Tax News

Tax Analysts report:

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

A release lists more than 40 types of business activities and relationships that will or will not create sales and use tax nexus with South Carolina. Nexus would allow the state to impose its sales and use tax on a person, activity, property, or transaction.
The activities and relationships are listed under the categories (1) general activities, (2) property in South Carolina, (3) activities of an employee or third party (e.g., a sales representative, independent contractor, or affiliated company), (4) delivery, (5) transactions with South Carolina printers, and (6) advertising.
The lists represent the Department of Revenue's responses to questions contained in two nexus surveys issued by national publications.
Subscribers to CCH Tax Research NetWork can view this release.
Revenue Ruling 07-3, South Carolina Department of Revenue, September 25, 2007.

CCH (cch.taxgroup.com) reports:

The Department of Revenue has adopted a rule allowing discretionary penalty waivers for Oregon personal income tax, corporation excise and income tax, timber severance tax, and cigarette and tobacco products tax taxpayers who believe that a penalty was imposed improperly. The following penalties are eligible for waiver under this rule:
l
the 5% penalty for failure to file a report or return by the due date;
l
the 5% penalty for failure to pay a tax by the due date;
l
the additional 20% penalty for failure to file a report or return within three months after the due date;
l
the additional 25% penalty for failure to file a report or return more than three months after the due date and the taxpayer receives a Notice of Determination and Assessment; and
l
the 100% penalty for failure to file three consecutive reports or returns by the due date of the third year.
A waiver request is timely filed if the Department receives it any time before the tax, penalty, and interest are paid in full, or up to one year after the tax, penalty, and interest are paid in full. In order to qualify for the waiver, the taxpayer must:
l
make a written request explaining the reason for the failure to file or failure to pay the tax;
l
pay the balance of the account, other than an amount equal to the penalty amount that may be waived, for the tax period for which the waiver is requested; and
l
meet all filing requirements for the tax program that assessed the penalty.
The Department will waive any penalty listed above for any tax program if there are circumstances beyond the taxpayer's control that caused the failure to file or pay, and if the circumstances existed at the time the return or payment was due.
OAR 150-305.145(4), Oregon Department of Revenue, effective July 31, 2007.

CCH (cch.taxgroup.com) reports:

In an advance payment transaction (APT), a corporation overstated its foreign sales corporation's (FSC) exempt income by reporting costs using the annual accounting method instead of applying "total costs" as contemplated under the FSC administrative pricing rules. The corporation maintained that, under the annual accounting method embodied in Code Secs. 451 and 461, a matching of income and expenses was not required, and, therefore, its FSC did not have to include in its combined taxable income (CTI) calculation for the year at issue costs related to the transaction that were incurred in the following year. This had the effect of increasing the amount of the FSC's income on which the tax exemption was computed.
The IRS maintained that, in computing CTI under Temporary Reg. §1.925(a)-1T(c)(6), total costs attributable to the APT had to be included in the year at issue regardless of whether they were incurred in a later year. The IRS was granted summary judgment because the FSC exemption was designed to approximate arm's-length pricing and, therefore, the administrative pricing rules required that the transfer price not be reduced by omitting costs in computing CTI.
CCH Comment. The FSC Repeal and Extraterritorial Income Exclusion Act of 2000 ( P.L.106-519) repealed the law governing the taxation of FSCs generally effective for transactions after September 30, 2000. The rules governing the taxation of FSCs were replaced with an exclusion from gross income for extraterritorial income (ETI). The American Jobs Creation Act of 2004 (P.L.108-357
) repealed the ETI regime for post-2004 transactions subject to transitional rules in 2005 and 2006.
The Proctor & Gamble Company, DC Ohio, 2007-2 USTC ¶50,663
Other References:
Code Sec. 451
CCH Reference - 2007FED ¶21,017.80
Code Sec. 461
CCH Reference - 2007FED ¶21,817.166
Code Sec. 925
CCH Reference - 2007FED ¶28,163.50
Tax Research Consultant
CCH Reference - TRC INTLOUT: 15,350
CCH Reference - TRC INTLOUT: 15,354

CCH (cch.taxgroup.com) reports:

The IRS has modified the exclusive procedures that certain corporations must use to obtain automatic approval to change their annual accounting period under Code Sec. 442 and Reg. §1.442-1(b). The modifications apply to (1) a corporation leaving a consolidated group that wants to change its annual accounting period in the year the corporation ceases to be a member of the group; and (2) a controlled foreign corporation (CFC) that has a majority U.S. shareholder year and is properly applying to change to a one-month deferral year or to a 52-53-week tax year that references a one-month deferral year.
As modified, the procedures clarify that any corporation leaving a consolidated group is excluded from the automatic change procedures during the group's tax year in which the corporation ceases to be a group member, without regard to a change in the group's accounting period. The corporation must continue to use the group's annual accounting period unless the corporation receives approval under Rev. Proc. 2002-39, 2002-1 CB 1046, to change its accounting period, or is required to change its accounting period upon joining another consolidated group.
The modified procedures also provide that if a CFC changes to a one-month deferral year or to a 52-53-week tax year that references the one-month deferral year, it is not required to issue financial statements and reports to creditors on the basis of the requested year. However, the CFC must close its books and records as of the last day of the first effective year. In every year thereafter, the CFC must close its books and records as of the last day of the requested tax year, either a one-month deferral year or a 52-53-week tax year that references the deferral year. The CFC must also compute its income and its earnings and profits on the basis of the requested year.
Rev. Proc. 2006-45, I.R.B. 2006-45, 851, is modified and clarified.
Rev. Proc. 2007-64, 2007FED ¶46,647
Other References:
Code Sec. 442
CCH Reference - 2007FED ¶20,406.13
CCH Reference - 2007FED ¶20,406.17
Code Sec. 898
CCH Reference - 2007FED ¶27,725.20
Statement of Procedural Rules Sec. 602.204
CCH Reference - 2007FED ¶43,384.10
Tax Research Consultant
CCH Reference - TRC CONSOL: 15,052
CCH Reference - TRC CONSOL: 15,060
CCH Reference - TRC ACCTNG: 24,110
CCH Reference - TRC ACCTNG: 24,110.05
CCH Reference - TRC ACCTNG: 24,110.15
CCH Reference - TRC ACCTNG: 24,150
CCH Reference - TRC ACCTNG: 24,154
CCH Reference - TRC ACCTNG: 24,156

CCH (cch.taxgroup.com) reports:

The IRS has updated the rules for determining the amount of an employee's ordinary and necessary business expenses for lodging, meals, and incidental expenses incurred while traveling away from home that are deemed substantiated under Reg. §1.274-5. The new procedure provides transition rules for the last three months of calendar year 2007 and updates the simplified "high-low" per diem rates and the high-cost/low-cost localities.
Transition Rules
CONUS rates. Taxpayers may continue to use the current CONUS rates for the first nine months of calendar year 2007 instead of the updated GSA rates; however, they must consistently use one or the other for the period of October 1, 2007, to December 31, 2007.
Meal and incidental expenses. Taxpayers who used the federal meal and incidental expense rates for the first nine months of calendar year 2007, may not use the transportation industry rates provided in this procedure until January 1, 2008. Conversely, taxpayers who used the transportation industry rates for the first nine moths, cannot use the federal meal and incidental expense rates until January 1, 2008.
Substantiation method. Payors who used the substantiation method for the first nine months of calendar year 2007, may not use the high-low method until January 1, 2008, and vice versa. However, payors using the high-low method may use the rates and high-cost localities contained in Rev. Proc. 2006-41, I.R.B. 2006-43, 777, rather than the updated rates and localities contained in this procedure.
Per Diem Rates
The update applies to per diem allowances paid for travel on or after October 1, 2007. The simplified "high-low" per diem rates have decreased to $237 for high-cost localities and increased to $152 for low-cost localities. For purposes of applying the high-low substantiation methods and the 50-percent limitation on meal expenses, the federal meal and incidental expense rate is treated as $58 for a high-cost locality and $45 for any other locality within CONUS.
Locality Update
The following localities have been added to the list of high-cost localities: Sedona, Arizona; Napa, California; Palm Springs, California; San Diego, California; Yosemite National Park, California; Silverthorne/Breckenridge, Colorado; Incline Village/Crystal Bay/Reno/Sparks, Nevada; Conway, New Hampshire; Tarrytown/White Plains/New Rochelle/Yonkers, New York; Loudon County, Virginia; Virginia Beach, Virginia; and Lake Geneva, Wisconsin.
The portion of the year for which the following are high-cost localities has been changed: Santa Barbara, California; Crested Butte/Gunnison, Colorado; Steamboat Springs, Colorado; Telluride, Colorado; Vail, Colorado; Fort Lauderdale, Florida; Miami, Florida; Palm Beach, Florida; Cambridge/St. Michaels, Maryland; Ocean City, Maryland; Nantucket, Massachusetts; Jamestown/Middletown/Newport, Rhode Island; and Park City, Utah.
The following localities have been removed from the list of high-cost localities: New Orleans, Louisiana, and Lake Placid, New York.
Rev. Proc. 2006-41, I.R.B. 2006-43, 777, is updated.
Rev. Proc. 2007-63, 2007FED ¶46,646
Other References:
Code Sec. 162
CCH Reference - 2007FED ¶180.01
CCH Reference - 2007FED ¶1070.11
CCH Reference - 2007FED ¶8856.17
Code Sec. 274
CCH Reference - 2007FED ¶14,417.002
CCH Reference - 2007FED ¶14,417.035
CCH Reference - 2007FED ¶14,417.037
CCH Reference - 2007FED ¶14,417.038
CCH Reference - 2007FED ¶14,417.039
CCH Reference - 2007FED ¶14,417.04
CCH Reference - 2007FED ¶14,417.041
CCH Reference - 2007FED ¶14,417.421
CCH Reference - 2007FED ¶14,417.62
Tax Research Consultant
CCH Reference - TRC INDIV: 36,054.05
CCH Reference - TRC INDIV: 36,056.10
CCH Reference - TRC INDIV: 36,056.15
CCH Reference - TRC BUSEXP: 24,808
CCH Reference - TRC BUSEXP: 24,904
CCH Reference - TRC BUSEXP: 24,906.10
CCH Reference - TRC BUSEXP: 24,906.25
CCH Reference - TRC BUSEXP: 24,912.05
CCH Reference - TRC BUSEXP: 24,912.15
CCH Reference - TRC BUSEXP: 24,912.20

CCH (cch.taxgroup.com) reports:

The IRS has issued proposed regulations that provide guidance regarding changes made to the rules governing S corporations under the American Jobs Creation Act of 2004 (P.L. 108-357) and the Gulf Opportunity Zone Act of 2005 (P.L. 109-135). Proposed amendments to the regulations were also issued to conform the regulations to changes made by the Small Business Job Protection Act of 1996 (P.L. 104-188). The proposed regulations are necessary to replace obsolete references in the current regulations and to allow taxpayers to make proper use of the provisions that made changes to prior law. In particular, the proposed regulations provide guidance on: 1) the S corporation family shareholder rules; 2) the definitions of "powers of appointment" and "potential current beneficiaries" (PCBs) with regard to electing small business trusts; (ESBTs), 3) the allowance of suspended losses to the spouse or former spouse of an S corporation shareholder; and 4) relief for inadvertently terminated or invalid qualified subchapter S subsidiary (QSub) elections.
The proposed regulations also remove or amend several references in the regulations under Code Sec. 1361 that cite a specific number of permissible S corporation shareholders and add conforming language to Reg. §1.1361-1(j)(8) regarding passive activity losses and at-risk amounts of qualified subchapter S trusts.
Family Shareholders
Code Sec. 1361(c)(1) treats a husband and wife (and their estates), and all members of a family (and their estates) as one shareholder for purposes of the 100 shareholder limitation. Notice 2005-91, 2005-2 CB 1164, informed taxpayers that the Treasury Department and the IRS intended to issue guidance regarding the family shareholder election under Code Sec. 1361(c)(1) and provided that taxpayers could rely on the provisions of Notice 2005-91 until the issuance of that guidance. Although the portions of Notice 2005-91 addressing the manner of making the family shareholder election are no longer relevant, and Notice 2005-91 will be obsoleted when these proposed regulations are adopted as final, the proposed regulations retain the provisions of Notice 2005-91 describing certain entities other than individuals that will be treated as members of the family.
The regulations also clarify that the "six generation" test is applied only at the date specified in Code Sec. 1361(c)(1)((iii) for determining whether an individual meets the definition of "common ancestor," has no continuing significance in limiting the number of generations of a family that may hold stock and be treated as a single shareholder and there is no adverse consequence to a person being a member of two families.
Disregard of Unexercised Powers of Appointment in ESBTs
Code Sec. 1361(e)(2) provides that in determining an ESBT's PCBs for any period, powers of appointment will be disregarded to the extent not exercised by the end of that period. This section also increases the period from 60 days to one year during which an ESBT may safely dispose of S corporation stock after an ineligible shareholder becomes a PCB. The proposed regulations remove and replace the sections of the regulation inconsistent with current law.
The definition of "potential current beneficiary" is amended to provide that all members of a class of unnamed charities permitted to receive distributions under a discretionary distribution power held by a fiduciary that is not a power of appointment, will be considered, collectively, to be a single PCB for purposes of determining the number of permissible shareholders under Code Sec. 1361(b)(1)(A) unless the power is actually exercised, in which case each charity that actually receives distributions will also be a PCB. The ESBT election requirements under Reg. §1.1361-1(m)(2)(ii)(A) are amended to require a trust containing such a power to indicate the presence of the power in the election statement. This amended PCB definition applies only to powers to distribute to one or more members of a class of unnamed charities which is unlimited in number. The amended PCB definition does not apply to a power to make distributions to or among particular named charities.
The proposed regulations further provide that a power to add beneficiaries, whether or not charitable, to a class of current permissible beneficiaries is generally a power of appointment; thus, it will be disregarded to the extent it is not exercised. However, if the power is exercised and an unlimited class of charitable beneficiaries is added to the class of current permissible beneficiaries, that class will count as a single PCB under the amended definition of PCB and, to the extent distributions are actually made to one or more charities, those charities will each count as PCBs.
Transfer of Stock Between Spouses or Incident to Divorce
Code Sec. 1366(d)(2) provides that if the stock of an S corporation is transferred between spouses or incident to divorce under Code Sec. 1041(a), any loss or deduction with respect to the transferred stock which cannot be taken into account by the transferring shareholder in the year of the transfer because of the basis limitation in Code Sec. 1366(d)(1) shall be treated as incurred by the corporation in the succeeding tax year with regard to the transferee. The proposed regulations amend the provisions of Reg. §1.1366-2(a)(5) to include this exception to the general rule of nontransferability of losses and deductions.
QSub Relief and Inadvertent Invalid Elections or Terminations
Code Sec. 1362(f) provides that QSubs are eligible for relief for an inadvertent invalid QSub election or termination under the same standards applied to an inadvertent invalid S corporation election or termination. The proposed regulations make conforming changes to Reg. §1.1362-4 and make additional changes to Reg. §1.1362-4 addressing the change to Code Sec. 1362(f), which provided relief for corporations with inadvertently invalid S corporation elections.
Comments are requested with respect to these regulations. Written or electronic comments must be received by December 27, 2007. A public hearing is scheduled for January 16, 2008.
Proposed Regulations, NPRM REG-143326-05, 2007FED ¶49,767
Other References:
Code Sec. 1361
CCH Reference - 2007FED ¶32,022C
CCH Reference - 2007FED ¶32,024C
CCH Reference - 2007FED ¶32,025E
CCH Reference - 2007FED ¶32,025K
Code Sec. 1362
CCH Reference - 2007FED ¶32,041C
CCH Reference - 2007FED ¶32,045C
Code Sec. 1366
CCH Reference - 2007FED ¶32,080D
CCH Reference - 2007FED ¶32,082A
CCH Reference - 2007FED ¶32,082H
Tax Research Consultant
CCH Reference - TRC SCORP: 156
CCH Reference - TRC SCORP: 158
CCH Reference - TRC SCORP: 160
CCH Reference - TRC SCORP: 166
CCH Reference - TRC SCORP: 404
CCH Reference - TRC SCORP: 550

CCH (cch.taxgroup.com) reports:

The IRS has issued proposed regulations relating to the treatment of transactions involving intercompany obligations and insurance payments from one member of a group to a captive insurance member.
On December 21, 1998, the IRS issued proposed regulations (NPRM REG-105964-98) clarifying the treatment of the transfer or the extinguishment of rights under intercompany obligations. After considering comments, the IRS is withdrawing the 1998 Proposed Regulations and issuing new proposals. However, for purposes of determining the tax treatment of transactions undertaken prior to the finalization of these proposed regulations, taxpayers may continue to rely upon the form and timing of the recast transaction, as clarified by the 1998 Proposed Regulations.
Revised Deemed Satisfaction-Reissuance Model
The current regulations and the 1998 proposed regulations generally provide that an obligation is treated as satisfied and, if the obligation remains outstanding, reissued as a new obligation. This is the deemed satisfaction-reissuance model. The new proposed regulations are intended to minimize the effects of intercompany obligations on a consolidated group's taxable income.
The proposed regulations adopt new and more precise mechanics for the application of the deemed satisfaction-reissuance model to certain intragroup and outbound transactions. In general, the new model deems the following sequence of events to occur immediately before, and independently of, the actual transaction: (1) the debtor is deemed to satisfy the obligation for a cash amount equal to the obligation's fair market value; and (2) the debtor is deemed to immediately reissue the obligation to the original creditor for that same cash amount. The parties are then treated as engaging in the actual transaction but with the new obligation.
For inbound transactions, the deemed satisfaction-reissuance model mirrors the mechanics and single-entity policies underlying the Code Sec. 108(e)(4) regulations. However, the deemed satisfaction-reissuance model also applies to obligations acquired for a premium and governs the treatment of the creditor as well as the debtor.
For outbound transactions, the deemed satisfaction-reissuance model furthers single-entity treatment by treating a consolidated group as a single issuer and an intercompany obligation acquired or assumed by a nonmember as newly-issued debt. The proposed regulations provide several exceptions to the application of the deemed satisfaction-reissuance model, discussed below.
The Deemed Satisfaction-Reissuance Amount
If a transaction is an intragroup exchange of an intercompany obligation for a newly issued intercompany obligation, the proposed regulations provide that the obligation would be deemed satisfied and reissued for its fair market value. In addition, for all intragroup debt exchanges, other than routine intragroup debt modifications, the newly issued obligation would be treated as having an issue price equal to its fair market value.
If a member's amount realized with respect to an intercompany obligation results from a mark to fair market value under Code Sec. 475, then the obligation will be treated as satisfied and reissued under these regulations but will not otherwise be marked to fair market value under Code Sec. 475
immediately thereafter.
Limitations on the Application of the Deemed Satisfaction-Reissuance Model
The proposed regulations apply the model upon a "triggering transaction," which is defined as any intercompany transaction in which a member realizes an amount, directly or indirectly, from the assignment or extinguishment of all or part of its remaining rights or obligations under an intercompany obligation (or from a comparable transaction). However, the proposed regulations provide a number of exceptions from the application of the deemed satisfaction and reissuance model. One exception involves certain transfers and assumptions of intercompany obligations in intragroup exchanges to which Code Sec. 332 or Code Sec. 361 apply. These proposed regulations also provide an exception to the application of the deemed satisfaction-reissuance model for taxable intragroup sales of assets where intercompany obligations are assumed as part of the transaction. Another exception involves an intragroup transactions in which an intercompany obligation is extinguished. Also excepted are routine intragroup modifications of intercompany obligations.
These proposed regulations retain the exceptions in the current regulations for transactions involving an obligation that became an intercompany obligation by reason of an event described in Reg. §1.108-2(e), and for amounts realized from reserve accounting under Code Sec. 585. However, consistent with the 1998 Proposed Regulations, the new proposals do not include the exception in the current regulations for transactions in which the deemed satisfaction and reissuance will not have a significant effect on any person's federal income tax liability for any year.
Material Tax Benefit Rule
In order to prevent distortions that may result from the shifting of built-in items from intercompany obligations, the proposed regulations include a special rule, the material tax benefit rule, that applies to intragroup transactions otherwise excepted from the deemed satisfaction-reissuance model under the exceptions for certain intragroup nonrecognition exchanges, taxable assumption transactions, extinguishment transactions, and routine debt modifications.
The material tax benefit rule generally applies to an intragroup assignment or extinguishment that would otherwise be excepted from the deemed satisfaction-reissuance model if, at the time of the transaction, it is reasonably foreseeable (regardless of intent) that the shifting of items of built-in gain, loss, income, or deduction from an intercompany obligation between members will secure a material tax benefit that would not otherwise be enjoyed.
Off-Market Issuance Rule
These proposed regulations also include a special rule, the off-market issuance rule, that generally applies if an intercompany obligation is issued at a rate of interest that is materially off-market, and at the time of issuance, it is reasonably foreseeable that the shifting of built-in items from the obligation from one member to another member will secure a material tax benefit.
Outbound Transactions
The new proposals retain the deemed satisfaction-reissuance model, with the new mechanics applied, as well as the current exception for outbound transactions involving an obligation that became intercompany obligation in an event described in Reg. §1.108-2(e). Two new exceptions have been added.
A new "subgroup" exception provides that the deemed satisfaction and reissuance model would not apply if the creditor and debtor to an intercompany obligation cease to be members of a consolidated group in a transaction in which neither member otherwise recognize an item with respect to the intercompany obligation and, immediately after the transaction, such creditor and debtor are members of another consolidated group.
A second exception would apply to an intercompany obligation that is newly issued in an intragroup reorganization and, pursuant to a plan of reorganization, is distributed to a nonmember shareholder or creditor in a transaction to which Code Sec. 361(c) applies.
Inbound Transactions
The proposed regulations retain the deemed satisfaction-reissuance model for inbound transactions, but also include a "subgroup" exception for certain of these transactions. The subgroup exception for inbound transactions is similar to the subgroup exception for outbound transactions discussed above. In addition, the proposed regulations provide a special rule that prevents inappropriate acceleration of a deduction for repurchase premium in certain inbound transactions.
Single Entity Treatment for Significant Insurance Members
The proposed regulations provide that when a significant portion (five percent or more) of the business of the insuring member arises from insuring the risks of other members, either by issuing insurance contracts directly to members or by reinsuring risks on contracts issued to members, it is appropriate to take into account the items from the intercompany transactions on a single entity basis. In such cases, the treatment of the members' items from the insurance transactions would be subject to the matching and acceleration rules of Reg. §1.1502-13. Under these rules, the insured member's deduction and the significant insurance member's income from the transaction would generally be taken into account currently. However, the effects of the intercompany transaction would otherwise be treated in a manner comparable to "self-insurance" by a single corporation.
The proposed regulations continue to except intercompany insurance transactions from single entity treatment where intercompany insurance represents less than five percent of the insuring member's business.
Comments
Before these proposals are adopted as final regulations, consideration will be given to any written or electronic comments that are submitted timely to the IRS. Comments are specifically requested on the following:
--whether it would be beneficial to eliminate any disparity between issue price and basis created upon the issuance of an obligation (for example, by treating such obligations as issued for fair market value);
--whether additional rules are needed for instruments intercompany obligations that are not debt instruments;
--whether some or all of these exceptions discussed above are appropriate, as well as suggestions for other exceptions;
--the relationship between the intragroup off-market issuance rule and the other limitations imposed by the code and regulations on lending transactions;
--whether the exclusion from the definition of intercompany obligation of executory obligations to purchase or provide goods or services is appropriate in all instances;
--whether special rules for the treatment of intercompany obligations transferred or assumed in transactions under Code Sec. 338
are needed;
--whether gross premiums written during the tax year less return premiums and premiums paid for reinsurance is an appropriate measure of an insuring member's business, as well as suggestions for alternatives;
--whether the status of an insuring member as a "significant insurance member" should be an annual determination and whether additional rules are needed when an insuring member's status changes; and
--whether any additional special rules are needed to accomplish single entity treatment for intercompany insurance transactions.
Written or electronic comments and requests for a public hearing must be received by December 27, 2007.
Proposed Regulations, NPRM REG-107592-00, 2007FED ¶49,766
Other References:
Code Sec. 1502
CCH Reference - 2007FED ¶33,159
Tax Research Consultant
CCH Reference - TRC CONSOL: 39,202.05
CCH Reference - TRC CONSOL: 39,304.10

CCH (cch.taxgroup.com) reports:

The Senate by a vote of 67 to 29 on September 27 passed the Children's Health Insurance Program Reauthorization Act of 2007 (HR 976), which President Bush has pledged to veto. The bill passed the House on September 25 (TAXDAY, 2007/09/27, C.4). The bill would add $35 billion to the State Children's Health Insurance Program (SCHIP) over five years --for a total of $60 billion. The additional funding would be raised by a 61-cent increase in the federal tax on cigarettes and tax increases on other tobacco products, including cigars and pipe tobacco. SCHIP insures children whose parents do not qualify for Medicaid but cannot afford private insurance.
Bush in a written statement urged Congress to send him a continuing resolution extending the SCHIP program through November 16. During the evening on September 27, the Senate by a vote of 94 to 1 passed HJRes 52, a continuing appropriations bill that would fund federal government operations through November 16 and contains the temporary SCHIP extension. The House passed the measure on September 26 (TAXDAY, 2007/09/27, C.2). "We should take this time to arrive at a more rational, bipartisan SCHIP reauthorization bill that focuses on children in poor families who don't currently have insurance, rather than raising taxes to cover people who already have private insurance," the president said.
By Paula Cruickshank, CCH News Staff

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

Minnesota Governor Tim Pawlenty has proposed Strategic Entrepreneurial Economic Development (SEED), a new initiative designed to stimulate rural economic development. The new program would include a 25% tax credit for investment in regional funds that support emerging businesses and new technologies, as well extensions of the local and state tax exemptions created under JOBZ.
Full text of the Governor's press release may be found at http://www.governor.state.mn.us/mediacenter/pressreleases/PROD008317.html.
Press Release , Governor's Office, September 25, 2007.

CCH (cch.taxgroup.com) reports:

A new publication on the topic of Colorado sales and use tax exemptions for government purchases has been issued. The document discusses the use of government credit cards and diplomatic tax exemption cards.
FYI Sales 63 , Colorado Department of Revenue, September 20, 2007, ¶200-748
Other References:
Explanations at ¶60-420

CCH (cch.taxgroup.com) reports:

A final partnership administrative adjustment (FPAA) notice, sent to an individual who was identified as an indirect partner of a general partnership, met the notice requirements of Code Sec. 6223(c)(3). The individual was the sole beneficiary of a trust that owned an interest in the general partnership that was the subject of the FPAA. The IRS readily found his name and address, as well as that of the tax matters partner who resided at the same address, from the individual's return identifying him as the beneficiary of the trust; the trust's return that listed the ownership interest in the general partnership under question; and the partnership's return listing the trust as a general partner. The individual's argument that the notice should have been sent to the trust, and not directly to him, was rejected because the individual owned the interest in the partnership through a "pass-through partner", i.e., the trust, and Code Sec. 6223 requires notice to be sent to the indirect partner rather than the pass-through partner.
C.P. Murphy, 129 TC No. 10, Dec. 57,120
Other References:
Code Sec. 6223
CCH Reference - 2007FED ¶37,639.20
CCH Reference - 2007FED ¶37,639.22
Tax Research Consultant
CCH Reference - TRC PART: 60,152
CCH Reference - TRC PART: 60,310

CCH (cch.taxgroup.com) reports:

The IRS has finalized regulations providing guidance for taxpayers that continue to be subject to the passive foreign investment company (PFIC) excess distribution regime of Code Sec. 1291, even though the foreign corporation in which they own stock is no longer treated as a PFIC under Code Sec. 1297(a) or (e). The final regulations generally adopt the temporary regulations that were effective and applied on December 8, 2005, with one modification (T.D. 9232; NPRM REG-133446-03). The final regulations clarify that multiple late purging elections are allowed to the same extent that multiple purging elections could have been made if the elections were timely filed. The regulations are effective on September 27, 2007, and apply as of December 8, 2005.
A shareholder of a foreign corporation may purge the stock of PFIC taint by making a deemed sale or deemed dividend election under Code Sec. 1298(b)(1), provided Code Sec. 1297(e) applies to a portion of the holding period. These rules also provide that such shareholders (or shareholders of foreign corporations that no longer meet the income or asset tests of Code Sec. 1297(a)) may make late deemed sale or deemed dividend elections. The deemed sale and deemed dividend election rules generally conform to the provisions under the Code Sec. 1291 regulations that apply to shareholders making a purging election in connection with a qualified electing fund (QEF) election, except for the following differences:
--The deemed dividend or gain recognized on the deemed sale of QEF stock is taxed as an excess distribution received by the shareholder on the qualification date. This qualification date is defined as the first day of the PFIC's first taxable year as a QEF. The final regulations provide, however, that the deemed dividend or gain recognized on the deemed sale, is taxed as an excess distribution received on the "controlled foreign corporation (CFC) qualification date." The CFC qualification date is defined as the first day on which the qualified portion of the shareholder's holding period in the Code Sec. 1297(e) PFIC begins, as determined under Code Sec. 1297(e)(3).
--The Code Sec. 1291 regulations define the term "post-1986 earnings and profits" as certain undistributed earnings and profits as of the day before the qualification date. The final regulations contain a similar rule, whereby post-1986 earnings and profits means certain undistributed earnings as of the day before the CFC qualification date, which may be a day after the first day of the tax year. Thus, when the CFC qualification date is a day after the first day of the tax year, undistributed earnings and profits will be determined at the close of the tax year that includes the CFC qualification date.
--Since the "once a PFIC, always a PFIC" rule of Code Sec. 1298(b)(1) often leaves a shareholder no way of removing the PFIC taint, the final regulations include late election relief provisions. Shareholders of a Code Sec. 1297(e) PFIC or a former PFIC are allowed to make a late deemed dividend or deemed sale election with the consent of the IRS, provided certain requirements are met. If the purging election is made for a closed tax year, the taxpayer must enter into a closing agreement to eliminate any prejudice to the U.S. government's interests as a consequence of the taxpayer's inability to file an amended return. Multiple late purging elections are permitted with IRS consent.
Time for Making the Deemed Sale or Deemed Dividend Elections
A shareholder must make the deemed sale or deemed dividend election on an original or amended return for the tax year that includes the CFC qualification date. If the election is made on an amended return, the return must be filed within three years of the due date of the original return, as extended under Code Sec. 6081.
A shareholder may request the consent of IRS to make a late deemed sale or deemed dividend election for his tax year that includes the CFC qualification date if he requests consent prior to the PFIC status being raised on audit, he agrees in an IRS closing agreement to eliminate any prejudice to U.S. government interests as a result of his inability to file amended returns for the tax year in which the CFC qualification date falls or an earlier closed tax year in which he took an inconsistent position with the treatment of the foreign corporation as a PFIC, and he follows the procedural rules stated below.
Manner of Making the Deemed Sale or Deemed Dividend Election
The deemed sale or deemed dividend election is made by filing Form 8621, Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund, with the shareholder's return for the election year. The gain or deemed dividend is reported as an excess distribution, and the associated tax and interest must be paid with the return. Where a shareholder makes the election after the return's due date, without regard to extensions, it must pay additional interest, as required by Code Sec. 6601, on the amount of the underpayment. Any realized loss is reported on Form 8621, although it is not recognized. The shareholder must attach a schedule to Form 8621 that demonstrates the calculation of the shareholder's pro rata share of the post-1986 earnings and profits of the PFIC that is treated as distributed on the CFC qualification date. If the shareholder claims an exclusion for amounts previously included in its income, the shareholder must include supporting information.
A late purging election is made by filing a completed Form 8621-A, Return by a Shareholder Making Certain Late Elections to End Treatment as a Passive Foreign Investment Company, and filing the form with the IRS, DP 8621-A, Ogden, UT 84201. In addition to the tax on the excess distribution, the shareholder is also liable for interest for the period beginning on the due date (without extensions) of his return for the year in which the CFC qualification date falls and ending on the date the late purging election is filed with the IRS.
Effect of Deemed Sale or Deemed Dividend Election
A shareholder making the deemed sale election is treated as having sold all of its PFIC stock for its fair market value on the CFC qualification date, which is subject to tax under Code Sec. 1291 as an excess distribution received on that date. A shareholder making the deemed dividend election must include in income as a dividend its pro rata share of the post-1986 earnings and profits of the PFIC attributable to all of the stock it held, directly or indirectly, on the termination date. Likewise, the deemed dividend is also taxed under Code Sec. 1291 as an excess distribution received on the termination date. Where a deemed sale election is made by an indirect shareholder, the amount of gain recognized and taxed is the amount of gain that the direct owner of the PFIC stock would have realized on an actual sale or disposition of the PFIC stock indirectly owned by the shareholder. Any loss realized on the deemed sale is not recognized. After the election, the shareholder's stock is no longer treated as PFIC stock. The shareholder is no longer subject to tax under Code Sec. 1291, unless the qualified portion of the shareholder's holding period ends under Code Sec. 1297(e)(2), and the foreign corporation later qualifies as a PFIC under Code Sec. 1297(a). A shareholder increases its basis of the PFIC stock owned directly by the amount of gain recognized on the deemed sale and by the amount of the deemed dividend. If it is an indirect shareholder, its adjusted basis is increased by the amount of the deemed dividend or gain recognized by the shareholder.
T.D. 9360, 2007FED ¶47,068
Other References:
Code Sec. 1291
CCH Reference - 2007FED ¶31,541K
Code Sec. 1297
CCH Reference - 2007FED ¶31,620F
CCH Reference - 2007FED ¶31,620J
Code Sec. 1298
CCH Reference - 2007FED ¶31,641D
CCH Reference - 2007FED ¶31,641J
Tax Research Consultant
CCH Reference - TRC INTLOUT: 18,200
CCH Reference - TRC INTLOUT: 18,202.20
CCH Reference - TRC INTLOUT: 18,202.25

CCH (cch.taxgroup.com) reports:

Homeowners affected by the nationwide subprime mortgage crisis would get $2 billion in tax relief, under the Mortgage Forgiveness Debt Relief Bill of 2007 (HR 3648), approved by the House Ways and Means Committee on September 26. The committee voted unanimously to approve the tax legislation, but some GOP lawmakers questioned the method of paying for the tax relief.
The legislation would permanently exclude from tax liability any mortgage debt on a principal residence that is forgiven following a foreclosure or renegotiation with lenders. Under current law, such debt forgiveness is considered income for tax purposes, resulting in tax liability for individuals and families. To pay for the tax relief, the bill would restrict taxpayers from excluding some gains from the sale of vacation homes or rental properties.
Rep. Sam Johnson, R-Texas, questioned why the tax relief for troubled homeowners would be permanent, rather than sunset after three years, as suggested by President Bush. Ranking committee member Jim McCrery, R-La., expressed dismay that tightening the capital gains rules on property used as vacation homes and rentals would cause the housing slump to worsen on the east and west coasts.
Rep. Kevin Brady, R-Texas, said that he wished the cost of paying for the relief was more tightly targeted to the lenders and real estate speculators who helped create the subprime lending crisis. Committee Chairman Charles B. Rangel, D-N.Y., brushed aside those concerns, however, saying that "it's so much easier to give the tax break than to pay for it." The legislation is expected to be voted on by the House in November, according to a committee aide.
By Stephen K. Cooper, CCH News Staff
Legislation to Exclude Discharges of Indebtedness on Principal Residences from Gross Income, HR 3648
JCT Description of an Amendment in the Nature of a Substitute to the Provisions of HR 3648, JCX-90-07.

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

The U.S. Supreme Court has granted an Ohio corporation's request to decide if Illinois may require it to treat the gain from its sale of an underlying business segment as apportionable business income, for state corporate income tax purposes, on the basis that the asset served an operational function.
Since 1968, the corporation (Mead) had owned 100% of what became Lexis/Nexis. Lexis/Nexis changed several times between a division and a subsidiary of Mead. In 1994, Mead sold Lexis/Nexis for a gain of approximately $1 billion. Mead, which transacted business in many states including Illinois, excluded the gain from its 1994 Illinois corporate income tax return. However, the Illinois Department of Revenue issued a deficiency notice on the basis that the gain was apportionable business income.
Mead challenged the Department's action in court, asserting that its investment in and disposition of Lexis/Nexis served an investment, as opposed to an operational, function and, therefore, the gain was not apportionable. The trial court disagreed and the Illinois Appellate Court affirmed. (TAXDAY, 2007/01/16, S.11) The Appellate Court considered several factors in concluding that Lexis/Nexis served Mead in an operational rather than an investment function, including: Mead's capital investment in the early years of Lexis/Nexis, Mead's retention of various tax advantages, Mead's investment of Lexis/Nexis' excess cash, Mead's approval of all major capital expenditures, Mead's ability to change Lexis/Nexis from a division to a subsidiary, and Mead's description in its annual report of Lexis/Nexis as a key business component.
The Illinois Supreme Court denied Mead's subsequent petition for appeal, and Mead filed this petition with the U.S. Supreme Court that has now been granted. Mead asserts that all of the factors relied upon by the Illinois Appellate Court derive from the fact that Mead owned 100% of Lexis/Nexis, and reflect an ordinary relationship between a company and a 100% owned subsidiary. If the Illinois decision is allowed to stand, Mead argues that it would mean that all income received by non-domiciliary corporations from subsidiaries or divisions will be subject to apportionment, in direct conflict with Allied-Signal, Inc., 504 U.S. 768 (1992), F.W. Woolworth Co.,
458 U.S. 354 (1982), and ASARCO Inc., 458 U.S. 307 (1982), and the Due Process and Commerce Clauses of the U.S. Constitution. Oral argument probably will be in January 2008 and a decision will be issued prior to the end of the Court's term next summer.
Subscribers to CCH Tax Research NetWork can view the petition.
MeadWestvaco Corp. v. Illinois Department of Revenue, U.S. Supreme Court, Dkt. 06-1413, petition for certiorari granted September 25, 2007.

CCH (cch.taxgroup.com) reports:

A petition for review was granted in the following case:
M.H. Boulware , CA-9, 2007-1 USTC ¶50,516. --The lower court refused to admit evidence allegedly showing diverted funds were nontaxable returns of capital resulting in an individual's conviction for tax evasion and for filing a false tax return in connection with his failure to report funds diverted from his closely held corporation as income for the tax years at issue. The U.S. Supreme Court has granted a Writ of Certiorari on the issue of, "Whether the diversion of corporate funds to a shareholder of a corporation without earnings and profits automatically qualifies as a non-taxable return of capital up to the shareholder's stock basis...even if the diversion was not intended as a return of capital."
Other References:
Code Sec. 7206
CCH Reference - 2007FED ¶41,318.157
Tax Research Consultant
CCH Reference - TRC IRS: 66,102.05

CCH (cch.taxgroup.com) reports:

Final Circular 230 regulations governing unenrolled practice, eligibility for enrollment, practice by former government employees, contingent fees, conflicts of interest, sanctions and disciplinary proceedings, and proposed preparer penalty regulations, have been issued. The final Circular 230 regulations are effective September 26, 2007. The proposed preparer penalty regulations apply to returns filed, or advice provided, on or after final regulations are published in the Federal Register, but no earlier than January 1, 2009.
Proposed Circular 230 regulations were published in the Federal Register on February 8, 2006 (NPRM REG-122380-02). The final Circular 230 regulations make a number changes to the proposed regulations, based primarily on practitioner comments, as follows:
Definition of Practice Before the IRS
The final regulations provide that practice includes rendering written advice with respect to any entity, transaction, plan or arrangement, or other plan or arrangement having a potential for tax avoidance or evasion. This is consistent with title 31, sec. 330 of the American Jobs Creation Act of 2004 (P.L.108-357). The final regulations clarify that although such written advice constitutes practice before the IRS, attorneys and CPAs do not need to file a Form 2848, Power of Attorney, to issue such advice.
Who May Practice
The final regulations establish an enrolled retirement plan agent designation. These individuals will be entitled to represent taxpayers with respect to specified qualified retirement plan issues. Enrolled retirement plan agents will be subject to examination and continuing education requirements. Both enrolled retirement agents and enrolled agents will have to follow the applicable procedures, and pay the user fees, for enrollment and renewal of enrollment.
Limited Practice by Non-Practitioners
Unenrolled return preparers will continue to be allowed to represent taxpayers during examination of returns they prepared, negotiate with the IRS, and bind taxpayers to a position. However, they cannot represent taxpayers before Appeals or in any other capacity before the IRS, or execute closing agreements, claims for refund or waivers.
Contingent Fees
Because of concern about contingent fee arrangements, which may encourage taxpayers to file refund claims and take advantage of the "audit lottery," the final regulations limit such arrangements entered into after March 26, 2008, to representation in connection with the IRS examination of an original return, representation with respect to an amended return or claim for refund or credit filed within 120 days of the taxpayer receiving written notification of an examination or written challenge to the original return, or representation in certain interest and penalty reviews.
Conflicts of Interest
If a practitioner represents two or more clients with conflicting interests, the final regulations require the signed, written consent to such representation by each affected client within 30 days after the client expresses such consent to the practitioner. The requirement of signed consent is designed to protect settlements from future collateral attack. Furthermore, for a period of one year after their employment ends, government employees will be prohibited from appearing before, or communicating with the intent to influence, a Treasury employee with respect to a rule they were involved in developing.
Sanctions, Misconduct and Disciplinary Proceedings
The proposed regulations conform preparer penalties to those imposed under the Small Business and Work Opportunity Tax Act of 2007 (P.L.110-28). Under the proposed regulations a practitioner may not sign a return unless the practitioner either has a reasonable belief that the tax treatment of each position satisfies the "more likely than not" standard (greater than fifty percent likelihood that the tax treatment will be upheld if challenged by the IRS), or has a reasonable basis for each position, and each position is disclosed to the IRS.
The final regulations permit the Secretary of the Treasury to disqualify appraisers who violate Circular 230, in addition to imposing penalties against them. Practitioners can also be sanctioned for disreputable conduct. The final regulations clarify that failure to sign a return is not disreputable conduct if the failure is due to reasonable cause and not willful neglect.
In instances of alleged misconduct the Director of the Office of Professional Responsibility (OPR) is permitted to confer with a practitioner, employer, firm or other entity, by phone or in person, although the final regulations do not make such conference a right. If a complaint is served, the final regulations adopt the proposed regulation requirement that within 10 days thereafter copies of evidence in support of the complaint be served on the respondent. Upon notice, supplemental charges against the practitioner may be filed. In response to practitioner concerns that premature public disclosure of disciplinary proceedings might unfairly damage a practitioner's reputation, the final regulations require that public disclosure of such proceedings be delayed until after the decision in such proceedings becomes final, although the regulations contain a provision for expedited suspension against practitioners who advance frivolous or obstructionist positions, which does not include noncompliance with their own filing obligations.
Practitioner Reaction
"The National Association of Enrolled Agents (NAEA) is asking for consistency between the paid preparer standard and the self-preparer standard," Robert Kerr, senior director of government relations for NAEA, told CCH. The NAEA has urged Congress to equalize the more-likely-than-not standard for paid preparers and the substantial authority standard for self-preparers. The standard for tax avoidance items should remain more-likely-than not, the NAEA told Congress.
Frank Degen, EA, past president of the National Association of Enrolled Agents (NAEA), told CCH that he was disappointed the IRS did not eliminate limited practice. "We agreed with the IRS that it was inconsistent with the requirement that all individuals permitted to practice before the IRS demonstrate their qualifications to advise and assist persons in presenting their cases before the IRS." Degen also urged the IRS Office of Professional Responsibility to create an electronic database where a taxpayer could check if his or her Circular 230 tax professional is in good standing with the IRS.
By Sherri Morris and George L. Yaksick, CCH News Staff
T.D. 9359, 2007FED ¶47,067
T.D. 9359, FINH ¶43,114
Proposed Regulations, NPRM REG-138637-07, 2007FED ¶49,765
Proposed Regulations, NPRM REG-138637-07, FINH ¶41,128
Other References:
31 CFR Part 10
CCH Reference - 2007FED ¶43,504
CCH Reference - 2007FED ¶43,508
CCH Reference - 2007FED ¶43,512
CCH Reference - 2007FED ¶43,516
CCH Reference - 2007FED ¶43,520
CCH Reference - 2007FED ¶43,524
CCH Reference - 2007FED ¶43,528
CCH Reference - 2007FED ¶43,536
CCH Reference - 2007FED ¶43,544
CCH Reference - 2007FED ¶43,556
CCH Reference - 2007FED ¶43,564
CCH Reference - 2007FED ¶43,572
CCH Reference - 2007FED ¶43,576
CCH Reference - 2007FED ¶43,589
CCH Reference - 2007FED ¶43,589C
CCH Reference - 2007FED ¶43,600
CCH Reference - 2007FED ¶43,604
CCH Reference - 2007FED ¶43,609
CCH Reference - 2007FED ¶43,612
CCH Reference - 2007FED ¶43,640
CCH Reference - 2007FED ¶43,644
CCH Reference - 2007FED ¶43,648
CCH Reference - 2007FED ¶43,652
CCH Reference - 2007FED ¶43,656
CCH Reference - 2007FED ¶43,660
CCH Reference - 2007FED ¶43,664
CCH Reference - 2007FED ¶43,672
CCH Reference - 2007FED ¶43,676
CCH Reference - 2007FED ¶43,680
CCH Reference - 2007FED ¶43,684
CCH Reference - 2007FED ¶43,685
CCH Reference - 2007FED ¶43,688
CCH Reference - 2007FED ¶43,704
CCH Reference - 2007FED ¶43,708
CCH Reference - 2007FED ¶43,712
CCH Reference - 2007FED ¶43,716
CCH Reference - 2007FED ¶43,720
CCH Reference - 2007FED ¶43,724
CCH Reference - 2007FED ¶43,728
CCH Reference - 2007FED ¶43,760
CCH Reference - FINH ¶23,040
CCH Reference - FINH ¶23,045
CCH Reference - FINH ¶23,050
CCH Reference - FINH ¶23,055
CCH Reference - FINH ¶23,060
CCH Reference - FINH ¶23,065
CCH Reference - FINH ¶23,070
CCH Reference - FINH ¶23,090
CCH Reference - FINH ¶23,110
CCH Reference - FINH ¶23,120
CCH Reference - FINH ¶23,130
CCH Reference - FINH ¶23,135
CCH Reference - FINH ¶23,155
CCH Reference - FINH ¶23,170
CCH Reference - FINH ¶23,175
CCH Reference - FINH ¶23,180A
CCH Reference - FINH ¶23,185
CCH Reference - FINH ¶23,190
CCH Reference - FINH ¶23,195
CCH Reference - FINH ¶23,201
CCH Reference - FINH ¶23,210
CCH Reference - FINH ¶23,220
CCH Reference - FINH ¶23,235
CCH Reference - FINH ¶23,245
CCH Reference - FINH ¶23,250
CCH Reference - FINH ¶23,252
CCH Reference - FINH ¶23,255
CCH Reference - FINH ¶23,275
CCH Reference - FINH ¶23,280
CCH Reference - FINH ¶23,285
CCH Reference - FINH ¶23,310
CCH Reference - FINH ¶23,315
CCH Reference - FINH ¶23,340
CCH Reference - FINH ¶23,342
Tax Research Consultant
CCH Reference - TRC IRS: 3,200
CCH Reference - TRC IRS: 3,204.10
CCH Reference - TRC IRS: 3,206.05

CCH (cch.taxgroup.com) reports:

The IRS has issued proposed regulations relating to the disclosure of reportable transactions and maintenance of lists required to be kept by material advisors of such transactions. The proposed regulations would add a new category of reportable transaction under Code Sec. 6011 to address the patenting of tax advice or tax strategies.
The IRS previously issued proposed, temporary and final regulations under Code Secs. 6011, 6111
and 6112 in November 2006 (NPRM REG-103038-05, NPRM REG-103039-05, NPRM REG-103043-05, T.D. 9295; TAXDAY, 2006/11/02, I.1). In the preamble to the proposed regulations, the IRS expressed concern regarding the patenting of tax advice or tax strategies that have the potential for tax avoidance and requested comments regarding the creation of a new category of reportable transaction to address those concerns.
After consideration of the comments received, the IRS has issued proposed regulations that would add "patented transactions", a new category of reportable transaction, to the Code Sec. 6011 regulations. The proposed regulations are intended to assist the IRS and Treasury Department in obtaining disclosures of tax-avoidance transactions and in providing effective tax administration.
Under the proposed regulations, a patented transaction is any transaction for which a taxpayer pays a fee to a patent holder or the patent holder's agent for the legal right to use a tax-planning method that the taxpayer knows or has reason to know is the subject of the patent. A patented transaction is also a transaction for which a patent holder or the patent holder's agent has the right to payment for another person's use of a tax-planning method that is the subject of the patent. The proposed regulations would include as a tax-planning method any plan, strategy, technique or structure designed to affect federal income, estate, gift, generation-skipping transfer, employment or excise tax. However, the proposed regulations would exclude patents issued solely for tax-preparation software or other tools used to perform or model mathematical calculations or to provide mechanical assistance in the preparation of tax or information returns.
The proposed regulations provide that a taxpayer has participated in a patented transaction if the taxpayer's tax return reflects a tax benefit from the transaction (including a deduction for fees paid to the patent holder or patent holder's agent). If the taxpayer is the patent holder or patent holder's agent, the taxpayer has participated in a patented transaction if the taxpayer's tax return reflects a tax benefit in relation to obtaining a patent for a tax-planning method or reflects income from a payment received from another person for use of the tax-planning method.
The proposed regulations also describe when a person is a material advisor with respect to a patented transaction under Code Sec. 6111. Because of the nature of patented transactions and how those transactions are marketed, the proposed regulations would reduce the threshold amounts in Reg. §301.6111-3(b)(3)(i)(A) from $50,000 to $250 and from $250,000 to $500.
The IRS and Treasury Department request comments on the proposed regulations. Written or electronic comments must be received by December 26, 2007. A public hearing will be scheduled if requested in writing by any person that submits timely comments.
Proposed Regulations, NPRM REG-129916-07, 2007FED ¶49,764
Proposed Regulations, NPRM REG-129916-07, FINH ¶41,129
Other References:
Code Sec. 6011
CCH Reference - 2007FED ¶35,125BB
CCH Reference - FINH ¶20,062
Code Sec. 6111
CCH Reference - 2007FED ¶37,001G
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

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

In four separate measures, corporate income, personal income, and property tax relief has been extended to California taxpayers affected by specific natural disasters occurring between September 2006 and July 2007. Generally, the legislation applies to losses and damages sustained in
-- the counties of Riverside and Ventura as a result of wildfires that occurred during the 2006 calendar year;
-- the counties of El Dorado, Fresno, Imperial, Kern, Kings, Madera, Merced, Monterey, Riverside, Sand Bernardino, San Diego, San Luis Obispo, Santa Barbara, Santa Clara, Stanislaus, Tulare, Venture, and Yuba that were the subject of a proclamation by the Governor of a state of emergency for freezing conditions that occurred in January 2007;
-- the county of El Dorado as a result of June 2007 wildfires; and
-- the counties of Santa Barbara and Ventura as a result of the Zaca Fire during the 2007 calendar year.
For corporate and personal income taxes, excess disaster losses arising from the 2006-2007 disasters can be carried over to other taxable years. The carryover provisions themselves were not amended.

CCH (cch.taxgroup.com) reports:

Neither an IRS levy on a taxpayer's cash and other liquid assets nor the placement of these funds into an escrow account pending final resolution of a disputed tax liability constituted the payment of the liability that stopped the accrual of interest. The levy only gave the IRS a security interest in the property. Since it did not transfer ownership to the IRS, it was not a payment of the disputed tax. Likewise, the placement of the property into an escrow account was not a payment of the disputed tax because the terms of the escrow specifically provided that escrowed amounts did not constitute a payment.
Affirming FedCl, 2003-1 USTC ¶50,407.
LaRosa's International Fuel Co., Inc., CA-FC, 2007-2 USTC ¶50,657
Other References:
Code Sec. 6511
CCH Reference - 2007FED ¶39,080.30
Code Sec. 6601
CCH Reference - 2007FED ¶39,415.168
Tax Research Consultant
CCH Reference - TRC PENALTY: 9,056
 

CCH (cch.taxgroup.com) reports:

A new e-mail scam, which imitates the IRS's "Where's My Refund?" tool, has surfaced on the Internet, the Service is warning. Individuals are directed to a website called "Get Your Tax Refund!" where criminals steal the victims' identities and financial information.
Tracing Refunds
The real "Where's My Refund?" tool enables individuals to trace their refunds online. Individuals expecting a refund enter their Social Security number, filing status and exact amount of refund shown on their return. The "Where's My Refund?" tool searches for the individual's refund and advises the taxpayer of the status of his or her refund.
Information at Risk
According to the IRS, the "Get Your Tax Refund!" scam is appearing in e-mails that claim that the IRS has calculated the recipient's "fiscal activity" and he or she is eligible for a refund. The taxpayer is instructed to link to the "Get Your Tax Refund!" page.
"Get Your Tax Refund!" copies the appearance of "Where's My Refund?" However, unlike the real website, "Get Your Tax Refund!" asks for confidential personal financial information. Individuals are instructed to reveal their Social Security numbers along with credit card numbers. Instead of entering the amount of refund shown on their return, "Get Your Tax Refund!" asks individuals to enter their credit card numbers, which are then stolen by identity thieves.
Reporting Suspicious E-mails
Individuals receiving "Get Your Tax Refund!" e-mails or any suspicious e-mails claiming to be from the IRS should contact the Service or the Treasury Inspector General for Tax Administration (TIGTA). Individuals can forward suspicious e-mails to a special IRS mailbox, hishing@irs.gov.">phishing@irs.gov. TIGTA, which investigates groups or individuals impersonating the IRS, can be reached at (800) 366-4484.
CCH Comment. These emails are designed to trigger an emotional response, Edward Zollers, CPA, Phoenix, Ariz., told CCH. "They (scam artists) want taxpayers to react before they think." "If you get anything in an email that appears to be from the IRS, delete it," Charles Wold, CPA/PFS, chair of the financial planning section of the Arizona Society of CPAs, added. "The IRS will not contact you by email."
By George L. Yaksick, Jr., CCH News Staff
IRS Example of Phishing E-mail
IRS Website Sample

CCH (cch.taxgroup.com) reports:

The IRS has released proposed regulations on the arbitrage restrictions under Code Sec. 148 applicable to tax-exempt bonds issued by state and local governments. These proposed regulations are being issued in order to update existing regulations, address certain current market developments, simplify and correct certain provisions and to make existing regulations more administrable.
Hedges Based on Taxable Interest Rates
The proposed regulations make revisions to accommodate certain hedges in which floating payments under the hedge are based on a taxable interest rate and to clarify that bonds covered by such a hedge are ineligible for treatment as fixed yield bonds under the special hedging rule in Reg. §1.148-4(h)(4). The IRS has determined that taxable-index hedges based on widely-used taxable indices, such as LIBOR-based hedges, sufficiently improve the efficiency of the tax-exempt bond market to warrant accommodation. The regulations accommodate these hedges by modifying (1) the provisions for "yield reduction payments," which permit an issuer to reduce yield on an investment by making payments to the federal government in certain permitted circumstances to comply with yield restriction rules, and (2) the qualified hedge provisions.
The proposed regulations make clear, however, that while taxable-index hedges can be qualified hedges, and, therefore, eligible for simple integration, they are not eligible for super integration because there is an insufficient correlation between tax-exempt bond interest rates and taxable market interest rate indices. In addition, the regulations modify the yield reduction payment rules to permit issuers to make yield reduction payments on certain variable-yield advance refunding issues in which the issuer has entered into a qualified hedge in the form of a variable-to-fixed interest rate swap to hedge its interest rate risk.
Electronic GIC Bidding
The bidding safe harbor for establishing the fair market value of guaranteed investment contracts (GICs) to accommodate electronic bidding has been revised by the proposed regulations. The regulations amend the fair market value safe harbor for GICs to allow electronic bidding procedures by (1) permitting bid specifications to be sent electronically over the Internet or by fax, and (2) amending the last look rule to provide that there is not a prohibited last look if all bidders have an equal opportunity for a last look.
Other Provisions
The proposed regulations remove the provision in the existing regulations that permits the IRS Commissioner to authorize a single yield computation on multiple bond issues. The proposed regulations also clarify that the amount that an issuer is entitled to receive under a rebate refund claim is the excess of the total amount actually paid over the rebate amount.
Comments
Written or electronic comments must be received by December 24, 2007. Outlines of topics to be discussed at a public hearing scheduled for January 30, 2008, must be received by January 2, 2008.
Proposed Regulations, NPRM REG-106143-07, 2007FED ¶49,763
Other References:
Code Sec. 148
CCH Reference - 2007FED ¶7871C
CCH Reference - 2007FED ¶7874A
CCH Reference - 2007FED ¶7875B
CCH Reference - 2007FED ¶7876B
CCH Reference - 2007FED ¶7880C
CCH Reference - 2007FED ¶7888B
Tax Research Consultant
CCH Reference - TRC SALES: 51,050
 

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

The Streamlined Sales Tax (SST) Governing Board resolved one of its two most enduring controversies, the treatment of digital products, but failed to reach agreement on the other, an alternative to the current sourcing provisions, during its meeting in Kansas City, Kansas, September 19-20, 2007. The meeting also saw the admission of two more states to full membership and leadership changes in the key constituent organizations. Kansas Secretary of Revenue Joan Wagnon is the incoming President of the Governing Board and the Council on State Taxation's Stephen Kranz is the new President of the Business Advisory Council (BAC).
With her term coming to an end, Diane Hardt, Wisconsin Department of Revenue, stepped down as chair of the State and Local Advisory Council (SLAC). Wagnon will appoint her successor. Hardt, who also co-chaired the SLAC's predecessor, the Streamlined Sales Tax Project (SSTP), from its inception over seven years ago, said the group had "set an example" for similar efforts in state government and urged participants to "keep an eye on the big picture" as they continue their work. She will continue to be involved in the SLAC and the Board as a delegate from Wisconsin.

CCH (cch.taxgroup.com) reports:

Answers to frequently asked questions (FAQs) received by the IRS about the new reporting requirements for small tax-exempt organizations are now available on the Service's website (http://www.irs.gov/charities/article/0,,id=173864,00.html). The IRS admits within these FAQs that some small tax-exempts have been confused over the new reporting requirements imposed by the Pension Protection Act of 2006 (PPA) (P.L.109-280) effective for tax years ending after December 31, 2006. It stated that the new FAQs were released to help clarify the new requirements. The FAQs review those circumstances in which small tax-exempts are required to use new electronic Form 990-N, Electronic Notice (e-Postcard) For Tax-Exempt Organizations Not Required To File Form 990 or 990-EZ, as well as the consequences of failing to file.
New Requirement
Small tax-exempt organizations, for purposes of the new filing requirements, are those tax-exempts with gross receipts of $25,000 or less. Ordinarily, these organizations are not required to file a Form 990, Return of Organization Exempt From Income Tax, or Form 990-EZ, Short Form Return of Organization Exempt From Income Tax. However, subject to several exceptions, the PPA now requires them to file an electronic Form 990-N. The form must be filed electronically by the 15th day of the fifth month after the close of the organization's tax period. The IRS began mailing educational letters to over 650,000 small tax-exempts in July of this year to warn about this new requirement.
Exempt Status At Risk
The IRS warns small tax-exempts that the PPA
requires the Service to automatically revoke the tax-exempt status of any organization failing to meet its annual filing requirement for three consecutive years. Small tax-exempts may meet this requirement by filing the new Form 990-N or by filing either of the full-fledged Forms 990 or 990-EZ. The IRS further warns that failing to file under one of these options for three consecutive years will trigger the need for reinstatement of tax-exempt status. Reinstatement requires an application, as well as payment of user fees. The entity must make such application for reinstatement using Form 1024, Application For Exemption Under Section 501(a).
By Torie Cole, CCH News Staff

CCH (cch.taxgroup.com) reports:

The Senate Finance Committee on September 21 approved the tax titles to two separate pieces of legislation: the American Infrastructure Investment and Improvement Bill, which would reauthorize the Airport and Airway Trust Fund (AATF), and the Habitat and Land Conservation Bill of 2007, which would provide tax incentives for farmers, ranchers, and private landowners. The FAA legislation was approved 16 to 5, and the conservation measure was ordered reported by voice vote.
The FAA mark would reauthorize the AATF through 2011, adding approximately $430 million each year to fund the satellite-based NextGen air traffic system and to fill 2009 shortfalls of approximately $5 billion in the Highway Trust Fund. Approximately $250 million of the additional $400 million in funds will come from General Aviation, or private jets, with the rest provided through commercial carriers. Compensation for a shortfall in the Highway Trust Fund would come through replenishing emergency spending from the fund, suspending transfers from the fund for certain repayments and credits and anti-fuel fraud provisions.
The nearly $3.2 billion in tax provisions found in the Habitat and Land Conservation Bill of 2007 would be used to permanently extend tax incentives for farmers, ranchers and other eligible taxpayers who establish conservation easements and to establish tax credits for taxpayers who take voluntary measures to help protect and restore the habitats of threatened or endangered species. The funds would also be used to cover a tax deduction for the cost of specific actions taken by taxpayers that are recommended in habitat recovery plans approved under the Endangered Species Act.
In addition, the measure would allow taxpayers to exclude from taxable income any payments received from the federal government under certain cost-sharing conservation programs and would extend a provision to allow taxpayers to fully deduct the costs of environmental cleanups in the year the costs are incurred. The cost of the measure is offset by revenues from increasing restrictions on so-called sale-in, lease-out transactions (SILO).
Senate Finance Committee ranking member Charles E. Grassley, R-Iowa, said that, while he supports the conservation legislation, more action is needed in tax law enforcement. "While I am willing to have the committee act on this legislation today, I will not be comfortable with further action until I am confident more has been done to address the ongoing abuses that IRS and Treasury have reported in the area of conservation easements," he said.
Prior to the markup, Senate Finance Committee Chairman Max Baucus, D-Mont., consulted with Finance members on modifications to the original Chairman's Mark of the air and highways bill that was released on September 17. The changes included: authorization for the use of Highway Trust Funds specifically to address the Minnesota I-35 bridge collapse, a Truth in Passenger Tax Disclosures provision preventing airlines from presenting fuel surcharges as government-imposed taxes, a requirement that new accruals in air carrier pension plans must be funded, Liberty Zone incentives for New York City, and exemptions for some shippers from the harbor maintenance tax at U.S. ports in the Great Lakes/St. Lawrence Seaway system. Some technical corrections were included as well. The committee also accepted a fully offset amendment to provide tax credit bonds for rail infrastructure
By Jeff Carlson, CCH News Staff
JCT Description of the Chairman's Modification to the Provisions of the American Infrastructure Investment and Improvement Act, JCX-83-07
JCT Estimated Revenue, General Fund, and Trust Fund Effects of the Chairman's Modification to the American Infrastructure Investment and Improvement Act, JCX-84-07
FAA Reauthorization Act of 2007, as Passed by the House on September 20, 2007, HR 2881
Federal Aviation Administration Extension Act of 2007, as Reported by the House Ways and Means Committee, HR 3540
House Ways and Means Committee Report on the Federal Aviation Administration Extension Act of 2007, HRRepNo 110-337.

Tax Analysts report:

Tax Analysts report:

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

A taxpayer that extracted and processed gas from its own gas wells was liable for Mississippi use tax on the portion of gas that was used and consumed by the taxpayer for plant fuel and as fuel to run its lease equipment at the well sites.
Such gas was subject to use tax as property that was withdrawn or used from an established business or from stock-in-trade for consumption or any other use in the business or by the owner. Previously, the taxpayer had purchased fuel used in operations from third parties and paid sales tax on those purchases.
Although the taxpayer was a wholesaler of gas to other companies, the gas at issue was never sold at wholesale for resale by another company. Thus, taxpayer could not avail itself of the wholesaler exemption. Use tax was due regardless of whether the gas came from within Mississippi's borders or was brought into the state.
Subscribers to CCH Tax Research NetWork can view this opinion.
Pursue Energy Corporation v. Mississippi State Tax Commission,
Mississippi Supreme Court, No. 2006-CA-01390-SCT, September 20, 2007.

CCH (cch.taxgroup.com) reports:

Nine hotel operators in Santa Cruz, California, were required to comply with subpoenas issued by the city requiring the production of records necessary for a transient occupancy tax audit. The ordinance that imposes the tax is not unconstitutionally vague, it did not violate equal protection principles by improperly classifying for taxation persons who cannot afford month-to-month housing and can afford residing at a motel only on a day-to-day basis, and the subpoenas were proper and lawful.

CCH (cch.taxgroup.com) reports:

Linda Stiff has started serving as acting IRS commissioner as of September 10, an IRS spokesperson has confirmed to CCH. A brief description of Stiff's prior service with the IRS, starting with her position in 1980 as a revenue agent in Jacksonville, Fla., now appears on the IRS's website (www.irs.gov) under "About the IRS," where she is listed as acting IRS commissioner.
In addition to her role as acting IRS commissioner, Stiff will serve as deputy commissioner for Services and Enforcement, providing direction and oversight for all major decisions affecting the four taxpayer-focused IRS Divisions: Wage and Investment; Large and Mid-Size Business; Small Business/Self-Employed; and Tax Exempt and Government Entities. Stiff held the position of deputy commissioner for Operations Support immediately prior to her appointment. Her new role as acting commissioner was determined under a standing Internal Delegation Order based on holding that former position. She replaces Kevin Brown, who has served as acting commissioner since May 4, when Mark W. Everson left the IRS to become head of the Red Cross.
No news has been forthcoming from the administration regarding how the selection of a new commissioner is progressing. The role of acting commissioner generally has been considered that of a caretaker. During an acting commissioner's term, policies and programs set into motion by the last commissioner are carried forward.
By George Jones, CCH News Staff
 

CCH (cch.taxgroup.com) reports:

The House on passed the FAA Reauthorization Bill of 2007 (HR 2881) by a vote of 267-151 on September 20. The measure, which funds the FAA for four years, includes the Airport and Airway Trust Fund Financing Bill of 2007 (HR 3539), which was approved by the House Ways and Means Committee to raise airline fuel taxes in order to pay for air traffic control system improvements and modernization efforts (TAXDAY, 2007/09/18, C.2).
The measure would increase the general aviation jet fuel tax rate from 21.8 cents per gallon to 30.7 cents per gallon. It would also increase the aviation fuel tax rate from 19.3 cents per gallon to 24.1 cents per gallon. Lawmakers said the funds would be used to provide funding for a next generation satellite air traffic control system, and to stabilize and strengthen the Airport and Airway Trust Fund.
The tax increases were approved by the Ways and Means Committee on September 18 when members voted unanimously to supportHR 3539. That bill, which would extend the taxes from September 30, 2007, through September 30, 2011, was included in HR 2881.
According to estimates from the Joint Committee on Taxation released on September 17, the tax provisions would raise $1.8 billion over the next 10 years. House Transportation and Infrastructure Committee Chairman Jim Oberstar, D-Minn., said the fuel tax increases only apply to noncommercial aviation, and the revenues will only pay for air traffic control modernization efforts.
The Bush administration on September 19 threatened to veto the FAA legislation, criticizing its reforms as inadequate and charging that the bill would worsen the status quo by undoing the actions of past Congresses. The Statement of Administration Policy suggests that lawmakers focus on ways to better target highway resources without resorting to tax increases or budget gimmicks.
By Stephen K. Cooper, CCH News Staff
Airport and Airway Trust Fund Financing Act of 2007, as Reported by the House Ways and Means Committee, HR 3539

CCH (cch.taxgroup.com) reports:

President Bush on September 20 stood firmly against any congressional move to increase tobacco taxes to pay for expansion of the federally and state-funded Children's Health Insurance Program (S-CHIP). Health and Human Services (HHS) Secretary Mike Leavitt, at a White House news conference, said that the president will seek a temporary extension of the existing S-CHIP program if the administration does not reach agreement on a funding compromise with Congress by the end of the fiscal year (FY) on September 30.
The president indicated that tax-cut policies have sustained economic growth and will help to avert an economic recession amid the current financial market turmoil. Referring to himself as a "supply-sider," Bush said that he believes supply-side economics, "when properly instituted," result in additional tax revenue growth. Higher-than-estimated tax receipts have kept the federal deficit "lower than the 30-year average," he noted. Keeping taxes low, combined with federal spending restraint, will keep the budget on track toward balance by 2012, the president maintained.
On mandatory spending programs, Bush said that he will not give up on entitlement reform. "The biggest issues we've got with the deficit are those deficits inherent in these entitlement programs."
On discretionary spending, the Congress faces a veto showdown on 10 out of 12 regular appropriations bills. Only the appropriations bills for military construction and the Department of Veterans Affairs have been spared a promised veto, noted White House Deputy Press Secretary Tony Fratto.
IRS Appropriations Bill
Meanwhile, the House approved an IRS budget of $11.1 billion for FY 2008 as part of a $12.3 billion Treasury budget (HR 2829, TAXDAY, 2007/06/29, C.1). The appropriation includes $3.6 billion for taxpayer service, $7.2 billion for enforcement, $282 million for business systems modernization, and $116 million for tax compliance research.
The Senate Appropriations Committee approved an $11.1 billion IRS budget on July 12, as part of the Financial Services and General Government Appropriations Act for FY 2008 (TAXDAY, 2007/07/13, C.3) The bill has not yet been taken up by the Senate.
By Paula Cruickshank and Brant Goldwyn, CCH News Staff
 

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

A Virginia Department of Taxation's sales tax assessment was declared erroneous because it was based on collecting sales tax on interstate commerce transactions not occurring in Virginia, in which the merchandise either (1) never entered Virginia or (2) was delivered outside Virginia, with risk of loss passing outside Virginia, for use or consumption outside Virginia. The assessment was corrected to reflect that no Virginia sales or use tax is due related to goods that never enter Virginia or that are delivered to an out-of-state recipient, whether the recipient is the purchaser or another person.
Bloomingdale's, Inc. v. Virginia Department of Taxation , Circuit Court for the City of Richmond, No. CL05T00891-00-1/07-3860, August 9, 2007, 204-653
Other References:
Explanations at ¶60-450

CCH (cch.taxgroup.com) reports:

As a service to our subscribers, CCH Tax & Accounting has prepared projected inflation-adjusted tax brackets for the 2008 Tax Rate Schedules, standard deduction amounts and personal exemption amounts for use in year-end and 2008 tax planning. The projected figures are based on the inflation-adjustment provisions of the Internal Revenue Code (IRC) as currently in force and the average of the Consumer Price Index for All Urban Consumers (CPI-U) published by the Department of Labor for each month in the 12-month period ending on August 31, 2007. Official IRS figures will not be released until later in 2007.
Tax Brackets
Joint returns. For married taxpayers filing jointly and surviving spouses, the maximum taxable income subject to the 10-percent bracket will rise from $15,600 in 2007 to $16,050 in 2008; the top of the 15-percent tax bracket will increase from $63,700 to $65,100. The bracket amounts for the remaining tax rates show similarly proportionate increases: $131,450 as the maximum for the 25-percent bracket (up $2,950 from 2007); $200,300 for the 28-percent bracket (up $4,450 from 2007); and $357,700 for the 33-percent bracket (up $8,000 from 2007). Amounts above the $357,700 level will be taxed at the 35 percent rate.
Unmarried filers. For single taxpayers, the maximum taxable income for the 10-percent bracket will increase to $8,025 for 2008 (up from $7,825 in 2007). The remainder of the rate brackets show inflation increases of: $700 for the top of the 15-percent bracket (to $32,550); $1,750 for the 25-percent bracket (to $78,850); $3,700 for the 28-percent bracket (to $164,550); and $8,000 for the top of the 33-percent bracket (to $357,700).
Married filing separately. Married taxpayers filing separately will see a $200 increase for the upper range of the 10-percent bracket (to $8,025) and a $700 increase for the 15-percent bracket (to $32,550). The top of the 25-percent bracket will increase by $1,475 (to $65,725); the 28-percent bracket will increase by $2,225 (to $100,150); and the 33-percent bracket will increase by $4,000 (to $178,850).
Heads of household. For heads of households, the maximum taxable income for the 10-percent bracket will rise to $11,450 (from $11,200). The top of the remainder of the bracket amounts will also increase: up $1,000 from 2007 for the 15-percent bracket, to $43,650; up $2,550 from 2007 for the 25-percent bracket, to $112,650; up $4,050 from 2007 for the 28-percent bracket, to $182,400; and up $8,000 from 2007 for the 33-percent bracket, to $357,700.
Estates and trusts. For estates and nongrantor trusts, the maximum taxable income for the 15-percent bracket will increase by $50 over the 2007 level, to $2,200 (there is no 10-percent bracket for these taxpayers). For the 25-percent bracket, the maximum for the bracket will be $5,150 (up $150 from 2007); for the 28-percent bracket, $7,850 (up $200 from 2007); and for the 33-percent bracket, $10,700 (up $250 from 2007).
Standard Deduction
The 2008 standard deduction will rise by $100, to $5,450, for single taxpayers; by $150, to $8,000, for heads of households; by $200, to $10,900, for married taxpayers filing jointly and surviving spouses; and by $100, to $5,450, for married taxpayers filing separately. The standard deduction for dependents will remain at $900 (or earned income plus $300).
Personal Exemptions
The amount of personal and dependency exemptions for 2008 will increase from the 2007 level by $100 to $3,500.
Gift Tax
The gift tax annual exemption, which rose from a base of $10,000 to $11,000 in 2002 and to $12,000 in 2006, will remain at the $12,000 level for 2008. Pursuant to the IRC, the exemption can rise only when the inflation adjustment produces an increase of $1,000 or more.
Personal Exemption, Itemized Deduction
Personal exemption phaseout. The 2008 personal exemption phaseout for married taxpayers filing jointly will increase by $5,350 over the 2007 level and will begin at adjusted gross income (AGI) of $239,950; for single taxpayers, the phaseout will increase by $3,550 over the 2007 level, to begin at AGI of $159,950; for heads of households, the increase over 2007 will be $4,450, to begin at AGI of $199,950; and for married taxpayers filing separately, the phaseout will begin at AGI of $119,975, representing an increase of $2,675.
Itemized deductions phaseout. For higher income taxpayers, the amount of their otherwise allowable itemized deductions will be reduced when AGI exceeds a threshold amount. The reduction is equal to the lesser of three percent of AGI over the threshold amount or 80 percent of itemized deductions otherwise allowable. For 2008, the threshold amount at which the three-percent itemized deduction limitation takes effect will increase by $3,550, to AGI of $159,950 for married taxpayers filing jointly, single taxpayers and heads of household, and will increase by $1,775, to AGI of $79,975 for married taxpayers filing separately.
Lesser phaseouts for 2008. New for 2008, the reduction of the inflation-adjusted phaseout of the personal exemption amounts and itemized deductions for taxpayers with adjusted gross income above certain thresholds get larger. Starting in 2008, taxpayers only lose one-third of the amount otherwise required under the phaseouts, down from two-thirds in 2006 and 2007. The amount hits zero in 2009.
New for 2008
The Code Sec. 179 expensing amounts, which were raised for 2007 by the Small Business and Work Opportunity Tax Act of 2007 (P.L. 110-28), will now be raised for inflation in 2008 to $128,000, with the starting phaseout amount also raised to $510,000. The Act
raised it retroactively to January 1st for 2007 to $125,000 and $500,000 respectively, from the prior 2007 inflation-adjusted amount of $112,000 and $450,000.
While the kiddie tax inflation adjusted amounts are adjusted for 2008 as before, the Act
changed the definition of "kiddies" that are subject to their parent's tax rates. Starting in 2008, the new law includes 18-year-olds, as well as students under 24 who may be claimed as dependents by a parent. The inflation-adjusted amounts themselves also rise independent of the Act, however, under the normal calculations, to $1,800 for 2008, up from $1,700 where it had been since 2006. The kiddie tax standard deduction rises from $850 to $900.
CCH Comment. Two other changes not keyed to automatic inflation adjustments but still very much governed by inflation include the AMT exclusion and the reduced capital gain rate:
--In 2006, the AMT exemption amounts were $42,500 for single individuals and $62,550 for married couples filing jointly. The higher amounts lapsed and are now set for 2007 and again for 2008 at just $33,750 for individuals and $45,000 for married couples filing jointly. Congress, however, is expected to enact another round of temporary relief.
--The net capital gain rate starting in 2008 is scheduled to be lowered to zero for those in the 15-percent income tax bracket, down from five percent in 2007.
Other Tax Figures
In addition to the projected tax figures for 2008 listed above, the IRC requires other adjustments based on the September 2006 through August 2007 CPI amounts. These additional amounts include:
Roth IRAs. The AGI limits for maximum Roth IRA contributions are: married filing jointly, $159,000 (formerly $156,000); other filing statuses, other than married filing jointly or separately, $101,000 (formerly $99,000).
IRAs. The AGI limits for maximum IRA contributions for individuals covered by a retirement plan are: married filing jointly, $85,000; head of household and single, $53,000.
Education savings bond interest exclusion.
When U.S. savings bonds are redeemed to pay expenses for higher education, the interest may be excluded from income if the taxpayer's income is below a certain range. For 2007, that phaseout range begins at $67,100 modified AGI ($100,650 for joint returns).
Education credits. The HOPE and Lifetime Learning Credits for 2008 will be phased out for those taxpayers with modified adjusted gross income in 2008 starting at $48,000 ($96,000 for married joint filers). The $1,000 credit amount in 2008 goes up $100 to $1,200.
Adoption expense credit. This $10,000 maximum credit was first subject to an inflation adjustment after 2002. For 2008, the amount will increase to $11,650, with the AGI phaseout beginning at $174,730.
Student loan interest income phaseout.
The $2,500 student loan interest deduction phaseout begins at $55,000 AGI for singles in 2008. The phaseout level for joint filers rises to $115,000.
Gifts to noncitizen spouses. The first $128,000 of gifts in 2008 to a spouse who is not a U.S. citizen will not be included in taxable gifts, up $5,000 from 2006.
Foreign gifts. A U.S. person receiving aggregate foreign gifts exceeding $13,560 in 2008 must file an information return.
Transportation fringe benefits. The monthly cap on the exclusion of qualified parking expenses will be $220 in 2008 (up from $215 in 2007). Transit passes/commuter highway vehicle amounts will rise $5 to $115 per month.
Child credit. The refundable child credit earned income threshold will be $12,050 (formerly $11,750).
By Torie Cole, CCH News Staff
 

CCH (cch.taxgroup.com) reports:

Disability benefits received by a lawyer under a group disability insurance policy were not includible in his gross income under Code Sec. 104(a)(3) because he paid the insurance premiums. Although the taxpayer's law firm wrote the checks for the premiums, the payments were deducted from his shareholder loan account, thereby reducing the loan balance owed to him by the firm, and were not deducted by the firm on its corporate tax return. Consequently, the economic burden of paying the premiums was on the taxpayer and the firm was merely a conduit.
R.S. Cotler, TC Memo. 2007-283, Dec. 57,108(M)
Other References:
Code Sec. 104
CCH Reference - 2007FED ¶6662.26
Tax Research Consultant
CCH Reference - TRC BUSEXP: 12,300
 

CCH (cch.taxgroup.com) reports:

The IRS will temporarily stop accepting applications on December 18, 2007, for determination letters for defined contribution plans that are filed on Form 5307, Application for Determination for Adopters of Master or Prototype or Volume Submitter Plans. All pre-approved (i.e., master and prototype, and volume submitter) defined contribution plans are required to be restated to comply with the Economic Growth and Tax Relief Reconciliation Act of 2001 (P.L. 107-16) (EGTRRA), and the plans must be submitted to the IRS for a determination letter (if needed) using Form 5307 during an approximately two-year period that has yet to start. The IRS plans to announce the dates of this period early in 2008. The temporary suspension until the beginning of this period will allow the IRS to prepare to receive the EGTRRA
applications.
The IRS will continue to process determination letter applications using Form 5307 for defined contribution plans filed before December 18, 2007, provided the plan has a favorable GUST opinion or advisory letter. Any application filed on or after December 18, 2007, and before the opening of the approximately two-year period for adopting EGTRRA-restated pre-approved plans will be returned to the applicant. Adopters of pre-approved defined benefit plans can continue to seek determination letters during this period. An adopting employer may continue to apply on Form 5307 for a determination letter for plan amendments related to a voluntary correction program submission or under the correction on audit program.
Announcement 2007-90, 2007FED ¶46,637
Other References:
Code Sec. 401
CCH Reference - ¶17,507.0425
CCH Reference - 2007FED ¶17,507.2531
CCH Reference - 2007FED ¶17,929.65
Tax Research Consultant
CCH Reference - TRC RETIRE: 51,052.20
CCH Reference - TRC RETIRE: 78,106

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

A sales finance company (taxpayer) was not entitled to a refund of Louisiana sales taxes advanced by the company for motor vehicle credit sales that were ultimately uncollectible and charged off the company's federal tax returns as bad debts. The taxpayer made no retail sales to the consumers whose credit accounts it purchased. Neither it nor the dealerships had a statutory obligation to collect the motor vehicle sales tax or to account for the tax to the Louisiana Department of Revenue, and as a consequence, the taxpayer was not entitled to a refund under the bad debt statute.

CCH (cch.taxgroup.com) reports:

The proceeds from a settlement of a lawsuit involving a claim to ownership of a life insurance policy were taxable as ordinary income. The lawsuit was filed by a taxpayer and his wife against his former employer for, among other things, breach of an employment contract provision requiring the employer to assign the life insurance policy on the taxpayer to his wife. In settlement thereof, the employer paid an amount to the taxpayer, however, the employer retained ownership of the policy. The taxpayer's argument that the proceeds were capital gain was rejected because there was no sale or exchange of the policy as contemplated by Code Sec. 1221; rather, the proceeds were specifically for settlement of the claim.
N.C. Eckersley, TC Memo. 2007-282, Dec. 57,107(M)
Other References:
Code Sec. 1221
CCH Reference - 2007FED ¶30,422.58
CCH Reference - 2007FED ¶30,422.6555
Tax Research Consultant
CCH Reference - TRC SALES: 3,266
 

CCH (cch.taxgroup.com) reports:

Various prescribed rates for federal income tax purposes for October 2007 have been provided by the IRS. The annual short-term, mid-term, and long-term applicable federal interest rates (AFRs) are 4.19 percent, 4.35 percent and 4.88 percent, respectively. The semiannual short-term, mid-term, and long-term AFRs are 4.15 percent, 4.30 percent and 4.82 percent, respectively. Quarterly short-term, mid-term and long-term AFRs are 4.13 percent, 4.28 percent and 4.79 percent, respectively. Finally, the monthly short-term, mid-term and long-term rates are 4.11 percent, 4.26 percent and 4.77 percent, respectively.
The short-term, mid-term, and long-term adjusted applicable federal rates (adjusted AFR) for October 2007 for purposes of Code Sec. 1288(b) are 3.60 percent, 3.79 percent, and 4.49 percent, respectively, when annual compounding is used.
Additionally, the Code Sec. 382 adjusted federal long-term rate is 4.49 percent, and the long-term tax-exempt rate is 4.50 percent. The Code Sec. 42(b)(2) appropriate percentage for the 70-percent present-value, low-income housing credit is 8.07 percent, and the appropriate percentage for the 30-percent present-value, low-income housing credit is 3.46 percent.
Finally, the Code Sec. 7520 AFR for determining the present value of an annuity, an interest for life or a term of years, or a remainder or reversionary interest is 5.20 percent.
Rev. Rul. 2007-63, 2007FED ¶46,636
Rev. Rul. 2007-63, FINH ¶P30,562
Other References:
Code Sec. 42
CCH Reference - 2007FED ¶173.02
CCH Reference - 2007FED ¶176.01
CCH Reference - 2007FED ¶4305.03
Code Sec. 382
CCH Reference - 2007FED ¶17,115.28
Code Sec. 642
CCH Reference - 2007FED ¶24,308.1885
Code Sec. 1274
CCH Reference - 2007FED ¶31,310.05
CCH Reference - 2007FED ¶31,310.11
Code Sec. 7520
CCH Reference - 2007FED ¶42,785.40
CCH Reference - FINH ¶18,950.05
Code Sec. 7872
CCH Reference - FINH ¶22,630.05
Tax Research Consultant
CCH Reference - TRC ACCTNG: 36,162.05
 

CCH (cch.taxgroup.com) reports:

Senate Finance Committee Chairman Max Baucus, D-Mont., announced on September 18 that the committee will mark up the "Habitat and Land Conservation Act of 2007," which would provide tax incentives for farmers, ranchers, and private landowners who voluntarily put easements on their property or who aid in the recovery of species classified as threatened or endangered. The markup is slated for September 20.
Provisions in the Habitat and Land Conservation Act of 2007 would: (1) permanently extend tax incentives for farmers, ranchers and other eligible taxpayers who establish conservation easements, (2) establish tax credits for taxpayers who take voluntary measures to help protect and restore the habitats of threatened or endangered species and (3) establish a tax deduction for the cost of specific actions taken by taxpayers that are recommended in habitat recovery plans approved under the Endangered Species Act.
In addition, the measure would allow taxpayers to exclude from taxable income any payments received from the federal government under certain cost-sharing conservation programs and extend a provision to allow taxpayers to fully deduct the costs of environmental cleanups in the year the costs are incurred.
"This bipartisan bill will go a long way towards preserving America's beauty and protecting our planet's most vulnerable species," said Baucus in a written statement. "This is a promise to our children and our grandchildren that we will guarantee access to the hunting and fishing areas that so many Americans treasure."
Baucus, with ranking member Charles E. Grassley, R-Iowa, and committee members Mike Crapo, R-Idaho, and Blanche Lincoln, D-Ark., co-sponsored the Endangered Species Recovery Act --which would establish tax credits for conservation easements --in February 2007. According to a release by Baucus' staff, conservation tax incentives have been strongly supported by lawmakers on both sides of the aisle, as well as advocacy organizations including the Congressional Sportsmen Foundation, National Wildlife Federation, Environmental Defense, the Defenders of Wildlife, the National Endangered Species Act Reform Coalition and the Farm Bureau.
By Jeff Carlson, CCH News Staff
 

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

The California Franchise Tax Board (FT has released a draft of a publication that addresses the tax issues faced and adjustments that will be required by registered domestic partners (RDPs) who file California personal income tax returns. Beginning with the 2007 tax returns filed in 2008, registered domestic partners will be required to file their tax return using a married/RDP filling jointly or married/RDP filing separately filing status.
The publication provides general information concerning registered domestic partnerships and the application of community property laws. Specific issues concerning the filing status adjustments that are required for RDPs that claim specified deductions and exclusions are also addressed. Examples of these adjustments include, but are not limited to, capital losses, transactions between RDPs, sale of a residence, investment interest, and expense depreciation property limits.
The FTB is seeking comments concerning this draft publication. Persons who have comments or suggestions concerning additional topics that should be addressed should submit the comments to RDP@ftb.ca.gov. A copy of the draft publication is available on the FTB's Web site (http://www.ftb.ca.gov/forms/drafts/07_drafts/07_737draft.pdf).
Alternatively, subscribers to CCH Tax Research NetWork can view the publication by using the link below.

CCH (cch.taxgroup.com) reports:

Married taxpayers were not entitled to have their Collection Due Process (CDP) appeal heard under the Code Sec. 7463(f)(2) small case procedures because their unpaid tax on the date of the determination notice exceeded $50,000. Although the couple disputed less than $50,000, the amount of the unpaid tax on the date of the determination notice, rather than the amount in dispute, governed their eligibility for small case designation.
M.P. Leahy, 129 TC No. 8, Dec. 57,105
Other References:
Code Sec. 6330
CCH Reference - 2007FED ¶38,184.60
Code Sec. 7463
CCH Reference - 2007FED ¶42,119.16
Tax Research Consultant
CCH Reference - TRC LITIG: 7,002
 

CCH (cch.taxgroup.com) reports:

All Forms 1098-C, Contributions of Motor Vehicles, Boats, and Airplanes, and Forms 1096, Annual Summary and Transmittal of U.S. Information Returns, filed after December 31, 2007, must be sent to the Internal Revenue Service Center, Kansas City, Mo. 64999. All donee organizations that receive a donation of a qualified vehicle with an estimated value of $500 or more, are required to file a Form 1098-C along with a Form 1096. Notice 2006-1, I.R.B. 2006-4, 347, instructing taxpayers to send the forms to Ogden, Utah, is modified.
Notice 2007-70, 2007FED ¶46,634
Other References:
Code Sec. 170
CCH Reference - 2007FED ¶11,660.515
CCH Reference - 2007FED ¶11,660.517
Code Sec. 6720
CCH Reference - 2007FED ¶40,209.10
Tax Research Consultant
CCH Reference - TRC INDIV: 51,456.25
 

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

Port modem management services purchased by an Internet service provider from a telecommunications company were telecommunications services subject to Pennsylvania sales tax rather than exempt enhanced services. The taxpayer contended that its primary objective in purchasing services from the telecommunications company was port modem management and that the services should not be classified as taxable basic telecommunications services merely because they were purchased and billed together with transmission services. However, the court determined that "management" was only one component of the services and the remaining services were used for taxable purposes.
The taxpayer also claimed that based on Pennsylvania Department of Revenue Policy Statement 60.20, the services constituted nontaxable enhanced telecommunications services because they were offered over a telecommunications network and some functions were performed by using a computer processing application. The court determined that it was appropriate to consult federal communications law to determine the taxability of the services because although Policy Statement 60.20 provides that exempt enhanced telecommunications services do not include services that use computer processing applications "solely for the management, control or operation of a telecommunication system or the management of a telecommunication service," the policy statement does not define that phrase. The computer processing applications performed by the telecommunications company fell within the Federal Communications Commission's categories of protocol processing that resemble exempt enhanced services but are considered taxable basic telecommunications services. The taxpayer claimed that federal communications law should not be used to interpret Policy Statement 60.20 and that in order to be consistent with the federal Internet Tax Freedom Act (ITFA), the Pennsylvania Department of Revenue could not impose a sales tax on a service that was not a taxable telecommunications service as defined in Policy Statement 60.20. However, the court determined that the ITFA did not apply because the version of the federal law that was in effect at the time of the purchases provided that the term "Internet access" did not include telecommunications services. Finally, Pennsylvania's tax on the services did not constitute a tax on electronic commerce in violation of the ITFA because the services were not transactions "conducted over the Internet or through Internet access."
America Online, Inc. v. Pennsylvania , Pennsylvania Commonwealth Court, No. 621 F.R. 2004, September 7, 2007, ¶203-704
Other References:
Explanations at ¶60-720

CCH (cch.taxgroup.com) reports:

A long-distance telephone carrier licensed to transmit 900 number and long distance telephone calls was liable for Maryland sales tax imposed on such 900-type telecommunications services. The taxpayer, a jointly responsible agent of the out-of-state vendors, was not merely a common carrier of the 900 service but was, instead, substantially involved in the multiple acts that created the service.

CCH (cch.taxgroup.com) reports:

The IRS was not required to issue a statutory notice of deficiency prior to making assessments after entering into closing agreements with limited partners to settle matters pertaining to a Notice of Final Partnership Administrative Adjustment (FPAA). The deficiencies assessed were attributable to the partners' at-risk amounts but those amounts, although they were affected items, did not qualify as affected items requiring a factual determination. In the closing agreements, the partners and the IRS stipulated to the partners' at-risk amounts, including the manner in which those amounts might increase. All of the adjustments made by the IRS could be made without additional information from the partners; the Service had only to refer to the terms of the closing agreements.
L.F. Bush, FedCl, 2007-2 USTC ¶50,635
Other References:
Code Sec. 6212
CCH Reference - 2007FED ¶37,544.20
Code Sec. 6231
CCH Reference - 2007FED ¶37,849.40
Tax Research Consultant
CCH Reference - TRC PART: 60,450
CCH Reference - TRC IRS: 27,154

CCH (cch.taxgroup.com) reports:

The IRS has released the applicable terminal charge and the Standard Industry Fare Level (SIFL) mileage rates for determining the value of noncommercial flights on employer-provided aircraft in effect for the second half of 2007 for purposes of the taxation of fringe benefits. The value of a flight is determined under the base aircraft valuation formula by multiplying the SIFL cents-per-mile rates applicable for the period during which the flight was taken by the appropriate aircraft multiple provided in Reg. §1.61-21(g)(7) and then adding the applicable terminal charge.
For flights taken during the period from July 2007, through December 31, 2007, the terminal charge is $37.91, and the SIFL rates are: $.2074 per mile for the first 500 miles, $.1581 per mile for 501 through 1,500 miles, and $.1520 per mile for over 1,500 miles.
Rev. Rul. 2007-55, 2007FED ¶46,633
Other References:
Code Sec. 61
CCH Reference - 2007FED ¶5907.04
CCH Reference - 2007FED ¶5907.042
CCH Reference - 2007FED ¶5907.50
Tax Research Consultant
CCH Reference - TRC COMPEN: 33,202.10

CCH (cch.taxgroup.com) reports:

Senate Finance Committee ranking member Charles E. Grassley, R-Iowa, along with two Finance Committee members, are urging the Treasury Department and IRS to go easy on taxpayers who have lost their homes due to foreclosure. "Working families who lose their homes are getting hit with huge tax bills," Grassley said in a statement. He noted that some of the homeowners are also receiving exceptionally high tax bills that are often inaccurate. "The IRS should offer the taxpayer every opportunity to negotiate the size of the bill and a fair payment plan," he added.
In a September 13 letter to Treasury Secretary Henry M. Paulson, Jr., Grassley and committee members Gordon Smith, R-Ore., and Pat Roberts, R-Kan., pressed Paulson to allow, for taxpayers who have lost homes through foreclosure, offers in compromise that will either eliminate or reduce the taxes they owe due to cancelled mortgage debt on a primary residence. "If the IRS issues simple procedures for taxpayers to file an offer in compromise --and undertakes a significant program of outreach to taxpayers, practitioners, and lenders --much good can be accomplished immediately," wrote the lawmakers. They also requested that the IRS address the problem of taxpayers receiving inaccurate Forms 1099 for the amount of debt forgiveness, saying, "We encourage you to have the IRS undertake preventive action in this area immediately."
President Bush on August 31 proposed changes to the Internal Revenue Code that would ensure cancelled mortgage debt on a primary residence is not counted as income and Congress is currently considering the proposal. The Finance Committee is expected to mark up the "Good Government" legislation the week beginning September 17 and Grassley noted that it could be an appropriate vehicle for any additional authority required by the IRS to immediately address the debt forgiveness issue before changes to the law are enacted.
By Jeff Carlson, CCH News Staff

Tax Analysts report:

Tax Analysts report:

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

A purchaser of computer software was liable for Texas sales and use tax on charges for installation, implementation, and maintenance services that were associated with the software and provided by the seller of the software.
Tax was applicable to certain software services only when the services were performed by the vendor of the software. The fact that the taxpayer could have hired a third party to perform the services at issue did not alter the taxability of those services.

CCH (cch.taxgroup.com) reports:

In response to the flood damage in southeastern Minnesota (DR-1717) in August and the property damaged by the Ham Lake fire of 2007, Governor Tim Pawlenty has signed a measure (H.F. 1a) during a special session that provides property tax relief to affected residential and commercial property owners. A county board of equalization in a qualifying county may grant a property tax abatement of up to 50% of the taxes, including taxes imposed on commercial-industrial property and seasonal residential recreational property, that are due on eligible property for taxes payable in 2007. The abatement does not apply to special assessments. The owner of the property is not required to apply for the abatement, and the county must grant any abatements by November 30, 2007.
"Eligible property" means a parcel of taxable property located in a qualified county containing a structure that has been determined by the assessor to have lost over 50% of its estimated market value due to flood or fire damage. For agricultural property, the abatement is limited to (1) the taxes on the parcel attributable to the value of the house, garage, and surrounding one acre, if the house has lost over 50% of its estimated market value and (2) the tax attributable to the value of any farm buildings and structures that have lost over 50% of their estimated market value.

CCH (cch.taxgroup.com) reports:

The Kentucky Court of Appeals determined that the federal Telecommunications Act of 1996 did not prevent the imposition of Kentucky utility gross receipts license tax by local school districts on gross receipts of direct broadcast satellite and wireless cable (DBS) service providers.
DBS service providers claimed that they were exempt from paying the utility tax because Sec. 602 of the Act prohibits taxes and fees by local taxing jurisdictions on direct-to-home satellite service. The court determined that the Sec. 602 "savings clause," which allows the taxation of a direct-to-home satellite service provider by a state, applied to the imposition of tax by local school districts because the tax was authorized for state purposes. Further, the court noted that the reason for prohibiting local jurisdictions from taxing DBS providers revolves around the burden of calculating and paying multiple tax bills with various due dates in any given state. In this case, the taxing scheme was not overly burdensome to DBS service providers because school districts were required to provide necessary information to service providers, providers could increase their rates to cover the cost of the tax, and providers were required to pay only one assessment each quarter.
The dissent disagreed that characterization of the tax as a state tax resolved the issue. Instead, the dissent determined that local school districts were local taxing jurisdictions prohibited from imposing the tax.
Treesh v. DirecTV, Kentucky Court of Appeals, No. 2006-CA-001983-MR, September 7, 2007, ¶202-804
Other References:
Explanations at ¶80-002

CCH (cch.taxgroup.com) reports:

A facilities technician was not entitled to carry back losses that resulted from trading securities on his own account. Since he conducted his trades as an individual, rather than as a securities dealer, his trading activities produced capital gains and losses; therefore, his losses could be carried forward, but not back. He also could not treat the losses as ordinary losses by making an untimely election to use the mark-to-market accounting method, absent evidence that he should be granted relief from the timely-election rules. Finally, he was subject to penalties for failing to file timely returns and make timely tax payments, absent evidence that his failures were due to reasonable cause and not willful neglect.
M. Kirch, TC Memo. 2007-276, Dec. 57,100(M)
Other References:
Code Sec. 475
CCH Reference - 2007FED ¶22,268.20
Code Sec. 1212
CCH Reference - 2007FED ¶30,402.50
Code Sec. 6651
CCH Reference - 2007FED ¶37,475.23
Tax Research Consultant
CCH Reference - TRC SALES: 15,208.10
CCH Reference - TRC SALES: 45,360.15
CCH Reference - TRC PENALTY: 3,050

CCH (cch.taxgroup.com) reports:

An individual was entitled to challenge his underlying tax liability in a Collection Due Process (CDP) appeal, but the IRS Appeals officer's refusal to allow him to do so was harmless error because his arguments concerning the liability were groundless. Although the taxpayer appealed the underlying tax liability, which arose, in part, from a self-assessed liability and, in part, from an IRS math error notice pursuant to Code Sec. 6213(b)(1), before such appeal was considered the IRS issued a levy notice for the same liability.
The Appeals office, in a letter signed by an Appeals team manager, thereafter summarily denied the tax liability appeals request. At a subsequent CDP hearing on the levy notice, the taxpayer was prevented from challenging the tax liability. The notice of determination upholding the levy action was signed by the same Appeals team manager who denied the prior appeals request. The taxpayer was entitled to challenge the liability at the CDP hearing both because the self-assessed portion of the liability had not been considered in the prior appeal and because, at the time the taxpayer became entitled to a CDP hearing, he had no prior opportunity to challenge the liability.
The failure to allow the taxpayer to challenge the liability was, however, harmless error because his only arguments with respect to the liability were frivolous. For the same reason, the involvement of the Appeals team manager in both the tax appeal and the CDP hearing, even if contrary to Code Sec. 6330(b)(3), was also harmless error, and the IRS was, therefore, entitled to proceed with the levy.
R.L. Perkins, 129 TC No. 7, Dec. 57,099
Other References:
Code Sec. 6213
CCH Reference - 2007FED ¶37,549.5255
Code Sec. 6330
CCH Reference - 2007FED ¶38,184.12
Tax Research Consultant
CCH Reference - TRC IRS: 27,206.15
CCH Reference - TRC IRS: 51,056.15

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

The income from an out-of-state corporation's distributive share of a limited partnership was subject to apportionment for Massachusetts corporate excise tax purposes and not subject to a 100% allocation of the income to the state. The corporation was entitled to an abatement of tax after the apportionment of the income from the limited partnership interest because the business activities of the limited partnership were closely related to that of the corporation and served an operational not passive investment function. Because other jurisdictions in which the corporation conducted business operations were entitled to tax an apportioned share of the limited partnership interest, a 100% allocation of the income to Massachusetts was improper.
Sasol North America v. Commissioner of Revenue , Massachusetts Appellate Tax Board, No. C273084, September 5, 2007, ¶401-101
Other References:
Explanations at ¶11-520

CCH (cch.taxgroup.com) reports:

California Governor Arnold Schwarzenegger has called a special session of the state Legislature beginning September 11, 2007, to consider and act upon health care reform legislation, for which the Governor previously had proposed funding relating to, among other things, state corporate and personal income taxes. Earlier this year the Governor had called for health care reform and proposed tax-related funding provisions, including increased payroll taxes, a dividend based on a percentage of gross revenues received by hospitals and physicians, and corporate and personal income tax conformity to federal law in the area of health savings accounts and cafeteria plans. (TAXDAY 2007/01/10, S.8)
In an announcement on his home page (http://gov.ca.gov/index.php?/press-release/7384/), the Governor noted that great strides had been made in the regular legislative session in the area of health care reform. However, he noted, budget negotiations took two months longer than was expected and time ran out.
The proclamation calling the special session, along with another proclamation for a simultaneous special session to consider and act upon legislation to ensure a reliable water supply for the state, can be accessed from the announcement Web site.
Release , California Governor Arnold Schwarzenegger, September 11, 2007.

CCH (cch.taxgroup.com) reports:

A corporation was entitled to deductions for compensation paid to its sole executive and shareholder in the amounts determined by the Tax Court for two tax years. The executive was the driving force behind the corporation's success and was underpaid in years during which the company was not profitable. The corporation retained the executive's compensation to further develop and expand its business and promised to reimburse the executive for past underpayment and to pay him bonuses for extraordinary services when it became more profitable.
Moreover, the corporation was entitled to deduct advertising expenses for one tax year. The expenses related to a detailed advertising campaign that resulted in an drastic increase in the corporation's profits. Therefore, the corporation showed a sufficient connection between the amount paid in advertising expenses and its business of producing and selling suntan lotion products. Finally, the corporation was not entitled to a depreciation deduction for certain floating structures. The structures were under construction during one of the tax years at issue and the corporation failed to provide any evidence that the structures were used primarily, or at all, for business in the second tax year at issue.
Related case, Reeves, at TC Memo. 2007-273, Dec. 57,096(M) (TAXDAY, 2007/09/13, J.3).
Vitamin Village, Inc., TC Memo. 2007-272, Dec. 57,095(M)
Other References:
Code Sec. 162
CCH Reference - 2007FED ¶8637.733
CCH Reference - 2007FED ¶8851.173
Code Sec. 167
CCH Reference - 2007FED ¶11,007.464
Tax Research Consultant
CCH Reference - TRC BUSEXP: 3,054
CCH Reference - TRC BUSEXP: 3,106
CCH Reference - TRC COMPEN: 9,100

CCH (cch.taxgroup.com) reports:

A settlement award payment was includible in an individual's income, even though it was subject to a creditor's claim in the individual's bankruptcy proceeding. The taxpayer argued that she did not exercise dominion and control over the award because it was placed in a trust account and could not be accessed without a court order. However, her argument ignored the fact that she volunteered to place the award in the bankruptcy trustee's custody. Thus, while she did not "constructively receive" the award in the year at issue; she "actually" received it. Further, the doctrine of constructive receipt generally addresses when, not whether, income is realized by a cash basis taxpayer. Finally, the taxpayer was entitled to a miscellaneous itemized deduction in an amount equal to the amount includible in her income.
CCH Comment. The taxpayer actually reported the income on her tax return for the year at issue on line 21 and subtracted it on the same line with the explanation that the amount was not "constructively received." The IRS, however, proceeded as if the income was not reported.
S.J. Burns, TC Memo. 2007-271, Dec. 57,094(M)
Other References:
Code Sec. 61
CCH Reference - 2007FED ¶5504.2642
Code Sec. 451
CCH Reference - 2007FED ¶21,005.743
Tax Research Consultant
CCH Reference - TRC INDIV: 33,164
 

CCH (cch.taxgroup.com) reports:

The Bush administration's economic, tax and financial policy shops are keeping a close eye on the effect of the tightening credit and housing markets on U.S. economic growth, according to a Treasury spokesman. Treasury Secretary Henry M. Paulson, Jr., recently noted that the current housing downturn will exact a "penalty" on economic growth, but the White House has not yet set a deadline for the President's Working Group on Financial Markets to complete its review of the role played by credit rating agencies and mortgage loan originators in the current housing downturn and credit crunch, according to Jennifer Zuccarelli, a Treasury spokeswoman. The next forecast on federal revenue and deficit estimates that would reflect any changes in the economic growth rate will be completed in December by the Office of Tax Analysis, noted Treasury spokesman, Andrew DeSouza.
Meanwhile, the Treasury Department continues to consider measures, such as lowering the U.S. corporate tax rate, to increase U.S. competitiveness abroad. "We live in a competitive economic environment globally" that requires the U.S. to reexamine its business tax and regulatory schemes, noted White House Press Secretary Tony Snow at a press briefing on September 12. There is no deadline yet for completing the Treasury review of U.S. competitiveness initiatives, confirmed DeSouza.
A top priority item on the administration's tax agenda in 2007 is to pass legislation extending relief from the alternative minimum tax (AMT). "We need a patch right now so that millions of Americans don't have to pay the AMT" before the current extension expires, DeSouza said. "What contributes to economic growth and strengthens it (is) low taxes, low regulations, and rewarding people who work hard and also generate value for the economy," Snow noted at his final briefing before stepping down as White House Press Secretary on September 14.
By Paula Cruickshank, CCH News Staff
 

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

The Tennessee franchise tax jobs credit was not available to a taxpayer that acquired a paper plant and hired 615 former employees who had been terminated one day earlier by the plant's previous owner. The taxpayer argued that the 615 jobs constituted net new full-time employee jobs, as required under the credit statute, but that argument was rejected.
The taxpayer asserted that, because the previous owner was a separate entity, the number of workers employed at the plant prior to the sale should not be considered when determining whether the taxpayer was entitled to claim the credit. However, an analysis of the statutory language and legislative history showed that the general purpose of the statute was to provide an incentive for companies to create new jobs and increase employment in Tennessee by either expanding existing operations or locating new operations within the state. Therefore, for the general purpose to be met, an employer must prove that it created at least 25 net new jobs resulting in an increase in employment in Tennessee.
In this case, the plant's previous owner terminated 820 full-time employee jobs on the day that the taxpayer acquired the plant. The following day, the taxpayer hired 615 employees to fill positions that previously existed, resulting in a decrease in employment in Tennessee by 205 workers. Accordingly, allowing the taxpayer to claim the credit for the 615 employees would not be in accord with the general purpose of the statute.
The taxpayer also claimed that its massive training program changed the 615 jobs into new positions, but that claim was without merit. Investment in training employees and updating plant equipment did not entitle the taxpayer to the jobs credit.
Weyerhaeuser Co. v. Chumley , Tennessee Court of Appeals, No. M2005-00212-COA-R3-CV, September 7, 2007, ¶401-202
Other References:
Explanations at ¶5-525

CCH (cch.taxgroup.com) reports:

Communications services sold by communications services providers to Internet Service Providers (ISPs), which were used by ISPs to provide Internet access service, were subject to Florida's communications services tax. Florida was not barred from enforcing its communications services tax on these services by the Internet Tax Freedom Act (ITFA) because Florida satisfied the grandfather provision. The grandfather provision applied to Florida because, prior to 1998, the year in which the ITFA became law, Florida imposed tax on telecommunication services that were purchased, used, or sold by a provider of Internet access to provide Internet access.
Technical Assistance Advisement, No. 07A19-001 , Florida Department of Revenue, July 24, 2007, ¶205-087
Other References:
Explanations at ¶80-115
 

CCH (cch.taxgroup.com) reports:

Under a new safe harbor insurance companies will not have to take into account increases in policy cash values of certain life insurance contracts described in Code Sec. 264(f)(4)(A) ("I-COLI Contracts") for purposes of applying the insurance company proration rules. Under the proration rules set forth in Code Secs. 805(a)(4), 807(a)(2), 807(b)(1), 812
and 832(b)(5)
certain tax-favored income must be prorated between an insurance company and its policyholders to more clearly reflect income. This includes tax-exempt interest, intercorporate dividends, and increases in policy cash values of life insurance and endowment contracts to which Code Sec. 264(f) applies.
In response to questions concerning the interpretation of the phrase "contracts to which Code Sec. 264(f) applies", the safe harbor provides that the proration rules will not apply to increases in policy cash values of I-COLI contracts covering no more than 35 percent of the total aggregate number of individuals described in Code Sec. 264(f)(4)(A) at any time during the taxable year. However, such contracts remain subject to IRS challenge under other provisions and judicial doctrines, including the business purpose doctrine.
This procedure is effective September 11, 2007. The IRS is requesting comments by December 31, 2007, about the need for additional guidance in this area. If, in response to comments, additional guidance is published it will apply prospectively.
Rev. Proc. 2007-61, 2007FED ¶46,631
Other References:
Code Sec. 264
CCH Reference - 2007FED ¶14,008.01
Code Sec. 805
CCH Reference - 2007FED ¶25,780.027
Code Sec. 807
CCH Reference - 2007FED ¶25,821.01
Code Sec. 812
CCH Reference - 2007FED ¶25,913.10
Code Sec. 832
CCH Reference - 2007FED ¶26,157.35

CCH (cch.taxgroup.com) reports:

As the school year begins, the IRS is reminding taxpayers to begin planning for education-related deductions by saving all receipts and other documentation of deductible expenses. Among the various deductions and credits available is the educator expense deduction, which allows teachers, instructors, counselors and other educators to deduct the costs of books, supplies, software and other items used in the classroom. To be eligible for the deduction, the taxpayer has to work a minimum of 900 hours per school year in an elementary or secondary school. The deduction, worth up to $250, is available regardless of whether the taxpayer itemizes deductions, however, it is scheduled to expire at the end of 2007.
Other deductions and credits available regardless of itemization include the tuition and fees deduction, the Hope Credit and the lifetime learning credit, which apply to post-secondary education. The tuition and fees credit is, also, scheduled to expire at the end of the year. Taxpayers are cautioned that they cannot take both the tuition and fees deduction and an education credit for the same student in the same school year.
IR-2007-158, 2007FED ¶46,630
Other References:
Code Sec. 222
CCH Reference - 2007FED ¶12,772.01
Tax Research Consultant
CCH Reference - TRC INDIV: 36,364
CCH Reference - TRC INDIV: 60,064
CCH Reference - TRC FILEIND: 9,054.20
CCH Reference - TRC FILEIND: 9,086

CCH (cch.taxgroup.com) reports:

Senate Finance Committee Chairman Max Baucus, D-Mont., said on September 11 that the committee will act in the next few weeks on an $8-billion to $10-billion new agriculture-related tax measure. Baucus stated that his goals for the tax package include a permanent trust fund to help ranchers and farmers hurt by crop and livestock losses, conversion of a number of conservation payment programs into fully offset tax credit programs and offering additional incentives for rural economic development and energy-related tax relief to agricultural producers.
Baucus outlined the following elements included in the package: an ongoing program to offset farming income losses not covered by the crop insurance program and, as the fund would be paid for with various provisions under the jurisdiction of the Finance Committee, participants in certain conservation programs may choose to receive tax credits instead of cash payments for easements; a new category of tax credit bonds for projects such as rural electric and telemedicine, rural broadband and other rural economic development community projects; and tax incentives for wind energy and other alternative energy; and to encourage farmers to grow alternative crops that are used to make ethanol, biodiesel and cellulosic biofuels. Many of these provisions appeared in the Finance Committee-approved Energy Advancement and Investment Bill of 2007 (TAXDAY, 2007/06/20, C.1).
Separately, Baucus' bill would also clarify that Conservation Reserve Program payments made to certain farmers participating in mandatory conservation activities are rental income and not subject to self-employment taxes. Creating the disaster assistance trust fund and converting payment programs to tax credits will free up previously obligated spending funds for the Agriculture Committee to use elsewhere, said Baucus in a written statement.
By Jeff Carlson, CCH News Staff

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

The Washington Supreme Court has rejected a pre-election challenge to the constitutionality of Initiative 960, a measure that would require two-thirds legislative approval or voter approval for tax increases. As a result of the high court's decision, I-960 will appear on the ballot in the November 2007 election.
The court stated that pre-election review of initiative measures was highly disfavored and that it would consider only two types of challenges to an initiative prior to an election: that the initiative does not meet the procedural requirements for placement on the ballot, which was not at issue here, and that the subject matter of the initiative is beyond the people's initiative power. Under I-960, any action that "raises taxes" and results in excess expenditures would be automatically subject to referendum. In addition, any tax increase that was shielded from referendum by an emergency clause in the legislation or by the failure to qualify a referendum for the ballot would require an advisory vote of the people. The plaintiffs maintained that these provisions exceeded the people's legislative power and would be unconstitutional if enacted. The plaintiffs also challenged the supermajority requirement of I-960 on the basis that it would have the unlawful effect of amending the constitution by establishing a supermajority requirement for tax increases not in the constitution.
The court found that neither of these challenges was subject to pre-election review. While the disputed sections of the initiative might be subject to constitutional challenge if passed, the initiative did not exceed the scope of legislative power and therefore could be placed on the general election ballot.
Futurewise v. Reed, Washington Supreme Court, No. 80430-3, September 7, 2007, ¶202-675
Other References:
Explanations at ¶89-054

CCH (cch.taxgroup.com) reports:

The Connecticut utilities tax imposed on the gross earnings from the provision of community antenna television service, video programming service by satellite, and certified video programming service in the state does not conflict with and is not preempted by federal law that limits franchise fees or taxes imposed on cable system operators to 5% of gross revenues. The tax is imposed not only on cable operators but is extended to other video service providers. The tax is the same whether it is in regard to cable operators, satellite video service providers, or certified competitive video service providers and, as such, it is not unduly discriminatory against cable operators so as to effectively constitute a tax directed at the cable system. All the providers are treated equally under the tax. As a result, the tax is not a franchise fee subject to the 5% limitation of the Cable Communications Policy Act of 1984.
Opinion, No. 2007-014, August 31, 2007, ¶401-255
Other References:
Explanations at ¶80-110

CCH (cch.taxgroup.com) reports:

The IRS has extended the January 1, 2008, deadline for compliance with the written plan requirements in the final nonqualified deferred compensation regulations under Code Sec. 409A (TAXDAY, 2007/04/11, I.1). Employers will now have until December 31, 2008, to bring plan documents into compliance with the regulations. Employers will have to operate their plans in compliance with the final regulations during 2008 and have their documents in place by December 31, 2008, in order to take advantage of this relief. The IRS has also released additional guidance on how the final regulations shall be applied.
CCH Comment. This will come as welcome news to the employee benefits community. Under Reg. §1.409A-1(c)(3), written plan documents for nonqualified deferred compensation plans are required for the first time. For some employers, that means documents have to be created from scratch. None of the operational requirements of the regulations are postponed nor is any of the prior transition relief extended. Even the written plan deadline extension requires plan documents to be retroactive to the original effective date of the regulations January 1, 2008.
Transition Relief
Retroactive amendment period. A nonqualified deferred compensation plan will not violate the requirements of Code Sec. 409A merely because the written provisions of the plan fail to meet the requirements of Code Sec. 409A guidance (including the final regulations and transition guidance) provided (1) the plan is in operational compliance, and (2) is amended on or before December 31, 2008, to comply retroactively to January 1, 2008. A plan is in compliance on or after January 1, 2008, if the written plan as amended (1) contains all of the written provisions required by the final regulations, and (2) accurately reflects the operation of the plan on and after January 1, 2008, through the date of amendment.
CCH Comment. It is worth repeating that the written plan must accurately reflect the new regulations and must reflect how the plan actually operated up until the time of the amendment.
Compliant time and form of payment. Unless a later date is permitted under the final regulations, if there have been deferrals of compensation under a plan as of January 1, 2008, but the deferred compensation has not been paid, the plan will not comply with Code Sec. 409A after December 31, 2007, unless the plan designates in writing before January 1, 2008, a compliant time and form of payment of such deferred compensation. Amounts deferred after December 31, 2007, and before January 1, 2009, will not comply with Code Sec. 409A unless the plan designates in writing a compliant time and form of payment of such amounts on or before the applicable deadline under the final regulations. For these purposes, a plan can designate a compliant time and form of payment even if some written plan provisions are not in compliance. For example, suppose the plan includes a "haircut" provision in the event of separation from service (i.e., the employee can elect an immediate lump sum payment subject to forfeiture of a specified portion). Even though such a provision is not allowed under the final regulations, as long as the plan does not use the provision, and the provision is removed by December 31, 2008, the plan is in compliance.
Designating a compliant time and form of payment. Under the notice, a plan will provide for a compliant time and form of payment for a deferred amount if the plan provides for an objectively determinable form of payment payable upon: (1) a separation from service; (2) a change in control event; (3) an unforeseeable emergency; (4) a specified date or fixed schedule of payments; (5) death; or (6) disability. For example, a plan may provide that an amount deferred under the plan will be paid in the form of a life annuity commencing on the later of the employee's separation from service or attaining age 65, but it may not provide that an amount deferred under the plan will be paid during the three years following the employee's separation from service (with the exact timing determined at the discretion of the employee).
Retroactive adoption of permissible payment event definitions. The plan may retroactively adopt permissible payment event definitions. Permissible payment events under the final regulations include separation from service, change in control events, unforeseeable emergencies, and disability. During 2008, the plan must operationally comply with those definitions. However, written provisions that do not reflect the regulatory definitions do not render the plan noncompliant as long as the written plan is amended prior to December 31, 2008, to accurately and retroactively reflect the regulatory provisions. For example, a plan providing that a payment will be made upon the employee's disability may be treated as providing for a payment upon a disability as defined in Reg. §1.409A-3(i)(4). The plan must actually be operated in accordance with the final regulations, so that a payment due upon the employee's disability could only be made upon a disability that met the requirements of the definition of disability set forth in the regulation. Furthermore, the plan must be amended by December 31, 2008, to accurately reflect the application of the provision during 2008 and to fully comply with the requirements of the final regulations.
If a payment event has been timely designated, a later adoption of an alternative definition of the designated payment event, as applicable on or before December 31, 2008, will not be treated as a change in the time or form of payment. However, once an event has occurred in 2008 and been treated as a payment event (or as not qualifying as a payment event), the employee and employer may not retroactively alter the definition of the payment event.
Designating specified payment date or fixed schedule of payments. The designation of a specified payment date or a fixed schedule of payments is governed by Reg. §1.409A-3(i)(1) of the final regulations. The regulation provides requirements for tax gross-up payments to qualify as fixed payments. A payment that would otherwise qualify under that regulation, except that the arrangement does not require that the payment be made by the end of the employee's tax year next following the employer's tax year in which the employer remits the related taxes, will be treated as designating a fixed schedule of payments if the plan is amended on or before December 31, 2008, to provide for such a requirement, and the plan is operated in compliance with such requirements for the period after December 31, 2007, through the date of amendment. Also, for a specified payment date or a fixed schedule of payments, the addition or deletion of a designated payment provision is not treated as a change in the time and form of payment if the addition or deletion is made on or before December 31, 2008, it meets the final regulatory requirements for designation of payment upon a permissible payment event or specified time or fixed schedule, and does not affect the tax year in which the payment will be made.
Retroactive Amendments and the six-month delay on payments to specified employees. The six-month delay requirement on payments to specified employees must be included in the written plan documents under Reg. §1.409A-1(c)(3)(v) of the final regulations. However, as long as payment is actually delayed, a plan will not be treated as failing this requirement as long as it is amended by December 31, 2008, to contain this requirement retroactively to January 1, 2008. The written plan provision must accurately reflect the operation of the plan through the amendment date, and taxpayers must demonstrate that the required delay was applied to affected payments. Taxpayers may have to demonstrate the method by which the employer identified any specified employees, and that such method was applied consistently to all plans and employees.
Application of Final Regulations and Additional Guidance
Good reason provisions of employment agreements.
The final regulations liberalized the rules regarding the treatment of separation from service payments under good reason terminations and provide a safe harbor in Reg. §1.409A-1(n)(2)(ii) for good cause conditions. Taxpayers may want to conform existing good reason conditions to meet the regulatory requirements, though modification of these arrangements may raise issues regarding whether a substantial risk of forfeiture condition has been added or modified in a manner that would not be respected under the final regulations or earlier guidance. This notice provides that taxpayers may make these modifications on or before December 31, 2007, without the modifications being treated as the extension of a substantial risk of forfeiture.
Application of substitution rule to employment agreements. Under Reg. §1.409A-3(f), payment made as a substitution for deferred compensation is treated as deferred compensation. Under the new guidance, if a right to deferred compensation payable only upon an involuntary separation from service would automatically be forfeited at the end of the term of the employment agreement, the grant of a right to deferred compensation in an extended, renewed, or renegotiated agreement will not be treated as a substitute for the forfeited right at the termination of the prior employment agreement.
Predetermined cashouts. Under Reg. §1.409A-2(b)(2)(ii), taxpayers have only a limited ability to provide for the cashout of remaining annuity or installment payments when the present value of the remaining payments falls below the predetermined threshold. Under the new guidance, a taxpayer may treat a cashout provision as part of an objectively determinable and nondiscretionary payment schedule if the payment schedule would otherwise meet the requirements of the regulations (including that the cashout threshold be fixed at the time the permissible payment is designated), if the taxpayer can demonstrate that the provision operated in an objective, nondiscretionary manner and did not operate so as to provide either the employer or the employee with the rights having substantially the effect of a right to a late elections to the time and form of payment.
Anticipated Voluntary Compliance Program
The IRS anticipates issuing guidance in the near future establishing a limited voluntary compliance program that will apply to certain unintentional operational failures to comply with Code Sec. 409A so that such failures can be corrected in the same tax year in which they occur.
Application of Restrictions on Certain Trusts
Restrictions apply under Code Sec. 409A(b) to the use of offshore trusts for nonqualified deferred compensation plans, to the ability of a plan to restrict trust assets to protect the payment of benefits in the event of an employer's change in financial health, and to the transfer of assets to a trust to pay nonqualifed deferred compensation during a period in which the plan is in high risk status, the employer is in bankruptcy, and the plan is underfunded. Until further guidance is issued, taxpayers may continue to rely on a reasonable, good faith interpretation of these provisions.
IR-2007-157, 2007FED ¶46,627
Treasury Department News Release, TDNR HP-551, 2007FED ¶46,628
Notice 2007-78, 2007FED ¶46,629
Other References:
Code Sec. 409A
CCH Reference - 2007FED ¶18,960.22
Tax Research Consultant
CCH Reference - TRC COMPEN: 15,066
 

CCH (cch.taxgroup.com) reports:

The Treasury has released final regulations regarding the allocation of purchase price in certain deemed and actual asset acquisitions under Code Secs. 338 and 1060. These regulations affect sellers and purchasers of nuclear power plants or of the stock of corporations that own nuclear power plants, and address the treatment of nuclear decommissioning funds.
Background
The deemed asset acquisition rules of Code Sec. 338 and the applicable asset acquisition rules of Code Sec. 1060 provide the rules used to compute and allocate the purchase or sales price among acquired assets in certain actual and deemed asset acquisitions. The purchase price generally includes liabilities of the seller that are assumed by the purchaser if the liabilities are treated as having been incurred by the purchaser, which, in turn, requires, at a minimum, that economic performance must have occurred with respect to the liability. Purchase price is allocated under a residual method that requires the price to be allocated in succession to one of a number of classes of assets up to the fair market value of the assets in each class, in an order that reflects a policy of allocating basis first to the assets that are susceptible to more accurate valuation or the cost of which is recovered most rapidly.
When a nuclear power plant station is sold, the assets may include the plant, equipment and other operating assets, also known as Class V assets under the residual method, and one or more nonqualified funds holding assets that have been set aside for the purpose of satisfying the owner's responsibility or liability to decommission the nuclear power station after the end of its useful life.
CCH Comment. Funds that are qualified under Code Sec. 468A are not treated as purchased or sold, since they are treated as assets of the qualified fund itself. Contributions to a qualified fund are limited in amount, but are immediately deductible.
In acquiring the nonqualified decommissioning fund assets, the purchaser usually also assumes the liability to decommission the station. However, a nuclear decommissioning liability will not satisfy the economic performance test until decommissioning occurs. Thus, as of the purchase date, the liability is not included in the purchase price that the purchaser allocates to the acquired assets. Consequently, to the extent that the purchase price allocated to the Class V assets is less than their fair market value, the purchaser will not recover a tax benefit, in the form of a deprecation deduction, for the decommissioning liability until economic performance occurs upon decommissioning.
Special Election
A special regulatory election has been provided for the purchaser in order to ameliorate the effect of the IRS's position that decommissioning liabilities do not satisfy the economic performance requirement as to the purchaser. For purposes of allocating purchase or sales price among the acquisition date assets of a target, a taxpayer may elect to treat a nonqualified fund as if it were an entity classified as a corporation, the stock of which was among the acquisition date assets of the target, and a Class V asset. In these cases, for allocation purposes, the hypothetical corporation will be treated as bearing the responsibility for decommissioning to the extent assets of the fund are expected to be used for that purpose. Furthermore, a Code Sec. 338(h)(10) election will be treated as made for the hypothetical corporation, even when the requirements for this election are not otherwise satisfied.
Making the Election
This irrevocable election is available for applicable asset acquisitions and qualified stock purchases on or after September 15, 2004. The purchaser may make this election regardless of whether the seller or sellers also make the election. If, however, the target corporation in a deemed asset acquisition is an S corporation, all of the S corporation shareholders must consent to the election. The election is made, in the case of a deemed asset acquisition, by taking a position consistent with the election on an original or amended tax return for the tax year of the qualified stock purchase. Such return must be filed no later than the later of: (1) 30 days after the date on which the Code Sec. 338 election is due; or (2) the due date (with extensions) for the original tax return for the tax year of the qualified stock purchase. If the transaction is an applicable asset acquisition, the election is made by taking a position on the timely filed original return for the year of the applicable asset acquisition.
Effect of Election
The election converts the assets of the nonqualified fund from primarily Class I and II assets to the assets of a corporation, the stock of which is a Class V asset. This allows the present costs of the decommissioning liability funded by the nonqualified fund, which cannot otherwise be taken into account for income tax purposes, to be netted against the fund assets for the sole purpose of valuing the stock of the hypothetical subsidiary corporation. Therefore, if this election were made, it would be expected that the assets of the nonqualified fund would be allocated a much smaller amount of the initial purchase price than if no such election had been made. Further, the disposition of fund assets would result in gain. A larger amount of the initial purchase price, however, would be available for allocation to the plant and other operating assets.
T.D. 9358, 2007FED ¶47,066
Other References:
Code Sec. 338
CCH Reference - 2007FED ¶16,275A
CCH Reference - 2007FED ¶16,281
Code Sec. 1060
CCH Reference - 2007FED ¶30,061
Tax Research Consultant
CCH Reference - TRC ACCTNG: 12,208
CCH Reference - TRC CCORP: 30,152.05
CCH Reference -TRC CCORP: 30,202.05
CCH Reference -TRC SALES: 33,052.10

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

North Carolina taxpayers are reminded that previously enacted legislation mandates that effective October 1, 2007, a taxpayer who is consistently liable for at least $10,000 a month in state and local sales and use taxes must make a monthly prepayment of the next month's tax liability. Such prepayments are due on the date a monthly return is due. As a consequence, beginning with the return for the month of October 2007, a taxpayer currently paying on a semimonthly basis is required to include a prepayment for the next period when filing the monthly return and remitting the tax due.
The prepayment must equal at least 65% of any of the following: (1) the amount of tax due for the current month; (2) the amount of tax due for the same month in the preceding year; or (3) the average monthly amount of tax due in the preceding calendar year. A taxpayer is not subject to interest or penalties for the underpayment of a prepayment if one of the above three calculation methods is used. Also, a taxpayer is not required to use the same method for calculating the amount of the prepayment each month.
During the month of October 2007, a taxpayer currently paying on a semimonthly basis must transition to this new prepayment procedure. There will be no semimonthly payment covering the period from October 1 through the 15th that would have been due on October 25, and there will be no semimonthly payment covering the period from October 16 through the 31st that would have been due on November 10. The October 2007 return and payment that is due November 20 must include all of October's liability plus the prepayment for November. For the November return that is due December 20, the prepayment shown on last month's return (October) will be deducted and a prepayment for the next period (December) will be included.
For those taxpayers who pay online via the Department's Web site at http://www.dornc.com/, the E-500 Sales and Use Online Filing and Payments system requires two separate payments: one payment for the current period and one payment for the prepayment for the next period. Both payments may be made with one login to the E-File system.
For those taxpayers who pay electronically by ACH Credit or ACH Debit (Touchtone, Voice, or PC Software), two payment transactions are required: one payment for the current period and a separate payment for the prepayment for the next period. For example, an October return due on November 20 will have a November prepayment. The prepayment will require a payment transaction denoting the November period. The balance from the October return will require another payment transaction denoting the October period.
CCH Tax Research NetWork subscribers may view the important notice in its entirety.
Important Notice, North Carolina Department of Revenue, September 7, 2007.

CCH (cch.taxgroup.com) reports:

An Idaho corporate income tax assessment against a multistate retail business was upheld as the taxpayer failed to substantiate its claims that the income in dispute was nonbusiness income or that it was entitled to use an alternative apportionment method to apportion its business income. The taxpayer's out-of-state insurance company affiliates were also required to be included in its combined report, and the taxpayer's reclassification of an IRC §1248 deemed dividend claimed on its federal return was rejected. As the taxpayer failed to provide any documentation to support its arguments, the negligence and substantial understatement penalties assessed by the Idaho State Tax Commission were also upheld.

CCH (cch.taxgroup.com) reports:

The IRS has ruled that a postponement of time to file a return pursuant to the grant of Code Sec. 7508 combat zone relief or Code Sec. 7508A relief due to a presidentially declared disaster does not change the date on which the return is last due, including extensions, for bankruptcy purposes and does not affect the priority and dischargeability of the tax liability in a bankruptcy proceeding.
In the three fact situations presented by the IRS, neither the Code Sec. 7508 relief nor the Code Sec. 7508A relief change or extend the due date for filing a tax return, including the extended due date under Code Sec. 6081. Instead, the period of postponement is disregarded.
Because relief under Code Sec. 7508 or Code Sec. 7508A neither changes nor extends the return's due date (or the return's extended due date), the postponement does not change the date on which the return is "last due, including extensions" under section 507(a)(8)(A)(i) of the Bankruptcy Code. Thus, the date on which an individual's return is last due, including extensions, is the return's due date or extended due date fixed by Code Sec. 6072 or 6081, rather than the last day of the relief period.
Under the facts presented, the date on which the individual's tax return is last due precedes the date that is three years before the filing of the bankruptcy petition. Therefore, the IRS's tax claim is not entitled to eighth priority under section 507(a)(8)(A)(i) of the Bankruptcy Code and the tax liability is not excepted from discharge under section 523(a)(1)(A) of the Bankruptcy Code.
In addition, with regard to the third fact situation, the date on which the tax return was "last due, under applicable law or under extension" under section 523(a)(1)((ii) of the Bankruptcy Code was likewise unaffected by the Code Sec. 7508 relief. Because under these facts the return was filed after the date on which the return was last due under applicable law or under any extension, and because the date of the petition was less than two years from the date on which the return was filed, the tax liability was excepted from discharge under sections 523(a)(1)((ii) and 727(b) of the Bankruptcy Code.
The IRS clarifies that the holding that Code Sec. 7508A relief does not affect the return's last due date, including extensions, for bankruptcy purposes also applies to an "affected taxpayer" other than an individual described in Reg. §301.7508A-1(d)(1).
Rev. Rul. 2007-59, 2007FED ¶46,624
Other References:
Code Sec. 7508
CCH Reference - 2007FED ¶42,687.22
Code Sec. 7508A
CCH Reference - 2007FED ¶42,687C.22
Tax Research Consultant
CCH Reference - TRC FILEIND: 15,204.20
CCH Reference - TRC FILEBUS: 15,108
CCH Reference - TRC FILEBUS: 15,110

CCH (cch.taxgroup.com) reports:

A multi-billion dollar tax bill that includes provisions to eliminate the alternative minimum tax (AMT), expand the earned income tax credit (EITC) and increase the child tax credit is currently in the planning stages, according to House Ways and Means Committee Chairman Charles B. Rangel, D-N.Y. Speaking at a wide-ranging press conference on September 7, Rangel told reporters that the revenue-neutral bill would likely cost $800 billion for AMT relief and at least another $250 billion for other middle-class tax relief provisions.
Rangel called the upcoming omnibus bill "the mother of all reform bills," saying the cost would be offset by corporate tax loophole closers and other revenue raisers, such as changing the taxation of carried interest. He said that the legislation could include many provisions that broaden the tax base or raise tax rates in order to pay for AMT elimination. Rangel added that he hopes the legislation will be considered by the House by the end of 2007.
"There are credits in the tax code that the people who put them in have forgotten them. They've been put in politically," Rangel said. "The question is not whether we can knock them out, it's how much money does it raise."
Rangel said that lawmakers would be trying to create a simplified, fairer tax system, but he noted the time constraints that lawmakers face. He said Congress must still find time to deal with energy, children's health, FAA modernization, trade, presidential vetoes and Senate filibusters.
While he expressed optimism that GOP lawmakers will participate in the process of drafting the legislation, Rangel said that he expects Republicans to vote against the final package. He said the tax legislation will be so large and affect roughly 90 million taxpayers that input from Republican lawmakers will be necessary to cut down on the number of mistakes and inefficiencies.
Any number of potential revenue raisers will be considered, even though not all of them have political backing, according to Rangel. For example, he quipped that lawmakers could consider changing the deduction for mortgage interest but, while it might generate needed revenue, it would never win passage in the House.
A second, faster track tax bill could likely include provisions to help homeowners who are currently facing foreclosure during the current mortgage crisis, Rangel noted. He added that lawmakers will be drafting legislation to allow taxpayers who have lost their homes to sidestep taxation on cancellation of debt income.
However, the legislation will be tightly drafted so that real estate speculators are not eligible for the tax relief. One thing lawmakers must decide is whether the tax relief will be based on the price of the house or the size of the mortgage, Rangel said.
By Stephen K. Cooper, CCH News Staff

Tax Analysts report:

Tax Analysts report:

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

Effective August 31, 2007, in determining whether a business has satisfied the threshold criteria for qualifying for the jobs creation credit or the business property investment credit against North Carolina corporate franchise or income taxes, personal income tax, or insurance gross premium tax, taxpayers may not aggregate the number of jobs created or business property placed in service in an urban progress zone or an agrarian growth zone with jobs created or business property placed in service at any other eligible establishments. Previously, such taxpayers could aggregate the jobs created or business property placed in service in business establishments located in the same county.
In addition, documentation supporting a taxpayer's eligibility for the oyster shell recycling credit against corporate income and personal income taxes need only be attached to a taxpayer's return if requested. Previously, certification by the North Carolina Department of Environment and Natural Resources was required to be attached to the return.
Ch. 527 (S.B. 540), Laws 2007, effective August 31, 2007.

CCH (cch.taxgroup.com) reports:

The Mississippi State Tax Commission (MSTC) was required to recalculate its assessment of corporate income tax attributable to the recapture of depreciation previously taken on sold corporate assets.
The taxpayer had divided the corporate assets sold into three groups and contested the recapture of any depreciation and amortization unrelated to IRC §1245 assets (e.g., furniture, fixtures, and signs). The taxpayers contended, further, that the MSTC was required to, but did not, calculate the recapture of depreciation and amortization in the same manner as provided for in IRC §1245.

CCH (cch.taxgroup.com) reports:

The Internal Revenue Service has certified two 2008 model year GM vehicles as meeting the requirements of the Alternative Motor Vehicle Credit for qualified hybrid motor vehicles. The credit amount for each vehicle is:
--Chevrolet Malibu hybrid --$1,300; and
--Saturn Aura hybrid --$1,300.
Original purchasers may claim the full amount of the allowable credit up to the end of the first calendar quarter after the quarter in which the manufacturer records the sale of its 60,000th vehicle. For the second and third calendar quarters after the quarter in which the 60,000th vehicle is sold, taxpayers may claim 50 percent of the credit. For the fourth and fifth calendar quarters, taxpayers may claim 25 percent of the credit. No credit is allowed after the fifth quarter.
IR-2007-156, 2007FED ¶46,623
Other References:
Code Sec. 30B
CCH Reference - 2007FED ¶4059E.0265
CCH Reference - 2007FED ¶4059E.10
Tax Research Consultant
CCH Reference - TRC INDIV: 57,708
CCH Reference - TRC INDIV: 57,708.20

CCH (cch.taxgroup.com) reports:

The IRS has corrected certain 2007 inflation adjustment amounts set forth in Rev. Proc. 2006-53, I.R.B. 2006-48, 996. The aggregate cost of any Code Sec. 179 property a taxpayer may elect to treat as an expense shall not exceed $125,000. The $125,000 limitation shall be reduced (but not below zero) by the amount by which the cost of property placed in service during the 2007 tax year exceeds $500,000. For tax years beginning after 2007 and before 2001, these amounts will be adjusted for inflation. Rev. Proc. 2006-53 is modified and superseded.
Rev. Proc. 2006-53 is modified and superseded.
Rev. Proc. 2007-60, 2007FED ¶46,622
Other References:
Code Sec. 179
CCH Reference - 2007FED ¶1090.11
CCH Reference - 2007FED ¶12,126.07
Tax Research Consultant
CCH Reference - TRC SALES: 6,364.20
CCH Reference - TRC CCORP: 42,060

CCH (cch.taxgroup.com) reports:

The IRS has published procedures allowing additional partnerships to use an aggregate method of allocating gains and losses under Reg. §704-3(e)(3) when the partnership revalues its property under Reg. §1.704-1(b)(2)(iv)(f) (a "reverse section 704(c)
allocation"). As of October 1, 2007, "qualified partnerships" may elect to aggregate built-in gains and losses from "qualified financial assets" for purposes of making "reverse Code Sec. 704(c) allocations." Taxpayers may, however, apply these rules to tax years beginning after December 31, 2005.
The terms "qualified partnership" and "qualified financial asset" are specifically defined for purposes of the new procedure. Once applied, the same aggregate approach must generally be used for all qualified financial assets for all tax years in which the partnership is a "qualified partnership."
If an electing partnership fails to qualify as a "qualified partnership" after making the election, the partnership then must make "reverse section 704(c)
allocations" on an asset-by-asset basis after the date of disqualification. The partnership, however, is not required to disaggregate the book gain or book loss from qualified asset revaluations before the date of disqualification when making "reverse section 704(c)
allocations" on or after the date of disqualification.
Rev. Proc. 2007-59, 2007FED ¶46,621
Other References:
Code Sec. 704
CCH Reference - 2007FED ¶25,135.40
Tax Research Consultant
CCH Reference - TRC PART: 9,152.05
 

CCH (cch.taxgroup.com) reports:

The House is scheduled to vote on September 7 on a bill to ban the controversial practice of patenting tax strategies, an aide to Rep. Howard L. Berman, D-Calif., told CCH on September 6. The measure is part of a comprehensive patent reform bill, the Patent Reform Bill of 2007 (HR 1908), sponsored by Rep. Berman.
In July, the House Judiciary Committee approved language curtailing the patenting of tax strategies (TAXDAY, 2007/07/19, C.3). Under HR 1908, an applicant would not be able to obtain a patent for a "tax-planning method." The bill defines a tax-planning method as "a plan, strategy, technique, or scheme that is designed to reduce, minimize or defer, or has, when implemented, the effect of reducing, minimizing or deferring a taxpayer's liability." However, the bill would not prohibit the patenting of return-preparation software.
The U.S. Patent and Trademark Office has approved patents for roughly 50 tax strategies, according to the AICPA. An additional 50 applications are reported to be pending. Many critics, including the AICPA, charge that patenting may mislead taxpayers into believing that a tax strategy has been approved by the IRS. In fact, the IRS does not review the applications for tax strategy patents.
Also on September 6, House Ways and Means Committee Chairman Charles B. Rangel, D-N.Y., and ranking member Jim McCrery, R-La., urged their colleagues to oppose any effort to remove the anti-tax strategy patent language from HR 1908. "The tax laws belong to all of us and we all have an obligation to comply with them. We shouldn't have to pay a royalty to do so," they wrote.
Legislation to prohibit the patenting of tax strategies is also pending in the Senate. The Stop Tax Haven Abuse Act (Sen 681) would prohibit the patenting of any strategy designed to minimize, avoid, defer, or otherwise affect the liability for federal, state, local or foreign tax. The bill has been referred to the Senate Finance Committee.
By George L. Yaksick, Jr., CCH News Staff
House Ways and Means Committee Letter

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

Legislation is enacted that dramatically revises the appeals process for resolving disputes of taxes administered by the North Carolina Department of Revenue (DOR), including corporation franchise and income taxes, personal income taxes, and sales and use taxes. The legislation, generally effective January 1, 2008, changes how taxpayers pursue tax refunds; revamps the procedures to protest refund denials, proposed assessments, vendor license revocations, and imposition of penalties; and revises and consolidates a variety of tax collection provisions. In addition, corporation franchise and income tax filing deadlines are changed, the failure to pay penalty is modified, and corporate officer liability for unpaid corporate sales and use, employer withholding, and motor fuel excise taxes is expanded.
Under the revised administrative provisions, the Tax Review Board will be abolished and taxpayers will be afforded an opportunity for an independent appeal before the North Carolina Office of Administrative Hearings prior to paying any proposed tax assessment or penalties. As a result of the abolition of the Tax Review Board, the manner in which taxpayers apply for use of an alternative apportionment method for corporate income tax purposes is revised, as is the procedure by which the DOR adopts regulations.

CCH (cch.taxgroup.com) reports:

In its September 2007 issue of Tax News , the California Franchise Tax Board (FT states that it will hold protective claims for refund of California corporation franchise and income taxes and personal income taxes paid on municipal bond interest pending action in Kentucky Department of Revenue v. Davis , U.S. Supreme Court, Dkt. 06-666, petition for certiorari granted May 21, 2007. Also, the FTB says that it is closely scrutinizing the use of IRC §754 by partnerships to construct bogus optional basis (BO transactions; announces that it is now easier for electronic return originators (EROs) to electronically file individual and business tax returns; provides a detailed discussion of its personal income tax audit program; reports on a recent interested parties meeting on withholding tax at the source; and encourages tax professionals to attend the upcoming California Tax Policy Conference in November.

CCH (cch.taxgroup.com) reports:

Taxpayers, who were successful in a collection case, were not entitled to discovery of unredacted IRS memoranda for purposes of subsequent litigation brought to recover costs and impose sanctions against the IRS. The memoranda, which included the IRS's initial trial counsel's request for advice from the IRS's national office and the national office's response, were protected from disclosure under the work product privilege. The timing of the memoranda indicated that they were prepared as part of the IRS's counsels' efforts to prepare legal theories and plan strategy for the case, which ultimately resulted in a settlement ( T. J. Ratke , Dec. 55,600(M)).
The Tax Court rejected the argument that the both memoranda were prepared for the case in chief and were not work product for purposes of the litigation determining costs and sanctions. Documents prepared for the same litigation qualify as work product. A decision on the litigation for which the memoranda were prepared could not be entered until the disposition of the costs and sanctions issue. Further, there was no case law indicating that a lawsuit should be segmented for purposes of deciding whether a document is work product.
The Tax Court further determined, after an in-camera review, that there was neither a substantial need to discover any of the fact-based work product nor compelling need to discover any of the opinion work product. Because the statement of facts were identical in both the unredacted and redacted versions of the memoranda, the taxpayers were in possession of fact-based work product. Moreover, the redacted portions would not impact the outcome of the costs and sanctions litigation. Therefore, there was no compelling need to discover the memoranda. The taxpayers' desire for the memoranda was outweighed by the protection afforded under the work product doctrine. Finally, the IRS did not waive the work product doctrine privilege with respect to the memoranda because there was no testimonial use of the memoranda.
Related decision at TC Memo. 2004-86, Dec. 55,600(M), 87 TCM 1169.
T.J. Ratke, 129 TC No. 6, Dec. 57,087
Other References:
Tax Court Rule 70
CCH Reference - 2007FED ¶42,320.89
Tax Research Consultant
CCH Reference - TRC LITIG: 6,304
 

CCH (cch.taxgroup.com) reports:

The IRS has highlighted two recent changes to the credit for the portion of employer Social Security taxes paid with respect to employee cash tips. Although the Fair Minimum Wage Act of 2007 (P.L. 110-28) increased the minimum wage, the Small Business and Work Opportunity Tax Act of 2007 (P.L. 110-28) provides that employers operating food and beverage establishments should continue to compute the amount of the Code Sec. 45B tip credit based on the federal minimum wage as in effect on January 1, 2007, i.e., $5.15 per hour. Additionally, effective for tax years beginning after December 31, 2006, the credit can offset the alternative minimum tax (AMT). This offset was previously applicable only against the regular tax.
IR-2007-155, 2007FED ¶46,620
Other References:
Code Sec. 45B
CCH Reference - 2007FED ¶4460.01
CCH Reference - 2007FED ¶4460.021
Tax Research Consultant
CCH Reference - TRC BUSEXP: 54,400
 

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

The Washington Supreme Court has affirmed a superior court order prohibiting the city of Bellevue from imposing its utility occupation tax on a network telephone service provider's charges for access to interstate service, charges for interstate services, or federally tariffed charges. The state high court found that RCW 35A.82.060(1) precluded such taxation.
The city disputed the superior court's ruling to the extent it held that customer access line charges; private line, frame relay, and ATM service charges; and other federally tariffed charges were necessarily charges for interstate services. The Supreme Court stated that whether the Federal Communications Commission or the Washington Utilities and Transportation Commission had jurisdiction over certain charges (i.e., whether the charges were for access to interstate or intrastate service) was not determined by looking to the customer's use of the connections, as the city contended. Instead, whether charges were charges for access to interstate, as opposed to intrastate, service was a question of law, and the city's contention that a court needed to conduct factual analysis to determine the interstate or intrastate nature of the charges was erroneous. In addition, the Supreme Court agreed with the company's position that access charges imposed pursuant to federal tariff were by law charges imposed on access to interstate service.
The Washington Court of Appeals had recently interpreted RCW 35.21.714, a statute substantively identical to RCW 35A.82.060, as precluding tax on interstate services only when those charges were to another telecommunications company. (Community Telecable of Seattle, Inc. v. City of Seattle, 149 P.3d 380 (2006)) However, the Supreme Court disagreed with the Court of Appeals' interpretation and found that the legislative history of RCW 35A.82.060(1) supported the conclusion that the statute precluded taxation of charges for interstate service regardless of whether those charges were to another telecommunications company.
Qwest Corp. v. City of Bellevue, Washington Supreme Court, No. 79909-1, August 30, 2007, ¶202-674
Other References:
Explanations at ¶72-001

CCH (cch.taxgroup.com) reports:

Missouri Governor Matt Blunt has signed special session legislation that provides new and enhanced corporate income, corporate franchise, financial institutions franchise, express companies (utilities), insurance gross premiums, and personal income tax credits designed to spur economic development in the state. Specifically, the legislation increases the annual tax credit cap and makes other changes relating to the quality jobs program, enacts a new distressed-area land assemblage tax credit, enacts a new tax credit for sales of beef from cattle born in Missouri, authorizes a tax credit for qualified equity investments in qualified community development entities, lowers eligibility requirements for film production tax credits and revises credit amounts, increases the annual tax credit cap and makes other changes relating to the enhanced enterprise zone tax credit, and expands definitions to make various tax credits available to tax-exempt charitable organizations.

CCH (cch.taxgroup.com) reports:

The IRS has announced that the interest rates for the calendar quarter beginning October 1, 2007, will remain at 8 percent for overpayments (7 percent in the case of a corporation), 8 percent for underpayments, and 10 percent for large corporate underpayments. The interest rate for the portion of a corporate overpayment exceeding $10,000 remains at 5.5 percent. The interest rates are computed by using the federal short-term rate based on daily compounding determined during July 2007.
Code Sec. 6621 provides that the rate of interest is to be determined on a quarterly basis. For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus three percentage points. Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus three percentage points, and the overpayment rate is the federal short-term rate plus two percentage points. The rate for large corporate underpayments is the federal short-term rate plus five percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half of a percentage point.
IR-2007-154, 2007FED ¶46,617
Rev. Rul. 2007-56, 2007FED ¶46,618
Rev. Rul. 2007-56, ETR ¶66,836
Rev. Rul. 2007-56, FINH ¶30,561
Other References:
Code Sec. 6601
CCH Reference - 2007FED ¶174.01
CCH Reference - 2007FED ¶175.01
CCH Reference - 2007FED ¶175.30
CCH Reference - ETR ¶102
CCH Reference - ETR ¶50,615.01
Code Sec. 6621
CCH Reference - 2007FED ¶39,455.01
CCH Reference - 2007FED ¶39,455.51
CCH Reference - FINH ¶21,685.01
CCH Reference - FINH ¶21,685.30
Code Sec. 6622
CCH Reference - 2007FED ¶39,465.01
Tax Research Consultant
CCH Reference - TRC ACCTNG: 33,204.15
CCH Reference - TRC PENALTY: 9,152

CCH (cch.taxgroup.com) reports:

In an overview of the Senate's ambitious fall legislative schedule, Senate Minority Leader Mitch McConnell, R-Ky., told reporters that renewing some 40 expiring tax provisions and providing another year of relief for middle-income taxpayers from the alternative minimum tax (AMT) is "fundamental" legislation that must be completed by the end of 2007.
Senate Majority Leader Harry Reid, D-Nev., however, who also gave the customary fall legislative agenda speech upon Congress's return from its summer recess on September 4, made no reference to tax legislation.
The tax provisions McConnell referenced are the temporary, more narrowly targeted temporary tax benefits --sometimes called the "extenders." The Senate on December 9, 2005, approved an extenders bill (HR 6111) that had been passed by the House on December 8 of that year. The bill was estimated to reduce tax revenue by $38.1 billion over five years and $45.1 billion over 10 years. It was signed into law as the Tax Relief and Health Care Act of 2006 (P.L.109-432).
The following are some of the temporary provisions extended by the Act; the extensions expire at the end of 2007:
--deduction of tuition;
--the new markets tax credit;
--deduction of state and local sales taxes;
--the research and experimentation tax credit;
--the work opportunity and welfare-to-work tax credits (combined);
--the earned income tax credit treatment of combat pay;
--qualified zone academy bonds;
--deduction of teacher expenses;
--expensing of brownfields costs;
--D.C. investment incentives;
--the Indian employment credit;
--depreciation on Indian reservations;
--leasehold depreciation; and
--rum excise cover-over to Puerto Rico and Virgin Islands.
By Jeff Carlson, CCH News Staff
 

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

Guidance is issued regarding Texas franchise taxes and the transition to a business margin calculation. Specifically, the Office of the Comptroller provides guidance covering the filing requirements for entities that either started or stopped doing business in Texas during 2007.
All corporations and limited liability companies (LLCs) formed before October 4, 2006, that are (1) subject to the earned surplus component, and (2) not part of a combined group and that cease doing business in Texas (whether by withdrawal, dissolution, merger, etc.) at any time before November 2, 2007, must file a final franchise tax report using Form 05-139 based on the earned surplus component.
Corporations or LLCs that are a part of a combined group must include the final report information in the combined report. The corporation or LLC must file a final franchise tax report using Form 05-139 to identify the name and taxpayer number of the reporting entity for the combined group.
A newly taxable partnership that was doing business in Texas after June 30, 2007, and is not doing business in this state on January 1, 2008, must file a final report using Form 05-171 based on the margin calculation. The tax reported on the final report is based on the period beginning on the later of January 1, 2007, or the date the entity was organized in this state or began doing business in Texas and ending on the date the entity became no longer subject to the tax.
Corporations and LLCs that were formed on or after October 4, 2006, will have an initial report due on or after January 1, 2008, based on the margin calculation. If the corporation or LLC wishes to end its existence at any time prior to January 1, 2008, the entity must file a "premature" initial franchise tax report using Form 05-168 based on the margin calculation. Instead of using an accounting year end date on this report, the initial filer in this category will use the last day the entity is doing business in Texas. The entity will not be required to file a final report.
The guidance is available at the Comptroller's Web site at http://www.window.state.tx.us/taxinfo/taxpnw/tpn2007/tpn708.html#issue1.
Tax Policy News, Vol. XVII, Issue 8 , Texas Comptroller of Public Accounts, August 2007.

CCH (cch.taxgroup.com) reports:

Kentucky Governor Ernie Fletcher has signed special session legislation (H.B. 1, Laws 2007) that creates and expands various alternative energy and fuel tax credits. Kentucky-based alternative fuel, gasification, or renewable energy facilities may claim credits against the corporation income tax, the limited liability entity tax, the personal income tax, the sales and use tax, and the severance tax. Companies that produce ethanol and cellulosic ethanol in Kentucky may claim credits against the corporation income tax, the limited liability entity tax, and the personal income tax. The legislation also increases the cap for the corporation income tax, limited liability entity tax, and personal income tax credit for biodiesel producers and blenders and extends the credit eligibility to renewable diesel producers; expands the corporation income tax, personal income tax, and public service corporation property tax credit for coal-fired electric generation plants to alternative fuel and gasification facilities; and provides a sales tax refund for manufacturers that invest in energy efficient machinery or equipment.

CCH (cch.taxgroup.com) reports:

President Bush on August 31 proposed temporary tax relief for homeowners with a good credit history who are facing foreclosure because the value of their homes is less than the worth of their mortgage. "I'm going to work with Congress to temporarily reform a key housing provision of the federal tax code, which will make it easier for homeowners to refinance their mortgages during this time of market stress," the president announced in the Rose Garden.
Under the president's proposal, if the value of a home declines and, for example, $20,000 of the homeowner's loan is forgiven, the tax code treats that $20,000 as taxable income. The Bush initiative, which requires the enactment of legislation to change the tax code, would temporarily change a key provision of the tax code to ensure that cancelled mortgage debt on a primary residence is not counted as income, according to a White House document.
The president pledged to work with Congress to enact the measure. He expressed support for a bipartisan House bill introduced by Reps. Rob Andrews, D-N.J., and Ron Lewis, R-Ky., and a Senate bill by Sens. Debbie A. Stabenow, D-Mich., and George Voinovich, R-Ohio, designed to protect homeowners from paying taxes on cancelled mortgage debt.
The president called on Congress to modernize the Federal Housing Administration (FHA) to help more homeowners qualify for FHA insurance by lowering down-payment requirements, raising loan limits and providing more flexibility in pricing. "These reforms would allow the FHA to reach families that need help, those with low incomes and less-than-perfect credit records or little savings," Bush asserted.
Current Law
Code Sec. 61 sets forth the general rule that, except as otherwise provided, "gross income means all income from whatever source derived." That section goes on to specify 15 items that must be included in gross income. An item found in Code Sec. 61(a)(12) is "income from discharge of indebtedness." Code Sec. 108 provides the only exceptions to the inclusion of "income from discharge of indebtedness." These exclusions cover four circumstances: (1) the discharge occurs in a title 11 [bankruptcy] case, (2) the discharge occurs when the taxpayer is insolvent (all indebtedness exceeds all assets), (3) the indebtedness discharged is qualified farm indebtedness or, (4) in the case of a taxpayer other than a C corporation, the indebtedness discharged is qualified real property business indebtedness.
Administration's Addition
The administration has not yet released proposed statutory language for the tax-relief portion of the president's plan to help homeowners. The president's own words, however, give some clues to --and raise some issues over --what he proposes. The president stated that:
--He will propose a revision to "a key housing provision of the federal tax code." It appears that the provision is Code Sec. 108.
--He is looking for "temporary" relief. However, whether he is referring to solving the current crisis that he believes will not repeat itself, giving relief only to those already overextended, or giving relief that is temporary only in the sense of being "paid back" by a lower tax break when the home is eventually sold are points that are unclear.
--He wants a change "to make it easier for people to refinance their homes." Whether he is limiting relief to refinancing for people who stay in their homes or will propose to extend relief to foreclosure situations as well is unclear. A White House "fact sheet" does describe the situation more broadly, however, referring to relief for "cancelled mortgage debt on a primary residence." In either case, the Bush proposal appears limited to mortgage indebtedness on a principal residence.
--He wants a provision close to that found in the Mortgage Cancellation Relief Act of 2007, which was introduced on April 17 in the House as HR 1876 and on May 15 in the Senate as Sen 1394. However, he does not wholly endorse the pending bills, saying, rather, that they are"onto a good idea" and "a positive step" and that "with a few changes in the Senate version and the House version, this administration can support these bills."
HR 1876/Sen 1394
would add a fifth exception to Code Sec. 108's list: "in the case of an individual, the indebtedness discharged is qualified residential indebtedness." "Qualified residential indebtedness" would be limited to the excess of the outstanding principal amount of the debt over the sum of the sales proceeds, plus the principal amount of any other indebtedness secured by such property. In turn, "qualified residential indebtedness" itself would be defined as indebtedness on real property used as a residence of the taxpayer and incurred to construct, reconstruct, or substantially improve it. Refinanced indebtedness would be included, but only to the extent the refinanced indebtedness does not exceed the amount of the indebtedness being refinanced.
Finally, HR 1876 and Sen 1394, as introduced, would only apply "to discharges after the date of the enactment." Unless that effective date is changed, homeowners with indebtedness income presently being recognized before passage would not qualify for relief.
By Paula Cruickshank and George Jones, CCH News Staff
White House Fact Sheet: New Steps to Help Homeowners Avoid Foreclosure

CCH (cch.taxgroup.com) reports:

The IRS has obsoleted Rev. Rul. 75-425, 1975-2 CB 291, since it is no longer determinative. Rev. Rul. 75-425 provided guidance regarding the effect of an alien individual, employed by a foreign government or international organization in the United States, signing a waiver under section 247(b) of the Immigration and Nationality Act. Generally, an alien individual employed by a foreign government or international organization who files the waiver is no longer entitled to exemption from income tax under Code Sec. 893 with respect to compensation received from such foreign government or international organization. However, the waiver has no effect on any income tax exemption derived from the provisions of an income tax treaty, consular agreement, or other international agreement to the extent the application of the exemption is not dependent upon the internal revenue laws of the United States. Rev. Rul. 75-425 also sets forth the application of the above rules with respect to a list of foreign countries with which the United States had an income tax treaty or consular agreement and a list of international organizations with respect to which the United States was a signatory to the international agreement creating the international organization(s) at the time of publication of the revenue ruling. Because many of those income tax treaties, consular agreements, and international agreements have been modified, superseded, or are no longer in force, and because the facts on which the ruling position was based no longer exist or are not sufficiently described to permit clear application of the currently applicable legal provisions and agreements, the IRS has concluded that Rev. Rul. 75-425 is no longer determinative with respect to foreign government and international organization employees of any foreign country.
Rev. Rul. 2007-60, 2007FED ¶46,616
Other References:
Code Sec. 893
CCH Reference - 2007FED ¶27,050.47
CCH Reference - 2007FED ¶27,622.1095
Tax Research Consultant
CCH Reference - TRC INTL: 12,150
 

CCH (cch.taxgroup.com) reports:

The IRS has informed poker tournament sponsors, including casinos, of their withholding and information reporting obligations under Code Sec. 3402(q) for amounts paid to tournament winners. Withholding is required where one or more tournament winners are paid in excess of $5,000 apiece over the entry and "buy-in" fees that participants are charged and that comprise a "wagering pool" from which the winnings are paid. The withholding rate is equal to the third lowest rate applicable to single filers, under Code Sec. 1(c), which currently is 25 percent.
A sponsor required to withhold on poker tournament winnings must file a Form W-2G, Certain Gambling Winnings, with the IRS on or before February 28 (March 31 if filed electronically) of the calendar year following the calendar year in which the winnings are paid. Certain information to be used by the sponsor for the when completing Form W-G must be supplied by the recipient of the winnings on Form W-2G or Form 5754, Statement by Person(s) Receiving Gambling Winnings, whichever is applicable.
CCH Comment. Form 5754 is used where the recipient of the tournament winnings is not the actual winner or is a member of a group of two or more winners on the same winning ticket.
Rev. Proc. 2007-57, 2007FED ¶46,613
Other References:
Code Sec. 3402
CCH Reference - 2007FED ¶33,589.25
Tax Research Consultant
CCH Reference - TRC PAYROLL: 3,404.10
 

Tax Analysts report:

Tax Analysts report:

Tax Analysts report:

Tax Analysts report: