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President Barack Obama signed HR 3962, the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010, on June 25.


The act allows single-employer plans to elect to amortize over a longer period pension shortfalls caused by losses in asset value they experienced in 2008. However, if plan sponsors pay compensation exceeding $1 million to any employee (including nonqualified deferred compensation amounts set aside or reserved in a trust or other arrangement) or pay “extraordinary” dividends or stock redemptions during the relief period, they must increase pension installment contributions by the excess amount of the dividends or redemptions. The compensation limits apply to services performed after Feb. 28, 2010.


Extraordinary dividends and stock redemptions are the portion of the combined total of dividends declared and stock redemptions paid during the plan year that exceeds the greater of either the employer’s adjusted net income (without regard to interest, taxes, depreciation and amortization expenses) in the preceding plan year, or dividends declared in the plan year (if the employer has declared dividends in the same manner for the immediately preceding five consecutive years). Certain redemptions and dividends with respect to preferred stock are excluded.


For multiemployer plans, the act provides relief from standard accounting rules to treat separately from any other “experience gain or loss” such experience gain or loss attributable to net investment losses incurred in either or both of the first two plan years ending after Aug. 31, 2008. Such gains or losses may be amortized over 30 years. The act also prescribes an extended “smoothing period” for the difference between expected and actual returns in the same plan years. Such an extension will be deemed an approved change in funding method under IRC § 412(d)(1) and will not be considered an unreasonable asset valuation method solely because of the change. The provisions also restrict pension benefit increases for plans making the election.




The IRS said on its website that it will phase in over the next two years a requirement that tax return preparers filing more than 10 income tax returns do so electronically. The requirement had been set to take effect next year. The preparer e-filing mandate was part of the Worker, Homeownership, and Business Assistance Act of 2009 (PL 111-92). It amended IRC § 6011(e)(3) to provide that, effective for returns filed after Dec. 31, 2010, any return preparer who files or expects to file more than 10 income tax returns for individuals, trusts or estates in a calendar year must e-file those returns.


The IRS announced that starting Jan. 1, 2011, tax return preparers who anticipate filing 100 or more individual or trust income tax returns will be required to e-file them. Then, starting Jan. 1, 2012, the threshold will drop to more than 10 returns.


In June, the Electronic Tax Administration Advisory Committee recommended phasing in the requirement over three years. The committee advises the IRS on its strategic plan for electronic tax administration and related issues. It monitors the IRS’ progress toward meeting its goal of receiving at least 80% of tax and information returns electronically. It also assesses the effects of e-filing on small businesses and self-employed taxpayers. Other key recommendations in this year’s report included that the IRS not impose burdens beyond the public benefit of its new proposal for greater regulation and oversight of return preparers. Also, the committee said, Congress should fund and the IRS should complete its plans for improved new e-filing computer systems.


The committee said the IRS should apply the requirement only to preparers filing the 1040 series of returns and phase in the requirement by setting the threshold at 100 returns for the 2011 filing season; 50 returns for the 2012 filing season; and 10 returns for the 2013 filing season. The IRS should also allow taxpayers to opt out of having their Form 1040 returns e-filed, it said. A gradual phase-in would help small tax practices handling business returns adopt e-filing as part of their business model, the committee said.


As the IRS further develops and implements tax preparer oversight and regulation, it should avoid any measures that would reduce the availability of qualified, authorized IRS e-file providers, the committee said. It could do so by making sure that all industry stakeholders are aware of the new requirements for registration, testing and education, and making sure those requirements are easily available and affordable for preparers. It should also enforce compliance both directly and indirectly, the latter by educating taxpayers about the importance of using only registered, qualified preparers, the committee said.


To improve its e-file computer platforms, the IRS should complete its Business Systems Modernization Program before starting any other new information technology programs, the committee said. The program includes the IRS’ Customer Account Data Engine and other systems designed to speed processing of returns and refunds and in other ways improve taxpayer service.


Regarding the 80% e-file goal, the committee noted that the 2010 filing season was projected to reach a 59% e-file rate for all major types of returns. To meet the 80% goal, about 40 million more returns will need to be e-filed. E-filing of individual returns in 2010 increased by three percentage points over the previous year to 72%.




The IRS and the Treasury Department issued final regulations to provide that the IRC § 704(c) partnership anti-abuse rule for property contributions and distributions must take into account the tax liabilities of both partners and certain owners of partners (TD 9485). The regulations also provide that partnerships cannot use an allocation method to achieve tax results that are inconsistent with the intent of the IRC’s partnership rules.


The final regulations adopt without any changes proposed regulations that the IRS issued in 2008 (REG-100798-06). The regulations respond to a recommendation by the Joint Committee on Taxation in the wake of the Enron scandal that the anti-abuse rule of Treas. Reg. § 1.704-3(a)(10) be strengthened to ensure that the allocation rules for property contributed to a partnership are not used to obtain unwarranted tax benefits.


Under the anti-abuse rule, a method (or combination of methods) for allocating contributed partnership property is not reasonable if the contribution of property and the corresponding allocation of tax items with respect to the property are made with a view to shifting the tax consequences of built-in gain or loss among the partners in a way that substantially reduces the present value of the partners’ aggregate tax liability. According to the IRS, a substantial reduction in the present value of an indirect partner’s tax liability must be considered when analyzing the reasonableness of an allocation method, because allowing a partnership to adopt a method under which the tax advantages accrue to an indirect partner rather than a direct partner would be inconsistent with the purposes of section 704(c).


Therefore, the regulations amend Treas. Reg. § 1.704-3(a)(10) to provide that, for purposes of applying the anti-abuse rule, the tax effect of an allocation method (or combination of methods) on both direct and indirect partners is considered. An indirect partner is defined as any direct or indirect owner of a partnership, S corporation, or controlled foreign corporation (CFC), or direct or indirect beneficiary of a trust or estate that is a partner in the partnership, and any consolidated group of which the partner in the partnership is a member.


The regulations also provide that the principles of section 704(c), together with the allocation methods described in Treas. Reg. §§ 1.704-3(b), (c) and (d), apply only to contributions that are otherwise respected for tax purposes. Thus, even though a transaction may satisfy the literal language of section 704(c) and the regulations, the IRS may recast the transaction to avoid tax results that are inconsistent with the intent of subchapter K (IRC sections 701 through 777 dealing with partnerships). The regulations state that one factor that may be relevant in determining whether a contribution of property should be recast is the use of the remedial method, in which allocations of remedial items of income, gain, loss or deduction are made to one partner and allocations of offsetting remedial items are made to a related partner.


Also, the final regulations provide that an owner of a CFC is treated as an indirect partner only with respect to the allocation of items that (1) enter into the computation of a U.S. shareholder’s inclusion under IRC § 951(a) with respect to the CFC, (2) enter into any person’s income attributable to a U.S. shareholder’s inclusion under section 951(a) with respect to the CFC, or (3) would enter into the computations described in (1) or (2) if such items were allocated to the CFC.


The regulations are effective for tax years that begin after June 9, 2010.


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