantial assets to the IRS. The individual had transferred his income and assets to two companies he failed to disclose on Form 656, Offer in Compromise, and supporting documents. Although the individual argued that he was denied from presenting his good faith defense, he failed to identify specific evidence that was excluded by the court. The record established that he was allowed to introduce evidence, to argue the facts attacking the willfulness element, to testify extensively and to explain his doubts as to his tax liability. Further, since a formal assessment is not a required element to proving tax evasion, the court properly ruled that the government did not need to prove that a valid assessment had been issued.. Finally, the court was without authority to issue an order compelling the prosecution to grant immunity to the individual's witness who invoked Fifth Amendment privilege and refused to testify.

C.E. Vaughn, CA-4 (unpublished opinion), 2007-2 USTC ¶50,811, aff'g, per curiam, an unreported DC W.Va. decision.

A married couple was properly convicted of tax evasion. The documents and information seized pursuant to a search warrant was properly introduced into evidence to establish the couples' tax liability; thus, the couple's claim that the warrant lacked particularity was without merit. Further, the government's evidence presented at trial was sufficient for a rational jury to find that the wife willfully evaded paying the tax deficiency. The couple transferred money to an offshore account, kept assets in the name of trusts and used those assets to live a lavish lifestyle.

J. Van Meter, CA-5, 2008-1 USTC ¶50,373.

The director of a television station was properly convicted of tax evasion. A single count charging the individual with tax evasion covering several years was not duplicitous when the director exhibited the same pattern of evasive conduct for all the years in question leading to one continuous course of conduct. Moreover, the evidence used by the government to prove one count of tax evasion encompassing those years was the same evidence it would have used to prove evasion in each year individually.

T.L. Root, DC Pa., 2008-1 USTC ¶50,391.

A federal district court properly convicted and sentenced an individual for income tax evasion. The individual operated his business under a false name, concealed his identity and income, and did not file a tax return for any of the tax years at issue. A rational jury could easily infer that the individual knew of his obligation to file federal income tax returns and that his failure to do so was an intentional violation of a known legal duty.

N. Stierhoff, CA-1, 2009-1 USTC ¶50,103.

An individual was properly convicted of attempted tax evasion. There was no merit in his argument that the district court lacked jurisdiction due to an alleged defect in the arrest warrant that was issued after his indictment. Even if the warrant was defective, the illegal arrest or detention did not void a subsequent conviction.

A.L. Farnsworth, CA-3, 2009-1 USTC ¶50,104.

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6694 and Scheule C trade or business expenses

In the case of Rowden v. Commissioner, below, a taxpayer could not deduct section 162 expenses associated with his ownership of an airplane on Schedule C because none of the activities related to the airplane was a trade or business, as limited by section 183(b)(2). The individual was not involved in the trade or business of environmental consulting in one of the years at issue because he did not establish that he engaged in related activities with the required continuity and regularity. Furthermore, expenses incurred by the individual with respect to aircraft maintenance activity in one year and in environmental aviation activity in the subsequent year were not deductible. The individual was not engaged in either activity as a trade or business because his primary purpose for engaging in the activities was not income or profit. His recordkeeping was disorganized and unreliable, he could not have an expectation that assets used in the activity would appreciate, he could not have had a good-faith expectation of realizing a profit on his operation, he introduced no evidence regarding the financial performance of his aircraft maintenance activity for previous years or evidence regarding occasional profits, and the individual's full-time job allowed the individual to conduct the aircraft maintenance activity at a loss. The section 6662 penalty was assessed and for that reason if the tax return would have been prepared by a tax return preparer, the NEGLIGENCE could easily be treated as “reckless” and, therefore, trigger the $5,000 6694 penalty on the return preparer. The “trade or business” expense is one of the most common IRS examination issues and the rationale of the Rowden case applies to ALL SCHEDUEL C EXPENSES. You will see from the Rowden case that the Tax Court is very tough on justifying trade or business expenses. My personal opinion is that the court in this case is wrong in not taking into account that a “business” can have a short duration. For example, one can enter a business and, if it does not work out, the wise thing to do is to abandon the business. Nevertheless all tax return preparers should understand that Schedule C business expenses for new and short term businesses will be vulnerable to an aggressive IRS examiner who will be newly focused on the revenue that could be generated from the 6694(b) penalty for the 2008 tax year.

Robert L. Rowden v. Commissioner,`Dkt. No. 17510-06 , TC Memo. 2009-41, February 19, 2009.


MEMORANDUM FINDINGS OF FACT AND OPINION

MARVEL, Judge: Respondent determined deficiencies of $5,074 and $7,396 in petitioner's 2002 and 2003 Federal income taxes and accuracy-related penalties under section 6662 1 of $1,015 and $1,479, respectively. After concessions 2 the issues for decision are:

(1) Whether petitioner was in the trade or business of environmental consulting and aircraft maintenance during 2002 and environmental aviation during 2003;

(2) whether petitioner substantiated deductions claimed on Schedules C, Profit or Loss From Business; and

(3) whether petitioner is liable for the accuracy-related penalties under section 6662.


FINDINGS OF FACT

The parties have stipulated some of the facts, which we incorporate in our findings by this reference. Petitioner resided in Oklahoma when his petition was filed.

During 2002 and 2003 petitioner was employed full time as an environmental engineer by Engineering and Environment, Inc. (EEI), a government contractor. He earned $52,611 and $60,889, respectively. Petitioner's employment contract was renewable annually. During 2002 petitioner also performed environmental consulting services that were an outgrowth of services he had performed and been paid for before 2002.

Petitioner grew up in a family of pilots and enjoys working on and being around airplanes. Petitioner has been a licensed pilot for about 25 years. In the 1980s petitioner completed a 2-year program at the Spartan School of Aeronautics in Tulsa, Oklahoma. After passing written and oral Federal Aviation Administration (FAA) tests, petitioner obtained a mechanic's certificate with airframe and powerplant ratings. 3 In 2000, after passing another FAA test, petitioner obtained an inspection authorization. 4 Petitioner also attended specialized aviation-related seminars; in August 2002 petitioner attended a seminar on aircraft rigging held by the Cessna Pilots Association.

On August 25, 2002, petitioner purchased a 50-percent interest in a 1975 Cessna 182P aircraft (Cessna) from DenRow Limited, L.C. (DenRow), for $30,000 using loan proceeds. DenRow is owned by petitioner's brother, William J. Rowden (Mr. Rowden), 5 a commercial airline pilot, and Mr. Rowden's wife. DenRow retained the other 50-percent interest in the Cessna. The Cessna continued to be hangared at the Prague, Oklahoma, municipal airport, although occasionally it was stored at the Lawton, Oklahoma, municipal airport where in 2003 petitioner rented hangar space.

Under the purchase agreement, petitioner was responsible for one-half of the maintenance, repair, storage, and operation costs of the Cessna. When petitioner purchased his interest in the Cessna, it was not in airworthy condition because its engine required a major overhaul. 6 At some point during the years at issue, petitioner sent the engine to an outside shop for an overhaul, at a cost of approximately $25,000.

During the years at issue petitioner spent 20 to 30 hours weekly working on the Cessna, on airplanes owned by other people, and on related matters. Neither Mr. Rowden nor DenRow paid petitioner for work he performed on the Cessna.

During the years at issue the Cessna was for sale. Petitioner followed market prices using various sources for aircraft valuation, such as trade periodicals. In 2007 the Cessna was appraised at $93,000. As of the date of trial Mr. Rowden did not believe the Cessna could be sold at a profit.

Petitioner timely filed his 2002 and 2003 Forms 1040, U.S. Individual Income Tax Return (2002 and 2003 returns). On the 2002 return he reported two businesses on two Schedules C (2002 Schedules C1 and C2). The 2002 Schedule C1 described petitioner's business as "Env [Environmental] Consulting", and the 2002 Schedule C2 described petitioner's other business as "Aircraft Maintenance". Petitioner reported one business on a Schedule C attached to the 2003 return (2003 Schedule C) and described his business as "Environmental Aviati[on]". On his Schedules C petitioner reported gross income and expenses and net profit or loss, as shown in the following table:



Net
Gross profit
Schedule C income Expenses or (loss)

2002 Schedule C1 -0- $9,780 ($9,780)

2002 Schedule C2 $450 11,364 (10,914)

2003 Schedule C 2,238 27,531 (25,293)


The following table compares the adjusted gross income (AGI) that petitioner would have reported if he had not engaged in his activities with the AGI that he actually reported on his 2002 and 2003 returns:



AGI
without
the AGI
Year activities reported

2002 $53,807 $33,113

2003 63,137 37,844


In the notice of deficiency respondent disallowed all 2002 Schedule C1 and 2003 Schedule C deductions. Respondent also disallowed deductions for tools, parts, and training expenses totaling $8,744 claimed on the 2002 Schedule C2. 7 Respondent disallowed these Schedule C deductions for the following reason: "Your deductions * * * have been adjusted to reflect the amount verified as paid or incurred for business purposes." Because respondent disallowed the deductions for business use of home of $511 and $504 claimed on the 2002 Schedule C1 and 2003 Schedule C, respondent allowed additional home mortgage interest deductions of $511 and $504 for 2002 and 2003, respectively. Respondent made computational adjustments to self-employment tax for 2003 and determined that petitioner was liable for accuracy-related penalties under section 6662 of $1,015 and $1,479 for 2002 and 2003, respectively.


OPINION

The Commissioner's determinations are presumed correct, and the taxpayer ordinarily bears the burden of proving that those determinations are erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Moreover, deductions are a matter of legislative grace, and the taxpayer bears the burden of proving that he is entitled to any deduction claimed. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). Petitioner does not contend that section 7491(a) shifts the burden of proof to respondent, and petitioner has not established that he satisfies the section 7491(a)(2) requirements.

Respondent contends that petitioner may not deduct his Schedule C expenses because none of the Schedule C activities was a trade or business. 8 Section 162(a) allows a taxpayer to deduct ordinary and necessary expenses of carrying on the taxpayer's trade or business. To be engaged in a trade or business with respect to which deductions are allowable under section 162, "the taxpayer must be involved in the activity with continuity and regularity", and "the taxpayer's primary purpose for engaging in the activity must be for income or profit." Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987). A sporadic activity or a hobby does not qualify. Id.



I. The Environmental Consulting Activity in 2002 9
Petitioner testified that he engaged in the environmental consulting activity "when available" and that the aviation activity had become his priority. During 2002 petitioner reported no gross income from the activity and only performed followup services; he attended two client meetings and conducted online research related to the activity. Petitioner did not introduce any evidence regarding how much time he spent on the activity. We conclude petitioner failed to establish that in 2002 he engaged in the environmental consulting activity with the requisite continuity and regularity. See id. Consequently, we do not need to address whether petitioner engaged in the environmental consulting activity for profit and whether he substantiated deductions claimed on the 2002 Schedule C1.



II. Aircraft Maintenance Activity in 2002 and Environmental Aviation Activity in 2003
A. In General

Section 162 allows deductions for ordinary and necessary expenses of carrying on an activity which constitutes the taxpayer's trade or business. To be engaged in a trade or business under section 162(a), "the taxpayer's primary purpose for engaging in the activity must be for income or profit." Commissioner v. Groetzinger, supra at 35. Section 212 allows deductions for expenses paid or incurred in connection with an activity engaged in for the production or collection of income, or for the management, conservation, or maintenance of property held for the production of income. The profit standards applicable to section 212 are the same as those used in section 162. See Allen v. Commissioner, 72 T.C. 28, 33 (1979).

Petitioner contends that respondent has conceded the profit-motive issue. We disagree. Respondent has not conceded the issue; respondent argued during trial and on brief that to establish that petitioner was engaged in a trade or business petitioner must prove he engaged in an activity with continuity and regularity and with the primary purpose of making a profit. See Commissioner v. Groetzinger, supra at 35. We begin our analysis of whether petitioner's aircraft maintenance activity or environmental aviation activity was a trade or business by examining whether petitioner engaged in either activity with the requisite profit motive.

Section 183, which restricts taxpayers from deducting losses from an activity that is not engaged in for profit, is often applied to determine whether an alleged trade or business is conducted with the requisite profit motive. Cannon v. Commissioner, 949 F.2d 345, 348 (10th Cir. 1991), affg. T.C. Memo. 1990-148; Krause v. Commissioner, 99 T.C. 132, 168 (1992), affd. sub nom. Hildebrand v. Commissioner, 28 F.3d 1024 (10th Cir. 1994). Section 183(c) defines any "activity not engaged in for profit" as "any activity other than one with respect to which deductions are allowable for the taxable year under section 162 or under paragraph (1) or (2) of section 212."

Absent a stipulation to the contrary, see sec. 7482(b)(2), this case is appealable to the Court of Appeals for the Tenth Circuit, which has applied the dominant or primary objective standard to test whether an alleged business activity is conducted for profit, Hildebrand v. Commissioner, 28 F.3d at 1027; Cannon v. Commissioner, supra at 350; 10 Oswandel v. Commissioner, T.C. Memo. 2007-183. Under the standard applied by the Court of Appeals for the Tenth Circuit, a taxpayer's dominant or primary objective in conducting the activity must be to earn a profit. Whether an activity was engaged in for profit is a factual determination to be resolved on the basis of all the surrounding facts and circumstances. Hildebrand v. Commissioner, 28 F.3d at 1027.

Section 1.183-2(b), Income Tax Regs., provides a nonexclusive list of factors to be considered in determining whether a taxpayer has the requisite profit objective. The factors are: (1) The manner in which the taxpayer carries on the activity; (2) the expertise of the taxpayer or his advisers; (3) the time and effort expended by the taxpayer in carrying on the activity; (4) the expectation that assets used in the activity may appreciate in value; (5) the success of the taxpayer in carrying on other similar or dissimilar activities; (6) the taxpayer's history of income or loss with respect to the activity; (7) the amount of occasional profits, if any, which are earned; (8) the financial status of the taxpayer; and (9) elements of personal pleasure or recreation. No single factor is determinative. See id.

While the taxpayer's expectation of profit need not be reasonable, it must be in good faith. Allen v. Commissioner, supra at 33. We give greater weight to the surrounding objective facts than to the taxpayer's mere statement of intent. Cannon v. Commissioner, supra at 351 n.8; Dreicer v. Commissioner, 78 T.C. 642, 645 (1982), affd. without published opinion 702 F.2d 1205 (D.C. Cir. 1983).

B. Nature of the Environmental Aviation Activity in 2003

Petitioner testified that the environmental aviation activity reported on the 2003 Schedule C combined two activities: Environmental consulting and aircraft maintenance. Petitioner received his 2003 Schedule C gross income from two clients for performing annual inspections in the course of the aircraft maintenance activity. 11 The record establishes that most 2003 Schedule C expenses, such as interest on the aviation loan, the Cessna insurance, and parts expenses, were incurred for petitioner's aircraft maintenance activity. Consequently, for purposes of this opinion we treat the environmental aviation activity as a continuation of the 2002 aircraft maintenance activity.

C. Applying the Factors

1. Manner in Which Petitioner Conducted the Activity

In deciding whether a taxpayer has conducted an activity in a businesslike manner we consider: (1) Whether complete and accurate books and records were maintained; (2) whether the activity was conducted in a manner substantially similar to those of other activities of the same nature that were profitable; and (3) whether changes in operating methods, adoption of new techniques, or abandonment of unprofitable methods were done in a manner consistent with an intent to improve profitability. See Engdahl v. Commissioner, 72 T.C. 659, 666-668 (1979); sec. 1.183-2(b)(1), Income Tax Regs.

Petitioner's recordkeeping was disorganized and unreliable. For example, although petitioner retained all receipts for his expenses, petitioner's files mistakenly contained receipts for unrelated years. Petitioner did not introduce any records pertaining to gross income, such as copies of customer work orders, logbooks, or customer invoices. Petitioner testified that approximately 25 percent of the parts he purchased were used for airplanes other than the Cessna and that he kept records for larger inventory items. However, petitioner did not introduce any inventory records into evidence.

We are not convinced that petitioner's recordkeeping represented anything other than an effort to substantiate expenses claimed on his return. For a taxpayer's books and records to indicate a profit motive, the taxpayer should use books and records for measuring profits, cutting expenses, and evaluating the overall performance of the operation. Golanty v. Commissioner, 72 T.C. 411, 430 (1979), affd. without published opinion 647 F.2d 170 (9th Cir. 1981). Petitioner's records, however, consisted of a collection of receipts. Petitioner presented no evidence that he used them to evaluate the profitability of his operations.

Petitioner testified that he had engaged in the aircraft maintenance activity since 1996. However, he offered no evidence regarding the past performance of the activity and whether he considered changes in his operating methods.

We conclude that during the years at issue petitioner did not conduct his aircraft maintenance activity in a businesslike manner. This factor favors respondent's position.

2. Expertise of Petitioner or His Advisers

Preparation for an activity by an extensive study of its accepted business, economic, and scientific practices or consultation with those who are experts therein may indicate a profit objective. Engdahl v. Commissioner, supra at 668; sec. 1.183-2(b)(2), Income Tax Regs. Efforts to gain experience and a willingness to follow expert advice may indicate a profit motive. Engdahl v. Commissioner, supra at 668. Petitioner established that he had acquired technical expertise by completing studies at the Spartan School of Aeronautics and by obtaining FAA certifications. However, petitioner did not establish that he had had experience or had acquired expertise in running a profitable business. This factor is neutral.

3. Time and Effort Devoted to the Activity

The fact that a taxpayer devotes personal time and effort to carrying on an activity may indicate an intention to derive a profit, particularly where there are no substantial personal or recreational elements associated with the activity. Sec. 1.183-2(b)(3), Income Tax Regs. Petitioner testified that he spent between 20 and 30 hours weekly working on the Cessna and his clients'airplanes. 12 However, the time petitioner spent working on the Cessna is consistent with the use of the Cessna for recreation. See Warden v. Commissioner, T.C. Memo. 1995-176 (finding that the time the taxpayers spent on cleaning and maintaining their yacht was consistent with the use of the yacht for recreation), affd. without published opinion 111 F.3d 139 (9th Cir. 1997). Petitioner did not introduce any evidence regarding what portion of 20-30 hours per week he spent working on clients' airplanes. Although petitioner testified that at the time of trial he spent less than 20 hours annually flying (predominantly using the Cessna), he did not introduce any evidence regarding how much of his use of the Cessna (after the repairs during the years at issue) was for personal flying and how much was for income-producing activities. Given the lack of evidence regarding the appropriate allocation, we conclude this factor is neutral.

4. Expectation That Assets Used in the Activity May Appreciate

The term "profit" encompasses appreciation of assets used in the activity. Sec. 1.183-2(b)(4), Income Tax Regs. An activity may produce an overall economic profit, even if there is no operational profit, when appreciation of the assets of the activity is taken into account. Id.

Petitioner claims that his business's value increased because the Cessna appreciated after the overhaul and because the Cessna ownership provided his business additional client exposure. The only evidence in the record that the Cessna was an advertising tool is petitioner's uncorroborated testimony, which we are not required to accept. See Tokarski v. Commissioner, 87 T.C. 74, 77 (1986). As to petitioner's expectations regarding the appreciation of the Cessna, although both petitioner and his brother testified that the Cessna had always been for sale and they had hoped to sell it at a profit, petitioner did not offer into evidence any listing prices for the Cessna or comparable aircraft or any other credible evidence in support of his claim that he had a good-faith expectation of selling the Cessna at a profit.

Even if we were to conclude, however, that petitioner had a good-faith expectation of selling the overhauled Cessna at a profit, we must still examine whether petitioner had a good-faith expectation of realizing a profit on his entire operation. Bessenyey v. Commissioner, 45 T.C. 261, 275 (1965), affd. 379 F.2d 252 (2d Cir. 1967). Such an expectation should be based on analyzing estimated future earnings from the activity, the likely appreciation of the Cessna, and whether the resulting amount would be sufficient to recoup losses from the activity. Because an airplane is generally a wasting asset, we fail to see how petitioner could expect in good faith to recoup his $30,000 cost of a one-half interest in the Cessna, the capital expenditures for the overhaul and repair of the Cessna, and his accumulated operating losses. Petitioner's expectation of making a profit was not based on careful analysis, and it is not supported by credible evidence. This factor favors respondent.

5. Success in Carrying On Other Similar or Dissimilar Activities

The fact that a taxpayer has engaged in similar activities and converted them from unprofitable to profitable enterprises may indicate that the taxpayer is engaged in the present activity for a profit, even though the activity is presently unprofitable. Sec. 1.183-2(b)(5), Income Tax Regs. Although petitioner testified he engaged in the environmental consulting activity before the years in issue, he offered no evidence regarding his success in the activity. This factor is neutral.

6. Petitioner's History of Income or Loss From the Activity

A taxpayer's history of income or loss with respect to any activity may indicate the presence or absence of a profit objective. See Golanty v. Commissioner, 72 T.C. at 426; sec. 1.183-2(b)(6), Income Tax Regs. However, "a series of startup losses or losses sustained because of unforeseen circumstances beyond the control of the taxpayer may not indicate a lack of profit motive." Kahla v. Commissioner, T.C. Memo. 2000-127 (citing Engdahl v. Commissioner, 72 T.C. at 669, and section 1.183-2(b)(6), Income Tax Regs.), affd. without published opinion 273 F.3d 1096 (5th Cir. 2001).

Petitioner testified that he had been providing maintenance services, such as aircraft maintenance, rigging, inspection, sale, and refurbishing since 1996. However, petitioner introduced no credible evidence regarding the financial performance of his aircraft maintenance activity before the years at issue. The failure to introduce such evidence raises a presumption that the evidence would be unfavorable to petitioner. See Wichita Terminal Elevator Co. v. Commissioner, 6 T.C. 1158, 1165 (1946), affd. 162 F.2d 513 (10th Cir. 1947). This factor favors respondent's position.

7. Amount of Occasional Profits

The amount of profits earned in relation to the amount of losses incurred, the amount of the investment, and the value of the assets in use may indicate a profit objective. See sec. 1.183-2(b)(7), Income Tax Regs. The opportunity to earn substantial profits in a highly speculative venture may be sufficient to indicate that the activity is engaged in for profit even though only losses are produced. See id.

During 2002 and 2003 the aircraft maintenance activity generated net losses which significantly reduced petitioner's AGI. Petitioner offered no credible evidence regarding what profits, if any, his aircraft maintenance activity generated between 1996 and 2001. Failure of a party to introduce evidence within his possession which, if true, would be favorable to him gives rise to the presumption that such evidence is unfavorable. Wichita Terminal Elevator Co. v. Commissioner, supra at 1165. This factor favors respondent's position.

8. Petitioner's Financial Status

The fact that a taxpayer does not have substantial income or capital from sources other than the activity in question may indicate that the activity is engaged in for profit. See sec. 1.183-2(b)(8), Income Tax Regs. Substantial income from sources other than the activity (especially if the losses from the activity generate substantial tax benefits) may indicate a lack of profit motive, particularly where elements of personal pleasure or recreation are involved. See id.

During 2002 and 2003 petitioner was employed as an environmental engineer, earning $52,611 and $60,889, respectively. Petitioner is single and has no children. Although the income did not support a lavish lifestyle, it provided petitioner with a comfortable living and allowed him to conduct the aircraft maintenance activity at a loss. This factor favors respondent's position.

9. Elements of Personal Pleasure or Recreation

The presence of personal pleasure or recreation relating to the activity may indicate the absence of a profit objective. See sec. 1.183-2(b)(9), Income Tax Regs. An activity is not treated as an activity not engaged in for profit merely because the taxpayer also has purposes or motivations other than to make a profit. Id.

Petitioner grew up around airplanes and has been a licensed pilot for 25 years. He enjoys working on airplanes and takes pride in his workmanship and in his family's aviation history. We cannot overlook significant elements of recreation and pleasure that petitioner derived from working on airplanes. This factor favors respondent's position.

D. Petitioner's Argument

Petitioner relies on Doggett v. Burnet, 65 F.2d 191 (D.C. Cir. 1933), revg. 23 B.T.A. 744 (1931), to suggest that a profit motive exists if a taxpayer enters into and carries on an activity with a good-faith intention to make a profit or with the belief that a trade or business can be profitable. However, in determining a taxpayer's intent, the Court of Appeals for the Tenth Circuit gives less weight to the taxpayer's statement of intent than to objective factors. Cannon v. Commissioner, 949 F.2d at 351 n.8. Moreover, such reliance on objective factors is consistent with section 1.183-2(a), Income Tax Regs., providing:

The determination whether an activity is engaged in for profit is to be made by reference to objective standards, taking into account all of the facts and circumstances of each case. Although a reasonable expectation of profit is not required, the facts and circumstances must indicate that the taxpayer entered into the activity, or continued the activity, with the objective of making a profit. * * * [Emphasis added.]

After a review of the objective factors discussed above, we are not convinced that petitioner engaged in his aircraft maintenance activity with the objective of making a profit.

E. Conclusion

After considering the factors listed in section 1.183-2(b), Income Tax Regs., and the facts and circumstances of this case, we conclude that petitioner has not established that he engaged in the aircraft maintenance activity with the primary or dominant objective of making a profit. Accordingly, we hold that petitioner's aircraft maintenance activity did not constitute a trade or business or profit-seeking activity in 2002 or 2003.

F. Deductibility of the 2002 Schedule C2 and 2003 Schedule C Expenses

Because we have sustained respondent's determination that petitioner's aircraft maintenance activity was not a trade or business under section 162, we must decide what deductions, if any, he may claim under section 183(b). Section 183(b)(1) permits deductions which are otherwise allowable without regard to whether the activity is engaged in for profit, such as State and local taxes and casualty losses. Section 183(b)(2) allows deductions that would be allowable if the activity were engaged in for profit, but only to the extent of gross income received from the activity, reduced by deductions under section 183(b)(1).

With respect to the 2002 Schedule C2, respondent allowed $2,620 in deductions. This amount exceeds petitioner's $450 gross income from the activity. Consequently, no additional deductions are allowed for 2002.

For 2003 petitioner did not claim any deductions that are allowable under section 183(b)(1). In his brief respondent concedes that "If the Court finds that petitioner was in the trade or business of environmental aviation in 2003, petitioner has substantiated the following expenses to be ordinary and necessary business expenses". Respondent lists the following expenses as substantiated:



Amount
Expense substantiated

Insurance $529

Office expense 186

Rent of other
business property 1,200

Supplies 1,020

Tools 1,570

Training
certifications 313

Professional
subscription 110

Total 4,928


Although we hold that in 2002 and 2003 petitioner's aircraft maintenance activity did not constitute a trade or business under section 162 or an activity for the production of income under section 212, under section 183(b)(2) petitioner's substantiated expenses from the activity are deductible for 2003 to the extent of $2,238, the gross income generated by the activity.



III. Accuracy-Related Penalty Under Section 6662
Respondent contends that petitioner is liable for the accuracy-related penalty on the grounds of substantial understatement of income tax under section 6662(a) and (b)(2) for 2002 and 2003 or, alternatively, negligence or disregard of rules or regulations under subsection (b)(1). 13

Section 6662(a) and (b)(2) authorizes the Commissioner to impose a 20-percent penalty if there is a substantial understatement of income tax. An understatement is substantial if the amount of the understatement for the taxable year exceeds the greater of 10 percent of the tax required to be shown on the return or $5,000. Sec. 6662(d)(1)(A).

The Commissioner bears the initial burden of production with respect to the taxpayer's liability for the section 6662(a) penalty and must produce sufficient evidence indicating that it is appropriate to impose the penalty. See sec. 7491(c). Respondent established that for both years at issue the amount of the understatement exceeds the greater of 10 percent of the tax required to be shown on the return or $5,000. Because respondent has met his burden of production, petitioner must produce sufficient evidence to prove that respondent's determination is incorrect. See Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001).

The accuracy-related penalty is not imposed with respect to any portion of the underpayment if the taxpayer can establish that he acted with reasonable cause and in good faith. Sec. 6664(c)(1). The taxpayer bears the burden of producing evidence to demonstrate reasonable cause under section 6664(c)(1). See Higbee v. Commissioner, supra at 446-448. We determine reasonable cause and good faith on a case-by-case basis, taking into account all pertinent facts and circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs.

In his post trial briefs petitioner did not address why the penalties should not be imposed. Petitioner did not contend that he was not negligent or that he had reasonable cause or acted in good faith. Therefore, we sustain respondent's determination to impose the section 6662(a) and (b)(2) accuracy-related penalty for 2002 and 2003.

We have considered all arguments raised by either party, and to the extent not discussed, we find them to be irrelevant, moot, or without merit.

To reflect the foregoing,

Decision will be entered under Rule 155.

1 Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. Monetary amounts are rounded to the nearest dollar.

2 Petitioner concedes that he is not entitled to deduct the $9,829 depreciation expense for 2003 and unreimbursed employee expenses of $6,596 and $5,083, before application of the 2-percent floor of sec. 67(a), for 2002 and 2003, respectively. After the latter concession petitioner's remaining miscellaneous itemized deductions do not exceed the 2-percent floor of sec. 67(a) and therefore also are not at issue.

3 A certified mechanic may perform or supervise the maintenance, preventive maintenance, or alteration of an aircraft or a part thereof for which he is rated. 14 C.F.R. sec. 65.81(a) (2003). A certified mechanic with an airframe rating may also approve and return to service an airframe or related part or appliance after he has performed, supervised, or inspected its maintenance or alteration. 14 C.F.R. sec. 65.85 (2003). A certified mechanic with a powerplant rating has similar additional privileges with respect to a powerplant, propeller, or any related part. See 14 C.F.R. sec. 65.87 (2003).

4 In general, a holder of an inspection authorization may inspect and approve for return to service any aircraft or related part after a major repair or major alteration; he may also perform certain other types of inspections. See 14 C.F.R. sec. 65.95 (2003).

5 At the time of trial Mr. Rowden held a mechanic's certificate with airframe and powerplant ratings and an inspection authorization, and he was a flight instructor for single-engine and multi-engine aircraft and instruments and a commercial glider pilot. Mr. Rowden bought undervalued airplanes, used them for charter and instruction, and then sold them. DenRow purchased the 1975 Cessna 182P (Cessna) in 2000 for $43,000. During the years at issue petitioner was not a partner, member, or agent of DenRow, and he was not involved in making any of its business decisions.

6 Airworthy means that the aircraft conforms to its type design and is in a condition for safe operation. 14 C.F.R. 3.5(a) (2008). Overhaul is a type of aircraft maintenance. 14 C.F.R. 1.1 (2003) (defined under the word "maintenance").

7 Respondent contends that in the notice of deficiency he erroneously allowed the 2002 Schedule C2 deductions totaling $2,620, but he does not assert an increased deficiency for 2002.

8 In the notice of deficiency respondent disallowed the deductions as not verified as paid or incurred for business purposes. At trial respondent argued that petitioner did not engage in the trade or business of environmental consulting and aircraft maintenance during 2002 and environmental aviation during 2003. Petitioner does not contend that the argument represents a new issue on which respondent should have the burden of proof. See Rule 142(a). In addition, petitioner listed the profit-motive issue with respect to the aviation-related activities in his trial memorandum as one for decision.

9 Although respondent states in his reply brief that petitioner has conceded the issue of the environmental consulting activity because he failed to address it on brief, petitioner in his opening brief continues to challenge the full amount of deficiency and identifies the 2002 Schedule C1 amounts as still in dispute. Nevertheless, we agree with respondent that petitioner does not address the environmental activity elsewhere in briefs, and we note that petitioner also agrees with respondent's proposed finding of fact that "Petitioner failed to introduce credible evidence that he was in the environmental consulting business in 2002." We address the environmental consulting activity for the sake of completeness.

10 In both Hildebrand v. Commissioner, 28 F.3d 1024, 1027 (10th Cir. 1994), affg. Krause v. Commissioner, 99 T.C. 132 (1992), and Cannon v. Commissioner, 949 F.2d 345, 350 (10th Cir. 1991), affg. T.C. Memo. 1990-148, the Court of Appeals for the Tenth Circuit applied the dominant or primary objective test at the partnership level in analyzing whether a partnership was engaged in an activity for profit under sec. 183.

11 While petitioner's testimony is not clear as to whether such annual inspections were performed in the course of environmental consulting services or aircraft maintenance services, petitioner contends in his brief that his 2003 Schedule C gross income was derived from "aircraft activities".

12 While petitioner's testimony is not clear as to whether such annual inspections were performed in the course of environmental consulting services or aircraft maintenance services, petitioner contends in his brief that his 2003 Schedule C gross income was derived from "aircraft activities".

13 Respondent argues that petitioner has conceded the issue of penalties because petitioner does not address it in his brief We address the issue for the sake of completeness because petitioner lists the issue as one for decision in his reply brief.

What Is a "Business"?: Airplane operation

Where an airplane was acquired for personal use but later was converted into commercial use by the taxpayer, the expenses borne by the taxpayer after such conversion were deductible by him.

R. Denny, 33 BTA 738, Dec. 9175 (Acq.).

Because the taxpayer's suppliers and customers were spread out over a large geographic area, owning and operating an airplane was considered an expense of his business. Consequently, since an instrument rating was essential for the taxpayer's efficient use of the plane for business purposes, the expense of operating the plane during his instrument flight training was deductible.

K.L. Knudtson, 41 TCM 166, Dec. 37,333(M), TC Memo. 1980-455.

The taxpayer, a flight surgeon and aviation pathologist for the United States Navy, was entitled to deduct 50 percent of his out-of-pocket expenses incurred in maintaining his privately owned airplane as a business-related educational expense.

E.J. Colangelo, 41 TCM 495, Dec. 37,445(M), TC Memo. 1980-543.

The entire cost of maintaining an airplane on a 24-hour standby basis, not merely the cost of flying time for a charter flight, was deductible as a business expense where the airplane was useful to the taxpayer in obtaining tenants for its shopping centers and was in fact less expensive and more efficient than alternative air travel arrangements.

Palo Alto Town & Country Village, Inc., CA-9, 78-1 USTC ¶9200, 565 F2d 1388.

The IRS's disallowance of a very small amount of claimed deductions for the cost of maintaining an airplane was not sustained.

O.W. Brothers, 33 TCM 269, Dec. 32,485(M), TC Memo. 1974-56.

A private surveyor was entitled to claim deductions for the costs of operating an airplane used in his business. The deductions were based on the percentage of business usage of the plane.

W.L. Snyder, 34 TCM 965, Dec. 33,307(M), TC Memo. 1975-221.

Similarly, as to an attorney.

H.A. Sherry, 34 TCM 1468, Dec. 33,507(M), TC Memo. 1975-336.

A teacher employed as a guidance counselor at a high school offering vocational training in avionics established that a direct and proximate relationship existed between flying his private airplane and his employment, and that a direct connection existed between his training in instrument flying and the enhancement of his employment skills. Thus, a portion of the operating expenses (including depreciation) of the airplane were deductible.

J.R. McKirahan, Jr., 45 TCM 787, Dec. 39,918(M), TC Memo. 1983-102.

A retired Naval officer, employed full time as a business and engineering consultant, was not entitled to deduct the cost of maintaining a private airplane. He was not in the business of chartering the plane.

C.F. Fischer, 50 TC 164, CCH Dec. 28,935.

Aviation activities carried on by a doctor engaged in the general practice of medicine did not constitute a trade or business.

J.V. Curran, 29 TCM 696, Dec. 30,185(M), TC Memo. 1970-160.

A taxpayer who used an airplane on buying trips for a store was not in the trade or business of renting an airplane to the store and did not hold the plane to produce income. Thus, he was not entitled to deduct various costs associated with the plane.

Bullock's Department Store, Inc., 32 TCM 1168, Dec. 32,217(M), TC Memo. 1973-249.

The taxpayers failed to establish that they had engaged in an air charter business. Accordingly, business expenses claimed by the taxpayers were disallowed.

D.R. Bacot, 56 TCM 1322, Dec. 45,503(M), TC Memo. 1989-77.

Similarly.

L.T. Baldwin, III, 83 TCM 1915, Dec. 54,798(M), TC Memo. 2002-162.

Nonprofit Activities: Amounts deductible regardless of profit motive

A bankruptcy trustee failed to prove that a Chapter 7 debtor's activities as a professional off-road bicyclist constituted a hobby rather than a business. Consequently, the debtor's deduction of her racing expenses was not a "substantial abuse" of the bankruptcy proceeding that merited dismissal of her petition. The trustee's arguments that the debtor had sustained two years of losses and that bicycle racing was a recreational sport were insufficient to overcome the statutory presumption in favor of granting the bankruptcy discharge. Rather, the taxpayer had an actual and honest profit objective with respect to the activity. She expended considerable time and effort on a daily basis participating in or preparing for races, earned rankings from a national bicycle association, won races that provided a small amount of prize money, and kept records of her income and expenses related to her racing activities.

D.L. Fletcher, BC-DC Vt., 2000-1 USTC ¶50,462.

A taxpayer who was denied deductions for accrued interest on nonrecourse notes used to finance a tax-motivated computer equipment transaction was entitled to deduct interest actually paid.

H. Gilman, 59 TCM 465, Dec. 46,541(M), TC Memo. 1990-205. Aff'd on other grounds, CA-2, 91-1 USTC ¶50,245, 933 F2d 143. Cert. denied, 1/13/92.

Evidence, penalty imposed. --Substantial Understatement: Evidence, penalty imposed

In the following cases, taxpayers made substantial understatements of tax to which the IRS correctly applied the substantial understatement penalty:

An individual was liable for the substantial understatement component of the accuracy-related penalty where he failed to include in income payments received from his employer as compensation for services. The reasonable cause exception did not apply because, despite not receiving a Form 1099-MISC issued by his employer, the taxpayer was aware that he should have included the amounts received in income. Moreover, the taxpayer's liability for the penalty was not affected as a result of the government's concession that he should have been taxed as an employee rather than an independent contractor.

R.A. Brunsman, 86 TCM 465, Dec. 55,322(M), TC Memo. 2003-291.

Married taxpayers were liable for the substantial understatement component of the accuracy-related penalty. The taxpayers failed to establish that their failure to pay their federal income tax liability in full was due to reasonable cause. The record was devoid of reliable evidence that the excess bank deposit amount was not subject to U.S. tax. The taxpayers gave inconsistent and incoherent testimony, and failed to comply with the Tax Court's request to have documents that they proffered translated into English and certified, so as to render them admissible.

R.M. Gutierrez, 86 TCM 611, Dec. 55,353(M), TC Memo. 2003-321.

The accuracy related penalty was imposed on an individual who improperly claimed various theft and business loss deductions arising from his bankruptcy and divorce.

S.M. Ferguson, Jr., 91 TCM 785, Dec. 56,438(M), TC Memo. 2006-32.

An accuracy-related penalty under Code Sec. 6662(a) for substantial understatement of income tax was imposed. The taxpayer's claim that the understatement was due to reasonable cause and made in good faith because he relied on his accountant, was not persuasive. The only alleged erroneous advice related to the carryforward of the claimed NOL, which the court disallowed because the taxpayer failed to substantiate it.

M.D. Lee, 91 TCM 999, Dec. 56,476(M), TC Memo. 2006-70.

The Tax Court improperly disallowed a corporate taxpayer's interest expense deductions and imposed an accuracy-related penalty after incorrectly concluding that advances made to the company by some of its shareholders were equity contributions, rather than bona fide debt.

Indmar Products Co. Inc., CA-6, 2006-1 USTC ¶50,270.

For purposes of the accuracy-related penalty for a substantial understatement of tax, a married couple did not demonstrate that there was reasonable cause for their understatement or that they acted in good faith. Their position that Code Sec. 165(d) did not apply to tournament poker did not constitute an honest misunderstanding. Further, the understatement was not subject to reduction because there was no substantial authority to support the taxpayers' position on tournament poker and there was no reasonable basis to support their argument.

G.E. Tschetschot, 93 TCM 914, Dec. 56,840(M), TC Memo. 2007-38.

An individual was liable for the accuracy-related penalty because he substantially understated his tax liability. The deficiency was more than ten percent of the amount required to be shown in his return. Moreover, he introduced no evidence to support a finding that he made a reasonable attempt to comply with the tax code.

R.C. Randall, CA-10, 2007-2 USTC ¶50,839.

Married taxpayers were subject to the Code Sec. 6662 accuracy-related penalty because the understatement of their tax liability exceeded ten percent of the tax required to be shown on their return and, therefore, met the statutory threshold for a substantial understatement of tax. In addition, no reasonable cause and good faith with respect to the tax underpayment was established. The taxpayers could not reasonably and in good faith rely on their tax return preparers because they failed to provide them with sufficient financial information to accurately and properly prepare their return. Moreover, the taxpayers did not make any efforts to review their return and assess the proper tax liability. The return was signed only by the wife, who also signed her husband's name, and although she coordinated the company's financial information with the tax return preparers, she never reviewed the return to make sure that all income items were reported.

R.A. Prudhomme, 95 TCM 1324, Dec. 57,388(M), TC Memo. 2008-83.

A doctor who claimed that federal law, as it relates to medical records, prevented her from submitting evidence regarding her income was liable for the substantial understatement penalty. The doctor failed to prove that she was entitled to any reduction in the understatement determined by the IRS.

J.K. McCammon, 95 TCM 1421, Dec. 57,419(M), TC Memo. 2008-114.

A self-employed attorney was liable for an accuracy-related penalty for a substantial understatement of income tax. The taxpayer did not establish that he acted with reasonable cause and in good faith, or any other basis for reducing the penalty. Although the taxpayer relied on a lawyer to prepare his tax return for the year at issue, he did not present evidence to establish that the lawyer was a competent tax professional. Further, he did not demonstrate that he provided the lawyer with all of the information necessary to prepare the return properly.

R.A. Tash, 95 TCM 1436, Dec. 57,427(M), TC Memo. 2008-120.

A taxpayer who failed to report nonemployee compensation and paid no tax was liable for the accuracy-related penalty, and sanctions were imposed for frivolous arguments. The accuracy-related penalty was based on both negligence and substantial understatement of income. The taxpayer was negligent in failing to include the amounts of income shown on several information returns (Forms 1099-MISC) on his return. Since the tax deficiency was greater than both $5,000 and 10 percent of the amount required to be shown on the return, there was a substantial understatement of income.

R.C. Randall, 95 TCM 1546, Dec. 57,448(M), TC Memo. 2008-138.

A series of payments under a divorce decree (the "settlement payments") were not deductible alimony and the payor spouse who deducted the settlement payments was liable for accuracy-related penalty under Code Sec. 6662. Other than the taxpayer's uncorroborated claim, nothing in the record indicated that the taxpayer relied on the appropriate authorities or otherwise had a reasonable basis for deducting the payments. The taxpayer provided no evidence that the exceptions to the penalty under Code Sec. 6662(d)(2)(B) were available; and, the taxpayer presented no evidence that he reasonably and in good faith relied on professional advice in taking the deduction, thus the exception under Code Sec. 6664(c)(1) was not available.

R.W. Fields, 96 TCM 130, Dec. 57,528(M), TC Memo. 2008-207.

An individual was subject to an accuracy-related penalty due to substantial understatement. Although he argued that the penalties should not be imposed, he presented no evidence of reasonable cause or good faith.

D.A. Hughes, Dec. 57,577(M), TC Memo. 2008-249.

Married taxpayers, who put their business in a sham trust and failed to report the trust's income, were subject to the accuracy-related penalty under Code Sec. 6662 for substantial understatement of their income tax. The taxpayers neither had a reasonable cause for their underpayment of tax nor acted in good faith.

D.W. Swanson, Dec. 57,595(M), TC Memo. 2008-265.

The victim of an investment scheme was liable for a Code Sec. 6662 accuracy-related penalty for the understatement attributable to the disallowance of his theft-loss deduction. The taxpayer unreasonably relied upon a tax advisor's advice because he failed to take adequate steps to determine that the advisor had sufficient expertise or that his advice was sufficiently independent. Back reference: ¶39,652.34.



D.J. Vincentini, Dec. 57,602(M), TC Memo. 2008-271.

A pipeline inspector/consultant who was liable for income tax on nonemployee compensation that he received, rather than his two purported business entities, was not entitled to business expense deductions in excess of what the IRS had conceded due to lack of evidence. In addition, penalties were imposed for erroneous tax return reporting and improper deductions that resulted in a substantial understatement of income tax.

H. Pate, Dec. 57,603(M), TC Memo. 2008-272.

Nominee lien issue -

In the Dornbrock case, below, was published on January 17, 2009. The case involves a nominee lien issue. The issue is important to tax return preparers for obvious reasons. For example, income is taxable income to the true owner of the property, and that owner could be the substantive owner. I see these issues frequently and, in my opinion, the factors considered justify a substance over form analysis. The government was entitled to foreclose tax liens that attached to a property held by a corporation as the nominee of a delinquent taxpayer. The government established that the individual was the true beneficial and equitable owner of the property. The corporation had no business purpose and was created for the sole purpose of holding title to the property. The individual was the only officer and director of the corporation and controlled the funds, assets and bank accounts of the corporation and related entities for his own benefit. Moreover, the individual exercised clear dominion and control over the property because he was the sole occupant, never paid any rent for its use, controlled the manner in which the property could be used and claimed an ownership interest in the property. Issues this this should be disclosed to the IRS to take advantage of the "reasonable basis" standard.



United States of America, Plaintiff v. William L. Dornbrock a/k/a Robert William Lee, Inland Management Systems, Inc., and Intelec, Inc., f/k/a Integra Engineering, Inc., Defendants.

U.S. District Court, So. Dist. Fla., Fort Lauderdale Div.; 06-61669-CIV-MARRA/GONZALEZ, January 17, 2008.

Related case at 2009-1 USTC ¶50,220.







FINDINGS OF FACT AND CONCLUSIONS OF LAW


GONZALEZ, District Court Judge: This action came before this Court to reduce to judgment the federal income tax liability of Defendant William L. Dornbrock ("Dornbrock") for tax years 1994 and 1995, and to foreclose on real property in collection of that liability. An agreed judgment was entered on August 31, 2007 as to the approximately $1.2 million liability against Defendant Dornbrock. The Court held trial in this matter commencing on November 19, 2007. The main issue at trial was whether Defendant Dornbrock is the true owner of the real property upon which the United States seeks to foreclose. Defendant Dornbrock is the sole occupant of the subject property, a three-bedroom condominium in Ft. Lauderdale, purchased in 1997 for $499,000 and assessed in 2007 as worth approximately $780,000. The condominium has at all times been titled in the name of Inland Management Systems, Inc. ("Inland").

The United States alleges that defendant Inland is a nominee for the true owner, Defendant Dornbrock. The defendants counter that Inland is a nominee for defendant Intelec, Inc., formerly known as Integra Engineering, Inc. ("Intelec"). The United States responds that if Intelec is determined to be the beneficial owner of the condominium, then because Intelec is the alter ego / nominee of Intelec owner Defendant Dornbrock, Defendant Dornbrock remains the only true owner of the condominium. The defendants deny that Defendant Dornbrock owns Intelec.



I. FINDINGS OF FACT

1. On April 28, 2000, Defendant Dornbrock consented to a U.S. Tax Court judgment for income tax liabilities for tax years 1994 and 1995.

