Tax News

CCH (cch.taxgroup.com) reports:

  An Illinois corporate income tax ruling discusses the taxability of a company that will provide gaming lessons through the Internet. In addition to a "starter kit," which would be downloaded from the Internet, the company would offer different levels of training that a customer could purchase, with the highest level allowing a customer to receive payment for referring other people to the site. The Department of Revenue refused to issue a ruling regarding nexus with the state and instead determined the tax liability imposed on nonresidents under state law.

  For taxable years ending before December 31, 2008, annual fees from poker training were not assigned to Illinois in computing the sales factor. Nothing in the letter request identified any income producing activity of the taxpayer that was performed in Illinois.

  With respect to gross receipts from sales of the taxpayer's "starter kits," sales factor treatment depends on whether a "starter kit" is tangible personal property. Assuming that a starter kit is canned computer software, gross receipts from sales would be considered sales of tangible personal property and therefore allocable to Illinois if downloaded by a purchaser in Illinois. If, however, a starter kit is not canned computer software, gross receipts from sales would not be assigned to Illinois.

  For taxable years ending on and after December 31, 2008, annual fees from poker training must be assigned to Illinois in computing the sales factor if the training is received in the state. Assuming the training is provided to individuals, the training is considered to be received in the individual's state of residence. Unless the taxpayer has actual knowledge that the residence of an individual is different from the billing address of the individual at the time of the sale, the individual is deemed to be a resident of the state in which the billing address is located.

  With respect to gross receipts from sales of "starter kits," the analysis again depends on whether the kits are canned computer software and therefore treated as tangible personal property. Gross receipts from sales of "starter kits" are assigned to Illinois to the extent that sales are made to Illinois residents. Again, unless the taxpayer has actual knowledge of the residence of a customer during the taxable year, the customer is deemed a resident of Illinois if the customer's billing address is in Illinois.

General Information Letter IT 08-0031-GIL , Illinois Department of Revenue, October 8, 2008, released December 12, 2008, ¶401-931

  Other References:

  Explanations at ¶10-075.

CCH (cch.taxgroup.com) reports:

  Distributions from the disposable military retirement pay of an individual's former spouse pursuant to a qualified domestic relations order (QDRO) were includible in the taxpayer's taxable income. There was no proof that the taxpayer's disbursement was in any way subject to double taxation or that income taxes were withheld from her share of the retirement pay prior to its disbursement.

  Although the taxpayer's interest in the retirement pay was calculated based on the retirement pay less income tax withheld, the QDRO specifically provided that taxes could only be withheld from the former spouse's pay, not from the taxpayer's share of the pay. Moreover, the QDRO did not state that the taxpayer's share of the retirement pay was not taxable or that it was subject to tax prior to distribution.

  A concurring opinion addressed an issue of first impression that the majority opinion sidestepped --namely, whether Tax Court Summary decisions have collateral estoppel effect. The concurring opinion concluded that the fact that a summary decision is not subject to appeal should not preclude the decision in that case from collaterally estopping the relitigation of the same issue by the same parties. Here, the issue before the court in this case had been decided against the taxpayer for a prior tax year in a Tax Court Summary decision (Mitchell, T.C. Summary Opinion 2004-160). The majority opinion declined to consider the collateral estoppel argument because the case had already been tried and presented a legal issue on the basis of largely undisputed facts.

L.G. Mitchell, 131 TC No. 15, Dec. 57,611

Other References:

 
Code Sec. 61

  CCH Reference - 2008FED ¶5507.121

 
Code Sec. 402

  CCH Reference - 2008FED ¶17,733.60

  Tax Research Consultant

  CCH Reference - TRC INDIV: 21,056
CCH Reference - TRC INDIV: 24,062.15

 

CCH (cch.taxgroup.com) reports:

  The IRS has released a series of guidance items addressing tax returner penalties addressed in Code Sec. 6694.

T.D. 9436

  Regulations addressing return preparer penalties have been issued. The final regulations amend existing regulations defining tax return preparers. These final regulations are applicable to returns and claims for refund filed (and advice given) after December 31, 2008. The regulations were previously limited to income tax return preparers; however, the definition now includes preparers of estate, gift and generation skipping transfer tax returns, employment tax returns, excise tax returns, and returns of exempt organizations. The standards of conduct that must be met to avoid imposition of the Code Sec. 6694 tax return preparer penalty have been changed, as has the computation of that penalty. The final regulations also expand the scope of current regulations under the penalty provisions of Code Sec. 6695 beyond income tax returns.

  The final regulations require a signing tax return preparer to furnish a copy of the completed tax return to the taxpayer and also to retain a copy. The tax return preparer's identification number needs to be included only on the return that is filed with the IRS. The regulations clarify that the copy of the return filed with the IRS may be provided to the taxpayer in any medium, including electronic, that is acceptable to both the taxpayer and the return preparer. Furthermore, for purposes of complying with the requirements of Code Sec. 6107, a corporation, partnership or other organization that hires a signing tax return preparer shall be treated as the sole signing tax return preparer.

  An individual is a tax return preparer subject toCode Sec. 6694 if the individual is primarily responsible for the position on the return or claim for refund giving rise to the understatement. Only one person within a firm will be considered primarily responsible for each position giving rise to an understatement and, accordingly, be subject to the penalty. If there is no signing tax return preparer for the return or claim for refund within that firm or if it is concluded that the signing tax return preparer is not primarily responsible for the position, the nonsigning tax return preparer within the firm with overall supervisory responsibility for the position(s) giving rise to the understatement generally will be considered the tax return preparer who is primarily responsible for the position. If the information presented would support a finding that either the signing tax return preparer or a nonsigning tax return preparer within a firm is primarily responsible for the position(s) giving rise to the understatement, the IRS may, depending on the evidence presented, assess the penalty against either one of the individuals, but not both, as the primarily responsible tax return preparer.

  The final regulations clarify that a tax return preparer may rely on advice furnished by another advisor, another tax return preparer, or other party, even if the advisor or tax return preparer is within the tax return preparer's same firm. However, the tax return preparer must meet the diligence standards in order to rely properly on information and advice provided by taxpayers or other individuals.

  The final regulations define the "reasonable to believe that the position would more likely than not be sustained on its merits" standard that now applies to positions that are tax shelters and reportable transactions to which Code Sec. 6662A applies. While recent legislation includes this "reasonable to believe" standard rather than the "reasonable belief that the position would more likely than not be sustained on its merits" standard used in previous legislation, the IRS interprets the two standards to have the same meaning. The final regulations contain the more recent terminology.

  The final regulations also modified the definition of adequate disclosure, removed provisions addressing the burden of proof regarding whether a tax return preparer has willfully attempted to understate the liability for tax and clarified that while a tax return preparer may not endorse or negotiate a refund check relating to a return for which he or she is a preparer, the preparer may affix a taxpayer's name on a refund check to deposit the check into an account in the name of the taxpayer. Appraisers are included in the definition of both signing and non-signing preparers, though penalties against them may not be stacked. Finally, administrative appeal rights remain available to tax return preparers who are subject to penalty under Code Sec. 6694.

Notice 2009-5

  Updated interim guidance has been issued concerning the
Code Sec. 6694(a) tax return preparer penalty, as recently modified by the Tax Extenders and Alternative Minimum Tax Relief Act of 2008 (P.L. 110-343). Other than for tax shelters, the guidance is generally effective for advice rendered, and returns, amended returns, and claims for refund prepared after May 27, 2007.

  CCH Comment:
Code Sec. 6694 now divides the definition of "unreasonable position" into three categories --a general category, a disclosed positions category, and a tax shelters and reportable transactions category, each with its own standard to determine whether such position is an unreasonable position. A position is treated as unreasonable and the return preparer penalty can apply unless there is substantial authority for the position (general category) or the position is properly disclosed and has a reasonable basis (disclosed positions category). A "more likely than not" standard applies for tax shelters, as defined in Code Sec. 6662(d)(2)(C)(ii), and reportable transactions to which Code Sec. 6662A applies. Prior to this change, the "more likely than not" standard applied to positions which would now fall in both the general and tax shelters categories.

  Interim guidance was previously issued in Notice 2008-13, I.R.B. 2008-3, 282 (TAXDAY, 2008/01/02, I.1) concerning application of the "more likely than not" standard. The updated guidance provides that for disclosed positions other than those falling in the tax shelters and reportable transactions category, preparers can either apply the new substantial authority standard or rely on guidance provided by Notice 2008-13. However, because the provisions governing the new tax shelters and reportable transactions category were not made retroactive, the interim guidance contained in Notice 2008-13 will continue to apply to positions falling within this category.

  The new guidance also discusses the definition of "substantial authority" for positions falling in the general category. Until further guidance is issued for purposes of Code Sec. 6694(a), the phrase has the same meaning as in Reg. §1.6662-4(d)(2), the analysis prescribed by Reg. §1.6662-4(d)(3)(i) through (ii) applies in determining whether substantial authority is present, and the authorities described in Reg. §1.6662-4(d)(3)(iii) are considered in determining whether there is substantial authority for a position.

  For tax shelters, but not reportable transactions with a significant avoidance purpose or listed transactions, a position will not be deemed an unreasonable position if there is substantial authority for the position, the preparer advises the taxapayer, documenting such advice in the preparer's files, of the Code Sec. 6662 penalty standards applicable to the taxpayer in the event the transaction is deemed to have a significant purpose of federal tax evasion or avoidance and, if having such purpose, the taxpayer possesses a reasonable belief that the treatment was more likely than not the proper treatment. The updated interim guidance also provides guidance to non-signing preparers advising other preparers, including other preparers in the same firm as the non-signing preparer, regarding a position with respect to a tax shelter. The interim guidance with respect to such tax shelters and reportable transactions to which Code Sec. 6662A applies is effective for positions on tax returns for taxable years ending after October 3, 2008.

  The IRS requests written and electronic comments concerning Notice 2009-5 by March 16, 2009.

Rev. Proc. 2009-11

  The IRS has identified the categories of tax returns and refund claims for purposes of the Code Sec. 6694 tax return preparer penalty and the returns and refund claims required to be signed by a tax return preparer in order to avoid the Code Sec. 6695(b) penalty (Rev. Proc. 2009-11). The tax return preparer rules were amended by the Small Business and Work Opportunity Tax Act of 2007 (P.L. 110-28) to extend the application of the income tax return preparer penalties to all tax return preparers, heighten the standards for both disclosed and undisclosed positions to avoid the Code Sec. 6694(a) penalty, increase the Code Sec. 6694 penalty and impose a penalty under Code Sec. 6695(b) on preparers who fail to sign a return or refund claim when required to do so by regulations. To reflect these amendments, the IRS issued interim guidance (Notice 2008-13, I.R.B. 2008-3, 282, Notice 2008-12, I.R.B. 2008-3, 280, and Notice 2008-46, I.R.B. 2008-18, 868) and published proposed regulations (NPRM
REG-129243-07). The Tax Extenders and Alternative Minimum Tax Relief Act of 2008 (P.L. 110-343) later amended the standard for avoiding the Code Sec. 6694(a) penalty for undisclosed positions. This guidance implements these legislative changes and the final regulations. The IRS may choose to add or remove documents from any of the categories in this revenue procedure in future guidance as it gains experience in implementing the provisions of P.L. 110-343 and the final regulations. The procedure is effective January 1, 2009, for all forms, tax returns, amended tax returns, and claims for refund filed on or after that date.

Returns Subject to Code Sec. 6694 Penalty

  Solely for purposes of Code Sec. 6694, a return or claim for refund includes any of the income tax, estate and gift tax, employment tax or excise tax returns listed in Section 3.02, or a claim for refund with respect to any such return. A claim for refund of tax includes a claim for credit against any tax and a request for abatement. A person who for compensation prepares all or a substantial portion of any of the listed tax returns or a claim for refund with respect to any such tax return is a tax return preparer subject to Code Sec. 6694.

  In addition, solely for purposes of Code Sec. 6694, an information return listed in Section 3.03(2) including information that is or may be reported on a taxpayer's return or refund claim is a return to which Code Sec. 6694 could apply if the information reported constitutes a substantial portion of that taxpayer's tax return or claim for refund. A person who for compensation prepares such information returns that do not report a tax liability but affect an entry or entries on a tax return and constitute a substantial portion of the tax return or claim for refund that does report a tax liability is a tax return preparer subject to Code Sec. 6694. Other documents that include information that is or may be reported on a taxpayer's tax return or claim for refund may also be treated as returns under Code Sec. 6694 if the reported information constitutes a substantial portion of that taxpayer's tax return or claim for refund.

  Further, forms listed in Section 3.04 that include information that is or may be reported on a taxpayer's tax return or claim for refund, and that constitute a substantial portion of such tax return or claim for refund, will not subject the preparer to the Code Sec. 6694(a) penalty. Such forms, however, may subject the preparer to a willful or reckless conduct penalty under Code Sec. 6694(b) if the information reported on the document constitutes a substantial portion of the tax return or claim for refund and is prepared willfully in any manner to understate the liability of tax on a tax return or claim for refund, or in reckless or intentional disregard of rules or regulations.

Returns and Claims Subject to Code Sec. 6695(b) Penalty

  The guidance also identifies returns and claims for refund required to be signed by a signing tax return preparer defined in Reg. §301.7701-15(b)(1) in order to avoid the Code Sec. 6695(b) penalty. The tax return preparer must sign the return in the manner prescribed by the IRS in forms, instructions or other appropriate guidance. Information on the preparer signature requirement for electronically filed returns will be announced in IRS publications, instructions and information posted electronically on the IRS.gov website. In order to avoid the penalty, a signing tax return preparer must provide a signature on any tax returns or claims for refund of tax that are filed on or after January 1, 2009. A non-inclusive list of such returns and refund claims is provided in Section 4.02.Notice 2008-12, I.R.B. 2008-3, 280, and Notice 2008-46, I.R.B. 2008-18, 868, are obsoleted, and the list of forms in Notice 2008-13, I.R.B. 2008-3, 282, is modified and superseded.

T.D. 9436, 2009FED ¶47,006

T.D. 9436, FINH ¶41,123

Notice 2009-5,
2009FED ¶46,201

Notice 2009-5,
FINH ¶30,606

Rev. Proc. 2009-11, 2009FED ¶46,202

Rev. Proc. 2009-11, FINH ¶30,607

Other References:

 
Code Sec. 6060

  CCH Reference - 2008FED ¶36,561

  CCH Reference - 2008FED ¶36,561E

  CCH Reference - 2008FED ¶36,561G

  CCH Reference - 2008FED ¶36,561I

  CCH Reference - 2008FED ¶36,561K

  CCH Reference - 2008FED ¶36,561M

  CCH Reference - 2008FED ¶36,561O

  CCH Reference - 2008FED ¶36,561Q

  CCH Reference - FINH ¶22,228

  CCH Reference - FINH ¶22,229

  CCH Reference - FINH ¶22,230

  CCH Reference - FINH ¶22,231

 
Code Sec. 6107

  CCH Reference - 2008FED ¶36,921

  CCH Reference - 2008FED ¶36,921BE

  CCH Reference - 2008FED ¶36,921BG

  CCH Reference - 2008FED ¶36,921BI

  CCH Reference - 2008FED ¶36,921BK

  CCH Reference - 2008FED ¶36,921BM

  CCH Reference - 2008FED ¶36,921BO

  CCH Reference - 2008FED ¶36,921BQ

  CCH Reference - FINH ¶20,436A

  CCH Reference - FINH ¶20,436B

  CCH Reference - FINH ¶20,436C

  CCH Reference - FINH ¶20,436D

 
Code Sec. 6109

  CCH Reference - 2008FED ¶36,961BC

  CCH Reference - 2008FED ¶36,961BE

  CCH Reference - 2008FED ¶36,961BG

  CCH Reference - 2008FED ¶36,961BI

  CCH Reference - 2008FED ¶36,961BK

  CCH Reference - 2008FED ¶36,961BM

  CCH Reference - 2008FED ¶36,961BQ

  CCH Reference - 2008FED ¶36,961C

  CCH Reference - FINH ¶20,438A

  CCH Reference - FINH ¶20,438B

  CCH Reference - FINH ¶20,438C

  CCH Reference - FINH ¶20,438E

 
Code Sec. 6662

  CCH Reference - FINH ¶21,790.20

 
Code Sec. 6694

  CCH Reference - 2008FED ¶39,955A

  CCH Reference - 2008FED ¶39,956A.01

  CCH Reference - 2008FED ¶39,956A.02

  CCH Reference - 2008FED ¶39,956BE

  CCH Reference - 2008FED ¶39,956BG

  CCH Reference - 2008FED ¶39,956BI

  CCH Reference - 2008FED ¶39,956BK

  CCH Reference - 2008FED ¶39,956BM

  CCH Reference - 2008FED ¶39,956BO

  CCH Reference - 2008FED ¶39,956BQ

  CCH Reference - 2008FED ¶39,957

  CCH Reference - 2008FED ¶39,957A.01

  CCH Reference - 2008FED ¶39,957A.022

  CCH Reference - 2008FED ¶39,957A.023

  CCH Reference - 2008FED ¶39,957A.03

  CCH Reference - 2008FED ¶39,957BE

  CCH Reference - 2008FED ¶39,957BG

  CCH Reference - 2008FED ¶39,957BI

  CCH Reference - 2008FED ¶39,957BK

  CCH Reference - 2008FED ¶39,957BM

  CCH Reference - 2008FED ¶39,957BO

  CCH Reference - 2008FED ¶39,957BQ

  CCH Reference - 2008FED ¶39,956C

  CCH Reference - 2008FED ¶39,957E

  CCH Reference - 2008FED ¶39,957EE

  CCH Reference - 2008FED ¶39,957EG

  CCH Reference - 2008FED ¶39,957EI

  CCH Reference - 2008FED ¶39,957EK

  CCH Reference - 2008FED ¶39,957EM

  CCH Reference - 2008FED ¶39,957EO

  CCH Reference - 2008FED ¶39,957EQ

  CCH Reference - 2008FED ¶39,957H

  CCH Reference - 2008FED ¶39,957HE

  CCH Reference - 2008FED ¶39,957HG

  CCH Reference - 2008FED ¶39,957HI

  CCH Reference - 2008FED ¶39,957HK

  CCH Reference - 2008FED ¶39,957HM

  CCH Reference - 2008FED ¶39,957HO

  CCH Reference - 2008FED ¶39,957HQ

  CCH Reference - 2008FED ¶39,960.70

  CCH Reference - FINH ¶21,853

  CCH Reference - FINH ¶21,854A

  CCH Reference - FINH ¶21,854B

  CCH Reference - FINH ¶21,854C

  CCH Reference - FINH ¶21,854D

  CCH Reference - FINH ¶21,855.01

  CCH Reference - FINH ¶21,855.05

  CCH Reference - FINH ¶21,855.50

  CCH Reference - FINH ¶21,856A

  CCH Reference - FINH ¶21,856B

  CCH Reference - FINH ¶21,856C

  CCH Reference - FINH ¶21,856D

  CCH Reference - FINH ¶21,858A

  CCH Reference - FINH ¶21,858B

  CCH Reference - FINH ¶21,858C

  CCH Reference - FINH ¶21,858D

  CCH Reference - FINH ¶21,860A

  CCH Reference - FINH ¶21,860B

  CCH Reference - FINH ¶21,860C

  CCH Reference - FINH ¶21,860D

  CCH Reference - FINH ¶21,861.01

 
Code Sec. 6695

  CCH Reference - 2008FED ¶39,966

  CCH Reference - 2008FED ¶39,966BE

  CCH Reference - 2008FED ¶39,966BG

  CCH Reference - 2008FED ¶39,966BI

  CCH Reference - 2008FED ¶39,966BK

  CCH Reference - 2008FED ¶39,966BM

  CCH Reference - 2008FED ¶39,966BO

  CCH Reference - 2008FED ¶39,966BQ

  CCH Reference - 2008FED ¶39,968

  CCH Reference - 2008FED ¶39,970.60

  CCH Reference - 2008FED ¶39,970.75

  CCH Reference - FINH ¶21,863A

  CCH Reference - FINH ¶21,863B

  CCH Reference - FINH ¶21,863C

  CCH Reference - FINH ¶21,863D

  CCH Reference - FINH ¶21,864.01

 
Code Sec. 6696

  CCH Reference - 2008FED ¶39,976

  CCH Reference - 2008FED ¶39,977BE

  CCH Reference - 2008FED ¶39,977BG

  CCH Reference - 2008FED ¶39,977BI

  CCH Reference - 2008FED ¶39,977BK

  CCH Reference - 2008FED ¶39,977BM

  CCH Reference - 2008FED ¶39,977BO

  CCH Reference - 2008FED ¶39,977BQ

 
Code Sec. 7701

  CCH Reference - 2008FED ¶43,081BC

  CCH Reference - 2008FED ¶43,081BE

  CCH Reference - 2008FED ¶43,081BG

  CCH Reference - 2008FED ¶43,081BI

  CCH Reference - 2008FED ¶43,081BK

  CCH Reference - 2008FED ¶43,081BM

  CCH Reference - 2008FED ¶43,081BO

  CCH Reference - 2008FED ¶43,113

  CCH Reference - FINH ¶22,772

  CCH Reference - FINH ¶22,773

  CCH Reference - FINH ¶22,774

  CCH Reference - FINH ¶22,812

  CCH Reference - FINH ¶22,815.06

  CCH Reference - FINH ¶22,815.82

  Tax Research Consultant

  CCH Reference - TRC IRS: 6,156
CCH Reference -
TRC IRS: 6,104

 

Tax Analysts report: