Tax News

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: