Tax News

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

A California superior court has dismissed a taxpayer's claim that a special penalty imposed in connection with California's corporation franchise and income and personal income tax amnesty program could not lawfully be imposed.
Under California's income tax amnesty program, which ran during February and March 2005 for taxes involving pre-2003 tax years, the California Franchise Tax Board (FT waived various penalties and fees that would otherwise have applied for the tax years for which taxpayers requested amnesty. However, if taxpayers failed to pay taxes for which they could have sought amnesty, the FTB was authorized to impose a special penalty equal to 50% of the accrued interest on amounts that were due and payable on the last day of the amnesty period.
As previously reported (TAXDAY, 2006/4/20, S.8, in this case during the amnesty period, the FTB was auditing the taxpayer's returns. The taxpayer requested that the FTB complete its audit prior to the end of the amnesty period, but the FTB declined. On the last day of the amnesty period, the taxpayer made a tax payment as a protective claim for the tax years at issue, but the payment was not made under the amnesty program. The FTB subsequently issued notices of proposed assessment (NPAs) for the tax years at issue, which totaled more than the amount of the taxpayer's tax payment. The NPAs stated that they did not include the 50% interest penalty, which would be separately assessed.
The taxpayer sought a declaratory judgment that the 50% interest penalty should not apply to tax liabilities that became final after the end of the amnesty period, as long as the taxpayer paid the full amount of the deficiency reflected in the NPAs within 15 days after receiving notice and demand for payment from the FTB. In the alternative, the taxpayer sought a declaration that the 50% interest penalty violated both substantive and procedural Due Process guarantees under the U.S. and California Constitutions.
The FTB filed a demurrer to the taxpayer's complaint on the basis that the case was not ripe for judicial decision, because the tax years at issue were still in protest status and the amnesty penalty had not yet been imposed. The superior court sustained the FTB's demurrer. The taxpayer has filed a notice of appeal.
Subscribers to CCH Tax Research NetWork can view the text of the judgment, the order, and the amended complaint.
General Electric Co. and Subsidiaries v. California Franchise Tax Board , California Superior Court, County of San Francisco, No. 449157, August 30, 2006; appeal filed, September 15, 2006.

CCH (cch.taxgroup.com) reports:

The IRS has published a list of the counties and parishes in the United States that have suffered exceptional, severe or extreme drought during the 12 months ending August 31, 2006. The list includes counties in 35 of the 50 states. As authorized in Code Sec. 1033(e)(2)( and implemented in Notice 2006-82, I.R.B. 2006-39, 529 (TAXDAY, 2006/09/11, I.7), an extended replacement period is available for livestock sold on account of extreme weather conditions if those weather conditions continue for more than three years.
Notice 2006-91, 2006FED ¶46,623
Other References:
Code Sec. 1033
CCH Reference - 2006FED ¶29,650.202

CCH (cch.taxgroup.com) reports:

In Rev. Proc. 2006-35 (I.R.B. 2006-37, 452; TAXDAY, 2006/08/25, I.2), the IRS announced that it would charge new user fees to process Form 8802, Application for United States Residency Certification, beginning with forms postmarked on or after October 2, 2006. The effective date for imposing the new user fees has been delayed. The user fees will be charged for all Forms 8802 received and postmarked on or after November 1, 2006.
Form 8802 is used to request Form 6166, a letter used to prove the applicant's status as a resident of the United States for claiming treaty benefits or an exemption from the value added tax (VAT). A user fee of $35 will cover a request for 20 original copies of Forms 6166 issued under the same TIN.
Notice 2006-90, 2006FED ¶46,622
Other References:
26 C.F.R. Part 601
CCH Reference - 2006FED ¶26,805.055
CCH Reference - 2006FED ¶43,360.42

CCH (cch.taxgroup.com) reports:

Active duty military reservists may receive early distributions from certain retirement plans without triggering the 10-percent penalty tax generally imposed on such distributions under Code Sec. 72(t) (Code Sec. 72(t)(2)(G), as added by the Pension Protection Act of 2006 (P.L. 109-280)). Specifically, early distributions from an IRA (including a Roth IRA) and distributions attributable to elective deferrals under a Code Sec. 401(k) plan or a Code Sec. 403(b) annuity, are not subject to the 10% penalty. To qualify, the reservist must have been called to active duty between September 11, 2001 and December 31, 2007 and the call up must be for at least 180 days or for an indefinite period. The relief is retroactive so eligible reservists who have already paid tax under Code Sec. 72(t) may claim a refund using an IRS Form 1040X, Amended U.S. Individual Income Tax Return. An eligible reservist filing for a refund should write "active duty reservist" on the top of the Form 1040X and provide the following details: date of the reservist's military call up, amount of the distribution in question and the amount of early distribution tax paid. Finally, the reservist can recontribute part or all of the distribution to an IRA. Generally, such recontribution must take place within two years after the reservist's active duty period ends. However, reservists whose duty period ended before Augusts 17, 2006 may recontribute the distribution until August 17, 2008. There is no deduction for making such a recontribution.
IR-2006-152, 2006FED ¶46,621
Other References:
Code Sec. 72
CCH Reference - 2006FED ¶6140.775

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

A release has been issued that provides detailed information on the two-day South Carolina Thanksgiving sales tax holiday that will begin 12:01 a.m. on November 24, 2006 (Friday), and end 12 midnight on November 25, 2006 (Saturday). (TAXDAY, 2006/06/13, S.20)

CCH (cch.taxgroup.com) reports:

California taxpayers who may have purchased untaxed cigarettes and tobacco products from online or mail-order merchants outside the state are being mailed cigarette and tobacco product excise tax and use tax returns by the State Board of Equalization (SBE). The first mailing will include approximately 12,000 taxpayers statewide, with tax liabilities ranging from $45 to $8,000. In the estimation of the SBE, the mailings will result in collections of $50 million over the next two years.
Under the federal Jenkins Act, the SBE obtains invoices from online cigarette and tobacco vendors detailing purchases by California customers. The SBE now receives 10,000 invoices each month and has identified several hundred thousand purchases thus far, according to the agency.
Subscribers to CCH Tax Research NetWork can view the text of the SBE release and the tax returns.
News Release, No. 54-G, California State Board of Equalization, September 26, 2006.

CCH (cch.taxgroup.com) reports:

A university hospital was not precluded by law from claiming the student exclusion from FICA taxes for its medical residents and, therefore, the IRS's motion for summary judgment was denied. The IRS argued that the student exclusion is limited to individuals who earn a nominal amount; thus, the medical residents, who earned significant sums, were by law ineligible for the exclusion. However, Reg. §31.3121(b)(10)-2(b) states that, for purposes of the student exclusion, the amount earned by the employee is immaterial. Because the regulation's language is clear, there was no reason to rely on the legislative history of the underlying code section or the IRS's interpretation of the regulation to determine its meaning.
The University of Chicago Hospitals, DC Ill., 2006-2 USTC ¶50,520
Other References:
Code Sec. 3121
Code Sec. 3401
CCH Reference - 2006FED ¶33,533.23
CCH Reference - 2006FED ¶33,538.558

CCH (cch.taxgroup.com) reports:

The IRS has provided updated procedures for a bond issuer to request an administrative appeal of a proposed adverse determination by the IRS's Office of Tax Exempt Bonds (TE of the Tax Exempt & Government Entities Division (TE/GE) that the interest on their bonds is not excludable from gross income under Code Sec. 103; or to a denial by TEB of a claimed overpayment of arbitrage rebate under Code Sec. 148. The procedures are generally effective on September 27, 2006. This procedure modifies and supersedes Rev. Proc. 99-35, 1999-2 C.B. 501, to take into account the IRS's updated organizational structure and to apply the revised appeal procedures to a proposed adverse determination or an arbitrage rebate claim denial.
Appeals Procedures
Generally, after a notice of a proposed adverse determination or arbitrage rebate claim denial is issued, the bond issuer has 30 days in which to submit an appeals request that responds to the notice and explains the issuer's positions regarding areas in dispute. (The TEB may extend the 30-day submission requirement upon the issuer's written request with supporting justification.) In addition to a complete explanation of the issuer's position, the appeals request must include:
1. The issuer's declaration that "Under penalties of perjury, I declare that I have examined this request for an appeal, including accompanying documents, and that, to the best of my knowledge and belief, the facts presented are true, correct, and complete;" and
2. A signature by the issuer or the issuer's authorized representative (an issuer may designate an authorized representative by including a properly completed Form 2848, Power of Attorney and Declaration of Representative with the appeals request).
There is no user fee for the appeals request. If the issuer does not make a timely request for an appeal, the proposed adverse determination becomes final and the IRS may begin the process of taxing the bondholders without further notice to the issuer. Further, once a proposed adverse determination becomes final, the TEB will generally not reopen settlement negotiations with an issuer regarding any matters identified in the examination.
Appeals Resolution
Upon receipt of an appeals request, the TEB Field Operations (TEB FO) sends the case file to TEB Compliance & Program Management (TEB CPM) for review and transfer to Appeals. Although jurisdiction over the raised issues will transfer from TEB to Appeals, TEB will retain jurisdiction over all tax matters related to the bond issue which are not specifically raised as an issue in the proposed adverse determination or arbitrage rebate claim denial. The issuer may authorize other persons, including conduit borrowers, to inspect or receive confidential information during the appeals process. Moreover, the issuer may also request that a tax matter be referred for technical advice according to the rules in Rev. Proc. 2006-2, 2006-1 I.R.B. 89. If the Appeals Office and the issuer fail to reach an agreement, the proposed adverse determination or arbitrage rebate claim denial becomes final, and the case is closed at the appeals level. If Appeals and the issuer do reach an agreement, a closing agreement is prepared by the Appeals Office based on the model closing agreement in the Internal Revenue Manual.
Comment Request
Comments are requested to help the IRS develop alternative dispute resolution programs to help resolve tax matters relating to tax-exempt bond issues during the examination and administrative appeal process. Comments are also requested on how TEB and Appeals may utilize mediation or other formal fast-track settlement programs. Submissions should be sent to: IRS, SE:T:GE:TEB ( Rev. Proc. 2006-40), 1111 Constitution Ave., NW, PE-583, Washington, D.C. 20224.
Rev. Proc. 99-35, 1999-2 C.B. 501, is modified and superseded.
Rev. Proc. 2006-40, 2006FED ¶46,620
Other References:
Code Sec. 103
CCH Reference - 2006FED ¶6602.15
Code Sec. 148
CCH Reference - 2006FED ¶7889.10
Code Sec. 7804
CCH Reference - 2006FED ¶43,266.20
Statement of Procedural Rules Sec. 601.201
CCH Reference - 2006FED ¶43,360.161

CCH (cch.taxgroup.com) reports:

The House Ways and Means Committee approved legislation on September 27 to make improvements to health savings account (HSAs) insurance plans. The panel voted 24 to 14 to pass the Health Opportunity Patient Empowerment Act of 2006 (HR 6134). The measure was introduced by panel members Reps. Eric Cantor, R-Va., and Paul Ryan, R-Wisc.
"HSAs are still relatively new, but we are already seeing them quickly grow in popularity in the early stages of their existence," said House Ways and Means Committee Chairman William M. Thomas, R-Calif. "The adjustments in this bill will make HSAs more attractive as Americans consider their health insurance options."
Under the legislation, employees who want to enroll in an HSA could make a one-time, tax-free, transfer of funds from their flexible spending arrangements or health reimbursement arrangements to an HSA. The bill would also repeal the annual deduction limitation on HSA contributions, improve the notification of cost-of-living adjustments for deductible requirements and contribution limits, and permit employers to contribute more to HSAs for lower paid employees.
"For many small businesses and individuals, HSAs make it possible to afford health care coverage, while setting aside tax-free savings for future medical expenses," said Ryan. "This consumer-driven approach is already beginning to help rein in medical costs."
Since the bill is not expected to reach a House floor vote before the Congress leaves Washington for the November elections, some committee Democrats questioned the need to spend the committee's time working on the legislation.
"I'm not sure what the big rush is to pass this bill," said Rep. Pete Stark, D-Calif. "Why are we dedicating the few remaining hours of this Congress on a bill that does little more than provide a new billion-dollar tax shelter for the wealthy?"
Stark charged that the legislation would not increase the number of people who are enrolled in HSAs or lower the number of uninsured workers. The Joint Committee on Taxation (JCT) estimated the cost of the legislation over a 10-year period would be $1 billion.
According to a JCT memo on the legislation, approximately 15 million individuals will be enrolled in HSAs in calendar year 2016. However, almost all of these new HSA account holders would have been previously insured, the JCT memo says. Treasury Deputy Assistant Secretary for Tax Policy Robert J. Carroll said industry estimates show as many as three million individuals and families are currently enrolled in HSA-eligible health insurance.
However, Carroll admitted, under questioning from Rep. Sander Levin, D-Mich., that only about 114,000 tax returns were filed with the IRS in 2003 that show deductions for HSAs. Carroll was unable to give an exact number of actual enrollees for the year 2005.
By Stephen K. Cooper, CCH News Staff
JCT Description of Chairman's Amendment in the Nature of a Substitute to HR 6134, the Health Opportunity Patient Empowerment Act of 2006, JCX-46-06
JCT Estimated Revenue Effects of the Amendment in the Nature of a Substitute to HR 6134, the Health Opportunity Patient Empowerment Act of 2006, Scheduled for Markup by the Committee on Ways and Means on September 27, 2006, JCX-47-06

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

A taxpayer has asked the U.S. Supreme Court to decide whether North Carolina may impose its corporate income tax on gains from the sale of investments in out-of-state businesses that the taxpayer maintains had no connection with North Carolina. The taxpayer also has asked the Court whether the North Carolina courts were required to address the merits of its challenge to the state's taxation of the gains.
Background: The taxpayer is a Delaware corporation with its principal place of business in Illinois. It operated local telephone companies in four states, including North Carolina, until 1991, when it sold companies in Iowa and Minnesota. The taxpayer sought permission to use separate accounting, rather than the standard apportionment formula, to compute its 1991 North Carolina corporate income tax. The taxpayer maintained that the Iowa and Minnesota businesses had no connection with North Carolina and, therefore, the state could not tax the gains from the sale of those businesses.
The state board did not act on the taxpayer's petition for separate accounting by the due date on the extension of the taxpayer's 1991 return, so the taxpayer filed a return using the standard apportionment formula and paid the resulting tax. Subsequently, the board denied the taxpayer's petition for separate accounting. The taxpayer then filed a request for a refund with the Secretary of Revenue, along with an amended return using a bifurcated apportionment method. The Secretary denied the refund. The Tax Board dismissed the petition for review of this denial for lack of subject matter jurisdiction. The issue ultimately reached the North Carolina Court of Appeals.
The Court of Appeals held that the Board properly dismissed the taxpayer's petition and did not have to reach the merits of the refund claim because it was based on an amended return using an alternative apportionment formula that was unlawful, in that use of that formula had been denied. Furthermore, the exclusive means for challenging the levy of an unlawful tax is by bringing a civil action in superior court. The taxpayer had brought such an action but it had been dismissed as untimely. Therefore, the Court of Appeals affirmed the Board's action. (TAXDAY, 2005/11/18, S.14) The North Carolina Supreme Court denied review.
Questions presented: The taxpayer has asked the high court whether (1) ASARCO Inc., 458 U.S. 307 (1982); F.W. Woolworth Co., 458 U.S. 354 (1982); Allied-Signal, Inc., 504 U.S. 768 (1992), and the Due Process and Commerce Clauses of the U.S. Constitution prohibit North Carolina's taxation of the gains; and (2) Jones v. Flowers,
126 S. Ct. 1708 (2006), requires North Carolina courts to have heard and decided the merits of the taxpayer's challenge to North Carolina's taxation of those gains.
Subscribers to CCH Tax Research NetWork can view the petition.
Central Telephone Co. v. Tolson, U.S. Supreme Court, petition for certiorari filed September 22, 2006.

CCH (cch.taxgroup.com) reports:

The new issue of TAXES, now available, includes articles and columns covering the following timely top tax issues:
Articles
Evaluating Razavi-Type Fixed Rental Pool Arrangements: How Important Are Tax Consequences in Making the Investment Decision? (By Sharon S. Lassar, William A. Duncan and John O. Everett)
Related Party Like-Kind Exchanges: Current Developments (By John Barsella and Paul C. Lau)
Transfer Pricing for Services: The Temporary Regulations (By Thomas M. Zollo, Charles W. Cope and Stephen R. Blough)
Columns
Tax Trends: The Future of Defined Benefit Plans After the Pension Protection Act of 2006 (By Mark Luscombe)
Family Tax Planning Forum: Pension Protection Act of 2006 Creates Favorable New Rules for IRAs (By Robert Keebler)
Corporate Tax Watch: Coltec Industries, Inc.: Another Spin on Economic Substance (By Debra Bennett)
International Tax Strategies: Repatriation and Exit Planning Using Offshore Holding Companies (By David Buss, David Hryck and Robert Rothman)
Subscribers to the CCH Tax Research Network can access this Journal issue at the Federal Tax tabs on TRN, depending on which publications or libraries they subscribe to.

CCH (cch.taxgroup.com) reports:

The IRS has issued interim guidance on the credit under for electricity produced from open-loop biomass. The guidance includes rules relating to the components of a closed-loop biomass facility, facilities using cogeneration and cofiring processes, additions or improvements of an existing facility and rules relating to sales of electricity. This guidance can be relied on until final regulations are issued. The IRS will not issue private letter rulings regarding Code Sec. 45 as it relates to open-loop biomass or on any issues for partnerships claiming the credit.
Background. A renewable electricity production credit is allowed for electricity produced by a taxpayer from qualified energy resources at a qualified facility. Open-loop biomass was added to the definition of qualified energy resources and open-loop biomass facilities was added to the definition of qualified facilities by the American Jobs Creation Act of 2004 (P.L. 108-357). The Energy Tax Incentives Act of 2005 (P.L. 109-58) added "any nonhazardous lignin waste material" to the definition of open-loop biomass and extended the deadline for placing open-loop biomass facilities in service to December 31, 2007. The definition was further amended to include "any lignin material".
Components. The guidance provides that, for purposes of Code Sec. 45(d)(3), an open-loop biomass facility is a power plant consisting of all components necessary for the production of electricity from open-loop biomass (and, if applicable, other energy sources). This includes: (1) all burners and boilers, (2) any handling and delivery equipment that supplies fuel directly to and is integrated with such burners and boilers, (3) steam headers, (4) turbines, (5) generators and (6) all other depreciable property necessary to the production of electricity. The facility does not include: (1) property used for the collection, processing or storage of open-loop biomass before its use in the production of electricity; (2) transformers or other property used in the transmission of electricity after its production; or (3) ancillary site improvement, such as roadways and fencing. The guidance further provides that a facility using open-loop biomass to produce both electric and thermal energy through cogeneration may be a qualified open-loop biomass facility. Also, electricity produced from open-loop biomass that is cofired with fuels other than fossil fuels may separately qualify for the credit.
Placed in service. The guidance provides that an open-loop biomass facility will not be treated as originally placed in service after October 22, 2004, if more than 20 percent of the facility's total value is attributable to property placed in service on or before October 22, 2004. Similarly, an open-loop biomass facility will not be treated as originally placed in service after August 8, 2005, if more than 20 percent of the facility's total value is attributable to property placed in service on or before August 8, 2005.
Sales. The guidance provides rules relating to sales. If electricity produced from open-loop biomass at any location is sold by a taxpayer to an unrelated person and either party simultaneously purchases electricity from an unrelated person for use at the same location, the sale will be treated as a sale to an unrelated person to the extent the amount of electricity sold exceeds the amount purchased. If a taxpayer sells commingled electricity to an unrelated party, only the applicable percentage of the electricity sold to the unrelated party is treated as electricity produced from open-loop biomass.
Notice 2006-88, 2006FED ¶46,618
Other References:
Code Sec. 45
CCH Reference - 2006FED ¶4415.30

CCH (cch.taxgroup.com) reports:

A bankruptcy court incorrectly held that a real estate and transactional attorney's tax debt was dischargeable because the IRS failed to prove that the debtor willfully attempted to defeat his tax debts. The bankruptcy court erred when it required the IRS to produce evidence of actual tax evasion by the debtor. A debtor may not receive a discharge of a tax debt arising from willful or criminal conduct. Thus, the nonpayment of taxes coupled with affirmative acts to avoid payment or collection of taxes may be sufficient to make a tax debt nondischargeable.
The debtor argued that he never attempted to evade or defeat his tax debt but, rather, that he filed accurate tax returns for each of the tax years at issue and merely failed to pay his taxes. However, the record indicated that the debtor: (1) chronically filed late tax returns; (2) failed to pay his taxes; (3) made gifts to his wife's business and his children; (4) failed to properly report wage income or pay withholding taxes; (5) titled property in his wife's name to frustrate tax collection efforts; and (6) lived a lavish lifestyle while ignoring his tax obligations. These were affirmative acts to avoid payment or collection of taxes.
In addition, the record contained evidence of the debtor's willful attempt to evade his tax debt, including: (1) improperly reporting wage income as nonwage income; (2) making intrafamily transfers of money while owing the IRS in excess of $600,000; (3) transferring large amounts of money to various charitable organizations to remove it from potential levy; (4) titling valuable property in his wife's name to avoid liens; and (5) living a lavish lifestyle while not paying his taxes. Moreover, the debtor caused his first law firm to declare bankruptcy due to a large tax delinquency, and his current law firm also owed a large tax debt.
There was no evidence that the debtor's failure to pay his taxes was due to inadvertence or mistake. Therefore, the bankruptcy court's finding that the debtor did not willfully attempt to evade or defeat his tax liability was clearly erroneous, and the debtor's tax debt is nondischargeable under section 523(a)(1)(C) of the Bankruptcy Code.
Reversing an unreported BC-DC Fla. decision.
In re A.I. Jacobs, DC Fla., 2006-2 USTC ¶50,513
Other References:
Code Sec. 6871
CCH Reference - 2006FED ¶40,630.175

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

Sellers of California real property that are currently subject to withholding at the rate of 3 1/3% on the sales price of California real property conveyed are given a new option to elect withholding at the corporation franchise tax rate (currently, 8.84%), bank and financial corporation tax rate (currently, 10.84%), or highest personal income tax rate (currently, 9.3%), as applicable, multiplied by the reportable gain on the sale. For this purpose, the highest personal income tax rate is determined without regard to the additional 1% surtax on income in excess of $1 million. The new provisions are effective January 1, 2007.
A seller making the election must certify the withholding amount in writing, under penalty of perjury, to the buyer or the real estate escrow person. The seller also must submit a copy of the written certificate and supporting documentation for the withholding amount to the California Franchise Tax Board (FT upon request. The written certification must be in a form prescribed by the FTB. The FTB must make the form available on its Web site and must provide electronic means for a seller to estimate the amount of gain required to be recognized on a transaction.
Withholding on sales of California real property applies generally to sales by resident and nonresident individuals and sales by corporations that do not have a permanent place of business in California, unless an exception to withholding applies. The limited exceptions to withholding on sales of California real property remain unchanged.
Ch. 428 (A.B. 2962), Laws 2006, effective as noted.

CCH (cch.taxgroup.com) reports:

Proposed regulations under Code Sec. 141 provide state and local governmental issuers of tax-exempt bonds with guidance for applying the private activity bond restrictions. Specifically, rules are proposed for the allocation of, and accounting for, tax-exempt bond proceeds for purposes of determining whether the restrictions on the private use of the proceeds are violated, thus, causing a bond to be treated as a private activity bond. (Interest on a private activity bond is not tax-exempt.) Special rules for allocating proceeds used to finance mixed-use facilities and rules regarding the treatment of partnerships as owners or users of facilities are also included. In addition, certain related matters that apply to qualified Code Sec. 501(c)(3) bonds under Code Sec. 145 are addressed by the proposals.
Allocation, Accounting Rules
Under the proposals, bond proceeds and other sources of funds may be allocated to expenditures using any reasonable, consistently applied accounting method that is consistent with how proceeds are allocated for purposes of the arbitrage investment restrictions of Code Sec. 148. Under a general pro rata allocation method, proceeds and any other sources allocated to capital expenditures for a capital project (i.e., the bond-financed property) are treated as allocated ratably throughout the project in proportion to the relative amounts of proceeds and other funds spent on that project. Allocations of sources of funds to uses, such as governmental use and private business use, are made in a manner that reasonably corresponds to the relative amounts of the sources of funding for on the property.
Mixed-Use Projects
Two elective allocation methods are allowed for mixed-used projects (i.e., projects that have both governmental use and private business use) if certain eligibility criteria are met --the physical portion allocation method and the undivided portion allocation method. If neither of theses methods is elected, the general pro rata allocation method described above applies.
Under the elective discrete physical portion allocation method, a mixed-use project is divided into physically discrete portions based on cost, space, or fair market value. The percentage of capital expenditures allocable to a particular discrete portion is determined using a reasonable, consistently applied method that reflects the proportionate benefit derived by the various users of the mixed-use project.
The bond issuer may determine which source or sources of funds spent on a mixed-use project are allocated to a particular discrete portion. For example, in the case of a mixed-use courthouse project, an issuer may allocate tax-exempt bond proceeds to a discrete portion of the courthouse used in public court proceedings for governmental use and allocate qualified equity to another discrete portion of the courthouse that will be used in private retail business.
Under the undivided portion allocation method, a mixed-use project is divided into a governmental use portion and a private business use portion on the basis of percentage of use. The mixed-use project is not divided into discrete portions.
Subject to an exception for mixed-use output facilities, the two elective allocation methods only apply if the mixed-use project is wholly owned by governmental persons.
Mixed Use Output Facilities
An issuer may apply the undivided portion allocation method to a mixed-use project that is an output facility if undivided ownership interests in the facility are owned by governmental persons or private businesses, provided that all owners of the undivided ownership interests share the ownership, output, and operating expenses in proportion to their contributions to the costs of the facility. The relative measures of the undivided portions are determined using the proportionate benefit derived by the users. If a private business and governmental entity each own an undivided interest in the facility, the proportionate benefit is based on ownership percentages.
Proposed Effective Dates
The proposed regulations would apply to bonds that are sold 60 or more days after the date of publication in the Federal Register as final regulations and that are subject to the 1997 final regulations issued under Code Sec. 141
by T.D. 8712, which also relate to private activity bond restrictions. The proposed regulations may not be relied upon prior to adoption as final regulations. However, issuers may apply Proposed Reg. §1.141-13(d) and Proposed Reg. §1.141-13(g), Example 5, to bonds issued before final regulations are published. These proposals would modify Reg. §1.141-13(d) to clarify how the rules regarding multipurpose issue allocations apply when an issuer wants to elect the multipurpose issue rule for an issue that would consist of qualified private activity bonds in part and governmental bonds in part with an appropriate allocation.
Issuers may continue to rely on rules contained in a 2002 advance notice of proposed rules (NPRM REG-142599-02), which provided limited guidance on allocation and accounting rules for mixed-use output facilities, until the effective date of the final regulations.
Hearing and Comments
A public hearing on the proposed regulations will be held on January 11, 2007, at 10:00 a.m. in the auditorium of the New Carrollton Federal Building, 5000 Ellin Rd., Lanham, Md. Requests to speak with outlines of topics to be discussed must be received by December 26, 2006. Submissions should be sent to: CCA:LPDR (REG-140379-02; REG-142599-02), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, D.C. 20044. Comments may also be submitted electronically via the IRS website at www.irs.gov/regs or the Federal e-Rulemaking Portal at www.regulations.gov (IRS REG-140379-02).
Proposed Regulations, NPRM REG-140379-02 and NPRM REG-142599-02, 2006FED ¶49,717
Other References:
Code Sec. 141
CCH Reference - 2006FED ¶7702BA
CCH Reference - 2006FED ¶7702CA
CCH Reference - 2006FED ¶7702HA
CCH Reference - 2006FED ¶7702PC
CCH Reference - 2006FED ¶7702RB
Code Sec. 145
CCH Reference - 2006FED ¶7826

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

The city of Seattle's imposition of its local business and occupation (B&O) tax on the entire gross income of a brokerage house based in the city was contrary to federal and state constitutional law because some of that income was generated by activities conducted outside the city. The Washington Court of Appeals concluded that Seattle must fairly apportion the company's gross receipts based on where the income-generating activity occurred. Separately, the court rejected the taxpayer's argument that the city's tax violated equal protection.
The taxpayer had about 24 employees at its home office in Seattle. In addition, the taxpayer had nearly 300 registered representatives who worked from more than 200 business locations in nine Western states, including Washington. The representatives arranged for the purchase and sale of securities under a broker-dealer's account. For the period at issue, the city assessed local B&O tax on all commissions received in the taxpayer's Seattle office, regardless of where the representative who generated the commission was based.
Under the fair apportionment prong of Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977), and other federal Commerce Clause jurisprudence, the Seattle tax assessment exceeded the city's power to tax interstate commerce. Specifically, the court found that attributing the entire proceeds of the company's registered representatives to the company's Seattle office violated the external consistency test for fair apportionment of interstate income. Although the company did not maintain offices outside Seattle, it was undisputed that some of its registered representatives generated sales outside Washington state. Under such circumstances, the city was taxing more than that portion of the revenues from the company's interstate activities that reflected the in-state component of the activity being taxed.
The court noted that its conclusion was consistent with the Department of Revenue's interpretation of the state B&O tax. In a case involving a broker dealer with facts similar to those of this case, the Department held that the fair apportionment prong of the Complete Auto Transit test required the state to apportion gross income because the taxpayer engaged in more than incidental business outside Washington.
The court also found that the city's assessment violated state limits on local government taxing authorities. Under Washington case law precedent, the city could not tax income generated by securities transactions within Washington state but outside Seattle when the incident of taxation was the privilege of doing business in the city. In this case, the income the city was attempting to reach as part of its tax base included commission income generated from the purchase or sale of securities outside Seattle and outside Washington state.
KMS Financial Services v. City of Seattle, Washington Court of Appeals, Division I, No. 56808-6-I (unpublished opinion), September 18, 2006, ¶202-623
Other References:
Explanations at ¶72-011

CCH (cch.taxgroup.com) reports:

The Department of Revenue has reissued its guidance regarding the corporate income and personal income tax subtraction allowed for Colorado source capital gains to provide new guidance for transfers between a pass-through entity and its members and to clarify the acquisition date of property pursuant to a divorce settlement.
For purposes of qualifying for the capital gains subtraction, a pass-through entity and an individual member of the entity are treated in the aggregate. Therefore, for purposes of determining a member's requisite holding period for property transferred by a pass-through entity, the member's acquisition date is the date on which the entity acquired the property, assuming the member already owned its share of the entity when the property was acquired. If a member acquires its share of a pass-through entity after the entity acquired the property, the member's acquisition date is the date it acquired its share of the entity.
In calculating the holding period of property acquired incident to a divorce settlement, the acquisition date of the property is determined by the status of the property during the marriage. Previously, the acquisition date of such property was determined by the classification of the property during the divorce. In addition, what was previously termed "marital" property has been clarified to mean property that is not jointly titled and controlled during the marriage.
FYI Income 15, Colorado Department of Revenue, September 2006, ¶300-015c
Other References:
Explanations at ¶10-825
Explanations at ¶15-325

CCH (cch.taxgroup.com) reports:

CCH Tax and Accounting is hosting a live 100-minute audio seminar, Year-End Tax Planning Ideas for Individual and Small Business Clients, on Wednesday, October 4 at 2:00 p.m. (Eastern), 1:00 p.m. (Central). Tax experts Sidney Kess and Barbara Weltman will provide practical guidance to tax practitioners seeking to help their clients with effective year-end tax planning strategies. This guidance will incorporate legislative changes enacted by TIPRA and the Pension Protection Act of 2006 (P.L. 109-280).
Amongst the issues Mr. Kess and Ms. Weltman will cover are:
2006 AMT exemption amount increase
Roth 401(k)
options;
Planning strategies resulting from the increase in the kiddie tax age;
New Medicaid rules;
New credits for home energy improvements and hybrid car purchases; and
Refund of tax on long distance phone service, and more.
Registration can be completed online at https://www.krm.com/cch or by calling 1-800-775-7654. Participants can earn two hours of CPE credit. In addition, firms registering for this audio seminar will receive as a bonus Tax Planning Strategies: Tax Savings Opportunities for Individuals and Families (2006-2007) and Highlights of the 2006 Tax Law Changes.

CCH (cch.taxgroup.com) reports:

The Treasury and IRS have announced that they will issue regulations under Code Sec. 367(b) to address certain cross-border triangular reorganizations designed to avoid U.S. tax, including tax on the repatriation of a subsidiary's earnings.
Regulations Under Code Sec. 367(b)
The regulations will apply to triangular reorganizations, in which either the parent corporation (P) or the subsidiary corporation (S) (or both) is foreign, and pursuant to the reorganization, S acquires from P, in exchange for property, all or a portion of the P stock and then uses the P stock as consideration in an exchange to acquire the stock or assets of another corporation (T). For this purpose, T could be either related or unrelated to P and S before the transaction. The triangular reorganizations involved may be forward or reverse triangular mergers, triangular "C" reorganizations, triangular "B" reorganizations, or reorganizations described in Code Sec. 368(a)(1)(G) and (a)(2)(D).
In such cases, taxpayers generally take the position that S's transfer of property to P for P's stock is treated as the purchase of P stock, not as a distribution from S to P. Thus, if P is domestic and S is foreign, the transaction could have the effect of repatriating foreign earnings of S to P without a corresponding dividend to P that would be subject to U.S. income tax. Similarly, if P is foreign and S is domestic, the transaction could have the effect of repatriating S's U.S. earnings to its foreign parent in a manner that is not subject to U.S. withholding tax. The transaction may also raise U.S. earnings stripping issues in the case where S uses a note to purchase all or a portion of the P stock. Moreover, if both P and S are foreign, the transactions may generally have the effect of avoiding income inclusions to certain U.S. shareholders of P that would be subject to U.S. tax under the subpart F rules. Foreign-to-foreign transactions of this type may also be used to facilitate the subsequent repatriation of foreign earnings to U.S. shareholders without U.S. tax.
To address these concerns, the regulations under Code Sec. 367(b) will make adjustments with respect to P and S such that the transfer of property from S to P in exchange for the P stock will have the effect of a Code Sec. 301(c) distribution of property that is treated separately from P's transfer of its stock to S pursuant to the reorganization. These adjustments will be made regardless of the fact that Code Sec. 1032 otherwise applies to the reorganization. Therefore, the regulations will require, as appropriate, an inclusion in P's gross income as a dividend, a reduction in the P's basis in its S or T stock, and the recognition of gain by P from the sale or exchange of property.
The regulations will also provide for appropriate corresponding adjustments, such as a reduction of S's earnings and profits as a result of the distribution (consistent with the Code Sec. 312 rules). The regulations will further address similar transactions in which S acquires the P stock used in the reorganization from a related party that purchased the P stock in a related transaction.
Effective Date of the Proposed Regulations
In general, the Code Sec. 367(b) regulations described in the notice will apply to transactions occurring on or after September 22, 2006. The regulations will not, however, apply to a transaction that was completed on or after September 22, 2006, provided the transaction was entered into pursuant to a written agreement that was binding before September 22, 2006, and at all times thereafter. No inference is intended regarding the treatment of transactions described herein under current law. The IRS may, where appropriate, challenge such transactions under applicable provisions or judicial doctrines.
Comments Requested
The IRS requests comments as to whether in certain cases it is appropriate to provide an exception from the treatment described in this notice. In addition, comments are requested as to the source and timing of the adjustments that will be made with respect to P and S under the regulations.
The IRS further requests comments regarding transactions that are not described in this notice. For example, comments are requested on transactions where S or P is foreign and S purchases P stock from a person unrelated to P (for example, from the public on the open market), or where S acquires the P stock in a transaction that is unrelated to the triangular reorganization.
Finally, comments are requested on the treatment of transactions similar to those described in this notice that do not qualify as reorganizations. The IRS clarifies that any regulations issued to address transactions that are not described in this notice will apply prospectively.
Treasury Department News Release, TDNR HP-109, 2006FED ¶46,616
Notice 2006-85, 2006FED ¶46,617
Other References:
Code Sec. 367
CCH Reference - 2006FED ¶16,667.60

Tax Analysts report:

Tax Analysts report:

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

For Illinois property tax purposes, there were no state or federal constitutional violations arising from retroactive application of a 2005 law that expressly validated a county's 1979 hard-road district tax levy that, when levied, was subject to a five-year limitation, according to the Illinois Supreme Court. A lower court ruling that vacated summary judgment in favor of the district was reversed.
As levied in 1979, the tax was subject to the five-year limitation, after which the law required that the levy be reauthorized. In 1980, the five-year limitation was repealed, and the 1979 levy was never reauthorized. Complaining taxpayers challenged the levy in 1997, charging that the levy had never been reauthorized and, therefore, was invalid. After a trial court granted summary judgment in favor of the taxpayers, the Illinois Appellate Court reversed the summary judgment. While an appeal by the district was pending before the Illinois Supreme Court, the state General Assembly in 2005 enacted legislation, over the Governor's veto, that validated the tax as enacted in 1979 for all subsequent years. The taxpayers challenged retroactive application of the 2005 law on constitutional grounds.

