Tax News

CCH (cch.taxgroup.com) reports:

  The North Carolina Superior Court has dismissed an action that challenged the constitutionality of a sales and use tax exemption for eligible Internet data centers as well as the initial approval of a grant equal to 75% of the state personal income tax withholding derived from the creation of new jobs. The suit, filed by the North Carolina Institute for Constitutional Law (NCICL), challenged: (1) legislation enacted in 2006 that grants a sales and use tax exemption for sales of electricity used at an eligible Internet data center and eligible business property to be located and used at such a center; and (2) a Job Development Investment Grant (JDIG) initially approved for Google but never finalized, to facilitate the construction of a data center to support Google's online operations and create jobs. The suit claimed that these actions violated the state constitution in that the tax benefits and other economic incentives or subsidies accrued to Google's private financial benefit and that Google was provided these benefits merely for operating its own private business and not in exchange for any public service. The plaintiffs, who sued in their individual capacities as North Carolina residents and taxpayers, alleged that the legislation was enacted solely to encourage Google to construct an Internet data facility in Lenoir, in Caldwell County, North Carolina.

CCH (cch.taxgroup.com) reports:

  A remote seller has asked the U.S. Supreme Court whether New Mexico may impose its gross receipts tax on the seller's sales into the state based solely on the activities of a third-party contractor that provides post-sale services to New Mexico buyers. The seller has told the Court that an answer is needed to resolve a split of state court authority over the scope of Tyler Pipe, 483 U.S. 232 (1987) and Scripto, Inc., 362 U.S. 207 (1960).

  The Texas-based seller is an Internet- and mail-order retailer of computers. It offered service contracts to buyers for on-site repair of its computers in New Mexico by a third-party contractor. The New Mexico Taxation and Revenue Department audited the seller and imposed an assessment for gross receipts tax on sales of its computers to New Mexico residents. The seller challenged the assessment on the basis that it does not have a physical presence in New Mexico and, therefore, lacked the requisite substantial nexus with the state that would impose a collection obligation consistent with Commerce Clause requirements.

  The New Mexico Court of Appeals held that the third-party contractor's activities helped the seller establish and maintain a market in New Mexico. Therefore, the seller, through its relationship with the contractor and the contractor's activities in New Mexico, had a substantial nexus with the state and, consequently, the Department's imposition of gross receipts tax did not violate the Commerce Clause. (TAXDAY, 2008/06/09, S.12) The seller argued unsuccessfully that, under Tyler Pipe and Scripto, a third party must be engaged in sales-related activities in order to establish substantial nexus for a seller. The contractor in this case was not engaged in sales solicitations. However, the Court of Appeals held that the fact that the U.S. Supreme Court has not yet addressed the question of whether a third party's non-sales activities in the taxing state can create nexus does not mean that the high court has held that such activities cannot provide such nexus. The New Mexico Supreme Court denied review.

  Subscribers to CCH Tax Research NetWork can view the petition.
 
 
Dell Marketing L.P. v. New Mexico Taxation and Revenue Department, U.S. Supreme Court, Dkt. 08-770, petition for certiorari filed December 15, 2008
 

CCH (cch.taxgroup.com) reports:

  A tax aide to a Republican member of the Senate Finance Committee (SFC) predicted that the new Congress will act quickly in January 2009 to pass stimulus legislation and have it ready for President Barack Obama to sign when he takes office. The SFC could see a markup scheduled for as early as January 8, even before the committee finishes organizing itself, although it would be unusual to have legislation ready for the new president to sign. The aide spoke to practitioners on December 17 at a BNA Tax Management Luncheon held at Buchanan, Ingersoll & Rooney in Washington, D.C.

  With the new president not yet in office, there is a void in leadership, the aide said. SFC Chairman Max Baucus, D-Mont., aims for the committee to have a role in stimulus legislation and wants a tax element in it. House Speaker Nancy Pelosi, D-Calif., has predicted a stimulus package of $600 billion, including $200 million in tax provisions. Both Republicans and Democrats support tax aid to the states, infrastructure help and food stamp increases.

  The aide believes that a second round of stimulus checks is unlikely. There are proposals for a payroll tax holiday, but that might not help people looking for work. The Republicans would prefer that bonus depreciation be extended.

  Sen. Orrin Hatch, R-Utah, is supporting expanded net operating loss (NOL) relief, such as an increase in the carryback period from two years to at least four years. Some may propose a 10- to 15-year carryback period, to move the proposal. An increased carryback period would help companies that have already maximized their carrybacks and cannot benefit from carryforwards since they are operating at a loss. Similarly, tax credits for wind and other renewable energy development do not help companies with losses. One company has called for a refundable credit, the aide noted.

  Hatch supports a permanent research credit, which he believes would have a stimulus effect. There is no discussion of a capital loss carryback for individuals, but there is some support for increasing the current $3,000 limit on deductible losses.

  Because a stimulus bill probably will not be governed by pay-as-you-go (PAYGO) requirements for offsets, Senate members may want to expand the bill's scope to include middle-class tax cuts or estate tax relief, for example. Unlike the Senate, the aide pointed out, the House may be more deferential to the new president, since it is generally governed by majority rule, without requiring the support of 60 members.

Subsequent Measures

  As soon as the economy starts to improve, Congress will shift its focus to reining in deficits, the aide predicted. The congressional Blue Dogs want a statutory requirement for PAYGO, rather than just an in-house rule. The aide expects Congress to impose some discipline on tax bills, but Republicans and Democrats may debate whether spending cuts or raising taxes is the appropriate solution. At some point, Congress will be looking for more revenue, which could come from tax increases, changes to the carried interest rules or codification of the economic substance doctrine.

  Both sides support estate tax reform, although they may differ on the exemption level and the rates. The aide believes that Congress will want to address the estate tax in 2009, and he expects action to be taken.

  Obama supports both tax cuts and increases. His chief of staff, Rahm Emanuel, initially said that the new administration does not want to wait but, since then, Obama has backed off on imposing new increases while economic stimulus is a concern. It is an open question whether Congress will take action on the 2001 tax cuts that are set to expire at the end of 2010.

  Congress is ready to talk about health care reform, the aide stated. Both Baucus and Sen. Edward M. Kennedy, D-Mass., are very interested. Reform could include changes to the health insurance exclusion. One proposal for a cap would raise $350 billion over 10 years. This is viewed as a health care issue, not as tax reform. Republicans will insist that any savings be plowed back into health reform, rather than used to support other spending measures, the aide said.

  It is not clear that Congress is ready to move on broader tax reform, the aide indicated, even with reform proposals from the House Ways and Means Committee. The president must take the lead, but Obama has not said much on this subject. More education is also needed. There has been no talk of 1986-type reform, involving a broadening of the tax base.

  By Brant Goldwyn, CCH News Staff

CCH (cch.taxgroup.com) reports:

  A private, nonprofit Catholic school was denied a refund of penalties for failure to file federal employment tax returns, to make required tax deposits and to pay its federal employment taxes. The school failed to show that its failures were due to reasonable cause and not willful neglect.

  The school exercised ordinary business care and prudence by providing for its tax obligations to be discharged by an employee. However, it failed to show that it was unable to pay its taxes (due to lack of funds or disability) or that it would have suffered undue hardship if the taxes had been paid on the dates due. The individual responsible for filing returns and paying taxes was not the school's CEO or CFO, but was an employee subject to the authority of others who failed to adequately supervise her. Although the school was in financial trouble, it failed to contradict evidence that it had access to accounts with sufficient funds available during all the relevant periods to pay the taxes.

St. Paul Cathedral School, DC Wash., 2009-1 USTC ¶50,109

Other References:

 
Code Sec. 6651

  CCH Reference - 2008FED ¶39,475.455

  CCH Reference - 2008FED ¶39,475.57

 
Code Sec. 6656

  CCH Reference - 2008FED ¶39,585.27

  CCH Reference - 2008FED ¶39,585.62

  Tax Research Consultant

  CCH Reference - TRC PENALTY: 3,062
CCH Reference - TRC PENALTY: 3,304
 

CCH (cch.taxgroup.com) reports:

  The Tax Court upheld deficiency determinations against two brothers whose capital contributions to two S corporations did not increase or restore their tax bases in loans they had made to the S corporations. The capital contributions, instead, increased their tax bases in their stock in the S corporations, resulting in additional ordinary income to the brothers when they received loan repayments from the S corporations.

  The brothers had attempted to allocate the capital contributions such that they increased their tax bases in the loans in order to use the increased tax bases in the loans to offset ordinary income. However,
Reg. §1.118-1 specifically provides that capital contributions do not constitute income to an S corporation under Code Sec. 1366(a)(1) and, therefore, such contributions to capital may not be treated as items of income used in calculating any "net increase" (as defined in
Code Sec. 1367(b)(2)() to increase or restore a shareholder's tax basis in loans to an S corporation.

  The brothers also argued that the capital contributions were made to obtain a release of personal guarantees on bank loans and, as such, the contribution amounts should be deductible as ordinary losses under Code Sec. 165(c). The argument failed because the shareholders had not guaranteed the loans for the purpose of making a profit, nor was the release of the guarantees the sole purpose for which the capital contributions were made.

I. Nathel, 131 TC No. 17, Dec. 57,617

Other References:

 
Code Sec. 1366

  CCH Reference - 2008FED ¶32,084.22

  CCH Reference - 2008FED ¶32,084.325

 
Code Sec. 1367

  CCH Reference - 2008FED ¶32,101.25

  Tax Research Consultant

  CCH Reference - TRC BUSEXP: 48,108
CCH Reference - TRC SCORP: 402.05
 

Tax Analysts report: