Category: Tax

District Court Holds IRS Lacks Authority to Issue and Enforce Tax Return Preparer Regulations

The National Law Review recently featured an article, District Court Holds IRS Lacks Authority to Issue and Enforce Tax Return Preparer Regulations, written by Gale E. Chan and Robin L. Greenhouse with McDermott Will & Emery:

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On January 18, 2013, the District Court for the District of Columbia (District Court) issued a surprising decision in Loving v. Internal Revenue Service, No. 12-385 (JEB), holding that the Internal Revenue Service (IRS) lacked the authority to issue and enforce the final Circular 230 tax return preparer regulations that were issued in 2011 (Regulations).  The District Court also permanently enjoined the IRS from enforcing the Regulations.

Background

As part of the IRS’s initiative to increase oversight of the tax return preparer industry by creating uniform and high ethical standards of conduct, the IRS created a new category of preparers, “registered tax return preparer,” to be subject to the rules of Circular 230.  Attorneys, certified public accountants, enrolled agents and enrolled actuaries were already subject to IRS regulation under Circular 230, and thus, were not affected by the issuance of the Regulations.

In June 2011, the IRS and the U.S. Department of the Treasury (Treasury) issued the Regulations relating to registered tax return preparers and practice before the IRS.  T.D. 9527 (June 3, 2011).  Under these rules, registered tax return preparers have a limited right to practice before the IRS.  A registered tax return preparer can prepare and sign tax returns, claims for refunds and other documents for submission to the IRS.  A registered tax return preparer who signs the return may represent taxpayers before revenue agents and IRS customer service representatives (or similar officers or employees of the IRS) during an examination, but the registered tax return preparer cannot represent the taxpayer before IRS appeals officers, revenue officers, counsel or similar officers or employees of the IRS.  In addition, a registered tax return preparer can only advise a taxpayer as necessary to prepare a tax return, claim for refund or other document intended to be submitted to the IRS.

The Regulations also impose additional examination and continuing education requirements on registered tax return preparers in addition to obtaining a preparer tax identification number (PTIN).  Under the rules, to become a “registered tax return preparer,” an individual must be 18 years old, possess a current and valid PTIN, pass a one-time competency examination, and pass a federal tax compliance check and a background check.  The Regulations require a registered tax return preparer to renew his or her PTIN annually and to pay the requisite user fee.  To renew a PTIN, a registered tax return preparer must also complete a minimum of 15 hours of continuing education credit each year that includes two hours of ethics or professional conduct, three hours of federal tax law updates and 10 hours of federal tax law topics.

Loving v. Internal Revenue Service

In Loving, three individual paid tax return preparers (Plaintiffs) filed suit against the IRS, the Commissioner of Internal Revenue and the United States (collectively, Government) seeking declaratory relief, arguing that tax return preparers whose only “appearance” before the IRS is the preparation of tax returns cannot be regulated by the IRS, and injunctive relief, requesting the court to permanently enjoin the IRS from enforcing the Regulations.  In filed declarations, two of the Plaintiffs indicated that they would likely close their tax businesses if they were forced to comply with the Regulations, and the third Plaintiff, who serves low-income clients, indicated that she would have to increase her prices if forced to comply with the Regulations, likely resulting in a loss of customers.  The Plaintiffs and the Government each filed separate motions for summary judgment.

At issue in the case was the IRS’s claim that it can regulate individuals who practice before it, including tax return preparers.  The IRS relied on an 1884 statute, 31 U.S.C. § 330, which provides the Treasury with the authority to regulate the people who practice before it.  The statute currently provides that the Treasury may “regulate the practice of representatives of persons before the Department of the Treasury.”  31 U.S.C. § 330(a)(1) (emphasis added).  The statute further requires that a representative demonstrate certain characteristics prior to being admitted as a representative to practice, including “competency to advise and assist persons in presenting their cases.”  31 U.S.C. § 330(a)(2)(D) (emphasis added).  The statute also gives the Treasury authority to suspend or disbar a representative from practice before the Treasury in certain circumstances, as well as to impose a monetary penalty.  31 U.S.C. § 330(b).

The District Court’s Application of Chevron

The District Court applied the framework of Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984), and concluded that the text and context of 31 U.S.C. § 330 unambiguously foreclosed the IRS’s interpretation of the statute.  Chevron applies a two-step inquiry to determine whether a statute is ambiguous.  The first step asks whether the intent of Congress is clear in the statute—i.e., has Congress “directly spoken to the precise question at issue.”  Chevron, 467 U.S. at 842.  If a court determines that the intent of Congress is clear, under the Chevron framework, that is the end and the court “must give effect to the unambiguously expressed intent of Congress.”  Id. at 842–43.  However, if the court determines that the statute is silent or ambiguous, the court must proceed to step two of Chevron and ask whether the agency’s interpretation “is based on a permissible construction of the statute.”  Id. at 843.  An agency’s construction under step two is permissible “unless it is arbitrary or capricious in substance, or manifestly contrary to the statute.”  Mayo Found. for Med. Educ. & Research v. United States, 131 S. Ct. 704, 711 (2011) (citation omitted).

In Loving, the District Court concluded that 31 U.S.C. § 330 was unambiguous as to whether tax return preparers are “representatives” who “practice” before the IRS for three reasons.  First, the District Court stated that 31 U.S.C. § 330(a)(2)(D) defines the phrase “practice of representatives” in a way that does not cover tax return preparers.  As noted above, 31 U.S.C. § 330(a)(2)(D) requires a representative to demonstrate that he or she is competent to advise and assist taxpayers in presenting their “cases.”  The District Court stated that the statute thus equates “practice” with advising and assisting with the presentation of a case, which the filing of a tax return is not.  Thus, the District Court concluded that the definition in 31 U.S.C. § 330(a)(2)(D) “makes sense only in connection with those who assist taxpayers in the examination and appeals stages of the process.”

Second, the District Court stated that the IRS’s interpretation of 31 U.S.C. § 330 would undercut various statutory penalties in the Internal Revenue Code (Code) specifically applicable to tax return preparers.  The District Court noted that if 31 U.S.C. § 330(b) is interpreted as authorizing the IRS to penalize tax return preparers under the statute, the statutory penalty provisions in the Code specific to tax return preparers would be displaced, thereby allowing the IRS to penalize tax return preparers more broadly than is permissible under the Code.  Thus, the District Court stated that the specific penalty provisions applicable to tax return preparers in the Code should not be “relegated to oblivion” and trumped by the general penalty provision of 31 U.S.C. § 330(b).

The District Court also stated that 31 U.S.C. § 330(b) does not authorize penalties on tax return preparers because Section 6103(k)(5) of the Code, which provides that the IRS may disclose certain penalties to state and local agencies that license, register or regulate tax return preparers, does not identify 31 U.S.C. § 330(b) as one of the reportable statutory penalty provisions.

Finally, the District Court stated that if the IRS’s interpretation of 31 U.S.C. § 330 is accepted, Section 7407 of the Code would be duplicative.  Section 7407 of the Code provides the IRS with the right to seek an injunction against a tax return preparer to enjoin the preparer from further preparing returns if the preparer engages in specified unlawful conduct.  This right is similar to the authority under 31 U.S.C. § 330(b) to penalize if the IRS’s interpretation of 31 U.S.C. § 330 is accepted.  Under the IRS’s interpretation of 31 U.S.C. § 330, the IRS could disbar a representative from practice before the IRS if a tax return preparer engages in the conduct described in 31 U.S.C. § 330(b) (incompetence, being disreputable, violating regulations and fraud).  Thus, the District Court noted that disbarment under 31 U.S.C. § 330(b) is wholly within the IRS’s control and would be an easier path to penalize a tax return preparer than offered by Section 7407 of the Code.  The District Court stated that under the IRS’s interpretation, the IRS likely would never utilize the remedies available under Section 7407 of the Code, thereby rendering the statute pointless.

Conclusion

The District Court granted the Plaintiffs’ motion for summary judgment, holding that the IRS lacked statutory authority to issue and enforce the Regulations against “registered tax return preparers,” and permanently enjoined the IRS from enforcing the Regulations.  The Government will likely appeal the District Court’s decision.  Nevertheless, the District Court’s decision will have a great impact on the hundreds of thousands of tax return preparers ensnared by the Regulations and the clients they serve.

© 2013 McDermott Will & Emery

Employers Can Obtain Refund for Excess FICA Tax Paid as Result of Increased Excludable Limit for Transit Benefits

The National Law Review recently published an article, Employers Can Obtain Refund for Excess FICA Tax Paid as Result of Increased Excludable Limit for Transit Benefits, written by Maureen O’Brien and Ruth Wimer, Esq., CPA with McDermott Will & Emery:

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On January 11, 2013, the Internal Revenue Service published Notice 2013-8 providing a special administrative procedure for employers with respect to 2012 transit pass benefits.  The American Taxpayer Relief Act retroactively increased the monthly transit benefit exclusion under Section 132(f)(2)(A) of the Internal Revenue Code for commuter highway vehicles or transit passes from $125 per participating employee to $240 per participating employee for the 2012 calendar year (the monthly transit benefit exclusion for parking remains at $240).  The notice addresses employers’ questions regarding the retroactive application of the increased exclusion, which can result in both decreased FICA and federal income tax liability.  Employers acting promptly, in many cases by January 31, may have less administrative burden in obtaining a benefit for themselves and their employees with respect to the retroactive increase for employer-provided transit benefits.

Background

Section 132(a)(5) of the Internal Revenue Code provides that any fringe benefit that is a qualified transportation fringe is excluded from gross income for federal income tax purposes, and the FICA rules allow for the same exclusion.  The term “qualified transportation fringe” includes (when provided by an employer to an employee) transportation in a commuter highway vehicle between home and work and any transit pass (Transit Benefits), or qualified parking.  Prior to the enactment of the American Taxpayer Relief Act (ATRA), the 2012 monthly limit for qualified parking was $240, and the monthly limit for other Transit Benefits was $125.  ATRA amended Section 132(f)(2) to increase the maximum monthly excludable amount for Transit Benefits to an amount equal to the maximum monthly excludable amount for qualified parking (i.e., $240), effective retroactively beginning on January 1, 2012.

As a result of ATRA, employers that provided Transit Benefits in excess of the pre-ATRA maximum monthly excludable amount may be able to obtain a refund of FICA amounts paid on such benefits.  Generally, corrections of overpayments of FICA tax are made when an error has been ascertained using either the adjustment process or using the refund claim process, and requires a Form 941-X to be filed for each quarter in which excess FICA taxes were reported.  (Correction of over-withheld federal income tax can not be made until after the year-end in which the over-withholding occurred.)

IRS Notice 2013-8 provides a special administrative process to obtain a refund for excess FICA tax paid as a result of the retroactive amendment on the monthly excludable limit for Transit Benefits.  To benefit from the retroactive increase in the excludable limits for Transit Benefits, the employer must have actually paid amounts for Transit Benefits in excess of the limit either from its own resources or from employee salary deferrals.

Employers that have not yet filed their fourth quarter Form 941 for 2012 must repay or reimburse their employees the over-collected FICA tax on the excess transit benefits for all four quarters of 2012 on or before filing the fourth quarter Form 941.  The employer, in reporting amounts on its fourth quarter Form 941, may then reduce the fourth quarter wages, tips and compensation reported on line 2, the taxable social security wages reported on line 5a and Medicare wages and the tips reported on line 5c by the excess transit benefits for all four quarters of 2012.  By taking advantage of this special administrative procedure, employers will avoid having to file Forms 941-X, and will also avoid having to file Forms W-2c.

Employers that have already filed the fourth quarter Form 941 must use Form 941-X to make an adjustment or claim a refund for any quarter in 2012 with regard to the overpayment of tax on the excess transit benefits after repaying or reimbursing the employees or, for refund claims, securing consents from its employees.  Similarly, employers that, on or before filing the fourth quarter Form 941, have not repaid or reimbursed some or all employees who received excess transit benefits in 2012 must use Form 941-X to make an adjustment or claim for refund with respect to the excess transit benefits provided to those employees, and must follow the normal procedures.

Employers that have not furnished 2012 Forms W-2 to their employees should take into account the increased exclusion for transit benefits in calculating the amount of wages reported in box 1, Wages, tips, other compensation; box 3, Social security wages; and box 5, Medicare wages and tips.  Employers that have repaid or reimbursed their employees for the over-collected FICA taxes prior to furnishing Form W-2 should reduce the amounts of withheld tax reported in box 4, Social security tax withheld, and box 6, Medicare tax withheld, by the amounts of the repayments or reimbursements.

In all cases, however, employers must report in box 2, Federal income tax withheld, the amount of income tax actually withheld during 2012.  The additional income tax withholding will be applied against the taxes shown on the employee’s individual income tax return (Form 1040, U.S. Individual Income Tax Return).  The same procedures are available to filers of other employment tax returns reporting FICA taxes (e.g., the related Spanish-language return or return for U.S. possessions) and to filers of employment tax returns reporting taxes under the Railroad Retirement Tax Act.

© 2013 McDermott Will & Emery

Operational and Technical Changes for FACTA Compliance – January 30 – February 1, 2013

The National Law Review is pleased to bring you information about the upcoming Global Financial Markets – Operational and Technical Changes for FACTA Compliance:

key topics

  • Assess the full implications of the finalized FATCA regulation
  • Coordinate an optimal approach to operational, infrastructural and technical changes under FATCA
  • Identify strategies to effectively manage client accounts
  • Integrate existing internal procedures with FATCA compliance
  • Understand what is expected by the IRS

key features

  • Pre-Conference Workshop on January 30, 2013 for an Additional Cost:
  • Pre-Conference Workshop: The Intergovernmental Agreements: Changing the Face of International Tax lead by JP&MF Consulting and Mopsick Tax Law LLP

event focus

FATCA is amongst the biggest topics of debate in financial institutions across the globe. The effect that it will have on these institutions cannot be underestimated and its operational impact on the existing systems is set to be both time consuming and costly. The ability to successfully align all key stakeholders, including operations, technology, risk, legal and tax, will determine the ultimate cost of FATCA compliance. Moving on from mere interpretive matters, this GFMI conference will not only address key FATCA requirements but also discuss the practical impacts of IGAs and strategies for achieving operational and infrastructural efficiency.

The Operational and Technical Changes for FATCA Compliance Conference will be a two and half day, industry focused event, specific to Senior Executives working in Banks, Insurance and Asset Management Companies. Attendees will address key FATCA requirements, while discussing the practical implications of IGAs and strategies for achieving operational and infrastructural efficiency.

Key Themes of the Operational and Technical Changes for FATCA Compliance Conference Include:

1. Challenges of FATCA regulations and prospects for the final regulation

2. Achieving operational and infrastructural efficiency

3. Coordinating existing AML/KYC procedures with FATCA compliance

4. FATCA from the FFI’s perspective 5. Beyond banking: the challenges of FATCA implementation

6. Coping with the withholding obligation under FATCA

This is not a trade show; our conference series is targeted at a focused group of senior level executives to maintain an intimate atmosphere for the delegates and speakers. Since we are not a vendor driven conference, the higher level focus allows delegates to network with their industry peers.

Operational and Technical Changes for FACTA Compliance – January 30 – February 1, 2013

The National Law Review is pleased to bring you information about the upcoming Global Financial Markets – Operational and Technical Changes for FACTA Compliance:

key topics

  • Assess the full implications of the finalized FATCA regulation
  • Coordinate an optimal approach to operational, infrastructural and technical changes under FATCA
  • Identify strategies to effectively manage client accounts
  • Integrate existing internal procedures with FATCA compliance
  • Understand what is expected by the IRS

key features

  • Pre-Conference Workshop on January 30, 2013 for an Additional Cost:
  • Pre-Conference Workshop: The Intergovernmental Agreements: Changing the Face of International Tax lead by JP&MF Consulting and Mopsick Tax Law LLP

event focus

FATCA is amongst the biggest topics of debate in financial institutions across the globe. The effect that it will have on these institutions cannot be underestimated and its operational impact on the existing systems is set to be both time consuming and costly. The ability to successfully align all key stakeholders, including operations, technology, risk, legal and tax, will determine the ultimate cost of FATCA compliance. Moving on from mere interpretive matters, this GFMI conference will not only address key FATCA requirements but also discuss the practical impacts of IGAs and strategies for achieving operational and infrastructural efficiency.

The Operational and Technical Changes for FATCA Compliance Conference will be a two and half day, industry focused event, specific to Senior Executives working in Banks, Insurance and Asset Management Companies. Attendees will address key FATCA requirements, while discussing the practical implications of IGAs and strategies for achieving operational and infrastructural efficiency.

Key Themes of the Operational and Technical Changes for FATCA Compliance Conference Include:

1. Challenges of FATCA regulations and prospects for the final regulation

2. Achieving operational and infrastructural efficiency

3. Coordinating existing AML/KYC procedures with FATCA compliance

4. FATCA from the FFI’s perspective 5. Beyond banking: the challenges of FATCA implementation

6. Coping with the withholding obligation under FATCA

This is not a trade show; our conference series is targeted at a focused group of senior level executives to maintain an intimate atmosphere for the delegates and speakers. Since we are not a vendor driven conference, the higher level focus allows delegates to network with their industry peers.

A Brief Explanation of the American Taxpayer Relief Act of 2012

The National Law Review recently published an article by Joseph W. Zitzka Jr. and Amanda Wilson of Lowndes, Drosdick, Doster, Kantor & Reed, P.A. regarding The American Taxpayer Relief Act of 2012:

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In the past few weeks, attention has focused on Washington and how the politicians would deal with the tax component of the so-called fiscal cliff (the tax increases that would automatically go into effect on January 1).  On January 1, 2013 Congress passed the American Taxpayer Relief Act of 2012 (the “Act”), and President Obama signed the Act into law on January 2.  Politicians have stated that the Act was designed to keep America from going over the fiscal cliff.  But what does that mean?  As explained below, the Act did reduce the number of tax increases that would go into effect, but unfortunately, many other tax increases still went into effect.

What Did the Act Address?

The main component of the looming tax increases was the expiration of the tax cuts introduced under President Bush.  The rates for all federal ordinary income tax brackets were set to return to 2003 rates, which would increase the tax rates across all brackets (generally, by 3 to 5%).  The Act changed this result, keeping the Bush era tax rates in place for all taxpayers except for those over a certain high-income threshold.  This threshold (the “Act Threshold”) is $450,000 for joint filers, $400,000 for single filers, and $225,000 for married taxpayers filing separately.  Taxpayers with income over the Act Threshold will be subject to tax at a maximum rate of 39.6%.

Additionally, the Bush tax cuts generally lowered the tax rate on capital gains to 15% and provided that qualified dividends would be taxed at a preferential 15% rate (instead of at ordinary income rates).  On January 1, capital gains rates were set to increase to 20% and dividends were set to be taxed at ordinary income rates.  The Act stopped these increases for taxpayers below the Act Threshold.  For taxpayers with income over the Act Threshold, capital gains and dividends will generally be taxed at an increased rate of 20% (which, for dividends, is better than the anticipated increase to ordinary income rates).

The Act has also increased tax liability for higher income taxpayers by reimplementing exemption and deduction phaseouts.  The threshold amount for these phaseouts (“Phaseout Threshold”) is $300,000 for joint filers, $250,000 for single filers, and $150,000 for married taxpayers filing separately.  Taxpayers with adjusted gross income above the Phaseout Threshold will be limited in the personal exemptions that they can claim, as their personal exemption amount will be reduced by 2% for each $2,500 by which the taxpayer’s adjusted gross income exceeds the applicable Phaseout Threshold.  In addition, these same taxpayers will be limited in the amount of itemized deductions that they can claim.  The amount of itemized deductions that can be deducted will be reduced by 3% of the amount by which the taxpayer’s adjusted gross income exceeds the Phaseout Threshold (subject to a limitation that the reduction shall not exceed 80% of the allowable itemized deductions).

The Act also addressed the looming threat that the alternative minimum tax (AMT) will impact more taxpayers.  The Act retroactively increased AMT exemption amounts to reduce the number of taxpayers that will be subject to AMT.

The Act extended the availability of 50% first-year bonus depreciation, and increased the expensing limitation for depreciable property for 2012 and 2013.  In 2012, the expensing limitation was $139,000 (with a phaseout threshold of $560,000), and this amount was set to be reduced dramatically in 2013.  The Act increased the expensing amount for 2012 (retroactively) and 2013 to $500,000 (with a phaseout threshold of $2 million).

Finally, the Act addressed the impending tax increase in the estate, gift, and generation-skipping transfer area.  Absent legislation, the maximum tax rate was set to increase from 35% to 55%, with the exemption amount decreasing from $5 million (actually, $5.12 million as the exemption is adjusted for inflation) to $1 million.  The Act makes the $5 million exemption (adjusted for inflation) permanent and provides for a maximum tax rate of 40%.

What Did the Act Not Address?

Several upcoming tax increases were not addressed by the Act.  The expiring tax holiday for payroll taxes was not address, meaning that the reduced 4.2% tax rate for the employees’ portion of the Social Security payroll tax has expired and the rate has returned to 6.2%. This will be a 2% tax rate increase that employees will immediately see on their paychecks.

In addition, the new 3.8% tax (referred to as the Unearned Income Medicare Contribution) on investment income will apply to most joint filers with adjusted gross income above $250,000 and single filers with adjusted gross income above $200,000.  The tax is essentially a flat tax at a 3.8% rate on investment income above the $250,000/$200,000 threshold.  The tax applies to the following:  dividends; rents; royalties; interest, except municipal-bond interest; short and long-term capital gains; the taxable portion of annuity payments; income from the sale of a principal home above the $250,000/$500,000 exclusion; a net gain from the sale of a second home; and passive income from real estate and investments in which a taxpayer does not materially participate.  Although the tax applies only to investment income above the threshold, other income (including wages or Social Security) can increase a taxpayer’s adjusted gross income above the threshold, exposing the taxpayer to this tax.

Finally, the Medicare tax rate will increase by .9 percent (from 1.45 percent to 2.35 percent) on wages for certain employees (i.e., those with wages over $200,000 for single filers, wages over $250,000 for joint filers, and wages over $125,000 for persons who are married but filing separately).

In short, the Act did prevent many tax increases from going into effect, but it was only a partial fix.  Many other provisions were allowed to go into effect, with the result that many taxpayers will face greater tax liability.

“Notice Under U.S. Treasury Department Circular 230:  To the extent that this e-mail communication and the attachment(s) hereto, if any, may contain written advice concerning or relating to a Federal (U.S.) tax issue, United States Treasury Department Regulations (Circular 230) require that we (and we do hereby) advise and disclose to you that, unless we expressly state otherwise in writing, such tax advice is not written or intended to be used, and cannot be used by you (the addressee), or other person(s), for purposes of (1) avoiding penalties imposed under the United States Internal Revenue Code or (2) promoting, marketing or recommending to any other person(s) the (or any of the) transaction(s) or matter(s) addressed, discussed or referenced herein.  Each taxpayer should seek advice from an independent tax advisor with respect to any Federal tax issue(s), transaction(s) or matter(s) addressed, discussed or referenced herein based upon his, her or its particular circumstances.”

© Lowndes, Drosdick, Doster, Kantor & Reed, PA

The Fiscal Cliff Legislation: An Executive Summary of What You Need to Know

The National Law Review recently published an article, The Fiscal Cliff Legislation: An Executive Summary of What You Need to Know, written by Michael L. Pate and Elizabeth L. McGinley of Bracewell & Giuliani LLP:

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As everyone knows, the American Taxpayer Relief Act of 2012 (aka, the “Fiscal Cliff Deal”) was passed by the U.S. House of Representatives late in the evening on January 1, 2013. The legislation includes provisions related to tax relief, business tax extenders, energy tax extenders, and the federal budget, among other issues.

To help you navigate this legislation, we have prepared documents featuring concise information on these provisions:

  1. A Summary of the Provisions in the American Taxpayer Relief Act of 2012
  2. The Fiscal Cliff Deal: What’s Included, What Isn’t, and What’s Next
  3. Estimated Revenue Effects of the American Taxpayer Relief Act of 2012

© 2012 Bracewell & Giuliani LLP

Operational and Technical Changes for FACTA Compliance – January 30 – February 1, 2013

The National Law Review is pleased to bring you information about the upcoming Global Financial Markets – Operational and Technical Changes for FACTA Compliance:

key topics

  • Assess the full implications of the finalized FATCA regulation
  • Coordinate an optimal approach to operational, infrastructural and technical changes under FATCA
  • Identify strategies to effectively manage client accounts
  • Integrate existing internal procedures with FATCA compliance
  • Understand what is expected by the IRS

key features

  • Pre-Conference Workshop on January 30, 2013 for an Additional Cost:
  • Pre-Conference Workshop: The Intergovernmental Agreements: Changing the Face of International Tax lead by JP&MF Consulting and Mopsick Tax Law LLP

event focus

FATCA is amongst the biggest topics of debate in financial institutions across the globe. The effect that it will have on these institutions cannot be underestimated and its operational impact on the existing systems is set to be both time consuming and costly. The ability to successfully align all key stakeholders, including operations, technology, risk, legal and tax, will determine the ultimate cost of FATCA compliance. Moving on from mere interpretive matters, this GFMI conference will not only address key FATCA requirements but also discuss the practical impacts of IGAs and strategies for achieving operational and infrastructural efficiency.

The Operational and Technical Changes for FATCA Compliance Conference will be a two and half day, industry focused event, specific to Senior Executives working in Banks, Insurance and Asset Management Companies. Attendees will address key FATCA requirements, while discussing the practical implications of IGAs and strategies for achieving operational and infrastructural efficiency.

Key Themes of the Operational and Technical Changes for FATCA Compliance Conference Include:

1. Challenges of FATCA regulations and prospects for the final regulation

2. Achieving operational and infrastructural efficiency

3. Coordinating existing AML/KYC procedures with FATCA compliance

4. FATCA from the FFI’s perspective 5. Beyond banking: the challenges of FATCA implementation

6. Coping with the withholding obligation under FATCA

This is not a trade show; our conference series is targeted at a focused group of senior level executives to maintain an intimate atmosphere for the delegates and speakers. Since we are not a vendor driven conference, the higher level focus allows delegates to network with their industry peers.

Late Action to Avert “Fiscal Cliff” Includes Several Health Policy Changes

MintzLogo2010_BlackAs was widely expected over the month of December, the Obama Administration and Congress scrambled in the late hours of 2012 and on New Year’s Day devising a legislative package to prevent the United States from going over the “Fiscal Cliff,” a series of across-the-board tax increases and spending cuts that would have automatically implemented without intervening legislative action. Although the compromise they reached was far from the “Grand Bargain” that President Obama and many members of Congress were seeking, Vice President Biden and Senate leadership came to an agreement to avoid the cliff for the early part of 2013. The Senate approved the package, the American Taxpayer Relief Act (H.R. 8), by an overwhelmingly bipartisan vote of 89-8 in the early morning hours of New Year’s Day. Later that day, shortly before midnight, the House voted to approve the Senate package by a vote of 257-167, with 85 Republicans joining 172 Democrats in support.

The legislation contains some significant health policy changes, described in more detail below, although its primary purpose is to prevent steep tax increases for 99% of Americans and to delay the automatic “sequestration” spending cuts that were scheduled to go into effect due to an earlier agreement to raise the debt ceiling. In H.R. 8, which the Congressional Budget Office (CBO) estimates will cost around $4 trillion, the sequester is turned off for two months, allowing Congress more time to focus on a comprehensive deficit reduction solution. In addition, current tax rates are permanently extended for all Americans earning up to $400,000 for individuals and $450,000 for married couples. Several other major tax modifications, including some related to the estate tax and capital gains, were also included. Discussion about other aspects of the legislation, including changes to renewable energy programs, may be found here.

The health policy provisions included in the bill fall into two main categories: (1) extension of various health care programs and reimbursement streams under Medicare and other government initiatives, and (2) “offsets” and changes in other programs and payment methodologies to glean savings to cover the costs of the package. A summary of the major health care provisions are as follows.

Summary of Extensions of Health Care Programs/Reimbursement

The most sought-after extender provision in the Act is the so-called “Doc Fix” or physician payment adjustment for Medicare providers. If Congress had failed to act, as of January 1, 2013, reimbursement rates for physicians under the Medicare program would have dropped by about 26.5% based off of the application of the sustainable growth rate (SGR) formula that adjusts Medicare physician reimbursement annually. The effect of the SGR formula, if it is actually implemented, is to decrease, not increase, physician reimbursement. Although there is widespread support for a “permanent fix” to the SGR, the steep costs of not implementing its cumulative reductions leads Congress every year to seek a short-term solution. H.R. 8 freezes the Medicare physician reimbursement rate at its 2012 level until December 31, 2013 with a price tag of about $25 billion over ten years. (A more permanent, albeit expensive, solution for the Doc Fix may be considered in Congress as part of the upcoming debates starting this spring over the debt ceiling increase and continuing resolution.)

In addition to the Doc Fix, several other payment and program extensions were part of the legislative agreement. Some of the more notable provisions include:

  • Ambulance Add-On Payments: This provision continues the base rate payment add-ons for ground ambulance transports through December 31, 2013. Ambulance transports will receive a 2% add-on in urban areas, a 3% add-on for rural areas, and a 22.6% add-on for super-rural areas (a “super-rural area” is defined as a rural county that is among the lowest quartile of all rural counties by population density).
  • Payments for Outpatient Therapy Services: Payments for these services will be capped at $1,880 for any therapy services provided by non-hospital providers. The Act continues to use this limit, but also extends the “exceptions case process” by which providers can receive additional reimbursements if more therapy services are deemed to be medically necessary. The extension lasts until December 31, 2013.
  • Medicare-Dependent Hospital (MDH) Program: H.R. 8 extends the MDH program, which delivers increased reimbursements to small rural hospitals that depend on Medicare payments for a large share of their revenue. The MDH program also supports the development of rural health infrastructure. The extension lasts through the beginning of the next federal fiscal year on October 1, 2013. The Act also extends a payment add-on for low-volume hospitals, which are defined as having fewer than 1,600 Medicare discharges and being at least 15 miles away from the nearest “like-hospital.”
  • Work Geographic Adjustment: Under this provision the existing 1.0 floor on the “physician work” index continues through December 31, 2013, to reflect the geographic differences in cost of resources to provide physician services to Medicare beneficiaries.
  • Medicare Advantage Plans for Special Needs Beneficiaries: The Act extends through 2014 the authority of specialized Medicare Advantage plans to target the enrollment of special needs individuals.
  • Medicare Reasonable Cost Contracts: H.R. 8 allows Medicare Reasonable Cost Contracts to exist through 2014 in areas in which at least two Medicare Advantage coordinated care plans currently operate.
  • Performance Improvement under Medicare: The Act extends funding through 2013 for the Medicare Improvements and Providers Act of 2008 and for outreach and assistance for low-income programs.

Outside of the Medicare program, the Act also has a number of other extensions, including: extending the Qualifying Individual Program, which allows Medicaid to pay Medicare Part B premiums for beneficiaries with incomes between 120% and 135% of the poverty line, until December 31, 2013; extending the Transitional Medical Assistance program, which allows low-income residents to maintain their Medicaid coverage when they start new employment, through December 31, 2013; continuing the Medicaid and CHIP Express Lane option through September 30, 2014; and extending funding for Family-to-Family Health Information Centers and diabetes research, treatment, and prevention programs for American Indians and Alaska Natives.

Summary of Health Care Offsets

In order to offset the projected costs of the extender provisions in the bill, the Act implements cost reductions in Medicare and other government health programs. Most significantly, a provision adjusting the Documentation and Coding of Medicare payments will allow CMS to recoup overpayments that it determines had been made to hospitals, and not yet recovered, as a result of the transition to Medicare Severity Diagnosis Related Groups (DRGs). CMS had been concerned that providers were “over-coding” (providing better documentation and coding of medical records to achieve a higher-weighted DRG) to increase their reimbursements and had instituted a prospective recoupment program covering certain years. This program is now extended. Congress estimates savings of $10.5 billion over ten years. In a separate provision, the Act increases the statute of limitations for recovering overpayments from 3 to 5 years.

Some of the other more notable offsets include the following:

  • End Stage Renal Disease (ESRD) Payments: H.R. 8 makes several changes related to payments for ESRD. It is projected to save $4.9 billion by altering the bundled payment to account for behavioral and utilization changes of dialysis drugs. It also is projected to save $300 million by reducing reimbursement rates by 10% for ambulance services to ESRD individuals receiving non-emergency basic life support services.
  • Medicare Disproportionate Share Hospitals: To save an estimated $4.2 billion, the Act maintains the 75% reduction in the reimbursement rate for Medicare Disproportionate Share Hospitals contained in the Affordable Care Act, and will determine future allotments from this rebased level.
  • Coding Intensity Adjustment: Under current law, Medicare Advantage plans receive a coding intensity adjustment of 3.41%, which reduces those plans’ reimbursement rates so that they more closely match the reimbursement to Medicare fee-for-service plans. This rate factor, determined by the CMS, will be increased to save an estimated $2 billion.
  • Consumer Operated and Oriented Plans (CO-OPs): The Act rescinds all unobligated funds for the CO-OP Program and its plans, which are nonprofit health insurance providers, established by section 1332(g) of the Affordable Care Act. The provision does not take away any obligated CO-OP funds, but it does create a contingency fund consisting of 10% of the current unobligated funds. The contingency fund will be used to help currently approved and created co-ops and will result in an estimated savings of $2.3 billion.
  • CLASS Repeal: The Act repeals the Community Living Assistance Services and Supports (CLASS) program established by the ACA and championed by the late Sen. Ted Kennedy (D-MA). Although in October 2011 the Obama administration suspended the long-term care insurance program in which workers would have paid monthly premiums during their careers to create a cash-bank in case of disability later in life, many Democrats had hoped to revive the program someday. H.R. 8 repeals the CLASS Act, although doing so provided no savings. In its place, the Act creates a Commission on Long-Term Care to develop a plant for the establishment, implementation and financing of a system to make long-term care services and support available for individuals. The Commission has no scoring effect.
  • Medicare Improvement Fund: The Act eliminates the Medicare Improvement Fund for an estimated savings of $1.7 billion.
  • Multiple Therapy Procedure Payment Reduction: The Act reduces payments for physical and other therapy services when they are provided in the same day for an estimated savings of $1.8 billion.
  • Advanced Imaging Services Adjustment: The Act increases the utilization factor used in the setting of payment for imaging services in Medicare from 75% to 90%, which is projected to save $800 million.
  • Competitive Bidding Rates Applicable for all Diabetic Supplies: The Act applies competitive bidding payment rates to diabetic test strips purchased at retail pharmacies for an estimated savings of $600 million.
  • Radiology Services Adjustment: The Act reduces payments for stereotactic radiosurgery services paid for under the Medicare hospital outpatient system, which is expected to save $300 million.

Although the American Taxpayer Relief Act has prevented the country from going over the “fiscal cliff,” the 113thCongress will almost certainly continue to focus on health care cost containment and entitlement reform in the coming weeks and months. Mintz Levin and ML Strategies will continue to closely monitor the effect of fiscal policy on health care.

©1994-2012 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.

The Effect of the Fiscal Cliff Deal on Estate Planning

An article by Susan C. Minahan with Michael Best & Friedrich LLP, The Effect of the Fiscal Cliff Deal on Estate Planning, was recently featured in The National Law Review:

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In an attempt to avert the “fiscal cliff” at the end of 2012, the American Taxpayer Relief Act of 2012 (the “2012 Act”) was passed by Congress on January 1, 2013, and signed into law by the President on January 2, 2013. The 2012 Act has significant impact on all taxpayers, and is a game changing piece of legislation in the estate, gift, and generation-skipping transfer tax area.

The 2012 Act permanently extends the $5,000,000 unified federal estate, gift, and generation skipping transfer (GST) tax exemptions implemented under the 2010 Tax Relief Act for all such transfers occurring after December 31, 2012. All three exemptions are indexed for inflation. As a result, the exemption amounts in 2013 are $5,250,000. The 2012 Act increases the maximum tax rate from thirty-five percent (35%) to forty percent (40%) for any transfers in excess of the exemption amounts.

The 2012 Act also permanently extends portability of unused estate tax exemption for married couples. Portability, a concept introduced in the 2010 Tax Relief Act, allows a surviving spouse to “port” or add a deceased spouse’s unused estate tax exemption amount to the surviving spouse’s exemption amount without the use of a traditional credit shelter trust. However, portability, as noted in our client alert dated December 20, 2010, should not be solely relied on as an estate planning substitute for several reasons. First, the ported amount can be lost if the surviving spouse remarries. Second, portability does not provide the same asset protection after the first spouse’s death that is provided by traditional credit shelter trust planning. Third, portability does not apply to the GST exemption; therefore, to leverage GST planning, careful dynasty trust planning is still necessary.

It should be noted that the exemptions are “permanent” only as long as Congress chooses not to change them (no tax law change should ever be considered “permanent” with a new Congress every two years).

In light of the 2012 Act and the current estate planning environment, estate planning is still necessary, and the following are continuing opportunities for transferring wealth:

Low Interest Rate Planning

Historically low interest rates continue to present the opportunity for intra-family low interest loans or refinancing of low interest intra-family loans. The January 2013 mid-term applicable federal rate (for 3-9 year loans) is 0.87%. Low interest rate loans can also be combined with gifting, resulting in larger tax free transfers. Sales to intentionally defective grantor trusts (IDGTs) and grantor retained annuity trusts (GRATs) are commonly used techniques for this type of planning, and the 2012 Act fortunately did not impose limits on GRATs, IDGTs or valuation discounts that had been proposed earlier. Congress may impose limits on the use of these techniques in the future, but at least for the time being, the window of opportunity for these techniques remains open.

GST Planning

Dynasty trusts that utilize the GST exemption can be used to transfer assets from generation to generation for multiple generations of a family, avoiding estate, gift, and GST tax at each generation. With the high exemptions, a single person can protect $5,250,000 and a married couple can protect $10,500,000, indexed for inflation, in this manner. In addition, as previously noted, GST exemption is not “portable” and therefore, dynasty trusts are important for married couples in protecting the GST exemption of each spouse. Limitations on the number of years a dynasty trust can run were also not part of the 2012 Act.

Asset Protection

Trusts remain an important part of estate planning, even for smaller estates, because they provide means of asset protection. Trusts can be used to protect assets from a beneficiary’s creditors, including a divorcing spouse. Trusts can also protect assets in the event a beneficiary becomes disabled. Lifetime irrevocable trusts also provide an estate and gift tax “freeze” for a donor’s estate at the value of the trust as of the date of the lifetime gift.

Annual Gifts

In addition to the lifetime gift tax exemption, each taxpayer may make annual exclusion gifts to any number of donees. The annual exclusion was indexed for inflation with the 2001 Act, and in 2013 the annual gift tax exclusion amount is $14,000 per donee.

The following are some other notable provisions of the Act that impact individuals:

  • Extends tax cuts for individuals with incomes under $400,000 and married couples under $450,000;
  • Raises the ordinary income tax rate from 35% to 39.6% for individuals with income over $400,000 and married couples with income over $450,000;
  • Raises capital gains and dividend tax from 15% to 20% for individuals with income over $400,000 and married couples with income over $450,000;
  • Overall limit on itemized deductions are reinstated for individuals with income over $250,000 and married couples with income over $300,000, which may impact lifetime charitable giving plans;
  • Permanently indexes the alternative minimum tax (AMT) for inflation;
  • Expands employees’ ability to convert traditional retirement accounts such as 401(k)s and 403(b)s into Roth accounts; and
  • Extends through 2013 the tax free IRA “rollover” to qualifying charities after age 70½ (Note: special rules relate to actions that may be taken in January of 2013 to treat contributions as being made during 2012).

© MICHAEL BEST & FRIEDRICH LLP

Fiscal Cliff Legislation Extends Production and Investment Tax Credits

The National Law Review recently published an article, Fiscal Cliff Legislation Extends Production and Investment Tax Credits, written by Alexander W. Jones of Bracewell & Giuliani LLP:

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The fiscal cliff legislation temporarily ends the uncertainty surrounding the extension of tax credits related to wind facilities that generate electricity. Under current law, the production tax credit (the “PTC”) applied to wind facilities that were operational by the end of 2012. The legislation amends the Code and provides that such PTC is available for wind facilities “the construction of which begins before January 1, 2014.” A wind facility typically cannot be planned and constructed within a calendar year, thus, the amended language could significantly increase the amount of facilities that are eligible to qualify for the PTC and cause an even greater demand in 2013 for wind turbines and other equipment necessary to generate electricity.

In addition, the fiscal cliff legislation extends the provision that allows developers and investors involved with wind facilities to elect to receive the investment tax credit (the “ITC”) in lieu of the PTC. The existing ITC provides for an immediate 30% tax credit in the year the facility is placed into service instead of the 2.2 cents per kilowatt hour PTC that is available for the 10 year period commencing when the wind facility is operational. The ability to elect to receive the ITC instead of the PTC will apply to most wind facilities that commence construction prior to January 1, 2014. The extension of such election should cause an increased amount of wind facility transactions to be partially financed by tax equity investors that prefer to take into account the ITC when the facility is completed.

The extension of the PTC and the amendment expanding the scope of wind facilities that are eligible to qualify for the PTC will be welcome by wind developers and investors and may result in increased investment in wind electricity in 2013. However, because the extension applies only for one year, there remains little certainty that the PTC will continue to be available for wind facilities the construction of which begins after 2013.

© 2012 Bracewell & Giuliani LLP