Although there is some evidence that the credit market is loosening, it is clear that the harsh lending environment of the past two years has taken a toll on a wide range of businesses.  There are, however, tools that provide temporary help, including the government’s current policy on “loss carrybacks.”

As part of the original stimulus bill, the loss carryback provision gave qualifying companies that registered a loss on their current income tax return the opportunity to extend that loss into previous, profitable years.  Under the adjusted regulations, the field of qualifiers has been expanded to include most companies, and a loss booked for the 2008 or 2009 calendar year (but not both) can be carried back up to five years through amended returns.

A CNN article on loss carrybacks points out that the provision has resulted in “some giant refunds for big businesses — troubled homebuilder Lennar recently booked a $353 million tax gain from the provision — and a much bigger hit to the nation’s coffers. The Joint Committee on Taxation estimates the carryback change will cost the government $33.2 billion this year, though the 10-year cost of the break is smaller, because companies won’t be carrying 2009 losses forward to reduce their future tax bills. The committee’s estimate of the 10-year cost is $10.4 billion.”

The move isn’t unprecedented.  According to an article in CFO Magazine, the Bush Administration provided a similar opportunity following 9/11, and in 2009 the original amendment was available only to businesses with less than $15 million in revenue.  This time it applies to businesses of all sizes and includes pass-through entities as well as C-corporations.

Anecdotal evidence suggests that companies are finding real benefit - albeit short term - in the carryback provision.  Is it a measure you think will aid small to midsized companies through to a recovery?

I would like to highlight an interesting perspective for those who hold within their IRA accounts unregistered securities or investments in limited partnerships such as private equity, venture capital and mezzanine: using an arbitrage strategy.

Let’s begin with a little background:

Investing IRA money in qualified unregistered investments has been within the bounds of IRS rules since 1974 and a common practice among most venture capital and private equity investors. Fast forward to 2010, sprinkle in a little bit of federal government stimulus, and qualified investors can now participate in a once in a lifetime opportunity to create their own personal tax-exempt entities (Roth IRAs) and at the same time arbitrage multiple premises of value.

The Arbitrage:

Let’s say you or someone you know is a high net worth individual who has accumulated unregistered securities within their IRA and these same securities are valued at $3.5 million by the company, its general partner and their outside accountants using United States Generally Accepted Accounting Principle SFAS No. 157 or some other comparable methodology. SFAS No. 157 value, which may not necessarily approximate the IRS’ minority, non-marketable value standards, is only one of many values that a single security can have in the same day. For example, these values may appear as:

-  Control, marketable value $ 6.5 million

-  SFAS No. 157 minority, non-marketable value $ 3.5 million

-  IRS minority, non-marketable value $ 3.0 million

Three distinctive values, same day, same security! This multiple premise of value translates into a permanent taxable income variance of $3.5 million ($6.5 million less $3.0 million) – allowing for a federal and state income tax savings of $1.50 million (assuming an effective 42% tax rate).

The benefit of a Roth IRA, as most people know, is its tax sheltering power over future interest, dividends and capital gains. It is the extra girth of the arbitrage that drastically influences the time value of the tax conversion costs and provides the ultimate wealth accumulating advantage. A time elapse example: under a three year premise that the underlying securities appreciate at a 15.0% CAGR, the arbitrage increases from $3.5 million to $5.3 million. Roth IRAs are a dynastic tax sheltering wealth strategy that will last for untold generations, and what better way to form it but with a little bit of arbitrage.

For those who like hedging arbitrage strategies, here is one for you! Under the new Roth IRA conversion rules there is a special tax incentive for 2010 conversions (ability to equally spread the taxable income on conversion over the following two tax years); and, most importantly, should it appear as if the investment will not succeed, a “fail-safe hedge” provision allows the investor to completely unravel the conversion, at any time, before the tax filing deadline. Under this provision, the earlier transaction can be either abandoned outright or it can be abandoned, reinstituted and re-priced 30 days later at a lower valuation and, therefore, a lower tax conversion costs. This wealth accumulation tactic, which can be further enhanced with a Roth Segregation Strategy, lasts no longer than the IRA/Roth IRA conversion period is open. Only as a result of the Great Recession and only in the United States of America!

While a formal valuation by an independent party is not specifically required within the new provisions, the valuation rulings within the IRS Code and the possible inconsistency between GAAP/IRS valuation methodologies cannot be ignored and, therefore, I recommend that the Roth conversion be made with a tax based securities’ valuation in mind. A well thought out valuation performed by a properly qualified and independent valuator who specializes in complying with IRS security valuations is a conversion cost worth its foundational bearings.

More changes may be on the way for the now infamous FIN 48, the guidelines for reporting uncertain tax positions. For the better part of three years, FIN 48 has seen a series of delays and adjustments that have sometimes had financial departments scrambling to understand the nuances.

A firm deadline for compliance was set last year, calling for all entities to adopt the standard as of the fiscal year beginning after December 31, 2008. However, as we approach the traditional tax season for that period, the IRS is already proposing changes to FIN 48 (for next year at the earliest). FIN 48 has been criticized in the past for its complexity and most notably its lack of clarity when it comes to pass-through and tax-exempt nonprofit entities. Given the deadline, private entities will have to get moving on FIN 48 compliance and stay attuned to the proposed adjustments.

The information reported under FIN 48 is meant to assist in the examination of tax returns by bringing to light areas of interest or magnitude that warrant further inquiry. The IRS is developing a schedule to be filed with corporate returns for taxpayers with assets greater than $10 million, which would require filers to provide a concise description of each uncertain tax position for which they or a related entity has recorded a reserve in financial statements; and the maximum amount of potential federal tax liability attributable to each uncertain tax position.

In addition to positions disclosed by taxpayers under FIN 48, the IRS changes would require that taxpayers disclose positions where no tax reserve was recorded because either it expects to litigate the position or it has determined that the IRS has an administrative practice or precedent not to examine the position.

The IRS proposal asks for descriptions of any uncertain tax positions to contain:

1. The Code sections potentially implicated by the position
2. A description of the taxable year or years to which the position relates
3. A statement that the position involves an item of income, gain, loss, deduction, or credit against tax
4. A statement that the position involves a permanent inclusion or exclusion of any item, the timing of that item, or both
5. A statement whether the position involves a determination of the value of any property or right
6. A statement whether the position involves a computation of basis.

Under the proposal, the IRS would also require that taxpayers indicate for each uncertain tax position the entire amount of federal income tax that would be due if the position were disallowed.

While the changes would not take effect during this filing season, the IRS is looking to expedite the process by requesting public comments by March 29, 2010. At that point, another chapter in the book on FIN 48 will go to press, and CPAs and finance departments will shift gears to keep pace.