| ’Tis
the (Tax) Season
JANUARY
2007 - Another holiday season is over and a new tax season
has begun. CPAs all over the country are sharpening their
pencils and revving up their calculators. Did I just write
that out loud? What I meant to say was: They’re installing
their tax preparation software. Things have changed considerably
over the past 30 or so years.
For
example, the dollar amounts for a variety of tax provisions
must be revised each year to keep pace with inflation. As
a result, taxpayers will see a rise in personal exemptions
and standard deductions, an escalation of tax brackets,
and an increase in income limits for IRAs in 2007.
One
thing that hasn’t changed is the preference of most
taxpayers to receive a refund. Most don’t comprehend
the fundamental premise that receiving an income tax refund
is tantamount to giving the government an interest-free
loan during the year. Nevertheless, my guess is that most
CPAs have experienced this pressure at some time during
their career from their clients. Some may have even felt
the need to use creative means to accomplish this goal.
Beware—the IRS is watching!
The
IRS is also keeping a closer eye on charitable donations.
The recently passed Pension Protection Act of 2006 changed
the recordkeeping requirements for taxpayers who claim a
deduction for cash contributions. If the contributions are
made by payroll deductions, the taxpayer needs to retain
a paystub, Form W-2, or other employer-provided document.
The document should show the total amount withheld for payment
to the charity and include a pledge card indicating the
name of the charity. For calendar-year taxpayers, application
of this rule begins in 2007.
Abusive
tax shelters have been a hot item on the IRS’s “naughty”
list. These schemes often use multiple flow-through entities,
such as trusts, limited liability companies (LLC), or limited
liability partnerships (LLP), to conceal the true nature
and ownership of income or assets for the purpose of evading
taxes. “Form over substance” should be the effective
guideline here. An arrangement that promises to eliminate
or substantially reduce tax liability should be reviewed
carefully. As the adage says, “If it sounds too good
to be true, it probably is.”
A
Potential Pandora’s Box
But
the most interesting development in 2006 was the issue of
patenting tax advice. You’re probably asking yourself,
How could this happen? A U.S. appeals court ruled in 1998
that “business methods” could be patented, and
50 tax-reduction strategy patents, primarily in the area
of gift and estate taxation, have since been issued by the
U.S. Patent and Trademark Office. To be granted a patent,
a tax strategy must be considered novel, nonobvious, and
useful. The fact that a tax strategy has been patented,
however, doesn’t have any bearing on whether the IRS
or the courts would find it legal. This could be extremely
confusing for taxpayers who might assume a patent means
the strategy has been approved by the government.
The
patenting of tax strategies can lead to confusing situations
for tax advisors as well. Earlier this year, Wealth Transfer
Group sued the executive chairman of Aetna for using a tax-savings
technique without paying a licensing fee for a strategy
that it patented. The technique involved the transfer of
stock options to a certain type of trust. An attorney representing
the defendant contends that the strategy used in this case
was clearly obvious and authorized in the tax law and, therefore,
not patentable. It’s reasonable to ask whether the
Patent Office has a knowledge of tax law sufficient to review
patent applications for tax shelters.
It
is also unclear how patent protection applies, as a practical
matter, to tax strategy. For example, what are the implications
when a tax advisor and taxpayer are unaware of the existence
of a patent on a particular strategy they have independently
decided to use? Furthermore, does the infringement occur
at the time the tax advisor discusses tax planning with
the client, at the time the tax planning structure is implemented,
or at the time the taxpayer’s return is filed?
I admit,
the idea of patenting a means to comply with federal tax
law seems perverse, and the motives of firms that would
do so seem strangely Machiavellian and opportunistic. It’s
not clear whether Congress will take action anytime soon
on this issue, but the patenting of tax advice is sure to
elicit strong feelings on both sides for the foreseeable
future.
As
always, I welcome your comments and suggestions.
Mary-Jo
Kranacher, MBA, CPA, CFE
Editor-in-Chief
mkranacher@nysscpa.org
|