2. On June 2, 2000, Notices of Federal Tax Lien were recorded in Broward County, Florida against William L. Defendant Dornbrock, Robert W. Lee, and Inland Management Systems, Inc.

3. Pursuant to an agreed judgment in this case, Defendant Dornbrock is indebted to the United States for unpaid income taxes, penalties, and interest for the tax years 1994 and 1995 in the amount of $1,206,570.43, plus interest and statutory additions as allowed by law from August 31, 2007 until the judgment is paid.



A. Defendant Dornbrock Controlled and Benefitted from Unit 1005.

1. Defendant Inland Management Systems, Inc. was formed for the sole purpose of holding title to a three-bedroom condominium, Unit 1005 in the Point of the Americas II complex. The condominium is located at 2200 S. Ocean Boulevard, Ft. Lauderdale, Florida ("Unit 1005").

2. Inland is record title holder of Unit 1005. Since the October 31, 1997 purchase of Unit 1005, title has not been held by any other entity or person.

3. Point of Americas II Condominiums approved a sale of Unit 1005 to Inland.

4. Inland has no business purpose and has never filed a tax return.

5. Inland was automatically dissolved as a Michigan corporation on July 15, 2002.

6. Inland is not a Florida corporation.

7. Defendant Dornbrock has always been the only officer and director of Inland and the only person to act on behalf of Inland. He has held himself out as an officer of Inland. Defendant Dornbrock was the president, CEO, secretary, treasurer, and CFO of Inland.

8. Defendant Dornbrock is the only person authorized to sign bank checks for Inland and the only person who signs any documents on behalf of Inland.

9. No documentary evidence reflects that Inland is owned by Intelec.

10. Defendant Dornbrock has identified himself as the owner of Unit 1005. [Exhibit 305 page 2 paragraph 2.]

11. Defendant Dornbrock has always been the sole occupant of Unit 1005.

12. Defendant Dornbrock controls the use of Unit 1005. He decides who may stay there and for what purpose the Unit is used.

13. Defendant Dornbrock has never paid rent for the use of Unit 1005.

14. Defendant Dornbrock may have guests at Unit 1005 without approval.

15. There are no restrictions imposed by Intelec or Inland or Maureen Russell on Defendant Dornbrock's use of Unit 1005.

16. Defendant Dornbrock has never declared his use of Unit 1005 as income.

17. No individual other than Defendant Dornbrock has claimed an ownership interest in Unit 1005.

18. Absent an order of foreclosure in this case, Defendant Dornbrock has the power at any time to sell the condominium and use the sale proceeds.

19. There is no mortgage on Unit 1005. It was purchased for $499,000.

20. Unit 1005 was assessed by Broward County in 2007 at $783,860.

21. Unit 1005 was purchased for Defendant Dornbrock's benefit.

22. At the time of the purchase of Unit 1005, the IRS was examining Defendant Dornbrock's tax returns and Defendant Dornbrock had retained counsel to appear on his behalf before the IRS.

23. Within the same year that Unit 1005 was purchased for Defendant Dornbrock, Unit 207 was purchased for the benefit of Timothy and Maureen Russell.

24. Defendant Dornbrock processes and pays all expenses of Unit 1005.

25. Defendant Dornbrock has authorized improvements to Unit 1005 in 2003.


B. Defendant Dornbrock Controls the Funds, Assets, and Bank Accounts of Inland, Integra, Intelec, Support Solutions and Related Entities for his Benefit. He Intentionally Holds No Assets in his Name.


1. Defendant Dornbrock opened and maintains a bank account in Inland's name. Defendant Dornbrock makes deposits and writes checks on the Inland account. The checks on the Inland bank account include payment of Defendant Dornbrock's personal expenses, including credit cards debt, resort fees, and gifts to family. Defendant Dornbrock also writes checks to pay the taxes and expenses affiliated with Unit 1005.

2. Defendant Dornbrock maintains no bank accounts in his name from which he pays his expenses. He uses bank accounts in the name of Inland and Support Solutions, Inc. to pay his personal expenses.

3. Defendant Dornbrock freely transfers funds between financial accounts he controls in the names of Integra, Inland, Support Solutions, Internal Technical Services, and Continental Manage.

4. Defendant Dornbrock holds no assets in his name, including real estate, cars, boats or financial accounts. His boat in Michigan is titled in the name of Continental Management, Inc., a corporation that does no business. His son, Dennis Dornbrock, is the primary user of the boat.

5. Defendant William Lee Dornbrock has used the alias Robert William Lee, including owning property, signing documents, and maintaining a checking account under the alias to aid in the concealment of assets.

6. Defendant Dornbrock has opened financial accounts for his sole personal benefit at ING and Fidelity and under the Inland American Real Estate Trust but placed the accounts in the name of Support Solutions, Inc., a defunct corporation.

7. Support Solutions, Inc. operated from 1998 to 2002 as a temporary staffing company. It was not owned by any other entity. It is a defunct company. The last tax return it filed was for tax year 2002.

8. Defendant Dornbrock represented to Patrick Kirby that he owned Integra Engineering, Inc. and sold assets of Integra to Kirby in an Asset Purchase Agreement signed by Defendant Dornbrock on behalf of Integra on December 31, 2004.

9. As a result of the Asset Purchase Agreement, checks and wire transfers of more than $400,000 were made to the account number 3660564271 of Support Solutions, Inc. Defendant Dornbrock misrepresented to Kirby that Support Solutions owed Integra. Defendant Dornbrock is the only signatory to the Support Solutions bank account into which the sales proceeds were deposited.

10. Defendant Dornbrock transferred more than $300,000 from the Support Solutions bank account to financial accounts for his personal benefit and over which he has sole control. Support Solutions has paid no taxes with regard to income from these accounts.

11. Defendant Dornbrock was an authorized signatory on the Integra Engineering, Inc. bank accounts at Comerica Bank from at least from February 28, 2002 and wrote checks on the Comerica accounts, including transferring money to the Support Solutions, Inc. account he controlled, after Support Solutions no longer did business.

12. Defendant Dornbrock transferred funds from the Comerica Bank accounts of Integra for his own benefit.

13. Defendant Dornbrock and Timothy Russell controlled Integra Engineering, Inc. until Timothy Russell's death on December 7, 2001.

14. Defendant Dornbrock and Timothy Russell, while he was living, held themselves out as partners in Integra Engineering, Inc.

15. Any remaining ownership interest or claims Maureen Russell may have had in Integra Engineering Inc. after her husband Timothy Russell died were transferred to Defendant Dornbrock in or about February 2005.

16. On January 31, 2005, Defendant Dornbrock had the name of Integra Engineering, Inc. changed to Intelec, Inc., but Intelec, Inc. does no business, has no bank accounts, and has never filed a tax return.

17. Integra Engineering, Inc. last filed a Form 1120 federal income tax return for tax year 2004. It reported $38,239 in net taxable income for 2004.

18. Integra Engineering, Inc. Form 1120 federal income tax returns were signed by Defendant Dornbrock from 1997 through 2002.

19. Integra Engineering, Inc. did not identify Unit 1005 as a corporate asset to the IRS.

20. Maureen Russell denies an ownership interest in Unit 1005.

21. Maureen Russell owns Unit 201.



II. CONCLUSIONS OF LAW

a. A tax lien arises by operation of law upon the assessment of an income tax deficiency. 26 U.S.C. §§6321, 6322.

b. A tax lien attaches to any interest a taxpayer holds or will hold in property, including property held by a nominee or alter ego. G.M. Leasing v. United States [ 77-1 USTC ¶9140], 429 U.S. 338, 350-51 (1977); Shades Ridge Holding Co., 888 F.2d 725, 729 (11 th Cir. 1989). A tax lien applies to any interest in property a taxpayer acquires after the lien. United States v. McDermott [ 93-1 USTC ¶50,164], 507 U.S. 447 at 447 (1993); see also Glass City v. United States [ 45-2 USTC ¶9449], 326 U.S. 265, 267 (1945) (tax lien applies to all property of taxpayer at any time during the life of the lien). The language of Section 6321 "is broad and reveals on its face that Congress meant to reach every interest in property that the taxpayer might have." United States v. National Bank of Commerce [ 85-2 USTC ¶9482], 472 U.S. 713, 719-20 (1985) ("Stronger language could hardly have been selected to reveal a purpose to assure the collection of taxes.")

c. A Notice of Federal Tax Lien operates as public notice to those who might seek to buy property titled to either the taxpayer or his or her known nominees that the property is encumbered and any sale would be subject to the government's claim. 26 U.S.C. §6323; Fla. Stat. §695.01(1) (recording to perfect a lien).

d. The nominee theory may be established without a showing of fraud. See, e.g., United States v. Bollinger [ 88-1 USTC ¶9233], 485 U.S. 340 (1988) (corporation held title to property as a nominee for partnerships so the partnerships could avoid Kentucky usury law).

e. A nominee holds bare legal title to property for the benefit of another. Black's Law Dictionary (7th Ed. 1999); United States v. Gilbert, 244 F.3d 888, 902 n.37 (11th Cir. 2001).

f. When a taxpayer's property or rights to property are held in the name of another, or are transferred to another with the taxpayer retaining beneficial ownership, the third party is said to hold the property as a nominee for the taxpayer. William D. Elliott, Federal Tax Collections, Liens, and Levies ¶ 9.10[1] at 9-93 to 9-94.

g. The "nominee theory involves the determination of the true beneficial or equitable ownership of the property" at issue. Oxford Capital Corp. v. United States [ 2000-1 USTC ¶50,447], 211 F.3d 280, 284 (5th Cir. 2000). "Focusing on the relationship between the taxpayer and the property, the [nominee] theory attempts to discern whether a taxpayer has engaged in a sort of legal fiction, for federal tax purposes, by placing legal title to property in the hands of another while, in actuality, retaining all or some of the benefits of being the true owner." In re Richards [ 99-1 USTC ¶50,317], 231 B.R. 571, 578 (E.D. Pa. 1999); see also Shades Ridge Holding Co., 888 F.2d at 728 (nominee theory focuses on delinquent taxpayer's relationship to the property); May v. United States [ 2007-2 USTC ¶50,799], Case No. 07-10531, 2007 WL 3287513 (11th Cir., Nov. 8, 2007) (same). Who really benefits from and controls the property is at the heart of a nominee case.

h. While the federal courts generally apply the law of the forum state (in this case, Florida) to resolve nominee, alter-ego and similar questions, Florida, like many states, does not have a bright-line test for determining nominee ownership. Therefore, federal common law applies. See Towe Antique Ford Found. v. IRS [ 92-1 USTC ¶50,115], 791 F.Supp. 1450, 1454 (D. Mont. 1992), aff'd on other grounds [ 93-2 USTC ¶50,430], 999 F.2d 1387 (9th Cir. 1993) (applying the test for nominees used by other courts when no applicable law from the appropriate state can be found); cf. Grippo v. Perazzo, 357 F.3d 1218, 1222 (11th Cir. 2004) (where Florida law does not answer the question at bar, the court will "look to federal law for guidance"); see also May v. United States [ 2007-2 USTC ¶50,799], Case No. 07-10531, 2007 WL 3287513 (11th Cir., Nov. 8, 2007) (affirming trial court finding that delinquent taxpayer owned land titled to a nominee).


FACTORS


i. Factors considered to determine whether property is being held by a nominee of the taxpayer include: (1) whether the taxpayer exercised dominion and control over the property; (2) whether the property of the taxpayer was placed in the name of the nominee in anticipation of collection activity; (3) whether the purported nominee paid any consideration for the property, or whether the consideration paid was inadequate; (4) whether a close relationship exists between the taxpayer and the nominee; and (5) whether the taxpayer pays the expenses (mortgage, property taxes, insurance) directly, or is the source of the funds for payments of the expenses. See Scoville v. United States [ 2001-1 USTC ¶50,442], 250 F.3d 1198, 1202 (8 th Cir. 2001); Oxford Capital Corp. v. United States [ 2000-1 USTC ¶50,447], 211 F.3d 280, 284 (5 th Cir. 2000); Shades Ridge Holding Co., 888 F.2d at 729; United States v. Klimek [ 97-1 USTC ¶50,281], 952 F.Supp. 1100, 1113 (E.D. Pa. 1997).

j. Not all of the foregoing factors are of equal weight, and they "should not be applied rigidly or mechanically, as no one factor is determinative." In re Richards [ 99-1 USTC ¶50,317], 231 B.R. 571, 579 (E.D. Pa. 1999). See also Simpson v. United States [ 89-1 USTC ¶9285], 1989 WL 73212 at *6 (M.D. Fla. 1989).

k. The most critical issue is who has substantial control over the property. See Shades Ridge, 888 F.2d at 728 ("The issue under either state or federal law depends on who has 'active' or 'substantial' control."); see also In re Richards [ 99-1 USTC ¶50,317], 231 B.R. at 579, citing United States v. Kudasik [ 98-2 USTC ¶50,535], 21 F.Supp.2d 501, 508 (W.D. Pa. 1998).

l. A related principal to the nominee doctrine is the alter ego doctrine. There are common elements to both doctrines. While the nominee doctrine focuses on the relationship between the taxpayer and the property, the alter ego doctrine focuses on whether the taxpayer is similar to or controls another individual, trust, business or corporation. See, e.g., Century Hotels v. United States [ 92-1 USTC ¶50,080], 952 F.2d 107, 110 n.5 (5th Cir. 1992) (listing objective factors to be considered); see also Zahara Spiritual Trust v. United States [ 90-2 USTC ¶50,473], 910 F.2d 240, 245 (5th Cir. 1990).


CONCLUSION


The United States has met its burden of proving that Defendant Dornbrock is the true and sole beneficial owner of Unit 1005. It is clear that Defendant Dornbrock exercised dominion and substantial control over the property located at Point of Americas. Also, this Court determines that Defendant Dornbrock holds true beneficial and equitable ownership of the property.

Therefore, foreclosure of Unit 1005 is ordered. The United States shall sell Unit 1005 to satisfy Defendant Dornbrock's tax liabilities as reflected in the judgment of August 31, 2007. The United States will submit a proposed Order of Sale setting forth the details of sale.

Judgment shall be entered for the United States.

DONE AND ORDERED.

Liability of the tax preparation firm

Note the following language in the final 6694 regulations:


§1.6694-1 (b) (5) Tax return preparer and firm responsibility. To the extent provided in §§1.6694-2(a)(2) and 1.6694-3(a)(2), an individual and the firm that employs the individual, or the firm of which the individual is a partner, member, shareholder, or other equity holder, both may be subject to penalty under section 6694 with respect to the position(s) on the return or claim for refund giving rise to an understatement. If an individual (other than the sole proprietor) who is employed by a sole proprietorship is subject to penalty under section 6694, the sole proprietorship is considered a "firm" for purposes of this paragraph (b).


§1.6694-2 (a) (2) Special rule for corporations, partnerships, and other firms. A firm that employs a tax return preparer subject to a penalty under section 6694(a) (or a firm of which the individual tax return preparer is a partner, member, shareholder or other equity holder) is also subject to penalty if, and only if --

(i) One or more members of the principal management (or principal officers) of the firm or a branch office participated in or knew of the conduct proscribed by section 6694(a);

(ii) The corporation, partnership, or other firm entity failed to provide reasonable and appropriate procedures for review of the position for which the penalty is imposed; or

(iii) The corporation, partnership, or other firm entity disregarded its reasonable and appropriate review procedures through willfulness, recklessness, or gross indifference (including ignoring facts that would lead a person of reasonable prudence and competence to investigate or ascertain) in the formulation of the advice, or the preparation of the return or claim for refund, that included the position for which the penalty is imposed.

§1.6694-3 (2) Special rule for corporations, partnerships, and other firms. A firm that employs a tax return preparer subject to a penalty under section 6694(b) (or a firm of which the individual tax return preparer is a partner, member, shareholder or other equity holder) is also subject to penalty if, and only if --

(i) One or more members of the principal management (or principal officers) of the firm or a branch office participated in or knew of the conduct proscribed by section 6694(b);

(ii) The corporation, partnership, or other firm entity failed to provide reasonable and appropriate procedures for review of the position for which the penalty is imposed; or

(iii) The corporation, partnership, or other firm entity disregarded its reasonable and appropriate review procedures through willfulness, recklessness, or gross indifference (including ignoring facts that would lead a person of reasonable prudence and competence to investigate or ascertain) in the formulation of the advice, or the preparation of the return or claim for refund, that included the position for which the penalty is imposed.

--------------------

The feedback that I have received from return preparer clients is that they were not aware of the firm liability plus the return preparer liability. As indicated, an employee of a sole proprietor and the sole proprietor firm may each be liabile for the penalty. In this example, if there are three reckless errors for the 2008 tax year, that would mean $15,000 in 6694(b) penalties for the return preparer and $15,000 in penalties for the firm. Obviously, the 6694 penalties will drive a great many of the return preparers to leave the return preparation industry.

There is no definition of "reasonable and appropriate" procedures. I read that term as requiring a detailed and comprehensive reviewer for every position in every tax return.

The test: what would lead a person of reasonable prudence and competence to investigate or ascertain an unreasonable position`or any problematical position?

It appears to me that the responsible person and the firm reviewer need to be expert on, for example, the tax regulations that interpret every Code provision. This is a bit "scary." It seems obvious that the responsible return preparer and the firm will no longer be able to rely on client data dealing with any deduction, expense or credit without verifying the underlying data IN EVERY 2008 TAX RETURN.

Two more points. The IRS and Treasury will be under pressure to raise tax revenue in this economy for obvious reasons. And you can expect IRS examiners to be aggressive on the 6694 issues. Examiners "follow the money" and a large amount of tax revenue can be raised from the 6694 penalties.

Continue to send questions to ab@irstaxattorney.com

Notice 2009-5 does not follow the law

6694(a)(2)(A) IN GENERAL. --Except as otherwise provided in this paragraph, a position is described in this paragraph unless there is or was substantial authority for the position.

As noted above, section 6694(a)(2)(A)expressly used "substantial" authority as the standarad of conduct for undisclosed problematical positions.

Below is some language extracted from Notice 2009-5

Notice 2009-5, December 16, 2008 – transitional rules



B. Definition of Substantial Authority

Until further guidance is issued, solely for purposes of section 6694(a) , "substantial authority" has the same meaning as in § 1.6662-4(d)(2) (or any successor provision) of the accuracy-related penalty regulations. The analysis prescribed by § 1.6662-4(d)(3)(i) through (ii) (or any successor provisions) applies for purposes of determining whether substantial authority is present. The authorities considered in determining whether there is substantial authority for a position are those authorities described in § 1.6662-4(d)(3)(iii) (or any successor provision).

Solely for purposes of section 6694(a) , a tax return preparer nevertheless will be considered to have met the standard in section 6694(a)(2)(A) if the tax return preparer relies in good faith and without verification on the advice of another advisor, another tax return preparer, or other party. Factors used in evaluating a tax return preparer's good faith reliance on the advice of another are found in § 1.6694-2(e)(5) .


This last quotation from Notice 2009-5, by creating a "reliance" provision, is inconsistent with 6694(a) which has never defined "substantial authority" to include a reliance rule. Notice 2009-5 is also inconsistent with the 6694 Final Regulations for the same reason. And Notice 2009-5 is also inconsistent with Notice 2009-5 which references § 1.6662-4(d)(3)(iii) because this relation does not include any reliance rule to establish "substantial authority."

You should take advantage of Notice 2009-5 for the 2008 tax year because it proveds a "reliance rule" (noted above) that is not supportable by the section 6694(a) statute and § 1.6662-4(d)(3)(iii) which is a longstanding regulation with substantial judicial support.

Obviously, this "reliance" transitional rule will not survive the new Treasury under the 44th President.

Proposed regulations - section 6231 TEFRA

Proposed Regulations`on section 6231, NPRM REG-138326-07 TEFRA partnership provisions

February 13, 2009


DEPARTMENT OF THE TREASURY



Internal Revenue Service

26 CFR Part 301

[REG-138326-07]

RIN 1545-BH22

Tax Avoidance Transactions

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

SUMMARY: This document contains proposed regulations under section 6231 of the Internal Revenue Code that allow the IRS to convert partnership items to nonpartnership items when the application of the unified partnership audit and litigation procedures of sections 6221 through 6234 (TEFRA partnership procedures) with respect to certain tax avoidance transactions interferes with the effective and efficient enforcement of the internal revenue laws. The regulations affect taxpayers who have engaged in a listed transaction through an entity subject to the TEFRA partnership procedures. This document also provides notice of a public hearing on these proposed regulations.

DATES: Written or electronic comments must be received by [INSERT DATE 90 DAYS AFTER DATE OF PUBLICATION OF THIS DOCUMENT IN THE FEDERAL REGISTER] . Outlines of topics to be discussed at the public hearing scheduled for June 4, 2009, at 10 a.m. must be received by May 15, 2009. ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-138326-07), room 5205, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-138326-07), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, DC 20224, or sent electronically via the Federal eRulemaking Portal at http://www.regulations.gov (IRS REG-138326-07). The public hearing will be held in the Auditorium, Internal Revenue Service Building, 1111 Constitution Avenue, N.W., Washington, DC. FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, Robert T. Wearing at (202) 622-4570; concerning submissions of comments, the hearing, or to be placed on the building access list to attend the hearing, Richard.A.Hurst@irscounsel.treas.gov of the Publications and Regulations Branch at (202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:



Background

This document contains proposed amendments to the Procedure and Administration Regulations (26 CFR Part 301) under section 6231(c) of the Internal Revenue Code. Section 402 of the Tax Equity and Fiscal Responsibility Act of 1982, Public Law 97-248 (96 Stat. 324) added sections 6221 through 6231 to the Internal Revenue Code to provide unified audit and litigation procedures for determining the tax treatment of partnership items at the partnership level rather than at the partner level. Sections 6233 and 6234 were subsequently added by section 714(p)(1) of the Tax Reform Act of 1984, Public Law 98-369 (98 Stat. 494) and section 1231(a) of the Taxpayer Relief Act of 1997, Public Law 105-34 (11 Stat. 788), respectively.

Ordinarily, under the TEFRA partnership procedures, the IRS must adjust a partner's treatment of partnership items only through partnership-level proceedings. There are several exceptions that allow adjustments to be made through partner-level proceedings. The small partnership exception set forth in section 6231(a)(1)(B) provides that partnerships having ten or fewer partners, each of whom is an individual, a C corporation, or an estate, are not subject to the TEFRA partnership procedures. Section 6231(b) provides that items cease to be partnership items subject to the TEFRA partnership procedures in several different situations. Section 6231(c) allows the Treasury Department and the IRS to determine and provide by regulations that treating items as partnership items in areas that present special enforcement considerations will interfere with the effective and efficient enforcement of the internal revenue laws and that, consequently, the items shall be treated as nonpartnership items. Section 6231(c) also allows the Treasury Department and the IRS to prescribe by regulations rules necessary to achieve the purposes of the TEFRA partnership procedures with respect to special enforcement areas. Section 6231(c) lists several specific special enforcement areas, including criminal investigations and indirect methods of proof of income, and provides that the Treasury Department and the IRS may determine others. The Treasury Department and the IRS previously have determined and provided by regulations that bankruptcy, receivership, and prompt assessment requests interfere with the effective and efficient enforcement of the internal revenue laws and designated them as special enforcement areas. See §§301.6231(c)-7 and -8 of the Procedure and Administration Regulations.



