Tax News

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: