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 at issue (the distinction between custodial and noncustodial parents) neither interfered with a fundamental right nor was itself suspect, the court applied the rational basis standard to determining whether it was constitutional.
Under the rational basis standard, a statutory classification is valid if it bears a rational basis to a legitimate governmental interest. Moreover, legislatures have especially broad latitude in creating classifications and distinctions in tax statutes. The court found that the bright-line rules in Code Sec. 152(e) bore a rational relationship to a legitimate governmental interest by easing administrative burdens on the IRS, which would otherwise be forced to involve itself in disputes between parents to decide who was entitled to the exemption and credit.
J.C. Harris, TC Memo. 2007-239, Dec. 57,061(M)
Other References:
Code Sec. 151
CCH Reference - 2007FED ¶2900.81
CCH Reference - 2007FED ¶8005.25
Code Sec. 152
CCH Reference - 2007FED ¶2900.38
CCH Reference - 2007FED ¶2900.702
CCH Reference - 2007FED ¶8250.38
Tax Research Consultant
CCH Reference - TRC FILEIND: 6,150
CCH Reference - TRC INDIV: 57,450

CCH (cch.taxgroup.com) reports:

Witnesses at an August 22 IRS hearing spoke against proposed regulations that would treat loans as capital assets (NPRM REG-109367-06, I.R.B. 2006-41, 683). An exception to the capital asset rules should continue to include loans, they testified. This would ensure that losses on loans and loan portfolios would be ordinary losses.
The witnesses represented lenders and purchasers of loans, including mortgage bankers, automobile manufacturers and government sponsored entities (GSEs). The GSEs included the Federal National Mortgage Association (Fannie Mae), the Student Loan Association (Sallie Mae), and the Federal Home Loan Mortgage Corporation (Freddie Mac).
The proposed regulations target what the IRS views as an abuse by the lending community to the capital gains exception in Code Sec. 1221(a)(4). The statute provides ordinary asset treatment for accounts or notes receivable acquired by a business for services rendered or a sale of property. Two court cases, Burbank Liquidating Corp. , (Dec. 26,025, 39 TC 999 (1963)) and Federal National Mortgage Association , (Dec. 49,102, 100 TC 541 (1993)), have treated loan origination as a service and secondary loan purchases as a service closely associated with the origination.
Associate Chief Counsel (Financial Institutions and Products) Lon Smith explained that the proposed regulations have a future effective date and that current law, including the IRS acquiescence in the Burbank
decision, continues to apply. The IRS will not apply the proposed regulations until they become effective, Smith indicated.
Opposition to Regulations
Glenn Eichen, on behalf of the Mortgage Bankers Association, said that he had both technical and policy concerns with the proposed regulations. Both loans and loan servicing rights are originated by a mortgage banker, he said. Loans are ordinary property, and Code Sec. 1221(a)(4) provides for ordinary treatment. The proposed regulations may throw that treatment into question and create confusion, especially during a time that the market is in flux, Eichen testified. Eichen noted that the issue raised by the regulations is topical, since mortgage bankers may have trouble selling their loans or need to take bigger losses.
Steven Rosenthal of Miller & Chevalier, on behalf of the Association of International Automobile Manufacturers, said that car financing arises in the ordinary course of business, whether done by the dealer, manufacturer or a separate financing arm. Loan notes are treated as ordinary assets under current law, he stated; changing this would have disastrous consequences. Rosenthal explained that car companies do not sell loans, but will hedge them to manage the interest income. Under the proposed regulations, any loss from the hedges would be capital. He suggested that the IRS ask Congress to amend Code Sec. 1221(a)(4) to add the phrase "to customers" to clarify the service requirement.
Scott Brown, an attorney-advisor with Financial Institutions and Products, questioned the witnesses' characterization of a loan as a service. He said that any activity could then be defined to provide a service, and that the witnesses' views of Code Sec. 1221(a)(4) were too broad.
GSEs Opposed
Ken Gideon of Skadden, Arps, Slate, Meagher & Flom, representing FNMA, testified that the regulations reach the wrong conclusion technically and the wrong policy answer. He noted that the statute did not require that the note be given "solely for" services or inventory, but merely requires a connection to services provided. This view is supported by the legislative history and supports the analysis of the two court cases, he said. The note is produced in the ordinary course of business. Gideon said that FNMA's requirement to buy mortgages and create a market was part of the services that it provided. Smith said that he could write a regulation that allowed GSEs to retain ordinary loss treatment (entities with a government mandate) but that would not help other types of lenders.
Rob Rudnick of Shearman and Sterling, representing FHLMC, said that he agreed with the Gideon testimony. Rudnick pointed out the stakes --a 20-point difference in tax rates between ordinary and capital, and limitations on capital losses.
John McManus of Sallie Mae added that notes arise as part of the company's core business, which is the acquisition of financial instruments. He noted that Sallie Mae competes with regulated banks whose loans receive ordinary asset treatment under Code Sec. 582(c). He said that it was unfair to give different treatment.
Support For Regulations
Randy Munyon of Levit, Zacks CPAs spoke in support of the regulations. He said that providing a loan is not a service or a sale of property, but the provision of money. He questioned the analysis of the two court cases that treated loans as ordinary assets, pointing out that such an analysis would make anything a service. He applauded the IRS and Treasury for correcting a mistaken interpretation of the regulations.
Munyon pointed out that his clients, originators of student loans, have income on the sale of the loans and want capital asset treatment. Other witnesses, however, represent organizations that have losses on the sale of loans and, therefore, benefit from ordinary asset treatment.
By Brant Goldwyn, CCH News Staff
 

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

Tennessee has submitted a petition to the Streamlined Sales and Use Tax (SST) Governing Board that would continue its associate membership until July 1, 2009, when it would become a full member. Currently, Tennessee is an associate member. However, under the terms of the Agreement, Tennessee's current associate membership will expire on December 31, 2007, because it will not be in full compliance with the Agreement by that date. The state recently delayed its previously enacted conformity provisions. (TAXDAY, 2007/07/06, S.26) Under current law, most of the provisions will become effective July 1, 2008, but full conformity will not be in place until July 1, 2009.
Tennessee's petition seeks to take advantage of an amendment to the Agreement that the Board adopted at its most recent meeting. (TAXDAY, 2007/06/26, S.1) Under this amendment, a state may now petition for membership up to 18 months prior to the date it will be in full compliance. If the petition is approved, the state will be an associate member during the interim before full compliance. Therefore, if Tennessee's petition is approved, the state will continue as an associate member until July 1, 2009, when it will automatically become a full member, assuming it does not further delay its conforming changes. If it does enact a further delay, it will forfeit its associate membership and must wait a year before repetitioning for membership.
The petition is expected to be voted on during the Board's upcoming meeting September 19-20, 2007, in Kansas City, Kansas. The petition and its supporting documentation can be found at http://www.streamlinedsalestax.org.
Petition for Membership, Tennessee Department of Revenue, filed August 17, 2007.

CCH (cch.taxgroup.com) reports:

The IRS reminds eligible telephone customers that they can still request the one-time excise tax refund on their 2006 income tax returns. This includes those who have not yet filed and those who obtained a tax-filing extension earlier this year. Form 1040EZ-T may be used to request a refund by taxpayers who do not otherwise need to file an income tax return. Individuals with low-income and many senior citizens may qualify to use this special form.
The IRS gave the following tips to help taxpayers figure the refund amount and to obtain it quickly: (1) consider using the standard refund amount; (2) figure the refund using the actual amount tax shown on phone bills and other records if the taxpayer paid more than the standard amount; (3) taxpayers who are not sure whether they paid the tax should check the portion of their telephone bill that relates to long-distance or bundled service; (4) taxpayers should not file duplicate requests; (5) taxpayers who already filed their return but failed to request the telephone tax refund can file an amend return; (6) file electronically and (7) taxpayers should stay away from tax preparers who falsely claim that telephone customers can claim hundreds of dollars or more back under this program.
IR-2007-144, 2007FED ¶46,593
IR-2007-144, ETR ¶66,835
Other References:
Code Sec. 164
CCH Reference - 2007FED ¶9502.355
Code Sec. 4251
CCH Reference - ETR ¶18,135.04
CCH Reference - ETR ¶18,135.68
Code Sec. 4252
CCH Reference - ETR ¶18,375.03
CCH Reference - ETR ¶18,375.25
Tax Research Consultant
CCH Reference - TRC EXCISE: 9,056
 

CCH (cch.taxgroup.com) reports:

The IRS has issued proposed regulations that address the allocation of pre-contribution gain or loss to a partner of a partnership (the "transferor partnership") that engages in an assets-over merger with another partnership (the "transferee partnership"). The regulations implement the principles previously articulated in Rev. Rul. 2004-43, 2004-1 CB 842, and will generally be effective for any distributions of property after January 19, 2005, if such property was contributed in an assets-over merger after May 3, 2004.
Under Code Secs. 704 and 737, a partner who contributes gain or loss property that is distributed to another partner within seven years, or who receives a distribution other than money within seven years of the contribution, may be required to recognize gain or loss. The proposed regulations provide that these same principles will apply to certain distributions occurring after a transferor partnership transfers all of its assets and liabilities to a transferee partnership in an assets-over merger.
The proposed regulations clarify that, while a partner contributing property to the transferor partnership will not be required to recognize gain or loss simply by virtue of the transferor partnership merging into a transferee partnership and distributing interests in the transferee partnership in liquidation of the former, the contributing partner will be required to recognize gain or loss on certain subsequent distributions by the transferee partnership within seven years. The proposed regulations specify how to compute such gain or loss, including cases where less than all of the originally contributed property is distributed. The seven-year period is measured by the date of the original contribution to the transferor partnership with two exceptions. First, where there is new built-in gain or loss as a result of the merger, that gain or loss may have to be recognized if the distribution occurs within seven years of the merger. Second, if the transferee partnership is subsequently merged into another partnership, the seven year period will commence from the date of the second merger with respect to any new built in gain or loss resulting from the second merger
There are exceptions to the application of the proposed regulations if the ownership of the transferor partnership and the transferee partnership are identical, with each partner owning an identical interest in each partnership, or there is no more than a 3-percent change in such interests.
A public hearing on the proposed regulations has been scheduled for December 5, 2007 at 10:00 a.m.
Propsed Regulations, NPRM REG-143397-05, 2007FED ¶49,760
Other References:
Code Sec. 704
CCH Reference - 2007FED ¶25,134B
CCH Reference - 2007FED ¶25,134G
Code Sec. 737
CCH Reference - 2007FED ¶25,426A
CCH Reference - 2007FED ¶25,426C
CCH Reference - 2007FED ¶25,426L
Tax Research Consultant
CCH Reference - TRC PART: 9,152.05
CCH Reference - TRC PART: 33,156

CCH (cch.taxgroup.com) reports:

The IRS has announced five additional pension or retirement plan arrangements that qualify under Code Sec. 817(h). Rev. Rul. 94-62, 1994-2 CB 164, listed nine arrangements that, for purposes of Reg. §1.817-(5)(f)(3)(iii), constituted qualified pension or retirement plans. The IRS has supplemented that list with the following five arrangements:
--A simple retirement account as described in Code Sec. 408(p);
--A deemed IRA as described in Code Sec. 408(q);
--A Roth IRA as described in Code Sec. 408A;
--A Code Sec. 415(m) plan that is also a governmental plan pursuant to Code Sec. 414(d); and
--A Code Sec. 457(f) plan that has as its sponsor either a charitable organization as described in Code Sec. 818(a)(4) or a governmental organization as described in Code Sec. 818(a)(4) whose employees are described in Code Sec. 403(b)(1)(A)(ii).
Rev. Rul. 94-62, 1994-2 CB 164, is supplemented.
Rev. Rul. 2007-58, 2007FED ¶46,592
Other References:
Code Sec. 408
CCH Reference - 2007FED ¶18,922.1069
CCH Reference - 2007FED ¶18,922.40
Code Sec. 408A
CCH Reference - 2007FED ¶18,930.01
Code Sec. 415
CCH Reference - 2007FED ¶19,218.35
Code Sec. 457
CCH Reference - 2007FED ¶21,536.21
Code Sec. 817
CCH Reference - 2007FED ¶26,015.70
Tax Research Consultant
CCH Reference - TRC RIC: 3,050
CCH Reference - TRC RIC: 3,064
CCH Reference - TRC RIC: 3,064.05
CCH Reference - TRC RIC: 3,064.10
CCH Reference - TRC RETIRE: 75,108

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

In a new publication, the California Franchise Tax Board identifies the top 10 errors made by taxpayers that result in corporate income and franchise tax payment and filing processing delays. The errors involve choosing the incorrect returns, incomplete or inaccurate responses to questions on the corporate income/franchise and pass-through entity forms, and errors involving accounting periods. The omission or inaccurate provision of identification numbers and entity names also is included in the top 10 list, as is claiming an incorrect amount of payments or lumping payments together for different entities or different accounting periods. The publication provides practical solutions to each of these common errors.
Subscribers to CCH Tax Research Network can view the publication.
Publication 761, Franchise Tax Board, August 20, 2007.

CCH (cch.taxgroup.com) reports:

"Transactions of interest" certainly have been a filter of "much interest," remarked Anita C. Soucy, Attorney-Advisor, Office of Tax Policy (Treasury), who has been involved in the development of the recent tax-shelter disclosure guidance that has been released over the past several weeks (T.D. 9350, T.D. 9351, T.D. 9352; TAXDAY, 2007/08/01, I.3; Notice 2007-72 and Notice 2007-73, TAXDAY, 2007/08/15, I.1). At a Tax Management luncheon held at Buchanan & Ingersoll in Washington, D.C. on August 20, Soucy shared insights behind some of the background analysis that went into the final disclosure regulations that were published on August 03, 2007. Together with former Treasury official Jeffrey H. Paravano, of Baker Hostetler, Soucy also debated the merits behind that first two "transactions of interest" notices that immediately followed the final regulations on August 15.
In reviewing several of the practitioner comments to proposed regulations that Treasury rejected, Soucy emphasized that "the name of the game is flexibility" so that the IRS is not boxed into a position that it cannot revise quickly. For example, the Treasury rejected any need to issue advanced notices of transactions of interests (TOIs) or to issue TOIs that would sunset after a certain period of time. While Soucy said that the IRS has the ability of come out with "yellow light notices," TOIs should be considered more significant. TOIs are not quite at the level of listed transactions because the IRS still lacks the information to determine whether the transaction should be identified specifically as a tax-avoidance transaction. However, TOIs are viewed with a certain suspicion that, somewhere within the parameters of the transaction, there is a potential for abuse.
"A TOI is not designated lightly," Soucy emphasized, "It is a recognition that a certain general transaction has the potential for abuse and we need more information. We have not made a determination that it is not a tax avoidance transaction. A TOI notice indicates that there is some part of the transaction about which the IRS is in the dark and needs more information." Soucy noted that, unlike a listed transaction notice, the TOI notice has a relatively short "analysis section" for the very reason that more information is needed before a proper analysis can be attached to it.
Retroactive Application
The retroactive effect of the final regulations with respect to the transactions of interest category --applicable for all transactions entered into on or after November 2, 2006 --has been another source of controversy that has been heightened by the TOI designations. A TOI announcement is made pursuant to the regulations and, therefore, is effective retroactively to transactions entered into on or after November 2, 2006. Apparently, the only negotiable issue between the proposed and the final regulations was not whether disclosure was required but how soon after a TOI announcement disclosure had to be made.
Soucy reported that the Treasury and IRS listened to many of the criticisms of the proposed regulations, especially in connection with a relatively short deadlines that would have been imposed. Therefore, while the government was unwilling to wait until "the next filed return" for newly announced TOI transactions to be disclosed, it did concede that 60 days was too short and lengthened the disclosure deadline to 90 days. Likewise, the safe harbor for reporting on information set forth on late Schedule K-1s was extended from 45 to 60 days.
Soucy also emphasized that the reporting of listed transactions and TOIs is a serious matter that carries significant penalties for noncompliance, whether or not intentional. "People are making a lot of protective disclosures," she stated, further observing that final regulations allow such action in recognition of the interpretative problems that some taxpayers and advisors have been facing.
Upcoming Guidance
Soucy made several general observations on the probable timetable of certain upcoming guidance:
--Form 8918, Material Advisor Disclosure Statement, which is not out yet, "it should be out shortly."
--Disclosure penalty regulations, on which "the government has a lot to say," will be issued relatively soon.
--The non-shelter piece of Circular 230 will be out "very shortly" and most certainly will precede further guidance on the tax shelter provisions under Circular 230. Of the tax shelter provisions, Soucy stated, "It is being worked on; it isn't something we are putting on the shelf and forgetting about."
By George Jones, CCH News Staff

