Federal Tax Bulletin - Issue 102 - November 20, 2015

IRS Issues Safe Harbor Method for Restaurant and Retail Store Remodeling Projects

The IRS has issued guidance providing certain taxpayers engaged in the trade or business of operating a retail establishment or a restaurant with a safe harbor method of accounting for determining whether expenditures incurred to remodel or refresh a qualified building can be deducted currently or must be capitalized. Rev. Proc. 2015-56 (11/19/15).

The new procedures, issued by the IRS on Thursday, should benefit many restaurants and retail stores that either are, or will be, renovating their space. Rev. Proc. 2015-56 provide a safe harbor method aimed at reducing disputes on the deductibility or capitalization of remodel-refresh costs. Under the safe harbor, restaurant and retail store owners may determine the portions of their remodel-refresh costs that may be deducted or must be capitalized. The new rules will minimize the need to perform a detailed factual analysis to determine whether each remodel-refresh cost incurred during a remodel-refresh project is for repair and maintenance or for an improvement.

In addition, because the new safe harbor method applies to the entire building unit of property, it eliminates the need to apply these rules separately to each building structure and each building system designated as a unit of property under the capitalization rules. Moreover, the safe harbor eases the factual inquiry into determining whether costs incurred during a remodel-refresh project adapt property to a new or different use, requiring qualified taxpayers to exclude from the safe harbor only amounts that adapt more than 20 percent of the total square footage of the building to a new or different use.

Observation: To properly apply the capitalization rules, many businesses engage firms to prepare cost segregation analyses since CPAs don't have the credentials or time to prepare such an analysis. Thus, the new rules have the added benefit of saving restaurant businesses money they might otherwise have to spend such an analyses.

Practice Tip: Rev. Proc. 2015-56 is effective for tax years beginning on or after January 1, 2014. Practitioners will want to review these rules if they have restaurant clients that have recently incurred remodel-refresh costs and have already filed returns to see if amended returns are in order.

In order to use the safe harbor, taxpayers must have an applicable financial statement, which for many taxpayers means an audited financial statement.

Background

Taxpayers operating in the retail and restaurant industries regularly incur expenditures to remodel or refresh their buildings (a "remodel-refresh project"). Generally, a retail or restaurant taxpayer undertakes a remodel-refresh project to remain competitive and to improve the customer experience.

These projects typically involve a planned undertaking to alter the physical appearance and layout of the building to maintain a contemporary and attractive environment, to more efficiently locate different functions and products, to conform to current industry standards and practices, to standardize the customer experience, to offer the most relevant goods, food, or beverages, and to address changes in demographics by changing offerings and their presentation. Typically, taxpayers also perform routine repairs and maintenance during a remodel-refresh project.

Code Sec. 162 generally allows a deduction for all the ordinary and necessary expenses paid or incurred during the tax year in carrying on any trade or business, including the costs of repairs and maintenance. Code Sec. 263(a) generally requires the capitalization of amounts paid to acquire, produce, or improve tangible property.

Reg. Sec. 1.162-4 allows taxpayers to deduct amounts paid for repairs and maintenance of tangible property if the amounts are not otherwise required to be capitalized. Reg. Sec. 1.263(a)-3 generally requires taxpayers to capitalize amounts paid to improve a unit of property. Reg. Sec. 1.263(a)-3(d) defines improvements as amounts paid that are for a betterment to a unit of property, that restore a unit of property, or that adapt a unit of property to a new or different use.

In addition, Code Sec. 263A requires the capitalization of the direct and allocable indirect costs of real or tangible property produced by a taxpayer for use in its trade or business or acquired for resale. Thus, the rules under Code Sec. 263A require taxpayers to apply an additional analysis to their remodel-refresh projects to determine which costs must be capitalized.

Because remodel-refresh projects frequently involve work performed on building structures and a variety of building systems, the tangible property regulations generally require taxpayers performing remodel-refresh projects to apply separate legal analyses to many different components of the building. Consequently, taxpayers frequently encounter questions regarding whether the costs for a particular remodel-refresh project should be characterized as repairs, maintenance, or an improvement of the taxpayers' property, causing taxpayers to expend significant resources on this factually intensive issue.

To reduce disputes regarding the deductibility or capitalization of remodel-refresh costs, Rev. Proc. 2015-56 provides a safe harbor approach under which qualified taxpayers may determine the portions of their remodel-refresh costs that may be deducted or must be capitalized for purposes of Code Secs. 162(a), 263(a), and 263A(b)(1).

Compliance Tip: Taxpayers wishing to avail themselves of the safe harbor must use the automatic change procedures in Rev. Proc. 2015-13.

Taxpayers Qualified to Use the Safe Harbor

The Rev. Proc. 2015-56 remodel-refresh safe harbor applies to a qualified taxpayer that pays qualified costs in the course of performing a remodel-refresh project on a qualified building. Definitions for those terms are as follows.

For purposes of the safe harbor, a qualified taxpayer is one who has an Applicable Financial Statement (as defined under Reg. Sec. 1.263(a)-1(f)(4)), and that:

(1) Is in the trade or business of selling merchandise to customers at retail; or

(2) Is in the trade or business of preparing and selling meals, snacks, or beverages to customer order for immediate on-premises and/or off-premises consumption.

Qualified taxpayers do not include motor vehicle dealers, manufacture home dealers, nonstore retailers, taxpayers primarily in the trade or business of operating hotels, amusement parks, casinos, and caterers and food service contractors.

A qualified building is each building unit of property used by a qualified taxpayer primarily for selling merchandise to customers at retail or primarily for preparing and selling food or beverages to customer order for immediate on-premises and/or off-premises consumption.

A remodel-refresh project means a planned undertaking by a qualified taxpayer on a qualified building to alter its physical appearance and/or layout in order to, among other reasons, maintain a contemporary and attractive appearance, more efficiently locate retail or restaurant functions and products, and to conform to current retail or restaurant building standards and practices.

A remodel-refresh project does not include a planned undertaking solely to repaint or to clean the interior or exterior of an existing qualified building.

Remodel-refresh costs mean amounts paid by a qualified taxpayer for remodel, refresh, repair, maintenance, or similar activities performed on a qualified building as part of a remodel-refresh project.

Remodel-Refresh Safe Harbor Method

The remodel-refresh safe harbor method of accounting determines the amount of the qualified costs that are deducted under Code Sec. 162 and the amount of such costs that are required to be capitalized under Code Secs. 263(a) and 263A. The safe harbor also provides for the treatment of the capitalized amount for depreciation and disposition purposes. Subject to certain exceptions, the remodel-refresh safe harbor applies to all of the qualified taxpayer's qualified costs paid during the tax year, and in general a taxpayer who uses the remodel-refresh safe harbor is required to use the method for all of its qualified costs.

To use the remodel-refresh safe harbor, the qualified taxpayer must comply with six separate requirements.

First, the qualified taxpayer must treat 75% of its qualified costs paid during the tax year as amounts deductible under Code Sec. 162(a) ("the deduction portion") and must treat the remaining 25% of its qualified costs paid during the tax year as costs for improvements to a qualified building under Code Sec. 263(a) and as costs for the production of property for use in the qualified taxpayer's trade or business under Code Sec. 263A ("the capital expenditure portion").

Second, the qualified taxpayer must document its qualified costs in a manner substantially similar to the standard set forth in Appendix A of Rev. Proc. 2015-56.

Third, the capital expenditure portion must be charged to a capital account. The capital expenditure portion for each qualified building is a separate asset or assets for depreciation purposes and is depreciated under Code Secs. 167 and 168 beginning when the capital expenditure portion is placed in service by the qualified taxpayer. The qualified taxpayer must make an election to include the capital expenditure portion in a general asset account.

Fourth, a qualified taxpayer must not make the partial disposition election under Reg. Sec. 1.168(i)-8(d)(2) for any portion of an original qualified building or any portion of any improvement or addition to an original qualified building. If a qualified taxpayer had previously made the partial disposition, prior to the first tax year that the qualified taxpayer uses the remodel-refresh safe harbor, the qualified taxpayer must revoke that partial disposition election.

The fifth requirement applies to a qualified taxpayer that recognized a gain or loss upon the disposition of a component of a qualified building, a structural component of a qualified building, or a component of such structural component (1) under Reg. Sec. 1.168(i)-1T or Reg. Sec. 1.168(i)-8T if that component or structural component is not an improvement or addition, or (2) in a tax year beginning before January 1, 2012, if that component or structural component is MACRS property. Such qualified taxpayer must change its present method of accounting to be in accord with Reg. Sec. 1.168(i)-1(e)(2)(viii) or Reg. Sec. 1.168(i)-8(c)(4) (determination of asset disposed of), on or before the first tax year that the qualified taxpayer uses the remodel-refresh safe harbor, and take the entire amount of the Code Sec. 481(a) adjustment into account in computing the qualified taxpayer's taxable income for that year of change.

Six, a qualified taxpayer must make a general asset account election under Code Sec. 168(i)(4) and Reg. Sec. 1.168(i)-1(l) to include in a general asset account any asset that is MACRS property and that comprises a qualified building.

Amounts paid to which the qualified taxpayer applies the remodel-refresh safe harbor are not capitalized separately under Code Sec. 263A(a)(1)(B) and (b)(1) as a direct or indirect cost of producing property used in the qualified taxpayer's trade or business.

A qualified taxpayer that uses the remodel-refresh safe harbor may not elect to apply the safe harbor for small taxpayers under Reg. Sec. 1.263(a)-3(h), nor the safe harbor for routine maintenance under Reg. Sec. 1.263(a)-3(i) for amounts paid for costs that are subject to the remodel-refresh safe harbor method.

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Court Rejects IRS Arguments Aimed at Limiting Taxpayers' Real Estate Losses

A recent district court decision is good news for taxpayers with multiple real estate activities and ancillary businesses. In Stanley v. U.S., 2015 PTC 407 (W.D. Ark. 2015), the IRS tried various arguments, which the court struck down, to prevent a couple from deducting rental real estate losses against non-passive income. For example, the court rejected a novel attempt by the IRS to use Code Sec. 83 to deny that the taxpayer had ownership of 10 percent of a real property trade or business. The court rejected the IRS's argument that, in order for the taxpayer to substantiate his claim that he was a real estate professional, he needed to keep track of time spent using a minimum of two categories: activities in real property trades or businesses and activities not in real property trades or businesses.

With respect to the issue of grouping activities, the court dismissed IRS attempts to use Reg. Sec. 1.469-9(e)(3)(i) to categorically bar a real estate professional from grouping rental and non-rental activities for purposes other than material participation, including for purposes of determining passive activity loss and credit.

The case is useful as a roadmap for taxpayers with multiple rental properties and businesses as to what the IRS may attempt to argue to prevent taxpayers from taking losses against non-passive income and how taxpayers can rebut those arguments.

Background

Before February 1, 1994, Roy Stanley practiced law, primarily representing real-estate clients and financial institutions. On February 1, 1994, Roy began working full time as President of Lindsey Management Co., Inc., (LMC), a property-management company organized as an S corporation. Between February 1, 1994, and August 14, 2009, Roy also acted as general counsel for LMC. From 1996 through 2010, Roy also served as President of Lindsey Communications, Inc. (LCI), a company that provided telecommunications services to certain properties managed by LMC. By 2009 Roy worked only half time at LMC, and at the end of 2010 he retired from LMC.

From the beginning of Roy's employment with LMC, the Stanleys acquired minority ownership interests in business entities that owned or operated the rental properties and adjoining golf courses managed by LMC. By 2009 and 2010, the Stanleys had an ownership interest in more than 100 entities. They also directly owned two rental properties, 2 percent of a third rental property, and interests in more than 85 additional entities through the Roy E. Stanley Family Limited Partnership. For 2009 and 2010, the Stanleys elected to group their real estate activities and reported all income and losses resulting from these ownership interests as non-passive on their Schedules E. Upon his resignation from LMC, and pursuant to his employment agreement, Roy transferred his stock back to James Lindsey, a majority owner.

When the IRS audited the Stanleys' 2009 and 2010 returns, it reclassified all of the Schedule E income and losses (except for those related to Roy's income from LMC) as passive, increasing the Stanleys' liabilities for those years. The Stanleys paid the additional assessed tax over $120,000 and filed for a refund in a district court.

The Stanleys' Arguments

Before the district court, the Stanleys argued that the IRS had erroneously regrouped their Schedule E activities and reclassified non-passive activity as passive. Specifically, the Stanleys asserted that for 2009 and 2010: (1) Roy was a qualifying taxpayer or "real estate professional," as he met the requirements set out in Code Sec. 469(c)(7); (2) the Stanleys' rental real estate activities and business activities could be grouped pursuant to Reg. Sec. 1.469-4(d)(1); (3) the Stanleys appropriately aggregated their rental real estate activities pursuant to Reg. Sec. 1.469-9(g); and (4) the aggregated rental real estate activities together with the grouped business activities should be classified as non-passive because Roy materially participated in the grouped "activity" in accordance with the criteria set forth in Reg. Sec. 1.469-5T(a).

The IRS's Arguments

The IRS argued that the Stanleys were not entitled to a refund because the IRS appropriately re-characterized their Schedule E activities as passive for tax years 2009 and 2010. In support of their position, the IRS contended that: (1) Roy was not a 5 percent owner of LMC as would be required for his services performed as an employee of LMC to constitute material participation in a real property trade or business; (2) Roy did not qualify as a real estate professional; (3) the Stanleys' Schedule E activities were not appropriately grouped; (4) Roy did not materially participate in an appropriately grouped activity as required to show non-passive income or loss; and (5) Roy did not adequately substantiate that (a) he was a 5 percent owner in LMC, (b) he qualified as a real estate professional, (c) he appropriately grouped rental activities with non-rental activities, or (d) he materially participated in any appropriately grouped activity.

Rental Real Estate Losses in General

Generally, under Code Sec. 469(c), rental activities are considered passive activities, regardless of the level of participation by a taxpayer. Thus, losses from a rental activity are generally deductible only to the extent of passive income. However, under Code Sec. 469(c)(7)(B), a taxpayer in the real property business can deduct losses from that business for a tax year, and the rental activity of the taxpayer is not treated as per se passive, if the taxpayer is treated as a real estate professional because the taxpayer meets the following requirements:

(1) more than one-half of the personal services performed in trades or businesses by the taxpayer during the tax year are performed in real property trades or businesses in which the taxpayer materially participates; and

(2) the taxpayer performs more than 750 hours of services during the tax year in real property trades or businesses in which the taxpayer materially participates (Code Sec. 469(c)(7)(B)).

In addition, personal services performed as an employee are not treated as performed in real property trades or businesses, but this rule does not apply if such employee is a 5-percent owner (as defined in Code Sec. 416(i)(1)(B)) in the employer.

Five Percent Ownership Analysis

The district court began its analysis by determining if Roy was at least a 5 percent owner of LMC such that his services performed as an employee of LMC could be treated as performed in a real property trade or business for purposes of determining if Roy was a "qualifying taxpayer" under Code Sec. 469(c)(7).

The IRS first argued that any income Roy received as a portion of LMC's profits was more properly characterized as direct salary income and was not indicative of ownership in the company. Roy testified that, from the time he began working at LMC in 1994, he owned 10 percent of the company. He admitted into evidence a stock certificate evidencing his ownership of 10 shares out of 100 shares of LMC stock issued and testified under oath that his stock in LMC was voting stock.

The court concluded that Roy adequately and reasonably substantiated his ownership in LMC for purposes of the Code. Furthermore, the court added, the fact that Roy did not make a capital contribution for his shares, as the IRS had argued, was not determinative of whether he nevertheless owned 10 percent of the stock of LMC since a capital contribution is merely one avenue of acquiring ownership of stock or other property.

Because LMC is an S corporation, the IRS alternatively argued that it was a corporate employer and Roy was required, pursuant to Code Sec. 416(i)(1)(B)(i)(I), to have owned 5 percent of the outstanding stock of LMC for 2009 and 2010 for him to count his work as an employee of LMC towards the participation required to be a real estate professional. The IRS argued that Roy's stock was restricted in that he was required to surrender it, pursuant to his employment agreement with LMC, either at the end of his employment or five years after his disability or death. Because of this restriction, the IRS said, Roy could not transfer his stock to anyone other than back to LMC or to James Lindsey. In advancing its argument that Roy did not own outstanding stock, the IRS relied on Code Sec. 83, which provides guidance for when a taxpayer should report gross income for property received in connection with the performance of services.

The district court rejected the IRS's reliance on Code Sec. 83, saying that the provision provided no authoritative, or even persuasive, guidance on the issue of whether Roy was a 5-percent owner of LMC. The court concluded that, in the ordinary understanding of the term "outstanding stock," Roy owned 10 percent of outstanding LMC stock.

Whether Roy Qualified as a Real Estate Professional

The court then addressed whether Roy satisfied the requirements to be considered a real estate professional who is, thus, not subject to the per se passive activity rule for rental real estate activities. The court began by noting that it was undisputed that (1) Roy spent over half of his working time performing services for LMC, as Roy had no employment other than his employment at LMC; (2) Roy performed more than 750 hours of services as an employee of LMC in 2009 and 2010; and (3) LMC was a real property management business. The court also found that Roy materially participated in LMC for tax years 2009 and 2010, as he spent more than 500 hours participating in the activity during each year.

The court rejected the IRS's argument that, in order for Roy to substantiate his claim that he was a real estate professional, he needed to keep track of time spent using a minimum of two categories: activities in real property trades or businesses and activities not in real property trades or businesses, such as the provision of legal services. Code Sec. 469, the court noted, does not require that the services performed in a real property trade or business be of any specific character or that all such services must be directly related to real estate. Rather, the court said, the services must simply be performed in real property trades or business in which the taxpayer materially participates. Because LMC was a real property business in which Roy materially participated, the court concluded that Roy satisfied the requirements of Code Sec. 469(c)(7) and was thus a real estate professional for 2009 and 2010.

Grouping Activities

With respect to the issue of grouping activities, the court noted that Reg. Sec. 1.469-9(e)(3)(i) bars grouping only for purposes of determining material participation and does not categorically bar a real estate professional from grouping rental and non-rental activities for other purposes, including for purposes of determining passive activity loss and credit.

After rejecting the IRS's interpretation that Reg. Sec. 1.469-9 prevented the Stanleys from grouping their aggregated rental activity with any other non-rental activity, the court analyzed whether the Stanleys' grouping of their Schedule E activities was appropriate under Reg. Sec. 1.469-4. Under Reg. Sec. 1.469-4(c)(1), the court noted, one or more trade or business activities or rental activities may be treated as a single activity if the activities constitute an appropriate economic unit for the measurement of gain or loss for purposes of Code Sec. 469. The Stanleys grouped their aggregated rental activity with other trade or business activities, including LMC, LCI, and the activity of golf courses adjoining LMC-managed properties.

After considering the relevant facts and circumstances, the court first found that the Stanleys' rental activity, LMC, LCI, and the golf courses formed an appropriate economic unit. According to the court, while there were certainly significant differences in the types of services offered by the rental properties, LMC, LCI, and the golf courses, all four services worked in concert in connection with the same trade or business category: rental real estate. The court also found that LMC, LCI, and the golf activities were insubstantial in relation to the rental activity. However, the court did exclude from the grouping several non-operational activities.

Material Participation

With respect to the IRS argument that Roy did not materially participate in an appropriately grouped activity as required to show non-passive income or loss, the court concluded that Reg. Sec. 1.469-9(e)(3)(ii) should be read to allow all work engaged in by Roy for the benefit of LMC to be counted as work performed in managing Roy's own rental real estate interests such that Roy's time at LMC should be counted towards determining whether he materially participated in his rental real estate activity. According to the court, it would be unreasonable, in the limited scenario presented by this case of a real estate professional who works at a real estate management company and also has ownership interests in the vast majority of properties managed by the company, to delineate the time he spent on an individual property, especially where much of the work performed by Roy was done for the benefit of multiple properties or LMC generally. Thus, the court concluded that Roy materially participated in the grouped activities.

For a discussion of the passive activity loss rules, including real estate professional requirements and grouping activities, see Parker Tax ¶ 247,100.

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Sports Team Didn't Produce Game Broadcasts, Wasn't Entitled to DPGR Deductions

The IRS advised that a sports team's share of gross receipts from a contract with a television network did not qualify as domestic production gross receipts (DPGR), and thus the team was not entitled to deductions under Code Sec. 199. The IRS determined that the network had the benefits and burdens of ownership of the game broadcasts, which meant that the network, and not the team, was the producer of the broadcast. CCA 201545018.

Background

A taxpayer is one of multiple teams in a sports league, which acts as an agent on behalf of all the teams. The taxpayer and the other teams each own rights to broadcast their games and the teams choose to pool their individual broadcast rights in order to assign and license the collective rights for national television broadcasting.

In the years at issue, the league licensed certain television broadcasting rights to multiple networks, and the networks generated revenues from the purchased rights by selling advertising aired during live broadcasts. The league serves as the teams' agent in negotiating contracts with the networks.

Under the facts of CCA 201545018, the league entered into a contract with a television network, granting the network the right to produce a specific package of league game broadcasts (game package), and deliver the broadcasts live. The contract required the network to "produce" a specified number of game broadcasts per week, including a live broadcast, and the network was obligated to deliver the live broadcast within a defined geographic location solely as provided in the contract.

The network was responsible for selecting the live camera shots, replays, slow motion, and all other features of the broadcast. The broadcast crew, including the sportscasters, commentators, announcers, was exclusively responsible for all descriptions and accounts of the game during the live broadcast.

Under the contract, the taxpayer received a proportional share of amounts paid to the league by the network for the broadcasting rights (minus certain fees allocated to the league as agent).

An agent with the Passthrough and Special Industries division requested assistance from the IRS Office of Chief Counsel on determining whether the taxpayer's share of gross receipts from the league's contract with the network qualifies as domestic production gross receipts (DPGR) under Code Sec. 199(c)(4)(A)(i)(II) from the disposition of a qualified film produced by the taxpayer.

Analysis

Taxpayers can take a deduction for a percentage of their income attributable to certain production activities that take place within the United States (i.e., domestic production activities). For 2010 and later years, the domestic production activities deduction is equal to 9 percent of the lesser of the taxpayer's qualified production activities income (QPAI) or its taxable income.

Under Reg. Sec. 1.199-1(c), the QPAI of a taxpayer is equal to its domestic production gross receipts (DPGR) less certain expenses, losses, or deductions allocable to that DPGR. Relatedly, under Code Sec. 199(c)(4)(A)(i), DPGR means the gross receipts of the taxpayer that are derived from the disposition of, among other things, any qualified film produced by the taxpayer.

Reg. Sec. 1.199-3(f)(1), in relevant part, provides that only one taxpayer may claim the domestic production activities deduction with respect to any qualifying activity performed in connection with the production of a qualified film. If one taxpayer performs a qualifying activity pursuant to a contract with another party, then only the taxpayer that has the benefits and burdens of ownership of the qualified film is treated as engaging in the qualifying activity.

The IRS Office of Chief Counsel (IRS) noted that to qualify as DPGR, the taxpayer's gross receipts from the contract with the network must be directly derived from the disposition of a qualified film, and that qualified film must be treated as produced by the taxpayer.

The IRS determined that the game broadcasts in which the taxpayer participated were live or delayed television programming, and were qualified films for purposes of Code Sec. 199. Thus, the IRS stated, by granting the network its broadcast rights, the taxpayer had disposed of a qualified film.

The IRS then turned to whether the taxpayer was the producer of the qualified films in order to receive the Code Sec. 199 deduction. The IRS noted that the potential producers of the game broadcasts were the network, the taxpayer, and the taxpayer's opponents in each of the broadcasts at issue. Because there were multiple potential producers, the IRS determined that, under Reg. Sec. 1.199-3(f)(1), it was necessary for the taxpayer to show the broadcasts were produced pursuant to a contract with the taxpayer and that the taxpayer had the benefits and burdens of ownership for purposes of the Code Sec. 199 deduction.

To the extent the taxpayer maintains an interest in the game broadcasts at issue, the IRS said, it favors treating network's activities as done pursuant to the contract with taxpayer. However, based on examples in Reg. Sec. 1.199-3(f)(4) and analyzing factors described in ADVO, Inc. & Sub v. Comm'r, 141 T.C. No. 9 (2013), the IRS determined that the network had the benefits and burdens of ownership of the game broadcasts, which meant that the network, and not the taxpayer, was the producer of the broadcast.

In its view, the IRS said, the most reasonable characterization of the arrangement was that the network was paying for the rights to broadcast, and agreeing to produce the game broadcasts at no charge as part of that agreement. The network received the opportunity to profit from the sales of advertising with respect to the live broadcasts, and the taxpayer retained the remaining rights to the broadcast in order to be able to profit in alternative ways if possible.

Ultimately, the IRS stated, its determination that taxpayer was not the producer of the game broadcasts meant that none of taxpayer's gross receipts from the contract in the years at issue qualify as DPGR.

For a discussion of the domestic production activities deduction, see Parker Tax ¶96,100.

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Court Rejects IRS Attempt to Limit Trust's Real Property Contribution to Adjusted Basis; FMV Is Correct Standard

Where a trust's governing instrument expressly allowed charitable contributions, real property contributions by the trust are valued at fair market value and not the properties' adjusted basis. Green v. U.S., 2015 PTC 396 (W.D. Okla. 2015).

Background

Mart D. Green is the trustee of The David and Barbara Green 1993 Dynasty Trust. The trust instrument expressly authorizes the trustee to distribute to charity such amounts from the gross income of the trust as the trustee determines appropriate. The trust instrument also provides that a distribution may be made from the trust to a charity only when both the purpose of the distribution and the charity are as described in Code Sec. 170(c). The trust wholly owns a single-member limited liability company called GDT CG1, LLC (GDT), which is disregarded as an entity separate from the trust for tax purposes.

Between 2002 and 2004, Hob-Lob Limited Partnership (Hob-Lob) owned or operated many, but not all, Hobby Lobby stores. During this same period, the trust was a 99% limited partner in Hob-Lob. Hob-Lob filed its yearly Form 1065, with the IRS and issued yearly Schedule K-1s to all of its partners, including the trust. Between 2002 and 2004, the K-1s issued to the trust reported approximately $109 million in distributions to the trust and reported the trust's share of ordinary business income as approximately $201 million.

Between 2002 and 2004, GDT purchased several properties which, in 2004, it donated to organizations described in Code Sec. 170(b)(1)(A). On its tax return for 2004, the trust reported a charitable deduction for those donations and valued the deduction at the properties' adjusted basis. The trust subsequently filed an amended tax return seeking a refund based on a charitable deduction in the amount of the fair market value (FMV) of the properties. The IRS disallowed the trust's refund claim, stating that the charitable deduction for the real property donated in 2004 was limited to the basis of the real property contributed.

The trust contested the IRS's disallowance in a district court, arguing that the FMV standard should apply to the charitable deduction because Congress did not specify a different valuation standard in Code Sec. 642(c)(1). The IRS argued that (1) Code Sec. 642(c)(1) limits a trust's deduction to the amount of gross income it contributed to charity; (2) gross income does not include unrealized appreciation; and (3) a liberal construction of the statute allowing fair market valuation would negate the gross income derivative requirement. As part of its argument, the IRS contended that for the donated properties to qualify as charitable deductions under Code Sec. 642(c)(1), they had to be "sourced from and traceable to" the trust's gross income. The IRS also argued that the trust was not entitled to a Code Sec. 642(c)(1) deduction because, when the donations were made, the donated properties were part of the principal of the trust and the trust was not authorized to make charitable donations from principal.

Analysis

Under Code Sec. 642(c)(1), a trust may take as a deduction in computing its taxable income (in lieu of the deduction allowed by Code Sec. 170(a)) any amount of the gross income, without limitation, which pursuant to the terms of the governing instrument is, during the taxable year, paid for a purpose specified in Code Sec. 170(c). Code Sec. 170 distinguishes between charitable contributions of cash and property other than money, and values the latter at the property's FMV at the time of contribution. Code Sec. 170(b)(1) limits an individual's charitable deduction to a percentage of the individual's contribution base. Code Sec. 170(b)(2) provides for limitations on the amount of contributions deductible by corporations.

The district court held that the trust was entitled to a charitable deduction in the amount of the donated properties' FMV. A notable distinction between Code Sec. 642 and Code Sec. 170, the court said, is the absence of limiting language in Code Sec. 642, which is present in Code Sec. 170. According to the court, rather than place limiting language in Code Sec. 642, Congress specified a deduction "without limitation." The IRS's interpretation, the court observed, sought to impose limitations where Congress clearly declined to do so.

The district court also cited the decision in Weingarden v. Comm'r, 825 F.2d 1027 (6th Cir. 1987), in which the Sixth Circuit addressed the distinction between Code Sec. 170 and Code Sec. 642, noting that statutes imposing a tax are generally construed liberally, in favor of the taxpayer, while statutes allowing deductions and exemptions are strictly interpreted, being matters of legislative grace. Of particular importance to the instant case, the district court said, Weingarden went further to distinguish statutes regarding charitable deductions, stating they are not matters of legislative grace, but rather expressions of public policy. As such, provisions regarding charitable deductions, the Sixth Circuit stated, should be liberally construed in favor of the taxpayer. Thus, the district court said, even if the language of the statute were unclear, a liberal construction in favor of the taxpayer would be appropriate.

With respect to the IRS's argument that the donation had to be "sourced from and traceable to" the trust's gross income, the court found that because the properties were all purchased with distributions from Hob-Lob to the trust and each distribution was part of GDT's gross income for the year in which it was distributed, the donated properties were purchased with an amount of the trust's gross income.

With respect to the IRS's argument that the donated properties were part of the trust's principal and the trust was not authorized to make charitable donations from the principal, the court said the IRS was confusing the federal tax concept of "gross income" with state law fiduciary accounting concepts of "income" and "principal." According to the court, there could be no serious question that the donations were made pursuant to the terms of the trust's governing instrument.

For a discussion of the rules relating to charitable donations by a trust, see Parker Tax ¶53,110.

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Foundation's Expenditures on Radio Messages Were Taxable Expenditures Subject to Excise Tax

The production and broadcast of 30- and 60-second radio messages by a tax-exempt foundation were attempts to influence legislation and/or the opinion of the general public and, thus, were taxable expenditures. As a result, the foundation and the foundation manager were liable for excise taxes on those expenditures. Loren E. Parks v. Comm'r, 145 T.C. No. 12 (2015).

Background

Parks Foundation (Foundation) is a Code Sec. 501(c)(3) tax-exempt organization which is also classified as a Code Sec. 509(a) private foundation. Loren Parks has been the sole contributor to the Foundation since its incorporation. The primary purposes of the Foundation, as set out in its bylaws, include: (1) enhancing and promoting sport fishing and sport hunting; (2) promoting education by researching and presenting to the public issues of general interest or concern and by supporting alternative educational programs and institutions; and (3) supporting charitable organizations and activities, the goals of which Parks Foundation wished to encourage and promote.

From 1997 through 2000, the Foundation spent $65,000, $200,000, $33,011, and $341,062, respectively, to produce 30 and 60-second radio messages and broadcast them on commercial radio stations in Oregon. The messages involved explanatory statements on ballot measures that were going to be voted on by the public. A subsequent article in Oregon's largest newspaper pointed out flaws, inaccuracies, and inconsistencies in the facts presented in these explanatory statements.

Code Sec. 4945 imposes four distinct excise taxes on taxable expenditures of private foundations. A taxable expenditure is any amount paid or incurred by a private foundation for certain prohibited purposes, including to carry on propaganda, or otherwise to attempt, to influence legislation. An initial tax may be imposed on a foundation and its management under Code Sec. 4945(a)(1) and (2). A second tier of excise taxes may be imposed under Code Sec. 4945(b)(1) and (2) where certain corrections are not timely made. The rules are aimed at exempt organizations that engage in lobbying. The two forms of lobbying are "direct lobbying" and "grass roots lobbying." Under Reg. Sec. 56.4911-2(b)(1), a communication is treated a direct lobbying communication and an attempt to influence legislation if it "refers to" specific legislation and reflects a view on such legislation.

In 2000, the Oregon Department of Justice filed a lawsuit against the Foundation, alleging that it had made expenditures from 1993 through 2000 that constituted taxable expenditures under Code Sec. 4945, thereby violating Oregon's Nonprofit Corporation Act. Subsequently, the IRS audited the Foundation's Forms 990-PF, Return of Private Foundation, for the years at issue and concluded that the Foundation's expenditures for the radio messages were taxable expenditures. According to the IRS, the expenditures were attempts to influence legislation and/or the opinion of the general public and therefore taxable expenditures, rendering the Foundation and Parks liable for excise taxes under Code Sec. 4945(a)(1) and (2). The IRS further determined that because the taxable expenditures were not timely corrected, the Foundation and Parks were also liable for excise taxes under Code Sec. 4945(b)(1) and (2).

Parks and the Foundation argued that they were not liable for excise taxes because the expenditures for the radio messages were not taxable expenditures. They contended that the radio messages were not attempts to influence legislation but instead, under Reg. Sec. 53.4945-2(a)(1), should be considered educational messages which qualified as "nonpartisan analysis, study, or research." They also argued that, except for two radio messages that specifically referred to one of the ballot measures by name, the radio messages were not direct lobbying communications because they did not "refer to" the ballot measures and because they did not mention any ballot measure by name.

Analysis

The Tax Court held that the Foundation's expenditures for the radio messages were taxable expenditures and, consequently, the Foundation and Parks were liable for excise taxes under Code Sec. 4945(a)(1) and (2). Further, the court held that both the Foundation and Parks were liable for the second tier excise taxes under Code Sec. 4945(b)(1) and (2).

In its analysis, the court cited Reg. Sec. 53.4945-2(a)(1), which generally provides that an expenditure is an attempt to influence legislation if it is for a direct or grass roots lobbying communication, unless it constitutes nonpartisan analysis, study, or research, or technical advice given to a governmental body in response to a written request. Such a communication is treated as an attempt to influence legislation, the court noted, only if it "refers to" specific legislation and reflects a view on such legislation. The court observed that the regulations do not provide a definition of the term "refers to" but instead interprets its meaning through illustrative examples. While the pertinent examples address grass roots lobbying, the court noted, they are equally applicable in the case of direct lobbying.

The court rejected the argument that the radio messages were not direct lobbying communications because they did not "refer to" the ballot measures by name. According to the court, pursuant to the regulations interpreting Code Sec. 4945(e), a communication "refers to" a ballot measure if it either refers to the measure by name or, without naming it, employs terms widely used in connection with the measure or describes the content or effect of the measure. The court found that the radio messages used various iterations of terms that had been widely used in connection with ballot measures that were going to be voted on.

The court also noted that certain messages made substantial use of inflammatory language and disparaging terms and reached its conclusions on the basis of strong feelings rather than objective evaluations. For example, the court said, certain messages cited a seemingly arbitrary and nonsensical government requirement imposed by "non-elected government bureaucrats." One radio message, the court observed, distorted the facts which led to Oregon's shutting down a number of its inmate work programs. The message incorrectly suggested, the court said, that Oregon's Governor and attorney general could have prevented the programs from being shut down but did not because of their personal views of the criminal justice system, i.e., they "just don't think criminals should spend much time in jail" and "think * * * [criminals] can be rehabilitated."

For a discussion of the excise taxes aimed at discouraging private foundations from engaging in legislative and political activities, see Parker Tax ¶62,4770.

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Paper Return Was Timely When Mailed 10 Days After Required Electronic Return Was Rejected

The IRS advised that a corporate taxpayer timely filed its 2010 amended return because the amended return would have been timely filed when its electronic amended return was rejected by the IRS, and a paper amended return was postmarked within ten days of the date of the IRS's e-file rejection notice. CCA 201545017.

Background

Under the facts of CCA 201545017, a corporate taxpayer, who files a consolidated Form 1120 on a calendar year basis, filed a 2010 amended return to claim research credits based on the alternative simplified method under Reg. Sec 1.41-9T. Under that method, no deduction was allowed for certain research expenses equal to the amount of the credit, and the taxpayer increased its taxable income on the 2010 amended return. This increase to taxable income resulted in an increase of the taxpayer's net operating loss utilized and triggered additional alternative minimum tax (AMT).

The taxpayer attempted to file the 2010 amended return electronically, as required to do so by Reg. Sec. 301.6011-5, but received notification that the electronically submitted return was rejected. The amended return was rejected because the Modernized e-file (Me-F) platform was no longer accepting 2010 returns at the time, as the Me-F only accepts Form 1120 for the current year and two prior years. After the electronic return was rejected, the taxpayer mailed the 2010 amended return and included a statement that the electronic transmission was rejected and therefore the taxpayer was filing a paper return. The 2010 amended paper return also included a payment related to the changes in tax due from the adjustments and a copy of the reject notification.

Because the IRS determined it had received the taxpayer's 2010 amended paper return with the additional tax liability after the three year statute of limitations for assessment had expired, it rejected the amended return and posted the included payment to the taxpayer's account.

An agent examining the taxpayer's 2012 return, which included adjustments based on the rejected 2010 amended return, requested assistance as to whether rejection of the

2010 amended paper return was proper.

Analysis

Reg. Sec. 301.6011-5 generally requires corporations with $10 million or more in total assets and that file 250 or more returns a year to electronically file their Form 1120 and Form 1120X.

Notice 2010-13 provides rules regarding the timely filing of rejected e-filed returns. Notice 2010-13 provides that if the return required to be filed electronically is transmitted on or before the due date (including extensions) and is rejected, but the electronic return originator or the filer comply with certain requirements for timely submission of the return, the return will be considered timely filed and any elections attached to the return will be considered valid.

Notice 2010-13 provides that for returns filed on or after January 1, 2010, the IRS will allow the filer 10 calendar days from the date of first transmission to perfect the return for electronic resubmission. If the electronic return cannot be accepted for processing electronically, the filer must file a paper return with the IRS where it would normally be filed. In order for the paper return to be considered timely, it must be postmarked by the U.S. Postal Service, or delivered to the IRS by the later of the due date of the return (including extensions), or 10 calendar days after the date the IRS last gives notification to the filer that the return has been rejected.

Notice 2010-13 also provides that corporations, partnerships, and tax-exempt organizations that are required to e-file must contact the e-Help Desk for assistance in correcting rejected returns before filing a paper return. If the taxpayer cannot correct the rejected return errors, they must receive authorization from the e-Help Desk prior to filing a paper return. However, in cases where the Me-F Platform will no longer accept an amended Form 1120, no waiver is needed to file the amended return on paper.

The IRS Office of Chief Counsel (IRS) noted that the taxpayer mailed a paper return within 10 calendar days after the date the IRS gave notification the return was rejected, and included a statement that the electronic transmission was rejected, along with a copy of the reject notification. It was not clear whether the taxpayer contacted the e-Help desk, but, the IRS said, such an attempt would have been fruitless when the Me-F Platform could not accept the amended return.

Although contacting the e-Help desk would have ensured that the paper return was identified as a rejected electronic return and the taxpayer was given credit for the date of the first rejection within the 10-day transmission perfection period, the IRS stated, the failure to do so in the instant case should not have deprived the taxpayer of the administrative grace afforded in Notice 2010-13. The IRS determined that no waiver request was required, the taxpayer substantially complied with the requirements of Notice 2010-13, and the failure by the taxpayer to electronically file the amended 2010 return was caused by the IRS' failure to accept an amended return during a period which would have been timely for paper filed returns.

Accordingly, the IRS advised that the taxpayer had timely filed its 2010 amended federal income tax return because the amended return would have been timely filed at the time the electronic amended return was transmitted to the IRS and rejected, and the paper amended return was postmarked within ten days of the date of the IRS's e-file rejection notice.

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IRS Extends Safe Harbor for Computing Certain Home Mortgage Deductions

The IRS has extended through 2017 the safe-harbor method for computing a homeowner's deduction for payments made on a home mortgage. Notice 2015-77.

Background

Financially distressed homeowners may receive payments under programs designed by state housing finance agencies (state HFAs) with funds from the HFA Hardest Hit Fund and payments made under the Emergency Homeowners' Loan Program (EHLP) and substantially similar state programs (SSSPs). The funds are authorized under the Dodd-Frank Act to promote the general welfare by helping homeowners who are at risk of losing their homes either pay their mortgage loans or transition to more affordable housing and do not involve the performance of services. These payments are excluded from gross income under the general welfare exclusion.

Notice 2013-7 provided a safe harbor method under which a homeowner who receives these payments may deduct payments the homeowner actually makes during that year to the mortgage servicer, HUD, or the State HFA on the home mortgage.

Notice 2015-77 amplifies Notice 2013-7 with respect to the HFA Hardest Hit Fund by extending the guidance relating to the safe harbor method for computing a homeowner's deduction for payments made on a home mortgage through calendar year 2017.

Safe Harbor Method for Computing Homeowner's Deductions

Under the safe harbor method in Notice 2015-77, for tax years 2010 through 2017, a homeowner may deduct the lesser of:

(1) The sum of all payments on the home mortgage that the homeowner actually makes during a taxable year to the mortgage servicer or the State HFA; and

(2) the sum of amounts shown on Form 1098, Mortgage Interest Statement, for mortgage interest received, real property taxes, and mortgage insurance premiums (if deductible for the taxable year under Code Sec. 163(h)(3)(E)).

This safe harbor method of computing the homeowner's deduction applies for a taxable year if the homeowner meets the requirements of Code Secs. 163 and 164 to deduct all of the mortgage interest on the loan and all of the real property taxes on the principal residence, and the homeowner participates in a state program in which the program payments could be used to pay interest on the home mortgage.

For a discussion of mortgage interest deductions, see Parker Tax ¶83,515.

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Sharing Tax Documents with Bank Consortium Did Not Defeat Attorney-Client Privilege

The Second Circuit vacated and remanded a district court decision after agreeing with the taxpayer that tax-related memoranda were protected by the work-product doctrine. According to the Second Circuit, a bank did not waive its attorney-client privilege when it shared documents with a consortium of banks having a common legal interest in the tax treatment of a refinancing and corporate restructuring resulting from an ill-fated acquisition originally financed by the consortium. Schaeffler v. U.S., 2015 PTC 414 (2nd Cir. 2015).

Background

The Schaeffler Group is a German automotive and industrial parts supplier. Georg Schaeffler, a U.S. resident, is an 80 percent owner of the ultimate parent of the Schaeffler Group, Schaeffler Holding. The Schaeffler Group attempted to acquire a minority interest in a German company, Continental AG, through a tender offer for its stock. German law prohibits tender offers that seek less than all of a company's shares. As a result, a partial offer can be accomplished only by setting an offering price estimated to result in the acquisition of the desired number of shares. To finance the offer, Schaeffler Group executed an $11 billion Euro loan agreement with a consortium of banks (the Consortium).

On July 30, 2008, the offer was made with an acceptance period ending on September 16, 2008. On September 14, 2008, Lehman Brothers Holding Inc. announced its bankruptcy, the stock market collapsed, and an economic crisis ensued. The market price of Continental AG shares, already declining, fell accordingly. Because German law prohibited the Schaeffler Group from withdrawing its tender offer, far more shareholders than expected or desired accepted the offer, leaving the Schaeffler Group the owner of nearly 89.9% of outstanding Continental AG shares.

These circumstances combined to threaten the Schaeffler Group's solvency and ability to meet its payment obligations to the Consortium. As a result, the Schaeffler Group and the Consortium sought to refinance the acquisition debt and to restructure the Schaeffler Group. Under U.S. law, because Schaeffler was an 80% owner of the ultimate parent of the Schaeffler Group, the tax consequences of his companies' debt refinancing and restructuring substantially affected his personal tax liability to the IRS. Given the complex and novel refinancing and restructuring that ensued, Schaeffler and Schaeffler Group anticipated scrutiny by the IRS. Therefore, they retained Ernst & Young (E&Y) and Dentons US LLP (Dentons) to advise on the federal tax implications of the transactions and possible future litigation with the IRS.

Subsequently, the IRS audited Schaeffler and the Schaeffler Group and issued a summons seeking all documents created by E&Y. The Schaeffler Group produced several thousand documents but sought to quash the demand for legal opinions. They sought to withhold memoranda, such as an E&Y memorandum (EY Tax Memo) that identified potential U.S. tax consequences of the refinancing and restructuring, identified and analyzed possible IRS challenges to the Schaeffler Group's tax treatment of the transactions, and discussed in detail the relevant statutory provisions, regulations, judicial decisions, and IRS rulings. The Schaeffler Group had shared the withheld documents with the Consortium.

Analysis

While the attorney-client privilege is generally waived by the voluntary disclosure of communications to another party, the privilege is not waived by disclosure of communications to a party that is engaged in a "common legal enterprise" with the holder of the privilege. Such disclosures remain privileged where a joint defense effort or strategy has been decided upon and undertaken by the parties and their respective lawyers in the course of an ongoing common enterprise and where multiple clients share a common interest about a legal matter. The Schaeffler Group filed a petition to quash the summons with a district court, claiming the withheld documents were protected under the work-product doctrine.

The district court denied the petition to quash and held that the Schaeffler Group had waived the attorney-client privilege by sharing the withheld documents with the Consortium. The court concluded that the "common legal interest" or "joint defense privilege" exception to the waiver by third-party disclosure rule did not apply because, in the court's view, the Consortium lacked any common legal stake in Schaeffler's putative litigation with the IRS because it would not be named as a co-defendant in the anticipated litigation and only the Consortium's economic interests, as opposed to its legal interests, were in jeopardy. The district court also held that that the EY Tax Memo and other similar documents were not entitled to work-product protection because the memo did not specifically refer to litigation by discussing what actions peculiar to the litigation process the parties might take or what settlement strategies might be considered. The court found that the EY Tax Memo would have been produced in the same form irrespective of any concern about litigation. The Schaeffler Group appealed.

The Second Circuit vacated and remanded the district court's order. The court held that parties may share a common legal interest, thus entitling them to attorney-client privilege, even if they are not parties in ongoing litigation. An interest in avoiding losses can establish a common legal interest, the court said. The court also rejected the district court's implication that tax analyses and opinions created to assist in large, complex transactions with uncertain tax consequences can never have work-product protection from IRS subpoenas. According to the court, this was contrary to case law, which explicitly embraces the dual-purpose doctrine that a document is eligible for work-product protection if, in light of the nature of the document and the factual situation in the particular case, the document can fairly be said to have been prepared or obtained because of the prospect of litigation. The court noted that, under Code Sec. 7525(a)(1), the same common law protections of confidentiality which apply to a communication between a taxpayer and an attorney also apply to a communication between a taxpayer and any federally authorized tax practitioner to the extent the communication would be considered a privileged communication if it were between a taxpayer and an attorney.

Finally, the Second Circuit rejected the district court's construct of a hypothetical scenario in which the Schaeffler Group faced exactly the same business and tax issues but did not anticipate litigation, saying such a scenario ignored reality.

For a discussion of the work-product doctrine and how it may be affected by disclosures of documents to third parties, see Parker Tax ¶263,130.

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IRS Finalizes Regulations Implementing ACA Group Health Plan Requirements

The IRS has finalized 2010 interim final regulations that implemented Code sections introduced by the ACA regarding grandfathered health plans, preexisting condition exclusions, lifetime and annual dollar limits on benefits, rescissions, coverage of dependent children to age 26, internal claims and appeal and external review processes, and patient protections. T.D. 9747 (11/18/15).

In 2010, the Patient Protection and Affordable Care Act (PPACA) and the Health Care and Education Reconciliation Act became law. Collectively, these two Acts are referred to as the Affordable Care Act (ACA). That same year, the IRS issued regulations (collectively, the 2010 interim final regulations) implementing the sections of the PHS Act revised by the ACA relating to relating to group health plans and health insurance issuers in the group and individual markets.

The final regulations in T.D. 9747 (11/18/15) finalize the 2010 interim final regulations and subsequent amendments without substantial change, and incorporate clarifications in guidance issued by the IRS.

The regulations finalized by T.D. 9747 are as follows:

• Reg. Sec. 54.9815-1251, which provides that certain group health plans and health insurance coverage existing as of March 23, 2010 (the date of enactment of the ACA) (grandfathered health plans) are only subject to certain provisions of the ACA;
• Reg. Sec. 54.98152704, which provides that a group health plan and a health insurance issuer offering group or individual coverage generally may not impose any preexisting condition exclusions;
• Reg. Sec. 54.9815-2711, which generally prohibits annual and lifetime dollar limits on essential health benefits;
• Reg. Sec. 54.9815-2712, which provides that a group health plan or a health insurance issuer offering group or individual coverage that makes available dependent coverage of children must make such coverage available for children until attainment of 26 years of age;
• Reg. Sec. 54.9815-2714, which provides that a group health plan or health insurance issuer offering group or individual coverage must not rescind coverage unless a covered individual commits fraud or makes an intentional misrepresentation of material fact.
• Reg. Sec. 54.9815-2719, which provides standards for group health plans that are not grandfathered health plans and health insurance issuers offering nongrandfathered coverage regarding both internal claims and appeals and external review; and,
• Reg. Sec. 54.98152719A, which provides rules regarding the designation of primary care providers.

The final regulations apply to group health plans and health insurance issuers beginning on the first day of the first plan year (or, in the individual market, the first day of the first policy year) beginning on or after January 1, 2017.

For a discussion of the group health plan requirements, see Parker Tax ¶ 195,500.

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IRS Reminds Practitioners to Renew PTINs

The IRS reminds professional tax return preparers to renew their Preparer Tax Identification Numbers (PTINs) if they plan to prepare returns in 2016. IR-2015-125 (11/12/15).

In a news release issued last week, the IRS reminded professional tax return preparers to renew their Preparer Tax Identification Numbers (PTINs) if they plan to prepare returns in 2016. Current PTINs expire December 31, 2015. Tax professionals can obtain or renew their PTINs at irs.gov/ptin.

Those renewing their PTINs can complete the process in about 15 minutes, according to the IRS. The renewal fee is $50. Tools are available to assist any preparers who have forgotten their user name, password, or email address.

New tax return preparers who are obtaining a first-time PTIN must create an online PTIN account as a first step and then follow directions to obtain a PTIN. Their fee is also $50.

For a discussion of the PTIN requirement, see Parker Tax ¶275,100.