Tax News

CCH (cch.taxgroup.com) reports:

  A California sales and use tax regulation regarding cell phones and other wireless telecommunication devices provided a safe harbor from unfair competition claims filed by a taxpayer against a provider. The provider advertised a cellular phone for sale at half the retail price if the purchaser also enrolled in a calling plan package. The California Code of Regulations requires that sales tax must be computed on the non-sale price of the product. The regulation permits, but does not require, that the charge be passed on to the customer. The provider did so without informing the customer prior to sale that the tax would be based on the full price of the cell phone. The amount of tax is shown on the sales invoice furnished to the customer at the time of sale. The taxpayer alleged that the provider engaged in unfair competition and misleading advertising by failing to inform the consumer that the tax would be imposed on the full price of the cell phone. The unfair competition law prohibits any unlawful, unfair, or fraudulent business act or practice, but its scope is limited. Specific legislation may limit the judiciary's power to declare conduct unfair. If the Legislature has permitted certain conduct, courts may not override that determination. When specific legislation provides a safe harbor, plaintiffs may not use the general unfair competition law to assault that harbor. The sales invoice the provider gave to the taxpayer stated the amount of the sales tax imposed on the sale. It provided the taxpayer notice of the amount of sales tax that would be imposed and it constituted a contract of sale between the provider and the taxpayer. As with any other contract, the taxpayer had the right to refuse to enter into the contract for the price stated. The taxpayer's unfair competition and misleading advertising claims failed because the provider complied with all applicable regulations.

  CCH Tax Research NetWork subscribers can view the opinion in its entirety.

  Yabsley v. Cingular Wireless, LLC , California Court of Appeal, Second Appellate District, Division Six, 2d Civil No. B198827, August 18, 2008.
 

CCH (cch.taxgroup.com) reports:

  The phrase "items of ordinary income" contained in an agreement entered into between a partnership and a venture capital firm did not include short-term capital gains. The interpretation of the phrase was based on the definition of "ordinary income" in the Internal Revenue Code (IRC), which unambiguously does not include capital gains. Therefore, the agreement, which provided a special allocation of ordinary income to the firm, did not provide an allocation of short-term capital gains.

  The agreement used the term "items of ordinary income" without actually defining that term and there was no indication that the parties intended to distinguish the definition of ordinary income from that in the IRC. The partnership's claim that the term "ordinary income" included all income taxed at ordinary income tax rates was unreasonable. In addition, the terms "ordinary income" and "capital gains" are defined in Black's Law Dictionary based on the source of the income rather than the tax rate, which was consistent with Code Sec. 702.

  Further, a settlement agreement entered between the partnership and the venture capital firm in a state court lawsuit did not bar the firm from joining the partnership-level proceeding seeking readjustment of certain partnership items as a participating partner under Code Sec. 6226(c)(2). The mutual release in the settlement agreement specified that the firm released its rights and claims against the partners; the parties did not intend the release to also include claims against the United States.

Imprimis Investors LLC, FedCl, 2008-2 USTC ¶50,489

Other References:

 
Code Sec. 61

  CCH Reference - 2008FED ¶5504.04

 
Code Sec. 702

  CCH Reference - 2008FED ¶25,083.2683

 
Code Sec. 1222

  CCH Reference - 2008FED ¶30,442.40

 
Code Sec. 6226

  CCH Reference - 2008FED ¶37,709.70

  Tax Research Consultant

  CCH Reference - TRC PART: 15,056.05
CCH Reference -
TRC PART: 60,554
 

CCH (cch.taxgroup.com) reports:

  Revised instructions to be used by tax-exempt organizations in completing the redesigned Form 990, Return of Organization Exempt From Income Tax, have been released by the IRS. The IRS released the redesigned Form 990 in December 2007, to be used for reporting tax year 2008 information in 2009. The redesigned form consists of a core form to be completed by all organizations and 16 schedules to be completed depending on the organization's type and activities. Transition rules, however, are in place so small organizations have time to adjust to the new form.

  For the 2008 tax year, most organizations with gross receipts less than $1.0 million and total assets less than $2.5 million may chose to use Form 990-EZ, Short Form Return of Organization Exempt From Income Tax (not redesigned for 2008), or the updated Form 990. For the 2009 tax year, entities can chose between Form 990-EZ or Form 990 if gross receipts are less than $500,000 and total assets less than $1.25 million. The filing thresholds will be set permanently at $200,000 gross receipts and $500,000 total assets beginning with the 2010 tax year. Organizations that generally have gross receipts of less than $25,000 will file Form 990-N, Electronic Notice (e-Postcard) for Tax-Exempt Organizations Not Required to File Form 990 or 990-EZ, for tax years 2007-2009. The gross receipts threshold is raised to $50,000 for tax years 2010 and later.

  The IRS released an initial draft of the instructions on April 7, 2008. With the latest release, the IRS has provided a description of changes from the April draft instructions. Many changes are intended to provide greater clarity regarding the specific information sought. The revised instructions provide additional examples, reduce the reporting burden, and establish or revise definitions and standards in certain areas. For example, the instructions define key employee for reporting compensation on Part VII of the core form and Schedule J (Compensation Information), Transactions With Interested Persons on Schedule L, and governance, management and disclosure on the core form. There are also significant changes to the instructions for many of the schedules, including Schedule H, Hospitals; Schedule J, Schedule K, Tax-Exempt Bonds; and Schedule L.

  The revised Form 990 instructions have a sequencing list that is particularly useful in determining the order to use in completing the various portions of the form (Parts I-XI) and any of the sixteen schedules that might be required (General Instruction C). Terms that are bolded in the instructions appear in alphabetical order in the Glossary. A compensation table is provided to aid in determining where and how to report various types of compensation paid to officers, directors, trustees, key employees and highest compensated employees (Specific Instructions for Part VII). Appendix E provides guidance relative to group returns and Appendix F explains how to report activities conducted indirectly through joint ventures and disregarded entities. Public inspection guidance is available in Appendix D. A properly completed Form 990 requires an organization to complete Parts I through XI of the Form 990, and any schedules for which a "Yes" response is indicated in Part IV of Form 990.

  Although the latest instructions are identified as a draft, the IRS indicated there will be no significant changes in content when the final version of the instructions is released later in 2008, although the wording and format may change. The Service stated that it was releasing the instructions now so that organizations and practitioners can review the content and prepare for the 2009 filing season (for 2008 tax returns).

  Practitioners commended the IRS for a huge effort and for releasing the instructions before 2009. At the same time, they noted the burdens placed on exempt organizations to meet the new reporting requirements.

  "The IRS has worked tirelessly to satisfy all stakeholders who often have very conflicting interests and opinions," Jane Searing, a shareholder with Clark Nuber in Bellevue, Washington told CCH. "It is really helpful that they are releasing the final instructions before the third quarter ends for calendar year organizations. This helps organizations and their service providers complete the work necessary to implement systems for collecting the information required on the new form. Although we have not had time to fully digest this latest version, we are hopeful this set of instructions will help clear up some of the outstanding questions and concerns over the version issued in April."

  "The revised form presents a huge burden for public charities," Nancy Ortmeyer Kuhn of Caplin & Drysdale in Washington, D.C. told CCH. "The expanded Form 990 requires a lot more information from charities that file the form. Many [organizations] will have to redo their accounting systems and they're still working on it. It's a huge job to capture the information they have to report. The community is hoping the IRS will understand this concern." Kuhn said it would be appropriate for the IRS to provide transition relief for reporting under the new system. One way to do this would be not to impose penalties when the IRS examines the first returns, Kuhn said.

  Reactions also varied as practitioners honed in on different schedules. "People were really unhappy with the [draft instructions'] definition of "key employee" [for Schedule J]," Suzy McDowell of Steptoe & Johnson LLP told CCH. The old definition looked for control of a discrete segment or five percent of the organization, McDowell stated. The revised definition "now requires organization-wide control or influence, or control of at least 10 percent of the organization." This is an improvement, McDowell said, although "exempt organizations won't be completely happy." McDowell said that another part of the instructions for Schedule J provided "extensive clarification" for the definitions of "reportable (wage) compensation" and "other compensation," a change that will be helpful.

  "The complexity is very evident and appears on the very first page of the instructions," Kuhn told CCH. There are three categories of transactions with "interested persons" that must be reported on Schedule L (Transactions With Interested Persons), Kuhn said, and each category uses a different definition of interested persons, she indicated. The American Bar Association commented that "this is complexity that doesn't need to be there," Kuhn said. "So [the lack of change] was disappointing."

  The instructions indicate when an organization can rely on "reasonable efforts" to obtain certain information from interested persons and third parties, such as family and business relationships, compensation paid by related organizations, and the involvement of an interested person in particular transactions. "This is good," Kuhn told CCH. "It shows there is an understanding that some information may not be available." McDowell agreed. "That's a big change that will give exempt organizations some relief."

  The IRS has identified approximately 1.3 million public charities and other non-charitable exempt organizations. For tax year 2004, the most recent year available, the IRS reported that it had received 364,000 Forms 990 and 142,000 Forms 990-EZ, a total of 506,000 returns. The IRS intends to release "draft" instructions in the next few weeks for the Form 990-EZ, the short form currently used by smaller tax-exempt organizations with gross receipts under $1 million and total assets of less than $2.5 million. The new Form 990-EZ will be phased in for smaller organizations over a three-year period.

  By Brant Goldwyn and Mary Krackenberger, CCH News Staff

IR-2008-98,
2008FED ¶46,548

IRS Completed 2008 Form 990 Instructions and Background Documents

IRS Background Paper --Summary of Form 990 Redesign Process

IRS TE/GE Division Exempt Organizations 2008 Form 990 Background Paper --Form 990, Moving from the Old to the New

IRS Background Paper --Changes to April Draft Instructions

Redesigned Forms 990 Instructions (August 2008)

Other References:

 
Code Sec. 6033

  CCH Reference - 2008FED ¶35,425.33

 
Code Sec. 6104

  CCH Reference - 2008FED ¶36,911.10

  Tax Research Consultant

  CCH Reference - TRC EXEMPT: 12,252.15

  CCH Reference - TRC EXEMPT: 12,258.05

CCH (cch.taxgroup.com) reports:

  The IRS has provided domestic asset/liability percentages and domestic investment yields needed by foreign life insurance companies and foreign property and liability insurance companies to compute their minimum effectively connected net investment income under Code Sec. 842(b). This guidance is effective for tax years beginning after December 31, 2006.

  For the first tax year beginning after 2006, the relevant domestic asset/liability percentages are 124.4 percent for foreign life insurance companies and 197.1 percent for foreign property and liability insurance companies. The relevant domestic investment yields are 4.9 percent for foreign life insurance companies and 4.2 percent for foreign property and liability insurance companies. In addition, instructions are set forth for computing foreign insurance companies' estimated tax liabilities for tax years beginning after 2006.

Rev. Proc. 2008-53, 2008FED ¶46,547

Other References:

 
Code Sec. 842

  CCH Reference - 2008FED ¶26251.70

  CCH Reference - 2008FED ¶26,251.72

  Tax Research Consultant

  CCH Reference - TRC INTLIN: 3,102.25

CCH (cch.taxgroup.com) reports:

  Various prescribed rates for federal income tax purposes for September 2008 have been provided by the IRS. The annual short-term, mid-term, and long-term applicable federal interest rates (AFRs) are 2.38 percent, 3.46 percent and 4.58 percent, respectively. The semiannual short-term, mid-term, and long-term AFRs are 2.37 percent, 3.43 percent and 4.53 percent, respectively. Quarterly short-term, mid-term and long-term AFRs are 2.36 percent, 3.42 percent and 4.50 percent, respectively. Finally, the monthly short-term, mid-term and long-term rates are 2.36 percent, 3.41 percent and 4.49 percent, respectively.

  The short-term, mid-term, and long-term adjusted applicable federal rates (adjusted AFRs) for September 2008 for purposes of Code Sec. 1288(b) are 1.81 percent, 3.21 percent and 4.53 percent, respectively, when annual compounding is used.

  Additionally, the Code Sec. 382 adjusted federal long-term rate is 4.53 percent, and the long-term tax-exempt rate is 4.65 percent. The Code Sec. 42(b)(2) appropriate percentage for the 70-percent present-value, low-income housing credit is 7.93 percent, and the appropriate percentage for the 30-percent present-value, low-income housing credit is 3.40 percent. Finally, the Code Sec. 7520 AFR for determining the present value of an annuity, an interest for life or a term of years, or a remainder or reversionary interest is 4.2 percent.

