Electronic Records Storage

R ecord retention bedevils many businesses because they must maintain sufficient records to substantiate virtually every item reported on tax and information returns. Some companies have defined and even limited the documentation they must maintain by entering into a record retention agreement with the Internal Revenue Service. However, such agreements are not always an option and often do not adequately address electronic data. In Revenue Procedure 97-22, the IRS provides guidance on maintaining records by using an electronic storage system that either images hardcopy books and records or transfers computerized books and records to an electronic storage medium.

The procedure makes clear the IRS is very concerned about the integrity of electronic storage systems and puts the onus on taxpayers to prove their systems are accurate and reliable and have not been tampered with. In addition, the IRS insists that a taxpayer's electronic systems support the taxpayer's books and records, include indexing and retrieval systems and provide an audit trail between the general ledger and the source documents. The taxpayer also is obligated to provide the IRS with the resources necessary to locate, retrieve, read and reproduce any electronically stored books and records.

Observation : The new procedure may allow taxpayers to eliminate some paper records; however, if a system fails to operate as required in the procedure, the taxpayer may face penalties if it has not maintained its books and records in original or authorized micrographic form.

Companies that change their computer storage systems must consider how they will provide the IRS with access to data from old systems. Corporate tax departments could help by developing electronic storage systems that both meet the procedure's requirements and assist them in providing the requested data to the IRS during examinations. A tax department would have to be able to show the IRS the links from the financial accounting records to the tax returns and produce specialized documentation, such as transfer pricing information.

—Tracy Hollingsworth, Esq., staff director of tax councils at Manufacturers Alliance, Arlington, Virginia .


Why Publicly Traded Partnerships Should Buy Back Stock

A corporation that repurchases its stock from a shareholder has no corporate-level tax consequences.

Conversely, if a partnership has an IRC section 754 election in place and redeems all or part of a partner's interest, the partnership realizes an increase in the basis of its remaining assets equal to the gain the partner recognizes as a result of the buyback.

Because of a statute in the Revenue Act of 1987, partnerships that were publicly traded on or before December 17, 1987, and are not engaged in real estate or natural resource activities will convert to corporate status on January 1, 1998. If those entities are contemplating buybacks, now is the best time. Why? Because the distributee partner's gain would yield an asset basis increase for the partnership. This basis increase would remain available to the entity when it converts to a corporation.

Observation : The amortization of this basis (most likely over a 15-year period) will reduce the new corporation's tax liability. If a buyback is delayed until after the conversion, the transaction will yield no corporate-level tax benefit.

—Robert Willens, CPA, managing director at Lehman Brothers, New York City .

Filing for Help
  According to Internal Revenue Bulletin 1997-9, cash paid in 1997 to a household employee such as a housekeeper is not subject to Federal Insurance Contribution Act taxes if it is less than $1,000. When a household employee receives more than $1,000 in 1997, then all the cash paid that employee is subject to FICA taxes.

Taxing Tenure
  A state university allows tenured professors to retire early and receive up to a full year's salary in exchange for the termination of their employment and the surrender of their tenure rights. In private letter ruling 9711001, the Internal Revenue Service ruled that since tenure is granted based on a faculty member's past performance, any payments to a retiring employee to give up tenure are wages for FICA tax purposes. Had payment been made to cancel the employee's employment contract, no FICA taxes would be owed (revenue ruling 58-301).

Distributions Balancing Act
  The Small Business Job Protection Act of 1996 allows employees (other than 5% owners) to begin receiving distributions from qualified plans by April 1 of the calendar year following the later of either (1) the calendar year in which the employee reaches age 7012 or (2) the calendar year in which the employee retires. In announcement 97-24, the IRS said an employer may give employees who attain age 7012 after 1995 and who do not retire the option to defer qualified plan distributions even though the employer's plan hasn't been amended to provide for this option. The IRS is expected to provide guidance for employers on how to allow for retroactive plan amendments and how to allow employees who are 7012 and are receiving distributions to stop receiving them.

True or False?
  The IRS released five fact sheets (FS 97-5 through 97-9) that (1) explain the examination and audit process, (2) describe the collection process, (3) provide an overview of IRS programs for tax-exempt organizations, (4) discuss political activity by exempt organizations, and (5) explain the appeals process.

How Late is Too Late?
  A woman's father mailed the IRS a $7,000 check in 1984 along with his application for automatic extension to file his 1983 return. The father died in 1988, at age 98, and his daughter was appointed administrator of his estate. The daughter soon discovered that the $7,000 check should have been for only $700. Her taxpayer refund claim was denied because the statute of limitations had closed-she sought to avoid the statute under a principle known as "equitable tolling." In the past, some courts had used this principle to allow late refunds when there was a case of senility and mental incompetence. However, the U.S. Supreme Court has now decided that courts cannot toll the statutory time limitations for filing refund claims under for "nonstatutory equitable" reasons (U.S. v. Marion Brockamp , no. 95-1225, U.S. Feb. 18, 1997). The Treasury Department is considering a proposal to extend the limitation period.

—Michael Lynch, CPA, Esq., associate professor of
accounting at Bryant College, Smithfield, Rhode Island

Where to find January’s flipbook issue

Starting this month, all Association magazines — the Journal of Accountancy, The Tax Adviser, and FM magazine (coming in February) — are completely digital. Read more about the change and get tips on how to access the new flipbook digital issues.


Get your clients ready for tax season

Upon its enactment in March, the American Rescue Plan Act (ARPA) introduced many new tax changes, some of which retroactively affected 2020 returns. Making the right moves now can help you mitigate any surprises heading into 2022.