Tidbits from March 5, 2010 Federal Bar Association Annual Tax Conference

            Ivins, Phillips & Barker partner Les Schneider reports that the following interesting points were made at the Tax Accounting Panel at the Federal Bar Association Annual Tax Conference on Friday, March 5, 2010.  Most of these points are of broad interest and not widely known.

1.         The final repair regulations (Reg. § 1.263(a)-3) will probably not be issued until late Fall.  The regulations will contain sections that are final, sections that are temporary and proposed and sections that are proposed for the first time.  There was no discussion of specific provisions expected to be contained in the regulations. 

            Accordingly, taxpayers that have not yet filed automatic consent accounting method change requests to expense previously capitalized repair expenditures pursuant to Rev. Proc. 2009-39 have substantial additional time during 2010 to file such requests.  This type of method change request need not be filed within the 90-day window, even though a taxpayer is under examination.

2.         The transaction cost regulations project that addresses how to treat capitalized transaction costs will be issued by June 30.

3.         The IRS has withdrawn its regulations project on Reg. § 1.451-4 and affinity programs and intends to interpret the existing regulations as applying narrowly to trading stamps.

4.         The panel discussed the recent bonus accrual pronouncement (ILM 200949040), which holds that a bonus that is forfeitable if an employee leaves the company before the bonus is paid is not deductible prior to the year of payment.  I raised the question of what happens if the forfeited bonus is simply returned to the bonus pool and paid out to other employees.  Andrew Keyso, Special Counsel to the Associate Chief Counsel, Income Tax & Accounting, indicated that the IRS has issued numerous accounting method consent letters permitting a deduction in the year of accrual in those circumstances.  Carol Conjura pointed out that the IRS has two revenue rulings outstanding that decline to follow the Washington Post case and reject the notion of group liability.  Mr. Keyso indicated that the IRS no longer follows these rulings.  Ms. Conjura responded that for FIN 48 purposes, the rulings constitute substantial authority against claiming a current deduction in these circumstances and Mr. Keyso’s contrary announcement is not substantial authority and can’t be relied on for FIN 48 purposes.  Mr. Keyso indicated that the IRS would consider revoking the rulings.

5.         The Treasury and IRS are receiving a lot of questions about the applicability of section 118 to various government grants included in recent legislation.  Guidance will be published soon.

6.         The handling of IBNR method change requests depend on whether the employee or the medical provider bills the company for the medical services.  Mr. Keyso stated that in the IRS’ opinion, the key factor in determining deductibility before a claim is filed is the issue of to whom the company is obligated under the terms of the company’s medical reimbursement plan.  If the company is obligated to reimburse the medical services provider, an earlier accrual is permitted; if the company is obligated to reimburse the employee, no deduction is permitted until the employee files a reimbursement claim.

7.         When a taxpayer is changing the year that a bad debt is worthless and should be written off, the IRS does not usually treat a change in the year of the write-off as a change in method of accounting, so that a taxpayer loses the deduction if the bad debt deduction should have been claimed in a barred year.  Section 481(a) would not apply.

8.         For a UNICAP method change to qualify for automatic consent treatment, if the taxpayer is not otherwise changing an overall allocation method, but is merely adding or subtracting Section 263A costs, the method change can be filed automatically if the taxpayer is adding costs, but not if the taxpayer is removing costs.  If a change to an overall allocation method is also being filed, adding or removing Section 263A costs may be included in that automatic change request.

9.         The treatment of taxpayers with refund cases or claims pending at the Joint Committee is clarified for purposes of Rev. Proc. 97-27 and Rev. Proc. 2008-52.  The treatment of the taxpayer depends on the taxpayer’s examination status immediately prior to sending the taxpayer’s case for Joint Committee review. 

            i.          If the taxpayer’s case is transferred from Exam to the Joint Committee, the taxpayer is considered to be continuously under examination throughout the period including while the taxpayer’s case is at the Joint Committee.  Thus, the taxpayer is considered continuously under exam for purposes of all of the window periods in Rev. Proc. 97-27 and Rev. Proc. 2008-52 until the Joint Committee approves the refund.  It doesn’t matter that the taxpayer signed a Form 870 prior to the case going to the Joint Committee.

            ii.         If the taxpayer’s case is transferred from Appeals to the Joint Committee and the taxpayer is not otherwise under examination for a prior or subsequent year, sending the case to the Joint Committee does not put the taxpayer under examination.  Instead, the taxpayer’s case is deemed to remain in Appeals while the case is pending at the Joint Committee.

            iii.       If the taxpayer files a refund claim that is sent for Joint Committee approval and the taxpayer is not otherwise under examination, sending the refund claim to the Joint Committee does not place the taxpayer under examination for purposes of Rev. Proc. 97-27 and Rev. Proc. 2008-52, unless the taxpayer is subsequently notified by Exam that the taxpayer is under examination.

10.       All method change requests involving the E&P of CFCs are now sent by the IT&A Branch to the International Branch at the National Office, so that special rules and language may be inserted in the consent letter relating to certain administrative procedures applicable to CFCs.

11.       If a taxpayer is not sure whether a method change qualifies for the automatic consent procedures, the IRS advises that the taxpayer should call the person listed in Rev. Proc. 2008-52 to get their opinion.  While the taxpayer may not legally rely on that opinion, if the National Office contact person thinks the answer is clear cut, the taxpayer should follow an approach consistent with that answer.  If the answer is grey, the taxpayer should consider filing a ruling request as to whether the request qualifies for the automatic consent procedures.  The IRS advises not to file a regular method change request in those circumstances because the IRS does not want to process such requests unnecessarily and will not give comfort rulings or comfort withdrawal letters that a taxpayer may rely on if the IRS concludes upon review that the method change qualifies for the automatic procedures.  (Personally, we don’t agree with this advice and we would recommend filing a regular method change request in these circumstances).

12.       Where a taxpayer includes multiple related accounting method change requests in a single Form 3115 and some of the changes have positive section 481(a) adjustments and other changes have negative section 481(a) adjustments, the taxpayer has a choice as to how to proceed.  The taxpayer may either net the positive and negative adjustments or show them separately and deduct the net negative adjustment in the year of change and amortize the net positive adjustment over four taxable years.