Tax News

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

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