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Tax Report: A Special Summary and Forecast Of Federal and State Tax Developments

February 15, 1995

RESTORING A DEDUCTION for the self-employed is trickier than expected.

A tax-law provision allowing many self-employed people to deduct as much as 25 percent of their health-insurance premiums expired at the end of 1993. Congress is working on legislation to restore that deduction and make it retroactive to 1994. The Treasury backs the idea and says about 3.2 million people would benefit. Treasury officials urge Congress to act before 1994 returns are due so taxpayers won’t have to file amended returns later in the year.

But the road to restoring the deduction is turning out to be bumpier than supporters had hoped. House approval is expected soon, but in the Senate ``it may not be as easy″ as originally planned, says a Senate staffer. House Ways and Means members voted to restore the deduction permanently, which costs more than just making it retroactive to 1994. Some senators may balk at a proposal to offset the lost revenues by repealing a tax break affecting Viacom Inc.’s planned cable-system sale, staffers say.

But supporters remain optimistic that Congress will approve the bill this year.

FAMILY PARTNERSHIPS escape an assault by the Treasury.

Following heated protests by some tax lawyers, the Treasury has changed its mind on an issue of major concern to estate planners. The Treasury is limiting the scope of a new tax regulation aimed at discouraging taxpayers from using partnerships in certain ways to cut taxes. The regulation will be limited solely to income taxes and won’t apply to estate or gift taxes. Lawyers say that decision removes a dark cloud over certain techniques that many wealthy people have used to save gift and estate taxes through family limited partnerships.

For example, a couple might contribute property to a partnership and give partnership interests to children, valuing each partnership interest at less than a proportionate value of the property itself. The Treasury’s new rule had threatened to curtail the use of this practice in some cases, says Andrew Berg of Debevoise & Plimpton in New York. The Treasury’s about-face is ``significant,″ but the IRS may still attack ``aggressive″ use of partnerships, he says.

TAXING DILEMMA: IRS requests for sensitive data worry more companies.

Suppose the IRS asks your company for internal data that it says will help the government in a battle with another company. How should your company react? And can the IRS force you to comply? More companies are struggling with these questions as the IRS expands its search for ``third-party comparables″ in high-stakes tax cases involving multinational companies, says John B. Magee of the Washington law firm of Miller & Chevalier.

Some companies complain IRS requests often require huge amounts of time and work. They also fear trade secrets they hand over may become public in court. Some also fear cooperating may damage business relationships and increase their own tax exposure. Thus, says Mr. Magee, many companies don’t respond to IRS requests. Others agree to comply only if issued a summons, but it isn’t clear whether the IRS summonses are enforceable. Another approach: negotiate. The IRS often settles for far less information than it initially requests.

John Monaco, an IRS assistant commissioner, says the agency is being ``very judicious″ in third-party requests and generally gets ``a lot of cooperation.″

ENDANGERED KNICKERS: Business support for ``knickers,″ Washington shorthand for a GOP tax-depreciation plan called ``neutral cost recovery system,″ has been underwhelming, congressional staffers and tax lawyers say. Thus, they say prospects for passage are fading fast.

AX THE INCOME TAX, says House Ways and Means Chairman Bill Archer. ``I personally would like to tear the income tax out by its roots and toss it overboard,″ he said at a conference sponsored by Baker & Hostetler and the Tax Foundation in Washington. He wants to replace the current system with a ``broad, consumption-based tax.″

CLEAR ENGLISH, good grammar and no double negatives should be required for government regulations, GOP House members say. That may not sound controversial. But a Treasury official complains it would make it ``hard to write tax regulations.″

A PLAN requiring registration of commercial tax-return preparers gains support.

Anyone who wants to set up shop as a tax-return preparer may do so without any IRS oversight. But the IRS is studying a proposal by a panel of outside tax specialists to require registration and some regulation of commercial tax-return preparers.

Their plan generally would make paid preparers meet such criteria as being at least 18 years old and taking approved ``continuing professional education.″ Lawyers, certified public accountants and enrolled agents would be exempt. The proposal is designed to improve expertise and professionalism of paid preparers, says M. Leon Berk, who is an enrolled agent in Royal Palm Beach, Fla. A high-ranking IRS official calls it ``a very feasible approach.″

BRIEFS: Wisdom from cyberspace: In a tax forum on America Online, one man quips: ``Taxes: When you care enough to send the very least!″ ... Former House Ways and Means tax counsel Kathleen M. Nilles moves to Gardner, Carton & Douglas in Washington. Carol Kulish, another former tax counsel, joins Arthur Andersen in Washington.

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