Explanation of Provisions

One of the principal purposes behind the enactment of the TEFRA partnership procedures was to provide for the more efficient use of the IRS's resources by reducing multiple proceedings with respect to partnership items. The abusive tax shelters of the 1970s often used a single partnership to generate tax benefits for dozens, if not hundreds, of investors. Before the enactment of the TEFRA partnership procedures, the partnership items of each investor were subject to separate partner-level proceedings. The TEFRA partnership procedures effectively brought the partnership item components of these proceedings together in a single proceeding. Unlike the tax shelters of the 1970s, however, the recent generation of tax avoidance transactions often uses combinations of trusts, S corporations, limited liability companies, partnerships, and other entities, many times arranged in tiers, for the tax benefit of a single investor or a small group of investors. The application of the TEFRA partnership procedures to these tax avoidance transactions often results in multiple proceedings that complicate the ultimate determination of the investors' tax liabilities and consume significant administrative resources.

For example, in a typical transaction described in Notice 2000-44 (2000-2 CB 255) (September 5, 2000), see §601.601(d)(2)(ii)(b) , in which the ultimate noneconomic loss or deduction is taken at the partner level by a single individual, the IRS first needs to initiate timely partnership-level proceedings to determine, among other things, whether the partnership is a sham and the amount and character of contributions and partnership liabilities. Following the partnership-level proceedings, the IRS often still must issue an affected items notice of deficiency to disallow the noneconomic loss or deduction at the partner level. Conducting both entity-level and partner-level proceedings in these cases to determine the tax liabilities of only a single individual or small group of related persons places an unnecessary burden on taxpayers, the IRS, and the federal courts.

Other tax avoidance transactions use multiple tiers of partnerships making coordinated partnership elections for the benefit of a single individual. Two or more separate partnership proceedings, as well as a partner-level proceeding, may need to take place before an assessment can be made against the individual. Again, conducting entity-level proceedings in these and similar cases in which a single individual or small group of related persons control multiple entities and receive all the tax benefits is inefficient and imposes a significant administrative burden.

The need to conduct partnership-level proceedings to determine the tax liabilities of a single individual or small group of related persons also generates complex and burdensome procedural issues that do not contribute to the determination of the individuals' tax liabilities. For example, the application of the TEFRA partnership procedures may raise complicated issues concerning the segregation and aggregation of partnership items, affected items, and nonpartnership items. Often, the TEFRA partnership procedures make the identification and examination of the transactions more complicated and difficult. As a result, the Treasury Department and the IRS have determined that special enforcement considerations, within the meaning of section 6231(c)(1)(E) , are present in the case of transactions that the Treasury Department and the IRS have publicly identified as tax avoidance transactions. Specifically, the Treasury Department and the IRS have determined that treating items related to listed transactions within the meaning of §1.6011-4(b)(2) of the Income Tax Regulations as partnership items interferes with the effective and efficient enforcement of the internal revenue laws.

The proposed regulations are limited to tax avoidance transactions that are publicly identified by the Treasury Department and the IRS as listed transactions under §1.6011-4(b)(2) of the Income Tax Regulations. Under the proposed regulations, the transaction must be a listed transaction on the date the IRS sends written notification to the partner that the partner's partnership items will be treated as nonpartnership items. Accordingly, the fact that a transaction becomes a listed transaction after the date on which the taxpayer engages in the transaction does not preclude the conversion of items under the proposed regulations. This limitation promotes taxpayer awareness of the transactions that can subject their partnership items to removal from the TEFRA partnership procedures. The Treasury Department and the IRS also have determined that the limitation will provide for the more efficient use of the IRS's resources.

Under the proposed regulations, the IRS will make determinations regarding whether to convert partnership items to nonpartnership items on a partnership-bypartnership and partner-by-partner basis. Thus, if a taxpayer is a partner in two partnerships with partnership items related to listed transactions and a third partnership that has no partnership items related to listed transactions, the IRS could convert the taxpayer's partnership items in either or both of the first two partnerships but could not convert the taxpayer's partnership items in the third partnership. Similarly, if a taxpayer engages in a listed transaction through a tier of TEFRA entities, the IRS could convert the taxpayer's partnership items in any or all of the tier entities with partnership items related to the listed transaction.

Although, consistent with section 6231(c)(2) , the Secretary has determined that treating items related to listed transactions as partnership items will interfere with the effective and efficient enforcement of the internal revenue laws and has so provided in the proposed regulations, the proposed regulations further provide that the partnership items related to listed transactions remain subject to the TEFRA partnership procedures unless and until the IRS sends written notification to the partner that the items will be treated as nonpartnership items. In this regard, the proposed regulations are consistent with the rules that are already in place with respect to sending notices under section 301.6231(c)-5 of the Procedure and Administration Regulations relating to partners under criminal investigation. See Phillips v. Commissioner , 272 F.3d 1172, 1176 (9th Cir. 2001). Specifically, the IRS will send written notification under the circumstances described in the proposed regulations using procedures similar to the procedures used under §301.6231(c)-5 of the Procedure and Administration Regulations, and will make conforming changes to the Internal Revenue Manual and Delegation Order 4-19, as necessary.

If the IRS concludes that a particular partner's partnership items should be treated as nonpartnership items under the circumstances described in the proposed regulations, the IRS will send written notification to the partner identifying each partnership for which the partner's partnership items will be treated as nonpartnership items. In the case of an indirect partner (as defined in section 6231(a)(10) ) having an interest in a partnership through one or more pass-thru partners (as defined in section 6231(a)(9) ), the IRS may send a written notification to the indirect partner identifying only the lower-tier partnership and not the pass-thru partners. In those circumstances, the partnership items attributable to the lower-tier partnership that flow through to the indirect partners will convert to nonpartnership items of the notified partner, even though the pass-thru partners were not identified in the written notification. Any partnership items originating with the pass-thru partners, that is, partnership items that are not attributable to the lower-tier partnership, will not convert to nonpartnership items unless the IRS identifies the pass-thru partner in the written notification (in which case all the partnership items directly attributable to the pass-thru partner also will convert to nonpartnership items of the notified partner).

As of the date that the IRS sends written notification of the conversion to the partner, all of the partner's partnership items attributable to the identified partnership will be treated as nonpartnership items for all of the identified partnership's taxable years that (1) ended on or before the date written notification is sent by the IRS to the partner and (2) for which the partner has items attributable to that partnership that are related to the listed transaction. The deficiency procedures in subchapter B of chapter 63 will apply, pursuant to section 6230(a)(2)(A)(ii) , as of the date of the notice.

The proposed regulations incorporate existing rules under § 301.6231(c)-3 of the Procedure and Administration Regulations, which provide that the partnership items of a partnership may not be converted if a notice of final partnership administrative adjustment (FPAA) with respect to those partnership items has been mailed to the tax matters partner of the partnership and either (1) the period for bringing an action with respect to the FPAA has expired and no judicial action has been brought or (2) the decision of the court in an action brought with respect to the FPAA has become final. This rule allows the IRS to send notification converting partnership items to nonpartnership items after the commencement of a judicial proceeding related to the converted partnership items. The Treasury Department and the IRS recognize, however, that it is not in the best interest of taxpayers, the Treasury Department, the IRS, or the courts to unnecessarily delay conversion of partnership items to nonpartnership items. Consistent with its existing practices under section 6231(c) , the IRS intends to make a decision regarding whether to convert partnership items to nonpartnership items before the commencement of any judicial proceeding, although on isolated and unusual occasions changed circumstances may require the IRS to revisit that decision after the commencement of a judicial proceeding. In addition, judicial doctrines such as collateral estoppel and res judicata may preclude litigating issues in a partner-level proceeding that were previously litigated in a partnership-level proceeding prior to conversion of partnership items to nonpartnership items. Finally, the partnership items of any partners to whom the IRS does not send written notification will not convert to nonpartnership items.



Proposed Effective Date

The regulations, when finalized, are proposed to apply to any taxable period ending on or after the date of publication of these rules as proposed regulations in the Federal Register .



Special Analyses

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations, and, because these regulations do not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Internal Revenue Code, this notice of proposed rulemaking has been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.



Comments and Public Hearing

Before these proposed regulations are adopted as final regulations, consideration will be given to any written (a signed original and eight (8) copies) or electronic comments that are submitted timely to the IRS. The Treasury Department and the IRS request comments on the clarity of the proposed rules and how they can be made easier to understand. The Treasury Department and the IRS also request comments that identify additional transactions or activities that present appropriate grounds for converting partnership items to nonpartnership items. All comments will be made available for public inspection and copying.

A public hearing has been scheduled for June 4, 2009, beginning at 10 a.m. in the Auditorium of the Internal Revenue Service Building, 1111 Constitution Avenue, N.W., Washington, DC. Due to building security procedures, visitors must enter at the Constitution Avenue entrance. In addition, all visitors must present photo identification to enter the building. Because of access restrictions, visitors will not be admitted beyond the immediate entrance area more than 30 minutes before the hearing starts. For information about having your name placed on the building access list to attend the hearing, see the "FOR FURTHER INFORMATION CONTACT" section of this preamble.

The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who wish to present oral comments at the hearing must submit written or electronic comments and an outline of the topics to be discussed and the time to be devoted to each topic (signed original and eight (8) copies) by May 15, 2009. A period of 10 minutes will be allotted to each person for making comments. An agenda showing the scheduling of the speakers will be prepared after the deadline for receiving outlines has passed. Copies of the agenda will be available free of charge at the hearing.



Drafting Information

The principal author of these regulations is Robert T. Wearing of the Office of the Associate Chief Counsel (Procedure and Administration).



List of Subjects in 26 CFR Part 301

Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income taxes, Penalties, Reporting and recordkeeping requirements.



Proposed Amendments to the Regulations

Accordingly, 26 CFR Part 301 is proposed to be amended as follows:



PART 301 --PROCEDURE AND ADMINISTRATION

Paragraph 1. The authority citation for part 301 is amended by adding the entry in numerical order to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Section 301.6231(c)-9 is also issued under 26 U.S.C. 6230(k) and 6231(c)(1) and (c)(3). * * *

Par. 2. Section 301.6231(c)-3 is amended by revising paragraphs (a) introductory text and (b) to read as follows:



§301.6231(c)-3 Limitation on applicability of §§301.6231(c)-4 through 301.6231(c)-9.

(a) In general . A provision of §§301.6231(c)-4 through 301.6231(c)-9 shall not apply with respect to partnership items arising in a partnership taxable year if, as of the date on which those items would otherwise begin to be treated as nonpartnership items under that provision.

* * * * *

(b) Effective/applicability date . The rules of this section, when adopted as final regulations in the Federal Register, will apply to partner taxable years ending on or after the date of publication of these proposed regulations in the Federal Register .

* * * * *

Par. 3. Section 301.6231(c)-9 is added to read as follows:



§301.6231(c)-9 Tax avoidance transactions.

(a) In general . The treatment of items that relate to a listed transaction, as defined in §1.6011-4 , as partnership items will interfere with the effective and efficient enforcement of the internal revenue laws. Accordingly, if a partner has partnership items that relate to a listed transaction and are attributable to a partnership that is identified in a written notification described in this paragraph, the partner's partnership items that are attributable to the identified partnership shall be treated as nonpartnership items as of the date on which the written notification is sent by the Internal Revenue Service to the partner. The determination whether to treat the partnership items of a partner as nonpartnership items shall be made by the Internal Revenue Service on a partnership-by-partnership and partner-by-partner basis. The partnership items of a partner shall not be treated as nonpartnership items under this section unless and until the Internal Revenue Service sends the partner written notification that the partner's partnership items attributable to the identified partnership will be treated as nonpartnership items. The written notification shall identify each partnership in which the partner holds an interest, directly or indirectly, with respect to which all the partner's partnership items will be treated as nonpartnership items. All partnership items of a partner that are attributable to a partnership that is identified in a written notification shall be treated as nonpartnership items for all taxable years of the identified partnership ending on or before the date the Internal Revenue Service sends written notification to the partner in which the partner has partnership items attributable to the identified partnership that relate to the listed transaction. Partnership items of a partner that are attributable to a partnership that is not identified in a written notification sent by the Internal Revenue Service to that partner shall not be treated as nonpartnership items of the notified partner, except that if the notified partner holds an interest in the identified partnership through one or more pass-thru partners (as defined in section 6231(a)(9) ), the partnership items attributable to the identified partnership that flow through the pass-thru partners to the indirect partners (as defined in section 6231(a)(10) ), will be treated as nonpartnership items of the notified partner even if the written notification does not identify the pass-thru partners.

(b) Examples . The provisions of this section may be illustrated by the following examples:

Example 1 . PS1 and PS2 are unrelated partnerships subject to the provisions of subchapter C, chapter 63 of the Internal Revenue Code. A is one of the partners of PS1 and one of the partners of PS2. PS1 and PS2 have partnership items that relate to a listed transaction, as defined in §1.6011-4(b)(2) . The IRS sends written notification to A that his partnership items in PS1 will be treated as nonpartnership items, but the IRS does not send written notification to A that his partnership items in PS2 will be treated as nonpartnership items. As a result, A's partnership items in PS1 are treated as nonpartnership items as of the date that the IRS sent written notification of the conversion to A, and A's partnership items in PS2 remain as partnership items.

Example 2 . PS3 and PS4 are partnerships subject to the provisions of subchapter C, chapter 63 of the Internal Revenue Code. B is one of the partners of PS3 and PS3 is one of the partners of PS4. B is an indirect partner in PS4 within the meaning of section 6231(a)(10) . Both PS3 and PS4 have partnership items related to a listed transaction, as defined in §1.6011-4(b)(2) . The IRS sends written notification to B that his partnership items in PS4 will be treated as nonpartnership items. As a result, all of B's partnership items flowing from PS4 are treated as nonpartnership items of B as of the date that the IRS sent written notification of the conversion to B. However, since the IRS did not send written notification to B that his partnership items in PS3 will be treated as nonpartnership items, B's partnership items in PS3 that are not attributable to PS4 will remain partnership items.

(c) Effective/applicability date . The rules of this section, when adopted as final regulations in the Federal Register , will apply to partner taxable years ending on or after the date of publication of these proposed regulations in the Federal Register .

February 9, 2009


Linda M. Kroening



Deputy Commissioner for Services and Enforcement.

H.R.1 Tirtle 1 Tax Provisions

H.R.1
American Recovery and Reinvestment Act of 2009 (Introduced in House)
________________________________________
TITLE I--TAX PROVISIONS

SEC. 1000. SHORT TITLE, ETC.

(a) Short Title- This title may be cited as the `American Recovery and Reinvestment Tax Act of 2009'.

(b) Reference- Except as otherwise expressly provided, whenever in this title an amendment or repeal is expressed in terms of an amendment to, or repeal of, a section or other provision, the reference shall be considered to be made to a section or other provision of the Internal Revenue Code of 1986.

(c) Table of Contents- The table of contents for this title is as follows:
Sec. 1000. Short title, etc.
Subtitle A--Making Work Pay
Sec. 1001. Making work pay credit.
Subtitle B--Additional Tax Relief for Families With Children
Sec. 1101. Increase in earned income tax credit.
Sec. 1102. Increase of refundable portion of child credit.
Subtitle C--American Opportunity Tax Credit
Sec. 1201. American opportunity tax credit.
Subtitle D--Housing Incentives
Sec. 1301. Waiver of requirement to repay first-time homebuyer credit.
Sec. 1302. Coordination of low-income housing credit and low-income housing grants.
Subtitle E--Tax Incentives for Business
Part 1--Temporary Investment Incentives
Sec. 1401. Special allowance for certain property acquired during 2009.
Sec. 1402. Temporary increase in limitations on expensing of certain depreciable business assets.
Part 2--5-Year Carryback of Operating Losses
Sec. 1411. 5-year carryback of operating losses.
Sec. 1412. Exception for TARP recipients.
Part 3--Incentives for New Jobs
Sec. 1421. Incentives to hire unemployed veterans and disconnected youth.
Part 4--Clarification of Regulations Related to Limitations on Certain Built-In Losses Following an Ownership Change
Sec. 1431. Clarification of regulations related to limitations on certain built-in losses following an ownership change.
Subtitle F--Fiscal Relief for State and Local Governments
Part 1--Improved Marketability for Tax-Exempt Bonds
Sec. 1501. De minimis safe harbor exception for tax-exempt interest expense of financial institutions.
Sec. 1502. Modification of small issuer exception to tax-exempt interest expense allocation rules for financial institutions.
Sec. 1503. Temporary modification of alternative minimum tax limitations on tax-exempt bonds.
Part 2--Tax Credit Bonds for Schools
Sec. 1511. Qualified school construction bonds.
Sec. 1512. Extension and expansion of qualified zone academy bonds.
Part 3--Taxable Bond Option for Governmental Bonds
Sec. 1521. Taxable bond option for governmental bonds.
Part 4--Recovery Zone Bonds
Sec. 1531. Recovery zone bonds.
Sec. 1532. Tribal economic development bonds.
Part 5--Repeal of Withholding Tax on Government Contractors
Sec. 1541. Repeal of withholding tax on government contractors.
Subtitle G--Energy Incentives
Part 1--Renewable Energy Incentives
Sec. 1601. Extension of credit for electricity produced from certain renewable resources.
Sec. 1602. Election of investment credit in lieu of production credit.
Sec. 1603. Repeal of certain limitations on credit for renewable energy property.
Sec. 1604. Coordination with renewable energy grants.
Part 2--Increased Allocations of New Clean Renewable Energy Bonds and Qualified Energy Conservation Bonds
Sec. 1611. Increased limitation on issuance of new clean renewable energy bonds.
Sec. 1612. Increased limitation and expansion of qualified energy conservation bonds.
Part 3--Energy Conservation Incentives
Sec. 1621. Extension and modification of credit for nonbusiness energy property.
Sec. 1622. Modification of credit for residential energy efficient property.
Sec. 1623. Temporary increase in credit for alternative fuel vehicle refueling property.
Part 4--Energy Research Incentives
Sec. 1631. Increased research credit for energy research.
Subtitle H--Other Provisions
Part 1--Application of Certain Labor Standards to Projects Financed With Certain Tax-Favored Bonds
Sec. 1701. Application of certain labor standards to projects financed with certain tax-favored bonds.
Part 2--Grants To Provide Financing for Low-Income Housing
Sec. 1711. Grants to States for low-income housing projects in lieu of low-income housing credit allocations for 2009.
Part 3--Grants for Specified Energy Property in Lieu of Tax Credits
Sec. 1721. Grants for specified energy property in lieu of tax credits.
Part 4--Study of Economic, Employment, and Related Effects of This Act
Sec. 1731. Study of economic, employment, and related effects of this Act.
Subtitle A--Making Work Pay
SEC. 1001. MAKING WORK PAY CREDIT.
(a) In General- Subpart C of part IV of subchapter A of chapter 1 is amended by inserting after section 36 the following new section:
`SEC. 36A. MAKING WORK PAY CREDIT.
`(a) Allowance of Credit- In the case of an eligible individual, there shall be allowed as a credit against the tax imposed by this subtitle for the taxable year an amount equal to the lesser of--
`(1) 6.2 percent of earned income of the taxpayer, or
`(2) $500 ($1,000 in the case of a joint return).
`(b) Limitation Based on Modified Adjusted Gross Income-
`(1) IN GENERAL- The amount allowable as a credit under subsection (a) (determined without regard to this paragraph) for the taxable year shall be reduced (but not below zero) by 2 percent of so much of the taxpayer's modified adjusted gross income as exceeds $75,000 ($150,000 in the case of a joint return).
`(2) MODIFIED ADJUSTED GROSS INCOME- For purposes of subparagraph (A), the term `modified adjusted gross income' means the adjusted gross income of the taxpayer for the taxable year increased by any amount excluded from gross income under section 911, 931, or 933.
`(c) Definitions- For purposes of this section--
`(1) ELIGIBLE INDIVIDUAL- The term `eligible individual' means any individual other than--
`(A) any nonresident alien individual,
`(B) any individual with respect to whom a deduction under section 151 is allowable to another taxpayer for a taxable year beginning in the calendar year in which the individual's taxable year begins, and
`(C) an estate or trust.
Such term shall not include any individual unless the requirements of section 32(c)(1)(E) are met with respect to such individual.
`(2) EARNED INCOME- The term `earned income' has the meaning given such term by section 32(c)(2), except that such term shall not include net earnings from self-employment which are not taken into account in computing taxable income. For purposes of the preceding sentence, any amount excluded from gross income by reason of section 112 shall be treated as earned income which is taken into account in computing taxable income for the taxable year.
`(d) Termination- This section shall not apply to taxable years beginning after December 31, 2010.'.
(b) Treatment of Possessions-
(1) PAYMENTS TO POSSESSIONS-
(A) MIRROR CODE POSSESSION- The Secretary of the Treasury shall pay to each possession of the United States with a mirror code tax system amounts equal to the loss to that possession by reason of the amendments made by this section with respect to taxable years beginning in 2009 and 2010. Such amounts shall be determined by the Secretary of the Treasury based on information provided by the government of the respective possession.
(B) OTHER POSSESSIONS- The Secretary of the Treasury shall pay to each possession of the United States which does not have a mirror code tax system amounts estimated by the Secretary of the Treasury as being equal to the aggregate benefits that would have been provided to residents of such possession by reason of the amendments made by this section for taxable years beginning in 2009 and 2010 if a mirror code tax system had been in effect in such possession. The preceding sentence shall not apply with respect to any possession of the United States unless such possession has a plan, which has been approved by the Secretary of the Treasury, under which such possession will promptly distribute such payments to the residents of such possession.
(2) COORDINATION WITH CREDIT ALLOWED AGAINST UNITED STATES INCOME TAXES- No credit shall be allowed against United States income taxes for any taxable year under section 36A of the Internal Revenue Code of 1986 (as added by this section) to any person--
(A) to whom a credit is allowed against taxes imposed by the possession by reason of the amendments made by this section for such taxable year, or
(B) who is eligible for a payment under a plan described in paragraph (1)(B) with respect to such taxable year.
(3) DEFINITIONS AND SPECIAL RULES-
(A) POSSESSION OF THE UNITED STATES- For purposes of this subsection, the term `possession of the United States' includes the Commonwealth of Puerto Rico and the Commonwealth of the Northern Mariana Islands.
(B) MIRROR CODE TAX SYSTEM- For purposes of this subsection, the term `mirror code tax system' means, with respect to any possession of the United States, the income tax system of such possession if the income tax liability of the residents of such possession under such system is determined by reference to the income tax laws of the United States as if such possession were the United States.
(C) TREATMENT OF PAYMENTS- For purposes of section 1324(b)(2) of title 31, United States Code, the payments under this subsection shall be treated in the same manner as a refund due from the credit allowed under section 36A of the Internal Revenue Code of 1986 (as added by this section).
(c) Refunds Disregarded in the Administration of Federal Programs and Federally Assisted Programs- Any credit or refund allowed or made to any individual by reason of section 36A of the Internal Revenue Code of 1986 (as added by this section) or by reason of subsection (b) of this section shall not be taken into account as income and shall not be taken into account as resources for the month of receipt and the following 2 months, for purposes of determining the eligibility of such individual or any other individual for benefits or assistance, or the amount or extent of benefits or assistance, under any Federal program or under any State or local program financed in whole or in part with Federal funds.
(d) Conforming Amendments-
(1) Section 6211(b)(4)(A) is amended by inserting `36A,' after `36,'.
(2) Section 1324(b)(2) of title 31, United States Code, is amended by inserting `36A,' after `36,'.
(3) The table of sections for subpart C of part IV of subchapter A of chapter 1 is amended by inserting after the item relating to section 36 the following new item:
`Sec. 36A. Making work pay credit.'.
(e) Effective Date- This section shall apply to taxable years beginning after December 31, 2008.
Subtitle B--Additional Tax Relief for Families With Children
SEC. 1101. INCREASE IN EARNED INCOME TAX CREDIT.
(a) In General- Subsection (b) of section 32 is amended by adding at the end the following new paragraph:
`(3) SPECIAL RULES FOR 2009 AND 2010- In the case of any taxable year beginning in 2009 or 2010--
`(A) INCREASED CREDIT PERCENTAGE FOR 3 OR MORE QUALIFYING CHILDREN- In the case of a taxpayer with 3 or more qualifying children, the credit percentage is 45 percent.
`(B) REDUCTION OF MARRIAGE PENALTY-
`(i) IN GENERAL- The dollar amount in effect under paragraph (2)(B) shall be $5,000.
`(ii) INFLATION ADJUSTMENT- In the case of any taxable year beginning in 2010, the $5,000 amount in clause (i) shall be increased by an amount equal to--
`(I) such dollar amount, multiplied by
`(II) the cost of living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins determined by substituting `calendar year 2008' for `calendar year 1992' in subparagraph (B) thereof.
`(iii) ROUNDING- Subparagraph (A) of subsection (j)(2) shall apply after taking into account any increase under clause (ii).'.
(b) Effective Date- The amendments made by this section shall apply to taxable years beginning after December 31, 2008.
SEC. 1102. INCREASE OF REFUNDABLE PORTION OF CHILD CREDIT.
(a) In General- Paragraph (4) of section 24(d) is amended to read as follows:
`(4) SPECIAL RULE FOR 2009 AND 2010- Notwithstanding paragraph (3), in the case of any taxable year beginning in 2009 or 2010, the dollar amount in effect for such taxable year under paragraph (1)(B)(i) shall be zero.'.
(b) Effective Date- The amendments made by this section shall apply to taxable years beginning after December 31, 2008.
Subtitle C--American Opportunity Tax Credit
SEC. 1201. AMERICAN OPPORTUNITY TAX CREDIT.
(a) In General- Section 25A (relating to Hope scholarship credit) is amended by redesignating subsection (i) as subsection (j) and by inserting after subsection (h) the following new subsection:
`(i) American Opportunity Tax Credit- In the case of any taxable year beginning in 2009 or 2010--
`(1) INCREASE IN CREDIT- The Hope Scholarship Credit shall be an amount equal to the sum of--
`(A) 100 percent of so much of the qualified tuition and related expenses paid by the taxpayer during the taxable year (for education furnished to the eligible student during any academic period beginning in such taxable year) as does not exceed $2,000, plus
`(B) 25 percent of such expenses so paid as exceeds $2,000 but does not exceed $4,000.
`(2) CREDIT ALLOWED FOR FIRST 4 YEARS OF POST-SECONDARY EDUCATION- Subparagraphs (A) and (C) of subsection (b)(2) shall be applied by substituting `4' for `2'.
`(3) QUALIFIED TUITION AND RELATED EXPENSES TO INCLUDE REQUIRED COURSE MATERIALS- Subsection (f)(1)(A) shall be applied by substituting `tuition, fees, and course materials' for `tuition and fees'.
`(4) INCREASE IN AGI LIMITS FOR HOPE SCHOLARSHIP CREDIT- In lieu of applying subsection (d) with respect to the Hope Scholarship Credit, such credit (determined without regard to this paragraph) shall be reduced (but not below zero) by the amount which bears the same ratio to such credit (as so determined) as--
`(A) the excess of--
`(i) the taxpayer's modified adjusted gross income (as defined in subsection (d)(3)) for such taxable year, over
`(ii) $80,000 ($160,000 in the case of a joint return), bears to
`(B) $10,000 ($20,000 in the case of a joint return).
`(5) CREDIT ALLOWED AGAINST ALTERNATIVE MINIMUM TAX- In the case of a taxable year to which section 26(a)(2) does not apply, so much of the credit allowed under subsection (a) as is attributable to the Hope Scholarship Credit shall not exceed the excess of--
`(A) the sum of the regular tax liability (as defined in section 26(b)) plus the tax imposed by section 55, over
`(B) the sum of the credits allowable under this subpart (other than this subsection and sections 23, 25D, and 30D) and section 27 for the taxable year.
Any reference in this section or section 24, 25, 26, 25B, 904, or 1400C to a credit allowable under this subsection shall be treated as a reference to so much of the credit allowable under subsection (a) as is attributable to the Hope Scholarship Credit.
`(6) PORTION OF CREDIT MADE REFUNDABLE- 40 percent of so much of the credit allowed under subsection (a) as is attributable to the Hope Scholarship Credit (determined after application of paragraph (4) and without regard to this paragraph and section 26(a)(2) or paragraph (5), as the case may be) shall be treated as a credit allowable under subpart C (and not allowed under subsection (a)). The preceding sentence shall not apply to any taxpayer for any taxable year if such taxpayer is a child to whom subsection (g) of section 1 applies for such taxable year.
`(7) COORDINATION WITH MIDWESTERN DISASTER AREA BENEFITS- In the case of a taxpayer with respect to whom section 702(a)(1)(B) of the Heartland Disaster Tax Relief Act of 2008 applies for any taxable year, such taxpayer may elect to waive the application of this subsection to such taxpayer for such taxable year.'.
(b) Conforming Amendments-
(1) Section 24(b)(3)(B) is amended by inserting `25A(i),' after `23,'.
(2) Section 25(e)(1)(C)(ii) is amended by inserting `25A(i),' after `24,'.
(3) Section 26(a)(1) is amended by inserting `25A(i),' after `24,'.
(4) Section 25B(g)(2) is amended by inserting `25A(i),' after `23,'.
(5) Section 904(i) is amended by inserting `25A(i),' after `24,'.
(6) Section 1400C(d)(2) is amended by inserting `25A(i),' after `24,'.
(7) Section 1324(b)(2) of title 31, United States Code, is amended by inserting `25A,' before `35'.
(c) Effective Date- The amendments made by this section shall apply to taxable years beginning after December 31, 2008.
(d) Application of EGTRRA Sunset- The amendment made by subsection (b)(1) shall be subject to title IX of the Economic Growth and Tax Relief Reconciliation Act of 2001 in the same manner as the provision of such Act to which such amendment relates.
(e) Treasury Studies Regarding Education Incentives-
(1) STUDY REGARDING COORDINATION WITH NON-TAX EDUCATIONAL INCENTIVES- The Secretary of the Treasury, or the Secretary's delegate, shall study how to coordinate the credit allowed under section 25A of the Internal Revenue Code of 1986 with the Federal Pell Grant program under section 401 of the Higher Education Act of 1965.
(2) STUDY REGARDING IMPOSITION OF COMMUNITY SERVICE REQUIREMENTS- The Secretary of the Treasury, or the Secretary's delegate, shall study the feasibility of requiring students to perform community service as a condition of taking their tuition and related expenses into account under section 25A of the Internal Revenue Code of 1986.
(3) REPORT- Not later than 1 year after the date of the enactment of this Act, the Secretary of the Treasury, or the Secretary's delegate, shall report to Congress on the results of the studies conducted under this paragraph.
Subtitle D--Housing Incentives
SEC. 1301. WAIVER OF REQUIREMENT TO REPAY FIRST-TIME HOMEBUYER CREDIT.
(a) In General- Paragraph (4) of section 36(f) is amended by adding at the end the following new subparagraph:
`(D) WAIVER OF RECAPTURE FOR PURCHASES IN 2009- In the case of any credit allowed with respect to the purchase of a principal residence after December 31, 2008, and before July 1, 2009--
`(i) paragraph (1) shall not apply, and
`(ii) paragraph (2) shall apply only if the disposition or cessation described in paragraph (2) with respect to such residence occurs during the 36-month period beginning on the date of the purchase of such residence by the taxpayer.'.
(b) Conforming Amendment- Subsection (g) of section 36 is amended by striking `subsection (c)' and inserting `subsections (c) and (f)(4)(D)'.
(c) Effective Date- The amendments made by this section shall apply to residences purchased after December 31, 2008.
SEC. 1302. COORDINATION OF LOW-INCOME HOUSING CREDIT AND LOW-INCOME HOUSING GRANTS.
Subsection (i) of section 42 of the Internal Revenue Code of 1986 is amended by adding at the end the following new paragraph:
`(9) COORDINATION WITH LOW-INCOME HOUSING GRANTS-
`(A) REDUCTION IN STATE HOUSING CREDIT CEILING FOR LOW-INCOME HOUSING GRANTS RECEIVED IN 2009- For purposes of this section, the amounts described in clauses (i) through (iv) of subsection (h)(3)(C) with respect to any State for 2009 shall each be reduced by so much of such amount as is taken into account in determining the amount of any grant to such State under section 1711 of the American Recovery and Reinvestment Tax Act of 2009.
`(B) SPECIAL RULE FOR BASIS- Basis of a qualified low-income building shall not be reduced by the amount of any grant described in subparagraph (A).'.
Subtitle E--Tax Incentives for Business

PART 1--TEMPORARY INVESTMENT INCENTIVES
SEC. 1401. SPECIAL ALLOWANCE FOR CERTAIN PROPERTY ACQUIRED DURING 2009.
(a) In General- Paragraph (2) of section 168(k) is amended--
(1) by striking `January 1, 2010' and inserting `January 1, 2011', and
(2) by striking `January 1, 2009' each place it appears and inserting `January 1, 2010'.
(b) Conforming Amendments-
(1) The heading for subsection (k) of section 168 is amended by striking `January 1, 2009' and inserting `January 1, 2010'.
(2) The heading for clause (ii) of section 168(k)(2)(B) is amended by striking `PRE-JANUARY 1, 2009' and inserting `PRE-JANUARY 1, 2010'.
(3) Subparagraph (D) of section 168(k)(4) is amended--
(A) by striking `and' at the end of clause (i),
(B) by redesignating clause (ii) as clause (v), and
(C) by inserting after clause (i) the following new clauses:
`(ii) `April 1, 2008' shall be substituted for `January 1, 2008' in subparagraph (A)(iii)(I) thereof,
`(iii) `January 1, 2009' shall be substituted for `January 1, 2010' each place it appears,
`(iv) `January 1, 2010' shall be substituted for `January 1, 2011' in subparagraph (A)(iv) thereof, and'.
(4) Subparagraph (B) of section 168(l)(5) is amended by striking `January 1, 2009' and inserting `January 1, 2010'.
(5) Subparagraph (B) of section 1400N(d)(3) is amended by striking `January 1, 2009' and inserting `January 1, 2010'.
(c) Effective Dates-
(1) IN GENERAL- Except as provided in paragraph (2), the amendments made by this section shall apply to property placed in service after December 31, 2008, in taxable years ending after such date.
(2) TECHNICAL AMENDMENT- Section 168(k)(4)(D)(ii) of the Internal Revenue Code of 1986, as added by subsection (b)(3)(C), shall apply to taxable years ending after March 31, 2008.
SEC. 1402. TEMPORARY INCREASE IN LIMITATIONS ON EXPENSING OF CERTAIN DEPRECIABLE BUSINESS ASSETS.
(a) In General- Paragraph (7) of section 179(b) is amended--
(1) by striking `2008' and inserting `2008, or 2009', and
(2) by striking `2008' in the heading thereof and inserting `2008, AND 2009'.
(b) Effective Date- The amendments made by this section shall apply to taxable years beginning after December 31, 2008.
PART 2--5-YEAR CARRYBACK OF OPERATING LOSSES
SEC. 1411. 5-YEAR CARRYBACK OF OPERATING LOSSES.
(a) In General- Subparagraph (H) of section 172(b)(1) is amended to read as follows:
`(H) CARRYBACK FOR 2008 AND 2009 NET OPERATING LOSSES-
`(i) IN GENERAL- In the case of an applicable 2008 or 2009 net operating loss with respect to which the taxpayer has elected the application of this subparagraph--
`(I) such net operating loss shall be reduced by 10 percent of such loss (determined without regard to this subparagraph),
`(II) subparagraph (A)(i) shall be applied by substituting any whole number elected by the taxpayer which is more than 2 and less than 6 for `2',
`(III) subparagraph (E)(ii) shall be applied by substituting the whole number which is one less than the whole number substituted under subclause (II) for `2', and
`(IV) subparagraph (F) shall not apply.
`(ii) APPLICABLE 2008 OR 2009 NET OPERATING LOSS- For purposes of this subparagraph, the term `applicable 2008 or 2009 net operating loss' means--
`(I) the taxpayer's net operating loss for any taxable year ending in 2008 or 2009, or
`(II) if the taxpayer elects to have this subclause apply in lieu of subclause (I), the taxpayer's net operating loss for any taxable year beginning in 2008 or 2009.
`(iii) ELECTION- Any election under this subparagraph shall be made in such manner as may be prescribed by the Secretary, and shall be made by the due date (including extension of time) for filing the taxpayer's return for the taxable year of the net operating loss. Any such election, once made, shall be irrevocable.
`(iv) COORDINATION WITH ALTERNATIVE TAX NET OPERATING LOSS DEDUCTION- In the case of a taxpayer who elects to have clause (ii)(II) apply, section 56(d)(1)(A)(ii) shall be applied by substituting `ending during 2001 or 2002 or beginning during 2008 or 2009' for `ending during 2001, 2002, 2008, or 2009'.'.
(b) Alternative Tax Net Operating Loss Deduction- Subclause (I) of section 56(d)(1)(A)(ii) is amended to read as follows:
`(I) the amount of such deduction attributable to the sum of carrybacks of net operating losses from taxable years ending during 2001, 2002, 2008, or 2009 and carryovers of net operating losses to such taxable years, or'.
(c) Loss From Operations of Life Insurance Companies- Subsection (b) of section 810 is amended by adding at the end the following new paragraph:
`(4) CARRYBACK FOR 2008 AND 2009 LOSSES-
`(A) IN GENERAL- In the case of an applicable 2008 or 2009 loss from operations with respect to which the taxpayer has elected the application of this paragraph--
`(i) such loss from operations shall be reduced by 10 percent of such loss (determined without regard to this paragraph), and
`(ii) paragraph (1)(A) shall be applied, at the election of the taxpayer, by substituting `5' or `4' for `3'.
`(B) APPLICABLE 2008 OR 2009 LOSS FROM OPERATIONS- For purposes of this paragraph, the term `applicable 2008 or 2009 loss from operations' means--
`(i) the taxpayer's loss from operations for any taxable year ending in 2008 or 2009, or
`(ii) if the taxpayer elects to have this clause apply in lieu of clause (i), the taxpayer's loss from operations for any taxable year beginning in 2008 or 2009.
`(C) ELECTION- Any election under this paragraph shall be made in such manner as may be prescribed by the Secretary, and shall be made by the due date (including extension of time) for filing the taxpayer's return for the taxable year of the loss from operations. Any such election, once made, shall be irrevocable.
`(D) COORDINATION WITH ALTERNATIVE TAX NET OPERATING LOSS DEDUCTION- In the case of a taxpayer who elects to have subparagraph (B)(ii) apply, section 56(d)(1)(A)(ii) shall be applied by substituting `ending during 2001 or 2002 or beginning during 2008 or 2009' for `ending during 2001, 2002, 2008, or 2009'.'.
(d) Conforming Amendment- Section 172 is amended by striking subsection (k).
(e) Effective Date-
(1) IN GENERAL- Except as otherwise provided in this subsection, the amendments made by this section shall apply to net operating losses arising in taxable years ending after December 31, 2007.
(2) ALTERNATIVE TAX NET OPERATING LOSS DEDUCTION- The amendment made by subsection (b) shall apply to taxable years ending after 1997.
(3) LOSS FROM OPERATIONS OF LIFE INSURANCE COMPANIES- The amendment made by subsection (d) shall apply to losses from operations arising in taxable years ending after December 31, 2007.
(4) TRANSITIONAL RULE- In the case of a net operating loss (or, in the case of a life insurance company, a loss from operations) for a taxable year ending before the date of the enactment of this Act--
(A) any election made under section 172(b)(3) or 810(b)(3) of the Internal Revenue Code of 1986 with respect to such loss may (notwithstanding such section) be revoked before the applicable date,
(B) any election made under section 172(b)(1)(H) or 810(b)(4) of such Code with respect to such loss shall (notwithstanding such section) be treated as timely made if made before the applicable date, and
(C) any application under section 6411(a) of such Code with respect to such loss shall be treated as timely filed if filed before the applicable date.
For purposes of this paragraph, the term `applicable date' means the date which is 60 days after the date of the enactment of this Act.
SEC. 1412. EXCEPTION FOR TARP RECIPIENTS.
The amendments made by this part shall not apply to--
(1) any taxpayer if--
(A) the Federal Government acquires, at any time, an equity interest in the taxpayer pursuant to the Emergency Economic Stabilization Act of 2008, or
(B) the Federal Government acquires, at any time, any warrant (or other right) to acquire any equity interest with respect to the taxpayer pursuant to such Act,
(2) the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, and
(3) any taxpayer which at any time in 2008 or 2009 is a member of the same affiliated group (as defined in section 1504 of the Internal Revenue Code of 1986, determined without regard to subsection (b) thereof) as a taxpayer described in paragraph (1) or (2).
PART 3--INCENTIVES FOR NEW JOBS
SEC. 1421. INCENTIVES TO HIRE UNEMPLOYED VETERANS AND DISCONNECTED YOUTH.
(a) In General- Subsection (d) of section 51 is amended by adding at the end the following new paragraph:
`(14) CREDIT ALLOWED FOR UNEMPLOYED VETERANS AND DISCONNECTED YOUTH HIRED IN 2009 OR 2010-
`(A) IN GENERAL- Any unemployed veteran or disconnected youth who begins work for the employer during 2009 or 2010 shall be treated as a member of a targeted group for purposes of this subpart.
`(B) DEFINITIONS- For purposes of this paragraph--
`(i) UNEMPLOYED VETERAN- The term `unemployed veteran' means any veteran (as defined in paragraph (3)(B), determined without regard to clause (ii) thereof) who is certified by the designated local agency as--
`(I) having been discharged or released from active duty in the Armed Forces during 2008, 2009, or 2010, and
`(II) being in receipt of unemployment compensation under State or Federal law for not less than 4 weeks during the 1-year period ending on the hiring date.
`(ii) DISCONNECTED YOUTH- The term `disconnected youth' means any individual who is certified by the designated local agency--
`(I) as having attained age 16 but not age 25 on the hiring date,
`(II) as not regularly attending any secondary, technical, or post-secondary school during the 6-month period preceding the hiring date,
`(III) as not regularly employed during such 6-month period, and
`(IV) as not readily employable by reason of lacking a sufficient number of basic skills.'.
(b) Effective Date- The amendments made by this section shall apply to individuals who begin work for the employer after December 31, 2008.