Rev. Rul. 2008-46, 2008FED ¶46,546

Rev. Rul. 2008-46, FINH ¶30,596

Other References:

 
Code Sec. 42

  CCH Reference - 2008FED ¶173.02

  CCH Reference - 2008FED ¶176.01

  CCH Reference - 2008FED ¶4385.03

 
Code Sec. 382

  CCH Reference - 2008FED ¶17,115.28

 
Code Sec. 642

  CCH Reference - 2008FED ¶24,308.1885

 
Code Sec. 1274

  CCH Reference - 2008FED ¶31,310.05

 
Code Sec. 7520

  CCH Reference - 2008FED ¶42,785.40

  CCH Reference - FINH ¶22,630.05

 
Code Sec. 7872

  CCH Reference - FINH ¶18,950.05

  Tax Research Consultant

  CCH Reference - TRC ACCTNG: 36,162.05

CCH (cch.taxgroup.com) reports:

  The IRS has issued proposed regulations that affect domestic corporations that transfer property to foreign corporations in certain transactions or that distribute the stock of certain foreign corporations, and certain shareholders of such domestic corporations.

Regulations Under Code Sec. 367(a)(5) and (b)

  Regulations proposed under Code Sec. 367(a)(5) and
(b) apply when a domestic corporation transfers certain property to a foreign corporation in an exchange described in Code Sec. 361(a) or (b). The regulations apply to property transfers by U.S. transferors, including RICs, REITs and S corporations.

  Generally, under Code Sec. 367(a)(5) a U.S. transferor to a foreign acquiring corporation in a Code Sec. 361 exchange recognizes gain with respect to the transfer of appreciated property under
Code Sec. 367(a)(1). This rule does not apply if the U.S. transferor is controlled by five or fewer domestic corporations. The proposed regulations confirm the general rule, but provide an elective exception, under which the exceptions provided by Code Sec. 367(a) and associated regulations may be available. The proposed regulations apply to all property transferred by a U.S. transferor in a Code Sec. 361 exchange, other than property to which Code Sec. 367(d) applies, and preserve or recognize the net built-in gain in Code Sec. 367(a) property transferred in the exchange. The regulations also contain an anti-stuffing rule with respect to Code Sec. 367(a) property. Inside gain is recognized currently by the U.S. transferor or preserved for future taxation in the stock received in the transaction by the controlling domestic corporate shareholder of the transferor.

  The proposed regulations include a control requirement regarding the U.S. transferor. Instances where a U.S. transferor must recognize gain on the transfer of the Code Sec. 367(a) property are also clarified, as are adjustments to the basis of stock received by control group members. Moreover, the U.S. transferor must include a statement with its U.S. income tax return for the year of the exchange under which it agrees to recognize gain and file an amended tax return if it enters into certain transactions with a principal purpose of avoiding U.S. tax.

  Proposed regulations under Code Sec. 367(b) provide an additional exception to the general rules that apply to certain transfers of stock of a foreign acquired corporation by a U.S. transferor to a foreign acquiring corporation in a Code Sec. 361 exchange. The proposed regulations provide that the U.S. transferor must include in income the Code Sec. 1248 amount attributable to the stock of the foreign acquired corporation only if immediately after the exchange, the foreign acquiring corporation or the foreign acquired corporation is not a CFC with respect to which the U.S. transferor is a
Code Sec. 1248 shareholder. The Code Sec. 1248 amount can be preserved in the hands of a corporate Code Sec. 1248 shareholder following the distribution of the stock of the foreign acquiring corporation by the U.S. transferor. Special rules for outbound triangular asset reorganizations are also proposed.

Regs Under the Code Sec. 367 Coordination Rule

  The coordination rule, found at
Reg. §1.367(a)-3(d)(2)(vi)(A), has been used inappropriately in transactions intended to repatriate earnings and profits of foreign corporations without the recognition of gain or a dividend inclusion. In response, the IRS issued Notice 2008-10, I.R.B. 2008-3, 277 (TAXDAY, 2007/12/31, I.7), which announced the revision of the application of the coordination rule exception. The proposed regulations incorporate, with modifications, the provisions of that IRS guidance.

Regs Under Code Sec. 1248(f)

  The proposed regulations under Code Sec. 1248(f) apply when a domestic corporation distributes stock of certain foreign corporations in a distribution to which Code Sec. 337, 355 or 361 applies. The proposed regulations include regulations described in Notice 87-64, 1987-2 CB 375. Under the proposed regulations:

  --A domestic distributing corporation that is a section 1248 shareholder of a foreign corporation and that distributes stock of such foreign corporation in a Code Sec. 337 distribution shall generally include in income as a dividend the Code Sec. 1248 amount attributable to the stock distributed.

  --If such a domestic distributing corporation distributes such stock in a Code Sec. 355 distribution, other than stock received by the domestic distributing corporation in a
Code Sec. 361 exchange, shall generally include in income as a dividend the Code Sec. 1248 amount attributable to the stock distributed, but only to the extent the domestic distributing corporation does not otherwise recognize gain on the Code Sec. 355 distribution.

  --If such a domestic distributing corporation distributes stock of such corporation received in a Code Sec. 361 exchange, in a
section 355 distribution or a Code Sec. 361 distribution, it shall include in income as a dividend the Code Sec. 1248 amount attributable to the stock distributed.

  The general rule will not apply to certain Code Sec. 337 distributions of the stock of a foreign corporation or certain Code Sec. 355 distributions of a stock of stock of a foreign corporation. An elective exemption to the general rule for certain distributions pursuant to a plan or reorganization is also provided.

Other Changes

  The proposed regulations suspend the application of
Code Sec. 1248(e) when capital gains are taxed at a rate equal to or greater than the rate at which ordinary income is taxed. Changes under Code Sec. 6038B establish reporting requirements for certain transfers of property by a domestic corporation to a foreign corporation in certain Code Sec. 361 exchanges.

Effective Dates

  A number of different effective dates apply with respect to the proposed regulations.

  --Proposed Reg. §1.367(a)-7 and the revisions to §1.6038B-1 apply to transfers occurring on or after the date that is 30 days after the date these regulations are published as final regulations in the Federal Register.

  --In accordance with Notice 87-64, §1.1248-6(d) applies to sales, exchanges or other dispositions of stock of a domestic corporation occurring on or after September 21, 1987.

  --The revisions described in Notice 2008-10 generally apply to transactions occurring on or after December 28, 2007.

  --Proposed Reg. §§1.1248-8(b)(2)(iv), 1248(f)-1 through
1.1248(f)-3, and the modifications to Proposed Reg. §1.367(b)-4 apply to transfers or distributions occurring on or after the date that is 30 days after the date these regulations are published as final regulations in the Federal Register.

Comments Requested

  The IRS is seeking comments on a number of aspects of these proposed regulations. Written or electronic comments and requests for a public hearing must be received by November 18, 2008.

Proposed Regulations, NPRM REG-209006-89, 2008FED ¶49,829

Other References:

 
Code Sec. 358

  CCH Reference - 2008FED ¶16,552L

 
Code Sec. 367

  CCH Reference - 2008FED ¶16,641F

  CCH Reference - 2008FED ¶16,642E

  CCH Reference - 2008FED ¶16,646E

  CCH Reference - 2008FED ¶16,647FE

  CCH Reference - 2008FED ¶16,647J

 
Code Sec. 1248

  CCH Reference - 2008FED ¶30,961D

  CCH Reference - 2008FED ¶30,963D

  CCH Reference - 2008FED ¶30,966C

  CCH Reference - 2008FED ¶30,967A

  CCH Reference - 2008FED ¶30,967E

  CCH Reference - 2008FED ¶30,967J

  CCH Reference - 2008FED ¶30,967I

  CCH Reference - 2008FED ¶30,967M

 
Code Sec. 6038B

  CCH Reference - 2008FED ¶35,580E

  Tax Research Consultant

  CCH Reference - TRC INTL: 30,076

  CCH Reference - TRC INTLOUT: 9,404

Tax Analysts report: