Tax News

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: