Tax News

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: