The IRS said in an interesting field service advice recently that an owner of acute care hospitals and nursing homes could elect to be treated as a “securities dealer” because it regularly held securities — or debts — from customers. Under US tax laws, a company can take a deduction for worthless debts. It used to be able to deduct a percentage of the outstanding debts each year as an addition to a reserve for bad debts. However, in 1986, Congress changed the rules to require that a company wait until the year a debt actually becomes worthless before deducting it. The idea was to stop deductions based merely on additions to a reserve.

A company that elects treatment as a “securities dealer” marks its receivables to market at the end of each year. This has the same effect as taking deductions based on a reserve allowance.

The IRS remarked in the field service advice that “it has been suggested that [this] implicitly permits taxpayers to circumvent the prohibition against reserves for bad debt.” However, it allowed just that for the nursing home owner.

A COMPANY COULD NOT CLAIM ATTORNEY-CLIENT PRIVILEGE FOR DOCUMENTS PREPARED BY ITS ACCOUNTANT WHO IS ALSO A LAWYER.

The documents were prepared in connection with work on the company’s tax returns. A US appeals court held in late April that documents prepared by accountants are not privileged from disclosure if the IRS wants them on audit. It said the fact that the adviser was also a lawyer would not shield the documents if he was doing work normally done by accountants.

In 1998, Congress created a special statutory privilege for accountants, like the attorney-client privilege, but this new privilege does not apply to any advice accountants give relating to corporate tax shelters. The judge mentioned this provision, but said it would not have changed his analysis even if the documents in question had been prepared after July 21, 1998 when the new statutory privilege took effect. The case is United States v. Richard A. Frederick.

THE IRS ISSUED CONFLICTING RULINGS ON PAYMENTS TO TERMINATE INTEREST RATE SWAPS.

Both rulings were released in late April. One is an old field service advice that said a payment to terminate an interest-rate swap that a borrower entered into in order to hedge his exposure on a floating-rate loan is a capital loss. However, the IRS told the IRS agent asking the question to develop the facts of the case further. The agent claimed the swap was being used as a hedge. The borrower had a more complicated explanation.

In a more recent field service advice, the IRS appeared to change course by instructing an agent that a company should be allowed to deduct its swap termination payment as an ordinary loss. The swap was entered into as a hedge.

THE IRS ADJUSTED SECTION 29 AND 45 TAX CREDITS.

The section 29 tax credit was $1.055 an mmBtu during 1998. This represents only a tiny increase in the credit from the year before when it was $1.052. The IRS said there was not enough inflation to justify an increase in the section 45 credit. It remained at 1.7¢ a kWh during 1998. Credits for calendar year 1999 will not be announced until April next year.

The section 29 credit is an inducement to look in unusual places for fuel. A company can claim credits for producing gas from biomass, coal seams, tight sands, Devonian shale and geopressured brine, or synthetic fuels from coal. Credits run through 2002 or 2007 depending on when the project was placed in service. All qualifying projects must already be in service.

The section 45 credit rewards companies for producing electricity from wind or closed-loop biomass. The credit runs for 10 years from when a power plant commences operations. Projects must be in service by June 1999 to qualify.