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Year-End Tax Review and Recent Legislative Happenings
By Paul Santos and Patrick J. Lavoie CPA
Through this space in this newsletter, we at Parent, McLaughlin & Nangle try to make our clients and other contacts and friends aware of the changing tax landscape as it is happening and occassionally promise updates when changes are still pending. For this year-end edition, we wanted to take a look back at a few recent articles written and give you the ultimate outcome or other progression of the law concerning the subject matter of those articles.
AMT Reform?
An article written in February of 2007 by Russell O. Coon, CPA detailed how the Democratic Chair of the Senate Finance Committee (Max Baucus D-MT) and some Republican Senators introduced legislation to repeal the Individual Alternative Minimum Tax (the "AMT") effective January 1, 2007. We wondered back then if this tax bill introduced in the Senate had any legs. The answer was "not yet" and the ultimate result was not a repeal of the AMT as outlined in the bill, but a widely publicized one-year "patch" outlined in The 2007 Tax Increase Prevention Act to keep the AMT exemptions for individuals in 2007 at a rate indexed for inflation over the 2006 AMT exemption amounts (read: slightly more). Although this topic will almost undoubtedly come up again in 2008, for now, this patch allows an estimated 25 million Americans to sleep better knowing they will not be subject to an average $2,000 increase in their federal tax bill.
Tax Strategy Patents
An article written back in August of 2007 by Patrick J. Lavoie, CPA covered the surge in recent years of tax stategy business method patents both issued and applications pending at the US Patent and Trademark Office. There was wide-spread concern among tax practitioners over allowing patents for tax planning business methods (i.e. tax-saving strategies) and how this procedure would create a climate of uncertainty for practitioners and their clients. As covered in the previous article, the American Institute of Certified Public Accountants (AICPA) sent letters to Congressional tax-writing committees urging both Houses of Congress to pass legislation to restrict patents on tax strategies. According to the AICPA, if patents were not restricted by this bill, it would complicate the process of providing tax advice and could possibly mislead taxpayers into thinking a patented tax strategy was valid under Federal tax law.
Since the original article was penned, we are pleased to report there has been some progress to disallow new patent applications for tax strategies. On September 7th, a bill titled the Patent Reform Act of 2007 was passed by the U.S. House of Representatives with a vote of 220-175, and Section 10 of this bill contains provisions that would deem tax planning methods to be unpatentable subject matter. The bill is now in consideration in the U.S. Senate and if passed there would have to be signed into law by the President, so the bill still has a way to go in the process before it becomes law. In seeming response to the House's positive vote in September, however, the IRS issued Proposed Regulations which would add patented transactions to a list of "reportable transactions" requiring taxpayers to disclose their participation in such transactions by attaching information statements to their tax returns for the year in which the transactions took place. So, although not a done deal, it is safe to say the noose is tightening on the patenting of tax strategies.
Section 409A deferred compensation plans
An article written in November 2004 by Shannon L. Bollin, CPA addressed sweeping changes Congress had enacted to the tax treatment of nonqualified deferred compensation arrangements. In general, section 409A of the Internal Revenue Code requires all compensation deferred under a qualified deferred compensation plan for the taxable year and all preceding taxable years to be included in gross income for the taxable year (i.e., immediately) to the extent the plan fails to meet stringent requirements outlined in the law. Enacted by The American Jobs Creation Act of 2004 (AJCA), section 409A imposed new requirements on how elections to defer compensation were to be made, limitations on the timing of distributions, and the amendments needed in existing plan documents to comply with these new requirements, to name a few. Right away, the IRS needed to provide some sort of guidance for transitional relief to existing plans; otherwise, by their very wording, these plans would have been in violation of the letter of the new law as of January 1st, 2005 only a few months after the AJCA became law. Through Notices and most recently Final Regulations issued previously this year, the IRS has provided this transitional guidance which essentially gave plan administrators until December 31, 2007 in which to analyze and make informed decisions about their plans in order to amend them to be in compliance with section 409A and the new Final Regulations. On October 22, 2007 the IRS issued Notice 2007-86 intending to permit and promote compliance with the requirements of section 409A, which extended the transitional relief currently scheduled to expire on December 31, 2007 through December 31, 2008.
If you would like to discuss these subjects further, please contact Paul Santos (psantos@pmn.com), Patrick Lavoie (plavoie@pmn.com) or any member of our tax service team at (617) 426-9440.
Note: This article represents a general overview of or opinion on certain tax issues or developments and should not be relied upon without an independent, professional analysis of how any of these provisions may apply to a specific situation. We recommend you consult your professional tax advisor before taking any action based on anything in this article.
IRS CIRCULAR 230 NOTICE: In compliance with U.S. Treasury Circular 230 Regulations and any applicable state laws, we hereby notify you that any tax advice contained in the body of this document, or attachments thereto, was not intended or written to be used, and cannot be used, by the recipient or any other party for the purpose of (1) avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions, or (2) promoting, marketing or recommending to another party any transaction or matter addressed herein.
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