PART 4--CLARIFICATION OF REGULATIONS RELATED TO LIMITATIONS ON CERTAIN BUILT-IN LOSSES FOLLOWING AN OWNERSHIP CHANGE
SEC. 1431. CLARIFICATION OF REGULATIONS RELATED TO LIMITATIONS ON CERTAIN BUILT-IN LOSSES FOLLOWING AN OWNERSHIP CHANGE.
(a) Findings- Congress finds as follows:
(1) The delegation of authority to the Secretary of the Treasury under section 382(m) of the Internal Revenue Code of 1986 does not authorize the Secretary to provide exemptions or special rules that are restricted to particular industries or classes of taxpayers.
(2) Internal Revenue Service Notice 2008-83 is inconsistent with the congressional intent in enacting such section 382(m).
(3) The legal authority to prescribe Internal Revenue Service Notice 2008-83 is doubtful.
(4) However, as taxpayers should generally be able to rely on guidance issued by the Secretary of the Treasury legislation is necessary to clarify the force and effect of Internal Revenue Service Notice 2008-83 and restore the proper application under the Internal Revenue Code of 1986 of the limitation on built-in losses following an ownership change of a bank.
(b) Determination of Force and Effect of Internal Revenue Service Notice 2008-83 Exempting Banks From Limitation on Certain Built-in Losses Following Ownership Change-
(1) IN GENERAL- Internal Revenue Service Notice 2008-83--
(A) shall be deemed to have the force and effect of law with respect to any ownership change (as defined in section 382(g) of the Internal Revenue Code of 1986) occurring on or before January 16, 2009, and
(B) shall have no force or effect with respect to any ownership change after such date.
(2) BINDING CONTRACTS- Notwithstanding paragraph (1), Internal Revenue Service Notice 2008-83 shall have the force and effect of law with respect to any ownership change (as so defined) which occurs after January 16, 2009 if such change--
(A) is pursuant to a written binding contract entered into on or before such date, or
(B) is pursuant to a written agreement entered into on or before such date and such agreement was described on or before such date in a public announcement or in a filing with the Securities and Exchange Commission required by reason of such ownership change.
Subtitle F--Fiscal Relief for State and Local Governments
PART 1--IMPROVED MARKETABILITY FOR TAX-EXEMPT BONDS
SEC. 1501. DE MINIMIS SAFE HARBOR EXCEPTION FOR TAX-EXEMPT INTEREST EXPENSE OF FINANCIAL INSTITUTIONS.
(a) In General- Subsection (b) of section 265 is amended by adding at the end the following new paragraph:
`(7) DE MINIMIS EXCEPTION FOR BONDS ISSUED DURING 2009 OR 2010-
`(A) IN GENERAL- In applying paragraph (2)(A), there shall not be taken into account tax-exempt obligations issued during 2009 or 2010.
`(B) LIMITATION- The amount of tax-exempt obligations not taken into account by reason of subparagraph (A) shall not exceed 2 percent of the amount determined under paragraph (2)(B).
`(C) REFUNDINGS- For purposes of this paragraph, a refunding bond (whether a current or advance refunding) shall be treated as issued on the date of the issuance of the refunded bond (or in the case of a series of refundings, the original bond).'.
(b) Treatment as Financial Institution Preference Item- Clause (iv) of section 291(e)(1)(B) is amended by adding at the end the following: `That portion of any obligation not taken into account under paragraph (2)(A) of section 265(b) by reason of paragraph (7) of such section shall be treated for purposes of this section as having been acquired on August 7, 1986.'.
(c) Effective Date- The amendments made by this section shall apply to obligations issued after December 31, 2008.
SEC. 1502. MODIFICATION OF SMALL ISSUER EXCEPTION TO TAX-EXEMPT INTEREST EXPENSE ALLOCATION RULES FOR FINANCIAL INSTITUTIONS.
(a) In General- Paragraph (3) of section 265(b) (relating to exception for certain tax-exempt obligations) is amended by adding at the end the following new subparagraph:
`(G) SPECIAL RULES FOR OBLIGATIONS ISSUED DURING 2009 AND 2010-
`(i) INCREASE IN LIMITATION- In the case of obligations issued during 2009 or 2010, subparagraphs (C)(i), (D)(i), and (D)(iii)(II) shall each be applied by substituting `$30,000,000' for `$10,000,000'.
`(ii) QUALIFIED 501(C)(3) BONDS TREATED AS ISSUED BY EXEMPT ORGANIZATION- In the case of a qualified 501(c)(3) bond (as defined in section 145) issued during 2009 or 2010, this paragraph shall be applied by treating the 501(c)(3) organization for whose benefit such bond was issued as the issuer.
`(iii) SPECIAL RULE FOR QUALIFIED FINANCINGS- In the case of a qualified financing issue issued during 2009 or 2010--
`(I) subparagraph (F) shall not apply, and
`(II) any obligation issued as a part of such issue shall be treated as a qualified tax-exempt obligation if the requirements of this paragraph are met with respect to each qualified portion of the issue (determined by treating each qualified portion as a separate issue issued by the qualified borrower with respect to which such portion relates).
`(iv) QUALIFIED FINANCING ISSUE- For purposes of this subparagraph, the term `qualified financing issue' means any composite, pooled, or other conduit financing issue the proceeds of which are used directly or indirectly to make or finance loans to one or more ultimate borrowers each of whom is a qualified borrower.
`(v) QUALIFIED PORTION- For purposes of this subparagraph, the term `qualified portion' means that portion of the proceeds which are used with respect to each qualified borrower under the issue.
`(vi) QUALIFIED BORROWER- For purposes of this subparagraph, the term `qualified borrower' means a borrower which is a State or political subdivision thereof or an organization described in section 501(c)(3) and exempt from taxation under section 501(a).'.
(b) Effective Date- The amendments made by this section shall apply to obligations issued after December 31, 2008.
SEC. 1503. TEMPORARY MODIFICATION OF ALTERNATIVE MINIMUM TAX LIMITATIONS ON TAX-EXEMPT BONDS.
(a) Interest on Private Activity Bonds Issued During 2009 and 2010 Not Treated as Tax Preference Item- Subparagraph (C) of section 57(a)(5) is amended by adding at the end a new clause:
`(vi) EXCEPTION FOR BONDS ISSUED IN 2009 AND 2010- For purposes of clause (i), the term `private activity bond' shall not include any bond issued after December 31, 2008, and before January 1, 2011. For purposes of the preceding sentence, a refunding bond (whether a current or advance refunding) shall be treated as issued on the date of the issuance of the refunded bond (or in the case of a series of refundings, the original bond).'.
(b) No Adjustment to Adjusted Current Earnings for Interest on Tax-Exempt Bonds Issued After 2008- Subparagraph (B) of section 56(g)(4) is amended by adding at the end the following new clause:
`(iv) TAX EXEMPT INTEREST ON BONDS ISSUED IN 2009 AND 2010- Clause (i) shall not apply in the case of any interest on a bond issued after December 31, 2008, and before January 1, 2011. For purposes of the preceding sentence, a refunding bond (whether a current or advance refunding) shall be treated as issued on the date of the issuance of the refunded bond (or in the case of a series of refundings, the original bond).'.
(c) Effective Date- The amendments made by this section shall apply to obligations issued after December 31, 2008.
PART 2--TAX CREDIT BONDS FOR SCHOOLS
SEC. 1511. QUALIFIED SCHOOL CONSTRUCTION BONDS.
(a) In General- Subpart I of part IV of subchapter A of chapter 1 is amended by adding at the end the following new section:
`SEC. 54F. QUALIFIED SCHOOL CONSTRUCTION BONDS.
`(a) Qualified School Construction Bond- For purposes of this subchapter, the term `qualified school construction bond' means any bond issued as part of an issue if--
`(1) 100 percent of the available project proceeds of such issue are to be used for the construction, rehabilitation, or repair of a public school facility or for the acquisition of land on which such a facility is to be constructed with part of the proceeds of such issue,
`(2) the bond is issued by a State or local government within the jurisdiction of which such school is located, and
`(3) the issuer designates such bond for purposes of this section.
`(b) Limitation on Amount of Bonds Designated- The maximum aggregate face amount of bonds issued during any calendar year which may be designated under subsection (a) by any issuer shall not exceed the sum of--
`(1) the limitation amount allocated under subsection (d) for such calendar year to such issuer, and
`(2) if such issuer is a large local educational agency (as defined in subsection (e)(4)) or is issuing on behalf of such an agency, the limitation amount allocated under subsection (e) for such calendar year to such agency.
`(c) National Limitation on Amount of Bonds Designated- There is a national qualified school construction bond limitation for each calendar year. Such limitation is--
`(1) $11,000,000,000 for 2009,
`(2) $11,000,000,000 for 2010, and
`(3) except as provided in subsection (f), zero after 2010.
`(d) 60 Percent of Limitation Allocated Among States-
`(1) IN GENERAL- 60 percent of the limitation applicable under subsection (c) for any calendar year shall be allocated by the Secretary among the States in proportion to the respective numbers of children in each State who have attained age 5 but not age 18 for the most recent fiscal year ending before such calendar year. The limitation amount allocated to a State under the preceding sentence shall be allocated by the State to issuers within such State.
`(2) MINIMUM ALLOCATIONS TO STATES-
`(A) IN GENERAL- The Secretary shall adjust the allocations under this subsection for any calendar year for each State to the extent necessary to ensure that the sum of--
`(i) the amount allocated to such State under this subsection for such year, and
`(ii) the aggregate amounts allocated under subsection (e) to large local educational agencies in such State for such year,
is not less than an amount equal to such State's adjusted minimum percentage of the amount to be allocated under paragraph (1) for the calendar year.
`(B) ADJUSTED MINIMUM PERCENTAGE- A State's adjusted minimum percentage for any calendar year is the product of--
`(i) the minimum percentage described in section 1124(d) of the Elementary and Secondary Education Act of 1965 (20 U.S.C. 6334(d)) for such State for the most recent fiscal year ending before such calendar year, multiplied by
`(ii) 1.68.
`(3) ALLOCATIONS TO CERTAIN POSSESSIONS- The amount to be allocated under paragraph (1) to any possession of the United States other than Puerto Rico shall be the amount which would have been allocated if all allocations under paragraph (1) were made on the basis of respective populations of individuals below the poverty line (as defined by the Office of Management and Budget). In making other allocations, the amount to be allocated under paragraph (1) shall be reduced by the aggregate amount allocated under this paragraph to possessions of the United States.
`(4) ALLOCATIONS FOR INDIAN SCHOOLS- In addition to the amounts otherwise allocated under this subsection, $200,000,000 for calendar year 2009, and $200,000,000 for calendar year 2010, shall be allocated by the Secretary of the Interior for purposes of the construction, rehabilitation, and repair of schools funded by the Bureau of Indian Affairs. In the case of amounts allocated under the preceding sentence, Indian tribal governments (as defined in section 7701(a)(40)) shall be treated as qualified issuers for purposes of this subchapter.
`(e) 40 Percent of Limitation Allocated Among Largest School Districts-
`(1) IN GENERAL- 40 percent of the limitation applicable under subsection (c) for any calendar year shall be allocated under paragraph (2) by the Secretary among local educational agencies which are large local educational agencies for such year.
`(2) ALLOCATION FORMULA- The amount to be allocated under paragraph (1) for any calendar year shall be allocated among large local educational agencies in proportion to the respective amounts each such agency received for Basic Grants under subpart 2 of part A of title I of the Elementary and Secondary Education Act of 1965 (20 U.S.C. 6331 et seq.) for the most recent fiscal year ending before such calendar year.
`(3) ALLOCATION OF UNUSED LIMITATION TO STATE- The amount allocated under this subsection to a large local educational agency for any calendar year may be reallocated by such agency to the State in which such agency is located for such calendar year. Any amount reallocated to a State under the preceding sentence may be allocated as provided in subsection (d)(1).
`(4) LARGE LOCAL EDUCATIONAL AGENCY- For purposes of this section, the term `large local educational agency' means, with respect to a calendar year, any local educational agency if such agency is--
`(A) among the 100 local educational agencies with the largest numbers of children aged 5 through 17 from families living below the poverty level, as determined by the Secretary using the most recent data available from the Department of Commerce that are satisfactory to the Secretary, or
`(B) 1 of not more than 25 local educational agencies (other than those described in subparagraph (A)) that the Secretary of Education determines (based on the most recent data available satisfactory to the Secretary) are in particular need of assistance, based on a low level of resources for school construction, a high level of enrollment growth, or such other factors as the Secretary deems appropriate.
`(f) Carryover of Unused Limitation- If for any calendar year--
`(1) the amount allocated under subsection (d) to any State, exceeds
`(2) the amount of bonds issued during such year which are designated under subsection (a) pursuant to such allocation,
the limitation amount under such subsection for such State for the following calendar year shall be increased by the amount of such excess. A similar rule shall apply to the amounts allocated under subsection (d)(4) or (e).'.
(b) Conforming Amendments-
(1) Paragraph (1) of section 54A(d) is amended by striking `or' at the end of subparagraph (C), by inserting `or' at the end of subparagraph (D), and by inserting after subparagraph (D) the following new subparagraph:
`(E) a qualified school construction bond,'.
(2) Subparagraph (C) of section 54A(d)(2) is amended by striking `and' at the end of clause (iii), by striking the period at the end of clause (iv) and inserting `, and', and by adding at the end the following new clause:
`(v) in the case of a qualified school construction bond, a purpose specified in section 54F(a)(1).'.
(3) The table of sections for subpart I of part IV of subchapter A of chapter 1 is amended by adding at the end the following new item:
`Sec. 54F. Qualified school construction bonds.'.
(c) Effective Date- The amendments made by this section shall apply to obligations issued after December 31, 2008.
SEC. 1512. EXTENSION AND EXPANSION OF QUALIFIED ZONE ACADEMY BONDS.
(a) In General- Section 54E(c)(1) is amended by striking `and 2009' and inserting `and $1,400,000,000 for 2009 and 2010'.
(b) Effective Date- The amendment made by this section shall apply to obligations issued after December 31, 2008.
PART 3--TAXABLE BOND OPTION FOR GOVERNMENTAL BONDS
SEC. 1521. TAXABLE BOND OPTION FOR GOVERNMENTAL BONDS.
(a) In General- Part IV of subchapter A of chapter 1 is amended by adding at the end the following new subpart:
`Subpart J--Taxable Bond Option for Governmental Bonds
`Sec. 54AA. Taxable bond option for governmental bonds.
`SEC. 54AA. TAXABLE BOND OPTION FOR GOVERNMENTAL BONDS.
`(a) In General- If a taxpayer holds a taxable governmental bond on one or more interest payment dates of the bond during any taxable year, there shall be allowed as a credit against the tax imposed by this chapter for the taxable year an amount equal to the sum of the credits determined under subsection (b) with respect to such dates.
`(b) Amount of Credit- The amount of the credit determined under this subsection with respect to any interest payment date for a taxable governmental bond is 35 percent of the amount of interest payable by the issuer with respect to such date.
`(c) Limitation Based on Amount of Tax-
`(1) IN GENERAL- The credit allowed under subsection (a) for any taxable year shall not exceed the excess of--
`(A) the sum of the regular tax liability (as defined in section 26(b)) plus the tax imposed by section 55, over
`(B) the sum of the credits allowable under this part (other than subpart C and this subpart).
`(2) CARRYOVER OF UNUSED CREDIT- If the credit allowable under subsection (a) exceeds the limitation imposed by paragraph (1) for such taxable year, such excess shall be carried to the succeeding taxable year and added to the credit allowable under subsection (a) for such taxable year (determined before the application of paragraph (1) for such succeeding taxable year).
`(d) Taxable Governmental Bond-
`(1) IN GENERAL- For purposes of this section, the term `taxable governmental bond' means any obligation (other than a private activity bond) if--
`(A) the interest on such obligation would (but for this section) be excludable from gross income under section 103, and
`(B) the issuer makes an irrevocable election to have this section apply.
`(2) APPLICABLE RULES- For purposes of applying paragraph (1)--
`(A) a taxable governmental bond shall not be treated as federally guaranteed by reason of the credit allowed under subsection (a) or section 6432,
`(B) the yield on a taxable governmental bond shall be determined without regard to the credit allowed under subsection (a), and
`(C) a bond shall not be treated as a taxable governmental bond if the issue price has more than a de minimis amount (determined under rules similar to the rules of section 1273(a)(3)) of premium over the stated principal amount of the bond.
`(e) Interest Payment Date- For purposes of this section, the term `interest payment date' means any date on which the holder of record of the taxable governmental bond is entitled to a payment of interest under such bond.
`(f) Special Rules-
`(1) INTEREST ON TAXABLE GOVERNMENTAL BONDS INCLUDIBLE IN GROSS INCOME FOR FEDERAL INCOME TAX PURPOSES- For purposes of this title, interest on any taxable governmental bond shall be includible in gross income.
`(2) APPLICATION OF CERTAIN RULES- Rules similar to the rules of subsections (f), (g), (h), and (i) of section 54A shall apply for purposes of the credit allowed under subsection (a).
`(g) Special Rule for Qualified Bonds Issued Before 2011- In the case of a qualified bond issued before January 1, 2011--
`(1) ISSUER ALLOWED REFUNDABLE CREDIT- In lieu of any credit allowed under this section with respect to such bond, the issuer of such bond shall be allowed a credit as provided in section 6432.
`(2) QUALIFIED BOND- For purposes of this subsection, the term `qualified bond' means any taxable governmental bond issued as part of an issue if--
`(A) 100 percent of the available project proceeds (as defined in section 54A) of such issue are to be used for capital expenditures, and
`(B) the issuer makes an irrevocable election to have this subsection apply.
`(h) Regulations- The Secretary may prescribe such regulations and other guidance as may be necessary or appropriate to carry out this section and section 6432.'.
(b) Credit for Qualified Bonds Issued Before 2011- Subchapter B of chapter 65, as amended by this Act, is amended by adding at the end the following new section:


SEC. 6432. CREDIT FOR QUALIFIED BONDS ALLOWED TO ISSUER.
`(a) In General- In the case of a qualified bond issued before January 1, 2011, the issuer of such bond shall be allowed a credit with respect to each interest payment under such bond which shall be payable by the Secretary as provided in subsection (b).
`(b) Payment of Credit- The Secretary shall pay (contemporaneously with each interest payment date under such bond) to the issuer of such bond (or to any person who makes such interest payments on behalf of the issuer) 35 percent of the interest payable under such bond on such date.
`(c) Application of Arbitrage Rules- For purposes of section 148, the yield on a qualified bond shall be reduced by the credit allowed under this section.
`(d) Interest Payment Date- For purposes of this subsection, the term `interest payment date' means each date on which interest is payable by the issuer under the terms of the bond.
`(e) Qualified Bond- For purposes of this subsection, the term `qualified bond' has the meaning given such term in section 54AA(h).'.
(c) Conforming Amendments-
(1) Section 1324(b)(2) of title 31, United States Code, is amended by striking `or 6428' and inserting `6428, or 6432,'.
(2) Section 54A(c)(1)(B) is amended by striking `subpart C' and inserting `subparts C and J'.
(3) Sections 54(c)(2), 1397E(c)(2), and 1400N(l)(3)(B) are each amended by striking `and I' and inserting `, I, and J'.
(4) Section 6401(b)(1) is amended by striking `and I' and inserting `I, and J'.
(5) The table of subparts for part IV of subchapter A of chapter 1 is amended by adding at the end the following new item:
`Subpart J. Taxable bond option for governmental bonds.'.
(6) The table of sections for subchapter B of chapter 65, as amended by this Act, is amended by adding at the end the following new item:
`Sec. 6432. Credit for qualified bonds allowed to issuer on advance basis.'.
(d) Transitional Coordination With State Law- Except as otherwise provided by a State after the date of the enactment of this Act, the interest on any taxable governmental bond (as defined in section 54AA of the Internal Revenue Code of 1986, as added by this section) and the amount of any credit determined under such section with respect to such bond shall be treated for purposes of the income tax laws of such State as being exempt from Federal income tax.
(e) Effective Date- The amendments made by this section shall apply to obligations issued after the date of the enactment of this Act.
PART 4--RECOVERY ZONE BONDS
SEC. 1531. RECOVERY ZONE BONDS.
(a) In General- Subchapter Y of chapter 1 is amended by adding at the end the following new part:
`PART III--RECOVERY ZONE BONDS
`Sec. 1400U-1. Allocation of recovery zone bonds.
`Sec. 1400U-2. Recovery zone economic development bonds.
`Sec. 1400U-3. Recovery zone facility bonds.
`SEC. 1400U-1. ALLOCATION OF RECOVERY ZONE BONDS.
`(a) Allocations-
`(1) IN GENERAL- The Secretary shall allocate the national recovery zone economic development bond limitation and the national recovery zone facility bond limitation among the States in the proportion that each such State's 2008 State employment decline bears to the aggregate of the 2008 State employment declines for all of the States.
`(2) 2008 STATE EMPLOYMENT DECLINE- For purposes of this subsection, the term `2008 State employment decline' means, with respect to any State, the excess (if any) of--
`(A) the number of individuals employed in such State determined for December 2007, over
`(B) the number of individuals employed in such State determined for December 2008.
`(3) ALLOCATIONS BY STATES-
`(A) IN GENERAL- Each State with respect to which an allocation is made under paragraph (1) shall reallocate such allocation among the counties and large municipalities in such State in the proportion the each such county's or municipality's 2008 employment decline bears to the aggregate of the 2008 employment declines for all the counties and municipalities in such State.
`(B) LARGE MUNICIPALITIES- For purposes of subparagraph (A), the term `large municipality' means a municipality with a population of more than 100,000.
`(C) DETERMINATION OF LOCAL EMPLOYMENT DECLINES- For purposes of this paragraph, the employment decline of any municipality or county shall be determined in the same manner as determining the State employment decline under paragraph (2), except that in the case of a municipality any portion of which is in a county, such portion shall be treated as part of such municipality and not part of such county.
`(4) NATIONAL LIMITATIONS-
`(A) RECOVERY ZONE ECONOMIC DEVELOPMENT BONDS- There is a national recovery zone economic development bond limitation of $10,000,000,000.
`(B) RECOVERY ZONE FACILITY BONDS- There is a national recovery zone facility bond limitation of $15,000,000,000.
`(b) Recovery Zone- For purposes of this part, the term `recovery zone' means--
`(1) any area designated by the issuer as having significant poverty, unemployment, home foreclosures, or general distress, and
`(2) any area for which a designation as an empowerment zone or renewal community is in effect.
`SEC. 1400U-2. RECOVERY ZONE ECONOMIC DEVELOPMENT BONDS.
`(a) In General- In the case of a recovery zone economic development bond--
`(1) such bond shall be treated as a qualified bond for purposes of section 6432, and
`(2) subsection (b) of such section shall be applied by substituting `55 percent' for `35 percent'.
`(b) Recovery Zone Economic Development Bond-
`(1) IN GENERAL- For purposes of this section, the term `recovery zone economic development bond' means any taxable governmental bond (as defined in section 54AA(d)) issued before January 1, 2011, as part of issue if--
`(A) 100 percent of the available project proceeds (as defined in section 54A) of such issue are to be used for one or more qualified economic development purposes, and
`(B) the issuer designates such bond for purposes of this section.
`(2) LIMITATION ON AMOUNT OF BONDS DESIGNATED- The maximum aggregate face amount of bonds which may be designated by any issuer under paragraph (1) shall not exceed the amount of the recovery zone economic development bond limitation allocated to such issuer under section 1400U-1.
`(c) Qualified Economic Development Purpose- For purposes of this section, the term `qualified economic development purpose' means expenditures for purposes of promoting development or other economic activity in a recovery zone, including--
`(1) capital expenditures paid or incurred with respect to property located in such zone,
`(2) expenditures for public infrastructure and construction of public facilities, and
`(3) expenditures for job training and educational programs.
`SEC. 1400U-3. RECOVERY ZONE FACILITY BONDS.
`(a) In General- For purposes of part IV of subchapter B (relating to tax exemption requirements for State and local bonds), the term `exempt facility bond' includes any recovery zone facility bond.
`(b) Recovery Zone Facility Bond-
`(1) IN GENERAL- For purposes of this section, the term `recovery zone facility bond' means any bond issued as part of an issue if--
`(A) 95 percent or more of the net proceeds (as defined in section 150(a)(3)) of such issue are to be used for recovery zone property,
`(B) such bond is issued before January 1, 2011, and
`(C) the issuer designates such bond for purposes of this section.
`(2) LIMITATION ON AMOUNT OF BONDS DESIGNATED- The maximum aggregate face amount of bonds which may be designated by any issuer under paragraph (1) shall not exceed the amount of recovery zone facility bond limitation allocated to such issuer under section 1400U-1.
`(c) Recovery Zone Property- For purposes of this section--
`(1) IN GENERAL- The term `recovery zone property' means any property to which section 168 applies (or would apply but for section 179) if--
`(A) such property was acquired by the taxpayer by purchase (as defined in section 179(d)(2)) after the date on which the designation of the recovery zone took effect,
`(B) the original use of which in the recovery zone commences with the taxpayer, and
`(C) substantially all of the use of which is in the recovery zone and is in the active conduct of a qualified business by the taxpayer in such zone.
`(2) QUALIFIED BUSINESS- The term `qualified business' means any trade or business except that--
`(A) the rental to others of real property located in a recovery zone shall be treated as a qualified business only if the property is not residential rental property (as defined in section 168(e)(2)), and
`(B) such term shall not include any trade or business consisting of the operation of any facility described in section 144(c)(6)(B).
`(3) SPECIAL RULES FOR SUBSTANTIAL RENOVATIONS AND SALE-LEASEBACK- Rules similar to the rules of subsections (a)(2) and (b) of section 1397D shall apply for purposes of this subsection.
`(d) Nonapplication of Certain Rules- Sections 146 (relating to volume cap) and 147(d) (relating to acquisition of existing property not permitted) shall not apply to any recovery zone facility bond.'.
(b) Clerical Amendment- The table of parts for subchapter Y of chapter 1 of such Code is amended by adding at the end the following new item:
`Part III. Recovery Zone Bonds.'.
(c) Effective Date- The amendments made by this section shall apply to obligations issued after the date of the enactment of this Act.
SEC. 1532. TRIBAL ECONOMIC DEVELOPMENT BONDS.
(a) In General- Section 7871 is amended by adding at the end the following new subsection:
`(f) Tribal Economic Development Bonds-
`(1) ALLOCATION OF LIMITATION-
`(A) IN GENERAL- The Secretary shall allocate the national tribal economic development bond limitation among the Indian tribal governments in such manner as the Secretary, in consultation with the Secretary of the Interior, determines appropriate.
`(B) NATIONAL LIMITATION- There is a national tribal economic development bond limitation of $2,000,000,000.
`(2) BONDS TREATED AS EXEMPT FROM TAX- In the case of a tribal economic development bond--
`(A) notwithstanding subsection (c), such bond shall be treated for purposes of this title in the same manner as if such bond were issued by a State, and
`(B) section 146 shall not apply.
`(3) TRIBAL ECONOMIC DEVELOPMENT BOND-
`(A) IN GENERAL- For purposes of this section, the term `tribal economic development bond' means any bond issued by an Indian tribal government--
`(i) the interest on which is not exempt from tax under section 103 by reason of subsection (c) (determined without regard to this subsection) but would be so exempt if issued by a State or local government, and
`(ii) which is designated by the Indian tribal government as a tribal economic development bond for purposes of this subsection.
`(B) EXCEPTIONS- The term tribal economic development bond shall not include any bond issued as part of an issue if any portion of the proceeds of such issue are used to finance--
`(i) any portion of a building in which class II or class III gaming (as defined in section 4 of the Indian Gaming Regulatory Act) is conducted or housed or any other property actually used in the conduct of such gaming, or
`(ii) any facility located outside the Indian reservation (as defined in section 168(j)(6)).
`(C) LIMITATION ON AMOUNT OF BONDS DESIGNATED- The maximum aggregate face amount of bonds which may be designated by any Indian tribal government under subparagraph (A) shall not exceed the amount of national tribal economic development bond limitation allocated to such government under paragraph (1).'.
(b) Study- The Secretary of the Treasury, or the Secretary's delegate, shall conduct a study of the effects of the amendment made by subsection (a). Not later than 1 year after the date of the enactment of this Act, the Secretary of the Treasury, or the Secretary's delegate, shall report to Congress on the results of the studies conducted under this paragraph, including the Secretary's recommendations regarding such amendment.
(c) Effective Date- The amendment made by subsection (a) shall apply to obligations issued after the date of the enactment of this Act.
PART 5--REPEAL OF WITHHOLDING TAX ON GOVERNMENT CONTRACTORS
SEC. 1541. REPEAL OF WITHHOLDING TAX ON GOVERNMENT CONTRACTORS.
Section 3402 is amended by striking subsection (t).
Subtitle G--Energy Incentives
PART 1--RENEWABLE ENERGY INCENTIVES
SEC. 1601. EXTENSION OF CREDIT FOR ELECTRICITY PRODUCED FROM CERTAIN RENEWABLE RESOURCES.
(a) In General- Subsection (d) of section 45 is amended--
(1) by striking `2010' in paragraph (1) and inserting `2013',
(2) by striking `2011' each place it appears in paragraphs (2), (3), (4), (6), (7) and (9) and inserting `2014', and
(3) by striking `2012' in paragraph (11)(B) and inserting `2014'.
(b) Technical Amendment- Paragraph (5) of section 45(d) is amended by striking `and before' and all that follows and inserting ` and before October 3, 2008.'.
(c) Effective Date-
(1) IN GENERAL- The amendments made by subsection (a) shall apply to property placed in service after the date of the enactment of this Act.
(2) TECHNICAL AMENDMENT- The amendment made by subsection (b) shall take effect as if included in section 102 of the Energy Improvement and Extension Act of 2008.
SEC. 1602. ELECTION OF INVESTMENT CREDIT IN LIEU OF PRODUCTION CREDIT.
(a) In General- Subsection (a) of section 48 is amended by adding at the end the following new paragraph:
`(5) ELECTION TO TREAT QUALIFIED FACILITIES AS ENERGY PROPERTY-
`(A) IN GENERAL- In the case of any qualified investment credit facility placed in service in 2009 or 2010--
`(i) such facility shall be treated as energy property for purposes of this section, and
`(ii) the energy percentage with respect to such property shall be 30 percent.
`(B) DENIAL OF PRODUCTION CREDIT- No credit shall be allowed under section 45 for any taxable year with respect to any qualified investment credit facility.
`(C) QUALIFIED INVESTMENT CREDIT FACILITY- For purposes of this paragraph, the term `qualified investment credit facility' means any facility described in paragraph (1), (2), (3), (4), (6), (7), (9), or (11) of section 45(d) if no credit has been allowed under section 45 with respect to such facility and the taxpayer makes an irrevocable election to have this paragraph apply to such facility.'.
(b) Effective Date- The amendments made by this section shall apply to facilities placed in service after December 31, 2008.
SEC. 1603. REPEAL OF CERTAIN LIMITATIONS ON CREDIT FOR RENEWABLE ENERGY PROPERTY.
(a) Repeal of Limitation on Credit for Qualified Small Wind Energy Property- Paragraph (4) of section 48(c) is amended by striking subparagraph (B) and by redesignating subparagraphs (C) and (D) as subparagraphs (B) and (C).
(b) Repeal of Limitation on Property Financed by Subsidized Energy Financing-
(1) IN GENERAL- Subsection (a) of section 48 is amended by striking paragraph (4).
(2) CONFORMING AMENDMENTS-
(A) Section 25C(e)(1) is amended by striking `(8), and (9)' and inserting `and (8)'.
(B) Section 25D(e) is amended by striking paragraph (9).
(c) Effective Date-
(1) IN GENERAL- Except as provided in paragraph (2),the amendment made by this section shall apply to periods after December 31, 2008, under rules similar to the rules of section 48(m) of the Internal Revenue Code of 1986 (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990).
(2) CONFORMING AMENDMENTS- The amendments made by subsection (b)(2) shall apply to taxable years beginning after December 31, 2008.
SEC. 1604. COORDINATION WITH RENEWABLE ENERGY GRANTS.
Section 48 is amended by adding at the end the following new subsection:
`(d) Coordination With Department of Energy Grants- In the case of any property with respect to which the Secretary of Energy makes a grant under section 1721 of the American Recovery and Reinvestment Tax Act of 2009--
`(1) DENIAL OF PRODUCTION AND INVESTMENT CREDITS- No credit shall be determined under this section or section 45 with respect to such property for the taxable year in which such grant is made or any subsequent taxable year.
`(2) RECAPTURE OF CREDITS FOR PROGRESS EXPENDITURES MADE BEFORE GRANT- If a credit was determined under this section with respect to such property for any taxable year ending before such grant is made--
`(A) the tax imposed under subtitle A on the taxpayer for the taxable year in which such grant is made shall be increased by so much of such credit as was allowed under section 38,
`(B) the general business carryforwards under section 39 shall be adjusted so as to recapture the portion of such credit which was not so allowed, and
`(C) the amount of such grant shall be determined without regard to any reduction in the basis of such property by reason of such credit.
`(3) TREATMENT OF GRANTS- Any such grant shall--
`(A) not be includible in the gross income of the taxpayer, but
`(B) shall be taken into account in determining the basis of the property to which such grant relates, except that the basis of such property shall be reduced under section 50(c) in the same manner as a credit allowed under subsection (a).'.
PART 2--INCREASED ALLOCATIONS OF NEW CLEAN RENEWABLE ENERGY BONDS AND QUALIFIED ENERGY CONSERVATION BONDS
SEC. 1611. INCREASED LIMITATION ON ISSUANCE OF NEW CLEAN RENEWABLE ENERGY BONDS.
Subsection (c) of section 54C is amended by adding at the end the following new paragraph:
`(4) ADDITIONAL LIMITATION- The national new clean renewable energy bond limitation shall be increased by $1,600,000,000. Such increase shall be allocated by the Secretary consistent with the rules of paragraphs (2) and (3).'.
SEC. 1612. INCREASED LIMITATION AND EXPANSION OF QUALIFIED ENERGY CONSERVATION BONDS.
(a) Increased Limitation- Subsection (e) of section 54D is amended by adding at the end the following new paragraph:
`(4) ADDITIONAL LIMITATION- The national qualified energy conservation bond limitation shall be increased by $2,400,000,000. Such increase shall be allocated by the Secretary consistent with the rules of paragraphs (1), (2), and (3).'.
(b) Loans and Grants to Implement Green Community Programs-
(1) IN GENERAL- Subparagraph (A) of section 54D(f)(1) is amended by inserting `(or loans or grants for capital expenditures to implement any green community program)' after `Capital expenditures'.
(2) BONDS TO IMPLEMENT GREEN COMMUNITY PROGRAMS NOT TREATED AS PRIVATE ACTIVITY BONDS FOR PURPOSES OF LIMITATIONS ON QUALIFIED ENERGY CONSERVATION BONDS - Subsection (e) of section 54D is amended by adding at the end the following new paragraph:
`(4) BONDS TO IMPLEMENT GREEN COMMUNITY PROGRAMS NOT TREATED AS PRIVATE ACTIVITY BONDS- For purposes of paragraph (3) and subsection (f)(2), a bond shall not be treated as a private activity bond solely because proceeds of the issue of which such bond is a part are to be used for loans or grants for capital expenditures to implement any green community program.'.
(c) Effective Date- The amendments made by this section shall apply to obligations issued after the date of the enactment of this Act.
PART 3--ENERGY CONSERVATION INCENTIVES
SEC. 1621. EXTENSION AND MODIFICATION OF CREDIT FOR NONBUSINESS ENERGY PROPERTY.
(a) In General- Section 25C is amended by striking subsections (a) and (b) and inserting the following new subsections:
`(a) Allowance of Credit- In the case of an individual, there shall be allowed as a credit against the tax imposed by this chapter for the taxable year an amount equal to 30 percent of the sum of--
`(1) the amount paid or incurred by the taxpayer during such taxable year for qualified energy efficiency improvements, and
`(2) the amount of the residential energy property expenditures paid or incurred by the taxpayer during such taxable year.
`(b) Limitation- The aggregate amount of the credits allowed under this section for taxable years beginning in 2009 and 2010 with respect to any taxpayer shall not exceed $1,500.'.
(b) Extension- Section 25C(g)(2) is amended by striking `December 31, 2009' and inserting `December 31, 2010'.
(c) Effective Date- The amendments made by this section shall apply to taxable years beginning after December 31, 2008.
SEC. 1622. MODIFICATION OF CREDIT FOR RESIDENTIAL ENERGY EFFICIENT PROPERTY.
(a) Removal of Credit Limitation for Property Placed in Service-
(1) IN GENERAL- Paragraph (1) of section 25D(b) is amended to read as follows:
`(1) MAXIMUM CREDIT FOR FUEL CELLS- In the case of any qualified fuel cell property expenditure, the credit allowed under subsection (a) (determined without regard to subsection (c)) for any taxable year shall not exceed $500 with respect to each half kilowatt of capacity of the qualified fuel cell property (as defined in section 48(c)(1)) to which such expenditure relates.'.
(2) CONFORMING AMENDMENT- Paragraph (4) of section 25D(e) is amended--
(A) by striking all that precedes subparagraph (B) and inserting the following:
`(4) FUEL CELL EXPENDITURE LIMITATIONS IN CASE OF JOINT OCCUPANCY- In the case of any dwelling unit with respect to which qualified fuel cell property expenditures are made and which is jointly occupied and used during any calendar year as a residence by two or more individuals the following rules shall apply:
`(A) MAXIMUM EXPENDITURES FOR FUEL CELLS- The maximum amount of such expenditures which may be taken into account under subsection (a) by all such individuals with respect to such dwelling unit during such calendar year shall be $1,667 in the case of each half kilowatt of capacity of qualified fuel cell property (as defined in section 48(c)(1)) with respect to which such expenditures relate.', and
(B) by striking subparagraph (C).
(b) Effective Date- The amendments made by this section shall apply to taxable years beginning after December 31, 2008.
SEC. 1623. TEMPORARY INCREASE IN CREDIT FOR ALTERNATIVE FUEL VEHICLE REFUELING PROPERTY.
(a) In General- Section 30C(e) is amended by adding at the end the following new paragraph:
`(6) SPECIAL RULE FOR PROPERTY PLACED IN SERVICE DURING 2009 AND 2010- In the case of property placed in service in taxable years beginning after December 31, 2008, and before January 1, 2011--
`(A) in the case of any such property which does not relate to hydrogen--
`(i) subsection (a) shall be applied by substituting `50 percent' for `30 percent',
`(ii) subsection (b)(1) shall be applied by substituting `$50,000' for `$30,000', and
`(iii) subsection (b)(2) shall be applied by substituting `$2,000' for `$1,000', and
`(B) in the case of any such property which relates to hydrogen, subsection (b) shall be applied by substituting `$200,000' for `$30,000'.'.
(b) Effective Date- The amendment made by this section shall apply to taxable years beginning after December 31, 2008.
PART 4--ENERGY RESEARCH INCENTIVES
SEC. 1631. INCREASED RESEARCH CREDIT FOR ENERGY RESEARCH.
(a) In General- Section 41 is amended by redesignating subsection (h) as subsection (i) and by inserting after subsection (g) the following new subsection:
`(h) Energy Research Credit- In the case of any taxable year beginning in 2009 or 2010--
`(1) IN GENERAL- The credit determined under subsection (a)(1) shall be increased by 20 percent of the qualified energy research expenses for the taxable year.
`(2) QUALIFIED ENERGY RESEARCH EXPENSES- For purposes of this subsection, the term `qualified energy research expenses' means so much of the taxpayer's qualified research expenses as are related to the fields of fuel cells and battery technology, renewable energy, energy conservation technology, efficient transmission and distribution of electricity, and carbon capture and sequestration.
`(3) COORDINATION WITH OTHER RESEARCH CREDITS-
`(A) INCREMENTAL CREDIT- The amount of qualified energy research expenses taken into account under subsection (a)(1)(A) shall not exceed the base amount.
`(B) ALTERNATIVE SIMPLIFIED CREDIT- For purposes of subsection (c)(5), the amount of qualified energy research expenses taken into account for the taxable year for which the credit is being determined shall not exceed--
`(i) in the case of subsection (c)(5)(A), 50 percent of the average qualified research expenses for the 3 taxable years preceding the taxable year for which the credit is being determined, and
`(ii) in the case of subsection (c)(5)(B)(ii), zero.
`(C) BASIC RESEARCH AND ENERGY RESEARCH CONSORTIUM PAYMENTS- Any amount taken into account under paragraph (1) shall not be taken into account under paragraph (2) or (3) of subsection (a).'.
(b) Conforming Amendment- Subparagraph (B) of section 41(i)(1)(B), as redesignated by subsection (a), is amended by inserting `(in the case of the increase in the credit determined under subsection (h), December 31, 2010)' after `December 31, 2009'.
(c) Effective Date- The amendments made by this section shall apply to taxable years beginning after December 31, 2008.
Subtitle H--Other Provisions
PART 1--APPLICATION OF CERTAIN LABOR STANDARDS TO PROJECTS FINANCED WITH CERTAIN TAX-FAVORED BONDS
SEC. 1701. APPLICATION OF CERTAIN LABOR STANDARDS TO PROJECTS FINANCED WITH CERTAIN TAX-FAVORED BONDS.
Subchapter IV of chapter 31 of the title 40, United States Code, shall apply to projects financed with the proceeds of--
(1) any qualified clean renewable energy bond (as defined in section 54C of the Internal Revenue Code of 1986) issued after the date of the enactment of this Act,
(2) any qualified energy conservation bond (as defined in section 54D of the Internal Revenue Code of 1986) issued after the date of the enactment of this Act,
(3) any qualified zone academy bond (as defined in section 54E of the Internal Revenue Code of 1986) issued after the date of the enactment of this Act,
(4) any qualified school construction bond (as defined in section 54F of the Internal Revenue Code of 1986), and
(5) any recovery zone economic development bond (as defined in section 1400U-2 of the Internal Revenue Code of 1986).
PART 2--GRANTS TO PROVIDE FINANCING FOR LOW-INCOME HOUSING
SEC. 1711. GRANTS TO STATES FOR LOW-INCOME HOUSING PROJECTS IN LIEU OF LOW-INCOME HOUSING CREDIT ALLOCATIONS FOR 2009.
(a) In General- The Secretary of the Treasury shall make a grant to the housing credit agency of each State in an amount equal to such State's low-income housing grant election amount.
(b) Low-Income Housing Grant Election Amount- For purposes of this section, the term `low-income housing grant election amount' means, with respect to any State, such amount as the State may elect which does not exceed 85 percent of the product of--
(1) the sum of--
(A) 100 percent of the State housing credit ceiling for 2009 which is attributable to amounts described in clauses (i) and (iii) of section 42(h)(3)(C) of the Internal Revenue Code of 1986, and
(B) 40 percent of the State housing credit ceiling for 2009 which is attributable to amounts described in clauses (ii) and (iv) of such section, multiplied by
(2) 10.
(c) Subawards for Low-Income Buildings-
(1) IN GENERAL- A State housing credit agency receiving a grant under this section shall use such grant to make subawards to finance the construction or acquisition and rehabilitation of qualified low-income buildings. A subaward under this section may be made to finance a qualified low-income building with or without an allocation under section 42 of the Internal Revenue Code of 1986, except that a State housing credit agency may make subawards to finance qualified low-income buildings without an allocation only if it makes a determination that such use will increase the total funds available to the State to build and rehabilitate affordable housing. In complying with such determination requirement, a State housing credit agency shall establish a process in which applicants that are allocated credits are required to demonstrate good faith efforts to obtain investment commitments for such credits before the agency makes such subawards.
(2) SUBAWARDS SUBJECT TO SAME REQUIREMENTS AS LOW-INCOME HOUSING CREDIT ALLOCATIONS- Any such subaward with respect to any qualified low-income building shall be made in the same manner and shall be subject to the same limitations (including rent, income, and use restrictions on such building) as an allocation of housing credit dollar amount allocated by such State housing credit agency under section 42 of the Internal Revenue Code of 1986, except that such subawards shall not be limited by, or otherwise affect (except as provided in subsection (h)(3)(J) of such section), the State housing credit ceiling applicable to such agency.
(3) COMPLIANCE AND ASSET MANAGEMENT- The State housing credit agency shall perform asset management functions to ensure compliance with section 42 of the Internal Revenue Code of 1986 and the long-term viability of buildings funded by any subaward under this section. The State housing credit agency may collect reasonable fees from a subaward recipient to cover expenses associated with the performance of its duties under this paragraph. The State housing credit agency may retain an agent or other private contractor to satisfy the requirements of this paragraph.
(4) RECAPTURE- The State housing credit agency shall impose conditions or restrictions, including a requirement providing for recapture, on any subaward under this section so as to assure that the building with respect to which such subaward is made remains a qualified low-income building during the compliance period. Any such recapture shall be payable to the Secretary of the Treasury for deposit in the general fund of the Treasury and may be enforced by means of liens or such other methods as the Secretary of the Treasury determines appropriate.
(d) Return of Unused Grant Funds- Any grant funds not used to make subawards under this section before January 1, 2011, shall be returned to the Secretary of the Treasury on such date. Any subawards returned to the State housing credit agency on or after such date shall be promptly returned to the Secretary of the Treasury. Any amounts returned to the Secretary of the Treasury under this subsection shall be deposited in the general fund of the Treasury.
(e) Definitions- Any term used in this section which is also used in section 42 of the Internal Revenue Code of 1986 shall have the same meaning for purposes of this section as when used in such section 42. Any reference in this section to the Secretary of the Treasury shall be treated as including the Secretary's delegate.
(f) Appropriations- There is hereby appropriated to the Secretary of the Treasury such sums as may be necessary to carry out this section.
PART 3--GRANTS FOR SPECIFIED ENERGY PROPERTY IN LIEU OF TAX CREDITS
SEC. 1721. GRANTS FOR SPECIFIED ENERGY PROPERTY IN LIEU OF TAX CREDITS.
(a) In General- Upon application, the Secretary of Energy shall, within 60 days of the application and subject to the requirements of this section, provide a grant to each person who places in service specified energy property during 2009 or 2010 to reimburse such person for a portion of the expense of such facility as provided in subsection (b).
(b) Grant Amount-
(1) IN GENERAL- The amount of the grant under subsection (a) with respect to any specified energy property shall be the applicable percentage of the basis of such facility.
(2) APPLICABLE PERCENTAGE- For purposes of paragraph (1), the term `applicable percentage' means--
(A) 30 percent in the case of any property described in paragraphs (1) through (4) of subsection (c), and
(B) 10 percent in the case of any other property.
(3) DOLLAR LIMITATIONS- In the case of property described in paragraph (2), (6), or (7) of subsection (c), the amount of any grant under this section with respect to such property shall not exceed the limitation described in section 48(c)(1)(B), 48(c)(2)(B), or 48(c)(3)(B) of the Internal Revenue Code of 1986, respectively, with respect to such property.
(c) Specified Energy Property- For purposes of this section, the term `specified energy property' means any of the following:
(1) QUALIFIED FACILITIES- Any facility described in paragraph (1), (2), (3), (4), (6), (7), (9), or (11) of section 45(d) of the Internal Revenue Code of 1986.
(2) QUALIFIED FUEL CELL PROPERTY- Any qualified fuel cell property (as defined in section 48(c)(1) of such Code).
(3) SOLAR PROPERTY- Any property described in clause (i) or (ii) of section 48(a)(3)(A) of such Code.
(4) QUALIFIED SMALL WIND ENERGY PROPERTY- Any qualified small wind energy property (as defined in section 48(c)(4) of such Code).
(5) GEOTHERMAL PROPERTY- Any property described in clause (iii) of section 48(a)(3)(A) of such Code.
(6) QUALIFIED MICROTURBINE PROPERTY- Any qualified microturbine property (as defined in section 48(c)(2) of such Code).
(7) COMBINED HEAT AND POWER SYSTEM PROPERTY- Any combined heat and power system property (as defined in section 48(c)(3) of such Code).
(8) GEOTHERMAL HEATPUMP PROPERTY- Any property described in clause (vii) of section 48(a)(3)(A) of such Code.
(d) Application of Certain Rules- In making grants under this section, the Secretary of Energy shall apply rules similar to the rules of section 50 of the Internal Revenue Code of 1986. In applying such rules, if the facility is disposed of, or otherwise ceases to be a qualified renewable energy facility, the Secretary of Energy shall provide for the recapture of the appropriate percentage of the grant amount in such manner as the Secretary of Energy determines appropriate.
(e) Exception for Certain Non-Taxpayers- The Secretary of Energy shall not make any grant under this section to any Federal, State, or local government (or any political subdivision, agency, or instrumentality thereof) or any organization described in section 501(c) of the Internal Revenue Code of 1986 and exempt from tax under section 501(a) of such Code.
(f) Definitions- Terms used in this section which are also used in section 45 or 48 of the Internal Revenue Code of 1986 shall have the same meaning for purposes of this section as when used in such section 45 or 48. Any reference in this section to the Secretary of the Treasury shall be treated as including the Secretary's delegate.
(g) Coordination Between Departments of Treasury and Energy- The Secretary of the Treasury shall provide the Secretary of Energy with such technical assistance as the Secretary of Energy may require in carrying out this section. The Secretary of Energy shall provide the Secretary of the Treasury with such information as the Secretary of the Treasury may require in carrying out the amendment made by section 1604.
(h) Appropriations- There is hereby appropriated to the Secretary of Energy such sums as may be necessary to carry out this section.
(i) Termination- The Secretary of Energy shall not make any grant to any person under this section unless the application of such person for such grant is received before October 1, 2011.
PART 4--STUDY OF ECONOMIC, EMPLOYMENT, AND RELATED EFFECTS OF THIS ACT
SEC. 1731. STUDY OF ECONOMIC, EMPLOYMENT, AND RELATED EFFECTS OF THIS ACT.
On February 1, 2010, and every 3 months thereafter in calendar year 2010, the Comptroller General of the United States shall submit to the Committee on Ways and Means a written report on the most recent national (and, where available, State-by-State) information on--
(1) the economic effects of this Act;
(2) the employment effects of this Act, including--
(A) a comparison of the number of jobs preserved and the number of jobs created as a result of this Act; and
(B) a comparison of the numbers of jobs preserved and the number of jobs created in each of the public and private sectors;
(3) the share of tax and non-tax expenditures provided under this Act that were spent or saved, by group and income class;
(4) how the funds provided to States under this Act have been spent, including a breakdown of--
(A) funds used for services provided to citizens; and
(B) wages and other compensation for public employees; and
(5) a description of any funds made available under this Act that remain unspent, and the reasons why.
TITLE II--ASSISTANCE FOR UNEMPLOYED WORKERS AND STRUGGLING FAMILIES
SEC. 2000. SHORT TITLE.
This title may be cited as the `Assistance for Unemployed Workers and Struggling Families Act'.
Subtitle A--Unemployment Insurance
SEC. 2001. EXTENSION OF EMERGENCY UNEMPLOYMENT COMPENSATION PROGRAM.
(a) In General- Section 4007 of the Supplemental Appropriations Act, 2008 (Public Law 110-252; 26 U.S.C. 3304 note), as amended by section 4 of the Unemployment Compensation Extension Act of 2008 (Public Law 110-449; 122 Stat. 5015), is amended--
(1) by striking `March 31, 2009' each place it appears and inserting `December 31, 2009';
(2) in the heading for subsection (b)(2), by striking `MARCH 31, 2009' and inserting `DECEMBER 31, 2009'; and
(3) in subsection (b)(3), by striking `August 27, 2009' and inserting `May 31, 2010'.
(b) Financing Provisions- Section 4004 of such Act is amended by adding at the end the following:
`(e) Transfer of Funds- Notwithstanding any other provision of law, the Secretary of the Treasury shall transfer from the general fund of the Treasury (from funds not otherwise appropriated)--
`(1) to the extended unemployment compensation account (as established by section 905 of the Social Security Act) such sums as the Secretary of Labor estimates to be necessary to make payments to States under this title by reason of the amendments made by section 2001(a) of the Assistance for Unemployed Workers and Struggling Families Act; and
`(2) to the employment security administration account (as established by section 901 of the Social Security Act) such sums as the Secretary of Labor estimates to be necessary for purposes of assisting States in meeting administrative costs by reason of the amendments referred to in paragraph (1).
There are appropriated from the general fund of the Treasury, without fiscal year limitation, the sums referred to in the preceding sentence and such sums shall not be required to be repaid.'.
SEC. 2002. INCREASE IN UNEMPLOYMENT COMPENSATION BENEFITS.
(a) Federal-State Agreements- Any State which desires to do so may enter into and participate in an agreement under this section with the Secretary of Labor (hereinafter in this section referred to as the `Secretary'). Any State which is a party to an agreement under this section may, upon providing 30 days' written notice to the Secretary, terminate such agreement.
(b) Provisions of Agreement-
(1) ADDITIONAL COMPENSATION- Any agreement under this section shall provide that the State agency of the State will make payments of regular compensation to individuals in amounts and to the extent that they would be determined if the State law of the State were applied, with respect to any week for which the individual is (disregarding this section) otherwise entitled under the State law to receive regular compensation, as if such State law had been modified in a manner such that the amount of regular compensation (including dependents' allowances) payable for any week shall be equal to the amount determined under the State law (before the application of this paragraph) plus an additional $25.
(2) ALLOWABLE METHODS OF PAYMENT- Any additional compensation provided for in accordance with paragraph (1) shall be payable either--
(A) as an amount which is paid at the same time and in the same manner as any regular compensation otherwise payable for the week involved; or
(B) at the option of the State, by payments which are made separately from, but on the same weekly basis as, any regular compensation otherwise payable.
(c) Nonreduction Rule- An agreement under this section shall not apply (or shall cease to apply) with respect to a State upon a determination by the Secretary that the method governing the computation of regular compensation under the State law of that State has been modified in a manner such that--
(1) the average weekly benefit amount of regular compensation which will be payable during the period of the agreement (determined disregarding any additional amounts attributable to the modification described in subsection (b)(1)) will be less than
(2) the average weekly benefit amount of regular compensation which would otherwise have been payable during such period under the State law, as in effect on December 31, 2008.
(d) Payments to States-
(1) IN GENERAL-
(A) FULL REIMBURSEMENT- There shall be paid to each State which has entered into an agreement under this section an amount equal to 100 percent of--
(i) the total amount of additional compensation (as described in subsection (b)(1)) paid to individuals by the State pursuant to such agreement; and
(ii) any additional administrative expenses incurred by the State by reason of such agreement (as determined by the Secretary).
(B) TERMS OF PAYMENTS- Sums payable to any State by reason of such State's having an agreement under this section shall be payable, either in advance or by way of reimbursement (as determined by the Secretary), in such amounts as the Secretary estimates the State will be entitled to receive under this section for each calendar month, reduced or increased, as the case may be, by any amount by which the Secretary finds that his estimates for any prior calendar month were greater or less than the amounts which should have been paid to the State. Such estimates may be made on the basis of such statistical, sampling, or other method as may be agreed upon by the Secretary and the State agency of the State involved.
(2) CERTIFICATIONS- The Secretary shall from time to time certify to the Secretary of the Treasury for payment to each State the sums payable to such State under this section.
(3) APPROPRIATION- There are appropriated from the general fund of the Treasury, without fiscal year limitation, such sums as may be necessary for purposes of this subsection.
(e) Applicability-
(1) IN GENERAL- An agreement entered into under this section shall apply to weeks of unemployment--
(A) beginning after the date on which such agreement is entered into; and
(B) ending before January 1, 2010.
(2) TRANSITION RULE FOR INDIVIDUALS REMAINING ENTITLED TO REGULAR COMPENSATION AS OF JANUARY 1, 2010- In the case of any individual who, as of the date specified in paragraph (1)(B), has not yet exhausted all rights to regular compensation under the State law of a State with respect to a benefit year that began before such date, additional compensation (as described in subsection (b)(1)) shall continue to be payable to such individual for any week beginning on or after such date for which the individual is otherwise eligible for regular compensation with respect to such benefit year.
(3) TERMINATION- Notwithstanding any other provision of this subsection, no additional compensation (as described in subsection (b)(1)) shall be payable for any week beginning after June 30, 2010.
(f) Fraud and Overpayments- The provisions of section 4005 of the Supplemental Appropriations Act, 2008 (Public Law 110-252; 122 Stat. 2356) shall apply with respect to additional compensation (as described in subsection (b)(1)) to the same extent and in the same manner as in the case of emergency unemployment compensation.
(g) Application to Other Unemployment Benefits-
(1) IN GENERAL- Each agreement under this section shall include provisions to provide that the purposes of the preceding provisions of this section shall be applied with respect to unemployment benefits described in subsection (h)(3) to the same extent and in the same manner as if those benefits were regular compensation.
(2) ELIGIBILITY AND TERMINATION RULES- Additional compensation (as described in subsection (b)(1))--
(A) shall not be payable, pursuant to this subsection, with respect to any unemployment benefits described in subsection (h)(3) for any week beginning on or after the date specified in subsection (e)(1)(B), except in the case of an individual who was eligible to receive additional compensation (as so described) in connection with any regular compensation or any unemployment benefits described in subsection (h)(3) for any period of unemployment ending before such date; and
(B) shall in no event be payable for any week beginning after the date specified in subsection (e)(3).
(h) Disregard of Additional Compensation for Purposes of Medicaid and SCHIP- The monthly equivalent of any additional compensation paid under this section shall be disregarded in considering the amount of income of an individual for any purposes under title XIX and title XXI of the Social Security Act.
(i) Definitions- For purposes of this section--
(1) the terms `compensation', `regular compensation', `benefit year', `State', `State agency', `State law', and `week' have the respective meanings given such terms under section 205 of the Federal-State Extended Unemployment Compensation Act of 1970 (26 U.S.C. 3304 note);
(2) the term `emergency unemployment compensation' means emergency unemployment compensation under title IV of the Supplemental Appropriations Act, 2008 (Public Law 110-252; 122 Stat. 2353); and
(3) any reference to unemployment benefits described in this paragraph shall be considered to refer to--
(A) extended compensation (as defined by section 205 of the Federal-State Extended Unemployment Compensation Act of 1970); and
(B) unemployment compensation (as defined by section 85(b) of the Internal Revenue Code of 1986) provided under any program administered by a State under an agreement with the Secretary.


SEC. 2003. SPECIAL TRANSFERS FOR UNEMPLOYMENT COMPENSATION MODERNIZATION.
(a) In General- Section 903 of the Social Security Act (42 U.S.C. 1103) is amended by adding at the end the following:
`Special Transfers in Fiscal Years 2009, 2010, and 2011 for Modernization
`(f)(1)(A) In addition to any other amounts, the Secretary of Labor shall provide for the making of unemployment compensation modernization incentive payments (hereinafter `incentive payments') to the accounts of the States in the Unemployment Trust Fund, by transfer from amounts reserved for that purpose in the Federal unemployment account, in accordance with succeeding provisions of this subsection.
`(B) The maximum incentive payment allowable under this subsection with respect to any State shall, as determined by the Secretary of Labor, be equal to the amount obtained by multiplying $7,000,000,000 by the same ratio as would apply under subsection (a)(2)(B) for purposes of determining such State's share of any excess amount (as described in subsection (a)(1)) that would have been subject to transfer to State accounts, as of October 1, 2008, under the provisions of subsection (a).
`(C) Of the maximum incentive payment determined under subparagraph (B) with respect to a State--
`(i) one-third shall be transferred to the account of such State upon a certification under paragraph (4)(B) that the State law of such State meets the requirements of paragraph (2); and
`(ii) the remainder shall be transferred to the account of such State upon a certification under paragraph (4)(B) that the State law of such State meets the requirements of paragraph (3).
`(2) The State law of a State meets the requirements of this paragraph if such State law--
`(A) uses a base period that includes the most recently completed calendar quarter before the start of the benefit year for purposes of determining eligibility for unemployment compensation; or
`(B) provides that, in the case of an individual who would not otherwise be eligible for unemployment compensation under the State law because of the use of a base period that does not include the most recently completed calendar quarter before the start of the benefit year, eligibility shall be determined using a base period that includes such calendar quarter.
`(3) The State law of a State meets the requirements of this paragraph if such State law includes provisions to carry out at least 2 of the following subparagraphs:
`(A) An individual shall not be denied regular unemployment compensation under any State law provisions relating to availability for work, active search for work, or refusal to accept work, solely because such individual is seeking only part-time work (as defined by the Secretary of Labor), except that the State law provisions carrying out this subparagraph may exclude an individual if a majority of the weeks of work in such individual's base period do not include part-time work (as so defined).
`(B) An individual shall not be disqualified from regular unemployment compensation for separating from employment if that separation is for any compelling family reason. For purposes of this subparagraph, the term `compelling family reason' means the following:
`(i) Domestic violence, verified by such reasonable and confidential documentation as the State law may require, which causes the individual reasonably to believe that such individual's continued employment would jeopardize the safety of the individual or of any member of the individual's immediate family (as defined by the Secretary of Labor).
`(ii) The illness or disability of a member of the individual's immediate family (as those terms are defined by the Secretary of Labor).
`(iii) The need for the individual to accompany such individual's spouse--
`(I) to a place from which it is impractical for such individual to commute; and
`(II) due to a change in location of the spouse's employment.
`(C) Weekly unemployment compensation is payable under this subparagraph to any individual who is unemployed (as determined under the State unemployment compensation law), has exhausted all rights to regular unemployment compensation under the State law, and is enrolled and making satisfactory progress in a State-approved training program or in a job training program authorized under the Workforce Investment Act of 1998. Such programs shall prepare individuals who have been separated from a declining occupation, or who have been involuntarily and indefinitely separated from employment as a result of a permanent reduction of operations at the individual's place of employment, for entry into a high-demand occupation. The amount of unemployment compensation payable under this subparagraph to an individual for a week of unemployment shall be equal to the individual's average weekly benefit amount (including dependents' allowances) for the most recent benefit year, and the total amount of unemployment compensation payable under this subparagraph to any individual shall be equal to at least 26 times the individual's average weekly benefit amount (including dependents' allowances) for the most recent benefit year.
`(D) Dependents' allowances are provided, in the case of any individual who is entitled to receive regular unemployment compensation and who has any dependents (as defined by State law), in an amount equal to at least $15 per dependent per week, subject to any aggregate limitation on such allowances which the State law may establish (but which aggregate limitation on the total allowance for dependents paid to an individual may not be less than $50 for each week of unemployment or 50 percent of the individual's weekly benefit amount for the benefit year, whichever is less).
`(4)(A) Any State seeking an incentive payment under this subsection shall submit an application therefor at such time, in such manner, and complete with such information as the Secretary of Labor may within 60 days after the date of the enactment of this subsection prescribe (whether by regulation or otherwise), including information relating to compliance with the requirements of paragraph (2) or (3), as well as how the State intends to use the incentive payment to improve or strengthen the State's unemployment compensation program. The Secretary of Labor shall, within 30 days after receiving a complete application, notify the State agency of the State of the Secretary's findings with respect to the requirements of paragraph (2) or (3) (or both).
`(B)(i) If the Secretary of Labor finds that the State law provisions (disregarding any State law provisions which are not then currently in effect as permanent law or which are subject to discontinuation) meet the requirements of paragraph (2) or (3), as the case may be, the Secretary of Labor shall thereupon make a certification to that effect to the Secretary of the Treasury, together with a certification as to the amount of the incentive payment to be transferred to the State account pursuant to that finding. The Secretary of the Treasury shall make the appropriate transfer within 7 days after receiving such certification.
`(ii) For purposes of clause (i), State law provisions which are to take effect within 12 months after the date of their certification under this subparagraph shall be considered to be in effect as of the date of such certification.
`(C)(i) No certification of compliance with the requirements of paragraph (2) or (3) may be made with respect to any State whose State law is not otherwise eligible for certification under section 303 or approvable under section 3304 of the Federal Unemployment Tax Act.
`(ii) No certification of compliance with the requirements of paragraph (3) may be made with respect to any State whose State law is not in compliance with the requirements of paragraph (2).
`(iii) No application under subparagraph (A) may be considered if submitted before the date of the enactment of this subsection or after the latest date necessary (as specified by the Secretary of Labor) to ensure that all incentive payments under this subsection are made before October 1, 2011.
`(5)(A) Except as provided in subparagraph (B), any amount transferred to the account of a State under this subsection may be used by such State only in the payment of cash benefits to individuals with respect to their unemployment (including for dependents' allowances and for unemployment compensation under paragraph (3)(C)), exclusive of expenses of administration.
`(B) A State may, subject to the same conditions as set forth in subsection (c)(2) (excluding subparagraph (B) thereof, and deeming the reference to `subsections (a) and (b)' in subparagraph (D) thereof to include this subsection), use any amount transferred to the account of such State under this subsection for the administration of its unemployment compensation law and public employment offices.
`(6) Out of any money in the Federal unemployment account not otherwise appropriated, the Secretary of the Treasury shall reserve $7,000,000,000 for incentive payments under this subsection. Any amount so reserved shall not be taken into account for purposes of any determination under section 902, 910, or 1203 of the amount in the Federal unemployment account as of any given time. Any amount so reserved for which the Secretary of the Treasury has not received a certification under paragraph (4)(B) by the deadline described in paragraph (4)(C)(iii) shall, upon the close of fiscal year 2011, become unrestricted as to use as part of the Federal unemployment account.
`(7) For purposes of this subsection, the terms `benefit year', `base period', and `week' have the respective meanings given such terms under section 205 of the Federal-State Extended Unemployment Compensation Act of 1970 (26 U.S.C. 3304 note).
`Special Transfer in Fiscal Year 2009 for Administration
`(g)(1) In addition to any other amounts, the Secretary of the Treasury shall transfer from the employment security administration account to the account of each State in the Unemployment Trust Fund, within 30 days after the date of the enactment of this subsection, the amount determined with respect to such State under paragraph (2).
`(2) The amount to be transferred under this subsection to a State account shall (as determined by the Secretary of Labor and certified by such Secretary to the Secretary of the Treasury) be equal to the amount obtained by multiplying $500,000,000 by the same ratio as determined under subsection (f)(1)(B) with respect to such State.
`(3) Any amount transferred to the account of a State as a result of the enactment of this subsection may be used by the State agency of such State only in the payment of expenses incurred by it for--
`(A) the administration of the provisions of its State law carrying out the purposes of subsection (f)(2) or any subparagraph of subsection (f)(3);
`(B) improved outreach to individuals who might be eligible for regular unemployment compensation by virtue of any provisions of the State law which are described in subparagraph (A);
`(C) the improvement of unemployment benefit and unemployment tax operations, including responding to increased demand for unemployment compensation; and
`(D) staff-assisted reemployment services for unemployment compensation claimants.'.
(b) Regulations- The Secretary of Labor may prescribe any regulations, operating instructions, or other guidance necessary to carry out the amendment made by subsection (a).
Subtitle B--Assistance for Vulnerable Individuals
SEC. 2101. EMERGENCY FUND FOR TANF PROGRAM.
(a) In General- Section 403 of the Social Security Act (42 U.S.C. 603) is amended by adding at the end the following:
`(c) Emergency Fund-
`(1) ESTABLISHMENT- There is established in the Treasury of the United States a fund which shall be known as the `Emergency Contingency Fund for State Temporary Assistance for Needy Families Programs' (in this subsection referred to as the `Emergency Fund').
`(2) DEPOSITS INTO FUND- Out of any money in the Treasury of the United States not otherwise appropriated, there are appropriated such sums as are necessary for payment to the Emergency Fund.
`(3) GRANTS-
`(A) GRANT RELATED TO CASELOAD INCREASES-
`(i) IN GENERAL- For each calendar quarter in fiscal year 2009 or 2010, the Secretary shall make a grant from the Emergency Fund to each State that--
`(I) requests a grant under this subparagraph for the quarter; and
`(II) meets the requirement of clause (ii) for the quarter.
`(ii) CASELOAD INCREASE REQUIREMENT- A State meets the requirement of this clause for a quarter if the average monthly assistance caseload of the State for the quarter exceeds the average monthly assistance caseload of the State for the corresponding quarter in the emergency fund base year of the State.
`(iii) AMOUNT OF GRANT- Subject to paragraph (5), the amount of the grant to be made to a State under this subparagraph for a quarter shall be 80 percent of the amount (if any) by which the total expenditures of the State for basic assistance (as defined by the Secretary) in the quarter, whether under the State program funded under this part or as qualified State expenditures, exceeds the total expenditures of the State for such assistance for the corresponding quarter in the emergency fund base year of the State.
`(B) GRANT RELATED TO INCREASED EXPENDITURES FOR NON-RECURRENT SHORT TERM BENEFITS-
`(i) IN GENERAL- For each calendar quarter in fiscal year 2009 or 2010, the Secretary shall make a grant from the Emergency Fund to each State that--
`(I) requests a grant under this subparagraph for the quarter; and
`(II) meets the requirement of clause (ii) for the quarter.
`(ii) NON-RECURRENT SHORT TERM EXPENDITURE REQUIREMENT- A State meets the requirement of this clause for a quarter if the total expenditures of the State for non-recurrent short term benefits in the quarter, whether under the State program funded under this part or as qualified State expenditures, exceeds the total such expenditures of the State for non-recurrent short term benefits in the corresponding quarter in the emergency fund base year of the State.
`(iii) AMOUNT OF GRANT- Subject to paragraph (5), the amount of the grant to be made to a State under this subparagraph for a quarter shall be an amount equal to 80 percent of the excess described in clause (ii).
`(C) GRANT RELATED TO INCREASED EXPENDITURES FOR SUBSIDIZED EMPLOYMENT-
`(i) IN GENERAL- For each calendar quarter in fiscal year 2009 or 2010, the Secretary shall make a grant from the Emergency Fund to each State that--
`(I) requests a grant under this subparagraph for the quarter; and
`(II) meets the requirement of clause (ii) for the quarter.
`(ii) SUBSIDIZED EMPLOYMENT EXPENDITURE REQUIREMENT- A State meets the requirement of this clause for a quarter if the total expenditures of the State for subsidized employment in the quarter, whether under the State program funded under this part or as qualified State expenditures, exceeds the total of such expenditures of the State in the corresponding quarter in the emergency fund base year of the State.
`(iii) AMOUNT OF GRANT- Subject to paragraph (5), the amount of the grant to be made to a State under this subparagraph for a quarter shall be an amount equal to 80 percent of the excess described in clause (ii).
`(4) AUTHORITY TO MAKE NECESSARY ADJUSTMENTS TO DATA AND COLLECT NEEDED DATA- In determining the size of the caseload of a State and the expenditures of a State for basic assistance, non-recurrent short-term benefits, and subsidized employment, during any period for which the State requests funds under this subsection, and during the emergency fund base year of the State, the Secretary may make appropriate adjustments to the data to ensure that the data reflect expenditures under the State program funded under this part and qualified State expenditures. The Secretary may develop a mechanism for collecting expenditure data, including procedures which allow States to make reasonable estimates, and may set deadlines for making revisions to the data.
`(5) LIMITATION- The total amount payable to a single State under subsection (b) and this subsection for a fiscal year shall not exceed 25 percent of the State family assistance grant.
`(6) LIMITATIONS ON USE OF FUNDS- A State to which an amount is paid under this subsection may use the amount only as authorized by section 404.
`(7) TIMING OF IMPLEMENTATION- The Secretary shall implement this subsection as quickly as reasonably possible, pursuant to appropriate guidance to States.
`(8) DEFINITIONS- In this subsection:
`(A) AVERAGE MONTHLY ASSISTANCE CASELOAD- The term `average monthly assistance caseload' means, with respect to a State and a quarter, the number of families receiving assistance during the quarter under the State program funded under this part or as qualified State expenditures, subject to adjustment under paragraph (4).
`(B) EMERGENCY FUND BASE YEAR-
`(i) IN GENERAL- The term `emergency fund base year' means, with respect to a State and a category described in clause (ii), whichever of fiscal year 2007 or 2008 is the fiscal year in which the amount described by the category with respect to the State is the lesser.
`(ii) CATEGORIES DESCRIBED- The categories described in this clause are the following:
`(I) The average monthly assistance caseload of the State.
`(II) The total expenditures of the State for non-recurrent short term benefits, whether under the State program funded under this part or as qualified State expenditures.
`(III) The total expenditures of the State for subsidized employment, whether under the State program funded under this part or as qualified State expenditures.
`(C) QUALIFIED STATE EXPENDITURES- The term `qualified State expenditures' has the meaning given the term in section 409(a)(7).'.
(b) Temporary Modification of Caseload Reduction Credit- Section 407(b)(3)(A)(i) of such Act (42 U.S.C. 607(b)(3)(A)(i)) is amended by inserting `(or if the immediately preceding fiscal year is fiscal year 2009 or 2010, then, at State option, during the emergency fund base year of the State with respect to the average monthly assistance caseload of the State (within the meaning of section 403(c)(8)(B)))' before `under the State'.
(c) Effective Date- The amendments made by this section shall take effect on the date of the enactment of this Act.
SEC. 2102. ONE-TIME EMERGENCY PAYMENT TO SSI RECIPIENTS.
(a) Payment Authority-
(1) IN GENERAL- At the earliest practicable date in calendar year 2009 but not later than 120 days after the date of the enactment of this section, the Commissioner of Social Security shall make a one-time payment to each individual who is determined by the Commissioner in calendar year 2009 to be an individual who--
(A) is entitled to a cash benefit under the supplemental security income program under title XVI of the Social Security Act (other than pursuant to section 1611(e)(1)(B) of such Act) for at least 1 day in the calendar month in which the first payment under this section is to be made; or
(B)(i) was entitled to such a cash benefit (other than pursuant to section 1611(e)(1)(B) of such Act) for at least 1 day in the 2-month period preceding that calendar month; and
(ii) whose entitlement to that benefit ceased in that 2-month period solely because the income of the individual (and the income of the spouse, if any, of the individual) exceeded the applicable income limit described in paragraph (1)(A) or (2)(A) of section 1611(a) of such Act.
(2) AMOUNT OF PAYMENT- Subject to subsection (b)(1) of this section, the amount of the payment shall be--
(A) in the case of an individual eligible for a payment under this section who does not have a spouse eligible for such a payment, an amount equal to the average of the cash benefits payable in the aggregate under section 1611 or 1619(a) of the Social Security Act to eligible individuals who do not have an eligible spouse, for the most recent month for which data on payment of the benefits are available, as determined by the Commissioner of Social Security; or
(B) in the case of an individual eligible for a payment under this section who has a spouse eligible for such a payment, an amount equal to the average of the cash benefits payable in the aggregate under section 1611 or 1619(a) of the Social Security Act to eligible individuals who have an eligible spouse, for the most recent month for which data on payment of the benefits are available, as so determined.
(b) Administrative Provisions-
(1) AUTHORITY TO WITHHOLD PAYMENT TO RECOVER PRIOR OVERPAYMENT OF SSI BENEFITS- The Commissioner of Social Security may withhold part or all of a payment otherwise required to be made under subsection (a) of this section to an individual, in order to recover a prior overpayment of benefits to the individual under the supplemental security income program under title XVI of the Social Security Act, subject to the limitations of section 1631(b) of such Act.
(2) PAYMENT TO BE DISREGARDED IN DETERMINING UNDERPAYMENTS UNDER THE SSI PROGRAM- A payment under subsection (a) shall be disregarded in determining whether there has been an underpayment of benefits under the supplemental security income program under title XVI of the Social Security Act.
(3) NONASSIGNMENT- The provisions of section 1631(d) of the Social Security Act shall apply with respect to payments under this section to the same extent as they apply in the case of title XVI of such Act.
(c) Payments To Be Disregarded for Purposes of All Federal and Federally Assisted Programs- A payment under subsection (a) shall not be regarded as income to the rec