Tax News

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 The credit is effectively repealed for tax years after 2023.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: