Tax News

CCH (cch.taxgroup.com) reports:

The House on June 28 passed HR 2829, which includes an IRS budget of $11.1 billion for fiscal year (FY) 2008 (TAXDAY, 2007/06/29, C.1). In addition, a panel of tax experts told the Senate Finance Committee (SFC) on June 27 that repealing the alternative minimum tax (AMT) could be paid for by modifying or ending the deduction for state and local taxes (TAXDAY, 2007/06/28, C.1). On the IRS front, a Treasury official noted that the June 30 deadline for making the Treasury/IRS 2007 Fiscal Year Guidance Plan is measured by the date when proper executive sign off of a piece of guidance is given, rather than when it is actually released to the public, meaning additional guidance will be issued soon.
White House
Prior to House passage of HR 2829, the White House issued a veto threat if the bill were to include amendments to weaken current sanctions against Cuba or provide federal funding of abortions. The administration, in a written policy statement, strongly objected to the provision that would have ended funding of the private debt collection program, arguing that its termination would cost taxpayers an estimated $63 million in FY 2007 and $1.5 billion over 10 years. The administration also stated its support for the proposed increases in IRS funding, particularly for enforcement to help narrow the tax gap.
Separately, President Bush said that he would consider supporting a health care tax credit in addition to his proposal to establish a standard health care deduction for families and individuals who purchase their own medical insurance. Bush reasoned that both approaches aim to level the playing field between those whose health insurance is provided by their employers and those who do not receive any tax benefits for buying their own health care plans.
Congress
A June 27 SFC hearing was called to educate lawmakers who are considering ways to prevent an additional 23 million Americans from paying the AMT when they file returns for 2007. The White House has suggested a one-year patch for the AMT while encouraging lawmakers to come up with a permanent solution. Raising federal taxes to pay for AMT repeal is unlikely to win the support of Finance Committee ranking member Charles E. Grassley, R-Iowa. He maintained that revenues projected to be collected by the AMT are revenues the tax was never meant to collect. SFC Chairman Max Baucus, D-Mont., said that the committee plans to work on a two-year patch after the August recess, but a permanent solution will need a lot more time.
The Senate, meanwhile, killed its comprehensive immigration reform bill (Sen 1639) on June 28, ending a bitter partisan fight over the path to citizenship for millions of illegal aliens living in the U.S. Proponents of the legislation were unable to muster the 60 votes needed to limit debate and move to a final bill. Senate Majority Leader Harry Reid, D-Nev., pulled the measure from the floor, prompting speculation that immigration reform would not be revisited in 2007. The measure included a provision that would have required the disclosure of taxpayer information to assist in immigration enforcement. Under the provision, the Social Security Administration would provide certain taxpayer data to the Department of Homeland Security for purposes of immigration enforcement, subject to confidentiality safeguards.
Grassley clarified on June 26 that, although the recently introduced Baucus/Grassley legislation regarding the taxation of some publicly traded partnerships (Sen 1624) does not address the separate issue of carried interest, he could change his mind regarding inclusion of such language in the bill. Both lawmakers agree that publicly traded partnerships or entities that directly or indirectly derive income from investment adviser or asset management services are not entitled to the exemption from corporate tax that is available to firms whose income is at least 90 percent passive-derived from dividends or royalties.
On June 29, the two senior taxwriters also expressed concern over an audit finding computing errors in the commercial tax software currently provided through the IRS's Free File program (TAXDAY, 2007/07/02, I.5). Free File directs low-to-middle income taxpayers away from the IRS website to online tax preparation firms for tax assistance. The audit by the Office of the Treasury Inspector General for Tax Administration (TIGTA) identified multiple calculation errors made by the commercial software of Free File Alliance firms and recommended that the IRS test the software for tax law accuracy.
The Senate Finance Committee plans to markup a $20 billion education tax incentives package shortly after Congress returns from its July 4 recess on July 9.
IRS
Despite being the last week of the Treasury/IRS 2007 Fiscal Year Guidance Plan, the final week of June was not flooded with as much guidance as during the past few weeks. However, Treasury Benefits Tax Counsel Thomas Reeder hinted that more is soon on its way, revealing that the June 30 guidance plan deadline is measured by the date when proper executive sign off of a piece of guidance is given, rather than when it is actually released to the public (TAXDAY, 2007/06/28, M.1). Reeder indicated that final regulations under Code Sec. 403(b) were about to be released.
In other news, the Service's controversial outsourcing of private tax collection survived a procedural challenge in the House as part of the House's debate on the FY 2008 IRS budget. The House approved an IRS budget of $11.1 billion for FY 2008, which reflects a 4.7 percent increase over FY 2007 (HR 2829).
Highlights of guidance released during the week of June 25 include:
Sample Forms . Sample forms for inter vivos and testamentary charitable lead annuity trusts were published by the IRS (Rev. Proc. 2007-45, TAXDAY, 2007/06/25, I.5; Rev. Proc. 2007-46, TAXDAY, 2007/06/25, I.6). Conrad Teitell, a partner with Cummings & Lockwood LLC, Stamford, Conn., and a CCH author, told CCH that, while the guidance is welcomed, there are some important limitations. "The IRS has limited eligible grantors to one individual or a husband and wife," Teitell observed. This treatment excludes same-sex couples, domestic partners, siblings, friends and others, he noted.
Web Tools . The IRS launched for new web-based tools for exempt organizations on the IRS website (IR-2007-124, TAXDAY, 2007/06/29, I.2). The "life cycles" provide guidance to social welfare organizations, labor organizations, agricultural and horticultural organizations, and trade associations and other business leagues.
FIN 48 . Workpapers under FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, are tax accrual workpapers and are subject to the Service's policy of restraint, Deborah Nolan, commissioner of the IRS Large and Mid-Size Business (LMS Division, told LMSB employees in a memorandum posted on the IRS website (TAXDAY, 2007/06/29, I.6). However, the policy of restraint is being revaluated overall. "LMSB is evaluating its tax accrual workpaper policy to ensure it is still appropriate in today's environment," Nolan wrote. The IRS also released a new Field Examiners' Guide on FIN 48.
In related news, IRS Chief Counsel announced that tax reconciliation workpapers created under FASB 109, Accounting for Income Taxes, are not tax accrual workpapers (CC-2007-015, TAXDAY, 2007/06/26, I.1). Therefore, they do not fall under the Service's policy of restraint.
Announcement 2007-62 . Finally, the IRS is requesting comments on proposed Form 1118, Foreign Tax Credit --Corporations (Ann. 2007-62, TAXDAY, 2007/06/28, I.1). The IRS is specifically asking for comments on the ordering rules in proposed Schedule J.
By Jeff Carlson, Stephen K. Cooper, Paula Cruickshank, George G. Jones and George L. Yaksick, Jr., CCH News Staff
 

