Tax News

CCH (cch.taxgroup.com) reports:

A lawsuit has been filed by the North Carolina Institute for Constitutional Law (NCICL) that challenges the enactment of a sales and use tax exemption as well as the award of a grant to Google, an Internet search engine, as violative of several provisions of the state constitution.
The suit challenges: (1) legislation enacted in 2006 that grants a sales and use tax exemption for sales of electricity used at an eligible Internet data center and eligible business property to be located and used at such a data center; and (2) the award of a Job Development Investment Grant (JDIG) with a maximum benefit of $4.8 million to facilitate the construction of a data center to support Google's online operations and create jobs. The suit claims that these actions violate the state constitution in that the tax benefits and other economic incentives or subsidies accrue to Google's private financial benefit. Further the complaint contends that Google is provided these benefits merely for operating its own private business and not in exchange for any public service.
Under the terms of the JDIG agreement approved by the state's Economic Investment Committee, a 12-year grant will be established and for each year that Google meets the required performance targets, the state will provide a grant equal to 75% of the state personal income tax withholding derived from the creation of new jobs. According to the complaint, although the legislation does not specifically reference Google, North Carolina representatives acknowledged after the legislation was enacted that the subsidies at issue were specifically intended for Google with respect to building and operating an Internet data center in Lenoir, which is located in Caldwell County, North Carolina. The plaintiffs in the case are North Carolina taxpayers and residents. The North Carolina Attorney General's Office has not yet filed a response to the complaint.

CCH (cch.taxgroup.com) reports:

A corporation that licensed its patents, trade secrets, and technologies to its parent corporation, which had facilities in New Jersey, had sufficient nexus with the state for the state to impose corporation business tax on the income it earned from that activity in the 1994 to 1996 tax years.
Following numerous U.S. Supreme Court decisions, the New Jersey Tax Court determined that physical presence was not required to create nexus for income tax purposes and that, therefore, intangible property alone could create nexus. Also, as previously reported, (TAXDAY, 2006/10/13, S.7)the New Jersey Supreme Court recently came to the same conclusion in Lanco, Inc. v. Division of Taxation and the Tax Court was bound by the high court's decision. The addition, in 1996, of an example to a regulation in no way changed the clear meaning of the underlying statute defining "doing business" in New Jersey. The example did not substantively amend the applicability of either the statute or the regulation, under both of which, the corporation was subject to the New Jersey corporation business tax.
Because the corporation had no reasonable cause to believe it was not subject to the corporation business tax, penalties imposed for late filing and for not taking advantage of a tax amnesty that was available in 2002 were properly imposed.
Subscribers to CCH's Tax Research NetWork
can view the Tax Court's decision.
Praxair Technology, Inc. v. Division of Taxation, , New Jersey Tax Court, No. 007445-05, June 18, 2007; released August 13, 2007.

CCH (cch.taxgroup.com) reports:

The IRS was denied access to a corporation's tax accrual workpapers because they were protected by the work product privilege. The IRS sought the workpapers in order to obtain information regarding SILO transactions engaged in by one of the corporation's subsidiaries.
Although the IRS established its prima facie
case for enforcement of a summons issued for the workpapers, since the documents sought contained attorney and tax practitioner advice and opinion regarding the possibility of, and chances of prevailing in, any future litigation with the IRS, the documents may have been protected by the attorney-client or tax practitioner-client privilege. However, because the corporation disclosed the documents to an independent auditor for SEC purposes, those privileges were waived.
That disclosure did not waive the work product privilege because it did not substantially increase the likelihood that the workpapers would be disclosed to the IRS. Further, the IRS did not overcome the privilege by establishing a substantial need for the documents.
Textron Inc., DC R.I., 2007-2 USTC ¶50,605
Other References:
Code Sec. 7572
CCH Reference - 2007FED ¶42,816F.021
CCH Reference - 2007FED ¶42,816F.25
Code Sec. 7602
CCH Reference - 2007FED ¶42,827.33
CCH Reference - 2007FED ¶42,827.5036
Tax Research Consultant
CCH Reference - TRC IRS: 21,054
CCH Reference - TRC IRS: 21,402.05
CCH Reference - TRC IRS: 21,402.35

CCH (cch.taxgroup.com) reports:

Defeat; Practitioners Hail Court's Logic
IRS Chief Counsel Donald Korb held a hurried news conference at the IRS National Office on August 23, less than 24 hours after a federal district court handed the IRS a stunning defeat regarding the enforcement of a summons to inspect tax accrual workpapers. ( Textron Inc. , DC R.I., 2007-2 USTC ¶50,605; TAXDAY, 2007/08/31, J.8). "The court's analysis is incorrect. We strongly believe that the documents are not work product," Korb said.
Practitioners polled by CCH immediately after the release of the Textron
decision, however, did not share Korb's view. They were in general agreement that the court came to the correct decision and for the right reasons.
The court in Textron
held that the work product privilege, which protects materials prepared or gathered by an attorney in anticipation of possible litigation or preparation for trial, applied and was not waived. It ruled that disclosure to Textron's independent auditor was not inconsistent with keeping the workpapers confidential and that the opinions of counsel contained in the workpapers were not information needed by the IRS to determine tax liability, more appropriately obtained through information document requests (IDRs).
Chief Counsel Reaction
"This is a very important case. I'm disappointed in the result," Korb told reporters. He disagrees with the court's attempt to distinguish a First Circuit case holding there was no privilege; the Textron
case is also appealable to the First Circuit Court of Appeals. He said the court failed to discuss other cases holding that disclosure of workpapers waives the work product privilege. Both of these points will be raised on appeal, Korb said.
"Let's see how this case plays out." Korb commented that the IRS lost three significant tax shelter cases in 2002 but then won the cases on appeal. "This victory by Textron may be short-lived," he said.
"This could move very quickly. In the meantime the IRS is going to maintain this policy" (of requesting workpapers), Korb indicated. "We're not going to change anything because of this case."
"The policy of restraint is still in effect," but "the policy is being looked at by some people," Korb said. He would not comment further on this point.
Practitioner Reaction
"This is a watershed victory for corporate taxpayers and an appropriate result from the standpoint of fundamental fairness in the tax system," Lawrence Hill, from Dewey Ballantine in New York commented to CCH immediately after the decision was handed down. "The work product doctrine was the correct doctrine for the district court to rest its decision on."
Jeffrey Paravano, from Baker & Hostetler in Washington, told CCH, "The court's decision in Textron
is terrific and is correct. The clarity of the court's analysis will help restore balance in adversary proceedings with the IRS."
Paravano further explained, "Judge Torres makes clear that tax accrual workpapers are prepared because of the prospect of litigation, and the fact that SEC rules require disclosure of litigation hazards does not change that fact because, if there is no prospect of litigation, no tax accrual workpapers would be prepared. Just as the IRS has the right to protect its legal impressions from taxpayers, taxpayers have the right to protect their opinion work product from the IRS. And, although the attorney client privilege and the Section 7525
practitioner privilege are waived by disclosure to a third party, including a company's independent auditor, the work product privilege is not waived except by disclosures that substantially increase the likelihood the company's adversary --the IRS in this case --would obtain access to the information."
"As a result, tax accrual workpapers prepared in anticipation of litigation need not be shared with the IRS even where the workpapers are shared with nonadversaries, like the company's independent auditors," Paravano concluded.
By Brant Goldwyn and George Jones, CCH News Staff
 

CCH (cch.taxgroup.com) reports:

The IRS has provided domestic asset/liability percentages and domestic investment yields needed by foreign life insurance companies and foreign property and liability insurance companies to compute their minimum effectively connected net investment income under Code Sec. 842(b). This guidance is effective for tax years beginning after December 31, 2005. For the first tax year beginning after 2005, the relevant domestic asset/liability percentages are 151.6 percent for foreign life insurance companies and 192.7 percent for foreign property and liability insurance companies. The relevant domestic investment yields are 4.5 percent for foreign life insurance companies and 3.3 percent for foreign property and liability insurance companies. In addition, instructions are set forth for computing foreign insurance companies' estimated tax liabilities for tax years beginning after 2005.
Rev. Proc. 2007-58, 2007FED ¶46,607
Other References:
Code Sec. 842
CCH Reference - 2007FED ¶26,251.70
CCH Reference - 2007FED ¶26,251.72
Tax Research Consultant
CCH Reference - TRC INTLIN: 3,102.25
 

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

An out-of-state corporation acting as an independent contractor for a tax-exempt rail carrier (Amtrak) was liable for New Mexico gross receipts tax on its receipts from performing inspection, maintenance, and cleaning services on Amtrak's rail cars during their scheduled stops in New Mexico. All of the taxpayer's arguments to the contrary were rejected.
The taxpayer failed to qualify for Amtrak's exemption from state taxes under 49 U.S.C. §24301(1). Amtrak had the option of using its own employees or using outside contractors to perform federally-mandated inspections of its rail cars. When it chose to hire outside contractors to perform these services, those contractors were subject to the same taxes imposed on other private entities. Also, Amtrak's decision to contract with the taxpayer to perform the inspections did not subsume the taxpayer into Amtrak's corporate structure or extend Amtrak's tax immunity to the taxpayer. The taxpayer remained an independent taxable entity engaged in selling its services for profit. As such, it was subject to New Mexico gross receipts tax on receipts from services performed within the state. In addition, the taxpayer's argument that it was exempt from state taxes because it was engaged in interstate commerce was rejected because the taxpayer's activities in New Mexico satisfied the four-part test set forth in Complete Auto Transit v. Brady , 430 U.S. 274 (1977).
Moreover, the taxpayer failed to qualify for the deductions provided in NMSA §7-9-56 for intrastate transportation and services provided in connection with interstate commerce. The deduction provided in NMSA §7-9-56(A) was limited to receipts from the actual transportation of persons and property and the taxpayer's inspection, maintenance, and cleaning of Amtrak trains did not involve transportation. Likewise, the taxpayer did not qualify for the deduction in NMSA §7-9-56( because the services were performed on Amtrak's rail cars and not on the property moved by those cars. The taxpayer did not handle, store, pack, or have any other contact with the freight moved by Amtrak trains.
Further, the taxpayer's argument that it relied on Amtrak's representations that its services were exempt from tax was rejected because such an argument was based on a misreading of the tax clauses in Amtrak's standard contract documents. Those documents stated that Amtrak was exempt from state and local taxes. They did not state that the taxpayer was exempt from tax or that the taxpayer was prohibited from recovering the cost of its gross receipts tax liability from Amtrak. The taxpayer's tax problem arose because it assumed that New Mexico law was similar to that of other states and imposed a sales tax on the buyer, rather than a gross receipts tax on the seller. A taxpayer's erroneous assumptions concerning the law did not constitute a defense to the taxpayer's liability for taxes due. Finally, the taxpayer's argument that it was entitled to rely on the exemption certificate it received from Amtrak was rejected because the certificate was not issued by or in a form approved by the Taxation and Revenue Department and there was no deduction or exemption applicable to the taxpayer's receipts from performing services for Amtrak. As a result, Amtrak's exemption certificate was meaningless.
In the Matter of the Protest of JDJ Services, Inc. , New Mexico Taxation and Revenue Department, No. 07-14, August 15, 2007, ¶401-169
Other References:
Explanations at ¶60-740

CCH (cch.taxgroup.com) reports:

The California Franchise Tax Board (FT has released indexed 2007 California personal income tax rate schedules and return filing thresholds.

CCH (cch.taxgroup.com) reports:

With the 2008 election process going into full speed, Code Sec. 501(c)(3) organizations risk losing their tax-exempt status if they participate in impermissible political campaign activities, Richard Crom, an official with the IRS Exempt Organizations Office of Customer Education and Outreach, warned on August 29. Crom spoke during an IRS phone forum about nonprofits.
Political Campaign Intervention
All Code Sec. 501(c)(3) organizations are absolutely prohibited from directly or indirectly participating in, or intervening in, any political campaign on behalf of, or in opposition to, any candidate for public office, explained Crom, who limited his remarks to 501(c)(3)s. "The prohibition applies to all campaigns at the federal, state and local levels," he said. If an organization violates the ban, it could lose its exempt status, he cautioned.
The prohibition is absolute as to certain activities, Richard A. Newman, a partner at Arent Fox, LLP, in Washington, D.C., told CCH. Some lobbying activities are distinguishable from political campaign intervention on behalf of, or in opposition to, a candidate, he noted.
Voter Education
"Some activities look like impermissible political intervention but are not," Crom explained. A 501(c)(3)
may conduct voter education activities so long as the activities are nonpartisan. Nonpartisan voter registration and programs that encourage voter participation are generally permissible, he noted.
The IRS has stressed that the prohibition is not intended to restrict free expression by leaders of exempt organizations when they are not speaking on behalf of the organization. "It is not always clear if a priest or minister is speaking for him or herself or the entity," Newman observed. The facts and circumstances are unique to almost every situation.
Candidate Appearances
A 501(c)(3)
can invite political candidates to speak at an event, Crom said. However, "the opportunity has to be equally given to all candidates." When a 501(c)(3)
violates the ban on political campaign intervention, it is the organization and not the candidate that suffers the consequences, he warned.
Crom noted that the IRS has issued several items of guidance recently to educate 501(c)(3)
organizations about political campaign intervention. A fact sheet was published in 2006 (FS-2006-17) and includes examples of permissible and impermissible political campaign intervention. Rev. Rul. 2007-41, I.R.B. 2007-25, 1421, describes 21 scenarios.
Newman told CCH that it is unlikely that Congress will relax the rules on political activity. "We are in a period of enormous skepticism about nonprofits," he noted.
e-Postcard
In other news, Crom reminded very small 501(c)(3)s
that they also risk losing their tax-exempt status if they disregard a new annual electronic filing requirement. The Pension Protection Act of 2006 (P.L.109-280) requires very small exempt organizations, with gross receipts of $25,000 or less, to file Form 990-N (also known as the "e-Postcard"). The requirement applies to tax periods beginning after December 31, 2006. The IRS began notifying small exempt organizations of the new filing requirement in July (TAXDAY, 2007/07/13, I.8).
Form 990-N is not optional, Crom explained. "If we don't see one filed for three years, the organization will have its status revoked automatically."
By George L. Yaksick, Jr., CCH News Staff
 

CCH (cch.taxgroup.com) reports:

The IRS announced that purchasers of qualified GMC and Honda hybrid vehicles may continue to claim the alternative motor vehicle tax credit.
The qualified GMC models and corresponding credit amounts are:
--Chevrolet Silverado Hybrid 2WD, model years 2006 and 2007: $250;
--Chevrolet Silverado Hybrid 4WD, model years 2006 and 2007: $650;
--GMC Sierra Hybrid 2WD, model years 2006 and 2007: $250;
--GMC Sierra Hybrid 4WD, model years 2006 and 2007: $650;
--Saturn Vue Green Line, model year 2007: $650; and
--Saturn Aura Hybrid, model year 2007; $1,300.
Purchasers of Honda hybrid vehicles may also continue to claim the credit; the qualified Honda models and the corresponding credit amount are:
--Honda Accord Hybrid, model year 2005: $650;
--Honda Accord Hybrid, model year 2007: $1,300;
--Honda Accord Hybrid Navi, model year 2007: $1,300; and
--Honda Civic Hybrid, model year 2007: $2,100.
GMC sold 969 qualifying vehicles to retail dealers in the quarter ending June 30, 2007, bringing its cumulative number of qualified GMC hybrid vehicles sold as of that date to 9,454. Honda sold 6,518 qualifying vehicles to retail dealers in the quarter ending June 30, 2007, bringing its cumulative number of qualified Honda hybrid vehicles sold as of that date to 58,872.
Taxpayers may claim the full amount of the alternative motor vehicle credit up to the end of the first calendar quarter after the quarter in which the manufacturer records its sale of 60,000 vehicles. During the next two quarters, taxpayers may claim 50 percent of the credit. Taxpayers may claim 25 percent of the credit for vehicles purchased during the fourth and fifth quarters. No credit is allowed after the fifth quarter.
CCH Comment. When asked for clarification about why today's announcement did not include any 2006 model year Hondas, the IRS referred CCH to a July 2007 posting on the IRS website, which did include certain 2006 model year Hondas. The posting may be found at: http://www.irs.gov/newsroom/article/0,,id=157632,00.html.
IR-2007-150, 2007FED ¶46,604
IR-2007-151, 2007FED ¶46,605
Other References:
Code Sec. 30B
CCH Reference - 2007FED ¶4059E.0265
CCH Reference - 2007FED ¶4059E.10
Tax Research Consultant
CCH Reference - TRC INDIV: 57,708

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

The filing deadline for the 2007 homeowners' property tax credit is extended from September 1, 2007, to October 31, 2007, the Maryland Department of Taxation has announced. The Homeowners' Tax Credit Program has been in existence since 1975, when it was known as the "circuit breaker" plan for elderly homeowners. The Maryland General Assembly has amended the plan through the years so that now this program is available to all homeowners regardless of their age, and the credits are given where needed based upon the person's income. Homeowners who filed and qualified by May 1 receive the credit directly on their tax bill or as a credit certificate issued at the same time the property tax bill is mailed.
What's New, Maryland Department of Taxation, August 23, 2007.

CCH (cch.taxgroup.com) reports:

Changes to the California unclaimed property program are enacted in conjunction with the Budget Act of 2007. In order to inform owners about the possible existence of identified unclaimed property, the Controller is required to mail, within 165 days after the final date for filing the report of escheated funds or property, a notice to each person having an address listed in the report who appears to be entitled to property with a value of $50 or more that has been escheated. If the report includes a Social Security number, the Controller is required to request that the California Franchise Tax Board (FT provide a current address for the apparent owner on the basis of that number.
The Controller must mail the notice to the apparent owner for whom a current address is obtained if the address is different from the address previously reported to the Controller. If the FTB does not provide an address or a different address, then the Controller must mail the notice to the address listed in the report. The mailed notice must contain (1) a statement that, according to a report filed with the Controller, property is being held to which the addressee appears entitled; (2) the name and address of the person holding the property and any necessary information regarding changes of name and address of the holder; (3) a statement that, if satisfactory proof of claim is not presented by the owner to the holder by the date specified in the notice, the property will be placed in the custody of the Controller and may be sold or destroyed, and all further claims concerning the property or, if sold, the net proceeds of its sale, must be directed to the Controller.
The Controller is also required to establish and conduct a notification program designed to inform owners about the possible existence of unclaimed property that has been received. Upon the request of the Controller, a state or local governmental agency may furnish to the Controller from its records the address or other identification or location information that could reasonably be used to locate an owner of unclaimed property. If the address or other information requested is deemed confidential under any California laws or regulations, it shall nevertheless be furnished to the Controller. However, neither the Controller nor any officer, agent, or employee of the Controller shall use or disclose that information except as may be necessary in attempting to locate the owner of the unclaimed property.
Every person filing a report is required to, no sooner than seven months and no later than seven months and 15 days after the final date for filing the report, pay or deliver to the Controller all escheated property specified in the report. If a person establishes his or her right to receive any property specified in the report to the satisfaction of the holder before that property has been delivered to the Controller, or it appears that for any other reason the property may not be subject to escheat, the holder is not required to pay or deliver the property to the Controller but is instead required to file a report with the Controller that contains information regarding the property not subject to escheat. Any property not paid or delivered that is later determined by the holder to be subject to escheat is subject to interest, as provided.
No sale of escheated property may be made until 18 months after the final date for filing the report. Securities listed on an established stock exchange and other securities may be sold by the Controller no sooner than 18 months, but no later than 20 months, after the final date for filing the report. Any property delivered to the Controller that has no apparent commercial value must be retained by the Controller for a period of not less than 18 months from the date the property is delivered to the Controller.
In making changes to the California unclaimed property program, the Legislature intends to reunite property owners with their property and adopt a more expansive notification program that will provide (1) notification by the state to all owners of unclaimed property prior to escheatment; (2) a more expansive post-escheatment policy that takes action to identify those owners of unclaimed property; and (3) a waiting period of not less than 18 months from delivery of property to the state prior to disposal of any unclaimed property deemed to have no commercial value.
Ch. 179 (S.B. 86), Laws 2007, effective August 24, 2007.

CCH (cch.taxgroup.com) reports:

The Treasury Department and the IRS have released proposed regulations regarding funding balances and benefit restrictions for underfunded defined benefit pension plans. The proposed regulations reflect the changes made by the Pension Protection Act of 2006, P.L.109-280, to Code Secs. 430
and 436 and will affect plan sponsors, administrators, participants and beneficiaries. Furthermore, the proposed regulations will apply to plan years beginning after December 31, 2007, and can be relied upon for qualification purposes pending release of the final regulations. Comments and requests for public hearings must be submitted by November 28, 2007.
The proposed regulations would provide guidance and transitional rules with regard to the establishment and maintenance of prefunding balances and funding standard carryover balances under Code Sec. 430(f) and are applicable to single-employer, plans of a controlled group of employers and multiple-employer plans. Additionally, they would allow an employer to elect to use prefunding balances and funding standard carryover balances to offset minimum required contributions under certain circumstances and would require such election to be in writing, irrevocable and sent to the plan's administrator and enrolled actuary in accordance with certain timing rules. Furthermore, the proposed regulations, pursuant to Code Sec. 430(f)(4)(A), would allow the subtraction of the prefunding balance from the plan's assets for the purpose of determining whether the plan will be required to establish a new shortfall amortization base under Code Sec. 430(c)(5).
The proposed regulations would also address, under Code Sec. 436, limitations on benefits and benefit accruals under single-employer plans and would impose a qualification requirement, under which plans would only satisfy the requirements of Code Sec. 436 if they satisfied the requirements of the regulations. Employer participants in multiple-employer plans would be treated as having a separate plan. The limitation requirements would not apply to new plans for the first five years of their existence. Additionally, if Code Sec. 436(d) limitations apply to a plan and then cease to apply on a certain date, the benefit limitations do not apply to annuities that start after the ending date and, if such limitations applied to accelerated benefits, the employer would be deemed to have made a Code Sec. 430(f) election.
The proposed regulations would require a plan that provides for unpredictable contingent event benefits to provide that such benefits will not be paid in a plan year in which the adjusted funding target attainment percentage (AFTAP) is less than 60 percent, or would be if the benefit were paid. Further, a plan must provide that, if its AFTAP is below 60 percent, it will not pay out any prohibited payments. Similarly, if the plan is in bankruptcy, it cannot make any prohibited payments until the enrolled actuary certifies the AFTAP is not below 100 percent. Separate rules would apply to limits on prohibited payments where the plan's AFTAP is between 60 percent and 80 percent. Under Code Sec. 436(e), the proposed regulations would require a plan to cease benefit accruals when the AFTAP falls below 60 percent.
Furthermore, the proposed regulations provide special rules for contributions made by employers to avoid the limitation requirement of Code Sec. 436. The benefit limitations can be avoided by reducing the prefunding balance and funding standard carryover balances, making additional contributions that are not added to the prefunding balance, making specific contributions as described in Code Sec. 436, and providing security.
Also addressed are: presumptions under Code Sec. 436(h) relating to benefit limitations and when the presumptions apply, special rules for unpredictable contingent event benefits during the precertification period, and additional limitations based on AFTAP.
Treasury Department News Release, TDNR HP-542, 2007FED ¶46,602
Proposed Regulations, NPRM REG-113891-07, 2007FED ¶49,762
Other References:
Code Sec. 430
CCH Reference - 2007FED ¶20,153
Code Sec. 436
CCH Reference - 2007FED ¶20,213
Tax Research Consultant
CCH Reference - TRC RETIRE: 30,156
CCH Reference - TRC RETIRE: 30,564

CCH (cch.taxgroup.com) reports:

The IRS has issued a warning to taxpayers of a new e-mail scam which claims that the recipient has been randomly selected to participate in a survey, the completion of which will entitle the recipient to an $80 credit. The survey, which arrives in an e-mail referencing the IRS in the "from" and "subject" lines, and which features the IRS logo, asks for the recipient's name, telephone number and credit card information. The IRS states that this information is used to withdraw bank account funds, incur charges on the victim's credit card or obtain loans in the victim's name.
The IRS reiterated that it does not send out unsolicited e-mails or ask for detailed personal information via e-mail. Wrongfully obtaining identity information over the internet or by telephone is a practice known as "phishing." To track down these bogus e-mails, the IRS has established an electronic mailbox where taxpayers can send information about suspicious e-mails. Taxpayers should send the information to: hishing@irs.gov.">phishing@irs.gov. Since setting up the electronic mailbox last year, the IRS has received more than 30,000 e-mails reporting almost 400 separate phishing incidents.
IR-2007-148, 2007FED ¶46,601
Other References:
Code Sec. 7804
CCH Reference - 2007FED ¶43,266.87
Tax Research Consultant
CCH Reference - TRC IRS: 3,154.15
 

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

Ending a six-week stalemate, California Governor Arnold Schwarzenegger has signed the state's budget bill (S.B. 77) with no tax increases; however, S.B. 87, a budget trailer bill accompanying the budget bill, repealed the teachers' credit against personal income tax. In addition, the budget bill set the personal income tax and corporation franchise and income tax collection cost recovery fees for the 2007-2008 fiscal year. S.B. 98, the budget trailer bill passed by the Assembly that contained numerous tax provisions (see TAXDAY, 2007/07/23, S.2), was declared "dead on arrival" in the Senate last month.
The teachers' credit against personal income taxes is repealed beginning with the 2007 taxable year. The credit allowed teachers who had at least four years of service in qualifying institutions to claim a credit for a portion of their wages. However, the credit had been suspended for the last three taxable years.
The budget bill, S.B. 77, officially sets the California personal income and corporation franchise and income tax collection cost recovery fees and filing enforcement cost recovery fees for the state's 2007-08 fiscal year. The collection cost recovery fee for an individual, partnership, or limited liability company (LLC) classified as a partnership increases to $155 (formerly, $126), and for a corporation or LLC classified as a corporation increases to $234 (formerly, $168). The filing enforcement cost recovery fee for an individual, partnership, or LLC classified as a partnership decreases to $122 (formerly, $125), and for a corporation or LLC classified as a corporation increases to $305 (formerly, $202). The California Franchise Tax Board had previously issued a public service bulletin that provided the estimated amount of the fees for the 2007-2008 fiscal year.
Property tax and sales and use tax provisions are covered in a separate story. (TAXDAY, 2007/08/28, S. 2)
Ch. 171 (S.B. 77) and Ch. 180 (S.B. 87), Laws 2007, applicable as noted.

CCH (cch.taxgroup.com) reports:

An individual was precluded by the equitable principle known as the doctrine of duty of consistency or quasi-estoppel from claiming ordinary loss treatment with respect to losses from a stock trading account when, in the preceding tax year, his wife filed a separate return that reported the gains from the same account as capital by reason of her status as an investor. The taxpayer attempted to claim ordinary loss treatment on the basis of his status as a trader with a mark-to-market election in effect under Code Sec. 475.
The doctrine of consistency applies if: (1) the taxpayer made a representation of fact or reported an item for tax purposes in one tax year; (2) the IRS acquiesced in or relied on that fact for that tax year; and (3) the taxpayer seeks to change the representation previously made in a later year after the statute of limitations bars adjustments for the earlier year.
In the tax year preceding the tax year in which the taxpayer sought to claim ordinary losses with respect to the account as a trader with a mark-to-market election, gains from the trading account were reported on a separate return filed by the taxpayer's wife, as capital gain. No gain from the account was reported on the taxpayer's separately filed tax return for that year even though the taxpayer now admitted to conducting all of the trading activity in the account. This method of reporting constituted a representation that the taxpayer's wife owned the account, the gains and losses were properly attributable to her, and the transactions were capital in nature. Thus, the first element of the doctrine of consistency was satisfied.
The second element was satisfied by virtue of the IRS having accepted the separate returns of the taxpayers showing the gains as capital and attributable to the wife. Finally, the third element was satisfied because the three-year statute of limitations barred the IRS from assessing any additional tax based on the changed position of the couple that the capital gains previously reported by the wife were ordinary income of the husband.
Various expenses claimed with respect to the husband's alleged stock trading and consulting activities were disallowed for lack of substantiation or recharacterized as employee expenses (i.e., itemized deductions) subject to the two-percent-of-adjusted-gross-income limitation. None of the supporting documentation provided by the taxpayers established a connection between the expenses incurred and any particular business activity other than his consulting business.
An accuracy-related penalty for negligence and substantial understatement of income tax was sustained. The taxpayers offered no specific defense to imposition of the penalty. They appeared to have attempted to manipulate the tax rules without justification by claiming capital gains in a year when the account generated gains and ordinary losses in a year in which the account generated losses.
L.B. Arberg, TC Memo. 2007-244, Dec. 57,066(M)
Other References:
Code Sec. 162
CCH Reference - 2007FED ¶8520.5875
Code Sec. 274
CCH Reference - 2007FED ¶14,417.26
Code Sec. 475
CCH Reference - 2007FED ¶22,268.55
Code Sec. 6501
CCH Reference - 2007FED ¶38,963.32
Code Sec. 6662
CCH Reference - 2007FED ¶39,651G.305
Tax Research Consultant
CCH Reference - TRC BUSEXP: 24,802
CCH Reference - TRC IRS: 30,356
CCH Reference - TRC PENALTY: 3,102

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

Illinois legislation amends the Economic Development for a Growing Economy Tax Credit Act to provide that an applicant that uses full-time employees from an employee-leasing company is eligible for a corporate income tax credit award.
P.A. 95-375 (S.B. 499), Laws 2007, effective August 23, 2007.

CCH (cch.taxgroup.com) reports:

In a nonprecedential letter decision, the California State Board of Equalization (SBE) held that an S corporation and its shareholder were eligible to claim an enterprise zone hiring credit against California personal income tax and corporation franchise and income taxes on behalf of employees who were neither economically disadvantaged nor hard-to-serve individuals but who were otherwise eligible to participate in the Job Training Partnership Act (JTPA) program.
The Franchise Tax Board had argued that the enterprise zone hiring credit could only be claimed on behalf of those individuals who were specifically listed as eligible participants in the JTPA provisions. However, the taxpayers successfully countered that the enterprise zone hiring credit statute enables employers to claim the credit on behalf of any individual eligible to participate in the JTPA program. The statutes governing the JTPA program allow a 10% exception to the program eligibility requirements that limit participation in the program to economically disadvantaged or hard-to-serve individuals. Because the employees at issue fell within the 10% exception applicable to those individuals with serious employment barriers, the taxpayers claimed that the employees were eligible to participate in the JTPA program and therefore were qualified employees for purposes of the enterprise zone hiring credit. The SBE ruled in favor of the taxpayers, allowing the taxpayers to claim the credit on behalf of employees who were older workers, high school drop outs, and veterans, but who did not meet the JTPA's statutory definition of "economically disadvantaged" or "hard-to-serve" individuals.
Letter Decision, Appeal of McClintock , Nos. 304497 and 304512, California State Board of Equalization, August 14, 2007, ¶404-440
Other References:
Explanations at ¶12-061
Explanations at ¶16-855
 

CCH (cch.taxgroup.com) reports:

The IRS may either credit a tax overpayment or a decrease in tax resulting from a tentative carryback adjustment against unassessed tax liabilities identified in a proof of claim filed in a bankruptcy case. Code Secs. 6402(a) and 6411(b)
do not require a deficiency determination or assessment as a prerequisite to crediting an overpayment or a carryback adjustment to a tax liability. Generally, the IRS does not make such credits until the tax liability is determined with specificity. Outside the bankruptcy context, that means that the IRS apply a credit only after issuance of a notice of deficiency. However, a proof of claim filed in a bankruptcy case represents a specific administrative determination of the nature and amount of a tax debt. Moreover, a proof of claim is prima facie evidence of the validity and amount of the claim. Further, a bankruptcy debtor has a forum for the judicial determination of any tax debt because bankruptcy courts have the authority to determine tax liabilities identified on a proof of claim. In addition, this ruling was published in conjunction with Rev. Rul. 2007-51, which addressed the IRS's right to set off either an overpayment or a decrease in tax against amounts reflected in a notice of deficiency.
Rev. Rul. 2007-52, 2007FED ¶46,599
Other References:
Code Sec. 6402
CCH Reference - 2007FED ¶38,519.145
Code Sec. 6411
CCH Reference - 2007FED ¶38,740.30
Tax Research Consultant
CCH Reference - TRC IRS: 30,122
CCH Reference - TRC IRS: 45,200

CCH (cch.taxgroup.com) reports:

The IRS may credit a tax overpayment or a decrease in tax liability resulting from a tentative carryback adjustment against unassessed tax liabilities determined in a notice of deficiency. Under Code Sec. 6402(a), the IRS may credit overpayments against any tax liability of the person who made the overpayment. However, the IRS will not apply this crediting provision prior to the issuance of a notice of deficiency that identifies the nature and amount of the tax liability. Similarly, the IRS may credit a decrease in tax against an unassessed liability under Code Sec. 6411(b) only if --within the applicable 90 day period --the IRS has sent the taxpayer a notice of deficiency stating the amount of the liability pursuant to Code Sec. 6212.
This ruling clarifies that Rev. Rul. 54-378 does not limit the IRS to only crediting overpayments against assessed tax liabilities. In addition, this ruling was published in conjunction with Rev. Rul. 2007-52, which addressed the IRS's right to set off either an overpayment or a decrease in tax against amounts reflected in a proof of claim filed in bankruptcy.
Rev. Rul. 2007-51, 2007FED ¶46,598
Other References:
Code Sec. 6402
CCH Reference - 2007FED ¶38,519.365
CCH Reference - 2007FED ¶38,519.545
Code Sec. 6411
CCH Reference - 2007FED ¶38,740.32
Tax Research Consultant
CCH Reference - TRC IRS: 30,122.20
CCH Reference - TRC IRS: 33,250

CCH (cch.taxgroup.com) reports:

Temporary, proposed and final regulations have been issued relating to the computation and allowance of the tentative carryback and refund adjustment under Code Sec. 6411. Pursuant to Code Sec. 6411, a corporation (other than an S corporation) that has an overpayment of tax as a result of a net operating loss, capital loss, business and research credits or a claim-of-right adjustment can file an application on Form 1139 for a tentative adjustment or refund of taxes for a year affected by the carryback of such loss, credit or adjustment. A noncorporate taxpayer can apply for similar adjustments on Form 1045, except that there is no capital loss carryback for individual or fiduciary taxpayers.
Temporary Regulations
The temporary regulations clarify that the IRS will not consider disputed amounts when computing the tentative carryback allowance. On the other hand, the IRS may credit or reduce the tentative adjustment by any assessed tax liabilities or unassessed tax liabilities determined in a deficiency notice (see Rev. Rul. 2007-51, TAXDAY, 2007/08/27, I.5), unassessed liabilities identified in a proof of claim filed in a bankruptcy proceeding (see Rev. Rul. 2007-52, TAXDAY, 2007/08/27, I.6), and other unassessed liabilities in rare and unusual circumstances.
CCH Comment. The IRS plans to adopt procedures that will require the National Office to review, prior to a credit or reduction of the tentative adjustment by an unassessed liability, under "rare and unusual circumstance."
Final Regulations
Final regulations were revised to remove all references to IRS district directors and service center directors. These positions were eliminated as a result of the IRS reorganization implemented pursuant to the IRS Reform and Restructuring Act of 1998.
Proposed Regulations
The text of the temporary regulations also serves as the text of the proposed regulations. Written and electronic comments and requests for a public hearing on the proposed regulations must be received by November 26, 2007.
Revenue Ruling Revoked
Rev. Rul. 78-369, 1978-2 CB 324, has been revoked. The IRS has determined that it was inconsistent with these regulations.
Rev. Rul. 2007-53, 2007FED ¶46,600
T.D. 9355, 2007FED ¶47,065
Proposed Regulations, NPRM REG-118886-06, 2007FED ¶49,761
Other References:
Code Sec. 6411
CCH Reference - 2007FED ¶38,723
CCH Reference - 2007FED ¶38,723D
CCH Reference - 2007FED ¶38,724
CCH Reference - 2007FED ¶38,724D
Tax Research Consultant
CCH Reference - TRC IRS: 30,122.20
 

Tax Analysts report:

Tax Analysts report:

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

Beginning with the 2008 taxable year, a new credit against North Carolina personal income tax and corporate franchise and income taxes is available to taxpayers who make donations to an exempt nonprofit organization for the purpose of providing funds for the organization to construct, purchase, or lease renewable energy property. The credit may only be claimed if the nonprofit organization actually uses the donation for its intended purpose and must be claimed in the year in which the property is placed in service.
The amount of the credit is equal to the taxpayer's share of the renewable energy investment credit the nonprofit organization could claim if the nonprofit organization were subject to tax. The taxpayer's share of the credit is calculated by dividing the taxpayer's donation by the cost of the renewable energy property placed in service during the taxable year and then multiplying this percentage by the amount of the credit the nonprofit organization could claim if it were subject to tax. The nonprofit organization must prorate each taxpayer's share of the credit if the donations made for the renewable energy property exceed the property's cost.
A taxpayer who claims the renewable energy property donation credit may not also claim a charitable contribution credit for the donation. Consequently, taxpayers must make an addition to federal taxable income for the amount of the donation for which the credit was claimed.
A nonprofit organization is required to keep a record of all donations that qualify for the credit. In the year the renewable energy property is placed in service the nonprofit organization must provide a statement to each donor describing the property that was placed in service, the property's cost, the amount of the renewable energy property investment credit the nonprofit organization could claim if it were subject to tax, and the taxpayer's share of the credit.
Although the credit is allowed against either personal income tax, corporate income tax or corporate franchise tax, the taxpayer must make a binding election as to which tax against which the credit and any credit carryovers will be claimed. The election is made when the taxpayer files the return on which the first installment of a credit is claimed. Unused credit may be carried over for five years.
The renewable energy property donation credit is a new Article 3B credit. All Article 3B credits, including carryovers, may not exceed 50% of the tax against which they are claimed for the taxable year, reduced by the sum of all other credits allowed against that tax, except tax payments made by or on behalf of the taxpayer. The other Article 3B credits include: the credit for investing in renewable energy; the credit for constructing renewable fuel facilities; the small business health insurance credit; the biodiesel producer credit, and the work opportunity credit.

CCH (cch.taxgroup.com) reports:

Gain from the sale of a corporation's stock was not subject to the New Jersey corporation business tax because it was a deemed sale of assets under IRC Sec. 338(h)(10), which was nonoperational income allocable to its principal state of business, California.
The court, following the Uniform Division of Income for Tax Purposes Act (UDITPA) and decisions from other state courts, determined that an election made under IRC Sec. 338(h)(10) to treat a corporation's sale of stock as a deemed sale of all its assets, was not an integral part of the corporation's trade or business and was, therefore, nonoperational income. Also, because New Jersey, by regulation, specifically recognizes IRC Sec. 338(h)(10) elections for corporation business tax purposes, the Division of Taxation was bound to accept all consequences of such an election. Because the income was nonoperational and was not allocable to New Jersey, but to California, it was not subject to the corporation business tax.
McKesson Water Products Company v. Division of Taxation, New Jersey Tax Court, No. 000156-2004, August 13, 2007, ¶401-306
Other References:
Explanations at ¶11-510

CCH (cch.taxgroup.com) reports:

The federal budget is on an unsustainable fiscal path, largely due to increasing expenditures in the Medicare and Medicaid programs over the next 10 years, the Congressional Budget Office (CBO) announced on August 23. The nonpartisan agency's annual report, "The Budget and Economic Outlook: An Update," shows the federal budget deficit at $158 billion --or roughly $90 billion below the deficit for 2006.
CBO Director Peter Orszag told reporters that the lower deficit figure is attributable to slower federal spending and strong, but diminishing, corporate tax revenues coupled with an unanticipated increase in individual tax revenues. The CBO report projected that revenues from corporate income taxes will peak in 2007 at 2.7 percent of GDP and then gradually diminish. Most of the continued rise in tax revenues, as a percentage of GDP, will come from individual taxes, Orszag said. The federal budget would see a small surplus from higher tax revenues if tax cuts passed in President Bush's first term are allowed to expire after 2010.
The CBO report notes that the 2007 increase in individual income tax receipts is due partly to solid growth in wage and salary income and partly to rapid growth in nonwage income. For the most part, they appear to reflect underlying economic events that are unrelated to recent changes in fiscal policy, the report states. Sluggish economic growth and the current instability in the national housing market are unlikely to have an impact on the federal budget outlook, the CBO report said. The CBO noted that the cost of the wars in Iraq and Afghanistan contributed to the deficit, but that war spending was partially offset by lower-than-expected outlays from earlier appropriations.
White House Reaction
Acting Office of Management and Budget (OM Director Stephen McMillan said the CBO deficit projection reaffirms the Bush administration's forecast of a decline in federal red ink and indicate that the administration is on track to reach a balanced budget by 2012. The OMB Mid-Session Review on July 11 predicted the fiscal year 2007 federal deficit would decline to $205 billion, or 1.5 percent of the gross domestic product, due largely to revenue growth (TAXDAY, 2007/07/12, W.1).
McMillan asserted that economic growth and higher tax revenues are further proof that the U.S. economy remains on "sound footing." He urged Congress to complete its work on the 12 annual appropriations bills before the fiscal year ends on September 30. Federal spending restraint is "equally important to achieving balance," McMillan noted in a written statement.
By Stephen K. Cooper and Paula Cruickshank, CCH News Staff.
CBO: The Budget and Economic Outlook: An Update, August 2007.

CCH (cch.taxgroup.com) reports:

Final regulations ease the reporting requirements of a regulated investment company (RIC) that elects under Code Sec. 853 to forgo a deduction or credit for certain foreign taxes paid and pass on those tax items to its shareholders. These final regulations adopt, with modifications, proposed regulations issued September 18, 2006 (NPRM REG-105248-04, TAXDAY, 2007/09/18, I.1). When this election is made, the foreign taxes at issue are added to the RIC's dividends paid deduction. Each shareholder then includes their proportionate share of the foreign taxes in gross income, is treated as having paid that share, and then deducts or claims a credit for their deemed payment of foreign tax.
Because the foreign tax credit regime has been amended to eliminate the per country limitation, a RIC no longer must inform shareholders of the dollar amounts paid to each foreign country. Rather, the statement to the shareholder must provide only the total amount of the shareholder's proportionate share of creditable foreign taxes paid, income from sources within countries described in Code Sec. 901(j), if any, and income derived from sources within other foreign countries or possessions of the United States. Various deadlines, such as the number of days by which a RIC must notify shareholders of its foreign tax passthrough election, have also been extended to reflect statutory changes.
These final regulations also adopt changes to the RIC's IRS reporting requirements. While the regulations retain the general requirement that a RIC must file a statement to elect Code Sec. 853; requirements that such statement be filed with Forms 1099 and 1096 have been eliminated. Final regulations also require that a RIC agree to provide certain information on foreign source income received and foreign taxes paid. Such information is provided on or with a modified Form 1118, Foreign Tax Credit - Corporations, but the IRS may issue future advice changing the form used for this reporting requirement.
The final regulations are applicable for RIC taxable years ending on or after December 31, 2007. For reporting purposes, however, a taxpayer may rely on the current regulations for a taxable year ending on or after December 31, 2007, but beginning before August 24, 2007.
T.D. 9357, 2007FED ¶47,064
Other References:
Code Sec. 853
CCH Reference - 2007FED ¶26,441
CCH Reference - 2007FED ¶26,442
CCH Reference - 2007FED ¶26,443
CCH Reference - 2007FED ¶26,444
Tax Research Consultant
CCH Reference - TRC RIC: 3,350

CCH (cch.taxgroup.com) reports:

The September 17 deadline is approaching for corporations that have requested extensions to file. Last year, only large corporations were required to file electronically. This is the first year mid-size corporations, those with assets between $10 million and $50 million, are required to file their returns electronically. Although small corporations are not yet required to e-file, according to the IRS, many have elected to do so voluntarily. Assistance for those corporations required to file electronically, or choosing to do so, is provided on-line at IRS.gov.
IR-2007-146, 2007FED ¶46,595
Other References:
Code Sec. 6011
CCH Reference - 2007FED ¶35,141.47
Tax Research Consultant
CCH Reference - TRC FILEBUS: 3,052.05
CCH Reference - TRC FILEBUS: 12,302
CCH Reference - TRC SCORP: 500

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

Online travel companies (OTCs) did not underpay North Carolina local occupancy taxes because they are not hotel operators for purposes of the state sales tax. The state sales tax is applicable only to operators of hotels and the local occupancy tax may be assessed only against gross receipts as determined from the standpoint of an operating hotel.
Pitt County levies an occupancy tax on the gross receipts derived from the rental in the county of any room, lodging or similar accommodation subject to sales tax under state law. State law, in turn, imposes its sales tax upon retailers for the privilege of selling, and operators of hotels and motels are considered "retailers" for purposes of the sales tax. The OTCs pay participating hotels a certain amount (a discount price) when they find people to rent rooms and consumers then reserve the rooms online for a marked-up price that includes applicable taxes. The OTCs, as trustees for the hotels, collect and pass on taxes to the hotels for remittance to the county. The OTCs, however, after collecting the taxes on the marked-up price, only pass on to the hotels the amount of taxes that are imposed on the discount price and they keep the difference. Pitt County and others brought a putative class action suit that alleged the companies had violated the occupancy tax by underpaying the tax due. The OTCs argued that the local occupancy tax is levied only upon hotel operators and that because they do not operate hotels, it does not require them to remit any more than they do. The county responded that the tax is levied not just on hotel operators but upon the gross receipts derived from all room rentals in the county, including those marked-up resales sold by the online travel companies.
The U.S. District Court, however, found that although the local occupancy tax is imposed upon certain amounts (gross receipts), the state sales tax is imposed upon certain classes of retailers, including operators of hotels and similar types of businesses. As such, the scope of the local occupancy tax is expressly circumscribed by the state sales tax. The Court noted that the state had not intervened in the action and had not asserted that the online travel companies should be considered operators for purposes of the state sales tax. The Court also noted that counties may only tax to the extent that the state allows them to do so. Had the occupancy tax extended to the conduct of the OTC's, the state sales tax provision that applies to operators of hotels must also have applied to the marked-up price charged by the companies. The Court observed that it was unlikely that the state had either not realized as much or had not collected the taxes.
In addition, the local occupancy tax applies only to the hotel's gross receipts (the room price charged by the hotels themselves). The OTCs are required to collect and remit taxes only on the discount price they charge the participating hotels and not the marked-up price that the consumers pay to the OTCs. Since the online travel companies had not underpaid their local occupancy taxes and there was no legal injury to the county, the county had no standing to file suit, the Court lacked jurisdiction over the county's claim and the county's suit was dismissed.
Pitt County v. Hotels.Com L.P. , United States District Court for the Eastern District of North Carolina, Eastern Division, No. 4:06-CV-30-BO, August 12, 2007, ¶202-384
Other References:
Explanations at ¶60-480

CCH (cch.taxgroup.com) reports:

A U.S. District Court in New York dismissed Nassau County's proposed class action lawsuit against 17 online travel companies for their alleged underpayment of New York hotel occupancy taxes that they collected on rooms sold to the public because the county failed to exhaust its own administrative remedies before filing the lawsuit.
Although the Nassau County Hotel Tax Law does not expressly set forth a procedure for the collection of taxes, other similar Nassau County tax laws require administrative proceedings prior to the filing of a lawsuit. Specifically, the Court looked to the provisions of Nassau County's Harness Horse Race Admissions Tax and the Entertainment Surcharge and determined that the Hotel Tax Law should be read in conjunction with them. Both of these similar laws have mandatory provisions that require, prior to the commencement of an action to recover unpaid taxes, an administrative determination that a tax is owing and the amount of the tax; notice to the taxpayer; and an opportunity for a hearing. Nassau County did not allege that it complied with any administrative processes for assessing and collecting local taxes, such as notice and an opportunity for a hearing. Thus, the county's complaint was dismissed for lack of subject matter jurisdiction.
County of Nassau, New York v. Hotels.com, LP , U.S. District Court, Eastern District of New York, 06 CV 5724 (ADS) (WDW), August 17, 2007, ¶405-825
Other References:
Explanations at ¶60-480
 

CCH (cch.taxgroup.com) reports:

Denial of the child tax credit and dependency exemption to a noncustodial parent did not violate the equal protection component of the Fifth Amendment's due process clause. The taxpayer's argument that Code Sec. 152(e)
violated Constitutional equal protection guarantees by granting the dependency exemption to the custodial parent, regardless of the relative amounts of support provided by each parent, was rejected. Since the statutory classification a