Thursday, April 30, 2009

New Law on Cancellation of Indebtedness Income

American Recovery and Reinvestment Tax Act of 2009. Under the American Recovery and Reinvestment Tax Act of 2009 ( P.L. 111-5), at the election of the taxpayer, discharge of indebtedness income resulting from the reacquisition after December 31, 2008, and before January 1, 2011, of a corporate or business debt instrument is includible in gross income ratably over a five-tax-year period ( Code Sec. 108(i), added by the American Recovery and Reinvestment Tax Act of 2009 ( P.L. 111-5)).
Income from Discharge of Indebtedness: Deferral of discharge of indebtedness income from reacquisition of debt instruments

At the election of the taxpayer, income from the discharge of indebtedness in connection with the reacquisition after December 31, 2008, and before January 1, 2011, of an applicable debt instrument is includible in gross income ratably over the five-tax-year period beginning with:
 The fifth tax year following the tax year in which the reacquisition occurs for a reacquisition occurring in 2009; and

 The fourth tax year following the tax year in which the reacquisition occurs for a reacquisition occurring in 2010 ( Code Sec. 108(i)(1), as added by the American Recovery and Reinvestment Tax Act of 2009 ( P.L. 111-5)).

Deferral of deduction for OID in debt-for-debt exchanges. If a debt instrument is issued for the applicable debt instrument being reacquired (or is treated as issued under Code Sec. 108(e)(4), which concerns acquisition of indebtedness by a person related to the debtor), and there is any original issue discount (OID) with respect to the debt instrument:
 no deduction otherwise allowable shall be allowed to the issuer with respect to the portion of such OID which (a) accrues before the first tax year in the five-tax-year period in which income from the discharge of indebtedness attributable to the reacquisition of the debt instrument is includible in gross income, and does not exceed the income from the discharge of indebtedness with respect to the debt instrument being reacquired; and

 the aggregate amount of deductions disallowed shall be allowed as a deduction ratably over the five-tax-year period.

If the amount of OID accruing before the first tax year in which the OID income is to be recognized exceeds the income from the discharge of indebtedness with respect to the applicable debt instrument being reacquired, the deductions are be disallowed in the order in which the OID is accrued ( Code Sec. 108(i)(2)(A), as added by P.L. 111-5).

Deemed debt-for-debt exchanges. If any debt instrument is issued by an issuer and the proceeds are used directly or indirectly by the issuer to reacquire an applicable debt instrument of the issuer, the newly issued debt instrument is treated as issued for the debt instrument being reacquired. If only a portion of the proceeds from a debt instrument are used for this purpose, the deferral rules apply to the portion of any OID on the newly issued debt instrument which is equal to the portion of the proceeds from such instrument used to reacquire the outstanding instrument ( Code Sec. 108(i)(2)(B), as added by P.L. 111-5). Thus, if a taxpayer makes the deferral election for a debt-for-debt exchange in which the newly issued debt instrument issued (or deemed issued, including by operation of Reg. §1.108-2(g)) in satisfaction of an outstanding debt instrument of the debtor has OID, then any otherwise allowable deduction for OID with respect to such newly issued debt instrument that (a) accrues before the first year of the five-tax-year period in which the related, deferred discharge of indebtedness income is included in the gross income of the taxpayer, and (b) does not exceed such related, deferred discharge of indebtedness income, is deferred and allowed as a deduction ratably over the same five-tax-year period in which the deferred discharge of indebtedness income is included in gross income (Conference Committee Report for American Recovery and Reinvestment Act of 2009).

This rule can apply in certain cases when a debtor reacquires its debt for cash. If the taxpayer issues a debt instrument and the proceeds of such issuance are used to reacquire a debt instrument of the taxpayer, the newly issued debt instrument is treated as if it were issued in satisfaction of the retired debt instrument. If the newly issued debt instrument has OID, this rule applies. Thus, all or a portion of the interest deductions with respect to OID on the newly issued debt instrument are deferred into the five-tax-year period in which the discharge of indebtedness income is recognized. Where only a portion of the proceeds of a new issuance are used to satisfy outstanding debt, the deferral rule applies to the portion of the OID on the newly issued debt instrument that is equal to the portion of the proceeds of such newly issued instrument used to retire outstanding debt of the taxpayer (Conference Committee Report for American Recovery and Reinvestment Act of 2009).

Applicable debt instrument. An applicable debt instrument is any debt instrument issued by: (i) a C corporation, or (ii) any other person in connection with the conduct of a trade or business by such person ( Code Sec. 108(i)(3)(A), as added by P.L. 111-5). A debt instrument for these purposes is broadly defined to include bonds, debentures, notes, certificates, or any other instrument or contractual arrangement constituting indebtedness within the meaning of Code Sec. 1275(a)(1) (which excludes certain annuity contracts) ( Code Sec. 108(i)(3)(B), as added by P.L. 111-5).

Reacquisition. Reacquisition for these purposes includes any acquisition of an applicable debt instrument by (i) the debtor which issued (or is otherwise the obligor under) the debt instrument, or (ii) a related person to such debtor ( Code Sec. 108(i)(4)(A), as added by P.L. 111-5). The determination of whether a person is related to another person is made in the same manner as Code Sec. 108(e)(4) concerning acquisition of indebtedness by a person related to the debtor ( Code Sec. 108(i)(5)(A), as added by P.L. 111-5.

Acquisition. Acquisition for these purposes includes an acquisition of an applicable debt instrument for cash, the exchange of the debt instrument for another debt instrument (including an exchange resulting from a modification of the debt instrument), the exchange of the debt instrument for corporate stock or a partnership interest, the contribution of the debt instrument to capital, and the complete forgiveness of the indebtedness by the holder of the debt instrument ( Code Sec. 108(i)(4)(B), as added by P.L. 111-5).

Election. The election to defer OID income is to be made on an instrument by instrument basis. Once made, the election is irrevocable. A taxpayer makes an election with respect to a debt instrument by including with its return for the tax year in which the reacquisition of the debt instrument occurs a statement that: (a) clearly identifies the debt instrument, and (b) includes the amount of deferred income under this provision, plus any other information that may be prescribed by the IRS. The IRS is authorized to require reporting of the election (and other information with respect to the reacquisition) for years subsequent to the year of the reacquisition. In the case of a pass-through entity, such as a partnership or S corporation, the election is made at the entity level ( Code Sec. 108(i)(5)(B), as added by P.L. 111-5; Conference Committee Report for American Recovery and Reinvestment Act of 2009).

Coordination with other exclusions. If a taxpayer elects to defer discharge of indebtedness income, the exclusions for discharge under a Chapter 11 bankruptcy, when the taxpayer is insolvent, qualified farm indebtedness, and qualified real property business indebtedness ( Code Sec. 108(a)(1)(A), (B), (C) and (D))) do not apply to the income from the discharge of indebtedness for the tax year of the election or any subsequent tax year ( Code Sec. 108(i)(5)(C), as added by P.L. 111-5). Thus, for example, an insolvent taxpayer may elect to defer income from the discharge of indebtedness rather than excluding the income and reducing tax attributes by a corresponding amount (Conference Committee Report for American Recovery and Reinvestment Act of 2009).

Acceleration of deferred items. In the case of the death of the taxpayer, the liquidation or sale of substantially all the assets of the taxpayer (including in a title 11 bankruptcy or similar case), the cessation of business by the taxpayer, or similar circumstances, any item of income or deduction which is deferred (and has not previously been taken into account) must be taken into account in the tax year in which such event occurs (or in the case of a title 11 bankruptcy or similar case, the day before the petition is filed). This rule applies in the case of the sale or exchange or redemption of an interest in a partnership, S corporation, or other pass-through entity by a partner, shareholder, or other person holding an ownership interest in such entity ( Code Sec. 108(i)(5)(D), as added by P.L. 111-5).

Special rule for partnerships. In the case of a partnership, any income deferred under this provision is to be allocated to the partners in the partnership immediately before the discharge in the manner such amounts would have been included in the distributive shares of the partners under Code Sec. 704 if the income were recognized at such time. Any decrease in a partner's share of partnership liabilities as a result of such discharge is not be taken into account for purposes of Code Sec. 752 (concerning the treatment of certain liabilities) at the time of the discharge to the extent it would cause the partner to recognize gain under Code Sec. 731. Thus, the deemed distribution under Code Sec. 752 is deferred with respect to a partner to the extent it exceeds such partner's basis. Amounts so deferred are taken into account at the same time, and to the extent remaining in the same amount, as income deferred under the provision is recognized by the partner ( Code Sec. 108(i)(6), as added by P.L. 111-5; Conference Committee Report for American Recovery and Reinvestment Act of 2009).

The Secretary of the Treasury may prescribe rules and regulations regarding the application of this provision, including: (a) extending the application of the rules regarding the acceleration of deferred items to other circumstances where appropriate, (b) requiring reporting of the election (and such other information as the Secretary may require) on returns of tax for subsequent tax years, and (c) rules for the application of the provision to partnerships, S corporations, and other pass-through entities including for the allocation of deferred deductions ( Code Sec. 108(i)(7), as added by P.L. 111-5).

Treasury Working on Guidance for New Law Deferring Cancellation of Debt Income
Treasury Associate Tax Legislative Counsel Michael Novey stated on April 29 that the Treasury is actively working on guidance projects on cancellation of debt (COD) income (Code Sec. 108(i)) and applicable high-yield discount obligations (AHYDO) (Code Sec. 163(e)(5)(7)). Both provisions were enacted in the American Recovery and Reinvestment Act of 2009 (P.L. 111-5). Speaking at a D.C. Bar program on the taxation of distressed debt, Novey said that the Treasury may publish initial guidance that can be done most quickly and follow this up with later guidance on other issues.


108(i) DEFERRAL AND RATABLE INCLUSION OF INCOME ARISING FROM BUSINESS INDEBTEDNESS DISCHARGED BY THE REACQUISITION OF A DEBT INSTRUMENT. --

108(i)(1) IN GENERAL. --At the election of the taxpayer, income from the discharge of indebtedness in connection with the reacquisition after December 31, 2008, and before January 1, 2011, of an applicable debt instrument shall be includible in gross income ratably over the 5-taxable-year period beginning with --

108(i)(1)(A) in the case of a reacquisition occurring in 2009, the fifth taxable year following the taxable year in which the reacquisition occurs, and

108(i)(1)(B) in the case of a reacquisition occurring in 2010, the fourth taxable year following the taxable year in which the reacquisition occurs.

108(i)(2) DEFERRAL OF DEDUCTION FOR ORIGINAL ISSUE DISCOUNT IN DEBT FOR DEBT EXCHANGES. --

108(i)(2)(A) IN GENERAL. --If, as part of a reacquisition to which paragraph (1) applies, any debt instrument is issued for the applicable debt instrument being reacquired (or is treated as so issued under subsection (e)(4) and the regulations thereunder) and there is any original issue discount determined under subpart A of part V of subchapter P of this chapter with respect to the debt instrument so issued --

108(i)(2)(A)(i) except as provided in clause (ii), no deduction otherwise allowable under this chapter shall be allowed to the issuer of such debt instrument with respect to the portion of such original issue discount which --

108(i)(2)(A)(i)(I) accrues before the 1st taxable year in the 5-taxable-year period in which income from the discharge of indebtedness attributable to the reacquisition of the debt instrument is includible under paragraph (1), and

108(i)(2)(A)(i)(II) does not exceed the income from the discharge of indebtedness with respect to the debt instrument being reacquired, and

108(i)(2)(A)(ii) the aggregate amount of deductions disallowed under clause (i) shall be allowed as a deduction ratably over the 5-taxable-year period described in clause (i)(I).

If the amount of the original issue discount accruing before such 1st taxable year exceeds the income from the discharge of indebtedness with respect to the applicable debt instrument being reacquired, the deductions shall be disallowed in the order in which the original issue discount is accrued.

108(i)(2)(B) DEEMED DEBT FOR DEBT EXCHANGES. --For purposes of subparagraph (A), if any debt instrument is issued by an issuer and the proceeds of such debt instrument are used directly or indirectly by the issuer to reacquire an applicable debt instrument of the issuer, the debt instrument so issued shall be treated as issued for the debt instrument being reacquired. If only a portion of the proceeds from a debt instrument are so used, the rules of subparagraph (A) shall apply to the portion of any original issue discount on the newly issued debt instrument which is equal to the portion of the proceeds from such instrument used to reacquire the outstanding instrument.

108(i)(3) APPLICABLE DEBT INSTRUMENT. --For purposes of this subsection --

108(i)(3)(A) APPLICABLE DEBT INSTRUMENT. --The term "applicable debt instrument" means any debt instrument which was issued by --

108(i)(3)(A)(i) a C corporation, or

108(i)(3)(A)(ii) any other person in connection with the conduct of a trade or business by such person.

108(i)(3)(B) DEBT INSTRUMENT. --The term "debt instrument" means a bond, debenture, note, certificate, or any other instrument or contractual arrangement constituting indebtedness (within the meaning of section 1275(a)(1)).

108(i)(4) REACQUISITION. --For purposes of this subsection --

108(i)(4)(A) IN GENERAL. --The term "reacquisition" means, with respect to any applicable debt instrument, any acquisition of the debt instrument by --

108(i)(4)(A)(i) the debtor which issued (or is otherwise the obligor under) the debt instrument, or

108(i)(4)(A)(ii) a related person to such debtor.

108(i)(4)(B) ACQUISITION. --The term "acquisition" shall, with respect to any applicable debt instrument, include an acquisition of the debt instrument for cash, the exchange of the debt instrument for another debt instrument (including an exchange resulting from a modification of the debt instrument), the exchange of the debt instrument for corporate stock or a partnership interest, and the contribution of the debt instrument to capital. Such term shall also include the complete forgiveness of the indebtedness by the holder of the debt instrument.

108(i)(5) OTHER DEFINITIONS AND RULES. --For purposes of this subsection --

108(i)(5)(A) RELATED PERSON. --The determination of whether a person is related to another person shall be made in the same manner as under subsection (e)(4).

108(i)(5)(B) ELECTION. --

108(i)(5)(B)(i) IN GENERAL. --An election under this subsection with respect to any applicable debt instrument shall be made by including with the return of tax imposed by chapter 1 for the taxable year in which the reacquisition of the debt instrument occurs a statement which --

108(i)(5)(B)(i)(I) clearly identifies such instrument, and

108(i)(5)(B)(i)(II) includes the amount of income to which paragraph (1) applies and such other information as the Secretary may prescribe.

108(i)(5)(B)(ii) ELECTION IRREVOCABLE. --Such election, once made, is irrevocable.

108(i)(5)(B)(iii) PASS- THRU ENTITIES. --In the case of a partnership, S corporation, or other pass-thru entity, the election under this subsection shall be made by the partnership, the S corporation, or other entity involved.

108(i)(5)(C) COORDINATION WITH OTHER EXCLUSIONS. --If a taxpayer elects to have this subsection apply to an applicable debt instrument, subparagraphs (A), (B), (C), and (D) of subsection (a)(1) shall not apply to the income from the discharge of such indebtedness for the taxable year of the election or any subsequent taxable year.

108(i)(5)(D) ACCELERATION OF DEFERRED ITEMS. --

108(i)(5)(D)(i) IN GENERAL. --In the case of the death of the taxpayer, the liquidation or sale of substantially all the assets of the taxpayer (including in a title 11 or similar case), the cessation of business by the taxpayer, or similar circumstances, any item of income or deduction which is deferred under this subsection (and has not previously been taken into account) shall be taken into account in the taxable year in which such event occurs (or in the case of a title 11 or similar case, the day before the petition is filed).

108(i)(5)(D)(ii) SPECIAL RULE FOR PASSTHRU ENTITIES. --The rule of clause (i) shall also apply in the case of the sale or exchange or redemption of an interest in a partnership, S corporation, or other passthru entity by a partner, shareholder, or other person holding an ownership interest in such entity.

108(i)(6) SPECIAL RULE FOR PARTNERSHIPS. --In the case of a partnership, any income deferred under this subsection shall be allocated to the partners in the partnership immediately before the discharge in the manner such amounts would have been included in the distributive shares of such partners under section 704 if such income were recognized at such time. Any decrease in a partner's share of partnership liabilities as a result of such discharge shall not be taken into account for purposes of section 752 at the time of the discharge to the extent it would cause the partner to recognize gain under section 731. Any decrease in partnership liabilities deferred under the preceding sentence shall be taken into account by such partner at the same time, and to the extent remaining in the same amount, as income deferred under this subsection is recognized.

108(i)(7) SECRETARIAL AUTHORITY. --The Secretary may prescribe such regulations, rules, or other guidance as may be necessary or appropriate for purposes of applying this subsection, including --

108(i)(7)(A) extending the application of the rules of paragraph (5)(D) to other circumstances where appropriate,

108(i)(7)(B) requiring reporting of the election (and such other information as the Secretary may require) on returns of tax for subsequent taxable years, and

108(i)(7)(C) rules for the application of this subsection to partnerships, S corporations, and other pass-thru entities, including for the allocation of deferred deductions.

Wednesday, April 29, 2009

abatement of interest 301.6404-2(c)

D.H. Sher, April 29, 2009, T.C. Memo. 2009-86

DAVID HARRIS SHER AND CATHERINE GAIL NEMSER, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

UNITED STATES TAX COURT. Docket No. 27548-07L. Filed April 28, 2009.
In April 1999 Ps requested an extension of time to file their 1998 Federal income tax return and separately submitted a $70,000 estimated tax payment. Although Ps' 1998 return includes signature dates in July 1999, R did not receive the return until 2004. R assessed the tax reflected on the return, along with additions to tax and interest, in 2004.

In October 2000 Ps filed their 1999 return and paid their 1999 taxes in full. In November 2000, R refunded the $70,000 estimated tax payment that R received in April 1999 and had credited to Ps' account for 1999.

After receiving a notice of deficiency for 2000, Ps filed a 2000 return. R processed this return and assessed tax, additions to tax, and interest in December 2002. Ps later conceded that they omitted income from their 2000 return and agreed to an additional assessment.

Ps submitted an offer-in-compromise (OIC) seeking relief based upon doubt as to collectibility and doubt as to liability, and R rejected it. R's Appeals Office sustained the rejection and rejected a second OIC, affirming that Ps' reasonable collection potential exceeded the amounts offered and concluding that Ps' liability was properly determined and assessed.

R filed a Federal tax lien and notified Ps. Ps requested a CDP hearing, seeking relief from interest and penalties. R's settlement officer sustained the filing of the Federal tax lien.

Held : R's determination is sustained, and Ps are not entitled to any abatement of interest.



MEMORANDUM OPINION


PANUTHOS, Chief Special Trial Judge: This case is before the Court on petitioners' request for judicial review of an Internal Revenue Service (IRS) determination to sustain a Federal tax lien filing.

Unless otherwise indicated, all section references are to the Internal Revenue Code, as amended.


Background


Some of the facts have been stipulated, and we so find. Petitioners resided in New York when they filed the petition. Petitioners were married at all relevant times, and they filed joint Federal income tax returns for each year in issue.

On April 15, 1999, the IRS received petitioners' request for an extension of time to file their Federal income tax return for taxable year 1998. On April 22, 1999, the IRS received a $70,000 estimated tax payment from petitioners. Petitioners mailed the estimated tax payment separately from the extension request and did not direct the IRS to apply the $70,000 to any particular tax year. The IRS applied the estimated tax payment toward petitioners' account for taxable year 1999.

The record includes petitioners' 1998 Form 1040, U.S. Individual Income Tax Return. Petitioners' return preparer dated this return July 6, 1999, and petitioners dated their signatures July 10, 1999. The return reports total tax due of $86,417, withholding credits of $5,803, estimated tax payments of $70,000, and a balance due of $10,614. IRS records reflect petitioners' 1998 extension request and the 1998 withholding credit on April 15, 1999. However, IRS records further reflect that the IRS received and processed petitioners' 1998 return on February 26, 2004. The IRS assessed tax, additions to tax, and interest as follows:


Total tax for 1998 $86,417.00

Failure to file addition to tax 18,138.15

Failure to pay addition to tax 20,153.50

Interest 40,111.38



Petitioners filed their 1999 Federal income tax return, with an extension, on October 12, 2000, and included full payment of their 1999 liability with the return. On November 20, 2000, the IRS refunded $70,000 to petitioners as an overpayment for 1999.

With the $70,000 income tax refund, the IRS included a statement explaining that the sum of petitioners' 1999 withholding tax credits and the payment submitted with the 1999 return exactly equaled their 1999 tax liability. The statement listed a $70,000 estimated tax payment made on April 22, 1999, and credited toward taxable year 1999. 1

On receipt of the $70,000 income tax refund check in November 2000, petitioners called the IRS to ask whether there had been some mistake and whether they should cash the check. Apparently because the IRS computer system did not have any record of a liability for 1998 (because the IRS had not yet received or processed a return from petitioners for 1998), an IRS employee told petitioners that the IRS did not have any record of petitioners' having any outstanding liability, that petitioners had overpaid their 1999 taxes, and that the refund was valid. Petitioners did not inform the IRS at any time before cashing the refund check that they wanted the IRS to apply that $70,000 payment to their account for 1998 rather than 1999.

The IRS issued petitioners a notice of deficiency for taxable year 2000, after which petitioners filed a Form 1040 for 2000. The IRS received this late-filed return on August 3, 2002, processed it, and assessed the following on December 9, 2002:


Total tax for 2000 $22,768.00

Failure to file addition to tax 3,561.30

Failure to pay addition to tax 1,187.10

Interest 1,268.93



On December 31, 2002, the IRS informed petitioners that their late-filed 2000 return failed to include certain income. Petitioners ultimately agreed with the IRS that they underreported their income for 2000, and they agreed to the assessment of additional tax, additions to tax, and interest. The IRS assessed the following on December 8, 2003:


Additional tax assessed for 2000 $20,006.00

Additional failure to file addition
to tax 8,767.25

Additional failure to pay addition
to tax 838.40

Additional interest 4,524.74



Petitioners submitted a Form 656, Offer in Compromise (OIC), dated January 10, 2004, in response to the IRS's determination of unreported income on petitioners' 2000 tax return. This OIC does not state which liabilities petitioners sought to compromise, but petitioners offered $17,000 and claimed as grounds for compromise both doubt as to collectibility (DATC) and doubt as to liability (DATL). It appears from the record that the IRS informed petitioners that this OIC could not be processed because the IRS did not have any record of petitioners' filing a tax return for 1998. Petitioners then submitted a 1998 Form 1040, which the IRS processed on February 26, 2004.

Petitioners submitted another OIC in March 2004, again offering to pay $17,000 and claiming both DATC and DATL, but this time listing tax years 1998 and 2000. They explained in a letter to the IRS that it had erroneously applied the $70,000 estimated tax payment they made in April 1999 to taxable year 1999 and erroneously refunded that amount to petitioners in November 2000. Petitioners also explained that they had a large net operating loss (NOL) that they proposed carrying back to offset their 1998 liability.

On January 3, 2005, the OIC reviewer informed petitioners that if there was an error with the application or refund of the estimated tax payment, petitioners might avoided some penalties and interest if they had taken action to inform the IRS of the error when it occurred rather than accepting the refund and cashing the check. The OIC reviewer advised petitioners that the IRS could not agree to petitioners' proposal to reduce their NOL by the amount of the refunded estimated tax payment. He also informed petitioners that they were not entitled to relief under either DATC or DATL and that formal notification of the rejection of their offer would follow.

On March 1, 2005, the IRS rejected petitioners' OIC. The OIC rejection letter recited that an analysis of petitioners' ability to pay dictated rejecting the $17,000 offer because petitioners' reasonable collection potential (RCP) was $161,708.07. The letter also explained that petitioners did not present any information indicating that the amount of tax assessed for 1998 or 2000 was incorrect; rather, petitioners claimed they were not liable for interest and penalties which accrued on the $70,000 portion of their 1998 tax liability that they intended to pay. The letter further stated that "Your failure to return this refund contributed to the accrual of penalties and interest." The IRS considered both collectibility and liability in rejecting petitioners' OIC.

Petitioners timely appealed the rejection of their OIC, challenging the DATC and the DATL conclusions. They complained of two IRS errors: Refunding the $70,000 estimated tax payment; and telling petitioners they had no tax liability. Petitioners also complained that the IRS notified them about the taxes due for 1998 nearly 5 years after they made the estimated tax payment in April 1999. Petitioners sought relief from interest and additions to tax due to the passage of time and due to the errors they ascribe to the IRS. Petitioners also argued that the IRS collectibility calculations did not properly account for the legitimate expenses of living in New York.

In November 2005, apparently as part of the appeal of the rejection of their $17,000 OIC, petitioners offered $28,000 to settle their liabilities for 1998 and 2000, again asserting DATC and DATL. Petitioners made arguments similar to those in their OIC appeal, and they did not assert that they filed their 1998 tax return before February 2004.

On February 9, 2006, the IRS Appeals Office determined that the tax liability was legally due and that petitioners' RCP was $139,277. Appeals noted that the 1998 return was filed February 26, 2004, well after petitioners fully paid their 1999 taxes and received the refund and also well after an IRS employee informed petitioners in 2000 that IRS records indicated that petitioners did not have any outstanding liability. Appeals sustained the rejection of the earlier OIC and rejected the new OIC.

On April 24, 2007, the IRS mailed a Notice of Federal Tax Lien Filing and Your Right to a Hearing Under IRC 6320 (filing notice) to petitioners. The IRS prepared the tax lien on April 13, 2007, and mailed a notice of Federal tax lien (NFTL) to New York County on April 18, 2007. The filing notice states that the lien was filed on April 17, 2007. 2

Petitioners filed a Form 12153, Request for a Collection Due Process or Equivalent Hearing, on May 8, 2007, challenging the lien filing for their liabilities for 1998 and 2000. 3 On that form, petitioners indicated that they sought an OIC as a collection alternative and withdrawal of the lien because: "1) Notification by IRS was late. 2) Amount assessed is wrong. 3) We dispute liability for interest and penalties."

In an attachment to their collection hearing request, petitioners asserted that the IRS failed to notify them within 5 days of filing the lien, and they challenged the underlying tax liability reflected in the filing notice for 1998 and 2000. Petitioners' challenge to the underlying liability for 1998 involved the estimated tax payment that the IRS refunded, the interest and additions to tax on that amount, and the fact that the IRS did not demand payment of their liability for 1998 until 2004. Petitioners' challenge to the liability for 2000 concerned the application of their subsequent year tax refunds. They complain that the IRS applied some of those refunds to 1998 and some to 2000. They also asserted that Appeals finally rejected their OIC on February 9, 2006, but that, as a result of delays in transferring the file from Appeals to Collections, the IRS did not send a new tax due bill until March 12, 2007; that they were told that interest and additions to tax would not accrue during the OIC process; and that they are not liable for all of the assessed and accrued interest and additions to tax.

The settlement officer (SO) assigned to petitioners' collection hearing instructed petitioners to submit certain information required for her to consider collection alternative(s). The SO informed petitioners that she could not consider challenges to the underlying tax liability for either 1998 or 2000 because petitioners received a notice of deficiency and/or had prior opportunities to dispute their liability. She scheduled a telephone conference with petitioners for October 30, 2007.

Petitioners did not submit any of the information the SO requested, and petitioners informed the SO during the collection hearing that they wished to pursue their case in court. Following the hearing, the IRS issued a Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330 (notice of determination), dated November 2, 2007. The SO recited in the notice of determination that petitioners did not provide a statement detailing any collection alternative sought and also did not submit the financial information required for her to consider collection alternatives. The SO explained that she verified that the applicable legal and administrative procedures were followed in the issuance of the Federal tax lien; that she considered the issues petitioners raised in their hearing request and during the conference, and that petitioners' arguments did not support the IRS's withdrawing the lien; that she could not consider challenges to the underlying tax liability because petitioners had prior opportunities to dispute the liability at issue; and that she balanced the need for efficient collection with petitioners' concerns that collection be no more intrusive than necessary. The IRS sustained the filing of the NFTL.

In their petition, petitioners assert:
I request a hearing to establish important facts and to require the IRS to remove interest and penalties from its collection action for the tax year 1998. During the hearing I intend to bring evidence of the following problems with the IRS collection action. 1) That the IRS in filing for a federal tax lien failed to obey proper procedure by not notifying me in writing 5 business days after the filing of a lien. 2) That the IRS has not provided an accurate accounting of liability. 3) That the IRS applied penalties and interest charges in a capricious fashion and that it cannot account for the numbers. 4) That interest and penalties should not have been applied at all considering that late payment of 1998 tax bill was due entirely to IRS error. 4) That the IRS has on a number of occasions misrepresented material facts to us that harmed our situation and led to greater liability. (A detailed explanation can be found on attached request for due process hearing).

Petitioners alleged at trial that they filed their 1998 return in 1999. This was the first time this allegation had been made. Petitioners also asserted that the IRS failed to timely notify them of the lien filing, and they sought to challenge the interest and penalty determinations. 4 Petitioners acknowledge their principal tax liabilities but assert that only reducing the additions to tax and interest can correct the IRS's errors.

The issue for decision is whether respondent abused his discretion in upholding the filing of the NFTL and denying petitioners' request for an abatement of interest.


Discussion


On the record before us, we find that, although petitioners' 1998 return bears signature dates in 1999, petitioners did not file the 1998 return until 2004.



I. Review of Collection Determination

Pursuant to sections 6320(c) and 6330(d)(1), we have jurisdiction to review the IRS's determination that the NFTL was properly filed.

In reviewing the Commissioner's decision to sustain collection actions, where tax liability is properly at issue, the Court reviews the Commissioner's determination of tax liability de novo. Sego v. Commissioner , 114 T.C. 604, 610 (2000); Goza v. Commissioner , 114 T.C. 176, 181-182 (2000). The Court reviews determinations regarding proposed collection actions for abuse of discretion. Sego v. Commissioner , supra at 610; Goza v. Commissioner , supra at 182. An abuse of discretion occurs when the exercise of discretion is without sound basis in fact or law. Murphy v. Commissioner , 125 T.C. 301, 308 (2005), affd. 469 F.3d 27 (1st Cir. 2006).

At the collection hearing, a taxpayer may raise any relevant issues relating to the unpaid tax or lien filing, including spousal defenses, challenges to the appropriateness of the collection actions, and offers of collection alternatives. In addition, he may challenge the existence or amount of the underlying tax liability, but only if he did not receive a notice of deficiency or otherwise have an opportunity to dispute such liability. Sec. 6330(c)(2)(B) .

In making a determination following a collection hearing, the IRS must consider: (1) Whether the requirements of any applicable law or administrative procedure have been met, (2) any relevant issues the taxpayer raised, and (3) whether the proposed collection action balances the need for efficient collection with legitimate concerns that the collection action be no more intrusive than necessary. Sec. 6330(c)(3) .



II. Procedural Error

At trial petitioners challenged the timing of the filing notice, arguing that the IRS failed to notify them within 5 days of the date the IRS filed the tax lien as required by section 6320(a)(2) .

Although the IRS prepared the tax lien on April 13, 2007, the filing notice states that the IRS filed the tax lien on April 17, 2007. The IRS mailed the NFTL to New York County on April 18, 2007. The IRS then mailed the filing notice to petitioners on April 24, 2007, which is within 5 business days of both April 17 and April 18. The IRS properly notified petitioners of the lien filing. 5



III. Challenges to the Underlying Tax Liabilities

Petitioners submitted an OIC challenging both collectibility and liability. The IRS concluded that petitioners could pay more than the amount of their offer and that the liability, including additions to tax and interest, had been properly assessed on the basis of petitioners' late-filed tax returns. The IRS rejected petitioners' OIC. Petitioners appealed that rejection. The Appeals Office reconsidered the challenges and entertained a new OIC. During the appeal the Appeals officer confirmed that the IRS properly assessed the liabilities and that petitioners' RCP exceeded their offer amounts. Appeals concluded that petitioners' offers were not acceptable.

Section 6330(c)(2)(B) allows a taxpayer to challenge an underlying tax liability in a collection hearing only if he did not receive any notice of deficiency for the liability and he did not otherwise have an opportunity to dispute the underlying tax liability. We have previously held that where a taxpayer received a notice of deficiency and did not file a timely petition, an OIC-DATL made during the later collection hearing was a challenge to the underlying tax liability. Thus, respondent properly refused to consider the underlying tax liability. Sec. 6330(c)(2)(B) ; Baltic v. Commissioner , 129 T.C. 178, 183 (2007).

For tax year 1998 petitioners did not receive a notice of deficiency. 6 For tax year 2000 petitioners received a notice of deficiency but did not file a petition with this Court. For each tax year petitioners challenged the tax liability with their OIC-DATL submissions before the collection proceeding.

It would appear that an OIC-DATL is an opportunity to dispute the underlying tax liability and that the SO did not abuse her discretion by not considering this challenge. Sec. 6330(c)(2)(B) ; see Baltic v. Commissioner , supra ; Lewis v. Commissioner , 128 T.C. 48 (2007); Sego v. Commissioner , supra at 609-611; Goza v. Commissioner , supra at 180-181, 183-184.

Even if petitioners could dispute the tax liability as discussed further below (see discussion on interest abatement), petitioners' failure to designate the period to which the $70,000 payment should be applied would result in a denial of petitioners' claim for relief. 7



IV. Interest Abatement

In the attachment to the collection hearing request, which petitioners also attached to their petition, petitioners seek relief from interest and additions to tax. 8 As discussed, section 6330(c)(2)(B) appears to foreclose the challenge to the underlying tax liability, including the additions to tax. 9 However, we will consider whether the IRS abused its discretion in refusing to abate any of the interest on petitioners' 1998 or 2000 liability. We note that because Congress did not intend the interest abatement statute to be used routinely, we grant abatement only "'where failure to abate interest would be widely perceived as grossly unfair.'" Lee v. Commissioner , 113 T.C. 145, 149 (1999) (quoting H. Rept. 99-426, at 844 (1985), 1986-3 C.B. (Vol. 2) 1, 844, and S. Rept. 99-313, at 208 (1986), 1986-3 C.B. (Vol. 3) 1, 208).

A taxpayer may be entitled to an abatement of interest when an unreasonable error or delay in an IRS employee's performing a ministerial or managerial act causes an error or delay in payment of tax. See sec. 6404(e) . Transferring a case between IRS offices after a request for transfer has been approved and misplacing a taxpayer's file are managerial acts; unreasonable errors or delays in either may be grounds for abatement of interest. See Palihnich v. Commissioner , T.C. Memo. 2003-297; sec. , Examples ( 1 ), ( 6 ), Proced. & Admin. Regs.

To qualify for abatement, the taxpayer must show: (1) An error or delay by the IRS in performing a ministerial or managerial act; (2) a correlation between a specific period of delay in payment and an error or delay by the IRS; and (3) that the taxpayer would have paid the tax liability earlier but for the IRS's error. Braun v. Commissioner , T.C. Memo. 2005-221.

Petitioners identified the period between the final rejection of their OIC, on February 9, 2006, and the issuance of a new tax due bill, on March 12, 2007, as a period of unreasonable delay. 10 However, they have not provided any link between any delay in producing a new tax due bill and their delay in payment. Petitioners were well aware of the principal amounts due for 1998 and 2000, and they knew the amounts of interest and additions to tax which were due before their filing OICs. Even though their attempts to compromise their liabilities had failed, they did not pay any of these amounts while waiting for a new bill from the IRS. Petitioners have not demonstrated that they would have paid their tax liability for 1998 and 2000 earlier but for the IRS's delay in preparing a tax due bill. See id.

It would not be unfair to hold petitioners liable for the interest on their tax liability. Petitioners are not entitled to abatement of interest.



V. Conclusion

The notice of determination indicates that the SO considered relevant issues petitioners raised, whether the IRS met the requirements of applicable law and administrative procedure, and whether the proposed collection action balances collection efficiency and intrusiveness. Petitioners did not raise any spousal defenses or pursue any collection alternatives during the collection hearing. The SO properly determined that petitioners were not entitled to challenge the existence or amount of the underlying tax liability.

The SO satisfied the requirements of sections 6320 and 6330, and we conclude that respondent's decision sustaining the filing of the NFTL was neither erroneous nor an abuse of discretion.

In reaching our holdings, we have considered all the parties' contentions, and to the extent not addressed herein, we conclude that they are irrelevant, moot, or without merit.

To reflect the foregoing,

Decision will be entered for respondent .

1 Petitioners' only estimated tax payment in 1999 was the $70,000 payment the Internal Revenue Service (IRS) received April 22, 1999, and credited toward petitioners' account for 1999.

2 New York County recorded the notice of Federal tax lien on May 14, 2007.

3 The notice of Federal tax lien listed liabilities of $143,164.03 for 1998, $51,740.72 for 2000, and $956.07 for 2003. Petitioners did not challenge the lien filing for 2003 in their collection hearing request.

4 As noted, the IRS assessed taxes, interest, and additions to tax for failure to file and failure to pay. It has not assessed any penalties for either 1998 or 2000.

5 We have made findings as to the relevant dates of the (1) mailing of the NFTL to New York County, (2) mailing of the lien filing notice to petitioners, (3) hearing date request by petitioners, and (4) recordation by New York County. Petitioners did not argue, nor do we conclude, that petitioners were adversely affected by the timing of the recording of the notice of lien since they requested and received administrative review. Further, they filed a timely petition in response to a notice of determination and had a full opportunity for judicial review. See Golub v. Commissioner , T.C. Memo. 2008-122.

6 The IRS is not required to issue a notice of deficiency when the assessment is of taxes determined by the IRS or the taxpayer and based on returns filed by the taxpayer. Montgomery v. Commissioner , 122 T.C. 1, 8 (2004); see also sec. 6201(a)(1) .

7 Finally, as to petitioners' complaint that the IRS applied some of their subsequent year overpayments to offset the 1998 liability when petitioners would have preferred to offset the 2000 liability, sec. 6402(a) allows the IRS to credit any overpayment to any liability owed by a taxpayer. Petitioners will not be heard to challenge the IRS's choice of which liability to offset. See Kalb v. United States , 505 F.2d 506, 509 (2d Cir. 1974).

8 Petitioners assert that the additions to tax and interest for 1998 should be reduced on account of the erroneous refund of their $70,000 estimated tax payment. We have found that petitioners filed their 1998 return in 2004. Respondent assessed and petitioners have not specifically challenged the failure to file addition to tax.

The failure to pay addition to tax accrues at 0.5 percent per month, to a maximum of 25 percent, from the date prescribed for payment of such tax. Sec. 6651(a)(2) . The maximum failure to pay addition to tax, therefore, accrues in 50 months. Petitioners' 1998 tax payment was due Apr. 15, 1999. More than 50 months have clearly elapsed since Apr. 15, 1999, even excluding the 19 months during which the IRS held petitioners' $70,000 estimated tax payment. Respondent has properly assessed the maximum failure to pay addition to tax.

9 As to the additions to tax, even if petitioners could so challenge, they have not shown reasonable cause or good faith for their failure to timely file or pay their taxes for 1998 or 2000. Thus, they are liable for these additions to tax. See sec. 6651(a)(1) and (2).

10 To the extent that petitioners might seek abatement of interest during the 19 months the IRS had petitioner's $70,000 estimated tax payment, such abatement is foreclosed by sec. 6404(e)(1) and (2). Petitioners made their estimated tax payment late and did not challenge the refund in 2000 as erroneous on the grounds that they intended the IRS to apply the estimated tax payment to a different year. Finally, their self-serving testimony is the only evidence they offered of any intent to apply the $70,000 payment toward tax year 1998.
Fraud Enforcement and Recovery Act of 2009, as Reported by the Senate Judiciary Committee - Senate Passes Fraud, Tax Evasion Bill
The Senate on April 28 approved, by a 92-4 margin, a measure that would apply the federal international money laundering statute to tax evasion in an effort to stem the spread of financial crimes. The Fraud Enforcement and Recovery Bill of 2009 (Sen 386) amends the federal international money laundering statute to create a new money laundering crime to cover moving money from or through the United States with the intent to engage in tax evasion. This amendment changes the previous understanding of the crime of money laundering, which has focused on punishing financial transactions designed to launder the proceeds of criminal activity.

Under Sen 386, the act of tax evasion itself, without the need or any subsequent financial transaction, would be treated as money laundering. This allows tax evasion to be punishable both under the Internal Revenue Code and under the federal money laundering statute, which carries far greater penalties.

The legislation was originally introduced on February 5, 2009 by Senate Finance Committee ranking member Charles E. Grassley, R-Iowa and Sen. Patrick J. Leahy, D-Vt. The Obama administration on April 20 released an official Statement of Administration Policy (SAP) indicating strong support for the bill and the House Judiciary Committee on April 28 approved a similar measure by voice vote.



Fraud Enforcement and Recovery Act of 2009, as Reported by the Senate Judiciary Committee

April 29, 2009

111th Congress

Calendar No. 28



111th CONGRESS



1st Session



S. 386

To improve enforcement of mortgage fraud, securities fraud, financial institution fraud, and other frauds related to federal assistance and relief programs, for the recovery of funds lost to these frauds, and for other purposes.



