Tax News

CCH (cch.taxgroup.com) reports:

  The Oklahoma Supreme Court has decided that the Oklahoma State Board of Equalization and the Oklahoma Tax Commission (hereinafter, the state revenue authorities) erroneously classified a natural gas gathering facility as a public service corporation and, accordingly, these state revenue authorities were without jurisdiction to assess the facility for purposes of Oklahoma ad valorem taxation. Instead, only the local county assessor had the jurisdiction to assess the facility's property. Furthermore, the court determined that a state statute relied upon by the state revenue authorities in taxing the facility was unconstitutional.

CCH (cch.taxgroup.com) reports:

  In an Idaho corporate income tax case involving loans that were secured by Idaho real property, the Tax Commission affirmed a deficiency notice, despite the taxpayer's claim that the transfer of the loans to related companies for securitization removed the loans from the Idaho apportionment numerators. The taxpayer argued that the loans should be excluded because the companies did not transact business in Idaho and, therefore, were not subject to Idaho income tax. In examining the safe harbor allowed for corporations conducting certain limited financial activities within Idaho, the Tax Commission noted that it is possible for a corporation to be maintaining an office in the state, based on activity being conducted on its behalf by affiliates or representatives, provided that such activity is more than just de minimis . In this case, the activities conducted at affiliated offices in Idaho exceeded the de minimis exception.

  In addition, with respect to the property factor, the Tax Commission concluded that the intercompany transfer of the loans to related companies did not amount to a material change that would justify excluding the loans from the Idaho numerator. The taxpayer's exclusion of the loan interest from the Idaho sales factor numerator was also rejected.

  The taxpayer also failed to establish that it should be allowed to change the assignment of certain other loans, based on a cost of performance analysis. In addition to solicitation occurring in Idaho, the loans in question were secured by Idaho real property, assigned to Idaho on regular business records, and assigned to Idaho in returns filed with other states.

  Finally, although the taxpayer's substantive arguments were rejected, the Tax Commission recognized that the underlying legal issues were complex. Because the taxpayer acted in good faith and there was reasonable cause for the positions taken, the substantial understatement penalty was waived.

Decision No. 20555 , June 24, 2008, received October 23, 2008, ¶400-594

  Other References:

  Explanations at ¶11-540

CCH (cch.taxgroup.com) reports:

  For purposes of determining percentage depletion under
Code Sec. 613A(c) for oil and gas produced from marginal properties, the IRS has released a table of the applicable percentages for marginal production that covers tax years beginning in calendar years 1991 through 2008. The applicable percentages are: 15 percent for calendar year 1991; 18 percent for calendar year 1992; 19 percent for calendar year 1993; 20 percent for calendar year 1994; 21 percent for calendar year 1995; 20 percent for calendar year 1996; 16 percent for calendar year 1997; 17 percent for calendar year 1998; 24 percent for calendar year 1999; 19 percent for calendar year 2000; and 15 percent for calendar years 2001 through 2008.

Notice 2008-89, 2008FED ¶46,636

Other References:

 
Code Sec. 613A

  CCH Reference - 2008FED ¶23,988.044

  CCH Reference - 2008FED ¶23,988.35

  Tax Research Consultant

  CCH Reference - TRC FARM: 15,216.05

CCH (cch.taxgroup.com) reports:

  The IRS has issued the inflation adjustment factor for use in determining the enhanced oil recovery credit under Code Sec. 43. The inflation adjustment factor for calendar year 2008 is 1.4666. Because the reference price as determined under Code Sec. 45K(d)(2)(C) for 2007 ($66.52) exceeds $28 multiplied by the inflation adjustment factor for 2007 by $25.45, the enhanced oil recovery credit for qualified costs paid or incurred in 2008 is phased out completely. The GNP implicit price deflator to be used for calendar year 2008 is 119.656.

Notice 2008-72, 2008FED ¶46,635

Other References:

 
Code Sec. 43

  CCH Reference - 2008FED ¶4387.021

  CCH Reference - 2008FED ¶4387.07

  CCH Reference - 2008FED ¶4387.30

  Tax Research Consultant

  CCH Reference - TRC BUSEXP: 54,302.05

  CCH Reference - TRC BUSEXP: 54,554.15

Tax Analysts report:

Tax Analysts report:

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

  The Ohio Tax Commissioner has issued a waiver of reporting requirements for certain real estate investment trusts (REITs), regulated investment companies (RICs), and real estate mortgage investment conduits (REMICs) for the corporate franchise tax year 2009 and the dealer in intangibles tax return year 2009. However, reporting requirements are not waived for any such entity if during the any portion of the calendar year 2008:

  -- at least 20% of the equity interest was owned by a person and/or by that person's related members, on a cumulative basis; and

  -- that person, or any of that person's related members, was an entity other than a publicly traded REIT or trust.

To be eligible for the waiver, the entities are required to submit to the Commissioner a list of the names, addresses, and Social Security or federal identification numbers of all investors, shareholders, and other similar investors who owned any interest or invested in the entity during the preceding calendar year.

  Subscribers to CCH Tax Research NetWork can view the waiver.

Administrative Journal Entry, Ohio Department of Taxation, October 15, 2008.
 

CCH (cch.taxgroup.com) reports:

  An individual who was the sole member of a limited liability company (LLC) was liable for the LLC's unpaid employment taxes. The court rejected the individual's argument that the Code Sec. 7701 regulations making the sole member of an LLC liable for the entity's employment taxes were invalid. The regulations at issue were a reasonable attempt by the IRS to fill in gaps left in the statute regarding the taxation of LLCs. Also, the IRS's decision to adopt an alternative approach did not strip the regulations of Chevron deference. Finally, a new regulation adopted by the IRS regarding a sole member's liability for an LLC's employment taxes did not apply because it was not in effect for the tax year at issue.

  Unpublished opinion affirming a DC Wash. decision, 2006-1 USTC ¶50,231.

E.A. Kandi, CA-9, 2008-2 USTC ¶50,599

Other References:

 
Code Sec. 7701

  CCH Reference - 2008FED ¶43,084.15

  CCH Reference - 2008FED ¶43,087.72

 
Code Sec. 7805

  CCH Reference - 2008FED ¶43,282.169

  Tax Research Consultant

  CCH Reference - TRC LLC: 9,050
 

CCH (cch.taxgroup.com) reports:

  The Tax Court had jurisdiction in a partnership-level proceeding to determine whether a taxpayer's purported partnership should be disregarded for tax purposes, whether the partners had any outside basis in their partnership interests, and whether the valuation misstatement penalty should apply. The partnership's alleged business purpose was to engage in foreign currency option trading on behalf of its partners; however, the taxpayer and his brother merely contributed pairs of offsetting long and short options and then, two months later, withdrew from the partnership, receiving cash and shares of corporate stock. The brothers increased their basis in their partnership interests to reflect their contributions of the long options, but did not reduce their basis to reflect the partnership's assumption of the short options they contributed. On the subsequent sale of the stock they had received from the partnership they claimed multimillion dollar losses. In its final partnership administrative adjustment (FPAA) for the year, the IRS determined that the partnership was not a partnership as a matter of fact, or if it was, that it had no business purpose other than tax avoidance and so was abusive, under Reg. §1.701-2, so that the partnership transactions should be treated as having been entered into by the partners directly, and neither the partners nor the partnership entered into the option or currency transactions with a profit motive. In challenging the FPAA, the taxpayer stipulated that he would not contest any items raised in the FPAA if the court determined that it had jurisdiction over them, except for the issue of whether valuation misstatement penalties applied. The IRS filed a motion for summary judgment on the grounds that the remaining issues raised in the FPAA all related to partnership issues.

  The taxpayer argued that the determination of the partnership's status is either not a partnership item or not an "item" at all. However, the court had jurisdiction over the status question under Temporary Reg. §301.6233-1T(a), which provides that whether a partnership existed should be determined in a partnership-level proceeding. Furthermore, the determination that a partnership should be disregarded under a sham or economic substance doctrine is indeed a partnership item since the definition of "item" is not limited to items of income, deduction, credit, gain, loss or basis or similar accounting entry, and the status of a partnership directly affects the calculation of all of those types of items. Though the listing of partnership items inReg. §301.6231(a)(3)-(1)(a) does not explicitly include the applicability of sham or economic substance doctrines, it does include "the legal and factual determinations that underlie the determination of the amount, timing, and characterization of items of income, credit, gain loss, deduction, etc."

  The taxpayer argued that the determination of the partners' outside bases in their partnership interests was not a partnership item, and so was beyond the court's jurisdiction in this case. The IRS conceded that position was generally the rule, but argued that where it is determined that the partnership should be disregarded, there can be no outside basis in it. The Tax Court adopted this view, noting that
Reg. §301.6231(a)(3)-1(c)(2) and
(3) recognize that the determination of partners' outside basis can sometimes be a partnership item. Once it has been determined that a partnership, or a particular partner's participation in a partnership should be disregarded, the Court may determine that the outside basis is zero.

  The Tax Court had jurisdiction to consider the imposition of penalties in this case. Even if the penalties were more directly related to affected items, and only indirectly related to partnership items, because they arose from the determination that the partnership should be disregarded, they were sufficiently related the vest the court with jurisdiction under Code Secs. 6221 and 6226(f). The taxpayer argued that the valuation misstatement penalty should not apply because the understatement was the result of the partnership's incorrect application of the law, not because of an erroneous valuation. Although there is a split among the Circuit Courts of Appeals on this issue, the court agreed with the majority of circuits in finding that the gross valuation misstatement penalty does apply in such a case, citing Reg. §1.6662-5(g), which provides that, when a taxpayer claims a basis in an item in which he has no basis, the gross valuation misstatement penalty will apply.

  The taxpayer also argued that the penalty should not apply because it would not be possible to determine why the partners' outside bases were disallowed. However, while a deduction or credit is or may have been disallowed for reasons other than the fact that the basis was inflated, and the penalty not imposed, in this case all of the IRS's alternative arguments resulted in a determination that a misstatement of the bases had occurred. Finally, the taxpayer argued that his stipulations did not prohibit him from arguing, with respect to the penalty, that the partnership was not a sham. The Tax Court rejected this claim, construing the stipulation to have preserved only the right to argue that sham and lack of economic substance are not partnership items, not the right to have challenge the sham determination on factual grounds.

Petaluma FX Partners, LLC, 131 TC No. 9, Dec. 57,562

Other References:

 
Code Sec. 6221

  CCH Reference - 2008FED ¶37,569.12

 
Code Sec. 6226

  CCH Reference - 2008FED ¶37,709.70

 
Code Sec. 6231

  CCH Reference - 2008FED ¶37,849.45

 
Code Sec. 6662

  CCH Reference - 2008FED ¶39,654.45

 
Code Sec. 7442

  CCH Reference - 2008FED ¶42,058.1535

  Tax Research Consultant

  CCH Reference - TRC PART: 60,060
CCH Reference -
TRC PART: 60,558
CCH Reference - TRC PENALTY: 3,110.05
 

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

  Qualified victims of Hurricane Ike may file a claim for refund of any Texas state and local hotel occupancy tax, including venue project hotel tax, paid during the period beginning September 8, 2008, and ending October 14, 2008. Texas Governor Rick Perry had originally suspended the collection of hotel tax on September 8, 2008, for 14 days and then extended the waiver to October 14, 2008.

CCH (cch.taxgroup.com) reports:

  The Michigan Department of Treasury has issued guidance, effective retroactively to January 1, 2008, regarding the nexus standard under the Michigan business tax (MBT). There are two alternative nexus standards under the MBT: (1) a taxpayer has physical presence in the state for more than one day during the tax year or (2) the person actively solicits sales in Michigan and has Michigan gross receipts of $350,000 or more. Once nexus is established, nexus lasts for the entire tax year. Furthermore, if one member of a unitary business group has nexus with Michigan, all group members must be included to calculate the tax bases and apportionment formulas.

  A taxpayer has physical presence in Michigan if it conducts business activities in Michigan, owns, rents, or leases tangible personal or real property, or delivers goods to Michigan in its own (or leased) vehicles. Nexus may be created, depending on the facts and circumstances, with these activities: meeting with suppliers or government officials, attending occasional meetings, holding hiring events, advertising, renting to or from a customer list, and attending trade shows. Corporations incorporated in Michigan have a physical presence in the state. Also, physical presence for a portion of a day establishes physical presence for the entire day. Active solicitation is the purposeful solicitation of persons in Michigan. The quality, nature, and magnitude of the activities are examined on a facts and circumstances basis to determine if active solicitation has been established.

  P.L. 86-272 protects taxpayers from the imposition of the business income tax portion of the MBT, but not the modified gross receipts tax portion. Only the solicitation to sell tangible personal property is immune. Therefore, leasing activities and activities regarding intangible property are not protected. Solicitation includes speech or conduct that explicitly or implicitly invites an order and activities entirely ancillary to requests for an order. Protection by P.L. 86-272 is determined on a tax year by tax year basis. Examples of protected and unprotected activities are provided. De minimis activities establish only a trivial connection. However, if they are conducted on a regular or systematic basis or pursuant to company policy, then the activities are not trivial.

Revenue Administrative Bulletin 2008-4 , Michigan Department of Treasury, October 21, 2008, ¶401-392

  Other References:

  Explanations at ¶10-075

CCH (cch.taxgroup.com) reports:

  Connecticut Governor M. Jodi Rell announced that she is calling the state Legislature into special session on November 24, 2008, to address her plan for eliminating Connecticut's 2009 fiscal year budget shortfall, which includes a proposed tax amnesty program expected to cover personal income taxes, corporate income taxes, sales and use taxes, and most other taxes administered by the Connecticut Department of Revenue Services.

  For the full text of the governor's announcement, go to
http://www.ct.gov/governorrell/cwp/view.asp?A=3293&Q=425462

Press Release , Connecticut Governor M. Jodi Rell, October 21, 2008.
 

CCH (cch.taxgroup.com) reports:

  Due to a conflict of interest, a limited partner was not bound by an extension of the assessment period signed by the partnership's tax matters partner (TMP). The TMP's plea agreement with the IRS for crimes unrelated to the partnership created a disabling conflict of interest that disqualified him from binding the partnership when he consented to extend the statute of limitations at the IRS's request. The TMP had pled guilty to structuring crimes in exchange for his agreement to cooperate fully with the IRS in order to resolve his tax liability and any tax liability and examination of the partnership. The plea agreement was a clear incentive for the TMP to ingratiate himself to the government, particularly since he would not be sentenced until almost a year later. The government knew that the TMP and the limited partner had conflicting interests when the TMP executed the requested consents, but continued to seek and secure the TMP's consents, without the limited partners' knowledge, until several years into the TMP's incarceration. Consequently, the consents executed by the TMP were rendered invalid, and the tax adjustments proposed by the IRS to the partnership's returns were time-barred.

  Unpublished opinion reversing the Tax Court, 92 TCM 106,
Dec. 56,585(M), TC Memo. 2006-164.

Leatherstocking 1983 Partnership, CA-2, 2008-2 USTC ¶50,597

Other References:

 
Code Sec. 6221

  CCH Reference - 2008FED ¶37,569.01

 
Code Sec. 6229

  CCH Reference - 2008FED ¶37,749.10

 
Code Sec. 6231

  CCH Reference - 2008FED ¶37,849.30

  CCH Reference - 2008FED ¶37,849.35

  Tax Research Consultant

  CCH Reference - TRC PART: 60,354

CCH (cch.taxgroup.com) reports:

  "The financial crisis is having an unprecedented impact on qualified retirement plans across the board at the employer, employee, and retiree levels," James Klein, president of the American Benefits Council (ABC), stated at a press briefing in Washington. DC on October 22. Unveiling ABC's "10-Point Plan to Help Employees and Retirees and to Strengthen the Economy and the Retirement System," Klein emphasized that existing tax law is standing in the way of an immediate solution, and that Congress needs to act quickly to remedy the situation. He added that it seemed plain that Congress never intended to hamstring employers, employees and retirees by application of certain provisions in existing tax law to unprecedented economic circumstances.

  Although retroactive relief is possible in certain circumstances if remedial legislation were to wait until January, Klein stated that a lame-duck session of Congress could prevent the irretrievable loss of certain benefits by making provisions immediately effective in 2008. He stressed that any new economic stimulus package should contain ABC's proposed relief - or a close variation - as essential to the nation's immediate economic health. Lynn Dudley, senior VP, Policy, at ABC, indicated that there already has been outreach to members of Congress about the 10-Point Plan, and that reception on the Hill to the need for legislative action "had been positive." Dudley stated that ABC's plan will be submitted to the various congressional committees over the next several weeks in conjunction of hearing that have been scheduled on the economic crisis.

  ABC's 10-Point Plan offers retirement plan-based solutions that address three major concerns: (1) how to help individuals weather the financial storm; (2) how to help businesses already in economic straits to meet what will be crushing funding obligations under existing law; and (3) how to encourage savings for the long term in the face of current market conditions.

  ABC's 10-Point Plan looks to the tax law to help individuals in three areas:

  (1) Help more middle-class taxpayers rebuild their retirement nest egg (or encourage them to start one) by expanding the income level at which the existing Saver's Credit would be available;

  (2) Allow retirees a chance to keep their retirement accounts whole while catching the market on the upswing by temporarily suspending required minimum distribution rules; and

  (3) Allow hard-strapped defined contribution plan and IRA participants to withdraw up to $10,000 with easy repayment terms.

Funding of Defined Benefit Plans

  "Current funding rules for defined benefit (D plans create enormous problems for both employers and employee," stated Kent Mason, partner, Davis & Harman LLP, counsel for ABC. According to ABC, current funding rules will precipitate widespread freezes of existing DB plans, will force companies to divert funds that could otherwise be used to help build their businesses, and will mean fewer jobs as companies cut back to meet their funding obligations.

  ABC's legislative proposals on the funding front all center around the need to delay certain of the additional requirements imposed on pension plans by the Pension Protection Act of 2006 (PPA) (P.L. 109-280). According to ABC, Congress never intended a quick transition from prior law to PPA rules to have such a draconian effect due to unanticipated "extreme market conditions." Mason emphasized that ABC was not proposing the repeal of the PPA but, rather, a slower transition of certain requirements. Specifically, as part of the 10-Point Plan, ABC recommends in connection with mandatory funding requirement:

  --To permit pension plans to smooth out unexpected asset losses for 36 months for 2009 through 2010;

  --To allow smoothing of asset losses, even in excess of 10-percent of the fair market value of assets;

  --To roll back for 2009 the phase-in of funding levels to 92-percent of full funding to pay projected benefits and removing cliff vesting at 100 percent for those companies with assets that miss the 92-percent target;

  --To permit 10-year amortization (rather than seven-year) of 2008 losses recognized in 2009; and

  --To permit a flexible interpretation of other PPA provisions on funding elections to avoid benefit restrictions and keep plans viable.

Encouragement of Future Participation

  ABC's 10-Point Plan also includes a recommendation to enhance financial education to encourage individuals to save for retirement. Dudley pointed to model notice that is being developed by the Department of Labor to help employers inform employees about the need to save for retirement, to diversify those savings and to continue to save even in a declining market. She mentioned that some employers have avoided giving employee/participants any investment advice over fears of being sued for incorrect recommendations. ABC also recommends that the Department of Education develop a five-year program to enhance financial literacy starting in the schools.

  Finally, in taking a long-range view to retirement savings, ABC recommends increasing the start-up tax credit for small business retirement plans. Under the recommendation, 75-percent of costs would be covered (rather than 50 percent), with a three year maximum credit increased from $500 to $2,000.

  By George Jones, CCH News Staff

CCH (cch.taxgroup.com) reports:

  "In these unprecedented times, it is important to get guidance out quickly," David Shapiro from the Treasury Department's Office of Tax Policy said on October 22, as the financial markets appear to be stabilizing after massive intervention by the federal government. Shapiro, who spoke at a program sponsored by the Taxation Section of the District of Columbia Bar Association, highlighted some of the Treasury's recent market-related guidance items, such as guidance for auction rate securities.

Auction Rate Securities

  Auction rate securities are municipal bonds, preferred stock or other items whose interest rates are reset every seven to 49 days through an auction process. When auctions for auction rate securities started to fail earlier this year, the Treasury and the IRS responded with guidance. Notice 2008-55, I.R.B. 2008-27, 11, was issued in June and addresses the effect of adding liquidity facilities to support certain auction rate preferred stock on the equity character of stock. In September, the Treasury Department and the IRS issued Rev. Proc. 2008-58 clarifying settlement offers related to auction rate litigation.

  Shapiro explained that the guidance was not necessarily issued to facilitate settlements, but to achieve some uniformity and consistency in the settlements. "Tens of thousands" of individuals could be affected by these settlements, Shapiro said.

  Under Rev. Proc. 2008-58, the IRS generally will not challenge the position that a taxpayer continues to own the auction rate security when receiving or accepting a settlement offer. Additionally, the IRS will not challenge the position that the taxpayer does not realize any income from receiving or accepting the settlement. These and other criteria generally apply to settlement offers received before June 30, 2009.

Crisis Easing

  On the same day that Shapiro spoke, the Association of Financial Professionals (AFP) reported strong support for the Treasury's Capital Purchase Program (CPP). In an AFP survey, 69 percent of financial professionals said that the CPP would improve corporate access to short-term credit. Under the CPP, the Treasury intends to purchase up to $250 billion of senior preferred shares in participating financial institutions. In exchange, the institutions must agree to caps on the deductibility of executive compensation and so-called golden parachutes.

  "While the economy appears to be shaken, credit looks to be stabilizing," Jim Kaitz, AFP president, said in a statement. "More than three weeks ago, we said that the most pressing issue for business is access to credit. Actions by policymakers have in recent days brought some measure of confidence back to the markets."

  By George L. Yaksick, Jr., CCH News Staff

CCH (cch.taxgroup.com) reports:

  Local ordinances that impose a Kentucky transient room tax on the rental of rooms were inapplicable to Internet businesses (i.e., online travel companies) that do not have ownership or physical control of the rooms they offer for rent. The ordinances impose a transient room tax on a percentage of the rent "...for every occupancy of a suite, room or rooms, charged by all persons, companies, corporations, or other like or similar persons, groups, or organizations, doing business as motor courts, motels, hotels, inns or like or similar accommodations businesses." A county alleged that the online travel companies (OTCs) negotiate with hotels for a discounted or wholesale price for rooms that they then purchase and resell to guests at a marked up or retail rate. The companies pay the transient room tax on the wholesale price but keep the difference between that amount and the amount of tax the guests pay on the retail price. The county claimed the travel companies should pay the tax on the higher retail price. The court found that the OTCs do not meet the definition of "like or similar accommodations businesses." Internet businesses that do not have ownership or physical control of the rooms they offer for rent are not like or similar to motor courts, motels, hotels, or inns. As such, the local taxing ordinances were inapplicable to the OTCs.

Louisville/Jefferson County Metro Government v. Hotels.com, LP , U.S. District Court, Western District of Kentucky, No. 3:06-CV-480-R, September 26, 2008,
¶202-848.

  Other References:

  Explanations at ¶60-480 .

CCH (cch.taxgroup.com) reports:

  Taxpayers have asked the U.S. Supreme Court whether the federal courts lack jurisdiction over the taxpayers' action challenging the District of Columbia unincorporated business tax. The taxpayers are nonresidents of the District who paid unincorporated business tax on their personal incomes as a result of their membership in real estate limited liability companies in the District. They filed an action in the U.S. District Court for the District of Columbia seeking a declaration that the tax violates federal law and the U.S. Constitution.

  The federal court dismissed the action, holding that challenges to District tax assessments, including the imposition of tax, are by federal statute not within federal jurisdiction because Congress granted exclusive jurisdiction over such cases to the District's courts. The court added that this result parallels the mandate of the federal Tax Injunction Act, 28 U.S.C. §1341. This result is not affected by the fact that the District's courts already have rejected an identical challenge in Bender, 906 A.2d 277 (D.C. 2006), cert. denied, 127 S. Ct. 1356 (2007). The U.S. Court of Appeals for the District of Columbia Circuit summarily affirmed the lower court.

  The taxpayers ask the high court whether the exclusive jurisdiction of the District's courts extends beyond challenges to the "assessment" of a tax to challenges to the imposition of a tax, where a tax refund is not sought.

Fernebok v. District of Columbia, U.S. Supreme Court, Dkt. 08-391, petition for certiorari filed September 22, 2008.

CCH (cch.taxgroup.com) reports:

  While the tax provisions of the recently enacted Emergency Economic Stabilization Act of 2008 (HR 1424) may have taken most of the spotlight during the week of September 29, the IRS and Treasury continued releasing guidance on other important tax issues. These topics included the financial markets, exempt organizations compliance, nonqualified deferred compensation and disaster relief.

  Financial Markets. The Treasury is making market-related guidance a priority in light of the present financial crisis. Newly released guidance toward that effort covered several areas:

  Banks and Code Sec. 382(h). For purposes of Code Sec. 382(h), the IRS has assured financial institutions that any deduction properly allowed after an ownership change of a banking corporation with respect to losses on loans or bad debts, or reasonable additions to its bad debt reserve, shall not be treated as a built-in loss or a deduction attributable to periods before the change date (Notice 2008-83).

  Government ownership and Code Sec. 382. The Treasury and the IRS have also announced that they will issue regulations providing that the closing date on which the U.S. government directly or indirectly owns a more-than-50-percent interest in a loss corporation will not be considered a testing date for purposes of Code Sec. 382 (Notice 2008-84).

  Bankruptcy default and Code Sec. 1058(a). The IRS has also provided guidance regarding the application of
Code Sec. 1058(a) to situations involving securities loan agreements where the borrower subsequently defaults as a result of its bankruptcy and the lender uses collateral provided pursuant to the agreement to purchase identical securities (Rev. Proc. 2008-63). Subject to several conditions, the purchase of the identical securities will not result in the loss of tax-free treatment under Code Sec. 1058(a) for the lender.

  Bail-out contributions and Code Sec. 382. The IRS announced it would issue regulations under Code Sec. 382(l)(1), to provide that a capital contribution is not part of a plan to purchase a corporation with net operating loss (NOL) carryforwards and use those carryforwards to offset the purchaser's other income solely because it was made within the two year period before the change of ownership (Notice 2008-78).

  Exempt Organizations Compliance. The IRS is sending compliance questionnaires focused on unrelated business income, endowments, and executive compensation practices to approximately 400 U.S. colleges and universities (IR-2008-112). The questionnaires are part of the IRS's effort to study the tax-exempt community.

  Ronald Schultz, IRS senior technical advisor, Tax Exempt and Government Entities Division (TE/GE), warned tax-exempt organizations and their advisors on October 1 that major changes to compensation reporting in the new 2008 Form 990 require answers to a whole new set of questions, as well as a fresh understanding of how to translate those answers into compliance.

  The IRS has issued guidance amending and supplementing
Notice 2008-41, I.R.B. 2008-15, 742, regarding reissuance standards for tax-exempt bonds (Notice 2008-88). The guidance expands the circumstances and time periods during which a state or local government may repurchase bonds it issued without resulting in a reissuance or retirement of such bonds under relevant tax code provisions.

  Nonqualified Deferred Compensation Although the IRS will continue not to issue advance rulings or determination letters on the income tax consequences of establishing, operating, or participating in a
Code Sec. 409A nonqualified deferred compensation plan, the agency has announced that it may issue rulings on the application of certain other tax provisions to participating taxpayers (Rev. Proc. 2008-61).

  Mortality Tables The IRS has updated the static mortality tables to be used under Code Secs. 417 and 430 for purposes of calculating the funding target and other items for valuation for defined benefit plans (Notice 2008-85).

  The IRS has provided guidance on the requirements of defined benefit plan sponsors wishing to use substitute mortality tables in determining the plan's minimum funding requirements, as allowed under Code Sec. 430(h)(3)(C) (Rev. Proc. 2008-62). This is an update of Rev. Proc. 2007-37, I.R.B. 2007-25, 1433, which was based on proposed regulations.

  Disaster relief. The IRS recently published a list of the counties and parishes in the United States that have suffered exceptional, severe or extreme drought during the 12 months ending August 31, 2007, sufficient to extend the livestock replacement period (Notice 2008-86). As authorized in Code Sec. 1033(e)(2)( and implemented in Notice 2006-82, I.R.B. 2006-39, 529, an extended replacement period is available for livestock sold on account of extreme weather conditions until the end of the first taxable year ending after the first drought-free year.

  Korb Departing. IRS Chief Counsel Donald L. Korb has announced his intention to leave his current position, effective January 19, 2009. Korb stated on October 2 that he was announcing his resignation at this time to give notice to "those many qualified individuals" who may wish to apply for the position as his successor. Korb will have served in the position of IRS Chief Counsel for four years and nine months at the time of his departure.

  By Torie Cole, CCH News Staff

CCH (cch.taxgroup.com) reports:

  President Bush on October 3 signed a massive financial rescue package, the Emergency Economic Stabilization Act of 2008, Energy Improvement and Extension Act of 2008 and Tax Extenders and Alternative Minimum Tax Relief Act of 2008 (HR 1424) that authorizes the Secretary of the Treasury to establish a troubled assets relief program, provides a temporary alternative minimum tax (AMT) fix, extension of expiring tax provisions and energy tax incentives. The president signed the Wall Street rescue package only a few hours after it was passed in the House by a vote of 263 to 171. The Senate passed the measure on October 1 (TAXDAY, 2008/10/02, C.1).

  The legislation grants the Treasury Department up to $700 billion to purchase assets from troubled financial companies in an effort to jump-start the flow of credit in the economy. However, the bill inserts greater congressional oversight over the flow of funds to the Treasury and includes greater protections for taxpayers. It also lifts the ceiling on the Federal Deposit Insurance Corporation's (FDIC) guarantee on bank deposits from $100,000 to $250,000. Other provisions of the bill limit the so-called "golden parachutes" that executives of failed institutions can receive if their firms take advantage of the Treasury bailout plan.

  The FDIC provision appeared to be a crucial component for garnering additional House votes after the chamber on September 29 rejected the Emergency Economic Stabilization Bill of 2008 (HR 3997) by a vote of 228 to 205 (TAXDAY, 2008/09/30, C.1). House Republicans voting against that measure totaled 133, with 95 Democrats joining them. The defeat of the original version was fueled by Republicans' anger over what they perceived as the overly-partisan nature of the bailout debate.

  The president, shortly after House passage of the rescue bill, commended congressional leaders for working together in a timely manner to pass the measure. "By coming together on this legislation, we have acted boldly to help prevent the crisis on Wall Street from becoming a crisis in communities across our country," Bush said in the Rose Garden. "We have shown the world that the United States of America will stabilize our financial markets and maintain a leading role in the global economy," Bush stated.

  Treasury Secretary Henry M. Paulson said the government will move rapidly, but also methodically, to implement the new authorities. "Transparency throughout this process will be important, and I look forward to providing regular updates as we move ahead to implement this strategy," he said.

  Paulson said the broad authorities in the legislation, combined with existing regulatory authorities and resources, "give us the ability to protect and recapitalize our financial system as we work through the stresses in our credit markets."

  From a tax administration perspective, IRS Commissioner Douglas H. Shulman praised Congress for passing the AMT patch and tax extenders in enough time for the IRS to handle the changes on its tax forms and computer systems. In 2007, AMT and extenders legislation retroactive to the start of 2007 was not enacted under December 26, 2007, putting the IRS behind in accepting and processes 2007 tax forms for many weeks into the 2008 filing season. In a written statement immediately after passage of the legislation, Shulman commented, "Timely passage of the AMT and extenders provisions is a great outcome for the nation's taxpayers. This gives the Internal Revenue Service enough time to prepare for the upcoming tax season."

  House Speaker Nancy Pelosi, D-Calif., called the measure a "much improved" version of the earlier draft. "Our eye now is to the future, to shine the bright light of accountability on what is happening in our financial markets so that it doesn't happen again." House Minority Leader John Boehner, R-Ohio, described the bill as an "imperfect product," but stressed that Congress had a responsibility to act.

  Despite repeated promises not to pass a tax extenders bill that was not fully offset by revenue increases or spending cuts, House Ways and Means Committee Chairman Charles B. Rangel, D-N.Y., cast his vote for the bailout bill. The bailout measure included the entire text of HR 6049, as amended by the Senate on September 23 (TAXDAY, 2008/09/24, C.1). Rangel and House Majority Leader Steny L. Hoyer, D-Md., said that they supported the clean energy tax incentives, AMT relief, extensions of expiring business and family tax cuts, disaster relief, mental health parity and other provisions in the bill, even though they did not meet the House pay-as-you-go budget rules.

  The combined cost for all the tax measures, energy, AMT, extenders and other provisions, is $150.496 billion, and the offsets in the package total $43.504 billion. Hoyer said that the addition of the tax provisions, combined with the stock market losses and state financial problems, prompted members to switch their votes to approve the bill. According to Hoyer's office, the 111th Congress will convene on January 6, 2009. However, several Democratic lawmakers said they would return to Capitol Hill in mid-November for party organization meetings.

  The American Bankers Association (ABA) said the legislation would provide "the financial backstop needed to unfreeze the financial markets and provide for greater transparency and accountability for firms that participate in the program."

  By Sarah Borchersen-Keto, Stephen K. Cooper, Paula Cruickshank and George Jones, CCH News Staff

SFC Release: Congress Approves Financial Rescue Plan with Baucus Protections for Taxpayers, Tax Relief to Promote Jobs, Energy, Families

SFC Release: Grassley Praises Signing of Bill to Shield Taxpayers from AMT, Offer Tax Relief for Iowa Disaster Recovery, Continue Tax Incentives for Wind Energy, Tax Relief for College Tuition

Ways and Means Release: Rangel Statement on Financial Rescue Bill

SAP on HR 1424 --Emergency Economic Stabilization Act of 2008, Energy Improvement and Extension Act of 2008, and Tax Extenders and Alternative Minimum Tax Relief Act of 2008

Statement by the President on the Emergency Economic Stabilization Act of 2008

White House Fact Sheet on Safeguarding the Financial Future of American Workers and Families

Treasury Department News Release, TDNR HP-1175
 

Tax Analysts report:

Tax Analysts report:

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

  Legislation subjects specified individuals to electronic California personal income tax payment requirements, accelerates the changes made to the nonresident group return requirements made earlier in the legislative session, expands the Franchise Tax Board's (FT collection authority, and increases various alcohol-related license fees.

CCH (cch.taxgroup.com) reports:

  Three challenges that an individual raised in connection with his deficiency were dismissed. The Tax Court lacked jurisdiction over penalties imposed under 31 U.S.C. sec. 5321 for the taxpayer's failure to file foreign bank account reports (FBARs) disclosing his Swiss bank accounts. While FBARs had to be filed with the IRS, penalties for failing to file them were not subject to the deficiency procedures that made up the foundation for most Tax Court jurisdiction. Additionally, even if the IRS could use a lien or levy to collect the penalties, and even if the court would have jurisdiction over a challenge to such a lien or levy, the taxpayer had not alleged that the IRS had taken any collection action with respect to the penalties.

  The court also lacked jurisdiction over a deficiency that arose in a year that was not included in the taxpayer's deficiency notice. Finally, it lacked jurisdiction over his challenge to deficiency interest that had not yet been assessed. Since there was no assessment, there was no IRS decision about abating the interest that would be subject to the court's review.

J.B. Williams III, 131 TC No. 6, Dec. 57,547

Other References:

 
Code Sec. 7442

  CCH Reference - 2008FED ¶42,058.122

  CCH Reference - 2008FED ¶42,058.139

  CCH Reference - 2008FED ¶42,058.151

  Tax Research Consultant

  CCH Reference - TRC LITIG: 6,112
CCH Reference -
TRC LITIG: 6,114
CCH Reference -
TRC LITIG: 6,116
 

CCH (cch.taxgroup.com) reports:

  The IRS, the Department of Labor's Employee Benefits Security Administration ("EBSA") and the Pension Benefit Guaranty Corporation ("PBGC") have provided additional relief to certain employee benefit plans because of damage caused by Hurricane Ike. This additional relief applies to plans located in the Texas counties of Brazoria, Chambers, Galveston, Harris, Jefferson, Liberty, Montgomery or Orange as of September 7, 2008.

Pre-Pension Protection Act Plans

  For plan years beginning before January 1, 2008, if the date for making a contribution or applying for a waiver falls within the period beginning on September 7, 2008, and ending on December 15, 2008, then the deadline for that contribution or application is postponed to December 15, 2008. In addition, for any plan with an extended contribution date, a contribution for any plan year before the premium payment year may be taken into account if it is made on or before the earlier of: (1) the extended date or (2) the date of the plan's variable-rate premium filing for the premium payment year.

Single Employer Plans

  For plan years beginning after December 31, 2007, if the date for making a contribution, applying for a waiver, or furnishing a required notice falls within the period beginning on September 7, 2008, and ending on December 15, 2008, then the date for making that contribution, application or notice is postponed to December 15, 2008. If the date for certification of the adjusted funded target attainment percentage falls within the period beginning on September 7, 2008, and ending on December 15, 2008, then the date by which such certification must be made is postponed to December 15, 2008. Moreover, a contribution for any plan year before the premium payment year may be taken into account if it is made on or before the earlier of: (1) the extended contribution due date or (2) the date of the plan's variable-rate premium filing for the premium payment year.

Multiemployer Defined Benefit Plans

  If the deadline by which a sponsor of an endangered or critical status plan must adopt a funding improvement plan or a rehabilitation plan falls within the period beginning on September 7, 2008, and ending on December 15, 2008, then that deadline is postponed to December 15, 2008. If the date by which the plan actuary must certify whether or not the plan is in endangered status for the plan year and whether or not the plan is or will be in critical status for the plan year falls within the period beginning on September 7, 2008, and ending on December 15, 2008, then the date by which that certification must be made is postponed to December 15, 2008. However, the date by which the sponsor of a plan that is in critical or endangered status must adopt a funding improvement plan or a rehabilitation plan continues to be determined based on the original deadline for the certification of the plan's status.

Notice 2008-87, 2008FED ¶46,601

Other References:

 
Code Sec. 6081

  CCH Reference - 2008FED ¶36,789.213

 
Code Sec. 7508A

  CCH Reference - 2008FED ¶42,687C.22

  Tax Research Consultant

  CCH Reference - TRC FILEIND: 15,204.25
CCH Reference - TRC FILEBUS: 15,110
 

CCH (cch.taxgroup.com) reports:

  The IRS has provided procedures for taxpayers on how to make the election to no longer maintain a surety bond or Treasury Direct Account (TDA) to avoid recapture of the low-income housing credit. The guidance is aimed at taxpayers who are maintaining a surety bond or TDA to satisfy the low-income housing tax credit recapture exception in Code Sec. 42(j)(6), as in effect on or before July 30, 2008. The procedures apply to all taxpayers that disposed of a qualified low-income building on or before July 30, 2008, for which the IRS has approved a Form 8693, Low-Income Housing Credit Disposition Bond. The election is allowed by section 3004(i)(2)((ii) of the Housing Tax Act of 2008 (P.L. 110-289).

  A taxpayer who seeks to make the election must submit a letter to the IRS containing the following information: (1) the taxpayer's name, address, and taxpayer identification number; (2) a statement affirming that the taxpayer reasonably expects that the building will continue to be operated as a qualified low-income building for the remainder of the building's compliance period; and (3) an "under penalties of perjury" declaration. The taxpayer must attach the signature page of an IRS-approved Form 8693 to the letter and mail to: Internal Revenue Service, Box 331, Attn: LIHC Unit, DP 607 South, Philadelphia Campus, Bensalem, Pa. 19020.

Rev. Proc. 2008-60, 2008FED ¶46,600

Other References:

 
Code Sec. 42

  CCH Reference - 2008FED ¶4385.72

  Tax Research Consultant

  CCH Reference - TRC BUSEXP: 54,222

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

  For purposes of California corporation franchise and income, personal income, and property taxes, taxpayers affected by qualifying natural disasters during 2007 and 2008 will be given tax relief in the form of carrybacks or carryovers of specified losses and extension of property tax exemptions during a rebuilding process.

  For losses caused by the disasters in each of those years, qualifying taxpayers can elect to claim a corporation franchise or income tax or personal income tax deduction on the tax return for the preceding year. Excess disaster losses may be carried forward for 15 years. Persons whose homes were destroyed can retain the homeowners' exemption from property tax on their property while they are in the process of rebuilding.

  Qualifying disasters include:

  -- wildfires during the 2007 calendar year in Inyo, Los Angeles, Orange, Riverside, San Bernardino, San Diego, Santa Barbara, and Ventura counties;

  -- strong winds on October 2007 in Riverside County;

  -- wildfires during May, June, or July 2008 in the counties of Butte, Kern, Mariposa, Mendocino, Monterey, Plumas, Santa Clara, Santa Cruz, Shasta, and Trinity;

  -- wildfires in July 2008 in Santa Barbara County;

  -- severe rainstorms, floods, landslides, or accumulation of debris on July 12, 2008, in Inyo County; and

  -- wildfires during May 2008 in Humboldt County.

Ch. 386 (S.B. 1064), Laws 2008, effective September 27, 2008.
 

CCH (cch.taxgroup.com) reports:

  California Gov. Arnold Schwarzenegger has signed two bills that were enacted as part of the budget compromise deal that impact corporation franchise and income, personal income, and sales and use taxes.

  As reported earlier (TAXDAY, 2008/09/18, S.4), one of the budget trailer bills (A.B. 1452) limits corporation franchise and income tax and personal income tax business credits; allows unitary group members to assign corporation franchise and income tax credits to other members of the unitary group; temporarily suspends net operating losses (NOLs), but thereafter conforms to the federal NOL carryback and carryover provisions; authorizes an amnesty program for unpaid corporation franchise and income and personal income taxes; requires limited liability companies (LLCs) to make estimated LLC fee payments; and expands the existing rebuttable presumption that a vehicle shipped or brought into California within 90 days from the purchase date is subject to use tax to apply to vehicles, vessels, and aircraft purchased out of state within 12 months of the purchase date.

  However, as a result of the budget negotiations between the governor and key California legislative leaders entered into after the governor threatened to veto the budget bill passed by the California Legislature, the governor has also signed another bill (SBx1 28) that repeals the tax amnesty program enacted by A.B. 1452, accelerates the collection of estimated corporation franchise and income and personal income taxes, enacts a 20% underpayment penalty for businesses with corporation franchise and income tax underpayments exceeding $1 million, clarifies the business credit limitation enacted by A.B. 1452, and specifies an operative date for the LLC estimated tax payment provisions enacted by A.B. 1452.

  Below is a summary of the provisions contained in both A.B. 1452 and SBx1 28.

CCH (cch.taxgroup.com) reports:

  The IRS has issued guidance amending and supplementing
Notice 2008-41, I.R.B. 2008-15, 742 (TAXDAY, 2008/03/26, I.1), regarding reissuance standards for tax-exempt bonds. The guidance expands the circumstances and time periods during which a state or local government may repurchase bonds it issued without resulting in a reissuance or retirement of such bonds for purposes of the provisions of the tax code pertaining to the tax-exempt status of municipal bonds. The new, relaxed rules are intended to provide flexibility in order to facilitate liquidity and stability in the short-term sector of the tax-exempt bond market.

 
Notice 2008-41 provided a special, temporary rule allowing issuers to repurchase auction rate bonds without triggering a reissuance or retirement of the repurchased bonds. The special exemption applied only to bonds purchased before October 1, 2008, and held for not more than 180 days after purchase. Otherwise, the repurchase of a tax-exempt bond by its governmental issuer will generally cause a retirement of the bond and the resale of that bond will generally be considered a reissuance for purposes of the tax-exempt bond rules.

  The new guidance expands this exception in several ways. First, the exception is expanded so that it applies to qualified tender bonds and tax-exempt commercial paper, as well as auction rate bonds. Second, the exception's time frame has been expanded to apply to qualifying bonds purchased on or before December 31, 2009, and held no later than that date. Finally, the final date for purchase of bonds pursuant to qualified tender rights is extended from October 1, 2008, to December 31, 2009.

Notice 2008-88, 2008FED ¶46,599

Other References:

 
Code Sec. 103

  CCH Reference - 2008FED ¶6602.453

 
Code Sec. 148

  CCH Reference - 2008FED ¶7889.13

 
Code Sec. 150

  CCH Reference - 2008FED ¶7933.023

  CCH Reference - 2008FED ¶7933.40

  Tax Research Consultant

  CCH Reference - TRC SALES: 51,052.25

CCH (cch.taxgroup.com) reports:

  The IRS is sending compliance questionnaires that focus on unrelated business income, endowments, and executive compensation practices to approximately 400 U.S. colleges and universities. The questionnaires are part of the IRS's effort to study the tax-exempt community and are being sent to a cross-section of small, mid-sized, and large private and public four-year colleges and universities.

  The information requested includes: how the schools report revenues and expenses from trade or business activities; how they classify their activities as exempt or taxable; how they calculate and report income or losses on taxable activities; how they invest and use endowment funds; and how they determine the compensation of certain highly paid individuals. The information gathered will help the IRS identify issues that may need further scrutiny or more outreach and education.

  The IRS expects to receive responses within the next several months. It will analyze the results and conduct examinations of a sample number of organizations. It expects to issue a report on the project in 2009.

IR-2008-112,
2008FED ¶46,598

SFC Press Release: Sen. Grassley Comments on IRS Questionnaire of Colleges, Universities

Other References:

 
Code Sec. 501

  CCH Reference - 2008FED ¶22,609.1975

  Tax Research Consultant

  CCH Reference - TRC EXEMPT: 3,300

CCH (cch.taxgroup.com) reports:

  As previously established in Rev. Rul. 2008-47 (I.R.B. 2008-39, 760; TAXDAY, 2008/08/29, I.1), the IRS announced that the interest rates for the calendar quarter beginning October 1, 2008, will be six percent for overpayments (five percent in the case of a corporation), six percent for underpayments and eight percent for large corporate underpayments. The interest rate for the portion of a corporate overpayment exceeding $10,000 is 3.5 percent. The interest rates are computed by using the federal short-term rate based on daily compounding determined during August 2008.

  The Internal Revenue Code 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-2008-111,
2008FED ¶46,597

Other References:

 
Code Sec. 6601

  CCH Reference - 2008FED ¶174.01

  CCH Reference - 2008FED ¶175.01

  CCH Reference - 2008FED ¶175.30

 
Code Sec. 6621

  CCH Reference - 2008FED ¶39,455.01

  CCH Reference - 2008FED ¶39,455.51

 
Code Sec. 6622

  CCH Reference - 2008FED ¶39,465.01

  Tax Research Consultant

  CCH Reference - TRC ACCTNG: 33,204.15
CCH Reference - TRC PENALTY: 9,152
 

CCH (cch.taxgroup.com) reports:

  By a vote of 74 to 25, the Senate on October 1 overwhelmingly approved a multi-billion dollar financial rescue package (HR 1424) consisting of the Emergency Economic Stabilization Bill of 2008, Senate-passed tax extenders and an increase in federal insurance of bank deposits to $250,000. However, House Democrats' resistance to revenue offsets could lead to defeat of the revised plan. The House defeated a previous version of the rescue package by a vote of 228 to 205 on September 29 (TAXDAY, 2008/09/30, C.1).

  President Bush, in a written statement, applauded passage of the rescue package and said the Senate amendments should help to win bipartisan support in the House. Bush said the bil