State Headlines

All States --Corporate Income Tax: Business Activity Tax Simplification Act Introduced in U.S. Senate
The protections of P.L. 86-272 would be expanded and a physical presence nexus standard would be codified for business activity taxes, under legislation introduced in the U.S. Senate on June 28, 2007. The Business Activity Tax Simplification Act of 2007 was introduced by Sens. Charles Schumer, D-N.Y., and Mike Crapo, R-Idaho. It is similar to legislation introduced in previous sessions of Congress. According to an accompanying press release, the legislation was introduced, in part, as a response to the U.S. Supreme Court's refusal to resolve the physical presence nexus controversy by accepting the Lanco and MBNA petitions for review. (TAXDAY, 2007/06/19, S.1)
Nexus standard: The legislation would prohibit a state from imposing a business activity tax on any taxpayer, unless the taxpayer has a physical presence in the state for 15 days or more during the year. Presence in a state "to conduct limited or transient business activity" would not establish physical presence.
P.L. 86-272: Since it was originally enacted in 1959, P.L. 86-272 has prohibited state and local governments from imposing a net income tax on a taxpayer whose business activities in the state are limited to certain protected activity. The proposed legislation would extend the prohibition of 86-272 to all business activity taxes, not just net income taxes as is currently the case. Also, it would include in protected activity solicitations with respect to any sale or transaction approved and fulfilled outside the state, including transactions involving intangible property and services. Currently, 86-272 only applies to solicitations for sales of tangible personal property. Furthermore, protected activity would include furnishing information, covering events, or gathering information in a state when the information is used or disseminated from outside the state, and include activities related to the purchase of goods or services in a state if the final decision to purchase is made outside the state.
Subscribers to CCH Tax Research NetWork can view the bill.
S. 1726, as introduced in the U.S. Senate on June 28, 2007.