The IRS has issued guidance regarding the deductibility of amounts paid by individuals for diagnostic and similar procedures, including certain devices, not compensated by insurance or otherwise, as medical care expenses under Code Sec. 213(a). In each of the three scenarios presented, the amounts paid by taxpayers were expenses for medical care deductible under Code Sec. 213(a), subject to the limitations of that section including the seven and a half percent floor on deductibility.
Under Code Sec. 213(d)(1)(A), medical care expenses include amounts paid related to the diagnosis, mitigation, treatment, cure or prevention of disease, or any condition affecting any structure or function of the body, including obstetrical services. Diagnosis includes the determination of the absence of disease, and may involve testing for changes in the function of the body unrelated to disease. The guidance clarifies that (1) Code Sec. 213 does not limit the deduction to amounts paid for the least expensive form of medical care applicable, and (2) a physician's recommendation, while often important to determine whether certain expenses are for medical or personal reasons, is unnecessary when the expenditures are for items wholly medical in nature and that serve no other function.
In the first scenario, money spent for an annual physical examination qualified as an expense for medical care, even though the taxpayer was not experiencing any symptoms of illness. In the second scenario, a taxpayer who was not experiencing any symptoms of illness paid for a full-body electronic scan at a clinic without having obtained a physician's recommendation for this procedure. Because the procedure served no non-medical purpose, it, too, qualified as an expense for medical care. In addition, neither the high cost of the procedure nor the possibility of less expensive alternative diagnostic tests barred the deductibility of the expense. Finally, in the third scenario, the expense of a self-administered pregnancy test kit qualified as an expense for medical care, even though it tested the healthy functioning of the body rather than attempted to detect disease.
Rev. Rul. 2007-72, 2007FED ¶46,744
Other References:
Code Sec. 213
CCH Reference - 2007FED ¶12,543.023
CCH Reference - 2007FED ¶12,543.132
CCH Reference - 2007FED ¶12,543.136
Tax Research Consultant
CCH Reference - TRC INDIV: 42,052
A debt instrument providing an economic return by reference to the euro (and market interest rates in respect of the euro) was a euro-denominated indebtedness of the issuer despite being both issued and redeemed for U.S. dollars. The acquisition of --or becoming an obligor under --a debt instrument is a Code Sec. 988 transaction if the amount a taxpayer is either required to pay or entitled to receive is determined by reference to a nonfunctional currency. Neither the translation of dollars into euros and euros back into dollars, nor the fact that intervening currency fluctuations might result in the holder receiving less at maturity than was originally paid for the instrument, are relevant to the characterization of the instrument as debt. It is also irrelevant to its characterization whether the instrument is privately offered, publicly offered or traded via an exchange.
Rev. Rul. 2008-1, 2007FED ¶46,746
Other References:
Code Sec. 988
CCH Reference - 2007FED ¶28,907.60
Tax Research Consultant
CCH Reference - TRC INTLOUT: 21,104.05
The IRS and the Treasury Department have requested comments from the public regarding issues that arise with respect to certain financial transactions often referred to, in the marketplace, as "prepaid forward contracts," or, in other circumstances, as "exchange traded notes." These transactions are similar to typical forward contracts, which are bilateral, executory contracts in which one party agrees to buy an asset on a future date for a specific forward purchase price, payable at that future time. However, in "prepaid forward contract" transactions, the purchase price is paid in advance of future delivery or cash settlement. Therefore, these transactions usually involve an initial payment by one party in exchange for a promise of either (1) a future delivery of a particular asset or group of assets (such as stocks or commodities) or (2) a future payment determined solely by reference to the value of such assets.
The IRS provided a list of issues associated with "prepaid forward contract" transactions. In particular, the IRS and the Treasury Department are looking for comments regarding whether the parties to these types of transactions should be required to accrue income/expense during the term of the transaction, in the event the transaction is not otherwise indebtedness for U.S. federal income tax purposes. With respect to this issue, the IRS referred to Rev. Rul. 2008-1, I.R.B. 2008-2, released in conjunction with Notice 2008-2, in which an instrument resembling, in form, a prepaid forward contract, was determined to be debt.
Comments regarding the enumerated issues pertaining to "prepaid forward contract" transactions must be submitted by May 13, 2008.
Notice 2008-2, 2007FED ¶46,747
Other References:
Code Sec. 988
CCH Reference - 2007FED ¶28,907.60
Code Sec. 1260
CCH Reference - 2007FED ¶31,145.01
Tax Research Consultant
CCH Reference - TRC SALES: 45,500
CCH Reference - TRC INTLOUT: 21,104.05
The Senate approved a one-year patch for the alternative minimum tax (AMT) without offsets even as House Democratic leaders declared their opposition to passing such legislation because it would add to the federal debt and budget deficit. Senate Republicans on December 7 defeated a motion to invoke cloture on an energy measure. President Bush, meanwhile, has threatened to veto any fiscally irresponsible appropriations bills that reach his desk, including a fiscal year 2008 omnibus spending package. The president and Treasury Secretary Henry M. Paulson, Jr., also announced a new initiative to address the growing subprime mortgage default crisis, and the IRS released guidance addressing transition relief on the correction of certain failures of nonqualified deferred compensation plans to comply with the operational requirements of Code Sec. 409A.
Congress
The Senate, by a vote of 88-5, on December 6 approved a one-year patch AMT patch without offsets (TAXDAY, 2007/12/07, C.1). Senate Finance Committee ranking member Charles E. Grassley, R-Iowa, later said on the Senate floor that they would likely have to defer until 2008 any action on an extension of expiring tax provisions commonly referred to as extenders. The House must now approve the amended version of its bill before President Bush can sign it into law. However, passage in that chamber is by no means assured.
House Democratic leaders say they are adamantly opposed to passing an AMT patch without revenue offsets because it would add to the federal debt and budget deficit. House Ways and Means Committee Chairman Charles B. Rangel, D-N.Y., plans to craft a new AMT relief bill that is paid for by tax increases that Senate Republicans find less objectionable. Appearing on Bloomberg TV on December 7, Rangel said that Senate GOP lawmakers and the president are being irresponsible in their insistence on not paying for AMT tax relief.
"It's hard for me to tell the Democrats from the Republicans in the Senate," said Rangel, following the overwhelming Senate vote to pass AMT relief without an offset and cause the federal government to borrow billions of dollars. He hinted that Democrats might use budget rules to force a filibuster-proof vote on the AMT in the Senate that only requires 51 votes to win passage. Meanwhile, members of the influential Blue Dog Coalition in the House have promised House Speaker Nancy Pelosi, D-Calif., to vote down any AMT legislation that is not paid for.
Ways and Means ranking member Jim McCrery, R-La., said tax hikes were unnecessary to protect middle-class Americans from the AMT. If the House Democratic leadership fails to allow the House to vote on a clean AMT patch, or if not enough House Democrats support such a patch, "then the tax increase that will fall on 23 million taxpayers will clearly lie at the doorstep of House Democrats," McCrery said.
Senate Republicans on December 7 defeated a motion to invoke cloture on an energy bill compromise package, the Clean Renewable Energy and Conservation Tax Bill of 2007 (HR 6) that includes $21 billion in tax credits and other incentives. The cloture motion was not agreed to by a vote of 53-42. Leaders of the Senate Energy and Natural Resources Committee planned to re-write the bill over the weekend and possibly jettison the tax package.
Meanwhile, Pelosi expressed disappointment that the Senate failed to support the House energy bill, HR 6 (TAXDAY, 2007/12/07, C.2). "The House will work with the Senate on a bipartisan basis to pass a strong energy bill and send it to the president's desk for his signature," she said in a statement following the Senate vote.
The bill, which also includes a host of alternative energy tax incentives to taper the U.S. need for foreign oil, would cost approximately $21 billion to be raised from higher taxes on big domestic oil and gas companies. The Democrats' bill would require more efficient appliances, plug-in electric vehicles and greener buildings, while expanding the use of cellulosic ethanol by the year 2022.
Democrats said the measure would also provide incentives for carbon capture and sequestration coal demonstration projects. The bill would promote the development of an advanced electricity infrastructure that requires utilities to use renewable fuels. Those incentives would be paid for by repealing billions of dollars in oil and gas tax breaks that Democrats believe are no longer necessary with the price of oil at nearly $100 per barrel.
Grassley reported on December 5 that he had received responses to his inquiries from five of six media-based ministries under investigation for abuses of their tax-exempt status. The senior lawmaker said that his actions were necessary after hearing allegations of wrongdoing, including excessive compensation, extravagant housing allowances, personal use of assets, lax board governance and unreported income.
White House Position
Earlier in the week of December 3, President Bush had threatened to veto any fiscally irresponsible appropriations bills that reached his desk, including a fiscal year 2008 omnibus spending package (TAXDAY, 2007/12/05, W.1). White House Press Secretary Dana Perino asserted that the president wants "clean and full funding for the troops" and an appropriations bill that Bush can sign.
The president is opposed to any tax offsets to pay for an AMT patch or the energy bill. Deputy Press Secretary Tony Fratto said that it would be "costly and wasteful" for Congress to delay passage of a clean AMT patch. Failure to pass a temporary AMT fix by the end of 2007 will delay the delivery of about $75 billion worth of tax refund checks in 2008, Bush warned.
On the energy bill, the Office of Management and Budget (OMB) argued that the tax code should not be used to single out specific industries, such as oil and gas companies, to fund tax incentives for greater use of alternative and renewable energy sources and tougher fuel-efficient standards. A White House spokesman said that rolling back any of the existing oil and gas tax breaks would create business uncertainty. The administration also opposes the provision to require utilities to generate 15 percent of its electrical power from renewable energy sources by 2020.
IRS
The IRS issued guidance and transition relief on the correction of certain failures of nonqualified deferred compensation plans to comply with the operational requirements of Code Sec. 409A (Notice 2007-100; TAXDAY, 2007/12/04, I.2). Relief is provided for certain failures that are corrected in the same year and for other small-dollar failures that are corrected in a subsequent year but before 2010.
The IRS has modified Q&A-23 of Notice 2007-7, I.R.B. 2007-5, 395, to provide that health insurance premiums paid to self-insured accident or health plans are eligible for the Code Sec. 402(l) exclusion (Notice 2007-99; TAXDAY, 2007/12/04, I.1). The exclusion applies to certain distributions from an eligible governmental plan that are used to pay health insurance premiums of a retired public safety officer and family. Congress is looking at legislation to authorize the change.
The State Department released a list of maximum per diem travel allowances for travel in foreign countries, beginning December 1, 2007 (TAXDAY, 2007/12/04, I.4).
The IRS issued a list of qualified alternative fuel motor vehicles, which can have a credit of up to $32,000, and qualified heavy hybrid vehicles, which can have a credit of up to $12,000 (IR-2007-96; TAXDAY, 2007/12/06, I.1).
The IRS and Treasury are aware of the many problems created by the new return preparer standards, Tax Legislative Counsel Michael Desmond declared on an American Bar Association webcast (TAXDAY, 2007/12/06, T.1). New rules under Code Sec. 6694 impose a heightened standard and tougher penalty on return preparers. Guidance will be forthcoming, Desmond stated.
Speakers at an IRS hearing said that proposed regulations (NPRM REG-148393-06, I.R.B. 2007-39, 714; TAXDAY, 2007/08/20, I.6) will discourage employers from developing long-term disability insurance coverage for defined contribution plans (TAXDAY, 2007/12/07, I.5). The proposed regulations treat a payment from the defined benefit plan for an accident or health insurance premium as a taxable distribution.
The IRS Office of Professional Responsibility (OPR) announced it had settled allegations under Circular 230 in connection with a $31 million municipal bond issue (IR-2007-197; TAXDAY, 2007/12/07, I.1). It was the first announced OPR action involving bond attorneys. Under the settlement, two attorneys agreed to follow certain procedures in the exercise of due diligence.
The IRS's Tax Exempt Bonds unit issued its Fiscal Year 2008 Work Plan (TAXDAY, 2007/12/07, I.4). The TEB will devote substantial resources to arbitrage-motivated transactions and will continue its focus on post-bond issuance compliance and monitoring. It will also expand its voluntary compliance program and start to look at student loan bonds.
A report by the Treasury Inspector General for Tax Administration (TIGTA) found that the IRS still struggles to fulfill its stated performance objectives (TAXDAY, 2007/12/07, T.1). The slow pace of modernization is a leading problem. Other problems are the need to improve the quality of its human capital, develop systems that provide accurate and timely financial and operating data, and improve analysis of the tax gap.
The Treasury will soon release a study on reforming the U.S. international tax system, Assistant Secretary for Tax Policy Eric Solomon indicated at PricewaterhouseCoopers' Global Tax Symposium 2007 (TAXDAY, 2007/12/04, T.1). The study is looking at many approaches, including worldwide inclusion, deferral of deductions, and a territorial system.
President Bush and Treasury Secretary Henry M. Paulson, Jr., announced a new initiative to address the growing subprime mortgage default crisis (TAXDAY, 2007/12/07, W.1). The initiative will be financed by the private sector but requires that the government approve certain tax breaks. These include preservation of the qualified status of a real estate mortgage investment conduit (REMIC) when certain changes are made. The IRS resolved this problem in Rev. Proc. 2007-72 (TAXDAY, 2007/12/07, I.2). Congress also must approve legislation that would exempt mortgage workouts from forgiveness of indebtedness income. HR 3648 is before the Senate and would accomplish this. In addition, the administration has proposed that tax-exempt bonds be available for refinancing existing loans. Under current law, they can only finance new mortgages for first-time homebuyers. This last issue is not needed to proceed with the administration's initiative.
By Jeff Carlson, Stephen K. Cooper, Paula Cruickshank and Brant Goldwyn, CCH News Staff