Tax News

Tax Analysts report:

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

  The New York Department of Taxation and Finance has issued a memorandum concerning changes to procedures for obtaining guidance from the Department for all taxes. In place of the Taxpayer Guidance Division, the Office of Counsel will now issue advisory opinions. Effective August 8, 2008, the Department will no longer accept advisory opinion petitions from any person or entity acting on behalf of unidentified persons or entities, and all identifying information of petitioners will be redacted from advisory opinions before publication. In addition, a petitioner may elect, when submitting the petition, to reserve the right to apply for the Voluntary Disclosure and Compliance (VDC) program with respect to the subject of the advisory opinion request.

 

CCH (cch.taxgroup.com) reports:

  A federal district court properly dismissed conspiracy and tax evasion charges against 13 former employees of a major accounting firm stemming from their alleged involvement in abusive tax shelters. The government's actions in pressuring the accounting firm, which was an unindicted co-conspirator, to limit and then to cut off payment of the defendants' legal fees deprived them of their Sixth Amendment right to counsel.

  The district court's ultimate finding of fact that, absent a government memorandum and the prosecutors' conduct, the accounting firm would have advanced the fees without condition or cap, was not clearly erroneous. The government stipulated that the accounting firm had a long standing voluntary practice of advancing and paying employees' legal fees without regard to economic costs or considerations and without a preset cap or condition of cooperation with the government in any civil, criminal or regulatory proceeding arising from activities within the scope of their employment.

  Moreover, the district court properly rejected the government's argument that it cured the Constitutional violation and, therefore, dismissal of the charges was improper. The accounting firm had entered into a deferred prosecution agreement (DPA) with the government that required it to cooperate fully with the prosecution. Under the DPA, payment of the defendants' attorneys' fees could have been considered noncooperation sufficient to subject the accounting firm to criminal prosecution. Furthermore, the firm remained subject to the DPA throughout the criminal proceedings. Thus, the accounting firm's adoption and enforcement of the new fees policy amounted to "state action."

  Further, while the defendants' Sixth Amendment rights attached only upon indictment, the district court properly considered pre-indictment state action that affected the defendants post-indictment. When the government, prior to indictment, acted to impair the defendants' relationship with counsel post-indictment, the pre-indictment actions ripened into cognizable Sixth Amendment deprivations upon indictment. Furthermore, the government failed to establish any legitimate justification for interfering in the firm's advancement of legal fees to the defendants.

  Affirming a DC N.Y. decision 2007-2 USTC ¶50,549. Related cases at 2003-1 USTC ¶50,174, 2003-2 USTC ¶50,691, 2004-1 USTC ¶50,281, 2007-1 USTC ¶50,514, 2007-2 USTC ¶50,567, 2007-2 USTC ¶50,723 and 2008-1 USTC ¶50,308.

J. Stein, CA-2, 2008-2 USTC ¶50,518

Other References:

 
Code Sec. 7202

  CCH Reference - 2008FED ¶2900.41

  CCH Reference - 2008FED ¶41,318.272

 
Code Sec. 7525

  CCH Reference - 2008FED ¶42,816F.25.

  Tax Research Consultant

  CCH Reference - TRC IRS:21,402.20

CCH (cch.taxgroup.com) reports:

  The Tax Court was ordered to vacate its earlier determination that an executive participated in a complicated kickback scheme that resulted in unreported income, and to reinstate the original special trial judge's report absolving the taxpayer from additional deficiencies and penalties. The Tax Court was bound by the special trial judge's report as long as it was supported by the record and was not manifestly unreasonable. Equivocal evidence that the taxpayer may have received unreported kickback income was insufficient to overturn the special trial judge's findings. C.M. Ballard , CA-11, 2008-1 USTC ¶50,270 (TAXDAY, 2008/04/11, J.6), followed.

  Vacating and remanding the Tax Court, 93 TCM 721; Dec. 56,822(M); TC Memo. 2007-21.

R.W. Lisle Est., CA-5, 2008-2 USTC ¶50,517

Other References:

 
Code Sec. 46

  CCH Reference - 2008FED ¶2300.58

  CCH Reference - 2008FED ¶2900.31

  CCH Reference - 2008FED ¶4580.665

 
Code Sec. 61

  CCH Reference - 2008FED ¶5504.133

  CCH Reference - 2008FED ¶5504.198

  CCH Reference - 2008FED ¶5504.20

  CCH Reference - 2008FED ¶5507.126

  CCH Reference - 2008FED ¶5507.15

 
Code Sec. 162

  CCH Reference - 2008FED ¶8520.1426

  CCH Reference - 2008FED ¶8520.5179

  CCH Reference - 2008FED ¶8636.433

 
Code Sec. 163

  CCH Reference - 2008FED ¶9104.378

  CCH Reference - 2008FED ¶9104.73

 
Code Sec. 164

  CCH Reference - 2008FED ¶9502.422

 
Code Sec. 165

  CCH Reference - 2008FED ¶9804.155

  CCH Reference - 2008FED ¶9900.80

  CCH Reference - 2008FED ¶10,001.103

 
Code Sec. 166

  CCH Reference - 2008FED ¶10,650.286

  CCH Reference - 2008FED ¶10,650.598

  CCH Reference - 2008FED ¶10,650.599

  CCH Reference - 2008FED ¶10,650.6565

  CCH Reference - 2008FED ¶10,650.825

 
Code Sec. 167

  CCH Reference - 2008FED ¶11,007.70

  CCH Reference - 2008FED ¶11,011.1976

 
Code Sec. 170

  CCH Reference - 2008FED ¶11,620.6918

  CCH Reference - 2008FED ¶11,660.31

  CCH Reference - 2008FED ¶11,680.12

 
Code Sec. 174

  CCH Reference - 2008FED ¶12,047.1805

 
Code Sec. 183

  CCH Reference - 2008FED ¶12,177.235

 
Code Sec. 212

  CCH Reference - 2008FED ¶12,523.3594

 
Code Sec. 267

  CCH Reference - 2008FED ¶14,161.30

  CCH Reference - 2008FED ¶14,161.80

 
Code Sec. 357

  CCH Reference - 2008FED ¶16,522.75

 
Code Sec. 446

  CCH Reference - 2008FED ¶20,620.396

 
Code Sec. 453

  CCH Reference - 2008FED ¶21,406.68

 
Code Sec. 482

  CCH Reference - 2008FED ¶22,283.21

  CCH Reference - 2008FED ¶22,283.26

 
Code Sec. 674

  CCH Reference - 2008FED ¶24,726.11

 
Code Sec. 675

  CCH Reference - 2008FED ¶24,742.10

 
Code Sec. 1211

  CCH Reference - 2008FED ¶30,392.15

 
Code Sec. 6015

  CCH Reference - 2008FED ¶35,192.76

 
Code Sec. 6231

  CCH Reference - 2008FED ¶37,849.40

 
Code Sec. 6501

  CCH Reference - 2008FED ¶38,967.28

  CCH Reference - 2008FED ¶38,967.30

  CCH Reference - 2008FED ¶38,967.706

 
Code Sec. 6621

  CCH Reference - 2008FED ¶39,455.66

 
Code Sec. 6651

  CCH Reference - 2008FED ¶39,475.505

 
Code Sec. 6662

  CCH Reference - 2008FED ¶39,651G.195

  CCH Reference - 2008FED ¶39,651G.30

  CCH Reference - 2008FED ¶39,651G.305

  CCH Reference - 2008FED ¶39,651G.31

  CCH Reference - 2008FED ¶39,651G.81

  CCH Reference - 2008FED ¶39,651G.833

  CCH Reference - 2008FED ¶39,652.103

  CCH Reference - 2008FED ¶39,652.34

  CCH Reference - 2008FED ¶39,652.38

  CCH Reference - 2008FED ¶39,652.72

  CCH Reference - 2008FED ¶39,654.30

  CCH Reference - 2008FED ¶39,654.35

 
Code Sec. 6663

  CCH Reference - 2008FED ¶39,658.475

  CCH Reference - 2008FED ¶39,658.48

  CCH Reference - 2008FED ¶39,658.71

 
Code Sec. 7443A

  CCH Reference - 2008FED ¶42,061.021

 
Tax Court Rule 155

  CCH Reference - 2008FED ¶42,315.76

 
Tax Court Rule 183

  CCH Reference - 2008FED ¶42,343.75

  Tax Research Consultant

  CCH Reference - TRC LITIG: 6,808

CCH (cch.taxgroup.com) reports:

  An individual's conviction for tax evasion was reversed because the indictment was constructively amended at trial. The grand jury indictment of the individual specifically charged her with willful failure to pay a medical clinic's employment taxes. However, at trial, the government's own witness testified that the individual was not the employer and was not responsible for paying the employment taxes. In order to save its case, the government argued that the term "employment taxes" included the trust fund recovery penalty (TFRP), which had been assessed against the individual personally and that she had failed to pay.

  The government's argument unconstitutionally broadened the basis for convicting the individual because the government never obtained a grand jury indictment of the individual for failure to pay the TFRP. Contrary to the government's argument the terms employment taxes and TFRP were not interchangeable terms. Liability for employment taxes extends only to employers, while liability for the TFRP extends to any responsible person. Therefore, absent a proper amendment to the indictment by the grand jury, the government was not free to prove any other tax liability at trial.

  Reversing and remanding an unreported DC Okla. decision.

S.T. Farr, CA-10, 2008-2 USTC ¶50,516

Other References:

 
Code Sec. 7203

  CCH Reference - 2008FED ¶2900.35

  CCH Reference - 2008FED ¶41,318.247

  Tax Research Consultant

  CCH Reference - TRC IRS: 66,060.10
CCH Reference - TRC IRS: 66,108.10
 

CCH (cch.taxgroup.com) reports:

  The IRS has announced that the interest rates for the calendar quarter beginning October 1, 2008, will be 6 percent for overpayments (5 percent in the case of a corporation), 6 percent for underpayments and 8 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.

Rev. Rul. 2008-47, 2008FED ¶46,553

Rev. Rul. 2008-47, FINH ¶30,597

Rev. Rul. 2008-47, ETR ¶66,857

Other References:

 
Code Sec. 6601

  CCH Reference - 2008FED ¶174.01

  CCH Reference - 2008FED ¶175.01

  CCH Reference - 2008FED ¶175.30

  CCH Reference - ETR ¶102

  CCH Reference - ETR ¶50,615.01

 
Code Sec. 6621

  CCH Reference - 2008FED ¶39,455.01

  CCH Reference - 2008FED ¶39,455.51

  CCH Reference - FINH ¶21,685.01

  CCH Reference - FINH ¶21,685.30

 
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
 

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

  A former IRS auditor was not entitled to deduct expenses incurred in his greyhound racing activities to the extent they exceeded his income from the activity. The taxpayer failed to establish that he engaged in the greyhound activity with the predominant, primary or principle objective of making a profit because most of the factors to be considered in making the determination weighed against him. The taxpayer failed to carry on the activity in a businesslike manner because he neither kept complete and accurate records nor maintained a business plan or budget for the activity. While the taxpayer may have had some knowledge about the mechanics of greyhound breeding and racing, he failed to demonstrate that he either consulted with economic experts or acquired his own personal economic expertise about the activity. Further, the taxpayer was a full-time employee while engaged in the activity and did breed enough litters of pups annually to be profitable. The value of the greyhounds generally depreciated over the years, a number of which did not survive training or were euthanized at the end of their racing lives. Finally, the taxpayer had 10 straight years of losses and never realized a profit from the activity, which was partially recreational for him.

  The taxpayer failed to present evidence that he had reasonable cause and acted in good faith to avoid the accuracy-related penalty for a substantial understatement of tax. Any defense could have been problematic, however, given the taxpayer's former employment.

R.T. Whitecavage, TC Memo 2008-203, Dec. 57,524(M)

Other References:

 
Code Sec. 183

  CCH Reference - 2008FED ¶12,177.29

 

CCH (cch.taxgroup.com) reports:

  The IRS has released on its website more details about the recently announced settlement initiative for sale-in, lease-out (SILO) and lease-in, lease-out (LILO) tax shelters. On August 7, 2008, the Service announced a settlement initiative to more than 45 corporations to end SILO and LILO transactions that it considers abusive (TAXDAY, 2008/08/07, I.3). On August 21 the IRS extended the time to accept the settlement (TAXDAY, 2008/08/25, I.8), and promised to provide more details about the offer.

Offers and Appeals

  The Service reminded taxpayers of its recent push-back of the due date for acceptance of the SILO and LILO settlement offer to 60 days after the date of the IRS's offer letter. Taxpayers had criticized the IRS's prior 30-day deadline as too short for companies to sufficiently evaluate the IRS's settlement offer.

  Should a taxpayer refuse to participate in the initiative, the IRS assured taxpayers that they may pursue their matters with the IRS Appeals Division. Yet, similar to the terms of the SILO and LILO settlement initiative, taxpayers using the Appeals process would be required to terminate all leases, both deemed and actual. The Service explained that this move was for consistency of tax administration and finality of its decision process.

Procedures

  The IRS also clarified the procedure taxpayers must follow in order to participate in the initiative; including, terminating any leases used in the SILO or LILO transactions, accepting the settlement offer, calculating the basis of property involved, and computing original issue discount (OID).

Lease Termination

  According to the settlement terms, if taxpayers are not able to actually terminate the leases by December 31, 2008, despite "good-faith efforts," then they will be allowed to deem the leases terminated. Later, they may claim an ordinary deduction equal to any excess gain recognized in the deemed termination in 2008 over the actual gain recognized in subsequent terminations actually occurring before January 1, 2011.

  Taxpayers must provide the IRS with a list of steps that they took to terminate the leases in order to show good faith. The Service will then examine the documentation to determine if the taxpayer used its "best efforts." Once the taxpayer accepts the offer and provides "best efforts" documentation, the IRS will deem a lease terminated, even if a lessee does not want to unwind the transaction or acts to delay the actual termination. This documentation requirement applies to all of the SILOs or LILOs in which a taxpayer may have engaged.

  The IRS clarified that leases involved in the SILO or LILO transaction cannot be sold to a third party in order to be considered actually terminated. It explained that an "actual termination" of a SILO or LILO transaction cannot be unwound.

Acceptance

  In addition, taxpayers must accept the settlement terms in writing and the agreement must be received by the IRS by mail or fax. The terms may not be accepted subject to negotiating a closing agreement and replying to the settlement offer with an expression of understanding regarding undefined terms does not constitute acceptance. The IRS specified that such a response would be considered a counterproposal to the settlement offer. Instead, the IRS advised asking questions about undefined terms in order to understand their meaning before attempting to accept the offer.

Basis

  The guidance reported that, before January 1, 2011, transaction costs associated with closing the leases underlying a SILO or LILO tax shelter may be included in the calculation of their basis, rather than as a reduction of proceeds. To substantiate these transaction costs, taxpayers must provide documentation, including all contracts, agreements and a breakdown of costs by amount, nature and recipient.

OID

  Finally, the IRS stated that taxpayers must recognize 100 percent of the OID that accrued annually in the SILO or LILO transaction if there is a deemed termination of the lease, until the actual termination of the lease, which must occur before January 1, 2011.

  By Torie Cole, CCH News Staff

LILO/SILO Initiative Frequently Asked Questions

 

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

  The government properly withheld documents responsive to a corporation's Freedom of Information Act (FOIA) request because they were protected by attorney work-product privilege. However, the IRS was required to segregate and disclose the factual portions of documents withheld under the deliberative process privilege. Therefore, the IRS was required to submit affidavits detailing the withheld portions of documents to enable the district court and the corporation to evaluate the government's claims of exemption. Moreover, the district court was required to conduct an in camera review of the documents if sufficiently specific affidavits were not provided. Further, the district court's decision that the IRS properly applied the tax convention information exemption was remanded because the decision was made without the benefit of thorough briefing by the parties.

  Affirming in part, reversing and remanding in part in part a DC Wash. decision, 2006-2 USTC ¶50,607.

Pacific Fisheries Inc., CA-9, 2008-2 USTC ¶50,510

Other References:

 
Code Sec. 6103

  CCH Reference - 2008FED ¶36,894.802

  CCH Reference - 2008FED ¶36,894.8046

  CCH Reference - 2008FED ¶36,894.825

  Tax Research Consultant

  CCH Reference - TRC IRS: 9,502
CCH Reference - TRC IRS: 9,502.15
CCH Reference -
TRC IRS: 9,550
 

CCH (cch.taxgroup.com) reports:

  The General Services Administration (GSA) has updated the maximum per diem rates for locations within the continental United States (CONUS). The list increases or decreases the maximum lodging and meals and incidental expenses amounts in certain existing per diem localities, adds new per diem localities and removes some previously designated per diem localities. The list is effective for fiscal year (FY) 2009.

  The Governmentwide Per Diem Advisory Board was established in May 2002 by the GSA in order to review the federal per diem rate setting process and the governmentwide lodging program. Effective for FY 2009, the standard CONUS lodging rate is $70.

Maximum Per Diem Rates for Continental U.S.

Other References:

 
Code Sec. 274

  CCH Reference - 2008FED ¶14,417.421

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

  A regulation has been adopted that explains the application of Illinois retailers' occupation (sales) tax, service occupation tax, and use tax to seminar materials. "Seminar materials" mean educational or informational material and any other item prepared, compiled, or obtained for distribution to seminar customers, such as books, practice guides, tapes, and compact discs. "Seminar" means any presentation, conference, training program, or continuing education course designed for educational, informational, professional, or recreational purposes.

 

CCH (cch.taxgroup.com) reports:

  An IRS Appeals Officer correctly concluded that the ten-year statute of limitations on collection of an individual's unpaid Federal income tax liabilities did not expire before the IRS filed its notice of Federal tax lien. Prior to expiration of the limitations period, the taxpayer agreed to extend the period for collection until December 31, 2011. Although the taxpayer asserted that the extension only applied to employment taxes, the Form 900, Tax Collection Waiver, signed by the taxpayer in connection with a defaulted installment agreement, clearly showed that the unpaid tax liabilities related to Form 1040 individual income tax liabilities.

H. Joy, TC Memo. 2008-197, Dec. 57,518(M)

Other References:

 
Code Sec. 6330

  CCH Reference - 2008FED ¶38,184.63

 
Code Sec. 6502

  CCH Reference - 2008FED ¶39,020.65

  Tax Research Consultant

  CCH Reference - TRC IRS: 45,204.25

  CCH Reference - TRC IRS: 48,056.25

Tax Analysts report:

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

  As part of his latest budget compromise proposal, California Governor Arnold Schwarzenegger is proposing a three-year temporary one cent sales and use tax rate increase (excluding diesel, gasoline and jet fuel); a two-year suspension of the corporation franchise and income tax net operating loss (NOL) deduction, which would be followed by a phased-in conformity to the federal NOL carryback and carryover periods; and enactment of a modified tax amnesty, a runaway Hollywood production tax credit, and provisions that better align accrual of revenues and accrual of spending.

  If enacted as proposed, the one cent sales tax rate increase would be followed by a permanent 11/4 -cent reduction beginning in the fourth year. Conformity to the federal NOL deduction would be phased-in over three years starting in 2010 and would allow taxpayers to claim a two-year NOL carryback and a 20-year NOL carryover. Currently, California does not allow NOL carrybacks and limits the carryover period to 10 years. The Governor's press release does not provide any further details regarding his tax amnesty proposal, the alignment of revenue and expense accruals, or the runaway Hollywood production tax credit.

  A fact sheet outlining the Governor's proposed budget compromise is available on the Governor's Web site at:
http://gov.ca.gov/index.php?/fact-sheet/10443/.

Fact Sheet , Governor Schwarzenegger's Office, August 20, 2008.
 

CCH (cch.taxgroup.com) reports:

  The IRS violated a discharge injunction with respect to a debtor whose tax liability was not discharged in bankruptcy. The liability was not discharged because a period of three years, not including periods of equitable tolling, had not run between the date of filing of the debtor's income tax return and the date of filing of the bankruptcy petition.

  Although the IRS believed its collection activity was done in good faith, it nevertheless knowingly and willfully violated the discharge injunction and, therefore, was subject to damages arising from the violation. While the IRS acted within its discretion to establish a policy of adding an additional six months to the three-year look-back period, the law changed, and any action subsequently taken by the IRS to collect the discharged debt, although in good faith and in conformance with the IRS policy, was contrary to the law. Consequently, the IRS was liable for damages arising from the violation.

  Because the IRS affirmatively pleaded sovereign immunity and because the government had not waived sovereign immunity, the debtor could not be awarded punitive damages. The debtor was, however, entitled to monetary damages for any losses proximately caused by the violation of the discharge injunction. Finally, because the debtor only alleged a violation that had occurred in the past, and not a continuing violation, coercive sanctions against the IRS were not required.

In re S.L. Distad, BC-DC Utah, 2008-2 USTC ¶50,500

Other References:

 
Code Sec. 6503

  CCH Reference - 2008FED ¶39,032.15

 
Code Sec. 6871

  CCH Reference - 2008FED ¶40,630.15

  CCH Reference - 2008FED ¶40,630.175

  CCH Reference - 2008FED ¶40,630.38

  Tax Research Consultant

  CCH Reference - TRC IRS: 57,054.15
CCH Reference -
TRC IRS: 30,200
CCH Reference -
TRC IRS: 45,118
CCH Reference -
TRC IRS: 57,158
 

CCH (cch.taxgroup.com) reports:

  A federal district court properly denied an individual and a corporation's (taxpayers) request for disclosure of an IRS officer's time records under the Freedom of Information Act (FOIA). The officer's time records were similar to "personnel and medical" files and were exempt from disclosure. Contrary to the taxpayers' argument, the officer's privacy interest outweighed any public interest and disclosure would not have contributed significantly to the public's understanding of IRS operations. Further, because the records were created in connection with the conditions of the officer's employment, and not her investigation of the taxpayers, the records could not be released under the Privacy Act without her consent. Moreover, the district the court did not abuse its discretion when it denied the taxpayers' request to conduct an in camera review of the remaining withheld documents because the IRS's declarations and the Vaughn index set out in detail which documents were withheld and the reasons for withholding them and the taxpayers failed to show that the IRS acted in bad faith.