IN THE SENATE OF THE UNITED STATES



February 5, 2009

Mr. LEAHY (for himself, Mr. GRASSLEY, Mr. KAUFMAN, Ms. KLOBUCHAR, and Mr. SCHUMER) introduced the following bill; which was read twice and referred to the Committee on the Judiciary



March 5, 2009



Reported by Mr. LEAHY, with an amendment

[Strike out all after the enacting clause and insert the part printed in italic]



A BILL

To improve enforcement of mortgage fraud, securities fraud, financial institution fraud, and other frauds related to federal assistance and relief programs, for the recovery of funds lost to these frauds, and for other purposes.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,



SECTION 1. SHORT TITLE.

This Act may be cited as the `Fraud Enforcement and Recovery Act of 2009' or `FERA'.



SEC. 2. AMENDMENTS TO IMPROVE MORTGAGE, SECURITIES, AND FINANCIAL FRAUD RECOVERY AND ENFORCEMENT.

(a) Definition of Financial Institution Amended To Include Mortgage Lending Business- Section 20 of title 18, United States Code, is amended --

(1) in paragraph (8), by striking `or' after the semicolon;

(2) in paragraph (9), by striking the period and inserting `; or'; and

(3) by inserting at the end the following:

`(10) a mortgage lending business (as defined in section 27 of this title) or any person or entity that makes in whole or in part a federally-related mortgage loan as defined in 12 U.S.C. 2602(1).'.

(b) Mortgage Lending Business Defined-

(1) IN GENERAL- Chapter 1 of title 18, United States Code, is amended by inserting after section 26 the following:



`Sec. 27. Mortgage lending business defined

`In this title, the term `mortgage lending business' means an organization which finances or refinances any debt secured by an interest in real estate, including private mortgage companies and any subsidiaries of such organizations, and whose activities affect interstate or foreign commerce.'.

(2) CHAPTER ANALYSIS- The chapter analysis for chapter 1 of title 18, United States Code, is amended by adding at the end the following:

`27. Mortgage lending business defined.'.

(c) False Statements in Mortgage Applications Amended To Include False Statements by Mortgage Brokers and Agents of Mortgage Lending Businesses- Section 1014 of title 18, United States Code, is amended by --

(1) striking `or' after `the International Banking Act of 1978),'; and

(2) inserting after `section 25(a) of the Federal Reserve Act' the following: `or a mortgage lending business whose activities affect interstate or foreign commerce, or any person or entity that makes in whole or in part a federally-related mortgage loan as defined in 12 U.S.C. 2602(1)'.

(d) Major Fraud Against the Government Amended To Include Economic Relief and Troubled Asset Relief Program Funds- Section 1031(a) of title 18, United States Code, is amended by --

(1) inserting after `or promises, in' the following: `any grant, contract, subcontract, subsidy, loan, guarantee, insurance or other form of Federal assistance, including through the Troubled Assets Relief Program, an economic stimulus, recovery or rescue plan provided by the Government, or the Government's purchase of any preferred stock in a company, or'; and

(2) striking `the contract, subcontract' and inserting `such grant, contract, subcontract, subsidy, loan, guarantee, insurance or other form of Federal assistance,'.

(e) Securities Fraud Amended To Include Fraud Involving Options and Futures in Commodities-

(1) IN GENERAL- Section 1348 of title 18, United States Code, is amended --

(A) in the caption, by inserting `and commodities' after `Securities';

(B) by inserting `any commodity for future delivery, or any option on a commodity or a commodity for future delivery, or' after `any person in connection with' ; and

(C) by inserting `any commodity for future delivery, or any option on a commodity or a commodity for future delivery, or' after `in connection with the purchase or sale of'.

(2) CHAPTER ANALYSIS- The item for section 1348 in the chapter analysis for chapter 63 of title 18, United States Code, is amended by inserting `and commodities' after `Securities'.

(f) Money Laundering Amended To Define Proceeds of Specified Unlawful Activity- Section 1956(c) of title 18, United States Code, is amended --

(1) in paragraph (8), by striking the period and inserting `; and'; and

(2) by inserting at the end the following:

`(9) the term `proceeds' means any property derived from or obtained or retained, directly or indirectly, through the commission of a specified unlawful activity, including the gross receipts of such specified unlawful activity.'.

(g) Making the International Money Laundering Statute Apply to Tax Evasion- Section 1956(a)(2)(A) of title 18, United States Code, is amended by --

(1) inserting `(i)' before `with the intent to promote'; and

(2) adding at the end the following:

`(ii) with the intent to engage in conduct constituting a violation of section 7201 or 7206 of the Internal Revenue Code of 1986; or'.



SEC. 3. ADDITIONAL FUNDING FOR INVESTIGATORS AND PROSECUTORS FOR MORTGAGE FRAUD, SECURITIES FRAUD, AND OTHER CASES INVOLVING FEDERAL ECONOMIC ASSISTANCE.

(a) In General-

(1) AUTHORIZATION- There is authorized to be appropriated to the Attorney General, to remain available until expended, $155,000,000 for each of the fiscal years 2010 and 2011, for the purposes of investigations, prosecutions, and civil proceedings involving federal assistance programs and financial institutions, including financial institutions to which this Act and amendments made by this Act apply.

(2) ALLOCATIONS- With respect to fiscal years 2010 and 2011, the amount authorized to be appropriated under paragraph (1) shall be allocated as follows:

(A) Federal Bureau of Investigation: $65,000,000.

(B) The offices of the United States Attorneys: $50,000,000.

(C) The criminal division of the Department of Justice: $20,000,000.

(D) The civil division of the Department of Justice: $15,000,000.

(E) The tax division of the Department of Justice: $5,000,000.

(b) Additional Appropriations for the Postal Inspection Service- There is authorized to be appropriated to the Postal Inspection Service of the United States Postal Service, $30,000,000 for each of the fiscal years 2010 and 2011 for investigations involving federal assistance programs and financial institutions, including financial institutions to which this Act and amendments made by this Act apply.

(c) Additional Appropriations for the Inspector General for the Housing and Urban Development Department- There is authorized to be appropriated to the Inspector General of the Department of Housing and Urban Development, $30,000,000 for each of the fiscal years 2010 and 2011 for investigations involving Federal assistance programs and financial institutions, including financial institutions to which this Act and amendments made by this Act apply.

(d) Use of Funds- The funds authorized to be appropriated under subsections (a), (b), and (c), shall be limited to cover the costs of each listed agency or department for investigating possible criminal, civil, or administrative violations and for prosecuting criminal, civil, or administrative proceedings involving financial crimes and crimes against Federal assistance programs, including mortgage fraud, securities fraud, financial institution fraud, and other frauds related to Federal assistance and relief programs

(e) Report to Congress- Following the final expenditure of all funds appropriated under this section that were authorized by subsections (a), (b), and (c), the Attorney General, in consultation with the United States Postal Inspection Service and the Inspector General for the Department of Housing and Urban Development, shall submit a joint report to Congress identifying --

(1) the amounts expended under subsections (a), (b), and (c) and a certification of compliance with the requirements listed in subsection (d); and

(2) the amounts recovered as a result of criminal or civil restitution, fines, penalties, and other monetary recoveries resulting from criminal, civil, or administrative proceedings and settlements undertaken with funds authorized by this Act.



SEC. 4. CLARIFICATIONS TO THE FALSE CLAIMS ACT TO REFLECT THE ORIGINAL INTENT OF THE LAW.

(a) Clarification of the False Claims Act- Section 3729 of title 31, United States Code, is amended --

(1) by striking subsection (a) and inserting the following:

`(a) Liability for Certain Acts-

`(1) IN GENERAL- Subject to paragraph (2), any person who --

`(A) knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval;

`(B) knowingly makes, uses, or causes to be made or used, a false record or statement to get a false or fraudulent claim paid or approved;

`(C) conspires to commit a violation of subparagraph (A), (B), (D), (E), (F), or (G) or otherwise to get a false or fraudulent claim paid or approved;

`(D) has possession, custody, or control of property or money used, or to be used, by the Government and knowingly delivers, or causes to be delivered, less than all of that money or property;

`(E) is authorized to make or deliver a document certifying receipt of property used, or to be used, by the Government and, intending to defraud the Government, makes or delivers the receipt without completely knowing that the information on the receipt is true;

`(F) knowingly buys, or receives as a pledge of an obligation or debt, public property from an officer or employee of the Government, or a member of the Armed Forces, who lawfully may not sell or pledge property; or

`(G) knowingly makes, uses, or causes to be made or used, a false record or statement to conceal, avoid, or decrease an obligation to pay or transmit money or property to the Government, or knowingly conceals, avoids, or decreases an obligation to pay or transmit money or property to the Government,

is liable to the United States Government for a civil penalty of not less than $5,000 and not more than $10,000, as adjusted by the Federal Civil Penalties Inflation Adjustment Act of 1990 (28 U.S.C. 2461 note; Public Law 104-410), plus 3 times the amount of damages which the Government sustains because of the act of that person.

`(2) REDUCED DAMAGES- If the court finds that --

`(A) the person committing the violation of this subsection furnished officials of the United States responsible for investigating false claims violations with all information known to such person about the violation within 30 days after the date on which the defendant first obtained the information;

`(B) such person fully cooperated with any Government investigation of such violation; and

`(C) at the time such person furnished the United States with the information about the violation, no criminal prosecution, civil action, or administrative action had commenced under this title with respect to such violation, and the person did not have actual knowledge of the existence of an investigation into such violation,

the court may assess not less than 2 times the amount of damages which the Government sustains because of the act of that person.

`(3) COSTS OF CIVIL ACTIONS- A person violating this subsection shall also be liable to the United States Government for the costs of a civil action brought to recover any such penalty or damages.';

(2) by striking subsections (b) and (c) and inserting the following:

`(b) Definitions- For purposes of this section --

`(1) the terms `knowing' and `knowingly' mean that a person, with respect to information --

`(A) has actual knowledge of the information;

`(B) acts in deliberate ignorance of the truth or falsity of the information; or

`(C) acts in reckless disregard of the truth or falsity of the information, and no proof of specific intent to defraud is required;

`(2) the term `claim' --

`(A) means any request or demand, whether under a contract or otherwise, for money or property and whether or not the United States has title to the money or property, that --

`(i) is presented to an officer, employee, or agent of the United States; or

`(ii) is made to a contractor, grantee, or other recipient if the United States Government --

`(I) provides or has provided any portion of the money or property requested or demanded; or

`(II) will reimburse such contractor, grantee, or other recipient for any portion of the money or property which is requested or demanded; and

`(B) does not include requests or demands for money or property that the Government has paid to an individual as compensation for Federal employment or as an income subsidy with no restrictions on that individual's use of the money or property; and

`(3) the term `obligation' means a fixed duty, or a contingent duty arising from an express or implied contractual, quasi-contractual, grantor-grantee, licensor-licensee, fee-based, or similar relationship, and the retention of any overpayment.';

(3) by redesignating subsections (d) and (e) as subsections (c) and (d), respectively; and

(4) in subsection (c), as redesignated, by striking `subparagraphs (A) through (C) of subsection (a)' and inserting `subsection (a)(2)'.



SECTION 1. SHORT TITLE.

This Act may be cited as the `Fraud Enforcement and Recovery Act of 2009' or `FERA'.



SEC. 2. AMENDMENTS TO IMPROVE MORTGAGE, SECURITIES, AND FINANCIAL FRAUD RECOVERY AND ENFORCEMENT.

(a) Definition of Financial Institution Amended To Include Mortgage Lending Business- Section 20 of title 18, United States Code, is amended --

(1) in paragraph (8), by striking `or' after the semicolon;

(2) in paragraph (9), by striking the period and inserting `; or'; and

(3) by inserting at the end the following:

`(10) a mortgage lending business (as defined in section 27 of this title) or any person or entity that makes in whole or in part a federally related mortgage loan as defined in 12 U.S.C. 2602(1).'.

(b) Mortgage Lending Business Defined-

(1) IN GENERAL- Chapter 1 of title 18, United States Code, is amended by inserting after section 26 the following:



`Sec. 27. Mortgage lending business defined

`In this title, the term `mortgage lending business' means an organization which finances or refinances any debt secured by an interest in real estate, including private mortgage companies and any subsidiaries of such organizations, and whose activities affect interstate or foreign commerce.'.

(2) CHAPTER ANALYSIS- The chapter analysis for chapter 1 of title 18, United States Code, is amended by adding at the end the following: `27. Mortgage lending business defined.'.

(c) False Statements in Mortgage Applications Amended To Include False Statements by Mortgage Brokers and Agents of Mortgage Lending Businesses- Section 1014 of title 18, United States Code, is amended by --

(1) striking `or' after `the International Banking Act of 1978),'; and

(2) inserting after `section 25(a) of the Federal Reserve Act' the following: `or a mortgage lending business whose activities affect interstate or foreign commerce, or any person or entity that makes in whole or in part a federally related mortgage loan as defined in 12 U.S.C. 2602(1)'.

(d) Major Fraud Against the Government Amended To Include Economic Relief and Troubled Asset Relief Program Funds- Section 1031(a) of title 18, United States Code, is amended by --

(1) inserting after `or promises, in' the following: `any grant, contract, subcontract, subsidy, loan, guarantee, insurance or other form of Federal assistance, including through the Troubled Assets Relief Program, an economic stimulus, recovery or rescue plan provided by the Government, or the Government's purchase of any preferred stock in a company, or'; and

(2) striking `the contract, subcontract' and inserting `such grant, contract, subcontract, subsidy, loan, guarantee, insurance or other form of Federal assistance,'.

(e) Securities Fraud Amended To Include Fraud Involving Options and Futures in Commodities-

(1) IN GENERAL- Section 1348 of title 18, United States Code, is amended --

(A) in the caption, by inserting `and commodities' after `Securities';

(B) by inserting `any commodity for future delivery, or any option on a commodity for future delivery, or' after `any person in connection with'; and

(C) by inserting `any commodity for future delivery, or any option on a commodity for future delivery, or' after `in connection with the purchase or sale of'.

(2) CHAPTER ANALYSIS- The item for section 1348 in the chapter analysis for chapter 63 of title 18, United States Code, is amended by inserting `and commodities' after `Securities'.

(f) Money Laundering Amended To Define Proceeds of Specified Unlawful Activity-

(1) MONEY LAUNDERING- Section 1956(c) of title 18, United States Code, is amended --

(A) in paragraph (8), by striking the period and inserting `; and'; and

(B) by inserting at the end the following:

`(9) the term `proceeds' means any property derived from or obtained or retained, directly or indirectly, through some form of unlawful activity, including the gross receipts of such activity.'.

(2) MONETARY TRANSACTIONS- Section 1957(f) of title 18, United States Code, is amended by striking paragraph (3) and inserting the following:

`(3) the terms `specified unlawful activity' and `proceeds' shall have the meaning given those terms in section 1956 of this title.'.

(g) Making the International Money Laundering Statute Apply to Tax Evasion- Section 1956(a)(2)(A) of title 18, United States Code, is amended by --

(1) inserting `(i)' before `with the intent to promote'; and

(2) adding at the end the following:

`(ii) with the intent to engage in conduct constituting a violation of section 7201 or 7206 of the Internal Revenue Code of 1986; or'.



SEC. 3. ADDITIONAL FUNDING FOR INVESTIGATORS AND PROSECUTORS FOR MORTGAGE FRAUD, SECURITIES FRAUD, AND OTHER CASES INVOLVING FEDERAL ECONOMIC ASSISTANCE.

(a) In General-

(1) AUTHORIZATION- There is authorized to be appropriated to the Attorney General, to remain available until expended, $165,000,000 for each of the fiscal years 2010 and 2011, for the purposes of investigations, prosecutions, and civil proceedings involving Federal assistance programs and financial institutions, including financial institutions to which this Act and amendments made by this Act apply.

(2) ALLOCATIONS- With respect to fiscal years 2010 and 2011, the amount authorized to be appropriated under paragraph (1) shall be allocated as follows:

(A) Federal Bureau of Investigation: $75,000,000 for fiscal year 2010 and $65,000,000 for fiscal year 2011.

(B) The offices of the United States Attorneys: $50,000,000.

(C) The criminal division of the Department of Justice: $20,000,000.

(D) The civil division of the Department of Justice: $15,000,000.

(E) The tax division of the Department of Justice: $5,000,000.

(b) Additional Appropriations for the Postal Inspection Service- There is authorized to be appropriated to the Postal Inspection Service of the United States Postal Service, $30,000,000 for each of the fiscal years 2010 and 2011 for investigations involving Federal assistance programs and financial institutions, including financial institutions to which this Act and amendments made by this Act apply.

(c) Additional Appropriations for the Inspector General for the Department of Housing and Urban Development- There is authorized to be appropriated to the Inspector General of the Department of Housing and Urban Development, $30,000,000 for each of the fiscal years 2010 and 2011 for investigations involving Federal assistance programs and financial institutions, including financial institutions to which this Act and amendments made by this Act apply.

(d) Additional Appropriations for the United States Secret Service- There is authorized to be appropriated to the United States Secret Service of the Department of Homeland Security, $20,000,000 for each of the fiscal years 2010 and 2011 for investigations involving Federal assistance programs and financial institutions, including financial institutions to which this Act and amendments made by this Act apply.

(e) Use of Funds- The funds authorized to be appropriated under subsections (a), (b), (c), and (d) shall be limited to cover the costs of each listed agency or department for investigating possible criminal, civil, or administrative violations and for prosecuting criminal, civil, or administrative proceedings involving financial crimes and crimes against Federal assistance programs, including mortgage fraud, securities fraud, financial institution fraud, and other frauds related to Federal assistance and relief programs

(f) Report to Congress- Following the final expenditure of all funds appropriated under this section that were authorized by subsections (a), (b), (c), and (d) the Attorney General, in consultation with the United States Postal Inspection Service, the Inspector General for the Department of Housing and Urban Development, and the Secretary of Homeland Security, shall submit a joint report to Congress identifying --

(1) the amounts expended under subsections (a), (b), (c), and (d) and a certification of compliance with the requirements listed in subsection (e); and

(2) the amounts recovered as a result of criminal or civil restitution, fines, penalties, and other monetary recoveries resulting from criminal, civil, or administrative proceedings and settlements undertaken with funds authorized by this Act.



SEC. 4. CLARIFICATIONS TO THE FALSE CLAIMS ACT TO REFLECT THE ORIGINAL INTENT OF THE LAW.

(a) Clarification of the False Claims Act- Section 3729 of title 31, United States Code, is amended --

(1) by striking subsection (a) and inserting the following:

`(a) Liability for Certain Acts-

`(1) IN GENERAL- Subject to paragraph (2), any person who --

`(A) knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval;

`(B) knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim;

`(C) conspires to commit a violation of subparagraph (A), (B), (D), (E), (F), or (G);

`(D) has possession, custody, or control of property or money used, or to be used, by the Government and knowingly delivers, or causes to be delivered, less than all of that money or property;

`(E) is authorized to make or deliver a document certifying receipt of property used, or to be used, by the Government and, intending to defraud the Government, makes or delivers the receipt without completely knowing that the information on the receipt is true;

`(F) knowingly buys, or receives as a pledge of an obligation or debt, public property from an officer or employee of the Government, or a member of the Armed Forces, who lawfully may not sell or pledge property; or

`(G) knowingly makes, uses, or causes to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the Government, or knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government,

is liable to the United States Government for a civil penalty of not less than $5,000 and not more than $10,000, as adjusted by the Federal Civil Penalties Inflation Adjustment Act of 1990 (28 U.S.C. 2461 note; Public Law 104-410), plus 3 times the amount of damages which the Government sustains because of the act of that person.

`(2) REDUCED DAMAGES- If the court finds that --

`(A) the person committing the violation of this subsection furnished officials of the United States responsible for investigating false claims violations with all information known to such person about the violation within 30 days after the date on which the defendant first obtained the information;

`(B) such person fully cooperated with any Government investigation of such violation; and

`(C) at the time such person furnished the United States with the information about the violation, no criminal prosecution, civil action, or administrative action had commenced under this title with respect to such violation, and the person did not have actual knowledge of the existence of an investigation into such violation,

the court may assess not less than 2 times the amount of damages which the Government sustains because of the act of that person.

`(3) COSTS OF CIVIL ACTIONS- A person violating this subsection shall also be liable to the United States Government for the costs of a civil action brought to recover any such penalty or damages.';

(2) by striking subsections (b) and (c) and inserting the following:

`(b) Definitions- For purposes of this section --

`(1) the terms `knowing' and `knowingly' --

`(A) mean that a person, with respect to information --

`(i) has actual knowledge of the information;

`(ii) acts in deliberate ignorance of the truth or falsity of the information; or

`(iii) acts in reckless disregard of the truth or falsity of the information; and

`(B) require no proof of specific intent to defraud;

`(2) the term `claim' --

`(A) means any request or demand, whether under a contract or otherwise, for money or property and whether or not the United States has title to the money or property, that --

`(i) is presented to an officer, employee, or agent of the United States; or

`(ii) is made to a contractor, grantee, or other recipient, if the money or property is to be spent or used on the Government's behalf or to advance a Government program or interest, and if the United States Government --

`(I) provides or has provided any portion of the money or property requested or demanded; or

`(II) will reimburse such contractor, grantee, or other recipient for any portion of the money or property which is requested or demanded; and

`(B) does not include requests or demands for money or property that the Government has paid to an individual as compensation for Federal employment or as an income subsidy with no restrictions on that individual's use of the money or property;

`(3) the term `obligation' means a fixed duty, or a contingent duty arising from an express or implied contractual, quasi-contractual, grantor-grantee, licensor-licensee, statutory, fee-based, or similar relationship, and the retention of any overpayment; and

`(4) the term `material' means having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property.';

(3) by redesignating subsections (d) and (e) as subsections (c) and (d), respectively; and

(4) in subsection (c), as redesignated, by striking `subparagraphs (A) through (C) of subsection (a)' and inserting `subsection (a)(2)'.

(b) Effective Date and Application- The amendments made by this section shall take effect on the date of enactment of this Act and shall apply to conduct on or after the date of enactment, except that subparagraph (B) of section 3729(a)(1) of title 31, United States Code, as added by subsection (a)(1), shall take effect as if enacted on June 7, 2008, and apply to all claims under the False Claims Act (31 U.S.C. 3729 et seq.) that are pending on or after that date.



Calendar No. 28



111th CONGRESS



1st Session



S. 386



A BILL

To improve enforcement of mortgage fraud, securities fraud, financial institution fraud, and other frauds related to federal assistance and relief programs, for the recovery of funds lost to these frauds, and for other purposes.

March 5, 2009

Reported with an amendment

Monday, April 27, 2009

Section 6676 - frivolous tax refund penalty

A taxpayer filing a refund or credit claim for an "excessive amount" is subject to a penalty equal to 20 percent of such excessive amount ( Code Sec. 6676(a), added by the Small Business and Work Opportunity Tax Act of 2007 ( P.L. 110-28). For this purpose, an excessive amount is the amount by which the refund or credit claim exceeds the amount allowable under the Code for the tax year ( Code Sec. 6676(b), added by P.L. 110-28).

The penalty is not imposed if the taxpayer can show that there is a reasonable basis for claiming the excessive refund or credit amount. In addition, the penalty does not apply to claims for refunds or credits related to the earned income credit since such claims are governed by a separate set of rules under Code Sec. 32 ( Code Sec. 6676(a), added by P.L. 110-28). Nor does the penalty apply to any portion of the excessive amount of the claim that is subject to the accuracy-related penalty under Code Sec. 6662 or 6662A, or the fraud penalty imposed under Code Sec. 6663 ( Code Sec. 6676(c), added by P.L. 110-28).

The penalty applies to claims for refunds or credits filed or submitted after May 25, 2007 (Act Sec. 8247(c) of P.L. 110-28).

ERRONEOUS CLAIM FOR REFUND OR CREDIT

6676(a) CIVIL PENALTY. --If a claim for refund or credit with respect to income tax (other than a claim for a refund or credit relating to the earned income credit under section 32) is made for an excessive amount, unless it is shown that the claim for such excessive amount has a reasonable basis, the person making such claim shall be liable for a penalty in an amount equal to 20 percent of the excessive amount.

6676(b) EXCESSIVE AMOUNT. --For purposes of this section, the term "excessive amount" means in the case of any person the amount by which the amount of the claim for refund or credit for any taxable year exceeds the amount of such claim allowable under this title for such taxable year.

6676(c) COORDINATION WITH OTHER PENALTIES. --This section shall not apply to any portion of the excessive amount of a claim for refund or credit which is subject to a penalty imposed under part II of subchapter A of chapter 68.

.01 Added by P.L. 110-28.



Joint Committee Summary of P.L. 110-28 (Small Business and Work Opportunity Tax Act of 2007)


.99 Penalty for filing erroneous claims for refunds or credits. --
Present Law


Present law imposes accuracy-related penalties on a taxpayer in cases involving a substantial valuation misstatement or gross valuation misstatement relating to an underpayment of income tax. 40 For this purpose, a substantial valuation misstatement generally means a value claimed that is at least twice (200 percent or more) the amount determined to be the correct value, and a gross valuation misstatement generally means a value claimed that is at least four times (400 percent or more) the amount determined to be the correct value.

The penalty is 20 percent of the underpayment of tax resulting from a substantial valuation misstatement and rises to 40 percent for a gross valuation misstatement. No penalty is imposed unless the portion of the underpayment attributable to the valuation misstatement exceeds $5,000 ($10,000 in the case of a corporation other than an S corporation or a personal holding company). Under present law, no penalty is imposed with respect to any portion of the understatement attributable to any item if (1) the treatment of the item on the return is or was supported by substantial authority, or (2) facts relevant to the tax treatment of the item were adequately disclosed on the return or on a statement attached to the return and there is a reasonable basis for the tax treatment. Special rules apply to tax shelters.
Explanation of Provision


The provision imposes a penalty on any taxpayer filing an erroneous claim for refund or credit. The penalty is equal to 20 percent of the disallowed portion of the claim for refund or credit for which there is no reasonable basis for the claimed tax treatment. The penalty does not apply to any portion of the disallowed portion of the claim for refund or credit relating to the earned income credit or any portion of the disallowed portion of the claim for refund or credit that is subject to accuracy-related or fraud penalties.
Effective Date


The provision is effective for claims for refund or credit filed after the date of enactment. --Joint Committee on Taxation, Technical Explanation of the Small Business and Work Opportunity Tax Act of 2007 May 25, 2007 (JCX-29-07).

40 Sec. 6662(b)(3) and (h).
Electing small businesses (ESBs) may elect a three-, four-, or five-year carryback period for 2008 net operating losses (NOLs) by filing Form 1045, Application for Tentative Refund; Form 1139, Corporation Application for Tentative Refund; or an amended return. The IRS has received many claims of carrybacks of NOLs but the taxpayers filing those claims have failed to make valid elections pursuant to Rev. Proc. 2009-19. New guidance prescribes how a taxpayer elects the carryback. Additionally, a taxpayer that initially elected to waive the NOL carryback period may be allowed to revoke that election. When filing Form 1045, Form 1139 or an amended return, the taxpayer should type or print across the top of the appropriate form "Revocation of NOL Carryback Wavier Pursuant to Rev. Proc. 2009-19." The new guidance is effective for NOLs arising in tax years ending after December 31, 2007. Rev. Proc. 2009-19, I.R.B. 2009-14, 747, is modified and, as modified, is superseded.




Rev. Proc. 2009-26 , I.R.B. 2009-19, April 24, 2009.

[ Code Sec. 172]








SECTION 1. PURPOSE

.01 In February 2009, the American Recovery and Reinvestment Tax Act of 2009, Div. B of Pub. L. No. 111-5, 123 Stat. 115 (the Act) was signed into law. Section 1211 of the Act allows an eligible small business (ESB) to elect to carry back a 2008 net operating loss (NOL) for a period of 3, 4, or 5 years to offset taxable income in those preceding taxable years. Prior to the Act, taxpayers generally could carry back an NOL only two taxable years. On March 16, 2009, the Internal Revenue Service and Treasury Department issued Rev. Proc. 2009-19, 2009-14 I.R.B. 747, advising taxpayers how to elect the 3-, 4-, or 5-year carryback.

.02 The Service has received many claims from taxpayers that seek a 3-, 4-, or 5-year carryback but that inadvertently have not made a valid election in accordance with Rev. Proc. 2009-19. These inadvertent failures may be due to the fact that the enactment of §1211 and issuance of Rev. Proc. 2009-19 occurred midway through the current tax return filing season.

.03 To provide certainty to taxpayers and to implement the intent of Congress in providing an extended carryback period, this revenue procedure modifies Rev. Proc. 2009-19 to provide that an ESB may elect a 3-, 4-, or 5-year carryback period simply by filing a Form 1045, Form 1139, or amended return that carries back the NOL for 3, 4, or 5 years. Although Forms 1045 and 1139 ordinarily are due within 12 months after the taxable year of the NOL, §172(b)(1)(H)(iii) requires that the taxpayer elect a 3-, 4-, or 5-year carryback within 6 months after the due date (excluding extensions) of the return for the taxable year of the NOL. Thus, a taxpayer that seeks to make a timely §172(b)(1)(H) election using Form 1045, Form 1139, or an amended return must file the form in advance of its ordinary due date.

.04 This revenue procedure also prescribes: (1) how a taxpayer elects a 3-, 4-, or 5-year carryback if the taxpayer previously filed an election to forgo an NOL carryback period; and (2) how a taxpayer elects a 3-, 4-, or 5-year carryback if the taxpayer is a partner of an ESB that is a partnership, a shareholder of an ESB that is an S corporation, or a sole proprietor.



SECTION 2. BACKGROUND

.01 Section 172(a) allows a deduction equal to the aggregate of the NOL carryovers and carrybacks to the taxable year. Section 172(b)(1)(A)(i) provides that an NOL for any taxable year generally must be carried back to each of the 2 years preceding the taxable year of the NOL. Section 172(b)(3) provides that any taxpayer entitled to a carryback period under §172(b)(1) may make an irrevocable election to relinquish the carryback period with respect to an NOL for any taxable year.

.02 Section 6411(a) provides that a taxpayer may file an application for a tentative carryback adjustment of the tax for the prior taxable year affected by an NOL carryback from any taxable year. Section 6411(a) also provides that the application must be filed on or after the date of filing for the return for the taxable year of the NOL from which the carryback results and within a period of 12 months after that taxable year or, with respect to any portion of a business credit carryback attributable to an NOL from a subsequent taxable year, within a period of 12 months from the end of the subsequent taxable year. Section 6411(b) provides a 90-day period during which the Service will make a limited examination of the application to discover omissions and errors of computation and determine the amount of the decrease in tax attributable to the carryback. The Service may disallow, without further action, any application that contains errors of computation that cannot be corrected within the 90-day period or that contains material omissions. The decrease in tax attributable to the carryback will be applied against unpaid amounts of tax. Any remainder of the decrease will, within the 90-day period, be credited or refunded.

.03 Section 172(b)(1)(H) permits an ESB to carry back its applicable 2008 NOL to 3, 4, or 5 years preceding the taxable year of the NOL, as the ESB elects.

.04 Section 172(b)(1)(H)(iv) provides that the term "eligible small business" has the meaning given by §172(b)(1)(F)(iii), except that §448(c) is applied by substituting "$15 million" for "$5 million" each place it appears. Section 172(b)(1)(F)(iii) provides that a small business is a corporation or partnership that meets the gross receipts test of §448(c) for the taxable year in which the loss arose (or in the case of a sole proprietorship, that would meet such test if the proprietorship were a corporation).

.05 Section 448 generally prohibits certain taxpayers from using the cash receipts and disbursements method of accounting. Section 448(b)(3) provides an exception to this requirement in the case of any corporation or partnership if, for all prior taxable years beginning after December 31, 1985, the entity (or any predecessor) met the $5 million gross receipts test of §448(c). Section 448(c)(1) provides that a corporation or partnership meets the $5 million gross receipts test for any prior taxable year if the average annual gross receipts of the entity for the 3-taxable-year period ending with that prior taxable year does not exceed $5 million. Section 448(c)(2) (aggregation rules) generally provides that all persons treated as a single employer under subsection (a) or (b) of §52 or subsection (m) or (o) of §414 are treated as one person for purposes of §448(c)(1).

.06 The $5 million gross receipts test of §448(c) is applied to a taxpayer's prior taxable year by determining the average annual gross receipts for the 3-year period that ends with that prior taxable year. Under §172(b)(1)(F)(iii), in order to be a small business, a taxpayer must meet the gross receipts test of §448(c) for the taxable year in which the NOL arose. Consequently, to determine if a taxpayer is a small business for purposes of §172(b)(1)(F)(iii), the taxable year in which the NOL arose is the last taxable year of the 3-year period to which the test is applied.

.07 Section 172(b)(1)(H)(ii)(I) provides that the term "applicable 2008 net operating loss" means the taxpayer's NOL for any taxable year ending in 2008. However, under §172(b)(1)(H)(ii)(II), the taxpayer may elect instead to have the term mean the taxpayer's NOL for any taxable year beginning in 2008.

.08 Section 172(b)(1)(H)(iii) provides that any election under §172(b)(1)(H) is required to be made in such a manner as may be prescribed by the Secretary, and must be made by the due date (including extension of time) for filing the taxpayer's return for the taxable year of the NOL. The election is irrevocable and may be made only for one taxable year.

.09 Section 1211(d)(2) of the Act provides that in the case of an applicable 2008 NOL for a taxable year ending before the date of enactment of the Act (February 17, 2009), (A) a previous election made under §172(b)(3) for the NOL may be revoked on or before April 17, 2009; (B) the §172(b)(1)(H) election for the NOL is treated as timely if made on or before April 17, 2009; and (C) an application under §6411(a) with respect to the NOL is treated as timely if filed on or before April 17, 2009.



SECTION 3. SCOPE

This revenue procedure applies to any taxpayer that is an ESB, a partner of a partnership that is an ESB, a shareholder in an S corporation that is an ESB, or a sole proprietor of a business that is an ESB, and that incurred an NOL for any taxable year ending in 2008 or beginning in 2008.



SECTION 4. APPLICATION

.01 Time and manner of making the election under §172(b)(1)(H).

(1) In general. A taxpayer within the scope of this revenue procedure that has an applicable 2008 NOL may make the election under §172(b)(1)(H) by following the procedure described in either section 4.01(2) or section 4.01(3) of this revenue procedure.

(2) Electing on original return. A taxpayer may make the election under §172(b)(1)(H) by attaching a statement to the taxpayer's timely filed federal income tax return for the taxable year in which the applicable 2008 NOL arises. The statement must state that the taxpayer is electing to apply §172(b)(1)(H) and specify the length of the NOL carryback period elected by the taxpayer (3, 4, or 5 years). If the taxpayer's taxable year of the applicable 2008 NOL ends before February 17, 2009, the taxpayer must make the election on or before the later of the due date (including extensions of time) of the taxpayer's return for that taxable year or April 17, 2009.

(3) Electing on an appropriate form. A taxpayer that did not make the election under §172(b)(1)(H) using the procedures of section 4.01(2) of this revenue procedure, and did not elect to forgo the NOL carryback period under §172(b)(3), may make the election under §172(b)(1)(H) as follows:

(a) What to file.

(i) A taxpayer may make the election under §172(b)(1)(H) by filing the appropriate form applying the NOL carryback period chosen by the taxpayer. No statement or label is required with the appropriate form. The appropriate form is:

(A) For corporations: Form 1139, Corporation Application for Tentative Refund, or Form 1120X, Amended U.S. Corporation Income Tax Return.

(B) For individuals: Form 1045, Application for Tentative Refund, or Form 1040X, Amended U.S. Individual Income Tax Return.

(C) For estates or trusts: Form 1045, or amended Form 1041, U.S. Income Tax Return for Estates and Trusts.

(ii) A taxpayer that makes the election under §172(b)(1)(H) by filing an amended return must file the return for the earliest taxable year to which the taxpayer is carrying back the applicable 2008 NOL. The taxpayer should not file an amended return for the applicable 2008 NOL taxable year.

(b) When to file. The appropriate form must be filed on or before the later of the date that is 6 months after the due date (excluding extensions) for filing the taxpayer's return for the taxable year of the applicable 2008 NOL or April 17, 2009.

(c) Additional rules. If a taxpayer makes the election by filing an appropriate form that amends a prior refund claim, the amendment also will apply to a carryback of any alternative tax NOL for the same taxable year. In the case of an amended application for a tentative carryback adjustment, the 90-day period described in §6411(b) will begin on the date the amended application is filed.

.02 Revocation of the election to waive NOL carryback period. A taxpayer within the scope of this revenue procedure that previously elected under §172(b)(3) to forgo the carryback period for an applicable 2008 NOL for a taxable year ending before February 17, 2009, may revoke that election and make the election under §172(b)(1)(H). Any revocation of the election to forgo the NOL carryback period also will apply to a carryback of any alternative tax NOL for the same taxable year. The taxpayer makes the revocation and election by following the procedures of section 4.01(3) of this revenue procedure. In addition, the taxpayer should type or print across the top of the appropriate form "Revocation of NOL Carryback Waiver Pursuant to Rev. Proc. 2009-19." The taxpayer must file the revocation and new election under §172(b)(1)(H) on or before April 17, 2009.

.03 Partnerships, S corporations, and sole proprietorships.

(1) If the taxpayer is a partner in a partnership that qualifies as an ESB, the taxpayer may make the §172(b)(1)(H) election for its distributive share of the qualifying ESB partnership income, gain, loss, and deduction that is both allocable to the taxpayer under §704 and allowed in calculating the taxpayer's applicable 2008 NOL.

(2) If the taxpayer is a shareholder in an S corporation that qualifies as an ESB, the taxpayer may make the §172(b)(1)(H) election for its pro rata share of the qualifying ESB S corporation income, gain, loss, and deduction under §1366 that is allowed in calculating the shareholder's applicable 2008 NOL.

(3) If the taxpayer is an owner of a sole proprietorship that qualifies as an ESB, the taxpayer may make the §172(b)(1)(H) election for the qualifying ESB sole proprietorship income, gain, loss, and deduction that is allowed in calculating the taxpayer's applicable 2008 NOL.

(4) In determining whether a partnership, S corporation, or sole proprietorship qualifies as an ESB, the gross receipts test applies at the partnership, corporate, or sole proprietorship level. The aggregation rules of §448(c)(2) apply to determine whether the partnership, S corporation, or sole proprietorship meets the gross receipts test of §448(c).

(5) The amount of the taxpayer's applicable 2008 NOL that the taxpayer may carry back under §172(b)(1)(H) is limited to the lesser of:

(a) The taxpayer's items of income, gain, loss or deduction that are allowed in calculating the taxpayer's applicable 2008 NOL and are from one or more partnerships, S corporations or sole proprietorships that qualify as ESBs, or

(b) The taxpayer's applicable 2008 NOL.

(6) Examples.

(a) Example 1. Partnerships A, B, and C have average annual gross receipts of $10 million, $12 million, and $14 million, respectively. Partner T owns a 40% interest in each partnership. None of the partnerships is required to be aggregated with any other entity for purposes of the aggregation rules of §448(c)(2). Subject to the limitations in section 4.03(5) of this revenue procedure, Partner T may apply its election under §172(b)(1)(H) to the portion of its applicable 2008 NOL attributable to its distributive share of the income, gain, loss, and deduction of each of Partnerships A, B, and C.

(b) Example 2. The facts are the same as in Example 1, except that Partnerships A and B are under common control within the meaning of §52(b)(1). Accordingly, Partnerships A and B are treated as one person under the aggregation rules of §448(c)(2). Because the aggregated average annual gross receipts of Partnerships A and B exceed $15 million, Partnerships A and B do not qualify as ESBs. Partner T may not apply its election under §172(b)(1)(H) to the portion of its applicable 2008 NOL attributable to its distributive share of the income, gain, loss, and deduction of Partnerships A and B. However, subject to the limitations in section 4.03(5) of this revenue procedure, Partner T may apply its election under §172(b)(1)(H) to the portion of its applicable 2008 NOL attributable to its distributive share of income, gain, loss, and deduction of Partnership C.



SECTION 5. EFFECT ON OTHER DOCUMENTS

Rev. Proc. 2009-19 is modified and, as modified, is superseded.



SECTION 6. EFFECTIVE DATE

This revenue procedure is effective for NOLs arising in taxable years ending after December 31, 2007.



SECTION 7. PAPERWORK REDUCTION ACT

The collection of information contained in this revenue procedure has been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under the following control numbers: 1545-0074 Form 1040 (U.S. Individual Income Tax Return) and Form 1040X (Amended U.S. Individual Income Tax Return); 1545-0123 Form 1120 (U.S. Corporation Income Tax Return); 1545-0132 Form 1120X (Amended U.S. Corporation Income Tax Return);1545-0092 Form 1041 (U.S. Income Tax Return for Estates and Trusts); 1545-0098 Form 1045 (Application for Tentative Refund); 1545-0582 Form 1139 (Corporation Application for Tentative Refund). For further information, please refer to the Paperwork Reduction Act statements accompanying these forms.



DRAFTING INFORMATION

The principal author of this revenue procedure is Seoyeon Park of the Office of the Associate Chief Counsel (Income Tax and Accounting). For further information regarding this notice, contact Ms. Park at (202) 622-4960 (not a toll-free call).