CCH (cch.taxgroup.com) reports:

An individual who conducted an automobile body repair shop business through his wholly owned S corporation received and failed to report taxable income in the amounts determined by the IRS. Although checks received from insurance customers were deposited in a business account and reported as taxable income, checks from other sources were generally cashed and the proceeds dispensed to the taxpayer and family members for personal use.
The taxpayer's contention that the proceeds from the cashed checks were kept as a large petty cash fund, which was embezzled by the company bookkeeper, was implausible. Although the bookkeeper had embezzled company funds, a previous investigation by authorities and the taxpayer's accountant concluded that the embezzlement was accomplished by writing and cashing unauthorized company checks and making unauthorized contributions to a 401(k)
plan. Furthermore, the taxpayer had previously denied the existence of a petty cash fund.
Since the court found that the bookkeeper did not embezzle additional funds from a petty cash fund, the company was not entitled to an embezzlement loss deduction in excess of the amount already claimed.
The court also disallowed numerous deductions claimed as business expenses of the body repair shop and of a taxpayer's second wholly-owned S corporation that allegedly conducted a race car business. These deductions were personal expenses of the taxpayer and his family or were unsubstantiated. They included the down payment and closing costs for the purchase of 80 acres of land, as well as costs related to improvements on the tract and the construction of personal residences built by the taxpayer for himself and his two sons. Additional personal expenses deducted as business expenses included dry cleaning bills, lease payments for personal vehicles, insurance premiums on a personal boat and Winnebago motor home, utilities and taxes for a lake-front vacation home, and several family vacations.
Expenses related to race cars owned by the taxpayer were also disallowed in the absence of any evidence that the taxpayer actually used the cars in any racing activities.
Finally, a fraud penalty was imposed. The taxpayers' pattern of cashing checks from noninsurance customers and failing to deposit the proceeds was part of a deliberate scheme to report only easily traceable income. Thus, the evidence clearly established the taxpayers' fraudulent intent.
L.F. Haney, Sr., TC Memo. 2007-238, Dec. 57,060(M)
Other References:
Code Sec. 61
CCH Reference - 2007FED ¶5600.55
Code Sec. 165
CCH Reference - 2007FED ¶10,101.101
Code Sec. 183
CCH Reference - 2007FED ¶12,177.205
Code Sec. 262
CCH Reference - 2007FED ¶13,603.117
CCH Reference - 2007FED ¶13,603.147
Code Sec. 6663
CCH Reference - 2007FED ¶39,658.475
Tax Research Consultant
CCH Reference - TRC BUSEXP: 15,054
CCH Reference - TRC BUSEXP: 30,104.10
CCH Reference - TRC BUSEXP: 39,052
CCH Reference - TRC PENALTY: 6,100

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

A corporation that formed subsidiaries to hold certain of its trademarks was properly disallowed a deduction from Massachusetts corporate excise (income) tax for the royalties paid to the subsidiaries because the transfer and license-back transactions constituted a sham. The transactions lacked economic substance and had no practical economic effect, other than the creation of tax benefits. The corporation failed to produce sufficient evidence to support a finding that the scheme could accomplish any of the purported business purposes. The subsidiaries had no meaningful control over the trademarks or the income generated from them, and the corporation did not permit the subsidiaries to negotiate the terms of the license agreements. Moreover, the corporation's business operations did not change following the transfer and license-back transactions.
It was also proper for the Commissioner of Revenue to deny a deduction for interest expenses claimed by the corporation. The vast majority of the royalty income generated from the licensing of the trademarks was returned to the corporation in the form of purported loans from the subsidiaries. However, the loans lacked many standard provisions to protect the lender, and the principal was never repaid. Given the circumstances surrounding the loan transactions, it was determined that the parties had no intention that the funds would ever be repaid. Accordingly, the loans were not bona fide indebtedness. Rather, the transferred funds constituted disguised or constructive dividends to the parent corporation.
The corporation was granted a partial abatement with respect to certain specific deductions that were improperly disallowed, but otherwise the Commissioner's actions were upheld.
The TJX Companies, Inc. v. Commissioner of Revenue, Massachusetts Appellate Tax Board, Nos. C262229-31, August 15, 2007, ¶401-098
Other References:
Explanations at ¶10-075

CCH (cch.taxgroup.com) reports:

The IRS has released proposed regulations regarding the tax treatment of payments made by qualified plans for medical or accident insurance under Code Sec. 402(a). Also included are conforming amendments under Code Secs. 72, 105, 106, 401, 402(c), 403(a) and 403(b). The proposed regulations would affect administrators, participants and beneficiaries of qualified retirements plans.
Under the proposed regulations, an accident or health insurance premium payment made by a qualified plan constitutes a taxable distribution under Code Sec. 402(a), for the tax year in which the premium is paid. If the premium is paid by a defined contribution plan out of monies not yet allocated to an individual's account, it would be treated as having been allocated to that individual's account and then charged against that individual's benefits. Amounts received through insurance for personal injury or illness, however, would not be includable in the individual's gross income. Likewise, payments made from a medical account would not be includable.
The IRS is specifically requesting comments on the issue of, ". . . whether the purchase of accident and health insurance can be treated as if the trust merely purchased an investment under which an insurers' payments for medical expenses are made to the trust and then treated as a return on that investment."
Comments are due by November 19, 2007. A public hearing has been scheduled for December 6, 2007, at 10:00 a.m. Outlines of topics to be discussed at the hearing must be received by November 15, 2007.
Proposed Regulations, NPRM REG-148393-06, 2007FED ¶49,759
Other References:
Code Sec. 72
CCH Reference - 2007FED ¶6125
Code Sec. 105
CCH Reference - 2007FED ¶6707
CCH Reference - 2007FED ¶6710
Code Sec. 106
CCH Reference - 2007FED ¶6802D
Code Sec. 401
CCH Reference - 2007FED ¶17,504D
Code Sec. 402
CCH Reference - 2007FED ¶18,205D
CCH Reference - 2007FED ¶18,210G
Code Sec. 403
CCH Reference - 2007FED ¶18,272D
CCH Reference - 2007FED ¶18,278J
Tax Research Consultant
CCH Reference - TRC PLANIND: 12,258.05
CCH Reference - TRC RETIRE: 60,302

State Headlines

Illinois --Multiple Taxes: Legislation Eliminates Various Tax Planning Strategies, Creates Amnesty Program, Makes Other Changes
Illinois has passed legislation that, among other things, disallows several tax planning strategies affecting corporate, personal, and franchise taxpayers. S.B. 1544 also modifies the apportionment rules for several different businesses and changes withholding requirements for partnerships and S corporations. Additionally, the bill creates an amnesty program for corporate franchise taxpayers and makes numerous other changes.
For tax years ending on or after December 31, 2008, interest and intangible expenses and costs otherwise allowed as a deduction, but paid directly or indirectly, to a person who would be a member of the same unitary business group but for the fact the person is prohibited from being included in the unitary business group because he or she is ordinarily required to apportion business income under a different apportionment formula must be added back to compute Illinois taxable income/base income. The addition must be reduced to the extent that dividends were included in the taxable income/base income of the unitary group for the same taxable year and received by the taxpayer or by a member of the taxpayer's unitary business group with respect to the stock of the same person to whom the interest and intangible expenses and cost were paid, accrued, or incurred.
Additionally, for tax years ending on or after December 31, 2008, taxpayers must add back any amount of insurance premium expenses and costs otherwise allowed as a deduction, but paid directly or indirectly, to an insurance company that would be a member of the same unitary business group but for the fact the company is ordinarily required to apportion business income under a different apportionment formula.
The apportionment rule for business income derived from providing transportation services other than airline services has been modified for taxable years ending on or after December 31, 2008. The new formula that will be used to apportion income for such businesses will include a numerator that will be (1) all receipts from any movement or shipment of people, goods, mail, oil, gas, or any other substance (other than by airline) that both originates and terminates in Illinois, plus (2) that portion of the person's gross receipts from movements or shipments of people, goods, mail, oil, gas, or any other substance (other than by airline) passing through, into, or out of Illinois, that is determined by the ratio that the miles traveled in Illinois bears to total miles from point of origin to point of destination. The denominator will be all revenue derived from the movement or shipment of people, goods, mail, oil, gas, or any other substance (other than by airline).
The apportionment formula used to calculate business income derived from providing airline services is also amended for taxable years ending on or after December 31, 2008. The numerator of the formula will be arrivals of aircraft to and departures from Illinois weighted as to cost of aircraft by type. The denominator will be total arrivals and departures of aircraft weighted as to cost of aircraft by type.
The corporate income tax apportionment rules for financial organizations are amended effective for tax years ending on or after December 31, 2008. The new formula is determined by multiplying the business income of a financial organization by a fraction, the numerator of which is its gross receipts from sources in Illinois or otherwise attributable to Illinois marketplace and the denominator of which is its gross receipts everywhere during the taxable year. Previously, interest income was only included in the numerator if it was received in Illinois from Illinois customers.
Partnerships, S corporations, and trusts will be required, beginning with taxable years ending on or after December 31, 2008, to withhold income tax from each nonresident partner, shareholder, or beneficiary amounts equal to the nonresident's distributive share of business income that is apportionable to Illinois multiplied by the applicable rates of tax for that partner or shareholder. This amount must be withheld even if it is not actually distributed.
The bill amends the definition of a captive real estate investment trust to include privately held REITs, provided more than 50% of the voting power or value is owned or controlled by a single corporate entity that is subject to the provisions of Subchapter C of the IRC. REITs that are not a captive REIT, preparing to go public, a tax-exempt entity, or a listed Australian property trust would not be included in the new definition.
An amnesty program for taxpayers owing any franchise taxes or license fees will run from February 1, 2008, through March 15, 2008. Participants are only required to pay all taxes that would have been payable during the last four years. All interest and penalties will be abated.
A related story discusses sales and use tax changes made by S.B. 1544. (TAXDAY, 2007/08/20, S.5)
P.A. 95-233 (S.B. 1544 ), Laws 2007, effective as noted.

CCH (cch.taxgroup.com) reports:

For purposes of determining percentage depletion under Code Sec. 613A(c) for oil and gas produced from marginal properties, the IRS has released a table of the applicable percentages for marginal production that covers tax years beginning in calendar years 1991 through 2007. The applicable percentages are: 15 percent for calendar year 1991; 18 percent for calendar year 1992; 19 percent for calendar year 1993; 20 percent for calendar year 1994; 21 percent for calendar year 1995; 20 percent for calendar year 1996; 16 percent for calendar year 1997; 17 percent for calendar year 1998; 24 percent for calendar year 1999; 19 percent for calendar year 2000; and 15 percent for calendar years 2001 through 2007.
Notice 2007-65, 2007FED ¶46,591
Other References:
Code Sec. 613A
CCH Reference - 2007FED ¶23,988.044
CCH Reference - 2007FED ¶23,988.35
Tax Research Consultant
CCH Reference - TRC FARM: 15,216.05
 

CCH (cch.taxgroup.com) reports:

The IRS has issued the inflation adjustment factor for calendar year 2007. The inflation adjustment factor for use in determining the enhanced oil recovery credit under Code Sec. 43 is 1.4222. Because the reference price as determined under Code Sec. 45K(d)(2)(C) for 2006 ($59.68) exceeds $28 multiplied by the inflation adjustment factor for 2006 by $19.86, the enhanced oil recovery credit for qualified costs paid or incurred in 2007 is phased out completely. The GNP implicit price deflator to be used for calendar year 2007 is 116.036.
Notice 2007-64, 2007FED ¶46,590
Other References:
Code Sec. 43
CCH Reference - 2007FED ¶4387.07
CCH Reference - 2007FED ¶4387.30
Tax Research Consultant
CCH Reference - TRC BUSEXP: 54,302.05
CCH Reference - TRC BUSEXP: 54,554.15

CCH (cch.taxgroup.com) reports:

The IRS has updated its list of time-sensitive acts that may be postponed under Code Secs. 7508 and 7508A. Code Sec. 7508
allows for the postponement of specified acts for individuals serving in the U.S. armed forces or in support of the armed forces in a combat zone, or serving with respect to a contingency operation as defined in 10 U.S.C. 101(a)(3). Code Sec. 7508A allows for the postponement of specified acts for taxpayers affected by a presidentially declared disaster or a terrorist or military action.
The procedure supplements the list of postponed acts in Code Sec. 7508(a)(1) and Reg. §301.7508A-1(c)(1)(vii). It also applies to transferors who are not affected taxpayers but who are involved in a Code Sec. 1031 like-kind exchange transactions and entitled to relief under the provisions of this revenue procedure. Further, certain acts, such as filing Tax Court petitions in innocent spouse and other nondeficiency cases, and making certain distributions from, contributions to, recharacterizations of, and certain transactions involving retirement plans, have been added to this revenue procedure.
In order for taxpayers to be entitled to postponement of any act listed in this revenue procedure, generally, the IRS will publish a notice or issue a guidance providing relief with respect to a presidentially declared disaster, or a terroristic or military action. Rev. Proc. 2005-27, 2005-1 CB 1050, is superseded.
Rev. Proc. 2007-56, 2007FED ¶46,589
Rev. Proc. 2007-56, FINH ¶30,559
Rev. Proc. 2007-56, ETR ¶66,834
Other References:
Code Sec. 112
CCH Reference - 2007FED ¶7082.25
Code Sec. 1031
CCH Reference - 2007FED ¶29,620.80
Code Sec. 4101
CCH Reference - ETR ¶10,945.04
CCH Reference - ETR ¶10,945.18
CCH Reference - ETR ¶10,945.42
Code Sec. 4221
CCH Reference - ETR ¶15,525.20
CCH Reference - ETR ¶15,535.645
CCH Reference - ETR ¶15,585.40
Code Sec. 7508
CCH Reference - 2007FED ¶42,687.22
CCH Reference - FINH ¶22,545.20
CCH Reference - ETR ¶57,485.72
Code Sec. 7508A
CCH Reference - 2007FED ¶42,687C.22
CCH Reference -FINH ¶22,560.30
CCH Reference -ETR ¶57,495.50
Tax Research Consultant
CCH Reference - TRC FILEIND: 18,052.20
CCH Reference - TRC FILEBUS: 15,108
CCH Reference - TRC FILEBUS: 15,110
CCH Reference - TRC ESTGIFT: 51,056.10
CCH Reference - TRC TRC EXCISE: 6,056.25
CCH Reference - TRC EXCISE: 6,056.35
CCH Reference - TRC SALES: 36,102.30
CCH Reference - TRC EXPAT: 12,550
CCH Reference - TRC EXPAT: 12,554
CCH Reference - TRC LITIG: 6,960
CCH Reference - TRC LITIG: 6,214
CCH Reference - TRC IRS: 45,204
CCH Reference - TRC RETIRE: 66,208

Tax Analysts report:

Tax Analysts report:

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

West Virginia has updated its Streamlined Sales and Use Tax (SST) taxability matrix to reflect sales and use tax rate changes that took effect July 1, 2007, for sales of certain food and food ingredients intended for human consumption. Specifically, the updated matrix reflects that, effective July 1, 2007, the sales and use tax rate decreases from 5% to 4% for:
-- food sold without eating utensils provided by the seller whose primary North American Industry Classification System (NAICS) classification is Food Manufacturing in Sector 311, except Subsector 3118 (Bakeries and Tortilla Manufacturing);
-- food sold without eating utensils provided by the seller in an unheated state by weight or volume as a single item; and
-- bakery items sold without eating utensils provided by the seller, including bagels, bars, biscuits, bread, buns, cakes, cookies, croissants, Danish, donuts, muffins, pastries, pies, rolls, tarts, tortes, and tortillas.
West Virginia excludes the categories listed above from the definition of "prepared food." A 6% sales and use tax rate applies to sales and uses of "prepared food."
The revised taxability matrix is available on the West Virginia State Tax Department's Web site at http://www.state.wv.us/taxrev/sst/matrix0807.pdf. Details of the tax changes were previously reported. (TAXDAY, 2007/07/02, S.34; TAXDAY, 2007/05/31, S.33; TAXDAY, 2006/12/04, S.15)
Taxability Matrix, West Virginia State Tax Department, August 16, 2007.

CCH (cch.taxgroup.com) reports:

Net operating loss (NOL) carryforwards generally would be allowed for corporations involved in liquidations and reorganizations for Virginia corporate income tax purposes. Virginia law allows a NOL deduction to the extent that it is allowable in computing federal taxable income. Virginia law does not require a corporation to have business activity in Virginia to use a NOL. Similarly, it does not matter if corporations are required to use different apportionment factors because NOLs reduce federal taxable income before apportionment. Thus, to the extent that a taxpayer has NOLs carried forward as a result of an IRC §332 liquidation or an IRC §368(a) corporate reorganization and the NOLs are allowable for federal income tax purposes, then the NOLs would be allowable for Virginia corporate income tax purposes.
Ruling of Commissioner, P.D. 07-120, Virginia Department of Taxation, July 31, 2007, ¶204-644
Other References:
Explanations at ¶10-605
Explanations at ¶10-805
 

CCH (cch.taxgroup.com) reports:

A corporation's refund claim for the 1995 tax year did not qualify for the special exception to the general statute of limitations and was untimely. The special limitations period under Code Sec. 6511(d)(2)(A) did not apply because the corporation's 1995 overpayment resulted from the carryover to 1995 of an unused net capital loss from 1994 and was not caused or generated by the carryback of the net capital loss to a carryback year. Instead, the corporation's carryover of the 1994 loss to the succeeding tax year was caused by the net capital loss in 1994. Thus, the overpayment in 1995 was not attributable to a capital loss carryback.
Affirming a FedCl decision, 2006-2 USTC ¶50,436.
Electrolux Holdings, Inc., CA-FC, 2007-2 USTC ¶50,583
Other References:
Code Sec. 6511
CCH Reference - 2007FED ¶39,080.17
CCH Reference - 2007FED ¶39,080.2455
Code Sec. 7422
CCH Reference - 2007FED ¶41,688.378
CCH Reference - 2007FED ¶41,688.504
Tax Research Consultant
CCH Reference - TRC IRS: 36,104
 

State Headlines

Colorado --Corporate, Personal Income Taxes: DOR to Participate in Multistate Voluntary Compliance Program
The Colorado Department of Revenue has announced that it will participate in the Multistate Tax Commission's (MTC's) voluntary compliance program that offers corporate income and personal income tax taxpayers involved with "abusive tax shelters" an opportunity to report their activity in exchange for a state benefit, usually full abatement of penalties. The program runs from May 1, 2007, to October 1, 2007.
Taxpayers who filed income tax returns for periods beginning before January 1, 2006, using abusive tax shelters are eligible to participate. Taxpayers who have not filed tax returns because of abusive tax shelters are also eligible. Taxpayers who wish to participate in this program must complete a separate MTC-VCP-1 application form for each state and send an amended or original tax return, payment, or other required documents. The MTC must receive all documents by October 1, 2007.
For more information, forms and procedures, taxpayers should visit the Multistate Tax Shelter Voluntary Compliance Program Web site at http://www.mtc.gov.
Release, Colorado Department of Revenue, August 14, 2007.

CCH (cch.taxgroup.com) reports:

In a case arising from a "Son of BOSS" shelter transaction, the Tax Court held that various determinations with regard to property transferred to a partnership, including the characterization of the transfer as a contribution or loan, whether the property involved should be aggregated with other property received from the same partner, the partnership's basis in the property, and the partner's basis in contributed property were related to partnership items. Therefore, individual partners could not proceed with a suit to determine the cost basis of a purchased Euro option that was transferred to the partnership in a partner-level proceeding.
The IRS argued that allowing consideration of the partners' issues with regard to the contributed property in isolation in the Tax Court was inappropriate in light of the part the transferred option played in the overall scheme. The Tax Court agreed that the item at issue was a partnership item under Reg. §1.6321(a)(3)-1(a)(4), and that it, therefore, did not have jurisdiction over the taxpayers' claim.
A. Nussdorf, 129 TC No. 5, Dec. 57,054
Other References:
Code Sec. 6231
CCH Reference -2007FED ¶37,569.12
CCH Reference - 2007FED ¶37,849.40
CCH Reference - 2007FED ¶37,849.45
Tax Research Consultant
CCH Reference - TRC PART: 60,056
 

CCH (cch.taxgroup.com) reports:

For purposes of determining the net increase or decrease in a life insurance company's reserves, where some or all of the reserves for a variable contract are accounted for as part of the company's separate account reserves, the amount of the end-of-year reserves is determined under the general rules for determining tax reserves for any contract and the required interest on the contract's reserve is calculated by multiplying the mean of the contract's beginning-of-year and end-of-year reserves by the applicable federal interest rate for the contract. This is the case even if the amount of the end-of-year reserve is different from the amount of the end-of-year net surrender value for the contract or the amount taken into account in determining the end-of-year statutory reserve for the contract.
The calculation method is the same even if a portion of the required interest is not attributable to policy interest. If , for instance, the contract includes a minimum guaranteed death benefit, the required interest attributable to that benefit is allocated to the insurer's general account reserves.
Rev. Rul. 2007-54, 2007FED ¶46,588
Other References:
Code Sec. 807
CCH Reference - 2007FED ¶25,821.25
Code Sec. 812
CCH Reference - 2007FED ¶25,913.35

CCH (cch.taxgroup.com) reports:

The difference between the adjusted alternative minimum tax (AMT) basis and the regular tax basis of stock received through incentive stock options (ISOs) was not a tax adjustment that was taken into account in the calculation of a married couple's alternative tax net operating loss (ATNOL) in the year the stock was sold. Furthermore, the couple's sale of stock received through the exercise of ISOs was a sale of a capital asset and, thus, did not create an ATNOL due to the restrictions of Code Sec. 172(d).
Although a taxpayer is generally not required to recognize income upon the grant or exercise of an ISO, in calculating AMT the spread between the exercise price and the fair market value of the stock on the date of exercise is treated as an item of adjustment and is included in alternative minimum taxable income (AMTI). Thus, the couple had a gain that must be included in AMTI in the year of exercise.
The taxpayers argued that the difference between the adjusted AMT basis and the regular tax basis of the stock sold was an adjustment that created an ATNOL that may be carried back to reduce their AMTI in an earlier year. Although basis of stock may be recovered under both the regular and the AMT systems, when that stock is sold at a loss, the statutory limitations on capital losses that are equally applicable to the AMT and the regular tax system must be taken into consideration. Because the applicable statutes do not provide for an adjustment to ATNOL for the difference between the adjusted AMT basis and the regular tax basis, this adjustment was not taken into account in the calculation of the ATNOL in the year the stock was sold.
E. Marcus, 129 TC No. 4, Dec. 57,053
Other References:
Code Sec. 56
CCH Reference - 2007FED ¶5210.57
CCH Reference - 2007FED ¶5210.63
Code Sec. 172
CCH Reference - 2007FED ¶12,014.4015
Tax Research Consultant
CCH Reference - TRC BUSEXP: 45,106.05
CCH Reference - TRC COMPEN: 24,054
CCH Reference - TRC FILEIND: 30,156.10

State Headlines

All States --Sales and Use Tax: SST Sourcing Group Reports; Nevada to Petition for Full Membership
The Executive Committee of the Streamlined Sales Tax (SST) Governing Board was told, during a conference call on August 15, 2007, that Nevada is about to petition for full membership on the Board. The Committee also received an update on the work of the sourcing task force, which was appointed at the Board's June meeting in Detroit. (TAXDAY, 2007/06/26, S.1) The Committee also discussed holding a Board meeting in Orlando, Florida, the week of December 10, 2007, but no final decision was reached.

CCH (cch.taxgroup.com) reports:

The IRS has issued final regulations that treat qualified subchapter S subsidiaries (QSubs) and single-owner eligible entities, currently considered disregarded entities, as separate entities for the purpose of federal employment tax and certain excise taxes. These regulations are effective August 16, 2007, and apply to wages paid on or after January 1, 2009, or, with respect to excise taxes, to liabilities imposed and actions first required or permitted in periods beginning on or after January 1, 2008.
Employment Taxes
The final regulations clarify that a disregarded entity is treated as a separate entity and as a corporation for purposes of federal employment tax, but continues to be disregarded for other federal tax purposes. The owner of a disregarded entity treated as a sole proprietorship is subject to self-employment taxes under the Self-Employment Contributions Act (SECA). Furthermore, the individual owner of a disregarded entity continues to be treated as self-employed for purposes of SECA taxes, and not as an employee of a disregarded entity for employment tax purposes. The employment tax provisions of the final regulations become effective January 1, 2009, so as to give employers sufficient time to modify their systems to comply with the new regulations. Disregarded entities and the owners of such entities may continue to use procedures permitted by Notice 99-6 for wages paid prior to January 1, 2009.
Excise Taxes
No comments were received and no public hearings were requested regarding the excise tax provisions; therefore, those provisions were adopted as proposed. Thus, an entity that is disregarded for other federal tax purposes is required to pay and report excise taxes, required and allowed to register with the IRS, and allowed to claim any credits (other than income tax credits), refunds and payments. Since a disregarded entity does not file an income tax return, the credit under Code Sec. 34 for certain uses of gasoline and special fuels is claimed on the owner's tax income tax return. Appropriate identification of the single-owner entity and its taxpayer identification number (TIN) is required. The excise tax provisions apply to periods beginning on or after January 1, 2008.
Notice 99-6, 1999-1 CB 321, is obsoleted as of January 1, 2009.
T.D. 9356, 2007FED ¶47,063
Other References:
Code Sec. 34
CCH Reference - 2007FED ¶4150A
Code Sec. 856
CCH Reference - 2007FED ¶26,512.305
Code Sec. 1361
CCH Reference - 2007FED ¶32,025D
CCH Reference - 2007FED ¶32,025H
Code Sec. 6109
CCH Reference - 2007FED ¶39,965.038
CCH Reference - 2007FED ¶39,965.135
Code Sec. 7701
CCH Reference - 2007FED ¶43,082
Tax Research Consultant
CCH Reference - TRC SCORP: 352.05
CCH Reference - TRC BUSEXP: 54,800
CCH Reference - TRC PAYROLL: 3,000

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

A medical education foundation was entitled to a refund of withheld FICA taxes because amended regulations that disqualified medical residents from the student exclusion from FICA taxation are invalid. Interpretive regulations are reasonable only if they harmonize with the plain language of the statute or, if the statute is ambiguous, they are based on a permissible construction of the statute. However, according to the court, there is nothing ambiguous about the statutory language of the student exclusion, which excludes several categories of "service" from "employment" for FICA purposes, including service performed in the employ of a school, college or university when such service is performed by a student who is enrolled and regularly attending classes at such school, college or university. Therefore, the addition of regulatory language that limits the exclusion to students who work only part-time and perform services for organizations that comply with the "primary function" test arbitrarily changed the ordinary meaning of the statute.
Related case at 2003-2 USTC ¶50,615.
Mayo Foundation for Medical Education, DC Minn., 2007-2 USTC ¶50,577
Other References:
Code Sec. 3401
CCH Reference - 2007FED ¶33,533.23
CCH Reference - 2007FED ¶33,538.5056
CCH Reference - 2007FED ¶33,538.558
Code Sec. 3121
Tax Research Consultant
CCH Reference - TRC PAYROLL: 3,122
 

State Headlines

Illinois --Sales and Use Tax: Local Cable and Video Service Provider Fee Authorized
An Illinois local unit of government may adopt an ordinance imposing a service provider fee on a holder of a state-issued authorization to provide cable service or video service within the boundaries of that local unit of government. The fee would be 5% of gross revenues or the same fee paid to the local unit of government by any incumbent cable operator providing cable service.

CCH (cch.taxgroup.com) reports:

The Treasury Department and the IRS have designated the first two "transactions of interest," published under recently released Reg. §1.6011-4(b)(6), concerning reportable transactions (TAXDAY, 2007/08/01, I.3). The Treasury and the IRS believe these transactions of interest have the potential for abuse, but lack sufficient information to determine whether they should be identified as tax avoidance transactions. Persons involved with such transactions of interest have certain disclosure and other responsibilities, and may be subject to penalties for failing to comply with such obligations. In addition, participants in such transactions may be subject to other penalties, including the accuracy-related penalty under Code Secs. 6662 or 6662A.
Contributions of Successor Member Interest Transactions (Notice 2007-72)
One transaction of interest involves taxpayers who purchase a remainder interest or similar successor member interest directly or indirectly in real property and then transfer such interest to a tax-exempt organization, claiming a charitable contribution deduction significantly higher than the amount paid for the interest. The Treasury and IRS are concerned that taxpayers may be utilizing the contribution of such successor member interests to generate an excessive deduction
Toggling Grantor Trust Transactions (Notice 2007-73)
Another transaction of interest involves certain transactions in which trust grantors attempt to avoid recognizing gain or claiming a tax loss greater than the actual economic loss by purportedly terminating ("toggling off") and then reestablishing ("toggling on") the grantor status of the trust. These terminations and reestablishments usually occur within a brief period of time.
IR-2007-143, 2007FED ¶46,585
Notice 2007-72, 2007FED ¶46,586
Notice 2007-73, 2007FED ¶46,587
Other References:
Code Sec. 6111
CCH Reference - 2007FED ¶37,002.021
Code Sec. 6112
CCH Reference - 2007FED ¶37,022.023
Tax Research Consultant
CCH Reference - TRC FILEBUS: 3,052.20
CCH Reference - TRC FILEBUS: 3,052.25
CCH Reference - TRC FILEBUS: 9,410.05
CCH Reference - TRC FILEBUS: 9,452
CCH Reference - TRC FILEBUS: 9,454
CCH Reference - TRC PENALTY: 3,252
CCH Reference - TRC PENALTY: 3,254
CCH Reference - TRC PENALTY: 3,254.05

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

Final regulations relating to the child and dependent care tax credit (Code Sec. 21) have been adopted. These regulations, which reflect law changes since 1984, apply to tax years ending after August 14, 2007. The final regulations adopt, with changes, proposed regulations that were publishedon May 24, 2006 (NPRM REG-139059-02).
The child care credit is a nonrefundable credit for a percentage of expenses for household and dependent care services necessary for gainful employment. The credit is available to a taxpayer with one or more qualifying individuals. A qualifying individual is the taxpayer's dependent who has not reached age 13 or a taxpayer's dependent or spouse who is physically or mentally incapable of self-care and who has the same principal place of abode as the taxpayer for more than one-half of the tax year.
The applicable percentage ranges from 20 percent to 35 percent, depending on the taxpayer's adjusted gross income. The amount of employment-related expenses that may be taken into account in determining the credit in any tax year is limited to $3,000 if there is one qualifying individual and $6,000 if there are two or more qualifying individuals.
Summer School, Day Camp
The final regulations clarify that the costs of summer school and tutoring programs are not qualifying employment-related expenses because they are educational in nature. A further clarification provides that the requirement that a dependent care center must comply with applicable state and local laws also applies to a day camp that meets the definition of a dependent care center in Code Sec. 21(b)(2)(D) by providing care for more than six persons in return for a fee. The final regulations retain the proposed rules that provided that the full amount paid for a day camp or similar program may constitute a qualifying employment-related expense, even though the camp specializes in a particular activity, such as soccer or computers. Similarly, the full amount paid for an education day camp that focuses on reading, math, writing, and study skills may be a qualifying expense. No portion of the cost of an overnight camp, however, is an employment-related expense.
Care Centers for Sick Children
A commentator suggested that the cost of sending a child to a sick care center should be treated as a qualifying expense. The IRS declined this suggestion. Whether the cost of sending a child who is too sick to be cared for by a regular day care center or other primary care provider is a qualifying child care expense or an expense for which a medical deduction may be allowed is a factual matter that must be determined on a case-by-case basis.
Absence from Work
Generally, qualifying expenses must be for periods during which a taxpayer is gainfully employed or is in active search of gainful employment. A taxpayer must allocate the cost of care on a daily basis if expenses are paid during a period in which a taxpayer is not employed or in active search of employment. The proposed regulations provided an exception to the allocation requirement for a short, temporary absence from work for a taxpayer paying dependent care on a weekly, monthly , or annual basis. The final regulations eliminate the requirement that the temporary absence exception only applies to taxpayers who pay for care on a weekly, monthly, or annual basis.
In addition, the new rules clarify that only those costs that a taxpayer is required to pay during the absence (e.g., while ill or on vacation) qualify for the exception. Examples are added to illustrate these rules. A safe harbor that treats an absence of no more than two consecutive calendar weeks as a short, temporary absence is also included.
Suggestions that the cost of care should be treated as an employment-related expense for any period that a taxpayer is on short- or long-term disability leave under the Family Medical Leave Act, paid medical leave, or paid maternity leave were rejected as inconsistent with the requirement that qualifying expenses must be paid to enable a taxpayer to be gainfully employed.
Shift Workers
The final regulations clarify that costs of overnight care and day care for parents who work at night and sleep during the day may be qualifying expenses.
Students at On-Line Institutions
In the case of married taxpayers, qualifying expenses are limited to the earned income of the lower earning spouse. A nonworking spouse who is a full-time student at an educational institution described in Code Sec. 170(b)(1)(A) for at least five months during the year is deemed to have earned $250 for each month of school attendance ($500 per month if there are two or more qualifying children).
The final regulations do not adopt a suggestion that a full-time student at an on-line degree program qualifies for the imputed income amount. The statute requires that the educational organization have students in attendance at the place where its educational activities are regularly carried on. However, an individual who takes online courses at a school that has traditional classroom instruction as well as on-line course may be a student for purposes of the deemed earned income rule.
Kindergarten Expenses
A commentator suggested that parents who send a child to a full-time private kindergarten because the public system only offers half-day kindergarten should be allowed to treat a portion of the expenses as qualifying expense. The IRS declined this suggestion on the grounds that kindergarten is considered a nonqualifying educational cost regardless of whether a child attends part-time or full-time. Similarly, qualifying expenses do not include the cost of sending a child to a private school even though the taxpayer lives overseas in a place where public education is unavailable.
Live-In Caregivers
The final regulations retain the rule that the additional cost of providing room and board for a caregiver over usual household expenses may be an employment-related expense. The final regulations have been clarified to provide that an increase in the cost of utilities attributable to providing room and board to a caregiver may constitute a qualifying expense.
Law Changes
The final regulations reflect recent statutory changes that were not reflected in the proposed regulations. They provide that the special dependency rule of Code Sec. 21(e)(5) applies to children of parents who live apart at all times during the last six months of the calendar year, as well as to the children of separated or divorced parents. Changes made to the definitions of qualifying individual and custodial parent by the Gulf Opportunity Zone Act of 2005 (P.L. 109-135) are also reflected. Finally, the final regulations clarify that, for tax years beginning after December 31, 2004, costs for care outside the taxpayer's household of a qualifying individual who is a dependent or spouse incapable of self-care who regularly spends at least eight hours each day in the taxpayer's household may continue to qualify for the credit.
Rev. Rul. 76-278, 1976-2 CB 84, and Rev. Rul. 76-288, 1976-2 CB 83, are obsoleted.
T.D. 9354, 2007FED ¶47,062
Other References:
Code Sec. 21
CCH Reference - 2007FED ¶3390
CCH Reference - 2007FED ¶3503D
CCH Reference - 2007FED ¶3504D
CCH Reference - 2007FED ¶3505D
CCH Reference - 2007FED ¶3506D
Tax Research Consultant
CCH Reference - TRC INDIV: 57,050

State Headlines

Ohio --Sales and Use Tax: Ohio Represented on SST Task Force Formed to Tackle Sourcing Issue
Ohio Rep. Bob Gibbs, R-Lakeville, is representing the state on a national task force assembled by the Streamlined Sales Tax Governing Board to analyze the effect of a shift from origin-based sourcing to destination-based sourcing, and to develop solutions for businesses that would be impacted by such a change.
The Streamlined Sales and Use Tax (SST) Agreement requires that by January 1, 2008, retailers in member states collect sales tax based on the rate at the sale's destination rather than the rate at the sale's origin. However, Ohio's budget legislation exempts retailers with less than $500,000 in annual delivery sales in Ohio from destination-based sourcing beginning January 1, 2008 (see TAXDAY, 2007/07/03, S.31). In response to this legislation, the Board assembled the task force to develop a solution to the sourcing issue before the Board's meeting next month.
Concerns over destination-based sourcing are largely voiced by small Ohio businesses that engage in delivery sales because local tax rates vary and businesses with over $30 million in annual delivery sales already must source by destination. In addition, Ohio is the largest state participating in the Agreement, and the task force's conclusions may determine whether Ohio may continue to participate. Gibbs warns that, "if we do not have a satisfactory solution by October 1, Ohio will no longer be an active participant."
News Release, Ohio Department of Taxation, August 13 , 2007.

CCH (cch.taxgroup.com) reports:

Final regulations for partnerships and LLCs that elect to roll over gain from qualified small business (QS stock have been adopted. The regulations apply to sales of QSB stock on or after August 14, 2007. Proposed regulations were published in July 2004 and corrected in August 2004 (NPRM REG-150562-03).
A number of provisions in the proposed regulations have been changed or clarified in the final rules, based primarily on practitioner comments.
Replacement Requirement
The final regulations retain the general rule that an investment in a partnership that holds QSB stock is not treated as an investment in QSB stock. However, the final regulations provide that a taxpayer (other than a C corporation) that sells QSB stock and elects Code Sec. 1045 treatment may satisfy the replacement QSB stock requirement with QSB stock timely purchased by a partnership in which the taxpayer is a partner on the date the QSB stock is purchased (a "purchasing partnership").
The final regulations also provide that an eligible partner of a partnership that sells QSB stock may satisfy the replacement requirement with QSB stock purchased by a purchasing partnership.
Basis Adjustments
If a taxpayer (including an eligible partner) sells QSB stock and treats a purchasing partnership's QSB stock purchase as the replacement QSB stock, the final regulations contain rules for determining the partner's basis in the replacement stock and the basis in the partner's interest in the purchasing partnership.
Gain Recognition, Nonrecognition Limitation
The final regulations contain rules for calculating a partner's distributive share of partnership gain that is not recognized as a result of the election, which will impact how much gain a partner can defer under Code Sec. 1045. Under the final regulations a partner will also be required to recognize gain when replacement QSB stock is distributed to another partner, which reduces the former's share of the replacement QSB stock held by the partnership. The final regulations modify the formula for computing the gain a partner is eligible to defer by multiplying the partner's realized gain by the smallest percentage interest in partnership capital from the time the QSB stock is acquired until it is sold. The proposed regulations looked instead to the partner's smallest percentage interest in partnership income, gain, or loss with respect to the QSB stock sold.
Opting Out
The proposed regulations provided that, if a partnership made a rollover election, all eligible partners of the partnership were required to defer their distributive share of gain. The final regulations allow a partner to opt out of the election by notifying the partnership in writing; that action will not effect the validity of the election for the partnership or the other partners.
CCH Comment. The final regulations do not specify a deadline for notifying the partnership that the partner is opting out of the deferral election. The IRS and Treasury have stated that a partnership is responsible for obtaining the necessary information to report its gain properly, and that to help accomplish this the partnership agreement should require that partners supply the necessary notice in a timely manner.
Tiered Partnership Rules
The proposed regulations contained special rules for tiered partnerships, in which an upper tier partnership's ownership of a lower tiered partnership was disregarded so that each partner of the upper tier partnership was treated as owning a direct interest in the lower tier partnership. While the final regulations retain this rule, they clarify that this does not preclude a partner in an upper tier partnership from treating an interest in QSB stock purchased by either partnership as replacement QSB stock.
Election Procedures
The final regulations clarify that a partnership making the QSB stock rollover election must attach a statement to its return for the tax year in which it purchases replacement QSB stock setting forth the appropriate basis adjustment with respect to the stock, the replacement QSB stock to which the adjustment has been made, together with its date of acquisition, and each partner's distributive share of deferred gain. While the proposed regulations stated that to make the election the partnership had to also follow the procedures set forth in Rev. Proc. 98-48, 1998-2 CB 367, the final regulations modify this to provide that the electing partnership or partner must only make the election in accordance with applicable forms and instructions, which are anticipated to be revised to reflect the final regulations.
T.D. 9353, 2007FED ¶47,061
Other References:
Code Sec. 1045
CCH Reference - 2007FED ¶29,852
Tax Research Consultant
CCH Reference - TRC SALES: 6,284
CCH Reference - TRC SALES: 15,308
CCH Reference - TRC SALES: 27,450
CCH Reference - TRC SALES: 33,254

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

In a New York bank franchise tax case, the Tax Appeals Tribunal affirmed an administrative law judge (ALJ) determination that it was improper for the Division of Taxation to make a discretionary adjustment to a bank holding company's combined income by including the income of an investment company subsidiary, which had made a grandfather election to remain subject to the Article 9-A corporate franchise tax as a general business corporation.
The discretionary adjustment, if permitted, would effectively nullify the subsidiary's valid election and would also create a de facto combination, which was strictly prohibited under the Tax Law with respect to grandfathered Article 9-A companies. The Division also failed to establish that the holding company's transactions lacked a business purpose or lacked economic substance. Furthermore, the Division's argument that the subsidiary was set up solely for tax avoidance was rejected.
Premier National Bancorp, Inc., New York Division of Tax Appeals, Tax Appeals Tribunal, DTA No. 819746, August 2, 2007, ¶405-807
Other References:
Explanations at ¶14-017

CCH (cch.taxgroup.com) reports:

The IRS has formally modified Notice 2003-81 to clarify its position that foreign currency options are not foreign currency contracts. In the "Facts" portion of that Notice, one sentence could readily be interpretated as concluding the opposite --and erroneous --legal position.
Notice 2003-81 constituted guidance barring transactions in which taxpayers dispose of a pair of offsetting options, claiming a loss on one of the options but contending that they do not have to recognize the corresponding gain on the other. The result is a large tax benefit (the claimed tax loss on one option) without recognition of the matching economic gain on the other option.
These transactions are known as "listed transactions" and the sentence at issue should have clearly stated that to the taxpayers involved. The IRS does not believe that foreign currency options are foreign currency contracts and its stated intention is to challenge any such characterization by taxpayers. However, Code Sec. 7805(b) relief will be granted to any taxpayers that adopted an accounting method to treat foreign currency option as foreign currency contracts in reasonable reliance on Notice 2003-81. Such relief will not be granted relative to any options transactions identifiable as listed transactions.
Notice 2007-71, 2007FED ¶46,582
Other References:
Code Sec. 1256
CCH Reference - 2007FED ¶31,107.11
CCH Reference - 2007FED ¶35,148.78
Tax Research Consultant
CCH Reference - TRC FILEBUS: 3,052.25
CCH Reference - TRC INTL: 6,210
CCH Reference - TRC SALES: 48,100

CCH (cch.taxgroup.com) reports:

The IRS has published the total amounts of unused housing credit carryovers allocated from the national pool to qualified states under Code Sec. 42(h)(3)(D) for calendar year 2007. Among states receiving an allocation, the allocations range from a high of $851,151 for California to a low of $12,023 for Wyoming.
Rev. Proc. 2007-55, 2007FED ¶56,580
Other References:
Code Sec. 42
CCH Reference - 2007FED ¶4385.85
Tax Research Consultant
CCH Reference - TRC BUSEXP: 54,220.10
 

CCH (cch.taxgroup.com) reports:

The IRS has provided temporary relief, until the first day of the first plan year that begins after June 30, 2008, for certain pension plans under which the definition of normal retirement age may be required to be changed to comply with the regulations that were recently issued under Code Sec. 401(a). Potential violations of the vesting and accrued benefit requirements for defined benefit plans under Code Sec. 411 that may arise from a definition of normal retirement age based on a minimum period of service are also identified. Comments are requested from sponsors of governmental plans as defined in Code Sec. 414(d) and other plans not subject to the requirements of Code Sec. 411 on whether such a plan may define normal retirement age based on years of service.
On May 22, 2007, final regulations on distributions from a pension plan upon attainment of normal retirement age were published (T.D. 9325, TAXDAY, 2007/05/22, I.1). The 2007 regulations modified Reg. §1.401(a)-1, which generally requires a pension plan to be maintained primarily to provide systematically for the payment of definitely determinable benefits after retirement, by adding in part new paragraphs (b)(2), (3) and (4).
Some plan sponsors expressed concern that, although they believe they will be able to demonstrate that their plan's definition of normal retirement age of less than age 55 satisfies the requirements of the 2007 regulations, until they receive a determination to that effect from the IRS, the presumption under the regulations that the plan does not satisfy those requirements creates uncertainty.
Relief Provided
Two forms of relief are provided and are available to plans that meet the eligibility requirements and that might otherwise be required to be amended to raise the plan's normal retirement age effective before the first day of the first plan year beginning after June 30, 2008, in order to satisfy the 2007 regulations. The relief does not apply to governmental plans, but it does apply to a plan maintained pursuant to one or more collective bargaining agreements that have been ratified and are in effect on May 22, 2007, if the first plan year beginning after the last of the agreements terminates (determined without regard to any extension thereof) begins before July 1, 2008.
Application Procedures
An application for a letter ruling as to whether a plan's normal retirement age reasonably represents the typical retirement age for the industry in which the covered workforce is employed is to be made in accordance with the procedures governing letter rulings requests in Rev. Proc. 2007-4, 2007-1 I.R.B. 118. The request must include the user fee for a letter ruling under section 6.01(10) of Rev. Proc. 2007-8, 2007-1 I.R.B. 230.
Rev. Proc. 2007-4, 2007-1 I.R.B. 118 and Notice 2007-3, I.R.B. 2007-2 are modified.
Request for Comments
Sponsors of governmental plans and other plans not subject to the requirements of Code Sec. 411 are asked to submit comments on whether normal retirement age under such a plan may be based on years of service. Comments are requested on whether and how a pension plan with a normal retirement age conditioned on the completion of a stated number of years of service satisfies the requirement in Reg. §1.401(a)-1(b)(1)(i) that a pension plan be maintained primarily to provide for the payment of definitely determinable benefits after retirement or attainment of normal retirement age and how such a plan satisfies the pre-ERISA vesting rules. Comments should be submitted by Nov. 25, 2007.
Notice 2007-69, 2007FED ¶46,581
Other References:
Code Sec. 401
CCH Reference - 2007FED ¶17,507.041
CCH Reference - 2007FED ¶17,507.042
CCH Reference - 2007FED ¶17,507.2531
CCH Reference - 2007FED ¶17,929.024
CCH Reference - 2007FED ¶17,929.06
Code Sec. 411
CCH Reference - 2007FED ¶19,076.96
Code Sec. 414
CCH Reference - 2007FED ¶19,156D.021
CCH Reference - 2007FED ¶19,156D.28
Tax Research Consultant
CCH Reference - TRC EXEMPT: 12,054
CCH Reference - TRC EXEMPT: 12,102
CCH Reference - TRC EXEMPT: 21,110
CCH Reference - TRC EXEMPT: 21,162
CCH Reference - TRC EXEMPT: 33,150
CCH Reference - TRC EXEMPT: 33,200
CCH Reference - TRC INDIV: 51,366.05
CCH Reference - TRC IRS: 12,230.10
CCH Reference - TRC IRS: 12,230.15
CCH Reference - TRC IRS: 12,230.20
CCH Reference - TRC IRS: 12,230.40
CCH Reference - TRC IRS: 12,304
CCH Reference - TRC RETIRE: 42,454
CCH Reference - TRC RETIRE: 51,050
CCH Reference - TRC RETIRE: 51,052.05
CCH Reference - TRC RETIRE: 51,052.20
CCH Reference - TRC RETIRE: 51,054
CCH Reference - TRC RETIRE: 51,100
CCH Reference - TRC RETIRE: 69,352

Tax Analysts report:

Tax Analysts report:

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

An Oregon property tax special assessment program is established for land subject to conservation easements. Land that is currently subject to farm use or forest use special assessment may be transferred to a conservation special assessment without paying additional tax. A $250 application fee is required for the conservation easement special assessment. Whether land subject to a conservation easement qualifies for special assessment is determined as of January 1 of the assessment year. If the land becomes disqualified prior to July 1 of the same assessment year, the land is then valued at its "real market value" as defined by law and must be assessed at its assessed value as provided by law.
Ch. 809 (S.B. 514), Laws 2007, effective July 1, 2008.

CCH (cch.taxgroup.com) reports:

Legislation to give member states of the Streamlined Sales and Use Tax (SST) Agreement collection authority over remote sellers has been introduced in the U.S. House of Representatives. The Sales Tax Fairness and Simplification Act (H.R. 3396) was introduced by Rep. William Delahunt, D-Mass., for himself, and for Reps. Spencer Bachus, R-Ala., and Ray LaHood, R-Ill. It is identical to legislation pending in the U.S. Senate, which was introduced by Sen. Mike Enzi, R-Wyo., except that the House bill does not contain a provision authorizing any federally recognized Indian tribe that imposes a sales tax to petition to become a member "state" under the Agreement and receive collection authority. (TAXDAY, 2007/05/24, S.2) H.R. 3396 has been referred to the House Judiciary Committee.
H.R. 3396, as introduced in the U.S. House of Representatives on August 3, 2007.

CCH (cch.taxgroup.com) reports:

The Code Sec. 403(b) regulations (T.D. 9340, TAXDAY, 2007/07/23, I.1) aim to diminish the extent to which tax-sheltered annuities differ from other salary-reduction arrangements, such as 401(k)s
and 457s, an IRS official indicated on August 9. Robert Architect of the IRS's Tax Exempt and Government Entities Division discussed the new regulations on an ALI-ABA Webcast that also featured David Raish of Ropes & Gray LLP and Louis Mazawey of the Groom Law Group, Chartered.
The regulations spell out a number of requirements for the plan, Architect said: the plan must be in writing; both the form and the operation of the written plan must comply with the terms and conditions for eligibility, limitations and benefits; and the plan must contain particular language on direct rollovers, nontransferability, minimum distributions and incidental benefits. The plan can be more than one document. Architect added that the IRS is drafting a model plan, which he described as a "simple plan." He expects the model plan to be issued in the next two months.
The IRS and the Department of Labor (in DOL Field Advice Bulletin 2007-02) clarified that the written plan requirement would not automatically subject the plan to ERISA. However, Architect said that certain optional features of a 403(b)
plan could subject a plan to ERISA.
For the first time, the regulations define what a controlled group is for tax-exempt organizations, Architect stated, indicating that governments and steeple churches are excluded from these rules. The rules are based on an 80-percent director/trustee common control test. The rules allow permissive aggregation for tax-exempts with a common exempt purpose. Architect said that there is some "wiggle room" to apply the rules. Surprisingly, he noted, the IRS received few comments on this section of the regulations.
The regulations are not effective until tax years beginning after December 31, 2008. Taxpayers can choose to rely on the regulations in their entirety. There are delayed effective dates for collectively bargained plans, church plans that need action by a church convention and governmental plans that need legislative action, as well as for removal of certain groups under the universal availability rules.
The regulations allow post-severance elective deferrals of regular, sick and vacation pay. The regulations also allow nonelective employer contributions for five tax years after employment, plus the end of the year that employment ceases. Nonelective contributions are subject to the nondiscrimination rules under Reg. §1.401(a)(4) that apply to former employees who were highly compensated employees. The nonelective contributions must stop upon the employee's death, Architect pointed out. He noted that Social Security taxes apply to elective deferrals but not to nonelective deferrals, so it was important to distinguish them.
While elective contributions are subject to a simple nondiscrimination test of universal availability, nonelective contributions are subject to more a stringent test under Code Secs. 401(a)(4) and 401(m)
similar to the one for qualified plans. These rules do not apply to a governmental plan.
A Code Sec. 403(b)(9) account maintained by a church must be governed by a plan that identifies it as a retirement income account. An exclusive benefit rule requires that account assets be maintained for participants. If the account is part of a trust arrangement, Architect said that a new rule grants the trust tax-exempt status. This was an unclear area, so the new rule should be helpful, he said.
By Brant Goldwyn, CCH News Staff
 

CCH (cch.taxgroup.com) reports:

Transitional relief under Notice 2006-89, I.R.B. 2006-43, 772, allowing certain Indian tribal government retirement plans (ITG plan) to qualify as governmental plans under Code Sec. 414(d), is extended from September 30, 2007 until six months after the IRS issues guidance on the issue.
The Pension Protection Act of 2006 (P.L. 109-280) amended Code Sec. 414(d) to allow an ITG plan to qualify for certain exemption purposes if substantially all of the services performed by all of the plan participants are essential government functions that are not also commercial activities. Under Notice 2006-89, an ITG plan could qualify as a government plan under Code Sec. 414(d) by following a reasonable and good faith compliance standard. The notice also provided special rules for "mixed" ITG plans, which are plans that provide benefits to employees substantially all of whose work is in essential governmental functions that are not commercial activities and to employees who perform commercial activities. In addition, certain plan amendments may prevent an ITG plan from utilizing the extended relief. Notice 2006-89 is modified.
Notice 2007-67, 2007FED ¶46,579
Other References:
Code Sec. 414
CCH Reference - 2007FED ¶19,156D.021
CCH Reference - 2007FED ¶19,156D.28
Tax Research Consultant
CCH Reference - TRC RETIRE: 69,352
 

CCH (cch.taxgroup.com) reports:

President Bush said that he is open to cutting corporate tax rates if the current tax structure puts the United States at a competitive disadvantage, but he stressed that any proposal must be revenue neutral. At an August 9 news conference, the president said that the underlying issue is simplification of the tax code. "My view all along has been the more simple the Code, the better; whether it be in the individual income tax side or the corporate tax side."
The president acknowledged that it would be politically difficult to end certain tax preferences in exchange for lowering the corporate rate. "I would readily concede to you this is a difficult issue, because the reason there is tax preferences in the first place are there are powerful interests that have worked to get the preference in the code," Bush stated.
The administration's review of the corporate tax rate, which has been tasked to the Treasury Department, is at the "very early stages of discussion," according to the president.
When asked specifically about the tax preference for hedge and private equity funds, Bush said that he does not support any changes in the tax treatment of carried interest. The administration is "very, very hesitant about trying to target one aspect of limited partnerships" because it could have a "spillover" effect on other limited partnerships, such as small businesses.
The president threw cold water on raising the federal tax on gasoline as a means of paying for the aging transportation infrastructure in the United States, particularly the approximately 500 bridges that have been rated structurally deficient. Bush said that Congress should find the funding for bridge repairs by changing its spending priorities. Congress should "revisit the process by which they spend gasoline money in the first place," he asserted.
In an opening statement, Bush credited the administration's tax-cut policies for fueling economic growth and job creation. Since the tax cuts took full effect in 2003, 8.3 million new jobs have been created and the U.S. economy has expanded by $1.3 trillion since 2001, he noted. Critics of administration tax policy counter that the federal deficit has ballooned under the president's watch, and will skyrocket if tax cuts due to expire in 2010 are extended.
By Paula Cruickshank, CCH News Staff
 

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

Agreements between Seattle City Light (SCL) and suburban cities under which SCL paid a percentage of revenues received from the cities' power customers in exchange for the cities' promise not to establish their own municipal electric utilities did not violate state law prohibiting certain franchise fees, the Washington Supreme Court has held.
Washington municipalities may impose a 6% utility tax for the privilege of conducting a power distribution business. The city of Seattle imposes such a tax on SCL's gross revenues, including revenues received from its suburban utility customers. The franchise agreements at issue provided that SCL would pay the cities 6% of its revenues derived from retail power sales to city residents in consideration for the cities' agreement not to exercise their authority to establish a competing municipal electric utility for the duration of the franchise.
Ratepayers contended that the payment provision of the agreements violated RCW 35.21.860(1), which provides that no city or town may impose a franchise fee or any other fee or charge of whatever nature or description on an electric utility. The court ruled that SCL's agreement to pay the cities a percentage of utility revenues SCL received from the cities' residents did not fall within the statutory prohibition because the cities did not impose the payment provision in exercising their governmental powers of taxation and regulation. Rather, the payments constituted valid consideration in exchange for the cities' promise to forbear from entering into competition with SCL. Accordingly, the court affirmed the summary judgment order dismissing the ratepayers' action.
Burns v. City of Seattle, Washington Supreme Court, No. 78449-3, August 2, 2007, ¶202-672
Other References:
Explanations at ¶80-400

CCH (cch.taxgroup.com) reports:

Budget clean-up legislation expands the types of construction costs eligible for the railroad intermodal facilities credit against North Carolina personal income tax, corporate income tax, and franchise tax to include the costs of constructing and equipping rail tracks to the railroad intermodal facility that are necessary to access and support facility operations, effective for taxable years beginning after 2006. An additional amendment changes the effective date for the mandate for the North Carolina Department of Revenue to publish the availability of the earned income tax credit against personal income taxes in the North Carolina individual income tax booklets from taxable years beginning on or after January 1, 2007, to taxable years beginning on or after January 1, 2008.
Changes to sales and use tax provisions are covered in a related story. (TAXDAY, 2007/08/09, S.14)
Ch. 345 (H.B. 714), Laws 2007, effective as noted above.

CCH (cch.taxgroup.com) reports:

The National Association of Enrolled Agents (NAEA) is the latest group of tax professionals to call for revising the controversial "more likely than not" reporting standard for return preparers enacted in the Small Business and Work Opportunity Tax Act of 2007 (P.L. 110-28) (TAXDAY, 2007/07/16, M.3). The NAEA urged the leaders and ranking members of the House Ways and Means and the Senate Finance Committees to apply the same standard for non-tax avoidance items to self-preparers and paid preparers in an August 6 letter.
New Standard
The 2007 Act raised the return preparer reporting standard under Code Sec. 6994 for undisclosed, non-tax avoidance items from the "realistic possibility of success" to "more likely than not." "The change creates a disconnect between the substantial authority standard for self-preparing taxpayers and the new more likely than not standard for tax professionals," the NAEA told the lawmakers.
The NAEA recommended that the same standard-substantial authority-apply to both self-preparers and paid preparers for non-tax avoidance items. The standard for tax avoidance items should remain at more likely than not.
The 2007 Act also expanded the scope of the provision to cover all return preparers, not just income tax return preparers. For disclosed positions, the 2007 Act replaced the non-frivolous standard with the requirement that there be a reasonable basis for the tax treatment of the position.
Preparer's Role
The NAEA also observed that the more likely than not standard is the standard used by the Tax Court in almost all of its cases. "Has the tax professional de facto become an auditor and judge at the same time a tax return is prepared?" the NAEA asked lawmakers.
Increase in Penalties
Congress also raised penalties. The old first-tier $250 penalty in Code Sec. 6994(a) jumps to the greater of $1,000 or 50 percent of the income derived, or to be derived, by the preparer. The penalty for willful or reckless conduct in Code Sec. 6994(b) increases from $1,000 to the greater of $5,000 or 50 percent of the income derived or to be derived by the preparer.
The NAEA agreed that wrong-doers should be sanctioned, but questioned whether the new penalties are excessive. "There is great potential for misuse or abuse of the penalty. While the IRS has been selective in assessing preparer penalties in the past, we know from experience that on occasion the IRS cuts off heads and later offers to discuss whether they can be reattached."
CCH Comment. "How many penalties can you assess on a small preparer before you put him or her out of business?" Claudia A. Hill, EA, who assisted in drafting the NAEA's letter to Congress, commented to CCH. Hill, who is also Editor-in-Chief of CCH's Journal of Tax Practice and Procedure, predicted that the IRS will use the enhanced penalties to put questionable preparers out of business very quickly.
Cautious Approach
The NAEA predicted that the tax professionals will prefer to err on the side of caution and over-disclose non-tax avoidance items. "The IRS will be swimming in Forms 8275-R (Regulation Disclosure Statement)."
Transitional Relief
The IRS issued transitional relief in June (Notice 2007-54, I.R.B. 2007-27, 12; TAXDAY, 2007/06/12, I.4). For income tax returns, amended returns and refund claims due on or before December 31, 2007 (determined with regard to any extension of time for filing), the standards under prior law and the current regulations will be applied to determine if a penalty should be imposed under Code Sec. 6694(a). For all other returns, amended returns and claims for refund, including estate, gift, and generation-skipping transfer tax returns, employment tax returns and excise tax returns, the reasonable basis standard in regulations under Code Sec. 6662
generally will be applied. Preparers who engage in willful or reckless conduct are ineligible for transitional relief.
By George L. Yaksick, Jr., CCH News Staff
NAEA Letter Regarding Reporting Standards for Tax Return Preparers.

CCH (cch.taxgroup.com) reports:

The Tax Court had jurisdiction over a deficiency determined in an affected items notice of deficiency that disallowed a passthrough loss resulting from a SON-OF-BOSS transaction designed to offset gain from the sale of stock with a corresponding loss. The affected items notice was issued after the tax matters partner (TMP) failed to file a petition with the Tax Court with regarding the notice of final partnership administrative adjustment (FPAA). In the FPAA, the IRS determined that the partnership was not entitled to deduct a short-term capital loss from the sale of Treasury notes or any interest expense. The IRS also determined that the basis of the property distributed to the partners was zero and that accuracy-related penalties would apply. The affected items notice made three adjustments to the taxpayer's income. The taxpayer's reported long-term capital gain was disallowed based on the determination that the basis of the distributed property was zero, the share of expenses was disallowed and computational itemized deductions were adjusted.
The taxpayer's argument that the Tax Court lacked jurisdiction because the long-term capital gain determination in the affected items notice of deficiency was a computational adjustment was rejected. Because there was an increase in the taxpayer's tax liability from an affected item that required a factual determination at the partner level, the deficiency procedures applied. The IRS's determination in the FPAA regarding the sale of stock distributed by the partnership dealt only with the partnership item components. Moreover, the IRS could not have made an assessment as to the long-term capital gain determination by examining the taxpayer's return and making ministerial adjustments. The taxpayer's return made no reference to the object of the sale underlying the claimed long-term capital loss.
The Tax Court, however, did not have jurisdiction over accuracy-related penalties determined in the affected items notice of deficiency. A plain reading of Code Sec. 6230 indicated that the deficiency procedures do not apply to the assessment of any partnership item penalty determined at the partnership level, regardless of whether further partner-level determinations were required.
M.V. Domulewicz, 129 TC No. 3, Dec. 57,038
Other References:
Code Sec. 6230
CCH Reference - 2007FED ¶37,769.15
CCH Reference - 2007FED ¶37,769.35
Tax Research Consultant
CCH Reference - TRC
 

CCH (cch.taxgroup.com) reports:

The Treasury Department and its Financial Crimes Enforcement Network (FinCEN) have issued final regulations concerning financial institution compliance the enhanced due diligence requirements of section 312 of the USA PATRIOT Act (P.L. 107-56). The regulations provide rules for U.S. financial institutions regarding how to conduct enhanced due diligence with regard to correspondent accounts established, maintained, administered or managed for certain types of foreign banks. The final regulations are effective September 10, 2007. The enhanced due diligence requirements will apply as of February 5, 2008, to each correspondent account for certain foreign banks for accounts established on or after that date. For such correspondent accounts established before February 5, 2008, the enhanced due diligence requirements apply as of May 5, 2008.
Background
Section 312 of the USA PATRIOT Act requires covered financial institutions to establish appropriate, specific and, where necessary, enhanced due diligence policies, procedures and controls that are reasonably designed to enable the financial institution to detect and report instances of money laundering. In May 2002, the Treasury and FinCEN issued its first set of proposed regulations regarding the implementation of the enhanced due diligence requirements. Due to a significant number of issues raised, however, the Treasury reissued the proposed regulations in January 2006 (RIN 1506-AA29). The second set of proposed regulations provided that covered financial institutions should apply the enhanced due diligence requirement with regard to foreign banks on a risk basis.
The new regulations finalize this second set of proposed regulations. They are substantially similar to those proposed regulations, but there are two significant wording changes designed to lighten the regulatory burden.
Review of "Documentation" Changed to Review of "Information"
The proposed regulations required covered financial institutions, in appropriate circumstances, to obtain and review "documentation" relating to a respondent bank's anti-money laundering program, and to consider whether such a program appears to be reasonably designed to detected and prevent money laundering. Commentators objected that this requirement amounted to an audit of the respondent bank's anti-money laundering program, and that the language barrier made this requirement difficult, expensive, and impractical. The final regulations replace "documentation" with "information," and make it clear that an audit of the anti-money laundering program is not required. Under the final regulations, a covered financial institution is required to consider and assess more generally the extent to which it may be exposed to money laundering risk by the respondent bank's correspondent account.
According to the Treasury, the revision was designed to reduce the burdens associated with reviewing documents, such as language barriers, as well as to provide covered financial institutions with flexibility to determine how to conduct due diligence with respect to a respondent bank's anti-money laundering efforts. For example, a covered financial institution may use a questionnaire in appropriate circumstances to gather information. If there is a sufficient transaction history with a respondent bank, a covered financial institution may conduct a review of that history to assess the money-laundering risk.
Requirement to "Minimize "Money Laundering Risk Changed to "Mitigate" Risk
The proposed regulations required a covered financial institution to take reasonable steps to assess and "minimize" money laundering risks related to the customers of their respondent banks. In response to concerns over the level of due diligence minimizing respondent bank risks might require, the Treasury revised its language to require a covered financial institution to take reasonable steps to assess and "mitigate" such money laundering risks.
Financial Crimes Enforcement Network Final Rule RIN 1506-AA29, 2007FED ¶47,060
Other References:
31 USC 5318
CCH Reference - 2007FED ¶36,547M
Tax Research Consultant
CCH Reference - TRC FILEBUS: 9,316
 

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

A corporate officer was held jointly and severally liable along with the corporation for expenses and administrative fees incurred by the State of Texas in cleaning up an abandoned salt water disposal facility because the corporation had forfeited its corporate privileges when it failed to pay its franchise taxes.
Under section 171.255(a) of the Texas Tax Code, a corporation forfeits all corporate privileges and its corporate charter if it fails to pay taxes due. Furthermore, each director or officer of the corporation is liable for each debt of the corporation that is created or incurred after the date on which the tax, or penalty is due and before the corporate privileges are revived.
In this case, the corporation failed to pay its franchise taxes and its privileges were never revived. Following the forfeiture of the corporation's charter, the State used its own funds to clean the abandoned oil and gas waste sites. The court ruled that the State was entitled to have its cleanup costs reimbursed by the responsible party. Although the taxpayer argued that he was not an officer or director of the now defunct corporation at the time that the cleanup expenses were incurred and when the administrative penalties were assessed, evidence was produced that demonstrated otherwise.
Martin v. The State of Texas , Texas Court of Appeals, Third District, No. 03-05-00810-CV, August 3, 2007, ¶403-294
Other References:
Explanations at ¶89-206

CCH (cch.taxgroup.com) reports:

Requiring 501(c)(3)
organizations to publicly disclose their income tax returns (Form 990-T, Exempt Organization Business Income Tax Return) treats them less favorably than for-profit businesses and may raise First Amendment issues, the American Bar Association (ABA) Section of Taxation told lawmakers on August 6. The House Ways and Means Oversight Subcommittee, which held a hearing on nonprofits on July 24 (TAXDAY, 2007/07/25, C.1), had asked for comments on how the Pension Protection Act of 2006 (PPA) (P.L. 109-280) is impacting exempt organizations. The PPA
will celebrate its first anniversary on August 17.
New Disclosure Rule
The PPA
made a sea-change in disclosure of federal income tax returns. Before the new law, no taxpayer was required to publicly disclose federal income tax returns, the ABA Tax Section observed. Now, 501(c)(3)
organizations must disclose their Forms 990-T in addition to their Forms 990, Return of Organization Exempt from Income Tax, which have long been available for public inspection.
The new disclosure requirement applies only to 501(c)(3)
organizations, the ABA Tax Section noted. Other exempt organizations are not affected.
The disclosure requirement"has the potential for turning away private joint venture partners and co-investors that prefer not to subject their activities to public disclosure," the ABA cautioned. Moreover, an entity could avoid it by transferring an unrelated business to a taxable subsidiary corporation.
CCH Comment. "The Pension Protection Act requires churches to disclose their Forms 990-T," Michael Clark, chairman of the Exempt Organizations Committee of the ABA Section of Taxation, told CCH. The ABA cautioned lawmakers that this mandatory requirement could raise First Amendment issues.
In addition, the ABA recommended that Congress modify the disclosure rule in the PPA. "Instead of subjecting Form 990-T to disclosure, additional disclosure of unrelated business activity could be required on Form 990."
Charitable Trusts
The ABA Tax Section urged lawmakers to take another look at PPA
section 1241(c), which overruled regulations governing the treatment of charitable trusts as supporting organizations. Although Congress was correct in being concerned about donors' "parking assets" in charitable trusts and retaining control over them, the PPA
affects many trusts where there is "no hint of abuse," they cautioned.
Gifts of Partial Interests
The PPA
imposes limits on a donor's deduction when a donor contributes an undivided interest in tangible personal property to a charity. The Section of Taxation questioned if the PPA
goes too far in curbing alleged abuses of gifts of undivided interests. "The PPA's valuation and recapture rules do not simply discourage such gifts, but in fact punish them harshly."
By George L. Yaksick, Jr., CCH News Staff
ABA Section of Taxation Comments Regarding the Provisions of the Pension Protection Act of 2006 Affecting Tax Exempt Organizations

CCH (cch.taxgroup.com) reports:

The IRS has issued guidance affirming that the new rules under Code Sec. 409A will have no effect on the way teachers salaries will be taxed in the coming school year. The IRS stressed that school districts are not required to offer an annualization election (i.e. deferred compensation) under the new rules; however, those that do offer the election will be required to make some changes to their plan. Since the new rules, which were finalized in April 2007, do not apply to elections made for school years beginning prior to January 2008, school districts will have ample time to make any required changes to their plan, and their employees will not be subject to additional taxes. The IRS anticipates any changes that need to be made will be minor. Further information is available on-line at www.irs.gov.
IR-2007-142, 2007FED ¶46,578
FAQs: Sec. 409A and Deferred Compensation
Other References:
Code Sec. 409A
CCH Reference - 2007FED ¶18,960.062
CCH Reference - 2007FED ¶18,960.042
Tax Research Consultant
CCH Reference - TRC COMPEN: 15,066
CCH Reference - TRC PLANRET: 3,206.35

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

The Multistate Tax Commission (MTC) held its 40th Annual Conference in Minneapolis, July 29-August 2, 2007, where participants discussed proposed revisions to the Uniform Division of Income for Tax Purposes Act (UDITPA), took action on various uniformity proposals, and listened to presentations on various challenges facing the states.

CCH (cch.taxgroup.com) reports:

Final regulations explaining how to compute corporate estimated tax payments have been adopted. The regulations apply to tax years beginning after September 6, 2007, and reflect law changes made since 1984. Proposed regulations were published in the Federal Register on December 12, 2005 (NPRM REG-107722-00).
Corporations are required to make quarterly installments of estimated tax on the fifteenth day of the fourth, sixth, ninth, and twelfth months of the tax year. Generally, each payment must be at least 25 percent of the required annual payment. The required annual payment is 100 percent of the tax shown on the return for the current tax year. However, certain small corporations may base the required annual payment on 100 percent of the tax shown on the return for the preceding tax year if this amount is less. Corporations may elect to use an annualized income installment or an adjusted seasonal installment if the installment is less than the amount computed under the general rules (Code Sec. 6655).
The final regulations make a number of changes and clarifications to the proposed regulations, based primarily on practitioner comments, as follows.
General rules
The final regulations provide that recaptured tax credits are not usually treated as a tax for estimated tax purposes. Rev. Rul. 78-257, 1978-1 CB 440, which held that a recaptured investment tax credit is a tax within the meaning of the estimated tax rules, is removed.
A rule contained in Proposed Reg. §1.6655-1(g)(3) which required a taxpayer to compute its prior year's tax liability using the current year's tax rates if those rates differed from the prior year's rates was eliminated since it was inconsistent with statutory language.
The final regulations clarify that, for purposes of the preceding tax year safe harbor, the tax shown on an amended return is only taken into account in computing installments that are due after an amended return is filed.
Annualized income installment exception
The recurring expense rules contained in the proposed regulations are eliminated in favor of special rules for specified items of deduction that are routinely incurred on an annual basis or for which a special exception to the general accounting rules exists. These specified items need only be allocated in a reasonably accurate manner, such as a ratable allocation throughout the tax year. The IRS may designate additional items in future guidance that will be subject to this rule.
The final regulations eliminate the alternative rule of the proposed regulations that allows taxpayers to take into account a proportionate amount of 50 percent of the current year estimated depreciation expense (Proposed Reg. §1.6655-2(f)(2)(v)(A)). The general rule allowing taxpayers to estimate their annual depreciation expense and include a proportionate amount of such expense for annualization purposes is retained but two new safe harbors, including a safe harbor based on the actual amount of the prior year's depreciation, are provided.
The unforeseeable events exception contained in Proposed Reg. 1.6655-2(h) is eliminated. Under this exception, unforeseeable events arising subsequent to an installment due date that caused the taxpayer's computation of its taxable income for a prior installment period to be understated did not result in a recomputation of its taxable income for the prior installment period. The IRS indicated that it now believes that it is more appropriate to provide relief from unforeseeable events in contemporaneous guidance.
Under the proposed regulations, in determining the applicability of the annualized income installment method or the adjusted seasonal installment method, reasonable estimates were made for items that substantially affected taxable income but could not be determined accurately by an installment due date (Proposed Reg. §1.6655-2(g)). The final regulations retain the rule but limit its application to specifically enumerated items such as the inflation index for taxpayers using the dollar-value LIFO inventory method, intercompany adjustments for taxpayers filing consolidated returns, and deferred gain under Code Secs. 1031 and 1033.
The final regulations allow taxpayers to make a reasonable estimate of the Code Sec. 199 deduction for purposes of determining annualized taxable income. The amount of adjustments required under Code Sec. 263A may also be reasonably estimated from existing data if it cannot be determined with reasonable accuracy by the installment due date.
A new rules allows a taxpayer to temporarily exclude certain advance payments from the calculation of annualized taxable income if those payments are deferred from inclusion in a taxpayer's taxable income and excluded from the taxpayer's income on financial statements.
The final regulations set forth a list of extraordinary items that will result in a distortion of annualized taxable income unless taken into account after annualizing taxable income. With the exception of NOL deductions and Code Sec. 481(a) adjustments, an item is not subject to this rule if it is less than $1 million. Special rules are provided for section 481(a) adjustments.
A new safe-harbor allows a taxpayer with a 52/53 week tax year to determine its annualization period on the month that ends closest to the end of its applicable thirteen-week period or four-week period that ends within the applicable annualization period.
Rules are now provided for taking into account subpart F income, a shareholder's intangible property income (Code Sec. 936(h)), and dividends received by closely held REITS when computing an annualized income installment. Items from passthrough entities other than partnerships and REITS are required to be taken into account in a manner similar to items from partnerships.
Adjusted seasonal installment method.
The final regulations clarify that the amount of any installment determined using the adjusted seasonal installment method must take into account the amount of any alternative minimum tax that would apply for the period of the computation and that the base period percentage cannot be a negative amount.
Large corporations.
The final regulations clarify that for purposes of determining whether a corporation is a "large" corporation (i.e., one with at least $1 million of taxable income during a testing period), an acquiring corporation takes into account the distributor or transferor corporations's taxable income or loss in a tax year in which a Code Sec. 381 transaction occurs.
Short tax years
The final regulations allow a taxpayer with an initial short tax year to make estimated tax payments as though it were a calendar-year taxpayer until it files its tax return for its initial tax year. As a result, the taxpayer will not be penalized if its subsequently chooses a fiscal year.
A special rule is added which allows a taxpayer that has an unforeseen termination of its tax year resulting in fewer than four installment payments to compute its estimated tax payments using the applicable percentage (normally 25 percent) and pay any outstanding balance with the final installment.
The computation provided in Proposed Reg. §1.6655-5(g)(2) for determining an annualized income installment is corrected to provide that the tax for an annualized period is divided by 12, multiplied by the number of months in the short tax year, and multiplied by the application percentage for the annualized income installment.
The rule contained in Proposed Reg. §1.6655-5(h) which required large corporations to compute the preceding year's tax on an annual basis if the preceding tax year was a short tax year when using the preceding year's tax to compute the first installment (Code Sec.6655(d)(2)) is eliminated as inconsistent with the Code.
T.D. 9347, 2007FED ¶47,059
Other References:
Code Sec. 56
CCH Reference - 2007FED ¶5201
CCH Reference - 2007FED ¶5202
Code Sec. 6425
CCH Reference - 2007FED ¶38,842
CCH Reference - 2007FED ¶38,843
Code Sec. 6655
CCH Reference - 2007FED ¶39,566
CCH Reference - 2007FED ¶39,566E
CCH Reference - 2007FED ¶39,567
CCH Reference - 2007FED ¶39,568
CCH Reference - 2007FED ¶39,570
CCH Reference - 2007FED ¶39,571
CCH Reference - 2007FED ¶39,572
CCH Reference - 2007FED ¶39,572C
CCH Reference - 2007FED ¶39,573
Tax Research Consultant
CCH Reference - TRC FILEBUS: 6,050
CCH Reference - TRC FILEBUS: 6,052
CCH Reference - TRC FILEBUS: 6,054
CCH Reference - TRC FILEBUS: 6,056
CCH Reference - TRC FILEBUS: 6,058
CCH Reference - TRC STAGES: 9,122

CCH (cch.taxgroup.com) reports:

The IRS has issued transition relief regarding the application of Code Sec. 355(b)(2)(C) and (D)
to certain trade or business acquisitions between members of affiliated groups under Reg. §1.355-3(b)(4)(iii) for purposes of the Code Sec. 355 active business or trade requirement. The relief is provided in light of the enactment of Code Sec. 355(b)(3) by the Tax Increase Prevention and Reconciliation Act of 2005 (P.L. 109-222), and its subsequent amendment by the Tax Relief and Health Care Act of 2006 (P.L. 109-432).
In May 2007, the IRS issued proposed regulations, including amendments to Reg. §1.355-3(b)(4)(iii), to reflect Code Sec. 355(b)(3) and its effect on other active trade or business rules (NPRM REG-123365-03, I.R.B. 2007-23, 1357; TAXDAY, 2007/05/07, I.3). The proposed rules generally provide that Code Sec. 355(b)(3) modifies the application of Code Secs. 355(b)(2)(C) and (D)
because it essentially treats a stock acquisition that results in the controlled corporation becoming a subsidiary member of the distributing corporation's separate affiliated group (SAG) as an asset acquisition for purposes of Code Sec.355(b). Thus, such a stock acquisition is subject to Code Sec. 355(b)(2)(C) regardless of whether it results in an acquisition of control that would otherwise be subject to Code Sec. 355(b)(2)(D). This also means that such a stock acquisition could violate Code Sec. 355(b)(2)(C) notwithstanding the fact that it would not violate Code Sec. 355(b)(2)(D) because there was no acquisition of control.
Because taxpayers may not have anticipated that such acquisitions of additional stock of the controlled corporation would adversely impact the controlled corporation's ability to satisfy the Code Sec. 355(b) active trade or business requirement, the IRS will not treat the distributing corporation's (or its SAG's) acquisition of additional stock of the controlled corporation as a violation of
Code Sec. 355(b)(2)(C) with respect to the controlled corporation, provided the transaction satisfies the requirements of Code Sec. 355(b)(2)(D), as in effect before the enactment of Code Sec. 355(b)(3). The relief applies to distributions effected on or before the date the proposed regulations (NPRM REG-123365-03) are published as temporary or final regulations.
Notice 2007-60, 2007FED ¶46,574
Other References:
Code Sec. 355
CCH Reference - 2007FED ¶16,466.55
Tax Research Consultant
CCH Reference - TRC REORG: 30,106
CCH Reference - TRC REORG: 30,106.05
CCH Reference - TRC REORG: 30,106.10
CCH Reference - TRC REORG: 30,106.15
CCH Reference - TRC REORG: 30,106.20

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

Minnesota Revenue Commissioner Ward Einess has sent a letter to Scott Peterson, Executive Director of the Streamlined Sales Tax (SST) Governing Board, notifying the Board that Minnesota laws will not conform to the provisions of the SST Agreement, beginning January 1, 2008. The letter explains that although the provisions necessary to maintain conformity with the SST Agreement were included in the proposed omnibus tax bill (H.F. 2268) earlier this year, this bill was vetoed in its entirety by Governor Tim Pawlenty. Details of the veto were previously reported. (TAXDAY, 2007/06/01, S.17)
The Commissioner's letter states that the Department of Revenue plans to reintroduce the SST conformity updates in legislation next year, and the Department is working to get an emergency bill passed early in the legislative session.
Subscribers to CCH Tax Research NetWork can view the Commissioner's letter.
Letter to Streamlined Sales Tax Governing Board , Minnesota Department of Revenue, July 24, 2007.

CCH (cch.taxgroup.com) reports:

Massachusetts governor Deval Patrick signed legislation creating a sales tax holiday for August 11-12, 2007. During this period, sales tax will not apply to nonbusiness retail sales of tangible personal property costing up to $2,500 per item. The tax holiday does not apply to sales of telecommunications, certain tobacco products, gas, steam, electricity, motor vehicles, motorboats, meals, or a single item whose price exceeds $2,500. Eligible sales include transactions occurring on August 11, 2007, and August 12, 2007. Transfer of possession must occur on one of those days, and prior sales and layaway sales are ineligible.
The Department of Revenue has issued a technical information release clarifying the exemption. The exemption applies to sales of tangible personal property bought for personal use. Purchases by corporations or other businesses, and purchases by individuals for business use, remain taxable. Purchases exempt from sales tax are also exempt from use tax; therefore, eligible items of tangible personal property purchased during the tax holiday from out-of-state retailers for use in Massachusetts are exempt from Massachusetts use tax.
If the sales price of a single item is greater than $2,500, sales or use tax is due on the entire price charged for the item. Special order items such as furniture are eligible for the tax holiday if they are ordered and paid in full on the tax holiday weekend, even if delivery is made at a later date. Prior special order purchases with deposits paid before August 11, 2007, will not qualify for the holiday even if customers pay the balance due on August 11 or August 12, 2007. Internet sales are exempt if the property is ordered and paid for on August 11 or August 12, 2007, Eastern Daylight Time. Actual delivery can occur after the holiday period.
Customers who are erroneously charged sales tax for exempt purchases should take their tax paid receipts to vendors to obtain refunds. Vendors may file applications for abatement of the erroneously collected tax within three years upon satisfactory evidence that the vendor has credited or refunded the tax to the purchaser. All Massachusetts businesses that normally make taxable sales of tangible personal property and that are open on August 11 and August 12, 2007, must participate in the tax holiday. Out-of-state retailers registered to collect Massachusetts sales and use tax must also participate.
The information release also provides details concerning sales of clothing, multiple items on one invoice, bundled transactions, coupons and discounts, exchanges, layaway sales, rain checks, rentals, rebates, and returns.
Ch. 81 (H.B. 2876), Laws 2007, effective as noted; Technical Information Release 07-12 , Massachusetts Department of Revenue, August 2, 2007, ¶401-095

CCH (cch.taxgroup.com) reports:

The IRS has released proposed regulations relating to the administration of cafeteria plans and the benefits that can be offered as a part of a cafeteria plan. The proposed regulations incorporate changes made by legislation since previous proposed regulations were drafted. The regulations consolidate and withdraw prior proposed regulations and replace a temporary regulation previously withdrawn by T.D. 9349 (TAXDAY, 2007/08/01, I.1). The rules contained in the new proposed regulations are substantially unchanged from the withdrawn proposed regulations, with only minor changes to reflect legislation and for clarification. The withdrawn proposed regulations were organized in question-and-answer format, but the new proposed regulations have abandoned that format.
Proposed Reg. §1.125-1
The new Proposed Reg. §1.125-1 contains guidance on the basic framework of a cafeteria plan, including definitions, rules regarding plan requirements, rules regarding eligible participants in a cafeteria plan and qualified benefits that can be offered in a cafeteria plan. Very few changes are included in these proposed regulations. However, the rules that disallow owner-employees from participation in a cafeteria plan are expanded to include two-percent shareholders in a S corporation. Also, the rule of Notice 89-110, 1989-2 CB 447, to determine how much income a participant should include for the cost of life insurance with a benefit in excess of $50,000 is removed to apply an amount based on Table I of Notice 89-110. Further, the written cafeteria plan must indicate a plan year that consists of 12 consecutive months, a short plan year is only permitted for a valid business purpose. Finally, the definition of a dependent is altered to reflect changes made to Code Sec. 152 by the Working Families Tax Relief Act (P.L. 108-311).
Proposed Reg. §1.125-2
The new Proposed Reg. §1.125-2 consolidates and clarifies the rules regarding the election of cafeteria plan benefits. These rules include the proper timing of elections, the general irrevocability of elections, the use of electronic media (rather than paper) for making the elections, the allowance of automatic elections for employees who fail to timely make elections, elections of salary reductions for health savings account (HSA) contributions and the proper election period for new employees.
Proposed Reg. §1.125-5
Proposed Reg. §1.125-5 contains the rules for the inclusion of a flexible spending arrangement (FSA) is a cafeteria plan. Included are rules that require the written plan to include uniform coverage and the use-or-lose rules, and the general requirements of a qualified FSA plan.
Proposed Reg. §1.125-6
Proposed Reg. §1.125-6 contains the rules for the proper substantiation of incurred costs that are to be reimbursed under a health and accident plan, an FSA or a health reimbursement account (HRA). These rules include the use of debit cards for purposes of substantiation permitted by Rev. Rul. 2003-43, 2003-1 CB 935, and Notice 2007-2, I.R.B. 2007-2, 254 (TAXDAY, 2006/12/15, I.2), inter alia .
Proposed Reg. §1.125-7
Proposed Reg. §1.125-7 contains restated guidance on the application of the nondiscrimination rules with regard to key employees and highly compensated individuals. The new guidance includes definitions of key terms and additional guidance on when contributions and benefits violate the nondiscrimination rules.
Effective Date
The new proposed regulations are proposed to generally apply to plan years beginning on or after January 1, 2009.
Comment Request and Hearing
The IRS has requested written or electronic comments, specifically comments on whether multiple employees can sponsor a single cafeteria plan, whether salary reductions can be based on tip income, and how a participant's uniform coverage amount should be computed if an election is made pursuant to a participant's change in status. A public hearing on the proposed regulations has been scheduled for November 15, 2007, beginning at 10:00 a.m.
Proposed Regulations, NPRM REG-142695-05, 2007FED ¶49,757
Other References:
Code Sec. 125
CCH Reference - 2007FED ¶7321
CCH Reference - 2007FED ¶7321B
CCH Reference - 2007FED ¶7322
CCH Reference - 2007FED ¶7323F
CCH Reference - 2007FED ¶7323G
CCH Reference - 2007FED ¶7323H
Tax Research Consultant
CCH Reference - TRC COMPEN: 51,050
CCH Reference - TRC COMPEN: 51,100
CCH Reference - TRC COMPEN: 51,150
CCH Reference - TRC COMPEN: 51,200

Tax Analysts report:

Tax Analysts report:

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

Oregon has enacted legislation that limits the personal income tax exemption for high-income taxpayers, provides benefits to military personnel and veterans and those who provide health care to them, and creates and amends various credits allowed against the personal income or corporation excise (income) tax.

CCH (cch.taxgroup.com) reports:

The budget appropriations bill is enacted and includes provisions that affect North Carolina franchise, corporate income, personal income, and sales and use taxes.

CCH (cch.taxgroup.com) reports:

The Tax Court lacked jurisdiction over a partner's challenge to accuracy-related penalties that were determined at a partnership level. While deficiency proceedings generally apply to affected items that require partner-level determinations, they do not apply to penalties that relate to adjustments of partnership items. Instead, the applicability of any penalty (including an accuracy-related penalty) that relates to an adjustment of a partnership item must be determined at the partnership level. A partner can then assert a partner-level defense to the penalty in a refund forum.
G.R. Fears, 129 TC No. 2, Dec. 57,029
Other References:
Code Sec. 6221
CCH Reference - 2007FED ¶37,569.12
Tax Research Consultant
CCH Reference - TRC PART: 60,060
 

CCH (cch.taxgroup.com) reports:

Senate Finance Committee (SFC) Chairman Max Baucus, D-Mont., said on August 2 that he is encouraged by an updated strategy from the Treasury Department to reduce the $345-billion annual tax gap. Key principles of the plan include reducing opportunities for tax evasion, a multi-year commitment to research, improvements in information technology, improved compliance activities, enhanced taxpayer service, reforming and simplifying tax laws, and coordinating with partners and stakeholders.
In April 2007 Baucus informed the Treasury and the IRS that he would expect the agency to achieve a 90% rate of voluntary compliance by 2017 (TAXDAY, 2007/04/19, C.1). The strategy delivered August 2 substantially expands upon a September 2006 Treasury effort, according to Baucus, and contains specific action items, benchmarks and timelines to achieve more effective and efficient tax administration.
A 4.7-percent IRS budget increase for Fiscal Year (FY) 2008 would give the IRS an additional $410 million for new enforcement initiatives as part of a strategy to improve compliance. The Service plans to devote those funds to increasing front-line enforcement resources; increasing voluntary compliance through improved taxpayer service options and enhanced research; investing in technology to reverse infrastructure deterioration, accelerating modernization, and improving the productivity of existing resources; and implementing legislative and regulatory changes.
According to the report, the Treasury Department developed a four-point comprehensive strategy for reducing the tax gap that directs the IRS to improve compliance by addressing both unintentional taxpayer errors and intentional taxpayer evasion, targeting specific sources of noncompliance, combining enforcement activities with a commitment to taxpayer service, and developing policy positions and compliance proposals with sensitivity to taxpayer rights by maintaining an appropriate balance between enforcement activity and taxpayer burden.
The Treasury and the IRS have pledged to increase audits, especially for Schedule C filers, develop more regulations and guidance, pursue tax shelter investors, and expand international cooperation. Most importantly, Treasury and the IRS intend to update their six-year-old estimate of the size of the tax gap to learn how large or small the gap really is. The 100-page report was greeted with guarded optimism by lawmakers.
"I am very encouraged by today's report and I believe it is an important step toward fairer and more efficient tax administration, "said Baucus in a prepared statement. "I am disappointed that Treasury chose not to set a specific goal for the rate of voluntary compliance, but if Treasury sticks to this plan, significant improvements in voluntary compliance can be achieved."
The report highlights more than 100 specific initiatives. The majority of the initiatives are scheduled to be launched in FY 2008 and FY 2009. However, many appear dependent on increased funding of IRS operations for FY 2008 and beyond.
CCH Comment. The Treasury and the IRS did not say how much revenue their initiatives would recover. The Bush administration has proposed 16 tax-gap measures that it estimates would collect nearly $30 billion over 10 years. At the heart of the administration's proposals are expanded information reporting requirements, such as requiring reporting of payments to corporations aggregating to $600 or more in a calendar year and reporting merchant credit card reimbursements.
The leaders of the SFC, who have long been vocal critics of lax IRS enforcement, greeted the report with cautious optimism. SFC ranking Republican Charles Grassley (R-Iowa) called the plan a "good beginning." He added, "Now begins the hard work of making it all happen. Too often, I've seen the best of intentions run into the brick wall of reality."
Treasury Secretary Henry M. Paulson had promised in July to deliver to the SFC a comprehensive strategy to reduce the tax gap (TAXDAY, 2007/07/19, C.4). Baucus had rejected an earlier strategy as lacking specific benchmarks and targets.
Schedule C Filers
Nonfarm proprietor income is underreported by an estimated $68 billion, according to Treasury and the IRS. In response, Schedule C filers can expect more audits. By September 30, 2008, the IRS plans to increase the number of Schedule C audits by seven percent. Schedule C audits will grow by an additional five percent by September 30, 2009.
International Activities
In 2004, Australia, Canada, the U.K., and the U.S. launched the Joint International Tax Shelter Information Centre (JITSIC). The four countries use JITSIC as a clearinghouse for information about abusive cross-boarder transactions ( TAXDAY, 2006/12/15, I.6). Japan has accepted an invitation to joint JITSIC in the near future. Treasury and the IRS also reported that JITSIC will open an office in London in the fall of 2007 in addition to its office in Washington, D.C.
The U.S. also plans to expand the use of the Organisation for Economic Co-operation and Development (OECD) to identify emerging abusive transactions and trends. The OECD has been in the forefront of persuading so-called tax haven countries to increase their oversight of transactions.
Taxpayers can expect more regulations on transfer pricing, the foreign tax credit, foreign trusts and cross border restructurings in FY 2008 and FY 2009. The IRS intends to hire more international examiners in 2007 and 2008.
Quicker Guidance
Treasury and the IRS also promised to increase the flow of regulations and published guidance in FY 2008 and FY 2009. By September 30, 2008, 80 percent of the items on the 2007-2008 Priority Guidance Plan will be released. The percentage will increase to 85 percent by September 30, 2009 for items on the 2008-2009 Priority Guidance Plan.
CCH Comment. "There were 264 items on last year's Priority Guidance Plan," Thomas Ochsenschalger, AICPA Vice President --Taxation, told CCH. "I wouldn't be surprised if there are 300 on the FY 2007-2008 plan."
Tax Shelter Investors
In 2004, the IRS offered a one-time settlement initiative to investors in the so-called Son of BOSS tax shelter (Announcement 2004-46). The IRS warned that taxpayers not participating in the settlement would risk criminal prosecution. Treasury and the IRS indicated that they will litigate unresolved Son of BOSS cases in FY 2008 and FY 2009. They also promised higher conviction rates for abusive tax schemes, corporate fraud and egregious nonfilers.
Nonprofits
On July 24, a government investigator told the House Ways and Means Committee that charitable organizations were responsible for nearly $1 billion in unpaid federal payroll taxes in 2006 (TAXDAY, 2007/07/25, C.1). Treasury and the IRS intend to implement a new electronic examination system for the Tax-Exempt/Government Entities Division, as well as initiating a new project to identify nonprofits that are not reporting and paying federal employment taxes.
By Jeff Carlson and George L. Yaksick, Jr., CCH News Staff
IR-2007-137, 2007FED ¶46,570
Treasury Department News Release, TDNR HP-524
Reducing the Federal Tax Gap --A Report on Improving Voluntary Compliance
SFC Release: Treasury Delivers Tax Gap Plan to Baucus
Other References:
Code Sec. 7804
CCH Reference - 2007FED ¶43,266.112
Tax Research Consultant
CCH Reference - TRC IRS: 15,054
 

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

North Carolina Governor Mike Easley signed a budget bill on July 31, 2007, with numerous tax law changes affecting corporate income tax, personal income tax, sales and use tax, property tax, motor fuels tax, insurance and public utility regulatory fees, and the tobacco products tax. Most notably, the bill enacts the following provisions.
Income and franchise tax changes:
-- effective July 31, 2007, conforms to the Internal Revenue Code (IRC) as enacted as of January 1, 2007 (formerly, January 1, 2006);
-- effective for taxable years beginning on or after January 1, 2008, enacts an earned income tax credit;
-- effective for taxable years beginning on or after January 1, 2007, mandates that the Department of Revenue include language in its printed booklets for the individual income tax return that identifies the availability of the state and federal earned income tax credit;
-- effective for taxable years beginning on or after January 1, 2007, re-enacts the long-term care credit;
-- effective for taxable years beginning on or after January 1, 2007, enacts an adoption tax credit;
-- effective for taxable years beginning on or after January 1, 2007, enhances the tax credit for research and development expenditures;
-- effective for taxable years beginning on or after January 1, 2007, modifies the tax credit for constructing renewable fuel facilities;
-- effective for taxable years beginning on or after January 1, 2007, provides an alternative for addressing a corporation's attempt to avoid state taxes through the use of a real estate investment trust (REIT);
-- enhances the IRC Sec. 529 plan income tax deduction (adjustments to taxable income are effective for taxable years beginning on or after January 1, 2007, and other changes to these provisions are effective July 31, 2007);
-- effective for taxable years beginning on or after January 1, 2007, enacts a state work opportunity tax credit;
-- effective January 1, 2007, enacts a tax incentive for railroad intermodal facilities;
-- effective for taxable years beginning on or after January 1, 2007, enacts a firefighter and rescue squad tax deduction; and
-- effective and applicable September 1, 2007, changes corporate annual report fees (changes regarding annual report fees paid by limited liability companies subject to the franchise tax are effective for taxable years beginning on or after January 1, 2007).
Sales and use tax changes:
-- effective July 31, 2007, the permanent extension of the additional 0.25% state sales and use tax rate (which was scheduled to expire on August 1, 2007) that results in a total general state tax rate of 4.25%;
-- effective and applicable October 1, 2007, imposes a privilege tax on software publishers' machinery and equipment;
-- effective and applicable July 1, 2007, expands the sales and use tax refund for certain aircraft manufacturers;
-- effective and applicable October 1, 2007, amends the sales tax holiday provisions;
-- levies a one-quarter cent county sales and use tax subject to a referendum;
-- provides a sales and use tax refund for analytical services supplies (the refund provision is effective July 1, 2007, and the definition of "analytical services" is effective July 31, 2007); and
-- effective and applicable October 1, 2007, modifies the exemption for data centers and imposes a privilege tax on certain eligible data centers.
Property tax and other tax changes:
-- effective July 31, 2007, sets the insurance regulatory fee;
-- effective July 1, 2007, sets the public utility regulatory fee;
-- effective July 31, 2007, caps the variable wholesale component of the motor fuels tax rate for two years;
-- effective July 31, 2007, provides for the levy of a local land transfer tax subject to a referendum; and
-- effective October 1, 2007, an increase in the tax rate applicable to tobacco products other than cigarettes.
In addition, the budget bill provides for the assumption by the state of 25% of the nonfederal share of Medical Assistance Program costs and Medicare Part D clawback payments currently borne by the counties, effective October 1, 2007.
Ch. 323 (H.B. 1473), Laws 2007, effective as noted above

CCH (cch.taxgroup.com) reports:

A Final Partnership Administrative Adjustment (FPAA) adjusting partners' basis in a partnership that was issued more than three years after the partners filed their return claiming losses resulting from the overstatement was time-barred. The extended six-year limitations period under Code Sec. 6501(e)(1)(A) did not apply because the government failed to show that a partnership item was omitted from the returns. The partnership's overstatement of its basis that resulted in a loss rather than a diminished gain was not an omission for purposes of the extended statute of limitations of Code Sec. 6501. However, although the adjustment was barred for the closed year, any assessments for the following year, to which the losses were carried forward, were not time-barred.
Related decision at 2006-1 USTC ¶50,352
Grapevine Imports, Ltd, FedCl, 2007-2 USTC ¶50,555
Other References:
Code Sec. 6501
CCH Reference - 2007FED ¶38,971.76
Tax Research Consultant
CCH Reference - TRC IRS: 27,212
CCH Reference - TRC PART: 60,352

CCH (cch.taxgroup.com) reports:

The IRS has released an advance notice of proposed rulemaking describing rules that the IRS anticipates proposing as regulations providing payout requirement rules for Type III supporting organizations that are not functionally integrated. No payments made to a Type III supporting organization that is not a functionally integrated Type III supporting organization may be counted as qualifying distributions.
Private nonoperating foundations are subject to an excise tax for failure to distribute accumulated income. Qualifying distributions by the nonoperating foundation reduce the amount required to be distributed. The Pension Protection Act of 2006 (P.L. 109-280) modified the definition of a "qualifying distribution" to prevent payments made by a nonoperating private foundation to a supporting organization from constituting a qualifying distribution.
Type III supporting organizations are operated in connection with one or more publicly supported organizations, and are required to demonstrate that they are responsive to the needs and demands of those supported organizations, and that both (1) the Type III organization is significantly involved in the operations of that/those organization(s), and (2) the supported organizations are dependent upon the supporting organization for the type of support it provides.
The document released by the IRS contains: (1) criteria for determining whether a Type III supporting organization is functionally integrated; (2) the modified requirements for Type III supporting organizations that are organized as trusts; and (3) the requirements regarding the type of information a Type III supporting organization must provide to its supported organization(s). These new requirements and criteria would apply to Type III supporting organizations as defined under Code Secs. 509(f)(3) and 4943(f)(5).
Comments
Written and electronic comments must be received by October 31, 2007. Submissions should be sent to CCA:LPDR (REG-155929-06), Room 5203, IRS, P.O. Box 7604, Ben Franklin Station, Washington, D.C. 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8:00 a.m. and 4:00 p.m. to CCA:LPDR (REG-155929-06), Courier's Desk, IRS, 1111 Constitution Avenue NW., Washington, D.C., or submitted electronically via the Federal eRulemaking Portal at www.regulations.gov (IRS-REG-155929-06).
Advance Proposed Regulation, NPRM REG-155929-06, 2007FED ¶46,568
Other References:
Code Sec. 4943
CCH Reference - 2007FED ¶34,072.01
Tax Research Consultant
CCH Reference - TRC EXEMPT: 21,208.15

CCH (cch.taxgroup.com) reports:

Proposed Reg. §26.2642-6 would provide guidance on the qualified severance of a trust for generation-skipping transfer (GST) tax purposes. The proposed regulations amend the regulations under Reg. §26.2642-6, published contemporaneously with the notice of proposed rulemaking on August 2, 2007, to address a situation where trusts resulting from a severance do not meet the requirements of a qualified severance, see T.D. 9348 (TAXDAY, 2007/08/02, I.1). If resulting trusts do not meet the qualified severance requirements, the resulting trusts will be treated as separate trusts for GST tax purposes so long as the resulting trusts are recognized under applicable state law. However, because the severance is not a qualified severance, each resulting trust will have the same inclusion ratio immediately after the severance as the original trust had prior to the severance. Conforming amendments are proposed to Reg. §§26.2654-1(a)(1)(i) and 26.2654-1(a)(5), Example 8 . The proposed regulations also provide for an additional type of qualified severance, the severance of a trust with an inclusion ratio between zero and one into more than two resulting trusts. The proposed regulations clarify Reg. §26.2642-6(d)(4) to provide that no discount or other reduction from the value of an asset owned by the original trust arising as a result of the division of the original trust's interest in the asset between the resulting trusts is allowed in funding the resulting trusts. This clarification is proposed to be effective with respect to severances occurring on or after the date the proposed regulations are published in the Federal Register.
The IRS has requested comments and requests for a public hearing on the proposed regulations. Written and electronic comments and requests for a hearing must be received by October 31, 2007. Written comments should be sent to CCA:LPDR (REG-128843-05), IRS, PO Box 7604, Ben Franklin Station, Washington, D.C. 20044. They may also be hand-delivered to the IRS Courier's Desk. Electronic comments can be submitted via the Federal eRulemaking Portal at www.regulations.gov (IRS REG-128843-05).
Proposed Regulations NPRM REG-128843-05, FINH ¶41,127
Other References:
Code Sec. 2601
CCH Reference - FINH ¶12,060
Code Sec. 2642
CCH Reference - FINH ¶12,870
Code Sec. 2654
CCH Reference - FINH ¶13,125
Tax Research Consultant
CCH Reference - TRC ESTGIFT: 57,074.15

CCH (cch.taxgroup.com) reports:

Final amendments to Reg. §§1.1001-1, 26.2600-1, 26.2642-6, and 26.2654-1, providing guidance on the qualified severance of a trust, have been adopted. The final regulations clarify that the severance rules of Reg. §26.2654-1(b) were not superseded by the enactment of Code Sec. 2642(a)(3). The funding of trusts resulting from a qualified severance on a non pro rata basis is permitted, provided that the funding is achieved by applying the appropriate fraction or percentage to the total value of the trust assets as of the "date of severance." See the notice of proposed rulemaking issued contemporaneously with the final regulations, NPRM REG-128843-05 (TAXDAY, 2007/08/02, I.2) for proposed amendments to Reg. §26.2642-6(d)(4). The regulations define "date of severance" as the date selected for determining the value of the trust assets so long as funding begins immediately and occurs within a reasonable time (no more than 90 days) before or after the selected date. In addition, the final regulations address the qualified severance of a trust that was irrevocable prior to September 25, 1985, but to which an addition was made after that date. The final regulations also clarify that, if the qualified severance results in a generation-skipping transfer (GST) taxable event, that event will be considered to occur immediately after the severance. While the reporting provisions of the regulations are not a requirement for qualified severance status, a severance should be reported to the IRS to ensure the appropriate application of the GST tax. Notification of a severance of a trust must be made by marking "Qualified Severance" at the top of Form 706-GS(T), Generation-Skipping Transfer Tax Return for Terminations and attaching a "Notice of Qualified Severance" to the return. The final regulations also expand the category of severances to which Reg. §1.1001-1(h)(1) applies to severances that meet the requirements of Reg. §§26.2642-6 or 26.2654-1(b). The regulations are effective August 2, 2007. For severances occurring after December 31, 2000, and before August 2, 2007, taxpayers may rely on any reasonable interpretation of Code Sec. 2642(a)(3), provided that reasonable notice of the severance has been given to the IRS.
T.D. 9348, 2007FED ¶47,058
T.D. 9348, FINH ¶43,113
Other References:
Code Sec. 1001
CCH Reference - 2007FED ¶29,221
CCH Reference - FINH ¶17,375
Code Sec. 2601
CCH Reference - FINH ¶12,045
Code Sec. 2642
CCH Reference - FINH ¶12,860
Code Sec. 2654
CCH Reference - FINH ¶13,115
Tax Research Consultant
CCH Reference - TRC ESTGIFT: 57,054.15

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

Taxpayers who are required to disclose a reportable transaction or a listed transaction for California corporate franchise, income or personal income tax purposes and who have not previously filed IRS Form 8886, Reportable Transaction Disclosure Statement, or any successor form, or who filed an incomplete Form 8886, are being allowed until September 29, 2007, to file a complete form with the California Franchise Tax Board (FT. If a taxpayer is required to file a disclosure statement and fails to do so by the deadline, the FTB will assess a penalty under Rev. & Tax. Code Sec. 19772 for failure to disclose a reportable or listed transaction. The penalty is $15,000 for each failure to disclose a reportable transaction and $30,000 for each failure to disclose a listed transaction. Taxpayers filing a disclosure statement in response to this announcement need only file a statement with the FTB's Abusive Tax Shelter Unit (ATSU), and need not file an amended return to make the disclosure. These taxpayers should write "FTB Notice 2007-3" in red on the top of their Form 8866.
Federal regulations provide that the disclosure statement is due when the taxpayer files an original or amended return for each year that reflects the taxpayer's participation in a reportable transaction. Also, for the initial year for which a disclosure statement is filed for a particular reportable transaction, the taxpayer must also send a duplicate copy to the federal Office of Tax Shelter Analysis. For California purposes, the general rule is that Form 8866 must be attached to the taxpayer's original or amended return for each taxable year for which the taxpayer participates in a reportable transaction. Also, for disclosure statements filed for the initial year of participation, the taxpayer must mail a copy of the disclosure to the FTB's ATSU.
A Form 8866 containing a statement that information will be provided upon request is not considered a complete disclosure statement. Also, if a taxpayer fails to file a copy of the disclosure statement with the FTB's ATSU for the initial year of participation at the same time the taxpayer files the disclosure statement with the taxpayer's return, the taxpayer will not be considered to have complied with the disclosure requirements.
Subscribers to CCH Tax Research NetWork may view the text of the notice.
FTB Notice 2007-3 , California Franchise Tax Board, July 31, 2007.

CCH (cch.taxgroup.com) reports:

The IRS has granted the victims of Hurricanes Katrina, Rita and Wilma an additional year in which to use the primary residence gain exclusion for gain from the sale of vacant land that had been used as a principal residence. Victims of these of these hurricanes will now have three years from the date of the destruction of their principal residence in which to sell the vacant land and exclude the gain.
Additional and further information is available from the IRS on their website at irs.gov.
IR-2007-134, 2007FED ¶46,567
Other References:
Code Sec. 121
CCH Reference - 2007FED ¶7266.022
CCH Reference - 2007FED ¶7266.27
Tax Research Consultant
CCH Reference - TRC PLANIND: 12,054.05
CCH Reference - TRC REAL: 15,158

CCH (cch.taxgroup.com) reports:

The IRS has issued final regulations on the disclosure of reportable transactions that affect taxpayers participating in such transactions, material advisors responsible for disclosing reportable transactions and material advisors responsible for keeping lists relating to reportable transactions. The final rules reflect changes required by the amendments to Code Secs. 6111 and 6112
that were made by the American Jobs Creation Act of 2004 (P.L. 108-357).
T.D. 9350
The first set of final regulations under Code Sec. 6011 modify and clarify the rules relating to the disclosure of reportable transactions. The final rules add a new category of reportable transactions, called "transactions of interest." This category includes transactions that the IRS and Treasury Department believe have a potential for tax avoidance or evasion, but for which the IRS and Treasury Department lack enough information to determine whether the transaction should be specifically identified as a tax-avoidance transaction. The IRS will identify transactions of interest by notice, regulation or other form of published guidance. From such published guidance, taxpayers will then be able to determine whether a particular transaction is the same or substantially similar to the transaction described and to determine who participated in the transaction. The transactions-of-interest category will apply to transactions entered into on or after November 2, 2006.
The final regulations under Code Sec. 6011 also cover the disclosure of reportable transactions by owners of a pass-through entity. If a taxpayer who is a partner in a partnership, a shareholder in an S corporation or a beneficiary of a trust receives a timely Schedule K-1 less than 10 calendar days before the due date of the taxpayer's return (including extensions) and the taxpayer determines that it participated in a reportable transaction, the disclosure statement will not be considered late if the taxpayer discloses the reportable transaction by filing a disclosure statement with the Office of Tax Shelter Analysis (OTSA) within 60 calendar days after the due date of the taxpayer's return, including extensions.
This 60-day period provided by the final rules is longer than the 45-day disclosure period that was included in the proposed rules. A 90-day period is allowed for taxpayers to disclose their participation in a transaction that is subsequently identified as a listed transaction or transaction of interest after the filing of the taxpayer's return. The disclosure statement is made on Form 8886, Reportable Transaction Disclosure Statement.
Since some pass-through entity owners may have minimal interests or may be unaware that the entity is engaged in a reportable transaction, the final rules also vary from the proposals by allowing the IRS and the Treasury Department to issue other provisions for disclosure through published guidance. This will give the IRS flexibility in determining who is subject to the disclosure requirements for a particular transaction.
Finally, based on other changes to the foreign tax credit rules under Code Sec. 901, the brief asset holding period reportable transaction category that was included in the proposed rules has been found unnecessary and has been removed from the categories of reportable transactions. Also, Forms 8271, Investor Reporting of Tax Shelter Registration Number, that are otherwise due on or after August 3, 2007, will no longer need to be filed by investors and will be obsoleted.
T.D. 9351
The final regulations under Code Sec. 6111, provide rules regarding the disclosure of reportable transactions by material advisors. A material advisor is a person who provides any material aid, assistance, or advice with respect to organizing, managing, promoting, selling, implementing, insuring, or carrying out any reportable transaction, and directly or indirectly derives gross income in excess of a threshold amount for such aid, assistance or advice. The threshold amount is generally $250,000, but is lowered to only $50,000 if substantially all of the tax benefits from the reportable transaction are provided to natural persons, looking through any partnerships, S corporations or trusts. Unless the facts and circumstances prove otherwise, substantially all of the tax benefits will be considered to be provided to natural persons if 70 percent or more the tax benefits from the reportable transactions are provided to natural persons.
Under the final disclosure requirements, a material advisor must file Form 8918, Material Advisor Disclosure Statement. In addition to information about the transaction, the material advisor must provide in the disclosure statement the identities of any material advisor or advisors who the material advisor knows or has reason to know acted as a material advisor with respect to the transaction. The IRS will provide a reportable transaction number for the disclosed reportable transaction to the material advisor. The material advisor must then provide the reportable transaction number to all taxpayers and material advisors for whom the material advisor acts as a material advisor. The final rule is therefore less stringent than the proposed rule, which would have required the material advisor to provide a reportable transaction number to all persons for whom the material advisor made a tax statement.
The final regulation also adopts the proposal that allows material advisors to designate, by written agreement, a single material advisor to disclose a reportable transaction where more than one material advisor is required to make a disclosure. However, the designation of one material advisor to disclose the transaction does not relieve the other material advisors of their obligation to disclose if the designated material advisor fails to disclose in a timely manner. Potential material advisors who are uncertain as to whether a transaction must be disclosed may also file a protective disclosure.
T.D. 9352
The final regulations under Code Sec. 6112 require each material advisor to prepare and maintain a list for each reportable transaction. The list must include an itemized statement of information, a description of the transaction, and copies of certain documents. Each material advisor responsible for maintaining a list must be able to make each component of the list available to the IRS upon written request. In order to provide more flexibility, the final regulations eliminate the requirement in the proposed regulation that the material advisor be able to produce each component of the list within 20 business days. Instead, the final rules set the time period for furnishing a list or components of a list as the period set forth in Code Sec. 6708
or in future published guidance under Code Sec. 6708.
T.D. 9350, 2007FED ¶47,055
T.D. 9350, FINH ¶43,112
T.D. 9351, 2007FED ¶47,056
T.D. 9352, 2007FED ¶47,057
Other References:
Code Sec. 6011
CCH Reference - 2007FED ¶35,125B
CCH Reference - 2007FED ¶35,126C
CCH Reference - 2007FED ¶35,127C
CCH Reference - 2007FED ¶35,129AA
CCH Reference - 2007FED ¶35,131
CCH Reference - FINH ¶20,060
CCH Reference - FINH ¶20,065
CCH Reference - FINH ¶20,070
Code Sec. 6111
CCH Reference - 2007FED ¶37,001D
Code Sec. 6112
CCH Reference - 2007FED ¶37,021
Tax Research Consultant
CCH Reference - TRC FILEBUS: 3,052.20
CCH Reference - TRC FILEBUS: 9,450
CCH Reference - TRC FILEBUS: 9,452
CCH Reference - TRC FILEBUS: 9,454
CCH Reference - TRC PENALTY: 3,252
CCH Reference - TRC PENALTY: 3,254

Tax Analysts report: