Re: 2009 Third Quarter Federal Tax Developments

Dear Client:

The third quarter of 2009 has seen a flood of new federal tax developments. We'd like to highlight some of
the more important federal tax developments for you. As always, please give our office a call or send us
an email if you have any questions about these developments.

Health care reform. Congress returned to work after its August recess with health care reform at the
top of its agenda. The tax provisions in the pending bills are very different from each other and it is unclear
at this time which will be enacted. The House has proposed a surtax on higher-income individuals to pay
for heath care reform. This approach has little support in the Senate. A final Senate bill is likely to include
new taxes on high-dollar health insurance plans. President Barack Obama wants Congress to get a health
care reform bill to the White House before 2010. Our office will keep you posted of developments. CCH
Federal Tax Weekly, No. 38, September 24, 2009.

Audits. The IRS is gearing up to launch a new employment tax compliance project. The project is
expected to focus on four areas: worker classification, fringe benefits, non-filers, and officers'
compensation. Taxpayers will be randomly selected for the National Research Program (NRP) study of
employment tax noncompliance. CCH Federal Tax Weekly, No. 37, September 17, 2009.

Penalties. The IRS announced a temporary freeze on the collection of Code Sec. 6707A penalties in July
and extended the moratorium in September. Many small businesses have complained that the penalties are
out of proportion to any tax benefits received. In some cases, small business owners purchased benefit
plans that turned out to be tax shelters. The IRS will suspend collection through December 31, 2009 in
cases where the annual tax benefit from the transaction is less than the penalty imposed under Code Sec.
6707A(b)(2): $100,000 for individuals or $200,000 for other taxpayers, per year. The suspension is intended
to give Congress time to pass corrective legislation. CCH Federal Tax Weekly No. 28, July 16, 2009;
CCH Federal Tax Weekly, No. 39, October 1, 2009.

Levies. In July, IRS Chief Counsel determined that the agency can levy on a taxpayer's health savings
account (HSA). The taxpayer would also be liable for an additional tax because an IRS levy on an HSA is
not a distribution to pay qualified medical expenses. CCH Federal Tax Weekly, No. 27, July 9, 2009.

First-time homebuyer credit. The first-time homebuyer credit, which reaches 10 percent or $8,000 of the
purchase price of a qualified residence, is set to end after November 30, 2009. A residence constructed by
the taxpayer only qualifies for the first-time homebuyer credit if the taxpayer must occupy the residence on
or before November 30, 2009. CCH Federal Tax Weekly, No. 38, September 24, 2009.

Motor vehicle sales tax deduction. In July, the IRS reminded taxpayers that the motor vehicle sales tax
deduction may be claimed for more than one vehicle but the deduction per vehicle is limited to the tax on
up to $49,500 of the purchase price of each qualifying vehicle. The deduction phases out for higher-income
individuals. If you are considering a new car or truck purchase before year-end, please contact our office
for more information about this valuable tax incentive. CCH Federal Tax Weekly, No. 30, July 30, 2009.

Compensation. In July, the IRS determined that discounted stock options do not qualify as performance-
based compensation. Compensation paid on the exercise of discounted stock options will be subject to the
$1 million deduction limit in Code Sec. 162(m) for public companies and will not qualify for the exception
for performance-based compensation. CCH Federal Tax Weekly No. 29, July 23, 2009.

Filing status. The Tax Court signaled in July that it does not plan to extend married filing joint status to
same-sex couples anytime soon (Merrill v Commr ). Married filing joint status is based on a marriage, the
court found. The Defense of Marriage Act of 1996 declared for federal purposes that marriage is between
a man and a woman and a spouse is defined as a person of the opposite sex. CCH Federal Tax Weekly,
No. 29, July 23, 2009.

Voluntary disclosure. Earlier this year, the IRS announced a temporary initiative to encourage taxpayers
with undisclosed foreign bank accounts to come forward. The offshore disclosure program was originally
scheduled to end on September 23, 2009. The IRS extended the deadline to October 15, 2009. Taxpayers
must pay back taxes plus interest and penalties for six years and the IRS will waive the 75 percent fraud
penalty. The IRS has indicated it will not seek criminal prosecution. CCH Federal Tax Weekly, No. 38,
September 24, 2009.

FBAR. The IRS also extended temporary relief for certain filers of Form TD F 90-22.1, Report of
Foreign Bank and Financial Accounts (FBAR), to October 15, 2009. Eligible taxpayers are taxpayers who
recently learned that they had FBAR filing obligations for years prior to 2009 and taxpayers who recently
learned that they have a current FBAR filing requirement for 2009 but did not have sufficient time to
properly file by the June 30 due date. Taxpayers with signature authority over foreign accounts and
taxpayers with foreign hedge funds or private equity accounts have an extended due date of June 30, 2010.
CCH Federal Tax Weekly, No. 38, September 24, 2009.

Foreign bank accounts. In August, the U.S. and Switzerland resolved their dispute over disclosing the
names of Americans with accounts at Swiss banking giant UBS AG. Information from as many as 4,500
UBS accounts may ultimately be disclosed to the IRS. CCH Federal Tax Weekly, No. 33, August 20,
2009.

Roth IRAs. Effective for 2010, individuals will be able to roll over funds to a Roth IRA regardless of
current income and other restrictions, the IRS reminded taxpayers in September. The IRS also issued
interim guidance on rollovers from employer plans to Roth IRAs. It's not too early to start planning for
Roth IRA conversions. Please contact our office if you have any questions. CCH Federal Tax Weekly,
No. 37, September 17, 2009.

Retirement savings. President Obama and the IRS announced new initiatives in September to encourage
Americans to save for retirement. The IRS issued seven rulings and notices to streamline automatic
enrollment in retirement plans and more. CCH Federal Tax Weekly, No. 36, September 10, 2009.

Refunds. Starting in 2010, taxpayers can check a box on their return to use all or part of their refund to
purchase Series I U.S. savings bonds. The bonds will be mailed directly to the taxpayer. CCH Federal
Tax Weekly, No. 36, September 10, 2009.

Privilege. The IRS won an important victory when the First Circuit Court of Appeals ruled in August that
tax accrual workpapers were not protected from disclosure under the work product doctrine (Textron v
US ). The court agreed with the IRS that the taxpayer had waived any applicable privilege by disclosing
the workpapers to an independent auditor. CCH Federal Tax Weekly, No. 33, August 20, 2009.

Listed transactions. The IRS updated its roster of listed transactions in July. These are transactions the
IRS has identified as abusive and that are subject to special disclosure and registration rules. The IRS also
updated its list of transactions of interest. These are transactions the IRS is monitoring for abuses. CCH
Federal Tax Weekly, No. 29, July 23, 2009.

COI income. The IRS issued election procedures in August for deferring cancellation of indebtedness
(COI) income on repurchased debt. The American Recovery and Reinvestment Act of 2009 enacted Code
Sec. 108(i) giving taxpayers an election to defer COI income from the reacquisition at a discount of an
applicable debt instrument in 2009 or 2010. The income is deferred until 2014 and then must be reported
ratably over five years, through 2018. CCH Federal Tax Weekly No. 33, August 20, 2009.

WOTC. The American Recovery and Reinvestment Act of 2009 added two new targeted groups for the
Work Opportunity Tax Credit (WOTC): disconnected youth and unemployed veterans working for an
eligible employer during 2009 or 2010. In August, the IRS clarified who qualifies as a disconnected youth
or unemployed veteran and provided some transition relief. CCH Federal Tax Weekly, No. 33, August
20, 2009.

S corporations. S corporations are a popular choice of business entity. The IRS reminded S corporation
shareholders that when corporate officers perform a service for the corporation and receive, or are entitled
to receive, payments, these payments are considered wages. CCH Federal Tax Weekly, No. 29, July 23
2009.

Accounting methods. In September, the IRS announced revised procedures for automatic consent to
change of accounting method. Generally, taxpayers must obtain IRS consent to change a method of
accounting. The IRS has attempted to streamline this process by permitting taxpayers to obtain automatic
consent for over 140 enumerated changes. CCH Federal Tax Weekly, No. 35, September 3, 2009.

LLCs and LLPs. In July, the Tax Court rejected the IRS's claim that members of limited liability
companies (LLCs) and limited liability partnerships (LLPs) should be automatically presumed not to
materially participate in the entities' activities under the Tax Code or temporary regulations (Garnett v
Commr) . CCH Federal Tax Weekly, No. 27, July 9, 2009.

These are just highlights of some of the important federal tax developments during the third quarter of
2009. Please contact our office for more details.

Sincerely yours,