  Unpublished opinion affirming a DC N.J. decision, 2008-2 USTC ¶50,498.

L.S. Berger, CA-3, 2008-2 USTC ¶50,499

Other References:

 
Code Sec. 6103

  CCH Reference - 2008FED ¶36,894.804

  CCH Reference - 2008FED ¶36,894.8044

  CCH Reference - 2008FED ¶36,894.8046

  CCH Reference - 2008FED ¶36,894.809

  CCH Reference - 2008FED ¶36,894.825

 
Code Sec. 7852

  CCH Reference - 2008FED ¶43,840.60

  Tax Research Consultant

  CCH Reference - TRC IRS: 9,500
CCH Reference - TRC IRS: 9,502.15
 

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

  Two different types of bundled transactions that involve the sale of equipment along with the sale of wireless Internet service are subject to Louisiana sales and use tax. In both types of transactions, the provider bundles a taxable transaction (i.e., the sale of equipment) with a nontaxable transaction (i.e., the sale of wireless Internet service).

 

CCH (cch.taxgroup.com) reports:

  The Florida Department of Revenue has released advisory comments regarding the changes to the administrative and judicial review of property taxes enacted by H.B. 909, including changes to the Value Adjustment Board ("Board"). The enactment of H.B. 909 was reported previously. (TAXDAY, 2008/06/20, S.9)

 

CCH (cch.taxgroup.com) reports:

  A bill passed by the California Legislature would conform California personal income tax law to federal amendments made by the Mortgage Forgiveness Debt Relief Act of 2007 (Public Law 110-142) that allow a personal income taxpayer to exclude from his or her gross income the discharge of the individual's qualified principal residence indebtedness in the 2007 through 2009 calendar years. However, if enacted , the bill would limit the California exclusion to indebtedness discharged in the 2007 and 2008 calendar years only. Additional provisions would limit the amount of the exclusion to $250,000 ($125,000 in the case of a married individual filing separate) and would define "qualified principal residence indebtedness" for purposes of the exclusion to mean an individual's qualified acquisition indebtedness of up to $800,000 ($400,000 in the case of a married individual filing separately), rather than the $2 million ($1 million in the case of a married individual filing separately) limitation provided under federal law. The exclusion would be applicable for California personal income tax purposes beginning with the 2007 taxable year.

S.B. 1055, as enrolled, August 19, 2008
 

CCH (cch.taxgroup.com) reports:

  An individual could not bring an action against his employer to recover federal taxes withheld from his wages and paid over to the IRS. His allegations that the employer was required to establish a statutory employer-employee relationship and secure a determination of worker status before withholding taxes consisted primarily of legal conclusions without authority or factual support. Withholding federal income tax and making payments to the IRS are mandatory duties for employers. Moreover, the exclusive remedy for a tax refund is an action against the United States, not against an employer.

H. Nino v. Ford Motor Company, DC Mich., 2008-2 USTC ¶50,497

Other References:

 
Code Sec. 3403

  CCH Reference - 2008FED ¶33,593.1635

 
Code Sec. 7422

  CCH Reference - 2008FED ¶41,688.362

  Tax Research Consultant

  CCH Reference - TRC FILEIND: 15,306

CCH (cch.taxgroup.com) reports:

  The government's letter to an individual did not constitute an acceptance of the individual's settlement offer and did not create a valid and binding settlement of the parties' dispute. The letter did not mirror the terms of the offer because it made no reference to the interest that would accrue if he failed to pay the settlement amount within 120 days of the government's acceptance.

  Instead, it provided that the offer would be accepted on condition that payment is made within 120 days, with the understanding that the settlement did not constitute a compromise of the individual's income tax liability. Since the letter altered the terms of the individual's offer, it was construed as a counteroffer by the government.

  Related decision at 2006-2 USTC ¶50,555.

E.A. Brinskele, FedCl, 2008-2 USTC ¶50,493

Other References:

 
Code Sec. 7122

  CCH Reference - 2008FED ¶41,130.175

  Tax Research Consultant

  CCH Reference - TRC IRS: 42,116

CCH (cch.taxgroup.com) reports:

  The IRS has released a fact sheet to help taxpayers determine whether an activity is engaged in for profit or merely as a hobby. The fact sheet discusses the hobby loss rules and lists several non-inclusive factors to be considered when making this determination, including:

  --Does the time and effort put into the activity indicate an intention to make a profit?

  --Do you depend on income from the activity?

  --If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?

  --Have you changed methods of operation to improve profitability?

  --Do you have the knowledge needed to carry on the activity as a successful business?

  --Have you made a profit in similar activities in the past?

  --Does the activity make a profit in some years?

  --Do you expect to make a profit in the future from the appreciation of assets used in the activity?

  If an activity is not for profit, losses from that activity may not be used to offset other income and deductions cannot exceed the gross receipts from the not for profit activity. Further, hobby deductions are claimed as itemized deductions in the following order and only to the extent stated in each of three categories:

  --Deductions that a taxpayer may claim for certain personal expenses, such as home mortgage interest and taxes, may be taken in full.

  --Deductions that do not result in an adjustment to the basis of property, such as advertising, insurance premiums and wages, may be taken next, to the extent gross income for the activity is more than the deductions from the first category.

  --Deductions that reduce the basis of property, such as depreciation and amortization, are taken last, but only to the extent gross income for the activity is more than the deductions taken in the first two categories.

IRS Fact Sheet FS-2008-23, 2008FED ¶46,549

Other References:

 
Code Sec. 183

  CCH Reference - 2008FED ¶12,177.169

  Tax Research Consultant

  CCH Reference - TRC BUSEXP: 3,052

  CCH Reference - TRC BUSEXP: 15,250

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

  A California sales and use tax regulation regarding cell phones and other wireless telecommunication devices provided a safe harbor from unfair competition claims filed by a taxpayer against a provider. The provider advertised a cellular phone for sale at half the retail price if the purchaser also enrolled in a calling plan package. The California Code of Regulations requires that sales tax must be computed on the non-sale price of the product. The regulation permits, but does not require, that the charge be passed on to the customer. The provider did so without informing the customer prior to sale that the tax would be based on the full price of the cell phone. The amount of tax is shown on the sales invoice furnished to the customer at the time of sale. The taxpayer alleged that the provider engaged in unfair competition and misleading advertising by failing to inform the consumer that the tax would be imposed on the full price of the cell phone. The unfair competition law prohibits any unlawful, unfair, or fraudulent business act or practice, but its scope is limited. Specific legislation may limit the judiciary's power to declare conduct unfair. If the Legislature has permitted certain conduct, courts may not override that determination. When specific legislation provides a safe harbor, plaintiffs may not use the general unfair competition law to assault that harbor. The sales invoice the provider gave to the taxpayer stated the amount of the sales tax imposed on the sale. It provided the taxpayer notice of the amount of sales tax that would be imposed and it constituted a contract of sale between the provider and the taxpayer. As with any other contract, the taxpayer had the right to refuse to enter into the contract for the price stated. The taxpayer's unfair competition and misleading advertising claims failed because the provider complied with all applicable regulations.

  CCH Tax Research NetWork subscribers can view the opinion in its entirety.

  Yabsley v. Cingular Wireless, LLC , California Court of Appeal, Second Appellate District, Division Six, 2d Civil No. B198827, August 18, 2008.
 

CCH (cch.taxgroup.com) reports:

  The phrase "items of ordinary income" contained in an agreement entered into between a partnership and a venture capital firm did not include short-term capital gains. The interpretation of the phrase was based on the definition of "ordinary income" in the Internal Revenue Code (IRC), which unambiguously does not include capital gains. Therefore, the agreement, which provided a special allocation of ordinary income to the firm, did not provide an allocation of short-term capital gains.

  The agreement used the term "items of ordinary income" without actually defining that term and there was no indication that the parties intended to distinguish the definition of ordinary income from that in the IRC. The partnership's claim that the term "ordinary income" included all income taxed at ordinary income tax rates was unreasonable. In addition, the terms "ordinary income" and "capital gains" are defined in Black's Law Dictionary based on the source of the income rather than the tax rate, which was consistent with Code Sec. 702.

  Further, a settlement agreement entered between the partnership and the venture capital firm in a state court lawsuit did not bar the firm from joining the partnership-level proceeding seeking readjustment of certain partnership items as a participating partner under Code Sec. 6226(c)(2). The mutual release in the settlement agreement specified that the firm released its rights and claims against the partners; the parties did not intend the release to also include claims against the United States.

Imprimis Investors LLC, FedCl, 2008-2 USTC ¶50,489

Other References:

 
Code Sec. 61

  CCH Reference - 2008FED ¶5504.04

 
Code Sec. 702

  CCH Reference - 2008FED ¶25,083.2683

 
Code Sec. 1222

  CCH Reference - 2008FED ¶30,442.40

 
Code Sec. 6226

  CCH Reference - 2008FED ¶37,709.70

  Tax Research Consultant

  CCH Reference - TRC PART: 15,056.05
CCH Reference -
TRC PART: 60,554
 

CCH (cch.taxgroup.com) reports:

  Revised instructions to be used by tax-exempt organizations in completing the redesigned Form 990, Return of Organization Exempt From Income Tax, have been released by the IRS. The IRS released the redesigned Form 990 in December 2007, to be used for reporting tax year 2008 information in 2009. The redesigned form consists of a core form to be completed by all organizations and 16 schedules to be completed depending on the organization's type and activities. Transition rules, however, are in place so small organizations have time to adjust to the new form.

  For the 2008 tax year, most organizations with gross receipts less than $1.0 million and total assets less than $2.5 million may chose to use Form 990-EZ, Short Form Return of Organization Exempt From Income Tax (not redesigned for 2008), or the updated Form 990. For the 2009 tax year, entities can chose between Form 990-EZ or Form 990 if gross receipts are less than $500,000 and total assets less than $1.25 million. The filing thresholds will be set permanently at $200,000 gross receipts and $500,000 total assets beginning with the 2010 tax year. Organizations that generally have gross receipts of less than $25,000 will file Form 990-N, Electronic Notice (e-Postcard) for Tax-Exempt Organizations Not Required to File Form 990 or 990-EZ, for tax years 2007-2009. The gross receipts threshold is raised to $50,000 for tax years 2010 and later.

  The IRS released an initial draft of the instructions on April 7, 2008. With the latest release, the IRS has provided a description of changes from the April draft instructions. Many changes are intended to provide greater clarity regarding the specific information sought. The revised instructions provide additional examples, reduce the reporting burden, and establish or revise definitions and standards in certain areas. For example, the instructions define key employee for reporting compensation on Part VII of the core form and Schedule J (Compensation Information), Transactions With Interested Persons on Schedule L, and governance, management and disclosure on the core form. There are also significant changes to the instructions for many of the schedules, including Schedule H, Hospitals; Schedule J, Schedule K, Tax-Exempt Bonds; and Schedule L.

  The revised Form 990 instructions have a sequencing list that is particularly useful in determining the order to use in completing the various portions of the form (Parts I-XI) and any of the sixteen schedules that might be required (General Instruction C). Terms that are bolded in the instructions appear in alphabetical order in the Glossary. A compensation table is provided to aid in determining where and how to report various types of compensation paid to officers, directors, trustees, key employees and highest compensated employees (Specific Instructions for Part VII). Appendix E provides guidance relative to group returns and Appendix F explains how to report activities conducted indirectly through joint ventures and disregarded entities. Public inspection guidance is available in Appendix D. A properly completed Form 990 requires an organization to complete Parts I through XI of the Form 990, and any schedules for which a "Yes" response is indicated in Part IV of Form 990.

  Although the latest instructions are identified as a draft, the IRS indicated there will be no significant changes in content when the final version of the instructions is released later in 2008, although the wording and format may change. The Service stated that it was releasing the instructions now so that organizations and practitioners can review the content and prepare for the 2009 filing season (for 2008 tax returns).

  Practitioners commended the IRS for a huge effort and for releasing the instructions before 2009. At the same time, they noted the burdens placed on exempt organizations to meet the new reporting requirements.

  "The IRS has worked tirelessly to satisfy all stakeholders who often have very conflicting interests and opinions," Jane Searing, a shareholder with Clark Nuber in Bellevue, Washington told CCH. "It is really helpful that they are releasing the final instructions before the third quarter ends for calendar year organizations. This helps organizations and their service providers complete the work necessary to implement systems for collecting the information required on the new form. Although we have not had time to fully digest this latest version, we are hopeful this set of instructions will help clear up some of the outstanding questions and concerns over the version issued in April."

  "The revised form presents a huge burden for public charities," Nancy Ortmeyer Kuhn of Caplin & Drysdale in Washington, D.C. told CCH. "The expanded Form 990 requires a lot more information from charities that file the form. Many [organizations] will have to redo their accounting systems and they're still working on it. It's a huge job to capture the information they have to report. The community is hoping the IRS will understand this concern." Kuhn said it would be appropriate for the IRS to provide transition relief for reporting under the new system. One way to do this would be not to impose penalties when the IRS examines the first returns, Kuhn said.

  Reactions also varied as practitioners honed in on different schedules. "People were really unhappy with the [draft instructions'] definition of "key employee" [for Schedule J]," Suzy McDowell of Steptoe & Johnson LLP told CCH. The old definition looked for control of a discrete segment or five percent of the organization, McDowell stated. The revised definition "now requires organization-wide control or influence, or control of at least 10 percent of the organization." This is an improvement, McDowell said, although "exempt organizations won't be completely happy." McDowell said that another part of the instructions for Schedule J provided "extensive clarification" for the definitions of "reportable (wage) compensation" and "other compensation," a change that will be helpful.

  "The complexity is very evident and appears on the very first page of the instructions," Kuhn told CCH. There are three categories of transactions with "interested persons" that must be reported on Schedule L (Transactions With Interested Persons), Kuhn said, and each category uses a different definition of interested persons, she indicated. The American Bar Association commented that "this is complexity that doesn't need to be there," Kuhn said. "So [the lack of change] was disappointing."

  The instructions indicate when an organization can rely on "reasonable efforts" to obtain certain information from interested persons and third parties, such as family and business relationships, compensation paid by related organizations, and the involvement of an interested person in particular transactions. "This is good," Kuhn told CCH. "It shows there is an understanding that some information may not be available." McDowell agreed. "That's a big change that will give exempt organizations some relief."

  The IRS has identified approximately 1.3 million public charities and other non-charitable exempt organizations. For tax year 2004, the most recent year available, the IRS reported that it had received 364,000 Forms 990 and 142,000 Forms 990-EZ, a total of 506,000 returns. The IRS intends to release "draft" instructions in the next few weeks for the Form 990-EZ, the short form currently used by smaller tax-exempt organizations with gross receipts under $1 million and total assets of less than $2.5 million. The new Form 990-EZ will be phased in for smaller organizations over a three-year period.

  By Brant Goldwyn and Mary Krackenberger, CCH News Staff

IR-2008-98,
2008FED ¶46,548

IRS Completed 2008 Form 990 Instructions and Background Documents

IRS Background Paper --Summary of Form 990 Redesign Process

IRS TE/GE Division Exempt Organizations 2008 Form 990 Background Paper --Form 990, Moving from the Old to the New

IRS Background Paper --Changes to April Draft Instructions

Redesigned Forms 990 Instructions (August 2008)

Other References:

 
Code Sec. 6033

  CCH Reference - 2008FED ¶35,425.33

 
Code Sec. 6104

  CCH Reference - 2008FED ¶36,911.10

  Tax Research Consultant

  CCH Reference - TRC EXEMPT: 12,252.15

  CCH Reference - TRC EXEMPT: 12,258.05

CCH (cch.taxgroup.com) reports:

  The IRS has provided domestic asset/liability percentages and domestic investment yields needed by foreign life insurance companies and foreign property and liability insurance companies to compute their minimum effectively connected net investment income under Code Sec. 842(b). This guidance is effective for tax years beginning after December 31, 2006.

  For the first tax year beginning after 2006, the relevant domestic asset/liability percentages are 124.4 percent for foreign life insurance companies and 197.1 percent for foreign property and liability insurance companies. The relevant domestic investment yields are 4.9 percent for foreign life insurance companies and 4.2 percent for foreign property and liability insurance companies. In addition, instructions are set forth for computing foreign insurance companies' estimated tax liabilities for tax years beginning after 2006.

Rev. Proc. 2008-53, 2008FED ¶46,547

Other References:

 
Code Sec. 842

  CCH Reference - 2008FED ¶26251.70

  CCH Reference - 2008FED ¶26,251.72

  Tax Research Consultant

  CCH Reference - TRC INTLIN: 3,102.25

CCH (cch.taxgroup.com) reports:

  Various prescribed rates for federal income tax purposes for September 2008 have been provided by the IRS. The annual short-term, mid-term, and long-term applicable federal interest rates (AFRs) are 2.38 percent, 3.46 percent and 4.58 percent, respectively. The semiannual short-term, mid-term, and long-term AFRs are 2.37 percent, 3.43 percent and 4.53 percent, respectively. Quarterly short-term, mid-term and long-term AFRs are 2.36 percent, 3.42 percent and 4.50 percent, respectively. Finally, the monthly short-term, mid-term and long-term rates are 2.36 percent, 3.41 percent and 4.49 percent, respectively.

  The short-term, mid-term, and long-term adjusted applicable federal rates (adjusted AFRs) for September 2008 for purposes of Code Sec. 1288(b) are 1.81 percent, 3.21 percent and 4.53 percent, respectively, when annual compounding is used.

  Additionally, the Code Sec. 382 adjusted federal long-term rate is 4.53 percent, and the long-term tax-exempt rate is 4.65 percent. The Code Sec. 42(b)(2) appropriate percentage for the 70-percent present-value, low-income housing credit is 7.93 percent, and the appropriate percentage for the 30-percent present-value, low-income housing credit is 3.40 percent. Finally, the Code Sec. 7520 AFR for determining the present value of an annuity, an interest for life or a term of years, or a remainder or reversionary interest is 4.2 percent.

Rev. Rul. 2008-46, 2008FED ¶46,546

Rev. Rul. 2008-46, FINH ¶30,596

Other References:

 
Code Sec. 42

  CCH Reference - 2008FED ¶173.02

  CCH Reference - 2008FED ¶176.01

  CCH Reference - 2008FED ¶4385.03

 
Code Sec. 382

  CCH Reference - 2008FED ¶17,115.28

 
Code Sec. 642

  CCH Reference - 2008FED ¶24,308.1885

 
Code Sec. 1274

  CCH Reference - 2008FED ¶31,310.05

 
Code Sec. 7520

  CCH Reference - 2008FED ¶42,785.40

  CCH Reference - FINH ¶22,630.05

 
Code Sec. 7872

  CCH Reference - FINH ¶18,950.05

  Tax Research Consultant

  CCH Reference - TRC ACCTNG: 36,162.05

CCH (cch.taxgroup.com) reports:

  The IRS has issued proposed regulations that affect domestic corporations that transfer property to foreign corporations in certain transactions or that distribute the stock of certain foreign corporations, and certain shareholders of such domestic corporations.

Regulations Under Code Sec. 367(a)(5) and (b)

  Regulations proposed under Code Sec. 367(a)(5) and
(b) apply when a domestic corporation transfers certain property to a foreign corporation in an exchange described in Code Sec. 361(a) or (b). The regulations apply to property transfers by U.S. transferors, including RICs, REITs and S corporations.

  Generally, under Code Sec. 367(a)(5) a U.S. transferor to a foreign acquiring corporation in a Code Sec. 361 exchange recognizes gain with respect to the transfer of appreciated property under
Code Sec. 367(a)(1). This rule does not apply if the U.S. transferor is controlled by five or fewer domestic corporations. The proposed regulations confirm the general rule, but provide an elective exception, under which the exceptions provided by Code Sec. 367(a) and associated regulations may be available. The proposed regulations apply to all property transferred by a U.S. transferor in a Code Sec. 361 exchange, other than property to which Code Sec. 367(d) applies, and preserve or recognize the net built-in gain in Code Sec. 367(a) property transferred in the exchange. The regulations also contain an anti-stuffing rule with respect to Code Sec. 367(a) property. Inside gain is recognized currently by the U.S. transferor or preserved for future taxation in the stock received in the transaction by the controlling domestic corporate shareholder of the transferor.

  The proposed regulations include a control requirement regarding the U.S. transferor. Instances where a U.S. transferor must recognize gain on the transfer of the Code Sec. 367(a) property are also clarified, as are adjustments to the basis of stock received by control group members. Moreover, the U.S. transferor must include a statement with its U.S. income tax return for the year of the exchange under which it agrees to recognize gain and file an amended tax return if it enters into certain transactions with a principal purpose of avoiding U.S. tax.

  Proposed regulations under Code Sec. 367(b) provide an additional exception to the general rules that apply to certain transfers of stock of a foreign acquired corporation by a U.S. transferor to a foreign acquiring corporation in a Code Sec. 361 exchange. The proposed regulations provide that the U.S. transferor must include in income the Code Sec. 1248 amount attributable to the stock of the foreign acquired corporation only if immediately after the exchange, the foreign acquiring corporation or the foreign acquired corporation is not a CFC with respect to which the U.S. transferor is a
Code Sec. 1248 shareholder. The Code Sec. 1248 amount can be preserved in the hands of a corporate Code Sec. 1248 shareholder following the distribution of the stock of the foreign acquiring corporation by the U.S. transferor. Special rules for outbound triangular asset reorganizations are also proposed.

Regs Under the Code Sec. 367 Coordination Rule

  The coordination rule, found at
Reg. §1.367(a)-3(d)(2)(vi)(A), has been used inappropriately in transactions intended to repatriate earnings and profits of foreign corporations without the recognition of gain or a dividend inclusion. In response, the IRS issued Notice 2008-10, I.R.B. 2008-3, 277 (TAXDAY, 2007/12/31, I.7), which announced the revision of the application of the coordination rule exception. The proposed regulations incorporate, with modifications, the provisions of that IRS guidance.

Regs Under Code Sec. 1248(f)

  The proposed regulations under Code Sec. 1248(f) apply when a domestic corporation distributes stock of certain foreign corporations in a distribution to which Code Sec. 337, 355 or 361 applies. The proposed regulations include regulations described in Notice 87-64, 1987-2 CB 375. Under the proposed regulations:

  --A domestic distributing corporation that is a section 1248 shareholder of a foreign corporation and that distributes stock of such foreign corporation in a Code Sec. 337 distribution shall generally include in income as a dividend the Code Sec. 1248 amount attributable to the stock distributed.

  --If such a domestic distributing corporation distributes such stock in a Code Sec. 355 distribution, other than stock received by the domestic distributing corporation in a
Code Sec. 361 exchange, shall generally include in income as a dividend the Code Sec. 1248 amount attributable to the stock distributed, but only to the extent the domestic distributing corporation does not otherwise recognize gain on the Code Sec. 355 distribution.

  --If such a domestic distributing corporation distributes stock of such corporation received in a Code Sec. 361 exchange, in a
section 355 distribution or a Code Sec. 361 distribution, it shall include in income as a dividend the Code Sec. 1248 amount attributable to the stock distributed.

  The general rule will not apply to certain Code Sec. 337 distributions of the stock of a foreign corporation or certain Code Sec. 355 distributions of a stock of stock of a foreign corporation. An elective exemption to the general rule for certain distributions pursuant to a plan or reorganization is also provided.

Other Changes

  The proposed regulations suspend the application of
Code Sec. 1248(e) when capital gains are taxed at a rate equal to or greater than the rate at which ordinary income is taxed. Changes under Code Sec. 6038B establish reporting requirements for certain transfers of property by a domestic corporation to a foreign corporation in certain Code Sec. 361 exchanges.

Effective Dates

  A number of different effective dates apply with respect to the proposed regulations.

  --Proposed Reg. §1.367(a)-7 and the revisions to §1.6038B-1 apply to transfers occurring on or after the date that is 30 days after the date these regulations are published as final regulations in the Federal Register.

  --In accordance with Notice 87-64, §1.1248-6(d) applies to sales, exchanges or other dispositions of stock of a domestic corporation occurring on or after September 21, 1987.

  --The revisions described in Notice 2008-10 generally apply to transactions occurring on or after December 28, 2007.

  --Proposed Reg. §§1.1248-8(b)(2)(iv), 1248(f)-1 through
1.1248(f)-3, and the modifications to Proposed Reg. §1.367(b)-4 apply to transfers or distributions occurring on or after the date that is 30 days after the date these regulations are published as final regulations in the Federal Register.

Comments Requested

  The IRS is seeking comments on a number of aspects of these proposed regulations. Written or electronic comments and requests for a public hearing must be received by November 18, 2008.

Proposed Regulations, NPRM REG-209006-89, 2008FED ¶49,829

Other References:

 
Code Sec. 358

  CCH Reference - 2008FED ¶16,552L

 
Code Sec. 367

  CCH Reference - 2008FED ¶16,641F

  CCH Reference - 2008FED ¶16,642E

  CCH Reference - 2008FED ¶16,646E

  CCH Reference - 2008FED ¶16,647FE

  CCH Reference - 2008FED ¶16,647J

 
Code Sec. 1248

  CCH Reference - 2008FED ¶30,961D

  CCH Reference - 2008FED ¶30,963D

  CCH Reference - 2008FED ¶30,966C

  CCH Reference - 2008FED ¶30,967A

  CCH Reference - 2008FED ¶30,967E

  CCH Reference - 2008FED ¶30,967J

  CCH Reference - 2008FED ¶30,967I

  CCH Reference - 2008FED ¶30,967M

 
Code Sec. 6038B

  CCH Reference - 2008FED ¶35,580E

  Tax Research Consultant

  CCH Reference - TRC INTL: 30,076

  CCH Reference - TRC INTLOUT: 9,404

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

  James R. Eads, Jr., has been named the new Executive Director of the Federation of Tax Administrators (FTA). He is formerly the Public Affairs Director for Ryan, a state tax consulting firm. Eads' previous experience includes service as Chief Counsel for the Arkansas Department of Finance & Administration Revenue Division and as state tax counsel for Sears and AT&T Corp. He also worked for Ernst & Young and the Internal Revenue Service.

  Eads replaces Harley Duncan, who resigned after 20 years with the FTA to take a position with KPMG. Eads will assume his new post on September 8.

News Release, Federation of Tax Administrators, August 14, 2008.
 

CCH (cch.taxgroup.com) reports:

  The IRS's proposed overhaul of Code Sec. 6694 regulations (NPRM REG-129243-07, I.R.B. 2008-27, 32; TAXDAY, 2008/06/17, I.1) drew a subdued response from tax professionals at an August 18 hearing in Washington, D.C. Representatives from practitioner groups and the return-preparation industry appear ready to live with the regulations if they are finalized as proposed. Recommended changes are largely limited to clarifications of proposed rules, such as those dealing with reliance on a taxpayer's legal conclusions, disclosure, a preparer's reliance on the advice of others, penalties and the treatment of appraisers.

New Standard

  The IRS issued the proposed regulations in June in response to changes made to Code Sec. 6694 by Congress in 2007. The Small Business and Work Opportunity Tax Act of 2007 (P.L. 110-28) replaced the realistic-possibility-of-success standard in Code Sec. 6694(a) with the heightened more-likely-than-not standard for undisclosed, nonabusive positions. The preparer must have a reasonable belief that the tax treatment of the position would more likely than not be sustained on its merits. Additionally, Congress extended Code Sec. 6694 to cover preparers of all returns, not just preparers of income tax returns.

  Preparers also risk significantly increased penalties under the 2007 Small Business Act. The old, first-tier $250 penalty in Code Sec. 6694(a) has jumped to the greater of $1,000 or 50 percent of the income derived, or to be derived, by the preparer. The penalty for willful or reckless conduct in Code Sec. 6694(b) increased from $1,000 to the greater of $5,000 or 50 percent of the income derived or to be derived by the preparer.

Legal Conclusions

  Under the proposed regulations, a preparer may generally rely in good faith on information provided by the taxpayer. However, the proposed regulations expressly prohibit the preparer from relying on information from a taxpayer with respect to legal conclusions on federal tax issues.

  J. Edward Swails, speaking on behalf of the American Institute of Certified Public Accountants (AICPA), warned that the prohibition could be interpreted as "changing the government's long-standing position that preparers can rely on taxpayer information regarding items that involve mixed issues of fact and law." These include, Swails explained, earnings and profits, depreciation and inventory. Swails also predicted that the prohibition would require preparers to "re-perform the research and analysis conducted by in-house tax professionals."

  Brian Donahue, director of government relations for H&R Block, Inc., urged the IRS to clarify the definition of legal conclusion. For example, if a client believes that he or she owns a property outright but actually has a life estate in the property, would the taxpayer's representation of an ownership interest be a legal conclusion, Donahue asked.

Alternative Reference Sources

  The first-tier penalty in Code Sec. 6694(a) would not be imposed if the IRS determines that the understatement was due to reasonable cause and the preparer acted in good faith. Among the factors the IRS will consider is the preparer's good-faith reliance on the advice of the taxpayer or others.

  The Pennsylvania Society of Public Accountants (PSPA) asked the IRS to expand the factors and accept alternative reference sources in addition to the authorities in Reg. §1.662-4(d)(3)(iii). "The alternative reference sources would be for purposes of sustaining that a preparer has reasonable cause and acted in good faith," said Paul J. Cannataro, speaking on behalf of the PSPA. An example of an alternative reference source would be CCH's Master Tax Guide, Cannataro told CCH.

  "The pressure from taxpayers to complete returns causes practitioners to work as many as 80 to 90 hours a week," Cannataro said. "For less complicated issues, the alternative reference sources provide a more expedient solution to the overwhelmed practitioner's problems."

Disclosure

  The proposed regulations permit a preparer to contemporaneously document in his or her file that disclosure was made to the client. However, boilerplate language is not allowed. The IRS has estimated that preparers will be able to prepare the contemporaneous document in 15 minutes. "The 15-minute estimate is inaccurate and misleading," Cannataro said.

NATP Comments

  The National Association of Tax Professionals (NATP), which did not send a representative to testify in person at the hearing, provided written comments to the IRS. The NATP urged the IRS to exercise caution in penalizing preparers for nonwillful errors. "IRS auditors should be disabused from raising a penalty as a result of a material error unless it is willful and there is a repeated pattern of it happening with the preparer. A one-time penalty should not be the basis for application of a penalty."

  Appraisers cautioned that the proposed regulations could be interpreted as treating appraisers as nonsigning preparers. The proposed regulations govern both signing and nonsigning preparers.

  Anita C. Soucy, attorney-advisor, Treasury Office of Tax Legislative Counsel, asked if a person could be retained to appraise a property and also prepare a return (related to the property). Jay Fisherman, speaking on behalf of the American Society of Appraisers, responded that this scenario would create a conflict of interest for the appraiser.

  Deborah Butler, associate chief counsel (Procedure & Administration), indicated that the proposed regulations will be finalized before the end of the year. The AICPA recommended that final Code Sec. 6694 regulations give preparers some transition relief. "The effective date should include a transition rule allowing preparers to comply with the requirements of Notice 2008-13 (TAXDAY, 2008/01/02, I.1), rather than the final regulations, for any return filed or any advice given within the 60 days following publication of the final regulations."

  In July, AICPA President Barry C. Melancon told CCH that equalizing the preparer and taxpayer penalty standards at substantial authority for undisclosed nonabusive return positions is the organization's top legislative priority (TAXDAY, 2008/07/24, M.2). The pending Renewable Energy and Job Creation Bill of 2008 (HR 6049), the so-called "extenders bill," would equalize the standards. While the bill passed in the House, it stalled in the Senate before Congress's August recess.

  The PSPA urged the IRS to support equalizing the preparer and taxpayer standards at substantial authority at the hearing. "The IRS has the obligation to make Congress aware of laws that cause inefficiency in the tax system. One such example is the unequal standard placed on preparers versus taxpayers," Cannataro said.

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

AICPA Comments on Proposed Rules (REG-129243-07) Regarding Tax Return Preparer Penalties

National Association of Tax Professionals Comments on Tax Return Preparer Penalties Under Code Secs. 6694 and 6695
 

CCH (cch.taxgroup.com) reports:

  The IRS has issued a new revenue procedure that taxpayers must follow when they wish to obtain automatic consent to change accounting methods. The new procedure generally applies to applications to change accounting methods that are filed on or after August 18, 2008, for a year of change ending on or after December 31, 2007.

  In general, a change in accounting method occurs when there is a change in the overall plan of accounting for gross income or deductions or when there is a change in the treatment of any material item. Except as otherwise provided, a taxpayer must obtain the consent of the IRS before changing accounting methods for tax purposes. Under the general rule, a taxpayer obtains IRS consent to an accounting method change by filing Form 3115, Application for Change in Accounting Method, during the tax year in which the taxpayer wants to make the proposed change.

  Previously, in Rev. Proc. 2002-9, 2002-1 CB 327, the IRS provided guidance on how taxpayers could receive automatic consent for certain accounting method changes specified in that revenue procedure. This latest guidance from the IRS supersedes Rev. Proc. 2002-9 and updates the automatic consent procedures for accounting method changes by clarifying some of the terms and conditions of Rev. Proc. 2002-9 and incorporating many of the modifications that have been made to that procedure since it was released.

  General procedures. Taxpayers who fall within the scope of the new procedure are automatically granted the consent of the IRS to change an accounting method described in the Appendix of the procedure. In most situations, a completed and filed current Form 3115 will serve as the application for consent to change accounting methods. The taxpayer must include the designated automatic accounting method change number, as identified in the Appendix of the procedure, on the application. A user fee does not have to be paid with the application.

  Taxpayers under IRS examination can file an application to change accounting methods under the automatic consent procedure, but only during certain time periods or under certain conditions. Taxpayers before an IRS Appeals Office or before a federal court can also file an application to change accounting methods under the automatic consent procedure but may receive limited audit protection if the accounting method to be changed is an issue under consideration.

  Five-year change prohibition. In general, a five-year prohibition on accounting method changes under the automatic consent procedure applies. Thus, unless otherwise provided, a taxpayer that changed its overall method of accounting or applied for consent to change its overall method of accounting during any of the five tax years ending with the year of change may not obtain automatic consent to change its overall method of accounting under the new procedure. A similar restriction applies to a change in a method of accounting for a specific item.

  Code Sec. 481 adjustment period. Many accounting method changes require a Code Sec. 481 adjustment so that amounts are not duplicated or omitted following the change. Unless otherwise provided, the new procedure sets forth a Code Sec. 481 adjustment period of four tax years for net positive Code Sec. 481 adjustments and one tax year for net negative Code Sec. 481 adjustments. Taxpayers may elect to use a one-year Code Sec. 481 adjustment period for positive net Code Sec. 481 adjustments that are less than $25,000. Special rules apply for taxpayers that are ceasing to engage in a trade or business or are terminating their existence.

  Incorporation of additional accounting method changes. Additional accounting method changes that have been incorporated in the new automatic consent procedure include: (1) changes for lessor improvements abandoned at termination of the lease; (2) changes for accounting for, or identifying disposed, depreciable repairable and reusable spare parts; (3) changes from depreciating land or nondepreciable land improvements to not depreciating them; (4) changes to capitalize and depreciate repairable and reusable spare parts; (5) changes from the cash method to the accrual method for specific items; (6) changes to the overall cash method for specified transportation industry taxpayers; (7) changes to an overall cash/hybrid method for certain banks; (8) changes to an overall cash method for farmers; (9) changes for nonshareholder contributions to capital under Code Sec. 118; (10) changes for retainages under Code Sec. 451; (11) changes relating to timing of incurring liabilities for employee bonuses and vacation pay under Code Sec. 461; (12) changes for rebates and allowances under Code Sec. 461; (13) changes from a ratable inclusion of rental income or expense to inclusion in accordance with the rent allocation; (14) changes from permissible methods of identifying and valuing inventories; (15) changes in the official used vehicle guide utilized in valuing used vehicles; (16) changes relating to invoiced advertising association costs for new vehicle retail dealerships; (17) changes to dollar-value pools of manufacturers; and (18) changes to comply with Reg. §1.1012-1(c)(1)-(4).

  Transition rules. The new automatic consent procedure generally applies to applications to change accounting methods that are filed on or after August 18, 2008, for a year of change ending on or after December 31, 2007. However, if a taxpayer within the scope of Rev. Proc. 97-27, 1997-1 CB 680, timely filed a Form 3115 under that procedure before August 18, 2008, requesting consent for a change in accounting method described in that procedure for a year of change ending on or after December 31, 2007, and the Form 3115 is still pending with the IRS National Office on August 18, 2008, the taxpayer may choose to make the change under the new procedure. The taxpayer must notify the IRS National Office of its intent to make the change under the new procedure before the later of September 18, 2008, or the issuance of a letter ruling granting or denying consent for the change.

  If a taxpayer filed an application under Rev. Proc. 2002-9 with the IRS National Office to make a change in accounting method and the application was postmarked or received before August 18, 2008, the taxpayer makes the change under Rev. Proc. 2002-9. However, a taxpayer that filed an application under Rev. Proc. 2002-9 before August 18, 2008, for a year of change that is the taxpayer's first tax year ending on or after December 31, 2007, may choose to file an amended application for that year under the new procedure.

Rev. Proc. 2008-52, 2008FED ¶46,545

Other References:

 
Code Sec. 77

  CCH Reference - 2008FED ¶530

  CCH Reference - 2008FED ¶6304.20

 
Code Sec. 162

  CCH Reference - 2008FED ¶8526.024

  CCH Reference - 2008FED ¶8610.01

  CCH Reference - 2008FED ¶8610.143

  CCH Reference - 2008FED ¶8630.025

  CCH Reference - 2008FED ¶8630.027

  CCH Reference - 2008FED ¶8630.1242

  CCH Reference - 2008FED ¶8630.45

  CCH Reference - 2008FED ¶8754.1695

 
Code Sec. 163

  CCH Reference - 2008FED ¶9104.0442

  CCH Reference - 2008FED ¶9104.62

  CCH Reference - 2008FED ¶9303.0668

  CCH Reference - 2008FED ¶9303.10

 
Code Sec. 166

  CCH Reference - 2008FED ¶10,690.155

 
Code Sec. 167

  CCH Reference - 2008FED ¶11,009.046

  CCH Reference - 2008FED ¶11,009.135

  CCH Reference - 2008FED ¶11,037.675

  CCH Reference - 2008FED ¶11,043.01

  CCH Reference - 2008FED ¶11,043.015

  CCH Reference - 2008FED ¶11,043.021

  CCH Reference - 2008FED ¶11,043.283

  CCH Reference - 2008FED ¶11,043.285

  CCH Reference - 2008FED ¶11,043.288

  CCH Reference - 2008FED ¶11,043.40

  CCH Reference - 2008FED ¶11,043.45

 
Code Sec. 168

  CCH Reference - 2008FED ¶11,279.051

  CCH Reference - 2008FED ¶11,279.0516

  CCH Reference - 2008FED ¶11,279.0545

  CCH Reference - 2008FED ¶11,279.058

  CCH Reference - 2008FED ¶11,279.073

  CCH Reference - 2008FED ¶11,279.18

  CCH Reference - 2008FED ¶11,279.19

  CCH Reference - 2008FED ¶11,279.55

  CCH Reference - 2008FED ¶11,279.68

  CCH Reference - 2008FED ¶11,279.70

 
Code Sec. 171

  CCH Reference - 2008FED ¶11,855.073

  CCH Reference - 2008FED ¶11,855.65

 
Code Sec. 174

  CCH Reference - 2008FED ¶12,047.035

  CCH Reference - 2008FED ¶12,047.037

  CCH Reference - 2008FED ¶12,047.046

  CCH Reference - 2008FED ¶12,047.057

  CCH Reference - 2008FED ¶12,047.10

  CCH Reference - 2008FED ¶12,047.115

 
Code Sec. 179B

  CCH Reference - 2008FED ¶12,136.20

 
Code Sec. 194

  CCH Reference - 2008FED ¶12,335.073

  CCH Reference - 2008FED ¶12,335.25

 
Code Sec. 197

  CCH Reference - 2008FED ¶12,455.30

 
Code Sec. 199

  CCH Reference - 2008FED ¶12,476.0235

  CCH Reference - 2008FED ¶12,476.0334

  CCH Reference - 2008FED ¶12,476.0386

  CCH Reference - 2008FED ¶12,476.0387

 
Code Sec. 263

  CCH Reference - 2008FED ¶13,709.017

  CCH Reference - 2008FED ¶13,709.03

  CCH Reference - 2008FED ¶13,709.033

  CCH Reference - 2008FED ¶13,709.035

  CCH Reference - 2008FED ¶13,709.037

  CCH Reference - 2008FED ¶13,709.105

  CCH Reference - 2008FED ¶13,709.385

  CCH Reference - 2008FED ¶13,709.469

  CCH Reference - 2008FED ¶13,709.564

 
Code Sec. 263A

  CCH Reference - 2008FED ¶13,815.037

  CCH Reference - 2008FED ¶13,815.044

  CCH Reference - 2008FED ¶13,815.24

  CCH Reference - 2008FED ¶13,815.63

  CCH Reference - 2008FED ¶13,822.05

  CCH Reference - 2008FED ¶13,822.30

  CCH Reference - 2008FED ¶13,822.80

  CCH Reference - 2008FED ¶13,848.01

  CCH Reference - 2008FED ¶13,848.04

  CCH Reference - 2008FED ¶13,848.045

  CCH Reference - 2008FED ¶13,848.10

  CCH Reference - 2008FED ¶13,848.15

  CCH Reference - 2008FED ¶13,850.01

  CCH Reference - 2008FED ¶13,850.28

  CCH Reference - 2008FED ¶13,850.50

 
Code Sec. 280F

  CCH Reference - 2008FED ¶15,108.042

 
Code Sec. 404

  CCH Reference - 2008FED ¶18,352.18

 
Code Sec. 446

  CCH Reference - 2008FED ¶20,620.0257

  CCH Reference - 2008FED ¶20,620.026

  CCH Reference - 2008FED ¶20,620.027

  CCH Reference - 2008FED ¶20,620.0274

  CCH Reference - 2008FED ¶20,620.0312

  CCH Reference - 2008FED ¶20,620.0314

  CCH Reference - 2008FED ¶20,620.054

  CCH Reference - 2008FED ¶20,620.055

  CCH Reference - 2008FED ¶20,620.075

  CCH Reference - 2008FED ¶20,620.076

  CCH Reference - 2008FED ¶20,620.102

  CCH Reference - 2008FED ¶20,620.111

  CCH Reference - 2008FED ¶20,620.143

  CCH Reference - 2008FED ¶20,620.144

  CCH Reference - 2008FED ¶20,620.166

  CCH Reference - 2008FED ¶20,620.20

  CCH Reference - 2008FED ¶20,620.217

  CCH Reference - 2008FED ¶20,620.222

  CCH Reference - 2008FED ¶20,620.226

  CCH Reference - 2008FED ¶20,620.236

  CCH Reference - 2008FED ¶20,620.238

  CCH Reference - 2008FED ¶20,620.239

  CCH Reference - 2008FED ¶20,620.241

  CCH Reference - 2008FED ¶20,620.2412

  CCH Reference - 2008FED ¶20,620.242

  CCH Reference - 2008FED ¶20,620.243

  CCH Reference - 2008FED ¶20,620.2432

  CCH Reference - 2008FED ¶20,620.247

  CCH Reference - 2008FED ¶20,620.248

  CCH Reference - 2008FED ¶20,620.249

  CCH Reference - 2008FED ¶20,620.2505

  CCH Reference - 2008FED ¶20,620.2507

  CCH Reference - 2008FED ¶20,620.251

  CCH Reference - 2008FED ¶20,620.258

  CCH Reference - 2008FED ¶20,620.259

  CCH Reference - 2008FED ¶20,620.284

  CCH Reference - 2008FED ¶20,620.285

  CCH Reference - 2008FED ¶20,620.286

  CCH Reference - 2008FED ¶20,620.292

  CCH Reference - 2008FED ¶20,620.304

  CCH Reference - 2008FED ¶20,620.311

  CCH Reference - 2008FED ¶20,620.323

  CCH Reference - 2008FED ¶20,620.3235

  CCH Reference - 2008FED ¶20,620.625

  CCH Reference - 2008FED ¶20,620.627

  CCH Reference - 2008FED ¶20,620.6275

  CCH Reference - 2008FED ¶20,620.6305

  CCH Reference - 2008FED ¶20,620.641

 
Code Sec. 448

  CCH Reference - 2008FED ¶20,803.03

  CCH Reference - 2008FED ¶20,803.032

  CCH Reference - 2008FED ¶20,803.50

  CCH Reference - 2008FED ¶20,803.75

 
Code Sec. 451

  CCH Reference - 2008FED ¶21,005.027

  CCH Reference - 2008FED ¶21,005.7035

  CCH Reference - 2008FED ¶21,005.7043

  CCH Reference - 2008FED ¶21,005.9327

  CCH Reference - 2008FED ¶21,005.933

  CCH Reference - 2008FED ¶21,005.946

  CCH Reference - 2008FED ¶21,030.073

 
Code Sec. 454

  CCH Reference - 2008FED ¶21,503.075

  CCH Reference - 2008FED ¶21,503.35

 
Code Sec. 455

  CCH Reference - 2008FED ¶21,517.075

  CCH Reference - 2008FED ¶21,517.35

 
Code Sec. 461

  CCH Reference - 2008FED ¶21,817.0285

  CCH Reference - 2008FED ¶21,817.029

  CCH Reference - 2008FED ¶21,817.128

  CCH Reference - 2008FED ¶21,817.163

  CCH Reference - 2008FED ¶21,817.2345

  CCH Reference - 2008FED ¶21,817.235

  CCH Reference - 2008FED ¶21,817.2377

  CCH Reference - 2008FED ¶21,817.287

  CCH Reference - 2008FED ¶21,817.3215

  CCH Reference - 2008FED ¶21,817.704

 
Code Sec. 467

  CCH Reference - 2008FED ¶21,911.01

 
Code Sec. 471

  CCH Reference - 2008FED ¶22,206.021

  CCH Reference - 2008FED ¶22,206.5075

  CCH Reference - 2008FED ¶22,208.50

  CCH Reference - 2008FED ¶22,208.76

  CCH Reference - 2008FED ¶22,210.24

  CCH Reference - 2008FED ¶22,218.01

  CCH Reference - 2008FED ¶22,218.35

 
Code Sec. 472

  CCH Reference - 2008FED ¶22,240.027

  CCH Reference - 2008FED ¶22,240.03

  CCH Reference - 2008FED ¶22,240.037

  CCH Reference - 2008FED ¶22,240.04

  CCH Reference - 2008FED ¶22,240.041

  CCH Reference - 2008FED ¶22,240.047

  CCH Reference - 2008FED ¶22,240.25

  CCH Reference - 2008FED ¶22,240.33

  CCH Reference - 2008FED ¶22,240.55

  CCH Reference - 2008FED ¶22,240.70

  CCH Reference - 2008FED ¶22,241.04

  CCH Reference - 2008FED ¶22,241.45

 
Code Sec. 475

  CCH Reference - 2008FED ¶22,268.023

  CCH Reference - 2008FED ¶22,268.20

 
Code Sec. 481

  CCH Reference - 2008FED ¶22,277.027

  CCH Reference - 2008FED ¶22,277.029

  CCH Reference - 2008FED ¶22,277.38

  CCH Reference - 2008FED ¶22,277.40

  CCH Reference - 2008FED ¶22,277.493

  CCH Reference - 2008FED ¶22,277.498

  CCH Reference - 2008FED ¶22,277.50

  CCH Reference - 2008FED ¶22,277.502

  CCH Reference - 2008FED ¶22,277.51

  CCH Reference - 2008FED ¶22,277.58

  CCH Reference - 2008FED ¶22,277.595

  CCH Reference - 2008FED ¶22,277.70

 
Code Sec. 585

  CCH Reference - 2008FED ¶23,662.10

 
Code Sec. 811

  CCH Reference - 2008FED ¶25,900.20

 
Code Sec. 832

  CCH Reference - 2008FED ¶26,157.021

 
Code Sec. 846

  CCH Reference - 2008FED ¶26,331.105

 
Code Sec. 860D

  CCH Reference - 2008FED ¶26,662.65

 
Code Sec. 861

  CCH Reference - 2008FED ¶27,131.128

  CCH Reference - 2008FED ¶27,146.49

 
Code Sec. 904

  CCH Reference - 2008FED ¶27,901.82

 
Code Sec. 985

  CCH Reference - 2008FED ¶28,848.028

  CCH Reference - 2008FED ¶28,848.032

 
Code Sec. 986

  CCH Reference - 2008FED ¶28,861.25

 
Code Sec. 1273

  CCH Reference - 2008FED ¶31,283.45

  CCH Reference - 2008FED ¶31,283.50

  CCH Reference - 2008FED ¶31,283.60

 
Code Sec. 1276

  CCH Reference - 2008FED ¶31,361.40

 
Code Sec. 1281

  CCH Reference - 2008FED ¶31,421.04

  CCH Reference - 2008FED ¶31,421.35

 
Code Sec. 1363

  CCH Reference - 2008FED ¶32,062.035

  CCH Reference - 2008FED ¶32,062.20

  CCH Reference - 2008FED ¶32,062.40

 
Code Sec. 1400J

  CCH Reference - 2008FED ¶32,472.10

 
Code Sec. 1400L

  CCH Reference - 2008FED ¶32,477.026

 
Code Sec. 1400N

  CCH Reference - 2008FED ¶32,487.031

 
Code Sec. 7121

  CCH Reference - 2008FED ¶41,090.115

 
Statement of Procedural Rules 601.201

  CCH Reference - 2008FED ¶43,360.16

 
Statement of Procedural Rules 601.204

  CCH Reference - 2008FED ¶43,384.031

  CCH Reference - 2008FED ¶43,384.10

  CCH Reference - 2008FED ¶43,384.45

  Tax Research Consultant

  CCH Reference - TRC DEPR: 15,304
CCH Reference - TRC ACCTNG: 21,100
CCH Reference - TRC ACCTNG: 21,200
 

CCH (cch.taxgroup.com) reports:

  The IRS has provided guidance regarding when a child of divorced or separated parents will be treated as a dependent of both parents. Under Code Sec. 152(e), a child of divorced or separated parents will only be treated as a dependent of the noncustodial parent for purposes of the dependency exemption only if the custodial parent provides a written declaration that he or she will not claim the child as a dependent for the tax year and the noncustodial parent attaches the declaration to his or her return. Many other provisions that provide for benefits and exclusions attributable to the dependents of a taxpayer reference the rules of Code Sec. 152, including its use in relation to the children of divorced or separated parents. However, under this procedure, the IRS will treat the child as a dependent of both parents for purposes of several provisions relating to medical expenses, medical coverage and employee benefits, regardless of whether or not the custodial parent released the claim of the exemption.

  Specifically, the IRS will treat a child as a dependent of both parents, without a declaration of the custodial parent, under the following circumstances:

  --the exclusion from gross income of certain employer reimbursements of expenses incurred for the medical care of the employee's child under Code Sec. 105(b);

  --the exclusion from gross income of employer contributions to an accident or health plan on behalf of the employee's children under Code Sec. 106(a) and Reg. §1.106-1;

  --the exclusion from gross income of fringe benefits qualifying as no-additional-cost services or qualified employee discounts under Code Sec. 132(a) that are treated as used by the employee due to use by an employee's child under Code Sec. 132(h)(2);

  --the deduction of medical expenses of the taxpayer's child under Code Sec. 213(a); and

  --the exclusions under Code Secs. 220(f)(1) and 223(f)(1) for distributions from Archer Medical Savings Accounts and Health Savings Accounts, respectively, if the distributions are used to pay qualified medical expenses of the account beneficiary's child.

  The guidance is effective August 18, 2008, but taxpayers may choose to apply the guidance to any tax year beginning after December 31, 2004, for which a credit or refund can still be claimed under Code Sec. 6511.

Rev. Proc. 2008-48, 2008FED ¶46,544

Other References:

 
Code Sec. 105

  CCH Reference - 2008FED ¶6702.027

  CCH Reference - 2008FED ¶6702.23

 
Code Sec. 106

  CCH Reference - 2008FED ¶6803.01

  CCH Reference - 2008FED ¶6803.193

 
Code Sec. 132

  CCH Reference - 2008FED ¶7438.034

  CCH Reference - 2008FED ¶7438.14

 
Code Sec. 152

  CCH Reference - 2008FED ¶8250.027

  CCH Reference - 2008FED ¶8250.21

 
Code Sec. 213

  CCH Reference - 2008FED ¶12,543.057

  CCH Reference - 2008FED ¶12,543.20

 
Code Sec. 220

  CCH Reference - 2008FED ¶12,675.25

 
Code Sec. 223

  CCH Reference - 2008FED ¶12,785.041

  CCH Reference - 2008FED ¶12,785.25

  Tax Research Consultant

  CCH Reference - TRC INDIV: 42,356.05

  CCH Reference - TRC INDIV: 42,450

  CCH Reference - TRC INDIV: 42,500

  CCH Reference - TRC FILEIND: 6,168.20

  CCH Reference - TRC COMPEN: 33,052

  CCH Reference - TRC COMPEN: 45,056.05

  CCH Reference - TRC COMPEN: 45,154.05

CCH (cch.taxgroup.com) reports:

  The IRS has released the Summer 2008 issue of the Statistics of Income (SOI) Bulletin. The SOI is a quarterly compilation of information from federal tax returns and other documents. This issue of the bulletin contains data on the growth in profits and tax liability reported by foreign-controlled domestic corporations.

  According to 2005 data, there were 61,820 foreign-controlled domestic corporations (FCDCs), accounting for 1.1 percent of the total of all U.S. corporations. However, FCDCs generated $3.5 trillion of total receipts with $9.2 trillion of total assets, accounting for 13.7 percent of receipts and 13.9 percent of assets reported on all U.S. corporation income tax returns. Profits, or net income less deficit, reported by FCDCs for tax purposes were $165.2 billion, an 81.9 percent increase from $90.8 billion reported in 2004. The U.S. tax liability for FCDCs, total income tax after credits, was $42.4 billion for 2005, a 41.7 percent increase since 2004.

  The bulletin also includes articles on:

  --Foreign corporations controlled by U.S. multinational corporations;

  --Corporations that claimed the foreign tax credit on their U.S. tax returns;

  --Growth trends in the number of partnership and sole proprietorship returns;

  --Federal gift tax returns filed for gifts given in 2005; and

  --Use of business credit for research activities.

  The Statistics of Income Bulletin is available from the Superintendent of Documents, U.S. Government Printing Office, P.O. Box 371954, Pittsburgh, Pa. 15250-7954, Both annual subscriptions and single issues are available. The Bulletin is also available online at www.irs.gov.

IR-2008-97,
2008FED ¶46,543

Summer 2008 SOI Bulletin [Document will be available on August 20, 2008 - CCH.]

Other References:

 
Code Sec. 6108

  CCH Reference - ¶36,942.01

  CCH Reference - ¶36,942.40

  Tax Research Consultant

  CCH Reference - TRC IRS: 3,152.10

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

  New Mexico Governor Bill Richardson unveiled details of a scaled-back personal income tax rebate plan to be presented to the legislature during the special session scheduled to begin on August 15, 2008. Under the revised plan, New Mexico taxpayers with adjusted gross incomes up to $60,000 would each receive a $120 tax rebate, plus $48 for each dependent. Taxpayers with incomes between $60,000 and $70,000 would receive an $80 rebate for each taxpayer and $32 for each dependent, while taxpayers with incomes between $70,000 and $80,000 would receive rebates of $40 for each taxpayer and $16 for each dependent. Taxpayers with incomes over $80,000 would not qualify for a rebate.

  For example:

  -- a married couple with two children and income of $45,000 would receive a rebate of $336.

  -- a single mother with one child and income of $25,000 would receive a rebate of $168.

  -- a single person with income of $15,000 would receive a rebate of $120.

  -- a married couple with one child and income of $75,000 would receive a rebate of $96.

  For the full text of the governor's announcement, go to
http://www.governor.state.nm.us. The governor's original tax rebate plan, which called for higher rebate amounts, was covered in an earlier story. (TAXDAY, 2008/07/18, S.18)

Press Release , New Mexico Governor's Office, August 14, 2008.
 

CCH (cch.taxgroup.com) reports:

  The California Franchise Tax Board has released the results from its interested parties meeting held on July 17, 2008, to discuss potential regulatory amendments intended to clarify the apportionment of trucking company and trucking activity income for California corporation franchise and income tax purposes. (TAXDAY, 2008/04/28, S.4)

  Topics discussed include:

  -- whether the definition of "trucking company" in Reg. 25137-11(b)(1) needs to be clarified;

  -- whether a definition of "trucking activities" should be added to Reg. 25137-11(b) and, if so, what form it should take;

  -- how Reg. 25137-11 would apply to a scenario based on a hypothetical trucking operation that was unitary with a mining operation;

  -- whether the receipts of freight forwarders should be governed by Reg. 25137-11;

  -- how to assign receipts when a trucking company purchases transportation from an independent contractor; and

  -- whether the "trucking company" definition should refer to owned motor vehicles.

  Subscribers to CCH Tax Research NetWork can view the summary of the meeting.
  Announcement , California Franchise Tax Board, August 14, 2008.
 

CCH (cch.taxgroup.com) reports:

  The IRS has released procedures setting forth the requirements for using IRS forms to file 2008 information returns, preparing acceptable substitutes of the official forms, and using official or acceptable substitute forms to furnish information to recipients. The procedures cover Forms 1096, 1098 series, 1099 series, 5498 series, W-2G, and 1042-S. Further, the procedures outline the official form specifications for a form or statement to be acceptable.

  Substitutes that totally conform to the specifications may be privately printed and filed as returns with the IRS. Taxpayers may contact the Substitute Forms Program by email at taxforms@irs.gov with "Substitute Forms" on the subject line for clarification of any specification, or by mail to: Internal Revenue Service, Attn: Substitute Forms Program, SE:W:CAR:MP:T:T:SP, 1111 Constitution Ave. NW., Room 6526, Washington, D.C. 20224.

 
Rev. Proc. 2007-50, I.R.B. 2007-31, 244, is superseded.

Rev. Proc. 2008-36, 2008FED ¶46,542

Other References:

 
Code Sec. 1461

  CCH Reference - 2008FED ¶32,828.157

 
Code Sec. 6041

  CCH Reference - 2008FED ¶35,836.075

  CCH Reference - 2008FED ¶35,836.30

 
Code Sec. 6041A

  CCH Reference - 2008FED ¶35,842.075

 
Code Sec. 6042

  CCH Reference - 2008FED ¶35,870.01

 
Code Sec. 6043

  CCH Reference - 2008FED ¶35,888.0756

 
Code Sec. 6044

  CCH Reference - 2008FED ¶35,911.075

  CCH Reference - 2008FED ¶35,911.30

 
Code Sec. 6045

  CCH Reference - 2008FED ¶35,930.024

  CCH Reference - 2008FED ¶35,930.28

 
Code Sec. 6047

  CCH Reference - 2008FED ¶35,983.075

 
Code Sec. 6049

  CCH Reference - 2008FED ¶36,037.075

  CCH Reference - 2008FED ¶36,037.58

 
Code Sec. 6050A

  CCH Reference - 2008FED ¶36,044.01

  CCH Reference - 2008FED ¶36,044.50

 
Code Sec. 6050B

  CCH Reference - 2008FED ¶36,062.01

  CCH Reference - 2008FED ¶36,062.35

 
Code Sec. 6050D

  CCH Reference - 2008FED ¶36,102.01

 
Code Sec. 6050E

  CCH Reference - 2008FED ¶36,122.077

 
Code Sec. 6050J

  CCH Reference - 2008FED ¶36,223.075

 
Code Sec. 6050N

  CCH Reference - 2008FED ¶36,301.01

  CCH Reference - 2008FED ¶36,301.35

 
Code Sec. 6050P

  CCH Reference - 2008FED ¶36,315.03

 
Code Sec. 6050Q

  CCH Reference - 2008FED ¶36,317.01

  CCH Reference - 2008FED ¶36,317.10

 
Code Sec. 6050R

  CCH Reference - 2008FED ¶36,319.01

 
Code Sec. 6050S

  CCH Reference - 2008FED ¶36,319B.075

 
Code Sec. 6050T

  CCH Reference - 2008FED ¶36,330.01

 
Code Sec. 6050U

  CCH Reference - 2008FED ¶36,350.01

 
Code Sec. 6050V

  CCH Reference - 2008FED ¶36,370.068

 
Code Sec. 7513

  CCH Reference - 2008FED ¶42,702.40

  Tax Research Consultant

  CCH Reference - TRC FILEBUS: 12,052.10
CCH Reference - TRC PAYROLL: 3,354.15
 

Tax Analysts report:

Tax Analysts report:

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

  August 15 is the deadline to request a second extension for taxpayers required to pay the Texas revised franchise tax electronically. Taxpayers must use Form 05-164 to request the November 17 extended due date for the 2008 franchise tax report. Combined groups are not required to resubmit the Affiliate List, Form 05-165. More information is available on the Comptroller's Web site at
http://www.window.state.tx.us/taxinfo/franchise/extensions.html.

Release, Office of the Comptroller, August 13, 2008.
 

CCH (cch.taxgroup.com) reports:

  The New York Department of Taxation and Finance has postponed the effective date of the previously announced reversal of its position that a sales tax vendor who sells or rents motor vehicles could use an exempt use certificate when purchasing parking services.  Originally, the effective date of this change was to be September 1, 2008. However, in order to allow a reasonable time for vendors of parking services to implement this change, the effective date of this change is postponed until January 1, 2009. Therefore, vendors of parking services will be required to collect sales tax from vendors who sell or rent motor vehicles on charges made for parking, garaging, or storing motor vehicles beginning January 1, 2009.

  In addition, the Department will not assess sales tax for periods prior to January 1, 2009, if a vendor of parking services accepted a properly completed exemption certificate based upon the information provided in TSB-M-91(7)S, provided the vendor begins collecting sales tax on those services beginning January 1, 2009.

  Subscribers to CCH Tax Research NetWork can view the memorandum.

TSB-M-08(4.1)S, Office of Tax Policy Analysis, Taxpayer Guidance Division, New York Department of Taxation and Finance, August 14, 2008.
 

CCH (cch.taxgroup.com) reports:

  The possibility of a carbon tax in the U.S. is edging closer to becoming a reality as federal officials begin to deal with the effects on the economy of global warming, according to former House Ways and Means senior tax counsel John Gimigliano, who spoke at the KPMG Global Energy Institute web seminar on August 14. Gimigliano, who is now a partner in KPMG's Washington National Tax Practice, helped draft many of the provisions in the Energy Policy Act of 2005 (P.L. 109-58).

  Gimigliano said a tax bill in 2010 could provide an opening for Congress to pass legislation that addresses global warming in a revenue-neutral manner. In 2010, lawmakers must consider capital gains and dividend tax rates, marriage tax penalty relief, estate taxes, child tax credits and the 10-percent tax bracket. In order to keep those provisions from expiring in 2010, Congress might institute a carbon tax that would generate the necessary revenues, Gimigliano suggested. A carbon tax might also pay for renewable energy tax incentives such as wind, biofuel, and solar tax credits.

  By Stephen K. Cooper, CCH News Staff

CCH (cch.taxgroup.com) reports:

  A federal district court lacked subject matter jurisdiction over a corporation's employment tax refund claims because they were untimely filed. For one of the tax years at issue, the refund claim was filed more than ten years after its return was filed and more than two years after its last payment towards its tax liabilities for that year. Further, the corporation failed to demonstrate that its claim for refund for another tax year was timely filed because the copy of the Form 843 allegedly sent to the IRS was unsigned and undated and the IRS had no record of receiving the claim. Assuming that the claim was received by the IRS, it was barred by the limitations period in Code Sec. 6511(a).

Zero Products, Inc., DC Tex., 2008-2 USTC ¶50,484

Other References:

 
Code Sec. 6511

  CCH Reference - 2008FED ¶39,080.2455

 
Code Sec. 7422

  CCH Reference - 2008FED ¶41,688.504

  Tax Research Consultant

  CCH Reference - TRC IRS: 36,052.05
CCH Reference -
TRC LITIG: 9,056
 

CCH (cch.taxgroup.com) reports:

  The IRS has updated guidance on the Employee Plans Compliance Resolutions System (EPCRS), a voluntary correction program for failures and errors in employee retirement plans. EPCRS allows plan sponsors and plan professionals to correct certain plan errors and, thus, retain the tax benefits granted to qualified plans, Code Sec. 403(b) plans, simplified employee pensions (SEPs) and savings incentive match plan for employees (SIMPLE) IRAs. There are three levels of correction programs:

  (1) The Self-Correction Program (SCP) permits a plan sponsor to correct insignificant operational failures in plans without having to notify the IRS and without paying any fee or sanction.

  (2) The Voluntary Correction Program (VCP) allows a plan sponsor, at any time before an audit, to pay a limited fee and receive IRS approval for a correction of a plan.

  (3) The Audit Closing Agreement Program (Audit CAP) allows a sponsor to correct a failure or an error that has been identified on audit and pay a sanction based on the nature, extent and severity of the failure.

  The new guidance makes the following improvements in the existing EPCRS procedures:

  (1) The SCP is expanded to situations in which operational mistakes have been partially corrected when the plan comes under examination, and new examples include employees from Code Sec. 401(k) plans.

  (2) New VCP application procedures apply to SEPS, SARSEPS and SIMPLE IRAs, and existing application procedures are streamlined for several issues, including failure to amend plans for law changes, loan problems, failure to make minimum distributions to participants, excess elective deferrals made by participants to Code Sec. 401(k) plans and plans established by ineligible employers. The new guidance also makes it easier to use VCP to correct loan failures.

  (3) The guidance clarifies that, in particular cases, the IRS may decline to make EPCRS available in the interest of sound tax administration.

  The IRS expects to issue updated guidance to make further improvements to EPCRS and invites comments on how to improve the program. The IRS is particularly interested in comments regarding automatic enrollment in Code Sec. 401(k) plans, designated contributions to Roth IRAs, and efforts to make EPCRS more available to small employers.

  The new guidance is generally effective January 1, 2009, but plan sponsors may apply it on or after September 2, 2008. Rev. Proc. 2006-27, I.R.B. 2006-22, 945, and Section 3 of Rev. Proc. 2007-49, I.R.B. 2007-30, 141, are modified and superseded.

IR-2008-96,
2008FED ¶46,540

Rev. Proc. 2008-50, 2008FED ¶46,541

Other References:

 
Code Sec. 401

  CCH Reference - 2008FED ¶17,507.042

  CCH Reference - 2008FED ¶17,507.043

  CCH Reference - 2008FED ¶17,507.0432

  CCH Reference - 2008FED ¶17,507.0434

  CCH Reference - 2008FED ¶17,507.0437

  CCH Reference - 2008FED ¶17,507.2531

  CCH Reference - 2008FED ¶17,507.331

  CCH Reference - 2008FED ¶17,929.025

  CCH Reference - 2008FED ¶17,929.65

 
Code Sec. 403

  CCH Reference - 2008FED ¶18,282.11

  CCH Reference - 2008FED ¶18,282.41

 
Code Sec. 410

  CCH Reference - 2008FED ¶18,997.25

 
Code Sec. 411

  CCH Reference - 2008FED ¶19,076.954

 
Code Sec. 412

  CCH Reference - 2008FED ¶19,125.60

 
Code Sec. 415

  CCH Reference - 2008FED ¶19,218.0355

 
Code Sec. 501

  CCH Reference - 2008FED ¶22,604.10

 
Code Sec. 509

  CCH Reference - 2008FED ¶22,812.50

 
Code Sec. 521

  CCH Reference - 2008FED ¶22,882.196

 
Code Sec. 7121

  CCH Reference - 2008FED ¶41,090.10

 
Statement of Procedural Rules Sec. 601.201

  CCH Reference - 2008FED ¶43,360.2112

  CCH Reference - 2008FED ¶43,360.2113

  CCH Reference - 2008FED ¶43,360.2116

  CCH Reference - 2008FED ¶43,360.212

  Tax Research Consultant

  CCH Reference - TRC RETIRE: 51,450

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

  On November 4, 2008, Colorado voters will be asked to decide whether the state sales and use tax rate should be raised by 0.2¢ gradually over a two-year period beginning July 1, 2009. The current sales tax rate is 2.9%. If the voters approve the increase, once it is completely phased-in by 2010, the sales tax rate would be 3.1%.

Amendment #51, Colorado Secretary of State, August 11, 2008.
 

CCH (cch.taxgroup.com) reports:

  Distributions paid up the corporate chain from lower tier subsidiaries to the ultimate parent of a unitary group each constituted dividends, creating unitary income to the respective payees within the meaning of Rev. & Tax. Code Sec. 25106, so that the third in the series of three distributions qualified for elimination from income for California corporation franchise and income tax purposes. Furthermore, in the application of Sec. 25106, California follows an earnings and profits ordering rule for dividend payments similar to the federal rules, whereby dividends are deemed paid out of current earnings and profits first and then layered back on a last-in, first-out basis.

 

CCH (cch.taxgroup.com) reports:

  The IRS has finalized proposed regulations (NPRM REG-143326-05) that provide guidance regarding changes made to the rules governing S corporations under the American Jobs Creation Act of 2004 (P.L. 108-357) and the Gulf Opportunity Zone Act of 2005 (P.L. 109-135). The amended regulations also conform to changes made by the Small Business Job Protection Act of 1996 (P.L. 104-188).

  The regulations are necessary to replace obsolete references in the old regulations and to allow taxpayers to make proper use of the provisions that made changes to the law. In particular, the regulations provide guidance on: (1) the S corporation family shareholder rules; (2) the definitions of "powers of appointment" and "potential current beneficiaries" (PCBs) with regard to electing small business trusts (ESBTs); (3) the allowance of suspended losses to the spouse or former spouse of an S corporation shareholder; and (4) relief for inadvertently terminated or invalid qualified subchapter S subsidiary (QSub) elections.

  The final regulations, which follow the proposed regulations with no substantive changes, also remove or amend several references in the regulations under Code Sec. 1361 that cite a specific number of permissible S corporation shareholders and add conforming language to Reg. §1.1361-1(j)(8) regarding passive activity losses and at-risk amounts of qualified subchapter S trusts.

Family Shareholders

 
Code Sec. 1361(c)(1) treats a husband and wife (and their estates) and all members of a family (and their estates) as one shareholder for purposes of the 100-shareholder limitation. Notice 2005-91, 2005-2 CB 1164, informed taxpayers that the Treasury Department and the IRS intended to issue guidance regarding the family shareholder election under Code Sec. 1361(c)(1) and provided that taxpayers could rely on the provisions of Notice 2005-91 until the issuance of that guidance.

  Although the portions of Notice 2005-91 addressing the manner of making the family shareholder election are no longer relevant, and Notice 2005-91 has been obsoleted with the publication of these final regulations, the regulations retain the provisions of Notice 2005-91 describing certain entities other than individuals that will be treated as members of the family.

  The regulations also clarify that the "six-generation" test is applied only at the date specified in Code Sec. 1361(c)(1)((iii) for determining whether an individual meets the definition of "common ancestor," and has no continuing significance in limiting the number of generations of a family that may hold stock and be treated as a single shareholder and there is no adverse consequence to a person being a member of two families.

Unexercised Powers of Appointment

 
Code Sec. 1361(e)(2) provides that, in determining an ESBT's PCBs for any period, powers of appointment will be disregarded to the extent not exercised by the end of that period. This section also increases the period from 60 days to one year during which an ESBT may safely dispose of S corporation stock after an ineligible shareholder becomes a PCB.

  The definition of "potential current beneficiary" is amended to provide that all members of a class of unnamed charities permitted to receive distributions under a discretionary distribution power held by a fiduciary that is not a power of appointment, will be considered, collectively, to be a single PCB for purposes of determining the number of permissible shareholders under Code Sec. 1361(b)(1)(A). However, if the power is actually exercised, each charity that actually receives distributions will also be a PCB.

  The ESBT election requirements under
Reg. §1.1361-1(m)(2)(ii)(A) are amended to require a trust containing such a power to indicate the presence of the power in the election statement. This amended PCB definition applies only to powers to distribute to one or more members of a class of unnamed charities. The amended PCB definition does not apply to a power to make distributions to or among particular named charities.

  The regulations further provide that a power to add beneficiaries, whether or not charitable, to a class of current permissible beneficiaries is generally a power of appointment; thus, it will be disregarded to the extent it is not exercised. However, if the power is exercised and an unlimited class of charitable beneficiaries is added to the class of current permissible beneficiaries, that class will count as a single PCB under the amended definition of PCB and, to the extent distributions are actually made to one or more charities, those charities will each count as PCBs.

Transfer Between Spouses

 
Code Sec. 1366(d)(2) provides that, if the stock of an S corporation is transferred between spouses or incident to divorce underCode Sec. 1041(a), any loss or deduction with respect to the transferred stock that cannot be taken into account by the transferring shareholder in the year of the transfer because of the basis limitation in Code Sec. 1366(d)(1) will be treated as incurred by the corporation in the succeeding tax year with regard to the transferee. The new regulations amend the provisions of Reg. §1.1366-2(a)(5) to include this exception to the general rule of nontransferability of losses and deductions.

QSub Relief

 
Code Sec. 1362(f) provides that QSubs are eligible for relief for an inadvertent invalid QSub election or termination under the same standards applied to an inadvertent invalid S corporation election or termination. The regulations make conforming changes to Reg. §1.1362-4 and make additional changes to that regulation that address the change to Code Sec. 1362(f), which provided relief for corporations with inadvertently invalid S corporation elections.

T.D. 9422, 2008FED ¶47,056

Other References:

 
Code Sec. 1361

  CCH Reference - 2008FED ¶32,022

  CCH Reference - 2008FED ¶32,024A

  CCH Reference - 2008FED ¶32,025D

  CCH Reference - 2008FED ¶32,025H

 
Code Sec. 1362

  CCH Reference - 2008FED ¶32,041

  CCH Reference - 2008FED ¶32,045

 
Code Sec. 1366

  CCH Reference - 2008FED ¶32,080B

  CCH Reference - 2008FED ¶32,082

  CCH Reference - 2008FED ¶32,082F

  Tax Research Consultant

  CCH Reference - TRC SCORP: 156
CCH Reference -
SCORP: 160
CCH Reference -
TRC SCORP: 166
CCH Reference -
TRC SCORP: 404
 

CCH (cch.taxgroup.com) reports:

  Stock acquired by a trust that owned an insurance policy in exchange for ownership rights as part of the demutualization of the insurance company had value but that value could not be determined at the time of acquisition. The trust did not realize any income on the sale of the stock because the amount received was less than its cost basis in the insurance policy as a whole.

  The "open transaction" exception to Reg. §1.61-6 applied because the policyholder's ownership rights did not have a determinable fair market value at the time the insurance policy was acquired. The ownership rights were inextricably tied to and indivisible from the insurance policy. The fact that no specific costs were allocated to the ownership rights indicated that those rights related to values associated with the insurance business as a whole and did not mean that those rights should be valued at zero.

E.A. Fisher, FedCl, 2008-2 USTC ¶50,481

Other References:

 
Code Sec. 61

  CCH Reference - 2008FED ¶5700.01

  CCH Reference - 2008FED ¶5700.17

 
Code Sec. 1001

  CCH Reference - 2008FED ¶29,225.153

  Tax Research Consultant

  CCH Reference - TRC SALES: 9,104.10
CCH Reference - TRC SALES: 36,404
CCH Reference -
TRC VALUE: 1,108
 

CCH (cch.taxgroup.com) reports:

  A corporation was required to produce certain documents that it received from its tax advisors and that had been withheld as privileged or non-responsive to an IRS summons. The corporation was required to produce internal billing records, fax cover sheets, engagement letters and other unredacted internal documents, such as handwritten notes, numerical calculations, internal e-mails and research findings, because it did not establish that the documents contained confidential communications or that the documents were covered by the tax practitioner privilege. Documents that contained only Canadian tax advice or business and accounting advice, rather than federal income tax advice were not statutorily privileged under
Code Sec. 7525. However, documents that reflected confidential communications between the corporation and its counsel were protected under the attorney-client privilege in their entirety.

  Further, the government met its burden of showing that withheld and redacted documents relating to the corporation's transactions surrounding its merger with a Canadian company fell within the tax shelter exception to the tax practitioner privilege and were, therefore, required to be fully disclosed. The government showed the existence of a "plan or arrangement," a significant purpose of which was to avoid federal income tax, and that the communications between the corporation and its tax advisors were made in connection with the promotion of the corporation's participation in a tax shelter. The government was not required to demonstrate that the underlying transaction lacked economic reality, was driven primarily by tax-avoidance concerns in order or aimed at selling or marketing tax shelter products.

Valero Energy Corp., DC Ill., 2008-2 USTC ¶50,482

Other References:

 
Code Sec. 7525

  CCH Reference - 2008FED ¶42,816F.25

  Tax Research Consultant

  CCH Reference - TRC IRS: 21,404

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

  The Tax Court properly determined that the gain from the sale of stock pledged as collateral for a loan was taxable to the founding shareholder, chief executive officer and chairman of the board of a public corporation. The taxpayer's argument that the sale constituted an unlawful conversion of the stock since the shares had been reissued in the creditor's name before the sale without the taxpayer's authorization was rejected. The pledge agreement clearly gave the creditor an unrestricted right to demand payment at any time and to sell the shares to satisfy the taxpayer's outstanding debt obligation. There was no evidence that the agreement was fraudulently induced or that the creditor sold the shares for any reason other than to satisfy the taxpayer's debt.

  In addition, the IRS's application of last-in-first-out (FIFO) method to establish the taxpayer's basis in the shares was sustained. The taxpayers failed to establish that they complied with the regulations that would permit them to use the LIFO method.

  Further, the taxpayer was not entitled to a bad debt deduction for the loan he extended to the corporation because he failed to prove that the loan became worthless in the tax year at issue. The taxpayer's contention that the corporation was insolvent was insufficient to demonstrate that there was no reasonable hope of recovery of the loan. Although the corporation filed for bankruptcy, the evidence indicated that it was capable of paying some of its liabilities because its shares were still valued at more than zero.

  Affirming the Tax Court, 92 TCM 157; CCH Dec. 56,595(M); TC Memo. 2006-174.

J.S. Rendall, CA-10, 2008-2 USTC ¶50,480

Other References:

 
Code Sec. 61

  CCH Reference - 2008FED ¶5504.203

 
Code Sec. 165

  CCH Reference - 2008FED ¶10,001.103

  CCH Reference - 2008FED ¶10,001.438

 
Code Sec. 166

  CCH Reference - 2008FED ¶10,650.352

 
Code Sec. 1012

  CCH Reference - 2008FED ¶29,336.451

  Tax Research Consultant

  CCH Reference - TRC ACCTNG: 222
CCH Reference - TRC BUSEXP: 48,252
 

CCH (cch.taxgroup.com) reports:

  Whether an employer met the worker classification safe harbor requirements under section 503 was a genuine issue of material fact and, therefore, the IRS was denied summary judgment on this issue. The IRS failed to establish that the employer did not consistently treat the salesmen as independent contractors. Although one IRS agent testified that no Forms 1099 or Form 1096 were filed by the employer for one of the tax years at issue, the employer provided copies of forms that he claimed were filed and the salesmen testified that they received them. In addition, the evidence was unclear regarding the employer's reliance on technical advice received from his attorney and the nature of that advice with respect to classification of the salesmen.

  However, the government established that federal income taxes assessed against the employer's operator and his wife and federal employment taxes assessed against the employer's operator were proper and timely. The individual gave his written consent to extend the statute of limitations and the assessments were made within the extended time. Moreover, the government was not required to send a deficiency notice to the individual prior to assessing the employment taxes and the individual consented to the assessment and collection of the income tax deficiency. Finally, the certificate of assessments and payments contained all of the necessary information and established that the taxes were properly assessed.

  The individual's argument that the assessments were incorrect because they did not reflect the innocent spouse relief granted to his wife was rejected. The innocent spouse relief granted to the individual's wife merely relieved her of her liability for the taxes at issue; it did not provide her with any type of credit or other benefit that would result in an adjustment or reduction of the tax liability owed by the non-innocent spouse.

  Federal tax liens arose on all of an individual's property at the time the tax assessments were made. The IRS produced copies of notice of federal tax lien sent to the individual by certified mail. It also treated a letter received from the individual for release of the liens as a request for a Collection Due Process hearing and ultimately denied the individual's request.

  Finally, the individual's wrongful collection action failed because he did not provide any evidence that his bank account was garnished or that he exhausted his administrative remedies before filing his claim.

R. Porter, DC Iowa, 2008-2 USTC ¶50,479

Other References:

 
Code Sec. 3401

  CCH Reference - 2008FED ¶33,538.5056

 
Code Sec. 6015

  CCH Reference - 2008FED ¶35,192.23

 
Code Sec. 6203

  CCH Reference - 2008FED ¶37,514.23

 
Code Sec. 6212

  CCH Reference - 2008FED ¶37,544.20

 
Code Sec. 6320

  CCH Reference - 2008FED ¶38,134.20

 
Code Sec. 6501

  CCH Reference - 2008FED ¶38,967.599

 
Code Sec. 7433

  CCH Reference - 2008FED ¶41,778.14

  Tax Research Consultant

  CCH Reference - TRC PAYROLL: 9,306

  CCH Reference - TRC IRS 27,212

  CCH Reference - TRC IRS 30,202.25

  CCH Reference - TRC IRS 30,254

  CCH Reference - TRC IRS 45,114

CCH (cch.taxgroup.com) reports:

  The IRS has requested comments regarding the possible expansion of the safe harbor valuation regulations under Code Sec. 475 (Reg. §1.475(a)-4) so that financial institutions headquartered outside the United States can qualify to make this election. Under the current regulations, if an eligible taxpayer makes the safe harbor election, the values of certain positions that the taxpayer reports on an eligible financial statement are treated as those positions' fair market values for purposes of Code Sec. 475. However, some internationally headquartered financial institutions have commented that the current safe harbor valuation regulations prevent them from using the safe harbor.

  The IRS requests answers to the following questions:

  (1) If the existing regulatory requirements discussed above were expanded to permit internationally headquartered financial institutions to make the election described in Reg. §1.475(a)-4(b), are a significant number of those institutions likely to make the election?

  (2) If the safe harbor were expanded to include circumstances where the values reported in the U.S. call report of a foreign bank are the same values that are reported in a mark-to-market income statement filed in the bank's home country, how will the IRS be able to match the values used for tax purposes with those on the home country income statement?

  (3) What is the relationship between the call report and the home-country income statement? Are there foreign currency translation considerations between the two? How might those be resolved so that the IRS can effectively and efficiently audit the records?

  (4) If the definition of "applicable financial statement" is expanded, should the applicable financial statement be the one filed by the foreign bank with its home country bank regulator rather than with a home country market regulator (like the SEC)?

  (5) How, if at all, does mark-to-market valuation under IFRS take expenses into account, including funding costs or any similar amount (e.g., cost of carry)?

  (6) In what circumstances is Code Sec. 475 relevant for other purposes of the tax code and in what circumstances do the policies of other sections of the code and the regulations that rely on asset values determined under Code Sec. 475 (including those determined pursuant to an election under Reg. §1.475(a)-4(b)) require special adjustment to the amount determined under Code Sec. 475?

  (7) Should the definition of "eligible method" go beyond the accounting methods that the SEC has accepted? If so, what is an appropriate (and administrable) framework for evaluating whether such a method complies with the basic criteria outlined above?

  Comments should be submitted on or before November 1, 2008, and should include a reference to Notice 2008-71.

Notice 2008-71, 2008FED ¶46,538

Other References:

 
Code Sec. 475

  CCH Reference - 2008FED ¶22,268.042

  Tax Research Consultant

  CCH Reference - TRC SALES: 45,362

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

  The Arizona Department of Revenue has issued a ruling clarifying the imposition of transaction privilege tax on sales of tangible personal property by out-of-state mail-order or Internet-based ("remote") vendors and the responsibility for use tax collection by such vendors. Ascertaining whether a remote vendor is liable for transaction privilege tax, is responsible for collecting use tax, or has no liability for either tax requires a determination of the vendor's nexus with the state.

 

CCH (cch.taxgroup.com) reports:

  The effectiveness of the new limitation on the home sale exclusion imposed by the Housing Assistance Tax Act (P.L. 110-289) may be likened to casting the proverbial wide net to catch a small fish, John Olivieri, partner in White & Case's private clients practice in New York, told CCH in a recent interview. He reasoned that the real abuse --the serial sheltering of gain from the sequential sales of principal residences by those owning three or more properties --could have been prevented more cleanly by simply imposing a 5-year limit or similar restriction on the number of times within which the home sale exclusion could be used. In its place, Olivieri sees unnecessary complexity, especially with respect to recordkeeping to prove precise periods during which a property is used as a principal residence.

  Olivieri also sees as unrealistic the Joint Committee of Taxation's 10-year revenue estimate of $1.4 billion collected from this provision, confirming the impression that the new restrictions are not worth the additional paperwork that will be required. Even considering the scheduled rise in the capital gains rate from 15 percent to 20 percent after 2010, Olivieri speculates that a flat real estate market may limit gains, and, hence, the necessity for the full $250,000 home sale exclusion ($500,000 for joint filers). Of course, many property owners may still have gains, if they bought long ago, but they may still be suffering from recent drops in the real estate market (especially if their properties are mortgaged) and Olivieri questions the sense of choosing this time, when many are smarting from lower real estate prices, to take even more from owners upon sale. He points out that this seems to be at odds with the overall aims of the Housing Assistance Act.

  Another factor to consider in assessing the impact of the new legislation is the decreasing value of the home sale exclusion in general. The exclusion caps have not been adjusted for inflation since its inception in 1997. Adjusted for a CPI that has been relatively modest over the past 10 years, an inflation-adjusted exclusion would now have reached $340,000 ($680,000 for joint filers). Given another 10 years of similar, low inflation, the amounts, if inflation-adjusted, would be $462,000 and $925,000, respectively.

  With gain from a residence converted from a vacation or rental property now being divided into a portion qualifying for the home sale exclusion and a portion that is nonqualifying use, determining precisely when a residence is converted to a principal residence becomes critical for determining the percentage of the gain exclusion the seller will be entitled to claim. Looking at objective factors such as mail delivery, banking activity, food shopping, church attendance, and the like is the only way to make this determination. Under prior law, all that needed to be proved to win a full exclusion was at least two years of use as a principal residence within a five-year ownership period before sale. Now, Olivieri stressed that the exact period of use as a principal residence is necessary to make the proper calculation of the amount of exclusion available.

  Example. Assume ownership of a property takes place between January 1, 2009, and January 1, 2020, and gain on its sale in 2020 is $600,000. Under prior law, proving use as a principal residence for at least two years between 2015 and 2020 was enough for a full $500,000 exclusion if a joint return were filed. Now, proving two years of use as a principal residence only entitles 2/10ths or $120,000 of the $600,000 gain to be sheltered by the home sale exclusion.

  Olivieri forecasts other strategies growing in popularity as the result of the new restrictions, again limiting the true revenue gains that they will bring into the Treasury. Many families simply will hold onto vacation properties rather that sell them, passing them on to their heirs with a date-of-death stepped-up basis of income tax purposes. Others will take a closer look at contributing residences to qualified personal residence trusts, which may become more attractive due to the inability of the contributor to maximize the principal residence exclusion if he or she were to sell the property.

  George Jones, CCH News Staff

CCH (cch.taxgroup.com) reports:

  IRS Commissioner Doug Shulman has selected J. Richard (Dick) Harvey Jr. as a senior advisor to the commissioner. As senior advisor to the commissioner, Harvey will provide guidance and assistance on matters of policy and tax administration. He will also maintain a close partnership between the commissioner's office and the IRS business units responsible for key programs in his areas of expertise, which include financial services tax issues and financial accounting for income taxes.

  Harvey is currently a partner at PricewaterhouseCoopers, where he serves as the U.S. Banking and Capital Markets Team Leader. Harvey will assume his new post on September 2.

IR-2008-95
 

CCH (cch.taxgroup.com) reports:

  A married couple, who bought and sold stocks through their limited liability company (LLC), were not engaged in a trade or business as traders in securities. As a result, the mark-to-market election (Code Sec. 475(f)) made by the LLC was invalid and losses reported by the taxpayers were capital and not ordinary.

  CCH Comment. A taxpayer is considered engaged in the trade or business of trading stock if (1) the taxpayer's trading is substantial and (2) the taxpayer seeks to profit from short-term swings in daily market movements. In evaluating whether trading activities are substantial, courts generally consider the number of executed trades in a year and the amount of money involved.

  In 2000, the couple began buying and selling stocks and reported approximately $280,000 in capital gains. In April 2001, they formed an LLC and made a mark-to-market election. From April through December, they reported an ordinary loss of approximately $180,000 based on 289 trades of stock with an aggregate basis of $933,000 and a collective sales price of $754,000. In 2002, they executed approximately 372 trades and claimed an ordinary loss of $45,000. They traded on 63 days from April through December 2001 or 40 percent of the possible trading days and on 110 days or 45 percent of the possible trading days in 2002. However, the number of trades and the amount of money involved were not sufficient to qualify the couple as traders.

  CCH Comment. For purposes of comparison, the court cited two decisions in which taxpayers were engaged in substantial trading. In the first case, the taxpayers traded stocks or options worth approximately $9 million ( S.A. Paoli, DC Ill., 92-1 USTC ¶50,102). In the second case, the taxpayer executed over 1,100 sales and purchases in each of the years at issue ( F.R. Mayer, 67 TCM 2949, Dec. 49,838(M), TC Memo. 1994-209). In another case, trading activity was held insubstantial when a taxpayer executed at most 83 purchases and 41 sales in one year and 76 purchases and 30 sales in the second year ( J.A. Moller, CA-FC, 83-2 USTC ¶9698, 721 F2d 810).

  Furthermore, the taxpayers were not attempting to catch swings in daily market movements. Their records showed that they rarely bought and sold on the same day. Many of the their stocks were held for more than 31 days. This trading pattern was more consistent with that of an investor than a trader.

  Since the taxpayers were not engaged in a trade or business, various expenses related to their trading activity were not deductible as business expenses. Deductions of investment interest paid were not allowed to the extent the deductions exceeded the limitation placed on investment income.

W. G. Holsinger, TC Memo. 2008-191, Dec. 57,512(M)

Other References:

 
Code Sec. 162

  CCH Reference - 2008FED ¶8521.1475

 
Code Sec. 163

  CCH Reference - 2008FED ¶9403.45

 
Code Sec. 475

  CCH Reference - 2008FED ¶22,268.55

  Tax Research Consultant

  CCH Reference - TRC INDIV: 48,450

  CCH Reference - TRC SALES: 45,052

  CCH Reference - TRC SALES: 45,350

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

  A qualified taxpayer, defined as a taxpayer whose Michigan business activity includes the manufacturing of polycrystalline silicon, may claim a credit against the Michigan business tax based on its consumption of electricity. The credit amount is calculated by multiplying the qualified consumption of electricity by the difference between the projected cost and the guaranteed cost of electricity. "Qualified consumption of electricity" means up to 1.445 million megawatt hours of electricity consumed during the tax year at the facility. The statute provides definitions of "projected cost" and "guaranteed cost" of electricity, based on varying cents per kilowatt hour, depending on the tax year. For tax years that begin after 2011 and before 2016, the credit may be calculated using the actual delivered price of electricity billed under a tariff rate or the projected cost of electricity, whichever is less. In addition, the credit is reduced for the 2022 and 2023 tax years: for the 2022 tax year, the qualified consumption of electricity is cut in half, and for the 2023 tax year, it is multiplied by 25%. The credit is effectively repealed for tax years after 2023.

  The credit may be claimed for 12 years (2012 through 2023) and is claimed after other Michigan business tax credits. If the amount of the credit exceeds the taxpayer's liability, the taxpayer may choose a refund or carry forward the unused amount for up to 10 years.

  The taxpayer must enter an agreement with the Michigan Economic Growth Authority (MEGA) before the end of 2008. MEGA will issue a certificate, which must be attached to the taxpayer's annual tax return.

  According to a press release, this credit is geared towards Dow Corning's Hemlock Semiconductor Corporation, which produces hyper-pure polycrystalline silicon for the semiconductor and solar industries.

Act 262 (S.B. 1270), Act 263 (H.B. 5972), Act 264 (H.B. 5976), Act 265 (S.B. 1267), Act 266 (S.B. 1268), Act 267 (H.B. 5973), Laws 2008, effective August 6, 2008; Press Release , Governor Jennifer M. Granholm, August 6, 2008.

 

CCH (cch.taxgroup.com) reports:

  The IRS has issued procedures that describe circumstances in which it will not treat a debt instrument as an applicable high yield discount obligation (AHYDO), as defined under Code Sec. 163(i), for purposes of Code Sec. 163(e)(5). Under Code Sec. 163(e)(5), a C corporation may not deduct the "disqualified portion" of original issue discount (OID) on an AHYDO issued after July 10, 1989.

Background

  Corporations often obtain financing commitments in advance of borrowing money. According to the IRS, recent events have proven that market conditions can unexpectedly worsen between the time a binding financing commitment is obtained by a corporation and the time the corporation calls upon the lender to perform pursuant to the financing commitment. This can have certain collateral economic consequences, which can result in the issue price of a debt instrument being significantly less than the amount of cash actually received by the corporation for the debt instrument. For federal income tax purposes, this can potentially raise adverse income tax consequences, including the disallowance of interest deductions on the debt instrument under Code Sec. 163(e)(5).

New Procedures

  According to the IRS, the new procedures will provide certainty with respect to the potential tax issues that may result from the issuance of a debt instrument (including a deemed issuance under Reg. §1.1001-3 pursuant to a significant modification of the originally issued debt instrument) in several circumstances. These circumstances involve:

  (1) a debt instrument issued for money pursuant to a financing commitment;

  (2) a debt instrument exchanged for a debt instrument issued pursuant to a financing commitment; and

  (3) a debt instrument indirectly exchanged for a debt instrument issued pursuant to a financing commitment.

  If the procedures apply to a debt instrument, the IRS will not treat it as an AHYDO for purposes of Code Sec. 163(e)(5) and
163(i). The IRS noted that no inference should be drawn as to whether similar consequences would result if a debt instrument falls outside the scope of these procedures. There should also be no inference that, in the absence of these procedures, a debt instrument within its scope would be an AHYDO.

Comment Request

  The IRS is requesting public comments related to these procedures. Comments should be submitted no later than November 15, 2008.

Rev. Proc. 2008-51, 2008FED ¶46,535

Other References:

 
Code Sec. 163

  CCH Reference - 2008FED ¶9303.043

  CCH Reference - 2008FED ¶9303.044

  Tax Research Consultant

  CCH Reference - TRC ACCTNG: 36,262

CCH (cch.taxgroup.com) reports:

  The IRS has issued proposed regulations that revise and clarify rules relating to recapture of the new markets tax credit and will affect certain taxpayers claiming the credit.

  On December 28, 2004, the IRS issued final regulations (T.D. 9171) under Code Sec. 45D with corrections on January 28, 2005. Subsequently, interested groups and organizations requested further guidance on the recapture of the credit, suggesting that revision of the final regulations to reduce uncertainty would promote increased investment of capital in low-income communities.

Overview

  The new markets tax credit was created as part of the Community Renewal Tax Relief Act of 2000 (P.L. 106-554) to encourage investment in economically challenged communities. Taxpayers are allowed to claim a credit for a certain percentage of their qualified equity investment (QEI) in a community development entity (CDE). A CDE is defined as any domestic corporation or partnership primarily organized to serve or provide investment capital for low-income communities or low-income persons. The new markets tax credit must be recaptured if, during the seven years from the original issue date of the qualified equity investment in a CDE, the entity ceases to be a CDE, the substantially all requirement is not met, or the investment is redeemed or cashed out by the CDE. Certain cash distributions by a partnership are not treated as a redemption triggering a recapture event.

Redemption Safe Harbor for Partnership CDEs

  The proposed regulations provide that, in the case of an equity investment that is a capital interest in a CDE that is a partnership, a pro rata cash distribution by the CDE to its partners based on each partner's capital interest in the CDE during the taxable year will not be treated as a redemption for purposes of Reg. §1.45D-1(e)(2)(iii) if the distribution does not exceed the sum of the CDE's operating income for the tax year and the CDE's undistributed operating income (if any) for the prior tax year. In addition, the proposed regulations add tax-exempt income under Code Sec. 103 and any other depreciation and amortization deductions under the Code to the list of Code sections that determine the amount of operating income. Finally, the proposed regulations clarify that a CDE may rely on Reg. §1.704-1(b)(1)(vii) to determine its allocable share of the deductions listed in Reg. §1.45D-1(e)(3)(iii) from another partnership to the CDE's calculation of its operating income.

Termination of a Partnership CDE Under Code Sec. 708(b)(1)(

  If a terminating partnership is a CDE, because of the deemed distribution of interests in the new partnership to the purchasing partner and the other remaining partners, a recapture event may be triggered under Code Sec. 45D(g)(3)(C) and Reg. §1.45D1(e)(2)(iii). However, because the sale of a QEI is not a recapture event under Code Sec. 45D(g)(3) and because the remaining partner or partners are not being cashed out, the IRS does not believe that the sale of a QEI that causes the termination of a CDE partnership under Code Sec. 708(b)(1)( should trigger recapture. Accordingly, the proposed regulations provide that a termination under Code Sec. 708(b)(1)( of a CDE partnership is not a recapture event.

Reasonable Expectations

  The proposed regulations clarify how the reasonable expectations rule of Reg. §1.45D-1(d)(6)(i) applies when a CDE makes an investment in or loan to another CDE. The proposed regulations provide that a CDE may rely on Reg. §1.45D-1(d)(6)(i) to treat an entity as a qualified active low-income community business even if the CDE's investment in or loan to the entity is made through other CDEs. The proposed regulations also clarify that CDEs may rely on
Reg. §1.45D-1(d)(6)(i) if their investments involve the portions of business rule under Code Sec. 45D(d)(2)(C), the rental to others of real property under Code Sec. 45D(d)(3)(A) and the exclusions from the definition of a qualified business under Reg. §1.45D-1(d)(5)(iii).

Comment and Hearing

  A public hearing is scheduled for December 12, 2008, beginning at 10:00 a.m. Outline of topics to be discussed should be received by the IRS by November 3, 2008.

Proposed Regulations, NPRM REG-149404-07, 2008FED ¶49,828

Other References:

 
Code Sec. 45D

  CCH Reference - 2008FED ¶4488

  Tax Research Consultant

  CCH Reference - TRC BUSEXP: 54,900

  CCH Reference - TRC BUSEXP: 54,910

CCH (cch.taxgroup.com) reports:

  A listing of the average annual effective interest rates on new loans under the Farm Credit System has been issued by the IRS. The rates are used in computing the special use value of farm real property for which an election is made under Code Sec. 2032A. The rates may be used by estates that value farmland under Code Sec. 2032A as of a date in 2008.

Rev. Rul. 2008-44, FINH ¶30,595

Other References:

 
Code Sec. 2032A

  CCH Reference - FINH ¶4240.33

  CCH Reference - FINH ¶4240.661

  Tax Research Consultant

  CCH Reference - TRC ESTGIFT: 36,200

Tax Analysts report:

Tax Analysts report:

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

A corporation that purchased manufacturing assets located in New York from an unrelated third-party corporation qualified for the refundable investment tax credit against New York corporate franchise (income) tax as a new business in New York. The taxpayer presented two scenarios under which the corporation might qualify for the credit as a new business.
A "new business" is defined, for purposes of the credit, as any corporation, except
(1) a corporation in which over 50% of the voting stock is owned or controlled, either directly or indirectly, by a taxpayer subject to tax under Article 9-A, 32, 33, or Sec. 183, 184, or 185 of Article 9;
(2) a corporation that is substantially similar in operation and ownership to a business entity (or entities) taxable, or previously taxable, under Article 9-A, 22, 32, 33, or Sec. 183, 184, or 185 of Article 9; or Article 23, or would have been subject to tax under Article 23 (as such article was in effect on January 1, 1980); or
(3) a corporation that has been subject to tax under Article 9-A for more than five taxable years.
Using the facts from the first scenario, the corporation in question was not substantially similar in operation and ownership to any other business entity currently or previously subject to tax in New York. Because the corporation was formed in 2007, it has not been subject to tax under Article 9-A for more than five taxable years. Furthermore, it was determined that more than 50% of the number of shares of stock entitling the stockholders to vote for the election of directors or trustees was not owned or controlled, directly or indirectly, by a taxpayer subject to the relevant portions of the Tax Law. Therefore, the corporation qualified as a new business and was eligible for a refund of the investment tax credit under the first scenario.
The second scenario used the same facts except that directors and officers of one of the parent corporation were not residents of New York. However, the residency of the parent corporation's directors and officers would not be a factor in determining whether that parent corporation would be subject to tax in New York under Article 9-A, so the corporation would still qualify for the refund of the investment tax credit.
TSB-A-08(4)C , New York Commissioner of Taxation and Finance, July 23, 2008, ¶406-129
Other References:
Explanations at ¶12-055

CCH (cch.taxgroup.com) reports:

Individuals and organizations with 25 or more trucks, tractors or other heavy vehicles used on highways must now file Form 2290, Heavy Highway Vehicle Use Tax Return, electronically, the IRS announced. The American Jobs Creation Act of 2004 (P.L. 108-357) provides that taxpayers with at least 25 vehicles must file their Forms 2290 electronically, and the IRS had been putting its excise e-file system in place since last summer. To file electronically, taxpayers need to select an approved transmitter/software provider for Form 2290; more information is available about this on the IRS's website (www.irs.gov/efile/article/0,,id=170570,00.html). Form 720, Quarterly Federal Excise Tax Return, and Form 8849, Claim for Refund of Excise Tax, may also be filed electronically.
IR-2008-94, ETR ¶66,856
Other References:
Code Sec. 4481
CCH Reference - ETR ¶29,545.01
Tax Research Consultant
CCH Reference - TRC EXCISE: 18,000

CCH (cch.taxgroup.com) reports:

For pension plan years beginning in August 2008, the IRS has released the corporate bond weighted average interest rate, the permissible range of interest rates used to calculate current plan liability and to determine the required contribution under Code Sec. 412(l) for plan years through 2008, and the current corporate bond yield curve and related segment rates for the purpose of establishing a plan's funding target under Code Sec. 430(h)(2).
The corporate bond weighted average interest rate for plan years beginning in August 2008 is 6.07 percent; and the 90-percent to 100-percent permissible range is 5.46 percent to 6.07 percent.
The annual rate of interest on 30-year Treasury securities for July 2008, used to determine the minimum present value of a participant's benefit under Code Sec. 417(e)(1) and (2), is 4.57 percent.
For plans electing not to use the transitional rule under Code Sec. 430(h)(2)(G), or for plans whose first year begins after 2008, the 24-month average segments rates for August 2008 are: 5.08 for the first segment; 6.06 for the second segment; and 6.55 for the third segment.
For plan years beginning in 2008, the funding transitional segment rates for August 2008 are: 5.74 for the first segment; 6.07 for the second segment; and 6.23 for the third segment.
For plan years beginning in 2008, the minimum present value transitional segment rates for July 2008 are: 4.69 for the first segment; 5.03 for the second segment; and 5.06 for the third segment.
Notice 2008-69, 2008FED ¶46,534
Other References:
Code Sec. 401
CCH Reference - 2008FED ¶17,730.40
Code Sec. 412
CCH Reference - 2008FED ¶19,125.505
Code Sec. 417
Code Sec. 430
CCH Reference - 2008FED ¶20,161.30
Tax Research Consultant
CCH Reference - TRC RETIRE: 15,304.05
CCH Reference - TRC RETIRE: 15,304.10
CCH Reference - TRC RETIRE: 15,304.15
CCH Reference - TRC RETIRE: 30,170
CCH Reference - TRC RETIRE: 30,556

CCH (cch.taxgroup.com) reports:

IRS third-party summonses issued to a bank in Puerto Rico were not quashed and were ordered enforced because the IRS satisfied the Powell factors. The summonses sought information regarding two bona fide Virgin Islands partnerships that properly filed their returns with the Virgin Islands Bureau of Internal Revenue (VBIR) but that were also required to file U.S. tax returns for any income earned from sources within the United States or on gross income effectively connected to a trade or business in the United States. Because the entities were foreign partnerships within the meaning of Code Sec. 6031(e)(2), the IRS had the authority to issue the summonses for the legitimate purpose of investigating the entities' reporting requirements and whether they reported the proper amounts and the source of the income for the tax years at issue.
Further, the summons request did not violate "the spirit of" the Tax Implementation Agreement (TIA) between the U.S. government and the Virgin Islands, which applied to the facts of this case. The summonses requested information about Virgin Islands entities; they were addressed to the bank's Puerto Rican branch only because that was where the bank's legal counsel's office was situated. Moreover, the entities did not produce any documents to establish that the IRS did not comply with the TIA by failing to notify the VBIR of the summonses before they were issued. Finally, although the IRS was already in possession of some documents requested pursuant to the summons, it was entitled to request the same documents from the bank in order to independently verify the completeness and accuracy of the documents produced by the entities.
Clearwater Consulting Concepts, LLLP, DC V.I., 2008-2 USTC ¶50,472
Other References:
Code Sec. 7602
CCH Reference - 2008FED ¶42,827.33
CCH Reference - 2008FED ¶42,827.562
Code Sec. 7609
CCH Reference - 2008FED ¶42,897.15
CCH Reference - 2008FED ¶42,897.57
Tax Research Consultant
CCH Reference - TRC IRS: 21,108

CCH (cch.taxgroup.com) reports:

A series of transactions entered into to increase the basis of family-owned corporate stock and reduce the capital gain upon the stock's sale, while in compliance with the literal terms of the tax code, lacked economic substance. The transactions (a "Son of BOSS"-type tax shelter), were undertaken pursuant to a tax strategy that was promoted by a law firm and referred to as Basis Enhancing Derivatives Structures ("BEDS").
In the transactions, the family members established separate single-member LLCs, each of which entered into Foreign Exchange Digital Options Transactions (FXDOTs), whereby they simultaneously purchased foreign currency digital long options and sold foreign currency digital short options involving the dollar/euro and the Swiss franc/dollar. Long option premiums paid were netted against the short option premiums to be paid by a bank, resulting in a net premium to be paid by each LLC.
The options were contributed to a pooled family investment partnership in exchange for interests in a partnership. The family members then contributed 50 percent of the corporate stock to the partnership. The digital options expired worthless and each family member contributed their LLC interests, which consisted of only an interest in the partnership to corresponding single-member S corporations, a transfer of over a 50-percent interest in the partnership, causing it to terminate.
The partnership increased the basis in the corporate stock by the long option premiums, not offset by the short option premiums that were paid by the bank. Upon the sale of the stock, the proceeds were offset by a claimed cost basis equal to the long option premiums.
In determining that the calculation of basis complied with the literal terms of the tax code, the court determined that the basis in the stock held by the partnership was not required to be reduced by the value of the short options assumed by the partnership. Under G. Helmer , 34 T.C.M. 727,CCH Dec. 33,225(M) and its progeny, the digital options, which were exercised only on their expiration date, were contingent obligations that did not constitute liabilities for purposes of basis reduction.
Further, while Reg. §1.752-6 requires a partner to reduce basis in a partnership interest by the value of contingent liabilities assumed by the partnership, the regulation could not be applied retroactively to the transactions. Although the regulation explicitly states that it is retroactive in nature, it did not meet the exceptions from the general rule that prohibits retroactive regulations. The regulation exceeded a specific authorization by Congress for the issuance of regulations that would prevent the acceleration or duplication of partnership losses contained in legislation that provided basis rules for contingent liabilities in the corporate context. Additionally, because the regulation exceeded its authority, the exception for regulations that prevent abuse was not an alternative grounds for validating the retroactive application of the regulation.
The court then examined the FXDOT transactions in accordance with Coltec Industries, Inc. , CA-FC, 2006-2 USTC ¶50,389, which requires that transactions have economic substance despite literal compliance with the tax code. The court found that, from an objective viewpoint, the FXDOT transactions lacked economic reality and were not motivated by a business purpose.
The IRS's expert presented the only relevant investment analysis to determine whether a reasonable possibility of profit existed. The analysis, which used generally accepted models employing standard option pricing theories and methodologies, established that the FXDOTs had no appreciable possibility of making a profit. In particular, the expert found that the options were overpriced and that a reasonable investor would expect a negative return, given the possible outcomes and payoffs from the transactions. Additionally, the expert included the costs associated with the transactions and performed an expected-rate-of-return analysis. The costs and fees associated with the transactions exceeded what little profit potential there was.
The managing partner's claim that the FXDOTs were entered into with a profit motive and business purpose was undermined by the fact that the FXDOTs were structured according to the law firm's tax strategy and the premiums paid were calculated to shelter gain from the stock sale and were not based on tax-independent considerations, such as risk on investment. Also negating a business purpose, the FXDOT transactions mimicked a sample digital option transaction sent to the managing partner by a bank that had previously participated in the tax strategy. Further, fees and commissions were paid on the basis of the gain to be sheltered, steps in the strategy unnecessarily increased the cost of executing the FXDOTs and documents were post-dated to conform to the strategy and did not reflect actual transaction dates. Because the transactions lacked economic reality, the transactions were disregarded for tax purposes. Disregarding the FXDOTs meant that the stock basis was unaffected by the transfer of the long options to the partnership.
Alternatively, the transactions could be collapsed under the step transaction doctrine to correspond to their substance. Under the interdependence test, the transactions making up the steps of the tax strategy were dependent and had no independent justification. The steps, such as passing the options from the LLCs to the partnership, increased costs and had no purpose other than producing tax benefits. Under the end result test, the steps taken pursuant to the strategy were structured and intended to result in the sale of the stock and the avoidance of capital gains. Thus, the separate transactions were collapsed into a single transaction. As a consequence of disregarding the steps, the partnership was unable to claim an increase in the basis of the stock.
Penalties
Substantial penalties were imposed as a consequence of the transactions being disregarded for tax purposes.
The valuation misstatement penalty applied because the adjusted basis claimed in the stock exceeded the adjusted basis determined to be correct by more than 400 percent. Although the determination was made at the entity level, the dollar threshold for imposing the penalty had to be determined at the partner level and so was reserved until subsequent partner-level proceedings were filed.
To the extent that the substantial underpayment penalty is calculated in subsequent partner-level proceedings, there could be no reduction for an understatement of tax attributable to substantial authority. The transactions were characterized as statutory tax shelter transactions. Substantial authority did not support the tax treatment claimed on the return. The court's finding that the transactions lacked economic substance displaced the reliance on Helmer and its progeny as substantial authority for the positions taken on the returns. The tax opinion provided by the law firm, while providing ample citations to law, contained factual contentions that the transactions were undertaken for substantial nontax business reasons, which were contradicted by testimony and other evidence.
The negligence penalty was also imposed and could not be negated based on the managing partner's reliance on the advice of professionals. The advice provided to the managing partner was not reasonable and the managing partner did not make a genuine investigation into the profit potential of the FXDOTs. No investigation was made as to the statements in the tax opinion, which were demonstrably false. An investigation could have revealed that the FXDOTs lacked profitability.
Additionally, the managing partner's reliance on his family's long-standing law firm and the law firm providing the tax strategy was not reasonable because both were tainted by conflict-of-interest. The tax strategy law firm could be characterized as a tax shelter promoter based on the proprietary nature of the confidentiality agreements it required and its fees, which were based on the gain sheltered. The long-standing law firm brokered contact with the tax strategy firm and received a fee for its involvement in the strategy that was separate from the fees related to the stock sale. The managing partner was a highly educated professional with financial investment experience, and involvement in his family's tax-planning efforts, who could be presumed to recognize that the tax strategy was to good to be true.
Finally, the reasonable cause and good faith exception to the accuracy-related penalties did not apply. The managing partner's reliance on professional advice was not reasonable, as was determined for purposes of assessing the negligence penalty. Additionally, the legal opinion provided contained assumptions and representations that a bona fide examination would have revealed to be false. The managing partner investigated only the validity of the FXDOTs as an investment vehicle and not whether they were profitable.
Stobie Creek Investments, LLC, FedCl, 2008-2 USTC ¶50,471
Other References:
Code Sec. 752
CCH Reference - 2008FED ¶25,526.17
Code Sec. 6662
CCH Reference - 2008FED ¶39,651G.17
CCH Reference - 2008FED ¶39,651G.81
Tax Research Consultant
CCH Reference - TRC PART: 15,256
CCH Reference - TRC SALES: 3,154
CCH Reference - TRC PENALTY: 3,100

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

On August 5, 2008, Indiana Governor Mitch Daniels called for final legislative passage of a constitutional amendment to make permanent the property tax caps contained in HEA 1001 and proposed giving taxpayers a refund for personal income tax purposes in the years when state revenues exceed those necessary for a balanced budget and rainy day reserves.
A constitutional amendment to make permanent the property tax caps, which limit property taxes to 1% of the value of a home, 2% of agricultural land or rental property, and 3% of any other business beginning in 2010, must be approved by two separate sessions of the General Assembly before it can go to a popular vote. Under Senate Joint Resolution 1 as passed by state lawmakers, effective January 1, 2012, the caps would be placed in the Indiana Constitution. The proposed constitutional amendment would go before the voters in the November 2010 general election only if lawmakers approve the measure again in the next General Assembly.
Governor Daniels also proposed the Automatic Taxpayer Refund, which would ensure that any tax revenues beyond those needed to maintain a balanced budget and adequate rainy day reserves be sent back to taxpayers in the form of a refund. In years when state revenues are above an agreed level needed for fiscal sufficiency, the surplus amount would be returned to taxpayers on a per capita basis in the form of a credit on their next income tax filing.
The governor's plan would require the approval of the General Assembly.
The full text of the new release can be found at the governor's Web site at http://www.in.gov/portal/news_events/24854.htm.
News Release , Office of Indiana Governor Mitch Daniels, August 5, 2008.  

CCH (cch.taxgroup.com) reports:

The proposed revision of the Uniform Division of Income for Tax Purposes Act (UDITPA) and federal preemption of state taxing authority were among the topics discussed at the annual conference of the Multistate Tax Commission (MTC), held on July 30, 2008, in Santa Fe, New Mexico. The discussion continued the following day at a meeting of the MTC's Executive Committee and during the group's annual business meeting, at which action was taken on several proposals.

CCH (cch.taxgroup.com) reports:

A law firm was a successor to its predecessor law firm; therefore, it was liable for the predecessor's unpaid employment taxes and other tax liabilities and could not maintain a wrongful levy action against the government with respect to those liabilities. The corporation had successor liability because it fell within the "continuity" exception to the general rule of state (Pennsylvania) law, which holds that a successor is not liable for the debts of its predecessor firms.
The government established a continuity of ownership, operations and corporate management between the two law firms. The differences between the size and specialization of the two law firms did not cleanse the successor of liability, and the transfer of assets for less than adequate consideration was deemed an artificial transfer of ownership for the purpose of evading liabilities.
Also weighing in favor of applying the continuity exception was the fact that the predecessor law firm ceased to exist, while the successor firm survived, indicating a de facto merger. Finally, the successor firm assumed obligations necessary for uninterrupted continuation of normal business operations, such as the predecessor law firm's lease, clients, personnel, office supplies and malpractice insurance contract, and it continued the firm's relationship with outside service providers such as the predecessor's accountant and payroll service.
Hwang Law Firm, LLC, DC Pa., 2008-2 USTC ¶50,468
Other References:
Code Sec. 7426
CCH Reference - 2008FED ¶41,713.44
Tax Research Consultant
CCH Reference - TRC IRS: 51,156.05

CCH (cch.taxgroup.com) reports:

The IRS has unveiled a settlement initiative for lease-in, lease-out (LILO) and sale-in, lease-out (SILO) tax shelters. Speaking by telephone with reporters on August 6, IRS Commissioner Douglas Shulman explained that the IRS will soon be sending out settlement offer letters to approximately 45 of the nation's largest corporations across a broad spectrum of industries, including banking.
These letters will contain identical offers that carry the same terms and must be accepted for all of a taxpayer's LILO or SILO leases within 30 days; after that time, the offer will be rescinded and no longer available. In return for "putting these cases behind them" and being excused of all underreporting penalties, each corporation will be required in effect to give up most of the deferral benefits of the shelter. The shelters targeted by the initiative represent "billions of dollars in lost tax revenues," Shulman reported.
The initiative is not universal but is "by-invitation-only." The IRS is planning no further announcement of this initiative to the public.
While hundreds of LILO and SILO transactions have taken place, many large corporations reportedly have participated in multiple shelter transactions. Shulman noted that some corporations will not be receiving settlement letters. Neither Shulman nor other IRS officials at the briefing, however, elaborated on how many taxpayers are being excluded from this initiative. Nor did anyone suggest that other taxpayers will be added to the offer-letter list over time. If a corporation that has participated in a LILO or SILO does not receive a letter, Shulman stated that the taxpayer could contact Paul DeNard, LMSB Deputy Commissioner, for the reason.
Settlement Offers
Shulman explained, and the settlement documentation (letters and attachments) distributed with his announcement show, that the settlement has five main features:
--The taxpayer must agree to concede 80 percent of any claimed interest expense deduction, amortized transaction costs, and head lease rent expense for each tax year through 2007;
--The IRS agrees to disregard 80 percent of any reported taxable rental income with respect to SILO or LILO transactions for each tax year through 2007;
--The taxpayer must agree to report in 2008, 80 percent of the original issue discount (OID) connected with the SILO or LILO transactions for each tax year through 2007;
--The taxpayer must exercise best efforts to terminate its SILO or LILO transactions on or before December 31, 2008; and
--The taxpayer must agree to recognize as ordinary income any termination gain, whether realized under an actual or deemed termination.
SILO/LILO Victories
The settlement initiative comes after a recent string of major IRS court victories involving these transactions earlier in the year. In AWG Leasing Trust (DC Ohio, 2008-1 USTC ¶50,370, TAXDAY, 2008/06/10, J.7), a federal district court denied tax benefits to a U.S. partnership related to its alleged purchase of a German waste-to-energy facility as an abusive SILO transaction. In BB&T Corp. (CA-4, 2008-1 USTC ¶50,306, TAXDAY, 2008/05/01, J.6), the Court of Appeals for the Fourth Circuit struck down the tax treatment of a financial services company's lease of wood-pulp manufacturing equipment as a LILO tax shelter, finding a lack of a genuine lease or genuine indebtedness. In Fifth Third Bancorp , DC Ohio, a federal district court jury, applying the economic substance doctrine, denied tax benefits related to a bank's leasing arrangement for passenger rail cars as an abusive LILO transaction.
Taxpayer Equity/IRS Pragmatism
Shulman was clear in representing the issue as one of fairness and equity among the taxpaying populace. "The public has a right to expect that large corporations be good corporate citizens and meet their legal and compliance obligations," he stated. "The nation's leading commercial enterprises have the legal and accounting resources to take full advantage of favorable provisions of the tax law," he continued, "but they are not entitled to use their extensive resources to twist provisions of the tax law to the point that they no longer reflect Congress's intent. As a basic matter of fairness to all taxpayers, the IRS cannot allow LILO and SILO deals to stand."
At the same time, however, Shulman reasoned that the settlement initiative also represented a pragmatic approach. Noting that "hundreds of these transactions" have not yet been examined and/or adjudicated, Shulman concluded that "the time has come to find the most effective way to resolve these existing disputes ... the settlement initiative achieves this." He added that pursuing this initiative against the most blatant offenders instead of following the usual examination and litigation route will allow the IRS to reclaim most of this revenue more quickly and free up its resources for other matters.
The Service expects, Shulman concluded, that offenders will take advantage of the penalty-free settlement as an "opportunity to clean up liabilities and move on."
By George Jones and Torie Cole, CCH News Staff
Remarks of IRS Commissioner Doug Shulman
IRS Letter 4395 (7-2008): Resolution of Lease-In/Lease-Out (LILO) Transactions
Attachment 1 --LILO Initiative
Attachment 2 --LILO Initiative
IRS Letter 4394 (7-2008): Resolution of Sale-In/Lease-Out (SILO) Transactions
Attachment 1 --SILO Initiative
Attachment 2 --SILO Initiative

CCH (cch.taxgroup.com) reports:

The IRS has ruled that the exclusive benefit rule of Code Sec. 401(a)
is violated if the sponsorship of a qualified retirement plan is transferred from an employer to an unrelated taxpayer, and the transfer is not in connection with a transfer of business assets, operations, or employees from the employer to the unrelated taxpayer. This conclusion would hold even if the unrelated taxpayer had some employees covered by the plan after the transaction, or some business assets or operations were transferred, where substantially all the business risks and opportunities under the transaction are those associated with the transfer of the sponsorship of the plan.
Background
For a retirement plan to be a qualified plan under Code Sec. 401(a), the plan must be maintained by the employer for the exclusive benefit of its employees or their beneficiaries. The employer corporation in the ruling's fact pattern transferred sponsorship and responsibilities for an underfunded defined benefit plan with no ongoing accrual of benefits to its wholly-owned subsidiary, which maintained no trade or business, had no employees, and had nominal assets. The employer then transferred assets to the subsidiary in an amount equal to the plan's underfunding, plus an additional margin. The employer corporation transferred ownership of the subsidiary to an unrelated corporation, at which point the subsidiary became a member of the unrelated corporation's controlled group rather than the employer corporation's controlled group. No assets (other than the assets to fund the plan), employees or operations were transferred, and the only business risk or opportunity in the transaction for the unrelated corporation was to profit from the acquisition and operation of the plan.
Exclusive Benefits Rule Violated
After transfer of the subsidiary, the plan would no longer satisfy the exclusive benefits rule because it was no longer maintained by the employer. By itself, the transfer of the retirement plan to the employer's subsidiary would not violate the exclusive benefit rule because the subsidiary was a member of the employer corporation's controlled group and, therefore, treated as the employer under Code Sec. 414(b). However, upon the sale of the stock in the subsidiary to the unrelated corporation, the subsidiary would no longer be part of the employer's controlled group. The rule under Code Sec. 414(a), that service for a predecessor employer is treated as service for the current employer, did not change this result because the unrelated corporation's controlled group was not the employer.
CCH Comment. As a result of a transaction such as this one, the funding and portfolio risk of a plan would in effect be outsourced to another party and the funding obligation would be removed from the employer's books. The IRS arguably stretched a bit here because the exclusive benefits rule guards against diversion of benefits and under the facts of the ruling, the employees' benefits were fully funded with a cushion. Moreover, IRC language is less than crystal clear that the exclusive benefit has to be provided by the employer as opposed to some other party, especially after benefits cease to accrue. Still, a retirement plan without an employer on the hook is a sufficient novelty that it is not surprising that the IRS refused to green light this sort of deal.
Rev. Rul. 2008-45, 2008FED ¶46,532
Other References:
Code Sec. 401
CCH Reference - 2008FED ¶17,515.55
CCH Reference - 2008FED ¶17,515.72
Code Sec. 414
CCH Reference - 2008FED ¶19,150A.70
CCH Reference - 2008FED ¶19,156A.30
Tax Research Consultant
CCH Reference - TRC RETIRE: 48,150
CCH Reference - TRC RETIRE: 54,100

CCH (cch.taxgroup.com) reports:

The IRS has issued proposed regulations concerning substantiation and reporting requirements for cash and noncash charitable contributions under Code Sec. 170. The regulations reflect the enactment of Code Sec. 170(f)(11) by the American Jobs Creation Act of 2004 (AJCA) (P.L. 109-357), which requires taxpayers to obtain a qualified appraisal for donated property if the taxpayer is claiming more than a $5,000 deduction, or attach to the tax return a qualified appraisal for contributions of property for which a deduction of more than $500,000 is claimed (Code Secs. 170(f)(11)(C) and (D)). The regulations also reflect the amendment of Code Sec. 170(f)(11)(E) by the Pension Protection Act of 2006 (PPA) (P.L. 109-280), which provides statutory definitions of the terms "qualified appraisal" and "qualified appraiser".
Notice 2006-96
Notice 2006-96, I.R.B. 2006-46, 902, provided transitional safe harbor definitions for the terms "qualified appraisal" "generally accepted appraisal standards," "appraisal designation," "education and experience in valuing the type of property," and "minimum education and experience." Those definitions apply to contributions of property for which a deduction of more than $5,000 is claimed on returns filed after August 17, 2006. All comments received regarding the definitions of the terms were considered in drafting these proposed regulations.
Monetary Gifts
Proposed Reg. §1.170A-15 would implement the requirements of Code Sec. 170(f)(17), as added by the PPA, and provide that a deduction is only allowed for any contributions of cash, check or other monetary gifts where the donor maintains a record of the contribution. This record can be in the form of a bank record or written communication from the donee; the record must show the name of the donee and the date and amount of the contribution. Where a bank statement does not include the name of the donee, a monthly bank statement and a photocopy or image obtained from the bank of the front of the check indicating the name of the donee is satisfactory. However, an exception to the substantiation requirement is provided by the proposed regulations for unreimbursed expenses of less than $250 incurred incident to the rendition of services to a charitable organization.
Revised Requirements
As under the present rules, the proposed regulations provide that donors who claim deductions for noncash contributions of less than $250 are required to obtain a receipt from the donee or keep reliable records. The proposed regulations provide that donors who make contributions over $250 but not more than $500 are only required to obtain a contemporaneous, written acknowledgment, under Code Sec. 170(f)(8) and Reg. §1.170A-13(f), and are not required to obtain any other written records.
For claimed contributions over $500 but not more than $5,000, the donor must obtain a contemporaneous written acknowledgment and file a completed Form 8283 with the return on which the deduction is claimed. For claimed contributions of more than $5,000, in addition to a contemporaneous written acknowledgment, a qualified appraisal is generally required, and either Section A or Section B of Form 8283, depending upon the type of property contributed, must be completed and filed with the return on which the deduction is claimed. For claimed contributions of more than $500,000, the donor must attach a copy of the qualified appraisal to the return. In addition, the substantiation requirements also apply to the return for any carryover year under Code Sec. 170(d).
Reasonable Cause Exception
An exception in Code Sec. 170(f)(11)(A)(ii)(II) overrules the above-stated noncash substantiation requirements. To apply, the donor must show that the failure to meet these requirements is due to reasonable cause and not willful neglect. Under the proposed regulations, to satisfy the exception, the donor must submit a detailed explanation with his or her return, stating why the failure to comply was due to reasonable cause and not willful neglect, and he or she must have timely obtained a contemporaneous, written acknowledgment and a qualified appraisal, if applicable. Consistent with congressional intent of reducing valuation abuses, the "reasonable cause" exception will most likely be strictly construed. In addition, the "good-faith omission" provision found inReg. §1.170A-13(c)(4)(H) has been superseded.
New Requirements
The proposed regulations are similar to the guidance provided in Notice 2006-96, except that they require compliance with the substance and principles of the Uniform Standards of Professional Appraisal Practice (USPAP). Section 3.02(2) of the notice merely requires an appraisal that is "consistent" with USPAP. The proposed regulations also would clarify the current rules. For example, the current regulations require an appraisal to be made no earlier than 60 days before the contribution date. Under the proposed rules, the valuation effective date, which is the date to which the value opinion applies, generally must be the date of the contribution. Where the appraisal is prepared before the contribution date, the valuation effective date must be no earlier than 60 days before and no later than the contribution date.
Qualified Appraiser
Many of the requirements from the current regulations have been incorporated into the proposed regulations. However, the required appraiser declarations have been modified. In addition, believing it sufficient for an appraiser to satisfy the more stringent requirement of verifiable education and experience, the proposed regulations provide that an appraiser has verifiable education and experience if he or she has successfully completed professional or college-level coursework in valuing the relevant type of property, and has two or more years of experience in valuing that type of property.
Clothing, Household Items
Proposed Reg. §1.170A-18 provides that no deduction is allowed for any contribution of clothing or a household item unless it is in good used condition or better, thus ensuring that donated clothing and household items are "of meaningful use to charitable organizations," as set forth in the Joint Committee on Taxation Technical Explanation of the PPA (JCX-38-06). However, this rule does not apply to a contribution of a single item of clothing or a household item for which a donor claims a deduction of more than $500, provided the donor submits a qualified appraisal with the return on which the deduction is claimed.
Effective Date
These proposed regulations are proposed to apply to contributions occurring after the date regulations are published as final in the Federal Register.
Comments, Public Hearing
Written or electronic comments and requests for a public hearing must be received by November 5, 2008. Send submissions to: CCA:LPDR (REG-140029-07), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, D.C., 20044, or they may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m., Courier's Desk, Internal Revenue Service, 1111 Constitution Ave. NW., Washington, D.C. 20224, or sent electronically via the Federal eRulemaking Portal at www.regulations.gov.
Proposed Regulations, NPRM REG-140029-07, 2008FED ¶49,827
Other References:
Code Sec. 170
CCH Reference - 2008FED ¶11,602C
CCH Reference - 2008FED ¶11,606C
CCH Reference - 2008FED ¶11,686C
CCH Reference - 2008FED ¶11,715
CCH Reference - 2008FED ¶11,720
CCH Reference - 2008FED ¶11,725
CCH Reference - 2008FED ¶11,730
Tax Research Consultant
CCH Reference - TRC INDIV: 51,454
CCH Reference - TRC INDIV: 51,456
CCH Reference - TRC INDIV: 51,458
CCH Reference - TRC INDIV: 51,462
CCH Reference - TRC CCORP: 9,350

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

An individual was entitled to challenge his underlying tax liability during a Collection Due Process hearing because he did not receive a notice of deficiency in time to petition the court. The IRS did not produce any evidence that the notice of deficiency was sent to the taxpayer at his address in prison where he resided at the time a notice was sent to his home and during the period in which he could have petitioned the court. The fact that the taxpayer's wife petitioned the court in response to a notice sent to her home only showed that she received the notice and that it was mailed to the couple's personal residence; it did not show that the taxpayer received the notice.
M.L. Conn, TC Memo. 2008-186, Dec. 57,507(M)
Other References:
Code Sec. 6330
CCH Reference - 2008FED ¶38,184.12
Tax Research Consultant
CCH Reference - TRC IRS: 51,056.05
 

CCH (cch.taxgroup.com) reports:

The IRS has issued proposed regulations providing guidance on the reduction of a S corporation's tax attributes when excluding income from the discharge of indebtedness, or cancellation of debt (COD) income, under Code Sec. 108.
Background
When a taxpayer is relieved of a duty to pay an indebtedness, Code Sec. 61 mandates that the discharged debt be included in income. However, Code Sec. 108 provides relief from this inclusion if a taxpayer is bankrupt or insolvent, or in the case of other types of discharged debt, such as qualified farm indebtedness or qualified real property business indebtedness. In these cases, Code Sec. 108(b) requires that certain tax attributes must be reduced and, unless a taxpayer elects to first reduce the basis of depreciable property, the first attribute to be reduced is any net operating loss (NOL) for the year of discharge and any NOL carried over to the year of discharge.
Special rules apply to the COD income of an S corporation. Under Code Sec. 108(d)(7)(A), the reduction of tax attributes is applied at the corporate level. Under Code Sec. 1366(d), the rules governing the taxation of shareholders of an S corpration, a shareholder cannot take into account losses and deductions that are in excess of the shareholder's basis in the stock and debt of the S corporation and, under Code Sec. 108(d)(7)(, any loss or deduction consequently disallowed is treated as a NOL of the S corporation (deemed NOL).
Proposed Rules
The proposed regulations clarify that any disallowed losses or deductions, including those of a shareholder who had transferred all stock during the year, are included in an S corporations deemed NOL. The proposed regulations also provide that if the deemed NOL exceeds the discharged COD income, the excess deemed NOL is allocated to the shareholders as disallowed losses and deductions which can subsequently be taken into account by the shareholders. The method of allocation is based upon each shareholder's disallowed losses and deductions in excess of the amount of COD income that would have been taken into account by each shareholder. Further, any excess deemed NOL allocated to a shareholder that had transferred all of the shareholder's stock during the year of discharged is permanently disallowed.
The proposed regulations also provide that the allocated excess deemed NOL retains the character in the hands of the shareholder that it had for the S corporation, and that, in order to preserve the ordering rules of Code Sec. 108(b)(2), any ordinary loss or deduction that was disallowed and included in the S corporation' deemed NOL is reduced before any disallowed capital loss included in the deemed NOL.
Finally, due to the importance of both the S corporation and other shareholders knowing the amount of each shareholder's disallowed or suspended losses, the proposed regulations require shareholders of an S corporation that excludes COD income to provide information regarding suspended losses to the S corporation. The proposed regulations also require the S corporation to then notify all shareholders of the amount of excess deemed NOL allocated to a shareholder, even if the amount is zero.
Hearing and Comments
A public hearing is scheduled for December 8, 2008, at 10 a.m. Written or electronic comments and outlines of topics to be discussed at the hearing must be received by the IRS by November 4, 2008. The IRS specifically requests comments regarding proposed alternate methods of allocating excess deemed NOLs.
Proposed Regulations,NPRM REG-102822-08, 2008FED ¶49,826
Other References:
Code Sec. 108
CCH Reference - 2008FED ¶7006C
Tax Research Consultant
CCH Reference - TRC SCORP: 404.10
 

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

  The taxpayer corporation and its subsidiary companies were entitled to use the percentage-of-completion (PCM) method to report income from a highway project as income from a long-term contract. The contract fell within the purpose of Code Sec. 460 because it created long-term construction obligations on behalf of the corporation without regard to any proof of defect. Although the corporation did not directly perform any construction work, it designed the road, managed its construction and was fully responsible for the final constructed product; thus, it bore the obligations of a general contractor.

  The corporation also bore the entire expense for the reconstruction, rehabilitation and preventive maintenance work needed to assure the road's performance over the next two decades. Both parties to the agreement knew with certainty that extensive construction work would occur in the future; they were only uncertain of the amount or timing of the future costs. Further, pavement and structure "warranties" in the agreement were not traditional warranties which would not have been eligible for PCM treatment. The corporation's duties were greater than those under a standard warranty and were not incidental to the underlying obligation. Instead, the provisions at issue were performance warranties that were separately negotiated and priced. The label was not controlling or even relevant; the substance and actual obligations incurred by the corporation indicated that the provisions were part of a long-term contract.

Koch Industries, Inc., DC Kan., 2008-2 USTC ¶50,465

Other References:

 
Code Sec. 460

  CCH Reference - 2008FED ¶21,560.30

  Tax Research Consultant

  CCH Reference - TRC ACCTNG: 33,100

CCH (cch.taxgroup.com) reports:

  An individual made a valid Code Sec. 83(b) election following the exercise of incentive stock options (ISOs), could not claim a "claim of right" deduction when nonvested shares were forfeited and could not claim alternative minimum tax (AMT) capital losses as an alternative tax net operating loss (ATNOL). Because the purpose of a Code Sec. 83(b) election is to realize income on assets that otherwise would not be included in income under Code Sec. 83(a) due to a substantial risk of forfeiture, the mere fact that an asset is subject to a substantial risk of forfeiture is no justification either for excluding it from the definition of "property", or for invalidating an otherwise valid Code Sec. 83(b) election. Further, there was no merit in the taxpayer's argument that depositing the nonvested shares into an escrow account did not satisfy Reg. § 1.83-3(e). The taxpayer did not provide any evidence to show that the escrow account used by his employer was inadequate to protect his shares from the employer's creditors.

  Further, the taxpayer was not entitled to a "claim of right" deduction under Code Sec. 1341 with respect to the forfeited, nonvested shares that were subject to a valid Code Sec. 83(b) election. Code Sec. 83(b)(1) specifically disallows any deduction with respect to forfeiture of nonvested shares subject to a valid deduction, and Reg. §1.1341(a)(1) only permits deductions allowable under other provisions of the Internal Revenue Code.

  Finally, the taxpayer's AMT capital losses were subject to the limitations on capital loss deductions in Code Secs. 172(d) and 1211(b); consequently, they were not deductible as ATNOL under Code Sec. 56(d)(2)(A)(i). Under Code Sec. 172, net capital losses are excluded from the computation of ATNOL; the taxpayer could only claim them as direct adjustments to AMT income, subject to other limitations.

  Affirming the Tax Court, 127 TC 184, Dec. 56,670.

A.J. Kadillak, CA-9, 2008-2 USTC ¶50,462

Other References:

 
Code Sec. 55

  CCH Reference - 2008FED ¶5101.14

 
Code Sec. 56

  CCH Reference - 2008FED ¶5210.57

  CCH Reference - 2008FED ¶5210.63

 
Code Sec. 83

  CCH Reference - 2008FED ¶6390.465

  CCH Reference - 2008FED ¶6390.77

 
Code Sec. 1341

  CCH Reference - 2008FED ¶31,882.227

  Tax Research Consultant

  CCH Reference - TRC COMPEN: 27,108.05
CCH Reference - TRC FILEIND: 30,156.10
CCH Reference - TRC FILEIND: 30,204
 

CCH (cch.taxgroup.com) reports:

  The IRS has released a fact sheet discussing the reporting requirements of U.S. taxpayers who set up, own, receive distributions from or transfer money or property to a foreign trust. The fact sheet is part of an IRS series on the international tax gap. The IRS stresses that, although there are legitimate reasons why a U.S. person may be involved with a foreign trust, transactions with the trust could subject the taxpayer to U.S. tax consequences and cause the taxpayer to incur filing requirements.

  A taxpayer who sets up or contributes money or property to a foreign trust, receives distributions from a foreign trust, or receives certain gifts or bequests from foreign entities is required to file Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts. In addition, a foreign trust with a U.S. owner is required to file Form 3520-A. Other potential reporting requirements include: Form 1040, Schedule B, Part III, Foreign Accounts and Trusts; TDR 90-22.1: Report of Foreign Bank and Financial Accounts; Form 709, Gift Tax Return; and Form 1040NR. The IRS also explained the tax consequences of different types of transactions between a foreign trust and U.S. taxpayer and warned taxpayers against using offshore schemes aimed at avoiding or deferring U.S. taxation.

IRS Fact Sheet: Foreign Trust Reporting Requirements
 

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

The California Franchise Tax Board (FT has unveiled a new Web page to address the many personal income tax issues that impact same-sex married couples (SSMCs) in light of the California Supreme Court's decision in In re Marriage Cases , 43 Cal. 4th 757 (2008), in which the Court ruled that same-sex couples are allowed to be legally married in California. The FTB explains that SSMCs are spouses under California tax law and are therefore required to file joint returns or file married filing separately. The FTB explains that a SSMC spouse can file as head of household if he or she otherwise meets the requirements for filing as head of household. Community property laws apply for state tax purposes. Also addressed are the specific deductions and exemptions that will differ on the federal and California tax returns. Finally, the FTB explains that SSMCs are eligible for innocent spouse relief.
The information can be found by searching for "SSMC" on the FTB's Web site at: http://www.ftb.ca.gov.
Same-Sex Married Couples , California Franchise Tax Board, July 31, 2008.

CCH (cch.taxgroup.com) reports:

The IRS is seeking comments from the public regarding a proposal to require taxpayers to report, for purposes of the passive activity loss (PAL) rules under Code Sec. 469 and Reg. §1.469-4, their grouping and regrouping of activities, as well as any addition or disposition of specific activities within their current grouping. There are no current rules requiring the reporting of a taxpayer's groupings, except those provided in Reg. §1.469-9(g), pertaining to the election available to certain real estate professionals.
According to the IRS, the lack of a general reporting system regarding taxpayer groupings has made it difficult for the IRS and taxpayers to verify taxpayers' historical groupings. The IRS believes that its proposed reporting requirements would alleviate this problem without unduly burdening taxpayers.
Proposed Reporting Requirement
The proposed reporting requirement would, in general, require taxpayers to report to the IRS, as part of their regular annual return, changes to a taxpayer's groupings. It would apply to all taxpayers, whether individuals or entities, to whom the rules under Reg. §1.469-4 apply. It would not apply to taxpayers who have made the election under Reg. §1.469-9(g).
Under the proposal, a written statement would be required for:
(1) the first tax year in which one or more trade or business activities or rental activities are originally grouped as a single activity or as separate activities.
(2) the first tax year in which a taxpayer adds a new trade or business activity or a rental activity to an existing grouping.
(3) a tax year in which the taxpayer disposes of a specific trade or business activity or a rental activity from an existing grouping.
A written statement would also need to be filed for a tax year in which the taxpayer is required to regroup trade or business activities or rental activities. Regrouping is required, under Reg. §1.469-4(e)(2), if it is determined that the taxpayer's original grouping was inappropriate or that a material change in the facts and circumstances has occurred that makes the original grouping clearly inappropriate.
There would not be a requirement to file a written statement to report the grouping of the trade or business activities or rental activities that have been made as of the effective date of any published final guidance until the taxpayer makes a change as described above.
Except as provided in Reg. §1.469-4(d)(5) (pertaining to "sec. 469 entities," i.e., C corporation, S corporations and partnerships subject to Code Sec. 469), in the event that a taxpayer is engaged in two or more trade or business activities or rental activities and fails to report whether the activities have been grouped as a single activity or as separate activities in accordance with these proposed rules, each activity will be treated as having been grouped as a separate activity for purposes of applying the passive activity loss and credit limitation rules of Code Sec. 469.
Request for Comments
The IRS noted that the proposal is not the only way to implement a reporting system for taxpayer groupings under Code Sec. 469. Public comments are requested on the proposal and, especially, whether it sufficiently balances the need for reporting with the burden of compliance. Comments on other possible approaches are also requested. Comments must be submitted, by mail or electronically, by November 4, 2008.
Notice 2008-64, 2008FED ¶46,530
Other References:
Code Sec. 469
CCH Reference - 2008FED ¶21,966.03
CCH Reference - 2008FED ¶21,966.031
CCH Reference - 2008FED ¶21,966.0552
Tax Research Consultant
CCH Reference - TRC BUSEXP: 33,102.15
CCH Reference - TRC BUSEXP: 33,650
CCH Reference - TRC BUSEXP: 33,652

CCH (cch.taxgroup.com) reports:

The IRS and Treasury Department have proposed amendments to Reg. §§1.460-3, 1.460-4, 1.460-5 and 1.460-6, that would provide guidance to the home construction industry on accounting for certain long-term construction contracts that qualify as home construction contracts under Code Sec. 460(e)(6). Guidance has also been proposed for taxpayers with long-term contracts under Code Sec. 460(f) regarding certain accounting method changes.
Code Sec. 460(a) requires taxpayers to use the percentage-of-completion method (PCM) to account for taxable income from any long-term contract, but Code Sec. 460(e) exempts home construction contracts from this general requirement. Under Code Sec. 460(e)(6), a "home construction contract" is any construction contract in which 80 percent or more of the total estimated contract costs are reasonably expected to be attributable to the construction of: (a) dwelling units in buildings containing four or fewer dwelling units, and (b) improvements to real property directly related to and located on the site of the dwelling units.
Code Sec. 460(e)(4) defines a "construction contract" as any contract for the building, construction, reconstruction or rehabilitation of, or the installation of any integral component to or improvement of, real property. The proposed regulations would expand the types of contracts eligible for the home construction contract exemption, and amend the rules for how taxpayer-initiated accounting method changes that comply with the regulations can be implemented.
The proposed regulations provide that a contract for the construction of common improvements is considered a contract for the construction of improvements to real property directly related to and located on the site of the dwelling units, even if the contract is not for dwelling unit construction. Thus, a land developer that sells individual lots (and its contractors and subcontractors) might have long-term construction contracts that qualify for the home construction contract exemption. The proposed regulations also permit an individual condominium unit to be considered a "townhouse" or "rowhouse" under the exemption, so that each condominium unit can be treated as a separate building in determining whether the underlying contract qualifies.
Under the current regulations, a taxpayer that uses the PCM or exempt-contract PCM, or elects the 10-percent method or special alternative minimum taxable income (AMTI) method, or that adopts or elects a cost allocation accounting method or changes to another method with IRS consent, must apply the method consistently for all similarly classified contracts until the taxpayer obtains consent under Code Sec. 446 to change to another accounting method. A taxpayer-initiated accounting method change is allowed only on a cut-off basis (i.e., only for contracts entered into on or after the year of change), so a Code Sec. 481(a) adjustment is not permitted or required.
The proposed regulations continue the cut-off method only for taxpayer-initiated changes: (1) from a permissible PCM method to another permissible PCM method for long-term contracts for which PCM is required, and (2) from a cost allocation method that complies with the Reg. §1.460-5 rules to another complying cost allocation method. All other taxpayer-initiated changes under Code Sec. 460 will be made with a Code Sec. 481(a) adjustment.
In determining the hypothetical tax underpayment or overpayment for any year as part of the look-back computation, the proposed regulations provide that amounts reported as Code Sec. 481(a) adjustments must generally be taken into account in the tax year(s) they are reported. In determining whether there is a hypothetical underpayment or overpayment, a taxpayer would use amounts reported under its old method for the years that method was used, and amounts reported under its new method for the years the new method was used, netted against the amount of any required Code Sec. 481(a) adjustments.
Thus, a look-back computation would not be required upon contract completion simply because the taxpayer has changed its accounting method, but would be required if actual costs or the contract price differ from the estimated amounts notwithstanding that an accounting method change occurred. The IRS and Treasury request comments on issues that taxpayers might foresee regarding these proposed rules.
The IRS and Treasury also expect to propose specific severing and completion rules for home construction contracts accounted under the completed-contract accounting method. They request comments specifically on the circumstances in which it would be inappropriate to require severing and completion of a home construction contract to be determined on a dwelling-unit-by-dwelling-unit or lot-by-lot basis, or on the basis of when the taxpayer receives payment(s) under the contract.
A public hearing on the proposals has been scheduled for December 5, 2008, beginning at 10:00 a.m. Written comments must be received by November 3, 2008. Outlines of topics to be discussed at the public hearing must be received by November 13, 2008.
Proposed Amendments of Regulations, NPRM REG-120844-07, 2008FED ¶49,825
Other References:
Code Sec. 460
CCH Reference - 2008FED ¶21,554CE
CCH Reference - 2008FED ¶21,555CE
CCH Reference - 2008FED ¶21,556CE
CCH Reference - 2008FED ¶21,557CE
Tax Research Consultant
CCH Reference - TRC ACCTNG: 33,066
CCH Reference - TRC ACCTNG: 33,152.05
CCH Reference - TRC ACCTNG: 33,352

Tax Analysts report:

Tax Analysts report:

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

  Massachusetts Governor Deval Patrick has signed legislation authorizing a sales tax holiday on August 16 and 17, 2008. On those days, sales tax does not apply to nonbusiness retail sales of tangible personal property costing $2,500 or less per item. The tax holiday does not apply to sales of telecommunications, tobacco products, gas, steam, electricity, motor vehicles, motorboats, or meals.

H.B. 4995, Laws 2008, effective July 30, 2008.
 

CCH (cch.taxgroup.com) reports:

  The IRS abused its discretion in denying a request for equitable innocent spouse relief under Code Sec. 6015(f). The taxpayer satisfied the relevant safe harbor conditions set out in Rev. Proc. 2000-15, 2000-1 CB 448. Her husband had died so she was no longer married. At the time the returns were filed, she had no knowledge or reason to know that the tax would not be paid by her husband. Finally, she would suffer economic hardship if relief were not granted because the payment of the underlying liabilities would prevent her from paying basic living expenses.

K.S. Alioto,
Dec. 57,506(M)

Other References:

 
Code Sec. 6015

  CCH Reference - 2008FED ¶35,192.25

  Tax Research Consultant

  CCH Reference - TRC INDIV: 18,058.15

CCH (cch.taxgroup.com) reports:

  The Pension Protection Act of 2006 (PPA) (P.L. 109-280) continues to have a tremendous effect on many retirement plan practitioners. While understanding of the statute has finally begun to sink in, the IRS and Treasury are now struggling with administering its requirements, especially for defined benefit plans with complex actuarial calculations. Most recently, the agencies listened to practitioners debate a perceived "revolving door" of regulation at a July 31 hearing on multiemployer defined benefit plan regulations (NPRM REG-110136-07, I.R.B. 2008-17, 838; TAXDAY, 2008/03/21, I.1). Practitioners clearly signaled their disagreement with a proposed rule regarding underfunded multiemployer defined benefit plans.

Critical Status

  According to testimony from Barry S. Slevin, on behalf of the United Food and Commercial Workers International Union, multiemployer defined benefit plans with less than 65 percent of the resources required to pay their expected future distributions are referred to as "critical status" plans. These critical status plans must adopt a "rehabilitation plan" that actuaries project will make up the difference between their liabilities and ability to pay within the course of 10 years. After adoption of a rehabilitation plan, Code Sec. 432(e)(4)( notes that the plan may emerge out of critical status within a year if the gap between its ability to pay and distribution liabilities has finally been projected by an actuarial certification to be met within 10 years, Slevin reported. The controversy is, however, that while both actuaries and attorneys alike argue that this period may be extended, the proposed regulations state otherwise.

  Slevin pointed out that, under Code Sec. 432(e)(4)(, multiemployer defined benefit plans are allowed to take into account extensions of the period over which their ability to pay their liabilities is projected, up to a maximum of five years. However, the proposed regulations require plans to ignore these extensions when applying the emergence out of critical status test. The result of not being allowed to use a 15-year projection period, some practitioners state, is that the plan is continuously stuck with a critical status classification.

Disagreement

  Edward Groden, testifying on behalf of the New England Teamsters & Trucking Industry Pension Fund, reported that this provision is an unlawful addition to the statutory rehabilitation plan requirement and is a hardship for employers and plan participants. He criticized the requirement as too difficult to implement and extraneous to the language of Code Sec. 432.

  Connie Leyva, testifying on behalf of the Southern California United Food & Commercial Workers Unions and Food Employers Joint Pension Trust Fund, agreed, asking the Treasury and the IRS to allow multiemployer defined benefit plans to use the extensions in determining whether the plan is in critical status. Leyva explained that, before the effective date of the regulations, her plan had proactively determined it was in critical status and adopted its own rehabilitation plan. If the unions would have to recalculate the status of their plan using a 10-year period, it is likely the plan would fall within the critical status classification again, forcing more reduction in benefits and increased plan participant contributions.

  Stephen Rosenblatt, testifying on behalf of the Sheet Metal Workers' National Pension Fund, also agreed. Rosenblatt pointed out that disallowing extensions of the period for actuarial projections could force plans to make more dramatic benefits cuts. Despite existing exceptions, he emphasized, these reductions could even lead to a violation of the Code Sec. 411(d)(6) anti-cutback rule for a participant's accrued benefits.

Call for Guidance

  Samuel Stanley, on behalf of the American Academy of Actuaries, called for IRS resolution of this disagreement. "With regard to the so-called "revolving door" issue, we think that this needs to be clarified," Stanley declared. "As practicing actuaries, we really need to have crystal clear rules as to how the emergence from critical status works.... We could tell that the issue is that plans enter critical status and then, under the regulations, there are extra requirements that involve consideration of the inclusion of amortization extensions. There's clearly a conflict there and the actuarial profession needs...guidance on that."

  By Torie Cole, CCH News Staff

Tax Analysts report: