Tax News

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: