Audit & Accounting

In a 3-0 ruling, a federal appeals court overturned a Securities and Exchange Commission ruling that required at least 75 percent of mutual fund directors to be independent of the fund company. According to published reports, the appellate court ruled that the regulator had the authority to adopt the rule; however, it maintained that the commission had not considered any alternatives and did not consider the costs of such a rule. Under that mandate, it was estimated that roughly 3,700 funds would have to seek new chairmen. The rule was to go into effect next year. With the decision, the matter will again to back to the commission, but it is not expected to be reviewed until a permanent replacement for Chairman William Donaldson is appointed. Donaldson will step down June 30.

J.J. Pickle, former Congressman, tax writer and an ardent reformer of Social Security, died last week here at the age of 91. While serving as chair of the Ways and Means Committee Social Security Subcommittee, Pickle was a key figure in Social Security legislation to keep the system from becoming insolvent and was, according to reports, responsible for the provision that gradually raised the age of eligibility for benefits from 65 to 67. Pickle also served as chair of the Ways and Means Oversight Subcommittee, where he promoted research incentives and investigated a host of tax issues. He retired from Congress 10 years ago, after serving more than three decades.

In just-released Revenue Ruling 2005-40, the Internal Revenue Service has underscored the fact that risk distribution must be present for smaller arrangements to qualify as insurance for federal income tax purposes. The ruling does not call into question the vast majority of insurance contracts issued by commercial insurance companies in the ordinary course of business. Since the Supreme Court's 1941 decision in Helvering v. LeGierse, both risk shifting and risk distribution have been required for an arrangement to constitute insurance for federal income tax purposes. The ruling concludes that an arrangement with an entity that "insures" the risks of only one policyholder does not qualify as insurance for tax purposes, because the risks are not distributed among other policyholders. The ruling also explains how this conclusion applies to single-member limited liability companies, which in some cases are treated as entities separate from their owners and in other cases are disregarded. Qualification of an arrangement as insurance may affect whether the issuer is taxed as an insurance company and whether or when amounts paid under the arrangement may be deductible. If an arrangement does not qualify as insurance, it may instead be characterized as a deposit, a loan, a contribution to capital or an indemnity arrangement other than an insurance contract. The ruling was accompanied by Notice 2005-49, soliciting comments from the public on additional standards relating to what constitutes insurance.

In May 2005, a U.S. House of Representatives Energy and Commerce subcommittee on health concluded that the rising cost of long-term health care, coupled with the impending surge of Baby Boomer retirees, could cripple the country financially unless changes are made.Testifying before the subcommittee, Dr. Judy Feder, dean of public policy at Georgetown University, stated that in the years ahead, just 30 percent of post-65-year-olds will die without needing long-term care. Twenty percent of that age group will require more than five years of care.

Three years after the guilty verdict that effectively destroyed the firm, the Supreme Court has overturned the conviction of Arthur Andersen for shredding documents related to its audits of energy giant Enron Corp.

The recent bid for Ameritrade by rival E*Trade Financial put the online brokerage world on the front page, as two of the largest firms in the business involved in a potential merger might say something about the current state of the brokerage industry.

NASD Fines Raymond James $750K: The NASD has censured and fined Raymond James & Associates Inc. and Raymond James Financial Services Inc. $750,000 for violations related to the firms' fee-based brokerage business.As part of the settlement, the firms will also pay restitution to 190 customers totaling $138,000. The firms neither admitted nor denied the charges.

412(i) plans continue to generate both interest and caution following recent Internal Revenue Service and Treasury Department actions to crack down on a handful of abusive schemes that had cropped up in this marketplace.

Taxpayers are generally allowed to deduct the fair market value of property that they contribute to a charity.

Impacted by the exorbitant costs of Sarbanes-Oxley 404 compliance, the average audit fees for companies with less than $1 billion in revenue skyrocketed 96 percent, to roughly $1 million from 2003 to 2004, according to a study by the law firm of Foley & Lardner LLP, based here.