Following the August recess, Congress will return to Washington in September. A priority on the legislative schedule will be consideration of a tax bill.

In a conference call this week, House Ways and Means Committee Chair Sander Levin (D-MI) discussed the fall schedule with reporters. He indicated that the House hopes the Senate will act first on a tax bill.

Chairman Levin affirmed the Democratic support for extending tax cuts for single persons with incomes of $200,000 ($250,000 for couples) in the forthcoming tax bill. House members have requested that the Joint Committee on Taxation analyze the effects on small businesses of allowing the top two brackets to return to 36% and 39.6%.

On August 25, 2010, Vice President Joe Biden expressed White House support for the same plan. He noted that extending the tax cuts for middle-income taxpayers and allowing the top two rates to increase would produce $700 billion in tax revenue over 10 years. Vice President Biden stated, "There's nothing populist about this. It's simple economics."

In the view of Biden, it is important to raise the top level of taxes because only 3% of small-business owners would pay the tax. In addition, the funds need to be used to help "small businesses and middle-class people."

Senate Majority Leader Harry Reid (D-NV) has scheduled a series of votes for September 14 on a new tax bill. The bill will cover various tax provisions that impact small businesses. A tax bill to extend the middle-class tax rates may be considered later in the month by the Senate.

House Minority Leader John Boehner (R-OH) continued to advocate an extension of all tax rates for 2011. He stated, "We will not solve our fiscal challenges until we cut spending and have real economic growth -- and we won't have real economic growth if we keep raising taxes on small businesses."

Rep. Boehner is also concerned about the new Form 1099 Information Reporting Requirements and the tax extenders. He suggests that Congress also should look carefully at the tax extenders to determine whether some of those provisions should not be enacted for 2010.

Internet Broadcast Not a Church

In Foundation of Human Understanding v. United States; No. 2009-5129 (16 Aug 2010), the Court of Appeals for the Federal Circuit determined that the Foundation of Human Understanding (FHU) did not meet the requirements to qualify as a church.

FHU and its founder, Roy Masters, started operation in 1963. Following incorporation of FHU, it applied for tax-exempt status. The IRS denied that request in 1983 and the FHU brought an action before the Tax Court.

In 1987 the Tax Court ruled that FHU was a church. It listed four grounds for that decision. FHU owned a church building and conducted services each week in Los Angeles. It operated a religious school named The Brighton Academy. It acquired the Tall Timber Ranch in Selma, Oregon as a seminar and retreat center and it conducted services at a church building in Grants Pass, Oregon.

In 2001, the IRS began a second review of FHU for the years 1998 to 2000. Following that review, the IRS determined that FHU no longer qualified as a church. FHU contested that decision and the United States Court of Federal Claims supported the IRS determination.

The court determined that there are two principal tests to decide whether or not an organization is a church. The first is a series of 14 criteria created by the IRS Commissioner in a 1979 speech. These include (1) a distinct legal existence; (2) a recognized creed and form of worship; (3) a definite and distinct ecclesiastical government; (4) a formal code of doctrine and discipline; (5) a distinct religious history; (6) a membership not associated with any other church or denomination; (7) an organization of ordained ministers; (8) ordained ministers selected after completing prescribed studies; (9) a literature of its own; (10) established places of worship; (11) regular congregation; (12) regular religious services; (13) Sunday schools for religious instruction of the young; and (14) schools for the preparation of its ministers.

The second test is the "associational test." It has been preferred by several courts as opposed to the "14 criteria" approach. Under the associational test, a church must demonstrate that it has a "body of believers or communicants that assembles regularly."

During the period of years in question, FHU did not conduct regular religious services. It held 21 seminars in various locations during the three years. FHU also broadcast sermons and messages over the radio and the Internet. Because of the seminars and Internet broadcasts, FHU claimed that it still should be treated as a church.

However, FHU no longer had regular services with a body of believers and, therefore, failed the association test. The Internet sermons and radio broadcasts did not provide the opportunity to interact and associate that would be present with the body meeting periodically for worship. Therefore, FHU no longer qualified as a church.

IRS Denies Second Estate Tax Extension

In D. Charles Dickow v. United States et al.; No. 1:09-cv-10786 (18 Aug 2010), the estate sought to file a request for a refund over three years after the initial due date for the estate tax return. The court determined that the refund filing was not within the required period of time.

Decedent Margaret Dickow passed away on January 15, 2003 and IRS Form 706 United States Estate Tax Return was due on October 15, 2003. The executor filed IRS Form 4768 (Application for Extension of Time to File a Return and/or Pay U.S. Estate Taxes) and received an extension until April 15, 2004. On that date the executor was waiting for an appraisal of a substantial real estate asset and filed a second Form 4768. The second Form 4768 had "REQUEST FOR SECOND EXTENSION" typed on the top of the form.

The IRS did not grant the second extension and sent a delinquency notice. The executor filed IRS Form 706 on September 30, 2004 and included a refund request. The executor had previously paid $945,000 to the IRS on the initial Form 706 due date and received a refund of $337,139.81.

Approximately three years later, on September 10, 2007, the executor filed an amended IRS Form 706 and claimed an additional refund of $239,768.48. The IRS denied the additional refund on the ground that the filing was not within the required three year period under Sec. 6511(a).

The court determined that the key issue is whether or not the second requested extension would permit a three year look-back for the amended IRS Form 706 filing on September 10, 2007.

IRS Form 4768 permits an extension in three cases. First, there is an automatic extension for six months. Second, an executor may request an additional extension if he or she is "out of the country." Finally, there is an "extension for cause" if the automatic six-month extension has not been requested and the executor can demonstrate appropriate reasons for the IRS to allow a later request for extension.

Because the IRS did not have the authority to extend for the second six months, the late request for refund was appropriately denied.

The estate also claimed that under a theory of "equitable estoppel," the IRS should be required to permit the late filing. However, the court noted that there was no "affirmative misconduct" on the part of the IRS that would permit a theory of equitable estoppel.

Applicable Federal Rate of 2.4% for September -- Rev. Rul. 2010-20; 2010-36 IRB 1 (18 August 2010)

The IRS has announced the Applicable Federal Rate (AFR) for September of 2010. The AFR under Section 7520 for the month of September will be 2.4%. The rates for August of 2.6% or July of 2.8% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2010, pooled income funds in existence less than three tax years must use a 4.6% deemed rate of return. Federal rates are available by clicking here.