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 .
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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.
Distributions Balancing Act
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Michael Lynch, CPA, Esq., associate professor of