Tax News

CCH (cch.taxgroup.com) reports:

The Ohio Department of Taxation has issued a press release reminding all taxpayers liable for the commercial activity tax (CAT), who are required to file quarterly, that their quarterly return is due no later than August 9. Quarterly filers are required to file their returns online. This can be done through the Ohio Business Gateway at http://obg.ohio.gov/.
Release, Ohio Department of Taxation, July 27, 2007.

CCH (cch.taxgroup.com) reports:

The IRS has issued proposed regulations concerning the Code Sec. 817(h)
diversification requirements for variable annuity, endowment and life insurance contracts. The proposed regulations would expand the list of permitted investors underReg. §1.817-5(f)(3)
and would modify the rules for inadvertent nondiversification remedy. The proposed changes would affect insurance companies that issue variable contracts and policyholders who purchase these contracts, and would be effective on the date they are published as final.
Proposed Reg. §1.817-5(a)(2)
The proposed amendments would remove the sentence in Reg. §1.817-5(a)(2)
that provides that the payment required to remedy an inadvertent diversification failure must be based on the tax that would have been owed by the policyholders if they were treated as receiving the income on the contract (Proposed Reg. §1.817-5(a)(2)(iii)). Despite the proposed modification, the amount required to be paid to remedy an inadvertent failure to diversify remains the amount set forth in section 4.02 of Rev. Proc. 92-25, 1992-1 CB 741. The modification of Reg. §1.817-5(a)(2), however, will preserve the IRS's flexibility to modify this amount in response to any comments received on Notice 2007-15, 2007-7 I.R.B. 503.
Proposed Reg. §1.817-5(f)(3)
The proposed regulations would further expand the list of permitted investors in Reg. §1.817-5(f)(3) to include: (1) qualified tuition programs defined in Code Sec. 529; (2) trustees of pension or retirement plans established and maintained outside of the United States primarily for the benefit of individuals, substantially all of whom are nonresident aliens; and (3) accounts that, pursuant to Puerto Rican law or regulation, are segregated from the general asset accounts of the life insurance companies that own the accounts, provided the requirements of Code Secs. 817(d) and
(h) are satisfied (without regard to the requirement the accounts be segregated pursuant to state law or regulation).
The addition of the first two categories of holders, which were the subject of some of the comments received on 2003 proposed regulations under Code Sec. 817 (REG-163974-02), is consistent with the purpose and operation of Code Sec. 817(h). In addition, neither the qualified tuition programs nor the foreign pension plans described in the proposed regulations present the possibility of investment by the general public, as that term is used in Rev. Rul. 81-225, 1981-2 CB 12, and Rev. Rul. 2003-92, 2003-2 CB 350. The inclusion of qualified tuition programs in the list of permitted investors, however, will not relieve those programs of the need to satisfy all requirements of Code Sec. 529 and the regulations under that section.
The inclusion of the third category of holders in the list of permitted investors would ensure that a beneficial interest held by a Puerto Rican company in an investment company, partnership, or trust does not prevent look-through treatment for the other holders of an interest in the same investment, company, partnership, or trust under Reg. §1.817 5(f)(2). At the same time, this amendment would not implicate the interpretive question of what constitutes a "state" within the meaning of Code Secs. 817(d)
and 7701(a)(10).
Comments and Requests
Specific comments are requested on whether rules similar to those proposed to apply to accounts that are segregated pursuant to Puerto Rican law or regulation should apply to accounts that are segregated pursuant to the laws or regulations of other territories. All written and electronic comments and requests for a public hearing must be received by October 29, 2007.
Proposed Regulations, NPRM REG-118719-07, 2007FED ¶49,756
Other References:
Code Sec. 817
CCH Reference - 2007FED ¶26,011C
Tax Research Consultant
CCH Reference - TRC INDIV: 30,410
CCH Reference - TRC INDIV: 30,068

CCH (cch.taxgroup.com) reports:

The IRS has suspended the tax-exempt status of the Goodwill Charitable Organization, Inc., f/k/a Al-Shahid Social Association, f/k/a Education Development Organization, of Dearborn, Michigan under Code Sec. 501(p). The suspension, effective as of July 24, 2007, was imposed because the organization was designated under Executive Order 13224, Blocking Property and Prohibiting Transactions With Persons Who Commit, Threaten To Commit, or Support Terrorism, as supporting or engaging in terrorist activity or supporting terrorism. Contributions made to the organization during the period that exempt status is suspended are not deductible for federal income tax purposes. Further, due to the suspension, the organization is required to file federal income tax returns, rather than Form 990, Return of Organization Exempt from Income Tax, beginning with the tax period that began on the suspension date.
Announcement 2007-70, 2007FED ¶46,564
Other References:
Code Sec. 501
CCH Reference - 2007FED ¶22,604.052
CCH Reference - 2007FED ¶22,604.28
Tax Research Consultant
CCH Reference - TRC EXEMPT: 12,210
 

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

The Massachusetts House of Representatives has passed a bill that would create a sales tax holiday on August 11 and 12, 2007, for nonbusiness retail sales of tangible personal property costing up to $2,500 per item.
H.B. 2876, as passed by the Massachusetts House of Representatives on July 26, 2007.

CCH (cch.taxgroup.com) reports:

The IRS announced on July 27 that Deputy Commissioner for Operations Support Linda Stiff has been named deputy commissioner for Services and Enforcement and, in that capacity, will take over as acting IRS commissioner upon the departure of Kevin M. Brown, the current acting IRS commissioner. Brown, who also has been serving as deputy commissioner for Services and Enforcement, announced on July 26 that he will leave the IRS in mid-September to join the American Red Cross as chief operating officer (TAXDAY, 2007/07/27, I.3). Brown has been acting commissioner since May 4, when Mark W. Everson left the IRS to become head of the Red Cross.
In her current job, Stiff oversees the development of policy for IRS personnel services, technology and security. She has also served as deputy commissioner of the Small Business/Self-Employed Division and as director of compliance for the IRS Wage and Investment Division.
Richard Spires, who currently serves as IRS chief information officer, will replace Stiff as deputy commissioner for Operations Support. Spires has maintained overall responsibility for the IRS Modernization and Information Technology Services and will continue to oversee the IRS modernization effort.
By Brant Goldwyn, CCH News Staff
IRS Statement on Linda Stiff

CCH (cch.taxgroup.com) reports:

The IRS has notified owners of qualified low-income buildings and state housing credit agencies about an extension of time under section Code Sec. 42(j)(4)(E) for the restoration of low-income housing credit projects located within the Gulf Opportunity Zone (GO Zone) that were damaged by Hurricane Katrina.
For low-income buildings that qualify, a housing credit agency may determine what constitutes a reasonable restoration period for purposes of Code Sec. 42(j)(4)(E), ending no later than 48 months after the end of calendar year 2005. In order to qualify, the owner must have been engaged in the restoration of the building's qualified basis during the restoration period provided in section 7.01 of Rev. Proc. 95-28, 1995-1 CB 704. The term "engaged in the restoration of the building's qualified basis" means, with respect to the qualified low-income building:
(1) ongoing physical repairs;
(2) having entered into binding, written contracts for the repair or restoration to be completed within the restoration period; or
(3) active negotiation of contracts for the repair or restoration, including obtaining permits for construction.
If a building's qualified basis is restored within the determined period, the building will not be subject to recapture, and the building may continue to earn credit during that restoration period. However, if the building is not restored within the reasonable restoration period, the owner will lose all credit claimed during the restoration period and suffer recapture for any prior years of claimed credit under the provisions of Code Sec. 42(j)(1).
For purposes of Code Sec. 42(j)(4)(E), the reasonable restoration period provided in the Notice applies to qualified low-income buildings that are (1) beyond the first year of the credit period, and (2) that, because of Hurricane Katrina and its aftermath, suffered a reduction in qualified basis that would cause it to be subject to recapture and loss of credit.
Notice 2007-66, 2007FED ¶46,563
Other References:
Code Sec. 42
CCH Reference - 2007FED ¶4385.60
CCH Reference - 2007FED ¶4385.71
Tax Research Consultant
CCH Reference - TRC BUSEXP: 54,206
CCH Reference - TRC BUSEXP: 54,222

CCH (cch.taxgroup.com) reports:

Early on July 27, 2007, the House Ways and Means Committee approved, by a vote of 24-17, the Children's Health and Medicare Protection (CHAMP) Bill of 2007 (HR 3162), which would expand the State Children's Health Insurance Program (SCHIP) over five years to cover millions of additional children, provide reforms to the Medicare program and reduce overpayments to Medicare Advantage plans. However, the House Energy and Commerce Committee (E&C) adjourned its markup for lack of progress. The E&C committee is unlikely to take up the bill again; it is expected that the measure will be brought to the floor through the Rules Committee during the week of July 30.
The proposal also would finance SCHIP expansion in part with tobacco tax increases. The proposal differs in scope from the $35 billion expansion under consideration by the Senate, which contains a 61-cent cigarette tax increase. The House bill (HR 3162) includes a $50 billion expansion, and a 45-cent cigarette tax increase.
The measure faces a veto threat from President Bush; the administration opposes the cigarette tax increases that would help pay for the expansion. Instead, Bush favors a small expansion and various health tax benefits.
By Catherine Hubbard, CCH News Staff
JCT Description of an Amendment in the Nature of a Substitute to the Provisions of Title X of HR 3162, the Children's Health and Medicare Protection Act of 2007, JCX-56-07
JCT Estimated Revenue Effects of the Chairman's Amendment in the Nature of a Substitute to Title X of HR 3162, the Children's Health and Medicare Protection Act of 2007, JCX-57-07

Tax Analysts report:

Tax Analysts report:

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

S.B. 97 enacts credits against capital stock/franchise, corporate net income, or personal income taxes for film production expenses and against personal income, corporate net income, capital stock/franchise, bank shares, title insurance and trust company shares, insurance premium, or mutual thrift institution taxes for resource protection and enhancement. In addition, the law increases amounts for the neighborhood assistance credit against corporate net income, personal income, capital stock/franchise, and insurance premiums taxes. It also enacts changes to the bank shares tax calculation, nexus requirements for the corporate net income and capital stock/franchise taxes, and taxpayer notice requirements for assessments of corporate net income, personal income, and realty transfer taxes.

CCH (cch.taxgroup.com) reports:

A Delaware intangible holding company's receipt of royalty income from two affiliated entities for the licensing of its trademarks, trade names, and service marks, which the entities used for retail business activities in Massachusetts, constituted substantial nexus in the state within the limits of the Commerce Clause of the U.S. Constitution and, therefore, the company was not entitled to an abatement of the state's corporate excise tax and related penalties. In addition, the company failed to show that apportionment of the income using only a sales factor resulted in taxation of extraterritorial values, or that it was entitled to use an alternative apportionment formula.

CCH (cch.taxgroup.com) reports:

American corporations are willing to trade tax preferences for a lower corporate rate, business executives told Treasury Secretary Henry M. Paulson, Jr. on July 26. While businesses may be eager for a corporate tax cut, many lawmakers are not, Alan Greenspan, former Federal Reserve Board chairman, cautioned. The businesses leaders and Greenspan spoke at the U.S. Business Tax Competitiveness Conference, a one-day conference sponsored by the Treasury Department in Washington, D.C.
Second Highest
The combined U.S. federal-state corporate tax rate is currently 39 percent. It is the second highest in the industrialized world after Japan at 40 percent.
"The current business tax system is not optimal," Paulson said. While progress has been made in some areas, such as lowering individual marginal tax rates and reducing the tax on dividends, "it is time for a comprehensive look at our system for taxing business."
Many of the business provisions in the Tax Code were enacted nearly 50 years ago. "Subpart F dates from 1962, when the U.S. was the dominant manufacturing country in the world," Treasury Assistant Secretary For Tax Policy Eric Solomon noted. "Today, we are very much a service economy."
Preferences
"We would trade preferences like the research and development tax credit in a minute for a lower corporate tax rate," Safra Catz, president and CEO of the Oracle Corporation, said. Her comments were echoed by other business leaders, including Jim Owens, president and CEO of Caterpillar, Inc. Owens said that his company spends $40 million a year on tax planning and filing globally, which he called a "waste of resources."
According to the Treasury Department, eliminating all preferences would raise $5 billion over a 10-year period, assuming the same statutory tax rates as the current system. If the revenue from tax preferences were used to lower the corporate tax rate, the rate could be lowered from 35 percent to 27 percent while producing approximately the same revenue.
CCH Comment . Twenty-seven percent is the average corporate tax rate of member countries of the European Union, Scott Hodge, president of the Tax Foundation, told CCH. The average rate for member countries of the Organisation for Economic Co-Operation and Development (OECD) is slightly higher, at 31 percent.
Although Catz, Owens and other business leaders at the conference were enthusiastic about giving up preferences for a lower corporate tax rate, the National Association of Manufacturers (NAM) called for enhancing one preference. "When the research and development credit was created in 1981, the U.S. had one of the strongest credits in the world. Today, the U.S. has fallen further behind and, among our major trading partners, now provides one of the weakest research and development incentives," NAM said in a statement released before the start of the conference. The Financial Services Forum recommended extending or making permanent the active financing exception for Subpart F of the Tax Code in a July 25 letter to Paulson.
Globalization
Worldwide corporate tax rates play an important role in deciding where to invest, Nanci Palminterre, vice president Finance and Enterprise Services, Intel Corporation, said. "There are many places that can provide us with the infrastructure and workforce we need." Countries are aggressively competing for investments and offering incentives, such as Malaysia's 10-year tax holiday, she noted.
"Anyone who has been to Ireland knows what a difference a lower corporate tax rate makes," Catz said. Ireland's corporate tax rate of 12.5 percent is among the lowest in the industrialized world. Multi-national companies have flocked to Ireland since the country lowered its corporate tax rate.
CCH Comment . Investment also grew in some eastern European countries after they lowered their corporate tax rates, Hodge told CCH. "U.S. investment in those countries increased significantly."
Political Resistance
"Anything that is anti-competitive, which our corporate tax rate is, strikes me as something we should be concerned about," Greenspan said. However, lowering the corporate tax rate will run into political resistance, he predicted. He also expressed concern about protectionist policies gaining popularity.
No Specific Proposals
Paulson did not make any specific proposals, repeatedly emphasizing that the conference was the start of a discussion about the nation's business tax system and competitiveness in the global economy. He briefly mentioned three ideas: lowering the corporate tax rate and eliminating preferences; moving to a territorial regime; or taxing capital differently.
"The next step will be to put together what we heard today and identify themes," Solomon said. There is no specific deadline for developing any proposals, Solomon added.
By George L. Yaksick, Jr., CCH News Staff
Treasury Department News Release, TDNR HP-507
Treasury Department News Release, TDNR HP-508
Financial Services Forum Letter to Paulson
NAM Release: Lower Corporate Tax Rates and a Strengthened R&amp Incentive Are Critical

CCH (cch.taxgroup.com) reports:

The Treasury and the IRS have proposed regulations that would clarify the 2-percent floor for itemized deductions as applied to expenses paid by estates and non-grantor trusts. The regulations would apply to payments made after the date the final regulations are published in the Federal Register.
Under the proposed regulations, only costs incurred by estates and non-grantor trusts that are unique to an estate and trust are excluded from the two-percent floor that applies to miscellaneous itemized deductions. For this purpose, a cost is unique to an estate or trust if it cannot be incurred by an individual in connection with property that is not held in an estate or trust. Costs that are not unique to an estate or trust are subject to the 2-percent floor. If an estate or non-grantor trust pays a single fee that includes both unique and non-unique costs, the estate or trust must use a reasonable method to allocate that fee between the two types of cost. These rules do not apply to expenses that are otherwise excluded from the definition of miscellaneous itemized deduction, or to expenses related to a trade or business.
CCH Comment. Under the proposed regulations, whether costs are subject to the 2-percent floor depends on the type of services provided, rather than the taxpayer's characterization or label for the services. Thus, taxpayers cannot avoid the 2-percent floor by bundling investment advisory fees and trustee's fees into a single expense.
A non-exclusive list of products or services that are unique to estates and trusts includes those rendered in connection with fiduciary accountings; judicial or quasi-judicial filings required as part of the administration of the estate or trust; fiduciary income tax and estate tax returns; the division or distribution of income or corpus to or among beneficiaries; trust or will contests or construction; fiduciary bond premiums; and communication with beneficiaries regarding estate or trust matters. A non-exclusive list of products or services that are not unique to estates and trusts includes those rendered in connection with custody or management of property; advice on investing for total return; gift tax returns; the defense of claims by creditors of the decedent or grantor; and the purchase, sale, maintenance, repair, insurance or management of non-trade or business property.
CCH Comment. The proposed regulations adopt the view that the 2-percent floor applies to a trust expense that is commonly or customarily incurred by individuals ( Mellon Bank, N.A, CA-FC, 2001-2 USTC ¶50,621), and can be avoided only when the expense is peculiar to trusts ( W.L. Rudkin Testamentary Trust, CA-2, 2006-2 USTC ¶50,569). The regulations reject the view that trust expenses can be excluded if they are necessary to meet specific fiduciary obligations imposed by state law ( W.J. O'Neill, Jr. Irrevocable Trust, CA-6, 93-1 USTC ¶50,332).
Comments and Hearing
Comments on the proposed regulations must be received by the IRS by October 25, 2007. A public hearing is scheduled for November 14, 2007, in the IRS Auditorium in the Internal Revenue Building, 1111 Constitution Ave. NW., Washington, D.C. Outlines of topics to be discussed at the hearing must be received by October 24, 2007. Electronic submissions can be made via the Federal eRulemaking Portal at http://www/regulations/gov/ (indicate IRS and REG-128224-06). Other submissions can be sent to CCA:LPD: PR (REG-128224-06), Room 5203, IRS, PO Box 7604, Ben Franklin Station, Washington D.C. 20044; or hand-delivered to CCA:LPDR (REG-128224-05), Courier's Desk, IRS, 1111 Constitution Ave., NW., Washington, D.C.
Proposed Regulations, NPRM REG-128224-06, 2007FED ¶49,754
Other References:
Code Sec. 67
CCH Reference - 2007FED ¶6063AG
Tax Research Consultant
CCH Reference - TRC ESTTRST: 12,054
 

CCH (cch.taxgroup.com) reports:

A tax increase on foreign-owned U.S. corporations included in the Farm Bill Extension Act of 2007 (HR 2419) threatened to sideline the legislation on July 26. House lawmakers began debate on the measure late on July 26, but it was unclear whether GOP protests would force Democrats to delay floor consideration.
The farm bill had bipartisan support when it left the House Agriculture Committee; however, a $4 billion tax measure was included in the bill to pay for an increase in food stamps and other farm programs. The tax provision was authored by House Ways and Means Committee member Lloyd Doggett, D-Texas, and would tax the interest and royalties that foreign-owned U.S. companies pay to their foreign affiliates. Doggett said that his legislation would ensure that tax treaties, designed to eliminate double-taxation for true residents of foreign countries, are not exploited by foreign parent corporations that structure expenses and payments though low-tax jurisdictions to avoid taxes on income earned in the U.S.
The Bush administration has issued a veto threat on the farm bill because of this provision. According to a statement of administration policy issued on July 25, if the bill were presented to President Bush in its current form, White House senior advisors would recommend that he veto the bill. "The [a]dministration strongly opposes the provision that would raise taxes on payments by U.S. subsidiaries to foreign affiliates," the statement reads. "In addition to being a tax increase, this provision would discourage foreign investment in the U.S., override tax treaties the U.S. has with many nations, and raise questions under other international agreements."
Ways and Means ranking member Jim McCrery, R-La., said that Doggett's tax legislation would hurt U.S. competitiveness and violate a host of tax treaties. "It is bad policy and bad politics," he said. "Democrats are trying to sneak a far-reaching and potentially destructive proposal through the House without proper consideration."
By Stephen K. Cooper, CCH News Staff
Ways and Means Release --U.S. Business: Vote "NO" on the Surprise Farm Bill Tax Hike
Letter from the Association of International Automobile Manufacturers, Inc. (AIAM) Regarding the Farm Bill Extension Act of 2007
Letter from the Business Roundtable Regarding the Farm Bill Extension Act of 2007
Letter from U.S. Chamber of Commerce Regarding the Farm Bill Extension Act of 2007
Statement of Administration Policy on HR 2419

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

A marketing corporation could not be required to file a combined New York corporate franchise tax report with its parent company, even though substantial intercorporate transactions created a presumption of distortion, because the corporation demonstrated with a thorough transfer pricing report that its intercompany pricing with the parent was at arm's length.
In challenging the transfer pricing report, the Division of Taxation argued that the companies presented as comparable to the taxpayer were not truly comparable for several reasons (e.g., they were significantly smaller and had significantly different business functions). The Division also asserted that the taxpayer was not compensated for significant services performed for the parent and that the taxpayer's experts failed in numerous ways to follow the technical rules of the IRC Sec. 482 regulations.
However, the Tax Appeals Tribunal rejected the Division's arguments, finding that the taxpayer diligently sought to comply with the law as developed in prior decisions. The taxpayer engaged recognized experts to apply the methods required in the regulations, and the contemporaneous transfer pricing report applied those methods diligently and supported its conclusions persuasively. The principal author of the report testified in its defense at the hearing, and the taxpayer presented expert testimony that endorsed the report's conclusions and methods. Accordingly, the Tribunal found that the taxpayer carried its burden of rebutting the presumption of distortion.
In the absence of the presumption, it was the Division's burden to demonstrate the existence of distortion. However, much of the material presented by the Division consisted of a recitation of factual discrepancies appearing to have very limited significance or demonstrating only that the comparable companies used in the report were not identical to the taxpayer. The Division failed to find major defects in the methodology of the report. In addition, although it objected to the profit level indicator used in the report, the Division did not show what other profit level indicator should have been used. The Division also did not persuasively attack the functional analysis that was the beginning point for selecting the appropriate class of comparable companies, and it did not show that the statistical screens applied in the report were manipulated to produce a particular result.
The Tribunal noted that the IRC Sec. 482 regulations rely upon statistical methods that purport to find only ranges of acceptable answers, not mathematical precision. If the methods are applied in a random way that is faithful to the procedures set out in the regulations, then lack of precision does not invalidate the results.
Hallmark Marketing Corp. , New York Division of Tax Appeals, Tax Appeals Tribunal, DTA No. 819956, July 19, 2007, ¶405-793
Other References:
Explanations at ¶11-550

CCH (cch.taxgroup.com) reports:

The IRS was required to disclose e-mails containing legal advice, which it had withheld under its two-hour rule, sent by lawyers in the IRS Office of the Chief Counsel (OCC) to IRS field personnel because they fell within the statutory definition of "chief counsel advice" (CCA) and, therefore, must be made available for inspection under Code Sec. 6110.
The IRS's two-hour rule, which effectively shielded advice rendered in less than two hours from disclosure, was contrary to the statutory directive that a written determination, including, without exception, a CCA, must be open to public inspection. The statute did not distinguish between advice rendered in less than two hours and advice that takes longer to complete, nor did it require any particular form or formality.
The documents sought fell within the statutory description because they were written interpretations of revenue provisions prepared by lawyers in the OCC and sent to field personnel. The advice did not have to be formally issued as an official position to fall under the statutory definition of a CCA, which encompassed not only a formal position or policy concerning a revenue position but also any legal interpretation of a revenue position. Also, the statutory phrase that the advice be prepared by any national office "component" of the OCC included advice prepared by an individual OCC lawyer, whether she be considered a "component" of the OCC or simply a member of an institutional component who prepares the opinion on its behalf.
Affirming a DC D.C. decision, 2006-1 USTC ¶50,223.
Tax Analysts, CA-D.C., 2007-2 USTC ¶50,553
Other References:
Code Sec. 6110
CCH Reference - 2007FED ¶36,988.20
Tax Research Consultant
CCH Reference - TRC IRS: 9,052.05
CCH Reference - TRC IRS: 9,052.15
CCH Reference - TRC IRS: 12,382

CCH (cch.taxgroup.com) reports:

The IRS's denial of an individual's interest abatement request was not an abuse of discretion because none of the errors or delays he complained of were ministerial acts under Code Sec. 6404. The taxpayer had requested an abatement of interest that had accrued while the IRS conducted a criminal investigation of several tax-shelter partnerships in which he had invested.
The denial was not an abuse of discretion because the delay that occurred during the investigation was not a ministerial act as contemplated by Code Sec. 6404(e)(1). Furthermore, although the IRS included erroneous information regarding the status of the investigation in a letter to the taxpayer, that error did not contribute to the accrual of interest.
In addition, the IRS was not collaterally estopped by the case of another investor, Beall v. U.S. , 2006-2 USTC ¶50,615 (TAXDAY, 2006/12/08, J.3), from denying it lost some of the records it had confiscated and that others were returned in disarray. The issue of whether the IRS lost some of the records or returned some of them in disarray was not litigated in Beall and, therefore, collateral estoppel did not apply.
Related case at TC Memo. 2000-216, Dec. 53,954(M), 80 TCM 56
R. Howell, TC Memo. 2007-204, Dec. 57,022(M)
Other References:
Code Sec. 6404
CCH Reference - 2007FED ¶38,580.50
CCH Reference - 2007FED ¶38,580.38
Tax Research Consultant
CCH Reference - TRC LITIG: 3,054
CCH Reference - TRC PENALTY: 9,056.20

CCH (cch.taxgroup.com) reports:

The IRS has certified the Honda FCX as a qualified fuel cell vehicle. Purchasers of these vehicles, which is only capable of operating on hydrogen, may claim the alternative motor vehicle credit. The credit amount for model years 2005 and 2006 is $12,000.
IR-2007-133, 2007FED ¶46,560
Other References:
Code Sec. 30B
CCH Reference - 2007FED ¶4059E.30
Tax Research Consultant
CCH Reference - TRC INDIV: 57,700
CCH Reference - TRC INDIV: 57,704

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

The Indiana Department of Revenue explains the credit against personal income tax for contributions to College Choice 529 education savings plans, which first becomes effective for the 2007 tax year. The amount of the credit is the lesser of: (1) 20% of contributions, (2) $1,000, or (3) the amount of the taxpayer's adjusted gross income tax liability for the taxable year reduced by the amount of other credits. The credit may not be carried back or forward and a refund is not available for any unused credit.
Information Bulletin #98 , July 2007, ¶401-218
Other References:
Explanations at ¶15-599c

CCH (cch.taxgroup.com) reports:

A Tax Court action did not qualify for small case designation because the total amount of unpaid tax, interest and penalties exceeded the jurisdictional limit for small cases. Eligibility for such designation in Code Sec. 6015"stand-alone" innocent spouse cases is based on the aggregate unpaid tax and assessed interest for all years for which relief is sought in the petition, together with all accrued unassessed interest and penalties for such years, measured as of date of the petition. While the total amount of unpaid tax and assessed interest and penalties in the taxpayer's case was less than $50,000, when added to accrued unassessed interest and penalties, the total exceeded the jurisdictional limit for small case designation, even though each individual year's total fell below such threshold. Accordingly, the case had to be continued under regular case procedures.
G.A. Petrane, 129 TC No. 1, Dec. 57,018
Other References:
Code Sec. 6015
CCH Reference - 2007FED ¶35,192.815
Code Sec. 7463
CCH Reference - 2007FED ¶42,119.16
CCH Reference - 2007FED ¶42,119.20
Tax Research Consultant
CCH Reference - TRC LITIG: 7,006.10

CCH (cch.taxgroup.com) reports:

A government auditor told House lawmakers on July 24 that charitable organizations were responsible for nearly $1 billion in unpaid federal taxes in 2006. Gregory D. Kutz, managing director of the Government Accountability Office (GAO)'s Forensic Audits and Special Investigations Office, testified before the House Ways and Means Oversight Subcommittee that nearly 55,000 tax-exempt organizations were responsible for 85 percent of unpaid taxes.
"About 1,500 of these entities each had over $100,000 in federal tax debts, with some owing multi-million dollars in federal taxes," Kutz said. "The majority of this debt represented payroll taxes and associated penalties and interest dating as far back as the early 1980s."
According to Kutz, the GAO investigators found abusive and potentially criminal activity, including repeated failures to remit payroll taxes withheld from employees. Officials at tax-exempt organizations paid themselves salaries over $1 million and accumulated substantial assets, such as multimillion-dollar homes and luxury vehicles.
The subcommittee hearing was called to review the current state of the charitable sector, said Subcommittee Chairman John Lewis, D-Ga. He said that tax-exempt organizations have spent over $1 trillion on directly serving those in need.
According to the IRS, approximately 1.6 million exempt organizations operate in the U.S. IRS Tax Exempt and Government Entities (TE/GE) Division Commissioner Steven T. Miller said that 55,000 tax-exempt organization with unpaid federal taxes represent just a fraction of the charitable sector.
However, Miller acknowledged that unpaid taxes is only one of the typical problems confronting these 55,000 organizations. For example, the directors are typically involved in fraudulent activities with other federal programs, such as Medicare. They also have unpaid state and local taxes, suspicious cash transactions and excessive fees paid to companies controlled by the directors.
In response to questioning by Lewis, Miller said that, in general, charitable organizations are law-abiding. He said the incidence of wrongdoing is similar to the rate observed in the general small business sector.
Subcommittee ranking member Jim Ramstad, R-Minn., expressed surprise at the number of exempt organizations with unpaid federal taxes. Kutz told Ramstad that no change in federal law is needed to address the problem; rather, he said that the IRS needs a more aggressive seizure and levy system for tax-exempt organizations.
Miller responded that it would be a burden on the Service to complete background checks on key individuals in tax-exempt organizations. He said that it would slow down the determination letter process.
By Stephen K. Cooper, CCH News Staff
SFC Memo on Charitable Sector Tax Abuse
GAO Testimony: Tax Compliance --Thousands of Organizations Exempt from Federal Income Tax Owe Nearly $1 Billion in Payroll and Other Taxes (GAO-07-1090T)
GAO Report: Tax Compliance --Thousands of Organizations Exempt from Federal Income Tax Owe Nearly $1 Billion in Payroll and Other Taxes (GAO-07-563)

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

North Carolina provisions are amended to conform with recent changes to the Streamlined Sales and Use Tax (SST) Agreement.

CCH (cch.taxgroup.com) reports:

The IRS intends to issue guidance regarding nonqualified deferred compensation plans under Code Sec. 457 and is seeking comments regarding the definition of" bona fide severance pay plan" under Code Sec. 457(e)(11) and the definition of "substantial risk of forfeiture" under Code Sec. 457(f)(1)(. Furthermore, the guidance will include rules similar to the rules under Code Sec. 409A (T.D. 9321, TAXDAY, 2007/04/11, I.1). Comments are due by October 15, 2007.
Notice 2007-62, 2007FED ¶46,557
Other References:
Code Sec. 457
CCH Reference - 2007FED ¶21,536.21
Tax Research Consultant
CCH Reference - TRC COMPEN: 15,052.40
CCH Reference - TRC COMPEN: 15,150

CCH (cch.taxgroup.com) reports:

The IRS has issued final regulations under Code Sec. 403(b) and related provisions of Code Secs. 402(b), 402(g), 402A, and 414(c). The regulations update guidance on Code Sec. 403(b) contracts of public schools and tax-exempt organizations. They finalize proposed regulations (NPRM REG-155608-02, November 16, 2004). The regulations generally apply for tax years beginning on or after December 31, 2008.
Background
Retirement plans under Code Sec. 403(b) provide tax-favored treatment for public school employees, employees of Code Sec. 501(c)(3) tax-exempt organizations, and certain ministers. Funding arrangements can include insurance annuity contracts, custodial accounts holding only shares of mutual funds, and church retirement income accounts. Elective deferrals under these plans must be made universally available. Control group rules for tax-exempt entities apply.
CCH Comment. The existing regulations date from 1964. The final regulations outdate or supersede decades of rulings (see footnote 11 in the Preamble to the Treasury Decision for a complete list). Certain existing rules are retained such as the rules for determining when employees are performing services for a public school (Rev. Rul. 73-607, 1973-2 CB 145; Rev. Rul. 80-139, 1980-1 CB 88), and rules regarding the treatment of church entities and public schools for control group purposes (Notice 89-23, 1989-1 CB 564).
Final Regulations
The final regulations are a comprehensive update of the current regulations regarding the exclusion for contributions, contribution limits, nondiscrimination rules, distribution timing rules, taxation of distributions, funding and special rules for church plans. They require that a Code Sec. 403(b) contract satisfy the regulatory requirements both in form and operation. The final regulations provide rules under which tax-exempt entities are aggregated and treated as a single employer under Code Sec. 414(c).
The final regulations mostly track the proposed regulations, but the IRS has made modifications, particularly in the areas of most concern to commentators. The issues cited by the IRS for special attention include (1) the newly created written plan document requirements, (2) the elimination of previously allowable exclusions from the universal availability rules, (3) the elimination of previously allowable contract exchanges, and (4) requests to broaden the circumstances under which permissive aggregation is permitted under the controlled group rules.
Written Plan Documents
The final regulations retain the requirement under the proposed regulations that a Code Sec. 403(b) contract be issued pursuant to a written plan, which in both form and operation satisfies the requirements of Code Sec. 403(b) and the regulations. In response to concerns about the administrative burdens imposed by the written plan requirements, the final regulations clarify that the plan may allocate to the employer or another person the responsibility for performing administrative functions, including compliance functions with regard to Code Sec. 403(b), as long as the individual is identified who will be responsible for requirements that apply based on consolidated contracts issued to a participant. Also, the plan is permitted to incorporate by reference other documents for purposes of including all of the material provisions, including the insurance policy or custodial account which as result would become part of the plan. In response to concerns about the added cost to public schools of maintaining a written plan, the IRS intends to publish model plan provisions that may be used by public school employers.
CCH Comment. The written plan requirement brings the 403(b)
plan requirements closer to those that govern 401(k)
plans.
Contract Exchanges
Tax-free contract exchanges taking place outside of the plan have been permitted under Rev. Rul. 90-24, 1990-1 CB 97, as long as the successor contract included distribution restrictions that are the same or more stringent than the distribution restrictions in the contract that is being exchanged. This rule created complications, especially when a participant's benefits were held by numerous carriers. The proposed regulations would limit tax-free exchanges to situations in which the new contract is provided under the plan. In response to concerns that the proposed rules went too far in discouraging contract exchanges, the final regulations permit an exchange of one contract for another to constitute a mere change of investment within the same plan, if (1) the new distribution restrictions that are not less stringent than those imposed on the contract being exchanged, and (2) the employer enters into an agreement with the issuer of the other contract under which the employer and the issuer will from time to time in the future provide each other with certain information concerning the participant's employment as well as information that takes into account the participant's other plans. These rules do not apply to contracts issued before 60 days after the date of publication of the regulations in the Federal Register (assuming the exchange satisfies the pre-existing requirements). The IRS is authorized to issue guidance allowing exchanges in other cases in which the resulting contract has procedures that are reasonably designed to ensure compliance with requirements that depend on the participant's employment information or information that takes into account other Code Sec. 403(b) contracts or qualified plans.
CCH Comment. Contract exchanges outside the plan are not permitted for 401(k)
plans.
Universal Availability Rules.
Nondiscrimination rules apply to Code Sec. 403(b) plans and, historically, under Notice 89-23, 1989-1 CB 564, employers have been held to a good faith standard in satisfying these requirements. This standard will continue to apply to state and local public schools (and certain church entities) for purposes of determining controlled groups.
Certain previously allowable exclusions provided by Notice 89-23, 1989-1 CB 564, are not carried forward in the final regulations. A transition rule applies to 403(b)
plans that contain exclusions, under which the plan may continue the exclusions up until tax years beginning on or after January 1, 2010. The eligible exclusions include (1) employees who make a one-time election to participate in a governmental plan (Code Sec. 414(d)) instead of a 403(b)
plan, (2) professors who are providing services on a temporary basis to another school for up to one year and for whom 403(b)
plan contributions are being made at a rate no greater than the rate each such professor would receive under the 403(b)
plan of the original school, and (3) employees who are affiliated with a religious order and who have taken a vow of poverty where the religious order provides for the support of such employees in their retirement.
Tax-Exempt Entity Controlled Groups
Like the proposed regulations, the final regulations provide rules for determining controlled groups for entities that are tax-exempt. These rules are not limited to Code Sec. 403(b), but apply more broadly for purposes of determining when tax-exempt entities are treated as a single employer under Code Sec. 414(b), (c), (m) and (o). For example, these rules apply to plans maintained by a tax-exempt entity that are intended to be qualified under Code Sec. 401(a). For a Code Sec. 501(c)(3) employer that makes contributions to a Code Sec. 403(b) plan, the controlled group rules would be generally relevant for purposes of the nondiscrimination requirements, contribution limits, catch-up contributions, and minimum distributions. The proposed regulations provided that (subject to anti-abuse rules), tax-exempt organizations can choose to be aggregated for these purposes if they maintain a single plan covering one or more employees from each organization, and the organizations regularly coordinate their day-to-day exempt activities. In response to requests to broaden the permissive aggregation rules, the final regulations authorize the IRS to permit permissive aggregation under other circumstances as long as there are substantial business reasons for maintaining each entity in a separate trust, corporation, or other form, and under which common control treatment would be consistent with the anti-abuse standards in the regulations.
Dates and Transition Rules
The regulations generally apply for tax years beginning on or after December 31, 2008, and, because individuals will almost uniformly be on a calendar tax year, these regulations will generally apply on January 1, 2009. For a plan maintained pursuant to one or more collective bargaining agreements that were ratified and in effect as of the date of publication in the Federal Register, the regulations do not apply until the earlier of: (1) the date on which the last of such agreements terminates (determined without regard to extensions made after the date of publication in the Federal Register), or (2) three years after the date of publication in the Federal Register. For a plan maintained by a church-related organization for which the authority to amend the plan is held by a church convention, the regulations do not apply before the beginning of the first plan year following December 31, 2009. Other transition rules apply for particular provisions.
Treasury Department News Release, TDNR HP-501, 2007FED ¶46,558
T.D. 9340, 2007FED ¶47,051
Other References:
Code Sec. 101
CCH Reference - 2007FED ¶6502
Code Sec. 401
CCH Reference - 2007FED ¶17,723C
CCH Reference - 2007FED ¶17,925A
Code Sec. 402
CCH Reference - 2007FED ¶18,208
CCH Reference - 2007FED ¶18,210B
CCH Reference - 2007FED ¶18,217C
CCH Reference - 2007FED ¶18,220H
Code Sec. 402A
CCH Reference - 2007FED ¶18,230C
Code Sec. 403
CCH Reference - 2007FED ¶18,271
CCH Reference - 2007FED ¶18,276C
CCH Reference - 2007FED ¶18,277
CCH Reference - 2007FED ¶18,277AC
CCH Reference - 2007FED ¶18,277B
CCH Reference - 2007FED ¶18,278C
CCH Reference - 2007FED ¶18,278F
CCH Reference - 2007FED ¶18,278H
CCH Reference - 2007FED ¶18,278K
CCH Reference - 2007FED ¶18,278M
CCH Reference - 2007FED ¶18,278P
CCH Reference - 2007FED ¶18,278S
CCH Reference - 2007FED ¶18,278V
CCH Reference - 2007FED ¶18,279
CCH Reference - 2007FED ¶18,280
Code Sec. 414
CCH Reference - 2007FED ¶19,155B
CCH Reference - 2007FED ¶19,155C
Code Sec. 3405
CCH Reference - 2007FED ¶33,620A
Code Sec. 4974
CCH Reference - 2007FED ¶34,382A
Tax Research Consultant
CCH Reference - TRC RETIRE: 69,050
CCH Reference - TRC RETIRE: 69,100
CCH Reference - TRC RETIRE: 69,150
CCH Reference - TRC RETIRE: 69,200
CCH Reference - TRC RETIRE: 69,250

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

A qualified business may claim a credit against Texas franchise tax for a capital investment in an enterprise project designated as such by the Texas Department of Economic Development on or after September 1, 2001, and before September 1, 2003, or designated as an enterprise project by the Texas Development Bank on or after September 1, 2003, and before January 1, 2005. An enterprise project is not eligible for this credit if a credit was claimed for the project under the enterprise zone capital investment credit provision that is in effect until January 1, 2008. In addition, a taxable entity, other than a combined group, may not claim this credit unless the entity was subject to the franchise tax as it existed on May 1, 2006. A combined group may claim this credit for each member entity that was subject to the franchise tax as it existed on May 1, 2006.

CCH (cch.taxgroup.com) reports:

In a letter to motor vehicle dealers, the Ohio Department of Taxation explains the effect that the state budget bill has on the application of Ohio sales tax to purchases of motor vehicles by residents of specific states.
Following a line-item veto of certain motor vehicle provisions contained in the bill, the resulting law provides that effective August 1, 2007, Ohio motor vehicle dealers must collect Ohio sales tax on the sale of vehicles to out-of-state residents who reside in the eight states that charge sales tax to Ohio residents. The eight states are Arizona, California, Florida, Indiana, Massachusetts, Michigan, South Carolina, and Washington. Motor vehicle sales to residents of any other state are not subject to Ohio sales tax if the purchaser completes the affidavit for nonresident sales (Form STEC-NR) when applying for title. Motor vehicle leases to nonresidents continue not to be subject to Ohio sales tax.
The amount of tax to collect on sales to residents of the eight named states is the lesser of 6% of the sale price and the amount of sales tax the nonresident purchaser would pay in their home state, after taking into account any trade-in allowance to reduce the price before calculating the tax if permitted in that state. The letter provides the sales tax rates for the eight states and specifies whether trade-in allowances may be used to reduce the sales price before computing sales tax.
From August 1, 2007, through June 30, 2008, sales taxes collected on sales to nonresidents of the eight states are to be paid to the State of Ohio through the Ohio Business Gateway. Beginning July 1, 2008, the taxes on these sales are to be paid to the Ohio Clerk of Courts.
Taxes paid on these sales are due by the 10th of the month following the end of the month in which the sales took place. The newly-reduced vendor discount rate of 0.75% applies if the taxes are timely filed and paid. The decrease in the vendor discount rate was previously reported. (TAXDAY, 2007/07/02, S.22)
Subscribers to CCH Tax Research NetWork may view the letter.

Letter to Motor Vehicle Dealers , Ohio Department of Taxation, July 2007; H.B. 119, effective 90 days after filing with the Ohio Secretary of State.

CCH (cch.taxgroup.com) reports:

The California Assembly has passed two budget trailer bills that would (1) revise California's corporation franchise and income tax apportionment formula for qualified taxpayers; (2) increase the research and development alternative incremental credit against personal income and corporation franchise and income taxes and enact a sunset date for the credit; (3) enact a motion picture credit and a commercial production credit against personal income tax and corporation franchise and income taxes; (4) repeal the credentialed teacher retention credit beginning with the 2007 taxable year; (5) enact an exemption for sales of low-sulfur fuel products for use in a vessel's auxiliary engine; (6) enact an exemption for sales of low-sulfur fuel products for use in a vessel's main engine; (7) enact an exemption for fuel and petroleum products sold to or purchased by an air common carrier for consumption or shipment in the conduct of its business as an air common carrier on a domestic flight; and (8) establish property tax assessment procedures for fractionally owned aircraft. At the time this story went to press, the bills were being debated by the Senate, where their passage is uncertain.

CCH (cch.taxgroup.com) reports:

The IRS has issued a final regulation that gives the IRS the authority to designate a domestic member of a consolidated group as a substitute agent for the group where a foreign entity is the group's common parent. A domestic member of the consolidated group that is designated the substitute agent will continue to be the group's agent until its existence terminates. Under the new regulation, if a group with a domestic substitute agent continues in existence with a new common parent that is a domestic corporation during a consolidated return year, the substitute agent is the agent of the group for the year until the new common parent becomes the comment parent. After that time, the new common parent becomes the agent of the group. The new rules are effective as of July 23, 2007.
T.D. 9343, 2007FED ¶47,050
Other References:
Code Sec. 1502
CCH Reference - 2007FED ¶33,168.0232
Tax Research Consultant
CCH Reference - TRC CCORP: 45,152
CCH Reference - TRC CCORP: 45,154
CCH Reference - TRC CONSOL: 9,204.10

CCH (cch.taxgroup.com) reports:

The IRS has released specifications for filing 2007 Forms 1098, 1099, 5498 and W-2G electronically through the IRS FIRE System or magnetically, using IBM 3480, 3490, 3490E, 3590 or 3590E tape cartridges. The IRS Enterprise Computing Center --Martinsburg (IRS/ECC-MT no longer accepts 3.5-inch diskettes for the filing of information returns. These procedures, which will be reprinted as the next revision of IRS Publication 1220, Specifications for Filing Forms 1098, 1099, 5498, and W-2G Electronically or Magnetically, must be used for the preparation of 2007 tax year information returns and information returns for tax years prior to 2007 that will be filed beginning January 1, 2008. Tape cartridge files must be received by December 1, 2008, in order to be processed. After December 1, 2008, only electronic files are acceptable.
The IRS noted that tax year 2007 will be the last tax year that ECC-MTB will accept tape cartridges. Due to processing deadlines, tape cartridges must be received by December 1, 2008, in order to be processed for the current year. After December 1, 2008, the only acceptable method of filing information returns with ECC-MTB will be electronically through the FIRE system.
Rev. Proc. 2006-33, I.R.B. 2006-32, 140, is superseded.
Rev. Proc. 2007-51, 2007FED ¶46,555
Other References:
Code Sec. 6011
CCH Reference - 2007FED ¶35,141.03
CCH Reference - 2007FED ¶35,141.47
CCH Reference - 2007FED ¶35,141.57
Code Sec. 7513
CCH Reference - 2007FED ¶42,702.13
CCH Reference - 2007FED ¶42,702.15
Tax Research Consultant
CCH Reference - TRC FILEBUS: 12,302.05
CCH Reference - TRC FILEBUS: 12,302.10

CCH (cch.taxgroup.com) reports:

For pension plan years beginning in July 2007, the IRS has released the corporate bond weighted average interest rate and the permissible range of interest rates used to calculate current plan liability and to determine the required contribution under Code Sec. 412(l) for plan years through 2007. The corporate bond weighted average interest rate for plan years beginning in July 2007 is 5.83 percent; and the 90-percent to 100-percent permissible range is 5.25 percent to 5.83 percent. The annual rate of interest on 30-year Treasury securities for June 2007, used to determine the minimum present value of a participant's benefit under Code Sec. 417(e)(1) and (2), is 5.20 percent.
Notice 2007-61, 2007FED ¶46,554
Other References:
Code Sec. 412
CCH Reference - 2007FED ¶19,125.50
Tax Research Consultant
CCH Reference - TRC RETIRE: 30,170
 

CCH (cch.taxgroup.com) reports:

The IRS has released a proposed revenue procedure that would supersede Rev. Proc. 2004-42, 2004-2 CB 121, which sets forth the process for a payment card organization to request a ruling that it is a Qualified Payment Card Agent (QPCA). Reg. §31.3406(g)-1(f) provides a limited exception from the backup withholding rules for payments made, by means of a payment card transaction, by payors (cardholders) to payees (merchants) through a QPCA. Regulations under Code Sec. 6724 relieve payors from certain taxpayer identification number (TIN) requirements for payments made through a QPCA.
A number of businesses subject to the payment card rules recommended changes to Rev. Proc. 2004-42 and Reg. §31.3406(g)-1(f) that would reflect modern electronic business operations of the payment card industry, as well as allow the use of payment cards by payees that elect out of the QPCA program. In response, the IRS recently issued proposed regulatory amendments (TAXDAY, 2007/07/13, I.2) and has now released proposed changes to Rev. Proc. 2004-42. Significant modifications would include the following:
(1) written notices that must be provided by payment card organizations to payors and payees (when obtaining authorizations to act on their behalf) may not only be mailed but may also be furnished electronically;
(2) the requirement that written notices inform payees that they will be treated as participants in the QPCA program if they continue to accept the organization's payment card is eliminated; instead, notices must inform payees that they may elect out of the program and continue to accept the organization's payment card;
(3) although QPCAs do not act on behalf of nonparticipating payees in furnishing payee data to payors, a QPCA, nevertheless, must furnish certain information to payors that use the QPCA's card to make reportable payments to nonparticipating payees; and
(4) specific authority is provided for furnishing payee data to payors electronically (including the posting of the information on a secure website) with the consent of both the payor and payee.
Comments on the proposed revenue procedure must be received by the