CCH (cch.taxgroup.com) reports:

The California Franchise Tax Board (FT is authorized to establish requirements and conditions to allow corporations to file a California group nonresident income tax return on behalf of electing nonresident directors who receive wages, salaries, fees, or other compensation from that corporation for director services, such as attendance at board of directors' meetings that take place in California. Nonresidents that elect to participate in the group return will not be required to file a nonresident personal income tax return to report director compensation attributable to California. In making the election, the nonresident agrees to be taxed at the highest marginal personal income tax rate (currently 9.3%). In addition, no deductions or credits may be claimed on the group return.
Corporations that file the group return are liable for the nonresident director's payments of tax, additions to tax, interest, and penalties associated with the director's compensation.
The FTB must set forth requirements and conditions for filing a nonresident director group return in its applicable forms and instructions. In addition, the FTB is authorized to adjust the income of an electing nonresident taxpayer included in a group return to properly reflect the nonresident's income.
A.B. 970, Laws 2006, operative January 1, 2007

CCH (cch.taxgroup.com) reports:

The IRS has announced that more than 12,500 large companies have e-filed their 2005 corporate tax returns. For this first time this year, corporations with $50 million or more in assets that file at least 250 returns were required to e-file, starting with their 2005 returns. Through their collaboration with taxpayers, practitioners, and software developers, the IRS developed a system to process large volumes of very complex returns, and developed rules to facilitate taxpayers' ability to comply with the mandate.
"E-file will cut many months off of the audit process and will allow us to develop sophisticated analytical tools to better select areas of audit inquiry, "said IRS Commissioner Mark W. Everson. "Taxpayers will benefit by having uncertainties on their tax returns resolved sooner, and the government will benefit by more promptly identifying and responding to areas of noncompliance."
E-file for large corporations was used successfully by taxpayers in all types of industries. The IRS designed corporate e-file to be flexible enough to accommodate the various needs of large business filers, such as allowing transition rules during the first year. The electronic filing requirements will be expanded to include tax year 2006 returns of corporations that file 250 or more returns a year and have $10 million or more in total assets.
IR-2006-147, 2006FED ¶46,609
Other References:
Code Sec. 6011
CCH Reference - 2006FED ¶35,141.47

CCH (cch.taxgroup.com) reports:

The IRS has issued guidance regarding the application of Code Sec. 911 to United States citizens and residents who earn income by performing services at the U.S. Naval Base at Guantanamo Bay. Under the guidance, such individuals may elect to exclude such income and housing costs from gross income, provided that they meet the other requirements of Code Sec. 911.
Code Sec. 911(a) allows a qualified individual to elect to exclude from gross income his or her foreign earned income and housing cost amount. Code Sec. 911(d)(1) defines a "qualified individual" as a U.S. citizen or resident whose tax home is in a foreign country and who meets certain requirements of residence or presence in a foreign country. Reg. §1.911-3(a) defines "foreign earned income" as income from sources within a foreign country that is earned during a period for which the individual qualifies to make an election. Under Code Sec. 911(b)(1)(, foreign earned income does not include amounts paid by the U.S. or an agency thereof to an employee of the U.S. or its agency.
Regulations issued under the Trading With the Enemy Act (TWEA), 50 U.S.C. App. 1 et seq., and the International Emergency Economic Powers Act, 50 U.S.C. 1701 et seq., include provisions generally prohibiting U.S. citizens and residents from engaging in transactions related to travel to, from or within certain foreign countries. Under TWEA, the Department of the Treasury's Office of Foreign Assets Control (OFAC) has issued the Cuban Assets Control Regulations (CACR), 31 C.F.R. part 515, which generally prohibits U.S. citizens from engaging in transactions related to travel to, from, and within Cuba. Under Code Sec. 911(d)(8)(A), if travel (or a transaction connected with travel) with respect to a foreign country is prohibited by these regulations during any period, then a taxpayer cannot exclude his or her foreign earned income or housing expenses related to that country for that period. Code Sec. 911(d)(8)(C) provides, however, that this restriction does not apply during any period in which the individual's activities are not in violation of the prohibitive regulations.
After consultations with OFAC, the IRS and Treasury have determined that the CACR do not proscribe transactions related to travel to, from, or within the U.S. Naval Base at Guantanamo Bay. For purposes of determining whether an individual's earned income is from sources within a foreign country, an individual who works at the base is performing services within a foreign country. Therefore, under Code Sec. 911(d)(8)(C), the Code Sec. 911(d)(8)(A) restriction does not apply to qualified individuals performing services at the base.
For further information regarding this notice, contact Kate Y. Hwa of the Office of Associate Chief Counsel (International), at (202) 622-3840 (not a toll-free call).
Notice 2006-84, 2006FED ¶46,610
Other References:
Code Sec. 911
CCH Reference - 2006FED ¶28,049.85

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

The Utah Legislature has approved, and Governor Jon Huntsman, Jr., has signed, legislation that reduces the top Utah personal income tax rate and expands the current personal income tax brackets for taxable years beginning after 2005, and allows individuals to use either the tax bracket system or a new flat rate tax option for taxable years beginning after 2006. The legislation was approved in a one-day special legislative session.
For taxable years beginning after 2005, the top personal income tax rate under the tax bracket system with expanded tax brackets is reduced from 7% to 6.98%. For taxable years beginning after 2008, the tax brackets are subject to adjustment for inflation.
For taxable years beginning after 2006, a resident or nonresident individual is allowed to calculate and pay either a flat 5.35% rate tax on the basis of adjusted gross income with limited deductions or a multi-rate tax under the tax bracket system on the basis of federal taxable income with traditional deductions. An individual that calculates and pays the flat rate tax is prohibited from making additions to, subtractions from, and adjustments to adjusted gross income, except for the following:
-- addition for the amount of any state income tax imposed, to the extent deducted from adjusted gross income by an estate or trust in determining federal taxable income;
-- addition for a lump sum distribution that the individual does not include in adjusted gross income on the individual's federal return for the taxable year;
-- addition for the amount of a child's income that a parent elects to report and does not include in adjusted gross income on the parent's federal return for the taxable year;
-- addition for certain medical care savings account withdrawals and penalties for which amounts were deducted on the state return;
-- addition for nonqualified Higher Education Savings Incentive Program account disbursements for which amounts were deducted on the state return;
-- addition for interest from bonds, notes, and other evidences of indebtedness issued by other state or local agencies;
-- addition for a distribution received by a resident beneficiary of a resident trust of income that was taxed at the trust level for federal tax purposes, but was subtracted from state taxable income;
-- addition for a distribution received by a resident beneficiary of a nonresident trust of undistributed distributable net income realized by the trust, if the undistributed distributable net income was taxed at the trust level for federal tax purposes, but was not taxed at the trust level by any state;
-- addition for any deducted adoption expense for which an individual receives reimbursement from another person;
-- subtraction for interest or dividends on federal obligations, to the extent included in gross income for federal income tax purposes but exempt from state income taxes;
-- subtraction for income derived by a Ute tribal member from a source within the Uintah and Ouray Reservation during a time when the Ute tribal member resides on homesteaded land diminished from the Uintah and Ouray Reservation;
-- subtraction for an amount received by an individual or distribution received by a beneficiary of a resident trust, if the amount or distribution constitutes a refund of state income taxes and is included in adjusted gross income on the individual's federal return for that taxable year;
-- subtraction for railroad retirement benefits paid for the taxable year and included in adjusted gross income on the individual's federal return for that taxable year;
-- subtraction for an amount received by an enrolled member of an American Indian tribe, to the extent that the state is not authorized or permitted to impose a tax on that amount;
-- adjustment to prevent a double tax benefit; and
-- adjustment to prevent a double tax detriment.
An individual that calculates and pays the flat rate tax is allowed to claim, carry forward, or carry back nonrefundable and refundable tax credits and make checkoff contributions.
Subscribers to CCH Tax Research NetWork can view the text of the enrolled bill.
S.B. 4001, Laws 2006, Fourth Special Session, effective as noted above; Telephone conversation , Utah Governor's Office, September 20, 2006

CCH (cch.taxgroup.com) reports:

The opportunity for amnesty offered by the original Streamlined Sales Tax (SST) Governing Board full member states will expire on September 30, 2006, for many sellers. The states in which the amnesty is expiring are Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, New Jersey, North Carolina, North Dakota, Oklahoma, South Dakota, and West Virginia.

CCH (cch.taxgroup.com) reports:

The IRS has issued interim guidance under the Code Sec. 152(c)(4) "tie-breaking rule." This rule is used to determine which taxpayer may claim a qualifying child when the child is used by multiple taxpayers to claim (1) head of household filing status (Code Sec. 2(b)), (2) the child and dependent care credit (Code Sec. 21), (3) the child tax credit (Code Sec. 24), (4) the earned income credit (Code Sec. 32), (5) the exclusion from income for dependent care assistance (Code Sec. 129), or (6) the dependency deduction (Code Sec. 151). Notice 2006-86 provides that, unless Code Sec. 152(e) applies, the tie-breaking rule of Code Sec. 152(c)(4) shall apply to these provisions as a group, rather than section-by-section. The child is, therefore, treated as the child of only one taxpayer for all the provisions that employ the Code Sec. 152(c) uniform definition of a qualifying child.
An exception exists for those taxpayers to whom Code Sec. 152(e) applies. Under Code Sec. 152(e), a noncustodial parent may claim a child as a qualifying child for purposes of the child tax credit and the dependency deduction only. The custodial parent may then claim the child as a qualifying child for purposes of head of household filing status, the earned income credit, the child and dependent care credit, or the exclusion from income for dependent care assistance. In such case, the child would be the qualifying child of two taxpayers.
Code Sec. 152 was amended by the Working Families Tax Relief Act of 2004 (P.L. 108-311), effective for tax years beginning after December 31, 2004. This guidance will apply until regulations reflecting this amendment have been issued and become effective.
Notice 2006-86, 2006FED ¶46,608
Other References:
Code Sec. 152
CCH Reference - 2006FED ¶8250.40

CCH (cch.taxgroup.com) reports:

Citing a flawed tax system that serves as a drag on economic growth, members of the business community and federal tax analysts made their case to the Senate Finance Committee on September 20 for substantial reform of the current business tax policy.
Former IRS Commissioner Charles O. Rossotti stated the problem in the simplest of terms: tax complexity continues to get worse every year. Since the adoption of the Tax Reform Act of 1986 (P.L. 99-514), Congress has passed 14,400 amendments to the tax code, resulting in greater compliance burdens and approximately $300 billion in tax revenue lost to U.S. coffers annually, in part because of the complexity of the Code.
Rossotti, along with many of the witnesses testifying before the committee, advocated a simpler tax system that would level the playing field among businesses and, in the process, introduce lower statutory rates while raising the same amount of revenue. The former Commissioner argued that lower rates, rather than special preferences, would better serve the business community, but he also urged simpler rules for smaller businesses than for their large counterparts. In addition, he said that the government should reduce or eliminate the double taxation of businesses, but that all business income should be taxed once at the approximately the same rates.
Regarding foreign income, Rossotti told lawmakers that he personally favored shifting the entire measurement of taxable income of large corporations to that reported under Generally Accepted Accounting Principles on a worldwide basis, with a simplified system for crediting foreign taxes paid. David M. Walker, Comptroller General of the United States, echoed similar sentiments, testifying that any new system proposals should offer as broad a tax base as possible in order to minimize overall tax rates and reduce tax preferences and complexity while increasing transparency.
"To the extent other goals, such as equity and simplicity, allow, the tax system should aim for increased economic efficiency by remaining as neutral as possible in its other structural features, "said Walker, citing differences in taxation based on legal form of organization, sources of financing or type of assets.
Focusing on taxation of business investments, Treasury Deputy Assistant Secretary for Tax Analysis Dr. Robert Carroll testified that there were a number of different policy avenues for influencing tax on capital treating different types of investment more uniformly, each with its own set of inherent trade-offs. As an example, Carroll offered the choice of allowing faster write-off of investment versus lowering the corporate tax rate.
"One difficulty with faster write-off of investment or expensing is the disparate treatment between old and new investment, "said Carroll, noting that because new investment receives more favorable treatment, the market value of existing capital may, in some instances, fall, relative to new investment. This gives rise to the potential need for transition relief to address changes in asset values that result from the disparate treatment of existing capital and new investment. Corporate rate reduction, he noted, avoids this difficulty because it applies to the return from both existing capital and new investment.
Following witness testimony, Committee Chairman Charles E. Grassley, R-Iowa, said that the hearing set the stage for future hearings that will examine specific aspects of business tax reform in greater depth. "Tax reform will take a bipartisan, national consensus," he said. "I think the consensus is there, that the business tax system is in desperate need of reform."
By Jeff Carlson, CCH News Staff
SFC Release: Grassley Opening Statement
SFC Release: Baucus Opening Statement
GAO Testimony: Business Tax Reform --Simplification and Increased Uniformity of Taxation Would Yield Benefits (GAO-06-1113T)

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

The mere grant of a right to use a developer's software does not create Iowa corporation income tax nexus where the developer does not have an office or permanent sales staff in Iowa and the software is not sold, but licensed, to an end user. However, sending an employee into Iowa for installation or training, for any period of time, constitutes a physical presence and is sufficient to create nexus. Once nexus is established, the entire amount of income received from the customer is considered Iowa receipts. In addition, nexus is determined on a year-to-year basis so that if a nexus activity occurs during the year, the corporation has nexus for the entire year. Also, P.L. 86-272, which prohibits taxation in certain circumstances on the solicitation of orders for tangible personal property, does not provide protection, as the software developer is licensing the right to use the software and is not selling tangible personal property.
Finally, application service providers who merely provide computer-based services to customers over a network, thereby granting the right to use the software for a fee, do not create nexus.
Policy Letter 06240045, Iowa Department of Revenue, May 30, 2006, ¶201-175
Other References:
Explanations at ¶10-075

CCH (cch.taxgroup.com) reports:

Various prescribed rates for federal income tax purposes for October 2006 have been provided by the IRS. The annual short-term, mid-term, and long-term applicable federal interest rates (AFRs) are 5.00 percent, 4.82 percent and 5.02 percent, respectively. The semiannual short-term, mid-term, and long-term AFRs are 4.94 percent, 4.76 percent and 4.96 percent, respectively. Quarterly short-term, mid-term and long-term AFRs are 4.91 percent, 4.73 percent and 4.93 percent, respectively. Finally, the monthly short-term, mid-term and long-term rates are 4.89 percent, 4.71 percent and 4.91 percent, respectively.
The short-term, mid-term, and long-term adjusted applicable federal rates (adjusted AFR) for October 2006 for purposes of Code Sec. 1288(b) are 3.50 percent, 3.69 percent, and 4.22 percent, respectively, when annual compounding is used.
Additionally, the Code Sec. 382 adjusted federal long-term rate is 4.22 percent, and the long-term tax-exempt rate is 4.52 percent. The Code Sec. 42(b)(2) appropriate percentage for the 70-percent present-value, low-income housing credit is 8.15 percent, and the appropriate percentage for the 30-percent present-value, low-income housing credit is 3.49 percent. Finally, theCode Sec. 7520 AFR for determining the present value of an annuity, an interest for life or a term of years, or a remainder or reversionary interest is 5.8 percent.
Rev. Rul. 2006-50, 2006FED ¶46,605
Rev. Rul. 2006-50, FINH ¶30,528
Other References:
Code Sec. 42
CCH Reference - 2006FED ¶173.02
CCH Reference - 2006FED ¶176.01
CCH Reference - 2006FED ¶4305.03
Code Sec. 382
CCH Reference - 2006FED ¶17,115.28
Code Sec. 642
CCH Reference - 2006FED ¶24,308.1885
Code Sec. 1274
CCH Reference - 2006FED ¶31,310.05
CCH Reference - 2006FED ¶31,310.11
Code Sec. 7520
CCH Reference - 2006FED ¶42,785.40
CCH Reference - FINH ¶22,630.05
Code Sec. 7872
CCH Reference - FINH ¶18,950.05

CCH (cch.taxgroup.com) reports:

Two companies that provided paratransit services to disabled persons were not entitled to income tax credits for excise taxes paid on gasoline used in the vehicles because the transportation the companies provided did not meet the requirements of Code Sec. 6421.
The companies' transportation services, which they provided in sedans and vans with a seating capacity of less than 20 adults, were only available to individuals who were certified as disabled under the Americans With Disabilities Act (ADA). Disabled individuals made reservations for a one-time ride between two points or set up a subscription service in which the same trip was scheduled at the same day and time at least once a week. Prior to each day's operation, the trips for the following day were set out in a daily travel manifest. Thus, a daily manifest might or might not include a stop that had been included on the previous day.
The companies' claim for an income tax credit for excise taxes paid on gasoline used in its vehicles was disallowed because the vans and four-door sedans they used to transport the passengers did not qualify as buses. "Bus" is not defined in the tax code; however, under its ordinary and common meaning, a four-passenger sedan does not qualify as a bus that is designed to carry a comparatively large number of passengers. Moreover, even though the word "automobile" precedes the word "bus" in the statute, there was no evidence that Congress intended the plain meaning of "automobile" to alter or expand the plain meaning of "bus." Although the companies' vans may have qualified as "buses" under Code Sec. 6421(b)(1), the companies were not able to quantify how many gallons of gasoline were used in the vans as compared to the sedans.
In addition, the companies did not provide scheduled transportation services along regular routes as required by Code Sec. 6421(b)(2) as the transportation the companies provided was on a variable schedule from day to day.
Finally, the companies' argument that the term "scheduled and along regular routes" in the tax code should be read in light of the paratransit regulations under the ADA was rejected. The ADA is not a taxing statute and, consequently, it has no applicability as to whether the companies qualified for an income tax credit.
Medical Transportation Management Corp., 127 TC --, No. 7, Dec. 56,625
Other References:
Code Sec. 34
CCH Reference - 2006FED ¶4151.29
CCH Reference - ETR ¶2075.11
Code Sec. 6421
CCH Reference - ETR ¶48,885.03
CCH Reference - ETR ¶48,885.75

CCH (cch.taxgroup.com) reports:

As a service to our subscribers, CCH Tax & Accounting has projected additional inflation-adjusted tax amounts that apply to the 2007 tax year. CCH TAX DAY published 2007 projected tax rate schedules, standard deduction amounts, personal exemption amounts and other figures on September 18 (TAXDAY, 2006/09/18, M.3). Those figures were based on the inflation-adjustment provisions of the Internal Revenue Code (IRC) as currently in force and the average of the Consumer Price Index for All Urban Consumers (CPI-U) published by the Department of Labor for each month in the 12-month period ending on August 31, 2006. That same CPI-U figure is also used to project the additional 2007 tax figures below.
Note: Official IRS figures will not be released until later in 2006.
New for 2007
The Tax Increase Protection and Reconciliation Act of 2005 (P.L. 109-222) and the Pension Protection Act of 2006 (P.L. 109-280), both passed in 2006, continue the trend of adjusting tax amounts for inflation. The new inflation-adjusted amounts required for 2007 based on the September 2005 to August 2006 figures include:
Roth IRAs. The AGI limits for maximum Roth IRA contributions are: married filing joint, $156,000 (formerly $150,000); other filing statuses, other than married filing jointly or separately, $99,000 (formerly $95,000).
IRAs. The AGI limits for maximum IRA contributions for individuals covered by a retirement plan are: married filing jointly, $83,000; head of household and single, $52,000; and married filing jointly when only one spouse is covered by a qualified plan, $156,000.
Saver's Credit. The AGI limits for the retirement contributions credit (Form 8880) are: married filing joint, for 50-percent credit, $31,000, for 20-percent credit, $34,000, and for 10-percent, credit $52,000; head of household, for 50-percent credit, $23,250, for 20-percent credit, $25,500, and for 10-percent credit, $39,000; other filers, for 50-percent credit, $15,500, for 20-percent credit, $17,000, for 10-percent credit, $26,000.
Other Tax Figures
In addition to the projected tax figures for 2007 listed above and in CCH TAX DAY on September 18, the IRC requires other adjustments based on the September 2005 through August 2006 CPI amounts. These additional amounts include:
Transportation fringe benefits. The monthly cap on the exclusion of qualified parking expenses will be $215 in 2007 (up from $205 in 2006). Transit passes/commuter highway vehicle amounts will rise $5 to $110 per month.
Earned income tax credit (EITC). The income limit used to compute the maximum EITC will be $5,590 for a taxpayer with no children (up from $5,380), $8,390 for a qualifying individual with one child (up from $8,080), and $11,790 for taxpayers with two or more children (up from $11,340). The disqualified (investment) income limit will be $2,900 (up from $2,800 in 2006).
Child credit. The refundable child credit earned income threshold will be $11,750 (formerly $10,000).
Health savings account (HSA) deductibles.
For 2007, an HSA must be paired with a health plan with a minimum $1,100 deductible (up $100 from 2006), $2,200 for family coverage (up from $2,100), and a maximum out-of-pocket amount of $5,500 for individual coverage (up from $5,250), $11,000 for family coverage (up from $10,500).
Long-term care. The limited exclusion available for daily benefits received under a qualified long-term care insurance contract will be $260 per day, up $10 from 2006. The amount of long-term care insurance premiums deductible as health insurance premiums also rises to $290 for age 40 or less, $550 for more than 40 years but not over 50 years, $1,100 for more than 50 years but not over 60 years, $2,950 for more than 60 years but not over 70 years, and $3,680 for more than 70 year of age.
MSA adjustments. The minimum/maximum deductibles will be set for single plans at $1,900/$2,850 and for family plans at $3,750/ $5,650. The maximum out-of-pocket expenses limit for a single plan will be $3,750 and for a family plan, $6,900.
Health savings account contributions. The projected HSA contribution limits are $2,850 for single and $5,650 for family plans. The high-deduction limits will be $1,100 for single and $2,200 for family plans. The out-of-pocket limits will be $5,500 for single and $11,000 for family plans.
Lien/levy priority relief. The IRS Restructuring and Reform Act of 1998 (P.L. 105-206) added certain levy protection dollar limits that rise in 2007: for mechanic's liens on homes, from $6,210 to $6,450; for casual sales of household goods and personal effects, from $7,430 to $7,720; and for property (books and tools needed for a trade, business or profession) exempt from levy, from $3,710 to $3,860.
Attorney's fees. The hourly cap for attorney's fees awards rise to $170 in 2007, from $160 in 2006.
Charitable organizations de minimis
benefits. In 2007, allowable token benefits may amount to no more than $8.90 before unrelated business income is triggered. A contribution of more than $44.50 will be fully deductible in 2007 if the benefit received by the donor is no more than the lesser of $89 or 2 percent of the amount of the contribution (up from $86 in 2006).
Dues paid to agricultural or horticultural organizations. The 2007 limitation under Code Sec. 512(d)(1) for exclusion of a member's dues from unrelated income is $136 (up from $131 in 2006).
Correction. In the September 18 CCH TAX DAY, the limits to the 10 percent rate bracket for married filing jointly and most unmarried filers were stated as $15,600 and $7,800, respectively. Correctly projected, they are $15,650 and $7,825.
By George Jones, CCH News Staff

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

For purposes of eligibility for the corporate and personal income tax capital credit, as well as other economic incentives based on employment that are provided or administered by Alabama or its political subdivisions, covered employees actually working full-time in the business operations of the client of a professional employer organization are considered to be employees solely of the client. The client is entitled to the benefit of any tax credit, economic incentive, or other benefit arising from the employment of covered employees of the client, subject to all other state and local laws controlling any such benefit.
In computing the Alabama apportionment formula, a client company must include in the payroll factor the amount paid to the professional employer organization that is due to be paid to covered employees as wages earned.
A "covered employee" is an individual who is a co-employee of both the professional employer organization and the client, is under contract to the professional employer organization, has agreed with the organization to be treated as a covered employee, and is subject to the Alabama Professional Employer Organization Registration Act.
Act 2006-229 (S.B. 41), Laws 2006, effective June 1, 2006

CCH (cch.taxgroup.com) reports:

With the congressional elections less than two months away, one church is deciding whether to comply with an IRS summons in a case that is being watched closely by congregations nationwide. On September 15, All Saints Episcopal Church in Pasadena, Calif., announced that the IRS had issued a summons requesting information about a guest minister whose 2004 sermon, according to critics, violated the rules prohibiting Code Sec. 501(c)(3) organizations from intervening in politics.
Sermon
The controversy at All Saints began two days before the 2004 presidential election when a guest minister preached a sermon titled, "If Jesus Debated Senator [John] Kerry and President Bush." After the election, the IRS launched an investigation.
Rev. Ed Bacon, rector of All Saints, said in a written statement that the IRS had sent a list of 13 questions about the sermon. Bacon characterized the questions as probing "deeply into core religious practices."
All Saints asked the IRS to reconsider its questions and to reissue its request for information as an administrative summons, which the IRS did.
"The summons listed 17 detailed requirements for information, documents and testimony regarding All Saints' relationship with the Rev. George Regas, the guest preacher, and all expenditures involved in having the sermon given on October 31, 2004," Bacon said. The IRS requested the materials by September 29.
Possible Court Challenge
The congregation could challenge the administrative summons in court. "All Saints leadership, with input from the congregation and our community, is prayerfully considering whether the church will comply with this summons or instead raise its concerns through the judicial process," Bacon said.
According to published reports, church members appear to favor challenging the IRS summons. The Los Angeles Times
reported that Bacon asked parishioners on September 17 to email their thoughts on what course of action to take to him.
Marcus Owens, lead counsel for All Saints, said in a written statement that the case involves "sweeping" First Amendment implications. Marcus also questioned whether the IRS has any legal basis for continuing its review of All Saints in light of the Service's recent decision not to challenge the tax-exempt status of the NAACP for alleged impermissible political activity during the 2004 presidential election.
Longtime Ban
Tax-exempt organizations have been barred from partisan political activity for more than 50 years. The IRS recently issued a reminder on its website to Code Sec. 501(c) organizations that the ban is "absolute." Organizations that violate the prohibition risk revocation of their tax-exempt status.
Earlier in 2006, the IRS reported that it had completed investigations into 40 alleged cases of impermissible political activity by churches (IRS 2004 Political Activity Compliance Initiative (PACI) Summary of Results as of February 16, 2006). In three cases, political intervention was not substantiated. Political intervention was substantiated in 37 cases and a written advisory or excise tax was imposed.
Advocacy Group
In related news, Americans United for Separation of Church and State announced on September 18 that it will launch a campaign to educate churches about federal tax laws. The group is sending 117,000 letters, one to every congregation in 11 battleground states in the November elections.
By George L. Yaksick, Jr. CCH News Staff

CCH (cch.taxgroup.com) reports:

The IRS has issued guidance for individuals filing bankruptcy cases under Chapter 11 (11 U.S.C. 1101 et seq.) on or after October 17, 2005. The guidance is necessary as a result of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) (P.L. 109-8) and the addition of Section 1115 to the Bankruptcy Code.
As a result of Section 1115, the bankruptcy estate, not the debtor, must include in gross income the debtor's gross earnings from postpetition services, as well as gross income from postpetition property under Code Sec. 1398(e). For bankruptcy cases filed before October 17, 2005, these amounts are generally includible in the debtor's gross income.
In general, the debtor-in-possession or trustee must file an income tax return reporting the debtor's gross income from postpetition services and property unless one of four exceptions apply. Amounts realized after conversion to a Chapter 13 case are taxed to the debtor because no separate entity is created. If the case is converted to a Chapter 7 case, Section 1115 will not apply and the amounts from postconversion services are taxed to the debtor. Property of the Chapter 11 estate becomes property of the Chapter 7 estate and income, including postconversion income, is taxed to the estate. Chapter 11 cases that are dismissed are treated as if no bankruptcy occurred. Gross income from prepetition property is included in the estate for Chapter 11 cases filed on or after October 17, 2005, with some exceptions
Amounts that are paid to a debtor-in-possession to manage or operate a trade or business that the debtor conducted prior to bankruptcy are includible in the individual's gross income. The amounts paid are generally deductible by the estate as administrative expenses.
Notification Requirements
Notice 2006-83 also provides guidance on certain notification requirements that must be met. A debtor must attach a statement to his or her return stating that a Chapter 11 bankruptcy case has been filed. A model statement is included in Notice 2006-83.
A bankruptcy estate's gross income, gross proceeds or other reportable payments are reported by the person making the payments using the estate's name and EIN as required by Code Sec. 6041 through Code Sec. 6049. The EIN is provided by the trustee or debtor in possession. The trustee or debtor in possession should not provide the EIN to the debtor's employer or person filing Form W-2 with respect to the debtor's wages or other compensation. Section 1115 does not affect the determination of what constitutes wages for federal income tax withholding or the Federal Insurance Contributions Act. These amounts are reported by the employer, whether prepetition or postpetition, on a Form W-2 issued to the debtor under the debtor's social security number.
Notification that a Chapter 11 bankruptcy case is closed, dismissed or converted to a Chapter 12 or 13 case must be provided by the debtor to those previously notified of the case. Gross income, proceeds and other reportable payments realized after the closing, dismissal or conversion are reported to the debtor. In the case of a conversion to a Chapter 7 case, the bankruptcy estate continues as a separate taxable entity and gross income, and other reportable payments are reported to the estate if these amounts are property of the Chapter 7 estate. Because amounts paid for postconversion services are taxed to the debtor, the debtor should notify payors that nonemployee compensation required to be reported on Form 1099-MISC and earned after conversion is reported using the debtor's name and TIN, rather than the estate's name and TIN.
Self-Employment, Employment Taxes
Earnings from postpetition services, including self-employment, constitute property of the estate. In the case of earnings from continuing services, the debtor must continue to report on Schedule SE of the individual income tax return the self-employment income earned postpetition.
A debtor is not required to file a new Form W-4 with an employer adjusting the debtor's withholding allowances solely because a Chapter 11 bankruptcy has been filed. A new Form W-4 may be necessary or prudent in some cases.
An employer's obligation for FICA tax, FUTA tax, or federal income tax withholding is not changed by Section 1115, with respect to wages of a Chapter 11 debtor in a case commenced after October 17, 2005. Thus, the employer should continue to reflect wages and withheld amounts on Form W-2.
Allocation of W-2 Amounts
If a portion of wages, salary or other compensation for a calendar year represent postpetition services, an allocation of the amounts reported on Form W-2 must be made. The debtor-in-possession or trustee must allocate in a reasonable manner the amounts reported in box 1 and the withheld income tax reported in box 2 between the debtor and estate. If reasonable, a simple percentage method can be used. The debtor-in-possession or trustee must also allocate improperly reported income between the debtor and the estate.
Comments
The IRS and Treasury request comments on further guidance that may be needed as a consequence of Section 1115, and in particular on the property treatment of postconfirmation income. Comments are also requested on the tax treatment of postpetition compensation from a third-party employer that the bankruptcy court allows the debtor to retain to pay for the debtor's personal or living expenses.
Comments should be submitted on these and other relevant issues in writing on or before December 1, 2006, to the Internal Revenue Service, P.O. Box 7604, Washington D.C. 20044, Attn: CCA:CBS (Notice 2006-83). Submissions may also be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to the Courier's Desk at Room 105, First Floor, Internal Revenue Service, 1901 S. Bell Street, Jeff Davis Highway, Arlington Va., Attn: CCA:CBS (Notice 2006-83). Submissions may also be sent electronically via the internet to the following email address: Notice.comments@irscounsel.treas.gov. Include the notice number in the subject line.
Notice 2006-83, 2006FED ¶46,603
Other References:
Code Sec. 1398
CCH Reference - 2006FED ¶32,414.50

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

The Ohio House Ways and Means Committee has approved a bill that would accelerate the reduction of the personal income tax rates. Under the budget bill, H.B. 66, Laws 2005, a 21% reduction in tax rates is scheduled to be phased in by 2009. The proposed legislation would increase the tax cuts beginning with the 2006 tax year and fully phase in the reduction by 2008.
H.B. 626, as approved by the Ohio House Ways and Means Committee, September 12, 2006

CCH (cch.taxgroup.com) reports:

As a service to our subscribers, CCH Tax & Accounting has prepared projected inflation-adjusted tax brackets for the 2007 Tax Rate Schedules, standard deduction amounts and personal exemption amounts for use in year-end and 2007 tax planning. The projected figures are based on the inflation-adjustment provisions of the Internal Revenue Code (IRC) as currently in force and the average of the Consumer Price Index for All Urban Consumers (CPI-U) published by the Department of Labor for each month in the 12-month period ending on August 31, 2006. It reflects a rise of 7.5 basis points from 196.4 to 203.9 or approximately a 3.7 percent rate. Official IRS figures will not be released until later in the year.
Tax Brackets
Joint returns. For married taxpayers filing jointly and surviving spouses, the maximum taxable income subject to the 10-percent bracket will rise from $15,100 in 2006 to $15,600 in 2007; the 15-percent tax bracket will increase from $61,300 to $63,700. The bracket amounts for the remaining tax rates show similarly proportionate increases: $128,500 as the maximum for the 25-percent bracket (up $4,800 from 2006); $195,850 for the 28-percent bracket (up $7,400 from 2006); and $349,700 for the 33-percent bracket (up $13,150 from 2006).
Unmarried filers. For single taxpayers, the maximum taxable income for the 10-percent bracket will increase to $7,800 for 2007 (up from $7,550 in 2006). The remainder of the rate brackets show inflation increases of: $1,200 for the top of 15-percent bracket (to $31,850); $2,900 for the 25-percent bracket (to $77,100); $6,050 for the 28-percent bracket (to $160,850); and $13,150 for the top of the 33-percent bracket (to $349,700).
Married filing separately. Married taxpayers filing separately will see a $250 increase for the upper range of the 10-percent bracket (to $7,800) and a $1,200 increase for those in the 15-percent bracket (to $31,850). A $2,400 increase will be seen for the top of the 25-percent bracket (to $64,250); a $3,700 increase for the 28-percent bracket (to $97,925); and a $6,575 increase for the 33-percent bracket (to $174,850).
Heads of household. For heads of households, the maximum taxable income for the 10-percent bracket will rise to $11,200 (from $10,750). The top of the remainder of the bracket amounts will also increase: up $1,600 from 2006 for the 15-percent bracket, to $42,650; up $4,100 from 2006 for the 25-percent bracket, to $110,100; up $6,700 from 2006 for the 28-percent bracket, to $178,350; and up $13,150 from 2006 for the 33-percent bracket, to $349,700.
Estates and trusts. For estates and nongrantor trusts, the maximum taxable income for the 15-percent bracket will increase by $100 over the 2006 level, to $2,150 (there is no 10-percent bracket for these taxpayers). For the 25-percent bracket, the maximum for the bracket will be $5,000 (up $150 from 2006); for the 28-percent bracket, $7,650 (up $250 from 2006); and for the 33-percent bracket, $10,450 (up $400 from 2006).
Standard Deduction
The 2007 standard deduction will rise by $200, to $5,350, for single taxpayers; by $300, to $7,850, for heads of households; by $400, to $10,700, for married taxpayers filing jointly and surviving spouses; and by $200, to $5,350, for married taxpayers filing separately. The standard deduction for dependents will remain at $850 (or earned income plus $300).
Personal Exemptions
The amount of personal and dependency exemptions for 2007 will increase from the 2006 level by $100 to $3,400.
The 2007 personal exemption phaseout for married taxpayers filing jointly will increase by $8,850 over the 2006 level and will begin at adjusted gross income (AGI) of $234,600; for single taxpayers, the phaseout will increase by $5,900 over the 2006 level, to begin at AGI of $156,400; for heads of households, the increase over 2006 will be $7,350, to begin at AGI of $195,500; and for married taxpayers filing separately, the phaseout will begin at AGI of $117,300, representing an increase of $4,425.
CCH Comment. The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) (P.L. 107-16) provides for the elimination of the phaseout in post-2009 tax years (subject to a sunset provision for years after 2010). The repeal, however, is being phased in over a five-year period that started in 2006. In 2006 and 2007, the mandatory phase-out reduction in personal exemptions (and itemized deductions) is only two-thirds of what it had been. In 2008 and 2009, it will be one-third of what it was in 2005 and it will be completely repealed starting in 2010. For most high-income taxpayers in 2007 that will mean reducing personal exemptions by two-thirds of an amount equal to 2 percentage points for each $2,500 or fraction thereof by which AGI exceeds one of the above-stated phase-out amounts.
Itemized Deductions
For higher income taxpayers, the amount of their otherwise allowable itemized deductions will be reduced when AGI exceeds a threshold amount. The reduction is equal to the lesser of 3 percent of AGI over the threshold amount or 80 percent of itemized deductions otherwise allowable. For 2007, the threshold amount at which the 3-percent itemized deduction limitation takes effect will increase by $5,900, to AGI of $156,400 for married taxpayers filing jointly, single taxpayers and heads of household, and will increase by $2,950, to AGI of $78,200 for married taxpayers filing separately.
CCH Comment. As with the personal exemption, with respect to tax years beginning in 2006, EGTRRA
calls for the gradual phaseout of the limitation on itemized deductions for high-income taxpayers until it is fully repealed, effective for tax years beginning after 2009 (subject to a sunset provision for years after 2010). For 2007 (as was the case in 2006), the reduction will be equal to two-thirds of the lesser of: (1) 3 percent of AGI over the threshold amount or (2) 80 percent of itemized deductions otherwise allowable. For most high-income taxpayers in 2007 that will mean reducing most itemized deductions by two-thirds of 3 percent of the excess of their adjusted gross income over one of the above-stated phase-out amounts.
Gift Tax Annual Exemption
The gift tax annual exemption, which rose from a base of $10,000 to $11,000 in 2002 and to $12,000 in 2006, will remain at the $12,000 level for 2007. Pursuant to the IRC, the exemption can rise only when the inflation adjustment would produce an increase of $1,000 or more.
Other Tax Figures
In addition to the projected tax figures for 2007 listed above, the IRC requires other adjustments based on the September 2005 through August 2006 CPI amounts. These additional amounts include:
Education savings bond interest exclusion.
When U.S. savings bonds are redeemed to pay expenses for higher education, the interest may be excluded from income if the taxpayer's income is below a certain range. For 2007, that phase-out range begins at $65,600 modified AGI ($98,400 for joint returns).
Section 179 expensing. The $100,000 expensing limit, which has been inflation adjusted since 2004, has been extended through 2009. For 2007, the limit will increase to $112,000. The $400,000 amount used to compute the phaseout also will increase, to $450,000.
Education credits. The HOPE and Lifetime Learning Credits for 2007 will be phased out for those taxpayers with modified adjusted gross income in 2007 starting at $47,000 ($94,000 for married joint filers). The $1,000 credit amounts themselves stay in 2007 at the $1,100 inflation-adjusted 2006 level.
Adoption expense credit. This $10,000 maximum credit was first subject to an inflation adjustment after 2002. For 2007, the amount will increase to $11,390, with the AGI phase-out beginning at $170,820.
Student loan interest income phaseout. The $2,500 student loan interest deduction phase-out rises $5,000 and begins at $55,000 AGI for singles in 2007. The phase-out level for joint filers similarly rises to $110,000.
Gifts to noncitizen spouses. The first $125,000 of gifts in 2007 to a spouse who is not a U.S. citizen will not be included in taxable gifts, up $5,000 from 2006.
Foreign gifts. A U.S. person receiving aggregate foreign gifts exceeding $13,258 in 2007 must file an information return.
By George G. Jones, CCH News Staff

CCH (cch.taxgroup.com) reports:

Lawmakers were warned by Senate Finance Committee (SFC) Chairman Charles E. Grassley, R-Iowa, that the IRS would experience severe administrative problems if Congress delays approving a package of tax extenders. However, Senate Majority Leader Bill Frist, R-Tenn., remains undecided as to whether to bring up the trifecta bill before Congress recesses in late September. Meanwhile, a group of international tax compliance officials from over 30 countries, including IRS Commissioner Mark W. Everson, pledged to combat cross-border noncompliance on September 15.
Congress
Grassley warned fellow lawmakers on September 13 of severe administrative problems for the IRS if Congress delays approving a package of tax extenders that includes the research and development credit (TAXDAY, 2006/09/14, C.2). An SFC staff report found that delays in enacting the extenders legislation would have a significant adverse impact on tax administration. Grassley urged colleagues to act quickly on the trifecta legislation (HR 5970), which includes the extenders' provisions and, if that falls, to move the so-called "trailer" bill, which contains a bipartisan agreement between the tax-writing committees on the expiring provisions.
Frist, however, remains undecided as to whether to bring up the trifecta bill before the congressional recess begins in late September. A working group comprised of Grassley, Senate Budget Committee Chairman Judd Gregg, R-N.H., Republican Policy Committee Chairman Jon Kyl, R-Ariz., and Sen. Trent Lott, R-Miss., have been meeting throughout the week to explore ideas on how to ensure passage of the trifecta package if it is brought to the Senate floor. Gregg told reporters on September 12 that he does not believe the Senate needs to vote on the trifecta package before recessing in late September. SFC ranking member Max Baucus, D-Mont., twice called for a unanimous consent agreement on the Senate floor to vote immediately on the extenders package and was rebuffed by Frist on both occasions.
The SFC on September 14 filed for floor consideration its report on the Telephone Excise Tax and Taxpayer Protection and Assistance Bill of 2006 (Sen 1321). The legislation, approved by the Finance Committee in June, would repeal the 3-percent federal excise tax on local telephone calls. It also includes measures to protect taxpayers from incompetent and unethical tax preparers. In May 2006, the Treasury Department halted collection of federal excise taxes on long-distance calls. With the end of the excise tax on local calls, the SFC legislation would fully repeal the telephone tax enacted 108 years ago to finance the Spanish-American War.
Also on September 14, Baucus introduced the Baucus Education Competitiveness Bill of 2006, which includes a tax title allowing deductions for college tuition, teachers' out-of-pocket expenses, charitable donations and property taxes (TAXDAY, 2006/09/15, C.1). The cost of the measure is an estimated $250 billion over five years.
IRS
At a two-day meeting in Seoul, Korea, chaired by Everson, tax officials from more than 30 countries on September 15 pledged to combat cross-border noncompliance (TAXDAY, 2006/09/18, M.4). The meeting was sponsored by the Organisation for Economic Co-operation and Development (OECD).
At the end of the meeting, participants adopted the "Seoul Declaration." They identified four areas in which they will intensify existing efforts or initiate new work:
(1) Further develop a directory of aggressive tax-planning schemes;
(2) Examine the role of accounting and law firms, and other intermediaries, in relation to noncompliance and the promotion of unacceptable tax minimization arrangements;
(3) Expand corporate governance guidelines issued in 2004 to give greater attention to the linkage between tax and good governance; and
(4) Improve the training of tax officials on international tax issues.
"This conference represents an important milestone in improving practical cooperation between revenue authorities. The leaders of tax administration from over 30 countries share the view that international noncompliance is a significant and growing problem," Everson said in a written statement released by the OECD
Transfer Pricing Survey. Just days after an international pharmaceutical company settled a multi-billion dollar tax dispute with the IRS, the accounting firm Ernst & Young issued a "stormy seas" forecast for transfer pricing.
On September 11, the IRS announced that GlaxoSmithKline Holdings (Americas) Inc. & Subsidiaries will make a $3.4 billion payment to settle a multi-year transfer pricing dispute (IR-2006-142). Glaxo also agreed to abandon its $1.8 billion refund claim.
On September 14, Ernst & Young, in the third installment of its 2005-2006 transfer pricing survey, reported that, while international tax authorities agree on transfer pricing principles, they are taking different approaches in applying these principles. The Ernst & Young survey also found that a "new wave" of countries, including China, Colombia, Israel and Turkey, is entering the transfer pricing enforcement field.
After the IRS announced the Glaxo settlement, Everson said in a written statement that transfer pricing is "one of the most significant challenges for us in the area of corporate tax administration."
Bogus IRS Letters. Scam artists are targeting noncitizens abroad with fake IRS correspondence. According to published reports, bogus IRS letters recently appeared in Bermuda.
The letters, on official-looking IRS letterhead, told recipients that if they did not complete a new Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for U.S. Tax Withholding, the "IRS" would apply backup withholding. The identity thieves also asked for information unrelated to Form W-8BEN, such as the individual's date and place of birth and bank and credit card account numbers, the Royal Gazette reported on September 15.
By Jeff Carlson and George L. Yaksick, Jr., CCH News Staff

Tax Analysts report:

Tax Analysts report:

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

The Oregon Department of Revenue has promulgated rules concerning the corporate excise (income) tax and personal income tax credit for film production development contributions and the personal income tax exemption under the Oregon Investment Advantage program. Also, a rule describing the computation of the personal income tax credit for income taxes paid to another state has been amended.

CCH (cch.taxgroup.com) reports:

The Georgia Department of Revenue will join the Multistate Tax Commission's (MTC) National Nexus Program effective October 1, 2006, for franchise, corporate and personal income, and sales and use tax purposes. The program assists multistate businesses in voluntarily resolving potential liabilities where nexus is the central issue. The National Nexus Program acts as a coordinator through which companies may anonymously approach a number of states at once and settle potential liabilities arising from past activities instead of dealing with individual states one at a time.
Press Release, Georgia Department of Revenue, September 13, 2006.

CCH (cch.taxgroup.com) reports:

Senate Finance Committee ranking member Max Baucus, D-Mont., on September 14 introduced the Education Competitiveness Act of 2006 that includes a tax title allowing deductions for college tuition, teachers' out-of-pocket expenses, charitable donations, and property taxes.
The federal deduction for local property taxes provides an additional standard deduction for the state and local property taxes that homeowners pay to support public education. Nonitemizers would be able to claim the deduction on top of the standard deduction --$500 for single filers, and $1,000 on a jointly filed return, for state and local real property taxes paid or accrued.
For direct higher education assistance, the measure would combine the Hope Scholarship and Lifetime Learning Credits into a single tax credit up to $2,000 per student for qualified tuition and related expenses. In addition, the bill would increase the repayment period of a higher education loan from a qualified retirement plan to ten years instead of five years, and would extend into 2006 and 2007 the qualified zone academy bonds, which provide an alternative to traditional tax-exempt bonds for school renovation.
The Baucus bill also would: (1) allow employees to exclude up to $7,000 from gross income per year for employer-provided education assistance, (2) make permanent and double the deduction for K-12th grade teachers who pay for schoolroom supplies, (3) increase the student loan interest deduction to $3,000 for annual student loan interest payments, and (4) allow companies that assemble computers and publishers to take an enhanced deduction for charitable contributions for educational purposes.
In another tax matter, Baucus took to the Senate floor to request a unanimous consent agreement of the Senate to take up and pass a package of so-called tax extenders, which includes the research and development credit. The request, which Baucus also raised on Sept. 13, was rejected for the second day in a row by Senate Majority Leader Bill Frist, R-Tenn.
"There are companies who now have to restate their financials because of Congress's failure to pass [the R&amp tax credit] which expired last year," said Baucus prior to his request. "They have to start restating their financials because of Congress's ineptitude; Congress's incompetence in not passing and continuing the research and development tax credit, teacher's deduction, tuition deduction, sales tax deduction."
By Jeff Carlson, CCH News Staff
Education Competitiveness Act of 2006
SFC Release: Baucus Bill Improves Education Tax Incentives
SFC Release: Baucus Proposes Free College for Math & Science Majors, Universal Pre-K & More in Major Education Initiative
SFC Release: Section Summaries for the Education Competitiveness Act of 2006
SFC Release: Introductory Statement of Sen. Baucus

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

A default judgment for unpaid Pennsylvania local business privilege tax was set aside because the taxpayer did not receive proper notice of the legal proceedings and raised meritorious defenses to the tax assessment. The taxpayer's claim of lack of notice was supported by township records which showed that copies of the tax appeals board's decision, sent by certified mail, were returned as not deliverable. With regard to the assessment made against the taxpayer in his individual capacity as a corporate officer, the applicable township ordinance contained no authority to pierce a corporate veil and allow an assessment against an officer or director of a separate legal entity. In addition, the taxpayer's argument that the amounts of the assessments were not valid was supported by the township auditor's admission that the assessments were based only on rough estimates of the business's gross receipts.
Whitehall Township v. Atiyeh et al. , Pennsylvania Commonwealth Court, No. 2429 C.D. 2005, September 13, 2006, ¶300-373
Other References:
Explanations at ¶89-228
Explanations at ¶255-645

CCH (cch.taxgroup.com) reports:

A nonresident partner's distributive share of liquidation gain, interest income, and dividend income, earned as a result of the partnership's sale of intangible trading technology in connection with the liquidation of the partnership, was nonbusiness income and therefore, not subject to Illinois personal income tax. Because the sale of the trading technology constituted a cessation of the partnership's business activities, and the proceeds from the sale were distributed to the partners and not used to acquire business assets or generate income for use in future business operations, gain from the sale was nonbusiness income under an exception to the functional test recognized by the Illinois Appellate Court in Blessing/White, Inc. v. Zehnder, 329 Ill.App.3d 714 (1st Dist. 2002). Although the trading technology was used in and essential to the partnership's business operations, the disposition of the trading technology was not essential to the business, and thus, the income generated was nonbusiness income.
Shakkour v. Bower , Illinois Appellate Court, First District, No. 1-04-1646, September 1, 2006, ¶401-715
Other References:
Explanations at ¶11-515
Explanations at ¶15-045

CCH (cch.taxgroup.com) reports:

At a September 13 hearing, Senate Finance Committee (SFC) Chairman Charles E. Grassley, R-Iowa, said that the government should look at ways to make sure nonprofit hospitals are taking care of the needs of the poor. "There needs to be real charity care provided," he said. Grassley indicated that he has not anticipated any legislation, but did ask the committee staff to develop a discussion paper within a few weeks that will outline legislative options. He wants the proposal developed in consultation with minority staff and with input from stakeholders.
Charity care hospitals "play a key role in America's safety net," said SFC ranking member Max Baucus, D-Mont. They operate in rural areas and are more likely to offer services that are unprofitable, such as psychiatric emergency services, according to Baucus, who said that he would like to work with the administration on a way to improve charity care and reduce the number of uninsured.
Charitable Exemption Standards and Guidelines
"There needs to be a higher standard for charitable exemption," said Nancy Kane, a professor of health management at the Harvard School of Public Health, Department of Health Policy and Management. She advocated requiring increased reporting and transparency to the IRS, increased communication to the community and requiring that hospitals partner with community groups. "Right now, we have no measurable requirement" in exchange for the tax breaks, Grassley agreed.
Many of those present at the hearing discussed the Catholic Health Association's guidelines for charity care hospitals. The guidelines recommend that bad debt and the Medicare shortfall not be counted as part of community benefit. Sister Carol Keehan, CEO of the association, said that its model also lays out what activities a hospital can consider charity care. "Communities deserve to know what those costs are," she said. The association's model "is a workable standard that should be applied," Kane suggested. Grassley said that the Catholic Health Association model could be used as a starting point for legislation.
Baucus noted that the IRS now looks for a "plus factor" in addition to a hospital policy of open admittance; for example, a tax-exempt hospital must also have a charity care, medical research or health education program. The IRS has not made clear how much of this a hospital has to do, he said, noting that some health providers have taken advantage of these "loose standards."
Accountability Through Reporting
Kevin Lofton, chair-elect of the American Hospital Association (AHA), Washington, D.C., said that uniform reporting would allow people to measure and compare the charity care nonprofit hospitals provide. "Uniform reporting is where we need to go," he said, adding that the Catholic Health Association's model and guidelines developed by the AHA are similar.
Baucus also asked the panel whether some charity hospital executives are overpaid or receive too many perks. Lofton said that the IRS Forms 990 need to be structured so that they look at total compensation. Kane suggested a separate From 990 for charity hospitals."The IRS is a great place to start," said Kane. However, state attorneys general and private-sector organizations should also take part in helping to improve quality, she said.
Responses from nonprofit hospitals to Sen. Grassley's queries regarding care provided to the poor and service to the community can be view at http://finance.senate.gov/sitepages/grassley.htm.
By Catherine Hubbard, CCH News Staff
SFC Release: Opening and Closing Statements of Chairman Grassley
SFC Release: Baucus Opening Statement

CCH (cch.taxgroup.com) reports:

Senate Finance Committee (SFC) Chairman Charles E. Grassley, R-Iowa, warned of administrative headaches for the IRS and taxpayers if Congress delays approving a package of widely applicable tax provisions commonly referred to as "extenders."
According to a September 13 SFC staff report, delays in enacting the "extenders" legislation would have a "significant adverse impact on tax administration."
Grassley urged his colleagues to act quickly on the trifecta legislation (HR 5970), which includes the extenders provisions and, if that falls, to move the so-called trailer bill, which contains a bipartisan agreement between the tax-writing committees on the expiring provisions.
Senate Majority Leader Bill Frist, R-Tenn., remains undecided on whether to bring up HR 5970 before Congress recesses in late September for the fall elections, although he did establish a working group of lawmakers, comprised of Grassley, Republican Policy Committee Chairman Jon Kyl, R-Ariz., and Sen. Trent Lott, R-Miss., to devise a strategy for moving permanent repeal of estate tax through the Senate by the end of September.
With the expiration of the extenders provisions at the end of 2005, staff members noted that they are not included in the 2006 draft tax forms, which would need revision if the legislation is passed. Because of contractual deadlines with the vendors who print the forms, the report stated that the IRS is "running out of time to revise the final forms and still be able to deliver them in time for the next filing season."
In order to ensure that tax form packages are mailed by December 27, 2006, the IRS must provide the contents of the tax form packages to the printing companies by November 7, 2006. The IRS needs a two- to three-week period to arrange and compose the tax packages, with all forms and instructions finalized by October 15, 2006. If the deductions are extended after the printing process is complete, the IRS will issue supplemental instructions on how to enter the deductions as write-in entries on the tax forms.
"A delay of legislative action beyond the anticipated recess date of September 29, 2006, will cause hardship, tax compliance problems and confusion for the millions of taxpayers who claim these widely-applicable tax benefits," stated Grassley in a press release.
By Jeff Carlson, CCH News Staff
SFC Release: 2006 Tax Return Filing Season Impact of Delayed Legislative Action on Widely Applicable Tax Relief Provisions
SFC Release: Baucus Offers Amendment to Renew Vital Tax Measures

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

The Alabama Court of Civil Appeals has restated its June 23, 2006, opinion (TAXDAY, 2006/6/28, S.1) that deduction provisions of the business privilege tax (BPT) and the former corporate shares tax (CST) were facially discriminatory against interstate commerce and violated the Commerce Clause of the U.S. Constitution absent sufficient justification from the state for the facially discriminatory statutes.
According to the court, the BPT and CST deduction provisions, which allowed taxpayers to deduct the book value of an equity investment of another entity doing business in Alabama, were discriminatory on their face because they imposed a heavier tax burden if the entity in which the taxpayer had invested did not do business in Alabama. However, the court has withdrawn its prior opinion, in which it held that the state did not meet its burden of providing sufficient justification for the facially discriminatory statutes, and in which it ordered the trial court to grant an appropriate refund, and has issued a substitute opinion. In the substitute opinion, the court restates its finding that the trial court erred in placing the burden on the taxpayer to overcome the presumption that the statutes were constitutional, and simply remands the case to the trial court for further proceedings consistent with its opinion.
AT&T Corp. v. Surtees, Alabama Court of Civil Appeals, No. 2040908, September 8, 2006, ¶201-153
Other References:
Explanations at ¶5-325

CCH (cch.taxgroup.com) reports:

A bill to stop the IRS from partially privatizing tax collection (Sen 3887) was introduced in the Senate on September 12. During the week of September 4, Senators Byron Dorgan, D-N.D., and Patty Murray, D-Wash., told IRS Commissioner Mark W. Everson that they would introduce a bill to halt privatization if the IRS went ahead with its initiative. In related news, the union representing IRS workers predicted that collection calls to taxpayers will begin on September 15.
Immediate Suspension
The Dorgan-Murray bill is intended to immediately suspend the IRS's privatization initiative. A House amendment to the Fiscal Year 2007 Treasury-Transportation appropriations bill (HR 5576) would prohibit the IRS from using any appropriated funds to pay private debt collectors in the future, but would not halt the program already underway.
Murray said that the bill is another reminder to the IRS that it should not move forward with privatization until Congress decides the future fate of the initiative. "The House has already passed a bill by more than 400 votes that includes a provision prohibiting this effort from going forward. This bill is another way to show the IRS that it should let Congress finish its review before taking steps that could be jeopardize the privacy and dignity of taxpayers," Murray said in a statement.
The bill has eight co-sponsors, all Democrats: Sens. Daniel Akaka, D-Hawaii; Diane Feinstein, D-Calif.; Edward M. Kennedy, D-Mass.; John Kerry, D-Mass.; Frank Lautenberg, D-N.J.; Patrick Leahy, D-Vt.; Joseph I. Lieberman, D-Conn.; and Barbara Mikulski, D-Md. Kennedy had also written to Everson urging him to delay privatization.
Collection Calls Could Start Soon
Also on September 12, the National Treasury Employees Union (NTEU) said that collection calls to taxpayers from private collection agencies are set to begin on September 15. The NTEU reported that the IRS is believed to have turned over some 12,500 taxpayer accounts to private collection agencies on September 7. "The IRS was expected to send a letter and brochure to impacted taxpayers last Saturday, to be followed by a letter from private collectors to be sent tomorrow," the NTEU reported.
By George L. Yaksick, Jr. CCH News Staff
Introduction to Legislation to Prohibit the Internal Revenue Service from Using Private Debt Collection Companies, Sen 3887.

CCH (cch.taxgroup.com) reports:

The Treasury and IRS have issued final regulations that address how to determine the attained age of an insured under a life insurance contract. Whether an insurance contract qualifies as a life insurance contract for federal income tax purposes depends upon the attained age of the insured. Specifically, the attained age of an insured under a life insurance contract must be determined to test whether the contract satisfies:
(1) the cash value accumulation test of Code Sec. 7702(b); or
(2) both meets the guideline premium requirements of Code Sec. 7702(c) and falls within the cash value corridor of Code Sec. 7702(d).
The proposed regulations were adopted with some modification. The final regulations generally apply to life insurance contracts that are issued after December 31, 2008, or issued on or after October 1, 2007, and based upon 2001 CSO tables.
Reg. §1.7702-2(b) provides two alternatives for determining attained age under a contract insuring a single life. The attained age of an insured can be either the insured's actual age on the date of determination or the insured's age by reference to the contract anniversary, so long as the contract age is within 12 months of the actual age on that date.
Under a contract insuring multiple lives on a last-to-die basis, the attained age under of the insured is the attained age, determined by applying the Reg. §1.7702-2(b) alternatives, of the youngest insured. If there are modifications to cash value or future mortality charges upon the death of the insured so that the attained age if the deceased insured is no longer taken into account, the youngest surviving insured is treated as the only insured under the contract. Under a contract insuring multiple lives on a first-to-die basis, the attained age of the insured is the attained age, determined by applying the Reg. §1.7702-2(b) alternatives, of the oldest insured.
Reg. §1.7702-2(e) provides numerous examples illustrating these rules.
T.D. 9287, 2006FED ¶47,062
Other References:
Code Sec. 7702
CCH Reference - 2006FED ¶43,152
CCH Reference - 2006FED ¶43,153B

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

The Oklahoma Tax Commission is offering a corporate income tax voluntary compliance initiative as a result of a decision by the Oklahoma Court of Civil Appeals that concerned nexus requirements. In Geoffrey, Inc. v. Oklahoma Tax Commission, Oklahoma Court of Civil Appeals, No. 99,938, December 23, 2005, the court held that the licensing of a corporation's intangible property for use within Oklahoma was sufficient to establish nexus for Commerce Clause and Due Process Clause purposes. (TAXDAY, 2006/01/10, S.20)
The initiative affects taxpayers deriving income from Oklahoma sources by licensing intangible property to related parties operating in Oklahoma. Taxpayers engaged in sheltering Oklahoma income through the use of an intangible holding company may come forward to participate in the compliance initiative. If the taxpayer derived income from Oklahoma sources, the taxpayer must file and pay all income and franchise taxes due for the 2003 through 2005 tax years. In return for complying, the Commission will waive all penalties and one-half of the interest as provided by statute. The initiative will run through December 31, 2006.
Oklahoma corporate income tax returns along with payment and/or any correspondence should be mailed to Oklahoma Tax Commission, Attn: Corporate Income Tax --Audit Division, P.O. Box 53248, Oklahoma City, Oklahoma 73152-3248.
This press release can be viewed at http://www.tax.ok.gov/upmin090806.html.
Press Release, Oklahoma Tax Commission, September 8, 2006.

CCH (cch.taxgroup.com) reports:

A bill passed by the California General Assembly would revise the California limited liability company (LLC) fee schedule from one based on an LLC's total income to one based on an LLC's income apportionable to California. If enacted, the bill would apply retroactively to taxable years beginning after 2001. The legislation was drafted in response to the San Francisco Superior Court's decision in Northwest Energetic Services, LLC v. California Franchise Tax Board , in which the court held that the LLC fee was an unfairly apportioned tax in violation of the Commerce and Due Process Clauses of the U.S. Constitution (see TAXDAY 2006/04/19, S.4).
A.B. 1614, as passed by the General Assembly on August 31, 2006.

CCH (cch.taxgroup.com) reports:

The massive new Pension Protection Act of 2006 (P.L. 109-280) represents the most important change for pensions in more than 30 years. In addition to setting forth new rules for defined benefit plans, the Act
also addresses retirement savings held in IRAs, 401(k)
and other defined contribution plans, as well as other tax provisions that affect many more taxpayers than do the new pension rules. To keep our customers updated on these changes, CCH is presenting a live 100-minute audio seminar, The Pension Protection Act of 2006 From the Tax Practitioner's Point of View , on Wednesday, September 13, 2006, at 2:00 p.m. Eastern; 1:00 p.m. Central.
In this audio seminar, CCH's Mark Luscombe, J.D., LL.M., CPA, and John W. Roth, J.D., LL.M., will review the many changes from the Pension Act
that tax professionals need to know about. Among the topics Luscombe and Roth will cover are:
(1) What clients should think about now if they still have defined benefit plans;
(2) Why 401(k)
plans and cash balance plans are now even more attractive;
(3) Why it is time to look again at Roth 401(k)s;
(4) Special help for small employers and their qualified retirement plans;
(5) How IRAs are more flexible;
(6) More comfort for 529
plans;
(7) New client options for tax refunds;
(8) New restrictions and reporting requirements for tax-exempt entities and for certain donations to charities;
(9) New rules on documenting charitable contributions and donations of fractional interests;
(10) New rules regarding conservation and façade easements;
(11) New caution flags on donor advised funds, and more.
Registration can be completed online at https://www.krm.com/cch or by calling 1-800-775-7654. Each site that registers for this seminar will also receive a copy of CCH's Pension Protection Act of 2006: Law, Explanation and Analysis , and a copy of CCH's Pension Protection Act of 2006: Text of H.R. 4 and JCT Explanation . Participants may also receive two hours of CPE credit.

CCH (cch.taxgroup.com) reports:

A merged beverage company was entitled to claim a $10 million bad debt deduction equal to the difference between an $18 million outstanding loan and the $8 million fair market value of bottling facilities securing the loan. A series of specific, identifiable events had occurred during the tax year that the deduction was claimed which rendered the loan worthless.
Prior to the merger, one of the merged companies (the "bottling company") created an unrelated company and lent it $18 million to purchase the bottling facilities, which it had been leasing from a third party. The $18 million purchase price was based on the present value of rental payments due over the term of the lease, which was also assumed by the unrelated company as part of the purchase. The deal was intended to be temporary and made primarily to enable the bottling company to renegotiate the lease on more favorable terms with the unrelated company.
The loan was to be repaid by reselling the bottling facilities and renegotiated lease to another party after it received financing. The financing, however, fell through and, with it, the planned repurchase. No other buyers were available. It was also impossible for the unrelated company to pay the principal on the loan since, for valid business reasons, the rental income received from the bottler was only equal to the interest due on the $18 million loan. After the planned purchase fell through, the bottling company merged with another beverage company and it became advisable to own the facilities, rather than lease them. The merged company then declared the loan in default and seized the facilities, claiming the bad debt deduction for a partially worthless debt.
According to the court, the failed financing by the intended ultimate purchaser, the lack of alternative purchasers, the borrower's lack of cash flow to pay the principal on the loan, and the merger, which rendered the leasing transaction undesirable, were all identifiable events that made the loan partially worthless. Furthermore, although the bottling company may have contributed to the worthlessness of the loan by failing to pay sufficient rent to enable repayment of the principal, this action did not preclude the deduction where other major factors, such as the failed financing by the intended ultimate purchaser, contributed to the worthlessness.
ABC Beverage Corp., TC Memo. 2006-195, Dec. 56,620(M)
Other References:
Code Sec. 166
CCH Reference - 2006FED ¶10,650.248
CCH Reference - 2006FED ¶10,650.465

CCH (cch.taxgroup.com) reports:

The IRS has announced that the interest rates for the calendar quarter beginning October 1, 2006, will remain at 8 percent for overpayments (7 percent in the case of a corporation), 8 percent for underpayments and 10 percent for large corporate underpayments. The interest rate for the portion of a corporate overpayment exceeding $10,000 remains at 5.5 percent. The interest rates are computed by using the federal short-term rate based on daily compounding determined during July 2006.
The Internal Revenue Code provides that the rate of interest is to be determined on a quarterly basis. For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus three percentage points. Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus three percentage points, and the overpayment rate is the federal short-term rate plus two percentage points. The rate for large corporate underpayments is the federal short-term rate plus five percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half of a percentage point.
IR-2006-143, 2006FED ¶46,596
Rev. Rul. 2006-49, 2006FED ¶46,597
Rev. Rul. 2006-49, FINH ¶30,527
Rev. Rul. 2006-49, ETR ¶66,803
Other References:
Code Sec. 6601
CCH Reference - 2006FED ¶175.01
CCH Reference - 2006FED ¶175.30
CCH Reference - ETR ¶102
CCH Reference - ETR ¶50,615.01
Code Sec. 6621
CCH Reference - 2006FED ¶39,455.01
CCH Reference - 2006FED ¶39,455.51
CCH Reference - FINH ¶15,685.01
CCH Reference - FINH ¶15,685.30
Code Sec. 6622
CCH Reference - 2006FED ¶39,465.01

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

A taxpayer was required to include sales in the sales factor numerator to apportion Virginia corporate income tax when the sales were tangible personal property delivered in Virginia.
The taxpayer manufactured perishable food products in Virginia and sold the food to a wholesaler. Title passed at the manufacturing plant where the goods were weighed and labeled. The food was then stored for two hours to three days in a refrigerated loading area the wholesaler rented from the taxpayer. Both the taxpayer and the wholesaler knew the ultimate destination of the products when the sales were made, and the food was shipped to locations within and without Virginia.
Sales of tangible personal property are not included in the Virginia sales factor numerator when the initial delivery of the property in Virginia is for transportation purposes and the seller knows the ultimate recipient is outside Virginia. The taxpayer argued that the short period the food was kept in storage was part of the transportation process. However, the Virginia Department of Taxation determined that the loading area was the food's destination and that the storage time was not part of the transportation process. Thus, the sales of the food were required to be included in the taxpayer's Virginia sales factor numerator.
Ruling of Commissioner, P.D. 06-86, Virginia Department of Taxation, August 30, 2006, ¶204-565
Other References:
Explanations at ¶11-525

CCH (cch.taxgroup.com) reports:

Due to intense and persistent drought in some areas of the country, the IRS has released guidance regarding extensions of the replacement period for livestock sold on account of drought. This guidance is effective for tax years ending after September 25, 2006, only.
Code Sec. 1033 provides for the nonrecognition of any gain resulting from an involuntary conversion of livestock (other than poultry) held for draft, breeding or dairy purposes; to be an involuntary conversion, the livestock must have been sold or exchanged solely on account of drought, flood or other weather-related conditions. The involuntary conversion classification only applies to the extent of the excess livestock sold or exchanged beyond the number that would have been sold following the taxpayer's normal business practices. Gain from an involuntary conversion is recognized only to the extent the amount realized on the conversion exceeds the cost of the replacement property.
A four-year replacement period is provided in which to obtain replacement property and qualify for this nonrecognition treatment. This replacement period normally ends four years after the close of the first tax year in which any part of the gain from the conversion is realized. However, this four-year period can be extended when weather-related conditions result in an area being designated as eligible for federal assistance for more than three consecutive years.
If an extension of the replacement period is appropriate due to persistent drought, the replacement period will be extended until the end of the taxpayer's first tax year ending after the first drought-free year in the taxpayer's region. The first drought-free year is the first 12-month period ending on August 31, in or after the last year of the taxpayer's four-year replacement period, that does not include any weekly period for which exceptional, extreme or severe drought is reported for any location in the region. The region applicable for a given taxpayer includes the county that experienced the drought conditions that resulted in the involuntary sale of the livestock and all counties that are contiguous to that county. Examples provided make clear that a county may be contiguous even if it touches the other county only at a corner, and even if the counties are in differing states.
A taxpayer may determine whether exceptional, extreme or severe drought is reported in an applicable area by reference to the U.S. Drought Monitor maps produced by the National Drought Mitigation Center, which are available online at www.drought.unl.edu/dm/archive.html. In making such a determination regarding any 12-month period ending on August 31, all maps after August 31 of the preceding year and before September 8 of that calendar year are considered. Alternatively, the IRS is planning to publish a list of all counties for which exceptional, extreme or severe drought was reported during the preceding 12 months in September of each year, beginning in 2006, for taxpayers' reference.
IR-2006-141, 2006FED ¶46,591
Notice 2006-82, 2006FED ¶46,592
Other References:
Code Sec. 1033
CCH Reference - 2006FED ¶29,650.202

CCH (cch.taxgroup.com) reports:

Congress returned from its August recess during the week of September 4 and speculation arose in the Senate that the bill to extend a group of popular tax breaks, increase the minimum wage and permanently cut the estate tax could be brought up again. In the House, Ways and Means Committee Chairman William M. Thomas, R-Calif., is still considering what, if any, tax legislation he would seek to move through the chamber.
Senate
Senate Majority Leader Bill Frist, R-Tenn., would not rule out another attempt to pass the so-called "trifecta" bill (the Estate Tax and Tax Relief Bill of 2006, HR 5970) in September, but lawmakers are unlikely to make changes to the estate tax provisions included in the measure in order to appease the bill's opponents, according to Republican Policy Committee Chairman Sen. Jon Kyl, R-Ariz. Senate Finance Committee ranking member Max Baucus, D-Mont., countered that the bill would not pass without changes. When senators narrowly defeated the motion to proceed to the three-pronged bill on August 3, Frist switched his vote at the last minute to "nay" in order to preserve a procedural option to reconsider the trifecta package in the Senate at a later date.
Baucus indicated that legislation to make the $1,000 child tax credit permanent and provide relief from the marriage penalty might draw more support for the trifecta bill. Frist, however, maintained that no decisions had been made regarding Senate action on the two tax provisions, which were initially enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001 (P.L. 107-16). The lawmaker said he needs to hold talks with other members of his caucus before any decisions would be made. The Senate has three weeks remaining to complete legislative work before temporarily adjourning as part of preparations for the fall elections. The Senate is tentatively slated to return for a lame-duck session beginning the second week in November.
House
Ways and Means Committee Chairman Thomas said he has not yet settled on a tax agenda for the remaining three weeks of September before Congress heads home for the November elections. However, Thomas told reporters that he does not view any particular piece of legislation, including the tax extenders, to be "must pass" legislation for Congress.
"I've said all along I don't like the idea of extenders. If they're good, they should be permanent law. If they aren't, they should be ended," Thomas said. He equated continually passing extender legislation each year to playing a game of "kick the can." Eventually, the game has to come to an end, he said.
The House is expected to leave town on September 29 in preparation for the November elections. According to House Majority Leader John Boehner, R-Ohio, the House will return on November 13 for a lame-duck session of one week.
Thomas said he does not know of any tax legislation that has to be passed before Congress completes its work for the year and the 109th Congress comes to a close. He plans to meet with the House leadership soon to determine the agenda but declined to provide specific answers to what might be considered.
By Jeff Carlson and Stephen K. Cooper, CCH News Staff

Tax Analysts report:

Tax Analysts report:

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

For Tennessee excise tax purposes, an out-of-state corporation's interest income earned on investments in U.S. treasury securities constituted nonbusiness earnings that were not subject to apportionment. The funds invested in the securities were derived from overnight investments in repurchase agreements, and the earnings at issue were therefore an investment layer removed from capital earned in the business. In addition, the corporation did not put the interest back into the business for operational and working capital needs. Accordingly, the earnings served an investment function and could not be taxed by Tennessee.
The Commissioner of Revenue asserted that the liquidity of the funds made them susceptible to being used as working capital to operate the business. However, although the funds were liquid, the balance of the facts established that they could not be classified as working capital.
Finally, under the U.S. Supreme Court's decision in Allied-Signal, Inc. v. Director , 504 U.S. 768 (1992), if a taxpayer's income-generating activities outside the taxing state are not connected to the taxpayer's business activities within the taxing state, the unitary business principle limits the power of the taxing state to apportion the income as business earnings. In this case, the investment activities outside Tennessee were wholly unrelated to the manufacturing activities conducted by the corporation's automotive division in Tennessee. The mere fact that the automotive business and the investments in treasury securities were owned by the same corporation did not satisfy the unitary business principle.
Subscribers to CCH Tax Research NetWork can view the text of the decision.
Siegel-Robert, Inc. v. Johnson , Tennessee Chancery Court, No. 00-3763-III, August 17, 2006

CCH (cch.taxgroup.com) reports:

During a September 7, 2006, conference call, the Executive Committee of the Multistate Tax Commission (MTC) approved two model uniform statutes on (1) disclosure of reportable transactions, and (2) compilation of state tax return data ("51-state spreadsheet"). Both model statutes narrowly failed to pass during the MTC annual meeting in August because they did not receive sufficient votes to cross the required 60% population threshold. (TAXDAY, 2006/08/24, S.1) During the conference call vote, the reportable transactions proposal received an affirmative vote of 16 states (with two states abstaining) representing 70% of the population, and the 51-state spreadsheet proposal received the vote of 14 states (with four states abstaining) representing 65% of the population.
Following the vote, Stephen Kranz, Council On State Taxation (COST), told CCH that COST will push for a third vote, which he is confident will result in a reversal of the latest action. Kranz stated, "If two votes are good, three will be better." He said that COST objects to both model statutes, but especially strongly to the 51-state spreadsheet proposal, which he referred to as a "truckload of paper" requirement.
Subscribers to CCH Tax Research NetWork can view both model statutes.
Conference call, Multistate Tax Commission, September 7, 2006

CCH (cch.taxgroup.com) reports:

The IRS has issued temporary and proposed regulations that provide rules for claiming the railroad track maintenance credit (RTMC) for qualified railroad track maintenance expenditures (QRTME) paid or incurred by a Class II or Class III railroad and other eligible taxpayers during the tax year. These regulations reflect changes made by the American Jobs Creation Act of 2004, P.L. 108-357, and the Gulf Opportunity Zone Act of 2005, P.L. 109-135. A taxpayer must file Form 8900, Qualified Railroad Track Maintenance Credit with its timely filed (including extensions) federal income tax return for the tax year for which the taxpayer: (1) claims the credit, (2) assigns any miles of eligible railroad track, or (3) receives an assignment of any miles of eligible railroad track claimed. An assignor must attach to its Form 8900 an information statement regarding the assignment.
Computation
The temporary regulations provide that the RTMC is equal to 50 percent of the qualified railroad track maintenance expenditures paid or incurred by an eligible taxpayer during the tax year, but the credit amount is limited. For Class II and Class III railroads, the credit cannot exceed $3,500 multiplied by the sum of: (1) the number of miles of railroad track owned or leased by the railroad within the United States at the close of the tax year, reduced by the number of miles of eligible railroad track assigned by the railroad to another eligible taxpayer for that year; and (2) the number of miles or eligible railroad owned or leased by another Class II or III railroad that are assigned to the Class II or III railroad for the tax year. For an eligible taxpayer that is not a Class II or III railroad, the credit cannot exceed $3,500 multiplied the number of miles of eligible railroad track assigned to the taxpayer by a Class II or III railroad for the tax year.
QRTME Paid or Incurred
The qualified railroad track maintenance expenditure is equal to the amount of expenditures paid or incurred during the tax year by an eligible taxpayer for maintaining railroad track, roadbed, bridges and related track structures that are located within the United States and owned or leased as of January 1, 2005, by a Class II or III railroad. These expenditures may or may not be chargeable to a capital account. Also, according to the regulations, paid or incurred means a liability incurred within the meaning of Reg. §1.446-1(c)(1)(ii). This means that a liability may not be taken into account under Code Sec. 45G prior to the tax year the liability is incurred. Also, the QRTME is not paid or incurred during the tax year that a taxpayer is entitled to a direct or indirect reimbursement of such expenditure. Indirect reimbursements include discounted freight shipping rates, price markups of railroad-related property, debt forgiveness or other similar arrangements. If an eligible taxpayer (assignee) pays a Class II or III railroad (assignor) an amount in exchange for an assignment of one or more miles of eligible railroad track, the amount is treated as QRTME paid or incurred by the assignee, not the assignor railroad, at the time and to the extent the assignor pays or incurs QRTME.
The temporary regulations further provide that an assignment of a mile of railroad track is not a legal transfer of title but merely a written designation. The written designation must include: the names and taxpayer identification numbers of the assignors and the assignees; the assignment of eligible railroad track miles; the date of this assignment; and the number of miles of eligible railroad track that is assigned by the assignor to the assignee for a tax year.
Definitions
The temporary regulations define several terms relating to the RTMC. Only an eligible taxpayer may claim the RTMC. An eligible taxpayer is defined as:
(1) A Class II railroad or Class III railroad during the tax year;
(2) Any person that transports property using the rail facilities of a Class II or Class III railroad during the tax year; or
(3) Any person that furnishes railroad services to a Class II or Class III railroad during the tax year (Temporary Reg. §1.45G-1T(b)(3)).
Class II and Class III railroads have the respective meanings given these terms by the Surface Transportation Board (ST. Accordingly, Class II railroads
have annual carrier operating revenues of less than $250 million but in excess of $20 million after applying the railroad deflator formula. Class III railroads have annual carrier operating revenues of $20 million or less after applying the same formula. Rail facilities include railroad yards, tracks, bridges, tunnels, wharves, docks, stations and other related assets that are used in the transport of freight by a railroad and that are owned or leased by the Class II or Class III railroad. The temporary regulations define railroad-related property as that which is provided directly to and is unique to a railroad, described in asset classes 40.1 through 40.54 of Rev. Proc. 87-56, 1987-2 CB 674, and described in the STB property accounts for grading, tunnels and subways and storage warehouses. Railroad-related services must relate to railroad shipping, loading and unloading railroad freight, or repairs of rail facilities or railroad-related property.
Special Rules
The temporary regulations provide further details on assignments (Temporary Reg. §1.45G-1T(d)) and provide rules for adjusting basis for the amount of the credit claimed by the eligible taxpayer (Temporary Reg. §1.45G-1T(e)(1)). The rules also cover the coordination of the credit with Code Sec. 61(Temporary Reg. §1.45G-1T(e)(2)) and the treatment of controlled groups under Code Sec. 45G (Temporary Reg. §1.45G-1T(f)).
Effective Date
The temporary regulations apply to tax years ending on or after the date they are filed in the Federal Register and beginning before January 1, 2008. A taxpayer may apply the temporary regulations beginning after December 31, 2004, and ending before they are filed in the Federal Register, provided that the taxpayer applies all of the provisions to the tax year.
Comments and Hearing
The text of the temporary regulations also serves as the comment document for proposed regulations. A public hearing on the proposals has been set for January 9, 2007, beginning at 10:00 a.m. in the auditorium of the New Carrollton Federal Building, 5000 Ellin Rd., Lanham, Md.. Written or electronic comments on the proposed regulations must be received by December 7, 2006, and outlines of topics to be discussed at the hearing must be received by December 8, 2006. Submissions should be sent to: IRS, CCA:LPDR (REG-142270-05), P.O. Box 7604, Ben Franklin Station, Washington, D.C. 20044. Comments may also be submitted electronically via the IRS website at www.irs.gov/regs or the Federal e-Rulemaking Portal at www.regulations.gov (IRS REG-142270-05).
T.D. 9286, 2006FED ¶47,061
Proposed Regulations NPRM REG-142270-05, 2006FED ¶49,715
Other References:
Code Sec. 45G
CCH Reference - 2006FED ¶4595A
CCH Reference - 2006FED ¶4595C

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

A comptroller's letter discusses whether various monthly service charges by a telecommunications provider to cellular phone customers are subject to Texas sales and use tax and/or the telecommunications infrastructure fund (TIF) fee.

CCH (cch.taxgroup.com) reports:

A foreign national could proceed anonymously with his Tax Court case and the entire court record would be sealed due to the risk that he or a member of his family might be kidnapped and held for ransom should his financial situation become public information. The taxpayer came from a country in which kidnappings are a rampant problem. A member of his family had been kidnapped and held for ransom several years ago. Court proceedings are normally open to the public and parties to lawsuits normally have to use their names in bringing their suits and filing their pleadings and court papers. However, the foreign national's interests in the safety of himself and his family outweighed the public interest favoring open judicial proceedings. It did not matter for these purposes that some of this information might have already become publicly available in connection with a different lawsuit.
Anonymous, 127 TC No. 6, Dec. 56,613
Other References:
Code Sec. 7461
CCH Reference - 2006FED ¶42,115B.35
CCH Reference - 2006FED ¶42,115B.50
Tax Court Rule 23
CCH Reference - 2006FED ¶42,183.68
Tax Court Rule 32
CCH Reference - 2006FED ¶42,192.60
Tax Court Rule 60
CCH Reference - 2006FED ¶42,220.70

CCH (cch.taxgroup.com) reports:

The Treasury and IRS have issued proposed regulations under Code Sec. 987 for determining and translating income and currency gain or loss with respect to operations of a qualified business unit (QBU) branch whose functional currency is other than the functional currency of the taxpayer. These proposed regulations replace regulations proposed on September 25, 1991, in light of concern that the earlier proposed regulations had not fully achieved the original goal of facilitating recognition of true economic foreign currency gain and loss under appropriate circumstances. The new proposed regulations are based on the "foreign exchange exposure pool" method, which the Treasury and IRS believe reflects foreign currency gain and loss more accurately than the 1991 proposed regulations, and does so in a manner consistent with statutory authority and legislative intent. The new proposed regulations are designed to prescribe more precisely foreign currency gain and loss that is economically realized, while minimizing or eliminating the realization of noneconomic currency gain and loss.
Code Sec. 987 provides guidance to foreign and domestic taxpayers with a QBU branch when the functional currency of the branch differs from the taxpayer. The taxpayer is generally required to compute the branch's taxable income separately using the profit and loss method of accounting, and translating it at the appropriate exchange rate. The taxpayer is required to make "proper adjustments" for transfers of property between QBUs having different functional currencies. Such adjustments include treating post-1986 remittances from each unit as made on a pro-rata basis out of post-1986 accumulated earnings; treating gain or loss as ordinary income or loss; and sourcing such gain or loss by reference to the source of the income giving rise to post-1986 accumulated earnings.
Foreign Exchange Exposure Pool Method
The 1991 proposed regulations, together with the check-the-box regulations, have combined to permit taxpayers to more easily trigger noneconomic losses. Accordingly, the adoption of the "foreign exchange exposure pool method" in the new proposed regulations provides that the income of a "Code Sec. 987 QBU" is determined by reference to the items of income, gain, deduction and loss booked to the QBU in its functional currency, adjusted to reflect U.S. tax principles. With certain exceptions, those items are translated into the functional currency of the QBU's owner at the average exchange rate for the year. However, the basis of historic assets and deductions for depreciation, depletion, and amortization of such assets are translated at the historic exchange rate. Using the historic exchange rate for these items differs from the approach taken in the 1991 proposed regulations, which instead uses the average exchange rate. Although simpler, the average exchange rate has led to the generation of noneconomic foreign currency gains or losses.
The "foreign exchange exposure pool method" uses a balance sheet approach to determine foreign currency gain or loss, which is then recognized upon a remittance. Such an approach allows taxpayers and the IRS to distinguish between those items whose value fluctuates with respect to changes in the owner's functional currency and those that do not. Under this method, exchange gain or loss related to "marked items" is identified annually, but is pooled and deferred until a remittance is made. A "marked item" is generally defined as an asset or liability that would generate a Code Sec. 988 gain or loss if it were held or entered into directly by the owner of the QBU.
When a QBU makes a remittance, a portion of the pooled and deferred exchange gain or loss is recognized. The amount taken into account is generally equal to the product of the owner's portion of the QBU's net unrecognized exchange gain or loss, multiplied by the owner's remittance proportion. The owner's remittance proportion is generally equal to the quotient of the remittance amount, divided by the aggregate basis of the QBU's gross assets, as reflected on its year-end balance sheet, without reduction for the remittance. The source and character of the recognized exchange gain or loss is determined by reference to the source and character of the income derived from the QBU's assets.
Scope
The proposed regulations provide rules for determining the taxable income or loss of a taxpayer with respect to a QBU, as well as the timing, amount, character, and source of foreign currency gain or loss recognized with respect to such QBU. The proposed regulations do not apply to banks, insurance companies and similar financial entities (including leasing companies, finance coordination centers, regulated investment companies, and real estate investment trusts). Upon receipt of comments to help precisely tailor the rules to address issues unique to these financial entities, subsequent guidance is planned that will extend the "foreign exchange exposure pool method" to them. Moreover, the proposed regulations will not apply to trusts, estates and S corporations, until after comments have been received regarding whether principles similar to those applied to partnerships should apply to these entities.
De Minimis Rule
The proposed regulations provide a de minimis
election for certain indirectly owned QBUs. An individual or corporation that owns a QBU indirectly through a partnership may elect not to take into account the foreign currency gain or loss of the QBU, provided the individual or corporation owns, directly or indirectly, less than five percent of the Code Sec. 987 partnership. For purposes of determining whether the less-than-five-percent threshold is satisfied, constructive ownership rules apply. However, this exception only applies to the recognition of exchange gain or loss with respect to a Code Sec. 987 QBU. Thus, owners of such QBUs that qualify under this exception must comply with all other aspects of the proposed regulations.
Elections
Proposed Reg. §1.987-1(f) provides rules for making elections under Code Sec. 987. The elections must generally be made by the owner of the QBU; they must be made for the first tax year in which the election is relevant by attaching a statement to a timely filed tax return for that tax year. In addition, Code Sec. 987
elections are treated as methods of accounting and are governed by the general rules regarding changes in methods of accounting. Further, a reasonable cause standard will be applied to determine whether taxpayers that fail to make a timely election are eligible for an extension of time.
Transition Rules
The transition rules of Proposed Reg. §1.987-10 apply to a taxpayer that is the owner of a QBU on the transition date, which is the first day of the first tax year to which these regulations apply. Such a taxpayer must transition to the "foreign exchange exposure pool method" whether or not the required determinations under Code Sec. 987 were made in prior years. A taxpayer that failed to make the required determinations in prior years, or that used an unreasonable method in prior years, can only use the "fresh start transition method" of Proposed Reg. §1.987-10(4). Generally, Proposed Reg. §1.987-10(c) allows a taxpayer to transition to the "foreign exchange exposure pool method" under one of two methods: the "deferral transition method" or the "fresh start transition method." Under the conformity rules of Proposed Reg. §1.987-10(c)(2), this election must be applied to all members that file a consolidated return with the taxpayer and any controlled foreign corporation (as defined in Code Sec. 957) in which the taxpayer owns more than 50 percent of the voting power or stock (as determined under Code Sec. 957(a)). This conformity rule is necessary to prevent taxpayers and certain related entities from taking inconsistent positions with respect to QBUs that have unrecognized foreign currency gains and losses.
Proposed Effective Date
These regulations are proposed to generally apply to tax years beginning one year after the first day of the first tax year following the publication date of a Treasury Decision adopting this rule as a final regulation in the Federal Register. A taxpayer may elect to apply these regulations to tax years beginning after that publication date.
Comments and Public Hearing
Comments are requested on a number of topics, including:
(1) whether special rules are needed for the global dealing of currencies and securities;
(2) on the relationship of Code Secs. 987 and 988
for banks;
(3) whether the use of exchange rate conventions is appropriate for banks and finance entities, and, if so, how such conventions should be determined;
(4) in the context of insurance companies, the proper treatment of insurance reserves, surplus, and investment assets held by the separate trades or business of an insurance company;
(5) the proper treatment of stock held in separate accounts of a Code Sec. 987 QBU of a life insurance company and the related insurance reserves established for those separate accounts;
(6) in the context of leasing companies, the treatment of stock in other leasing companies recorded on the books and records of a Code Sec. 987 QBU and how the rules of Code Secs. 986 and 987
can be reconciled if stock is treated as "market asset" in this setting;
(7) how the rules of the proposed regulations should be applied to trusts, estates and S corporations, and whether principles similar to those applied to partnerships should apply to these entities;
(8) the application of transition rules;
(9) whether an exception to the general revocation rule, where a Code Sec. 987 QBU is acquired in certain transactions that do not result in the termination of such QBU, is warranted, and if so, the appropriate scope of such an exception;
(10) the interaction of the attribution and transfer rules with other foreign currency provisions in the Code;
(11) the application of the characterization rules to provisions other than the international tax rules;
(12) whether a safe harbor (i.e., the assets and liabilities of an eligible QBU would be deemed to be allocated in a manner that appropriately reflects each partner's share of the economic benefits and burdens if certain conditions are satisfied) should be included, and, if so, what form it should take;
(13) the adjustments that would occur under Code Sec. 752 when there is as assumption by a partnership of a partner's liability that is denominated in a functional currency different from the partner and that, as a result is subject to Code Sec. 988 in the hands of the partner; whether provisions should be included in Code Sec. 988 to better coordinate the operation of Code Secs. 987 and 988; and whether provisions should be included in Code Sec. 988 in order to coordinate the aggregate approach with respect to certain assets and liabilities that are not reflected on an eligible QBU of the partnership;
(14) additional provisions that should be included to coordinate the provisions of Code Sec. 987 with subchapter K of chapter 1 of the Code, as to how capital accounts maintained under Code Sec. 704 should be adjusted to take into account Code Sec. 987 gain or loss; whether Code Sec. 987 loss should be subject to the limitation period provided under Code Sec. 704(d) and, if so, how such a limitation might be applied; and as to any other provisions of subchapter K of chapter 1 of the Code on which guidance should be provided;
(15) whether it is appropriate to treat inbound asset transactions as terminations;
(16) the interplay between Reg. §1.1502-13 and the proposed regulations and the timing of the inclusion of the deferred Code Sec. 987 gain or loss;
(17) the application of the transition rules to partnerships that were, under the current proposed regulations, treated as QBUs for purposes of Code Sec. 987; and on the treatment of QBUs of such partnerships; and
(18) concerns that may arise by the inclusion of certain controlled foreign corporations in the conformity rule.
A public hearing on the proposed regulations will be held on November 21, 2006, at 10:00 a.m. in the auditorium of the New Carrollton Federal Building, 5000 Ellin Rd., Lanham, Md.. Written or electronic comments on the proposed regulations must be received by December 5, 2006. Persons who wish to present oral comments at the hearing must submit comments and an outline of topics to be discussed at the hearing by October 31, 2006. Submissions should be sent to: IRS, CCA:LPDR (REG-208270-86), P.O. Box 7604, Ben Franklin Station, Washington, D.C. 20044. Comments may also be submitted electronically via the IRS website at www.irs.gov/regs or the Federal e-Rulemaking Portal at www.regulations.gov (IRS REG-208270-86).
Proposed Regulations, NPRM REG-208270-86, 2006FED ¶49,714
Other References:
Code Sec. 987
CCH Reference - 2006FED ¶27,140BA
CCH Reference - 2006FED ¶28,842C
CCH Reference - 2006FED ¶28,846C
CCH Reference - 2006FED ¶28,881AA
CCH Reference - 2006FED ¶28,881CA
CCH Reference - 2006FED ¶28,881EA
CCH Reference - 2006FED ¶28,881G
CCH Reference - 2006FED ¶28,882C
CCH Reference - 2006FED ¶28,882D
CCH Reference - 2006FED ¶28,882E
CCH Reference - 2006FED ¶28,882F
CCH Reference - 2006FED ¶28,882G
CCH Reference - 2006FED ¶28,882H
CCH Reference - 2006FED ¶28,882I
Code Sec. 988
CCH Reference - 2006FED ¶28,902C
CCH Reference - 2006FED ¶28,905C
Code Sec. 989
CCH Reference - 2006FED ¶28,921A
CCH Reference - 2006FED ¶28,923A

CCH (cch.taxgroup.com) reports:

The Senate might reconsider the so-called "trifecta" tax bill in September, but lawmakers are unlikely to make changes to the estate tax provisions included in the measure, said Sen. Jon Kyl, R-Ariz, on September 6. In remarks to reporters, Kyl said that changes would have to be made to other parts of the narrowly defeated Estate Tax and Extension of Tax Relief Bill of 2006 (HR 5970) in order to win Democratic support.
"Estate tax has been 57 votes three times in a row," Kyl said, noting that the Senate failed to muster 60 votes to cut off debate on legislation to repeal the estate tax before the August recess. He said that GOP lawmakers ought to look at changes to tax-extender provisions in order to attract more Democratic votes. "If it didn't, then we're just wasting time," he said.
Senate Finance Committee ranking member Max Baucus, D-Mont., said that the Senate would be unable to pass the trifecta bill without changes. He noted that lawmakers are unlikely to change their votes during an election year, so bringing up an unchanged trifecta bill would be unfruitful.
Baucus indicated that legislation to make the $1,000 child tax credit permanent and provide relief from the marriage penalty might draw more support for the trifecta bill. However, he said that Democrats would have to see all of the changes that Republicans are offering before they consider supporting it.
In the House, GOP lawmakers are looking for ways to appease voters who are concerned about the economy, said House Majority Leader John Boehner, R-Ohio. He floated the idea that the House might consider legislation to make the child tax credit permanent in the next four or five weeks.
"Making the child tax credit permanent, I think, would help give people confidence that we are serious about the burdens of taxes on American families," Boehner said. He stressed that, currently, the child tax credit is not on the House's legislative agenda for this fall.
By Stephen K. Cooper, CCH News Staff

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

A claim for refund of a California personal income tax late filing penalty was granted because the claim was filed within two years after the IRS abated the federal late filing penalty. The California Franchise Tax Board had agreed to abate the late filing penalty but denied the claim for refund because it was not filed within four years from the original filing due date or within one year of the date of overpayment.
The taxpayers contended that they timely filed the claim within one year of the overpayment. The taxpayer had entered into an installment agreement to pay three years of delinquent taxes. The penalty related to the first year's liability. The taxpayer filed the return within one year of the time it completed its payment obligation for all three taxable years. However, the FTB applied the installment payments to the liability for the earliest taxable year first, which meant that the liability for that taxable year was paid one year earlier. Because the taxpayer did not file within one year from the date the liability for the taxable year at issue was paid, the taxpayer's claim did not fall within the general statute of limitations period.
Although the State Board of Equalization ruled that the refund claim was indeed barred by the general statute of limitations, it found that the taxpayers did timely file under another statutory provision that allows taxpayers to file within two years of a federal adjustment. The IRS had abated the federal late payment penalty for reasonable cause. Because this abatement changed the amount of the taxpayer's federal tax liability, the taxpayer had two years from the federal determination to file a state refund claim. As the taxpayers filed the claim within this time frame, the SBE granted the refund.
Mart, California State Board of Equalization, August 29, 2006, ¶404-050
Other References:
Explanations at ¶89-224

CCH (cch.taxgroup.com) reports:

The IRS has released final regulations under Code Sec. 6502 regarding the ability of the IRS to enter into agreements extending the period of limitations on tax collection. The regulations adopt the provisions of the proposed regulations (NPRM REG-148702-03) with certain modifications. The final regulations incorporate the amendments to Code Sec. 6502 made by the IRS Restructuring and Reform Act of 1998 (P.L. 105-206), and are effective as of September 6, 2006.
Under Code Sec. 6502, the IRS generally has 10 years from the date of assessment to collect a timely assessed tax liability. Prior to January 1, 2000, the IRS was permitted to enter into an agreement with a taxpayer to extend the period of limitations on collection at any time prior to the expiration of the collection period. However, under the final regulations, the IRS may enter into an agreement to extend the period of limitations for collection if an extension agreement is executed either at the time an installment agreement is entered into or prior to a release of levy pursuant to Code Sec. 6343, provided the release occurs after the expiration of the original period of limitations.
The final regulations do not address the continued effectiveness of extension agreements executed on or before December 31, 1999. Under the proposed regulations, extension agreements executed on or before December 31, 1999, other than those executed in connection with installment agreements, expire on the later of: (1) December 31, 2002, or, if earlier, the date of which the extension agreement expired by its terms; or (2) the end of the original 10-year statutory period. Because few cases exist in which waivers executed on or before December 31, 1999, are still open, there was no longer a need to address this provision in final regulations.
T.D. 9284, 2006FED ¶47,060
T.D. 9284, FINH ¶43,109
Other References:
Code Sec. 6502
CCH Reference - 2006FED ¶39,011
FINH ¶21,420

CCH (cch.taxgroup.com) reports:

Congress returned to an abbreviated four-week legislative schedule on September 5 and Senate GOP leaders played down the possibility that further tax cuts would be enacted, acknowledging that there is little time left in the session to sway budget-conscious lawmakers. However, Senate Majority Leader Bill Frist, R-Tenn., would not rule out another attempt to move the narrowly defeated "trifecta" bill (the Estate Tax and Extension of Tax Relief Bill of 2006 (HR 5970)) or a pair of popular tax breaks.
Republican leaders are considering taking up a separate piece of tax legislation to make permanent the $1,000 child tax credit and relief from the marriage penalty as enacted by the Economic Growth and Tax Relief Reconciliation Act of 2001 (P.L. 107-16). The two popular tax measures have bipartisan support and could move on their own, or become an additional sweetener to the three-pronged bill that failed on August 3 to pass in the Senate by four votes.
HR 5970 would extend a group of popular tax breaks, increase the minimum wage and permanently slash the estate tax. Budget hawks earlier stood firm against holding a vote on the measure, citing the record-setting federal deficit, and most Democrats dismissed it as a giveaway to the wealthy.
When the Senate narrowly defeated the motion to proceed to the three-pronged bill, however, Frist switched his vote at the last minute to "nay" in order to preserve a procedural option to reconsider the "trifecta" package in the Senate at a later date.
"Whether we have the votes is too soon to tell," Frist told reporters on September 5. "We need to talk about it," he said, referring to House and Senate Republican leaders and Democratic holdouts.
By Jeff Carlson, CCH News Staff

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

In actions involving allegations of California unclaimed property law violations, two California courts have determined that qui tam actions under the California False Claims Act (CFCA) could not be maintained as brought. The California Supreme Court determined that a city was not a "person" who may bring a qui tam action. In the second case, the California Court of Appeal held that an individual could not sustain a qui tam action against telecommunications companies because the information pertaining to the alleged violations already was in the public domain.

CCH (cch.taxgroup.com) reports:

The Streamlined Sales Tax (SST) Governing Board added Rhode Island and Vermont as members and took action on several outstanding items, including relief from liability for purchasers, during a meeting in Bismarck, North Dakota. The SST Implementing States and the State and Local Advisory Council (SLAC) also met during the four day session that ran August 28-31, 2006.

CCH (cch.taxgroup.com) reports:

The IRS has released, in question-and-answer format, guidance on the information reporting requirements for qualified tuition and related expenses under Code Sec. 6050S. In general, an eligible educational institution is required to file information returns and to furnish statements to assist taxpayers and the IRS in determining the amount of qualified tuition and related expenses for which an education tax credit is allowable under Code Sec. 25A. For calendar years 2006 and after, the institutions are required to report certain information on Form 1098-T, Tuition Statement.
The IRS clarified that institutions must report only for students who are enrolled for an academic period beginning during the calendar year and for whom a transaction that is required to be reported is made during the calendar year. No reporting is required for nonresident alien individuals, unless the individual requests that the institution report for a calendar year. Further, an institution must report the amount of any grants that it administered and processed during the calendar year for the payment of the student's cost of attendance and all payments of qualified expenses received during the calendar year, even if one or more of the payments relate to an academic period that began during a prior calendar year.
Form 1098-T also includes "half-time "and "graduate-level" indicators to determine whether the Hope Scholarship Credit or the Lifetime Learning Credit may be allowable for the student's qualified expenses.
Notice 2006-72, 2006FED ¶46,581
Other References:
Code Sec. 25A
CCH Reference - 2006FED ¶3830.50
Code Sec. 6050S
CCH Reference - 2006FED ¶36,319B.20

CCH (cch.taxgroup.com) reports:

Capitol Hill has been quiet with Congress out of town, but the IRS is moving ahead with its initiatives. Tax debt collection by private collection agencies will begin on September 7 and restoration work on the IRS National Office appears to be on schedule.
Private Debt Collection
Almost two years after the IRS was first authorized by Congress under the American Jobs Creation Act of 2004 (P.L. 108-357) to contract out certain tax collection activities, private tax collection will begin on September 7. Under this highly controversial program, the IRS initially will assign 12,500 taxpayer accounts to private collection agencies (PCAs). It plans to turn over a total of 40,000 accounts to PCAs by the end of 2006. The accounts will only be those with amounts for which the taxpayer has admitted liability.
Taxpayers whose accounts are turned over to a PCA will receive a letter from the IRS. The letter will inform them of their rights, with telephone numbers for IRS employees overseeing the program and the Taxpayer Advocate Service.
PCAs are not authorized to take enforcement actions involving liens, levies or property seizures, work cases where the taxpayer qualifies for an installment agreement longer than five years or be involved in offers-in-compromise, bankruptcies, hardship issues, or litigation. By law, taxpayers chosen for the PCA program can have their accounts returned to the IRS.
Restoration on IRS HQ
Restoration of the flood-damaged IRS National Office is on schedule to be completed by December 8, 2006, a GSA spokesperson told CCH on September 1. The mammoth building was closed after water flooded its basement and subbasement in June, destroying electrical, heating and other systems. IRS personnel have been temporarily relocated to other government buildings in the Washington, D.C., area.
"The IRS building now has light and power but not air-conditioning," the GSA spokesperson said. He noted that many of the building's systems were custom-made in the past. If they cannot be repaired, new systems must be manufactured for the building.
"This is what is known as a delegated building, where at some point in the 1990s we agreed to a request from IRS that they be given approval to manage the building themselves. Accordingly, the IRS is responsible for day-to-day operations and maintenance, while GSA is responsible for long-term and capital-intensive projects," the GSA spokesperson explained.
Treasury Funding
The proposed fiscal year (FY) 2007 budget for the IRS continues a trend toward enforcement and away from taxpayer service and modernization according to a report released by the Congressional Research Service (CRS) on August 23.
The proportion of appropriated funds in the IRS budget for enforcement rose from 39 percent in FY 2003 to 44 percent in FY 2006, according to the CRS. Meanwhile, the proportion for taxpayer services fell from 40 percent of its budget in FY 2003 to 39 percent in FY 2006. Funds for modernization dropped from 4 percent of the IRS budget in FY 2003 to 2 percent in FY 2006, according to the CRS.
The Bush administration's budget for FY 2007 would devote 38 percent of the IRS budget to taxpayer services, 45 percent to enforcement and less than 2 percent to modernization.
A focus on closing the "tax gap" --the difference between taxes owed and actually paid --is responsible for the shift, reports the CRS. According to the IRS, the net gap for 2001 ranged between $257 billion to $298 billion.
The report is entitled "Transportation, the Treasury, Housing and Urban Development, the Judiciary, the District of Columbia, the Executive Office of the President, and Independent Agencies (TTHUD): FY 2007 Appropriations."
By Dave Hansen, George Jones and George L. Yaksick, Jr., CCH News Staff

CCH (cch.taxgroup.com) reports:

The Streamlined Sales Tax (SST) Governing Board added Rhode Island and Vermont as members and took action on several outstanding items, including relief from liability for purchasers, during a meeting in Bismarck, North Dakota. The SST Implementing States and the State and Local Advisory Council (SLAC) also met during the four day session that ran August 28-31, 2006.

CCH (cch.taxgroup.com) reports:

The IRS has released, in question-and-answer format, guidance on the information reporting requirements for qualified tuition and related expenses under Code Sec. 6050S. In general, an eligible educational institution is required to file information returns and to furnish statements to assist taxpayers and the IRS in determining the amount of qualified tuition and related expenses for which an education tax credit is allowable under Code Sec. 25A. For calendar years 2006 and after, the institutions are required to report certain information on Form 1098-T, Tuition Statement.
The IRS clarified that institutions must report only for students who are enrolled for an academic period beginning during the calendar year and for whom a transaction that is required to be reported is made during the calendar year. No reporting is required for nonresident alien individuals, unless the individual requests that the institution report for a calendar year. Further, an institution must report the amount of any grants that it administered and processed during the calendar year for the payment of the student's cost of attendance and all payments of qualified expenses received during the calendar year, even if one or more of the payments relate to an academic period that began during a prior calendar year.
Form 1098-T also includes "half-time "and "graduate-level" indicators to determine whether the Hope Scholarship Credit or the Lifetime Learning Credit may be allowable for the student's qualified expenses.
Notice 2006-72, 2006FED ¶46,581
Other References:
Code Sec. 25A
CCH Reference - 2006FED ¶3830.50
Code Sec. 6050S
CCH Reference - 2006FED ¶36,319B.20

CCH (cch.taxgroup.com) reports:

Capitol Hill has been quiet with Congress out of town, but the IRS is moving ahead with its initiatives. Tax debt collection by private collection agencies will begin on September 7 and restoration work on the IRS National Office appears to be on schedule.
Private Debt Collection
Almost two years after the IRS was first authorized by Congress under the American Jobs Creation Act of 2004 (P.L. 108-357) to contract out certain tax collection activities, private tax collection will begin on September 7. Under this highly controversial program, the IRS initially will assign 12,500 taxpayer accounts to private collection agencies (PCAs). It plans to turn over a total of 40,000 accounts to PCAs by the end of 2006. The accounts will only be those with amounts for which the taxpayer has admitted liability.
Taxpayers whose accounts are turned over to a PCA will receive a letter from the IRS. The letter will inform them of their rights, with telephone numbers for IRS employees overseeing the program and the Taxpayer Advocate Service.
PCAs are not authorized to take enforcement actions involving liens, levies or property seizures, work cases where the taxpayer qualifies for an installment agreement longer than five years or be involved in offers-in-compromise, bankruptcies, hardship issues, or litigation. By law, taxpayers chosen for the PCA program can have their accounts returned to the IRS.
Restoration on IRS HQ
Restoration of the flood-damaged IRS National Office is on schedule to be completed by December 8, 2006, a GSA spokesperson told CCH on September 1. The mammoth building was closed after water flooded its basement and subbasement in June, destroying electrical, heating and other systems. IRS personnel have been temporarily relocated to other government buildings in the Washington, D.C., area.
"The IRS building now has light and power but not air-conditioning," the GSA spokesperson said. He noted that many of the building's systems were custom-made in the past. If they cannot be repaired, new systems must be manufactured for the building.
"This is what is known as a delegated building, where at some point in the 1990s we agreed to a request from IRS that they be given approval to manage the building themselves. Accordingly, the IRS is responsible for day-to-day operations and maintenance, while GSA is responsible for long-term and capital-intensive projects," the GSA spokesperson explained.
Treasury Funding
The proposed fiscal year (FY) 2007 budget for the IRS continues a trend toward enforcement and away from taxpayer service and modernization according to a report released by the Congressional Research Service (CRS) on August 23.
The proportion of appropriated funds in the IRS budget for enforcement rose from 39 percent in FY 2003 to 44 percent in FY 2006, according to the CRS. Meanwhile, the proportion for taxpayer services fell from 40 percent of its budget in FY 2003 to 39 percent in FY 2006. Funds for modernization dropped from 4 percent of the IRS budget in FY 2003 to 2 percent in FY 2006, according to the CRS.
The Bush administration's budget for FY 2007 would devote 38 percent of the IRS budget to taxpayer services, 45 percent to enforcement and less than 2 percent to modernization.
A focus on closing the "tax gap" --the difference between taxes owed and actually paid --is responsible for the shift, reports the CRS. According to the IRS, the net gap for 2001 ranged between $257 billion to $298 billion.
The report is entitled "Transportation, the Treasury, Housing and Urban Development, the Judiciary, the District of Columbia, the Executive Office of the President, and Independent Agencies (TTHUD): FY 2007 Appropriations."
By Dave Hansen, George Jones and George L. Yaksick, Jr., CCH News Staff

Vacation Homes in Orlando.

Disney World Vacation Homes

Tax Analysts report:

Tax Analysts report:

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

A law firm (relator) that brought "qui tam" complaints against several online retailers alleging that the retailers failed to collect Illinois use taxes on sales to Illinois residents was dismissed as a party plaintiff in the lawsuits because it was not the original source of the information found in the complaints. Rather, the allegations in the relator's complaints were supported by or substantially similar to information in previous public disclosures that were readily available in the news media or in transcripts from congressional hearings.
Under the Illinois Whistleblower Reward and Protection Act, the relator was required to have possessed direct and independent knowledge of the information on which its complaint was based and voluntarily provided the information to the government before filing the complaint. The motion to dismiss was filed by the State of Illinois, which intervened in the lawsuits.
State ex rel Beeler v. Target Corporation , Illinois Appellate Court, First District, Nos. 1-04-2001 and 1-04-3159, August 25, 2006, ¶401-714
Other References:
Explanations at ¶61-510
Explanations at ¶89-180

CCH (cch.taxgroup.com) reports:

Idaho Governor Jim Risch signed a measure (H.B. 1, Laws 2006, First Extraordinary Session) on August 31, 2006, that reduces property taxes by eliminating the maintenance and operation levy for school funding, effective retroactively to January 1, 2006, and increases the sales and use tax rate from 5% to 6%, effective October 1, 2006. The measure also provides for a nonbinding advisory question to appear on the November 2006 ballot that asks voters whether to keep the property tax reduction and sales tax increase.
Phone Conversation , Office of Idaho Governor Jim Risch, August 31, 2006; H.B. 1), Laws 2006, First Extraordinary Session, effective as noted.

CCH (cch.taxgroup.com) reports:

News that the IRS is ending its investigation of the NAACP was greeted with cheers by Senate Finance Committee (SFC) ranking member Max Baucus, D-Mont., on August 31. The investigation into allegedly impermissible political activities was started in 2004. Two years later, the IRS has concluded that the NAACP continues to qualify as a Code Sec. 501(c)(3) organization.
NAACP President and CEO Bruce Gordon announced on August 31 that the IRS had closed its investigation. In an August 9 letter, the IRS told the NAACP, "We have determined that you continue to qualify as an organization described in IRS section 501(c)(3)."
Allegations of Partisan Political Activities
The IRS investigation was sparked by comments NAACP Board of Directors Chairman Julian Bond made in a speech about the Bush administration before the 2004 presidential election. According to the NAACP, complaints about Bond's speech were filed by several Republican members of the House and Senate.
"It's disappointing that the IRS took nearly two years to conclude what we knew from the beginning. The NAACP did not violate tax laws and continues to be politically non-partisan," Gordon said in a statement.
Baucus Still Questions Motivation
Baucus was an early critic of the IRS investigation, expressing concern that it was politically motivated. After the NAACP's announcement, Baucus said, "The American public expects and deserves a high degree of nonpartisanship and professionalism from the IRS. I'm still not certain that this investigation, launched immediately before the 2004 presidential election, met those standards."
By George L. Yaksick, Jr., CCH News Staff
SFC Release: Baucus Welcomes Conclusion of IRS Investigation of NAACP

CCH (cch.taxgroup.com) reports:

The IRS has finalized existing temporary regulations governing the use by professional service providers (including accountants, doctors, lawyers and others) of nonaccrual-experience accounting methods to account for uncollectable receivables. The final regulations require, as a general rule, that a taxpayer use any nonaccrual-experience method that clearly reflects the taxpayer's actual experience or any one of four safe harbor nonaccrual-experience methods:
(1) a revenue-based moving average method;
(2) an actual experience method;
(3) a modified Black Motor method; or
(4) a modified moving average method.
If the taxpayer does not use one of these safe harbor methods, the taxpayer must validate its chosen method by self-testing. A method can be validated by being tested against either the taxpayer's actual experience or the results of any one of the safe harbors in the first year it is used and on a cumulative three-year basis thereafter. The regulations reserve and request comments on the issue of how actual experience is to be determined for testing purposes.
The existing temporary regulations include specific rules for filing an application to change to a nonaccrual-experience method of accounting. The final regulations omit those rules; instead, administrative guidance will be issued. Automatic consent will be available for taxpayers changing to one of the safe harbor methods. Advance consent will be required to use any other method.
T.D. 9285, 2006FED ¶47,059
Other References:
Code Sec. 448
CCH Reference - 2006FED ¶20,802

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