Tax Notes

The IRS issues proposed regulations that would require taxation of “split-dollar” life insurance policies ( www.treas.gov/press/releases/po3230.htm ). Many businesses use such products as a form of supplemental compensation for their employees. Under these regulations, a split-dollar policy bought for this purpose would be taxed one of two ways depending on who owns it. If the employee is the owner, the IRS would view as a loan any premiums the company pays on his or her behalf and tax the employee on the difference between market-rate interest and the policy’s actual interest rate. But if the company owns the policy, the IRS would regard the employer’s payment of premiums as an “economic benefit” to the employee that includes the value of the life insurance protection plus any other benefits he or she receives under the policy. The proposed changes also affect split-dollar policies in which corporations and shareholders or donors and donees participate. They apply only to policies taking effect after the IRS issues final regulations. In the interim, taxpayers can base their returns on the proposed rules. If the final regulation’s wording is more advantageous, they can file an amended return. Comments are due October 7.

The AICPA tax division is seeking member input via a quick online survey ( www.cpa2biz.com/ResourceCenters/tax ) on U.S. income tax treaties and will use the responses for its comments to the Treasury Department regarding treaty negotiations. Specifically, the division’s international tax technical-resource panel is interested in encouraging the Treasury to negotiate income tax treaties with countries where none currently exists. The survey asks respondents to rank the following countries in priority order (1 (most important) to 8 (least important)) for developing such agreements:

Argentina Brazil Chile Colombia Costa Rica Singapore Taiwan Other (Indicate country name and reason for inclusion.) The tax division also requests that those taking the survey list any U.S. income tax treaties already in force that they would like to see renegotiated and the reasons why. Responses are due October 1.

A new IRS compliance program requires taxpayers to explain discrepancies between income and losses that partnerships, S corporations or trusts reported on schedule K-1, Shareholder’s Share of Income, Credits, Deductions, etc., and the information individuals supplied on form 1040 and other schedules ( www.irs.gov/pub/irs-news/ir-02-83.pdf ). IRS examiners screen returns to ensure taxpayers properly reported, for example, passive loss limitations and income or losses on schedule E of form 1040. But when the service cannot account for differences in the information provided, it requests an explanation from the taxpayer. In the first half of 2002, the IRS issued 65,000 notices requesting clarification on some of the 18 million K-1s that reported $1.2 trillion in 2001 income to partners, stockholders and beneficiaries. The service says a letter or phone call from a taxpayer or his or her tax adviser can resolve many such inquiries.

The latest IRS life expectancy tables require smaller annual distributions from tax-deferred retirement plans and have been issued as Supplement to Publication 590, Individual Retirement Arrangements (IRAs) (www.irs.gov/pub/irs-pdf/p590supp.pdf). For 2002, the service says, taxpayers can use either the new tables or those in the April edition ( www.irs.gov/pub/irs-pdf/p590.pdf ) of publication 590.

A revised version ( www.irs.gov/pub/irs-pdf/p1828.pdf ) of IRS publication 1828, Tax Guide for Churches and Religious Organizations, explains special tax laws and procedures applying to such entities. It covers topics such as the unrelated business income tax, recordkeeping requirements, substantiation and disclosure rules applicable to charitable organizations and avoiding activities that could jeopardize tax-exempt status.