Tax News

CCH (cch.taxgroup.com) reports:

  The Florida Department of Revenue (DOR) has issued Emergency Rule 12CER08-31 along with guidance on the new rule, which, for corporate income tax purposes, governs Florida's decoupling from the bonus depreciation and IRC §179 expensing election enacted by the federal Economic Stimulus Act of 2008 (P.L. 110-185). Under the rule, taxpayers are required to add back any IRC §179 deduction that exceeds $125,000. Taxpayers must also add back an amount equal to the total depreciation claimed under IRC §167 and IRC §168 on the federal return, minus the amount of depreciation deduction that would have been allowable under IRC §167 and IRC §168, as in effect on January 1, 2007, if the taxpayers had not expensed any amounts in excess of $125,000 under IRC §179, or taken bonus depreciation under IRC §168(k). This rule applies to taxpayers who deducted more than $128,000 on their 2008 federal income tax returns under IRC §179 or claimed bonus depreciation on assets placed in service during the 2008 calendar year.

  In tax years beginning after 2008, taxpayers will be required to make an adjustment to their Florida taxable income by an amount equal to the amount of depreciation deduction that would have been allowable under IRC §167 and IRC §168, as in effect on January 1, 2007, if the taxpayers had not expensed any amounts in excess of $125,000 under IRC §179, or taken bonus depreciation under IRC §168(k), minus the amount of depreciation deduction taken under IRC §167 and IRC §168 on their related federal returns.

  Upon the sale or disposition of property for which an addback was required, the Florida gain will be the same as the federal gain. However, Florida taxable income will have to be adjusted by an amount equal to the Florida depreciation taken on the asset, minus the total federal depreciation taken on the asset. The total amount of adjustments claimed for property for all years cannot exceed the total additions for the same property. A schedule reflecting the additions and all subsequent adjustments must be attached to the Florida corporate income tax return.

  The guidance provided by the DOR contains extensive examples.

  Subscribers to CCH Tax Research NetWork can view the complete text of the emergency rule.

  Emergency Rule 12CER08-31, effective December 10, 2008; Tax Information Publication, No. 08C01-10 , Florida Department of Revenue, December 10, 2008, ¶205-283

 
Other References:

  Explanations at ¶10-670

 

CCH (cch.taxgroup.com) reports:

  The U.S. Supreme Court has granted a request by an operator of oil tankers to review whether an Alaska city's personal property tax on large vessels docking at private facilities violates the U.S. Constitution. The city of Valdez imposes a tax on 100% of a vessel's assessed value, times a ratio based on the number of days spent in Valdez divided by the total number of days spent in all ports, including Valdez, where the vessel has acquired a situs for taxation. The tanker operator challenged the tax in court, asserting that it violates the Due Process and Commerce Clauses of the U.S. Constitution because it creates a risk of multiple taxation, and the Constitution's Tonnage Clause, which prohibits taxes that "operate to impose a charge for the privilege of entering, trading in, or lying in a port."

  The Alaska Supreme Court rejected these challenges. The state high court held that the port-days formula is fair and does not create a risk of duplicative taxation. Furthermore, the court held that a fairly apportioned property tax is not a tonnage duty and, therefore, does not violate the Tonnage Clause. (TAXDAY, 2008/04/30, S.1)

  Subscribers to CCH Tax Research NetWork can view the petition that was granted.

  Polar Tankers, Inc. v. Valdez, U.S. Supreme Court, Dkt. 08-310, petition for certiorari granted December 12, 2008
 

CCH (cch.taxgroup.com) reports:

  The IRS has released final, temporary and proposed regulations to provide guidance concerning the distribution of stock of a controlled corporation acquired in a taxable transaction within five years of the distribution as described in Code Sec. 355(a)(3)(. The temporary regulations will affect corporations and their shareholders, and the text of the temporary regulations serves as the text of the proposed regulations.

  CCH Comment. The IRS has deemed its new regulations as "necesssary" due to amendments to Code Sec. 355(b) by the Tax Increase Prevention and Reconciliation Act of 2005 (P.L. 109-222), the Tax Relief and Health Care Act of 2006 (P.L. 109-432), and the Tax Technical Corrections Act of 2007 (P.L. 110-172.

  Under Code Sec. 355(a), a corporation may distribute stock in a corporation it controls to its shareholders without causing either the distributing corporation or its shareholders to recognize income, gain, or loss. Code Sec. 355(b)(1) requires that, immediately after the distribution, the distributing and controlled corporations must each be engaged in the active conduct of a trade or business. Code Sec. 355(b)(2) provides in part that a corporation is engaged in the active conduct of a trade or business if and only if it is engaged in the active conduct of a trade or business that has been actively conducted throughout the five-year period ending on the distribution date. It also provides that the trade or business must not have been acquired in a transaction in which gain or loss was recognized during the pre-distribution period.

  Under Code Sec. 355(b)(3)(A)-(C): (1) in determining whether a corporation meets the active business requirement, all members of the corporation's separate affiliated group (SAG) are treated as one corporation; (2) the term "SAG" means the affiliated group that would be determined under Code Sec. 1504(a) if the corporation were the common parent and the includible corporations provision under Code Sec. 1504(b) did not apply; and (3) if a parent corporation became a SAG member as a result of one or more taxable transactions, any trade or business conducted by such corporation at the time of SAG membership is treated as acquired in a taxable transaction.

  Under Code Sec. 355(a)(3)(, stock of a controlled corporation acquired by a distributing corporation in any transaction that is not a taxable transaction and that occurs within five years of the distribution of such stock is not treated as stock of the controlled corporation but, rather, as other property (also known as "hot stock"). Code Sec. 355(a)(3)( has been characterized as the "hot stock rule."

  The temporary regulations generally provide that controlled corporation stock acquired by the SAG of which the distributing corporation is the common parent within the pre-distribution period in a taxable transaction constitutes hot stock, except if the controlled corporation is a member of that SAG at any time after the acquisition but prior to the distribution. This provision renders obsolete Rev. Rul. 76-54, 1976-1 CB 96, and Rev. Rul. 65-286, 1965-2 CB 92. Transfers of controlled corporation stock owned by members of such SAG immediately before and immediately after the transfer are disregarded and not treated as acquisitions for purposes of the hot stock rule.

 
Reg. §1.355-2(g) generally exempted from the hot stock rule an acquisition of controlled corporation stock by the distributing corporation from a member of the affiliated group of which the distributing corporation was a member. The temporary regulations retain this affiliate exception, but the IRS will continue to study the impact that transfers between affiliates should have on satisfaction of the active trade or business requirement and application of the hot stock rule.

  The IRS is also considering issuing additional guidance under Code Sec. 355(a)(3)( on: (1) the effect of indirect acquisitions and the extent to which predecessor rules should apply for purposes of the hot stock rule; (2) the position that issuances of controlled stock by the controlled corporation to the distributing corporation in a taxable transaction do not give rise to hot stock; and (3) the effect of redemptions of controlled stock.

  Effective date. The final and temporary regulations are generally applicable for distributions occurring after December 15, 2008. However, unless taxpayers elect otherwise, the temporary regulations do not apply to any distribution occurring after December 15, 2008, pursuant to a transaction that is: (1) made under an agreement binding on December 15, 2008, and at all times thereafter; (2) described in a ruling request submitted to the IRS on or before such date; or (3) described on or before such date in a public announcement or in a filing with the Securities and Exchange Commission. Taxpayers may elect to apply the temporary regulations retroactively to distributions to which section 4(b) of the Tax Technical Corrections Act of 2007 (P.L. 110-172 applies (generally to distributions occurring after May 17, 2006).

  Public comments. The IRS requests comments on the clarity of the proposed rules and how they can be made easier to understand. Comments are also requested regarding:

  - the overall approach taken in the proposed rules, including the extent to which the definition of a taxable transaction should be the same under Code Sec. 355(a)(3)( and Code Sec. 355(b), and whether the exception for affiliate acquisitions should be the same under those sections;

  - the need for future guidance relating to predecessors of distributing corporations, acquisitions involving corporations that join the distributing corporation's SAG or the controlled corporation's SAG, predecessors of controlled corporations, the application of The E.L. Dunn Trust, 86 TC 745, Dec. 42,998 (Acq.), and the treatment of stock issuances by the controlled corporation to the distributing corporation; and

  - the potential application of the hot stock rule to redemptions of controlled corporation stock, specifically regarding the circumstances under which Code Sec. 355(a)(3)( should apply

  Written or electronic comments and requests for a public hearing must be received by March 16, 2009.

 
Rev. Ruls. 76-54, 1976-1 CB 96, and 65-286, 1965-2 CB 92, are obsoleted.

T.D. 9435, 2008FED ¶47,068

Proposed Regulations, NPRM REG-150670-07, 2008FED ¶49,842

Other References:

 
Code Sec. 355

  CCH Reference - 2008FED ¶16,461

  CCH Reference - 2008FED ¶16,461B

  CCH Reference - 2008FED ¶16,462

  CCH Reference - 2008FED ¶16,463

  CCH Reference - 2008FED ¶16,463D

  CCH Reference - 2008FED ¶16,466.27

  CCH Reference - 2008FED ¶16,466.855

 
Code Sec. 356

  CCH Reference - 2008FED ¶16,493.23

  Tax Research Consultant

  CCH Reference - TRC CCORP: 39,252.10
CCH Reference - TRC REORG: 30,104.05
CCH Reference - TRC REORG: 30,152.10
CCH Reference - TRC REORG: 30,154
 

CCH (cch.taxgroup.com) reports:

  The IRS has issued guidance that describes methodologies that it is considering publishing as safe harbors to be used in the determination of basis in stock that is acquired in a Code Sec. 368(a)(1)( ("B") reorganization or other transferred-basis transaction. The methodologies are intended to respond to issues raised as a result of substantial changes in market practice since the issuance of Rev. Proc. 81-70, 1981-2 CB 729. Comments are requested on the proposed methodologies, and, pending further guidance, taxpayers may rely on the safe harbors set forth in the guidance.

  A "B" reorganization is the acquisition by one corporation of the stock of a target corporation, solely in exchange for the voting stock of the acquiring corporation or its parent, if immediately after the exchange the acquiring corporation is in control of the target. Under Code Sec. 362, if a corporation acquires property in a transferred-basis transaction, including a B reorganization or a Code Sec. 351 transfer from controlling stockholders, the property so acquired keeps the same basis as it had in the hands of the transferor.

Background

  The IRS issued Rev. Proc. 81-70 to facilitate the determination of basis in B reorganizations due to two problems encountered by taxpayers in attempting to establish basis in acquired stock: (1) the acquisition of basis information from target corporation shareholders surrendering stock of widely held corporations was time-consuming, burdensome, and costly; and (2) not all surrendering shareholders were responding to requests for basis information. Rev. Proc. 81-70 provides guidelines for the use of statistical sampling techniques and estimation techniques to determine the basis of stock acquired in a B reorganization where the burden of obtaining the actual basis figures is unreasonable.

  At the time Rev. Proc. 81-70 was issued, most stock was registered stock, so that the name of the beneficial owner of the stock was recorded by the issuing corporation's stock transfer agent on its books. Today, however, stock of public companies is generally held in "street name," whereby the stock is held by a nominee (usually a clearinghouse or other financial institution holding stock on behalf of their members or customers) and the transfer agent's books list the nominee as the owner of the stock. Because there are often several tiers of nominee owners, each subject to confidentiality and other constraints that could bar the release of information, the identification of the beneficial owners of large portions of public companies, and their bases in those interests, can be nearly impossible to discover. Further, the information needed to identify the nominee holders tends to dissipate fairly quickly.

  The IRS, having studied the issues raised by nominee stock holdings and having received public comments on these issues, has concluded that the guidelines of Rev. Proc. 81-70 need to be expanded to address these issues. Expanded guidance (referred to by the IRS as "Expanded Rev. Proc. 81-70") will also apply, not only to B reorganizations but, also, to all transferred basis transactions.

Proposed Guidance

  In order to address the issues raised by nominee stock holdings and to simplify the determination of basis for small stock holdings, "Expanded Rev. Proc. 81-70" will include several safe harbor provisions. Each safe harbor will apply to a specified group of surrendering shareholders and will prescribe a methodology that can be used to determine those shareholders' bases in surrendered stock.

  In general, a determination of basis will be considered timely if it is completed within two years of the later of the date of the transferred basis transaction and the date that "Expanded Rev. Proc. 81-70" becomes effective. A previously completed basis determination will be considered timely if made compliant with the provisions of "Expanded Rev. Proc. 81-70" within two years of the date that "Expanded Rev. Proc. 81-70" becomes effective.

  Notwithstanding any safe harbor prescribed in "Expanded Rev. Proc. 81-70," if the acquiring corporation has, or acquires, actual knowledge of a surrendering shareholder's actual basis in a share of surrendered target stock, the acquirer's allowable basis in the share is equal to that of the surrendering shareholder's basis.

  If an acquiring corporation complies with the terms of a safe harbor, including those provisions that apply to all such safe harbors, the IRS will not assert an alternative method to determine a corporation's allowable basis in stock.

  Safe harbor for target stock surrendered by or on behalf of reporting shareholders. Under this safe harbor, the basis of stock surrendered by reporting shareholders must be determined by survey. In general, a survey must be done in accordance with guidelines set forth in Rev. Proc. 81-70.

  Safe harbor for target stock surrendered by or on behalf of registered nonreporting shareholders. Under this safe harbor, the basis of stock surrendered by registered, nonreporting shareholders must be determined by the certificate method, as described in the notice.

  Safe harbor for target stock surrendered by nominees on behalf of nonreporting shareholders. Under this safe harbor, the basis of all stock surrendered by nominees on behalf of nonreporting shareholders is determined under the basis modeling method, as described in the guidance.

  Reporting requirements. Corporations acquiring target stock in a transferred basis transaction will be treated as satisfying their reporting requirements under Reg. §§1.351-3 and 1.368-3 with respect to the return for the tax year in which the transaction is completed if the corporation includes a statement on or with the return stating that a basis study is pending with respect to the acquired stock.

  Interim use of safe harbor methodologies. "Expanded Rev. Proc. 81-70" will be effective for transferred-basis transactions on or after the date it is issued. Prior to the issuance of "Expanded Rev. Proc. 81-70," taxpayers may use the methodologies of any safe harbor described above to determine the basis of target stock acquired in any transferred-basis transaction that occurs prior to issuance. In such instances, the timeliness requirement will be treated as satisfied if the study is completed within two years of the later of the date of the transferred-basis transaction or January 12, 2009.

Request for Comments

  Comments are requested as to whether the approaches described in the notice should be adopted and to what extent, if any, the approaches should be further combined or modified to produce a set of rules that is both administrable and reflective of statutory intent. The IRS is especially interested in comments regarding whether a simpler methodology, such as one that would determine the basis of all surrendered shares by using a weighted average trading price, would be helpful to taxpayers and appropriate for the tax system. In addition, comments are specifically requested regarding the determination of basis in atypical transferred-basis transactions, such as acquisitions in bankruptcy reorganizations, acquisitions involving foreign transfer agents, and acquisitions involving foreign corporations that may be subject to the rules of Reg. §1.367(b)-13.

Notice 2009-4,
2008FED ¶46,695

Other References:

 
Code Sec. 351

  CCH Reference - 2008FED ¶16,405.01

 
Code Sec. 362

  CCH Reference - 2008FED ¶16,612.162

 
Code Sec. 368

  CCH Reference - 2008FED ¶16,753.21

  Tax Research Consultant

  CCH Reference - TRC CCORP: 39,304.10

Tax Analysts report: